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American Tobacco

American Brands, Inc., 1985 Annual Report

Date: 1985
Length: 56 pages
ATX040148935-ATX040148990
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60079922
Author
American Brands Inc
Brand
Lucky Strike
Carlton
Silk Cut
Pall Mall
Tareyton
Condor
Benson & Hedges
Berkeley
Silva Thins
Sobranie
La Corona
Antonio Y Cleopatra
American Sweets
Roi-Tan
Half & Half
Paladin Blackcherry Pipe Tobacco
Bourbon Blend Pipe Tobacco
Casa Silva
Sail
Flying Dutchman
Hamlet
Old Holborn

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1 Financial Highlights A ....R. ,,Joc. and Subsld hrl¢~ (Dollar~ in t bo~land~ except per share m~lni~l Net inoome per Common share "vVithout dilution F/flly diluted Div~talds paid per Common share Net sales Operating income Income behoove provisions ior taxe.s on income Net income DMdends paid Comlfllo~ Prfferred Number of Common s~ockho!ders, December 31 (I) Average number c£ Common shares outstanding during the year 1985 $7.34 7.18 3.90 $7,308,311 898,284 750,733 420,870 $214,920 18,754 94,862 55,090,966 1984 $7.20 7.03 3.7125 $6,995,187 892,208 746,210 414,120 $204,377 18,029 101,303 55,044,502 1983 $6.76 6.59 3.55 $7,093,392 851,198 729,956 390,298 $195,004 19,151 106,588 54,921,251 Operating Results By Product Lind2) (In million) Net sa|es Operating income 1985 1984 1983 t985 1984 1983 ToMcco products Domestic $1.428.9 $I,411.1 $1,444.7 International 2,981.1 2,817.9 2,972.2 Finandal serrdces -- __ Hardware and secualtT 969.3 519.3 462.4 Distilled beverages 245.8 246.4 241.2 Fx~d products 557,O 493.8 479.3 Golf and leisure ploducts 167.1 122.9 113.4 Optical goods and services 142.7 130. 3 144.4 Offic~e products 338.7 335.5 318.5 Personal care products 147.1 1t3.3 125.7 SpecialLy hoalnesses 798.6 784. 7 791.6 Total $7,308.3 $6,995.2 $7,093.4 $408.2 $382.4 $370.6 t11.4 114.3 122.9 t74.1 172.9 132.1 43,4 48.4 43.8 40.2 39,3 36.7 27.4 28.6 33.2 22.3 19.5 I6.7 18.3 18.4 32.1 17.1 13.8 31.3 9.3 8.3 7.1 26.6 26.3 24.7 $898.3 $892.2 $851.2 ~t~ %~x:c'~h t,'~ ,-~ of record, not ~ecessarib, reflectirig beileficlal o~ nership. !2) See pages 41 and 48 ~r I nform~ion on Busieess Segments. t
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2 To Our Stockholders Bolstered by strong results in the second ha/f, particularly in the foun'h quar~r, the American Brands group completed the best year in its bisror); with record resul~ hi sales, ne~ it,come and eanslags per g~are .~r I9~ Sales ~r the full year reached a record $7.31 billitm versus $Z0 billion hi 198~k ln- dudi ng financial services, which is acca~nted for by the equiW med~d, tot~ revenues would have amounted to $8.23 billion in 1985, compared with $Z85 billion. Net income was a record $421 mill~, or $7.34 par share, c~mpated with $414 million, or $220 per share. Net inccn~v¢ has now ine~sed in ten of the p~t eleven years and more than t~ed ~cr that period. In addition to s~es and net income, oper- ating th~3me and incl)me be ~'c taxes wete alao at record l~els for the yea~ Highlights of Operations Our ~siness showed strong, broad-b0sed g~ths ir~ 1985. Every wdy3r produc~ ii~e recorded increxsed sale~, and all our segments were profitable. The American Tobacco Company again showed retxxd profits and achieved notable marketing succvsses.The Luc~~ Strike ~lter franchise confumed to enid" sharply higher demand, resulting in good unit growth for the entire Lucky Strike fraL~hise. Carlton, the ultea-low-tar leader, wx~ successfully intro- duced in Jatxm and China and had wohdwide unit grc~'th for the year. Gallaher Limited, ~r large U.K.-based subsidiary, concluded an exeel~em year with record results in sterlln~ Unit sales ~ciga. retres were up, and Gallaher's share of the United Kingdom market increased. Gailaher now has ore third of the b~ K. cigerette mar- ket and almost half of the cigar and smoking tobacco mar~s~ Every set'mr of its non- tobacco operanons also reported higher oper- ating income in s~eriing w/th paralcttLarly notable g~ins pos~ IZv 0 fmx, its offg'e prod- acts sul'dtdlaD', and Prestige, its hcmesvares subsidiary, which was iEchded for a full year. Financial ser~dces~mprislng Franklin Life mad S~mthland Life--hM record oper- ating income for the year./qnancial se~ice~ revenues continued to show good gr~h, ri~ng 8% to $923 million. James B. Beam lYtstilling Co. and Acushnec Company also posted record sales and earnings in 1985. Jim Beam conthaues to be the world's Ieadlng b~thon, and Acushnet remains the ~orMwide leader in quality golf bails withTitleist and Pinnacle. Sak~ reeot~ we.re ~lm adf~e~d by cur Master Lock, Sunshine Biscuits, Pinkermn~ and Jetgens subsidiaries, Sales for the c~ce products segment of our business, which in- eludes Wilton Jones, the principal operations of Swingline, Perma Prcalucts, and, in the U.K., Ofrex Group, were slightly ahead, though operating income declined. In Februany 1985, American Brands Inth-- ~aational Corporation opened its first overseas ef~ce in ~k~o. VChilc c~r presence in the Asia/Pacific region is small, we have a fine base on which to build. Acquisit/ons M~ ]986 ~]1 mark the 20th annie.- program, which began with the acquisition of Sunshine Biscuits, Inc., in 1966. In total, we have invesaed over $2.6 billion for acquisitions over the past ~,ew~ years at'x[ aa aMifioaal $1.5 billiota in capital improvements in these
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-May 11)86 Will mark th~ 210th annJvl)raary of thestart of the very succe~sdut dlverai- ficatian p;~gram,.. t~ ~U,zcmm~e~H~sl- nesmm accounted for 54% of total operating Imll] companies. I~ 1985, ~'e~iend businesses accollnted for 54% of total operating income. Last May, the Aeash net Company acquired Foot-Joy; Inc, g premier manufac*urer cggolf shoes. \Ve belim e this acquisition compl¢ - ments Ac~shnet's leadership position in the golFbsdustry exceptldn~' well. La~e in |995 and ~ady this ~ar we aim com~pleted several small acxiuisidons to further ~milaour position in hardware and ~:curiD: Master Lock breeadened its pmdoct liae with the purchase of Dexv~r Lock Compare; manu~cturer cddoor ldek sets and door hard~re, and The prestige Gmup~ house v.~ re'a l~ne x~ e×pa*~ded w~rk our av~ilskloa ofBonW products, Inc., makers ofquMity kimhen utensils. In addi6on, an agivement w'as reached in February' 1986/or Pinkel'ton's to purchase the asse~s of BASIX Control* Systems Cor|x3ration, a business specializing in electronic security systems. Dividend Increased E~ wkh~ M~h L 1986 ~, the dMdend on the Common ~xock has been raised to a $4.05 indicated annual rate, up from $3.90. Thh marks the 71~lae~ntb ~¢n- sec utive )ear & which the dividend ha~ b~n roired aad the tz~enty-slxtb Juch im~rgase durmg d;ut pe.od In Der*~nber, smekhdders ~proved a plan of reorganiTation ~hieh estab[iabed a new hold- ing company structure for Amerleat~ Brands and its subsidiaries effecGv as of January 1, 1986. In olxier to better reflect managerial responsibilide% domestic mb~*_'o operations are now conducted by a separate subsidiar}; The AmerieanT~co GompaW, wkh Tbemas C. Hays as president and Chief Executive OfficenThe new holffmg companp is also ~mmed American Btmlds, lnc. Corporate Headquarters Relocation This summer we will redo o,~e our corporate offices to Sot~hern Cc~o.~ectlc ut.Thla reloca- tion offers overwhelming long term economic lidvantages for the Cc~nparry, whieb hm leased a building in Greemwieh. Manmgeme~ Changes A numher of management changes were announced ia~ Septemher m strengthen ~ur executive teall) and to create strong continuiD' of maaagement fur the fur are.These eha~ges became eff~:tig~' Jan~lary I, 1986: D Will'am J. Alley was de,ted Vice Chair- man, a mw and swamgldally impor~nt operating position. c Arnold 1 lenson w~ dec~l Execmive Vice President and Ch*efl~inancial Ofiqcvr. Robert L. Phncher ,~ elected Senior Vide Presidem and Chlef Accounting Officer. Paul A. Randour joined the Corn~ as Sen~ Vice President and General Couosel. Thomas C. H~ys was elected Vice Presh!e~t-Toba~vo. Robert j. Rukeyser was elected Vice President--Office Products. Russdl i~ Truitt was eiecrnd Vice Presldent--Operafion~. Boa¢~ Changes Several Board cheages occurred over the Wst )ea: Paul A. Randour an4 Robert J.R~ke~er were ekcted Directors, effective January 1,1986. ~No~an E. Auerbach ~as elected to the Board~ effeed~ February" I, 1986. ~Joh, I~ Clark, a Di~tor since 1978, reigned fr<xn ~he Boa~ ia Ju~ ~nd Willi~n Sword, a Director since 1976, resigned in January' 1986. OuUoDk American Brands has been on the move for sortie t~me flo>,: Out" oper~ions have coaieseed into two strong core businesses-- packaged consumer g,~:d s and financial se.rvlee~.The CompaW has enornmas £na~- cial resources and cash flow" well in e.v~ s s c£finandal operaing rec~ir ernera_v We haw great ~xfoers with excellent posi- tions in marl}, markets; we have a successful acquisition ptogt~m, which will continue, ~nd we have a growing position in world markets. Our ability to geneeate c0nsismnt earn[wgs growth was again evident in 198£ and we ~ce ~he future w~h strengab and conFdm~e. Suhmltted c~ bdndfof the Board of Directors, Edua~l Vd Whittcmore Chairman ~fabe Board and Chief Executive Ofi%~x February 25,1986
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1~mt~tin9 residential property i$ 0 n® of the marry $ervicgs pes'formed by p~nkerton~,the world's premier private security and investigat i~ serviGes company.
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~'~ Tit leist GO~! and Foot*Joy units Of our Acushnet Company sub- sidiary provide premium quality TitleiSt, Pinnacle and Four- JOy gQLf prod- Ucts t0 golfe~'~ of all gew~atiotls.The world /amousTItleist ball was again the #1 golf bait Int985.
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O'l-,~z¸• ~ n-~|,~ i~| • ~.~| K'm
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14 Review of Operations pk~n~iow-tar brand and leader in tht ultra .low-tar setlmont~ Sham In 1USS.I.uclcy ~lke FIIte~ ares Ludk,/ /;ttlka Lights hacll combined unit gain ~4 46%, P~dl MJl Red r~malned tho nm~flRet hm~ a~dTamyton maJn/~nt~ ~ Je~h~ pollt[on In the ¢haml fllbw~ Oome6ticTobacco Record Profits were achleved in 1985 by" the domestic mb~e- co business, which consists of The American Tobacco Company andThe American Cigar Company. Operating i~come in- creased by 7% to $408.2 mil- lion. Sales c¢$1.43 billion were up dight [y fi~m $1.4I IftUion in 1984. American ToMcco con- finned a~gressi~ marl~tthg ixogmm for the Car/t~a a~ Lucky Strike franchises, which suceessfiflly str~lgth- ened the company's lY~sition in the low-tar cat~gory. C~rltc*n, the pleater low t~r brand aod the ind~try~ sales le~er in the ukra-low-tar se~ gai~ed overall mark-~ sham with unit gains in its 100's, 120~ and s~yles.Tbe ~ncl~se w~ expanded further in M~ when Carlton Mmthol lOOk Box was int~doced nadon- ali)~ Smokers now have a choice ofekven Carlton styles which cover a broad range cgpreferences. The Carlton franchise in. elude~ the industr)~s Iovce~ tar menthol, lo~t tar 120's and lowest tar slims. Carlton Box King remained the low- est in tar ~-any bran& Carlwn~ export sales in 1985 nearly doubled, with sharp gains achieved in the Middle East and Japan. Dur- ing the year, Carlton became the first brand in Japan to in- dude ~ar and nicotine num- bers on the pack. In 19~ Carlton posted a ~mrldwide unit ~lume gain. The total Lucky ~nke feancnise shov.~d a gain in units and market shine for the year, reflecting a ~y aealve program afconsumer promotion and advertising for the low tar fi~r line. Overall, Luc~ ~ke Filters and Lucky Strike Lights had a combined unit gain ot-46%. In the charcoal fih~r ciga- ret~ camgo~, _~nerican To~cco's Tareyton brand maintained i~ number one position. The company also re- mained the leader ia the nonfil~er se~ PallMall Red is the sixth best-~fing cigarette in the cotm~ Pa// Ma/g Rnd and Lucky Strike Regular together aecoun~l ~r appmxima~ly 58% of the ieduaxy's nonfil~ unit sales in 198~ AmericanTob~cco's alga- rette prices were increased in June by $1.0(I per thousand, and, in December, by $1.00 on k~ng s~ze and $125 on lofts, 120's and pa~rMa[[Red. Srno~ing ~acco pmdu~ of An'~ean Tobacco indude Hagf ar~Ha/f, one of the market's best<riling brands, as wall as Pa&din g/ackeherry and Bourb~ Blend. American Cigar, in 1985, maintained its market share with unit declines in line with the in~" tm~d. Cc~tinenta~-styh cigars cominued to display ~ncour- aging growth. In the latter half of the year, American Ci rlntrodu~xlLaCorona ~ Tip as a tip~d com- panion to rke highly sncce~s- fol La Corona Whiffs cigar, Consuraer resl~se has bee~ go~d andt ov-~ll, the Wh~ lio~ pond a 17% unit vd- ume income. Also in ing~ the compaW in~ American Sweet6 a large cigar positioned in the 9¢ to 12¢ price range, whk:h accounts for close to haffc¢ the indnstry's large size dgar sales. The Antotdo y Ckopatra brand, which includes A &C Grenadiers, ct~alnund to be the eoml~"s major profit cont ribumr. Other established cigar brands include Roi-Tan and Ca~a Silva. Ameal¢an Cigar also di~rib uses Sail and Flying Dutchman ffomThe Netherlands. ici,d ,,,I _ H
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t985 a~tin ~ctw~t~lits m ut ttto tI.K. ciglm~¢~ marl~t. BInson and ~ Slse~at Fillet ts tile lelmllnll beand in t he U,K.with ~or 8n 4.R% share,and $;Ik ct~,v, ltn 1411% ~,is tt~ 18adlhll loW-tar bramd. market share growth im tim U.K, In Qaohuf Its olhor main tob~t~o p~duct (mt~lomm, Inlemlltio roll Tobac<:o Record results in pounds sterling were again produced by our international mb~xo business, wl~ch consists al- most entirely of the tobacco ~s o£ C-~allaher Lim+ lied, our United Kingdom- hasea subsi~a~. Sales of £2.28 biilion and operating income of£92.5 million were up 8.5% and 7.7%, ~- speccively, fi~n t984. When t ranshted into dollars, sales in 1985 were $2.96 billion, and oFel'ating income wvs $1II.4 million, compared with $2.82 billion an6 $I1¢3 lnii- llon, re~pecrively, for the preceding year. Alth~gh the a~erage e:~aange ra~e f~ the Bfir.ith pou ed w~ iower tbr the year, it rebounded in die second h~/f, partlcuhdy in the ffc~ar th quarter. Galld/er~s outs~nd]ng ~aoce k~ poueds star- ling in 1985 refleex'd con- tinuing ~gressive ad~erti~ng a~d promotional support for its brand~ For the year, the company showed a gain in trek elgatetre ~ume and its share of the L~K. market again incmosed, with Gallaher now commanding a third ~the rnad~ Gallaher½ higher unit sates contrasted with an in&say- wide decline of al~t 1%. During the yoar, G,alhher screngahened its position in the iow- tar segraent of d+e manet with the successfitl immducfion in July of Sd/k CutExtra~ a quality 100 miI- llmeter cigarette. Overall unit sales of the .~/k Cut brmd were up f~ the year and its share of the U.KAow-tar market rose m ~cout 46%. Silk Cut Extra improved Gallaher~ presence in the growing longer length cam- gm3~ which ~ted over I5% of the total market, com- pared with only 5% in 1975. The com[nmy now has three strong entries in the bnger lellgth ~egme~t,The other t~x~3 are Bemon ~ Hedges Longer Length, introduced th t983, aed Berkdey Super- kings, introduced in late 1984. Gallakerh share of the longer ~g~ market ig 1985 wos 23%, up from 17% in I984. Bemon and Hedges Special Filter, badged by ~ward-~iu- nthg advertising, continued to he the U.K.'s number one selling cigarette with over an 18% share of the total ci~l rette market. Its closest com- Petitor has less than ha/~of that share. Gallal~ also achieved market share growth in the L~K. in each flits other main tobacco pro&tot camg06es. The e~rnpany~ share of the pipe tobacco market, in wNch 69~d~ ~ the leading brand, rose ~o over 48%. Hamlet, the number one cigar, again posted unit gains and Gall,~er ~ sham ofth~ market rose to 49%. OM Hot~or~ ~ share of the roll- ytm~-c~+n segment was 4-1%. P~d by ,~lk Cut, Gall~er l~OS~ed goodimgao*e- ment m ctgarette exports to its major markem.Tot~ ex- port unlr.velume, excluding a one+time contract sale in the "or year, ro+e 18% in Dig. ~itS cm'e market+ in the Middle East and on the European Centinem, ~ Cut had ~x'celIen t unit volume gains. Further pmgaess ,a~ dm mhieved th the Peopte~s Ile~ublio ogChJrm. G~aher~s exlxxts of ci~rs aN roll- your-own tOaac_co were M+~ad f~ the y~an N3tmeyer, Crailake?s Dutch mbsid~ had go~1 impmveme~t in profits, reflecting increased mlrket share for roll-your-own 0ahacco inThe Netherlands and **Vest German): Ritmeester, which makes dgars and also is hased in The ~Lands, h~1 a t gain, but Gallaher ~t~in) bad ~ modest dedir~.
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16 Southland I.ile at the vzncf of I'~"S had $2f.0 billion uf combined Insurance In forclh Both ~g to U~Ully I~mdu~ ntw ~Hal~ ~ m~ cl~nging iI~nsum(w gllN~'~. Financial Services ]~nancial services t epre~nt~ American Brands' second core business and consists of The Franklin Life lnsueaace CompaW and Southland Life Insurance Compaw.Total assets at December 31,1985~ were $4.6 billion and capital ~ $L2 billion. Insurance in force mtalnd $31.0 billion. Revenues Prom financial services are not included in consolidated sales as this Imsiness is accounted for by the equity method. To~/ revenues for 1985 were $923.4 million, ~p Z6% over 1984, and inaluded $577.2 millkm o~epremium and $337.7 million cffnet invest- ri/e/lt Jr/LTm~& Total nmv insurance mid reached $6.7 billion a~ first year ordinary insurance pre- miums were $62.0 million compared with $61.8 million in 1984. F~nklin~s Pr~dden- tidA~muity policy generated $30.7 million of fitv* year premiums. Franklin's sales leaders for the year were Presid~tialL~ at $1.3 bil- llon and Executk~,e Select Wh0k k h'e at $838.1 million. Southland's top seller was its UnlversalLife with $829.0 million, In 1985~ financial services rant ~:d~uted $174.1 miIlion m opeearing income, compared wkh $172.9 million in the prior )~ar. Continuing shifts i~ consumer demand have created dramatic p~ktct dlanges in the lit~ insurance ilxchst~; Franklin and South- land arc successfut/y meeting the challenge 1~" de~eloping and rmrketing inna~tbie nmv policies and concepts. These inid~e ~nMin's DecL¢~ 6), a pension protec- f~n program, ~id2 emb~es an individual to plan fi*r rn~- imum peo~on benefits, and Mortgage Buyer, ~ich pro- rides a client with the oppof t~lnity ~ save interest cm~s by tmying off a mortgege early and then ~:,\ing an annuity to rn~lIlq lze money accumulation.The company's llew teacnl instlranoe ridel~, the Challenger series, have also been e~remely well re- cidved. [nuoduced in .April, sales of the latter amounted to $.¢7Z l million for the year. In I986, Franklin will introduce Portfi//o Lift', a variable universal life polig; as well as a new low pre- mium whole 1~ poli cia Additionall); Franklin's pd- ky acceleration program, which started in December, shetlid improve sales of its whole life policies in 1986. Essentially, this program enables existing policyholders to apply dMdends toward the payment of premiums on old p,li¢ies, feeeii~g present premium dbihrs for the pur- chase of addkiomllife insur- ance, Southland's pr~ct intmducrions will include ne~, verslons of tfieir Un£ersM L/fl policies and a new ~ ins~,a~.x~ p/ar~.
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17 Hardware and Security The ha~re a~ seenfi~ segrnem consists of Master Lock Compai~y, Hnl~r toffs, Inc.,The Prestige Grcmp d Gallaher, MCM Pioducrs, lnc. and a poedon of Swin~tine Inc. For 1985, saIes veere a record $$6g~3 million ard operating incorr~ amounted to $43.4 million, compared with $J1~3 million and $48.4 miiFton, respectively, ~or prior )~ar. Mastez L~k, the world's largest Padlock man~urcr, is the major conm2mtor © this segmen:'s operating in- come. h~ 1985, M~er agah~ achi~ retard ~x~les on an increase in unit relume and ~.~d the $100 mililon mark r the first time. Ope,"ating profits also were ahead For the year with all Ioek zatego- ties showing impmwement, par tic~larly pin tumbler lain- inked padlocks and combl- n~ioa a~ ~ik-itx k~cker locks sold to schods and in- Stlt~ional cust omem. In addi- tion to being the leading supplier to these markets, M~ster Lock is the number one company in the locksmith and [xa~t~ n~. At the end of 1985~ the compaW broadened its scepe of oper- ations by entering the secu~i~ and builder~ hard- warn supply txislnesses through the acq.islrion of Dexter Lock Compaw, a manmCacturer of premium quaiitp door lock sets and door hardware, During the year, M~ster Lock successfully i~troduced Serbs 2000, the ~rld's stmr~gest combina6on Ddtock, a muki-~rpc~e resetrable combination cabte lock, and a resettablc combination ski lock, all of which added to results. New padlock product development ~lJ comthue to he an important loug-tenn objective of Master Lock along with exp~nslon in other sec urihv hairy#are areas. The Prestige Group, a unit of Gahaher, w~s in- cluded For the entire ~ar, ver~tlS seven months the }rear before, and added impor- tantly t~ the segment½ resu~ 19~The company is oe.e of the largest man@aemrers of housex~'a res c~t slde the L~ S. Products inclt~ie quali~ cook ~arel bakewR~e+ Izltchetl rooJsI pressure ¢.ookel s~ car- pe~ sweepers, cutlery and small electric appliances. I~ I985, Prestlge's industri~ bakeware pmd~cts per~rmed ~e la~K cont~bu~r to ~rm proms rathe ~we~and se©u~ s~nen~ Wdened It~ product line by a~ui~9 a mklm quedlty door lOCk t98G, &mric~n Brands a~i~da ma~ quil~¥ Rl~he~ lils, wall in the L[K. Its ~uropean subsidiaries, particularly those in Italy and Sweden, also dkl ~el]. New prod- ucts introduced included microwave ovemvare, colored D~s ~nd pressure cookeea, and a travel iron. In Ja~ary 19~6, Amcrlca~ Bra~ds ac+ quired Bonny Products, Inc, which is based in New York. Bon~ has a good market position in the U.S, for ~l- kimb~n vme~sits and wilt be operated in mnjunct~ with Prestige. Pinker tonK the premier ~ongovernmenml security ~nd i~vesti@tRe services o~ization, had record rev- enues for ~9~ Hce*~'er, operaing income w~s con- skler'ably below 19~4 of fierce competition through ou~ the security industry ~s weli as significant charges to opemtlons. In addition, Pinker inn's initiated several programs to increase ks mark~ sha~e over the r~ex~ several years in the energy, governmem, investigation, stud p~trol and im'pec tlon markets. Efforts in the i~esdgation catego~, ~ich were expanded in the prior year, h~ already ~au to
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18 pay of?'with gains in revenue and operating profits in 198~. In February t986, the com- Pany reached an agreer~nt to acquire the assets of BASIX Corttrols S}~tems Corpolatlon, ~ieh specializes in dec. tmaha s~c-arky s vs~m~ MCM Products, Inc. com- pri~s Marson Corporation, Marvel Lighting Co:~ra- than, "WR. Case & Sons Cut- lery Co. and Marson Canada inc. While o~rall sales were lev~ with 1984, opeeatlng inoa~e rebounded sharpl)~ Marmn, manufacturer of mm Ix*iy repair and rbvting products, again had mco~ sales and operating income. Marson Canada manufac- tures and distributes Macron products in that ¢ountD: Ma~el, which produces long-life incandescent light bulbs, also showed increases in sale* and operating profits. Case Cutlery, continued to face an inflax of low wieed impor~ and x~mk demand for qllalh3- cuder~ S'edngtings hardware llne, which inclndea manual and dectric stapteguns, nail drix~rs, ri'et setting tools and ~ guns, also faced gift corn tkk)n dttdng the year, resu~nt g in unf~,orable compark~ons with 1984. ~im Beam, the number one selBng bou~son in the wmld, again in~reased its market ~hare in 119115. Jim Beam ZZTJngers, (~mbining bourbon v~th carbonated s~t drinks,were suoc~s- f~d[y introduced in ~he U.S, du~Hg t~e ~ear, Oist/fled Beverages James B. Beam~ distilled bev- erage o~.~at han in 1985 set rccords for the tenth con- secutiv~e ~ar. Sales of $24~8 million and operating income of $40.2 migion, cc~apared v¢ith $246.4 million and $3~3 million, respectlvelF, for 1984. tim Beam, the number one sell~ng br~thon in the world, again increased its market share in the rice of a further iadt~wy-wida decline in bourbon sales. Componndlng the thdus*ry's pmbl~n x*~s a 20% increase on October 1 in tile federal excise tax levied on distilled be~vragm. The comlx~W's bourbon cat- a~crease in ¢~erat 11~ income for 1985" and accounm'd for 89~ of the total.Thls in- eludes the contribndon of J~m Beam ZZginger~, combining bourbon with carbonated soft drinks, which were Success- full), introduced in the U.K during the )'ear. Beam's Black Label, a premium priced bourbon, also added to the gain in profits as did the oampaw's bourbon decanter b~sine~ Ex~or t s:a]e.s r>ff~*~ Beam did well and pmfus ~ere ahead for the )"ear. In Australia, the coml~ ny's larg- est market oneslde the ~X S., bourbon unk sales rose 33%. ]ira Beam ZZZingers estab- lished a new category of dis titled spirits. First introduced ~kh cola, tim Beam w ~ later in tile year combined with glnge* ale and lemon-Iime soda. All three ham retched exvdlent consumer response and added impormndy to I985 profits, tim Beam ZZZing~rs are also dnd~g we2I in ?mstndia where the com- paW introduced the producx in 1984. MilicaW markets in Europe and in the Far East ~re a/so added in 1985, and lira Beeem ZZZingers will be made avaihhle to regular mar]ram in those areas in 1986. Beam i~ 1985 e~tered the itavo~ed schnapps business, the faste~ gro~ng segment of the industry; with the introduction of ks Baron !~*l Sckeuters line. Initially pm- duoed in roost beer, t aspherry, lxeach and burma'scorch flamrs, the line will he e× ganded further in 1986, Peter Heering Cherry Liqueuh a Dainsh import for which Beam became the sole L~S. distributor in 1985. ~lso added to the company's profir~
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~9 Pdu~t s roiled out nart~naHy by Sunshine in 1~8S Included diunShlno Amorln~m Herikago snack crmc:~- Ira ~ QhlpW4 ~t~t~vi~ a sot~ ©l~ate chip c~io.~ Ttt4~ didd~d Mr and ~ Weli-knm line, Food Produ©ts Incr~ced sa~ were achi~e~l by our ~bod products segment in I985. FIOwe~L despite a ~lvng recovery {n the ~cond half, operating i~rs ,x~a'e down for tbe year. Total sails For 1985 were $507.0 million and operating income am~mted to $27.4 million.This comFlred with $493.8 million and $28.6 million, respectively, for 1984. mack crackers. These dis- tinctive~ flayed crackers have been well received by consumers, and Sun,in* American Heri~ge has becorae a firm lmse for Sunsbane~ growing snack cracker b~iness. Sunabi~'s Cbeezlt, which posed an itlcrease in u~ volume, eominued to be Amefica~ number one ¢.:be~e cracker. K~i~p) crackers, the corn- W's leading el'~rkez, ais~ Sunshine Biscuits, Inc., lmpi~x-d its i~c~lrlon by V~t~ • ~4fich accounts for ~he major img a galn in unlt volume. portion of this segment had record sales, t Iowa.', he~'y costs for new and fin roved products and intensi~d marknd ng effor ~s a~versely affected profits. Wkile pro- motlonal ac6vley remained aggressive and compodtion comimlnd ro be intense, the COmlxr~r bega~ to hetiefit fi'om its new product fines as well as greater demand for established I~rands in the second hal£ Early in the year, Sunshine completed the nationa/intro- duction of~he ~nshina American ~eritag~ line of Sunshine also exp~nded its txx~kie Ix~ness early in 1985 with ~he intrnduction in test markets ofa uni eline c£ sof~ chocolate ~ cooldes- Ch~o~ Ct~¢,~s, available ir~ fudge, pe~t~ Ix, t~r, burrer- scotch and raisin flavors. Eno:)uraged by exI:etlent con- st.lmer and te~de ~aappor t, Cbip:), Chew: were roiled out national/), by the third q0arter. A strong performance w~ achieved by Hydrox cookies, whleh x~,~re refonnulated and r~lx~ka~d in the se'et~d gear~r aild backed by strong F¢omotkmal and tedevision stl port. ~ational distribution ~Pw Hyd~ox wa~ tvmpie~ed in the third quartel~ Also in • a tlU~rter, Fig Cbe~ies, Sun sJlir~e's new ~nd imp~vd fig bar, ~s succ:essfillly ~est marketed and nafioned ~ndout vail be completed in a9~6. Increased raw material costs adversdv affec~d profits of Sunshine's L[S. mack food un~ oi~ the V~x Coas~ (Bell Brand and Blue Be//). Cvmpadres tondlh chip~ and "Natural St~Se" potato chips e-c~int~ed to be major con- trl/altors to sales ~x~um¢. Humpty Dump~/Foods Limited, Sunshrde's Cam- dian ~ack tbo6 s~idiar3; ~3sted record sales and oper- ating income in I985 not only in Caoadiaa dollars, bu~ also in U.S. dcdlers, ~esl)ire lower exchange rates. 9: .'~. • ~"
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2O This strong per formanoe resulted from unit volume gains throughout eastern Canada, its primary market. Taylor Food Products, Inc., a sul~idiary of James K Beam Distilling Co., which princes the well known Mr M~ "T" B~ody Mary mix and other cvck~dl mlxes, had record sales and operating profits in 1985. In addition to increasing dls~rl- bution ~ supermarkets and mass merchandising retail ouddts~ the company suxzcess- fulb, introduced Mr and M~ "T" Lime ]uice, a new sulfide free lime product. Taylor also entered the fast- g~wing mineral water b0siness ~ becoming m!e GS. distributor for Ram/osa Swedish Mineral Water Tleist and Pin- ~cle golf products are fav~rit es of profession- als and anlelteurs alike. This category now incJudes theTItleiat Collectlon of golf appareland F@ot-Joy, the leading marketer of golf shoes and gOl| gloves in the U.S. Golf and Leisure Products Reflecting reexaxl results scored by the Titleist Golf DMsion of our AcushneE Comptny and its acquisition of Foot-Joy, I no. in May, operating income of the golf and leisure predict ca~gory amounted to $22.3 million on sales of $167.1 milfion. Th~ compared ndth $1~5 million and $122.9 mi]lion~ respectlx,ely, for I984. The Titleisz DMsfon's mength in 1985 continued to be its golf hell hesiness, which features the Titleist and pinnacle brands. Titleist is the top-sellltag golf ball in the U.S.The T;tleist 384 7bur wxs Flayed by 80% of the professionals on the PGA tour in 1985 and was the most played ball at the ptestigious Mas~ers, U.S. Opel1, British OWn and PGA champion- shlps.The Titleist 3g4 DT, a ~ersion of the 384Tour offering performance and dumbilit y, also remained a Fa'and te with golfers. In I985. Pinnacle, well known for dupability and distance became the first two piece construction gdf hell to he made available with compres- sion options. While golf dub and putter vixume w~ soft in 1985, sales of accessories showed a good increase.The latter benefi~ed from the company's succe.~- fth entry in the fa~ growing golf appard market with the introduction of the Titleist Collection, including slacks, shirts, sweaters and ndnsuits. Another dimension t~ Acush net's golf buziness was added through the acquisition of l~ot-Joy, Inc., the leading ~ of golf thoe5 md golf glc~s in t he U.S. Foot - Joy's Clas~cs, plemiom priced golf shoes, are worn by appmximatdy 85% of the
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21 players on the PGA and LPGA t~vars.T h~ ccmpaW also distributes dress and ath- letic shoes as well as socks and related accesmries. ~qth the addition of Foot-Joy, .aaa~hnet h~s become the number one supplier in the country, of g9£ balls, shees a~ g~oves. T~Idst Limit~l, .~ush- net's U,,K-based subsidiary, continued to maintain its golf bail leadership position in the U.K. Tt~feiet also remaiaed n~.mber one o~ the ContinenL T]fld~ Japan, Inc., a joint *~mt ure with TWo Tire and Rubber Co. continues to focus on im~rc~,ing distribu- tion o~Titlei~t and Pinnacle golf baits in Japan, the world's second largest gdf market. DIIor~ & AJtchlson~WJth b~flchel, ts the rargest ~tJ~4com~en~ M Europe.It has 484 branch~s in tho U.K., 70 In Italy and 45 hi Spain. Optical Goods and Smk:es The Ddlond & Aitch]son Group, a unk of Gall~er, showed a mode~ inctCa-~ in operating income in pounds sterling to £14.0 mill/an ott record sales of£110.1 milli~. This c~raF~red with £I3.8 million and £927 miIlion, reapective~; for 1984. In dd lars, 1985 operating income w~s $I8.3 millloa and sales were $142.7 miliion.The Gro.p~ peribrmance for the very competitive ~tttLqtl~l that has developed in the U.K. since Parliament re- moved restrictions in December 1984 on the sale of .eTegl~ ~-'s by nonregistered op(vda~s. Wkh ~ re~uI~ant prolifemtion of new c~n- pethoea in 1985, Dd}ond & Aitch~on significantly incneased irs mad~eting efforts to maintain its lead etship l~osition. Adver[ising re~trl~torts were Ol~] removed and, in I985, the comlxmy w'as permivted to advertise for the first time. Eydand Hottse, the first optical department store in Europe, which was opened at the end of 1984 in Binning- ham, England, had an eKel /ent first year.Additional mf~ are planned for 1986. The compaw's cont~c~ lens business sho~d improved opet afing profits as did over- seas operations in Italy and Spain. Doliond & Ai0chi~n, ~th 579 branches, is vhe larges~ opticai compa~ in Europe. It has 464 branches in the U.K., 70 in Ital)~ and a.5 in Spain.
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22 Office Products Our office toducts segment comprises ~v~ilson Jones Company, Of rex Group Holdings. a subsidiary of Gallaher Limited, and the /~ncipel operations of Swingline Inc. Althc~gh overalt saIes for the segment edged slightly higher to a record $336.7 million, oper- ating income declined to $1Zl million from $33.8 mil- lion in 1984. Wilson Jones, the largest company in the group, l~d z dlgficrdt year with opelaring income down substantially from 1984. Increased corn- petition in a lacldus~ eawi- mnment for the domeede office produczs industry, cou- pled wkh a sizeable inventory write down, advetsdy affect- ed profits. During the year, Wilson Jones took signifi- cant steps to improve future profitability These included Ot1¢~ prOduCt c~mpanims Ir~hade SwingHng, maker of the world's largest I~1 Ilnlll arid host -known sta pier; wnsore Jonesl hlanu- lecturer O# I~sl.le4tf blhderS and col~mnae p~, pern~ Products mlkw of corrugated sl~rage boxes; Ind Of rex,the leading ddttributOr of oiflce produCtS in the U,K. discontinuance of low profit products and impm~ed pe~ chasing and manufacturing procedures. In addition, the compaw~ Ellzz~'th, New Jersey plant was sold, with operati~s Wansferred to more efiqcierlt facilities.In 1986, Wilson Jones will ix im~esting aggressiveb, in new produces as well as new ~ant and equipment. Wilson Jones' Penna Products subsidiary,, which makes corrugated boxes for storage and ~lipping of records, again posted record sales and operating profits. During ~he year, Perma mo~l production to a larger, more modern facliity in Dall~.% Tex'~. The Ofre~ Group, which is the leading distribumr of office Peoduc~s in the ILK, had an excellent year and set records in sales and operating income in smiling as well as U.S. dollars, Rexel, the lapgest cocap~ny in the Ofrex Group and the number one stapler manu- facmrer in the ILK., posted higher operating results ~r 1985 as it benefited from gains in office and art and graphics products. During the )'ear, Rexel successfully launched a number of new products and modumized ks manufre.~Usillg SaefiigleS, which should enhance future profir~bilit): E~sdight, maker of of~ce filing and storage products~ and Lawtons, a dis- trihuror ofindust rial prnduct~, had slightly lower operating profits, as did Rexel (Ireland). Ofrex Business Machines made further progress in developing as a major interna- tion~ manuazaclurer of paper shredders. Products that showed particularly good growth in I985 included Re.~[ s~aplers, N)lex folders, Cumber&nd pencils and Derwent color pencils and crayons.
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23 Swingiine, manufacturer of the world's largest selling and bes~-kncnvn stapler, aim ~s adveeaelp affected sluuggJ ish domestic demand for o~e products and supplim as well as increased foreign competition.The 747 and 767 full strip manual staplers, rb~ S'winJlne YO00 electronic stapler, and the premier line of Speedpoint sm~es all had good sales. A major manu- facturer ogcopying and col ~ing machines incorporated the YO00 in some of its equipment during the ycan Sales e( the 5000 and the 6gO0, another elect runic model also used with copying machines, should henefit in 1986 from their use in machines c( another major manufacturer. slw) adver rising and I~)moUOnal support~ uil ~/OdL~tS bearing the Jergens trademark pos|ed excellent unit volum galnsin lg85, Personal Care Products The Andrew Jeans Corn- DW is the pemonaI care pnx/ucts segr~-'nt of ?maeri- can Brands. In i985, Jergcns' sales r~se 10% to a record $1421 million and operating income increased 13% to $9.3 million.These ~rong gains, ~chiex~ in a highly competitive environment, reflect the compang's basic sffategy for long term growth--to capitalize on the svroeg Jetge~s beard nanm in hand lotions and soaps. Backed b v aggressive advertising and pmmotldnal support, all products hear- ing the Jergens trademark posted excellent unit volume gains ilt 198£These included ]ergens Lotiol~, /ergens Atoe & Lanolin Skin Conditioning Lotion, ]ergms Alo~ & Lanolin Ski~ CondiKoni~g Bar,/ergens M~Z soap, and ]ergens Lotion E~rwhed liquid gap. As a result of the gains achio'ed by these prod uc~, Jelgens increased its ~are of the h~rd/odon and soap markets. The eompanfs Camdian st~bsidia~' and its inter- naaloml dbqff~on also per- formed wcll in 1985 as the), too ben~ted from increased madmtiiag effor*s for Jergens product~.The SBS Products subaidiary, which produces industrial and i~stitudonal skin ctea~sers, was ath~ersely afi~ted by heacy indum'y employment c~tl~cks, Research and development of new and improved prod- ~ts continues ~ he a major Fgm~rit y While long estab llshed p~ducts did well, ne~ items intmduoed in the past five }ears also did ~vdl and accented for o~er 40% of i985's domestic sale~. f ~r _ JI
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24 butlon business had reco4~ sai~ and oper- atingincome in pounds starling for the yam~ Other specialty business- es include Aaushnat~ Rubber Diviskm, maker of natural and synt boric nlbber products,and Regal China, p~oducer af Bmmn~ truphy bonfires, Specially Businesses Our specialty, businesses in- dude Gallaher's retailing, wholesaling and pump and wive operations, Golden Belt Marmficturing Compar~ Acuthneth Rubber Divgion and Beam's Regal China subaldiar~ Reflecting strong imprc*~e- ment in the fourth quarter by the major operations, mainly Galhher's disrrlbu- tion and pump and valve businesses, this category ahowed ~sed oper~ result& Combined s~des rose 2% to $798.6 million, and openttthg income increased 1% to $26.6 million. Gallaber's distr~ution businesses in total had record sales and oputanng income for the year in pounds ster- ling and ~ere ahead in U.S. ddlars. Operations ocmsist of Fothuc~, which has 475 out- lets including newspaper, confectioner, and stationery. branches, and conveafience and *~ailety stores in the G K.;Tobacco Kiosks, oper- amr of 589 kiosks sdling to bacco products in large stores and 60 cffits own tobacco and confectionery shops; and May fair, the largest vending machiDe cornNny in the U.K. with over 47,500 on-site machines. Tobacco Sales, the company's wholesaling busi- ness in Nord~rn Ireland, had bwer profits due ro intense comFefifion. Galhher's pump and valve businesses achieved record operating income in pounds sm'ling and higher results in ~S. dollars. SauMers Valve congmund to perform ~vll, but operating profits of the Mono Group ll~ae adversely affected by rmr~niz~tlon oas~s at its Manchester tic- tory and a drought which hurt sales in Mric~ HP, the compaay~ Italian-based valve and plastic pipe Erring oper- ation, rebounded in 1985 wkh gains in sales and oper- aing p~6rs. In other specialty areas, Act~hnet's Rubber Division, manufieturer of predalon- molded natural and synthetic higher opecadng income. However, Golden Belt, which produces consumer pack- aging materials and cigarette- tipping, and Regal China, maker of Beam's trophy bot- tles and man.ficturer of lamp lxases, both experienced a decline in operating income.
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26 Results of" Operations 11)85 compared to 1984 Net sales of $7~308,311,000, a record, ii)creased $t13,124,000, or 5%.Tobacco pr~acts sales o($4,390,023,000 were up $161,053,000, or 4%. Domestic tr~oacco increased $17,812,000, or I%, as the effects o(higher selling prices and llne ex~asi~as were partly c~et by lower units. I ntera~tional to~cco increased $143,241,000, or 5%, as record sales in stealing, refleednghigher selling prices, a latgn portion of which resulted from excise tax increases, and higher units were pertly o(f~t by the effects O( translaf~a at lower average ~xchange ra~es. Hardware and security, w~ up $30,001,000, or 10%, due to the inclusion O( Prestige Group throng~aout 1985, in comparison with seven months of 1984, higher selling prices, unit increases and the introduction caenew peeducts. Disrd/ed beverages were up $3)330,000, or 1%, on benefits from the introduction of new products, higher selling prices and excise taxes, partly offset by lc~er units. Food paoduc~s increased $11,236,000, or 3%, from higher selling prices, new/mxlu~s and line exmns~ns, partly offset by lower units and the effects of translating Canadian sa/es at lower average exchange raEes. Office products were up $I,200,000 on higher selling prices, new products and llne extensions, partly offset by effects o(lower units, discontinued products and mmsOahon o(g~¢elgn sa/es a~ io~ a,~erage e~hange rate~.The Other segraent increased 7%; domestic businesses were up $46,275,000, or 14%, principally from higher Golf ang leisure products refletzing the May 1985 acquisition of Foot-Joy and higher Pet sonai care prcduc~s on price incre~es, new ptoduets and higher units; foreign busi- nesses were up 7% in sterling on price increases, partly offset by lower units, but increased only 5%, or $38,029,000, after translation at lower ~erage exchange rates. Operating income O($898,264,000, a record, was up $6,059~000, or l%.Tobacco products were ahead $22,903,000, or 5%. Domestic tobacco rose $25,833,000, or 7%, on im proved grc~ marg~m atmbutable to higher selling prices and manufacturing effacleades, partly offset by higher selling ex- pemes/dated to money-offcoupon promotions, in.rational rol~cc~ recoM results in sterling, up 8%, reflecting higher sales, slightly lower gro~ margin and higher advertising ex- penses, translated into a decline of 3%, or $2,930,000, due to lower average exchange rares. Hardware and security declined $~050,000, or 10%, principally due to lower gross margin for Pinkerton~ reflecting more competitive pricing ofrew h~i- ne~ in order to attain increased market share, partly offset by the indufion of Prestige Group throughout 1985, in com- pariaon with seven months of 1984. Distilled beverages were up $852,000, or 2%, on increased sales and improved g~ss margin, par tly offset by higher selling expenses. Food products decreased $1,108,000, or 4%, as higher sales and impIoved gross margin ~re more than offset liy increased marketing expense~ incurred to counter iiitense competitive activlt~ Ottice Wod~zs were down $16,724,000, or 50%, geirlcipal/y on lower gross margin reflecting ~le Incduc~ mix and an inventor3' write-down.The Other segment increased $4~034,000, or 6%, on gains for both domestic and tbreign businesses. Financial services rose $1,152,000, or I%, as ~ revenues were par t [y offset b" ~er expenses. (In millkms~ m Imern~ttonal v:bacco B Dome~t a: e,q~:o • Franklin Life Insurance Company ~ are no~ ir~l~ded ~ Franklin is a~amed for by the equity nmhod_ Operating Income $920 ~ I n~erraucr~al tot~eeo m Dcanef~ ~0ba~ 6~.7 ~ -¢,¢;0 I 4,62~ 3,7~ 2,77~ 1,8~0 925 0 76 77 78 79 80 81 82 83 84 85 805 ! 690 575 460 345 230 113 0 76 7~ 78 79 80 81 R2 8] 84 85 !
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Interest expense was down $1,501,000, or 1%, principally on lower domestic borrowings and inmrest rates.The change in "Other (income) expenses, net" is mainly due to gains on disposition of tobacco and office products properties. C~:po rate administrative e.xpemes were up $6,372,000, or 25%, on highec salaries and lehted fringe benefits, and Pa~essional and consulting fees. lncc~ae before taxes of $750,733,000, a recold, was up $4,523000, or 1%. locome ~ of $329,863,000 were down $2~227,000, or 1%, as effects of reducsion in the statutory rate cn foreign income and higher investment and other tax credits exceeded year's $6,600,000 credk rdami to the recomlxnatioa of lifo imurance pollcy reserves. Net income of $420,870,000, a record, was up $6,750,000, or 2%. See Pages 42 through 44 ~r a disoassion of the imtJact of inflation and changing prices on the Company's net sales and 1984 compared to 1983 Net s£es of $6,995f187,000 decreased $98,205,000, or 1%. Tobacco prodocts were down $187,917,000, or 4%. Domesdc t0bacco ~ $33,544,000, or 2%, ~s effects of lower unks were partly of~t by higher selfing prices, lra~rrational to- hac~o declined $I54,373,000, or 5%, as recoifl sales in slerfing, reflecting higher selfing prices, a large portion c£which re- s0/ted from e~clse tax irr.a'e~es in the U.K., were more than offset by effects of trans~ion at sul~tandally lower aver agc ~reign exchange rates. Hardwale a~d security xws up $56,902,000, or 12%, on iadusion of the newly acquired Prestige G~UP from June 1,1984 and price and unit in- Distilled beverages were up $~231,000, or 2%, mainly due to higher belubon units ~d price increases. Office prod- ucts vcele up $17,008,000, or 5%, on higher prices, increased units and new preducts, partly c~et by effects tff translating foreign sales at lower average exchange m~es. Food prndu~ increased $14,449,000, or 3%, on higher selling pt~e~ and new products and line extenslom, Pardy offset by unit do- cline~The Other segraent decreased slightly; domestic blm- n~ses were up $20,779,000, or 6%, on price in(-reas~ and trait gsms mmnly in Golf and Personal care Im~duc~s; foreign btlalnesses were up 10% in s~eding zs all companies benefited from peice and unit increl~es, but declined $24,657,000, or 3%, after translation at suhitandally Iower average exchange rams; Optical goods and servm:s' gshi in sterling was tena pered by unflvorable comperlsoa to tetr~pendve sight test fees received ~ the ILK. government in 1983. Operating income of $892,20~000, a record, ,~s up $41,007,000, or 5%.Tobacco products were ahead $3,239,000. Domestic tobacco rose $11,789,000, or 3%, on imprcr~l gross margins and lower marketing expense~, lntemation~ tobacco's record results in sterling, up 5%, translated into a decline of $8,550,000, or 7%, due ro substantially lower average foreign exchange rates. Hardware and security gained $ 4,634,000, or 1I %, due, in ~ to inclusion of Prestige Group. Distilled beverages were up $2,626,000, or 7%, on increased sales and improved gross margias, partly offset by higher operating expense~ Office products were up $2,510,000, or 8%, prin- ~pally on significant gains in Swinghne ar'A U.K. based oger- Food prnduc~s decreased $4,612,000, or 14%, as higher sales were ino~ than offset by lower gro~s margins and increased selling expenses incurred to counter ira_tense corn. petitive aedvic3~ The Other segment decreased $8,197,000, or 10%, on a decline in foreign businesses of $12,182,000, or 25%, principaUy on the unfavorable comparison in Optical gonds and servic~ ro ~ve sight test fees received in I983. Hnaneial services to~e $40,827,000, or 31%, re- fle~xing the acquialsic~a, in January 1984, of Southland Life I~suranoe Ca3mpany Interest expease increased $16,630,000, or 16%, due to higher borrowings and rates. lno~ne before taxes of $746,2 I0,000 ~v~ up $16,254,000, or 2%. Income t~x~ of $332,090,000 we~ down $7,568,000, or 2%, reflecrin~ in part, a redo~lion in the ~tatmotT rate on fondgn income and a $6~600,000 re~ ~cti£m ofdeferI~l ta.~s axribtmble to recomputation of life insurance pohey reserves as tequixed byTheTax Reform Act of 1984. Net income of $414,120,000, a rec~ was up $23,822,000, 6%. Quarterly financial data t985 Is~ Qt~ 2rid Qt~ ]~1 ~r. 4rhQ~r. Netsales $1,731.6 $1,626.3 $2,012.8 $1,937.6 Gross peofit 422.8 435.5 492.4 482.4 Net income 107.9 85.9 114.4 I12.7 Net income per Common shaxe W~thour dilution 1.88 1.48 2.00 1.98 Fully diluted 1.84 L45 1.96 1.93 1984 lstQa'. 2ndQtr. SrdQtr, 4tkQrr. Netsales $1,836.5 $1,677.7 $1,837.3 $1,643.7 Gross profit 438.8 432,7 443.0 427.0 Net income 106.7 95.I I06.1 106,2 Net income per Common share Without diluuon 1.86 1.64 1.85 1.85 Fully dih~d LSI 1.61 1.80 1.81
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28 Financial Review hrnJ~s Earnings per Common share amounted to a record $%34 in I985, compared ;,Ash $%20 in 1984. Resuks for I985 include the impact of an invenuz¢y wrim-down in the office products group and the ~'anslation of GaI]aher's sterling results at a bwer average exchange ta~e. Net income has incaxased in ten of t he p0~t eleven )~qrs. Dividends The quarterly dividend on Common stock was increased from 925¢ to $1.0125 per sham, ¢~'c't ire with the March 1,1986 dividend payment, raising the indicated annual rate flora $3.90 to $4.05.This ~ marks the 19th consecutive ),ear in which the Comn]on s~ck dlvidenc] has been raJ~ed and the 82nd consecutive year in which dividends have been paid to stockholders. Total dividends paid on Comn~cal stc~k in 1985 arnc~nrecl to $214,920,000, compared ~4th $204,377,000 in 1984. t~eferred stock dividends decreased to $16,754,000 from $18,029,000 as a result of conversions into Common stuck and purchases in 1984 of shares of $2.75 Preferred s~ck. The Common stock di~-ideod of $3.90 per share paid in I985 prc~;~ed a yield c£ 29% based on the year-end dosing market price. In the mn years ended Decemhex 31, I985~ the ),early Common dividend increased 191%, compared x,Ath 66% for the companies making up the Dow Jones Industrial A~,erage.TM Consmner tM,~ Index increased by 100% during the same period. Intent e befoo~ taxes i ] m~an~ taxes (In milaoo~ m N~in~Jn~e Earnings and dividends paid per Common share m Earn]tl~ ~r shal~ m Div~e~ds pay per share $300 70O 6O0 I 500 4OO I ]00 2O3 I00 0 76 77 78 79 80 $7.60 81 82 8~ 84 8S 0 76 77 78 7q 80 81 82 81 84 85
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29 Cash Flow 1985, compared with $476,719,000 in 1984.This amount ~ms sufficient to cover cash dividends to stockholders and capital expendkure reqshrements, while stiff prcMdthg $102,689,000 for geaneM ~ purpeees. Over the lx~ £~e Fears ca~h flow from oFeraion s has e~:eeded amounts required for divi- den& and capimal expenditures by $4/0,674,000.The ability m g~aerate cash flow continues to be an important consideration in the selection ofacqui~tlons. Nearly haheshe Company~ total assets of $4# billion are dasfified as oarrent, e,&lencing the Company's financial liquidity. Irtve~mdes of $1,~61,558,000 e~ meat dalx $230,898,000. Accounts receivable of $763,695,000 ,sere up $145,71~000 and turned over R6 times, or about e~ry 38 days during the ),ear. Working capital amounted to $773,439,000 a~ year-end, compared gish $729,889,000 in 1984. Cash flow frcrn the financial se~'ices seDment, which is not consolidated with that of the Company, amounmd to $359,t91,000, ~a'~pared with $318,63~,000 in 1984. With modest capital requirements, financial services paid $66,502,000 in dividends to its parent in 1985 and added $178,540,000 to its irr~estment portfolio, whleh amounted to $3,602,178,000 8t year-end. Capital Expenditures Outlays for capital improvement~ in 1985 tmaled $169¢¢89,000, compared with $163,908,000 in the prior year. The primary god of the capital expenditures programs is the c~antlnued m~ernization cglxxh plant and machinery in or*let to Fnduce *,he ~lghest qufftty prnd~t at the b-we~ /x~sK~ble rest. Capital e~penditures by business segmmts are shown on page 42.These programs w~ff be expanded during 1986, resulting in an increase in capital expenditures to an estimated $260,000,000. b~unds for these expenthtau~ are expected to be generated internalI~ Depredation and amortization in 1985 vv'as $110,208,000, compared with $102,860,000 i~ 1984.1 ~r,aee,,c ~ credits were $7,942,000 for 1985 and $~,740,000 for 1984. Cash/low, dividends mm Cash 8o,v from W,e~ians and ~pltal expmidltulrls" mm C~p~lcxp~ndlmres (l~ millm~ m Gash divkk-v~ "Finn kli n LRe Imu ranee Comparg~s cash f~w ts ~t included as Franklin is accoan~ f0r by the equity m~hod. Capital exp~dilum and dep~-,ck~'ion ft. mill~) m Capital ~itlu~s m ~pI~KaaIlOll aFit] ~i~atlon $$20 $200 ~25 260 ~" 19s 130 ~" 6~ ~- 0 7¢a 77 7g 79 80 81 82 83 ~a~ 85 0 7~ 77 ?g 79 80 ~1 82 8~ 84 g~
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7O" Debt Position and Unes of Credit In Fcb~ary [98~ £40,000,000 of 12% Euiosterling Notes due I995 were soN. During the ~r, ,~rrants to purchase $26,305,000 ~nci?~ amount of I1¼ % Eu[~odutI~r Not~ due t989 were exepcLsed, lea'4~ warmnLs outstanding to pur- chase $73,695,000 principal amoum.T~ proceeds from d~ese t~a~om ~vem app[~l ~ the ~nazcing ofex~ingbor- rowings and for odv~ corpo~te ~rposes. }~r-end, Ioag-rerm debt amoumed to $740,53~000, or 22% of e:z:l capi~izadon. Shot t-te=m herpowings at year-end, iz~ludlng current lx~6on of bng-~rm debt, amounted ~o $390,125,000, oom- Fared with $413,961,000 at the end of 1984. Total l~0owings a3~t nr~ to $1,130,660,000 at y~r-end, down $15,620,000 from last yea~This reduced deb(l~l ~as achi~'ed ~ nearly $70,000000 ,~s im~s~ in acquisidu~s. The translation of sterling obligations at a significant~ higher )~ar-end excha~ge rare ser*ed to increase the traaslated dollar carrying ~lue by $26,495,000.The r~tio of total dc~t to equity at year-end ,*~s 47%, down significantly from last paar's ratio of 55%. In March I986, $150,000,000 of 91/s % ~[ures due 2016 were sold.The proceeds will be used for general corporate, purposes, including the repayment of cutstandi n g fleeting ra~e debt, The Company maintains credit facilities ~'ith major banking institutions in the U.S. and other countries where it conducts bualnes& At year-end, the Company and Galhher had $937,058,000 ofshett-term lines of credk of which $696,021,000 was not being used.The Company also main- rains long-term revoMng credit lines totaling $800,000,000 with maturities through 1991. lnteres~ expense for I985 amoamed to $116,850,000, a decrease of $1,501,000 from I984.This change resu~d princi- pally fi~m dec~d average bormwing~ in the U.S., Iargely off- set by higher average inmrest rates and borrowings in the U.K. Inventories and total debt m Imentories (In millions) ~ roll debt 84 85 Total debt and mm Src<khclders' equity Mo~kl~[der~ equity" mTo~/&~ (1 n millior~l • Con,~r~le pre~red stocks ~d C~n n~'~l g~ckl-.dde~s' equity .7~) .79 .61 .~9 52 .~ .46 $0 .53 .47 $2'440 1,525 1,220 7 0 76 77 78 79 80 81 82 83 84 85
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Acquisitions ~nons we~ made in 1985 w I:¢oaden the prnduct lines ff ~-eei'Jl subsidiary companies. In May, Ac~net Company ac- quiied Foot-Joy, Inc., maturer of the leading line of gcffshoes and gloves. In November, Master Lock acquired Dexter Lock Company, manuthcturers of door lock sets and duc~ hardware. In January 1986, the Company acquired Bonny Products, Inc., a U.S. manufacturer and distribuwr ofldtchen u~ensi/s, w supplement the housewares line. In February 1986, Pinkerton's agreed w purchase the assets of BASIX Controls Systems Corporation, a basJ.ness specializing in electronic security s3~tems.The t or.al c~" of these ao~isitions is approximately $82,000,000. Companies acquired since the beginning ffshe diversifi- cation program in 1966 comnbuted $5,835,271,000 in sales and $487,611,000 in operating income in 1985, or 80% and 54%, respectively, of consnddated results Income taxes for 1985 amounmd to $329,863,000, a decrease of $2,227,000 from the prior year. This decrease was primarily ~fibmable w the effects of reduction in the statuary rate on foreign income and higher investment and other tax credits which exceeded last year~ $6,600,000 credk related to the reccmrimmion ~'life insurance policy reserves. U.S. federal oa:ise t~xe~ anaoanted to $464,774,000, or 28% of 1985 tobacco and distilled beverage sales. International toheoco cruise ta~es were $2,151370,000 and rqxesemed 73% ofinmmational tobacco sales. Social security and orix~r tax~s brought the Company's total taxes ro $3,064,288,000. ~.ommon St~=lltholaMe# Equity Common stockholders' equity at year-end was $2,378,063,000, an increase of $263,455,000, and ~rnounted to 72% of total ca#talization. Return on average stockholders' equity was 1 during 1985. Book value per Common share increased from $38.39 to $43.43 at the end of 198~ During the year, 636,359 shares of Common stock were purchased for the treasury at an ~rage cost cg$61.93 t~r -- share and 302,226 shares were delivered upon the exertase o~ stock options and the coir, zImon of securkies. At year-end, there ~re 2,641,908 treasury shares, an amount sufficient to cover sites deliverable upon conversion of preferred stock and exercise of~atstanding stock ~IXiC*s. Common stockholders' equity per share 546.~ 40.25 )4"50 I 28.75 I 2100 17.25 11.50 171 0 76 77 78 79 80 81 82 83 84 8f Quarterly Commn stock dividend payments lees I984 3/1/85 $ .975 6/1/85 .975 9/1/88 .975 12/1/85 .97._.~5 Total $5.90 Common stock prices 1165 ~ Hi# Low Ftrst 70 61% Second 69~4 63Ya Third 663A 54~A Foarda 68 53% payment Amotmt Date per Shale 3/1/84 $ .90 611/84 .9375 9/1/84 .9175 12/l/84 .9375 $3.7128 1984 High Low 6~ s3~ 57 52~ 62½ 54~ 65~ 60½ The Commo¢l smek is listed on the: New York Stock Exchange, which is the Prinall~l marimt f~r this securit~The h!gh and low prices ale as reported in the c~nsclidated transacuon repl~lng sy~eco.
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32 Consolidated Balance Sheet Deeem~ 3I ~tl~aNm Cash Acccurgs ~, oasmmers, k~s albwanc~ for d~00tmts, doubtfid acc~ants and returns,WS~h $~AI,~'~ 1984, $21,779 Invemork:s Leaf tobacco Bulk whisky Other raw mamslals, supgt~es and ~,~rk in process ~n~ i~]~ Total cunent assets 1985 1984 $ 26,1613 $ 29,190 763,695 617,980 $8~762 590~289 121,538 116~841 23T,025 227,630 417.233 385,838 t,361,5.!111 1,290,595 ~,741 61,J37 2,23'/,607 1:999~102 t,176,2118 1,100,286 Investme~ InThe Franklin Life Insurance Company ~, plant mtd equipl~ent Land, improvemems m land and Jez~c~ds Buildi.gs Maehlnery and equipme~ Conmm~on in progress Less ac~trrmlamd detueclatksn and amor tizati~a Intangibles multlng from business acquisitions Otlhelr ;ikliset8 Total assets 61,438 88,264 312,444 279,020 t,t03,701 929,9t5 40,994 46,936 1,518,577 I~314,155 717,482 634,048 801,095 680,107 1841,78'1 597,727 61).304 51,622 $4,~6,0S3 $4,428,844 See Stunm.~ of Significant Agcounting Policies and Notes A~companying Financial Smteraemrs.
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33 Amet4ean Beards, Iw- and Suimdlmes December 31 Current liabilities Notes payabte m banks Comme~ial paper Accounts payshle Accrued taxes Accrued expenses and other liabilities Cur~nt lx)r ftc~a of le, g-term deix Totui Curr~at I~aMIJes Long.tet:~ debt Deferred income taxes Redeemable prefe~ed stock $2.75 Preferred stuck, without par value, stated vaiue and mandatory redemption price $30.50 per share Convertible preferred stocks--redeemable at Company's option $2.67 Convem'ble Preferred stuck, withoat par value, stated value $30.50 per share $1.70 Convem~le Preferred s~ock, without Far vsh~e, stated value $20 per share Total conve~ible prefern~ stocks Common stockholders' equity Common stock, par value $3.125 par share, 57,392,506 shares issued Paid-in surplus Unrealized aplxeciati~ (depreciation} on investments in marketable equity securities of The Franklin Life Insurance Compaay F~fign currency adj~ments Retained earnings Treasury st~k, at cmt Total Common ~lders' equity 1985 $ 24,3t 189 138~744 264~S3 512,125 297,055 8j192 1,464~168 740,535 158,461 137,480 47,346 47,340 179,352 63,413 4,051 (264,t73) 2,509,537 (114,1t7) 2,378,063 1984 $ 231,745" " 61,530 206,117 411,718 237,417 120,686 1,269,213 732,319 122,498 137,480 52,155 371 52,726 179,352 64,530 (24,749) (339,521) 2,320,34I (85,345) 2,114,608 Total Iiabilitle~ and stockhuiders' equity $4,926,053 $4,428,844
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34 Consolidated Statement of Income and Retained Earnings For years ended December 31 Net sales Cost of F~xluct~ ~I set,Aces sctd Facise taxes on ~ sold Gross profit Advertising. selling and admi,~t rative ~wenses Equi~3, in pretax earnings ~ff The Franklin Life In.su~nce Company Operating income Interest and rdamd charges Cerporate administrative expenses Other (income) expenses, net Income bef(xa provisions for taxes on income Provisions for taxes on income Net inoonte Retained earnings at beginning of year Cash dividends deolared Common stock $2.78 Preferred stock $2.67 Cor0mrribie Preferred s~ock $1.70 Converrible Preferred stock Retained earnings at end of year Net income per Common sham Without dilution Fully diluted Dividends paid per Common share 19115 1984 1983 $7,308,311 $6,993,187 $7,09t,89_2 2,859,277 2,736,465 2,718,324 2,615,944 2,520,210 2,636,94~0 5,475,221 5,256,675 8,375,26~ %833,090 1,738,512 1,718,128 t,108,906 1,019,21~ 999,031 724,184 719,277 719,097 1"/4,080 -- 172,928 132,101 898,264 __ 892,205 851,198 t16,650 118,351 101,721 32,430 26,088 26,841 11,7491 1,886 (7,320) 147,531 145,995 121,242 750,733 746,210 729,956 32S,863 332,090 339,658 420j870 414~120 ]90,298 2,320,341 2,128,627 1,982,484 2,741,211 2,542,747 2,342,782 214,920 204,377 195,004 t2,397 13,215 I3,820 4,321 4,763 5,270 36 51 61 231,674 222,406 214,155 $2,509,537 $2,820,34I $2,128,62Z $7.34 $7.20 $6.76 7.12 7.03 6.89 3.90 3.7125 3.58 See Summary c~ Significant Accounting Policies and Noes Aconm}mnying Fina nci~l Statement&
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35 Consolidated Statement of Changes in Financial Position Amer n Brands, Ir .and Sul idiarles (In thousands) F~ years ended December 31 Sore of funds from operations Net income Depreci~ion and amortization Equity in undist rilmt~d earnings of The Franklin Life lr~ttrance Cornpa~ Noncurrent deferred income taxes From operations Funds provided (used) by operations Working capital, excluding short-term debt A~difions to im~erty, plant and equipment Dispositions cff~y, plant and equipment Other ~ opl~r~ians Effect of fo~elg. ~,~ha~ ~t~ d~ges o,1 ~ki~g opld Net |ntelrnal sa4arc4~s of funds Financing and investment activities Dividends to s~ckhotders Additional investment in Franklin (Decrease) increase in short and long-term debt Cost in e~ce~s of net a~sets of hesinesses acquired Net noneurtent a~se~ of businesses acquired Purchases of Common stock for treasury $2.75 Preferred sasck re'acquired Financing and ]~m~ activities (Decrease) increase in cash 1985 $420,870 110,206 (47,177) 19~951 502p852 (22,291) (1S9~89) 14,156 (13,792) (191~t16) 24,146 336,582 (231,674) m (42,107) (21,866) (4,3011 |39,411) (339,156) $ (2,577) 1984 $414,I20 102,860 (58,991) 18,730 476,719 93,t03 (163,908) 16,691 (2,577) (56,491) (35,660) 384,568 (222,406) (203,439) 105,732 (27,782) (19,049) (6,860) (12,894) (386,698) $ (2,I30) 1983 $390,298 99,I15 (38,438) 18,708 469,683 (66,340) (136,634) 19,253 938 (182,785) (23,329} 263,569 (214,155) 139,311 (136,540) (19,715) (24,912) (658) (256,669) 6,900 See Summary of Significant Accounting Policies and Notes Accompanyin g Enancial St~emen~
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36 Summary of Significant Accounting Policies Principles of ¢onsondaUon The eonsolid~r~ financial smements include the accounts of the Company and all subsidiaries other than The Franklin Life Insurance Company (and sul~liarles), a who0y-owned subsidiary, which is accounted for by the quit), method. Hscal year-ends ofcer tain subsidiaries of Galhher Limited range fiom September 30 to November 30 to fecilitam Gallahefs year-end closio~ Certain amotm~s in the consolidated IMance sheet as eg December 31,1984 ha~e been reclassified ~o conform to the 1985 presenmion. Inventories Imentories are priced at the lower of cc~t (avelage; fi r~x in, first-c~tt; and minor amounts at last-in, first-o~t) or market. In accordance with generally recognized trade practice, the leaf tobacco and bulk whiskey irwentones are dassifiod as current assets, although ~ of such i nvemories, due to the duration of a~ng processes, ordinarily will pot be sdd within o~e year. The la~-in, firm-out inventory included in the consclldated balance sl~eet is $1,690,000 in e.,'c~ s of the valuation repormd by a subsidiary for federal inccrne tax purposes, resuking from a revaluation of this asset to fair value ~t the date the sub'diary was lmrchased. Proper ty, plant anti ec~ipment Property, plant and equipment am carried at corn Dep~dat~l and amondzation am provided, pcincipally on a stndght-line basis, over the estimated useful lives of the assets. Profits or losses resulting from dispositions are included in income. Betterments and renewals which improve and extend the life of an mint are capitalized; maintenance and repair msrs are expensed. Intangibles I ntang~'bles resulting from business acquisitions, comprising hiaeds and trademarks and cost in excess of net assets of businesses acquired, are oomid~ to have a continuing value over an iedefini~e period and are not being amortized, except for mtangibbs acquired aft~ 1970, ,~hich are being amortized on a straight-line in.is over 40 years. AmordzatFoa of in- tangibles amounted to $6,743,000 in 1985, $6,343,000 in 1984 and $6,045,000 in 1983. Income taxes Provision is made For deferred income tames reiating to differences in the timing ccf recognialon for book and tax purposes of certain items, Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries, aggregating approxthmmly $462,t01,000 at December 31, I985, as such earnings are ~peexed to be permanently reinvested in these companies. The investment tax credit is aco~mod for as a reduction of taxes on income currently payable. Pension plans PetL4on expense, which is being funded, is demmlined by independent actuaries and includes am~tization of unfunded prior service costs, principalb, owx 40 years. nnl~7~ll i [
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37 Notes Accompanying Financial Statements Reorganization1 Pursuant to a plan of reorganizatfon, effective January 1,1986, .4~rican Brands, Inc., a New Jersey corporation ("American New Jersey"), which ~s the publicly-bald parent corporation for the American Brands group of companies, was merged in~ a subsidiary of American Brands, Inc., a Delaware corporation ("American Delaware"), with the result that the shares of slack in American New Jersey were cam'erred into shares of stock in American Delaware and American Delaware became the new publicly-held Paint cerporation for the A~n Brands group of companics.Tbe transa~on bad no effect on the financial sta~ement~ |nvestment InTIle Franklin Life InSurance Company Summarized finandal statements for Franklin are as follows: 1985 1984 A$scKs Investments Other assets To~ Reset ~s and liabilities Insumncx: rc~er yes and claims General Iiabilities Capiui Total (In tho~ands) $3,802,178 $3,423,638 1,01~k849 993,367 $4,621,027 $4,417~005 $3,267,946 $3,079,234 t76,818 237,485 3,444,764 3,316,719 1,17e,283 1,100,286 $4,62t,027 $4,417,005 1966 1984 1983 Revenues (In tboasands) ~¢lniums$577,183 $835,780 $180,072 Net inves~taent income 337,723 308,7S4 222,895 Other interne 8,481 13,731 9,375 923,387 858,267 582,342 Benefits paid or pravided soe,326 540,013 379,674 Ex~ 142,413 148,505 70,704 Net realized gains on i ra,es~menm (1,434) (179) (137) Fcd~al income taxes 60,401 55,047 47,463 80Q,708 740,386 497J04 Net income S113,s79 $I/7,881 $ 84,638 Divide~ igsid $66,1102 $58,890 $46,200 = Operations of Southland Life Insurance Company are included with thase of Franklin a~ ofJanuat7 1,1984. Pro forma information for the ),ear 1983 assuming ownership of Southland as of January 1, 1983, is as folIows: (In t br~sarsts. ¢~'~pt pec sha~e amee~mJ Fxluity in pret~x earnings of Franldin Equity in net income of Franklin Consolida~ net income Net income per Common share Without dilution Fully d[lutefi $159,428 104,803 400,t63 $6.94 6.76 Federal inc~ome taxes of Franklin for the year 1984 reflect a credit of $6,600,000 related to reduction of deferred income taxes resulting from recompu~ion of life insurance policy reserves as required byTheTax Reform Act of 1984. Undistributed earnings of Franklin, incIuded in consdl- dated retained earnings as of December 31, 1985, amounted to $327,13I,OOO. Urder thsumnce tax regulations, a portion of Franklin's accumulated smtutary income has not been subject to tax. Should the aggregated untaxed income exceed certain Pae- scribed maximums or cash dis'iderds to the Compaey exceed the accumulated taxed portion, the excess ~ld be subject to federal ir~ame tax. Taxes have not been provided on the un- taxed income, which a~regated $195,000,000 at D~_~mber 31, 1985 and 1984, since F~mklul does not contemphte distrib- uting such income in the ~reseeshle future. Acquisitions In May 1983, Acushnet Company acquired Foot-Joy, In% a manufacturer of gdf shoes, at a east of $86,897,000.Tbe cost exceeded the fair tulue of net assets acquired by. $21,666,000. On January 3,1984,The Franklin Life Insurance Company purchased all of the mmtanding Common stack of Southland Uffe Insurance Company at a cost of $385,077,000, of which $203,439,000 was contributed by the parent to Franklin. The cost exceeded the fair ~Ive of the r~t assets acquired by $96,673,000. Foreign subsidiaries The cotrsolidsted financial st~ernents include the following related to operations, principally in the Uul~ed Kingdom, of Galhher Limited and its sub~idiarics: t965 1984 198~ (In ittmsandx) Tand a~em $1,598,t84 $1,2t4,172 $1,280,074 Tt:~tal liabilkies t,017~419 799,421 782,733 Net sales 4,006,338 3,785,872 3,¢10,128 Operating income 167,117 161,001 174,6t3 Net incame 1~,517 85,260 91,074 [IFF1
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18 Notes cmtinued Foreign currency adjustments A nabff~s of changes in foreign currency adjustments is as follov~: 1985 1984 Balance at beginning of year Aggregate dlust mere from translation of f~reign currency financial smermnts and effec~ of hedging tramac~ns Income taxes related to hedging rransacfiom Bahnce at end of)ear hnk lines of credit (1 n daomands) $(339,5211 $(233,1101 73=016 (104,0701 2,330 (2~3411 $1264,1731 $(339,5211 At December 31,198~ the Company and Gallaher Limited had short-term hank lines ofcredk amounting to $937,058,000, of which $696,021~000 ~ unused. Long-term debt The comp3nents of long term debt are as follows: 1888 1984 IlVs% notes, due 1989 9~1% notes, due 1987 8 t/+ % notes, due I985 11% Eurodollar notes, due 1987 (b) 12% Eurosterling notes, due 1995 12 Vz % Sterling loan sg~ck, due 2009 11%% Euroduilar notes, due 1989 (b) Domestic revolxlng credit notes (a) Obli~oas under capitalized/ea.s~ Miscdlancous borrowings Less current portion Total Iln thmsands) $150,000 $250,000 150,000 I50,000 156,000 150,000 -- 114~034 100,000 100,000 57+808 43=3/16 34~776 26,305 34,0OO 20,100 17,55T 15,385 t8,901 18,710 746,727 853,005 6,192 120+686 $740,S3S $7t2,319 (a) Under domestic revdving credit agreement s, t he Com~ ny had at December 31, 1985 unused commitments aggregating $765,200,000, which exFdre 1986 through 1991; the interest rate is fiyed at the time of each borrowing. A commkment fee, tanging from ]/8 % ~o +/g % per annum, is paid oa the avexage unused credit.The Company, in the event that it becomes advisable, invmds to exercise its fights under these agreements m refinance $150,000,000 ofshort+erm notes payable; ae- coxdingty, short-term notes payable in this amount ha~e been classified as Iong-~rm debt. (b) In December 1984, 11% Eurodollar notes and 100,000 warrants which, through December 15,1987, entitle hdders to purchase $100,000900 principal amount of 1I V4 % Eurodollar notes at a price of 100% of their principal amoant, were sold. At December 31, 1985, ~wrants for the purchase of $73,695,000 principal amount of such notes had not been e~c4sed. Estimated payments for maturing debt and sinking fund requirements, during the next five years are as follo~: I986, $8,192,000; 1987~ $254,562,00011988, $3,892,000; 1989~ $179,478,000; 1990, $1,104,000. Capital stock The Company has 200,000,000 authorized shares of Common stock and 60,000+000 authorized shares of" preferred stock. Redeemable prefenQd stock Shares of the $2.75 Preferred stock issued and outstanding were 4,507,528 at December 31, 1985 and 1984 and ~007,528 shares at December 31,1983.The holders of the $2.75 Pre- fer red stock are entitled to cumulath,e dividends, to one- quarter of a vote per share (in certain events, to the exclusion tithe Common shares and other pmeerred stock issues) and to preference in liquidation over holders of Common s0~ck of $30.50 per share phs mwrued dividends. ~Vhenever six quar- terly dividend paymenm on such Profened stock are in defauk and until all such dividends have been laid, such holders (in addition to the right to ,~0te with the Cornmm stock and other preferred stock ~r the dection of directors) may vote separately as a class to dect two of'the directors then being ekct~.The Ctnnpm~ is required on each Malch 10 ~o redeem 3%, and has the noncumulative option to redeera an additional 3%, of the numher of shares of origbtal issue at a lake of $30.50 per share, plus accrued dgfidcnds.The 3% annual mandatory redemption araounts to 165,226 shal~s, or $5,040,000. previously reac- quired shares are sufficient to cover such mandawry redemp- tions through March 10, 1990.The Company may also redeem such Preferred stock on or after March I0, 1989, at Ixices haginning at $31.88 per share and declining to $30.50 per share on March 10, 1999, plus accrued di~+Jends.Them me aim certain restrictions agaimx the declaration or payment of dividends on Common stock or the acquisition of Common stock by the Company it'it is in defauk on any" dividends on the $2.75 Preferred, and the Company may not pay any divi- dends on Common stock c~ purchase or redeem any shares of Common stock or share~ of an)" present series of preferred stock if the Company ~s in default on redemption .payments on the $2.75 Preferred. Conve~ible i~re4erred stocks--redeemable at Company's option ~ares of the $2.67 Convertible Preferred stock issued and otmstanding at December 31, 1985, 1984 and 1983 were 1,552,328 sheies, 1,709,987 shares and 1,870,413 shares, re- spectleely.The bolde;s of $2.67 Convertible preferred stock
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39 Notes continued arc endsted to cumulative dividends, to three-¢enths c~a yore per share (in certain events, m the ~xclusion of the Common shares), m preference in l/quldsti~ over holders of Coramon stock cf $30.50 per share plus accrued dividends and to con- stock. Authorized hut unissued Common shares are reserved apon such conversions, hut treasury shares may be 1985, 1984 and 1983, 157,659 shares, 160,426 shares and 200,182 shares, respectively, were con- ~ redeem such Preferrnd stock at a per share and declining to $30.50 per share on plus accrund dividends. On October 9,198.¢, all the 8,209 shines of $1.70 Con- stock then outstanding were redeemed. During 1985, I984 and 1983, 20,377 shares, 3,472 shares and 5,143 shares, respechvely~ ofthu $1.70 Cortver dble Preferred • ock were converted into Common stock. qUnlt December 3L 1985. Changes in tre~ury shares and pald-in mrplus during the three years ended December 3I, 1985, ~ere as follows: Treasu ' shares SUl~US Paid-in (In t hoasands) 3ahnce~January 1,1983 2,227 $ 72,725 $63,409 Ptltchases 513 24,912 -- Delh~a,zd in con necrion with co~ of seoarities and ex~rdse of stock opr~os (296) (10,218) (769) Evce~s of sta~ed value over the cost of tha $2.75 P~ stock reacquhud -- -- I04 Bahrce, December 11, L983 2,444 87,419 62,744 Purchases t15 6,860 -- Delivered in oannection vAth comct~n c~ securidss and oerc~se ofst~k ~ (251) (8,934) ($70) ~ ofs~a~d value ~ the cog of the $2.73 Pt ofer red stock reaequired -- -- 2,35:6 Balan~, ~ 31,1984 2,308 88,345 64,830 Purchog~ 636 39,411 -- in connection wkh conversion of secathies and exermse of stock opti~ms (302) (10,639) (I,117) Balance, December 31, 198~ 2,642 $114,117 $63,413 Stock options The Stuck Option Plan author/zes the granting to key employe~ c~incentlve stock options and nor~alified stuck options to pmchase a maximum of 1,200,000 and 200,000 shares, respectivdy, of the Co~ Common stock at fiir market values at dates of grant. Options generally may not be e:andsnd prior to one year or more than ten years from ~he dare of grant. Stock ap~ation tights, which may be granted in conjunction with the grant of nonquaIified stock options, permit the optionee to zecdve shares of Common s~ock, cash, or a combination of thares and cash measured by tbe differ- ence between the option price and the fair market value of the Common stock at the time of ~xercise of such rights. Changes during the three years ended December 31,1985:, in shares under option, were as fthlows, Option Prices Shares Under option, at January I, 1983 $38.8125 and $47.3128 465,600 Optka~ granted $87.73 218,580 Oprlons ex~ed~ed $38.8128 and $47.3125 (99,700) Oprkms hpsed -- (7,780) Under op(m, December 31, 1983 $38.8125to$57.75 573,700 Options granted $61.78 to $63.0628 195,800 Optlons e.,am:ised $38.8128 ro$57.75 (84,000) Optiom lapsnd -- (16,600) Under optioa, at December 31,1984 $38.8125 to $61.0625 668,600 Opens grang~l $60.125 and $64.5628 227,600 Op(ionsex~rcised $38.8128to$61.75 (102,000) Options lapsed (21,680) Under option, at December tl, 1985 $38.8128 to$64.5628 772,580 At December 3I, 1985, options for 548,380 shares were exercisable, and at January I and December 31,1985, 531,400 ~mres and 325,450 shares, respectively, were available for future grants under the Plan.Treasury shares are delivered on exeocise of option~
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4O No~ continued P~nsion plans Tbe Company and. ir~ consolidated sul~dhrks have a number of lXaasioa plans cc0,'ering substantially a]l employees.The plans Im:~vi& for the payment of ~Irancnt benefits, ncrmsily commencing at age 65, and ~dso for the payment of cer~n disability and severance benefits. After meeting certain qualificatlol~ all employee acquires a vested F~ht to fmure benefit~The he-nefits payable under the plato are genendly determined on the b~sis of the emplopu~ length of service and earnings. Pension expense, including provision for prior ser- vice costs, was $59,227,000 in 1985, $59,315,000 in 1984 and $66,420,000 in 1983.Tbe decrease in 1984 pension expense was attrit~table to wanslation of the amount relatnd to Gallaher Limhed, at a lower average foreign e~ehange rate and changes in ac~afial assumptions in plans of certain subsidiaries. The actuarial present value ofaccumulatnd ]~an benefits, which is based on assura]yaons different, in cer rain respects, from those used for the Plans' fimding requrrements, and net assets fcr defined benefit plans as if January 1,1985, the most reoent valuation d~re, and January 1,1984, are as fol!o~x~: 1985 1984 (In thomnds) Actmrlal gseser~ ~ue of accumuhted F/an benefits: Vested $482,827 $456,990 N~nv~ted 23,274 29,372 Total $-~5,~t $486,t62 Net assets available f0r benefits S41~1,178 $469,947 The weighted average of the assumed ~ of return used in determining the actuarial present value of accunml~ed plan benefits was apprc~lmardy 8.6% ~r,1985 and 1984. Benefits and net assets of foreign subsidiaries plans are nc~ included •hove as such phns are fully funded and not suffFct to the Employee Retirement Income Security Act. in.too taxeg The components ca'income before provisions for ta.~es on income are as foUows: 1985 1984 I981 (In thoa~nds) Domestkoporations $407,580 $595,189 $561,296 Fordgnopurat~ons 143,144 151,021 168,660 Tood I~'so,753 $746,210 $729,956 The provisions for taxes on il~come are as follows: 1985 1984 1983 (In t hat~rds) Cur rendy pay'~le: Federal $218,373 $212,146 $215,548 ~gn 48,28Q 45,020 87,151 Other ~,,49S 17,600 34,742 Deferred: Federal and other 23,103 25,684 22,5 [ 5 Foreign 4,80a 11,670 9,502 Total ~II9,~163 $132,090 $339,658 A reconCdiat fon of the provisions for taxes on income at the 46% federal statutory income tax rate to the tax [axMfioas as reported is as fotlows: 1985 1984 1983 (In thou~nds) Pm~Dns computed federal ~toatory income tax rate $345,237 $141,257 $135,780 Other income t~xes~ net of fede~l tax benefit t8,627 20,304 18,761 For6gn income taxes at ute (lower) higtlec than federal statumt3" rJtc (8,018) (3,t61) 7,643 U.K. s~ck rdlef mx • xedits -- (3,746) (11,655) Lo~er effective income tax rate for life thsu rance companies (18,S46) (I7,900) (9,613) Tax reduction on recalcuhdon of lhee insurance policy rese~s -- (6,600) ] Investment tax credit~ (7,g4.21 (8,740) (4,283) Other 405 5,876 3,025 ~m as repurted ~29,863 $332,090 $339,658 The provisions for deferred income t~xes relate ro the following: 1985 1984 I983 (In thr~ard~) ~iation $13,922 $17,085 $15,352 Insurancc oper~ions :13,316 12,892 15,162 (kher (9,23;!) 7,349 1,503 Total $2~8,006 $37,324 $32~017
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l 41 Notes conan.nd Lease comm~ments Future minimum lease Psymems under c~l leases together with present ~lue ufnet minimum lease Ps~lents as of December 31,1985, are ~ fo]lowz: (In tbut~aods) 1986 $ 2,946 1987 2,440 1988 1,987 1989 1,741 1990 1,387 Remainder 91,365 Tond minimum ~ payments I 01,866 Less amount repretenting imere~t 84,309 Present value ~'net minimum lease payments $ 17,557 Future minimum rental payments under noncancalab/e operating lewes m uf I)ecemher 3I, 1985, are as follows: (In thoamtds) I986 $ 27,108 1987 2t,805 1988 21#67 1989 19,012 1990 16,920 Remainder 102,503 Total minimum rental gaynxm~ 210,818 Less minimum re~t~s ~a be recub'ed under noncancelable subleases 12,181 $I98,634 Total rental expense for all operating leases (reduced by minor amounts from subleases) an~ounted to $35,417,000 m I985, $31,301,000 in 1984 and $30,295,000 in 1983. Information on business segments The Company and subsidia~es operate pdnalpslly in the following industry, segments: Tobacco products includes dgaretms and smoking tobaccos manufactured by aM~aeriaanTobacco and GaJlal~er and cagars manufactured by American Cigar and Gal/aher. Hardwaie and security includes locks manufactured by Master Lock, stapling and fastening equipment manufamnvd by Swingline, incande~cemt lamps, cutlery ~nd riveting prod- ucts manufactured by suksidiaales c~'MCM, the se,urity and im~:stigati~ ser,r~s prc~'ided by Pinker inn's and housewam products manufactured by Prestige. Distilled beverages includes products produced by Beam. Food products includes crackers, cooMe~ and snacks martu- factored by Sunshine Biscuits and cocktail mixes manufactured by a subsidiar~ of Beam. Office products includes office stationeryq supplias, and iitfonnation storage and retrieval s~tems manofacmred by Wilson Jones and its divisions, and products of Swingiin~ and subsidiaries of Gallaher. The Other industry, segment principally consists of golf and leiaure products of Acushnet, optical gtxxts and services of Cedlaber sulrgdiaries, personal care products of Jergens and the spedalty businesses of retailing, wholesaling and pumps and valves of Gal]aher sol~idiaales, rubber products of Acushnet and the oper~ions of Golden Belt. The operatingincome of Franklin and Southland is rcportnd as "l~mnalal services." The Company operates in ~e United States, Europe (pritx6pslly the Unknd Kingdom) and other areas (principally Canada). Net sales and operating inconle for the years 1985, 1984 and 1983, and identifiable assets for the mlamd year-ends by indus- try' segments and by geographic areas, are shown on page 48. Reconciliation of identifiable a~sers to consolidated total assets is as follows: 1985 1984 1983 (In t[)o~andaJ Idcntifi~bie resets $3,732,228 $3,308,326 $3,407,371 lm~estment in Franklin t,176,263 1,100,286 839~869 C~porate 17,562 20,232 56,634 Total s4,926,053 $4,428,844 $4,303,874 Depreciation and amortization by ieduslry segments is as follows: ~9115 1984 1983 (In tb~t~nds) Toba.xupttxlaL~a $ 36,94t $ 35,365 $)4,094 Hardware and sccuriw t3,258 11,812 L0,217 Distilled beverages 13,659 14,410 I 5,748 Food pmduc~s 10,658 9,720 8,857 Office pludut~s 9,092 8,647 8,630 Od~er 26,600 22,906 21:869 Total $110,208 $I02,860 $99,115
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42 Notes continued Capi al expenditures by industny segments are as ~llows: 1985 1984 1983 (In t l~ndO Tohaccoprodu~xs $ 62,456 $ 63,$43 $ 60,394 Haidware and s~urity 16~8 9,171 5,599 Distilled beret ages 14,588 16,403 12,292 Food prnducts 18,t71 18,410 16,614 Office l~toducrs 13,635 14~320 9~026 Other 43,81 t 42,06 i 32,709 Total $169,489 $163,908 $I36,634 Supplementary profit and loss information Supplementary piofit and loss information is as follows: 1985 1984 1983 (In thimsands) Fndecal and foreign ex~se mx~s ineIuded in ~et sales: Domestic ~bacco $ 3S5,~2 $ 373,953 $ 410,346 Tnterna0onaI tobacco 2,t51,170 2,038,786 2,142,646 Distilled hex~eraga$ 108,832 107,50I 103,948 Total $2,615,944 $-2,520,210 $2,656,940 Research and de~loprnen~ expense $18,661 $18,t82 $17,378 "Other (income) expenses, net" in 1985 includes an agg~- gate gain efiapp~ximately $4,000~000 on the sale of tobs~_a:o and office products properties. Operating income in 1983 includes a net benefit efiapproxi- matdy $14,000,000 related to retrospective sight test fees mcelved £rom the ILK. government by Gallaher's optical ser- vices companies. Eacnir4s per share Net bscome per Common share wkhout dilution is based on the weighted average nurcher of Common shares outstanding in each year and after preferred stock di~4dend rtxluiremevcs. Fully diluted net income per Comn~m share assttmes that any convertible preferred shazes o~tstanding at the beginning of each year were conver~d at those dates, with preferred stuck dividend requirements and outstanding Common shares ad~sted accordbsgl): It also assumes that outstanding Common thates were increased by shares issuahle upon exercise of those stock options for which market price exceeds exercise price, less shares which could ha~e been purchased with rdated proceeds. Pending litigation The Arneri~n TohacctJ Compeny subsidiary and other toL~.'~o manufacturers are del~mdants in ~rious actions based upon allegations that human ailments have resulted from mhacco use. While k is not possible to predict the outcome of pending llrlgation, management does not believe that the pending actions wiil have a material adverse effect upon the finaocial condition of the Company and such actions are being idgomusly clefe~ded. Financial reporting and changing prlce~ (unaudltedI The fo owing information presents a supplemer~ry cunent cost income computation that mmsttres the effects of changes in the specific prices of inventories and ptoperry, Fhnt and equipment use8 hy the Company (current cos0.The results shown under this supplementary, computation are, m best, an imprecise rc~asurement of the effects of inflation and t he~efiore are not necessarily indicative of the present or future eco- nomic condition of the Conl, npa t~: Con~31idated statement of income and other data adjusted for effects of changing prices are as follows: 1985 Historical cost Oar t~at cost (In thottsaads) Net sales $ 7,308,3 t I $7,308,311 C~t of lx~l~s and set vices sokl 5,403,428 5,432,628 Op~aOng expunses 1,070,491 1,070,401 Dept eeizti~ aM ar~)izization 110,208 147,689 Equky in pre~ax earning~ of Franklin Operating income I ntere.~t atad related charge~ Other cxFenses, net Income before provision for Provision for ra~es on income Net income Incre~e ~n tm~s]a~ed valne of l~reign currency net assets Gain firm dec0 t~e in purchasing IX~,cr of net monetary items Inventories Ne: p~lzer q', plant and equipment 6,584,127 6,650~808 724,184 657,503 174,080 174,080 898,264 8ti,583 116,850 116,850 30,681 30,681 147,531 147,53l 750,733 684,052 329,863 329,863 $ 420,870 $ 354,189 $75,t48 $I20,288 867,$91 $1,361,558 $1,334,546 $801,095 $ 1,125,419
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43 Notes continued The increase in general price level oflnven~rlas and net property., plant and equipment over increase in specific prices an a current cost basis amounted to $141,449,000 and mmprises the following: Total Imvr~ries equzgment (In rlmm*o~) Increase in general price le~ $109,569 $ 59,029 $50,540 {Decre~e) inerea~ in specific prices(31,880) (57,964) 26,084 $I41,449 $116,993 $24~456 The concept of current cost is ~ upon the a~sumptabn that the Company, at current costs, produced or purchased the mine imentorles and acquired fixed ~asets of exactiy the same service pommia[ as were owned at the end of the yean Current cost for leaft~acco, bulk whiskey and te.lated comportents included in raw mamtials and finished products is based upon la~est available prices at December 31, 1985~ for comparable quality" and quantities at terms at which the Company normally purchases these items. Overhead relied to the duration of aging ~s of these inventories is adjusted to curmx cost The historical cost of the remaining inventories is generady equi~'alant to current cost. Invenmey values reflect adjustment IN- depression based on estiraaed cttrmrlt cost of fred assets. Current cost indexes were applied to ~bstantially all fixed a~ets.These externally published indexes are based on actual cost incurred for typical machine~ and equipment used in specific industries and industrial plants located in pamcular geographic areas. Construction in progress is included at his- ~rical cost.The Company believes that the result achieved is a reasonable appmximatic~ of the current cost of ks productive assets. Cost of pradnccs and ~awices mid and depreciation and amortization under this supplem~ comimaion were based on invenwry costing methods and depreciation rates and methods used lbr historical finandal reporting. Free year coraparlson of selected data expressed in average 1985 constant dollars is as follows: 1985 1984 1983 1982 1981 Nee sales Ctlrrent cost: Net income Net income per Common share Net ~ssetx at year-end Increase (deexea~) in translated value of forelgn currency net assets Gain from decline in pam~asing p:)wer ~ff net monetary items Other inKxmakm: Increase in general l~rce level ofinvenmrim tr, cre~e in ~:i~¢~and oe( pmlmrty, tit and equipment c~cr Dividends Did per Common share Common stuck pFtce ar )xar-eald Average Consumer Price Index ( ] n milllons, e:ax~pt per slxar~ *tmo~r, rs) $7,3o8.3 $7,247.0 $7,660.9 $7,246.6 $7,734.7 354,2 339.2 312.3 283.4 313.7 8.t3 5.82 5.31 4.73 5.28 2,$97.2 2,649.7 2,753.6 2,818.2 2,950.2 '1110.3 (148.0) (72.5) (139.7) (181.0) 67.6 63.2 63.7 69.2 160.9 141,4 58.1 64.7 33.2 65.4 3.90 3.85 3.83 3.90 3.80 64,94 65.60 62.92 50A5 42.08 322.2 311.1 298.4 289.1 272,4
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44 Notes concluded In concept, constant dollar accoundng ~es the effects of ganend inflation by restating historical ddlar costs of inven- tories and Imapexty, plant and equipment into dollars having the same purchasing power.The Company measures a signifi- cant part of its operations in functional currencies other than the U.S. ddlanThe United Kingdom Retail Price Index w~ used ~o restate British pound sterling amounts into consxant foreign fimctional currency before tmnaludng those amounts into U.S. doUars.Tbe Consumer Price Index for all Urhan Consumers ("CPI-U') ~ applied to the remaining values. Application of tbeze indexes to the historical values of mon- etary assets and liabilities attempts to show the purchasing power gain or loss from holding net monetary, items during an inflationary period. Man~ent's analysis of changing prices information foliows: In estimating net income unde* the current cost meth~xl, a41ust merit s have been made to historical amoums reported for ccat of products and services sold and depreciation and amorti- zation. Spudfie prices the Company would ha~e pald to pro- dune the imvnames mid would, he~ increased ~st of sales $29,200,000, or less than 1% over historical cost.The tignifi cant upx~rd re~umfon of proper t3~ plant and equipment arising liom replacing historical costs with those measured by specific prices increased historical depreCmdon and amorti- zation by $37,481,000. Under current cost, net income would have been $314,189~000, or $6.I1 per Common share. In accordance wish the requirements, the pm, dalon for taxes on income was not adjusted to reflect any effects of infla- tion. Since taxes are based on his~orioai income rather than economic gain, the tax burden is often greater than statumrT rate~ indioare. Consequentiy, the effective income tax rate for 1985 of 44% under his0arical cost ~muld have increased to 48% under the current cost method.This shows that under existing tax laws inflation makes k increasingly difficuk f~ afrertax earnings to be suffaciont to replace assets, provide a fiir return to stockholders and genemm cash required for growth. In determining gain or loss from holding monetary, items during an inflationary period, inventories are tre~ed as non- monetary assets, and redeemable preferred stock ks considered a monetary Iiabigty.Therefore, the $67,591,000 gain from decline in purchasing tx~r of net amounts owed results from an excess of moneeary llabilkies over mone~£ mse~ When prices are rising, monetary a~ts line purchasing power since a gg~en amount of dollars buys less at the end of a period than at the beginning of a period. Conversely, monetary liabilities gain purchasing power since dollars of ksser vahie are used to Saris fy obIigatlons. The increase in the values of the Company's inventories and proper t~; plant and equipment adjusxed for general inflation as compared m the specific prices at which the Company esti- mates k could replace these assets indieams that general inflation e:~:eeded current coat by $141,449,0 OR The comparative infixmudon shown in the fi~e-year sum- mary is stated in dollars of appmximaely equal purchasing power as measured by the CPI-U. Average 1985 ddlars were used as the base year and, accordingly, amounts of prior yeats have been increased to reflect the loss of gmeud purchasing powe~ Net sales as reported in historical driers increased from I981 to 1985 at an annual compound gro~xh ra~e of 3%, wbeteas, under the constant dollar concept, sales would ha~e decreased 1%. Common stock di-ddeMs paid on an historical basis increased at a compound annual rate of 5% since I981 and kept pace with infladon.Tbe market price per Common share increased over the period, in terms of average 1985 constant dollars, at a compound annual rate of 11%, compared to I6% in actual dollars.
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45 L licrt of Independent Certified Report o£Management Accountants To the Board of Dire~xors and Stc~khoklers of Americ~n Brands, Inc.: gvT~ have examined the comolidamd balance sheet of American Brands, Inc. and Subsidiaries as of Decemher 31, 1985 and 1984, and the ~ consolidated ~nts of income and retained earnings and changes in financial position for the years ended December 31,1985,1984 and 198~ Our exam- in.rlons were made in accordance with generally acceffed auditing standards and, accordingly, indnded ~ch rests of rl,e accounting records and ~('h other auditing procedures ~a we considered nece~ary-in the circumstances. In our opinion, the aforementioned finandal aamnmts present fairly the consolidated fmanchl po~ition of kanerican Brands, Inc. and Sut;ddiaries at ~ 31, 1985 and I984, and the consdidamd results of their q0eratmm and changes in their financial position for the years ended December 31,198~ 1984 and 1983, in conformity with generally acce~ account- ing principles applied on a consistent h~sis. 1251 A~'enue of the ,thllericas New Yofg, New York 10020 February 3, I986 To the Stocldloldeas of American Brands, Inc.: We have Prepared the consolidated balance sheet of Amerlcan Ba'ands, Inc. and Sul0ddiaries as of December 31, 1985 and 1984, and the related consolidated s~ ofinmme and retained earnings and changes in financial position for the years ended December 31~ I98.~ I984 and 198~ The financial statements have been prepared in accomhnce with generally accepted accounting Fdnd#es. Fmancied infom~ticn else- where in the Annual Relx:ct is consis-,en~ with that in the fimncid statements. The system ofinternM contmis of the Corap~ny and its subsidiaries is designed to pr~de re~omble assurances that the fimndal records are adequate and can he relied upon ~o provide inf~madon for the prepat'auon of financial stamments and that established policies and procedures are carefully followed. Independent public axxxmtants ~tre dected annually by, the stockholders of the Coml~ny m examine financial statements. Cacpers & Lybmnd, independent certified public a:ccuntants, are currently engaged ~o perfecto suck ew, minamn.Their examination is in aomrdance ~4th g~merally accepted auditing standards and indude~ ~ of'transactlons and selective te~s of in~n,M accounting commls. The Audk Commirme of the Beard of Directors, consisting sdely of outside direcmm, meets periodically with the inde- pendent !mblic accountants, in~rnal auditors and ~nt to review accounting, auditing and financial reporting matters. The auditors have dirca access to the Audit Commitme.
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46 Eleven-year Consolidated Selecxed Financial Data ( 111 ~t~ls, ~ept p~ share ~ount s) 1995 1984 1983 1982 Operating data ,'Nlet sales $7,206,311 Gr~s profiz 1,833,090 Operating income 898,264 Interest and nd~tnd charges116,850 Income before ta~s 750,733 Taxes on income 329,863 Net ineofllc/z) 420,870 Per Common share~ Without dilution 7.34 Fully diluted 7.t8 Di~$dends paid per Comn~n share 3.90 Average Common shares outstanding during "~ar 56,091 Divldends declared Common $214,920 Preferred 16,754 Added to retained eardin~ 189,196 Balance sheet data I m'entories $ t t3G1,558 Current ~ssets 2,237,807 xc~brking capital 773,439 Propecty, plant and equipment, net 801 #95 Total assets 4,926,053 Short-term debt 3911,125 bag-term debt 740,S3S Redeemable preferred stock 137,480 Comer tible preferred stocks 47,346 Common stc~ldaolders' eqdity 2,378,063 Book ~lue per Common share 43,43 Capital expenditures 169,489 Number of Common stockholders(~/ 99 $6,995,187 1,738,512 892,205 118,351 746,210 332,090 414,120 7.20 7.03 3.7125 55,045 $204,377 18,029 191~714 $1,290,595 1,999,102 729,889 680,IO7 4,428~844 413,961 732,319 137,480 52,726 2,114,608 38.39 163,908 101 $7,093,392 1,718,128 851,198 101,721 729~956 339,658 390,298 6.76 6.59 t.55 54,921 $195,004 19,151 176,143 $1,381,786 2,142,699 792,758 673,909 4,303,874 446,525 602,696 152,730 57,689 2,027,458 36.90 136,634 107 $6,504,961 I,$72,407 781,842 I21,235 668,794 287,554 381,240 6.85 6.38 3.50 55,111 $192,797 20,477 167,966 $1,400,730 2,048,634 787,I04 661,457 4,040,332 378,939 534,557 153,492 63,917 1,924,891 34.89 147~036 110 !/I See pa~es 25 through 31 for Financial Relrie~; 1211975 i i/eludes extraordinar~ gain ot"$8,501.(10¢, or 17 cents per Commc~l ~tare ~t ith~t t d u ion, aM 15 cents l~er Comn~n share rally dilurcd. {I On January 3I, 1986, tJlere ~ere 93,¢22 Common stockholders of record Ill
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47 and S~iar~ 1981 I980 1979 1978 1977 1976 1973 $6,538,161 1,502,146 783,340 135,519 604,997 218,870 386,127 6.68 6.46 3.2128 54,446 $174,953 22,676 188,498 $1,451,341 2,159,972 766~880 669,387 4,133,024 477,544 573,562 I67,980 73,767 1,825,962 33.32 161~183 114 $6~801,456 1,498,634 761,026 113,242 628,509 280,616 377,893 6.80 6.20 2.95 54,274 $123,998 17,999 235,896 $1,438,583 2,I85,498 816,993 639~046 4~024,170 435,545 536,102 167,980 98,520 1,783,485 32.31 187,744 114 $8,845,988 1,303,168 669,812 99~944 556,799 223,441 t33,358 8.74 5.40 2.3125 53,418 $160,356 32,601 140,40I $I,360,418 1,966,133 728,085 535,933 3,716,759 435,942 533,484 167,980 167,227 1,480,032 27.82 122,521 117 $5,I76~706 1,128,821 501,177 71,907 419,193 211,294 207,899 3.90 3.76 1.8125 82,424 $95,214 3,675 109,010 $1,260,613 1,766,032 739~889 479,680 2~918,928 425,333 396,477 32,832 1,323,598 24.94 100,623 12l $4,616,390 1,022,457 437,662 66,599 358,200 184,016 174,184 3.23 3.13 1.49 52,119 $77,661 4,720 91,803 $1,279~644 1,730,554 798,925 439,930 2,837,254 424,785 549,680 62~706 I~I76,348 22.60 74~209 123 $4,125,837 956,825 405,758 67~033 321,601 165,309 156,292 2.94 2.80 1.40 51,269 $71,668 5,511 79,113 $1,I69,097 1,520,034 827,181 403~519 2,405,I80 288,770 520,067 I 69,489 1,049,469 20.12 61,380 126 $4,055,313 898,077 388,641 78,94t 309,430 162,425 155,506 2.95 2.82 1.34 51,224 $68,623 4,424 82,459 $1,116,367 1,478,279 800,685 404,700 2,375,531 308~662 564,016 73,388 989~946 19.36 68,509 I28 m
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48 Information on Buff ness Segments ) (I n mili~s) t985 1984 1983 1982 1981 1980 Business by Industry segments Net sales Tobaoco products $4,350.0 $4,229.0 $4,416.9 $4,196.4 $4,183.1 $4,298.5 Hardware and security 569.2 519. 3 462.4 [ 73.5 194.1 183.6 Distilled beverages 249.8 246.4 241.2 227.3 210.7 189.3 Food products 507.0 493.8 479.3 469.9 560.8 535.9 Offace products 336.7 335.5 318.5 312.8 255.5 226.4 Other 1,255-5 1,171.2 1,175.1 1,125.i 1,134.0 1,367.8 $7,308.2 86,995.2 $7,09t.4 $6,505.0 $6,538.2 $6,801.5 Operating income Tobacco pooducts $519.6 $496.7 $493.5 $464.0 $437.9 $439.1 Hare'ware and seoarity 43.4 48.4 43.8 26.7 38.2 36.9 Distilled beverages 40.2 39.3 36.7 32.6 30,6 26.6 Food ixoducts 37.4 28.6 33.2 32.1 35.0 28.1 Office products 17.1 33.8 31.3 25.4 38.8 37.2 Other 76.5 72.5 80.6 71.3 68.8 75.0 724.2 719.3 719.1 652. l 649.3 642.9 [qnancial services 174.1 172,9 132.1 129.7 134.2 118.1 $898.3 $892.2 $831.2 $781.8 $783.5 $761.0 Identifiable assets Tobacco products $1,647.5 $ I,419.6 $1,620.1 $1,633.1 $1,663.6 $1,748.8 Hardware and security 458,2 422.9 341.9 179.7 204.1 197.9 DistiUed beveeages 259,5 259.3 245.5 244.6 231.7 210.I Food products 178.1' 174.8 167.2 158.7 242.0 236.9 Office products 427.5 420.3 420.7 411.3 409.3 286.5 Other 760.5 591.4 612.0 566.5 611.9 608.0 $3,732.2 $3,308.3 $3,407.4 $3,193.9 $3,362.6 $1,288.2 Business by geographic areas Net sales Uni~d States $3,150.0 $3,064.9 $3,048.1 $2,525,2 $2,562.2 $2,442.1 Europe 2,630.4 3,704.8 3,826.1 3,828.1 3,844.6 4,235.8 Other 227.9 225.5 219.2 151.7 131.4 123.6 $7,308.3 $6,995.2 $7,093.4 $6,505.0 $6,538.2 $6,801.3 Operating income United Stat~ $551.4 $550.5 $536.0 $486.0 $473.8 $447.8 Europe 163.3 156.l 170.9 158.1 163.8 183.6 9.5 12.7 12.2 8.0 11.7 11.5 724.2 719.3 719.1 652.1 649.3 642.9 I~nancial services (Unlted States) 174.1 172.9 132.1 129.7 134.2 118.1 $868.3 $892.2 $851.2 $781.8 $783.5 $761.0 Ide4tUflable alambs Unitrd States $2,059.8 $1,995.1 $2,043.1 $1,821.5 $1,876.2 $1,824.7 Europe 1,565.7 1,201.0 1,249.6 1,279.1 1,404.0 1,394.2 Other 105.7 112.2 114,7 93.3 82.4 69.3 $3,732.2 $3,308.3 $3,407.4 $3,193.9 $3,362.6 $3,288.2 (t) See page 41 for further information on htslness segments.
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49 Major Companies of American Brands, Inc. I ACushnet Compaily M~ nu~crarer/dist nbat~ oi 77t/d.~ and P~de ~kt'pm,l.~; a~d acces~r;es; B~//~ Eye pur~m; tN: Tidc~tt C~cI~ r~ ~ app~ev,I; an~ F~ot-]o~, tbe rm=.iet line Rubber [~',;sion m~ke~ ~rec ~,-n,old~ namvJ and 5ynr/~ie r u~er p~. [98+ Sale~_ $2048R~000 John~ LUdest Pmstdent and Chief gxecttfi~ Oi~r The Franklin Life insurance Oompany Offers a l'arlety ofindlv~u~J lxll~ies, amlxiti~s ~ g~s9 it~raace ~. mer ~,~r, Br~' lr~ SOl~hland Lit~ l~ra~ Com/~ subs~iary is a fuU line life insurance compar, j s~li~.ing in g]~,up Life ~ rut he,Jr h insur~,,,¢e aJ~ un~ersaJlife policies Combined insurar~e in fon-e ~ i'e~r.er,d ,,.~ $310 bill~. 1~ and Ch e f gxecu~we O~x The Alnerl~n Tobacco COmpany Brar~ include Ludy Strike, Cadton, Mal/and Tarcyto~ ci m ,~e[l Cigar ube~ iar~N b~ ind~e Anto~to y Chopa~ra, Roi Tan, La Corona Wbt~, 4meri:au b~c~¢s a~xl Cam Situa ~av~k~ng mbao.,~ i*~lude Sail~nd Flying Du~'bmon Th~,m~ C l~ys + James B. Beam Distilling CO, F'~,~ee+ ]rm/leem, INe I~'~es~ sctli~ N~ r bon in the w~<kI. [[ ~ markers J~a Beam ZZZmgers, Bra's Black Label, Beam~ Cbo~, l]emm'a R%,~I China tm~r Ixmle~Cbawau~oc+tial~Dark£Tvs +t~d ka, and the famous Mr and Mr~ "7" B]a0dy M#ry Mix. Areo~ Beam~ in~m,r ~ are Kam+ra C Liqueu ~ Kam0ra D~- +++,,+ Cherry l+iq~+ ~'U Orange L~, Aalbo,g Aleoa~t and Spey Ro~Iso~e~ 1985 Sales--$27~544,000 ~ryM.Ben~t p+( aral Ch+ E~ C3ffleer ~allllhm. Llmltl~d An in~r na~onal grc~lp ba~d in tf+e U.K, im~lved in to~,ct~, O i~, Immp~ aml ~i+~+, dignlmI~ ~5~e produc~ ~ml hrm~ewa~e~ It ban a 3 j% ~l~re of ihe k~ K. <fi~e~ce market ~nd ~+ larg, er s~ar~ ng In its, k is t he mat ket le~der itl Eu rope. SIt~lr i G, eame~[i+ Ck~rr~t~ Oold4m Belt Manufacturing Sp~i~iz~ in mt~ re pTir~ a,~ wpcr t~Jl lamimt km ~: <m~sum~ c< J~r ~ A r~+r~m~ Bm(~ um~ a<mmtm~ "~flimm • ~m~tt p~m ard Ch~Exccut~ Off)+~+ WilSon ,,)0¢1111 Company Mamff~ct uxes a ~ li+e r ff offll.~ p~d1 MCM productS, I~tC. tt~s, ineNdJ ng ~llmlmr I1~ Ioo~ Openaiem~ i~lude Case Cu~ler y, gmk~ of lemP0inder+, u'eotmting fonms, eontpt~x ~+gh ~?lwe3~t,~maNgm~,lamset~ Fir, m~blr~Jers~,~,m+ag~me kn+*~, sc]~o~ a nd she~rs; Mabel long life V t rune I~vlsk~ r&e~ keeping sy'~ms it ~ar~emcn~ ]igNt bt]lbs; ~ nd Minion auto It also sells Wper 5hreo~+rs ~nd its Petma body ~ir a,d ri~tirg Im~tuc~ Pm~c~ s~llm3, r~lms eor ragared 198~ SaI~$6L,774,000 b<~es f~r ~rmg r~:urds Russell I~Tr ua~t - p~esident ~nd Chxf E~e,:ma~ O fti~r Pinker ton'r,, Inr,, /hn gx-nvon's is tl:e prero~er r~m menut organization in [he v.ofld la~v~ding securk t ~ r,d im~xlg~ti, ~ se-,,k-es. 1~ Seles-$31~42R000 Rober t],MeG.ine÷ Chair man and Chtef I;xecur ~e O/Srer 198I S~1e~-$I78,450,000 Exeeum~ ~]ce president a~t Cheer Operating Officer ! S ml ~dvisor m the 9ao,* n with direcm~o
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i
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Arnclld HenP, on ~,~ "¢'~ ~esid~u and Chk.f I~mdied l~g~l ~ff~irs for~e COml~J~r tx~glnnin~ in 1~9 ~nd ,~ls mined ~ C~ef Co~nsel J n 197~ Fie w~ e~'r~d Sen~r ¥i~ pc~dert ~ Ge~e~l Coun~l and a [~ i:~ 1981 anti J~ ~ ~ of the Compen~i~n ~nd Robert L Plancher $,-nio~ Vice ]pre~de~t ar~ Chief A~oaen~ ir~ Ot~ce~ fin~e ~ammry 19~ He ,aln~ Die,or in 1971, ~nd dec0:d C~r~]rr in t 9T8. t4e ,,v~s elected v~c~ p~ ~d. Co~tt~ler and A Di~ in 19gL |ugelte R. ~Uldefson E~ ~,1 o~l~ Director in 19~, ~e is C~ir~,an m~ t he Com~l~Lto~l Corn rail tee ~nd ~ ~ ~r c f ~]-~ Audit a~d Nc~nina~" Commlr~ lqeis ~ par~ & O]tck, P~. P~Ul A. Randour Seni/~ '~c~ pr~e~( a~ Gerbil Rolber t J, Rukeyser d~Com in ]~1 ~ b~L~rn~ V~ Geurge H, WOodarcl Dzrec~w: Eme~rul
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52 Social Responsibility Corporate Data American Brands and mr subsidiaries manage a ~riety of programs ~o enhance ~hc qmlky of life in the communities in which we operate and where our empkry~s and tier families live as wall as in society at large. A commirme, appointed by the Board of Directors, monitors corporate act k4tles to assure that envimnmenrM, safety and social issues are deak -a~th responsibl): ParOeular emphasis is placed on matching gifts and empl%,ee invok~ment. Chairman and Chief Executive Officer Edward ~r~ "Whittemore is a Vice President, Die*_*or and Chalmlan of the Executive/Finance Commkme of the Ftaliee Athletic League (PAL) in New York City. PAL provides programs ~.r some ~0,000 children in many of the city's difficuk neighborhoads. Shown below at a PAL fimdralser held last September a Carnegie Hall are three PAL youngsters with Mr Wh~or¢, Frank Sinawa and Manhattan District Attorney Robert M. Morgentheu, the president of PAL. Mr. Sinatra performed in cor~er t and Mr. W'hkmmor¢ served as Chairman a'the benefit. The National Women's F.conomic AHlalnc;e's 1985 Corporate Leadership Award ,*vas presnnlWcl to Mr. Wh~'ion[, ~r his I~d~hipin I~s~g (~ller i1~ ii~lIiiDmlo oppor t uri~iN ~r ~nl*HI. I~ir mn am Die.lot 1lift) and ~|~c~ t~AIIlam. CowlPor~e Officers Edward x,'~{ ~.Vhittemore Chair man of t he Board alxi Ch,,-f Ex,~ugn,c Offi~t~- Vi~,~ "uius ,~a B. Lougee, III Chlef Opeoaing O~fiucr WBliam J.~' V~e Cha~rr~n Arnold Henmn ~e~ut ~'~e Vic~ pre£~lent a ad Chic( ~5 n~ nciaL Of Feet Robert L, Plancher Setter Vice Predd~t ard Ch~A:cc~nting O ffi6"r Paul A. Randour Senior Vice prr-~dcm ~r~l Geraeral Coumel Robert L. Aus0n Vice prtaxl, ant Admitustrmon Thomas C. H~,s V~:e p~em Tclx~m Robert J. Rukeyser Vke ~er¢ Ofllce pro&:cr s Russell ~ Trukt VVCe pre~s4em--Opeea~lons Peter Reed, Jr. Vke preztdem ,ndT~a~urer John ELudes F~ifR B~n Joseph J. Grifl~n Cxmt r~ller Louis E Fernous, Jr. ~cre~ry Arthur E "Wade ~,~lsta nt Cont roller Theresa B. gealey ,~s~st~m Sec[e~ry Martin J. McDermott ~s~i~ant Se~ret~r ~" DudleZ L. Bauerlaln, Jr. A3~i~m 1refuter Everett ~ Par~in, Jr. Aasi,a~nt Tr~a~u r~ Executive Offices 245 Park Avenue New York, NY 10167 (212) 880-4200 229 Sou~h Sta0e Street Dover, DE 19901 CommRon and All [~'~4'~rred $to©ks Morgan GuavantyTrttst Company of New "~brk 30 "v'v~st Broadway New ~brk, .N~' 10015 $2.67 and $2.75 Preferred Stocks OnJy The ]~ Nafio.,~ Bank of Ch]¢a~ One Hrst National Plaza Chicago, IL 60670 DIvMend The Bank of New York Amomatie Diff~Jend Reinvest ment Service EO. Box 11002 New ~brk, NY 10249 American Brands Common stock is listed on the Ne~ York Stock Exchange. Its trading symbol is AMB. It is also listed on zhe Amsmrdam, Antwerp, Basle, Brussels, Dusseldc~, Frankfurt, Gene~, Le, ndon, Paris and Zurich exchanges.
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