UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 1-9076
FORTUNE BRANDS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $3.125 per share New York Stock Exchange, Inc.
$2.67 Convertible Preferred Stock,
without par value New York Stock Exchange, Inc.
9% Notes Due 1999 New York Stock Exchange, Inc.
8 5/8% Debentures Due 2021 New York Stock Exchange, Inc.
8 1/2% Notes Due 2003 New York Stock Exchange, Inc.
7 7/8% Debentures Due 2023 New York Stock Exchange, Inc.
7 1/2% Notes Due 1999 New York Stock Exchange, Inc.
Preferred Share Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Registrant's voting stock held by
non-affiliates of Registrant, at February 12, 1998, was $6,525,014,000. The
number of shares outstanding of Registrant's Common Stock, par value $3.125 per
share, at March 2, 1998, was 172,439,971.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Certain information contained in the Annual Report to Stockholders of
Registrant for the fiscal year ended December 31, 1997 is incorporated
by reference into Part I, Part II and Part IV hereof.
(2) Certain information contained in the Proxy Statement for the Annual
Meeting of Stockholders of Registrant to be held on April 28, 1998 is
incorporated by reference into Part III hereof.
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PART I
Item 1. Business.
(a) General development of business.
Registrant is a holding company with subsidiaries engaged in
the manufacture and sale of home products, office products, golf products and
distilled spirits.
Registrant was incorporated under the laws of Delaware in 1985
and until 1986 conducted no business. Prior to 1986, the businesses of
Registrant's subsidiaries were conducted by American Brands, Inc., a New Jersey
corporation organized in 1904 ("American New Jersey"), and its subsidiaries.
American New Jersey was merged into The American Tobacco Company on December 31,
1985, and the shares of the principal first-tier subsidiaries formerly held by
American New Jersey were transferred to Registrant. In addition, Registrant
assumed all liabilities and obligations in respect of the public debt securities
of American New Jersey outstanding immediately prior to the merger. On May 30,
1997, the Registrant's name was changed from American Brands, Inc. to Fortune
Brands, Inc.
As a holding company, Registrant is a legal entity separate
and distinct from its subsidiaries. Accordingly, the right of Registrant, and
thus the right of Registrant's creditors (including holders of its debt
securities and other obligations) and stockholders, to participate in any
distribution of the assets or earnings of any subsidiary is subject to the
claims of creditors of the subsidiary, except to the extent that claims of
Registrant itself as a creditor of such subsidiary may be recognized, in which
event Registrant's claims may in certain circumstances be subordinate to certain
claims of others. In addition, as a holding company, a principal source of
Registrant's unconsolidated revenues and funds is dividends and other payments
from its subsidiaries. Registrant's principal subsidiaries currently are not
limited by long-term debt or other agreements in their abilities to pay cash
dividends or to make other distributions with respect to their capital stock or
other payments to Registrant.
In recent years, Registrant has been engaged in a strategy of
seeking to enhance the operations of its principal operating companies. Pursuant
to this strategy, in 1997 Registrant completed five acquisitions of office
products, golf clubs and home products businesses for an aggregate cost of $92
million, including fees and expenses. In 1996, Registrant acquired Cobra Golf
Incorporated ("Cobra"), a leading manufacturer of golf clubs, for an aggregate
cost of $712 million in cash, including fees and expenses. In February 1998,
Registrant's office products subsidiary completed the acquisition of the Apollo
Presentation Products group of companies, marketers of office and conference
presentation products, for $65 million.
Registrant has also disposed of subsidiaries having
significant revenues but engaged in businesses considered by Registrant to be
nonstrategic to its long-term operations. For example, in 1994, Registrant sold
The American Tobacco Company, a subsidiary engaged in the domestic tobacco
business, to Brown & Williamson Tobacco Corporation (a subsidiary of B.A.T
Industries p.l.c.) for $1 billion. In 1995,
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Registrant sold American Franklin Company, whose subsidiaries were engaged in
the life insurance business, to American General Corporation for $1.17 billion.
Most recently, on May 30, 1997, Registrant completed the spin-off of Gallaher
Group Plc ("Gallaher Group") to Registrant's stockholders. Subsidiaries of
Gallaher Group compete in the international tobacco business.
In addition, a number of other nonstrategic businesses and
product lines have been sold. In 1997, one of Registrant's office products
subsidiaries sold Sax Arts & Crafts, a marketer to schools of arts and crafts
supplies, and in 1998, a home products subsidiary sold assets relating to the
manufacture of door locks and related hardware. In 1995, U.K.-based Forbuoys
(retail distribution) and Prestige (housewares) were sold, both of which were
subsidiaries in the Gallaher Group.
Registrant continues to pursue the above strategy and in
furtherance thereof explores other possible acquisitions in fields related to
its principal operating companies. Registrant also cannot exclude the
possibility of acquisitions in other fields or further dispositions. Although no
assurance can be given as to whether or when any acquisitions or dispositions
will be consummated, if agreement with respect to any acquisitions were to be
reached, Registrant might finance such acquisitions by issuance of additional
debt or equity securities. The additional debt from any acquisitions, if
consummated, would increase Registrant's debt-to-equity ratio and such debt or
equity securities might, at least in the near term, have a dilutive effect on
earnings per share. Registrant also continues to consider other corporate
strategies intended to enhance stockholder value. It cannot be predicted whether
or when any such strategies might be implemented or what the financial effect
thereof might be upon Registrant's debt or equity securities.
Another aspect of Registrant's strategy to enhance the
operations of its principal operating companies has been to focus particular
attention on pursuing cost initiatives and productivity-enhancing opportunities.
To that end, in 1997 Registrant recorded pre-tax restructuring and other
nonrecurring charges totaling $298.2 million across all of its principal
operating companies. The restructuring actions will be substantially completed
in 1998 and are expected to produce annualized savings of over $50 million, much
of that beginning in 1998. The Registrant expects to use much of the savings to
support the future growth of its operating companies' brands. In total, capital
expenditures on these restructuring related projects will be approximately $75
million.
Cautionary Statement
Except for the historical information contained in this Annual
Report on Form 10-K, certain statements herein, including without limitation,
certain matters discussed in Part I, Item 1 -- Business and Item 3 -- Legal
Proceedings and in Part II, Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations, are forward looking statements
that involve a number of risks and uncertainties. Actual results could differ
materially from such forward looking statements depending upon such risks and
uncertainties including, but not limited to, the following: changes in general
economic
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conditions, foreign exchange rate fluctuations, competitive product and pricing
pressures, the impact of excise tax increases with respect to distilled spirits,
regulatory developments, the uncertainties of litigation, as well as other risks
and uncertainties detailed from time to time in Registrant's Securities and
Exchange Commission filings.
(b) Financial information about industry segments.
See Note 16 "Information on Business Segments" in the Notes to
Consolidated Financial Statements contained in the 1997 Annual Report to
Stockholders of Registrant, which Note is incorporated herein by reference.
(c) Narrative description of business.
The following is a description of the business of the
subsidiaries of Registrant in the industry segments of Home Products, Office
Products, Golf Products and Distilled Spirits. For financial information about
the above industry segments, see Note 16 "Information on Business Segments" in
the Notes to Consolidated Financial Statements contained in the 1997 Annual
Report to Stockholders of Registrant, which Note is incorporated herein by
reference.
Home Products
MasterBrand Industries, Inc. ("MasterBrand") is a holding
company for subsidiaries in the home products business. Subsidiaries include
Moen Incorporated ("Moen"), Master Lock Company ("Master Lock"), Aristokraft,
Inc. ("Aristokraft") and Waterloo Industries, Inc. ("Waterloo"). The home
products business is highly competitive. MasterBrand's operating companies
compete on the basis of product quality, price, service and responsiveness to
distributor and retailer needs and end-user consumer preferences.
Moen manufactures and packages faucets, sinks and plumbing
accessories and parts and a wide variety of plumbing supply and repair products
in the U.S. and East Asia. In November 1997, Moen acquired Creative Specialties,
Inc., a marketer of bath furnishings under the Donner brand name. Faucets are
sold under a variety of trade names, including Moen, Moentrol, Touch Control,
One-Touch, Riser, Monticello, PureTouch, Concentrix, Chateau, Legend, Pulsation
and Sani-Stream, and other products are sold under the Moen, Chicago Specialty,
Dearborn Brass, Wrightway, Anchor Brass, Hoov-R-Line and Donner brand names.
Composite kitchen sinks are sold under the MoenStone brand name. Sales are made
through Moen's own sales force and independent manufacturers' representatives
primarily to wholesalers, mass merchandisers and home centers, professional
plumbers and also to industrial distributors, repackagers and original equipment
manufacturers. Some plumbing parts and repair products are purchased from other
manufacturers. Products are sold principally in the U.S. and Canada and also in
East Asia, Mexico and Latin America. Moen's chief competitors include Masco's
Delta/Peerless, Black & Decker's Price Pfister, Kohler and American Standard.
In the 1996 Amendments to the Safe Drinking Water Act (the
"SDWA Amendments"), the U.S. Congress authorized the Environmental Protection
Agency (the "EPA") to adopt a voluntary industry standard as a
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means of establishing maximum allowable leachate levels of lead from plumbing
fixtures and fittings used to supply drinking water. The EPA has endorsed the
NSF International Standard 61, Section 9 protocol ("Section 9") for evaluating
leachate from plumbing fittings used to supply drinking water. As of August 6,
1998, it will be unlawful to manufacture, distribute, sell or install any
plumbing fixture or fitting used to supply drinking water, such as a brass
faucet, that does not meet the requirements of Section 9. Moen uses a
proprietary process to limit leachate of lead from brass faucets that is its
principal means of complying with Section 9, although there are alternative
means available to Moen and its competitors. All of Moen's brass faucets have
been certified by an independent laboratory to be in compliance with Section 9,
and programs are in place with respect to its other drinking water supply
fixtures and fittings. Moen's management believes that the compliance
requirements under the SDWA Amendments will not have a material adverse effect
on its business. It is not possible to predict whether further action will be
taken at the federal, state or local levels to regulate plumbing fixtures or
fittings, or the nature of any such action, or the effect that any such action
may have on the industry generally or on Moen.
In August 1995, Moen settled litigation with the California
Attorney General and private parties concerning California's "Proposition 65"
statute, as it relates to lead leachates from brass faucets. Terms of the
settlement require specific reductions of lead leachates from brass faucets
until the year 2000, and establish maximum permitted lead leachates levels after
2000. All of Moen's brass faucets currently meet the requirements of the
settlement concerning lead leachates for the year 2000 and thereafter.
Master Lock manufactures keyed and combination padlocks, chain
and cable locks, bicycle locks, built-in locker locks and other specialty
security devices. Sales of products designed for consumer use are made to
wholesale distributors and to home centers, hardware and other retail outlets,
while sales of lock systems are made to industrial and institutional users,
original equipment manufacturers and retail outlets. Most sales are brokered
through independent manufacturers' representatives, primarily in the U.S. and
Canada. Master Lock encounters competition from Abus, Belwith, Hampton, American
Lock, and various imports in the padlock segment. In March 1998, Master Lock
sold its Door Hardware Division to Ingersoll Rand's Schlage subsidiary.
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. Aristokraft competes with a number of manufacturers, including Masco's
Merillat and KraftMaid, American Woodmark, Schrock, Triangle Pacific and Mill's
Pride.
Waterloo manufactures tool storage products, consisting
primarily of high quality steel tool boxes, tool chests, workbenches and related
products manufactured for private label sale by one of the largest national
retailers in the U.S. Similar products are sold under
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the Waterloo and All American brand names to specialty industrial and automotive
dealers, mass merchandisers, home centers and hardware stores. Waterloo also
manufactures hospital carts and storage units and sells such products to
institutional users. Waterloo competes with Snap-on, Kennedy, Stanley, Stack-On,
and others in the metal storage segment, and with Contico, Zag, Rubbermaid and
others in the plastic hand box category.
Raw materials used for the manufacture of products offered by
MasterBrand's operating companies are primarily red oak and maple lumber,
particleboard, rolled steel, brass, zinc, copper, nickel, and various plastic
resins. These materials are available from a number of sources.
The MasterBrand operating companies are each evaluating
opportunities for increasing their purchases of components and finished goods
from domestic and international lower-cost third-party vendors. Such actions are
being taken in order to improve their respective cost and competitive positions.
Sales of MasterBrand operating companies' products are
becoming increasingly concentrated in a smaller number of major customers,
principally mass merchant superstores, home centers, and large distributors and
home builders. The MasterBrand operating companies also are increasingly facing
competition on a value-priced basis. 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 and will present
opportunities for the most efficient manufacturers.
Office Products
ACCO World Corporation ("ACCO") is a holding company for
subsidiaries engaged in designing, developing, manufacturing and marketing a
wide variety of traditional and computer-related office products, supplies,
personal computer accessory products, time management products, presentation
aids and label products. 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, Australia and Taiwan.
ACCO USA, Inc., ACCO's primary U.S. operating company, changed
its name to ACCO Brands, Inc. ("ACCO Brands") in December 1997 and had merged
into it Kensington Microware Limited ("Kensington"), an affiliate. ACCO Brands
manufactures binders, fasteners, paper clips, punches, staples, stapling
equipment and storage products, as well as computer supplies and accessories, in
the U.S. ACCO Canada Inc. ("ACCO Canada"), a subsidiary of ACCO, manufactures a
limited product range and distributes in Canada a range of office products
similar to that distributed by ACCO Brands in the U.S. Principal office products
brands include ACCO products, Swingline staples and stapling equipment, Wilson
Jones binders and columnar pads, Perma Products corrugated board storage
products and Kensington computer accessories and supplies. Products are sold
throughout the U.S. and Canada by in-house sales forces and independent
representatives to office and computer products wholesalers, retailers, dealers,
mail order companies and mass merchandisers. Recent
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acquisitions of North American office products companies include the following:
In January 1997, a subsidiary of Kensington completed the acquisition of
Advanced Gravis Computer Technology Ltd., a leading marketer of personal
computer joysticks and game pads; in October 1997, May Tag & Label Corp., a
U.S.-based manufacturer of labeling products sold under the MACO brand, was
acquired; and in February 1998, the Apollo Presentation Products group of
companies, a North American leader in presentation products, was acquired.
Subsidiaries of ACCO Europe PLC ("ACCO Europe"), a subsidiary
of ACCO, manufacture and distribute a wide range of office supplies and machines
and storage and retrieval filing systems. ACCO Europe's products are sold
primarily in the U.K., Ireland, western Europe and Australia through its
subsidiaries' sales forces and through distributors. Principal brands sold by
ACCO Europe's subsidiaries include ACCO products, Kensington computer
accessories, Rexel stapling products, Nyrex and Twinlock filing products, the
Nobo and Sasco ranges of presentation products and, in Australia, Marbig
products. In July 1997, a subsidiary of ACCO Europe acquired Nobo Group plc, a
leading manufacturer of presentation aids, principally in the U.K. and
continental Europe.
Day-Timers, Inc.("Day-Timers"), a subsidiary of ACCO,
manufactures personal organizers, planners and time management computer software
in the U.S. Management believes Day-Timers is 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 of Day-Timers,
through direct mail advertising, catalogs to consumers and businesses, and
electronic marketing. In addition, products are sold through ACCO Brands and
ACCO Canada to retailers and mass merchandisers. ACCO Brands also conducts time
management seminars for personnel of corporations in the U.S.; similar
activities are conducted by Day-Timer's subsidiaries in the U.S., Canada,
Australia and Europe.
ACCO's business is increasingly concentrated in a small number
of major customers, principally office products superstores, wholesalers and
contract stationers. As the office products industry continues to consolidate,
the growth of large customers will continue to present pricing and service
challenges to manufacturers and will present opportunities for the most
efficient manufacturers.
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 concentrating on one product category. ACCO's key
competitors on a world-wide basis include Avery Dennison, Esselte, Fellowes,
Atapco and GBC. Primary competitors for personal organizers in the North
American market are Franklin Quest and Day-Runner, and 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.
In computer accessories, ACCO competes against Logitech, Fellowes, Microsoft and
others. ACCO's operating companies compete on the basis of product quality,
price, service and responsiveness to consumer preferences.
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ACCO's subsidiaries purchase raw materials and components from
a variety of sources, including non-U.S. vendors, on competitively available
terms that fluctuate based on market conditions. ACCO is establishing
substantial and growing production operations in Mexico, helping to reduce its
cost base.
Golf Products
Acushnet Company ("Acushnet") is comprised of the Titleist and
FootJoy Worldwide Division, the Acushnet Golf Division and Cobra. The Titleist
and FootJoy 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, Titleist Titanium,
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
FootJoy 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, South Africa and Japan
through subsidiaries, 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, Bobby Grace by Cobra 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 the Cobra sales
force. Cobra markets its products internationally through Acushnet's
subsidiaries in the U.K., continental Europe and Canada, through its own
subsidiary in Japan, through an exclusive licensee in Australia and outside
these areas through distributors. In August 1997, Cobra acquired the assets of
Bobby Grace Golf Design, Inc., and in connection therewith has employed Bobby
Grace to design its line of Bobby Grace by Cobra golf putters.
In golf balls, Titleist's main competitors are Spalding,
Wilson, Dunlop/Slazenger and Bridgestone. In golf shoes, Etonic, Nike, Dexter,
Reebok, Mizuno, Stylo and Adidas are the main competitors. In golf clubs,
Callaway, Taylor Made, Ping, Tommy Armour, Spalding, Mizuno, Maruman, Dunlop,
Bridgestone and Daiwa are the main competitors. In golf gloves, Wilson, Daiwa,
Dunlop/Maxfli, Kasco, Slazenger, Tommy Armour, Mizuno and Bridgestone are the
main competitors. Acushnet and its subsidiaries compete on the basis of product
quality, price, service and responsiveness to consumer preferences.
Acushnet's advertising and promotional campaigns rely in part
on a large number of touring professionals and club professionals using and
endorsing its products. Acushnet has been competing for the endorsement and
promotional services of touring professionals. As a result, these costs have
risen and may continue to rise.
The United States Golf Association ("USGA") establishes
standards for golf equipment used in competitive play in the United States. The
USGA has proposed a plan to change the testing conditions for determining
whether a golf ball conforms to the USGA's overall
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distance standard. Such a plan has been under consideration by the USGA for
several years, and the date by which such a plan, if adopted, would be
implemented is uncertain. A change from the current testing conditions could
result in balls currently on the market or under development being deemed
non-conforming, and could have other as yet undetermined effects on Acushnet's
business and the golf ball industry.
There is currently a substantial market in "knock-off" and
counterfeit golf clubs which imitate or copy the protected features of original
equipment manufacturers golf club products. Acushnet has an active program of
enforcing its intellectual property rights against those who make or sell such
products.
Callaway Golf Company and Taylor Made Golf Company have each
announced an intention to enter the golf ball market. The nature, scope and
timing of these introductions have not yet been announced. Each company
currently holds a substantial market position in the golf club category that
could encourage purchase of their respective golf ball products by the trade and
by consumers. It is not possible to predict what effect, if any, the Callaway or
Taylor Made golf ball businesses will have on Acushnet's or its competitors'
businesses.
Distilled Spirits
JBB Worldwide, Inc. ("JBB Worldwide") is a holding company for
subsidiaries in the distilled spirits business. Principal subsidiaries include
Jim Beam Brands Co. ("Beam"), Alberta Distillers Limited ("Alberta"), JBB
(Asia-Pacific) Pty. Limited ("JBB (Asia-Pacific)") and JBB (Greater Europe) PLC
("JBB (Greater Europe)").
Principal markets for the products of JBB Worldwide's
subsidiaries are the U.S., the U.K. and Australia. Approximately 85% of JBB
Worldwide subsidiary sales are to these three markets, with the U.S. and the
U.K. representing 59% 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.;
sells bulk Canadian whisky into a variety of export markets; and imports and
distributes wines. JBB (Asia-Pacific) is located in Australia and sells JBB
Worldwide subsidiary 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 structure, Beam, Alberta, JBB (Greater Europe) and JBB
(Asia-Pacific) have each been given the responsibility of selling
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the combined branded product portfolio in designated 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 designation, 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 (produced
by Alberta), Ronrico and Pusser's rums, El Tesoro and Chinaco tequilas and A. de
Fussigny cognac. In February 1998, JBB Worldwide formed a joint venture to
distribute the "Barwang" wine brand on a global basis, except in Australia and
New Zealand.
JBB (Greater Europe) has its origins as a distiller of Scotch
whisky in 1844. In 1993, JBB (Greater Europe) completed the acquisition of
Invergordon Distillers Group PLC, another distiller, blender and marketer of
Scotch whisky. JBB (Greater Europe)'s principal brand names are Whyte & Mackay
Special Reserve, The Claymore, The Dalmore, Cluny, Mackinlay, Isle of Jura and
Bruichladdich Scotch whiskies, Glayva Scotch whisky liqueur and Vladivar vodka.
JBB (Greater Europe)'s products are sold in the U.K. through its own sales
force, in the U.S. and Australia through the affiliated company distribution
networks, and through independent distributors in other areas of the world.
Products of JBB Worldwide's subsidiaries are sold through
various distributors and, in the 18 "control" states (and one county) in the
U.S. which have established government control over certain aspects of the
purchase and distribution of alcoholic beverages, through government controlled
liquor authorities.
The distilled spirits business is highly competitive, with
many brands sold in the consumer market. Management believes there are
approximately nine major competitors worldwide and many smaller distillers and
bottlers. Management also believes that, based on units and sales value, the JBB
Worldwide group, with four brands that each sell over one million cases
worldwide, is the second or third largest producer and marketer of distilled
spirits in the U.S. and is among the nine major competitors worldwide. JBB
Worldwide's subsidiaries compete on the basis of product quality, price, service
and responsiveness to consumer preferences. The merger of Grand Metropolitan PLC
and Guinness PLC to create Diageo PLC reflects the trend towards consolidation
in the highly competitive global spirits business. The creation of Diageo PLC,
and the breadth of its portfolio of brands, as well as the continued
consolidation of the supplier, distributor and retailer tiers may present
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pricing and service challenges for distilled spirits producers, as well as
opportunities for the most efficient producers.
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. Beam has entered into a long-term supply agreement for new oak
barrels. Blended Scotch whiskies are composed of a variety of grain and malt
whiskies blended to provide a consistent product. The Scotch industry is
therefore dependent on the trading of whiskies between whisky companies.
Because whiskeys are aged for various periods, generally from
three to eight years, subsidiaries of JBB Worldwide maintain, in accordance with
industry practice, substantial inventories of bulk whiskey in warehouse
facilities. Whiskey production is generally scheduled to meet demand years into
the future, and production schedules are adjusted from time to time to bring
inventories into balance with estimated future demand.
The production, storage, transportation, distribution and sale
of the products of JBB Worldwide's subsidiaries 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 federal excise taxes and/or customs duties as well as state,
local and other taxes. There have been no increases in the U.S. federal excise
tax since January 1, 1991, 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.
Changes in the U.K. excise duties on distilled spirits in
recent years have resulted in increases or decreases in the price of a typical
700 milliliter bottle of Scotch whisky as follows:
Amount of
Effective Increase
Date (Decrease)
---------- ----------
January 1, 1995 26 pence
November 28, 1995 (27 pence)
November 26, 1996 (26 pence)
January 1, 1998 19 pence
The U.K. budget announced in March 1998 raises duties on a typical pint of beer
by one pence and a typical bottle of wine by four pence. The budget announcement
did not provide for an increase in excise duties on distilled spirits.
It is believed that the U.S. federal excise tax increase in
1991 contributed to a decline in distilled spirits unit sales for the industry,
including Beam. The effect of any future excise tax increases
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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.
The Alcoholic Beverage Labeling Act of 1988 (the "Labeling
Act") 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 for sale or distribution in the U.S. and to
members of the United States Armed Forces abroad bear a specific written warning
statement. It is not possible to state whether any additional or different
requirements imposing further labeling or other warning statement requirements
will be enacted in the U.S. Requirements that distilled spirits containers bear
warning statements have been established in certain other markets in which JBB
Worldwide subsidiaries sell products, notably South Korea, Thailand and Japan.
It is not possible to predict the effect, if any, that existing or future
labeling or other warning statement requirements may have on the industry
generally or on JBB Worldwide specifically.
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 led to calls for
government regulation and other action at the 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. JBB Worldwide operating
units outside the U.S. have conducted broadcast advertising in markets where
such advertising is legal and not in violation of voluntary restrictions by
industry groups. It is not possible to predict whether any legislation,
regulation or other government action will be enacted, promulgated or taken in
the U.S., 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.
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Other Matters
Employees
Registrant and its subsidiaries had, as of December 31, 1997,
the following number of employees:
Home Products 8,600
Office Products 8,740
------
Home and Office Products 17,340
Golf Products 5,080
Distilled Spirits 2,320
Corporate Headquarters 180
------
Total 24,920
======
Environmental matters
Registrant and its subsidiaries are subject to federal, state
and local laws and regulations concerning the discharge of materials into the
environment and the handling, disposal and clean-up of waste materials and
otherwise relating to the protection of the environment. While it is not
possible to quantify with certainty the potential impact of actions regarding
environmental matters, particularly remediation and other compliance efforts
that Registrant's subsidiaries may undertake in the future, in the opinion of
management of Registrant, compliance with the present environmental protection
laws, before taking into account estimated recoveries from third parties, will
not have a material adverse effect upon the capital expenditures, financial
condition, results of operations or competitive position of Registrant and its
subsidiaries.
(d) Financial information about foreign and domestic
operations and export sales.
Registrant's subsidiaries operate in the United States, Europe
(principally the U.K.) and other areas (principally Canada and Australia). See
the table captioned "Information on Business Segments" contained in the 1997
Annual Report to Stockholders of Registrant, which table is incorporated herein
by reference. Registrant has investments in various foreign countries,
principally the United Kingdom, as well as Australia and Canada, and, therefore,
changes in the value of the currencies of these countries can have an effect on
Registrant's financial statements when translated into U.S. dollars.
Item 2. Properties.
Registrant leases its principal executive offices in Old
Greenwich, Connecticut. The following is a description of the principal
properties of Registrant's subsidiaries.
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Home Products
MasterBrand leases its executive offices in Lincolnshire,
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 three warehouses in the U.S. and
eleven distribution centers, of which nine are in the U.S. and one is in each of
Canada and Mexico.
Office Products
ACCO leases its executive offices in Lincolnshire, Illinois.
Principal properties of subsidiaries of ACCO include seven plants which are
owned and operated in the U.S., ten in the U.K., and two in France, and one each
in Germany, Italy, Australia, the Republic of Ireland and Mexico. In addition,
subsidiaries of ACCO lease and operate six facilities in the U.S., three in
Mexico, four in Canada, two in the U.K., and one in each of France, Australia
and Italy. Of these leased facilities, (i) four in the U.S., two in Canada and
one in each of Australia and the U.K., are combined manufacturing and
distribution facilities, (ii) two in each of Canada and Mexico and one in each
of the U.S., U.K., Italy and France are distribution facilities and (iii) one in
each of the U.S. and Mexico are manufacturing facilities.
Golf 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 two test
facilities, all located in the U.S. Acushnet also leases three warehouses, two
manufacturing facilities, a test facility, and three research and development
facilities, all located in the U.S. Acushnet also leases an office in Taiwan. A
subsidiary of Acushnet leases three 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, Sweden, Austria, Denmark, The Netherlands and South Africa and lease a
sales office in the Republic of Ireland. Subsidiaries of Acushnet in Japan lease
two sales offices and two warehouse facilities. Acushnet's majority-owned joint
ventures in Thailand lease and operate two plants there. Acushnet's
minority-owned joint venture in China leases and operates one plant. Cobra
leases a combined executive office and distribution center, a combined
administrative and assembly facility, a combined warehouse and distribution
center and a graphite shaft production facility all located in Carlsbad,
California. Cobra also leases an administration office in Taiwan.
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
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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.
Registrant and its subsidiaries are of the opinion that their
properties are suitable to their respective businesses and have productive
capacities adequate to the needs of such businesses.
Item 3. Legal Proceedings.
Overview
On December 22, l994, Registrant sold The American Tobacco
Company ("ATCO") to Brown & Williamson Tobacco Corporation ("B&W"), a
wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with the sale,
B&W and ATCO ("the Indemnitors") agreed to indemnify Registrant against claims
including legal expenses arising from smoking and health and fire safe cigarette
matters relating to the tobacco business of ATCO.
Numerous legal actions, proceedings and claims are pending in
various jurisdictions against leading tobacco manufacturers, including ATCO,
based upon allegations that cancer and other ailments have resulted from tobacco
use. Registrant has been named as a defendant in some of the cases brought
against ATCO. These claims generally fall within three categories: (i) smoking
and health cases alleging personal injury brought on behalf of individual
plaintiffs, (ii) smoking and health cases alleging personal injury and
purporting to be brought on behalf of classes of individual plaintiffs, and
(iii) health care cost recovery cases, including class actions, brought by state
and local governments, unions, federal and state taxpayers and others seeking
reimbursement for Medicaid and/or other health care expenditures allegedly
caused by cigarette smoking. Damages claimed in some of the smoking and health
class actions and health care cost recovery cases range into the billions of
dollars. Certain former asbestos manufacturers and asbestos manufacturers'
personal injury settlement trusts have also sought unspecified amounts in
indemnity or contribution in third party actions against all or most of the
major domestic tobacco manufacturers. It has also been reported that civil and
criminal investigations of tobacco manufacturers are pending before certain
prosecutorial and other authorities.
In recent years there has been a substantial increase in the
number of smoking and health cases filed in the United States, a trend which
accelerated in 1997.
Individual Cases
As of March 27, 1998, there were approximately 97 smoking and
health cases pending on behalf of individual plaintiffs in which Registrant has
been named as one of the defendants (excluding approximately 28 cases in Texas
that were voluntarily dismissed but which may be refiled under certain
conditions), compared with approximately 48 such cases as of March 2, 1997. One
individual case involves allegations of personal injury allegedly related to
environmental tobacco smoke
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("ETS"), which case was recently decided by an Indiana jury in favor of
defendants. See "Recent Case Developments" below.
Class Actions
As of March 27, 1998, there were approximately 25 purported
smoking and health class actions pending in which Registrant has been named as
one of the defendants (including three that involve allegations of various
personal injuries related to exposure to ETS), compared with approximately 9
such cases on March 2, 1997. Most of these actions purport to constitute
statewide class actions and were filed after May 1996 when the Fifth Circuit
Court of Appeals held that a purported class consisting of all "addicted"
smokers nationwide did not meet the standards and requirements of the federal
rules governing class actions and reversed a federal district court's class
certification (Castano, described below).
Health Care Cost Recovery Actions
The number of health care cost recovery actions in which
Registrant has been named as one of the defendants also increased during 1997,
with approximately 17 such cases pending as of March 27, 1998, compared with
approximately 8 such cases on March 2, 1997.
Recent Case Developments
On March 19, 1998, an Indiana jury returned a unanimous
verdict on behalf of all defendants in an ETS action brought by an individual
claimant against Registrant among others (Dunn, described below). In August
1996, a Florida jury awarded a former smoker and his spouse $750,000 in a
smoking and health case against B&W (as successor by merger to ATCO) (Carter v.
American Tobacco Company, et al.), and that manufacturer was subsequently
ordered to pay approximately $1.8 million in attorneys' fees and costs.
Registrant was not a party to that litigation. The defendant in that action has
appealed the verdict and the attorneys' fee award. Later that month, a jury
returned a verdict for defendants in a smoking and health case in Indiana
against certain United States cigarette manufacturers including ATCO (Rogers v.
R.J. Reynolds Tobacco Co., et al.). Plaintiff has filed a motion seeking a new
trial based on the alleged discovery of new evidence. In May and October 1997,
Florida juries also returned verdicts for defendants in smoking and health cases
involving other United States cigarette manufacturers (Connor v. R.J. Reynolds
Tobacco Co., et al.; Karbiwnyk v. R.J. Reynolds Tobacco Co., et al.).
In October 1997, certain manufacturers executed a Settlement
Agreement (the "Agreement") with counsel for a class of non-smoking flight
attendants that had brought suit in Florida alleging injury from exposure to
ETS. (Broin, et al. v. Philip Morris Incorporated, et al.) The Agreement has
been preliminarily approved by the court and would require the manufacturers to
pay, severally and not jointly, the sum of $300 million, in three annual
installments, to fund a research foundation to "sponsor scientific research with
respect to the early detection and cure of diseases associated with cigarette
smoking." The Agreement also provides that the plaintiffs will receive no money
damages, but are permitted to file individual suits for compensatory damages,
but not
15
<PAGE>
punitive damages. In such an action, the burden of proof regarding whether ETS
can cause certain specified diseases has been shifted to the manufacturers, but
the ordinary burden of proof shall apply to all other issues, including whether
the plaintiffs' own individual injuries were caused by ETS. Registrant was
previously voluntarily dismissed from this action, and is not a party to the
Agreement. The Agreement does not require Registrant to pay any money or incur
any obligations. See also "Proposed Resolution of Certain Regulatory and
Litigation Issues" below.
Trial Dates
A health care cost recovery case brought by the State of
Oklahoma against Registrant among others is currently scheduled for trial during
1998 as are two purported class actions brought against Registrant among others
(State of Oklahoma; Clay; Aksamit; each described below).
Proposed Resolution of Certain Regulatory
and Litigation Issues
On June 20, 1997, certain U.S. tobacco companies signed a
Memorandum of Understanding (the "Memorandum") with certain state attorneys
general and private attorneys maintaining various actions against the industry,
whereby they would support the adoption of federal legislation (and any
necessary ancillary undertakings) that would incorporate the features of a
sixty-eight page "Proposed Resolution" attached to the Memorandum. The Proposed
Resolution calls for legislation that would, among other things, restrict how
tobacco products are manufactured, marketed and distributed in the United
States. If enacted, the legislation would also resolve the attorney general
health care recovery actions and class actions pending against the industry,
would bar similar actions in the future, and would in certain respects limit the
relief that can be obtained in lawsuits brought against the industry by
individual claimants. In addition, third party payor (and similar claims) could
be maintained only if based on subrogation of individual claims.
The Proposed Resolution would require substantial payments by
participating manufacturers aggregating an estimated $368.5 billion over the
first 25 years after the legislation is adopted, including a $10 billion initial
payment on the date that federal legislation implementing the terms of the
Proposed Resolution is signed (to be adjusted downward for initial payments made
to Mississippi, Florida and Texas pursuant to the settlements of health costs
recovery actions described below). The Proposed Resolution would also require
the Food and Drug Administration to impose additional annual surcharges on the
industry if targeted reductions in underage smoking are not achieved in
accordance with a legislative timetable. The legislation featured in the
Proposed Resolution would not require the Registrant to pay any money or incur
any obligations.
There can be no assurance that the legislation called for in
the Proposed Resolution will be enacted. It is also impossible to predict when
the legislation may be approved, if it is. Moreover, there can be no assurance
that any legislation that is enacted will embody the features described in the
Proposed Resolution. Certain features of the contemplated legislation have been
questioned by the President, members
16
<PAGE>
of Congress and others, and legislation that contains new or different terms may
be enacted. In addition, any legislation that is enacted, including provisions
limiting claims that can be brought against the industry or restricting the
relief that can be obtained against it, may be subject to legal challenge in
litigation. The Proposed Resolution itself has no legal effect on any current or
future smoking and health litigation.
Mississippi, Florida and Texas Settlements
It has been reported that the companies agreeing to the
Proposed Resolution have also settled health care cost recovery actions brought
by the States of Mississippi, Florida and Texas on terms consistent with the
Proposed Resolution. Pursuant to these settlements, the settling defendants,
among other things, reportedly paid $170 million, $550 million and $725 million
to Mississippi, Florida and Texas, respectively, representing each state's
estimated share of the $10 billion initial payment under the Proposed
Resolution, reimbursed each state's out-of-pocket costs and those of its private
counsel, and agreed to pay each state annually amounts based on its anticipated
share of annual industry payments under the Proposed Resolution. In addition,
the settling defendants reportedly agreed to pay the following amounts to
support pilot programs aimed at reducing the use of tobacco products by persons
under the age of 18: Mississippi, $62 million; Florida, $200 million and Texas
$264 million. The settling defendants reportedly also agreed to pay reasonable
attorneys' fees of private contingency fee counsel of Mississippi, Florida and
Texas as set by a panel of independent arbitrators.
List of Pending Cases
The following sets forth the principal parties to the
proceedings referred to above in which Registrant is currently named as a
defendant, the court in which such proceedings are pending and the date such
proceedings were instituted against Registrant:
Aksamit v. Brown & Williamson Tobacco Corporation, et al.,
United States District Court for the District of South Carolina, November 20,
1997;
Altman v. Fortune Brands, Inc., et al., Supreme Court of New
York, New York County, December 16, 1997;
Anderson, C. v. Fortune Brands, Inc., et al., Supreme Court of
New York, Kings County, October 30, 1997;
Anderson, J. v. The American Tobacco Company, et al., Circuit
Court of Knox County, Tennessee, May 23, 1997;
Anes v. The American Tobacco Company, et al., Court of Common
Pleadings for the County of Philadelphia, Pennsylvania, July 1, 1997;
Badillo v. The American Tobacco Company, et al., United States
District Court for the District of Nevada, October 8, 1997;
17
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Badon v. R.J.R. Nabisco, Inc., et al., Judicial District
Court, Parish of Cameron, Louisiana, May 23, 1994;
Beckom (State of Tennessee) v. The American Tobacco Company,
et al., United States District Court, Eastern Division of Tennessee, May 8,
1997;
Bellows v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, December 1, 1997;
City of Birmingham v. The American Tobacco Company, et al.,
United States District Court of the Northern District of Alabama, May 28, 1997;
Brammer v. The American Tobacco Company, et al., United States
District Court for the Southern District of Iowa, June 30, 1997;
Caiazzo v. The American Tobacco Company, et al., Supreme Court
of New York, Richmond County, September 26, 1997;
Cameron v. The American Tobacco Company, et al., Supreme Court
of New York, Nassau County, June 30, 1997;
Carll v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, July 20, 1997;
Castano v. The American Tobacco Company, et al., United States
District Court for the Eastern District of Louisiana, March 29, 1994;
Cavanagh v. The American Tobacco Company, et al., Supreme
Court of New York, Richmond County, May 6, 1997;
Chamberlain v. The American Tobacco Company, et al., United
States District Court for the Northern District of Ohio, August 14, 1996;
Clay v. The American Tobacco Company, et al., United States
District Court for the Southern District of Illinois, May 22, 1997;
Collins v. The American Tobacco Company, et al., Supreme Court
of New York, Westchester County, May 16, 1997;
Condon v. The American Tobacco Company, et al., Supreme Court
of New York, Nassau County, May 13, 1997;
Conner v. The American Tobacco Company, et al., Second
Judicial District Court of Bernalillo County, New Mexico, October 10, 1996;
Cotroneo v. Fortune Brands, Inc., Supreme Court of New York,
New York County, October 21, 1997;
Coyne v. American Brands, et al., United States District Court
for the Northern District of Ohio, September 16, 1996;
Crane v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, April 4, 1997;
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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;
Daley, L. v. The American Tobacco Company, et al., Circuit
Court of Cook County, Illinois, July 7, 1997;
Daly, E. v. The American Tobacco Company, et al., Court of
Common Pleadings for the County of Philadelphia, Pennsylvania, July 1, 1997;
DaSilva v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, April 3, 1997;
Davis v. R.J. Reynolds Tobacco Company, et al., Iowa District
Court, Polk County, October 23, 1997;
Demos v. John Doe/Manufacturer, United States District Court
for the District of Connecticut, September 11, 1997;
Dunn v. The American Tobacco Company, et al., Circuit Court of
Delaware County, Indiana, May 28, 1993;
Dzak v. The American Tobacco Company, et al., Supreme Court of
the State of New York, Queens County, December 8, 1996;
El-Haddi v The American Tobacco Company, et al., Court of
Common Pleadings for the County of Philadelphia, Pennsylvania, May 29, 1997;
Emig v. The American Tobacco Company, et al., 18th Judicial
District Court of Sedgwick County, Kansas, Civil Department, February 6, 1997;
Evans, B. v. Philip Morris Incorporated, et al., Circuit Court
of Jasper County, Mississippi, June 10, 1997;
Evans, R. v. The American Tobacco Company, et al., Supreme
Court of the State of New York, Kings County, August 23, 1996;
Ferguson v. The American Tobacco Company, et al., Court of
Common Pleadings for the County of Philadelphia, Pennsylvania, May 29, 1997;
Fink v. The American Tobacco Company, et al., Supreme Court of
New York, New York County, June 6, 1997;
Folkman v. The American Tobacco Company, et al., Court of
Common Pleas of Philadelphia County, Pennsylvania, October 28, 1997;
Geiger v. The American Tobacco Company, et al., Supreme Court
of New York, Queens County, May 1, 1997;
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Gelfond v. Fortune Brands, Inc., Supreme Court of New York,
New York County, October 21, 1997;
Golden v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, July 3, 1997;
Greco v. The American Tobacco Company, et al., Supreme Court
of New York, Queens County, June 27, 1997;
Gruder v. Fortune Brands, Inc., et al., Supreme Court of New
York, Kings County, December 17, 1997;
Guilloteau v. The American Tobacco Company, et al., Supreme
Court of New York, Kings County, December 1, 1997;
Hansen C., v. The American Tobacco Company, et al., Supreme
Court of New York, Suffolk County, October 16, 1997;
Hansen P. v. The American Tobacco Company, et al., United
States District Court for the State of Arkansas, Western Division, November 4,
1996 (under caption "McGinty");
State of Hawaii v. Brown & Williamson Tobacco Corporation, et
al., Circuit Court of the First Circuit, Hawaii, January 31, 1997;
Hellen v. The American Tobacco Company, et al., Supreme Court
of the State of New York, Kings County, August 23, 1996;
Herrera v. American Tobacco Company, et al., Fourth Judicial
District of Utah County, Utah, January 28, 1998;
Hoffman v. American Tobacco Company, et al., Circuit Court of
Kanawha County, West Virginia, February 13, 1998;
Hulsey v. American Brands, Inc., et al., District Court of
Nueces County, 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, July 16, 1996;
State of Iowa v. The American Tobacco Company, et al.,
District Court of Iowa, Polk County, November 27, 1996;
Jackson v. Philip Morris Incorporated, et al., District Court
of Salt Lake County, Utah, March 10, 1998;
Jaust v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, September 10, 1997;
Jones v. American Tobacco Company, et al., Superior Court of
Georgia, Richmond County, January 13, 1998;
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Juliano v. The American Tobacco Company, et al., Supreme Court
of New York, Richmond County, July 24, 1997;
Keenan v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, September 15, 1997;
Kelley (State of Michigan) v. The American Tobacco Company, et
al., Circuit Court of Ingham County, Michigan, August 21, 1996;
Kestenbaum v. The American Tobacco Company, et al., Supreme
Court of New York, New York County, May 23, 1997;
Knowles v. The American Tobacco Company, et al., Civil
District Court of Louisiana, Parish of Orleans County, June 30, 1997;
Knutsen v. The American Tobacco Company, et al., Supreme Court
of the State of New York, Kings County, October 11, 1996;
Kotlyar v. The American Tobacco Company, et al., Supreme Court
of New York, Queens County, December 1, 1997;
Labriola v. The American Tobacco Company, et al., Supreme
Court of New York, Suffolk County, May 28, 1997;
Larkin v. The American Tobacco Company, et al., Court of
Common Pleas of Pennsylvania, Allegheny County, June 27, 1997;
Lehman v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, July 10, 1997;
Leibstein v. The American Tobacco Company, et al., Supreme
Court of New York, Nassau County, June 30, 1997;
Leiderman v. The American Tobacco Company, et al., Supreme
Court of New York, Kings County, July 2, 1997;
Lennon v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, November 5, 1997;
Levinson v. The American Tobacco Company, et al., Supreme
Court of New York, Kings County, April 17, 1997;
Lien v. The American Tobacco Company, et al., Supreme Court of
New York, Suffolk County, April 28, 1997;
Litke v. American Brands, Inc., et al., Supreme Court of New
York, Kings County, May 7, 1997;
Lombardo v. The American Tobacco Company, et al., Supreme
Court of New York, Nassau County, June 6, 1997;
Long v. The American Tobacco Company, et al., Supreme Court of
New York, Bronx County, September 24, 1997;
LoPardo v. The American Tobacco Company, et al., Supreme Court
of New York, Nassau County, September 25, 1997;
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Lucca v. The American Tobacco Company, et al., Supreme Court
of the State of New York, Kings County, February 3, 1997;
Lynch v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, September 24, 1997;
Lyons v. Brown & Williamson Tobacco Company, et al., Superior
Court of Georgia, Fulton County, May 27, 1997;
Maisonet v. The American Tobacco Company, et al., Supreme
Court of New York, Kings County, May 12, 1997;
Margolin v. The American Tobacco Company, et al., Supreme
Court of the State of New York, Queens County, November 22, 1996;
Martin v. The American Tobacco Company, et al., Supreme Court
of New York, Queens County, June 30, 1997;
McCune v. The American Tobacco Company, et al., United States
District Court for the Southern District of West Virginia, January 31, 1997;
McGraw (State of West Virginia) v. The American Tobacco
Company, et al., Circuit Court of Kanawha County, West Virginia, September 20,
1994;
McGuinness v. The American Tobacco Company, et al., Supreme
Court of New York, New York County, June 30, 1997;
McLane v. The American Tobacco Company, et al., Supreme Court
of New York, Richmond County, May 13, 1997;
Mednick v. The American Tobacco Company, et al., Supreme Court
of New York, Kings County, August 20, 1997;
Mishk v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, May 2, 1997;
State of Missouri v. The American Tobacco Company, et al.,
Circuit Court of Missouri, St. Louis County, May 12, 1997;
Morris v. R.J. Reynolds, et al., Circuit Court of Kanawha
County, West Virginia, March 13, 1998;
State of Nevada v. Philip Morris Incorporated, et al., Second
Judicial District of Nevada, Washoe County, May 21, 1997;
Newell v. The American Tobacco Company, et al., Supreme Court
of New York, Suffolk County, October 3, 1997;
State of New Mexico v. The American Tobacco Company, et al.,
First Judicial District of New Mexico, Santa Fe County, May 27, 1997;
State of New York v. Philip Morris, Incorporated, et al.,
United States District Court, Southern District of New York, January 27, 1997;
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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, Inc., et al., District Court of
Nueces County, Texas, December 2, 1996;
Oklahoma (State of Oklahoma) v. The American Tobacco Company,
et al., District Court for Cleveland County, Oklahoma, August 22, 1996;
Orr v. The American Tobacco Company, et al., Court of Common
Pleas for County of Philadelphia, Pennsylvania, May 29, 1997;
Parsons v. AC&S, Inc., et al., Circuit Court of Kanawha
County, West Virginia, February 27, 1998;
Perez v. The American Tobacco Company, et al., Supreme Court
of New York, Kings County, June 23, 1997;
Perri v. The American Tobacco Company, et al., Supreme Court
of New York, Nassau County, October 17, 1997;
Peterson v. The American Tobacco Company, et al., Circuit
Court of the First Circuit, Hawaii, February 6, 1997;
Piccione v. The American Tobacco Company, et al., Supreme
Court of New York, Kings County, September 29, 1997;
Piscitello v. Philip Morris Incorporated, et al., Superior
Court of New Jersey Law Division, Middlesex County, July 28, 1997;
Portnoy v. The American Tobacco Company, et al., Supreme Court
for the State of New York, New York County, October 21, 1997;
Commonwealth of Puerto Rico v. Brown & Williamson Tobacco
Company, et al., United States District Court, Division of Puerto Rico, June 17,
1997;
Reed, M. v. American Brands, Inc., et al., District Court of
Cameron County, 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;
Rhode Island (State of Rhode Island) v. Brown & Williamson as
Successor, Superior Court of Providence, Rhode Island, July 17, 1997;
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;
Roseff v. The American Tobacco Company, et al., Supreme Court
of New York, December 2, 1997;
23
<PAGE>
Rubinobitz v. The American Tobacco Company, et al., Supreme
Court of New York, Nassau County, May 28, 1997;
Schulhoff v. The American Tobacco Company, et al., Supreme
Court of New York, Queens County, October 7, 1997;
Schwartz, I. v. The American Tobacco Company, et al., Supreme
Court of New York, Nassau County, May 19, 1997;
Schwartz, P. 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 28,
1996;
Senzer v. The American Tobacco Company, et al., Supreme Court
of New York, Queens County, May 13, 1997;
Shapiro v. The American Tobacco Company, et al., Supreme Court
of New York, New York County, June 17, 1997;
Siegel v. The American Tobacco Company, et al., Supreme Court
of the State of New York, Kings County, August 22, 1996;
Smith, B.J. v. The American Tobacco Company, et al., Supreme
Court of New York, Queens County, August 27, 1997;
Sola v. The American Tobacco Company, et al., Supreme Court
for the State of New York, Bronx County, July 16, 1996;
State of South Carolina v. Brown & Williamson Tobacco Company,
et al., Court of Common Pleas of South Carolina, Richmond County, May 12, 1997;
Sprung, L. v. The American Tobacco Company, et al., Supreme
Court of New York, Kings County, May 13, 1997;
Standish, J. v. The American Tobacco Company, Supreme Court of
New York, Bronx County, July 11, 1997;
Stern v. Liggett Group, Inc., Supreme Court of New York, New
York County, January 29, 1997;
Sumpter v. American Tobacco Company, et al., Superior Court of
Indiana, Marion County, February 26, 1998;
Tepper v. Philip Morris Incorporated, et al., Superior Court
of New Jersey, Law Division, Bergen County, May 28, 1997;
Thompson, G. v. The American Tobacco Company, et al., Court of
Common Pleas of Philadelphia County, Pennsylvania, October 30, 1997;
Thompson, J. v. American Tobacco Company, Inc., et al., State
of Minnesota District Court, County of Ramsey Judicial District, September 4,
1996 (under caption "Masepohl");
24
<PAGE>
University of South Alabama v. The American Tobacco Company,
et al., United States District Court, Southern Division of Alabama, May 23,
1997;
Upshur v. The American Tobacco Company, et al., Court of
Common Pleas of Philadelphia County, Pennsylvania, October 10, 1997;
State of Utah v. The American Tobacco Company, et al., United
States District Court for the District of Utah, Central Division, September 30,
1996;
Valentin v. Fortune Brands, Inc., et al., Supreme Court of New
York, Queens County, September 2, 1997;
Walgreen v. The American Tobacco Company, et al., Supreme
Court of New York, New York County, May 23, 1997;
Werner v. Fortune Brands, Inc., et al., Supreme Court of New
York, Queens County, December 12, 1997;
Whirley v. American Brands, Inc., et al., District Court of
Nueces County, Texas, December 2, 1996;
White v. The American Tobacco Company, et al., United States
District Court, Southern District of Mississippi, Western Division, April 18,
1997;
Whiddon v. The American Tobacco Company, Inc., et al., 36th
Judicial District Court, Parish of Beauregard, Louisiana, December 19, 1997;
Young v. The American Tobacco Company, et al., Civil District
Court for the Parish of Orleans, Louisiana, November 12, 1997;
Zarudsky v. The American Tobacco Company, et al., Supreme
Court of New York, Nassau County, May 28, 1997; and
Zuzalski v. The American Tobacco Company, et al., Supreme
Court of the State of New York, Queens County, April 3, 1997.
List of Cases Terminated
With regard to proceedings of the above types which have been
terminated and not previously reported as such:
Arch v. The American Tobacco Company, et al., which was
previously pending in the United States District Court for the Eastern District
of Pennsylvania, and instituted on August 8, 1996, was dismissed without
prejudice on August 11, 1997;
Brown v. The American Tobacco Company, et al., which was
previously pending in the Superior Court of California, San Diego County, and
instituted on June 10, 1997, was dismissed per stipulation on November 11, 1997;
25
<PAGE>
Cosentino v. The American Tobacco Company, et al., which was
previously pending in the Superior Court of New Jersey, Law Division, Middlesex
County, and instituted on May 21, 1997, was voluntarily dismissed without
prejudice on October 21, 1997;
Dymits v. American Brands, Inc., et al., which was previously
pending in the United States District Court for the Northern District of
California, and instituted on May 22, 1996, was dismissed without prejudice on
December 31, 1996;
Enright v. The American Tobacco Company, et al., which was
previously pending in the Superior Court of New Jersey, Camden County, and
instituted on May 28, 1997, was voluntarily dismissed on September 24, 1997;
Hansen, C. v. The American Tobacco Company, et al., which was
previously pending in the Supreme Court of New York, Suffolk County, and
instituted on March 28, 1997, was dismissed in its entirety for failure to state
a cause of action on September 30, 1997;
Hissom v. The American Tobacco Company, et al., which was
previously pending in the United States District Court for the Southern District
of West Virginia, and instituted on June 12, 1997, was dismissed per stipulation
on October 31, 1997;
Kristich v. The American Tobacco Company, et al., which was
previously pending in the Supreme Court of New York, Suffolk County, and
instituted on November 15, 1996, was dismissed in its entirety for failure to
state a cause of action on September 30, 1997;
Nocifero v. The American Tobacco Company, et al., which was
previously pending in the Supreme Court of New York, Suffolk County, and
instituted on July 16, 1996, was dismissed in its entirety for failure to state
a cause of action on September 30, 1997;
West Virginia-Ohio Valley I.B.E.W. Welfare Fund v. The
American Tobacco Company, et al., which was previously pending in the Circuit
Court of Kanawha County, West Virginia, and instituted on September 11, 1997,
was dismissed per stipulation on November 19, 1997.
Conclusion
Registrant's counsel have advised that, in their opinion, on
the basis of their investigations generally with respect to suits and claims of
this character, Registrant has meritorious defenses to the above-mentioned
actions.
Management believes that there are meritorious defenses to the
above-mentioned pending actions and these actions are being vigorously
contested. However, it is not possible to predict the outcome of the pending
litigation, and it is possible that some of these actions could be decided
unfavorably. Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the pending
litigation. Management believes that the pending actions will not have a
material adverse effect upon the results of operations, cash flows or financial
condition of Registrant as
26
<PAGE>
long as the Indemnitors continue to fulfill their obligations to indemnify
Registrant under the aforementioned indemnification agreement (see "Overview" on
page 14).
For a discussion of other pending litigation, see Note 19
"Pending Litigation" in the Notes to Consolidated Financial Statements contained
in the 1997 Annual Report to Stockholders of Registrant, which Note is
incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4a. Executive Officers of the Registrant.
The name, present positions and offices with Registrant,
principal occupations during the past five years and age of each of Registrant's
present executive officers are as follows:
Present positions and offices with
Registrant and principal occupations
Name during the past five years Age
- ---- ------------------------------------ ---
Thomas C. Hays Chairman of the Board and Chief 62
Executive Officer of Registrant
since January 1995; President and
Chief Operating Officer of
Registrant prior thereto
John T. Ludes President and Chief Operating Officer 61
of Registrant since January 1995;
Group Vice President of Registrant and
President and Chief Executive Officer
of Acushnet prior thereto
Gilbert L. Klemann, II Executive Vice President - Strategic 47
and Legal Affairs of Registrant
since January 1998; Senior Vice
President and General Counsel of
Registrant prior thereto
Dudley L. Bauerlein, Jr. Senior Vice President and Chief 51
Financial Officer of Registrant
since January 1995; Vice President
and Treasurer of Registrant prior thereto
Charles H. McGill Senior Vice President -- Corporate 56
Development of Registrant since
January 1996; Vice President --
Corporate Development of Registrant
during 1995; Corporate Vice
President -- Acquisitions of The Dun &
Bradstreet Corporation prior thereto
27
<PAGE>
Present positions and offices with
Registrant and principal occupations
Name during the past five years Age
- ---- ------------------------------------ ---
Steven C. Mendenhall Senior Vice President and Chief 49
Administrative Officer of Registrant
since January 1995; Vice President
and Chief Administrative Officer of
Registrant prior thereto
Craig P. Omtvedt Senior Vice President and Chief 48
Accounting Officer of Registrant
since January 1998; Vice President and
Chief Accounting Officer of Registrant
during 1997; Vice President -- Deputy
Controller and Chief Internal Auditor of
Registrant during 1996; Deputy
Controller and Chief Internal Auditor
of Registrant during 1995; Deputy
Controller of Registrant prior
thereto
Robert J. Rukeyser Senior Vice President -- Corporate 55
Affairs of Registrant
Mark A. Roche Vice President and General Counsel 43
of Registrant since January 1998;
Vice President and Associate General
Counsel of Registrant from January 1996
to December 1997; Associate General
Counsel of Registrant prior thereto
In the case of each of the above-listed executive officers,
the occupation or occupations given were his principal occupation and employment
during the period or periods indicated. None of such executive officers is
related to any other such executive officer. None was selected pursuant to any
arrangement or understanding between him and any other person. All executive
officers are elected annually.
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.
See the information in the tables captioned "Quarterly Common
Stock Dividend Payments" and "Quarterly Composite Common Stock Prices" and the
discussion relating thereto contained in the 1997 Annual Report to Stockholders
of Registrant, which information and discussion are incorporated herein by
reference. On February 27, 1998, there were 45,104 record holders of
Registrant's Common Stock, par value $3.125 per share.
28
<PAGE>
Item 6. Selected Financial Data.
See the information for 1993 through 1997 in the table
captioned "Six-Year Consolidated Selected Financial Data" contained in the 1997
Annual Report to Stockholders of Registrant, which information is incorporated
herein by reference.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
See the discussion and analysis under the captions "Results of
Operations" and "Financial Condition" contained in the 1997 Annual Report to
Stockholders of Registrant, which discussion and analysis are incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
See the discussion and analysis under "Market Risk," "Foreign
Exchange Contracts" and "Interest Rates" under the caption "Financial Condition"
in the 1997 Annual Report to Stockholders of Registrant, which discussion is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
See the information in the Consolidated Balance Sheet,
Consolidated Statement of Income, Consolidated Statement of Cash Flows,
Consolidated Statement of Stockholders' Equity, Notes to Consolidated Financial
Statements and Report of Independent Accountants contained in the 1997 Annual
Report to Stockholders of Registrant, which information is incorporated herein
by reference. For unaudited selected quarterly financial data, see the table
captioned "Quarterly Financial Data" contained in the 1997 Annual Report to
Stockholders of Registrant, which table is incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of Registrant.
See the information under the caption "Election of Directors"
contained in the Proxy Statement for the Annual Meeting of Stockholders of
Registrant to be held on April 28, 1998, which information is incorporated
herein by reference. See also the information with respect to executive officers
of Registrant under Item 4a of Part I hereof, which information is incorporated
herein by reference.
Item 11. Executive Compensation.
See the information up to but not including the subcaption
"Report of the Compensation and Stock Option Committee on Executive
Compensation" under the caption "Executive Compensation" contained in the
29
<PAGE>
Proxy Statement for the Annual Meeting of Stockholders of Registrant to be held
on April 28, 1998, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
See the information under the caption "Certain Information
Regarding Security Holdings" contained in the Proxy Statement for the Annual
Meeting of Stockholders of Registrant to be held on April 28, 1998, which
information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules
and Exhibits.
(1) Financial Statements (all financial statements listed below are of
Registrant and its consolidated subsidiaries)
Consolidated Balance Sheet as of December 31, 1997 and 1996
contained in the 1997 Annual Report to Stockholders of Registrant is
incorporated herein by reference.
Consolidated Statement of Income for the years ended December
31, 1997, 1996 and 1995 contained in the 1997 Annual Report to
Stockholders of Registrant is incorporated herein by reference.
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 contained in the 1997 Annual Report
to Stockholders of Registrant is incorporated herein by reference.
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 contained in the 1997 Annual
Report to Stockholders of Registrant is incorporated herein by
reference.
Notes to Consolidated Financial Statements contained in the 1997
Annual Report to Stockholders of Registrant are incorporated herein
by reference.
Report of Independent Accountants contained in the 1997 Annual
Report to Stockholders of Registrant is incorporated herein by
reference.
30
<PAGE>
(2) Financial Statement Schedules
See Index to Financial Statement Schedule of Registrant and
subsidiaries at page F-1, which Index is incorporated herein by
reference.
(3) Exhibits
3(i). Certificate of Incorporation of Registrant as in effect on the
date hereof is incorporated herein by reference to Exhibit 3b to
the Current Report on Form 8-K of Registrant dated December 2,
1997.
3(ii). By-laws of Registrant as in effect on the date hereof are
incorporated herein by reference to Exhibit 3(ii)(b) to the
Quarterly Report on Form 10-Q of Registrant dated August 12,
1997.
10a1. Fortune Brands, Inc. Annual Executive Incentive Compensation
Plan is incorporated herein by reference to Exhibit 10a1 to the
Quarterly Report on Form 10-Q of Registrant dated August 12,
1997.*
10b1. 1986 Stock Option Plan of Fortune Brands, Inc. and amendments
thereto are incorporated herein by reference to Exhibit 10b2 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1992.*
10b2. Amendment to 1986 Stock Option Plan of Fortune Brands, Inc.
constituting Exhibit 10b1 hereto is incorporated herein by
reference to Exhibit 10b to the Quarterly Report on Form 10-Q of
Registrant dated November 11, 1993.*
10b3. Amendment to 1986 Stock Option Plan of Fortune Brands, Inc.
constituting Exhibits 10b1 and 10b2 hereto is incorporated
herein by reference to Exhibit 10b to the Quarterly Report on
Form 10-Q of Registrant dated August 11, 1994.*
10b4. Amendment to the 1986 Stock Option Plan of Fortune Brands, Inc.
constituting Exhibits 10b1, 10b2 and 10b3 hereto is incorporated
herein by reference to Exhibit 10a2 to the Quarterly Report on
Form 10-Q of Registrant dated November 11, 1997.*
10b5. 1990 Long-Term Incentive Plan of Fortune Brands, Inc. (As
Amended and Restated as of January 1, 1994) is incorporated
herein by reference to Exhibit 10a to the Quarterly Report on
Form 10-Q of Registrant dated August 11, 1994.*
10b6. Amendment to 1990 Long-Term Incentive Plan of Fortune Brands,
Inc. constituting Exhibit 10b5 hereto is incorporated herein by
reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q
of Registrant dated November 11, 1997.*
31
<PAGE>
10b7. Fortune Brands, Inc. Non-Employee Director Stock Option Plan is
incorporated herein by reference to Exhibit 10b1 to the
Quarterly Report on Form 10-Q of Registrant dated August 12,
1997.*
10c1. Amended Supplemental Plan of Fortune Brands, Inc. is
incorporated herein by reference to Exhibit 10c1 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1995.*
10c2. Trust Agreement, made as of the 2nd day of January, 1991, among
Registrant, The Chase Manhattan Bank (National Association)
("Chase"), et al. establishing a trust in favor of Gilbert L.
Klemann, II for purposes of paying amounts under the Amended
Supplemental Plan constituting Exhibit 10c1 hereto is
incorporated herein by reference to Exhibit 10c2 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1995.*
10c3. Amendment made as of the 1st day of November, 1993 to Trust
Agreement constituting Exhibit 10c2 hereto is incorporated
herein by reference to Exhibit 10c3 to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended December 31, 1995.*
10c4. Amendment made as of the 1st day of January, 1995, to the Trust
Agreement constituting Exhibits 10c2 and 10c3 hereto is
incorporated herein by reference to Exhibit 10c4 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1995.*
10c5. Amendment made as of the 1st day January, 1997, to Trust
Agreement constituting Exhibits 10c2, 10c3 and 10c4 hereto.*
10c6. Schedule identifying substantially identical agreements to Trust
Agreement and Amendments thereto constituting Exhibits 10c2,
10c3, 10c4 and 10c5 hereto, respectively, in favor of Thomas C.
Hays, John T. Ludes, Robert J. Rukeyser, Steven C. Mendenhall
and Dudley L. Bauerlein, Jr.*
10c7. Amendment made as of the 24th day of February, 1997, to Trust
Agreement constituting Exhibits 10c2, 10c3, 10c4 and 10c5 hereto
relating to the trust established in favor of Thomas C. Hays.*
10c8. Trust Agreement, made as of the 1st day of November, 1993, among
Gilbert L. Klemann, II, Registrant and Chase establishing a
grantor trust in favor of Gilbert L. Klemann, II for purposes of
paying amounts under the Amended Supplemental Plan constituting
Exhibit 10c1 hereto is incorporated herein by reference to
Exhibit 10c6 to the Annual Report on Form 10-K of Registrant for
the Fiscal Year ended December 31, 1995.*
10c9. Amendment made as of 1st day of January, 1996 to Trust Agreement
constituting Exhibit 10c8 hereto is incorporated
32
<PAGE>
herein by reference to the Quarterly Report on Form 10-Q of
Registrant dated August 8, 1996.*
10c10. Amendment made as of the 1st day of January, 1997 to Trust
Agreement and Amendment thereto, constituting Exhibits 10c8 and
10c9 hereto, respectively, is incorporated herein by reference
to Exhibit 10c1 to the Quarterly Report on Form 10-Q of
Registrant dated August 12, 1997.*
10c11. Schedule identifying substantially identical agreements to the
Trust Agreement and Amendments constituting Exhibits 10c8, 10c9
and 10c10 hereto in favor of Thomas C. Hays, John T. Ludes,
Robert J. Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein,
Jr., Charles H. McGill and Craig P. Omtvedt.*
10c12. Amendment made as of the 24th day of February, 1997 to Trust
Agreement and Amendments thereto, constituting Exhibits 10c8,
10c9 and 10c10 hereto, among Thomas C. Hays, Registrant and
Chase.*
10d1. Resolutions of the Board of Directors of Registrant adopted on
October 28, 1986 and July 26, 1988 adopting and amending a
retirement plan for directors of Registrant who are not officers
or employees of Registrant or a subsidiary thereof are
incorporated herein by reference to Exhibit 10e1 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1991 maintained in Commission File No. 1-9076.*
10d2. Resolutions of the Board of Directors of Registrant adopted on
July 26, 1994 amending the resolutions constituting Exhibit 10d1
hereto is incorporated herein by reference to Exhibit 10e2 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1994.*
10e1. Severance and Retirement Agreement made as of February 24,
1997, between Registrant and Thomas C. Hays is incorporated
herein by reference to Exhibit 10d1 to the Quarterly Report on
Form 10-Q of Registrant dated August 12, 1997.
10f1. Resolution of the Board of Directors of Registrant adopted on
November 27, 1990 with respect to retirement and health benefits
provided to Gilbert L. Klemann, II is incorporated herein by
reference to Exhibit 10p1 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1991
maintained in Commission File No. 1-9076.*
10g1. Letter dated January 23, 1996 from Registrant with respect to
deferred payment of fees to Eugene R. Anderson is incorporated
herein by reference to Exhibit 10k1 to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended December 31, 1995.*
10g2. Letter dated August 11, 1995 from Registrant with respect to
deferred payment of fees to Gordon R. Lohman is incorporated
herein by reference to Exhibit 10b to the Quarterly Report on
Form 10-Q of Registrant dated November 9, 1995.*
33
<PAGE>
10h1. Agreement dated January 2, 1991 between Registrant and Gilbert
L. Klemann, II is incorporated herein by reference to Exhibit
10s1 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1992.*
10h2. Amendment dated November 28, 1994 to the Agreement constituting
Exhibit 10h1 hereto is incorporated herein by reference to
Exhibit 10r2 to the Annual Report on Form 10-K of Registrant for
the Fiscal Year ended December 31, 1994.*
10h3. Schedule identifying substantially identical agreements to the
Agreement and the Amendment thereto constituting Exhibits 10h1
and 10h2 hereto, respectively, entered into by Registrant with
Thomas C. Hays, John T. Ludes, Robert J. Rukeyser, Steven C.
Mendenhall, Dudley L. Bauerlein, Jr., Charles H. McGill and
Craig P. Omtvedt is incorporated herein by reference to Exhibit
10j3 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1996.*
10i1. Trust Agreement, made as of the 2nd day of January, 1991, among
Registrant, Chase, et al. establishing a trust in favor of
Gilbert L. Klemann, II for purposes of paying amounts under the
Agreement constituting Exhibits 10h1 and 10h2 hereto is
incorporated herein by reference to Exhibit 10s1 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
10i2. Amendment made as of the 1st day of November, 1993 to Trust
Agreement constituting Exhibit 10i1 hereto is incorporated
herein by reference to Exhibit 10s2 to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended December 31, 1994.*
10i3. Amendment made as of the 1st day of January, 1997 to Trust
Agreement and Amendment thereto constituting Exhibits 10i1 and
10i2 hereto, respectively.*
10i4. Schedule identifying substantially identical agreements to the
Trust Agreement and Amendments thereto constituting Exhibits
10i1, 10i2 and 10i3 hereto, respectively, in favor of Thomas C.
Hays, John T. Ludes, Robert J. Rukeyser, Steven C. Mendenhall,
Dudley L. Bauerlein, Jr., Charles H. McGill and Craig P.
Omtvedt.*
10j1. Agreement dated as of January 2, 1991 between Registrant and
Gilbert L. Klemann, II and amendment thereto is incorporated
herein by reference to Exhibit 10y1 to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended December 31, 1991
maintained in Commission File No. 1-9076.*
10j2. Agreement dated as of October 28, 1991 amending the Agreement
constituting Exhibit 10j1 hereto is incorporated herein by
reference to Exhibit 10w2 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1992.*
34
<PAGE>
10j3. Amendment effective as of January 1, 1995 to the Agreement and
Amendment thereto constituting Exhibits 10j1 and 10j2 hereto,
respectively, is incorporated herein by reference to Exhibit
10u3 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1994.*
10j4. Schedule identifying substantially identical agreements to the
Agreement and Amendments thereto constituting Exhibits 10j1,
10j2 and 10j3 hereto entered into by Registrant with John T.
Ludes, Robert J. Rukeyser, Steven C. Mendenhall, Dudley L.
Bauerlein, Jr. and Craig P. Omtvedt is incorporated herein by
reference to Exhibit 10m4 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1996.*
10k1. Agreement dated February 24, 1995 between Registrant and Charles
H. McGill is incorporated herein by reference to Exhibit 10w1 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1994.*
10k2. Amendment made as of January 29, 1996 to the Agreement
constituting Exhibit 10k1 hereto.*
10l1. Rights Agreement, dated as of November 19, 1997, between
Registrant and First Chicago Trust Company of New York, as
Rights Agent, is incorporated herein by reference to Exhibit 4a
to the Current Report on Form 8-K of Registrant dated December
2, 1997.
10m1. Indemnification Agreement, dated as of December 22, 1994, among
Registrant, The American Tobacco Company and Brown & Williamson
Tobacco Corporation.
12. Statement re computation of ratio of earnings to fixed charges.
13. 1997 Annual Report to Stockholders of Registrant.
21. Subsidiaries of Registrant.
23(i)a. Consent of Independent Accountants, Coopers & Lybrand L.L.P.
23(i)b. Consent of Counsel, Chadbourne & Parke LLP.
24. Powers of Attorney relating to execution of this Annual Report
on Form 10-K.
27a. Financial Data Schedule for Fiscal Year ended December 31, 1997
(Article 5).
27b. Restated Financial Data Schedule for the Interim Period ended
September 30, 1997 (Article 5).
27c. Restated Financial Data Schedule for the Interim Period ended
June 30, 1997 (Article 5).
27d. Restated Financial Data Schedule for the Interim Period ended
March 31, 1997 (Article 5).
35
<PAGE>
27e. Restated Financial Data Schedule for the Fiscal Year ended
December 31, 1996 (Article 5).
27f. Restated Financial Data Schedule for the Interim Period ended
September 30, 1996 (Article 5).
27g. Restated Financial Data Schedule for the Interim Period ended
June 30, 1996 (Article 5).
27h. Restated Financial Data Schedule for the Interim Period ended
March 31, 1996 (Article 5).
27i. Restated Financial Data Schedule for the Fiscal Year ended
December 31, 1995 (Article 5).
* Indicates that exhibit is a management contract or
compensatory plan or arrangement.
In lieu of filing certain instruments with respect to
long-term debt of the kind described in Item 601(b)(4) of Regulation S-K,
Registrant agrees to furnish a copy of such instruments to the Securities and
Exchange Commission upon request.
(b) Reports on Form 8-K.
Registrant filed a Current Report on Form 8-K, dated October 1, 1997,
in respect of Registrant's press release dated September 30, 1997
announcing an increase in the quarterly dividend on Registrant's common
stock (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated October 21, 1997,
in respect of Registrant's press release dated October 21, 1997
announcing Registrant's financial results for the three-month and
nine-month periods ended September 30, 1997 (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated December 2, 1997,
in respect of the declaration by the Board of Directors of Registrant
of a dividend of preferred share purchase rights on Registrant's common
stock (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated January 12, 1998,
in respect of Registrant's press release dated January 12, 1998
announcing anticipated pro forma earnings growth of Registrant in 1998
(Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated January 23, 1998,
in respect of Registrant's press release dated January 23, 1998
announcing Registrant's financial results for the three-month and
twelve-month periods ended December 31, 1997 (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated February 10, 1998,
in respect of Registrant's press release dated February 6, 1998
announcing the signing by ACCO World Corporation of a definitive
agreement to acquire the Apollo Presentation Products business (Items 5
and 7(c)).
36
<PAGE>
Registrant filed a Current Report on Form 8-K, dated February 20, 1998,
in respect of Registrant's press release dated February 6, 1998 with
respect to anticipated pro forma earnings growth of Registrant in 1998
(Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated March 2, 1998, in
respect of Registrant's press release dated February 27, 1998
announcing the completion by ACCO World Corporation of its acquisition
of the Apollo Presentation Products business (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated March 4, 1998, in
respect of Registrant's press release dated March 3, 1998 with respect
to anticipated overall earnings growth outlook of Registrant in 1998
(Items 5 and 7(c)).
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
FORTUNE BRANDS, INC.
(Registrant)
By Thomas C. Hays
Thomas C. Hays
Chairman of the Board and
Date: March 30, 1998 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed below by the following persons on
behalf of Registrant and in the capacities and on the dates indicated.
Thomas C. Hays
Thomas C. Hays, Chairman of the Board and
Chief Executive Officer (principal executive
officer) and Director
Date: March 30, 1998
John T. Ludes*
John T. Ludes, President and
Chief Operating Officer and Director
Date: March 30, 1998
Dudley L. Bauerlein, Jr.
Dudley L. Bauerlein, Jr., Senior Vice President and
Chief Financial Officer (principal financial officer)
Date: March 30, 1998
Craig P. Omtvedt*
Craig P. Omtvedt, Senior Vice President and
Chief Accounting Officer (principal accounting officer)
Date: March 30, 1998
Eugene R. Anderson*
Eugene R. Anderson, Director
Date: March 30, 1998
Patricia O. Ewers*
Patricia O. Ewers, Director
Date: March 30, 1998
38
<PAGE>
John W. Johnstone, Jr.*
John W. Johnstone, Jr., Director
Date: March 30, 1998
Wendell J. Kelley*
Wendell J. Kelley, Director
Date: March 30, 1998
Sidney Kirschner*
Sidney Kirschner, Director
Date: March 30, 1998
Gordon R. Lohman*
Gordon R. Lohman, Director
Date: March 30, 1998
Charles H. Pistor, Jr.*
Charles H. Pistor, Jr., Director
Date: March 30, 1998
Anne M. Tatlock*
Anne M. Tatlock, Director
Date: March 30, 1998
John W. Thompson*
John W. Thompson, Director
Date: March 30, 1998
Peter M. Wilson*
Peter M. Wilson, Director
Date: March 30, 1998
*By A. Robert Colby
A. Robert Colby, Attorney-in-Fact
39
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE
Pages
-----
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Report of Independent Accountants F-2
Schedule
--------
II Valuation and qualifying accounts
For the years ended December 31,
1997, 1996 and 1995 F-3
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Fortune Brands, Inc.:
Our report on the consolidated financial statements of Fortune
Brands, Inc. and Subsidiaries has been incorporated by reference in this Form
10-K from the 1997 Annual Report to Stockholders of Fortune Brands, Inc. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page F-1 of this
Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York
February 4, 1998
F-2
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1996 and 1995 (In millions)
- ---------------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Additions
---------
Balance at Charged Balance
Beginning to Costs at End
Description of Period and Expenses Deductions of Period
- -----------------------------------------------------------------------------
1997:
Allowance for cash
discounts $ 7.4 $ 71.1 $ 70.3 (1) $ 8.2
Allowance for
returns 18.9 129.0 127.5 (1) 20.4
Allowance for
doubtful accounts 23.3 11.9 10.6 (2) 25.7
(1.1)(3)
------ ------ ------ ------
$ 49.6 $212.0 $207.3 $ 54.3
====== ====== ====== ======
1996 (4):
Allowance for cash
discounts $ 5.1 $ 64.1 $ 73.1 (1) $ 7.4
(11.3)(3)
Allowance for
returns 15.6 131.2 130.6 (1) 18.9
(2.7)(3)
Allowance for
doubtful accounts 21.6 5.3 5.7 (2) 23.3
(2.1)(3)
------ ------ ------ ------
$ 42.3 $200.6 $193.3 $ 49.6
====== ====== ====== ======
1995 (4):
Allowance for cash
discounts $ 5.0 $ 42.1 $ 42.0 (1) $ 5.1
Allowance for
returns 12.4 97.4 94.2 (1) 15.6
Allowance for
doubtful accounts 23.3 5.8 7.5 (2) 21.6
------ ------ ------ ------
40.7 $145.3 $143.7 $ 42.3
====== ====== ====== ======
(1) Cash discounts and returns allowed customers.
(2) Doubtful accounts written off, net of recoveries.
(3) Balance at acquisition date of subsidiaries.
(4) Restated for discontinued operations.
F-3
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
3(i). Certificate of Incorporation of
Registrant as in effect on the date
hereof is incorporated herein by
reference to Exhibit 3b to the
Current Report on Form 8-K of
Registrant dated December 2, 1997.
3(ii). By-laws of Registrant as in effect
on the date hereof are incorporated
herein by reference to Exhibit
3(ii)(b) to the Quarterly Report on
Form 10-Q of Registrant dated
August 12, 1997.
10a1. Fortune Brands, Inc. Annual
Executive Incentive Compensation
Plan is incorporated herein by
reference to Exhibit 10a1 to the
Quarterly Report on Form 10-Q of
Registrant dated August 12, 1997.*
10b1. 1986 Stock Option Plan of Fortune
Brands, Inc. and amendments thereto
are incorporated herein by
reference to Exhibit 10b2 to the
Annual Report on Form 10-K of
Registrant for the Fiscal Year
ended December 31, 1992.*
10b2. Amendment to 1986 Stock Option Plan
of Fortune Brands, Inc.
constituting Exhibit 10b1 hereto is
incorporated herein by reference to
Exhibit 10b to the Quarterly Report
on Form 10-Q of Registrant dated
November 11, 1993.*
10b3. Amendment to 1986 Stock Option Plan
of Fortune Brands, Inc.
constituting Exhibits 10b1 and 10b2
hereto is incorporated herein by
reference to Exhibit 10b to the
Quarterly Report on Form 10-Q of
Registrant dated August 11, 1994.*
10b4. Amendment to the 1986 Stock Option
Plan of Fortune Brands, Inc.
constituting Exhibits 10b1, 10b2
and 10b3 hereto is incorporated
herein by reference to Exhibit 10a2
to the Quarterly Report on Form
10-Q of Registrant dated November
11, 1997.*
10b5. 1990 Long-Term Incentive Plan of
Fortune Brands, Inc. (As Amended
and Restated as of January 1, 1994)
is incorporated herein by reference
to Exhibit 10a to the Quarterly
Report on Form 10-Q of Registrant
dated August 11, 1994.*
10b6. Amendment to 1990 Long-Term
Incentive Plan of Fortune Brands,
Inc. constituting Exhibit 10b5
hereto is incorporated herein by
reference to Exhibit 10a1 to the
Quarterly Report on Form 10-Q of
Registrant dated November 11,
1997.*
<PAGE>
10b7. Fortune Brands, Inc. Non-Employee
Director Stock Option Plan is
incorporated herein by reference to
Exhibit 10b1 to the Quarterly
Report on Form 10-Q of Registrant
dated August 12, 1997.*
10c1. Amended Supplemental Plan of
Fortune Brands, Inc. is
incorporated herein by reference to
Exhibit 10c1 to the Annual Report
on Form 10-K of Registrant for the
Fiscal Year ended December 31,
1995.*
10c2. Trust Agreement, made as of the 2nd
day of January, 1991, among
Registrant, The Chase Manhattan
Bank (National Association)
("Chase"), et al. establishing a
trust in favor of Gilbert L.
Klemann, II for purposes of paying
amounts under the Amended
Supplemental Plan constituting
Exhibit 10c1 hereto is incorporated
herein by reference to Exhibit 10c2
to the Annual Report on Form 10-K
of Registrant for the Fiscal Year
ended December 31, 1995.*
10c3. Amendment made as of the 1st day of
November, 1993 to Trust Agreement
constituting Exhibit 10c2 hereto is
incorporated herein by reference to
Exhibit 10c3 to the Annual Report
on Form 10-K of Registrant for the
Fiscal Year ended December 31,
1995.*
10c4. Amendment made as of the 1st day of
January, 1995, to the Trust
Agreement constituting Exhibits
10c2 and 10c3 hereto is
incorporated herein by reference to
Exhibit 10c4 to the Annual Report
on Form 10-K of Registrant for the
Fiscal Year ended December 31,
1995.*
10c5. Amendment made as of the 1st day
January, 1997, to Trust Agreement
constituting Exhibits 10c2, 10c3
and 10c4 hereto.*
10c6. Schedule identifying substantially
identical agreements to Trust
Agreement and Amendments thereto
constituting Exhibits 10c2, 10c3,
10c4 and 10c5 hereto, respectively,
in favor of Thomas C. Hays, John T.
Ludes, Robert J. Rukeyser, Steven
C. Mendenhall and Dudley L.
Bauerlein, Jr.*
10c7. Amendment made as of the 24th day
of February, 1997, to Trust
Agreement constituting Exhibits
10c2, 10c3, 10c4 and 10c5 hereto
relating to the trust established
in favor of Thomas C. Hays.*
<PAGE>
10c8. Trust Agreement, made as of the 1st
day of November, 1993, among
Gilbert L. Klemann, II, Registrant
and Chase establishing a grantor
trust in favor of Gilbert L.
Klemann, II for purposes of paying
amounts under the Amended
Supplemental Plan constituting
Exhibit 10c1 hereto is incorporated
herein by reference to Exhibit 10c6
to the Annual Report on Form 10-K
of Registrant for the Fiscal Year
ended December 31, 1995.*
10c9. Amendment made as of 1st day of
January, 1996 to Trust Agreement
constituting Exhibit 10c8 hereto is
incorporated herein by reference to
the Quarterly Report on Form 10-Q
of Registrant dated August 8,
1996.*
10c10. Amendment made as of the 1st day of
January, 1997 to Trust Agreement
and Amendment thereto, constituting
Exhibits 10c8 and 10c9 hereto,
respectively, is incorporated
herein by reference to Exhibit 10c1
to the Quarterly Report on Form
10-Q of Registrant dated August 12,
1997.*
10c11. Schedule identifying substantially
identical agreements to the Trust
Agreement and Amendments
constituting Exhibits 10c8, 10c9
and 10c10 hereto in favor of Thomas
C. Hays, John T. Ludes, Robert J.
Rukeyser, Steven C. Mendenhall,
Dudley L. Bauerlein, Jr., Charles
H. McGill and Craig P. Omtvedt.*
10c12. Amendment made as of the 24th day
of February, 1997 to Trust
Agreement and Amendments thereto,
constituting Exhibits 10c8, 10c9
and 10c10 hereto, among Thomas C.
Hays, Registrant and Chase.*
10d1. Resolutions of the Board of
Directors of Registrant adopted on
October 28, 1986 and July 26, 1988
adopting and amending a retirement
plan for directors of Registrant
who are not officers or employees
of Registrant or a subsidiary
thereof are incorporated herein by
reference to Exhibit 10e1 to the
Annual Report on Form 10-K of
Registrant for the Fiscal Year
ended December 31, 1991 maintained
in Commission File No. 1-9076.*
10d2. Resolutions of the Board of
Directors of Registrant adopted on
July 26, 1994 amending the
resolutions constituting Exhibit
10d1 hereto is incorporated herein
by reference to Exhibit 10e2 to the
Annual Report on Form 10-K of
Registrant for the Fiscal Year
ended December 31, 1994.*
<PAGE>
10e1. Severance and Retirement Agreement
made as of February 24, 1997,
between Registrant and Thomas C.
Hays is incorporated herein by
reference to Exhibit 10d1 to the
Quarterly Report on Form 10-Q of
Registrant dated August 12, 1997.
10f1. Resolution of the Board of
Directors of Registrant adopted on
November 27, 1990 with respect to
retirement and health benefits
provided to Gilbert L. Klemann, II
is incorporated herein by reference
to Exhibit 10p1 to the Annual
Report on Form 10-K of Registrant
for the Fiscal Year ended December
31, 1991 maintained in Commission
File No. 1-9076.*
10g1. Letter dated January 23, 1996 from
Registrant with respect to deferred
payment of fees to Eugene R.
Anderson is incorporated herein by
reference to Exhibit 10k1 to the
Annual Report on Form 10-K of
Registrant for the Fiscal Year
ended December 31, 1995.*
10g2. Letter dated August 11, 1995 from
Registrant with respect to deferred
payment of fees to Gordon R. Lohman
is incorporated herein by reference
to Exhibit 10b to the Quarterly
Report on Form 10-Q of Registrant
dated November 9, 1995.*
10h1. Agreement dated January 2, 1991
between Registrant and Gilbert L.
Klemann, II is incorporated herein
by reference to Exhibit 10s1 to the
Annual Report on Form 10-K of
Registrant for the Fiscal Year
ended December 31, 1992.*
10h2. Amendment dated November 28, 1994
to the Agreement constituting
Exhibit 10h1 hereto is incorporated
herein by reference to Exhibit 10r2
to the Annual Report on Form 10-K
of Registrant for the Fiscal Year
ended December 31, 1994.*
10h3. Schedule identifying substantially
identical agreements to the
Agreement and the Amendment thereto
constituting Exhibits 10h1 and 10h2
hereto, respectively, entered into
by Registrant with Thomas C. Hays,
John T. Ludes, Robert J. Rukeyser,
Steven C. Mendenhall, Dudley L.
Bauerlein, Jr., Charles H. McGill
and Craig P. Omtvedt is
incorporated herein by reference to
Exhibit 10j3 to the Annual Report
on Form 10-K of Registrant for the
Fiscal Year ended December 31,
1996.*
<PAGE>
10i1. Trust Agreement, made as of the 2nd
day of January, 1991, among
Registrant, Chase, et al.
establishing a trust in favor of
Gilbert L. Klemann, II for purposes
of paying amounts under the
Agreement constituting Exhibits
10h1 and 10h2 hereto is
incorporated herein by reference to
Exhibit 10s1 to the Annual Report
on Form 10-K of Registrant for the
Fiscal Year ended December 31,
1994.*
10i2. Amendment made as of the 1st day of
November, 1993 to Trust Agreement
constituting Exhibit 10i1 hereto is
incorporated herein by reference to
Exhibit 10s2 to the Annual Report
on Form 10-K of Registrant for the
Fiscal Year ended December 31,
1994.*
10i3. Amendment made as of the 1st day of
January, 1997 to Trust Agreement
and Amendment thereto constituting
Exhibits 10i1 and 10i2 hereto,
respectively.*
10i4. Schedule identifying substantially
identical agreements to the Trust
Agreement and Amendments thereto
constituting Exhibits 10i1, 10i2
and 10i3 hereto, respectively, in
favor of Thomas C. Hays, John T.
Ludes, Robert J. Rukeyser, Steven
C. Mendenhall, Dudley L. Bauerlein,
Jr., Charles H. McGill and Craig P.
Omtvedt.*
10j1. Agreement dated as of January 2,
1991 between Registrant and Gilbert
L. Klemann, II and amendment
thereto is incorporated herein by
reference to Exhibit 10y1 to the
Annual Report on Form 10-K of
Registrant for the Fiscal Year
ended December 31, 1991 maintained
in Commission File No. 1-9076.*
10j2. Agreement dated as of October 28,
1991 amending the Agreement
constituting Exhibit 10j1 hereto is
incorporated herein by reference to
Exhibit 10w2 to the Annual Report
on Form 10-K of Registrant for the
Fiscal Year ended December 31,
1992.*
10j3. Amendment effective as of January
1, 1995 to the Agreement and
Amendment thereto constituting
Exhibits 10j1 and 10j2 hereto,
respectively, is incorporated
herein by reference to Exhibit 10u3
to the Annual Report on Form 10-K
of Registrant for the Fiscal Year
ended December 31, 1994.*
<PAGE>
10j4. Schedule identifying substantially
identical agreements to the
Agreement and Amendments thereto
constituting Exhibits 10j1, 10j2
and 10j3 hereto entered into by
Registrant with John T. Ludes,
Robert J. Rukeyser, Steven C.
Mendenhall, Dudley L. Bauerlein,
Jr. and Craig P. Omtvedt is
incorporated herein by reference to
Exhibit 10m4 to the Annual Report
on Form 10-K of Registrant for the
Fiscal Year ended December 31,
1996.*
10k1. Agreement dated February 24, 1995
between Registrant and Charles H.
McGill is incorporated herein by
reference to Exhibit 10w1 to the
Annual Report on Form 10-K of
Registrant for the Fiscal Year
ended December 31, 1994.*
10k2. Amendment made as of January 29, 1996
to the Agreement constituting Exhibit
10k1 hereto.*
10l1. Rights Agreement, dated as of
November 19, 1997, between
Registrant and First Chicago Trust
Company of New York, as Rights
Agent, is incorporated herein by
reference to Exhibit 4a to the
Current Report on Form 8-K of
Registrant dated December 2, 1997.
10m1. Indemnification Agreement, dated as
of December 22, 1994, among
Registrant, The American Tobacco
Company and Brown & Williamson
Tobacco Corporation.
12. Statement re computation of ratio
of earnings to fixed charges.
13. 1997 Annual Report to Stockholders
of Registrant.
21. Subsidiaries of Registrant.
23(i)a. Consent of Independent Accountants,
Coopers & Lybrand L.L.P.
23(i)b. Consent of Counsel, Chadbourne &
Parke LLP.
24. Powers of Attorney relating to
execution of this Annual Report on
Form 10-K.
27a. Financial Data Schedules for Fiscal
Year ended December 31, 1997
(Article 5).
27b. Restated Financial Data Schedule
for the Interim Period ended
September 30, 1997 (Article 5).
27c. Restated Financial Data Schedule
for the Interim Period ended June
30, 1997 (Article 5).
<PAGE>
27d. Restated Financial Data Schedule
for the Interim Period ended March
31, 1997 (Article 5).
27e. Restated Financial Data Schedule
for the Fiscal Year ended December
31, 1996 (Article 5).
27f. Restated Financial Data Schedule
for the Interim Period ended
September 30, 1996 (Article 5).
27g. Restated Financial Data Schedule
for the Interim Period ended June
30, 1996 (Article 5).
27h. Restated Financial Data Schedule
for the Interim Period ended March
31, 1996 (Article 5).
27i. Restated Financial Data Schedule
for the Fiscal Year ended December
31, 1995 (Article 5).
* Indicates that exhibit is a
management contract or compensatory
plan or arrangement.
EXHIBIT 10c5
AMENDMENT TO TRUST AGREEMENT
THIS AMENDMENT, made as of the 1st day of January, 1997, among AMERICAN
BRANDS, INC., a Delaware corporation (the "Company"), THE CHASE MANHATTAN BANK,
a New York banking corporation (the "Trustee") and HEWITT ASSOCIATES LLC, a
limited liability company formed under the laws of Illinois ("Hewitt")
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Trustee are parties to a Trust Agreement
for the purpose of establishing a trust in order to provide a source of benefits
under the terms of the Company's Supplemental Plan for the benefit of Gilbert L.
Klemann, II and Hewitt is designated as Trustee's Contractor thereunder; and
WHEREAS, the parties desire to amend the Trust Agreement as set forth
herein;
NOW, THEREFORE, in consideration of the premises, the parties agree
that the Trust Agreement is hereby amended as follows:
1. Section 5.2 is hereby amended to change the third sentence thereof
to read as follows:
"The investment manager shall invest the assets of the Fund solely in
the Vista Select Bond Fund to the extent practicable and otherwise in
The Chase Manhattan Bank Personal Trust Market Rate Account."
2. Section 5.2 is hereby further amended by deleting paragraph (b)
thereof and redesignating paragraphs (c) through (p) as paragraphs (b)
through (o), respectively.
3. Section 9.1 is hereby amended to provide, to the extent not already
provided therein, that the trust may be terminated pursuant to a resolution
of the Compensation and Stock Option Committee of the Company's Board of
Directors as well as by a resolution of the Company's Board of Directors.
4. The Trust Agreement is hereby further amended to reflect the change
of the Company's name so that references to "American Brands, Inc." and the
"Company" shall be deemed to be references to "Fortune Brands, Inc." subject
to the approval of such change of name by the Company's stockholders.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this AMENDMENT to be duly
executed as of the day and year first written above.
AMERICAN BRANDS, INC.
Attest: By Steven C. Mendenhall
-----------------------------
Steven C. Mendenhall
Senior Vice President and
Mark S. Lyon Chief Administrative Officer
- --------------------
ASST. SECRETARY
THE CHASE MANHATTAN BANK
Attest: By Mark J. Altschuler
-----------------------------
Mark J. Altschuler
Vice President
Carl P. Pierleoni
- ---------------------
CARL P. PIERLEONI
SECOND VICE PRESIDENT
HEWITT ASSOCIATES LLC
Attest: By C.L. Connolly, III
---------------------------
Barbara C. Checkon
- ---------------------
I hereby consent to the foregoing AMENDMENT.
Witness:
Dianne L. Ebner Gilbert L. Klemann, II
- --------------------- ----------------------------
GILBERT L. KLEMANN, II
<PAGE>
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT-July 7, 1997
COUNTY OF FAIRFIELD )
Personally appeared STEVEN C. MENDENHALL, Senior Vice President and
Chief Administrative Officer of AMERICAN BRANDS, INC., signer and sealer of the
foregoing instrument, and acknowledged the same to be his free act and deed as
such Senior Vice President and Chief Administrative Officer and the free act and
deed of said Corporation, before me.
Lenora Rowser
-----------------------
Notary Public
STATE OF NEW YORK )
: ss.: New York, NY-8/4, 1997
COUNTY OF NEW YORK )
Personally appeared MARK J. ALTSCHULER, Vice President of THE CHASE
MANHATTAN BANK, signer and sealer of the foregoing instrument, and acknowledged
the same to be his free act and deed as such Vice President and the free act and
deed of said Company, before me.
Scott P. Callahan
---------------------------
Notary Public
STATE OF ILLINOIS )
: ss.: Lincolnshire, IL-July 7, 1997
COUNTY OF LAKE )
Personally appeared C.L. Connolly, III, Principal of HEWITT ASSOCIATES
LLC, signer and sealer of the foregoing instrument, and acknowledged the same to
be his free act and deed as such Principal and the free act and deed of said
HEWITT ASSOCIATES LLC, before me.
Ann F. Eckstein
----------------------------
Notary Public
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT-July 7, 1997
COUNTY OF FAIRFIELD )
Personally appeared GILBERT L. KLEMANN, II, signer of the foregoing
instrument, and acknowledged the same to be his free act and deed, before me.
Lenora Rowser
---------------------------
Notary Public
EXHIBIT 10c6
Schedule identifying substantially identical agreements, among Fortune Brands,
Inc. ("Fortune") and Chase Manhattan Bank (National Association), et al.,
establishing a trust in favor of each of the following persons, to the Agreement
and the Amendments thereto constituting Exhibits 10c2, 10c3, 10c4 and 10c5,
respectively, to the Annual Report on Form 10-K of Fortune for the Fiscal Year
ended December 31, 1997
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
John T. Ludes
Robert J. Rukeyser
Steven C. Mendenhall
Dudley L. Bauerlein, Jr.
EXHIBIT 10c7
AMENDMENT TO TRUST AGREEMENT
THIS AMENDMENT, made as of the 24th day of February, 1997, among
AMERICAN BRANDS, INC., a Delaware corporation (the "Company"), THE CHASE
MANHATTAN BANK, a New York banking corporation (the "Trustee") and HEWITT
ASSOCIATES LLC, a limited liability company formed under the laws of Illinois
("Hewitt")
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Trustee have entered into a Trust
Agreement made as of February 1, 1989, as amended (the "Trust Agreement") for
the purpose of establishing a trust in order to provide a source of benefits
under the terms of the Company's Supplemental Plan (the "Plan") for the benefit
of Mr. Thomas C. Hays and Hewitt is designated as Trustee's Contractor
thereunder; and
WHEREAS, the Company and the Executive entered into an agreement made
as of February 24, 1997 providing for severance benefits and certain
supplemental retirement benefits to the Executive under certain circumstances
(the "Severance and Retirement Agreement") which superseded a retirement
agreement made as of January 1, 1995 between the Company and the Executive; and
WHEREAS, it is desired that the trust may be used for the purpose of
providing a source of payments under the supplemental retirement provisions of
the Severance and Retirement Agreement as well as under the Plan;
NOW, THEREFORE, in consideration of the premises, the parties agree
that the Trust Agreement is hereby amended as follows:
1. Section 1.2 is hereby amended by changing the third sentence thereof
to read as follows:
"Upon the establishment of this Trust, and from time to time
thereafter, the Company shall contribute to the Trust such amount in
cash (or other property permitted by Section 3.6) as the Company shall
determine to be appropriate to provide a source of the payments
required under the terms of the Plan and the supplemental retirement
provisions of the Severance and Retirement Agreement."
2. Section 2.2 is hereby amended by changing the first four sentences
thereof to read as follows:
"The Company represents and agrees that the Trust established under
this Agreement does not fund and is not intended to fund the Plan or
benefits which may be payable under the supplemental retirement
provisions of the Severance and Retirement Agreement, or any other
employee benefit plan or program of the Company. Such Trust is and is
intended to be a depository arrangement with the Trustee for the
setting aside of cash and other assets of the Company for the meeting
of part or all of its future obligations to the Executive and his
Beneficiaries under the Plan and the supplemental retirement provisions
of the Severance and Retirement Agreement. Contributions by the Company
to this Trust shall be in respect of only the Executive. The purpose of
this Trust is to provide a fund from which benefits may be payable
under the Plan and the supplemental retirement provisions of the
Severance and Retirement Agreement and as to which the Executive and
his Beneficiaries may, by exercising the procedures set forth herein,
have access to some or all of their benefits as such become due without
having the payment of such benefits subject to the administrative
control of the Company unless the Company becomes insolvent as defined
in Section 2.1."
3. Section 3.2 is hereby amended by changing the first sentence thereof
to read as follows:
"Except for the records dealing solely with the Fund and its
investment, which shall be maintained by the Trustee, the Trustee's
Contractor shall maintain all the Executive's records contemplated by
this Agreement, including records of the Executive's compensation and
benefits from the Company, the amount of his benefits accrued under the
Plan and the supplemental retirement provisions of the Severance and
Retirement Agreement, the Executive's Beneficiary designation, the
Company's contributions to the Fund and such other records as may be
necessary for determining the amount payable to the Executive or his
Beneficiary under the Plan and the supplemental retirement provisions
of the Severance and Retirement Agreement."
<PAGE>
4. Section 3.4 is hereby amended by changing the first two sentences
thereof to read as follows:
"Upon the direction of the Company or upon the application of the
Executive or Beneficiary of a deceased Executive by submission of a
Payment Demand Notice in the form attached hereto as Schedule A, a copy
of which shall be delivered by the Trustee's Contractor to the Company,
the Trustee's Contractor shall prepare and deliver to the Trustee
within thirty days of receipt of such direction or application a
certification to the Trustee that the Executive's benefits under the
Plan and the supplemental retirement provisions of the Severance and
Retirement Agreement have become payable, and shall deliver a copy of
such certification to the Company and to the Executive or Beneficiary.
In preparing such certification, the Trustee's Contractor shall obtain
updated information from the Company for calculating benefits under the
Plan and the supplemental retirement provisions of the Severance and
Retirement Agreement."
5. Section 3.5 is hereby amended by changing the first two sentences
thereof as follows:
"Upon the payment of all Company liabilities under the Plan and the
supplemental retirement provisions of the Severance and Retirement
Agreement to the Executive and Beneficiaries, the Trustee's Contractor
shall prepare a certification to the Trustee, the Executive or his
Beneficiary and to the Company, and the Trustee shall thereupon hold or
distribute the Fund in accordance with the written instructions of the
Company. At no time prior to the Company's insolvency, as defined in
Section 2.1, or the payment of all liabilities of the Company under the
Plan and the supplemental retirement provisions of the Severance and
Retirement Agreement in respect of the Executive and his Beneficiaries
shall any part of the Fund revert to the Company."
6. Section 3.6 is hereby amended by changing the first sentence thereof
to read as follows:
"Nothing provided in this Agreement shall relieve the Company of its
liabilities to pay the benefits provided under the Plan and the
supplemental retirement provisions of the Severance and Retirement
Agreement except to the extent such liabilities are met by application
of Fund assets."
7. Section 4.1 is hereby amended by changing the first sentence thereof
to read as follows:
"The Company shall provide the Trustee's Contractor with a complete
copy of the Plan and the Severance and Retirement Agreement and all
amendments thereto and of the resolutions of the Board of Directors of
the Company or its Compensation and Stock Option Committee approving
the Plan and the Severance and Retirement Agreement and all amendments
thereto, promptly upon their adoption."
8. Section 4.1 is hereby further amended by changing the last sentence
thereof to read as follows:
"The Company shall be responsible for keeping accurate books and
records with respect to the Executive, his compensation and his rights
and interests in the Fund under the Plan and the supplemental
retirement provisions of the Severance and Retirement Agreement."
<PAGE>
9. Section 9.1 is hereby amended by changing the second sentence
thereof to read as follows:
"Upon receipt by the Company and the Executive or his Beneficiaries of
a written certification from the Trustee's Contractor that all
liabilities have been paid with respect to the Executive or his
Beneficiaries under the Plan and the supplemental retirement provisions
of the Severance and Retirement Agreement, the Company pursuant to a
resolution of its Board of Directors or Compensation and Stock Option
Committee may terminate the Trust upon delivery to the Trustee and the
Executive or his Beneficiaries of (a) a certified copy of such
resolution, (b) an original certification of the Trustee's Contractor
that all such liabilities have been paid and (c) a written instrument
of termination duly executed and acknowledged in the same form as this
Agreement."
10. Section 11.3 is hereby amended by changing the first sentence
thereof to read as follows:
"No right or interest of the Executive or his Beneficiary under the
Plan, under the supplemental retirement provisions of the Severance and
Retirement Agreement or in the Fund shall be transferable or assignable
or shall be subject to alienation, anticipation or encumbrance, and no
right or interest of the Executive or Beneficiary in the Plan or in the
Fund shall be subject to any garnishment, attachment or execution."
IN WITNESS WHEREOF, the parties have caused this AMENDMENT to be duly
executed as of the day and year first written above.
AMERICAN BRANDS, INC.
Attest:
Louis F. Fernous, Jr. By Steven C. Mendenhall
- --------------------- ---------------------------
Secretary Steven C. Mendenhall
Senior Vice President and
Chief Administrative Officer
THE CHASE MANHATTAN BANK
Attest:
Scott P. Callahan By Mark J. Altschuler
- ----------------- -------------------------
Mark J. Altschuler
Vice President
HEWITT ASSOCIATES LLC
Attest:
Barbara C. Checkon By C.L. Connolly III
- ------------------ ------------------------
I hereby consent to the foregoing AMENDMENT.
Witness:
Thomas C. Hays
---------------------
Diane Cuomo Thomas C. Hays
- ------------------
<PAGE>
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT-March 24, 1997
COUNTY OF FAIRFIELD )
Personally appeared Steven C. Mendenhall, Senior Vice President and
Chief Administrative Officer of AMERICAN BRANDS, INC., signer and sealer of the
foregoing instrument, and acknowledged the same to be his free act and deed as
such Senior Vice President and Chief Administrative Officer and the free act and
deed of said Corporation, before me.
Mark S. Lyon
----------------------
Notary Public
STATE OF NEW YORK )
: ss.: New York, NY-April 28, 1997
COUNTY OF NEW YORK )
Personally appeared Mark J. Altschuler, Vice President of THE CHASE
MANHATTAN BANK, signer and sealer of the foregoing instrument, and acknowledged
the same to be his free act and deed as such Vice President and the free act and
deed of said Company, before me.
Preeta S. Balladin
------------------------
Notary Public
STATE OF ILLINOIS )
: ss.: Lincolnshire, IL-June 3, 1997
COUNTY OF LAKE )
Personally appeared C.L. Connolly, III, Principal, of HEWITT ASSOCIATES
LLC, signer and sealer of the foregoing instrument, and acknowledged the same to
be his free act and deed as such Principal and the free act and deed of said
Limited Liability Company, before me.
Ann F. Eckstein
-------------------------
Notary Public
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT-March 25, 1997
COUNTY OF FAIRFIELD )
Personally appeared THOMAS C. HAYS, signer of the foregoing instrument,
and acknowledged the same to be his free act and deed, before me.
Louis F. Fernous, Jr.
-----------------------------
Notary Public
EXHIBIT 10c11
Schedule identifying substantially identical agreements, among Fortune Brands,
Inc. ("Fortune") and each of the following persons, to the Agreement and the
Amendments thereto constituting Exhibits 10c6, 10c7 and 10c8, respectively, to
the Annual Report on Form 10-K of Fortune for the Fiscal Year ended December 31,
1997
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
John T. Ludes
Robert J. Rukeyser
Steven C. Mendenhall
Dudley L. Bauerlein, Jr.
Charles H. McGill
Craig P. Omtvedt
EXHIBIT 10c12
AMENDMENT TO THOMAS C. HAYS
TRUST AGREEMENT
THIS AMENDMENT, made as of the 24th day of February, 1997, between
THOMAS C. HAYS (the "Executive"), AMERICAN BRANDS, INC., a Delaware corporation
(the "Company") and THE CHASE MANHATTAN BANK, a New York banking corporation
(the "Trustee")
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Executive, the Company and the Trustee have entered into a
Trust Agreement made as of November 1, 1993, as amended (the "Trust Agreement")
for the purpose of establishing a trust in order to provide a source of benefits
under the terms of the Company's Supplemental Plan (the "Plan") for the benefit
of the Executive; and
WHEREAS, the Company and the Executive entered into an agreement made
as of February 24, 1997 providing for severance benefits and certain
supplemental retirement benefits to the Executive under certain circumstances
(the "Severance and Retirement Agreement") which superseded a retirement
agreement made as of January 1, 1995 between the Company and the Executive; and
WHEREAS, it is desired that the trust may be used for the purpose of
providing a source of payments under the Severance and Retirement Agreement as
well as under the Plan;
NOW, THEREFORE, in consideration of the premises, the parties agree
that the Trust Agreement is hereby amended as follows:
1. Section 1.1 is hereby amended by changing the last sentence thereof
to read as follows:
"The Trust shall be solely for the purpose of providing benefits under
the Plan and the supplemental retirement provisions of the Severance
and Retirement Agreement with respect to the Executive, and neither the
Company nor any creditors of the Company shall have any interest in the
Fund."
2. Section 1.2 is hereby amended in its entirety to read as
follows:
"The Trustee shall hold, manage, invest and otherwise administer the
Fund pursuant to the terms of this Agreement. The Trustee shall be
responsible only for contributions actually received by it hereunder
and shall have no responsibility for the correctness of the amount
thereof. Upon the establishment of this Trust, and from time to time
thereafter, the Company may contribute to the Trust, unless otherwise
directed by the Executive to make such contributions to a segregated
account established with the Trustee or other bank, trust company or
other financial institution by or for the benefit of the Executive
pursuant to the Plan ("Segregated Account"), such amount in cash as the
Company shall determine to be appropriate to provide a source of the
payments required under the terms of the Plan and the supplemental
retirement provisions of the Severance and Retirement Agreement. Prior
to the making of any contribution to the Trust, the Company shall have
approved the establishment of a Segregated Account of the Executive,
the terms and provisions thereof, and the bank, trust company or other
financial institution with which such Segregated Account may be
established. The initial contribution by the Company shall be in an
amount approximately equal to the present value of the after tax
equivalent of the aggregate maximum benefits that would be due to the
Executive as of such date under the retirement provisions and the
profit-sharing provisions of the Plan, or such lesser amount as the
Company shall determine. The Company will make additional annual
contributions to the Trust or Segregated Account in amounts such that
the amount of the Fund, together with the amount in the Executive's
Segregated Account, at such time will be approximately equal to the
present value of the after tax equivalent of the Executive's accrued
benefits under the Plan and the supplemental retirement provisions of
the Severance and Retirement Agreement at that time, or in such lesser
amounts as the Company shall determine. The Company also may make a
final contribution to the Trust as promptly as practicable after the
Executive's termination of employment in an amount such that the amount
of the Fund, together with the amount, if any, in the Executive's
Segregated Account will be equal to (i) the sum of the present value of
the after tax equivalent of (x) the Executive's benefit under the
supplemental retirement provisions of the Plan and the Severance and
Retirement Agreement or, if the termination of employment is by reason
of the death of the Executive, the Executive's benefit under the
supplemental retirement provisions of the Plan and the Severance and
Retirement Agreement immediately prior to his death and (y) the
Executive's supplemental profit-sharing benefit under the Plan, reduced
by (ii) the amounts of any actual withdrawals from the Fund or from the
Executive's Segregated Account by the Executive as provided in Section
2.4 plus the income which would have been earned on such withdrawn
amounts from the time of withdrawal to the time of the Executive's
termination of employment, at a rate equal to the after tax equivalent
of 120% of the applicable monthly immediate annuity interest purchase
rate which would be used by the Pension Benefit Guaranty Corporation
from time to time during such period for the purpose of determining the
present value of a single sum distribution on plan termination."
3. Section 1.3 is hereby amended by changing the first
sentence thereof to read as follows:
"The Company shall certify to the Trustee and the Executive at the time
of each contribution to the Fund the amount of such contribution being
made in respect of the Executive's supplemental retirement benefit
under the Plan and the Severance and Retirement Agreement and the
amount being made in respect of the Executive's supplemental
profit-sharing benefit under the Plan."
4. Section 2.1 is hereby amended by in its entirety to read as
follows:
"The Company shall act as Administrator of the Trust. Except for the
records dealing solely with the Fund and its investment, which shall be
maintained by the Trustee, the Company as Administrator shall maintain
all the Executive's records contemplated by this Agreement, including
records of the Executive's compensation and benefits from the Company,
the amount of his benefits accrued under the Plan and the supplemental
retirement provisions of the Severance and Retirement Agreement, the
Company's contributions to the Fund, withdrawals from the Fund as
provided in Section 2.4 or from the Executive's Segregated Account, the
Executive's beneficiary designation and such other records as may be
necessary for determining the amount payable to the Executive or his
Surviving Spouse or other beneficiary under the Plan and the
supplemental retirement provisions of the Severance and Retirement
Agreement. All such records shall be made available promptly upon the
request of the Executive. In the event that the Executive's Segregated
Account is not maintained with the Trustee, the Company shall give
written notice to the Trustee as to the identity of the bank, trust
company or other financial institution with which the Segregated
Account is maintained. In such case, the Company also shall give notice
to the Trustee in the event of a withdrawal by the Executive of any or
all of the funds in his Segregated Account. The Company shall give
written notice to the Trustee of the Executive's termination of
employment, and as to whether such termination is by reason of the
death of the Executive. The Company as Administrator shall also prepare
and distribute the Executive's annual estimated benefit statements
specified in Section 2.2 and shall perform such other duties and
responsibilities in connection with the administration of the Trust as
the Company or the Trustee determines is necessary or advisable to
achieve the objectives of this Agreement."
5. Section 3.1 is hereby amended by changing the last sentence
thereof to read as follows:
"The Company shall be responsible for keeping accurate books and
records with respect to the Executive, his compensation and his rights
and interests in the Fund under the Plan and the supplemental
retirement provisions of the Severance and Retirement Agreement."
6. Section 11.1 is hereby amended in its entirety to read as
follows:
"In consideration of the establishment of the Fund, the Executive
consents to the distribution from time to time of assets of the trust
established pursuant to the Trust Agreement made as of the 1st day of
February, 1989, among American Brands, Inc., The Chase Manhattan Bank
(National Association) and Hewitt Associates established to provide a
source of the Executive's benefits under the Plan, in amounts to be
used for the making of contributions to the Trust or Segregated Account
of the Executive as provided in Section 1.2, or the making of payments
to the Executive (or beneficiary) pursuant to the Plan and the
supplemental retirement provisions of the Severance and Retirement
Agreement."
<PAGE>
IN WITNESS WHEREOF, the parties have caused this AMENDMENT to be duly
executed as of the day and year first written above.
Attest: AMERICAN BRANDS, INC.
Louis F. Fernous, Jr. By Steven C. Mendenhall
- --------------------- ----------------------------
Secretary Steven C. Mendenhall
Senior Vice President and
Chief Administrative Officer
Attest: THE CHASE MANHATTAN BANK
Scott P. Callahan By Mark J. Altschuler
- --------------------- ----------------------------
Mark J. Altschuler
Vice President
Witness: Thomas C. Hays
---------------------------
THOMAS C. HAYS
Diane Cuomo
- ----------------------
<PAGE>
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT - March 24, 1997
COUNTY OF FAIRFIELD )
Personally appeared Steven C. Mendenhall, Senior Vice President and
Chief Administrative Officer of AMERICAN BRANDS, INC., signer and sealer of the
foregoing instrument, and acknowledged the same to be his free act and deed as
such Senior Vice President and Chief Administrative Officer and the free act and
deed of said Corporation, before me.
Mark S. Lyon
---------------------
Notary Public
STATE OF NEW YORK )
: ss.: New York, NY - April 28, 1997
COUNTY OF NEW YORK )
Personally appeared Mark J. Altschuler, Vice President of THE CHASE
MANHATTAN BANK, signer and sealer of the foregoing instrument, and acknowledged
the same to be his free act and deed as such Vice President and the free act and
deed of said Company, before me.
Preeta S. Balladin
-----------------------
Notary Public
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT - March 25, 1997
COUNTY OF FAIRFIELD )
Personally appeared THOMAS C. HAYS, signer of the foregoing instrument,
and acknowledged the same to be his free act and deed, before me.
Louis F. Fernous, Jr.
------------------------
Notary Public
EXHIBIT 10i3
AMENDMENT TO TRUST AGREEMENT
THIS AMENDMENT, made as of the 1st day of January, 1997, among AMERICAN
BRANDS, INC., a Delaware corporation (the "Company"), THE CHASE MANHATTAN BANK,
a New York banking corporation (the "Trustee") and HEWITT ASSOCIATES LLC, a
limited liability company formed under the laws of Illinois ("Hewitt")
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Trustee are parties to a Trust Agreement
for the purpose of establishing a trust in order to provide a source of benefits
under the terms of a Compensation Agreement with Gilbert L. Klemann, II and
Hewitt is designated as Trustee's Contractor thereunder; and
WHEREAS, the parties desire to amend the Trust Agreement as set forth
herein;
NOW, THEREFORE, in consideration of the premises, the parties agree
that the Trust Agreement is hereby amended as follows:
1. Section 5.2 is hereby amended to change the third sentence thereof
to read as follows:
"The investment manager shall invest the assets of the Fund solely in
the Vista Select Bond Fund to the extent practicable and otherwise in
The Chase Manhattan Bank Personal Trust Market Rate Account."
2. Section 5.2 is hereby further amended by deleting paragraph (b)
thereof and redesignating paragraphs (c) through (p) as paragraphs (b)
through (o), respectively.
3. The Trust Agreement is hereby further amended to reflect the change
of the Company's name so that references to "American Brands, Inc." and the
"Company" shall be deemed to be references to "Fortune Brands, Inc." subject
to the approval of such change of name by the Company's stockholders.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this AMENDMENT to be duly
executed as of the day and year first written above.
AMERICAN BRANDS, INC.
Attest: By Steven C. Mendenhall
------------------------------
Steven C. Mendenhall
Senior Vice President and
Mark S. Lyon Chief Administrative Officer
- ------------------------
ASST. SECRETARY
THE CHASE MANHATTAN BANK
Attest: By Mark J. Altschuler
-----------------------------
Mark J. Altschuler
Vice President
Carl P. Pierleoni
- -------------------------
CARL P. PIERLEONI
SECOND VICE PRESIDENT
HEWITT ASSOCIATES LLC
Attest: By C.L. Connolly
----------------------------
Barbara C. Checkon
- --------------------------
I hereby consent to the foregoing AMENDMENT.
Witness:
Dianne L. Ebner Gilbert L. Klemann, II
- -------------------------- ---------------------------
GILBERT L. KLEMANN, II
<PAGE>
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT- July 7, 1997
COUNTY OF FAIRFIELD )
Personally appeared STEVEN C. MENDENHALL, Senior Vice President and
Chief Administrative Officer of AMERICAN BRANDS, INC., signer and sealer of the
foregoing instrument, and acknowledged the same to be his free act and deed as
such Senior Vice President and Chief Administrative Officer and the free act and
deed of said Corporation, before me.
Lenora Rowser
---------------------
Notary Public
STATE OF NEW YORK )
: ss.: New York, NY- 8/14 , 1997
COUNTY OF NEW YORK )
Personally appeared MARK J. ALTSCHULER, Vice President of THE CHASE
MANHATTAN BANK, signer and sealer of the foregoing instrument, and acknowledged
the same to be his free act and deed as such Vice President and the free act and
deed of said Company, before me.
Scott P. Callahan
-----------------------
Notary Public
STATE OF ILLINOIS )
: ss.: Lincolnshire, IL- July 14, 1997
COUNTY OF LAKE )
Personally appeared C.L. Connolly, III, Principal of HEWITT ASSOCIATES
LLC, signer and sealer of the foregoing instrument, and acknowledged the same to
be his free act and deed as such Principal and the free act and deed of said
HEWITT ASSOCIATES LLC, before me.
Ann F. Eckstein
------------------------
Notary Public
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT- July 7, 1997
COUNTY OF FAIRFIELD )
Personally appeared GILBERT L. KLEMANN, II, signer of the foregoing
instrument, and acknowledged the same to be his free act and deed, before me.
Lenora Rowser
------------------------
Notary Public
EXHIBIT 10i4
Schedule identifying substantially identical agreements, among Fortune Brands,
Inc. ("Fortune") and Chase Manhattan Bank (National Association), et al.
establishing a trust in favor of each of the following persons, to the Agreement
and the Amendments thereto constituting Exhibits 10i1, 10i2 and 10i3,
respectively, to the Annual Report on Form 10-K of Fortune for the Fiscal Year
ended December 31, 1997
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
John T. Ludes
Robert J. Rukeyser
Steven C. Mendenhall
Dudley L. Bauerlein, Jr.
Charles H. McGill
Craig P. Omtvedt
EXHIBIT 10k2
AMENDMENT TO SEVERANCE AGREEMENT
This AMENDMENT effective as of January 29, 1996 to the Severance
Agreement (the "Agreement") dated as of February 24, 1995 between AMERICAN
BRANDS, INC., a Delaware corporation (the "Company"), and CHARLES H. McGILL (the
"Executive");
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Executive entered into the Agreement in
order to provide severance benefits in the event of termination of employment;
and
WHEREAS, the Company and the Executive desire to amend the Agreement as
set forth herein;
NOW, THEREFORE, in consideration of the premises and to further assure
the retention of the Executive in the employ of the Company after the date of
this Amendment to Severance Agreement, the parties hereto do hereby agree as
follows:
1. Section 2(b)(ii)(B) of the Agreement is hereby amended in its
entirety as follows:
"(B) the lesser of the number two and the number of years (and fraction
thereof) from the Termination Date to the Executive's Normal Retirement Date
(as defined in the Retirement Plan for Employees and Former Employees of
American Brands, Inc. (the "Retirement Plan"))."
2. Section 2(c) of the Agreement is hereby amended by changing
"one-year period" in each place it appears therein to "two-year period".
3. Section 2(d) of the Agreement is hereby amended in its entirety as
follows:
"(d) If the Company shall terminate the Executive's employment other
than for Disability or Cause, then in addition to the retirement benefits to
which the Executive is entitled under the Retirement Plan, the Supplemental
Plan and any other defined benefit pension plan maintained by the Company or
any affiliate, and any other program, practice or arrangement of the Company
or any affiliate to provide the Executive with a defined pension benefit
after termination of employment, and any successor plans thereto (all such
plans being collectively referred to herein as the "Pension Plans"), the
Company shall pay the Executive monthly beginning at the date that payments
commence under the Retirement Plan an amount equal to the excess of (i) over
(ii) below where
(i) equals the sum of the aggregate monthly amounts of pension
payments (determined as a straight life annuity) to which the Executive
would have been entitled under the terms of each of the Pension Plans
in which he was an active participant (without regard to any amendment
made subsequent to the date hereof which adversely affects in any
manner the computation of the Executive's benefits) determined as if he
were fully vested thereunder and had accumulated two additional years
(or, if less, the number of years (and fraction thereof) from the
Termination Date to the Executive's Normal Retirement Date) of Service
thereunder (subsequent to his Termination Date) at his rate of Actual
Earnings in effect on the date hereof plus any increases subsequent
thereto,
and where
(ii) equals the sum of the aggregate monthly amounts of pension
payments (determined as a straight life annuity) to which the Executive
is entitled under the terms of each of the Pension Plans in which he
was an active participant at the date hereof or subsequently.
For purposes of clause (i), the amounts payable pursuant to Sections
2(b)(ii)(A)(1) and (2) and (2)(b)(ii)(B) shall be considered as part of the
Executive's Actual Earnings and such amounts shall be deemed to represent
two years (or, if less, the number of years (and fraction thereof) from the
Termination Date to the Executive's Normal Retirement Date) of Actual
Earnings for purposes of determining his highest consecutive five year
average rate of Actual Earnings. The supplemental pension benefits
determined under this Section 2(d) shall be payable by the Company to the
Executive and his contingent annuitant, if any, or to the Executive's
Surviving Spouse as a spouse's benefit if the Executive dies prior to
commencement of benefits under this Agreement, in the same manner and for
the same period as his pension benefits under the Supplemental Plan and
shall be adjusted actuarially to reflect payment in a form other than a
straight life annuity. Benefits hereunder which commence prior to age 60
shall be actuarially reduced to reflect early commencement to the extent,
if any, provided in the Retirement Plan as if the Executive's Termination
Date were an Early Retirement Date. All capitalized terms used in this
Section 2(d) shall have the same meaning as in the Retirement Plan as in
effect on the date hereof, unless otherwise defined herein or otherwise
required by the context."
IN WITNESS WHEREOF, the Company has caused this Amendment to Severance
Agreement to be signed by its officer thereunto duly authorized and its seal to
be hereunto affixed and attested and the Executive has hereunto set his hand as
of the 22nd day of March, 1996.
AMERICAN BRANDS, INC.
By Steven C. Mendenhall
------------------------
SRVP Chief Administrative Officer
(Corporate Seal)
ATTEST:
Louis F. Fernous, Jr.
- ------------------------
Secretary
Charles H. McGill
------------------------
Charles H. McGill
EXHIBIT 10m1
[EXECUTION COPY]
INDEMNIFICATION AGREEMENT
AGREEMENT dated as of December 22, 1994 (this "Agreement"),
among AMERICAN BRANDS, INC., a Delaware corporation ("Seller"),
THE AMERICAN TOBACCO COMPANY, a Delaware corporation (the
"Company"), and BROWN & WILLIAMSON TOBACCO CORPORATION, a Delaware
corporation (the "Subsidiary") (the Company and the Subsidiary are
herein sometimes referred to individually as an "Indemnitor" and
collectively as the "Indemnitors").
WHEREAS, Seller and B.A.T Industries P.L.C., a public limited company
organized under the laws of England ("Buyer"), have entered into a Stock
Purchase Agreement dated as of April 26, 1994 (the "Stock Purchase Agreement"),
pursuant to which, inter alia, Seller has agreed to sell to Buyer and Buyer has
agreed to purchase from Seller all of the outstanding capital stock of the
Company;
WHEREAS, pursuant to the terms of the Stock Purchase Agreement, each
Indemnitor is to enter into this Agreement at the time of the closing of the
sale under the Stock Purchase Agreement;
WHEREAS, each Indemnitor will benefit from, and therefore desires to
facilitate the consummation of, the transactions contemplated by the Stock
Purchase Agreement;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Indemnification. The Indemnitors agree, jointly and severally, to
indemnify Seller and each of its officers, directors, employees, stockholders,
agents, representatives, successors and assigns, against and hold them harmless
from any loss, liability, claim, damage or expense (including reasonable legal
fees and expenses) suffered or incurred by any such indemnified party arising
from (i) any claim, investigation or proceeding alleging personal injury, (ii)
any claim, investigation or proceeding alleging fraud or (iii) any other claim,
investigation or proceeding, in the case of each of clauses (i), (ii) and (iii),
arising from smoking and health or fire-safe cigarette matters relating to the
tobacco business of the Company or any of its predecessors, including, without
limitation, any such matter arising from or related to the development,
manufacture, packaging, labeling, production, delivery, sale, resale,
distribution, advertising, marketing, promotion, use or consumption of, or
exposure to (whether occurring before, on or after the date hereof), any tobacco
products of the Company or any of its predecessors or research in respect of
smoking and health or fire-safe cigarette matters.
2. Procedures Relating to Indemnification Claims. (a) If any person
(the "indemnified party") entitled to indemnification under this Agreement
should have a claim against any Indemnitor under this Agreement, the indemnified
party shall deliver notice of such claim with reasonable promptness to
Subsidiary, as the representative of the Indemnitors. The failure by any
indemnified party so to notify Subsidiary shall not relieve the Indemnitors from
any liability which they may have to such indemnified party under this
Agreement, except to the extent that the Indemnitors shall have been actually
prejudiced as a result of such failure.
(b) If a claim for indemnification hereunder relates to an action,
suit, investigation or proceeding against or involving the indemnified party,
Subsidiary shall assume the defense thereof with counsel selected by Subsidiary.
From and after the time that Subsidiary assumes the defense of such matter, the
Indemnitors shall not be liable to the indemnified party for legal expenses
incurred by the indemnified party in connection with such defense. The
indemnified party shall have the right to employ counsel, at its own expense,
separate from the counsel employed by the indemnifying party, but such counsel
shall not have any right to participate in any such matter and Subsidiary shall
control such defense in all respects but Seller and such counsel shall have the
right to be kept fully informed of the progress of such defense. The Indemnitors
shall be liable for the fees and expenses of counsel employed by the indemnified
party for any period during which Subsidiary has failed to assume the defense of
such matter (other than during any period in which the indemnified party shall
have failed to give notice of the matter as provided herein). The indemnified
party shall not unreasonably withhold its consent to any settlement, compromise
or discharge of such matter which Subsidiary may recommend. The indemnified
party shall not settle any claim covered by this Agreement.
(c) The indemnified party shall cooperate with the Indemnitors in their
defense of any matter covered by this Agreement, at the expense (including
reasonable legal fees and expenses) of the Indemnitors. The indemnified party
shall further provide the Indemnitors at the expense (including reasonable legal
fees and expenses) of the Indemnitors, with such information and assistance as
any Indemnitor may reasonably request to defend any matter covered hereby,
including, in the case of Seller, the assistance of officers and employees of
Seller when reasonably considered necessary by any Indemnitor to defend any such
matter. Except as required by law or legal process, Seller shall not take any
action or make any admission which adversely affects or could reasonably be
foreseen to adversely affect the defense of any matter covered hereby or that
could reasonably be foreseen to be covered hereby and shall not, and shall not
permit any of its affiliates, officers, directors, employees, agents or others
acting on its behalf to, make any adverse public statement regarding any such
matters.
(d) It is understood and agreed that effective as of the date of this
Agreement and without any further notification by Seller hereunder, the
Indemnitors shall jointly and severally indemnify Seller in respect of the
proceedings pending against Seller on the date hereof and set forth in Schedule
A attached hereto and Subsidiary shall assume the defense of each such
proceeding as contemplated hereby.
3. Representations and Warranties of Subsidiary. Subsidiary represents
and warrants to Seller as follows:
(a) Subsidiary is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of incorporation. Subsidiary
has all requisite corporate power and authority to enter into this Agreement and
to perform its obligations hereunder. All corporate acts and other proceedings
required to be taken by Subsidiary to authorize the execution, delivery and
performance of this Agreement have been duly and properly taken. This Agreement
has been duly executed and delivered by Subsidiary and constitutes a legal,
valid and binding obligation of Subsidiary enforceable against Subsidiary in
accordance with its terms, subject to the qualification, however, that
enforcement of the rights and remedies created hereby is subject to bankruptcy
and other similar laws of general application relating to or affecting the
rights and remedies of creditors and that the remedy of specific enforcement or
of injunctive relief is subject to the discretion of the court before which any
proceeding therefor may be brought.
(b) The execution and delivery of this Agreement by Subsidiary does
not, and compliance with the terms hereof will not, conflict with, or result in
any violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation to any person under, or to increased, additional, accelerated or
guaranteed rights or entitlements of any person under, or result in the creation
or any lien, claim, encumbrance, security interest, option, charge or
restriction of any kind upon any of the properties or assets of Subsidiary
under, any provision of (i) the certificate of incorporation or by-laws of
Subsidiary, (ii) any material note, bond, mortgage, indenture, deed of trust,
license, lease, contract, commitment, agreement or arrangement to which
Subsidiary is a party or by which any of its properties or assets are bound or
(iii) any judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Subsidiary or its properties or assets, other than, in the case of
clause (ii) above, any such items that, individually or in the aggregate, would
not have a material adverse effect on the ability of Subsidiary to perform its
obligations hereunder. No consent, approval, license, permit, order or
authorization of, or registration, declaration or filing with, any Federal,
state, local or foreign government or any court of competent jurisdiction,
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign, is required to be obtained or made by or
with respect to Subsidiary or any of its affiliates in connection with the
execution, delivery and performance of this Agreement by Subsidiary.
(c) Subsidiary does not have any affiliate (other than the Company and
any of its subsidiaries) which manufacturers cigarettes in the United States.
4. Covenants of the Indemnitors. The Indemnitors jointly and severally
agree as follows:
(a) Subject to Section 4(b), each Indemnitor will do or cause to be
done all things necessary to preserve and keep in full force and effect its
corporate existence in accordance with its respective organizational documents
and all applicable laws.
(b) The Indemnitors shall not consolidate with or merge into any other
person or convey or transfer, or cause to be conveyed or transferred, in one or
a series of related or substantially contemporaneous transactions, all or
substantially all of their business (consisting of 50% or more of their combined
United States domestic unit sales in the immediately preceding calendar year),
to any person or persons (other than an Indemnitor), unless (i) the person
formed by such consolidation or into which the Indemnitor is merged or the
person or persons acquiring by conveyance or transfer the business of the
Indemnitors shall be duly organized and existing under the laws of the
jurisdiction of its organization and shall expressly assume, by an instrument
supplemental hereto, executed and delivered to Seller prior to or
contemporaneously with the consummation of such transaction, the performance of
the obligations of the Indemnitor under this Agreement, and (ii) prior to and
immediately after giving effect to such transaction, the Indemnitor shall not be
in default in any material respect of its obligations under this Agreement.
5. Notices. All notices or other communications required or permitted
to be given hereunder shall be in writing and shall be delivered by hand or sent
by prepaid cable or telecopy or sent, postage prepaid, by registered, certified
or express mail or reputable overnight courier service and shall be deemed given
when so delivered by hand, cabled or telecopied, or if mailed, ten days after
mailing (two business days in the case of express mail or overnight courier
service), as follows:
(i) if to Seller,
American Brands, Inc.
1700 East Putnam Avenue
Old Greenwich, Connecticut 06870-0811
Attention: Gilbert L. Klemann, II
with copies to:
American Brands, Inc.
1700 East Putnam Avenue
Old Greenwich, Connecticut 06870-0811
Attention: Arnold Henson
and to:
Chadbourne & Parke
30 Rockefeller Plaza
New York, New York 10112
Attention: Edward P. Smith; and
(ii) if to any Indemnitor,
Brown & Williamson Tobacco Corporation
1500 Brown & Williamson Tower
P.O. Box 35090
Louisville, Kentucky 40232
Attention: F. Anthony Burke
with a copy to:
King & Spalding
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Attention: Frank Jones or
Gordon Smith
or to such other person or address as the addressee may have specified in a
notice duly given to the sender as provided herein.
6. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more such counterparts have been signed by
each of the parties and delivered to each of the other parties.
7. Entire Agreement. This Agreement contains the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter. None of the parties hereto shall be liable or bound to any other
party hereto in any manner by any representations, warranties or convenants
relating to such subject matter except as specifically set forth herein.
8. Jurisdiction. Seller and the Indemnitors each irrevocably submits to
the nonexclusive jurisdiction of (a) the Supreme Court of the State of New York,
New York County, and (b) the United States District Court for the Southern
District of New York, for the purposes of any suit, action or other proceeding
arising out of this Agreement. Each Indemnitor agrees that service of process,
summons, notice or document by hand delivery or U.S. registered mail in care of
King & Spalding, 191 Peachtree Street, N.E., Atlanta, Georgia 30303, Attention
Managing Partner, shall be effective service of process for any action, suit or
proceeding brought against such Indemnitor in any such court. Seller agrees that
service of process, summons, notice or document by hand delivery or U.S.
registered mail in care of Chadbourne & Parke, 30 Rockefeller Plaza, New York,
New York 10112, Attention of Managing Clerk, shall be effective service of
process for any action, suit or proceeding brought against Seller in any such
court. Seller and the Indemnitors each irrevocably and unconditionally waives
any objection to the laying of venue of any action, suit or proceeding arising
out of this Agreement in (i) the Supreme Court of the State of New York, New
York County, or (ii) the United States District Court for the Southern District
of New York, and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.
9. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York applicable to
agreements made and to be performed entirely within such State, without regard
to the conflicts of law principles of such State.
10. Amendment; Waiver. No amendment, modification or waiver in respect
of this Agreement shall be effective unless in writing and signed by all parties
hereto. No delay or failure on the part of any party in exercising any rights
hereunder, and no particular or single exercise thereof, will constitute a
waiver of such rights or of any other rights hereunder.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
AMERICAN BRANDS, INC.
by Gilbert L. Klemann, II
-------------------------
Name: Gilbert L. Klemann, II
Title: Senior Vice President
and General Counsel
THE AMERICAN TOBACCO COMPANY
by T.P. Kriz
------------------------
Name: T.P. Kriz
Title: Senior Vice President
and Chief Accounting
Officer
BROWN & WILLIAMSON TOBACCO
CORPORATION
by F. Anthony Burke
-------------------------
Name: F. Anthony Burke
Title: Vice President Law
and General Counsel
<PAGE>
Schedule A
I. Smoking and health cases in which American Brands, Inc., a Delaware
corporation, is not a defendant:
Butler v. Philip Morris, Inc., et al.
(Cir. Ct., Jones County, Mississippi)
Castano, et al. v. The American Tobacco Co., et al.
(U.S.D.C., E.D. La.)
Dunn, et al. v. The American Tobacco Company, et al.
(Super. Ct., Delaware County, Indiana)
Michener v. The American Tobacco Company, et al.
(Dist. Ct., Oklahoma County, Oklahoma)
Moore v. The American Tobacco Co., et al.
(Chancery Court, Jackson Co., Mississippi)
McGraw v. The American Tobacco Co., et al.
(Cir. Ct., Kanawha Co., West Virginia)
II. Pre-1986 smoking and health cases naming American Brands, Inc. a
New Jersey corporation, as a defendant:
Effective December 31, 1985, American Brands, Inc., a New Jersey
corporation, merged with The American Tobacco Company, a Delaware corporation.
The resulting Delaware corporation retained the name "The American Tobacco
Company." As a result, the company now known as The American Tobacco Company is
the defendant in any cases filed on or before December 31, 1985 that named
"American Brands" as a defendant. There are six pending cases in that category:
Bridges, et al. v. The American Tobacco Co.
(Sup. Ct., Albany Co., New York)
Grinnell, et al. v. The American Tobacco Co., et al.
(Dist. Ct., Jefferson Co., Texas)
Haight, et al. v. The American Tobacco Co., et al.
(Cir. Ct., Kanawha Co., West Virginia)
(procedurally dismissed subject to reopening)
I.D. Rogers, et al. v. R.J. Reynolds Tobacco Co., et al.
(Dist. Ct., Jefferson Co., Texas)
Frank Smith v. American Tobacco Co.
(Ct. Com. Pleas, Philadelphia Co., Pennsylvania)
Doris Smith, et al. v. R.J. Reynolds Tobacco Co.
(U.S.D.C., D.N.J.)
III. Other smoking and health cases:
American Brands, Inc. a Delaware corporation, is the recipient of a
third-party subpoena from American Broadcasting Companies in Philip Morris
Companies, Inc., et al. v. American Broadcasting Companies, et al. (Cir. Ct.,
City of Richmond, Va.). That subpoena is currently the subject of litigation.
IV. Pending smoking and health cases in which American Brands, Inc., a
Delaware corporation, was named as a defendant but has been dismissed:
Allman, et al. v. Philip Morris, Inc., et al.
(U.S.D.C., S.D. Cal.)
Bluitt, et al. v. R.J. Reynolds Tobacco Co., et al.
(U.S.D.C., N.D. Tex.)
Broin, et al. v. Philip Morris Companies, Inc., et al.
(Cir. Ct., Dade Co., Florida)
Tompkin, et al. v. American Tobacco Co., et al.
(U.S.D.C., N.D. Ohio)
EXHIBIT 12
FORTUNE BRANDS, INC.
Statement Re Computation of Ratio of Earnings to Fixed Charges(1)
(Dollar amounts in millions)
Years Ended December 31,
------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Continuing Operations
- ------------------------------
Earnings Available:
Income before
provision for
taxes on income
and minority interest $249.9 $ 43.4 $358.9 $340.1 $145.2
Less: Excess of
earnings over
dividends of less
than fifty percent
owned companies 0.1 - 0.2 0.2 0.2
Capitalized interest 0.3 0.2 - 0.3 -
------ ------ ------ ------ ------
249.5 43.2 358.7 339.6 145.0
------ ------ ------ ------ ------
Fixed Charges:
Interest expense
(including capitalized
interest) and amortization
of debt discount and expenses 200.5 184.6 147.1 172.6 122.4
Portion of rentals
representative of
an interest factor 11.9 12.8 13.5 15.1 14.7
------ ------ ------ ------ ------
Total Fixed Charges 212.4 197.4 160.6 187.7 137.1
------ ------ ------ ------ ------
Total Earnings
Available $461.9 $240.6 $519.3 $527.3 $282.1
====== ====== ====== ====== ======
Ratio of Earnings to
Fixed Charges 2.17 1.22 3.23 2.81 2.06
==== ==== ==== ==== ====
(1) Years 1993 through 1996 restated for discontinued operations.
EXHIBIT 13
FINANCIAL CONTENTS
Results of Operations page 33
Financial Condition page 40
Consolidated Statement of Income page 43
Consolidated Balance Sheet page 44
Consolidated Statement of Cash Flows page 46
Consolidated Statement of Stockholders' Equity page 47
Notes to Consolidated Financial Statements page 48
Report of Independent Accountants page 61
Report of Management page 61
Information on Business Segments page 62
Six-Year Consolidated Selected Financial Data page 63
32
<PAGE>
RESULTS OF OPERATIONS Fortune Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Net Sales Operating Income(1)
------------------------------------- ------------------------------------
1997 1996 1995 1997 1997(2) 1996 1995
(In millions) (Adjusted)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Home products $1,394.0 $1,374.1 $1,306.8 $ 96.2 $193.0 $184.1 $178.3
Office products 1,294.2 1,228.7 1,206.1 19.3 106.6 95.6 84.5
------------------------------------- ------------------------------------
Home and office products 2,688.2 2,602.8 2,512.9 115.5 299.6 279.7 262.8
Golf products 911.6 811.4 579.3 69.7 120.4 109.0 83.0
Distilled spirits 1,244.7 1,303.5 1,288.6 158.8 222.2 208.4 189.7
------------------------------------- ------------------------------------
Ongoing operations 4,844.5 4,717.7 4,380.8 344.0 642.2 597.1 535.5
Other businesses(3) -- -- 547.3 -- -- -- 3.4
------------------------------------- ------------------------------------
Continuing operations $4,844.5 $4,717.7 $4,928.1 $344.0 $642.2 $597.1 $538.9
==========================================================================
</TABLE>
(1) Operating income represents net sales less all costs and expenses
excluding corporate administrative expenses, interest and related expenses and
other (income) expenses, net.
(2) Excludes restructuring and other nonrecurring charges of $298.2 million.
See Note 15.
(3) Includes housewares and retail distribution sold in 1995.
CONSOLIDATED
On May 30, 1997, Gallaher Group Plc ("Gallaher"), the Company's international
tobacco subsidiary, was spun off ("Gallaher spin-off") and the Company's name
was changed from American Brands, Inc. to Fortune Brands, Inc. As a result, the
Company's stockholders owned shares in two publicly-traded companies -- Fortune
Brands, Inc. and Gallaher. The consolidated financial statements have been
restated to present Gallaher as a discontinued operation. (See Notes to
Consolidated Financial Statements, Note 4.)
1997 COMPARED TO 1996
Net sales increased 3% on benefits from new products and line extensions, partly
offset by volume declines. The benefits from acquisitions in home and office
products were offset by the sale of nonstrategic businesses. Net sales in 1996
benefited from the inclusion of an additional month in distilled spirits U.K.
operations (change to calendar year-end). Operating income decreased 42% due to
$298.2 million of restructuring and other nonrecurring charges taken in 1997
across all segments. Excluding these charges, operating income increased 8%,
primarily due to higher sales and gross margins, partly offset by increased
marketing and research and development expenses. The effects of lower average
foreign exchange rates on sales and operating income were not significant.
The Company reviewed productivity-enhancing opportunities throughout
the year and recorded pre-tax restructuring and other nonrecurring charges of
$298.2 million. The restructuring actions are expected to produce annualized
savings exceeding $50 million, much of that beginning in 1998. The Company
expects to use much of the savings to support the future growth of its operating
companies' brands. In connection with the restructuring, home and office
products will be reducing their combined workforce by 7%, or 1,125 individuals,
principally production employees. Approximately 30% of the charge will be cash
payments, principally relating to employee termination costs, of which $61.6
million will be paid during 1998. The Company's capital expenditures on
restructuring related projects amounted to $5.5 million in 1997 and is expected
to approach $70 million in 1998. The restructuring actions will be substantially
completed during 1998. (See Note 15.)
Interest and related expenses decreased 29% reflecting lower average
borrowings resulting principally from the use of the proceeds from the Gallaher
spin-off. Fixed interest rate debt and short-term debt effectively converted
into fixed-rate debt by interest rate swaps comprised almost all of the
borrowings at December 31, 1997.
The effective income tax rate comparisons were distorted by the
restructuring and other nonrecurring charges. Excluding these charges, the
effective income tax rates for 1997 and 1996 were 44.6% and 46.5%, respectively.
33
<PAGE>
RESULTS OF OPERATIONS Fortune Brands, Inc. and Subsidiaries
Income from continuing operations of $41.5 million, or 24 cents per
basic Common share, compared with $181.7 million, or $1.04 per share for 1996.
The decrease was due to the restructuring and other nonrecurring charges of $201
million after taxes, or $1.17 per share. Excluding these charges, income from
continuing operations was $242.5 million, or $1.41 per share.
Income from discontinued operations, which represents five months of
Gallaher's net income of $65.1 million, or 38 cents per share, in 1997,
compared with $315.1 million, or $1.82 per share, for the full year 1996. In
addition, the 1997 amount included $67.1 million in pre-tax spin-off
expenses. (See Note 4.)
The extraordinary items charge in 1997 of $8.1 million ($12.4 million
pre-tax), or five cents per share, and the 1996 charge of $10.3 million ($15.8
million pre-tax), or six cents per share, resulted from the extinguishment of
debt. (See Note 17.)
Net income of $98.5 million, or 57 cents per share, compared with
$486.5 million, or $2.80 last year.
The Company derived about 20% of its 1997 operating income before
restructuring and other nonrecurring charges from operations in foreign
countries, principally the United Kingdom, Australia, and Canada. Fluctuations
in the exchange rates of such countries' currencies represent the principal
exposures that may affect results in future periods. The Company cannot
accurately predict fluctuations in foreign exchange rates for 1998. However, a
10% reduction in average exchange rates for these foreign currencies from the
1997 average rates would not have resulted in a material decrease in 1997
operating income.
Pro forma income from operations and basic and diluted earnings per
Common share, respectively, of $257.8 million, and $1.51 and $1.48 compared with
$222.7 million, and $1.30 and $1.28 in 1996. Pro forma results reflect
adjustments to income from continuing operations to include a net cash payment
that approximated $1.25 billion, after taxes, that Gallaher made to the Company
in connection with the Gallaher spin-off and the assumption that such proceeds
were used to purchase 2.5 million Common shares and repay debt as of January 1,
1996. In addition, the 1997 pro forma amounts exclude the $201 million, or $1.17
and $1.16 per basic and diluted share, respectively, of restructuring and other
nonrecurring charges. Pro forma information is presented for informational
purposes only and does not purport to be indicative of the results of operations
which would actually have been obtained if the transactions had occurred on
January 1, 1996, or which may exist or be obtained in the future.
The Company and its operating companies have undertaken a program to
determine the work necessary to make their computer information systems Year
2000 compliant. The program, which covers internal information technology and
external business partner issues, encompasses various stages including
assessment, strategy, development, testing and implementation. Based on
activities to date and on project plans, critical systems are expected to be
Year 2000 compliant by December 31, 1998. Resolution of the Year 2000 issue is
not expected to have a material adverse effect upon the results of operations,
cash flow or financial condition of the Company.
On December 22, 1994, the Company sold The American Tobacco Company
subsidiary to Brown & Williamson Tobacco Corporation, a wholly owned subsidiary
of B.A.T Industries p.l.c. In connection with the sale, Brown & Williamson
Tobacco Corporation and The American Tobacco Company ("the Indemnitors") agreed
to indemnify the Company against claims including legal expenses arising from
smoking and health and fire safe cigarette matters relating to the tobacco
business of The American Tobacco Company.
The Company is a defendant in numerous actions based upon allegations
that human ailments have resulted from tobacco use. Management believes that
there are meritorious defenses to the pending actions and these actions are
being vigorously contested. However, it is not possible to predict the outcome
of the pending litigation, and it is possible that some of these actions could
be decided unfavorably. Management is unable to make a meaningful estimate of
the amount or range of loss that could result from an unfavorable outcome of the
pending litigation. Management believes that the pending actions will not have
a material adverse effect upon the results of operations, cash flows or
financial condition of the Company as long as the Indemnitors continue to
fulfill their obligations to indemnify the Company under the aforementioned
indemnification agreement.
In addition to the lawsuits described above, the Company and its
subsidiaries are defendants in lawsuits associated with their business and
operations. It is not possible to predict the outcome of the pending actions,
but management believes that there are meritorious defenses to these actions
and that these actions will not have a material adverse effect upon the
results of operations, cash flows or financial condition of the Company.
These actions are being vigorously contested.
34
<PAGE>
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 4, 1998, various subsidiaries of the Company had
been designated as potentially responsible parties under "Superfund" or similar
state laws with respect to 46 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 flows or financial condition
of the Company.
1996 COMPARED TO 1995
Net sales and operating income from ongoing operations increased 8% and 12%,
respectively.
Net sales increased due to price increases, new products and line
extensions and the inclusion of Cobra Golf, acquired in January 1996, partly
offset by volume declines, principally in distilled spirits. Excluding
restructuring charges of $17.8 million in distilled spirits in 1995, operating
income from ongoing operations was up 8% on the higher sales, partly offset by
increased operating expenses. The effects of lower average foreign exchange
rates on sales and operating income were not significant.
Interest and related expenses increased $28.9 million (21%) due to
higher average borrowings to fund the purchase of Cobra and Common share
purchases.
The unfavorable change in other (income) expenses, net, reflected
interest income in 1995 from the investment of proceeds from the disposition of
The American Tobacco Company and of the Franklin life insurance business.
The 1995 restructuring charge in distilled spirits
amounted to $17.8 million ($12.2 million after taxes), or six cents per share.
The 1995 gain on disposal of businesses reflected a $20 million
reversal of a loss provision recorded in 1994 in connection with the disposal of
nonstrategic businesses and increased 1995 earnings per share by 10 cents.
Income from continuing operations was $181.7 million, or $1.04 per
Common share, compared with $185.9 million, or $.99 per share in 1995.
Income from discontinued operations, which represents Gallaher's net
income of $315.1 million, or $1.82 per share, in 1996 compared with $357. 2
million, or $1.91 per share,
in 1995.
The extraordinary item charge in 1996 of $10.3 million ($15.8 million
pre-tax), or six cents per share, and the 1995 charge of $2.7 million ($4.1
million pre-tax), or one cent per share, resulted from the extinguishment of
debt.
Net income of $486.5 million, or $2.80 per Common share, compared with
$540.4 million, or $2.89 per share in 1995. The Company, through Common share
purchases and redemption of convertible debentures, reduced outstanding 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 earnings per share by three
cents.
HOME PRODUCTS
1997 COMPARED TO 1996
Net sales increased 1% principally on line extensions and new products, partly
offset by lower volume on existing products as well as the absence of Moen
operations in Taiwan and Japan. All companies except Master Lock reported higher
sales.
Operating income decreased 48% due to a $96.8 million restructuring
and other nonrecurring charge related to the disposition of certain product
lines and the rationalization of operations. Operating income excluding this
charge increased 5% on the sales increase and improved gross margin (principally
favorable product mix at Moen), partly offset by higher operating expenses and
unfavorable comparison to last year's $2.2 million gain on the sale of Moen's
joint venture in Taiwan. The increased operating expenses result from higher
volume-related selling expenses at Moen and increased research and development
expenses, partly offset by lower general
35
<PAGE>
RESULTS OF OPERATIONS Fortune Brands, Inc. and Subsidiaries
and administrative expenses. Operating income increased at all companies
except Master Lock. Operating income at Master Lock declined principally due to
the January 1, 1997 average price reduction of 15% in response to a shift by
mass merchants to competitors' value-priced imported products.
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 and will present opportunities for the most
efficient manufacturers.
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 reflected higher labor and overhead costs. The higher operating
expenses reflected 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 the reversal of
reserves related to a joint venture in 1995. 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.
OFFICE PRODUCTS
1997 COMPARED TO 1996
Net sales increased 5% on the introduction of new products, partly offset by
lower prices, volume declines in existing product lines and lower average
foreign exchange rates. The benefits from acquisitions were largely offset by
the sale of nonstrategic businesses. The majority of the increase occurred in
North America and Europe, reflecting higher Kensington computer accessories
sales (new products) and higher Day-Timer time-management products sold through
the retail channel.
Operating income decreased 80% due to an $87.3 million restructuring
and other nonrecurring charge principally related to the rationalization of
operations, the discontinuance of certain product lines and lease cancellation
costs, partly offset by a pre-tax gain on the sale of nonstrategic businesses.
Operating income excluding this charge increased 12% reflecting the sales
increase and improved gross margin (principally manufacturing effciencies in
North America and Europe, stabilized raw material costs and favorable product
mix), partly offset by higher operating expenses. The increased operating
expenses principally reflected higher customer program costs in North America,
higher marketing, freight, distribution and research and development costs
associated with the new products and higher general and administrative costs.
As the office products industry continues to consolidate, the
growth of large customers will continue to present pricing and service
challenges to manufacturers and will present opportunities for the most
efficient manufacturers.
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-Timer products were adversely affected by the impact
of strong initial sales into the retail channel in 1995.
36
<PAGE>
GOLF PRODUCTS
1997 COMPARED TO 1996
Net sales were up 12% on line extensions and new products, volume increases in
golf balls, clubs, gloves and shoes and one additional month of Cobra results in
1997 (acquired January 24, 1996), partly offset by discontinued products
associated with new product introductions and lower average foreign exchange
rates. Operating income decreased 36% due to a $50.7 million restructuring and
other nonrecurring charge related to the discontinuance of certain product lines
and the rationalization of operations. Operating income excluding this charge
increased 10% reflecting the higher sales, partly offset by a shift in product
mix and increases in material costs, advertising and promotional expenditures
and research and development expenses associated with the development of new
products.
1996 COMPARED TO 1995
Net sales increased 40% on the inclusion of Cobra 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 FootJoy
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.
DISTILLED SPIRITS
1997 COMPARED TO 1996
Net sales decreased 5% principally resulting from lower volume and inclusion of
an additional month of sales for the U.K. operations in 1996 (change to calendar
year-end added $34.3 million), partly offset by price increases, new products
and line extensions, the benefit from a domestic bulk sale and higher average
foreign exchange rates. The volume declines reflect lower case shipments in the
U.S., partially to reduce trade inventories, and decreased case shipments in the
U.K. These declines were partly offset by higher case shipments in selected
international markets (principally Australia and Germany) for Jim Beam Bourbon
and pre-mixed cocktails, and higher case shipments in Canada.
Operating income decreased 24% due to a $63.4 million restructuring
and other nonrecurring charge related to a change in estimate for bulk whiskey
valuations which resulted from the integration of the worldwide distilled
spirits business, international distribution and lease agreements and the
discontinuance of certain product lines. Operating income excluding this charge
increased 7% on an improved product mix, benefits of price increases and lower
operating expenses resulting from lower advertising and promotional support on
selected brands and effective cost controls. Operating results improved in North
America (price increases and lower brand support spending, partly offset by
lower U.S. case shipments), Australia (higher volume, partly offset by
unfavorable average foreign exchange rates) and the U.K. (lower operating
expenses, partly offset by lower volume). The inclusion of an additional month
of U.K. operations in 1996 had an immaterial effect on operating income.
The November 1997 U.K. budget resulted in a 19 pence tax increase on
a typical bottle effective January 1, 1998. 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. While considered from time to time, the
last federal excise tax increase on distilled spirits in the U.S. was an 8%
increase effective January 1, 1991.
37
<PAGE>
RESULTS OF OPERATIONS Fortune Brands, Inc. and Subsidiaries
Through 1995, distilled spirits consumption in many countries,
including the U.S., continued a long-term decline. Estimated total unit sales of
distilled spirits in the U.S. declined by approximately 2 to 3% from 1993 to
1995. In 1996, estimated total U.S. distilled spirits unit sales equaled 1995,
and preliminary information suggests total 1997 U.S. sales of distilled spirits
in units declined only slightly. Whether the historic decline in distilled
spirits consumption has been reversed is uncertain. JBB Worldwide's total unit
depletions (sales from distributors to retailers) in the U.S. decreased by 3.1%,
3.5% and 3.4% in 1997, 1996 and 1995, respectively. The decline in unit sales
by JBB Worldwide in the U.S., which is greater than the decline for the U.S.
industry as a whole, is believed to be the result of its concentration on
whiskey brands and mid-to-low priced products, both of which are estimated to be
declining at higher rates than the aggregate decline of distilled spirits
consumption in the U.S., and on price increases taken to increase profits as
compared to unit sales.
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 led to calls for government
regulation and other actions at federal, state and local levels. JBB Worldwide,
through its Jim Beam Brands Co. subsidiary, has not begun any such advertising
but may yet do so in response to competitive conditions. JBB Worldwide operating
units outside the U.S. have conducted 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 industry trends.
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 reflected one additional month for the U.K.
operations (change to calendar year-end added $34.3 million), higher volume
applicable to international sales (primarily Jim Beam Bourbon and pre-mixed
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, reflected improved results from Jim Beam Bourbon
international sales, particularly in Australia, and the private label Scotch
whisky business, partly offset by lower profits in the U.S. domestic market and
from U.K.-based branded products. The inclusion of the additional month of the
U.K. operations 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 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 on branded products in
the U.K.
38
<PAGE>
QUARTERLY FINANCIAL DATA(1)
unaudited
<TABLE>
<CAPTION>
(In millions, except per share amounts)
1997 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $1,105.1 $1,235.5 $1,185.5 $1,318.4
Gross profit 448.6 469.0 452.6 515.2
Operating income 125.9 79.9 108.8 29.4
Income (loss) from continuing operations (2) $ 35.0 $ 4.3 $28.0 $(25.8)
Income (loss) from discontinued operations 101.6 (36.5) -- --
Extraordinary items -- -- -- (8.1)
-------------------------------------------------------
Net income (loss) $136.6 $(32.2) $28.0 $(33.9)
-------------------------------------------------------
Earnings per Common share
Basic
Continuing operations(2) $.20 $ .03 $.16 $(.15)
Discontinued operations .60 (.22) -- --
Extraordinary items -- -- -- (.05)
-------------------------------------------------------
Net income $.80 $(.19) $.16 $(.20)
-------------------------------------------------------
Diluted
Continuing operations(2) $.20 $ .02 $.16 $(.15)
Discontinued operations .58 (.20) -- --
Extraordinary items -- -- -- (.05)
-------------------------------------------------------
Net income $.78 $(.18) $.16 $(.20)
=======================================================
1996 1st 2nd 3rd 4th
- -------------------------------------------------------------------------------------------------------
Net sales $1,055.1 $1,207.7 $1,158.1 $1,296.8
Gross profit 421.1 474.6 446.7 521.0
Operating income 125.2 153.1 134.0 184.8
Income from continuing operations $ 31.8 $ 56.0 $ 31.2 $ 62.7
Income from discontinued operations 92.3 66.0 105.5 51.3
Extraordinary items (10.3) -- -- --
-------------------------------------------------------
Net income $113.8 $122.0 $136.7 $114.0
-------------------------------------------------------
Earnings per Common share
Basic
Continuing operations $ .18 $.31 $.19 $.36
Discontinued operations .52 .38 .61 .31
Extraordinary items (.06) -- -- --
-------------------------------------------------------
Net income $ .64 $.69 $.80 $.67
-------------------------------------------------------
Diluted
Continuing operations $ .18 $.31 $.18 $.36
Discontinued operations .51 .37 .61 .30
Extraordinary items (.06) -- -- --
-------------------------------------------------------
Net income $ .63 $.68 $.79 $.66
=======================================================
</TABLE>
(1) All previously published quarterly financial data have been restated.
(See Notes 1, 4 and 18.)
(2) In 1997, income (loss) from continuing operations and basic and
diluted earnings per Common share reflected restructuring and other
nonrecurring charges of $65.4 million ($89.3 million pre-tax) and 38
cents and 38 cents in the second quarter, $23 million ($38.1 million
pre-tax) and 13 cents and 12 cents in the third quarter, and $112.6
million ($170.8 million pre-tax) and 66 cents and 66 cents in the fourth
quarter, respectively. (See Note 15.)
39
<PAGE>
FINANCIAL CONDITION Fortune Brands, Inc. and Subsidiaries
CASH FLOW
NET CASH PROVIDED FROM CONTINUING OPERATING ACTIVITIES
Net cash provided from continuing operating activities in 1997 was $426.3
million, as compared with $333.5 million in 1996. This increase in net cash
provided principally reflects higher operating income excluding restructuring
and other nonrecurring charges, lower interest expense and favorable changes in
various components of working capital. Net cash provided in 1996 was impacted
unfavorably by the inclusion of Cobra's working capital requirements.
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES
Net cash used by investing activities in 1997 was $227.6 million, as compared
with net cash used in 1996 of $867.3 million.
Capital expenditures. Capital spending is focused on the operating
companies becoming the lowest cost producers of the highest quality products.
Capital expenditures in 1997 were $196.9 million, as compared with $199.7
million in 1996. See Note 16 for capital expenditures. Funds for 1998 capital
expenditures, estimated at $250 million (which includes $70 million related to
the restructuring), are expected to be generated internally.
Dispositions. In 1997, the Company disposed of two nonstrategic
businesses for a total of $48 million. In 1995, proceeds from the disposition of
the Franklin life insurance business and of other nonstrategic businesses were
$1.2 billion.
Acquisitions. In 1997, the Company completed the acquisition of five
companies for $84.6 million, net of cash acquired. In 1996, acquisitions, net of
cash acquired, amounted to $700.3 million, principally Cobra.
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES
Net cash used by financing activities in 1997 was $1.5 billion, as compared with
net cash provided in 1996 of $95.9 million, principally reflecting the repayment
of debt in 1997 using the proceeds provided in connection with the Gallaher
spin-off, the impact of the acquisition of Cobra in 1996 and lower Common share
purchases in 1997. At the time of the spin-off, Gallaher paid to the Company an
amount that approximated $1.25 billion, after taxes. The Company's purchases of
Common stock amounted to $90 million during 1997 as compared with $444.3 million
during 1996.
CASH PROVIDED BY DISCONTINUED OPERATIONS
To allocate the overall debt burden of the Company at the time of the Gallaher
spin-off, Gallaher borrowed and paid to the Company approximately $1.25 billion,
after taxes. The Company used the proceeds to pay down debt.
DIVIDENDS
Dividends paid per Common share in 1997 were $1.41 per share. Dividends paid to
Common stockholders in 1997 decreased to $242.3 million from $347.2 million,
reflecting the lower dividend rate following the Gallaher spin-off as well as
fewer shares outstanding during 1997.
In connection with the Gallaher spin-off, the Company's dividend
was set at an indicated annual rate of $.80 per share. On December 1, 1997,
the quarterly dividend paid on Common stock was increased 5% to $.21 per
share, or an indicated annual rate of $.84 per share.
FINANCIAL POSITION
At December 31, 1997, total debt decreased $1.3 billion to $1.1 billion.
Short-term debt decreased $377.6 million and long-term debt decreased $859.2
million. The ratio of total debt to total capital decreased to 22.2% at year
end 1997, from 39.3% at year end 1996. The decrease principally reflected the
repayment of debt using the proceeds received in connection with the Gallaher
spin-off.
40
<PAGE>
At December 31, 1997, the Company had $850 million of debt securities
(including Medium Term Notes) available for sale under its shelf registration
with the Securities and Exchange Commission.
In 1997, the Company purchased $95.8 million principal amount of its
debt. In 1996, the Company redeemed $300 million principal amount of its debt.
(See Note 17.)
At year end 1997, the Company had $2.5 billion of long-term credit
facilities, substantially all of which remained unused. On September 2, 1997,
the Company terminated the revolving credit agreements that had been in place
and entered into revolving credit agreements with expiration dates of August 1,
2002 with various banks which provide for unsecured committed borrowings of up
to $2.5 billion, including Eurocurrencies. A commitment fee of .10% per annum is
paid on the unused portion. 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 decreased to $327.1 million in 1997 from $774 million
in 1996 principally due to the impacts of the Gallaher spin-off. Management
believes that the 1997 working capital level was adequate to support continued
growth.
FOREIGN EXCHANGE
The Company has investments in various foreign countries, principally the United
Kingdom, as well as Australia and Canada. Therefore, changes in the value of the
currencies of these countries affect the Company's balance sheet and cash flow
statements when translated into U.S. dollars.
MARKET RISK
The Company is exposed to various market risks, including changes in foreign
currency exchange rates and interest rates. Market risk is the potential loss
arising from adverse changes in market rates and prices, such as foreign
currency exchange and interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative
purposes. The Company enters into financial instruments to manage and reduce
the impact of changes in foreign currency exchange rates and interest rates.
The counterparties are major financial institutions.
FOREIGN EXCHANGE CONTRACTS
The Company enters into forward foreign exchange contracts principally to
hedge the currency fluctuations in transactions denominated in foreign
currencies, thereby limiting the Company's risk that would otherwise result
from changes in exchange rates. During 1997, the principal transactions
hedged were short-term intercompany loans, intercompany purchases and
dividends declared by foreign operating companies. The periods of the forward
foreign exchange contracts correspond to the periods of the hedged
transactions. Gains and losses on forward foreign exchange contracts and the
offsetting losses and gains on hedged transactions are reflected in the
income statement.
At December 31, 1997, the Company had outstanding forward foreign
exchange contracts to purchase $72 million and sell $164 million of various
currencies (principally pound sterling) with a weighted average maturity of 121
days.
The estimated fair value of foreign currency contracts represents
the amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices. At December 31, 1997, the
difference between the fair value of all outstanding contracts and the
contract amounts was immaterial. A 10% fluctuation in exchange rates for
these currencies would change the fair value by approximately $9 million.
However, since these contracts hedge foreign currency denominated
transactions, any change in the fair value of the contracts would be offset
by changes in the underlying value of the transactions being hedged.
INTEREST RATES
The Company enters into interest rate swap agreements to manage its exposure to
interest rate changes. The swaps involve the exchange of fixed and variable
interest rate payments without exchanging the notional principal amount.
Payments or receipts on the agreements are recorded as adjustments to interest
expense. At December 31, 1997, the Company had outstanding interest rate swap
agreements denominated in dollars, maturing at various dates through 1999, with
an aggregate notional principal amount of $200 million. Under these agreements
the Company receives a floating rate based on thirty day commercial paper rates
and pays a fixed interest rate. These swaps effectively change the Company's
payment of interest on $200 million of variable rate debt to fixed rate debt.
41
<PAGE>
FINANCIAL CONDITION Fortune Brands, Inc. and Subsidiaries
The fair value of these interest rate swap agreements represents
the estimated receipts or payments that would be made to terminate the
agreements. At December 31, 1997, the Company would have paid $6.6 million to
terminate the agreements. A 1% decrease in the thirty day commercial paper
rates would increase the amount paid by approximately $3 million. The fair
value is based on dealer quotes, considering current interest rates.
The fair market value of long-term fixed interest rate debt is
subject to interest rate risk. Generally, the fair market value of fixed
interest rate debt will increase as interest rates fall and decrease as
interest rates rise. The estimated fair value of the Company's total
long-term debt (including current portion) at December 31, 1997 was $1,013
million. A 1% increase from prevailing interest rates at December 31, 1997
would result in a decrease in fair value of total long-term debt by
approximately $51 million. Fair values were determined from quoted market
prices, where available, and from investment bankers using current interest
rates considering credit ratings and the remaining terms to maturity.
See Notes 1 and 14 for a discussion of the accounting policies for
Derivative Financial Instruments and information on Financial Instruments,
respectively.
STOCKHOLDERS' EQUITY
Stockholders' equity at year end 1997 increased $341.1 million to $4 billion
principally reflecting changes resulting from the Gallaher spin-off.
During 1997, the Company purchased 2.5 million shares of Common stock.
At its July 29, 1997 meeting, the Board of Directors authorized a systematic
share purchase program to cover future stock option exercises. This program is
anticipated to be in the range of two million shares per year.
From June 2, 1997, the initial trading date of the Company as Fortune
Brands, the Common stock traded within a range of $30.375 to $38.00. The Common
stock generated a total return of 21.1% from June 2 through December 31, 1997.
Book value per Common share was $23.31 at year end.
CAUTIONARY STATEMENT
This annual report contains statements relating to future results, which are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Actual results may differ materially from those
projected as a result of certain risks and uncertainties, including but not
limited to changes in general economic conditions, foreign exchange rate
fluctuations, competitive product and pricing pressures, the impact of excise
tax increases with respect to distilled spirits, regulatory developments, the
uncertainties of litigation, as well as other risks and uncertainties detailed
from time to time in the Company's Securities and Exchange Commission filings.
QUARTERLY COMMON STOCK DIVIDEND PAYMENTS
Fortune Brands* American Brands
----------------------------------------
1997 1997 1996
- ------------------------------------------------------ ----
Payment date Per share Per share Per share
- ------------------------------------------------------ ---------
March 1 -- $.50 $ .50
June 1 -- .50 .50
September 1 $.20 -- .50
December 1 .21 -- .50
------------------- ---------
$1.41 $2.00
=================== =========
QUARTERLY COMPOSITE COMMON STOCK PRICES
Fortune Brands* American Brands
----------------------------------------
1997 1997 1996
- ---------------------------------------------------------------- ----
High Low High Low High Low
- ---------------------------------------------------------------- ----
First -- -- 537/8 483/8 477/8 423/8
Second 38 301/2 56 473/4 461/8 397/8
Third 375/16 325/8 -- -- 467/8 40
Fourth 375/8 303/8 -- -- 501/8 413/4
===========================================
* From June 2, 1997, the initial trading date of the Company as Fortune
Brands.
The Common stock is listed on the New York Stock Exchange, which is the
principal market for this security. The high and low prices are as reported
in the consolidated transaction reporting system.
42
<PAGE>
CONSOLIDATED STATEMENT OF INCOME Fortune Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $4,844.5 $4,717.7 $4,928.1
Cost of products sold 2,540.4 2,401.1 2,626.0
Excise taxes on distilled spirits 418.7 453.2 485.7
Advertising, selling, general and administrative expenses 1,301.6 1,249.5 1,245.8
Amortization of intangibles 104.2 102.7 90.1
Restructuring charges 209.1 - 17.8
Interest and related expenses 116.7 165.5 136.6
Other (income) expenses, net 14.1 6.1 (11.3)
Gain on disposal of businesses - - 20.0
--------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 139.7 339.6 357.4
Income taxes 98.2 157.9 171.5
--------------------------------------
INCOME FROM CONTINUING OPERATIONS 41.5 181.7 185.9
Income from discontinued operations 65.1 315.1 357.2
Extraordinary items (8.1) (10.3) (2.7)
--------------------------------------
Net income $ 98.5 $ 486.5 $ 540.4
======================================
Earnings per Common share
Basic
Income from continuing operations $ .24 $ 1.04 $ .99
Income from discontinued operations .38 1.82 1.91
Extraordinary items (.05) (.06) (.01)
--------------------------------------
Net income $ .57 $ 2.80 $ 2.89
======================================
Diluted
Income from continuing operations $ .23 $ 1.03 $ .98
Income from discontinued operations .38 1.79 1.89
Extraordinary items (.05) (.06) (.01)
--------------------------------------
Net income $ .56 $ 2.76 $ 2.86
======================================
DIVIDENDS PAID PER COMMON SHARE $ 1.41 $ 2.00 $ 2.00
======================================
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
Basic 171.6 173.3 186.9
======================================
Diluted 173.3 176.1 189.6
======================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
43
<PAGE>
CONSOLIDATED BALANCE SHEET Fortune Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
DECEMBER 31 (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 54.2 $ 34.9
Accounts receivable less allowances for discounts,
doubtful accounts and returns, 1997 $54.3; 1996 $49.6 862.0 892.4
Inventories
Bulk whiskey 338.1 379.3
Other raw materials, supplies and work in process 258.7 266.8
Finished products 358.4 391.8
-----------------------
955.2 1,037.9
Net assets of discontinued operations - 683.3
Other current assets 224.2 193.6
-----------------------
TOTAL CURRENT ASSETS 2,095.6 2,842.1
-----------------------
Property, plant and equipment
Land and improvements 65.8 59.4
Buildings and improvements to leaseholds 494.8 472.9
Machinery and equipment 1,262.7 1,198.9
Construction in progress 106.8 92.1
-----------------------
1,930.1 1,823.3
Less accumulated depreciation 949.2 850.7
-----------------------
Property, plant and equipment, net 980.9 972.6
Intangibles resulting from business acquisitions,
net of cumulative amortization, 1997 $747.7; 1996 $649.3 3,674.1 3,730.7
Other assets 191.9 191.9
-----------------------
TOTAL ASSETS $6,942.5 $7,737.3
=======================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
44
<PAGE>
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to banks $ 36.8 $ 37.1
Commercial paper 191.6 691.2
Accounts payable 254.6 241.3
Accrued taxes 475.2 443.4
Accrued expenses and other liabilities 634.1 601.2
Current portion of long-term debt 176.2 53.9
------------------------
TOTAL CURRENT LIABILITIES 1,768.5 2,068.1
------------------------
Long-term debt 739.1 1,598.3
Deferred income taxes 38.5 19.3
Postretirement and other liabilities 379.3 375.6
------------------------
TOTAL LIABILITIES 2,925.4 4,061.3
------------------------
Stockholders' equity
$2.67 Convertible Preferred stock 11.3 12.9
Common stock, par value $3.125 per share, 229.6 shares issued 717.4 717.4
Paid-in capital 151.1 166.5
Foreign currency adjustments 19.9 (195.9)
Minimum pension liability adjustment (13.0) (8.2)
Retained earnings 5,129.7 5,025.4
Treasury stock, at cost (1,999.3) (2,042.1)
------------------------
TOTAL STOCKHOLDERS' EQUITY 4,017.1 3,676.0
------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,942.5 $ 7,737.3
========================
</TABLE>
45
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS Fortune Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
FOR YEARS ENDED DECEMBER 31 (IN MILLIONS) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 98.5 $ 486.5 $ 540.4
Income from discontinued operations (65.1) (315.1) (357.2)
Extraordinary items 8.1 10.3 2.7
Restructuring charges 209.1 - 17.8
Gain on disposals - - (20.0)
Depreciation and amortization 242.7 238.3 224.0
Decrease (increase) in accounts receivable 29.8 (74.4) (59.2)
Decrease (increase) in inventories 31.9 (34.2) 121.2
Increase in other assets (4.5) (5.1) (18.7)
(Decrease) increase in accrued taxes (27.8) 43.4 12.1
(Decrease) increase in accounts payable, accrued expenses and
other liabilities (16.0) 20.3 (211.3)
(Decrease) increase in deferred income taxes (74.8) (1.6) 1.1
Other operating activities, net (5.6) (34.9) 127.4
---------------------------------------
NET CASH PROVIDED FROM CONTINUING OPERATING ACTIVITIES 426.3 333.5 380.3
---------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (196.9) (199.7) (175.6)
Proceeds from the disposition of property, plant and equipment 5.5 14.5 15.3
Proceeds from the disposition of operations, net of cash 48.0 5.9 1,175.8
Acquisitions, net of cash acquired (84.6) (700.3) (4.2)
Other investing activities, net 0.4 12.3 (2.3)
---------------------------------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (227.6) (867.3) 1,009.0
---------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in short-term debt, net (506.4) 670.7 10.2
Issuance of long-term debt 18.6 604.7 94.1
Repayment of long-term debt (756.0) (421.0) (588.3)
Dividends to stockholders (243.4) (348.4) (377.5)
Cash purchases of Common stock for treasury (90.0) (444.3) (988.4)
Other financing activities, net 82.3 34.2 25.5
---------------------------------------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (1,494.9) 95.9 (1,824.4)
---------------------------------------
Effect of foreign exchange rate changes on cash (6.4) (3.6) (16.9)
Cash provided by discontinued operations 1,321.9 244.4 230.0
---------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 19.3 $ (197.1) $ (222.0)
=======================================
Cash and cash equivalents at beginning of year $ 34.9 $ 232.0 $ 454.0
Cash and cash equivalents at end of year $ 54.2 $ 34.9 $ 232.0
=======================================
Cash paid during the year for
Interest, net of capitalized amount $ 126.1 $ 193.8 $ 197.5
Income taxes $ 300.6 $ 132.9 $ 137.9
=======================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
46
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Fortune Brands, Inc. and Subsidiaries
$2.67 MINIMUM
CONVERTIBLE FOREIGN PENSION TREASURY
PREFERRED COMMON PAID-IN CURRENCY LIABILITY RETAINED STOCK,
(IN MILLIONS) STOCK STOCK CAPITAL ADJUSTMENTS ADJUSTMENT EARNINGS AT COST
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $15.7 $717.4 $174.6 $(249.0) $(4.4) $4,724.4 $ (745.6)
Net income - - - - - 540.4 -
Cash dividends - - - - - (377.5) -
Changes during the year - - - 14.4 (8.8) - -
Purchases - - - - - - (981.1)
Conversion of securities and
delivery of stock plan shares (1.6) - (3.0) - - - 48.1
-------------------------------------------------------------------------------------------
Balance at December 31, 1995 14.1 717.4 171.6 (234.6) (13.2) 4,887.3 (1,678.6)
Net income - - - - - 486.5 -
Cash dividends - - - - - (348.4) -
Changes during the year - - - 38.7 5.0 - -
Purchases - - - - - - (444.3)
Conversion of securities and
delivery of stock plan shares (1.2) - (5.1) - - - 80.8
-------------------------------------------------------------------------------------------
Balance at December 31, 1996 12.9 717.4 166.5 (195.9) (8.2) 5,025.4 (2,042.1)
Net income - - - - - 98.5 -
Cash dividends - - - - - (243.4) -
Changes during the year - - - (44.9) (4.8) - -
Purchases - - - - - - (86.2)
Conversion of securities and
delivery of stock plan shares (1.6) - (15.3) - - - 119.4
Shares issued in connection
with an acquisition - - (0.1) - - - 9.6
Gallaher spin-off - - - 260.7 - 249.2 -
-------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $11.3 $717.4 $151.1 $ 19.9 $(13.0) $5,129.7 $(1,999.3)
===========================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fortune Brands, Inc. and Subsidiaries
1 SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
all majority-owned subsidiaries. The consolidated financial statements have been
restated to present certain disposed subsidiaries as discontinued operations. In
addition, certain financial statement amounts have been reclassified to conform
to the 1997 presentation.
The consolidated financial statements are prepared in conformity
with generally accepted accounting principles, which require management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, sales and expenses for the reporting periods. Actual results for
future periods could differ from those estimates.
CASH AND CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or less are
included in cash and cash equivalents.
INVENTORIES
Inventories are priced at the lower of cost (principally average and first-in,
first-out and minor amounts at last-in, first-out) or market. In accordance with
generally recognized trade practice, bulk whiskey inventories are classified as
current assets, although part of such inventories, due to the duration of aging
processes, ordinarily will not be sold within one year.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is provided,
principally on a straight-line basis, over the estimated useful lives of the
assets. Gains or losses resulting from dispositions are included in income.
Betterments and renewals which improve and extend the life of an asset are
capitalized; maintenance and repair costs are expensed.
INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS
Intangibles resulting from business acquisitions, comprising cost in excess of
net assets of businesses acquired, and brands and trademarks, are being
amortized on a straight-line basis over 40 years, except for intangibles
acquired prior to 1971, which are not being amortized because they are
considered to have a continuing value over an indefinite period. The Company
periodically evaluates the recoverability of intangibles resulting from business
acquisitions and measures the amount of impairment, if any, by assessing current
and future levels of income and cash flows as well as other factors, such as
business trends, prospects and market and economic conditions.
ADVERTISING COSTS
Advertising costs, which amounted to $303 million, $290.2 million and $205.4
million in 1997, 1996 and 1995, respectively, are principally charged to expense
as incurred.
RESEARCH AND DEVELOPMENT
Research and development expenses, which amounted to $46.6 million, $34.2
million and $25.8 million in 1997, 1996 and 1995, respectively, are charged to
expense as incurred.
INCOME TAXES
Deferred tax liabilities or assets are established for temporary differences
between financial and tax reporting bases and are subsequently adjusted to
reflect changes in tax rates expected to be in effect when the temporary
differences reverse.
Deferred income taxes are not provided on undistributed earnings of
foreign subsidiaries, aggregating approximately $196.9 million at December 31,
1997, as such earnings are expected to be permanently reinvested in these
companies.
FOREIGN CURRENCY TRANSLATION
Foreign currency balance sheet accounts are translated into U.S. dollars at the
rates of exchange at the balance sheet date. Income and expenses are translated
at the average rates of exchange in effect during the year. The related
translation adjustments are made directly to a separate component of
stockholders' equity.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are utilized by the Company to reduce foreign
currency exchange and interest rate risks. The Company has established policies
and procedures for risk assessment and the approval, reporting and monitoring of
derivative financial instrument activities. The Company does not enter into
financial instruments for trading or speculative purposes.
Gains and losses on forward foreign exchange contracts used to hedge
the currency fluctuations on transactions denominated in foreign currencies and
the offsetting losses and gains on hedged transactions are recorded in the
"Other (income) expenses, net" caption in the income statement.
48
<PAGE>
Gains and losses on forward foreign exchange contracts used to hedge a portion
of the Company's investment in foreign subsidiaries and the offsetting losses
and gains on the portion of the investment being hedged are recorded in the
"Foreign currency adjustments" caption in stockholders' equity.
Payments or receipts on interest rate swap agreements are
recorded in the "Interest and related expenses" caption in the income
statement.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, FAS Statement No.130, "Reporting Comprehensive Income" was issued,
effective January 1, 1998. FAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in the financial statements.
FAS No. 130 requires financial statement disclosures for prior periods to be
restated. The Company is in the process of determining its preferred disclosure
format.
In June 1997, FAS Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information" was issued, effective with the 1998
annual financial statements. FAS No. 131 establishes standards for the way
that public companies report information about operating segments in annual
financial statements. FAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major
customers and requires financial statement disclosure for prior periods to be
restated. The Company is in the process of evaluating the disclosure
requirements under this standard.
2 ACQUISITIONS
During the second half of 1997, acquisitions were made in home and office
products for an aggregate cost of $92 million, including fees, expenses and $9.5
million resulting from the issuance of Common shares. In connection with these
acquisitions, liabilities amounting to $72 million were included at the dates of
acquisition. The cost exceeded the fair value of net assets acquired by $90
million.
In January 1996, Cobra Golf Incorporated ("Cobra") was acquired for an
aggregate cost of $712 million in cash, including fees and expenses. In
connection with this acquisition, liabilities amounting to $60 million were
included at the date of acquisition. The cost exceeded the fair value of net
assets acquired by $657 million.
These operations have been included in consolidated results from the
dates of acquisition. Had operations of home and office products'
acquisitions been consolidated from January 1, 1996, they would not have
materially affected 1996 results. Had Cobra's operations been consolidated
from January 1, 1995, they would not have materially affected 1995 results.
3 DISPOSITIONS
In January 1995, the Company completed the sale of the Franklin life insurance
business for $1.17 billion, before related expenses. The results of operations
of Franklin were previously reclassified as discontinued operations.
In 1994, the Company recorded a $245 million charge to income in
connection with plans to dispose of a number of nonstrategic businesses. The
sales of these businesses were completed in 1995. As a result, $20 million of
the charge was reversed in 1995.
4 DISCONTINUED OPERATIONS
On May 30, 1997, Gallaher Group Plc ("Gallaher"), the Company's international
tobacco subsidiary, was spun off and the Company's name was changed from
American Brands, Inc. to Fortune Brands, Inc. As a result, the Company's
stockholders owned shares in two publicly-traded companies--Fortune Brands, Inc.
and Gallaher.
To allocate the overall debt burden of the Company at the time of
the spin-off, Gallaher borrowed and paid to the Company an amount that
approximated $1.25 billion, after taxes. The Company used the proceeds to pay
down debt.
As a result of the spin-off, 63.18% of each shareholder's tax
basis in American Brands Common shares should be allocated to Fortune Brands
Common shares and 36.82% should be allocated to Gallaher shares.
Also, in connection with the spin-off, Gallaher and Gallaher
Limited agreed to indemnify the Company against claims arising from smoking
and health and fire safe cigarette matters relating to the tobacco business
of Gallaher and its subsidiaries.
49
<PAGE>
The consolidated financial statements have been reclassified to
identify Gallaher's international tobacco operations as discontinued operations
for all periods. Summarized data for the discontinued operations, net of
allocation of interest expense based on a ratio of Gallaher's net assets to
consolidated net assets of the Company, is as follows:
RESULTS OF OPERATIONS
(In millions, except per share amounts) 1997(a) 1996 1995
- -----------------------------------------------------------------------------
Net sales $2,575.0 $6,861.6 $6,439.0
=================================
Income before taxes $186.4 $484.7 $536.4
Spin-off expenses (67.1) -- --
Income taxes (54.2) (169.6) (179.2)
---------------------------------
Income from discontinued operations $65.1 $315.1 $357.2
=================================
Earnings per Common share
Basic $.38 $1.82 $1.91
=================================
Diluted $.38 $1.79 $1.89
=================================
(a) Includes results through May 30, 1997.
NET ASSETS OF DISCONTINUED OPERATIONS
(In millions) December 31, 1996
- -------------------------------------------------------------------------
Current assets $2,020.4
Property, plant and equipment, net 258.4
Other assets 477.2
Current liabilities (1,933.0)
Noncurrent liabilities (139.7)
--------
$ 683.3
========
5 SHORT-TERM BORROWINGS AND CREDIT FACILITIES
At December 31, 1997 and 1996, there were $228.4 million and $728.3 million of
short-term borrowings outstanding, respectively, comprised of notes payable to
banks and commercial paper. The weighted average interest rate on these
borrowings was 5.7% and 5.6%, respectively.
At December 31, 1997 and 1996, there were $26.4 million and $21.4 million
outstanding under committed bank credit agreements, which provide for unsecured
borrowings of up to $63 million and $56 million, respectively, for general
corporate purposes, including acquisitions.
In addition, the Company had uncommitted bank lines of credit, which
provide for unsecured borrowings for working capital of up to $41 million of
which $16 million was outstanding at year end.
See Note 14 for a description of the Company's use of financial
instruments.
6 LONG-TERM DEBT
The components of long-term debt are as follows:
(In millions) 1997 1996
- ----------------------------------------------------------------------
Notes payable(a) $ -- $ 400.0
Revolving credit notes(a) 18.5 204.9
Other notes(b) 101.0 150.3
8-1/2% Notes, Due 2003(c) 157.3 200.0
8-5/8% Debentures, Due 2021(c) 123.6 150.0
7-7/8% Debentures, Due 2023 150.0 150.0
7-1/2% Notes, Due 1999 150.0 150.0
9% Notes, Due 1999(c) 73.3 100.0
9-1/4% Eurosterling Notes, Due 1998 82.5 85.6
12-1/2% Sterling Loan Stock, Due 2009 49.4 51.4
Miscellaneous 9.7 10.0
-------------------
915.3 1,652.2
Less current portion 176.2 53.9
-------------------
$739.1 $1,598.3
===================
(a) The Company maintains revolving credit agreements expiring in 2002 with
various banks, which provide for unsecured borrowings of up to $2.5
billion. The interest rate is set at the time of each borrowing. A
commitment fee of .10% per annum is paid on the unused portion. The fee is
subject to increases up to a maximum of .20% per annum in the event the
Company's long-term debt rating falls below specified levels. Borrowings
under these agreements may be made for general corporate purposes,
including acquisitions and support for the Company's short-term borrowings
in the commercial paper market. At December 31, 1996, $400 million of
short-term notes payable were reclassified as long-term debt since the
Company intended to exercise its rights under these arrangements to
refinance these notes, in the event that it became advisable. There was no
reclassification at December 31, 1997.
(b) The Other notes have maturity dates ranging from one to four years, with a
weighted average coupon of 8.8%.
(c) See Note 17.
Estimated payments for maturing debt during the next five years are
as follows: 1998, $176.2 million; 1999, $227.4 million; 2000, $2.9 million;
2001, $13.8 million; and 2002, $14.1 million.
50
<PAGE>
7 $2.67 CONVERTIBLE PREFERRED STOCK--
REDEEMABLE AT COMPANY'S OPTION
Shares of the $2.67 Convertible Preferred stock issued and outstanding at
December 31, 1997, 1996 and 1995 were 369,939 shares, 422,732 shares and 461,008
shares, respectively. Reacquired, redeemed or converted authorized shares that
are not outstanding are required to be retired or restored to the status of
authorized but unissued shares of preferred stock without series designation.
The holders of $2.67 Convertible Preferred stock are entitled to cumulative
dividends, three-tenths of a vote per share (in certain events, to the exclusion
of the Common shares), preference in liquidation over holders of Common stock of
$30.50 per share plus accrued dividends and convert each share of such stock
into 6.205 shares of Common stock. In connection with the Gallaher spin-off, the
conversion rate of each share of $2.67 Convertible Preferred Stock was adjusted
from 4.08 shares of American Brands Common stock to 6.205 shares of Fortune
Brands Common stock. Authorized but unissued Common shares are reserved for
issuance upon such conversions, but treasury shares may be and are delivered.
During 1997, 1996 and 1995, 52,793 shares, 38,276 shares and 55,178 shares,
respectively, were converted. The Company may redeem such Preferred stock at a
price of $30.50 per share, plus accrued dividends.
A cash dividend of $2.67 per share in the aggregate amounts of $1.1
million, $1.2 million and $1.3 million was paid in each of the years ended
December 31, 1997, 1996 and 1995, respectively.
8 CAPITAL STOCK
The Company has 750 million authorized shares of Common stock and 60 million
authorized shares of preferred stock.
There were 171,855,989 and 170,565,785 Common shares outstanding at
December 31, 1997 and 1996, respectively.
The cash dividends paid on the Common stock for the years ended
December 31, 1997, 1996 and 1995 aggregated $242.3 million, $347.2 million and
$376.2 million, respectively.
Treasury shares purchased and received as consideration for stock
options exercised amounted to 2,507,737 shares in 1997, 10,108,848 shares in
1996, and 24,790,403 shares in 1995. Treasury shares delivered in connection
with exercise of stock options and grants of other stock awards and conversion
of preferred stock and debentures amounted to 3,521,779 shares in 1997,
2,544,262 shares in 1996 and 1,710,151 shares in 1995. In connection with a 1997
acquisition, 276,162 shares were issued. At December 31, 1997 and 1996 there
were 57,714,035 and 59,004,239 Common treasury shares, respectively.
9 PREFERRED SHARE PURCHASE RIGHTS
Each outstanding share of Common stock also evidences one Preferred Share
Purchase Right ("Right"). The Rights will generally become exercisable only in
the event of an acquisition of, or a tender offer for, 15% or more of the Common
stock. If exercisable, each Right is exercisable for 1/100th of a share of
Series A Junior Participating Preferred Stock at an exercise price of $150.
Also, upon an acquisition of 15% or more of the Common stock, or upon an
acquisition of the Company or the transfer of 50% or more of its assets or
earning power, each Right (other than Rights held by the 15% acquiror, if
applicable), if exercisable, will generally be exercisable for common shares of
the Company or the acquiring company, as the case may be, having a market value
of twice the exercise price. In certain events, however, Rights may be exchanged
by the Company for Common stock at a rate of one share per Right. The Rights may
be redeemed at any time prior to an acquisition of 15% or more of the Common
stock at a redemption price of $.01 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. The Rights expire on December 24, 2007.
All 2.5 million of the authorized Series A Preferred shares are
reserved for issuance upon exercise of Rights, and at December 31, 1997,
outstanding Rights would have been exercisable as described above in the
aggregate for 1,718,560 of such shares.
10 STOCK PLANS
The 1990 Long-Term Incentive Plan, as amended, authorizes the granting to key
employees of the Company and its subsidiaries of incentive and nonqualified
stock options, stock appreciation rights, restricted stock, performance awards
and other stock-based awards, any of which may be granted alone or in
combination with other types of awards or dividend equivalents. Such grants may
be made on or before December 31, 1999 for up to 17 million shares of the Common
stock. The Company's Long-Term Incentive Plan for Key Employees of
51
<PAGE>
Subsidiaries also authorizes the granting to key employees of the Company's
subsidiaries of similar types of awards other than stock options and stock
appreciation rights, and one million shares have been reserved for issuance upon
payment of any awards granted thereunder after December 31, 1990. Stock options
and stock appreciation rights may no longer be granted under the Company's 1986
Stock Option Plan, but outstanding awards may continue to be exercised until
their expiration dates.
Stock options under the Plans have exercise prices equal to fair
market values at dates of grant. Options generally may not be exercised prior to
one year or more than ten years from the date of grant. Stock appreciation
rights, which may be granted in conjunction with option grants, permit the
optionees to receive shares of Common stock, cash or a combination of shares and
cash measured by the difference between the option exercise price and the fair
market value of the Common stock at the time of exercise of such right.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations in accounting for its stock plans as
allowed under FAS Statement No. 123, "Accounting for Stock-Based Compensation".
Had compensation cost for the fixed stock options granted in 1997, 1996 and 1995
been determined consistent with FAS No. 123, pro forma net income and earnings
per Common share would have been as follows:
(In millions, except per share amounts) 1997 1997(a) 1996 1995
- ------------------------------------------------------------------------------
Net income $78.7 $90.6 $477.5 $539.6
====================================
Earnings per Common share
Basic $.45 $.52 $2.75 $2.88
====================================
Diluted $.45 $.52 $2.71 $2.85
====================================
(a) Excludes incremental fair value, as calculated under the Black-Scholes
option-pricing model, related to the adjustment of options in the Gallaher
spin-off.
These pro forma amounts are not necessarily indicative of future amounts.
Changes during the three years ended December 31, 1997 in shares under
options were as follows:
Weighted-Average
Options Exercise Price
- ------------------------------------------------------------------------------
Outstanding at January 1, 1995 9,674,840 $37.33
Granted 1,760,400 42.20
Exercised (869,030) 33.15
Lapsed (646,650) 40.69
- ------------------------------------------------------------------------------
Outstanding at December 31, 1995 9,919,560 38.34
Granted 1,772,550 48.65
Exercised (1,721,260) 35.17
Lapsed (189,700) 44.84
- ------------------------------------------------------------------------------
Outstanding at December 31, 1996 9,781,150 40.64
Granted 99,100 52.75
Exercised (2,267,110) 37.04
Lapsed (43,000) 48.66
Cancelled (297,400) 46.65
- ------------------------------------------------------------------------------
OUTSTANDING AT MAY 30, 1997 7,272,740 41.63
GALLAHER SPIN-OFF ADJUSTMENT(a) 4,427,250 --
- ------------------------------------------------------------------------------
Outstanding at May 30, 1997 after
Gallaher spin-off 11,699,990 25.88
Granted 1,786,000 35.63
Exercised (1,325,538) 23.38
Lapsed (56,653) 30.26
- ------------------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1997 12,103,799 $27.57
==============================================================================
(a) On May 30, 1997, in connection with the Gallaher spin-off, the Company
adjusted the number of shares under options and the option exercise prices to
preserve, as closely as possible, the economic value of the options that existed
at the time of the spin-off.
Options exercisable at the end of each of the three years ended
December 31, 1997 were as follows:
Options Weighted-Average
Exercisable Exercise Price
- ---------------------------------------------------------------------------
December 31, 1997 10,166,612 $26.07
December 31, 1996 8,075,350 $38.93
December 31, 1995 8,159,160 $37.51
52
<PAGE>
The weighted-average fair values of options granted during 1997, 1996 and
1995 were $7.66, $7.11 and $5.98, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 1997,
1996 and 1995:
1997 1996 1995
- ----------------------------------------------------------------------
Expected dividend yield 2.6% 5.0% 5.0%
Expected volatility 20.9% 19.0% 19.0%
Risk-free interest rate 5.8% 5.9% 5.6%
Expected term 4.5 Years 5 Years 5 Years
Options outstanding at December 31, 1997 were as follows:
Weighted-average
Range of Number remaining Weighted-average
exercise prices outstanding contractual life exercise price
- ----------------------------------------------------------------------------
$18.55 to $23.27 3,396,337 5.3 $21.39
26.03 to 29.10 4,582,560 5.6 27.53
30.30 to 35.63 4,124,902 9.3 32.70
- ----------------------------------------------------------------------------
$18.55 to $35.63 12,103,799 6.8 $27.57
============================================================================
Options exercisable at December 31, 1997 were as follows:
Number Weighted-average
exercisable exercise price
-------------------------------
3,396,337 $21.39
4,582,560 27.53
2,187,715 30.30
-------------------------------
10,166,612 $26.07
===============================
At December 31, 1997, performance awards were outstanding pursuant to which
up to 122,352 shares, 155,412 shares, 142,140 shares and 147,300 shares may be
issued in 1998, 1999, 2000 and 2001, respectively, depending on the extent to
which certain specified performance objectives are met. 40,240 shares, 45,890
shares and 112,994 shares were issued pursuant to performance awards during
1997, 1996 and 1995, respectively. The costs of performance awards are expensed
over the performance period.
Compensation expense for stock based plans recorded for 1997 and 1996 was
$5 million and $1.9 million, respectively.
Shares available in connection with future awards under the Company's stock
plans at December 31, 1997, 1996 and 1995 were 8,216,471, 7,193,139 and
8,955,039, respectively. Authorized but unissued shares are reserved for
issuance in connection with awards, but treasury shares may be and are
delivered.
11 PENSION AND OTHER RETIREE BENEFITS
The Company has a number of pension plans, principally in the United States,
covering substantially all employees. The plans provide for payment of
retirement benefits, mainly commencing between the ages of 60 and 65, and also
for payment of certain disability and severance benefits. After meeting certain
qualifications, an employee acquires a vested right to future benefits. The
benefits payable under the plans are generally determined on the basis of an
employee's length of service and earnings. Annual contributions to the plans are
sufficient to satisfy legal funding requirements.
PENSION PLANS
The components of net pension cost are as follows:
(In millions) 1997 1996 1995
- --------------------------------------------------------------------
Service cost $ 26.2 $ 24.0 $ 16.3
Interest cost 46.5 42.4 35.1
Actual return on plan assets (101.9) (76.3) (85.7)
Net amortization and deferral 46.7 28.0 45.7
------------------------------------
$ 17.5 $ 18.1 $ 11.4
====================================
53
<PAGE>
The funded status of the pension plans as of December 31 was as
follows:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------
Assets exceed Accumulated Assets exceed Accumulated
accumulated benefits accumulated benefits
(In millions) benefits exceed assets benefits exceed assets
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated benefit obligation
Vested $404.4 $209.9 $389.7 $122.1
Nonvested 20.9 3.6 16.5 3.6
----------------------------------------------------------
$425.3 $213.5 $406.2 $125.7
==========================================================
Projected benefit obligation $484.0 $234.7 $470.6 $137.6
Fair value of plan assets, principally
equity securities and corporate bonds 566.5 183.7 548.7 103.1
----------------------------------------------------------
Excess (deficiency) of assets
over projected benefit obligation 82.5 (51.0) 78.1 (34.5)
Unrecognized net transition (gain) loss (8.6) 0.3 (11.3) 0.8
Unrecognized net (gain) loss from
experience differences (36.4) 49.2 (22.1) 17.5
Unrecognized prior service cost 10.2 17.2 4.1 24.6
Adjustment needed to recognize
minimum liability -- (29.8) -- (30.0)
----------------------------------------------------------
Prepaid pension cost
(pension liability) $ 47.7 $(14.1) $48.8 $(21.6)
==========================================================
Actuarial assumptions
Discount rate 7.0% 7.0% 7.75% 7.75%
Weighted average rate of
compensation increase 4.5% 4.7% 4.9% 5.1%
Expected long-term rate of
return on plan assets 10.0% 10.0% 10.0% 10.1%
==========================================================
</TABLE>
DEFINED CONTRIBUTION PLANS
The Company sponsors a number of defined contribution plans. Contributions are
determined under various formulas. Costs related to such plans amounted to $21.4
million, $18.1 million and $16.8 million in 1997, 1996 and 1995, respectively.
OTHER RETIREE BENEFITS
The Company provides postretirement health care and life insurance benefits to
certain employees and retirees in the United States and certain employee groups
outside the United States. Most employees and retirees outside the United States
are covered by government health care programs.
The components of the postretirement benefit cost are as follows:
(In millions) 1997 1996 1995
- ----------------------------------------------------------------------
Service cost $ 1.9 $ 2.5 $ 2.6
Interest cost 8.2 9.1 10.0
Net amortization and deferral (2.8) (1.2) (2.4)
-----------------------------------
$ 7.3 $10.4 $10.2
===================================
The status of the other retiree benefit plans as of December 31 was as
follows:
(In millions) 1997 1996
- ----------------------------------------------------------------------
Accumulated postretirement benefit
obligation
Retirees $ 84.3 $ 76.3
Fully eligible active plan participants 11.1 13.4
Other active plan participants 29.8 28.8
---------------------
125.2 118.5
Unrecognized prior service cost 3.0 3.9
Unrecognized net gain from experience
differences 18.5 22.9
---------------------
Accrued postretirement liability $146.7 $145.3
=====================
Assumed weighted average discount rate 7.0% 7.8%
=====================
The assumed health care cost trend rate used in measuring the health
care portion of the postretirement benefit cost for 1998 is 8.5%, gradually
declining to 5% by the year 2007 and remaining at that level thereafter. A 1%
increase in the assumed health care cost trend rate for each year would increase
the accumulated benefit obligation as of December 31, 1997 and postretirement
benefit cost for 1997 by approximately 7% and 13%, respectively.
54
<PAGE>
12 LEASE COMMITMENTS
Future minimum rental payments under noncancelable operating leases as of
December 31, 1997 are as follows:
(In millions)
- ----------------------------------------------------
1998 $ 43.5
1999 37.1
2000 30.6
2001 25.3
2002 25.1
Remainder 136.7
-------
Total minimum rental payments 298.3
Less minimum rentals to be received under
noncancelable subleases 16.1
-------
$ 282.2
=======
Total rental expense for all operating leases (reduced by minor
amounts from subleases) amounted to $42.5 million, $43.3 million and $39.9
million in 1997, 1996 and 1995, respectively.
13 INCOME TAXES
The components of income from continuing operations before income taxes are as
follows:
(In millions) 1997 1996 1995
- --------------------------------------------------------
Domestic operations $120.8 $215.2 $238.9
Foreign operations 18.9 124.4 118.5
--------------------------
$139.7 $339.6 $357.4
==========================
A reconciliation of income taxes at the 35% federal statutory income
tax rate to income taxes as reported is as follows:
(In millions) 1997 1996 1995
- -----------------------------------------------------------------
Income taxes computed at
federal statutory income
tax rate $48.9 $118.9 $125.1
Other income taxes, net of
federal tax benefit 10.9 18.4 12.9
Lower effective rate on disposal
of businesses -- -- (7.0)
Goodwill amortization not
deductible for income tax
purposes 32.9 32.4 27.9
Miscellaneous, including
reversals of tax provisions
no longer required 5.5 (11.8) 12.6
-------------------------
Income taxes as reported $98.2 $157.9 $171.5
=========================
Income taxes are as follows:
(In millions) 1997 1996 1995
- -----------------------------------------------------------------
Currently payable
Federal $100.3 $104.4 $110.2
Foreign 38.2 26.2 45.3
Other 21.1 24.5 16.5
Deferred
Federal and other (42.3) 0.2 1.0
Foreign (19.1) 2.6 (1.5)
---------------------------
$ 98.2 $157.9 $171.5
===========================
The components of net deferred tax assets (liabilities) are as follows:
(In millions) 1997 1996
- -----------------------------------------------------------------
Current assets
Compensation and benefits $ 12.6 $ 13.0
Other reserves 30.6 29.9
Capitalized interest-inventory 12.7 12.1
Restructuring 30.1 5.0
Interest 14.8 12.7
Accounts receivable 14.1 14.9
Miscellaneous 26.8 21.5
----------------------
141.7 109.1
----------------------
Current liabilities
Inventories (13.0) (22.9)
Miscellaneous (1.9) (6.6)
----------------------
(14.9) (29.5)
----------------------
Deferred income taxes included in
Other current assets 126.8 79.6
----------------------
Noncurrent assets
Compensation and benefits 18.8 17.6
Other retiree benefits 49.8 49.1
Other reserves 42.0 23.4
Foreign exchange 6.3 52.0
Miscellaneous 18.6 17.6
----------------------
135.5 159.7
----------------------
Noncurrent liabilities
Depreciation (85.2) (91.9)
Pensions (11.5) (11.3)
Trademark amortization (60.9) (55.1)
Miscellaneous (16.4) (20.7)
----------------------
(174.0) (179.0)
----------------------
Deferred income taxes (38.5) (19.3)
----------------------
Net deferred tax asset $ 88.3 $ 60.3
======================
55
<PAGE>
14 FINANCIAL INSTRUMENTS
The Company does not enter into financial instruments for trading or speculative
purposes. Financial instruments are used to reduce the impact of changes in
foreign currency exchange rates and interest rates. The principal financial
instruments used are forward foreign exchange contracts and interest rate swaps.
The counterparties are major financial institutions. Although the Company's
theoretical risk is the replacement cost at the then estimated fair value of
these instruments, management believes that the risk of incurring losses is
remote and that such losses, if any, would be immaterial.
The Company enters into forward foreign exchange contracts principally
to hedge the currency fluctuations in transactions denominated in foreign
currencies, thereby limiting the Company's risk that would otherwise result from
changes in exchange rates. The periods of the forward foreign exchange contracts
correspond to the periods of the hedged transactions. The Company periodically
enters into forward foreign exchange contracts to hedge a portion of its
investments in U.K. operating companies.
At December 31, 1997, the Company had outstanding forward foreign
exchange contracts to purchase $72 million and sell $164 million of various
foreign currencies (principally pound sterling), with maturities ranging from
January 5, 1998 to November 30, 1998, with a weighted average maturity of 121
days. At December 31, 1996, the Company also had outstanding forward foreign
exchange contracts to purchase $103 million and sell $2.1 billion of various
foreign currencies (principally pound sterling), with maturities ranging from
January 2, 1997 to December 29, 1997, with a weighted average maturity of 142
days. The higher activity in 1996 reflected the decision to hedge a greater
portion of the investment in U.K. operating companies.
The estimated fair value of foreign currency contracts represents the
amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices. At December 31, 1997, the difference
between the contract amounts and fair values was immaterial. At December 31,
1996, the Company would have paid $137 million, the difference between the
contract amounts and fair values, to offset the existing contracts.
The Company enters into interest rate swap agreements to manage its
exposure to interest rate changes. The swaps involve the exchange of fixed and
variable interest rate payments without exchanging the notional principal
amount.
At December 31, 1997 and 1996, the Company had outstanding interest
rate swap agreements denominated in dollars, maturing at various dates through
1999, with aggregate notional principal amounts of $200 million and $500
million, respectively. Under these agreements the Company receives a floating
rate based on thirty day commercial paper rates, or a weighted average rate of
5.8% and 5.7% at December 31, 1997 and 1996, respectively, and pays a weighted
average fixed interest rate of 7.8% and 6.6% at December 31, 1997 and 1996,
respectively.
The fair value of these interest rate swap agreements represents the
estimated receipts or payments that would be made to terminate the agreements.
At December 31, 1997 and 1996, the Company would have paid $6.6 million and $8.7
million, respectively, to terminate the agreements. The fair value is based on
dealer quotes, considering current interest rates.
The estimated fair value of the Company's cash and cash equivalents,
notes payable to banks and commercial paper, approximates the carrying amounts
due principally to their short maturities.
The estimated fair value of the Company's $915.3 million and $1,652.2
million total long-term debt (including current portion) at December 31, 1997
and 1996 was approximately $1,013 million and $1,726.1 million, respectively.
The fair value is determined from quoted market prices, where available, and
from investment bankers using current interest rates considering credit ratings
and the remaining terms to maturity.
Concentration of credit risk with respect to accounts receivable is
limited because a large number of geographically diverse customers make up the
operating companies' domestic and international customer base, thus spreading
the credit risk.
56
<PAGE>
15 RESTRUCTURING AND OTHER NONRECURRING CHARGES
Restructuring and other nonrecurring charges are as follows:
1997
---------------------------------
Cost of Sales
(In millions) Restructuring Charges Total
- -------------------------------------------------------------------
Home products $ 79.5 $17.3 $ 96.8
Office products 82.5 4.8 87.3
---------------------------------
Home and office products 162.0 22.1 184.1
Golf products 15.9 34.8 50.7
Distilled spirits 31.2 32.2 63.4
---------------------------------
$209.1 $89.1 $298.2
=================================
Home products include charges related to the disposition of certain product
lines and the rationalization of operations.
Office products include charges related to the rationalization of
operations, the discontinuance of certain product lines and lease cancellation
costs, partly offset by a $12.6 million pre-tax gain on the sale of nonstrategic
businesses.
Golf products include charges related to the discontinuance of certain
product lines and the rationalization of operations.
Distilled spirits include charges related to a change in estimate for bulk
whiskey valuations which resulted from the integration of the worldwide
distilled spirits business, international distribution and lease agreements and
the discontinuance of certain product lines.
The rationalization of operations referred to above includes the closure of
certain manufacturing facilities, the consolidation of certain selling
facilities, the termination of a foreign joint venture, and the sale or disposal
of certain facilities.
Restructuring and other nonrecurring charges by category of expenditures
relates to the following:
1997
------------------------------------
Cost of Sales
(In millions) Restructuring Charges Total
- --------------------------------------------------------------------------
Rationalization of operations
Employee termination
costs(a) $ 59.3 -- $ 59.3
Facilities closing costs 19.2 -- 19.2
Other 35.7 $19.1 54.8
Inventories -- 70.0 70.0
International distribution
and lease agreements 27.2 -- 27.2
Loss on disposal of fixed assets
and businesses(b) 67.7 -- 67.7
------------------------------------
$209.1 $89.1 $298.2
====================================
(a) Home and Office products will be reducing their workforce by 7%, or 1,125
individuals, primarily production employees.
(b) The remaining net book value of assets to be disposed of at December 31,
1997 approximated $55 million.
Reconciliation of the restructuring and other nonrecurring charges
liability is as follows:
1997
-------------------------------------
Cost of Sales
(In millions) Restructuring Charges Total
- --------------------------------------------------------------------------
Provision $ 209.1 $ 89.1 $ 298.2
Cash expenditures (20.5) (8.5) (29.0)
Non-cash write-offs (127.0) (80.6) (207.6)
-------------------------------------
Balance at December 31, 1997 $ 61.6 $ -- $ 61.6
=====================================
The balance at December 31, 1997 relates principally to employee
termination costs that will be paid during 1998. The Company anticipates that
the restructuring actions will be substantially completed during 1998.
In 1995, a restructuring charge of $17.8 million was recorded in distilled
spirits principally in connection with a bottling plant closing, write-down of
property, plant and equipment, and related employee termination costs on a 5%
reduction in workforce.
57
<PAGE>
16 INFORMATION ON BUSINESS SEGMENTS
The Company's subsidiaries operate principally in the following business
segments:
Home products includes kitchen and bathroom faucets, plumbing supply and
repair products manufactured, packaged or distributed by Moen, locks
manufactured by Master Lock, kitchen cabinets and bathroom vanities manufactured
by Aristokraft, and tool storage products manufactured by Waterloo.
Office products includes paper fastening, computer accessories, time
management systems and other office products manufactured by ACCO World
subsidiaries.
Golf products includes golf balls, shoes, gloves and clubs manufactured and
marketed by Titleist and FootJoy Worldwide and golf clubs manufactured and
marketed by Cobra, acquired in January 1996.
Distilled spirits includes products produced or imported by JBB Worldwide
subsidiaries.
Other businesses included housewares (Prestige), sold in May 1995, and
retail distribution (Forbuoys), sold in July 1995.
The Company's subsidiaries operate in the United States, Europe
(principally in the U.K.) and other areas (principally in Canada and Australia).
Net sales and operating income for the years 1997, 1996 and 1995 and
identifiable assets for the related year ends by business segments and by
geographic areas, are shown on page 62.
Operating income represents net sales less all costs and expenses excluding
corporate administrative expenses, interest and related expense and other
(income) expenses, net. A reconciliation of operating income to income from
continuing operations before income taxes is as follows:
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------
Operating income $344.0 $597.1 $538.9
Interest and related expenses 116.7 165.5 136.6
Non-operating expenses 87.6 92.0 64.9
Gain on disposal of
businesses -- -- (20.0)
------------------------------------
Income from continuing
operations before
income taxes $139.7 $339.6 $357.4
====================================
Reconciliation of identifiable assets to total assets is
as follows:
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------
Identifiable assets $6,787.8 $6,907.0 $5,936.7
Corporate 154.7 147.0 376.0
Net assets of discontinued
operations -- 683.3 520.7
--------------------------------------
$6,942.5 $7,737.3 $6,833.4
======================================
Depreciation is as follows:
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------
Home products $42.3 $ 40.8 $ 35.2
Office products 39.9 39.2 35.8
------------------------------------
Home and office products 82.2 80.0 71.0
Golf products 16.3 13.4 10.0
Distilled spirits 37.1 39.4 35.9
Corporate 2.9 2.8 2.9
------------------------------------
Ongoing operations 138.5 135.6 119.8
Other businesses -- -- 14.1
------------------------------------
$138.5 $135.6 $133.9
====================================
Amortization of intangibles is as follows:
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------
Home products $29.9 $ 30.0 $30.1
Office products 21.5 20.7 21.0
------------------------------------
Home and office products 51.4 50.7 51.1
Golf products 17.8 16.3 1.2
Distilled spirits 35.0 35.7 34.4
------------------------------------
Ongoing operations 104.2 102.7 86.7
Other businesses -- -- 3.4
------------------------------------
$104.2 $102.7 $90.1
====================================
Capital expenditures are as follows:
(In millions) 1997 1996 1995
- --------------------------------------------------------------------------
Home products $ 55.6 $ 60.6 $ 68.1
Office products 43.0 40.9 36.1
------------------------------------
Home and office products 98.6 101.5 104.2
Golf products 59.4 50.4 20.6
Distilled spirits 37.5 46.5 39.5
Corporate 1.4 1.3 0.9
------------------------------------
Ongoing operations 196.9 199.7 165.2
Other businesses -- -- 10.4
------------------------------------
$196.9 $199.7 $175.6
====================================
58
<PAGE>
17 EXTRAORDINARY ITEMS
In the fourth quarter of 1997, the Company purchased the following principal
amounts of its outstanding debt: $42.7 million of 8 1/2% Notes, Due 2003, $26.7
million of 9% Notes, Due 1999 and $26.4 million of 8 5/8% Debentures, Due 2021.
The extinguishment of debt resulted in a charge of $8.1 million ($12.4 million
pre-tax) or five cents per Common share.
In March 1996, the Company redeemed $149.6 million of its $150 million
7 5/8% Eurodollar Convertible Debentures, Due 2001, at a redemption price of
103.8125% of the principal amount plus accrued interest and redeemed its $150
million 9 1/8% Debentures, Due 2016, at a redemption price of 104.4375% of the
principal amount plus accrued interest. The extinguishment of debt resulted in a
charge of $10.3 million ($15.8 million pre-tax), or six cents per share.
In April 1995, holders of $199.5 million of the $200 million 5 3/4%
Eurodollar Convertible Debentures, Due 2005, exercised their right to "put"
their debentures at a price of 114.74%, plus accrued interest. This resulted in
a total payment by the Company of $240.4 million, including premium and accrued
interest, and reduced the number of diluted shares outstanding by 5.1 million.
The extinguishment of debt resulted in a charge of $2.7 million ($4.1 million
pre-tax), or one cent per share.
18 EARNINGS PER SHARE
In the fourth quarter of 1997, the Company adopted FAS Statement No. 128,
"Earnings per Share". Accordingly, diluted earnings per Common share for all
prior periods have been restated.
Basic earnings per Common share are based on the weighted average number of
Common shares outstanding in each year and after preferred stock dividend
requirements. Diluted earnings per Common share assume that any dilutive
convertible debentures and convertible preferred shares outstanding at the
beginning of each year were converted at those dates, with related interest,
preferred stock dividend requirements and outstanding Common shares adjusted
accordingly. It also assumes that outstanding Common shares were increased by
shares issuable upon exercise of those stock options for which market price
exceeds exercise price, less shares which could have been purchased by the
Company with related proceeds. The Convertible Preferred stock was not included
in the computation of diluted earnings per Common share for 1997 since it would
have resulted in an antidilutive effect.
The computation of basic and diluted earnings per Common share for "Income
from continuing operations" is as follows:
(In millions,
except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------
Income from continuing
operations $41.5 $181.7 $185.9
Less: Preferred stock dividends 1.1 1.2 1.3
------------------------------------
Income available to
Common stockholders
-- basic 40.4 180.5 184.6
Convertible Preferred stock
dividend requirements -- 1.2 1.3
------------------------------------
Income available to
Common stockholders
-- diluted $40.4 $181.7 $185.9
====================================
Weighted average number of
Common shares outstanding
-- basic 171.6 173.3 186.9
Conversion of Convertible
Preferred stock -- 1.8 2.0
Exercise of stock options 1.7 1.0 0.7
------------------------------------
Weighted average number of
Common shares outstanding
-- diluted 173.3 176.1 189.6
====================================
Earnings per Common share
Basic $.24 $1.04 $.99
====================================
Diluted $.23 $1.03 $.98
====================================
59
<PAGE>
19 PENDING LITIGATION
TOBACCO LITIGATION AND INDEMNIFICATION
On December 22, 1994, the Company sold The American Tobacco Company subsidiary
to Brown & Williamson Tobacco Corporation, a wholly-owned subsidiary of B.A.T
Industries p.l.c. In connection with the sale, Brown & Williamson Tobacco
Corporation and The American Tobacco Company ("the Indemnitors") agreed to
indemnify the Company against claims including legal expenses arising from
smoking and health and fire safe cigarette matters relating to the tobacco
business of The American Tobacco Company.
The Company is a defendant in numerous actions based upon allegations that
human ailments have resulted from tobacco use. Management believes that there
are meritorious defenses to the pending actions and these actions are being
vigorously contested. However, it is not possible to predict the outcome of the
pending litigation, and it is possible that some of these actions could be
decided unfavorably. Management is unable to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome of the
pending litigation. Management believes that the pending actions will not have
a material adverse effect upon the results of operations, cash flows or
financial condition of the Company as long as the Indemnitors continue to
fulfill their obligations to indemnify the Company under the aforementioned
indemnification agreement.
OTHER LITIGATION
In addition to the lawsuits described above, the Company and its subsidiaries
are defendants in lawsuits associated with their business and operations. It is
not possible to predict the outcome of the pending actions, but management
believes that there are meritorious defenses to these actions and that these
actions will not have a material adverse effect upon the results of operations,
cash flows or financial condition of the Company. These actions are being
vigorously contested.
20 ENVIRONMENTAL
The Company is subject to laws and regulations relating to the protection of the
environment.
The Company provides for expenses associated with environmental remediation
obligations when such amounts are probable and can be reasonably estimated. Such
accruals are adjusted as new information develops or circumstances change and
are not discounted. Statement of Position 96-1, "Environmental Remediation
Liabilities" ("SOP 96-1"), was effective as of January 1, 1997. SOP 96-1
provides guidance on specific accounting matters in connection with recognizing,
measuring and disclosing environmental remediation liabilities. Adoption of SOP
96-1 did not have any effect on the Company's financial condition or results of
operations.
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 flows or financial condition of the Company.
60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
OF FORTUNE BRANDS, INC.
We have audited the accompanying consolidated balance sheet of Fortune Brands,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, cash flows and stockholders' equity for the
years ended December 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the management of Fortune Brands, Inc. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Fortune Brands,
Inc. and Subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
1301 Avenue of the Americas
New York, New York
February 4, 1998
REPORT OF MANAGEMENT
TO THE STOCKHOLDERS OF FORTUNE BRANDS, INC.
We have prepared the consolidated balance sheet of Fortune Brands, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, cash flows and stockholders' equity for the years ended
December 31, 1997, 1996 and 1995. The financial statements have been prepared in
accordance with generally accepted accounting principles. Financial information
elsewhere in this Annual Report is consistent with that in the financial
statements.
The system of internal controls of the Company and its subsidiaries is
designed to provide reasonable assurances that the financial records are
adequate and can be relied upon to provide information for the preparation of
financial statements and that established policies and procedures are carefully
followed.
Independent accountants are elected annually by the stockholders of the
Company to audit the financial statements. Coopers & Lybrand L.L.P., independent
accountants, are currently engaged to perform such audit. Their audit is in
accordance with generally accepted auditing standards and includes tests of
transactions and selective tests of internal accounting controls.
The Audit Committee of the Board of Directors, consisting solely of outside
directors, meets periodically with the independent accountants, internal
auditors and management to review accounting, auditing, and financial reporting
matters. The auditors have direct access to the Audit Committee.
/s/ Thomas C. Hays
Thomas C. Hays
Chairman of the Board and
Chief Executive Officer
/s/ Craig P. Omtvedt
Craig P. Omtvedt
Senior Vice President and
Chief Accounting Officer
61
<PAGE>
INFORMATION ON BUSINESS SEGMENTS(1)(2) Fortune Brands, Inc. and Subsidiaries
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BUSINESS SEGMENTS
NET SALES
Home products $1,394.0 $1,374.1 $1,306.8 $1,270.6 $1,119.5 $1,014.8
Office products 1,294.2 1,228.7 1,206.1 1,049.7 977.2 1,003.5
-----------------------------------------------------------------------
Home and office products 2,688.2 2,602.8 2,512.9 2,320.3 2,096.7 2,018.3
Golf products 911.6 811.4 579.3 507.1 452.7 416.2
Distilled spirits 1,244.7 1,303.5 1,288.6 1,268.2 1,194.6 1,268.3
-----------------------------------------------------------------------
Ongoing operations 4,844.5 4,717.7 4,380.8 4,095.6 3,744.0 3,702.8
Other businesses -- -- 547.3 1,281.4 1,438.2 1,747.1
-----------------------------------------------------------------------
$4,844.5 $4,717.7 $4,928.1 $5,377.0 $5,182.2 $5,449.9
=======================================================================
OPERATING INCOME(3)
Home products $ 96.2 $184.1 $178.3 $176.5 $155.5 $159.0
Office products 19.3 95.6 84.5 74.5 63.2 58.1
-----------------------------------------------------------------------
Home and office products 115.5 279.7 262.8 251.0 218.7 217.1
Golf products 69.7 109.0 83.0 73.3 63.6 53.3
Distilled spirits 158.8 208.4 189.7 221.2 214.7 195.8
-----------------------------------------------------------------------
Ongoing operations 344.0 597.1 535.5 545.5 497.0 466.2
Other businesses -- -- 3.4 (1.8) 27.2 24.3
-----------------------------------------------------------------------
$344.0 $597.1 $538.9 $543.7 $524.2 $490.5
=======================================================================
IDENTIFIABLE ASSETS
Home products $1,785.8 $1,809.3 $1,824.7 $1,806.6 $1,809.0 $1,786.4
Office products 1,638.9 1,608.4 1,553.6 1,540.4 1,465.7 1,510.5
-----------------------------------------------------------------------
Home and office products 3,424.7 3,417.7 3,378.3 3,347.0 3,274.7 3,296.9
Golf products 1,260.9 1,239.2 381.7 336.2 308.9 264.0
Distilled spirits 2,102.2 2,250.1 2,176.7 2,208.1 2,229.7 1,830.9
-----------------------------------------------------------------------
Ongoing operations 6,787.8 6,907.0 5,936.7 5,891.3 5,813.3 5,391.8
Other businesses -- -- -- 667.5 973.7 916.0
-----------------------------------------------------------------------
$6,787.8 $6,907.0 $5,936.7 $6,558.8 $6,787.0 $6,307.8
=======================================================================
GEOGRAPHIC AREAS
NET SALES
United States $3,550.9 $3,417.8 $3,203.8 $3,069.2 $2,895.8 $2,765.9
Europe 808.0 813.3 1,293.2 1,906.3 1,935.0 2,346.6
Other countries 485.6 486.6 431.1 401.5 351.4 337.4
-----------------------------------------------------------------------
$4,844.5 $4,717.7 $4,928.1 $5,377.0 $5,182.2 $5,449.9
=======================================================================
Operating income(3)
United States $317.8 $477.7 $430.4 $425.4 $394.3 $379.5
Europe (34.2) 46.8 41.3 61.0 91.4 67.0
Other countries 60.4 72.6 67.2 57.3 38.5 44.0
-----------------------------------------------------------------------
$344.0 $597.1 $538.9 $543.7 $524.2 $490.5
=======================================================================
Identifiable assets
United States $4,899.3 $4,935.8 $4,165.0 $4,139.8 $4,186.9 $4,163.0
Europe 1,541.5 1,617.4 1,495.8 2,158.1 2,347.6 1,892.1
Other countries 347.0 353.8 275.9 260.9 252.5 252.7
-----------------------------------------------------------------------
$6,787.8 $6,907.0 $5,936.7 $6,558.8 $6,787.0 $6,307.8
=======================================================================
</TABLE>
(1) See Note 16 for further Information on Business Segments.
(2) Years prior to 1997 restated for discontinued tobacco operations.
(3) 1997 includes $298.2 million of restructuring and other nonrecurring
charges. (See Note 15.)
62
<PAGE>
SIX-YEAR CONSOLIDATED SELECTED FINANCIAL DATA(1) Fortune Brands, Inc. and
Subsidiaries
<TABLE>
<CAPTION>
(In millions, except per share amounts
and number of Common stockholders) 1997(3) 1996(3) 1995 1994(3)(4) 1993(3) 1992
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA(2)
<S> <C> <C> <C> <C> <C> <C>
Net sales $4,844.5 $4,717.7 $4,928.1 $5,377.0 $5,182.2 $5,449.9
Gross profit 1,885.4 1,863.4 1,816.4 1,971.1 1,947.0 2,015.0
Depreciation and amortization 242.7 238.3 224.0 244.5 240.4 235.4
Operating income 344.0 597.1 538.9 543.7 524.2 490.5
Interest and related expenses 116.7 165.5 136.6 173.0 188.2 177.4
Income taxes 98.2 157.9 171.5 119.8 126.7 108.9
Income (loss) from continuing operations 41.5 181.7 185.9 (78.8) 120.1 113.4
Income from discontinued operations 65.1 315.1 357.2 812.9 548.1 770.4
Extraordinary items (8.1) (10.3) (2.7) -- -- --
Cumulative effect of accounting changes(5) -- -- -- -- (198.4) --
Net income(6) 98.5 486.5 540.4 734.1 469.8 883.8
Earnings per Common share
Basic
Continuing operations(6) $.24 $1.04 $ .99 $(.40) $ .59 $ .51
Discontinued operations .38 1.82 1.91 4.03 2.71 3.78
Extraordinary items (.05) (.06) (.01) -- -- --
Accounting changes(5) -- -- -- -- (.98) --
-------------------------------------------------------------------------
Net income $.57 $2.80 $2.89 $3.63 $2.32 $4.29
Diluted
Continuing operations(6) $ .23 $1.03 $ .98 $(.40) $ .59 $ .51
Discontinued operations .38 1.79 1.89 4.03 2.71 3.76
Extraordinary items (.05) (.06) (.01) -- -- --
Accounting changes(5) -- -- -- -- (.98) --
-------------------------------------------------------------------------
Net income $ .56 $2.76 $2.86 $3.63 $2.32 $4.27
=========================================================================
COMMON SHARE DATA(2)
Dividends paid $242.3 $347.2 $376.2 $401.7 $397.5 $368.0
Dividends paid per share $1.41 $2.00 $2.00 $1.9925 $1.97 $1.805
Average number of shares outstanding 171.6 173.3 186.9 201. 6 201.8 204.0
Book value per share $23.31 $21.48 $21.61 $22.95 $21.01 $21.11
Number of stockholders, December 31(7) 46,537 52,832 56,769 60,611 63,537 63,929
=========================================================================
BALANCE SHEET DATA(2)
Inventories $ 955.2 $1,037.9 $ 950.9 $1,156.0 $1,198.7 $1,046.6
Current assets(8) 2,095.6 2,842.1 2,112.5 3,726.1 2,597.7 1,972.5
Working capital(8) 327.1 774.0 651.7 1,673.4 1,110.6 320.3
Property, plant and equipment, net 980.9 972.6 904.3 979.7 1,065.0 998.9
Intangibles, net 3,674.1 3,730.7 3,103.2 3,346.4 3,429.9 3,077.0
Net assets of discontinued operations -- -- 520.7 334.9 1,320.3 2,136.3
Total assets 6,942.5 7,737.3 6,833.4 8,557.9 8,598.0 8,603.7
Short-term debt 404.6 782.2 470.0 553.7 333.2 610.5
Long-term debt 739.1 1,598.3 1,063.0 1,485.5 2,492.0 2,405.0
Stockholders' equity 4,017.1 3,676.0 3,864.0 4,633.1 4,256.0 4,296.3
Capital expenditures 196.9 199.7 175.6 157.6 178.5 209.8
=========================================================================
</TABLE>
(1) Years prior to 1997 have been restated. See Notes 1, 4 and 18.
(2) See pages 32 through 42 of Financial Section.
(3) See Notes 2 and 4. 1993 includes the acquisition in December of Invergordon
Distillers Group PLC.
(4) The years 1994 and prior reflect as discontinued operations, the results of
the former domestic tobacco subsidiary, The American Tobacco Company, and
the former Franklin life insurance business.
(5) Principally represents a change in the method of accounting for
postretirement benefits.
(6) Net income and both basic and diluted earnings per Common share in 1994
include $241.3 million and $1.20, respectively, on the loss on disposal of
businesses.
(7) On January 31, 1998, there were 46,065 Common stockholders of record, not
necessarily reflecting beneficial ownership.
(8) 1996, 1994 and 1993 include net assets of discontinued operations as
current assets.
63
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following is a list of subsidiaries of Registrant as of the date hereof
and the state or other jurisdiction of incorporation of each. Except as
indicated below, each subsidiary does business under its own name. Indentations
indicate that the voting securities of a subsidiary are wholly owned by the
subsidiary immediately preceding the indentation, unless otherwise indicated.
The names of certain subsidiaries are omitted. Such subsidiaries would not,
if considered in the aggregate as a single subsidiary, constitute a significant
subsidiary within the meaning of Item 601(b)(21)(ii) of Regulation S-K.
State or Other
Jurisdiction
Subsidiary of Incorporation
- ---------- ----------------
ACCO World Corporation Delaware
ACCO Brands, Inc. Delaware
Apollo Space Systems, Inc. Delaware
Advanced Gravis Computer Technology Ltd. British Columbia, Canada
ACCO Canada Inc. Ontario, Canada
Plymouth Tool & Stamping Limited Ontario, Canada
ACCO Europe PLC England
ACCO France S.A. France
ACCO-Rexel Group Services Limited England
ACCO Australia Limited Australia
ACCO Eastlight Limited England
ACCO-Rexel Limited 1 Republic of Ireland
ACCO UK Limited England
Hetzel GmbH Germany
Hetzel GmbH & Co. KG
(Limited Partnership) Germany
Nobo Group Limited England
Artois France
DeVisu 2 France
Elite Optics Limited England
- --------------------
1 66.67% owned by ACCO-Rexel Group Services Limited and 33.33% owned by ACCO
World Corporation.
2 69% owned by Artois and 31% owned by Nobo Group Limited.
<PAGE>
State or Other
Jurisdiction
Subsidiary of Incorporation
- ---------- ----------------
NOBO Limited England
Nobo Holdings BV Netherlands
NOBO BV Netherlands
Nobo (UK) Limited England
Velos- Perforex Limited England
Marbig Rexel Pty. Limited Australia
ACCO Mexicana S.A. de C.V. Mexico
Day-Timers, Inc. Delaware
Day-Timers of Canada, Ltd. Canada
Day-Timers Pty. Limited Australia
International Business Controls, B.V. 3 Netherlands
ACCO Italia S.p.A. Italy
Acushnet Company Delaware
Acushnet Cayman Limited Cayman Islands
Acushnet Lionscore Limited 4 Cayman Islands
Acushnet Foot-Joy (Thailand) Limited 5 Thailand
Acushnet Foreign Sales Corporation Barbados
Acushnet International Inc. Delaware
Acushnet Canada Inc. Canada
Acushnet Manufacturing, Inc./Fabrication
Acushnet Inc. Canada
Acushnet GmbH Germany
Acushnet-Danmark ApS Denmark
Acushnet France S.A. France
Acushnet Nederland B.V. Netherlands
Acushnet Osterreich GmbH Austria
Acushnet Sverige AB Sweden
Acushnet Limited England
Acushnet South Africa (Pty.) Ltd. South Africa
Titleist Japan, Inc. Japan
Titleist & Foot-Joy (Thailand) Limited 5 Thailand
Cobra Golf Incorporated Delaware
Cobra Golf Europe, S.A. France
Cobra Golf Export, Inc. Barbados
Cobra Golf-Japan Incorporated Delaware
Fortune Brands Finance Canada Ltd. Ontario, Canada
Fortune Brands Finance Europe B.V. Netherlands
Fortune Brands International Corporation Delaware
- --------------------
3 Does business in the Republic of Ireland through a branch named "ACCO
Ireland."
4 40% owned by Acushnet Cayman Limited.
5 70% owned by Acushnet Company.
<PAGE>
State or Other
Jurisdiction
Subsidiary of Incorporation
- ---------- ----------------
JBB Worldwide, Inc. Delaware
Alberta Distillers Limited Alberta, Canada
Carrington Distillers Limited Ontario, Canada
Featherstone & Co. Limited Ontario, Canada
JBB (Asia-Pacific) Pty. Limited New South Wales,
Australia
JBB (Asia-Pacific) Superannuation Pty. Limited New South Wales,
Australia
JBB (Greater Europe) PLC 6 Scotland
Whyte & Mackay (India) Limited 7 Delhi, India
Jim Beam Brands Co. Delaware
James B. Beam Distilling International Co., Inc. Barbados
JBB Spirits (New York) Inc. New York
John de Kuyper & Son, Incorporated Delaware
Wood Terminal Company Delaware
MasterBrand Industries, Inc. Delaware
Aristokraft, Inc. Delaware
Master Lock Company Delaware
Master Lock Europe, S.A. 8 France
Master Lock Pacific Limited 9 Hong Kong
Moen Incorporated Delaware
Creative Specialties, Inc. California
Creative Specialties International California
Creative Specialties International
Company Limited 10 Hong Kong
Moen China, Limited Hong Kong
Moen de Mexico, S.A. de C.V. Mexico
Moen Guangzhou Faucet Co., Ltd. 11 China
Moen, Inc. Ontario, Canada
Moen of Pennsylvania, Inc. Delaware
Moen Japan K.K. Japan
21st Century Companies, Inc. Delaware
Waterloo Industries, Inc. Delaware
May Tag & Label Corp. Delaware
1700 Insurance Company Ltd. Bermuda
- --------------------
6 428,055,999 shares owned by JBB Worldwide; 1 share owned by Jim Beam
Brands Co.
7 Shares owned 51% by JBB (Greater Europe) PLC.
8 99.68% owned by Master Lock Company.
9 99.9% owned by Master Lock Company; 0.1% owned by Fortune Brands
International Corporation.
10 60% owned by Creative Specialties, Inc.
11 60% owned by Moen Incorporated.
EXHIBIT 23(i)a
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference into (a) the
Registration Statement on Form S-8 (Registration No. 33-64071) relating to the
Defined Contribution Plan of Fortune Brands, Inc. and Participating Operating
Companies, the Registration Statement on Form S-8 (Registration No. 33-64075)
relating to the MasterBrand Industries, Inc. Hourly Employee Savings Plan, the
Registration Statement on Form S-8 (Registration No. 33-58865) relating to the
1990 Long-Term Incentive Plan of Fortune Brands, Inc., and the prospectuses
related thereto, and (b) the prospectuses related to the Registration Statements
on Form S-3 (Registration Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of
Fortune Brands, Inc. of:
(1) our report dated February 4, 1998, accompanying the
consolidated financial statements of Fortune Brands,
Inc. and its subsidiaries as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996
and 1995, incorporated by reference into this Annual
Report on Form 10-K of Fortune Brands, Inc., and
(2) our report dated February 4, 1998, accompanying the
consolidated financial statement schedule of Fortune
Brands, Inc. and its subsidiaries, included in this
Annual Report on Form 10-K.
We also consent to the references to our firm as experts in
the prospectuses related to the Registration Statements on Form S-3 referred to
above.
COOPERS & LYBRAND L.L.P.
1301 Avenue of the Americas
New York, New York 10019
March 30, 1998
EXHIBIT 23(i)b
CONSENT OF COUNSEL
We consent to the incorporation by reference of our opinions contained
in Item 3, "Legal Proceedings", of this Annual Report on Form 10-K of Fortune
Brands, Inc. into (a) the Registration Statement on Form S-8 (Registration No.
33-64071) relating to the Defined Contribution Plan of Fortune Brands, Inc. and
Participating Operating Companies, the Registration Statement on Form S-8
(Registration No. 33-64075) relating to the MasterBrand Industries, Inc. Hourly
Employee Savings Plan, the Registration Statement on Form S-8 (Registration No.
33-58865) relating to the 1990 Long-Term Incentive Plan of Fortune Brands, Inc.,
and the prospectuses related thereto, and (b) the prospectuses related to the
Registration Statements on Form S-3 (Registration Nos. 33-50832, 33-42397,
33-23039 and 33-3985) of Fortune Brands, Inc.
CHADBOURNE & PARKE LLP
30 Rockefeller Plaza
New York, New York 10112
March 30, 1998
EXHIBIT 24
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated with their
respective names below, hereby constitute and appoint GILBERT L. KLEMANN, II,
EDWARD P. SMITH and A. ROBERT COLBY, and each of them severally, the
attorneys-in-fact of the undersigned with full power to them and each of them to
sign for and in the name of the undersigned in the capacities indicated below
the Annual Report on Form 10-K of Fortune Brands, Inc. for the fiscal year
ended December 31, 1997, and any and all amendments thereto:
Signature Title Date
Thomas C. Hays
- ---------------------- Chairman of the Board February 13, 1998
Thomas C. Hays and Chief Executive
Officer (principal
executive officer) and
Director
John T. Ludes
- ---------------------- President and Chief February 18, 1998
John T. Ludes Operating Officer and
Director
Dudley L. Bauerlein, Jr.
- ---------------------- Senior Vice President February 18, 1998
Dudley L. Bauerlein, Jr. and Chief Financial
Officer (principal
financial officer)
Craig P. Omtvedt
- ---------------------- Senior Vice President February 13, 1998
Craig P. Omtvedt and Chief Accounting
Officer (principal
accounting officer)
<PAGE>
Eugene R. Anderson
- ---------------------- Director February 22, 1998
Eugene R. Anderson
Patricia O. Ewers
- ---------------------- Director February 22, 1998
Patricia O. Ewers
John W. Johnstone, Jr.
- ---------------------- Director February 23, 1998
John W. Johnstone, Jr.
Wendell J. Kelley
- ---------------------- Director February 22, 1998
Wendell J. Kelley
Sidney Kirschner
- ---------------------- Director February 22, 1998
Sidney Kirschner
Gordon R. Lohman
- ---------------------- Director February 23, 1998
Gordon R. Lohman
Charles H. Pistor, Jr.
- ---------------------- Director February 22, 1998
Charles H. Pistor, Jr.
Anne M. Tatlock
- ---------------------- Director February 22, 1998
Anne M. Tatlock
John W. Thompson
- ---------------------- Director February 22, 1998
John W. Thompson
Peter M. Wilson
- ---------------------- Director February 23, 1998
Peter M. Wilson
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> $ 54
<SECURITIES> 0
<RECEIVABLES> 916
<ALLOWANCES> 54
<INVENTORY> 955
<CURRENT-ASSETS> 2,096
<PP&E> 1,930
<DEPRECIATION> 949
<TOTAL-ASSETS> 6,942
<CURRENT-LIABILITIES> $1,769
<BONDS> 739
<COMMON> 717
0
11
<OTHER-SE> 3,288
<TOTAL-LIABILITY-AND-EQUITY> 6,942
<SALES> $4,845
<TOTAL-REVENUES> 4,845
<CGS> 2,540
<TOTAL-COSTS> 2,540
<OTHER-EXPENSES> 419
<LOSS-PROVISION> 12
<INTEREST-EXPENSE> 117
<INCOME-PRETAX> 140
<INCOME-TAX> 98
<INCOME-CONTINUING> 42
<DISCONTINUED> 65
<EXTRAORDINARY> (8)
<CHANGES> 0
<NET-INCOME> $ 99
<EPS-PRIMARY> $.57
<EPS-DILUTED> $.56
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> $ 66
<SECURITIES> 0
<RECEIVABLES> 885
<ALLOWANCES> 49
<INVENTORY> 951
<CURRENT-ASSETS> 2,026
<PP&E> 1,849
<DEPRECIATION> 915
<TOTAL-ASSETS> 6,803
<CURRENT-LIABILITIES> $1,497
<BONDS> 834
<COMMON> 717
0
12
<OTHER-SE> 3,306
<TOTAL-LIABILITY-AND-EQUITY> 6,803
<SALES> $3,526
<TOTAL-REVENUES> 3,526
<CGS> 1,869
<TOTAL-COSTS> 1,869
<OTHER-EXPENSES> 287
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 93
<INCOME-PRETAX> 158
<INCOME-TAX> 91
<INCOME-CONTINUING> 67
<DISCONTINUED> 65
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $ 132
<EPS-PRIMARY> $.77
<EPS-DILUTED> $.76
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> $ 157
<SECURITIES> 0
<RECEIVABLES> 919
<ALLOWANCES> 52
<INVENTORY> 1,019
<CURRENT-ASSETS> 2,218
<PP&E> 1,847
<DEPRECIATION> 903
<TOTAL-ASSETS> 7,020
<CURRENT-LIABILITIES> $1,634
<BONDS> 846
<COMMON> 717
0
12
<OTHER-SE> 3,374
<TOTAL-LIABILITY-AND-EQUITY> 7,020
<SALES> $2,341
<TOTAL-REVENUES> 2,341
<CGS> 1,237
<TOTAL-COSTS> 1,237
<OTHER-EXPENSES> 186
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> 97
<INCOME-TAX> 58
<INCOME-CONTINUING> 39
<DISCONTINUED> 65
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $ 104
<EPS-PRIMARY> $.61
<EPS-DILUTED> $.60
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> $ 40
<SECURITIES> 0
<RECEIVABLES> 884
<ALLOWANCES> 51
<INVENTORY> 1,074
<CURRENT-ASSETS> 2,904
<PP&E> 1,829
<DEPRECIATION> 870
<TOTAL-ASSETS> 7,737
<CURRENT-LIABILITIES> $2,116
<BONDS> 1,452
<COMMON> 717
0
13
<OTHER-SE> 3,012
<TOTAL-LIABILITY-AND-EQUITY> 7,737
<SALES> $1,105
<TOTAL-REVENUES> 1,105
<CGS> 574
<TOTAL-COSTS> 574
<OTHER-EXPENSES> 82
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 70
<INCOME-TAX> 35
<INCOME-CONTINUING> 35
<DISCONTINUED> 102
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> $ 137
<EPS-PRIMARY> $.80
<EPS-DILUTED> $.78
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> $ 35
<SECURITIES> 0
<RECEIVABLES> 942
<ALLOWANCES> 50
<INVENTORY> 1,038
<CURRENT-ASSETS> 2,842
<PP&E> 1,823
<DEPRECIATION> 851
<TOTAL-ASSETS> 7,737
<CURRENT-LIABILITIES> $2,068
<BONDS> 1,598
<COMMON> 717
0
13
<OTHER-SE> 2,946
<TOTAL-LIABILITY-AND-EQUITY> 7,737
<SALES> $4,718
<TOTAL-REVENUES> 4,718
<CGS> 2,401
<TOTAL-COSTS> 2,401
<OTHER-EXPENSES> 453
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 340
<INCOME-TAX> 158
<INCOME-CONTINUING> 182
<DISCONTINUED> 315
<EXTRAORDINARY> (10)
<CHANGES> 0
<NET-INCOME> $ 487
<EPS-PRIMARY> $2.80
<EPS-DILUTED> $2.76
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> $ 40
<SECURITIES> 0
<RECEIVABLES> 873
<ALLOWANCES> 56
<INVENTORY> 999
<CURRENT-ASSETS> 2,769
<PP&E> 1,736
<DEPRECIATION> 823
<TOTAL-ASSETS> 7,573
<CURRENT-LIABILITIES> $1,963
<BONDS> 1,591
<COMMON> 717
0
13
<OTHER-SE> 2,851
<TOTAL-LIABILITY-AND-EQUITY> 7,573
<SALES> $3,421
<TOTAL-REVENUES> 3,421
<CGS> 1,769
<TOTAL-COSTS> 1,769
<OTHER-EXPENSES> 310
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 123
<INCOME-PRETAX> 224
<INCOME-TAX> 105
<INCOME-CONTINUING> 119
<DISCONTINUED> 264
<EXTRAORDINARY> (10)
<CHANGES> 0
<NET-INCOME> $ 373
<EPS-PRIMARY> $2.13
<EPS-DILUTED> $2.10
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> $ 35
<SECURITIES> 0
<RECEIVABLES> 893
<ALLOWANCES> 56
<INVENTORY> 991
<CURRENT-ASSETS> 2,754
<PP&E> 1,711
<DEPRECIATION> 796
<TOTAL-ASSETS> 7,571
<CURRENT-LIABILITIES> $2,029
<BONDS> 1,465
<COMMON> 717
0
14
<OTHER-SE> 2,895
<TOTAL-LIABILITY-AND-EQUITY> 7,571
<SALES> $2,263
<TOTAL-REVENUES> 2,263
<CGS> 1,165
<TOTAL-COSTS> 1,165
<OTHER-EXPENSES> 202
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 80
<INCOME-PRETAX> 155
<INCOME-TAX> 67
<INCOME-CONTINUING> 88
<DISCONTINUED> 158
<EXTRAORDINARY> (10)
<CHANGES> 0
<NET-INCOME> $ 236
<EPS-PRIMARY> $1.33
<EPS-DILUTED> $1.31
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF MARCH 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> $ 49
<SECURITIES> 0
<RECEIVABLES> 841
<ALLOWANCES> 60
<INVENTORY> 998
<CURRENT-ASSETS> 2,619
<PP&E> 1,676
<DEPRECIATION> 768
<TOTAL-ASSETS> 7,449
<CURRENT-LIABILITIES> $1,759
<BONDS> 1,465
<COMMON> 717
0
14
<OTHER-SE> 3,047
<TOTAL-LIABILITY-AND-EQUITY> 7,449
<SALES> $1,055
<TOTAL-REVENUES> 1,055
<CGS> 548
<TOTAL-COSTS> 548
<OTHER-EXPENSES> 86
<LOSS-PROVISION> 1
<INTEREST-EXPENSE> 37
<INCOME-PRETAX> 66
<INCOME-TAX> 34
<INCOME-CONTINUING> 32
<DISCONTINUED> 92
<EXTRAORDINARY> (10)
<CHANGES> 0
<NET-INCOME> $ 114
<EPS-PRIMARY> $.64
<EPS-DILUTED> $.63
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> $ 232
<SECURITIES> 0
<RECEIVABLES> 821
<ALLOWANCES> 42
<INVENTORY> 951
<CURRENT-ASSETS> 2,112
<PP&E> 1,645
<DEPRECIATION> 741
<TOTAL-ASSETS> 6,833
<CURRENT-LIABILITIES> $1,461
<BONDS> 1,063
<COMMON> 717
0
14
<OTHER-SE> 3,133
<TOTAL-LIABILITY-AND-EQUITY> 6,833
<SALES> $4,928
<TOTAL-REVENUES> 4,928
<CGS> 2,626
<TOTAL-COSTS> 2,626
<OTHER-EXPENSES> 486
<LOSS-PROVISION> 6
<INTEREST-EXPENSE> 137
<INCOME-PRETAX> 357
<INCOME-TAX> 171
<INCOME-CONTINUING> 186
<DISCONTINUED> 357
<EXTRAORDINARY> (3)
<CHANGES> 0
<NET-INCOME> $ 540
<EPS-PRIMARY> $2.89
<EPS-DILUTED> $2.86
</TABLE>
