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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-9076
AMERICAN BRANDS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich,Connecticut 06870-0811
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $3.125 per share New York Stock Exchange, Inc.
$2.67 Convertible Preferred Stock,
without par value New York Stock Exchange, Inc.
9% Notes Due 1999 New York Stock Exchange, Inc.
8 5/8% Debentures Due 2021 New York Stock Exchange, Inc.
8 1/2% Notes Due 2003 New York Stock Exchange, Inc.
7 7/8% Debentures Due 2023 New York Stock Exchange, Inc.
7 1/2% Notes Due 1999 New York Stock Exchange, Inc.
Preferred Share Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Registrant's voting stock held by non-
affiliates of Registrant, at February 13, 1997, was $9,269,858,740. The number
of shares outstanding of Registrant's Common Stock, par value $3.125 per share,
at March 3, 1997, was 171,670,172.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Certain information contained in the Annual Report to Stockholders of
Registrant for the fiscal year ended December 31, 1996 is incorporated by
reference into Part I, Part II and Part IV hereof.
(2) Certain information contained in the Proxy Statement for the Annual Meeting
of Stockholders of Registrant to be held on April 30, 1997 is incorporated
by reference into Part III hereof.
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PART I
Item 1. Business.
(a) General development of business.
Registrant is a holding company with subsidiaries engaged in various
businesses. Subsidiaries of Registrant are engaged in the manufacture and sale
of cigarettes, cigars and smoking tobaccos, principally in the United Kingdom
("U.K."), distilled spirits, various types of hardware and home improvement
products, golf and leisure products and office products, supplies and
accessories.
Registrant was incorporated under the laws of Delaware in 1985 and until
1986 conducted no business. Prior to 1986, the businesses of Registrant's
subsidiaries were conducted by American Brands, Inc., a New Jersey corporation
organized in 1904 ("American New Jersey"), and its subsidiaries. American New
Jersey was merged into The American Tobacco Company on December 31, 1985, and
the shares of the principal first-tier subsidiaries formerly held by American
New Jersey were transferred to Registrant. In addition, Registrant assumed all
liabilities and obligations in respect of the public debt securities of American
New Jersey outstanding immediately prior to the merger. Unless the context
otherwise indicates, references herein to American Brands, Inc. and to
Registrant for all periods prior to January 1, 1986 are to American New Jersey.
As a holding company, Registrant is a legal entity separate and distinct
from its subsidiaries. Accordingly, the right of Registrant, and thus the right
of Registrant's creditors (including holders of its debt securities and other
obligations) and stockholders, to participate in any distribution of the assets
or earnings of any subsidiary is subject to the claims of creditors of the
subsidiary, except to the extent that claims of Registrant itself as a creditor
of such subsidiary may be recognized, in which event Registrant's claims may in
certain circumstances be subordinate to certain claims of others. In addition,
as a holding company, a principal source of Registrant's unconsolidated revenues
and funds is dividends and other payments from its subsidiaries. Registrant's
principal subsidiaries currently are not limited by long-term debt or other
agreements in their abilities to pay cash dividends or to make other
distributions with respect to their capital stock or other payments to
Registrant.
In recent years Registrant has been engaged in a strategy seeking to
enhance the operations of its subsidiaries in certain major businesses. Pursuant
to such strategy Registrant has made acquisitions in the distilled spirits
business, the office products business and the hardware and home improvement
products business, and, in January 1996, acquired all the outstanding capital
stock of Cobra Golf Incorporated ("Cobra"), a leader in golf clubs, for an
aggregate cost of $712 million in cash, including fees and expenses. These
acquisitions were financed at least in part by debt or debt securities
convertible into Common Stock. In addition, Registrant has been making
dispositions of businesses considered to be nonstrategic to its long-term
operations. Since January 1, 1994, these dispositions have included the sale of
American Franklin Company, Registrant's life insurance business, to
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American General Corporation for $1.17 billion on January 31, 1995, the sale of
The American Tobacco Company ("ATCO"), Registrant's domestic tobacco subsidiary,
to Brown & Williamson Tobacco Corporation, a subsidiary of B.A.T Industries
p.l.c. ("B.A.T"), for $1 billion on December 22, 1994, and the sale of Dollond &
Aitchison Group PLC, a subsidiary of Gallaher Limited ("Gallaher"), for total
consideration of $146 million on July 12, 1994. Registrant has also disposed of
a number of other nonstrategic businesses and product lines, including U.K.-
based Forbuoys (retail distribution) and Prestige (housewares), both
subsidiaries of Gallaher. The sale of Prestige was completed on May 2, 1995. The
sale of the retail distribution group was completed on July 24, 1995.
On October 8, 1996, Registrant announced plans to spin off its U.K.-
based Gallaher tobacco business. Completion of the transaction, which is
expected around mid-1997, is pending receipt of favorable tax rulings and
relevant stockholder approvals. When the spin-off is completed, the financial
statements will be restated to show tobacco operations (Gallaher and ATCO) as
discontinued operations. Following the transaction, Registrant's stockholders
will own shares in two publicly-traded companies - the Registrant (renamed
Fortune Brands, Inc.) ("Fortune Brands") and Gallaher. To allocate the overall
debt burden of Registrant at the time of the spin-off, Gallaher will borrow and
pay to Fortune Brands pounds sterling in the range of 925 million. Fortune
Brands will use the net cash proceeds of approximately $1.25 billion initially
to pay down short-term debt. The Gallaher debt will be in addition to its
seasonal working capital requirements.
Registrant continues to pursue its strategy of enhancing the operations
of its subsidiaries in certain major businesses and in furtherance thereof
explores other possible acquisitions in fields related to its major businesses.
Registrant also cannot exclude the possibility of acquisitions in other fields
or further dispositions. Although no assurance can be given as to whether or
when any acquisitions or dispositions will be consummated, if agreement with
respect to any acquisitions were to be reached, Registrant might finance such
acquisitions by issuance of additional debt or equity securities. The additional
debt from any acquisitions, if consummated, would increase Registrant's debt-to-
equity ratio and such debt or equity securities might, at least in the near
term, have a dilutive effect on earnings per share. Registrant also continues to
consider other corporate strategies intended to enhance stockholder value. It
cannot be predicted whether or when any such strategies might be implemented or
what the financial effect thereof might be upon Registrant's debt or equity
securities.
Cautionary Statement
Except for the historical information contained in this Annual Report on
Form 10-K, certain statements herein, including without limitation, certain
matters discussed in Part I, Item 1 -- Business and Item 3 -- Legal Proceedings
and in Part II, Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations, are forward looking statements that involve
a number of risks and uncertainties. Actual results could differ materially from
such forward looking statements depending upon such risks and uncertainties
including, but not limited to, the following: general economic conditions,
foreign
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exchange rate fluctuations, competitive product and pricing pressures, the
impact of excise tax increases with respect to international tobacco and
distilled spirits, regulatory developments, the uncertainties of litigation, as
well as other risks and uncertainties detailed from time to time in Registrant's
Securities and Exchange Commission filings.
(b) Financial information about industry segments.
See "Information on Business Segments" in the Notes to Consolidated
Financial Statements contained in the 1996 Annual Report to Stockholders of
Registrant, which information is incorporated herein by reference.
(c) Narrative description of business.
The following is a description of the business of the subsidiaries of
Registrant in the industry segments of International Tobacco, Distilled Spirits,
Hardware and Home Improvement Products, Golf and Leisure Products and Office
Products. For financial information about the above industry segments, see
"Information on Business Segments" in the Notes to Consolidated Financial
Statements contained in the 1996 Annual Report to Stockholders of Registrant,
which information is incorporated herein by reference.
International Tobacco
Gallaher is the largest manufacturer of tobacco products for the U.K.
market and manufactures and markets a range of cigarettes, cigars and pipe and
handrolling tobacco products. Gallaher is the leader in each of the cigarette,
cigar and pipe tobacco markets in the U.K., with market shares of consumer sales
of 39.1%, 49.7% and 46.2%, respectively, and is the second largest handrolling
tobacco manufacturer in the U.K., with a 38.0% market share. Gallaher is also
the U.K. market leader in the growing low tar cigarette sector. Gallaher's sales
of cigarettes, principally in the premium sector, accounted for 92.7% of its
total U.K. tobacco sales in 1996. The sale of Gallaher's cigarettes in selected
international markets is an important part of its operations, accounting for
28.9% of Gallaher's total cigarette unit sales in 1996. The sale of Gallaher's
tobacco products in selected international markets accounted for 13.7% of sales
in 1996, and Gallaher sold tobacco products in over 35 countries, with
international sales concentrated primarily in the Republic of Ireland,
continental western Europe and the former Soviet Union. Gallaher manufactures
substantially all of its products, for both domestic and international markets,
in the U.K. and the Republic of Ireland.
A significant factor affecting Gallaher's operations is the government
duty on tobacco products. The current U.K. government has expressed an intent to
increase duty on tobacco products by an average of at least 3% per annum in
excess of the rate of inflation. This represents an annual direct increase in
cost of sales for Gallaher, which, if passed on to the retail trade, would be
expected to affect the consumption of tobacco products. The continuing impact of
price increases in the U.K. cigarette market, principally due to substantial
duty increases in recent years, has reduced annual industry volumes, led to
greater price competition and accelerated trading down by consumers to
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lower price cigarette brands, resulting in pressure on margins. These changes
are particularly affecting Gallaher, the majority of whose sales are in the
premium sector of the U.K. cigarette market.
The imposition of duty increases in the U.K. government's budget
announcement also affects the annual pattern of Gallaher's sales and inventory
values. Historically, Gallaher's sales in the U.K. have peaked in the weeks
preceding the budget announcement, as trade customers have sought to avoid the
expected duty increases by acquiring inventories of tobacco products at pre-
budget prices. In addition, as a result of paying duty at the pre-budget rate,
Gallaher has held significantly higher inventory values in the months
immediately following the U.K. government's budget announcement. Any change in
the timing of the budget announcement or in the regulations relating to the
application of duty increases could have a material impact on Gallaher's
operating performance, as could the outcome of pending litigation, not involving
Gallaher, if it resulted in commercial organizations being entitled to act as
agents for U.K. individuals to bring into the U.K. tobacco products on which
duty had been paid in another European Union ("EU") member state without the
need to pay U.K. excise duty. Manufacturers' price increases in the U.K. have
tended to be annual, most recently in the spring of each year, resulting in a
second, less accentuated, peak in sales prior to such an increase.
Sales of cigarettes in the U.K. have been in a gradual decline since
their peak in 1973, with cigarette consumer sales falling by an average of 2.5%
per annum over the period from 1992 to 1996. Within this overall downward trend,
however, growth has been apparent in certain sectors of the U.K. market, more
recently in those for lower tar products and lower price brands. Gallaher's
share of the U.K. unit sales to consumers increased significantly from a level
of 32.3% in 1985 to a peak of 42.9% in 1990, and was 39.1% in 1996. The
reduction in market share in recent years has been primarily a result of the
trend away from premium price cigarettes to lower price products. The trend away
from premium price cigarettes to lower price products in the last six years is
also reflected in the total market shares of Gallaher's premium Benson and
Hedges and Silk Cut brands, which have declined from 20.4% and 10.3%,
respectively, in 1990 to 14.3% and 9.9% in 1996.
Gallaher launched Mayfair in February 1992 and Sovereign in March 1996
in the lower price sector of the U.K. market to capitalize on this growing
market. The launch of Sovereign was the largest brand launch ever undertaken by
Gallaher and its introduction, together with the growth of sales of Mayfair
cigarettes, enabled Gallaher's low price cigarette brands to increase their
share of the total market from 1.8% in January 1996 to 4.1% in December 1996.
Gallaher classifies the U.K. cigarette market in terms of three price sectors
based on the recommended retail price for a standard pack of 20 cigarettes: the
premium sector (presently (Pounds)2.97 and above); the mid-price sector
(presently (Pounds)2.82 to (Pounds)2.96); and the low-price sector (presently
(Pounds)2.81 or less). The premium sector represents 48.5% of the U.K. cigarette
market and the mid-price sector and low-price sector represent 23.9% and 27.6%,
respectively. Gallaher's market position is particularly strong in the premium
sector, where it earns margins superior to the margins on its products in the
mid and low-price sectors. Gallaher has a 53.6% share of the premium sector
principally through its Benson and Hedges and Silk Cut brands, the two
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largest selling brands in the premium sector. Gallaher also has a 41.4% market
share in the mid-price sector, through its Berkeley Superkings and Benson and
Hedges Superkings brands, and an 11.7% market share in the low-price sector,
principally through its Mayfair and Sovereign brands.
The average tar content of cigarettes sold in the U.K. has been
gradually falling for more than 20 years, reflecting trends in consumer
preferences and regulatory initiatives to reduce the tar content of cigarettes.
In addition to the main brand, lower tar variants are also sold under the Benson
and Hedges, Berkeley, Mayfair and Sovereign brand names. Lower tar cigarettes
have accounted for a growing share of the U.K. market and Gallaher believes that
it is well positioned to take advantage of what it believes will be a continuing
trend. Gallaher is the market leader in the U.K. in the low tar cigarette
sector, which it presently classifies as cigarettes with a tar yield of six
milligrams or less. Within this sector, the Silk Cut brand has a 63.4% share. To
capitalize on this position, Gallaher launched Silk Cut Ultra, with a tar yield
of one milligram, in 1992.
Gallaher's principal competitor in the U.K. market is Imperial Tobacco
Group PLC ("Imperial Tobacco"). Imperial Tobacco has a 37.8% share of the
cigarette market. The second main competitor in the U.K. cigarette market is The
Rothmans (U.K.) Partnership ("Rothmans"). Brands distributed by Rothmans have a
13.3% share of the cigarette market. Gallaher also has competition from imported
brands, including those of R. J. Reynolds Tobacco Company.
Gallaher's international activities are concentrated in the markets of
the Republic of Ireland, the former Soviet Union, France, Greece, Germany,
Belgium and the Canary Islands. Gallaher plans to develop niche positions in
certain markets in the Asia Pacific region. In addition to sales in duty paid
markets, duty free sales to travelers and tourists are also a significant part
of Gallaher's international business. Market trends in continental western
Europe are generally similar to those in the U.K., with a longer term overall
decline in the demand for cigarettes and increasing regulatory intervention. In
the emerging economies of the former Soviet Union and Asia Pacific, however,
sales of western-style cigarettes are generally increasing.
The Republic of Ireland represents an important international market for
Gallaher and in 1996 accounted for 23.3% of Gallaher's international cigarette
sales. Gallaher is the leading cigarette manufacturing company in the Republic
of Ireland with a 44.2% share of the cigarette market. Gallaher has had a
manufacturing operation in the Republic of Ireland for more than 30 years and
manages its Irish operations independently of its other international
operations. The tobacco market in the Republic of Ireland is different from
that in the U.K., primarily because Irish legislation creates a framework for
the price at which different cigarette brands can be sold. The advertising and
promotion of tobacco products is also subject to greater restrictions in the
Republic of Ireland than in the U.K.
Continental western Europe is also significant for Gallaher and in 1996
accounted for 38.2% of Gallaher's international cigarette sales. A major
contributor to Gallaher's sales growth in continental western Europe has been
the strategic acquisition in 1993 of the rights to the
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Benson and Hedges trademark for the EU and countries in the European Free Trade
Association ("EFTA"), with the exception of duty free markets. In terms of
volume, Gallaher's principal markets in continental western Europe are France,
Germany and Greece, which together accounted for 28.8% of Gallaher's
international cigarette sales, and in each of which Gallaher sold more than one
billion cigarettes in 1996. Belgium and the Canary Islands are also important
contributors to Gallaher's international operating profits.
In 1996, Gallaher sold more than 2.4 billion cigarettes in the former
Soviet Union, principally in Russia and Kazakhstan, which accounted for 18.6% of
Gallaher's international cigarette sales, but at sales prices and associated
margins which were considerably lower than those achieved in continental western
European markets. Gallaher's cigarette sales to the former Soviet Union have
increased significantly in recent years. Gallaher does not own the rights to the
Benson and Hedges or Silk Cut trademarks in the former Soviet Union. Gallaher's
principal brand in these markets is Sovereign. Gallaher believes that in 1996
Sovereign accounted for between 5% and 10% of the cigarette market in
Kazakhstan. Gallaher has acquired a site and intends to construct a factory in
Kazakhstan. Gallaher intends to pursue opportunities for development in the Asia
Pacific region which it believes will become increasingly important to its
international operations.
In 1996, Gallaher's duty free sales were in excess of one billion
cigarettes and accounted for 8.4% of its international cigarette sales. The
principal outlets for Gallaher duty free sales are ferries, airports, the
Channel tunnel, airlines and British service personnel serving overseas. A
significant proportion of duty free sales relates to travel within the EU and is
threatened by plans to abolish intra-EU duty free sales in 1999. While the
extent of the impact of such abolition cannot be predicted, Gallaher believes
that the loss of duty free sales may be partially offset by some expected flow
back of sales into domestic European markets. Gallaher expects the effect of any
flow back on its domestic European sales to be enhanced by the elimination of
intra-EU duty free sales of Benson and Hedges cigarettes, currently made by
B.A.T in duty free markets.
Gallaher's principal raw materials for the manufacture of cigarettes,
tobacco and cigars are tobacco leaf, cigarette paper, acetate tow (for the
production of filter tips), cardboard and other packaging materials, which are
purchased from a number of suppliers. Gallaher is not unduly reliant on any one
supplier and has not suffered any significant production interruption as a
result of an interruption in the supply of raw materials.
Gallaher has several principal suppliers for its cigarette, tobacco and
cigar machinery and failure of machinery has not historically created
significant supply problems. Although Gallaher has operations in Northern
Ireland, where there has been social and political unrest, there has been no
consequential damage to Gallaher's manufacturing facilities there.
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The advertising, sale and consumption of cigarettes and other tobacco
products in the U.K. and many other countries have been subject to pressure from
governments, health officials and anti-smoking groups, who claim that the
smoking of cigarettes and tobacco products is harmful to health. A number of
substantial restrictions on the marketing, advertising, product design and
consumption of cigarettes have been introduced by regulation or voluntary
agreements as a result of this pressure. In addition, anti-smoking groups are
seeking to diminish the social acceptability of smoking. Currently, advertising
and promotion in the tobacco industry in the U.K. is restricted under the terms
of voluntary agreements entered into with the government and under the
requirements of legislation. These restrictions limit the amount that tobacco
companies may spend on certain activities, restrict the types of media and forms
of advertising used and require the placement of a health warning on every
advertisement and on the packaging of tobacco products. The nature of the
labeling of health warnings (both in the U.K. and in other EU countries) is
governed by EU directives. These directives provide that packs of tobacco
products must carry a health warning on their most visible surface together with
a second warning label.
An EU directive on television broadcasting has prohibited television
advertising for all tobacco products throughout the EU since 1991. There is a
proposal for an EU directive which would provide for a total ban on the
advertising of tobacco products throughout the EU and would restrict the use of
tobacco brand names on non-tobacco products. This proposed directive would have
to be adopted by the Council of Ministers of the member states of the EU by a
qualified majority of such states prior to it becoming effective.
The advertising, sponsorship and promotion of tobacco products in the
Republic of Ireland is more restrictive than in the U.K. Tobacco products may
only be advertised in newspapers, magazines or other similar publications, in
retail sale premises, in duty free zones and on packs of tobacco products.
Consumer promotions are prohibited. In addition, the maximum amount which
tobacco manufacturers may spend annually on the advertising and sponsorship of
tobacco products is determined by the Irish Minister for Health.
There are also various country-specific restrictions in other EU
countries and in the non-EU countries to which Gallaher currently sells its
tobacco products. These include a ban on advertising and the prohibition of
sponsorship of sport and other events in France, except in limited
circumstances.
An EU directive currently limits the tar yield of cigarettes to 15
milligrams per cigarette, which is to be reduced to 12 milligrams per cigarette
by December 31, 1997. This directive has been implemented in the U.K. and in
most other EU countries. A new voluntary agreement on the approval and use of
new additives in tobacco products in the U.K. is expected to be implemented in
1997. The voluntary agreement regulates the additives which may be used in
tobacco products and includes limits on their use. It also makes provision for
certain information on additives to be provided to the U.K. Department of Health
and to be made public, and includes guidelines for the testing and use of new
additives in tobacco products and for the certification of compliance with the
voluntary agreement by U.K. tobacco manufacturers.
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In December 1996, the Commission of the European Communities adopted a
communication on the present and proposed role of the EU in reducing tobacco
consumption. The purpose of the communication is to contribute to a review of
existing and possible future anti-smoking strategies aimed at reducing the
alleged public health impact of smoking on European citizens.
Excise duties represent a significant percentage of the retail price of
tobacco products in duty paid markets and have been steadily increased by
governments in many of the countries in which Gallaher sells its products. In
addition, an EU directive requires that the minimum excise tax (excluding Value
Added Tax) on the most popular price category of cigarette in each EU country
must represent not less than 57% of the total recommended retail price.
Gallaher has successfully managed its business within the current
regulatory climate. It is not possible to predict whether additional or more
restrictive legislation, regulations, directives or actions will be implemented
or taken in the U.K. or in other countries in which Gallaher sells its products
or the nature of any such legislation, regulations, directives or actions. It is
possible, however, that any further regulation in respect of advertising and
promotion in its key markets would have an adverse effect on Gallaher's sales
and operating performance. A general election is to take place in the U.K.
before the end of May 1997. A change in government could lead to changes in the
regulatory environment. The U.K. Labour Party has indicated that, if it were to
form the next government, it would initiate a ban on advertising of tobacco
products in the U.K. by way of legislation. It is unclear which forms of
marketing and promotion would be affected and it is also not possible to predict
the effect any such legislation, regulations, directives or actions may have on
Gallaher or on the tobacco industry generally.
See Item 3, "Legal Proceedings".
Distilled Spirits
JBB Worldwide, Inc. ("JBB Worldwide") is a holding company for
subsidiaries in the distilled spirits business. Principal subsidiaries include
Jim Beam Brands Co. ("Beam"), Alberta Distillers Limited ("Alberta"), JBB (Asia-
Pacific) Pty. Limited ("JBB (Asia-Pacific)") (formerly Fortune Brands Pty.
Limited) and JBB (Greater Europe) PLC ("JBB (Greater Europe)") (formerly The
Whyte & Mackay Group PLC).
JBB Worldwide's principal markets are the U.S., the U.K. and Australia.
Approximately 85% of JBB Worldwide's sales are to these three markets, with the
U.S. and the U.K. representing 58% and 19% of sales, respectively.
JBB Worldwide's leading brands are owned by its subsidiaries, except
that DeKuyper cordials are produced and sold in the U.S. under a perpetual
license, Gilbey's gin and Gilbey's vodka are produced and sold in the U.S. under
a license expiring September 30, 2007 and the Kamchatka vodka brand is claimed
by another entity in California.
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Beam, located primarily in the U.S., currently produces, or imports, and
markets a broad line of distilled spirits, including Bourbon and other whiskeys,
cordials, gin, vodka, rum, tequila and cognac. Alberta, located in Canada,
produces and sells in Canada a line of distilled spirits, produces Canadian
whisky and other distilled spirit products for export to the U.S., and sells
bulk Canadian whisky into a variety of export markets. JBB (Asia-Pacific) is
located in Australia and sells JBB Worldwide products (primarily Jim Beam
Bourbon whiskey) as well as several brands under agency agreements. JBB (Greater
Europe) is located in the U.K. and produces, bottles, and sells blended and
single malt Scotch whiskies, markets and sells vodka, and sells Scotch whisky in
bulk. Under the JBB Worldwide holding company, Beam, Alberta, JBB (Greater
Europe) and JBB (Asia-Pacific) have each been given the responsibility of
selling the combined branded product portfolio in defined markets around the
world.
Beam and its predecessors have been distillers of Bourbon whiskey since
1795. Beam's nine leading brand names are Jim Beam Bourbon whiskey, Windsor
Canadian Supreme Whisky, Lord Calvert Canadian Whisky, DeKuyper cordials,
Gilbey's gin, Gilbey's vodka, Kamchatka vodka, Wolfschmidt vodka and Kessler
American Blended Whiskey. Principal Bourbon whiskey brand names are Jim Beam,
the largest-selling Bourbon whiskey in the U.S. and in the world, Old Grand-Dad,
Old Crow, Old Taylor, four premium and super premium Bourbon whiskeys (Booker's,
Knob Creek, Baker's and Basil Hayden's) sold under the Small Batch Bourbon
whiskey name grouping, and Jim Beam & Cola, which combines Jim Beam Bourbon
whiskey with a cola soft drink. DeKuyper is the top-selling cordial line in the
U.S. Beam also produces Chateaux and Leroux cordials, Beam's 8-Star Blend and
Calvert Extra blended whiskeys, Dark Eyes vodka and Calvert gin, and imports, in
bottle or in bulk, Canada House Canadian Whisky (produced by Alberta), The
Dalmore and The Claymore Scotch whiskies (both produced by JBB (Greater
Europe)), Kamora coffee liqueur, After Shock cinnamon liqueur and Avalanche Blue
peppermint schnapps (both produced by Alberta), Ronrico and Pusser's rums, El
Tesoro and Chinaco tequilas and A. de Fussigny cognac.
JBB (Greater Europe) has its origins as a distiller of Scotch whisky in
1844. During the fourth quarter of 1993, JBB (Greater Europe) completed the
acquisition of Invergordon Distillers Group PLC, another distiller, blender and
marketer of Scotch whisky. Its principal brand names are Whyte & Mackay Special
Reserve, The Claymore, The Dalmore, Cluny, Mackinlay, Isle of Jura and
Bruichladdich Scotch whiskies, Glayva Scotch whisky liqueur and Vladivar vodka.
JBB (Greater Europe)'s products are sold in the U.K. through its own sales
force, in the U.S. and Australia through the affiliated company distribution
networks, and through independent distributors in other areas of the world.
Products of JBB Worldwide's subsidiaries are sold through various
distributors and, in the 18 "control" states (and one county) in the U.S. which
have established government control over certain aspects of the purchase and
distribution of alcoholic beverages, through government controlled liquor
authorities.
The distilled spirits business is highly competitive, with many brands
sold in the consumer market. Management believes there are approximately ten
major competitors worldwide and many smaller distillers
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and bottlers. Management also believes that, based on units and sales value, JBB
Worldwide, with four brands which each sell over one million cases worldwide, is
the second or third largest producer and marketer of distilled spirits in the
U.S. and is among the ten major competitors worldwide. JBB Worldwide competes on
the basis of product quality and price and its responsiveness to consumer
preferences.
Raw materials for the production, storage and aging of products of JBB
Worldwide's subsidiaries are principally corn, other grains, and new oak
barrels, and are readily available from a number of sources except that new oak
barrels are available from only two major sources, one of which is owned by a
competitor. Blended Scotch whiskies are composed of a variety of grain and malt
whiskies blended to provide a consistent product. The Scotch industry is
therefore dependent on the trading of whiskies between whisky companies.
Because whiskeys are aged for various periods, generally from three to
eight years, subsidiaries of JBB Worldwide maintain, in accordance with industry
practice, substantial inventories of bulk whiskey in warehouse facilities.
Whiskey production is generally scheduled to meet demand years into the future,
and production schedules are adjusted from time to time to bring inventories
into balance with estimated future demand.
The production, storage, transportation, distribution and sale of JBB
Worldwide's products are subject to regulation by federal, state, local and
foreign authorities. Various local jurisdictions prohibit or restrict the sale
of distilled spirits in whole or in part.
In the U.S., U.K. and many other countries, distilled spirits are
subject to excise taxes and/or custom duties. State, local and other
governmental authorities in such countries also impose taxes on distilled
spirits. On January 1, 1991, the U.S. federal excise tax on distilled spirits
was increased by one dollar per proof gallon. There have been no subsequent
increases in the U.S. federal excise tax, although proposals to increase such
taxes have been made from time to time. In addition, there are proposals pending
to increase or impose new distilled spirits taxes in various jurisdictions.
The United Kingdom Finance Acts, 1993 and 1994 did not provide for any
increase in the excise duties on distilled spirits, whereas the Finance Act,
1995 provided for an increase in the excise duties on distilled spirits
equivalent to 26 pence on the price of a typical 700 milliliter bottle of Scotch
whisky. The U.K. budgets introduced on November 26, 1996 and November 28, 1995
provided for a decrease in the excise duties on distilled spirits with the
result that the price of a typical 700 milliliter bottle of Scotch whisky
decreased by 26 and 27 pence, respectively.
It is believed that the U.S. federal excise tax increase in 1991
contributed to the decline in distilled spirits unit sales for the industry,
including Beam. The effect of any future excise tax increases in any
jurisdiction cannot be determined, but it is possible that any future tax
increases would have an adverse effect on unit sales and increase existing
competitive pressures.
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The Alcoholic Beverage Labeling Act of 1988 and regulations promulgated
thereunder by the Bureau of Alcohol, Tobacco and Firearms of the Department of
the Treasury (the "Bureau") require that containers of alcoholic beverages
bottled on or after November 18, 1989 for sale or distribution in the U.S. or
for sale, distribution or shipment to members of the United States Armed Forces
abroad bear the statement: "GOVERNMENT WARNING: (1) According to the Surgeon
General, women should not drink alcoholic beverages during pregnancy because of
the risk of birth defects. (2) Consumption of alcoholic beverages impairs your
ability to drive a car or operate machinery, and may cause health problems."
The Alcoholic Beverage Labeling Act of 1988 and the regulations prohibit any
other requirement of a statement relating to alcoholic beverages and health on
any beverage alcohol container or package containing such a container. If the
Secretary of the Treasury, after appropriate investigation and consultation with
the Surgeon General, finds available scientific information justifying a change
in, addition to or deletion of all or part of the required statement, he is
required to report such information to the United States Congress together with
specific recommendations with respect thereto. It is not possible to state
whether any legislation or additional regulations or action imposing additional
labeling or other warning statement requirements will be enacted, promulgated or
taken in the U.S. or other markets in which JBB Worldwide sells products, nor is
it possible to predict the effect, if any, that the existing labeling
requirement or any additional labeling or other warning statement requirements
may have on the industry generally or on JBB Worldwide.
During 1996, certain competitors of JBB Worldwide began television and
radio broadcast advertising of distilled spirits products in the U.S. market,
and the national distilled spirits industry association retracted a previous
voluntary ban on such activities. These developments have created a certain
amount of controversy and threats of governmental regulation and other action at
federal, state and local levels. JBB Worldwide, through its Beam subsidiary, has
not begun any such advertising but may yet do so in response to competitive
conditions. Other operating units outside the U.S. have previously begun such
broadcast advertising in markets where legal and not in violation of voluntary
restrictions by industry groups. It is not possible to state whether any
legislation or additional regulation or other government action will be enacted,
promulgated or taken in the U.S. market, nor is it possible to predict the
effect, if any, of the ultimate resolution of this matter on the industry
generally or the business of JBB Worldwide specifically.
Hardware and Home Improvement Products
MasterBrand Industries, Inc. ("MasterBrand") is a holding company for
subsidiaries in the hardware and home improvement products business.
Subsidiaries include Moen Incorporated ("Moen"), Master Lock Company ("Master
Lock"), Aristokraft, Inc. ("Aristokraft") and Waterloo Industries, Inc.
("Waterloo"). The hardware and home improvement products business is highly
competitive. MasterBrand's operating companies compete on the basis of product
quality and price and their responsiveness to consumer preferences.
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Moen manufactures and packages single- and two-handle faucets, sinks and
plumbing accessories and parts and a wide variety of plumbing supply and repair
products in the U.S. and East Asia. Faucets are sold under a variety of trade
names, including Moen, Moentrol, Touch Control, One-Touch, Riser, Monticello,
Concentrix, Chateau, Legend, Pulsation and Sani-Stream, and other products are
sold under the Moen, Chicago Specialty, Dearborn Brass, Wrightway, Anchor Brass
and Hoov-R-Line brand names. Composite kitchen sinks are sold under the
MoenStone brand name. Sales are made through Moen's own sales force and
independent manufacturers' representatives primarily to wholesalers, mass
merchandisers and home centers and also to industrial distributors, repackagers
and original equipment manufacturers. Some of the plumbing parts and repair
products are purchased from other manufacturers. Products are sold principally
in the U.S. and Canada and also in East Asia, Mexico and Latin America. Moen's
chief competitors include Masco's Delta/Peerless, Black & Decker's Price
Pfister, Kohler and American Standard.
Legislation has been introduced in the U.S. Congress that would, if
enacted, endorse a voluntary industry standard that establishes maximum
allowable leachate levels of certain substances, including lead from plumbing
fittings and pumps, and which would require the Environmental Protection Agency
("EPA") to evaluate the effectiveness of the standard within twelve months of
enactment. The legislation that was introduced previously in the Congress would,
if enacted, require a reduction in the lead content of plumbing fittings and
pumps used for drinking water, if an appropriate maximum leachate standard for
lead is not voluntarily adopted. In September 1994, the EPA endorsed a voluntary
standard that establishes maximum leachate levels of those substances, including
lead from new plumbing fittings and fixtures. It is not possible to predict
whether federal, state or local legislation, regulations or action will be
enacted, promulgated or taken or the nature of any such legislation, regulations
or action, nor is it possible to predict the effect any such legislation,
regulations or action may have on the industry generally or on Moen.
Master Lock manufactures key-controlled and combination padlocks, chain
and cable locks, bicycle locks, built-in locker locks and other specialty
security devices, and also manufactures door lock sets and door hardware. Sales
of products designed for consumer use are made to wholesale distributors and to
home centers, hardware and other retail outlets, while sales of lock systems are
made to industrial and institutional users, original equipment manufacturers and
retail outlets. Most sales are brokered through independent manufacturers'
representatives, primarily in the U.S. and Canada. Master Lock encounters
competition from Abus, Belwith, Hampton, American Lock, and various imports in
the padlock segment, and from Black & Decker's Kwikset, Schlage, Masco's Weiser,
and Weslock in the door hardware segment.
Aristokraft manufactures kitchen cabinets and bathroom vanities. Stock
and semi-custom cabinets are sold under the brand names of Aristokraft and
Decora, respectively. Sales under the Aristokraft brand name are made in the
U.S. primarily through stocking distributors for resale to kitchen and bath
specialty dealers, lumber and building material dealers, remodelers and
builders. Decora products are sold
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primarily to kitchen and bath specialty dealers. Aristokraft competes with a
number of manufacturers, including Masco's Merillat and KraftMaid, American
Woodmark, Schrock, Triangle Pacific and Mill's Pride.
Waterloo manufactures tool storage products, consisting primarily of
high quality steel tool boxes, tool chests, workbenches and related products
manufactured for private label sale by one of the largest national retailers in
the U.S. Similar products are sold under the Waterloo and All American brand
names to specialty industrial and automotive dealers, mass merchandisers, home
centers and hardware stores. Waterloo also manufactures hospital carts and
storage units and sells such products to institutional users. Waterloo competes
with Snap-on, Kennedy, Stanley, Stack-On, and others in the metal storage
segment, and with Contico, Plano, Rubbermaid and others in the plastic storage
segment.
Raw materials used for the manufacture of products offered by
MasterBrand's operating companies are primarily red oak lumber, particleboard,
rolled steel, brass, zinc, copper, nickel, and various plastic resins. These
materials are available from a number of sources.
Golf and Leisure Products
Acushnet Company ("Acushnet") is comprised of the Titleist and Foot-Joy
Worldwide Division, the Acushnet Golf Division and Cobra. The Titleist and
Foot-Joy Worldwide Division is a leading manufacturer and distributor of golf
balls, golf shoes, golf clubs and golf gloves. Other products include bags,
carts, dress and athletic shoes as well as socks and accessories. Acushnet's
leading brands are Titleist and Pinnacle golf balls, DCI, Scotty Cameron by
Titleist and Bulls Eye golf clubs and putters, Classics and DryJoys golf shoes
and Sta-Sof and Weather-Sof golf gloves. Acushnet products are sold primarily
to golf pro shops throughout the U.S. by the Titleist and Foot-Joy Worldwide
sales force and to sporting goods stores and mass merchants through the Acushnet
Golf Division. Sales are made in the U.K., Canada, Germany, Austria, Denmark,
France, Sweden, The Netherlands and South Africa through subsidiaries, in Japan
through a majority-owned joint venture, in Ireland through a branch of a U.K.
subsidiary and outside these areas through distributors or agents. Cobra is a
leading manufacturer and distributor of golf clubs, with emphasis on oversized
graphite shafted golf clubs marketed and sold under the King Cobra brand name.
Other Cobra products include specialty golf clubs, putters, golf bags and golf
accessories. Cobra's products are sold to on-course golf pro shops and selected
off-course specialty stores throughout the U.S. by independent sales
representatives. Cobra markets its products internationally through
subsidiaries in the U.K., continental Europe and Japan, through exclusive
licensees in Australia and Canada and outside these areas through distributors.
In golf balls, Titleist's main competition is Spalding, Wilson,
Dunlop/Slazenger and Bridgestone. In golf shoes, Etonic, Nike, Dexter, Reebok,
Mizuno, Stylo and Adidas are the main competition. In golf clubs, Callaway,
Taylor Made, Ping, Tommy Armour, Spalding, Mizuno, Maruman, Dunlop, Bridgestone
and Daiwa are the main competition. In golf gloves, Wilson, Daiwa,
Dunlop/Maxfli, Kasco, Slazenger, Tommy Armour, Mizuno and Bridgestone are the
main competition. Acushnet's subsidiaries
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compete on the basis of product quality and price and their responsiveness to
consumer preferences.
Office Products
ACCO World Corporation ("ACCO") and its subsidiaries are engaged in
designing, developing, manufacturing and marketing a wide variety of traditional
and computer-related office products and supplies, personal computer accessory
products, time management products and presentation aids. Products are
manufactured by subsidiaries, joint ventures and licensees of ACCO, or
manufactured to such subsidiaries' specifications by third party suppliers,
throughout the world, principally in the U.S., Canada, western Europe and
Australia.
ACCO USA, Inc., a subsidiary of ACCO, manufactures binders, fasteners,
paper clips, punches, staples, stapling equipment and storage products, as well
as computer binders, supplies and accessories, in the U.S. ACCO Canada Inc., a
subsidiary of ACCO, manufactures and distributes a similar range of office
products in Canada. Principal brands include ACCO products, Swingline staples
and stapling equipment, Wilson Jones binders and columnar pads and Perma
Products corrugated board storage products. Products are sold throughout the
U.S. and Canada by their respective sales forces to office and computer products
wholesalers, retailers, dealers, mail order companies and mass merchandisers.
Kensington Microware Limited ("Kensington"), a subsidiary of ACCO,
designs, develops and markets a range of computer accessories and supplies. In
1995, Silicon Sports and STATX lines of computer accessories and cleaning
products were acquired. In 1996 a subsidiary of Kensington acquired the
outstanding common shares of Advanced Gravis Computer Technology Ltd.
("Gravis"), a leading marketer of products for the personal computer
entertainment market. Gravis designs and sells joysticks, game pads and sound
cards for both Macintosh and IBM-compatible computers.
Subsidiaries of ACCO Europe PLC, a subsidiary of ACCO, manufacture and
distribute a wide range of office supplies and machines and storage and
retrieval filing systems. Their products are sold primarily in the U.K.,
Ireland, western Europe and Australia through their own sales forces and
distributors.
Day-Timers, Inc., a subsidiary of ACCO, manufactures personal organizers
and planners in the U.S. and is estimated by management to be the leading direct
marketer of time management aids in North America. Products are sold in the U.S.
by Day-Timers, and in Canada, Australia and Europe by subsidiaries, through
direct mail advertising and catalogs to consumers and businesses. In addition,
products are sold through ACCO USA, Inc. and ACCO Canada Inc. to retailers and
mass merchandisers. A subsidiary also conducts time management seminars for
personnel of corporations, as well as other entities throughout the U.S.,
Canada, Australia and Europe. Another subsidiary markets, principally in the
U.S., arts and crafts supplies primarily to schools.
Management believes that manufacturing within the office products
industry is highly fragmented. Due to local market preferences for product
design and paper sizes, many office product manufacturers
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supply on a domestic basis only. Additionally, many manufacturers supply a
relatively narrow range of products, usually concentrating on one product
category. Management believes that ACCO's key competitors on a world-wide basis
include Avery Dennison, Esselte, Fellowes, Atapco and GBC. Management also
believes that its primary competitors for personal organizers in the North
American market are Franklin Quest and Day-Runner, and its key competitors in
the international market for personal organizers, although less developed than
in the North American market, include Filo Fax in the U.K. and Quo Vadis in
France. ACCO's operating companies compete on the basis of product quality and
price and their responsiveness to consumer preferences.
Other Matters
Employees
Registrant and its subsidiaries had, as of December 31, 1996, the
following number of employees, a substantial number of whom were covered by
collective bargaining agreements with various unions:
Registrant and subsidiaries
excluding Gallaher:
---------------------------
Distilled Spirits 2,390
Hardware and Home Improvement Products 8,460
Golf and Leisure Products 4,780
Office Products 8,470
Corporate Headquarters 200
------
24,300
------
Gallaher Limited:
----------------
Tobacco Products 3,700
------
Total 28,000
======
Environmental matters
Registrant and its subsidiaries are subject to federal, state and local
laws and regulations 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. While it is not possible to
quantify with certainty the potential impact of actions regarding environmental
matters, particularly remediation and other compliance efforts that Registrant's
subsidiaries may undertake in the future, in the opinion of management of
Registrant, 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 capital expenditures, financial condition,
results of operations or competitive position of Registrant and its
subsidiaries.
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(d) Financial information about foreign and domestic operations and
export sales.
Registrant's subsidiaries operate in the United States, Europe
(principally the U.K.) and other areas (principally Canada and Australia). See
the table captioned "Information on Business Segments" contained in the 1996
Annual Report to Stockholders of Registrant, which table is incorporated herein
by reference. As is disclosed in such table, Registrant has sizable investments
in, and derives substantial income from, Europe (principally the U.K.), and,
therefore, changes in the value of foreign currencies (principally sterling) can
have a material effect on Registrant's financial statements when translated into
U.S. dollars.
Item 2. Properties.
Registrant leases its principal executive offices in Old Greenwich,
Connecticut. The following is a description of properties of Registrant's
subsidiaries.
International Tobacco
Gallaher's principal properties are its factories in Lisnafillan,
Northern Ireland, Hyde, England, Cardiff, Wales and Dublin, the Republic of
Ireland, its head office in Weybridge, England, its U.K. national distribution
center in Crewe, England, and administration facilities in Northolt, England.
Apart from the Dublin factory, part of the Lisnafillan factory and some land
adjacent to the Hyde factory which Gallaher leases, all of these are freehold
properties owned by Gallaher.
Gallaher has entered into a contract for the sale of its facilities in
Northolt and an agreement to lease new premises in Perivale, west London.
Completion of the sale and new lease, which is conditional on completion of
certain works at the premises in Perivale, is expected to take place in late
summer of 1997. In addition, Gallaher has announced its plans to expand the
Lisnafillan factory and close the Hyde factory over the next three to four
years.
Distilled Spirits
JBB Worldwide operates from executive offices leased by Beam in
Deerfield, Illinois. Other subsidiaries of JBB Worldwide lease offices in
Glasgow, Scotland; Burnaby, British Columbia, Canada; and Gordon, New South
Wales, Australia. Subsidiaries of JBB Worldwide and a joint venture in India,
own and operate seven bottling plants, twelve distilleries (of which three are
malt distilleries not currently in use) and numerous warehouses for the aging of
bulk whiskeys all located in the U.S., Scotland, Canada and India. In addition,
JBB Worldwide subsidiaries lease sales offices and warehouse space for the
storage of promotional material in various locations throughout the world.
Hardware and Home Improvement Products
MasterBrand leases its executive offices in Deerfield, Illinois and a
subsidiary, Moen, owns its executive offices in North Olmsted, Ohio. Principal
properties of subsidiaries of MasterBrand include
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nineteen plants and two distribution centers owned and operated in the U.S. A
60%-owned joint venture in China owns and operates one plant. In addition,
subsidiaries of MasterBrand lease and operate three plants and four warehouses
in the U.S. and ten distribution centers, of which seven are in the U.S. and one
is in each of Canada, Japan and Mexico.
Golf and Leisure Products
Acushnet owns a combined executive office and research and development
facility and a distribution and packaging facility in Fairhaven, Massachusetts.
In addition, it owns and operates five plants and a test facility, all located
in the U.S. Acushnet also leases three warehouses, a manufacturing facility, a
test facility, and two research and development facilities, all located in the
U.S. Acushnet also leases an office in Taiwan. A subsidiary of Acushnet leases
two combined sales office and warehouse facilities in Canada. Other Acushnet
subsidiaries own and operate a plant and a warehouse in England, lease a sales
office and warehouse in each of Germany, France and Sweden and lease a sales
office in each of Austria, Denmark, The Netherlands, the Republic of Ireland and
South Africa. Acushnet's majority-owned joint venture in Japan leases two sales
offices and a warehouse facility there. Acushnet's majority-owned joint ventures
in Thailand lease and operate two plants there. Acushnet's minority-owned joint
venture in China leases and operates one plant. Cobra leases a combined
executive office and distribution center, a combined administrative and assembly
facility, a combined warehouse and distribution center and a graphite shaft
production facility all located in Carlsbad, California. Principal properties of
subsidiaries of Cobra are leased and include one combined sales and distribution
and assembly facility in France, one combined sales and distribution office in
the U.K. and one combined sales and administrative facility in Japan.
Office Products
ACCO leases its executive offices in Deerfield, Illinois. Principal
properties of subsidiaries of ACCO include seven plants owned and operated in
the U.S., seven in the U.K., and one in each of France, Germany, Italy,
Australia, the Republic of Ireland and Mexico. In addition, subsidiaries of ACCO
lease and operate nine facilities in the U.S., three in Mexico, five in Canada,
two in each of Australia and the U.K., and one in each of France, Germany and
Italy. Of these leased facilities, (i) three in the U.S., two in Canada and one
in each of Australia, the U.K., and Germany, are combined manufacturing and
distribution facilities, (ii) five in the U.S., two in each of Canada and Mexico
and one in each of the U.K., Italy, Australia and France are distribution
facilities and (iii) one in each of the U.S., Canada and Mexico are
manufacturing facilities.
Registrant and its subsidiaries are of the opinion that their properties
are suitable to their respective businesses and have productive capacities
adequate to the needs of such businesses.
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Item 3. Legal Proceedings.
(a) (i) Registrant's former subsidiary, 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. On December 22, l994, Registrant sold ATCO
to Brown & Williamson Tobacco Corporation ("B&W"), a wholly-owned subsidiary of
B.A.T. B&W and ATCO have agreed to indemnify Registrant against claims arising
from smoking and health and fire safe cigarette matters relating to the tobacco
business of ATCO.
In 1988, there was a jury award against another tobacco manufacturer
that was subsequently overturned on appeal and remanded for a new trial. The
plaintiff in this case later withdrew the action with prejudice. In 1996, there
was a jury award against B&W, successor by merger to ATCO, which is pending
appeal. The smallest of the five major domestic cigarette manufacturers has
announced a settlement of certain tobacco related claims. The other four major
domestic cigarette manufacturers have continued to vigorously defend these
lawsuits. Registrant has been named as a defendant in some of the cases brought
against ATCO and is currently named in sixty-eight of these cases, although it
has not been served in eleven of such cases. One such action is brought by an
individual alleging health ailments caused by the inhalation of environmental
tobacco smoke (Dunn, described below); eight are brought by the attorneys
general (or on behalf of the attorney general) of Hawaii (State of Hawaii,
described below), Ohio (Coyne, described below), Louisiana (Ieyoub, described
below), Michigan (Kelley, described below), West Virginia (McGraw, described
below), Iowa (State of Iowa, described below), Oklahoma (State of Oklahoma,
described below), and Utah (State of Utah, described below) respectively,
seeking unspecified compensatory and punitive damages and various forms of
relief, including restitution of the expenditures by the state for the cost of
medical care provided by the state to its citizens for numerous diseases
allegedly caused by cigarette and other tobacco products; seventeen allege state
or nationwide class actions on behalf of individuals allegedly addicted to
cigarettes through the manipulation of nicotine levels or individuals who have
suffered personal injury from the use of cigarettes. The seventeen cases are
Arch (purporting to be a Pennsylvania class action, described below),
Chamberlain (purporting to be an Ohio class action, described below), Conner
(purporting to be a New Mexico class action, described below), Crozier
(purporting to be an Alabama class action, described below), Emig (purporting to
be a Kansas class action, described below), Harris (purporting to be a
Pennsylvania class action, described below), Masepohl (purporting to be a
Minnesota class action, described below), McCune (purporting to be a West
Virginia class action, described below), McGinty (purporting to be an Arkansas
class action, described below), Norton (purporting to be an Indiana class
action, described below), Peterson (purporting to be a Hawaii class action,
described below), Reed (purporting to be a District of Columbia class action,
described below), Richardson (purporting to be a Maryland class action,
described below), Ruiz (purporting to be a Puerto Rico class action, described
below), Scott (purporting to be a Louisiana class action, described below),
Walls (purporting to be an Oklahoma class
18
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action, described below) and Zito (purporting to be a New York class action,
described below). There are also forty-two individual cases where the plaintiffs
allege personal injury from the use of cigarettes (Castano, Creech, Cresser,
Dymits, Dzak, Evans, Fernandez, Galvan, M.L., Gossett, Hagness, E., Harris, G.,
Heitsch, Hellen, Hernandez, M., Hulsey, Inzerilla, Knutsen, Kristich, Lewis,
Lucca, Luna, Magill, Margolin, Martinez, Nociforo, Oglesby, Perez, Portnoy,
Ramirez, Ramirez, J., Ramirez, O., Reed, M., Reitano, Rose, Salinas, Sanchez,
Schwartz, Siegel, Sola, Stern, Vacquera, and Whirley - all described below).
The following sets forth the principal parties to the above-described
sixty-eight proceedings in which Registrant is currently named as a defendant,
the court in which such proceedings are pending and the date such proceedings
were instituted against Registrant: Arch v. The American Tobacco Company, et
al., United States District Court for the Eastern District of Pennsylvania,
August 8, 1996; Castano v. The American Tobacco Company, et al., United States
District Court for the Eastern District of Louisiana, March 29, 1994;
Chamberlain v. The American Tobacco Company, et al., United States District
Court for the Northern District of Ohio, August 14, 1996; Conner v. The American
Tobacco Company, et al., Second Judicial District Court of Bernalillo County,
New Mexico, October 10, 1996; Coyne v. American Brands, et al., United States
District Court for the Northern District of Ohio, September 17, 1996; Creech v.
The American Tobacco Company, et al., Supreme Court of the State of New York,
Richmond County, January 6, 1997; Cresser v. The American Tobacco Company, et
al., Supreme Court of the State of New York, Kings County, October 10, 1996;
Crozier v. The American Tobacco Company, et al., United States District Court
for the Middle District of Alabama, August 8, 1996; Dunn v. The American Tobacco
Company, et al., Circuit Court of Delaware County, Indiana, May 28, 1993; Dymits
v. American Brands, et al., United States District Court for the Northern
District of California, May 22, 1996; Dzak v. The American Tobacco Company, et
al., Supreme Court of the State of New York, Queens County, December 8, 1996;
Emig v. The American Tobacco Company, et al., 18th Judicial District Court of
Sedgwick County, Kansas, Civil Department, February 6, 1997; Evans v. The
American Tobacco Company, et al., Supreme Court of the State of New York, Kings
County, August 23, 1996; Fernandez v. American Brands, et al., District Court of
Nueces County, Texas, November 13, 1996; Galvan v. American Brands, et al.,
District Court of Nueces County, Texas, March 3, 1997; Gossett v. American
Brands, et al., United States District Court for the Southern District of Texas,
Brownsville Division, November 14, 1996; E. Hagness v. American Brands, et al.,
District Court of Nueces County, Texas, December 27, 1996; G. Harris v. American
Brands, et al., United States District Court for the Southern District of Texas,
December 2, 1996; Harris v. The American Tobacco Company, et al., United States
District Court for the Eastern District of Pennsylvania, October 14, 1996; State
of Hawaii v. Brown & Williamson Tobacco Corporation, et al., Circuit Court of
the First Circuit, Hawaii, January 31, 1997; Heitsch v. American Brands, et al.,
District Court of Hidalgo County, Texas, December 23, 1996; Hellen v. The
American Tobacco Company, et al., Supreme Court of the State of New York, Kings
County, August 23, 1996; M. Hernandez v. American Brands, et al., District Court
of Nueces County, Texas, December 16, 1996; Hulsey v. American Brands, et al.,
United States District Court for the Southern District of Texas, December 2,
1996; Ieyoub (State of Louisiana) v. The American Tobacco Company, et al,
District Court of Calcasieu Parish, Louisiana, March 13, 1996; Inzerilla
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v. The American Tobacco Company, et al., Supreme Court of the State of New York,
Queens County, May 29, 1996; Kelley (State of Michigan) v. The American Tobacco
Company, et al., Circuit Court for the 30th Judicial Circuit, Michigan, August
21, 1996; Knutsen v. The American Tobacco Company, et al., Supreme Court of the
State of New York, Kings County, October 11, 1996; Kristich v. The American
Tobacco Company, et al., Supreme Court of the State of New York, Suffolk County,
November 15, 1996; Lewis v. American Brands, et al., District Court of Hidalgo
County, Texas, January 24, 1997; Lucca v. The American Tobacco Company, et al.,
Supreme Court of the State of New York, Kings County, February 3, 1997; Luna v.
American Brands, et al., District Court of Nueces County, Texas, November 13,
1996; Magill v. American Brands, et al., District Court of Nueces County, Texas,
December 23, 1996; Margolin v. The American Tobacco Company, et al., Supreme
Court of the State of New York, Queens County, November 22, 1996; Martinez v.
The American Tobacco Company, et al., District Court of Nueces County, Texas,
November 19, 1996; Masepohl v. The American Tobacco Company, et al., United
States District Court for the District of Minnesota, September 3, 1996; McCune
v. The American Tobacco Company, et al., United States District Court for the
Southern District of West Virginia, January 31, 1997; McGinty v. The American
Tobacco Company, et al., United States District Court for the Eastern District
of Arkansas, Western Division, November 4, 1996; McGraw (State of West Virginia)
v. The American Tobacco Company, et al., Circuit Court of Kanawha County, West
Virginia, September 20, 1994; Nociforo v. The American Tobacco Company, et al.,
Supreme Court of the State of New York, Suffolk County, July 16, 1996; Norton v.
Brown & Williamson Tobacco Corporation, et al., United States District Court for
the Southern District of Indiana, May 3, 1996; Oglesby v. American Brands, et
al., United States District Court for the Southern District of Texas, December
2, 1996; Oklahoma (State of Oklahoma) v. The American Tobacco Company, et al.,
District Court for Cleveland County, Oklahoma, August 22, 1996; G. Perez v.
American Brands, et al., District Court of Hidalgo County, Texas, November 26,
1996; Peterson v. The American Tobacco Company, et al., Circuit Court of the
First Circuit, Hawaii, February 6, 1997; Portnoy v. The American Tobacco
Company, et al., Supreme Court for the State of New York, Suffolk County, July
15, 1996; Ramirez v. American Brands, et al., District Court of Hidalgo County,
Texas, November 12, 1996; J. Ramirez v. American Brands, et al., District Court
of Hidalgo County, Texas, December 23, 1996; O. Ramirez v. American Brands, et
al., District Court of Brooks County, Texas, December 23, 1996; Reed v. Philip
Morris Incorporated, et al., Superior Court of the District of Columbia, June
21, 1996; M. Reed v. American Brands, et al., United States District Court for
the Southern District of Texas, December 6, 1996; Reitano v. The American
Tobacco Company, et al., Supreme Court of the State of New York, Kings County,
August 22, 1996; Richardson v. Philip Morris Inc., et al., County Court of
Baltimore, Maryland, May 24, 1996; Rinaldi v. The American Tobacco Company, et
al., Supreme Court of the State of New York, Kings County, January 6, 1997; Rose
v. The American Tobacco Company, et al., Supreme Court of the State of New York,
New York County, December 18, 1996; Ruiz v. The American Tobacco Company, et
al., United States District Court for the District of Puerto Rico, December 9,
1996; Salinas v. American Brands, et al., District Court of Webb County, Texas,
February 20, 1997; Sanchez v. American Brands, et al., Circuit Court of the
State of Texas, Starr County, December 6, 1996; Schwartz v. The American Tobacco
Company, et al., Supreme Court for the State of New York, Kings County, December
9, 1996; Scott v. The American Tobacco
20
<PAGE>
Company, et al., United States District Court for the Eastern District of
Louisiana, Orleans Parish, May 25, 1996; Siegel v. The American Tobacco Company,
et al., Supreme Court of the State of New York, Kings County, August 22, 1996;
Sola v. The American Tobacco Company, et al., Supreme Court for the State of New
York, Bronx County, July 12, 1996; State of Iowa v. The American Tobacco
Company, et al., District Court of Iowa, Polk County, November 27, 1996; State
of Utah v. The American Tobacco Company, et al., United States District Court
for the District of Utah, Central Division, September 30, 1996; Stern v. The
American Tobacco Company, et al., United States District Court for the Southern
District of New York January 29, 1997; Vacquera v. American Brands, et al.,
District Court of Hidalgo County, Texas, December 4, 1996; Walls v. The American
Tobacco Company, et al., District Court of Creek County, Oklahoma, February 6,
1997; Whirley v. American Brands, et al., United States District Court for the
Southern District of Texas, December 2, 1996; and Zito v. The American Tobacco
Company, et al., Supreme Court of the State of New York, New York County, June
19, 1996.
Reference is made to the description of Dymits v. American Brands, et
al., United States District Court for the Northern District of California, in
paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1996. By order
dated December 31, 1996, Registrant's motion to dismiss for lack of personal
jurisdiction was granted with prejudice. The plaintiff in this case has
indicated that he will appeal the trial court's order.
Reference is made to the description of State of Maryland v. Philip
Morris Inc., et al., Circuit Court of Baltimore, Maryland, in 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, 1996. On November 11, 1996,
Registrant was dismissed by stipulation as a defendant in such case.
Reference is made to the description of Banks v. Philip Morris
Companies Inc., et al., Circuit Court of Okaloosa County, Florida, in 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, 1996. On December 10, 1996,
this action was voluntarily dismissed by the plaintiff.
Reference is made to the description of Daniels v. Brown & Williamson
Tobacco Corp., et al., United States District Court for the Eastern District of
New York, in paragraph (a) of Part II, Item 1, "Legal Proceedings", of
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996. On November 18, 1996, a consent order was filed dismissing
Registrant from this action.
Reference is made to the description of Pollan v. Brown & Williamson
Tobacco Corp., et al., United States District Court for the Eastern District of
New York, in paragraph (a) of Part II, Item 1, "Legal Proceedings", of
Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996. On November 18, 1996, a consent order was filed dismissing
Registrant from this action.
21
<PAGE>
In addition, Registrant was named as a defendant, together with
leading tobacco manufacturers, in Pazienza v. B.A.T Industries P.L.C., et al.,
Superior Court of New Jersey, Middlesex County, December 13, 1996, and Attanazio
v. B.A.T Industries P.L.C., et al., Superior Court of New Jersey, Middlesex
County, January 6, 1997. Pazienza and Attanazio are individual cases where the
plaintiffs allege personal injury from the use of cigarettes. On January 22,
1997 and February 12, 1997, respectively, consent orders were filed dismissing
Registrant from these actions.
Registrant has been informed that (1) two actions involving the
smoking and health controversy were filed in the District Court of Nueces
County, Texas on December 12 and December 16, 1996, (2) an action involving the
smoking and health controversy was filed in the District Court of Starr County,
Texas on December 16, 1996, (3) an action involving the smoking and health
controversy was filed in the District Court of Willacy County, Texas on December
16, 1996, and (4) an action involving the smoking and health controversy was
filed in the District Court of Kleberg County, Texas on December 23, 1996, and
that Registrant has been named as a defendant in the foregoing actions. As of
the date hereof, Registrant has not been served nor has it obtained copies of
the complaints in respect of these actions.
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 the above-mentioned actions
and threatened actions. The actions will be vigorously contested.
It has been reported that certain groups of attorneys, and attorneys
general of various states, are interested in promoting product liability and
other suits against the tobacco manufacturers. 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. It has also been reported that civil and criminal investigations of
tobacco manufacturers are pending before certain prosecutorial and other
authorities.
(ii) (A) To date limited legal aid has been granted to claimants in
alleged health-related actions against tobacco manufacturers in the U.K.
Gallaher is currently involved in four actions in the U.K. in respect of which
plaintiffs are alleging health damage resulting from tobacco use and have made
applications for legal aid. Two of these actions, in Scotland, were stayed
pending applications for legal aid and those applications were subsequently
refused. In the third action, in Northern Ireland, legal aid was granted but
the case has made no significant progress since the writ was served in 1990. In
the fourth action, in Northern Ireland, the claimant has received limited legal
aid, but has not received legal aid to issue proceedings.
In England, applications for legal aid were filed with the Legal Aid
Board commencing in 1992 and were subsequently rejected after opposition by a
number of tobacco manufacturers. The Legal Aid Board subsequently reconsidered
the applications and in January 1995 granted limited legal aid to approximately
200 claimants seeking to bring proceedings against tobacco manufacturers for
alleged smoking-related ailments. A number of tobacco manufacturers thereafter
submitted further
22
<PAGE>
representations in opposition to the applicants' requests for full legal aid and
the Legal Aid Board announced in July 1996 that all legal aid was being
withdrawn.
Notwithstanding the denial of legal aid, in November 1996 proceedings
were issued in England by 12 plaintiffs against Gallaher and Imperial Tobacco
alleging that the claimants had contracted lung cancer as a result of smoking
tobacco products. Seven of these plaintiffs allege that they smoked tobacco
products manufactured by Gallaher. In December 1996 another writ was issued by
the same legal advisers on behalf of a further 11 plaintiffs, eight of whom
allege that they smoked tobacco products manufactured by Gallaher. These
proceedings have been brought without any legal aid but with the plaintiffs'
legal advisers acting on a conditional fee basis whereby they will receive a fee
only if the proceedings are successful. Gallaher has been informed by the
plaintiffs' solicitors that, in total, the plaintiffs' solicitors are processing
approximately 100 claims.
(B) The first action against a tobacco manufacturer in the U.K.
alleging smoking-related health effects was brought against Gallaher. Dean v.
Gallaher Limited was an action commenced in the High Court in Northern Ireland
in which the plaintiff sought unspecified damages against Gallaher Limited and
its subsidiary and predecessor, Hergall (1981) Limited (In liquidation)
("Hergall") for peripheral vascular disease, probably Buerger's disease,
allegedly caused by cigarette smoking. In 1988, the plaintiff obtained legal
aid to proceed up to the point of setting down for trial. He served his Writ
later that year and his statement of claim in 1989. Beginning on October 14,
1996, the Court heard evidence at a trial of the preliminary issue as to whether
the plaintiff was suffering from Buerger's disease or peripheral vascular
disease. After three days of testimony, the hearing was adjourned at the
plaintiff's request. On October 21, 1996, the plaintiff consented to judgment
being entered in favor of the defendants in both actions.
(C) In Brennan v. Hergall (1981) Limited (In Liquidation), in the High
Court in Northern Ireland, the plaintiff, a former employee of Hergall (then
called Gallaher Limited), is seeking unspecified damages for peripheral arterial
disease allegedly caused by cigarette smoking. The plaintiff received legal aid
and issued a writ in October 1990, but no statement of claim has been served to
date. The writ was originally served on Gallaher, but in March 1995, the
plaintiff obtained leave to substitute Hergall as the named defendant in the
action, and in November 1995, the plaintiff filed an amended writ of summons
naming Hergall as the proper defendant.
(D) In Havelin v. Gallaher Limited et al., in the Court of Session in
Scotland, the pursuer commenced his action in May 1995 against Gallaher by
issuing a summons and condescendence. The pursuer seeks (Pounds)100,000 plus
interest for Buerger's disease allegedly caused by cigarette smoking. In
February 1995, prior to commencing this action, the pursuer applied to the
Scottish Legal Aid Board for legal aid to fund his action. Gallaher submitted
representations in opposition and in June 1995, the pursuer's application for
legal aid was refused. The pursuer sought a review of this decision, which was
unsuccessful in November 1995. This litigation is currently stayed.
23
<PAGE>
(E) In Burnett v. Gallaher Limited, in the Court of Session in
Scotland, the pursuer commenced his action in July 1995 by issuing a summons and
condescendence. The pursuer seeks (Pounds)100,000 plus interest for heart
disease allegedly caused by cigarette smoking. In July 1995, the pursuer
applied to the Scottish Legal Aid Board for legal aid to fund his action.
Gallaher submitted representations in opposition and in June 1996, the pursuer's
application for legal aid was refused. This litigation is currently stayed.
(F) In Shiels v. Gallaher Limited et al., in the High Court in
Northern Ireland, the plaintiff issued a writ in October 1995 and served it in
October 1996. The plaintiff, the representative of the deceased, seeks
unspecified damages for Buerger's disease and/or premature atherosclerosis
suffered by the deceased allegedly caused by cigarette smoking. The plaintiff
sought legal aid to issue proceedings and in November 1995, Gallaher submitted
representations in opposition to the grant of legal aid. To date, the plaintiff
has received only limited legal aid but has not received legal aid to issue
proceedings. On January 10, 1997, plaintiff's application for an extension of
time in which to serve a statement of claim was adjourned by consent until May
16, 1997.
(G) On November 12, 1996, a writ was issued by the London law firm of
Leigh, Day & Co. in the High Court of England and Wales on behalf of 12
plaintiffs (Hodgson, et al. v. Imperial Tobacco Limited and Gallaher Limited).
Each of the plaintiffs claims to have contracted lung cancer as a result of
smoking tobacco products. Seven of the 12 plaintiffs claim to have smoked
Gallaher's products. Those plaintiffs are John Barrie Hodgson, Denis William
House, Leslie Marsden, Martin Margolis, Murdo Ian Macmillan, Sarah Marie Hore
and James Alan Beech. On December 10, 1996, Leigh Day & Co. issued another writ
on behalf of 11 further plaintiffs (Bywater et al. v. Imperial Tobacco Limited
and Gallaher Limited), each of whom also claims to have developed lung cancer as
a result of smoking tobacco products. Eight of the 11 plaintiffs claim to have
smoked Gallaher's products. Those plaintiffs are Anthony John Bywater, Thomas
Patrick Keating, David Michael Knight, Peter Joseph Keating, John Alan
Lightfoot, Susan Virginia Auton, John Matthew Williams and Frances Wilcox. On
December 11, 1996, the plaintiffs' lawyers requested the early assignment of a
High Court judge to these cases. On December 31, 1996, the Senior Master and
Queen's Remembrancer of the High Court denied the plaintiffs' request for a
recommendation to the Lord Chief Justice for the assignment of a single judge to
the cases. The Senior Master recommended that the plaintiffs' lawyers take
various steps to clarify the nature, scope and scale of the litigation and
indicated that he would be prepared to hear the application again once such
steps have been taken. Leigh, Day & Co. has proposed that 20 cases be
identified as lead cases and that these 20 cases be tried together as a group
action in October 1998 and has advised the Court that it and other associated
law firms are working together on approximately 100 cases (including the 23
filed in November and December 1996). It is not possible at the outset of this
litigation to predict what form the proceedings might ultimately take or the
time frame in which the litigation might proceed.
(H) In addition to the actions described above, from time to time
Gallaher has received a small number of letters before action
24
<PAGE>
alleging smoking-related health effects as a result of smoking cigarettes
manufactured by Gallaher. As of the date hereof, Gallaher was not aware of any
proceeding commenced against it in relation to these allegations.
(I) Registrant has been advised by its legal advisers that, in their
opinion on the basis of their investigations generally with respect to actions
and claims of this character, Gallaher has meritorious defenses to these actions
and claims. The pending actions and claims will be vigorously contested.
(b) 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
Registrant. See the note captioned "Pending Litigation" in the Notes to
Consolidated Financial Statements contained in the 1996 Annual Report to
Stockholders of Registrant, which note is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4a. Executive Officers of the Registrant.
The name, present positions and offices with Registrant, principal
occupations during the past five years and age of each of Registrant's present
executive officers are as follows:
Present positions and offices with
Registrant and principal occupations
Name during the past five years Age
- ---- ------------------------------------ ---
Thomas C. Hays Chairman of the Board and Chief 61
Executive Officer of Registrant
since January 1995; President and
Chief Operating Officer of
Registrant prior thereto
John T. Ludes President and Chief Operating Officer 60
of Registrant since January 1995;
Group Vice President of Registrant and
President and Chief Executive Officer
of Acushnet prior thereto
Dudley L. Bauerlein, Jr. Senior Vice President and Chief 50
Financial Officer of Registrant
since January 1995; Vice President
and Treasurer of Registrant prior thereto
Gilbert L. Klemann, II Senior Vice President and General 46
Counsel of Registrant
25
<PAGE>
Present positions and offices with
Registrant and principal occupations
Name during the past five years Age
- ---- ------------------------------------ ---
Charles H. McGill Senior Vice President -- Corporate 55
Development of Registrant since
January 1996; Vice President --
Corporate Development of Registrant
during 1995; Corporate Vice
President -- Acquisitions of The Dun &
Bradstreet Corporation prior thereto
Steven C. Mendenhall Senior Vice President and Chief 48
Administrative Officer of Registrant
since January 1995; Vice President
and Chief Administrative Officer of
Registrant from 1993 through 1994;
Vice President -- Human Resources of
Registrant prior thereto
Robert J. Rukeyser Senior Vice President -- Corporate 54
Affairs of Registrant
Craig P. Omtvedt Vice President and Chief Accounting 47
Officer of Registrant since January
1997; Vice President -- Deputy
Controller and Chief Internal Auditor
of Registrant during 1996; Deputy
Controller and Chief Internal Auditor
of Registrant during 1995; Deputy
Controller of Registrant prior
thereto
Mr. Peter M. Wilson, who has been a member of the Executive Committee
of the Board of Directors of Registrant and Chairman and Chief Executive of
Gallaher since February 1, 1994, is deemed to be an executive officer of
Registrant for the purposes of this Item 4a. Mr. Wilson was Deputy Chairman of
Gallaher and Chairman and Chief Executive of Gallaher Tobacco Limited prior
thereto. His age is 55.
In the case of each of the above-listed executive officers, the
occupation or occupations given were his principal occupation and employment
during the period or periods indicated. None of such executive officers is
related to any other such executive officer. None was selected pursuant to any
arrangement or understanding between him and any other person. All executive
officers are elected annually.
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.
See the information in the tables captioned "Quarterly Common Stock
Dividend Payments" and "Quarterly Composite Common Stock Prices"
26
<PAGE>
and the discussion relating thereto contained in the 1996 Annual Report to
Stockholders of Registrant, which information and discussion are incorporated
herein by reference. On March 3, 1997, there were 51,855 record holders of
Registrant's Common Stock, par value $3.125 per share.
Item 6. Selected Financial Data.
See the information for 1992 through 1996 in the table captioned "Six-
Year Consolidated Selected Financial Data" contained in the 1996 Annual Report
to Stockholders of Registrant, which information is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
See the discussion and analysis under the captions "Results of
Operations" and "Financial Condition" contained in the 1996 Annual Report to
Stockholders of Registrant, which discussion and analysis are incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data.
See the information in the Consolidated Balance Sheet, Consolidated
Statement of Income, Consolidated Statement of Cash Flows, Consolidated
Statement of Stockholders' Equity, Notes to Consolidated Financial Statements
and Report of Independent Accountants contained in the 1996 Annual Report to
Stockholders of Registrant, which information is incorporated herein by
reference. For unaudited selected quarterly financial data, see the table
captioned "Quarterly Financial Data" contained in the 1996 Annual Report to
Stockholders of Registrant, which table is incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of Registrant.
See the information under the caption "Election of Directors" contained
in the Proxy Statement for the Annual Meeting of Stockholders of Registrant to
be held on April 30, 1997, which information is incorporated herein by
reference. See also the information with respect to executive officers of
Registrant under Item 4a of Part I hereof, which information is incorporated
herein by reference.
Item 11. Executive Compensation.
See the information up to but not including the subcaption "Report of
the Compensation and Stock Option Committee on Executive Compensation" under the
caption "Executive Compensation" contained in the Proxy Statement for the Annual
Meeting of Stockholders of Registrant to
27
<PAGE>
be held on April 30, 1997, which information is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
See the information in the table and notes related thereto and in the
last paragraph under the caption "Election of Directors" and the information
under the caption "Certain Information Regarding Security Holdings" contained in
the Proxy Statement for the Annual Meeting of Stockholders of Registrant to be
held on April 30, 1997, which information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements (all financial statements listed below are of
Registrant and its consolidated subsidiaries)
Consolidated Balance Sheet as of December 31, 1996 and 1995 contained
in the 1996 Annual Report to Stockholders of Registrant is incorporated
herein by reference.
Consolidated Statement of Income for the years ended December 31, 1996,
1995 and 1994 contained in the 1996 Annual Report to Stockholders of
Registrant is incorporated herein by reference.
Consolidated Statement of Cash Flows for the years ended December 31,
1996, 1995 and 1994 contained in the 1996 Annual Report to Stockholders of
Registrant is incorporated herein by reference.
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994 contained in the 1996 Annual Report to
Stockholders of Registrant is incorporated herein by reference.
Notes to Consolidated Financial Statements contained in the 1996 Annual
Report to Stockholders of Registrant are incorporated herein by reference.
Report of Independent Accountants contained in the 1996 Annual Report
to Stockholders of Registrant is incorporated herein by reference.
28
<PAGE>
(2) Financial Statement Schedules
See Index to Financial Statement Schedule of Registrant and
subsidiaries at page F-1, which Index is incorporated herein by reference.
(3) Exhibits
3(i). Certificate of Incorporation of Registrant as in effect on the date
hereof is incorporated herein by reference to Exhibit 3a2 to the
Quarterly Report on Form 10-Q of Registrant dated May 14, 1990.
3(ii). By-laws of Registrant as in effect on the date hereof are incorporated
herein by reference to Exhibit 3(ii)(b) to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended December 31, 1995.
10a1. Article XII ("Incentive Compensation") of the By-laws of Registrant is
incorporated herein by reference to Exhibit 3(ii) hereof.*
10b1. 1986 Stock Option Plan of American Brands, Inc. and amendments thereto
are incorporated herein by reference to Exhibit 10b2 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended December
31, 1992.*
10b2. Amendment to 1986 Stock Option Plan of American Brands, Inc.
constituting Exhibit 10b1 hereto is incorporated herein by reference to
Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated
November 11, 1993.*
10b3. Amendment to 1986 Stock Option Plan of American Brands, Inc.
constituting Exhibits 10b1 and 10b2 hereto is incorporated herein by
reference to Exhibit 10b to the Quarterly Report on Form 10-Q of
Registrant dated August 11, 1994.*
10b4. 1990 Long-Term Incentive Plan of American Brands, Inc. (As Amended and
Restated as of January 1, 1994) is incorporated herein by reference to
Exhibit 10a to the Quarterly Report on Form 10-Q of Registrant dated
August 11, 1994.*
10c1. Amended Supplemental Plan of American Brands, Inc. is incorporated
herein by reference to Exhibit 10c1 to the Annual Report on Form 10-K
of Registrant for the Fiscal Year ended December 31, 1995.*
10c2. Trust Agreement, made as of the 2nd day of January, 1991, among
Registrant, The Chase Manhattan Bank (National Association) ("Chase"),
et al. establishing a trust in favor of Gilbert L. Klemann, II for
purposes of paying amounts under the Amended Supplemental Plan
constituting Exhibit 10c1 hereto is incorporated herein by reference to
Exhibit 10c2 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1995.*
29
<PAGE>
10c3. Amendment made as of the 1st day of November, 1993 to Trust Agreement
constituting Exhibit 10c2 hereto is incorporated herein by reference to
Exhibit 10c3 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1995.*
10c4. Amendment made as of the 1st day of January, 1995, to the Trust
Agreement constituting Exhibits 10c2 and 10c3 hereto is incorporated
herein by reference to Exhibit 10c4 to the Annual Report on Form 10-K
of Registrant for the Fiscal Year ended December 31, 1995.*
10c5. Schedule identifying substantially identical agreements to the Trust
Agreement and the Amendments thereto constituting Exhibits 10c2, 10c3
and 10c4 hereto, respectively, in favor of Thomas C. Hays, John T.
Ludes, Robert J. Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein,
Jr. and Charles H. McGill.*
10c6. Trust Agreement, made as of the 1st day of November, 1993, among
Gilbert L. Klemann, II, Registrant and Chase establishing a grantor
trust in favor of Gilbert L. Klemann, II for purposes of paying amounts
under the Amended Supplemental Plan constituting Exhibit 10c1 hereto is
incorporated herein by reference to Exhibit 10c6 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year ended December 31,
1995.*
10c7. Amendment made as of 1st day of January, 1996 to Trust Agreement
constituting Exhibit 10c6 hereto is incorporated herein by reference to
the Quarterly Report on Form 10-Q of Registrant dated August 8, 1996.*
10c8. Schedule identifying substantially identical agreements to the Trust
Agreement and Amendment thereto constituting Exhibits 10c6 and 10c7
hereto, respectively, in favor of Thomas C. Hays, John T. Ludes, Robert
J. Rukeyser, Steven C. Mendenhall and Dudley L. Bauerlein, Jr.*
10d1. Resolutions of the Board of Directors of Registrant adopted on October
28, 1986 and July 26, 1988 adopting and amending a retirement plan for
directors of Registrant who are not officers or employees of Registrant
or a subsidiary thereof are incorporated herein by reference to Exhibit
10e1 to the Annual Report on Form 10-K of Registrant for the Fiscal
Year ended December 31, 1991.*
10d2. Resolutions of the Board of Directors of Registrant adopted on July 26,
1994 amending the resolutions constituting Exhibit 10d1 hereto is
incorporated herein by reference to Exhibit 10e2 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year ended December 31,
1994.*
10e1. Retirement Agreement, made as of January 1, 1995, between Registrant
and Thomas C. Hays is incorporated herein by reference to Exhibit 10f1
to the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1994.*
30
<PAGE>
10f1. Gallaher Limited Executive Incentive Plan adopted on October 20, 1994
is incorporated herein by reference to Exhibit 10g1 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended December
31, 1994.*
10f2. Trust Deed dated March 24, 1983 between Gallaher Limited ("Gallaher")
and Gallaher Pensions Limited, and amendments thereto, providing
supplemental retirement benefits to certain executives of Gallaher are
incorporated herein by reference to Exhibits 10g2 and 10g3 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1989.*
10f3. Trust Deed dated June 3, 1992 further amending Exhibit 10f2 hereto is
incorporated herein by reference to Exhibit 10g3 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year ended December 31,
1992.*
10f4. Trust Deed dated January 24, 1994 further amending Exhibits 10f2 and
10f3 hereto is incorporated herein by reference to Exhibit 10g4 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1993.*
10f5. Trust Deed dated April 8, 1994 further amending Exhibits 10f2, 10f3 and
10f4 hereto is incorporated herein by reference to Exhibit 10f5 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1995.*
10g1. Resolution of the Board of Directors of Registrant adopted on November
27, 1990 with respect to retirement and health benefits provided to
Gilbert L. Klemann, II is incorporated herein by reference to Exhibit
10p1 to the Annual Report on Form 10-K of Registrant for the Fiscal
Year ended December 31, 1991.*
10h1. Service Agreement dated March 11, 1997 between Gallaher and Peter M.
Wilson.*
10h2. Letter dated September 20, 1991 from Gallaher in respect of retirement
benefits provided to Peter M. Wilson is incorporated herein by
reference to Exhibit 10o2 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1993.*
10h3. Letter dated March 15, 1994 amending Exhibit 10h2 hereto is
incorporated herein by reference to Exhibit 10o3 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year ended December 31,
1993.*
10i1. Letter dated January 23, 1996 from Registrant with respect to deferred
payment of fees to Eugene R. Anderson is incorporated herein by
reference to Exhibit 10k1 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1995.*
10i2. Letter dated August 11, 1995 from Registrant with respect to deferred
payment of fees to Gordon R. Lohman is incorporated
31
<PAGE>
herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q
of Registrant dated November 9, 1995.*
10j1. Agreement dated January 2, 1991 between Registrant and Gilbert L.
Klemann, II is incorporated herein by reference to Exhibit 10s1 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1992.*
10j2. Amendment dated November 28, 1994 to the Agreement constituting Exhibit
10j1 hereto is incorporated herein by reference to Exhibit 10r2 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
10j3. Schedule identifying substantially identical agreements to the
Agreement and the Amendment thereto constituting Exhibits 10j1 and 10j2
hereto, respectively, entered into by Registrant with Thomas C. Hays,
John T. Ludes, Robert J. Rukeyser, Steven C. Mendenhall, Dudley L.
Bauerlein, Jr., Charles H. McGill and Craig P. Omtvedt.*
10k1. Trust Agreement, made as of the 2nd day of January, 1991, among
Registrant, Chase, et al. establishing a trust in favor of Gilbert L.
Klemann, II for purposes of paying amounts under the Agreement
constituting Exhibits 10j1 and 10j2 hereto is incorporated herein by
reference to Exhibit 10s1 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1994.*
10k2. Amendment made as of the 1st day of November, 1993 to Trust Agreement
constituting Exhibit 10k1 hereto is incorporated herein by reference to
Exhibit 10s2 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1994.*
10k3. Schedule identifying substantially identical agreements to the Trust
Agreement and Amendment thereto constituting Exhibits 10k1 and 10k2
hereto, respectively, in favor of Thomas C. Hays, John T. Ludes, Robert
J. Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein, Jr. and Craig
P. Omtvedt.*
10l1. Agreement dated as of March 1, 1988 and amendments thereto between
Registrant and Thomas C. Hays are incorporated herein by reference to
Exhibit 10v1 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1992.*
10l2. Amendment effective as of January 1, 1995 to the Agreement constituting
Exhibit 10l1 hereto is incorporated herein by reference to Exhibit 10t2
to the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1994.*
10l3. Amendment effective as of January 1, 1995 to the Agreement and
Amendment thereto constituting Exhibits 10l1 and 10l2 hereto,
respectively, is incorporated herein by reference to Exhibit 10t3 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
32
<PAGE>
10m1. Agreement dated as of January 2, 1991 between Registrant and Gilbert L.
Klemann, II and amendment thereto is incorporated herein by reference
to Exhibit 10y1 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1991.*
10m2. Agreement dated as of October 28, 1991 amending the Agreement
constituting Exhibit 10m1 hereto is incorporated herein by reference to
Exhibit 10w2 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1992.*
10m3. Amendment effective as of January 1, 1995 to the Agreement and
Amendment thereto constituting Exhibits 10m1 and 10m2 hereto,
respectively, is incorporated herein by reference to Exhibit 10u3 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
10m4. Schedule identifying substantially identical agreements to the
Agreement and Amendments thereto constituting Exhibits 10m1, 10m2 and
10m3 hereto entered into by Registrant with John T. Ludes, Robert J.
Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein, Jr. and Craig P.
Omtvedt.*
10n1. Agreement dated February 24, 1995 between Registrant and Charles H.
McGill is incorporated herein by reference to Exhibit 10w1 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
l0o1. Rights Agreement dated as of December 13, 1987 between Registrant and
First Chicago Trust Company of New York, as Rights Agent, and
amendments thereto is incorporated herein by reference to Exhibit 10aa1
to the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1992.*
11. Statement setting forth net income for computation of earnings per
Common share, primary and fully diluted, and statement setting forth
computation of weighted average number of Common shares outstanding on
a fully diluted basis.
12. Statement re computation of ratio of earnings to fixed charges.
13. 1996 Annual Report to Stockholders of Registrant.
21. Subsidiaries of Registrant.
23(i)a. Consent of Independent Accountants, Coopers & Lybrand L.L.P.
23(i)b. Consent of Counsel, Chadbourne & Parke LLP.
24. Powers of Attorney relating to execution of this Annual Report on Form
10-K.
27. Financial Data Schedule (Article 5).
* Indicates that exhibit is a management contract or compensatory plan
or arrangement.
33
<PAGE>
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 October 8, 1996, in
respect of Registrant's press release dated October 8, 1996 announcing
Registrant's plan to spin off the U.K.-based tobacco business of its
Gallaher Limited subsidiary (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated October 16, 1996, in
respect of Registrants' press release dated October 15, 1996 announcing
that Registrant will redeem its 7 3/4% Eurodollar Convertible Debentures
Due 2002, its 5-3/8% Eurodollar Convertible Debentures Due 2003 and its 5-
3/4% Eurodollar Convertible Debentures Due 2005. (Items 5 and 7 (c)).
Registrant filed a Current Report on Form 8-K, dated October 22, 1996, in
respect of Registrant's press release dated October 22, 1996 announcing
Registrant's financial results for the three-month and nine-month periods
ended September 30, 1996 (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated December 19, 1996, in
respect of Registrant's press release dated December 19, 1996 announcing
Registrant's plan to consolidate production at its Gallaher tobacco unit
(Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated January 24, 1997, in
respect of Registrant's press release dated January 24, 1997 announcing
Registrant's financial results for the three-month and twelve-month periods
ended December 31, 1996 (Items 5 and 7(c)).
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN BRANDS, INC.
(Registrant)
By Thomas C. Hays
Thomas C. Hays
Chairman of the Board and
Date: March 13, 1997 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
Thomas C. Hays
Thomas C. Hays, Chairman of the Board and
Chief Executive Officer (principal executive
officer) and Director
Date: March 13, 1997
John T. Ludes*
John T. Ludes, President and Chief
Operating Officer and Director
Date: March 13, 1997
Dudley L. Bauerlein, Jr.
Dudley L. Bauerlein, Jr., Senior Vice President and
Chief Financial Officer (principal
financial officer)
Date: March 13, 1997
Craig P. Omtvedt
Craig P. Omtvedt, Vice President and Chief Accounting
Officer (principal accounting officer)
Date: March 13, 1997
Eugene R. Anderson*
Eugene R. Anderson, Director
Date: March 13, 1997
Patricia O. Ewers*
Patricia O. Ewers, Director
Date: March 13, 1997
35
<PAGE>
John W. Johnstone, Jr.*
John W. Johnstone, Jr., Director
Date: March 13, 1997
Wendell J. Kelley*
Wendell J. Kelley, Director
Date: March 13, 1997
Sidney Kirschner*
Sidney Kirschner, Director
Date: March 13, 1997
Gordon R. Lohman*
Gordon R. Lohman, Director
Date: March 13, 1997
Charles H. Pistor, Jr.*
Charles H. Pistor, Jr., Director
Date: March 13, 1997
Anne M. Tatlock*
Anne M. Tatlock, Director
Date: March 13, 1997
John W. Thompson*
John W. Thompson, Director
Date: March 13, 1997
Peter M. Wilson*
Peter M. Wilson, Director
Date: March 13, 1997
*By A. Robert Colby
A. Robert Colby, Attorney-in-Fact
36
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE
Pages
-----
AMERICAN BRANDS, INC. AND SUBSIDIARIES
Report of Independent Accountants F-2
Schedule
--------
II Valuation and qualifying accounts
For the years ended December 31,
1996, 1995 and 1994 F-3
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
American Brands, Inc.:
Our report on the consolidated financial statements of American Brands,
Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from
the 1996 Annual Report to Stockholders of American Brands, Inc. In connection
with our audits of such financial statements, we have also audited the related
financial statement schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
February 3, 1997
F-2
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1996, 1995 and 1994 (In millions)
Col. A Col. B Col. C Col. D Col. E
-------------- --------------- ------------- ---------
Additions
---------------
Balance at Charged Balance
Beginning to Costs at End
Description of Period and Expenses Deductions of Period
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996:
Allowance for cash
discounts $ 5.5 $ 64.4 $ 73.4 (1) $ 7.8
(11.3)(3)
Allowance for
returns 15.6 131.2 130.3 (1) 18.9
(2.4)(3)
Allowance for
doubtful accounts 26.1 6.7 8.1 (2) 26.8
(2.1)(3)
---------
$47.2 $202.3 $ 196.0 $53.5
===== ====== ========= =========
1995:
Allowance for cash
discounts $ 5.3 $ 42.8 $ 42.6 (1) $ 5.5
Allowance for
returns 12.6 98.3 95.3 (1) 15.6
Allowance for
doubtful accounts 34.1 7.2 15.2 (2) 26.1
----- ------ --------- ---------
$52.0 $148.3 $ 153.1 $47.2
===== ====== ========= =========
1994:
Allowance for cash
discounts $ 6.3 $ 93.0 $ 92.7 (1) $ 5.3
1.3 (4)
Allowance for
returns 21.9 90.9 93.2 (1) 12.6
7.0 (4)
Allowance for
doubtful accounts 34.3 11.3 (0.9)(5) 34.1
9.5 (2)
2.9 (4)
----- ------ --------- ---------
$62.5 $195.2 $ 205.7 $52.0
===== ====== ========= =========
</TABLE>
(1) Cash discounts and returns allowed customers.
(2) Doubtful accounts written off, net of recoveries.
(3) Balance at acquisition date of subsidiaries.
(4) Balance at disposal date of subsidiaries.
(5) Effect of changes in foreign exchange rates.
F-3
<PAGE>
EXHIBIT INDEX
3(i). Certificate of Incorporation of Registrant as in effect on the date
hereof is incorporated herein by reference to Exhibit 3a2 to the
Quarterly Report on Form 10-Q of Registrant dated May 14, 1990.
3(ii). By-laws of Registrant as in effect on the date hereof are incorporated
herein by reference to Exhibit 3(ii)(b) to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended December 31, 1995.
10a1. Article XII ("Incentive Compensation") of the By-laws of Registrant is
incorporated herein by reference to Exhibit 3(ii) hereof.*
10b1. 1986 Stock Option Plan of American Brands, Inc. and amendments thereto
are incorporated herein by reference to Exhibit 10b2 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended December
31, 1992.*
10b2. Amendment to 1986 Stock Option Plan of American Brands, Inc.
constituting Exhibit 10b1 hereto is incorporated herein by reference to
Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated
November 11, 1993.*
10b3. Amendment to 1986 Stock Option Plan of American Brands, Inc.
constituting Exhibits 10b1 and 10b2 hereto is incorporated herein by
reference to Exhibit 10b to the Quarterly Report on Form 10-Q of
Registrant dated August 11, 1994.*
10b4. 1990 Long-Term Incentive Plan of American Brands, Inc. (As Amended and
Restated as of January 1, 1994) is incorporated herein by reference to
Exhibit 10a to the Quarterly Report on Form 10-Q of Registrant dated
August 11, 1994.*
10c1. Amended Supplemental Plan of American Brands, Inc. is incorporated
herein by reference to Exhibit 10c1 to the Annual Report on Form 10-K
of Registrant for the Fiscal Year ended December 31, 1995.*
10c2. Trust Agreement, made as of the 2nd day of January, 1991, among
Registrant, The Chase Manhattan Bank (National Association) ("Chase"),
et al. establishing a trust in favor of Gilbert L. Klemann, II for
purposes of paying amounts under the Amended Supplemental Plan
constituting Exhibit 10c1 hereto is incorporated herein by reference to
Exhibit 10c2 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1995.*
10c3. Amendment made as of the 1st day of November, 1993 to Trust Agreement
constituting Exhibit 10c2 hereto is incorporated herein by reference to
Exhibit 10c3 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1995.*
<PAGE>
10c4. Amendment made as of the 1st day of January, 1995, to the Trust
Agreement constituting Exhibits 10c2 and 10c3 hereto is incorporated
herein by reference to Exhibit 10c4 to the Annual Report on Form 10-K
of Registrant for the Fiscal Year ended December 31, 1995.*
10c5. Schedule identifying substantially identical agreements to the Trust
Agreement and the Amendments thereto constituting Exhibits 10c2, 10c3
and 10c4 hereto, respectively, in favor of Thomas C. Hays, John T.
Ludes, Robert J. Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein,
Jr. and Charles H. McGill.*
10c6. Trust Agreement, made as of the 1st day of November, 1993, among
Gilbert L. Klemann, II, Registrant and Chase establishing a grantor
trust in favor of Gilbert L. Klemann, II for purposes of paying amounts
under the Amended Supplemental Plan constituting Exhibit 10c1 hereto is
incorporated herein by reference to Exhibit 10c6 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year ended December 31,
1995.*
10c7. Amendment made as of 1st day of January, 1996 to Trust Agreement
constituting Exhibit 10c6 hereto is incorporated herein by reference to
the Quarterly Report on Form 10-Q of Registrant dated August 8, 1996.*
10c8. Schedule identifying substantially identical agreements to the Trust
Agreement and Amendment thereto constituting Exhibits 10c6 and 10c7
hereto, respectively, in favor of Thomas C. Hays, John T. Ludes, Robert
J. Rukeyser, Steven C. Mendenhall and Dudley L. Bauerlein, Jr.*
10d1. Resolutions of the Board of Directors of Registrant adopted on October
28, 1986 and July 26, 1988 adopting and amending a retirement plan for
directors of Registrant who are not officers or employees of Registrant
or a subsidiary thereof are incorporated herein by reference to Exhibit
10e1 to the Annual Report on Form 10-K of Registrant for the Fiscal
Year ended December 31, 1991.*
10d2. Resolutions of the Board of Directors of Registrant adopted on July 26,
1994 amending the resolutions constituting Exhibit 10d1 hereto is
incorporated herein by reference to Exhibit 10e2 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year ended December 31,
1994.*
10e1. Retirement Agreement, made as of January 1, 1995, between Registrant
and Thomas C. Hays is incorporated herein by reference to Exhibit 10f1
to the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1994.*
10f1. Gallaher Limited Executive Incentive Plan adopted on October 20, 1994
is incorporated herein by reference to Exhibit 10g1 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended December
31, 1994.*
<PAGE>
10f2. Trust Deed dated March 24, 1983 between Gallaher Limited ("Gallaher")
and Gallaher Pensions Limited, and amendments thereto, providing
supplemental retirement benefits to certain executives of Gallaher are
incorporated herein by reference to Exhibits 10g2 and 10g3 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1989.*
10f3. Trust Deed dated June 3, 1992 further amending Exhibit 10f2 hereto is
incorporated herein by reference to Exhibit 10g3 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year ended December 31,
1992.*
10f4. Trust Deed dated January 24, 1994 further amending Exhibits 10f2 and
10f3 hereto is incorporated herein by reference to Exhibit 10g4 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1993.*
10f5. Trust Deed dated April 8, 1994 further amending Exhibits 10f2, 10f3 and
10f4 hereto is incorporated herein by reference to Exhibit 10f5 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1995.*
10g1. Resolution of the Board of Directors of Registrant adopted on November
27, 1990 with respect to retirement and health benefits provided to
Gilbert L. Klemann, II is incorporated herein by reference to Exhibit
10p1 to the Annual Report on Form 10-K of Registrant for the Fiscal
Year ended December 31, 1991.*
10h1. Service Agreement dated March 11, 1997 between Gallaher and Peter M.
Wilson.*
10h2. Letter dated September 20, 1991 from Gallaher in respect of retirement
benefits provided to Peter M. Wilson is incorporated herein by
reference to Exhibit 10o2 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1993.*
10h3. Letter dated March 15, 1994 amending Exhibit 10h2 hereto is
incorporated herein by reference to Exhibit 10o3 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year ended December 31,
1993.*
10i1. Letter dated January 23, 1996 from Registrant with respect to deferred
payment of fees to Eugene R. Anderson is incorporated herein by
reference to Exhibit 10k1 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1995.*
10i2. Letter dated August 11, 1995 from Registrant with respect to deferred
payment of fees to Gordon R. Lohman is incorporated herein by reference
to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated
November 9, 1995.*
10j1. Agreement dated January 2, 1991 between Registrant and Gilbert L.
Klemann, II is incorporated herein by reference to Exhibit 10s1 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1992.*
<PAGE>
10j2. Amendment dated November 28, 1994 to the Agreement constituting Exhibit
10j1 hereto is incorporated herein by reference to Exhibit 10r2 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
10j3. Schedule identifying substantially identical agreements to the
Agreement and the Amendment thereto constituting Exhibits 10j1 and 10j2
hereto, respectively, entered into by Registrant with Thomas C. Hays,
John T. Ludes, Robert J. Rukeyser, Steven C. Mendenhall, Dudley L.
Bauerlein, Jr., Charles H. McGill and Craig P. Omtvedt.*
10k1. Trust Agreement, made as of the 2nd day of January, 1991, among
Registrant, Chase, et al. establishing a trust in favor of Gilbert L.
Klemann, II for purposes of paying amounts under the Agreement
constituting Exhibits 10j1 and 10j2 hereto is incorporated herein by
reference to Exhibit 10s1 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1994.*
10k2. Amendment made as of the 1st day of November, 1993 to Trust Agreement
constituting Exhibit 10k1 hereto is incorporated herein by reference to
Exhibit 10s2 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1994.*
10k3. Schedule identifying substantially identical agreements to the Trust
Agreement and Amendment thereto constituting Exhibits 10k1 and 10k2
hereto, respectively, in favor of Thomas C. Hays, John T. Ludes, Robert
J. Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein, Jr. and Craig
P. Omtvedt.*
10l1. Agreement dated as of March 1, 1988 and amendments thereto between
Registrant and Thomas C. Hays are incorporated herein by reference to
Exhibit 10v1 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1992.*
10l2. Amendment effective as of January 1, 1995 to the Agreement constituting
Exhibit 10l1 hereto is incorporated herein by reference to Exhibit 10t2
to the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1994.*
10l3. Amendment effective as of January 1, 1995 to the Agreement and
Amendment thereto constituting Exhibits 10l1 and 10l2 hereto,
respectively, is incorporated herein by reference to Exhibit 10t3 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
10m1. Agreement dated as of January 2, 1991 between Registrant and Gilbert L.
Klemann, II and amendment thereto is incorporated herein by reference
to Exhibit 10y1 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1991.*
10m2. Agreement dated as of October 28, 1991 amending the Agreement
constituting Exhibit 10m1 hereto is incorporated herein by reference to
Exhibit 10w2 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1992.*
<PAGE>
10m3. Amendment effective as of January 1, 1995 to the Agreement and
Amendment thereto constituting Exhibits 10m1 and 10m2 hereto,
respectively, is incorporated herein by reference to Exhibit 10u3 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
10m4. Schedule identifying substantially identical agreements to the
Agreement and Amendments thereto constituting Exhibits 10m1, 10m2 and
10m3 hereto entered into by Registrant with John T. Ludes, Robert J.
Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein, Jr. and Craig P.
Omtvedt.*
10n1. Agreement dated February 24, 1995 between Registrant and Charles H.
McGill is incorporated herein by reference to Exhibit 10w1 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
l0o1. Rights Agreement dated as of December 13, 1987 between Registrant and
First Chicago Trust Company of New York, as Rights Agent, and
amendments thereto is incorporated herein by reference to Exhibit 10aa1
to the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1992.*
11. Statement setting forth net income for computation of earnings per
Common share, primary and fully diluted, and statement setting forth
computation of weighted average number of Common shares outstanding on
a fully diluted basis.
12. Statement re computation of ratio of earnings to fixed charges.
13. 1996 Annual Report to Stockholders of Registrant.
21. Subsidiaries of Registrant.
23(i)a. Consent of Independent Accountants, Coopers & Lybrand L.L.P.
23(i)b. Consent of Counsel, Chadbourne & Parke LLP.
24. Powers of Attorney relating to execution of this Annual Report on Form
10-K.
27. Financial Data Schedule (Article 5).
* Indicates that exhibit is a management contract or compensatory plan
or arrangement.
<PAGE>
EXHIBIT 10c5
Schedule identifying substantially identical agreements, among American Brands,
Inc. ("American") and The Chase Manhattan Bank (National Association), et al.
establishing a trust in favor of each of the following persons, to the Trust
Agreement and Amendments thereto constituting Exhibits 10c2, 10c3 and 10c4,
respectively, to the Annual Report on Form 10-K of American for the Fiscal Year
ended December 31, 1996
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
John T. Ludes
Robert J. Rukeyser
Steven C. Mendenhall
Dudley L. Bauerlein, Jr.
Charles H. McGill
<PAGE>
EXHIBIT 10c8
Schedule identifying substantially identical agreements, among American Brands,
Inc. ("American") and The Chase Manhattan Bank (National Association), et al.
establishing a grantor trust in favor of each of the following persons, to the
Trust Agreement and Amendment thereto constituting Exhibits 10c6 and 10c7,
respectively, to the Annual Report on Form 10-K of American for the Fiscal Year
ended December 31, 1996
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
John T. Ludes
Robert J. Rukeyser
Steven C. Mendenhall
Dudley L. Bauerlein, Jr.
<PAGE>
EXHIBIT 10h1
THIS AGREEMENT is made the 11th day of March 1997
BETWEEN:
(1) GALLAHER LIMITED a company in England under number 1501573 whose registered
office is at Members Hill, Brooklands Road, Weybridge, Surrey KT13 0QU
("the Company") and
(2) PETER MICHAEL WILSON of The Stable Old Odiham Road Alton Hampshire GU234
4BW ("the Executive")
WHEREBY IT IS AGREED AS FOLLOWS:
INTERPRETATION
1. (A) DEFINITIONS
UNLESS the context otherwise requires, in this Agreement and in the Schedule
hereto the following words and phrases shall have the meanings given below:
(1) "subsidiary" or "subsidiary company" and "holding company" shall have the
meanings ascribed to them Part XXVI of the Companies Act 1985;
(2) "Group" means the Company, the company incorporated in England under number
3299793 currently named Gallaher Group Limited ("Gallaher Group") and all
the subsidiaries of the Company and Gallaher Group and "Group Company"
shall be construed accordingly;
(3) "the Board" means the Board of Directors of the Company;
(4) "the Business" means (taken together) the business of the Company and the
business of any other Group Company with which the Executive is required by
the Board under Clause 3 of this Agreement to be concerned;
(5) "Contractual Retirement Date" means the date specified in paragraph 8 of
the Schedule hereto;
(6) "the Effective Date" means the date specified in Paragraph 2 of the
Schedule hereto;
(7) "month" means a calendar month; and
<PAGE>
(8) "Restricted Client" means any person who on the date of termination of the
Executive's employment or at any time during the period of eighteen months
immediately prior to the date of termination was a client of the Company
and with whom during the same period the Executive shall have had business
dealings.
(9) "Demerger" means the demerger of the Company and its subsidiaries from
American Brands, Inc. (ABI") which is to be effected by, inter alia, the
transfer of all the issued shares in the Company to a new company to be
owned by ABI and to be known as Gallaher Group Plc ("Gallaher Group"), the
distribution by ABI of all the issued shares in Gallaher Group to the
shareholders of ABI in the same proportions as those shareholders hold
shares in ABI and the listing of all the issued shares in Gallaher Group on
the London Stock Exchange and in the form of American depository shares on
the New York Stock Exchange.
Other words and phrases the definition of which is contained or referred to in
Part XXVI of the Companies Act 1985 shall be construed as having the meanings
thereby attributed to them.
(B) CONSTRUCTION OF CERTAIN REFERENCES
Unless the context otherwise requires any references in this Agreement to:
(1) a "person" shall include any individual company corporation firm
partnership joint venture association organisation or trust (in each case
whether or not having separate legal personality) and references to any of
the same shall include a reference to the others;
(2) "writing" or "written" shall include any means of visible reproduction;
(3) words denoting the singular shall include the plural and vice versa;
(4) sub-clauses are references to sub-clauses of the Clause in which the
reference appears;
(5) statutory provisions shall be construed as references to those provisions
as respectively amended or re-enacted or as their application is modified
by other
2
<PAGE>
provisions (whether before or after the date hereof) from time to time and
shall include any provisions of which they are re-enactments (whether with
or without modification); and
(6) the masculine gender shall be deemed to include the feminine gender.
(C) CLAUSE HEADINGS
Clause headings are inserted for convenience only and shall not affect the
construction of this Agreement.
(D) REASONABLE OF RESTRICTIONS
The restrictions contained in Clause 13 hereof are considered reasonable by the
parties hereto. In particular, the Executive agrees that the restrictions are
reasonable and necessary for the protection of the business of the Company and
any Group Company as appropriate.
APPOINTMENT
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2. THE Company shall employ the Executive and the Executive agrees to serve the
Company in the capacity specified in paragraph 1 of the Schedule hereto as at
and with effect from the Effective Date and continuing thereafter (subject to
termination as hereinafter provided) unless and until terminated by the Company
giving to the Executive not less than the period of prior notice in writing
specified in paragraph 3(a) of the Schedule hereto or the Executive giving to
the Company not less than the period of prior notice in writing specified in
paragraph 3(b) of the Schedule hereto but so that the employment of the
Executive hereunder shall terminate in any event on the Contractual Retirement
Date. The Company will be entitled from time to time to appoint any other
person or persons to act jointly with the Executive in the performance of his
duties.
DUTIES, POWERS AND MOBILITY
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3. (A) THE Executive shall exercise such powers perform such duties (if any)
and comply with such directions in relation to the business of the Company and
any other Group Company or Group Companies consistent with his employment
hereunder as the Board or any person authorized by the Board for the purpose may
from time to time confer upon or assign or give to him.
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(B) The Executive shall during the continuance of his employment
hereunder (unless prevented by ill health or accident) devote so much of his
time and attention and abilities to the Business as the Board may reasonably
require for the proper performance of his duties hereunder and shall use his
best endeavors to promote and protect the general interests and welfare of the
Company.
(C) The Executive shall at all times promptly give to the Board (in
writing if so requested) all such information explanations and assistance as it
may require in connection with the Business and his employment hereunder.
(D) The Executive may be required to travel on the business of the
Company or any other Group Company both inside and outside the United Kingdom in
the proper performance of his duties hereunder.
(E) The Executive shall work in such place or places (whether within
or outside the United Kingdom) as the Board may reasonably require for the
proper performance of his duties hereunder.
REMUNERATION
4. (A) SUBJECT to Clause 8(B) below the Company shall pay to the Executive
during the continuance of his employment hereunder as remuneration for his
services a salary at the annual rate specified in paragraph 4 of the Schedule
hereto payable in arrear by equal installments on or before the last day of each
month which said salary shall be deemed to accrue from day to day. Such salary
shall include any sum receivable by the Executive as Director's fees from the
Company or any other Group Company.
(B) The remuneration payable to the Executive by the Company pursuant
to sub-clause (A) shall be subject to review in accordance with the Company's
practice from time to time. The Company shall be under no obligation to
increase remuneration on such review but shall not in any event reduce
remuneration on review.
(C) The Executive may be entitled to a bonus in addition to salary.
Entitlement to bonus will be at the absolute discretion of the Company.
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EXPENSES
5. THE Company shall pay or refund or procure to be paid or refunded to the
Executive all reasonable traveling entertainment and other similar out of pocket
expenses necessarily and wholly incurred by him in the performance of his duties
hereunder but the Company shall be entitled as a condition of reimbursement to
such evidence from the Executive as to such expenses as the Board may reasonably
require (including without limitation proper accounts with vouchers).
COMPANY CAR
6. (A) THE Company shall make available to the Executive a motor car ("the
Car") for his use of such type as the Board may in its absolute discretion
decide is suitable for him.
(B) The Company shall pay the costs of insuring, testing and taxing
the Car and shall reimburse the Executive in respect of all running expenses in
connection with the use of the Car (including petrol, lubrication, maintenance
and repairs of the Car) but excluding any petrol for private mileage outside the
United Kingdom.
(C) The Car may from time to time be replaced with a car of similar
type.
(D) The Executive shall be permitted to use the Car for his own
personal purposes including use on holiday outside the United Kingdom and
traveling to and from his normal place of business.
(E) The Executive shall ensure that at all times when the Car is
driven on a public highway it is in the state and condition required by law and
that if so required a current test certificate is in force in respect of it.
(F) The Executive shall at all times conform to all regulations which
may from time to time be made or imposed by the Company or any other Group
Company as appropriate in regard to motor cars provided for the use of
executives.
(G) It shall be a condition of the provision of the Car to the
Executive that in the event of the termination of the employment of the
Executive for whatever
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reason and howsoever caused, the Executive shall immediately upon demand deliver
up the Car to the Company.
HOLIDAYS
7. (A) IN addition to statutory and bank holidays the Executive shall be
entitled to paid holiday in each calendar year of the period specified in
paragraph 5 of the Schedule hereto at such time or times as the Business may
permit.
(B) Holidays may not be carried forward from one year to the next and
the Executive will not be entitled to any payment (whether during the
continuance or on termination of this Agreement) in lieu of holidays not taken.
SICKNESS AND INCAPACITY
8. (A) IF the Executive is absent from work as a result of sickness or injury
he will
(1) if the period of absence is less than eight consecutive calendar
days, submit to the Company on his return a certificate of sickness
completed by himself;
(2) if it is eight consecutive calendar days or more submit to the
Company without delay a medical certificate signed by a practicing medical
practitioner in respect of each week of absence after the first.
(B) Subject to compliance with sub-clause (A) above the Executive
will be entitled to payment of his salary at the full rate (less any social
security or other benefits payable to him) during the first twelve months of
absence from work as a result of sickness or injury. Thereafter the Executive
shall be entitled to such salary and other benefits (if any) as the Company
shall in its absolute discretion decide.
(C) The Company will pay Statutory Sick Pay, where appropriate, in
accordance with the legislation in force at the time of absence and any payment
of salary in accordance with this Clause will go towards discharging its
liability to pay Statutory Sick Pay.
(D) If the Executive is absent from work due to the act or default of
a third party, and claim for damages, if made, shall include a claim for "loss
of earnings". Any
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sum recovered under this head shall subsequently be refunded to the Company.
(E) The Executive shall submit himself to a medical examination at
the request and reasonable expense of the Board at any time during the
continuance of his employment hereunder whether or not the Executive is absent
by reason of sickness injury or other incapacity.
PENSION
9. (A) In this clause "Pension Scheme" means the Gallaher 'M' Pension Scheme
and includes, unless the context otherwise requires, any replacement scheme as
provided below.
(B) The Executive shall, while in employment hereunder, be entitled
to be and to remain a member of the Pension Scheme on a non-contributory basis,
subject to the terms and conditions of the Pension Scheme from time to time in
force, including the powers of amendment and discontinuance.
(C) The Company undertakes to and with the Executive as follows:
(1) no material adverse amendment will be made to the benefits
payable or prospectively or contingently payable under the
Pension Scheme to or in respect of the Executive apart from any
such amendment which is made in order to comply with any
applicable law, regulation or requirement or is made with the
prior written consent of the Executive;
(2) if while the Executive is in employment hereunder the Pension
Scheme is terminated or the Executive is unable to continue in
pensionable service under the Pension Scheme:
(a) the Executive will be provided with the benefit of a
replacement retirement benefits scheme (the "replacement
scheme") which is approved or is treated by the Board of
Inland Revenue as approved under Chapter I, Part XIV, Income
and Corporation Taxes Act 1988;
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(b) subject to (c) below, the benefits payable or prospectively
or contingently payable under the replacement scheme to or
in respect of the Executive will be no less favorable
overall than those so payable under the Pension Scheme
immediately prior to the Pension Scheme being terminated or,
as the case may be, the Executive ceasing to be in
pensionable service under it;
(c) where a transfer value is not made from the Pension Scheme
to the replacement scheme in lieu of all the benefits
otherwise payable under the Pension Scheme to or in respect
of the Executive or where such a transfer value has been
paid but a subsequent transfer value is before the Executive
ceases to employed hereunder paid from the replacement
scheme in respect of all or any of the benefits otherwise
payable under the replacement scheme in respect of the
Executive's membership of the Pension Scheme a reasonable
deduction, as determined by the Company on actuarial advice,
shall be made from the benefits otherwise payable pursuant
to (b) above for any benefits which are not payable under
the replacement scheme but which are payable or, as the case
may be, have been paid in respect of the Executive's
membership of the Pension Scheme.
(D) The Company undertakes to procure if the Executive on ceasing to
be employed by the Company becomes employed by another person (the "New
Employer") pursuant to the Transfer of Undertakings (Protection of Employment)
Regulations 1981 the Executive is employed by the New Employer on the terms with
regard to relevant benefits which are identical to those contained in this
clause and that in relation to the provision of relevant benefits employment
with the Company is treated as employment with the New Employer (where "relevant
benefits" has the same meaning as in section 612, Income and Corporation Taxes
Act 1988).
(E) A contracting-out certificate is in force in relation to the
Pension Scheme for the purposes of the Pension Scheme Act 1993.
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PRIVATE HEALTH INSURANCE AND OTHER INSURANCE
10. THE Company shall pay all premiums and make all necessary payments to
provide the Executive with medical insurance under the provisions of the
Company's membership of such medical insurance scheme or schemes as the Board
may from time to time determine and of which the Executive is or may become
during the continuance of his employment hereunder a member.
EXCLUSIVE SERVICE
11. DURING the continuance of his employment hereunder the Executive shall not
(save with the prior consent of the Board communicated in writing by the
Secretary of the Company to the Executive) either as principal servant or agent
carry on or be engaged concerned or interested directly or indirectly whether
alone or on his behalf or on behalf of or in association or conjunction with any
other person and whether as an employee or in any capacity in any trade business
or occupation whatsoever other than that of the Company or of any other Group
Company (otherwise than as a holder for investment purposes only of any units of
an authorized unit trust and as a holder directly or through nominees of not
more than 5 per cent of the shares or debentures in any company or companies).
INVENTIONS AND IMPROVEMENTS
12. (A) IN this Clause 12, the term "Intellectual Property" means inventions
(whether patentable or not, and whether or not patent protection has been
applied for or granted),improvements, developments, discoveries, proprietary
information, trade marks, trade names, logos, art work, slogans, know-how,
processes, designs (whether or not registrable and whether or not design rights
subsist in them), utility models, works in which copyright may subsist
(including computer software and preparatory and design materials therefor), and
all works protected by rights or forms of protection of a similar nature or
having equivalent effect anywhere in the world.
(B) Subject to the provisions of the Patents Act 1977, the Registered
Designs Act 1949 and the Copyright Designs and Patents Act 1988, if at any time
in the course of or in connection with his employment under this Agreement the
Executive makes or discovers or participates in the making or discovery of any
Intellectual Property directly or indirectly relating to or capable of being
used in the
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business carried on by the Company or by any Group Company, full details of the
Intellectual Property shall immediately be disclosed in writing by him to the
Company and the Intellectual Property shall be the absolute property of the
Company. At the request and expense of the Company, the Executive shall give and
supply all such information, data, drawings and assistance as may be necessary
or in the opinion of the Company desirable to enable the Company to exploit the
Intellectual Property to the best advantage, and shall execute all documents and
do all things which may be necessary or in the opinion of the Company desirable
for obtaining patent or other protection for the Intellectual Property in such
parts of the world as may be specified by the Company and for vesting the same
in the Company or as it may direct.
PROTECTION OF INTERESTS OF COMPANY: CONFIDENTIALITY, NON-ENTICEMENT, NON-
SOLICITATION AND NON-COMPETITION
13. (A) THE Executive shall not at any time either before or after the
termination of his employment with the Company use disclose or communicate to
any person whatsoever any confidential information relating to the business of
the Company or any Group Company or any customers suppliers or agents thereof or
their affairs or any trade secrets of which he may have become possessed during
the continuance of his employment with the Company or supply the names or
addresses of any customers or agents of the Company or any Group Company to any
person except in the proper course of his duties hereunder or as authorized in
writing by the Board or as ordered by a Court of competent jurisdiction.
(B) The Executive shall not at any time during the continuance of his
employment with the Company make otherwise than for the benefit of the Company
or any Group Company any notes or memoranda relating to any matter within the
scope of the Business or concerning any of the dealings or affairs of any Group
Company.
(C) The Executive shall not utter any statement (whether written or
oral) to any representative of television radio film newspaper or other similar
media and shall not write any article for the press or otherwise for publication
on any matter connected with or relating to the business of any Group Company
except in the proper course of his duties or with the approval of the Board.
(D) The Executive hereby covenants that he shall not without the
consent in writing of the Board during the
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continuance of his employment by the Company or during the period specified in
paragraph 9 of the Schedule hereto after the date of termination of his
employment except in the event of an unlawful termination by the Company either
on his own account or in conjunction with or on behalf of any other person
solicit or entice away or endeavor to solicit or to entice away from the Company
or any Group Company any individual:
(a) who is a senior employee or director of the Company or any Group
Company; or
(b) who is contracted to render services to any such company
and in either case with whom the Executive has business dealings during his
employment with the Company whether or not any such person would commit a breach
of contract by reason of his leaving service.
(E) The Executive hereby covenants that he shall not during the
period specified in paragraph 10 of the Schedule hereto immediately following
the termination of his employment except in the event of an unlawful termination
by the Company on his own behalf or on behalf of or in conjunction with any
other person solicit interfere with or entice away or attempt to solicit
interfere with or entice away any person who is a Restricted Client provided
always that nothing contained in this sub-clause shall be deemed to prohibit the
seeking or doing of business not in direct or indirect competition with the
Business.
(F) The Executive hereby covenants that he shall not during the
period specified in paragraph 10 of the Schedule hereto immediately following
the termination of his employment except in the event of an unlawful termination
by the Company on his own behalf or on behalf of in conjunction with any other
person have business dealings directly or indirectly with any person who is a
Restricted Client provided always that nothing contained in this sub-clause
shall be deemed to prohibit the seeking or doing of business not in direct or
indirect competition with the Business.
(G) The Executive hereby covenants that he shall not, without the
prior consent in writing of the Company, during the 12-month period immediately
following the termination of his employment except in the event of an unlawful
termination by the Company either alone or jointly, be engaged, concerned or
interested either directly or
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indirectly in any capacity in the business of the manufacture or sale of tobacco
products.
(H) The Executive hereby covenants with the Company in terms
identical to those contained in sub-clauses (D), (E), (F) and (G) save that the
reference to the termination of the Executive's employment shall refer to the
termination of the Executive's employment for any reason whatsoever whether
lawful or unlawful.
SCOPE OF RESTRICTIONS AND APPLICATION
14. THE Executive agrees that in the event of his receiving from any person an
offer of employment either during the continuance of this Agreement or during
the continuance in force of all or any of the restrictions set out in Clause 13
of this Agreement he shall forthwith inform the Company Secretary.
TERMINATION UPON AMALGAMATION OR RECONSTRUCTION
15. (A) THE provisions of subclause 15(B) shall not apply to a termination
employment occurring within two years after a Change of Control (as defined in
sub-clause 17(F)).
(B) If the employment of the Executive with the Company shall be
terminated either by reason of the liquidation of the Company for the purpose of
reconstruction or amalgamation or as part of any arrangement for the
amalgamation or reconstruction of the Company not involving insolvency and the
Executive shall be offered employment with any concern or undertaking resulting
from such amalgamation or reconstruction on terms and conditions which taken as
a whole are not less favorable than the terms of this Agreement then the
Executive shall have no claim against the Company in respect of such termination
of his employment with the Company.
DIRECTORSHIPS
16. (A) THE Executive shall accept appointment as a Director of any such Group
Company as the Board may require in connection with his appointment hereunder
and as a Director of any other company as the Board may reasonably so require
and he shall resign without claim for compensation from office as a Director of
any such company (other than the Company) at any time on request by the Company
which resignation shall not affect continuance in any way of this Agreement.
The Executive shall forthwith account to the
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Company for any director's fees or other emoluments remuneration or payments
either receivable or received by him by virtue of his holding office as such
director as aforesaid (or waive any right to the same if so required by the
Company).
(B) Upon the termination of the Executive's employment with the
Company for whatsoever reason the Executive shall unless requested by the Board
not to do so resign promptly from
(1) office as a director of the Company or of any Group Company or of any other
company as is referred to in sub-clause (A) of which he is a director and
(2) from all offices held by him in any or all of such companies and
(3) all trusteeships held by him of any pension schemes or other trusts
established by the Company or any other Group Company or any other company
with which the Executive has had dealings as a consequence of his
employment by the Company.
(C) Should the Executive fail to resign from office as a director or
from any other office or trusteeship as if referred to in sub-clauses (A) or (B)
either during his employment when requested by the Company so to do or on
termination thereof the Company is hereby irrevocably authorized to appoint some
person in his name and on his behalf to execute any documents and to do all
things requisite to give effect thereto.
(D) Save with the prior agreement in writing of the Board the
Executive shall not during the continuance of his employment hereunder resign
office as a director of the Company or any Group Company or any other company as
is referred to in sub-clause (A) or do anything that would cause him to be
disqualified from continuing to hold office as a director.
TERMINATION
17. (A) THE Executive's employment with the Company may be terminated
forthwith by the Company without prior notice if the Executive shall at any
time:
(1) commit any serious breach or repeated or continual breach of any of his
obligations hereunder; or
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(2) be guilty of any serious misconduct or serious neglect in the discharge of
his duties hereunder; or
(3) have a bankruptcy order made against him or if he shall make any
arrangement or composition with his creditors or have an interim order made
against him pursuant to Section 252 of the Insolvency Act 1986; or
(4) tend by his actions or omissions to bring the name or reputation of the
Company or any Group Company into serious disrepute or prejudice the
interests of the business of the Company or any other Group Company
(bearing in mind the nature of the duties he is engaged in hereunder and
the capacity in which he is employed); or
(5) be convicted of an offense under any present or future statutory enactment
or regulation relating to insider dealing; or
(6) be or become prohibited by law from being a director.
(B) In the event of termination pursuant to sub-clause (A) the
Company shall not be obliged to make any further payment to the Executive beyond
the amount of any remuneration actually accrued due to the date of such
termination and the Company shall be entitled to deduct from such remuneration
any sums owing to it or to any other Group Company by the Executive.
(C) In the event of the termination of the employment of the
Executive hereunder for whatever reason and whether by notice or in any other
manner whatsoever the Executive agrees that he will not at any time after such
termination represent himself as still having any connection with the Company or
any Group Company.
(D) In the event of the termination of the employment of the
Executive hereunder by notice given pursuant to Clause 2 of this Agreement by
either party, the Executive agrees that the Company may in its absolute
discretion require the Executive not to render all or any of his duties
hereunder or to exclude him from any premises of the Company (without providing
any reason therefor) during the relevant notice period or (if the date of
termination is disputed) at any time after the disputed date of termination and
that such action (if taken) on the part of the Company shall not constitute a
breach of this Agreement of any kind whatsoever in respect of which the
Executive has any claim
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against the Company provided always that throughout the period of any such
action the Executive's salary and contractual benefits shall not cease to be
payable by reason thereof.
(E) At any time within two years after the Executive becoming aware
of a Change of Control (as defined in sub-clause (F) below) of the Company and
except as otherwise provided in sub-clauses (G), (H), (I) and (J) below, the
Executive will, either on being dismissed by the Company (otherwise than under
sub-clause (A) above) or upon terminating his employment with or without notice
following any of the events set out in sub-clause (K) below, be entitled to be
paid by the Company a sum equivalent to two years' salary at the rate in effect
immediately prior to the date of the termination plus a sum equal to twice the
last bonus received by the Executive prior to the Change of Control plus twice
the tax value of the benefits in kind received by the Executive in respect of
the twelve month period preceding the Change of Control. Payment will be made
within 21 days of termination of employment and will be accepted by the
Executive in full and final settlement of all or any claims the Executive has or
may have arising out of the termination of his employment including such claims
(if any) that the Executive has or may have arising from the failure (if any) by
the Company to give to the Executive the period of notice specified in paragraph
3(a) of the Schedule hereto. For the avoidance of any doubt it is agreed that
no discount or deduction shall be made from any payment under this clause 17(E)
to take account of any mitigation on the part of the Executive of the loss
arising from the termination of his employment or accelerated receipt of the
payment.
(F) For the purposes of this clause "Change of Control" shall subject
to the provisions of sub-clause (H) below be regarded as occurring if and only
if
(i) any person, firm or company who or which does not at 1 January
1997 possess Control of the Company acquires Control of the
Company or
(ii) any person firm or company who or which does not immediately
following Demerger possess Control of the Company acquires
Control of the Company
except that prior to Demerger a Change of Control shall be regarded as occurring
if and only if the Company ceases to
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be beneficially owned (directly or indirectly) to the extent of at least 50% by
American Brands, Inc ("ABI") or if 20% or more of the common stock of ABI shall
come within the beneficial ownership of one person or one concerted group of
persons.
For these purposes:
(1) "Person firm or company" shall include any person acting in concert (within
the definition of that expression in the City Code on Takeovers or Mergers
as at 1 January 1997) with that person firm or company; and
(2) "Control" bears the meaning as at 1 January 1997 given to that expression
in section 840 of Income and Corporation Taxes Act 1988.
(G) In the event that the employment of the Executive would be
terminated upon the expiry of a notice of termination of this Agreement which
has been served by either party prior to the date of the Change of Control then
the provisions of sub-clause (E) above shall not apply.
(H) Demerger shall not constitute a Change of Control for the
purposes of sub-clause (E) above.
(I) In the event that the employment of the Executive would be
terminated automatically on the Contractual Retirement Date within two years of
the Change of Control the payment under sub-clause (E) shall be reduced pro rata
by reference to the proportion of the two year period which falls after the
Contractual Retirement Date.
(J) In the event that the Executive terminates his employment by
giving notice following any of the events set out in sub-clause (K) that part of
the payment under sub-clause (E) which is related to salary and the tax value of
benefits in kind shall be reduced pro rata by reference to the period of notice
worked by the Executive.
(K) The events referred to in sub-clause (E) above are as follows:
(1) without the Executive's express written consent any material reduction in
the aggregate duties responsibilities and authority assigned to him
pursuant to Clause 3(A) of this Agreement or the assignment to him of any
duties responsibilities or authority
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inconsistent with the duties responsibilities and authority previously
assigned to him pursuant to Clause 3(A) of this Agreement or a change in
his title or position below that in effect on the date of the Change of
Control;
(2) a reduction by the Company in the Executive's salary in effect on the date
hereof as increased subsequently pursuant to Clause 4(B);
(3) the failure of the Company substantially to maintain and to continue the
Executive's participation in the Company's benefit plans as in effect on
the date hereof as increased by improvements made subsequent thereto or the
taking of any action which would materially reduce the Executive's benefits
under any of such plans or deprive the Executive of any material fringe
benefit enjoyed by him on the date hereof or subsequently. For the
purposes hereof such benefit plans shall include but not be limited to the
Company's pension plans. The substituting for any existing benefit plan of
a similar plan providing no less favorable benefits shall be deemed not to
be a failure by the Company to maintain or continue the Executive's
participation in any such benefit plan and any reference in this sub-clause
to any benefit plan shall be deemed to include a reference to any such
substituted benefit plan;
(4) either of the next two annual bonuses following a Change of Control is less
than the bonus (if any) paid in respect of the Last Year provided that if
the consolidated profits before tax of the Group for the Last Year are
greater than the consolidated profits before tax of the Group for the
Current Year then for the purposes of this Clause 17(K)(4) the bonus in
respect of the Last Year shall be deemed to be reduced pro rata by
reference to the proportion which the consolidated profits before tax of
the Group for the Current Year bear to the consolidate profits before tax
of the Group for the Last Year. In this Clause 17(K)(4)
"the Current Year" means either of the two financial years of the
Group immediately following the Last Year.
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"the Last Year" means:
(i) if a Change of Control takes place between the ending of a
financial year of the Group and the payment of a bonus in respect
of that financial year or, as the case may be, a declaration that
there will be no bonus in respect of that financial year, the
financial year of the Group next but one immediately preceding
the financial year of the Group during which the Change of
Control takes place; and in all other circumstances
(ii) the financial year of the Group immediately preceding the
financial year of the Group during which the Change of Control
takes place
save that
(i) if the Last Year is the financial year ended 31 December 1996 or
31 December 1997 then the consolidated profits before tax of the
Company and its subsidiaries shall be substituted for those of
the Group for the purposes of this Clause 17(K)(4)
(ii) if the Last Year is the financial year ended 31 December 1996
then the bonus paid in respect of the Last Year shall be deemed
to be (Pounds)160,500
(iii) if following a Change of Control there is a significant change
in the nature or scale of the business of the Group the profits
before tax of the Current Year will be deemed to be equal to the
profits before tax of the Last Year
For the avoidance of doubt if no bonus is paid in respect of the Last Year
nothing in this Clause 17(K)(4) shall entitle the Executive to terminate
his employment or to receive a payment pursuant to Clause 17(E).
(5) notwithstanding Clause 3(E) the relocation of the offices at which the
Executive was required to work at the time of the Change of Control arising
to a location more than 35 miles away except for required travel on
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the Company's business to an extent substantially consistent with his
business travel obligations on the date hereof;
(6) the failure of the Company to provide the Executive during a calendar year
with a number of paid holidays at least equal to the number of paid
holidays to which he was entitled at the date hereof pursuant to Clause 7
of this Agreement as increased subsequent thereto;
(7) circumstances arise which entitle the Executive to terminate this Agreement
without notice because of the Company's conduct (ie, the circumstances of
constructive dismissal).
STATUTORY PARTICULARS
18. THE following particulars are set forth in compliance with the requirements
of the Employment Rights Act 1996:
(A) The employment of the Executive by the Company and his continuous period of
employment with the Company began on the respective dates specified in
paragraphs 13 and 7 of the Schedule hereto.
(B) Save as contained herein or otherwise notified to the Executive in writing
there are no terms or conditions of employment relating to hours of work or
to normal working hours or to holidays or to holiday pay or to incapacity
for work due to sickness or injury or to sick pay or to pensions or pension
schemes or to disciplinary rules and procedures or to collective
agreements.
(C) If the Executive is dissatisfied with any disciplinary decision relating to
him or if he has any grievance arising from his employment hereunder he may
refer any such matter to the Board which will deal with the matter by
discussion and by a decision of those present at the relevant Board Meeting
at which the matter is discussed.
(D) The Executive's hours of work shall be such as may be requisite for the
proper discharge of his duties hereunder.
(E) The Executive hereby authorizes the Company to deduct and to retain from
any remuneration accrued due to him under the terms of this Agreement
(whether or not
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actually paid during the continuance of his employment hereunder) those
sums set out in paragraph 12 of the Schedule hereto.
RETURN OF PROPERTY ON TERMINATION
19 (A) UPON the termination of his employment with the Company for whatsoever
cause the Executive shall forthwith deliver up to the Company or its authorized
representative any property of the Company or any other Group Company which may
be in his possession custody or under his control including without limitation
the Car and the keys relating thereto minutes memoranda correspondence notes
records reports sketches plans or other documents and any copies thereof,
whether or not the same were originally supplied to him by the Company or any
other Group Company.
(B) If so requested the Executive shall provide to the Board a signed
statement confirming that he has fully complied with sub-clause (A).
NOTICES
20. ANY notice to be given hereunder shall be given in writing and may be given
either personally or may be sent addressed in the case of the Company to its
registered office for the time being and in the case of the Executive to him at
his last known place of residence and any notice given by post shall be deemed
to have been served on the day which is three days following that on which it
was posted.
CONSTRUCTION
21. (A) THE provisions of the Schedule hereto and any special terms endorsed
in writing by or on behalf of the parties hereto shall be read and construed as
part of this Agreement and shall be enforceable accordingly.
(B) The benefit of each agreement and obligation of the Executive
under Clause 13 of this Agreement may be assigned to successors for the time
being carrying on the Business and enforced by such assignees for the time being
carrying on the Business and such agreements and obligations shall operate and
remain binding notwithstanding the termination of this Agreement.
20
<PAGE>
LAW OF AGREEMENT
22. THIS Agreement shall be governed by and interpreted according to the Law of
England.
PRIOR AGREEMENTS
- ----------------
23. THIS Agreement shall be in substitution for any subsisting service
agreement or contract of employment (oral or otherwise) made between the Company
and the Executive or between any other Group Company and the Executive which
shall be deemed to have been terminated by mutual consent with effect from the
Effective Date.
IN WITNESS whereof this Agreement has been entered into the day and
year first above written.
{ The common seal of GALLAHER
{ LIMITED was hereunto
[SEAL] { affixed in the presence of:
[Signature illegible] Director
N.P. Bulpitt Secretary
{ SIGNED and DELIVERED
Peter M. Wilson { by the EXECUTIVE as a deed
{ in the presence of:
C.T. Fielden
Solicitor
Members Hill
Weybridge
21
<PAGE>
THE SCHEDULE above referred to
1. Capacity of the Executive: Chairman and Chief
(Clause 2) Executive of Gallaher
Limited
2. The Effective Date: 1st January 1997
(Clause 2)
3. Minimum Notice Period: (a) Two Years
(Clause 2) (b) One year
4. Remuneration: (Pounds)485,000
(Clause 4)
5. Holidays: 25 Working days
(Clause 7)
6. Pension Schemes: The Gallaher "M" Pension
(Clause 9) Scheme
7. The continuous period of
employment of the
Executive with the
Company for statutory 06 October 1969
purposes began on:
(Clause 18(A))
8. Contractual Retirement Date: 30 June 2001
(Clause 2)
9. Period of Non-Enticement: Twelve months
(Sub-clause 13(D))
10. Period of Non-solicitation: Twelve months
(Sub-clause 13(E))
11. Period of dealing: Twelve months
(Sub-clause 13(F))
12. Deduction authorized pursuant to the Employment
Rights Act 1996:
any debt owed by the Executive to the Company;
any pension or other similar contribution owed by
the Executive as a consequence of the Executive's
membership of the pension schemes referred to in
paragraph 6 above;
22
<PAGE>
any deduction from remuneration the Executive's
consent to which has previously been signified to
the Company in writing and the deduction of any
other sum or sums which may from time to time be
required or authorized pursuant to subsection
13(1)(a) of the Employment Rights Act 1996.
(Sub-Clause 18(E))
13. The employment of the Executive by the Company began on:
01 January 1981. (Clause 18(A))
23
<PAGE>
EXHIBIT 10j3
Schedule identifying substantially identical agreements, among American Brands,
Inc. ("American") and each of the following persons, to the Agreement and the
Amendment thereto constituting Exhibits 10j1 and 10j2, respectively, to the
Annual Report on Form 10-K of American for the Fiscal Year ended December 31,
1996
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
John T. Ludes
Robert J. Rukeyser
Steven C. Mendenhall
Dudley L. Bauerlein, Jr.
Charles H. McGill
Craig P. Omtvedt
<PAGE>
EXHIBIT 10k3
Schedule identifying substantially identical agreements, among American Brands,
Inc. ("American") and The Chase Manhattan Bank (National Association), et al.
establishing a trust in favor of each of the following persons, to the Trust
Agreement and Amendment thereto constituting Exhibits 10kl and 10k2,
respectively, to the Annual Report on Form 10-K of American for the Fiscal Year
ended December 31, 1996
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
John T. Ludes
Robert J. Rukeyser
Steven C. Mendenhall
Dudley L. Bauerlein, Jr.
Craig P. Omtvedt
<PAGE>
EXHIBIT 10m4
Schedule identifying substantially similar agreements, among American Brands,
Inc. ("American") and each of the following persons, to the Agreement and the
Amendments thereto constituting Exhibits 10m1, 10m2 and 10m3, respectively, to
the Annual Report on Form 10-K of American for the Fiscal Year ended December
31, 1996
- --------------------------------------------------------------------------------
Name
----
John T. Ludes
Robert J. Rukeyser
Steven C. Mendenhall
Dudley L. Bauerlein, Jr.
Craig P. Omtvedt
<PAGE>
EXHIBIT 11
AMERICAN BRANDS, INC.
Statement setting forth net income for computation of earnings per Common
share - primary and fully diluted:
Years Ended December 31,
1996 1995 1994
------- ------- --------
(In millions)
Income from continuing
operations before
extraordinary items $496.8 $543.1 $ 885.1
Preferred stock dividend
requirements 1.2 1.3 1.4
------ ------ -------
Income from continuing operations
before extraordinary items for
computing earnings per Common
share - Primary 495.6 541.8 883.7
Loss from discontinued operations - - (151.0)
Extraordinary items (10.3) (2.7) -
------ ------ -------
Net income for computing earnings
per Common share - Primary 485.3 539.1 732.7
Interest and related expenses on
Convertible debentures, net of
income taxes 2.4 12.7 21.5
Convertible Preferred stock
dividend requirements 1.2 1.3 1.4
------ ------ -------
Net Income for computing earnings
per Common share -
Fully diluted $488.9 $553.1 $ 755.6
====== ====== =======
<PAGE>
Statement setting forth net income for computation of earnings per Common
share - primary and fully diluted:
Years Ended December 31,
1996 1995 1994
------- ------- -------
(In millions, except
per share amounts)
Weighted average number of
Common shares outstanding
during each year - Primary 173.3 186.9 201.6
Addition from assumed conversion
as of the beginning of each
year of the Convertible
Preferred stock outstanding
at the end of each year 1.7 1.9 2.1
Addition from assumed conversion
of Convertible debentures - 3.7 9.3
Other additions 3.4 3.2 0.7
------ ------ ------
Weighted average number of
Common shares outstanding
during each year on a Fully
diluted basis 178.4 195.7 213.7
====== ====== ======
EARNINGS PER COMMON SHARE
Primary
Income from continuing
operations $ 2.86 $ 2.90 $ 4.38
Loss from discontinued
operations - - (.75)
Extraordinary items (.06) (.01) -
------ ------ ------
Net income $ 2.80 $ 2.89 $ 3.63
====== ====== ======
Fully diluted
Income from continuing
operations $ 2.80 $ 2.84 $ 4.24
Loss from discontinued
operations - - (.71)
Extraordinary items (.06) (.01) -
------ ------ ------
Net income $ 2.74 $ 2.83 $ 3.53
====== ====== ======
2
<PAGE>
EXHIBIT 12
AMERICAN BRANDS, INC.
Statement Re Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Continuing Operations
- ---------------------
Earnings Available:
Income before
provision for
taxes on income
and minority interest $1,255.1 $ 878.9 $1,354.0 $ 895.3 $ 824.8
Less: Excess of
earnings over
dividends of less
than fifty percent
owned companies 0.3 0.8 0.4 0.2 0.2
Capitalized interest 1.0 2.5 1.4 0.2 0.3
-------- -------- -------- -------- --------
1,253.8 875.6 1,352.2 894.9 824.3
-------- -------- -------- -------- --------
Fixed Charges:
Interest expense
(including capitalized
interest) and amortization
of debt discount and expenses 283.4 258.7 224.9 170.4 185.9
Portion of rentals
representative of
an interest factor 32.3 29.8 27.1 20.6 16.2
-------- -------- -------- -------- --------
Total Fixed Charges 315.7 288.5 252.0 191.0 202.1
-------- -------- -------- -------- --------
Total Earnings
Available $1,569.5 $1,164.1 $1,604.2 $1,085.9 $1,026.4
======== ======== ======== ======== ========
Ratio of Earnings to
Fixed Charges 4.97 4.04 6.37 5.69 5.08
======== ======== ======== ======== ========
</TABLE>
<PAGE>
EXHIBIT 13
Financial Contents
Results of Operations
............................................page 27
Financial Condition
............................................page 36
Consolidated Statement
of Income
............................................page 39
Consolidated Balance Sheet
............................................page 40
Consolidated Statement
of Cash Flows
............................................page 42
Consolidated Statement
of Stockholders' Equity
............................................page 43
Notes to Consolidated Financial
Statements
............................................page 44
Report of Independent
Accountants
............................................page 57
Report of Management
............................................page 57
Information on Business
Segments
............................................page 58
Six-Year Consolidated Selected
Financial Data
............................................page 59
26
<PAGE>
Results of Operations
American Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Net sales Operating income(1)
--------------------------------- ---------------------------------
(In millions) 1996 1995 1994 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Ongoing operations
International tobacco $ 6,861.6 $ 6,439.0 $ 6,174.8 $ 488.2 $ 554.1 $ 521.1
Distilled spirits 1,303.5 1,288.6 1,268.2 208.4 189.7 221.2
Hardware and home
improvement products 1,374.1 1,306.8 1,270.6 184.1 178.3 176.5
Golf and leisure products 811.4 579.3 507.1 109.0 83.0 73.3
Office products 1,228.7 1,206.1 1,049.7 95.6 84.5 74.5
--------- --------- --------- --------- --------- ---------
11,579.3 10,819.8 10,270.4 1,085.3 1,089.6 1,066.6
Domestic tobacco(2) -- -- 1,594.7 -- -- 247.6
Other businesses(2) -- 547.3 1,281.4 -- 3.4 (1.8)
--------- --------- --------- --------- --------- ---------
Continuing operations $11,579.3 $11,367.1 $13,146.5 $ 1,085.3 $ 1,093.0 $ 1,312.4
========= ========= ========= ========= ========= =========
</TABLE>
(1) Operating income represents net sales less all costs and expenses excluding
corporate administrative expenses, interest and related expenses and other
(income) expenses, net.
(2) See page 46 for Dispositions.
CONSOLIDATED
1996 Compared to 1995
Net sales and operating income from continuing operations increased 2% and
decreased 1%, respectively.
Net sales and operating income from ongoing operations, which exclude other
businesses sold in 1995 (see page 46 for Dispositions), increased 7% and
decreased 0.4%, respectively. Net sales increased due to price increases
(including international tobacco excise tax increases), new products and line
extensions (principally in international tobacco), and the inclusion of Cobra
Golf, acquired in January 1996, partly offset by volume declines, principally in
international tobacco and distilled spirits. Excluding restructuring charges of
$88.8 million in international tobacco in 1996 and $17.8 million in distilled
spirits in 1995, operating income from ongoing operations was up 6% on the
higher sales, partly offset by increased operating expenses. The effects of
lower average exchange rates on sales and operating income were not significant.
Interest and related expenses increased $18.9 million (12%) due to higher
average borrowings to fund the purchase of Cobra and Common share purchases.
The unfavorable change in other (income) expenses, net, reflected interest
income in 1995 from the investment of proceeds from the disposition of The
American Tobacco Company and of the Franklin life insurance business.
The 1996 restructuring charge in international tobacco amounted to $88.8
million ($59.5 million after taxes), or 34 cents and 33 cents on a primary and
fully diluted per share basis. The 1995 restructuring charge in distilled
spirits amounted to $17.8 million ($12.2 million after taxes), or six cents per
share on both a primary and fully diluted per share basis.
The 1995 gain on disposal of businesses, net, reflected a $20 million
reversal of the $245 million loss provision recorded in 1994 in connection with
the disposal of nonstrategic businesses and increased 1995 primary and fully
diluted E.P.S. by ten cents and nine cents, respectively.
Income from continuing operations was $496.8 million, or $2.86 per Common
share, compared with $543.1 million, or $2.90 per share, last year. Excluding
restructuring charges and amounts related to businesses disposed, income from
continuing operations was $556.3 million, or $3.20 per Common share, compared
with $539.6 million, or $2.88 per share, last year.
The extraordinary item charge in 1996 of $10.3 million ($15.8 million
pre-tax), or six cents per share, and the 1995 charge of $2.7 million ($4.1
million pre-tax), or one cent per share, reflected the
27
<PAGE>
extinguishment of debt. See page 55 for Extraordinary Items.
Net income of $486.5 million, or $2.80 per Common share, compared with
$540.4 million, or $2.89 per share, last year. The Company, through Common share
purchases and redemption of convertible debentures, reduced outstanding fully
diluted shares by 12.8 million and 30 million in 1996 and 1995, respectively.
During 1996, the Company purchased 10 million Common shares at an aggregate cost
of $444.3 million, which, after consideration of the related impact on borrowing
levels, interest expense and net income, benefited primary earnings per share by
16 cents and fully diluted earnings per share by 20 cents.
On October 8, 1996, the Company announced plans to spin off its U.K.-based
Gallaher tobacco business. Completion of the transaction, which is expected
around mid-1997, is pending receipt of favorable tax rulings and relevant
stockholder approvals. When the spin-off is completed, the name of the Company
will be changed to Fortune Brands and the financial statements will be restated
to show tobacco operations (Gallaher and The American Tobacco Company) as
discontinued operations. Following the transaction, the Company's stockholders
will own shares in two publicly-traded companies--Fortune Brands and Gallaher.
Earnings per Common share in 1997 will continue to benefit from the
Company's 1996 purchase of shares of Common stock. Following the proposed
spin-off of Gallaher, the Company will consider purchasing up to 10 million
additional Common shares depending on market conditions and investment needs and
opportunities. The Company is also reviewing productivity-enhancing
opportunities at the non-tobacco operations, and anticipates that this review
may result in restructuring charges in 1997.
The Company derived 49% of its operating income in 1996 from Europe,
primarily the United Kingdom. As a result, fluctuations in foreign currencies,
principally sterling, can have a significant effect on dollar results in future
periods. If the planned spin-off of Gallaher occurs, changes in the sterling
exchange rate will have significantly less impact on the results of operations
of Fortune Brands.
For a description of certain pending litigation, see page 56. As stated
therein, it is not possible to predict the outcome of such 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.
Subsidiaries of the Company are involved in proceedings concerning the
discharge of materials into the environment and the handling, disposal and
clean-up of waste materials and otherwise relating to the protection of the
environment. As of February 3, 1997, various subsidiaries of the Company had
been designated as potentially responsible parties under "Superfund" or similar
state laws with respect to 44 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 upon the results of operations, cash flow or financial condition
of the Company.
28
<PAGE>
1995 Compared to 1994
Net sales and operating income from continuing operations decreased 14% and 17%,
respectively.
Net sales and operating income from ongoing operations, which exclude
domestic tobacco and other businesses sold in 1995 and 1994, increased 5% and
2%, respectively. Excluding the favorable effects of higher average foreign
exchange rates of $197.2 million and $15.5 million, net sales and operating
income from ongoing operations were up 3% and 1%, respectively. Net sales
increased due to price increases (including international tobacco excise tax
increases), new products and line extensions, partly offset by volume declines,
principally in international tobacco. Operating income increased due to the
higher sales, partly offset by increased operating expenses.
Interest and related expenses decreased $52.3 million (25%) 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 of the Franklin life insurance
business.
The net gain on disposal of businesses in 1995 reflected a $20 million
reversal of the estimated loss recorded in 1994 in connection with the
businesses disposed. 1994 reflected a $577.9 million pre-tax gain on the sale of
domestic tobacco, partly offset by a $245 million pre-tax loss in connection
with the businesses disposed.
The effective income tax rate of 39.2% in 1995 increased from 34.5% in
1994, principally as a result of the lower effective income tax rate on 1994's
net gain on disposal of businesses and lower reversals of tax provisions no
longer required in 1995.
Income from continuing operations was $543.1 million, or $2.90 per Common
share in 1995, compared with $885.1 million, or $4.38 per share in 1994. The
decrease was largely due to 1994's $267 million, or $1.32 per share, net gain on
disposal of businesses as well as the absence of The American Tobacco Company's
results of operations, partly offset by 1995's $20 million provision reversal
for disposal of businesses.
The extraordinary item resulted from a charge of $2.7 million ($4.1 million
pre-tax), or one cent per share, for the extinguishment of debt. See page 55 for
Extraordinary Items.
Net income of $540.4 million, or $2.89 per Common share, compared with
$734.1 million, or $3.63 per share, in 1994, which included a loss of $151
million, or 75 cents per share, from the discontinued life insurance operations.
The Company, through Common share purchases and the extinguishment of debt,
reduced outstanding fully diluted shares by 30 million, or more than 14% in
1995. During 1995, the Company purchased 24.7 million Common shares at an
aggregate cost of $981.1 million, which, after consideration of the related
impact on borrowing levels, interest expense and net income, benefited primary
earnings per share by 11 cents and fully diluted earnings per share by 14 cents.
International Tobacco
General
The tobacco market in developed economies has been subject to significant
regulatory influence and/or voluntary agreements with governments in recent
years, including the levying of substantial tax and duty charges, the imposition
of restrictions on advertising and marketing, the introduction of health
warnings on packaging, restrictions on the tar content of cigarettes and the
prohibition of smoking in many public places. Partly as a result of certain of
these measures, tobacco consumption in certain of Gallaher's principal markets
has declined in recent years and Gallaher expects this trend to continue.
Gallaher has taken steps to limit the impact of this decline on its operations.
Gallaher has invested heavily in its brands to build brand recognition and
thereby strengthen its position in the event that further restrictions are
imposed on tobacco advertising. In the U.K., its
29
<PAGE>
principal market, Gallaher has broadened its portfolio through product launches
and brand extensions in order to benefit from growth in specific sectors of the
market, such as those for lower tar and lower price cigarettes, and to increase
its ability to compete for market share. Gallaher has also established market
positions in the Republic of Ireland, key markets in continental western Europe
and part of the former Soviet Union, further reducing its sensitivity to
regulatory changes in any single country.
Advertising, promotion and brand building play a key role in Gallaher's
business, with significant expenditures on programs in the U.K. and overseas to
support its key brands and to develop the markets for new brands and brand
extensions. It is possible, however, that any further regulation in respect of
advertising and promotion in its key markets would have an adverse effect on
Gallaher's sales and operating performance. A general election is to take place
in the U.K. before the end of May 1997. The U.K. Labour Party has indicated that
if it were to form the next government, it would legislate further advertising
restrictions on tobacco products. It is unclear which forms of marketing and
promotion would be affected and to what extent, if any, this would affect sales
and profitability in the U.K. tobacco market.
A significant factor affecting Gallaher's operations is the government duty
on tobacco products. Continuing the trend of tax increases in recent years, the
U.K. budget announcements in November 1996 and 1995 each resulted in 15 pence
increases and in November 1994 a 10 pence increase in the tax on a typical pack
of cigarettes. A supplemental budget announcement in December 1994 resulted in a
further increase of 6 pence in the tax on a typical pack of cigarettes effective
January 1, 1995. The current U.K. government has expressed an intent to increase
duty on tobacco products by an average of at least 3% per annum in excess of the
rate of inflation. This represents an annual direct increase in cost of sales
for Gallaher, which, if passed on to the retail trade, would be expected to
affect the consumption of tobacco products. Gallaher has generally passed on the
full duty increases to its customers in recent years with the result that these
amounts are included in net sales and cost of sales. The continuing impact of
price increases, principally due to substantial duty increases in recent years,
has reduced annual industry volumes, led to greater price competition and
accelerated trading down by consumers to lower price brands, resulting in
pressure on margins. These changes are particularly affecting Gallaher, the
majority of whose sales are in the premium sector.
In 1996, 86% of Gallaher's tobacco sales of (Pounds Sterling) 4.4 billion
and 83% of operating income of (Pounds Sterling) 367.1 million, excluding the
restructuring charge, were in the U.K. Over the period 1992 to 1996, total
cigarette consumption in certain of Gallaher's principal markets declined, with
total consumer sales in the U.K. falling by an average of 2.5% per annum. Within
this overall downward trend, however, growth has been apparent in certain
sectors of the U.K. market, particularly those for lower tar products, lower
price brands and distributors' and retailers' own-label product lines.
Gallaher's share of U.K. unit sales to consumers increased significantly
from a level of 32.3% in 1985 to a peak of 42.9% in 1990 and was 39.1% in 1996.
In 1988, Gallaher became the cigarette market leader in the U.K. The growth in
share was achieved through, among other measures, the introduction of a series
of creative advertising campaigns to build consumer awareness of Gallaher's
products and the launches of new brands and brand extensions. The reduction in
share in recent years has been primarily a result of the trend away from premium
price cigarettes to lower price products.
Historically, Gallaher's sales in the U.K. have peaked in the weeks
preceding the budget announcement, as trade customers have sought to avoid the
expected duty increases by acquiring inventories of tobacco products at
pre-budget prices. Shipments were affected by such changes in trade buying
patterns related to the U.K. budget announcements at the end of 1996, 1995 and
1994. In addition, as a result of paying duty at the pre-budget rate, Gallaher
has held significantly higher inventory values in the months immediately
following the U.K. government's budget announcement. Any unexpected change in
the timing of the budget announcement or in the regulations relating
30
<PAGE>
to the application of duty increases could have a material impact on Gallaher's
operating performance, as could the outcome of pending litigation, not involving
Gallaher, if it resulted in commercial organizations being entitled to act as
agents for U.K. individuals to bring into the U.K. tobacco products on which
duty had been paid in another European Union member state without the need to
pay U.K. excise duty.
1996 Compared to 1995
Net sales in sterling were up 7% on price increases (principally resulting from
higher U.K. tobacco taxes and the April 1996 and 1995 manufacturers' price
increases), the inclusion of one additional month's results for Gallaher
(Dublin) (change to a calendar year-end added (Pounds Sterling) 26 million
sterling to net sales and an immaterial amount to operating income) and a slight
increase in U.K. cigarette unit sales, reflecting benefits from the launch of
Sovereign and growth in Mayfair. Gallaher's estimated share of U.K. consumer
sales was 39.1% in 1996, as compared with 39.2% in 1995. Gallaher's share of
U.K. cigarette market shipments was estimated to be 39.3% for the year, as
compared with 40% in 1995. Gallaher (Dublin) also benefited from volume gains
and favorable exchange rates. Gallaher's worldwide cigarette unit sales were up
3%. Operating income in sterling decreased 10%. Excluding a (Pounds Sterling)
53.3 million restructuring charge in 1996, operating income in sterling was up
5%, on higher sales, partly offset by increased advertising and promotional
costs to support the launch of Sovereign in the U.K. In dollars, net sales and
operating income, excluding the restructuring charge, increased 7% and 4%,
respectively, reflecting translation at lower average foreign exchange rates.
The restructuring charge, primarily covering termination costs, reflects
Gallaher's plan announced in December 1996 to consolidate cigarette production
in the U.K. into one factory. The three- to four-year program will result in the
expansion of Gallaher's factory and installation of new high-speed cigarette
machinery at Lisnafillan, Northern Ireland, creating about 300 new positions,
and the closing of the Hyde factory in Manchester, England with the elimination
of all 950 positions. The timetable of the plan reflects the lead time needed
for the manufacture and installation of the new cigarette machinery.
1995 Compared to 1994
Net sales in sterling were up 2%, 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 5.8% U.K.
cigarette unit sales decline, which was affected by changes in trade buying
patterns related to the U.K. budget announcements at the end of 1995 and 1994.
Gallaher's worldwide cigarette unit sales were down 5.3%. Operating income in
sterling increased 4% on higher sales, partly offset by higher operating
expenses, including increased advertising and promotional costs on U.K. support
for Benson and Hedges Special Filter. In dollars, net sales and operating income
increased 4% and 6%, respectively, reflecting translation at higher average
foreign exchange rates.
31
<PAGE>
Distilled Spirits
1996 Compared to 1995
Net sales and operating income increased 1% and 10%, respectively. Excluding the
1995 restructuring charge of $17.8 million, operating income increased slightly.
The 1995 restructuring charge reflected a bottling plant closing, write-down of
property, plant and equipment, and related employee termination costs on a 5%
reduction in workforce.
The sales increase reflects one additional month (change to calendar
year-end added $34.3 million) of Whyte & Mackay U.K. operations, higher volume
applicable to international sales (primarily Jim Beam bourbon and premixed
cocktails) and private label Scotch whisky sales, price increases on certain
products (primarily Jim Beam bourbon and, in the U.S. market, DeKuyper
cordials), and the benefit of new product introductions in the U.S. market,
largely offset by volume declines (primarily in the U.S. market and on branded
products from the U.K. operations) and the effect of the reduction in U.K.
excise taxes.
The small increase in operating income, excluding the 1995 restructuring
charge, reflects improved results from Jim Beam bourbon international sales,
particularly in Australia, and the private label Scotch whisky business, partly
offset by lower profits in the U.S. domestic market and from U.K.-based branded
products. The inclusion of the additional month of the Whyte & Mackay business
had an immaterial effect on operating income. U.S. domestic results were
negatively impacted by volume declines, including the effects of lower
distributor inventories, and higher brand support spending, offset in part by
price increases on key brands such as Jim Beam bourbon and DeKuyper cordials and
by higher earnings from new product introductions. U.K.-based branded products
profitability was negatively impacted by lower volume and increased brand
support spending. Total marketing expenses increased 17%, reflecting higher
support of new products in the North American market and Whyte & Mackay branded
products in the U.K.
The November 1996 U.K. budget resulted in a 26 pence tax reduction on a
typical bottle following a similar reduction of 27 pence in November 1995. The
supplemental 1994 U.K. budget resulted in a 26 pence tax increase on a typical
bottle effective January 1, 1995, whereas the 1993 U.K. budget did not result in
any tax change. While considered from time to time, the last excise tax increase
on distilled spirits in the U.S. was an 8% increase effective January 1, 1991.
In recent years, distilled spirits consumption in many countries, including
the U.S., continued its long-term decline. It is estimated that overall sales of
distilled spirits in the U.S. declined by 2-3% in each year since 1993. Total
unit depletions (sales into retail distribution) by JBB Worldwide in the U.S.
decreased by 3.3%, 3.4% and 2.8% in 1996, 1995 and 1994, respectively. Whiskey
consumption has declined faster than the overall rate of decline of distilled
spirits consumption in the U.S. Whiskeys comprise over 50% of JBB Worldwide's
U.S. unit sales, a larger percentage than the estimated 34% of unit sales for
the overall U.S. market. In recent years, the market for beverage alcohol has
demanded an increasingly broad variety of products, particularly in the U.S.
During 1996, certain competitors of JBB Worldwide began television and
radio broadcast advertising of distilled spirits products in the U.S. market,
and the national distilled spirits industry association retracted a previous
voluntary ban on such activities. These developments have created a certain
amount of controversy and threats of government regulation and other actions at
federal, state and local levels. JBB Worldwide, through its Jim Beam subsidiary,
has not begun any such advertising but may yet do so in response to competitive
conditions. Other operating units outside the U.S. have previously begun such
broadcast advertising in markets where legal and not in violation of voluntary
restrictions by industry groups.
While it is impossible to predict any future U.K. and U.S. tax increases,
as well as any restrictions on advertising, any such increases or restrictions
may have an adverse effect on unit sales and add to continuing industry
declines.
32
<PAGE>
1995 Compared to 1994
Net sales increased 2% and operating income decreased 14%. Excluding the $17.8
million restructuring charge in 1995 and nonrecurring benefits (including
one-time bulk sales) at Whyte & Mackay in 1994, operating income increased 3%.
Beam's 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, partly
offset by higher marketing expenses and increased costs of materials. The
increased marketing 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 in Australia and Germany.
Whyte & Mackay's sales in sterling decreased 1% on unfavorable comparison
to last year's benefit from one-time bulk sales, partly offset by the effects of
the supplemental 1994 U.K. budget 26 pence tax increase on a typical bottle,
effective January 1, 1995 and export volume increases in Scotch whisky.
Operating income in sterling decreased 80%, principally due to the 1995
restructuring charge and an unfavorable comparison to 1994's benefits from
one-time bulk sales and other nonrecurring benefits.
Hardware and Home Improvement Products
1996 Compared to 1995
Net sales increased 5% on price increases, line extensions, new products and
higher overall volume. All four companies in the group reported increased sales
except Master Lock, which was flat. The overall volume increase resulted from
Moen, while the other companies reported lower volume. Price, line extension and
new product increases were reported by all companies.
Operating income increased 3% on the sales increase, and a $2.2 million
gain on the sale of Moen's joint venture in Taiwan, partly offset by increased
manufacturing and operating expenses. The manufacturing expense increase
reflects higher labor and overhead costs. The higher operating expenses reflect
higher selling and distribution expenses (principally Moen and Master Lock to
meet competitive activities), increased research and development expenses at
Moen, and an unfavorable comparison to last year's reversal of reserves related
to a joint venture. All companies but Master Lock reported increased operating
income. Master Lock declined on lower volume and increased spending on selling
and pricing programs as a result of a shift by mass merchants to competitors'
value-priced products. In response to these competitive conditions, on January
1, 1997, Master Lock decreased prices on its core padlock products by an average
of 15% and aggressive restructuring actions are being considered to reduce
costs.
As the home building industry continues to consolidate, the growth of large
mass merchants and home centers will continue to present pricing and service
challenges to manufacturers.
1995 Compared to 1994
Net sales increased 3% on price increases, line extensions and new products,
partly offset by volume declines. All four companies in the group achieved
higher sales. Operating income increased 1% as the sales increase and lower
operating expenses were largely offset by increased raw material costs and
effects of lower volume. All companies reported improved operating income,
except Moen. Moen's decline reflected a downturn in its U.S. market, principally
in the second and third quarters, higher raw material and marketing costs and
the effects of difficult economic conditions in Taiwan and Canada.
33
<PAGE>
Golf and Leisure Products
1996 Compared to 1995
Net sales increased 40% on the inclusion of Cobra, acquired January 24, 1996,
and volume gains in all product lines, reflecting benefits from line extensions
and new products, partly offset by lower average foreign exchange rates.
Operating income was up 31% on the inclusion of Cobra and an increase at
Titleist and Foot-Joy Worldwide. Cobra's lower than expected results were due
primarily to startup production problems and marketing costs associated with new
products. Titleist's increased operating income reflected the higher sales,
partly offset by higher operating expenses, principally associated with the
support and development of new products to meet competitive activity.
1995 Compared to 1994
Net sales were up 14% on increased volume in all product lines, reflecting
benefits from line extensions and new products. Operating income increased 13%
on higher sales, partly offset by higher operating expenses, principally
marketing and volume-related expenses including costs related to European
expansion.
Office Products
1996 Compared to 1995
Net sales increased 2%. Excluding the office furniture operations sold in 1995
and the acquisition of Advanced Gravis in September 1996, sales increased 5% on
new products and price increases, partly offset by volume declines in existing
product lines and lower average foreign exchange rates. Operating income
increased 13% reflecting the sales increase and improved gross margin
(principally reflecting the price increases), partly offset by higher operating
expenses, principally customer programs and new product and business development
costs in North America and increased freight and distribution expenses in
Europe. Comparisons for Day-Timers were adversely affected by the impact of
strong initial sales into the retail channel in 1995.
As the office products industry continues to consolidate, the growth of
large retailers will continue to present pricing and service challenges to
manufacturers.
1995 Compared to 1994
Net sales increased 15% on new products and volume increases reflecting
continued market share gains, higher average foreign exchange rates and limited
price increases. Operating income was up 13%, principally in domestic
businesses, reflecting the sales increase, partly offset by higher raw material
costs, which were not fully recovered by the price increases, and higher
marketing and volume-related expenses.
34
<PAGE>
Quarterly Financial Data
unaudited
(In millions, except per share amounts)
1996 1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
Net sales $2,737.9 $2,486.0 $2,920.1 $3,435.3
Gross profit 678.7 667.7 710.0 837.7
Operating income 274.3 254.6 293.1 263.3
Income from continuing operations $124.1 $122.0 $136.7 $114.0
Extraordinary items (10.3) -- -- --
-------- -------- -------- --------
Net income $113.8 $122.0 $136.7 $114.0
-------- -------- -------- --------
Earnings per Common share
Primary
Continuing operations $.70 $.69 $.80 $.67
Extraordinary items (.06) -- -- --
-------- -------- -------- --------
Net income $.64 $.69 $.80 $.67
-------- -------- -------- --------
Fully diluted
Continuing operations $.68 $.68 $.79 $.65
Extraordinary items (.06) -- -- --
-------- -------- -------- --------
Net income $.62 $.68 $.79 $.65
======== ======== ======== ========
1995 1st 2nd 3rd 4th
- --------------------------------------------------------------------------------
Net sales $2,792.5 $2,594.7 $2,895.3 $3,084.6
Gross profit 688.3 676.9 690.1 739.7
Operating income 262.2 238.3 278.4 314.1
Income from continuing operations $116.6 $119.1 $153.3 $154.1
Extraordinary items -- (2.7) -- --
-------- -------- -------- --------
Net income $116.6 $116.4 $153.3 $154.1
-------- -------- -------- --------
Earnings per Common share
Primary
Continuing operations $.60 $.63 $.82 $.85
Extraordinary items -- (.01) -- --
-------- -------- -------- --------
Net income $.60 $.62 $.82 $.85
-------- -------- -------- --------
Fully diluted
Continuing operations $.59 $.62 $.80 $.83
Extraordinary items -- (.01) -- --
-------- -------- -------- --------
Net income $.59 $.61 $.80 $.83
======== ======== ======== ========
The fourth quarter of 1996 includes a restructuring charge of $88.8 million
($59.5 million after taxes), or $.34 and $.33 per Common share primary and fully
diluted, respectively, in international tobacco related to the closing of a U.K.
cigarette factory.
35
<PAGE>
Financial Condition
American Brands, Inc. and Subsidiaries
CASH FLOW
Net Cash Provided from Continuing Operating Activities
Net cash provided from continuing operating activities in 1996 was $474.4
million, as compared with $591.6 million in 1995. Fluctuations in inventories,
accounts payable, accrued taxes and accounts receivable are principally
attributable to the impact of U.K. budget announcements, including the U.K.
supplemental budget announcement in 1994, and the absence of U.K. retail
distribution operations sold in 1995. Net cash provided in 1996 was also
impacted unfavorably by the inclusion of Cobra's working capital requirements
and the change to a calendar year-end at Gallaher (Dublin). The 1995 net cash
provided included the payment of $29.4 million related to the "put" exercise
premium on the 5-3/4% Eurodollar Convertible Debentures.
Net Cash (Used) Provided by Investing Activities
Net cash used by investing activities in 1996 was $918 million, as compared with
net cash provided in 1995 of $1.1 billion. The net cash used in 1996 was
principally attributable to the acquisition of Cobra in 1996. Net cash provided
in 1995 was principally attributable to proceeds received from the disposition
of operations.
Capital expenditures. Capital spending is focused on the operating
companies becoming the lowest cost producers of the highest quality products.
Capital expenditures in 1996 were $239.6 million, as compared with $208 million
in 1995. This increase is principally attributable to higher expenditures in
golf and leisure due primarily to the expansion of a ball plant. See page 55 for
capital expenditures. Funds for 1997 capital expenditures, estimated at $220
million, are expected to be generated internally.
Dispositions. Proceeds from the disposition of the Franklin life insurance
business and of other nonstrategic businesses in 1995 were $1.3 billion. On
December 22, 1994, the Company sold American Tobacco for $1 billion.
Acquisitions. In January 1996, Cobra was acquired for $712 million,
including fees and expenses.
Net Cash Provided (Used) by Financing Activities
Net cash provided by financing activities in 1996 was $424.2 million, as
compared with net cash used in 1995 of $1.7 billion. The change resulted
principally from 1996 borrowings, primarily in the short-term capital markets,
and lower purchases of Common stock for treasury. The Company's purchases of
Common stock amounted to $444.3 million during 1996, as compared with $988.4
million in 1995.
PROPOSED SPIN-OFF OF GALLAHER TOBACCO
On October 8, 1996, the Company announced plans to spin off its U.K.-based
Gallaher tobacco business. To allocate the overall debt burden of the Company at
the time of the spin-off, Gallaher will borrow and pay to Fortune Brands
approximately $1.4 billion. Fortune Brands will use the proceeds (approximately
$1.25 billion after taxes) initially to pay down short-term debt. The Gallaher
debt will be in addition to its seasonal working capital requirements.
DIVIDENDS
Dividends paid per Common share in 1996 were $2.00 per share. Dividends paid to
Common stockholders in 1996 decreased to $347.2 million from $376.2 million,
reflecting lower shares outstanding during 1996.
Although the dividend payout ratio continues to be higher than it has been
in the past, the ratio may be brought down over time with future growth in
earnings per share. The payout ratio for Fortune Brands is anticipated to be
lower than that of American Brands.
Following the completion of the proposed spin-off of Gallaher, the combined
initial annualized dividend per share currently contemplated by the management
of both companies (Fortune Brands and Gallaher) will equal, based on a $1.56
sterling exchange rate on the date of the announcement, the existing $2.00 per
share American Brands dividend. U.S. and eligible U.K. taxpayers will
effectively receive about another 30 cents, or 15%, for a total of about $2.30
per share. This added benefit comes in the form of a refund or credit of the
U.K. Advance Corporation Tax ("A.C.T.") that is paid by Gallaher on its
dividends. U.S. taxpayers will be entitled to a cash refund of the A.C.T. paid
by Gallaher less applicable U.K. withholding taxes which can be credited against
their U.S. income tax liability. The U.S. foreign tax credit is subject to
complicated limitations.
Future dividends for Fortune Brands and Gallaher will be determined by, and
will be at the discretion of, the respective Board of each company following the
spin-off, subject to available profits and other considerations.
It is currently contemplated that any post spin-off dividend payable by
Gallaher in respect of 1997 will be paid as to 50% of such dividend in the form
of an interim dividend in 1997 and as to the other 50% as a final 1997 dividend,
subject to Gallaher shareholder approval, payable in 1998. Thereafter, Gallaher
anticipates that any dividends will be paid in the form of a one-third interim
dividend and a two-thirds final dividend, as is customary for many U.K.
companies.
36
<PAGE>
FINANCIAL POSITION
At December 31, 1996, total debt increased $1.2 billion to $3.1 billion.
Short-term debt increased $748.9 million and long-term debt increased $443.7
million. The ratio of total debt to total capital increased to 45.4% at year-end
1996, from 32.5% at year-end 1995. The increase was principally due to increased
commercial paper borrowings primarily for the Cobra acquisition and additional
Common share purchases.
On March 5, 1996, the Company redeemed its $150 million 7-5/8% Eurodollar
Convertible Debentures, Due 2001, at a redemption price of 103.8125% of the
principal amount plus accrued interest. On March 1, 1996, the Company redeemed
its $150 million 9-1/8% Debentures, Due 2016, at a redemption price of 104.4375%
of the principal amount plus accrued interest. In connection with the
redemptions, the Company reduced the number of fully diluted shares outstanding
by 2.8 million. The Company redeemed these debentures from existing resources.
At December 31, 1996, the Company had $850 million of debt securities
(including Medium Term Notes) available for sale under its shelf registration
with the Securities and Exchange Commission.
At year-end 1996, the Company had $4 billion of long-term credit
facilities, substantially all of which remained unused. These facilities are
available for general corporate purposes, including acquisitions and support for
the Company's short-term borrowings in the commercial paper market. In addition,
Gallaher had (Pounds Sterling) 150 million ($257 million) in committed,
short-term revolving credit agreements available for general corporate purposes,
including acquisitions.
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.
Working capital decreased to $178.1 million in 1996 from $752.7 million in
1995 principally due to higher levels of short-term debt, partly offset by other
increases in working capital. Management believes that the 1996 level was
adequate to support continued growth. Accounts receivable increased principally
due to higher sales in the fourth quarter of 1996, the inclusion of Cobra and
the higher sterling foreign exchange rate at December 31, 1996. The increase in
inventories reflects higher levels of duty paid finished goods inventories in
international tobacco, higher sterling foreign exchange rate and the inclusion
of Cobra.
FOREIGN EXCHANGE
The Company has sizable investments in Europe, primarily in the U.K. Therefore,
changes in the value of foreign currencies, principally sterling, affect the
Company's balance sheet and cash flow statements when translated into U.S.
dollars.
If the planned spin-off of Gallaher occurs, changes in the sterling
exchange rate will have significantly less impact on the financial statements of
Fortune Brands.
FINANCIAL INSTRUMENTS
The Company does not enter into financial instruments for trading or speculative
purposes. Financial instruments, principally forward foreign exchange contracts,
are used to reduce the impact of changes in foreign currency exchange rates with
respect to short-term loans, dividends declared by foreign operating companies
and a portion of the Company's investments in U.K. operating companies. Interest
rate swaps are used to reduce the impact of changes in interest rates. The
counterparties are major financial institutions. Although the Company's
theoretical risk is the replacement cost at the then estimated fair value of
these instruments, management believes that the risk of incurring credit losses
is remote and that such losses, if any, would be immaterial.
The Company enters into forward foreign exchange contracts principally to
hedge the currency fluctuations in transactions denominated in foreign
currencies, principally short-term loans to Gallaher, thereby limiting the
Company's risk that would otherwise result from changes in exchange rates. The
periods of the forward foreign exchange contracts correspond to the periods of
the hedged transactions. Gains and losses on forward foreign exchange contracts
and the offsetting losses and gains on hedged transactions are reflected in the
income statement. The Company also enters into forward foreign exchange
contracts to hedge a portion of its investments in U.K. operating companies. The
gains and losses on these contracts effectively offset losses and gains on the
portion of the investment being hedged and are reflected in stockholders'
equity.
At December 31, 1996, the Company had outstanding forward foreign exchange
contracts to purchase $148 million and sell $2.1 billion of various foreign
currencies (principally sterling), with a weighted average maturity of 142 days.
At December 31, 1995, the Company had outstanding forward foreign exchange
contracts to purchase $141 million and sell $346 million of various foreign
currencies (principally sterling), with a weighted average maturity of 58 days.
The increased activity in 1996 reflects the decision to hedge a greater portion
of the investments in U.K. operating companies.
37
<PAGE>
If the planned spin-off of Gallaher occurs, the Company's foreign exchange
activity will be greatly reduced.
The Company enters into interest rate swap agreements to manage its
exposure to interest rate changes. The swaps involve the exchange of fixed and
variable interest rate payments without exchanging the notional principal
amount. Payments or receipts on the agreements are recorded as adjustments to
interest expense, and did not have a significant effect on interest expense for
1996, 1995 or 1994. At December 31, 1996 and 1995, the Company had outstanding
interest rate swap agreements denominated in dollars, maturing at various dates
through 1999, with aggregate notional principal amounts of $500 million and $200
million, respectively. See page 53 for additional information on Financial
Instruments.
STOCKHOLDERS' EQUITY
Stockholders' equity at year-end 1996 decreased $193 million to $3.7 billion
principally from the purchase of Common shares and dividends to stockholders,
partly offset by net income. Return on average Common stockholders' equity was
13.1% during 1996 as compared with 13% last year.
During 1996, the Company purchased 10 million shares of Common stock.
Following the proposed spin-off of Gallaher, Fortune Brands will consider
purchasing up to 10 million additional Common shares, depending on market
conditions and investment needs and opportunities.
During the year, the Common stock traded within a range of $39.875 to
$50.125. The Common stock generated a total return of 266.4%, or 13.9%
compounded annually, over the ten-year period ended December 31, 1996.
Book value per Common share was $21.52 at year end.
Cautionary Statement
This annual report contains statements relating to future results, which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
projected as a result of certain risks and uncertainties, including but not
limited to changes in general economic conditions, foreign exchange rate
fluctuations, competitive product and pricing pressures, the impact of excise
tax increases with respect to international tobacco and distilled spirits,
regulatory developments, the uncertainties of litigation, as well as other risks
and uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.
Quarterly Common Stock Dividend Payments
1996 1995
- --------------------------------------------------------------------------
Payment date Per share Per share
- --------------------------------------------------------------------------
March 1 $.50 $.50
June 1 .50 .50
September 1 .50 .50
December 1 .50 .50
------- -------
$2.00 $2.00
======= =======
Quarterly Composite Common Stock Prices
1996 1995
- --------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------
First 47-7/8 42-3/8 39-7/8 36-5/8
Second 46-1/8 39-7/8 42-1/8 37-1/2
Third 46-7/8 40 43-1/2 38-5/8
Fourth 50-1/8 41-3/4 47-1/4 40-3/8
====== ====== ====== ======
The Common stock is listed on the New York Stock Exchange, which is the
principal market for this security. The high and low prices are as reported in
the consolidated transaction reporting system.
38
<PAGE>
Consolidated Statement of Income
American Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For years ended December 31
(In millions, except per share amounts) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $11,579.3 $11,367.1 $13,146.5
Cost of products sold 2,882.2 3,109.9 3,765.1
Excise taxes on products sold 5,803.0 5,462.2 5,656.8
Advertising, selling, general and administrative
expenses 1,698.5 1,665.3 2,385.8
Amortization of intangibles 107.4 95.1 96.3
Restructuring charges 88.8 17.8 --
Interest and related expenses 178.7 159.8 212.1
Other (income) expenses, net (3.6) (16.8) 12.1
Gain on disposal of businesses, net -- 20.0 332.9
--------- --------- ---------
Income from continuing operations before income taxes 824.3 893.8 1,351.2
Income taxes 327.5 350.7 466.1
--------- --------- ---------
Income from continuing operations 496.8 543.1 885.1
Loss from discontinued operations -- -- (151.0)
Extraordinary items (10.3) (2.7) --
--------- --------- ---------
Net income $486.5 $540.4 $734.1
========= ========= =========
Earnings per Common share
Primary
Income from continuing operations $2.86 $2.90 $4.38
Loss from discontinued operations -- -- (.75)
Extraordinary items (.06) (.01) --
--------- --------- ---------
Net income $2.80 $2.89 $3.63
========= ========= =========
Fully diluted
Income from continuing operations $2.80 $2.84 $4.24
Loss from discontinued operations -- -- (.71)
Extraordinary items (.06) (.01) --
--------- --------- ---------
Net income $2.74 $2.83 $3.53
========= ========= =========
Dividends paid per Common share $2.00 $2.00 $1.9925
========= ========= =========
Average number of Common shares outstanding
Primary 173.3 186.9 201.6
========= ========= =========
Fully diluted 178.4 195.7 213.7
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
39
<PAGE>
Consolidated Balance Sheet
American Brands, Inc. and Subsidiaries
December 31 (In millions, except per share amounts) 1996 1995
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents $ 119.7 $ 139.9
Accounts receivable less allowances for discounts,
doubtful accounts and returns, 1996 $53.5; 1995 $47.2 1,125.0 984.4
Inventories
Leaf tobacco 196.3 148.1
Bulk whiskey 379.3 343.7
Other raw materials, supplies and work in process 313.1 271.6
Finished products 1,367.5 1,076.8
-------- --------
2,256.2 1,840.2
-------- --------
Other current assets 372.5 199.5
-------- --------
Total current assets 3,873.4 3,164.0
-------- --------
Property, plant and equipment
Land and improvements 76.3 76.8
Buildings and improvements to leaseholds 552.3 524.0
Machinery and equipment 1,650.0 1,456.3
Construction in progress 96.8 76.2
-------- --------
2,375.4 2,133.3
Less accumulated depreciation 1,144.5 996.0
-------- --------
Property, plant and equipment, net 1,230.9 1,137.3
Intangibles resulting from business acquisitions,
net of cumulative amortization, 1996 $665.4; 1995 $550.8 3,936.4 3,305.2
Other assets 463.5 414.7
-------- --------
Total assets $9,504.2 $8,021.2
======== ========
See Notes to Consolidated Financial Statements.
40
<PAGE>
1996 1995
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to banks $ 482.9 $ 297.4
Commercial paper 922.9 --
Accounts payable 475.2 301.9
Accrued excise and other taxes 855.9 826.8
Accrued expenses and other liabilities 904.5 571.8
Current portion of long-term debt 53.9 413.4
-------- --------
Total current liabilities 3,695.3 2,411.3
-------- --------
Long-term debt 1,598.3 1,154.6
Deferred income taxes 119.5 127.6
Postretirement and other liabilities 406.9 450.5
-------- --------
Total liabilities 5,820.0 4,144.0
-------- --------
Stockholders' equity
$2.67 Convertible Preferred stock 12.9 14.1
Common stock, par value $3.125 per share,
229.6 shares issued 717.4 717.4
Paid-in capital 166.5 171.6
Foreign currency adjustments (195.9) (234.6)
Retained earnings 5,025.4 4,887.3
Treasury stock, at cost (2,042.1) (1,678.6)
-------- --------
Total stockholders' equity 3,684.2 3,877.2
-------- --------
Total liabilities and stockholders' equity $9,504.2 $8,021.2
======== ========
41
<PAGE>
Consolidated Statement of Cash Flows
American Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For years ended December 31 (In millions) 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 486.5 $ 540.4 $ 734.1
Loss from discontinued operations -- -- 151.0
Extraordinary items 10.3 2.7 --
Restructuring charges 88.8 17.8 --
Gain on disposals, net (1.3) (20.0) (331.5)
Depreciation and amortization 274.8 257.5 314.4
(Increase) decrease in accounts receivable (55.9) 33.6 168.4
(Increase) decrease in inventories (299.7) 82.7 (425.5)
Increase in other assets (30.0) (47.7) (19.1)
(Decrease) increase in accrued excise and other taxes (107.0) (229.0) 362.8
Increase (decrease) in accounts payable, accrued expenses
and other liabilities 169.9 (192.3) 10.4
(Decrease) increase in deferred income taxes (11.0) 4.2 38.0
Other operating activities, net (51.0) 141.7 (6.6)
-------- -------- --------
Net cash provided from continuing operating activities 474.4 591.6 996.4
-------- -------- --------
Investing activities
Additions to property, plant and equipment (239.6) (208.0) (201.4)
Proceeds from the disposition of property, plant and equipment 20.1 17.7 21.1
Proceeds from the disposition of operations, net of cash 8.0 1,312.3 1,121.8
Acquisitions, net of cash acquired (700.3) (24.1) (19.9)
Other investing activities, net (6.2) (2.3) (0.5)
-------- -------- --------
Net cash (used) provided by investing activities (918.0) 1,095.6 921.1
-------- -------- --------
Financing activities
Increase (decrease) in short-term debt, net 1,090.6 100.0 (1,147.3)
Issuance of long-term debt 513.1 94.1 35.9
Repayment of long-term debt (421.0) (523.2) (376.6)
Dividends to stockholders (348.4) (377.5) (403.1)
Cash purchases of Common stock for treasury (444.3) (988.4) (20.1)
Other financing activities, net 34.2 25.5 1.9
-------- -------- --------
Net cash provided (used) by financing activities 424.2 (1,669.5) (1,909.3)
-------- -------- --------
Effect of foreign exchange rate changes on cash (0.8) 12.1 1.6
-------- -------- --------
Cash provided by discontinued operations -- -- 37.8
-------- -------- --------
Net (decrease) increase in cash and cash equivalents $(20.2) $29.8 $47.6
======== ======== ========
Cash and cash equivalents at beginning of year $139.9 $110.1 $62.5
Cash and cash equivalents at end of year $119.7 $139.9 $110.1
======== ======== ========
Cash paid during the year for
Interest, net of capitalized amount $198.9 $206.6 $226.1
Income taxes $393.1 $295.5 $354.2
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
Consolidated Statement of Stockholders' Equity
American Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
$2.67
Convertible Foreign Treasury
Preferred Common Paid-in currency Retained stock,
(In millions) stock stock capital adjustments earnings at cost
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $17.1 $717.4 $173.3 $(317.4) $4,393.4 $(717.7)
Net income -- -- -- -- 734.1 --
Cash dividends -- -- -- -- (403.1) --
Translation adjustments -- -- -- 68.4 -- --
Purchases -- -- -- -- -- (32.5)
Conversion of securities and
delivery of stock plan shares (1.4) -- 1.3 -- -- 4.6
----- ------ ------ ------- -------- ---------
Balance at December 31, 1994 15.7 717.4 174.6 (249.0) 4,724.4 (745.6)
Net income -- -- -- -- 540.4 --
Cash dividends -- -- -- -- (377.5) --
Translation adjustments -- -- -- 14.4 -- --
Purchases -- -- -- -- -- (981.1)
Conversion of securities and
delivery of stock plan shares (1.6) -- (3.0) -- -- 48.1
----- ------ ------ ------- -------- ---------
Balance at December 31, 1995 14.1 717.4 171.6 (234.6) 4,887.3 (1,678.6)
Net income -- -- -- -- 486.5 --
Cash dividends -- -- -- -- (348.4) --
Translation adjustments -- -- -- 38.7 -- --
Purchases -- -- -- -- -- (444.3)
Conversion of securities and
delivery of stock plan shares (1.2) -- (5.1) -- -- 80.8
----- ------ ------ ------- -------- ---------
Balance at December 31, 1996 $12.9 $717.4 $166.5 $(195.9) $5,025.4 $(2,042.1)
===== ====== ====== ======= ======== =========
</TABLE>
See Notes to Consolidated Financial Statements.
43
<PAGE>
Notes to Consolidated Financial Statements
American Brands, Inc. and Subsidiaries
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries.
The Company is presenting its consolidated statement of income in a
"single-step" format and, accordingly, certain reclassifications of prior year
amounts have been made to conform to this presentation.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, sales and expenses for the reporting periods. Actual results for
future periods could differ from those estimates.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or less are
included in cash and cash equivalents.
Inventories
Inventories are priced at the lower of cost (principally average and first-in,
first-out and minor amounts at last-in, first-out) or market. In accordance with
generally recognized trade practice, the leaf tobacco and bulk whiskey
inventories are classified as current assets, although part of such inventories,
due to the duration of aging processes, ordinarily will not be sold within one
year.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Depreciation is provided,
principally on a straight-line basis, over the estimated useful lives of the
assets. Gains or losses resulting from dispositions are included in income.
Betterments and renewals which improve and extend the life of an asset are
capitalized; maintenance and repair costs are expensed.
Intangibles Resulting from Business Acquisitions
Intangibles resulting from business acquisitions, comprising cost in excess of
net assets of businesses acquired, and brands and trademarks, are being
amortized on a straight-line basis over 40 years, except for intangibles
acquired prior to 1971, which are not being amortized because they are
considered to have a continuing value over an indefinite period. The Company
periodically evaluates the recoverability of intangibles resulting from business
acquisitions and measures the amount of impairment, if any, by assessing current
and future levels of income and cash flows as well as other factors, such as
business trends, prospects and market and economic conditions.
Advertising Costs
Advertising costs, which amounted to $433 million and $390.3 million in 1996 and
1995, respectively, are principally charged to expense as incurred.
Income Taxes
Deferred tax liabilities or assets are established for temporary differences
between financial and tax reporting bases and are subsequently adjusted to
reflect changes in tax rates expected to be in effect when the temporary
differences reverse. A valuation allowance is established for any deferred tax
asset for which realization is not likely.
Deferred income taxes are not provided on undistributed earnings of foreign
subsidiaries, aggregating approximately $596.6 million at December 31, 1996, as
such earnings are expected to be permanently reinvested in these companies.
Foreign Currency Translation
Foreign currency balance sheet accounts are translated into U.S. dollars at the
rates of exchange at the balance sheet date. Income and expenses are translated
at the average rates of exchange in effect during the year. The related
translation adjustments are made directly to a separate component of
stockholders' equity.
The Company has sizable investments in Europe, primarily in the U.K.
Therefore, changes in the value of foreign currencies, principally sterling,
affect the Company's consolidated financial statements when translated into U.S.
dollars.
44
<PAGE>
Derivative Financial Instruments
Derivative financial instruments are utilized by the Company to reduce foreign
exchange and interest rate risks. The Company has established policies and
procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. The Company does not enter into
financial instruments for trading or speculative purposes.
Gains and losses on forward foreign exchange contracts used to hedge the
currency fluctuations on transactions denominated in foreign currencies and the
offsetting losses and gains on hedged transactions are recorded in the "Other
(income) expenses, net" caption in the income statement. Gains and losses on
forward foreign exchange contracts used to hedge a portion of the Company's
investment in foreign subsidiaries and the offsetting losses and gains on the
portion of the investment being hedged are recorded in the "Foreign currency
adjustments" caption in stockholders' equity.
Payments or receipts on interest rate swap agreements are recorded in the
"Interest and related expenses" caption in the income statement.
Earnings Per Share
Earnings per Common share are based on the weighted average number of Common
shares outstanding in each year and after preferred stock dividend requirements.
Fully diluted earnings per Common share assume that any convertible
debentures and convertible preferred shares outstanding at the beginning of each
year 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.
PROPOSED SPIN-OFF OF GALLAHER TOBACCO
On October 8, 1996, the Company announced plans to spin off its U.K.-based
Gallaher tobacco business. Completion of the transaction, which is expected
around mid-1997, is pending receipt of favorable tax rulings and relevant
stockholder approvals. When the spin-off is completed, the name of the Company
will be changed to Fortune Brands and the financial statements will be restated
to show tobacco operations (Gallaher and The American Tobacco Company) as
discontinued operations. Following the transaction, the Company's stockholders
will own shares in two publicly-traded companies--Fortune Brands and Gallaher.
To allocate the overall debt burden of the Company at the time of the
spin-off, Gallaher will borrow and pay to Fortune Brands approximately $1.4
billion. Fortune Brands will use the proceeds (approximately $1.25 billion after
taxes) initially to pay down short-term debt. The Gallaher debt will be in
addition to its seasonal working capital requirements.
ACQUISITIONS
In January 1996, Cobra Golf Incorporated ("Cobra"), a leader in golf clubs, was
acquired for an aggregate cost of $712 million in cash, including fees and
expenses. In connection with this acquisition, liabilities amounting to $60
million were included at the date of acquisition. The cost exceeded the fair
value of net assets acquired by $657 million. Cobra's operations have been
included in consolidated results from date of acquisition. Had operations been
consolidated from January 1, 1995, they would not have materially affected 1995
results.
45
<PAGE>
DISPOSITIONS
In December 1994, the Company sold The American Tobacco Company, its domestic
tobacco business, for $1 billion in cash, before related expenses.
In the fourth quarter of 1994, the Company recorded a $245 million charge
to income in connection with 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. The sale
of Prestige was completed in May 1995. With the sale of the retail distribution
operations in July 1995, the Company completed the disposition of nonstrategic
businesses and product lines. As a result, $20 million of the $245 million
provision that was recorded in 1994 in connection with the dispositions was
reversed in the third quarter of 1995.
In July 1994, the Company sold Dollond & Aitchison (optical), a subsidiary
of Gallaher, for total consideration of $146 million, which approximated the
carrying value of the company.
The components of the gain on the disposal of businesses, net are as
follows:
1995 1994
---------- ---------------------------------
(In millions, Other Domestic Other
except per share amounts) businesses tobacco businesses Total
- --------------------------------------------------------------------------------
Pre-tax gain (loss) $20.0 $577.9 $(245.0) $332.9
Income taxes -- 69.6 (3.7) 65.9
------- ------- ------- -------
Net income $20.0 $508.3 $(241.3) $267.0
------- ------- ------- -------
Earnings per Common share $.10 $2.52 $(1.20) $1.32
======= ======= ======= =======
DISCONTINUED OPERATIONS
In the fourth quarter of 1994, the Company entered into an agreement to sell its
Franklin life insurance business for $1.17 billion in cash, before related
expenses. The sale was completed in January 1995.
The results of operations of Franklin were reclassified as discontinued
operations. Summarized results of operations for Franklin, net of allocation of
interest expense based on a normal debt to equity ratio for a life insurance
company, were as follows:
(In millions) 1994
- --------------------------------------------------------------------------------
Revenues $ 951.8
=======
Income from operations
Income before taxes $91.3
Income taxes 35.5
-------
Net income from operations 55.8
-------
Loss on disposal of operations
Income during the phase-out period,
net of $4.2 million of income taxes 4.2
Loss on disposal(a) (211.0)
-------
Net loss on disposal (206.8)
-------
Loss from discontinued operations $(151.0)
=======
(a) No income tax benefit was recorded since the loss was non-deductible.
SHORT-TERM BORROWINGS AND
CREDIT FACILITIES
At December 31, 1996 and 1995, there were $1,405.8 million and $297.4 million of
short-term borrowings outstanding, respectively, comprised of notes payable to
banks and commercial paper. The weighted average interest rate on these
borrowings was 5.8% and 6.5%, respectively.
At December 31, 1996 and 1995, there were $23.2 million and $17.8 million
outstanding under committed bank credit agreements, which provide for unsecured
borrowings of up to $313 million and $286 million, respectively, for general
corporate purposes, including acquisitions. Fees of 0.10% per annum are paid on
Gallaher's credit agreements totaling (Pounds Sterling) 150 million ($257
million).
In addition, the Company had uncommitted bank lines of credit, which
provide for unsecured borrowings for working capital of up to $794 million of
which $447 million was outstanding at year end.
See page 53 for a description of the Company's use of financial
instruments.
46
<PAGE>
LONG-TERM DEBT
The components of long-term debt are as follows:
(In millions) 1996 1995
- --------------------------------------------------------------------------------
Notes payable(a) $ 400.0 $ --
Revolving credit notes(a) 204.9 97.0
Other notes(b) 150.3 251.3
8-1/2% Notes, Due 2003 200.0 200.0
8-5/8% Debentures, Due 2021 150.0 150.0
7-7/8% Debentures, Due 2023 150.0 150.0
7-1/2% Notes, Due 1999 150.0 150.0
9% Notes, Due 1999 100.0 100.0
9-1/4% Eurosterling Notes,
Due 1998 85.6 77.7
12-1/2% Sterling Loan Stock,
Due 2009 51.4 46.6
7-5/8% Eurodollar Convertible
Debentures, Due 2001(c) -- 150.0
9-1/8% Debentures, Due 2016(c) -- 150.0
Miscellaneous 10.0 45.4
-------- --------
1,652.2 1,568.0
Less current portion 53.9 413.4
-------- --------
$1,598.3 $1,154.6
======== ========
(a) The Company maintains revolving credit agreements expiring in 2000 with
various banks, which provide for unsecured borrowings of up to $4 billion
including $1 billion in various Eurocurrencies. The interest rate is set at
the time of each borrowing. A commitment fee of 0.15% per annum is paid on
the unused portion. The fee is subject to increases up to a maximum of
0.25% per annum in the event the Company's long-term debt rating falls
below specified levels. Borrowings under these agreements may be made for
general corporate purposes, including acquisitions and support for the
Company's short-term borrowings in the commercial paper market. The
Company, in the event that it becomes advisable, intends to exercise its
rights under these agreements to refinance $400 million of short-term notes
payable; accordingly, short-term notes payable in this amount have been
classified as long-term debt at December 31, 1996.
(b) The Other notes have maturity dates ranging from one to five years, with a
weighted average coupon of 8.6%.
(c) In March 1996, the Company redeemed the 7-5/8% Eurodollar Convertible
Debentures, Due 2001, and the 9-1/8% Debentures, Due 2016. An extraordinary
charge of $10.3 million, or six cents per Common share, was recorded in the
first quarter of 1996.
Estimated payments for maturing debt during the next five years are as
follows: 1997, $53.9 million; 1998, $178.6 million; 1999, $252.7 million; 2000,
$601.5 million; and 2001, $11.5 million.
$2.67 CONVERTIBLE PREFERRED STOCK--
REDEEMABLE AT COMPANY'S OPTION
Shares of the $2.67 Convertible Preferred stock issued and outstanding at
December 31, 1996, 1995 and 1994 were 422,732 shares, 461,008 shares and 516,186
shares, respectively. Reacquired, redeemed or converted authorized shares that
are not outstanding are required to be retired or restored to the status of
authorized but unissued shares of preferred stock without series designation.
The holders of $2.67 Convertible Preferred stock are entitled to cumulative
dividends, three-tenths of a vote per share (in certain events, to the exclusion
of the Common shares), preference in liquidation over holders of Common stock of
$30.50 per share plus accrued dividends and convert each share of such stock
into 4.08 shares of Common stock. Authorized but unissued Common shares are
reserved for issuance upon such conversions, but treasury shares may be and are
delivered. During 1996, 1995 and 1994, 38,276 shares, 55,178 shares and 45,100
shares, respectively, were converted. The Company may redeem such Preferred
stock at a price of $30.50 per share, plus accrued dividends.
A cash dividend of $2.67 per share in the aggregate amounts of $1.2
million, $1.3 million and $1.4 million was paid in each of the years ended
December 31, 1996, 1995 and 1994, respectively.
CAPITAL STOCK
The Company has 750 million authorized shares of Common stock and 60 million
authorized shares of preferred stock.
There were 170,565,785 and 178,130,371 Common shares outstanding at
December 31, 1996 and 1995, respectively.
The cash dividends paid on the Common stock for the years ended December
31, 1996, 1995 and 1994 aggregated $347.2 million, $376.2 million and $401.7
million, respectively.
Treasury shares purchased and received as consideration for stock options
exercised amounted to 10,108,848 shares in 1996, 24,790,403 shares in 1995 and
950,220 shares in 1994. Treasury shares delivered in connection with exercise of
stock options and grants of other stock awards and conversion of preferred stock
and debentures amounted to 2,544,262 shares in 1996, 1,710,151 shares in 1995
and 416,795 shares in 1994. At December 31, 1996 and 1995, there were 59,004,239
and 51,439,653 Common treasury shares, respectively.
47
<PAGE>
PREFERRED SHARE PURCHASE RIGHTS
Each outstanding share of Common stock also evidences one Preferred Share
Purchase Right ("Right"). The Rights will generally become exercisable only in
the event of an acquisition of or a tender offer for 10% or more of the Common
stock. If exercisable, each Right is exercisable for 1/200th of a share of
Series A Junior Participating Preferred Stock at an exercise price of $52.50.
Also, upon an acquisition of 10% or more of the Common stock, or upon an
acquisition of the Company or the transfer of 50% or more of its assets or
earning power, each Right (other than Rights held by the 10% acquiror, if
applicable), if exercisable, will generally be exercisable for common shares of
the Company or the acquiring company, as the case may be, having a market value
of twice the exercise price. In certain events, however, Rights may be exchanged
by the Company for Common stock at a rate of one share per Right. The Rights may
be redeemed at any time prior to an acquisition of 10% or more of the Common
stock at a redemption price of $.005 per Right. Until a Right is exercised, the
holder, as such, will have no voting, dividend or other rights as a stockholder
of the Company. Unless either redeemed or exchanged, the Rights will expire on
December 24, 1997.
All 1.4 million of the authorized Series A Preferred shares are reserved
for issuance upon exercise of Rights, and at December 31, 1996, outstanding
Rights were exercisable as described above in the aggregate for 852,829 of such
shares.
STOCK PLANS
The 1990 Long-Term Incentive Plan, as amended, authorizes the granting to key
employees of the Company and its subsidiaries of incentive and nonqualified
stock options, stock appreciation rights, restricted stock, performance awards
and other stock-based awards, any of which may be granted alone or in
combination with other types of awards or dividend equivalents. Such grants may
be made on or before December 31, 1999 for up to 12 million shares of the Common
stock. The Company's Long-Term Incentive Plan for Key Employees of Subsidiaries
also authorizes the granting to key employees of the Company's subsidiaries of
similar types of awards other than stock options and stock appreciation rights,
and one million shares have been reserved for issuance upon payment of any
awards granted thereunder after December 31, 1990. Stock options and stock
appreciation rights may no longer be granted under the Company's 1986 Stock
Option Plan, but outstanding awards may continue to be exercised until their
expiration dates.
Stock options under the Plans have exercise prices equal to fair market
values at dates of grant. Options generally may not be exercised prior to one
year or more than ten years from the date of grant. Stock appreciation rights,
which may be granted in conjunction with option grants, permit the optionees to
receive shares of Common stock, cash or a combination of shares and cash
measured by the difference between the option exercise price and the fair market
value of the Common stock at the time of exercise of such right.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock plans as
allowed under FAS Statement No. 123, "Accounting for Stock-Based Compensation."
Accordingly, the adoption of this statement did not affect the Company's results
of operations, financial position or liquidity. Had compensation cost for the
fixed stock options granted in 1996 and 1995 been determined consistent with FAS
No. 123, pro forma net income and earnings per share would have been as follows:
(In millions, except per share amounts) 1996 1995
- --------------------------------------------------------------------------------
Net income $477.5 $539.6
====== ======
Earnings per Common share
Primary $2.75 $2.88
====== ======
Fully diluted $2.69 $2.82
====== ======
The effects of applying FAS No. 123 in this pro forma disclosure are not
necessarily indicative of future amounts.
48
<PAGE>
Changes during the three years ended December 31, 1996 in shares under
option were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Options price Options price Options price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 9,919,560 $38.34 9,674,840 $37.33 8,779,060 $37.85
Granted 1,772,550 48.65 1,760,400 42.20 2,562,200 35.12
Exercised (1,721,260) 35.17 (869,030) 33.15 (239,650) 30.60
Lapsed (189,700) 44.84 (646,650) 40.69 (953,880) 39.70
Canceled -- -- -- -- (472,890) 33.67
---------- ------ ---------- ------ ---------- ------
Outstanding at end of year 9,781,150 $40.64 9,919,560 $38.34 9,674,840 $37.33
========== ====== ========== ====== ========== ======
Options exercisable at end of year 8,075,350 $38.93 8,159,160 $37.51 7,464,240 $37.98
========== ====== ========== ====== ========== ======
Weighted-average fair value of
options granted during year $7.11 $5.98
====== ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995:
1996 1995
------------------------------------------------
Expected dividend yield 5.0% 5.0%
Expected forfeiture rate 12.5% 2.2%
Expected volatility 19.0% 19.0%
Risk-free interest rate 5.9% 5.6%
Expected term 5 Years 5 Years
======= =======
Options outstanding and exercisable at December 31, 1996 were as follows:
Options outstanding Options exercisable
- --------------------------------------------------------- ---------------------
Weighted- Weighted- Weighted-
average average average
Range of Number remaining exercise Number exercise
exercise prices outstanding contractual life price exercisable price
- --------------------------------------------------------------------------------
$21.25 to $29.84 348,290 1.6 $28.26 348,290 $28.26
31.44 to 37.44 3,802,170 6.1 34.42 3,802,170 34.42
40.19 to 48.75 5,630,690 7.7 45.60 3,924,890 44.25
- ---------------- --------- --- ------ --------- ------
$21.25 to $48.75 9,781,150 6.8 $40.64 8,075,350 $38.93
================ ========= === ====== ========= ======
At December 31, 1996, performance awards were outstanding pursuant to which
up to 68,837 shares, 90,750 shares, 111,450 shares and 91,950 shares may be
issued in 1997, 1998, 1999 and 2000, respectively, depending on the extent to
which certain specified performance objectives are met. 45,890 shares, 112,994
shares and 14,135 shares were issued pursuant to performance awards during 1996,
1995 and 1994, respectively. The costs of restricted and deferred shares and
performance awards are expensed over the restriction or performance period.
The compensation expense for stock based plans recorded for 1996 was $2.3
million.
Shares available in connection with future awards under the Company's stock
plans at December 31, 1996, 1995 and 1994 were 7,193,139, 8,955,039 and
10,598,855, respectively. Authorized but unissued shares are reserved for
issuance in connection with awards, but treasury shares may be and are
delivered.
49
<PAGE>
Pension and Other Retiree Benefits
The Company has a number of pension plans covering substantially all employees.
The plans provide for payment of retirement benefits, mainly commencing between
the ages of 60 and 65, and also for payment of certain disability and severance
benefits. After meeting certain qualifications, an employee acquires a vested
right to future benefits. The benefits payable under the plans are generally
determined on the basis of an employee's length of service and earnings. Annual
contributions to the plans are sufficient to satisfy legal funding requirements.
U.S. Pension Plans
The components of net pension cost are as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $18.1 $13.9 $24.3
Interest cost 31.1 28.9 67.6
Actual return on plan assets (60.3) (77.3) (48.8)
Net amortization and deferral 26.1 46.0 (23.9)
----- ----- -----
$15.0 $11.5 $19.2
===== ===== =====
The funded status of the U.S. plans as of December 31 was as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
Assets Accumulated Assets Accumulated
exceed benefits exceed benefits
accumulated exceed accumulated exceed
(In millions) benefits assets benefits assets
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation
Vested $243.6 $122.1 $253.2 $102.4
Nonvested 13.6 3.6 10.5 1.8
------ ------ ------ ------
$257.2 $125.7 $263.7 $104.2
====== ====== ====== ======
Projected benefit obligation $312.0 $137.6 $313.2 $113.6
Fair value of plan assets, principally
equity securities and corporate bonds 366.0 103.1 333.3 72.3
------ ------ ------ ------
Excess (deficiency) of assets over
projected benefit obligation 54.0 (34.5) 20.1 (41.3)
Unrecognized net transition (gain) loss (7.4) 0.8 (9.1) 1.2
Unrecognized net (gain) loss from
experience differences (17.2) 17.5 14.5 21.3
Unrecognized prior service cost (0.9) 24.6 (0.2) 23.4
Adjustment needed to recognize minimum liability -- (30.0) -- (35.0)
------ ------ ------ ------
Prepaid pension cost (pension liability) $28.5 $(21.6) $25.3 $(30.4)
====== ====== ====== ======
Actuarial assumptions
Discount rate 7.75% 7.75% 7.25% 7.25%
Weighted average rate of compensation increase 4.7% 5.1% 4.2% 4.6%
Expected long-term rate of return on plan assets 10.0% 10.0% 10.0% 10.0%
====== ====== ====== ======
</TABLE>
50
<PAGE>
Non-U.S. Pension Plans
The components of net pension cost are as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------
Service cost $ 26.3 $ 25.3 $ 38.8
Interest cost 66.2 65.9 68.7
Actual return on plan assets (125.6) (124.4) (61.0)
Net amortization and deferral 29.7 28.7 (32.7)
-------- -------- -------
$ (3.4) $ (4.5) $ 13.8
======== ======== =======
The funded status (assets exceed accumulated benefits) of the non-U.S.
plans as of December 31 was as follows:
(In millions) 1996 1995
- ------------------------------------------------------------------------------
Accumulated benefit obligation
Vested $ 824.3 $ 686.5
Nonvested 4.2 3.2
------- -------
$ 828.5 $ 689.7
======= =======
Projected benefit obligation $ 929.7 $ 784.4
Fair value of plan assets,
principally equity securities
and corporate bonds 1,265.2 1,034.1
------- -------
Excess of assets over projected
benefit obligation(a) 335.5 249.7
Unrecognized net transition gain (16.0) (18.3)
Unrecognized net gain from experience differences (74.2) (43.7)
Unrecognized prior service cost 31.3 33.8
------- -------
Prepaid pension cost $ 276.6 $ 221.5
======= =======
Actuarial assumptions
Weighted average discount rate 8.3% 8.5%
Weighted average rate of compensation increase 6.9% 7.0%
Expected long-term rate of return on plan assets 9.5% 9.5%
======= =======
(a) The excess of assets over the projected benefit obligation, calculated
under the valuation method mandated by FAS Statement No. 87, "Employers'
Accounting for Pensions," arises principally in the U.K. Under current U.K.
legislation, no part of this excess could be repaid to the Company from the
U.K. plans.
Defined Contribution Plans
The Company sponsors a number of defined contribution plans. Contributions are
determined under various formulas. Cost related to such plans amounted to $18.1
million, $16.9 million and $26.2 million in 1996, 1995 and 1994, respectively.
Other Retiree Benefits
The Company provides postretirement health care and life insurance benefits
to certain employees and retirees in the United States and certain employee
groups outside the United States. Most employees and retirees outside the United
States are covered by government health care programs.
The components of the postretirement benefit cost are as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Service cost $ 3.1 $ 3.7 $ 8.1
Interest cost 11.5 14.4 26.9
------- ------- -------
$ 14.6 $ 18.1 $ 35.0
======= ======= =======
The status of the plans as of December 31 was as follows:
(In millions) 1996 1995
- -------------------------------------------------------------------------------
Accumulated postretirement
benefit obligation
Retirees $ 107.5 $ 130.0
Fully eligible active plan participants 13.3 16.5
Other active plan participants 40.5 52.9
------- -------
161.3 199.4
Unrecognized prior service cost 3.9 3.1
Unrecognized net gain from experience differences 18.8 --
------- -------
Accrued postretirement cost $ 184.0 $ 202.5
======= =======
Assumed weighted average discount rate 7.9% 7.7%
======= =======
The assumed health care cost trend rate used in measuring the health care
portion of the postretirement benefit cost for 1997 is 10.25%, gradually
declining to 6% by the year 2007 and remaining at that level thereafter. A 1%
increase in the assumed health care cost trend rate for each year would increase
the accumulated benefit obligation as of December 31, 1996 and postretirement
benefit cost for 1996 by approximately 11% and 13%, respectively.
51
<PAGE>
LEASE COMMITMENTS
Future minimum rental payments under noncancelable operating leases as of
December 31, 1996 are as follows:
(In millions)
- -------------------------------------------------------------------------------
1997 $45.3
1998 39.4
1999 33.7
2000 27.3
2001 24.4
Remainder 202.9
------
Total minimum rental payments 373.0
Less minimum rentals to be received
under noncancelable subleases 45.8
------
$327.2
======
Total rental expense for all operating leases (reduced by minor amounts
from subleases) amounted to $45.7 million, $58.5 million and $81.3 million in
1996, 1995 and 1994, respectively.
INCOME TAXES
The components of income from continuing operations before income taxes are as
follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Domestic operations $ 219.7 $ 236.7 $ 924.7
Foreign operations 604.6 657.1 426.5
-------- -------- --------
$ 824.3 $ 893.8 $1,351.2
======== ======== ========
A reconciliation of income taxes at the 35% federal statutory income tax
rate to income taxes as reported is as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Income taxes
computed at
federal statutory
income tax rate $ 288.5 $ 312.8 $ 472.9
Other income taxes,
net of federal tax
benefit 18.4 12.9 22.3
Lower effective rate
on disposal of
businesses -- (7.0) (50.6)
Goodwill not
deductible for
income tax
purposes 32.4 27.9 28.4
Miscellaneous,
including
reversals of tax
provisions no
longer required (11.8) 4.1 (6.9)
-------- -------- --------
Income taxes as
reported $ 327.5 $ 350.7 $ 466.1
======== ======== ========
Income taxes are as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Currently payable
Federal $ 124.5 $ 129.0 $ 208.9
Foreign 185.7 201.8 186.0
Other 24.5 16.5 26.2
Deferred
Federal and other 5.8 3.0 39.8
Foreign (13.0) 0.4 5.2
-------- -------- --------
$ 327.5 $ 350.7 $ 466.1
======== ======== ========
The components of net deferred tax assets (liabilities) are as follows:
(In millions) 1996 1995
- --------------------------------------------------------------------------------
Current assets
Compensation and benefits $ 23.0 $ 14.2
Other reserves 32.0 16.5
Product coupons 9.8 9.8
Capitalized interest-inventory 12.1 12.2
Restructuring 37.2 14.1
Interest 13.6 11.4
Accounts receivable 15.3 11.8
Miscellaneous 40.7 33.1
------- -------
183.7 123.1
------- -------
Current liabilities
Inventories (22.9) (23.6)
Miscellaneous (17.9) (14.6)
------- -------
(40.8) (38.2)
------- -------
Deferred income taxes
included in Other
current assets 142.9 84.9
------- -------
Noncurrent assets
Compensation and benefits 17.6 21.9
Other retiree benefits 61.2 70.1
Other reserves 23.4 24.1
Foreign exchange 52.0 9.8
Miscellaneous 23.4 13.8
------- -------
177.6 139.7
------- -------
Noncurrent liabilities
Depreciation (112.1) (110.3)
Pensions (92.2) (78.5)
Trademark amortization (69.2) (55.2)
Miscellaneous (23.6) (23.3)
------- -------
(297.1) (267.3)
------- -------
Deferred income taxes (119.5) (127.6)
------- -------
Net deferred tax asset (liability) $ 23.4 $ (42.7)
======= =======
52
<PAGE>
FINANCIAL INSTRUMENTS
The Company does not enter into financial instruments for trading or speculative
purposes. Financial instruments are used to reduce the impact of changes in
foreign currency exchange rates and interest rates. The principal financial
instruments used are forward foreign exchange contracts and interest rate swaps.
The counterparties are major financial institutions. Although the Company's
theoretical risk is the replacement cost at the then estimated fair value of
these instruments, management believes that the risk of incurring credit losses
is remote and that such losses, if any, would be immaterial.
The Company enters into forward foreign exchange contracts principally to
hedge the currency fluctuations in transactions denominated in foreign
currencies, principally short-term loans to Gallaher, thereby limiting the
Company's risk that would otherwise result from changes in exchange rates. The
periods of the forward foreign exchange contracts correspond to the periods of
the hedged transactions. The Company also enters into forward foreign exchange
contracts to hedge a portion of its investments in U.K. operating companies.
At December 31, 1996, the Company had outstanding forward foreign exchange
contracts to purchase $148 million and sell $2.1 billion of various foreign
currencies (principally sterling), with maturities ranging from January 2, 1997
to December 29, 1997, with a weighted average maturity of 142 days. At December
31, 1995, the Company had outstanding forward foreign exchange contracts to
purchase $141 million and sell $346 million of various foreign currencies
(principally sterling), with maturities ranging from January 2, 1996 to December
31, 1996, with a weighted average maturity of 58 days. The increased activity in
1996 reflects the decision to hedge a greater portion of the investments in U.K.
operating companies.
The estimated fair value of foreign currency contracts represents the
amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices. At December 31, 1996, the Company
would have paid $140 million, the difference between the contract amounts and
fair values, to offset the existing contracts. At December 31, 1995, the
difference between the contract amounts and fair values was immaterial.
The Company enters into interest rate swap agreements to manage its
exposure to interest rate changes. The swaps involve the exchange of fixed and
variable interest rate payments without exchanging the notional principal
amount.
At December 31, 1996 and 1995, the Company had outstanding interest rate
swap agreements denominated in dollars, maturing at various dates through 1999,
with aggregate notional principal amounts of $500 million and $200 million,
respectively. Under these agreements the Company receives a floating rate based
on thirty day commercial paper rates, or a weighted average rate of 5.7% and
5.8% at December 31, 1996 and 1995, and pays a weighted average fixed interest
rate of 6.6% and 7.8% for 1996 and 1995, respectively.
The fair value of these interest rate swap agreements represents the
estimated receipts or payments that would be made to terminate the agreements.
At December 31, 1996, the Company would have paid $8.7 million and at December
31, 1995 would have paid $15.4 million to terminate the agreements. The fair
value is based on dealer quotes, considering current interest rates.
The estimated fair value of the Company's cash and cash equivalents, notes
payable to banks and commercial paper, approximates the carrying amounts due
principally to their short maturities.
The estimated fair value of the Company's $1,652.2 million and $1,568
million total long-term debt (including current portion) at December 31, 1996
and 1995 was approximately $1,726.1 million and $1,687.8 million, respectively.
The fair value is determined from quoted market prices, where available, and
from investment bankers using current interest rates considering credit ratings
and the remaining terms to maturity.
Concentration of credit risk with respect to accounts receivables is
limited because a large number of geographically diverse customers make up the
operating companies' domestic and international customer base, thus spreading
the credit risk.
53
<PAGE>
SUPPLEMENTARY PROFIT AND LOSS INFORMATION
Supplementary profit and loss information is as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Federal and foreign
excise taxes
included in net sales
International
tobacco $5,349.8 $4,976.5 $4,742.6
Distilled spirits 453.2 485.7 488.9
Domestic tobacco -- -- 425.3
-------- -------- --------
$5,803.0 $5,462.2 $5,656.8
======== ======== ========
Research and
development
expenses $ 40.2 $ 31.8 $ 43.5
======== ======== ========
RESTRUCTURING CHARGES
The 1996 restructuring charge in international tobacco of $88.8 million,
primarily covering termination costs, reflected Gallaher's plan announced in
December 1996 to consolidate cigarette production in the U.K. into one factory.
The three- to four-year program will result in the expansion of Gallaher's
factory and installation of new high-speed cigarette machinery at Lisnafillan,
Northern Ireland, and the closure of the Hyde factory in Manchester, England
with the elimination of all 950 positions. There were no payments or
terminations during 1996.
The 1995 restructuring charge of $17.8 million reflected distilled spirits'
bottling plant closing, write-down of property, plant and equipment, and related
employee termination costs on a 5% reduction in workforce. This restructuring
was substantially completed by December 31, 1996.
Information on Business Segments
The Company's subsidiaries operate principally in the following business
segments: International tobacco includes cigarettes and other tobacco products
manufactured by Gallaher.
Distilled spirits includes products produced or imported by Jim Beam and
Whyte & Mackay.
Hardware and home improvement products includes kitchen and bathroom
faucets, plumbing supply and repair products manufactured, packaged or
distributed by Moen, locks manufactured by Master Lock, kitchen cabinets and
bathroom vanities manufactured by Aristokraft, and tool storage products
manufactured by Waterloo.
Golf and leisure products includes golf balls, shoes, gloves and clubs
manufactured and marketed by Titleist and Foot-Joy Worldwide and golf clubs
manufactured and marketed by Cobra acquired in January 1996.
Office products includes paper fastening, computer accessories, time
management systems and other office products manufactured by ACCO World
subsidiaries.
Domestic tobacco included cigarettes manufactured by American Tobacco,
which was sold in December 1994.
Other businesses included optical (Dollond & Aitchison), sold in July 1994,
rubber products, sold in December 1994, housewares (Prestige), sold in May 1995,
and retail distribution (Forbuoys), sold in July 1995.
The Company's subsidiaries operate in the United States, Europe
(principally in the U.K.) and other areas (principally in Canada and Australia).
Net sales and operating income for the years 1996, 1995 and 1994, and
identifiable assets for the related year ends by business segments and by
geographic areas, are shown on page 58.
Operating income represents net sales less all costs and expenses excluding
corporate administrative expenses, interest and related expenses and other
(income) expenses, net. A reconciliation of operating income to income from
continuing operations before income taxes is as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Operating income $1,085.3 $1,093.0 $1,312.4
Interest and related
expenses 178.7 159.8 212.1
Non-operating
expenses 82.3 59.4 82.0
Gain on disposal of
businesses, net -- (20.0) (332.9)
-------- -------- --------
Income from
continuing
operations before
income taxes as
reported $ 824.3 $ 893.8 $1,351.2
======== ======== ========
Reconciliation of identifiable assets to consolidated total assets is as
follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
Identifiable assets $9,355.3 $7,845.9 $8,452.0
Corporate 148.9 175.3 172.4
Net assets of
discontinued
operations -- -- 1,170.0
-------- -------- --------
$9,504.2 $8,021.2 $9,794.4
======== ======== ========
54
<PAGE>
Depreciation is as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
International tobacco $ 31.8 $ 28.5 $ 41.1
Distilled spirits 39.4 35.9 36.2
Hardware and home improvement products 40.8 35.2 34.4
Golf and leisure products 13.4 10.0 8.9
Office products 39.2 35.8 36.7
Corporate 2.8 2.9 2.7
------- ------- -------
Ongoing operations 167.4 148.3 160.0
Domestic tobacco -- -- 23.9
Other businesses -- 14.1 34.2
------- ------- -------
$ 167.4 $ 162.4 $ 218.1
======= ======= =======
Amortization of intangibles is as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
International tobacco $ 4.7 $ 5.1 $ 5.1
Distilled spirits 35.7 34.4 33.9
Hardware and home improvement products 30.0 30.1 30.1
Golf and leisure products 16.3 1.2 1.1
Office products 20.7 21.0 20.5
------- ------- -------
Ongoing operations 107.4 91.8 90.7
Other businesses -- 3.3 5.6
------- ------- -------
$ 107.4 $ 95.1 $ 96.3
======= ======= =======
Capital expenditures are as follows:
(In millions) 1996 1995 1994
- --------------------------------------------------------------------------------
International tobacco $ 39.9 $ 32.4 $ 33.0
Distilled spirits 46.5 39.5 34.3
Hardware and home improvement products 60.6 68.1 45.3
Golf and leisure products 50.4 20.6 15.5
Office products 40.9 36.1 33.5
Corporate 1.3 0.9 1.1
------- ------- -------
Ongoing operations 239.6 197.6 162.7
Domestic tobacco -- -- 10.8
Other businesses -- 10.4 27.9
------- ------- -------
$ 239.6 $ 208.0 $ 201.4
======= ======= =======
EXTRAORDINARY ITEMS
In March 1996, the Company redeemed $149.6 million of the $150 million 7-5/8%
Eurodollar Convertible Debentures, Due 2001, at a redemption price of 103.8125%
of the principal amount plus accrued interest and redeemed its $150 million
91/8% Debentures, Due 2016, at a redemption price of 104.4375% of the principal
amount plus accrued interest. In connection with the redemptions, the Company
recorded a charge of $10.3 million ($15.8 million pre-tax), or six cents per
Common share.
In April 1995, holders of $199.5 million of the $200 million 53/4%
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 $2.7 million ($4.1
million pre-tax), or one cent per Common share.
PRO FORMA HISTORICAL FINANCIAL
INFORMATION (Unaudited)
The pro forma information represents the historical amounts of the Company
restated to show the tobacco operations of Gallaher and The American Tobacco
Company as discontinued operations, including an allocation of interest expense.
The pro forma results are presented for informational purposes only and do
not purport to be indicative of the results of operations which would actually
have been obtained if the transactions had occurred in such periods, or which
may exist or be obtained in the future. The pro forma information does not
reflect the use of the $1.25 billion net cash proceeds to be received when the
spin-off of Gallaher is completed.
55
<PAGE>
The pro forma information is as follows:
(In millions, except per share amounts) 1996 1995 1994
- --------------------------------------------------------------------------------
Net sales
Continuing operations
Ongoing operations $ 4,717.7 $ 4,380.8 $ 4,095.6
Other businesses -- 547.3 1,281.4
--------- --------- ---------
$ 4,717.7 $ 4,928.1 $ 5,377.0
========= ========= =========
Income (loss) from continuing operations
Ongoing operations $ 181.7 $ 170.2 $ 167.0
Other businesses(1) -- 15.7 (245.8)
--------- --------- ---------
181.7 185.9 (78.8)
Discontinued operations(2) 315.1 357.2 812.9
Extraordinary items (10.3) (2.7) --
--------- --------- ---------
Net income $ 486.5 $ 540.4 $ 734.1
========= ========= =========
Earnings per Common share
Primary
Continuing operations
Ongoing operations(3) $ 1.04 $ .91 $ .82
Other businesses(1) -- .08 (1.22)
--------- --------- ---------
1.04 .99 (.40)
Discontinued operations(2) 1.82 1.91 4.03
Extraordinary items (.06) (.01) --
--------- --------- ---------
Net income $ 2.80 $ 2.89 $ 3.63
========= ========= =========
Fully diluted
Continuing operations
Ongoing operations(3) $ 1.03 $ .93 $ .88
Other businesses(1) -- .08 (1.15)
--------- --------- ---------
1.03 1.01 (.27)
Discontinued operations(2) 1.77 1.83 3.80
Extraordinary items (.06) (.01) --
--------- --------- ---------
Net income $ 2.74 $ 2.83 $ 3.53
========= ========= =========
(1) 1995 includes a $20 million (no taxes required) reversal of a portion of
the 1994 loss on disposal of businesses, or $.10 and $.09 primary and fully
diluted E.P.S., respectively. 1994 includes a $245 million ($241.3 million
after taxes) loss on disposal of businesses, or $1.20 and $1.13 primary and
fully diluted E.P.S., respectively.
(2) Discontinued operations for 1994 also includes the gain on the sale of
American Tobacco of $508.3 million, or $2.52 and $2.38 per Common share on
a primary and fully diluted basis, respectively, and $55.8 million of
income from the results of operations of the Franklin life insurance
business, (net of allocated interest) and a $206.8 million loss on its
disposal, for a net loss of $151 million, or $.75 and $.71 primary and
fully diluted E.P.S., respectively.
(3) Pro forma as adjusted earnings per Common share for 1996 of $1.32 primary
and $1.30 fully diluted gives effect to the benefit of $1.25 billion net
proceeds resulting from the payment that Gallaher will make to Fortune
Brands when the transaction is consummated, as if the proceeds were
received and used for the possible purchase of 10 million shares of Fortune
Brands Common stock and the repayment of debt at January 1, 1996.
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.
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.
56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of American Brands, Inc.
We have audited the accompanying consolidated balance sheet of American Brands,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, cash flows and stockholders' equity for the
years ended December 31, 1996, 1995 and 1994. These financial statements are the
responsibility of the management of American Brands, Inc. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of American
Brands, Inc. and Subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York
February 3, 1997
REPORT OF MANAGEMENT
To the Stockholders of American Brands, Inc.
We have prepared the consolidated balance sheet of American Brands, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income, cash flows and stockholders' equity for the years ended
December 31, 1996, 1995 and 1994. The financial statements have been prepared in
accordance with generally accepted accounting principles. Financial information
elsewhere in this Annual Report is consistent with that in the financial
statements.
The system of internal controls of the Company and its subsidiaries is
designed to provide reasonable assurances that the financial records are
adequate and can be relied upon to provide information for the preparation of
financial statements and that established policies and procedures are carefully
followed.
Independent accountants are elected annually by the stockholders of the
Company to audit the financial statements. Coopers & Lybrand L.L.P., independent
accountants, are currently engaged to perform such audit. Their audit is in
accordance with generally accepted auditing standards and includes tests of
transactions and selective tests of internal accounting controls.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with the independent accountants, internal
auditors and management to review accounting, auditing, and financial reporting
matters. The auditors have direct access to the Audit Committee.
/s/ Thomas C. Hays
Thomas C. Hays
Chairman of the Board and
Chief Executive Officer
/s/ Craig P. Omtvedt
Craig P. Omtvedt
Vice President and Chief
Accounting Officer
57
<PAGE>
Information on Business Segments
American Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In millions) 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BUSINESS SEGMENTS(1)
Net sales
International tobacco $ 6,861.6 $ 6,439.0 $ 6,174.8 $ 5,946.8 $ 6,387.3 $ 6,384.3
Distilled spirits 1,303.5 1,288.6 1,268.2 1,194.6 1,268.3 1,061.2
Hardware and home
improvement products 1,374.1 1,306.8 1,270.6 1,119.5 1,014.8 902.3
Golf and leisure products 811.4 579.3 507.1 452.7 416.2 391.0
Office products 1,228.7 1,206.1 1,049.7 977.2 1,003.5 982.3
--------- --------- --------- --------- --------- ---------
Ongoing operations 11,579.3 10,819.8 10,270.4 9,690.8 10,090.1 9,721.1
Domestic tobacco -- -- 1,594.7 1,501.5 1,820.9 1,784.6
Other businesses -- 547.3 1,281.4 1,438.2 1,747.1 1,687.7
--------- --------- --------- --------- --------- ---------
$11,579.3 $11,367.1 $13,146.5 $12,630.5 $13,658.1 $13,193.4
========= ========= ========= ========= ========= =========
Operating income
International tobacco $ 488.2 $ 554.1 $ 521.1 $ 487.2 $ 558.8 $ 532.0
Distilled spirits 208.4 189.7 221.2 214.7 195.8 151.6
Hardware and home
improvement products 184.1 178.3 176.5 155.5 159.0 141.5
Golf and leisure products 109.0 83.0 73.3 63.6 53.3 45.9
Office products 95.6 84.5 74.5 63.2 58.1 37.7
--------- --------- --------- --------- --------- ---------
Ongoing operations 1,085.3 1,089.6 1,066.6 984.2 1,025.0 908.7
Domestic tobacco -- -- 247.6 169.2 540.4 547.8
Other businesses -- 3.4 (1.8) 27.2 24.3 22.5
--------- --------- --------- --------- --------- ---------
$ 1,085.3 $ 1,093.0 $ 1,312.4 $ 1,180.6 $ 1,589.7 $ 1,479.0
========= ========= ========= ========= ========= =========
Identifiable assets
International tobacco $ 2,448.3 $ 1,909.2 $ 1,893.2 $ 1,540.2 $ 1,251.0 $ 1,690.2
Distilled spirits 2,250.1 2,176.7 2,208.1 2,229.7 1,830.9 1,947.4
Hardware and home
improvement products 1,809.3 1,824.7 1,806.6 1,809.0 1,786.4 1,734.6
Golf and leisure products 1,239.2 381.7 336.2 308.9 264.0 240.6
Office products 1,608.4 1,553.6 1,540.4 1,465.7 1,510.5 1,588.4
--------- --------- --------- --------- --------- ---------
Ongoing operations 9,355.3 7,845.9 7,784.5 7,353.5 6,642.8 7,201.2
Domestic tobacco -- -- -- 702.1 806.0 762.9
Other businesses -- -- 667.5 973.7 916.0 1,088.7
--------- --------- --------- --------- --------- ---------
$ 9,355.3 $ 7,845.9 $ 8,452.0 $ 9,029.3 $ 8,364.8 $ 9,052.8
========= ========= ========= ========= ========= =========
GEOGRAPHIC AREAS(1)
Net sales
United States $ 3,452.0 $ 3,232.6 $ 4,676.4 $ 4,415.2 $ 4,591.2 $ 4,206.8
Europe 7,662.2 7,724.0 8,073.9 7,881.8 8,740.9 8,736.3
Other countries 465.1 410.5 396.2 333.5 326.0 250.3
--------- --------- --------- --------- --------- ---------
$11,579.3 $11,367.1 $13,146.5 $12,630.5 $13,658.1 $13,193.4
========= ========= ========= ========= ========= =========
Operating income
United States $ 475.2 $ 425.7 $ 671.4 $ 558.1 $ 914.5 $ 843.8
Europe 536.7 599.3 585.8 578.4 633.7 594.7
Other countries 73.4 68.0 55.2 44.1 41.5 40.5
--------- --------- --------- --------- --------- ---------
$ 1,085.3 $ 1,093.0 $ 1,312.4 $ 1,180.6 $ 1,589.7 $ 1,479.0
========= ========= ========= ========= ========= =========
Identifiable assets
United States $ 5,103.8 $ 4,539.9 $ 4,494.1 $ 5,043.7 $ 5,150.4 $ 5,030.2
Europe 4,012.8 3,051.8 3,709.4 3,767.3 3,019.8 3,840.1
Other countries 238.7 254.2 248.5 218.3 194.6 182.5
--------- --------- --------- --------- --------- ---------
$ 9,355.3 $ 7,845.9 $ 8,452.0 $ 9,029.3 $ 8,364.8 $ 9,052.8
========= ========= ========= ========= ========= =========
</TABLE>
(1) See page 54 for further Information on Business Segments.
58
<PAGE>
Six-Year Consolidated Selected Financial Data
American Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In millions, except per share amounts
and number of Common stockholders) 1996(2) 1995(2) 1994(2) 1993(2) 1992 1991(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA(1)
Net sales $11,579.3 $11,367.1 $13,146.5 $12,630.5 $13,658.1 $13,193.4
Gross profit 2,894.1 2,795.0 3,724.6 3,629.0 4,051.3 3,823.0
Depreciation and amortization 274.8 257.5 314.4 293.9 289.0 266.2
Operating income from
continuing operations 1,085.3 1,093.0 1,312.4 1,180.6 1,589.7 1,479.0
Interest and related expenses 178.7 159.8 212.1 227.6 251.6 246.6
Income taxes 327.5 350.7 466.1 334.2 464.4 387.4
Income from continuing operations 496.8 543.1 885.1 541.2 786.9 716.2
Income (loss) from discontinued
operations -- -- (151.0) 127.0 96.9 89.9
Extraordinary items (10.3) (2.7) -- -- -- --
Cumulative effect of accounting changes(3) -- -- -- (198.4) -- --
Net income(4) 486.5 540.4 734.1 469.8 883.8 806.1
Earnings per Common share
Primary
Continuing operations(4) $ 2.86 $ 2.90 $ 4.38 $ 2.67 $ 3.81 $ 3.47
Discontinued operations -- -- (.75) .63 .48 .44
Extraordinary items (.06) (.01) -- -- -- --
Accounting changes(3) -- -- -- (.98) -- --
--------- --------- --------- --------- --------- ---------
Net income $ 2.80 $ 2.89 $ 3.63 $ 2.32 $ 4.29 $ 3.91
--------- --------- --------- --------- --------- ---------
Fully diluted
Continuing operations(4) $ 2.80 $ 2.84 $ 4.24 $ 2.63 $ 3.69 $ 3.33
Discontinued operations -- -- (.71) .60 .44 .41
Extraordinary items (.06) (.01) -- -- -- --
Accounting changes(3) -- -- -- (.94) -- --
--------- --------- --------- --------- --------- ---------
Net income $ 2.74 $ 2.83 $ 3.53 $ 2.29 $ 4.13 $ 3.74
========= ========= ========= ========= ========= =========
COMMON SHARE DATA(1)
Dividends paid $ 347.2 $ 376.2 $ 401.7 $ 397.5 $ 368.0 $ 323.7
Dividends paid per share $ 2.00 $ 2.00 $ 1.9925 $ 1.97 $ 1.805 $ 1.5925
Average number of shares outstanding 173.3 186.9 201.6 201.8 204.0 202.6
Book value per share $ 21.52 $ 21.69 $ 22.97 $ 21.09 $ 21.14 $ 20.42
Number of stockholders,
December 31(5) 52,832 56,769 60,611 63,537 63,929 66,950
========= ========= ========= ========= ========= =========
BALANCE SHEET DATA(1)
Inventories $2,256.2 $1,840.2 $2,015.7 $2,043.2 $1,810.2 $2,141.5
Current assets(6) 3,873.4 3,164.0 4,670.9 3,733.1 3,453.1 3,869.8
Working capital(6) 178.1 752.7 1,555.4 575.4 664.4 609.4
Property, plant and equipment, net 1,230.9 1,137.3 1,212.7 1,472.1 1,406.4 1,472.4
Intangibles, net 3,936.4 3,305.2 3,549.1 3,637.9 3,104.0 3,284.0
Net assets of discontinued operations -- -- -- 1,344.0 1,274.2 1,239.0
Total assets 9,504.2 8,021.2 9,794.4 10,566.5 9,868.8 10,521.9
Short-term debt 1,459.7 710.8 705.8 1,182.9 824.7 730.6
Long-term debt 1,598.3 1,154.6 1,512.1 2,492.4 2,406.8 2,551.9
Stockholders' equity 3,684.2 3,877.2 4,637.5 4,271.4 4,301.6 4,316.0
Capital expenditures 239.6 208.0 201.4 243.4 285.7 232.0
========= ========= ========= ========= ========= =========
</TABLE>
(1) See pages 26 through 38 of Financial Section.
(2) See pages 45 and 46 for Acquisitions and Dispositions, respectively. 1991
includes the acquisition in December of certain distilled spirits
trademarks and 1993 includes the acquisition in December of Invergordon and
the acquisition in June of the Benson and Hedges cigarette trademark in
Europe.
(3) Principally represents a change in the method of accounting for
postretirement benefits.
(4) Net income and primary and fully diluted earnings per Common share in 1994
include $267 million and $1.32 and $1.25, respectively, on the net gain on
disposal of businesses (see page 46 for Dispositions).
(5) On January 31, 1997, there were 52,412 Common stockholders of record, not
necessarily reflecting beneficial ownership.
(6) Includes $1,170 million of net assets of discontinued life insurance
operations in 1994.
59
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following is a list of subsidiaries of Registrant as of the date hereof
and the state or other jurisdiction of incorporation of each. Except as
indicated below, each subsidiary does business under its own name. Indentations
indicate that the voting securities of a subsidiary are wholly owned by the
subsidiary immediately preceding the indentation, unless otherwise indicated.
The names of certain subsidiaries are omitted. Such subsidiaries would not,
if considered in the aggregate as a single subsidiary, constitute a significant
subsidiary within the meaning of Item 601(b)(21)(ii) of Regulation S-K.
State or Other
Jurisdiction
Subsidiary of Incorporation
- ---------- ----------------
ACCO World Corporation Delaware
ACCO Canada Inc. Ontario, Canada
Plymouth Tool & Stamping Limited Ontario, Canada
ACCO Europe PLC England
ACCO France S.A. France
ACCO-Rexel Group Services PLC England
ACCO UK Limited England
Hetzel GmbH & Co. KG Germany
ACCO Eastlight Limited England
Marbig Rexel Pty. Limited Australia
ACCO Australia Limited Australia
ACCO-Rexel Limited 1 Republic of Ireland
Don Gresswell Limited England
ACCO USA, Inc. Delaware
Day-Timers, Inc. Delaware
Day-Timers of Canada, Ltd. Canada
Day-Timers Pty. Limited Australia
Sax Arts and Crafts, Inc. Delaware
International Business Controls, B.V. 2 Netherlands
ACCO Italia S.p.A. Italy
Kensington Microware Limited Delaware
Advanced Gravis Computer Technology Ltd. British Columbia, Canada
- ------------
1 66.67% owned by ACCO-Rexel Group Services PLC and 33.33% owned by ACCO
World Corporation.
2 Does business in the Republic of Ireland through a branch named "ACCO
Ireland."
<PAGE>
State or Other
Jurisdiction
Subsidiary of Incorporation
- ---------- ----------------
Acushnet Company Delaware
Acushnet Cayman Limited British West Indies
Acushnet Lionscore Limited 3 British West Indies
Acushnet Foreign Sales Corporation Barbados
Acushnet International Inc. Delaware
Acushnet Canada Inc. Canada
Acushnet Limited England
Acushnet South Africa (Pty.) Ltd. South Africa
Acushnet GmbH Germany
Acushnet-Danmark ApS Denmark
Acushnet France S.A. France
Acushnet Nederland B.V. Netherlands
Acushnet Osterreich GmbH Austria
Acushnet Sverige A.B. Sweden
Titleist Japan, Inc. 4 Japan
Foot-Joy (Thailand) Limited 5 Thailand
Titleist & Foot-Joy (Thailand) Limited 5 Thailand
Cobra Golf Incorporated Delaware
Cobra Golf Europe, S.A. France
Cobra Golf Export, Inc. Barbados
Cobra Golf-Japan Incorporated Delaware
Cobra Golf U.K. England
AmeriBrands Finance Canada Ltd. Ontario, Canada
American Brands Finance Europe B.V. Netherlands
American Brands International Corporation Delaware
ATIC Group, Inc. Delaware
Gallaher Limited England
Benson & Hedges Limited England
J. R. Freeman & Son Limited England
Gallaher Canarias S.A. Spain
Gallaher (Dublin) Limited Republic of Ireland
Gallaher Hellas S.A. Greece
Gallaher International Limited England
Gallaher Kazakhstan Ltd. Kazakhstan
The Galleon Insurance Company Limited Isle of Man
The Schooner Insurance Company Limited Isle of Man
- -----------
3 40% owned by Acushnet Cayman Limited.
4 80% owned by Acushnet International Inc.
5 70% owned by Acushnet Company.
2
<PAGE>
State or Other
Jurisdiction
Subsidiary of Incorporation
- ---------- ----------------
JBB Worldwide, Inc. Delaware
Jim Beam Brands Co. Delaware
James B. Beam Distilling International Co., Inc. Barbados
JBB Spirits (New York) Inc. New York
JBB (Asia-Pacific) Pty. Limited New South Wales,
Australia
JBB (Asia-Pacific) Superannuation Pty. Limited New South Wales,
Australia
JBB (Greater Europe) PLC 6 Scotland
Whyte & Mackay (India) Limited 7 Delhi, India
Alberta Distillers Limited Alberta, Canada
Carrington Distillers Limited Ontario, Canada
Featherstone & Co. Limited Ontario, Canada
John de Kuyper & Son, Incorporated Delaware
Wood Terminal Company Delaware
MasterBrand Industries, Inc. Delaware
Aristokraft, Inc. Delaware
Master Lock Company Delaware
Master Lock Europe, S.A. 8 France
Master Lock Pacific Limited 9 Hong Kong
Moen Incorporated Delaware
Moen China, Limited Hong Kong
Moen de Mexico, S.A. de C.V. Mexico
Moen Guangzhou Faucet Co., Ltd. 10 China
Moen, Inc. Ontario, Canada
Moen of Pennsylvania, Inc. Delaware
Moen Japan K.K. Japan
21st Century Companies, Inc. Delaware
Waterloo Industries, Inc. Delaware
1700 Insurance Company Ltd. Bermuda
- ------------
6 428,055,999 shares owned by JBB Worldwide; 1 share owned by Jim Beam Brands
Co.
7 Shares owned 51% by JBB (Greater Europe) PLC.
8 99.68% owned by Master Lock Company.
9 99.9% owned by Master Lock Company; 0.1% owned by American Brands
International Corporation.
10 60% owned by Moen Incorporated.
3
<PAGE>
EXHIBIT 23(i)a
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation 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. 33-64075) 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. of:
(1) our report dated February 3, 1997, accompanying the consolidated
financial statements of American Brands, Inc. and its
subsidiaries as of December 31, 1996 and 1995, and for the years
ended December 31, 1996, 1995 and 1994, incorporated by reference
into this Annual Report on Form 10-K of American Brands, Inc.,
and
(2) our report dated February 3, 1997, accompanying the consolidated
financial statement schedule of American Brands, Inc. and its
subsidiaries, included in this Annual Report on Form 10-K.
We also consent to the references to our firm as experts in the prospectuses
related to the Registration Statements on Form S-3 referred to above.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019
March 13, 1997
<PAGE>
EXHIBIT 23(i)b
CONSENT OF COUNSEL
We consent to the incorporation by reference of our opinions contained
in Item 3, "Legal Proceedings", of this Annual Report on Form 10-K 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
March 13, 1997
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated with their
respective names below, hereby constitute and appoint GILBERT L. KLEMANN, II,
EDWARD P. SMITH and A. ROBERT COLBY, and each of them severally, the attorneys-
in-fact of the undersigned with full power to them and each of them to sign for
and in the name of the undersigned in the capacities indicated below the Annual
Report on Form 10-K of American Brands, Inc. for the fiscal year ended December
31, 1996, and any and all amendments thereto:
Signature Title Date
Thomas C. Hays
---------------------- Chairman of the Board February 19, 1997
Thomas C. Hays and Chief Executive
Officer (principal
executive officer) and
Director
John T. Ludes
---------------------- President and Chief February 24, 1997
John T. Ludes Operating Officer and
Director
Dudley L. Bauerlein, Jr.
---------------------- Senior Vice President February 24, 1997
Dudley L. Bauerlein, Jr. and Chief Financial
Officer (principal
financial officer)
Craig P. Omtvedt
---------------------- Vice President February 24, 1997
Craig P. Omtvedt and Chief Accounting
Officer (principal
accounting officer)
Eugene R. Anderson
---------------------- Director February 24, 1997
Eugene R. Anderson
Patricia O. Ewers
---------------------- Director February 24, 1997
Patricia O. Ewers
<PAGE>
John W. Johnstone, Jr.
---------------------- Director February 25, 1997
John W. Johnstone, Jr.
Wendell J. Kelley
---------------------- Director February 24, 1997
Wendell J. Kelley
Sidney Kirschner
---------------------- Director February 24, 1997
Sidney Kirschner
Gordon R. Lohman
---------------------- Director February 24, 1997
Gordon R. Lohman
Charles H. Pistor, Jr.
---------------------- Director February 24, 1997
Charles H. Pistor, Jr.
Anne M. Tatlock
---------------------- Director February 24, 1997
Anne M. Tatlock
John W. Thompson
---------------------- Director February 24, 1997
John W. Thompson
Peter M. Wilson
---------------------- Director February 20, 1997
Peter M. Wilson
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> $ 120
<SECURITIES> 0
<RECEIVABLES> 1,178
<ALLOWANCES> 53
<INVENTORY> 2,256
<CURRENT-ASSETS> 3,873
<PP&E> 2,375
<DEPRECIATION> 1,144
<TOTAL-ASSETS> 9,504
<CURRENT-LIABILITIES> $ 3,695
<BONDS> 1,598
<COMMON> 717
0
13
<OTHER-SE> 2,954
<TOTAL-LIABILITY-AND-EQUITY> 9,504
<SALES> $11,579
<TOTAL-REVENUES> 11,579
<CGS> 2,882
<TOTAL-COSTS> 2,882
<OTHER-EXPENSES> 5,803
<LOSS-PROVISION> 7
<INTEREST-EXPENSE> 179
<INCOME-PRETAX> 824
<INCOME-TAX> 327
<INCOME-CONTINUING> 497
<DISCONTINUED> 0
<EXTRAORDINARY> (10)
<CHANGES> 0
<NET-INCOME> $ 487
<EPS-PRIMARY> $2.80
<EPS-DILUTED> $2.74
</TABLE>
