FORTUNE BRANDS INC, DEF 14A, 1998-03-13

FORTUNE BRANDS INC
DEF 14A, 1998-03-13
CIGARETTES

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<PAGE>

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

FORTUNE BRANDS, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

-------------------------------------------------------------------------

(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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Notes:

<PAGE>

FORTUNE
BRANDS

1700 East Putnam Avenue

Old Greenwich, Connecticut 06870

March 13, 1998

Dear Stockholder:

The 1998 Annual Meeting of Stockholders will be held at 2:00 p.m. on Tuesday,
April 28, 1998, at the Hyatt Regency Greenwich, 1800 East Putnam Avenue, Old
Greenwich, Connecticut. The sole purpose of the meeting is to consider the
business described in the following notice of meeting and proxy statement.

It is important to ensure that your shares be represented at the meeting
whether or not you personally plan to attend. We urge you to promptly complete,
date and return your proxy in the enclosed postpaid return envelope provided
for that purpose.

Sincerely yours,
LOGO

Thomas C. Hays
Chairman of the Board
and Chief Executive Officer
<PAGE>

LOGO FORTUNE BRANDS, INC.

NOTICE OF MEETING

March 13, 1998

The Annual Meeting of Stockholders of Fortune Brands, Inc. will be held at
the Hyatt Regency Greenwich, 1800 East Putnam Avenue, Old Greenwich,
Connecticut, at 2 o'clock in the afternoon (Eastern Daylight Time) on Tuesday,
April 28, 1998, for the following purposes:

Item 1: The election of four directors for a term expiring at the 2001
Annual Meeting or until their successors have been elected and
qualified (see pages 1 to 19 of the Proxy Statement);

Item 2: The election of Coopers & Lybrand L.L.P. as independent
accountants of the Company for the year 1998 (see page 19 of
the Proxy Statement); and

Item 3: If presented, a stockholder proposal requesting the elimination
of election of directors by classes, expected to be made by one
stockholder (see pages 19 to 21 of the Proxy Statement);

and to transact such other business as may properly come before the
meeting or any adjournment thereof.

The stock transfer books will not be closed, but holders of Common Stock and
$2.67 Convertible Preferred Stock, to be entitled to vote, must be holders of
record at the close of business on February 27, 1998.

/s/ Louis F. Fernous, Jr.

Louis F. Fernous, Jr.
Vice President and
Secretary
<PAGE>

LOGO FORTUNE BRANDS, INC.

PROXY STATEMENT

INTRODUCTION

The principal executive offices of Fortune Brands, Inc. (the "Company" or
"Fortune Brands") are located at 1700 East Putnam Avenue, Old Greenwich,
Connecticut 06870. This Proxy Statement and accompanying proxy are first being
sent or given to stockholders on or about March 13, 1998.

VOTING AND PROXIES

The accompanying proxy is solicited by the Board of Directors. It may be
revoked at any time before being voted by written notice given to the
secretary of the meeting or by the delivery of a later-dated proxy. Proxies
properly executed, duly returned to the Company and not revoked will be voted
for the election of directors (except to the extent that authority therefor is
withheld) and on the other Items described in this Proxy Statement in
accordance with the instructions in the proxy. The Board of Directors is not
aware at the date hereof of any other matter proposed to be presented at this
meeting, and does not believe that any matter may be properly presented other
than the election of directors and Items 2 and 3. If any other matter is
properly presented, the persons named in the enclosed form of proxy will have
discretionary authority to vote thereon according to their best judgment.
Presence at the meeting does not of itself revoke the proxy.

The only securities of the Company entitled to be voted are shares of Common
Stock and $2.67 Convertible Preferred Stock and only holders of record at the
close of business on February 27, 1998 are entitled to vote. Holders of Common
Stock are entitled to one vote per share and holders of $2.67 Convertible
Preferred Stock are entitled to three-tenths of one vote per share. There were
172,431,648 shares of Common Stock and 364,192 shares of $2.67 Convertible
Preferred Stock outstanding at February 27, 1998.

The affirmative vote of shares representing a majority in voting power of
the shares of the Company's Common Stock and $2.67 Convertible Preferred
Stock, voted together as one class, present in person or represented by proxy
and entitled to vote at the meeting, a quorum being present, is necessary for
the adoption of each of Items 2 and 3. The election of directors, Item 1, will
be by a plurality of votes cast. Proxies marked as abstentions, or to withhold
a vote from a nominee as a director in the case of the election of directors,
will have the effect of a negative vote. Broker non-votes (where a nominee
holding shares for a beneficial owner has not received voting instructions
from the beneficial owner with respect to a particular matter and such nominee
does not possess or choose to exercise his discretionary authority with
respect thereto) will be considered as present at the meeting but not entitled
to vote with respect to the particular matter and will therefore have no
effect on the vote.

As a matter of policy, stockholder proxies, ballots and tabulations that
identify individual stockholders are kept secret and access thereto is limited
to the independent Inspectors of Election and certain employees of the Company
who must acknowledge their responsibility to comply with such policy.

ITEM 1

ELECTION OF DIRECTORS

The Board of Directors currently consists of 12 members. The Company's
Certificate of Incorporation provides for the classification of the Board of
Directors into three classes, as nearly equal in number as possible, with
staggered terms of office and provides that upon the expiration of the term

1
<PAGE>

of office for a class of directors, nominees for such class shall be elected
for a term of three years or until their successors are duly elected and
qualified. At this meeting, four nominees for director are to be elected as
Class III directors. The nominees are Mr. John T. Ludes, Mrs. Anne M. Tatlock,
Mr. John W. Thompson and Mr. Peter M. Wilson. The four Class I and four Class
II directors have one year and two years, respectively, remaining on their
terms of office. If no contrary indication is made, proxies in the
accompanying form are to be voted for such nominees or, in the event any such
nominee is not a candidate or is unable to serve as a director at the time of
the election (which is not now expected), for any nominee who shall be
designated by the Board of Directors to fill such vacancy, unless the Board of
Directors shall determine to reduce the number of directors pursuant to the
By-laws. All nominees are members of the present Board of Directors. All
nominees and all current Class I and Class II directors were elected by the
stockholders, except that Mrs. Anne M. Tatlock was elected by the Board of
Directors as a Class III director effective February 27, 1996 and Mr. John W.
Thompson was elected by the Board of Directors as a Class III director
effective November 19, 1996.

There are set forth below opposite the names of the nominees and Class I and
Class II directors their present positions and offices with the Company and
their principal occupations during the past five years, their ages and the
year first elected a director of the Company.

President and Chief Operating Officer of 61 1995
Fortune Brands, Inc. since 1995; Group Vice
PHOTO President of Fortune Brands, Inc. and President
and Chief Executive Officer of Acushnet Company
(golf products), a subsidiary of Fortune
Brands, Inc., prior thereto
John T. Ludes*
President, Fiduciary Trust Company 58 1996
International (global investment management
services) since 1994; Executive Vice President
PHOTO and Director, Institutional Equity Department,
Fiduciary Trust Company International prior
thereto
Anne M. Tatlock

General Manager--IBM North America, 48 1996
International Business Machines Corporation
("IBM"), since 1997; General Manager, Personal
Software Products Division of IBM from 1995 to
PHOTO 1996; Corporate Vice President and General
Manager, Marketing--U.S. of IBM from 1993 to
1994; Area General Manager--Midwest of IBM
prior thereto
John W. Thompson
</TABLE>

2
<PAGE>

<TABLE>
<CAPTION>
PRESENT POSITIONS AND OFFICES YEAR FIRST
WITH THE COMPANY AND PRINCIPAL ELECTED
NAME OCCUPATIONS DURING THE PAST FIVE YEARS AGE DIRECTOR
---- -------------------------------------- --- ----------
<C> <S> <C> <C>
LOGO Chairman and Chief Executive of Gallaher 56 1994
Group Plc since 1997 and Chairman and
Chief Executive of Gallaher Limited
(tobacco products), a former subsidiary
of Fortune Brands, Inc., since 1994;
Deputy Chairman of Gallaher Limited
prior thereto
Peter M. Wilson
CLASS I DIRECTORS--TERM EXPIRING 1999
LOGO Chairman of the Board and Chief 62 1981
Executive Officer of Fortune Brands,
Inc. since 1995; President and Chief
Operating Officer of Fortune Brands,
Inc. prior thereto
Thomas C. Hays*
LOGO President and Chief Executive Officer of 63 1991
Northside Hospital, Inc.
Sidney Kirschner
LOGO President and Chief Executive Officer of 63 1990
AMSTED Industries Incorporated (products
for the railroad, construction and
building markets)
Gordon R. Lohman*
LOGO Retired since 1995; Vice Chair of 67 1985
Southern Methodist University prior
thereto
Charles H. Pistor, Jr.
</TABLE>

3
<PAGE>

PHOTO Partner, Anderson Kill & Olick, P.C. 70 1980
(law firm)
Eugene R. Anderson*

PHOTO President, Pace University 62 1991
Patricia O. Ewers

Retired since 1996; Chairman of Olin 65 1989
Corporation (chemical, metal and
defense-related products) during 1996;
Chairman and Chief Executive Officer of
Olin Corporation from 1994 to 1995;
PHOTO Chairman, President and Chief Executive
Officer of Olin Corporation prior
thereto
John W. Johnstone, Jr.*

Retired since 1991; Chairman and Chief 71 1988
PHOTO Executive Officer of Illinois Power
Company prior thereto
Wendell J. Kelley
</TABLE>
- --------
* Member of Executive Committee of the Board of Directors. Mr. Ludes also
served on the Board of Directors from 1987 to 1990.

Seven meetings of the Board of Directors were held during the Company's last
fiscal year. Each director of the Company attended at least 75% of the
aggregate of (i) all meetings of the Board of Directors and (ii) all meetings
of committees of the Board of Directors of which the director was a member,
during the periods that the director served during the Company's last fiscal
year except for Mr. Anderson. In addition to participation at Board and
committee meetings, the Company's directors discharge their responsibilities
throughout the year through personal meetings and other communications,
including considerable telephone contact, with the Chairman and others
regarding matters of interest and concern to the Company.

4
<PAGE>

In addition to the Executive Committee, the Board of Directors has an Audit
Committee, a Compensation and Stock Option Committee and a Nominating and
Corporate Governance Committee. The Audit Committee is composed of Messrs.
Anderson, Pistor, Thompson and Mrs. Tatlock. Its functions include
recommending annually to the Board of Directors a firm of independent
accountants to audit the Company's financial statements and the scope of such
firm's audit, reviewing reports and recommendations of the Company's
independent accountants, reviewing the scope of all internal audits and
reports and recommendations in connection therewith and reviewing nonaudit
services provided by the Company's principal independent accountants. It held
six meetings during the Company's last fiscal year. The Compensation and Stock
Option Committee is composed of Messrs. Johnstone, Kirschner, Lohman and Dr.
Ewers. It administers the Company's Stock Option Plans and 1990 Long-Term
Incentive Plan, and its functions include the designation of key employees to
whom stock options, performance awards and other stock-based awards may be
granted, and, within specified limits, the number of shares that may be
granted to any such key employee. Its functions also include setting
compensation for officers employed by the Company and holding the office of
Vice President or a more senior office and the determination of the award to
such persons of incentive compensation under the Annual Executive Incentive
Compensation Plan of the Company. It held five meetings during the Company's
last fiscal year. The Nominating and Corporate Governance Committee is
composed of Messrs. Anderson, Johnstone, Lohman and Pistor. Its functions
include recommending persons for nomination for election as members of the
Board of Directors, recommending directors for membership on the Audit
Committee, Compensation and Stock Option Committee and Nominating and
Corporate Governance Committee, recommending directors and executive officers
for membership on other committees established by the Board of Directors,
recommending to the Board of Directors compensation arrangements for
nonmanagement directors and recommending to the Board of Directors policies
and practices designed to foster an effective corporate governance environment
within the Company. The Nominating and Corporate Governance Committee held
three meetings during the last fiscal year. Stockholders wishing to recommend
persons for consideration by the Nominating and Corporate Governance Committee
as nominees for election to the Board of Directors can do so by writing to the
Secretary of the Company at 1700 East Putnam Avenue, Old Greenwich,
Connecticut 06870, giving each such person's name, biographical data and
qualifications. Any such recommendation should be accompanied by a written
statement from the person recommended of his consent to be named as a nominee
and, if nominated and elected, to serve as a director. The Company's
Certificate of Incorporation also contains a procedure for stockholder
nomination of directors.

Mr. Hays is a director of Gallaher Group Plc and ACNielsen Corporation; Mr.
Johnstone is a director of Olin Corporation, Phoenix Home Life Insurance
Company and McDermott International Inc.; Mr. Kirschner is a director of
Superior Surgical Mfg. Co., Inc.; Mr. Lohman is a director of Ameren
Corporation; Mr. Ludes is a director of New England Zenith Fund; Mr. Pistor is
a director of AMR Corporation, Centex Corporation, Oryx Energy Company and
Zale Corporation; Mrs. Tatlock is a director of American General Corporation;
and Mr. Thompson is a director of Northern Indiana Public Service Company.

For information with respect to the beneficial ownership of securities of
the Company by directors and executive officers, see "Certain Information
Regarding Security Holdings" on pages 21 and 22.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Each director and officer of the Company who is subject to Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") is required
to report to the SEC by a specified date his or her beneficial ownership of or
transactions in the Company's securities. Reports received by the Company
indicate that all such directors and officers have filed all requisite reports
with the SEC on a timely basis during or with respect to 1997.

5
<PAGE>

EXECUTIVE COMPENSATION

There is set forth in the following table a summary of all compensation paid
to, or earned by, the five most highly compensated executive officers during
each of the Company's last three fiscal years:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------- ---------------------------------
AWARDS PAYOUTS
------------ -------
SECURITIES
OTHER ANNUAL UNDERLYING LTIP ALL OTHER
NAME AND COMPENSATION OPTIONS/SARS PAYOUT COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) (#) ($)(2) ($)(3)
------------------ ---- ---------- --------- ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
THOMAS C. HAYS.......... 1997 975,000 1,068,100 979,942 107,000 798,076 90,877
Chairman of the Board 1996 940,500 823,953 602,594 93,000 427,380 190,578
and Chief Executive 1995 900,000 812,341 219,289 93,000 379,440 229,679
Officer
JOHN T. LUDES........... 1997 625,000 524,900 439,229 56,500 368,322 54,285
President and Chief 1996 575,000 414,300 333,729 50,000 171,004 106,878
Operating Officer 1995 500,000 408,600 189,082 50,000 151,823 171,187
GILBERT L. KLEMANN, II.. 1997 435,000 272,800 85,628 38,200 208,715 36,255
Executive Vice 1996 414,400 230,000 74,308 28,100 171,004 54,755
President--Strategic 1995 396,600 225,600 96,409 28,100 143,048 96,777
and Legal Affairs
ROBERT J. RUKEYSER...... 1997 385,000 228,000 109,088 27,500 208,715 32,127
Senior Vice President-- 1996 370,800 194,300 38,900 25,000 171,004 49,056
Corporate Affairs 1995 354,800 197,400 85,809 25,000 151,823 82,302
STEVEN C. MENDENHALL.... 1997 358,700 213,200 77,033 24,000 165,751 30,205
Senior Vice President 1996 344,900 180,700 32,487 20,900 128,319 45,738
and Chief 1995 330,000 181,500 39,136 20,900 113,925 79,289
Administrative Officer
</TABLE>
- --------
(1) At the 1993 Annual Meeting, stockholders approved Company contributions to
trusts established by executives in order to fund supplemental retirement
and profit-sharing benefits under the Company's Supplemental Plan on a
current basis. The executive is taxed on the contribution when made and the
earnings on the trust, but the Company provides the executive with an
additional amount to pay the taxes. The amounts distributed to the
executive at retirement, however, are not subject to tax and therefore the
Company contributes to the trusts only the present value of the executive's
after-tax benefit instead of being required to provide the executive's pre-
tax benefit upon retirement. The amounts set forth in the "Other Annual
Compensation" column include the amounts paid to the executive for
reimbursement of taxes as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Thomas C. Hays................................ $935,062 $522,168 $201,469
John T. Ludes................................. 421,266 294,839 181,951
Gilbert L. Klemann, II........................ 67,665 49,492 89,278
Robert J. Rukeyser............................ 91,125 38,900 78,678
Steven C. Mendenhall.......................... 63,558 32,487 33,936
</TABLE>

The remaining amounts in the "Other Annual Compensation" column are cash
dividend equivalents on performance share awards.

(2) The LTIP Payout is the value of performance share payment for the
performance period ended in the year reported.

6
<PAGE>

(3) These amounts include Company contributions to the tax qualified Defined
Contribution Plan of the Company and supplemental profit-sharing amounts
under the Company's Supplemental Plan as described below.

Company contributions to the tax qualified Defined Contribution Plan of the
Company for 1997 were $11,929 for each of Messrs. Hays, Ludes, Klemann,
Rukeyser and Mendenhall.

The Supplemental Plan provides for those amounts that would have been
contributed under the Company's tax qualified Defined Contribution Plan but
for certain Internal Revenue Code limitations. Supplemental profit-sharing
amounts credited under the Company's Supplemental Plan for 1997 were:
$78,948 for Mr. Hays; $42,356 for Mr. Ludes; $24,326 for Mr. Klemann;
$20,198 for Mr. Rukeyser; and $18,276 for Mr. Mendenhall.

In order to fund the Company's obligations to provide supplemental profit-
sharing benefits under the Company's Supplemental Plan as described above,
the Company made contributions under the trust funding arrangements
approved by stockholders at the 1993 Annual Meeting. The following
contributions to the trusts are not listed in the "All Other Compensation"
column for 1997 as they were made to fund the supplemental profit-sharing
liabilities already disclosed in the "All Other Compensation" column:
$71,873 for Mr. Hays; $37,380 for Mr. Ludes; $21,972 for Mr. Klemann;
$18,753 for Mr. Rukeyser; and $16,878 for Mr. Mendenhall.

The Company made additional contributions in 1997 to the trusts to fund its
obligations for supplemental retirement benefits under the Company's
Supplemental Plan to Messrs. Hays, Ludes, Klemann, Rukeyser and Mendenhall.
See the Pension Plan Table on page 10 for a description of the amount of
these supplemental retirement benefits.

The Company provides a split-dollar life insurance program for certain
executive officers. The death benefits payable on behalf of the executives
under the split-dollar life insurance program, and the amount of premiums
contributed by the executives, are the same as under the group term life
insurance program which is available to all other salaried employees. All
insurance proceeds from the split-dollar life insurance program in excess
of each executive's death benefit are payable to the Company, and the
program is designed for the Company to recover at least its aggregate
premium cost. The Company elected to prepay its share of the full premiums
for the policies covering the five executives identified above in two
annual installments in 1994 (the year the split-dollar insurance program
was established) and 1995. Additional split-dollar life insurance was
obtained in 1995 for Messrs. Hays and Ludes in order to provide for the
increased death benefit attributable to their 1995 salary increases with
the premiums for this increased insurance payable in two annual
installments in 1995 and 1996. The amounts set forth in the "All Other
Compensation" column for years in which premiums were paid include the
dollar value of insurance premiums paid by the Company for split-dollar
insurance as reduced by the projected refund to the Company on the maturity
of the policy calculated on an actuarial basis. The Company paid no
premiums in 1997 for split-dollar insurance coverage for the five
executives identified above and no amounts have been included as
compensation for 1997 in the foregoing table in respect of the split-dollar
insurance program.

7
<PAGE>

The following table provides information on grants of stock options made in
1997:

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS GRANTED EXERCISE OR GRANT DATE
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION PRESENT
NAME GRANTED(#)(1) FISCAL YEAR ($/SH) DATE(2) VALUE ($)(3)
- ---- ------------- --------------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
THOMAS C. HAYS.......... 107,000 5.7 35.625 11/17/07 816,196
JOHN T. LUDES........... 56,500 3.0 35.625 11/17/07 430,982
GILBERT L. KLEMANN, II.. 38,200 2.0 35.625 11/17/07 291,390
ROBERT J. RUKEYSER...... 27,500 1.5 35.625 11/17/07 209,770
STEVEN C. MENDENHALL.... 24,000 1.3 35.625 11/17/07 183,072
</TABLE>
- --------
(1) All options are for shares of Common Stock of the Company. No stock
appreciation rights ("SARs") were granted during 1997. Options are
generally not exercisable until the expiration of one year from the date of
grant.
(2) The 1990 Long-Term Incentive Plan, as amended, further provides that each
option shall have a limited right ("Limited Right") which generally is
exercised automatically on the date of change in control of the Company.
The Limited Right generally entitles the holder of the option to receive
cash equal to the number of shares subject to the option multiplied by the
difference between the exercise price per share and (i) the fair market
value of such shares at the date of exercise of the Limited Right if the
option is an incentive stock option and (ii) if the option is a
nonqualified stock option, the greater of (a) the highest price per share
paid for shares of Common Stock of the Company acquired in the change in
control and (b) the highest fair market value of shares of Common Stock
during a specified period prior to the time of exercise. The option is
cancelled to the extent of the exercise of the Limited Right.
(3) Grant Date Present Value is determined using the Black-Scholes option
pricing model based on the following assumptions: (a) an expected option
term of four and a half years which reflects a reduction of the actual ten
year term of an option based on historical data regarding the average
length of time an optionee holds the option before exercising; (b) a risk-
free rate of return of 5.8%, the rate of a five year U.S. Treasury Zero
Coupon Bond corresponding to the expected option term; (c) stock price
volatility of 20.9% based on weekly high-low stock market quotations for
the period June 2, 1997 to November 14, 1997 preceding the date of grant;
and (d) a yield of 2.6% based on the annual dividend rate of $0.84 per
share at date of grant. The Grant Date Present Values set forth in the
table are only theoretical values and may not accurately determine present
value. The actual value, if any, to be realized by an optionee will depend
on the excess of the market value of the Common Stock over the exercise
price on the date the option is exercised.

8
<PAGE>

The following table provides information concerning exercise of stock
options, alone or in tandem with SARs, made during 1997 by each of the five
most highly compensated executive officers:

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
SHARES UNEXERCISED OPTIONS/ OPTIONS/SARS
ACQUIRED ON SARS AT FY-END (#) AT FY-END ($)
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (#)(1) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ----------- ------------ --------------------- --------------------
<S> <C> <C> <C> <C>
THOMAS C. HAYS.......... 110,718 1,791,133 827,503/107,000 9,243,614/153,813
JOHN T. LUDES........... 12,190 333,472 505,854/ 56,500 6,218,537/ 81,219
GILBERT L. KLEMANN, II.. -0- -0- 307,058/ 38,200 3,422,346/ 54,913
ROBERT J. RUKEYSER...... 14,000 428,851 393,614/ 27,500 5,046,956/ 39,531
STEVEN C. MENDENHALL.... 61,500 1,258,514 157,348/ 24,000 1,662,269/ 34,500
</TABLE>
- --------
(1) SARs permit an optionee, upon exercise of such rights and surrender of the
related option or part thereof, to receive a payment equal to the excess of
the fair market value (at the time of exercise) of the shares covered by
such option or part thereof so surrendered over the option price of such
shares. Such payment may be made in Common Stock of the Company (valued on
the basis of the fair market value of Common Stock at the time of
exercise), in cash, or partly in cash and partly in Common Stock of the
Company, as the Compensation and Stock Option Committee may determine.
There are no SARs outstanding for any of the named officers.

The following table provides information concerning long-term compensation
awards made during 1997 to the five most highly compensated executive officers:

LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
PERFORMANCE PERIOD 1998-2000

<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK
PERFORMANCE PRICE-BASED PLANS
NUMBER OF SHARES, OR OTHER PERIOD ------------------------
UNITS OR OTHER UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#)(1) OR PAYOUT (#) (#) (#)
- ---- ----------------- ---------------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
THOMAS C. HAYS.......... 23,300 3 yrs 11,650 23,300 34,950
JOHN T. LUDES........... 12,500 3 yrs 6,250 12,500 18,750
GILBERT L. KLEMANN, II.. 8,400 3 yrs 4,200 8,400 12,600
ROBERT J. RUKEYSER...... 5,900 3 yrs 2,950 5,900 8,850
STEVEN C. MENDENHALL.... 5,300 3 yrs 2,650 5,300 7,950
</TABLE>
- --------
(1) Performance share awards were granted for the January 1, 1998-December 31,
2000 performance period. These figures represent the number of shares that
will be awarded upon attainment of the average consolidated return on
equity and cumulative increase in earnings per share targets for the
performance period 1998-2000.

The number of shares of Common Stock to be delivered for the performance
period 1998-2000 is based on the level of achievement of specified operating
goals of the Company and its consolidated subsidiaries during the performance
period. The target number of shares will be earned if 100% of the targeted
average consolidated return on equity and cumulative basic earnings per share
are achieved and an additional amount of shares will be paid if the targeted
goals are exceeded, but the maximum number of shares paid will not exceed 150%
of the target amount. The threshold amount will be earned

9
<PAGE>

at the achievement of 90% of the targeted average consolidated return on
equity and cumulative basic earnings per share. In addition, cash dividend
equivalents will be paid, but only to the extent that the performance goals
are achieved.

RETIREMENT PLANS

The following table sets forth the highest estimated annual retirement
benefits payable to persons in the specified compensation and years of service
classifications upon retirement at normal retirement date, assuming election
of an annuity for the life of the employee only, under the plans of the
Company under which executive officers of the Company would be entitled to
benefits:

PENSION PLAN TABLE

<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS
FOR REPRESENTATIVE YEARS OF CREDITED SERVICE
---------------------------------------------------------
REMUNERATION 10 15 20 25 30 35
- ------------ -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 500,000 $ 75,000 $112,500 $150,000 $187,500 $ 225,000 $ 262,500
600,000 90,000 135,000 180,000 225,000 270,000 315,000
700,000 105,000 157,500 210,000 262,500 315,000 367,500
800,000 120,000 180,000 240,000 300,000 360,000 420,000
900,000 135,000 202,500 270,000 337,500 405,000 472,500
1,000,000 150,000 225,000 300,000 375,000 450,000 525,000
1,100,000 165,000 247,500 330,000 412,500 495,000 577,500
1,200,000 180,000 270,000 360,000 450,000 540,000 630,000
1,300,000 195,000 292,500 390,000 487,500 585,000 682,500
1,400,000 210,000 315,000 420,000 525,000 630,000 735,000
1,600,000 240,000 360,000 480,000 600,000 720,000 840,000
1,800,000 270,000 405,000 540,000 675,000 810,000 945,000
2,000,000 300,000 450,000 600,000 750,000 900,000 1,050,000
2,200,000 330,000 495,000 660,000 825,000 990,000 1,155,000
2,400,000 360,000 540,000 720,000 900,000 1,080,000 1,260,000
</TABLE>

The estimated annual retirement benefits set forth in the preceding table
include any offset for Social Security benefits.

The compensation covered by the plans under which executive officers are to
receive retirement benefits includes essentially compensation that would fall
under the categories of "Salary" and "Bonus" in the Summary Compensation Table
shown above on page 6 averaged over the five highest consecutive years. The
years of service of Messrs. Hays, Ludes, Rukeyser and Mendenhall are 33, 19,
16 and 20, respectively. Mr. Klemann, who joined the Company's employ in 1991,
has a special retirement arrangement which credits him with service since 1976
in order to recognize that he devoted full time to the legal affairs of the
Company from 1976 through 1990 while with the Company's outside law firm.

Executive officers employed by the Company will accrue all benefits after
1995 under the Supplemental Plan rather than the Company's tax qualified
Retirement Plan. Under the Supplemental Plan, persons employed by the Company
holding the office of Vice President or a more senior office with the Company
will each receive an annual benefit equal to 52 1/2% of his average
compensation during the five highest-paid consecutive calendar years of
employment, provided he continues in employment until the earlier of normal
retirement age of 65 or completion of 35 years of service. This 52 1/2%
benefit is the same as the benefit in the 35 year column of the Pension Plan
Table set forth above. The benefit is reduced by 1 1/2% of such average
compensation for each year that such officer retires prior to age 65 unless he
has completed 35 years of service. The benefit is also reduced by benefits
under the Company's Retirement Plan, the retirement plans of subsidiaries of
the Company and of any prior

10
<PAGE>

employer. This supplemental retirement benefit covers Messrs. Hays, Ludes,
Klemann, Rukeyser and Mendenhall, except that the Company has an agreement
with Mr. Hays pursuant to which his benefit is determined based on his average
compensation during the three highest-paid consecutive calendar years of
employment rather than five. The Pension Plan Table includes these
Supplemental Plan benefits.

The Supplemental Plan also provides supplemental benefits in an amount equal
to the difference between the benefits payable under the Retirement Plan and
the amount that would be payable under the Company's tax qualified Retirement
Plan formula in excess of the Internal Revenue Code limitation on maximum
annual benefits payable from tax qualified retirement plans (currently the
lesser of $130,000 and the employee's average compensation during his three
highest-paid consecutive years of employment). The Supplemental Plan also
provides for payments of any amount by which the Retirement Plan benefit is
reduced because of the limitation contained in the Internal Revenue Code on
the combination of the benefits payable thereunder and additions to the
Company's tax qualified Defined Contribution Plan. The Internal Revenue Code
also provides that benefits under tax qualified plans cannot be based on
compensation in excess of a certain limit (currently $160,000). The
Supplemental Plan provides the difference between the amount paid under the
Retirement Plan and the amount that would have been paid thereunder if the
$160,000 limit on compensation were not included therein. In calculating
retirement benefits, no credit is given for service in excess of 35 years.

The Company's agreement with Mr. Hays also provides him with a supplemental
annual retirement benefit of 52 1/2% of his average compensation during the
three highest-paid consecutive calendar years of employment if Mr. Hays
becomes disabled or dies prior to normal retirement date of age 65 or if the
Company terminates his employment for reasons other than cause, or Mr. Hays
terminates his employment for good reason (as defined in the agreement). For
purposes of determining Mr. Hays' highest three-year average earnings, his
compensation at the date of his termination of employment is deemed to
continue until normal retirement date. This benefit to Mr. Hays is reduced by
the amount paid to him under the Company's tax qualified Retirement Plan and
Supplemental Plan and the retirement plans of any affiliate of the Company.

As noted in Note (1) under the Summary Compensation Table on page 6, Messrs.
Hays, Ludes, Klemann, Rukeyser and Mendenhall and certain other executive
officers have established trusts to which the Company makes contributions to
fund currently the Company's supplemental retirement and profit-sharing
obligations. The Company also continues to maintain "rabbi" trusts with a bank
for the purpose of paying its supplemental retirement and profit-sharing
obligations that are not fully funded by the executives' trusts.

SEVERANCE AND EMPLOYMENT AGREEMENTS

The Company has entered into agreements with Messrs. Hays, Ludes, Klemann,
Rukeyser and Mendenhall to provide certain severance benefits for them in the
event of their termination of employment following a change in control (as
defined in the agreements) of the Company. Each agreement provides generally
that if, subsequent to a change in control, the Company terminates the
employment of the officer other than for disability or cause, or if the
officer elects to terminate his employment for good reason, as provided in the
agreement, the officer will then receive three years of base salary, three
times the amounts for one year of his incentive compensation award and Defined
Contribution Plan allocation (and the supplemental profit-sharing allocation
under the Supplemental Plan), three additional years of service and earnings
credit under the retirement plans and agreements of the Company and three
additional years of coverage under the life, health, accident, disability and
other employee plans of the Company, provided that if any such person is
within three years of his normal retirement date, the multiplier of three is
reduced for each category of payment to the number of years and portion
thereof remaining prior to such date. Each agreement also provides for payment
of an amount necessary to restore any benefit diminution under the agreement
and the Company's 1986

11
<PAGE>

Stock Option Plan and 1990 Long-Term Incentive Plan if the special excise tax
imposed under Section 280G of the Internal Revenue Code is applicable.
Assuming a change in control and a termination date of February 1, 1998, the
amounts payable under such agreements would have been $4,847,010, $3,691,903,
$2,352,914, $1,955,629 and $1,824,463 for Messrs. Hays, Ludes, Klemann,
Rukeyser and Mendenhall, respectively. The Company has established "rabbi"
trusts with a bank for the purpose of paying these amounts. The foregoing
amounts do not include the three additional years of service and earnings
credit under retirement plans and agreements or the three additional years of
coverage under life, health, accident, disability and other employee plans to
which the foregoing persons would be entitled. Upon termination of employment
following a change in control, the executive would also be entitled to retain
his split-dollar life insurance policy in order to provide the death benefit
with any insurance proceeds after death in excess of the death benefit to be
returned to the Company. The amounts payable are reduced by any amounts
payable under the agreements referred to in the succeeding paragraph providing
severance benefits after termination of employment without regard to a change
in control.

The Company has also entered into agreements with Messrs. Hays, Ludes,
Klemann, Rukeyser and Mendenhall to provide severance benefits without regard
to a change in control if the Company terminates the employment of the officer
for reasons other than for disability or cause. The Company will also provide
the severance benefits to Mr. Hays if he terminates his employment for good
reason as provided in the agreement. The severance agreements provide the same
benefits as those described in the preceding paragraph for a termination of
employment following a change in control except that the multiplier is two in
the case of Messrs. Ludes, Klemann, Rukeyser and Mendenhall. Although the
original multiplier for Mr. Hays was three, the multiplier is two and one-
quarter as of February 1, 1998 as Mr. Hays had two and one-quarter years
remaining as of that date until his normal retirement date. Assuming a
termination of employment on February 1, 1998, the amounts payable under the
severance agreements, which would represent the applicable multiple of base
salary, bonus and Defined Contribution Plan allocation (and the supplemental
profit-sharing allocation under the Company's Supplemental Plan), would have
been $4,847,010, $2,461,269, $1,568,609, $1,303,753 and $1,216,309 for Messrs.
Hays, Ludes, Klemann, Rukeyser and Mendenhall, respectively. The foregoing
amounts do not include the additional years of service and earnings credit
under retirement plans and agreements or the additional years of coverage
under life, health, accident, disability and other employee plans to which the
foregoing persons would be entitled.

DIRECTOR COMPENSATION

Each director who is not an officer or employee of the Company or one of its
subsidiaries receives an annual fee of $35,000 for services as a director and
an additional $15,000 for committee service for an aggregate cash fee of
$50,000. Three non-employee directors each receive an additional $15,000 for
service on the Executive Committee. The Company has agreements with Messrs.
Anderson and Lohman to defer payment of the fees to which they are entitled as
directors, including any fees for committee service. Interest on the deferred
amounts is accrued quarterly based on the average quarterly treasury bill
rate. During 1997, the Company also paid the cost of group life insurance
coverage for directors who were not officers or employees of the Company in an
amount not in excess of $3,000 for each director, except for Mr. Anderson, for
whom the cost was $8,908, and Mr. Kelley, for whom the cost was $6,852.
Directors who are not officers or employees of the Company are also covered
under the Company's matching gift program whereby the Company will make a 200%
match of gifts totaling up to $15,000 by the director to an eligible
charitable or educational institution.

Each director who is not an officer or employee of the Company or one of its
subsidiaries is also paid 482 shares of Common Stock of the Company each year
under the Company's Stock Plan for Non-employee Directors which was approved
by the stockholders at the 1995 Annual Meeting. The Company has an agreement
with Mr. Lohman to defer payment of these shares. While receipt of the shares
is deferred, dividends that would have been paid with respect to such shares
had receipt thereof not been

12
<PAGE>

deferred are also deferred and will accrue interest quarterly from the
respective dates such dividends would have been paid at a rate equal to the
average quarterly treasury bill rate. Directors who are not officers or
employees of the Company or one of its subsidiaries are covered while on
Company business by the business travel accident insurance policy which covers
employees of the Company generally.

Each director who is not an officer or employee of the Company or one of its
subsidiaries and is first elected to the Board of Directors after April 30,
1997 is eligible to receive an annual grant of a nonqualified stock option to
purchase 2,000 shares of Common Stock of the Company under the Non-Employee
Director Stock Option Plan which was approved by stockholders at the 1997
Annual Meeting. Under the terms of the Non-Employee Director Stock Option Plan
(i) the option price per share is the fair market value at time of grant, (ii)
the option does not become exercisable until the holder shall have remained a
director of the Company for at least one year after the date of grant (except
in the case of death or a change in control of the Company) and may generally
be exercised for ten years from the date of grant and (iii) if the holder
ceases to be a director other than by reason of death, disability or
retirement after five or more years of service as a director, the option shall
terminate and cease to be exercisable 30 days after such cessation of service
except in the event of a change in control. Each option has a limited right
which is generally exercised automatically on the date of a change in control
of the Company. The limited right entitles the holder of the option to receive
cash equal to the number of shares subject to the option multiplied by the
difference between the exercise price per share and the greater of (i) the
highest price per share paid for shares of Common Stock of the Company
acquired in the change in control and (ii) the highest fair market value of
shares of Common Stock of the Company during the 60-day period beginning on
the date of the change in control. The option will be canceled to the extent
of the exercise of the limited right.

Each director who was elected to the Board of Directors prior to April 30,
1997 and is not an officer or employee of the Company or one of its
subsidiaries who voluntarily retires or decides not to stand for reelection as
a director will receive an annual retirement benefit equal to the annual
director's fee (exclusive of fees for committee service and fees for service
on boards of directors of subsidiaries) in effect at the time of retirement to
be paid for the number of years equal to such director's full years of
service. Such benefit is payable beginning in the year in which such director
retires or attains age 65, whichever occurs later, and continues to be payable
to the director's beneficiary in the event of the director's death until all
such payments have been made. The benefit is also payable to the director's
beneficiary if the director dies prior to retirement after having completed at
least three years of service. The Non-Employee Director Stock Option Plan was
adopted as a substitute for this retirement program. Non-employee directors
who are first elected to the Board of Directors after April 30, 1997 are not
eligible to receive the retirement benefit and previously elected non-employee
directors have the choice to elect to continue to accrue retirement benefits
or elect to cease to accrue such benefits and, in lieu of future accruals, to
receive an annual option grant under the Non-Employee Director Stock Option
Plan.

Each director who is not an officer or employee of the Company is covered
under the Company's charitable award program for non-employee directors. Under
the program, the Company will make future contributions of up to $500,000 for
each such director to charitable, educational or other qualified organizations
designated by the director. The contribution would be made after the death of
the director and the Company's obligation is funded by Company owned life
insurance policies. Mr. Wilson does not participate in the charitable award
program.

REPORT OF THE COMPENSATION AND STOCK OPTION COMMITTEE ON EXECUTIVE
COMPENSATION

The Company's executive compensation program assists the Company in
attracting, motivating and retaining the executive resources that it needs in
order to maximize its return to stockholders.

13
<PAGE>

Toward that end, the program provides:

. competitive levels of salary and total compensation

. annual incentive compensation that varies with the annual financial
performance of the Company and its various operating companies as
well as the attainment of individual goals established for each
executive

. long-term incentive compensation to reward long-term financial
performance.

The Company provides levels of total compensation for executive officers
that are competitive with compensation for executives with comparable
responsibilities in corporations of similar size. The competitive information
is derived from a variety of sources, principally surveys conducted by Towers
Perrin, the outside consultants of the Compensation and Stock Option Committee
(the "Committee"), and Management Compensation Services, a division of Hewitt
Associates, of compensation awarded by large, publicly-held corporations with
median revenues in excess of $2 billion participating in the surveys (the
"survey group"). Most of the companies in the survey group are in the S&P 500
and some are in the Peer Group index described on pages 18 and 19. The
Committee relies on a broad array of companies for comparative analysis of
executive compensation because the Committee believes that the Company's
competitors for executive talent are more varied than the Peer Group chosen
for comparing stockholder return in the Performance Graph on page 18.

The Company's executive compensation program consists of three basic
elements--base salaries, annual incentive bonuses and long-term incentives.
The long-term incentive plans covering the Company's executive officers are
designed to ensure that incentive compensation varies based on the
profitability of the Company and its various operating companies and on the
performance of the Company's Common Stock. In addition, these plans as well as
the annual incentive bonus program provide the flexibility to reward
executives based on their individual performance.

Committee Responsibilities

The Company's By-laws require that the salaries of officers employed by the
Company and having the offices of Vice President and above be fixed by the
Committee. The Committee also has the authority to select corporate
performance measures for each year under the annual incentive bonus program
which, if attained, will establish an incentive compensation fund for the year
as well as to determine the allocation of the fund among the participants. In
addition, the Committee grants awards to executive officers and certain other
officers under the Company's 1990 Long-Term Incentive Plan, which as described
below generally consisted in 1997 of stock options and performance share
awards. The Committee also reviews the design of the Company's executive
compensation programs, assesses their competitiveness and effectiveness and
makes recommendations with respect to them.

Each of the elements of the program is described in the report below,
including a discussion of the specific actions taken by the Committee with
respect to the Chief Executive Officer and the other executive officers for
1997.

Base Salaries

In determining salary adjustments for the Chief Executive Officer and other
executive officers the Committee sought to maintain salary levels that are
competitive with the survey group. The salary increase for the Chief Executive
Officer for 1997 was 3.7%. This was somewhat below the 4.2% average salary
increase for the survey group. The average salary increase for executive
officers during 1997 was 4.3% which approximated the 4.2% average salary
increase for the survey group. In addition, one executive officer who had been
promoted received a promotional increase.

14
<PAGE>

Annual Incentive Bonuses

The Company's Annual Executive Incentive Compensation Plan was approved by
stockholders at the Annual Meeting last year. The Plan covers officers holding
the office of Vice President and above. The Committee determined at the
beginning of 1997 that an incentive bonus fund for the year be established of
2.5% of adjusted net income. Adjusted net income was defined as the Company's
income from continuing operations, determined in accordance with generally
accepted accounting principles, as reflected in the audited consolidated
statement of income for 1997, but adjusted, net of income taxes, by the
Company's independent accountants to (i) eliminate restructuring and other
charges (including all related costs and expenses), (ii) include the results
of operations for such year from businesses classified as "discontinued
operations" prior to the disposition dates, and (iii) to the extent not
adjusted pursuant to items (i) and (ii) above, eliminate gains or losses
resulting from the sale or writedown of intangible assets, land or buildings,
charges for impaired assets, investments in business units and securities
resulting from the sale of business units.

In order to allocate the incentive bonus fund among the executives, the
Committee established a target level for the annual bonuses which was 50% of
salary for executive officers except that the target levels for the Chief
Executive Officer and the President and Chief Operating Officer were 85% and
70% of salary, respectively. The Committee also established a maximum dollar
amount of bonus for each executive which was 150% of the target bonus.
Individual bonuses are based 80% on Company financial performance and 20% on
individual performance. The Committee has the authority to reduce but not to
increase the incentive bonus award.

Target award levels were assigned to the Chief Executive Officer and the
other executive officers based on competitive practice and the target
percentage level for executive officers was set at the median of the survey
group. Based on pre-established earnings per share growth criteria, net income
goals, personal objectives and the successful spin-off of the international
tobacco business of the Company's former subsidiary, Gallaher Limited, the
Committee determined that the payment to the Chief Executive Officer should be
129% of the target award and the payment to executive officers generally
should be 121% of the target award. The total amount of the incentive bonuses
paid to eligible officers for 1997 was 43% of the total authorized incentive
fund.

Long-Term Incentives

Under the Company's 1990 Long-Term Incentive Plan, the Committee can grant
to key employees of the Company and its subsidiaries a variety of long-term
incentives, including nonqualified stock options, incentive stock options,
stock appreciation rights, restricted stock, performance awards, dividend
equivalents and other stock-based incentives. During 1997, the Committee
granted incentive stock options and nonqualified stock options to executive
officers of the Company. Performance share awards were also granted for the
1998-2000 performance period.

The Committee intends that stock options and performance awards serve as a
significant portion of the executives' total compensation package, and thus
they are granted in consideration of present and anticipated performance, as
well as past performance. Annual and long-term incentives make up the major
portion of the total compensation of executive officers. Moreover, the stock
options and performance awards offer the executive officers significant long-
term incentives to increase their efforts on behalf of the Company and its
subsidiaries, to focus managerial efforts on enhancing stockholder value and
to align the interests of the executives with the stockholders. As indicated
above, the Committee's compensation philosophy is to have long-term incentives
that pay more for superior performance and less if performance does not
achieve that level. The Committee, in making its determinations with respect
to stock option and performance award grants to the individual senior
executives was guided by the percentage of the individual's base salary that
the estimated value of the stock options and performance award would comprise.
The Committee sets the percentage of base salary

15
<PAGE>

that the long-term incentive would represent at a level based on a comparison
to the value of long-term incentives awarded to similarly-compensated
executives in the survey group, based on the outside consultants' survey of
competitive practice regarding the percentage of base salary represented by
long-term incentives. The Committee used an option pricing valuation method
for purposes of making such comparison. The grants are designed so that stock
options comprise 60% of the long-term incentive grant and performance awards
comprise 40% thereof. These grants continue the Committee's practice of
providing executive officers with annual long-term incentive grants that are
at competitive levels as recommended by Towers Perrin, the Committee's outside
consultants.

In determining the level of grants for the executive officers, the Committee
considered several factors in its subjective judgment without any of these
factors being weighted greater than any other: first, that the Company and its
subsidiaries comprised a large and diverse organization with over 100
operating subsidiaries in four highly competitive industries doing business on
a worldwide basis; second, the complex task facing the executive officers in
managing and furthering the performance, growth and prospects of such an
organization; and third, the high level of performance and results achieved by
the Company and its subsidiaries in recent years, particularly during a time
when very competitive conditions have been adversely affecting principal
markets in which many of the businesses operate, as well as the steps taken by
the executive officers to enhance stockholder value.

In November 1997 the Committee granted incentive and nonqualified stock
options. The options have an exercise price of not less than fair market value
of the stock on the date of grant. The options generally become exercisable
one year from the date of grant, and expire 10 years from the date of grant.
Benefits to an executive officer from stock options will be realized only in
the event of an increase in the market value of the Company's Common Stock.

The Committee also granted performance share awards for the 1998 to 2000
performance period which are contingent upon the achievement by the Company
and its subsidiaries of specified average return on equity and cumulative
basic earnings per share targets over the performance period 1998 to 2000.
Performance share awards will not be paid unless at least 90% of the targeted
consolidated return on equity and cumulative basic earnings per share are
achieved. The target number of shares of the Company's Common Stock will be
earned if 100% of the targeted consolidated return on equity and cumulative
basic earnings per share are achieved and an additional amount of shares will
be paid if the targeted goals are exceeded but the maximum number of shares
paid will not exceed 150% of the target amount. The performance share award
grant when aggregated with the stock option grant to the Chief Executive
Officer and the other executive officers placed each of them at the 50th
percentile of the survey group. In addition, the recipients of these
performance awards will receive cash dividend equivalents at the time of
payment of the performance shares equal to the cash dividends that would have
been paid on the shares had the recipient owned the shares during the
performance period.

The Internal Revenue Code limits the allowable tax deduction that may be
taken by the Company for compensation paid to the Chief Executive Officer and
the four other highest paid executive officers required to be named in the
Summary Compensation Table. The limit is $1 million per executive per year,
provided that compensation payable solely on account of the attainment of
performance goals is excluded from the limitation. It is the Committee's
intent to qualify to the extent practicable the annual incentive bonus and
stock options and performance awards under the 1990 Long-Term Incentive Plan
as performance-based compensation in order that these elements of compensation
may qualify for the exclusion from the $1 million limit.

Compensation and Stock Option Committee

16
<PAGE>

The following directors were members of the Compensation and Stock Option
Committee through September 30, 1997 and determined the 1997 salaries and
incentive bonus targets for the Chief Executive Officer and the other
executive officers.

Gordon R. Lohman, Chairman
Eugene R. Anderson
John W. Johnstone, Jr.
Sidney Kirschner
Charles H. Pistor, Jr.

The following directors have been members of the Compensation and Stock
Option Committee since September 30, 1997 and determined the final payment of
incentive bonus for 1997 as well as 1997 stock option grants and performance
awards for the 1998-2000 performance period for the Chief Executive Officer
and the other executive officers.

Gordon R. Lohman, Chairman
Patricia O. Ewers
John W. Johnstone, Jr.
Sidney Kirschner

February 23, 1998

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Messrs. Thomas C. Hays, John T. Ludes, Robert L. Plancher and D.L.
Bauerlein, Jr., who were executive officers of the Company during the latter
part of 1996 and the early part of 1997, which is the period during which 1997
salaries and incentive bonus targets for executive officers of the Company
were determined, served as members of the Board of Directors of Gallaher
Limited, a former subsidiary of the Company, and participated in setting
compensation for Mr. Peter M. Wilson, Chairman and Chief Executive of Gallaher
Limited, who is a director of the Company and was also an executive officer of
the Company during this period. Mr. Hays currently is a member of the Board of
Directors of Gallaher Group Plc of which Mr. Wilson is currently Chairman and
Chief Executive. None of these individuals is or was a member of the
Compensation and Stock Option Committee of the Company.

17
<PAGE>

FORTUNE BRANDS, INC. STOCK PRICE PERFORMANCE
(WITH DIVIDEND REINVESTMENT)

<TABLE>
<CAPTION>
FO S&P 500 Index 1996 Peer Group Index* 1997 Peer Group Index*
<S> <C> <C> <C> <C>
12/31/92 $ 100 $ 100 $ 100 $ 100
12/31/93 87.1 110.1 112.4 111
12/31/94 104.1 111.5 99.5 104.3
12/31/95 129.7 153.4 125 126.3
12/31/96 151.2 188.7 130 138.5
12/31/97 184.1 251.6 163.2 174.5
</TABLE>

* Excludes Fortune Brands, Inc.

Peer Group Index

The 1996 Peer Group was composed of publicly traded companies in industry
segments corresponding to the Company's five core businesses during 1996: the
Tobacco segment was composed of B.A.T Industries p.l.c.; the Distilled Spirits
segment was composed of Brown-Forman Corporation, The Seagram Company, Ltd.,
Allied Domecq PLC, Grand Metropolitan PLC and Diageo PLC, formerly known as
Guinness PLC; the Home Products segment was composed of Masco Corporation, The
Black & Decker Corporation, Newell Co. and The Stanley Works; the Office
Products segment was composed of Hunt Manufacturing Co., General Binding
Corporation, Rubbermaid Incorporated and Avery Dennison Corporation; and the
Golf and Leisure segment was composed of The Arnold Palmer Golf Company,
formerly known as ProGroup, Inc., Salomon S.A. and Brunswick Corporation.

The 1997 Peer Group is composed of publicly traded companies in industry
segments corresponding to the Company's current four core businesses: the
Tobacco segment has been deleted in its entirety due to the spin-off of the
Company's international tobacco business conducted by Gallaher Limited in
1997; the Distilled Spirits segment is composed of Brown-Forman Corporation,
The Seagram Company, Ltd., Allied Domecq PLC, Grand Metropolitan PLC and
Diageo PLC, formerly known as Guinness PLC; the Home Products segment is
composed of Masco Corporation, The Black & Decker Corporation, Newell Co. and
The Stanley Works; the Office Products segment is composed of Hunt

18
<PAGE>

Manufacturing Co., General Binding Corporation, Rubbermaid Incorporated and
Avery Dennison Corporation; and the Golf and Leisure segment is composed of The
Arnold Palmer Golf Company, formerly known as ProGroup, Inc., Brunswick
Corporation, Salomon S.A. and Callaway Golf Company (Callaway Golf Company has
been added because of its golf products business).

Grand Metropolitan PLC ceased trading on December 16, 1997 when it was merged
with Guinness PLC.

The weighted average total return of each of the entire 1996 Peer Group and
the entire 1997 Peer Group, for each year, is calculated as follows: (1) the
total return of each Peer Group member is calculated by dividing the change in
market value of a share of its common stock, assuming periodic dividend
reinvestment, by the cumulative value of a share of its common stock at the
beginning of the year (the total return for Grand Metropolitan PLC has been
weighted in 1997 for actual trading days); (2) each Peer Group member's total
return is then weighted within its industry segment based on its market
capitalization at the beginning of the year, relative to the market
capitalization of the entire segment, and the sum of such weighted returns
results in a weighted average total return for that segment; and (3) each
segment's weighted average total return is then weighted based on the
percentage of sales, excluding excise taxes, of that segment of the Company for
the year, as compared with total Company sales, excluding excise taxes, and the
sum of such weighted returns results in a weighted average total return for the
entire Peer Group.

Each of the 1996 Peer Group Index and the 1997 Peer Group Index reflects the
weighted average total return for the entire Peer Group calculated for the five
year period from a base of 100.

The Report of the Compensation and Stock Option Committee on Executive
Compensation and the Fortune Brands, Inc. Stock Price Performance graph shall
not be deemed to be "soliciting material" or to be "filed" with the SEC or
subject to Regulation 14A or 14C of the Regulations of the SEC under the
Exchange Act, or to the liabilities of Section 18 of the Exchange Act.

ITEM 2

ELECTION OF INDEPENDENT ACCOUNTANTS

The Board of Directors recommends that the stockholders elect Coopers &
Lybrand L.L.P. as independent accountants for the Company for the year 1998. In
line with this recommendation the Board of Directors intends to introduce at
the forthcoming Annual Meeting the following resolution (designated herein as
Item 2):

"RESOLVED, that Coopers & Lybrand L.L.P. be and they are hereby elected
independent accountants for the Company for the year 1998."

In accordance with the Company's practice, a member of Coopers & Lybrand
L.L.P. will attend the Annual Meeting to make a statement if he desires to do
so and to respond to any appropriate questions that may be asked by
stockholders.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ITEM 2.

ITEM 3

RESOLUTION REQUESTING ELIMINATION OF ELECTION OF
DIRECTORS BY CLASSES

The Company is informed that John J. Gilbert, whose address is 29 East 64th
Street, New York, New York 10021-7043, an owner of 400 shares of Common Stock
and claiming an additional family interest of 667 shares, intends to introduce
at the Annual Meeting the following resolution (designated herein as Item 3):

19
<PAGE>

"RESOLVED: That the stockholders of Fortune Brands, Inc., assembled in
annual meeting in person and by proxy, hereby request that the Board of
Directors take the needed steps to provide that at future elections of
directors new directors be elected annually and not by classes, as is now
provided, and that on expiration of present terms of directors their
subsequent election shall also be on an annual basis."

The proponent has furnished the following statement setting forth the
reasons advanced in support of the proposal:

"Continued very strong support along the lines we suggest were shown at the
last annual meeting when 45.36%, an increase over the previous year, 3,429
owners of 60,574,203 shares, were cast in favor of this proposal. The vote
against included 7,507 unmarked proxies.

"ARCO to its credit, voluntarily ended theirs stating that when a very high
percentage (34.6%) desired it to be changed to an annual election it was
reason enough for them to change it. Several other companies have also
followed suit such as: Pacific Enterprises, Katy Industries, and Hanover
Direct. Among the latest to end theirs is Ameritech, Occidental Petroleum,
Time Warner and Fluor. Fortune Brands should follow their example. Also, in
the merger of NYNEX into Bell Atlantic the annual election of directors,
instead of the stagger system that NYNEX had, was adopted.

"A few years ago my resolution on the subject was withdrawn when the
Westinghouse directors agreed to end their stagger system. At the Lockheed-
Martin merger the stagger system was ended and also at a special meeting of
First Commerce Corporation in 1995. Further, Allegheny Power System tried
to put in a stagger system, as well as take away cumulative voting, and the
stockholders defeated it, showing stockholders are interested in their
rights.

"Because of the normal need to find new directors and because of
environmental problems and the avalanche of derivative losses and many
groups desiring to have directors who are qualified on the subjects, we
think that ending the stagger system of electing directors and having
cumulative voting is the answer.

"Equitable Life Insurance Company, which is now called Equitable Companies,
converted from a policy owned company to a public stockholder meeting.
Thanks to AXA, the controlling French insurance company not wanting it,
they now do not have a staggered board.

"Orange and Rockland Utility Company had a terrible time with the stagger
system and its 80% clause to recall a director. The chairman was involved
in a scandal affecting the company. Not having enough votes the meeting to
get rid of the chairman had to be adjourned. Finally, at the adjourned
meeting enough votes were counted to recall him.

"If you agree, please mark your proxy for this resolution; otherwise it is
automatically cast against it, unless you have marked to abstain."

BOARD OF DIRECTORS STATEMENT ON ITEM 3

Under the Delaware Code, the State in which the Company is incorporated, the
change contemplated by the proposal would require an amendment to the
Company's Certificate of Incorporation which must first be approved by the
Board of Directors and then submitted to a vote of the stockholders. A vote in
favor of Item 3, therefore, would constitute a recommendation that the Board
initiate this amendment. The Board of Directors does not believe, however,
that such an amendment would be in the best interests of the Company or its
stockholders.

In 1986, the stockholders approved an amendment to the Company's Certificate
of Incorporation to provide for the current division of the Board of Directors
by class, with one class elected each year for a three-year term. Fully 86.9%
of the votes cast with respect to that proposal were cast in its favor.

20
<PAGE>

The Board of Directors believes that a classified board enables the Company
to establish long-term strategic plans for a reasonable period into the future
and thereby provide for continuity of corporate policies. The Board also
believes that flexibility is achieved by the election of one-third of the
directors annually, while stability is retained because a majority of the
directors at all times will have had prior experience in the management of the
Company's business. In addition, the classified Board of Directors would
preclude the immediate removal of all incumbent directors by a person seeking
a change in control of the Company and thereby would benefit all of the
Company's stockholders as the incumbent directors would then be in a position
to act to protect the stockholders' value in the Company. Surveys of corporate
board structures conducted by certain organizations independent of the Company
have shown that more than half of the corporations included in the surveys
maintain classified boards. For the foregoing reasons, the Board of Directors
believes that the amendment contemplated by Item 3 is not in the best
interests of the Company. Resolutions substantially similar to Item 3 were
rejected by the stockholders at each Annual Meeting from 1989 through 1997.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE AGAINST ITEM 3.

CERTAIN INFORMATION REGARDING SECURITY HOLDINGS

The following tabulation sets forth information with respect to the
beneficial ownership of equity securities of the Company by each nominee for
director and other directors, each executive officer listed on page 6 and of
such persons and other executive officers of the Company as a group (19
persons) at February 12, 1998. The information is based on information
received by the Company from the nominees and other directors and executive
officers, from the Corporate Employee Benefits Committee of the Company and
from the Trustee of the Defined Contribution Plan of the Company.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP
NAME (A)(B)(C)(D)
---- --------------------
<S> <C>
Eugene R. Anderson.................................. 10,082
Patricia O. Ewers................................... 1,782
Thomas C. Hays...................................... 979,170
John W. Johnstone, Jr............................... 2,482
Wendell J. Kelley................................... 4,082
Sidney Kirshner..................................... 2,382
Gilbert L. Klemann, II.............................. 319,555
Gordon R. Lohman.................................... 1,500
John T. Ludes....................................... 557,711
Steven C. Mendenhall................................ 181,825
Charles H. Pistor, Jr............................... 4,482
Robert J. Rukeyser.................................. 437,546
Anne M. Tatlock..................................... 2,000
John W. Thompson.................................... 1,305
Peter M. Wilson..................................... 2,140
All of the above and other executive officers as a
group
(19 persons)....................................... 3,069,012
</TABLE>
- --------
(a) No individual director or nominee for director or executive officer
beneficially owns one percent or more of the outstanding equity securities
of the Company. The percentage ownership of the outstanding equity
securities by the nominees and other directors and all executive officers
as a group was 1.8% at February 12, 1998.
(b) To the best of the Company's knowledge, each nominee and Class I and Class
II director and executive officer who is not a director has sole voting
and investment power with respect to shares shown after his name above,
other than with respect to the shares listed in Note (d) below that may

21
<PAGE>

be acquired upon exercise of options, and except as follows: Mr. Hays shares
voting and investment power as a co-trustee of various family trusts with
respect to 5,107 shares and with respect to which shares he disclaims
beneficial ownership and Mr. Hays has no voting or investment power with
respect to 4,000 shares held in trust for the benefit of his wife and with
respect to which shares he disclaims beneficial ownership; Mr. Ludes has no
voting or investment power with respect to 12,691 shares held in trust for
the benefit of his wife and with respect to which shares he disclaims
beneficial ownership; and Mr. Pistor shares voting and investment power with
his wife with respect to 2,400 shares.
(c) The numbers of shares attributable to Company contributions under the
Defined Contribution Plan of the Company included in the numbers shown
above are as follows: Thomas C. Hays, 2,672; Gilbert L. Klemann, II, 2,272;
John T. Ludes, 3,089; Steven C. Mendenhall, 2,444; and Robert J. Rukeyser,
6,275. The numbers of shares attributable to employee contributions under
such Plan included in the numbers shown above are: Thomas C. Hays, 7,203;
Gilbert L. Klemann, II, 555; John T. Ludes, 487; Steven C. Mendenhall,
2,291; and Robert J. Rukeyser, 832. The Trustee of the Defined Contribution
Plan has agreed to vote the shares it holds in the Trust in accordance with
instructions received from members of the Plan and shares as to which
instructions are not received are voted by the Trustee proportionally in
the same manner as shares as to which the Trustee has received
instructions. The number shown in the table above includes 49,542 shares of
Common Stock held on December 31, 1997 by the Trustee of the Defined
Contribution Plan of the Company (including certain of those referred
above) which number is equivalent as of that date to the undivided
proportionate beneficial interests of the directors and executive officers
of the Company in all such shares.
(d) The numbers of shares of which the nominees and Class I and Class II
directors and Messrs. Klemann, Mendenhall and Rukeyser had the right to
acquire beneficial ownership pursuant to the exercise on or before April
13, 1998 of options granted by the Company are as follows: Thomas C. Hays,
827,503; Gilbert L. Klemann, II, 307,058; John T. Ludes, 505,854; Steven C.
Mendenhall, 157,348; and Robert J. Rukeyser, 393,614. The number of shares
shown in the table above includes 2,709,696 shares (including those
referred to in the prior sentence) of which the directors and executive
officers had the right to acquire beneficial ownership pursuant to the
exercise on or before April 13, 1998 of options granted by the Company.
Inclusion of such shares does not constitute an admission by any nominee,
director or executive officer that he is the beneficial owner of such
shares.

To the best of the Company's knowledge, no one person was the beneficial
owner of more than 5% of the outstanding voting securities of the Company or of
more than 5% of any class of voting securities of the Company at February 12,
1998.

SUBMISSION OF STOCKHOLDER PROPOSALS AND NOMINATIONS

The Company's Certificate of Incorporation contains procedures for
stockholder nomination of directors and the Company's By-laws contain
procedures for other stockholder proposals to be presented before annual
stockholder meetings. The Certificate of Incorporation provides that any record
owner of stock entitled to be voted generally in the election of directors may
nominate one or more persons for election as a director at a stockholders'
meeting only if written notice is given to the Secretary of the Company of the
intent to make such nomination. The notice must be given 120 days in advance of
the annual meeting and must include: (i) the name and address of each
stockholder who intends to appear in person or by proxy to make the nomination
and of the person or persons to be nominated; (ii) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming them) pursuant to which the nomination is to be
made by the stockholder; (iii) such other information regarding each nominee
proposed by such stockholder as would have been included in a proxy statement;
and (iv) the consent of each nominee to serve if elected.

22
<PAGE>

With respect to stockholder proposals or other business to be considered at
the annual meeting of stockholders, the By-laws provide that a stockholder of
record must give written notice to the Secretary of the Company no later than
120 days before the meeting. The notice must set forth: (i) a brief
description of the business to be brought before the meeting, the reasons for
conducting such business and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made and (ii) as to the stockholder giving the notice and the beneficial
owner, if any, on whose behalf the proposal is made (a) the name and address
of such stockholder, as they appear on the Company's books, and of such
beneficial owner and (b) the class and number of shares of the Company which
are owned beneficially and of record by such stockholder and such beneficial
owner. The By-laws further provide that, notwithstanding the foregoing
provisions, stockholders wishing to have a proposal included in the Company's
proxy statement shall comply with the applicable requirements of the Exchange
Act, and the rules and regulations thereunder and shall have the rights
provided by Rule 14a-8 under such Act. In order to be eligible under Rule 14a-
8 for inclusion in the Company's proxy statement and accompanying proxy at the
next annual meeting of stockholders currently scheduled to be held on May 5,
1999, stockholder proposals must be received by the Company on or before
November 13, 1998.

A copy of the Certificate of Incorporation and By-law provisions is
available upon written request to Mr. Louis F. Fernous, Jr., Vice President
and Secretary, Fortune Brands, Inc., 1700 East Putnam Avenue, Old Greenwich,
Connecticut 06870. The person presiding at the meeting is authorized to
determine if a proposed matter is properly before the meeting or if a
nomination is properly made.

MISCELLANEOUS

A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SEC FOR
ITS LAST FISCAL YEAR, INCLUDING ANY FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULES THERETO, WILL BE MADE AVAILABLE TO STOCKHOLDERS WITHOUT
CHARGE UPON WRITTEN REQUEST TO MR. LOUIS F. FERNOUS, JR., VICE PRESIDENT AND
SECRETARY, FORTUNE BRANDS, INC., 1700 EAST PUTNAM AVENUE, OLD GREENWICH,
CONNECTICUT 06870. THE COMPANY WILL FURNISH ANY EXHIBITS TO FORM 10-K TO EACH
STOCKHOLDER REQUESTING THEM UPON PAYMENT OF A FEE OF $.10 PER PAGE TO COVER
THEIR COST.

The expense of the solicitation of proxies for this meeting, including the
cost of mailing, will be borne by the Company. In addition to mailing copies
of this material to stockholders, the Company will request persons who hold
stock in their names or custody, or in the names of nominees, for the benefit
of others to forward copies of such material to the beneficial owners of the
stock of the Company and to request authority for the execution of the
proxies. To the extent deemed necessary in order to assure sufficient
representation at the meeting, officers and regular employees of the Company
will request the return of proxies by telephone, facsimile or in person. In
addition, the Company has retained Georgeson & Company Inc., Wall Street
Plaza, New York, New York 10005, to aid in the solicitation of proxies for a
fee, including its expenses, estimated at $25,000. The total expense to be
borne by the Company will depend upon the volume of shares represented by the
proxies received promptly in response to the notice of meeting.

Stockholders who do not intend to be present at the meeting are urged to
send in their proxies without delay. Prompt response is helpful, and your
cooperation will be appreciated.

February 27, 1998

23
<PAGE>

LOGO
THIS PROXY STATEMENT IS PRINTED ON
RECYCLED PAPER. THE ENTIRE
PUBLICATION IS RECYCLABLE.
<PAGE>

P
R
O
X
Y

[LOGO] FORTUNE BRANDS, INC.

PROXY SOLICITED BY THE BOARD OF DIRECTORS

The undersigned hereby appoints T.C. HAYS, G.L. KLEMANN, II and J.T. LUDES
proxies, with power of substitution, to vote at the Annual Meeting (including
adjournments) of stockholders of Fortune Brands, Inc., to be held April 28,
1998, at the Hyatt Regency Greenwich, Old Greenwich, Connecticut at 2:00 P.M.,
for the election of nominees John T. Ludes, Anne M. Tatlock, John W. Thompson
and Peter M. Wilson as Class III directors (Item 1), on Items 2 and 3 referred
to on the reverse side and described in the Proxy Statement, and on any other
business before the meeting, with all powers the undersigned would possess if
personally present. A majority (or, if only one, then that one) of the proxies
or their substitutes acting at the meeting may exercise all powers hereby
conferred.

This proxy when properly executed will be voted in the manner directed herein by
the stockholder. If no contrary indication is made, the proxies will vote FOR
---
the election of the nominees of the Board of Directors (Item 1), FOR Item 2 and
---
AGAINST Item 3 if it is presented to the meeting.
- -------

(Continued and to be signed and dated on the other side)

PLEASE EXECUTE AND RETURN YOUR PROXY PROMPTLY

(See enclosed Proxy Statement)
<PAGE>

[X] Please mark
your votes
as this

- --------------------------------------------------------------------------------
The Board of Directors recommends votes FOR items 1 and 2
---
proposed by the Company
- --------------------------------------------------------------------------------

FOR WITHHELD
ALL FROM ALL
1. Election of Directors [_] [_]

FOR, EXCEPT individual nominee(s) (Messrs. Ludes, Thompson
and Wilson and Mrs. Tatlock) whose name(s) is written below:

___________________________________________________________

FOR AGAINST ABSTAIN
2. Elect Coopers & Lybrand L.L.P. [_] [_] [_]
Independent accountants for 1998

- --------------------------------------------------------------------------------
The Board of Directors recommends a vote AGAINST Item 3
-------
proposed by a Stockholder
- --------------------------------------------------------------------------------

FOR AGAINST ABSTAIN
3. Request elimination of election [_] [_] [_]
of directors by classes

Date: ____________________, 1998

_________________________________________

_________________________________________
Signature(s) of Stockholder(s)

Note: Please mark, date, sign as name
appears at left, and return this
proxy in the enclosed postpaid
envelope. (Executors, administrators,
trustees, custodians, etc., should
indicate capacity in which signing.)