UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission file number 1-9076
ended September 30, 1998
FORTUNE BRANDS, INC.
---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
---------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock, par value
$3.125 per share, at October 30, 1998 was 171,008,796 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
- ------ --------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 74.2 $ 54.2
Accounts receivable, net 879.8 862.0
Inventories
Bulk whiskey 345.1 338.1
Other raw materials, supplies and
work in process 279.8 258.7
Finished products 430.3 358.4
-------- --------
1,055.2 955.2
Other current assets 239.9 224.2
-------- --------
Total current assets 2,249.1 2,095.6
Property, plant and equipment, net 1,081.5 980.9
Intangibles resulting from
business acquisitions, net 3,796.2 3,674.1
Other assets 225.7 191.9
-------- --------
Total assets $7,352.5 $6,942.5
======== ========
See Notes to Condensed Consolidated Financial Statements.
- 1 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 68.4 $ 36.8
Commercial paper 295.0 191.6
Accounts payable 239.3 254.6
Accrued taxes 458.0 475.2
Accrued expenses and other liabilities 684.6 634.1
Current portion of long-term debt 184.3 176.2
-------- --------
Total current liabilities 1,929.6 1,768.5
Long-term debt 975.5 739.1
Deferred income taxes 45.7 38.5
Postretirement and other liabilities 376.7 379.3
-------- --------
Total liabilities 3,327.5 2,925.4
-------- --------
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 10.7 11.3
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 143.7 151.1
Accumulated other comprehensive income 16.0 6.9
Retained earnings 5,149.4 5,129.7
Treasury stock, at cost (2,012.2) (1,999.3)
-------- --------
Total stockholders' equity 4,025.0 4,017.1
-------- --------
Total liabilities and
stockholders' equity $7,352.5 $6,942.5
======== ========
See Notes to Condensed Consolidated Financial Statements.
- 2 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Nine Months Ended September 30, 1998 and 1997
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1998 1997
-------- --------
Net sales $3,830.0 $3,526.1
Cost of products sold 1,967.7 1,869.2
Excise taxes on spirits and wine 307.0 286.7
Advertising, selling, general and
administrative expenses 1,047.6 959.9
Amortization of intangibles 80.5 77.9
Restructuring charges - 74.2
Interest and related expenses 76.6 92.7
Other (income) expenses, net 3.7 7.5
-------- --------
Income from continuing operations
before income taxes 346.9 158.0
Income taxes 149.2 90.7
-------- --------
Income from continuing operations 197.7 67.3
Income from discontinued operations - 65.1
Extraordinary items (30.5) -
-------- --------
Net income $ 167.2 $ 132.4
======== ========
Earnings per Common share
Basic
Income from continuing operations $1.14 $.39
Income from discontinued operations - .38
Extraordinary items (.18) -
----- ----
Net income $ .96 $.77
===== ====
Diluted
Income from continuing operations $1.12 $.38
Income from discontinued operations - .38
Extraordinary items (.18) -
----- ----
Net income $ .94 $.76
===== ====
Dividends paid per Common share $.63 $1.20
==== =====
Average number of Common shares outstanding
Basic 172.5 171.6
===== =====
Diluted 176.8 175.2
===== =====
See Notes to Condensed Consolidated Financial Statements.
- 3 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended September 30, 1998 and 1997
------------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1998 1997
---------- ----------
Net sales $1,300.3 $1,185.5
Cost of products sold 681.0 632.0
Excise taxes on spirits and wine 107.5 100.9
Advertising, selling, general and
administrative expenses 346.3 318.5
Amortization of intangibles 27.3 26.0
Restructuring charges - 18.4
Interest and related expenses 26.2 24.0
Other (income) expenses, net 2.6 4.7
-------- --------
Income before income taxes 109.4 61.0
Income taxes 52.6 33.0
-------- --------
Net income $ 56.8 $ 28.0
======== ========
Earnings per Common share
Basic $.33 $.16
==== ====
Diluted $.32 $.16
==== ====
Dividends paid per Common share $.21 $.20
==== ====
Average number of Common shares outstanding
Basic 172.3 171.3
===== =====
Diluted 175.9 175.7
===== =====
See Notes to Condensed Consolidated Financial Statements.
- 4 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Nine Months Ended September 30, 1998 and 1997
-----------------------------------------------------
(In millions)
(Unaudited)
1998 1997
--------- ---------
Operating activities
Net income $ 167.2 $ 132.4
Restructuring charges - 74.2
Income from discontinued operations - (65.1)
Extraordinary items 30.5 -
Depreciation and amortization 186.5 183.9
Decrease in accounts receivable 1.9 35.0
(Increase) decrease in inventories (61.4) 40.3
Decrease in accounts payable, accrued
expenses and other liabilities (47.7) (82.4)
Increase(decrease) in accrued taxes 1.6 (57.1)
Other operating activities, net (30.3) (33.2)
------ --------
Net cash provided from continuing
operating activities 248.3 228.0
------ --------
Investing activities
Additions to property, plant and equipment (169.9) (111.2)
Acquisitions, net of cash acquired (270.4) (44.6)
Proceeds from disposition of operations 17.0 48.0
Other investing activities, net 0.6 3.6
------ --------
Net cash used by investing activities (422.7) (104.2)
------ --------
Financing activities
Increase (decrease) in short-term debt, net 136.4 (626.4)
Issuance of long-term debt 617.5 18.3
Repayment of long-term debt (374.8) (654.5)
Dividends to stockholders (109.3) (207.1)
Cash purchases of Common stock for treasury (84.3) (79.6)
Other financing activities, net 12.6 83.3
------ --------
Net cash provided (used) by financing activities 198.1 (1,466.0)
------ --------
Effect of foreign exchange rate changes on cash (3.7) (7.0)
------ --------
Cash provided by discontinued operations - 1,380.7
------ --------
Net increase in cash and cash equivalents 20.0 31.5
Cash and cash equivalents at beginning of period 54.2 34.9
------ --------
Cash and cash equivalents at end of period $ 74.2 $ 66.4
====== ========
See Notes to Condensed Consolidated Financial Statements.
- 5 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the Nine Months Ended September 30, 1998 and 1997
-------------------------------------------------------------
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
$2.67 Accumulated
Convertible other Treasury
Preferred Common Paid-in comprehensive Retained stock,
stock stock capital income earnings at cost Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $12.9 $717.4 $166.5 $(204.1) $5,025.4 $(2,042.1) $3,676.0
Comprehensive income
Net income - - - - 132.4 - 132.4
Changes during the period - - - (56.0) - - (56.0)
----- ------ ------ ------- -------- --------- --------
Total comprehensive income - - - (56.0) 132.4 - 76.4
----- ------ ------ ------- -------- --------- --------
Dividends - - - - (243.3) - (243.3)
Purchases - - - - - (75.6) (75.6)
Conversion of preferred stock and
delivery of stock plan shares (1.4) - (8.8) - - 102.0 91.8
Gallaher spin-off - - - 260.7 249.2 - 509.9
----- ------ ------ ------- -------- --------- --------
Balance at September 30, 1997 $11.5 $717.4 $157.7 $ 0.6 $5,163.7 $(2,015.7) $4,035.2
===== ====== ====== ======= ======== ========= ========
Balance at December 31, 1997 $11.3 $717.4 $151.1 $ 6.9 $5,129.7 $(1,999.3) $4,017.1
Comprehensive income
Net income - - - - 167.2 - 167.2
Changes during the period - - - 9.1 - - 9.1
----- ------ ------ ----- -------- --------- --------
Total comprehensive income - - - 9.1 167.2 - 176.3
----- ------ ------ ----- -------- --------- --------
Dividends - - - - (147.5) - (147.5)
Purchases - - - - - (84.1) (84.1)
Conversion of preferred stock and
delivery of stock plan shares (0.6) - (7.4) - - 71.2 63.2
----- ------ ------ ----- -------- --------- --------
Balance at September 30, 1998 $10.7 $717.4 $143.7 $16.0 $5,149.4 $(2,012.2) $4,025.0
===== ====== ====== ===== ======== ========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
- 6 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of September 30, 1998,
the related condensed consolidated statements of income for the
three-month and nine-month periods ended September 30, 1998 and 1997,
and the related condensed consolidated statements of cash flows and
stockholders' equity for the nine-month periods ended September 30,
1998 and 1997 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted of
restructuring and other nonrecurring charges in 1997 and normal
recurring items. Interim results may not be indicative of results for a
full year.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes. The year-end condensed consolidated balance sheet
was derived from the Company's audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. This Form 10-Q should be read in conjunction with the
Company's consolidated financial statements and notes incorporated by
reference in its 1997 Annual Report on Form 10-K.
2. Acquisitions
On August 26, 1998, the Company's spirits and wine subsidiary
acquired the business of Geyser Peak Winery and certain related
vineyard property for an aggregate cost of approximately $96 million.
On June 12, 1998, the Company's home products subsidiary acquired
Schrock Cabinet Company for an aggregate cost of approximately
$110 million.
On February 27, 1998, the Company's office products subsidiary
acquired the Apollo Presentation Products group of companies, marketers
of office and conference presentation products, for an aggregate cost
of approximately $65 million.
During the second half of 1997, acquisitions were made in the home
and office products segments for an aggregate cost of $92 million,
including fees, expenses and $9.5 million resulting from the issuance
of Common shares. In connection with the 1997 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.
- 7 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions (Concluded)
These operations have been included in consolidated results from
the dates of acquisition. Had operations of the acquisitions made in
1997 been consolidated from January 1, 1996, and the acquisitions made
in 1998 been consolidated from January 1, 1997, they would not have
materially affected results.
3. 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.
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.
The condensed consolidated financial statements were reclassified
to identify Gallaher's international tobacco operations as discontinued
operations. Summarized results of operations for the international
tobacco operations, net of allocation of interest expense based on the
ratio of Gallaher's net assets to consolidated net assets of the
Company, are as follows:
- 8 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Discontinued Operations (Concluded)
Nine Months Ended
September 30, 1997*
------------------
(In millions,
except per share amounts)
Net sales $2,575.0
========
Income before taxes $186.4
Spin-off expenses (67.1)
Income taxes (54.2)
------
Income from
discontinued operations $ 65.1
======
Earnings per Common share
Basic $.38
====
Diluted $.38
====
* Includes results through May 30, 1997.
4. Earnings Per Share
Basic earnings per Common share are based on the weighted average
number of Common shares outstanding in each period and after preferred
stock dividend requirements.
Diluted earnings per Common share assume that any dilutive
convertible preferred shares outstanding at the beginning of each
period were converted at those dates, with 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 that could have been purchased by
the Company with related proceeds.
- 9 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Earnings Per Share (Concluded)
The computation of basic and diluted earnings per Common share
for "Income from continuing operations" is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Income from continuing operations $197.7 $67.3 $56.8 $28.0
Less: Preferred stock dividends 0.7 0.8 0.3 0.2
------ ----- ----- -----
Income available to Common
stockholders - basic 197.0 66.5 56.5 27.8
Convertible Preferred stock
dividend requirements 0.7 0.8 0.3 0.2
------ ----- ----- -----
Income available to Common
stockholders - diluted $197.7 $67.3 $56.8 $28.0
====== ===== ===== =====
Weighted average number of Common
shares outstanding - basic 172.5 171.6 172.3 171.3
Conversion of Convertible
Preferred stock 2.2 2.0 2.2 2.5
Exercise of stock options 2.1 1.6 1.4 1.9
----- ----- ----- -----
Weighted average number of Common
shares outstanding - diluted 176.8 175.2 175.9 175.7
===== ===== ===== =====
Earnings per Common share
Basic $1.14 $.39 $.33 $.16
===== ==== ==== ====
Diluted $1.12 $.38 $.32 $.16
===== ==== ==== ====
</TABLE>
- 10 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Extraordinary Items
During the six-month period ended June 30, 1998, the Company
purchased the following principal amounts of its outstanding debt:
$31.4 million of 7-1/2% Notes, Due 1999, $50.4 million of 8-1/2% Notes,
Due 2003, $10.5 million of 9% Notes, Due 1999 and $32.7 million of
8-5/8% Debentures, Due 2021, and the Company also redeemed the
outstanding $50.1 million of 12-1/2% Sterling Loan Stock, Due 2009. The
extinguishment of debt resulted in a charge of $30.5 million ($46.9
million pre-tax), or 18 cents per Common share for the nine months
ended September 30, 1998.
6. Long-Term Debt
On June 30, 1998, the Company issued $200 million of 6-5/8%
Debentures, Due 2028. On March 31, 1998, the Company issued $200
million of 6-1/4% Notes, Due 2008. The net proceeds were used for
general corporate purposes.
7. Restructuring and Other Nonrecurring Charges
During the nine-month and three-month periods ended September 30,
1997, the Company recorded pre-tax restructuring and other nonrecurring
charges of $127.4 million and $38.1 million, respectively, as follows:
Nine Months Ended September 30, 1997
------------------------------------
Nonrecurring
Cost of Sales
Restructuring Charges Total
------------- ------ -----
(In millions)
Home products $15.9 $ 8.3 $ 24.2
Office products 23.5 - 23.5
----- ----- ------
Home and office products 39.4 8.3 47.7
Golf products 11.6 19.7 31.3
Spirits and wine 23.2 25.2 48.4
----- ----- ------
Total $74.2 $53.2 127.4
===== =====
Income tax benefit 39.0
------
Net charge $ 88.4
======
- 11 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Restructuring and Other Nonrecurring Charges (Concluded)
Three Months Ended September 30, 1997
-------------------------------------
Nonrecurring
Cost of Sales
Restructuring Charges Total
------------- ------ -----
(In millions)
Home products $ 6.8 $ - $ 6.8
Golf products 11.6 19.7 31.3
----- ----- -----
Total $18.4 $19.7 38.1
===== =====
Income tax benefit 15.1
-----
Net charge $23.0
=====
Home products 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.
Spirits and wine 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 and the sale or disposal of certain
facilities.
The Company recorded an aggregate of $298.2 million of pre-tax
restructuring and other nonrecurring charges in 1997. In connection
with the restructuring, the home and office products segments will be
reducing their workforces by 7%, or 1,125 individuals, primarily
production employees. As of September 30, 1998 approximately 470
positions were eliminated. The remaining restructuring liability at
September 30, 1998, which relates principally to employee termination
costs that will be paid during 1998, was $41.7 million. The Company
anticipates that the restructuring activities will be substantially
completed during 1998.
- 12 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Comprehensive Income
During the first quarter of 1998, the Company adopted FAS
Statement No. 130, "Reporting Comprehensive Income" and has elected to
report comprehensive income in the condensed consolidated statement of
stockholders' equity. Comprehensive income is defined as the change in
equity from transactions and other events from nonowner sources and
comprises net income and other comprehensive income. The components of
accumulated other comprehensive income are as follows:
<TABLE>
<CAPTION>
Foreign Minimum Accumulated
currency pension liability other
adjustments adjustment comprehensive income
----------- ---------- -------------------
(In millions)
<S> <C> <C> <C>
Balance December 31, 1996 $(195.9) $(8.2) $(204.1)
Changes in nine months (56.0) - (56.0)
Gallaher spin-off 260.7 - 260.7
------- ----- -------
Balance September 30, 1997 $ 8.8 $(8.2) $ 0.6
======= ===== =======
Balance December 31, 1997 $19.9 $(13.0) $ 6.9
Changes in nine months 9.1 - 9.1
----- ------ -----
Balance September 30, 1998 $29.0 $(13.0) $16.0
===== ====== =====
</TABLE>
For the three-month periods ended September 30, 1998 and 1997,
total comprehensive income was $66.8 million and a loss of $3.7
million, respectively.
9. 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.
- 13 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
9. Pending Litigation (Concluded)
Tobacco Litigation and Indemnification (Concluded)
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.
10. Environmental
The Company is subject to laws and regulations relating to the
protection of the environment. While it is not possible to quantify
with certainty the potential impact of actions regarding environmental
matters, particularly remediation and other compliance efforts that the
Company's subsidiaries may undertake in the future, in the opinion of
management, compliance with the present environmental protection laws,
before taking into account estimated recoveries from third parties,
will not have a material adverse effect upon the results of operations,
cash flows or financial condition of the Company.
- 14 -
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors of Fortune Brands, Inc.:
We have reviewed the condensed consolidated balance sheet of
Fortune Brands, Inc. and Subsidiaries as of September 30, 1998, the
related condensed consolidated statements of income for the three-month
and nine-month periods ended September 30, 1998 and 1997, and the
condensed consolidated statements of cash flows and stockholders'
equity for the nine-month periods ended September 30, 1998 and 1997.
These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data, and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression
of an opinion regarding the consolidated financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1997, and the related consolidated statements of income, cash flows and
stockholders' equity for the year then ended (not presented herein) and
in our report dated February 4, 1998, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1997 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it
has been derived.
11 Madison Avenue PricewaterhouseCoopers LLP
New York, New York 10010
November 11, 1998
- 15 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
---------------------------------------
<TABLE>
<CAPTION>
Results of Operations for the Nine Months Ended September 30, 1998 as
Compared to the Nine Months Ended September 30, 1997
----------------------------------------------------------------------------
Net Sales Operating Income(1)
---------------------- ---------------------------------------
1998 1997 1998 1997 1997(2)
---- ---- ---- ---- -------
(In millions)
<S> <C> <C> <C> <C> <C>
Home products $1,143.3 $1,016.6 $148.7 $112.4 $136.6
Office products 986.5 891.9 61.6 30.3 53.8
-------- -------- ------ ------ ------
Home and office products 2,129.8 1,908.5 210.3 142.7 190.4
Golf products 820.1 750.0 124.5 81.8 113.1
Spirits and wine 880.1 867.6 145.5 90.1 138.5
-------- -------- ------ ------ ------
$3,830.0 $3,526.1 $480.3 $314.6 $442.0
======== ======== ====== ====== ======
<FN>
(1) Operating income represents net sales less all costs and expenses
excluding corporate administrative expenses, interest and related
expenses and other (income) expenses, net.
(2) Excludes restructuring and other nonrecurring charges of $127.4 million.
</FN>
</TABLE>
CONSOLIDATED
- ------------
Net sales increased 9% on benefits from new products and line extensions,
acquisitions and price increases, partly offset by volume declines in some
existing products, the sale of nonstrategic businesses and lower average foreign
exchange rates (primarily the Australian dollar). Operating income increased 53%
principally due to $127.4 million of restructuring and other nonrecurring
charges taken in 1997 across all segments. (See Note 7 in the Notes to Condensed
Consolidated Financial Statements.) Operating income excluding these charges
increased 9%, principally due to the higher sales, partly offset by higher
operating expenses coupled with effects of lower average foreign exchange rates.
Excluding the 1997 restructuring charges and the effects of translation at lower
average foreign exchange rates, net sales and operating income were up 10% and
11%, respectively.
- 16 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
During 1997, the Company recorded an aggregate of $298.2 million of pre-tax
restructuring and other nonrecurring charges. (See Note 7.) The following
restructuring activities are underway: the expansion of the Nogales, Mexico
operation to include office products' Swingline stapling production and a
significant portion of home products' Master Lock assembly operations, the
integration of office products in Europe and Australia and the planned reduction
of workforces in the home and office products segments. The Company anticipates
that the remaining restructuring activities will be substantially completed
during 1998.
Interest and related expenses decreased 17% reflecting lower average borrowings
principally from the use of the proceeds from the Gallaher spin-off, as
discussed below.
The effective income tax rate comparisons for the nine-month periods ended
September 30, 1998 and 1997 were distorted by 1997 restructuring and other
nonrecurring charges. Excluding these charges, the effective income tax rates
were 43% and 45.4%, respectively. The lower effective tax rate this year
principally reflected the reduced impact of nondeductible goodwill on higher
pre-tax income as well as lower state taxes.
Income from continuing operations of $197.7 million, or $1.14 per Common share,
for the nine months ended September 30, 1998 compared with $67.3 million, or 39
cents per share, for the same period last year. The increase was principally due
to last year's $88.4 million, or 51 cents per share, in net restructuring and
other nonrecurring charges. Excluding these charges, income from continuing
operations was up $42 million, or 27%.
On May 30, 1997, Gallaher Group Plc ("Gallaher"), the Company's international
tobacco subsidiary, was spun off ("the Gallaher spin-off") and the Company's
name was changed from American Brands, Inc. to Fortune Brands, Inc. The
consolidated financial statements were restated to present Gallaher as a
discontinued operation. (See Note 3.)
Income from discontinued operations for the nine months ended September 30, 1997
represented Gallaher's net income of $65.1 million, or 38 cents per share. In
addition, this amount included $67.1 million (pre-tax)in spin-off expenses. (See
Note 3.)
- 17 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
The extraordinary items charge in the nine months ended September 30, 1998 of
$30.5 million ($46.9 million pre-tax), or 18 cents per share, resulted from the
extinguishment of debt. (See Note 5.)
Net income of $167.2 million, or 96 cents per share, compared with $132.4
million, or 77 cents per share, for the same period last year.
Income from continuing operations of $197.7 million, and basic and diluted
earnings per share of $1.14 and $1.12, respectively, in the nine months ended
September 30, 1998 compared with pro forma income from continuing operations of
$171.1 million, and pro forma basic and diluted earnings per share of $1.00 and
99 cents, respectively, in the nine months ended September 30, 1997. Pro forma
results reflect adjustments to income from continuing operations to exclude
restructuring and other nonrecurring charges and to include a net cash payment
that approximated $1.25 billion, after taxes, that Gallaher made to the Company
in connection with the Gallaher spin-off and the assumption that such proceeds
were used to purchase 2.5 million Common shares and repay debt as of January 1,
1997. This pro forma information is provided for informational purposes only and
does not purport to be indicative of the results of operations which would
actually have been obtained if the transactions had occurred on January 1, 1997,
or which may exist or be obtained in the future.
See Notes 9 and 10 for discussions of pending litigation and environmental
matters.
In June 1997, FAS Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information", was issued, to be effective with the 1998
annual financial statements. FAS No. 131 establishes standards for reporting
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.
In June 1998, FAS Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities", was issued, to be effective for fiscal quarters beginning
after June 15, 1999. FAS No. 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities. The Company is in the
process of evaluating the effect of adoption on future results and the
disclosure requirements under this standard.
- 18 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
In March 1998, AICPA Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," was issued, to be
effective January 1, 1999. SOP 98-1 provides guidance on which types of costs
should be capitalized and expensed for computer software developed or obtained
for internal use. The Company is in the process of evaluating the effect of
adoption on future results and the disclosure requirements under this SOP.
YEAR 2000 ISSUE
- ------------
GENERAL. The "Year 2000", or "Y2K", problem exists because many computer
programs and computerized devices use only the last two digits to refer to a
year. As a result, these programs and devices may not properly recognize a year
that begins with "20" instead of the familiar "19". If not corrected, many
computer applications could fail or produce erroneous results.
In early 1997, the Company established a task force, comprised of the
information technology specialists from the Company and its operating companies,
to develop an action plan to address the Year 2000 issues. The task force
functions primarily as a means to coordinate information sharing across the
Company's operating companies, to assess and facilitate the progress towards
becoming Y2K compliant and to regularly advise the Company's management and
Board of Directors regarding the project's status.
PROJECT OVERVIEW. The Company and its operating companies have focused their Y2K
compliance efforts in three areas: information technology ("IT") related systems
and processes such as operating systems, applications and programs; embedded
logic ("non-IT") systems and processes such as manufacturing machines, security
devices, etc.; and compliance efforts of third parties (such as suppliers,
customers, joint venture partners, government, utilities and other service
providers.) Within each of the IT and non-IT areas, the project includes
inventorying all programs and devices and identifying those that are affected by
the Y2K issue, developing strategies to resolve the issues, testing such
strategies and installing the solutions. The third party aspect of the project
involves contacting and, where appropriate, visiting with significant third
parties to request that they confirm their own Y2K compliance.
In addition to the efforts that have been focused on resolution of the Year 2000
issue, some business segments also have undertaken the normal course replacement
of older IT systems and non-IT devices with enterprise programs and other system
solutions to improve business processes. These enterprise programs also will
result in making the affected systems Year 2000 compliant.
- 19 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
YEAR 2000 ISSUE (Continued)
- ------------
INTERNAL STATE OF READINESS. The non-IT portion of the project is substantially
complete, and the Company and its operating companies anticipate that all non-IT
systems will be Y2K compliant by December 31, 1998. A significant amount of the
IT portion of the project also has been completed, and the Company and its
operating companies anticipate that all IT systems will be Y2K compliant by June
30, 1999. The Company has been focusing its efforts on compliance, believes it
will be compliant in time and consequently has not yet developed formal
contingency plans. However, if progress of compliance efforts so warrants,
formal contingency plans will be developed.
THIRD PARTY RISKS. Many third parties have responded to the Company's requests
for information and more extensive inquiries have been initiated with
significant suppliers and customers. As of this time, third party compliance is
difficult to assess. The failure of one or more significant third parties to be
Y2K compliant may include, among other things, temporary plant closings, delays
in the delivery of products, delays in the receipt of supplies and invoice and
collection errors. Contingency plans will be developed and implemented to the
extent feasible in the timeframe prior to December 31, 1999. Such actions may
include identifying or contracting with additional sources of raw materials and
components and building of supplies and inventory. Because of the difficulties
inherent in assessing the Y2K compliance of third parties, each of the Company's
business segments consider disruptions caused by the failure of such parties to
be Y2K compliant to present the most reasonably likely worst-case scenarios. In
addition to the risks facing businesses generally, such as the failure of
significant service providers in the utilities, communications, transportation,
banking, financial and government sectors to be Y2K compliant, the Company faces
certain risks specific to the businesses of its operating companies. The
continuing rationalization of manufacturing activities in the home, office and
golf segments has resulted in an increase in the level of manufacturing, and
purchases from vendors and suppliers, in less-developed countries. The Y2K
compliance in such areas is particularly difficult to assess, and the failure of
key suppliers to be Y2K compliant could cause disruptions in these segments.
Also, the continued trend towards consolidation among the customer base in the
home and office products segments presents special risks. Because the Company's
sales in these segments are becoming concentrated on a number of larger
customers, the failure of one or more such customers to be Y2K compliant could
result in interruptions in sales to affected customers. Finally, the Company's
spirits and wine segment faces potential disruptions in the U.S. related to
non-compliance by any of the state and local government entities that control
the distribution and sale of spirits and wine in 18 "control" states. Moreover,
the requirement that
- 20 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
YEAR 2000 ISSUE (Concluded)
- ------------
spirits and wine be sold only through the government in such jurisdictions may
legally prohibit the Company's spirits and wine segment from taking the
necessary steps to continue to sell or distribute products until such government
entities' Y2K problems are successfully resolved.
COSTS TO ADDRESS YEAR 2000 ISSUES. Based on the efforts to date and on project
plans, the Company currently estimates that the total costs (including costs of
existing internal resources) will be approximately $25 million, which is being
provided by internally generated sources. Of the total cost, approximately 56
percent has been expended as of September 30, 1998. This cost estimate may
change as the program progresses.
CONCLUSION. Based on current assessment efforts, the Company anticipates that
its internal Year 2000 issues will be resolved in a timely manner. However, the
Year 2000 problem presents a number of risks that are beyond the Company's
reasonable control, particularly with respect to the Y2K compliance of third
parties, both domestic and international. Although the Company believes that its
Y2K program is designed to appropriately identify and address those issues which
are within the Company's reasonable control, there can be no assurance that its
efforts will be fully effective or that Y2K issues will not have a material
adverse effect upon the results of operations, cash flows or financial condition
of the Company.
- 21 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Home Products
- -------------
Net sales increased 12% on an overall volume increase (line extensions and new
products, partly offset by volume declines in some existing products), the
benefit of acquisitions and price increases, partly offset by the disposal of
Master Lock's door hardware business in the first quarter of 1998 and Moen's
operations in Japan in the third quarter of 1997. Operating income increased 32%
principally due to last year's $24.2 million restructuring and other
nonrecurring charge related to the disposition of certain product lines and the
rationalization of operations. Operating income excluding this charge increased
9% principally reflecting the sales increase, partly offset by lower gross
margin (principally lower margins at acquired companies) and higher
volume-related selling expenses.
Office Products
- ---------------
Net sales increased 11% on benefit from acquisitions and an overall volume
increase (principally from new products), partly offset by reduced prices, lower
average foreign exchange rates and the absence of two nonstrategic businesses
sold in 1997. Operating income increased 103% principally due to last year's
$23.5 million restructuring charge related to the rationalization of operations,
the discontinuance of certain product lines and lease cancellation costs, partly
offset by a pre-tax gain on the sale of nonstrategic businesses. Operating
income excluding this charge increased 14% reflecting the sales increase and
improved gross margin (principally stabilized raw material costs and other cost
reductions), partly offset by increased operating expenses. The higher operating
expenses were substantially related to maintaining customer service levels as
restructuring programs are being implemented and higher customer program costs.
Operating income benefited from the acquisitions and was negatively impacted by
translation of foreign results at lower average foreign exchange rates.
- 22 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Golf Products
- -------------
Net sales were up 9% on an overall volume increase in golf balls, clubs, gloves
and shoes (new products and line extensions, partly offset by volume declines in
some existing products coupled with discontinued products associated with new
product introductions) and price increases, partly offset by lower average
foreign exchange rates. Operating income increased 52% principally due to last
year's $31.3 million restructuring and other nonrecurring charge related to the
discontinuance of certain product lines and the rationalization of operations.
Operating income excluding this charge increased 10% reflecting the higher sales
and slightly improved gross margin, partly offset by higher advertising and
promotional expenditures and research and development expenses associated with
the support of existing products and the development of new products.
The golf club market has been adversely affected this year by lower consumer
demand, resulting in a revenue decline in the U.S. market in the range of 10-15%
and extensive price discounting. Both Titleist and Cobra were affected by the
overall weakness in the market for irons, though both achieved volume gains in
metalwoods. For the third quarter, Titleist golf club net sales were up on a
favorable product mix and firm pricing. For Cobra, results were more in line
with the overall market, as sales and profits declined significantly. Cobra is
undertaking cost reduction initiatives to bring expenses into line with lower
demand and to further improve manufacturing and other synergies between Cobra
and Titleist. For the full year 1998, depending on evolving market conditions,
an increase in operating income is expected for golf products, however, a
decline is expected in the fourth quarter.
The United States Golf Association ("USGA") establishes standards for golf
equipment used in competitive play in the United States. On November 2, 1998,
the USGA announced the immediate implementation of a new rule with respect to
the performance of golf clubs. The Company has reviewed this rule and believes
that most or all of its products currently marketed and under development will
conform to such rule. In the long term, this new rule could hamper innovation
and make it more difficult to use technological advances to produce USGA
conforming products. However, it is not possible to determine whether in the
long term this new rule will have a material effect on the golf club industry
and the Company's golf products segment.
- 23 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Golf Products (Concluded)
- -------------
The USGA has also announced its intention to propose a new rule in the Spring of
1999 with respect to initial velocity and the overall distance standard for golf
balls. Until such rule is proposed, the Company cannot determine whether the
USGA's actions, if taken, will have an effect on its golf ball business and/or
the golf ball industry.
Spirits and Wine
- ----------------
Net sales increased 1% on price and volume increases and benefit of an
acquisition, partly offset by lower average foreign exchange rates and the
unfavorable comparison to a 1997 domestic bulk sale. The overall volume increase
principally reflected higher case shipments in the U.S. (benefits from reduced
trade inventories in late 1997) and Canada, line extensions and new products,
partly offset by lower volume in Europe. Operating income increased 61%
principally due to last year's $48.4 million restructuring and other
nonrecurring charge related to a change in estimate for bulk whiskey valuations
which resulted from the integration of the worldwide distilled spirits business,
international distribution and lease agreements and the discontinuation of
certain product lines. Operating income excluding this charge increased 5% on
the sales increase and improved gross margin, (principally price increases and
favorable product mix), partly offset by increased operating expenses
(principally volume-related selling expenses in the U.S.). Operating results
improved in North America and Europe while Australian results declined due to
the negative impact of translation at a 17% lower average foreign exchange rate.
For the fourth quarter of 1998, more modest growth in operating income is
expected.
The merger of Grand Metropolitan PLC and Guinness PLC to create Diageo PLC in
late 1997 reflects the trend towards consolidation in the highly competitive
global spirits business. The creation of Diageo PLC and the breadth of its
portfolio of brands, as well as the continued consolidation of the supplier,
distributor and retailer tiers may present pricing and service challenges for
distilled spirits producers, as well as opportunities for the most efficient
producers.
- 24 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided from continuing operating activities of $248.3 million for the
nine months ended September 30, 1998 compared with $228 million for the same
nine-month period last year.
Net cash used by investing activities for the nine months ended September 30,
1998 was $422.7 million, as compared with $104.2 million in the same nine-month
period last year. The increased use of funds in 1998 reflects the acquisitions
of Apollo Presentation Products, Schrock Cabinet Company and Geyser Peak Winery
and higher capital expenditures (including $42.6 million related to previously
announced 1997 restructuring activities), partly offset by lower proceeds from
disposed operations.
Net cash provided by financing activities for the nine months ended September
30, 1998 was $198.1 million, as compared with net cash used by financing
activities of $1,466 million in the same nine-month period last year, reflecting
the repayment in 1997 of debt using the proceeds provided by Gallaher in
conjunction with the spin-off of that company, and lower total dividends paid
this year because the Company reset the dividend rate at the time of the
Gallaher spin-off. During the nine months ended September 30, 1998 the Company
purchased 2,490,500 Common shares including those purchased pursuant to the
systematic share purchase program approved in 1997 and other open market
purchases.
Total debt at September 30, 1998 was $1.5 billion, an increase of $379.5 million
from December 31, 1997. The ratio of total debt to total capital increased from
22.2% at December 31, 1997 to 27.5% at September 30, 1998 as a result of
acquisitions and share purchases.
During the six months ended June 30, 1998, the Company purchased or redeemed
$175.1 million principal amount of its outstanding debt. (See Note 5.) On June
30, 1998, the Company issued $200 million of 6-5/8% Debentures, Due 2028. On
March 31, 1998, the Company issued $200 million of 6-1/4% Notes, Due 2008. (See
Note 6.)
Management believes that the Company's internally generated funds, together with
its access to global credit markets, are more than adequate to meet the
Company's capital needs.
- 25 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
---------------------------------------
Results of Operations for the Three Months Ended September 30, 1998 as
Compared to the Three Months Ended September 30, 1997
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Sales Operating Income(1)
------------------------- -------------------------------------
1998 1997 1998 1997 1997(2)
---- ---- ---- ---- -------
(In millions)
<S> <C> <C> <C> <C> <C>
Home products $ 433.8 $ 352.4 $ 52.9 $ 41.0 $ 47.8
Office products 346.3 316.4 24.3 20.7 20.7
-------- -------- ------ ------ ------
Home and office products 780.1 668.8 77.2 61.7 68.5
Golf products 214.7 208.7 22.7 (8.9) 22.4
Spirits and wine 305.5 308.0 56.3 56.0 56.0
-------- -------- ------ ------ ------
$1,300.3 $1,185.5 $156.2 $108.8 $146.9
======== ======== ====== ====== ======
<FN>
(1) Operating income represents net sales less all costs and expenses
excluding corporate administrative expenses, interest and related
expenses and other (income) expenses, net.
(2) Excludes restructuring and other nonrecurring charges of $38.1 million.
</FN>
</TABLE>
CONSOLIDATED
- ------------
Net sales increased 10% on acquisitions and benefits from line extensions and
new products, partly offset by volume declines in some existing products, lower
average foreign exchange rates (primarily the Australian dollar) and the sale of
nonstrategic businesses. Operating income increased 44% principally due to last
year's $38.1 million of restructuring and other nonrecurring charges in home
products and golf products. (See Note 7 in the Notes to Condensed Consolidated
Financial Statements.) Operating income excluding these charges increased 6%,
principally due to the higher sales, partly offset by higher operating expenses
coupled with effects of lower average foreign exchange rates. Excluding the 1997
restructuring charges and the effects of translation at lower average foreign
exchange rates, net sales and operating income were up 11% and 9%, respectively.
- 26 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
Interest and related expenses increased 9% reflecting higher average borrowings
principally due to borrowings to fund acquisitions and purchase shares.
The effective income tax rate comparisons for the three-month periods ended
September 30, 1998 and 1997 were distorted by 1997 restructuring and other
nonrecurring charges. Excluding these charges, the effective income tax rates
were 48.1% and 48.5%, respectively.
Net income of $56.8 million, or 33 cents per Common share, for the three months
ended September 30, 1998 compared with $28 million, or 16 cents per share, for
the same period last year. The increase was principally due to last year's $23
million, or 13 cents per share, in net restructuring and other nonrecurring
charges. Excluding these charges, net income was up $5.8 million, or 11%.
Home Products
- -------------
Net sales increased 23% from benefit of acquisitions and an overall volume
increase (line extensions and new products, partly offset by volume declines in
some existing products)and price increases, partly offset by the absence of
Master Lock's door hardware division and Moen's operations in Japan. Operating
income increased 29% principally due to last year's $6.8 million restructuring
and nonrecurring charge as discussed in the section discussing the nine month
results. Operating income excluding this charge increased 11% principally on the
sales increase, partly offset by lower gross margin (principally lower margins
at acquired companies) and higher volume-related selling expenses.
- 27 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Office Products
- ---------------
Net sales increased 9% on benefit from acquisitions and an overall volume
increase (new products and higher volume on existing products), partly offset by
reduced prices, lower average foreign exchange rates and the absence of two
nonstrategic businesses sold in 1997. Operating income increased 17% reflecting
the sales increase and improved gross margin (principally stabilized raw
material costs and other cost reductions), partly offset by increased operating
expenses. The higher operating expenses were related to higher customer program
costs and costs related to maintaining customer service levels as restructuring
programs are being implemented. Operating income benefited from the acquisitions
and was negatively impacted by translation of foreign results at lower average
foreign exchange rates.
Golf Products
- -------------
Net sales were up 3% on volume increases in golf balls and shoes (principally
new products and line extensions) and price increases, partly offset by a volume
decline in golf clubs and golf gloves and lower average foreign exchange rates.
Operating income of $22.7 million compared to an operating loss of $8.9 million
in 1997, which included the $31.3 million restructuring and nonrecurring charge
as discussed in the section discussing the nine month results. Operating income
excluding this charge increased 1% reflecting the higher sales, almost offset by
lower gross margin (principally due to the Cobra brand decline discussed in the
nine month results) and slightly higher operating expenses (principally higher
promotional expenses and research and development expenses associated with the
support of existing products and development of new products). See the section
on "Golf Products" describing the nine month results for additional information
on golf clubs.
Spirits and Wine
- ----------------
Net sales decreased 1% as lower volume (principally in Europe) and lower average
foreign exchange rates were nearly offset by higher prices and the benefit of an
acquisition. Operating income increased slightly as the improved gross margin
(principally price increases and favorable product mix), was nearly offset by
the decreased sales. Operating results improved in North America and Europe
while Australian results declined due to the negative impact of translation at a
19% lower average foreign exchange rate.
- 28 -
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
CAUTIONARY STATEMENT
- --------------------
This Quarterly Report on Form 10-Q contains statements relating to future
results, which are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Readers are cautioned that
these forward-looking statements speak only as of the date hereof. 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, changes in golf
equipment regulatory standards, the impact of weather, particularly on the home
products and golf brand groups, expenses and disruptions related to shifts in
manufacturing to different locations and sources, delays in the integration of
recent acquisitions, the timely resolution of the Year 2000 issue, as well as
other risks and uncertainties detailed from time to time in the Company's
Securities and Exchange Commission filings.
- 29 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
- ------ -----------------
(a) Overview
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 under the heading "Overview".
Individual Cases
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 under the heading "Individual Cases". As of November 11,
1998, there were approximately 237 smoking and health cases pending on behalf of
individual plaintiffs in which Registrant has been named as one of the
defendants, compared with approximately 97 such cases as of March 27, 1998. See
"Recent Case Developments" below.
Class Actions
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 under the heading "Class Actions". As of November 11,
1998, there were approximately 27 purported smoking and health class actions
pending in which Registrant has been named as one of the defendants, compared
with approximately 25 such cases as of March 27, 1998.
Health Care Cost Recovery Actions
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 under the heading "Health Care Cost Recovery Actions".
As of November 11, 1998, there were approximately 20 health care recovery
actions pending in which Registrant has been named as one of the defendants,
compared with approximately 17 such cases as of March 27, 1998.
Recent Case Developments
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 under the heading "Recent Case Developments" and to Part
II, Item 1, "Legal Proceedings", of Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, under the heading "Recent Case
Developments".
On June 10, 1998, a jury in a Florida case awarded the estate of a
smoker $52,249 for medical expenses, $500,000 to his surviving widow for loss of
companionship and $450,000 in punitive damages, in a smoking and health case
against Brown and Williamson Tobacco Corporation ("B&W") (as
- 30 -
<PAGE>
Item 1. LEGAL PROCEEDINGS (Continued)
- ------ -----------------
successor by merger to The American Tobacco Company ("ATCO")) (Widdick,
described in Part I, Item 3, "Legal Proceedings", of Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 under the heading "List
of Pending Cases"). Defendant B&W has filed a motion for judgment
notwithstanding the verdict or for a new trial. On August 13, 1998, the First
Circuit of the Florida Court of Appeals ruled that the trial court should have
granted B&W's motion to transfer the case to the Circuit Court of Palm Beach
County. On October 26, 1998 the trial court transferred the case to the Circuit
Court of Palm Beach County. Registrant is not a party to the Widdick litigation.
See also "Proposed Resolution of Certain Regulatory and Litigation Issues"
below.
Trial Dates
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 under the heading "Trial Dates," and to Part II, Item 1,
"Legal Proceedings", of Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998, under the heading "Trial Dates".
Proposed Resolution of Certain Regulatory
and Litigation Issues
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 under the heading "Proposed Resolution of Certain
Regulatory and Litigation Issues" and to Part II, Item 1, "Legal Proceedings",
of Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998, under the heading "Proposed Resolution of Certain Regulatory and
Litigation Issues".
State Settlements
Reference is made to disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 under the heading "Mississippi, Florida and Texas
Settlements," and to Part II, Item 1, "Legal Proceedings", of Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, under the
heading "State Settlements".
List of Pending Cases
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 under the heading "List of Pending Cases", and in Part
II, Item 1, "Legal Proceedings", of Registrant's Quarterly Reports on Form 10-Q
for the quarters ended March 31, 1998 and June 30, 1998, under the heading "List
of Pending Cases". In addition to those proceedings
- 31 -
<PAGE>
Item 1. LEGAL PROCEEDINGS (Continued)
- ------ -----------------
previously reported, Registrant has been named as a defendant in the following
proceedings involving the smoking and health controversy:
Anes v. The American Tobacco Co., et al., Court of Common Pleas,
State of Pennsylvania, Philadelphia County, July 1, 1997; Clifton v. The
American Tobacco Co., et al., Court of Common Pleas, State of Pennsylvania,
Philadelphia County; Colfield v. The American Tobacco Co., et al., United States
District Court for the Eastern District of California, September 3, 1998;
Construction Laborers of Greater St. Louis Welfare Fund, et al. v. The American
Tobacco Co., et al., U.S. District Court for the Eastern District of Missouri,
October 20, 1998; Cook, et al. v. The American Tobacco Co., et al., United
States District Court for the Eastern District of California, September 3, 1998;
Daly v. The American Tobacco Co., et al., Court of Common Pleas, State of
Pennsylvania, Philadelphia County, July 1, 1997; Folkman v. The American Tobacco
Co., et al., Court of Common Pleas, State of Pennsylvania, Philadelphia County,
October 28, 1998; Glaser v. The American Tobacco Co., et al., Court of Common
Pleas, State of Pennsylvania, Philadelphia County, July 21, 1997; Greenfield v.
The American Tobacco Co., et al., Court of Common Pleas, State of Pennsylvania,
Philadelphia County, January 28, 1998; Harley v. The American Tobacco Co., et
al., Court of Common Pleas, State of Pennsylvania, August 28, 1998; Helt, et al.
v. The American Tobacco Co., et al., United States District Court for the
Eastern District of California, September 3, 1998; Hissom v. The American
Tobacco Co., et al., Circuit Court, State of West Virginia, Kanawha County, June
12, 1997; Krochtengel v. The American Tobacco Co., et al., Supreme Court of New
York, Kings County, July 15, 1998; Kupat Holim Clalit v. Philip Morris, Inc., et
al., Jerusalem District Court, September 28, 1998; Oliver v. The American
Tobacco Co., et al., Court of Common Pleas, State of Pennsylvania, Philadelphia
County, April 1, 1998; Panama (Republic of Panama) v. The American Tobacco Co.,
et al., United States District Court of Louisiana, August 25, 1998; Pennetti v.
The American Tobacco Co., et al., Court of Common Pleas, State of Pennsylvania,
Philadelphia County, April 13, 1998; Reilly v. The American Tobacco Co., et al.,
Court of Common Pleas, State of Pennsylvania, Philadelphia County; Shipunoff v.
The American Tobacco Co., et al., United States District Court for the Eastern
District of California, September 3, 1998; Shultz v. The American Tobacco Co.,
et al., Court of Common Pleas, State of Pennsylvania, Philadelphia County,
December 5, 1997; Simmons v. The American Tobacco Co., et al., Court of Common
Pleas, State of Pennsylvania, Philadelphia County, April 1, 1998; Simon v. The
American Tobacco Co., et al., Court of Common Pleas, State of Pennsylvania,
Philadelphia County; Sweeney v. The American Tobacco Co., et al., Court of
Common Pleas, State of Pennsylvania, Allegheny County, October 30, 1998; Thomas
v. The American Tobacco Co., et al., Circuit Court, State of Missouri, Jefferson
County, October 9, 1998; Thompson, G., et al. v. The American Tobacco Co., et
al., Court of Common Pleas, State of Pennsylvania, Philadelphia County, October
28, 1997; Tiscavitch, et al. v. The American Tobacco Co., et al., Court of
Common Pleas, State of Pennsylvania, Philadelphia County, May 28, 1998; Upsher
v. The American Tobacco Co., et al., Court of Common Pleas, State of
Pennsylvania, Philadelphia County,
- 32 -
<PAGE>
Item 1. LEGAL PROCEEDINGS (Continued)
- ------ -----------------
October 10, 1997; Van Fossen v. The American Tobacco Co., et al., United States
District Court for the Eastern District of California, September 3, 1998; and
Zeringue v. The American Tobacco Co., et al., District Court of Louisiana,
Jefferson County, September 9, 1998.
Registrant has also been informed that it has been named as a
defendant in 27 individual actions involving the smoking and health controversy
that were filed in the Circuit Court of the State of West Virginia, Kanawha
County, on July 31, 1998. The surnames of the first-named plantiffs in each of
such actions are as follows: Adkins; Anderson; Baum; Bogges; Bolin; Brumfield;
Byus; Childers; Clay; Dean; Dempsey; Fuller; Hibbes; Hodge; Husty; King, D.;
Maynard; McNelly; Miller, B.; Mitchem; Newkirk; Ritchie; Sanders; Shamblen;
Stone; Thompson, E.; and Wayne.
Registrant has also been informed that it has been named as a
defendant in 65 individual actions involving the smoking and health controversy
that were filed in the Circuit Court of the State of West Virginia, Kanawha
County, on October 1, 1998. The surnames of the first-named plantiffs in each of
such actions are as follows: Allen; Austin; Bland; Bocook; Boone; Bradford;
Brogan; Brown, A.; Brown, W.; Bryant; Burdette; Clayton; Coleman, I.; Coleman,
L.; Conley; Cottrill, C.; Cottrill, L.; Crites; Cunningham; DiBacco; DiGirolamo;
Duffield; Eanes; Edwards; Fife; Freeman; Gauze; Gillespie; Gilman; Graham; Hall;
Harbert; Harding; Heaster; Hieneman; Hodges; Holbrook; Johnson; Keene; Keyes;
King, J.; LeBrun; Long; Mallett; Miller, J.; Mounts; Owen; Phillips; Price;
Ramsey; Ritenour; Rose; Smith; Sopsher, C.; Sopsher, C.; Stockton; Surgeon;
Vance; Walls; Weese; Wills; Wiseman; Woods, D.; Woods, H.; and Wright.
Registrant has also been informed that it has been named as a
defendant in 18 individual actions involving the smoking and health controversy
that were filed in the Circuit Court of the State of West Virginia, Kanawha
County, on October 28, 1998. The surnames of the first-named plantiffs in each
of such actions are as follows: Akers; Bishop; Carter; Combs; Compton; Cooper;
Craig; Duncan; Humphreys; Jenkins; Jones; Likens; McCormick; Randolph; Speece;
Tranquill; Whaley; and Williams.
List of Cases Terminated
With regard to proceedings which have been terminated and not
previously reported as such:
Hulsey v. American Brands, Inc., et al., which was previously
pending in the District Court of Nueces County, Texas, and instituted on
December 2, 1996, was dismissed on April 7, 1997 when the Court granted
defendants' motion for summary judgment. The United States Supreme Court
declined to accept the plaintiff's petition for writ of certiorari on October 5,
1998;
- 33 -
<PAGE>
Item 1. LEGAL PROCEEDINGS (Concluded)
- ------ -----------------
Oglesby v. American Brands, Inc., et al., which was previously
pending in the District Court of Nueces County, Texas, and instituted on
December 2, 1996, was dismissed on April 7, 1997 when the Court granted
defendants' motion for summary judgment. The United States Supreme Court
declined to accept the plaintiff's petition for writ of certiorari on October 5,
1998;
Reed, M. v. American Brands, Inc., et al., which was previously
pending in the District Court of Cameron County, Texas, and instituted on
December 6, 1996, was dismissed on April 14, 1997 when the Court granted
defendants' motion for summary judgment. The United States Supreme Court
declined to accept the plaintiff's petition for writ of certiorari on October 5,
1998; and
Whirley v. American Brands, Inc., et al., which was previously
pending in the District Court of Nueces County, Texas, and instituted on
December 2, 1996, was dismissed on April 7, 1997 when the Court granted
defendants' motion for summary judgment. The United States Supreme Court
declined to accept the plaintiff's petition for writ of certiorari on October 5,
1998.
Conclusion
Registrant's counsel have advised that on the basis of their
investigations generally with respect to suits and claims of this character,
Registrant has meritorious defenses to the above-mentioned actions.
Management believes that there are meritorious defenses to the
above-mentioned pending actions and these actions are being vigorously
contested. However, it is not possible to predict the outcome of the pending
litigation, and it is possible that some of these actions could be decided
unfavorably. Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the pending
litigation. Management believes that the pending actions will not have a
material adverse effect upon the results of operations, cash flows or financial
condition of Registrant as long as the Indemnitors continue to fulfill their
obligations to indemnify Registrant under the aforementioned indemnification
agreement (see "Overview" above).
(b) Reference is made to Note 9, "Pending Litigation", in the Notes
to Condensed Consolidated Financial Statements set forth in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
- 34 -
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ --------------------------------
(a) Exhibits.
--------
10a1. Amendment made as of the first day of August,
1998 to the Trust Agreement among Gilbert L.
Klemann, II, Registrant and The Chase Manhattan
Bank (National Association) and Amendments
thereto constituting Exhibits 10c8, 10c9 and
10c10 to the Annual Report on Form 10-K of
Registrant for the fiscal year ended December 31,
1997.*
10a2. Schedule identifying substantially identical
agreements to the Amendment constituting Exhibit
10a1 hereto in favor of Thomas C. Hays, John T.
Ludes, Robert J. Rukeyser, Steven C. Mendenhall,
Dudley L. Bauerlein, Jr., Charles H. McGill and
Craig P. Omtvedt.*
10b1. Amendment dated as of August 1, 1998 to the
Agreement dated as of January 2, 1991 between
Registrant and Gilbert L. Klemann, II and
Amendments thereto constituting Exhibits 10j1,
10j2 and 10j3 to the Annual Report on Form 10-K
of Registrant for the fiscal year ended December
31, 1997.*
10b2. Schedule identifying substantially identical
agreements to the Amendment constituting Exhibit
10b1 hereto in favor of John T. Ludes, Robert J.
Rukeyser and Dudley L. Bauerlein, Jr.*
10b3. Amendment dated as of August 1, 1998 between
Registrant and Steven C. Mendenhall to the
Agreement and Amendments between Registrant and
Mr. Mendenhall substantially identical to
Exhibits 10j1, 10j2 and 10j3 to the Annual Report
on Form 10-K of Registrant for the fiscal year
ended December 31, 1997.*
10b4. Schedule identifying substantially identical
agreements to the Amendment constituting Exhibit
10b3 hereto in favor of Charles H. McGill and
Craig P. Omtvedt.*
10b5. Amendment dated as of September 29, 1998 between
Registrant and John T. Ludes to the Agreement and
Amendments between Registrant and Mr. Ludes
substantially identical to Exhibits 10j1, 10j2
and 10j3 to the Annual Report on Form 10-K of
Registrant for the fiscal year ended December 31,
1997 and Exhibit 10b1 hereto.*
- 35 -
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
- ------ --------------------------------
12. Statement re computation of ratio of earnings to
fixed charges.
15. Letter from PricewaterhouseCoopers LLP dated
November 11, 1998 re unaudited financial
information.
27. Financial Data Schedule (Article 5).
* Indicates that exhibit is a management
contract or compensatory arrangement.
In lieu of filing certain instruments with respect to long-term
debt of the kind described in Item 601(b)(4) of Regulation S-K, Registrant
agrees to furnish a copy of such instruments to the Securities and Exchange
Commission upon request.
(b) Reports on Form 8-K.
-------------------
Registrant filed a Current Report on Form 8-K, dated July 1, 1998,
in respect of Registrant's issuance and sale of $200,000,000
aggregate principal amount of its 6-5/8% Debentures Due 2028 in an
underwritten public offering (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated July 24, 1998,
in respect of (i) Registrant's press release dated July 22, 1998
announcing that Registrant had entered into a definitive agreement
to purchase Geyser Peak Winery and (ii) Registrant's press release
dated July 24, 1998 announcing Registrant's financial results for
the three-month and six-month periods ended June 30, 1998 (Items 5
and 7(c)).
Registrant filed a Current Report on Form 8-K, dated August 26,
1998, in respect of Registrant's press release dated August 26,
1998 announcing that Registrant's spirits and wine business had
completed the acquisition of Geyser Peak Winery (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated September 29,
1998, in respect of (i) Registrant's press release dated September
29, 1998 announcing a five percent increase in the dividend on
Registrant's Common Stock, and (ii) Registrant's press release
dated September 29, 1998 announcing the election of certain
executive officers of Registrant and members of Registrant's board
of directors. (Items 5 and 7(c)).
- 36 -
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (Concluded)
- ------ --------------------------------
Registrant filed a Current Report on Form 8-K, dated October 23,
1998, in respect of Registrant's press release dated October 23,
1998 announcing Registrant's financial results for the three-month
and nine-month periods ended September 30, 1998 (Items 5 and 7(c)).
- 37 -
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FORTUNE BRANDS, INC.
--------------------
(Registrant)
Date: November 11, 1998 By /s/ C. P. Omtvedt
----------------- ----------------------
C. P. Omtvedt
Senior Vice President and
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
10a1. Amendment made as of the first day of
August, 1998 to the Trust Agreement among
Gilbert L. Klemann, II, Registrant and The
Chase Manhattan Bank (National Association)
and Amendments thereto constituting Exhibits
10c8, 10c9 and 10c10 to the Annual Report on
Form 10-K of Registrant for the fiscal year
ended December 31, 1997.*
10a2. Schedule identifying substantially identical
agreements to the Amendment constituting
Exhibit 10a1 hereto in favor of Thomas C.
Hays, John T. Ludes, Robert J. Rukeyser,
Steven C. Mendenhall, Dudley L. Bauerlein,
Jr., Charles H. McGill and Craig P.
Omtvedt.*
10b1. Amendment dated as of August 1, 1998 to the
Agreement dated as of January 2, 1991
between Registrant and Gilbert L. Klemann,
II and Amendments thereto constituting
Exhibits 10j1, 10j2 and 10j3 to the Annual
Report on Form 10-K of Registrant for the
fiscal year ended December 31, 1997.*
10b2. Schedule identifying substantially identical
agreements to the Amendment constituting
Exhibit 10b1 hereto in favor of John T.
Ludes, Robert J. Rukeyser and Dudley L.
Bauerlein, Jr.*
10b3. Amendment dated as of August 1, 1998 between
Registrant and Steven C. Mendenhall to the
Agreement and Amendments between Registrant
and Mr. Mendenhall substantially identical
to Exhibits 10j1, 10j2 and 10j3 to the
Annual Report on Form 10-K of Registrant for
the fiscal year ended December 31, 1997.*
10b4. Schedule identifying substantially identical
agreements to the Amendment constituting
Exhibit 10b3 hereto in favor of Charles H.
McGill and Craig P. Omtvedt.*
10b5. Amendment dated as of September 29, 1998
between Registrant and John T. Ludes to the
Agreement and Amendments between Registrant
and Mr. Ludes substantially identical to
Exhibits 10j1, 10j2 and 10j3 to the Annual
Report on Form 10-K of Registrant for the
fiscal year ended December 31, 1997 and
Exhibit 10b1 hereto.*
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP dated
November 11, 1998 re unaudited financial
information.
27. Financial Data Schedule (Article 5).
* Indicates that exhibit is a management
contract or compensatory arrangement.
EXHIBIT 10a1
AMENDMENT TO TRUST AGREEMENT
THIS AMENDMENT made as of the lst day of August, 1998, among GILBERT
L. KLEMANN, II (the "Executive"), FORTUNE BRANDS, INC., a Delaware corporation
(the "Company") and THE CHASE MANHATTAN BANK, a New York banking corporation
(the "Trustee")
W I T N E S S E T H :
WHEREAS, the Executive, the Company (formerly known as American
Brands, Inc.) and the Trustee have entered into a Trust Agreement made as of
November 1, 1993, as amended (the "Trust Agreement") for the purpose of
establishing a trust in order to provide a source of benefits under the terms of
the Company's Supplemental Plan; and
WHEREAS, the parties desire to amend the Trust Agreement to reflect
the change of name of the Company as well as to provide that the trust might be
used as a source of providing pension benefits, in addition to those payable
under the Supplemental Plan, that may become payable to the Executive, his
spouse or beneficiaries under the Severance Agreement between the Executive and
the Company dated as of January 2, 1991, as amended (the "Severance Agreement"),
the Compensation Agreement between the Executive and the Company dated as of
January 2, 1991, as amended (the "Compensation Agreement"), and any other
agreements or arrangements for the payment of additional pension or other
deferred compensation benefits to or on behalf of the Executive;
NOW, THEREFORE, in consideration of the premises, the parties agree
that the Trust Agreement is hereby amended as follows:
1. All references to "American Brands, Inc." in the Trust Agreement be
and they are hereby changed to references to "Fortune Brands, Inc." and all
references to the "Company" in the Trust Agreement shall be deemed to be
references to Fortune Brands, Inc.
2. The trust established by the Trust Agreement, in addition to being
used to provide a source of benefits under the Company's Supplemental Plan,
may also be used as a source of providing additional pension benefits that
may become payable to the Executive, his spouse or beneficiaries under the
Severance Agreement, the Compensation Agreement and any other agreements or
arrangements for the payment of additional pension or other deferred
compensation benefits to or on behalf of the Executive and references in
the Trust Agreement to the "Plan" shall also be deemed to be references to
the Severance Agreement, the Compensation Agreement and such other
agreements or arrangements for the payment of additional pension or other
deferred compensation benefits.
IN WITNESS WHEREOF, the parties have caused this AMENDMENT to be duly
executed as of the day and year first written above.
Attest: FORTUNE BRANDS, INC.
Louis F. Fernous, Jr. By Steven C. Mendenhall
- ------------------------- ------------------------------
Secretary Steven C. Mendenhall
Senior Vice President and
Chief Administrative Officer
Attest: THE CHASE MANHATTAN BANK
Scott P. Callahan By Mark J. Altschuler
- ------------------------- ------------------------------
Mark J. Altschuler
Vice President
I hereby consent to the foregoing AMENDMENT.
Witness:
Alean N. Timm Gilbert L. Klemann, II
- ------------------------- ------------------------------
GILBERT L. KLEMANN, II
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT- July 29, 1998
COUNTY OF FAIRFIELD )
Personally appeared STEVEN C. MENDENHALL, Senior Vice President and
Chief Administrative Officer of FORTUNE BRANDS, INC., signer and sealer of the
foregoing instrument, and acknowledged the same to be his free act and deed as
such Senior Vice President and Chief Administrative Officer and the free act and
deed of said Corporation, before me.
Lenora Rowser
-----------------------------
Notary Public
STATE OF NEW YORK )
: ss.: New York, NY- 8/18, 1998
COUNTY OF NEW YORK )
Personally appeared MARK J. ALTSHCULER, Vice President of THE CHASE
MANHATTAN BANK, signer and sealer of the foregoing instrument, and acknowledged
the same to be his free act and deed as such Vice President and the free act and
deed of said Corporation, before me.
Shavon S. Sharp
-----------------------------
Notary Public
STATE OF CONNECTICUT )
: ss.: Old Greenwich, CT- 8/24, 1998
COUNTY OF FAIRFIELD )
Personally appeared GILBERT L. KLEMANN, II, signer of the foregoing
instrument, and acknowledged the same to be his free act and deed, before me.
Mark S. Lyon
------------------------------
Notary Public
EXHIBIT 10a2
Schedule identifying substantially identical
agreements among Fortune Brands, Inc. ("Fortune"),
The Chase Manhattan Bank (National Association)
and each of the following persons, to the
Amendment constituting Exhibit 10a1 the Quarterly
Report on Form 10-Q of Fortune for the period
ended September 30, 1998
--------------------------------------------------
Name
----
Thomas C. Hays
John T. Ludes
Robert J. Rukeyser
Steven C. Mendenhall
Dudley L. Bauerlein, Jr.
Charles H. McGill
Craig P. Omtvedt
EXHIBIT 10b1
AMENDMENT TO SEVERANCE AGREEMENT
This AMENDMENT dated as of August 1, 1998 to the Severance Agreement
(the "Agreement") dated as of January 2, 1991, as amended, between AMERICAN
BRANDS, INC., a Delaware corporation (the "Company") and GILBERT L. KLEMANN, II
(the "Executive"),
W I T N E S S E T H :
WHEREAS, the Company (now known as Fortune Brands, Inc.) and the
Executive entered into the Agreement in order to provide severance benefits in
the event of termination of the Executive's employment; and
WHEREAS, the Company and the Executive desire to amend the Agreement
in order to provide severance benefits in the event that the Executive
terminates employment for Good Reason (as defined herein) or as a result of a
Relocation (as defined herein);
NOW, THEREFORE, in consideration of the premises and to further assure
the retention of the Executive in the employ of the Company after the date of
this Amendment to Severance Agreement, the parties hereto do hereby agree as
follows:
1. Section 1(a) of the Agreement is hereby amended in its entirety as
follows:
"(a) Entitlement to Benefits. If and only if during the term of
the Agreement the Executive's employment with the Company is
terminated by the Company other than for Disability or Cause or by the
Executive for Good Reason or as a result of a Relocation (each as
defined in this Section 1), the Executive shall be entitled to
benefits as provided in Section 2. The Executive shall not be entitled
to any benefits hereunder in the event his employment with the Company
is terminated as a result of his death, by the Company for Disability
or Cause or by the Executive other than for Good Reason or as a result
of a Relocation."
2. Section 1(d) of the Agreement is hereby amended by changing the
first sentence thereof as follows:
"Any termination by the Company for Disability or Cause shall be
communicated by Notice of Termination to the Executive and any
termination by the Executive for Good Reason or as a result of a
Relocation shall be communicated by Notice of Termination to the
Company."
3. Section 1(e) of the Agreement is hereby amended in its entirety as
follows:
"(e) Termination Date. As used herein, 'Termination Date' shall
mean (i) if employment is terminated by the Company for Disability, 30
days after Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a
full-time basis during such 30-day period), (ii) if employment is
terminated by the Company for Cause, the date on which a Notice of
Termination is given, (iii) if employment is terminated for Good
Reason, the date specified in the Notice of Termination, (iv) if
employment is terminated as a result of a Relocation, the day of
completion of six months (or such shorter period specified by the
Company at its election) of full-time employment with the Company
after the date specified in the Notice of Termination and (v) if
employment is terminated for any other reason, the date on which the
Executive ceases to perform his duties for the Company; provided,
however, that if within 30 days after any Notice of Termination is
given the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the termination, the
Termination Date shall be the date on which the dispute is finally
determined, either by written agreement of the parties or by a final
judgment, order or decree of court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been
perfected); provided, further, however, that if the dispute is
resolved in favor of the Company, the Termination Date shall not be so
extended but shall be the date determined under clauses (i) through
(v) of this Section 1(e)."
4. Section 1(f) is hereby added to the Agreement as follows:
"(f) Good Reason. Termination of employment by the Executive for
Good Reason shall be deemed to have occurred only if the Executive
terminates his employment and provides a Notice of Termination to the
Company prior to such date for any of the following reasons:
(i) a reduction by the Company in the Executive's base
salary as in effect on August 1, 1998 plus all increases therein
subsequent thereto;
(ii) the failure of the Company substantially to maintain
and to continue the Executive's participation in the Company's
benefit plans as in effect on August 1, 1998 and with all
improvements therein subsequent thereto (other than those plans
or improvements that have expired thereafter in accordance with
their original terms), or the taking of any action which would
materially reduce the Executive's benefits under any of such
plans or deprive the Executive of any material fringe benefit
enjoyed by him on August 1, 1998 or subsequently. For the
purposes hereof such benefit plans shall include, but not be
limited to, the Incentive Compensation Plans, the Pension Plans,
the Defined Contribution Plan and the Company's Long-Term
Incentive Plan;
(iii) the sum of the Executive's base salary and the amount
paid to the Executive as incentive compensation under the
Incentive Compensation Plans for any calendar year during the
term hereof is less than 90% of the sum of the Executive's base
salary and the amount paid to the Executive under the Incentive
Compensation Plans for 1997 or any subsequent year during the
term hereof for which the sum of such amounts was greater;
provided, however, that this paragraph shall not be applicable if
the cause of the reduction of the sum of the Executive's base
salary and incentive compensation is a failure of the Company to
meet performance goals under the Incentive Compensation Plans;
(iv) the failure of the Company to provide the Executive
during each calendar year with a number of paid vacation days at
least equal to the number of paid vacation days to which he was
entitled at the date hereof plus any increases therein subsequent
thereto;
(v) any purported termination of the Executive's employment
by the Company which is not effected pursuant to a Notice of
Termination, and for purposes of this Agreement, no such
purported termination shall be effective; or
(vi) any failure of the Company to comply with and satisfy
Section 3;
provided, however, that termination of employment by the Executive
under clauses (i), (ii) and (iii) above shall not be deemed to have
occurred for Good Reason if the reason for the compensation reduction
or failure of benefit plan coverage thereunder is due to a change in
the individual elements of aggregate compensation, which change is
applicable to officers of the Company generally, without a material
reduction in aggregate compensation."
5. Section 1(g) is hereby added to the Agreement as follows:
"(g) Relocation. Relocation means the relocation of the Company's
principal executive offices from Old Greenwich, Connecticut to a
location more than 35 miles from Old Greenwich, Connecticut or the
Company's requiring the Executive to be based anywhere other than the
Company's principal executive offices, except for required travel on
the Company's business to an extent substantially consistent with his
business travel obligations on August 1, 1998."
6. Section 2(a) of the Agreement is hereby amended in its entirety as
follows:
"(a) If the Executive's employment is terminated by the Company
for Disability or Cause or by the Executive other than (i) for Good
Reason or (ii) as a result of a Relocation, the Company shall have no
obligation to pay any compensation to the Executive under this
Agreement in respect of periods beginning on or after the Termination
Date, but this Agreement shall have no effect on any other obligation
the Company may have to pay the Executive compensation to which he may
otherwise be entitled."
7. Section 2(b) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," in the first sentence thereof.
8. Section 2(c) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," in the first sentence thereof.
9. Section 2(d) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," in the first sentence thereof and to delete the following
sentence therefrom:
"Benefits hereunder which commence prior to age 60 shall be
actuarially reduced to reflect early commencement to the extent, if
any, provided in the Retirement Plan as if the Executive's Termination
Date were an Early Retirement Date."
10. Section 2(e) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," therein.
11. Section 2(f) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," in the first sentence thereof as well as to add "and
reduced by the amount actually paid for such calendar year under the Incentive
Compensation Plans" at the end of clause (ii) thereof.
12. Section 2(g) of the Agreement is hereby amended by adding "or the
Executive terminates his employment as a result of a Relocation or for Good
Reason" after the words "Disability or Cause" therein.
13. Section 2(k) is hereby added to the Agreement as follows:
"(k) In the event that the Executive terminates his employment as
a result of a Relocation by delivering to the Company a Notice of
Termination not later than the first anniversary of the Relocation,
the Company shall provide the Executive with the severance benefits
set forth in this Section 2 and at the respective dates set forth in
this Section 2, except that
(i) the multiplier set forth in Section 2(b)(ii)(B) shall be
one-half of such multiplier set forth therein;
(ii) the period for which employee benefit coverage shall be
maintained after the Executive's Termination Date under Section
2(c) shall be one-half of the period set forth therein; and
(iii) the additional period of Service and amount of Actual
Earnings set forth in Section 2(d) shall be one-half of the
period and amount set forth therein.
Payment of severance benefits under this Section 2(k) shall be
subject to the Executive continuing in the full-time employ of the
Company for six months (or such shorter period specified by the
Company at its election) following the delivery of a Notice of
Termination to the Company and the Termination Date of the Executive
shall be the end of such six month (or such shorter) period. For the
avoidance of doubt, if the Executive's employment with the Company is
terminated by the Company other than for Disability or Cause, or by
the Executive for Good Reason, the Executive shall be entitled to the
full severance benefits set forth in Section 2 rather than the reduced
severance benefits set forth in this Section 2(k) even though the
termination of the Executive's employment occurs in connection with or
at approximately the same time as a Relocation."
14. Section 2(l) is hereby added to the Agreement as follows:
"(l) In addition to any other benefits which may be payable to
the Executive under the Pension Plans and Section 2(d) hereof, if the
Executive's employment with the Company is terminated by the Company
other than for Disability or Cause, or by the Executive for Good
Reason or as a result of a Relocation, and the Termination Date occurs
before the Executive attains Early Retirement Date (as defined in the
Retirement Plan), the Company shall pay to the Executive a
supplemental pension benefit in an amount equal to the difference
between (i) the benefits payable from the Pension Plans and Section
2(d) hereof and (ii) 65% of the Executive's accrued benefit under the
Pension Plans and Section 2(d) hereof, provided that the Executive's
full accrued benefit under the Pension Plans and Section 2(d) hereof
shall be paid without reduction for early payment if the Executive has
completed at least 30 years of Qualifying Employment (as defined in
the Retirement Plan) at the date of the Executive's termination of
employment with entitlement to a benefit hereunder.
This additional pension benefit shall be payable outside the
Pension Plans and shall commence on the first day of the month
following the Executive's termination of employment with the Company
even though pension benefits may not yet then be payable under the
Pension Plans and Section 2(d) hereof. The benefit payable under this
Section 2(l) shall be paid to the Executive in the form of a 100%
joint and survivor annuity with the Executive's spouse as contingent
annuitant if the Executive is married at the date of commencement of
payments hereunder in which event the benefit shall be further reduced
for the joint and survivor annuity coverage to the same extent as
provided in the Supplemental Plan; provided that if the Executive is
not married at the date the enhanced pension benefits commence
hereunder, the enhanced pension benefits under this Section 2(l) shall
be paid as an annuity for the Executive's life only. At the time that
benefits commence under the Supplemental Plan, the monthly benefits
payable hereunder shall then be actuarially adjusted to the form of
benefit payable under the Supplemental Plan and shall be paid in the
same form as the benefit payable under the Supplemental Plan, with
survivorship benefits hereunder then payable after the Executive's
death to the same contingent annuitant to whom benefits are payable
under the Supplemental Plan, if any, that survives the Executive.
In the event that an employee grantor trust ("Grantor Trust") has
been established among the Company, the Executive and a trustee, the
Company may provide the additional pension benefits payable pursuant
to Section 2(d) and Section 2(l) through the Grantor Trust (or, at the
Executive's request, the Segregated Account referred to in the Grantor
Trust) as soon as practicable after the termination of employment of
the Executive using the same actuarial basis and methodology as for
other Supplemental Plan benefits which are provided through the
Grantor Trust and assuming that the underlying monthly pension
benefits which are valued for Grantor Trust funding purposes are
payable in the form of an annuity for the life of the Executive only
and commencing immediately upon termination of employment but with the
early payment reduction calculated as if the Executive had terminated
employment at age 55."
15. All references to "American Brands, Inc." in the Agreement be and
they are hereby changed to references to "Fortune Brands, Inc."
IN WITNESS WHEREOF, the Company has caused this Amendment to Severance
Agreement to be signed by its officer thereunto duly authorized and its seal to
be hereunder affixed and attested and the Executive has hereunto set his hand as
of the date first written above.
FORTUNE BRANDS, INC.
(Corporate Seal) By Steven C. Mendenhall
---------------------------
Steven C. Mendenhall
ATTEST: Senior Vice President and
Chief Administrative Officer
Louis F. Fernous, Jr. Gilbert L. Klemann, II
- --------------------------- ---------------------------
Secretary GILBERT L. KLEMANN, II
EXHIBIT 10b2
Schedule identifying substantially identical
agreements between Fortune Brands, Inc. ("Fortune")
and each of the following persons, to the Amendment
constituting Exhibit 10b1 the Quarterly Report on
Form 10-Q of Fortune for the period ended
September 30, 1998
--------------------------------------------------
Name
----
John T. Ludes
Robert J. Rukeyser
Dudley L. Bauerlein, Jr.
EXHIBIT 10b3
AMENDMENT TO SEVERANCE AGREEMENT
This AMENDMENT dated as of August 1, 1998 to the Severance Agreement
(the "Agreement") dated as of October 1, 1990, as amended, between AMERICAN
BRANDS, INC., a Delaware corporation (the "Company") and STEVEN C. MENDENHALL
(the "Executive"),
W I T N E S S E T H :
WHEREAS, the Company (now known as Fortune Brands, Inc.) and the
Executive entered into the Agreement in order to provide severance benefits in
the event of termination of the Executive's employment; and
WHEREAS, the Company and the Executive desire to amend the Agreement
in order to provide severance benefits in the event that the Executive
terminates employment for Good Reason (as defined herein);
NOW, THEREFORE, in consideration of the premises and to further assure
the retention of the Executive in the employ of the Company after the date of
this Amendment to Severance Agreement, the parties hereto do hereby agree as
follows:
1. Section 1(a) of the Agreement is hereby amended in its entirety as
follows:
"(a) Entitlement to Benefits. If and only if during the term of
the Agreement the Executive's employment with the Company is
terminated by the Company other than for Disability or Cause or by the
Executive for Good Reason (as defined in this Section 1), the
Executive shall be entitled to benefits as provided in Section 2. The
Executive shall not be entitled to any benefits hereunder in the event
his employment with the Company is terminated as a result of his
death, by the Company for Disability or Cause or by the Executive
other than for Good Reason."
2. Section 1(d) of the Agreement is hereby amended by changing the
first sentence thereof as follows:
"Any termination by the Company for Disability or Cause shall be
communicated by Notice of Termination to the Executive and any
termination by the Executive for Good Reason shall be communicated by
Notice of Termination to the Company."
3. Section 1(e) of the Agreement is hereby amended in its entirety as
follows:
"(e) Termination Date. As used herein, 'Termination Date' shall
mean (i) if employment is terminated by the Company for Disability, 30
days after Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a
full-time basis during such 30-day period), (ii) if employment is
terminated by the Company for Cause, the date on which a Notice of
Termination is given, (iii) if employment is terminated for Good
Reason, the date specified in the Notice of Termination, and (iv) if
employment is terminated for any other reason, the date on which the
Executive ceases to perform his duties for the Company; provided,
however, that if within 30 days after any Notice of Termination is
given the party receiving such Notice of Termination notifies the
other party that a dispute exists concerning the termination, the
Termination Date shall be the date on which the dispute is finally
determined, either by written agreement of the parties or by a final
judgment, order or decree of court of competent jurisdiction (the time
for appeal therefrom having expired and no appeal having been
perfected); provided, further, however, that if the dispute is
resolved in favor of the Company, the Termination Date shall not be so
extended but shall be the date determined under clauses (i) through
(iv) of this Section 1(e)."
4. Section 1(f) is hereby added to the Agreement as follows:
"(f) Good Reason. Termination of employment by the Executive for
Good Reason shall be deemed to have occurred only if the Executive
terminates his employment and provides a Notice of Termination to the
Company prior to such date for any of the following reasons:
(i) a reduction by the Company in the Executive's base
salary as in effect on August 1, 1998 plus all increases therein
subsequent thereto;
(ii) the failure of the Company substantially to maintain
and to continue the Executive's participation in the Company's
benefit plans as in effect on August 1, 1998 and with all
improvements therein subsequent thereto (other than those plans
or improvements that have expired thereafter in accordance with
their original terms), or the taking of any action which would
materially reduce the Executive's benefits under any of such
plans or deprive the Executive of any material fringe benefit
enjoyed by him on August 1, 1998 or subsequently. For the
purposes hereof such benefit plans shall include, but not be
limited to, the Incentive Compensation Plans, the Pension Plans,
the Defined Contribution Plan and the Company's Long-Term
Incentive Plan;
(iii) the sum of the Executive's base salary and the amount
paid to the Executive as incentive compensation under the
Incentive Compensation Plans for any calendar year during the
term hereof is less than 90% of the sum of the Executive's base
salary and the amount paid to the Executive under the Incentive
Compensation Plans for 1997 or any subsequent year during the
term hereof for which the sum of such amounts was greater;
provided, however, that this paragraph shall not be applicable if
the cause of the reduction of the sum of the Executive's base
salary and incentive compensation is a failure of the Company to
meet performance goals under the Incentive Compensation Plans;
(iv) the failure of the Company to provide the Executive
during each calendar year with a number of paid vacation days at
least equal to the number of paid vacation days to which he was
entitled at the date hereof plus any increases therein subsequent
thereto;
(v) any purported termination of the Executive's employment
by the Company which is not effected pursuant to a Notice of
Termination, and for purposes of this Agreement, no such
purported termination shall be effective; or
(vi) any failure of the Company to comply with and satisfy
Section 3;
provided, however, that termination of employment by the Executive
under clauses (i), (ii) and (iii) above shall not be deemed to have
occurred for Good Reason if the reason for the compensation reduction
or failure of benefit plan coverage thereunder is due to a change in
the individual elements of aggregate compensation, which change is
applicable to officers of the Company generally, without a material
reduction in aggregate compensation."
5. Section 2(a) of the Agreement is hereby amended in its entirety as
follows:
"(a) If the Executive's employment is terminated by the Company
for Disability or Cause or by the Executive other than for Good
Reason, the Company shall have no obligation to pay any compensation
to the Executive under this Agreement in respect of periods beginning
on or after the Termination Date, but this Agreement shall have no
effect on any other obligation the Company may have to pay the
Executive compensation to which he may otherwise be entitled."
6. Section 2(b) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," in the first sentence thereof.
7. Section 2(c) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," in the first sentence thereof.
8. Section 2(d) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," in the first sentence thereof and to delete the following
sentence therefrom:
"Benefits hereunder which commence prior to age 60 shall be
actuarially reduced to reflect early commencement to the extent, if
any, provided in the Retirement Plan as if the Executive's Termination
Date were an Early Retirement Date."
9. Section 2(e) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," therein.
10. Section 2(f) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason," after the words
"Disability or Cause," in the first sentence thereof as well as to add "and
reduced by the amount actually paid for such calendar year under the Incentive
Compensation Plans" at the end of clause (ii) thereof.
11. Section 2(g) of the Agreement is hereby amended by adding "or the
Executive terminates his employment for Good Reason" after the words "Disability
or Cause" therein.
12. Section 2(k) is hereby added to the Agreement as follows:
"(l) In addition to any other benefits which may be payable to
the Executive under the Pension Plans and Section 2(d) hereof, if the
Executive's employment with the Company is terminated by the Company
other than for Disability or Cause, or by the Executive for Good
Reason, and the Termination Date occurs before the Executive attains
Early Retirement Date (as defined in the Retirement Plan), the Company
shall pay to the Executive a supplemental pension benefit in an amount
equal to the difference between (i) the benefits payable from the
Pension Plans and Section 2(d) hereof and (ii) 65% of the Executive's
accrued benefit under the Pension Plans and Section 2(d) hereof,
provided that the Executive's full accrued benefit under the Pension
Plans and Section 2(d) hereof shall be paid without reduction for
early payment if the Executive has completed at least 30 years of
Qualifying Employment (as defined in the Retirement Plan) at the date
of the Executive's termination of employment with entitlement to a
benefit hereunder.
This additional pension benefit shall be payable outside the
Pension Plans and shall commence on the first day of the month
following the Executive's termination of employment with the Company
even though pension benefits may not yet then be payable under the
Pension Plans and Section 2(d) hereof. The benefit payable under this
Section 2(k) shall be paid to the Executive in the form of a 100%
joint and survivor annuity with the Executive's spouse as contingent
annuitant if the Executive is married at the date of commencement of
payments hereunder in which event the benefit shall be further reduced
for the joint and survivor annuity coverage to the same extent as
provided in the Supplemental Plan; provided that if the Executive is
not married at the date the enhanced pension benefits commence
hereunder, the enhanced pension benefits under this Section 2(k) shall
be paid as an annuity for the Executive's life only. At the time that
benefits commence under the Supplemental Plan, the monthly benefits
payable hereunder shall then be actuarially adjusted to the form of
benefit payable under the Supplemental Plan and shall be paid in the
same form as the benefit payable under the Supplemental Plan, with
survivorship benefits hereunder then payable after the Executive's
death to the same contingent annuitant to whom benefits are payable
under the Supplemental Plan, if any, that survives the Executive.
In the event that an employee grantor trust ("Grantor Trust") has
been established among the Company, the Executive and a trustee, the
Company may provide the additional pension benefits payable pursuant
to Section 2(d) and Section 2(k) through the Grantor Trust (or, at the
Executive's request, the Segregated Account referred to in the Grantor
Trust) as soon as practicable after the termination of employment of
the Executive using the same actuarial basis and methodology as for
other Supplemental Plan benefits which are provided through the
Grantor Trust and assuming that the underlying monthly pension
benefits which are valued for Grantor Trust funding purposes are
payable in the form of an annuity for the life of the Executive only
and commencing immediately upon termination of employment but with the
early payment reduction calculated as if the Executive had terminated
employment at age 55."
13. All references to "American Brands, Inc." in the Agreement be and
they are hereby changed to references to "Fortune Brands, Inc."
IN WITNESS WHEREOF, the Company has caused this Amendment to Severance
Agreement to be signed by its officer thereunto duly authorized and its seal to
be hereunder affixed and attested and the Executive has hereunto set his hand as
of the date first written above.
FORTUNE BRANDS, INC.
(Corporate Seal) By Gilbert L. Klemann, II
---------------------------
ATTEST: Gilbert L. Klemann, II
Executive Vice President -
Strategic and Legal Affairs
Louis F. Fernous, Jr. Steven C. Mendenhall
- --------------------------- ---------------------------
Secretary STEVEN C. MENDENHALL
EXHIBIT 10b4
Schedule identifying substantially identical
agreements between Fortune Brands, Inc.
("Fortune") and each of the following persons,
to the Amendment constituting Exhibit 10b3 the
Quarterly Report on Form 10-Q of Fortune for the
period ended September 30, 1998
------------------------------------------------
Name
----
Charles H. McGill
Craig P. Omtvedt
EXHIBIT 10b5
AMENDMENT TO SEVERANCE AGREEMENT
This AMENDMENT dated as of September 29, 1998 to the Severance
Agreement (the "Agreement") dated as of March 1, 1988, as amended, between
AMERICAN BRANDS, INC., a Delaware corporation (the "Company") and JOHN T. LUDES
(the "Executive"),
W I T N E S S E T H :
WHEREAS, the Company (now known as Fortune Brands, Inc.) and the
Executive entered into the Agreement in order to provide severance benefits in
the event of termination of the Executive's employment; and
WHEREAS, in order to induce the Executive to continue in its employ
through December 31, 1999, the Company and the Executive desire to amend the
Agreement in order to provide severance benefits in the event that the Executive
resigns effective December 31, 1999;
NOW, THEREFORE, in consideration of the premises and to further assure
the retention of the Executive in the employ of the Company through December 31,
1999, the parties hereto do hereby agree as follows:
1. Section 1(f) of the Agreement is hereby amended by redesignating
clauses (iv) through (vi) thereof as clauses (v) through (vii), respectively,
and adding new clause (iv) thereto as follows:
"(iv) the effectiveness of the resignation of the Executive,
effective December 31, 1999, as a director, officer and employee of
the Company and from every position held by the Executive with the
Company and any of its subsidiaries;".
2. Executive hereby resigns, effective December 31, 1999, as a
director, officer and employee of the Company and from every position held by
the Executive with the Company and any of its subsidiaries.
IN WITNESS WHEREOF, the Company has caused this Amendment to Severance
Agreement to be signed by its officer thereunto duly authorized and its seal to
be hereunder affixed and attested and the Executive has hereunto set his hand as
of the date first written above.
FORTUNE BRANDS, INC.
By Steven C. Mendenhall
----------------------------
Steven C. Mendenhall
Senior Vice President and
Chief Administrative Officer
(Corporate Seal)
ATTEST:
Louis F. Fernous, Jr. John T. Ludes
- ------------------------ ----------------------------
Secretary JOHN T. LUDES
EXHIBIT 12
----------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended December 31, September 30,
--------------------------------------------------------------- ----------
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings Available:
Income from continuing operations
before income taxes, minority
interest and extraordinary items......... $249.9 $ 43.4 $358.9 $340.1 $145.2 $350.3
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies...................... 0.1 - 0.2 0.2 0.2 0.2
Capitalized interest................. 0.3 0.2 - 0.3 - -
------ ------ ------ ------ ------ ------
249.5 43.2 358.7 339.6 145.0 350.1
====== ====== ====== ====== ====== ======
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt discount
and expenses............................. 200.5 184.6 147.1 172.6 122.4 78.6
Portion of rentals representative
of an interest factor.................... 11.9 12.8 13.5 15.1 14.7 13.6
------ ------ ------ ------ ------ ------
Total Fixed Charges................ 212.4 197.4 160.6 187.7 137.1 92.2
------ ------ ------ ------ ------ ------
Total Earnings Available........... $461.9 $240.6 $519.3 $527.3 $282.1 $442.3
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges............ 2.17 1.22 3.23 2.81 2.06 4.80
==== ==== ==== ==== ==== ====
</TABLE>
EXHIBIT 15
----------
November 11, 1998
Securities and Exchange Commission
450 5th Street, N.W.
Attention: Filing Desk, Stop 1-4
Washington, D.C. 20549-1004
Re: Fortune Brands, Inc.
We are aware that our report dated November 11, 1998, on our review of
interim financial information of Fortune Brands, Inc. and Subsidiaries for the
three-month and nine-month periods ended September 30, 1998 and 1997 included in
this Form 10-Q, has been incorporated by reference into (a) the Registration
Statement on Form S-8 (Registration No. 33-64071) relating to the Defined
Contribution Plan of Fortune Brands, Inc. and Participating Operating Companies,
the Registration Statement on Form S-8 (Registration No. 33-64075) relating to
the MasterBrand Industries, Inc. Hourly Employee Savings Plan, the Registration
Statement on Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term
Incentive Plan of Fortune Brands, Inc., the Registration Statement on Form S-8
(Registration No. 333-51173) relating to the Fortune Brands, Inc. Non-Employee
Director Stock Option Plan, and the prospectuses related thereto, and (b) the
prospectuses related to the Registration Statements on Form S-3 (Registration
Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of Fortune Brands, Inc. Pursuant
to Rule 436(c) under the Securities Act of 1933, this report should not be
considered a part of such registration statements or prospectuses or
certification by us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
PricewaterhouseCoopers LLP
11 Madison Avenue
New York, New York 10010
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT OF INCOME AS
OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> $ 74
<SECURITIES> 0
<RECEIVABLES> 941
<ALLOWANCES> 61
<INVENTORY> 1,055
<CURRENT-ASSETS> 2,249
<PP&E> 2,121
<DEPRECIATION> 1,039
<TOTAL-ASSETS> 7,352
<CURRENT-LIABILITIES> $1,930
<BONDS> 975
<COMMON> 717
0
11
<OTHER-SE> 3,297
<TOTAL-LIABILITY-AND-EQUITY> 7,352
<SALES> $3,830
<TOTAL-REVENUES> 3,830
<CGS> 1,968
<TOTAL-COSTS> 1,968
<OTHER-EXPENSES> 307
<LOSS-PROVISION> 10
<INTEREST-EXPENSE> 77
<INCOME-PRETAX> 347
<INCOME-TAX> 149
<INCOME-CONTINUING> 198
<DISCONTINUED> 0
<EXTRAORDINARY> (31)
<CHANGES> 0
<NET-INCOME> $ 167
<EPS-PRIMARY> $.96
<EPS-DILUTED> $.94
</TABLE>
