UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file number 1-9076
FORTUNE BRANDS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $3.125 per share New York Stock Exchange, Inc.
$2.67 Convertible Preferred Stock,
without par value New York Stock Exchange, Inc.
9% Notes Due 1999 New York Stock Exchange, Inc.
8 5/8% Debentures Due 2021 New York Stock Exchange, Inc.
8 1/2% Notes Due 2003 New York Stock Exchange, Inc.
7 7/8% Debentures Due 2023 New York Stock Exchange, Inc.
7 1/2% Notes Due 1999 New York Stock Exchange, Inc.
Preferred Share Purchase Rights New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Registrant's voting stock held by
non-affiliates of Registrant, at February 11, 1999, was $5,273,997,000. The
number of shares outstanding of Registrant's Common Stock, par value $3.125 per
share, at March 12, 1999, was 167,900,121.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Certain information contained in the Annual Report to Stockholders of
Registrant for the fiscal year ended December 31, 1998 is incorporated
by reference into Part I, Part II and Part IV hereof.
(2) Certain information contained in the Proxy Statement for the Annual
Meeting of Stockholders of Registrant to be held on April 27, 1999 is
incorporated by reference into Part III hereof.
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PART I
Item 1. Business.
(a) General development of business.
Registrant is a holding company with subsidiaries engaged in the
manufacture and sale of home products, office products, golf products and
spirits and wine.
Registrant was incorporated under the laws of Delaware in 1985 and
until 1986 conducted no business. Prior to 1986, the businesses of Registrant's
subsidiaries were conducted by American Brands, Inc., a New Jersey corporation
organized in 1904 ("American New Jersey"), and its subsidiaries. American New
Jersey was merged into The American Tobacco Company on December 31, 1985, and
the shares of the principal first-tier subsidiaries formerly held by American
New Jersey were transferred to Registrant. In addition, Registrant assumed all
liabilities and obligations in respect of the public debt securities of American
New Jersey outstanding immediately prior to the merger. On May 30, 1997,
Registrant's name was changed from American Brands, Inc. to Fortune Brands, Inc.
As a holding company, Registrant is a legal entity separate and
distinct from its subsidiaries. Accordingly, the right of Registrant, and thus
the right of Registrant's creditors (including holders of its debt securities
and other obligations) and stockholders, to participate in any distribution of
the assets or earnings of any subsidiary is subject to the claims of creditors
of the subsidiary, except to the extent that claims of Registrant itself as a
creditor of such subsidiary may be recognized, in which event Registrant's
claims may in certain circumstances be subordinate to certain claims of others.
In addition, as a holding company, a principal source of Registrant's
unconsolidated revenues and funds is dividends and other payments from its
subsidiaries. Registrant's principal subsidiaries currently are not limited by
long-term debt or other agreements in their abilities to pay cash dividends or
to make other distributions with respect to their capital stock or other
payments to Registrant.
In recent years, Registrant has been engaged in a strategy of seeking
to enhance the operations of its principal operating companies. Pursuant to this
strategy, in 1998, Registrant completed three acquisitions of home products,
office products and spirits and wine businesses for an aggregate cost of $271.8
million in cash, including fees and expenses. In 1997, Registrant completed five
acquisitions of office products, golf clubs and home products businesses for an
aggregate cost of $92 million, including fees and expenses. In 1996, Registrant
acquired Cobra Golf Incorporated ("Cobra"), a leading manufacturer of golf
clubs, for an aggregate cost of $712 million in cash, including fees and
expenses.
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Most recently, on March 30, 1999, Registrant announced that its Jim
Beam Brands subsidiary along with Highland Distillers and Remy-Cointreau have
signed a memorandum of understanding to establish a jointly owned international
distribution company for markets outside the United States. Pursuant to this
arrangement, Jim Beam, Highland Distillers and Remy-Cointreau would each
contribute distribution assets and/or cash having an approximate value of $110
million to, and own equal shares in, the distribution company. It is anticipated
that the distribution company will operate in approximately 50 countries. The
arrangement is subject to certain conditions, including completion of due
diligence, execution of definitive agreements and necessary approvals.
Registrant has also disposed of subsidiaries having significant
revenues but engaged in businesses considered by Registrant to be nonstrategic
to its long-term operations. For example, in 1994, Registrant sold The American
Tobacco Company, a subsidiary engaged in the domestic tobacco business, to Brown
& Williamson Tobacco Corporation (a subsidiary of B.A.T Industries p.l.c.) for
$1 billion. In 1995, Registrant sold American Franklin Company, whose
subsidiaries were engaged in the life insurance business, to American General
Corporation for $1.17 billion. In 1997, Registrant completed the spin-off of
Gallaher Group Plc ("Gallaher Group") to Registrant's stockholders. Subsidiaries
of Gallaher Group compete in the international tobacco business.
In addition, a number of other nonstrategic businesses and product
lines have been sold. In 1997, one of Registrant's office products subsidiaries
sold Sax Arts & Crafts, a marketer to schools of arts and crafts supplies. In
1998, one of Registrant's home products subsidiaries sold assets relating to the
manufacture of door locks and related hardware.
Registrant continues to pursue the above strategy and in furtherance
thereof explores other possible acquisitions in fields related to its principal
operating companies. Registrant also cannot exclude the possibility of
acquisitions in other fields or further dispositions. Although no assurance can
be given as to whether or when any acquisitions or dispositions will be
consummated, if agreement with respect to any acquisitions were to be reached,
Registrant might finance such acquisitions by issuance of additional debt or
equity securities. The additional debt from any acquisitions, if consummated,
would increase Registrant's debt-to-equity ratio and such debt or equity
securities might, at least in the near term, have a dilutive effect on earnings
per share. Registrant also continues to consider other corporate strategies
intended to enhance stockholder value. It cannot be predicted whether or when
any such strategies might be implemented or what the financial effect thereof
might be upon Registrant's debt or equity securities.
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Another aspect of Registrant's strategy to enhance the operations of
its principal operating companies has been to continuously evaluate the
productivity of their product lines and existing asset base and actively seek to
identify opportunities to improve Registrant's and its subsidiaries cost
structure. This strategy led Registrant to record, in 1997, pre-tax
restructuring and other nonrecurring charges totaling $298.2 million across all
of its principal operating companies. Future opportunities may involve, among
other things, the relocation of manufacturing or assembly to locations generally
having lower costs, the reorganization of operations and a possible downsizing
and move of the corporate office.
Cautionary Statement
Except for the historical information contained in this Annual Report
on Form 10-K, certain statements in this document, including without limitation,
certain matters discussed in Part I, Item 1 -- Business and Item 3 -Legal
Proceedings and in Part II, Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations, are forward-looking statements
that involve a number of risks and uncertainties. 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 Registrant's
Securities and Exchange Commission filings.
(b) Financial information about industry segments.
See Note 15 "Information on Business Segments" in the Notes to
Consolidated Financial Statements contained in the 1998 Annual Report to
Stockholders of Registrant, which Note is incorporated herein by reference.
(c) Narrative description of business.
The following is a description of the business of the subsidiaries of
Registrant in the industry segments of Home Products, Office Products, Golf
Products and Spirits and Wine. For financial information about the above
industry segments, see Note 15 "Information on Business Segments" in the Notes
to Consolidated Financial Statements contained in the 1998 Annual Report to
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Stockholders of Registrant, which Note is incorporated herein by reference.
Home Products
MasterBrand Industries, Inc. ("MasterBrand") is a holding company for
subsidiaries in the home products business. Subsidiaries include Moen
Incorporated ("Moen"), Aristokraft, Inc. ("Aristokraft"), Schrock Cabinet
Company ("Schrock"), Master Lock Company ("Master Lock") and Waterloo
Industries, Inc. ("Waterloo"). The home products business is highly competitive.
MasterBrand's operating companies compete on the basis of product quality,
price, service and responsiveness to distributor and retailer needs and end-user
consumer preferences. Factors which affect MasterBrand's results of operations
include the levels of home improvement and residential construction activity
principally in the U.S. (including repair and remodeling and new construction).
Moen manufactures and packages faucets, sinks, bath furnishings and
plumbing accessories and parts and a wide variety of plumbing supply and repair
products in the U.S. and East Asia. Faucets are sold under a variety of trade
names, including Moen, Moentrol, Touch Control, One-Touch, Riser, Monticello,
PureTouch, Concentrix, Chateau, Legend, Pulsation and Sani-Stream, and other
products are sold under the Moen, Chicago Specialty, Dearborn Brass, Wrightway,
Anchor Brass, Hoov-R-Line and Donner brand names. Composite kitchen sinks are
sold under the MoenStone brand name. Sales are made through Moen's own sales
force and independent manufacturers' representatives primarily to wholesalers,
mass merchandisers and home centers and also to industrial distributors,
repackagers and original equipment manufacturers. Some plumbing parts and repair
products are purchased from other manufacturers and repackaged for resale.
Products are sold principally in the U.S. and Canada and also in East Asia,
Mexico and Latin America. Moen's chief competitors include Masco's
Delta/Peerless, Black & Decker's Price Pfister, Kohler and American Standard.
MasterBrand Cabinets, Inc. ("MasterBrand Cabinets") is a holding
company for two subsidiaries, Aristokraft and Schrock, both of which are engaged
in manufacturing stock and semi-stock custom kitchen cabinets and bathroom
vanities. MasterBrand Cabinets was formed in June 1998 in connection with the
acquisition of certain assets and liabilities of Schrock from White Consolidated
Industries, Inc., a wholly-owned subsidiary of AB Electrolux of Sweden. Schrock
sells under the brand names Schrock, Kemper and Diamond; Aristokraft's brand
names are Aristokraft and Decora. The Schrock, Kemper and Diamond brand names
are primarily sold in the U.S. to home centers and kitchen and bath specialty
dealers. Sales under the Aristokraft brand name are made in the U.S. primarily
through stocking distributors for resale to kitchen and bath specialty dealers,
lumber and building material dealers, remodelers and builders. Decora brands are
sold primarily in the U.S. to kitchen and bath specialty dealers. Schrock
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and Aristokraft both compete with a number of manufacturers, including Masco's
Merillat and KraftMaid, Armstrong World Industries, Triangle Pacific, American
Woodmark and Mill's Pride.
Master Lock manufactures key-controlled and combination padlocks, chain
and cable locks, bicycle locks, built-in locker locks and other specialty
security devices. Sales of products designed for consumer use are made to
wholesale distributors and to home centers, hardware and other retail outlets,
while sales of lock systems are made to industrial and institutional users,
original equipment manufacturers and retail outlets. Sales are made through
independent manufacturers' representatives, primarily in the U.S. and Canada, as
well as through Master Lock's own sales force. Master Lock competes with Abus,
Belwith, Kryptonite, Hampton, American Lock, and various imports in the padlock
segment. In March 1998, Master Lock sold its Door Hardware Division to Ingersoll
Rand's Schlage subsidiary.
Waterloo manufactures tool storage products, consisting primarily of
high quality steel tool boxes, tool chests, workbenches and related products
manufactured for private label sale by a number of the largest national
retailers in the U.S. Similar products are sold under the Waterloo brand name to
specialty industrial and automotive dealers, mass merchandisers, home centers
and hardware stores. Waterloo also manufactures hospital carts and storage units
and sells such products to institutional users. Waterloo competes with Snap-On,
Kennedy, Stanley, Stack-On, and others in the metal storage segment, and with
Contico, Zag, Rubbermaid and others in the plastic hand box category.
Raw materials used for the manufacture of products offered by
MasterBrand's operating companies are primarily red oak and maple lumber,
particleboard, rolled steel, brass, zinc, copper, nickel, and various plastic
resins. These materials are available from a number of sources.
The MasterBrand operating companies are each evaluating opportunities
for increasing their purchases of components and finished goods from domestic
and international lower-cost third-party vendors. Such actions are being taken
in order to improve their respective cost and competitive positions.
Sales of MasterBrand operating companies' products are becoming
increasingly concentrated in a smaller number of major customers, principally
mass merchant superstores, home centers and large distributors and home
builders. The MasterBrand operating companies also are increasingly facing
competition on a value-priced basis. The continued consolidation of
MasterBrand's customers and the growth of large mass merchants and home centers
will continue to present pricing and service challenges to manufacturers and
will present opportunities for the most efficient manufacturers.
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Office Products
ACCO World Corporation ("ACCO") is a holding company for subsidiaries
engaged in designing, developing, manufacturing and marketing a wide variety of
traditional and computer-related office products, supplies, personal computer
accessory products, time management products, presentation aids and label
products. Products are manufactured by subsidiaries, joint ventures and
licensees of ACCO, or manufactured to such subsidiaries' specifications by third
party suppliers, throughout the world, principally in the U.S., Canada, western
Europe, Australia, Taiwan and China.
ACCO Brands, Inc. ("ACCO Brands"), ACCO's primary U.S. operating
company, manufactures or sells binders, fasteners, paper clips, punches,
staples, stapling equipment and storage products, computer supplies and
accessories, labels and presentation products. ACCO Canada Inc. ("ACCO Canada"),
a subsidiary of ACCO, manufactures a limited product range and distributes in
Canada a range of office products similar to that distributed by ACCO Brands in
the U.S. Principal office products brands include ACCO fastener products,
Swingline staples and stapling equipment, Wilson Jones binders and columnar
pads, Perma Products corrugated storage products, Kensington computer
accessories and supplies, MACO and Wilson Jones labels and Apollo presentation
products. Products are sold throughout the U.S. and Canada by in-house sales
forces and independent representatives to office and computer products
wholesalers, retailers, dealers, mail order companies and mass merchandisers.
Recent acquisitions of North American office products companies include the
following: in 1997, Advanced Gravis Computer Technology Ltd., a leading marketer
of personal computer joysticks and game pads, and also in 1997, May Tag & Label
Corp., a manufacturer of labeling products sold under the MACO brand; and in
February 1998, the Apollo group of companies, a North American leader in
presentation products.
Subsidiaries of ACCO Europe PLC ("ACCO Europe"), another subsidiary of
ACCO, manufacture and distribute a wide range of office supplies and machines,
storage and retrieval filing systems and presentation products. ACCO Europe's
products are sold primarily in the U.K., Ireland, western Europe and Australia
through its subsidiaries' sales forces and through distributors. Principal
brands used by ACCO Europe's subsidiaries include ACCO fastening products,
Kensington computer accessories, Rexel stapling products, Nyrex and Twinlock
filing products, Nobo and Sasco presentation products and, in Australia, Marbig
products. In 1997, a subsidiary of ACCO Europe acquired Nobo Group plc, a
leading manufacturer of presentation aids, principally in the U.K. and
continental Europe.
Day-Timers, Inc.("Day-Timers"), a subsidiary of ACCO, manufactures
personal organizers, planners and time management computer software in the U.S.
Management believes Day-Timers is the leading direct marketer of time management
aids in North America. Products are sold in the U.S. by Day-Timers, and in
Canada, Australia
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and Europe by subsidiaries of Day-Timers, through direct mail advertising,
catalogs to consumers and businesses, and electronic commerce. In addition,
products are sold through ACCO Brands and ACCO Canada to retailers and mass
merchandisers. ACCO Brands also conducts time management seminars for personnel
of corporations in the U.S. and similar activities are conducted by Day-Timer's
subsidiaries in Canada, Australia and Europe.
The office products business is increasingly concentrated in a small
number of major customers, principally office products superstores, wholesalers
and contract stationers. The continuing consolidation of both competitors and
customers is causing increased pricing pressures that have negatively affected
results. The reduction in net prices, particularly in the fourth quarter of
1998, was compounded by the decision of several customers to reduce inventory
levels. These conditions are expected to affect comparisons for the first half
of 1999 and generally will continue to present challenges for the office
products group and its competitors. They also will present opportunities for the
most efficient manufacturers.
Management believes that manufacturing within the office products
industry remains highly fragmented; however, significant manufacturing
consolidations occurred during 1998, particularly the acquisition of Leitz by
Esselte and of IBICO by GBC. Due to local market preferences for product design
and paper sizes, many office product manufacturers supply on a regional basis
only. Many manufacturers supply a relatively narrow range of products. ACCO's
key competitors on a world-wide basis include Avery Dennison, Esselte, Newell,
Fellowes, Atapco and GBC. Primary competitors for personal organizers in the
North American market are Franklin Quest and Day-Runner, and key competitors in
the international market for personal organizers, although less developed than
in the North American market, include Filo Fax in the U.K. and Quo Vadis in
France. In computer accessories, ACCO competes against Logitech, Fellowes,
Microsoft and others. ACCO's operating companies compete on the basis of product
quality, price, service and responsiveness to consumer preferences.
ACCO's subsidiaries purchase raw materials, components and products
from a variety of sources, including non-U.S. vendors, on competitively
available terms that fluctuate based on market conditions. ACCO is establishing
substantial and growing production operations in Mexico, helping to reduce its
cost base.
Golf Products
Acushnet Company ("Acushnet"), together with its subsidiaries, is a
leading manufacturer and distributor of golf balls, golf clubs, golf shoes and
golf gloves. Other products include bags, carts, dress and athletic shoes as
well as socks and accessories. Acushnet's leading brands are Titleist and
Pinnacle golf balls; DCI, Titleist Titanium, Vokey design, Scotty Cameron by
Titleist and Bulls Eye golf clubs and putters; FootJoy Classics and DryJoys golf
shoes;
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and FootJoy Sta-Sof and Weather-Sof golf gloves. Acushnet products are sold
primarily to golf pro shops throughout the U.S. by the Titleist and FootJoy
Worldwide Division sales force and to sporting goods stores and mass merchants
through the Acushnet Golf Division. Sales are made in the U.K., Canada, Germany,
Austria, Denmark, France, Sweden, The Netherlands, Thailand, South Africa and
Japan through subsidiaries, in Ireland through a branch of a U.K. subsidiary,
and outside these areas through distributors or agents. Cobra is a subsidiary
that is a leading manufacturer and distributor of golf clubs, with emphasis on
oversized graphite shafted golf clubs marketed and sold under the Cobra brand
name. Other Cobra products include specialty golf clubs, Bobby Grace by Cobra
putters, golf balls, golf bags and golf accessories. Cobra's products are sold
to on-course golf pro shops and selected off-course specialty stores throughout
the U.S. by Cobra's sales force. Cobra markets its products internationally
through Acushnet's subsidiaries in the U.K., continental Europe, Canada, Japan
and Thailand, through an exclusive licensee in Australia and outside these areas
through distributors.
Acushnet and its subsidiaries compete on the basis of product quality,
price, service and responsiveness to consumer preferences. In golf balls,
Acushnet's main competitors are Spalding, Wilson, Dunlop/Slazenger and
Bridgestone. In golf clubs, Callaway, Taylor Made, Ping, Tommy Armour, Spalding,
Wilson and Mizuno are the main competitors. In golf shoes, Etonic, Nike, Dexter,
Reebok, Mizuno, Stylo and Adidas are the main competitors. In golf gloves,
Wilson, Etonic, Daiwa, Dunlop/Maxfli, Kasco, Slazenger, Tommy Armour, Mizuno and
Bridgestone are the main competitors.
The United States Golf Association establishes standards for golf
equipment used in competitive play in the United States. The USGA has announced
its intention to propose a new rule in the late summer of 1999 addressing the
initial velocity and overall distance standard for golf balls. Until more
details regarding the proposed rule change become available, we cannot determine
whether it would have an effect on Acushnet's group's golf ball business and/or
the golf ball industry. Taylor Made Golf and Nike have recently introduced golf
balls into their product offerings. Callaway Golf announced it intends to do so
in the near future. Each company has significant brand awareness in the golf
market that could encourage purchases of their respective golf ball products by
the trade and by consumers. It is not possible to predict what effect, if any,
the Callaway, Taylor Made and Nike golf balls will have on Acushnet's or its
competitors' business.
The golf club market was adversely affected in 1998 by lower consumer
demand, leading to increased inventory and price discounting. These changes led
to an estimated revenue decline in the U.S. market in the range of 10-15%. Both
the Titleist and Cobra brands were affected by the overall weakness in the
market for irons, though both achieved volume gains in metal woods. Titleist
golf club net sales were up on a favorable product mix and firm pricing. For
Cobra, sales
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results were more in line with the overall market trend and profits declined
significantly, particularly in the second half of the year. Conditions in the
club market and the overall inventory levels are likely to affect comparisons in
1999. Aggressive actions are underway to bring Cobra expenses in line with lower
demand and to identify further synergies between Titleist and Cobra. On November
2, 1998, the USGA announced the immediate implementation of a new rule with
respect to the performance of golf clubs. Registrant believes that most or all
of Acushnet's group's golf products currently marketed and under development
will conform to this new 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 on Registrant's golf products segment.
Acushnet's advertising and promotional campaigns rely in part on a
large number of touring professionals and club professionals using and endorsing
its products. Acushnet has been competing for the endorsement and promotional
services of touring professionals. As a result, these costs have risen and may
continue to rise.
There is currently a substantial market in "knock-off" and counterfeit
golf clubs which imitate or copy the protected features of original equipment
manufacturer golf club products. Acushnet has an active program of enforcing its
intellectual property rights against those who make or sell such products.
Spirits and Wine
Jim Beam Brands Worldwide, Inc. ("JBB Worldwide") is a holding company
for subsidiaries in the distilled spirits and wine business. Principal
subsidiaries include Jim Beam Brands Co. ("Beam"), Alberta Distillers Limited
("Alberta"), JBB (Asia-Pacific) Pty. Limited ("JBB (Asia-Pacific)") and JBB
(Greater Europe) PLC ("JBB (Greater Europe)").
Principal markets for the products of JBB Worldwide's subsidiaries are
the U.S., the U.K. and Australia. Approximately 80% of JBB Worldwide subsidiary
sales are to these three markets, with the U.S. and the U.K. representing 54%
and 16% of sales, respectively.
JBB Worldwide's leading brands are owned by its subsidiaries, except
that DeKuyper cordials are produced and sold in the U.S. under a perpetual
license, Gilbey's gin and Gilbey's vodka are produced and sold in the U.S. under
a license expiring September 30, 2007 and the rights to Kamchatka vodka brand in
California are claimed by another entity.
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Beam, whose operations are located in the U.S., currently produces, or
imports, and markets a broad line of distilled spirits, including bourbon and
other whiskeys, cordials, gin, vodka, rum, tequila and cognac. As discussed
below, in 1998 Beam also added wines to its product offerings. Alberta, located
in Canada, produces and sells in Canada a line of distilled spirits; produces
Canadian whisky and other distilled spirit products for export to the U.S.;
sells bulk Canadian whisky into a variety of export markets; and imports and
distributes wines. JBB (Asia-Pacific) is located in Australia and sells JBB
Worldwide subsidiary products (primarily Jim Beam bourbon whiskey) as well as
several brands under agency agreements. JBB (Greater Europe) is located in the
U.K. and produces, bottles, and sells blended and single malt Scotch whiskies,
markets and sells vodka, and sells Scotch whisky in bulk. Under the JBB
Worldwide holding company structure, Beam, Alberta, JBB (Greater Europe), and
JBB (Asia-Pacific) have each been given the responsibility of selling the
combined branded product portfolio in designated markets around the world.
Beam and its predecessors have been distillers of bourbon whiskey since
1795. Beam's nine leading brand names are Jim Beam Bourbon Whiskey, Windsor
Canadian Supreme Whisky, Lord Calvert Canadian Whisky, DeKuyper cordials,
Gilbey's gin, Gilbey's vodka, Kamchatka vodka, Wolfschmidt vodka and Kessler
American Blended Whiskey. Principal bourbon whiskey brand names are Jim Beam,
the largest-selling bourbon whiskey in the U.S. and in the world, four premium
and super premium bourbon whiskeys (Booker's, Knob Creek, Baker's and Basil
Hayden's) sold under the Small Batch bourbon whiskey designation, Jim Beam &
Cola, which combines Jim Beam bourbon whiskey with a cola soft drink, Old
Grand-Dad, Old Crow and Old Taylor. DeKuyper is the top-selling cordial line in
the U.S. Beam also produces Chateaux and Leroux cordials, Beam's 8-Star Blend
and Calvert Extra blended whiskeys, Dark Eyes vodka and Calvert gin, and
imports, in bottle or in bulk, Canada House Canadian Whisky (produced by
Alberta), The Dalmore and The Claymore Scotch whiskies (both produced by JBB
(Greater Europe)), Kamora coffee liqueur, After Shock cinnamon liqueur (produced
by Alberta), Ronrico and Pusser's rums, El Tesoro and Chinaco tequilas and A. de
Fussigny cognacs.
In August 1998, JBB Worldwide purchased the Geyser Peak wine business
and adjacent vineyard property. The winery is located in Alexander Valley,
Sonoma County, California. Geyser Peak wine brands include ultra-premium Geyser
Peak Reserve and Venezia, super-premium Geyser Peak and popular premium Canyon
Road. The premium category is generally divided by the trade into three
segments: ultra premium wines that retail at over $14 per bottle; super premium
wines that retail between $7 and $14 per bottle; and popular premium wines that
retail between $3 and $7 per bottle. In February 1998, JBB Worldwide formed a
joint venture to distribute the Barwang brand of Australian wines on a global
basis, except in Australia and New Zealand.
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JBB (Greater Europe) has its origins as a distiller of Scotch whisky in
1844. In 1993, JBB (Greater Europe) completed the acquisition of Invergordon
Distillers Group PLC, another distiller, blender and marketer of Scotch whisky.
JBB (Greater Europe)'s principal brand names are Whyte & Mackay Special Reserve,
The Claymore, The Dalmore, Cluny, Mackinlay, Isle of Jura and Bruichladdich
Scotch whiskies, Glayva Scotch whisky liqueur and Vladivar vodka. JBB (Greater
Europe)'s products are sold in the U.K. through its own sales force, in the U.S.
and Australia through the affiliated company distribution networks, and through
independent distributors in other areas of the world.
Products of JBB Worldwide's subsidiaries are sold through various
distributors and, in the 18 "control" states (and one county) in the U.S. which
have established government control over certain aspects of the purchase and
distribution of alcoholic beverages, through government controlled liquor
authorities.
The distilled spirits business is highly competitive, with many brands
sold in the consumer market. Management believes there are approximately nine
major competitors worldwide and many smaller distillers and bottlers. Management
also believes that, based on units and sales value, the JBB Worldwide group,
with four brands that each sell over one million cases worldwide, is the second
or third largest producer and marketer of distilled spirits in the U.S. and is
among the nine major competitors worldwide. JBB Worldwide's subsidiaries compete
on the basis of product quality, price, service and responsiveness to consumer
preferences. Through 1995, consumption of distilled spirits declined in many
countries, including the U.S. However, since 1996, consumption in the U.S. has
been steady or increased slightly, indicating that the historic decline may be
reversing. Since 1996, Beam's total depletions (sales from distributors to
retailers) have declined. In 1998, total depletions were down slightly in the
U.S., although the rate of decline slowed from prior years, and depletions of
Jim Beam bourbon and DeKuyper cordials increased. The decline in the total
number of cases sold by Beam may be due to its historic concentration of
mid-to-low priced products that may not be benefiting from the factors
influencing the recent industry trends. The number of cases sold by Beam also
may be affected by price increases taken in recent years to increase its profits
as compared to unit sales.
The merger of Grand Metropolitan PLC and Guinness PLC to create Diageo
PLC in late 1997 may reflect a trend towards consolidation in the highly
competitive global spirits business. The creation of Diageo PLC, and the breadth
of its portfolio, 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.
11
<PAGE>
The principal raw materials for the production, storage and aging of
distilled products are primarily corn, other grains, and new oak barrels, and
are readily available from a number of sources except that new oak barrels are
available from only two major sources, one of which is owned by a competitor.
Beam has entered into a long-term supply agreement for new oak barrels. Blended
Scotch whiskies are composed of a variety of grain and malt whiskies blended to
provide a consistent product. The Scotch industry is therefore dependent on the
trading of whiskies between whisky companies.
The principal raw materials used in the production of wines are grapes,
barrels and packaging materials. Grapes are primarily purchased from independent
growers under long-term supply contracts and, from time to time, are adversely
affected by weather and other forces which may limit production. In fiscal 1998,
approximately 5-10% of Geyser Peak's total grape supply came from company-owned
land.
Because whiskeys are aged for various periods, generally from three to
eight years, subsidiaries of JBB Worldwide maintain, in accordance with industry
practice, substantial inventories of bulk whiskey in warehouse facilities.
Whiskey production is generally scheduled to meet demand years into the future,
and production schedules are adjusted from time to time to bring inventories
into balance with estimated future demand.
The production, storage, transportation, distribution and sale of the
products of JBB Worldwide's subsidiaries are subject to regulation by federal,
state, local and foreign authorities. Various local jurisdictions prohibit or
restrict the sale of distilled spirits and wine in whole or in part. As a result
of the publicity surrounding litigation against manufacturers of tobacco
products, some commentators have speculated that other industries, including
beverage alcohol, may some day also be targets of litigation. Registrant
believes, and counsel has advised generally, that if such actions were
commenced, Registrant and its subsidiaries would have meritorious defenses to
such suits and they would be vigorously contested.
In the U.S., U.K. and many other countries, distilled spirits and wine
are subject to federal excise taxes and/or customs duties as well as state,
local and other taxes. There have been no increases in the U.S. federal excise
tax since January 1, 1991, although proposals to increase such taxes have been
made from time to time. In addition, there are proposals pending to increase or
impose new distilled spirits taxes in various jurisdictions.
The U.K. budget announced in March 1998 raised duties on a typical pint
of beer by one pence and a typical bottle of wine by four pence. The U.K. budget
announced in March 1999 did not provide for an increase on duties on a typical
pint of beer or a typical bottle of wine.
12
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The U.K. budget announcements in March 1998 and 1999 did not provide
for an increase in excise tax duties on distilled spirits. Changes in the U.K.
excise duties on distilled spirits in recent years have resulted in increases or
decreases in the price of a typical 700 milliliter bottle of Scotch whisky as
follows:
Amount of
Effective Increase
Date (Decrease)
----------------- ----------
January 1, 1995 26 Pence
November 28, 1995 (27 pence)
November 26, 1996 (26 pence)
January 1, 1998 19 pence
It is believed that the U.S. Federal excise tax increase in 1991
contributed to a decline in distilled spirits unit sales for the industry,
including Beam. The effect of any future excise tax increases in any
jurisdiction cannot be determined, but it is possible that any future tax
increases would have an adverse effect on unit sales and increase existing
competitive pressures.
The Alcoholic Beverage Labeling Act of 1988 (the "Labeling Act") and
regulations promulgated thereunder by the Bureau of Alcohol, Tobacco and
Firearms of the Department of the Treasury (the "Bureau") require that
containers of alcoholic beverages for sale or distribution in the U.S. and to
members of the United States Armed Forces abroad bear a specific written warning
statement. It is not possible to state whether any additional or different
requirements imposing further labeling or other warning statement requirements
will be enacted in the U.S. Requirements that distilled spirits containers bear
warning statements have been established in certain other markets in which JBB
Worldwide subsidiaries sell products, notably South Korea, Thailand and Japan.
It is not possible to predict the effect, if any, that existing or future
labeling or other warning statement requirements may have on the industry
generally or on JBB Worldwide specifically.
Previously, there has been discussion and legislation introduced to ban
U.S. television advertising of spirits. Although no legislation is currently
pending or has been enacted, most TV networks and local affiliated stations in
the U.S. currently decline to accept distilled spirits advertising. JBB
Worldwide's operating subsidiaries outside the U.S. have conducted broadcast
advertising in markets where legal. In addition, the Bureau recently approved
two statements for wine labels referencing the health effects of wine
consumption. Producers may voluntarily place these statements on wine labels,
but Beam has no present intention of placing either statement on its wine
labels. The Bureau has not yet authorized such statements for beer or spirits
labels. It is not possible to predict the effect, if any, the use of these
statements may have on Beam's or its competitors' businesses. The approval of
these statements also has generated
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<PAGE>
criticism and calls for additional legislative restrictions on beverage alcohol
advertising, although to date, no such legislation has been proposed or is
pending. It is also not possible to predict when or whether additional
restrictions on advertising may be implemented in the U.S. or elsewhere. If new
restrictions are implemented, they may have an adverse effect on unit sales and
industry trends.
Other Matters
Employees
Registrant and its subsidiaries had, as of December 31, 1998, the
following number of employees:
Home Products 10,500
Office Products 8,400
------
Home and Office Products 18,900
Golf Products 4,650
Spirits and Wine 2,300
Corporate Headquarters 190
------
Total 26,040
======
Environmental matters
Registrant and its subsidiaries are subject to federal, state and local
laws and regulations concerning the discharge of materials into the environment
and the handling, disposal and clean-up of waste materials and otherwise
relating to the protection of the environment. While it is not possible to
quantify with certainty the potential impact of actions regarding environmental
matters, particularly remediation and other compliance efforts that Registrant's
subsidiaries may undertake in the future, in the opinion of management of
Registrant, compliance with the present environmental protection laws, before
taking into account estimated recoveries from third parties, will not have a
material adverse effect upon the capital expenditures, financial condition,
results of operations or competitive position of Registrant and its
subsidiaries.
(d) Financial information about foreign and domestic
operations and export sales.
Registrant's subsidiaries operate in the United States, Europe
(principally the U.K.) and other areas (principally Canada and Australia). See
the table captioned "Information on Business Segments" contained in the 1998
Annual Report to Stockholders of Registrant, which table is incorporated herein.
Registrant has investments in various foreign countries, principally the United
14
<PAGE>
Kingdom, as well as Australia and Canada, and, therefore, changes in the value
of the currencies of these countries can have an effect on Registrant's
financial statements when translated into U.S. dollars.
Item 2. Properties.
Registrant leases its principal executive offices in Old Greenwich,
Connecticut. The following is a description of the principal properties of
Registrant's subsidiaries.
Home Products
MasterBrand leases its executive offices in Lincolnshire, Illinois and
a subsidiary, Moen, owns its executive offices in North Olmsted, Ohio. Principal
properties of subsidiaries of MasterBrand include twenty-four plants and two
distribution centers owned and operated in the U.S. A 60%-owned joint venture in
China owns and operates one plant. In addition, subsidiaries of MasterBrand
lease and operate two plants and four warehouses in the U.S. and nine
distribution centers, of which seven are in the U.S. and one is in each of
Canada and Mexico.
Office Products
ACCO leases its executive offices in Lincolnshire, Illinois from a
subsidiary. Principal properties of subsidiaries of ACCO include seven plants
which are owned and operated in the U.S., six in the U.K., and two in each of
Australia and Mexico, and one each in Germany, Italy, France and the Republic of
Ireland. In addition, subsidiaries of ACCO lease and operate six facilities in
the U.S., two in Mexico, three in each of Canada and the U.K., and one in each
of France and Italy. Of these leased facilities, (i) five in the U.S. and one in
each of Canada and the U.K. are combined manufacturing and distribution
facilities, (ii) two in Canada and one in each of Mexico, the U.K., Italy and
France are distribution facilities and (iii) one in each of the U.S., Mexico and
the U.K. are manufacturing facilities.
Golf Products
Acushnet owns a combined executive office and research and development
facility and a distribution and packaging facility in Fairhaven, Massachusetts.
In addition, it owns and operates five plants and two test facilities, all
located in the U.S. Acushnet also leases three warehouses, two manufacturing
facilities, a test facility, and three research and development facilities, all
located in the U.S. Acushnet also leases an office in Taiwan. A subsidiary of
Acushnet leases three combined sales office and warehouse facilities in Canada.
Other Acushnet subsidiaries own and operate a plant and a warehouse in England,
lease a sales office and warehouse in each of Germany, France, Sweden, Austria,
Denmark, The Netherlands and South Africa and lease a sales office in the
Republic of Ireland. A subsidiary of Acushnet in Japan leases two sales offices
and one
15
<PAGE>
warehouse facility. A subsidiary of Acushnet in Thailand leases a sales office
and warehouse facility in addition to leasing two manufacturing plants through a
majority owned joint venture. Acushnet's minority-owned joint venture in China
leases and operates one plant. Cobra leases a combined executive office and
distribution center, a combined administrative and assembly facility, and a
combined warehouse and distribution center all located in Carlsbad, California.
Spirits and Wine
JBB Worldwide operates from executive offices leased by Beam in
Deerfield, Illinois. Other subsidiaries of JBB Worldwide lease offices in
Glasgow, Scotland; Burnaby, British Columbia, Canada; and Gordon, New South
Wales, Australia. Subsidiaries of JBB Worldwide own and operate seven bottling
plants, twelve distilleries (of which three are malt distilleries not currently
in use), a winery (including vineyards, production and bottling facilities on
site) and numerous warehouses for the aging of bulk whiskeys all located in the
U.S., Scotland and Canada. In addition, JBB Worldwide subsidiaries lease sales
offices and warehouse space for the storage of promotional material in various
locations throughout the world.
Registrant and its subsidiaries are of the opinion that their
properties are suitable to their respective businesses and have productive
capacities adequate to the needs of such businesses.
Item 3. Legal Proceedings.
Overview
On December 22, l994, Registrant sold The American Tobacco Company
("ATCO") to Brown & Williamson Tobacco Corporation ("B&W"), at the time a
wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with the sale,
B&W and ATCO ("the Indemnitors") agreed to indemnify Registrant against claims
including legal expenses arising from smoking and health and fire safe cigarette
matters relating to the tobacco business of ATCO.
Numerous legal actions, proceedings and claims are pending in various
jurisdictions against leading tobacco manufacturers, including B&W both
individually and as successor by merger to ATCO, based upon allegations that
cancer and other ailments have resulted from tobacco use. Registrant has been
named as a defendant in some of these cases. These claims generally fall within
three categories: (i) smoking and health cases alleging personal injury brought
on behalf of individual plaintiffs, (ii) smoking and health cases alleging
personal injury and other damages and purporting to be brought on behalf of
classes of individual plaintiffs, and (iii) health care cost recovery cases,
including class actions, brought by foreign governments, unions, federal and
state taxpayers and others seeking reimbursement for health care expenditures
allegedly caused by cigarette smoking.
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<PAGE>
As noted below, in 1998, certain United States tobacco companies, including B&W,
entered into a Master Settlement Agreement that resolved all remaining health
care cost recovery cases brought by the various States, U.S. territories, and
the District of Columbia. Damages claimed in some of the smoking and health
class actions and remaining health care cost recovery cases range into the
billions of dollars.
Certain former asbestos manufacturers and asbestos manufacturers'
personal injury settlement trusts have also sought unspecified amounts in
indemnity or contribution in third party actions against all or most of the
major domestic tobacco manufacturers. It has also been reported that civil and
criminal investigations of tobacco manufacturers are pending before certain
prosecutorial and other authorities. Reports have also stated that the federal
government is considering filing an action seeking reimbursement for health care
expenditures allegedly related to cigarette smoking. President Clinton advocated
the filing of such a lawsuit during his State of the Union Address to Congress
on January 19, 1999.
In recent years there has been a substantial increase in the number of
smoking and health cases filed in the United States, a trend which continued to
accelerate in 1998.
Individual Cases
As of March 29, 1999, there were approximately 230 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 "List of Pending Cases" below.
Class Actions
As of March 29, 1999, there were approximately 28 purported smoking and
health class actions pending in which Registrant has been named as one of the
defendants (including four that involve allegations of various personal injuries
relating to exposure to environmental tobacco smoke ("ETS"), compared with
approximately 25 such cases as of March 27, 1998. See "List of Pending Cases"
below.
Health Care Cost Recovery Actions
As of March 29, 1999, there were approximately 9 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. See "List of
Pending Cases" below.
17
<PAGE>
Recent Case Developments
On June 22, 1998, a Florida appellate court overturned a verdict by a
Florida jury that had awarded a former smoker and his spouse $750,000 in a
smoking and health case against B&W (as successor by merger to ATCO) (Carter v.
American Tobacco Company, et al.). The court found, among other things, that the
action had been time-barred. On July 7, 1998, plaintiffs moved for rehearing and
clarification, which the appellate court denied on December 31, 1998. Plaintiffs
have filed a petition seeking discretionary review by the Florida Supreme Court
of the appellate court's June 22, 1998 and December 31, 1998 decisions. B&W has
opposed this petition. Registrant was not a party to the Carter litigation.
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 protection, and for pain and suffering, and $450,000 in
punitive damages, in a smoking and health case against B&W (individually and as
successor by merger to ATCO) (Widdick v. Brown & Williamson Tobacco Corporation,
et al.). On June 22, 1998, B&W filed a motion for judgment notwithstanding the
verdict or for a new trial. While a decision on that motion was pending, on
August 13, 1998, a Florida appellate court ruled that the trial court should
have granted B&W's motion prior to the trial to transfer the case to the Circuit
Court of Palm Beach or Broward County. On January 29, 1999, pursuant to a motion
by B&W, and based on its August 13, 1998 decision, the appellate court vacated
the final judgment and set aside the jury verdict. On February 11, 1999,
plaintiff filed a motion for rehearing or, in the alternative, for certification
to the Florida Supreme Court. The appellate court denied plaintiff's motion for
rehearing and certification on March 10, 1999. Registrant is not a party to the
Widdick litigation.
In July of 1998, trial began in a Florida action against B&W
(individually and as successor by merger to ATCO) and other U.S. tobacco
manufacturer defendants brought on behalf of a class of Florida residents
allegedly injured as a result of their alleged addiction to cigarettes
containing nicotine (Engle v. R.J. Reynolds Tobacco Company, et al.). This trial
is still in progress. Registrant is not a party to the Engle litigation.
In January of 1999, trial began in four consolidated cases brought
against certain tobacco manufacturers in state court in Memphis, Tennessee. B&W
is a defendant in two of the cases, and is a defendant as successor to ATCO in
another of the cases. (Newcomb v. R.J. Reynolds Tobacco Company, et al.;
McDaniel v. Brown & Williamson Tobacco Corporation, et al.; Settle v. Brown &
Williamson Tobacco Corporation). Plaintiffs allege that their decedents died as
a result of smoking cigarettes manufactured by defendants. This trial is still
in progress. Registrant is not a party to this litigation.
18
<PAGE>
In February of 1999, trial began in federal court in Akron, Ohio in a
class action brought on behalf of a variety of union health funds located in
Ohio against B&W (individually and as successor by merger to ATCO) and others to
recover health care expenditures allegedly caused by smoking. (Iron Workers
Local Union No. 17 Insurance Fund v. Philip Morris, Inc., et al.). On March 18,
1999, the jury returned a verdict in favor of defendants. Registrant is not a
party to the Ohio Ironworkers litigation.
On February 9, 1999, a jury in San Francisco, California returned a
verdict in favor of a former smoker who claimed that she contracted lung cancer
as a result of smoking. (Henley v. Philip Morris Incorporated, et al.) The jury
awarded the plaintiff $1.5 million in compensatory damages and $50 million in
punitive damages. Philip Morris is the sole defendant to this action and has
filed motions for judgment notwithstanding the verdict.
Resolution of Health Care Cost Recovery Actions By States, U.S. Territories and
the District of Columbia
On November 23, 1998, certain U.S. tobacco companies, including B&W,
entered into a Master Settlement Agreement (the "MSA") with certain state
attorneys general that would result in the dismissal of all remaining health
care reimbursement lawsuits brought by the various States, U.S. territories, and
the District of Columbia. Registrant is not a party to the MSA and is not bound
by any of the payment obligations or other restrictions of the MSA. As discussed
below, health care cost recovery actions filed by the states of Minnesota,
Texas, Florida and Mississippi were settled separately prior to the MSA.
Under the MSA, the settling States agree to dismiss their current
health care reimbursement lawsuits and not to refile such suits in the future.
The MSA provides for the release by the settling States of claims for past
conduct, acts or omissions (including future damages resulting from past
conduct, acts or omissions) in any way related, in whole or in part, to the use,
sale, distribution, manufacture, development, advertising, marketing or health
effects of, the exposure to, or research, statements or warnings about, tobacco
products. The release includes any claim that was brought or comparable claims
that could have been brought by the States in their health care cost recovery
actions. It also includes claims for future conduct, acts or omissions, or
claims in any way related, in whole or in part, to the use of or exposure to
tobacco products manufactured in the ordinary course of business, including
future claims for reimbursement of health care costs allegedly associated with
the use of or exposure to tobacco products. All 52 government entities permitted
to participate in the MSA, including 46 States, American Samoa, Guam, Puerto
Rico, the U.S. Virgin Islands, the Northern Mariana Islands and the District of
Columbia, have dismissed their health care reimbursement suits pursuant to the
MSA.
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<PAGE>
The MSA provides for the release of claims against participating
manufacturers, as well as their predecessors, successors, and past, present, and
future affiliates. "Affiliate" is defined to include past or present persons or
entities who own or control, are owned by or controlled by, or are under common
ownership of a 10% or more equity interest. Registrant understands that it is a
released party under the terms of the MSA.
Under the MSA, participating manufacturers are required to make initial
"upfront" payments totaling nearly $13 billion between 1998 and 2003 to the
settling States. Additional annual payments must be made beginning in 2000 in
perpetuity (starting at $4.5 billion in 2000 and increasing to $9 billion in
2018 and thereafter), and payments to several funds (a "strategic contribution"
fund to reward individual States for their contributions to the settlement, a
public health foundation, and a public advertising and awareness fund) are also
required. Further payments of $300 million per year will also be required, if
the market share of the participating manufacturers in the preceding year was at
least 99.05%. These payments are subject to various credits and adjustments,
depending on industry volume, inflation, and other factors. The initial up front
payment will be allocated among the participating manufacturers according to
market capitalizations; all other payments are to be allocated according to
market share. Moreover, participating manufacturers have agreed to a variety of
additional restrictions and limitations, including, for example, restrictions on
advertising, marketing and lobbying. The MSA also calls for the participating
manufacturers to pay attorneys' fees for the States' attorneys in the settled
litigation.
Minnesota
A settlement with the State of Minnesota was reached on May 8, 1998.
Under the terms of this settlement, the settling defendants must make initial
payments to the State of Minnesota totaling approximately $1.3 billion in annual
installments from 1998 through 2003. (Certain of these amounts may be adjusted
for inflation and changes in sales volume.) In addition, annual payments due to
Minnesota totaled $102 million in 1998, and are to increase incrementally to a
total of $204 million for 2003, and continue in that amount thereafter. Total
annual payments may be adjusted for inflation and changes in sales. The
Minnesota settlement also requires payments totaling $469 million to Blue Cross
and Blue Shield of Minnesota in installments beginning in 1998 and ending in
2003. The settling defendants are also to pay a total of $10 million per year
for ten years to a national research account. The settling defendants have also
agreed to a number of non-financial terms in the settlement of the Minnesota
action, including restrictions on advertising and merchandising. The settling
defendants have further agreed to pay the plaintiffs' attorneys' fees.
20
<PAGE>
In addition, because of the Minnesota settlement, Texas, Florida and
Mississippi will receive increased payments under their own settlement
agreements, which provide that terms of subsequent state tobacco settlement
agreements may be incorporated into the Texas, Florida and Mississippi
agreements. Texas, Florida and Mississippi will receive these additional
payments, because the Minnesota agreement requires payments different from the
Texas, Florida and Mississippi agreements.
Registrant was not a party to the Minnesota case. It is neither a party
to the settlement agreement nor required to pay any money under it.
Texas
A settlement with the State of Texas was reached on January 16, 1998.
Under the terms of this settlement, the settling defendants were required to pay
the State of Texas initial payments totaling $725 million and $264 million to
fund anti-smoking initiatives. In addition, annual payments due to Texas totaled
$290 million in 1998, and are to increase incrementally to a total of $580
million for 2003, and continue in that amount thereafter. Total annual payments
may be adjusted for inflation and changes in sales. Allocation of payment among
individual companies is based on their share of domestic cigarette sales. Total
payments to the State of Texas are to increase by $2.275 billion due to the
Minnesota settlement; this additional amount is to be paid in installments over
several years. The settling defendants have further agreed to pay the State's
attorneys fees.
Registrant was not a party to the Texas case. It is neither a party to
the settlement agreement nor required to pay any money under it.
Florida
A settlement with the State of Florida was reached on August 25, 1997.
Under the terms of this settlement, the settling defendants were required to pay
a total of $550 million into a special escrow account as well as $200 million to
support a pilot program aimed at reducing youth smoking. In addition, annual
payments due to Florida totaled $220 million in 1998, and are to increase
incrementally to $440 million in 2003, and continue in that amount thereafter.
Total annual payments may be adjusted for inflation and changes in sales.
Allocation of payment among individual companies is based on their share of
domestic cigarette sales. Total payments to the State of Florida are to increase
by $1.75 billion due to the Minnesota settlement; this additional amount is to
be paid in installments over several years. The settling defendants have further
agreed to pay the State's attorneys fees.
21
<PAGE>
Registrant was dismissed as a defendant from this action, and is
neither a party to the settlement nor required to pay any money under it.
Mississippi
A settlement of the State of Mississippi action was reached on July 2,
1997. Under the terms of this settlement, the settling defendants were required
to make initial payments to the State totaling $170 million. In addition, annual
payments due to Mississippi totaled $68 million in 1998 and are to increase
incrementally to a total of $136 million for 2003, and continue in that amount
thereafter. Total annual payments may be adjusted for inflation and changes in
sales. Allocation of payment among individual companies is based on their share
of domestic cigarette sales. Total payments to the State of Mississippi are to
increase by $550 million due to the Minnesota settlement; this additional amount
is to be paid in installments over several years. The settling defendants have
further agreed to pay the State's attorneys fees.
Registrant was voluntarily dismissed from this action, and is neither a
party to the settlement nor required to pay any money under it.
List of Pending Cases
For a list of pending cases, see Exhibit 99 to this Form 10-K and, for
a discussion of other pending litigation, see Note 19 "Pending Litigation" in
the Notes to Consolidated Financial Statements contained in the 1998 Annual
Report to Stockholders of Registrant, which Note is incorporated herein by
reference.
List of Terminated Cases
For a list of terminated cases, see Exhibit 99 to this Form 10-K.
Conclusion
Management believes that there are meritorious defenses to the pending
actions referred to in Exhibit 99 of this Form 10-K 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" on page 16).
22
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 4a. Executive Officers of the Registrant.
The name, present positions and offices with Registrant, principal
occupations during the past five years and age of each of Registrant's present
executive officers are as follows:
Present positions and offices with
Registrant and principal occupations during
Name during the past five years Age
- ---- ------------------------------------ ---
Thomas C. Hays Chairman of the Board and Chief Executive 63
Officer of Registrant since January 1995;
President and Chief Operating Officer of
Registrant prior thereto
Norman H. Wesley President and Chief Operating Officer of 49
Registrant since January 1999; Chairman of
the Board and Chief Executive Officer of
Fortune Brands Home and Office, Inc. since
December 1997 and MasterBrand Industries,
Inc. since April 1997 and Chairman of ACCO
World Corporation since October 1998;
Chairman and Chief Executive Officer of ACCO
World Corporation from May 1997 to October
1998; President and Chief Executive Officer
of ACCO World Corporation prior thereto
John T. Ludes Vice Chairman of Registrant since January 62
1999; President and Chief Operating Officer
of Registrant from January 1995 to December
1998; Group Vice President of Registrant and
President and Chief Executive Officer of
Acushnet prior thereto
Gilbert L. Klemann, II Executive Vice President - Corporate of 48
Registrant since January 1999; Executive
Vice President - Strategic and Legal Affairs
of Registrant during 1998; Senior Vice
President and General Counsel of Registrant
prior thereto
Dudley L. Bauerlein, Jr. Senior Vice President and Chief Financial 52
Officer of Registrant since January 1995;
Vice President and Treasurer of Registrant
prior thereto
23
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Present positions and offices with
Registrant and principal occupations during
Name during the past five years Age
- ---- ------------------------------------ ---
Craig P. Omtvedt Senior Vice President and Chief Accounting 49
Officer of Registrant since January 1998;
Vice President and Chief Accounting Officer
of Registrant during 1997; Vice President -
Deputy Controller and Chief Internal Auditor
of Registrant during 1996; Deputy Controller
and Chief Internal Auditor of Registrant
during 1995; Deputy Controller of Registrant
prior thereto
Mark A. Roche Senior Vice President and General Counsel of 44
Registrant since January 1999; Vice
President and General Counsel during 1998;
Vice President and Associate General Counsel
of Registrant from January 1996 to December
1997; Associate General Counsel of
Registrant prior thereto
Robert J. Rukeyser Senior Vice President - Corporate Affairs of 56
Registrant
In the case of each of the above-listed executive officers, the
occupation or occupations given were his principal occupation and employment
during the period or periods indicated. None of such executive officers is
related to any other such executive officer. None was selected pursuant to any
arrangement or understanding between him and any other person. All executive
officers are elected annually.
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.
See the information in the tables captioned "Quarterly Common Stock
Dividend Payments" and "Quarterly Composite Common Stock Prices" and the
discussion relating thereto contained in the 1998 Annual Report to Stockholders
of Registrant, which information and discussion are incorporated herein by
reference. On February 26, 1999, there were 40,968 record holders of
Registrant's Common Stock, par value $3.125 per share.
Item 6. Selected Financial Data.
See the information for 1994 through 1998 in the table captioned
"Six-Year Consolidated Selected Financial Data" contained in the 1998 Annual
Report to Stockholders of Registrant, which information is incorporated herein
by reference.
24
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
See the discussion and analysis under the captions "Results of
Operations" and "Financial Condition" contained in the 1998 Annual Report to
Stockholders of Registrant, which discussion and analysis are incorporated
herein by reference.
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk.
See the discussion and analysis under "Market Risk," "Foreign Exchange
Contracts" and "Interest Rates" under the caption "Financial Condition" in the
1998 Annual Report to Stockholders of Registrant, which discussion is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
See the information in the Consolidated Statement of Income,
Consolidated Balance Sheet, Consolidated Statement of Cash Flows, Consolidated
Statement of Stockholders' Equity, Notes to Consolidated Financial Statements
and Report of Independent Accountants contained in the 1998 Annual Report to
Stockholders of Registrant, which information is incorporated herein by
reference. For unaudited selected quarterly financial data, see the table
captioned "Quarterly Financial Data" contained in the 1998 Annual Report to
Stockholders of Registrant, which table is incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of Registrant.
See the information under the caption "Election of Directors" contained
in the Proxy Statement for the Annual Meeting of Stockholders of Registrant to
be held on April 27, 1999, which information is incorporated herein by
reference. See also the information with respect to executive officers of
Registrant under Item 4a of Part I hereof, which information is incorporated
herein by reference.
Item 11. Executive Compensation.
See the information up to but not including the subcaption "Report of
the Compensation and Stock Option Committee on Executive Compensation" under the
caption "Executive Compensation" contained in the Proxy Statement for the Annual
Meeting of Stockholders of
25
<PAGE>
Registrant to be held on April 27, 1999, which information is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners
and Management.
See the information under the caption "Certain Information Regarding
Security Holdings" contained in the Proxy Statement for the Annual Meeting of
Stockholders of Registrant to be held on April 27, 1999, which information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
(1) Financial Statements (all financial statements listed below are
of Registrant and its consolidated subsidiaries)
Consolidated Statement of Income for the years ended December 31,
1998, 1997 and 1996 contained in the 1998 Annual Report to Stockholders
of Registrant is incorporated herein by reference.
Consolidated Balance Sheet as of December 31, 1998 and 1997 contained
in the 1998 Annual Report to Stockholders of Registrant is incorporated
herein by reference.
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996 contained in the 1998 Annual Report to Stockholders
of Registrant is incorporated herein by reference.
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996 contained in the 1998 Annual Report to
Stockholders of Registrant is incorporated herein by reference.
Notes to Consolidated Financial Statements contained in the 1998
Annual Report to Stockholders of Registrant are incorporated herein by
reference.
Report of Independent Accountants contained in the 1998 Annual Report
to Stockholders of Registrant is incorporated herein by reference.
26
<PAGE>
(2) Financial Statement Schedules
See Index to Financial Statement Schedule of Registrant and
subsidiaries at page F-1, which Index is incorporated herein by
reference.
(3) Exhibits
3(i). Restated Certificate of Incorporation of Registrant as in
effect on the date hereof.
3(ii)a. Amendments to By-laws of Registrant.
3(ii)b. By-laws of Registrant as in effect on the date hereof.
10a1. Fortune Brands, Inc. Annual Executive Incentive Compensation Plan
is incorporated herein by reference to Exhibit 10a1 to the
Quarterly Report on Form 10-Q of Registrant dated August 12,
1997.*
10b1. 1986 Stock Option Plan of Fortune Brands, Inc. and amendments
thereto are incorporated herein by reference to Exhibit 10b2 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1992.*
10b2. Amendment to 1986 Stock Option Plan of Fortune Brands, Inc.
constituting Exhibit 10b1 hereto is incorporated herein by
reference to Exhibit 10b to the Quarterly Report on Form 10-Q of
Registrant dated November 11, 1993.*
10b3. Amendment to 1986 Stock Option Plan of Fortune Brands, Inc. and
Amendment thereto constituting Exhibits 10b1 and 10b2 hereto is
incorporated herein by reference to Exhibit 10b to the Quarterly
Report on Form 10-Q of Registrant dated August 11, 1994.*
10b4. Amendment to the 1986 Stock Option Plan of Fortune Brands, Inc.
and Amendments thereto constituting Exhibits 10b1, 10b2 and 10b3
hereto is incorporated herein by reference to Exhibit 10a2 to the
Quarterly Report on Form 10-Q of Registrant dated November 11,
1997.*
10b5. 1990 Long-Term Incentive Plan of Fortune Brands, Inc. (As Amended
and Restated as of January 1, 1994) is incorporated herein by
reference to Exhibit 10a to the Quarterly Report on Form 10-Q of
Registrant dated August 11, 1994.*
10b6. Amendment to 1990 Long-Term Incentive Plan of Fortune Brands, Inc.
constituting Exhibit 10b5 hereto is incorporated herein by
reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of
Registrant dated November 11, 1997.*
27
<PAGE>
10b7. Fortune Brands, Inc. Non-Employee Director Stock Option Plan is
incorporated herein by reference to Exhibit 10b1 to the Quarterly
Report on Form 10-Q of Registrant dated August 12, 1997.*
10b8. Amendment to Registrant's Non-Employee Director Stock Option Plan
constituting Exhibit 10b7 hereto is incorporated herein by
reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of
Registrant dated August 12, 1998.*
10b9. Fortune Brands, Inc. Stock Plan for Non-employee Directors.*
10c1. Amended Supplemental Plan of Fortune Brands, Inc. is incorporated
herein by reference to Exhibit 10c1 to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended December 31, 1995.*
10c2. Trust Agreement, made as of the 2nd day of January, 1991, among
Registrant, The Chase Manhattan Bank ("Chase"), et al.
establishing a trust in favor of Gilbert L. Klemann, II for
purposes of paying amounts under the Amended Supplemental Plan
constituting Exhibit 10c1 hereto is incorporated herein by
reference to Exhibit 10c2 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1995.*
10c3. Amendment made as of the 1st day of November, 1993 to Trust
Agreement constituting Exhibit 10c2 hereto is incorporated herein
by reference to Exhibit 10c3 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1995.*
10c4. Amendment made as of the 1st day of January, 1995, to the Trust
Agreement and Amendment thereto constituting Exhibits 10c2 and
10c3 hereto is incorporated herein by reference to Exhibit 10c4 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1995.*
10c5. Amendment made as of the 1st day January, 1997, to Trust Agreement
and Amendments thereto constituting Exhibits 10c2, 10c3 and 10c4
hereto is incorporated herein by reference to Exhibit 10c5 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1997.*
10c6. Schedule identifying substantially identical agreements to Trust
Agreement and Amendments thereto constituting Exhibits 10c2, 10c3,
10c4 and 10c5 hereto in favor of Thomas C. Hays, Norman H. Wesley,
John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A.
Roche and Robert J. Rukeyser.*
28
<PAGE>
10c7. Amendment made as of the 24th day of February, 1997, to Trust
Agreement and Amendments thereto constituting Exhibits 10c2, 10c3,
10c4 and 10c5 hereto relating to the trust established in favor of
Thomas C. Hays, is incorporated herein by reference to Exhibit
10c7 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1997.*
10c8. Trust Agreement, made as of the 1st day of November, 1993, among
Gilbert L. Klemann, II, Registrant and Chase establishing a
grantor trust in favor of Gilbert L. Klemann, II for purposes of
paying amounts under the Amended Supplemental Plan constituting
Exhibit 10c1 hereto is incorporated herein by reference to Exhibit
10c6 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1995.*
10c9. Amendment made as of 1st day of January, 1996 to Trust Agreement
constituting Exhibit 10c8 hereto is incorporated herein by
reference to the Quarterly Report on Form 10-Q of Registrant dated
August 8, 1996.*
10c10. Amendment made as of the 1st day of January, 1997 to Trust
Agreement and Amendment thereto constituting Exhibits 10c8 and
10c9 hereto is incorporated herein by reference to Exhibit 10c1 to
the Quarterly Report on Form 10-Q of Registrant dated August 12,
1997.*
10c11. Amendment made as of the 1st day of August, 1998 to Trust
Agreement and Amendments thereto constituting Exhibits 10c8, 10c9
and 10c10 hereto is incorporated herein by reference to Exhibit
10a1 to the Quarterly Report on Form 10-Q of Registrant dated
November 11, 1998.*
10c12. Schedule identifying substantially identical agreements to the
Trust Agreement and Amendments thereto constituting Exhibits 10c8,
10c9, 10c10 and 10c11 hereto in favor of Thomas C. Hays, Norman H.
Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt,
Mark A. Roche and Robert J. Rukeyser.*
10c13. Amendment made as of the 24th day of February, 1997 to Trust
Agreement and Amendments thereto constituting Exhibits 10c8, 10c9,
10c10 and 10c11 hereto, among Thomas C. Hays, Registrant and
Chase, is incorporated herein by reference to Exhibit 10c12 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1997.*
10d1. Resolutions of the Board of Directors of Registrant adopted on
October 28, 1986 and July 26, 1988 adopting and amending a
retirement plan for directors of Registrant who are not officers
or employees of Registrant or a subsidiary thereof
29
<PAGE>
are incorporated herein by reference to Exhibit 10e1 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1991 maintained in Commission File No. 1-9076.*
10d2. Resolutions of the Board of Directors of Registrant adopted on
July 26, 1994 amending the resolutions constituting Exhibit 10d1
hereto is incorporated herein by reference to Exhibit 10e2 to the
Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
10e1. Severance and Retirement Agreement made as of February 24, 1997,
between Registrant and Thomas C. Hays is incorporated herein by
reference to Exhibit 10d1 to the Quarterly Report on Form 10-Q of
Registrant dated August 12, 1997.
10f1. Resolutions of the Board of Directors of Registrant adopted on
November 27, 1990 with respect to retirement and health benefits
provided to Gilbert L. Klemann, II is incorporated herein by
reference to Exhibit 10p1 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1991 maintained
in Commission File No. 1-9076.*
10f2. Resolutions of the Board of Directors of Registrant adopted on
July 26, 1988 with respect to retirement and health benefits
provided to Mark A. Roche.*
10g1. Letter dated January 23, 1996 from Registrant with respect to
deferred payment of fees to Eugene R. Anderson is incorporated
herein by reference to Exhibit 10k1 to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended December 31, 1995.*
10g2. Letter dated August 11, 1995 from Registrant with respect to
deferred payment of fees to Gordon R. Lohman is incorporated
herein by reference to Exhibit 10b to the Quarterly Report on Form
10-Q of Registrant dated November 9, 1995.*
10h1. Agreement dated January 2, 1991 between Registrant and Gilbert L.
Klemann, II is incorporated herein by reference to Exhibit 10s1 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1992.*
10h2. Amendment dated November 28, 1994 to the Agreement constituting
Exhibit 10h1 hereto is incorporated herein by reference to Exhibit
10r2 to the Annual Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1994.*
10h3. Schedule identifying substantially identical agreements to the
Agreement and Amendment thereto constituting Exhibits 10h1 and
10h2 hereto entered into by Registrant with Thomas C. Hays, Norman
H. Wesley, John T. Ludes, Dudley L.
30
<PAGE>
Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert
J. Rukeyser.*
10i1. Trust Agreement, made as of the 2nd day of January, 1991, among
Registrant, Chase, et al. establishing a trust in favor of Gilbert
L. Klemann, II for purposes of paying amounts under the Agreement
and Amendment thereto constituting Exhibits 10h1 and 10h2 hereto
is incorporated herein by reference to Exhibit 10s1 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
10i2. Amendment made as of the 1st day of November, 1993 to Trust
Agreement constituting Exhibit 10i1 hereto is incorporated herein
by reference to Exhibit 10s2 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1994.*
10i3. Amendment made as of the 1st day of January, 1997 to Trust
Agreement and Amendment thereto constituting Exhibits 10i1 and
10i2 hereto is incorporated herein by reference to Exhibit 10i3 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1997.*
10i4. Schedule identifying substantially identical agreements to the
Trust Agreement and Amendments thereto constituting Exhibits 10i1,
10i2 and 10i3 hereto in favor of Thomas C. Hays, Norman H. Wesley,
John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A.
Roche and Robert J. Rukeyser.*
10j1. Agreement dated as of January 2, 1991 between Registrant and
Gilbert L. Klemann, II and amendment thereto is incorporated
herein by reference to Exhibit 10y1 to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended December 31, 1991
maintained in Commission File No. 1-9076.*
10j2. Agreement dated as of October 28, 1991 amending the Agreement
constituting Exhibit 10j1 hereto is incorporated herein by
reference to Exhibit 10w2 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31, 1992.*
10j3. Amendment effective as of January 1, 1995 to the Agreement and
Amendment thereto constituting Exhibits 10j1 and 10j2 hereto is
incorporated herein by reference to Exhibit 10u3 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1994.*
10j4. Schedule identifying substantially identical agreements to the
Agreement and Amendments thereto constituting Exhibits 10j1, 10j2
and 10j3 hereto entered into by Registrant with
31
<PAGE>
Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr.,
Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.*
10j5. Amendment dated as of August 1, 1998 to the Agreement and
Amendments thereto constituting Exhibits 10j1, 10j2 and 10j3
hereto is incorporated herein by reference to Exhibit 10b1 to the
Quarterly Report on Form 10-Q of Registrant dated November 11,
1998.*
10j6. Schedule identifying substantially identical agreements to the
Amendment constituting Exhibit 10j5 hereto entered into by
Registrant with John T. Ludes, Dudley L. Bauerlein, Jr. and Robert
J. Rukeyser.*
10j7. 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, 10j3
and 10j5 hereto is incorporated herein by reference to Exhibit
10b5 to the Quarterly Report on Form 10-Q of Registrant dated
November 11, 1998.*
10j8. Amendment dated as of August 1, 1998 between Registrant and Craig
P. Omtvedt to the Agreement and Amendments thereto substantially
identical to Exhibits 10j1, 10j2 and 10j3 hereto.*
10j9. Schedule identifying substantially identical agreements to the
Amendment constituting Exhibit 10j8 hereto entered into by
Registrant with Norman H. Wesley and Mark A. Roche.*
10k1. Rights Agreement, dated as of November 19, 1997, between
Registrant and First Chicago Trust Company of New York, as Rights
Agent, is incorporated herein by reference to Exhibit 4a to the
Current Report on Form 8-K of Registrant dated December 2, 1997.
10l1. Indemnification Agreement, dated as of December 22, 1994, among
Registrant, The American Tobacco Company and Brown & Williamson
Tobacco Corporation, is incorporated herein by reference to
Exhibit 10m1 to the Annual Report on Form 10-K of Registrant for
the Fiscal Year ended December 31, 1997.
12. Statement re computation of ratio of earnings to fixed charges.
13. 1998 Annual Report to Stockholders of Registrant.
21. Subsidiaries of Registrant.
23(i). Consent of Independent Accountants, PricewaterhouseCoopers LLP.
32
<PAGE>
24. Powers of Attorney relating to execution of this Annual Report on
Form 10-K.
27. Financial Data Schedule for Fiscal Year ended December 31, 1998
(Article 5).
99. List of Pending/Terminated Cases.
* Indicates that exhibit is a management contract or compensatory
plan or arrangement.
In lieu of filing certain instruments with respect to long-term debt of
the kind described in Item 601(b)(4) of Regulation S-K, Registrant agrees to
furnish a copy of such instruments to the Securities and Exchange Commission
upon request.
(b) Reports on Form 8-K.
Registrant filed a Current Report on Form 8-K, dated October 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)).
Registrant filed a Current Report on Form 8-K, dated January 13, 1999,
in respect of Registrant's press release dated January 12, 1999
announcing Registrant's expectation of earnings per share growth in
1999 (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated January 22, 1999,
in respect of Registrant's press release dated January 22, 1999
announcing Registrant's financial results for the three-month and
twelve-month periods ended December 31, 1998 (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated February 18, 1999,
in respect of a speech delivered on February 18, 1999 by the Chairman
and Chief Executive Officer of Registrant and Executive Vice President
and Chief Operating Officer of Jim Beam Brands Worldwide, Inc., a
wholly-owned subsidiary of Registrant, at the 1999 Consumer Analyst
Group of New York (CAGNY) Conference (Items 5 and 7(c)).
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FORTUNE BRANDS, INC.
(Registrant)
By /s/ Gilbert L. Klemann, II
---------------------------------
Gilbert L. Klemann, II
Executive Vice President
- Corporate
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
Registrant and in the capacities and on the dates indicated.
/s/ Thomas C. Hays *
- -----------------------------
Thomas C. Hays, Chairman of the Board and
Chief Executive Officer (principal executive
officer) and Director
Date: March 30, 1999
/s/ Norman H. Wesley *
- -----------------------------
Norman H. Wesley, President and
Chief Operating Officer and Director
Date: March 30, 1999
/s/ John T. Ludes *
- -----------------------------
John T. Ludes, Vice Chairman and Director
Date: March 30, 1999
/s/ Gilbert L. Klemann, II
- -----------------------------
Gilbert L. Klemann, II, Executive
Vice President - Corporate and Director
Date: March 30, 1999
/s/ Dudley L. Bauerlein, Jr.
- -----------------------------
Dudley L. Bauerlein, Jr., Senior Vice President and
Chief Financial Officer (principal financial officer)
Date: March 30, 1999
34
<PAGE>
/s/ Craig P. Omtvedt
- -----------------------------
Craig P. Omtvedt, Senior Vice President and
Chief Accounting Officer (principal accounting officer)
Date: March 30, 1999
/s/ Eugene R. Anderson *
- -----------------------------
Eugene R. Anderson, Director
Date: March 30, 1999
/s/ Patricia O. Ewers *
- -----------------------------
Patricia O. Ewers, Director
Date: March 30, 1999
/s/ John W. Johnstone, Jr. *
- -----------------------------
John W. Johnstone, Jr., Director
Date: March 30, 1999
/s/ Sidney Kirschner *
- -----------------------------
Sidney Kirschner, Director
Date: March 30, 1999
/s/ Gordon R. Lohman *
- -----------------------------
Gordon R. Lohman, Director
Date: March 30, 1999
/s/ Charles H. Pistor, Jr. *
- -----------------------------
Charles H. Pistor, Jr., Director
Date: March 30, 1999
/s/ Eugene A. Renna *
- -----------------------------
Eugene A. Renna, Director
Date: March 30, 1999
/s/ Anne M. Tatlock *
- -----------------------------
Anne M. Tatlock, Director
Date: March 30, 1999
/s/ John W. Thompson *
- -----------------------------
John W. Thompson, Director
Date: March 30, 1999
35
<PAGE>
/s/ Peter M. Wilson *
- -----------------------------
Peter M. Wilson, Director
Date: March 30, 1999
*By /s/ A. Robert Colby
- -----------------------------
A. Robert Colby, Attorney-in-Fact
36
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULE
Pages
-----
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Report of Independent Accountants F-2
Schedule
--------
II Valuation and qualifying accounts
For the years ended December 31,
1998, 1997 and 1996 F-3
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
and Stockholders of
Fortune Brands, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated February 3, 1999 appearing on page 57 of the 1998 Annual Report to
Stockholders of Fortune Brands, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
11 Madison Avenue
New York, New York 10010
February 3, 1999
F-2
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS For the Years Ended December 31, 1998,
1997 and 1996 (In millions)
----------------------------------------------------------------------
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Additions
---------
Balance at Charged Balance
Beginning to Costs at End
Description of Period and Expenses Deductions of Period
- ------------------------------------------------------------------------
1998:
Allowance for cash
discounts $ 8.2 $ 93.1 $ 92.4 (1) $ 8.9
Allowance for
returns 20.4 150.3 151.6 (1) 19.1
Allowance for
doubtful accounts 25.7 14.3 9.9 (2) 33.4
(3.3)(3)
----- ------ ------ -----
$54.3 $257.7 $250.6 $61.4
===== ====== ====== =====
1997:
Allowance for cash
discounts $ 7.4 $ 71.1 $ 70.3 (1) $ 8.2
Allowance for
returns 18.9 129.0 127.5 (1) 20.4
Allowance for
doubtful accounts 23.3 11.9 10.6 (2) 25.7
(1.1)(3)
----- ------ ------ -----
$49.6 $212.0 $207.3 $54.3
===== ====== ====== =====
1996:
Allowance for cash
discounts $ 5.1 $ 64.1 $ 73.1 (1) $ 7.4
(11.3)(3)
Allowance for
returns 15.6 131.2 130.6 (1) 18.9
(2.7)(3)
Allowance for
doubtful accounts 21.6 5.3 5.7 (2) 23.3
(2.1)(3)
----- ------ ------ -----
$42.3 $200.6 $193.3 $49.6
===== ====== ====== =====
(1) Cash discounts and returns allowed customers.
(2) Doubtful accounts written off, net of recoveries.
(3) Balance at acquisition date of subsidiaries.
F-3
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
3(i). Restated Certificate of Incorporation of Registrant
as in effect on the date hereof.
3(ii)a. Amendments to By-laws of Registrant.
3(ii)b. By-laws of Registrant as in effect on the date hereof.
10a1. Fortune Brands, Inc. Annual Executive Incentive
Compensation Plan is incorporated herein by reference
to Exhibit 10a1 to the Quarterly Report on Form 10-Q
of Registrant dated August 12, 1997.*
10b1. 1986 Stock Option Plan of Fortune Brands, Inc. and
amendments thereto are incorporated herein by
reference to Exhibit 10b2 to the Annual Report on
Form 10-K of Registrant for the Fiscal Year
ended December 31, 1992.*
10b2. Amendment to 1986 Stock Option Plan of Fortune
Brands, Inc. constituting Exhibit 10b1 hereto is
incorporated herein by reference to Exhibit 10b to
the Quarterly Report on Form 10-Q of Registrant
dated November 11, 1993.*
10b3. Amendment to 1986 Stock Option Plan of Fortune Brands,
Inc. and Amendment thereto constituting Exhibits 10b1
and 10b2 hereto is incorporated herein by reference
to Exhibit 10b to the Quarterly Report on Form 10-Q of
Registrant dated August 11, 1994.*
10b4. Amendment to the 1986 Stock Option Plan of Fortune
Brands, Inc. and Amendments thereto constituting
Exhibits 10b1, 10b2 and 10b3 hereto is incorporated
herein by reference to Exhibit 10a2 to the
Quarterly Report on Form 10-Q of Registrant dated
November 11, 1997.*
10b5. 1990 Long-Term Incentive Plan of Fortune Brands,
Inc. (As Amended and Restated as of January 1, 1994)
is incorporated herein by reference to Exhibit 10a
to the Quarterly Report on Form 10-Q of
Registrant dated August 11, 1994.*
<PAGE>
10b6. Amendment to 1990 Long-Term Incentive Plan of
Fortune Brands, Inc. constituting Exhibit 10b5 hereto
is incorporated herein by reference to Exhibit 10a1
to the Quarterly Report on Form 10-Q of
Registrant dated November 11, 1997.*
10b7. Fortune Brands, Inc. Non-Employee Director Stock
Option Plan is incorporated herein by reference to
Exhibit 10b1 to the Quarterly Report on Form 10-Q
of Registrant dated August 12, 1997.*
10b8. Amendment to Registrant's Non-Employee Director
Stock Option Plan constituting Exhibit 10b7 hereto
is incorporated herein by reference to Exhibit
10a1 to the Quarterly Report on Form 10-Q of
Registrant dated August 12, 1998.*
10b9. Fortune Brands, Inc. Stock Plan for Non-employee
Directors.*
10c1. Amended Supplemental Plan of Fortune Brands, Inc.
is incorporated herein by reference to Exhibit
10c1 to the Annual Report on Form 10-K of Registrant
for the Fiscal Year ended December 31, 1995.*
10c2. Trust Agreement, made as of the 2nd day of
January, 1991, among Registrant, The Chase
Manhattan Bank ("Chase"), et al. establishing a
trust in favor of Gilbert L. Klemann, II for
purposes of paying amounts under the Amended
Supplemental Plan constituting Exhibit 10c1 hereto
is incorporated herein by reference to Exhibit 10c2
to the Annual Report on Form 10-K of Registrant for
the Fiscal Year ended December 31, 1995.*
10c3. Amendment made as of the 1st day of November, 1993
to Trust Agreement constituting Exhibit 10c2 hereto
is incorporated herein by reference to Exhibit 10c3
to the Annual Report on Form 10-K of Registrant
for the Fiscal Year ended December 31, 1995.*
10c4. Amendment made as of the 1st day of January, 1995,
to the Trust Agreement and Amendment thereto
constituting Exhibits 10c2 and 10c3 hereto is
incorporated herein by reference to Exhibit 10c4 to
the Annual Report on Form 10-K of Registrant for
the Fiscal Year ended December 31, 1995.*
<PAGE>
10c5. Amendment made as of the 1st day January, 1997,
to Trust Agreement and Amendments thereto
constituting Exhibits 10c2, 10c3 and 10c4
hereto is incorporated herein by reference to
Exhibit 10c5 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended
December 31, 1997.*
10c6. Schedule identifying substantially identical
agreements to Trust Agreement and Amendments thereto
constituting Exhibits 10c2, 10c3, 10c4 and 10c5 hereto
in favor of Thomas C. Hays, Norman H. Wesley,
John T. Ludes, Dudley L. Bauerlein, Jr., Craig P.
Omtvedt, Mark A. Roche and Robert J. Rukeyser.*
10c7. Amendment made as of the 24th day of February, 1997,
to Trust Agreement and Amendments thereto constituting
Exhibits 10c2, 10c3, 10c4 and 10c5 hereto relating
to the trust established in favor of Thomas C. Hays,
is incorporated herein by reference to Exhibit
10c7 to the Annual Report on Form 10-K of Registrant
for the Fiscal Year ended December 31, 1997.*
10c8. Trust Agreement, made as of the 1st day of November,
1993, among Gilbert L. Klemann, II, Registrant and
Chase establishing a grantor trust in favor of
Gilbert L. Klemann, II for purposes of paying amounts
under the Amended Supplemental Plan constituting
Exhibit 10c1 hereto is incorporated herein by
reference to Exhibit 10c6 to the Annual Report on
Form 10-K of Registrant for the Fiscal Year ended
December 31, 1995.*
10c9. Amendment made as of 1st day of January, 1996 to Trust
Agreement constituting Exhibit 10c8 hereto is
incorporated herein by reference to the Quarterly
Report on Form 10-Q of Registrant dated
August 8, 1996.*
10c10. Amendment made as of the 1st day of January, 1997 to
Trust Agreement and Amendment thereto constituting
Exhibits 10c8 and 10c9 hereto is incorporated herein
by reference to Exhibit 10c1 to the Quarterly Report
on Form 10-Q of Registrant dated August 12, 1997.*
10c11. Amendment made as of the 1st day of August, 1998 to
Trust Agreement and Amendments thereto constituting
Exhibits 10c8, 10c9 and 10c10 hereto is incorporated
herein by reference to Exhibit 10a1 to the Quarterly
Report on Form 10-Q of Registrant dated November 11,
1998.*
10c12. Schedule identifying substantially identical
agreements to the Trust Agreement and Amendments
thereto constituting Exhibits 10c8, 10c9, 10c10 and
10c11 hereto in favor of Thomas C. Hays, Norman H.
Wesley, John T. Ludes, Dudley L. Bauerlein, Jr.,
Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.*
<PAGE>
10c13. Amendment made as of the 24th day of February, 1997
to Trust Agreement and Amendments thereto constituting
Exhibits 10c8, 10c9, 10c10 and 10c11 hereto, among
Thomas C. Hays, Registrant and Chase, is incorporated
herein by reference to Exhibit 10c12 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1997.*
10d1. Resolutions of the Board of Directors of Registrant
adopted on October 28, 1986 and July 26, 1988 adopting
and amending a retirement plan for directors of
Registrant who are not officers or employees of
Registrant or a subsidiary thereof are incorporated
herein by reference to Exhibit 10e1 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1991 maintained in Commission
File No. 1-9076.*
10d2. Resolutions of the Board of Directors of Registrant
adopted on July 26, 1994 amending the resolutions
constituting Exhibit 10d1 hereto is incorporated
herein by reference to Exhibit 10e2 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1994.*
10e1. Severance and Retirement Agreement made as of
February 24, 1997, between Registrant and Thomas C.
Hays is incorporated herein by reference to Exhibit
10d1 to the Quarterly Report on Form 10-Q of
Registrant dated August 12, 1997.
10f1. Resolutions of the Board of Directors of Registrant
adopted on November 27, 1990 with respect to
retirement and health benefits provided to Gilbert
L. Klemann, II is incorporated herein by reference
to Exhibit 10p1 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December 31,
1991 maintained in Commission File No. 1-9076.*
10f2. Resolutions of the Board of Directors of Registrant
adopted on July 26, 1988 with respect to retirement
and health benefits provided to Mark A. Roche.*
10g1. Letter dated January 23, 1996 from Registrant with
respect to deferred payment of fees to Eugene R.
Anderson is incorporated herein by reference to
Exhibit 10k1 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended
December 31, 1995.*
10g2. Letter dated August 11, 1995 from Registrant with
respect to deferred payment of fees to Gordon R.
Lohman is incorporated herein by reference to
Exhibit 10b to the Quarterly Report on Form
10-Q of Registrant dated November 9, 1995.*
<PAGE>
10h1. Agreement dated January 2, 1991 between Registrant
and Gilbert L. Klemann, II is incorporated herein
by reference to Exhibit 10s1 to the Annual Report
on Form 10-K of Registrant for the Fiscal Year
ended December 31, 1992.*
10h2. Amendment dated November 28, 1994 to the Agreement
constituting Exhibit 10h1 hereto is incorporated
herein by reference to Exhibit 10r2 to the Annual
Report on Form 10-K of Registrant for the
Fiscal Year ended December 31, 1994.*
10h3. Schedule identifying substantially identical
agreements to the Agreement and Amendment thereto
constituting Exhibits 10h1 and 10h2 hereto entered
into by Registrant with Thomas C. Hays, Norman
H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr.,
Craig P. Omtvedt, Mark A. Roche and
Robert J. Rukeyser.*
10i1. Trust Agreement, made as of the 2nd day of
January, 1991, among Registrant, Chase, et al.
establishing a trust in favor of Gilbert L.
Klemann, II for purposes of paying amounts under
the Agreement and Amendment thereto constituting
Exhibits 10h1 and 10h2 hereto is incorporated
herein by reference to Exhibit 10s1 to the Annual
Report on Form 10-K of Registrant for the Fiscal
Year ended December 31, 1994.*
10i2. Amendment made as of the 1st day of November, 1993
to Trust Agreement constituting Exhibit 10i1 hereto
is incorporated herein by reference to Exhibit 10s2
to the Annual Report on Form 10-K of Registrant for
the Fiscal Year ended December 31, 1994.*
10i3. Amendment made as of the 1st day of January, 1997
to Trust Agreement and Amendment thereto constituting
Exhibits 10i1 and 10i2 hereto is incorporated herein
by reference to Exhibit 10i3 to the Annual Report on
Form 10-K of Registrant for the Fiscal Year
ended December 31, 1997.*
10i4. Schedule identifying substantially identical
agreements to the Trust Agreement and Amendments
thereto constituting Exhibits 10i1, 10i2 and 10i3
hereto in favor of Thomas C. Hays, Norman H. Wesley,
John T. Ludes, Dudley L. Bauerlein, Jr., Craig P.
Omtvedt, Mark A. Roche and Robert J. Rukeyser.*
10j1. Agreement dated as of January 2, 1991 between
Registrant and Gilbert L. Klemann, II and amendment
thereto is incorporated herein by reference to
Exhibit 10y1 to the Annual Report on Form
10-K of Registrant for the Fiscal Year ended
December 31, 1991 maintained in Commission File
No. 1-9076.*
<PAGE>
10j2. Agreement dated as of October 28, 1991 amending
the Agreement constituting Exhibit 10j1 hereto is
incorporated herein by reference to Exhibit 10w2
to the Annual Report on Form 10-K of Registrant for
the Fiscal Year ended December 31, 1992.*
10j3. Amendment effective as of January 1, 1995 to the
Agreement and Amendment thereto constituting
Exhibits 10j1 and 10j2 hereto is incorporated
herein by reference to Exhibit 10u3 to the Annual
Report on Form 10-K of Registrant for the Fiscal
Year ended December 31, 1994.*
10j4. Schedule identifying substantially identical
agreements to the Agreement and Amendments thereto
constituting Exhibits 10j1, 10j2 and 10j3 hereto
entered into by Registrant with Norman H. Wesley,
John T. Ludes, Dudley L. Bauerlein, Jr., Craig P.
Omtvedt, Mark A. Roche and Robert J. Rukeyser.*
10j5. Amendment dated as of August 1, 1998 to the Agreement
and Amendments thereto constituting Exhibits 10j1,
10j2 and 10j3 hereto is incorporated herein by
reference to Exhibit 10b1 to the Quarterly Report
on Form 10-Q of Registrant dated November 11, 1998.*
10j6. Schedule identifying substantially identical
agreements to the Amendment constituting Exhibit 10j5
hereto entered into by Registrant with John T. Ludes,
Dudley L. Bauerlein, Jr. and Robert J. Rukeyser.*
10j7. 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, 10j3
and 10j5 hereto is incorporated herein by reference
to Exhibit 10b5 to the Quarterly Report on Form 10-Q
of Registrant dated November 11, 1998.*
10j8. Amendment dated as of August 1, 1998 between
Registrant and Craig P. Omtvedt to the Agreement and
Amendments thereto substantially identical to Exhibits
10j1, 10j2 and 10j3 hereto.*
10j9. Schedule identifying substantially identical agreements
to the Amendment constituting Exhibit 10j8 hereto
entered into by Registrant with Norman H. Wesley and
Mark A. Roche.*
<PAGE>
10k1. Rights Agreement, dated as of November 19, 1997,
between Registrant and First Chicago Trust Company of
New York, as Rights Agent, is incorporated herein by
reference to Exhibit 4a to the Current Report on Form
8-K of Registrant dated December 2, 1997.
10l1. Indemnification Agreement, dated as of December 22,
1994, among Registrant, The American Tobacco Company
and Brown & Williamson Tobacco Corporation, is
incorporated herein by reference to Exhibit 10m1 to
the Annual Report on Form 10-K of Registrant for
the Fiscal Year ended December 31, 1997.
12. Statement re computation of ratio of earnings to
fixed charges.
13. 1998 Annual Report to Stockholders of Registrant.
21. Subsidiaries of Registrant.
23(i). Consent of Independent Accountants,
PricewaterhouseCoopers LLP.
24. Powers of Attorney relating to execution of this
Annual Report on Form 10-K.
27. Financial Data Schedule for Fiscal Year ended
December 31, 1998 (Article 5).
99. List of Pending/Terminated Cases.
* Indicates that exhibit is a management contract
or compensatory plan or arrangement.
EXHIBIT 3(i)
Restated Certificate of Incorporation
of
Fortune Brands, Inc.
(Pursuant to Section 245 of the General
Corporation Law of the State of Delaware)
Fortune Brands, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware (hereinafter called the
"Company"), DOES HEREBY CERTIFY that:
FIRST: The name of the Company is Fortune Brands, Inc. and the name
under which the Company originally was incorporated is American Brands Holding
Company.
SECOND: The original Certificate of Incorporation of the Company was
filed with the Secretary of State of the State of Delaware on October 1, 1985.
THIRD: The provisions of the Certificate of Incorporation of the
Company, as heretofore amended or supplemented, are hereby restated and
integrated into this Restated Certificate of Incorporation of the Company,
without further amendment and without any discrepancy between such provisions
and the provisions of this Restated Certificate of Incorporation of the Company,
as follows:
ARTICLE I
The name of the Corporation is Fortune Brands, Inc. (the "Company").
ARTICLE II
The address of the Company's registered office in the State of Delaware
is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name
of its registered agent at such address is United States Corporation Company.
ARTICLE III
The purpose of the Company is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE IV
1. The total number of shares of all classes of stock that the Company
shall have authority to issue is eight hundred and ten million (810,000,000)
shares, of which seven hundred and fifty million (750,000,000) shares shall be
Common Stock, par value $3.125 per share, and sixty million (60,000,000) shares
shall be Preferred Stock, without par value. The designations and the powers,
preferences and rights of the Common Stock and the Preferred Stock, and the
qualifications, limitations or restrictions thereof, are as provided in or
pursuant to this Article IV.
2. (a) The rights of holders of Common Stock to receive dividends or
to share in the distribution of assets in the event of liquidation, dissolution
or winding up of the affairs of the Company shall be subject to the preferences
and other rights of the Preferred Stock as may be fixed in this Certificate of
Incorporation or in the resolution or resolutions of the Board of Directors
providing for the issue of such Preferred Stock.
<PAGE>
(b) The holders of Common Stock shall be entitled to one vote for each
share of Common Stock held by them of record at the time for determining the
holders thereof entitled to vote.
3. Authority is hereby vested in the Board of Directors to issue from
time to time the Preferred Stock in one or more series and to fix by the
resolution of resolutions providing for the issue of shares of any such series
the voting powers, designations, preferences and relative, participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, of such series to the full extent permitted by this
Certificate of Incorporation and the law of the State of Delaware. The authority
of the Board of Directors with respect to each such series shall include, but
not be limited to, determination of the following:
(i) The number of shares to constitute such series, and the
distinctive designations thereof;
(ii) The voting powers, full or limited, if any, of such
series;
(iii) The rate of dividends payable on shares of such series,
the conditions on which and the times when such dividends are payable,
the preference to, or the relations to, the payment of the dividends
payable on any other class, classes or series of stock, whether
cumulative or noncumulative, and, if cumulative, the dates from which
dividends on shares of such series shall be cumulative;
(iv) The right, if any, of the Company to redeem shares of
such series and the terms and conditions of such redemption;
(v) The requirement of any sinking fund or funds to be
applied to the purchase or redemption of shares of such series and, if
so, the amount of such fund or funds and the manner of application;
(vi) The rights of shares of such series upon the
liquidation, dissolution or winding up of, or upon any distribution of
the assets of, the Company;
(vii) The rights, if any, of the holders of shares of such
series to convert such shares into, or to exchange such shares for,
shares of any other class, classes or series of stock and the price or
prices or rate or rates of exchange and the adjustments at which such
shares shall be convertible or exchangeable, and any other terms and
conditions of such conversion or exchange; and
(viii) Any other preferences and relative, participating,
optional or other special rights of shares of such series, and
qualifications, limitations or restrictions including, without
limitation, any restriction on an increase in the number of shares of
any series theretofore authorized and any qualifications, limitations
or restrictions of rights or powers to which shares of any future
series shall be subject; provided that the voting powers, designations,
preferences and relative, participating, optional or other special
rights and qualifications, limitations or restrictions thereof, of the
$2.67 Convertible Preferred Stock and the Series A Junior Participating
Preferred Stock are as set forth or incorporated by reference in
Sections 6 and 7 of this Article IV.
4. The number of authorized shares of any class or classes of stock of
the Company may be increased or decreased by the affirmative vote of the holders
of a majority of the stock of the Company that is entitled to vote, without a
separate class vote of any class or classes of stock of the Company, except as
may be otherwise provided in this Certificate of Incorporation or in the
resolution or resolutions fixing the voting rights of any series of the
Preferred Stock.
5. No holder of Common Stock or Preferred Stock, as such, shall have
or be entitled to any preemptive right whatsoever.
6. The shares of Preferred Stock are hereby divided to create a series
of Preferred Stock, and it is hereby determined that such series shall consist
of 5,514,459 shares, which shall have the following designation,
2
<PAGE>
relative rights, preferences and limitations and a stated capital at least equal
to the par value of the stock into which such shares are made convertible:
(a) The distinctive serial designation of the series is $2.67
Convertible Preferred Stock (hereinafter called "$2.67 Preferred").
(b) (1) Holders of shares of $2.67 Preferred shall be entitled to
three-tenths of a vote per share, and, except as provided in subparagraphs (2)
and (3) of this paragraph (b) or by present or future law otherwise specifically
provided, shall not be entitled to vote as a class.
(2) If payment of six or more quarterly dividends (whether or not
consecutive) payable on Preferred Stock of any series shall be in default, in
whole or in part, the holders of shares of $2.67 Preferred (in addition to any
other rights of holders of shares of any series of Preferred Stock to vote,
including any right to vote with the holders of Common Stock for the election of
directors) shall be entitled, until such time as all such dividends in default
have been paid in full, at each annual meeting of stockholders, voting
separately as a class with all other holders of Preferred Stock having the right
to vote for directors at such meeting regardless of series, to elect two of the
directors then being elected. If, while the holders of shares of Preferred Stock
as a class are entitled to vote for the election of such two directors, any
vacancy occurs among the directors elected by the holders of shares of Preferred
Stock, the remaining director so elected by the holders of shares of Preferred
Stock shall be entitled to nominate for election by the Board of Directors a
successor director to hold office for the unexpired term of the director whose
position has become vacant. If the vacancy is not filled by nomination by the
remaining director, or if there is then in office no director who has been
elected by the holders of shares of Preferred Stock (whether or not prior to the
initial election of any such director), the Company shall, as soon as possible,
call (on at least 20 days' notice) a special meeting of the holders of shares of
Preferred Stock having the right to vote for directors at such meeting for the
purpose of filling such vacancy or vacancies in the Board of Directors. If the
Company fails to call such a meeting within 30 days after a written request by
any three or more holders of shares of Preferred Stock, then such three or more
holders of shares of Preferred Stock may call (on at least 20 days' notice) a
special meeting of the holders of shares of Preferred Stock having the right to
vote for directors at such meeting for such purpose and, if the vacancy or
vacancies are not theretofor filled as hereinabove provided, it or they may be
filled at such meeting by the holders of shares of Preferred Stock, voting
separately as a class regardless of series.
(3) The affirmative vote of the holders of at least two-thirds of the
shares of $2.67 Preferred, voting separately as a class, given in person or by
proxy at any special or annual meeting called to take action thereon, shall be
necessary to permit, effect or validate any amendment of the Certificate of
Incorporation of the Company, or approve any agreement of merger or
consolidation which contains any provision, to (i) exclude or limit the right of
the holders of $2.67 Preferred to vote on any matter, except as such right may
be limited by voting rights given to new shares then being authorized of any
existing or new series of Preferred Stock; (ii) reduce the rate or change the
time for accumulation or payment of dividends on the shares of $2.67 Preferred;
(iii) cancel or otherwise adversely affect dividends which have accrued but have
not been declared on the shares of $2.67 Preferred; (iv) effect a conversion,
exchange or reclassification of the shares of $2.67 Preferred; (v) change the
designation, preferences, limitations, conversion rate, call provisions or
relative rights of the shares of $2.67 Preferred; or (vi) change shares of $2.67
Preferred then outstanding into a different number of shares, or into the same
number of shares of another class or series. Nothing herein shall be deemed to
restrict or limit the right of the Board of Directors of the Company to create,
or authorize the Board to create, a new series of Preferred Stock having, or
convertible into shares having, rights or preferences prior or superior to those
of the shares of $2.67 Preferred; provided that the Board of Directors of the
Company shall not have the right to issue any shares with equal, prior or
superior rights to those of the $2.67 Preferred as a dividend or distribution on
any junior stock (which shall mean for the purposes of this Section 6 the Common
Stock and any other class of stock of the Company hereafter authorized over
which the $2.67 Preferred has preference or priority in the payment of dividends
or in the distribution of assets on any dissolution, liquidation or winding up
of the Company).
(c) (1) The holders of shares of $2.67 Preferred shall be entitled
to receive, out of funds legally available therefor, cumulative cash dividends
of a limited and preferential nature at a rate of $2.67 per share per annum, and
no more, payable quarterly on the tenth day of March, June, September and
December commencing
3
<PAGE>
March 10, 1986, as and when declared by the Board of Directors. Dividends on
each share of $2.67 Preferred shall be cumulative and shall commence to accrue
from the date of the original issuance of shares of this series. Accumulations
of dividends shall not bear interest.
(2) No dividend shall be paid or declared on any junior stock, other
than a dividend payable in junior stock, nor shall any shares of junior stock be
acquired for a consideration by the Company or by any subsidiary (which shall
mean any corporation or entity, the majority of the voting power to elect
directors of which is held directly or indirectly by the Company), unless all
dividends on the $2.67 Preferred accrued for all past quarter-yearly dividend
periods shall have been paid and unless, in the case of dividends on any junior
stock, the full dividends on the $2.67 Preferred for the then current
quarter-yearly dividend period provided in accordance with subparagraph (1) of
this paragraph (c) shall have been or shall then be paid or declared. The
foregoing restriction on acquisition of shares of junior stock shall be
inapplicable to any payments in lieu of issuance of fractional shares thereof
whether upon any merger, conversion, stock dividend or otherwise.
(d) (1) In the event of any liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, the holder of each share of
$2.67 Preferred then outstanding shall be entitled to be paid out of the assets
of the Company available for distribution to its stockholders before any
distribution or payment shall be made to the holders of any junior stock, an
amount equal to the sum of (i) $30.50 per share plus (ii) an additional sum
computed at the rate of $2.67 per share per annum, for the period from the date
on which dividends on such share became cumulative to and including the date
fixed for such payment, less the aggregate of dividends that on or before the
date fixed for such payment shall have been paid or declared and set aside for
payment, but computed without interest. If the assets of the Company available
for distribution to its stockholders shall be insufficient to pay in full all
amounts to which the holders of $2.67 Preferred are entitled, the amount
available for distribution to the holders of shares of $2.67 Preferred shall be
shared pro rata by them.
(2) Notice of any payment in full pursuant to subparagraph (1) of
this paragraph (d) shall be given by publication at least once in a newspaper of
general circulation in the Borough of Manhattan, The City of New York, printed
in the English language and customarily published on each business day, such
publication to be not more than 60 days and not less than 30 days prior to the
payment date. Notice of such payment shall also be given in the same manner as
provided for mailing notice of redemption in subparagraph (2) of paragraph (e)
as if the date for payment were the date fixed for redemption referred to in
said subparagraph (2), except that such notice shall be mailed not less than 30
days prior to the date fixed for payment. Neither failure to publish or mail
such notice nor defect therein or in the publication or mailing thereof shall
affect the validity of the proceedings for such payment.
(3) For the purposes of this Paragraph (d), a consolidation or merger
of the Company with any other corporation shall not constitute or be deemed to
constitute a liquidation, dissolution or winding up of the Company.
(e) (1) The Company may, at its option, at any time or from time to
time redeem the whole or any part of the $2.67 Preferred outstanding at the time
of redemption, upon notice given as hereinafter specified, by paying in cash the
following redemption prices per share:
If Redeemed during the
12-Month Period Redemption
Beginning March 10 Price per Share
------------------------- ---------------
1985.......................... $32.10
1986.......................... 31.70
1987.......................... 31.30
1988.......................... 30.90
and thereafter at a redemption price per share of $30.50; together with an
additional sum, for each share so to be redeemed, computed at the rate of $2.67
per share per annum for the period from the date on which dividends on such
share became cumulative to and including the date fixed for such redemption,
less the aggregate of the
4
<PAGE>
dividends that on or before the date fixed for such redemption shall have been
paid or declared and set aside for payment, but computed without interest.
Notwithstanding the foregoing, the Company may not redeem less than the whole of
the $2.67 Preferred at the time outstanding unless all dividends on the $2.67
Preferred for all past quarter-yearly dividend periods shall have been paid or
declared and set aside for payment.
(2) Notice of any such redemption pursuant to this paragraph (e)
shall be deemed given if mailed by certified mail, return receipt requested, not
less than 90 days prior to the date fixed for redemption, to each stockholder of
record of shares so to be redeemed at his address as it appears on the books of
the Company. Neither failure to mail such notice nor defect therein or in the
mailing thereof shall affect the validity of the proceedings for the redemption
of any shares so to be redeemed.
(3) If only part of the $2.67 Preferred at the time outstanding is to
be redeemed, the selection of the shares to be redeemed may be made pro rata, by
lot or in any other equitable manner. The Board of Directors shall have the
power to prescribe the manner in which the selection is to be made.
(4) When any shares of $2.67 Preferred are redeemed out of capital,
their redemption shall effect their retirement. When any shares of $2.67
Preferred are otherwise redeemed or reacquired, the Company shall retire such
shares by resolution of the Board of Directors. In either event, the Board of
Directors shall cause to be filed with the Office of the Secretary of State of
Delaware an appropriate certificate which shall have the effect of restoring
such shares to the status of authorized but unissued shares of Preferred Stock
without series designation.
(f) (1) If notice of payment in full to holders of shares of $2.67
Preferred of the amounts to which they are entitled in accordance with
subparagraph (2) of paragraph (d) or notice of redemption in accordance with
subparagraph (2) of paragraph (e) shall have been given or if the Company shall
have given to the bank or trust company hereinafter referred to irrevocable
authority promptly to give or complete such notice, and if on or before the
payment date, or redemption date specified therein, the funds necessary for such
payment or redemption shall have been deposited by the Company with a bank or
trust company in good standing, designated in such notice, organized under the
laws of the United States of America or of the State of New York, in trust for
the pro rata benefit of the holders of the shares entitled to such payment or so
called for redemption, as the case may be, then, notwithstanding that any
certificate for shares entitled to such payment or so called for redemption, as
they case may be, shall not have been surrendered for retirement, from and after
the time of such deposit by the Company, or from and after the time such notice
to holders of $2.67 Preferred is given, whichever is later, all such shares
shall be deemed no longer to be outstanding and all rights appertaining to such
shares shall forthwith terminate, except only the right of the holders thereof
to receive from such bank or trust company the funds so deposited, without
interest, and the right to exercise on or before but not later than the fifth
day next preceding the date fixed for payment or redemption, as the case may be,
any privilege of conversion that has not theretofore expired. Any interest
accrued on such funds shall be paid to the Company from time to time.
(2) Any funds deposited by the Company pursuant to subparagraph (1)
of this paragraph (f) that shall not be required for such payment or redemption
because of the exercise of any right of conversion subsequent to the date of
such deposit shall be released and repaid to the Company forthwith. Any funds so
deposited that have not been paid by the end of five years from such payment or
redemption date shall be released and repaid to the Company forthwith, after
which the holders of the shares of $2.67 Preferred entitled to such payment or
of the shares of $2.67 Preferred so called for redemption, as the case may be,
shall be entitled to receive payment thereof only from the Company, but subject
to applicable law.
(g) (1) Subject to the provisions for adjustment hereinafter set
forth, each share of $2.67 Preferred shall be convertible, at the option of the
holder thereof, into 1.02 (1-2/100) of a fully paid and non-assessable share of
Common Stock of the Company upon surrender to any Transfer Agent for the $2.67
Preferred, or to the Company if no such Transfer Agent exists, of the
certificate for the share so to be converted, together with such form of notice
of election to convert as may be provided from time to time by the Company. The
number of shares of Common Stock deliverable upon conversion of a share of $2.67
Preferred is hereinafter sometimes called "the conversion rate."
5
<PAGE>
(2) Any share of $2.67 Preferred called for redemption or for which
payment is provided upon any liquidation, dissolution or winding up of the
Company may be converted as in this paragraph (g); provided that it is converted
at any time on or before but not later than the fifth day next preceding the
date fixed for redemption or payment, as the case may be. No allowance or
adjustment for dividends on either class of stock shall be made upon conversion,
except that where conversion is made of any share of $2.67 Preferred called for
redemption or for which payment is provided upon any liquidation, dissolution or
winding up of the Company there shall be paid cumulative cash dividends on the
$2.67 Preferred prorated from the next preceding date on which said cash
dividends have been paid to the date the shares of $2.67 Preferred shall be
deemed to have been converted. Shares of the $2.67 Preferred shall be deemed to
have been converted as of the date of the surrender for conversion of the
certificates therefor, together with the form of notice provided by the Company
duly signed by the holder thereof, and the person entitled to receive shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder of such shares of Common Stock on such date.
(3) The number of shares of Common Stock deliverable upon conversion
of each share of $2.67 Preferred shall be subject to adjustment from time to
time as follows:
(A) In case the Company shall (i) declare a dividend or other
distribution on its Common Stock in shares of its capital stock, (ii)
subdivide or combine the outstanding shares of Common Stock or (iii)
issue by reclassification or change of its outstanding shares of Common
Stock (including any such reclassification or change in connection with
a consolidation or merger in which the Company is the continuing
corporation) any capital stock (all shares so issued to be included in
the term "Common Stock" as used in this subparagraph (3)), the
conversion rate in effect at the time of the record date for such
dividend or distribution or of the effective date of such subdivision,
combination, reclassification or change shall be adjusted so that the
holder of each share of $2.67 Preferred surrendered for conversion
after such time shall be entitled to receive the number and kind of
shares that he would have owned or have been entitled to receive had
such share of $2.67 Preferred been converted immediately prior to such
time. Such adjustment shall be made successively whenever any event
listed above shall occur.
(B) In case the Company shall, while any shares of $2.67
Preferred remain outstanding, enter into any consolidation with or
merger into any other corporation wherein the Company is not the
surviving corporation, or sell or convey its property as an entirety or
substantially as an entirety, and in connection with such
consolidation, merger, sale or conveyance, shares of stock or other
securities shall be issuable or deliverable in exchange for the Common
Stock of the Company, proper provision shall be made that the holder of
any share of $2.67 Preferred may thereafter convert the same into the
same kind and amount of securities as may be issuable by the terms of
such consolidation, merger, sale or conveyance with respect to the
number of shares of Common Stock of the Company into which such share
of $2.67 Preferred is convertible at the time of such consolidation,
merger, sale or conveyance.
(C) In case the Company shall fix a record date for the
determination of stockholders entitled to receive rights or warrants to
be issued to holders of its Common Stock as such entitling such holders
(for a period expiring within 60 days after such record date) to
subscribe for or purchase Common Stock at a price per share less than
the Current Market Price per share of Common Stock (as defined in
clause (E) of this subparagraph (3)) on such record date, then in each
such case the conversion rate shall be changed so that on and after
such record date it shall be the product obtained by multiplying the
conversion rate immediately prior to such record date by a fraction, of
which the numerator shall be the number of shares of Common Stock
outstanding on such record date plus the number of additional shares of
Common Stock issuable upon exercise of such rights and warrants, and of
which the denominator shall be the number of shares of Common Stock
outstanding on such record date plus a number of shares of Common Stock
equal to that obtained by dividing the aggregate consideration
receivable on exercise of such rights or warrants by such Current
Market Price. For the purposes of this clause (C), the issuance of
rights or warrants (exercisable for a period expiring within 60 days
after the record date with respect thereto) to purchase stock or
securities convertible into shares of Common Stock shall be deemed to
be the issuance of rights or warrants to purchase the maximum number of
shares of Common Stock into which such stock or securities are
convertible and the aggregate consideration receivable on exercise of
such rights or
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<PAGE>
warrants shall be deemed equal to the aggregate consideration
receivable for such securities when such rights or warrants are
exercised plus the minimum aggregate amount, if any, payable upon
conversion of such stock or securities into Common Stock. An adjustment
pursuant to this clause (C) shall be made whenever any such rights or
warrants are issued, and shall be made as of the record date for the
determination of stockholders entitled to receive such rights or
warrants. In the event that such rights or warrants are not so issued,
the conversion rate shall again be adjusted, effective as of the date
on which the Board of Directors of the Company determines not to issue
such rights or warrants, as if such record date had not been fixed.
(D) In case the Company shall fix a record date for making a
distribution (including any such distribution made in connection with a
consolidation or merger in which the Company is the continuing
corporation) on its Common Stock of evidences of its indebtedness or
corporate assets (excluding dividends paid in, or distributions of,
cash) or subscription rights or warrants (excluding those referred to
in clause (C) of this subparagraph (3)), the conversion rate shall be
increased effective immediately following such record date to a new
conversion rate which shall be the product obtained by multiplying the
conversion rate immediately prior to such record date by a fraction of
which the numerator shall be the Current Market Price per share of
Common Stock (as defined in clause (E) of this subparagraph (3)) on
such record date and of which the denominator shall be such Current
Market Price per share of Common Stock less the fair market value (as
determined by the Board of Directors, whose determination shall be
conclusive) of the portion of the assets or evidences of indebtedness
so distributed or of such subscription rights or warrants applicable to
one share of Common Stock. Such adjustment shall be made successively
whenever such a record date is fixed. In the event that such
distribution is not so made, the conversion rate shall again be
adjusted, effective as of the date on which the Board of Directors
determines not to make such distribution, as if such record date had
not been fixed.
(E) For the purpose of any computation under clauses (C) and
(D) of this subparagraph (3), the "Current Market Price" per share of
Common Stock on any record date shall be deemed to be the average of
the daily closing prices for the 30 consecutive full business days
commencing 45 such business days before such record date. For the
purpose of this clause (E), the "Current Market Price" per share of
Common Stock of American Brands, Inc., a New Jersey corporation
organized under an Agreement of Consolidation in 1904 (hereinafter
called "American") calculated as provided in this clause (E) for Common
Stock of the Company, shall be deemed to be the "Current Market Price"
per share of Common Stock of the Company for any relevant period or
periods up to the date of issuance of the $2.67 Preferred. The "closing
price" of the Common Stock for any day shall be the last sale price
regular way on such day, or in case no such sale takes place on such
day, the average of the closing bid and asked prices regular way, in
either case as officially quoted on the New York Stock Exchange, or, if
the Common Stock is not listed or admitted to trading on such exchange,
on the principal national securities exchange on which the Common Stock
is listed or admitted to trading, or if the Common Stock is not listed
or admitted to trading on any national securities exchange, the average
of the bid and asked prices as furnished by any New York Stock Exchange
member firm selected from time to time by the Board of Directors for
that purpose or, if such bid and asked prices are not available, such
other prices as may be selected by the Board of Directors for the
purpose.
(F) No adjustment pursuant to this subparagraph (3) shall be
required unless the particular event involved would require an increase
or decrease of at least 1% in the conversion rate; provided, however,
that any adjustments that by reason of this clause (F) are not required
to be made shall be carried forward and taken into account in any
subsequent adjustment, and provided further, however, that such
adjustment shall be made no later than the earlier of (i) 3 years after
the date of the particular event involved, or (ii) the date as to which
the aggregate adjustments not previously made would require a total
increase or decrease of 1% in the conversion rate. For the purpose of
this clause (F), any adjustment not required to be made with respect to
the $2.67 Preferred Stock of American under the terms of conversion
rate adjustment provisions applicable thereto because the particular
event involved did not require an increase or decrease of at least 1%
in the conversion rate and not carried forward and taken into account
in any subsequent
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adjustment pursuant to such terms at the date of issuance of the $2.67
Preferred, shall be taken into account with respect to adjustments
required to be made pursuant to this clause (F).
(G) In the event that at any time as a result of an adjustment
made pursuant to clause (A) of this subparagraph (3), the holder of any
share of $2.67 Preferred thereafter surrendered for conversion shall
become entitled to receive any shares of capital stock of the Company
other than Common Stock, thereafter the number of such other shares so
receivable upon conversion of any share of $2.67 Preferred shall be
subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in clauses (A) to (F) of this subparagraph (3)
and the other provisions of this resolution fixing terms of the $2.67
Preferred with respect to the Common Stock, to the extent they can
appropriately apply on like terms to such other shares.
(H) The Company shall, simultaneously with any action that
would require an adjustment pursuant to this subparagraph (3), take all
necessary action to make the aggregate amount of state capital
represented by the outstanding shares of $2.67 Preferred at least equal
to the aggregate par value of the shares of Common Stock into which
such shares of $2.67 Preferred will be convertible as the result of
such adjustment.
(I) Whenever any adjustment is required by this subparagraph
(3), the Company shall promptly file with each Transfer Agent, if any,
for the $2.67 Preferred a statement describing in reasonable detail the
adjustment and the method of calculation used, and mail a copy of such
statement to each holder of shares of $2.67 Preferred of record on the
date as of which such adjustment was made.
(4) The Company shall at all times on and after the issuance of the
$2.67 Preferred keep available for delivery the full number of issued or
unissued shares of Common Stock into which all outstanding shares of $2.67
Preferred are convertible.
(5) No certificate for a fraction of a share shall be delivered upon
the conversion, but, in lieu of any fractional share that would otherwise be
required to be delivered in accordance with the foregoing provisions, the
Company shall pay to the person otherwise entitled to such fractional share a
sum in cash equal to such fraction multiplied by the closing price (as defined
in clause (E) of subparagraph (3) of this paragraph (g)) of the Common Stock on
the day prior to the day of the conversion.
(6) The certificate of any independent firm of public accountants
selected by the Board of Directors shall be evidence of the correctness of any
adjustment made pursuant to this paragraph (g). All calculations of adjustments
under this paragraph (g) shall be made to the nearest one-thousandth of a share.
(7) Conversion of shares of $2.67 Preferred shall effect their
retirement. Shares of $2.67 Preferred otherwise reacquired by the Company shall
be retired by resolution of the Board of Directors. In either event, the Board
of Directors shall cause to be filed with the Office of the Secretary of State
of Delaware an appropriate certificate which shall have the effect of restoring
such shares to the status of authorized but unissued shares of Preferred Stock
without series designation.
7. The designation and amount of the Series A Junior Participating
Preferred Stock, and the voting powers, preferences and relative, participating,
optional or other special rights of the shares of such Series, and the
qualifications, limitations or restrictions thereof, are stated and expressed in
Exhibit A attached hereto and incorporated herein by reference.
ARTICLE V
Except for any By-law that by its terms states that it may be amended
or repealed only by action of the stockholders, the Board of Directors is
authorized to adopt, amend or repeal the By-laws of the Company.
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ARTICLE VI
Any action required or permitted to be taken by the stockholders of the
Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing by stockholders.
ARTICLE VII
1. Except as otherwise provided in Section 2 of this Article VII, in
addition to any affirmative vote required by law, this Certificate of
Incorporation or the By-laws of the Company, the affirmative vote of at least 66
2/3% of the votes cast by the stockholders of the Company, voting together as a
single class at a meeting at which a quorum is present, shall be required for
(i) the adoption of any amendment to, or repeal of any provision of, this
Certificate of Incorporation (other than the adoption of any amendment
authorized pursuant to Section 3 of Article IV of this Certificate of
Incorporation or the increase or decrease of the number of shares of any series
of Preferred Stock or the elimination thereof by action of the Board of
Directors as authorized by the General Corporation Law of Delaware), (ii) any
merger or consolidation of the Company with or into any other corporation, (iii)
any sale or lease of all or substantially all of the assets of the Company to
any other corporation, person or other entity or (iv) the dissolution of the
Company. Except as otherwise provided in Section 2 of this Article VII, such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage or separate class vote may be specified,
in other provisions of this Certificate of Incorporation, by law, in any
agreement with any national securities exchange or otherwise.
2. Nothing contained in Section 1 of this Article VII shall require
the approval of the stockholders of the Company to authorize (i) a merger or
consolidation in which the Company is the surviving corporation if (A) the
agreement of merger does not amend in any respect this Certificate of
Incorporation, (B) each share of stock of the Company outstanding immediately
prior to the effective date of the merger is to be an identical outstanding or
treasury share of the Company after the effective date of the merger, and (C)
either no shares of Common Stock of the Company and no shares, securities or
obligations convertible into such stock are to be issued or delivered under the
plan of merger, or the authorized unissued shares or the treasury shares of
Common Stock of the Company to be issued or delivered under the plan of merger
plus those initially issuable upon conversion of any other shares, securities or
obligations to be issued or delivered under such plan do not exceed 20% of the
shares of Common Stock of the Company outstanding immediately prior to the
effective date of the merger, or (ii) a merger into the Company of any other
corporation if at least 90% of the outstanding shares of each class of stock of
such other corporation is owned by the Company.
ARTICLE VIII
1. Except as otherwise provided for, or fixed by, or pursuant to the
provisions of Article IV of this Certificate of Incorporation relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock, the number of the directors of the Company shall be fixed from
time to time by or pursuant to the By-laws of the Company but shall not exceed
20. The directors, other than those who may be elected by the holders of any
class or series of stock having a preference over the Common Stock, shall be
classified, with respect to the time for which they severally hold office, into
three classes, as nearly equal in number as reasonably possible, with the
directors in each class to hold office until their successors are elected and
qualified. Each member of the Board of Directors in the first class of directors
shall hold office until the Annual Meeting of stockholders in 1987, each member
of the Board of Directors in the second class of directors shall hold office
until the Annual Meeting of stockholders in 1988 and each member of the Board of
Directors in the third class of directors shall hold office until the Annual
Meeting of stockholders in 1989. At each annual meeting of the stockholders of
the Company, the successors to the class of directors whose terms expire at that
meeting shall be elected to hold office for terms expiring at the later of the
annual meeting of stockholders held in the third year following the year of
their election or the election and qualification of the successors to such class
of directors.
2. Subject to the rights of holders of any class or series of stock
having a preference over the Common Stock, nominations for the election of
directors may be made by the Board of Directors or by any record owner of
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stock of the Company authorized to be issued from time to time under Article IV
of this Certificate of Incorporation and entitled to be voted generally in the
election of directors ("Voting Stock"). Any such stockholder, however, may
nominate one or more persons for election as director at a meeting only if
written notice of such stockholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Company not later than (a) with
respect to an election to be held at an annual meeting of stockholders, one
hundred twenty (120) days in advance of such meeting, and (b) with respect to an
election to be held at a special meeting of stockholders for the election of
directors, the close of business on the seventh day following the earlier of (i)
the date on which notice of such meeting is first given to stockholders and (ii)
the date on which a public announcement of such meeting is first made. Each such
notice shall include: (1) the name and address of each stockholder of record who
intends to appear in person or by proxy to make the nomination and of the person
or persons to be nominated; (2) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (3) such other information
regarding each nominee proposed by such stockholder as would have been required
to be included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (4) the consent of each nominee to serve
as a director of the Company if so elected. The chairman of the meeting may
refuse to acknowledge the nomination of any person not made in compliance with
the foregoing procedure.
3. Except as otherwise provided for, or fixed by, or pursuant to the
provisions of Article IV of this Certificate of Incorporation relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock, newly created directorships resulting from any increase in the
number of directors or any vacancy on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled
solely by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors, or by a sole
remaining director. Any director elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
4. Subject to the rights of holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon liquidation to
elect additional directors under specified circumstances, any one or more
directors of the Company may be removed, only for cause, only by the affirmative
vote of at least 80% of the combined voting power of the then outstanding shares
of Voting Stock, voting together as a single class, at any annual meeting of
stockholders of the Company or at any special meeting of stockholders of the
Company, the notice of which shall state that the removal of a director or
directors is among the purposes of the meeting.
5. Notwithstanding any other provision of this Certificate of
Incorporation or the By-laws of the Company (and notwithstanding the fact that a
lesser percentage or separate class vote may be specified by law, this
Certificate of Incorporation or the By-laws of the Company), the affirmative
vote of at least 80% of the combined voting power of the then outstanding shares
of Voting Stock, voting together as a single class, shall be required to amend
or repeal, or adopt any provisions inconsistent with, this Article VIII;
provided, however, that the preceding provisions of this Section 5 shall not
apply to any amendment to this Article VIII, and such amendment shall require
only such affirmative vote as is required by law and any other provisions of
this Certificate of Incorporation or the By-laws of the Company, if such
amendment shall have been approved by at least three-fourths of the members of
the Board of Directors then in office.
ARTICLE IX
No director of the Company shall be personally liable to the Company or
its stockholders for monetary damages for breach of fiduciary duty as a
director; provided, however, that the foregoing clause shall not apply to any
liability of a director to the extent provided by applicable law (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the General
Corporation Law of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. Neither the amendment nor
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<PAGE>
the repeal of this Article IX, nor the adoption of any provision of this
Certificate of Incorporation inconsistent with this Article IX, shall be
effective with respect to any cause of action, suit, claim or other matter that,
but for this Article IX, would accrue or arise prior to such amendment, repeal
or adoption of an inconsistent provision.
ARTICLE X
The Company reserves the right to amend, alter or repeal any provision
contained in this Certificate of Incorporation in the manner now or hereafter
prescribed by statute, and all rights of stockholders herein are subject to this
reservation.
FOURTH: The Board of Directors of the Company has duly adopted this
Restated Certificate of Incorporation of the Company in accordance with the
provisions of Section 245 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, the Company has caused its corporate seal to be
affixed hereto and this certificate to be signed by its officer thereunto duly
authorized and attested by its Vice President and Secretary this second day of
February, 1999.
By Thomas C. Hays
---------------------------------
Thomas C. Hays
Chairman of the Board and
Chief Executive Officer
[Corporate Seal]
Louis F. Fernous, Jr.
- -------------------------------
Louis F. Fernous, Jr.
Vice President and Secretary
11
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EXHIBIT A
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
FORTUNE BRANDS, INC.
The designation and amount of the Series A Junior Participating
Preferred Stock, and the voting powers, preferences and relative, participating,
optional or other special rights of the shares of such Series, and the
qualifications, limitations or restrictions thereof, are as follows:
Section 1. Designation and Amount. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" ("Series A
Preferred Stock") and the number of shares constituting such series shall be
2,500,000. Such number of shares may be adjusted by appropriate action of the
Board of Directors.
Section 2. Dividends and Distributions.
(A) Subject to the provisions for adjustment hereinafter set forth, the
holders of shares of Series A Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors out of funds legally
available for the purpose, (i) cash dividends in an amount per share (rounded to
the nearest cent) equal to 100 times the aggregate per share amount of all cash
dividends contemporaneously declared on the Common Stock of the Company
presently of the par value of $3.125 per share ("Common Stock") and (ii) a
preferential cash dividend ("Preferential Dividends"), if any, on the tenth day
of March, June, September and December of each year (each a "Quarterly Dividend
Payment Date"), commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount equal to $10 per share of Series A Preferred Stock less the
per share amount of all cash dividends declared on the Series A Preferred Stock
pursuant to clause (i) of this sentence since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series A Preferred Stock. In the event the Company shall, at any time after the
issuance of any share or fraction of a share of Series A Preferred Stock, make
any distribution on the shares of Common Stock of the Company, whether by way of
a dividend or a reclassification of stock, a recapitalization, reorganization or
partial liquidation of the Company or otherwise, which is payable in cash or any
debt security, debt instrument, real or personal property or any other property
(other than cash dividends subject to the immediately preceding sentence and
other than a distribution of rights or warrants to acquire any such share,
including any debt security convertible into or exchangeable for any such share,
at a price less than the Current Market Price of such share), then and in each
such event the Company shall simultaneously pay on each then outstanding share
of Series A Preferred Stock of the Company a distribution, in like kind, of 100
times (subject to the provisions for adjustment hereinafter set forth) such
distribution paid on a share of Common Stock. The dividends and distributions on
the Series A Preferred Stock to which holders thereof are entitled pursuant to
clause (i) of the first sentence of this paragraph and pursuant to the second
sentence of this paragraph are hereinafter referred to as "Participating
Dividends" and the multiple of such cash and non-cash dividends on the Common
Stock applicable to the determination of the Participating Dividends, which
shall be 100 initially but shall be adjusted from time to time as hereinafter
provided, is hereinafter referred to as the "Dividend Multiple". In the event
the Company shall at any time after November 19, 1997 declare or pay any
dividend or make any distribution on Common Stock payable in shares of Common
Stock, or effect a subdivision or split or a combination, consolidation or
reverse split of the outstanding shares of Common Stock into a greater or lesser
number of shares of Common Stock, then in each such case the Dividend Multiple
thereafter applicable to the determination of the amount of Participating
Dividends which holders of shares of Series A Preferred Stock shall be entitled
to receive shall be the Dividend Multiple applicable immediately prior to such
event multiplied by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event.
(B) The Company shall declare each Participating Dividend at the same
time it declares any cash or non-cash dividend or distribution on the Common
Stock in respect of which a Participating Dividend is required to
<PAGE>
be paid. No cash or non-cash dividend or distribution on the Common Stock in
respect of which a Participating Dividend is required to be paid shall be paid
or set aside for payment on the Common Stock unless a Participating Dividend in
respect of such dividend or distribution on the Common Stock shall be
simultaneously paid, or set aside for payment, on the Series A Preferred Stock.
(C) Preferential Dividends shall begin to accrue on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issuance of any shares of Series A Preferred Stock.
Accrued but unpaid Preferential Dividends shall cumulate but shall not bear
interest. Preferential Dividends paid on the shares of Series A Preferred Stock
in an amount less than the total amount of such dividends at the time accrued
and payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding.
Section 3. Voting Rights. The holders of shares of Series A
Preferred Stock shall have the following voting rights:
(A) Subject to the provisions for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of the stockholders of the Company. The
number of votes which a holder of Series A Preferred Stock is entitled to cast,
as the same may be adjusted from time to time as hereinafter provided, is
hereinafter referred to as the "Vote Multiple". In the event the Company shall
at any time after November 19, 1997 declare or pay any dividend on Common Stock
payable in shares of Common Stock, or effect a subdivision or split or a
combination, consolidation or reverse split of the outstanding shares of Common
Stock into a greater or lesser number of shares of Common Stock, then in each
such case the Vote Multiple thereafter applicable to the determination of the
number of votes per share to which holders of shares of Series A Preferred Stock
shall be entitled after such event shall be the Vote Multiple immediately prior
to such event multiplied by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as one class on all matters submitted to a vote of
stockholders of the Company.
(C) In the event that the Preferential Dividends accrued on the Series
A Preferred Stock for four or more quarterly dividend periods, whether
consecutive or not, shall not have been declared and paid or set apart for
payment, the holders of record of preferred stock of the Company of all series
(including the Series A Preferred Stock), other than any series in respect of
which the right is expressly withheld by the Certificate of Incorporation or the
authorizing resolutions included in the Certificate of Designation therefor,
shall have the right, at the next meeting of stockholders called for the
election directors, to elect two members of the Board of Directors, which
directors shall be in addition to the number required by the By-laws prior to
such event, to serve until the next annual meeting of the stockholders and until
their successors are elected and qualified or their earlier resignation, removal
or incapacity or until such earlier time as all accrued and unpaid Preferential
Dividends upon the outstanding shares of Series A Preferred Stock shall have
been paid (or set aside for payment) in full. The holders of shares of Series A
Preferred Stock shall continue to have the right to elect directors as provided
by the immediately preceding sentence until all accrued and unpaid Preferential
Dividends upon the outstanding shares of Series A Preferred Stock shall have
been paid (or set aside for payment) in full. Such directors may be removed and
replaced by such stockholders, and vacancies in such directorships may be filled
only by such stockholders (or by the remaining director elected by such
stockholders, if there be one) in the manner permitted by law; provided,
however, that any such action by stockholders shall be taken at a meeting of
stockholders and shall not be taken by written consent thereof.
(D) Except as otherwise required by law or set forth herein, holders of
Series A Preferred Stock shall have no special voting rights and their consent
shall not be required (except to the extent they are entitled to vote with
holders of Common Stock as set forth herein) for the taking of any corporate
action.
<PAGE>
Section 4. Certain Restrictions.
(A) Whenever Preferential Dividends or Participating Dividends are in
arrears or the Company shall be in default of payment thereof, thereafter and
until all accrued and unpaid Preferential Dividends and Participating Dividends,
whether or not declared, on shares of Series A Preferred Stock outstanding shall
have been paid or set aside for payment in full, and in addition to any and all
other rights which any holder of shares of Series A Preferred Stock may have in
such circumstances, the Company shall not
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to, the Series A Preferred
Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity as to
dividends with the Series A Preferred Stock, unless dividends are paid
ratably on the Series A Preferred Stock and all such parity stock on
which dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled;
(iii) except as permitted by subparagraph (iv) of this
paragraph 4(A), redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, provided that the Company may at any time
redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of any stock of the Company ranking junior (both
as to dividends and upon liquidation, dissolution or winding up) to the
Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any
shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock (either as to dividends or
upon liquidation, dissolution or winding up), except in accordance with
a purchase offer made in writing or by publication (as determined by
the Board of Directors) to all holders of such shares upon such terms
as the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(B) The Company shall not permit any subsidiary of the Company to
purchase or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
(C) The Company shall not issue any shares of Series A Preferred Stock
except upon exercise of Rights issued pursuant to that certain Rights Agreement
dated as of November 19, 1997 between the Company and First Chicago Trust
Company of New York, a copy of which is on file with the Secretary of the
Company at its principal executive office and shall be made available to
stockholders of record without charge upon written request therefor addressed to
the Secretary. Notwithstanding the foregoing sentence, nothing contained in the
provisions hereof shall prohibit or restrict the Company from issuing for any
purpose any series of preferred stock with rights and privileges similar to,
different from, or greater than, those of the Series A Preferred Stock.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. The Company shall
cause all such shares upon their retirement and cancellation to become
authorized but unissued shares of preferred stock, without designation as to a
series, and such shares may be reissued as part of a new series of preferred
stock to be created by resolution or resolutions of the Board of Directors.
Section 6. Liquidation, Dissolution or Winding Up. Upon any voluntary
or involuntary liquidation, dissolution or winding up of the Company, no
distribution shall be made (i) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock unless the holders of shares of Series A Preferred
Stock shall have received, subject to adjustment as
<PAGE>
hereinafter provided, (A) $100 per share plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the date
of such payment, or (B) if greater than the amount specified in clause (i)(A) of
this sentence, the amount equal to 100 times the aggregate amount to be
distributed per share to holders of Common Stock, or (ii) to the holders of
stock ranking on a parity upon liquidation, dissolution or winding up with the
Series A Preferred Stock, unless simultaneously therewith distributions are made
ratably on the Series A Preferred Stock and all other shares of such parity
stock in proportion to the total amounts to which the holders of shares of
Series A Preferred Stock are entitled under clause (i)(A) of this sentence and
to which the holders of such parity shares are entitled, in each case upon such
liquidation, dissolution or winding up. The amount to which holders of Series A
Preferred Stock may be entitled upon liquidation, dissolution or winding up of
the Company pursuant to clause (i)(B) of the foregoing sentence is hereinafter
referred to as the "Participating Liquidation Amount" and the multiple of the
amount to be distributed to holders of shares of Common Stock upon the
liquidation, dissolution or winding up of the Company applicable pursuant to
such clause to the determination of the Participating Liquidation Amount, as
such multiple may be adjusted from time to time as hereinafter provided, is
hereinafter referred to as the "Liquidation Multiple". In the event the Company
shall at any time after November 19, 1997 declare or pay any dividend on Common
Stock payable in shares of Common Stock, or effect a subdivision or split or a
combination, consolidation or reverse split of the outstanding shares of Common
Stock into a greater or lesser number of shares of Common Stock, then in each
such case the Liquidation Multiple thereafter applicable to the determination of
the Participating Liquidation Amount to which holders of Series A Preferred
Stock shall be entitled after such event shall be the Liquidation Multiple
applicable immediately prior to such event multiplied by a fraction the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Certain Reclassifications and Other Events.
(A) In the event that holders of shares of Common Stock of the Company
receive after November 19, 1997 in respect of their shares of Common Stock any
share of capital stock of the Company (other than any share of Common Stock of
the Company), whether by way of reclassification, recapitalization,
reorganization, dividend or other distribution or otherwise ("Transaction"),
then and in each such event the dividend rights, voting rights and rights upon
the liquidation, dissolution or winding up of the Company of the shares of
Series A Preferred Stock shall be adjusted so that after such event the holders
of Series A Preferred Stock shall be entitled, in respect of each share of
Series A Preferred Stock held, in addition to such rights in respect thereof to
which such holder was entitled immediately prior to such adjustment, to (i) such
additional dividends as equal the Dividend Multiple in effect immediately prior
to such Transaction multiplied by the additional dividends which the holder of a
share of Common Stock shall be entitled to receive by virtue of the receipt in
the Transaction of such capital stock, (ii) such additional voting rights as
equal the Vote Multiple in effect immediately prior to such Transaction
multiplied by the additional voting rights which the holder of a share of Common
Stock shall be entitled to receive by virtue of the receipt in the Transaction
of such capital stock and (iii) such additional distributions upon liquidation,
dissolution or winding up of the Company as equal the Liquidation Multiple in
effect immediately prior to such Transaction multiplied by the additional amount
which the holder of a share of Common Stock shall be entitled to receive upon
liquidation, dissolution or winding up of the Company by virtue of the receipt
in the Transaction of such capital stock, as the case may be, all as provided by
the terms of such capital stock.
(B) In the event that holders of shares of Common Stock of the Company
receive after November 19, 1997 in respect of their shares of Common Stock any
right or warrant to purchase Common Stock (including as such a right, for all
purposes of this paragraph, any security convertible into or exchangeable for
Common Stock) at a purchase price per share less than the Current Market Price
(as hereinafter defined) of a share of Common Stock on the date of issuance of
such right or warrant, then and in each such event the dividend rights, voting
rights and rights upon the liquidation, dissolution or winding up of the Company
of the shares of Series A Preferred Stock shall be adjusted so that after such
event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple
shall each be the product of the Dividend Multiple, the Vote Multiple and the
Liquidation Multiple, as the case may be, in effect immediately prior to such
event multiplied by a fraction the numerator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the maximum number of shares of Common Stock which could be
acquired upon exercise in full of
<PAGE>
all such rights or warrants and the denominator of which shall be the number of
shares of Common Stock outstanding immediately before such issuance of rights or
warrants plus the number of shares of Common Stock which could be purchased, at
the Current Market Price of the Common Stock at the time of such issuance, by
the maximum aggregate consideration payable upon exercise in full of all such
rights or warrants.
(C) In event that holders of shares of Common Stock of the Company
receive after November 19, 1997 in respect of their shares of Common Stock any
right or warrant to purchase capital stock of the Company (other than shares of
Common Stock), including as such a right, for all purposes of this paragraph,
any security convertible into or exchangeable for capital stock of the Company
(other than Common Stock), at a purchase price per share less than the Current
Market Price of such shares of capital stock on the date of issuance of such
right or warrant, then and in each such event the dividend rights, voting rights
and rights upon liquidation, dissolution or winding up of the Company of the
shares of Series A Preferred Stock shall each be adjusted to that after such
event each holder of a share of Series A Preferred Stock shall each be entitled,
in respect of each share of Series A Preferred Stock held, in addition to such
rights in respect thereof to which such holder was entitled immediately prior to
such event, to receive (i) such additional dividends as equal the Dividend
Multiple in effect immediately prior to such event multiplied, first, by the
additional dividends to which the holder of a share of Common Stock shall be
entitled upon exercise of such right or warrant by virtue of the stock capital
which could be acquired upon such exercise and multiplied again by the Discount
Fraction (as hereinafter defined) and (ii) such additional voting rights as
equal the Vote Multiple in effect immediately prior to such event multiplied,
first, by the additional voting rights to which the holder of a share of Common
Stock shall be entitled upon exercise of such right or warrant by virtue of the
capital stock which could be acquired upon such exercise and multiplied again by
the Discount Fraction and (iii) such additional distributions upon liquidation,
dissolution or winding up of the Company as equal the Liquidation Multiple in
effect immediately prior to such event multiplied, first, by the additional
amount which the holder of a share of Common Stock shall be entitled to receive
upon liquidation, dissolution or winding up of the Company upon exercise of such
right or warrant by virtue of the capital stock which could be acquired upon
such exercise and multiplied again by the Discount Fraction. For purposes of
this paragraph, the "Discount Fraction" shall be a fraction the numerator of
which shall be the difference between the Current Market Price (as hereinafter
defined) of a share of the capital stock subject to a right or warrant
distributed to holders of shares of Common Stock of the Company as contemplated
by this paragraph immediately after the distribution thereof and the purchase
price per share for such share of capital stock pursuant to such right or
warrant and the denominator of which shall be the Current Market Price of a
share of such capital stock immediately after the distribution of such right or
warrant.
(D) For purposes of this Section 7, the "Current Market Price" of a
share of capital stock of the Company (including a share of Common Stock) on any
date shall be deemed to be the average of the daily closing prices per share
thereof over the 30 consecutive Trading Days (as such term is hereinafter
defined) immediately prior to such date; provided, however, that, in the event
that such Current Market Price of any such share of capital stock is determined
during a period which includes any date that is within 30 Trading Days after the
ex-dividend date for (i) a dividend or distribution on stock payable in shares
of such stock or securities convertible into shares of such stock, or (ii) any
subdivision, split, combination, consolidation, reverse stock split or
reclassification of such stock, then, and in each such case, the Current Market
Price shall be appropriately adjusted by the Board of Directors of the Company
to reflect the Current Market Price of such stock to take into account
ex-dividend trading. The closing price for any day shall be the last sale price,
regular way, or, in case no such sale takes place on such day, the average of
the closing bid and asked prices, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the New York Stock Exchange or, if the shares
are not listed or admitted to trading on the New York Stock Exchange, as
reported in the principal consolidated transaction reporting system with respect
to securities listed on the principal national securities exchange on which the
shares are listed or admitted to trading or, if the shares are not listed or
admitted to trading on any national securities exchange, the last quoted price
or, if not so quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in
use, or if on any such date the shares are not quoted by any such organization,
the average of the closing bid and asked prices as furnished by a professional
market maker making a market in the shares selected by the Board of Directors of
the Company. The term "Trading Day" shall mean a day on which the principal
national securities exchange on which the shares are
<PAGE>
listed or admitted to trading is open for the transaction of business or, if the
shares are not listed or admitted to trading on any national securities
exchange, on which the New York Stock Exchange or such other national securities
exchange as may be selected by the Board of Directors of the Company is open. If
the shares are not publicly held or not so listed or traded on any day within
the period of 30 Trading Days applicable to the determination of Current Market
Price thereof as aforesaid, "Current Market Price" shall mean the fair market
value thereof per share as determined in good faith by the Board of Directors of
the Company. In either case referred to in the foregoing sentence, the
determination of Current Market Price shall be described in a statement filed
with the Secretary of the Company.
Section 8. Consolidation, Merger, etc. In case the Company shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case each
outstanding share of Series A Preferred Stock shall at the same time be
similarly exchanged for or changed into the aggregate amount of stock,
securities, cash and/or other property (payable in like kind), as the case may
be, for which or into which each share of Common Stock is changed or exchanged
multiplied by the highest of the Vote Multiple, the Dividend Multiple or the
Liquidation Multiple in effect immediately prior to such event.
Section 9. Effective Time of Adjustments.
(A) Adjustments to the Series A Preferred Stock required by the
provisions hereof shall be effective as of the time at which the event requiring
such adjustments occurs.
(B) The Company shall give prompt written notice to each holder of a
share of Series A Preferred Stock of the effect of any adjustment to the voting
rights, dividend rights or rights upon liquidation, dissolution or winding up of
the Company of such shares required by the provisions hereof. Notwithstanding
the foregoing sentence, the failure of the Company to give such notice shall not
affect the validity of or the force or effect of or the requirement for such
adjustment.
Section 10. No Redemption. The shares of Series A Preferred Stock
shall not be redeemable at the option of the Company or any holder thereof.
Notwithstanding the foregoing sentence of this Section, the Company may acquire
shares of Series A Preferred Stock in any other manner permitted by law, the
provisions hereof and the Certificate of Incorporation of the Company.
Section 11. Ranking. Unless otherwise provided in the Certificate of
Incorporation of the Company or a Certificate of Designation relating to a
subsequent series of preferred stock of the Company, the Series A Preferred
Stock shall rank junior to all other series of the Company's preferred stock as
to the payment of dividends and the distribution of assets on liquidation,
dissolution or winding up and senior to the Common Stock.
Section 12. Amendment. The provisions hereof and the Certificate of
Incorporation of the Company shall not be amended in any manner which would
materially affect the rights, privileges or powers of the Series A Preferred
Stock without, in addition to any other vote of stockholders required by law,
the affirmative vote of the holders of two-thirds or more of the outstanding
shares of Series A Preferred Stock, voting together as a single class.
EXHIBIT 3(ii)a
FORTUNE BRANDS, INC.
BY-LAW AMENDMENTS
ADOPTED ON SEPTEMBER 29, 1998
EFFECTIVE JANUARY 1, 1999
Article I, Section 1 was amended to read in its entirety as follows:
SECTION 1. The number of directors constituting the entire Board of
Directors of the Company, which shall be no fewer than ten and no greater than
twenty, shall be determined by action of the Board of Directors adopted at any
regular or special meeting of the Board of Directors by the affirmative vote of
at least two-thirds of all directors then in office, provided notice of the
proposed change in the number of directors shall be given in writing to each of
the directors then in office. Any amendment to this Section 1 of these By-laws
may be adopted at any regular or special meeting of the Board of Directors by
the affirmative vote of at least two-thirds of all the directors then in office.
Article IV, Section 1 was amended to read in its entirety as follows:
SECTION 1. The Board of Directors shall annually choose from amongst
its members a Chairman of the Board. The Board shall also annually choose a Vice
Chairman (if any), a President (if any), one or more Executive Vice Presidents
(if any), one or more Senior Vice Presidents (if any), a principal financial
officer, a principal accounting officer, such other Vice Presidents (if any) as
it shall determine, a Secretary, a Treasurer and a Controller (if any), who need
not be directors.
Article IV, Section 8 was amended to read in its entirety as follows:
SECTION 8. The Vice Chairman (if any), the President (if any), the
Executive Vice Presidents (if any), the Senior Vice Presidents (if any) and such
other Vice Presidents as shall have been chosen shall have such powers and
perform such duties as shall at any time be delegated to them by the Board of
Directors. At the request of the Chairman of the Board, or in case of his
absence or disability, the President (if any), or if there is no President such
other elected officer designated by the Chairman of the Board in a writing filed
with the records of the Secretary, shall perform the duties of the Chairman of
the Board, subject to the control of the Board of Directors.
<PAGE>
Article VII, Section 1 was amended to read in its entirety as follows:
SECTION 1. All checks or bank drafts shall be signed by any two of the
following named officers: Chairman of the Board, Vice Chairman, President, the
principal financial officer, the principal accounting officer, any Vice
President, Secretary, any Assistant Secretary, Treasurer, any Assistant
Treasurer, Controller, any Assistant Controller; and in such other manner as the
Board of Directors may from time to time designate.
Article VII, Section 2 was amended to read in its entirety as follows:
SECTION 2. All notes or other obligations or contracts shall be signed
by the Chairman of the Board, the Vice Chairman, the President, the principal
financial officer, the principal accounting officer, or any Vice President and
also by one of the following officers: the Secretary, an Assistant Secretary,
the Treasurer, an Assistant Treasurer, the Controller, or an Assistant
Controller (provided that no individual shall sign the instrument in two
capacities), or shall be signed by the Chairman of the Board, the Vice Chairman,
the President, the principal financial officer, the principal accounting
officer, or any Vice President, with the corporate seal or a facsimile thereof
affixed thereto or imprinted thereon, attested by the Secretary or an Assistant
Secretary; or such notes, obligations or contracts shall be signed in such
manner and by one or more of such officers or other persons on behalf of the
Company as the Board of Directors may from time to time authorize or direct.
When and as authorized or directed by the Board of Directors, the signatures of
such officers or other persons or any of them signing on behalf of the Company
may be facsimiles.
EXHIBIT 3(ii)b
BY-LAWS
of
FORTUNE BRANDS, INC.
(As Amended)
ARTICLE I
Directors
Section 1. The number of directors constituting the entire Board of
Directors of the Company, which shall be no fewer than ten and no greater than
twenty, shall be determined by action of the Board of Directors adopted at any
regular or special meeting of the Board of Directors by the affirmative vote of
at least two-thirds of all directors then in office, provided notice of the
proposed change in the number of directors shall be given in writing to each of
the directors then in office. Any amendment to this Section 1 of these By-laws
may be adopted at any regular or special meeting of the Board of Directors by
the affirmative vote of at least two-thirds of all the directors then in office.
Section 2. Each director shall hold office until his successor is
elected and qualified or until his earlier resignation or removal. Any director
of the Company may resign at any time upon written notice to the Company. Except
as otherwise provided for, or fixed by, or pursuant to the provisions of Article
IV of the Certificate of Incorporation relating to the rights of the holders of
any class or series of stock having a preference over the
1-1-99
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2 BY-LAWS
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Common Stock, newly created directorships resulting from any increase in the
number of directors or any vacancy on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled
solely by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors, or by a sole
remaining director.
Section 3. In order to qualify to hold office as a director of the
Company, a person must hold at least one share of stock of the Company.
Section 4. The directors may hold their meetings and have an office and
keep the books of the Company in Old Greenwich, Connecticut, or elsewhere
outside of the State of Delaware.
Section 5. The Board of Directors, by resolution adopted by a majority
of the entire Board, may appoint from among its members an Executive Committee
which shall have at least three members. To the extent provided in such
resolution, such committee shall have and may exercise all the powers and
authority of the Board, including the power to authorize the seal of the Company
to be affixed to all papers that require it, except that such
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BY-LAWS 3
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committee shall not have such power and authority in reference to
(1) amending the Certificate of Incorporation (except that
such committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by
the Board of Directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix the designations and any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Company or the
conversion into, or the exchange of such shares for, shares of any
other class or classes or any other series of the same or any other
class or classes of stock of the Company or fix the number of shares of
any series of stock or authorize the increase or decrease of the shares
of any series);
(2) adopting an agreement of merger or consolidation under
Sections 251 or 252 of the General Corporation Law of
Delaware;
(3) recommending to the stockholders any action that requires
stockholders' approval;
1-1-86
<PAGE>
4 BY-LAWS
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(4) making, amending or repealing any By-law of the Company;
(5) electing or appointing any director, or removing any
officer or director;
(6) amending or repealing any resolution theretofore adopted
by the Board of Directors;
(7) fixing compensation of the directors for serving on the
Board of Directors or on any committee; or
(8) unless the resolution shall expressly so provide,
declaring a dividend, authorizing the issuance of stock or
adopting a certificate of ownership and merger pursuant to
Section 253 of the General Corporation Law of Delaware.
Actions taken at a meeting of such committee shall be reported to the
Board of Directors at its next meeting following such committee meeting; except
that, when the meeting of the Board is held within two days after the committee
meeting, such report shall be made to the Board at either its first or second
meeting following such committee meeting.
1-1-86
<PAGE>
BY-LAWS 5
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ARTICLE II
Meetings of Stockholders
Section l. The annual meeting of the stockholders of the Company for
the election of directors, and such other business as may properly come before
the meeting, shall be held at such place as may from time to time be designated
by the directors, on the first Wednesday of May, at ten o'clock in the forenoon,
or at such other hour as the directors may designate, or on such other day and
at such hour as the directors may designate. If the day fixed for the meeting is
a legal holiday, the meeting shall be held at the same hour on the next business
day which is not a legal holiday.
Section 2. Special meetings of the stockholders, to be held at such
place as may from time to time be designated by the directors, may be called
only by the Chairman of the Board, the President or the Board of Directors, by
resolution adopted by a majority of the entire Board, for such purposes as shall
be specified in the call.
Section 3. Except as otherwise provided by law, due notice of each
annual meeting of the stockholders shall be given by a written or printed notice
signed by the Secretary
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6 BY-LAWS
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or an Assistant Secretary of the Company and mailed, postage prepaid, at least
ten days prior to such meeting to each stockholder of record entitled to vote
thereat appearing on the books of the Company at the address given thereon.
Due notice of each special meeting shall be given also in the manner
above provided. The notice shall state the object of the special meeting, and no
other business shall be transacted at such meeting.
Section 4. The holders of a majority in voting power of the outstanding
shares of capital stock entitled to vote, present in person or represented by
proxy, shall constitute a quorum at a meeting of stockholders. Except as
otherwise required by law or the Certificate of Incorporation, the affirmative
vote of shares representing a majority in voting power of the shares present in
person or represented by proxy at a meeting at which a quorum is present and
entitled to vote on the subject matter shall be the act of the stockholders, and
except that directors shall be elected by a plurality of votes cast at an
election. The stockholders present at a duly convened meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
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BY-LAWS 7
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Section 5. Each meeting of the stockholders, whether annual or special,
shall be presided over by the Chairman of the Board if present, and if he is not
present by the President if present. If neither officer specified in the
preceding sentence is present, the meeting shall be presided over by the person
designated in writing by the Chairman of the Board, or if the Chairman of the
Board has made no designation, by the person designated by the President, or if
the President has made no designation, by the person designated by the Board of
Directors. If neither officer specified in the first sentence of this section is
present, and no one designated by the Chairman of the Board or the President or
the Board of Directors is present, the meeting may elect any stockholder of
record who is entitled to vote for directors, or any person present holding a
proxy for such a stockholder, to preside. The Secretary of the Company (or in
his absence any Assistant Secretary) shall be the Secretary of any such meeting;
in the absence of the Secretary and Assistant Secretaries, any person may be
elected by the meeting to act as Secretary of the meeting.
Section 6. Any voting proxy given by a stockholder must be in writing,
executed by the stockholder, or, in lieu thereof, to the extent permitted by
law, may be transmitted in a telegram, cablegram or other means of
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8 BY-LAWS
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electronic transmission setting forth or submitted with information from which
it can be determined that the telegram, cablegram or other electronic
transmission was authorized by the stockholder. A copy, facsimile transmission
or other reliable reproduction of a written or electronically-transmitted proxy
authorized by this Section 6 may be substituted for or used in lieu of the
original writing or electronic transmission to the extent permitted by law.
Section 7. Any previously scheduled annual or special meeting of
stockholders may, by resolution of the Board of Directors, be postponed upon
public announcement made prior to the date previously scheduled for such meeting
of stockholders. For purposes of this Article II, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Company with the Securities and Exchange Commission pursuant to
Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. The
person presiding over any meeting of stockholders, or a majority of the voting
power of the shares entitled to vote, present in person or represented by proxy,
even if less than a quorum, may adjourn the meeting from time to time. No notice
of the time and
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BY-LAWS 9
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place of adjourned meetings need be given except as required by law.
Section 8. The directors shall appoint one or more inspectors of
election and of the vote at any time prior to the date of any meeting of
stockholders at which an election is to be held or a vote is to be taken. In the
event any inspector so appointed is absent from such meeting or for any other
reason fails to act as such at the meeting, the person presiding pursuant to
these By-laws may appoint a substitute who shall have all the powers and duties
of such inspector. The inspector or inspectors so appointed shall act at such
meeting, make such reports thereof and take such other action as shall be
provided by law and as may be directed by the person presiding over the meeting.
Each inspector, before entering upon the discharge of his duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his ability.
Section 9. The directors may, at any time prior to any annual or
special meeting of the stockholders, adopt an order of business for such meeting
which shall be the order of business to be followed at such meeting. The date
and time of the opening and the closing of the polls for each matter upon which
the stockholders will vote at
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10 BY-LAWS
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such meeting shall be announced at such meeting by the person presiding over
such meeting.
Section l0. At any meeting of stockholders a stock vote shall be taken
on any resolution or other matter presented to the meeting for action if so
ordered by the person presiding over the meeting or on the demand of any
stockholder of record entitled to vote at the meeting or any person present
holding a proxy for such a stockholder. Such order or demand for a stock vote
may be made either before or after a vote has been taken on such resolution or
other matter in a manner other than by stock vote and before or after the result
of the vote taken otherwise than by stock vote has been announced. The result of
a stock vote taken in accordance with this By-law shall supersede the result of
any vote previously taken in any manner other than by stock vote.
Section 11. (A) Nominations of persons for election to the Board of
Directors of the Company may be made as provided in the Certificate of
Incorporation. The proposal of other business to be considered by the
stockholders may be made at an annual meeting of stockholders (1) pursuant to
the Company's notice of meeting, (2) by or at the direction of the Board of
Directors or (3) by any stockholder of the Company who was a stockholder of
record at the time of giving of the notice provided for
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BY-LAWS 11
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in this Section 11, who is entitled to vote thereon at the meeting and who
complies with the notice procedures set forth in this Section 11.
(B) For business (other than the nomination of persons for election to
the Board of Directors) to be properly brought before an annual meeting by a
stockholder pursuant to clause (3) of paragraph (A) of this Section 11, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Company. To be timely, a stockholder's notice shall be delivered, either by
personal delivery or by United States mail, postage prepaid, to the Secretary
not later than one hundred twenty (120) days in advance of such meeting. Such
stockholder's notice shall set forth (1) a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made and (2) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the proposal is made (a) the name and address of such
stockholder, as they appear on the Company's books, and of such beneficial owner
and (b) the class and number of shares of the Company which are owned
beneficially and of record by such stockholder and such beneficial owner.
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(C) The person presiding over an annual meeting of stockholders shall
have the power and duty to determine whether any business proposed by any
stockholder to be brought before the meeting was made in accordance with the
procedures set forth in this Section 11 and, if any proposed business is not in
compliance with this Section 11, to declare that such defective proposal shall
be disregarded.
(D) In addition to the foregoing provisions of this Section 11, a
stockholder shall comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder with
respect to the matters set forth in this Section 11. Nothing in this Section 11
shall be deemed to affect any rights of stockholders to request inclusion of
proposals in the Company's proxy statement pursuant to Rule l4a-8 under such
Act.
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ARTICLE III
Meetings of Directors
Section 1. Regular meetings of the Board of Directors shall be held at
the office of the Company in Old Greenwich, Connecticut, or at such other place
as may from time to time be designated by the directors, the Chairman of the
Board or the President, at ten o'clock in the forenoon on the last Tuesday of
each month other than March, May, June, August and December and at three o'clock
in the afternoon on the day on which the annual meeting of stockholders is held.
If any such day shall be a holiday, the meeting scheduled for that day shall be
held on the next business day. Special meetings may be held as determined by the
Board of Directors, and may be called by the Chairman of the Board at any time
and shall be called by him on the request of three directors, or, if the
Chairman of the Board fails to call such meeting when so requested, the same may
be called by any three directors.
Section 2. No notice need be given of regular meetings of the
directors, except that at least one day's notice shall be given of any place
other than the office of the Company in Old Greenwich, Connecticut at which any
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such meeting is to be held, but such notice need not be given to any director
who signs a written waiver of notice before or after the meeting. Attendance of
a director at a meeting shall constitute a waiver of notice of such meeting,
except when the director attends a meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
Section 3. At any meeting six directors shall constitute a quorum
unless otherwise provided for in these By-laws or in the Certificate of
Incorporation or in any applicable statute, but in no case less than one-third
of all the directors then in office.
Section 4. Members of the Board of Directors or of any Committee
thereof may participate in meetings of the Board of Directors or of such
committee by means of conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation shall constitute presence in person at such meeting.
Section 5. Any action required or permitted to be taken at any meeting
of the Board of Directors or of any committee thereof may be taken without a
meeting if all members of the Board of Directors or of such committee,
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as the case may be, consent thereto in writing and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or of such
committee.
ARTICLE IV
Officers
Section 1. The Board of Directors shall annually choose from amongst
its members a Chairman of the Board. The Board shall also annually choose a Vice
Chairman (if any), a President (if any), one or more Executive Vice Presidents
(if any), one or more Senior Vice Presidents (if any), a principal financial
officer, a principal accounting officer, such other Vice Presidents (if any) as
it shall determine, a Secretary, a Treasurer and a Controller (if any), who need
not be directors.
Section 2. The Board of Directors may elect other officers and define
their powers and duties.
Section 3. Any two offices not inconsistent with each other may be held
by the same person.
Section 4. All officers elected by the Board of Directors shall hold
office, subject to removal by the Board, until their successors are chosen and
qualified. The affirmative vote of at least two-thirds of all of the directors
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then in office shall be required to remove or reduce the salary of any officer
elected by the Board of Directors.
Section 5. All agents and employees shall be appointed and may be
removed by the Chairman of the Board, subject to the control of the Board of
Directors.
Section 6. Vacancies among officers of the Company shall be filled as,
and to the extent that, the Board of Directors shall determine by vote of a
majority of the directors present at any regular or special meeting at which not
less than a majority of all the directors then in office are present.
Section 7. The Chairman of the Board shall be the Chief Executive
Officer of the Company and shall have general direction of its business affairs,
subject, however, to the control of the Board of Directors. He shall, if
present, preside at all meetings of the Board of Directors and shall perform
such other duties and have such responsibilities as the Board may from time to
time determine.
SECTION 8. The Vice Chairman (if any), the President (if any), the
Executive Vice Presidents (if any), the Senior Vice Presidents (if any) and such
other Vice Presidents as shall have been chosen shall have such powers and
perform such duties as shall at any time be delegated to them by the Board of
Directors. At the request of the Chairman of the Board, or in case of his
absence or disability, the President (if any), or if there is no President such
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other elected officer designated by the Chairman of the Board in a writing filed
with the records of the Secretary, shall perform the duties of the Chairman of
the Board, subject to the control of the Board of Directors.
Section 9. The Secretary shall give the requisite notice of meetings of
stockholders and directors and shall record the proceedings of such meetings,
shall have the custody of the seal of the Company and shall affix it or cause it
to be affixed to such instruments as require the seal and attest it and, besides
his powers and duties prescribed by law, shall have such other powers and
perform such other duties as shall at any time be required of him by the Board
of Directors.
Section 10. The Assistant Secretaries shall assist the Secretary in the
discharge of his duties and shall have such powers and perform such other duties
as shall at any time be delegated to them by the Board of Directors, and in the
absence or disability of the Secretary, shall perform the duties of his office,
subject to the control of the Board.
Section 11. The Treasurer shall have charge of the funds and securities
of the Company and shall have such
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powers and perform such duties as shall at any time be delegated to him by the
Board of Directors.
Section 12. The Assistant Treasurers shall assist the Treasurer in the
discharge of his duties and shall have such powers and perform such other duties
as shall at any time be delegated to them by the Board of Directors, and in the
absence or disability of the Treasurer, shall perform the duties of his office
subject to the control of the Board.
Section 13. Any other officer, agent or employee of the Company may be
required to give such security for the faithful performance of his duties as
shall be determined by the Board of Directors, who shall also determine the
custody of any security given.
ARTICLE V
Salaries
Section 1. The salaries of all officers elected by the Board of
Directors who hold offices of a rank of Vice President or above shall be fixed
by the Compensation and Stock Option Committee.
Section 2. Salaries of all other officers elected by the Board and all
other agents and employees shall be fixed by or in the manner determined by the
Board.
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Section 3. The Board of Directors, by the affirmative vote of a
majority of directors in office and irrespective of any personal interest of any
directors, shall have authority to establish reasonable compensation of
directors for services to the Company as directors, officers or otherwise,
except that the Compensation and Stock Option Committee, by the affirmative vote
of a majority of Committee members in office and irrespective of any personal
interest of any Committee members or other directors, shall have authority to
establish such compensation of directors who also are officers elected by the
Board and hold offices of a rank of Vice President or above.
ARTICLE VI
Seal
Section 1. The Seal of the Company shall be in such form as the Board
of Directors may from time to time prescribe and it may be used by causing it or
a facsimile thereof to be impressed or affixed or in any other manner
reproduced.
ARTICLE VII
Signatures on Commercial
Instruments and Contracts
Section 1. All checks or bank drafts shall be signed by any two of the
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following named officers: Chairman of the Board, Vice Chairman, President, the
principal financial officer, the principal accounting officer, any Vice
President, Secretary, any Assistant Secretary, Treasurer, any Assistant
Treasurer, Controller, any Assistant Controller; and in such other manner as the
Board of Directors may from time to time designate.
SECTION 2. All notes or other obligations or contracts shall be signed
by the Chairman of the Board, the Vice Chairman, the President, the principal
financial officer, the principal accounting officer, or any Vice President and
also by one of the following officers: the Secretary, an Assistant Secretary,
the Treasurer, an Assistant Treasurer, the Controller, or an Assistant
Controller (provided that no individual shall sign the instrument in two
capacities), or shall be signed by the Chairman of the Board, the Vice Chairman,
the President, the principal financial officer, the principal accounting
officer, or any Vice President, with the corporate seal or a facsimile thereof
affixed thereto or imprinted thereon, attested by the Secretary or an Assistant
Secretary; or such notes, obligations or contracts shall be signed in such
manner and by one or more of such officers or other persons on behalf of the
Company as the Board of Directors may from time to time authorize or direct.
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When and as authorized or directed by the Board of Directors, the signatures of
such officers or other persons or any of them signing on behalf of the Company
may be facsimiles.
ARTICLE VIII
Capital Stock
Section 1. Certificates of the capital stock of the Company shall be
issued for shares duly numbered and registered in the order of their issue, and
shall be in the form the directors shall prescribe.
Section 2. The capital stock shall be transferable on the transfer
books of the Company, subject to these By-laws, by the owner in person, or by
attorney or legal representative, written evidence of whose authority shall be
filed with the Company.
Section 3. No transfer of capital stock can be required except upon
surrender and cancellation of the certificate representing the same.
Section 4. The Board of Directors may at any time, in its discretion,
appoint one or more transfer agents or registrars of the shares of stock of the
Company and terminate the appointment of any transfer agent or registrar. The
Board of Directors may also designate the Company to perform such functions
alone or in conjunction with one or more other transfer agents or registrars.
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Section 5. (A) For the purpose of determining the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or for the purpose of determining stockholders entitled to receive
payment of any dividend or allotment of any right, or for the purpose of any
other action, the Board of Directors may fix, in advance, a date as the record
date for any such determination of stockholders. Such date shall be not more
than 60 nor less than 10 days before the date of such meeting, nor more than 60
days prior to any other action.
(B) When a determination of stockholders of record entitled to notice
of or to vote at any meeting of stockholders has been made as provided in this
Section 5, such determination shall apply to any adjournment thereof, unless the
Board of Directors fixes a new record date under this Section 5 for the
adjourned meeting.
ARTICLE IX
Committee on Conflicts of Interests
Section 1. The Board of Directors, by resolution adopted by a majority
of the entire Board, shall appoint a Committee on Conflicts of Interests which
shall have at
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least three members. To the extent provided by resolution of the Board, such
committee shall have the power to interpret, administer and apply the policies
of the Company as established by the Board from time to time with respect to
conflicts of interests.
ARTICLE X
Dividends
Section 1. Dividends on the Preferred Stock and the Common Stock of the
Company may be declared by the Board of Directors, at any regular or special
meeting, as provided by law and the Certificate of Incorporation.
ARTICLE XI
Amendments
Section 1. The Board of Directors shall, except as otherwise provided
in these By-laws or the Certificate of Incorporation, have the power to alter,
amend or repeal these By-laws at any meeting by the affirmative vote of
two-thirds of the directors then in office, provided notice of the proposed
alteration, amendment or repeal be given in writing to each of the directors,
and provided also that
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no alteration, amendment or repeal of a specification in any section of these
By-laws of a stated fraction of directors as the minimum number whose presence
or vote is requisite for action under such section may be made without the
presence or vote or both, as the case may be, of the minimum number so
specified.
ARTICLE XII
[Repealed effective April 30, 1997.]
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ARTICLE XIII
Indemnification
Section 1. (A) Each person (an "indemnitee") who was or is made or
threatened to be made a party to or was or is involved (as a witness or
otherwise) in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she or a person of whom
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he or she is the legal representative was or is a director, officer or employee
of the Company or was or is serving at the request of the Company as a director,
officer, employee or agent of another corporation or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding was or is alleged action in
an official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Company to the fullest extent permitted by
the General Corporation Law of the State of Delaware as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Company to provide broader indemnification
rights than said law permitted the Company to provide prior to such amendment),
against all expense, liability and loss (including attorneys' fees and retainers
therefor, judgments, fines, excise taxes or penalties under the Employee
Retirement Income Security Act of 1974, as amended, and amounts paid in
settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to
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the benefit of his or her heirs, executors and administrators; provided,
however, that except as provided in Section 3 of this Article XIII with respect
to proceedings seeking to enforce rights to indemnification, the Company shall
indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by such person only if such proceeding
(or part thereof) was authorized by the Board of Directors of the Company.
(B) The right to indemnification conferred in this Article XIII is and
shall be a contract right. The right to indemnification conferred in this
Article XIII shall include the right to be paid by the Company the expenses
(including attorneys' fees and retainers therefor) reasonably incurred in
connection with any such proceeding in advance of its final disposition, such
advances to be paid by the Company within 20 days after the receipt by the
Company of a statement or statements from the indemnitee requesting such advance
or advances from time to time; provided, however, that if the General
Corporation Law of the State of Delaware requires, the payment of such expenses
incurred by a director or officer in his or her capacity as a director or
officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without
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limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Company of
an undertaking by or on behalf of such director or officer, to repay all amounts
so advanced if it shall ultimately be determined that such director or officer
is not entitled to be indemnified under this Article XIII or otherwise.
Section 2. (A) To obtain indemnification under this Article XIII, an
indemnitee shall submit to the Company a written request, including therein or
therewith such documentation and information as is reasonably available to the
indemnitee and is reasonably necessary to determine whether and to what extent
the indemnitee is entitled to indemnification. Upon written request by an
indemnitee for indemnification pursuant to the first sentence of this Section
2(A), a determination, if required by applicable law, with respect to the
indemnitee's entitlement thereto shall be made as follows: (1) if requested by
the indemnitee, by Independent Counsel (as hereinafter defined), or (2) if no
request is made by the indemnitee for a determination by Independent Counsel,
(a) by the Board of Directors by a majority vote of a quorum consisting of
Disinterested Directors (as hereinafter defined), or (b) if a quorum of the
Board of Directors consisting of Disinterested Directors is not
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obtainable or, even if obtainable, such quorum of Disinterested Directors so
directs, by Independent Counsel in a written opinion to the Board of Directors,
a copy of which shall be delivered to the indemnitee, or (c) by the stockholders
of the Company. In the event the determination of entitlement to indemnification
is to be made by Independent Counsel at the request of the indemnitee, the
Independent Counsel shall be selected by the indemnitee unless the indemnitee
shall request that such selection be made by the Board of Directors, in which
event the Independent Counsel shall be selected by the Board of Directors. If it
is so determined that the indemnitee is entitled to indemnification, payment to
the indemnitee shall be made within 10 days after such determination.
(B) In making a determination with respect to entitlement to
indemnification hereunder, the person, persons or entity making such
determination shall presume that the indemnitee is entitled to indemnification
under this Article XIII, and the Company shall have the burden of proof to
overcome that presumption in connection with the making by any person, persons
or entity of any determination contrary to that presumption.
Section 3. (A) If a claim under Section 1 of this Article XIII is not
paid in full by the Company within
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30 days after a written claim pursuant to Section 2(A) of this Article XIII has
been received by the Company, or if an advance is not made within 20 days after
a request therefor pursuant to Section 1(B) of this Article XIII has been
received by the Company, the indemnitee may at any time thereafter bring suit
(or, at the indemnitee's option, an arbitration proceeding before a single
arbitrator pursuant to the rules of the American Arbitration Association)
against the Company to recover the unpaid amount of the claim or the advance
and, if successful in whole or in part, the indemnitee shall be entitled to be
paid also the expense of prosecuting such claim. It shall be a defense to any
such suit or proceeding (other than a suit or proceeding brought to enforce a
claim for expenses incurred in connection with any proceeding in advance of its
final disposition where the required undertaking, if any is required, has been
tendered to the Company) that the indemnitee has not met the standards of
conduct which make it permissible under the General Corporation Law of the State
of Delaware for the Company to indemnify the indemnitee for the amount claimed
or that such indemnification otherwise is not permitted under the General
Corporation Law of the State of Delaware, but the burden of proving such defense
shall be on the Company.
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(B) Neither the failure of the Company (including its Board of
Directors, Independent Counsel or stockholders) to have made a determination
prior to the commencement of such action that indemnification of the indemnitee
is proper in the circumstances because he or she has met the applicable standard
of conduct set forth in the General Corporation Law of the State of Delaware,
nor an actual determination by the Company (including its Board of Directors,
Independent Counsel or stockholders) that the indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the indemnitee has not met the applicable standard of conduct.
(C) If a determination shall have been made pursuant to Section 2(A) of
this Article XIII that the indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or
arbitration commenced pursuant to paragraph (A) of this Section 3.
(D) The Company shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to paragraph (A) of this Section 3
that the procedures and presumptions of this Article XIII are not valid, binding
and enforceable and shall stipulate in any
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such court or before any such arbitrator that the Company is bound by all the
provisions of this Article XIII.
Section 4. The right to indemnification and the payment of expenses
incurred in connection with a proceeding in advance of its final disposition
conferred in this Article XIII shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, By-laws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
Section 5. The Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Company or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Company would have
the power to indemnify such person against such expense, liability or loss under
the General Corporation Law of the State of Delaware. To the extent that the
Company maintains any policy or policies providing such insurance, each such
director, officer or employee, and each such agent to which rights to
indemnification have been granted as provided in Section 6 of this Article XIII,
shall be covered by such policy or policies in accordance with its or their
terms to the
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maximum extent of the coverage thereunder for any such director, officer,
employee or agent.
Section 6. The Company may, to the extent authorized from time to time
by the Board of Directors, grant rights to indemnification, and rights to be
paid by the Company the expenses incurred in connection with any proceeding in
advance of its final disposition, to any agent of the Company to the fullest
extent of the provisions of this Article XIII with respect to the
indemnification and advancement of expenses of directors, officers and employees
of the Company.
Section 7. If any provision or provisions of this Article XIII shall be
held to be invalid, illegal or unenforceable for any reason whatsoever: (A) the
validity, legality and enforceability of the remaining provisions of this
Article XIII (including without limitation, each portion of any Section of this
Article XIII containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not
in any way be affected or impaired thereby; and (B) to the fullest extent
possible, the provisions of this Article XIII (including, without limitation,
each portion of any Section of this Article XIII containing any such provision
held to be invalid, illegal or unenforceable) shall be
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construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
Section 8. For purposes of this Article XIII:
(A) "Disinterested Director" means a director of the Company who is not
and was not a party to the matter in respect of which indemnification is sought
by the indemnitee.
(B) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the past five years has been, retained to represent: (1) the Company or the
indemnitee in any matter material to either such party, or (2) any other party
to the matter giving rise to a claim for indemnification. Notwithstanding the
foregoing, the term "Independent Counsel" shall not include any person who,
under the applicable standards of professional conduct then prevailing, would
have a conflict of interest in representing either the Company or the indemnitee
in an action to determine the indemnitee's rights under this Article XIII.
Section 9. Any notice, request or other communication required or
permitted to be given to the Company under this Article XIII shall be in writing
and either
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delivered in person or sent by telecopy, telex, telegram or certified or
registered mail, postage prepaid, return receipt requested, to the Secretary of
the Company and shall be effective only upon receipt by the Secretary.
EXHIBIT 10b9
AMERICAN BRANDS, INC.
STOCK PLAN FOR NON-EMPLOYEE DIRECTORS
1. Purpose of Plan
The purpose of the American Brands, Inc. Stock Plan for Non-employee
Directors (the "Plan") is to enable American Brands, Inc. ("American") to
provide its Non-employee Directors (as defined below) with shares of common
stock of American ("Common Stock") and thereby to attract and retain
non-employee directors of exceptional ability and further align their interests
with those of the other stockholders of American by increasing their proprietary
interests in American.
2. Administration of Plan
The Plan shall be administered by the Salary Committee (the
"Committee") of the Board of Directors of American. None of the members of the
Committee shall be eligible to receive shares of Common Stock under the Plan or
have been so eligible for receipt within one year prior thereto. The Committee
shall have the power and authority to administer, construe and interpret the
Plan, to make rules for carrying it out and to make changes in such rules.
3. Participation
All Non-employee Directors shall participate in the Plan. The term
"Non-employee Director" means a member of the Board of Directors of American who
is not at the time of receipt of shares of Common Stock pursuant to the Plan a
full-time employee of American or any subsidiary thereof.
4. Payment of Shares of Common Stock
(a) Subject to all the terms and conditions of the Plan, each
Non-employee Director shall receive 300 shares of Common Stock per year for
services as a Non-employee Director during such year. To be entitled to receive
such shares with respect to any year, a Non-employee Director must be serving as
such immediately following the Annual Meeting of stockholders of American held
during such year. Except as otherwise provided in Section 4(b), certificates
representing such shares shall be delivered to such Non-employee Director as
soon as practicable thereafter.
(b) A Non-employee Director may elect to defer receipt of shares of
Common Stock under this Section 4. The election shall (i) be made in writing to
the Secretary of American before the November 1 immediately preceding the year
in which the shares of Common Stock
<PAGE>
are to be received, (ii) specify the future date or dates on which the shares of
Common Stock are to be paid or the future event or events upon the occurrence of
which the shares are to be paid and (iii) be irrevocable. On each future date or
upon the occurrence of each future event so specified, certificates representing
the shares whose receipt has been deferred until such date or such future event
shall be delivered to the Non-employee Director, together with an amount
representing the dividends on such shares that would have been paid prior to
such future date or such future event if receipt of such shares had not been so
deferred ("unpaid dividends"), together, in the case of cash unpaid dividends,
with interest thereon, accrued quarterly from the respective dates such
dividends would have been paid, at a rate equal to the average quarterly United
States Treasury bill rate. The obligation of American to make payment of any
deferred shares of Common Stock or any unpaid dividends (and interest thereon)
as provided in this Section 4(b) is not required to be funded.
(c) An election by a Non-employee Director pursuant to Section 4(b) to
defer receipt of any shares of Common Stock shall confer no rights upon such
Non-employee Director, as a stockholder of the Company or otherwise, with
respect to such shares, but shall confer only the right to receive such shares
and unpaid dividends (and interest thereon) as and when provided in Section
4(b).
(d) Notwithstanding anything to the contrary in Section 4(b) or 4(c),
in the event a Non-employee Director has elected to defer receipt of shares of
Common Stock pursuant to Section 4(b) and in the event of such person's death
prior to receipt thereof, such shares and any unpaid dividends (and interest
thereon) provided for in Section 4(b) shall be promptly paid to the beneficiary
or beneficiaries designated by such person in writing to the Secretary of
American or, if no beneficiary has been so designated, to such person's estate.
(e) Notwithstanding anything to the contrary in Section 4(b) or 4(c),
in the event a Non-employee Director has elected to defer receipt of shares of
Common Stock pursuant to Section 4(b) and in the event of a Change in Control
(as defined in this Section 4(e)), such shares and any unpaid dividends (and
interest thereon) provided for in Section 4(b) shall be promptly paid to such
Non-employee Director. A "Change in Control" shall be deemed to have occurred if
(i) any person (as that term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect
on February 28, 1995) is or becomes the beneficial owner (as that term is used
in Section 13(d) of the Exchange Act and the rules and regulations promulgated
thereunder, as in effect on February 28, 1995) of stock of American entitled to
cast more than 20% of the votes at the time entitled to be cast generally for
the election of directors, (ii) more than 50% of the members of the Board of
Directors of American shall not be Continuing Directors (which term, as used
herein, means the directors of American (A) who are members of the Board of
Directors on February 28, 1995 or (B) who subsequently became directors of
American and who were elected or designated to be candidates for election as
nominees of the Board of Directors, or whose election or nomination for election
by American's stockholders was otherwise approved, by a vote of a majority of
the Continuing Directors then on the Board of
2
<PAGE>
Directors), (iii) American shall be merged or consolidated with, or, in any
transaction or series of transactions, substantially all of the business or
assets of American shall be sold or otherwise acquired by, another corporation
or entity and, as a result thereof, either (x) the stockholders of American
immediately prior thereto shall not directly or indirectly have at least 50% or
more of the combined voting power of the surviving, resulting or transferee
corporation or entity immediately thereafter or (y) any person (as that term is
used in Sections 13(d) and 14(d) of the Exchange Act, as in effect on February
28, 1995) is or becomes the beneficial owner (as that term is used in Section
13(d) of the Exchange Act, and the rules and regulations promulgated thereunder,
as in effect on February 28, 1995) of more than 20% of the combined voting power
of the surviving, resulting or transferee corporation or entity, or (iv) any
change in control of American shall have occurred of a nature that would be
required to be reported in response to Item 1(a) of Form 8-K promulgated under
the Exchange Act as in effect on February 28, 1995, regardless of whether
American is at the time of such change in control subject to the reporting
requirement thereof. Notwithstanding the foregoing, a Change in Control shall
not be deemed to have occurred if an acquisition of stock that would otherwise
constitute a Change in Control pursuant to clause (i) or (iv) of the preceding
sentence is made by American or a direct or indirect subsidiary thereof, by any
corporation in a merger or consolidation that does not constitute a Change in
Control pursuant to clause (iii) of the preceding sentence or by any employee
benefit plan (or related trust) sponsored or maintained by American or a direct
or indirect subsidiary thereof.
(f) The right to receive shares of Common Stock, the receipt of which
has been deferred by a Non-employee Director pursuant to Section 4(b) shall not
be transferable by such Non-employee Director otherwise than by will or the laws
of descent and distribution or pursuant to a qualified domestic relations order
as defined in the Internal Revenue Code of 1986, as amended.
(g) The shares of Common Stock issued hereunder shall be in addition to
any other fees to which a Non-employee Director may be entitled.
5. Taxes
Any taxes that are required to be withheld upon delivery of shares of
Common Stock issued pursuant to the Plan to a Non-employee Director shall be
paid to American in cash by such Non-employee Director unless deducted and
withheld from any cash fees payable by American to such Non-employee Director or
paid by such Non-employee Director in shares of Common Stock in an exempt
transaction under Section 16 of the Exchange Act.
6. Limitations and Conditions
(a) The total number of shares of Common Stock that may be issued to
Non-employee Directors under the Plan is 20,000. Such total number of shares may
consist, in
3
<PAGE>
whole or in part, of authorized but unissued shares or shares held in American's
treasury. The foregoing number may be increased or decreased by the events set
forth in Section 7 below.
(b) Prior to each issuance to a Non-employee Director of shares of
Common Stock pursuant to the Plan, such Non-employee Director must make
representations satisfactory to the Committee to the effect that such shares are
to be held for investment purposes and not with a view to or for resale or
distribution except in compliance with the Securities Act of 1933, as amended
(the "Securities Act"), and must give a written undertaking to American in form
and substance satisfactory to the Committee that he or she will not publicly
offer or sell or otherwise distribute such shares other than (i) in the manner
and to the extent permitted by Rule 144 promulgated by the Securities and
Exchange Commission under the Securities Act, (ii) pursuant to any other
exemption from the registration provisions of the Securities Act or (iii)
pursuant to an effective registration statement thereunder.
(c) Nothing contained herein shall be deemed to create the right in any
Non-employee Director to remain a member of the Board of Directors of American,
to be nominated for reelection or to be reelected as such or, after ceasing to
be such a member, to receive any shares of Common Stock under the Plan to which
he or she is not already entitled with respect to any year.
7. Stock Adjustments
In the event of any merger, consolidation, stock or other non-cash
dividend, extraordinary cash dividend, split-up, spin-off, combination or
exchange of shares, reorganization or recapitalization or change in
capitalization, or any other similar corporate event, the Committee may make
such adjustments in (i) the aggregate number of shares of Common Stock that may
be issued under the Plan as set forth in Section 6(a) and the number of shares
that may be issued to a Non-employee Director with respect to any year as set
forth in Section 4(a), (ii) the kind of shares that may be issued under the Plan
and (iii) the amount and kind of payment that may be made in respect of unpaid
dividends on shares of Common Stock whose receipt has been deferred pursuant to
Section 4(b), as the Committee shall deem appropriate in the circumstances. The
determination by the Committee as to the terms of any of the foregoing
adjustments shall be conclusive and binding.
8. Amendment and Termination
(a) The Board of Directors of American shall have the power to amend or
terminate the Plan at any time; provided, however, that, to be effective, any
amendment of the Plan shall comply with the requirements of the rules and
regulations promulgated under Section 16(b) of the Exchange Act to the extent
necessary so that the receipt of shares of Common Stock by a Non-employee
Director under the Plan shall be exempt from such Section 16(b);
4
<PAGE>
and provided, further, that no termination of the Plan shall adversely affect
the rights of any Non-employee Director with respect to any otherwise payable
shares of Common Stock whose receipt has been deferred or with respect to unpaid
dividends (and interest thereon) pursuant to Section 4(b). Notwithstanding the
preceding sentence, no amendment or modification of any provision of the Plan
relating to the amount, price and timing of any security that may be granted
hereunder may be amended more often than once in every six months, other than to
comport with changes in the Internal Revenue Code of 1986, as amended.
(b) Subject to any prior termination of the Plan by the Board of
Directors of American, shares of Common Stock shall be issuable under the Plan
only with respect to the calendar years 1995 through 1999 inclusive.
9. Effective Date
The Plan shall be subject to and effective upon its approval by the
stockholders of American.
5
EXHIBIT 10c6
Schedule identifying substantially identical agreements, among Fortune Brands,
Inc. ("Fortune") and The Chase Manhattan Bank, et al., establishing a trust in
favor of each of the following persons, to the Agreement and the Amendments
thereto constituting Exhibits 10c2, 10c3, 10c4 and 10c5 to the Annual Report on
Form 10-K of Fortune for the Fiscal Year ended December 31, 1998
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
Norman H. Wesley
John T. Ludes
Dudley L. Bauerlein, Jr.
Craig P. Omtvedt
Mark A. Roche
Robert J. Rukeyser
EXHIBIT 10c12
Schedule identifying substantially identical agreements, among Fortune Brands,
Inc. ("Fortune"), The Chase Manhattan Bank and each of the following persons, to
the Trust Agreement and Amendments constituting Exhibits 10c8, 10c9, 10c10 and
10c11 to the Annual Report on Form 10-K of Fortune for the Fiscal Year ended
December 31, 1998
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
Norman H. Wesley
John T. Ludes
Dudley L. Bauerlein, Jr.
Craig P. Omtvedt
Mark A. Roche
Robert J. Rukeyser
EXHIBIT 10f2
Resolutions Adopted by the Board of Directors of
Fortune Brands, Inc. on July 26, 1988
- -------------------------------------
RESOLVED, that there be paid to Mr. Mark A. Roche (or to him
and any beneficiary designated by him in accordance with the Retirement Plan for
Employees and Former Employees of American Brands, Inc. (the "Retirement Plan"),
or any superseding plan then in effect, or to Mr. Roche's surviving spouse if
eligible for a spouse's benefit thereunder) from and after termination of Mr.
Roche's employment, any benefits as would be payable under the Retirement Plan
and this Company's Supplemental Retirement Plan, or any superseding plans, as
then in effect if, for the purpose of determining eligibility for benefits and
the amount thereof, Mr. Roche had been in continuous service with this Company
since July 27, 1981; and further
RESOLVED, that this Company pay to Mr. Roche (or to such
beneficiary), concurrently with the payment of whatever benefits become payable
under the Retirement Plan and this Company's Supplemental Retirement Plan, or
any superseding plans, outside-the-Plan benefits in an amount equal to the
difference between (i) the benefits payable from the Retirement Plan and such
Supplemental Retirement Plan and (ii) the total amount of benefits payable
pursuant to the foregoing resolutions, provided that Mr. Roche may select any
actuarially equivalent method of payment for the outside-the-Plan benefits as is
permitted under the Retirement Plan, which need not be the same form of payment
as actually elected under the Retirement Plan; and further
RESOLVED, that the Corporate Employee Benefits Committee (or
any successor committee) may direct that the retirement benefits payable to Mr.
Roche pursuant to the preceding resolutions be paid in an actuarially equivalent
single sum payment, provided that except as set forth in the following
resolutions, no such payment shall be made prior to termination of employment;
and further
RESOLVED, that in the event the Company segregates assets
which are intended to be a source for payment of such retirement benefits to Mr.
Roche and the benefits are determined to be taxable to Mr. Roche prior to actual
receipt thereof, a single sum payment shall be made to Mr. Roche in an amount
sufficient to pay such taxes notwithstanding that Mr. Roche may not then have
terminated employment, which tax payment shall then be used as an offset to the
retirement benefits thereafter payable
<PAGE>
pursuant to the preceding resolutions of this Board, which retirement benefits
shall also be paid in an actuarially equivalent single sum payment promptly upon
termination of employment; and further
RESOLVED, that in determining actuarial equivalency of a
single sum payment, there shall be used the interest rate which would be used as
of the first day of the month preceding the month in which the distribution
occurs by the Pension Benefit Guaranty Corporation for the purposes of
determining the present value of a single sum distribution on plan termination
and the 1974 George B.
Buck Mortality Table, set forward one year; and further
RESOLVED, that from and after Mr. Roche's termination of
employment, Mr. Roche shall be eligible for retiree medical and life insurance
benefits to the same extent as retired executives of the Company are entitled to
such benefits generally; and further
RESOLVED, that for purposes of determining eligibility and
amount of benefits under this Company's Sick Leave and Long-Term Disability
Plans and Dental Plan, the date of July 27, 1981 shall be deemed Mr. Roche's
commencement date of credited service; and further
RESOLVED, that the Chairman of the Board, the President, the
Executive Vice President and Chief Financial Officer, the Senior Vice President
and Chief Accounting Officer, the Senior Vice President and General Counsel and
the Senior Vice President and Chief Administrative Officer of this Company be
and each of them is hereby directed to execute and deliver to Mr. Roche the
agreement of this Company confirming its obligations undertaken in the preceding
resolutions pursuant to which retirement benefits, sick leave and long-term
disability benefits and dental benefits will be provided for Mr.
Roche.
2
EXHIBIT 10h3
Schedule identifying substantially identical agreements, between Fortune Brands,
Inc. ("Fortune") and each of the following persons, to the Agreement and
Amendment constituting Exhibits 10h1 and 10h2 to the Annual Report on Form 10-K
of Fortune for the Fiscal Year ended December 31, 1998
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
Norman H. Wesley
John T. Ludes
Dudley L. Bauerlein, Jr.
Craig P. Omtvedt
Mark A. Roche
Robert J. Rukeyser
EXHIBIT 10i4
Schedule identifying substantially identical agreements, among Fortune Brands,
Inc. ("Fortune") and The Chase Manhattan Bank, et al. in favor of each of the
following persons, to the Trust Agreement and Amendments thereto constituting
Exhibits 10i1, 10i2 and 10i3 to the Annual Report on Form 10-K of Fortune for
the Fiscal Year ended December 31, 1998
- --------------------------------------------------------------------------------
Name
----
Thomas C. Hays
Norman H. Wesley
Dudley L. Bauerlein, Jr.
Craig P. Omtvedt
Mark A. Roche
Robert J. Rukeyser
EXHIBIT 10j4
Schedule identifying substantially identical agreements, between Fortune Brands,
Inc. ("Fortune") and each of the following persons, to the Agreement and
Amendments thereto constituting Exhibits 10j1, 10j2 and 10j3 to the Annual
Report on Form 10-K of Fortune for the Fiscal Year ended December 31, 1998
- --------------------------------------------------------------------------------
Name
----
Norman H. Wesley
John T. Ludes
Dudley L. Bauerlein, Jr.
Mark A. Roche
Robert J. Rukeyser
EXHIBIT 10j6
Schedule identifying substantially identical agreements, between Fortune Brands,
Inc. ("Fortune") and each of the following persons, to the Amendment
constituting Exhibit 10j5 to the Annual Report on Form 10-K of Fortune for the
Fiscal Year ended December 31, 1998
- --------------------------------------------------------------------------------
Name
----
Norman H. Wesley
John T. Ludes
Dudley L. Bauerlein, Jr.
Mark A. Roche
Robert J. Rukeyser
EXHIBIT 10j8
AMENDMENT TO SEVERANCE AGREEMENT
This AMENDMENT dated as of August 1, 1998 to the Severance
Agreement (the "Agreement") dated as of January 29, 1996, as amended, between
AMERICAN BRANDS, INC., a Delaware corporation (the "Company") and CRAIG P.
OMTVEDT (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:
<PAGE>
"(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
2
<PAGE>
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
3
<PAGE>
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;
<PAGE>
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.
5
<PAGE>
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.
6
<PAGE>
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
7
<PAGE>
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
8
<PAGE>
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. Craig P. Omtvedt
- ------------------------------- -----------------------------
Secretary CRAIG P. OMTVEDT
EXHIBIT 10j9
Schedule identifying substantially identical agreements, between Fortune Brands,
Inc. ("Fortune") and each of the following persons, to the Amendment
constituting Exhibit 10j8 to the Annual Report on Form 10-K of Fortune for the
Fiscal Year ended December 31, 1998
- --------------------------------------------------------------------------------
Name
----
Norman H. Wesley
Mark A. Roche
EXHIBIT 12
FORTUNE BRANDS, INC.
Statement Re Computation of Ratio of Earnings to Fixed Charges
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
Continuing Operations
- ------------------------------
<S> <C> <C> <C> <C> <C>
Earnings Available:
Income before
provision for
taxes on income
and minority interest $ 43.4 $358.9 $340.1 $145.2 $ 516.4
Less: Excess of
earnings over
dividends of less
than fifty percent
owned companies - 0.2 0.2 0.2 0.2
Capitalized interest 0.2 - 0.3 - -
--------- --------- ------- ------- --------
43.2 358.7 339.6 145.0 516.2
-------- --------- ------- ------- --------
Fixed Charges:
Interest expense
(including capitalized
interest) and amortization
of debt discount and expenses 184.6 147.1 172.6 122.4 105.4
Portion of rentals
representative of
an interest factor 12.8 13.5 15.1 14.7 17.0
------- ------- ------- -------- --------
Total Fixed Charges 197.4 160.6 187.7 137.1 122.4
------- ------- ------- -------- --------
Total Earnings
Available $240.6 $519.3 $527.3 $282.1 $638.6
===== ===== ====== ===== =====
Ratio of Earnings to
Fixed Charges 1.22 3.23 2.81 2.06 5.22
==== ==== ==== ==== ====
</TABLE>
EXHIBIT 13
FINANCIAL HIGHLIGHTS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Reported Pro Forma Basis(1)
- ----------------------------------------------------------------------------------------------
(In millions, except per share amounts) 1998 1997 1998 1997 Change
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales
Home products $ 1,624.4 $ 1,394.0 $ 1,624.4 $ 1,394.0
Office products 1,387.7 1,294.2 1,387.7 1,294.2
- ----------------------------------------------------------------------------------------------
Home and office products 3,012.1 2,688.2 3,012.1 2,688.2
Golf products 962.9 911.6 962.9 911.6
Spirits and wine 1,265.9 1,244.7 1,265.9 1,244.7
- ----------------------------------------------------------------------------------------------
$ 5,240.9 $ 4,844.5 $ 5,240.9 $ 4,844.5 8%
==============================================================================================
Operating company contribution(2)
Home products $ 252.5 $ 222.9 $ 252.5 $ 222.9
Office products 134.0 128.1 134.0 128.1
- ----------------------------------------------------------------------------------------------
Home and office products 386.5 351.0 386.5 351.0
Golf products 142.9 138.2 142.9 138.2
Spirits and wine 268.9 257.2 268.9 257.2
- ----------------------------------------------------------------------------------------------
$ 798.3 $ 746.4 $ 798.3 $ 746.4 7%
==============================================================================================
Income from continuing operations $ 293.6 $ 41.5 $ 293.6 $ 257.8 14%
==============================================================================================
Earnings per Common share
from continuing operations
==============================================================================================
Basic $ 1.70 $ .24 $ 1.70 $ 1.51 13%
==============================================================================================
Diluted $ 1.67 $ .23 $ 1.67 $ 1.48 13%
==============================================================================================
EBITDA(3) $ 865.7 $ 499.1 $ 865.7 $ 797.3 9%
==============================================================================================
===============================================================================================
Dividends paid per Common share $ .85 $ 1.41 $ .85 $ .81 5%
==============================================================================================
Average number of Common shares
outstanding 172.2 171.6 172.2 170.3
==============================================================================================
</TABLE>
(1) Unaudited pro forma results exclude restructuring and other nonrecurring
charges in 1997 (See Note 14) and reflect the net cash payment Gallaher
Group Plc made to the Company in connection with the spin-off on May 30,
1997 (See Note 3) and the assumption that such proceeds were used to
purchase 2.5 million Common shares and repay debt as of January 1, 1997.
Pro forma information is presented for informational purposes only and
does not purport to be indicative of the results of operations which would
actually have been obtained if the transactions had occurred on January 1,
1997.
(2) Operating company contribution is net sales less all costs and expenses
other than restructuring and other nonrecurring charges, amortization of
intangibles, corporate administrative expenses, interest and related
expenses, other (income) expenses, net and income taxes.
(3) EBITDA is defined as income from continuing operations before interest
expense, income taxes and depreciation and amortization. EBITDA is a
measure commonly used by analysts and investors. Accordingly, this
information has been presented to permit a more complete analysis of the
Company's operating performance. EBITDA should not be considered a
substitute for net income or cash flow prepared in accordance with
generally accepted accounting principles as a measure of the profitability
or liquidity of the Company.Fortune Brands, Inc. is a holding company with
subsidiaries engaged in the manufacture and sale of home products, office
products, golf products and distilled spirits and wine. To make this
annual report easier to read, we've used the words "we," "our" and similar
terms to describe the activities of Fortune Brands or its subsidiary
companies or both, depending upon the context.
Fortune Brands, Inc. is a holding company with subsidiaries engaged in the
manufacture and sale of home products, office products, golf products and
distilled spirits and wine. To make this annual report easier to read, we've
used the words "we," "our" and similar terms to describe the activities of
Fortune Brands or its subsidiary companies or both, depending upon the context.
4
<PAGE>
Financial Contents
Results of Operations 29
Financial Condition 36
Consolidated Statement of Income 39
Consolidated Balance Sheet 40
Consolidated Statement of Cash Flows 42
Consolidated Statement of Stockholders' Equity 43
Notes to Consolidated Financial Statements 44
Report of Independent Accountants 57
Report of Management 57
Information on Business Segments 58
Six-Year Consolidated Selected Financial Data 59
28
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RESULTS OF OPERATIONS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Net Sales Operating Company Contribution(1)
- ---------------------------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Home products $1,624.4 $1,394.0 $1,374.1 $252.5 $222.9 $214.1
Office products 1,387.7 1,294.2 1,228.7 134.0 128.1 116.3
- ---------------------------------------------------------------------------------------------------
Home and office products 3,012.1 2,688.2 2,602.8 386.5 351.0 330.4
Golf products 962.9 911.6 811.4 142.9 138.2 125.3
Spirits and wine 1,265.9 1,244.7 1,303.5 268.9 257.2 244.1
- ---------------------------------------------------------------------------------------------------
Continuing operations $5,240.9 $4,844.5 $4,717.7 $798.3 $746.4 $699.8
===================================================================================================
</TABLE>
(1) Operating company contribution (OCC) is net sales less all costs and
expenses other than restructuring and other nonrecurring charges,
amortization of intangibles, corporate administrative expenses, interest
and related expenses, other (income) expenses, net and income taxes. (See
Note 15.)
CONSOLIDATED
1998 Compared to 1997 Net sales grew by $396.4 million, an increase of 8%. The
introduction of new products and line extensions, acquisitions, and price
increases primarily caused the increase. The net sales increase was tempered by
fewer units sold of some existing products, the sale of nonstrategic businesses
and the effects of lower average foreign exchange rates (primarily the
Australian dollar).
Operating company contribution is the key measure by which we gauge
performance. In 1998, OCC grew $51.9 million, up 7%. The higher sales
principally caused this increase. The increase was tempered by lower average
foreign exchange rates and higher operating expenses. OCC benefited from the
restructuring activities initiated in 1997. If the exchange rates had remained
constant at their 1997 levels, net sales and operating company contribution
would have increased 9%.
During 1997, we recorded an aggregate of $298.2 million of pre-tax
restructuring and other nonrecurring charges. (See Notes to Consolidated
Financial Statements, Note 14.) During 1998, the program was substantially
completed. The following activities are in the process of being finalized: the
completion of the Nogales, Mexico, operation related to office products'
Swingline stapling production and a significant portion of home products' Master
Lock assembly operations, and the resultant reduction of workforces
(approximately 500 positions) in the home and office products segments. These
remaining restructuring activities are expected to be completed during 1999.
When the restructuring activities are completed, we expect these actions to
produce annualized savings exceeding $50 million. Much of these savings were
achieved in 1998.
Interest and related expenses decreased $14 million, or 12%. This decrease
reflects lower average borrowings principally because of the use of a portion of
the proceeds paid to us by Gallaher Group Plc in 1997 in connection with its
spin-off from the Company. (See Note 3.)
Lower pre-tax income in 1997 due to restructuring and other nonrecurring
charges distorted the effective income tax rate comparisons for 1998 and 1997.
Excluding these charges, the effective income tax rates were 42.6% and 44.6%,
respectively. We had a lower effective tax rate this year principally because of
foreign and state tax initiatives and nondeductible goodwill had a smaller
impact on higher pre-tax income.
Income from continuing operations of $293.6 million, or $1.70 per basic
Common share, for 1998 compared with $41.5 million, or 24 cents per share, for
1997. The significant increase occurred principally because in 1997 we recorded
$201 million, or $1.17 per share ($1.16 diluted), in net restructuring and other
nonrecurring charges. Excluding these charges, income from continuing operations
was up $51.1 million, or 21%.
Income from discontinued operations for 1997 represented Gallaher's net
income before the spin-off. It was $65.1 million, or 38 cents per share. (See
Note 3.)
In 1998, we incurred extraordinary items charges of $30.5 million ($46.9
million pre-tax), or 18 cents per share, and in 1997 the charge was $8.1 million
($12.4 million pre-tax), or five cents per share. In both years, the charges
related to purchasing or redeeming debt. (See Note 16.)
Net income of $263.1 million, or $1.52 per share, compared with $98.5
million, or 57 cents per share, for 1997.
Pro forma financial information is discussed because of the significant
changes to our businesses that occurred in 1997. Pro forma results reflect the
exclusion of the 1997 restructuring and other nonrecurring charges, the
inclusion of a net cash payment that approximated $1.25 billion, after taxes,
that Gallaher paid to us in connection with its spin-off and the assumption that
as of January 1, 1997 we used those proceeds to purchase 2.5 million Common
shares and repay debt.
Income from continuing operations of $293.6 million, and basic and diluted
earnings per share of $1.70 and $1.67, respectively, for 1998 compared with pro
forma income from continuing operations of $257.8 million, and pro forma basic
and diluted earnings per share of $1.51 and $1.48, respectively, in 1997. This
pro forma information is provided for informational purposes only. We cannot
state for certain that these results of operations actually would have been
obtained if the transactions had occurred on January 1, 1997.
The Company derived 26% of its 1998 and 1997 operating company
contribution from foreign countries, principally the United Kingdom, Australia
and Canada. Fluctuations in the
29
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RESULTS OF OPERATIONS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
exchange rates of foreign currencies represent a principal exposure that may
affect results in future periods. Lower average foreign exchange rates reduced
1998 OCC by $11.7 million. We cannot accurately predict fluctuations in foreign
exchange rates. A 10% change in average exchange rates for the foreign
currencies from the 1998 average rates would result in a change in 1998 OCC of
approximately $20 million, or about 21/2%.
Pending Litigation On December 22, 1994, the Company sold The American Tobacco
Company subsidiary to Brown & Williamson Tobacco Corporation, a wholly-owned
subsidiary of B.A.T Industries p.l.c. In connection with the sale, Brown &
Williamson Tobacco Corporation and The American Tobacco Company ("the
Indemnitors") agreed to indemnify the Company against claims including legal
expenses arising from smoking and health and fire safe cigarette matters
relating to the tobacco business of The American Tobacco Company.
The Company is a defendant in numerous actions based upon allegations that
human ailments have resulted from tobacco use. Management believes that there
are meritorious defenses to the pending actions and these actions are being
vigorously contested. However, it is not possible to predict the outcome of the
pending litigation, and it is possible that some of these actions could be
decided unfavorably. Management is unable to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome of the
pending litigation. Management believes that the pending actions will not have a
material adverse effect upon the results of operations, cash flows or financial
condition of the Company as long as the Indemnitors continue to fulfill their
obligations to indemnify the Company under the aforementioned indemnification
agreement.
In addition to the lawsuits described above, the Company and its
subsidiaries are defendants in lawsuits associated with their business and
operations. It is not possible to predict the outcome of the pending actions,
but management believes that there are meritorious defenses to these actions and
that these actions will not have a material adverse effect upon the results of
operations, cash flows or financial condition of the Company. These actions are
being vigorously contested.
Environmental Matters Along with other responsible parties, our subsidiaries
face claims relating to the protection of the environment. As of February 15,
1999, various of our subsidiaries had been designated as potentially responsible
parties under "Superfund" or similar state laws with respect to 47 sites. We
believe that the costs of complying with the present environmental protection
laws, before considering estimated recoveries either from other responsible
parties or insurance, will not have a material adverse effect upon our results
of operations, cash flows or financial condition.
Recently Issued Accounting Standards In June 1998, FAS Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. It
will become effective for us beginning on January 1, 2000. FAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. We are in the process of evaluating the effect of
adoption on future results and the disclosure requirements under this standard.
In March 1998, AICPA Statement of Position 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," was issued. It
became effective on 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. We do not currently expect the adoption of SOP 98-1
to have a material effect on our financial statements.
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 "19." If this problem is not corrected,
many computer applications could fail or produce erroneous results.
In early 1997, we established a task force, comprised of our and our
subsidiaries' information technology specialists, to develop an action plan to
address the Year 2000 issues. The task force functions primarily as a means to
coordinate information sharing across our operating companies, to assess and
facilitate the progress towards becoming Y2K compliant and to regularly advise
our management and Board of Directors regarding the project's status.
Project Overview. We and our operating companies have focused our 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 of our 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.
30
<PAGE>
Internal State Of Readiness. The non-IT portion of the project is
substantially complete, and we currently anticipate that all critical non-IT
systems will be Y2K compliant by June 30, 1999. A significant amount of the IT
portion of the project also has been completed, and we anticipate that all IT
systems also will be Y2K compliant by June 30, 1999.
Third Party Risks. Many third parties have responded to our requests for
information and more extensive inquiries are ongoing with significant suppliers
and customers. If one or more significant third parties fails to be Y2K
compliant, results 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.
The Y2K compliance of third parties is inherently difficult to assess. As
a result, each of our 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, we face certain risks specific to our businesses.
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 countries 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 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 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. In essence, the requirement
that spirits and wine be sold only through the government in such jurisdictions
may legally prohibit the 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.
Contingency Planning. We have been focusing our efforts on compliance, and
we believe the critical IT and non-IT portions of the project will be compliant
in time. In addition, we are engaged in continuing efforts to evaluate the Y2K
compliance of our significant third party suppliers and customers. The Year 2000
problem presents a number of risks that are beyond our reasonable control.
Accordingly, contingency plans focusing on critical activities are being
developed and will be implemented to the extent necessary. Among the plans being
considered are arranging for contingent raw material, component and
manufacturing capacity sources; building supplies and inventory; escrowing the
computer source codes of key software applications; reviewing data recovery
disaster plans; and rescheduling normal year-end plant shutdowns to the initial
days of 2000.
Costs To Address Year 2000 Issues. Based on the efforts to date and on
project plans, we currently estimate 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, we spent
approximately 72% as of December 31, 1998. This cost estimate may change as the
program progresses.
Conclusion. Based on current assessment efforts, we anticipate that our
internal Year 2000 issues will be resolved in a timely manner. However, the Year
2000 problem presents a number of risks that are beyond our reasonable control,
particularly with respect to the Y2K compliance of third parties, both domestic
and international. Although we believe that our Y2K program is designed to
appropriately identify and address those issues which are within our reasonable
control, there can be no assurance that our efforts will be fully effective or
that Y2K issues will not have a material adverse effect upon our results of
operations, cash flows or financial condition.
Conversion to the Euro On January 1, 1999, eleven participating countries of the
European Union converted to the Euro as their common national currency. The
previous national currencies of these countries will still be accepted as legal
tender until at least January 1, 2002. We do not expect the conversion to the
Euro to have a material effect on our results of operations, cash flows or
financial condition.
Cost Initiatives We continuously evaluate the productivity of our product lines
and existing asset base and actively seek to identify opportunities to improve
our cost structure. Future opportunities may involve, among other things, the
relocation of manufacturing or assembly to locations generally having lower
costs or the reorganization of operations. Implementing any significant
identified cost reduction and efficiency opportunities could result in charges.
1997 Compared to 1996 On May 30, 1997, we spun off Gallaher Group Plc, our
international tobacco subsidiary, and changed our name from American Brands,
Inc. to Fortune Brands, Inc. As a result, our stockholders owned shares in two
publicly-traded companies -- Fortune Brands, Inc. and Gallaher. (See Note 3.)
Net sales increased $126.8 million, up 3%. New products and line
extensions primarily caused the increase, which was partly offset by volume
declines. Acquisitions in home and office products and nonstrategic divestitures
largely offset one another. We included an additional month in distilled
spirits' U.K. operations in 1996 (change to calendar year-end), which also
benefited net sales. Operating company contribution
31
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RESULTS OF OPERATIONS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
increased by $46.6 million, up 7%. Higher sales and gross margin primarily
caused this increase. The OCC increase was tempered by increased marketing and
research and development expenses. Lower average foreign exchange rates did not
significantly affect sales and OCC.
We reviewed productivity-enhancing opportunities throughout the year and
recorded pre-tax restructuring and other nonrecurring charges of $298.2 million.
In connection with the restructuring, the home and office products segments will
be terminating 1,125 individuals (about 7% of the combined workforce),
principally production employees. Cash payments account for approximately 30% of
the charge, principally relating to employee termination costs. (See Note 14.)
Interest and related expenses decreased $48.8 million, or 29%; average
borrowings were lower because we had the use of the proceeds from the Gallaher
spin-off.
The effective income tax rate comparisons were distorted by the
restructuring and other nonrecurring charges. Excluding these charges, the
effective income tax rates for 1997 and 1996 were 44.6% and 46.5%, respectively.
Income from continuing operations of $41.5 million, or 24 cents per basic
Common share, compared with $181.7 million, or $1.04 per share, for 1996.
Restructuring and other nonrecurring charges of $201 million after taxes, or
$1.17 per share, caused this significant decrease. Excluding these charges,
income from continuing operations was $242.5 million, or $1.41 per share.
Income from discontinued operations represents Gallaher's net income
before the spin-off. It was $65.1 million, or 38 cents per share, in 1997,
compared with $315.1 million, or $1.82 per share, for the full year 1996. In
addition, the 1997 amount included $67.1 million in pre-tax spin-off expenses.
(See Note 3.)
In 1997 and 1996, we incurred the extraordinary items charges in
purchasing or redeeming our debt. In 1997, the charge was $8.1 million ($12.4
million pre-tax), or five cents per share, and in 1996 the charge was $10.3
million ($15.8 million pre-tax), or six cents per share. (See Note 16.)
Net income in 1997 of $98.5 million, or 57 cents per share, compared with
$486.5 million, or $2.80 per share in 1996.
HOME PRODUCTS
1998 Compared to 1997 Net sales increased $230.4 million, or 17%. The increase
was attributable primarily to the acquisitions of Schrock cabinets in June 1998
and Donner bath products in December 1997 and the benefit of overall volume and
price increases. The overall volume increase reflects line extensions and the
introduction of new products, but was partially offset by volume declines in
some existing products. Master Lock disposed of its door hardware business in
early 1998 and Moen disposed of its operations in Japan in 1997, actions which
tempered the segment's sales increase. All companies except Master Lock reported
higher sales.
Operating company contribution increased $29.6 million, up 13%. The
increase principally reflects the increased sales, and was partially offset by a
lower gross margin (principally lower margins at acquired companies) and
increased operating expenses. Moen's higher volume-related selling programs,
advertising and Y2K spending were the principal reasons for the increased
operating expenses.
Sales of our companies' home products are becoming increasingly
concentrated in a smaller number of major customers, principally mass merchant
superstores, home centers and large distributors and home builders. Our products
also are increasingly facing competition on a value-priced basis. As the home
building industry continues to consolidate, the growth of large mass merchants
and home centers will continue to present us and our competitors with pricing
and service challenges. It will also present opportunities for the most
efficient manufacturers.
1997 Compared to 1996 Net sales increased $19.9 million, or 1%. The increase was
the result of an overall volume increase partially offset by the absence of
Moen's operations in Taiwan and Japan. This overall volume increase reflects
line extensions and new products, partially offset by lower volume on some
existing products. All companies except Master Lock reported higher sales.
Operating company contribution increased $8.8 million, or 4%, on the sales
increase and an improved gross margin. A more favorable product mix at Moen was
the principal factor leading to the margin improvement. These increases were
partially offset by higher operating expenses and unfavorable comparison to
1996's $2.2 million gain on the sale of Moen's joint venture in Taiwan. The
increased operating expenses resulted from higher volume-related selling
expenses at Moen and increased research and development expenses, but was partly
offset by lower general and administrative expenses. Operating company
contribution increased at all companies except Master Lock. Operating company
contribution at Master Lock declined principally due to the January 1, 1997
average price reduction of 15% taken in response to a shift by mass merchants to
competitors' value-priced imported products.
OFFICE PRODUCTS
1998 Compared to 1997 Net sales increased $93.5 million, up 7%. The increase was
primarily attributable to acquisitions made in each year as well as an overall
volume increase. The sales increase was tempered by lower prices and the absence
of two nonstrategic businesses sold in 1997. The overall volume increase
reflects the introduction of new products, partially offset by volume declines
in some existing
32
<PAGE>
products. Excluding acquisitions and divestitures, net sales were down slightly
because increases in North America and Continental Europe were more than offset
by declines in Australia (largely due to lower average foreign exchange rates).
Operating company contribution increased $5.9 million, up 5%. This
increase reflects the sales increase and an improvement in gross margin,
partially offset by higher operating expenses. The gross margin increase
principally reflects stabilized raw material costs and other cost reductions,
mostly offset by lower gross margins at acquired companies. The increased
operating expenses reflected higher volume-related freight and distribution
costs, higher customer service costs incurred to maintain customer service
levels while undergoing restructuring programs, higher customer program costs,
advertising and Y2K expenses. Operating company contribution benefited from the
acquisitions and was hurt by lower average foreign exchange rates.
The office products business is increasingly concentrated in a small
number of major customers, principally office products superstores, wholesalers
and contract stationers. The continuing consolidation of both competitors and
customers is causing increased pricing pressures that have negatively affected
results. The reduction in net prices, particularly in the fourth quarter of
1998, was compounded by the decision of several customers to reduce inventory
levels. These conditions are expected to affect comparisons for the first half
of 1999 and generally will continue to present challenges for our office
products group and its competitors. They also will present opportunities for the
most efficient manufacturers.
1997 Compared to 1996 Net sales increased $65.5 million, up 5%. An overall
volume increase (new products, partly offset by volume declines in some existing
products) primarily accounted for the increase. The increase was partially
offset by lower prices and lower average foreign exchange rates. Acquisitions
and nonstrategic divestitures largely offset one another. The majority of the
sales increase occurred in North America and Europe, primarily reflecting higher
Kensington computer accessories sales (new products) and higher Day-Timer
time-management products sold through the retail channel.
Operating company contribution increased $11.8 million, up 10%. This
increase reflects the sales increase and an improved gross margin (reflecting
manufacturing efficiencies in North America and Europe, stabilized raw material
costs and a more favorable product mix). It was partially offset by higher
operating expenses. The increased operating expenses principally reflected
higher costs in the areas of North American customer programs; marketing,
freight and distribution; research and development associated with the new
products; and general and administration.
GOLF PRODUCTS
1998 Compared to 1997 Net sales increased $51.3 million, up 6%. An overall
volume increase in golf balls, clubs and gloves (new products and line
extensions) and price increases primarily caused the increase. The increase was
tempered by volume declines in golf shoes and irons and by trade incentives on
existing club models in connection with introducing new product lines. Operating
company contribution increased $4.7 million, up 3%. This increase primarily
reflects the higher sales. It was partially offset by higher operating expenses,
including increased 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 was adversely affected in 1998 by lower consumer
demand, leading to increased inventory and price discounting. These changes led
to an estimated revenue decline in the U.S. market in the range of 10 - 15%.
Both the Titleist and Cobra brands were affected by the overall weakness in the
market for irons, though both achieved volume gains in metal woods. Titleist
golf club net sales were up on a favorable product mix and firm pricing. For
Cobra, sales results were more in line with the overall market trend and profits
declined significantly, particularly in the second half of the year. Conditions
in the club market and the overall inventory levels are likely to affect
comparisons in 1999. Aggressive actions are underway to bring Cobra expenses in
line with lower demand and to identify further synergies between Titleist and
Cobra.
The United States Golf Association 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. We believe that most or all of our group's golf
products currently marketed and under development will conform to this new 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 on our golf products
segment.
The USGA has also announced its intention to propose a new rule in the
spring of 1999 addressing the initial velocity and overall distance standard for
golf balls. Until more details regarding the proposed rule change become
available, we cannot determine whether it would have an effect on our group's
golf ball business and/or the golf ball industry.
Taylor Made Golf and Nike have recently introduced golf balls into their
product offerings. Callaway Golf announced it intends to do so in the near
future. Each company has significant brand awareness in the golf market that
could encourage purchases of their respective golf ball products by the trade
33
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RESULTS OF OPERATIONS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
and by consumers. It is not possible to predict what effect, if any, the
Callaway, Taylor Made and Nike golf balls will have on our or our competitors'
businesses.
1997 Compared to 1996 Net sales were up $100.2 million, or 12%. Line extensions
and new products, volume increases in golf balls, clubs, gloves and shoes and
one additional month of Cobra results in 1997 (acquired January 24, 1996)
primarily caused the increase. The trade incentives on existing club models in
connection with introducing new product lines and lower average foreign exchange
rates partially offset the increase. Operating company contribution increased
$12.9 million, or 10%, reflecting the higher sales. The OCC increase was
tempered by a shift in product mix and increases in material costs, advertising
and promotional expenditures and research and development expenses associated
with the development of new products.
Spirits And Wine
1998 Compared to 1997 Net sales increased $21.2 million, up 2%. Price and
overall volume increases and the benefit of the Geyser Peak wine business
(acquired August 1998) were the primary drivers of this growth. The increase was
partially offset by lower average foreign exchange rates and the unfavorable
comparison to a one-time domestic bulk sale in 1997. The overall volume increase
principally reflected higher case shipments in the U.S. (benefits from reduced
trade inventories in late 1997), Australia and Canada, line extensions and new
products. Volume in Europe was lower.
Operating company contribution increased $11.7 million, up 5%. The sales
increase and an improved gross margin (principally reflecting price increases
and more favorable product mix) were the primary reasons for this increase.
Increased operating expenses, chiefly increased domestic brand spending on Jim
Beam bourbon, DeKuyper cordials and Small Batch Bourbons, tempered the amount of
the OCC increase. Operating results improved in North America and Europe.
Australian results declined primarily because the average foreign exchange rate
was 15% lower than the prior year.
The merger of Grand Metropolitan PLC and Guinness PLC to create Diageo PLC
in late 1997 may reflect a trend towards consolidation in the highly competitive
global spirits business. The creation of Diageo PLC and the breadth of its
portfolio, as well as continued consolidation of the supplier, distributor and
retailer tiers, may present pricing and service challenges for our subsidiaries
and their competitors. It may also present opportunities, particularly for the
most efficient competitors.
Beverage alcohol sales are particularly sensitive to higher excise tax
rates. In the past, governments raised excise taxes in our operating companies'
two largest markets, the U.S. and the U.K. Although no such increases are
presently pending, the possibility of future increases cannot be ruled out. In
addition, previously there has been discussion and legislation introduced to ban
U.S. television advertising of spirits. Although no legislation is pending or
has been enacted, most TV networks and local affiliated stations in the U.S.
currently decline to accept distilled spirits advertising. Our operating
subsidiaries outside the U.S. have conducted broadcast advertising in markets
where legal. It is impossible to predict any future U.K. and U.S. excise tax
increases, as well as any restrictions on advertising. If they occur, they may
have an adverse effect on unit sales and industry trends.
Through 1995, consumption of distilled spirits declined in many countries,
including our major market, the U.S. However, since 1996, consumption in the
U.S. has been steady or increased slightly, indicating that the historic decline
may be reversing. Since 1996, our depletions (sales from distributors to
retailers) have declined. In 1998, total depletions were down slightly in the
U.S., although the rate of decline slowed from prior years, and depletions of
Jim Beam bourbon and DeKuyper cordials increased. The decline in the total
number of cases we sold may be due to our historic concentration on mid-to-low
priced products that may not be benefiting from the factors influencing the
recent industry trends. The number of cases sold also may be affected by price
increases we have taken in recent years to increase profits as compared to unit
sales.
1997 Compared to 1996 Net sales decreased $58.8 million, down 5%. Lower volume
and inclusion of an additional month of sales for the U.K. operations in 1996
(change to calendar year-end added $34.3 million) primarily caused the decrease.
Price increases, new products and line extensions, the benefit from a one-time
domestic bulk sale in 1997 and higher average foreign exchange rates partially
offset the sales decrease. The volume declines reflect lower case shipments in
the U.S., in part to reduce trade inventories, and fewer case shipments in the
U.K. These volume declines were partially offset by higher case shipments in
selected international markets (principally Australia and Germany) for Jim Beam
bourbon and pre-mixed cocktails, higher case shipments in Canada, line
extensions and new products.
Operating company contribution increased $13.1 million, up 5%. The
increase was led by an improved product mix, price increases and lower operating
expenses (lower advertising and promotional support on selected brands and
effective cost controls). Operating results improved in North America, Australia
and the U.K. In North America the reason was price increases and lower brand
support spending, partially offset by lower U.S. case shipments. In Australia,
the reason was higher volume, partially offset by unfavorable average foreign
exchange rates. In the U.K., lower operating expenses, partly offset by lower
volume caused the increase. The inclusion of an additional month of U.K.
operations in 1996 immaterially affected operating company contribution.
34
<PAGE>
QUARTERLY FINANCIAL DATA (unaudited)
FORTUNE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In millions, except per share amounts)
1998 1st 2nd 3rd 4th
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,203.5 $ 1,326.2 $ 1,300.3 $ 1,410.9
Gross profit 497.7 545.8 511.8 574.0
Operating company contribution 168.1 209.2 183.5 237.5
Income from continuing operations $ 53.0 $ 87.9 $ 56.8 $ 95.9
Extraordinary items (8.4) (22.1) -- --
- ---------------------------------------------------------------------------------------------
Net income $ 44.6 $ 65.8 $ 56.8 $ 95.9
- ---------------------------------------------------------------------------------------------
Earnings per Common share
Basic
Continuing operations $ .31 $ .50 $ .33 $ .56
Extraordinary items (.05) (.13) -- --
- ---------------------------------------------------------------------------------------------
Net income $ .26 $ .37 $ .33 $ .56
- ---------------------------------------------------------------------------------------------
Diluted
Continuing operations $ .30 $ .50 $ .32 $ .55
Extraordinary items (.05) (.13) -- --
- ---------------------------------------------------------------------------------------------
Net income $ .25 $ .37 $ .32 $ .55
=============================================================================================
1997 1st 2nd 3rd 4th
- ---------------------------------------------------------------------------------------------
Net sales $ 1,105.1 $ 1,235.5 $ 1,185.5 $ 1,318.4
Gross profit 448.6 469.0 452.6 515.2
Operating company contribution 151.9 195.1 172.9 226.5
Income (loss) from continuing operations(1) $ 35.0 $ 4.3 $ 28.0 $ (25.8)
Income (loss) from discontinued operations 101.6 (36.5) -- --
Extraordinary items -- -- -- (8.1)
- ---------------------------------------------------------------------------------------------
Net income (loss) $ 136.6 $ (32.2) $ 28.0 $ (33.9)
- ---------------------------------------------------------------------------------------------
Earnings per Common share
Basic
Continuing operations(1) $ .20 $ .03 $ .16 $ (.15)
Discontinued operations .60 (.22) -- --
Extraordinary items -- -- -- (.05)
- ---------------------------------------------------------------------------------------------
Net income $ .80 $ (.19) $ .16 $ (.20)
- ---------------------------------------------------------------------------------------------
Diluted
Continuing operations(1) $ .20 $ .02 $ .16 $ (.15)
Discontinued operations .58 (.20) -- --
Extraordinary items -- -- -- (.05)
- ---------------------------------------------------------------------------------------------
Net income $ .78 $ (.18) $ .16 $ (.20)
=============================================================================================
</TABLE>
(1) In 1997, income (loss) from continuing operations and basic and diluted
earnings per Common share reflected restructuring and other nonrecurring
charges of $65.4 million ($89.3 million pre-tax) and 38 cents and 38 cents
in the second quarter, $23 million ($38.1 million pre-tax) and 13 cents
and 12 cents in the third quarter, and $112.6 million ($170.8 million
pre-tax) and 66 cents and 66 cents in the fourth quarter, respectively.
(See Note 14.)
35
<PAGE>
FINANCIAL CONDITION
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CASH FLOW
Net Cash Provided from Continuing Operating Activities Net cash provided from
continuing operating activities in 1998 was $404.2 million. This compared with
$426.3 million in 1997. Increases in various components of working capital
principally caused the decrease in net cash provided. Higher operating company
contribution and lower interest expense partly offset the increase in working
capital.
Net Cash Used by Investing Activities Net cash used by investing activities in
1998 was $502.8 million. This compared with $227.6 million in 1997. Capital
expenditures. We focus our capital spending on becoming the lowest cost
producers of the highest quality products.
Capital expenditures in 1998 were $251.9 million as compared with $196.9 million
in 1997. This includes $64.7 million in 1998 and $5.5 million in 1997 related to
the 1997 restructuring (principally land and buildings related to transferring
operations to Mexico). See Note 15 for capital expenditures. We estimate the
1999 capital expenditures to be $240 million. We expect to generate these funds
internally.
Acquisitions. In 1998, we acquired Apollo Presentation Products, Schrock
Cabinet Company and Geyser Peak Winery for a total of $271.8 million, net of
cash acquired. In 1997, we acquired five companies for $84.6 million, net of
cash acquired. In 1996, our acquisitions, net of cash acquired, amounted to
$700.3 million, principally Cobra Golf. See Note 2 for acquisitions.
Dispositions. In 1998, Master Lock Company disposed of its door hardware
business for $17 million. In 1997, we disposed of two nonstrategic businesses
for a total of $48 million.
Net Cash Provided (Used) by Financing Activities Net cash provided by financing
activities in 1998 was $90.2 million. This compared with $1.5 billion of net
cash used in 1997. At the time of the spin-off, Gallaher paid us an amount that
approximated $1.25 billion, after taxes. We used a portion of these proceeds to
repay debt in 1997. The purchases of our Common stock, including those shares
purchased pursuant to the systematic share purchase program approved in 1997,
amounted to $112 million during 1998, as compared with $90 million during 1997.
Cash Provided by Discontinued Operations To allocate the overall debt burden of
the Company at the time of the Gallaher spin-off in 1997, Gallaher borrowed and
paid to us approximately $1.25 billion, after taxes. As mentioned above, we used
a portion of the proceeds to pay down debt.
DIVIDENDS
We paid dividends in 1998 of $.85 per Common share. Dividends paid to Common
stockholders in 1998 decreased to $146.5 million from $242.3 million. We paid
the lower dividends in 1998 because we reset the dividend rate in 1997 to an
indicated annual rate of $.80 per share when we spun off Gallaher.
On December 1, 1997, we increased the Common stock quarterly dividend by
5% to $.21 per share, or an indicated annual rate of $.84 per share. On December
1, 1998 we increased it again by 5% to $.22 per share, or an indicated annual
rate of $.88 per share.
FINANCIAL POSITION
At December 31, 1998, total debt increased $342.7 million to $1.5 billion.
Short-term debt increased $100.1 million and long-term debt increased $242.6
million. Our total debt to total capital ratio increased to 26.6% at year end
1998 from 22.2% at year end 1997.
During 1998, we issued $200 million of 65/8% Debentures, Due 2028 and $200
million of 61/4% Notes, Due 2008.
In 1998, we purchased or redeemed $175.1 million principal amount of our
debt, and in 1997 we purchased $95.8 million. (See Note 16.)
At December 31, 1998, $450 million of debt securities were available for
public sale under our shelf registration with the Securities and Exchange
Commission.
At year end 1998, we had $2.5 billion of long-term credit facilities,
substantially all of which remained unused. These facilities are available for
general corporate purposes, including acquisitions. They also support our
short-term borrowings in the commercial paper market.
We believe that our internally generated funds, together with access to
global credit markets, are more than adequate to meet our capital needs.
Working capital increased to $420.7 million in 1998 from $327.1 million in
1997. Increases in accounts receivable and inventories, primarily resulting from
the 1998 acquisitions, were the principal causes for the increase, but higher
levels of short-term debt tempered the increase. The increase in inventories
also reflects the customer inventory reduction programs in office products and
lower consumer demand in the golf club market. We believe that our 1998 working
capital level was adequate to support continued growth.
36
<PAGE>
FOREIGN EXCHANGE
We have investments in various foreign countries, principally the United
Kingdom, as well as Australia and Canada. Therefore, changes in the value of the
currencies of these countries affect our balance sheet and cash flow statements
when translated into U.S. dollars.
MARKET RISK
We are exposed to various market risks, including changes in foreign currency
exchange rates and interest rates. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as foreign currency
exchange rates and interest rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes. We enter into
financial instruments to manage and reduce the impact of changes in foreign
currency exchange rates and interest rates. The counterparties are major
financial institutions.
Foreign Exchange Contracts We enter into forward foreign exchange contracts
principally to hedge the currency fluctuations in transactions denominated in
foreign currencies. These contracts limit the risk that would otherwise result
from changes in exchange rates. We primarily hedge short-term intercompany
loans, intercompany purchases and dividends declared by foreign operating
companies. The periods of the forward foreign exchange contracts correspond to
the periods of the hedged transactions. We reflect any gains and losses on
forward foreign exchange contracts and the offsetting losses and gains from
hedged transactions on our income statement.
At December 31, 1998, we had outstanding forward foreign exchange
contracts to purchase $35 million and sell $201 million of various currencies
(principally pound sterling) with a weighted average maturity of 110 days. At
December 31, 1997, we had outstanding forward foreign exchange contracts to
purchase $72 million and sell $164 million in various currencies (principally
pound sterling) with a weighted average maturity of 121 days.
The estimated fair value of foreign currency contracts represents the
amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices. At December 31, 1998 and 1997, the
fair value of all outstanding contracts and the contract amounts were
essentially the same. A 10% fluctuation in exchange rates for these currencies
would change the fair value by approximately $17 million and $9 million,
respectively. However, since these contracts hedge foreign currency denominated
transactions, any change in the fair value of the contracts will equal the
changes in the underlying value of the transactions being hedged.
Interest Rates We enter into interest rate swap agreements in order to manage
our exposure to interest rate changes. The swaps involve the exchange of fixed
and variable interest rate payments without exchanging the notional principal
amount. We record the payments or receipts on the agreements as adjustments to
interest expense. At December 31, 1998 and 1997, we had outstanding interest
rate swap agreements denominated in dollars, maturing at various dates in 1999,
with an aggregate notional principal amount of $200 million. Under these
agreements, we receive a floating rate based on thirty day commercial paper
rates and pay a fixed interest rate. These swaps effectively convert our
interest rate on $200 million of debt from a variable rate into a fixed rate.
The fair value of these interest rate swap agreements represents the
estimated receipts or payments that would be made to terminate the agreements.
At December 31, 1998, we would have paid $4.2 million to terminate the
agreements, compared with $6.6 million in 1997. If the thirty day commercial
paper rates decreased 1%, it would increase the amount paid by approximately $1
million at December 31, 1998 and $3 million at December 31, 1997. We based the
fair value on dealer quotes, considering current interest rates.
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. The
estimated fair value of our total long-term debt (including current portion) at
December 31, 1998 was $1,252.3 million; in 1997 it was $1,013 million. If the
prevailing interest rates at December 31, 1998 and 1997 increased by 1%, that
would result in the fair value of our total long-term debt decreasing by
approximately $76 million and $51 million, respectively. We based fair values on
quoted market prices, where available, and on investment bankers' quotes using
current interest rates considering credit ratings and the remaining terms to
maturity.
See Notes 1 and 13 for a discussion of the accounting policies for
Derivative Financial Instruments and information on Financial Instruments,
respectively.
STOCKHOLDERS' EQUITY
Stockholders' equity at year end 1998 increased $80.4 million to $4.1
billion. This increase principally reflects net income partially offset by
dividends to stockholders and purchases of Common shares.
During 1998 and 1997, pursuant to a systematic share purchase program and other
open market purchases, we purchased 3.4 million and 2.5 million shares of Common
stock, respectively. At its July 29, 1997 meeting, our Board of Directors
authorized a systematic share purchase program principally to cover future stock
option exercises and other stock awards.
37
<PAGE>
FINANCIAL CONDITION
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENT
This annual report contains statements relating to future results. They are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. We caution readers 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:
o changes in general economic conditions,
o foreign exchange rate fluctuations,
o competitive product and pricing pressures,
o the impact of excise tax increases with respect to distilled spirits,
o regulatory developments,
o the uncertainties of litigation,
o changes in golf equipment regulatory standards,
o the impact of weather, particularly on the home products and golf brand
groups,
o expenses and disruptions related to shifts in manufacturing to different
locations and sources,
o delays in the integration of recent acquisitions,
o the timely resolution of the Year 2000 issue, and
o other risks and uncertainties detailed from time to time in the Company's
Securities and Exchange Commission filings.
QUARTERLY COMMON STOCK DIVIDEND PAYMENTS
Fortune Brands American Brands
----------------------------------------
1998 1997* 1997
- --------------------------------------------------------------------------------
Payment date Per share Per share Per share
- --------------------------------------------------------------------------------
March 1 $ .21 $ -- $ .50
June 1 .21 -- .50
September 1 .21 .20 --
December 1 .22 .21 --
- --------------------------------------------------------------------------------
$ .85 $ 1.41
================================================================================
QUARTERLY COMPOSITE COMMON STOCK PRICES
Fortune Brands American Brands
------------------------------------------------------------------
1998 1997* 1997
- --------------------------------------------------------------------------------
High Low High Low High Low
- --------------------------------------------------------------------------------
First 411 3/16 35 -- -- 53 7/8 48 3/8
Second 42 1/4 35 9/16 38 30 1/2 56 47 3/4
Third 391 5/16 25 1/4 37 5/16 32 5/8 -- --
Fourth 36 5/16 26 3/8 37 5/8 30 3/8 -- --
================================================================================
* From June 2, 1997, our initial trading date as Fortune Brands.
Our Common stock is listed on the New York Stock Exchange, its principal
market. The high and low prices are as reported in the consolidated
transaction reporting system.
38
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
FORTUNE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For years ended December 31 (In millions, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 5,240.9 $ 4,844.5 $ 4,717.7
Cost of products sold 2,667.9 2,540.4 2,401.1
Excise taxes on spirits and wine 443.7 418.7 453.2
Advertising, selling, general and administrative expenses 1,401.5 1,301.6 1,249.5
Amortization of intangibles 108.2 104.2 102.7
Restructuring charges -- 209.1 --
Interest and related expenses 102.7 116.7 165.5
Other (income) expenses, net 5.0 14.1 6.1
- --------------------------------------------------------------------------------------------------------
Income from continuing operations before income taxes 511.9 139.7 339.6
Income taxes 218.3 98.2 157.9
- --------------------------------------------------------------------------------------------------------
Income from continuing operations 293.6 41.5 181.7
Income from discontinued operations -- 65.1 315.1
Extraordinary items (30.5) (8.1) (10.3)
- --------------------------------------------------------------------------------------------------------
Net income $ 263.1 $ 98.5 $ 486.5
========================================================================================================
Earnings per Common share
Basic
Income from continuing operations $ 1.70 $ .24 $ 1.04
Income from discontinued operations -- .38 1.82
Extraordinary items (.18) (.05) (.06)
- --------------------------------------------------------------------------------------------------------
Net income $ 1.52 $ .57 $ 2.80
========================================================================================================
Diluted
Income from continuing operations $ 1.67 $ .23 $ 1.03
Income from discontinued operations -- .38 1.79
Extraordinary items (.18) (.05) (.06)
- --------------------------------------------------------------------------------------------------------
Net income $ 1.49 $ .56 $ 2.76
========================================================================================================
Dividends paid per Common share $ .85 $ 1.41 $ 2.00
========================================================================================================
Average number of Common shares outstanding
Basic 172.2 171.6 173.3
========================================================================================================
Diluted 176.2 173.3 176.1
========================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.39
39
<PAGE>
CONSOLIDATED BALANCE SHEET
FORTUNE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31 (In millions, except per share amounts) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 40.3 $ 54.2
Accounts receivable less allowances for discounts,
doubtful accounts and returns, 1998 $61.4; 1997 $54.3 919.9 862.0
Inventories
Bulk whiskey 338.0 338.1
Other raw materials, supplies and work in process 280.8 258.7
Finished products 468.8 358.4
- ------------------------------------------------------------------------------------------
1,087.6 955.2
Other current assets 217.5 224.2
- ------------------------------------------------------------------------------------------
Total current assets 2,265.3 2,095.6
- ------------------------------------------------------------------------------------------
Property, plant and equipment
Land and improvements 76.8 65.8
Buildings and improvements to leaseholds 529.8 494.8
Machinery and equipment 1,389.0 1,262.7
Construction in progress 165.3 106.8
- ------------------------------------------------------------------------------------------
2,160.9 1,930.1
Less accumulated depreciation 1,041.0 949.2
- ------------------------------------------------------------------------------------------
Property, plant and equipment, net 1,119.9 980.9
Intangibles resulting from business acquisitions,
net of cumulative amortization, 1998 $857.1; 1997 $747.7 3,761.3 3,674.1
Other assets 213.2 191.9
- ------------------------------------------------------------------------------------------
Total assets $7,359.7 $6,942.5
==========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.39
40
<PAGE>
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to banks $ 71.5 $ 36.8
Commercial paper 249.9 191.6
Current portion of long-term debt 183.3 176.2
Accounts payable 274.9 254.6
Accrued taxes 472.4 475.2
Accrued expenses and other liabilities 592.6 634.1
- ------------------------------------------------------------------------------------------
Total current liabilities 1,844.6 1,768.5
- ------------------------------------------------------------------------------------------
Long-term debt 981.7 739.1
Deferred income taxes 49.9 38.5
Postretirement and other liabilities 386.0 379.3
- ------------------------------------------------------------------------------------------
Total liabilities 3,262.2 2,925.4
- ------------------------------------------------------------------------------------------
Stockholders' equity
$2.67 Convertible Preferred stock 10.5 11.3
Common stock, par value $3.125 per share, 229.6 shares issued 717.4 717.4
Paid-in capital 147.6 151.1
Accumulated other comprehensive income 4.7 6.9
Retained earnings 5,245.4 5,129.7
Treasury stock, at cost (2,028.1) (1,999.3)
- ------------------------------------------------------------------------------------------
Total stockholders' equity 4,097.5 4,017.1
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $7,359.7 $6,942.5
==========================================================================================
</TABLE>
41
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
For years ended December 31 (In millions) 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 263.1 $ 98.5 $ 486.5
Income from discontinued operations -- (65.1) (315.1)
Extraordinary items 30.5 8.1 10.3
Restructuring charges -- 209.1 --
Depreciation and amortization 251.1 242.7 238.3
(Increase) decrease in accounts receivable (38.0) 29.8 (74.4)
(Increase) decrease in inventories (89.7) 31.9 (34.2)
Increase in other assets (20.6) (4.5) (5.1)
Increase (decrease) in accrued taxes 38.6 (27.8) 43.4
(Decrease) increase in accounts payable,
accrued expenses and other liabilities (63.1) (16.0) 20.3
Increase (decrease) in deferred income taxes 44.0 (74.8) (1.6)
Other operating activities, net (11.7) (5.6) (34.9)
- -------------------------------------------------------------------------------------------------
Net cash provided from continuing operating activities 404.2 426.3 333.5
- -------------------------------------------------------------------------------------------------
Investing activities
Additions to property, plant and equipment (251.9) (196.9) (199.7)
Acquisitions, net of cash acquired (271.8) (84.6) (700.3)
Proceeds from the disposition of property, plant and equipment 6.5 5.5 14.5
Proceeds from the disposition of operations, net of cash 17.0 48.0 5.9
Other investing activities, net (2.6) 0.4 12.3
- -------------------------------------------------------------------------------------------------
Net cash used by investing activities (502.8) (227.6) (867.3)
- -------------------------------------------------------------------------------------------------
Financing activities
Increase (decrease) in short-term debt, net 92.8 (506.4) 670.7
Issuance of long-term debt 624.1 18.6 604.7
Repayment of long-term debt (376.0) (756.0) (421.0)
Dividends to stockholders (147.4) (243.4) (348.4)
Cash purchases of Common stock for treasury (112.0) (90.0) (444.3)
Other financing activities, net 8.7 82.3 34.2
- -------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 90.2 (1,494.9) 95.9
- -------------------------------------------------------------------------------------------------
Effect of foreign exchange rate changes on cash (5.5) (6.4) (3.6)
Cash provided by discontinued operations -- 1,321.9 244.4
- -------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents $ (13.9) $ 19.3 $ (197.1)
=================================================================================================
Cash and cash equivalents at beginning of year $ 54.2 $ 34.9 $ 232.0
Cash and cash equivalents at end of year $ 40.3 $ 54.2 $ 34.9
=================================================================================================
Cash paid during the year for
Interest, net of capitalized amount $ 211.8 $ 126.1 $ 193.8
Income taxes $ 124.1 $ 300.6 $ 132.942
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
42
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FORTUNE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
$2.67 Accumulated
Convertible Other Treasury
Preferred Common Paid-in Comprehensive Retained Stock,
(In millions) Stock Stock Capital Income Earnings at Cost Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 14.1 $ 717.4 $ 171.6 $ (247.8) $ 4,887.3 $ (1,678.6) $ 3,864.0
Comprehensive income
Net income -- -- -- -- 486.5 -- 486.5
Changes during the year -- -- -- 43.7 -- -- 43.7
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- 43.7 486.5 -- 530.2
Dividends -- -- -- -- (348.4) -- (348.4)
Purchases -- -- -- -- -- (444.3) (444.3)
Conversion of preferred stock and
delivery of stock plan shares (1.2) -- (5.1) -- -- 80.8 74.5
- ----------------------------------------------------------------------------------------------------------------------------------
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 -- -- -- -- 98.5 -- 98.5
Changes during the year -- -- -- (49.7) -- -- (49.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- (49.7) 98.5 -- 48.8
Dividends -- -- -- -- (243.4) -- (243.4)
Purchases -- -- -- -- -- (86.2) (86.2)
Conversion of preferred stock and
delivery of stock plan shares (1.6) -- (15.3) -- -- 119.4 102.5
Shares issued in connection
with an acquisition -- -- (0.1) -- -- 9.6 9.5
Gallaher spin-off -- -- -- 260.7 249.2 -- 509.9
- ----------------------------------------------------------------------------------------------------------------------------------
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 -- -- -- -- 263.1 -- 263.1
Changes during the year -- -- -- (2.2) -- -- (2.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- -- (2.2) 263.1 -- 260.9
Dividends -- -- -- -- (147.4) -- (147.4)
Purchases -- -- -- -- -- (112.2) (112.2)
Conversion of preferred stock and
delivery of stock plan shares (0.8) -- (3.5) -- -- 83.4 79.1
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 10.5 $ 717.4 $ 147.6 $ 4.7 $ 5,245.4 $ (2,028.1) $4,097.543
==================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.43
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
1 SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation The consolidated financial statements include the accounts
of the Company and all majority-owned subsidiaries.
The consolidated financial statements are prepared in conformity with
generally accepted accounting principles, which require management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, sales and expenses for the reporting periods. Actual results for
future periods could differ from those estimates.
Cash and Cash Equivalents Highly liquid investments with an original maturity of
three months or less are included in cash and cash equivalents.
Inventories Inventories are priced at the lower of cost (principally first-in,
first-out, and average and minor amounts at last-in, first-out) or market. In
accordance with generally recognized trade practice, bulk whiskey inventories
are classified as current assets, although part of such inventories, due to the
duration of aging processes, ordinarily will not be sold within one year.
Property, Plant and Equipment Property, plant and equipment are carried at cost.
Depreciation is provided, principally on a straight-line basis, over the
estimated useful lives of the assets. Gains or losses resulting from
dispositions are included in income. Betterments and renewals which improve and
extend the life of an asset are capitalized; maintenance and repair costs are
expensed.
Intangibles Resulting From Business Acquisitions Intangibles resulting from
business acquisitions, comprising cost in excess of net assets of businesses
acquired, and brands and trademarks, are being amortized on a straight-line
basis over 40 years, except for intangibles acquired prior to 1971, which are
not being amortized because they are considered to have a continuing value over
an indefinite period. The Company periodically evaluates the recoverability of
intangibles resulting from business acquisitions and measures the amount of
impairment, if any, by assessing current and future levels of income and
undiscounted cash flows as well as other factors, such as business trends,
prospects and market and economic conditions.
Advertising Costs Advertising costs, which amounted to $318.6 million, $303
million and $290.2 million in 1998, 1997 and 1996, respectively, are principally
charged to expense as incurred.
Research and Development Research and development expenses, which amounted to
$54 million, $46.6 million and $34.2 million in 1998, 1997 and 1996,
respectively, are charged to expense as incurred.
Income Taxes Deferred tax liabilities or assets are established for temporary
differences between financial and tax reporting bases and are subsequently
adjusted to reflect changes in tax rates expected to be in effect when the
temporary differences reverse.
Deferred income taxes are not provided on undistributed earnings of
foreign subsidiaries, aggregating approximately $214.1 million at December 31,
1998, as such earnings are expected to be permanently reinvested in these
companies.
Foreign Currency Translation Foreign currency balance sheet accounts are
translated into U.S. dollars at the rates of exchange at the balance sheet date.
Income and expenses are translated at the average rates of exchange in effect
during the year. The related translation adjustments are made directly to a
separate component of the "Accumulated other comprehensive income" caption in
stockholders' equity.
Derivative Financial Instruments Derivative financial instruments are utilized
by the Company to reduce foreign currency exchange and interest rate risks. The
Company has established policies and procedures for risk assessment and the
approval, reporting and monitoring of derivative financial instrument
activities. The Company does not enter into financial instruments for trading or
speculative purposes.
Gains and losses on forward foreign exchange contracts used to hedge the
currency fluctuations on transactions denominated in foreign currencies and the
offsetting losses and gains on hedged transactions are recorded in the "Other
(income) expenses, net" caption in the income statement.
Gains and losses on forward foreign exchange contracts used to hedge a
portion of the Company's investment in foreign subsidiaries and the offsetting
losses and gains on the portion of the investment being hedged are recorded in
the "Accumulated other comprehensive income" caption in stockholders' equity.
Payments or receipts on interest rate swap agreements are recorded in the
"Interest and related expenses" caption in the income statement.
44
<PAGE>
Recently Issued Accounting Standards In June 1998, FAS Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued, to
be effective January 1, 2000. 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 its financial condition
and the disclosure requirements under this standard.
2 ACQUISITIONS
During 1998, acquisitions were made in home products, office products and
spirits and wine segments for an aggregate cost of $271.8 million, including
fees and expenses. In connection with these acquisitions, liabilities amounting
to $51 million were included at the dates of acquisition. The cost exceeded the
fair value of net assets acquired by $193.7 million.
During 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.
In January 1996, Cobra Golf Incorporated was acquired for an aggregate
cost of $712 million in cash, including fees and expenses. In connection with
this acquisition, liabilities amounting to $60 million were included at the date
of acquisition. The cost exceeded the fair value of net assets acquired by $657
million.
These operations have been included in consolidated results from the dates
of acquisition. Had the acquisitions been consolidated at the beginning of the
year prior to the acquisitions, 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 consolidated financial statements were reclassified to identify
Gallaher's international tobacco operations as discontinued operations for all
periods. Summarized data for the discontinued operations, net of allocation of
interest expense based on a ratio of Gallaher's net assets to consolidated net
assets of the Company, is as follows:
Results of Operations
(In millions, except per share amounts) 1997(a) 1996
- -------------------------------------------------------------------------------
Net sales $ 2,575.0 $ 6,861.6
- -------------------------------------------------------------------------------
Income before taxes $ 186.4 $ 484.7
Spin-off expenses (67.1) --
Income taxes (54.2) (169.6)
- -------------------------------------------------------------------------------
Income from discontinued operations $ 65.1 $ 315.1
===============================================================================
Earnings per Common share
Basic $ .38 $ 1.82
===============================================================================
Diluted $ .38 $ 1.79
===============================================================================
(a) Includes results through May 30, 1997.
4 SHORT-TERM BORROWINGS AND CREDIT FACILITIES
At December 31, 1998 and 1997, there were $321.4 million and $228.4 million of
short-term borrowings outstanding, respectively, comprised of notes payable to
banks and commercial paper. The weighted average interest rate on these
borrowings was 5.3% and 5.7%, respectively.
At December 31, 1998 and 1997, there were $40.8 million and $26.4 million
outstanding under committed bank credit agreements, which provide for unsecured
borrowings of up to $56 million and $63 million, respectively, for general
corporate purposes, including acquisitions.
In addition, the Company had uncommitted bank lines of credit, which
provide for unsecured borrowings for working capital of up to $28 million of
which $20.4 million was outstanding at year end.
See Note 13 for a description of the Company's use of financial
instruments.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
5 LONG-TERM DEBT
The components of long-term debt are as follows:
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Notes payable(a) $ 200.0 $ --
Revolving credit notes(a) 16.6 18.5
Other notes(b) 11.0 101.0
61/4% Notes, Due 2008 200.0 --
65/8% Debentures, Due 2028 200.0 --
81/2% Notes, Due 2003(c) 106.9 157.3
85/8% Debentures, Due 2021(c) 90.9 123.6
77/8% Debentures, Due 2023 150.0 150.0
71/2% Notes, Due 1999(c) 118.6 150.0
9% Notes, Due 1999(c) 62.8 73.3
91/4% Eurosterling Notes, Due 1998 -- 82.5
121/2% Sterling Loan Stock, Due 2009(c) -- 49.4
Miscellaneous 8.2 9.7
- --------------------------------------------------------------------------------
1,165.0 915.3
Less current portion 183.3 176.2
- --------------------------------------------------------------------------------
$ 981.7 $ 739.1
================================================================================
(a) The Company maintains revolving credit agreements expiring in 2002 with
various banks, which provide for unsecured borrowings of up to $2.5
billion. The interest rate is set at the time of each borrowing. A
commitment fee of .10% per annum is paid on the unused portion. The fee is
subject to increases up to a maximum of .20% per annum in the event the
Company's long-term debt rating falls below specified levels. Borrowings
under these agreements may be made for general corporate purposes,
including acquisitions and support for the Company's short-term borrowings
in the commercial paper market. The Company, in the event that it becomes
advisable, intends to exercise its rights under these agreements to
refinance $200 million of short-term notes payable; accordingly,
short-term notes payable in this amount have been classified as long-term
debt at December 31, 1998.
(b) The Other notes mature in 2001, with a weighted average coupon of 8.8 %.
(c) See Note 16.
Estimated payments for maturing debt during the next five years are as
follows: 1999, $183.3 million; 2000, $3.4 million; 2001, $13 million; 2002,
$216.5 million; and 2003, $107.6 million.
6 $2.67 CONVERTIBLE PREFERRED STOCK -- REDEEMABLE AT COMPANY'S OPTION
Shares of the $2.67 Convertible Preferred stock issued and outstanding at
December 31, 1998, 1997 and 1996 were 344,831 shares, 369,939 shares and 422,732
shares, respectively. Reacquired, redeemed or converted authorized shares that
are not outstanding are required to be retired or restored to the status of
authorized but unissued shares of preferred stock without series designation.
The holders of $2.67 Convertible Preferred stock are entitled to cumulative
dividends, three-tenths of a vote per share (in certain events, to the exclusion
of the Common shares), preference in liquidation over holders of Common stock of
$30.50 per share plus accrued dividends and convert each share of such stock
into 6.205 shares of Common stock. Authorized but unissued Common shares are
reserved for issuance upon such conversions, but treasury shares may be and are
delivered. Shares converted were 25,108 shares, 52,793 shares and 38,276 shares
during 1998, 1997 and 1996, respectively. The Company may redeem such Preferred
stock at a price of $30.50 per share, plus accrued dividends.
A cash dividend of $2.67 per share in the aggregate amounts of $0.9
million, $1.1 million and $1.2 million was paid in each of the years ended
December 31, 1998, 1997 and 1996, respectively.
7 CAPITAL STOCK
The Company has 750 million authorized shares of Common stock and 60 million
authorized shares of preferred stock.
There were 170,884,270 and 171,855,989 Common shares outstanding at
December 31, 1998 and 1997, respectively.
The cash dividends paid on the Common stock for the years ended December
31, 1998, 1997 and 1996 aggregated $146.5 million, $242.3 million and $347.2
million, respectively.
Treasury shares purchased and received as consideration for stock options
exercised amounted to 3,444,180 shares in 1998, 2,507,737 shares in 1997 and
10,108,848 shares in 1996. Treasury shares delivered in connection with exercise
of stock options and grants of other stock awards and conversion of preferred
stock and debentures amounted to 2,472,461 shares in 1998, 3,521,779 shares in
1997 and 2,544,262 shares in 1996. In connection with a 1997 acquisition,
276,162 shares were issued. At December 31, 1998 and 1997 there were 58,685,754
and 57,714,035 Common treasury shares, respectively.
46
<PAGE>
8 PREFERRED SHARE PURCHASE RIGHTS
Each outstanding share of Common stock also evidences one Preferred Share
Purchase Right ("Right"). The Rights will generally become exercisable only in
the event of an acquisition of, or a tender offer for, 15% or more of the Common
stock. If exercisable, each Right is exercisable for 1/100th of a share of
Series A Junior Participating Preferred Stock at an exercise price of $150.
Also, upon an acquisition of 15% or more of the Common stock, or upon an
acquisition of the Company or the transfer of 50% or more of its assets or
earning power, each Right (other than Rights held by the 15% acquiror, if
applicable), if exercisable, will generally be exercisable for common shares of
the Company or the acquiring company, as the case may be, having a market value
of twice the exercise price. In certain events, however, Rights may be exchanged
by the Company for Common stock at a rate of one share per Right. The Rights may
be redeemed at any time prior to an acquisition of 15% or more of the Common
stock at a redemption price of $.01 per Right. Until a Right is exercised, the
holder, as such, will have no voting, dividend or other rights as a stockholder
of the Company. The Rights expire on December 24, 2007.
All 2.5 million of the authorized Series A Preferred shares are reserved
for issuance upon exercise of Rights, and at December 31, 1998, outstanding
Rights would have been exercisable as described above in the aggregate for
1,708,843 of such shares.
9 STOCK PLANS
The 1990 Long-Term Incentive Plan, as amended, authorizes the granting to key
employees of the Company and its subsidiaries of incentive and nonqualified
stock options, stock appreciation rights, restricted stock, performance awards
and other stock-based awards, any of which may be granted alone or in
combination with other types of awards or dividend equivalents. Such grants may
be made on or before December 31, 1999 for up to 17 million shares of the Common
stock. The Company's Long-Term Incentive Plan for Key Employees of Subsidiaries
also authorizes the granting to key employees of the Company's subsidiaries of
similar types of awards other than stock options and stock appreciation rights,
and one million shares have been reserved for issuance upon payment of any
awards granted thereunder after December 31, 1990. Stock options and stock
appreciation rights may no longer be granted under the Company's 1986 Stock
Option Plan, but outstanding awards may continue to be exercised until their
expiration dates.
Stock options under the Plans have exercise prices equal to fair market
values at dates of grant. All options granted expire at the end of ten years
from date of grant. Options granted before November 1998 generally become vested
after one year. Options granted in November 1998 generally become vested
one-third each year over a three-year period. Stock appreciation rights, which
may be granted in conjunction with option grants, permit the optionees to
receive shares of Common stock, cash or a combination of shares and cash
measured by the difference between the option exercise price and the fair market
value of the Common stock at the time of exercise of such right.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for its stock plans as
allowed under FAS Statement No. 123, "Accounting for Stock-Based Compensation."
Had compensation cost for the fixed stock options granted in 1998, 1997 and 1996
been determined consistent with FAS No. 123, pro forma net income and earnings
per Common share would have been as follows:
(In millions, except per share amounts) 1998 1997 1997(a) 1996
- -------------------------------------------------------------------------------
Net income $252.9 $78.7 $90.6 $477.5
===============================================================================
Earnings per Common share
Basic $ 1.46 $ .45 $ .52 $ 2.75
===============================================================================
Diluted $ 1.43 $ .45 $ .52 $ 2.71
===============================================================================
(a) Excludes incremental fair value, as calculated under the Black-Scholes
option-pricing model, related to the adjustment of options in the Gallaher
spin-off.
These pro forma amounts are not necessarily indicative of future amounts.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Changes during the three years ended December 31, 1998 in shares under
options were as follows:
Weighted-Average
Options Exercise Price
- -------------------------------------------------------------------------------
Outstanding at January 1, 1996 9,919,560 $ 38.34
Granted 1,772,550 48.65
Exercised (1,721,260) 35.17
Lapsed (189,700) 44.84
- -------------------------------------------------------------------------------
Outstanding at December 31, 1996 9,781,150 40.64
Granted 99,100 52.75
Exercised (2,267,110) 37.04
Lapsed (43,000) 48.66
Cancelled (297,400) 46.65
- -------------------------------------------------------------------------------
Outstanding at May 30, 1997 7,272,740 41.63
Gallaher spin-off adjustment(a) 4,427,250 --
- -------------------------------------------------------------------------------
Outstanding at May 30, 1997 after
Gallaher spin-off 11,699,990 25.88
Granted 1,786,000 35.63
Exercised (1,325,538) 23.38
Lapsed (56,653) 30.26
- -------------------------------------------------------------------------------
Outstanding at December 31, 1997 12,103,799 27.57
Granted 2,612,300 35.01
Exercised (2,230,843) 25.58
Lapsed (69,930) 34.55
- -------------------------------------------------------------------------------
Outstanding at December 31, 1998 12,415,326 $29.45
===============================================================================
(a) On May 30, 1997, in connection with the Gallaher spin-off, the Company
adjusted the number of shares under options and the option exercise prices
to preserve, as closely as possible, the economic value of the options
that existed at the time of the spin-off.
Options exercisable at the end of each of the three years ended December
31, 1998 were as follows:
Options Weighted-Average
Exercisable Exercise Price
- --------------------------------------------------------------------------------
December 31, 1998 9,732,526 $27.92
December 31, 1997 10,166,612 $26.07
December 31, 1996 8,075,350 $38.93
The weighted-average fair values of options granted during 1998, 1997 and
1996 were $6.70, $7.66 and $7.11, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 1998,
1997 and 1996:
1998 1997 1996
- --------------------------------------------------------------------------------
Expected dividend yield 2.7% 2.6% 5.0%
Expected volatility 21.0% 20.9% 19.0%
Risk-free interest rate 4.8% 5.8% 5.9%
Expected term 4.5 Years 4.5 Years 5 Years
Options outstanding at December 31, 1998 were as follows:
Weighted-Average
Range Of Number Remaining Weighted-Average
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------------------------------------------------------------------------
$19.75 to $23.27 2,530,028 4.5 $21.49
26.03 to 29.10 3,498,885 4.8 27.42
30.30 to 38.69 6,386,413 9.0 33.72
- --------------------------------------------------------------------------------
$19.75 to $38.69 12,415,326 6.9 $29.45
================================================================================
Options exercisable at December 31, 1998 were as follows:
Number Weighted-Average
Exercisable Exercise Price
-------------------------------
2,530,028 $21.49
3,498,885 27.42
3,703,613 32.78
-------------------------------
9,732,526 $27.92
===============================
At December 31, 1998, performance awards were outstanding pursuant to
which up to 155,412 shares, 142,140 shares, 147,300 shares and 223,950 shares
may be issued in 1999, 2000, 2001 and 2002, respectively, depending on the
extent to which certain specified performance objectives are met. 81,569 shares,
40,240 shares and 45,890 shares were issued pursuant to performance awards
during 1998, 1997 and 1996, respectively. The costs of performance awards are
expensed over the performance period.
Compensation expense for stock based plans recorded for 1998, 1997 and
1996 was $4.3 million, $5 million and $1.9 million, respectively.
Shares available in connection with future awards under the Company's
stock plans at December 31, 1998, 1997 and 1996 were: 6,843,255; 8,216,471; and
7,193,139, respectively. Authorized but unissued shares are reserved for
issuance in connection with awards, but treasury shares may be and are
delivered.
48
<PAGE>
10 PENSION AND OTHER RETIREE BENEFITS
In 1998, the Company adopted FAS Statement No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." FAS 132 standardizes the
disclosure requirements for pensions and other postretirement benefits. Prior
years' information has been restated to conform with the new requirements.
The Company has a number of pension plans, principally in the United
States, covering substantially all employees. The plans provide for payment of
retirement benefits, mainly commencing between the ages of 60 and 65, and also
for payment of certain disability and severance benefits. After meeting certain
qualifications, an employee acquires a vested right to future benefits. The
benefits payable under the plans are generally determined on the basis of an
employee's length of service and earnings. Annual contributions to the plans are
sufficient to satisfy legal funding requirements.
The Company provides postretirement health care and life insurance
benefits to certain employees and retirees in the United States and certain
employee groups outside the United States. Most employees and retirees outside
the United States are covered by government health care programs.
The components of net pension and postretirement costs are as follows:
Pension Benefits Postretirement Benefits
- -------------------------------------------------------------------------------
(In millions) 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Service cost $ 31.4 $ 26.2 $ 24.0 $ 2.1 $ 1.9 $ 2.5
Interest cost 50.5 46.5 42.4 8.5 8.2 9.1
Expected return
on plan assets (66.3) (58.5) -- -- -- --
Net amortization
and deferral 4.2 3.3 4.3 (1.5) (2.8) (1.2)
- -------------------------------------------------------------------------------
$ 19.8 $ 17.5 $ 18.1 $ 9.1 $ 7.3 $ 10.4
===============================================================================
The reconciliation of beginning and ending balances of benefit obligations
and fair value of plan assets, and the funded status of the plans are as
follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
- ----------------------------------------------------------------------------------------
(In millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation
at beginning of year $ 718.7 $ 608.2 $ 125.2 $ 118.5
Service cost 31.4 26.2 2.1 1.9
Interest cost 50.5 46.5 8.5 8.2
Actuarial loss (gain) 22.8 67.4 (6.8) 0.7
Participants' contributions 4.3 4.2 0.9 0.9
Acquisitions 15.1 -- 1.2 --
Exchange rate changes 0.1 (2.1) (0.2) --
Benefits paid (39.6) (42.1) (9.3) (7.9)
Other items 0.4 10.4 -- 2.9
- ----------------------------------------------------------------------------------------
Benefit obligation
at end of year 803.7 718.7 121.6 125.2
- ----------------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets
at beginning of year 750.2 651.8 -- --
Actual return on plan assets 59.2 107.6 -- --
Employer contributions 14.3 27.5 8.4 7.0
Participants' contributions 4.3 4.2 0.9 0.9
Acquisitions 12.0 -- -- --
Exchange rate changes (1.2) 0.1 -- --
Benefits paid (35.4) (38.8) (9.3) (7.9)
Other items 3.1 (2.2) -- --
- ----------------------------------------------------------------------------------------
Fair value of plan assets
at end of year 806.5 750.2 -- --
- ----------------------------------------------------------------------------------------
Funded Status 2.8 31.5 (121.6) (125.2)
Unrecognized actuarial
loss (gain) 39.1 12.6 (24.0) (18.5)
Unrecognized transition gain (4.2) (5.9) -- --
Unrecognized prior
service cost 25.0 27.4 (2.7) (3.0)
Other (1.8) (2.2) -- --
- ----------------------------------------------------------------------------------------
Net amount recognized $ 60.9 $ 63.4 $(148.3) $(146.7)
========================================================================================
</TABLE>
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Amounts recognized in the balance sheet are as follows:
<TABLE>
<CAPTION>
Pension Benefits Postretirement Benefits
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In millions) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------
Pension benefit cost $ 73.9 $ 77.0 $ -- $ --
Accrued benefit liability (43.4) (43.4) (148.3) (146.7)
Intangible assets 17.5 16.8 -- --
Accumulated other
comprehensive income 12.9 13.0 -- --
- ----------------------------------------------------------------------------------------
Net amount recognized $ 60.9 $ 63.4 $(148.3) $(146.7)
========================================================================================
Weighted-average assumptions:
Discount rate 6.7% 7.0% 6.7% 7.0%
Expected long-term rate of
return on plan assets 9.5% 10.0% -- --
Rate of compensation
increase 4.3% 4.5% 6.0% 6.0%
========================================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $230.6 million, $215.3 million and $186 million,
respectively, as of December 31, 1998 and $234.7 million, $213.5 million and
$183.7 million, respectively, as of December 31, 1997.
The assumed health care cost trend rate used in measuring the health care
portion of the postretirement cost for 1999 is 7.75%, gradually declining to 5%
by the year 2007 and remaining at that level thereafter. Assumed health care
cost trend rates have a significant effect on the amounts reported for
postretirement benefits. A 1% increase in assumed health care cost trend rates
would increase the total of the service and interest cost components for 1998
and the postretirement benefit obligation as of December 31, 1998 by $1 million
and $10.8 million, respectively. A 1% decrease in assumed health care cost trend
rates would decrease the total of the service and interest cost components for
1998 and the postretirement benefit obligation as of December 31, 1998 by
approximately $0.9 million and $9.6 million, respectively.
The Company sponsors a number of defined contribution plans. Contributions
are determined under various formulas. Costs related to such plans amounted to
$22.7 million, $21.4 million and $18.1 million in 1998, 1997 and 1996,
respectively.
11 LEASE COMMITMENTS
Future minimum rental payments under noncancelable operating leases as of
December 31, 1998 are as follows:
(in millions)
- -------------------------------------------------------------------------------
1999 $ 48.0
2000 41.0
2001 35.5
2002 31.0
2003 25.7
Remainder 138.0
- -------------------------------------------------------------------------------
Total minimum rental payments 319.2
Less minimum rentals to be received
under noncancelable subleases 16.6
- -------------------------------------------------------------------------------
$302.6
===============================================================================
Total rental expense for all operating leases (reduced by minor amounts
from subleases) amounted to $49.8 million, $42.5 million and $43.3 million in
1998, 1997 and 1996, respectively.
12 INCOME TAXES
The components of income from continuing operations before income taxes are as
follows:
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Domestic operations $407.1 $120.8 $215.2
Foreign operations 104.8 18.9 124.4
- -------------------------------------------------------------------------------
$511.9 $139.7 $339.6
===============================================================================
A reconciliation of income taxes at the 35% federal statutory income tax
rate to income taxes as reported is as follows:
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Income taxes computed at
federal statutory income
tax rate $179.2 $ 48.9 $118.9
Other income taxes, net of
federal tax benefit 17.4 10.9 18.4
Goodwill amortization not
deductible for income
tax purposes 33.4 32.9 32.4
Miscellaneous, including
reversals of tax provisions
no longer required (11.7) 5.5 (11.8)
- -------------------------------------------------------------------------------
Income taxes as reported $218.3 $ 98.2 $157.9
===============================================================================
50
<PAGE>
Income taxes are as follows:
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Currently payable
Federal $106.7 $100.3 $104.4
Foreign 35.3 38.2 26.2
Other 25.3 21.1 24.5
Deferred
Federal and other 42.2 (42.3) 0.2
Foreign 8.8 (19.1) 2.6
- -------------------------------------------------------------------------------
$218.3 $ 98.2 $157.9
===============================================================================
The components of net deferred tax assets (liabilities) are as follows:
(In millions) 1998 1997
- -------------------------------------------------------------------------------
Current assets
Compensation and benefits $ 11.1 $ 12.6
Other reserves 28.3 30.6
Capitalized interest-inventory 13.5 12.7
Restructuring 20.5 30.1
Interest 1.9 14.8
Accounts receivable 14.8 14.1
Miscellaneous 29.3 26.8
- -------------------------------------------------------------------------------
119.4 141.7
- -------------------------------------------------------------------------------
Current liabilities
Inventories (10.3) (13.0)
Miscellaneous (10.5) (1.9)
- -------------------------------------------------------------------------------
(20.8) (14.9)
- -------------------------------------------------------------------------------
Deferred income taxes included in
Other current assets 98.6 126.8
- -------------------------------------------------------------------------------
Noncurrent assets
Compensation and benefits 27.3 18.8
Other retiree benefits 48.7 49.8
Other reserves 35.1 42.0
Foreign exchange 0.8 6.3
Miscellaneous 16.0 18.6
- -------------------------------------------------------------------------------
127.9 135.5
- -------------------------------------------------------------------------------
Noncurrent liabilities
Depreciation (63.1) (85.2)
Pensions (9.4) (11.5)
Trademark amortization (67.2) (60.9)
Miscellaneous (38.1) (16.4)
- -------------------------------------------------------------------------------
(177.8) (174.0)
- -------------------------------------------------------------------------------
Deferred income taxes (49.9) (38.5)
- -------------------------------------------------------------------------------
Net deferred tax asset $ 48.7 $ 88.3
===============================================================================
13 FINANCIAL INSTRUMENTS
The Company does not enter into financial instruments for trading or speculative
purposes. Financial instruments are used to reduce the impact of changes in
foreign currency exchange rates and interest rates. The principal financial
instruments used are forward foreign exchange contracts and interest rate swaps.
The counterparties are major financial institutions. Although the Company's
theoretical risk is the replacement cost at the then estimated fair value of
these instruments, management believes that the risk of incurring losses is
remote and that such losses, if any, would be immaterial.
The Company enters into forward foreign exchange contracts principally to
hedge currency fluctuations in transactions denominated in foreign currencies,
thereby limiting the Company's risk that would otherwise result from changes in
exchange rates. The periods of the forward foreign exchange contracts correspond
to the periods of the hedged transactions. The Company periodically enters into
forward foreign exchange contracts to hedge a portion of its net investments in
U.K. operating companies.
At December 31, 1998, the Company had outstanding forward foreign exchange
contracts to purchase $35 million and sell $201 million of various foreign
currencies (principally pound sterling), with maturities ranging from January 4,
1999 to January 28, 2000, with a weighted average maturity of 110 days. At
December 31, 1997, the Company also had outstanding forward foreign exchange
contracts to purchase $72 million and sell $164 million of various foreign
currencies (principally pound sterling), with maturities ranging from January 5,
1998 to November 30, 1998, with a weighted average maturity of 121 days.
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
The estimated fair value of foreign currency contracts represents the
amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices. At December 31, 1998 and 1997, the
difference between the contract amounts and fair values was immaterial.
The Company enters into interest rate swap agreements to manage its
exposure to interest rate changes. The swaps involve the exchange of fixed and
variable interest rate payments without exchanging the notional principal
amount.
At December 31, 1998 and 1997, the Company had outstanding interest rate
swap agreements denominated in dollars, maturing at various dates in 1999, with
an aggregate notional principal amount of $200 million. Under these agreements
the Company receives a floating rate based on thirty day commercial paper rates,
or a weighted average rate of 5.2% and 5.8% at December 31, 1998 and 1997,
respectively, and pays weighted average fixed interest rates of 7.8% at December
31, 1998 and 1997.
The fair value of these interest rate swap agreements represents the
estimated receipts or payments that would be made to terminate the agreements.
At December 31, 1998 and 1997, the Company would have paid $4.2 million and $6.6
million, respectively, to terminate the agreements. The fair value is based on
dealer quotes, considering current interest rates.
The estimated fair value of the Company's cash and cash equivalents, notes
payable to banks and commercial paper, approximates the carrying amounts due
principally to their short maturities.
The estimated fair value of the Company's $1,165 million and $915.3
million total long-term debt (including current portion) at December 31, 1998
and 1997 was approximately $1,252.3 million and $1,013 million, respectively.
The fair value is determined from quoted market prices, where available, and
from investment bankers using current interest rates considering credit ratings
and the remaining terms to maturity.
Concentration of credit risk with respect to accounts receivable is
limited because a large number of geographically diverse customers make up the
operating companies' domestic and international customer base, thus spreading
the credit risk.
14 RESTRUCTURING AND OTHER NONRECURRING CHARGES
Restructuring and other nonrecurring charges are as follows:
1997
----------------------------------------
Cost of Sales
(In millions) Restructuring Charges Total
- -------------------------------------------------------------------------------
Home products $ 79.5 $ 17.3 $ 96.8
Office products 82.5 4.8 87.3
- -------------------------------------------------------------------------------
Home and office products 162.0 22.1 184.1
Golf products 15.9 34.8 50.7
Spirits and wine 31.2 32.2 63.4
- -------------------------------------------------------------------------------
$209.1 $ 89.1 $298.2
===============================================================================
Home products include charges related to the disposition of certain
product lines and the rationalization of operations.
Office products include charges related to the rationalization of
operations, the discontinuance of certain product lines and lease cancellation
costs, partly offset by a $12.6 million pre-tax gain on the sale of nonstrategic
businesses.
Golf products include charges related to the discontinuance of certain
product lines and the rationalization of operations.
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, the termination of a foreign joint venture, and the sale or disposal
of certain facilities.
52
<PAGE>
Restructuring and other nonrecurring charges by category of expenditures
relates to the following:
1997
-----------------------------------------
Cost of Sales
(In millions) Restructuring Charges Total
- --------------------------------------------------------------------------------
Rationalization of operations
Employment termination
costs(a) $ 59.3 -- $ 59.3
Facilities closing costs 19.2 -- 19.2
Other 35.7 $ 19.1 54.8
Inventories -- 70.0 70.0
International distribution and
lease agreements 27.2 -- 27.2
Loss on disposal of fixed
assets and businesses 67.7 -- 67.7
- --------------------------------------------------------------------------------
$209.1 $ 89.1 $298.2
================================================================================
(a) Home products and office products combined workforce reduction of 7%, or
1,125 individuals, primarily production employees.
Reconciliation of the restructuring and other nonrecurring charges
liability is as follows:
Cost of Sales
(In millions) Restructuring Charges Total
- -------------------------------------------------------------------------------
1997 provision $209.1 $ 89.1 $298.2
Cash expenditures (20.5) (8.5) (29.0)
Non-cash write-offs (127.0) (80.6) (207.6)
- -------------------------------------------------------------------------------
Balance at December 31, 1997 61.6 -- 61.6
Cash expenditures (41.1) -- (41.1)
Non-cash write-offs (2.1) -- (2.1)
- -------------------------------------------------------------------------------
Balance at December 31, 1998 $ 18.4 $ -- $ 18.4
===============================================================================
During 1998, the program was substantially completed. The following
activities are in the process of being finalized: the completion of the Nogales,
Mexico operation related to office products' Swingline stapling production and a
significant portion of the home products' Master Lock assembly operations, and
the resultant reduction of workforces in the home and office products segments.
As of December 31, 1998, approximately 600 positions were eliminated. These
remaining restructuring activities are expected to be completed during 1999.
15 INFORMATION ON BUSINESS SEGMENTS
The Company's subsidiaries operate principally in the following business
segments:
Home products include kitchen and bathroom faucets, plumbing supply and
repair products manufactured, packaged or distributed by Moen, locks
manufactured by Master Lock, kitchen cabinets and bathroom vanities manufactured
by Aristokraft and Schrock, and tool storage products manufactured by Waterloo.
Office products include paper fastening, computer accessories, time
management systems, presentation products and other office products manufactured
by ACCO World subsidiaries.
Golf products include golf balls, shoes, gloves and clubs manufactured and
marketed by Titleist and FootJoy Worldwide and golf clubs manufactured and
marketed by Cobra.
Spirits and wine include products produced or imported by Jim Beam Brands
Worldwide subsidiaries.
The Company's subsidiaries operate principally in the United States, the
United Kingdom, Canada and Australia.
Net sales and operating company contribution for the years 1998, 1997 and
1996 and segment assets for the related year ends by business segments and by
geographic areas, are shown on page 58.
Operating company contribution is net sales less all costs and expenses
other than restructuring and other nonrecurring charges, amortization of
intangibles, corporate administrative expenses, interest and related expenses,
other (income) expenses, net and income taxes.
A reconciliation of operating company contribution to consolidated income
from continuing operations before income taxes is as follows:
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Operating company contribution $798.3 $746.4 $699.8
Restructuring and other
nonrecurring charges -- 298.2 --
Amortization of intangibles 108.2 104.2 102.7
Interest and related expenses 102.7 116.7 165.5
Non-operating expenses 75.5 87.6 92.0
- -------------------------------------------------------------------------------
Income from continuing operations
before income taxes as reported $511.9 $139.7 $339.6
===============================================================================
Reconciliation of segment assets to consolidated total assets is as
follows:
(In millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Segment assets $3,473.2 $3,113.7 $3,176.3
Intangibles resulting from
business acquisitions, net 3,761.3 3,674.1 3,730.7
Corporate 125.2 154.7 147.0
Net assets of discontinued
operations -- -- 683.3
- --------------------------------------------------------------------------------
$7,359.7 $6,942.5 $7,737.3
================================================================================
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Long-lived assets are as follows:(a)
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
United States $ 852.3 $724.2 $721.0
United Kingdom 194.8 203.1 194.1
Canada 21.2 22.9 23.2
Australia 16.8 4.3 6.1
Other countries 34.8 26.4 28.2
- -------------------------------------------------------------------------------
$1,119.9 $980.9 $972.6
===============================================================================
(a) Represents property, plant and equipment, net.
Depreciation is as follows:
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Home products $ 41.8 $ 42.3 $ 40.8
Office products 42.5 39.9 39.2
- -------------------------------------------------------------------------------
Home and office products 84.3 82.2 80.0
Golf products 20.0 16.3 13.4
Spirits and wine 35.7 37.1 39.4
Corporate 2.9 2.9 2.8
- -------------------------------------------------------------------------------
$142.9 $138.5 $135.6
===============================================================================
Amortization of intangibles is as follows:
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Home products $ 31.7 $ 29.9 $ 30.0
Office products 23.3 21.5 20.7
- -------------------------------------------------------------------------------
Home and office products 55.0 51.4 50.7
Golf products 17.4 17.8 16.3
Spirits and wine 35.8 35.0 35.7
- -------------------------------------------------------------------------------
$108.2 $104.2 $102.7
===============================================================================
Capital expenditures are as follows:
(In millions) 1998 1997 1996
- -------------------------------------------------------------------------------
Home products $ 57.6 $ 55.6 $ 60.6
Office products 107.2 43.0 40.9
- -------------------------------------------------------------------------------
Home and office products 164.8 98.6 101.5
Golf products 39.9 59.4 50.4
Spirits and wine 46.3 37.5 46.5
Corporate 0.9 1.4 1.3
- -------------------------------------------------------------------------------
$251.9 $196.9 $199.7
===============================================================================
16 EXTRAORDINARY ITEMS
During 1998, the Company purchased or redeemed 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.
In 1997, the Company purchased the following principal amounts of its
outstanding debt: $42.7 million of 8 1/2% Notes, Due 2003, $26.7 million of 9%
Notes, Due 1999 and $26.4 million of 8 5/8% Debentures, Due 2021. The
extinguishment of debt resulted in a charge of $8.1 million ($12.4 million
pre-tax), or five cents per share.
In 1996, the Company redeemed $149.6 million of its $150 million 7 5/8%
Eurodollar Convertible Debentures, Due 2001, at a redemption price of 103.8125%
of the principal amount plus accrued interest and redeemed its $150 million
9 1/8% Debentures, Due 2016, at a redemption price of 104.4375% of the principal
amount plus accrued interest. The extinguishment of debt resulted in a charge of
$10.3 million ($15.8 million pre-tax), or six cents per share.
54
<PAGE>
17 EARNINGS PER SHARE
Basic earnings per Common share are based on the weighted average number of
Common shares outstanding in each year and after preferred stock dividend
requirements. Diluted earnings per Common share assume that any dilutive
convertible debentures and convertible preferred shares outstanding at the
beginning of each year were converted at those dates, with related interest,
preferred stock dividend requirements and outstanding Common shares adjusted
accordingly. It also assumes that outstanding Common shares were increased by
shares issuable upon exercise of those stock options for which market price
exceeds exercise price, less shares which could have been purchased by the
Company with related proceeds. The Convertible Preferred stock was not included
in the computation of diluted earnings per Common share for 1997 since it would
have resulted in an antidilutive effect.
The computation of basic and diluted earnings per Common share for "Income
from continuing operations" is as follows:
(In millions, except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------
Income from continuing operations $293.6 $ 41.5 $181.7
Less: Preferred stock dividends 0.9 1.1 1.2
- -------------------------------------------------------------------------------
Income available to
Common stockholders - basic 292.7 40.4 180.5
Convertible Preferred stock
dividend requirements 0.9 -- 1.2
- -------------------------------------------------------------------------------
Income available to
Common stockholders
- diluted $293.6 $ 40.4 $181.7
===============================================================================
Weighted average number of
Common shares outstanding
- basic 172.2 171.6 173.3
Conversion of Convertible
Preferred stock 2.2 -- 1.8
Exercise of stock options 1.8 1.7 1.0
- -------------------------------------------------------------------------------
Weighted average number of
Common shares outstanding
- diluted 176.2 173.3 176.1
===============================================================================
Earnings per Common share
Basic $ 1.70 $ .24 $ 1.04
===============================================================================
Diluted $ 1.67 $ .23 $ 1.03
===============================================================================
18 COMPREHENSIVE INCOME
During 1998, the Company adopted FAS Statement No. 130, "Reporting Comprehensive
Income" and has elected to report Comprehensive Income in the Consolidated
Statement of Stockholders' Equity. Comprehensive Income is defined as net income
and other changes in stockholders' equity from transactions and other events
from sources other than stockholders.
The components of and changes in other comprehensive income (expense) are
as follows:
Accumulated
Foreign Minimum Other
Currency Pension Liability Comprehensive
(In millions) Adjustments Adjustment Income
- -------------------------------------------------------------------------------
Balance at January 1, 1996 $(234.6) $(13.2) $(247.8)
Changes during year
(including taxes of $41.3) 38.7 5.0 43.7
- -------------------------------------------------------------------------------
Balance at December 31, 1996 (195.9) (8.2) (204.1)
Comprehensive income changes
during year (including taxes
of $30.1) (44.9) (4.8) (49.7)
Gallaher spin-off 260.7 -- 260.7
- -------------------------------------------------------------------------------
Balance at December 31, 1997 19.9 (13.0) 6.9
Changes during year
(net of taxes of $7.1) (7.4) 5.2 (2.2)
- -------------------------------------------------------------------------------
Balance at December 31, 1998 $ 12.5 $ (7.8) $ 4.7
===============================================================================
55
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded)
FORTUNE BRANDS, INC. AND SUBSIDIARIES
19 PENDING LITIGATION
Tobacco Litigation and Indemnification On December 22, 1994, the Company sold
The American Tobacco Company subsidiary to Brown & Williamson Tobacco
Corporation, a wholly-owned subsidiary of B.A.T Industries p.l.c. In connection
with the sale, Brown & Williamson Tobacco Corporation and The American Tobacco
Company ("the Indemnitors") agreed to indemnify the Company against claims
including legal expenses arising from smoking and health and fire safe cigarette
matters relating to the tobacco business of The American Tobacco Company.
The Company is a defendant in numerous actions based upon allegations that
human ailments have resulted from tobacco use. Management believes that there
are meritorious defenses to the pending actions and these actions are being
vigorously contested. However, it is not possible to predict the outcome of the
pending litigation, and it is possible that some of these actions could be
decided unfavorably. Management is unable to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome of the
pending litigation. Management believes that the pending actions will not have a
material adverse effect upon the results of operations, cash flows or financial
condition of the Company as long as the Indemnitors continue to fulfill their
obligations to indemnify the Company under the aforementioned indemnification
agreement.
Other Litigation In addition to the lawsuits described above, the Company and
its subsidiaries are defendants in lawsuits associated with their business and
operations. It is not possible to predict the outcome of the pending actions,
but management believes that there are meritorious defenses to these actions and
that these actions will not have a material adverse effect upon the results of
operations, cash flows or financial condition of the Company. These actions are
being vigorously contested.
20 ENVIRONMENTAL
The Company is subject to laws and regulations relating to the protection of the
environment.
The Company provides for expenses associated with environmental
remediation obligations when such amounts are probable and can be reasonably
estimated. Such accruals are adjusted as new information develops or
circumstances change and are not discounted.
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.
56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Fortune Brands, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, cash flows and stockholders' equity present
fairly, in all material respects, the consolidated financial position of Fortune
Brands, Inc. and Subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the management of Fortune Brands, Inc.; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
11 Madison Avenue
New York, New York 10010
February 3, 1999
REPORT OF MANAGEMENT
To the Stockholders of Fortune Brands, Inc.
We have prepared the consolidated balance sheet of Fortune Brands, Inc. and
Subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, cash flows and stockholders' equity for the years ended
December 31, 1998, 1997 and 1996. The financial statements have been prepared in
accordance with generally accepted accounting principles. Financial information
elsewhere in this Annual Report is consistent with that in the financial
statements.
The system of internal controls of the Company and its subsidiaries is
designed to provide reasonable assurances that the financial records are
adequate and can be relied upon to provide information for the preparation of
financial statements and that established policies and procedures are carefully
followed.
Independent accountants are elected annually by the stockholders of the
Company to audit the financial statements. PricewaterhouseCoopers LLP,
independent accountants, are currently engaged to perform such audit. Their
audit is in accordance with generally accepted auditing standards and includes
tests of transactions and selective tests of internal accounting controls.
The Audit Committee of the Board of Directors, consisting solely of
outside directors, meets periodically with the independent accountants, internal
auditors and management to review accounting, auditing, and financial reporting
matters. The auditors have direct access to the Audit Committee.
/s/ Thomas C. Hays
Thomas C. Hays
Chairman of the Board and
Chief Executive Officer
/s/ Craig P. Omtvedt
Craig P. Omtvedt
Senior Vice President and
Chief Accounting Officer
57
<PAGE>
INFORMATION ON BUSINESS SEGMENTS(1)
FORTUNE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In millions) 1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BUSINESS SEGMENTS
Net sales
Home products $1,624.4 $1,394.0 $1,374.1 $1,306.8 $1,270.6 $1,119.5
Office products 1,387.7 1,294.2 1,228.7 1,206.1 1,049.7 977.2
- ------------------------------------------------------------------------------------------------
Home and office products 3,012.1 2,688.2 2,602.8 2,512.9 2,320.3 2,096.7
Golf products 962.9 911.6 811.4 579.3 507.1 452.7
Spirits and wine 1,265.9 1,244.7 1,303.5 1,288.6 1,268.2 1,194.6
- ------------------------------------------------------------------------------------------------
Ongoing operations 5,240.9 4,844.5 4,717.7 4,380.8 4,095.6 3,744.0
Other businesses(2) -- -- -- 547.3 1,281.4 1,438.2
- ------------------------------------------------------------------------------------------------
$5,240.9 $4,844.5 $4,717.7 $4,928.1 $5,377.0 $5,182.2
================================================================================================
Operating company contribution
Home products $ 252.5 $ 222.9 $ 214.1 $ 208.4 $ 206.6 $ 190.3
Office products 134.0 128.1 116.3 105.5 95.0 87.7
- ------------------------------------------------------------------------------------------------
Home and office products 386.5 351.0 330.4 313.9 301.6 278.0
Golf products 142.9 138.2 125.3 84.2 74.4 64.6
Spirits and wine 268.9 257.2 244.1 241.9 255.1 231.1
- ------------------------------------------------------------------------------------------------
Ongoing operations 798.3 746.4 699.8 640.0 631.1 573.7
Other businesses(2) -- -- -- 6.8 4.0 33.1
- ------------------------------------------------------------------------------------------------
$ 798.3 $ 746.4 $ 699.8 $ 646.8 $ 635.1 $ 606.8
================================================================================================
Segment assets(3)
Home products $ 826.2 $ 735.8 $ 752.7 $ 738.1 $ 686.5 $ 658.7
Office products 1,011.5 861.4 856.9 794.1 750.8 658.8
- ------------------------------------------------------------------------------------------------
Home and office products 1,837.7 1,597.2 1,609.6 1,532.2 1,437.3 1,317.5
Golf products 667.6 617.1 579.8 361.9 315.3 286.7
Spirits and wine 967.9 899.4 986.9 939.4 932.2 956.5
- ------------------------------------------------------------------------------------------------
Ongoing operations 3,473.2 3,113.7 3,176.3 2,833.5 2,684.8 2,560.7
Other businesses(2) -- -- -- -- 527.6 796.4
- ------------------------------------------------------------------------------------------------
$3,473.2 $3,113.7 $3,176.3 $2,833.5 $3,212.4 $3,357.1
================================================================================================
GEOGRAPHIC AREAS
Net sales(4)
United States $3,814.7 $3,432.4 $3,330.6 $3,116.5 $2,917.2 $2,749.1
United Kingdom 551.7 499.5 522.8 498.6 492.9 417.9
Canada 235.6 223.9 194.2 184.7 183.6 169.1
Australia 158.4 199.6 190.9 160.6 141.3 106.2
Other countries 480.5 489.1 479.2 420.4 360.6 301.7
- ------------------------------------------------------------------------------------------------
Ongoing operations $5,240.9 $4,844.5 $4,717.7 $4,380.8 $4,095.6 $3,744.0
================================================================================================
</TABLE>
(1) See Note 15 for further Information on Business Segments.
(2) Other businesses included retail distribution and housewares sold during
1995 and optics sold in 1994.
(3) Represents total assets excluding intercompany receivables and intangibles
resulting from business acquisitions, net.
(4) Net sales are attributed to countries based on location of customer.
58
<PAGE>
SIX-YEAR CONSOLIDATED SELECTED FINANCIAL DATA
FORTUNE BRANDS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In millions, except per share amounts
and number of Common stockholders) 1998(2) 1997(2) 1996(2) 1995 1994(3) 1993(2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operating Data(1)
Net sales $5,240.9 $4,844.5 $4,717.7 $4,928.1 $5,377.0 $5,182.2
Gross profit 2,129.3 1,885.4 1,863.4 1,816.4 1,971.1 1,947.0
Depreciation and amortization 251.1 242.7 238.3 224.0 244.5 240.4
Operating company contribution 798.3 746.4 699.8 646.8 635.1 606.8
Interest and related expenses 102.7 116.7 165.5 136.6 173.0 188.2
Income taxes 218.3 98.2 157.9 171.5 119.8 126.7
Income (loss) from continuing operations 293.6 41.5 181.7 185.9 (78.8) 120.1
Income from discontinued operations -- 65.1 315.1 357.2 812.9 548.1
Extraordinary items (30.5) (8.1) (10.3) (2.7) -- --
Cumulative effect of accounting changes(4) -- -- -- -- -- (198.4)
Net income(5) 263.1 98.5 486.5 540.4 734.1 469.8
Earnings per Common share
Basic
Continuing operations(5) $1.70 $.24 $1.04 $.99 $(.40) $.59
Discontinued operations -- .38 1.82 1.91 4.03 2.71
Extraordinary items (.18) (.05) (.06) (.01) -- --
Accounting changes(4) -- -- -- -- -- (.98)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $1.52 $.57 $2.80 $2.89 $3.63 $2.32
=================================================================================================================================
Diluted
Continuing operations(5) $1.67 $.23 $1.03 $.98 $(.40) $.59
Discontinued operations -- .38 1.79 1.89 4.03 2.71
Extraordinary items (.18) (.05) (.06) (.01) -- --
Accounting changes(4) -- -- -- -- -- (.98)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $1.49 $.56 $2.76 $2.86 $3.63 $2.32
=================================================================================================================================
Common Share Data(1)
Dividends paid $146.5 $242.3 $347.2 $376.2 $401.7 $397.5
Dividends paid per share $.85 $1.41 $2.00 $2.00 $1.9925 $1.97
Average number of shares outstanding 172.2 171.6 173.3 186.9 201.6 201.8
Book value per share $23.92 $23.31 $21.48 $21.61 $22.95 $21.01
Number of stockholders, December 31(6) 41,603 46,537 52,832 56,769 60,611 63,537
=================================================================================================================================
Balance Sheet Data(1)
Inventories $1,087.6 $955.2 $1,037.9 $950.9 $1,156.0 $1,198.7
Current assets(7) 2,265.3 2,095.6 2,842.1 2,112.5 3,726.1 2,597.7
Working capital(7) 420.7 327.1 774.0 651.7 1,673.4 1,110.6
Property, plant and equipment, net 1,119.9 980.9 972.6 904.3 979.7 1,065.0
Intangibles, net 3,761.3 3,674.1 3,730.7 3,103.2 3,346.4 3,429.9
Net assets of discontinued operations -- -- -- 520.7 334.9 1,320.3
Total assets 7,359.7 6,942.5 7,737.3 6,833.4 8,557.9 8,598.0
Short-term debt 504.7 404.6 782.2 470.0 553.7 333.2
Long-term debt 981.7 739.1 1,598.3 1,063.0 1,485.5 2,492.0
Stockholders' equity 4,097.5 4,017.1 3,676.0 3,864.0 4,633.1 4,256.0
Capital expenditures 251.9 196.9 199.7 175.6 157.6 178.5
=================================================================================================================================
</TABLE>
(1) See pages 28 through 38 of Financial Section.
(2) See Notes 2 and 3. 1993 includes the acquisition in December of
Invergordon Distillers Group PLC.
(3) The years 1994 and prior reflect as discontinued operations, the results
of the former domestic tobacco subsidiary, The American Tobacco Company,
and the former Franklin life insurance business.
(4) Principally represents a change in the method of accounting for
postretirement benefits.
(5) Net income and both basic and diluted earnings per Common share in 1994
include $241.3 million and $1.20, respectively, on the loss on disposal of
businesses.
(6) On January 31, 1999, there were 41,285 Common stockholders of record, not
necessarily reflecting beneficial ownership.
(7) 1996, 1994 and 1993 include net assets of discontinued operations as
current assets.
59
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
The following is a list of subsidiaries of Registrant as of the date
hereof and the state or other jurisdiction of incorporation of each. Except as
indicated below, each subsidiary does business under its own name. Indentations
indicate that the voting securities of a subsidiary are wholly owned by the
subsidiary immediately preceding the indentation, unless otherwise indicated.
The names of certain subsidiaries are omitted. Such subsidiaries would
not, if considered in the aggregate as a single subsidiary, constitute a
significant subsidiary within the meaning of Item 601(b)(21)(ii) of Regulation
S-K.
State or Other
Jurisdiction
Subsidiary of Incorporation
- -------------- ----------------
ACCO World Corporation Delaware
ACCO Brands, Inc. Delaware
ACCO Canada Inc. Ontario, Canada
Plymouth Tool & Stamping Limited Ontario, Canada
ACCO Europe PLC England
ACCO-Rexel Group Services Limited England
ACCO Australia Pty. Limited Australia
ACCO Eastlight Limited England
ACCO Manufacturing Limited Australia
ACCO-Rexel Limited (1) Republic of Ireland
ACCO UK Limited England
Apollo Audio Visual Europe S.A. Belgium
Apollo Presentation Products Limited England/Wales
Hetzel Vermogensverwaltungs GmbH Germany
Hetzel GmbH & Co. KG (Limited Partnership) Germany
Nobo Group Limited England
ACCO France S.A. France
Elite Optics Limited England
- --------------------
(1) 66.67% owned by ACCO-Rexel Group Services Limited and 33.33% owned by ACCO
World Corporation.
<PAGE>
State or Other
Jurisdiction
Subsidiary of Incorporation
- -------------- ----------------
NOBO Limited England
Nobo Holdings BV Netherlands
NOBO BV Netherlands
Nobo (UK) Limited England
Velos- Perforex Limited England
ACCO Mexicana S.A. de C.V. Mexico
Day-Timers, Inc. Delaware
Day-Timers of Canada, Ltd. Canada
Day-Timers Pty. Limited Australia
International Business Controls, B.V. Netherlands
ACCO Italia S.p.A. Italy
Acushnet Company Delaware
Acushnet Cayman Limited Cayman Islands
Acushnet Lionscore, Ltd. (2) Cayman Islands
Acushnet Foot-Joy (Thailand) Limited (3) Thailand
Acushnet Foreign Sales Corporation Barbados
Acushnet International Inc. Delaware
Acushnet Canada Inc. Canada
Acushnet Manufacturing Inc./Fabrication Acushnet Inc. Canada
Acushnet Golf Thailand Ltd. Thailand
Acushnet GmbH Germany
Acushnet-Danmark ApS Denmark
Acushnet France S.A. France
Acushnet Nederland B.V. Netherlands
Acushnet Osterreich GmbH Austria
Acushnet South Africa (Pty.) Ltd. South Africa
Acushnet Sverige AB Sweden
Acushnet Japan, Inc. Japan
Acushnet Limited England
Cobra Golf Incorporated Delaware
Cobra Golf Export Incorporated Barbados
Fortune Brands Finance Canada Ltd. Ontario, Canada
Fortune Brands Finance Europe B.V. Netherlands
Fortune Brands International Corporation Delaware
- --------------------
(2) 40% owned by Acushnet Cayman Limited.
(3) 70% owned by Acushnet Company.
<PAGE>
State or Other
Jurisdiction
Subsidiary of Incorporation
- -------------- ----------------
Jim Beam Brands Worldwide, Inc. Delaware
Alberta Distillers Limited Alberta, Canada
Carrington Distillers Limited Ontario, Canada
Featherstone & Co. Limited Ontario, Canada
JBB (Asia-Pacific) Pty. Limited New South Wales, Australia
JBB (Asia-Pacific) Superannuation Pty. Limited New South Wales, Australia
Barwang International Pty Ltd (4) Australia
JBB (Greater Europe) PLC (5) Scotland
Jim Beam Brands Co. Delaware
James B. Beam Distilling International Co., Inc. Barbados
JBB Spirits (New York) Inc. New York
John de Kuyper & Son, Incorporated Delaware
Wood Terminal Company Delaware
MasterBrand Industries, Inc. Delaware
MasterBrand Cabinets, Inc. Delaware
Aristokraft Inc. Delaware
Schrock Cabinet Company Delaware
Master Lock Company Delaware
Master Lock de Nogales, S.A. de C.V. Mexico
Master Lock Europe, S.A. (6) France
Moen Incorporated Delaware
Creative Specialties, Inc. California
Creative Specialties International California
Creative Specialties International Company Limited (7) Hong Kong
Moen China, Limited Hong Kong
Moen de Mexico, S.A. de C.V. Mexico
Moen Guangzhou Faucet Co., Ltd. (8) China
Moen, Inc. Ontario, Canada
Moen of Pennsylvania, Inc. Delaware
21st Century Companies, Inc. Delaware
Waterloo Industries, Inc. Delaware
May Tag & Label Corp. Delaware
1700 Insurance Company Ltd. Bermuda
- --------------------
(4) 50% owned by JBB (Asia-Pacific) Pty. Limited.
(5) 428,055,999 shares owned by Jim Beam Brands Worldwide, Inc.;
1 share owned by Jim Beam Brands Co.
(6) 99.68% owned by Master Lock Company.
(7) 60% owned by Creative Specialties, Inc.
(8) 60% owned by Moen Incorporated.
EXHIBIT 23(i)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference into (a) the Registration
Statement on Form S-8 (Registration No. 33-64071) relating to the Defined
Contribution Plan of Fortune Brands, Inc. and Participating Operating Companies,
the Registration Statement on Form S-8 (Registration No. 33-64075) relating to
the MasterBrand Industries, Inc. Hourly Employee Savings Plan, the Registration
Statement on Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term
Incentive Plan of Fortune Brands, Inc., 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. of our
report dated February 3, 1999, relating to the consolidated financial
statements, which appears in the 1998 Annual Report to Stockholders of Fortune
Brands, Inc., which is incorporated in this Annual Report on Form 10-K. We also
consent to the incorporation by reference of our report on the consolidated
financial statement schedule which appears in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
11 Madison Avenue
New York, New York 10010
March 30, 1999
EXHIBIT 24
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated with their
respective names below, hereby constitute and appoint MARK A. ROCHE, EDWARD P.
SMITH and A. ROBERT COLBY, and each of them severally, the attorneys-in-fact of
the undersigned with full power to them and each of them to sign for and in the
name of the undersigned in the capacities indicated below the Annual Report on
Form 10-K of Fortune Brands, Inc. for the fiscal year ended December 31, 1998,
and any and all amendments thereto:
Signature Title Date
/s/ Thomas C. Hays
- ---------------------- Chairman of the Board February 8, 1999
Thomas C. Hays and Chief Executive
Officer (principal
executive officer) and
Director
/s/ John T. Ludes
- ---------------------- Vice Chairman and February 22, 1999
John T. Ludes Director
/s/ Norman H. Wesley
- ---------------------- President and Chief February 8, 1999
Norman H. Wesley Operating Officer and
Director
/s/ Gilbert L. Klemann, II
- ---------------------- Executive Vice February 10, 1999
Gilbert L. Klemann, II President - Corporate
and Director
/s/ Dudley L. Bauerlein, Jr.
- ---------------------- Senior Vice President February 11, 1999
Dudley L. Bauerlein, Jr. and Chief Financial
Officer (principal
financial officer)
<PAGE>
/s/ Craig P. Omtvedt
- --------------------- Senior Vice President February 10, 1999
Craig P. Omtvedt and Chief Accounting
Officer (principal
accounting officer)
/s/ Eugene R. Anderson
- ---------------------- Director February 22, 1999
Eugene R. Anderson
/s/ Patricia O. Ewers
- ---------------------- Director February 22, 1999
Patricia O. Ewers
/s/ John W. Johnstone, Jr.
- ---------------------- Director February 22, 1999
John W. Johnstone, Jr.
/s/ Sidney Kirschner
- ---------------------- Director February 22, 1999
Sidney Kirschner
/s/ Gordon R. Lohman
- ---------------------- Director February 26, 1999
Gordon R. Lohman
/s/ Charles H. Pistor, Jr.
- ---------------------- Director February 22, 1999
Charles H. Pistor, Jr.
/s/ Eugene A. Renna
- ---------------------- Director February 22, 1999
Eugene A. Renna
/s/ Anne M. Tatlock
- ---------------------- Director February 23, 1999
Anne M. Tatlock
<PAGE>
/s/ John W. Thompson
- ---------------------- Director February 23, 1999
John W. Thompson
/s/ Peter M. Wilson
- ---------------------- Director February 19, 1999
Peter M. Wilson
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT
OF INCOME AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> $ 40
<SECURITIES> 0
<RECEIVABLES> 981
<ALLOWANCES> 61
<INVENTORY> 1,088
<CURRENT-ASSETS> 2,265
<PP&E> 2,161
<DEPRECIATION> 1,041
<TOTAL-ASSETS> 7,360
<CURRENT-LIABILITIES> $1,845
<BONDS> 982
<COMMON> 717
0
11
<OTHER-SE> 3,370
<TOTAL-LIABILITY-AND-EQUITY> 7,360
<SALES> $5,241
<TOTAL-REVENUES> 5,241
<CGS> 2,668
<TOTAL-COSTS> 2,668
<OTHER-EXPENSES> 444
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> 512
<INCOME-TAX> 218
<INCOME-CONTINUING> 294
<DISCONTINUED> 0
<EXTRAORDINARY> (31)
<CHANGES> 0
<NET-INCOME> $ 263
<EPS-PRIMARY> $1.52
<EPS-DILUTED> $1.49
</TABLE>
EXHIBIT 99
List of Pending Cases
The following sets forth the principal parties to the proceedings
referred to in Item 3 of this Form 10-K in which Registrant is currently named
as a defendant, the court in which such proceedings are pending and the date
such proceedings were instituted against Registrant:
Adkins v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Akers v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Allen v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Altman v. Fortune Brands, Inc., et al., Supreme Court of New York, New
York County, December 16, 1997;
Anderson, C. v. Fortune Brands, Inc., et al., Supreme Court of New
York, Kings County, October 30, 1997;
Anderson, D. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, July 31, 1998;
Anderson, J. v. The American Tobacco Company, et al., Circuit Court of
Knox County, Tennessee, May 23, 1997;
Anes v. The American Tobacco Co., et al., Court of Common Pleas for the
County of Philadelphia, Pennsylvania, July 1, 1997;
Arnett v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, May 28, 1998;
Austin v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Avallone v. The American Tobacco Company, et al., Superior Court of New
Jersey, Middlesex County, April 23, 1998;
<PAGE>
Badillo v. The American Tobacco Company, et al., United States District
Court for the District of Nevada, October 8, 1997;
Badon v. R.J.R. Nabisco, Inc., et al., Judicial District Court, Parish
of Cameron, Louisiana, May 23, 1994;
Baum v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Beckom (State of Tennessee) v. The American Tobacco Company, et al.,
United States District Court, Eastern Division of Tennessee, May 8, 1997;
Bellows v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, December 1, 1997;
City of Birmingham v. The American Tobacco Company, et al., United
States District Court of the Northern District of Alabama, May 28, 1997;
Bishop v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Bland v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Bocook v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Boggess v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Bolin v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Boone v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
2
<PAGE>
Bowden v. The American Tobacco Company, et al., United States District
Court, Western District of Virginia, January 6, 1999;
Bradford v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Brammer v. The American Tobacco Company, et al., United States District
Court for the Southern District of Iowa, June 30, 1997;
Brogan v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Brown, A. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Brown, E. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Brown, W. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Brown-Jones v. The American Tobacco Company, et al., Superior Court of
Georgia, Richmond County, January 13, 1998;
Brumfield v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Bryant v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Burdette v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Byus v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
3
<PAGE>
Caiazzo v. The American Tobacco Company, et al., Supreme Court of New
York, Richmond County, September 26, 1997;
Cameron v. The American Tobacco Company, et al., Supreme Court of New
York, Nassau County, June 30, 1997;
Carll v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, July 20, 1997;
Carter v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Castano v. The American Tobacco Company, et al., United States District
Court for the Eastern District of Louisiana, March 29, 1994;
Cavanagh v. The American Tobacco Company, et al., Supreme Court of New
York, Richmond County, May 6, 1997;
Chamberlain v. The American Tobacco Company, et al., United States
District Court for the Northern District of Ohio, August 14, 1996;
Childers v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Clay, D. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Clay, J. v. The American Tobacco Company, et al., United States
District Court for the Southern District of Illinois, May 22, 1997;
Clayton v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Coleman, I. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, October 1, 1998;
Coleman, L. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, October 1, 1998;
4
<PAGE>
Colfield v. The American Tobacco Co., et al., United States District
Court for the Eastern District of California, September 3, 1998;
Collins v. The American Tobacco Company, et al., Supreme Court of New
York, Westchester County, May 16, 1997;
Combs v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Compton v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Condon v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, May 13, 1997;
Conley v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Connor v. The American Tobacco Company, et al., Second Judicial
District Court of Bernalillo County, New Mexico, October 10, 1996;
Construction Laborers of Greater St. Louis Welfare Fund, et al. v. The
American Tobacco Co., et al., United States District Court for the Eastern
District of Missouri, October 20, 1998;
Cook v. The American Tobacco Co., et al., United States District Court
for the Eastern District of California, September 3, 1998;
Cooper v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Cotroneo v. Fortune Brands, Inc., Supreme Court of New York, New York
County, October 21, 1997;
Cottrill, C. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, October 1, 1998;
5
<PAGE>
Cottrill, L. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, October 1, 1998;
County of Allegheny v. The American Tobacco Co., et al., United States
District Court for the Western District of Pennsylvania, March 12, 1999;
Coyne v. American Brands, et al., United States District Court for the
Northern District of Ohio, September 16, 1996;
Craig v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Crane v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, April 4, 1997;
Creech v. The American Tobacco Company, et al., Supreme Court of New
York, Richmond County, January 6, 1997;
Creekmoore v. Brown & Williamson Tobacco Corporation, et al., Superior
Court of the State of North Carolina, Buncombe County, July 31, 1998;
Crites v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Cunningham v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, October 1, 1998;
Daley v. The American Tobacco Company, et al., Circuit Court of Cook
County, Illinois, July 7, 1997;
Daly v. The American Tobacco Company, et al., Court of Common Pleas for
the County of Philadelphia, Pennsylvania, July 1, 1997;
Daniels v. The American Tobacco Company, et al., United States District
Court, Southern District of California, April 2, 1998;
DaSilva v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, April 3, 1997;
6
<PAGE>
Davis v. R.J. Reynolds Tobacco Company, et al., Iowa District Court,
Polk County, October 23, 1997;
Dean v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Dempsey v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
DiBacco v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
DiGirolamo v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, October 1, 1998;
Duffield v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Duncan v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Dzak v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, December 8, 1996;
Eanes v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Edwards v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
El-Haddi v The American Tobacco Company, et al., Court of Common Pleas
for the County of Philadelphia, Pennsylvania, May 29, 1997;
Emig v. The American Tobacco Company, et al., 18th Judicial District
Court of Sedgwick County, Kansas, Civil Department, February 6, 1997;
Evans, B. v. Philip Morris Incorporated, et al., Circuit Court of
Jasper County, Mississippi, June 10, 1997;
7
<PAGE>
Evans, R. v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, August 23, 1996;
Ferguson v. The American Tobacco Company, et al., Court of Common Pleas
for the County of Philadelphia, Pennsylvania, May 29, 1997;
Fife v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Fink v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, June 6, 1997;
Folkman v. The American Tobacco Co., et al., Court of Common Pleas for
the County of Philadelphia, Pennsylvania, October 28, 1998;
Freeman v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Fuller v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Gauze v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Geiger v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, May 1, 1997;
Gelfond v. Fortune Brands, Inc., et al., Supreme Court of New York, New
York County, May 1, 1998;
Gillespie v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Gilman v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Glaser v. The American Tobacco Co., et al., Court of Common Pleas for
the County of Philadelphia, Pennsylvania, July 21, 1997;
8
<PAGE>
Golden v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, July 3, 1997;
Graham v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Greco v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, June 27, 1997;
Greenfield v. The American Tobacco Co., et al., Court of Common Pleas
for the County of Philadelphia, Pennsylvania, January 28, 1998;
Gruder v. Fortune Brands, Inc., et al., Supreme Court of New York,
Kings County, December 17, 1997;
Guilloteau v. The American Tobacco Company, et al., Supreme Court of
New York, Kings County, December 1, 1997;
Hall v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Hansen, C., v. The American Tobacco Company, et al., Supreme Court of
New York, Suffolk County, October 16, 1997;
Hansen, P. v. The American Tobacco Company, et al., United States
District Court for the State of Arkansas, Western Division, November 4, 1996
(under caption "McGinty");
Harbert v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Harding v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Harley v. The American Tobacco Co., et al., Court of Common Pleas for
the County of Philadelphia, Pennsylvania, August 28, 1998;
9
<PAGE>
Heaster v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Hellen v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, August 23, 1996;
Helt v. The American Tobacco Co., et al., United States District Court
for the Eastern District of California, September 3, 1998;
Hibbs v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Hieneman v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Hodge v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Hodges v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Holbrook v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Huffman v. American Tobacco Company, et al., Circuit Court of the State
of West Virginia, Kanawha County, February 13, 1998;
Humphreys v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Husty v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Inzerilla v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, July 16, 1996;
Jackson v. Philip Morris Incorporated, et al., District Court of Salt
Lake County, Utah, March 10, 1998;
10
<PAGE>
Jaust v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, September 10, 1997;
Jenkins v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Jividen v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Mason County, January 13, 1999;
Johnson v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Jones v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Juliano v. The American Tobacco Company, et al., Supreme Court of New
York, Richmond County, July 24, 1997;
Keenan v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, September 15, 1997;
Keene v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Kennon v. Brown & Williamson Tobacco Corp., et al., District Court for
East Baton Rouge, State of Louisiana, October 3, 1997;
Kestenbaum v. The American Tobacco Company, et al., Supreme Court of
New York, New York County, May 23, 1997;
Keyes v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
King, D. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
11
<PAGE>
King, J. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Knutsen v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, October 11, 1996;
Kotlyar v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, December 1, 1997;
Krochtengel v. The American Tobacco Co., et al., Supreme Court of New
York, Kings County, July 15, 1998 (under caption "Newberg");
Kupat Holim Clalit v. Philip Morris, Inc., et al., Jerusalem District
Court, September 28, 1998;
Labriola v. The American Tobacco Company, et al., Supreme Court of New
York, Suffolk County, May 28, 1997;
Larkin v. The American Tobacco Company, et al., Court of Common Pleas
of Pennsylvania, Allegheny County, June 27, 1997;
LeBrun v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Lehman v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, July 10, 1997;
Leibstein v. The American Tobacco Company, et al., Supreme Court of New
York, Nassau County, June 30, 1997;
Leiderman v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, July 2, 1997;
Lennon v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, November 5, 1997;
Lien v. The American Tobacco Company, et al., Supreme Court of New
York, Suffolk County, April 28, 1997;
Likens v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
12
<PAGE>
Litke v. American Brands, Inc., et al., Supreme Court of New York,
Kings County, May 7, 1997;
Little v. Brown & Williamson Tobacco Corp., et al., Court of Common
Pleas, Charleston, South Carolina, May 26, 1998;
Lombardo v. The American Tobacco Company, et al., Supreme Court of New
York, Nassau County, June 6, 1997;
Long, J. v. The American Tobacco Company, et al., Supreme Court of New
York, Bronx County, September 24, 1997;
Long, S. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
LoPardo v. The American Tobacco Company, et al., Supreme Court of New
York, Nassau County, September 25, 1997;
Lucca v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, February 3, 1997;
Lynch v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, September 24, 1997;
Magnus v. The American Tobacco Company, et al., United States District
Court for the Eastern District of New York, May 6, 1998;
Maisonet v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, May 12, 1997;
Mallett v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Margolin v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, November 22, 1996;
Martin v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, June 30, 1997;
Maynard v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
13
<PAGE>
McCormick v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
McCune v. The American Tobacco Company, et al., United States District
Court for the Southern District of West Virginia, January 31, 1997;
McGuinness v. The American Tobacco Company, et al., Supreme Court of
New York, New York County, June 30, 1997;
McLane v. The American Tobacco Company, et al., Supreme Court of New
York, Richmond County, May 13, 1997;
McNelly v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Mednick v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, August 20, 1997;
Miller, B. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, July 31, 1998;
Miller, J. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, October 1, 1998;
Mishk v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, May 2, 1997;
Mitchem v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Morris v. R.J. Reynolds, et al., Circuit Court of the State of West
Virginia, Kanawha County, March 13, 1998;
Mounts v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Murphy v. The American Tobacco Company, et al., United States District
Court for the District of Nevada, Southern Division, January 6, 1998;
14
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National Asbestos Workers Medical Fund v. The American Tobacco Company,
et al., United States District Court, Eastern District of New York, March 27,
1988;
Newell v. The American Tobacco Company, et al., Supreme Court of New
York, Suffolk County, October 3, 1997;
Newkirk v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Norton v. Brown & Williamson Tobacco Corporation, et al., United States
District Court for the Southern District of Indiana, May 3, 1996;
O'Hara v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, February 23, 1998;
Orr v. The American Tobacco Company, et al., Court of Common Pleas for
the County of Philadelphia, Pennsylvania, May 29, 1997;
Owen v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Panama (Republic of Panama) v. The American Tobacco Co., et al., United
States District Court of Louisiana, August 25, 1998;
Parsons v. AC&S, Inc., et al., Circuit Court of the State of West
Virginia, Kanawha County, February 27, 1998;
Pennetti v. The American Tobacco Co., et al., Court of Common Pleas for
the County of Philadelphia, Pennsylvania, April 13, 1998;
Perez v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, June 23, 1997;
Perri v. The American Tobacco Company, et al., Supreme Court of New
York, Nassau County, October 17, 1997;
Peterson v. The American Tobacco Company, et al., Circuit Court of the
First Circuit, Hawaii, February 6, 1997;
15
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Phillips v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Piccione v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, September 29, 1997;
Piscitello v. Philip Morris Incorporated, et al., Superior Court of New
Jersey Law Division, Middlesex County, July 28, 1997;
Portnoy v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, October 21, 1997;
Price v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Ramsey v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Randolph v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Reitano v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, August 22, 1996;
Rico v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, November 30, 1998;
Rinaldi v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, January 6, 1997;
Ritchie v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Ritenour v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Rose, G. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
16
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Rose, N. v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, December 18, 1996;
Roseff v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, December 2, 1997;
Rubinobitz v. The American Tobacco Company, et al., Supreme Court of
New York, Nassau County, May 28, 1997;
Sanders v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Schulhoff v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, October 7, 1997;
Schwartz, I. v. The American Tobacco Company, et al., Supreme Court of
New York, Nassau County, May 19, 1997;
Schwartz, P. v. The American Tobacco Company, et al., Supreme Court New
York, Kings County, December 9, 1996;
Scott v. The American Tobacco Company, et al., United States District
Court for the Eastern District of Louisiana, Orleans Parish, May 28, 1996;
Senzer v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, May 13, 1997;
Shamblen v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Shapiro v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, June 17, 1997;
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 for
the County of Philadelphia, Pennsylvania, December 5, 1997;
Siegel v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, August 22, 1996;
17
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Simmons v. The American Tobacco Company, et al., Court of Common Pleas
for the County of Philadelphia, Pennsylvania, April 1, 1998;
Smith, B.J. v. The American Tobacco Company, et al., Supreme Court of
New York, Queens County, August 27, 1997;
Smith, C. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Sola v. The American Tobacco Company, et al., Supreme Court of New
York, Bronx County, July 16, 1996;
Sopsher, C. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, October 1, 1998;
Sopsher, C. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, October 1, 1998;
Speece v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Sprung v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, May 13, 1997;
Standish v. The American Tobacco Company, Supreme Court of New York,
Bronx County, July 11, 1997;
Stern v. Liggett Group, Inc., Supreme Court of New York, New York
County, January 29, 1997;
Stockton v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Stone v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Sumpter v. American Tobacco Company, et al., Superior Court of Indiana,
Marion County, February 26, 1998;
18
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Surgeon v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Sweeney v. The American Tobacco Co., et al., Court of Common Pleas,
State of Pennsylvania, Allegheny County, October 30, 1998;
Tantum v. The American Tobacco Company, et al., Court of Common Pleas
for the County of Philadelphia, Pennsylvania, December 21, 1998;
Tepper v. Philip Morris Incorporated, et al., Superior Court of New
Jersey, Law Division, Bergen County, May 28, 1997;
Thomas v. The American Tobacco Co., et al., Circuit Court, State of
Missouri, Jefferson County, October 9, 1998;
Thompson, B. v. The American Tobacco Co., et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Thompson, E. v. The American Tobacco Company, et al., Circuit Court of
the State of West Virginia, Kanawha County, July 31, 1998;
Thompson, G. v. The American Tobacco Co., et al., Court of Common Pleas
for the County of Philadelphia, Pennsylvania, October 30, 1997;
Thompson, J. v. American Tobacco Company, Inc., et al., State of
Minnesota District Court, County of Ramsey Judicial District, September 4, 1996
(under caption "Masepohl");
Tiscavitch v. The American Tobacco Co., et al., Court of Common Pleas
for the County of Philadelphia, Pennsylvania, May 28, 1998;
Tranquill v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
University of South Alabama v. The American Tobacco Company, et al.,
United States District Court, Southern Division of Alabama, May 23, 1997;
19
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Upshur v. The American Tobacco Company, et al., Court of Common Pleas
for the County of Philadelphia, Pennsylvania, October 10, 1997;
Utah Laborers, et al. v. The American Tobacco Company, et al., United
States District Court for the District of Utah, June 4, 1998;
Valentin v. Fortune Brands, Inc., et al., Supreme Court of New York,
Queens County, September 2, 1997;
Vance v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Van Fossen v. The American Tobacco Co., et al., United States District
Court for the Eastern District of California, September 3, 1998;
Vaughn v. Philip Morris, Inc., et al., United States District Court for
the Western District of Virginia, December 17, 1998;
Wagner v. The American Tobacco Company, et al., Supreme Court of New
York, Kings County, April 17, 1997;
Walgreen v. The American Tobacco Company, et al., Supreme Court of New
York, New York County, May 23, 1997;
Walls v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Wayne v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, July 31, 1998;
Weese v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Werner v. Fortune Brands, Inc., et al., Supreme Court of New York,
Queens County, December 12, 1997;
Whaley v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
20
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Whiddon v. The American Tobacco Company, Inc., et al., 36th Judicial
District Court, Parish of Beauregard, Louisiana, December 19, 1997;
Wilkinson v. The American Tobacco Company, et al., Circuit Court,
Putnam County, West Virginia, January 19, 1999;
Williams v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 28, 1998;
Wills v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Wiseman v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Woods, D. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Woods, H. v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Wright v. The American Tobacco Company, et al., Circuit Court of the
State of West Virginia, Kanawha County, October 1, 1998;
Young v. The American Tobacco Company, et al., Civil District Court for
the Parish of Orleans, Louisiana, November 12, 1997;
Zarudsky v. The American Tobacco Company, et al., Supreme Court of New
York, Nassau County, May 28, 1997;
Zeringue v. The American Tobacco Co., et al., District Court of
Louisiana, Jefferson Parish, September 9, 1998; and
Zuzalski v. The American Tobacco Company, et al., Supreme Court of New
York, Queens County, April 3, 1997.
21
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List of Cases Terminated
With regard to proceedings of the above types which have been
terminated and not previously reported as such:
Aksamit v. Brown & Williamson Tobacco Corporation, et al., which was
previously pending in the United States District Court for the District of South
Carolina, and instituted on November 20, 1997, was voluntarily dismissed without
prejudice on June 18, 1998;
Coyle v. The American Tobacco Company, et al., which was previously
pending in the United States District Court for the Northern District of Nevada,
and instituted on January 26, 1998, was dismissed without prejudice on August
12, 1998;
Cresser v. The American Tobacco Company, et al., which was previously
pending in the Supreme Court of New York, Kings County, and instituted on
October 10, 1996, was dismissed per stipulation with prejudice on November 19,
1998;
Demos v. John Doe/Manufacturer, which was previously pending in the
United States District Court for the District of Connecticut, and instituted on
September 11, 1997, was dismissed on appeal by the U.S. Court of Appeals for the
Second Circuit on November 9, 1998 and no Petition of Certiorari was filed with
the Supreme Court of the United States within the statutory filing period;
Gallup v. The American Tobacco Company, et al., which was previously
pending in the United States District Court for the Northern District of Nevada,
and instituted on May 21, 1998, was voluntarily dismissed by the plaintiffs on
August 25, 1998;
State of Hawaii v. Brown & Williamson Tobacco Corporation, et al.,
which was previously pending in the Circuit Court of the First Circuit, Hawaii,
and instituted on January 31, 1997, was dismissed on December 10, 1998 pursuant
to the Master Settlement Agreement entered into by certain U.S. tobacco
companies, including Brown & Williamson Tobacco Corporation ("MSA");
Herrera v. The American Tobacco Company, et al., which was previously
pending in the Fourth Judicial District
22
<PAGE>
of Utah County, Utah, and was instituted on January 28, 1998, was dismissed by
the plaintiffs without prejudice on October 1, 1998;
Ieyoub (State of Louisiana) v. The American Tobacco Company, et al.,
which was previously pending in the District Court of Calcasieu Parish,
Louisiana, and instituted on March 13, 1996, was dismissed pursuant to the MSA
on December 11, 1998;
State of Iowa v. The American Tobacco Company, et al., which was
previously pending in the District Court of Iowa, Polk County, and instituted on
November 27, 1996, was dismissed pursuant to the MSA on December 7, 1998;
Kelley (State of Michigan) v. The American Tobacco Company, et al.,
which was previously pending in the Circuit Court of Ingham County, Michigan,
and instituted on August 21, 1996, was dismissed pursuant to the MSA on December
7, 1998;
Knowles v. The American Tobacco Company, et al., which was previously
pending in the Civil District Court of Louisiana, Parish of Orleans County, and
instituted on June 30, 1997, was voluntarily dismissed by the plaintiffs without
prejudice on December 28, 1998;
Landry v. The American Tobacco Company, et al., which was previously
pending in the District Court for East Baton Rouge, State of Louisiana, and
instituted on May 18, 1998, was voluntarily dismissed by the plaintiffs in
September, 1998;
Lyons v. Brown & Williamson Tobacco Company, et al., which was
previously pending in the Superior Court of Georgia, Fulton County, and
instituted on May 27, 1997, was voluntarily dismissed without prejudice on
December 7, 1998;
McGraw (State of West Virginia) v. The American Tobacco Company, et
al., which was previously pending in the Circuit Court of the State of West
Virginia, Kanawha County, and instituted on September 20, 1994, was dismissed
pursuant to the MSA on December 11, 1998;
State of Missouri v. The American Tobacco Company, et al., which was
previously pending in the Circuit Court of Missouri, St. Louis County, and
instituted on May 12, 1997, was dismissed pursuant to the MSA on March 5, 1999;
23
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State of Nevada v. Philip Morris Incorporated, et al., which was
previously pending in the Second Judicial District of Nevada, Washoe County, and
instituted on May 21, 1997, was dismissed pursuant to the MSA on December 10,
1998;
State of New Mexico v. The American Tobacco Company, et al., which was
previously pending in the First Judicial District of New Mexico, Santa Fe
County, and instituted on May 27, 1997, was dismissed pursuant to the MSA on
December 11, 1998;
State of New York v. Philip Morris, Incorporated, et al., which was
previously pending in the United States District Court, Southern District of New
York, and instituted on January 27, 1997, was dismissed pursuant to the MSA on
December 23, 1998;
Oklahoma (State of Oklahoma) v. The American Tobacco Company, et al.,
which was previously pending in the District Court for Cleveland County,
Oklahoma, and instituted on August 22, 1996, was dismissed pursuant to the MSA
on December 1, 1998;
Commonwealth of Puerto Rico v. Brown & Williamson Tobacco Company, et
al., which was previously pending in the United States District Court, Division
of Puerto Rico, and instituted on June 17, 1997, was dismissed pursuant to the
MSA on December 9, 1998;
Rhode Island (State of Rhode Island) v. Brown & Williamson as
Successor, which was previously pending in the Superior Court of Providence,
Rhode Island, and instituted on July 17, 1997, was dismissed pursuant to the MSA
on December 17, 1998;
Rivenburgh v. The American Tobacco Company, et al., which was
previously pending in the United States District Court for the Southern District
of Nevada, and instituted on January 6, 1998, was voluntarily dismissed by the
plaintiffs on November 6, 1998;
State of South Carolina v. Brown & Williamson Tobacco Company, et al.,
which was previously pending in the Court of Common Pleas of South Carolina,
Richmond County, and instituted on May 12, 1997, was dismissed pursuant to the
MSA on December 31, 1998;
24
<PAGE>
Sparks v. Brown & Williamson Tobacco Corp., et al., which was
previously pending in the Court of Common Pleas for Trumbull County, Ohio, and
instituted on July 16, 1998, was voluntarily dismissed on July 30, 1998;
Tucker v. The American Tobacco Company, et al., which was previously
pending in the United States District Court for the Northern District of Nevada,
and was instituted on January 26, 1998, was dismissed without prejudice on
August 12, 1998;
Ulrich, S. v. The American Tobacco Company, et al., which was
previously pending in the United States District Court for the Southern District
of Nevada, and was instituted on January 6, 1998, was voluntarily dismissed by
the plaintiffs on November 6, 1998;
State of Utah v. The American Tobacco Company, et al., which was
previously pending in the United States District Court for the District of Utah,
Central Division, and instituted on September 30, 1996, was dismissed pursuant
to the MSA on January 6, 1999; and
White v. The American Tobacco Company, et al., which was previously
pending in the United States District Court for the Southern District of
Mississippi, Western Division, and instituted on April 18, 1997, was voluntarily
dismissed by the plaintiffs without prejudice on September 18, 1998.
25
