UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission file number 1-9076
ended September 30, 1997
FORTUNE BRANDS, INC.
---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock, par value
$3.125 per share, at October 31, 1997 was 171,616,449 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
- ------ --------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
September 30, December 31,
1997 1996
------------ -------------
(Unaudited) (Restated)
Assets
Current assets
Cash and cash equivalents $ 66.4 $ 34.9
Accounts receivable, net 836.0 892.4
Inventories
Bulk whiskey 351.7 379.3
Other raw materials, supplies and
work in process 256.6 266.8
Finished products 342.5 391.8
-------- --------
950.8 1,037.9
Net assets of discontinued operations - 683.3
Other current assets 172.7 193.6
-------- --------
Total current assets 2,025.9 2,842.1
Property, plant and equipment, net 934.6 972.6
Intangibles resulting from
business acquisitions, net 3,611.0 3,730.7
Other assets 232.0 191.9
-------- --------
Total assets $6,803.5 $7,737.3
======== ========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
September 30, December 31,
1997 1996
------------ ------------
(Unaudited) (Restated)
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 31.6 $ 37.1
Commercial paper 68.6 691.2
Accounts payable 190.8 241.3
Accrued taxes 483.0 443.4
Accrued expenses and other liabilities 550.1 601.2
Current portion of long-term debt 173.0 53.9
--------- ---------
Total current liabilities 1,497.1 2,068.1
Long-term debt 834.1 1,598.3
Deferred income taxes 62.1 19.3
Postretirement and other liabilities 366.8 367.4
--------- ---------
Total liabilities 2,760.1 4,053.1
--------- ---------
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 11.5 12.9
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 157.7 166.5
Foreign currency adjustments 8.8 (195.9)
Retained earnings 5,163.7 5,025.4
Treasury stock, at cost (2,015.7) (2,042.1)
--------- ---------
Total stockholders' equity 4,043.4 3,684.2
--------- ---------
Total liabilities and
stockholders' equity $ 6,803.5 $ 7,737.3
========= =========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Nine Months Ended September 30, 1997 and 1996
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1997 1996
---------- ----------
(Restated)
Net sales $3,526.1 $3,420.9
Cost of products sold 1,869.2 1,768.8
Excise taxes on distilled spirits 286.7 309.7
Advertising, selling, general and
administrative expenses 959.9 915.5
Amortization of intangibles 77.9 76.9
Restructuring charges 74.2 -
Interest and related expenses 92.7 122.6
Other (income) expenses, net 7.5 3.2
-------- --------
Income from continuing operations
before income taxes 158.0 224.2
Income taxes 90.7 105.2
-------- --------
Income from continuing operations 67.3 119.0
Income from discontinued operations 65.1 263.8
Extraordinary items - (10.3)
-------- --------
Net income $ 132.4 $ 372.5
======== ========
Earnings per Common share
Primary
Income from continuing operations $.39 $ .68
Income from discontinued operations .38 1.51
Extraordinary items - (.06)
---- -----
Net income $.77 $2.13
==== =====
Fully diluted
Income from continuing operations $.39 $ .68
Income from discontinued operations .36 1.47
Extraordinary items - (.06)
----- -----
Net income $.75 $2.09
===== =====
Dividends paid per Common share $1.20 $1.50
===== =====
Average number of Common shares outstanding
Primary 171.6 174.3
===== =====
Fully diluted 175.7 178.8
===== =====
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended September 30, 1997 and 1996
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1997 1996
--------- ----------
(Restated)
Net sales $1,185.5 $1,158.1
Cost of products sold 632.0 604.0
Excise taxes on distilled spirits 100.9 107.4
Advertising, selling, general and
administrative expenses 318.5 305.8
Amortization of intangibles 26.0 25.7
Restructuring charges 18.4 -
Interest and related expenses 24.0 43.1
Other (income) expenses, net 4.7 2.9
-------- --------
Income from continuing operations
before income taxes 61.0 69.2
Income taxes 33.0 38.0
-------- --------
Income from continuing operations 28.0 31.2
Income from discontinued operations - 105.5
-------- --------
Net income $ 28.0 $ 136.7
======== ========
Earnings per Common share
Primary
Income from continuing operations $.16 $.19
Income from discontinued operations - .61
---- ----
Net income $.16 $.80
==== ====
Fully diluted
Income from continuing operations $.16 $.19
Income from discontinued operations - .60
---- ----
Net income $.16 $.79
==== ====
Dividends paid per Common share $.20 $.50
==== ====
Average number of Common shares outstanding
Primary 171.3 170.4
===== =====
Fully diluted 176.3 173.9
===== =====
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Nine Months Ended September 30, 1997 and 1996
-----------------------------------------------------
(In millions)
(Unaudited)
1997 1996
--------- ---------
(Restated)
Operating activities
Net income $ 132.4 $ 372.5
Restructuring charges 74.2 -
Income from discontinued operations (65.1) (263.8)
Extraordinary items - 10.3
Depreciation and amortization 183.9 176.4
Decrease (increase) in accounts receivable 35.0 (16.5)
Decrease (increase) in inventories 40.3 (19.8)
Decrease in accounts payable, accrued
expenses and other liabilities (82.4) (58.2)
(Decrease) increase in accrued taxes (57.1) 6.6
Other operating activities, net (33.2) (30.8)
---------- --------
Net cash provided from continuing
operating activities 228.0 176.7
---------- --------
Investing activities
Additions to property, plant and equipment (111.2) (113.5)
Acquisitions, net of cash acquired (44.6) (702.1)
Dispositions 48.0 4.3
Other investing activities, net 3.6 14.6
---------- --------
Net cash used by investing activities (104.2) (796.7)
---------- --------
Financing activities
(Decrease)increase in short-term debt, net (626.4) 842.4
Issuance of long-term debt 18.3 600.7
Repayment of long-term debt (654.5) (404.6)
Dividends to stockholders (207.1) (262.9)
Cash purchases of Common stock for treasury (79.6) (418.5)
Other financing activities, net 83.3 4.6
---------- --------
Net cash (used) provided by financing activities(1,466.0) 361.7
---------- --------
Effect of foreign exchange rate changes on cash (7.0) (3.2)
Cash provided by discontinued operations 1,380.7 69.4
---------- --------
Net increase (decrease) in cash
and cash equivalents 31.5 (192.1)
Cash and cash equivalents at beginning of period 34.9 232.0
---------- --------
Cash and cash equivalents at end of period $ 66.4 $ 39.9
========== ========
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of September 30, 1997,
the related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 1997 and 1996
and the related condensed consolidated statement of cash flows for the
nine-month periods ended September 30, 1997 and 1996 are unaudited. In
the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Such
adjustments consisted of restructuring and other nonrecurring charges
and normal recurring items. Interim results may not be indicative of
results for a full year.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes. The year-end condensed consolidated balance sheet
was derived from the Company's audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. This Form 10-Q should be read in conjunction with the
Company's consolidated financial statements and notes incorporated by
reference in its 1996 Annual Report on Form 10-K.
2. Acquisition
In January 1996, Cobra Golf Incorporated ("Cobra") was acquired
for an aggregate cost of $712 million in cash, including fees and
expenses. In connection with this acquisition, liabilities amounting to
$60 million were included at the date of acquisition. The cost exceeded
the fair value of net assets acquired by $657 million. Cobra's
operations have been included in consolidated results from the date of
acquisition.
3. Discontinued Operations
On May 30, 1997, the international tobacco operations were spun
off and the name of the Company was changed to Fortune Brands, Inc. As
a result, the Company's stockholders owned shares in two
publicly-traded companies -- Fortune Brands, Inc. ("Fortune") and
Gallaher Group Plc ("Gallaher").
To allocate the overall debt of the Company at the time of the
spin-off, Gallaher borrowed and paid to the Company an amount that will
ultimately approximate $1.25 billion, after taxes. The Company used the
proceeds initially to pay down short-term debt.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Discontinued Operations (Continued)
The condensed consolidated financial statements were reclassified
to identify international tobacco operations as discontinued operations
for all periods. Summarized data for the international tobacco
operations, net of allocation of interest expense based on a ratio of
Gallaher's net assets to consolidated net assets of the Company, is as
follows:
Three Months
Nine Months Ended
Results of operations Ended September 30, September 30,
--------------------- --------------------- -------------
1997* 1996 1996
-------- -------- ---------
(In millions)
Net sales $2,575.0 $4,723.1 $1,762.0
======== ======== ========
Income before taxes $186.4 $ 405.6 $161.9
Spin-off expenses (67.1) - -
Income taxes (54.2) (141.8) (56.4)
------- -------- ------
Income from
discontinued operations $ 65.1 $ 263.8 $105.5
====== ======== =======
*Includes results through spin-off date, May 30, 1997.
Net assets of discontinued December 31,
operations 1996
-------------------------- -----------
(In millions)
Current assets $ 2,020.4
Property, plant and
equipment, net 258.4
Other assets 477.2
Current liabilities (1,933.0)
Non-current liabilities (139.7)
---------
$ 683.3
=========
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Discontinued Operations (Concluded)
In connection with the spin-off, the conversion rate of each share
of $2.67 Convertible Preferred stock was adjusted from 4.08 shares of
American Brands, Inc. Common stock to 6.205 shares of Fortune Brands
Common stock.
4. Restructuring and Other Nonrecurring Charges
The Company has been reviewing productivity-enhancing
opportunities and as a result, recorded pre-tax charges of $38.1
million and $127.4 million, respectively, during the three and nine
months ended September 30, 1997. The savings expected to be achieved
will principally be offset by costs associated with brand building,
new product development and new international market development
activities.
The Company anticipates additional pre-tax restructuring and other
nonrecurring charges during the fourth quarter of 1997 aggregating
approximately $90 million as formal restructuring plans are approved
and communicated.
Charges recorded to date by business segment are as follows (in
millions):
Nine Months Ended September 30, 1997
------------------------------------
Nonrecurring
Cost of Sales
Restructuring Charges Total
------------- ------------- -----
Home Products $15.9 $ 8.3 $ 24.2
Office Products 23.5 - 23.5
----- ----- ------
Home and Office Products 39.4 8.3 47.7
Golf Products 11.6 19.7 31.3
Distilled Spirits 23.2 25.2 48.4
----- ----- ------
Total $74.2 $53.2 127.4
===== =====
Income tax benefit 39.0
------
Net charge $ 88.4
======
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Restructuring and Other Nonrecurring Charges (Concluded)
Three Months Ended September 30, 1997
-------------------------------------
Nonrecurring
Cost of Sales
Restructuring Charges Total
------------- ------------- -----
Home Products $ 6.8 $ - $ 6.8
Golf Products 11.6 19.7 31.3
----- ----- -----
Total $18.4 $19.7 38.1
===== =====
Income tax benefit 15.1
-----
Net charge $23.0
=====
Home Products includes charges related to the discontinuance of
certain product lines and operations, the consolidation of facilities
and the write-down of property, plant and equipment.
Office Products includes charges, principally resulting from the
discontinuance and rationalization of product lines and related assets,
the write-down of property, plant and equipment, and lease cancellation
costs, partly offset by the pre-tax gain on the sale of two
non-strategic businesses.
Golf Products includes charges related to the discontinuance of
certain product lines and the rationalization of operations.
Distilled Spirits includes charges due to a change in estimate for
bulk whiskey valuations which resulted from the integration of the
worldwide distilled spirits business and costs related to leased
facilities and international distribution agreements.
5. Earnings Per Share
Earnings per Common share are based on the weighted average number of
Common shares outstanding in each period and after preferred stock
dividend requirements.
Fully diluted earnings per Common share assume that any
convertible debentures and convertible preferred shares outstanding at
the beginning of each period, or at their date of issuance, if later,
were converted at those dates, with related interest, preferred stock
dividend requirements and outstanding Common shares adjusted
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Earnings Per Share (Concluded)
accordingly. It also assumes that outstanding Common shares were
increased by shares issuable upon exercise of those stock options for
which market price exceeds exercise price, less shares which could have
been purchased by the Company with related proceeds.
6. Extraordinary Items
In March 1996, the Company redeemed $149.6 million of its $150
million 7-5/8% Eurodollar Convertible Debentures, Due 2001, at a
redemption price of 103.8125% of the principal amount plus accrued
interest and redeemed its $150 million 9-1/8% Debentures, Due 2016, at
a redemption price of 104.4375% of the principal amount plus accrued
interest. In connection with the redemptions, the Company recorded a
charge of $10.3 million ($15.8 million pre-tax), or six cents per
Common share.
7. Dividends Declared
The Board of Directors declared dividends on the Company's Common
stock and $2.67 Convertible Preferred stock for the fourth quarter of
1997, in the amount of 21 cents and 66 3/4 cents, respectively, on
September 30, 1997, payable in December 1997. The dividends for the
fourth quarter of 1996 were declared in October 1996, payable in
December 1996. The accrued expenses and other liabilities balance sheet
caption as of September 30, 1997 includes $36.2 million of dividends
payable in December 1997.
8. Credit Facilities
On September 2, 1997, the Company entered into revolving credit
agreements, with expiration dates of August 1, 2002, with various banks
providing for unsecured committed borrowings of up to $2.5 billion,
including various Eurocurrencies. The interest rate is set at the time
of each borrowing. A commitment fee of 0.10% per annum is paid on the
unused portion. The commitment fee is subject to increases up to a
maximum level of 0.20% per annum in the event the Company's long-term
debt rating falls below specified levels. On September 2, 1997, the
Company also terminated the revolving credit agreements that had been
in place.
9. Pending Litigation
The Company and its subsidiaries are defendants in various
lawsuits associated with their business and operations, and the Company
is a defendant in actions based upon allegations that human ailments
have resulted from tobacco use. It is not possible to predict the
outcome of the pending litigation, but management believes that there
are meritorious defenses to the pending actions and that the pending
actions will not have a material adverse effect upon the results of
operations,
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
9. Pending Litigation (Concluded)
cash flow or financial condition of the Company. These actions are
being vigorously contested.
On December 22, 1994, the Company sold The American Tobacco
Company subsidiary to Brown & Williamson Tobacco Corporation, a
wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with
the sale, Brown & Williamson Tobacco Corporation and The American
Tobacco Company agreed to indemnify the Company against claims arising
from smoking and health and fire safe cigarette matters relating to the
tobacco business of The American Tobacco Company.
In connection with the spin-off of Gallaher Group Plc on May 30,
1997, Gallaher Group Plc and Gallaher Limited agreed to indemnify the
Company against claims arising from smoking and health and fire safe
cigarette matters relating to the tobacco business of Gallaher and its
subsidiaries.
10. Environmental
The Company is subject to laws and regulations relating to the
protection of the environment. While it is not possible to quantify
with certainty the potential impact of actions regarding environmental
matters, particularly remediation and other compliance efforts that the
Company's subsidiaries may undertake in the future, in the opinion of
management, compliance with the present environmental protection laws,
before taking into account estimated recoveries from third parties,
will not have a material adverse effect upon the results of operations,
cash flow or financial condition of the Company.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors of Fortune Brands, Inc.:
We have reviewed the condensed consolidated balance sheet of
Fortune Brands, Inc. and Subsidiaries as of September 30, 1997, the
related condensed consolidated statements of income for the three-month
and nine-month periods ended September 30, 1997 and 1996 and the
related condensed consolidated statement of cash flows for the
nine-month periods ended September 30, 1997 and 1996. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data, and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression
of an opinion regarding the consolidated financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1996, and the related consolidated statements of income, cash flows and
Common stockholders' equity for the year then ended (not presented
herein) and in our report dated February 3, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1996 is fairly stated, in
all material respects, in relation to the consolidated balance sheet
from which it has been derived.
1301 Avenue of the Americas COOPERS & LYBRAND L.L.P.
New York, New York
November 11, 1997
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------ AND RESULTS OF OPERATIONS.
-----------------------------------------------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for the Nine Months Ended September 30, 1997 as
Compared to the Nine Months Ended September 30, 1996
---------------------------------------------------------------------------
Net Sales Operating Income(1)
----------------- -----------------------
1997 1996(3) 1997 1997(2) 1996(3)
(Adjusted)
-------- ------- ------- ------- ------
(In millions)
Home Products $1,016.6 $1,005.8 $112.4 $136.6 $130.4
Office Products 891.9 853.3 30.3 53.8 49.5
-------- -------- ------ ------ ------
Home and Office Products 1,908.5 1,859.1 142.7 190.4 179.9
Golf Products 750.0 669.1 81.8 113.1 104.7
Distilled Spirits 867.6 892.7 90.1 138.5 127.7
-------- -------- ------ ------ ------
$3,526.1 $3,420.9 $314.6 $442.0 $412.3
======== ======== ====== ====== ======
(1) Operating income represents net sales less all costs and expenses
excluding corporate administrative expenses, interest and related
expenses and other (income) expenses, net.
(2) Excludes restructuring and other nonrecurring charges of $127.4 million.
(3) Restated for discontinued international tobacco operations.
CONSOLIDATED
- ------------
Net sales increased 3% on line extensions, new products, the inclusion of
Advanced Gravis (acquired September 1996) and Cobra Golf (acquired January 24,
1996) and price increases, partly offset by discontinued golf products
associated with new product introductions, the absence of operations sold and
the inclusion of an additional month last year in distilled spirits' U.K.
operations (change to calendar year-end). Operating income decreased 24% due to
$127.4 million in restructuring and other nonrecurring charges. (See note 4
in the Notes to Condensed Consolidated Financial Statements.) Operating income
excluding these charges increased 7%, principally due to higher sales and gross
margins, partly offset by increased marketing and research and development
expenses.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Interest and related expenses decreased 24% reflecting lower average borrowings
resulting principally from the use of the Gallaher spin-off proceeds.
The effective income tax rate comparisons for the nine-month periods ended
September 30, 1997 and 1996 were distorted by the 1997 restructuring and other
nonrecurring charges. Excluding these charges, the effective income tax rates
were 45.4% and 46.9%, respectively.
Income from continuing operations of $67.3 million, or 39 cents per Common
share, for the nine months ended September 30, 1997 compared with $119 million,
or 68 cents per share, for the same period last year. The decrease was due to
$88.4 million, or 51 cents per share, in net restructuring and other
nonrecurring charges. Excluding these charges, income from continuing operations
was $155.7 million, or 90 cents per share, up $36.7 million, or 31%.
On May 30, 1997, the international tobacco operations of Gallaher were spun off.
Income from discontinued operations, which represents the net income of the
international tobacco operations, net of an allocation of interest expense, of
$65.1 million, or 38 cents per share (representing five months in 1997),
compared with $263.8 million, or $1.51 per share (representing nine months in
1996). In addition, the 1997 amount includes $67.1 million in spin-off expenses.
(See note 3 in the Notes to Condensed Consolidated Financial Statements.)
The extraordinary items resulted from a charge of $10.3 million ($15.8 million
pre-tax) in connection with the redemption in March 1996 of the Company's $150
million 7-5/8% Eurodollar Convertible Debentures, Due 2001 and its $150 million
9-1/8% Debentures, Due 2016. (See note 6 in the Notes to Condensed Consolidated
Financial Statements.)
Net income of $132.4 million, or 77 cents per share, for the nine months ended
September 30, 1997, compared with $372.5 million, or $2.13 per share, for the
same period last year.
Pro forma income from operations and primary and fully diluted earnings per
Common share for the nine months ended September 30, 1997 of $172.8 million, and
$1.01 and 99 cents compared with $149.8 million, and 87 cents and 86 cents,
respectively, for the same period last year. Pro forma results reflect
adjustments to income from continuing operations to include a net cash payment
of approximately $1.25 billion that Gallaher made to the Company and the
assumption that such proceeds were used to purchase 2.5 million Common shares
and repay debt as of January 1, 1996. The ultimate use of the proceeds may
differ from that described herein. In addition, the 1997 pro forma amounts
exclude the restructuring and other nonrecurring charges. Pro forma information
is presented for informational purposes only and does not purport to be
indicative of the results of operations which would actually have been obtained
if the transactions had occurred on
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
January 1, 1996, or which may exist or be obtained in the future.
The Company has been reviewing productivity-enhancing opportunities and as a
result, during the nine months ended September 30, 1997, recorded pre-tax
charges of $127.4 million. The Company anticipates additional pre-tax
restructuring and other nonrecurring charges during the fourth quarter of 1997
aggregating approximately $90 million as formal restructuring plans are approved
and communicated. These charges will provide principally for rationalization of
manufacturing, distribution and sourcing.
In February 1997, FAS Statement No. 128, "Earnings per Share" was issued.
FAS No. 128 simplifies the computation of earnings per share ("E.P.S.") and
replaces primary E.P.S. with basic E.P.S. and fully diluted E.P.S. with diluted
E.P.S. FAS No. 128 is effective for annual and interim financial statements
issued after December 15, 1997 and earlier application is not permitted.
FAS No. 128 requires the restatement of E.P.S. data for all prior periods.
The Company is currently determining the impact that this statement will have
on its E.P.S. amounts when adopted.
See notes 9 and 10 in the Notes to Condensed Consolidated Financial Statements
for discussion of pending litigation and environmental matters.
Home Products
- -------------
Net sales increased 1% principally on line extensions and new products, partly
offset by the absence of Moen's joint venture in Taiwan (sold September 1996)
and lower volume on existing products. All companies except Master Lock reported
increased sales. Operating income decreased 14% due to $24.2 million in
restructuring and other nonrecurring charges related to the discontinuance of
certain product lines and operations, the consolidation of facilities and the
write-down of property, plant and equipment. Operating income excluding these
charges increased 5% on the sales increase and improved gross margin
(principally favorable product mix at Moen), partly offset by higher
volume-related selling expenses at Moen, increased research and development
expenses and unfavorable comparison to last year's gain on the sale of Moen's
joint venture in Taiwan.
Operating income at Master Lock declined principally due to the January 1, 1997
15% average price reduction on core padlock products in response to a shift by
mass merchants to value-price imported products, as well as lower volume and
increased operating expenses. It is anticipated that this price reduction will
result in a decline in Master Lock's operating income for the year.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Office Products
- ---------------
Net sales increased 5%, principally in North America, on new products, the
inclusion of Advanced Gravis (acquired September 1996) and higher average
foreign exchange rates, partly offset by the absence of operations sold, a
slight decline in prices and volume declines on existing products. Operating
income decreased 39% due to a $23.5 million restructuring charge principally
resulting from the discontinuance and rationalization of product lines and
related assets, the write-down of property, plant and equipment, and lease
cancellation costs, partly offset by the pre-tax gain on the sale of two
non-strategic businesses. Operating income excluding this charge increased 9%
reflecting the sales increase and improved gross margin (principally
manufacturing efficiencies and stabilized raw material costs in North America),
partly offset by higher operating expenses (mainly customer programs and new
product and business development costs).
Golf Products
- -------------
Net sales were up 12% on line extensions and new products, volume increases in
existing product lines (golf balls, clubs, gloves and shoes) and one additional
month of Cobra results in 1997 (acquired January 24, 1996), partly offset by
discontinued products associated with new product introductions and lower
average foreign exchange rates. Operating income decreased 22% due to $31.3
million of restructuring and nonrecurring charges related to the discontinuance
of certain product lines and the rationalization of operations. Excluding these
charges, operating income increased 8% reflecting the higher sales, partly
offset by lower gross margin (reflecting a shift in product mix and increased
material costs), and higher operating expenses, principally associated with the
support and development of new products.
Distilled Spirits
- -----------------
Net sales decreased 3%, principally due to the inclusion of an additional month
of sales in 1996 resulting from the change to a calendar year-end for the U.K.
operations. Excluding the change to calendar year-end and excise taxes, sales
increased 3% on price increases, higher average foreign exchange rates, line
extensions and new products and a benefit from a domestic bulk sale, partly
offset by lower overall volume in existing product lines. The net decrease in
volume resulted from lower case shipments in the U.S. and U.K., partly offset by
higher shipments in Australia and Canada and improved private label volume in
the U.K. Operating income decreased 29% due to $48.4 million in restructuring
and other nonrecurring charges resulting from a change in estimate for bulk
whiskey valuations which resulted from the integration of the worldwide
distilled spirits business and costs related to leased facilities and
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Distilled Spirits (Concluded)
- -----------------------------
international distribution agreements. Operating income excluding this charge
increased 8% on improved operating results in North America (price increases and
lower brand spending, partly offset by lower overall U.S. cased goods volume),
Australia (higher volume), and the U.K. (lower operating expenses, partly offset
by lower volume).
In recent years, distilled spirits consumption in many countries, including the
U.S., continued its long-term decline. It is estimated that overall sales of
distilled spirits in the U.S. declined by 2 to 3% in each year from 1993 to
1995. However, industry estimates indicate that U.S. distilled spirits sales
increased slightly in 1996. Whether this represents a change in the long-term
decline in distilled spirits consumption is uncertain.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided from continuing operating activities of $228 million for the
nine months ended September 30, 1997 compared with net cash provided from
continuing operating activities of $176.7 million for the same nine-month period
last year.
Net cash used by investing activities for the nine months ended September 30,
1997 was $104.2 million, as compared with net cash used of $796.7 million in the
nine-month period last year, principally reflecting last year's acquisition of
Cobra.
Net cash used by financing activities for the nine months ended September 30,
1997 was $1.5 billion, as compared with net cash provided of $361.7 million in
1996, principally reflecting the repayment in 1997 of debt using the proceeds
provided by Gallaher in conjunction with the spin-off of that company, the
impact of the 1996 acquisition of Cobra and lower 1997 Common share purchases.
At the time of the spin-off, Gallaher borrowed and paid to the Company an amount
that will ultimately approximate $1.25 billion, after taxes. For the nine months
ended September 30, 1997, the Company's purchases of Common stock amounted to
$79.6 million as compared to $418.5 million during last year's comparable
nine-month period.
Total debt at September 30, 1997 was $1.1 billion, a decrease of $1.3 billion
from December 31, 1996, reflecting the repayment in 1997 of debt using the
proceeds provided by Gallaher in conjunction with the spin-off of that company.
The ratio of total debt to total capital decreased from 39.3% at December 31,
1996 to 21.5% at September 30, 1997.
On March 5, 1996, the Company redeemed its $150 million 7-5/8% Eurodollar
Convertible Debentures, Due 2001, at a redemption price of 103.8125% of the
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (Concluded)
- -------------------------------------------
principal amount plus accrued interest. On March 1, 1996, the Company redeemed
its $150 million 9-1/8% Debentures, Due 2016, at a redemption price of 104.4375%
of the principal amount plus accrued interest.
Through September 30, 1997, the Company purchased 2.2 million Common shares.
Although the Company has the authority to purchase additional shares and has not
ruled out such purchases, it anticipates that it may not make further
substantial purchases this year. At its July 29 meeting, the Board of Directors
authorized the institution of a systematic share purchase program to cover
future stock option exercises. This program is anticipated to be in the range of
two million shares per year.
On September 2, 1997, the Company entered into revolving credit agreements, with
expiration dates of August 1, 2002, with various banks providing for unsecured
committed borrowings of up to $2.5 billion, including various Eurocurrencies.
The interest rate is set at the time of each borrowing. A commitment fee of
0.10% per annum is paid on the unused portion. The commitment fee is subject to
increases up to a maximum level of 0.20% per annum in the event the Company's
long-term debt rating falls below specified levels. On September 2, 1997, the
Company also terminated the revolving credit agreements that had been in place.
Management believes that the Company's internally generated funds, together with
its access to global credit markets, are more than adequate to meet the
Company's capital needs.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Results of Operations for the Three Months Ended September 30, 1997 as
Compared to the Three Months Ended September 30, 1996
---------------------------------------------------------------------------
Net Sales Operating Income(1)
----------------- -----------------------
1997 1996(3) 1997 1997(2) 1996(3)
(Adjusted)
------ ------- ----- -------- -------
(In millions)
Home Products $ 352.4 $ 349.1 $ 41.0 $47.8 $ 44.2
Office Products 316.4 304.3 20.7 20.7 19.3
-------- -------- ------ ------ ------
Home and Office Products 668.8 653.4 61.7 68.5 63.5
Golf Products 208.7 195.5 (8.9) 22.4 17.6
Distilled Spirits 308.0 309.2 56.0 56.0 52.9
-------- -------- ------ ------ ------
$1,185.5 $1,158.1 $108.8 $146.9 $134.0
======== ======== ====== ====== ======
(1) Operating income represents net sales less all costs and expenses
excluding corporate administrative expenses, interest and related
expenses and other (income) expenses, net.
(2) Excludes restructuring and other nonrecurring charges of $38.1 million.
(3) Restated for discontinued international tobacco operations.
CONSOLIDATED
- ------------
Net sales increased 2% on new products and line extensions, partly offset by the
absence of operations sold. Operating income decreased 19% due to $38.1
million in restructuring and other nonrecurring charges in golf products and
home products. Operating income excluding these charges increased 10%,
principally due to higher sales and gross margins, partly offset by increased
operating expenses.
Interest and related expenses decreased 44% primarily reflecting lower average
borrowings resulting principally from the use of the Gallaher spin-off proceeds.
Income from continuing operations of $28 million, or 16 cents per Common share,
for the three months ended September 30, 1997 compared with $31.2 million, or 19
cents per share for the same period last year. The decrease was due to $23
million, or 13 cents per share, in net restructuring and other nonrecurring
charges. Excluding these charges, income from continuing operations was $51
million, or 29 cents per share, up $19.8 million, or 63%.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- -----------------------
On May 30, 1997, the international tobacco operations of Gallaher were spun off.
Income from discontinued products of $105.5 million, or 61 cents per share, in
1996, represents the net income of international tobacco operations, net of an
allocation of interest expense. (See note 3 in the Notes to Condensed
Consolidated Financial Statements.)
Net income of $28 million, or 16 cents per share, for the three months ended
September 30, 1997 compared with income of $136.7 million, or 80 cents per
share, for the same period last year.
Pro forma income from operations and primary and fully diluted earnings per
Common share for the three months ended September 30, 1997 of $51 million, and
29 cents compared with $41.4 million, and 25 cents, respectively, for the same
period last year. Pro forma results reflect adjustments to income from
continuing operations to include a net cash payment of approximately $1.25
billion that Gallaher made to the Company and the assumption that such proceeds
were used to purchase 2.5 million Common shares and repay debt as of January 1,
1996. The ultimate use of the proceeds may differ from that described herein. In
addition, the 1997 pro forma amounts exclude the restructuring and other
nonrecurring charges. Pro forma information is presented for informational
purposes only and does not purport to be indicative of the results of operations
which would actually have been obtained if the transactions had occurred on
January 1, 1996, or which may exist or be obtained in the future.
Home Products
- -------------
Net sales increased 1% as line extensions and new products were partly offset by
the lower volume and absence of Moen's joint venture in Taiwan (sold September
1996). The increased sales reported by Waterloo and Aristokraft were partly
offset by declines at Master Lock and Moen. Operating income decreased 7% due to
a $6.8 million restructuring charge related to the closure of an operation.
Operating income excluding this charge increased 8% on the sales increase and
improved gross margin (principally favorable product mix at Moen), partly offset
by unfavorable comparison to last year's $2.2 million gain on the sale of Moen's
joint venture in Taiwan and increased research and development expenses.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Office Products
- ---------------
Net sales increased 4%, principally in North America, on new products, volume
increases on existing product lines and the inclusion of Advanced Gravis, partly
offset by the absence of operations sold, a slight decline in prices and lower
average foreign exchange rates. Operating income increased 7% reflecting the
sales increase and improved gross margin (principally manufacturing efficiencies
and stabilized raw material costs in North America), partly offset by higher
operating expenses (mainly customer programs and new product and business
development costs). Comparisons for the third quarter were unfavorably impacted
by the absence of two non-strategic businesses sold in 1997 which had seasonally
strong results in the third quarter of 1996.
Golf Products
- -------------
Net sales were up 7% reflecting line extensions and new products and volume
increases in existing product lines (golf balls, clubs and gloves), partly
offset by discontinued products associated with new product introductions and
lower average foreign exchange rates. Operating income decreased due to $31.3
million of restructuring and nonrecurring charges related to the discontinuance
of certain product lines and the rationalization of operations. Excluding these
charges, operating income increased 27% reflecting the higher sales, partly
offset by increased advertising and research and development expenses associated
with the support and development of new products.
Distilled Spirits
- -----------------
Net sales decreased slightly. Excluding excise taxes, sales increased 3% on
price increases, line extensions and higher average foreign exchange rates,
partly offset by lower overall volume on existing product lines. The net
decrease in volume principally resulted from lower case shipments in the U.S.
Operating income increased 6% principally on improved operating results in North
America (price increases and lower brand spending, partly offset by lower
overall U.S. cased goods volume).
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
CAUTIONARY STATEMENT
- --------------------
This Quarterly Report on Form 10-Q contains statements relating to future
results, which are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including but not limited to changes in general economic conditions, competitive
product and pricing pressures, foreign exchange rate fluctuations, the impact of
excise tax increases with respect to distilled spirits, regulatory developments,
the uncertainties of litigation, as well as other risks and uncertainties
detailed from time to time in the Company's Securities and Exchange Commission
filings.
<PAGE>
PART I - EXHIBIT A
-------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share -
Primary and Fully Diluted (Unaudited)
--------------------------------------------
(In millions)
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
(Restated)
Income from continuing operations $ 67.3 $119.0
Preferred stock dividend requirements (0.8) (0.9)
------ ------
Income from continuing operations available for
computing earnings per Common share - primary 66.5 118.1
Income from discontinued operations 65.1 263.8
Extraordinary items - (10.3)
------ ------
Net income for computing earnings
per Common share - primary $131.6 $371.6
====== ======
Income from continuing operations available for
computing earnings per Common share - primary $ 66.5 $118.1
Convertible preferred stock dividend requirements 0.8 0.9
Interest and related expenses on convertible
debentures - 2.3
------ ------
Income from continuing operations available for
computing earnings per Common share -
fully diluted 67.3 121.3
Income from discontinued operations 65.1 263.8
Extraordinary items - (10.3)
------ ------
Net income for computing earnings per Common
share - fully diluted $132.4 $374.8
====== ======
<PAGE>
PART I - EXHIBIT A (Continued)
-------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Computation of Weighted Average Number of
Common Shares Outstanding on a Fully Diluted Basis (Unaudited)
--------------------------------------------------------------
(In millions, except per share amounts)
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
Weighted average number of Common shares
outstanding during each period - primary 171.6 174.3
Addition from assumed conversion as of the
beginning of each period of the convertible
preferred stock outstanding at the end of
each period 2.0 1.8
Addition from assumed conversion of
convertible debentures - 0.6
Other additions 2.1 2.1
----- -----
Weighted average number of Common shares
outstanding during each period on a
fully diluted basis 175.7 178.8
===== =====
(Restated)
----------
Earnings per Common share -
Primary
Income from continuing operations $.39 $ .68
Income from discontinued operations .38 1.51
Extraordinary items - (.06)
---- -----
Net income $.77 $2.13
==== =====
Fully diluted
Income from continuing operations $.39 $ .68
Income from discontinued operations .36 1.47
Extraordinary items - (.06)
---- -----
Net income $.75 $2.09
==== =====
<PAGE>
PART I - EXHIBIT A (Continued)
-------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share -
Primary and Fully Diluted (Unaudited)
--------------------------------------------
(In millions)
Three Months Ended
September 30,
----------------------
1997 1996
--------- ---------
(Restated)
Income from continuing operations $28.0 $ 31.2
Preferred stock dividend requirements (0.2) (0.3)
----- ------
Income from continuing operations available for
computing earnings per Common share - primary 27.8 30.9
Income from discontinued operations - 105.5
----- ------
Net income for computing earnings
per Common share - primary $27.8 $136.4
===== ======
Income from continuing operations available for
computing earnings per Common share - primary $27.8 $ 30.9
Convertible preferred stock dividend requirements 0.2 0.3
Interest and related expenses on convertible
debentures - 0.3
----- ------
Income from continuing operations available for
computing earnings per Common share - 28.0 31.5
fully diluted
Income from discontinued operations - 105.5
----- ------
Net income for computing earnings per
Common share - fully diluted $28.0 $137.0
===== ======
<PAGE>
PART I - EXHIBIT A (Concluded)
-------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Computation of Weighted Average Number of
Common Shares Outstanding on a Fully Diluted Basis (Unaudited)
--------------------------------------------------------------
(In millions, except per share amounts)
Three Months Ended
September 30,
----------------------
1997 1996
--------- ---------
Weighted average number of Common shares
outstanding during each period - primary 171.3 170.4
Addition from assumed conversion as of the
beginning of each period of the convertible
preferred stock outstanding at the end of
each period 2.3 1.7
Addition from assumed conversion of
convertible debentures - 0.6
Other additions 2.7 1.2
----- -----
Weighted average number of Common shares
outstanding during each period on a
fully diluted basis 176.3 173.9
====== ======
(Restated)
----------
Earnings per Common share -
Primary
Income from continuing operations $.16 $.19
Income from discontinued operations - .61
---- ----
Net income $.16 $.80
==== ====
Fully diluted
Income from continuing operations $.16 $.19
Income from discontinued operations - .60
---- ----
Net income $.16 $.79
==== ====
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
- ------ -----------------
(a) Reference is made to paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996, to paragraph (a) of Part II, Item 1, "Legal
Proceedings", of Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1997, and to paragraph (a) of Part II, Item 1, "Legal
Proceedings", of Registrant's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997. In addition, Registrant has been named as a
defendant, together with leading tobacco manufacturers, in Badillo, A. v. The
American Tobacco Company, et al., United States District Court for the District
of Nevada, October 8, 1997; and Clay, J. v. The American Tobacco Company, et
al., United States District Court for the Southern District of Illinois, May 22,
1997. These cases are class actions on behalf of individuals allegedly addicted
to cigarettes through the manipulation of nicotine levels or individuals who
have allegedly suffered personal injury from the use of cigarettes.
In addition, Registrant has been named as a defendant, together with
leading tobacco manufacturers, in Caiazzo, B. v. The American Tobacco Company,
et al., Supreme Court of New York, Richmond County, September 23, 1997; Carll,
J. v. The American Tobacco Company, et al., Supreme Court of New York, New York
County, July 20, 1997; Cotroneo, L. v. Fortune Brands, Inc., Supreme Court of
New York, New York County, October 21, 1997; Demos, J. v. John Doe/Manufacturer,
United States District Court for the District of Connecticut, August 31, 1997;
Folkman, R. v. The American Tobacco Company, et al., Court of Common Pleas of
Philadelphia County, Pennsylvania, October 28, 1997; Gelfond, M. v. Fortune
Brands, Inc., Supreme Court of New York, New York County, October 21, 1997;
Golden, R. v. The American Tobacco Company, et al., Supreme Court of New York,
New York County, July 3, 1997; Jaust, T. v. The American Tobacco Company, et
al., Supreme Court of New York, New York County, September 10, 1997; Juliano, S.
v. The American Tobacco Company, et al., Supreme Court of New York, Richmond
County, July 24, 1997; Keenan, T. v. The American Tobacco Company, et al.,
Supreme Court of New York, New York County, September 15, 1997; Lehman, R. v.
The American Tobacco Company, et al., Supreme Court of New York, New York
County, July 10, 1997; Long, J. v. The American Tobacco Company, et al.,
Supreme Court of New York, Bronx County, September 24, 1997; LoPardo, T. v. The
American Tobacco Company, et al., Supreme Court of New York, Nassau County,
September 25, 1997; Lynch, R. v. The American Tobacco Company, et al., Supreme
Court of New York, New York County, September 24, 1997; Mednick, S. v. The
American Tobacco Company, et al., Supreme Court of New York, Kings County,
August 20, 1997; Mosely, F. v. Philip Morris Companies, Inc., et al., Circuit
Court of Baldwin County, Alabama, September 24, 1997; Perez, P. v. The American
Tobacco Company, et al., Supreme Court of New York, Kings County, August 15,
1997; Piccione, Y. v. The American Tobacco Company, et al., Supreme Court of
New York, Kings County, September 29, 1997; Smith, B.J. v. The American Tobacco
Company, et al., Supreme Court of New York, Queens County, August 27, 1997;
Thompson, G. v. The American Tobacco Company, et al., Court of Common Pleas of
Philadelphia County, Pennsylvania, October 30, 1997; Upshur, W. v. The
<PAGE>
Item 1. LEGAL PROCEEDINGS. (Continued)
- ------ -----------------
American Tobacco Company, et al., Court of Common Pleas of Philadelphia County,
Pennsylvania, October 10, 1997; and Valentin, A. v. Fortune Brands, Inc., et
al., Supreme Court of New York, Queens County, September 2, 1997. These are
individual cases where the plaintiffs allege personal injury from the use of
cigarettes.
In addition, Registrant has been named as a defendant,
together with leading tobacco manufacturers, in West Virginia-Ohio Valley
I.B.E.W. Welfare Fund v. The American Tobacco Company, et al., Circuit Court of
Kanawha County, West Virginia, September 11, 1997. This is a case brought by a
labor union seeking various forms of equitable relief, including restitution of
the medical expenses incurred by the union for the cost of medical care provided
by the union to its members for numerous diseases allegedly caused by cigarettes
and other tobacco products.
In addition, Registrant has been named as a defendant,
together with leading tobacco manufacturers, in Rhode Island (State of Rhode
Island) v. Brown & Williamson as Successor, Superior Court of Providence, Rhode
Island, October 14, 1997. This case has been brought by the attorney general of
Rhode Island seeking to recover medical costs provided by the State of Rhode
Island to its citizens suffering from alleged tobacco related injuries.
Reference is made to the description of Gossett, M. v.
American Brands, Inc., et al., United States District Court for the Southern
District of Texas, Brownsville Division, in paragraph (a) of Part I, Item 3,
"Legal Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996. On April 14, 1997, the Court dismissed with
prejudice plaintiffs' claims against all defendants.
Reference is made to the description of Lippincott v. The
American Tobacco Company, et al., Superior Court of New Jersey, Camden County,
in paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997. On
September 29, 1997, Registrant was voluntarily dismissed from the case without
prejudice by plaintiffs subject to certain provisions set forth in the
Stipulation and Order.
Reference is made to the description of Misell, D. v. The
American Tobacco Company, et al., District Court of Texas, Nueces County, in
paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1997. On September
9, 1997, plaintiffs voluntarily dismissed the action without prejudice.
Reference is made to the description of Mosely, F. v. Philip Morris
Companies, Inc., et al., Circuit Court of Baldwin County, Alabama, above.
On October 20, 1997, the Court dismissed Registrant without prejudice.
<PAGE>
Item 1. LEGAL PROCEEDINGS. (Continued)
- ------ -----------------
Reference is made to the description of Reed, S. v. Philip
Morris Incorporated, et al., Superior Court of the District of Columbia, in
paragraph (a) of Part I, Item 3, "Legal Proceedings", of Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996. On October 31,
1997, the Court dismissed Registrant from the case without prejudice.
Reference is made to the description of Thomas, P. v. The
American Tobacco Company, et al., Circuit Court of Michigan, Wayne County, in
paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1997. On October 8,
1997, plaintiffs voluntarily dismissed the action without prejudice.
Reference is made to the description of Willis, D. v. The
American Tobacco Company, et al., United States District Court for the Western
Division of Louisiana, in paragraph (a) of Part II, Item 1, "Legal Proceedings",
of Registrant's Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 1997. On July 21, 1997, the Court dismissed Registrant without
prejudice. Reference is made to the description of Woods, D. v. The American
Tobacco Company, et al., Superior Court of North Carolina, Wake County, in
paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1997. On October 17,
1997, plaintiffs voluntarily dismissed Registrant without prejudice.
In connection with the sale of Registrant's former subsidiary,
The American Tobacco Company ("ATCO"), to Brown & Williamson Tobacco Corporation
("Brown & Williamson") on December 22, 1994, Brown & Williamson and ATCO agreed
to indemnify Registrant against claims arising from smoking and health and fire
safe cigarette matters relating to the tobacco business of ATCO. Registrant's
counsel have advised that, in their opinion, on the basis of their
investigations generally with respect to suits and claims of this character,
Registrant has meritorious defenses to these actions and threatened actions. The
actions will be vigorously contested. Registrant's former subsidiary, Gallaher
Limited ("Gallaher"), has been named as a defendant in certain proceedings
alleging smoking-related health effects as a result of plaintiffs smoking
cigarettes manufactured by Gallaher. Registrant has not been named as a
defendant in any such proceedings. On May 30, 1997, Registrant spun off its
U.K.-based Gallaher tobacco business. In connection with such spin-off, Gallaher
Group Plc and Gallaher agreed to indemnify Registrant against claims arising
from smoking and health and fire safe cigarette matters relating to the tobacco
business of Gallaher and its subsidiaries.
<PAGE>
Item 1. LEGAL PROCEEDINGS. (Concluded)
- ------ -----------------
(b) It is not possible to predict the outcome of the pending
litigation referenced in paragraph (a) above, but management believes that there
are meritorious defenses to the pending actions and that the pending actions
will not have a material adverse effect upon the results of operations, cash
flow or financial condition of Registrant. Reference is made to note 9, "Pending
Litigation", in the Notes to Condensed Consolidated Financial Statements set
forth in Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
- ------ -----------------------------------------
(c) On June 9, 1997, Registrant issued 482 shares of its
common stock to each of eight of its non-employee directors pursuant to
Registrant's stockholder-approved Stock Plan for Non-Employee Directors. The
shares were issued as compensation to the non-employee directors for service to
Registrant. The issuance of the shares was exempt from registration under the
Securities Act of 1933, as amended (the "Securities Act") as a transaction not
involving a public offering under Section 4(2) of the Securities Act.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits.
--------
10a1. Amendment to 1990 Long-Term Incentive Plan of Fortune Brands,
Inc. (As Amended and Restated as of January 1, 1994)
constituting Exhibit 10b4 to the Annual Report on Form 10-K
for the Fiscal Year ended December 31, 1996.
10a2. Amendment to 1986 Stock Option Plan of Fortune Brands, Inc.
constituting Exhibit 10b3 to the Annual Report on Form 10-K
for the Fiscal Year ended December 31, 1996.
12. Statement re computation of ratio of earnings to fixed
charges.
15. Letter from Coopers & Lybrand L.L.P. dated November 11, 1997
re unaudited financial information.
23. Consent of Counsel, Chadbourne & Parke LLP.
27. Financial Data Schedule (Article 5).
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (Concluded)
- ------ --------------------------------
In lieu of filing certain instruments with respect to
long-term debt of the kind described in Item 601(b)(4) of Regulation S-K,
Registrant agrees to furnish a copy of such instruments to the Securities and
Exchange Commission upon request.
(b) Reports on Form 8-K.
-------------------
Registrant filed a Current Report on Form 8-K, dated July 23, 1997, in
respect of Registrant's press release dated July 23, 1997 announcing
Registrant's financial results for the three-month and six-month
periods ended June 30, 1997 (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated October 1, 1997,
in respect of Registrant's press release dated September 30, 1997
announcing an increase in the quarterly dividend on Registrant's
common stock (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated October 21, 1997,
in respect of Registrant's press release dated October 21, 1997
announcing Registrant's financial results for the three-month and
nine-month periods ended September 30, 1997 (Items 5 and 7(c)).
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FORTUNE BRANDS, INC.
--------------------
(Registrant)
Date: November 11, 1997 By /s/ C. P. Omtvedt
------------------ -------------------------
C. P. Omtvedt
Vice President and
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
10a1. Amendment to 1990 Long-Term Incentive Plan of Fortune Brands,
Inc. (As Amended and Restated as of January 1, 1994)
constituting Exhibit 10b4 to the Annual Report on Form 10-K
for the Fiscal Year ended December 31, 1996.
10a2. Amendment to 1986 Stock Option Plan of Fortune
Brands, Inc. constituting Exhibit 10b3 to the
Annual Report on Form 10-K for the Fiscal Year
ended December 31, 1996.
12. Statement re computation of ratio of earnings to
fixed charges.
15. Letter from Coopers & Lybrand L.L.P. dated
November 11, 1997 re: unaudited financial
information.
23. Consent of Counsel, Chadbourne & Parke LLP.
27. Financial Data Schedule (Article 5).
EXHIBIT 10a1
------------
AMENDMENTS TO THE
FORTUNE BRANDS, INC.
1990 LONG-TERM INCENTIVE PLAN
-----------------------------
1. Section 3 of the Plan is hereby amended in its entirety as follows:
3. Administration of Plan
The Plan shall be administered by the Committee whose members
shall be appointed by the Board of Directors and consisting of at least
three members of the Board of Directors. The members of the Committee
shall qualify to administer the Plan for purposes of Rule 16b-3 (and
any other applicable rule) promulgated under Section 16(b) of the
Exchange Act. The Committee may adopt its own rules of procedure, and
the action of a majority of the Committee, taken at a meeting, or taken
without a meeting by unanimous written consent of the members of the
Committee, shall constitute action by the Committee. The Committee
shall have the power and authority to administer, construe and
interpret the Plan, to make rules for carrying it out and to make
changes in such rules.
2. Section 5(a)(iv) of the Plan is hereby amended in its entirety as
follows:
(iv) If a Participant's employment with the Company terminates
other than by reason of the Participant's death, disability or
retirement under a retirement plan of the Company, the Participant's
Option shall terminate and cease to be exercisable 30 days from the
date of such termination except as otherwise provided in Section 12(b).
If a Participant's employment with the Company terminates by reason of
death, disability or retirement under a retirement plan of the Company,
the Participant's Option shall continue to be exercisable until the
expiration date stated in the option, provided that a Nonqualified
Stock Option may be exercised within one year from the date of death
even if later than such expiration date. In the case of a Participant
whose principal employer is a Subsidiary, then such Participant's
employment shall be deemed to be terminated for purposes of this
Section 5 as of the date on which such principal employer ceases to be
a Subsidiary.
3. Section 5(e) of the Plan is hereby amended in its entirety as follows:
(e) Subject to Sections 5(b) and 14, a Right granted with an
accompanying Option shall be exercisable only during the period in
which the Option (or part thereof) in respect of which such Right was
granted is exercisable.
4. Section 10(d) of the Plan is hereby amended in its entirety as follows:
(d) No Award or portion thereof shall be transferable by the
Participant otherwise than by will or by the laws of descent and
distribution, except that an Option and related Right may be
transferred by gift to any member of the holder's immediate family or
to a trust or partnership solely for the benefit of such immediate
family members to the extent permitted in the applicable Award
Agreement. A Right shall never be transferred except to the transferee
of the related Option. During the lifetime of the Participant, an
Option or Right shall be exercisable only by the Participant unless it
has been transferred to a member of the holder's immediate family or to
a trust or partnership solely for the benefit of such immediate family
members, in which case it shall be exercisable only by such transferee.
For the purpose of this provision, a holder's "immediate family" shall
mean the holder's spouse, children and grandchildren.
5. Section 12(b)(i) of the Plan is hereby amended in its entirety as
follows:
(b) (i) In the event of a Change in Control (as defined in
Section 12(b)(iii)), then each Option or Right held by a Participant
that is not then exercisable shall become immediately exercisable and
shall remain exercisable as provided in Section 5 notwithstanding
anything to the contrary in the first sentence of Section 5(a)(ii) or
in Section 5(b). In addition, unless the Committee otherwise determines
at the time of grant or at any time thereafter but prior to such Change
in Control, each Limited Right outstanding at the time of such Change
in Control shall be deemed to be automatically exercised as of the date
of such Change in Control or as of such other date during the 60-day
period beginning on the date of such Change in Control as the Committee
may determine prior to such Change in Control. In the event that the
Limited Right is not automatically exercised, the Participant may
during the 60-day period beginning on the date of the Change in Control
(such 60-day period being hereinafter referred to as the "Limited Right
Exercise Period"), in lieu of exercising such Option or Right in whole
or in part, exercise the Limited Right (or part thereof) pertaining to
such Option. Such Participant, whether the exercise is pursuant to his
election or automatic pursuant to the terms hereof, shall be entitled
to receive in cash an amount determined by multiplying the number of
shares subject to such Option (or part thereof) by the amount by which
the exercise price of each share is exceeded by (A) if such Option is
an Incentive Stock Option, the fair market value of such shares at the
date of exercise or (B) if such Option is a Nonqualified Stock Option,
the greater of (x) the highest purchase price per share paid for the
shares of the Company beneficially acquired in the transaction or
series of transactions resulting in the Change in Control by the person
or persons deemed to have acquired control pursuant to the Change in
Control and (y) the highest fair market value of shares of Common Stock
during the Limited Right Exercise Period prior to the time of exercise.
A Limited Right shall be exercised in whole or in part by giving
written notice of such exercise on a form approved by the Committee to
the Secretary of Fortune, except that no such written notice shall be
required in the event such Limited Right is automatically exercised
pursuant to the terms hereof. The exercise shall be effective as of the
date specified in the notice of exercise, but not earlier than the date
the notice of exercise is actually received and in the hands of the
Secretary of Fortune. In the event the last day of a Limited Right
Exercise Period shall fall on a day that is not a business day, then
the last day thereof shall be deemed to be the next following business
day. To the extent an Option or a Right pertaining thereto is exercised
in whole or in part, the Limited Right in respect of such Option shall
terminate and cease to be exercisable. To the extent a Limited Right is
exercised in whole or in part, the Option (or part thereof) to which
such Limited Right pertains and the Right (or part thereof) pertaining
to such Option (or part thereof) shall terminate and cease to be
exercisable.
EXHIBIT 10a2
------------
AMENDMENTS TO THE
FORTUNE BRANDS, INC.
1986 STOCK OPTION PLAN
----------------------
1. Section 5(d) of the Plan is hereby amended in its entirety as follows:
(d) If a Participant's employment with the Company terminates
other than by reason of the Participant's death, disability or
retirement under a retirement plan of the Company, the Participant's
Option shall terminate and cease to be exercisable 30 days from the
date of such termination except as otherwise provided in paragraph (b)
of Section 10. If a Participant's employment with the Company
terminates by reason of death, disability or retirement under a
retirement plan of the Company, the Participant's Option shall continue
to be exercisable until the expiration date stated in the option,
provided that a Nonqualified Stock Option may be exercised within one
year from the date of death even if later than such expiration date. In
the case of a Participant whose principal employer is a Subsidiary,
then such Participant's employment shall be deemed to be terminated for
purposes of this Section 5 as of the date on which such principal
employer ceases to be a Subsidiary.
2. Section 7(c) of the Plan is hereby amended in its entirety as follows:
(c) Subject to Section 6, a Right shall be exercisable only
during the period in which the Nonqualified Stock Option (or part
thereof) in respect of which such Right was granted is exercisable.
3. Section 8(d) of the Plan is hereby amended in its entirety as follows:
(d) An Option or Right shall not be transferable by the
Participant otherwise than by will or by laws of descent and
distribution, except that an Option and related Right may be
transferred by gift to any member of the holder's immediate family or
to a trust or partnership solely for the benefit of such immediate
family members to the extent permitted in the applicable Nonqualified
Stock Option Agreement. A Right shall never be transferred except to
the transferee of the related Option. During the lifetime of the
Participant, an Option or Right shall only be exercisable by the
Participant unless it has been transferred to a member of the holder's
immediate family or to a trust or partnership solely for the benefit of
such immediate family members, in which case it shall be exercisable
only by such transferee. For the purpose of this provision, a holder's
"immediate family" shall mean the holder's spouse, children and
grandchildren.
PART II - EXHIBIT 12
--------------------
<TABLE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Note)
(Dollar amounts in millions)
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
------------------------------------------------------- -------------
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings Available:
Income from continuing operations
before income taxes, minority
interest and extraordinary items......... $225.0 $249.9 $ 43.4 $358.9 $340.1 $162.2
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies...................... 0.2 0.1 - 0.2 0.2 0.1
Capitalized interest............... - 0.3 0.2 - 0.3 -
------ ------ ------ ------ ------ ------
224.8 249.5 43.2 358.7 339.6 162.1
====== ====== ====== ====== ====== ======
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt discount
and expenses............................. 189.6 200.5 184.6 147.1 172.6 97.4
Portion of rentals representative
of an interest factor.................... 12.9 11.9 12.8 13.5 15.1 12.0
------ ------ ------ ------ ------ ------
Total Fixed Charges................ 202.5 212.4 197.4 160.6 187.7 109.4
------ ------ ------ ------ ------ ------
Total Earnings Available........... $427.3 $461.9 $240.6 $519.3 $527.3 $271.5
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges............ 2.11 2.17 1.22 3.23 2.81 2.48
==== ==== ==== ==== ==== ====
(Note) The ratios of earnings to fixed charges for the years ended
December 31, 1992 through 1996 have been restated to exclude
results of the discontinued tobacco operations.
</TABLE>
PART II - EXHIBIT 15
--------------------
November 11, 1997
Securities and Exchange Commission
450 5th Street, N.W.
Attention: Filing Desk, Stop 1-4
Washington, D.C. 20549-1004
Re: Fortune Brands, Inc.
We are aware that our report dated November 11, 1997, on our review of
interim financial information of Fortune Brands, Inc. and Subsidiaries for the
nine-month periods ended September 30, 1997 and 1996 included in this Form 10-Q,
has been incorporated by reference into (a) the Registration Statement on Form
S-8 (Registration No. 33-64071) relating to the Defined Contribution Plan of
Fortune Brands, Inc. and Participating Operating Companies, the Registration
Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand
Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on
Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term Incentive
Plan of Fortune Brands, Inc., and the prospectuses related thereto, and (b) the
prospectuses related to the Registration Statements on Form S-3 (Registration
Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of Fortune Brands, Inc. Pursuant
to Rule 436(c) under the Securities Act of 1933, this report should not be
considered a part of such registration statements or prospectuses or
certification by us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019
PART II - EXHIBIT 23
--------------------
CONSENT OF COUNSEL
We consent to the incorporation by reference of our opinions contained
in Part II, Item 1, "Legal Proceedings", of this Quarterly Report on Form 10-Q
of Fortune Brands, Inc. into (a) the Registration Statement on Form S-8
(Registration No. 33-64071) relating to the Defined Contribution Plan of Fortune
Brands, Inc. and Participating Operating Companies, the Registration Statement
on Form S-8 (Registration No. 33-64075) relating to the MasterBrand Industries,
Inc. Hourly Employee Savings Plan, the Registration Statement on Form S-8
(Registration No. 33-58865) relating to the 1990 Long-Term Incentive Plan of
Fortune Brands, Inc., and the prospectuses related thereto, and (b) the
prospectuses related to the Registration Statements on Form S-3 (Registration
Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of Fortune Brands, Inc.
CHADBOURNE & PARKE LLP
30 Rockefeller Plaza
New York, New York 10112
November 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT OF INCOME AS
OF SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> $ 66
<SECURITIES> 0
<RECEIVABLES> 885
<ALLOWANCES> 49
<INVENTORY> 951
<CURRENT-ASSETS> 2,026
<PP&E> 1,849
<DEPRECIATION> 915
<TOTAL-ASSETS> 6,803
<CURRENT-LIABILITIES> $1,497
<BONDS> 834
<COMMON> 717
0
12
<OTHER-SE> 3,314
<TOTAL-LIABILITY-AND-EQUITY> 6,803
<SALES> $3,526
<TOTAL-REVENUES> 3,526
<CGS> 1,869
<TOTAL-COSTS> 1,869
<OTHER-EXPENSES> 287
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 158
<INCOME-TAX> 91
<INCOME-CONTINUING> 67
<DISCONTINUED> 65
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $ 132
<EPS-PRIMARY> $.77
<EPS-DILUTED> $.75
</TABLE>
