<PAGE>
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN A PROXY STATEMENT
SCHEDULE 14 INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_]Preliminary Proxy Statement
[_]Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(e)(2))
[X]Definitive Proxy Statement
[_]Definitive Additional Materials
[_]Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
AMERICAN BRANDS, INC.
- -------------------------------------------------------------------------------
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
- -------------------------------------------------------------------------------
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[_]No fee required
[X]Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
Ordinary shares of 10 pence each of Gallaher Group Plc (including those
represented by American Depositary Shares)
- -------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
700,000,000 ordinary shares (estimated maximum)
- -------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
The fee is equal to one-fiftieth of one percent of the book value of
the ordinary shares of Gallaher Group Plc. The aggregate book value of
such ordinary shares at December 31, 1996 was $574,059,000.
- -------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction: Not Applicable
- -------------------------------------------------------------------------------
(5) Total fee paid: $114,812
- -------------------------------------------------------------------------------
[X]Fee paid previously with preliminary materials.
- -------------------------------------------------------------------------------
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- -------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.: N/A
- -------------------------------------------------------------------------------
(3) Filing Party: N/A
- -------------------------------------------------------------------------------
(4) Date Filed: N/A
- -------------------------------------------------------------------------------
<PAGE>
[LOGO] AMERICAN
BRANDS, INC.
1700 EAST PUTNAM AVENUE
OLD GREENWICH, CONNECTICUT 06870
March 15, 1997
Fellow Stockholders:
You are cordially invited to attend the 1997 Annual Meeting of Stockholders
of American Brands, Inc. (the "Company" or "American Brands") to be held at
10:00 a.m. on Wednesday, April 30, 1997, at the Stamford Center for the Arts,
Atlantic Street and Tresser Boulevard, Stamford, Connecticut.
This year's Annual Meeting marks a particularly significant and exciting
time for American Brands and its stockholders, and I urge you to attend in
person or be represented by proxy. At the meeting, you will be asked to
approve a major transaction that will separate American Brands into two
strong, publicly-held companies: the international tobacco business of
Gallaher and the non-tobacco businesses of American Brands. Each company will
have the great brands, powerful market leadership, financial strength and
dedicated workforce to excel in its respective markets. Upon completion of the
separation, you will own shares in Gallaher and shares in American Brands,
which will be renamed Fortune Brands, Inc.
Specifically, you are being asked to consider and vote on a group of
separate but related proposals (the "Distribution Proposals"), described in
detail on the following pages, that provide for the separation of Gallaher
from the Company's other businesses. The separation will be accomplished
through the distribution to the Company's stockholders of American Depositary
Shares (in the form of American Depositary Receipts) and ordinary shares of
Gallaher Group Plc ("New Gallaher"), a newly-formed English company and a
wholly-owned subsidiary of the Company, currently named Gallaher Group
Limited, together representing all the outstanding share capital of New
Gallaher. The distribution is intended to qualify as tax-free to the Company's
stockholders under U.S. tax laws.
In the distribution, U.S. and Canadian holders of American Brands Common
Stock would receive one American Depositary Share of New Gallaher representing
four ordinary shares of New Gallaher for every one share of American Brands
Common Stock held.
Once the distribution of the New Gallaher shares is complete, the Company
would continue to be a holding company with subsidiaries engaged in the
distilled spirits, hardware and home improvement products, golf and leisure
products and office products businesses. The Company proposes to change its
name to FORTUNE BRANDS, Inc. in conjunction with the distribution. Your
current stock certificates will continue to evidence ownership of the Company
(renamed Fortune Brands, Inc.) after the distribution. You do not need to send
in your stock certificates with your proxy or in connection with any of the
transactions contemplated by the Distribution Proposals.
The transaction represents a bold step to further brighten prospects for our
operations as well as those of New Gallaher and build value for our
stockholders. THE BOARD OF DIRECTORS BELIEVES THE TRANSACTION IS IN THE
STOCKHOLDERS' BEST INTERESTS AND RECOMMENDS STOCKHOLDERS VOTE FOR THE
TRANSACTION.
In the accompanying Proxy Statement you will find important information
relating to the distribution as well as descriptions of the businesses,
directors and management of the Company and New Gallaher. I urge you to read
it carefully.
Your vote is important. Even if you plan to attend the meeting in person, I
urge you to sign, date and mail the accompanying proxy card in the enclosed
postage-paid envelope as promptly as possible to make sure your interests are
represented.
Sincerely yours,
/s/ Thomas C. Hays
Thomas C. Hays
Chairman of the Board and Chief
Executive Officer
<PAGE>
[LOGO] AMERICAN
BRANDS, INC.
NOTICE OF MEETING
March 15, 1997
The Annual Meeting of the Stockholders of American Brands, Inc., a Delaware
corporation (the "Company"), will be held at the Stamford Center for the Arts,
Atlantic Street and Tresser Boulevard, Stamford, Connecticut, at 10 o'clock in
the forenoon (Eastern Daylight Time) on Wednesday, April 30, 1997, for the
following purposes:
A. To consider and vote upon three separate but related proposals
(collectively, the "Distribution Proposals") described in the accompanying
Proxy Statement that provide for:
Item 1: Approval of the distribution by the Company of American
Depositary Shares (evidenced by American Depositary Receipts) and ordinary
shares of Gallaher Group Plc, an English company and wholly-owned
subsidiary of the Company currently named Gallaher Group Limited ("New
Gallaher"), together representing all the outstanding share capital of New
Gallaher, on the basis described in the accompanying Proxy Statement
(collectively, the "Distribution") (see pages 4 to 114 of the Proxy
Statement);
Item 2: Approval of an amendment to the Company's By-laws to repeal the
annual executive incentive compensation program set forth in Article XII
thereof and approval of the Fortune Brands, Inc. Annual Executive Incentive
Compensation Plan (see pages 114 to 116 of the Proxy Statement); and
Item 3: Approval of an amendment to the Certificate of Incorporation of
the Company to change the name of the Company to Fortune Brands, Inc. (see
page 117 of the Proxy Statement).
THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION PROPOSALS IS NOT CONDITIONED
UPON THE APPROVAL OF ANY OTHER DISTRIBUTION PROPOSAL. THE BOARD OF DIRECTORS
HAS RETAINED DISCRETION, EVEN IF STOCKHOLDER APPROVAL OF THE DISTRIBUTION
PROPOSALS IS OBTAINED AND THE CONDITIONS TO THE DISTRIBUTION ARE SATISFIED, TO
ABANDON, DEFER OR MODIFY THE DISTRIBUTION OR ANY OTHER ELEMENT CONTAINED IN
THE DISTRIBUTION PROPOSALS.
B. To consider and vote upon the following additional proposals described in
the accompanying Proxy Statement that provide for:
Item 4: The election of four directors for a term expiring at the 2000
Annual Meeting or until their successors have been elected and qualified
(see pages 118 to 136 of the Proxy Statement);
Item 5: The election of Coopers & Lybrand L.L.P. as independent
accountants of the Company for the year 1997 (see page 136 of the Proxy
Statement);
Item 6: Approval of the American Brands, Inc. Non-Employee Director Stock
Option Plan (see pages 136 to 139 of the Proxy Statement);
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Item 7: If presented, a stockholder proposal requesting the elimination
of election of directors by classes, expected to be made by one stockholder
(see pages 139 to 141 of the Proxy Statement);
Item 8: If presented, a stockholder proposal requesting a report with
respect to the Glass Ceiling Commission's recommendations, expected to be
made by one stockholder (see pages 141 to 142 of the Proxy Statement); and
Item 9: If presented, a stockholder proposal requesting an equal
employment report, expected to be made by two stockholders (see pages 142
to 144 of the Proxy Statement).
C. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The stock transfer books will not be closed, but holders of Common Stock and
$2.67 Convertible Preferred Stock, to be entitled to vote, must be holders of
record at the close of business on March 3, 1997.
/s/ Louis F. Fernous, Jr.
Louis F. Fernous, Jr.
Vice President and Secretary
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PROXY STATEMENT SUMMARY................................................... i
THE ANNUAL MEETING....................................................... i
THE DISTRIBUTION......................................................... iii
NEW GALLAHER............................................................. vii
FORTUNE BRANDS........................................................... viii
NEW GALLAHER SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA.............. ix
NEW GALLAHER SUMMARY PRO FORMA CONDENSED FINANCIAL DATA.................. xi
AMERICAN BRANDS, INC. AND SUBSIDIARIES SUMMARY CONSOLIDATED HISTORICAL
FINANCIAL DATA.......................................................... xii
FORTUNE BRANDS, INC. SUMMARY PRO FORMA CONDENSED FINANCIAL DATA.......... xiii
INTRODUCTION.............................................................. 1
VOTING AND PROXIES....................................................... 1
MATTERS FOR CONSIDERATION AT THE ANNUAL MEETING.......................... 2
NO APPRAISAL RIGHTS...................................................... 3
CAUTIONARY STATEMENT...................................................... 4
THE DISTRIBUTION PROPOSALS................................................ 4
THE DISTRIBUTION (Item 1)................................................ 4
Background and Reasons for the Distribution............................. 4
Opinion of Financial Advisor............................................ 6
Manner of Effecting the Distribution.................................... 8
Listing and Trading of New Gallaher Ordinary Shares and ADSs............ 9
Listing and Trading of Fortune Brands Common Stock...................... 10
Conditions to the Distribution.......................................... 10
FUTURE MANAGEMENT OF THE SEPARATE COMPANIES.............................. 11
New Gallaher............................................................ 11
Fortune Brands.......................................................... 11
CERTAIN ORGANIZATIONAL MATTERS........................................... 11
RELATIONSHIP BETWEEN NEW GALLAHER AND FORTUNE BRANDS AFTER THE
DISTRIBUTION............................................................ 11
Distribution Agreement.................................................. 12
Indemnification Agreement............................................... 13
Tax Allocation Agreement................................................ 13
Interim Services Agreement.............................................. 14
DIVIDEND POLICIES........................................................ 14
New Gallaher............................................................ 14
Fortune Brands.......................................................... 14
DIVIDENDS AND PRICE RANGE OF COMPANY COMMON STOCK........................ 15
ALLOCATION OF INDEBTEDNESS............................................... 16
INTERESTS OF CERTAIN PERSONS IN THE DISTRIBUTION......................... 17
REGULATORY APPROVALS..................................................... 17
ACCOUNTING TREATMENT..................................................... 17
NEW GALLAHER SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA............. 18
NEW GALLAHER MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 20
NEW GALLAHER PRO FORMA CONDENSED FINANCIAL STATEMENTS.................... 28
AMERICAN BRANDS, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED HISTORICAL
FINANCIAL DATA.......................................................... 32
FORTUNE BRANDS, INC. PRO FORMA CONDENSED FINANCIAL STATEMENTS............ 34
</TABLE>
I
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FORTUNE BRANDS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA
RESULTS OF OPERATIONS AND FINANCIAL CONDITION........................... 41
NEW GALLAHER BUSINESS AND PROPERTIES..................................... 48
Introduction............................................................ 48
History and Development................................................. 49
The Tobacco Market...................................................... 50
Principal Brands........................................................ 51
Turnover By Region...................................................... 51
U.K. Business........................................................... 51
International Business.................................................. 54
Marketing............................................................... 56
Sales................................................................... 57
Distribution............................................................ 57
Manufacturing........................................................... 57
Employees............................................................... 58
Properties.............................................................. 59
Regulation/Legal Environment............................................ 59
Legal Proceedings....................................................... 61
Standstill Agreement.................................................... 63
Exchange Controls and Other Limitations Affecting Security Holders...... 64
FORTUNE BRANDS BUSINESS AND PROPERTIES................................... 65
Introduction............................................................ 65
Businesses.............................................................. 65
Employees............................................................... 68
Properties.............................................................. 68
Competition............................................................. 69
Environmental Matters................................................... 70
Foreign and Domestic Operations and Export Sales........................ 70
Governmental Regulation and Related Matters............................. 70
Legal Proceedings....................................................... 71
NEW GALLAHER MANAGEMENT.................................................. 75
New Gallaher Board of Directors......................................... 75
Officer................................................................. 76
Corporate Governance.................................................... 76
Compensation of Directors and Officers.................................. 77
Certain Transactions.................................................... 79
Ownership of New Gallaher Ordinary Shares............................... 79
FORTUNE BRANDS MANAGEMENT................................................ 80
Board of Directors and Executive Officers of Fortune Brands............. 80
Certain Transactions.................................................... 80
Ownership of Fortune Brands Common Stock................................ 80
DESCRIPTION OF NEW GALLAHER ORDINARY SHARES.............................. 81
General................................................................. 81
Voting Rights........................................................... 81
Quorum.................................................................. 82
Dividend Rights......................................................... 82
Distribution of Assets on a Winding-Up.................................. 82
Preemptive Rights....................................................... 83
Disclosure of Interests................................................. 83
Transfer of Shares in Uncertificated Form............................... 84
</TABLE>
II
<PAGE>
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Transfer of Shares in Certificated Form................................. 84
Variation of Rights..................................................... 85
Share Capital and Changes in Capital.................................... 85
Non-U.K. Shareholders................................................... 85
Registrar............................................................... 85
Liability of Directors and Officers..................................... 85
DESCRIPTION OF AMERICAN DEPOSITARY SHARES................................ 86
American Depositary Receipts............................................ 86
Deposit, Transfer and Withdrawal........................................ 86
Dividends, Other Distributions and Rights............................... 87
Record Dates............................................................ 89
Voting of Deposited Securities.......................................... 89
Reports and Other Communications........................................ 90
Amendment and Termination of the Deposit Agreement...................... 90
Charges of Depositary................................................... 91
Liability of Owner and Beneficial Owner for Taxes....................... 91
Disclosure of Interests................................................. 91
General................................................................. 92
Governing Law........................................................... 93
DESCRIPTION OF FORTUNE BRANDS CAPITAL STOCK.............................. 94
General................................................................. 94
Fortune Brands Common Stock............................................. 94
Company Rights and Junior Preferred Stock............................... 94
Convertible Preferred Stock............................................. 95
COMPARATIVE RIGHTS OF SHAREHOLDERS....................................... 96
Voting Rights........................................................... 96
Actions by Written Consent.............................................. 96
Sources and Payment of Dividends........................................ 97
Rights of Purchase and Redemption....................................... 97
Special Meeting of Shareholders......................................... 97
Rights of Appraisal..................................................... 98
Preemptive Rights....................................................... 98
Amendment of Governing Instruments...................................... 99
Shareholders' Votes on Certain Reorganizations.......................... 99
Rights of Inspection.................................................... 100
Classification of the Board of Directors................................ 101
Removal of Directors.................................................... 101
Vacancies on the Board of Directors..................................... 102
Liability of Directors and Officers..................................... 102
Indemnification of Directors and Officers............................... 102
Shareholders' Suits..................................................... 103
Certain Provisions Relating to Share Acquisitions....................... 103
Disclosure of Interests................................................. 104
Certain London Stock Exchange Listing Requirements...................... 105
U.S. FEDERAL AND U.K. TAX CONSIDERATIONS................................. 106
U.S. Federal Income Tax Consequences of the Distribution to the Company
and to Beneficial Owners of Company Common Stock....................... 106
Potential Taxability.................................................... 107
U.K. Tax Consequences of the Distribution to U.K. Holders of Company
Common Stock........................................................... 108
U.S. FEDERAL AND U.K. TAX TREATMENT OF NEW GALLAHER SHAREHOLDERS......... 109
U.S. Holders............................................................ 109
</TABLE>
III
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U.K. Holders............................................................ 112
Other Holders........................................................... 112
U.K. Inheritance and Gift Taxes......................................... 113
U.K. Stamp Duty and Stamp Duty Reserve Tax.............................. 113
APPROVAL OF AN AMENDMENT TO THE COMPANY'S BY-LAWS TO REPEAL THE ANNUAL
EXECUTIVE INCENTIVE COMPENSATION PROGRAM SET FORTH THEREIN AND APPROVAL
OF THE FORTUNE BRANDS, INC. ANNUAL EXECUTIVE INCENTIVE COMPENSATION PLAN
(Item 2)................................................................ 114
AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE
COMPANY (Item 3)........................................................ 117
THE ADDITIONAL PROPOSALS.................................................. 118
ELECTION OF DIRECTORS (Item 4)........................................... 118
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE................. 123
EXECUTIVE COMPENSATION.................................................. 124
ELECTION OF INDEPENDENT ACCOUNTANTS (Item 5)............................. 136
APPROVAL OF THE AMERICAN BRANDS, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION
PLAN (Item 6)........................................................... 136
RESOLUTION REQUESTING ELIMINATION OF ELECTION OF DIRECTORS BY CLASSES
(Item 7)................................................................ 139
RESOLUTION REQUESTING A REPORT WITH RESPECT TO THE GLASS CEILING
COMMISSION'S RECOMMENDATIONS (Item 8)................................... 141
RESOLUTION REQUESTING EQUAL EMPLOYMENT REPORT (Item 9)................... 142
CERTAIN INFORMATION REGARDING SECURITY HOLDINGS........................... 144
SUBMISSION OF STOCKHOLDER PROPOSALS AND NOMINATIONS....................... 145
OTHER MATTERS............................................................. 146
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................... 146
AVAILABLE INFORMATION.................................................... 146
REPORTS OF NEW GALLAHER.................................................. 146
MISCELLANEOUS............................................................. 147
INDEX TO FINANCIAL STATEMENTS............................................. F-1
ANNEX A: Opinion of Morgan Stanley & Co. Incorporated..................... A-1
ANNEX B: Fortune Brands, Inc. Annual Executive Incentive Compensation
Plan..................................................................... B-1
ANNEX C: American Brands, Inc. Non-Employee Director Stock Option Plan.... C-1
</TABLE>
IV
<PAGE>
PROXY STATEMENT SUMMARY
The following is a summary of certain information contained in this Proxy
Statement. This summary is included for convenience only and should not be
considered complete. This summary is qualified in its entirety by the more
detailed information and financial statements contained elsewhere in this Proxy
Statement. Throughout this Proxy Statement Summary (i) the term "Fortune
Brands" refers to American Brands, Inc., after the Distribution (as defined
below) renamed Fortune Brands, Inc., (ii) the term "New Gallaher" refers to
Gallaher Group Plc and (iii) the term "Fortune Brands Common Stock" refers to
American Brands Common Stock after the Distribution, in each case unless the
context otherwise requires.
THE ANNUAL MEETING
DATE, TIME AND PLACE OF The Annual Meeting of the Stockholders of American
ANNUAL MEETING Brands, Inc., a Delaware corporation (the "Company"),
will be held at the Stamford Center for the Arts,
Atlantic Street and Tresser Boulevard, Stamford,
Connecticut, at 10:00 a.m., Eastern Daylight Time, on
Wednesday, April 30, 1997.
MATTERS FOR At the Annual Meeting, stockholders of the Company
CONSIDERATION AT THE will be asked to consider and vote upon three
ANNUAL MEETING separate but related proposals (the "Distribution
Proposals"): (i) approval of the distribution by the
Company (the "Distribution") of American Depositary
Shares (evidenced by American Depositary Receipts)
and ordinary shares of 10 pence each of New Gallaher
("New Gallaher Ordinary Shares"), together
representing all the outstanding share capital of New
Gallaher, an English company and wholly-owned
subsidiary of the Company, on a pro rata basis to the
stockholders of the Company ("Item 1"); (ii) approval
of an amendment to the Company's By-laws to repeal
the annual executive incentive compensation program
set forth in Article XII thereof and approval of the
Fortune Brands, Inc. Annual Executive Incentive
Compensation Plan ("Item 2"); and (iii) approval of
an amendment to the Certificate of Incorporation of
the Company to change the name of the Company to
Fortune Brands, Inc. ("Item 3").
The effectiveness of each of the Distribution
Proposals is not conditioned upon the approval of any
other Distribution Proposal. The Board of Directors
of the Company (the "Company Board") has retained
discretion, even if stockholder approval of the
Distribution Proposals is obtained and the conditions
to the Distribution are satisfied, to abandon, defer
or modify the Distribution or any other element
contained in the Distribution Proposals. The Company
Board recommends that you vote FOR all of the
Distribution Proposals.
For a description of the reasons for the
Distribution, see "THE DISTRIBUTION PROPOSALS--THE
DISTRIBUTION--Background and Reasons for the
Distribution."
In addition, stockholders will also be asked to
consider and vote upon the following proposals (the
"Additional Proposals"): (i) the election of four
directors for a term expiring at the 2000 Annual
Meeting or until their successors have been elected
and qualified ("Item 4"); (ii) the election of
i
<PAGE>
Coopers & Lybrand L.L.P. as independent accountants
of the Company for the year 1997 ("Item 5"); (iii)
approval of the American Brands, Inc. Non-Employee
Director Stock Option Plan ("Item 6"); (iv) if
presented, a stockholder proposal requesting the
elimination of election of directors by classes,
expected to be made by one stockholder ("Item 7");
(v) if presented, a stockholder proposal requesting a
report with respect to the Glass Ceiling Commission's
recommendations, expected to be made by one
stockholder ("Item 8"); and (vi) if presented, a
stockholder proposal requesting an equal employment
report, expected to be made by two stockholders
("Item 9").
The effectiveness of the Additional Proposals is not
conditioned upon the approval of the Distribution
Proposals or any other Additional Proposals. The
Company Board recommends that you vote FOR Items 4, 5
and 6 and recommends that you vote AGAINST Items 7, 8
and 9.
ANNUAL MEETING RECORD
DATE March 3, 1997 (the "Annual Meeting Record Date").
VOTING Each holder of record of the Company's Common Stock
and $2.67 Convertible Preferred Stock as of the
Annual Meeting Record Date (the "Record Shares") is
entitled to vote at the Annual Meeting. Holders of
the Company's Common Stock are entitled to one vote
per share and holders of the Company's $2.67
Convertible Preferred Stock are entitled to three-
tenths of one vote per share. The holders of a
majority in voting power of the Record Shares
entitled to vote, present in person or represented by
proxy, will constitute a quorum for the transaction
of business at the Annual Meeting. Approval of Item 3
will require the affirmative vote of (i) at least 66
2/3% of the combined votes cast by the holders of the
Record Shares voting thereon and (ii) a majority of
the combined votes of the outstanding Record Shares.
The election of directors, Item 4, will be by a
plurality of votes cast. Approval of all other Items
at the Annual Meeting will require the affirmative
vote of shares representing a majority in voting
power of the Record Shares, voted together as one
class, present in person or represented by proxy at
the Annual Meeting.
NO APPRAISAL RIGHTS
Stockholders of the Company will not be entitled to
appraisal rights in connection with the Distribution.
See "INTRODUCTION--NO APPRAISAL RIGHTS."
ii
<PAGE>
THE DISTRIBUTION
SHARES TO BE The Distribution will be made to holders of record on
DISTRIBUTED the Distribution Record Date (as defined below) of
issued and outstanding shares of common stock, par
value $3.125, of the Company ("Company Common
Stock"). Each U.S. and Canadian holder of Company
Common Stock will receive as a dividend one American
Depositary Share ("ADS"), with each such ADS
representing four New Gallaher Ordinary Shares
(evidenced by American Depositary Receipts ("ADRs")),
for every one share of Company Common Stock held. All
other holders of Company Common Stock will receive
four New Gallaher Ordinary Shares for every one share
of Company Common Stock held. Company stockholders
will not have to make any payment to receive their
pro rata share of the Distribution. See "THE
DISTRIBUTION PROPOSALS--THE DISTRIBUTION--Manner of
Effecting the Distribution."
DISTRIBUTION RECORD The "Distribution Record Date" will be established by
DATE the Company Board shortly before the Distribution.
DISTRIBUTION DATE The "Distribution Date" will be established by the
Company Board. On the Distribution Date, the Company
will effect the Distribution by instructing The Bank
of New York, as Distribution Agent, to allocate ADSs
and New Gallaher Ordinary Shares to the holders of
record of Company Common Stock on the Distribution
Record Date. The Distribution Agent will arrange for
the mailing of ADRs to U.S. and Canadian record
holders, and certificates representing New Gallaher
Ordinary Shares to all other record holders, as soon
as practicable thereafter. See "THE DISTRIBUTION
PROPOSALS--THE DISTRIBUTION--Manner of Effecting the
Distribution."
CONDITIONS TO THE The Distribution is subject to, among other things:
DISTRIBUTION (i) approval of the Distribution by stockholders of
the Company; (ii) receipt of a favorable tax ruling
from the Internal Revenue Service (the "IRS") as to
certain U.S. federal income tax consequences of the
Distribution; (iii) final approval by the Company
Board of the Distribution; (iv) all necessary third
party consents having been obtained, except for those
consents which would not have a material adverse
effect on the Company or New Gallaher if they were
not obtained; (v) the Registration Statements on Form
20-F and F-6 to be filed by New Gallaher with respect
to the ADSs being declared effective; (vi) the Board
of Directors of New Gallaher (the "New Gallaher
Board"), composed of the persons identified herein as
the New Gallaher directors, being duly elected; (vii)
the Memorandum and Articles of Association of New
Gallaher being amended to be substantially in the
forms delivered by New Gallaher to the Company;
(viii) the ADSs being approved for listing on the New
York Stock Exchange (the "NYSE") and the New Gallaher
Ordinary Shares being admitted to the Official List
of the London Stock Exchange; (ix) the transactions
contemplated by the Distribution Agreement (as
defined below) in connection with the Transfers (as
defined below) and other organizational matters being
consummated in all material respects; (x) the Company
and New Gallaher
iii
<PAGE>
having entered into certain agreements and other
arrangements in connection with the transactions
contemplated by the Distribution; (xi) a no-action
letter from the Securities and Exchange Commission
(the "SEC") regarding certain aspects of the
Distribution being issued and in full force and
effect; (xii) no suit, action or proceeding by or
before any court of competent jurisdiction or other
governmental authority having been commenced or
threatened to restrain or challenge the transactions
contemplated by the Distribution Agreement, and no
inquiry having been received that in the reasonable
judgment of the Company Board may lead to such a
suit, action or proceeding; and (xiii) no order,
injunction or decree having been issued by any court
of competent jurisdiction or other legal restraint or
prohibition preventing consummation of the
Distribution being in effect. The Company Board has
retained discretion to waive any of the
aforementioned conditions. However, the Company Board
will not waive the requirement of receipt of a
favorable tax ruling from the IRS unless, in the
Company Board's judgment, based on an opinion of
counsel, Section 355 of the Internal Revenue Code
will apply to the Distribution. Even if stockholder
approval of the Distribution Proposals is obtained
and the other conditions to the Distribution are
satisfied, the Company Board may abandon, defer or
modify the Distribution or any other element
contained in the Distribution Proposals.
See "THE DISTRIBUTION PROPOSALS--THE DISTRIBUTION--
Conditions to the Distribution."
REASONS FOR THE The Distribution is designed to separate two types of
DISTRIBUTION businesses with different financial, investment and
operating characteristics, growth potential and
investment risk and return profiles so that the
separate management of each can adopt strategies and
pursue objectives more appropriate to the profile of
its specific businesses. The Company Board believes
that the Distribution would, among other things: (i)
enable New Gallaher to focus its resources on
enhancing its products, developing new markets and
products and expanding its business outside the
United Kingdom; (ii) streamline New Gallaher's
decision-making process and thereby increase
responsiveness to the rapidly changing business
environment by confining decision-making as to
allocation of resources to New Gallaher's executives
having specialized knowledge and experience in the
tobacco business; (iii) permit Fortune Brands'
management to focus exclusively on developing Fortune
Brands' long-term growth businesses; (iv) permit each
of Fortune Brands and New Gallaher to achieve
appropriate market recognition for its performance
and potential; (v) provide prospective stockholders
the opportunity to make separate investment decisions
relating to each of the companies; (vi) permit
Fortune Brands' trading multiple to reflect the
growth rates of its businesses; (vii) decrease the
likelihood that the price of Fortune Brands Common
Stock will be affected by the tobacco environment;
(viii) enhance Fortune Brands' ability to utilize its
equity securities to acquire businesses; (ix) permit
the market ultimately to adjust the stock prices of
Fortune Brands and New Gallaher to reflect
appropriate yields for the
iv
<PAGE>
companies based on their different investment
characteristics; (x) give Fortune Brands' management
the flexibility to reinvest a higher percentage of
earnings in future growth; (xi) more effectively
incentivize employees with stock-based compensation
tied more directly to the results of their respective
employers; (xii) focus investors on Fortune Brands as
a non-tobacco consumer products company; and (xiii)
allow New Gallaher to be viewed in the context of the
European tobacco market and regulatory environment in
which it operates.
See "THE DISTRIBUTION PROPOSALS--THE DISTRIBUTION--
Background and Reasons for the Distribution."
CERTAIN ORGANIZATIONAL Prior to the Distribution Date, the Company will
MATTERS transfer to New Gallaher all the stock of ATIC Group,
Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company ("ATIC"), which is the
immediate parent of Gallaher Limited, and will prior
to or shortly after the Distribution, effectuate
certain other transactions intended to allocate
assets and liabilities relating to the businesses of
New Gallaher and Fortune Brands after the
Distribution (such transfers being referred to
collectively as the "Transfers"). Stockholder
approval is not being sought for the Transfers and
the Company could proceed with the Transfers whether
or not stockholder approval is obtained for the
Distribution Proposals. See "THE DISTRIBUTION
PROPOSALS--CERTAIN ORGANIZATIONAL MATTERS."
RELATIONSHIP BETWEEN After the Distribution, neither New Gallaher nor
THE COMPANIES AFTER THE Fortune Brands will have any ownership interest in
DISTRIBUTION the other. Each of New Gallaher and Fortune Brands
will be an independent public company. New Gallaher
and Fortune Brands will enter into agreements
relating to the provision of certain services on a
temporary basis subsequent to the Distribution and
providing for the allocation of tax and certain other
liabilities and obligations. Thomas C. Hays, Chairman
of the Board and Chief Executive Officer of the
Company, will serve as a non-executive director of
New Gallaher and Peter M. Wilson, who will be
Chairman and Chief Executive of New Gallaher, will
continue to serve as a director of Fortune Brands.
See "THE DISTRIBUTION PROPOSALS--RELATIONSHIP BETWEEN
NEW GALLAHER AND FORTUNE BRANDS AFTER THE
DISTRIBUTION" and "THE DISTRIBUTION PROPOSALS--
INTERESTS OF CERTAIN PERSONS IN THE DISTRIBUTION."
ALLOCATION OF Management of the Company intends to allocate the
INDEBTEDNESS consolidated indebtedness of the Company between New
Gallaher and Fortune Brands. The amounts to be
allocated take into account the ability of each of
the companies to generate cash flow with the
intention of establishing a strong capital structure
for each company. Such allocation will be
accomplished by New Gallaher distributing pounds
sterling in the range of 925 million (net cash
proceeds of approximately $1.25 billion) to the
Company prior to the Distribution. New Gallaher will
fund this distribution with new bank borrowings and
available cash. See "THE DISTRIBUTION PROPOSALS--
ALLOCATION OF INDEBTEDNESS."
v
<PAGE>
U.S. FEDERAL INCOME TAX It is intended that the Distribution will qualify as
CONSEQUENCES OF THE a tax-free spin-off to the holders of Company Common
DISTRIBUTION Stock under Section 355 of the Internal Revenue Code
of 1986, as amended (the "Internal Revenue Code").
Under Section 355 of the Internal Revenue Code, in
general, no income, gain or loss will be recognized
on the Distribution by the holders of Company Common
Stock or by New Gallaher and Fortune Brands on the
Distribution. See "THE DISTRIBUTION PROPOSALS--U.S.
FEDERAL AND U.K. TAX CONSIDERATIONS." It is a
condition to the Distribution that the Company
receive a ruling from the IRS that Section 355 of the
Internal Revenue Code will apply to the Distribution.
Although the Company Board has retained the
discretion to waive this condition, the Company Board
will not waive such condition unless in the Company
Board's judgment, based on an opinion of counsel,
Section 355 of the Internal Revenue Code will apply
to the Distribution.
Such a ruling, while generally binding upon the IRS,
is subject to certain factual representations and as-
sumptions. The Company is not aware of any facts or
circumstances which would cause such representations
and assumptions to be untrue. For a description of
the consequences to Fortune Brands, New Gallaher and
the stockholders if the Distribution were not to
qualify as a spin-off under Section 355 of the Inter-
nal Revenue Code, see "THE DISTRIBUTION PROPOSALS--
U.S. FEDERAL AND U.K. TAX CONSIDERATIONS--Potential
Taxability."
Even if the Distribution qualifies as a tax-free
spin-off to the stockholders under Section 355 of the
Internal Revenue Code, if certain proposed
regulations are finalized in their present form and
become effective before the Distribution is
completed, the Company would be liable for corporate
tax on the difference between the fair market value
and the tax basis of all the New Gallaher Ordinary
Shares distributed, except to the extent such shares
are distributed to beneficial owners who are U.S.
corporations. If these final regulations are issued
in their proposed form and become effective prior to
the Distribution, the Company will not go forward
with the Distribution if the final regulations will
be applicable to the transactions. See "THE
DISTRIBUTION PROPOSALS--U.S. FEDERAL AND U.K. TAX
CONSIDERATIONS--Potential Taxability--Possible Impact
of Proposed Treasury Regulations."
ACCOUNTING TREATMENT Subsequent to approval of the Distribution Proposals
at the Annual Meeting and receipt of the IRS ruling
discussed above, the Company will present the net
assets and results of Gallaher (as defined below) as
a discontinued operation for all periods prior to the
Distribution. The consolidated financial statements
of Fortune Brands for periods subsequent to the
Distribution will not include the net assets or
results of New Gallaher. After the Distribution, the
business of New Gallaher will be reflected in its
separate consolidated financial statements. See "THE
DISTRIBUTION PROPOSALS--ACCOUNTING TREATMENT."
vi
<PAGE>
NEW GALLAHER
BUSINESS After the Distribution, New Gallaher will be engaged
primarily through Gallaher Limited (its wholly-owned
subsidiary) and its subsidiaries (together,
"Gallaher") in the manufacture of tobacco products in
the U.K. and the Republic of Ireland and the sale of
tobacco products principally in western Europe and
the former Soviet Union. See "THE DISTRIBUTION
PROPOSALS--NEW GALLAHER BUSINESS AND PROPERTIES."
PRINCIPAL OFFICE The principal office of New Gallaher will be at the
current corporate headquarters of Gallaher, Members
Hill, Brooklands Road, Weybridge, Surrey, KT13 OQU,
England. New Gallaher's telephone number will be 011-
44-1932-859777.
BOARD OF DIRECTORS The New Gallaher Board currently comprises Philip R.
Burchell and Christopher T. Fielden. Prior to the
Distribution Date, the Company, as sole stockholder
of New Gallaher, plans to elect the following
additional nine individuals to the New Gallaher
Board: Peter M. Wilson, Graham J. Hearne, William B.
Curry, Nigel H. Northridge, Nigel T. Simon, Richard
J. Brooke, John Gildersleeve, Thomas C. Hays and
Antony D. Portno. Messrs. Hays and Wilson currently
serve as directors of the Company and both will
continue to serve as directors of Fortune Brands
after the Distribution. See "THE DISTRIBUTION
PROPOSALS--NEW GALLAHER MANAGEMENT--New Gallaher
Board of Directors."
POST-DISTRIBUTION The declaration and payment of dividends by New
DIVIDEND POLICY Gallaher is at the discretion of the New Gallaher
Board. Although the New Gallaher Board may recommend
a final dividend, the payment of such final dividend
each year requires shareholder approval, which
typically is sought at the annual general meeting in
the following year. New Gallaher intends to pay
interim and final dividends in November and May,
respectively. It is anticipated that interim
dividends will be approximately one-third of the
total annual dividend paid. However, it is currently
contemplated that, as a transitional measure in
respect of 1997 in recognition of the historic
pattern of dividends paid by the Company, New
Gallaher will pay an interim and final dividend of
equal amounts. For illustrative purposes, the New
Gallaher Board estimates that the total dividend in
respect of the fiscal year ended December 31, 1996
would have amounted to 77 pence per ADS, or
approximately $1.20 based on a $1.56 sterling
exchange rate (the exchange rate on the date of the
announcement of the Distribution) exclusive of a
related tax credit equal to 25% of the net dividend
for eligible U.S. and U.K. taxpayers. This
illustrative 1996 dividend has been estimated on the
basis that New Gallaher had been a publicly-held
company since January 1, 1996 with the capital
structure and borrowings of New Gallaher which are
expected to be in place on the Distribution Date. The
New Gallaher Board intends to evaluate its dividend
policy in the future, from time to time, in the light
of New Gallaher's results of operations, financial
condition, cash requirements, future prospects and
other factors (including taxation) it deems relevant.
However, there can be no assurance that any dividends
will be paid in the future. See "THE
vii
<PAGE>
DISTRIBUTION PROPOSALS--DIVIDEND POLICIES--New
Gallaher" and "U.S. FEDERAL AND U.K. TAX
CONSIDERATIONS--U.S. FEDERAL AND U.K. TAX TREATMENT
OF NEW GALLAHER SHAREHOLDERS."
TRADING MARKET There is currently no public market for New Gallaher
Ordinary Shares or ADSs. New Gallaher intends to list
the ADSs on the NYSE and the New Gallaher Ordinary
Shares on the London Stock Exchange. See "THE
DISTRIBUTION PROPOSALS--THE DISTRIBUTION--Listing and
Trading of New Gallaher Ordinary Shares and ADSs."
FORTUNE BRANDS
BUSINESS After the Distribution, Fortune Brands will be
engaged, through its wholly-owned subsidiaries, in
the distilled spirits, hardware and home improvement
products, golf and leisure products and office
products businesses. See "THE DISTRIBUTION
PROPOSALS--FORTUNE BRANDS BUSINESS AND PROPERTIES."
PRINCIPAL OFFICE The principal office of Fortune Brands will be at the
current corporate headquarters of the Company, 1700
East Putnam Avenue, Old Greenwich, Connecticut 06870.
Fortune Brands' telephone number will be (203) 698-
5000.
BOARD OF DIRECTORS Effective as of the Distribution Date, the Board of
Directors of Fortune Brands is expected to consist of
the then current directors of the Company. See "THE
DISTRIBUTION PROPOSALS--FORTUNE BRANDS MANAGEMENT."
Prior to the Distribution Date, Mr. Hays will become
a member of the New Gallaher Board. Also, Mr. Wilson
will continue to serve as a director of Fortune
Brands.
POST-DISTRIBUTION The declaration and payment of dividends by Fortune
DIVIDEND POLICY Brands will be at the discretion of the Fortune
Brands Board. It is currently contemplated that the
cash dividend on the Fortune Brands Common Stock
after the Distribution will be at an initial
annualized rate of $0.80 per share. The Fortune
Brands Board intends to evaluate its dividend policy
in the future, from time to time, in light of Fortune
Brands' results of operations, financial condition,
cash requirements, future prospects and other factors
the Fortune Brands Board deems relevant. However,
there can be no assurance that any dividends will be
paid in the future. See "THE DISTRIBUTION PROPOSALS--
DIVIDEND POLICIES--Fortune Brands."
TRADING MARKET After the Distribution, it is expected that Fortune
Brands Common Stock (formerly Company Common Stock)
will continue to be listed on the NYSE. As a result
of the Distribution, the trading price range of
Fortune Brands Common Stock is expected to be lower
than the trading price range of Company Common Stock
prior to the Distribution. See "THE DISTRIBUTION
PROPOSALS--THE DISTRIBUTION--Listing and Trading of
Fortune Brands Common Stock."
viii
<PAGE>
NEW GALLAHER
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated historical financial data presented below has been
prepared as if Gallaher, together with ATIC, had been in existence on a stand-
alone basis for the entire period. This financial information has been
presented elsewhere in this Proxy Statement as that of New Gallaher or Gallaher
Group Plc. This historical data has been derived from New Gallaher's
Consolidated Financial Statements for each of the five years in the period
ended December 31, 1996 and is presented in accordance with accounting
principles generally accepted in the U.K. ("UK GAAP") and in pounds sterling
with a convenience column in U.S. dollars for the year ended December 31, 1996.
The Consolidated Financial Statements for each of the three years in the period
ended December 31, 1996 are included elsewhere in this Proxy Statement.
The summary data set forth below should be read in conjunction with the New
Gallaher Selected Consolidated Historical Financial Data, New Gallaher
Consolidated Financial Statements and notes thereto and "NEW GALLAHER
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," included elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 (i) 1996 1995 1994 1993 1992
-------- --------------- --------------- --------------- --------------- ---------------
(UK GAAP IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Turnover (including
duty) (ii)
Continuing: U.K. ...... $6,458.0 (Pounds)3,772.2 (Pounds)3,557.5 (Pounds)3,537.2 (Pounds)3,667.6 (Pounds)3,357.8
International....... 1,026.8 599.8 520.9 468.5 319.8 248.5
Discontinued........... 96.4 56.3 564.9 1,024.5 1,072.5 1,106.5
-------- --------------- --------------- --------------- --------------- ---------------
$7,581.2 (Pounds)4,428.3 (Pounds)4,643.3 (Pounds)5,030.2 (Pounds)5,059.9 (Pounds)4,712.8
======== =============== =============== =============== =============== ===============
Operating profit (iii)
Continuing: U.K. ...... $ 395.5 (Pounds) 231.0 (Pounds) 291.3 (Pounds) 282.3 (Pounds) 291.0 (Pounds) 281.6
International....... 111.3 65.0 46.1 50.6 39.4 25.1
Discontinued........... 4.3 2.5 5.8 23.6 27.8 16.6
-------- --------------- --------------- --------------- --------------- ---------------
$ 511.1 (Pounds) 298.5 (Pounds) 343.2 (Pounds) 356.5 (Pounds) 358.2 (Pounds) 323.3
======== =============== =============== =============== =============== ===============
Profit for the financial
period (iv)............ $ 378.0 (Pounds) 220.8 (Pounds) 196.1 (Pounds) 161.0 (Pounds) 230.9 (Pounds) 203.1
======== =============== =============== =============== =============== ===============
Earnings per share (v).. $ .54 31.5p 28.0p 23.0p 33.0p 29.0p
======== =============== =============== =============== =============== ===============
Dividends per
share (v).............. $ 1.80 105.4p 20.8p 22.8p 30.4p 19.9p
======== =============== =============== =============== =============== ===============
BALANCE SHEET DATA
Current assets.......... $2,138.2 (Pounds)1,249.0 (Pounds)1,108.1 (Pounds)1,414.5 (Pounds)1,290.7 (Pounds) 969.1
Net current assets
(liabilities) (vi)..... 387.2 226.2 222.4 130.7 (70.3) 58.6
Total assets............ 2,565.5 1,498.6 1,845.3 2,185.7 2,192.4 1,681.1
Net assets.............. 505.6 295.3 826.0 772.8 685.4 681.8
Capital employed (vii)
Continuing: U.K. ...... $1,063.7 (Pounds) 621.3 (Pounds) 522.3 (Pounds) 388.7 (Pounds) 349.8 (Pounds) 202.5
International....... 52.0 30.4 1.0 15.9 17.2 21.7
Discontinued........... -- -- 602.4 748.0 962.6 716.6
Interest bearing net
assets (liabilities).. (610.1) (356.4) (299.7) (379.8) (644.2) (259.0)
-------- --------------- --------------- --------------- --------------- ---------------
$ 505.6 (Pounds) 295.3 (Pounds) 826.0 (Pounds) 772.8 (Pounds) 685.4 (Pounds) 681.8
======== =============== =============== =============== =============== ===============
OTHER DATA
EBITDA (viii)........... $ 582.3 (Pounds) 340.1 (Pounds) 358.4 (Pounds) 366.1 (Pounds) 419.4 (Pounds) 379.0
EBITDA as adjusted (ix)
Continuing: U.K. ...... 562.4 328.5 309.2 308.4 309.9 298.3
International....... 118.7 69.3 50.1 56.8 40.8 26.1
Discontinued........... 13.3 7.8 24.3 63.9 68.7 54.6
</TABLE>
ix
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995
--------------- ---------------
(US GAAP IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATING DATA
Net sales..................................... (Pounds)4,372.9 (Pounds)4,079.4
Income--continuing operations................. 235.7 262.9
Net income (x)................................ 233.8 215.1
Earnings per share--continuing
operations (xi).............................. 2.77 3.09
Earnings per share--net income (xi)........... 2.75 2.53
Dividends per share (xi)...................... 8.67 1.71
BALANCE SHEET DATA
Total assets.................................. (Pounds)1,603.9 (Pounds)1,950.3
</TABLE>
(i) The pound sterling amounts presented for the year ended December 31, 1996
have been translated into U.S. dollars at the rate of $1.712 to the pound
sterling, which was the selling rate as quoted at 3 p.m. Eastern time by
Dow Jones Telerate Inc. on December 31, 1996. (See note 2(b) to New
Gallaher Consolidated Financial Statements.)
(ii) Turnover represents net sales.
(iii) Operating profit represents turnover less cost of sales, duty and all
expenses, excluding exceptional items relating to discontinued
operations, net interest, investment income and taxes. 1996 U.K.
operating profit is net of the exceptional charge of (Pounds)65.5 million
relating to the Hyde factory closing.
(iv) Profit for the financial period represents net income.
(v) Earnings and dividends per equity share are calculated based on profits for
the financial period and total dividends, respectively, divided by an
estimate of the approximate maximum number of New Gallaher Ordinary Shares
which are expected to be outstanding immediately after the Distribution
(700,000,000 shares).
(vi) Net current assets (liabilities) is equivalent to working capital.
(vii) Capital employed represents net assets exclusive of interest bearing
assets and liabilities.
(viii) EBITDA is defined as profit before interest expense, taxation and
depreciation and amortization. Management believes that EBITDA is a
measure commonly used by analysts and investors. Accordingly, this
information has been presented to permit a more complete analysis of New
Gallaher's operating performance. EBITDA should not be considered a
substitute for profit after taxation, net income or cash flow data
prepared in accordance with generally accepted accounting principles in
the U.K. or the U.S. as a measure of the profitability or liquidity of
New Gallaher.
(ix) EBITDA as adjusted reflects EBITDA (as defined above), adjusted to exclude
exceptional items relating to discontinued operations and the 1996
exceptional charge of (Pounds)65.5 million relating to the Hyde factory
closing.
(x) For a reconciliation of net income between UK and US GAAP for each of the
two years in the period ended December 31, 1996, see note 35 to New
Gallaher Consolidated Financial Statements.
(xi) Earnings and dividends per share under US GAAP are calculated based on the
historical number of Gallaher Limited Ordinary Shares outstanding during
the periods presented (85,056,000 shares).
x
<PAGE>
NEW GALLAHER
SUMMARY PRO FORMA CONDENSED FINANCIAL DATA (UNAUDITED)
The following table presents summary pro forma financial data for New
Gallaher as of and for the year ended December 31, 1996. The information set
forth below is derived from the New Gallaher pro forma financial data appearing
elsewhere in this Proxy Statement. See "THE DISTRIBUTION PROPOSALS--NEW
GALLAHER PRO FORMA CONDENSED FINANCIAL STATEMENTS." The summary pro forma
financial data presented assumes consummation of the Transfers and the
Distribution as of the beginning of the period for operating and other data and
as of the end of the period for balance sheet data.
The summary pro forma financial data of New Gallaher does not purport to
represent what the financial position or results of operations of New Gallaher
would actually have been if the Transfers and the Distribution had in fact been
consummated on such dates or to project the financial position or results of
operations as of any future date or for any period.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
----------------------
(UK GAAP IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C>
OPERATING DATA
Turnover--continuing.................................. (Pounds)4,372.0
Operating profit--continuing.......................... 296.0
Profit for the financial period....................... 181.9
Earnings per share (i)................................ 26.0p
Adjusted earnings per share (ii)...................... 32.3p
BALANCE SHEET DATA
Net current assets.................................... (Pounds) 226.2
Total assets.......................................... 1,498.6
Creditors: amounts falling due after more than one
year................................................. 950.4
Net liabilities....................................... (629.7)
</TABLE>
- --------
(i) Earnings per share has been calculated based on an estimate of the
approximate maximum number of New Gallaher Ordinary Shares which are
expected to be outstanding immediately after the Distribution (700,000,000
shares).
(ii) Adjusted earnings per share has been calculated based on the profit for
the financial period, adjusted to exclude the exceptional charge, net of
tax thereon, relating to the Hyde factory closing, divided by 700,000,000
Ordinary Shares.
(iii) See New Gallaher pro forma financial data for selected pro forma amounts
determined in accordance with US GAAP.
xi
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA
The summary consolidated historical financial data presented below has been
derived from the Company's Consolidated Financial Statements as of and for each
of the five years in the period ended December 31, 1996. See "THE DISTRIBUTION
PROPOSALS--AMERICAN BRANDS, INC. AND SUBSIDIARIES SELECTED CONSOLIDATED
HISTORICAL FINANCIAL DATA." The information presented below does not reflect
the Transfers and the Distribution and, accordingly, the table presents data
for the Company that includes amounts attributable to both Gallaher and the
businesses that will comprise Fortune Brands.
The following summary financial data should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, and the
discussion and analysis under the captions "Results of Operations" and
"Financial Condition," included in the Annual Report to Stockholders of the
Company for the fiscal year ended December 31, 1996, which is incorporated
herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Net sales............... $11,579.3 $11,367.1 $13,146.5 $12,630.5 $13,658.1
Operating income (i).... 1,085.3 1,093.0 1,312.4 1,180.6 1,589.7
Income from continuing
operations (ii)........ 496.8 543.1 885.1 541.2 786.9
Net income (ii)......... 486.5 540.4 734.1 469.8 883.8
EARNINGS PER COMMON
SHARE
PRIMARY
Continuing operations
(ii).................. $ 2.86 $ 2.90 $ 4.38 $ 2.67 $ 3.81
Net income (ii)........ 2.80 2.89 3.63 2.32 4.29
FULLY DILUTED
Continuing operations
(ii).................. $ 2.80 $ 2.84 $ 4.24 $ 2.63 $ 3.69
Net income (ii)........ 2.74 2.83 3.53 2.29 4.13
COMMON SHARE DATA
Dividends per share..... $ 2.00 $ 2.00 $ 1.9925 $ 1.97 $ 1.805
Average number of shares
outstanding............ 173.3 186.9 201.6 201.8 204.0
Book value per share.... $ 21.52 $ 21.69 $ 22.97 $ 21.09 $ 21.14
BALANCE SHEET DATA
Current assets (iii).... $ 3,873.4 $ 3,164.0 $ 4,670.9 $ 3,733.1 $ 3,453.1
Working capital (iii)... 178.1 752.7 1,555.4 575.4 664.4
Total assets............ 9,504.2 8,021.2 9,794.4 10,566.5 9,868.8
Short-term debt......... 1,459.7 710.8 705.8 1,182.9 824.7
Long-term debt.......... 1,598.3 1,154.6 1,512.1 2,492.4 2,406.8
Stockholders' equity.... 3,684.2 3,877.2 4,637.5 4,271.4 4,301.6
OTHER DATA
EBITDA (iv)............. $ 1,277.8 $ 1,311.1 $ 1,877.7 $ 1,396.9 $ 1,791.9
</TABLE>
- --------
(i) Operating income represents net sales less all costs and expenses excluding
corporate administrative expenses, interest and related expenses and other
(income) expenses, net. 1996 includes a restructuring charge in
international tobacco amounting to $88.8 million ($59.5 million after
taxes), or 34 cents and 33 cents on a primary and fully diluted per share
basis relating to the Hyde factory closing.
(ii) Income from continuing operations and net income in 1994 include $267
million ($332.9 million before taxes), which increased primary and fully
diluted earnings per share by $1.32 and $1.25, respectively, resulting
from the net gain on disposal of businesses. Income from continuing
operations and net income and primary and fully diluted earnings per
Common share in 1995 include a $20 million (no taxes required) and ten
cents and nine cents, respectively, reversal of a loss provision.
(iii) 1994 includes $1,170 million of net assets of discontinued life insurance
operations.
(iv) EBITDA is defined as income from continuing operations before interest
expense, income taxes and depreciation and amortization. Management
believes that EBITDA is a measure commonly used by analysts and investors.
Accordingly, this information has been presented to permit a more complete
analysis of the Company's operating performance. EBITDA should not be
considered a substitute for net income or cash flow data prepared in
accordance with generally accepted accounting principles as a measure of
the profitability or liquidity of the Company.
xii
<PAGE>
FORTUNE BRANDS, INC.
SUMMARY PRO FORMA CONDENSED FINANCIAL DATA (UNAUDITED)
The following table presents summary pro forma condensed financial data for
Fortune Brands for each of the three years in the period ended December 31,
1996. The information set forth below is derived from the Fortune Brands pro
forma financial statements appearing elsewhere in this Proxy Statement. See
"THE DISTRIBUTION PROPOSALS--FORTUNE BRANDS, INC. PRO FORMA CONDENSED FINANCIAL
STATEMENTS." The summary pro forma condensed financial data presented assumes
consummation of the Transfers and the Distribution as of the beginning of each
of the periods presented for operating data and as of December 31, 1996 for the
balance sheet data. In addition, the following pro forma summary data reflects
the results and net assets of The American Tobacco Company, which was sold in
December 1994, as a discontinued operation for all periods prior to the date of
sale.
The summary pro forma financial data of Fortune Brands does not purport to
represent what the financial position or results of operations of Fortune
Brands would actually have been if the Transfers and the Distribution had in
fact been consummated on such dates or to project the financial position or
results of operations as of any future date or for any period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
OPERATING DATA
Net sales
Ongoing operations...................... $4,717.7 $4,380.8 $4,095.6
Other businesses........................ -- 547.3 1,281.4
-------- -------- --------
$4,717.7 $4,928.1 $5,377.0
======== ======== ========
Operating income (i)
Ongoing operations...................... $ 597.1 $ 535.5 $ 545.5
Other businesses........................ -- 3.4 (1.8)
-------- -------- --------
$ 597.1 $ 538.9 $ 543.7
======== ======== ========
Income (loss) from continuing operations
Ongoing operations...................... $ 181.7 $ 170.2 $ 167.0
Other businesses (ii)................... -- 15.7 (245.8)
-------- -------- --------
$ 181.7 $ 185.9 $ (78.8)
======== ======== ========
Earnings per Common share from continuing
operations
Primary
Ongoing operations...................... $ 1.04 $ .91 $ .82
Other businesses........................ -- .08 (1.22)
-------- -------- --------
$ 1.04 $ .99 $ (.40)
======== ======== ========
Fully diluted
Ongoing operations...................... $ 1.03 $ .93 $ .88
Other businesses........................ -- .08 (1.15)
-------- -------- --------
$ 1.03 $ 1.01 $ (.27)
======== ======== ========
BALANCE SHEET DATA
Total assets.............................. $7,737.3
Assets of continuing operations........... 7,054.0
Long-term debt............................ 1,598.3
Stockholders' equity...................... 3,684.2
COMMON SHARE DATA
Dividends per share (iii)................. $ 2.00 $ 2.00 $ 1.9925
Average number of shares outstanding...... 173.3 186.9 201.6
Book value per share...................... $ 21.52
OTHER DATA
EBITDA (iv)............................... $ 743.4 $ 718.0 $ 458.5
EBITDA as adjusted (v).................... 743.4 698.0 703.5
</TABLE>
xiii
<PAGE>
- --------
(i) Operating income represents net sales less all costs and expenses excluding
corporate administrative expenses, interest and related expenses and other
(income) expenses, net.
(ii) Income (loss) from continuing operations and primary and fully diluted
earnings per Common share in 1994 include a $241.3 million ($245 million
before taxes) and $1.20 and $1.13, respectively, loss on disposal of
businesses. Income (loss) from continuing operations and primary and fully
diluted earnings per Common share in 1995 include a $20 million (no taxes
required) and ten cents and nine cents, respectively, reversal of the loss
provision.
(iii) Dividends shown are the actual dividends paid by the Company. The
declaration and payment of dividends by Fortune Brands will be at the
discretion of the Fortune Brands Board. It is currently contemplated that
the cash dividends on the Fortune Brands Common Stock after the
Distribution will be at an initial annualized rate of $0.80 per share.
(iv) EBITDA is defined as income (loss) from continuing operations before
interest expense, income taxes and depreciation and amortization.
Management believes that EBITDA is a measure commonly used by analysts and
investors. Accordingly, this information has been presented to permit a
more complete analysis of Fortune Brands' performance. EBITDA should not
be considered a substitute for net income or cash flow data prepared in
accordance with generally accepted accounting principles as a measure of
the profitability or liquidity of Fortune Brands.
(v) EBITDA as adjusted excludes the 1994 loss ($245 million) and 1995 reversal
($20 million), as discussed in (ii) above.
xiv
<PAGE>
AMERICAN BRANDS, INC.
PROXY STATEMENT
INTRODUCTION
The principal executive offices of American Brands, Inc. (the "Company" or
"American Brands") are located at 1700 East Putnam Avenue, Old Greenwich,
Connecticut 06870. This Proxy Statement and accompanying proxy are first being
sent or given to stockholders on or about March 15, 1997. Throughout this
Proxy Statement (i) the term "Fortune Brands" refers to the Company after the
Distribution (as defined below), renamed Fortune Brands, Inc., (ii) the term
"New Gallaher" refers to Gallaher Group Plc, an English public limited
company, after the Distribution, (iii) the term "Gallaher" refers to Gallaher
Limited (an English private limited company and, prior to the Distribution, an
indirect, wholly-owned subsidiary of the Company) and its subsidiaries and
(iv) the term "Fortune Brands Common Stock" refers to Company Common Stock (as
defined below) after the Distribution, in each case unless the context
otherwise requires.
VOTING AND PROXIES
The accompanying proxy is solicited by the Board of Directors of American
Brands (the "Company Board"). It may be revoked at any time before being voted
by written notice given to the secretary of the meeting or by the delivery of
a later-dated proxy. Proxies properly executed, duly returned to the Company
and not revoked, will be voted for the election of directors (except to the
extent that authority therefor is withheld) and on the other Items described
in this Proxy Statement in accordance with the instructions in the proxy. The
Company Board is not aware at the date hereof of any other matter proposed to
be presented at this meeting, and does not believe that any matter may be
properly presented other than Items 1 through 9. If any other matter is
properly presented, the persons named in the enclosed form of proxy will have
discretionary authority to vote thereon according to their best judgment.
Presence at the meeting does not of itself revoke the proxy.
The only securities of the Company entitled to be voted are shares of common
stock, par value $3.125, of the Company ("Company Common Stock") and $2.67
Convertible Preferred Stock and only holders of record at the close of
business on March 3, 1997 are entitled to vote. Holders of the Company Common
Stock are entitled to one vote per share and holders of $2.67 Convertible
Preferred Stock are entitled to three-tenths of one vote per share. There were
171,670,172 shares of Company Common Stock and 415,967 shares of $2.67
Convertible Preferred Stock outstanding at March 3, 1997.
The affirmative vote of shares representing a majority in voting power of
the shares of Company Common Stock and $2.67 Convertible Preferred Stock,
voted together as one class, present in person or represented by proxy and
entitled to vote at the meeting, a quorum being present, is necessary for the
approval of each of the Items except for Items 3 and 4. The approval of Item
3, relating to the change of the name of the Company to Fortune Brands, Inc.,
requires the affirmative vote of (i) at least 66 2/3% of the combined votes
cast by the holders of Company Common Stock and $2.67 Convertible Preferred
Stock voting thereon and (ii) a majority of the combined votes of the
outstanding shares of Company Common Stock and $2.67 Convertible Preferred
Stock. The election of directors, Item 4, will be by a plurality of votes
cast. Proxies marked as abstentions, or to withhold a vote from a nominee as a
director in the case of the election of directors, will have the effect of a
negative vote. Broker non-votes (where a nominee holding shares for a
beneficial owner has not received voting instructions from the beneficial
owner with respect to a particular matter and such nominee does not possess or
choose to exercise his discretionary authority with respect thereto) will be
considered as present at the meeting but not entitled to vote with respect to
the particular matter and will therefore have no effect on the vote except
with respect to Item 3, where such broker non-votes will have the effect of a
negative vote to the extent that the approval of Item 3 requires a majority of
the combined votes of the outstanding shares of Company Common Stock and $2.67
Convertible Preferred Stock.
<PAGE>
As a matter of policy, stockholder proxies, ballots and tabulations that
identify individual stockholders are kept secret and access thereto is limited
to the independent Inspectors of Election and certain employees of the Company
who must acknowledge their responsibility to comply with such policy.
MATTERS FOR CONSIDERATION AT THE ANNUAL MEETING
At the Annual Meeting, holders of the Company Common Stock and $2.67
Convertible Preferred Stock will be asked to consider and vote upon the
following separate but related proposals, denominated Items 1 through 3 (the
"Distribution Proposals"):
Item 1: Approval of the distribution (the "Distribution") by the Company
of American Depositary Shares (evidenced by American Depositary Receipts)
and ordinary shares of 10 pence each of New Gallaher ("New Gallaher
Ordinary Shares"), together representing all the outstanding share capital
of New Gallaher, an English company and currently a wholly-owned subsidiary
of the Company, on the basis described below in "THE DISTRIBUTION
PROPOSALS--THE DISTRIBUTION";
Item 2: Approval of an amendment to the Company's By-laws to repeal the
annual executive incentive compensation program set forth in Article XII
thereof and approval of the Fortune Brands, Inc. Annual Executive Incentive
Compensation Plan (see "THE DISTRIBUTION PROPOSALS--APPROVAL OF AN
AMENDMENT TO THE COMPANY'S BY-LAWS TO REPEAL THE ANNUAL EXECUTIVE INCENTIVE
COMPENSATION PROGRAM SET FORTH THEREIN AND APPROVAL OF THE FORTUNE BRANDS,
INC. ANNUAL EXECUTIVE INCENTIVE COMPENSATION PLAN"); and
Item 3: Approval of an amendment to the Certificate of Incorporation of
the Company to change the name of the Company to Fortune Brands, Inc. (see
"THE DISTRIBUTION PROPOSALS--AMENDMENT TO THE CERTIFICATE OF INCORPORATION
TO CHANGE THE NAME OF THE COMPANY").
THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION PROPOSALS IS NOT CONDITIONED
UPON THE APPROVAL OF ANY OTHER DISTRIBUTION PROPOSAL. THE COMPANY BOARD HAS
RETAINED DISCRETION, EVEN IF STOCKHOLDER APPROVAL OF THE DISTRIBUTION
PROPOSALS IS OBTAINED AND THE CONDITIONS TO THE DISTRIBUTION ARE SATISFIED, TO
ABANDON, DEFER OR MODIFY THE DISTRIBUTION OR ANY OTHER ELEMENT CONTAINED IN
THE DISTRIBUTION PROPOSALS.
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE FOR ALL OF THE DISTRIBUTION
PROPOSALS.
Although the Company believes that stockholder approval of the Distribution
is not required under Delaware law because the Distribution is a dividend for
purposes of Section 170(a) of the Delaware General Corporation Law (the
"Delaware Code"), the Company Board has made stockholder approval of the
Distribution a condition to the Distribution because of the importance of the
Distribution to the Company and its stockholders. Approval of Item 2 is being
sought because the applicable provisions of the Company's By-laws require such
approval. Accordingly, if Item 2 is not approved by the stockholders, the
proposed amendment to the Company's annual executive compensation program
could not occur. Approval of Item 2 is also being sought to preserve the
Company's ability to deduct, for federal income tax purposes, compensation
paid pursuant the Company's annual executive compensation program. Under
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), stockholder approval of performance-based compensation plans
(including material amendments thereto) is necessary to qualify for the
performance-based compensation exception to the limitation on the Company's
ability to deduct compensation paid to certain specified executives in excess
of $1 million. Approval of Item 3 is being sought because the provisions of
the Delaware Code and the Company's Certificate of Incorporation (the "Company
Certificate") require such approval.
2
<PAGE>
In addition, holders of the Company Common Stock and $2.67 Convertible
Preferred Stock will be asked to consider and vote upon the following
additional proposals, denominated Items 4 through 9 (the "Additional
Proposals"):
Item 4: The election of four directors for a term expiring at the 2000
Annual Meeting or until their successors have been elected and qualified
(see "THE ADDITIONAL PROPOSALS--ELECTION OF DIRECTORS");
Item 5: The election of Coopers & Lybrand L.L.P. as independent
accountants of the Company for the year 1997 (see "THE ADDITIONAL
PROPOSALS--ELECTION OF INDEPENDENT ACCOUNTANTS");
Item 6: Approval of the American Brands, Inc. Non-Employee Director Stock
Option Plan (see "THE ADDITIONAL PROPOSALS--APPROVAL OF THE AMERICAN
BRANDS, INC. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN");
Item 7: If presented, a stockholder proposal requesting the elimination
of election of directors by classes, expected to be made by one stockholder
(see "THE ADDITIONAL PROPOSALS--RESOLUTION REQUESTING ELIMINATION OF
ELECTION OF DIRECTORS BY CLASSES");
Item 8: If presented, a stockholder proposal requesting a report with
respect to the Glass Ceiling Commission's recommendations, expected to be
made by one stockholder (see "THE ADDITIONAL PROPOSALS--RESOLUTION
REQUESTING A REPORT WITH RESPECT TO THE GLASS CEILING COMMISSION'S
RECOMMENDATIONS"); and
Item 9: If presented, a stockholder proposal requesting an equal
employment report, expected to be made by two stockholders (see "THE
ADDITIONAL PROPOSALS--RESOLUTION REQUESTING EQUAL EMPLOYMENT REPORT").
THE EFFECTIVENESS OF EACH ADDITIONAL PROPOSAL IS NOT CONDITIONED UPON THE
APPROVAL OF THE DISTRIBUTION PROPOSALS OR ANY OTHER ADDITIONAL PROPOSAL.
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE FOR ITEMS 4, 5 AND 6 AND
RECOMMENDS THAT YOU VOTE AGAINST ITEMS 7, 8 AND 9.
NO APPRAISAL RIGHTS
Stockholders of the Company will not be entitled to appraisal rights in
connection with the Distribution.
3
<PAGE>
CAUTIONARY STATEMENT
This Proxy Statement contains statements relating to future results which
are forward-looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995. Actual results may differ materially
from those projected as a result of certain risks and uncertainties, including
but not limited to changes in general economic conditions, foreign exchange
rate fluctuations, competitive product and pricing pressures, the impact of
excise tax increases with respect to international tobacco and distilled
spirits, regulatory developments and the uncertainties of litigation, as well
as other risks and uncertainties detailed from time to time in the Company's
Securities and Exchange Commission ("SEC") filings.
THE DISTRIBUTION PROPOSALS
ITEM 1
THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Company periodically reviews its businesses to determine their fit with
the Company's overall business strategy. In recent years, the Company has
focused on developing its operations having higher long-term growth potential.
For example, the Company has made acquisitions in the Distilled Spirits
business, the Office Products business, the Hardware and Home Improvement
business and the Golf and Leisure Products business to create businesses with
a scale to compete on a global basis. In addition, the Company has disposed of
businesses considered to be nonstrategic to its long-term operations. These
dispositions have included the sale of The Franklin Life Insurance Company,
the Company's life insurance business, in January 1995; the sale of The
American Tobacco Company, the Company's domestic tobacco subsidiary, in
December 1994; and the sale of Dollond & Aitchison Group (Holdings) Limited
("Dollond & Aitchison") (optical goods and services), a subsidiary of
Gallaher, in July 1994. The Company has also disposed of a number of other
nonstrategic businesses and product lines, including United Kingdom-based
Forbuoys Limited, Marshell Group Limited and TM Group Limited (the "retail
group") (all retail distribution) and The Prestige Group Plc ("Prestige")
(housewares), both subsidiaries of Gallaher. The sale of Prestige was
completed in May 1995 and the sale of the retail group was completed in July
1995.
As a result of the foregoing, the Company Board believes that at the present
time, the Company has businesses which have very strong long-term growth
prospects--hardware and home improvement products, golf and leisure products
and office products; a distilled spirits business that has strong growth
potential in its overseas markets; and a highly profitable, but more mature,
international tobacco business that generates over 40% of the Company's
earnings before interest and taxes.
Although the international tobacco business has performed extremely well,
further expansion of such tobacco business would need to be balanced with the
Company's long-term restructuring strategy as expressed above. The Company
Board has determined that a separation of the international tobacco business
and its other consumer products businesses into two publicly-owned companies
would benefit both companies because it would result in two corporations, each
with its own very different financial, investment and operating
characteristics and investment risk and return profiles. The Company Board
believes that the Distribution would permit the separate management of each of
the companies to adopt strategies and pursue objectives more appropriate to
the profile of its specific businesses than is possible under the present
combined structure.
The Company Board believes that if Gallaher is separated from the Company,
Gallaher's business will be enhanced because it will function as an enterprise
that is committed to the tobacco business for the long-term and that is
focused exclusively on building the tobacco business through enhancing its
products, developing new markets and products and expanding its business
outside of the United Kingdom ("U.K.") While Gallaher's cash flow has been
more than sufficient to support the investments Gallaher has sought to make
over the years, the continued development and expansion of Gallaher's business
has had to be balanced with the needs of the Company's other businesses. The
Company Board also believes that Gallaher will be able to respond more quickly
and responsively to business challenges and the rapidly changing business
environment because its
4
<PAGE>
decision-making process will be more streamlined and confined to decision-
making by U.K.-based Gallaher executives, with specialized knowledge and
experience in the tobacco business.
The Company Board believes that the separation would also benefit the
Company, as it would permit the Company's management to focus all of its time
and energy on developing the Company's other core businesses, rather than
devoting significant time and attention, as it presently does, to the Gallaher
business. It is expected that Fortune Brands will be able to focus exclusively
on the management decisions and risk assessments associated with its long-term
growth businesses.
The Company Board believes that the Distribution would also permit the
financial community and markets to recognize Fortune Brands and New Gallaher
as distinct businesses and to evaluate the companies more effectively since
the financial performance of each would be more easily understood. As a
consequence, each of Fortune Brands and New Gallaher would better achieve
appropriate market recognition for its performance and potential.
The Company Board believes that the market views tobacco and non-tobacco
investments differently and values them in a different way. The Company
expects its non-tobacco businesses to be valued by investors based on a
multiple of earnings, while the tobacco business is more likely to be valued
by investors based on its significant and consistent cash flow. If the tobacco
and non-tobacco businesses are separated, prospective stockholders will have
the opportunity to make separate investment decisions relating to each
company. Moreover, the separation would allow the markets to appreciate more
fully the growth rate and growth potential of the Company's other core
businesses, which are now being obscured by Gallaher's contribution of over
40% of the Company's earnings before interest and taxes.
If Gallaher is separated from the Company's other core businesses, the
Company Board believes that the Company's trading multiple should reflect the
growth rates of its other businesses, while its stock price is less likely to
be affected by the tobacco litigation and regulatory environment. The Company
would then be in a better position to utilize its equity securities to acquire
companies whose stockholders seek to be acquired in a tax-free stock
transaction.
Furthermore, because tobacco and non-tobacco investments are viewed
differently, investors demand a different dividend yield to support their
investment. Today, the Company is providing dividends at a level appropriate
for a tobacco company. It is currently contemplated that, as a result of the
Distribution, the combined companies will initially offer investors a total
dividend that is comparable to the current Company payout, but the market will
ultimately be able to adjust the stock prices of the two post-spin-off
components to assure appropriate yields. The Distribution would also give
Fortune Brands' management the flexibility in the future to reinvest a higher
percentage of earnings in future growth.
The Company Board also believes that the Distribution will better enable
equity-based and other incentive compensation for key employees of each of the
businesses to be tied more closely to the performance of their respective
employers' businesses, and therefore to the creation of shareholder value by
these key employees, than is possible while the Gallaher business and the
Company's other businesses are aggregated within the Company group. The
Company Board believes that its principal businesses, as well as its
stockholders, as stockholders of New Gallaher and Fortune Brands, should
benefit from the positive effects of these more closely aligned management
incentives.
Finally, the Company Board believes that some investors do not realize that
the Company is no longer associated with the U.S. tobacco market,
notwithstanding its 1994 sale of The American Tobacco Company. The Company's
stock has frequently been negatively affected by adverse developments in the
U.S. tobacco litigation and regulatory environment. Following the
Distribution, Fortune Brands should be recognized as a non-tobacco consumer
products company and, likewise, New Gallaher should be recognized more clearly
as a European tobacco manufacturer that is operating in an environment
significantly different from the current U.S. tobacco litigation and
regulatory environment.
5
<PAGE>
These factors led the Company Board to consider the potential separation of
its Gallaher tobacco business from its other consumer products businesses as a
part of its continual review of its overall portfolio of businesses. In the
course of determining to proceed with the separation, the Company Board
reviewed many alternatives. After thoroughly reviewing such alternatives, and
in light of the factors discussed above, the Company Board believes that the
Distribution is in the best interests of the Company, Gallaher and the
Company's stockholders.
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE FOR ALL OF THE DISTRIBUTION
PROPOSALS.
OPINION OF FINANCIAL ADVISOR
American Brands retained Morgan Stanley & Co. Incorporated ("Morgan
Stanley") to act as American Brands' financial advisor in connection with the
Distribution and related matters based upon Morgan Stanley's experience and
expertise. Morgan Stanley rendered a written opinion to the Company Board
that, as of March 12, 1997 and subject to the considerations set forth in such
opinion, the proposed Distribution is fair from a financial point of view to
holders of shares of Company Common Stock.
The full text of Morgan Stanley's written opinion dated March 12, 1997,
which sets forth the assumptions made, matters considered and limitations on
the review undertaken, is attached as Annex A to this Proxy Statement and is
incorporated herein by reference. Stockholders are urged to, and should, read
the Morgan Stanley opinion carefully and in its entirety. The Morgan Stanley
opinion is directed to the Company Board and concerns the fairness of the
proposed Distribution from a financial point of view to the holders of shares
of Company Common Stock, and it does not address any other aspect of the
Distribution. The summary of the Morgan Stanley opinion set forth in this
Proxy Statement is qualified in its entirety by reference to the full text of
such opinion. The Company Board has requested that Morgan Stanley deliver an
updated opinion to the Company Board, to be dated as of the date of the
Company Board's declaration of the dividend constituting the Distribution, in
substantially the same form as the opinion attached as Annex A to this Proxy
Statement.
In arriving at its opinion, Morgan Stanley (i) reviewed certain publicly
available financial statements and other information relating to American
Brands and Gallaher; (ii) reviewed certain internal financial statements and
other financial and operating data concerning American Brands and Gallaher
prepared by their respective managements; (iii) analyzed certain financial
budgets and forecasts prepared by the respective managements of American
Brands and Gallaher; (iv) compared the financial performance of Gallaher with
that of certain other companies with publicly traded securities which Morgan
Stanley deemed to be comparable to New Gallaher; (v) compared the financial
performance of American Brands and Fortune Brands with that of certain other
companies with publicly traded securities which Morgan Stanley deemed to be
comparable to the businesses of American Brands and Fortune Brands,
respectively; (vi) discussed past and current operations and financial
condition and the prospects of American Brands and Gallaher with senior
executives of American Brands and Gallaher; (vii) participated in discussions
among representatives of American Brands and Gallaher and their U.S. and U.K.
legal, tax and accounting advisors; (viii) reviewed this Proxy Statement and
certain documents relating to the Distribution; and (ix) performed such other
analyses and considered such other factors as Morgan Stanley deemed
appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by Morgan Stanley for the purposes of its opinion. With respect to
the financial budgets and forecasts, Morgan Stanley assumed that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of the future financial performance of American
Brands, Fortune Brands and New Gallaher. Morgan Stanley did not make any
independent valuation or appraisal of the assets or liabilities, contingent or
otherwise, of American Brands, Fortune Brands, Gallaher or New Gallaher, nor
has Morgan Stanley been furnished with any such appraisals. Morgan Stanley
expresses no opinion with respect to any potential liabilities of American
Brands, Fortune Brands, Gallaher or New Gallaher in connection with any
litigation.
Morgan Stanley further assumed that, prior to the Distribution, American
Brands will receive a ruling from the Internal Revenue Service (the "IRS") or
an opinion of counsel to the effect that the Distribution will qualify as a
spin-off under Section 355 of the Internal Revenue Code and consequently that
the Distribution will
6
<PAGE>
generally be tax-free to American Brands under federal income tax laws. Morgan
Stanley has assumed that American Brands will recognize taxable gain on shares
distributed to any foreign shareholders of American Brands as of the date of
the Distribution. Morgan Stanley has also assumed that American Brands will
recognize taxable income upon the receipt of the approximately $1.4 billion
distribution which is to be made to American Brands by New Gallaher prior to
the Distribution, although the amount of such taxable income will be
significantly reduced through the use of foreign tax credits. Morgan Stanley
understands that the Inland Revenue Service has indicated that interest
payable by New Gallaher on borrowings to fund the Distribution will not be
deductible for U.K. corporation tax purposes. Morgan Stanley has assumed and
relied upon the estimates of the managements of New Gallaher and American
Brands of the probability and magnitude of the potential tax liability to New
Gallaher in connection with the Distribution. The management of American
Brands has advised Morgan Stanley that the Company has agreed to indemnify New
Gallaher for 50% of the taxes attributable to such possible lost tax
deductions subject to a maximum indemnification of (Pounds)65 million
(approximately $100 million), as well as 50% of the tax, if any, incurred by
New Gallaher on the indemnity payments. Morgan Stanley has also assumed that
American Brands will receive a ruling from the IRS to the effect that the
Distribution will not be a taxable transaction to the U.S. stockholders of
American Brands under federal income tax laws (except to the extent of any
cash distributed in lieu of fractional shares of New Gallaher). Morgan Stanley
has further assumed the correctness of the conclusions set forth in such
ruling. In addition, Morgan Stanley understands that the Distribution will be
taxable to the U.K. stockholders of American Brands. For the purposes of its
opinion, with American Brands' consent, Morgan Stanley has assumed that the
tax cost to American Brands will not be material in respect of (i) ownership
of Company Common Stock by foreign shareholders (based upon American Brands'
estimates of foreign shareholdings of the Company) and (ii) the transfer of
certain trademarks by ATIC Group, Inc. to New Gallaher. Morgan Stanley has
also assumed that the Distribution will comply with all federal, state, local
and foreign laws and applicable regulations.
Morgan Stanley assumed that the conditions to the Distribution stated in
this Proxy Statement will be satisfied and the Distribution and the related
transactions will be consummated on the terms set forth in this Proxy
Statement, including, among other things, the transfer by ATIC Group, Inc. of
certain tobacco-related trademarks to New Gallaher prior to consummation of
the Distribution. Morgan Stanley also understands that New Gallaher's
principal asset will be shares in Gallaher and that New Gallaher intends to
distribute approximately $1.4 billion to American Brands prior to consummation
of the Distribution.
Morgan Stanley's opinion is necessarily rendered on the basis of securities
markets, economic and general business and financial conditions prevailing as
of the date of such opinion and the conditions and prospects, financial and
otherwise, of American Brands, Fortune Brands, Gallaher and New Gallaher as
they were represented to it as of the date thereof or as they were reflected
in the information and documents reviewed by it. Morgan Stanley's opinion
assumes that the shares of American Brands, Fortune Brands and New Gallaher
are fully and widely distributed among investors and are subject only to
normal trading activity. Morgan Stanley notes that trading in the Company
Common Stock before the Distribution is effected, and Fortune Brands Common
Stock and New Gallaher Ordinary Shares after the Distribution is effected, for
a period commencing with the public announcement of the Distribution and
continuing for a time following the completion of the Distribution, may
involve a redistribution of such securities among the various investors in
these securities. Accordingly, during such period, such securities may trade
at prices below both those at which they traded prior to the public
announcement of the Distribution and those at which they would trade on a
fully distributed basis after the Distribution is completed. The estimation of
market trading prices of newly distributed securities is subject to
uncertainties and contingencies, all of which are difficult to predict and
beyond the control of the firm making such estimates. In addition, the market
price of such securities will fluctuate with changes in market conditions, the
conditions and prospects, financial and otherwise, of American Brands, Fortune
Brands and New Gallaher, and other factors which generally influence the
prices of securities.
The Company Board retained Morgan Stanley based upon its experience and
expertise. Morgan Stanley is a nationally recognized investment banking and
advisory firm. Morgan Stanley, as part of its investment banking business, is
continuously engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings,
financings, competitive bidding, secondary distributions of listed and
7
<PAGE>
unlisted securities, private placements and valuations for corporate and other
purposes. In the past, Morgan Stanley and its affiliates have provided
financial advisory and financing services for the Company and have received
fees for the rendering of such services. Morgan Stanley is a full service
securities firm engaged in securities trading and brokerage activities, as
well as providing investment banking, financing and financial advisory
services. From time to time, Morgan Stanley has provided and continues to
provide investment banking and financial advisory services to the Company as
underwriters and financial advisors. In the ordinary course of Morgan
Stanley's trading and brokerage activities, Morgan Stanley or its affiliates
may at any time hold long or short positions and may trade or otherwise effect
transactions, for their own accounts or for the account of customers, in debt
or equity securities or senior loans of the Company or New Gallaher. In
connection with the Distribution, Morgan Stanley & Co. Limited will be the
sponsor in connection with the listing of New Gallaher Ordinary Shares on the
London Stock Exchange and its fee therefor is subsumed in the transaction fee
for Morgan Stanley.
Pursuant to an engagement letter between the Company and Morgan Stanley, the
Company retained Morgan Stanley as financial advisor in connection with a
potential transaction involving Gallaher. The Company agreed to pay Morgan
Stanley an advisory fee or a transaction fee based upon whether the
Distribution is consummated. The advisory fee, payable if the Distribution is
not consummated, is estimated to be between $1 million and $1.5 million. If
the Distribution is consummated, Morgan Stanley's transaction fee will be
approximately $14 million to $17 million, against which any advisory fee paid
will be credited.
The Company has also agreed to reimburse Morgan Stanley for its out-of-
pocket expenses, including the fees of its outside legal counsel engaged with
the Company's consent. The Company has agreed to indemnify Morgan Stanley and
its affiliates, their respective directors, officers, agents and employees,
and each person, if any, controlling Morgan Stanley or any of its affiliates
against certain liabilities, including liabilities under the federal
securities laws.
MANNER OF EFFECTING THE DISTRIBUTION
The Company Board has approved (subject to the satisfaction of the
conditions to the Distribution discussed under "--Conditions to the
Distribution" below and the actual declaration of the dividend in respect of
the Distribution) a plan to distribute all the outstanding New Gallaher
Ordinary Shares to the holders of outstanding Company Common Stock. In the
Distribution, each U.S. and Canadian holder of Company Common Stock will
receive as a dividend one American Depositary Share ("ADS") (with each such
ADS representing four New Gallaher Ordinary Shares) evidenced by an American
Depositary Receipt or Receipts ("ADRs"), for every one share of Company Common
Stock held on the record date for the Distribution established by the Company
Board (the "Distribution Record Date"). All other holders of Company Common
Stock will receive four New Gallaher Ordinary Shares for every share of
Company Common Stock held on the Distribution Record Date.
If the Company's stockholders approve the Distribution and all other
conditions thereto are satisfied (or waived by the Company Board, if
permissible), and if the Company Board declares the Distribution, the
Distribution will occur on a date to be established by the Company Board (the
"Distribution Date"). The Distribution Date and the Distribution Record Date
will be established by the Company Board after the receipt of a favorable tax
ruling with respect to the Distribution, unless the receipt thereof has been
waived (see "--U.S. FEDERAL AND U.K. TAX CONSIDERATIONS--U.S. Federal Income
Tax Consequences of the Distribution to the Company and to Beneficial Owners
of Company Common Stock" and "--Conditions to the Distribution"). The
Distribution Record Date will be a date that is as soon as practicable
following the declaration of the Distribution. Prior to the Distribution Date,
all the outstanding New Gallaher Ordinary Shares will be held by The Bank of
New York, as the Depositary, or its custodian (other than a nominal number of
New Gallaher Ordinary Shares that will be retained by the Company for U.K.
corporate law reasons) and the Company will hold an ADR evidencing ADSs which
will represent all the New Gallaher Ordinary Shares held by The Bank of New
York or its custodian. On the Distribution Date, the Company will deliver its
ADR and the nominal number of New Gallaher Ordinary Shares held directly by it
(which together will represent all the outstanding share capital of New
Gallaher) to The Bank of New York, as the Distribution Agent. As soon as
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<PAGE>
practical thereafter, the Distribution Agent will arrange for the mailing of
ADRs to the U.S. and Canadian holders, and certificates representing New
Gallaher Ordinary Shares to all other holders, of record of Company Common
Stock as of the Distribution Record Date on the bases as described in the
immediately preceding paragraph. All such shares will be credited as fully
paid. See "--DESCRIPTION OF NEW GALLAHER ORDINARY SHARES" and "--DESCRIPTION
OF AMERICAN DEPOSITARY SHARES."
No holder of Company Common Stock will be required to pay any cash or other
consideration for the ADRs or certificates representing New Gallaher Ordinary
Shares received in the Distribution or to surrender or exchange shares of
Company Common Stock in order to receive ADRs or certificates representing New
Gallaher Ordinary Shares.
The Company expects that no fractional ADSs or New Gallaher Ordinary Shares
will need to be distributed as a result of the Distribution, except to the
extent any stockholders of the Company participating in the Company's Stock
Accumulation Plan and Employee Stock Purchase Plan have credited to their
accounts on the Distribution Record Date a fractional share of Company Common
Stock. In lieu of delivering any fractional ADSs to such stockholders, all
such fractional interests will be aggregated into whole ADSs and delivered to
an independent agent (the "Independent Agent"). The Independent Agent, through
broker-dealers it selects, will sell such ADSs on behalf of these stockholders
at such time or times, and at such prices and in such amounts, as the
Independent Agent deems appropriate, and thereafter such Independent Agent
will collect the net proceeds from such sales and make the appropriate
payments to these stockholders.
As a result of the Distribution, owners of Company Common Stock will become
the owners of four New Gallaher Ordinary Shares for every one share of Company
Common Stock held of record on the Distribution Record Date. Owners of Company
Common Stock will also retain their continuing ownership interest in the
Company (renamed Fortune Brands).
Stockholders of the Company having inquiries relating to the Distribution
prior to the Distribution Date should contact Kissel-Blake Inc., 110 Wall
Street, New York, New York, 10005, telephone number: 1-800-554-7733, or may
call either Shareholder Direct(R) at 1-800-310-5960 for recorded information
about the Distribution, or the Company's Shareholder Services Department at 1-
800-225-2719. Written inquiries may be directed to the Vice President and
Secretary, American Brands, Inc., 1700 East Putnam Avenue, Old Greenwich,
Connecticut 06870-0811.
LISTING AND TRADING OF NEW GALLAHER ORDINARY SHARES AND ADSs
There is not currently a public market for New Gallaher Ordinary Shares or
the ADSs representing such shares. Prices at which New Gallaher Ordinary
Shares and ADSs may trade prior to the Distribution on a "when-issued" basis
or after the Distribution cannot be predicted. Until the New Gallaher Ordinary
Shares and ADSs are fully distributed and an orderly market develops, the
prices at which trading in such shares occurs may fluctuate significantly. The
prices at which New Gallaher Ordinary Shares and ADSs trade will be determined
by the marketplace and may be influenced by many factors, including, among
others, the depth and liquidity of the market for New Gallaher Ordinary Shares
and ADSs, investor perception of New Gallaher and the industry in which New
Gallaher participates, New Gallaher's dividend policy and general economic and
market conditions. See "--DIVIDEND POLICIES--New Gallaher."
New Gallaher intends to apply to list the ADSs on the New York Stock
Exchange (the "NYSE") and the New Gallaher Ordinary Shares on the London Stock
Exchange. The NYSE symbol for the ADSs is expected to be "GLH". For a
description of the New Gallaher Ordinary Shares and ADSs, see "--DESCRIPTION
OF NEW GALLAHER ORDINARY SHARES" and "--DESCRIPTION OF AMERICAN DEPOSITARY
SHARES."
The Company filed a request for a no-action letter with the SEC setting
forth, among other things, the Company's view that the Distribution does not
require registration of the New Gallaher Ordinary Shares under
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<PAGE>
the Securities Act of 1933, as amended (the "Securities Act"), and has
received a favorable letter from the SEC in response to this request.
Accordingly, New Gallaher Ordinary Shares and ADSs distributed to the
Company's stockholders in the Distribution will be freely transferable, except
for securities received by persons who may be deemed to be "affiliates" of New
Gallaher within the meaning of Rule 144 promulgated under the Securities Act.
Persons who are affiliates of New Gallaher within the meaning of Rule 144
would be subject to such rule and may not publicly offer or sell the New
Gallaher Ordinary Shares or ADSs received in connection with the Distribution
except pursuant to a registration statement under the Securities Act or an
exemption. However, the 90-day waiting period of Rule 144(c)(1) would not
apply to such sales by affiliates.
LISTING AND TRADING OF FORTUNE BRANDS COMMON STOCK
After the Distribution, it is expected that Fortune Brands Common Stock
(formerly Company Common Stock) will continue to be listed and traded on the
NYSE. The NYSE symbol for Fortune Brands Common Stock will be "FO". Following
the Distribution, Fortune Brands' financial results will no longer be
consolidated with Gallaher's international tobacco business, and, as a result,
sales, income and other results of operations will be below those of the
Company prior to the Distribution. Accordingly, as a result of the
Distribution, the trading price range of Fortune Brands Common Stock
immediately after the Distribution is expected to be lower than the trading
price range of Company Common Stock prior to the Distribution. The combined
trading prices of Fortune Brands Common Stock and the ADSs or New Gallaher
Ordinary Shares held by stockholders after the Distribution may be less than,
equal to or greater than the trading price of Company Common Stock prior to
the Distribution. The prices at which Fortune Brands Common Stock trades after
the Distribution will be determined by the marketplace and may be influenced
by many factors, including, among others, the continuing depth and liquidity
of the market for Fortune Brands Common Stock, investor perception of Fortune
Brands' businesses, Fortune Brands' dividend policy and general and economic
and market conditions. See "--DIVIDEND POLICIES--Fortune Brands."
CONDITIONS TO THE DISTRIBUTION
The Distribution is subject to, among other things: (i) approval of the
Distribution by stockholders of the Company; (ii) receipt of a favorable tax
ruling from the IRS as to certain U.S. federal income tax consequences of the
Distribution; (iii) final approval by the Company Board of the Distribution;
(iv) all necessary third party consents having been obtained, except for those
consents which would not have a material adverse effect on the Company or New
Gallaher if they were not obtained; (v) the Registration Statements on Form
20-F and F-6 to be filed by New Gallaher with respect to the ADSs being
declared effective; (vi) the Board of Directors of New Gallaher (the "New
Gallaher Board"), composed of the persons identified herein as the New
Gallaher directors, being duly elected; (vii) the Memorandum and Articles of
Association of New Gallaher being amended to be substantially in the forms
delivered by New Gallaher to the Company; (viii) the ADSs being approved for
listing on the NYSE and the New Gallaher Ordinary Shares being admitted to the
Official List of the London Stock Exchange; (ix) the transactions contemplated
by the Distribution Agreement (as defined below) in connection with the
Transfers (as defined below) and other organizational matters being
consummated in all material respects; (x) the Company and New Gallaher having
entered into each of the agreements and other arrangements to be entered into
in connection with the transactions contemplated by the Distribution
Agreement, including, without limitation, the Interim Services Agreement (as
defined below), the Tax Allocation Agreement (as defined below) and the
Indemnification Agreement (as defined below), and each such agreement being in
full force and effect; (xi) a no-action letter from the SEC regarding certain
aspects of the Distribution being issued and in full force and effect; (xii)
no suit, action or proceeding by or before any court of competent jurisdiction
or other governmental authority having been commenced or threatened to
restrain or challenge the transactions contemplated by the Distribution
Agreement, and no inquiry having been received that in the reasonable judgment
of the Company Board may lead to such a suit, action or proceeding; and (xiii)
no order, injunction or decree having been issued by any court of competent
jurisdiction or other legal restraint or prohibition preventing consummation
of the Distribution being in effect. The Company Board has retained discretion
to waive any of the aforementioned conditions. However, the Company Board will
not waive the requirement of receipt of the
10
<PAGE>
favorable tax ruling from the IRS unless, in the Company Board's judgment,
based on an opinion of counsel, Section 355 of the Internal Revenue Code will
apply to the Distribution. Even if all the conditions have been satisfied, the
Distribution Agreement may be terminated and the Distribution abandoned by the
Company Board, in its sole discretion, without the approval of the Company's
stockholders, at any time prior to the Distribution Date.
As noted above, the Company Board has approved, subject to the satisfaction
of the conditions discussed under this heading and the actual declaration of
the dividend in respect of the Distribution, a plan to distribute all the
outstanding New Gallaher Ordinary Shares.
FUTURE MANAGEMENT OF THE SEPARATE COMPANIES
NEW GALLAHER
Following the Distribution it is intended that New Gallaher will be a
holding company and through Gallaher will operate the tobacco business of
Gallaher substantially in the manner in which it is currently operated. New
Gallaher will conduct the tobacco business with substantially the same
operating management with which it is presently conducted: Peter M. Wilson
will be Chairman and Chief Executive; Philip R. Burchell will be Finance
Director; William B. Curry will be Production and Personnel Director;
Christopher T. Fielden will be Group Legal Adviser; Nigel H. Northridge will
be Sales and Marketing Director; Nigel T. Simon will be International
Director; and Nigel P. Bulpitt will be Company Secretary. See "--NEW GALLAHER
MANAGEMENT."
FORTUNE BRANDS
Following the Distribution it is intended that the non-tobacco businesses of
the Company will continue to be operated substantially in the manner in which
they are currently operated. See "--FORTUNE BRANDS MANAGEMENT--Board of
Directors and Executive Officers of Fortune Brands."
CERTAIN ORGANIZATIONAL MATTERS
Prior to the Distribution Date, the Company will transfer to New Gallaher
the stock of ATIC Group, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company ("ATIC"), which is the immediate parent of Gallaher,
and will prior to or shortly after the Distribution, effectuate certain other
transactions intended to allocate assets and liabilities relating to the
businesses of New Gallaher and Fortune Brands after the Distribution (such
transfers being referred to collectively as the "Transfers"). Stockholder
approval is not being sought for the Transfers and the Company could proceed
with the Transfers whether or not stockholder approval is obtained for the
Distribution Proposals.
RELATIONSHIP BETWEEN NEW GALLAHER AND FORTUNE BRANDS AFTER THE DISTRIBUTION
Gallaher is an indirect, wholly-owned subsidiary of the Company, and the
financial position and results of operations of Gallaher have been included in
the Company's consolidated financial statements. After the Distribution,
Fortune Brands will not have any ownership interest in New Gallaher or
Gallaher, and New Gallaher (after the Transfers, the parent of Gallaher) will
be an independent public company. Furthermore, except as described below, all
contractual relationships existing prior to the Distribution between the
Company and Gallaher will be terminated except for any commercial
relationships in the ordinary course of business.
Prior to the Distribution, the Company and New Gallaher will enter into
certain agreements, described below, relating to the provision of certain
services on a temporary basis subsequent to the Distribution and providing for
the allocation of tax and certain other liabilities and obligations. Each of
the Company and New
11
<PAGE>
Gallaher believes that the agreements are fair to the parties to such
agreements. In each case, the terms of these agreements will have been
reviewed by individuals who will be included at a senior management level of
New Gallaher and Fortune Brands. The agreements contain various terms which
are believed to be comparable to those used by others in similar transactions
in the United States.
Copies of the forms of certain agreements will be filed as exhibits to the
Registration Statement on Form 20-F of New Gallaher in respect of the
registration of the ADSs and the New Gallaher Ordinary Shares under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition,
the Company intends to file a Current Report on Form 8-K in connection with
the Distribution, and certain agreements either will be filed as exhibits to
such report or will be included in a later filing by the Company under the
Exchange Act. See "OTHER MATTERS--AVAILABLE INFORMATION" and "OTHER MATTERS--
REPORTS OF NEW GALLAHER."
DISTRIBUTION AGREEMENT
The Company, ATIC, New Gallaher and Gallaher will enter into a distribution
agreement (the "Distribution Agreement") providing for, among other things,
the principal corporate transactions required to effect the Transfers and the
Distribution, and certain other agreements governing the relationship between
Fortune Brands and New Gallaher with respect to or in consequence of the
Distribution.
Prior to the Distribution, New Gallaher will distribute pounds sterling in
the range of 925 million (net cash proceeds of approximately $1.25 billion) to
the Company (the "Distribution Payment"). New Gallaher will fund the
Distribution Payment with new bank borrowings and available cash and the
Company will initially use the funds received to repay its short-term
indebtedness, with the remainder to be utilized for working capital purposes.
The ultimate use of the proceeds may differ from the assumptions used herein.
The effect of these transactions will be to adjust the post-Distribution
capital structure of each company by decreasing the consolidated debt of the
Company and increasing the consolidated debt of New Gallaher. The amount of
the Distribution Payment takes into account the ability of each of the
companies to generate cash flow with the intention of establishing a strong
capital structure for each company.
Subject to certain exceptions, the Distribution Agreement provides for
certain cross-indemnities principally designed to place financial
responsibility for the liabilities of New Gallaher and its subsidiaries with
New Gallaher and financial responsibility for the liabilities of Fortune
Brands and its subsidiaries with Fortune Brands. In addition, the Distribution
Agreement provides that each of Fortune Brands and New Gallaher will indemnify
the other in the event of certain liabilities, including liabilities arising
under the Exchange Act and the Financial Services Act 1986.
The Distribution Agreement also deals with insurance matters, including
provision for the allocation of benefits between Fortune Brands and New
Gallaher under certain existing insurance policies after the Distribution Date
and for the administration of insured claims. The Distribution Agreement also
requires each of Fortune Brands and New Gallaher to maintain for a period of
time after the Distribution Date a directors' and officers' liability
insurance policy providing comparable coverage on substantially the same terms
for events occurring prior to the Distribution Date for all persons who are or
were directors and officers of the respective company and its subsidiaries as
of the Distribution Date as existed under the Company's existing directors'
and officers' liability insurance policies.
The Distribution Agreement provides that, in general, except as otherwise
set forth therein, in the Tax Allocation Agreement (as defined below) or in
the Interim Services Agreement (as defined below), all costs and expenses
incurred on or prior to the Distribution Date in connection with the
Distribution will be allocated taking into consideration the party for whose
benefit the expenses are incurred. In addition, except as otherwise set forth
in the Distribution Agreement, the Tax Allocation Agreement or the Interim
Services Agreement, each of Fortune Brands and New Gallaher will bear its own
costs and expenses incurred after the Distribution Date.
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<PAGE>
The Distribution Agreement provides that various conditions must be
satisfied (or waived as described below) or the Distribution will not be made.
See "--THE DISTRIBUTION--Conditions to the Distribution." The Company Board
has retained discretion to waive any such conditions. However, the Company
Board will not waive the requirement of receipt of a favorable tax ruling from
the IRS unless, in the Company Board's judgment, based on an opinion of
counsel, Section 355 of the Internal Revenue Code will apply to the
Distribution. Even if all the conditions have been satisfied, the Distribution
Agreement may be terminated and the Distribution abandoned by the Company
Board, in its sole discretion, without the approval of the Company's
stockholders, at any time prior to the Distribution Date.
INDEMNIFICATION AGREEMENT
Prior to the Distribution, the Company, ATIC, New Gallaher and Gallaher will
enter into an indemnification agreement (the "Indemnification Agreement")
pursuant to which, among other things, ATIC, New Gallaher and Gallaher (the
"Indemnitors") will jointly and severally indemnify the Company against claims
arising from smoking and health and fire safe cigarette matters relating to
the tobacco business of Gallaher. In support of this indemnity, the
Indemnitors have agreed to obtain similar indemnities in favor of the Company
in the event of the transfer or licensing of certain assets to third parties.
TAX ALLOCATION AGREEMENT
Prior to the Distribution, the Company, New Gallaher and Gallaher will enter
into a tax allocation agreement (the "Tax Allocation Agreement") which
provides, among other things, for the allocation between the parties thereto
of responsibility for federal, state, local and foreign tax liabilities for
periods before and after the Distribution Date and related matters such as the
filing of tax returns and the conduct of audits and other tax proceedings. In
general, the Tax Allocation Agreement provides that New Gallaher and Gallaher
will be responsible for all such taxes of New Gallaher and its subsidiaries,
and that Fortune Brands will be responsible for all such taxes of Fortune
Brands and its subsidiaries (including, in each case, subsidiaries disposed of
to third parties in respect of taxes arising in the periods in which they were
subsidiaries), except that Fortune Brands will be responsible for 50% of the
taxes attributable to any loss of tax deduction for interest paid on
borrowings to fund the Distribution Payment under the New Gallaher Facility
(as defined below), subject to a maximum Fortune Brands responsibility of
(Pounds)65 million (approximately $100 million), as well as 50% of the tax, if
any, incurred by New Gallaher on any indemnification payment by Fortune Brands
in respect of any such loss of tax deduction.
The Tax Allocation Agreement also allocates between Fortune Brands, on the
one hand, and New Gallaher and Gallaher, on the other hand, responsibility for
any taxes which may arise in connection with separating New Gallaher from the
Company. Fortune Brands will be responsible for any U.S. federal, state or
local income taxes imposed on the Company in connection with the Distribution
in respect of New Gallaher Ordinary Shares or ADSs distributed to foreign
beneficial holders of Company Common Stock as well as for any federal, state
or local income taxes imposed on the Company as a result of the failure of the
Distribution to qualify as a spin-off under Section 355 of the Internal
Revenue Code. Notwithstanding the foregoing, New Gallaher and Gallaher will be
responsible for any federal, state and local income taxes imposed on the
Company or its stockholders as a result of the failure of the Distribution to
qualify as a spin-off under Section 355 of the Internal Revenue Code or
certain related transactions to qualify as tax-free under the Internal Revenue
Code if such failure is attributable to certain actions by or in respect of
New Gallaher (including its subsidiaries), such as the acquisition of New
Gallaher by a third party within a period that would cause such a failure. In
the event that such taxes become payable by New Gallaher or Gallaher, such
payment would have a material adverse effect on the financial position,
results of operations and cash flow of New Gallaher.
The Tax Allocation Agreement also provides for a payment to be made either
by New Gallaher or Gallaher or by the Company in the event that the value of
the dividend in kind of the share capital of The Whyte & Mackay Group PLC by
Gallaher in April 1996 to the Company is determined by the U.K. Inland Revenue
to be greater or less than (Pounds)323 million. The payment is to cover any
additional tax credit payable, or any excess tax credit paid, by Gallaher in
respect of advance corporation tax attributable to the dividend in kind.
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<PAGE>
Though valid as between the parties thereto, the Tax Allocation Agreement is
not binding on the IRS.
INTERIM SERVICES AGREEMENT
The Company and New Gallaher will enter into an interim services agreement
(the "Interim Services Agreement") prior to the Distribution Date. Pursuant to
the Interim Services Agreement, Fortune Brands will provide to New Gallaher
and New Gallaher will provide to Fortune Brands, after the Distribution Date,
certain services which prior to the Distribution Date have been provided to
Gallaher by the Company or to the Company by Gallaher (the "Services"). The
Services will be provided on mutually agreed terms. It is not anticipated that
the Services will generally be provided beyond a term of one year after the
Distribution.
DIVIDEND POLICIES
NEW GALLAHER
The declaration and payment of dividends by New Gallaher is at the
discretion of the New Gallaher Board. Although the New Gallaher Board may
recommend a final dividend, the payment of such final dividend each year
requires shareholder approval, which typically is sought at the annual general
meeting in the following year. New Gallaher intends to pay interim and final
dividends in November and May, respectively. It is anticipated that interim
dividends will be approximately one-third of the total annual dividend paid.
However, it is currently contemplated that, as a transitional measure in
respect of 1997 in recognition of the historic pattern of dividends paid by
the Company, New Gallaher will pay an interim and final dividend of equal
amounts. For illustrative purposes, the New Gallaher Board estimates that the
total dividend in respect of the fiscal year ended December 31, 1996 would
have amounted to 77 pence per ADS, or approximately $1.20 based on a $1.56
sterling exchange rate (the exchange rate on the date of the announcement of
the Distribution) exclusive of a related tax credit equal to 25% of the net
dividend for eligible U.S. and U.K. taxpayers. This illustrative 1996 dividend
has been estimated on the basis that New Gallaher had been a publicly-held
company since January 1, 1996 with the capital structure and borrowings of New
Gallaher which are expected to be in place on the Distribution Date. The New
Gallaher Board intends to evaluate its dividend policy in the future, from
time to time, in the light of New Gallaher's results of operations, financial
condition, cash requirements, future prospects and other factors (including
taxation) it deems relevant. However, there can be no assurance that any
dividends will be paid in the future. For a discussion of the tax treatment of
dividends, see "U.S. FEDERAL AND U.K. TAX TREATMENT OF NEW GALLAHER
SHAREHOLDERS."
FORTUNE BRANDS
The declaration and payment of dividends by Fortune Brands is at the
discretion of the Fortune Brands Board. It is currently contemplated that the
cash dividend on the Fortune Brands Common Stock after the Distribution will
be at an initial annualized rate of $0.80 per share. The Fortune Brands Board
intends to evaluate its dividend policy in the future, from time to time, in
light of Fortune Brands' results of operations, financial condition, cash
requirements, future prospects and other factors it deems relevant. However,
there can be no assurance that any dividends will be paid in the future.
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DIVIDENDS AND PRICE RANGE OF COMPANY COMMON STOCK
The Company Common Stock is listed and traded on the NYSE. The following
table reflects the high and low sales prices per share of Company Common
Stock, as reported in the NYSE Composite Transaction Reporting System. The
table also sets forth the cash dividends paid per share of Company Common
Stock in the period actually paid.
<TABLE>
<CAPTION>
PRICE RANGE
OF COMPANY
COMMON STOCK CASH DIVIDENDS
--------------- PAID ON COMPANY
HIGH LOW COMMON STOCK
------- ------- ---------------
<S> <C> <C> <C>
1994
First Quarter................................. $35 7/8 $29 7/8 $.4925
Second Quarter................................ 34 3/4 29 3/8 .50
Third Quarter................................. 37 1/8 31 1/2 .50
Fourth Quarter................................ 38 3/8 32 7/8 .50
1995
First Quarter................................. 39 7/8 36 5/8 .50
Second Quarter................................ 42 1/8 37 1/2 .50
Third Quarter................................. 43 1/2 38 5/8 .50
Fourth Quarter................................ 47 1/4 40 3/8 .50
1996
First Quarter................................. 47 7/8 42 3/8 .50
Second Quarter................................ 46 1/8 39 7/8 .50
Third Quarter................................. 46 7/8 40 .50
Fourth Quarter................................ 50 1/8 41 3/4 .50
</TABLE>
On October 7, 1996, the last trading day before the Company announced the
Distribution, the high and low sales prices for Company Common Stock on the
NYSE Composite Transaction Reporting System were $44 1/2 and $43 3/4,
respectively. On March 11, 1997, the last trading day for which quotations
were available at the time of the printing of this Proxy Statement, the
closing price for Company Common Stock on the NYSE Composite Transaction
Reporting System was $52 3/4. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT TRADING
PRICE INFORMATION. The Company Common Stock is also listed on the Amsterdam,
Antwerp, Basel, Brussels, Dusseldorf, Frankfurt, Geneva, London and Zurich
exchanges.
For a discussion of the impact of the Distribution on the trading price of
Company Common Stock, see "--THE DISTRIBUTION--Listing and Trading of Fortune
Brands Common Stock." For a discussion of the dividend policy of New Gallaher
and Fortune Brands after the Distribution, see "--DIVIDEND POLICIES."
There has not been any established public trading market for New Gallaher
Ordinary Shares or ADSs. For a discussion of certain matters in respect
thereof, see "--THE DISTRIBUTION--Listing and Trading of New Gallaher Ordinary
Shares and ADSs."
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ALLOCATION OF INDEBTEDNESS
In connection with the Distribution, management of the Company intends to
allocate the consolidated indebtedness of the Company between New Gallaher and
Fortune Brands. The amounts to be allocated take into account the ability of
each of the companies to generate cash flow with the intention of establishing
a strong capital structure for each company. Such allocation will be
accomplished by New Gallaher distributing pounds sterling in the range of 925
million (net cash proceeds of approximately $1.25 billion) to the Company
prior to the Distribution. New Gallaher intends to fund the Distribution
Payment with available cash and new bank borrowings.
New Gallaher has entered into a credit agreement (the "Credit Agreement")
with certain banks for a pounds sterling 1.2 billion five year multicurrency
revolving credit facility (the "New Gallaher Facility") for the use of New
Gallaher and, upon Gallaher becoming a party to the Credit Agreement by
signing an accession agreement, Gallaher (together, the "Borrowers") in
connection with the Distribution and subsequently for general corporate
purposes. The New Gallaher Facility is not secured and any indebtedness
thereunder will rank at least pari passu with other unsecured indebtedness of
the Borrowers. Pricing on the New Gallaher Facility reflects the credit
standing of New Gallaher and Gallaher after the Distribution.
The Credit Agreement contains certain restrictions on the Borrowers,
including ones that (i) require maintenance of a specified level of
consolidated operating profit in relation to consolidated net interest
expense, (ii) limit the incurrence of subsidiary indebtedness, (iii) limit the
creation of security interests and (iv) limit the ability of New Gallaher and
its subsidiaries to dispose of assets. Any indebtedness outstanding under the
New Gallaher Facility and/or any remaining commitment under the New Gallaher
Facility will become due and payable and/or cancelled should certain events of
default occur, including a failure to pay interest, principal or fees when
due, certain insolvency events, and a failure to comply with various covenants
including those noted above. In addition, if the Distribution and the listing
of the New Gallaher Ordinary Shares on the London Stock Exchange does not
occur, or it is clear that they could not occur, on or before October 31,
1997, the New Gallaher Facility will terminate effective November 1, 1997 and
the Company is obligated to repay the lenders any amounts outstanding under
the New Gallaher Facility, together with accrued interest thereon.
The U.K. Inland Revenue has indicated to New Gallaher that interest payable
by New Gallaher on its borrowings under the New Gallaher Facility to fund the
Distribution Payment will not be deductible for U.K. corporation tax purposes.
The New Gallaher directors, based on advice of New Gallaher's solicitors and
an opinion of leading tax counsel in the U.K., believe that the U.K. Inland
Revenue position is incorrect, and New Gallaher intends to deduct the interest
and, if necessary, challenge the U.K. Inland Revenue's position during any
subsequent tax audit and in the courts. The Company has agreed to indemnify
New Gallaher for 50% of the taxes attributable to such possible lost tax
deductions, if any, subject to a maximum indemnification of (Pounds)65 million
(approximately $100 million), as well as 50% of the tax, if any, incurred by
New Gallaher on this indemnity payment. See "--RELATIONSHIP BETWEEN NEW
GALLAHER AND FORTUNE BRANDS AFTER THE DISTRIBUTION--Tax Allocation Agreement."
Management of the Company believes that there is sufficient financing
capability in respect of each of New Gallaher and Fortune Brands to accomplish
the allocation of indebtedness contemplated.
16
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE DISTRIBUTION
As a result of the Distribution, individuals who are directors and executive
officers of the Company and certain individuals who will be directors and
executive officers of New Gallaher or Fortune Brands will receive ADSs or New
Gallaher Ordinary Shares in respect of the Company Common Stock held by such
individuals in their capacities as stockholders of the Company. See "--NEW
GALLAHER MANAGEMENT--Ownership of New Gallaher Ordinary Shares."
Stock options and performance awards held by (i) individuals who are
directors and executive officers of the Company and (ii) certain individuals
who will be directors and officers of New Gallaher, will be adjusted or
cashed-out in connection with the Distribution.
Information concerning the management and executive compensation
arrangements of New Gallaher and Fortune Brands after the Distribution is set
forth under "--NEW GALLAHER MANAGEMENT--Compensation of Directors and
Officers" and "THE ADDITIONAL PROPOSALS--ELECTION OF DIRECTORS--EXECUTIVE
COMPENSATION."
REGULATORY APPROVALS
The Company does not believe that any material federal, state or foreign
regulatory approvals will be necessary in connection with the Distribution.
ACCOUNTING TREATMENT
Subsequent to approval of the Distribution Proposals at the Annual Meeting
and receipt of the IRS ruling discussed above, the Company will present the
net assets and results of Gallaher's tobacco business as a discontinued
operation for all periods prior to the Distribution. The consolidated
financial statements of Fortune Brands for periods subsequent to the
Distribution will not include the net assets or results of New Gallaher. In
addition, as a result of the Distribution, the Company will also reclassify
the net assets and results of operations of The American Tobacco Company,
which was sold in December 1994, as a discontinued operation for all prior
periods. See "--FORTUNE BRANDS, INC. PRO FORMA CONDENSED FINANCIAL
STATEMENTS."
After the Distribution, New Gallaher will present its financial position and
results of operations in its separate company financial statements, which will
be prepared in accordance with accounting principles generally accepted in the
U.K. and in pounds sterling. The historical financial statements of New
Gallaher contained in this Proxy Statement are presented in conformity with
U.K. accounting principles, in pounds sterling and as if New Gallaher had been
a separate company for all periods presented. See "--NEW GALLAHER PRO FORMA
CONDENSED FINANCIAL STATEMENTS" and the Consolidated Financial Statements for
each of the three years in the period ended December 31, 1996 contained
elsewhere in this Proxy Statement, which include a reconciliation of certain
New Gallaher financial data to amounts prepared in conformity with accounting
principles generally accepted in the U.S.
17
<PAGE>
NEW GALLAHER
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The selected consolidated historical financial data presented below has been
prepared as if Gallaher, together with ATIC, had been in existence on a stand-
alone basis for the entire period. This financial information has been
presented elsewhere in this Proxy Statement as that of New Gallaher or
Gallaher Group Plc.
The selected consolidated historical financial data presented below has been
derived from New Gallaher's Consolidated Financial Statements for each of the
five years in the period ended December 31, 1996, and is presented in
accordance with accounting principles generally accepted in the U.K. ("UK
GAAP"), in pounds sterling with a convenience column in US dollars for the
year ended December 31, 1996, and as if New Gallaher had been a separate
company for all periods presented. The Consolidated Financial Statements for
each of the three years in the period ended December 31, 1996 are included
elsewhere in this Proxy Statement.
The selected consolidated historical financial data set forth below should
be read in conjunction with the New Gallaher Consolidated Financial Statements
and notes thereto and "NEW GALLAHER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included elsewhere in this
Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 (i) 1996 1995 1994 1993 1992
-------- --------------- --------------- --------------- --------------- ---------------
(UK GAAP IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Turnover (including
duty) (ii)
Continuing: U.K. ...... $6,458.0 (Pounds)3,772.2 (Pounds)3,557.5 (Pounds)3,537.2 (Pounds)3,667.6 (Pounds)3,357.8
International...... 1,026.8 599.8 520.9 468.5 319.8 248.5
Discontinued........... 96.4 56.3 564.9 1,024.5 1,072.5 1,106.5
-------- --------------- --------------- --------------- --------------- ---------------
$7,581.2 (Pounds)4,428.3 (Pounds)4,643.3 (Pounds)5,030.2 (Pounds)5,059.9 (Pounds)4,712.8
======== =============== =============== =============== =============== ===============
Operating profit (iii)
Continuing: U.K. ...... $ 395.5 (Pounds) 231.0 (Pounds) 291.3 (Pounds) 282.3 (Pounds) 291.0 (Pounds) 281.6
International...... 111.3 65.0 46.1 50.6 39.4 25.1
Discontinued........... 4.3 2.5 5.8 23.6 27.8 16.6
-------- --------------- --------------- --------------- --------------- ---------------
$ 511.1 (Pounds) 298.5 (Pounds) 343.2 (Pounds) 356.5 (Pounds) 358.2 (Pounds) 323.3
======== =============== =============== =============== =============== ===============
Profit for the financial
period (iv)............ $ 378.0 (Pounds) 220.8 (Pounds) 196.1 (Pounds) 161.0 (Pounds) 230.9 (Pounds) 203.1
======== =============== =============== =============== =============== ===============
Earnings per share (v).. $ .54 31.5p 28.0p 23.0p 33.0p 29.0p
======== =============== =============== =============== =============== ===============
Dividends per
share (v).............. $ 1.80 105.4p 20.8p 22.8p 30.4p 19.9p
======== =============== =============== =============== =============== ===============
BALANCE SHEET DATA
Current assets.......... $2,138.2 (Pounds)1,249.0 (Pounds)1,108.1 (Pounds)1,414.5 (Pounds)1,290.7 (Pounds) 969.1
Net current assets
(liabilities) (vi)..... 387.2 226.2 222.4 130.7 (70.3) 58.6
Total assets............ 2,565.5 1,498.6 1,845.3 2,185.7 2,192.4 1,681.1
Net assets.............. 505.6 295.3 826.0 772.8 685.4 681.8
Capital employed (vii)
Continuing: U.K. ...... $1,063.7 (Pounds) 621.3 (Pounds) 522.3 (Pounds) 388.7 (Pounds) 349.8 (Pounds) 202.5
International...... 52.0 30.4 1.0 15.9 17.2 21.7
Discontinued........... -- -- 602.4 748.0 962.6 716.6
Interest bearing net
assets (liabilities).. (610.1) (356.4) (299.7) (379.8) (644.2) (259.0)
-------- --------------- --------------- --------------- --------------- ---------------
$ 505.6 (Pounds) 295.3 (Pounds) 826.0 (Pounds) 772.8 (Pounds) 685.4 (Pounds) 681.8
======== =============== =============== =============== =============== ===============
OTHER DATA
EBITDA (viii)........... $ 582.3 (Pounds) 340.1 (Pounds) 358.4 (Pounds) 366.1 (Pounds) 419.4 (Pounds) 379.0
EBITDA as adjusted (ix)
Continuing: U.K. ...... 562.4 328.5 309.2 308.4 309.9 298.3
International...... 118.7 69.3 50.1 56.8 40.8 26.1
Discontinued........... 13.3 7.8 24.3 63.9 68.7 54.6
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1996 1995
--------------- ---------------
(US GAAP IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
OPERATING DATA
Net sales............................. (Pounds)4,372.9 (Pounds)4,079.4
Income--continuing operations......... 235.7 262.9
Net income (x)........................ 233.8 215.1
Earnings per share--continuing
operations (xi)...................... 2.77 3.09
Earnings per share--net income (xi)... 2.75 2.53
Dividends per share (xi).............. 8.67 1.71
BALANCE SHEET DATA
Total assets.......................... (Pounds)1,603.9 (Pounds)1,950.3
</TABLE>
(i) The pound sterling amounts presented for the year ended December 31, 1996
have been translated into U.S. dollars at the rate of $1.712 to the pound
sterling, which was the selling rate as quoted at 3 p.m. Eastern time by
Dow Jones Telerate Inc. on December 31, 1996. (See note 2(b) to New
Gallaher Consolidated Financial Statements.)
(ii) Turnover represents net sales.
(iii) Operating profit represents turnover less cost of sales, duty and all
expenses, excluding exceptional items relating to discontinued
operations, net interest, investment income and taxes. 1996 U.K.
operating profit is net of the exceptional charge of (Pounds)65.5 million
relating to the Hyde factory closing.
(iv) Profit for financial period represents net income.
(v) Earnings and dividends per equity share are calculated based on profits for
the financial period and total dividends, respectively, divided by an
estimate of the approximate maximum number of New Gallaher Ordinary Shares
which are expected to be outstanding immediately after the Distribution
(700,000,000 shares).
(vi) Net current assets (liabilities) is equivalent to working capital.
(vii) Capital employed represents net assets exclusive of interest bearing
assets and liabilities.
(viii) EBITDA is defined as profit before interest expense, taxation and
depreciation and amortization. Management believes that EBITDA is a
measure commonly used by analysts and investors. Accordingly, this
information has been presented to permit a more complete analysis of New
Gallaher's operating performance. EBITDA should not be considered a
substitute for profit after taxation, net income or cash flow data
prepared in accordance with generally accepted accounting principles in
the U.K. or the U.S. as a measure of the profitability or liquidity of
New Gallaher.
(ix) EBITDA as adjusted reflects EBITDA (as defined above), adjusted to exclude
exceptional items relating to discontinued operations and the 1996
exceptional charge of (Pounds)65.5 million relating to the Hyde factory
closing.
(x) For a reconciliation of net income between UK and US GAAP for each of the
two years in the period ended December 31, 1996, see note 35 to New
Gallaher Consolidated Financial Statements.
(xi) Earnings and dividends per share under US GAAP are calculated based on the
historical number of Gallaher Limited Ordinary Shares outstanding during
the periods presented (85,056,000 shares).
The following table sets forth pounds sterling selling rates as quoted at 3
p.m. Eastern time by Dow Jones Telerate Inc. and other sources as published
daily in The Wall Street Journal. Such rates are expressed as U.S. dollars per
pound sterling. On March 3, 1997, the 3 p.m. selling rate was $1.6167 per pound
sterling.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Exchange rate at end of period......... $1.7120 $1.5530 $1.5650 $1.4795 $1.5145
Average exchange rate for period....... 1.5627 1.5793 1.5322 1.5027 1.7668
Highest exchange rate during period.... 1.7120 1.6405 1.6377 1.5860 2.0067
Lowest exchange rate during period..... 1.4925 1.5315 1.4605 1.4180 1.4940
</TABLE>
19
<PAGE>
NEW GALLAHER
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The New Gallaher Management's Discussion and Analysis of Financial Condition
and Results of Operations set forth below should be read in conjunction with
the New Gallaher Selected Consolidated Historical Financial Data and New
Gallaher Consolidated Financial Statements, and notes thereto, included
elsewhere in this Proxy Statement.
GENERAL
Gallaher is the largest manufacturer of tobacco products for the U.K. market
and manufactures and markets a range of cigarettes, cigars and pipe and
handrolling tobacco products. Most of this business, 92.7% of total U.K.
turnover from continuing operations in 1996, consists of the sale of
cigarettes, principally in the premium sector.
In 1996, Gallaher's continuing operations had total turnover of
(Pounds)4,372.0 million, of which (Pounds)3,772.2 million or 86.3% was in the
U.K., and total operating profit of (Pounds)296.0 million, of which
(Pounds)231.0 million or 78.0% was also in the U.K. Excluding the exceptional
cost of sales charge of (Pounds)65.5 million relating to the announced closing
of the Hyde factory, total operating profit was (Pounds)361.5 million, of
which (Pounds)296.5 million, or 82.0%, was in the U.K.
The sale of Gallaher's cigarettes in selected international markets is an
important part of its operations, accounting for 28.9% of Gallaher's total
cigarette unit sales in 1996. The sale of Gallaher's tobacco products in
selected international markets accounted for 13.7% of turnover from continuing
operations in 1996, and Gallaher sold tobacco products in over 35 countries,
with international sales concentrated primarily in the Republic of Ireland,
continental western Europe and the former Soviet Union.
Gallaher is currently an indirect, wholly-owned subsidiary of the Company.
In connection with the Distribution, Gallaher will become a wholly-owned
subsidiary of New Gallaher, which will be separated from the Company and
become independently quoted on the London Stock Exchange and the NYSE. After
the Distribution, the Company will have no equity ownership in New Gallaher or
Gallaher. The discussion and analysis which follows has been prepared in
respect of the historic results of operations of Gallaher, adjusted to include
the results of ATIC, the direct parent of Gallaher, on a consolidated basis.
ATIC will be transferred to New Gallaher in connection with the Distribution.
No other adjustments have been made to Gallaher's historic results to reflect
the expected effects of the Distribution, whether in respect of financing or
of intercompany services and charges.
The tobacco market in developed economies has been subject to significant
regulatory influence and/or voluntary agreements with governments in recent
years, including the levying of substantial tax and duty charges, the
imposition of restrictions on advertising and marketing, the introduction of
health warnings on packaging, restrictions on the tar content of cigarettes
and the prohibition of smoking in many public places. Partly as a result of
certain of these measures, tobacco consumption in certain of Gallaher's
principal markets has declined in recent years and Gallaher expects this trend
to continue. Gallaher has taken steps to limit the impact of this decline on
its operations. Gallaher has invested heavily in its brands to build brand
recognition and thereby strengthen its position in the event that further
restrictions are imposed on tobacco advertising. In the U.K., its principal
market, Gallaher has broadened its portfolio through product launches and
brand extensions in order to benefit from growth in specific sectors of the
market, such as those for lower tar and lower price cigarettes, and to
increase its ability to compete for market share. Gallaher has also
established market positions in the Republic of Ireland, key markets in
continental western Europe and part of the former Soviet Union, further
reducing its sensitivity to regulatory changes in any single country.
Advertising, promotion and brand building play a key role in Gallaher's
business, with significant expenditure on programs in the U.K. and overseas to
support its key brands and to develop the markets for new brands and brand
extensions. It is possible, however, that any further regulation in respect of
advertising and
20
<PAGE>
promotion in its key markets would have an adverse effect on Gallaher's sales
and operating performance. A general election is to take place in the U.K.
before the end of May 1997. The U.K. Labour Party has indicated that if it
were to form the next government, it would legislate further advertising
restrictions on tobacco products. It is unclear which forms of marketing and
promotion would be affected and to what extent, if any, this would affect
sales and profitability in the U.K. tobacco market.
A significant factor affecting Gallaher's operations is the government duty
on tobacco products. Such duty represents a significant cost to tobacco
companies and Gallaher includes these amounts in both turnover and cost of
sales. The current U.K. government has expressed an intent to increase duty on
tobacco products by an average of at least 3% per annum in excess of the rate
of inflation. This represents an annual direct increase in cost of sales for
Gallaher, which, if passed on to the retail trade, would be expected to affect
the consumption of tobacco products. Gallaher has generally passed on the full
duty increases to its customers in recent years with the result that these
amounts are included in net sales and cost of sales. The continuing impact of
price increases in the U.K. cigarette market, principally due to substantial
duty increases in recent years, has reduced annual industry volumes, led to
greater price competition and accelerated trading down by consumers to lower
price cigarette brands, resulting in pressure on margins. These changes are
particularly affecting Gallaher, the majority of whose sales are in the
premium sector of the U.K. cigarette market.
The imposition of duty increases in the U.K. government's budget
announcement also affects the annual pattern of Gallaher's turnover and
inventory values. Historically, Gallaher's sales in the U.K. have peaked in
the weeks preceding the budget announcement, as trade customers have sought to
avoid the expected duty increases by acquiring inventories of tobacco products
at pre-budget prices. In addition, as a result of paying duty at the pre-
budget rate, Gallaher has held significantly higher inventory values in the
months immediately following the U.K. government's budget statement. Any
change in the timing of the budget announcement, or in the regulations
relating to the application of duty increases, could have a material impact on
Gallaher's operating performance, as could the outcome of pending litigation,
not involving Gallaher, if it resulted in commercial organizations being
entitled to act as agents for U.K. individuals to bring into the U.K. tobacco
products on which duty had been paid in another European Union ("EU") member
state without the need to pay U.K. excise duty.
Tobacco manufacturers in the U.K., including Gallaher, have been sued by
parties seeking damages for ailments claimed to have resulted from tobacco
use. To date, there has been no recovery of damages against Gallaher in any
action alleging that its tobacco products have resulted in human ailments.
Gallaher believes that there are meritorious defenses to the actions pending
against it. There can, however, be no assurance that favorable decisions will
be achieved in the proceedings pending against Gallaher, that additional
proceedings will not be commenced against Gallaher in the U.K. or elsewhere,
or that Gallaher will not incur damages or that, if incurred, such damages
will not be material. Regardless of the outcome of the pending litigation, the
costs of defending these claims could be substantial and will not be fully
recoverable from unsuccessful plaintiffs. See "--NEW GALLAHER BUSINESS AND
PROPERTIES--Legal Proceedings."
THE UNITED KINGDOM
Sales of cigarettes in the U.K. have been in gradual decline since their
peak in 1973, with cigarette consumer sales falling by an average of 2.5% per
annum over the period 1992 to 1996. Within this overall downward trend,
however, growth has been apparent in certain sectors of the U.K. market, more
recently in those for lower tar products and lower price brands.
Gallaher's share of the U.K. unit sales to consumers increased significantly
from a level of 32.3% in 1985 to a peak of 42.9% in 1990 and was 39.1% in
1996. In 1988, Gallaher became the cigarette market leader in the U.K. The
growth in Gallaher's market share was achieved through, among other measures,
the introduction of a series of creative advertising campaigns to build
consumer awareness of Gallaher's products and the launches of new brands and
brand extensions. The reduction in market share in recent years has been
primarily a result of the trend away from premium price cigarettes to lower
price products.
21
<PAGE>
INTERNATIONAL
Gallaher's international activities are concentrated in the markets of the
Republic of Ireland, the former Soviet Union, France, Greece, Germany, Belgium
and the Canary Islands. Gallaher plans to develop niche positions in certain
markets in the Asia Pacific region. In addition to sales in duty paid markets,
duty free sales to travelers and tourists are also a significant part of
Gallaher's international business.
Market trends in continental western Europe are generally similar to those
in the U.K., with a longer term overall decline in the demand for cigarettes
and increasing regulatory intervention. In the emerging economies of the
former Soviet Union and Asia Pacific, however, sales of western-style
cigarettes are generally increasing. Gallaher's objective is to develop a
balanced portfolio of interests in established markets and in emerging markets
with strong growth opportunities, either independently or through joint
arrangements. In order to focus on its existing initiatives, Gallaher has no
present intention of seeking opportunities in Africa or North or South
America.
RESULTS OF OPERATIONS
The following table sets out a summary of New Gallaher's consolidated
trading results including ATIC for each of the five years in the period ended
December 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
(UK GAAP IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Turnover
U.K. .................. (Pounds)3,772.2 (Pounds)3,557.5 (Pounds)3,537.2 (Pounds)3,667.6 (Pounds)3,357.8
International.......... 599.8 520.9 468.5 319.8 248.5
--------------- --------------- --------------- --------------- ---------------
Continuing operations.. 4,372.0 4,078.4 4,005.7 3,987.4 3,606.3
Discontinued opera-
tions................. 56.3 564.9 1,024.5 1,072.5 1,106.5
--------------- --------------- --------------- --------------- ---------------
4,428.3 4,643.3 5,030.2 5,059.9 4,712.8
Duty
U.K.................... 3,025.6 2,829.9 2,794.4 2,869.6 2,618.4
International.......... 383.4 322.7 282.0 181.1 143.6
--------------- --------------- --------------- --------------- ---------------
Continuing operations.. 3,409.0 3,152.6 3,076.4 3,050.7 2,762.0
Discontinued opera-
tions................. 16.2 74.0 71.3 70.0 69.9
--------------- --------------- --------------- --------------- ---------------
3,425.2 3,226.6 3,147.7 3,120.7 2,831.9
Other costs and over-
heads.................. 704.6 1,073.5 1,526.0 1,581.0 1,557.6
Operating profit (i)
U.K. (ii).............. 231.0 291.3 282.3 291.0 281.6
International.......... 65.0 46.1 50.6 39.4 25.1
--------------- --------------- --------------- --------------- ---------------
Continuing operations.. 296.0 337.4 332.9 330.4 306.7
Discontinued opera-
tions................. 2.5 5.8 23.6 27.8 16.6
--------------- --------------- --------------- --------------- ---------------
(Pounds) 298.5 (Pounds) 343.2 (Pounds) 356.5 (Pounds) 358.2 (Pounds) 323.3
=============== =============== =============== =============== ===============
Operating margin (iii)
U.K.................... 30.9% 40.0% 38.0% 36.5% 38.1%
International.......... 30.0 23.3 27.1 28.4 23.9
Continuing............. 30.7 36.4 35.8 35.3 36.3
</TABLE>
- --------
Notes
(i) Operating profit represents turnover less cost of sales, duty and all
expenses, excluding exceptional items relating to discontinued operations,
net interest, investment income and taxes. 1996 U.K. operating profit is
net of the exceptional charge of (Pounds)65.5 million relating to the Hyde
factory closing.
(ii) Consolidation adjustments in respect of unrealized profit on sales by
Gallaher's tobacco business to its discontinued retail distribution
business are included within the results of the U.K. continuing
operations.
(iii) Operating profit as a percentage of turnover excluding duty.
Since 1993, Gallaher has disposed of a number of non-tobacco businesses by
distribution to the Company or by sale. JBB (Greater Europe) PLC (formerly The
Whyte & Mackay Group PLC) (distilled spirits) was
22
<PAGE>
transferred to the Company in 1996 and Dollond & Aitchison (optical goods and
services), Forbuoys Limited, Marshell Group Limited and TM Group Limited (all
retail distribution) and Prestige (housewares) were sold in previous years.
The results of these businesses are included in the table above within
discontinued operations prior to their disposal. Gallaher is now able to focus
its financial and management resources on its tobacco operations.
OVERVIEW
Over the period 1992 to 1996, Gallaher achieved a compound annual growth
rate in turnover from continuing operations of 4.9% and a compound annual
growth rate in operating profit from continuing operations (before exceptional
cost of sales in 1996) of 4.2%.
New Gallaher believes that Gallaher's improvement in operating profit has
been achieved through a combination of price increases, initiatives taken to
defend the leading market share positions in the U.K. of its Benson and Hedges
and Silk Cut cigarette brands, the successful launch of new products in the
lower tar and lower price sectors of the market, improved operational
efficiency and increasing contributions from international markets. In the
same period, total cigarette consumption in certain of Gallaher's principal
markets declined, with total consumer sales in the U.K. falling by an average
of 2.5% per annum.
New Gallaher believes that Gallaher's U.K. market performance relative to
its competitors is most appropriately measured by reference to consumer sales,
which represent the total unit sales made by retailers to consumers. The
financial results of its operations, however, are more closely related to
trade sales, which are the unit sales made by Gallaher to its customers in the
retail and distribution trades. In any financial year, consumer sales and
trade sales of Gallaher's products may differ substantially as inventories
held in the trade by Gallaher's customers vary from year to year.
1996 COMPARED TO 1995
TURNOVER
Gallaher's overall turnover decreased 4.6% from (Pounds)4,643.3 million in
1995 to (Pounds)4,428.3 million in 1996. The decrease was attributable to the
disposal of the retail and housewares businesses during 1995 and the disposal
of the distilled spirits business in 1996. Turnover from continuing operations
increased 7.2% from (Pounds)4,078.4 million in 1995 to (Pounds)4,372.0 million
in 1996.
Gallaher's turnover from continuing operations in the U.K. increased 6.0%
from (Pounds)3,557.5 million in 1995 to (Pounds)3,772.2 million in 1996. This
increase was due primarily to price increases resulting from the increases in
duty announced in the U.K. government budget statement of November 1995 and to
Gallaher's manufacturer's price increases in April 1995 and April 1996 and a
slight increase in Gallaher's overall U.K. cigarette unit sales, partly offset
by a continuation in the trend towards lower price products at the expense of
premium brands. Benson and Hedges' share of the total U.K. market declined to
14.3% in 1996 from 14.8% in 1995 primarily due to this trend.
Gallaher's turnover from international operations increased 15.1% from
(Pounds)520.9 million in 1995 to (Pounds)599.8 million in 1996. This increase
in turnover was due primarily to a 25.5% increase in the Republic of Ireland,
partly as a result of the inclusion of an additional month in 1996 following a
change in accounting period. This was supported by turnover gains from price
increases, volume growth and exchange benefits in the Republic of Ireland and
a strong performance from Benson and Hedges in continental western Europe.
OPERATING PROFIT
Operating profit from continuing operations decreased 12.3% from
(Pounds)337.4 million in 1995 to (Pounds)296.0 million in 1996. Operating
margins from continuing operations declined from 36.4% in 1995 to 30.7% in
1996. Before exceptional cost of sales of (Pounds)65.5 million, operating
profit from continuing operations increased 7.1%.
23
<PAGE>
Operating profit from continuing operations in the U.K. decreased by 20.7%
from (Pounds)291.3 million in 1995 to (Pounds)231.0 million in 1996,
principally due to the exceptional cost of sales charge relating to the
announced closure of the Hyde factory. Excluding the exceptional cost of sales
charge, operating profit from continuing operations in the U.K. increased by
1.8%. This reflected increased revenues and favorable comparison to prior
period expenditure on new management information systems, partly offset by
increased advertising expenditure associated with the launch of Sovereign.
Operating profit from international operations increased 41.0% from
(Pounds)46.1 million in 1995 to (Pounds)65.0 million in 1996. This reflected
the performance in 1996 in the Republic of Ireland as noted above and gains in
continental western Europe, partly offset by additional advertising
expenditures.
1995 COMPARED TO 1994
TURNOVER
Gallaher's turnover decreased 7.7% from (Pounds)5,030.2 million in 1994 to
(Pounds)4,643.3 million in 1995. The decrease was due to the disposal of the
retail and housewares businesses in 1995 and the disposal of the optical goods
and services business in 1994. Turnover from continuing operations increased
1.8% from (Pounds)4,005.7 million in 1994 to (Pounds)4,078.4 million in 1995.
Gallaher's turnover from continuing operations in the U.K. increased 0.6%
from (Pounds)3,537.2 million in 1994 to (Pounds)3,557.5 million in 1995. This
increase was due primarily to the aggregate price increase of 16 pence per
typical pack of 20 cigarettes resulting from the increases in duty announced
in the U.K. government budget statements of November and December 1994, and to
Gallaher's manufacturer's price increase of between three and four pence per
pack in April 1995. The effect of these price increases was partly offset by a
5.8% decline in Gallaher's U.K. cigarette unit sales, due mainly to shifts in
trade buying patterns related to the duty increases announced in the
government's budget statements at the end of 1994 and 1995. Consumer sales of
Gallaher cigarettes declined by 2.7% in 1995.
Gallaher introduced the Gratis gift voucher-based loyalty program for Benson
and Hedges smokers in late 1994. Gallaher believes that this benefited the
market performance of Benson and Hedges, limiting the decline in Benson and
Hedges' share of the total U.K. market from 14.9% in 1994 to 14.8% in 1995
despite continued trading down by consumers to lower price brands. The lower
price sector continued to grow in importance, fueled by the U.K. government's
continued increases in duty. Gallaher's principal lower price brand, Mayfair,
benefited from this trend, growing in trade volume by 51% to achieve sales of
over one billion cigarettes in 1995.
Gallaher's turnover from international operations increased 11.2% from
(Pounds)468.5 million in 1994 to (Pounds)520.9 million in 1995. This increase
in turnover was due primarily to a 14.4% increase in the Republic of Ireland
resulting from increased prices, improved exchange rates and higher volumes in
a growing market and was also supported by the strong performance of Benson
and Hedges in continental western Europe. The effects of these improvements
were partly offset by the sale of the Silk Cut trademark outside the EU and
the European Free Trade Association ("EFTA") in December 1994.
OPERATING PROFIT
Operating profit from continuing operations increased 1.4% from
(Pounds)332.9 million in 1994 to (Pounds)337.4 million in 1995. Operating
margins from continuing operations improved from 35.8% of turnover excluding
duty in 1994 to 36.4% in 1995.
Operating profit from continuing operations in the U.K. increased 3.2% from
(Pounds)282.3 million in 1994 to (Pounds)291.3 million in 1995. A significant
part of this increase was due to the recognition of deferred intercompany
profit following the disposal of the retail distribution business in 1995.
Gallaher's 1995 manufacturer's price increase, savings from production
efficiency improvements and decreased distribution expenses from the
24
<PAGE>
rationalization of Gallaher's U.K. distribution facilities also contributed to
increased profits, but their effects were partially offset by volume
decreases. Expenses incurred in the reorganization of the U.K. sales force and
the introduction of new management information systems also limited the
improvement in reported profit in the U.K. in 1995.
Operating profit from international operations decreased 8.9% from
(Pounds)50.6 million in 1994 to (Pounds)46.1 million in 1995. This decrease
was due primarily to a provision established in 1995 in respect of inventories
for the former Soviet Union considered to be obsolete and to the impact of the
sale of the Silk Cut trademark outside the EU and EFTA. Volume growth in other
international markets, particularly Belgium, Duty Free and the Canary Islands,
partially offset the impact of these factors on total operating profit.
OTHER PROFIT AND LOSS ACCOUNT ITEMS
EXCEPTIONAL ITEMS
As discussed in Note 6 to the New Gallaher Consolidated Financial
Statements, exceptional items for the years ended December 31, 1995 and 1994
of (Pounds)25.2 million and (Pounds)63.0 million, respectively, all relate to
the disposal of companies in the retail distribution and housewares businesses
of Gallaher.
INTEREST
Net interest expense for each of the three years in the period to December
31, 1996 varies due to the proceeds received from the sale of companies in
1994 and 1995 and the positive cash flow from operating activities partly
offset by increasing interest rates during the period.
Interest costs are not indicative of the likely future payments of interest
as a result of anticipated borrowings.
TAXATION
The taxation on profit and ordinary activities reflects effective rates of
26.9%, 36.8% and 41.6% in 1996, 1995 and 1994, respectively. Movements in the
effective rates in 1995 and 1994 result primarily from the exceptional items
for which there was no taxation effect. In 1996, the effective rate was
reduced by the impact of a one time advance corporation tax credit in ATIC
arising from the dividend in kind of the distilled spirits division, and such
credit would not be available in the future.
LIQUIDITY AND CAPITAL RESOURCES
Through December 31, 1996, Gallaher financed its operations and capital and
other expenditures from a combination of cash generated from operations, loans
provided by the Company, bank borrowings and proceeds from the sale of
subsidiaries. In addition to the borrowings described below, these
arrangements will continue until the Distribution is effected, in connection
with which the balance on any loans to or from the Company will be repaid by
or to Gallaher. After the Distribution, New Gallaher will finance all of its
cash requirements initially through internally generated funds and borrowings
from third parties.
Prior to the Distribution, it is expected that New Gallaher will borrow from
external lenders and distribute the Distribution Payment. At December 31,
1996, on the basis that the Distribution had taken place on that date, the pro
forma long-term debt of New Gallaher would have been (Pounds)925.0 million,
principally in respect of the new loans from external lenders. See "--NEW
GALLAHER PRO FORMA CONDENSED FINANCIAL STATEMENTS." New Gallaher currently
intends to refinance a portion of this long-term debt at or before the end of
its term. New Gallaher believes that internally generated funds, together with
its access to global credit markets, are more than adequate to meet New
Gallaher's capital needs.
Gallaher's cash flows vary significantly throughout the year. Since 1993,
December has been the month with the most substantial cash outflow, caused
mainly by U.K. duty payments in that month, while most other months have
historically shown net cash inflows from operating activities, particularly in
the first quarter of the following year.
25
<PAGE>
The decrease in operating cash flows from continuing operations in 1995
compared to 1994 was primarily due to the change in timing of excise duty
payments on inventory movements, partially offset by lower trade debtors.
The decrease in operating cash flows from continuing operations in 1996
compared to 1995 was primarily due to the impact of excise duty payments on
inventories.
Gallaher's borrowing requirements vary significantly throughout the year.
The U.K. government's annual budget statement leads to substantial
fluctuations in the value of Gallaher's inventory and accounts receivable and
a large cash outflow in respect of duty paid in the month following the budget
statement. Since 1993, the budget statement has been issued in November,
resulting in Gallaher's year end balance sheet reflecting capital employed
near its peak for the year.
Gallaher's principal investment in tangible fixed assets for the tobacco
business has been its historic investment in plant, machinery, fittings and
equipment.
In December 1996, Gallaher announced plans to invest approximately
(Pounds)40 million over the next three to four years in connection with the
expansion of the Lisnafillan factory and the closure of the Hyde factory in
Manchester. Gallaher has acquired a site and intends to construct a factory in
Kazakhstan. The current estimate of the capital expenditure for this project
is approximately (Pounds)11.5 million including additional working capital.
With the exception of these two items, Gallaher currently has no material
commitments in respect of capital expenditure. See "--NEW GALLAHER BUSINESS
AND PROPERTIES--Manufacturing--Production."
EXPOSURE TO CURRENCY FLUCTUATIONS
Gallaher reports the results of its operations and states its balance sheet
in pounds sterling. When revenues are earned or costs and expenses incurred in
currencies other than sterling, Gallaher's reported results are exposed to
gains or losses arising from fluctuations in the exchange rates between those
currencies and sterling. Where monetary assets or liabilities are denominated
in foreign currencies, Gallaher's reported balance sheet is subject to similar
gains or losses.
In 1996, 13.7% of Gallaher's turnover from continuing operations was in
international markets. The majority of sales and costs in these markets are
invoiced by and to Gallaher in currencies other than sterling and a
significant proportion of revenue is used to pay local expenses (including
local duty) incurred in those international markets. The only other material
foreign currency-denominated cost incurred by Gallaher is the purchase of
tobacco leaf, which is sourced from various countries and principally charged
in U.S. dollars.
Gallaher continually assesses its exposure to the financial impact of future
exchange rate movements. Gallaher's policy is selectively to hedge certain of
its forecast foreign currency transaction exposures over a rolling twelve-
month period. This is effected by periodically undertaking hedging
arrangements with third party counterparties.
As a result, Gallaher's exposure to currency fluctuations is small and its
reported results of operations and balance sheet are affected relatively
little by changes in the exchange rates between sterling and other currencies.
PRO FORMA FINANCIAL POSITION AND RESULTS OF OPERATIONS
In connection with the Distribution, New Gallaher will incur indebtedness in
the range of (Pounds)925 million which will be used to finance the
Distribution Payment. On a pro forma basis, assuming the Distribution occurred
as of December 31, 1996, New Gallaher's liability to creditors for amounts
falling due after more than one year, including long-term debt of (Pounds)925
million, would have been (Pounds)950.4 million and its net liabilities would
have been (Pounds)629.7 million. This pro forma deficit results from the
Distribution Payment which is recorded as a reduction of
26
<PAGE>
equity shareholders' funds. On a pro forma basis, New Gallaher's net current
asset position will not be adversely affected by the Distribution Payment and
would have been (Pounds)226.2 million as at December 31, 1996. On a pro forma
basis, assuming that the Distribution Payment had occurred as at January 1,
1996, profit on ordinary activities after tax for the year ended December 31,
1996 would have been reduced by approximately (Pounds)38.9 million for related
interest expense, net of taxes.
The U.K. Inland Revenue has indicated to New Gallaher that interest payable
by New Gallaher on its borrowings under the New Gallaher Facility to fund the
Distribution Payment will not be deductible for U.K. corporation tax purposes.
The New Gallaher directors, based on advice of New Gallaher's solicitors and
an opinion of leading tax counsel in the U.K., believe that the U.K. Inland
Revenue position is incorrect, and New Gallaher intends to deduct the interest
and, if necessary, challenge the U.K. Inland Revenue's position during any
subsequent tax audit and in the courts. The Company has agreed to indemnify
New Gallaher for 50% of the taxes attributable to such possible lost tax
deductions, if any, subject to a maximum indemnification of (Pounds)65 million
(approximately $100 million), as well as 50% of the tax, if any, incurred by
New Gallaher on this indemnity payment. See "--RELATIONSHIP BETWEEN NEW
GALLAHER AND FORTUNE BRANDS AFTER THE DISTRIBUTION--Tax Allocation Agreement."
PRINCIPAL DIFFERENCES BETWEEN US AND UK GAAP
New Gallaher prepares its consolidated financial statements, as discussed
herein, in accordance with UK GAAP. The principal differences between UK GAAP
and US GAAP affecting New Gallaher's consolidated financial statements, which
are discussed in note 35 to the New Gallaher Consolidated Financial
Statements, relate to pension costs, deferred income taxes and losses, costs
and expenses related to discontinued operations. The principal differences are
as follows:
Pension costs
Under UK GAAP, pension costs are determined in accordance with UK Statement
of Standard Accounting Practice No. 24, with costs being expensed over
employees' working lives. Under US GAAP, pension costs are determined in
accordance with the requirements of the Statements of Financial Accounting
Standards Nos. 87 and 88. Differences between the UK and US GAAP figures arise
from the requirement to use different actuarial methods and assumptions and
the method of amortizing surpluses or deficits.
Deferred taxation
Under UK GAAP, deferred taxation is only accounted for to the extent that it
is probable that taxation liabilities or assets will crystallize in the
foreseeable future. Under US GAAP, deferred taxation is accounted for on all
temporary differences and a valuation allowance is established in respect of
those deferred taxation assets where it is more likely than not that some
portion will not be realized.
Hyde closure provision
Under UK GAAP, the Hyde closure provision included an amount for additional
depreciation as permitted by SSAP No. 12 (revised). Under US GAAP, there is no
impairment as defined under SFAS No. 121.
Disposal of operations
The 1995 adjustment relates to differences between UK and US GAAP in the
timing of recognition of disposal costs. Under UK GAAP, disposal costs are
recognized in the year they are incurred. Under US GAAP, such costs are
accrued at the measurement date being the date management formally committed
New Gallaher to the disposal plan.
Goodwill
Differences arising in the calculation of goodwill are primarily due to the
impact of accounting differences in ascertaining acquisition balance sheets
under UK and US GAAP.
27
<PAGE>
NEW GALLAHER
PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The pro forma condensed balance sheets of New Gallaher as of December 31,
1996 and pro forma capitalization table as of December 31, 1996 present the
financial position of New Gallaher as if the Transfers and the Distribution
had been completed as of such dates. The pro forma condensed statement of
income of New Gallaher for the year ended December 31, 1996 presents the
results of operations of New Gallaher as if the Transfers and the Distribution
had been completed at the beginning of the year.
The pro forma condensed financial data of New Gallaher and notes thereto
should be read in conjunction with the New Gallaher Consolidated Financial
Statements and Notes thereto appearing elsewhere herein and the Company's
Consolidated Financial Statements contained in the 1996 Annual Report to
Stockholders of the Company for the fiscal year ended December 31, 1996, which
is incorporated herein by reference. The pro forma information presented is
for informational purposes only and may not necessarily reflect future results
of operations and financial position or what the results of operations or
financial position would have been had the Transfers and the Distribution
occurred as of such dates or during the periods presented.
PRO FORMA CAPITALIZATION (UNAUDITED)
The following table sets forth, as of December 31, 1996, the historical
capitalization of New Gallaher and the pro forma capitalization of New
Gallaher after giving effect to the Distribution and Transfers. This table
should be read in conjunction with the New Gallaher Consolidated Financial
Statements and Notes thereto, appearing elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
PRO FORMA
NEW GALLAHER ADJUSTMENTS PRO FORMA
------------- -------------- -------------
(UK GAAP IN MILLIONS)
<S> <C> <C> <C>
Short-term debt................. (Pounds)610.3 -- (Pounds)610.3
Long-term debt (a).............. -- (Pounds) 925.0 925.0
------------- -------------- -------------
610.3 925.0 1,535.3
------------- -------------- -------------
Capital and reserves
Called up share capital (b)... 105.0 (35.0)(d) 70.0
Share premium account (c)..... 97.3 -- 97.3
Other reserve................. -- (890.0)(d) (890.0)
Profit and loss account (e)... 93.0 -- 93.0
------------- -------------- -------------
Equity shareholders' funds.... 295.3 (Pounds)(925.0) (629.7)
------------- -------------- -------------
Total capitalization............ (Pounds)905.6 -- (Pounds)905.6
============= ============== =============
</TABLE>
(a) New Gallaher has historically had no long-term debt. Creditors amounts
falling due after more than one year principally represents the provision
for post-retirement benefits which are not included in long-term debt
presented above.
(b) Represents par value of capital stock outstanding.
(c) Represents additional paid-in capital.
(d) Represents the payment of the cash distribution to the Company.
(e) Represents retained earnings.
See Accompanying Notes to Pro Forma Condensed Financial Statements.
28
<PAGE>
NEW GALLAHER
PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
NEW GALLAHER ADJUSTMENTS PRO FORMA
------------- -------------- --------------
(UK GAAP IN MILLIONS)
<S> <C> <C> <C>
Fixed assets
Intangible assets............. (Pounds)107.9 (Pounds) 107.9
Tangible assets............... 136.7 136.7
Investments................... 5.0 5.0
------------- --------------
249.6 249.6
------------- --------------
Current assets
Stocks........................ 711.6 711.6
Debtors:
Amounts falling due within
one year................... 177.2 177.2
Amounts falling due after
more than one year......... 135.3 135.3
Investments................... 200.6 200.6
Cash at bank and in hand...... 24.3 24.3
------------- --------------
1,249.0 1,249.0
Creditors: amounts falling due
within one year................ (1,022.8) (1,022.8)
------------- --------------
Net current assets.............. 226.2 226.2
------------- --------------
Total assets less current lia-
bilities....................... 475.8 475.8
Creditors: amounts falling due
after more than one year..... (25.4) (Pounds)(925.0) (950.4)
Provision for liabilities and
charges...................... (155.1) (155.1)
------------- -------------- --------------
Net assets (liabilities)........ (Pounds)295.3 (Pounds)(925.0) (Pounds)(629.7)
============= ============== ==============
</TABLE>
See Accompanying Notes to Pro Forma Condensed Financial Statements.
29
<PAGE>
NEW GALLAHER
PRO FORMA CONDENSED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
NEW GALLAHER ADJUSTMENTS PRO FORMA
--------------- ------------- ---------------
(UK GAAP IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Turnover
Continuing operations...... (Pounds)4,372.0 (Pounds)4,372.0
Discontinued operations.... 56.3 56.3
--------------- ---------------
4,428.3 4,428.3
Duty......................... (3,425.2) (3,425.2)
Other cost of sales.......... (333.4) (333.4)
Exceptional cost of sales-
continuing operations....... (65.5) (65.5)
--------------- ---------------
Gross profit................. 604.2 604.2
Net operating expenses....... (305.7) (305.7)
--------------- ---------------
Operating profit
Continued operations....... 296.0 296.0
Discontinued operations.... 2.5 2.5
--------------- ---------------
298.5 298.5
Income from fixed asset in-
vestments................... 0.4 0.4
Net interest income (ex-
pense)...................... 3.0 (Pounds)(58.0) (55.0)
--------------- ------------- ---------------
Profit on ordinary activities
before taxation............. 301.9 (58.0) 243.9
Taxation on profit on ordi-
nary activities............. (81.1) 19.1 (62.0)
--------------- ------------- ---------------
Profit for the financial pe-
riod........................ (Pounds) 220.8 (Pounds)(38.9) (Pounds) 181.9
=============== ============= ===============
Earnings per equity share
Based on profit for year... 31.5p 26.0p
Adjusted earnings per
share..................... 37.8p 32.3p
</TABLE>
See Accompanying Notes to Pro Forma Condensed Financial Statements.
30
<PAGE>
NEW GALLAHER
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The accompanying pro forma condensed financial statements reflect the
following:
(i) The New Gallaher column includes its results and financial position
as reported in the New Gallaher Consolidated Financial Statements included
elsewhere in this Proxy Statement.
(ii) The pro forma adjustment column reflects long-term debt of
(Pounds)925.0 million borrowed by New Gallaher to fund a distribution of
the same amount to the Company. In addition, the pro forma statements of
income reflect interest cost relating to such debt estimated at 6.2693%,
which is based on the Credit Agreement, and an associated tax benefit
calculated at a rate of 33%.
The U.K. Inland Revenue has indicated to New Gallaher that interest
payable by New Gallaher on its borrowings under the New Gallaher Facility
to fund the Distribution Payment will not be deductible for U.K.
corporation tax purposes. The New Gallaher directors, based on advice of
New Gallaher's solicitors and an opinion of leading tax counsel in the
U.K., believe that the U.K. Inland Revenue position is incorrect, and New
Gallaher intends to deduct the interest and, if necessary, challenge the
U.K. Inland Revenue's position during any subsequent tax audit and in the
courts. The Company has agreed to indemnify New Gallaher for 50% of the
taxes attributable to such possible lost tax deductions, if any, subject to
a maximum indemnification of (Pounds)65 million (approximately $100
million), as well as 50% of the tax, if any, incurred by New Gallaher on
this indemnity payment.
(iii) Earnings per share are calculated based on profits for the
financial period divided by an estimate of the approximate maximum number
of New Gallaher Ordinary Shares which are expected to be outstanding
immediately after the Distribution (700,000,000 shares).
(iv) Adjusted earnings per share are calculated as indicated in (iii)
above after adjusting profits to exclude exceptional items and tax thereon.
(v) Costs and expenses, consisting primarily of transaction costs for
investment bankers' fees, legal, accounting and printing, related to the
Distribution, will be allocated between Fortune Brands and New Gallaher.
The pro forma condensed financial statements do not give effect to such
expenses.
(vi) The accompanying condensed financial statements do not reflect any
amount relating to the cost of the Interim Services Agreement as such
amounts are expected to be immaterial.
(vii) Subsequent to the Distribution, New Gallaher intends to revise
certain of its director and employee compensation plans. In addition,
Gallaher will cash-out and cancel certain stock options in respect of
Company Common Stock held by its employees based on the market price of the
Company Common Stock. Amounts to be incurred under these revised plans and
cash-out of stock options are not currently determinable and are therefore
not included in the accompanying pro forma condensed financial statements.
(viii) The following is a reconciliation of certain pro forma amounts
reported under UK GAAP to amounts which would be reported under US GAAP:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(UK GAAP IN
MILLIONS, EXCEPT
PER SHARE DATA)
<S> <C>
Pro forma profit for the financial period determined
under UK GAAP......................................... (Pounds)181.9
Adjustments to reflect US GAAP......................... 13.0
-------------
Pro forma net income under US GAAP..................... (Pounds)194.9
=============
Pro forma earnings per share under US GAAP (a)......... (Pounds) 2.29
=============
</TABLE>
(a) Pro forma earnings per share under US GAAP are calculated based on
the historical number of Gallaher Limited Ordinary Shares outstanding
during the periods presented (85,056,000 shares, all of which were
owned indirectly by the Company).
31
<PAGE>
AMERICAN BRANDS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
The selected consolidated historical financial data presented below has been
derived from the Company's Consolidated Financial Statements as of and for
each of the five years in the period ended December 31, 1996. The information
presented below does not reflect the Transfers and the Distribution and,
accordingly, the table presents data for the Company that includes amounts
attributable to both Gallaher and the businesses that will comprise Fortune
Brands.
The following selected financial data should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto, and the
discussion and analysis under the captions "Results of Operations" and
"Financial Condition," included in the Annual Report to Stockholders of the
Company for the fiscal year ended December 31, 1996, which is incorporated
herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Net sales............... $11,579.3 $11,367.1 $13,146.5 $12,630.5 $13,658.1
Operating income (i).... 1,085.3 1,093.0 1,312.4 1,180.6 1,589.7
Income from continuing
operations............. 496.8 543.1 885.1 541.2 786.9
Income (loss) from
discontinued
operations............. -- -- (151.0) 127.0 96.9
Extraordinary items..... (10.3) (2.7) -- -- --
Cumulative effect of
accounting changes..... -- -- -- (198.4) --
Net income (ii)......... 486.5 540.4 734.1 469.8 883.8
EARNINGS PER COMMON
SHARE
PRIMARY
Continuing operations.. $ 2.86 $ 2.90 $ 4.38 $ 2.67 $ 3.81
Discontinued
operations............ -- -- (.75) .63 .48
Extraordinary items.... (.06) (.01) -- -- --
Accounting changes..... -- -- -- (.98) --
--------- --------- --------- --------- ---------
Net income (ii)........ $ 2.80 $ 2.89 $ 3.63 $ 2.32 $ 4.29
========= ========= ========= ========= =========
FULLY DILUTED
Continuing operations.. $ 2.80 $ 2.84 $ 4.24 $ 2.63 $ 3.69
Discontinued
operations............ -- -- (.71) .60 .44
Extraordinary items.... (.06) (.01) -- -- --
Accounting changes..... -- -- -- (.94) --
--------- --------- --------- --------- ---------
Net income (ii)........ $ 2.74 $ 2.83 $ 3.53 $ 2.29 $ 4.13
========= ========= ========= ========= =========
COMMON SHARE DATA
Dividends per share..... $ 2.00 $ 2.00 $ 1.9925 $ 1.97 $ 1.805
Average number of shares
outstanding............ 173.3 186.9 201.6 201.8 204.0
Book value per share.... $ 21.52 $ 21.69 $ 22.97 $ 21.09 $ 21.14
BALANCE SHEET DATA
Current assets (iii).... $ 3,873.4 $ 3,164.0 $ 4,670.9 $ 3,733.1 $ 3,453.1
Working capital (iii)... 178.1 752.7 1,555.4 575.4 664.4
Total assets............ 9,504.2 8,021.2 9,794.4 10,566.5 9,868.8
Short-term debt......... 1,459.7 710.8 705.8 1,182.9 824.7
Long-term debt.......... 1,598.3 1,154.6 1,512.1 2,492.4 2,406.8
Stockholders' equity.... 3,684.2 3,877.2 4,637.5 4,271.4 4,301.6
OTHER DATA
EBITDA (iv)............. $ 1,277.8 $ 1,311.1 $ 1,877.7 $ 1,396.9 $ 1,791.9
</TABLE>
- --------
(i) Operating income represents net sales less all costs and expenses
excluding corporate administrative expenses, interest and related expenses
and other (income) expenses, net. 1996 includes a restructuring charge in
international tobacco amounting to $88.8 million ($59.5 million after
taxes), or 34 cents and 33 cents on a primary and fully diluted per share
basis relating to the Hyde factory closing.
(ii) Net income and primary and fully diluted earnings per Common share in
1994 include $267 million ($332.9 million before taxes) and $1.32 and
$1.25, respectively, on the net gain on disposal of businesses. Net
income and primary and fully diluted earnings per Common share in 1995
include a $20 million (no taxes required) and ten cents and nine cents,
respectively, reversal of a loss provision.
32
<PAGE>
(iii) 1994 includes $1,170 million of net assets of discontinued life
insurance operations.
(iv) EBITDA is defined as income from continuing operations before interest
expense, income taxes and depreciation and amortization. Management
believes that EBITDA is a measure commonly used by analysts and
investors. Accordingly, this information has been presented to permit a
more complete analysis of the Company's operating performance. EBITDA
should not be considered a substitute for net income or cash flow data
prepared in accordance with generally accepted accounting principles as a
measure of the profitability or liquidity of the Company.
33
<PAGE>
FORTUNE BRANDS, INC.
PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The following pro forma condensed financial statements and capitalization
table are presented for informational purposes only and do not purport to be
indicative of the financial position which would actually have existed or the
results of operations which would actually have been obtained if the
transactions had occurred in the periods indicated below or which may exist or
be obtained in the future.
The pro forma condensed balance sheet and pro forma capitalization table as
of December 31, 1996 give effect to the elimination of the accounts of New
Gallaher and the related pro forma adjustments described in the notes. The
balance sheet as of December 31, 1996 is presented as though the Distribution
occurred at that date.
The pro forma condensed statements of income for the years ended December
31, 1996, 1995 and 1994 give effect to discontinued operations treatment for
the tobacco businesses by: (i) eliminating from continuing operations the
results of operations of The American Tobacco Company ("American Tobacco"), a
former wholly-owned subsidiary of American Brands, which was sold in December
1994, as described in Note (B), and (ii) by eliminating from continuing
operations the results of Gallaher Tobacco, which is expected to be
accomplished as described in Note (C). The pro forma results of operations are
presented as though these transactions occurred on January 1, 1994. Such
statements of income do not reflect the use of the estimated $1.25 billion net
cash proceeds expected to be received by American Brands from New Gallaher as
a result of the Distribution as described in Note (E). The ultimate use of the
proceeds may differ from that described in Note (E).
These statements, including the Pro Forma Capitalization table, should be
read in conjunction with, and are qualified by, information set forth under
"FORTUNE BRANDS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA
RESULTS OF OPERATIONS AND FINANCIAL CONDITION" which follows and with the
Company's Consolidated Financial Statements and Notes thereto for the fiscal
year ended December 31, 1996 contained in the Annual Report to Stockholders of
the Company for the fiscal year ended December 31, 1996, which is incorporated
herein by reference.
PRO FORMA CAPITALIZATION (UNAUDITED)
(IN MILLIONS)
The following table sets forth, as of December 31, 1996, the historical
capitalization of American Brands and the pro forma capitalization of Fortune
Brands after giving effect to the Distribution. The table below does not
reflect the use of the estimated $1.25 billion net cash proceeds, which may
initially be used to reduce debt.
<TABLE>
<CAPTION>
AMERICAN GALLAHER INTERCOMPANY
BRANDS TOBACCO RECLASSIFICATION PRO FORMA
-------- -------- ---------------- ---------
<S> <C> <C> <C> <C>
Short-term debt.................... $1,459.7 $(445.8) $(231.7) $ 782.2
Long-term debt..................... 1,598.3 1,598.3
Stockholders' equity............... 3,684.2 3,684.2
-------- ------- ------- --------
Total capitalization............... $6,742.2 $(445.8) $(231.7) $6,064.7
======== ======= ======= ========
</TABLE>
See Accompanying Notes to Pro Forma Condensed Financial Statements.
34
<PAGE>
FORTUNE BRANDS, INC.
PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AMERICAN GALLAHER INTERCOMPANY PRO FORMA
BRANDS TOBACCO RECLASSIFICATION ADJUSTMENTS PRO FORMA
--------- --------- ---------------- --------- ----------- ---------
(A) (C) (D) (E)
<S> <C> <C> <C> <C> <C> <C>
Assets
Current assets
Cash and cash
equivalents........... $ 119.7 $ (84.8) $ 34.9 $1,250.0 $ 1,284.9
Accounts receivable,
net................... 1,125.0 (232.6) 892.4 892.4
Inventories............ 2,256.2 (1,218.3) 1,037.9 1,037.9
Net assets of
discontinued
operations............ -- 915.0 $(231.7) 683.3 (683.3) --
Other current assets... 372.5 (178.9) 193.6 193.6
--------- --------- ------- --------- -------- ---------
Total current assets.. 3,873.4 (799.6) (231.7) 2,842.1 566.7 3,408.8
Property, plant and
equipment, net........ 1,230.9 (258.3) 972.6 972.6
Intangibles resulting
from business
acquisitions, net 3,936.4 (205.7) 3,730.7 3,730.7
Other assets........... 463.5 (271.6) 191.9 191.9
--------- --------- ------- --------- -------- ---------
Total assets.......... $ 9,504.2 $(1,535.2) $(231.7) $ 7,737.3 $ 566.7 $ 8,304.0
========= ========= ======= ========= ======== =========
Liabilities and
Stockholders' Equity
Current liabilities
Notes payable to
banks................. $ 482.9 $ (445.8) $ 37.1 $ 37.1
Commercial paper....... 922.9 $(231.7) 691.2 691.2
Accounts payable....... 475.2 (233.9) 241.3 241.3
Accrued excise and
other taxes........... 855.9 (412.5) 443.4 443.4
Accrued expenses and
other liabilities..... 904.5 (303.3) 601.2 601.2
Current portion of
long-term debt........ 53.9 53.9 53.9
--------- --------- ------- --------- ---------
Total current
liabilities.......... 3,695.3 (1,395.5) (231.7) 2,068.1 2,068.1
Long-term debt......... 1,598.3 1,598.3 1,598.3
Deferred income taxes.. 119.5 (100.2) 19.3 19.3
Postretirement and
other liabilities..... 406.9 (39.5) 367.4 367.4
--------- --------- ------- --------- ---------
Total liabilities..... 5,820.0 (1,535.2) (231.7) 4,053.1 4,053.1
--------- --------- ------- --------- ---------
Stockholders' equity
$2.67 Convertible
Preferred stock--
redeemable at
Company's option...... 12.9 12.9 12.9
Common stock, par value
$3.125 per share,
229.6 shares issued... 717.4 717.4 717.4
Paid-in capital........ 166.5 166.5 166.5
Foreign currency
adjustments........... (195.9) (195.9) $ 238.0 42.1
Retained earnings...... 5,025.4 5,025.4 328.7 5,354.1
Treasury stock, at
cost.................. (2,042.1) (2,042.1) (2,042.1)
--------- --------- -------- ---------
Total stockholders'
equity............... 3,684.2 3,684.2 566.7 4,250.9
--------- --------- ------- --------- -------- ---------
Total liabilities and
stockholders'
equity............... $ 9,504.2 $(1,535.2) $(231.7) $ 7,737.3 $ 566.7 $ 8,304.0
========= ========= ======= ========= ======== =========
</TABLE>
See Accompanying Notes to Pro Forma Condensed Financial Statements.
35
<PAGE>
FORTUNE BRANDS, INC.
PRO FORMA CONDENSED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1996
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AMERICAN GALLAHER
BRANDS TOBACCO PRO FORMA
--------- --------- ---------
(A) (C)
<S> <C> <C> <C>
Net sales...................................... $11,579.3 $(6,861.6) $4,717.7
Cost of products sold........................ 2,882.2 (481.1) 2,401.1
Excise taxes on products sold................ 5,803.0 (5,349.8) 453.2
Advertising, selling, general and administra-
tive expenses............................... 1,698.5 (449.0) 1,249.5
Amortization of intangibles.................. 107.4 (4.7) 102.7
Interest and related expenses................ 178.7 (13.2) 165.5
Restructuring charges........................ 88.8 (88.8) --
Other (income) expenses, net................. (3.6) 9.7 6.1
--------- --------- --------
Income before income taxes..................... 824.3 (484.7) 339.6
Income taxes................................... 327.5 (169.6) 157.9
--------- --------- --------
Income from continuing operations.............. $ 496.8 $ (315.1) $ 181.7
========= ========= ========
Income from continuing operations
Per Common share
Primary.................................... $ 2.86 $ 1.04
--------- --------
Fully diluted.............................. $ 2.80 $ 1.03
--------- --------
Average number of Common shares outstanding
Primary...................................... 173.3 173.3
--------- --------
Fully diluted................................ 178.4 178.4
--------- --------
</TABLE>
See Accompanying Notes to Pro Forma Condensed Financial Statements.
36
<PAGE>
FORTUNE BRANDS, INC.
PRO FORMA CONDENSED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AMERICAN GALLAHER
BRANDS TOBACCO PRO FORMA
--------- --------- ---------
(A) (C)
<S> <C> <C> <C>
Net sales...................................... $11,367.1 $(6,439.0) $4,928.1
Cost of products sold........................ 3,109.9 (483.9) 2,626.0
Excise taxes on products sold................ 5,462.2 (4,976.5) 485.7
Advertising, selling, general and administra-
tive expenses............................... 1,665.3 (419.5) 1,245.8
Amortization of intangibles.................. 95.1 (5.0) 90.1
Restructuring charges........................ 17.8 17.8
Interest and related expenses................ 159.8 (23.2) 136.6
Other (income) expenses, net................. (16.8) 5.5 (11.3)
(Gain) on disposal of businesses, net........ (20.0) (20.0)
--------- --------- --------
Income before income taxes..................... 893.8 (536.4) 357.4
Income taxes................................... 350.7 (179.2) 171.5
--------- --------- --------
Income from continuing operations.............. $ 543.1 $ (357.2) $ 185.9
========= ========= ========
Income from continuing operations
Per Common share
Primary.................................... $ 2.90 $ .99
--------- --------
Fully diluted.............................. $ 2.84 $ 1.01
--------- --------
Average number of Common shares outstanding
Primary...................................... 186.9 186.9
--------- --------
Fully diluted................................ 195.7 195.7
--------- --------
</TABLE>
See Accompanying Notes to Pro Forma Condensed Financial Statements.
37
<PAGE>
FORTUNE BRANDS, INC.
PRO FORMA CONDENSED STATEMENT OF INCOME (UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AMERICAN AMERICAN GALLAHER
BRANDS TOBACCO TOBACCO PRO FORMA
--------- --------- --------- ---------
(A) (B) (C)
<S> <C> <C> <C> <C>
Net sales........................... $13,146.5 $(1,594.7) $(6,174.8) $5,377.0
Cost of products sold............. 3,765.1 (349.6) (498.5) 2,917.0
Excise taxes on products sold..... 5,656.8 (425.3) (4,742.6) 488.9
Advertising, selling, general and
administrative expenses.......... 2,385.8 (572.2) (407.7) 1,405.9
Amortization of intangibles....... 96.3 (4.9) 91.4
Interest and related expenses..... 212.1 (10.8) (28.3) 173.0
Other (income) expenses, net...... 12.1 (0.8) 3.5 14.8
(Gain) loss on disposal of busi-
nesses, net...................... (332.9) 577.9 245.0
--------- --------- --------- --------
Income before income taxes.......... 1,351.2 (813.9) (496.3) 41.0
Income taxes........................ 466.1 (165.7) (180.6) 119.8
--------- --------- --------- --------
Income (loss) from continuing opera-
tions.............................. $ 885.1 $ (648.2) $ (315.7) $ (78.8)
========= ========= ========= ========
Income (loss) from continuing opera-
tions
Per Common share
Primary......................... $ 4.38 $ (.40)
--------- --------
Fully diluted................... $ 4.24 $ (.27)
--------- --------
Average number of Common shares out-
standing
Primary........................... 201.6 201.6
--------- --------
Fully diluted..................... 213.7 213.7
--------- --------
</TABLE>
See Accompanying Notes to Pro Forma Condensed Financial Statements.
38
<PAGE>
FORTUNE BRANDS, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
BASIS OF PRESENTATION
On October 8, 1996, American Brands announced the Distribution. Completion
of the transaction, which is expected around mid-1997, is pending upon the
receipt of favorable tax rulings and relevant stockholder approvals. When
the spin-off is completed the financial statements will be restated to show
tobacco operations (Gallaher Tobacco and American Tobacco) as discontinued
operations. Following the transaction, American Brands' stockholders will
own shares in two publicly-traded companies -- Fortune Brands and New
Gallaher.
THE FOLLOWING IS A SUMMARY OF THE PRO FORMA ADJUSTMENTS:
(A) AMERICAN BRANDS
This column represents the historical consolidated financial condition and
results of operations.
(B) AMERICAN TOBACCO
On December 22, 1994, American Brands sold American Tobacco. This column in
the pro forma condensed statements of income for the year ended December
31, 1994, eliminates the results of operations of American Tobacco, the
gain on the sale and includes an allocation of interest expense based on a
ratio of American Tobacco's net assets to the consolidated net assets of
American Brands.
(C) GALLAHER TOBACCO
This column in the pro forma condensed balance sheet eliminates and
reclassifies the net assets of New Gallaher to "Net assets of discontinued
operations." This column in the pro forma condensed statements of income
eliminates the results of operations of New Gallaher and includes an
allocation of interest expense based on a ratio of New Gallaher's net
assets to the consolidated net assets of American Brands and assumes the
Transfers have taken place.
The amounts included in this column in the pro forma condensed financial
statements have been prepared using a different basis of accounting than
was used in the preparation of New Gallaher consolidated financial
statements included elsewhere in this Proxy Statement. This column
principally represents the historical results of operations of Gallaher's
tobacco business on a US GAAP basis. The consolidated profit and loss
accounts included in the New Gallaher consolidated financial statements
includes non-tobacco business segments which have been reflected as
discontinued operations on a UK GAAP basis for all periods presented.
(D) INTERCOMPANY RECLASSIFICATION
This column in the pro forma condensed balance sheet as of December 31,
1996 reclassifies American Brands' net intercompany receivable from
Gallaher Tobacco as a decrease in "Net assets of discontinued operations,"
with a corresponding decrease in "Commercial paper."
(E) PRO FORMA ADJUSTMENTS
This column in the pro forma condensed balance sheet as of December 31,
1996, reflects the estimated $1.25 billion net cash proceeds expected to be
received by American Brands from New Gallaher as a result of the
Distribution, and eliminates the "Net assets of discontinued operations"
and records the difference as an adjustment to the appropriate components
of Stockholders' equity.
39
<PAGE>
FORTUNE BRANDS, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS (UNAUDITED)--(CONCLUDED)
The pro forma condensed statements of income do not reflect the use of the
$1.25 billion net cash proceeds or the possible 10 million Common share
purchase that may be made following the spin-off. Assuming the $1.25
billion net cash proceeds were received on January 1, 1996 and used for the
possible 10 million share purchase of Fortune Brands Common stock and the
repayment of debt, pro forma as adjusted earnings per Common share for 1996
was $1.32 primary and $1.30 fully diluted. The ultimate use of the proceeds
may differ from that described herein.
(F) OTHER
The U.K. Inland Revenue has indicated to New Gallaher that interest payable
by New Gallaher on its borrowings under the New Gallaher Facility to fund
the Distribution Payment will not be deductible for U.K. corporation tax
purposes. The New Gallaher directors, based on advice of New Gallaher's
solicitors and an opinion of leading tax counsel in the U.K., believe that
the U.K. Inland Revenue position is incorrect, and New Gallaher intends to
deduct the interest and, if necessary, challenge the U.K. Inland Revenue's
position during any subsequent tax audit and in the courts. The Company has
agreed to indemnify New Gallaher for 50% of the taxes attributable to such
possible lost tax deductions, if any, subject to a maximum indemnification
of (Pounds)65 million (approximately $100 million), as well as 50% of the
tax, if any, incurred by New Gallaher on this indemnity payment.
Costs and expenses, consisting primarily of transaction costs for
investment bankers, legal, accounting and printing fees, relating to the
Distribution, will be allocated between Fortune Brands and New Gallaher.
The pro forma condensed financial statements do not give effect to such
expenses.
Amounts related to the Interim Services Agreement between Fortune Brands
and New Gallaher are not reflected in the pro forma condensed financial
statements since the amounts are expected to be immaterial.
40
<PAGE>
FORTUNE BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This discussion and analysis of financial condition and results of
operations has been prepared to reflect the Distribution and refers to Fortune
Brands, although the corporation was named American Brands, Inc. during the
periods covered. The financial statements for each of the three years in the
period ended December 31, 1996 give effect to discontinued operations
treatment for the tobacco businesses by eliminating from continuing operations
the results of operations of The American Tobacco Company which was sold in
December 1994 and the results of Gallaher Tobacco.
<TABLE>
<CAPTION>
NET SALES
--------------------------
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Distilled spirits........................... $1,303.5 $1,288.6 $1,268.2
Hardware and home improvement products...... 1,374.1 1,306.8 1,270.6
Golf and leisure products................... 811.4 579.3 507.1
Office products............................. 1,228.7 1,206.1 1,049.7
-------- -------- --------
Ongoing operations........................ 4,717.7 4,380.8 4,095.6
Other businesses............................ -- 547.3 1,281.4
-------- -------- --------
Continuing operations..................... $4,717.7 $4,928.1 $5,377.0
======== ======== ========
<CAPTION>
OPERATING INCOME(I)
--------------------------
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
Distilled spirits........................... $ 208.4 $ 189.7 $ 221.2
Hardware and home improvement products...... 184.1 178.3 176.5
Golf and leisure products................... 109.0 83.0 73.3
Office products............................. 95.6 84.5 74.5
-------- -------- --------
Ongoing operations........................ 597.1 535.5 545.5
Other businesses............................ -- 3.4 (1.8)
-------- -------- --------
Continuing operations..................... $ 597.1 $ 538.9 $ 543.7
======== ======== ========
</TABLE>
- --------
(i) Operating income represents net sales less all costs and expenses
excluding corporate administrative expenses, interest and related expenses
and other (income) expenses, net.
CONSOLIDATED
1996 COMPARED TO 1995
Net sales from continuing operations decreased 4% and operating income from
continuing operations increased 11%.
Net sales from ongoing operations, which excludes other businesses sold in
1995, increased 8% principally due to new products, the inclusion of Cobra
Golf Incorporated ("Cobra") and price increases, partly offset by volume
declines. Operating income from ongoing operations increased 12% principally
due to the Cobra acquisition, favorable comparison to the $17.8 million
restructuring charge in distilled spirits in 1995, as well as higher sales,
partly offset by higher ongoing operating expenses.
41
<PAGE>
Interest and related expenses increased $28.9 million (21%) due to higher
average borrowings to fund the purchase of Cobra and share purchases.
The unfavorable change in other (income) expenses, net, reflected interest
income in 1995 from the investment of proceeds from the disposition of The
American Tobacco Company and the Franklin life insurance business.
The gain on disposal of businesses, net, in 1995 reflected the reversal of
$20 million of the $245 million loss provision recorded in 1994 in connection
with the disposition of nonstrategic businesses, and increased primary and
fully diluted E.P.S. by ten cents and nine cents, respectively.
Income from continuing operations was $181.7 million, or $1.04 per Common
share, compared with $185.9 million or 99 cents per share, last year.
Excluding the restructuring charge in distilled spirits and amounts related to
businesses disposed, income from continuing operations in 1995 was $182.4
million, or 97 cents per Common share.
The Company, through Common share purchases and redemption of convertible
debentures, reduced outstanding fully diluted shares by 12.8 million and 30
million in 1996 and 1995, respectively. During 1996, the Company purchased 10
million Common shares at an aggregate cost of $444.3 million, which, after
consideration of the related impact on borrowing levels, interest expense and
net income, benefited primary earnings per share by three cents and fully
diluted earnings per share by five cents.
Earnings per Common share in 1997 will continue to benefit from the
Company's 1996 purchase of shares of Common stock. Following the proposed
spin-off of Gallaher, the Company will consider purchasing up to 10 million
additional Common shares depending on market conditions and investment needs
and opportunities.
The Company derived 21% of its operating income in 1996 from Europe
(principally the U.K.) and other areas (principally Canada and Australia). As
a result, fluctuations in foreign currencies, principally sterling, will have
significantly less impact on the results of operations of Fortune Brands than
historically has been the case for American Brands.
For a description of certain pending litigation, see "--FORTUNE BRANDS
BUSINESS AND PROPERTIES--Legal Proceedings." As stated therein, it is not
possible to predict the outcome of such litigation, but management believes
that there are meritorious defenses to the pending actions and that the
pending actions will not have a material adverse effect upon the results of
operations, cash flow or financial condition of the Company.
Subsidiaries of the Company are involved in proceedings concerning the
discharge of materials into the environment and the handling, disposal and
clean-up of waste materials and otherwise relating to the protection of the
environment. As of February 3, 1997, various subsidiaries of the Company had
been designated as potentially responsible parties under "Superfund" or
similar state laws with respect to 44 sites. While it is not possible to
quantify with certainty the potential impact of actions regarding
environmental matters, particularly remediation and other compliance efforts
that the Company's subsidiaries may undertake in the future, in the opinion of
management, compliance with the present environmental protection laws, before
taking into account estimated recoveries from third parties, will not have a
material adverse effect upon the results of operations, cash flow or financial
condition of the Company.
The U.K. Inland Revenue has indicated to New Gallaher that interest payable
by New Gallaher on its borrowings under the New Gallaher Facility to fund the
Distribution Payment will not be deductible for U.K. corporation tax purposes.
The New Gallaher directors, based on advice of New Gallaher's solicitors and
an opinion of leading tax counsel in the U.K., believe that the U.K. Inland
Revenue position is incorrect, and New Gallaher intends to deduct the interest
and, if necessary, challenge the U.K. Inland Revenue's position during any
subsequent tax audit and in the courts. The Company has agreed to indemnify
New Gallaher for 50% of the taxes attributable to such possible lost tax
deductions, if any, subject to a maximum indemnification of (Pounds)65
42
<PAGE>
million (approximately $100 million), as well as 50% of the tax, if any,
incurred by New Gallaher on this indemnity payment. See "--RELATIONSHIP
BETWEEN NEW GALLAHER AND FORTUNE BRANDS AFTER THE DISTRIBUTION--Tax Allocation
Agreement."
1995 COMPARED TO 1994
Net sales and operating income from continuing operations decreased 8% and
1%, respectively. Net sales from ongoing operations, which excludes other
businesses sold in 1995 and 1994, increased 7% due principally to new
products, line extensions and price increases, partly offset by volume
declines. Operating income from ongoing operations decreased 2% reflecting a
restructuring charge in 1995 of $17.8 million and the nonrecurring benefits
(including one-time bulk sales) in 1994 in distilled spirits. Excluding these
items, operating income increased 5%.
Interest and related expenses decreased $36.4 million (21%) due to lower
average borrowings. Higher interest income caused the favorable change in
other (income) expenses, net. Both changes reflected the use of proceeds from
the disposition of The American Tobacco Company and the Franklin life
insurance business.
The net gain on disposal of businesses in 1995 reflected a $20 million
reversal of the estimated loss recorded in 1994 in connection with the
disposal of nonstrategic businesses. 1994 reflected a $245 million loss
($241.3 million after-tax) on the expected sale of nonstrategic businesses.
Excluding the net gain on disposal of businesses in 1995 and the loss on the
expected sale of nonstrategic businesses in 1994, the effective income tax
rate of 50.8% increased from 43.2% in 1994 on lower reversals of tax
provisions no longer required in 1995.
Income from continuing operations was $185.9 million, or 99 cents per Common
share, compared with a loss of $78.8 million, or 40 cents per Common share, in
1994. The increase was largely due to 1994's $241.3 million, or $1.20 per
share loss on disposal of businesses, partly offset by 1995's $20 million, or
ten cents per share primary and nine cents per share fully diluted, provision
reversal for disposal of businesses.
The Company, through Common share purchases and the extinguishment of debt,
reduced outstanding fully diluted shares by 30 million, or more than 14% in
1995. During 1995, the Company purchased 24.7 million Common shares at an
aggregate cost of $981.1 million.
DISTILLED SPIRITS
1996 COMPARED TO 1995
Net sales and operating income increased 1% and 10%, respectively. Excluding
the 1995 restructuring charge of $17.8 million, operating income increased
slightly. The 1995 restructuring charge reflected a bottling plant closing,
write-down of property, plant and equipment, and related employee termination
costs on a 5% reduction in workforce.
The sales increase reflects one additional month (change to calendar year-
end added $34.3 million) of JBB (Greater Europe) PLC (formerly known as The
Whyte & Mackay Group PLC) ("JBB (Greater Europe)") U.K. operations, higher
volume applicable to international sales (primarily Jim Beam bourbon and
premixed cocktails) and private label Scotch whisky sales, price increases on
certain products (primarily Jim Beam bourbon and, in the U.S. market, DeKuyper
cordials), and the benefit of new product introductions in the U.S. market,
largely offset by volume declines (primarily in the U.S. market and on branded
products from the U.K. operations) and the effect of the reduction in U.K.
excise taxes.
The small increase in operating income, excluding the 1995 restructuring
charge, reflects improved results from Jim Beam bourbon international sales,
particularly in Australia, and the private label Scotch whisky business,
partly offset by lower profits in the U.S. domestic market and from U.K.-based
branded products. The
43
<PAGE>
inclusion of the additional month of the JBB (Greater Europe) business had an
immaterial effect on operating income. U.S. domestic results were negatively
impacted by volume declines, including the effects of lower distributor
inventories, and higher brand support spending, offset in part by price
increases on key brands such as Jim Beam bourbon and DeKuyper cordials and by
higher earnings from new product introductions. U.K.-based branded products
profitability was negatively impacted by lower volume and increased brand
support spending. Total marketing expenses increased 17%, reflecting higher
support of new products in the North American market and JBB (Greater Europe)
branded products in the U.K.
The November 1996 U.K. budget resulted in a 26 pence tax reduction on a
typical bottle following a similar reduction of 27 pence in November 1995. The
supplemental 1994 U.K. budget resulted in a 26 pence tax increase on a typical
bottle effective January 1, 1995, whereas the 1993 U.K. budget did not result
in any tax change. While considered from time to time, the last excise tax
increase on distilled spirits in the U.S. was an 8% increase effective January
1, 1991.
In recent years, distilled spirits consumption in many countries, including
the U.S., continued its long-term decline. It is estimated that overall sales
of distilled spirits in the U.S. declined by 2%-3% in each year since 1993.
Total unit depletions (sales into retail distribution) by JBB Worldwide in the
U.S. decreased by 3.3%, 3.4% and 2.8% in 1996, 1995 and 1994, respectively.
Whiskey consumption has declined faster than the overall rate of decline of
distilled spirits consumption in the U.S. Whiskeys comprise over 50% of JBB
Worldwide's U.S. units sales, a larger percentage than the estimated 34% of
unit sales for the overall U.S. market. In recent years, the market for
beverage alcohol has demanded an increasingly broad variety of products,
particularly in the U.S.
During 1996, certain competitors of JBB Worldwide began television and radio
broadcast advertising of distilled spirits products in the U.S. market, and
the national distilled spirits industry association retracted a previous
voluntary ban on such activities. These developments have created a certain
amount of controversy and threats of government regulation and other actions
at federal, state and local levels. JBB Worldwide, through its Jim Beam Brands
Co. ("Beam") subsidiary, has not begun any such advertising but may yet do so
in response to competitive conditions. Other operating units outside the U.S.
have previously begun such broadcast advertising in markets where legal and
not in violation of voluntary restrictions by industry groups.
While it is impossible to predict any future U.K. and U.S. tax increases, as
well as any restrictions on advertising, any such increases or restrictions
may have an adverse effect on unit sales and add to continuing industry
declines.
1995 COMPARED TO 1994
Net sales increased 2% and operating income decreased 14%. Excluding the
$17.8 million restructuring charge in 1995 and nonrecurring benefits
(including one-time bulk sales) at JBB (Greater Europe) in 1994, operating
income increased 3%.
Beam's sales increased 2% on the introduction of After Shock cordial, higher
international shipments, and price increases, partly offset by lower domestic
shipments. Operating income increased 2% on the higher sales, partly offset by
higher marketing expenses and increased costs of materials. The increased
marketing expenses included costs to promote Jim Beam bourbon's 200th
anniversary and the introduction of After Shock as well as higher
international expenditures. International sales and operating income increased
on higher shipments, principally in Australia and Germany.
JBB (Greater Europe)'s net sales in sterling decreased 1% on unfavorable
comparison to 1994's benefit from one-time bulk sales, partly offset by the
effects of the supplemental 1994 U.K. budget 26 pence tax increase on a
typical bottle, effective January 1, 1995 and export volume increases in
Scotch whisky. Operating income in sterling decreased 80%, principally due to
the 1995 restructuring charge and an unfavorable comparison to 1994's benefits
from one-time bulk sales and other nonrecurring benefits.
44
<PAGE>
HARDWARE AND HOME IMPROVEMENT PRODUCTS
1996 COMPARED TO 1995
Net sales increased 5% on price increases, line extensions, new products and
higher overall volume. All four companies in the group reported increased
sales except Master Lock, which was flat. The overall volume increase resulted
from Moen, while the other companies reported lower volume. Price, line
extension and new product increases were reported by all companies.
Operating income increased 3% on the sales increase and a $2.2 million gain
on the sale of Moen's joint venture in Taiwan, partly offset by increased
manufacturing and operating expenses. The manufacturing expense increase
reflects higher labor and overhead costs. The higher operating expenses
reflect higher selling and distribution expenses (principally Moen and Master
Lock to meet competitive activities), increased research and development
expenses at Moen, and an unfavorable comparison to last year's reversal of
reserves related to a joint venture. All companies but Master Lock reported
increased operating income. Master Lock declined on lower volume and increased
spending on selling and pricing programs as a result of a shift by mass
merchants to competitors' value-priced products. In response to these
competitive conditions, on January 1, 1997, Master Lock decreased prices on
its core padlock products by an average of 15% and aggressive restructuring
actions are being considered to reduce costs.
As the home building industry continues to consolidate, the growth of large
mass merchants and home centers will continue to present pricing and service
challenges to manufacturers.
1995 COMPARED TO 1994
Net sales increased 3% on price increases, line extensions and new products,
partly offset by volume declines. All four companies in the group achieved
higher sales. Operating income increased 1% as the sales increase and lower
operating expenses were largely offset by increased raw material costs and
effects of lower volume. All companies except Moen reported improved operating
income. Moen's decline reflected a downturn in its U.S. market, principally in
the second and third quarters, higher raw material and marketing costs and the
effects of difficult economic conditions in Taiwan and Canada.
GOLF AND LEISURE PRODUCTS
1996 COMPARED TO 1995
Net sales increased 40% on the inclusion of Cobra, acquired January 24,
1996, and volume gains in all product lines, reflecting benefits from line
extensions and new products, partly offset by lower average foreign exchange
rates. Operating income was up 31% on the inclusion of Cobra and an increase
at Titleist and Foot-Joy Worldwide. Cobra's lower than expected results were
due primarily to startup production problems and marketing costs associated
with new products. Titleist's increased operating income reflected the higher
sales, partly offset by higher operating expenses, principally associated with
the support and development of new products to meet competitive activity.
1995 COMPARED TO 1994
Net sales were up 14% on increased volume in all product lines, reflecting
benefits from line extensions and new products. Operating income increased 13%
on higher sales, partly offset by higher operating expenses, principally
marketing and volume related expenses including costs related to European
expansion.
45
<PAGE>
OFFICE PRODUCTS
1996 COMPARED TO 1995
Net sales increased 2%. Excluding the office furniture operations sold in
1995 and the acquisition of Advanced Gravis in September 1996, sales increased
5% on new products and price increases, partly offset by volume declines in
existing product lines and lower average foreign exchange rates. Operating
income increased 13% reflecting the sales increase and improved gross margin
(principally reflecting the price increases), partly offset by higher
operating expenses, principally customer programs and new product and business
development costs in North America and increased freight and distribution
expenses in Europe. Comparisons for Day-Timers were adversely affected by the
impact of strong initial sales into the retail channel in 1995.
As the office products industry continues to consolidate, the growth of
large retailers will continue to present pricing and service challenges to
manufacturers.
1995 COMPARED TO 1994
Net sales increased 15% on new products and volume increases reflecting
continued market share gains, higher average foreign exchange rates and
limited price increases. Operating income was up 13%, principally in domestic
businesses, reflecting the sales increase, partly offset by higher raw
material costs which were not fully recovered by the price increases, and
higher marketing and volume-related expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities in 1996 was $333.5 million, as
compared to $380.3 million in 1995. Net cash provided in 1996 was impacted
unfavorably by inclusion of Cobra's working capital requirements. The 1995
amount included the cash provided by disposed businesses to the date of
disposal in 1995, partly offset by the payment of $29.4 million related to the
"put" exercise premium on the 5 3/4% Eurodollar Convertible Debentures.
Income from continuing operations in 1996 amounted to $181.7 million and
depreciation and amortization was $238.3 million. Income from continuing
operations in 1995 amounted to $185.9 million and depreciation and
amortization was $223.9 million. These sources of funds were partly offset by
cash used for working capital requirements of $60.8 million and $66.5 million,
in 1996 and 1995, respectively.
Net cash used by investing activities in 1996 of $867.2 million principally
reflects the acquisition of Cobra and capital expenditures of $199.6 million.
The net cash provided by investing activities in 1995 of $1 billion reflects
the proceeds received on the sale of the Franklin life insurance business of
$1.17 billion, partly offset by capital expenditures of $175.5 million. The
increase in capital expenditures in 1996 is primarily attributable to an
increase in golf and leisure products reflecting expansion of a golf ball
plant, partly offset by $10.4 million absence of capital expenditures of
businesses disposed.
Net cash provided by financing activities of $95.9 million in 1996
principally reflects a net increase in borrowings of $854.4 million, partly
offset by purchases of Common stock for treasury of $444.3 million and payment
of dividends of $348.4 million. The net cash used by financing activities in
1995 of $1.82 billion reflects purchases of Common stock for treasury of
$988.4 million, payment of dividends of $377.5 million and a net decrease in
borrowings of $484 million.
During 1996, the Company purchased 10 million shares of Common stock.
Following the proposed spin-off of New Gallaher, Fortune Brands will consider
purchasing up to 10 million additional Common shares, depending on market
conditions and investment needs and opportunities.
The dividends paid in 1996 and 1995 represent a payment of $2.00 per Common
share. The lower payment in 1996 reflects the reduced number of outstanding
Common shares. It is currently anticipated that the initial
46
<PAGE>
Fortune Brands annualized dividend will be $.80 per share. Future dividends by
Fortune Brands will be determined by, and will be at the discretion of, the
Company Board following the spin-off, subject to available profits and other
considerations.
On March 5, 1996, the $150 million 7 5/8% Eurodollar Convertible Debentures,
due 2001, were redeemed at a redemption price of 103.8125% of the principal
amount plus accrued interest. On March 1, 1996, the $150 million 9 1/8%
Debentures, due 2016, were redeemed at a redemption price of 104.4375% of the
principal amount plus accrued interest.
Total debt at December 31, 1996 was $2.4 billion, as compared to $1.5
billion in 1995, primarily reflecting the increase in commercial paper
borrowings principally for the acquisition of Cobra and additional Common
share purchases. The ratio of total debt to total capital increased from 28.3%
at December 31, 1995 to 39.3% at December 31, 1996. The ratio of total debt to
total capital adjusted to reflect the Transfers and the Distribution (assuming
the net proceeds were used to increase cash and cash equivalents) at December
31, 1996 was 35.9%.
To allocate the overall debt burden of American Brands at the time of the
spin-off, New Gallaher will borrow and pay to Fortune Brands pounds sterling
in the range of 925 million (net cash proceeds of approximately $1.25
billion). Fortune Brands will use such proceeds initially to pay down short-
term debt.
At December 31, 1996, the Company had $850 million of debt securities
(including Medium Term Notes) available for sale under its shelf registration
with the SEC.
At December 31, 1996, the Company had $4 billion of long-term credit
facilities, substantially all of which remained unused. These facilities are
available for general corporate purposes, including acquisitions and support
for the Company's short-term borrowings in the commercial paper market.
Management believes that the Company's internally generated funds, together
with its access to global credit markets, are more than adequate to meet the
Company's capital needs.
Working capital at December 31, 1996 was $774 million compared to $651.7
million at December 31, 1995. The increase principally resulted from the
classification of net assets of discontinued operations of $683.3 million as
current assets at December 31, 1996, partly offset by higher short-term debt
levels at December 31, 1996 (principally reflecting the acquisition of Cobra
and purchase of Common shares for the treasury). Management believes that the
1996 level was adequate to support continued growth.
If the planned spin-off of New Gallaher occurs, changes in foreign exchange
rates, principally sterling, will have significantly less impact on the
financial statements of Fortune Brands.
Financial instruments, principally forward foreign exchange contracts, are
used to reduce the impact of changes in foreign currency exchange rates with
respect to short-term loans, dividends declared by foreign operating companies
and a portion of the Company's investments in U.K. operating companies.
Interest rate swaps are used to reduce the impact of changes in interest
rates. The counterparties are major financial institutions. Although the
Company's theoretical risk is the replacement cost at the then estimated fair
value of these instruments, management believes that the risk of incurring
credit losses is remote and that such losses, if any, would be immaterial. The
Company does not enter into financial instruments for trading or speculative
purposes. If the planned spin-off of New Gallaher occurs, Fortune Brands'
foreign exchange activity will be greatly reduced.
47
<PAGE>
NEW GALLAHER BUSINESS AND PROPERTIES
Except as otherwise indicated herein, market share information in respect of
the U.K. reflects unit sales to consumers in the case of cigarettes and cigars
and volume sales to consumers in the case of pipe and handrolling tobacco, and
is based on information compiled by A.C. Nielsen Company Limited ("Nielsen").
Except as otherwise indicated herein, such information applies to the year
ended December 31, 1996. Nielsen's information reflects the results of surveys
conducted by it and represents best estimates only. Trade sales in the U.K.
reflect unit sales for 1996 based on information compiled by Barclays Bank Plc
from data supplied by U.K. tobacco manufacturers and importers. Except as
otherwise indicated herein, market share information in respect of the
Republic of Ireland reflects unit sales to the trade in the thirteen months
ended December 31, 1996 and is based on information compiled by KPMG, Dublin,
which reflects the results of the compilation of data supplied by the industry
which has not been audited; in respect of France, Germany and the Canary
Islands reflects 1996 unit trade sales and is based on information provided by
distributors in those territories; in respect of Greece reflects 1996 unit
trade sales and is based on information provided by a trade association; in
respect of Kazakhstan represents Gallaher's own estimates; and in respect of
duty free sales reflects 1996 unit trade sales and is based on reports
compiled by Barclays Bank Plc.
Gallaher will become a wholly-owned subsidiary of New Gallaher in connection
with the Distribution. See "--CERTAIN ORGANIZATIONAL MATTERS."
INTRODUCTION
Gallaher is the largest manufacturer of tobacco products for the U.K. market
and manufactures and markets a range of cigarettes, cigars and pipe and
handrolling tobacco products. Gallaher is the leader in each of the cigarette,
cigar and pipe tobacco markets in the U.K., with market shares of 39.1%, 49.7%
and 46.2%, respectively, and is the second largest handrolling tobacco
manufacturer in the U.K., with a 38.0% market share. Gallaher is also the U.K.
market leader in the growing low tar cigarette sector.
In 1996 Gallaher's continuing operations had total turnover of
(Pounds)4,372.0 million, of which (Pounds)3,772.2 million, or 86.3%, was in
the U.K., and total operating profit (before exceptional cost of sales of
(Pounds)65.5 million) of (Pounds)361.5 million, of which (Pounds)296.5
million, or 82.0%, was also in the U.K.
Gallaher's U.K. business is based primarily on the sale of a number of
leading brands, including Benson and Hedges, Silk Cut and Berkeley cigarettes,
Hamlet cigars, Condor pipe tobacco and Old Holborn handrolling tobacco. Most
of this business, 92.7% of total U.K. turnover from continuing operations in
1996, consists of the sale of cigarettes, principally in the premium sector.
The most important brands for Gallaher's U.K. business are Benson and Hedges,
the U.K. market's largest selling cigarette brand, and Silk Cut, the U.K.
market's largest selling low tar cigarette brand. Each of these brands enjoys
high consumer awareness as a result of Gallaher's innovative advertising and
promotional campaigns.
The sale of Gallaher's cigarettes in selected international markets is an
important part of its operations, accounting for 28.9% of Gallaher's total
cigarette unit sales in 1996. The sale of Gallaher's tobacco products in
selected international markets accounted for 13.7% of turnover from continuing
operations in 1996, and Gallaher sold tobacco products in over 35 countries,
with international sales concentrated primarily in the Republic of Ireland,
continental western Europe and the former Soviet Union.
Gallaher manufactures substantially all of its products, for both domestic
and international markets, in the U.K. and the Republic of Ireland. Gallaher
produces cigarettes and pipe and handrolling tobacco in Lisnafillan in
Northern Ireland, which is also its research and development center;
cigarettes in Hyde, near Manchester in England; cigarettes in Dublin in the
Republic of Ireland; and cigars in Cardiff in Wales. Gallaher has announced
its plans to expand the Lisnafillan factory and close the Hyde factory over
the next three to four years. Gallaher's U.K. national distribution center is
in Crewe in England and its head office is in Weybridge in England. See "--
Manufacturing--Production."
48
<PAGE>
HISTORY AND DEVELOPMENT
Gallaher's business was established in 1857 in Londonderry to manufacture
Irish Roll pipe tobacco, and manufactured its first machine-made cigarettes at
around the turn of this century. In the period up to 1950, Gallaher pursued a
strategy of acquisitions, with a particular emphasis on the cigarette market.
During this period Gallaher acquired the rights to the du Maurier brand in the
U.K. (one of the first filter tipped cigarettes to be sold in the U.K.), which
was subsequently disposed of by Gallaher, and the rights to the Senior Service
brand in the U.K. and the Republic of Ireland. As a result of these
acquisitions, Gallaher became primarily a cigarette producing company. The Old
Holborn brand of handrolling tobacco and Manikin, which was at that time one
of the leading cigar brands, were also acquired during this period.
In 1955, Gallaher made its most significant acquisition, that of Benson &
Hedges Limited, through which it acquired the right to use the Benson and
Hedges trademark in the U.K. and the Republic of Ireland. Gallaher
subsequently acquired the right to use the Benson and Hedges trademark for the
rest of the EU and countries in EFTA, with the exception of duty free markets,
in 1993. Under Gallaher's ownership, Benson and Hedges became the largest
cigarette brand in the U.K. in 1978. Benson and Hedges had a 14.3% share of
the U.K. cigarette market in 1996.
In 1964, Gallaher identified a market opportunity for a branded mild
cigarette and launched Silk Cut. The brand was developed through a series of
successful advertising and promotional campaigns and is currently the leading
low tar cigarette brand in the U.K., with a 9.9% share of the U.K. cigarette
market. Gallaher has capitalized on the appeal of the brand by launching brand
extensions, such as Silk Cut Extra Mild and Silk Cut Ultra, to respond to
increasing demand for even lower tar products. In order to concentrate on its
key markets, and to obtain value for the Silk Cut brand in regions where it
had not fully developed the potential for Silk Cut, Gallaher sold the Silk Cut
trademark outside western Europe to B.A.T Industries p.l.c. ("B.A.T") at the
end of 1994.
By the end of 1977, the U.K. excise duty on cigarettes had changed from a
duty on unmanufactured tobacco leaf to the present duty on the finished
product. This change in duty structure fundamentally changed the U.K.
cigarette market in that it increased demand for "King Size" cigarettes, which
were longer than the then standard cigarette. Gallaher was well represented in
this particular sector of the market with Benson and Hedges Special Filter and
Silk Cut King Size cigarettes and consequently the unit sales and market share
of these brands increased significantly. King Size and longer cigarettes now
account for over 96% of all cigarette sales in the U.K.
In the 1980s, Gallaher began to give greater focus to its international
operations, particularly in continental western Europe. The acquisition in
1993 of the rights to the Benson and Hedges trademark in the EU and countries
in EFTA, with the exception of the duty free markets, supplemented Gallaher's
existing rights in the U.K. and the Republic of Ireland and increased
significantly Gallaher's presence in continental western Europe. Gallaher is
continuing to develop its presence overseas by applying the marketing
expertise it has developed successfully over the years in the U.K. in its
international markets. More recently, Gallaher has established a position in
emerging markets through the launch of new brands, such as Sovereign
cigarettes in the former Soviet Union, and plans to develop Sobranie
cigarettes in Asia Pacific markets.
Commencing in about 1970, Gallaher sought to diversify its operations, by
making acquisitions of various businesses including businesses involved in
retail distribution, housewares, optical goods and services and the
manufacture and distribution of distilled spirits. In 1993 Gallaher decided to
refocus its operations by divesting non-core assets. As part of this strategy,
it sold its optical goods and services, housewares, and retail distribution
businesses in July 1994, May 1995 and July 1995, respectively. In April 1996
Gallaher transferred its last material non-tobacco related business, its
distilled spirits division, The Whyte & Mackay Group PLC (now known as JBB
(Greater Europe) PLC), to the Company. Although Gallaher still owns certain
non-tobacco operations comprising a pumps business in Zimbabwe and its captive
insurance business in the Isle of Man, these are not considered to be material
to the overall operations of Gallaher and Gallaher is now able to focus its
financial and management resources on its tobacco operations.
49
<PAGE>
The American Tobacco Company, a former subsidiary of the Company, became a
13% shareholder in Gallaher in 1962 and that shareholding increased to 100% in
1975. Gallaher is presently an indirect wholly-owned subsidiary of the
Company.
THE TOBACCO MARKET
In 1995, an estimated 5.25 trillion cigarettes were sold throughout the
world, with the western European market accounting for over 10% of world
consumption. The U.K. market accounted for an estimated 83 billion cigarettes
in 1995, which made it the fourth largest market in western Europe. In recent
years, global cigarette consumption has been rising slowly. Most of the
increase in demand has been in the emerging markets of eastern Europe, the
former Soviet Union and Asia, while sales in western Europe (including the
U.K.) and North America have been generally declining. Gallaher expects these
trends to continue. Major international cigarette manufacturers are competing
to establish their brands in the major emerging markets, where there is still
a high level of unsatisfied demand for western-style cigarettes.
Cigarettes are manufactured using two principal tobacco blends, Virginia
blend and American blend. Virginia blend products tend to be more prevalent in
the U.K., the Republic of Ireland, Africa and Asia, with American blend
products more prevalent in continental western Europe and the U.S.
Traditionally, Gallaher has focused on producing Virginia blend cigarettes.
Historically, the U.K. has been the principal focus of Gallaher's business.
The smoking population in the U.K. is estimated to currently number around 13
million people, more than 10.5 million of whom are cigarette smokers. In 1995,
the U.K. tobacco market had an estimated retail value, including excise duty
and value added tax ("VAT"), of (Pounds)11.4 billion, of which (Pounds)10.5
billion was cigarette sales. The volumes of tobacco products sold in the U.K.
have declined since the 1970s, with total cigarette consumer sales over the
period 1992 to 1996 falling by an average of 2.5% per annum. This period has
also seen increasing demand for cigarette brands with a lower tar content and
greater competition between manufacturers based on pricing. There are over 300
brands of cigarette sold in the U.K. However, the market is highly
concentrated with the five leading brands accounting for more than half of all
cigarette sales.
There are significant differences between each of the principal western
European markets. This is a consequence of the duty structures, distribution
mechanisms, the degree of government regulation and local preferences for
tobacco blends in each market. The principal western European markets are
dominated by a limited number of established brands. There are also
differences between the U.K. market and the international markets in which
Gallaher operates in that sales prices and associated margins achieved in
international markets are typically lower than those achieved in the U.K.
market.
A significant factor affecting Gallaher's operations is the government duty
on tobacco products. Such duty represents a significant cost to tobacco
companies and Gallaher includes these amounts in both turnover and cost of
sales. The current U.K. government has expressed an intent to increase duty on
tobacco products by an average of at least 3% per annum in excess of the rate
of inflation. This represents an annual direct increase in cost of sales for
Gallaher, which, if passed on to the retail trade, would be expected to affect
the consumption of tobacco products. Gallaher has generally passed on the full
duty increases to its customers in recent years with the result that these
amounts are included in net sales and cost of sales. The continuing impact of
price increases in the U.K. cigarette market, principally due to substantial
duty increases in recent years, has reduced annual industry volumes, led to
greater price competition and accelerated trading down by consumers to lower
price cigarette brands, resulting in pressure on margins. These changes are
particularly affecting Gallaher, the majority of whose sales are in the
premium sector of the U.K. cigarette market.
Since November 1996 approximately 79% of the recommended retail price for a
premium brand cigarette sold in the U.K. has consisted of excise duties and
VAT. Rates of duty charged on tobacco products in the U.K. are typically
higher than those charged in other western European countries. This encourages
both legal and, more significantly, illegal cross-border trade from countries
with lower levels of duty. This cross-border trading has developed principally
in the handrolling tobacco sector, which is a comparatively small part of
Gallaher's business.
50
<PAGE>
The imposition of duty increases in the U.K. government's budget
announcement also affects the annual pattern of Gallaher's turnover and
inventory values. Historically, Gallaher's sales in the U.K. have peaked in
the weeks preceding the budget announcement, as trade customers have sought to
avoid the expected duty increases by acquiring inventories of tobacco products
at pre-budget prices. In addition, as a result of paying duty at the pre-
budget rate, Gallaher has held significantly higher inventory values in the
months immediately following the U.K. government's budget announcement. Any
change in the timing of the budget announcement or in the regulations relating
to the application of duty increases could have a material impact on
Gallaher's operating performance, as could the outcome of pending litigation,
not involving Gallaher, if it resulted in commercial organizations being
entitled to act as agents for U.K. individuals to bring into the U.K. tobacco
products on which duty had been paid in another EU member state without the
need to pay U.K. excise duty.
Manufacturers' price increases in the U.K. have tended to be annual, most
recently in the spring of each year, resulting in a second, less accentuated,
peak in sales prior to such an increase.
PRINCIPAL BRANDS
Gallaher's brands are key to its profitability and growth. Its principal
brands are among the market leaders in the cigarette, cigar, handrolling
tobacco and pipe tobacco sectors in the U.K. and the Republic of Ireland, and
Gallaher has established positions in other markets in western Europe.
Gallaher's principal cigarette brands are Benson and Hedges (encompassing
primarily Benson and Hedges Special Filter, Benson and Hedges Lights, Benson
and Hedges Superkings, Benson and Hedges Superkings Lights and Benson and
Hedges American Blend), Silk Cut (encompassing primarily Silk Cut King Size,
Silk Cut Extra Mild and Silk Cut Ultra), Berkeley (encompassing primarily
Berkeley Superkings, Berkeley Superkings Lights and Berkeley Superkings
Menthol), Mayfair, Sovereign and Sobranie. Gallaher's principal cigar brand is
Hamlet (encompassing Hamlet, Hamlet Miniatures, Hamlet Reserve, Hamlet Special
and Hamlet Extra Mild). Gallaher's principal tobacco brands are Old Holborn
and Condor.
Gallaher is continuing to develop its portfolio of brands through brand
extensions into different taste sectors, different price sectors and lower tar
cigarettes in order to increase its U.K. and international market share
further and enhance consumer appeal.
TURNOVER BY REGION
The following table sets forth by geographic region turnover from continuing
operations of Gallaher for the periods indicated (see "--NEW GALLAHER
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
(UK GAAP IN MILLIONS)
<S> <C> <C> <C>
Continuing Turnover (including
duty)
U.K. (i) (Pounds)3,772.2 (Pounds)3,557.5 (Pounds)3,537.2
International (ii) 599.8 520.9 468.5
</TABLE>
Notes:
(i) U.K. represents sales in the U.K. domestic market.
(ii) International represents sales primarily in the Republic of Ireland,
continental western Europe, the former Soviet Union, the Asia Pacific
region and duty free sales.
U.K. BUSINESS
Gallaher is the largest manufacturer of tobacco products for the U.K. market
and manufactures and markets a range of cigarettes, cigars and pipe and
handrolling tobacco products.
51
<PAGE>
Gallaher's U.K. business is based primarily on the sale of a number of
leading brands, including Benson and Hedges, Silk Cut and Berkeley cigarettes,
Hamlet cigars, Condor pipe tobacco and Old Holborn handrolling tobacco. In
addition, Gallaher's Kensitas brand has a strong presence in Scotland. Most of
this business consists of the sale of cigarettes, principally in the premium
sector. The most important brands for Gallaher's U.K. business are Benson and
Hedges, the U.K. market's largest selling cigarette brand, and Silk Cut, the
U.K. market's largest selling low tar cigarette brand. Each of these brands
enjoys high consumer awareness as a result of Gallaher's innovative
advertising and promotional campaigns.
Cigarettes
Gallaher is the leader in the U.K. cigarette market, with a 39.1% market
share. Gallaher's sales of cigarettes, principally in the premium sector,
accounted for 92.7% of its total U.K. turnover from continuing operations in
1996.
Sales of cigarettes in the U.K. have been in a gradual decline since their
peak in 1973, with cigarette consumer sales falling by an average of 2.5% per
annum over the period 1992 to 1996. Within this overall downward trend,
however, growth has been apparent in certain sectors of the U.K. market, more
recently in those for lower tar products and lower price brands.
Gallaher's share of U.K. unit sales to consumers increased significantly
from a level of 32.3% in 1985 to a peak of 42.9% in 1990, and was 39.1% in
1996. In 1988, Gallaher became the cigarette market leader in the U.K. The
growth in Gallaher's market share was achieved through, among other measures,
the introduction of a series of creative advertising campaigns to build
consumer awareness of Gallaher's products and the launches of new brands and
brand extensions. The reduction in market share in recent years has been
primarily a result of the trend away from premium price cigarettes to lower
price products.
Gallaher classifies the U.K. cigarette market in terms of three price
sectors based on the recommended retail price for a standard pack of 20
cigarettes: the premium sector (presently (Pounds)2.97 and above); the mid-
price sector (presently (Pounds)2.82 to (Pounds)2.96); and the low-price
sector (presently (Pounds)2.81 or less). The premium sector represents 48.5%
of the U.K. cigarette market and the mid-price sector and low-price sector
represent 23.9% and 27.6%, respectively. Gallaher's market position is
particularly strong in the premium sector, where it earns margins superior to
the margins on its products in the mid and low-price sectors. Gallaher has a
53.6% share of the premium sector principally through its Benson and Hedges
and Silk Cut brands, the two largest selling brands in the premium sector.
Benson and Hedges and Silk Cut together accounted for 24.2% of cigarette
consumer sales in the U.K. in 1996 with aggregate sales of 19.5 billion
cigarettes. Gallaher also has a 41.4% market share in the mid-price sector,
through its Berkeley Superkings and Benson and Hedges Superkings brands, and
an 11.7% market share in the low-price sector, principally through its Mayfair
and Sovereign brands.
The trend away from premium price cigarettes to lower price products in the
last six years is also reflected in the total market shares of Gallaher's
premium Benson and Hedges and Silk Cut brands, which have declined from 20.4%
and 10.3%, respectively, in 1990 to 14.3% and 9.9% in 1996. In response to
this trend, Gallaher introduced Gratis, a gift voucher-based loyalty program
whereby consumers collect coupons which can be redeemed for gifts, in October
1994, to strengthen Benson and Hedges' position as the leading brand in the
U.K. Gallaher launched Mayfair in February 1992 and Sovereign in March 1996 in
the lower price sector of the U.K. market to capitalize on this growing
market. The launch of Sovereign was the largest brand launch ever undertaken
by Gallaher and its introduction, together with the growth of sales of Mayfair
cigarettes, enabled Gallaher's low price cigarette brands to increase their
share of the total market from 1.8% in January 1996 to 4.1% in December 1996.
Gallaher believes that, in spite of pricing pressure from competitors, its
continued investment in brand development through innovative marketing has
enabled it to maintain its leading position in the market and its accumulated
brand recognition will be an important element of future profitability.
52
<PAGE>
The average tar content of cigarettes sold in the U.K. has been gradually
falling for more than 20 years, reflecting trends in consumer preferences and
regulatory initiatives to reduce the tar content of cigarettes. In addition to
the main brand, lower tar variants are also sold under the Benson and Hedges,
Berkeley, Mayfair and Sovereign brand names. Lower tar cigarettes have
accounted for a growing share of the U.K. market and Gallaher believes that it
is well positioned to take advantage of what it believes will be a continuing
trend. Gallaher is the market leader in the U.K. in the low tar cigarette
sector, which it presently classifies as cigarettes with a tar yield of six
milligrams or less. Within this sector the Silk Cut brand has a 63.4% share.
To capitalize on Gallaher's position in the low tar sector, Gallaher launched
Silk Cut Ultra, with a tar yield of one milligram, in 1992. In 1996, Silk Cut
Ultra had a 1.6% share of the total cigarette market.
Cigars
Gallaher is the leader in the U.K. cigar market, with a 49.7% market share.
The sale of cigars accounted for 4.1% of Gallaher's U.K. turnover from
continuing operations in 1996. The market for cigars in the U.K. has been
declining at an average rate of 4.8% per annum since 1991. Gallaher classifies
the cigar market into three sectors according to size-- miniature, small and
large. Over 70% of the U.K. cigar market comprises the sale of small cigars.
Gallaher's principal cigar brand is Hamlet, which is sold in the small cigar
sector and is the leader in the U.K. cigar market with a 39.8% market share.
Gallaher markets other cigars from the Hamlet brand family in the miniature
and large sectors, together with Sobranie cigars in the miniature sector, King
Six cigars in the small sector and Sullivan Powell cigars in the large sector.
Handrolling Tobacco
Gallaher is the U.K.'s second largest handrolling tobacco manufacturer, with
a 38.0% market share in the U.K. The sale of handrolling tobacco accounted for
2.2% of Gallaher's U.K. turnover from continuing operations in 1996.
Gallaher's principal handrolling tobacco brand is Old Holborn, supported by
other brands, including Amber Leaf and Samson, the latter of which is
manufactured under license in the U.K. from Niemeyer, a Dutch tobacco company.
Gallaher believes that the majority of handrolling tobacco being smoked in the
U.K. consists of tobacco manufactured in the U.K., including Old Holborn,
imported into the U.K. from markets with lower levels of duty. Gallaher
believes that the importation of such products is predominantly illegal. This
results from the rate of duty in the U.K. being significantly higher than that
in other parts of the EU. The U.K. duty paid volume sales of handrolling
tobacco have fallen by an average of 11.7% each year over the last three
years.
Pipe Tobacco
Gallaher is the leader in the U.K. pipe tobacco market, with a 46.2% market
share. The sale of pipe tobacco accounted for 0.9% of Gallaher's U.K. turnover
from continuing operations in 1996. Gallaher's principal pipe tobacco brands
are Condor and Mellow Virginia, which have a 24.7% and 7.3% market share,
respectively, and are the largest and fourth largest brands, respectively.
Gallaher also distributes Clan in the U.K., which has a 11.7% market share and
is the third largest brand, on behalf of Niemeyer. The pipe tobacco market in
the U.K. has declined steadily, with sales to the trade in the U.K. falling
from 1,800 metric tons in 1991 to 1,000 metric tons in 1996. Approximately
one-third of pipe tobacco smokers are over the age of 65.
U.K. Competition
Gallaher's principal competitor in the U.K. market is Imperial Tobacco Group
PLC ("Imperial Tobacco"). Imperial Tobacco has a 37.8% share of the cigarette
market, a 47.4% share of the cigar market (more than a third of which Imperial
Tobacco derives from the distribution of cigars on behalf of Henri Wintermans,
a Dutch cigar company), a 51.0% share of the handrolling tobacco market and a
36.4% share of the pipe tobacco market. Imperial Tobacco's principal cigarette
brands are Embassy and Regal in the premium sector, Superkings and John Player
Special in the mid-price sector and Lambert & Butler in the low-price sector.
Of these brands, Lambert & Butler is the largest and accounted for
approximately 28% of Imperial Tobacco's total cigarette consumer sales in
1996.
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The second main competitor in the U.K. cigarette market is The Rothmans
(U.K.) Partnership, which, through its agent, Rothmans (U.K.) Limited,
distributes brands such as Rothmans Royals, Dunhill, Craven A, Marlboro and
Raffles on behalf of certain companies including Rothmans and Philip Morris.
Brands distributed by The Rothmans (U.K.) Partnership have a 13.3% share of
the cigarette market. Gallaher also has competition from imported brands,
including those of R.J. Reynolds Tobacco Company ("R.J. Reynolds").
INTERNATIONAL BUSINESS
Gallaher's international sales, which are based primarily on cigarettes,
accounted for 21.8% ((Pounds)65.0 million) of Gallaher's operating profit in
1996 (after exceptional cost of sales of (Pounds)65.5 million) and represented
approximately 13 billion cigarettes.
Gallaher's international activities are concentrated in the markets of the
Republic of Ireland, the former Soviet Union, France, Greece, Germany, Belgium
and the Canary Islands. Gallaher plans to develop niche positions in certain
markets in the Asia Pacific region. In addition to sales in duty paid markets,
duty free sales to travellers and tourists are also a significant part of
Gallaher's international business.
Market trends in continental western Europe are generally similar to those
in the U.K., with a longer term overall decline in the demand for cigarettes
and increasing regulatory intervention. In the emerging economies of the
former Soviet Union and Asia Pacific, however, sales of western-style
cigarettes are generally increasing.
Gallaher's objective is to develop a balanced portfolio of interests in
established markets and in emerging markets with strong growth opportunities,
either independently or through joint arrangements. In order to focus on its
existing initiatives, Gallaher has no present intention of seeking
opportunities in Africa or North or South America.
The Republic of Ireland
The Republic of Ireland represents an important international market for
Gallaher and in 1996 accounted for 23.3% of Gallaher's international cigarette
sales. Gallaher is the leading cigarette manufacturing company in the Republic
of Ireland with a 44.2% share of the cigarette market and offers a tobacco
product portfolio that includes Benson and Hedges and Silk Cut cigarettes,
Hamlet cigars and Old Holborn handrolling tobacco. Gallaher has had a
manufacturing operation in the Republic of Ireland for more than 30 years and
manages its Irish operations independently of its other international
operations. Gallaher produces cigarettes in Dublin, where it also packs pipe
tobacco and handrolling tobacco imported from the U.K., and imports cigars for
sale in the Republic of Ireland.
Total cigarette sales in the Republic of Ireland grew by 1.5% and 1.4% in
1995 and 1996, respectively, which Gallaher believes is attributable to the
recent strength of the Irish economy, the country's demographic changes and
its growing tourist industry. Gallaher is the leading tobacco company in the
Republic of Ireland, with 44.2% of the cigarette market, 75.6% of the cigar
market and 54.4% of the pipe and handrolling tobacco market. Silk Cut King
Size and Benson and Hedges King Size are two of the top three cigarette brands
in the country, Hamlet is the top cigar brand and Old Holborn and Condor are
two of the top three tobacco brands. Gallaher's cigarette sales in the
Republic of Ireland have grown at an average annual growth rate of 9.3% per
annum since 1992.
The tobacco market in the Republic of Ireland is different from that in the
U.K., primarily because Irish legislation creates a framework for the price at
which different cigarette brands can be sold. The advertising and promotion of
tobacco products is also subject to greater restrictions in the Republic of
Ireland than in the U.K. Gallaher intends to continue to build on its position
in the Republic of Ireland by maintaining the investment in its existing
brands and, to the extent permitted by legislation, the marketing of new
brands to meet any future changes in consumer demand.
Continental Western Europe
Continental western Europe is also significant for Gallaher and in 1996
accounted for 38.2% of Gallaher's international cigarette sales. A major
contributor to Gallaher's sales growth in continental western Europe has
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been the strategic acquisition in 1993 of the rights to the Benson and Hedges
trademark for the EU and countries in EFTA, with the exception of duty free
markets. Gallaher intends to increase further its market share in continental
western Europe through the development of its existing brands, by way of line
extensions, particularly in the lower tar sector and in the American blend
market sector, and the continued development of its products in its selected
markets.
In terms of volume, Gallaher's principal markets in continental western
Europe are France, Germany and Greece, which together accounted for 28.8% of
Gallaher's international cigarette sales, and in each of which Gallaher sold
more than one billion cigarettes in 1996. Gallaher's initiatives in these
countries have included the launch of Benson and Hedges American Blend in
France, the development of innovative advertising campaigns for its Benson and
Hedges brand in Germany and the promotion of its Silk Cut brand in Greece.
Belgium and the Canary Islands are also important contributors to Gallaher's
international operating profits.
Gallaher believes that it has experienced a significant level of demand from
U.K. customers buying tobacco products, particularly handrolling tobacco, in
continental western Europe due to the high level of duty on tobacco products
in the U.K. relative to other western European countries.
Former Soviet Union
In 1996 Gallaher sold more than 2.4 billion cigarettes in the former Soviet
Union, principally in Russia and Kazakhstan, which accounted for 18.6% of
Gallaher's international cigarette sales, but at sales prices and associated
margins which were considerably lower than those achieved in continental
western European markets. Gallaher's cigarette sales to the former Soviet
Union have increased significantly in recent years, although Gallaher
experiences volatility in sales during periods of heightened political and
economic instability and regulatory change. Gallaher's principal brand in
these markets is Sovereign, supported by State Line (an American blend
cigarette) and Sobranie. Gallaher does not own the rights to the Benson and
Hedges or Silk Cut trademarks in the former Soviet Union. Gallaher believes
that in 1996 Sovereign accounted for between 5% and 10% of the cigarette
market in Kazakhstan. Gallaher intends to continue to address the
opportunities for significant growth in the former Soviet Union by way of
focused brand building and local manufacturing. Gallaher has acquired a site
and intends to construct a factory in Kazakhstan.
Asia Pacific
Gallaher intends to pursue opportunities for development in the Asia Pacific
region which it believes will become increasingly important to its
international operations. Among other initiatives, Gallaher plans to establish
a sales and marketing office in Hong Kong and is exploring opportunities in
the People's Republic of China, the world's largest market for cigarettes. In
1996, Gallaher launched a new Sobranie line extension in Japan and intends to
promote its Sovereign and Sobranie brands for sale in other markets in the
Asia Pacific region.
Duty Free Sales
In 1996, Gallaher's duty free sales were in excess of one billion cigarettes
and accounted for 8.4% of its international cigarette sales. Gallaher's
principal duty free brands are Silk Cut cigarettes (which has a 12.1% share of
the U.K. duty free cigarette market) and Old Holborn handrolling tobacco.
Gallaher does not own the rights to the Benson and Hedges trademark in the
duty free market. More than 80% of Gallaher's duty free sales are to
purchasers traveling to or from the U.K. The principal outlets for Gallaher
duty free sales are ferries, airports, the Channel tunnel, airlines and
British service personnel serving overseas.
A significant proportion of duty free sales relates to travel within the EU
and is threatened by plans to abolish intra-EU duty free sales in 1999. While
the extent of the impact of such abolition cannot be predicted, Gallaher
believes that the loss of duty free sales may be partially offset by some
expected flow back of sales into domestic European markets. Gallaher expects
the effect of any flow back on its domestic European sales to be enhanced by
the elimination of intra-EU duty free sales of Benson and Hedges cigarettes,
currently made by B.A.T in duty free markets.
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Contract Manufacture
Gallaher manufactures cigarettes under contract for B.A.T, which accounted
for 9.2% of Gallaher's international cigarette sales in 1996.
International Competition
Gallaher's principal competitors in the Republic of Ireland, where Gallaher
has a 44.2% share of the cigarette market, are P.J. Carroll & Company Limited,
a subsidiary of Rothmans, which Gallaher estimates has a market share of
28.4%, and John Player & Sons (Dublin) Limited, a subsidiary of Imperial
Tobacco, which Gallaher estimates has a market share of 27.4%.
In the U.K. duty free cigarette market, in which Gallaher has a 15.5% market
share, Gallaher's principal competitors are B.A.T, which has a market share of
35.6%, Imperial Tobacco, which has a market share of 24.9%, Philip Morris,
which has a market share of 11.8%, and Rothmans, which has a market share of
9.6%.
In Gallaher's other international markets, its market share is relatively
small. The market share of its cigarette business is approximately 1.7% in
France, 0.8% in Germany, 4.0% in Greece, 3% to 5% in the Canary Islands, 5% to
10% in Kazakhstan and less than 0.8% in each of its other international
markets. The principal competitors in these international markets are Philip
Morris, B.A.T, Rothmans, R.J. Reynolds and the local domestic producers in
each market.
MARKETING
Advertising, promotion and brand building play a key role in Gallaher's
business, with significant expenditure on programs in the U.K. and overseas to
support its key brands and to develop the markets for new brands and brand
extensions. Gallaher has won numerous awards for advertising innovation and
creativity for its Benson and Hedges, Silk Cut, Hamlet and Condor campaigns
over the last 20 years, through which it pioneered tobacco advertising in the
U.K.
In international markets, advertising is carried out for Gallaher's leading
brands, such as Benson and Hedges and Silk Cut, using locally developed
advertising themes. The Republic of Ireland, Germany and Greece are the
principal markets where such advertising is undertaken and Gallaher will
shortly commence television advertising of Sovereign in the former Soviet
Union. Promotion of Silk Cut is undertaken in duty free outlets, where
permitted, using a range of consumer promotions, including sampling and gifts.
Gallaher's brand building activities also include the sponsorship of a wide
variety of high profile sporting teams and events such as the Benson and
Hedges Jordan Formula One Grand Prix motor racing team, the Benson and Hedges
golf and snooker tournaments, the Benson and Hedges Cup in cricket and the
Silk Cut Challenge Cup in rugby league. In December 1996, Gallaher agreed to
sponsor the Silk Cut entry in the 1997 Whitbread Round the World yacht race.
Gallaher's management believes that involvement in such high profile
international sporting events provides benefits not achieved by domestic
advertising alone.
Other significant promotional activities include Gratis, the Benson and
Hedges gift voucher-based loyalty program, a similar reward scheme for
customers who smoke Kensitas cigarettes and various Silk Cut gift promotions
launched from time to time.
Promotions at point of sale form a significant element of Gallaher's
marketing strategy. Gallaher owns approximately 30,000 merchandising display
units and kiosks, used by retailers throughout the U.K. as the display and
vending areas for tobacco products. Gallaher's ownership of these assets
results in prominence being given to its brands and products at the point of
sale. A number of the U.K.'s largest retail groups currently use exclusively
Gallaher's display units and kiosks in their stores.
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Gallaher believes that its market position in the U.K. and the Republic of
Ireland enables it to exercise influence within the retail sector to assist
the promotion of its products and that the market leadership of its brands in
these countries strengthens Gallaher's position with respect to future
performance. Gallaher is also continuing to investigate ways of further
developing its direct marketing activities.
SALES
Gallaher's U.K. sales are conducted through its U.K. sales division which
currently employs approximately 280 people. The division is controlled from
Gallaher's headquarters at Weybridge and has two support offices at Crewe and
Northolt. Gallaher places significant emphasis on a strong and responsive
sales team and initiatives are taken to ensure that the organization of the
sales division addresses the changing needs of the business and its major
customers.
As part of its U.K. sales effort, Gallaher's sales staff visits
approximately 60,000 retail outlets a year to promote new initiatives and
support the sale and distribution of Gallaher's products. Gallaher also uses a
third party merchandising force of approximately 100 people which is
responsible for maintaining brand awareness and image in the retail market.
Gallaher's international sales are conducted through its wholly-owned
subsidiaries, including Gallaher International Limited and Gallaher (Dublin)
Limited. Its international operations, excluding those in the Republic of
Ireland, employ approximately 150 people to support Gallaher's sales efforts
in the U.K. and in offices in Paris, Athens, Hamburg, the Canary Islands,
Madrid, Moscow and Kazakhstan. The sales force in the Republic of Ireland
currently consists of 43 people.
DISTRIBUTION
Gallaher's U.K. distribution operation is based at its national distribution
center in Crewe. The construction of this facility was completed in 1994 and
enabled Gallaher to achieve a significant reduction in distribution costs
through the closure of existing distribution centers. Since December 1991,
Gallaher has closed eight distribution centers. Gallaher has achieved
substantial improvements in its distribution organization since 1985. While
Gallaher's unit cigarette sales in the U.K. have declined by approximately
2.3% over that period, initiatives by Gallaher to concentrate its customer
base towards wholesalers and distributors have resulted in a decrease in the
number of accounts serviced by Gallaher from more than 22,000 to approximately
2,000 and the number of employees has fallen from over 650 to approximately
100. Total distribution costs have declined during that period by
approximately 40% when adjusted for inflation.
The Crewe center has capacity to store approximately eight billion
cigarettes and Gallaher believes that, with its computer systems, electronic
movement and storage facilities, the Crewe center is one of the most up-to-
date distribution facilities in Europe.
Gallaher uses a network of third party carriers for final delivery to
customers, which enables it to adapt more easily and cost effectively to times
of high and low demand. The distribution and storage requirements of
Gallaher's business are greatest in the weeks preceding the U.K. government's
budget statement. At such times, Gallaher may use additional storage space to
cover peak requirements.
Tobacco products for international markets are also delivered to customers
using, principally, third party local distributors.
MANUFACTURING
Raw Materials
Gallaher's principal raw materials for the manufacture of cigarettes,
tobacco and cigars are tobacco leaf, cigarette paper, acetate tow (for the
production of filter tips), cardboard and other packaging materials, which are
purchased from a number of suppliers. Gallaher is not unduly reliant on any
one supplier and has not suffered any significant production interruption as a
result of an interruption in the supply of raw materials.
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Tobacco leaf accounts for approximately one-third of manufacturing costs and
one-half of raw material costs. In 1996, Gallaher purchased approximately
37,000 metric tons of tobacco leaf from a number of world markets, principally
Brazil, Zimbabwe, southern Europe and North America. Gallaher purchases
tobacco leaf from independent dealers and has leaf buying offices in Harare,
Zimbabwe and Goldsboro, North Carolina in the U.S. to support its sourcing
operations.
As with other agricultural commodities, the price of tobacco leaf tends to
be cyclical, with imbalances in supply and demand influencing future
production levels. Different regions also experience variations in weather
patterns which affect crop quality. Though the effect of price fluctuations on
Gallaher's operating performance may be limited by the geographic spread of
its tobacco leaf sources and by Gallaher's policy of holding approximately one
year's inventory of tobacco leaf in order to aid consistency of blends, any
significant change in tobacco leaf prices could affect Gallaher's operating
profit.
Production
Gallaher manufactures substantially all of its products, for both domestic
and international markets, in the U.K. and the Republic of Ireland.
Gallaher has four manufacturing sites which, in 1996, manufactured
approximately 45 billion cigarettes, 590 million cigars and 2,720 metric tons
of handrolling and pipe tobacco, and as of December 31, 1996, employed
approximately 2,340 people in its factories.
In December 1996 Gallaher announced its decision to concentrate its U.K.
cigarette production at its factory in Lisnafillan, Northern Ireland. The
three to four year program will result in the expansion of the Lisnafillan
factory and the closure of its factory in Hyde, Manchester. The restructuring
is expected to result in the loss of approximately 950 jobs at Hyde and the
addition of approximately 300 jobs at Lisnafillan. As part of this
restructuring, Gallaher intends to invest approximately (Pounds)40 million
over the next three to four years to expand the Lisnafillan factory, including
the installation of four ultra high speed cigarette machinery complexes. The
expansion of the purpose-built factory at Lisnafillan will provide Gallaher
with an annual production plant capacity of up to 50 billion cigarettes,
matching the current combined plant capacity of Hyde and Lisnafillan. Gallaher
believes that this restructuring will result in lower overhead costs and
improve production efficiency.
Gallaher has several principal suppliers for its cigarette, tobacco and
cigar machinery and failure of machinery has not historically created
significant supply problems. Although Gallaher has operations in Northern
Ireland, where there has been social and political unrest, there has been no
consequential damage to Gallaher's manufacturing facilities there.
Research and Development
Gallaher employs approximately 125 people in its research and development
department located at its factory at Lisnafillan in Northern Ireland. The
department is principally focused on new product design and new processing
techniques, with the aim of reducing the product cost and enhancing quality
and consumer acceptability. In addition, the department has responsibility for
quality control and compliance with regulatory constraints.
Gallaher spent approximately (Pounds)4.5 million, (Pounds)4.1 million and
(Pounds)4.0 million during 1994, 1995 and 1996, respectively, on research and
development in respect of continuing operations.
EMPLOYEES
As of December 31, 1996, Gallaher employed approximately 3,700 people.
Gallaher considers relations with its employees to be good. Approximately
three-quarters of Gallaher's employees in the U.K. are members of trade unions
including the Amalgamated Transport and General Workers Union, the Amalgamated
Electrical and
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Engineering Union and the Manufacturing, Science and Finance Union. In the
Republic of Ireland, certain of Gallaher's employees are members of the
Services, Industrial, Professional, Technical Union and the Marine Port &
General Workers Union. Each of these unions is recognized by Gallaher. In
December 1996, Gallaher announced plans to close its Hyde factory, which will
result in the loss of approximately 950 jobs, partly offset by the creation of
approximately 300 jobs at the Lisnafillan factory as a result of the planned
expansion of such factory. Gallaher is in consultation with the trade unions
in connection with the announced closing of the Hyde factory. See "--
Manufacturing--Production."
PROPERTIES
Gallaher's principal properties are its factories in Lisnafillan, Northern
Ireland, Hyde, England, Cardiff, Wales, and Dublin, the Republic of Ireland,
its head office in Weybridge, England, its U.K. national distribution center
in Crewe, England, and administration facilities in Northolt, England. Apart
from the Dublin factory, part of the Lisnafillan factory and some land
adjacent to the Hyde factory which Gallaher leases, all of these are freehold
properties owned by Gallaher.
Gallaher has entered into a contract for the sale of its facilities in
Northolt and an agreement to lease new premises in Perivale, west London.
Completion of the sale and new lease, which is conditional on completion of
certain works at the premises in Perivale, is expected to take place in late
summer of 1997. In addition, Gallaher has announced its plans to expand the
Lisnafillan factory and close the Hyde factory over the next three to four
years. See "--Manufacturing--Production."
REGULATION/LEGAL ENVIRONMENT
The advertising, sale and consumption of cigarettes and other tobacco
products in the U.K. and many other countries have been subject to pressure
from governments, health officials and anti-smoking groups, who claim that the
smoking of cigarettes and tobacco products is harmful to health. A number of
substantial restrictions on the marketing, advertising, product design and
consumption of cigarettes have been introduced by regulation or voluntary
agreements as a result of this pressure. In addition, anti-smoking groups are
seeking to diminish the social acceptability of smoking.
Advertising, Sponsorship and Promotion
Currently, advertising and promotion in the tobacco industry in the U.K. is
restricted under the terms of voluntary agreements entered into with the
government and under the requirements of legislation. These restrictions limit
the amount that tobacco companies may spend on certain activities, restrict
the types of media and forms of advertising used and require the placement of
a health warning on every advertisement and on the packaging of tobacco
products.
The tobacco industry in the U.K. has, since 1971, negotiated voluntary
agreements with the U.K. government regarding tobacco advertising and
promotional activities. The current voluntary agreement on the advertising and
promotion of tobacco products is intended to remain in force at least until
June 1, 1999, subject to any amendment that may be required by any future U.K.
or EU legislation. This voluntary agreement regulates the content and design
of cigarette advertisements, poster advertising expenditure, the placement of
tobacco product advertisements, the use of health warnings on advertisements,
promotional activities and related matters.
Tobacco companies have also been subject to voluntary restrictions in the
U.K. since 1977 on the extent to which they can sponsor sporting events. The
current voluntary agreement on sponsorship of sport is intended to run at
least until June 1, 1999, subject to any amendment that may be required by any
future U.K. or EU legislation. This agreement limits the amount which may be
spent on sponsorship of sporting events in the U.K. by individual tobacco
companies, includes guidelines for press and poster advertising for sponsored
events, regulates the placement of advertisements for sponsored events and
prohibits the financial support of any sport in which the majority of
participants is under the age of 18 or of events designed to appeal to
audiences predominantly under that age. The agreement includes codes of
practice laid down by the British Broadcasting Corporation and the Independent
Television Commission concerning television coverage. The sponsorship of any
sporting event not referred to in the agreement must receive the approval of
the U.K. Minister for Sport.
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Industry performance under the voluntary agreements referred to above is
monitored by the Committee for Monitoring Agreements on Tobacco Advertising
and Sponsorship whose membership is composed of equal numbers of
representatives of the government departments concerned and members of the
tobacco industry with an independent chairman.
The nature of the labeling of health warnings (both in the U.K. and in other
EU countries) is governed by EU directives. These directives provide that
packs of tobacco products must carry a health warning on their most visible
surface together with a second warning label.
An EU directive on television broadcasting has prohibited television
advertising for all tobacco products throughout the EU since 1991. There is a
proposal for an EU directive which would provide for a total ban on the
advertising of tobacco products throughout the EU and would restrict the use
of tobacco brand names on non-tobacco products. This proposed directive would
have to be adopted by the Council of Ministers of the member states of the EU
by a qualified majority of such states prior to it becoming effective.
The advertising, sponsorship and promotion of tobacco products in the
Republic of Ireland is more restrictive than in the U.K. Tobacco products may
only be advertised in newspapers, magazines or other similar publications, in
retail sale premises, in duty free zones and on packs of tobacco products.
Consumer promotions are prohibited. In addition, the maximum amount which
tobacco manufacturers may spend annually on the advertising and sponsorship of
tobacco products is determined by the Irish Minister for Health.
There are also various country-specific restrictions in other EU countries
and in the non-EU countries to which Gallaher currently sells its tobacco
products. These include a ban on advertising and the prohibition of
sponsorship of sport and other events in France, except in limited
circumstances.
Product Constituents
An EU directive currently limits the tar yield of cigarettes to 15
milligrams per cigarette, which is to be reduced to 12 milligrams per
cigarette by December 31, 1997. This directive has been implemented in the
U.K. and in most other EU countries.
A new voluntary agreement on the approval and use of new additives in
tobacco products in the U.K. is expected to be implemented in 1997. The
voluntary agreement regulates the additives which may be used in tobacco
products and includes limits on their use. It also makes provision for certain
information on additives to be provided to the U.K. Department of Health and
to be made public, and includes guidelines for the testing and use of new
additives in tobacco products and for the certification of compliance with the
voluntary agreement by U.K. tobacco manufacturers.
Restrictions on Consumption
There are various pressure groups and anti-smoking lobbies whose activities
are aimed at curtailing the sale of cigarettes to the public and reducing the
social acceptability of smoking. In recent years, there has also been an
increased amount of attention focused on the alleged harmful effects of
environmental tobacco smoke or "passive smoking". These activities have
resulted in the imposition of restrictions on smoking in public places and
smoking practices at work.
In December 1996, the Commission of the European Communities adopted a
communication on the present and proposed role of the EU in reducing tobacco
consumption. The purpose of the communication is to contribute to a review of
existing and possible future anti-smoking strategies aimed at reducing the
alleged public health impact of smoking on European citizens.
Tobacco Taxation
Excise duties represent a significant percentage of the retail price of
tobacco products in duty paid markets and have been steadily increased by
governments in many of the countries in which Gallaher sells its products.
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In the U.K., cigarette excise duties and VAT comprise around 79% of the
recommended retail price of a pack of cigarettes in the premium price sector.
The U.K. government has stated its intention to increase excise duty on
tobacco products by an average of at least 3% a year in excess of the rate of
inflation.
In addition, an EU directive requires that the minimum excise tax (excluding
VAT) on the most popular price category of cigarette in each EU country must
represent not less than 57% of the total recommended retail price.
Packaging
Draft regulations to implement an EU directive on packaging and packaging
waste which requires member states to achieve specified levels of recovery and
recycling of packaging waste in the U.K. were introduced before Parliament in
January 1997 and are expected to become law in March 1997. These regulations
will impose an obligation on persons regarded as producers, such as Gallaher,
to recover and recycle specified percentages of packaging waste.
Future Regulation
Gallaher has successfully managed its business within the current regulatory
climate. It is not possible to predict whether additional or more restrictive
legislation, regulations, directives or actions will be implemented or taken
in the U.K. or in other countries in which Gallaher sells its products or the
nature of any such legislation, regulations, directives or actions. It is
possible, however, that any further regulation in respect of advertising and
promotion in its key markets would have an adverse effect on Gallaher's sales
and operating performance. A general election is to take place in the U.K.
before the end of May 1997. A change in government could lead to changes in
the regulatory environment. The U.K. Labour Party has indicated that, if it
were to form the next government, it would initiate a ban on advertising of
tobacco products in the U.K. by way of legislation. It is unclear which forms
of marketing and promotion would be affected and it is also not possible to
predict the effect any such legislation, regulations, directives or actions
may have on Gallaher or on the tobacco industry generally.
LEGAL PROCEEDINGS
Tobacco manufacturers in the U.K., including Gallaher, have been sued by
parties seeking damages for ailments claimed to have resulted from tobacco
use. The first action brought against a tobacco manufacturer in the U.K. for
alleged smoking-related health effects is believed to have been in 1988. To
date no judgment has been entered and, to Gallaher's knowledge, no action has
been settled, in favor of a plaintiff in any such action in the U.K.
To date limited legal aid has been granted to claimants in alleged health-
related actions against tobacco manufacturers in the U.K. Gallaher is
currently involved in four actions in the U.K. in respect of which plaintiffs
are alleging health damage resulting from tobacco use and have made
applications for legal aid. Two of these actions, in Scotland, were stayed
pending applications for legal aid and those applications were subsequently
refused. In the third action, in Northern Ireland, legal aid was granted but
the case has made no significant progress since the writ was served in 1990.
In the fourth action, in Northern Ireland, the plaintiff has received limited
legal aid, but has not received legal aid to issue proceedings.
In England, applications for legal aid were filed with the Legal Aid Board
commencing in 1992 and were subsequently rejected after opposition by a number
of tobacco manufacturers. The Legal Aid Board subsequently reconsidered the
applications and in January 1995 granted limited legal aid to approximately
200 claimants seeking to bring proceedings against tobacco manufacturers for
alleged smoking-related ailments. A number of tobacco manufacturers thereafter
submitted further representations in opposition to the applicants' requests
for full legal aid and the Legal Aid Board announced in July 1996 that all
legal aid was being withdrawn.
Notwithstanding the denial of legal aid, in November 1996 proceedings were
issued in England by 12 plaintiffs against Gallaher and Imperial Tobacco
alleging that the claimants had contracted lung cancer as a result of smoking
tobacco products. Seven of these plaintiffs allege that they smoked tobacco
products manufactured by Gallaher. In December 1996 another writ was issued by
the same legal advisers on behalf of a further 11
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plaintiffs, eight of whom allege that they smoked tobacco products
manufactured by Gallaher. These proceedings have been brought without any
legal aid but with the plaintiffs' legal advisers acting on a conditional fee
basis whereby they will receive a fee only if the proceedings are successful.
Gallaher has been informed by the plaintiffs' solicitors that, in total, the
plaintiffs' solicitors are processing approximately 100 claims.
Neither Gallaher nor any of its subsidiaries is a party to any smoking and
health litigation in any jurisdiction other than in the U.K. Actions have,
however, been brought against other tobacco manufacturers outside the U.K.,
primarily in the U.S. These actions have alleged, among other things, that
claimants have contracted lung cancer and other diseases as a result of
smoking cigarettes or being exposed to the tobacco smoking of others, and that
tobacco manufacturers have fraudulently and negligently misrepresented the
health effects of tobacco, controlled the level of nicotine in tobacco
products so as to make them addictive and suppressed research and information
contained in internal documents. Claims have also been brought on behalf of
the attorneys general of various U.S. states, local governments and public
health agencies in the U.S. to recover public medical expenditures for alleged
tobacco related illnesses.
In the U.S., a 1988 jury award against a tobacco manufacturer was overturned
on appeal in 1990 and remanded for a new trial. The plaintiff later withdrew
the action with prejudice. In 1996, there was a jury award against Brown &
Williamson Tobacco Corp., as successor by merger to The American Tobacco
Company, which is pending appeal. The smallest of the five major U.S.
cigarette manufacturers announced a settlement of certain tobacco related
claims in March 1996.
To date, there has been no recovery of damages against Gallaher in any
action alleging that its tobacco products have resulted in human ailments. It
is not possible to predict the outcome of the pending litigation. Gallaher
believes, however, that there are meritorious defenses to the pending actions
described above and that the pending actions will not have a material adverse
effect upon the results of the operations, the cash flow or financial
condition of Gallaher. Gallaher has been advised by its legal advisers that,
in their opinion, on the basis of their investigations generally with respect
to actions and claims of this character, Gallaher has meritorious defenses to
these actions and claims. The pending actions and claims will be vigorously
contested. There can, however, be no assurance that favorable decisions will
be achieved in the proceedings pending against Gallaher, that additional
proceedings will not be commenced against Gallaher in the U.K. or elsewhere,
or that Gallaher will not incur damages or that, if incurred, such damages
will not be material. Regardless of the outcome of the pending litigation, the
costs of defending these actions and claims could be substantial and will not
be fully recoverable from unsuccessful plaintiffs.
The first action against a tobacco manufacturer in the U.K. alleging
smoking-related health effects was brought against Gallaher. Dean v. Gallaher
Limited was an action commenced in the High Court in Northern Ireland in which
the plaintiff sought unspecified damages against Gallaher Limited and its
subsidiary and predecessor, Hergall (1981) Limited (In Liquidation)
("Hergall"), for peripheral vascular disease, probably Buerger's disease,
allegedly caused by cigarette smoking. In 1988, the plaintiff obtained legal
aid to proceed up to the point of setting down for trial. He served his writ
later that year and his statement of claim in 1989. Beginning on October 14,
1996, the Court heard evidence at a trial of the preliminary issue as to
whether the plaintiff was suffering from Buerger's disease or peripheral
vascular disease. After three days of testimony, the hearing was adjourned at
the plaintiff's request. On October 21, 1996, the plaintiff consented to
judgment being entered in favor of the defendants in both actions.
Gallaher, or related entities of Gallaher, are currently named as a
defendant in the actions described below.
In Brennan v. Hergall (1981) Limited (In Liquidation), in the High Court in
Northern Ireland, the plaintiff, a former employee of Hergall (then called
Gallaher Limited), is seeking unspecified damages for peripheral arterial
disease allegedly caused by cigarette smoking. The plaintiff received legal
aid and issued a writ in October 1990, but no statement of claim has been
served to date. The writ was originally served on Gallaher, but in March 1995,
the plaintiff obtained leave to substitute Hergall as the named defendant in
the action, and in November 1995, the plaintiff filed an amended writ of
summons naming Hergall as the proper defendant.
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In Havelin v. Gallaher Limited et al., in the Court of Session in Scotland,
the pursuer commenced his action in May 1995 against Gallaher by issuing a
summons and condescendence. The pursuer seeks (Pounds)100,000 plus interest
for Buerger's disease allegedly caused by cigarette smoking. In February 1995,
prior to commencing this action, the pursuer applied to the Scottish Legal Aid
Board for legal aid to fund his action. Gallaher submitted representations in
opposition and in June 1995, the pursuer's application for legal aid was
refused. The pursuer sought a review of this decision, which was unsuccessful
in November 1995. This litigation is currently stayed.
In Burnett v. Gallaher Limited, in the Court of Session in Scotland, the
pursuer commenced his action in July 1995 by issuing a summons and
condescendence. The pursuer seeks (Pounds)100,000 plus interest for heart
disease allegedly caused by cigarette smoking. In July 1995, the pursuer
applied to the Scottish Legal Aid Board for legal aid to fund his action.
Gallaher submitted representations in opposition and in June 1996, the
pursuer's application for legal aid was refused. This litigation is currently
stayed.
In Shiels v. Gallaher Limited et al., in the High Court in Northern Ireland,
the plaintiff issued a writ in October 1995 and served it in October 1996. The
plaintiff, the representative of the deceased, seeks unspecified damages for
Buerger's disease and/or premature atherosclerosis suffered by the deceased
allegedly caused by cigarette smoking. The plaintiff sought legal aid and in
November 1995, Gallaher submitted representations in opposition to the grant
of legal aid. To date, the plaintiff has received only limited legal aid but
has not received legal aid to issue proceedings. On January 10, 1997, the
plaintiff's application for an extension of time in which to serve a statement
of claim was adjourned by consent until May 16, 1997.
On November 12, 1996, a writ was issued by the London law firm of Leigh, Day
& Co. in the High Court of England and Wales on behalf of 12 plaintiffs
(Hodgson, et al. v. Imperial Tobacco Limited and Gallaher Limited). Each of
the plaintiffs claims to have contracted lung cancer as a result of smoking
tobacco products. Seven of the 12 plaintiffs claim to have smoked Gallaher's
products. Those plaintiffs are John Barrie Hodgson, Denis William House,
Leslie Marsden, Martin Margolis, Murdo Ian Macmillan, Sarah Marie Hore and
James Alan Beech. On December 10, 1996, Leigh Day & Co. issued another writ on
behalf of 11 further plaintiffs (Bywater et al. v. Imperial Tobacco Limited
and Gallaher Limited), each of whom also claims to have developed lung cancer
as a result of smoking tobacco products. Eight of the 11 plaintiffs claim to
have smoked Gallaher's products. Those plaintiffs are Anthony John Bywater,
Thomas Patrick Keating, David Michael Knight, Peter Joseph Keating, John Alan
Lightfoot, Susan Virginia Auton, John Matthew Williams and Frances Wilcox. On
December 11, 1996, the plaintiffs' lawyers requested the early assignment of a
High Court judge to these cases. On December 31, 1996, the Senior Master and
Queen's Remembrancer of the High Court denied the plaintiffs' request for a
recommendation to the Lord Chief Justice for the assignment of a single judge
to the cases. The Senior Master recommended that the plaintiffs' lawyers take
various steps to clarify the nature, scope and scale of the litigation and
indicated that he would be prepared to hear the application again once such
steps have been taken. Leigh, Day & Co. has proposed that 20 cases be
identified as lead cases and that these 20 cases be tried together as a group
action in October 1998 and has advised the Court that it and other associated
law firms are working together on approximately 100 cases (including the 23
filed in November and December 1996). It is not possible at the outset of this
litigation to predict what form the proceedings might ultimately take or the
time frame in which the litigation might proceed.
In addition to the actions described above, from time to time Gallaher has
received a small number of letters before action alleging smoking-related
health effects as a result of smoking cigarettes manufactured by Gallaher. As
of March 12, 1997, the latest practicable date prior to mailing of this Proxy
Statement, Gallaher was not aware of any proceedings commenced against it in
relation to these allegations.
STANDSTILL AGREEMENT
In May 1996, B.A.T agreed with American Brands that, for a period ending no
later than October 1999, B.A.T would not announce or submit any proposal for a
business combination or acquisition in respect of American Brands or its
principal businesses, including Gallaher. Following the Distribution becoming
effective,
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this restriction will not apply to New Gallaher and Gallaher if a third party
unaffiliated with B.A.T has made a public announcement with respect to a
merger or similar transaction involving New Gallaher and Gallaher or if B.A.T
has obtained the prior written consent of New Gallaher to engage in
discussions regarding a possible transaction. The agreement, which is governed
by New York law, provides that the rights thereunder will be directly
enforceable by New Gallaher and Gallaher. The New Gallaher Board would have
due regard to the interests of shareholders of New Gallaher and their
fiduciary responsibilities as directors of New Gallaher if B.A.T applied to
New Gallaher for any such consent.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are currently no restrictions under English law on the import or
export of capital or affecting the remittance of dividends or other payments
to non-U.K. holders of New Gallaher Ordinary Shares except for certain
restrictions imposed from time to time pursuant to legislation, such as the
United Nations Act 1946 and the Emergency Laws Act 1964, against the
government or residents of certain countries. See "U.S. FEDERAL AND U.K. TAX
CONSIDERATIONS--U.S. FEDERAL AND U.K. TAX TREATMENT OF NEW GALLAHER
SHAREHOLDERS."
Except for certain restrictions which may be imposed from time to time
pursuant to legislation as described above, there are currently no limitations
imposed by English law or New Gallaher's Memorandum and Articles of
Association, on the rights of non-U.K. citizens or residents to hold, or
exercise voting rights attaching to, New Gallaher Ordinary Shares. New
Gallaher will give ADS holders the right to attend and speak at general
meetings but not to vote in person or count in the quorum. However, non-U.K.
holders of New Gallaher Ordinary Shares will not be entitled to receive
notices from New Gallaher, including notices of general meetings, unless they
have given New Gallaher an address in the U.K. to which such notices may be
sent. See "--DESCRIPTION OF AMERICAN DEPOSITARY SHARES--Voting of Deposited
Securities." In addition, New Gallaher intends to provide certain financial
information to its shareholders, including the holders of ADSs. See "OTHER
MATTERS--AVAILABLE INFORMATION".
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FORTUNE BRANDS BUSINESS AND PROPERTIES
INTRODUCTION
American Brands, to be known as Fortune Brands, Inc., assuming the adoption
and implementation of Item 3, is a holding company organized under the laws of
Delaware. After the Distribution, its subsidiaries will be engaged in the
manufacture and sale of distilled spirits, various types of hardware and home
improvement products, golf and leisure products and office products, supplies
and accessories.
BUSINESSES
The following is a description of the businesses of the companies to remain
as subsidiaries of Fortune Brands in the industry segments of distilled
spirits, hardware and home improvement products, golf and leisure products and
office products.
Distilled Spirits
JBB Worldwide, Inc. ("JBB Worldwide") is a holding company for subsidiaries
in the Distilled Spirits business. Principal subsidiaries include Beam,
Alberta Distillers Limited ("Alberta"), JBB (Asia-Pacific) Pty. Limited ("JBB
(Asia-Pacific)") (formerly Fortune Brands Pty. Limited) and JBB (Greater
Europe).
JBB Worldwide's principal markets are the U.S., the U.K. and Australia.
Approximately 85% of JBB Worldwide's sales are to these three markets, with
the U.S. and the U.K. representing 58% and 19% of sales, respectively.
JBB Worldwide's leading brands are owned by its subsidiaries, except that
DeKuyper cordials are produced and sold in the U.S. under a perpetual license,
Gilbey's gin and Gilbey's vodka are produced and sold in the U.S. under a
license expiring September 30, 2007 and the Kamchatka vodka brand is claimed
by another entity in California.
Beam, located primarily in the U.S., currently produces, or imports, and
markets a broad line of distilled spirits, including Bourbon and other
whiskeys, cordials, gin, vodka, rum, tequila and cognac. Alberta, located in
Canada, produces and sells in Canada a line of distilled spirits, produces
Canadian whisky and other distilled spirit products for export to the U.S.,
and sells bulk Canadian whisky into a variety of export markets. JBB (Asia-
Pacific) is located in Australia and sells JBB Worldwide products (primarily
Jim Beam Bourbon whiskey) as well as several brands under agency agreements.
JBB (Greater Europe) is located in the U.K. and produces, bottles, and sells
blended and single malt Scotch whiskies, markets and sells vodka, and sells
Scotch whisky in bulk. Under the JBB Worldwide holding company, Beam, Alberta,
JBB (Greater Europe) and JBB (Asia-Pacific) have each been given the
responsibility of selling the combined branded product portfolio in defined
markets around the world.
Beam and its predecessors have been distillers of Bourbon whiskey since
1795. Beam's nine leading brand names are Jim Beam Bourbon whiskey, Windsor
Canadian Supreme Whisky, Lord Calvert Canadian Whisky, DeKuyper cordials,
Gilbey's gin, Gilbey's vodka, Kamchatka vodka, Wolfschmidt vodka and Kessler
American Blended Whiskey. Principal Bourbon whiskey brand names are Jim Beam,
the largest-selling Bourbon whiskey in the U.S. and in the world, Old Grand-
Dad, Old Crow, Old Taylor, four premium and super premium Bourbon whiskeys
(Booker's, Knob Creek, Baker's and Basil Hayden's) sold under the Small Batch
Bourbon whiskey name grouping, and Jim Beam & Cola, which combines Jim Beam
Bourbon whiskey with a cola soft drink. DeKuyper is the top-selling cordial
line in the U.S. Beam also produces Chateaux and Leroux cordials, Beam's 8-
Star Blend and Calvert Extra blended whiskeys, Dark Eyes vodka and Calvert
gin, and imports, in bottle or in bulk, Canada House Canadian Whisky (produced
by Alberta), The Dalmore and The Claymore Scotch whiskies (both produced by
JBB (Greater Europe)), Kamora coffee liqueur, After Shock cinnamon liqueur and
Avalanche Blue peppermint schnapps (both produced by Alberta), Ronrico and
Pusser's rums, El Tesoro and Chinaco tequilas and A. de Fussigny cognac.
JBB (Greater Europe) has its origins as a distiller of Scotch whisky in
1844. During the fourth quarter of 1993, JBB (Greater Europe) completed the
acquisition of Invergordon Distillers Group PLC, another distiller,
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blender and marketer of Scotch whisky. Its principal brand names are Whyte &
Mackay Special Reserve, The Claymore, The Dalmore, Cluny, Mackinlay, Isle of
Jura and Bruichladdich Scotch whiskies, Glayva Scotch whisky liqueur and
Vladivar vodka. JBB (Greater Europe)'s products are sold in the U.K. through
its own sales force, in the U.S. and Australia through the affiliated company
distribution networks, and through independent distributors in other areas of
the world.
Products of JBB Worldwide's subsidiaries are sold through various
distributors and, in the 18 "control" states (and one county) in the U.S.
which have established government control over certain aspects of the purchase
and distribution of alcoholic beverages, through government controlled liquor
authorities.
Raw materials for the production, storage and aging of products of JBB
Worldwide's subsidiaries are principally corn, other grains, and new oak
barrels, and are readily available from a number of sources except that new
oak barrels are available from only two major sources, one of which is owned
by a competitor. Blended Scotch whiskies are composed of a variety of grain
and malt whiskies blended to provide a consistent product. The Scotch industry
is therefore dependent on the trading of whiskies between whisky companies.
Because whiskeys are aged for various periods, generally from three to eight
years, subsidiaries of JBB Worldwide maintain, in accordance with industry
practice, substantial inventories of bulk whiskey in warehouse facilities.
Whiskey production is generally scheduled to meet demand years into the
future, and production schedules are adjusted from time to time to bring
inventories into balance with estimated future demand.
Hardware and Home Improvement Products
MasterBrand Industries, Inc. ("MasterBrand") is a holding company for
subsidiaries in the hardware and home improvement products business.
Subsidiaries include Moen, Master Lock, Aristokraft, and Waterloo.
Moen manufactures and packages single- and two-handle faucets, sinks and
plumbing accessories and parts and a wide variety of plumbing supply and
repair products in the U.S. and East Asia. Faucets are sold under a variety of
trade names, including Moen, Moentrol, Touch Control, One-Touch, Riser,
Monticello, Concentrix, Chateau, Legend, Pulsation and Sani-Stream, and other
products are sold under the Moen, Chicago Specialty, Dearborn Brass,
Wrightway, Anchor Brass and Hoov-R-Line brand names. Composite kitchen sinks
are sold under the MoenStone brand name. Some of the plumbing parts and repair
products are purchased from other manufacturers. Products are sold principally
in the U.S. and Canada and also in East Asia, Mexico and Latin America. Sales
are made through Moen's own sales force and independent manufacturers'
representatives primarily to wholesalers, mass merchandisers and home centers
and also to industrial distributors, repackagers and original equipment
manufacturers.
Master Lock manufactures key-controlled and combination padlocks, chain and
cable locks, bicycle locks, built-in locker locks and other specialty security
devices, and also manufactures door lock sets and door hardware. Sales of
products designed for consumer use are made to wholesale distributors and to
home centers, hardware and other retail outlets, while sales of lock systems
are made to industrial and institutional users, original equipment
manufacturers and retail outlets. Most sales are brokered through independent
manufacturers' representatives, primarily in the U.S. and Canada.
Aristokraft manufactures kitchen cabinets and bathroom vanities. Stock and
semi-custom cabinets are sold under the brand names of Aristokraft and Decora,
respectively. Sales under the Aristokraft brand name are made in the U.S.
primarily through stocking distributors for resale to kitchen and bath
specialty dealers, lumber and building material dealers, remodelers and
builders. Decora products are sold primarily to kitchen and bath specialty
dealers.
Waterloo manufactures tool storage products, consisting primarily of high
quality steel tool boxes, tool chests, workbenches and related products
manufactured for private label sale by one of the largest national retailers
in the U.S. Similar products are sold under the Waterloo and All American
brand names to specialty industrial and automotive dealers, mass
merchandisers, home centers and hardware stores. Waterloo also manufactures
hospital carts and storage units and sells such products to institutional
users.
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Raw materials used for the manufacture of products offered by MasterBrand's
operating companies are primarily red oak lumber, particleboard, rolled steel,
brass, zinc, copper, nickel, and various plastic resins. These materials are
available from a number of sources.
Golf and Leisure Products
Acushnet Company ("Acushnet") is comprised of the Titleist and Foot-Joy
Worldwide Division, the Acushnet Golf Division and Cobra. The Titleist and
Foot-Joy Worldwide Division is a leading manufacturer and distributor of golf
balls, golf shoes, golf clubs and golf gloves. Other products include bags,
carts, dress and athletic shoes as well as socks and accessories. Acushnet's
leading brands are Titleist and Pinnacle golf balls, DCI, Scotty Cameron by
Titleist and Bulls Eye golf clubs and putters, Classics and DryJoys golf shoes
and Sta-Sof and Weather-Sof golf gloves. Acushnet products are sold primarily
to golf pro shops throughout the U.S. by the Titleist and Foot-Joy Worldwide
sales force and to sporting goods stores and mass merchants through the
Acushnet Golf Division. Sales are made in the U.K., Canada, Germany, Austria,
Denmark, France, Sweden, The Netherlands and South Africa through
subsidiaries, in Japan through a majority-owned joint venture, in Ireland
through a branch of a U.K. subsidiary and outside these areas through
distributors or agents.
Cobra is a leading manufacturer and distributor of golf clubs, with emphasis
on oversized graphite shafted golf clubs marketed and sold under the King
Cobra brand name. Other Cobra products include specialty golf clubs, putters,
golf bags and golf accessories. Cobra's products are sold to on-course golf
pro shops and selected off-course specialty stores throughout the U.S. by
independent sales representatives. Cobra markets its products internationally
through subsidiaries in the U.K., continental Europe and Japan, through
exclusive licensees in Australia and Canada and outside these areas through
distributors.
Office Products
ACCO World Corporation ("ACCO") and its subsidiaries are engaged in
designing, developing, manufacturing and marketing a wide variety of
traditional and computer-related office products and supplies, personal
computer accessory products, time management products and presentation aids.
Products are manufactured by subsidiaries, joint ventures and licensees of
ACCO, or manufactured to such subsidiaries' specifications by third party
suppliers, throughout the world, principally in the U.S., Canada, western
Europe and Australia.
ACCO USA, Inc., a subsidiary of ACCO, manufactures binders, fasteners, paper
clips, punches, staples, stapling equipment and storage products, as well as
computer binders, supplies and accessories, in the U.S. ACCO Canada Inc., a
subsidiary of ACCO, manufactures and distributes a similar range of office
products in Canada. Principal brands include ACCO products, Swingline staples
and stapling equipment, Wilson Jones binders and columnar pads and Perma
Products corrugated board storage products. Products are sold throughout the
U.S. and Canada by their respective sales forces to office and computer
products wholesalers, retailers, dealers, mail order companies and mass
merchandisers.
Kensington Microware Limited ("Kensington"), a subsidiary of ACCO, designs,
develops and markets a range of computer accessories and supplies. In 1995,
Silicon Sports and STATX lines of computer accessories and cleaning products
were acquired. In 1996 a subsidiary of Kensington acquired the outstanding
common shares of Advanced Gravis Computer Technology Ltd. ("Gravis"), a
leading marketer of products for the personal computer entertainment market.
Gravis designs and sells joysticks, game pads and sound cards for both
Macintosh and IBM-compatible computers.
Subsidiaries of ACCO Europe PLC, a subsidiary of ACCO, manufacture and
distribute a wide range of office supplies and machines and storage and
retrieval filing systems. Their products are sold primarily in the U.K.,
Ireland, western Europe and Australia through their own sales forces and
distributors.
Day-Timers, Inc., a subsidiary of ACCO, manufactures personal organizers and
planners in the U.S. and is estimated by management to be the leading direct
marketer of time management aids in North America. Products are sold in the
U.S. by Day-Timers, and in Canada, Australia and Europe by subsidiaries,
through direct mail
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advertising and catalogs to consumers and businesses. In addition, products
are sold through ACCO USA, Inc. and ACCO Canada Inc. to retailers and mass
merchandisers. A subsidiary also conducts time management seminars for
personnel of corporations, as well as other entities throughout the U.S.,
Canada, Australia and Europe. Another subsidiary markets, principally in the
U.S., arts and crafts supplies primarily to schools.
EMPLOYEES
Fortune Brands and its subsidiaries had, as of December 31, 1996, the
following number of employees, a substantial number of whom were covered by
collective bargaining agreements with various unions:
<TABLE>
<S> <C>
Distilled spirits 2,390
Hardware and home improvement products 8,460
Golf and leisure products 4,780
Office products 8,470
Corporate headquarters 200
------
24,300
</TABLE>
Generally, labor relations have been maintained in a normal and satisfactory
manner.
PROPERTIES
Fortune Brands leases its principal executive offices in Old Greenwich,
Connecticut. The following is a description of properties of Fortune Brands'
subsidiaries.
Distilled Spirits
JBB Worldwide operates from executive offices leased by Beam in Deerfield,
Illinois. Other subsidiaries of JBB Worldwide lease offices in Glasgow,
Scotland; Burnaby, British Columbia, Canada; and Gordon, New South Wales,
Australia. Subsidiaries of JBB Worldwide and a joint venture in India, own and
operate seven bottling plants, twelve distilleries (of which three are malt
distilleries not currently in use) and numerous warehouses for the aging of
bulk whiskeys all located in the U.S., Scotland, Canada and India. In
addition, JBB Worldwide subsidiaries lease sales offices and warehouse space
for the storage of promotional material in various locations throughout the
world.
Hardware and Home Improvement Products
MasterBrand leases its executive offices in Deerfield, Illinois and a
subsidiary, Moen, owns its executive offices in North Olmsted, Ohio. Principal
properties of subsidiaries of MasterBrand include nineteen plants and two
distribution centers owned and operated in the U.S. A 60%-owned joint venture
in China owns and operates one plant. In addition, subsidiaries of MasterBrand
lease and operate three plants and four warehouses in the U.S. and ten
distribution centers, of which seven are in the U.S. and one is in each of
Canada, Japan and Mexico.
Golf and Leisure Products
Acushnet owns a combined executive office and research and development
facility and a distribution and packaging facility in Fairhaven,
Massachusetts. In addition, it owns and operates five plants and a test
facility, all located in the U.S. Acushnet also leases three warehouses, a
manufacturing facility, a test facility, and two research and development
facilities, all located in the U.S. Acushnet also leases an office in Taiwan.
A subsidiary of Acushnet leases two combined sales office and warehouse
facilities in Canada. Other Acushnet subsidiaries own and operate a plant and
a warehouse in England, lease a sales office and warehouse in each of Germany,
France and Sweden and lease a sales office in each of Austria, Denmark, The
Netherlands, the Republic of Ireland and South Africa. Acushnet's majority-
owned joint venture in Japan leases two sales offices and a warehouse facility
there. Acushnet's majority-owned joint ventures in Thailand lease and operate
two plants there. Acushnet's minority-owned joint venture in China leases and
operates one plant. Cobra leases a combined executive office and distribution
center, a combined administrative and assembly facility, a combined warehouse
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and distribution center and a graphite shaft production facility all located
in Carlsbad, California. Principal properties of subsidiaries of Cobra are
leased and include one combined sales and distribution and assembly facility
in France, one combined sales and distribution office in the U.K. and one
combined sales and administrative facility in Japan.
Office Products
ACCO leases its executive offices in Deerfield, Illinois. Principal
properties of subsidiaries of ACCO include seven plants owned and operated in
the U.S., seven in the U.K., and one in each of France, Germany, Italy,
Australia, the Republic of Ireland and Mexico. In addition, subsidiaries of
ACCO lease and operate nine facilities in the U.S., three in Mexico, five in
Canada, two in each of Australia and the U.K., and one in each of France,
Germany and Italy. Of these leased facilities, (i) three in the U.S., two in
Canada and one in each of Australia, the U.K., and Germany, are combined
manufacturing and distribution facilities, (ii) five in the U.S., two in each
of Canada and Mexico and one in each of the U.K., Italy, Australia and France
are distribution facilities and (iii) one in each of the U.S., Canada and
Mexico are manufacturing facilities.
Fortune Brands and its subsidiaries are of the opinion that their properties
are suitable to their respective businesses and have productive capacities
adequate to the needs of such businesses.
COMPETITION
Distilled Spirits
The distilled spirits business is highly competitive, with many brands sold
in the consumer market. Management believes there are approximately ten major
competitors worldwide and many smaller distillers and bottlers. Management
also believes that, based on units and sales value, JBB Worldwide, with four
brands which each sell over 1 million cases worldwide, is the second or third
largest producer and marketer of distilled spirits in the U.S. and is among
the ten major competitors worldwide. JBB Worldwide competes on the basis of
the product quality and price and its responsiveness to consumer preferences.
Hardware and Home Improvement Products
The hardware and home improvement products business is highly competitive.
Moen's chief competitors include Masco's Delta/Peerless, Black & Decker's
Price Pfister, Kohler and American Standard. Master Lock encounters
competition from Abus, Belwith, Hampton, American Lock, and various imports in
the padlock segment, and from Black & Decker's Kwikset, Schlage, Masco's
Weiser, and Weslock in the door hardware segment. Aristokraft competes with a
number of manufacturers, including Masco's Merillat and KraftMaid, American
Woodmark, Schrock, Triangle Pacific and Mill's Pride. Waterloo competes with
Snap-on, Kennedy, Stanley, Stack-On, and others in the metal storage segment,
and with Contico, Plano, Rubbermaid and others in the plastic storage segment.
MasterBrand's operating companies compete on the basis of product quality and
price and their responsiveness to consumer preferences.
Golf and Leisure Products
In golf balls, Titleist's main competition is Spalding, Wilson,
Dunlop/Slazenger and Bridgestone. In golf shoes, Etonic, Nike, Dexter, Reebok,
Mizuno, Stylo and Adidas are the main competition. In golf clubs, Callaway,
Taylor Made, Ping, Tommy Armour, Spalding, Mizuno, Maruman, Dunlop,
Bridgestone and Daiwa are the main competition. In golf gloves, Wilson, Daiwa,
Dunlop/Maxfli, Kasco, Slazenger, Tommy Armour, Mizuno and Bridgestone are the
main competition. Acushnet's subsidiaries compete on the basis of product
quality and price and their responsiveness to consumer preferences.
Office Products
Management believes that manufacturing within the office products industry
is highly fragmented. Due to local market preferences for product design and
paper sizes, many office product manufacturers supply on a domestic basis
only. Additionally, many manufacturers supply a relatively narrow range of
products, usually
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concentrating on one product category. Management believes that ACCO's key
competitors on a world-wide basis include Avery Dennison, Esselte, Fellowes,
Atapco and GBC. Management also believes that its primary competitors for
personal organizers in the North American market are Franklin Quest and Day-
Runner, and its key competitors in the international market for personal
organizers, although less developed than in the North American market, include
Filo Fax in the U.K. and Quo Vadis in France. ACCO's operating companies
compete on the basis of product quality and price and their responsiveness to
consumer preferences.
ENVIRONMENTAL MATTERS
Fortune Brands and its subsidiaries are subject to federal, state and local
laws and regulations concerning the discharge of materials into the
environment and the handling, disposal and clean-up of waste materials and
otherwise relating to the protection of the environment. While it is not
possible to quantify with certainty the potential impact of actions regarding
environmental matters, particularly remediation and other compliance efforts
that Fortune Brands' subsidiaries may undertake in the future, in the opinion
of management of Fortune Brands, compliance with the present environmental
protection laws, before taking into account estimated recoveries from third
parties, will not have a material adverse effect upon the capital
expenditures, financial condition, results of operations or competitive
position of Fortune Brands and its subsidiaries.
FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Fortune Brands' subsidiaries operate in the United States, Europe
(principally the U.K.) and other areas (principally Canada and Australia).
Approximately 27% of Fortune Brands' 1996 net sales and 21% of its 1996
operating income originated outside the U.S., and approximately 63% and 41% of
such amounts, respectively, were generated in Europe. Changes in the value of
foreign currencies (principally pounds sterling) will have significantly less
impact on Fortune Brands' financial statements when translated into U.S.
dollars than historically has been the case for American Brands.
GOVERNMENTAL REGULATION AND RELATED MATTERS
Distilled Spirits
The production, storage, transportation, distribution and sale of JBB
Worldwide's products are subject to regulation by federal, state, local and
foreign authorities. Various local jurisdictions prohibit or restrict the sale
of distilled spirits in whole or in part.
In the U.S., U.K. and many other countries, distilled spirits are subject to
excise taxes and/or customs duties. State, local and other governmental
authorities in such countries also impose taxes on distilled spirits. On
January 1, 1991, the U.S. federal excise tax on distilled spirits was
increased by one dollar per proof gallon. There have been no subsequent
increases in the U.S. federal excise tax, although proposals to increase such
taxes have been made from time to time. In addition, there are proposals
pending to increase or impose new distilled spirits taxes in various
jurisdictions.
The United Kingdom Finance Acts, 1993 and 1994 did not provide for any
increase in the excise duties on distilled spirits, whereas the Finance Act,
1995 provided for an increase in the excise duties on distilled spirits
equivalent to 26 pence on the price of a typical 700 milliliter bottle of
Scotch whisky. The U.K. budgets introduced on November 26, 1996 and November
28, 1995 provided for a decrease in the excise duties on distilled spirits
with the result that the price of a typical 700 milliliter bottle of Scotch
whisky decreased by 26 and 27 pence, respectively.
It is believed that the U.S. federal excise tax increase in 1991 contributed
to the decline in distilled spirits unit sales for the industry, including
Beam. The effect of any future excise tax increases in any jurisdiction cannot
be determined, but it is possible that any future tax increases would have an
adverse effect on unit sales and increase existing competitive pressures.
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The Alcoholic Beverage Labeling Act of 1988 and regulations promulgated
thereunder by the Bureau of Alcohol, Tobacco and Firearms of the Department of
the Treasury (the "Bureau") require that containers of alcoholic beverages
bottled on or after November 18, 1989 for sale or distribution in the U.S. or
for sale, distribution or shipment to members of the United States Armed
Forces abroad bear the statement: "GOVERNMENT WARNING: (1) According to the
Surgeon General, women should not drink alcoholic beverages during pregnancy
because of the risk of birth defects. (2) Consumption of alcoholic beverages
impairs your ability to drive a car or operate machinery, and may cause health
problems." The Alcoholic Beverage Labeling Act of 1988 and the regulations
prohibit any other requirement of a statement relating to alcoholic beverages
and health on any beverage alcohol container or package containing such a
container. If the Secretary of the Treasury, after appropriate investigation
and consultation with the Surgeon General, finds available scientific
information justifying a change in, addition to or deletion of all or part of
the required statement, he is required to report such information to the
United States Congress together with specific recommendations with respect
thereto. It is not possible to state whether any legislation or additional
regulations or action imposing additional labeling or other warning statement
requirements will be enacted, promulgated or taken in the U.S. or other
markets in which JBB Worldwide sells products, nor is it possible to predict
the effect, if any, that the existing labeling requirement or any additional
labeling or other warning statement requirements may have on the industry
generally or on JBB Worldwide.
During 1996, certain competitors of JBB Worldwide began television and radio
broadcast advertising of distilled spirits products in the U.S. market, and
the national distilled spirits industry association retracted a previous
voluntary ban on such activities. These developments have created a certain
amount of controversy and threats of governmental regulation and other action
at federal, state and local levels. JBB Worldwide, through its Beam
subsidiary, has not begun any such advertising but may yet do so in response
to competitive conditions. Other operating units outside the U.S. have
previously begun such broadcast advertising in markets where legal and not in
violation of voluntary restrictions by industry groups. It is not possible to
state whether any legislation or additional regulation or other government
action will be enacted, promulgated or taken in the U.S. market, nor is it
possible to predict the effect, if any, of the ultimate resolution of this
matter on the industry generally or the business of JBB Worldwide
specifically.
Hardware and Home Improvement Products
Legislation has been introduced in the U.S. Congress that would, if enacted,
endorse a voluntary industry standard that establishes maximum allowable
leachate levels of certain substances, including lead from plumbing fittings
and pumps, and which would require the Environmental Protection Agency ("EPA")
to evaluate the effectiveness of the standard within twelve months of
enactment. The legislation that was introduced previously in the Congress
would, if enacted, require a reduction in the lead content of plumbing
fittings and pumps used for drinking water, if an appropriate maximum leachate
standard for lead is not voluntarily adopted. In September 1994, the EPA
endorsed a voluntary standard that establishes maximum leachate levels of
those substances, including lead from new plumbing fittings and fixtures. It
is not possible to predict whether federal, state or local legislation,
regulations or action will be enacted, promulgated or taken or the nature of
any such legislation, regulations or action, nor is it possible to predict the
effect any such legislation, regulations or action may have on the industry
generally or on Moen.
LEGAL PROCEEDINGS
The Company's former subsidiary, The American Tobacco Company ("ATCO"), and
other leading tobacco manufacturers have been sued by parties seeking damages
for cancer and other ailments claimed to have resulted from tobacco use and by
certain asbestos manufacturers seeking unspecified amounts in indemnity or
contribution in third-party actions against all or most of the major domestic
tobacco manufacturers. On December 22, 1994, the Company sold ATCO to Brown &
Williamson Tobacco Corporation, a wholly-owned subsidiary of B.A.T. Brown &
Williamson Tobacco Corporation and ATCO have agreed to indemnify the Company
against claims arising from smoking and health and fire safe cigarette matters
relating to the tobacco business of ATCO.
In 1988, there was a jury award against another tobacco manufacturer that
was subsequently overturned on appeal and remanded for a new trial. The
plaintiff in this case later withdrew the action with prejudice. In 1996,
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there was a jury award against Brown & Williamson Tobacco Corporation,
successor by merger to ATCO, which is pending appeal. The smallest of the five
major domestic cigarette manufacturers has announced a settlement of certain
tobacco related claims. The other four major domestic cigarette manufacturers
have continued to vigorously defend these lawsuits. As of March 12, 1997, the
Company has been named as a defendant in some of the cases brought against
ATCO and is named in sixty-eight of these cases, although it has not been
served in eleven of such cases. One such action is brought by an individual
alleging health ailments caused by the inhalation of environmental tobacco
smoke (Dunn, described below); eight are brought by the attorneys general (or
on behalf of the attorney general) of Hawaii (State of Hawaii, described
below), Ohio (Coyne, described below), Louisiana (Ieyoub, described below),
Michigan (Kelley, described below), West Virginia (McGraw, described below),
Iowa (State of Iowa, described below), Oklahoma (State of Oklahoma, described
below), and Utah (State of Utah, described below) respectively, seeking
unspecified compensatory and punitive damages and various forms of relief,
including restitution of the expenditures by the state for the cost of medical
care provided by the state to its citizens for numerous diseases allegedly
caused by cigarettes and other tobacco products; seventeen allege state or
nationwide class actions on behalf of individuals allegedly addicted to
cigarettes through the manipulation of nicotine levels or individuals who have
suffered personal injury from the use of cigarettes. The seventeen cases are
Arch (purporting to be a Pennsylvania class action, described below),
Chamberlain (purporting to be an Ohio class action, described below), Conner
(purporting to be a New Mexico class action, described below), Crozier
(purporting to be an Alabama class action, described below), Emig (purporting
to be a Kansas class action, described below), Harris (purporting to be a
Pennsylvania class action, described below), Masepohl (purporting to be a
Minnesota class action, described below), McCune (purporting to be a West
Virginia class action, described below), McGinty (purporting to be an Arkansas
class action, described below), Norton (purporting to be an Indiana class
action, described below), Peterson (purporting to be a Hawaii class action,
described below), Reed (purporting to be a District of Columbia class action,
described below), Richardson (purporting to be a Maryland class action,
described below), Ruiz (purporting to be a Puerto Rico class action, described
below), Scott (purporting to be a Louisiana class action, described below),
Walls (purporting to be an Oklahoma class action, described below) and Zito
(purporting to be a New York class action, described below). There are also
forty-two individual cases where the plaintiffs allege personal injury from
the use of cigarettes (Castano, Creech, Cresser, Dymits, Dzak, Evans,
Fernandez, Galvan, M.L., Gossett, Hagness, E., Harris, G., Heitsch, Hellen,
Hernandez, M., Hulsey, Inzerilla, Knutsen, Kristich, Lewis, Lucca, Luna,
Magill, Margolin, Martinez, Nociforo, Oglesby, Perez, Portnoy, Ramirez,
Ramirez, J., Ramirez, O., Reed, M., Reitano, Rose, Salinas, Sanchez, Schwartz,
Siegel, Sola, Stern, Vacquera and Whirley--all described below).
The following sets forth the principal parties to the above-described sixty-
eight proceedings in which the Company is currently named as a defendant, the
court in which such proceedings are pending and the date such proceedings were
instituted against the Company: Arch v. The American Tobacco Company, et al.,
United States District Court for the Eastern District of Pennsylvania, August
8, 1996; Castano v. The American Tobacco Company, et al., United States
District Court for the Eastern District of Louisiana, March 29, 1994;
Chamberlain v. The American Tobacco Company, et al., United States District
Court for the Northern District of Ohio, August 14, 1996; Conner v. The
American Tobacco Company, et al., Second Judicial District Court of Bernalillo
County, New Mexico, October 10, 1996; Coyne v. American Brands, et al., United
States District Court for the Northern District of Ohio, September 17, 1996;
Creech v. The American Tobacco Company, et al. Supreme Court of the State of
New York, Richmond County, January 6, 1997; Cresser v. The American Tobacco
Company, et al., Supreme Court of the State of New York, Kings County, October
10, 1996; Crozier v. The American Tobacco Company, et al., United States
District Court for the Middle District of Alabama, August 8, 1996; Dunn v. The
American Tobacco Company, et al., Circuit Court of Delaware County, Indiana,
May 28, 1993; Dymits v. American Brands, et al., United States District Court
for the Northern District of California, May 22, 1996; Dzak v. The American
Tobacco Company, et al., Supreme Court of the State of New York, Queens
County, December 8, 1996; Emig v. The American Tobacco Company, et al., 18th
Judicial District Court of Sedgwick County, Kansas, Civil Department, February
6, 1997; Evans v. The American Tobacco Company, et al., Supreme Court of the
State of New York, Kings County, August 23, 1996; Fernandez v. American
Brands, et al., District Court of Nueces County, Texas, November 13, 1996;
Galvan v. American Brands, et al., District Court of Nueces County, Texas,
March 3, 1997; Gossett v. American Brands, et al., United States District
Court for the Southern
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District of Texas, Brownsville Division, November 14, 1996; E. Hagness v.
American Brands, et al., District Court of Nueces County, Texas, December 27,
1996; G. Harris v. American Brands, et al., United States District Court for
the Southern District of Texas, December 2, 1996; Harris v. The American
Tobacco Company, et al., United States District Court for the Eastern District
of Pennsylvania, October 14, 1996; State of Hawaii v. Brown & Williamson
Tobacco Corporation, et al., Circuit Court of the First Circuit, Hawaii,
January 31, 1997; Heitsch v. American Brands, et al., District Court of
Hidalgo County, Texas, December 23, 1996; Hellen v. The American Tobacco
Company, et al., Supreme Court of the State of New York, Kings County, August
23, 1996; M. Hernandez v. American Brands, et al., District Court of Nueces
County, Texas, December 16, 1996; Hulsey v. American Brands, et al., United
States District Court for the Southern District of Texas, December 2, 1996;
Ieyoub (State of Louisiana) v. The American Tobacco Company, et al., District
Court of Calcasieu Parish, Louisiana, March 13, 1996; Inzerilla v. The
American Tobacco Company, et al., Supreme Court of the State of New York,
Queens County, May 29, 1996; Kelley (State of Michigan) v. The American
Tobacco Company, et al., Circuit Court for the 30th Judicial Circuit,
Michigan, August 21, 1996; Knutsen v. The American Tobacco Company, et al.,
Supreme Court of the State of New York, Kings County, October 11, 1996;
Kristich v. The American Tobacco Company, et al., Supreme Court of the State
of New York, Suffolk County, November 15, 1996; Lewis v. American Brands, et
al., District Court of Hidalgo County, Texas, January 24, 1997; Lucca v. The
American Tobacco Company, et al., Supreme Court of the State of New York,
Kings County, February 3, 1997; Luna v. American Brands, et al., District
Court of Nueces County, Texas, November 13, 1996; Magill v. American Brands,
et al., District Court of Nueces County, Texas, December 23, 1996; Margolin v.
The American Tobacco Company, et al., Supreme Court of the State of New York,
Queens County, November 22, 1996; Martinez v. The American Tobacco Company, et
al., District Court of Nueces County, Texas, November 19, 1996; Masepohl v.
The American Tobacco Company, et al., United States District Court for the
District of Minnesota, September 3, 1996; McCune v. The American Tobacco
Company, et al., United States District Court for the Southern District of
West Virginia, January 31, 1997; McGinty v. The American Tobacco Company, et
al., United States District Court for the Eastern District of Arkansas,
Western Division, November 4, 1996; McGraw (State of West Virginia) v. The
American Tobacco Company, et al., Circuit Court of Kanawha County, West
Virginia, September 20, 1994; Nociforo v. The American Tobacco Company, et
al., Supreme Court of the State of New York, Suffolk County, July 16, 1996;
Norton v. Brown & Williamson Tobacco Corporation, et al., United States
District Court for the Southern District of Indiana, May 3, 1996; Oglesby v.
American Brands, et al., United States District Court for the Southern
District of Texas, December 2, 1996; Oklahoma (State of Oklahoma) v. The
American Tobacco Company, et al., District Court for Cleveland County,
Oklahoma, August 22, 1996; G. Perez v. American Brands, et al., District Court
of Hidalgo County, Texas, November 26, 1996; Peterson v. The American Tobacco
Company, et al., Circuit Court of the First Circuit, Hawaii, February 6, 1997;
Portnoy v. The American Tobacco Company, et al., Supreme Court for the State
of New York, Suffolk County, July 15, 1996; Ramirez v. American Brands, et
al., District Court of Hidalgo County, Texas, November 12, 1996; J. Ramirez v.
American Brands, et al., District Court of Hidalgo County, Texas, December 23,
1996; O. Ramirez v. American Brands, et al., District Court of Brooks County,
Texas, December 23, 1996; Reed v. Philip Morris Incorporated, et al., Superior
Court of the District of Columbia, June 21, 1996; M. Reed v. American Brands,
et al., United States District Court for the Southern District of Texas,
December 6, 1996; Reitano v. The American Tobacco Company, et al., Supreme
Court of the State of New York, Kings County, August 22, 1996; Richardson v.
Philip Morris Inc., et al., County Court of Baltimore, Maryland, May 24, 1996;
Rinaldi v. The American Tobacco Company, et al., Supreme Court of the State of
New York, Kings County, January 6, 1997; Rose v. The American Tobacco Company,
et al., Supreme Court of the State of New York, New York County, December 18,
1996; Ruiz v. The American Tobacco Company, et al., United States District
Court for the District of Puerto Rico, December 9, 1996; Salinas v. American
Brands, et al., District Court of Webb County, Texas, February 20, 1997;
Sanchez v. American Brands, et al., Circuit Court of the State of Texas, Starr
County, December 6, 1996; Schwartz v. The American Tobacco Company, et al.,
Supreme Court for the State of New York, Kings County, December 9, 1996; Scott
v. The American Tobacco Company, et al., United States District Court for the
Eastern District of Louisiana, Orleans Parish, May 25, 1996; Siegel v. The
American Tobacco Company, et al., Supreme Court of the State of New York,
Kings County, August 22, 1996; Sola v. The American Tobacco Company, et al.,
Supreme Court for the State of New York, Bronx County, July 12, 1996; State of
Iowa v. The American Tobacco Company, et al., District Court of Iowa, Polk
County, November 27, 1996; State of Utah v.
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The American Tobacco Company, et al., United States District Court for the
District of Utah, Central Division, September 30, 1996; Stern v. The American
Tobacco Company, et al., United States District Court for the Southern
District of New York, January 29, 1997; Vacquera v. American Brands, et al.,
District Court of Hidalgo County, Texas, December 4, 1996; Walls v. The
American Tobacco Company, et al., District Court of Creek County, Oklahoma,
February 6, 1997; Whirley v. American Brands, et al., United States District
Court for the Southern District of Texas, December 2, 1996; and Zito v. The
American Tobacco Company, et al., Supreme Court of the State of New York, New
York County, June 19, 1996.
The Company has been informed that (1) two actions involving the smoking and
health controversy were filed in the District Court of Nueces County, Texas on
December 12 and December 16, 1996, (2) an action involving the smoking and
health controversy was filed in the District Court of Starr County, Texas on
December 16, 1996, (3) an action involving the smoking and health controversy
was filed in the District Court of Willacy County, Texas on December 16, 1996,
and (4) an action involving the smoking and health controversy was filed in
the District Court of Kleberg County, Texas on December 23, 1996, and that the
Company has been named as a defendant in the foregoing actions. As of March
12, 1997, the Company had not been served nor had it obtained copies of the
complaints in respect of these actions.
The Company's counsel have advised that, in their opinion, on the basis of
their investigations generally with respect to suits and claims of this
character, the Company has meritorious defenses to the above-mentioned actions
and threatened actions. The actions will be vigorously contested.
It has been reported that certain groups of attorneys, and attorneys general
of various states, are interested in promoting product liability and other
suits against the tobacco manufacturers. It has also been reported that other
claims against the tobacco manufacturers may be made seeking damages for
alleged injuries claimed to have resulted from exposure to tobacco smoking of
others. It has also been reported that civil and criminal investigations of
tobacco manufacturers are pending before certain prosecutorial and other
authorities.
It is not possible to predict the outcome of the pending litigation, but
management believes that there are meritorious defenses to the pending actions
and that the pending actions will not have a material adverse effect upon the
results of operations, cash flow or financial condition of the Company. See
the note captioned "Pending Litigation" in the Notes to Consolidated Financial
Statements contained in the 1996 Annual Report to Stockholders of the Company,
which note is incorporated herein by reference.
Subsidiaries of the Company are involved in proceedings concerning the
discharge of materials into the environment and the handling, disposal and
clean-up of waste materials and otherwise relating to the protection of the
environment. As of February 3, 1997, various subsidiaries of the Company had
been designated as potentially responsible parties under "Superfund" or
similar state laws with respect to 44 sites. While it is not possible to
quantify with certainty the potential impact of actions regarding
environmental matters, particularly remediation and other compliance efforts
that the Company's subsidiaries may undertake in the future, in the opinion of
management, compliance with the present environmental protection laws, before
taking into account estimated recoveries from third parties, will not have a
material adverse effect upon the results of operations, cash flow or financial
condition of Fortune Brands. See the note captioned "Environmental" in the
Notes to Consolidated Financial Statements contained in the 1996 Annual Report
to Stockholders of the Company, which note is incorporated herein by
reference.
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NEW GALLAHER MANAGEMENT
NEW GALLAHER BOARD OF DIRECTORS
Peter Michael Wilson, Chairman and Chief Executive
Peter Wilson, age 55, will be the Chairman and Chief Executive of New
Gallaher prior to the Distribution Date, having been chairman and chief
executive of Gallaher since February 1994. He was deputy chairman of Gallaher
from 1989 to 1994 and has been chairman and chief executive of Gallaher
Tobacco Limited, a subsidiary of Gallaher, since 1987. Prior to that he had
held a number of positions with Gallaher and its subsidiaries since he joined
them in October 1969. He is also a director of certain subsidiaries of
Gallaher as well as a director of the Company.
Graham James Hearne, CBE, Non-executive Deputy Chairman
Graham Hearne, age 59, will be appointed the non-executive Deputy Chairman
of New Gallaher prior to the Distribution Date. He is chairman of Enterprise
Oil plc, and is also a non-executive director of Reckitt & Colman plc,
Courtaulds PLC and N M Rothschild & Sons Limited.
Philip Raymond Burchell, Finance Director
Philip Burchell, age 54, will be appointed the Finance Director of New
Gallaher prior to the Distribution Date, having been director of finance of
Gallaher since December 1988 and deputy chairman since February 1994. Prior to
that he had held a number of positions with Gallaher since he joined Gallaher
in January 1975. He is also a director of certain subsidiaries of Gallaher.
William Bonynge Curry, Production and Personnel Director
William Curry, age 49, will be appointed the Production and Personnel
Director of New Gallaher prior to the Distribution Date, having been
production director of Gallaher since February 1996 and production and
personnel director since February 1997. He joined Gallaher in November 1969
and has held a number of positions, including that of production and personnel
director of Gallaher Tobacco Limited. He is also a director of certain
subsidiaries of Gallaher.
Christopher Thomas Fielden, Group Legal Adviser
Christopher Fielden, age 54, will be appointed the Group Legal Adviser to
New Gallaher and its subsidiaries prior to the Distribution Date, having been
legal adviser to Gallaher since 1972. He was secretary of Gallaher from
January 1985 to February 1986, and a director from September 1987 to March
1991 having joined Gallaher in 1972 as a solicitor.
Nigel Hargreaves Northridge, Sales and Marketing Director
Nigel Northridge, age 41, will be appointed Sales and Marketing Director of
New Gallaher prior to the Distribution Date, having been sales and marketing
director of Gallaher since February 1996. He joined Gallaher in 1976 and has
since held positions with Gallaher, including that of managing director of
Gallaher (Dublin) Limited from July 1990 to December 1993 when he was
appointed sales and marketing director of Gallaher Tobacco Limited. He is also
a director of certain subsidiaries of Gallaher.
Nigel Timothy Simon, International Director
Nigel Simon, age 41, will be appointed International Director of New
Gallaher prior to the Distribution Date, having been international director of
Gallaher since February 1996, and having held a number of positions with
Gallaher since he joined Gallaher in October 1984. He is also a director of
certain subsidiaries of Gallaher.
Richard James Brooke, Non-executive Director
Richard Brooke, age 42, will be appointed a non-executive Director of New
Gallaher prior to the Distribution Date. He is the group finance director of
British Sky Broadcasting Group PLC, having joined such company in 1988.
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John Gildersleeve, Non-executive Director
John Gildersleeve, age 52, will be appointed a non-executive Director of New
Gallaher prior to the Distribution Date. He is the commercial and trading
director of Tesco PLC, having been a director of Tesco PLC since 1984. He is
also a non-executive director of Lloyds TSB Group PLC.
Thomas Chandler Hays, Non-executive Director
Thomas Hays, age 61, has been a director of Gallaher since July 1987 and
will be appointed a non-executive Director of New Gallaher prior to the
Distribution Date. He has been the Chairman of the Board and Chief Executive
Officer of the Company since January 1995. Prior to that he was the President
and Chief Operating Officer of the Company.
Dr. Antony David Portno, Non-executive Director
Dr. Antony Portno, age 58, will be appointed a non-executive Director of
New Gallaher prior to the Distribution Date. He is a director of Bass PLC and
chairman of Bass Leisure, Bass Brewers and Bass International Brewers, having
joined Bass PLC in 1971.
OFFICER
Nigel Peter Bulpitt, Company Secretary
Nigel Bulpitt, age 49, is the Company Secretary of New Gallaher, having been
company secretary of Gallaher since May 1995 and a director since March 1991.
Prior to that he had held a number of positions with Gallaher since 1985. He
is also a director of certain subsidiaries of Gallaher.
CORPORATE GOVERNANCE
Following the Distribution, New Gallaher intends to comply with the
applicable provisions of the Code of Best Practice published by the Cadbury
Committee on the Financial Aspects of Corporate Governance (the "Cadbury
Code") and with the recommendations contained in the report of the Study Group
on Directors' Remuneration (the "Greenbury Report"). As Peter Wilson will act
as Chairman and Chief Executive of New Gallaher, the New Gallaher Board as
recommended by the Cadbury Code will include non-executive directors who will
provide a strong and independent element on the New Gallaher Board and the
Deputy Chairman will be a non-executive director.
The New Gallaher Board will establish audit and remuneration committees,
each of which will be comprised only of non-executive directors. The New
Gallaher Board will also establish a nomination committee whose members will
be the Chairman and two non-executive directors.
The audit committee will be responsible for monitoring the adequacy and
effectiveness of the internal controls and compliance procedures, overseeing
the preparation of the annual financial statements and making recommendations
to the New Gallaher Board regarding the auditors and their terms of
appointment. The remuneration committee will determine New Gallaher's policy
for executive remuneration and the individual packages for the executive
directors and will ensure compliance with the best practice provisions
regarding directors' remuneration and report to the shareholders. The
nomination committee will oversee the selection and appointment process in
relation to the New Gallaher Board and make recommendations to the New
Gallaher Board in connection with that process.
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COMPENSATION OF DIRECTORS AND OFFICERS
Aggregate annual remuneration of all directors and officers of New Gallaher
as a group for the year ending December 31, 1997 is expected to total
(Pounds)2,042,000 (of which approximately (Pounds)1,810,000 is in respect of
the directors), including the value of benefits payable in kind, but excluding
amounts that may be paid under bonus or profit sharing plans, all assuming
such remuneration payments are made in respect of the full year ending
December 31, 1997. The estimated aggregate value for the year ending December
31, 1997 for pension, retirement or similar benefits for directors and
officers of New Gallaher as a group is expected to be approximately
(Pounds)510,000.
Under the terms of service contracts between Gallaher and each executive
director, the annual base salary of each executive director is as set forth
below.
<TABLE>
<CAPTION>
BASE ANNUAL
EXECUTIVE DIRECTOR SALARY ((Pounds))
- ------------------ -----------------
<S> <C>
Peter M. Wilson.............................................. 485,000
Philip R. Burchell........................................... 336,700
William B. Curry............................................. 160,000
Christopher T. Fielden....................................... 241,500
Nigel H. Northridge.......................................... 175,000
Nigel T. Simon............................................... 150,000
</TABLE>
Each of these salaries was established based upon the recommendation of the
Compensation and Stock Option Committee of the Company as advised by Towers
Perrin, the independent consultants of that committee.
The executive directors' service contracts provide that in certain
circumstances, following a change of control of Gallaher and termination of
employment, the executive director will be entitled to be paid a sum equal to
two years' salary at the then current rate plus a sum equal to two times the
last bonus received prior to the change of control plus twice the tax value of
the benefits-in-kind received in respect of the 12 month period preceding the
change of control. Any such payment shall be made without any deduction to
take account of any mitigation on the part of the executive director and there
will be no discount for accelerated payment. These provisions do not, however,
apply in the event that a change of control of Gallaher occurs by reason of
the Distribution.
The executive directors of New Gallaher may be entitled to an annual bonus,
such entitlement being at New Gallaher's discretion. It is intended that any
such bonus will be based on a target which will be determined by the
remuneration committee. It is expected that the maximum annual bonus which may
be awarded to each executive director will be 50% of his base salary. Any
payments made to an executive director under Gallaher's profit sharing
arrangements available to employees generally will be taken into account in
calculating any annual bonus payable. In respect of 1997, the executive
directors will participate in the profit related pay scheme.
Each of the persons expected to be executive directors of New Gallaher is
currently a member of the Gallaher "M' Pension Scheme and will continue to be
a member following the Distribution. Entitlements under the "M' Pension Scheme
include provisions whereby on retirement at age 60, each executive director
will be entitled to an annual pension equal to two-thirds of his final
pensionable pay. Special provisions apply to an executive director whose
employment is terminated under certain circumstances within two years of a
change of control of Gallaher other than a change of control which occurs by
reason of the Distribution. In such event, the executive director will be
entitled to a pension payable upon the termination of his employment if he is
over age 50, or otherwise upon reaching age 50. The pension will be paid at an
annual rate of two-thirds of final pensionable pay multiplied by, generally,
the sum of the periods of employment completed with Gallaher plus any
unexpired notice (as defined) and divided by the period of employment which
would have been completed had it continued to age 60.
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Each of the non-executive directors of New Gallaher will be paid
(Pounds)25,000 a year, except that the Deputy Chairman will be paid
(Pounds)60,000 a year. The non-executive directors will not receive any annual
bonus nor will they be entitled to any long term incentive awards or a
pension.
In connection with the Distribution, each option which is outstanding under
the American Brands, Inc. 1990 Long-Term Incentive Plan or the American
Brands, Inc. 1986 Stock Option Plan on the Distribution Date and held by a
person employed by New Gallaher and its subsidiaries will be cashed-out and
canceled. Gallaher will pay to such holders in respect of each such option an
amount equal to the difference between (i) the exercise price of such options
and (ii) the average of the daily closing prices per share of Company Common
Stock as reported on the NYSE Composite Transaction Reporting System for the
five full consecutive trading days of the NYSE ending on the last full trading
day before the Distribution Record Date or, if earlier, the date on which
Company Common Stock commences trading on an "ex-dividend" basis reflecting
the Distribution (such payment to be net of applicable withholding taxes). As
of February 13, 1997, New Gallaher's executive directors and officers held
options with respect to an aggregate of 174,000 shares of Company Common Stock
at a weighted average exercise price of $47.365 per share. Assuming a market
value of $53.375 per share of Company Common Stock (the closing price on March
3, 1997) and that none of such options will be exercised prior to the
Distribution, such executive directors and officers will receive an aggregate
of $1,045,740 in respect of such options as a result of the Distribution.
For senior executives and executive directors, New Gallaher will establish a
performance share plan and a deferred bonus plan. Under the performance share
plan, selected participants will be awarded New Gallaher Ordinary Shares if
certain performance conditions are satisfied during the performance period,
which will be three consecutive fiscal years. The performance conditions will
be based on the total shareholder return and growth of earnings per share
during the performance period. Under the deferred bonus plan, selected
participants will be awarded New Gallaher Ordinary Shares if certain
performance conditions are satisfied during the performance period (which will
be three consecutive fiscal years) subject to a minimum award equal to half of
the shares retained by them during the performance period regardless of
whether the performance conditions are satisfied. The performance conditions
will be determined by the remuneration committee and will be based on the
growth of earnings per share during the performance period. Participation in
the deferred bonus plan will be conditional on the participant remaining an
employee and either having deposited with the employee trust the equivalent
of, or retaining shares with a value equivalent to, up to one-third of his
gross annual bonus during the performance period.
New Gallaher will establish a savings related share option scheme (the "SAYE
Scheme") and a profit sharing scheme (the "Profit Sharing Scheme") for the
U.K. employees of Gallaher, including the directors and officers of New
Gallaher. Both schemes will be submitted for approval by the Inland Revenue.
Under the SAYE Scheme, each participant will have to take out a Save-As-You-
Earn ("SAYE") contract with a building society to save a regular sum for a
specified period. At the end of the SAYE contract period the participant will
be entitled to a bonus from the building society. The participant may be
granted an option in respect of such number of New Gallaher Ordinary Shares as
can be bought at the option price with the expected proceeds of the SAYE
contract (including the bonus). An option granted under the SAYE Scheme is not
transferable and generally may only be exercised within six months of the
bonus date.
The Profit Sharing Scheme is based on a trust under which any New Gallaher
Ordinary Shares acquired by trustees of the scheme will be appropriated to
participants by reference to their relevant earnings or similar factors. New
Gallaher and/or Gallaher will, when required by the trustees, make
contributions to enable the trustees to acquire and appropriate New Gallaher
Ordinary Shares to participants. Any New Gallaher Ordinary Shares so
appropriated will generally be held by the trustees for at least two years and
may not be dealt with in any way during such period except on a reconstruction
or takeover, although the participant becomes the beneficial owner of such New
Gallaher Ordinary Shares and is entitled to receive dividends. A participant
will generally become the registered holder of such shares three years after
the date of appropriation.
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CERTAIN TRANSACTIONS
Except for the employment arrangements referred to under "Compensation of
Directors and Officers" immediately above, neither New Gallaher nor any of its
subsidiaries is a party to any material transaction, or proposed transaction,
in which any director or officer of New Gallaher, or any relative or spouse of
such person or any relative of any such spouse, has a direct or indirect
material interest. No director or officer of New Gallaher, nor any associate
of any such director or officer, is indebted to New Gallaher or any of its
subsidiaries.
OWNERSHIP OF NEW GALLAHER ORDINARY SHARES
The following table sets forth the number of New Gallaher Ordinary Shares
held by existing and proposed directors of New Gallaher individually and all
existing and proposed directors and officers of New Gallaher as a group as of
the Distribution, assuming that stockholders of the Company receive four New
Gallaher Ordinary Shares in the Distribution for each share of Company Common
Stock held on March 3, 1997 (the "Annual Meeting Record Date") and that such
persons do not dispose of or acquire any shares of Company Common Stock prior
to the Distribution Record Date"):
<TABLE>
<CAPTION>
NUMBER OF
NEW GALLAHER
IDENTITY OF PERSON OR GROUP ORDINARY SHARES
- --------------------------- ---------------
<S> <C>
Peter M. Wilson................................................. 560
Philip R. Burchell.............................................. 16,000
Christopher T. Fielden.......................................... 15,200
Thomas C. Hays.................................................. 385,296
All directors and officers as a group (12 persons).............. 417,056
</TABLE>
Although the Distribution is intended to be tax-free for a U.S. holder of
Company Common Stock, receipt of New Gallaher Ordinary Shares in connection
with the Distribution by holders of Company Common Stock who are resident in
the U.K. will be treated as income for U.K. tax purposes for such stockholders
and as such income tax will be payable. Other than Mr. Hays, all of the
executive directors of New Gallaher are resident in the U.K. Accordingly, each
of the directors set forth above, other than Mr. Hays, sold shares of Company
Common Stock prior to the Annual Meeting Record Date and/or intends to sell
shares of Company Common Stock prior to the Distribution Record Date.
The executive directors currently intend to acquire shares in New Gallaher
following the Distribution. Peter M. Wilson also intends to acquire shares in
Fortune Brands following the Distribution.
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FORTUNE BRANDS MANAGEMENT
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS OF FORTUNE BRANDS
The directors and executive officers of Fortune Brands immediately after the
Distribution will be substantially similar to the management of the Company
except that Mr. Wilson will no longer be an executive officer of the Company
but will remain a director and Mr. Plancher retired on February 28, 1997. See
"THE ADDITIONAL PROPOSALS--ELECTION OF DIRECTORS."
CERTAIN TRANSACTIONS
As noted above, Mr. Hays will continue to serve as Chairman of the Board and
Chief Executive Officer of Fortune Brands and will be appointed as a non-
executive director of New Gallaher. Also, Mr. Wilson will continue to serve as
a director of Fortune Brands and will serve as Chairman and Chief Executive of
New Gallaher.
OWNERSHIP OF FORTUNE BRANDS COMMON STOCK
The beneficial ownership of Fortune Brands Common Stock immediately after
the Distribution will be substantially similar to the beneficial ownership of
the Company Common Stock. See "ELECTION OF DIRECTORS" and "CERTAIN INFORMATION
REGARDING SECURITY HOLDINGS."
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<PAGE>
DESCRIPTION OF NEW GALLAHER ORDINARY SHARES
GENERAL
New Gallaher's authorized share capital is (Pounds)1,000,000 which is
divided into 1,000,000 ordinary shares, of which two shares are issued and
outstanding and are owned by the Company. Prior to the Distribution Date, it
is intended that New Gallaher's share capital will be amended to provide for
an authorized share capital of (Pounds)105,000,000, which will be divided into
1,050,000,000 New Gallaher Ordinary Shares. Based on the number of shares of
Company Common Stock outstanding as of March 3, 1997, approximately
700,000,000 New Gallaher Ordinary Shares, including those represented by ADSs,
will be distributed to the Company's stockholders in the Distribution. All of
the New Gallaher Ordinary Shares issued in connection with the Distribution
will be validly issued, fully paid and non-assessable. Under English law and
New Gallaher's Articles of Association, as in effect as of the Distribution
(the "Articles"), persons who are neither residents nor nationals of the U.K.
may freely hold, vote and transfer New Gallaher Ordinary Shares in the same
manner as U.K. residents.
The following is a description of the rights of holders of fully paid New
Gallaher Ordinary Shares based on the Articles. This description does not
purport to be complete and is qualified in its entirety by reference to the
full Articles, copies of which will be filed as exhibits to the Registration
Statement on Form 20-F.
VOTING RIGHTS
Subject to any special terms as to voting upon which any ordinary shares may
have been issued and to the provisions of the Articles, on a show of hands,
every member who is present in person at a general meeting shall have one vote
and, on a poll, every member who is present in person or by proxy shall have
one vote for every ordinary share of which he is the holder. The expression
"present in person" in the Articles includes a person present as the duly
authorized representative of a corporate shareholder acting in that capacity.
No shareholder shall be entitled to vote at a general meeting or at any
separate meeting of the holders of any class of share of New Gallaher either
personally or by proxy if (a) any call due and payable by such holder to New
Gallaher in respect of that ordinary share remains unpaid, unless the
directors otherwise determine, or (b) such holder, or any other person who
appears to be interested in that ordinary share, has been duly served pursuant
to the provisions in the Articles with a notice requiring the provision to New
Gallaher of information regarding that ordinary share (a "disclosure notice")
and is in default in complying with such notice for 28 days (or 14 days if
such ordinary share, together with all other ordinary shares held by such
member in relation to which such a default has occurred, represented at least
0.25% of the issued ordinary shares) after service of such notice.
A resolution put to the vote at a general meeting shall be decided on a show
of hands unless a poll is demanded. Subject to the provisions of the U.K.
Companies Act 1985 (the "1985 Act") and every other statute (including orders
and regulations or subordinate legislation made thereunder) for the time being
in force concerning companies and affecting New Gallaher (the "Companies
Acts"), a poll may be demanded by (i) the chairman of the meeting; (ii) at
least five members present in person or by proxy and entitled to vote; (iii)
any shareholder or shareholders present in person or by proxy and representing
in the aggregate not less than one-tenth of the total voting rights of all
shareholders having the right to attend and vote at such meetings; or (iv) any
shareholder or shareholders present in person or by proxy and holding shares
conferring a right to vote at the meeting, being shares on which an aggregate
sum has been paid up equal to not less than one-tenth of the total sum paid up
on all ordinary shares conferring such right. Due to the fact that under
English law voting rights are only conferred on registered holders of shares,
a person holding through a nominee may not directly demand a poll or vote on a
show of hands but may instruct his nominee to do so.
Unless otherwise required by law or the Articles, voting at general meetings
is by ordinary resolution. An ordinary resolution (including, for example, but
not limited to a resolution for the election of directors, the approval of
financial statements, the declaration of a final dividend, the appointment of
auditors, the increase of authorized share capital or the grant of authority
to allot shares) requires the affirmative vote of a majority of the
shareholders who, in the case of a vote by a show of hands, are present in
person or, in the case of a vote by
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poll, are present in person or by proxy and hold shares conferring in the
aggregate a majority of the votes actually cast on the ordinary resolution. A
special resolution (including, for example, but not limited to a resolution
amending the Articles, changing the name of New Gallaher or waiving statutory
preemption rights on the issue of new shares for cash) or an extraordinary
resolution (including, for example, but not limited to modifying the rights of
any class of shares at a meeting of the holders of such class or relating to
certain matters concerning the liquidation of New Gallaher) requires the
affirmative vote of not less than three-fourths of the shareholders who, in
the case of a vote by show of hands, are present in person or, in the case of
a vote by poll, are present in person or by proxy and hold shares conferring
in the aggregate at least three-fourths of the votes actually cast on the
resolution. In the case of an equality of votes at a general meeting, whether
on a show of hands or on a poll, the chairman of the meeting is entitled to
cast a deciding vote. Annual general meetings and meetings at which a special
resolution (as specified in the Articles) or a resolution of which special
notice has been given to the company or a resolution appointing a person as a
director is proposed must be convened on at least 21 clear days notice in
writing. Any other extraordinary meetings must be convened on at least 14
clear days notice in writing. Meetings may be called on shorter notice with
the consent of the shareholders. The term "clear days notice" means calendar
days and excludes the date of mailing, the deemed date of receipt of such
notice, which if sent by first class mail is normally the day following such
mailing, and the date of the meeting itself.
QUORUM
The quorum required to transact business at general meetings is two
shareholders who are present in person or by proxy and entitled to vote on the
business to be transacted.
DIVIDEND RIGHTS
Subject to the Companies Acts, New Gallaher may by ordinary resolution
declare dividends to be paid to shareholders of New Gallaher provided that no
such dividend shall exceed the amount recommended by the directors. If in the
opinion of the directors, the profits of New Gallaher justify such payments,
the directors may also, subject to the Companies Acts, pay fixed dividends on
any class of shares carrying a right to a fixed dividend and may also declare
and pay interim dividends on any class of shares of such amounts and on such
dates and in respect of such periods as they think fit. Unless the rights
attached to, or the terms of issue of, any shares provide otherwise, all
dividends shall (as regards any shares not fully paid throughout the period in
respect of which the dividend is paid) be apportioned and paid pro rata
according to the amounts paid on the shares during any portion or portions of
the period in respect of which the dividend is paid. However, no amount paid
on a share in advance of calls shall be treated as paid on the share. No
dividend shall be paid otherwise than out of profits available for
distribution under the provisions of the Companies Acts. If any shareholder,
or any other person appearing to be interested in ordinary shares, has been
served with a disclosure notice by New Gallaher under the Articles and (i) is
in default in complying with such notice for 14 days after service of such
notice and (ii) the ordinary shares in relation to which the default occurred
(the "default shares", which shall include any further ordinary shares issued
in respect of such ordinary shares) represent at least 0.25% of the issued
ordinary shares of New Gallaher, then any dividend or other money which would
otherwise be payable in respect of such default shares may be retained by New
Gallaher until such default has been remedied. Any dividend remaining
unclaimed after a period of 12 years from the date such dividend was declared
or became due for payment shall be forfeited and shall revert to New Gallaher.
The directors may, with the approval of shareholders, in respect of any
dividend declared or paid in any period for which such approval is granted,
offer shareholders the right to elect to receive additional ordinary shares,
credited as fully paid, in whole or in part instead of cash.
DISTRIBUTION OF ASSETS ON A WINDING-UP
On a liquidation of New Gallaher, the liquidator may, with the authority of
an extraordinary resolution of New Gallaher and any sanction required by the
1985 Act, divide among the shareholders in specie or in kind the whole or any
part of the assets of New Gallaher (whether they shall consist of property of
the same kind or not) and may, for that purpose, set such values as he deems
fair upon any assets to be so divided and may determine how the division shall
be carried out between the shareholders or different classes of shareholders.
The liquidator
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<PAGE>
may, with like authority, vest all or any part of the assets in trusts for the
benefit of shareholders, and the liquidation of New Gallaher may be closed and
New Gallaher dissolved, but no shareholder shall be compelled to accept any
shares or other property in respect of which there is a liability.
PREEMPTIVE RIGHTS
The Articles do not contain any preemptive rights. The 1985 Act confers on
shareholders, to the extent not waived or disapplied, rights of preemption in
respect of equity securities that are, or are to be, issued for cash. The term
"equity securities" means (a) shares of New Gallaher, other than shares which,
with respect to dividends and capital, carry a right to participate only up to
a specified amount in a distribution and shares allotted pursuant to an
employee's share scheme; and (b) rights to subscribe for or to convert into
such shares. Pursuant to the 1985 Act, these provisions may be disapplied by a
special resolution of the shareholders, either generally or specifically.
Pursuant to the Articles, however, the period of any such disapplication may
not exceed 15 months from the date of the special resolution. For any future
issue of shares which are subject to these rights of preemption, the
shareholders will have to approve the disapplication of the preemptive rights,
which procedure may inhibit and cause delays in raising new capital. It is
intended that the preemption rights in respect of some of New Gallaher's
authorized, but unissued, share capital will be disapplied. Such
disapplication is to expire at the earlier of the next annual general meeting
of New Gallaher or 15 months after the date of such disapplication.
DISCLOSURE OF INTERESTS
The 1985 Act provides that a person (including a company and other legal
entities) who acquires or becomes aware that he has acquired a material
interest of 3% or more, (including an interest in ADSs) or an interest
(whether or not including material interests) of 10% or more of the nominal
value of any class of shares comprised in a public company's "relevant share
capital" (which, for these purposes, means the company's issued share capital
carrying rights to vote in all circumstances at general meetings of the
company) in certain circumstances is obliged to notify that company, in
writing, of his interest within the two days following the day on which the
obligation arises. After the first notification of a 3% or greater interest,
in the case of a material interest, or a 10% or greater interest in any other
case, similar notifications must be made, where the percentage level interest
increases or decreases through 3% or 10% or any greater whole number
percentage.
For disclosure purposes most interests are defined as material. The
principal categories of interest which are not defined as material and need
only be notified when such interests, together with any material interests,
reach more than 10% in aggregate, are (a) an interest which a person
authorized to manage investments belonging to another has by virtue of having
the management of such investments under an agreement in, or evidenced in,
writing; and (b) an interest which a person has by virtue of being the
operator of certain types of collective investment schemes in the EU.
In addition, the 1985 Act provides that a public company may by notice in
writing require a person whom the company knows or has reasonable cause to
believe to be, or to have been at any time during the three years immediately
preceding the date on which the notice is issued, interested in shares
comprised in the company's "relevant share capital" (including an interest in
ADSs) to confirm that fact or (as the case may be) to indicate whether or not
that is the case and where he holds or has during the relevant time held an
interest in such shares, to give such further information as may be required
in accordance with the statutory provisions relating to his interest and any
other interest in the shares of which he is aware to New Gallaher. The
disclosure must be made within such reasonable period as may be specified by
the relevant notice.
For the purpose of the above obligations, an interest of a person in shares
means any interest (other than certain disregarded interests) in shares
including interests in any share in which (i) his spouse, or child or
stepchild under the age of 18 is interested; (ii) a corporate body is
interested and either (a) that corporate body is or its directors are
accustomed to act in accordance with that person's directions or instructions
or (b) that person controls, or is entitled to exercise control of, one-third
or more of the voting power of that corporate body; or (iii) another party is
interested and the person and that other party are parties to an agreement
(being an
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agreement which (a) provides for one or more parties to it to acquire
interests in shares in a particular public company and (b) imposes obligations
or restrictions on any one or more of the parties to it with respect to their
use, retention or disposal of such interests acquired pursuant to the
agreement and any interest in the company's shares is in fact acquired by any
of the parties pursuant to the agreement).
Where notice is served by a company under these provisions of the 1985 Act
on a person who is or was interested in shares of the company and that person
fails to give the company any information required by the notice within the
time specified in the notice, the company may apply to the court for an order
directing that the shares in question be subject to restrictions prohibiting,
inter alia, any transfer of those shares, the exercise of voting rights in
respect of such shares and, other than in liquidation, payments in respect of
such shares.
The Articles provide for the suspension of the right to attend and vote at
general meetings after failure to provide information concerning an interest
in shares.
In addition, a person who fails to comply with the statutory notification or
disclosure obligations described above is subject to criminal penalties. Any
person who believes they have acquired 3% or more of any class of shares
(including through ADSs) should notify the Company Secretary at New Gallaher's
registered office.
TRANSFER OF SHARES IN UNCERTIFICATED FORM
The Articles allow the directors, in their absolute discretion, to resolve
that any class of shares in the Company may be issued in uncertificated form
(without a share certificate) and transferred by means of any computer-based
system permitted by the Companies Acts and the Uncertificated Securities
Regulations 1995 (the "Regulations") which enables title to shares to be
transferred without a written instrument of transfer. The Articles also allow
the directors to implement such arrangements as the directors consider fit, in
accordance with and subject to the Companies Acts and the Regulations and the
listing rules of the London Stock Exchange, to evidence and regulate the
transfer of title to shares in uncertificated form and to approve (or
disapprove as the case may be) the registration of such transfers. New
Gallaher will still be obliged to issue share certificates to those
shareholders who request them.
TRANSFER OF SHARES IN CERTIFICATED FORM
The following provisions apply to any class or classes of shares in relation
to which the directors have not made a resolution as referred to in the
previous paragraph.
The instrument of transfer of any ordinary share shall be in the usual or
common form or in any other form approved by the directors. Any such
instrument of transfer shall be signed by or on behalf of the transferor and,
in the case of a partly paid share, by the transferee. The transferor shall be
deemed to remain the holder of the shares concerned until the name of the
transferee is entered in the register of members in respect thereof. The
registration of transfers of shares may be suspended at such times and for
such periods as the directors may from time to time determine provided that it
does not exceed 30 days in any year and, in the case of uncertificated shares,
any approval required by the Regulations has been obtained.
The directors may, in their absolute discretion and without assigning any
reason therefor, refuse to register any transfer of a share unless the share
is fully paid and it is one on which New Gallaher does not have a lien; if it
is a transfer to joint holders, it is in favor of not more than four joint
holders; and it is in respect of only one class of shares. The directors may
also, in their absolute discretion and without assigning any reason therefor,
refuse to register any transfer of shares to a minor or a bankrupt.
The transfer must be deposited at New Gallaher's registered office or such
other place as the directors determine accompanied by the relevant share
certificate(s) and, such other evidence (if any) as the directors may
reasonably require to prove the right of the transferor to make the transfer.
See "--DESCRIPTION OF AMERICAN DEPOSITARY SHARES--Deposit, Transfer and
Withdrawal".
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VARIATION OF RIGHTS
Subject to the provisions of the Companies Acts, whenever the share capital
is divided into different classes of shares, the rights attached to any class
of shares for the time being may be varied or abrogated either with the
consent in writing of the holders of three-quarters in nominal value of the
issued shares of the class, or with the sanction of an extraordinary
resolution passed at a separate general meeting of the holders of the shares
of the class.
SHARE CAPITAL AND CHANGES IN CAPITAL
Subject to the provisions of the Companies Acts and the existing rights of
other shareholders any shares in New Gallaher may be issued with such rights,
privileges or restrictions as New Gallaher by ordinary resolution may (before
the allotment of such shares) from time to time determine or, failing such
determination, as the directors may determine.
New Gallaher may (whether or not all the shares for the time being
authorized shall have been issued or all the shares in issue have been fully
paid up) from time to time by ordinary resolution increase its share capital
by the creation of new shares, such new share capital to be of such amount and
divided into shares of such amounts and carrying such rights as the ordinary
resolution shall prescribe. New Gallaher may also from time to time by
ordinary resolution consolidate all or any of its capital share into shares of
a larger amount than its existing shares; subdivide its existing shares or any
of them or cancel any shares which at the date of the passing of the ordinary
resolution have not been taken or agreed to be taken, subject to the Companies
Acts and any rights attached to the shares. New Gallaher may from time to time
by special resolution reduce its authorized and issued share capital, any
capital redemption reserve, any share premium account or other undistributable
reserve in any manner.
Subject to the Companies Acts and the Articles and any confirmation or
consent required by law, New Gallaher may from time to time purchase its own
shares (including any redeemable shares).
NON-U.K. SHAREHOLDERS
There is no limitation in the Articles on the rights of non-U.K. citizens or
residents to hold, or exercise voting rights attaching to, New Gallaher
Ordinary Shares. New Gallaher has given ADS holders the right to attend and
speak at general meetings but not to vote in person or count in the quorum.
However, non-U.K. shareholders are not entitled to receive notice from New
Gallaher, including notices of general meetings, unless they have given New
Gallaher an address in the U.K. to which such notices may be sent. See "--
DESCRIPTION OF AMERICAN DEPOSITARY SHARES--Voting of Deposited Securities." In
addition, New Gallaher intends to provide certain financial information to its
shareholders, including the holders of ADSs. See "OTHER MATTERS--AVAILABLE
INFORMATION".
REGISTRAR
The Registrar for the New Gallaher Ordinary Shares will be Independent
Registrars Group Limited.
LIABILITY OF DIRECTORS AND OFFICERS
English law does not permit a company to indemnify a director or an officer
of the company or any person employed by the company as auditor against any
liability which by virtue of any rule of law would otherwise attach to him in
respect of negligence, default, breach of duty or breach of trust in relation
to the company except liability incurred by such director, officer or auditor
in defending any legal proceedings (whether civil or criminal) in which
judgment is given in his favor or in which he is acquitted or in certain
instances where, although he is liable, a court finds that such director,
officer or auditor acted honestly and reasonably and that having regard to all
the circumstances he ought fairly to be excused and relief is granted by the
court. Section 310 of the 1985 Act enables companies to purchase and maintain
insurance for directors, officers and auditors against any liability (civil or
criminal) which would otherwise attach to them in respect of any negligence,
default, breach of duty or breach of trust in relation to the company.
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
The following is a summary of certain provisions of the Deposit Agreement
(the "Deposit Agreement"), to be entered into by New Gallaher, The Bank of New
York, as depositary (the "Depositary"), and the registered holders of ADRs
(the "Owners") and the owners of a beneficial interest in ADRs (the
"Beneficial Owners"), pursuant to which the ADRs are to be issued.
This summary does not purport to be complete and is subject to and qualified
in its entirety by reference to the Deposit Agreement, including the form of
ADRs. Copies of the Deposit Agreement and the Memorandum and Articles of
Association of New Gallaher will be available for inspection at the Corporate
Trust Office of the Depositary, currently located at 101 Barclay Street, New
York, New York 10286, and at the principal office of the agent of the
Depositary (the "Custodian"), which is located at the London, England office
of The Bank of New York located at 46 Berkeley Street, London, W1X 6AD. The
Depositary's principal executive office is located at 48 Wall Street, New
York, New York 10286.
AMERICAN DEPOSITARY RECEIPTS
ADRs evidencing ADSs are issuable by the Depositary pursuant to the Deposit
Agreement. Each ADS will represent four New Gallaher Ordinary Shares or
evidence of the right to receive four New Gallaher Ordinary Shares (together
with any additional New Gallaher Ordinary Shares at any time deposited or
deemed deposited under the Deposit Agreement and any and all other securities,
cash and property received by the Depositary or the Custodian in respect
thereof and at such time held under the Deposit Agreement, "Deposited
Securities"). Only persons in whose names ADRs are registered on the books of
the Depositary will be treated by the Depositary and New Gallaher as Owners.
DEPOSIT, TRANSFER AND WITHDRAWAL
The Depositary has agreed, subject to the terms and conditions of the
Deposit Agreement, that upon delivery to the Custodian of New Gallaher
Ordinary Shares (or evidence of rights to receive New Gallaher Ordinary
Shares) and pursuant to appropriate instruments of transfer in a form
satisfactory to the Custodian, the Depositary will, upon payment of the fees,
charges and taxes provided in the Deposit Agreement, execute and deliver as
promptly as practicable at its Corporate Trust Office to, or upon the written
order of, the person or persons named in the notice of the Custodian delivered
to the Depositary or requested by the person depositing such New Gallaher
Ordinary Shares with the Depositary, an ADR or ADRs, registered in the name or
names of such person or persons, and evidencing any authorized number of ADSs
requested by such person or persons.
Upon surrender at the Corporate Trust Office of the Depositary of an ADR for
the purpose of withdrawal of the Deposited Securities represented by the ADSs
evidenced by such ADR, and upon payment of the fees of the Depositary for the
surrender of ADRs, governmental charges and taxes provided in the Deposit
Agreement, and subject to the terms and conditions of the Deposit Agreement,
the Owner of such ADR will be entitled to delivery without unreasonable delay,
to him or upon his order, of the amount of Deposited Securities at the time
represented by the ADS or ADSs evidenced by such ADR. The forwarding of share
certificates, other securities, property, cash and other documents of title
for such delivery will be at the risk and expense of the Owner.
Subject to the terms and conditions of the Deposit Agreement, and any
limitations established by the Depositary, and unless requested by New
Gallaher in writing to cease doing so, the Depositary may deliver ADRs prior
to the receipt of New Gallaher Ordinary Shares (a "Pre-Release") and deliver
New Gallaher Ordinary Shares upon the receipt and cancellation of ADRs which
have been Pre-Released, whether or not such cancellation is prior to the
termination of such Pre-Release or the Depositary knows that such ADR has been
Pre-Released. The Depositary may receive ADRs in lieu of New Gallaher Ordinary
Shares in satisfaction of a Pre-Release. Each Pre-Release must be (i) preceded
or accompanied by a written representation from the person to whom the ADRs or
New Gallaher Ordinary Shares are to be delivered that such person, or its
customer, owns the New Gallaher Ordinary Shares or ADRs to be remitted, as the
case may be; (ii) at all times fully collateralized with cash or such other
collateral as the Depositary deems appropriate; (iii) terminable by the
Depositary on not
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more than five business days' notice; and (iv) subject to such further
indemnities and credit regulations as the Depositary deems appropriate. The
number of ADSs which are outstanding at any time as a result of Pre-Releases
will not normally exceed thirty percent (30%) of the New Gallaher Ordinary
Shares deposited hereunder; provided, however, that the Depositary reserves
the right to change or disregard such limit from time to time as it reasonably
deems appropriate and may, with the prior written consent of New Gallaher,
change such number for purpose of general application.
DIVIDENDS, OTHER DISTRIBUTIONS AND RIGHTS
Subject to any restrictions imposed by the laws of England and Wales,
regulations or applicable permits, the Depositary is required as promptly as
practicable to convert or cause to be converted any currency other than U.S.
dollars ("Foreign Currency"), that it receives in respect of the Deposited
Securities, into U.S. dollars, to the extent that in its judgment it can do so
on a reasonable basis and can transfer the resulting U.S. dollars to the
United States and to distribute the resulting U.S. dollar amount (net of
reasonable and customary expenses incurred by the Depositary in converting
such Foreign Currency) as promptly as practicable to the Owners entitled
thereto, in proportion to the number of ADSs representing such Deposited
Securities evidenced by ADRs held by them, respectively. Such distribution may
be made upon an averaged or other practicable basis without regard to any
distinctions among Owners on account of exchange restrictions or the date of
delivery of any ADR or ADRs or otherwise. The amount distributed to the Owners
will be reduced by any amount on account of taxes to be withheld by New
Gallaher or the Depositary. See "--Liability of Owner and Beneficial Owner for
Taxes" below. If such conversion or distribution can be effected only with the
approval or license of any government or agency thereof, the Depositary shall
file such application for approval or license, if any, as it may deem
desirable.
If the Depositary determines that in its judgment any Foreign Currency
received by the Depositary or the Custodian cannot be converted on a
reasonable basis into U.S. dollars transferable to the United States, or if
any approval or license of any government or agency thereof which is required
for such conversion is denied or in the opinion of the Depositary, after
consultation with New Gallaher, is not obtainable, or if any such approval or
license is not obtained within a reasonable period as determined by the
Depositary, the Depositary may distribute the Foreign Currency received by the
Depositary or the Custodian to, or in its discretion may hold such Foreign
Currency uninvested and without liability for interest thereon for the
respective accounts of, the Owners entitled to receive the same. If any such
conversion of Foreign Currency, in whole or in part, cannot be effected for
distribution to some of the Owners entitled thereto, the Depositary may in its
discretion make such conversion and distribution in U.S. dollars to the extent
permissible to the Owners entitled thereto, and may distribute the balance of
the Foreign Currency received by the Depositary to, or hold such balance
uninvested and without liability for interest thereon for, the respective
accounts of the Owners entitled thereto; provided, however, that if requested
in writing by an Owner entitled thereto, the Depositary will distribute to
such an Owner the portion of such balance of Foreign Currency to which such
Owner is entitled as promptly as practicable.
If New Gallaher declares a dividend in, or free distribution of, New
Gallaher Ordinary Shares, the Depositary may, and will if New Gallaher so
requests, and such request is deemed practicable by the Depositary, distribute
to the Owners of outstanding ADRs entitled thereto, in proportion to the
number of ADSs evidenced by the ADRs held by them, respectively, additional
ADRs evidencing an aggregate number of ADSs that represents the amount of New
Gallaher Ordinary Shares received as such dividend or free distribution,
subject to the terms and conditions of the Deposit Agreement with respect to
the deposit of New Gallaher Ordinary Shares and the issuance of ADSs evidenced
by ADRs, including the withholding of any tax or other governmental charge and
the payment of fees of the Depositary. The Depositary may withhold any such
distribution of ADRs if it has not received reasonably satisfactory assurances
from New Gallaher that such distribution does not require registration under
the Securities Act or is exempt from registration under the provisions of such
Act. In lieu of delivering ADRs for fractional ADSs in the event of any such
dividend or free distribution, the Depositary will sell the amount of New
Gallaher Ordinary Shares represented by the aggregate of such fractions and
distribute the net proceeds in accordance with the Deposit Agreement. If
additional ADRs are not so distributed, each ADS will thenceforth also
represent the additional New Gallaher Ordinary Shares distributed upon the
Deposited Securities represented thereby.
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If New Gallaher offers or causes to be offered to the holders of any
Deposited Securities any rights to subscribe for additional New Gallaher
Ordinary Shares or any rights of any other nature, the Depositary will, after
consultation with New Gallaher, have discretion as to the procedure to be
followed in making such rights available to any Owners or in disposing of such
rights for the benefit of any Owners and making the net proceeds available in
U.S. dollars to such Owners or, if by the terms of such rights offering or for
any other reason, the Depositary may not either make such rights available to
any Owners or dispose of such rights and make the net proceeds available to
such Owners, then the Depositary shall allow the rights to lapse; provided,
however, if at the time of the offering of any rights the Depositary
determines in its discretion that it is lawful and feasible to make such
rights available to all Owners or to certain Owners but not to other Owners,
the Depositary may distribute to any Owner to whom it determines the
distribution to be lawful and feasible, in proportion to the number of ADSs
held by such Owner, warrants or other instruments therefor in such form as it
deems appropriate. If the Depositary determines in its discretion that it is
not lawful and feasible to make such rights available to certain Owners, it
may sell the rights, warrants or other instruments in proportion to the number
of ADSs held by the Owners to whom it has determined it may not lawfully or
feasibly make such rights available, and allocate the net proceeds of such
sales for the account of such Owners otherwise entitled to such rights,
warrants or other instruments, upon an averaged or other practical basis
without regard to any distinctions among such Owners because of exchange
restrictions or the date of delivery of any ADR or ADRs, or otherwise. The
Depositary will not be responsible for any failure to determine that it may be
lawful or feasible to make such rights available to Owners in general or any
Owner or Owners in particular.
In circumstances in which rights would not otherwise be distributed, if an
Owner requests the distribution of warrants or other instruments in order to
exercise the rights allocable to the ADSs of such Owner, the Depositary will
make such rights available to such Owner upon written notice from New Gallaher
to the Depositary that (a) New Gallaher has elected in its sole discretion to
permit such rights to be exercised and (b) such Owner has executed such
documents as New Gallaher has determined in its sole discretion are reasonably
required under applicable law. If the Depositary has distributed warrants or
other instruments for rights to all or certain Owners, then upon written
instruction from such an Owner pursuant to such warrants or other instruments
to the Depositary to exercise such rights, upon payment by such Owner to the
Depositary for the account of such owner of an amount equal to the purchase
price of the New Gallaher Ordinary Shares to be received in exercise of the
rights, and upon payment of the fees of the Depositary as set forth in such
warrants or other instruments, the Depositary will, on behalf of such Owner,
exercise the rights in accordance with the terms and conditions thereof and
purchase the New Gallaher Ordinary Shares, and New Gallaher shall thereupon
cause the New Gallaher Ordinary Shares so purchased to be delivered to the
Depositary on behalf of such Owner. As agent for such Owner, the Depositary
will cause the New Gallaher Ordinary Shares so purchased to be deposited, and
will execute and deliver ADRs to such Owner, pursuant to the Deposit
Agreement.
The Depositary will not offer rights to Owners having an address in the
United States unless both the rights and the securities to which such rights
relate are either exempt from registration under the Securities Act with
respect to a distribution to all Owners or are registered under the provisions
of such Act. If an Owner requests the distribution of warrants or other
instruments, notwithstanding that there has been no such registration under
such Act, the Depositary will not effect such distribution unless it has
received an opinion from recognized counsel in the United States for New
Gallaher upon which the Depositary may rely that such distribution to such
Owner is exempt from such registration. No distribution of rights or
distribution of the net proceeds of any sale of rights to Owners will be
unreasonably delayed by any action of the Depositary or any of its agents. The
Depositary will not be responsible for any failure to determine that it may be
lawful or feasible to make such rights available to Owners in general or any
Owner in particular. Nothing in the Deposit Agreement will create, or be
construed to create, any obligation on the part of New Gallaher to file a
registration statement with respect to such rights or underlying securities or
to endeavor to have such a registration statement declared effective.
Whenever the Depositary receives any distribution other than cash, New
Gallaher Ordinary Shares or rights in respect of the Deposited Securities, the
Depositary will as promptly as practicable cause the securities or property
received by it to be distributed to the Owners entitled thereto, after
deduction or upon payment of any
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fees and expenses of the Depositary or any taxes or other governmental
charges, in proportion to their holdings, respectively, in any manner that the
Depositary may reasonably deem equitable and practicable for accomplishing
such distribution; provided, however, that if in the opinion of the Depositary
such distribution cannot be made proportionately among the Owners entitled
thereto, or if for any other reason (including, but not limited to, any
requirement that New Gallaher or the Depositary withhold an amount on account
of taxes or other governmental charges or that such securities must be
registered under the Securities Act in order to be distributed to Owners or
Beneficial Owners) the Depositary deems such distribution not to be feasible,
the Depositary may, after consultation with New Gallaher, adopt such method as
it may deem equitable and practicable for the purpose of effecting such
distribution, including, but not limited to, the public or private sale of the
securities or property thus received, or any part thereof, and the net
proceeds of any such sale (net of the fees of the Depositary) will be
distributed by the Depositary to the Owners entitled thereto as in the case of
a distribution received in cash.
If the Depositary determines that any distribution of property (including
New Gallaher Ordinary Shares and rights to subscribe therefor) is subject to
any taxes or other governmental charges which the Depositary is obligated to
withhold, the Depositary may, by public or private sale, dispose of all or a
portion of such property in such amount and in such manner as the Depositary
deems necessary and practicable to pay such taxes or charges and the
Depositary will distribute the net proceeds of any such sale after deduction
of such taxes or charges to the Owners entitled thereto in proportion to the
number of ADSs held by them, respectively.
Upon any change in nominal or par value, split-up, consolidation, conversion
or any other reclassification of Deposited Securities, or upon any
recapitalization, reorganization, merger or consolidation or sale of assets
affecting New Gallaher or to which it is a party, any securities which shall
be received by the Depositary or Custodian in exchange for, in conversion of,
or in respect of Deposited Securities will be treated as new Deposited
Securities under the Deposit Agreement, and the ADSs will thenceforth
represent, in addition to the existing Deposited Securities, the right to
receive the new Deposited Securities so received in exchange or conversion,
unless additional ADRs are delivered pursuant to the following sentence. In
any such case the Depositary may, and will, if New Gallaher so requests,
execute and deliver additional ADRs as in the case of a distribution of New
Gallaher Ordinary Shares, or call for the surrender of outstanding ADRs to be
exchanged for new ADRs specifically describing such new Deposited Securities.
RECORD DATES
Whenever any cash dividend or other cash distribution shall become payable
or any distribution other than cash shall be made, or whenever rights shall be
issued with respect to the Deposited Securities, or whenever for any reason
the Depositary causes a change in the number of New Gallaher Ordinary Shares
that are represented by each ADS, or whenever the Depositary shall receive
notice of any meeting, or any adjourned meeting, of holders of New Gallaher
Ordinary Shares or other Deposited Securities, or whenever the Depositary
shall find it necessary or convenient, the Depositary will fix a record date
(a) for the determination of the Owners who will be (i) entitled to receive
such dividend, distribution or rights, or the net proceeds of the sale
thereof, (ii) entitled to give instructions for the exercise of voting rights
at any such meeting, or (iii) to receive information as to such meeting, or
(b) on or after which each ADS will represent the changed number of New
Gallaher Ordinary Shares, all subject to the provisions of the Deposit
Agreement.
VOTING OF DEPOSITED SECURITIES
Upon receipt of notice of any meeting or solicitation of consents or proxies
of holders of New Gallaher Ordinary Shares or other Deposited Securities, if
requested in writing by New Gallaher, the Depositary will, as soon as
practicable thereafter, mail to all Owners a notice, the form of which notice
will be in the sole discretion of the Depositary, containing (a) the
information included in such notice of meeting received by the Depositary from
New Gallaher, (b) a statement that the Owners as of the close of business on a
specified record date will be entitled, subject to any applicable provision of
the laws of England and Wales, the Memorandum and Articles of Association of
New Gallaher and the Deposited Securities, to instruct the Depositary as to
the exercise of the
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voting rights, if any, pertaining to the amount of New Gallaher Ordinary
Shares or other Deposited Securities represented by their respective ADSs, and
(c) a statement as to the manner in which such instructions may be given. Upon
the written request of an Owner on such record date, received on or before the
date established by the Depositary for such purpose (the "Instruction Date")
the Depositary will endeavor, insofar as practicable, to vote or cause to be
voted the amount of New Gallaher Ordinary Shares or other Deposited Securities
represented by the ADSs evidenced by such ADRs in accordance with the
nondiscretionary instructions set forth in such request. The Depositary will
not vote or attempt to exercise the right to vote that attaches to the New
Gallaher Ordinary Shares or other Deposited Securities, other than in
accordance with such instructions. There can be no assurance that the Owner
generally or any Owner in particular will receive the notice described in this
paragraph sufficiently prior to the Instruction Date in order to ensure that
the Depositary will in fact receive such instructions on or before such date.
In accordance with the Memorandum and Articles of Association and the laws of
England and Wales, failure by an Owner or Beneficial Owner to comply with New
Gallaher's request for information of the nature described under "--
DESCRIPTION OF NEW GALLAHER ORDINARY SHARES--Disclosure of Interests" may
result, inter alia, in withdrawal of the voting rights of the Owner or
Beneficial Owner.
REPORTS AND OTHER COMMUNICATIONS
The Depositary will make available for inspection by Owners at its Corporate
Trust Office any reports and communications, including any proxy soliciting
material, received from New Gallaher, which are both (a) received by the
Depositary as the holder of the Deposited Securities and (b) made generally
available to the holders of such Deposited Securities by New Gallaher. The
Depositary will also send to the Owner copies of such reports and
communications when furnished by New Gallaher pursuant to the Deposit
Agreement.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of ADRs and any provisions of the Deposit Agreement may at any time
and from time to time be amended by agreement between New Gallaher and the
Depositary in any respect which they may deem necessary or desirable without
the consent of the Owners; provided, however, that any amendment that imposes
or increases any fees or charges (other than taxes and other governmental
charges, registration fees, cable, telex or facsimile transmission costs,
delivery costs or other such expenses), or which otherwise prejudices any
substantial existing right of Owners, will not take effect as to outstanding
ADRs until the expiration of 30 days after notice of any amendment has been
given to the Owners of outstanding ADRs. Every Owner of an ADR, at the time
any amendment so becomes effective, will be deemed, by continuing to hold such
ADR, to consent and agree to such amendment and to be bound by the Deposit
Agreement as amended thereby. In no event will any amendment impair the right
of the Owner of any ADR to surrender such ADR and receive therefor the
Deposited Securities represented thereby, except to comply with mandatory
provisions of applicable law.
The Depositary will at any time at the direction of New Gallaher terminate
the Deposit Agreement by mailing notice of such termination to the Owners of
the ADRs then outstanding at least 90 days prior to the date fixed in such
notice for such termination. The Depositary may likewise terminate the Deposit
Agreement by mailing notice of such termination to New Gallaher and the Owners
of all ADRs then outstanding if, any time after 90 days have expired after the
Depositary will have delivered to New Gallaher a written notice of its
election to resign, a successor depositary will not have been appointed and
accepted its appointment, in accordance with the terms of the Deposit
Agreement. If any ADRs remain outstanding after the date of termination of the
Deposit Agreement, the Depositary thereafter will discontinue the registration
of transfers of ADRs, will suspend the distribution of dividends to the Owners
thereof and will not give any further notices or perform any further acts
under the Deposit Agreement, except the collection of dividends and other
distributions pertaining to the Deposited Securities, the sale of rights and
other property and the delivery of underlying New Gallaher Ordinary Shares,
together with any dividends or other distributions received with respect
thereto and the net proceeds of the sale of any rights or other property, in
exchange for surrendered ADRs (after deducting, in each case, the fees of the
Depositary for the surrender of an ADR and other expenses set forth in the
Deposit Agreement and any applicable taxes or governmental charges). At any
time after the expiration of one year from
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the date of termination, the Depositary may sell the Deposited Securities then
held thereunder and hold uninvested the net proceeds of such sale, together
with any other cash, unsegregated and without liability for interest, for the
pro rata benefit of the Owners that have not therefore surrendered their ADRs,
such Owners thereupon becoming general creditors of the Depositary with
respect to such net proceeds. After making such sale, the Depositary will be
discharged from all obligations under the Deposit Agreement, except to account
for net proceeds and other cash (after deducting, in each case, the fee of the
Depositary and other expenses set forth in the Deposit Agreement for the
surrender of an ADR and any applicable taxes or other governmental charges).
CHARGES OF DEPOSITARY
New Gallaher agrees to pay the fees, reasonable expenses and out-of-pocket
charges of the Depositary and those of any Registrar only in accordance with
agreements in writing entered into between the Depositary and New Gallaher
from time to time. The charges and expenses of the Custodian are for the sole
account of the Depositary.
The Depositary will charge any party depositing or withdrawing New Gallaher
Ordinary Shares or any party surrendering ADRs or to whom ADRs are issued
(including, without limitation, issuance pursuant to a stock dividend or stock
split declared by New Gallaher or an exchange of stock regarding the ADRs or
Deposited Securities or a distribution of ADRs pursuant to the Deposit
Agreement) where applicable: (1) taxes, stamp duties, stamp duty reserve taxes
and other governmental charges; (2) such registration fees as may from time to
time be in effect for the registration of transfers of New Gallaher Ordinary
Shares generally on the share register of New Gallaher or the appointed agent
of New Gallaher for transfer and registration of New Gallaher Ordinary Shares
and applicable to transfers of New Gallaher Ordinary Shares to the name of the
Depositary or its nominee or the Custodian or its nominee on the making of
deposits or withdrawals; (3) such cable, telex and facsimile transmission
expenses as are expressly provided in the Deposit Agreement; (4) such
reasonable expenses as are incurred by the Depositary in the conversion of
Foreign Currency pursuant to the Deposit Agreement; (5) a fee not in excess of
$5.00 per 100 ADSs (or portion thereof) for the issuance and surrender,
respectively, of ADRs pursuant to the Deposit Agreement; (6) subject to the
rules of any stock exchange on which the ADSs are listed for trading, a fee
not in excess of $.02 per ADS (or portion thereof) for any cash distribution
made pursuant to the Deposit Agreement including, but not limited to, Section
4.01 through 4.04 thereof; and (7) a fee for the distribution of securities
pursuant to the Deposit Agreement, such fee being in an amount equal to the
fee for the execution and delivery of ADSs referred to above which would have
been charged as a result of the deposit of such securities (for purposes of
this clause 7 treating all such securities as if they were New Gallaher
Ordinary Shares), but which securities are instead distributed by the
Depositary to Owners.
The Depositary, pursuant to the Deposit Agreement, may own and deal in any
class of securities of New Gallaher and its affiliates and in ADRs.
LIABILITY OF OWNER AND BENEFICIAL OWNER FOR TAXES
If any tax or other governmental charge shall become payable by the
Custodian or the Depositary with respect to any ADR or any Deposited
Securities represented by the ADSs evidenced by such ADR, such tax or other
governmental charges will be payable by the Owner or Beneficial Owner of such
ADR to the Depositary. The Depositary may refuse to effect any transfer of
such ADR or any withdrawal of Deposited Securities underlying such ADR until
such payment is made, and may withhold any dividends or other distributions,
or may sell for the account of the Owner or Beneficial Owner thereof any part
or all of the Deposited Securities underlying such ADR and may apply such
dividends, distributions or the proceeds of any such sale to pay any such tax
or other governmental charge and the Owner or Beneficial Owner of such ADR
will remain liable for any deficiency.
DISCLOSURE OF INTERESTS
Notwithstanding anything to the contrary in the Deposit Agreement, each
Owner and Beneficial Owner will agree to be bound by and subject to applicable
provisions of the 1985 Act and the Memorandum and Articles of
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Association of New Gallaher to the same extent as if such ADSs evidenced by
such ADRs were New Gallaher Ordinary Shares. In particular, the obligation of
a holder of New Gallaher Ordinary Shares (or other persons with an interest
therein) to disclose certain information to New Gallaher under certain
circumstances, as described under "--DESCRIPTION OF NEW GALLAHER ORDINARY
SHARES--Disclosure of Interests" also is applicable to Owners and Beneficial
Owners. The consequences to an Owner or Beneficial Owner (or other interested
person) for failing to comply with the disclosure requirements also are the
same as those for a holder of Ordinary Shares (or other interested person)
described under "--DESCRIPTION OF NEW GALLAHER ORDINARY SHARES--Disclosure of
Interests."
The Depositary will use reasonable efforts to forward to any Owners at the
request and at the expense of New Gallaher, any request by New Gallaher for
information and to comply with any instructions of New Gallaher, to the extent
reasonably practicable, given in connection with the foregoing. If New
Gallaher requests information from the Depositary or the Custodian, as the
registered owners of New Gallaher Ordinary Shares, pursuant to the Memorandum
and Articles of Association of New Gallaher or the 1985 Act, the Depositary
will use reasonable efforts to comply with such requests.
GENERAL
Neither the Depositary nor New Gallaher nor any of their respective
directors, officers, employees, agents or affiliates will be liable to any
Owner or Beneficial Owner, if by reason of any provision of any present or
future law or regulation of the United States, England and Wales or any other
country, or of any other governmental or regulatory authority or stock
exchange, or by reason of any provision, present or future, of the Memorandum
and Articles of Association of New Gallaher, or by reason of any provision of
any securities issued or distributed by New Gallaher, or any offering or
distribution thereof, or by reason of any act of God or war or other
circumstances beyond its control, the Depositary or New Gallaher or any of
their respective directors, officers, employees, agents, or affiliates shall
be prevented, delayed or forbidden from, or be subject to any civil or
criminal penalty on account of, doing or performing any act or thing which by
the terms of the Deposit Agreement or the Deposited Securities it is provided
will be done or performed; nor will the Depositary or New Gallaher or any of
their respective directors, officers, employees, agents or affiliates incur
any liability to any Owner or Beneficial Owner of any ADR by reason of any
nonperformance or delay, caused as aforesaid, in the performance of any act or
thing which by the terms of the Deposit Agreement it is provided will or may
be done or performed, or by reason of any exercise of, or failure to exercise,
any discretion provided for under the Deposit Agreement. Where, by the terms
of a distribution pursuant to the Deposit Agreement, or an offering or
distribution pursuant to the Deposit Agreement, or for any other reason, such
distribution or offering may not be made available to Owners, and the
Depositary may not dispose of such distribution or offering on behalf of such
Owners and make the net proceeds available to such Owners, then the Depositary
will not make such distribution or offering, and will allow the rights, if
applicable, to lapse.
New Gallaher and the Depositary assume no obligation nor will they be
subject to any liability under the Deposit Agreement to Owners or Beneficial
Owners, except that they agree to perform their respective obligations
specifically set forth under the Deposit Agreement without negligence or bad
faith.
The ADRs are transferable on the books of the Depositary, provided that the
Depositary may close the transfer books at any time or from time to time when
deemed expedient by it in connection with the performance of its duties or at
the written request of New Gallaher. As a condition precedent to the execution
and delivery, registration of transfer, split-up, combination or surrender of
any ADR or withdrawal of any Deposited Securities, the Depositary, the
Custodian or the Registrar may require payment from the person presenting the
ADR or the depositor of the New Gallaher Ordinary Shares of a sum sufficient
to reimburse it for any tax or other governmental charge and any stock
transfer or registration fee with respect thereto (including any such tax or
charge and fee with respect to New Gallaher Ordinary Shares being deposited or
withdrawn) and payment of any applicable fees payable by the Owners and
Beneficial Owners. The Depositary may refuse to deliver ADRs, to register the
transfer of any ADR or to make any distribution on, or related to New Gallaher
Ordinary Shares
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until it has received such proof of citizenship or residence, exchange control
approval or other information as it may deem necessary or proper. The
delivery, transfer, registration of transfer of outstanding ADRs and surrender
of ADRs or withdrawal of Deposited Securities generally may be suspended or
refused during any period when the transfer books of the Depositary, New
Gallaher or the Foreign Registrar are closed or if any such action is deemed
necessary or advisable by the Depositary or New Gallaher, at any time or from
time to time. Notwithstanding anything to the contrary in the Deposit
Agreement, the surrender of outstanding ADRs and the withdrawal of Deposited
Securities may not be suspended, subject only to (i) temporary delays caused
by closing the transfer books of the Depositary or New Gallaher or the deposit
of New Gallaher Ordinary Shares in connection with voting at a shareholders'
meeting or the payment of dividends, (ii) the payment of fees, taxes and
similar charges, and (iii) compliance with any U.S. or other laws or
governmental regulations relating to the ADRs or to the withdrawal of the
Deposited Securities.
Until termination of the Deposit Agreement upon its terms, the Depositary
will keep books, at its Corporate Trust Office, for the registration and
transfer of ADRs, which at all reasonable times will be open for inspection by
the Owners, provided that such inspection will not be for the purpose of
communicating with Owners in the interest of a business or object other than
the business of New Gallaher or a matter related to the Deposit Agreement or
the ADRs.
The Depositary may, at its sole risk, appoint one or more co-transfer agents
for the purpose of effecting transfers, combinations and split-ups of ADRs at
designated transfer offices on behalf of the Depositary. In carrying out its
functions, a co-transfer agent may require evidence of authority and
compliance with applicable laws and other requirements by Owners or persons
entitled to ADRs and will be entitled to protection and indemnity to the same
extent as the Depositary.
GOVERNING LAW
The Deposit Agreement will be governed by the laws of the State of New York.
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DESCRIPTION OF FORTUNE BRANDS CAPITAL STOCK
GENERAL
The Company's present Certificate of Incorporation (the "Company
Certificate") authorizes the issuance of a total of 810,000,000 shares of all
classes of stock, of which 750,000,000 may be shares of Company Common Stock,
and 60,000,000 may be shares of preferred stock without par value. At March 3,
1997, the Annual Meeting Record Date, 171,670,172 shares of Company Common
Stock were issued and outstanding. The Company Certificate provides that the
Company Board is vested with the authority to issue from time to time shares
of preferred stock in one or more series and to fix the voting powers,
designations, preferences and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions thereof.
If approved by the stockholders of the Company, the Company Certificate will
be amended upon consummation of the Distribution to the change the name of the
Company to Fortune Brands, Inc. Prior to the Distribution, no amendments will
be made to the Company Certificate with respect to the Company's authorized
capital stock.
None of the proposals will effect any changes in the terms of the capital
stock of the Company, except the name of the Company will be changed to
Fortune Brands, Inc.
FORTUNE BRANDS COMMON STOCK
As is currently the case, the holders of Fortune Brands Common Stock will be
entitled to one vote for each share of Fortune Brands Common Stock held of
record by them at the time for determining the holders thereof entitled to
vote on matters submitted to stockholders. The Distribution will not affect
any of the rights of the holders of Fortune Brands Common Stock. Subject to
the rights of the holders of the Company's preferred stock which may be
outstanding at the time, holders of Fortune Brands Common Stock will continue
to be entitled to such dividends on the Fortune Brands Common Stock as the
Board of Directors may declare out of funds legally available therefor.
COMPANY RIGHTS AND JUNIOR PREFERRED STOCK
The Company will continue to have 1,400,000 shares of the Company's Series A
Junior Participating Preferred Stock authorized and reserved for issuance in
connection with the Preferred Share Purchase Rights (the "Rights") to purchase
Series A Junior Participating Preferred Stock issued pursuant to the Rights
Agreement dated as of December 13, 1987, as amended as of January 30, 1990 and
September 25, 1990, between the Company and First Chicago Trust Company of New
York (the "Rights Agreement"). Each outstanding share of Fortune Brands Common
Stock will continue to evidence one Right.
The Rights generally become exercisable only in the event of an acquisition
of or a tender offer for 10% or more of the Company Common Stock. If
exercisable, each Right is exercisable for 1/200th of a share of Series A
Junior Participating Preferred Stock at an exercise price of $52.50. Also,
upon an acquisition of 10% or more of the Company Common Stock, or upon an
acquisition of the Company or the transfer of 50% or more of its assets or
earning power to a "person" (as defined in the Rights Agreement), each Right
(other than Rights held by the 10% acquiror, if applicable), if exercisable,
will generally be exercisable for common shares of the Company or the
acquiring company, as the case may be, having a market value of twice the
exercise price. In certain events, however, Rights may be exchanged by the
Company for Company Common Stock at a rate of one share per Right. The Rights
may be redeemed at any time prior to an acquisition of 10% or more of the
Company Common Stock by a person at a redemption price of $.005 per Right.
Until a Right is exercised, the holder, as such, will have no voting, dividend
or other rights as a stockholder of the Company. Unless either redeemed or
exchanged, the Rights will expire on December 24, 1997.
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CONVERTIBLE PREFERRED STOCK
At March 3, 1997, the Annual Meeting Record Date, 415,967 shares of Company
$2.67 Convertible Preferred Stock were issued and outstanding. The
Distribution will not affect the terms of the $2.67 Convertible Preferred
Stock, which are set forth in the Company Certificate. However, pursuant to
Section 7(g)(3)(D) of Article IV of the Company Certificate, the conversion
rate at which the $2.67 Convertible Preferred Stock is convertible into
Company Common Stock after the Distribution will be adjusted as follows. The
new conversion rate will be the product obtained by multiplying (i) the
conversion rate immediately prior to the Distribution Record Date by (ii) a
fraction, (a) the numerator of which shall be the current market price per
share of Company Common Stock (which is deemed to be the average of the daily
closing prices for the 30 consecutive full business days commencing 45 such
business days before the Distribution Record Date (the "Current Market
Price")) and (b) the denominator of which shall be the Current Market Price
per share of Company Common Stock minus the fair market value (as determined
by the Company Board, whose determination shall be conclusive) of the portion
of assets distributed in the Distribution applicable to one share of Company
Common Stock. The Company expects that this adjustment will result in a
substantial increase in the conversion rate of the $2.67 Convertible Preferred
Stock (which is currently 4.08 shares of Company Common Stock per share of
$2.67 Convertible Preferred Stock) and, as a result, a substantial increase in
the number of shares of Company Common Stock issuable upon conversion thereof.
At the current conversion rate of 4.08 shares of Company Common Stock per
share of $2.67 Convertible Preferred Stock, the 415,967 outstanding shares of
$2.67 Convertible Preferred Stock on the Annual Meeting Record Date are
convertible into approximately 1,697,145 shares of Company Common Stock. The
Company may redeem the $2.67 Convertible Preferred Stock at a price of $30.50
per share, plus accrued dividends, upon at least 90 days notice.
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COMPARATIVE RIGHTS OF SHAREHOLDERS
As a result of the Distribution, stockholders of the Company, a Delaware
corporation, will become beneficial owners of the Ordinary Shares of New
Gallaher, a public limited company incorporated under the laws of England and
Wales. The following is a summary of material differences between the rights
of stockholders of the Company and the rights of shareholders of New Gallaher
and of the differences between the corporate laws of Delaware and England and
Wales and the companies' respective charter documents. For information as to
where the governing instruments of the Company and New Gallaher may be
obtained, see "OTHER MATTERS--AVAILABLE INFORMATION" and "OTHER MATTERS--
REPORTS OF NEW GALLAHER."
Pursuant to Section 14 of the Exchange Act and the rules promulgated
thereunder (the "Proxy Rules"), the Company is required to comply with certain
notice and disclosure requirements relating to the solicitation of proxies in
respect of stockholder meetings. As a foreign private issuer, New Gallaher
will not be subject to the Proxy Rules. However, if its application for
admission is accepted, New Gallaher will be subject to the listing rules of
the London Stock Exchange regulating notices of shareholder meetings and
solicitation of proxies. Under the applicable London Stock Exchange
requirements, notice of a shareholder meeting is normally accompanied by a
shareholder circular (or in the case of an Annual General Meeting, by an
annual report and accounts) containing an explanation of the purpose of the
meeting and the Board's recommendations with respect to actions to be taken.
All such communications will be sent to holders of ADSs at approximately the
same time as they are sent to holders of New Gallaher Ordinary Shares. As a
foreign private issuer with securities listed on the NYSE (if its application
for listing is made and accepted) and registered under Section 12 of the
Exchange Act, New Gallaher will also be required under the Exchange Act to
publicly file with the SEC and the NYSE annual reports and other information,
see "OTHER MATTERS--REPORTS OF NEW GALLAHER."
VOTING RIGHTS
Under the Delaware Code, each stockholder is entitled to one vote per share
unless the certificate of incorporation provides otherwise. In addition, the
certificate of incorporation may provide for cumulative voting at all
elections of directors of the corporation. Under the Company Certificate and
By-laws, holders of Company Common Stock are entitled to one vote per share on
all matters, and cumulative voting is not permitted. A quorum consists of a
majority in voting power of the outstanding shares of capital stock entitled
to vote, present in person or represented by proxy, unless otherwise required
by law or the Company Certificate.
Under English law, the voting rights of shareholders are governed by a
company's articles of association, subject to the statutory right of
shareholders to demand a poll (a vote by the number of shares held) at a
general meeting. Cumulative voting is essentially unknown under English law.
Two shareholders entitled to vote and present in person constitute a quorum
for the purposes of a general meeting, unless the company's articles of
association specify otherwise. New Gallaher's Articles of Association specify
that two shareholders entitled to vote and present in person or by proxy
constitute a quorum.
ACTIONS BY WRITTEN CONSENT
Under the Delaware Code, unless the certificate of incorporation provides
otherwise, any action required or permitted to be taken at any meeting of
stockholders may instead be taken without a meeting, without prior notice or a
vote if a written consent to the action is signed by the stockholders
representing the number of shares necessary to take such action at a meeting
at which all shares entitled to vote were present and voted. The Company
Certificate does not permit action to be taken by written consent in lieu of a
meeting.
Under English law, a company's articles of association may provide that a
resolution in writing executed by or on behalf of each shareholder who would
have been entitled to vote upon it if it had been proposed at a general
meeting at which he was present will be as effective as if it had been passed
at a general meeting properly convened and held. New Gallaher's Articles of
Association do not contain any such provision.
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SOURCES AND PAYMENT OF DIVIDENDS
The Delaware Code permits the payment of dividends in cash, property or
capital stock out of surplus or if there is no surplus, out of net profits for
the fiscal year in which the dividend is declared or the preceding fiscal
year, subject to any restrictions contained in the certificate of
incorporation; except that payment of dividends from such net profits is
prohibited when capital represented by stock having a preference on
distribution of assets would be impaired thereby. The Company Certificate does
not restrict the payment of dividends unless Preferred Stock is outstanding
and the dividends thereon have not been paid.
Under English law, a company may pay dividends on its ordinary shares,
subject to the prior rights of holders of its preferred shares, only out of
its distributable profits (namely its accumulated, realized profits less
accumulated, realized losses) and not out of share capital, which includes
share premiums (paid-in surplus). Amounts credited to the share premium
account (representing the excess of the consideration for the issue of
outstanding shares over the aggregate par value of such shares) may not be
paid out as cash dividends but may be used, among other things, to pay up
unissued shares which may then be distributed to shareholders in proportion to
their holdings. In addition, a public company such as New Gallaher may only
make a distribution if, at that time and immediately after such distribution,
the amount of its net assets is not less than the aggregate of its called up
(i.e., issued and paid up) share capital and undistributable reserves.
RIGHTS OF PURCHASE AND REDEMPTION
Under the Delaware Code, a corporation may purchase or redeem its own shares
out of surplus, provided with certain exceptions, that no repurchase or
redemption shall occur (i) when the capital is or would thereby become
impaired, (ii) at a price higher than the redemption price in the case of
stock redeemable at the option of the corporation, or (iii) where in the case
of redemption, such redemption is not authorized by other provisions of
Delaware law. The Company Certificate does not prohibit the reissue of
acquired shares.
Under English law, a company may issue redeemable shares if authorized to do
so by its articles of association and subject to the conditions stated
therein. Such shares may be redeemed only if fully paid and, in the case of
public companies, only, subject as provided below, out of distributable
profits or the proceeds of a new issue of shares made for the purpose of the
redemption. Where redeemable shares are redeemed wholly out of profits the
amount by which the par value of the company's issued share capital is
diminished must be transferred to the capital redemption reserve, which is
generally treated as paid-up share capital. In addition, any amount payable on
redemption of any redeemable shares in excess of the par value must be paid
out of distributable profits unless the shares were issued at a premium. In
that case, any amount payable in excess of the par value thereof may be paid
out of the proceeds of a fresh issue of shares up to an amount equal to
whichever is the lesser of the aggregate of the premiums received by the
company on the issue of those shares or the amount of the company's share
premium account as at the time of the redemption, including any sum
transferred to that account in respect of premiums on the new issue. A company
may purchase its own shares, including any redeemable shares, if authorized by
its articles of association and provided that such purchase has been
previously approved by an ordinary resolution of its shareholders in the case
of an on-market purchase or a special resolution in other cases. The above
provisions that apply to redemption of redeemable shares apply also to
purchases of shares. The London Stock Exchange, on which the New Gallaher
Ordinary Shares are proposed to be listed, requires that purchases by a
company of its own shares within a period of 12 months of 15% or more of its
equity shares must be made by way of a tender or partial offer to all
shareholders of that class, and in the case of a tender offer, at a stated
maximum price or at a fixed price. Notice of a tender offer must be given by
advertising in two U.K. national newspapers at least seven days before the
offer closes. Purchases below the 15% threshold may be made through the market
in the ordinary way provided that the price is not more than 5% above the
average for the five business days before the purchase date of the middle
market quotations (being the average of the bid prices in a day) taken from
the London Stock Exchange Official List.
SPECIAL MEETING OF SHAREHOLDERS
Under the Delaware Code, a special meeting of stockholders may be called by
the board of directors, and by such other person or persons as may be
authorized to do so by the certificate of incorporation or by-laws. The
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Company's By-laws provide that a special meeting of stockholders may be called
only by the Chairman of the Board, the President or the Company Board, by
resolution adopted by a majority of the entire Company Board, for such
purposes as are specified in the call.
Under English law, an extraordinary general meeting of shareholders may be
called by the board of directors or (notwithstanding any provision to the
contrary in a company's articles of association) by a request from
shareholders holding not less than one-tenth of the paid-up capital of the
company carrying voting rights at general meetings. An ordinary resolution
requires 14 clear days notice, and requires a majority vote of those present
and entitled to vote. An extraordinary resolution requires 14 clear days
notice and a three-quarters majority vote of those present and entitled to
vote. A special resolution requires 21 clear days notice and requires a three-
quarters majority vote of those present and entitled to vote. An annual
general meeting requires 21 clear days notice regardless of the type of
resolution to be proposed thereat. "Extraordinary resolutions" are relatively
unusual and are confined to certain matters out of the ordinary course of
business such as a proposal to wind up the affairs of the company. Proposals
which are the normal subject of "special resolutions" generally involve
proposals to change the name of the company, to alter its capital structure in
certain respects, to change or amend the rights of shareholders, to permit the
company to issue new shares for cash without applying the shareholders'
preemptive rights, to amend the company's objects (purpose clause) and
articles of association and to carry out certain other matters where either
the company's articles of association or the 1985 Act prescribe that a
"special resolution" is required. All other proposals relating to the ordinary
course of the company's business, such as the election of directors, would be
the subject of an "ordinary resolution."
RIGHTS OF APPRAISAL
Under the Delaware Code, stockholders who follow prescribed statutory
procedures are entitled to dissent from certain corporate reorganizations and
instead demand payment of the fair cash value of their shares. Unless the
certificate of incorporation provides otherwise, dissenters do not have rights
of appraisal with respect to (i) a merger or consolidation by a corporation,
the shares of which are listed on a national securities exchange or held by
more than 2,000 stockholders, if the stockholders receive shares in the
surviving corporation, shares of another corporation that are publicly listed
or held by more than 2,000 stockholders, cash in lieu of fractional shares or
any combination of the above, or (ii) shareholders of a corporation surviving
a merger if no vote of the stockholders of the surviving corporation is
required to approve the merger. The Company stockholders are not entitled to
appraisal rights in connection with the Distribution. See "INTRODUCTION--NO
APPRAISAL RIGHTS."
While English law does not generally provide for appraisal rights, if a
shareholder applies to a court as described under "Shareholders' Votes on
Certain Reorganizations" below, the court may specify such terms for the
acquisition as it considers appropriate.
PREEMPTIVE RIGHTS
Unless the certificate of incorporation expressly provides otherwise,
stockholders of a Delaware corporation do not have preemptive rights. The
Company Certificate does not provide for preemptive rights.
Under English law, equity securities, which are shares in the company other
than (i) shares which with respect to dividends and capital carry a right to
participate only up to a specified amount in a distribution; and (ii) shares
in an employee share scheme and rights to subscribe for or convert into such
shares, which are to be issued for cash, must be offered in the first instance
to the existing equity shareholders in proportion to the respective nominal
values of their holdings, unless a special resolution has been passed at a
general meeting of shareholders to disapply these preemptive rights. It is the
custom of many English companies listed on the London Stock Exchange, at each
annual general meeting to propose a resolution to authorize the board of
directors to allot up to a specified amount of share capital otherwise than
pro rata to its existing shareholders. It
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is intended that the preemption rights in respect of some of New Gallaher's
authorized, but unissued, share capital will be disapplied. Such
disapplication is to expire at the earlier of the next annual general meeting
of New Gallaher or 15 months after the date of such disapplication.
AMENDMENT OF GOVERNING INSTRUMENTS
Under the Delaware Code, the affirmative vote of a majority of the
"outstanding stock" entitled to vote and of the shares of each class entitled
to vote on the amendment as a class is required. In addition, the affirmative
vote of a majority of the shares of a class is required with respect to
amendments which would (as to the class) (i) increase or decrease the
aggregate number of authorized shares, (ii) increase or decrease the par value
of shares, or (iii) alter or change the powers, preferences, or special rights
of shares so as to affect them adversely. In addition, under the Company
Certificate, the affirmative vote of at least two-thirds of the votes cast by
the shareholders, voting together as a single class at a meeting at which a
quorum is present, is required for the adoption of any amendment to, or repeal
of any provision of the Company Certificate, except as otherwise provided in
the Company Certificate or By-laws, or as required by law.
Under the Delaware Code, the by-laws of a corporation may be amended or
repealed by stockholders entitled to vote, provided, however, the certificate
of incorporation may confer this power to the board of directors. The fact
that such power has been conferred upon the directors does not divest the
stockholders of their power to amend or repeal bylaws. The Company Certificate
provides that the By-laws may be amended or repealed by the Company Board,
except for any by-law that by its terms states it may be amended or repealed
only by action of the stockholders.
Under English law, the shareholders have the authority to alter most
provisions of a company's memorandum and all provisions of its articles of
association by special resolution, subject in the case of certain alterations
to the memorandum of association, to the right of dissenting shareholders to
apply to the courts to cancel the alterations. Under English law, the board of
directors is not authorized to change the memorandum or the articles of
association. Amendments affecting the rights of the holders of any class of
shares may, depending on the rights attached to such class and the nature of
the amendments, also require approval of the classes affected in separate
class meetings.
SHAREHOLDERS' VOTES ON CERTAIN REORGANIZATIONS
The Delaware Code requires a majority vote of the shares entitled to vote in
order to effectuate a merger between two Delaware corporations or between a
Delaware corporation and a corporation organized under the laws of another
state (a "foreign corporation"). However, unless required by the certificate
of incorporation, Delaware law does not require a vote of the stockholders of
a constituent corporation surviving the merger if (i) the merger agreement
does not amend that corporation's certificate of incorporation, (ii) each
share of that corporation's stock outstanding before the effective date of the
merger is identical to an outstanding or treasury share of the surviving
corporation after the merger, and (iii) in the event the merger plan provides
for the issuance of common stock or securities convertible into common stock
by the surviving corporation, the common stock issued and the common stock
issuable upon conversion of the issued securities do not exceed 20% of the
shares outstanding immediately before the effective date of the merger. Any
sale, lease or exchange of all or "substantially all" of a corporation's
assets requires authorization by a majority vote of the outstanding stock
entitled to vote.
In addition to the Delaware Code requirements, the Company Certificate
provides that, except as otherwise provided in the Company Certificate or By-
laws, the affirmative vote of at least 66 2/3% of the votes cast by the
stockholders, voting together as a single class at a meeting at which a quorum
is present, is required for (i) any merger or consolidation of the Company
with or into any other corporation, (ii) any sale or lease of all or
substantially all of the assets of the Company to any other corporation,
person or other entity, or (iii) the dissolution of the Company. Such vote is
required notwithstanding the fact that no vote may be required, or that
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a lesser percentage or separate class vote may be specified, in other
provisions of the Certificate of Incorporation, by-law or in any agreement
with any national securities exchange or otherwise. However, the Company
Certificate does not require the approval of stockholders to authorize (i) a
merger or consolidation in which the Company is the surviving corporation if
(A) the agreement or merger does not amend in any respect the Company
Certificate, (B) each share of stock of the Company outstanding immediately
prior to the effective date of the merger is to be an identical outstanding or
treasury share of the Company after the effective date of the merger, and (C)
either no shares of Company Common Stock and no shares, securities or
obligations convertible into such stock are to be issued or delivered under
the plan of merger, or the authorized unissued shares or the treasury shares
of Company Common Stock to be issued or delivered under the plan of merger
plus those initially issuable upon conversion of any other shares, securities
or obligations to be issued or delivered under such plans do not exceed 20% of
the shares of Company Common Stock outstanding immediately prior to the
effective date of the merger, or (ii) a merger into the Company of any other
corporation if at least 90% of the outstanding shares of each class of stock
of such other corporation is owned by the Company.
Shareholder approval is usually required under the listing rules of the
London Stock Exchange for an acquisition or disposition by a listed company if
the net assets of the company or business to be acquired or disposed of
represent 25% or more of the net asset value of the company or 25% or more of
the value of the company or any of the various other criteria prescribed by
the listing rules of the London Stock Exchange. Where the size of the
acquisition or disposal falls below that level, certain information may
nevertheless be required to be published or circulated to shareholders.
Shareholder approval may also be required for an acquisition or disposal of
assets between a listed company and certain parties including (i) directors of
the company or its subsidiaries, (ii) holders of 10% or more of the votes to
be cast on all (or substantially all) matters at general meetings of the
company, any holding company or subsidiary or (iii) any associate of (i) or
(ii).
The 1985 Act provides for schemes of arrangement, which are arrangements or
compromises between a company and any class of its shareholders (or any class
of its creditors) and are used for certain types of reconstructions,
amalgamations, capital reorganizations or takeovers. They require the approval
at a special meeting of the company of a majority in number of the
shareholders representing 75% of the relevant class of shares present and
voting, either in person or by proxy, and the sanction of the courts. Once so
approved and sanctioned, all shareholders of the relevant class are bound by
the terms of the scheme; a dissenting shareholder would have no rights
comparable to dissenters' rights described below. The 1985 Act also provides
that where a take-over offer (as defined therein) is made for the shares of a
company incorporated in the U.K. and, within four months of the date of the
offer the offeror has, by virtue of acceptances of the offer, acquired or
contracted to acquire not less than nine-tenths in value of the shares to
which the offer relates, the offeror may, within two months of reaching the
nine-tenths level, by notice require shareholders who do not accept the offer
to transfer their shares on the terms of the offer. A dissenting shareholder
may apply to the court within six weeks of the date on which such notice was
given objecting to the transfer or its proposed terms. The court is unlikely
(absent fraud or oppression) to exercise its discretion to order that the
acquisition not take effect, but it may specify such terms of the transfer as
it finds appropriate. A minority shareholder is also entitled in these
circumstances to require the offeror to acquire his shares on the terms of the
offer.
RIGHTS OF INSPECTION
The Delaware Code entitles any stockholder of record, in person or by an
agent, upon written demand under oath stating the purpose thereof, to inspect
during usual business hours, for any proper purpose, the corporation's stock
ledger, a list of its stockholders and its other books and records, and to
make copies or extracts therefrom. A proper purpose means a purpose reasonably
related to such person's interest as a stockholder.
Except when closed in accordance with the provisions of the 1985 Act, the
register of members of an English public company may be inspected during
business hours by its shareholders, including in the case of New Gallaher,
holders of ADSs, without charge and by other persons upon payment of a charge,
and copies may be obtained on payment of a charge. The shareholders of an
English public company, including, in the case of New Gallaher, holders of
ADSs, may, without charge, also inspect the minutes of meetings of the
shareholders
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during business hours and obtain copies upon payment of a charge. The
published annual accounts of an English public company are required to be laid
before the shareholders in general meeting and a shareholder is entitled to a
copy of such accounts. The shareholders of New Gallaher, including the holders
of ADSs, have no rights to inspect the accounting records of the company or
minutes of meetings of directors. Certain registers required to be kept by the
company are open to public inspection and service contracts of directors of
the company (which have more than twelve months unexpired or require more than
twelve months' notice to terminate) must also be available for inspection
during business hours. Rights of inspection during business hours mean that
the company must make the register, index or document available for inspection
for not less than two hours during the period between 9:00 a.m. and 5:00 p.m.
on each business day. The listing rules of the London Stock Exchange require
the service contracts of directors to be open for inspection at certain times
for periods longer than two hours.
CLASSIFICATION OF THE BOARD OF DIRECTORS
Under the Delaware Code, the certificate of incorporation, initial by-laws
or by-laws adopted by a vote of the stockholders of a Delaware corporation may
provide for the classification of the board of directors in order to stagger
the terms of directors. The Company Certificate provides for the Company Board
to be classified into three classes, as nearly equal in number as reasonably
possible. The term "classified board" generally means the specification of
selected board seats for a term of more than one year, with different classes
of board seats coming up for election each year.
Neither English law nor New Gallaher's Articles provide for the same type of
classification. New Gallaher's Articles require that, at every Annual General
Meeting, one-third (or the nearest number to but not exceeding one-third) of
the directors will retire from office and that all vacant directorships may be
filled at that meeting. The directors to retire in each year, in addition to
any director retiring out of choice or by reason of his age (in the case of
New Gallaher, 70), are the directors who have been longest in office since
their last appointment. Where directors were appointed on the same day, the
directors to retire shall be determined by lot. Although this tri-annual
rotation of directors is similar to a classified board, it is different in
that any director who is a member of the one-third of directors who have been
longest in office since their last election or appointment at the time of the
Annual General Meeting will retire from office regardless of the actual year
of such director's last appointment. A retiring director is eligible for re-
election. However, if at any Annual General Meeting the place of a retiring
director is not filled, the retiring director, if willing to act, is deemed to
have been re-appointed, unless at such meeting it is resolved not to fill such
vacated office, or unless a resolution for his re-appointment shall have been
put to the meeting and lost. A director appointed since the last Annual
General Meeting holds office only until the next Annual General Meeting
following his appointment, when he will retire, but will be eligible for re-
election.
REMOVAL OF DIRECTORS
Under the Delaware Code, any director or the entire board of directors may
generally be removed, with or without cause by a majority stockholder vote.
However, a director of a corporation with a classified board of directors may
be removed only for cause unless the certificate of incorporation otherwise
provides. The Company Certificate provides that any one or more directors may
be removed, only for cause, only by the affirmative vote of at least 80% of
the combined voting power of the then outstanding shares of voting stock,
voting together as a single class, at any annual meeting of stockholders or at
a special meeting of stockholders, the notice of which states that removal of
a director or directors is among the purposes of the meeting, subject to the
rights of holders of Preferred Stock to elect additional directors under
specified circumstances.
Under the 1985 Act, shareholders have the right to remove a director by
ordinary resolution of which special notice (28 clear days) has been given to
the company, irrespective of the provisions of the articles of association of
the company.
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VACANCIES ON THE BOARD OF DIRECTORS
As permitted under the Delaware Code, unless the certificate of
incorporation or the by-laws of a corporation provide otherwise, a majority
vote of the directors then in office may fill vacancies and newly created
directorships, even if the number of current directors is less than a quorum
or only one director remains. If the directors filling an open slot on the
board constitute less than a majority of the whole board (as measured before
an increase in the size of the board), the Delaware Court of Chancery may,
upon application of stockholders holding at least 10% of the outstanding
voting shares, summarily order an election to fill the open slot or replace
directors chosen by the directors then in office. Unless otherwise provided in
the certificate of incorporation or by-laws, when one or more directors resign
effective at a future date, a majority of directors then in office, including
those who have so resigned, may vote to fill the vacancy. Under the Company
Certificate and By-laws, all vacancies are to be filled solely by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Company Board, or by a sole remaining
director.
Under English law, shareholders of an English public company may, by
ordinary resolution, appoint a person who is willing to be a director either
to fill a vacancy or as an additional director. The board of directors also
has the power to appoint a director to fill a vacancy or as an additional
director, subject to such conditions as may be set out in the company's
articles of association, provided that such appointment will only last until
the next following annual general meeting of the company, at which the
director concerned may be re-elected.
No person other than a director retiring at an Annual General Meeting will,
unless recommended by the directors, be eligible for the office of director at
the Annual General Meeting unless, not less than seven nor more than 42 days
before the day appointed for the meeting, there has been lodged at the
registered office of New Gallaher, written notice, from a shareholder entitled
to be present and vote at the meeting, of his intention to propose such person
for appointment and written notice, signed by the person to be proposed, of
his willingness to be appointed.
LIABILITY OF DIRECTORS AND OFFICERS
The Delaware Code permits a Delaware corporation to include in its
certificate of incorporation a provision to limit or eliminate the personal
liability of directors to the corporation and its stockholders for breach of
fiduciary duty. However, this provision excludes any limitation on liability
for (i) any breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) willful or
negligent violation of the laws governing the payment of dividends or the
purchase or redemption of stock or (iv) any transaction from which the
director derives any improper personal benefit. The Company Certificate
provides indemnification for directors and officers, with the same limitations
set forth in Delaware law.
English law does not permit a company to include a provision in its articles
of association limiting or eliminating the personal liability of directors for
breach of fiduciary duty.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware Code provides that a corporation may indemnify any person made
a party or threatened to be made a party to any type of proceeding (other than
certain actions by or in right of the corporation) because he or she is or was
a director, officer, employee or agent of the corporation or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, against expenses, judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such proceeding
if such person acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation; or
in a criminal proceeding, if he or she had no reasonable cause to believe his
or her conduct was unlawful. Expenses incurred by an officer or director (or
other employees or agents as deemed appropriate by the board of directors) in
defending civil or criminal proceedings may be paid by the corporation in
advance of the final disposition of such proceeding upon receipt of an
undertaking by or on behalf of such person to repay such amount if it is
ultimately determined that such person is not entitled to be indemnified by
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the corporation. To indemnify a party, the corporation must determine that the
party meets the applicable standards of conduct. The Company's By-laws provide
for indemnification of directors and officers to the full extent permitted by
the Delaware Code.
English law does not permit a company to indemnify a director or an officer
of the company or any person employed by the company as auditor against any
liability which by virtue of any rule of law would otherwise attach to him in
respect of negligence, default, breach of duty or breach of trust in relation
to the company except liability incurred by such director, officer or auditor
in defending any legal proceedings (whether civil or criminal) in which
judgment is given in his favor or in which he is acquitted or in certain
instances where, although he is liable, a court finds that such director,
officer or auditor acted honestly and reasonably and that having regard to all
the circumstances he ought fairly to be excused and relief is granted by the
court. Section 310 of the 1985 Act enables companies to purchase and maintain
insurance for directors, officers and auditors against any liability (civil or
criminal) which would otherwise attach to them in respect of any negligence,
default, breach of duty or breach of trust in relation to the company.
SHAREHOLDERS' SUITS
Under the Delaware Code, a stockholder may institute a lawsuit against one
or more directors, either on his own behalf, or derivatively on behalf of the
corporation.
In addition to having the right to institute a lawsuit on behalf of the
company in certain limited circumstances under English law, Section 459 of the
1985 Act permits an individual shareholder to apply for a court order where
the company's affairs are being or have been conducted in a manner unfairly
prejudicial to the interests of the shareholders generally or some part of the
shareholders, including at least such shareholder, or when any actual or
proposed act or omission of the company is or would be so prejudicial. A court
when granting relief has wide discretion, including authorizing civil
proceedings to be brought in the name of the company by a shareholder on such
terms as the court may direct. Except in these limited respects, English law
does not permit class action lawsuits by shareholders on behalf of the company
or on behalf of other shareholders.
CERTAIN PROVISIONS RELATING TO SHARE ACQUISITIONS
Pursuant to the Delaware Code, with certain exceptions, a Delaware
corporation may not engage in any of a broad range of business combinations,
such as mergers, consolidations and sales of assets, with an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless (i) the transaction that results in the
person's becoming an interested stockholder or the business combination is
approved by the board of directors of the corporation before the person
becomes an interested stockholder, (ii) upon consummation of the transaction
which results in the stockholder becoming an interested stockholder, the
interested stockholder owns 85% or more of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding shares owned by
persons who are directors and officers and shares owned by certain employee
stock plans or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board
of directors and by holders of at least two-thirds of the corporation's
outstanding voting stock, excluding shares owned by the interested
stockholder, at a meeting of stockholders. Under Delaware law, an "interested
stockholder" is defined as any person, other than the corporation and any
direct or indirect majority-owned subsidiary, that is (i) the owner of 15% or
more of the outstanding voting stock of the corporation or (ii) an affiliate
or associate of the corporation and was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder. Such provision does not
apply to a corporation that so provides in an amendment to its certificate of
incorporation or by-laws passed by a majority of its outstanding shares at any
time. Such stockholder action does not become effective for 12 months
following its adoption and would not apply to persons who were already
interested stockholders at the time of the amendment. The Company Certificate
does not contain such a provision.
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In the case of a company listed on the London Stock Exchange, shareholder
approval may be required for certain acquisitions or disposals of assets
involving directors or substantial shareholders or their associates. See "--
Shareholders' Votes on Certain Reorganizations." In addition, takeovers of
public companies are regulated by the City Code on Takeovers and Mergers (the
"City Code"), non-statutory rules not enforceable at law but administered by
the Panel on Takeovers and Mergers, a body comprising representatives of
certain City of London financial and professional institutions which oversees
the conduct of such takeovers. One of the provisions of the City Code is to
the effect that (i) when any person acquires, whether by a series of
transactions over a period of time or not, shares which (taken together with
shares held or acquired by persons acting in concert with him) carry 30% or
more of the voting rights of a public company; or (ii) when any person,
together with persons acting in concert with him, holds not less than 30% but
not more than 50% of the voting rights and such person, or any person acting
in concert with him, acquires in any period of twelve months additional shares
carrying more than 1% of the voting rights, such person must generally make an
offer for all of the equity shares of the company (whether voting or non-
voting) for cash, or accompanied by a cash alternative, at not less than the
highest price paid for the relevant shares during the twelve months preceding
the date of the offer.
DISCLOSURE OF INTERESTS
Section 198 of the 1985 Act provides that a person (including a company and
other legal entities) who acquires an interest or becomes aware that he has
acquired a material interest of 3% or more (including an interest in ADSs) or
an interest (whether or not including material interests) of 10% or more of
the nominal value of any class of shares comprised in a public company's
"relevant share capital" (which, for these purposes, means that company's
issued share capital carrying rights to vote in all circumstances at general
meetings of the company) in certain circumstances is obliged to notify that
company, in writing, of his interest within two days following the day on
which the obligation arises. Thereafter, similar notification must be made
where the percentage level of interest increases or decreases through 3% or
10% or any greater whole number percentage. The New Gallaher Ordinary Shares
are "relevant share capital" for this purpose.
In addition, Section 212 of the 1985 Act provides that a public company may
by notice in writing (a "Section 212 Notice") require a person whom the
company knows or has reasonable cause to believe to be, or to have been at any
time during the three years immediately preceding the date on which the notice
is issued, interested in shares comprised in the company's "relevant share
capital" to confirm that fact or (as the case may be) to indicate whether or
not that is the case, and where he holds or has during the relevant time held
an interest in such shares, to give such further information as may be
required relating to his interest and any other interest in the shares of
which he is aware. The disclosure must be made within such reasonable period
as may be specified in the relevant notice (which may, depending on the
circumstances, be as short as one or two days).
For the purpose of the above obligations, the interest of a person in shares
means any kind of interest (including an interest in ADSs) in shares including
interests in any shares (i) in which his spouse, or his child or stepchild
under the age of 18 is interested, (ii) if a corporate body is interested in
them and either (a) that corporate body is or its directors are accustomed to
act in accordance with that person's directions or instructions or (b) that
person controls one-third or more of the voting power of that corporate body,
or (iii) if another party is interested in shares and the person and that
other party are parties to a "concert party" agreement under Section 204 of
the 1985 Act (being an agreement which provides for one or more parties to it
to acquire interests in shares of a particular public company, which imposes
obligations or restrictions on any one or more of the parties as to the use,
retention or disposal of such interests acquired pursuant to such agreement
and any interest in the company's shares is in fact acquired by any of the
parties pursuant to the agreement).
Where a Section 212 notice is served by a company on a person who is or was
interested in shares of the company and that person fails to give the company
any information required by the notice within the time specified in the
notice, the company may apply to the court for an order directing that the
shares in question be subject to restrictions prohibiting, inter alia, any
transfer of those shares, the exercise of voting rights in respect of such
shares, the issue of further shares in respect of such shares and, other than
in a liquidation, payments,
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including dividends, in respect of such shares. Such restrictions may also
void any agreement to transfer such shares. In addition, a person who fails to
fulfill the obligations described above is subject to criminal penalties in
the U.K. Under New Gallaher's Articles, certain of the powers of imposing
restrictions granted to the courts may be imposed by the New Gallaher Board in
certain circumstances.
CERTAIN LONDON STOCK EXCHANGE LISTING REQUIREMENTS
In addition to the provisions of its Articles and the 1985 Act, if the New
Gallaher Ordinary Shares are accepted for listing on the London Stock
Exchange, New Gallaher will be subject to the listing rules made under Section
142 of the Financial Services Act 1986 as set out in the listing rules of the
London Stock Exchange and in particular to the continuing obligations under
those rules. Among other things, these rules require a listed company to
notify the London Stock Exchange of any information necessary to enable
holders of listed securities and the public to appraise the position of the
company and to avoid the establishment of a false market in its listed
securities. The company must ensure equality of treatment for all holders of
listed securities who are in the same position and, where its securities are
listed on more than one stock exchange, must ensure that equivalent
information is made available to the market on each exchange on which its
securities are listed. In addition, the listing rules impose obligations on
listed companies to send the following information to shareholders:
1. Details relating to certain acquisitions, disposals, takeovers,
mergers and offers either made by or in respect of the company;
2. An explanatory circular, whenever a general meeting of the
shareholders is convened which includes any business other than routine
business at an annual general meeting (routine business includes such items
as declarations of final dividends, approval of the report and accounts,
re-election of directors, appointment of auditors and renewal of
authorities to allot securities and of disapplications of statutory pre-
emption rights).
In addition to the above requirements, a company is required to notify the
London Stock Exchange of certain notifications received by the company of
persons holding an interest in 3% or more of any class of the company's
relevant share capital, any changes in the New Gallaher Board, any purchase or
redemption by the company of its own equity securities, any directors'
interests in the shares or the debentures of their company and changes in the
capital structure of the company. Half yearly reports of results for the first
six months of any fiscal year, the preliminary announcement of results for
each full fiscal year and the annual report and accounts must also be
published.
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U.S. FEDERAL AND U.K. TAX CONSIDERATIONS
The following discussion summarizes certain U.S. federal and U.K. tax
considerations relating to the Distribution and to the acquisition, ownership
and disposition by a beneficial owner of the New Gallaher Ordinary Shares and
the ADSs. The statements made herein, although not purporting to describe all
of the U.S. federal and U.K. tax considerations that may be relevant to a
beneficial owner of Company Common Stock, in the opinion of Chadbourne & Parke
LLP, fairly summarize the U.S. federal tax matters discussed, and, in the
opinion of Simmons & Simmons, fairly summarize the U.K. tax matters discussed.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION TO THE COMPANY AND TO
BENEFICIAL OWNERS OF COMPANY COMMON STOCK
The Company has requested a ruling from the IRS substantially to the effect
that, among other things, the Distribution will qualify under Section 355 of
the Internal Revenue Code as a tax-free spin-off to beneficial owners of
Company Common Stock. Under Section 355 of the Internal Revenue Code, in
general:
1. Beneficial owners of Company Common Stock will not recognize any
taxable income, gain or loss as a result of the Distribution, except that
beneficial owners of Company Common Stock that receive cash in lieu of
fractional shares will recognize gain or loss equal to the difference
between such cash and the tax basis of their Company Common Stock allocated
to such fractional shares. Any such gain or loss will constitute capital
gain or loss if such fractional shares would have been held as a capital
asset on the Distribution Date.
2. Beneficial owners of Company Common Stock will apportion the tax basis
of their Company Common Stock among such Company Common Stock and any New
Gallaher Ordinary Shares or ADSs (including fractional shares of New
Gallaher Ordinary Shares or ADSs) received by such beneficial owners in the
Distribution in proportion to the relative fair market values of such
Common Stock, Ordinary Shares or ADSs on the Distribution Date.
3. The holding period for the New Gallaher Ordinary Shares or ADSs
received in the Distribution by beneficial owners of Company Common Stock
will include the period during which such beneficial owners held the
Company Common Stock with respect to which the Distribution was made,
provided that such Company Common Stock is held as a capital asset by such
beneficial owners on the Distribution Date.
4. Except as described in the next paragraph, the Distribution will not
be treated as a taxable disposition of New Gallaher by the Company.
The receipt of an IRS ruling, substantially to the foregoing effect, is a
condition to the Distribution. The Company Board has reserved the right to
waive the receipt of such ruling as a condition to consummation of the
Distribution. The Company Board will not waive such condition unless, in the
Company Board's judgment, based on the opinion of counsel, Section 355 of the
Internal Revenue Code will apply to the Distribution.
Even if the Distribution qualifies as a spin-off under Section 355 of the
Internal Revenue Code and would be tax-free to the beneficial owners of
Company Common Stock and generally tax-free to the Company, the Company will
be required to pay U.S. corporate income tax in connection with the
Distribution based on the difference between the fair market value of the New
Gallaher Ordinary Shares or ADSs and the Company's adjusted tax basis in the
New Gallaher Ordinary Shares or ADSs to the extent such New Gallaher Ordinary
Shares or ADSs are distributed to beneficial owners of Company Common Stock
who, at the time of the Distribution, are foreign persons with respect to the
United States. The Company believes that the foreign beneficial share
ownership of Company Common Stock is very small and consequently believes that
the resulting U.S. federal income tax liability would not be material to the
transaction.
In connection with the Distribution, the consolidated indebtedness of the
Company will be allocated between New Gallaher and the Company. Such
allocation will be made by New Gallaher borrowing and distributing to the
Company pounds sterling in the range of 925 million (net cash proceeds of
approximately $1.25 billion) prior to the Distribution.
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The Company is routinely the subject of IRS, state, local and foreign tax
audits with respect to on-going business operations, and assertions of
additional tax liability in the course of such audits are a routine matter.
The Company believes that it has adequately provided for any additional taxes
that may become due as a result of such tax audits or in connection with
aspects of the Distribution and pre-Distribution transactions for which the
Company has not sought rulings from the IRS.
Current Treasury regulations require each beneficial owner of Company Common
Stock who receives New Gallaher Ordinary Shares or ADSs pursuant to the
Distribution to attach to his or her federal income tax return for the year in
which the Distribution occurs a detailed statement setting forth such data as
may be appropriate in order to show the applicability of Section 355 of the
Internal Revenue Code to the Distribution. The Company will provide the
appropriate information to each holder of record of Company Common Stock as of
the Distribution Record Date.
POTENTIAL TAXABILITY
Factual representations and assumptions. An IRS ruling substantially to the
effect that the Distribution will qualify as a tax-free spin-off to the
holders of Company Common Stock under Section 355 of the Internal Revenue
Code, while generally binding upon the IRS, is subject to certain factual
representations and assumptions. If the Company Board waives the receipt of
such IRS ruling as a condition to consummation of the Distribution and
consummates the Distribution based on an opinion of counsel, such opinion is
also subject to certain factual representations and assumptions and is not
binding upon the IRS. If such factual representations and assumptions were
incorrect in any material respect, such ruling or opinion of counsel could
become invalid. The Company is not aware of any facts or circumstances which
would cause such representations and assumptions to be untrue. Each of the
Company and New Gallaher has agreed to certain restrictions on each of their
future actions to provide further assurances that Section 355 of the Internal
Revenue Code will apply to the Distribution. If the Distribution were not to
qualify under Section 355 of the Internal Revenue Code, then, in general, a
U.S. corporate tax (which would be very substantial) would be payable by the
Company based upon the difference between (x) the fair market value of the New
Gallaher Ordinary Shares or ADSs and (y) the Company's adjusted basis in such
New Gallaher Ordinary Shares or ADSs. If the Distribution occurred and it were
not to qualify under Section 355 of the Internal Revenue Code, the Company's
resulting tax liability would have a material adverse effect on the financial
position, results of operations and cash flows of either Fortune Brands or of
New Gallaher, depending on which corporation actually bears the obligation for
the payment of such taxes pursuant to the Tax Allocation Agreement. See "--
RELATIONSHIP BETWEEN NEW GALLAHER AND FORTUNE BRANDS AFTER THE DISTRIBUTION--
Tax Allocation Agreement."
Furthermore, if the Distribution were not to qualify as a tax-free spin-off
to the beneficial owners of Company Common Stock under Section 355 of the
Internal Revenue Code, each beneficial owner of Company Common Stock becoming
the beneficial owner of New Gallaher Ordinary Shares or ADSs as a result of
the Distribution would be treated as if such beneficial owner had received a
distribution in an amount equal to the fair market value of New Gallaher
Ordinary Shares or ADSs beneficially owned, which would be taxable as (x) a
dividend to the extent of such beneficial owner's pro rata share of the
Company's current and accumulated earnings and profits, (y) a reduction in
such beneficial owner's basis in Company Common Stock to the extent the amount
received exceeds such beneficial owner's share of such earnings and profits
and (z) gain from the exchange of Company Common Stock to the extent the
amount received exceeds both such beneficial owner's share of earnings and
profits and such beneficial owner's basis in Company Common Stock.
Possible Impact of Proposed Treasury Regulations. Under proposed Treasury
Regulations, a U.S. corporation that distributes to its shareholders the
shares of a foreign subsidiary in a transaction qualifying as a tax-free spin-
off to its shareholders under Section 355 of the Internal Revenue Code would
be required to pay U.S. federal corporate income tax on the difference between
the fair market value and the adjusted tax basis of all the shares
distributed, except to the extent such shares are distributed to beneficial
owners who are U.S. corporations. Such regulations are proposed to be
effective for distributions that occur on or after the date that is 30 days
after the date final regulations are published in the Federal Register. It is
not possible to predict when
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such final regulations may be issued or the content of such final regulations.
If the final regulations are issued in their presently proposed form and
become effective prior to the Distribution, the Company will not go forward
with the Distribution if the final regulations will be applicable to the
Distribution.
U.K. TAX CONSEQUENCES OF THE DISTRIBUTION TO U.K. HOLDERS OF COMPANY COMMON
STOCK
The receipt of New Gallaher Ordinary Shares or ADSs in the Distribution by
beneficial owners of Company Common Stock who are resident in the U.K. will be
treated as income rather than capital for U.K. tax purposes since the
Distribution will not involve an exempt distribution under Section 213 of the
Income and Corporation Taxes Act 1988 (the "1988 Act").
For the purposes of U.K. capital gains tax or U.K. corporation tax on
chargeable gains, the "base cost" of the Company Common Stock in the hands of
such beneficial owners of Company Common Stock will not be affected by the
Distribution. The "base cost" of the New Gallaher Ordinary Shares or ADSs
received by such beneficial owners in the Distribution will be equal to the
market value of such New Gallaher Ordinary Shares or ADSs at the time of the
Distribution.
The U.K. Inland Revenue has given clearance under Section 707 of the 1988
Act confirming that no notice to counteract a tax advantage ought to be given
by the U.K. Inland Revenue under Section 703 of the 1988 Act in respect of the
Distribution.
THE FOREGOING SUMMARY OF THE ANTICIPATED U.S. FEDERAL AND U.K. INCOME TAX
CONSEQUENCES OF THE DISTRIBUTION IS FOR GENERAL INFORMATION ONLY. COMPANY
STOCKHOLDERS SHOULD CONSULT THEIR OWN ADVISORS AS TO THE SPECIFIC TAX
CONSEQUENCES OF THE DISTRIBUTION, INCLUDING THE APPLICATION AND EFFECT OF
FOREIGN, STATE AND LOCAL TAX LAWS.
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U.S. FEDERAL AND U.K. TAX TREATMENT OF NEW GALLAHER SHAREHOLDERS
The following discussion summarizes certain U.S. federal and U.K. tax
considerations relating to the acquisition, ownership and disposition of the
New Gallaher Ordinary Shares and the ADSs by a beneficial owner thereof.
The discussion of U.S. federal tax considerations is based upon the Internal
Revenue Code, the Treasury regulations promulgated thereunder, and judicial
and administrative interpretations thereof, all as in effect on the date
hereof and which are subject to change, possibly with retroactive effect. The
discussion of U.K. tax considerations is based upon current U.K. tax law,
practice, and court decisions which are subject to change. The discussion is
also based on the U.S./U.K. double taxation treaties relating to income and
capital gains (the "Treaty") and to estate and gift taxes (the "Estate Tax
Treaty"), which are also subject to change.
This summary relates only to a beneficial owner who is resident or
ordinarily resident in the U.K. for U.K. tax purposes (a "U.K. Holder") or who
is a citizen or a resident of the United States, a corporation organized under
the laws of the United States, any other person who is otherwise subject to
U.S. federal income tax on a net basis with respect to worldwide income or any
trust if a court within the U.S. is able to exercise primary supervision over
the administration of such trust and one or more U.S. fiduciaries have the
authority to control all the substantial decisions of such trust (a "U.S.
Holder").
It is possible for U.K. resident companies to elect to pay a cash dividend
as a "foreign income dividend" (a "FID"). New Gallaher has no present
intention to elect to treat any dividend as a FID, and, accordingly, the
following discussion assumes that any dividend paid by New Gallaher will not
be paid as a FID.
U.S. HOLDERS
The summary of the U.S. federal tax considerations for U.S. Holders is
generally limited to U.S. Holders that will hold the New Gallaher Ordinary
Shares or ADSs as "capital assets" and whose functional currency is the U.S.
dollar, and does not address the U.S. federal tax consequences to U.S. Holders
that may be subject to special U.S. federal income tax rules, such as
insurance companies, tax-exempt organizations, or banks, that hold the New
Gallaher Ordinary Shares or ADSs as part of a "straddle", "hedge" or
"conversion transaction", or that own (directly, indirectly or by attribution)
10% or more of the outstanding New Gallaher Ordinary Shares (including New
Gallaher Ordinary Shares represented by ADSs).
U.K. Taxation of Dividends. Upon the payment of a dividend, New Gallaher
must generally pay to the U.K. Inland Revenue advance corporation tax ("ACT")
at a current rate of 25% of the dividend paid. An Eligible U.S. Holder (as
defined below) who receives a dividend will generally be entitled under the
Treaty to receive from the U.K. Inland Revenue a refund of any ACT paid by New
Gallaher with respect to such dividend (the "Treaty Payment"). The Treaty
Payment will generally equal (i) the ACT paid by New Gallaher with respect to
such dividend (the "Paid ACT") reduced by (ii) an amount equal to 15% of the
sum of the dividend plus the Paid ACT (the "15% U.K. Withholding Tax").
For example, if New Gallaher were to pay an (Pounds)80 dividend to an
Eligible U.S. Holder and pay (Pounds)20 of ACT with respect to the dividend,
the Eligible U.S. Holder would be entitled to a Treaty Payment of (Pounds)5
(i.e., the Paid ACT of (Pounds)20 minus 15% of the sum of the (Pounds)80
dividend plus the (Pounds)20 Paid ACT) resulting in a total cash receipt
(before U.S. taxes) of (Pounds)85. (As noted below under "U.S. Taxation of
Dividends", the Eligible U.S. Holder in this example would generally have
taxable income for U.S. federal income tax purposes of (Pounds)100 (i.e., the
(Pounds)80 dividend received plus the Paid ACT of (Pounds)20) and a (Pounds)15
foreign tax credit or deduction.)
The term "Eligible U.S. Holder" means a U.S. Holder of New Gallaher Ordinary
Shares or ADSs and the dividend paid thereon that satisfies the following
conditions:
(i) the U.S. Holder is an individual or a corporation that is a resident
of the U.S. for the purposes of the Treaty (and, in the case of a
corporation, is not also a resident of the U.K. for U.K. tax purposes);
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(ii) the U.S. Holder is not a corporation that, either alone or together
with one or more associated corporations, controls, directly or indirectly,
at least 10% of the New Gallaher Ordinary Shares, including the New
Gallaher Ordinary Shares represented by ADSs;
(iii) the U.S. Holder does not hold the New Gallaher Ordinary Shares or
ADSs in a manner that is effectively connected with a permanent
establishment in the U.K. through which such U.S. Holder conducts business
or with a fixed base in the U.K. from which such U.S. Holder performs
independent personal services;
(iv) under certain circumstances, the U.S. Holder is not exempt from U.S.
federal income tax on dividend income in the U.S.;
(v) under certain circumstances, the U.S. Holder does not own 10% or more
of the New Gallaher Ordinary Shares (including New Gallaher Ordinary Shares
represented by ADSs); and
(vi) under certain circumstances, the U.S. Holder is not an investment or
holding company 25% or more of the capital of which is owned, directly or
indirectly, by persons that are not individual residents or citizens of the
U.S.
If the U.S. Holder is a partnership, trust or estate, the Treaty Payment
will be available with respect to a New Gallaher dividend only to the extent
the dividend income derived by the partnership, trust or estate is subject to
U.S. federal income tax as income of a U.S. resident, either in its hands or
the hands of its partners, grantor or beneficiaries, as the case may be.
Under Section 812 of the 1988 Act, the U.K. Treasury has power in certain
circumstances to deny the payment of ACT refunds under the Treaty to a
corporate shareholder of New Gallaher if it or an associated company has a
qualifying presence in a country which operates a unitary system of corporate
taxation. This power comes into force only if the U.K. Treasury so prescribes
by statutory instrument. No such instrument has yet been made.
New Gallaher intends to attempt to establish with the U.K. Inland Revenue an
arrangement whereby, subject to certain exceptions, the Treaty Payment will be
remitted, together with the associated dividend, to an Eligible U.S. Holder
provided the Eligible U.S. Holder completes a declaration confirming
entitlement to the Treaty Payment. An Eligible U.S. Holder who does not come
within these arrangements and who wishes to claim a Treaty Payment must do so
in the manner and at the time prescribed in IRS Revenue Procedure 80-18, 1980-
1 C.B. 623 and IRS Revenue Procedure 81-58, 1981-2 C.B. 678 (the "IRS Revenue
Procedures"). Under U.K. law, claims for Treaty Payments normally must be made
within six years following the end of the U.K. year of assessment (generally
ending April 5th in each year) in which the dividend is paid. The first such
claim by an Eligible U.S. Holder for a payment under the IRS Revenue
Procedures is made by sending the appropriate U.K. form in duplicate to the
Director of the Internal Revenue Service Center with which the Eligible U.S.
Holder's last U.S. federal income tax return was filed. If the Eligible U.S.
Holder qualifies as a U.S. resident, the IRS will certify the form to that
effect and forward it to the U.K. Inland Revenue. Forms may be obtained by
writing to the Internal Revenue Service, Assistant Commissioner
(International), 950 L'Enfant Plaza South, S.W., Washington D.C. 20004,
Attention: Taxpayers Service Division. Because a refund claim is not
considered made until the U.K. Inland Revenue receives the appropriate form
from the IRS, forms should be sent to the IRS well before the end of the
applicable limitations period. Any claim under the IRS Revenue Procedures
after the first claim should be filed directly with U.K. Inland Revenue, FICO
International, Fitz Roy House, P.O. Box 46, Castle Meadow Road, Nottingham,
NC2 1BD, U.K.
U.S. Holders who are not resident or ordinarily resident in the U.K. and
have no other source of U.K. income are not required to file a U.K. income tax
return.
It should be noted that no entitlement to a Treaty Payment will arise in
respect of a dividend if the draft legislation contained in the Finance Bill
as mentioned below under the heading "U.K. Holders--U.K. Taxation of
Dividends" is enacted and applies. The legislation should not apply to normal
dividends paid by New Gallaher.
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U.S. Taxation of Dividends. A U.S. Holder receiving a distribution from New
Gallaher will be required to include the gross amount of such distribution
(including, if applicable, the Treaty Payment and the 15% U.K. Withholding
Tax) in gross income as a taxable dividend to the extent that such
distribution is paid from New Gallaher's current or accumulated earnings and
profits, as determined under U.S. federal income tax principles. Any
distributions in excess of New Gallaher's earnings and profits will be
treated, for U.S. federal income tax purposes, first as a non-taxable return
of capital to the extent of the U.S. Holder's basis in the New Gallaher
Ordinary Shares or ADSs, and then as gain from the sale or exchange of such
New Gallaher Ordinary Shares or ADSs. U.S. corporate holders will not be
allowed a deduction for dividends received in respect of distributions on New
Gallaher Ordinary Shares or ADSs.
For U.S. federal income tax purposes, the amount of any cash distribution
made in pounds sterling will be equal to the U.S. dollar value of such pounds
sterling generally on the date of receipt (which, in the case of a U.S. Holder
of ADSs, will be the date of receipt by the Depositary), regardless of whether
the payment is actually converted into U.S. dollars. If a U.S. Holder converts
pounds sterling into U.S. dollars or otherwise disposes of them at a time when
their U.S. dollar value is greater or less than at the time of receipt, such
U.S. Holder may recognize U.S.-source ordinary income or loss.
The 15% U.K. Withholding Tax will be treated for U.S. tax purposes as a
foreign income tax that may be claimed, subject to certain complex
limitations, as a foreign tax credit against the U.S. federal income tax
liability of the U.S. Holder. Dividends from New Gallaher will generally
constitute foreign-source income and will generally be classified as "passive
income" for purposes of determining the U.S. foreign tax credit limitation. In
lieu of claiming a U.S. foreign tax credit, the U.S. Holder may elect to claim
a deduction for the U.K. tax withheld against such U.S. Holder's U.S. federal
income. The rules relating to the determination of the U.S. foreign tax credit
are complex, and prospective investors should consult their own tax advisors
with respect thereto.
A U.S. Holder of New Gallaher Ordinary Shares or ADSs will be exempt from
the 31% U.S. backup withholding tax with respect to dividends received from
New Gallaher, if such U.S. Holder (i) is a corporation or other exempt
recipient and, if required, demonstrates its status as such, or (ii) provides
to a paying agent a U.S. taxpayer identification number and otherwise complies
with any applicable backup withholding requirements.
U.K. Taxation of Capital Gains. A U.S. Holder who is not resident or
ordinarily resident for tax purposes in the United Kingdom will not be liable
for U.K. tax on chargeable gains realized on the disposal of New Gallaher
Ordinary Shares or ADSs unless such U.S. Holder carries on a trade, profession
or vocation in the United Kingdom through a branch or agency and the New
Gallaher Ordinary Shares or ADSs are or have been used, held or acquired for
the purposes of such trade, profession or vocation or for the purposes of such
branch or agency.
The surrender of ADSs in exchange for the deposited New Gallaher Ordinary
Shares represented thereby will not be a taxable event for the purposes of
U.K. corporation tax on chargeable gains or U.K. capital gains tax.
Accordingly, U.S. Holders will not recognize any taxable gain or loss for such
purposes upon such surrender.
U.S. Taxation of Capital Gains. A U.S. Holder will generally recognize U.S.-
source taxable gain or loss for U.S. federal income tax purposes upon the sale
or other disposition of the New Gallaher Ordinary Shares or ADSs, subject to
applicable rules and exceptions set forth in the Internal Revenue Code. The
amount of such gain or loss will be equal to the difference between the amount
realized on the sale and the U.S. Holder's adjusted basis in the New Gallaher
Ordinary Shares or ADSs. Gain or loss upon the sale of the New Gallaher
Ordinary Shares or ADSs will be capital gain or loss if such Ordinary Shares
or ADSs are capital assets in the hands of the U.S. Holder and will be long-
term or short-term capital gain or loss, depending on whether such Ordinary
Shares or ADSs have a holding period of more than one year. Certain
limitations exist on the deductibility of
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capital losses by both corporate and individual taxpayers. Any tax imposed by
the U.K. directly on the gain from such a sale or other disposition would
generally be eligible for the U.S. foreign tax credit; however, because the
gain would be U.S.-source, the U.S. Holder might not be able to use the credit
otherwise available because of the foreign tax credit limitation rules. The
rules relating to the determination of the U.S. foreign tax credit are complex
and prospective investors should consult their own tax advisors with respect
thereto.
The surrender of ADSs in exchange for the deposited New Gallaher Ordinary
Shares represented thereby will not be a taxable event for U.S. federal income
tax purposes. Accordingly, no taxable gain or loss will be recognized for such
purposes upon such surrender.
A U.S. Holder of New Gallaher Ordinary Shares or ADSs will be exempt from
the 31% U.S. backup withholding tax with respect to proceeds of a sale or
other disposition of such New Gallaher Ordinary Shares or ADSs if such U.S.
Holder (i) is a corporation or other exempt recipient and, if required,
demonstrates its status as such, or (ii) provides to a paying agent or a
broker, as the case may be, a U.S. taxpayer identification number and
otherwise complies with any applicable backup withholding requirements.
U.K. HOLDERS
The summary of U.K. tax considerations for U.K. Holders does not address the
U.K. tax consequences to U.K. Holders of New Gallaher Ordinary Shares who, for
any reason, are subject to special tax regimes, such as dealers in securities,
insurance companies and other financial institutions.
U.K. Taxation of Dividends. No U.K. income tax is withheld from dividend
payments by New Gallaher. However, on paying a dividend, New Gallaher is
generally liable to account to the U.K. Inland Revenue for ACT at a current
rate of one quarter of the dividend paid. ACT paid by New Gallaher can
generally be set against its liability to mainstream corporation tax, subject
to certain limits and restrictions.
A U.K. resident individual shareholder will generally be entitled to a tax
credit in respect of any dividend received equal to one-quarter of the amount
of the dividend. Liability to U.K. income tax is calculated on the sum of the
dividend and the tax credit. The tax credit therefore equals 20% of the
combined amount of the dividend and tax credit. The tax credit will be
available to offset such a shareholder's liability to income tax on the
dividend. A shareholder liable to income tax at the lower or basic rates will
have no further liability to income tax on the dividend. In appropriate cases,
the tax credit may be reclaimed in cash from the U.K. Inland Revenue. A U.K.
resident corporate shareholder will not normally be liable to U.K. taxation on
any dividend received and will generally be able to treat the dividend and
related tax credit as franked investment income.
Draft legislation is contained in the U.K. Finance Bill currently before
Parliament which, if enacted, will affect the treatment of certain dividends
associated with transactions in securities and certain other income
distributions. The legislation should not apply to normal dividends paid by
New Gallaher.
U.K. Taxation of Capital Gains. U.K. Holders of New Gallaher Ordinary Shares
may, depending upon their particular circumstances, be liable to U.K. capital
gains tax or U.K. corporation tax on chargeable gains on a disposal of New
Gallaher Ordinary Shares. For such U.K. Holders who received those New
Gallaher Ordinary Shares in the Distribution, the gain, if any, on which such
U.K. tax liability will arise will be the difference between the "base cost"
of those New Gallaher Ordinary Shares, being their market value at the time of
the Distribution, adjusted for inflation to the date of disposal, and the
consideration given for that disposal.
OTHER HOLDERS
U.K. Taxation of Dividends. Dividends paid on New Gallaher Ordinary Shares
or ADSs will not be subject to a U.K. withholding tax. Whether Holders of New
Gallaher Ordinary Shares or ADSs who are resident in countries other than the
U.K. or the U.S. are entitled to a payment from the Inland Revenue of a
proportion of the tax credit in respect of any dividends received depends in
general upon the provisions of any double taxation
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convention which exists between such countries and the U.K. However, such
other holders of New Gallaher Ordinary Shares or ADSs who are Commonwealth
citizens or fall into certain categories of person within Section 278 of the
1988 Act (including nationals of member states of the European Economic Area)
may be entitled to a tax credit which they may set off against their total
U.K. income tax liability or, in appropriate cases, reclaim in cash. Such
holders should consult their own tax advisers as to whether they are entitled
to reclaim any part of the tax credit, the procedure for claiming payment and
what relief or credit may be claimed in respect of such tax credit in their
own jurisdictions.
U.K. Taxation of Capital Gains. Holders of New Gallaher Ordinary Shares or
ADSs who are resident in countries other than the U.K. or the U.S. and who are
not resident or ordinarily resident for tax purposes in the U.K. will not be
liable for U.K. tax on capital gains on the disposal of such New Gallaher
Ordinary Shares or ADSs unless such holders carry on a trade, profession or
vocation in the U.K. through a branch or agency and the New Gallaher Ordinary
Shares or the ADSs are or have been used, held or acquired for the purposes of
such trade, profession or vocation or for the purposes of such branch or
agency.
The surrender of ADSs in exchange for the deposited New Gallaher Ordinary
Shares represented thereby will not be a taxable event for the purposes of
U.K. corporation tax on chargeable gains or U.K. capital gains tax.
Accordingly, such holders will not recognize any taxable gain or loss for such
purposes upon such surrender.
U.K. INHERITANCE AND GIFT TAXES
U.K. Holders. New Gallaher Ordinary Shares will be situated in the U.K. for
U.K. inheritance tax purposes. A gift of those New Gallaher Ordinary Shares or
the death of their Holder may, as a result, subject to certain exemptions and
reliefs, give rise to a liability for U.K. inheritance tax even if the Holder,
at the time of the gift or his death, is neither domiciled, nor deemed to be
domiciled, in the U.K. Whether ADSs will be situated in the U.K. will depend
upon the nature of the arrangements under the Depositary Facility. If situated
outside the U.K., ADSs would not be subject to U.K. inheritance tax in the
case of a Holder who, at the time of the gift or his death, is neither
domiciled, nor deemed to be domiciled, in the U.K.
U.S. Holders. An individual who is domiciled in the U.S. for the purposes of
the Estate Tax Treaty and who is not a national of or domiciled in the U.K.
for purposes of the Estate Tax Treaty generally will not be subject to U.K.
inheritance tax with respect to the New Gallaher Ordinary Shares or ADSs on
the individual's death or on a gift of such New Gallaher Ordinary Shares or
ADSs during the individual's lifetime provided that any applicable U.S.
federal gift or estate tax liability is paid, unless the New Gallaher Ordinary
Shares or ADSs are part of the business property of a permanent establishment
of the individual in the U.K. or pertain to a fixed base of the individual in
the U.K. used for the performance of independent personal services. Where the
New Gallaher Ordinary Shares or ADSs have been placed in trust by a settlor
who, at the time of settlement, was domiciled in the United States and was not
a national of the U.K., the New Gallaher Ordinary Shares or ADSs generally
will not be subject to U.K. inheritance tax provided that any applicable U.S.
federal gift or estate tax liability is paid, unless the New Gallaher Ordinary
Shares or ADSs are part of the business property of a permanent establishment
of the individual in the U.K. or pertain to a fixed base of the individual in
the U.K. used for the performance of independent personal services. In the
exceptional case where the New Gallaher Ordinary Shares or ADSs are subject to
both U.K. inheritance tax and to U.S. federal gift or estate tax, the Estate
Tax Treaty generally provides for the tax paid in the U.K. to be credited
against tax payable in the U.S. or for the tax paid in the U.S. to be credited
against tax payable in the U.K. based on priority rules set out in the Estate
Tax Treaty.
U.K. STAMP DUTY AND STAMP DUTY RESERVE TAX
A sale of New Gallaher Ordinary Shares subsequent to the Distribution will
be subject to U.K. ad valorem stamp duty, or, if an unconditional agreement to
transfer such New Gallaher Ordinary Shares is not completed by a duly stamped
transfer, U.K. stamp duty reserve tax, generally, in the case of stamp duty,
at the rate of 50p
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per (Pounds)100 or part (Pounds)100 of the consideration paid and, in the case
of stamp duty reserve tax, at the rate of 0.5% of the consideration paid.
Liability to pay U.K. stamp duty and stamp duty reserve tax is generally a
liability of the purchaser.
No U.K. stamp duty will be payable on any transfer of an ADS, provided that
the ADR evidencing the ADS (and any separate instrument of transfer) is
executed and retained at all times outside the U.K. An agreement to transfer
ADSs will not be subject to U.K. stamp duty reserve tax.
THE FOREGOING SUMMARY IS FOR GENERAL INFORMATION ONLY. IT IS NOT INTENDED AS
TAX ADVICE TO ANY PARTICULAR INVESTOR AND DOES NOT ADDRESS ALL ASPECTS OF U.S.
AND U.K. TAXATION THAT MAY BE RELEVANT TO PARTICULAR TAXPAYERS. PROSPECTIVE
PURCHASERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISERS REGARDING THE TAX
CONSEQUENCES, INCLUDING, IF RELEVANT, THE CONSEQUENCES UNDER U.S. STATE AND
LOCAL AND OTHER LAWS, OF THE DISTRIBUTION AND OF THE ACQUISITION, OWNERSHIP
AND DISPOSITION OF NEW GALLAHER ORDINARY SHARES OR ADSS.
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE FOR ITEM 1.
ITEM 2
APPROVAL OF AMENDMENT TO THE COMPANY'S BY-LAWS TO REPEAL THE ANNUAL EXECUTIVE
INCENTIVE COMPENSATION PROGRAM SET FORTH THEREIN AND APPROVAL OF THE FORTUNE
BRANDS, INC. ANNUAL EXECUTIVE INCENTIVE COMPENSATION PLAN
The Company Board is recommending to stockholders the repeal of the annual
executive incentive compensation program set forth in Article XII of the
Company's By-laws. Although the Company Board believes that Article XII has
served the Company and its stockholders well for many years by enabling the
Company to attract and retain senior executives of the highest quality, the
Company Board believes that, given the Company's ongoing restructuring
program, a new program should be established in order to reflect more
appropriately the characteristics of the Company and to provide the
Compensation and Stock Option Committee of the Company Board (the "Committee")
that administers the incentive compensation program with greater flexibility.
Accordingly, the Company Board adopted the Fortune Brands, Inc. Annual
Executive Incentive Compensation Plan (the "Plan") effective January 1, 1997,
subject to the approval of the Plan by the stockholders of the Company.
Consistent with current competitive practice, the Plan is contained in a
separate plan document rather than in the Company's By-laws. The Company Board
believes that the Plan will advance the interests of the Company and its
stockholders in securing and retaining executives of outstanding ability by
providing performance-based incentives to senior executives. The Plan is set
forth in full in Annex B. The description of the Plan which appears below is
qualified in its entirety by reference thereto.
SUMMARY OF ARTICLE XII
Article XII of the Company's By-laws provides for payment of incentive
compensation to members of the Management Group (consisting generally of
persons elected to the office of Vice President of the Company or a more
senior office). An amount equal to 1/2 of 1% of Adjusted Income From
Continuing Operations (as defined in Article XII) is made available for
allotment annually if a cash dividend has been paid on the Company Common
Stock. Of the amount available for incentive compensation, 18% is allotted to
the Chairman of the Board and the remainder is available for allotment to the
Management Group on the following basis: 30% of the total amount available is
allotted by Article XII to the members of the Management Group other than the
Chairman of the Board in proportion to their fixed salaries, and the balance
may be allotted to them by the Committee entirely at its discretion as to
amounts and individuals. The Committee has the authority to reduce the 18%
allotment to the Chairman of the Board and the 30% allotment to any member of
the Management Group. Payments are made in cash as soon as practicable after
the award is determined after the end of the year.
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REASONS FOR THE PROPOSAL
Article XII incentive compensation is based solely on Adjusted Income from
Continuing Operations. The Company Board believes that it would be more
desirable if the Committee had the ability to set executive incentive
compensation based on a variety of performance objectives and to modify those
goals to reflect changes in the Company's business. Accordingly, the Plan
allows the Committee to base the incentive compensation of the executives upon
a variety of corporate performance objectives set forth in the Plan. The
Company Board believes that the flexibility of the Plan will significantly
enhance the ability of the Committee to more closely tailor the incentives,
and compensation risks, of the executives participating in the Plan to their
specific responsibilities and overall corporate objectives.
Approval of Item 2 by the stockholders is also being sought to preserve the
Company's ability to deduct, for federal income tax purposes, compensation
paid pursuant to the Company's annual executive incentive compensation
program. Under Section 162(m) of the Internal Revenue Code, stockholder
approval of performance-based compensation plans (including material
amendments thereto) is necessary for the Plan to qualify for the exception to
the limitation on the Company's ability to deduct compensation paid to certain
specified executives in excess of $1 million annually.
The repeal of Article XII of the By-laws is being submitted to stockholders
as Article XII by its terms provides that it may be repealed only by the
stockholders.
SUMMARY OF THE PLAN
Eligibility
Awards may be granted only to persons elected to the office of Vice
President of the Company or a more senior office. A total of 12 officers are
currently eligible for participation in the Plan.
Administration
The Plan will be administered by the Committee, which is composed of
"outside directors" within the meaning of Section 162(m) of the Internal
Revenue Code who are authorized to make grants of performance-based
compensation. The Committee has authority to administer, construe and
interpret the Plan, to make rules for carrying it out and to make changes in
such rules.
Awards and Performance Measures
Within the first 90 days of each calendar year, the Committee will set
corporate performance measures for such year which, if attained, will
establish an incentive compensation fund for the year. At the same time, the
Committee will determine the allocation of the fund among the participants.
The performance measures will be based on any of the following performance
criteria, either alone or in any combination as the Committee may determine:
cash flow; cash flow from operations; earnings per share of Fortune Brands
Common Stock; earnings per share of Fortune Brands Common Stock from
continuing operations; income before income taxes; income before income taxes,
depreciation and amortization; income from continuing operations; net asset
turnover; net income; operating income; operating margin; return on equity;
return on net assets; return on total assets; return on total capital; sales;
economic value added; and total return to stockholders. Performance measures
may be determined on an absolute basis or relative to internal goals or
relative to levels attained in prior years or in comparison to other
companies. The Committee may provide, as part of each grant, that the
performance measures may be adjusted in the event of certain extraordinary
events set forth in the Plan. The maximum amount of an award to any
participant for any year will not exceed $2.5 million. No part of the amount
available for awards in any year which is not awarded in such year may be
carried forward for award in subsequent years.
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The Committee will, promptly after the end of the year on the date on which
all necessary financial or other information becomes available, in the manner
required by Section 162(m) of the Internal Revenue Code certify (i) the degree
to which performance measures have been attained and (ii) with respect to each
participant, the amount of the participant's award, if any. The Committee may,
in its sole discretion, reduce or eliminate, but may not increase, any award.
No part of any potential award for any year which is not actually awarded to a
participant because of any such reduction will be available for award to any
other participant whose actual compensation for such year is subject to
Section 162(m) of the Internal Revenue Code. Awards are payable in cash as
promptly as practicable after the certifications described above have been
made by the Committee.
The Committee has discretion, upon the request of a Participant, to defer
the payment of an award (or a portion thereof) to a participant. The Committee
will have discretion to provide for the payment of an amount equivalent to
interest, at such rate or rates or based on such investment fixed by the
Committee, on any such deferred award.
While the amount of incentive bonus that may be awarded to a participant for
any year cannot be determined, the Company believes that if the Plan had been
in effect for 1996, the executive officers named in the Summary Compensation
Table on page 124 would have received comparable bonuses to those shown in the
Summary Compensation Table for 1996.
Amendment and Termination
The Company Board may at any time alter, amend, suspend or terminate the
Plan in whole or in part without approval by the stockholders. No amendment
may, however, increase the award payable to a participant for a year if the
amendment is adopted after the final day for setting the objective performance
measures for such year (e.g., after the 90th day of the year) nor may any Plan
amendment or termination adversely affect the rights of a participant for whom
an award has been determined for a completed year but not yet paid.
RESOLUTION CONSTITUTING ITEM 2
The resolution (designated herein as Item 2) to repeal the annual executive
incentive compensation program contained in Article XII of the Company's By-
laws and approve the Fortune Brands, Inc. Annual Executive Incentive
Compensation Plan is as follows:
"RESOLVED, that, as conditionally adopted by the Board of
Directors, the repeal of the Company's annual executive
incentive compensation program contained in Article XII of the
By-laws be and it is hereby approved and the Fortune Brands,
Inc. Annual Executive Incentive Compensation Plan submitted to
this Annual Meeting and as shown in Annex B to the proxy
statement accompanying the notice of this Annual Meeting be and
it is hereby approved effective for 1997 and subsequent years."
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE FOR ITEM 2.
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ITEM 3
AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO CHANGE THE NAME OF THE
COMPANY
Approval of Item 3 will constitute approval of the amendment to the Company
Certificate discussed under this heading. Approval of Item 3 is being sought
because applicable provisions of the Company Certificate and the Delaware Code
require such approval. Accordingly, if Item 3 is not approved by the
stockholders the proposed amendment could not occur.
NAME CHANGE
Stockholders will be asked to vote to amend the Company Certificate to
change the name of the Company to Fortune Brands, Inc. Stockholders are being
asked to vote to so amend the Company Certificate so that the Company will be
able to conduct its business under that name. The name change has been
proposed to reflect, and to assist investors in appreciating, the
significantly different composition of the Company as a result of its
restructuring during the past several years. It is intended that the name
change would be effected immediately prior to or simultaneously with the
Distribution or at such other time deemed appropriate by the Company Board.
RESOLUTION CONSTITUTING ITEM 3
The resolution (designated herein as Item 3) to approve an amendment to the
Company Certificate to change the name of the Company to Fortune Brands, Inc.
is as follows:
"RESOLVED, that, as proposed and declared advisable by the
Board of Directors, Article I of the Certificate of
Incorporation of the Company be amended to read in its
entirety as follows:
"ARTICLE I
The name of the Corporation is Fortune Brands, Inc. (the
"Company")."
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE FOR ITEM 3.
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THE ADDITIONAL PROPOSALS
ITEM 4
ELECTION OF DIRECTORS
The Company Board currently consists of 12 members. The Company Certificate
provides for the classification of the Company Board into three classes, as
nearly equal in number as possible, with staggered terms of office and
provides that upon the expiration of the term of office for a class of
directors, nominees for such class shall be elected for a term of three years
or until their successors are duly elected and qualified. At this meeting,
four nominees for director are to be elected as Class II directors. The
nominees are Mr. Eugene R. Anderson, Dr. Patricia O. Ewers, Mr. John W.
Johnstone, Jr., and Mr. Wendell J. Kelley. The four Class I and four Class III
directors have two years and one year, respectively, remaining on their terms
of office. If no contrary indication is made, proxies in the accompanying form
are to be voted for such nominees or, in the event any such nominee is not a
candidate or is unable to serve as a director at the time of the election
(which is not now expected), for any nominee who shall be designated by the
Company Board to fill such vacancy, unless the Company Board shall determine
to reduce the number of directors pursuant to the By-laws. All nominees are
members of the present Company Board. All nominees and all current Class I and
Class III directors were elected by the stockholders, except that Mrs. Anne M.
Tatlock was elected by the Company Board as a Class III director effective
February 27, 1996 and Mr. John W. Thompson was elected by the Company Board as
a Class III director effective November 19, 1996.
There are set forth below opposite the names of the nominees and Class I and
Class III directors their present positions and offices with the Company and
their principal occupations during the past five years, their ages and the
year first elected a director of the Company. There are also set forth below
opposite their names under the heading "Shares of Company Common Stock
beneficially owned", the shares of Company Common Stock beneficially owned by
them on February 13, 1997 (except, as stated in Note (c) below, beneficial
ownership is disclaimed as to certain shares), including shares of Company
Common Stock (if any) of which they had the right on such date to acquire
beneficial ownership pursuant to the exercise on or before April 14, 1997 of
options granted by the Company, plus the number (if any) of shares of Company
Common Stock held on December 31, 1996 by the Trustee of the Defined
Contribution Plan of the Company attributable to Company contributions and to
employee pre-tax contributions made through payroll deductions that is
equivalent as of that date to their undivided proportionate beneficial
interests in all such shares. Beneficial ownership information is also
provided below for three of the executive officers listed in the Summary
Compensation Table on page 124. In addition, Gilbert L. Klemann, II and Robert
L. Plancher, executive officers listed in the Summary Compensation Table, had
such beneficial ownership of 171,896 and 67,270 shares of Company Common
Stock, respectively, on February 13, 1997. In no instance does the security
ownership of any of the nominees or other directors or executive officers
listed below equal or exceed one percent of the outstanding shares of Company
Common Stock. The information as to security holdings is based on information
received by the Company from the nominees and other directors and executive
officers, from the Corporate Employee Benefits Committee of the Company and
from the Trustee.
118
<PAGE>
<TABLE>
<CAPTION>
SHARES OF
PRESENT POSITIONS AND OFFICES YEAR FIRST COMPANY COMMON STOCK
WITH THE COMPANY AND PRINCIPAL ELECTED BENEFICIALLY OWNED
NAME OCCUPATIONS DURING THE PAST FIVE YEARS AGE DIRECTOR (A)(B)(C)
---- -------------------------------------- --- ---------- --------------------
<C> <S> <C> <C> <C>
NOMINEES FOR DIRECTOR-- CLASS II--TERM EXPIRING 2000
Partner, Anderson Kill & 69 1980 9,600
Olick, P.C. (law firm)
[PHOTO]
Eugene R.
Anderson*
President, Pace 61 1991 1,300
[PHOTO] University
Patricia O.
Ewers
Retired since 1996; 64 1989 2,000
Chairman of Olin
Corporation (chemical,
metal and defense-
related products) during
1996; Chairman and Chief
Executive Officer of
Olin Corporation from
1994 to 1995; Chairman,
President and Chief
[PHOTO]
Executive Officer of
John W. Olin Corporation prior
Johnstone, Jr. thereto
Retired since 1991; 70 1988 3,600
Chairman and Chief
Executive Officer of
Illinois Power Company
prior thereto
[PHOTO]
Wendell J.
Kelley
</TABLE>
119
<PAGE>
<TABLE>
<CAPTION>
SHARES OF
PRESENT POSITIONS AND OFFICES YEAR FIRST COMPANY COMMON STOCK
WITH THE COMPANY AND PRINCIPAL ELECTED BENEFICIALLY OWNED
NAME OCCUPATIONS DURING THE PAST FIVE YEARS AGE DIRECTOR (A)(B)(C)
---- -------------------------------------- --- ---------- --------------------
<C> <S> <C> <C> <C>
CLASS III DIRECTORS--TERM EXPIRING 1998
</TABLE>
President and Chief 60 1995 310,939
Operating Officer of
[PHOTO] American Brands, Inc.
John T. since January 1995; Group
Ludes* Vice President of
American Brands, Inc. and
President and Chief
Executive Officer of
Acushnet Company (golf
and leisure products), a
subsidiary of American
Brands, Inc., prior
thereto
President, Fiduciary 57 1996 1,000
[PHOTO] Trust Company
Anne M. International (global
Tatlock investment management
services) since 1994;
Executive Vice President
and Director,
Institutional Equity
Department, Fiduciary
Trust Company
International prior
thereto
General Manager--IBM 47 1996 500
[PHOTO] North America,
John W. International Business
Thompson Machines Corporation
("IBM"), since 1997;
General Manager, Personal
Software Products
Division of IBM from 1995
to 1996; Corporate Vice
President and General
Manager, Marketing--U.S.
of IBM from 1993 to 1994;
Area General Manager--
Midwest of IBM prior
thereto
Chairman and Chief 55 1994 140
[PHOTO] Executive of Gallaher
Peter M. Limited (tobacco
Wilson* products), a subsidiary
of American Brands, Inc.,
since February 1994;
Deputy Chairman of
Gallaher Limited prior
thereto
120
<PAGE>
<TABLE>
<CAPTION>
SHARES OF
PRESENT POSITIONS AND OFFICES YEAR FIRST COMPANY COMMON STOCK
WITH THE COMPANY AND PRINCIPAL ELECTED BENEFICIALLY OWNED
NAME OCCUPATIONS DURING THE PAST FIVE YEARS AGE DIRECTOR (A)(B)(C)
---- -------------------------------------- --- ---------- --------------------
<C> <S> <C> <C> <C>
CLASS I DIRECTORS--TERM EXPIRING 1999
</TABLE>
Chairman of the Board and 61 1981 615,305
Chief Executive Officer
of American Brands, Inc.
since January 1995;
[PHOTO] President and Chief
Thomas C. Operating Officer of
Hays* American Brands, Inc.
prior thereto
President and Chief 62 1991 1,900
[PHOTO] Executive Officer of
Sidney Northside Hospital, Inc.
Kirschner since 1992; Chairman of
the Board, President and
Chief Executive Officer
of National Service
Industries, Inc.
(lighting equipment,
textile rentals and
specialty chemicals)
prior thereto
President and Chief 62 1990 1,500
[PHOTO] Executive Officer of
Gordon R. AMSTED Industries
Lohman* Incorporated (products
for the railroad,
construction and building
markets)
Retired since 1995; Vice 66 1985 4,000
[PHOTO] Chair of Southern
Charles H. Methodist University
Pistor, Jr. prior thereto
- --------
* Member of Executive Committee of the Company Board. Mr. Ludes also served
on the Company Board from 1987 to 1990.
(a) The numbers of shares attributable to Company contributions under the
Defined Contribution Plan of the Company included in the numbers shown
above are as follows: Thomas C. Hays, 2,511; Gilbert L. Klemann, II,
1,958; John T. Ludes, 3,027; and Robert L. Plancher, 1,341. The numbers of
shares attributable to employee pre-tax contributions under such Plan
included in the numbers shown above are: Thomas C. Hays, 6,963; Gilbert L.
Klemann, II, 496; John T. Ludes, 477; and Robert L. Plancher, 24.
121
<PAGE>
(b) The number of shares of which the nominees and Class I and Class III
directors and Messrs. Klemann and Plancher had the right to acquire
beneficial ownership pursuant to the exercise on or before April 14, 1997
of options granted by the Company included in the numbers shown above are
as follows: Thomas C. Hays, 499,600; Gilbert L. Klemann, II, 162,750; and
John T. Ludes, 264,410. Mr. Plancher has exercised all his options.
Inclusion of such shares does not constitute an admission by any nominee,
director or executive officer that he is the beneficial owner of such
shares.
(c) To the best of the Company's knowledge, each nominee and Class I and Class
III director and executive officer named above has sole voting and
investment power with respect to shares shown after his name above, other
than with respect to the shares listed in Note (b) above and except as
follows: Mr. Hays shares voting and investment power as a co-trustee of
various family trusts with respect to 5,107 shares and with respect to
which shares he disclaims beneficial ownership and Mr. Hays has no voting
or investment power with respect to 4,000 shares held in trust for the
benefit of his wife and with respect to which shares he disclaims
beneficial ownership; and Mr. Pistor shares voting and investment power
with his wife with respect to 2,400 shares. The Trustee of the Defined
Contribution Plan has agreed to vote the shares it holds in the Trust in
accordance with instructions received from members of the Plan and shares
as to which instructions are not received are voted by the Trustee
proportionally in the same manner as shares as to which the Trustee has
received instructions.
Eight meetings of the Company Board were held during the Company's last
fiscal year. Each director of the Company attended at least 75% of the
aggregate of (i) all meetings of the Company Board and (ii) all meetings of
committees of the Company Board of which the director was a member, during the
periods that the director served during the Company's last fiscal year. In
addition to participation at Board and committee meetings, the Company's
directors discharge their responsibilities throughout the year through
personal meetings and other communications, including considerable telephone
contact, with the Chairman and others regarding matters of interest and
concern to the Company.
In addition to the Executive Committee, the Company Board has an Audit
Committee, a Compensation and Stock Option Committee and a Nominating and
Corporate Governance Committee. The Audit Committee is composed of Messrs.
Anderson, Pistor, Thompson, Dr. Ewers and Mrs. Tatlock. Its functions include
recommending annually to the Company Board a firm of independent accountants
to audit the Company's financial statements and the scope of such firm's
audit, reviewing reports and recommendations of the Company's independent
accountants, reviewing the scope of all internal audits and reports and
recommendations in connection therewith and reviewing nonaudit services
provided by the Company's principal independent accountants. It held four
meetings during the Company's last fiscal year. The Compensation and Stock
Option Committee is composed of Messrs. Anderson, Johnstone, Kirschner, Lohman
and Pistor. It administers the Company's Stock Option Plans and 1990 Long-Term
Incentive Plan, and its functions include the designation of key employees to
whom stock options, performance awards and other stock-based awards may be
granted, and, within specified limits, the number of shares that may be
granted to any such key employee. Its functions also include setting
compensation for officers employed by the Company and holding the office of
Vice President or a more senior office and the determination of the award to
such persons of incentive compensation under Article XII of the By-laws of the
Company. It held five meetings during the Company's last fiscal year. The
Nominating and Corporate Governance Committee is composed of Messrs. Anderson,
Johnstone, Lohman and Pistor. Its functions include recommending persons for
nomination for election as members of the Company Board, recommending
directors for membership on the Audit Committee, Compensation and Stock Option
Committee and Nominating and Corporate Governance Committee, recommending
directors and executive officers for membership on other committees
established by the Company Board, recommending to the Company Board
compensation arrangements for nonmanagement directors and recommending to the
Company Board policies and practices designed to foster an effective corporate
governance environment within the Company. The Nominating and Corporate
Governance Committee held five meetings during the last fiscal year.
Stockholders wishing to recommend persons for consideration by the Nominating
and Corporate Governance Committee as nominees for election to the Company
Board can do so by writing to the Secretary of the Company at 1700 East Putnam
Avenue, Old Greenwich, Connecticut 06870, giving each such person's name,
biographical
122
<PAGE>
data and qualifications. Any such recommendation should be accompanied by a
written statement from the person recommended of his consent to be named as a
nominee and, if nominated and elected, to serve as a director. The Company
Certificate also contains a procedure for stockholder nomination of directors.
Mr. Hays is a director of ACNielsen Corporation; Mr. Johnstone is a director
of Olin Corporation, Phoenix Home Life Insurance Company and McDermott
International Inc.; Mr. Kelley is a director of Magna Group, Inc.; Mr.
Kirschner is a director of Superior Surgical Mfg. Co., Inc.; Mr. Lohman is a
director of CIPSCO Incorporated and Central Illinois Public Service Company;
Mr. Ludes is a director of the New England Zenith Fund; Mr. Pistor is a
director of AMR Corporation, Centex Corporation and Oryx Energy Company; Mrs.
Tatlock is a director of American General Corporation and PHH Corporation; and
Mr. Thompson is a director of Northern Indiana Public Service Company.
For information with respect to the beneficial ownership of securities of
the Company by directors and executive officers as a group, see "Certain
Information Regarding Security Holdings".
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Each director and officer of the Company who is subject to Section 16 of the
Exchange Act is required to report to the SEC by a specified date his or her
beneficial ownership of or transactions in the Company's securities. Reports
received by the Company indicate that all such directors and officers have
filed all requisite reports with the SEC on a timely basis during or with
respect to 1996.
123
<PAGE>
EXECUTIVE COMPENSATION
There is set forth in the following table a summary of all compensation paid
to, or earned by, the five most highly compensated executive officers during
each of the Company's last three fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------- ---------------------------------
AWARDS PAYOUTS
------------ -------
SECURITIES
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND BONUS COMPENSATION OPTIONS/SARS PAYOUT COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($) (1) ($) (2) (#) ($)(3) ($)(4)
------------------ ---- ---------- ------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
THOMAS C. HAYS.......... 1996 940,500 823,953 602,594 93,000 427,380 190,578
Chairman of the Board 1995 900,000 812,341 219,289 93,000 379,440 229,679
and Chief Executive Of- 1994 655,800 433,600 198,133 130,000 113,063 272,596
ficer of
American Brands, Inc.
JOHN T. LUDES........... 1996 575,000 414,300 333,729 50,000 171,004 106,878
President and Chief 1995 500,000 408,600 189,082 50,000 151,823 171,187
Operating Officer of 1994 365,600 331,000 96,852 60,000 45,225 156,369
American
Brands, Inc.
PETER M. WILSON......... 1996 538,353 414,170 23,900 30,000 191,169 -0-
Chairman and Chief 1995 520,695 389,261 8,200 30,000 169,725 -0-
Executive of Gallaher 1994 477,280 361,939 10,859 38,000 33,919 -0-
Limited
GILBERT L. KLEMANN, II.. 1996 414,400 230,000 74,308 28,100 171,004 54,755
Senior Vice President 1995 396,600 225,600 96,409 28,100 143,048 96,777
and General Counsel of 1994 377,700 217,500 54,942 34,000 45,225 118,591
American
Brands, Inc.
ROBERT L. PLANCHER(5)... 1996 390,200 206,900 102,969 -0- 171,004 53,215
Senior Vice President 1995 373,400 230,400 90,590 25,500 151,823 168,163
and Chief Accounting 1994 355,600 206,500 95,287 34,000 45,225 175,774
Officer of
American Brands, Inc.
</TABLE>
- --------
(1) Article XII of the By-laws of the Company provides for payment of
incentive compensation to members of the Management Group (consisting
generally of persons elected to the office of Vice President of the
Company or a more senior office). An amount equal to 1/2 of 1% of Adjusted
Income From Continuing Operations (as defined in Article XII) is made
available for allotment annually if a cash dividend has been paid on the
Company Common Stock. Of the amount available for incentive compensation,
18% is allotted to the Chairman of the Board and the remainder is
available to the Management Group on the following basis: 30% of the total
amount available is allotted by Article XII to the members of the
Management Group other than the Chairman of the Board in proportion to
their fixed salaries, and the balance may be allotted to them by the
Compensation and Stock Option Committee, entirely at its discretion as to
amounts and individuals. The Compensation and Stock Option Committee has
the authority to reduce the 18% allotment to the Chairman of the Board and
the 30% allotment to any member of the Management Group. Payments are made
in cash as soon as practicable after the award is determined after the end
of the year. Mr. Wilson participated in an incentive compensation plan for
key employees of Gallaher Limited. Under such plan, an amount equal to
0.387% of consolidated profits before tax (as defined in such plan) was
made available for allotment annually. Of the amount made available for
incentive compensation, 18.5% was allotted to the Chairman of Gallaher
Limited. See Item 2 for a description of a proposal to amend the Company's
By-laws to repeal the annual executive incentive compensation program set
forth in Article XII thereof and replace it with a new Annual Executive
Incentive Compensation Plan; the Report of the Compensation and Stock
Option Committee on executive compensation for a description of a revised
annual executive incentive compensation formula for Gallaher Limited
effective January 1, 1997; and "THE DISTRIBUTION PROPOSALS--NEW GALLAHER
MANAGEMENT--Compensation of Directors and Officers" for a description of
new compensation arrangements for Gallaher executives following the
Distribution.
124
<PAGE>
(2) At the 1993 Annual Meeting, stockholders approved Company contributions to
trusts established by executives in order to fund supplemental retirement
and profit-sharing benefits under the Company's Supplemental Plan on a
current basis. The executive is taxed on the contribution when made and
the earnings on the trust, but the Company provides the executive with an
additional amount to pay the taxes. The amounts distributed to the
executive at retirement, however, are not subject to tax and therefore the
Company contributes to the trusts only the present value of the
executive's after-tax benefit instead of being required to provide the
executive's pre-tax benefit upon retirement. The amounts set forth in the
"Other Annual Compensation" column include the amounts paid to the
executive for reimbursement of taxes as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Thomas C. Hays...................................... 522,168 201,469 169,919
John T. Ludes....................................... 294,839 181,951 85,563
Gilbert L. Klemann, II.............................. 49,492 89,278 43,653
Robert L. Plancher.................................. 79,197 83,459 83,998
</TABLE>
The remaining amounts in the "Other Annual Compensation" column are cash
dividend equivalents on performance share awards.
(3) The LTIP Payout is the value of performance share payment for the
performance period ended in the year reported.
(4) These amounts include Company contributions to the tax qualified Defined
Contribution Plan of the Company and supplemental profit-sharing amounts
under the Company's Supplemental Plan as described below.
Company contributions to the tax qualified Defined Contribution Plan of the
Company for 1996 were $15,862 for each of Messrs. Hays, Ludes, Klemann and
Plancher.
The Supplemental Plan provides for those amounts that would have been
contributed under the Company's tax qualified Defined Contribution Plan but
for certain Internal Revenue Code limitations. Supplemental profit-sharing
amounts credited under the Company's Supplemental Plan for 1996 were
$127,223 for Mr. Hays, $66,166 for Mr. Ludes, $38,893 for Mr. Klemann and
$37,353 for Mr. Plancher.
In order to fund the Company's obligations to provide supplemental profit-
sharing benefits under the Company's Supplemental Plan as described above,
the Company made contributions under the trust funding arrangements
approved by stockholders at the 1993 Annual Meeting. The following
contributions to the trusts are not listed in the "All Other Compensation"
column for 1996 as they were made to fund these supplemental profit-sharing
liabilities described in the preceding paragraph and already disclosed in
the "All Other Compensation" column: $55,838 for Mr. Hays; $32,127 for Mr.
Ludes; $21,894 for Mr. Klemann; and $21,650 for Mr. Plancher.
The Company made additional contributions in 1996 to the trusts to fund its
obligations for supplemental retirement benefits under the Company's
Supplemental Plan to Messrs. Hays, Ludes, Klemann and Plancher. See the
Pension Plan Table on page 128 for a description of the amount of these
supplemental retirement benefits.
In 1994, the Company substituted a split-dollar life insurance program for
certain executive officers in lieu of the group term life insurance program
under which they were previously covered. The death benefits payable on
behalf of the executives under the split-dollar life insurance program, and
the amount of premiums contributed by the executives, remain the same as
under the group term life insurance program which had been available to all
salaried employees, including executives, on the same terms and conditions.
All insurance proceeds from the split-dollar life insurance program in
excess of each executive's death
125
<PAGE>
benefit are payable to the Company, and the program is designed for the
Company to recover at least its aggregate premium cost. The Company elected
to prepay its share of the full premiums for the policy in two annual
installments in 1994 and 1995. Additional split-dollar life insurance was
obtained in 1995 for Messrs. Hays and Ludes in order to provide for the
increased death benefit attributable to their 1995 salary increases with
the premium for this increased insurance payable in two annual installments
in 1995 and 1996. The amounts set forth in the "All Other Compensation"
column for 1996 include the dollar value of insurance premiums paid by the
Company for the additional split-dollar insurance for Messrs. Hays and
Ludes as reduced by the projected refund to the Company on the maturity of
the policy calculated on an actuarial basis as follows: $47,493 for Mr.
Hays and $24,850 for Mr. Ludes.
(5) Mr. Plancher retired on February 28, 1997.
The following table provides information on grants of stock options made in
1996:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR GRANT DATE
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED (#)(1) FISCAL YEAR ($/SH) DATE(2) VALUE ($)(3)
---- -------------- --------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Thomas C. Hays.......... 93,000 5.2 48.75 11/18/06 663,811
John T. Ludes........... 50,000 2.8 48.75 11/18/06 356,887
Peter M. Wilson......... 30,000 1.7 48.75 11/18/06 214,132
Gilbert L. Klemann, II.. 28,100 1.6 48.75 11/18/06 200,571
Robert L. Plancher...... -- -- -- --
</TABLE>
- --------
(1) All options are for shares of Company Common Stock. No stock appreciation
rights ("SARs") were granted during 1996. Options are generally not
exercisable until the expiration of one year from the date of grant.
(2) The 1990 Long-Term Incentive Plan (As Amended and Restated as of January
1, 1994) further provides that each option shall have a limited right
("Limited Right") which generally is exercised automatically on the date
of change in control of the Company, or (if later) the day after the
expiration of the six-month holding period for options not held for such
six-month period by those holders subject to Section 16 of the Exchange
Act. The Limited Right generally entitles the holder of the option to
receive cash equal to the number of shares subject to the option
multiplied by the difference between the exercise price per share and (i)
the fair market value of such shares at the date of exercise of the
Limited Right if the option is an incentive stock option and (ii) if the
option is a nonqualified stock option, the greater of (a) the highest
price per share paid for shares of Company Common Stock acquired in the
change in control and (b) the highest fair market value of shares of
Company Common Stock during a specified period prior to the time of
exercise. The option is cancelled to the extent of the exercise of the
Limited Right.
(3) Grant Date Present Value is determined using the Black-Scholes option
pricing model based on the following assumptions: (a) an expected option
term of five years which reflects a reduction of the actual ten year term
of an option based on historical data regarding the average length of time
an optionee holds the option before exercising; (b) a risk-free rate of
return of 5.9%, the rate of a five year U.S. Treasury Zero Coupon Bond
corresponding to the expected option term; (c) stock price volatility of
19% based on weekly high-low stock market quotations for the five years
preceding the date of grant; (d) yield of 5% based on the annual dividend
rate of $2.00 per share at date of grant; (e) no discount for risk of
forfeiture for the named executive officers; and (f) notwithstanding the
fact that these options are non-transferable, no discount for non-
transferability was applied. The Grant Date Present Values set forth in
the table are only theoretical values and may not accurately determine
present value. The actual value, if any, to be realized by an optionee
will depend on the excess of the market value of the Company Common Stock
over the exercise price on the date the option is exercised. See "THE
DISTRIBUTION PROPOSALS--NEW GALLAHER MANAGEMENT--Compensation of Directors
and Officers."
126
<PAGE>
The following table provides information concerning exercise of stock
options, alone or in tandem with SARs, made during 1996 by each of the five
most highly compensated executive officers:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS/ OPTIONS/SARS
ACQUIRED ON SARS AT FY-END (#) AT FY-END ($)
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (#)(1) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
---- ----------- ------------ --------------------- --------------------
<S> <C> <C> <C> <C>
Thomas C. Hays.......... 93,050 1,098,121 499,600/93,000 5,188,825/69,750
John T. Ludes........... 3,350 54,752 276,600/50,000 3,301,677/37,500
Peter M. Wilson......... 4,000 73,250 198,600/30,000 2,375,981/22,500
Gilbert L. Klemann, II.. 0 0 162,750/28,100 1,467,838/21,075
Robert L. Plancher...... 119,300 2,081,736 140,550/0 1,321,581/0
</TABLE>
- --------
(1) SARs permit an optionee, upon exercise of such rights and surrender of the
related option or part thereof, to receive a payment equal to the excess
of the fair market value (at the time of exercise) of the shares covered
by such option or part thereof so surrendered over the option price of
such shares. Such payment may be made in Company Common Stock (valued on
the basis of the fair market value of Company Common Stock at the time of
exercise), in cash, or partly in cash and partly in Company Common Stock,
as the Compensation and Stock Option Committee may determine. There are no
SARs outstanding for any of the named officers.
The following table provides information concerning long-term compensation
awards made during 1996 to the five most highly compensated executive
officers:
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
PERFORMANCE PERIOD 1997-1999
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK
NUMBER OF SHARES, PERFORMANCE PRICE-BASED PLANS
UNITS OR OTHER OR OTHER PERIOD ------------------------
RIGHTS UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME (#)(1) OR PAYOUT (#) (#) (#)
---- ----------------- ---------------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Thomas C. Hays.......... 14,600 3 yrs 7,300 14,600 21,900
John T. Ludes........... 7,800 3 yrs 3,900 7,800 11,700
Peter M. Wilson......... 0 -- 0 0 0
Gilbert L. Klemann, II.. 4,400 3 yrs 2,200 4,400 6,600
Robert L. Plancher...... 0 -- 0 0 0
</TABLE>
- --------
(1) In November 1996, performance share awards were granted for the January 1,
1997-December 31, 1999 performance period. These figures represent the
number of shares that will be awarded upon attainment of the average
consolidated return on equity and cumulative increase in earnings per
share targets for the performance period 1997-1999.
The number of shares of Company Common Stock to be delivered for the
performance period 1997-1999 is based on the level of achievement of specified
operating goals of the Company and its consolidated subsidiaries during the
performance period. The target amount will be earned if 100% of the targeted
average consolidated return on equity and cumulative increase in earnings per
share are achieved. The threshold amount will be earned at the achievement of
83 1/3% of the targeted average consolidated return on equity and 94% of the
targeted cumulative earnings per share. The maximum award amount will be
earned at the achievement of 125% of the targeted average consolidated return
on equity and 114% of the targeted cumulative earnings per share. In addition,
cash dividend equivalents will be paid only to the extent that the performance
goals are achieved.
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RETIREMENT PLANS
The following table sets forth the highest estimated annual retirement
benefits payable to persons in the specified compensation and years of service
classifications upon retirement at normal retirement date, assuming election
of an annuity for the life of the employee only, under the plans of the
Company under which executive officers of the Company would be entitled to
benefits:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS
FOR REPRESENTATIVE YEARS OF CREDITED SERVICE
---------------------------------------------------------
REMUNERATION 10 15 20 25 30 35
- ------------ -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 500,000 $ 75,000 $112,500 $150,000 $187,500 $ 225,000 $ 262,500
600,000 90,000 135,000 180,000 225,000 270,000 315,000
700,000 105,000 157,500 210,000 262,500 315,000 367,500
800,000 120,000 180,000 240,000 300,000 360,000 420,000
900,000 135,000 202,500 270,000 337,500 405,000 472,500
1,000,000 150,000 225,000 300,000 375,000 450,000 525,000
1,100,000 165,000 247,500 330,000 412,500 495,000 577,500
1,200,000 180,000 270,000 360,000 450,000 540,000 630,000
1,300,000 195,000 292,500 390,000 487,500 585,000 682,500
1,400,000 210,000 315,000 420,000 525,000 630,000 735,000
1,600,000 240,000 360,000 480,000 600,000 720,000 840,000
1,800,000 270,000 405,000 540,000 675,000 810,000 945,000
2,000,000 300,000 450,000 600,000 750,000 900,000 1,050,000
2,200,000 330,000 495,000 660,000 825,000 990,000 1,155,000
2,400,000 360,000 540,000 720,000 900,000 1,080,000 1,260,000
</TABLE>
The estimated annual retirement benefits set forth in the preceding table
include any offset for Social Security benefits.
The compensation covered by the plans under which executive officers are to
receive retirement benefits includes essentially compensation that would fall
under the categories of "Salary" and "Bonus" in the Summary Compensation Table
shown above on page 124 averaged over the five highest consecutive years. The
years of service of Messrs. Hays, Ludes and Plancher are 32, 18 and 33,
respectively. Mr. Klemann, who joined the Company's employ in 1991, has a
special retirement arrangement which credits him with service since 1976 in
order to recognize that he devoted full time to the legal affairs of the
Company from 1976 through 1990 while with the Company's outside law firm.
The Supplemental Plan of the Company provides supplemental benefits in an
amount equal to the difference between the benefits payable under the
Retirement Plan and the amount that would be payable under the Company's tax
qualified Retirement Plan formula in excess of the Internal Revenue Code
limitation on maximum annual benefits payable from tax qualified retirement
plans (currently the lesser of $125,000 and the employee's average
compensation during his three highest-paid consecutive years of employment).
The Supplemental Plan also provides for payments of any amount by which the
Retirement Plan benefit is reduced because of the limitation contained in the
Internal Revenue Code on the combination of the benefits payable thereunder
and additions to the Company's tax qualified Defined Contribution Plan. The
Internal Revenue Code also provides that benefits under tax qualified plans
cannot be based on compensation in excess of a certain limit (currently
$160,000). The Supplemental Plan provides the difference between the amount
paid under the Retirement Plan and the amount that would have been paid
thereunder if the $160,000 limit on compensation were not included therein. In
calculating retirement benefits, no credit is given for service in excess of
35 years. The Pension Plan Table includes these Supplemental Plan benefits.
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Under the Supplemental Plan, persons employed by the Company holding the
office of Vice President or a more senior office with the Company will each
receive an annual benefit equal to 52 1/2% of his average compensation during
the five highest-paid consecutive calendar years of employment, provided he
continues in employment until the earlier of normal retirement age of 65 or
completion of 35 years of service. This 52 1/2% benefit is the same as the
benefit in the 35 year column of the Pension Plan Table set forth above. The
benefit is reduced by 1 1/2% of such average compensation for each year that
such officer retires prior to age 65 unless he has completed 35 years of
service. The benefit is also reduced by benefits under the Company's
Retirement Plan, the retirement plans of subsidiaries of the Company and of
any prior employer. This supplemental retirement benefit covers Messrs. Hays,
Ludes, Klemann and Plancher, except that the Company has an agreement with Mr.
Hays pursuant to which his benefit is determined based on his average
compensation during the three highest-paid consecutive calendar years of
employment rather than five.
Executive officers employed by the Company will accrue all benefits after
1995 under the Supplemental Plan rather than the Company's tax qualified
Retirement Plan.
The Company's agreement with Mr. Hays also provides him with a supplemental
annual retirement benefit of 52 1/2% of his average compensation during the
three highest-paid consecutive calendar years of employment if Mr. Hays
becomes disabled or dies prior to normal retirement date of age 65 or if the
Company terminates his employment for reasons other than cause, or Mr. Hays
terminates his employment for good reason (as defined in the agreement). For
purposes of determining Mr. Hays' highest three-year average earnings, his
compensation at the date of his termination of employment is deemed to
continue until normal retirement date. This benefit to Mr. Hays is reduced by
the amount paid to him under the Company's tax qualified Retirement Plan and
Supplemental Plan and the retirement plans of any affiliate of the Company.
As noted in Note (2) under the Summary Compensation Table on page 124,
Messrs. Hays, Ludes, Klemann and Plancher and certain other executive officers
have established trusts to which the Company makes contributions to fund
currently the Company's supplemental retirement and profit-sharing
obligations. The Company also continues to maintain "rabbi" trusts with a bank
for the purpose of paying its supplemental retirement and profit-sharing
obligations that are not fully funded by the executives' trusts.
SEVERANCE AND EMPLOYMENT AGREEMENTS
The Company has entered into agreements with Messrs. Hays, Ludes and Klemann
to provide certain severance benefits for them in the event of their
termination of employment following a change in control (as defined in the
agreements) of the Company. Each agreement provides generally that if,
subsequent to a change in control, the Company terminates the employment of
the officer other than for disability or cause, or if the officer elects to
terminate his employment for good reason, as provided in the agreement, the
officer will then receive three years of base salary, three times the amounts
for one year of his incentive compensation award and Defined Contribution Plan
allocation (and the supplemental profit-sharing allocation under the
Supplemental Plan), three additional years of service and earnings credit
under the retirement plans and agreements of the Company and three additional
years of coverage under the life, health, accident, disability and other
employee plans of the Company, provided that if any such person is within
three years of his normal retirement date, the multiplier of three is reduced
for each category of payment to the number of years and portion thereof
remaining prior to such date. Each agreement also provides for payment of an
amount necessary to restore any benefit diminution under the agreement and the
Company's 1986 Stock Option Plan and 1990 Long-Term Incentive Plan if the
special excise tax imposed under Section 280G of the Internal Revenue Code is
applicable. Assuming a change in control and a termination date of February 1,
1997, the amounts payable under such agreements would have been $5,812,613,
$3,350,482, and $2,145,764 for Messrs. Hays, Ludes and Klemann, respectively.
The Company has established "rabbi" trusts with a bank for the purpose of
paying these amounts. The foregoing amounts do not include the three
additional years of service and earnings credit under retirement plans and
agreements or the three additional years of coverage under life, health,
accident, disability and other employee plans to which the foregoing persons
would be entitled. Upon termination of employment following a change in
control, the executive would also be entitled to retain his split-dollar life
insurance policy in order to provide the
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death benefit with any insurance proceeds after death in excess of the death
benefit to be returned to the Company. The amounts payable are reduced by any
amounts payable under the agreements referred to in the succeeding paragraph
providing severance benefits after termination of employment without regard to
a change in control.
The Company has also entered into agreements with Messrs. Hays, Ludes and
Klemann to provide severance benefits without regard to a change in control if
the Company terminates the employment of the officer for reasons other than
for disability or cause. The Company will also provide the severance benefits
to Mr. Hays if he terminates his employment for good reason as provided in the
agreement. The severance agreements provide the same benefits as those
described in the preceding paragraph for a termination of employment following
a change in control except that the multiplier is three in the case of Mr.
Hays and two in the case of Messrs. Ludes and Klemann. Assuming a termination
of employment on February 1, 1997, the amounts payable under the severance
agreements, which would represent their base salary, Article XII award and
Defined Contribution Plan allocation (and the supplemental profit-sharing
allocation under the Company's Supplemental Plan), would have been $5,812,613,
$2,233,655 and $1,430,510 for Messrs. Hays, Ludes and Klemann, respectively.
The foregoing amounts do not include the additional years of service and
earnings credit under retirement plans and agreements or the additional years
of coverage under life, health, accident, disability and other employee plans
to which the foregoing persons would be entitled.
Gallaher Limited had an agreement with Mr. Wilson which provided, among
other things, for his employment by Gallaher Limited at a salary rate for 1996
of (Pounds)344,500 and for reimbursement of all reasonable expenses incurred
by him in the performance of his duties under the agreement. The agreement was
terminable by Gallaher Limited upon three years' written notice. The agreement
also provided that in the event the employment of Mr. Wilson was terminated,
or Mr. Wilson elected to terminate his employment for good reason, after a
change in control of the Company or Gallaher Limited, he was to receive up to
three times his salary, incentive compensation and certain benefits. See "THE
DISTRIBUTION PROPOSALS--NEW GALLAHER MANAGEMENT--Compensation of Directors and
Officers" for a description of the new agreement for Mr. Wilson in effect for
1997. This new agreement will be in effect even if the Distribution is not
approved.
DIRECTOR COMPENSATION
Each director who is not an officer or employee of the Company or one of its
subsidiaries receives an annual fee of $35,000 for services as a director and
an additional $15,000 for committee service for an aggregate cash fee of
$50,000. Two non-employee directors each receive an additional $15,000 for
service on the Executive Committee. The Company has agreements with Messrs.
Anderson and Lohman to defer payment of the fees to which they are entitled as
directors, including any fees for committee service. Interest on the deferred
amounts is accrued quarterly based on the average quarterly treasury bill
rate. During 1996, the Company also paid the cost of group life insurance
coverage for directors who were not officers or employees of the Company in an
amount not in excess of $3,000 for each director, except for Mr. Kelley, for
whom the cost was $6,852. Directors who are not officers or employees of the
Company are also covered under the Company's matching gift program whereby the
Company will make a 200% match of gifts totaling up to $15,000 by the director
to an eligible charitable or educational institution.
Each director who is not an officer or employee of the Company or one of its
subsidiaries is also paid 300 shares of Company Common Stock each year under
the Company's Stock Plan for Non-employee Directors which was approved by the
stockholders at the 1995 Annual Meeting. The amount of 300 shares will be
increased if the Distribution is consummated pursuant to the antidilution
provisions of the Plan and such increase will be based on a comparison of the
trading prices of Company Common Stock prior to the Distribution and Fortune
Brands Common Stock subsequent to the Distribution. The Company has an
agreement with Mr. Lohman to defer payment of these shares. While receipt of
the shares is deferred, dividends that would have
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been paid with respect to such shares had receipt thereof not been deferred
are also deferred and will accrue interest quarterly from the respective dates
such dividends would have been paid at a rate equal to the average quarterly
treasury bill rate. Directors who are not officers or employees of the Company
or one of its subsidiaries are covered while on Company business by the
business travel accident insurance policy which covers employees of the
Company generally.
Each director who is not an officer or employee of the Company or one of its
subsidiaries who voluntarily retires or decides not to stand for reelection as
a director will receive an annual retirement benefit equal to the annual
director's fee (exclusive of fees for committee service and fees for service
on boards of directors of subsidiaries) in effect at the time of retirement to
be paid for the number of years equal to such director's full years of
service. Such benefit is payable beginning in the year in which such director
retires or attains age 65, whichever occurs later, and continues to be payable
to the director's beneficiary in the event of the director's death until all
such payments have been made. The benefit is also payable to the director's
beneficiary if the director dies prior to retirement after having completed at
least three years of service. The new Non-Employee Director Stock Option Plan
is being proposed as a substitute for this retirement program. If the Non-
Employee Director Stock Option Plan is adopted, new non-employee directors
will not be eligible to receive the retirement benefit and the current non-
employee directors will have the choice to elect to continue to accrue
retirement benefits or elect to cease to accrue such benefits and, in lieu of
future accruals, to receive an annual option grant under the Non-Employee
Director Stock Option Plan. See Item 6, "APPROVAL OF THE AMERICAN BRANDS, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN."
Each director who is not an officer or employee of the Company is covered
under the Company's charitable award program for non-employee directors. Under
the program, the Company will make future contributions of up to $500,000 for
each such director to charitable, educational or other qualified organizations
designated by the director. The contribution would be made after the death of
the director and the Company's obligation is funded by Company owned life
insurance policies. Mr. Wilson will not participate in the charitable award
program.
REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE ON EXECUTIVE
COMPENSATION
The Company's executive compensation program assists the Company in
attracting, motivating and retaining the executive resources that it needs in
order to maximize its return to stockholders.
Toward that end, the program provides:
. competitive levels of salary and total compensation
. annual incentive compensation that varies with the annual financial
performance of the Company and its various operating companies
. long-term incentive compensation to reward long-term financial
performance.
The Company provides levels of total compensation for executive officers
that are competitive with compensation for executives with comparable
responsibilities in corporations of similar size. The competitive information
is derived from a variety of sources, principally surveys conducted by Towers
Perrin, the outside consultants of the Compensation and Stock Option Committee
(the "Committee"), and Management Compensation Services, a division of Hewitt
Associates, of compensation awarded by over 200 large, publicly-held
corporations with revenues in excess of $2 billion participating in the
surveys (the "survey group"). Most of the companies in the survey group are in
the S&P 500 and some are in the Peer Group index described on page 136. The
Committee relies on a broad array of companies for comparative analysis of
executive compensation because the Committee believes that the Company's
competitors for executive talent are more varied than the Peer Group chosen
for comparing stockholder return in the Performance Graph on page 135.
The Company's executive compensation program consists of three basic
elements--base salaries, annual incentive bonuses and long-term incentives.
The long-term incentive plans covering the Company's executive officers are
designed to ensure that incentive compensation varies based on the
profitability of the Company and
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its various operating companies and on the performance of the Company Common
Stock. In addition, these plans provide the flexibility to reward executives
based on their individual performance.
Committee Responsibilities
The Company's By-laws require that the salaries of officers employed by the
Company and having the offices of Vice President and above be fixed by the
Committee. The Committee also has the authority to allot to executive officers
a portion of the incentive compensation available for allotment under Article
XII of the Company's By-laws. In addition, the Committee grants awards to
executive officers and certain other officers under the Company's 1990 Long-
Term Incentive Plan, which as described below generally consisted in 1996 of
stock options and performance share awards. The Committee also reviews the
design of the Company's executive compensation programs, assesses their
competitiveness and effectiveness and makes recommendations with respect to
them. The Committee reviewed the salary of Mr. Peter M. Wilson prior to formal
approval of his salary by the Board of Directors of Gallaher Limited.
Each of the elements of the program is described in the report below,
including a discussion of the specific actions taken by the Committee with
respect to the Chief Executive Officer and the other executive officers for
1996.
Base Salaries
In determining salary adjustments for the Chief Executive Officer and other
executive officers employed by the Company for 1996, the Committee sought to
maintain salary levels that were comparable with the median level of the
survey group. The salary increase for the Chief Executive Officer and, except
as noted below, for other executive officers employed by the Company for 1996
was 4.5%. This placed the Chief Executive Officer at the median level of the
survey group but was somewhat below the 5% average salary increase for the
survey group. Mr. John T. Ludes, who was promoted to President and Chief
Operating Officer in 1995, received a market adjustment salary increase of 15%
and another executive officer received a market adjustment salary increase of
6.7%. Two other executive officers who were promoted effective January 1, 1996
also received promotional increases. After giving effect to these promotional
and other increases, the salary levels of the executive officers employed by
the Company were on average 5% above the median of the survey group. The 1996
salary increase of Mr. Peter M. Wilson, an executive officer of the Company
employed by its subsidiary, Gallaher Limited, was also 4.5%.
Annual Incentive Bonuses
Article XII of the By-laws of the Company as approved by stockholders
provides for payment of incentive compensation to members of the Management
Group (defined pursuant to Article XII), including executive officers. An
amount equal to 1/2 of 1% of adjusted income from continuing operations (as
defined in Article XII) is made available for allotment annually if a cash
dividend has been paid on the Common Stock of the Company. Of the amount
available for incentive compensation, 18% is allotted to the Chief Executive
Officer and the remainder is available to the Management Group on the
following basis: 30% of the total amount available is allotted by Article XII
to the members of the Management Group in proportion to their salaries, and
the balance may be allotted by the Committee, entirely at the Committee's
discretion, as to amounts and individuals. The Committee has the authority to
reduce the amount of any allotment to the Chief Executive Officer or a member
of the Management Group. In determining the manner of allocating the amount
made available for allotment to individual executive officers employed by the
Company other than the Chief Executive Officer for 1996, the Committee decided
that 75% of such award should be based on corporate earnings performance and
25% on the attainment of individual objectives. Payments are made in cash as
soon as practicable after determination of the amount available. The total
amount of the 1996 Article XII awards to eligible officers, including
executive officers, was $3,081,353 as compared with $4,577,519 which was
permitted to be awarded under the Article XII formula.
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Mr. Wilson participated in an incentive compensation plan for key employees
of Gallaher Limited. Under such plan, an amount equal to 0.387% of
consolidated profits before tax (as defined in such plan) is made available
for allotment annually. Of the amount made available for incentive
compensation, 18.5% is allotted to the Chairman of Gallaher Limited. The
Committee has reviewed, and the Board of Directors of Gallaher Limited has
approved, revised compensation arrangements for Mr. Wilson and other officers
of Gallaher effective January 1, 1997. The changes are for the purpose of
adjusting the salary and annual bonus components of cash compensation in order
to more closely conform to typical practice in the U.K. as recommended by
Towers Perrin. The changes will result in the salary component being a greater
portion of total current pay and the bonus component being a lesser portion of
total current pay. The revised Gallaher incentive compensation plan will
result in 0.195% of consolidated profits before tax being made available for
allotment annually with 21.5% of such available amount being allocated to the
Chairman of Gallaher.
In connection with the spin-off of Gallaher Limited, the Committee has
recommended the implementation of a new annual incentive bonus program to take
the place of Article XII (see Item 2, "THE DISTRIBUTION PROPOSALS--APPROVAL OF
AN AMENDMENT TO THE COMPANY'S BY-LAWS TO REPEAL THE ANNUAL EXECUTIVE INCENTIVE
COMPENSATION PROGRAM SET FORTH THEREIN AND APPROVAL OF THE FORTUNE BRANDS,
INC. ANNUAL EXECUTIVE INCENTIVE COMPENSATION PLAN").
Other Considerations with Respect to the Chief Executive Officer's
Compensation
As adjusted income from continuing operations increased 1.4% during 1996 as
compared with 1995, the annual incentive compensation for Mr. Thomas C. Hays
as Chief Executive Officer under Article XII increased 1.4% from the 1995
annual incentive compensation. This portion of his compensation is based
strictly on a stockholder-approved formula related to the pre-tax earnings
performance of the Company as explained under Annual Incentive Bonuses above.
Long-Term Incentives
Under the Company's 1990 Long-Term Incentive Plan, the Committee can grant
to key employees of the Company and its subsidiaries a variety of long-term
incentives, including nonqualified stock options, incentive stock options,
stock appreciation rights, restricted stock, performance awards, dividend
equivalents and other stock-based incentives. During 1996, the Committee
granted performance share awards, incentive stock options and nonqualified
stock options to executive officers of the Company.
The Committee intends that stock options and performance awards serve as a
significant piece of the executives' total compensation package, and thus they
are granted in consideration of present and anticipated performance, as well
as past performance. Annual and long-term incentives make up the major portion
of the total compensation of executive officers. Moreover, the stock options
and performance awards offer the executive officers significant long-term
incentives to increase their efforts on behalf of the Company and its
subsidiaries, to focus managerial efforts on enhancing stockholder value and
to align the interests of the executives with the stockholders. As indicated
above, the Committee's compensation philosophy is to have long-term incentives
that pay more for superior performance and less if performance does not
achieve that level. The Committee, in making its determinations with respect
to stock option and performance award grants to the individual senior
executives was guided by the percentage of the individual's base salary that
the estimated value of the stock options and performance award would comprise.
The Committee sets the percentage of base salary that the long-term incentive
would represent at a level based on a comparison to the value of long-term
incentives awarded to similarly-compensated executives in the survey group,
based on the outside consultants' survey of competitive practice regarding the
percentage of base salary represented by long-term incentives. The Committee
used an option pricing valuation method for purposes of making such
comparison. The grants are designed so that stock options comprise 60% of the
long-term incentive grant and performance awards comprise 40% thereof. These
grants continue the Committee's practice of providing executive officers with
annual long-term incentive grants that are at competitive levels as
recommended by Towers Perrin, the Committee's outside consultants.
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In determining the level of grants for the executive officers, the Committee
considered several factors in its subjective judgment without any of these
factors being weighted greater than any other: first, that the Company and its
subsidiaries comprised a large and diverse organization with over 100
operating subsidiaries in five highly competitive industries doing business on
a worldwide basis; second, the complex task facing the executive officers in
managing and furthering the performance, growth and prospects of such an
organization; and third, the high level of performance and results achieved by
the Company and its subsidiaries in recent years, particularly during a time
when extremely difficult economic conditions have been adversely affecting
principal markets in which many of the businesses operate, as well as the
steps taken by the executive officers to enhance stockholder value.
In November 1996 the Committee granted performance share awards for the 1997
to 1999 performance period as well as stock options. The options have an
exercise price of not less than fair market value of the stock on the date of
grant. The options generally become exercisable one year from the date of
grant, and expire 10 years from the date of grant. Benefits to an executive
officer from stock options will be realized only in the event of an increase
in the market value of the Company Common Stock.
The performance share awards for the 1997 to 1999 performance period are
contingent upon the achievement by the Company and its subsidiaries of
specified average return on equity and cumulative earnings per share targets
over the performance period 1997 to 1999. The target number of shares of
Company Common Stock will be earned if 100% of the targeted consolidated
return on equity and cumulative earnings per share are achieved. Fifty percent
of the target amount will be earned at the achievement of 83 1/3% of the
targeted average consolidated return on equity and 94% of the targeted
cumulative earnings per share. The maximum award of 150% of the target amount
will be earned at the achievement of 125% of the targeted average consolidated
return on equity and 114% of the targeted cumulative earnings per share. The
performance share award grant when aggregated with the stock option grant to
the Chief Executive Officer placed him at the 43rd percentile of the survey
group while the performance award and stock option grants to all executive
officers were at the 48th percentile of the survey group. The performance
share awards for this 1997 to 1999 performance period are designed to provide
a maximum share payment only if the Company's return on equity and earnings
per share increase was among that achieved by the top 20% of companies
comprising the Standard & Poor's 500 in recent years. In addition, the
recipients of these performance awards will receive cash dividend equivalents
at the time of payment of the performance shares equal to the cash dividends
that would have been paid on the shares had the recipient owned the shares
during the performance period.
The Internal Revenue Code limits the allowable tax deduction that may be
taken by the Company for compensation paid to the Chief Executive Officer and
the four other highest paid executive officers required to be named in the
Summary Compensation Table. The limit is $1 million per executive per year,
provided that compensation payable solely on account of the attainment of
performance goals is excluded from the limitation. It is the Committee's
intent to qualify to the extent practicable the annual incentive bonus and
stock options and performance awards under the 1990 Long-Term Incentive Plan
as performance based compensation in order that these elements of compensation
may qualify for the exclusion from the $1 million limit.
Compensation and Stock Option
Committee
Gordon R. Lohman, Chairman
Eugene R. Anderson
John W. Johnstone, Jr.
Sidney Kirschner
Charles H. Pistor, Jr.
December 31, 1996
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The following individuals, who were executive officers of the Company during
1996, served as members of the Board of Directors of Gallaher Limited, a
subsidiary of the Company, and participated in setting compensation for Mr.
Peter M. Wilson, Chairman and Chief Executive of Gallaher Limited, who was
also an executive officer and director of the Company during 1996, and have
signed this Report for this purpose.
Thomas C. Hays
John T. Ludes
Robert L. Plancher
Dudley L. Bauerlein, Jr.
December 31, 1996
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As members of the Board of Directors of Gallaher Limited, a subsidiary of
the Company, Messrs. Thomas C. Hays, John T. Ludes, Robert L. Plancher and
Dudley L. Bauerlein, Jr., who are executive officers of the Company,
participated in setting compensation for Mr. Peter M. Wilson, the Chairman and
Chief Executive of Gallaher Limited, who was also an executive officer and
director of the Company during 1996. None of these individuals is a member of
the Compensation and Stock Option Committee of the Company. The members of the
Compensation and Stock Option Committee of the Company are set forth above.
AMERICAN BRANDS, INC. STOCK PRICE PERFORMANCE
(WITH DIVIDEND REINVESTMENT)
AMB S&P500 INDEX 1996 PEER GROUP INDEX*
12/31/91 100 100 100
92 93.8 107.6 132.1
93 81.7 118.5 149.8
94 97.7 120 131.8
95 121.6 165.1 167.2
96 141.8 203.1 177.4
- --------
* Excludes American Brands, Inc.
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Peer Group Index
The Peer Group is composed of publicly traded companies in industry segments
corresponding to the Company's current five core businesses: the Tobacco
segment is composed of B.A.T (Hanson PLC has been deleted because it is no
longer in the tobacco business and B.A.T has been added in its place); the
Distilled Spirits segment is composed of Brown-Forman Corporation, The Seagram
Company, Ltd., Allied Domecq PLC, Grand Metropolitan PLC and Guinness PLC; the
Hardware and Home Improvement segment is composed of Masco Corporation, The
Black & Decker Corporation, Newell Co. and The Stanley Works; the Office
Products segment is composed of Hunt Manufacturing Co., General Binding
Corporation, Rubbermaid Incorporated and Avery Dennison Corporation; and the
Golf and Leisure segment is composed of The Arnold Palmer Golf Company,
formerly known as ProGroup, Inc., Salomon S.A. and Brunswick Corporation.
The weighted average total return of the entire Peer Group, for each year,
is calculated as follows: (1) the total return of each Peer Group member is
calculated by dividing the change in market value of a share of its common
stock, assuming periodic dividend reinvestment, by the cumulative value of a
share of its common stock at the beginning of the year; (2) each Peer Group
member's total return is then weighted within its industry segment based on
its market capitalization at the beginning of the year, relative to the market
capitalization of the entire segment, and the sum of such weighted returns
results in a weighted average total return for that segment; and (3) each
segment's weighted average total return is then weighted based on the
percentage of sales, excluding excise taxes, of that segment of the Company
for the year, as compared with total Company sales, excluding excise taxes,
and the sum of such weighted returns results in a weighted average total
return for the entire Peer Group.
The Peer Group Index reflects the weighted average total return for the
entire Peer Group calculated for the five year period from a base of 100.
The Report of the Compensation and Stock Option Committee on Executive
Compensation and the American Brands, Inc. Stock Price Performance graph shall
not be deemed to be "soliciting material" or to be "filed" with the SEC or
subject to Regulation 14A or 14C of the Regulations of the SEC under the
Exchange Act, or to the liabilities of Section 18 of the Exchange Act.
ITEM 5
ELECTION OF INDEPENDENT ACCOUNTANTS
The Company Board recommends that the stockholders elect Coopers & Lybrand
L.L.P. as independent accountants for the Company for the year 1997. In line
with this recommendation the Company Board intends to introduce at the
forthcoming Annual Meeting the following resolution (designated herein as Item
5):
"RESOLVED, that Coopers & Lybrand L.L.P. be and they are
hereby elected independent accountants for the Company for the
year 1997."
In accordance with the Company's practice, a member of Coopers & Lybrand
L.L.P. will attend the Annual Meeting to make a statement if he desires to do
so and to respond to any appropriate questions that may be asked by
stockholders.
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE FOR ITEM 5.
ITEM 6
APPROVAL OF THE AMERICAN BRANDS, INC.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
On January 28, 1997, the Company Board adopted the American Brands, Inc.
Non-Employee Director Stock Option Plan (the "Non-Employee Director Plan"),
subject to approval by the stockholders of the Non-Employee
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Director Plan, to provide for the granting to non-employee directors through
December 31, 2001 of an annual grant of an option to purchase 2,000 shares of
Company Common Stock. Under the Non-Employee Director Plan, awards may be made
covering up to 125,000 shares of Company Common Stock. These amounts are
subject to adjustment for stock splits, stock dividends and similar events.
The Board believes that the Non-Employee Director Plan will aid the Company
in attracting and retaining non-employee directors of outstanding ability by
making it possible to offer them the opportunity to acquire shares of Company
Common Stock and thereby further align their interests with those of other
stockholders of the Company. Accordingly, the Company Board has adopted the
Non-Employee Director Plan and recommends its approval by stockholders.
SUMMARY OF THE NON-EMPLOYEE DIRECTOR PLAN
The Non-Employee Director Plan is set forth in full in Annex C, and the
description of the Non-Employee Director Plan which appears below is qualified
in its entirety by reference thereto.
The Non-Employee Director Plan will be administered by the Nominating and
Corporate Governance Committee (the "Nominating Committee") appointed by the
Company Board and consisting of at least two members of the Company Board. The
members of the Nominating Committee are intended to qualify as "non-employee"
directors under Rule 16b-3 promulgated under Section 16 of the Exchange Act.
The Nominating Committee has the power and authority to administer, enforce
and interpret the Non-Employee Director Plan, to make rules for carrying it
out and to make changes in such rules.
Eligibility
In order to participate in the Non-Employee Director Plan, a person must
become a member of the Company Board after the date of adoption of the Non-
Employee Director Plan by the stockholders of the Company and must not at the
time of receipt of an option under the Non-Employee Director Plan be a full-
time employee of the Company or one of its subsidiaries. Any current director
of the Company who is not a full-time employee of the Company or one of its
subsidiaries who irrevocably elects to cease to accrue future benefits under
the Company's retirement benefit plan for non-employee directors so long as
the Company maintains the Non-Employee Director Plan or a successor plan is
also eligible to participate in the Non-Employee Director Plan as well as any
current or future director of the Company who ceases to serve as an employee
of the Company or one of its subsidiaries and to whom the Nominating Committee
determines in its sole discretion to grant options. All eligible participants
are referred to herein as "Eligible Directors."
Stock Options
The Non-Employee Director Plan authorizes only the granting of options which
do not qualify as incentive stock options under the Internal Revenue Code to
purchase shares of Common Stock.
Under the Non-Employee Director Plan (a) the option price per share shall
not be less than fair market value at the time of grant, (b) an option will
not become exercisable until the holder shall have remained a director of the
Company for at least one year after the date of grant (subject to limited
exceptions specified in the Non-Employee Director Plan) and may be exercised
for ten years from the date of grant unless an earlier expiration date is
stated in the option agreement, provided that an option may be exercised
within one year from the date of death even though such one-year period
extends beyond the ten-year term, and (c) payment in full of the option price
must be made upon exercise of each option, either in cash or shares of Company
Common Stock with a fair market value equal to the option price (provided such
shares have been held at least one year by the participant) or by a
combination of cash and such shares having an aggregate value equal to the
option price. The Nominating Committee may permit holders simultaneously to
exercise options and sell the shares of Company Common Stock thereby acquired
pursuant to a brokerage or similar arrangement, approved in advance by the
Nominating Committee, and use the proceeds from such sale as payment of the
purchase price of such shares and to pay applicable tax withholding.
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If a person's status as an Eligible Director ceases other than by reason of
death, disability or retirement from service as a member of the Company Board
after five or more years of service as an Eligible Director ("Retirement"),
the option shall terminate and cease to be exercisable 30 days after such
cessation of service except in the event of a Change in Control (as defined
below). If a person's status as an Eligible Director ceases by reason of
death, disability or Retirement, the option will continue to be exercisable
until the expiration date set forth in the option agreement, provided that an
option may be exercised within one year from the date of death even though
beyond such expiration date.
The Non-Employee Director Plan provides that each option shall have a
limited right ("Limited Right") which is automatically exercised on the date
of a Change in Control, or a later date determined by the Nominating Committee
prior to a Change in Control, unless the Nominating Committee determines at
the time of grant or at any time thereafter but prior to the Change in Control
that the Limited Right shall not be automatically exercised. In the event that
the Limited Right is not automatically exercised, the holder may during the
60-day period beginning on the date of the Change in Control (the "Limited
Right Exercise Period"), in lieu of exercising the option, exercise the
Limited Right relating thereto. The Limited Right entitles the holder of the
option to receive cash equal to the number of shares subject to the option
multiplied by the difference between the exercise price per share and the
greater of (a) the highest price per share paid for shares of Company Common
Stock acquired in the "Change in Control" and (b) the highest fair market
value of shares of Company Common Stock during the Limited Right Exercise
Period prior to the date of exercise. The option will be canceled to the
extent of the exercise of a Limited Right whether automatic or by the holder
of the option. To the extent that a Limited Right is not automatically
exercised or exercised by the holder, the holder may exercise the option
during the Limited Right Exercise Period as described under "Change in
Control" below.
Other Terms and Conditions
The Non-Employee Director Plan provides that no options may be granted after
December 31, 2001, but that the terms of options granted on or before December
31, 2001 may extend beyond such date. Any shares that have been made subject
to an option that cease to be subject to the option (other than by reason of
exercise or payment of the option) shall again be available for grant. The
Non-Employee Director Plan also provides that no option or portion thereof
shall be transferable by the participant (except as a gift to immediate family
members and trusts for the benefit of immediate family members, if permitted
in the agreement governing the terms of the option) otherwise than by will or
the laws of descent and distribution.
Change in Control
In the event of a Change in Control of the Company, the Non-Employee
Director Plan provides that (a) each option shall become immediately
exercisable; (b) if a holder's status as a member of the Company Board is
terminated following a Change in Control, the options and related Limited
Rights shall be exercisable during the Limited Right Exercise Period
applicable to such option; and (c) Limited Rights shall be automatically
exercised or become exercisable as described above under "Stock Options".
A "Change in Control" is defined in the Non-Employee Director Plan to have
occurred upon (a) the acquisition by a person or group of beneficial ownership
of more than 20% of the outstanding voting stock of the Company, (b) a
majority of the Company Board ceasing to be continuing directors (as defined
in the Non-Employee Director Plan), (c) a merger, consolidation or sale of
substantially all the assets of the Company in a transaction in which the
Company's stockholders immediately prior to the transaction do not have at
least 50% of the voting power of the surviving, resulting or transferee entity
or following which any person or group has beneficial ownership of more than
20% of the voting power of the surviving, resulting or transferee entity or
(d) the occurrence of any other event reportable by the Company as a change in
control in a filing with the SEC on Form 8-K. The definition does, however,
exclude (i) acquisitions of stock that would otherwise constitute a change in
control made by the Company or an employee benefit plan (or related trust)
sponsored or maintained by the Company and (ii) a merger or consolidation with
a corporation that does not trigger the change in control provisions.
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Amendment and Termination
The Company Board has the power, in its discretion, to amend the Non-
Employee Director Plan at any time. It does not have the power, however,
except as may be otherwise provided in the Non-Employee Director Plan, to (a)
increase the maximum number of shares authorized for issuance pursuant to the
Non-Employee Director Plan, (b) change the class of eligible recipients to
other than Eligible Directors, (c) reduce the basis upon which any minimum
stock option price is determined, (d) extend the period within which awards
under the Non-Employee Director Plan may be granted beyond December 31, 2001
or (e) provide for a stock option exercisable more than ten years from the
date of grant, except in the event of death. In addition, the Company Board
does not have the power to change the terms of any previously-granted option
in a manner that would adversely affect the rights of the holder thereof
without the consent of such holder, except to the extent provided in the Non-
Employee Director Plan or contained in the terms of the option.
The Company Board may suspend or terminate the Non-Employee Director Plan at
any time. No such suspension or termination, however, shall affect options
then in effect.
FEDERAL INCOME TAX CONSEQUENCES
The grant of an option will not result in any immediate tax consequence to
the Company or the holder. Upon exercise of an option, the holder will realize
ordinary income in an amount equal to the fair market value of the stock at
the time of exercise over the option price, and the Company will generally be
entitled to a deduction in the same amount.
RESOLUTION CONSTITUTING ITEM 6
The resolution (designated herein as Item 6) to approve the Non-Employee
Director Stock Option Plan is as follows:
"RESOLVED, that, as conditionally adopted by the Board of
Directors, the American Brands, Inc. Non-Employee Director
Stock Option Plan submitted to this Annual Meeting and as
shown in Annex C to the proxy statement accompanying the
notice of this Annual Meeting be and it is hereby approved for
1997 and subsequent years."
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE FOR ITEM 6.
ITEM 7
RESOLUTION REQUESTING ELIMINATION OF ELECTION OF DIRECTORS BY CLASSES
The Company is informed that John J. Gilbert, whose address is 29 East 64th
Street, New York, New York 10021-7043, a record holder of 400 shares of
Company Common Stock and claiming an additional family interest of 1,200
shares, intends to introduce at the Annual Meeting the following resolution
(designated herein as Item 7):
"RESOLVED: That the stockholders of American Brands, Inc.,
assembled in annual meeting in person and by proxy, hereby
request that the Board of Directors take the needed steps to
provide that at future elections of directors new directors be
elected annually and not by classes as is now provided and
that on expiration of present terms of directors their
subsequent election shall also be on an annual basis."
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The proponent has furnished the following statement setting forth the
reasons advanced in support of the proposal:
"Continued very strong support along the lines we suggest were shown at the
last annual meeting when 39.7%, an increase over the previous year, 4,529
owners of 54,359,487 shares, were cast in favor of this proposal. The vote
against included 8,937 unmarked proxies.
"ARCO to its credit, voluntarily ended theirs stating that when a very high
percentage (34.6%) desired it to be changed to an annual election it was
reason enough for them to change it. Several other companies have also
followed suit such as: Pacific Enterprises, Katy Industries, Hanover Direct
and others. Ameritech is one of the latest to end theirs.
"A few years ago my resolution on the subject was withdrawn when the
Westinghouse directors agreed to end their stagger system. At the Lockheed-
Martin merger the stagger system was ended and also at a special meeting of
First Commerce Corporation in 1995. Further, Allegheny Power System tried
to put in a stagger system, as well as take away cumulative voting, and the
stockholders defeated it, showing stockholders are interested in their
rights.
"Because of the normal need to find new directors and because of
environmental problems and the avalanche of derivative losses and many
groups desiring to have directors who are qualified on the subjects, we
think that ending the stagger system of electing directors is the answer.
Some recommendations have been made to carry out the CERES 10 points. The
11th, in our opinion, should be to end the stagger system of electing
directors and to have cumulative voting.
"Equitable Life Insurance Company, which is now called Equitable Companies,
converted from a policy owned company to a public stockholder meeting.
Thanks to AXA, the controlling French insurance company not wanting it,
they now do not have a staggered board.
"Orange and Rockland Utility Company had a terrible time with the stagger
system and its 80% clause to recall a director. The chairman was involved
in a scandal affecting the company. Not having enough votes the meeting to
get rid of the chairman had to be adjourned. Finally, at the adjourned
meeting enough votes were counted to recall him.
"If you agree, please mark your proxy for this resolution; otherwise it is
automatically cast against it, unless you have marked to abstain."
COMPANY BOARD STATEMENT ON ITEM 7
Under the Delaware Code, the State in which the Company is incorporated, the
change contemplated by the proposal would require an amendment to the Company
Certificate which must first be approved by the Company Board and then
submitted to a vote of the stockholders. A vote in favor of Item 7, therefore,
would constitute a request that the Board initiate this amendment. The Company
Board does not believe, however, that such an amendment would be in the best
interests of the Company or its stockholders.
In 1986, the stockholders approved an amendment to the Company Certificate
to provide for the current division of the Company Board by class, with one
class elected each year for a three-year term. Fully 86.9% of the votes cast
with respect to that proposal were cast in its favor.
The Company Board believes that a classified board enables the Company to
plan for a reasonable period into the future and thereby provide for
continuity of corporate policies. The Company Board also believes that
flexibility is achieved by the election of one-third of the directors
annually, while stability is retained because a majority of the directors at
all times will have had prior experience in the management of the Company's
business. In addition, the classified Company Board would preclude the
immediate removal of all incumbent directors by a person seeking a change in
control of the Company and thereby would benefit all of the Company's
stockholders as the incumbent directors would then be in a position to act to
protect the stockholders' value in the Company. Surveys of corporate board
structures conducted by certain organizations independent of the Company have
shown that more than half of the corporations included in the surveys maintain
classified boards.
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For the foregoing reasons, the Company Board believes that the amendment
contemplated by Item 7 is not in the best interests of the Company.
Resolutions substantially similar to Item 7 were rejected by the stockholders
at each Annual Meeting from 1989 through 1996.
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE AGAINST ITEM 7.
ITEM 8
RESOLUTION REQUESTING A REPORT WITH RESPECT TO
THE GLASS CEILING COMMISSION'S RECOMMENDATIONS
The Company is informed that the Mercy Health Services, whose address and
stock ownership will be furnished by the Company promptly upon receipt of any
oral or written request therefor, intends to introduce at the Annual Meeting
the following resolution (designated herein as Item 8):
"The term 'glass ceiling' was first used in a 1986 Wall Street Journal
article to describe an artificial barrier to the advancement of women to
corporate management positions. Senator Robert Dole introduced the Glass
Ceiling Act, as part of Title II of the Civil Rights Act of 1991. President
Bush signed the 1991 Civil Rights Act and established the 21 bi-partisan
Glass Ceiling Commission. The Commission was charged with preparing
recommendations for the President and corporate leaders on the Glass
Ceiling issue.
"In 1991 Secretary of Labor Lynn Martin completed the Glass Ceiling
Initiative report. Senator Dole praised the report stating this 'confirm
(s) what many of us have suspected all along--the existence of invisible,
artificial barriers blocking women and minorities from advancing up the
corporate ladder to management and executive level positions' and 'for this
Senator, the issue boils down to ensuring equal access and equal
opportunity.'
"Secretary of Labor and Chairperson of the Glass Ceiling Robert Reich
states, 'The glass ceiling is not only an egregious denial of social
justice that affects two-thirds of the population, but a serious economic
problem that takes a huge financial toll on American business.' And '. . .
we need to attract and retain the best, most flexible workers and leaders
available, for all levels of the organization.'
"The stated vision of the bi-partisan Glass Ceiling Commission is 'a
national corporate leadership fully aware that shifting demographics and
economic restructuring make diversity at management and decision making
levels a prerequisite for the long-term success of the United States in
domestic and global market places'. The report revealed that women made up
45.7% of the total workforce and were awarded over half of all Master
degrees, yet 95% of senior-level managers remain men. Women today earn
about $.72 for every dollar earned by men.
"The Glass Ceiling report confirms inclusiveness in the workplace has a
positive impact on the bottom line. A 1993 study of Standard and Poor 500
companies revealed, '. . . firms that succeed in shattering their own glass
ceiling racked up stock-market records that were nearly 2 1/2 times better
than otherwise-comparable companies.'
"We believe that top management positions should more closely reflect the
people in the workforce and marketplace if our company is going to remain
competitive in the future.
"THEREFORE BE IT RESOLVED: the shareholders request the board of directors
prepare a report, at reasonable cost and excluding confidential
information, available to shareholders by the fall of 1997 on our progress
in response to the Glass Ceiling Commission's business recommendations
including a review of:
1. Plans of the CEO and Board to address the glass ceiling issue.
2. Steps the company has taken to use the Glass Ceiling's Report and
managements recommendation flowing from it.
3. Company-wide policies addressing leadership development, employee
mentoring, workforce diversity initiatives and family friendly programs.
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4. An explanation of how executive compensation packages and performance
evaluations include executives efforts in breaking the glass ceiling.
5. A chart of senior management broken down by gender and race."
COMPANY BOARD STATEMENT ON ITEM 8
The Company firmly supports diversity in the workplace, as evidenced by its
policies and programs. The Company long has been and will continue to be
strongly committed to the principle of equal employment opportunity. The
policy of the Company opposing all forms of discrimination has been clearly
stated. The policy of the Company and each of its subsidiaries is to comply
fully with the spirit and letter of federal, state and local anti-
discrimination laws. Nondiscriminatory and equal employment opportunity is to
be provided for all qualified applicants and employees in all personnel
actions, including recruiting, job assignment, training and educational
opportunity, promotion, layoff and compensation and benefits.
The Company has already considered the principles set forth by the Glass
Ceiling Commission and a Company committee, which includes members of the
Company Board, reviews various policies and programs of the Company that
support the goal of diversity. This committee also considers workforce issues
relating to the effective utilization of, and opportunities for, women and
minorities. Among the matters considered by such committee has been
information contained in the March 1995 Glass Ceiling Commission fact-finding
report, "Good for Business: Making Full Use of the Nation's Human Capital".
The final report of the Glass Ceiling Commission, "A Solid Investment:
Making Full Use of the Nation's Capital," was issued in 1995. Many of the
recommendations in the final report involved considerable controversy within
the Glass Ceiling Commission itself. For example, on the issue of disclosure
of diversity data, a number of commissioners believed that issues of privacy
and corporate trade secrets dictated against such disclosure. The report
requested by this proposal would result in the public dissemination of such
confidential information.
The Company believes that the reports and publicity requested by this
proposal would not enhance its commitment to equal employment opportunity and
creating a diverse workplace. The Company's commitment to such programs is
part of its ordinary business operations, and consequently, is part of the job
responsibilities of each executive. Both management and the Company Board are
entrusted with the obligation and opportunity to make such programs
successful. The Company Board believes that to require the preparation of
additional reports would not be a prudent use of the Company's resources.
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE AGAINST ITEM 8.
ITEM 9
RESOLUTION REQUESTING EQUAL EMPLOYMENT REPORT
The Company is informed that the Immaculate Heart Missions, Inc. and the
Congregation of the Sisters of Charity of the Incarnate Word, whose respective
addresses and stockholdings will be furnished by the Company promptly upon
receipt of any oral or written request therefor, intend to introduce at the
Annual Meeting the following resolution (designated herein as Item 9):
"More than 140 major employers publicly disclose reports on work diversity
for their shareholders; for example Capital Cities/ABC's Commitment Report,
U.S. Air's Affirming Workplace Diversity and Amoco's Diverse Work Force. In
California, all of the regulated utilities and most of the major banks
provide this data voluntarily. Southern California Edison, has informed the
Glass Ceiling Commission that it supports public reporting of this kind.
The Glass Ceiling Commission recommends that '. . . both public and private
sectors work toward increased public disclosure of diversity data.' The
following chart shows our company's EEO-1 data for 1992 and totals for 1991
and 1990. Later years are not available.
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EMPLOYMENT STANDARDS ADMINISTRATION
OFFICE OF FEDERAL CONTRACT COMPLIANCE PROGRAMS
1992 EEO-1 FILE
<TABLE>
<CAPTION>
MALE FEMALE
----------------------- -----------------------
TOTAL MALE FEMALE BLACK ASIAN AM IND HISP BLACK ASIAN AM IND HISP
----- ----- ------ ----- ----- ------ ---- ----- ----- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Officials/Managers...... 2290 1788 502 62 12 4 38 31 3 3 5
Professionals........... 1139 707 432 11 16 3 7 11 6 1 10
Technicians............. 727 454 273 29 3 1 5 21 5 1 7
Sales Workers........... 1743 1162 581 49 5 0 40 18 2 2 14
Office & Clerical....... 2762 286 2476 31 10 0 10 167 11 6 20
Craftsmen............... 2297 1947 350 184 20 3 89 32 4 2 25
Operators............... 6709 1364 3545 599 58 3 349 948 74 10 49
Laborers................ 3019 1309 1710 156 18 5 218 113 45 2 232
Service Workers......... 386 97 289 21 1 0 7 24 1 1 204
Total 1992.............. 21072 10914 10158 1142 143 19 763 1365 151 28 536
Total 1991.............. 20878 11030 9848 1103 134 18 670 1301 131 24 536
Total 1990.............. 21408 11266 10142 1191 137 25 685 1316 139 25 538
</TABLE>
"BE IT RESOLVED: THE SHAREHOLDERS REQUEST THE BOARD OF DIRECTORS PREPARE A
REPORT AT REASONABLE COST, TO BE AVAILABLE TO SHAREHOLDERS BY THE FALL OF
1997, EXCLUDING CONFIDENTIAL INFORMATION AND FOCUSING ON THE FOLLOWING
AREAS:
1. A chart identifying employees according to their sex and race in each of
the nine major EEOC defined job categories for 1994, 1995 and 1996,
listing either numbers or percentages in each category.
2. A summary description of any Affirmative Action policies and programs to
improve performances, including job categories where women and minorities
are underutilized.
3. A description of any policies and programs oriented specifically toward
increasing the number of managers who are qualified females and/or belong
to ethnic minorities.
4. A general description of how the company publicizes its Affirmative
Action policies and programs to merchandise suppliers and service
providers.
5. A description of any policies and programs favoring the purchase of
goods and services from minority-and/or female owned business
enterprises."
COMPANY BOARD STATEMENT ON ITEM 9
The Company firmly supports diversity in the workplace, as evidenced by its
policies and programs. The Company long has been and will continue to be
strongly committed to the principle of equal employment opportunity. The
policy of the Company opposing all forms of discrimination has been clearly
stated. The policy of the Company and each of its subsidiaries is to comply
fully with the spirit and letter of federal, state and local anti-
discrimination laws. Nondiscriminatory and equal employment opportunity is to
be provided for all qualified applicants and employees in all personnel
actions, including recruiting, job assignment, training and educational
opportunity, promotion, layoff and compensation and benefits.
The Company's corporate equal employment opportunity policy has been and is
communicated to employees in various Company documents and by posting on
bulletin boards. Supervisors are informed that they should base decisions on
employment in accordance with this policy. Equal employment training sessions
are held from time to time for employees and managers and have included
sensitivity programs on harassment in the workplace.
Corporate committees have been established to review and monitor corporate
equal employment opportunity policies and procedures and affirmative action
programs where applicable. One such committee, which includes
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members of the Company Board, reviews various policies and programs of the
Company that support the goal of diversity and considers workforce issues
relating to the effective utilization of, and opportunities for, women and
minorities.
Many of the subsidiary companies for some time have maintained formal
affirmative action programs applicable to government contractors. These
programs have been and are available for review by employees. Recruiting
agencies, labor unions and suppliers of goods and services are advised of
these programs and are asked to execute government required EEO
certifications. Statistical information required by law is filed with
government agencies.
Many recommendations in the final report of the Glass Ceiling Commission ("A
Solid Investment: Making Full Use of the Nation's Human Capital") involved
considerable controversy within the Glass Ceiling Commission itself. For
example, on the issue of disclosure of employment information and diversity
data, a number of commissioners believed that issues of privacy and corporate
trade secrets dictated against such disclosure. A report requested by this
proposal includes the disclosure of a chart known as Form EEO-1, which is a
confidential document filed by private employers with the Equal Employment
Opportunity Commission.
The Company Board believes that the additional report requested by this
proposal is neither appropriate nor necessary. As described above, equal
employment opportunity and diversity issues have long been high on the agenda
of management and the Company Board as part of the ordinary business
operations of the Company. Adoption of the proposal is not needed to enhance
the Company's already strong commitment to equal employment opportunity nor
ensure that the Company's employees receive fair employment opportunities.
Much of the information requested by the proponents is duplicative and
maintained locally by the more than 100 active subsidiaries of the Company.
The Company Board also believes that much of this information should be kept
confidential. The preparation of a report in the format requested by the
proponents would also require an unnecessary expenditure of time and money. A
resolution substantially similar to Item 9 was rejected by the stockholders at
both the 1995 and 1996 Annual Meetings.
THE COMPANY BOARD RECOMMENDS THAT YOU VOTE AGAINST ITEM 9.
CERTAIN INFORMATION REGARDING SECURITY HOLDINGS
The following tabulation sets forth information with respect to the
beneficial ownership of equity securities of the Company by all directors and
executive officers of the Company as a group (18 persons) at February 13,
1997. The information is based on information received by the Company from the
directors and officers, from the Corporate Employee Benefits Committee of the
Company and the Trustee of the Defined Contribution Plan of the Company.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENTAGE
TITLE OF CLASS (A)(B)(C) OF CLASS
-------------- -------------------- ----------
<S> <C> <C>
Common Stock............................... 1,747,237 shares 1.02%
</TABLE>
- --------
(a) For information as to voting and investment power with respect to shares
owned by directors and executive officers, see Note (c) to the table under
"Election of Directors". To the best of the Company's knowledge, each
executive officer who is not a director has sole voting and investment
power with respect to shares owned by him, other than with respect to
shares included in Note (b) below that may be acquired upon exercise of
options, and with respect to shares included in Note (c) below. The
Trustee of the Defined Contribution Plan of the Company has agreed to vote
the shares of Company Common Stock held in trust in accordance with
instructions received from members of the Plan and shares as to which
instructions are not received are voted by the Trustee proportionally in
the same manner as shares as to which the trustee has received
instructions.
(b) The number shown above includes 42,875 shares of Company Common Stock held
on December 31, 1996 by the Trustee of the Defined Contribution Plan of
the Company (including certain of those referred
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to in Note (a) to the table under "Election of Directors") which number is
equivalent as of that date to the undivided proportionate beneficial
interests of the directors and executive officers of the Company in all
such shares, and 1,470,020 shares (including certain of those referred to
in Note (b) to the table under "Election of Directors"), of which the
directors and executive officers had the right to acquire beneficial
ownership pursuant to the exercise on or before April 14, 1997 of options
granted by the Company. Inclusion of such 1,470,020 shares does not
constitute an admission by the directors and executive officers that they
are the beneficial owners of such shares.
(c) The number shown above includes 9,107 shares held in various family trusts
for the benefit of or with a remainder to various family members of
another executive officer and director, as to which shares
such executive officer and director disclaims beneficial ownership. These
shares are referred to in Note (c) to the table under "Election of
Directors".
To the best of the Company's knowledge, no one person was the beneficial
owner of more than 5% of the outstanding voting securities of the Company or
of more than 5% of any class of voting securities of the Company at February
13, 1997.
SUBMISSION OF STOCKHOLDER PROPOSALS AND NOMINATIONS
The Company Certificate contains procedures for stockholder nomination of
directors and the Company's By-laws contain procedures for other stockholder
proposals to be presented before annual stockholder meetings. The Company
Certificate provides that any record owner of stock entitled to be voted
generally in the election of directors may nominate one or more persons for
election as a director at a stockholders' meeting only if written notice is
given to the Secretary of the Company of the intent to make such nomination.
The notice must be given 120 days in advance of the annual meeting and must
include: (i) the name and address of each stockholder who intends to appear in
person or by proxy to make the nomination and of the person or persons to be
nominated; (ii) a description of all arrangements or understandings between
the stockholder and each nominee and any other person or persons (naming them)
pursuant to which the nomination is to be made by the stockholder; (iii) such
other information regarding each nominee proposed by such stockholder as would
have been included in a proxy statement; and (iv) the consent of each nominee
to serve if elected.
With respect to stockholder proposals or other business to be considered at
the annual meeting of stockholders, the By-laws provide that a stockholder of
record must give written notice to the Secretary of the Company no later than
120 days before the meeting. The notice must set forth: (i) a brief
description of the business to be brought before the meeting, the reasons for
conducting such business and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made and (ii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the proposal is made (a) the name and address
of such stockholder, as they appear on the Company's books, and of such
beneficial owner and (b) the class and number of shares of the Company which
are owned beneficially and of record by such stockholder and such beneficial
owner. The By-laws further provide that, notwithstanding the foregoing
provisions, stockholders wishing to have a proposal included in the Company's
proxy statement shall comply with the applicable requirements of the Exchange
Act, and the rules and regulations thereunder and shall have the rights
provided by Rule 14a-8 under such Act. In order to be eligible under Rule 14a-
8 for inclusion in the Company's proxy statement and accompanying proxy at the
next annual meeting of stockholders currently scheduled to be held on May 6,
1998, stockholder proposals must be received by the Company on or before
November 14, 1997.
A copy of the relevant Company Certificate and By-law provisions is
available upon written request to Mr. Louis F. Fernous, Jr., Vice President
and Secretary, American Brands, Inc., 1700 East Putnam Avenue, Old Greenwich,
Connecticut 06870. The person presiding at the meeting is authorized to
determine if a proposed matter is properly before the meeting or if a
nomination is properly made.
145
<PAGE>
OTHER MATTERS
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Annual Report on Form 10-K for the fiscal year ended December 31, 1996
filed by the Company with the SEC is incorporated herein by reference.
All documents filed by the Company with the SEC pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to the
date of the Annual Meeting or any adjournment thereof shall be deemed to be
incorporated by reference herein.
Any statements contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes hereof to the extent
that a statement contained herein (or in any other subsequently filed document
that also is incorporated by reference herein) modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
Any person receiving a copy of this Proxy Statement may obtain, without
charge, upon written or oral request, a copy of any of the documents
incorporated by reference herein, except for the exhibits to such documents
(other than the exhibits expressly incorporated in such documents by
reference). Requests should be directed to: American Brands, Inc., 1700 East
Putnam Avenue, Old Greenwich, Connecticut 06870, Attention: Mr. Louis F.
Fernous, Jr., Vice President and Secretary (telephone: (203) 698-5000).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and the rules and regulations promulgated thereunder and in accordance
therewith files reports, proxy statements and other information with the SEC.
Reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Regional Offices of the SEC at Seven World Trade Center, Suite 1300, New York,
New York 10048 and in the Citicorp Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such information may be obtained by
mail from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The SEC also maintains a World
Wide Web site that contains reports, proxy and information statements and
other information regarding the Company, which files electronically with the
SEC (http://www.sec.gov). Reports and other information concerning the Company
may also be inspected at the offices of the NYSE, 20 Broad Street, New York,
New York 10005.
REPORTS OF NEW GALLAHER
Prior to the Distribution Date, New Gallaher will file with the SEC a
Registration Statement on Form 20-F (herein, together with all amendments and
exhibits thereto, referred to as the "Registration Statement") under the
Exchange Act, with respect to the New Gallaher Ordinary Shares and ADSs. As a
result of such registration, New Gallaher will become subject to the reporting
requirements of the Exchange Act applicable to a foreign private issuer, and
in accordance therewith will be required to file reports and other information
with the SEC. The Registration Statement, including the exhibits thereto and
reports and other information filed by New Gallaher with the SEC can be
inspected without charge upon request at the public reference facilities
maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Regional Offices of the SEC at Seven World Trade Center,
Suite 1300, New York, New York 10048 and in the Citicorp Center, Suite 1400,
500 West Madison Street, Chicago, Illinois 60661 and, if the ADSs are accepted
for listing on the NYSE, at the public reference room of the NYSE located at
20 Broad Street, New York, New York 10005. Copies of such material and any
part thereof will also be available by mail from the Public Reference Section
of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
146
<PAGE>
As a foreign private issuer, New Gallaher will be exempt from the rules
under the Exchange Act prescribing the furnishing and content of proxy
statements and its officers, directors and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act. Under the Exchange Act, New Gallaher will not
be required to publish financial statements as frequently or as promptly as
United States companies. However, if the New Gallaher Ordinary Shares are
accepted for listing on the London Stock Exchange, New Gallaher will be
subject to the Rules of the London Stock Exchange regulating notices of
shareholders' meetings, solicitation of proxies and other reports and
communications.
New Gallaher will enter into a deposit agreement with The Bank of New York,
as Depositary, regarding the issuance of and rights pertaining to the ADSs.
Pursuant to the deposit agreement it is expected that New Gallaher will
furnish to the Depositary all notices of shareholders' meetings and other
reports and communications that are made generally available to shareholders
of New Gallaher and that the Depositary will, to the extent permitted by law,
make such notices, reports and communications available to record holders of
ADSs and mail to all record holders of ADSs a notice containing a summary of
the information contained in any notice of a shareholders' meeting received by
the Depositary. See "THE DISTRIBUTION PROPOSALS--DESCRIPTION OF AMERICAN
DEPOSITARY SHARES."
MISCELLANEOUS
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SEC FOR
ITS LAST FISCAL YEAR, INCLUDING ANY FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES THERETO, WILL BE MADE AVAILABLE TO STOCKHOLDERS WITHOUT
CHARGE UPON WRITTEN REQUEST TO MR. LOUIS F. FERNOUS, JR., VICE PRESIDENT AND
SECRETARY, AMERICAN BRANDS, INC., 1700 EAST PUTNAM AVENUE, OLD GREENWICH,
CONNECTICUT 06870. THE COMPANY WILL FURNISH ANY EXHIBITS TO FORM 10-K TO EACH
STOCKHOLDER REQUESTING THEM UPON PAYMENT OF A FEE OF $.10 PER PAGE TO COVER
THEIR COST.
The expense of the solicitation of proxies for this meeting, including the
cost of mailing, will be borne by the Company. In addition to mailing copies
of this material to stockholders, the Company will request persons who hold
stock in their names or custody, or in the names of nominees, for the benefit
of others to forward copies of such material to the beneficial owners of the
stock of the Company and to request authority for the execution of the
proxies. To the extent deemed necessary in order to assure sufficient
representation at the meeting, officers and regular employees of the Company
will request the return of proxies by telephone, facsimile or in person. In
addition, the Company has retained Kissel-Blake Inc., 110 Wall Street, New
York, New York 10005, to aid in the solicitation of proxies for a fee,
including its expenses, estimated at $40,000. The total expense to be borne by
the Company will depend upon the volume of shares represented by the proxies
received promptly in response to the notice of meeting.
Stockholders who do not intend to be present at the meeting are urged to
send in their proxies without delay. Prompt response is helpful, and your
cooperation will be appreciated.
March 12, 1997
147
<PAGE>
GALLAHER GROUP PLC
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Directors' Statement of Responsibility................................... F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of the Independent Accountants.................................... F-3
Consolidated Profit and Loss Accounts for the Three Years Ended December
31, 1996................................................................ F-4
Statement of Total Recognised Gains and Losses for the Three Years Ended
December 31, 1996....................................................... F-5
Consolidated Balance Sheets as of December 31, 1995 and 1996............. F-5
Consolidated Cash Flow Statements for the Three Years Ended December 31,
1996.................................................................... F-6
Notes to the Consolidated Financial Statements........................... F-7
</TABLE>
F-1
<PAGE>
GALLAHER GROUP PLC
DIRECTORS' STATEMENT OF RESPONSIBILITY
DIRECTORS' STATEMENT OF RESPONSIBILITY IN RELATION TO THE CONSOLIDATED
FINANCIAL STATEMENTS
The Directors are required by U.K. law to prepare financial statements for
each fiscal period which give a true and fair view of the state of affairs of
the Group as at the end of the fiscal period and of the profit and loss for
that period. The Directors confirm that suitable accounting policies have been
consistently applied in the preparation of the financial statements, supported
by reasonable and prudent judgements and estimates as necessary; applicable
accounting standards have been followed, and the financial statements have
been prepared on the going concern basis.
The Directors are responsible for ensuring the maintenance of proper
accounting records, which disclose with reasonable accuracy the financial
position of the Group at any time and from which financial statements can be
prepared to comply with the U.K. Companies Act 1985. They are also responsible
for ensuring the operation of systems of internal control for safeguarding the
assets of the Group and for preventing and detecting fraud and other
irregularities.
F-2
<PAGE>
REPORT OF THE INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Gallaher Group Plc
We have audited the Consolidated Financial Statements of Gallaher Group Plc
and its subsidiary undertakings contained on pages F-4 to F-31 of this Proxy
Statement which are expressed in pounds sterling. These financial statements
have been prepared on the basis set out in notes 1 and 2(c) on page F-7, and
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the UK which are substantially the same as those followed in the
US. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above, which have been
prepared on the basis set out in notes 1 and 2(c) therein, present fairly, in
all material respects, the consolidated financial position of Gallaher Group
Plc and its subsidiary undertakings at 31 December 1996 and 1995, and the
consolidated results of their operations, total recognised gains and losses
and their cash flows for each of the three years in the period ended 31
December 1996 in conformity with generally accepted accounting principles in
the UK, which differ from generally accepted accounting principles in the US.
The effect of the major differences in the determination of net income and
shareholders' equity is shown in note 35 to the Consolidated Financial
Statements.
Coopers & Lybrand
Chartered Accountants
12 March 1997
London, England
F-3
<PAGE>
GALLAHER GROUP PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-----------------------------------------
NOTES 1994 1995 1996 1996
----- --------- --------- --------- --------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C> <C>
TURNOVER 3,4
Continuing operations.......... 4,005.7 4,078.4 4,372.0 7,484.8
Discontinued operations........ 1,024.5 564.9 56.3 96.4
5,030.2 4,643.3 4,428.3 7,581.2
Duty............................. (3,147.7) (3,226.6) (3,425.2) (5,863.9)
Other cost of sales.............. (963.0) (639.9) (333.4) (570.8)
Exceptional cost of sales--
continuing operations........... -- -- (65.5) (112.1)
-------- -------- -------- --------
Gross profit..................... 919.5 776.8 604.2 1,034.4
Net operating expenses........... (563.0) (433.6) (305.7) (523.3)
-------- -------- -------- --------
OPERATING PROFIT 4,5
Continuing operations.......... 332.9 337.4 296.0 506.8
Discontinued operations........ 23.6 5.8 2.5 4.3
356.5 343.2 298.5 511.1
EXCEPTIONAL ITEMS
Loss on sale of operation...... 6 -- (25.2) -- --
Provision for diminution in
value of assets in operations
to be sold.................... (63.0) -- -- --
Income from fixed asset
investments..................... 9 0.5 0.4 0.4 0.7
Net interest (expense)/income.... 10 (18.0) (8.3) 3.0 5.1
-------- -------- -------- --------
PROFIT ON ORDINARY ACTIVITIES
BEFORE TAXATION................. 3 276.0 310.1 301.9 516.9
Taxation on profit on ordinary
activities...................... 11 (114.9) (114.0) (81.1) (138.9)
-------- -------- -------- --------
PROFIT ON ORDINARY ACTIVITIES
AFTER TAXATION.................. 161.1 196.1 220.8 378.0
Minority interests............... (0.1) -- -- --
-------- -------- -------- --------
PROFIT FOR FINANCIAL YEAR........ 161.0 196.1 220.8 378.0
Dividends on equity shares--
cash............................ 13 (159.9) (145.5) (182.4) (312.3)
- --specie......................... 13 -- -- (555.4) (950.8)
-------- -------- -------- --------
RETAINED PROFIT/(DEFICIT) FOR THE
YEAR............................ 33 1.1 50.6 (517.0) (885.1)
======== ======== ======== ========
EARNINGS PER EQUITY SHARE BASED
ON PROFIT FOR YEAR.............. 12 23.0p 28.0p 31.5p 54.0c
ADJUSTED EARNINGS PER EQUITY
SHARE........................... 12 32.0p 31.6p 37.8p 64.7c
DIVIDENDS PER EQUITY SHARE....... 13 22.8p 20.8p 105.4p 180.4c
</TABLE>
There is no difference between the profit on ordinary activities before
taxation and the retained profit/(deficit) for the years stated above and their
historical cost equivalents.
F-4
<PAGE>
GALLAHER GROUP PLC
STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-----------------------------------
1994 1995 1996 1996
--------- --------- --------- -----
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Profit for financial year................ 161.0 196.1 220.8 378.0
Exchange adjustments on net investment in
overseas operations..................... (2.0) 2.8 (12.2) (20.9)
----- ----- ----- -----
TOTAL RECOGNISED GAINS AND LOSSES...... 159.0 198.9 208.6 357.1
===== ===== ===== =====
</TABLE>
GALLAHER GROUP PLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AT 31 DECEMBER
-----------------------------
NOTES 1995 1996 1996
----- --------- --------- --------
(Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
FIXED ASSETS
Intangible assets........................ 14 509.1 107.9 184.7
Tangible assets.......................... 15 222.9 136.7 234.0
Investments.............................. 16 5.2 5.0 8.6
------- -------- --------
737.2 249.6 427.3
------- -------- --------
CURRENT ASSETS
Stocks................................... 17 694.0 711.6 1,218.3
Debtors: 18
amounts falling due within one year.... 293.6 177.2 303.3
amounts falling due after more than one
year.................................. 48.6 135.3 231.6
Investments.............................. 16 22.7 200.6 343.4
Cash at bank and in hand................. 49.2 24.3 41.6
------- -------- --------
1,108.1 1,249.0 2,138.2
Creditors: amounts falling due within one
year.................................... 21 (885.7) (1,022.8) (1,751.0)
------- -------- --------
NET CURRENT ASSETS......................... 222.4 226.2 387.2
------- -------- --------
TOTAL ASSETS LESS CURRENT LIABILITIES...... 959.6 475.8 814.5
Creditors: amounts falling due after more
than one year........................... 22 (41.4) (25.4) (43.5)
Provisions for liabilities and charges... 23 (92.2) (155.1) (265.4)
------- -------- --------
NET ASSETS................................. 3 826.0 295.3 505.6
======= ======== ========
CAPITAL AND RESERVES
Called up share capital.................. 24 105.0 105.0 179.8
Share premium............................ 24 97.3 97.3 166.6
Profit and loss account.................. 33 622.2 93.0 159.2
------- -------- --------
EQUITY SHAREHOLDERS' FUNDS................. 34 824.5 295.3 505.6
Minority interests......................... 1.5 -- --
------- -------- --------
826.0 295.3 505.6
======= ======== ========
</TABLE>
F-5
<PAGE>
GALLAHER GROUP PLC
CONSOLIDATED CASH FLOW STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
------------------------------------
NOTES 1994 1995 1996 1996
----- --------- --------- --------- ------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C> <C>
Net cash inflow from operating
activities....................... 26 468.1 331.6 306.0 523.9
Returns on investments and
servicing of finance
Interest received............... 5.0 7.7 11.6 19.9
Interest paid................... (23.0) (14.8) (6.4) (11.0)
Income from fixed asset
investments.................... -- 0.4 0.4 0.7
Net cash (outflow)/inflow from
returns on investments and
servicing of finance............. (18.0) (6.7) 5.6 9.6
Taxation
Corporation tax, overseas tax
and tax deposits............... (77.5) (106.6) (179.1) (306.6)
Capital expenditure and financial
investments
Purchase of tangible fixed
assets......................... (44.0) (27.3) (26.3) (45.0)
Purchase of intangible fixed
assets......................... (2.0) -- (5.3) (9.1)
Sale of tangible fixed assets... 8.9 2.7 5.1 8.7
Sale of intangible fixed
assets......................... 2.3 -- -- --
Increase in loans to fellow
subsidiaries of
American Brands................ -- -- (17.0) (29.1)
Net cash outflow from capital
expenditure and financial
investments...................... (34.8) (24.6) (43.5) (74.5)
Acquisitions and disposals
Purchase of minority interest... (0.8) -- -- --
Sale of subsidiaries and
associated undertakings, net of
cash .......................... 25 80.2 93.4 15.4 26.4
Net cash inflow from acquisitions
and disposals.................... 79.4 93.4 15.4 26.4
Equity cash dividends paid........ (159.9) (145.5) (182.4) (312.3)
------ ------ ------ ------
Net cash inflow/(outflow) before
use of liquid resources and
financing........................ 28 257.3 141.6 (78.0) (133.5)
Management of liquid resources.... 27 (9.4) 10.9 (178.3) (305.2)
Financing
(Decrease)/increase in loans from
American Brands.................. (93.9) (257.2) 150.0 256.8
Decrease in bank and other loans.. (0.2) (23.6) -- --
Net cash (outflow)/inflow from
financing........................ (94.1) (280.8) 150.0 256.8
------ ------ ------ ------
Increase/(decrease) in cash....... 28 153.8 (128.3) (106.3) (181.9)
====== ====== ====== ======
</TABLE>
F-6
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 INTRODUCTION
Subject to approval at the Annual Meeting of Shareholders of American
Brands, Inc. ("American Brands") and receipt of a tax ruling from the US
Internal Revenue Service, American Brands plans to distribute to existing
American Brands shareholders, on a pro rata basis, American depositary shares
(evidenced by American depositary receipts) representing all the outstanding
share capital of Gallaher Group Plc (referred to as the "Distribution"). In
addition, prior to the date of the Distribution, American Brands will transfer
to Gallaher Group Plc (referred to elsewhere in this Proxy Statement as "New
Gallaher") all of the common stock of ATIC Group, Inc. (a wholly owned
subsidiary of American Brands), which is the immediate parent of Gallaher
Limited ("Gallaher"). Accordingly, the Consolidated Financial Statements
include the accounts of ATIC and Gallaher and its subsidiaries.
Gallaher disposed of its optical, housewares and retail distribution
divisions on 12 July 1994, 2 May 1995, and 25 July 1995, respectively. On 10
April 1996, the ownership of the distilled spirits division was transferred to
American Brands by way of a dividend in specie. All of these operations have
been treated as discontinued operations throughout the financial statements.
Further information on the discontinued operations is set out in note 25.
2 ACCOUNTING POLICIES
The financial statements have been prepared in accordance with accounting
standards currently applicable in the UK. The principal accounting policies,
which have been applied consistently for all the periods covered by this
report, are set out below.
(a) Basis of accounting
The financial statements have been prepared in accordance with the
historical cost convention.
The Consolidated Financial Statements ("the financial statements") have been
prepared in accordance with UK generally accepted accounting principles ("UK
GAAP") and with UK accounting presentation. Note 35 in this report provides a
summary of adjustments for the two years ended 31 December 1996 and 1995,
which would be required if those financial statements were to be restated
under US generally accepted accounting principles ("US GAAP").
The preparation of the financial statements in conformity with UK GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
(b) Convenience statement
Certain pound sterling amounts in the financial statements at 31 December
1996 and for the year then ended have been translated into US dollars at the
rate of $1.712 to the pound sterling, which was the selling rate as quoted at
3 p.m. Eastern time by Dow Jones Telerate Inc. on 31 December 1996. Such
translation should not be construed as a representation that the pound
sterling amounts have been or could be converted into US dollars at that or
any other rate.
(c) Basis of consolidation
The basis on which the financial statements of Gallaher Group Plc (the
"Company") and its subsidiary undertakings (together "the Group") have been
prepared is described below. The principles of merger accounting have been
applied to the proposed acquisition of ATIC Group, Inc. ("ATIC") by the
Company in connection with the Distribution. This has the effect of treating
the proposed merger of ATIC and the Company as if it had happened prior to the
three year period ended 31 December 1996. Accordingly, the financial
statements have been prepared as if the group structure, to be in effect
immediately after the proposed acquisition of ATIC, had been in existence for
the entire period.
F-7
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The financial statements comprise the accounts of Gallaher and ATIC after
making such adjustments as considered necessary. In order not to delay the
preparation of the annual consolidated financial statements, certain
subsidiaries have 30 November as their accounting reference date. In 1993 and
1996, Gallaher International Limited, and Gallaher (Dublin) Limited,
respectively, two of the Group's subsidiaries, changed their accounting
reference dates from 30 November to 31 December and accordingly the financial
statements for those years include the results for 13 months in respect of
those companies. The changes in reference dates did not have a significant
effect on the results of operations for those periods.
(d) Foreign currencies
Assets and liabilities denominated in foreign currencies are translated into
sterling at rates of exchange ruling at the balance sheet dates, or, if hedged
forward, at the rate of exchange under the related forward currency contract.
The results of overseas subsidiaries are translated at average rates of
exchange in the financial years. Exchange differences arising from the
retranslation of the opening net investment in subsidiaries are taken directly
to retained profits. Exchange gains and losses arising on transactions in
foreign currencies are dealt with in the profit and loss account.
(e) Turnover
Turnover represents amounts charged to external customers for goods sold,
services supplied and licence fees, and includes excise duties but not VAT or
its equivalent.
(f) Research and development
Research and development expenditure is written off as incurred.
(g) Advertising
All advertising expenditure, including that on new brands, is charged in the
year in which it is incurred.
(h) Cigarette gift schemes
Provision is made for the estimated costs of redemption of the certificates
issued under the cigarette gift schemes at the time the cigarettes are sold by
Gallaher.
(i) Intangible fixed assets
Intangible fixed assets includes purchased goodwill (representing the excess
of the cost of shares in subsidiaries over the fair value of the net assets of
those companies at the date of acquisition), trade marks, brands and licences.
They are generally amortised by equal annual instalments over their expected
useful economic lives, not exceeding forty years.
(j) Government grants
Grants relating to expenditure on tangible fixed assets are treated as
deferred income and credited to profit over a period approximating to the
lives of qualifying assets. Revenue based grants are credited to the profit
and loss account in the same period as the related expenditure.
(k) Leases
Costs in respect of operating leases are charged as incurred. Leasing
agreements which transfer to the Group substantially all the benefits and
risks of ownership of an asset are treated as if the asset had been purchased
outright. The assets are included in tangible fixed assets and the capital
element of the leasing commitments is shown as obligations under finance
leases. The lease rentals are treated as consisting of capital and interest
elements. The capital element is applied to reduce the outstanding obligations
and the interest element is charged against profit so as to give a constant
periodic rate of charge on the remaining balance outstanding at each
accounting year end. Assets held under finance leases are depreciated over the
shorter of the lease terms and the useful lives of equivalent owned assets.
F-8
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(l) Depreciation of tangible fixed assets
Depreciation is calculated to write off the cost of tangible fixed assets,
mainly by equal annual instalments, over their estimated useful lives, which
are principally:
<TABLE>
<S> <C>
Land and buildings
Freehold:
Land, which can
be separately
identified.... Not depreciated
Buildings
(including
land not
separately
identifiable).. 50 Years
Leasehold:
Long (lease
term 50 years
or more)...... 50 years
Short (lease
term under 50
years)........ Term of lease
Plant and
machinery......... 3-20 years
Fittings and
equipment......... 3-10 years
</TABLE>
(m) Stocks
Stocks and work in progress are valued at the lower of cost and net
realisable value. Cost is determined in respect of UK tobacco products
principally on the basis of average cost, in respect of bulk whisky
principally on a unit cost basis and in respect of other stocks and work in
progress principally on a first in, first out basis. In the case of
manufactured products, cost includes all direct expenditure and production
overheads based on the normal level of activity. In the case of tobacco
products and distilled spirits, the valuation of work in progress and finished
goods includes excise duties incurred. Net realisable value is the price at
which the stock can be realised in the normal course of business. Provision is
made for obsolescent, slow moving and defective stocks.
(n) Deferred taxation
Deferred taxation is provided under the liability method in respect of all
material timing differences between profits as shown in the financial
information and profits as computed for taxation purposes to the extent that
it is probable that a liability or an asset will crystallise in the
foreseeable future. Full provision is made for deferred taxation on timing
differences arising from the provision of employee pensions and other post
retirement benefits. No provision is made for taxation which could arise in
the event of overseas subsidiaries declaring dividends out of their retained
profits where such amounts are expected to be permanently reinvested in the
respective companies.
(o) Pensions and other post retirement benefits
Pension schemes are operated throughout most of the Group and are available
to the majority of its employees. With certain minor exceptions, the pension
schemes are defined benefit schemes and are fully funded by group companies
and, where applicable, by contributions from employees. Gallaher and its UK
tobacco subsidiaries are covered by joint pension arrangements. The assets of
the group's schemes are administered and maintained by trustees separately
from the assets of the group companies, with independent qualified actuaries
as advisors. The actuarial method used to evaluate defined benefit schemes in
most cases is the projected unit basis.
No assumptions are made relating to discretionary increases in respect of
pensions in payment. Pension charges, therefore, include the capitalised
amount of the discretionary increases provided in the year, to the extent that
they are not covered by surpluses.
Actuarial valuations are undertaken every three years or more frequently
when circumstances demand.
A number of companies within the Group provide health care and/or company
products on beneficial terms to retired employees. In accordance with the
provisions of Urgent Issues Task Force Abstract no. 6, the projected costs of
these benefits are charged in the financial information over the period that
eligible employees are expected to render service.
F-9
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3 SEGMENTAL ANALYSIS BY GEOGRAPHICAL AREA
Following the disposal of non-core activities the Group is principally
engaged in only one class of business, the manufacture, marketing and
distribution of tobacco products. The geographical analyses of turnover,
profit before taxation and net assets are as follows:
Turnover
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-------------------------------------
1994 1995 1996 1996
--------- --------- --------- -------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
BY DESTINATION
Continuing operations:
UK................................... 3,537.2 3,557.5 3,772.2 6,458.0
International........................ 468.5 520.9 599.8 1,026.8
Discontinued operations................ 1,024.5 564.9 56.3 96.4
------- ------- ------- -------
5,030.2 4,643.3 4,428.3 7,581.2
======= ======= ======= =======
BY ORIGIN
Continuing operations:
UK................................... 3,704.4 3,737.2 3,953.3 6,768.0
International........................ 301.3 341.2 418.7 716.8
Discontinued operations................ 1,024.5 564.9 56.3 96.4
------- ------- ------- -------
5,030.2 4,643.3 4,428.3 7,581.2
======= ======= ======= =======
</TABLE>
Profit before taxation
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
------------------------------------
1994 1995 1996 1996
--------- --------- --------- ------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
BY DESTINATION
Continuing operations:
UK
Before exceptional cost of
sales........................... 282.3 291.3 296.5 507.6
Exceptional cost of sales (note
4).............................. -- -- (65.5) (112.1)
----- ----- ----- ------
282.3 291.3 231.0 395.5
International...................... 50.6 46.1 65.0 111.3
Discontinued operations.............. 23.6 5.8 2.5 4.3
----- ----- ----- ------
Operating profit..................... 356.5 343.2 298.5 511.1
Exceptional items (note 6)......... (63.0) (25.2) -- --
Income from fixed asset investments
(note 9).......................... 0.5 0.4 0.4 0.7
Net interest (expense)/income...... (18.0) (8.3) 3.0 5.1
----- ----- ----- ------
PROFIT BEFORE TAXATION............... 276.0 310.1 301.9 516.9
===== ===== ===== ======
</TABLE>
F-10
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net assets
<TABLE>
<CAPTION>
AT 31 DECEMBER
---------------------------
1995 1996 1996
--------- --------- -------
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
BY LOCATION
Continuing operations:
UK............................................ 522.3 621.3 1,063.7
International................................. 1.0 30.4 52.0
Discontinued operations......................... 602.4 -- --
------- ------ -------
Capital employed................................ 1,125.7 651.7 1,115.7
Interest bearing net liabilities................ (299.7) (356.4) (610.1)
------- ------ -------
826.0 295.3 505.6
======= ====== =======
</TABLE>
The Group has a centralised financing policy within the UK operated by
Gallaher. It is considered that any divisional apportionment of interest and
interest bearing net liabilities would not be meaningful.
4 ANALYSIS OF OPERATING PROFIT
Continuing operations
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-----------------------------------------
1994 1995 1996 1996
--------- --------- --------- --------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Turnover........................ 4,005.7 4,078.4 4,372.0 7,484.8
Other cost of sales............. (324.8) (310.0) (310.2) (531.0)
Duty:UK......................... (2,794.4) (2,829.9) (3,025.6) (5,179.9)
International................ (282.0) (322.7) (383.4) (656.3)
Exceptional cost of sales....... -- -- (65.5) (112.1)
-------- -------- -------- --------
Gross profit.................... 604.5 615.8 587.3 1,005.5
Distribution, advertising and
selling costs.................. (224.4) (223.1) (239.4) (409.9)
Administrative expenses......... (47.0) (56.4) (52.0) (89.0)
Other operating
(expenses)/income.............. (0.2) 1.1 0.1 0.2
-------- -------- -------- --------
Operating profit................ 332.9 337.4 296.0 506.8
======== ======== ======== ========
Discontinued operations
Turnover........................ 1,024.5 564.9 56.3 96.4
Other cost of sales............. (638.2) (329.9) (23.2) (39.8)
Duty............................ (71.3) (74.0) (16.2) (27.7)
-------- -------- -------- --------
Gross profit.................... 315.0 161.0 16.9 28.9
Distribution, advertising and
selling costs.................. (243.8) (111.8) (10.4) (17.8)
Administrative expenses......... (53.6) (34.8) (4.1) (7.0)
Other operating
income/(expenses).............. 6.0 (8.6) 0.1 0.2
-------- -------- -------- --------
Operating profit................ 23.6 5.8 2.5 4.3
======== ======== ======== ========
</TABLE>
The exceptional charge to cost of sales of (Pounds)65.5 million ($112.1
million) in 1996 principally comprises redundancy costs and additional
depreciation of (Pounds)12.0 million ($20.5 million) associated with
Gallaher's announced closure of its Hyde, Manchester manufacturing facility.
This charge has no material impact on the effective rate of taxation on profit
for the year.
F-11
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5 OPERATING PROFIT
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
----------------------------------
1994 1995 1996 1996
--------- --------- --------- ----
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Operating profit is stated after
charging:
Amortisation of intangible fixed
assets............................... 19.2 14.2 6.8 11.6
Depreciation of tangible fixed
assets............................... 52.9 25.8 34.4 58.9
Rentals under operating leases for
land and buildings................... 25.8 13.0 3.1 5.3
Research and development
expenditures......................... 5.8 4.6 4.0 6.9
Auditors' remuneration for:
Audit............................... 0.9 0.5 0.4 0.7
Other services to the Company and
its UK subsidiaries................ 0.4 0.5 -- --
</TABLE>
Amortisation of intangible fixed assets and depreciation of tangible fixed
assets are analysed as follows:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
----------------------------------
1994 1995 1996 1996
--------- --------- --------- ----
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Continuing operations:
UK...................................... 25.9 17.5 31.6 54.1
International........................... 6.2 4.0 4.3 7.4
Discontinued operations................... 40.0 18.5 5.3 9.0
---- ---- ---- ----
72.1 40.0 41.2 70.5
==== ==== ==== ====
</TABLE>
Research and development expenditures include the following amounts relating
to continuing operations:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
----------------------------------
1994 1995 1996 1996
--------- --------- --------- ----
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Continuing operations.................... 4.5 4.1 4.0 6.9
=== === === ===
</TABLE>
6 EXCEPTIONAL ITEMS
The exceptional item in 1995 represents the loss arising on the disposal of
the retail distribution and housewares businesses.
The exceptional item in 1994 comprised provisions to reduce the carrying
value of assets in a number of businesses within the retail distribution and
housewares divisions to their estimated net realisable value. The fixed assets
relating to these operations were reclassified as current assets in 1994.
These exceptional items did not give rise to any material taxation
consequences.
F-12
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7 DIRECTORS' EMOLUMENTS
Total emoluments charged in respect of the directors of Gallaher were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
--------------------------------------------
1994 1995 1996 1996
------------ ------------ ------------ -----
(Pounds)'000 (Pounds)'000 (Pounds)'000 $'000
<S> <C> <C> <C> <C>
Management remuneration..... 1,843 1,698 2,573 4,405
Contributions to pension
schemes.................... 363 347 440 753
Unfunded pensions to former
directors.................. 56 54 51 87
----- ----- ----- -----
2,262 2,099 3,064 5,245
===== ===== ===== =====
</TABLE>
(a) Management remuneration included payments under an incentive plan, which
is profit-based and similar to those applicable to other subsidiaries of
American Brands.
(b) In addition to the above emoluments, a provision was made in 1996 for
unfunded pension scheme contributions on behalf of a director amounting to
(Pounds)769,000 ($1,316,528).
(c) Included in management remuneration in 1995 is compensation to past
directors for loss of office; (Pounds)633,359 (this included benefits
other than cash of which the estimated money value was (Pounds)116,000 to
provide additional pension);
(d) The emoluments disclosed above include the following amounts (excluding
pension contributions) paid to the:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
------------------------------------
1994 1995 1996 1996
-------- -------- -------- ---------
(Pounds) (Pounds) (Pounds) $
<S> <C> <C> <C> <C>
Chairman and highest paid director.... 569,180 620,597 737,746 1,263,021
Former chairman and highest paid
director............................. 52,063 -- -- --
</TABLE>
F-13
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The number of directors (including the chairman and highest paid director)
who received emoluments (excluding pension contributions) in the following
ranges was:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-----------------------
1994 1995 1996
------- ------- -------
NUMBER NUMBER NUMBER
<S> <C> <C> <C>
(Pounds)735,001-(Pounds)740,000...................... -- -- 1
(Pounds)650,001-(Pounds)655,000...................... -- -- --
(Pounds)620,001-(Pounds)625,000...................... -- 1 --
(Pounds)605,001-(Pounds)610,000...................... 1 -- --
(Pounds)500,001-(Pounds)505,000...................... -- -- 1
(Pounds)480,001-(Pounds)485,000...................... -- -- --
(Pounds)445,001-(Pounds)450,000...................... -- -- --
(Pounds)415,001-(Pounds)420,000...................... -- 1 --
(Pounds)385,001-(Pounds)390,000...................... 1 -- --
(Pounds)360,001-(Pounds)365,000...................... -- -- 1
(Pounds)310,001-(Pounds)315,000...................... -- -- --
(Pounds)305,001-(Pounds)310,000...................... -- -- --
(Pounds)285,001-(Pounds)290,000...................... -- -- --
(Pounds)275,001-(Pounds)280,000...................... -- 1 1
(Pounds)270,001-(Pounds)275,000...................... -- -- --
(Pounds)255,001-(Pounds)260,000...................... -- 1 --
(Pounds)250,001-(Pounds)255,000...................... 2 -- --
(Pounds)245,001-(Pounds)250,000...................... -- -- --
(Pounds)230,001-(Pounds)235,000...................... -- -- --
(Pounds)215,001-(Pounds)220,000...................... 1 -- --
(Pounds)200,001-(Pounds)205,000...................... -- -- --
(Pounds)185,001-(Pounds)190,000...................... -- -- 2
(Pounds)170,001-(Pounds)175,000...................... -- -- 1
(Pounds)160,001-(Pounds)165,000...................... -- -- --
(Pounds)140,001-(Pounds)145,000...................... -- -- 1
(Pounds)125,001-(Pounds)130,000...................... -- 1 --
(Pounds)70,001-(Pounds)75,000........................ 1 -- --
(Pounds)50,001-(Pounds)55,000........................ 1 -- --
Not more than (Pounds)5,000.......................... 5 5 5
</TABLE>
F-14
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8 EMPLOYEE INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-----------------------
1994 1995 1996
------- ------- -------
NUMBER NUMBER NUMBER
<S> <C> <C> <C>
The average number of persons (including executive
directors) employed by the Group was:
Continuing operations:
Manufacturing.................................... 2,635 2,461 2,394
Sales and distribution........................... 912 799 642
Administration and management.................... 830 788 762
------- ------- ------
4,377 4,048 3,798
Discontinued operations............................ 15,490 7,519 332
------- ------- ------
19,867 11,567 4,130
======= ======= ======
</TABLE>
The above numbers include part time employees.
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-----------------------------------
1994 1995 1996 1996
--------- --------- --------- -----
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Staff costs for the above persons
(excluding executive directors):
Wages and salaries.................. 255.1 166.5 111.9 191.6
Social security costs............... 23.7 14.0 10.0 17.1
Contributions to pension schemes
(note 19).......................... 13.7 11.5 3.9 6.7
----- ----- ----- -----
292.5 192.0 125.8 215.4
===== ===== ===== =====
</TABLE>
9 INCOME FROM FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
----------------------------------
1994 1995 1996 1996
--------- --------- --------- ----
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Continuing operations:
Income from other unlisted fixed asset
investments........................... 0.2 0.4 0.4 0.7
Discontinued operations:
Income from investments in associated
undertakings.......................... 0.3 -- -- --
--- --- --- ---
0.5 0.4 0.4 0.7
=== === === ===
</TABLE>
10 NET INTEREST EXPENSE/(INCOME)
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-----------------------------------
1994 1995 1996 1996
--------- --------- --------- -----
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Interest payable:
On bank loans and overdrafts........ 7.9 4.9 3.5 6.0
On other loans wholly repayable
within five years.................. 15.9 10.1 4.0 6.8
Less: interest receivable............. (5.8) (6.7) (10.5) (17.9)
---- ---- ----- -----
18.0 8.3 (3.0) (5.1)
==== ==== ===== =====
</TABLE>
Included in interest payable on other loans wholly repayable within five
years are amounts payable to American Brands of (Pounds)3.2 million ($5.5
million) in 1996 (1995: (Pounds)7.5 million and 1994: (Pounds)13.4 million).
Net interest, as disclosed above, is not necessarily indicative of the
future net interest position of the Group. This is primarily due to the
differences between the proposed financing structure of the new Group and the
historic financing structure while the Group is a subsidiary of American
Brands.
F-15
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11 TAXATION ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-----------------------------------
1994 1995 1996 1996
--------- --------- --------- -----
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
UK corporation tax (based on profit
for the year at 33%)................ 115.9 124.8 111.4 190.7
Relief for overseas taxation......... (2.7) (6.1) (3.8) (6.5)
Net US tax of ATIC................... (2.8) (3.5) (21.8) (37.3)
----- ----- ----- -----
110.4 115.2 85.8 146.9
Overseas taxation.................... 6.2 5.1 6.0 10.3
Deferred taxation.................... (4.1) (6.5) (14.4) (24.6)
Deferred taxation of ATIC............ 2.9 2.6 3.5 6.0
(Over)/under provision in previous
years............................... (0.5) (2.4) 0.2 0.3
----- ----- ----- -----
114.9 114.0 81.1 138.9
===== ===== ===== =====
</TABLE>
The tax charge would have increased by approximately (Pounds)21.7 million
($37.2 million) (1995: (Pounds)2.5 million and 1994: (Pounds)1.3 million) if
the Group had existed in its proposed new structure during these years. This
is a result of the loss of US tax status of ATIC following its proposed
liquidation.
12 EARNINGS PER EQUITY SHARE
The calculation of earnings per equity share has been based on: (a) the
profit for the financial year (after taxation and minority interests) and (b)
700,000,000 ordinary shares of 10 pence each, being the relevant approximate
maximum number of ordinary shares expected to be in issue after the
reorganisation as described in note 24. The earnings of the Group as part of
American Brands are not necessarily representative of those that may arise
following the proposed reorganisation and subsequent financial restructuring.
A reconciliation of the adjusted earnings per equity share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
---------------------------------------
1994 1995 1996 1996
--------- --------- --------- ---------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Profit for the financial year...... 161.0 196.1 220.8 378.0
Adjustments:
Exceptional cost of sales--
continuing operations............ -- -- 65.5 112.1
Loss on sale of operations........ -- 25.2 -- --
Provision for diminution of value
of assets in operations
to be sold....................... 63.0 -- -- --
Tax thereon....................... -- -- (21.5) (36.8)
----- ----- ----- -----
Adjusted earnings.................. 224.0 221.3 264.8 453.3
===== ===== ===== =====
<CAPTION>
PENCE PENCE PENCE CENTS
PER SHARE PER SHARE PER SHARE PER SHARE
<S> <C> <C> <C> <C>
Earnings per equity share.......... 23.0 28.0 31.5 54.0
Adjustments:
Exceptional cost of sales--
continuing operations............ -- -- 9.4 16.0
Loss on sale of operations........ -- 3.6 -- --
Provision for diminution of value
of assets in operations to be
sold............................. 9.0 -- -- --
Tax thereon....................... -- -- (3.1) (5.3)
----- ----- ----- -----
Adjusted earnings per equity
share............................. 32.0 31.6 37.8 64.7
===== ===== ===== =====
</TABLE>
F-16
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The calculation of adjusted earnings per equity share has been based on
700,000,000 ordinary shares as explained above. Exceptional items have been
excluded from the calculation of adjusted earnings per equity share in order
to show the earnings per equity share from normal trading.
13 DIVIDENDS PER EQUITY SHARE
The calculation of dividends per equity share is based on the actual
dividend paid in each year and on 700,000,000 shares being the relevant number
of shares as described in note 12.
In 1996, the Group made a distribution in specie of The Whyte & Mackay Group
PLC, its distilled spirits operations. The distribution in specie represents
the net assets of The Whyte & Mackay Group PLC at the date of transfer of
(Pounds)555.4 million.
14 INTANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
NET
COST AMORTISATION BOOK VALUE
--------- ------------ ----------
(Pounds)M (Pounds)M (Pounds)M
<S> <C> <C> <C>
Balance at 1 January 1995.................. 566.3 (38.2) 528.1
Disposals................................ (9.7) 4.1 (5.6)
Amortisation for the year................ -- (14.2) (14.2)
Exchange adjustments..................... 0.9 (0.1) 0.8
------ ----- ------
Balance at 31 December 1995................ 557.5 (48.4) 509.1
Additions................................ 5.3 -- 5.3
Disposals................................ (427.0) 37.7 (389.3)
Amortisation for the year................ -- (6.8) (6.8)
Exchange adjustments..................... (11.2) 0.8 (10.4)
------ ----- ------
Balance at 31 December 1996................ 124.6 (16.7) 107.9
====== ===== ======
Balance at 31 December 1996 ($m)........... 213.3 (28.6) 184.7
====== ===== ======
</TABLE>
Intangible fixed assets comprise purchased goodwill and trademarks. During
1996 the Group capitalised additional deferred consideration of (Pounds)5.3
million ($9.1 million) and charged amortisation of (Pounds)2.9 million ($5.0
million) in respect of trademarks. At 31 December 1996 the net book value of
these trademarks was (Pounds)102.6 million ($175.7 million) (1995:
(Pounds)110.6 million).
F-17
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
ASSETS IN
LAND AND PLANT AND FITTINGS AND COURSE OF
BUILDINGS MACHINERY EQUIPMENT CONSTRUCTION TOTAL
--------- --------- ------------ ------------ ---------
(Pounds)M (Pounds)M (Pounds)M (Pounds)M (Pounds)M
<S> <C> <C> <C> <C> <C>
COST
At 1 January 1995....... 92.8 243.4 88.7 0.1 425.0
Additions............. 1.3 10.9 8.0 7.1 27.3
Reclassifications..... 0.7 (2.5) 6.9 (5.1) --
Exchange adjustments.. 0.1 0.5 0.3 -- 0.9
Disposals............. (2.9) (5.1) (36.5) -- (44.5)
----- ------ ----- ----- ------
At 31 December 1995..... 92.0 247.2 67.4 2.1 408.7
Additions............. 0.1 8.0 7.5 10.7 26.3
Reclassifications..... -- -- 10.1 (10.1) --
Exchange adjustments.. (0.2) (0.5) (0.3) -- (1.0)
Disposals............. (38.8) (50.9) (18.9) -- (108.6)
----- ------ ----- ----- ------
At 31 December 1996..... 53.1 203.8 65.8 2.7 325.4
===== ====== ===== ===== ======
DEPRECIATION
At 1 January 1995....... (17.6) (111.1) (58.5) -- (187.2)
Charge for year....... (1.6) (14.3) (9.9) -- (25.8)
Exchange adjustments.. (0.1) (0.2) (0.2) -- (0.5)
Disposals............. 0.4 1.9 25.4 -- 27.7
----- ------ ----- ----- ------
At 31 December 1995..... (18.9) (123.7) (43.2) -- (185.8)
Charge for year....... (5.7) (20.3) (8.4) -- (34.4)
Exchange adjustments.. -- 0.2 0.2 -- 0.4
Disposals............. 4.0 14.3 12.8 -- 31.1
----- ------ ----- ----- ------
At 31 December 1996..... (20.6) (129.5) (38.6) -- (188.7)
===== ====== ===== ===== ======
NET BOOK VALUE
31 December 1995...... 73.1 123.5 24.2 2.1 222.9
===== ====== ===== ===== ======
31 December 1996...... 32.5 74.3 27.2 2.7 136.7
===== ====== ===== ===== ======
31 December 1996 $m... 55.6 127.2 46.6 4.6 234.0
===== ====== ===== ===== ======
</TABLE>
The cost of land and buildings include freehold land, which is not being
depreciated, of (Pounds)9.8 million in 1996 ($16.8 million) (1995: (Pounds)12.7
million).
<TABLE>
<CAPTION>
AT 31 DECEMBER
------------------------
1995 1996 1996
--------- --------- ----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
The net book value of land and buildings
comprises:
Freehold....................................... 71.2 31.1 53.2
Long leasehold................................. 1.9 1.4 2.4
---- ---- ----
73.1 32.5 55.6
==== ==== ====
</TABLE>
F-18
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16 INVESTMENTS
<TABLE>
<CAPTION>
AT 31 DECEMBER
------------------------
1995 1996 1996
--------- --------- ----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
FIXED ASSETS
Interests in unlisted associated undertakings...... 0.2 -- --
Unlisted investments............................... 5.0 5.0 8.6
--- --- ---
5.2 5.0 8.6
=== === ===
</TABLE>
<TABLE>
<CAPTION>
AT 31 DECEMBER
-------------------------
1995 1996 1996
--------- --------- -----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
CURRENT ASSETS
UK listed investments (market value)............... 0.9 -- --
Unlisted investments............................... 21.8 25.2 43.1
Loan to American Brands............................ -- 175.4 300.3
---- ----- -----
22.7 200.6 343.4
==== ===== =====
</TABLE>
Included within unlisted current asset investments are financial instruments
amounting to (Pounds)22.3 million ($38.2 million) (1995 - (Pounds)18.5
million). These financial instruments, the UK listed investments and the loan
to American Brands are classified as liquid resources in the cash flow
statement (see note 27).
Particulars of main subsidiaries, whose results or financial position affect
the figures of the Group, are set out in note 36.
17 STOCKS
<TABLE>
<CAPTION>
AT 31 DECEMBER
---------------------------
1995 1996 1996
--------- --------- -------
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Raw materials and consumables.................... 221.8 133.9 229.2
Work in progress................................. 8.0 7.8 13.4
Finished goods................................... 464.2 569.9 975.7
----- ----- -------
694.0 711.6 1,218.3
===== ===== =======
Current replacement value........................ 775.6 748.4 1,281.3
===== ===== =======
</TABLE>
F-19
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18 DEBTORS
<TABLE>
<CAPTION>
AT 31 DECEMBER
-------------------------
1995 1996 1996
--------- --------- -----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
AMOUNTS FALLING DUE WITHIN ONE YEAR
Trade debtors.................................... 273.3 135.9 232.7
Amounts owed by American Brands and fellow
subsidiaries.................................... 3.2 29.3 50.1
Other debtors.................................... 11.7 6.5 11.1
Prepayments and accrued income................... 5.4 5.5 9.4
----- ----- -----
293.6 177.2 303.3
===== ===== =====
AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Prepaid pension contributions (note 19).......... 37.8 51.1 87.5
Deferred tax asset (note 23)..................... 5.1 80.2 137.3
Other debtors.................................... 5.7 4.0 6.8
----- ----- -----
48.6 135.3 231.6
===== ===== =====
</TABLE>
At the time of being appointed as directors of Gallaher, P. Veen, N.
Northridge and N. Simon were each in receipt of a loan from Gallaher that
related to relocation assistance following a company initiated employment
move. Details of the loans, which are secured, are set out below:
<TABLE>
<CAPTION>
AMOUNT OWING AT 31 DECEMBER
INTEREST --------------------------------------------
REPAYMENT DATE RATE 1994 1995 1996 1996
---------------- -------- ------------ ------------ ------------ -----
(Pounds)'000 (Pounds)'000 (Pounds)'000 $'000
<S> <C> <C> <C> <C> <C> <C>
P. Veen................. (note (a) below) 4% 275.0 275.0 -- --
N. Northridge........... (note (b) below) 5% 22.0 22.0 22.0 37.7
N. Simon................ (note (b) below) 5% 16.4 16.4 16.4 28.1
</TABLE>
The balances at 31 December 1995 represent the maximum amounts outstanding
on the loans during 1996. All interest due was paid in the year.
(a) As of 31 December 1996, Gallaher had purchased a property from P. Veen at
its independently assessed market value of (Pounds)316,500 ($541,848). Of
this amount (Pounds)275,000 ($470,800) was applied to satisfy in full the
above loan and to discharge the related charge held by Gallaher. P. Veen
will continue to lease the property from Gallaher for an annual rental of
(Pounds)14,400 ($24,653). The terms of the lease will allow P. Veen to
rent the property throughout his employment with Gallaher and for the six
months following any termination of his employment.
(b) In February 1997, N. Northridge repaid the loan of (Pounds)22,000
($37,700) in full and the associated security was discharged. In March
1997, N. Simon repaid the loan of (Pounds)16,400 ($28,100) in full and the
associated security was discharged.
19 PENSION SCHEMES
<TABLE>
<CAPTION>
1995 1996 1996
--------- --------- ----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
MOVEMENTS IN PREPAID PENSION CONTRIBUTIONS
At 1 January....................................... 28.2 37.8 64.7
Charge for the year................................ (11.5) (3.9) (6.7)
Funding and other movements........................ 21.1 17.2 29.5
----- ---- ----
At 31 December..................................... 37.8 51.1 87.5
===== ==== ====
</TABLE>
The charge for the year is after a reduction of (Pounds)5.0 million ($8.6
million) (1995: (Pounds)1.6 million) in respect of the amortisation of
existing actuarial surpluses. This amortisation is over a period of 9 to 15
years (1995: 9 to 15
F-20
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years), reflecting the average remaining service lives of members at the most
recently available actuarial valuations, which were at various dates between 1
April 1994 and 30 September 1996.
The principal actuarial assumptions adopted in these valuations assume that,
over the long term, the annual rate of return on investments will exceed the
annual rate of pensionable salary increases by 2.5% (1995: 2.5%).
The aggregate market value of scheme assets for the Group at the most recent
valuations, amounted to (Pounds)632.3 million ($1,082.5 million) (1995:
(Pounds)558.3 million).
The actuarial value of the scheme assets at the dates of the most recent
actuarial valuations, expressed as a percentage of the aggregate benefits that
had accrued to members at those dates, excluding future discretionary pension
benefit increases, was 123% (1995: 112%).
In October 1996, Gallaher announced its intention to increase pensions in
payment, with effect from April 1997, by the lesser of retail price inflation
and 5% per annum, for all employee pensionable service prior to and beyond
April 1997. This change in pension benefit arrangements will increase pension
costs in the future.
20 POST RETIREMENT BENEFITS OTHER THAN PENSIONS
<TABLE>
<CAPTION>
1995 1996 1996
--------- --------- -----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
At 1 January...................................... 33.7 37.0 63.3
Charge for the year............................... 5.0 2.7 4.6
Funding and other movements....................... (1.7) (17.1) (29.2)
---- ----- -----
At 31 December.................................... 37.0 22.6 38.7
==== ===== =====
</TABLE>
The liability for post retirement benefits other than pensions relates to
the provision of health care and/or company products on beneficial terms to
retired employees by a number of companies within the Group. The liability has
been ascertained from independent actuarial valuations, which adopt the
principal assumptions that, over the long term, the annual rate of increase in
the cost of benefit arrangements will range from 5.5% to 8.5%. This assumption
is unchanged from 1995. The costs of these benefits are expected to attract
taxation relief when paid.
21 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
AT 31 DECEMBER
---------------------------
1995 1996 1996
--------- --------- -------
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Bank loans and overdrafts...................... 177.1 260.3 445.6
Loans from American Brands..................... 200.0 350.0 599.2
----- ------- -------
Short term borrowings.......................... 377.1 610.3 1,044.8
Amounts owed to American Brands and fellow
subsidiaries.................................. 1.2 2.2 3.8
Trade creditors................................ 71.9 48.8 83.5
Financing of bills discounted with recourse.... 72.6 -- --
Corporation tax................................ 105.3 67.9 116.2
Other taxes, duties and social security
contributions................................. 201.6 173.1 296.4
Other creditors................................ 5.5 3.8 6.5
Deferred consideration payable................. 9.0 -- --
Accruals and deferred income................... 41.5 116.7 199.8
----- ------- -------
885.7 1,022.8 1,751.0
===== ======= =======
</TABLE>
Financing of bills discounted with recourse represents amounts received from
banks for bills of exchange discounted with recourse before their maturity
date.
Under the proposed terms of the reorganization, the American Brands loans
outstanding at 31 December 1996 will be repaid.
F-21
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
AT 31 DECEMBER
------------------------
1995 1996 1996
--------- --------- ----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Post retirement benefits (note 20).................. 37.0 22.6 38.7
Accruals and deferred income........................ 4.4 2.8 4.8
---- ---- ----
41.4 25.4 43.5
==== ==== ====
</TABLE>
23 PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
AT 31 DECEMBER
--------------------------
1995 1996 1996
--------- --------- ------
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
ATIC deferred tax liability (a)................. 5.5 8.2 14.0
Reorganisation provision (b).................... 17.0 69.6 119.1
Other provisions (c)............................ 69.7 77.3 132.3
----- ----- ------
Total provisions for liabilities and charges.... 92.2 155.1 265.4
===== ===== ======
<CAPTION>
<S> <C> <C> <C>
UK deferred tax asset (a)
Accelerated capital allowances................ 16.9 9.7 16.6
ACT recoverable............................... -- (54.5) (93.3)
Other timing differences...................... (22.0) (35.4) (60.6)
----- ----- ------
(5.1) (80.2) (137.3)
===== ===== ======
</TABLE>
(a) Movements in deferred taxation
<TABLE>
<CAPTION>
1995 1996 1996
--------- --------- ------
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Balance at 1 January............................. 4.8 0.4 0.7
Provisions for the year........................ (3.3) (11.7) (20.1)
Disposals...................................... (1.1) (60.7) (103.9)
---- ----- ------
Balance at 31 December........................... 0.4 (72.0) (123.3)
==== ===== ======
Represented by
Deferred tax liability......................... 5.5 8.2 14.0
Deferred tax asset............................. (5.1) (80.2) (137.3)
---- ----- ------
0.4 (72.0) (123.3)
==== ===== ======
</TABLE>
The full potential liability/(asset) for deferred taxation in respect of all
timing differences, including the amount for which actual provision has been
made in the financial statements, is as follows:
<TABLE>
<CAPTION>
AT 31 DECEMBER
--------------------------
1995 1996 1996
--------- --------- ------
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Accelerated capital allowances................. 24.8 12.8 21.9
Capital gains that would arise on sales of
properties at book value...................... 2.1 -- --
Other timing differences....................... (22.0) (35.4) (60.6)
ACT recoverable................................ -- (54.5) (93.3)
ATIC, timing differences....................... 5.5 8.2 14.0
----- ----- ------
10.4 (68.9) (118.0)
===== ===== ======
</TABLE>
F-22
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Movement in reorganisation provision
<TABLE>
<CAPTION>
1995 1996 1996
--------- --------- -----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Balance at 1 January.............................. 25.6 17.0 29.1
Provision for the year.......................... 15.9 65.3 111.8
Provision utilised and released................. (22.1) (7.6) (13.0)
Disposal........................................ (2.4) (5.1) (8.8)
----- ---- -----
Balance at 31 December............................ 17.0 69.6 119.1
===== ==== =====
</TABLE>
(c) Movement in other provisions
<TABLE>
<CAPTION>
1995 1996 1996
--------- --------- -----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Balance at 1 January.............................. 51.0 69.7 119.3
Provisions for the year......................... 43.9 49.3 84.4
Provisions utilised and released................ (24.6) (40.6) (69.5)
Disposals....................................... (0.6) (1.1) (1.9)
----- ----- -----
Balance at 31 December............................ 69.7 77.3 132.3
===== ===== =====
</TABLE>
Other provisions mainly represent amounts in respect of redemption of
cigarette gift scheme certificates and captive insurance claims reserves.
24 SHARE CAPITAL AND SHARE PREMIUM
<TABLE>
<CAPTION>
AT 31 DECEMBER
-------------------------
1995 1996 1996
--------- --------- -----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Allotted and fully paid 700,000,000 ordinary
shares of 15 pence each........................ 105.0 105.0 179.8
Share premium account........................... 97.3 97.3 166.6
----- ----- -----
202.3 202.3 346.4
===== ===== =====
</TABLE>
In 1994 American Brands increased its investment in ATIC by contributing a
trademark and an associated liability for deferred consideration at a net book
value of (Pounds)88.2 million. This has been reflected by the effective issue
of 305,190,315 ordinary shares of 15 pence each amounting to an increase in
the share capital of (Pounds)45.8 million and share premium of (Pounds)42.4
million.
On the acquisition of ATIC it is expected that the Company will issue
700,000,000 ordinary shares of 15 pence each, the acquisition will be
accounted for by taking advantage of Group Reconstruction Relief as allowed by
s.132 of the Companies Act 1985 and a share premium account will be set up to
ensure the aggregate of share capital and share premium equate to the
investment by American Brands in ATIC.
Subsequent to the acquisition of ATIC the Company will undergo a capital
reorganisation whereby it is expected that its entire share capital of
700,000,000 ordinary shares of 15 pence each will be divided into
1,050,000,000 ordinary shares of 10 pence each. In addition it is currently
anticipated that the Company will repurchase 350,000,000 of its ordinary
shares of 10 pence each for (Pounds)925.0 million ($1.58 billion).
F-23
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
25 DISCONTINUED OPERATIONS
The following assets and liabilities, as included in the consolidated
balance sheet at 31 December 1995 relate to businesses that were subsequently
disposed of:
<TABLE>
<CAPTION>
AT 31 DECEMBER
--------------
1995
---------
(Pounds)M
<S> <C> <C> <C>
Fixed assets
Intangible assets.................................... 392.9
Tangible assets...................................... 74.9
Investments.......................................... 0.2
-----
468.0
-----
Current assets
Stocks............................................... 121.4
Debtors: amounts falling due within one year......... 75.2
Investments.......................................... 0.3
-----
196.9
Creditors: amounts falling due within one year....... (44.2)
-----
Net current assets..................................... 152.7
-----
Total assets less current liabilities.................. 620.7
Creditors: amounts falling due after more than one
year................................................ (6.8)
Provision for liabilities and charges................ (11.5)
-----
Net assets............................................. 602.4
=====
</TABLE>
The Group has a centralised financing policy within the UK and as divisional
apportionment of this financing is not considered to be meaningful, no such
amounts are included above.
For disposals effected during 1994, 1995 and 1996 the net assets at the time
of disposal and consideration received were:
<TABLE>
<CAPTION>
1995 1996
1994 RETAIL AND DISTILLED
OPTICS HOUSEWARES SPIRITS
--------- ---------- ---------
(Pounds)M (Pounds)M (Pounds)M
<S> <C> <C> <C>
Net assets disposed of:
Tangible and intangible fixed assets...... 81.2 14.6 462.3
Stocks.................................... 34.5 53.0 124.7
Net cash and cash
equivalents/(overdrafts)................. 9.8 0.8 (14.1)
Debtors and other assets.................. 21.3 124.6 40.7
Creditors and provisions.................. (55.3) (64.1) (58.2)
----- ----- -----
91.5 128.9 555.4
Profit/(loss) on disposal................... 2.5 (25.2) --
----- ----- -----
94.0 103.7 555.4
===== ===== =====
Satisfied by:
Dividend in specie........................ -- -- 555.4
Cash received, net of expenses incurred... 88.0 93.2 --
Deferred and other non-cash
consideration............................ 6.0 10.5 --
----- ----- -----
94.0 103.7 555.4
===== ===== =====
</TABLE>
F-24
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition, (Pounds)2.0 million was received in 1994 in respect of the
disposal of associated undertakings.
(Pounds)1.0 million of deferred consideration was received in 1995 in
respect of the disposal of the optics division.
(Pounds)1.3 million of deferred consideration was received in 1996 in
respect of the disposal of the retail and housewares and optics divisions.
The discontinued businesses had the following impact on cash flows prior to
disposal:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
----------------------------------
1994 1995 1996 1996
--------- --------- --------- ----
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Total discontinued operations:
Net cash inflow from operating
activities........................... 54.0 22.0 22.0 37.7
Net cash (outflow)/inflow from capital
expenditures......................... (17.9) (5.6) 0.1 0.2
----- ---- ---- ----
36.1 16.4 22.1 37.9
===== ==== ==== ====
</TABLE>
26 NET CASH INFLOW FROM OPERATING ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
------------------------------------
1994 1995 1996 1996
--------- --------- --------- ------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Operating profit..................... 356.5 343.2 298.5 511.1
Adjustments for non-cash items:
Depreciation and amortisation...... 72.1 40.0 41.2 70.5
Exchange adjustments............... (3.3) 1.2 (0.1) (0.3)
(Profit)/loss on sale of tangible
and intangible fixed assets and
operations........................ (4.8) 0.2 (0.2) (0.3)
Decrease in debtors.................. 144.5 72.4 87.5 149.8
(Increase)/decrease in stocks........ (221.2) 74.6 (143.2) (245.1)
Increase/(decrease) in creditors..... 124.3 (200.0) 22.3 38.2
------ ------ ------ ------
468.1 331.6 306.0 523.9
====== ====== ====== ======
27 MANAGEMENT OF LIQUID RESOURCES
<CAPTION>
YEAR ENDED 31 DECEMBER
------------------------------------
1994 1995 1996 1996
--------- --------- --------- ------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
(Increase)/decrease in short term
loans to American Brands............ (9.7) 9.7 (175.4) (300.3)
(Purchase)/sale of listed
investments......................... (2.1) 1.9 0.9 1.5
Sale/(purchase) of unlisted
investments......................... 2.4 (0.7) (3.8) (6.4)
------ ------ ------ ------
(9.4) 10.9 (178.3) (305.2)
====== ====== ====== ======
</TABLE>
F-25
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
28 ANALYSIS OF NET DEBT
<TABLE>
<CAPTION>
DEBT DUE:
----------------------------------------------------------------------------------
CASH
IN HAND BANK LOANS DEBT DUE DEBT DUE CURRENT
AND AND AFTER ONE WITHIN FINANCE ASSET
AT BANK OVERDRAFTS NET CASH YEAR ONE YEAR LEASES INVESTMENTS TOTAL
--------- ---------- --------- --------- --------- --------- ----------- ---------
(Pounds)M (Pounds)M (Pounds)M (Pounds)M (Pounds)M (Pounds)M (Pounds)M (Pounds)M
<S> <C> <C> <C> <C> <C> <C> <C> <C>
At 1 January 1994....... 19.7 (175.4) (155.7) (22.6) (551.8) (0.5) 20.9 (709.7)
Cash flow............... 12.4 141.4 153.8 -- 94.0 0.1 9.4 257.3
Non cash movements...... -- -- -- 22.6 (22.6) -- -- --
Exchange movements...... 0.5 -- 0.5 -- -- -- -- 0.5
----- ------ ------ ----- ------ ---- ----- ------
At 31 December 1994..... 32.6 (34.0) (1.4) -- (480.4) (0.4) 30.3 (451.9)
Cash flow............... 14.8 (143.1) (128.3) -- 280.8 -- (10.9) 141.6
Non cash movements...... -- -- -- -- (0.4) 0.4 -- --
Exchange movements...... 1.8 -- 1.8 -- -- -- -- 1.8
----- ------ ------ ----- ------ ---- ----- ------
At 31 December 1995..... 49.2 (177.1) (127.9) -- (200.0) -- 19.4 (308.5)
Cash flow............... (23.1) (83.2) (106.3) -- (150.0) -- 178.3 (78.0)
Exchange movements...... (1.8) -- (1.8) -- -- -- -- (1.8)
----- ------ ------ ----- ------ ---- ----- ------
At 31 December 1996..... 24.3 (260.3) (236.0) -- (350.0) -- 197.7 (388.3)
----- ------ ------ ----- ------ ---- ----- ------
At 31 December 1996 $m.. 41.6 (445.6) (404.0) -- (599.2) -- 338.5 (664.7)
===== ====== ====== ===== ====== ==== ===== ======
</TABLE>
29 CAPITAL COMMITMENTS
<TABLE>
<CAPTION>
AT 31 DECEMBER
------------------------
1995 1996 1996
--------- --------- ----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Contracts placed but not provided for in this
financial report................................ 3.7 7.3 12.5
=== === ====
</TABLE>
30 CONTINGENT LIABILITIES
At 31 December 1996, the Group had contingent liabilities for guarantees
given in respect of subsidiaries which amount to (Pounds)41.1 million ($70.4
million) (1995: (Pounds)56.7 million) and in respect of third parties which
amount to (Pounds)4.9 million ($8.4 million) (1995: (Pounds)7.0 million). In
addition, a charge has been registered on the assets of Gallaher to secure a
mortgage advance to an employee relating to a Gallaher initiated employment
move, under which the maximum contingent liability at 31 December 1996
amounted to (Pounds)45,000 ($77,040) (1995: (Pounds)45,000).
There are a number of instances where litigation proceedings, hearings or
claims negotiations are pending or threatened against Gallaher and its
subsidiaries. To date, there has been no recovery of damages against Gallaher
or any of its subsidiaries in any action alleging that its tobacco products
have resulted in human ailments. It is not possible to predict the outcome of
the pending litigation. Management believes, however, that there are
meritorious defenses to the pending actions described above and that the
pending actions will not have a material adverse effect upon the results of
the operations, the cash flow or financial condition of the Group. The Company
has been advised by its legal advisers that, in their opinion on the basis of
their investigations generally with respect to actions and claims of this
character, the Group has meritorious defenses to these actions and claims. The
pending actions and claims will be vigorously contested. There can, however,
be no assurance that favorable decisions will be achieved in the proceedings
pending against Gallaher and its subsidiaries, that additional proceedings
will not be commenced against the Group in the U.K. or elsewhere, or that the
Group will not incur damages or that, if incurred, such damages will not be
material. Regardless of the outcome of the pending litigation, the costs of
defending these claims could be substantial and will not be fully recoverable
from unsuccessful plaintiffs.
F-26
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
31 PROPOSED TRANSACTION
It was announced on 8 October 1996 that Gallaher would demerge from American
Brands and be listed on the London and New York stock exchanges. The proposed
transaction is discussed in detail in the American Brands Proxy Statement.
32 OPERATING LEASE COMMITMENTS
The minimum annual lease payments to which the Group is committed under non-
cancellable operating leases is as follows:
<TABLE>
<CAPTION>
AT 31 DECEMBER
------------------------
1995 1996 1996
--------- --------- ----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Continuing operations:
Due within one year................................. 0.3 -- --
Due between one and five years...................... 0.4 0.5 0.9
Due after five years................................ 1.9 1.9 3.2
Discontinued operations............................. 1.8 -- --
--- --- ---
4.4 2.4 4.1
=== === ===
</TABLE>
These commitments relate mainly to land and buildings.
33 STATEMENT OF RETAINED PROFITS
<TABLE>
<CAPTION>
1994 1995 1996 1996
--------- --------- --------- -------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Retained profits at 1 January....... 569.7 568.8 622.2 1,065.2
Retained profit/(deficit) for the
year............................... 1.1 50.6 (517.0) (885.1)
Exchange adjustments on net
investments in
overseas operations................ (2.0) 2.8 (12.2) (20.9)
----- ----- ------ -------
Retained profits at 31 December..... 568.8 622.2 93.0 159.2
===== ===== ====== =======
</TABLE>
34 RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1994 1995 1996 1996
--------- --------- --------- -------
(Pounds)M (Pounds)M (Pounds)M $M
<S> <C> <C> <C> <C>
Profit for the financial year....... 161.0 196.1 220.8 378.0
Dividends on equity shares--cash (159.9) (145.5) (182.4) (312.3)
--specie................ -- -- (555.4) (950.8)
------ ------ ------ -------
1.1 50.6 (517.0) (885.1)
Additional capital contribution and
share premium...................... 88.2 -- -- --
Exchange adjustment on net
investment in overseas operations.. (2.0) 2.8 (12.2) (20.9)
------ ------ ------ -------
Net increase/(decrease) in equity
shareholders' funds................ 87.3 53.4 (529.2) (906.0)
Equity shareholders' funds at 1
January............................ 683.8 771.1 824.5 1,411.6
------ ------ ------ -------
Equity shareholders' funds at 31
December........................... 771.1 824.5 295.3 505.6
====== ====== ====== =======
</TABLE>
F-27
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
35 DIFFERENCES BETWEEN UK AND US GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial information set out above has been prepared under UK GAAP.
These accounting principles differ in certain aspects from US GAAP. The
material differences as they apply to the Group are summarised below.
(a) Pension costs
Under UK GAAP, pension costs are determined in accordance with UK Statement
of Standard Accounting Practice ("SSAP") No. 24, with costs being expensed
over employees' working lives. Under US GAAP, pension costs are determined in
accordance with the requirements of the Statements of Financial Accounting
Standards ("SFAS") Nos. 87 and 88. Differences between the UK and US GAAP
figures arise from the requirement to use different actuarial methods and
assumptions and the method of amortising surpluses or deficits.
(b) Deferred taxation
Under UK GAAP, deferred taxation is only accounted for to the extent that it
is probable that taxation liabilities or assets will crystallise in the
foreseeable future. Under US GAAP, deferred taxation is accounted for on all
temporary differences and a valuation allowance is established in respect of
those deferred taxation assets where it is more likely than not that some
portion will not be realised.
(c) Hyde closure provision
Under UK GAAP, the Hyde closure provision included an amount for additional
depreciation as permitted by SSAP No. 12 (revised). Under US GAAP, there is no
impairment as defined under SFAS No. 121.
(d) Disposal of operations
The 1995 adjustment relates to differences between UK and US GAAP in the
timing of recognition of disposal costs. Under UK GAAP, disposal costs are
recognized in the year they are incurred. Under US GAAP, such costs are
accrued at the measurement date being the date management formally committed
the Group to the disposal plan.
(e) Goodwill
Differences arising in the calculation of goodwill are primarily due to the
impact of accounting differences in ascertaining acquisition balance sheets
under UK and US GAAP.
F-28
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following statement summarises the material adjustments, net of tax
effect, which reconcile the profit on ordinary activities after tax, under UK
GAAP to the amounts which would have been reported had US GAAP been applied.
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-------------------------
1995 1996 1996
--------- --------- -----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Profit on ordinary activities after taxation as
reported in the consolidated profit and loss
account under UK GAAP........................... 196.1 220.8 378.0
Significant adjustments:
Pension costs.................................. 10.2 5.2 8.9
Deferred tax................................... (1.7) (0.2) (0.3)
Hyde closure provision......................... -- 8.3 14.2
Disposal of operations......................... 11.0 -- --
Other, net..................................... (0.5) (0.3) (0.5)
----- ----- -----
Net income under US GAAP......................... 215.1 233.8 400.3
===== ===== =====
</TABLE>
In addition, under US GAAP, companies are required to report the results of
discontinued operations, net of tax and an allocation of corporate interest,
as a single net amount, "Income/(loss) from discontinued operations".
Accordingly, under US GAAP, turnover, operating profit, income from continuing
operations and income from discontinued operations would have been as set out
below. Interest has been allocated to discontinued operations on the basis of
the ratio of net assets of the discontinued operations to consolidated net
assets in accordance with EITF No. 87-24 under US GAAP, although as indicated
elsewhere in this report the Group does not consider such an allocation to be
meaningful.
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
---------------------------
1995 1996 1996
--------- --------- -------
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Turnover--continuing operations............... 4,079.4 4,372.9 7,486.4
Operating profit--continuing operations....... 350.6 316.1 541.2
Income from continuing operations............. 262.9 235.7 403.5
Loss from discontinued operations............. (47.8) (1.9) (3.2)
Earnings per equity share--continuing
operations (a)............................... 3.09 2.77 4.74
Loss per equity share--discontinued
operations (a)............................... (0.56) (0.02) (0.03)
Earnings per equity share--net income (a)..... 2.53 2.75 4.71
</TABLE>
(a) Under US GAAP, earnings per equity share is calculated based on the
historical number of Gallaher ordinary shares (85,056,000) outstanding
during each year.
F-29
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following statement summarises the material adjustments which reconcile
total ordinary shareholders' equity funds under UK GAAP to the amounts which
would have been reported had US GAAP been applied:
<TABLE>
<CAPTION>
AT 31 DECEMBER
--------------------------
1995 1996 1996
--------- --------- -----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Equity shareholders' funds as reported in the
consolidated balance sheet under UK GAAP...... 826.0 295.3 505.6
Significant adjustments:
Increase in non-current pension assets....... 99.0 100.2 171.5
Decrease in non-current liabilities for the
Hyde closure................................ -- 12.2 20.9
Increase in non-current liabilities for
deferred taxation........................... (41.7) (39.1) (66.9)
Increase in goodwill......................... 6.1 -- --
Other, net................................... (0.1) 5.1 8.7
----- ----- -----
Equity shareholders' funds under US GAAP....... 889.3(a) 373.7 639.8
===== ===== =====
</TABLE>
- --------
(a) Includes minority interest of (Pounds)1.5 million in 1995.
CASH FLOW STATEMENTS
Under UK GAAP, the consolidated cash flow statements have been prepared in
accordance with the revised version of UK Financial Reporting Standard No. 1
("FRS 1 revised") and presents substantially the same information as that
required under SFAS No. 95. Under US GAAP however, there are certain
differences from UK GAAP with regard to classification of items within the
cash flow statement.
Under UK GAAP, cash flows are presented separately for operating activities;
returns on investments and servicing of finance; taxation; capital expenditure
and financial investment; acquisitions and disposals; equity cash dividends
paid; management of liquid resources; and financing. Under US GAAP however,
only three categories of cash flow activity are reported being operating
activities, investing activities and financing activities. Cash flows from
taxation and return on investments and servicing of finance would be included
as operating activities under US GAAP. Capital expenditure and financial
investment and acquisitions and disposals would be included as investing
activities under US GAAP. The payment of dividends would be included under
financing activities and changes arising from the management of liquid
resources would be treated as activity within cash and cash equivalents under
US GAAP.
Set out below is a summary consolidated statement of cash flows under US
GAAP:
<TABLE>
<CAPTION>
YEAR ENDED 31 DECEMBER
-------------------------
1995 1996 1996
--------- --------- -----
(Pounds)M (Pounds)M $M
<S> <C> <C> <C>
Net cash flow from operating activities............ 218.3 132.5 226.9
Net cash provided/(used) by investing activities... 68.8 (28.1) (48.1)
Net cash used by financing activities.............. (426.3) (32.4) (55.5)
------ ----- -----
Net (decrease)/increase in cash and cash
equivalents ...................................... (139.2) 72.0 123.3
====== ===== =====
</TABLE>
F-30
<PAGE>
GALLAHER GROUP PLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
36 PRINCIPAL SUBSIDIARIES
<TABLE>
<CAPTION>
COMPANY COUNTRY OF REGISTRATION
- ------- -----------------------
<S> <C> <C> <C>
CONTINUING BUSINESSES
TOBACCO
ATIC Group, Inc. ........................... USA a
Benson & Hedges Ltd. ....................... England and Wales a(i) *
J.R. Freeman & Son Ltd. .................... England and Wales a *
Gallaher Ltd. .............................. England and Wales a
Gallaher Canarias SA........................ Spain b *
Gallaher (Dublin) Ltd. ..................... Republic of Ireland a(i) *
Gallaher Hellas SA.......................... Greece b *
Gallaher International Ltd. ................ England and Wales a(ii) *
Gallaher Kazakhstan Ltd. ................... Kazakhstan b *
OTHER
The Galleon Insurance Co. Ltd. ............. Isle of Man b *
The Schooner Insurance Co. Ltd. ............ Isle of Man b *
DISCONTINUED BUSINESSES
DISTILLED SPIRITS
The Whyte & Mackay Group PLC................ Scotland b *
Invergordon Distillers Group Plc............ Scotland b
The Invergordon Distillers Ltd. ............ Scotland b
The Scotch Whisky Heritage Centre Ltd.
(56.47%)................................... Scotland b
William Muir Ltd. .......................... Scotland b
Whyte & Mackay (India) Pvt Ltd. (51%)....... India b
RETAIL DISTRIBUTION
Forbuoys Plc................................ England and Wales b *
Marshell Group Ltd. ........................ England and Wales b *
TM Group Plc................................ England and Wales b *
HOUSEWARES
The Prestige Group Plc...................... England and Wales b *
Fabricados Inoxidables SA................... Spain b
Prestige France SA.......................... France b
Prestige Group (Australia) Pty Ltd. ........ Australia b
Prestige Group UK Plc....................... England and Wales b
Prestige Haushaltswaren GmbH................ Germany b
Prestige Italiana SpA....................... Italy b
</TABLE>
Accounting dates at or within seven days of the end of the following
months:
a December.
b November.
(i) Changed accounting reference date from November to December in 1996.
(ii) Changed accounting reference date from November to December 1993.
*Shares directly held by Gallaher: all shares held are ordinary shares: all
100% owned except where stated.
F-31
<PAGE>
ANNEX A
March 12, 1997
Board of Directors
American Brands, Inc.
1700 East Putnam Avenue
Old Greenwich, CT 06870-0811
Dear Sirs and Mesdames:
We understand that American Brands, Inc. ("American Brands" or the "Company")
is proposing to distribute 100% of the ordinary shares of Gallaher Group PLC
("New Gallaher" and the New Gallaher Ordinary Shares) which American Brands
owns, on a pro rata basis, to the holders of American Brands common stock (the
"Distribution"). We further understand that New Gallaher's principal asset
will be shares in Gallaher Limited ("Gallaher") and that New Gallaher intends
to distribute approximately $1.4 billion to American Brands prior to
consummation of the Distribution.
You have asked for our opinion as of the date hereof whether the proposed
Distribution is fair, from a financial point of view, to the holders of
American Brands common stock. A description of the Distribution is more fully
set forth in the Proxy Statement (the "Proxy") to be distributed to the
holders of American Brands common stock in connection with the annual meeting
of stockholders to be held in connection with the proposed Distribution.
For purposes of this opinion, we have:
(i) reviewed certain publicly available financial statements and other
information relating to American Brands and Gallaher;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning American Brands and Gallaher prepared by their
respective managements;
(iii) analyzed certain financial budgets and forecasts prepared by the
respective managements of American Brands and Gallaher;
(iv) compared the financial performance of Gallaher with that of certain other
companies with publicly traded securities which we deemed to be
comparable to New Gallaher;
(v) compared the financial performance of American Brands and American Brands
excluding New Gallaher ("Fortune Brands") with that of certain other
companies with publicly traded securities which we deemed to be comparable
to the businesses of American Brands and Fortune Brands, respectively;
(vi) discussed past and current operations and financial condition and the
prospects of American Brands and Gallaher with senior executives of
American Brands and Gallaher;
(vii) participated in discussions among representatives of American Brands and
Gallaher and their U.S. and U.K. legal, tax and accounting advisors;
(viii) reviewed the Proxy and certain documents relating to the Distribution;
and
(ix) performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the financial budgets and forecasts, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available
A-1
<PAGE>
estimates and judgments of the future financial performance of American
Brands, Fortune Brands and New Gallaher. We have not made any independent
valuation or appraisal of the assets or liabilities, contingent or otherwise,
of American Brands, Fortune Brands, Gallaher or New Gallaher, nor have we been
furnished with any such appraisals. We note that we express no opinion with
respect to any potential liabilities of American Brands, Fortune Brands,
Gallaher or New Gallaher in connection with any litigation.
We have further assumed that, prior to the Distribution, American Brands will
receive a ruling from the Internal Revenue Service (the "IRS") or an opinion
of counsel to the effect that the Distribution will qualify as a spin-off
under Section 355 of the Internal Revenue Code and consequently that the
Distribution will generally be tax-free to American Brands under federal
income tax laws. We have assumed that American Brands will recognize taxable
gain on shares distributed to any foreign shareholders of American Brands as
of the date of the Distribution. We have also assumed that American Brands
will recognize taxable income upon the receipt of the approximately $1.4
billion distribution which is to be made to American Brands by New Gallaher
prior to the Distribution, although the amount of such taxable income will be
significantly reduced through the use of foreign tax credits. We understand
that the Inland Revenue Service has indicated that interest payable by New
Gallaher on borrowings to fund the Distribution will not be deductible for
U.K. corporation tax purposes. We have assumed and relied upon the estimates
of the managements of New Gallaher and American Brands of the probability and
magnitude of the potential tax liability to New Gallaher in connection with
the Distribution. The management of American Brands has advised us that the
Company has agreed to indemnify New Gallaher for 50% of the taxes attributable
to such possible lost tax deductions subject to a maximum indemnification of
(Pounds)65 million (approximately $100 million), as well as 50% of the tax, if
any, incurred by New Gallaher on the indemnity payments. We have also assumed
that American Brands will receive a ruling from the IRS to the effect that the
Distribution will not be a taxable transaction to the U.S. shareholders of
American Brands under federal income tax laws (except to the extent of any
cash distributed in lieu of fractional shares of New Gallaher). We have
further assumed the correctness of the conclusions set forth in such ruling.
In addition, we understand that the Distribution will be taxable to the U.K.
shareholders of American Brands. For the purposes of this opinion, with your
consent, we have assumed that the tax cost to American Brands will not be
material in respect of (i) ownership of American Brands' stock by foreign
shareholders (based upon American Brands' estimates of foreign shareholdings
of the Company) and (ii) the transfer of certain trademarks by ATIC Group,
Inc. to New Gallaher. We have also assumed that the Distribution will comply
with all federal, state, local and foreign laws and applicable regulations.
We have also assumed that the conditions for the Distribution stated in the
Proxy Statement will be satisfied and the Distribution and the related
transactions will be consummated on the terms set forth in the Proxy
Statement, including, among other things, the transfer by ATIC Group, Inc. of
certain tobacco-related trademarks to New Gallaher prior to consummation of
the Distribution.
Our opinion is necessarily rendered on the basis of securities markets,
economic and general business and financial conditions prevailing as of the
date hereof and the conditions and prospects, financial and otherwise, of
American Brands, Fortune Brands, Gallaher and New Gallaher as they are
represented to us as of the date hereof or as they were reflected in the
information and documents reviewed by us. Our opinion assumes that the shares
of American Brands, Fortune Brands and New Gallaher are fully and widely
distributed among investors and are subject only to normal trading activity.
We note that trading in the common stock of American Brands before the
Distribution is effected, and common stock of Fortune Brands and New Gallaher
Ordinary Shares after the Distribution is effected, for a period commencing
with the public announcement of the Distribution and continuing for a time
following the completion of the Distribution, may involve a redistribution of
such securities among the various investors in these securities. Accordingly,
during such period, such securities may trade at prices below both those at
which they traded prior to the public announcement of the Distribution and
those at which they would trade on a fully distributed basis after the
Distribution is completed. The estimation of market trading prices of newly
distributed securities is subject to uncertainties and contingencies, all of
which are difficult to predict and beyond the control of the firm making such
estimates. In addition, the market price of
A-2
<PAGE>
such securities will fluctuate with changes in market conditions, the
conditions and prospects, financial and otherwise, of American Brands, Fortune
Brands and New Gallaher, and other factors which generally influence the
prices of securities.
We have acted as financial advisor to the Board of Directors of American
Brands in connection with the Distribution and will receive a fee for our
services. In the past, Morgan Stanley and its affiliates have provided
investment banking and financing services for American Brands and have
received fees for the rendering of such services. In connection with the
distribution, Morgan Stanley & Co. Limited will act as the sponsor in
connection with the listing of New Gallaher Ordinary Shares on the London
Stock Exchange.
Our advisory services and the opinion expressed herein are provided solely for
the benefit of American Brands' Board of Directors in evaluating the
Distribution, except that this opinion may be included in any filing made by
the Company with the Securities and Exchange Commission. In rendering our
opinion, we express no opinion or recommendation as to how the shareholders of
American Brands should vote at the shareholder meeting held in connection with
the Distribution and this opinion does not address the prices at which the
Common Stock of Fortune Brands or New Gallaher Ordinary Shares will trade
after the Distribution is effected.
Based upon and subject to the foregoing, we are of the opinion as of the date
hereof that the proposed Distribution is fair, from a financial point of view,
to the holders of American Brands common stock.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
/s/ David J. Topper
By: _________________________________
David J. Topper
Managing Director
A-3
<PAGE>
ANNEX B
FORTUNE BRANDS, INC.
ANNUAL EXECUTIVE
INCENTIVE COMPENSATION PLAN
ARTICLE I
GENERAL
SECTION 1.1 Purpose. The purpose of this Annual Executive Incentive
Compensation Plan (the "Plan") is to advance the interests of the stockholders
of Fortune Brands, Inc. (the "Company") by providing performance-based
incentives to senior executives of the Company.
SECTION 1.2 Definitions. As used in the Plan, the following terms shall have
the following meanings:
(a) "Award" means, for each Participant, a specific dollar amount payable
as determined by the Committee pursuant to Section 2.2 of the Plan after
application of the Committee's discretion pursuant to Section 2.4(b) of the
Plan;
(b) "Board of Directors" means the Board of Directors of the Company;
(c) "Code" means the Internal Revenue Code of 1986, as amended;
(d) "Committee" means the Compensation and Stock Option Committee of the
Board of Directors;
(e) "Incentive Pool" means, with respect to each Performance Period, the
total amount of dollars available to be paid to all Participants. This
amount shall be based on an objective formula established by the Committee
in accordance with Section 2.2 of the Plan using one or more of the
Performance Measures. It shall be allocated among the Participants in the
manner determined by the Committee in accordance with the Plan;
(f) "Participants" means, with respect to each Performance Period, the
group of all persons elected to the office of Vice President of the Company
or any office senior thereto except any officer covered by an annual
incentive compensation plan of any subsidiary of the Company. A person who
during part of such Performance Period has held such office shall
participate on a proportional basis reflecting the portion of the
Performance Period during which he or she has held such office;
(g) "Performance Measures" means performance goals and objectives, which
shall be based on any of the following performance criteria, either alone
or in any combination, as the Committee may determine: cash flow; cash flow
from operations; earnings per Common share; earnings per Common share from
continuing operations; income before income taxes; income before income
taxes, depreciation and amortization; income from continuing operations;
net asset turnover; net income; operating income; operating margin; return
on equity; return on net assets; return on total assets; return on total
capital; sales; economic value added; and total return to stockholders. For
any Performance Period, Performance Measures may be determined on an
absolute basis or relative to internal goals or relative to levels attained
in years prior to such Performance Period or related to other companies.
For any Performance Period, the Committee shall provide whether and how the
Performance Measures shall be adjusted in the event of any or all of the
following items: extraordinary, unusual or non-recurring items; effects of
changes in applicable laws, regulations or accounting principles; effects
of currency fluctuations; effects of financing activities (e.g., effect on
earnings per share of issuance of convertible debt securities); realized or
unrealized gains and losses on securities; expenses, charges or credits for
restructuring initiatives, productivity initiatives or for impaired assets;
non-cash items (e.g., amortization, depreciation or reserves); other non-
operating items; writedowns of intangible assets, property, plant or
equipment, investments in business units and securities resulting from the
sale of business units; spending for acquisitions; and effects of any
recapitalization, reorganization, merger, acquisition, divestiture,
consolidation, spin-off, split-off, combination, liquidation, dissolution,
sale of assets, or other similar corporate transaction or event; and
B-1
<PAGE>
(h) "Performance Period" means each consecutive twelve-month period
commencing January 1 of each year.
SECTION 1.3 Administration of the Plan. The Plan shall be administered by
the Committee; provided, however, that (i) the number of directors on the
Committee shall not be less than two and (ii) each member of the Committee
shall be an "outside director" within the meaning of Section 162(m)(4) of the
Code. 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.
ARTICLE II
AWARDS
SECTION 2.1 Awards. The Committee may make Awards to Participants with
respect to each Performance Period, subject to the terms and conditions set
forth in the Plan.
SECTION 2.2 Terms of Awards. Within 90 days after the commencement of each
Performance Period (or prior to such later date as permitted by, or such
earlier date as required by, Section 162(m) of the Code and the regulations
promulgated thereunder), the Committee shall establish in writing for such
Performance Period (i) the objective formula for determining the Incentive
Pool for the Performance Period (using one or more of the Performance
Measures) and (ii) the allocable percentage of the total Incentive Pool to
which each Participant shall be entitled, provided that the total of all such
percentages for all Participants for any Performance Period shall not exceed
100 percent. The Committee shall cause each Participant to be notified in
writing of (i) his or her selection as a Participant and (ii) the formula for
determining the Incentive Pool for the Performance Period.
SECTION 2.3 Limitations on Awards. The maximum amount of an Award to any
Participant for any Performance Period shall not exceed $2.5 million. No part
of the amount of any Incentive Pool for any Performance Period which is not
awarded in such Performance Period may be carried forward for award in
subsequent Performance Periods.
SECTION 2.4 Determination of Awards.
(a) The Committee shall, promptly after the date on which all necessary
financial or other information for a particular Performance Period becomes
available, in the manner required by Section 162(m) of the Code, certify (i)
the degree to which each of the Performance Measures has been attained and
(ii) with respect to each Participant, the amount of the Participant's Award,
if any.
(b) Notwithstanding anything in the Plan to the contrary, the Committee may,
in its sole discretion reduce or eliminate, but may not increase, any Award.
In exercising its discretion, the Committee may use such objective or
subjective factors as it determines to be appropriate in its sole discretion.
The determination by the Committee as to the terms of any of the foregoing
adjustments shall be conclusive and binding. No part of any potential Award
for any Performance Period which is not actually awarded to a Participant
because of any reduction permitted by this Section 2.4(b) or required by
Section 2.3 shall be available for award to any other Participant whose actual
compensation for such period is subject to Section 162(m) of the Code.
(c) After the end of each Performance Period when the amount of each
Participant's Award has been determined, the Committee shall cause each
Participant to be provided with written notice of the amount of his or her
Award, if any. Awards shall become payable in cash as promptly as practicable
after the certifications described in this Section 2.4 have been made by the
Committee.
B-2
<PAGE>
SECTION 2.5 Deferral of Payment of Awards. Notwithstanding Section 2.4(c),
the Committee may, in its sole discretion, upon the request of a Participant,
determine that the payment of an Award (or a portion thereof) to the
Participant shall be deferred and when such deferred Award shall be paid and
over what period of time. The Committee shall have discretion to provide for
the payment of an amount equivalent to interest, at such rate or rates fixed
by the Committee or based on one or more predetermined investments selected by
the Committee, on any such deferred Award.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 Restriction on Transfer. The rights of a Participant with
respect to amounts payable under the Plan shall not be transferable by such
Participant, otherwise than by will or the laws of descent and distribution.
SECTION 3.2 Tax Withholding. The Company shall have the right to deduct from
all payments made under the Plan to a Participant or to a Participant's
beneficiary or beneficiaries any Federal, state or local taxes required by law
to be withheld with respect to such payments.
SECTION 3.3 Source of Payments. The Company shall not have any obligation to
establish any separate fund or trust or other segregation of assets to provide
for payments under the Plan. To the extent any person acquires any rights to
receive payments hereunder from the Company, such rights shall be no greater
than those of an unsecured creditor.
SECTION 3.4 Employment Rights and Other Benefit Programs. The provisions of
the Plan shall not give any Participant any right to be retained in the
employment of the Company. In the absence of any specific agreement to the
contrary, the Plan shall not affect any right of the Company, or of any
affiliate of the Company, to terminate, with or without cause, any
Participant's employment at any time. The Plan shall not replace any contract
of employment between the Company and any Participant, but shall be considered
a supplement thereto. The Plan is in addition to, and not in lieu of, any
other employee benefit plan or program in which any Participant may be or
become eligible to participate by reason of employment with the Company.
SECTION 3.5 Amendment and Termination. The Board of Directors may at any
time and from time to time alter, amend, suspend or terminate the Plan in
whole or in part. No termination or amendment of the Plan may, without the
consent of the Participant to whom an Award has been determined for a
completed Performance Period but not yet paid, adversely affect the rights of
such Participant in such Award, nor shall any amendment increase the amount
payable to a Participant for a Performance Period if such amendment is made
after the final day of the period for establishing the objective formula for
determining the Incentive Pool for the Performance Period set forth in Section
2.2 of the Plan.
SECTION 3.6 Governing Law. The Plan and all rights and Awards hereunder
shall be construed in accordance with and governed by the laws of the State of
Delaware.
SECTION 3.7 Severability. If any provision of the Plan is or becomes or is
deemed to be invalid, illegal or unenforceable in any jurisdiction such
provision shall be construed or deemed amended to conform to applicable laws,
or if it cannot be so construed or deemed amended without, in the
determination of the Committee, materially altering the purpose or intent of
the Plan, such provision shall be stricken as to such jurisdiction, and the
remainder of the Plan shall remain in full force and effect.
SECTION 3.8 Effective Date. The Plan shall be effective as of January 1,
1997, subject to the approval thereof by the stockholders of the Company at
the 1997 annual meeting of stockholders. Such approval shall meet the
requirements of Section 162(m) of the Code and the regulations thereunder. If
such approval is not obtained, then the Plan shall not be effective and any
formula for determining the Incentive Pool for any Performance Period, any
percentage thereof to which any person otherwise may be entitled and any
notice given pursuant to Section 2.2 of the Plan shall be void ab initio.
B-3
<PAGE>
ANNEX C
AMERICAN BRANDS, INC.*
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE OF PLAN
The purpose of this Non-Employee Director Stock Option Plan (the "Plan") is
to enable American Brands, Inc. ("American") to attract and retain Eligible
Directors (as defined below) of outstanding ability by making it possible to
offer them the opportunity to acquire shares of common stock of American and
thereby further align their interests with those of other stockholders of
American.
2. DEFINITIONS
As used in the Plan, the following words shall have the following meanings:
(a) "Board of Directors" means the Board of Directors of American;
(b) "Committee" means the Nominating and Corporate Governance Committee of
the Board of Directors;
(c) "Common Stock" means common stock of American;
(d) "Eligible Director" means:
(i) A person who becomes a member of the Board of Directors, after the
date of adoption of this Plan by the stockholders of American and is not at
the time of receipt of an Option hereunder a full-time employee of American
or a Subsidiary; or
(ii) Any current director of American who is not a full-time employee of
American or a Subsidiary who irrevocably elects to cease to accrue benefits
under American's retirement benefit plan for non-employee directors for so
long as the Company maintains this Plan or a successor plan hereto; or
(iii) Any current or future director of American who ceases to serve as
an employee of American or a Subsidiary and to whom the Committee
determines in its sole discretion to grant options.
(e) "Exchange Act" means the Securities Exchange Act of 1934, as amended;
(f) "Limited Right" means a right to receive cash in lieu of the exercise of
an Option as set forth in Section 7(b);
(g) "Option" means a stock option to purchase shares of Common Stock which
is intended not to qualify as an incentive stock option as defined in Section
422 of the Internal Revenue Code;
(h) "Option Agreement" means an agreement between American and a Participant
that sets forth the terms, conditions and limitations applicable to an Option;
(i) "Participant" means a person to whom one or more Options have been
granted that have not all been forfeited or terminated under the Plan;
(j) "Retirement" means retirement from service as a member of the Board of
Directors by an Eligible Director after five or more years of service as an
Eligible Director; and
(k) "Subsidiary" means any corporation other than American in an unbroken
chain of corporations beginning with American if each of the corporations
other than the last corporation in the unbroken chain owns 50% or more of the
voting stock in one of the other corporations in such chain.
- --------
* References to American Brands, Inc. or American shall mean Fortune Brands,
Inc. or Fortune, as the case may be, in the event that the stockholders of
American Brands, Inc. approve changing the name of American Brands, Inc. to
Fortune Brands, Inc.
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<PAGE>
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 two members of
the Board of Directors. 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.
4. GRANTING OF OPTIONS
Subject to all the terms and conditions of the Plan, each Eligible Director
shall be granted an Option covering 2,000 shares of Common Stock per year for
services as a non-employee director during such year, such grant to be made on
the date of the Annual Meeting of stockholders of American during such year.
To be entitled to receive such Option with respect to any year, an Eligible
Director must be serving as a director of American immediately following such
Annual Meeting. Notwithstanding the foregoing, if at the scheduled time of
grant, the General Counsel of American determines, in such Counsel's sole
determination, that American is in possession of material, undisclosed
information about American, then the annual grant of Options hereunder shall
be suspended until the second day after (a) public dissemination of such
information or (b) the day in such General Counsel's sole determination the
information is no longer material, and the exercise price, exercisability date
and term of option shall be determined by reference to such later date.
Options under the Plan may be in such form and contain such terms, conditions
and limitations as the Committee may determine. The terms, conditions and
limitations of each Option under the Plan shall be set forth in an Option
Agreement, in a form approved by the Committee, consistent, however, with the
terms of the Plan.
5. GRANT OF OPTIONS
(a) The terms and conditions with respect to each Option granted under the
Plan shall be consistent with the following:
(i) The Option price per share shall not be less than fair market value
at the time the Option is granted.
(ii) Exercise of the Option shall be conditioned upon the Participant
named therein having remained as an Eligible Director of American for at
least one year after the date of the grant of the Option; provided,
however, that this condition shall not be applicable in the event of the
death of the Participant or as otherwise provided in Section 7(b). The
Option shall be exercisable in whole or in part from time to time during
the period beginning at the completion of the required time stated in the
Option Agreement and ending at the expiration of ten years from the date of
grant of the Option, unless an earlier expiration date shall be stated in
the Option or the Option shall cease to be exercisable pursuant to Section
5(a)(iv) or because of the exercise of the Limited Right pertaining thereto
as provided in Section 7(b).
(iii) Payment in full of the Option price shall be made upon exercise of
each Option and may be made in cash, by the delivery of shares of Common
Stock with a fair market value equal to the Option price, provided the
Participant has held such shares for a period of at least one year, or by a
combination of cash and such shares that have been held by the Participant
for a period of at least one year whose fair market value together with
such cash shall equal the Option price. The Committee may also permit
Participants, either on a selective or aggregate basis, simultaneously to
exercise Options and sell the shares of Common Stock thereby acquired
pursuant to a brokerage or similar arrangement, approved in advance by the
Committee, and use the proceeds from such sale as payment of the purchase
price of such shares.
(iv) If a Participant's status as an Eligible Director ceases other than
by reason of the Participant's death, disability or Retirement, the
Participant's Option shall terminate and cease to be exercisable 30 days
after such cessation of service except as otherwise provided in Section
7(b). If a Participant's status as an Eligible Director terminates by
reason of death, disability or Retirement, the Participant's Option shall
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<PAGE>
continue to be exercisable until the expiration date stated in the Option
Agreement, provided that an Option may be exercised within one year from
the date of death even if later than such expiration date.
(v) Each Option shall contain a Limited Right to receive cash in lieu of
shares under the circumstances set forth in Section 7(b).
(b) The holder of an Option who decides to exercise the Option in whole or
in part shall give notice to the Secretary of American of such exercise in
writing on a form approved by the Committee. Any exercise shall be effective
as of the date specified in the notice of exercise, but not earlier than the
date the notice of exercise, together with payment in full of the Option
price, is actually received and in the hands of the Secretary of American.
6. LIMITATIONS AND CONDITIONS
(a) The total number of shares of Common Stock that may be made subject to
Options under the Plan is 125,000 shares. Such total number of shares may
consist, in whole or in part, of unissued shares or reacquired shares. The
foregoing number of shares may be increased or decreased by the events set
forth in Section 7(a). In the event that American or a Subsidiary makes an
acquisition or is a party to a merger or consolidation and American assumes
the options or other awards consistent with the purpose of this Plan of the
company acquired, merged or consolidated which are administered pursuant to
this Plan, shares of Common Stock subject to the assumed options or other
awards shall not count as part of the total number of shares of Common Stock
that may be made subject to Options under this Plan.
(b) Any shares that have been made subject to an Option that cease to be
subject to the Option (other than by reason of exercise or payment of the
Option) shall again be available for grant and shall not be considered as
having been theretofore made subject to option.
(c) No Option shall be granted under the Plan after December 31, 2001, but
the terms of Options granted on or before the expiration thereof may extend
beyond such expiration. At the time an Option is granted or amended or the
terms or conditions of an Option are changed, the Committee may provide for
limitations or conditions on such Option.
(d) No Option 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 may be transferred by gift to any member of the Participant's
immediate family or to a trust for the benefit of such immediate family
members, if permitted in the applicable Option Agreement. During the lifetime
of the Participant, an Option shall be exercisable only by the Participant
unless it has been transferred to a member of the Participant's immediate
family or to a trust 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 Participant's "immediate family" shall mean the
Participant's spouse, children and grandchildren.
(e) No person who receives an Option under the Plan shall have any rights of
a stockholder as to shares under option until, after proper exercise of the
Option, such shares have been recorded on American's official stockholder
records as having been issued or transferred.
(f) American shall not be obligated to deliver any shares until they have
been listed (or authorized for listing upon official notice of issuance) upon
each stock exchange upon which outstanding shares of such class at the time
are listed nor until there has been compliance with such laws or regulations
as American may deem applicable. American shall use its best efforts to effect
such listing and compliance. No fractional shares shall be delivered.
(g) Nothing herein shall be deemed to create the right in any Eligible
Director to remain a member of the Board of Directors, to be nominated for
reelection or to be reelected as such or, after claiming to be such a member,
to receive any Options under the Plan to which he or she is not already
entitled with respect to any year.
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<PAGE>
7. STOCK ADJUSTMENTS, CHANGE IN CONTROL AND DIVESTITURES
(a) In the event of any merger, consolidation, stock or other non-cash
dividend, extraordinary cash dividend, split-up, spin-off, combination or
exchange of shares, reorganization or recapitalization or change in
capitalization, or any other similar corporate event, the Committee may make
such adjustments in (i) the aggregate number of shares subject to the Plan and
(ii) the number and kind of shares that are subject to any Option (including
any Option outstanding after cessation of director status) and the Option
price per share without any change in the aggregate Option price to be paid
therefor upon exercise of the Option; provided, however, no adjustment to any
Option granted hereunder shall be made in the event American spins-off to its
stockholders the international tobacco operations of Gallaher Limited and its
subsidiaries except that adjustments may be made to any Options granted prior
to such spin-off. The determination by the Committee as to the terms of any of
the foregoing adjustments shall be conclusive and binding.
(b) (i) In the event of a Change in Control (as defined in Section
7(b)(iii)), then each Option 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). 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
herein referred to as the "Limited Right Exercise Period"), in lieu of
exercising such Option 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 the
greater of (x) the highest purchase price per share paid for the shares of
American 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 American, 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 American. 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
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 shall terminate and cease to be exercisable.
(ii) Notwithstanding anything to the contrary in the first sentence of
Section 5(a)(ii) or in 5(a)(iv), the provisions of this Section 7(b)(ii) will
be applicable in the event of a termination of a Participant's status of a
member of the Board of Directors on or after a Change in Control and prior to
the expiration of the Limited Right Exercise Period applicable thereto. No
Option or Limited Right held by a Participant shall terminate or cease to be
exercisable as a result of his termination as a member of the Board of
Directors on or after a Change in Control and prior to the expiration of the
Limited Right Exercise Period applicable thereto, but shall be exercisable
throughout the Limited Right Exercise Period applicable thereto; provided,
however, that in no event shall any Option be exercisable after ten years from
its date of grant (except in the event of death as provided in Section
5(a)(iv)).
(iii) A "Change in Control" shall be deemed to have occurred if (A) any
person (as that term is used in Sections 13(d) and 14(d) of the Exchange Act,
as in effect on January 28, 1997) is or becomes the beneficial owner (as that
term is used in Section 13(d) of the Exchange Act, and the rules and
regulations promulgated
C-4
<PAGE>
thereunder, as in effect on January 28, 1997) of stock of American entitled to
cast more than 20% of the votes at the time entitled to be cast generally for
the election of directors, (B) more than 50% of the members of the Board of
Directors shall not be Continuing Directors (which term, as used herein, means
the directors of American (x) who are members of the Board of Directors on
January 28, 1997 or (y) who subsequently became directors of American and who
were elected or designated to be candidates for election as nominees of the
Board of Directors, or whose election or nomination for election by American's
stockholders was otherwise approved, by a vote of a majority of the Continuing
Directors then on the Board of Directors), (C) American shall be merged or
consolidated with, or, in any transaction or series of transactions,
substantially all of the business or assets of American shall be sold or
otherwise acquired by, another corporation or entity and, as a result thereof,
either (1) the stockholders of American immediately prior thereto shall not
directly or indirectly have at least 50% or more of the combined voting power
of the surviving, resulting or transferee corporation or entity immediately
thereafter or (2) any person (as that term is used in Sections 13(d) and 14(d)
of the Exchange Act, as in effect on January 28, 1997) is or becomes the
beneficial owner (as that term is used in Section 13(d) of the Exchange Act,
and the rules and regulations promulgated thereunder, as in effect on January
28, 1997) of more than 20% of combined voting power of the surviving,
resulting or transferee corporation or entity, or (D) any change in control of
American shall have occurred of a nature that would be required to be reported
in response to Item 1(a) of Form 8-K promulgated under the Exchange Act as in
effect on January 28, 1997, regardless of whether American is at the time of
such change in control subject to the reporting requirement thereof.
Notwithstanding the foregoing, a Change in Control shall not be deemed to have
occurred if an acquisition of stock that would otherwise constitute a Change
in Control pursuant to clause (A) or (D) of the preceding sentence is made by
American or a Subsidiary, by any corporation in a merger or consolidation that
does not constitute a Change in Control pursuant to clause (C) of the
preceding sentence or by any employee benefit plan (or related trust)
sponsored or maintained by American or a Subsidiary.
8. AMENDMENT AND TERMINATION
(a) The Board of Directors shall have the power to amend the Plan. It shall
not, however, except as otherwise provided in the Plan, increase the maximum
number of shares authorized for the Plan, nor change the class of eligible
recipients to other than Eligible Directors, nor reduce the basis upon which
the minimum Option price is determined, nor extend the period within which
Options under the Plan may be granted, nor provide for an Option that is
exercisable more than ten years from the date it is granted except in the
event of death. It shall have no power to change the terms of any Option
theretofore granted under the Plan so as to impair the rights of a Participant
without the consent of the Participant whose rights would be affected by such
change except to the extent, if any, provided in the Plan or in the Option.
(b) The Board of Directors may suspend or terminate the Plan at any time. No
such suspension or termination shall affect Options or Limited Rights then in
effect.
9. FOREIGN OPTIONS
(a) The Committee may grant Options to Eligible Directors who are subject to
the tax laws of nations other than the United States, which Options may have
terms and conditions that differ from the terms thereof as provided elsewhere
in the Plan for the purpose of complying with the foreign tax laws.
(b) The terms and conditions of Options granted under Section 9(a) may
differ from the terms and conditions which the Plan would require to be
imposed upon Options if the Committee determines that the grants are desirable
to promote the purposes of the Plan for the Eligible Directors identified in
Section 9(a); provided that the Committee may not grant such Options that do
not comply with the limitations of Section 8(a).
10. WITHHOLDING TAXES
American shall have the right to deduct from any cash payment made under the
Plan any federal, state or local income or other taxes required by law to be
withheld with respect to such payment. It shall be a condition
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<PAGE>
to the obligation of American to deliver shares upon the exercise of an
Option, that the Participant pay to American such amount as may be requested
by American for the purpose of satisfying any liability for such withholding
taxes. Any Option Agreement may provide that the Participant may elect, in
accordance with any conditions set forth in such Option Agreement, to pay any
withholding taxes in shares of Common Stock.
11. EFFECTIVE DATE
The Plan shall be subject to and effective upon its approval by the
stockholders of American.
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<PAGE>
[LOGO] RECYCLED PAPER
THIS PROXY STATEMENT IS PRINTED ON RECYCLED PAPER. THE ENTIRE PUBLICATION IS
RECYCLABLE.
<PAGE>
PROXY SOLICITED BY THE BOARD OF DIRECTORS
[LOGO] AMERICAN
BRANDS, INC.
The undersigned hereby appoints T.C. HAYS, G.L. KLEMANN, II and J.T. LUDES
proxies, with power of substitution, to vote at the Annual Meeting (including
adjournments) of stockholders of American Brands, Inc., to be held April 30,
1997, at the Stamford Center for the Arts, Stamford, Connecticut at 10:00 A.M.,
for the election of nominees Eugene R. Anderson, Patricia O. Ewers, John W.
Johnstone, Jr. and Wendell J. Kelley as Class II directors (Item 4), on Items 1
through 3 and Items 5 through 9 referred to on the reverse side and described in
the Proxy Statement, and on any other business before the meeting, with all
powers the undersigned would possess if personally present. A majority (or, if
only one, then that one) of the proxies or their substitutes acting at the
meeting may exercise all powers hereby conferred.
This proxy when properly executed will be voted in the manner directed herein
by the stockholder. If no contrary indication is made, the proxies will vote
FOR the election of the nominees of the Board of Directors (Item 4), FOR
- --- ---
Items 1, 2, 3, 5 and 6, and AGAINST items 7 through 9 if they are presented
-------
to the meeting.
Please mark, date, sign
as name appears at
right, and return this
proxy in the enclosed
postpaid envelope.
(Executors, administrators,
trustees, custodians, etc.,
should indicate capacity
in which signing.)
Please
Sign (RIGHT ARROW) [ ] DATED , 1997
Here --------------
(DETACH HERE)
PLEASE EXECUTE AND RETURN YOUR PROXY PROMPTLY
(See enclosed Proxy Statement)
<PAGE>
P R O X Y
The Board of Directors recommends votes FOR Items 1 through 6 proposed by the
---
Company
FOR AGAINST ABSTAIN
1. Distribution of all the outstanding [ ] [ ] [ ]
share capital of Gallaher Group Plc
2. Repeal of Article XII of the By-laws [ ] [ ] [ ]
and approve new executive
compensation plan
3. Amend the Certificate of [ ] [ ] [ ]
Incorporation to change name
WITHHELD
FOR ALL FROM ALL
4. Election of Directors [ ] [ ]
FOR, EXCEPT Individual nominee(s) (Messrs. Anderson,
Johnstone and Kelley and Dr. Ewers) whose name(s) is written
below:
- ------------------------------
FOR AGAINST ABSTAIN
5. Elect Coopers & Lybrand L.L.P. [ ] [ ] [ ]
independent accountants for
1997
6. Approve Non-Employee Director
Stock Option Plan [ ] [ ] [ ]
The Board of Directors recommends votes AGAINST Items 7
-------
through 9 proposed by Stockholders
FOR AGAINST ABSTAIN
7. Request elimination of election [ ] [ ] [ ]
of directors by classes
8 Request report with respect
to Glass Ceiling Commission's [ ] [ ] [ ]
recommendations
9. Request equal employment [ ] [ ] [ ]
report
(To be signed and dated on the other side)
(DETACH HERE)
[LOGO] AMERICAN
BRANDS, INC.
P R O X Y
