UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
February 20, 1998 (February 17, 1998)
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Date of Report (Date of earliest event reported)
FORTUNE BRANDS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 1-9076 13-3295276
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
l700 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
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<PAGE>
INFORMATION TO BE INCLUDED IN THE REPORT
Item 5. Other Events.
- ------ ------------
Registrant's press release dated February 17, 1998 is filed herewith as
Exhibit 20 and is incorporated herein by reference.
In addition, the following exhibit is filed herewith as Exhibit 99 and is
incorporated herein by reference:
Exhibit 99 -- Fortune Brands, Inc. and Subsidiaries (i) Consolidated
Statement of Income for the years ended December 31, 1997, 1996 and 1995, (ii)
Consolidated Balance Sheet as of December 31, 1997 and 1996, (iii) Consolidated
Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995,
(iv) Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995, (v) Notes to Consolidated Financial
Statements, (vi) Report of Independent Accountants and (vii) Information on
Business Segments.
References in such Exhibit 99 to the Company are, unless the context otherwise
requires, to Registrant.
Item 7. Financial Statements and Exhibits.
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(c) Exhibits.
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20. Press release of Registrant dated February 17, 1998.
23. Consent of Independent Accountants, Coppers & Lybrand L.L.P.
27. Financial Data Schedule (Article 5).
99. Fortune Brands, Inc. and Subsidiaries (i) Consolidated
Statement of Income for the years ended December 31,
1997, 1996 and 1995, (ii) Consolidated Balance Sheet as
of December 31, 1997 and 1996, (iii) Consolidated
Statement of Cash Flows for the years ended December
31, 1997, 1996 and 1995, (iv) Consolidated Statement of
Stockholders' Equity for the years ended December 31,
1997, 1996 and 1995, (v) Notes to Consolidated
Financial Statements, (vi) Report of Independent
Accountants and (vii) Information on Business Segments.
<PAGE>
SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this Current Report to be signed on its
behalf by the undersigned thereunto duly authorized.
FORTUNE BRANDS, INC.
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(Registrant)
By C. P. Omtvedt
--------------------------------
C. P. Omtvedt
Senior Vice President and
Chief Accounting Officer
Date: February 20, 1998
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
- ------- -------------
20. Press release of Registrant dated
February 17, 1998.
23. Consent of Independent Accountants,
Coppers & Lybrand L.L.P.
27. Financial Data Schedule (Article 5).
99. Fortune Brands, Inc. and Subsidiaries
(i) Consolidated Statement of Income
for the years ended December 31, 1997,
1996 and 1995, (ii) Consolidated Balance
Sheet as of December 31, 1997 and 1996,
(iii) Consolidated Statement of Cash
Flows for the years ended December 31,
1997, 1996 and 1995, (iv) Consolidated
Statement of Stockholders' Equity for
the years ended December 31, 1997, 1996
and 1995, (v) Notes to Consolidated
Financial Statements, (vi) Report of
Independent Accountants and (vii)
Information on Business Segments.
EXHIBIT 20
NEWS RELEASE
NEWS RELEASE
Fortune Brands, Inc., 1700 East Putnam Avenue, Old Greenwich, CT 06870
NEWS RELEASE
Media Relations: Investor Relations:
Roger W. W. Baker Daniel A. Conforti
(203)698-5148 (203)698-5132
FORTUNE BRANDS REAFFIRMS STRONG 1998 GROWTH OUTLOOK;
NOTES LEADING POSITION
IN FORTUNE MAGAZINE'S "MOST ADMIRED" SURVEY
Naples, FL, February 17, 1998 -- Fortune Brands, Inc. (NYSE-FO), the consumer
products company, reaffirmed this morning its strong growth outlook for 1998.
Speaking at the 1998 Consumer Analyst Group of New York (CAGNY)
Conference in Naples, Florida, Fortune Brands Chairman and Chief Executive
Officer Thomas C. Hays stated that the Company expects to achieve 13-15% E.P.S.
growth in 1998, assuming a satisfactory economic and pricing environment and no
further erosion in the key foreign currency exchange rates. This 1998 target is
also the Company's long-term E.P.S. growth goal.
Hays noted that Fortune Brands closed 1997 on a high note, with a 17%
fourth quarter E.P.S. gain and with strong momentum across all brand groups.
"Our optimism is based on great resources," Hays stated, "including
great brands, a powerful balance sheet and tremendous cash flow, and it's based
on a strategy that's working. We're very pleased that the success of our
strategy is becoming recognized in a strong and growing reputation for
excellence." In Fortune Magazine's just-released ranking of America's Most
Admired companies, the Company ranked as the most admired company in its
category by a wide margin. Overall, among the 476 companies listed, only 11
companies ranked higher.
"Fortune Magazine says that the Most Admired companies have passion,
commitment and ferocity," Hays noted. "Let me assure you that these are the
traits that are driving Fortune Brands. We are determined to delight our
shareholders."
Hays stated that the Company's strategy is sharply focused on revenue
growth, cost initiatives and asset management. "We're driving revenue growth
that's faster than our categories'," Hays said. "We're aggressively managing the
supply chain on a worldwide basis to ensure low costs and high quality. And
we're driving higher return on investment by aggressively managing working
capital and by tightly controlling capital expenditures."
Fortune Brands, Inc. is a consumer products company with headquarters
in Old Greenwich, Connecticut. Its operating companies have powerhouse brands
and leading market positions. Home and office products consist of hardware and
home improvement brands -- including Moen faucets, Master locks and Aristokraft
cabinets sold by units of MasterBrand Industries -- and office products brands
- -- including ACCO World Corporation's Day-Timer and Swingline. Acushnet
Company's golf brands include Titleist, Cobra and FootJoy. Major distilled
spirits brands sold by units of JBB Worldwide, Inc. include Jim Beam and Knob
Creek Bourbon, DeKuyper cordials and Whyte & Mackay Scotch.
* * *
This press release 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.
###
EXHIBIT 23
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 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 Current Report on Form 8-K
of Fortune Brands, Inc.
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
February 20, 1998
<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
0
11
<COMMON> 717
<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>
<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.
1
<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
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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.
2
<PAGE>
<TABLE>
<CAPTION>
1997 1996
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<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>
3
<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.
4
<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.
5
<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.
6
<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.
7
<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
81/2% Notes, Due 2003(c) 157.3 200.0
85/8% Debentures, Due 2021(c) 123.6 150.0
77/8% Debentures, Due 2023 150.0 150.0
71/2% Notes, Due 1999 150.0 150.0
9% Notes, Due 1999(c) 73.3 100.0
91/4% Eurosterling Notes, Due 1998 82.5 85.6
121/2% 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.
8
<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
9
<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
10
<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
====================================
11
<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.
12
<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
======================
13
<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.
14
<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.
15
<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 20.
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
====================================
16
<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
====================================
17
<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.
18
<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
19
<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.)
20
