UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission file number 1-9076
ended March 31, 1999
FORTUNE BRANDS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3295276
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (203) 698-5000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
The number of shares outstanding of the registrant's Common stock, par value
$3.125 per share, at April 30, 1999 was 167,062,940 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
- ------ --------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
March 31, December 31,
1999 1998
----------- ------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 43.6 $ 40.3
Accounts receivable, net 930.0 919.9
Inventories
Bulk whiskey 331.9 338.0
Other raw materials, supplies and
work in process 271.3 280.8
Finished products 482.7 468.8
-------- --------
1,085.9 1,087.6
Other current assets 247.3 217.5
-------- --------
Total current assets 2,306.8 2,265.3
Property, plant and equipment, net 1,103.8 1,119.9
Intangibles resulting from
business acquisitions, net 3,700.4 3,761.3
Other assets 218.5 213.2
-------- --------
Total assets $7,329.5 $7,359.7
======== ========
See Notes to Condensed Consolidated Financial Statements.
-1-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 58.1 $ 71.5
Commercial paper 448.3 249.9
Current portion of long-term debt 182.8 183.3
Accounts payable 261.9 274.9
Accrued taxes 491.8 472.4
Accrued expenses and other liabilities 489.3 592.6
-------- -------
Total current liabilities 1,932.2 1,844.6
Long-term debt 974.4 981.7
Deferred income taxes 51.2 49.9
Postretirement and other liabilities 385.2 386.0
-------- --------
Total liabilities 3,343.0 3,262.2
-------- --------
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 10.4 10.5
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 144.8 147.6
Accumulated other comprehensive income (18.9) 4.7
Retained earnings 5,263.6 5,245.4
Treasury stock, at cost (2,130.8) (2,028.1)
-------- --------
Total stockholders' equity 3,986.5 4,097.5
-------- --------
Total liabilities and
stockholders' equity $7,329.5 $7,359.7
======== ========
See Notes to Condensed Consolidated Financial Statements.
-2-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended March 31, 1999 and 1998
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
1999 1998
-------- -------
Net sales $1,292.3 $1,203.5
Cost of products sold 677.7 618.7
Excise taxes on spirits and wine 96.7 87.1
Advertising, selling, general and
administrative expenses 364.3 346.5
Amortization of intangibles 27.3 26.3
Interest and related expenses 25.3 25.1
Other (income) expenses, net 0.9 2.1
-------- --------
Income before income taxes and
extraordinary items 100.1 97.7
Income taxes 44.0 44.7
-------- --------
Income before extraordinary items 56.1 53.0
Extraordinary items - (8.4)
-------- --------
Net income $ 56.1 $ 44.6
======== ========
Earnings per Common share
Basic
Income before extraordinary items $.33 $ .31
Extraordinary items - (.05)
---- -----
Net income $.33 $ .26
==== =====
Diluted
Income before extraordinary items $.32 $ .30
Extraordinary items - (.05)
---- -----
Net income $.32 $ .25
==== =====
Dividends paid per Common share $.22 $.21
==== ====
Average number of Common shares outstanding
Basic 169.9 172.3
===== =====
Diluted 173.2 177.1
===== =====
See Notes to Condensed Consolidated Financial Statements.
-3-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months Ended March 31, 1999 and 1998
-----------------------------------------------------
(In millions)
(Unaudited)
1999 1998
--------- ---------
Operating activities
Net income $ 56.1 $ 44.6
Extraordinary items - 8.4
Depreciation and amortization 63.8 62.1
Increase in accounts receivable (15.5) (24.4)
Increase in inventories (5.8) (54.6)
Decrease in accounts payable, accrued
expenses and other liabilities (98.5) (74.5)
Increase in accrued taxes 25.0 14.7
Other operating activities, net (22.8) (17.6)
------ ------
Net cash provided (used) by operating activities 2.3 (41.3)
------ ------
Investing activities
Additions to property, plant and equipment (38.7) (49.5)
Acquisitions, net of cash acquired - (65.3)
Proceeds from disposition of operations - 16.0
Other investing activities, net 0.8 (1.0)
------ ------
Net cash used by investing activities (37.9) (99.8)
------ ------
Financing activities
Increase in short-term debt, net 187.4 194.9
Issuance of long-term debt 0.4 200.3
Repayment of long-term debt (7.8) (119.2)
Dividends to stockholders (37.9) (36.4)
Cash purchases of Common stock for treasury (110.3) (16.9)
Other financing activities, net 4.6 35.5
------ ------
Net cash provided by financing activities 36.4 258.2
------ ------
Effect of foreign exchange rate changes on cash 2.5 2.5
------ ------
Net increase in cash and cash equivalents 3.3 119.6
Cash and cash equivalents at beginning of period 40.3 54.2
------ ------
Cash and cash equivalents at end of period $ 43.6 $173.8
====== ======
See Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the Three Months Ended March 31, 1999 and 1998
---------------------------------------------------
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
$2.67 Accumulated
Convertible other Treasury
Preferred Common Paid-in comprehensive Retained stock,
stock stock capital income earnings at cost Total
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $11.3 $717.4 $151.1 $ 6.9 $5,129.7 $(1,999.3) $4,017.1
Comprehensive income
Net income - - - - 44.6 - 44.6
Changes during the period - - - 9.1 - - 9.1
----- ------ ------ ----- -------- --------- --------
Total comprehensive income - - - 9.1 44.6 - 53.7
----- ------ ------ ----- -------- --------- --------
Dividends - - - - (36.4) - (36.4)
Purchases - - - - - (17.7) (17.7)
Conversion of preferred stock and
delivery of stock plan shares (0.3) - (1.8) - - 53.9 51.8
----- ------ ------ ----- -------- --------- --------
Balance at March 31, 1998 $11.0 $717.4 $149.3 $16.0 $5,137.9 $(1,963.1) $4,068.5
===== ====== ====== ===== ======== ========= ========
Balance at December 31, 1998 $10.5 $717.4 $147.6 $4.7 $5,245.4 $(2,028.1) $4,097.5
Comprehensive income
Net income - - - - 56.1 - 56.1
Changes during the period - - - (23.6) - - (23.6)
----- ------ ------ ------ -------- --------- --------
Total comprehensive income - - - (23.6) 56.1 - 32.5
----- ------ ------ ------ -------- --------- --------
Dividends - - - - (37.9) - (37.9)
Purchases - - - - - (112.6) (112.6)
Conversion of preferred stock and
delivery of stock plan shares (0.1) - (2.8) - - 9.9 7.0
----- ------ ------ ------ -------- --------- --------
Balance at March 31, 1999 $10.4 $717.4 $144.8 $(18.9) $5,263.6 $(2,130.8) $3,986.5
===== ====== ====== ====== ======== ========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
-5-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of March 31, 1999 and
the related condensed consolidated statements of income, cash flows and
stockholders' equity for the three-month periods ended March 31, 1999
and 1998 are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements have
been included. Such adjustments consisted only of normal recurring
items. Interim results may not be indicative of results for a full
year.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes. The year-end condensed consolidated balance sheet
was derived from the Company's audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. This Form 10-Q should be read in conjunction with the
Company's consolidated financial statements and notes incorporated by
reference in its 1998 Annual Report on Form 10-K.
2. Joint Venture/Acquisitions
On March 30, 1999, the spirits and wine business reached agreement
in principle with Remy-Cointreau and Highland Distillers to form a new
international sales and distribution joint venture for markets outside
the United States. To create this joint venture, each company will
contribute approximately $110 million in distribution assets and/or
cash. The joint venture is projected to begin operations in late
summer.
During 1998, acquisitions were made in the 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. These operations have been included in
consolidated results from the dates of acquisition. Had the
acquisitions been consolidated from January 1, 1997, they would not
have materially affected results.
-6-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Information on Business Segments
Net sales and operating company contribution are as follows:
Three Months Ended March 31,
----------------------------
Operating
Net Company
Sales Contribution
--------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
(In millions)
Home products $ 441.2 $ 342.4 $ 68.7 $ 55.2
Office products 315.2 321.8 15.5 28.2
-------- -------- ------ ------
Home and office products 756.4 664.2 84.2 83.4
Golf products 250.1 277.0 36.5 41.7
Spirits and wine 285.8 262.3 50.1 43.0
-------- ------- ------ ------
$1,292.3 $1,203.5 $170.8 $168.1
======== ======== ====== ======
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 before income taxes and extraordinary items is as follows:
Three Months Ended March 31,
----------------------------
1999 1998
------ ------
(In millions)
Operating company contribution $170.8 $168.1
Amortization of intangibles 27.3 26.3
Interest and related expenses 25.3 25.1
Non-operating expenses 18.1 19.0
------ ------
Income before income taxes
and extraordinary items $100.1 $ 97.7
====== ======
-7-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Earnings Per Share
The computation of basic and diluted earnings per Common share for
"Income before extraordinary items" is as follows:
Three Months Ended
March 31,
------------------
1999 1998
---- ----
(In millions,
except per share amounts)
Income before extraordinary items $56.1 $53.0
Less: Preferred stock dividends 0.2 0.2
----- -----
Income available to Common
stockholders - basic 55.9 52.8
Convertible Preferred stock
dividend requirements 0.2 0.2
----- -----
Income available to Common
stockholders - diluted $56.1 $53.0
===== =====
Weighted average number of Common
shares outstanding - basic 169.9 172.3
Conversion of Convertible
Preferred stock 2.1 2.3
Exercise of stock options 1.2 2.5
----- -----
Weighted average number of Common
shares outstanding - diluted 173.2 177.1
===== =====
Earnings per Common share
Basic $.33 $.31
==== ====
Diluted $.32 $.30
==== ====
-8-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Extraordinary Items
During the first quarter of 1998, the Company purchased the
following principal amounts of its outstanding debt: $23.2 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. The extinguishment of debt
resulted in a charge of $8.4 million ($13 million pre-tax), or five
cents per Common share.
6. Comprehensive Income
The components of accumulated other comprehensive income are as
follows:
Foreign Minimum Accumulated
currency pension liability other
adjustments adjustment comprehensive income
----------- ---------- --------------------
(In millions)
Balance December 31, 1997 $19.9 $(13.0) $ 6.9
Changes in first quarter 9.1 - 9.1
----- ------ -----
Balance March 31, 1998 $29.0 $(13.0) $16.0
===== ====== =====
Balance December 31, 1998 $ 12.5 $(7.8) $ 4.7
Changes in first quarter (23.6) - (23.6)
------ ----- ------
Balance March 31, 1999 $(11.1) $(7.8) $(18.9)
====== ===== ======
7. 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.
-9-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Pending Litigation (Concluded)
Tobacco Litigation and Indemnification (Concluded)
The Company is a defendant in numerous actions based upon
allegations that human ailments have resulted from tobacco use.
Management believes that there are meritorious defenses to the pending
actions and these actions are being vigorously contested. However, it
is not possible to predict the outcome of the pending litigation, and
it is possible that some of these actions could be decided unfavorably.
Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the
pending litigation. Management believes that the pending actions will
not have a material adverse effect upon the results of operations, cash
flows or financial condition of the Company as long as the Indemnitors
continue to fulfill their obligations to indemnify the Company under
the aforementioned indemnification agreement.
Other Litigation
In addition to the lawsuits described above, the Company and its
subsidiaries are defendants in lawsuits associated with their business
and operations. It is not possible to predict the outcome of the
pending actions, but management believes that there are meritorious
defenses to these actions and that these actions will not have a
material adverse effect upon the results of operations, cash flows or
financial condition of the Company. These actions are being vigorously
contested.
8. 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.
-10-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
---------------------------------------------------------
9. Subsequent Events
Restructuring and Other Nonrecurring Charges
On April 27, 1999, the Company announced plans to reduce its
corporate headquarters workforce (currently 185) by about one-third,
and relocate the corporate headquarters to Lincolnshire, Illinois, by
the end of 1999. As a result, the Company expects to record pre-tax
restructuring and other nonrecurring charges of approximately $60-70
million over the remainder of 1999. Total projected annualized savings
is estimated to be in the range of $25-30 million.
Change in Accounting for Recovery of Intangible Assets
On April 27, 1999, the Company announced plans to change its
method of accounting for evaluating the recovery of intangibles,
primarily goodwill, effective April 1, 1999. Accordingly, the Company
will record a non-cash charge of approximately $1.2 billion in the
second quarter of 1999 reflecting the change from an undiscounted cash
flow to a discounted cash flow methodology. The Company evaluates
potential acquisitions as well as capital projects using discounted
cash flow analysis, among other factors, and believes that evaluating
the recovery of intangibles, primarily goodwill, on the same basis is
preferable to its prior policy. For the full year 1999 (9 months
remaining), amortization will be reduced by an estimated 15 cents per
share to 45 cents. For 2000, annual amortization will be reduced by an
estimated 21 cents per share.
The $1.2 billion non-cash charge associated with the change in
accounting consists of $1.1 billion split approximately evenly between
golf and spirits and wine, with the remaining balance in the office
products segment.
-11-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors of Fortune Brands, Inc.:
We have reviewed the condensed consolidated balance sheet of
Fortune Brands, Inc. and Subsidiaries as of March 31, 1999 and the
related condensed consolidated statements of income, cash flows and
stockholders' equity for the three-month periods ended March 31, 1999
and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data, and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit in accordance with generally
accepted auditing standards, the objective of which is the expression
of an opinion regarding the consolidated financial statements taken as
a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1998, and the related consolidated statements of income, cash flows and
stockholders' equity for the year then ended (not presented herein) and
in our report dated February 3, 1999, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1998 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it
has been derived.
PricewaterhouseCoopers LLP
11 Madison Avenue
New York, New York 10010
May 13, 1999
-12-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for the Three Months Ended March 31, 1999 as Compared
to the Three Months Ended March 31, 1998
-------------------------------------------------------------------------
Operating Company
Net Sales Contribution (1)
----------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(In millions)
Home products $ 441.2 $ 342.4 $ 68.7 $ 55.2
Office products 315.2 321.8 15.5 28.2
-------- ------- ------ ------
Home and office products 756.4 664.2 84.2 83.4
Golf products 250.1 277.0 36.5 41.7
Spirits and wine 285.8 262.3 50.1 43.0
------- ------- ------ ------
$1,292.3 $1,203.5 $170.8 $168.1
======== ======== ====== ======
(1) 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.
CONSOLIDATED
- ------------
Net sales increased $88.8 million, or 7% on acquisitions made in 1998 in the
home products, spirits and wine, and office products segments and on benefits
from line extensions and new products, partly offset by volume declines in some
existing products, slightly lower average foreign exchange rates and lower
prices. Operating company contribution increased 2% on the benefits from the
acquisitions.
-13-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
Interest and related expenses increased 1% reflecting higher average borrowings,
partly offset by lower interest rates.
The effective income tax rates for the three months ended March 31, 1999 and
1998 were 44% and 45.8%, respectively. The lower effective tax rate this year
principally reflected lower taxes on foreign dividends.
Income before extraordinary items of $56.1 million, or 33 cents per basic Common
share, for the three months ended March 31, 1999 compared with $53 million, or
31 cents per share, for the same period last year.
The extraordinary items charge in the three months ended March 31, 1998 of $8.4
million ($13 million pre-tax), or five cents per share, resulted from the
extinguishment of debt. (See Note 5.)
Net income of $56.1 million, or 33 cents per share, compared with $44.6 million,
or 26 cents per share, for the same period last year.
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 future results and the disclosure requirements under this
standard.
-14-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
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.
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. We anticipate
-15-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
YEAR 2000 READINESS DISCLOSURE (Continued)
- ------------------------------
that IT systems will be Y2K compliant by June 30, 1999, except for a few
applications in foreign office products locations that will be made compliant
during the third quarter.
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.
-16-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
YEAR 2000 READINESS DISCLOSURE (Concluded)
- ------------------------------
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; and reviewing data recovery
disaster plans.
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 84
percent as of March 31, 1999. 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.
Restructuring and Other Nonrecurring Charges
- --------------------------------------------
On April 27, 1999, the Company announced plans to reduce its corporate
headquarters workforce (currently 185) by about one-third, and relocate the
corporate headquarters to Lincolnshire, Illinois, by the end of 1999. As a
result, the Company expects to record pre-tax restructuring and other
nonrecurring charges of approximately $60-70 million over the remainder of 1999.
Total projected annualized savings is estimated to be in the range of $25-30
million.
The Company also announced that it intends to initiate further restructuring
actions to reduce the cost structure in its operations. These steps will be
-17-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
- ------------
Restructuring and Other Nonrecurring Charges (CONCLUDED)
- --------------------------------------------
initiated over the next 12-18 months, with corresponding charges recorded as
actions are initiated. The review of potential projects, including evaluation of
potential savings, is still underway, and a second quarter announcement is
anticipated. The Company currently estimates that additional restructuring and
other nonrecurring charges could be in the range of $100-150 million before
taxes.
Change in Accounting for Recovery of Intangible Assets
- ------------------------------------------------------
On April 27, 1999, the Company announced plans to change its method of
accounting for evaluating the recovery of intangibles, primarily goodwill,
effective April 1, 1999. Accordingly, the Company will record a non-cash charge
of approximately $1.2 billion in the second quarter of 1999 reflecting the
change from an undiscounted cash flow to a discounted cash flow methodology. The
Company evaluates potential acquisitions as well as capital projects using
discounted cash flow analysis, among other factors, and believes that evaluating
the recovery of intangibles, primarily goodwill, on the same basis is preferable
to its prior policy. For the full year 1999 (9 months remaining), amortization
will be reduced by an estimated 15 cents per share to 45 cents. For 2000, annual
amortization will be reduced by an estimated 21 cents per share.
The $1.2 billion non-cash charge associated with the change in accounting
consists of $1.1 billion split approximately evenly between golf and spirits and
wine, with the remaining balance in the office products segment.
-18-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Home Products
- -------------
Net sales increased $98.8 million, or 29%. The increase was primarily
attributable to the acquisition of Schrock cabinets in June 1998 and overall
volume and price increases. The overall volume increases reflect line
extensions, volume increases in existing products and the introduction of new
products. Operating company contribution increased $13.5 million, or 24%. The
increase principally reflects the increased sales, partly offset by increased
operating expenses. Higher volume-related selling expenses (principally at Moen)
and increased general and administrative expenses are the main reasons for the
increased operating expenses. Gross margin declined slightly on lower margins at
Schrock.
Office Products
- ---------------
Net sales declined $6.6 million, or 2%. The decrease was primarily attributable
to lower prices, which includes higher rebates and allowances, and lower overall
volume, partly offset by benefits of an acquisition. The overall volume decline
reflects lower volume in some existing products, partly offset by the
introduction of new products. The lower volume primarily results from inventory
reduction programs by major customers. Operating company contribution decreased
$12.7 million, or 45%. The decrease reflects the lower sales, lower gross margin
and higher operating expenses. The gross margin was lower because of lower
prices and additional costs related to current integration and relocation of
operations in North America, Europe and Australia. The increased operating
expenses are a result of higher customer program costs, higher distribution
expenses (particularly in the U.K.), and higher Y2K expenses, partly offset by
lower general and administrative expenses and lower freight costs (favorable
comparison to 1998 costs incurred to maintain customer service levels during
restructuring activities).
-19-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Golf Products
- -------------
Net sales decreased $26.9 million, or 10%, on an overall volume decline in golf
clubs reflecting the timing of Cobra's new product introductions and the
continued softness in the golf club market. Cobra's introduction of new products
last year occurred in the first quarter. This year's newly introduced Cobra
Gravity Back irons began shipping later in the first quarter, and drivers
started shipping in April. As a result, the timing of new product introductions
and discounting on older models led to a significant decline in sales of Cobra
clubs and to a lower margin in golf clubs. The sales decline in golf clubs was
partly offset by sales gains in golf balls, shoes and gloves on volume increases
(benefits from new products and line extensions). Operating company contribution
decreased $5.2 million, or 12%, as a result of the sales decline and lower gross
margin, partly offset by lower operating expenses. Lower operating expenses
primarily reflect savings associated with the 1998 staff reductions at Cobra and
reduced advertising and promotional expenses.
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 our group's golf ball business and/or the golf ball industry.
-20-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Spirits and Wine
- ----------------
Net sales increased $23.5 million, or 9%. The increase resulted from the August
1998 Geyser Peak wine acquisition, overall volume increases and higher prices,
partly offset by lower average foreign exchange rates. The overall volume
increase principally reflected higher case shipments of Jim Beam bourbon in the
U.S. and pre-mixed cocktails in Australia, both benefiting from purchases made
by customers in advance of announced price increases. DeKuyper cordial shipments
in the U.S. also increased, partly due to line extensions. Shipments of other
U.S. brands and volume in the European operations declined. Operating company
contribution increased $7.1 million, or 17%. The increase resulted from the
sales gain and improved gross margin (principally reflecting favorable product
mix and price increases), partly offset by increased operating expenses. The
higher operating expenses were principally caused by increased volume-related
selling expenses. Operating results improved in North America (which also
benefited from the wine acquisition) and Australia. For the remainder of the
year, more modest growth in operating company contribution is expected.
On March 30, 1999, the spirits and wine business reached agreement in principle
with Remy-Cointreau and Highland Distillers to form a new international sales
and distribution joint venture for markets outside the United States. To create
this joint venture, each company will contribute approximately $110 million in
distribution assets and/or cash. The joint venture is projected to begin
operations in late summer.
-21-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided from operating activities of $2.3 million for the three months
ended March 31, 1999 compared with net cash used of $41.3 million for the same
three-month period last year.
Net cash used by investing activities for the three months ended March 31, 1999
was $37.9 million, as compared with $99.8 million in the same three-month period
last year that included the acquisition of Apollo Presentation Products.
Net cash provided by financing activities for the three months ended March 31,
1999 was $36.4 million, as compared with $258.2 million in the same three-month
period last year. During the three months ended March 31, 1999, the Company
purchased 3,622,100 Common shares including those purchased pursuant to the
systematic share purchase program and other open market purchases.
Total debt at March 31, 1999 was $1.7 billion, an increase of $177.2 million
from December 31, 1998. The ratio of total debt to total capital increased from
26.6% at December 31, 1998 to 29.4% at March 31, 1999.
During the three months ended March 31, 1998, the Company purchased $66.4
million principal amount of its outstanding debt. (See Note 5.)
Management believes that the Company's internally generated funds, together with
its access to global credit markets, are more than adequate to meet the
Company's capital needs.
-22-
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
CAUTIONARY STATEMENT
- --------------------
This Quarterly Report on Form 10-Q contains statements relating to future
results. They are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Readers are cautioned that
these forward-looking statements speak only as of the date hereof. Actual
results may differ materially from those projected as a result of certain risks
and uncertainties, including but not limited to: changes in general economic
conditions, foreign exchange rate fluctuations, competitive product and pricing
pressures, the impact of excise tax increases with respect to distilled spirits,
regulatory developments, the uncertainties of litigation, changes in golf
equipment regulatory standards, the impact of weather, particularly on the home
products and golf brand groups, expenses and disruptions related to shifts in
manufacturing to different locations and sources, delays in the integration of
recent acquisitions, the timely resolution of the Year 2000 issue, as well as
other risks and uncertainties detailed from time to time in the Company's
Securities and Exchange Commission filings.
-23-
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
- ------ -----------------
(a) Smoking and Health Proceedings
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 under the heading "Overview".
Individual Cases
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 under the heading "Individual Cases". As of May 11,
1999, there were approximately 232 smoking and health cases pending on behalf of
individual plaintiffs in which Registrant has been named as one of the
defendants, compared with approximately 230 such cases as of March 29, 1999. See
"Recent Case Developments" below.
Class Actions
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 under the heading "Class Actions". As of May 11, 1999,
there were approximately 28 purported smoking and health class actions pending
in which Registrant has been named as one of the defendants, compared with
approximately 28 such cases as of March 29, 1999.
Health Care Cost Recovery Actions
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 under the heading "Health Care Cost Recovery Actions".
As of May 11, 1999, there were approximately 11 health care recovery actions
pending in which Registrant has been named as one of the defendants, compared
with approximately 9 such cases as of March 29, 1999.
Recent Case Developments
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 under the heading "Recent Case Developments".
In Widdick v. Brown & Williamson Tobacco Corporation, et al., the trial
court on April 15, 1999, in accordance with the January 29, 1999 order of the
appellate court, entered an order that vacated the final judgment previously
entered, set aside the June 10, 1998 jury verdict and transferred the case to
Palm Beach County, Florida. Registrant is not a party to the Widdick litigation.
-24-
<PAGE>
Item 1. LEGAL PROCEEDINGS (Continued)
- ------ -----------------
On May 10, 1999 the jury returned a verdict in favor of the defendants
on all counts in the four consolidated cases brought against certain tobacco
manufacturers in state court in Memphis, Tennessee (Newcomb v. R.J. Reynolds
Tobacco Company, et al.; McDaniel v. Brown & Williamson Tobacco Corporation, et
al.; Settle v. Brown & Williamson Tobacco Corporation). B&W is a defendant in
two of the cases, and is a defendant as successor to ATCO in another of the
cases. Registrant is not a party to this 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. The latter award was reduced to $25 million by the trial
court. On May 5, 1999, Philip Morris, the sole defendant to this action,
appealed to the California Court of Appeals.
On March 30, 1999, a jury in Portland, Oregon returned a verdict in
favor of the estate of a deceased smoker who allegedly contacted lung cancer and
died as a result of smoking. (The Estate of Jesse E. Williams v. Philip Morris
Incorporated). The jury awarded plaintiff $821,485 in compensatory damages and
$79.5 million in punitive damages. Philip Morris is the sole defendant to this
action.
List of Pending Cases
Reference is made to the disclosure in Part I, Item 3, "Legal
Proceedings", of Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998, and Exhibit 99 thereto, under the heading "List of
Pending Cases. See Exhibit 99 to this Form 10-Q for a list of additional
proceedings involving the smoking and health controversy in which Registrant has
been named a defendant.
List of Terminated Cases
See Exhibit 99 to this Form 10-Q for a list of proceedings which have
been terminated and have not previously been reported as such.
Conclusion
Management believes that there are meritorious defenses to the
above-mentioned pending actions and these actions are being vigorously
contested. However, it is not possible to predict the outcome of the pending
litigation, and it is possible that some of these actions could be decided
unfavorably. Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the pending
litigation. Management believes that the pending actions will not have a
material adverse effect upon the results of operations, cash flows or financial
condition of Registrant as long as the Indemnitors continue to fulfill their
obligations to indemnify Registrant under the aforementioned indemnification
agreement (see "Overview" above).
-25-
<PAGE>
Item 1. LEGAL PROCEEDINGS (Continued)
- ------ -----------------
(b) Craig J. Wedde v. Valley Warehousing, Inc., et al. is an action
filed pro se in the Circuit Court, Fond DuLac County, State of Wisconsin on
April 7, 1999 against thirty-four defendants including Fortune Brands, Inc.
which seeks damages of $1,000,000,000 and injunctive relief based on the claim
that the producers of beverage alcohol and their products have caused harm to
the public. The action will be vigorously contested.
(c) Reference is made to Note 7, "Pending Litigation", in the Notes to
Condensed Consolidated Financial Statements set forth in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
- ------ ---------------------------------
(a) Exhibits.
--------
12. Statement re computation of ratio of earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP dated May 13, 1999 re
unaudited financial information.
27. Financial Data Schedule (Article 5).
99. List of Pending/Terminated Cases.
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 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
-26-
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K (Continued)
- ------ ---------------------------------
1999 Consumer Analyst Group of New York (CAGNY) Conference (Items 5 and
7(c)).
Registrant filed a Current Report on Form 8-K, dated April 23, 1999, in
respect of Registrant's press release dated April 23, 1999 announcing
Registrant's financial results for the three-month period ended March
31, 1999 (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated May 3, 1999, in
respect of Registrant's press release dated April 27, 1999 announcing
its headquarters relocation and goodwill accounting change (Items 5 and
7(c)).
-27-
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FORTUNE BRANDS, INC.
--------------------
(Registrant)
Date: May 13, 1999 By /s/ C. P. Omtvedt
------------ ----------------------
C. P. Omtvedt
Senior Vice President and
Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
- ------- -------------
12. Statement re computation of ratio of earnings
to fixed charges.
15. Letter from PricewaterhouseCoopers LLP dated
May 13, 1999 re unaudited financial information.
27. Financial Data Schedule (Article 5).
99. List of Pending/Terminated Cases.
PART II - EXHIBIT 12
--------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Three Months
Ended
Years Ended December 31, March 31,
------------------------------------------------------ ----------
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings Available:
Income from continuing operations
before income taxes, minority
interest and extraordinary items. . . $ 43.4 $358.9 $340.1 $145.2 $516.4 $101.0
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies. . . . . . . . . . - 0.2 0.2 0.2 0.2 0.1
Capitalized interest. . . . . . . 0.2 - 0.3 - - 1.3
------ ------ ------ ------ ------ ------
43.2 358.7 339.6 145.0 516.2 99.6
====== ====== ====== ====== ====== ======
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt discount
and expense. . . . . . . . . . . . . 184.6 147.1 172.6 122.4 105.4 27.3
Portion of rentals representative
of an interest factor. . . . . . . . 12.8 13.5 15.1 14.7 17.0 4.5
------ ------ ------ ------ ------ -----
Total Fixed Charges. . . . . . 197.4 160.6 187.7 137.1 122.4 31.8
------ ------ ------ ------ ------ ------
Total Earnings Available. . . $240.6 $519.3 $527.3 $282.1 $638.6 $131.4
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges. . . 1.22 3.23 2.81 2.06 5.22 4.13
==== ==== ==== ==== ==== ====
</TABLE>
PART II - EXHIBIT 15
---------------------
May 13, 1999
Securities and Exchange Commission
450 5th Street, N.W.
Attention: Filing Desk, Stop 1-4
Washington, D.C. 20549-1004
Re: Fortune Brands, Inc.
We are aware that our report dated May 13, 1999, on our review of
interim financial information of Fortune Brands, Inc. and Subsidiaries for the
three-month period ended March 31, 1999 included in this Form 10-Q, has been
incorporated by reference into (a) the Registration Statement on Form S-8
(Registration No. 33-64071) relating to the Defined Contribution Plan of Fortune
Brands, Inc. and Participating Operating Companies, the Registration Statement
on Form S-8 (Registration No. 33-64075) relating to the MasterBrand Industries,
Inc. Hourly Employee Savings Plan, the Registration Statement on Form S-8
(Registration No. 33-58865) relating to the 1990 Long-Term Incentive Plan of
Fortune Brands, Inc., the Registration Statement on Form S-8 (Registration No.
333-51173) relating to the Fortune Brands, Inc. Non-Employee Director Stock
Option Plan, and the prospectuses related thereto, and (b) the Registration
Statements on Form S-3 (Registration Nos. 33-50832, 33-42397, 33-23039 and
33-3985) of Fortune Brands, Inc. Pursuant to Rule 436(c) under the Securities
Act of 1933, this report should not be considered a part of such registration
statements or prospectuses or certification by us within the meaning of Sections
7 and 11 of that Act.
Very truly yours,
PricewaterhouseCoopers LLP
11 Madison Avenue
New York, New York 10010
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT OF INCOME AS
OF MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 44
<SECURITIES> 0
<RECEIVABLES> 987
<ALLOWANCES> 57
<INVENTORY> 1,086
<CURRENT-ASSETS> 2,307
<PP&E> 2,151
<DEPRECIATION> 1,047
<TOTAL-ASSETS> 7,330
<CURRENT-LIABILITIES> 1,932
<BONDS> 974
<COMMON> 717
0
10
<OTHER-SE> 3,260
<TOTAL-LIABILITY-AND-EQUITY> 7,330
<SALES> 1,292
<TOTAL-REVENUES> 1,292
<CGS> 678
<TOTAL-COSTS> 678
<OTHER-EXPENSES> 97
<LOSS-PROVISION> 2
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 100
<INCOME-TAX> 44
<INCOME-CONTINUING> 56
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.32
</TABLE>
EXHIBIT 99
List of Pending Cases
Reference is made to the disclosure in Exhibit 99 of Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1998 under the
heading "List of Pending Cases". In addition to those proceedings previously
reported, Registrant has been named as a defendant in the following proceedings:
Eiser v. The American Tobacco Company, et al., Court of Common Pleas of
Philadelphia County, Philadelphia, March 30, 1999;
Iacono, A. v. The American Tobacco Company, et al., Supreme Court,
Kings County, New York, August 20, 1997 (formerly reported under caption
"Mednick");
Mason v. American Brands, Inc. n/k/a Fortune Brands, Inc. et al., Iowa
District Court, Polk County, March 12, 1999;
Miller, A v. Brown & Williamson Tobacco Corporation, et al., Circuit
Court, Kanawha County, West Virginia, January 26, 1999;
Republic of Panama v. The American Tobacco Company, et al., Civil
District Court for the Parish of Orleans, New Orleans, Louisiana, August 25,
1998; and
Republic of Venezuela, by and through its Attorney General, Juan
Nepomuceno Garrido v. Philip Morris Companies, et al., Circuit Court of The
Eleventh Judicial Circuit, Miami-Dade County, Florida, January 27, 1999.
List of Terminated Cases
The following proceedings of the above types have been terminated and
not previously reported as such:
Rose, N. v. The American Tobacco Company, et al., which was previously
pending in the Supreme Court of New York, New York County, and instituted on
December 18, 1996, was dismissed by order of the trial court on September 18,
1998.
