UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission file number 1-9076
ended March 31, 1997
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
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock, par value
$3.125 per share, at April 30, 1997 was 171,927,279 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
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AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
March 31, December 31,
1997 1996
------------ ------------
(Unaudited) (Restated)
Assets
Current assets
Cash and cash equivalents $ 39.6 $ 34.9
Accounts receivable, net 833.2 892.4
Inventories
Bulk whiskey 375.2 379.3
Other raw materials, supplies and
work in process 285.9 266.8
Finished products 412.9 391.8
-------- --------
1,074.0 1,037.9
Net assets of discontinued operations 767.0 683.3
Other current assets 190.6 193.6
-------- --------
Total current assets 2,904.4 2,842.1
Property, plant and equipment, net 958.7 972.6
Intangibles resulting from
business acquisitions, net 3,676.0 3,730.7
Other assets 198.0 191.9
-------- --------
Total assets $7,737.1 $7,737.3
======== ========
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
March 31, December 31,
1997 1996
----------- ------------
(Unaudited) (Restated)
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 43.7 $ 37.1
Commercial paper 906.3 691.2
Accounts payable 201.8 241.3
Accrued taxes 436.3 443.4
Accrued expenses and other liabilities 434.6 601.2
Current portion of long-term debt 93.7 53.9
--------- ---------
Total current liabilities 2,116.4 2,068.1
Long-term debt 1,452.4 1,598.3
Deferred income taxes 44.6 19.3
Postretirement and other liabilities 373.0 367.4
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Total liabilities 3,986.4 4,053.1
--------- ---------
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 12.6 12.9
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 170.5 166.5
Foreign currency adjustments (225.5) (195.9)
Retained earnings 5,076.0 5,025.4
Treasury stock, at cost (2,000.3) (2,042.1)
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Total stockholders' equity 3,750.7 3,684.2
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Total liabilities and
stockholders' equity $ 7,737.1 $ 7,737.3
========= =========
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended March 31, 1997 and 1996
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1997 1996
---------- ----------
(Restated)
Net sales $1,105.1 $1,055.1
Cost of products sold 574.5 547.8
Excise taxes on products sold 82.0 86.2
Advertising, selling, general and
administrative expenses 313.0 291.1
Amortization of intangibles 26.0 24.2
Interest and related expenses 37.9 36.8
Other (income) expenses, net 2.1 2.9
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Income from continuing operations
before income taxes 69.6 66.1
Income taxes 34.6 34.3
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Income from continuing operations 35.0 31.8
Income from discontinued operations 101.6 92.3
Extraordinary items - (10.3)
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Net income $ 136.6 $ 113.8
======== ========
Earnings per Common share
Primary
Income from continuing operations $.20 $.18
Income from discontinued operations .60 .52
Extraordinary items - (.06)
---- ----
Net income $.80 $.64
==== ====
Fully diluted
Income from continuing operations $.20 $.18
Income from discontinued operations .58 .50
Extraordinary items - (.06)
---- ----
Net income $.78 $.62
==== ====
Dividends paid per Common share $.50 $.50
==== ====
Average number of Common shares outstanding
Primary 171.3 177.7
===== =====
Fully diluted 174.8 183.9
===== =====
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months Ended March 31, 1997 and 1996
-----------------------------------------------------
(In millions)
(Unaudited)
1997 1996
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(Restated)
Operating activities
Net income $ 136.6 $ 113.8
Income from discontinued operations (101.6) (92.3)
Extraordinary items - 10.3
Depreciation and amortization 62.2 56.2
Decrease in accounts receivable 50.1 18.6
Increase in inventories (49.3) (20.6)
Decrease in accounts payable, accrued
expenses and other liabilities (102.1) (99.8)
(Decrease) increase in accrued taxes (0.4) 23.8
Other operating activities, net (31.5) (8.1)
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Net cash (used) provided from continuing
operating activities (36.0) 1.9
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Investing activities
Additions to property, plant and equipment (34.3) (31.9)
Acquisition, net of cash acquired - (695.2)
Other investing activities, net (0.6) 9.8
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Net cash used by investing activities (34.9) (717.3)
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Financing activities
Increase in short-term debt, net 223.2 702.3
Issuance of long-term debt - 401.1
Repayment of long-term debt (100.2) (351.4)
Dividends to stockholders (86.0) (89.3)
Cash purchases of Common stock for treasury - (86.5)
Other financing activities, net 43.6 (3.3)
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Net cash provided by financing activities 80.6 572.9
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Effect of foreign exchange rate changes on cash (5.0) 0.5
Cash used by discontinued operations - (40.6)
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Net increase (decrease) in cash
and cash equivalents 4.7 (182.6)
Cash and cash equivalents at beginning of period 34.9 232.0
------- -------
Cash and cash equivalents at end of period $ 39.6 $ 49.4
======= =======
See Notes to Condensed Consolidated Financial Statements.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of March 31, 1997 and
the related condensed consolidated statements of income and cash flows
for the three-month periods ended March 31, 1997 and 1996 are
unaudited. In the opinion of management, all adjustments necessary for
a fair presentation of such financial statements have been included.
Such adjustments consisted only of normal recurring items. Interim
results may not be indicative of results for a full year.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes. The year-end condensed consolidated balance sheet
was derived from the Company's audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. This Form 10-Q should be read in conjunction with the
Company's consolidated financial statements and notes incorporated by
reference in its 1996 Annual Report on Form 10-K.
2. Acquisition
In January 1996, Cobra Golf Incorporated ("Cobra") 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 the date of
acquisition.
3. Discontinued Operations
On April 30, 1997, the Company's stockholders approved the
spin-off of its U.K.-based tobacco business conducted by Gallaher
Limited ("Gallaher") and its subsidiaries. On May 7, 1997, the Company
received a favorable tax ruling from the Internal Revenue Service as to
certain U.S. federal income tax consequences of the spin-off. The Board
of Directors set a May 30, 1997 record and payment date for the
spin-off, subject to the satisfaction or waiver of the remaining
conditions of the spin-off. In connection with the spin-off, the name
of the Company will be changed to Fortune Brands, Inc., and as a result
of the spin-off, the Company's stockholders will own shares in two
publicly-traded companies Fortune Brands, Inc. and Gallaher Group Plc.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Discontinued Operations (Continued)
The condensed consolidated financial statements have been restated
to reflect tobacco operations as discontinued operations.
The net assets and results of operations of the international
tobacco operations have been reclassified to identify them as
discontinued operations for all periods presented in the condensed
consolidated financial statements. Summarized data for the
international tobacco operations, net of allocation of interest expense
based on a ratio of Gallaher's net assets to consolidated net assets of
the Company, as of the beginning of each period, is as follows:
Three Months
Results of operations Ended March 31,
--------------------- -------------------------
1997 1996
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(In millions)
Net sales $1,739.8 $1,682.8
======== ========
Income before taxes $152.7 $141.5
Income taxes (51.1) (49.2)
------ ------
Income from discontinued
operations $101.6 $ 92.3
====== ======
Net assets of discontinued March 31, December 31,
operations 1997 1996
-------------------------- ---------- -----------
(In millions)
Current assets $1,636.3 $2,020.4
Property, plant and
equipment, net 242.1 258.4
Other assets 505.4 477.2
Current liabilities (1,469.1) (1,933.0)
Non-current liabilities (147.7) (139.7)
-------- --------
$ 767.0 $ 683.3
======== ========
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Discontinued Operations (Concluded)
To allocate the overall debt burden of the Company at the time of
the spin-off, Gallaher has borrowed and paid to the Company
approximately $1.25 billion, after taxes. The Company has used the
proceeds initially to pay down short-term debt. The Gallaher debt is in
addition to its seasonal working capital requirements.
The following sets forth certain pro forma consolidated results
for the Company which have been adjusted to reflect the approximately
$1.25 billion net cash proceeds resulting from the payment Gallaher has
made to the Company and based on the assumption that such proceeds were
used for the possible purchase of 10 million Common shares and the
repayment of debt. The ultimate use of the proceeds may differ from
that described herein.
Three Months
Ended March 31,
-----------------------
1997 1996
-------- --------
(In millions, except
per share amounts)
Income from continuing
operations $43.7 $40.5
Earnings per Common share -
Primary $.27 $.24
Fully diluted .27 .24
4. Supplementary Profit and Loss Information
Federal and foreign distilled spirits' excise taxes included in
net sales for the three-month periods ended March 31, 1997 and March
31, 1996 are $82 million and $86.2 million, respectively.
The effective income tax rate for the three-month periods ended
March 31, 1997 and 1996 exceeded the statutory tax rate principally due
to the impact of nondeductible goodwill. The lower effective income tax
rate of 49.7% for the three-month period ended March 31, 1997, as
compared with 51.9% for the same period last year, principally
reflected tax benefits associated with research and development
activities.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Earnings Per Share
Earnings per Common share are based on the weighted average number of
Common shares outstanding in each period and after preferred stock
dividend requirements.
Fully diluted earnings per Common share assume that any convertible
debentures and convertible preferred shares outstanding at the
beginning of each period, or at their date of issuance, if later, were
converted at those dates, with related interest, preferred stock
dividend requirements and outstanding Common shares adjusted
accordingly. It also assumes that outstanding Common shares were
increased by shares issuable upon exercise of those stock options for
which market price exceeds exercise price, less shares which could have
been purchased by the Company with related proceeds.
6. 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 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 recorded a
charge of $10.3 million ($15.8 million pre-tax), or six cents per
Common share.
7. 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.
-8-
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
7. Pending Litigation (Concluded)
On May 8, 1997, in connection with the spin-off, Gallaher Group
Plc and Gallaher agreed to indemnify the Company against claims arising
from smoking and health and fire safe cigarette matters relating to the
tobacco business of Gallaher and its subsidiaries.
8. 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.
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<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors of American Brands, Inc.:
We have reviewed the condensed consolidated balance sheet of
American Brands, Inc. and Subsidiaries as of March 31, 1997 and the
related condensed consolidated statements of income and cash flows for
the three-month periods ended March 31, 1997 and 1996. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data, and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression
of an opinion regarding the consolidated financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1996, and the related consolidated statements of income, cash flows and
Common stockholders' equity for the year then ended (not presented
herein) and in our report dated February 3, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1996 is fairly stated, in
all material respects, in relation to the consolidated balance sheet
from which it has been derived.
1301 Avenue of the Americas COOPERS & LYBRAND L.L.P.
New York, New York
May 12, 1997
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ AND RESULTS OF OPERATIONS
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AMERICAN BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for the Three Months Ended March 31, 1997
as Compared to the Three Months Ended March 31, 1996
---------------------------------------------------------------------------
Net Sales Operating Income (1)
------------------------ ---------------------
1997 1996 (2) 1997 1996 (2)
--------- --------- ------- --------
(In millions)
Hardware and home
improvement products $ 328.7 $ 321.3 $ 44.4 $ 42.8
Office products 290.1 277.6 21.2 19.7
Golf and leisure products 235.9 209.8 29.1 35.0
Distilled spirits 250.4 246.4 31.2 27.7
-------- -------- ------ ------
$1,105.1 $1,055.1 $125.9 $125.2
======== ======== ====== ======
(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) Restated for discontinued tobacco operations.
CONSOLIDATED
- ------------
Net sales rose 5% on new products, line extensions, the inclusion of Cobra Golf
and Advanced Gravis and favorable effect of higher average foreign exchange
rates, partly offset by discontinued golf products. Operating income was up 1%,
principally due to the higher sales, partly offset by higher operating expenses.
The effective income tax rate for the three-month periods ended March 31, 1997
and 1996 exceeded the statutory tax rate principally due to the impact of
nondeductible goodwill. The lower effective income tax rate of 49.7% for the
three-month period ended March 31, 1997, as compared with 51.9% for the same
period last year, principally reflected tax benefits associated with research
and development activities.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
Income from continuing operations of $35 million, or 20 cents per Common share,
for the three months ended March 31, 1997 compared with $31.8 million, or 18
cents per share for the same period last year. Lower average Common shares
outstanding in 1997 benefited each of primary and fully diluted EPS by one cent
reflecting the Company's Common share purchases and consideration of the related
impact on borrowing levels, interest expense and net income.
On April 30, 1997, the Company's stockholders approved the spin-off of its
U.K.-based Gallaher tobacco business. On May 7, 1997, the Company received a
favorable tax ruling from the Internal Revenue Service as to certain U.S.
federal income tax consequences of the spin-off. The Board of Directors set a
May 30, 1997 record and payment date for the spin-off, subject to the
satisfaction or waiver of the remaining conditions of the spin-off. In
connection with the spin-off, the name of the Company will be changed to Fortune
Brands, Inc., and as a result of the spin-off, the Company's stockholders will
own shares in two publicly-traded companies - Fortune Brands, Inc. and Gallaher
Group Plc.
Income from discontinued operations of $101.6 million, or 60 cents per share, in
1997 compared with $92.3 million, or 52 cents per share, in 1996. These amounts
represent the net income of international tobacco operations, net of an
allocation of interest expense.
The extraordinary items resulted from a charge of $10.3 million ($15.8 million
pre-tax) in connection with the redemption in March 1996 of the Company's $150
million 7-5/8% Eurodollar Convertible Debentures, Due 2001 and its $150 million
9-1/8% Debentures, Due 2016. (See note 6 in the Notes to Condensed Consolidated
Financial Statements.)
Net income of $136.6 million, or 80 cents per share, for the three months ended
March 31, 1997, compared with $113.8 million, or 64 cents per share, for the
same period last year.
The Company is reviewing productivity-enhancing restructuring opportunities in
each of its non-tobacco operations. It currently anticipates pre-tax
restructuring and other charges to approximate $200 million over the next three
quarters, principally for rationalization of manufacturing,
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
distribution and sourcing and the discontinuance of marginal product lines. The
operational discussions which follow are before any possible restructuring and
other charges that may occur over the next three quarters.
In February 1997, FAS Statement No. 128, "Earnings per Share" was issued. FAS
No. 128 simplifies the computation of earnings per share ("EPS") and replaces
primary EPS with basic EPS and fully diluted EPS with diluted EPS. FAS No. 128
is effective for annual and interim financial statements issued after December
15, 1997 and earlier application is not permitted. FAS No. 128 requires the
restatement of EPS data for all prior periods. The Company has not yet
determined the impact that this statement will have on its EPS amounts when
adopted.
See notes 7 and 8 in the Notes to Condensed Consolidated Financial Statements
for discussion of pending litigation and environmental matters.
Hardware and Home Improvement Products
- --------------------------------------
Net sales increased 2%. Excluding Moen's joint venture in Taiwan (sold September
1996), sales increased 4% on line extensions, higher volume and new products.
The volume increases at Moen and Aristokraft were partly offset by declines at
Master Lock and Waterloo. Operating income increased 4% on the sales increase
and a favorable product mix at Moen, partly offset by increased operating
expenses. The increased operating expenses primarily reflected increased
marketing and research and development expenses at Moen and Master Lock. The
marketing increase reflects higher volume-related selling expenses at Moen as
well as increased expenditures to meet competitive activities at Moen and Master
Lock. All companies but Master Lock reported increased operating income.
Operating income at Master Lock declined principally due to the January 1, 1997
15% average price reduction on core padlock products in response to a shift by
mass merchants to value-price, imported products, as well as lower volume and
increased operating expenses. It is anticipated that this price reduction will
result in a decline in Master Lock's operating income throughout 1997. Despite
the lower operating income at Master Lock, operating income for the group is
expected to increase for the year.
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
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Office Products
- ---------------
Net sales increased 5%. Excluding the office furniture operations (sold November
1996) and the acquisition of Advanced Gravis (acquired September 1996), sales
increased 3% on new products and higher average foreign exchange rates, partly
offset by volume declines in existing product lines and a slight decline in
prices. Operating income increased 8% reflecting the sales increase and improved
gross margin (principally manufacturing efficiencies and stabilized raw material
costs in North America), partly offset by higher operating expenses, mainly
customer programs and new product and business development costs.
Golf and Leisure Products
- -------------------------
Net sales were up 12% reflecting a full quarter for Cobra in 1997 (acquired
January 24, 1996) as well as benefits from new products, line extensions and
volume increases in golf balls, clubs, gloves and shoes partly offset by effects
of discontinued products. Operating income declined 17% reflecting increased
manufacturing costs associated with gearing up for increased customer demand for
recently introduced golf clubs and the timing of advertising and marketing
expenses. Operating income for the year is expected to increase.
Distilled Spirits
- -----------------
Net sales increased 2% principally due to higher average foreign exchange rates,
price increases, benefits from a domestic bulk sale, new products and line
extensions, partly offset by lower volume in existing product lines and the
effect of the November 1996 reduction in U.K. excise taxes. The net decrease in
volume resulted from lower case shipments in the U.S. and U.K., partly offset by
higher worldwide Jim Beam Bourbon case shipments, higher shipments in Canada and
improved private label volume in the U.K. Excluding excise taxes, net sales were
up 5%. Operating income increased 13% reflecting a benefit from a change to a
calendar year-end for the former Whyte & Mackay operations, improved operating
results in North America (principally higher gross margins reflecting price
increases) and Australia, partly offset by lower operating results in the U.K.
For the
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Distilled Spirits (Concluded)
- -----------------
remainder of 1997, modest growth in operating income is expected, with the shift
in fiscal year for the former Whyte & Mackay operations not significantly
affecting full-year comparisons.
Discontinued Operations
- -----------------------
International tobacco's net sales in sterling were down 3%, due to adverse
product mix and foreign exchange rates, partly offset by price increases
(principally resulting from higher U.K. tobacco excise taxes and the April 1996
manufacturer's price increase). Gallaher's worldwide cigarette unit sales were
up 1.1%. Export unit sales were up 38.1%, primarily from gains in France, Duty
Free and the former Soviet Union. U.K. cigarette unit sales were down 7.2%,
largely as a result of changes in trade buying patterns related to the
government budget and Gallaher's manufacturer's price increases. Gallaher's
estimated share of U.K. cigarette sales to consumers was 39.3%, as compared with
38.8% for last year's comparable three-month period. Operating income in
sterling increased 4% on price increases and lower operating expenses, partly
offset by an adverse product mix and foreign exchange rates. In dollars, net
sales and operating income increased 3% and 11%, respectively, reflecting
translation at higher average sterling foreign exchange rates.
Gallaher believes that the recent change in the U.K. government as a result of
the May 1, 1997 general election could lead to a change in the timing of the
U.K. budget statement and is likely to lead to a ban on the advertising of
tobacco products. Any change in the timing of the budget statement could have a
material impact on Gallaher's operating performance in the year in which the
change occurs or in the year following such change, depending on when it occurs.
It is also possible that any ban on advertising would have an adverse effect on
Gallaher's operating performance.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used from continuing operating activities of $36 million for the three
months ended March 31, 1997 compared with net cash provided from continuing
operating activities of $1.9 million for the same three-month
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<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (Continued)
- -------------------------------
period last year. The decrease was largely attributable to changes in
inventories and accrued taxes, partly offset by fluctuations in accounts
receivable.
Net cash used by investing activities for the three months ended March 31, 1997
was $34.9 million, as compared with net cash used of $717.3 million in the
three-month period last year, reflecting last year's acquisition of Cobra.
Net cash provided by financing activities for the three months ended March 31,
1997 was $80.6 million, as compared with net cash provided of $572.9 million in
1996, reflecting lower borrowings and absence of purchases this year of Common
stock for treasury. The Company's purchases of Common stock amounted to $86.5
million during last year's comparable three month period.
Total debt at March 31, 1997 was $2.5 billion, an increase of $115.6 million
from December 31, 1996, primarily reflecting an increase in short-term
borrowings. The ratio of total debt to total capital increased from 39.3% at
December 31, 1996 to 40% at March 31, 1997.
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.
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.
On April 30, 1997, the Company's stockholders approved the spin-off of its
U.K.-based Gallaher tobacco business. On May 7, 1997, the Company received a
favorable tax ruling from the Internal Revenue Service as to certain U.S.
federal income tax consequences of the spin-off. The Board of Directors set a
May 30, 1997 record and payment date for the spin-off, subject to the
satisfaction or waiver of the remaining conditions of the spin-off.
-16-
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (Concluded)
- -------------------------------
To allocate the overall debt burden of the Company at the time of the spin-off,
Gallaher has borrowed and paid to the Company approximately $1.25 billion, after
taxes. The Company has used the proceeds initially to pay down short-term debt.
CAUTIONARY STATEMENT
- --------------------
This Quarterly Report on Form 10-Q 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.
-17-
<PAGE>
PART I - EXHIBIT A
------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share -
Primary and Fully Diluted (Unaudited)
--------------------------------------------
(In millions)
Three Months Ended
March 31,
--------------------------
1997 1996
--------- ---------
(Restated)
Income from continuing operations $ 35.0 $ 31.8
Preferred stock dividend requirements (0.3) (0.3)
------ ------
Income from continuing operations available for
computing earnings per Common share - primary 34.7 31.5
Income from discontinued operations 101.6 92.3
Extraordinary items - (10.3)
------ ------
Net income for computing earnings
per Common share - primary $136.3 $113.5
====== ======
Income from continuing operations available for
computing earnings per Common share - primary $ 34.7 $ 31.5
Convertible preferred stock dividend requirements 0.3 0.3
Interest and related expenses on convertible
debentures - 1.7
------ ------
Income from continuing operations available for
computing earnings per Common share -
fully diluted 35.0 33.5
Income from discontinued operations 101.6 92.3
Extraordinary items - (10.3)
------ ------
Net income for computing earnings per Common
share - fully diluted $136.6 $115.5
====== ======
-18-
<PAGE>
PART I - EXHIBIT A (Concluded)
------------------
AMERICAN BRANDS, INC. AND SUBSIDIARIES
Computation of Weighted Average Number of
Common Shares Outstanding on a Fully Diluted Basis (Unaudited)
--------------------------------------------------------------
(In millions, except per share amounts)
Three Months Ended
March 31,
-------------------------
1997 1996
--------- ---------
Weighted average number of Common shares
outstanding during each period - primary 171.3 177.7
Addition from assumed conversion as of the
beginning of each period of the convertible
preferred stock outstanding at the end of
each period 1.7 1.9
Addition from assumed conversion of
convertible debentures - 0.9
Other additions 1.8 3.4
----- -----
Weighted average number of Common shares
outstanding during each period on a
fully diluted basis 174.8 183.9
===== =====
(Restated)
----------
Earnings per Common share -
Primary
Income from continuing operations $.20 $.18
Income from discontinued operations .60 .52
Extraordinary items - (.06)
---- ----
Net income $.80 $.64
==== ====
Fully diluted
Income from continuing operations $.20 $.18
Income from discontinued operations .58 .50
Extraordinary items - (.06)
---- ----
Net income $.78 $.62
==== ====
-19-
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
- ------ -----------------
(a) Reference is made to paragraph (a) of Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996. In addition, Registrant has been named as a defendant,
together with leading tobacco manufacturers, in Zuzalski v. The American Tobacco
Company, et al., Supreme Court of the State of New York, Queens County, April 3,
1997. The plaintiff in this case alleges personal injury from the use of
cigarettes.
Reference is made to the description of Fernandez v. American Brands, et
al., District Court of Nueces County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. By stipulation and order dated April 18, 1997,
Registrant was dismissed from this case.
Reference is made to the description of Galvan v. American Brands, et al.,
District Court of Nueces County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. Registrant was non-suited by plaintiffs' counsel
on March 25, 1997.
Reference is made to the description of E. Hagness v. American Brands, et
al., District Court of Nueces County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. Registrant was non-suited by plaintiffs' counsel
on March 25, 1997.
Reference is made to the description of G. Harris v. American Brands, et
al., United States District Court for the Southern District of Texas, in
paragraph (a) of Part I, Item 3, "Legal Proceedings", of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996. By stipulation
signed by the parties dated February 18, 1997, Registrant was dismissed from
this action.
Reference is made to the description of Harris v. The American Tobacco
Company, et al., United States District Court for the Eastern District of
Pennsylvania, in paragraph (a) of Part I, Item 3, "Legal Proceedings", of
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31,
1996. The court dismissed this action on January 27, 1997.
Reference is made to the description of Heitsch v. American Brands, et al.,
District Court of Hidalgo County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. By stipulation and order dated April 17, 1997,
Registrant was dismissed from this action.
Reference is made to the description of M. Hernandez v. American Brands, et
al., District Court of Nueces County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. Registrant was non-suited by plaintiffs' counsel
on March 25, 1997.
-20-
<PAGE>
Item 1 LEGAL PROCEEDINGS. (Continued)
- ------ -----------------
Reference is made to the description of Lewis v. American Brands, et al.,
District Court of Hidalgo County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. By stipulation and order dated April 14, 1997,
Registrant was dismissed from this action.
Reference is made to the description of Luna v. American Brands, et al.,
District Court of Nueces County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. By stipulation and order dated April 18, 1997,
Registrant was dismissed from this action.
Reference is made to the description of Magill v. American Brands, et al.,
District Court of Nueces County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. By stipulation and order dated April 18, 1997,
Registrant was dismissed from this action.
Reference is made to the description of Martinez v. American Brands, et
al., District Court of Nueces County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. By stipulation and order dated April 18, 1997,
Registrant was dismissed from this action.
Reference is made to the description of G. Perez v. American Brands, et
al., District Court of Hidalgo County, Texas, in paragraph (a) of Part I, Item
3, "Legal Proceedings", of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. By stipulation and order dated April 17,
1997, Registrant was dismissed from this action.
Reference is made to the description of J. Ramirez v. American Brands, et
al., District Court of Hidalgo County, Texas, in paragraph (a) of Part I, Item
3, "Legal Proceedings", of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. On April 10, 1997, plaintiff voluntarily
dismissed the entire action.
Reference is made to the description of O. Ramirez v. American Brands, et
al., District Court of Brooks County, Texas, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. By stipulation and order dated April 22, 1997,
Registrant was dismissed from this action.
Reference is made to the description of Richardson v. Philip Morris Inc.,
et al., County Court of Baltimore, Maryland, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. By stipulation and order dated March 24, 1997,
Registrant was dismissed from this action.
-21-
<PAGE>
Item 1 LEGAL PROCEEDINGS. (Continued)
- ------ -----------------
Reference is made to the description of Salinas v. American Brands, et al.,
District Court of Webb County, Texas, in paragraph (a) of Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996. By stipulation and order dated April 20, 1997,
Registrant was dismissed from this action.
Reference is made to the description of Sanchez v. American Brands, et al.,
Circuit Court of the State of Texas, Starr County, in paragraph (a) of Part I,
Item 3, "Legal Proceedings", of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. By stipulation and order dated April 17,
1997, Registrant was dismissed from this action.
Reference is made to the description of Vacquera v. American Brands, et
al., District Court of Hidalgo County, Texas, in paragraph (a) of Part I, Item
3, "Legal Proceedings", of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. By stipulation and order dated April 17,
1997, Registrant was dismissed from this action.
Reference also is made to the discussion of the smallest of the five major
domestic cigarette manufacturers having announced a settlement of certain
tobacco related claims, in paragraph (a) of Part I, Item 3, "Legal Proceedings",
of Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1996. This domestic tobacco manufacturer has announced a further settlement
of certain tobacco related claims.
In connection with the sale of Registrant's former subsidiary, The American
Tobacco Company ("ATCO"), to Brown & Williamson Tobacco Corporation ("Brown &
Williamson") on December 22, 1994, Brown & Williamson and ATCO agreed to
indemnify Registrant against claims arising from smoking and health and fire
safe cigarette matters relating to the tobacco business of ATCO. Registrant's
counsel have advised that, in their opinion, on the basis of their
investigations generally with respect to suits and claims of this character,
Registrant has meritorious defenses to these actions and threatened actions. The
actions will be vigorously contested.
Reference is made to the discussion of the proceedings issued against
Gallaher and Imperial Tobacco in November and December of 1996 by 12 and 11
plaintiffs, respectively, without any legal aid but with plaintiff's legal
advisers acting on a conditional fee basis, in paragraph (a)(ii)(A) of Part I,
Item 3, "Legal Proceedings", of Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996. In April 1997, a third writ was issued by
the same legal advisers on behalf of an additional 13 plaintiffs, eight of whom
allege that they smoked tobacco products manufactured by Gallaher.
Reference is made to the description of the writs issued by the London law
firm of Leigh, Day & Co. on November 12, 1996 (Hodgson, et al. v. Imperial
Tobacco and Gallaher Limited) and December 10, 1996 (Bywater, et al. v. Imperial
Tobacco Limited and Gallaher Limited) in the High Court of England and Wales, in
paragraph (a)(ii)(G) of Part I, Item 3, "Legal Proceedings", of Registrant's
Annual Report on Form 10-K for the fiscal
-22-
<PAGE>
Item 1 LEGAL PROCEEDINGS. (Concluded)
- ------ -----------------
year ended December 31, 1996. On April 18, 1997, Leigh, Day & Co. issued another
writ on behalf of 13 further plaintiffs (Stewart, et al. v. Imperial Tobacco
Limited, Gallaher Limited and Hergall (1981) Limited (In Liquidation)), each of
whom also claims to have developed lung cancer as a result of smoking tobacco
products. Eight of the 13 plaintiffs claim to have smoked Gallaher's products.
Those plaintiffs are Robert Frederick Stobbs, Alec Edward Jackson, Marjorie May
Millburn, Graham David Newborough, Leonard Dudley Jenkins, Bryan Milne, Graham
Raymond Pare and Colin Reay. The plaintiffs have fixed a hearing before the
Senior Master and Queen's Remembrancer on June 5, 1997 for a renewed application
to request a recommendation to the Lord Chief Justice for the assignment of a
single judge to all cases issued to date.
In connection with the spin-off of Registrant's U.K.-based Gallaher tobacco
business, on May 8, 1997, Gallaher Group Plc and Gallaher agreed to indemnify
Registrant against claims arising from smoking and health and fire safe
cigarette matters relating to the tobacco business of Gallaher and its
subsidiaries. Registrant has been advised by its legal advisers that, in their
opinion, on the basis of their investigations generally with respect to suits
and claims of this character, Gallaher has meritorious defenses to these actions
and threatened actions. The actions will be vigorously contested.
(b) It is not possible to predict the outcome of the pending litigation
referenced in paragraph (a) above, but management believes that there are
meritorious defenses to the pending actions and that the pending actions will
not have a material adverse effect upon the results of operations, cash flow or
financial condition of the Registrant. Reference is made to note 7, "Pending
Litigation", in the Notes to Condensed Consolidated Financial Statements set
forth in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------ ---------------------------------------------------
(a) The Annual Meeting of Stockholders was held on April 30, 1997.
(c)(i) A proposal (designated Item 1 and set forth in Registrant's Proxy
Statement) to approve the distribution of American Depositary Shares (evidenced
by American Depositary Receipts) and ordinary shares of Gallaher Group Plc, an
English company and wholly-owned subsidiary of Registrant, together representing
all of the outstanding share capital of Gallaher Group Plc, was approved by a
majority of the combined votes cast by the holders of Registrant's Common Stock
and $2.67 Convertible Preferred Stock voting thereon: 134,374,929 affirmative
votes; 875,517 negative votes; and 830,014 votes abstained.
-23-
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (Continued)
- ------ ---------------------------------------------------
(c)(ii) A proposal (designated Item 2 and set forth in Registrant's Proxy
Statement), approved by the Board of Directors, to approve an amendment to
Registrant's By-laws to repeal the annual executive incentive compensation
program set forth in Article XII thereof and to approve the Fortune Brands, Inc.
Annual Executive Incentive Compensation Plan to be effective for 1997 and
subsequent years was approved by a majority of the combined votes cast by the
holders of Registrant's Common Stock and $2.67 Convertible Preferred Stock
voting thereon: 128,116,135 affirmative votes; 6,065,553 negative votes; and
1,928,468 votes abstained.
(c)(iii) A proposal (designated Item 3 and set forth in Registrant's Proxy
Statement) to approve an amendment to Registrant's Certificate of Incorporation
to change the name of Registrant to Fortune Brands, Inc. was approved by a
majority of the combined votes of the outstanding shares of Registrant's Common
Stock and $2.67 Convertible Preferred Stock and at least 66 2/3% of the combined
votes cast by the holders of Registrant's Common Stock and $2.67 Convertible
Preferred Stock voting thereon: 133,451,642 affirmative votes; 1,861,078
negative votes; and 799,963 votes abstained.
(c)(iv) Registrant's Certificate of Incorporation provides for the
classification of the Board of Directors into three classes, as nearly equal in
number as possible, with staggered terms of office and provides that upon the
expiration of the term of office for a class of directors, nominees for such
class shall be elected for a term of three years or until their successors are
duly elected and qualified. The four nominees for Class II directors, Mr. Eugene
R. Anderson, Dr. Patricia O. Ewers, Mr. John W. Johnstone, Jr. and Mr. Wendell
J. Kelley, were elected by a plurality of the combined votes cast by the holders
of Registrant's Common Stock and $2.67 Convertible Preferred Stock voting
thereon:
(A) Mr. Anderson: 150,481,938 votes for and 1,364,304 votes withheld;
(B) Dr. Ewers: 150,500,110 votes for and 1,346,132 votes withheld;
(C) Mr. Johnstone: 150,586,917 votes for and 1,259,326 votes withheld;
(D) Mr. Kelley: 150,430,441 votes for and 1,415,801 votes withheld.
(c)(v) A proposal (designated Item 5 and set forth in Registrant's Proxy
Statement), approved by the Board of Directors, to elect Coopers & Lybrand
L.L.P. independent accountants of Registrant for the year 1997 was approved by a
majority of the combined votes cast by the holders of Registrant's Common Stock
and $2.67 Convertible Preferred Stock voting thereon: 150,806,366 affirmative
votes; 493,224 negative votes; and 546,653 votes abstained.
-24-
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (Concluded)
- ------ ---------------------------------------------------
(c)(vi) A proposal (designated Item 6 and set forth in Registrant's Proxy
Statement), approved by the Board of Directors, to approve the American Brands,
Inc. Non-Employee Director Stock Option Plan to be effective for 1997 and
subsequent years was approved by a majority of the combined votes cast by the
holders of Registrant's Common Stock and $2.67 Convertible Preferred Stock
voting thereon: 141,716,512 affirmative votes; 8,396,649 negative votes; and
1,733,082 votes abstained.
(c)(vii) A proposal (designated Item 7 and set forth in Registrant's Proxy
Statement) requesting the elimination of election of directors by classes was
defeated by a majority of the combined votes cast by the holders of Registrant's
Common Stock and $2.67 Convertible Preferred Stock voting thereon: 72,975,557
negative votes; 60,574,203 affirmative votes; 2,560,396 votes abstained; and
15,736,086 broker non-votes.
(c)(viii) A proposal (designated Item 8 and set forth in Registrant's Proxy
Statement) requesting a report with respect to the Glass Ceiling Commission's
recommendations was defeated by a majority of the combined votes cast by the
holders of Registrant's Common Stock and $2.67 Convertible Preferred Stock
voting thereon: 115,131,756 negative votes; 10,247,045 affirmative votes;
10,731,355 votes abstained; and 15,736,087 broker non-votes.
(c)(ix) A proposal (designated Item 9 and set forth in Registrant's Proxy
Statement) requesting an equal employment report was defeated by a majority of
the combined votes cast by the holders of Registrant's Common Stock and $2.67
Convertible Preferred Stock voting thereon: 114,474,152 negative votes;
10,974,669 affirmative votes; 10,660,934 votes abstained; and 15,736,488 broker
non-votes.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits.
--------
12. Statement re computation of ratio of earnings to
fixed charges.
15. Letter from Coopers & Lybrand L.L.P. dated
May 12, 1997 re unaudited financial information.
23. Consent of Counsel, Chadbourne & Parke LLP.
27. Financial Data Schedule (Article 5).
99. American Brands, Inc. Pro Forma Condensed Balance
Sheet as of March 31, 1997.
-25-
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (Concluded)
- ------ --------------------------------
In lieu of filing certain instruments with respect to long-term debt of the
kind described in Item 601(b)(4) of Regulation S-K, Registrant agrees to furnish
a copy of such instruments to the Securities and Exchange Commission upon
request.
(b) Reports on Form 8-K.
-------------------
Registrant filed a Current Report on Form 8-K, dated January 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)).
Registrant filed a Current Report on Form 8-K, dated April 23, 1997, in
respect of Registrant's press release dated April 23, 1997 announcing
Registrant's financial results for the three-month period ended March
31, 1997 (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated May 9, 1997, in
respect of Registrant's press releases dated May 7, 1997, announcing
the receipt of a favorable ruling from the Internal Revenue Service,
and May 8, 1997, announcing the commencement of a consent solicitation
with respect to its outstanding U.S. registered debt, and in respect of
Registrant's Consent Solicitation Statement dated May 9, 1997
distributed to holders of such debt securities in connection with such
solicitation, as well as certain agreements and financial and other
information in connection with the previously announced spin-off of
Registrant's U.K.-based Gallaher tobacco business (Items 5 and 7(c)).
-26-
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERICAN BRANDS, INC.
---------------------
(Registrant)
Date: May 12, 1997 By /s/ C. P. Omtvedt
------------ -------------------------
C. P. Omtvedt
Vice President and
Chief Accounting Officer
-27-
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from Coopers & Lybrand L.L.P. dated
May 12, 1997 re unaudited financial information.
23. Consent of Counsel, Chadbourne & Parke LLP.
27. Financial Data Schedule (Article 5).
99. American Brands, Inc. Pro Forma Condensed
Balance Sheet as of March 31, 1997.
PART II - EXHIBIT 12
--------------------
<TABLE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Note)
(Dollar amounts in millions)
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
------------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings Available:
Income from continuing operations
before income taxes, minority
interest and extraordinary items......... $225.0 $249.9 $ 43.4 $358.9 $340.1 $ 72.1
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies...................... 0.2 0.1 - 0.2 0.2 -
Capitalized interest............... - 0.3 0.2 - 0.3 -
------ ------ ------ ------ ------ ------
224.8 249.5 43.2 358.7 339.6 72.1
====== ====== ====== ====== ====== ======
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt discount
and expenses............................. 189.6 200.5 184.6 147.1 172.6 39.4
Portion of rentals representative
of an interest factor.................... 12.9 11.9 12.8 13.5 15.1 4.1
------ ------ ------ ------ ------ ------
Total Fixed Charges................ 202.5 212.4 197.4 160.6 187.7 43.5
------ ------ ------ ------ ------ ------
Total Earnings Available........... $427.3 $461.9 $240.6 $519.3 $527.3 $115.6
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges............ 2.11 2.17 1.22 3.23 2.81 2.66
==== ==== ==== ==== ==== ====
(Note) The ratios of earnings to fixed charges for the years ended December 31, 1992 through 1996 have been restated to exclude
results of the discontinued tobacco operations.
</TABLE>
PART II - EXHIBIT 15
--------------------
May 12, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Attention: Filing Desk, Stop 1-4
Washington, D.C. 20549-1004
Re: American Brands, Inc.
We are aware that our report dated May 12, 1997, on our review of interim
financial information of American Brands, Inc. and Subsidiaries for the
three-month periods ended March 31, 1997 and 1996 included in this Form 10-Q,
has been incorporated by reference into (a) the Registration Statement on Form
S-8 (Registration No. 33-64071) relating to the Defined Contribution Plan of
American Brands, Inc. and Participating Operating Companies, the Registration
Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand
Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on
Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term Incentive
Plan of American Brands, Inc., and the prospectuses related thereto, and (b) the
prospectuses related to the Registration Statements on Form S-3 (Registration
Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of American Brands, Inc. Pursuant
to Rule 436(c) under the Securities Act of 1933, this report should not be
considered a part of such registration statements or prospectuses or
certification by us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019
PART II - EXHIBIT 23
--------------------
CONSENT OF COUNSEL
We consent to the incorporation by reference of our opinions contained
in Part II, Item 1, "Legal Proceedings", of this Quarterly Report on Form 10-Q
of American Brands, Inc. into (a) the Registration Statement on Form S-8
(Registration No. 33-64071) relating to the Defined Contribution Plan of
American Brands, Inc. and Participating Operating Companies, the Registration
Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand
Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on
Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term Incentive
Plan of American Brands, Inc., and the prospectuses related thereto, and (b) the
prospectuses related to the Registration Statements on Form S-3 (Registration
Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of American Brands, Inc.
CHADBOURNE & PARKE LLP
30 Rockefeller Plaza
New York, New York 10112
May 12, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT OF INCOME AS
OF MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> $ 40
<SECURITIES> 0
<RECEIVABLES> 884
<ALLOWANCES> 51
<INVENTORY> 1,074
<CURRENT-ASSETS> 2,904
<PP&E> 1,829
<DEPRECIATION> 870
<TOTAL-ASSETS> 7,737
<CURRENT-LIABILITIES> $2,116
<BONDS> 1,452
<COMMON> 717
0
13
<OTHER-SE> 3,021
<TOTAL-LIABILITY-AND-EQUITY> 7,737
<SALES> $1,105
<TOTAL-REVENUES> 1,105
<CGS> 574
<TOTAL-COSTS> 574
<OTHER-EXPENSES> 82
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 70
<INCOME-TAX> 35
<INCOME-CONTINUING> 35
<DISCONTINUED> 102
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $ 137
<EPS-PRIMARY> $.80
<EPS-DILUTED> $.78
</TABLE>
PART II - EXHIBIT 99
--------------------
AMERICAN BRANDS, INC.
PRO FORMA CONDENSED BALANCE SHEET (Unaudited)
The following pro forma condensed balance sheet is presented for informational
purposes only and does not purport to be indicative of the financial position
which would actually have existed if the transactions had occurred on the date
indicated below or which may exist or be obtained in the future.
The pro forma condensed balance sheet as of March 31, 1997 gives effect to the
discontinued operations treatment for the results of operations of the Company's
U.K.-based Gallaher tobacco business as a result of its spin-off and the receipt
of the $1.25 billion net proceeds and the related pro forma adjustments, each as
described in the notes. The ultimate use of the proceeds may differ from that
described in Note (B). The balance sheet as of March 31, 1997 is presented as
though the spin-off occurred at that date.
The pro forma condensed balance sheet should be read in conjunction with, and is
qualified by, the Company's Condensed Consolidated Financial Statements and
Notes thereto for the three months ended March 31, 1997 contained in the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
<PAGE>
<TABLE>
AMERICAN BRANDS, INC.
PRO FORMA CONDENSED BALANCE SHEET (Unaudited)
March 31, 1997
(In millions, except per share data)
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
American Pro Forma Pro
Brands Adjustments Forma
--------- ------------ ------
(A) (B)
Assets
Current assets
Cash and cash equivalents $ 39.6 $ 39.6
Accounts receivable, net 833.2 833.2
Inventories 1,074.0 1,074.0
Net assets of discontinued operations 767.0 $ (767.0) -
Other current assets 190.6 190.6
---------- ---------- ----------
Total current assets 2,904.4 (767.0) 2,137.4
Property, plant and equipment, net 958.7 958.7
Intangibles resulting from
business acquisitions, net 3,676.0 3,676.0
Other assets 198.0 198.0
---------- ---------- ----------
Total Assets $ 7,737.1 $ (767.0) $ 6,970.1
========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Notes payable to banks $ 43.7 $ 43.7
Commercial paper 906.3 $ (906.3) -
Accounts payable 201.8 201.8
Accrued taxes 436.3 436.3
Accrued expenses and other liabilities 434.6 434.6
Current portion of long-term debt 93.7 93.7
---------- ---------- ----------
Total current liabilities 2,116.4 (906.3) 1,210.1
Long-term debt 1,452.4 (343.7) 1,108.7
Deferred income taxes 44.6 44.6
Postretirement and other liabilities 373.0 373.0
---------- ---------- ----------
Total liabilities 3,986.4 (1,250.0) 2,736.4
---------- ---------- ----------
Stockholders' equity
$2.67 Convertible Preferred stock - redeemable
at Company's option 12.6 12.6
Common stock, par value $3.125 per share,
229.6 shares issued 717.4 717.4
Paid-in capital 170.5 170.5
Foreign currency adjustments (225.5) 245.0 19.5
Retained earnings 5,076.0 238.0 5,314.0
Treasury stock, at cost (2,000.3) (2,000.3)
---------- ---------- ----------
Total stockholders' equity 3,750.7 483.0 4,233.7
---------- ---------- ----------
Total liabilities and stockholders' equity $ 7,737.1 $ (767.0) $ 6,970.1
========== ========== ==========
See Accompanying Notes to Pro Forma Condensed Balance Sheet.
</TABLE>
<PAGE>
AMERICAN BRANDS, INC.
NOTES TO PRO FORMA CONDENSED BALANCE SHEET (Unaudited)
Basis of Presentation
On April 30, 1997, the Company's stockholders approved the spin-off of its
U.K.-based Gallaher tobacco business. On May 7, 1997, the Company received a
favorable tax ruling from the Internal Revenue Service as to certain U.S.
federal income tax consequences of the spin-off. As a result, the balance sheet
as of March 31, 1997 was restated to reflect the Gallaher tobacco operations as
discontinued operations. The Board of Directors set a May 30, 1997 record and
payment date for the spin-off, subject to the satisfaction or waiver of the
remaining conditions of the spin-off. In connection with the spin-off, the name
of the Company will be changed to Fortune Brands, Inc., and, as a result of the
spin-off, the financial statements will be restated to show tobacco operations
as discontinued operations, and the Company's stockholders will own shares in
two publicly-traded companies - Fortune Brands, Inc. and Gallaher Group Plc.
The following is a summary of the pro forma adjustments:
A) American Brands
This column represents the Company's historical condensed balance sheet
restated to reclassify the net assets of the Gallaher tobacco operations as
"Net assets of discontinued operations".
B) Pro Forma Adjustments
This column reflects the use of the $1.25 billion net cash proceeds
received in connection with the spin-off by the Company from Gallaher Group
Plc. as a reduction of debt, and eliminates the "Net assets of discontinued
operations" and records the difference as an adjustment to the appropriate
components of Stockholders' equity.
