<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission file number 1-9076
ended September 30, 2000
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.)
300 Tower Parkway, Lincolnshire, Illinois 60069-3640
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 484-4400
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
The number of shares outstanding of the Registrant's common stock, par value
$3.125 per share, at October 31, 2000 was 154,691,805 shares.
1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
------ --------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
----------------------------------------
(In millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -----------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 84.9 $ 71.9
Accounts receivable, net 894.5 956.5
Inventories
Bulk whiskey 308.7 326.0
Other raw materials, supplies and
work in process 301.0 284.3
Finished products 503.7 451.1
-------- --------
1,113.4 1,061.4
Other current assets 239.3 223.0
-------- --------
Total current assets 2,332.1 2,312.8
Property, plant and equipment, net 1,164.8 1,176.5
Intangibles resulting from
business acquisitions, net 2,516.6 2,592.1
Other assets 333.7 335.7
-------- --------
Total assets $6,347.2 $6,417.1
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -----------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 28.8 $ 35.1
Commercial paper 829.6 602.2
Current portion of long-term debt 12.5 2.7
Accounts payable 246.1 272.2
Accrued taxes 426.3 436.3
Accrued expenses and other liabilities 618.1 654.4
--------- ---------
Total current liabilities 2,161.4 2,002.9
Long-term debt 1,152.5 1,204.8
Deferred income taxes 62.1 48.3
Postretirement and other liabilities 392.7 422.9
--------- ---------
Total liabilities 3,768.7 3,678.9
--------- ---------
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 9.4 9.9
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 126.8 130.8
Accumulated other
comprehensive loss (75.9) (14.9)
Retained earnings 4,292.1 4,205.2
Treasury stock, at cost (2,491.3) (2,310.2)
--------- ---------
Total stockholders' equity 2,578.5 2,738.2
--------- ---------
Total liabilities and
stockholders' equity $ 6,347.2 $ 6,417.1
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Nine Months Ended September 30, 2000 and 1999
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Net sales $4,267.7 $4,052.3
Cost of products sold 2,273.1 2,131.2
Excise taxes on spirits and wine 254.3 297.3
Advertising, selling, general and
administrative expenses 1,167.6 1,131.6
Amortization of intangibles 59.6 65.7
Write-down of goodwill - 1,126.0
Restructuring charges 10.2 106.7
Interest and related expenses 100.5 77.4
Other expenses, net 6.3 2.6
-------- --------
Income (Loss) Before Taxes 396.1 (886.2)
Income taxes 161.1 105.6
-------- --------
Net Income (Loss) $ 235.0 $ (991.8)
======== ========
Earnings (Loss) per Common Share
Basic $ 1.48 $ (5.92)
======== ========
Diluted $ 1.46 $ (5.92)
======== ========
Dividends paid per Common share $ .69 $ .66
======== ========
Average number of Common shares outstanding
Basic 158.6 167.6
======== ========
Diluted 161.0 167.6
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended September 30, 2000 and 1999
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 1,403.3 $ 1,339.3
Cost of products sold 754.6 699.9
Excise taxes on spirits and wine 83.7 94.0
Advertising, selling, general and
administrative expenses 380.8 379.3
Amortization of intangibles 19.8 19.2
Restructuring charges 2.1 26.8
Interest and related expenses 34.8 26.2
Other expenses, net 2.7 2.6
--------- ---------
Income Before Taxes 124.8 91.3
Income taxes 51.5 43.1
--------- ---------
Net income $ 73.3 $ 48.2
========= =========
Earnings per Common share
Basic $ 0.47 $ 0.29
========= =========
Diluted $ 0.46 $ 0.28
========= =========
Dividends paid per Common share $ .23 $ .22
========= =========
Average number of Common shares outstanding
Basic 156.5 165.9
========= =========
Diluted 158.8 169.4
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Nine Months Ended September 30, 2000 and 1999
-----------------------------------------------------
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Operating activities
Net income (loss) $ 235.0 $ (991.8)
Depreciation and amortization 177.2 173.2
Restructuring charges 10.2 106.7
Write-down of goodwill - 1,126.0
Decrease in accounts receivable 36.2 7.7
(Increase) decrease in inventories (82.2) 50.4
Decrease in accounts payable, accrued
expenses and other liabilities (54.9) (72.6)
Increase in accrued taxes (8.4) (1.0)
Other operating activities, net (31.8) (50.3)
-------- --------
Net cash provided from operating activities 281.3 348.3
Investing activities
Additions to property, plant and equipment (144.3) (136.0)
Investment in joint venture (25.6) (27.3)
Other investing activities, net 13.2 20.1
-------- --------
Net cash used by investing activities (156.7) (143.2)
-------- --------
Financing activities
Increase in short-term debt, net 223.9 388.6
Issuance of long-term debt 0.6 1.7
Repayment of long-term debt (42.5) (194.2)
Dividends to stockholders (110.4) (111.6)
Cash purchases of Common stock for treasury (185.6) (336.5)
Proceeds received from exercise of stock options 1.8 78.7
Other financing activities, net 0.5 (0.6)
-------- --------
Net cash used by financing activities (111.7) (173.9)
-------- --------
Effect of foreign exchange rate changes on cash 0.1 (2.2)
-------- --------
Net increase in cash and cash equivalents 13.0 29.0
Cash and cash equivalents at beginning of period 71.9 40.3
-------- --------
Cash and cash equivalents at end of period $ 84.9 $ 69.3
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the Nine Months Ended September 30, 2000 and 1999
------------------------------------------------------------------------
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
$2.67 Accumulated
Convertible other Treasury
Preferred Common Paid-in comprehensive Retained stock,
stock stock capital income (loss) earnings at cost Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
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 loss - - - - (991.8) - (991.8)
Foreign currency adjustments - - - (15.8) - - (15.8)
----- ----- ------ ------ -------- -------- --------
Total comprehensive loss - - - (15.8) (991.8) - (1,007.6)
----- ----- ------ ------ -------- -------- --------
Dividends - - - - (149.8) - (149.8)
Purchases - - - - - (337.6) (337.6)
Conversion of preferred stock and
delivery of stock plan shares (0.5) - (29.9) - - 111.7 81.3
----- ------ ------ ------ -------- --------- --------
Balance at September 30, 1999 $10.0 $717.4 $117.7 $(11.1) $4,103.8 $(2,254.0) $2,683.8
===== ====== ====== ====== ======== ========= ========
Balance at December 31, 1999 $9.9 $717.4 $130.8 $(14.9) $4,205.2 $(2,310.2) $2,738.2
Comprehensive income
Net income - - - - 235.0 - 235.0
Foreign currency adjustments - - (61.0) - - (61.0)
----- ----- ------ ------ -------- -------- --------
Total comprehensive (loss) income - - - (61.0) 235.0 - 174.0
----- ----- ------ ------ -------- -------- --------
Dividends - - - - (148.1) - (148.1)
Purchases - - - - - (188.2) (188.2)
Conversion of preferred stock and
delivery of stock plan shares (0.5) - (4.0) - - 7.1 2.6
----- ------ ------ ------ -------- --------- --------
Balance at September 30, 2000 $9.4 $717.4 $126.8 $(75.9) $4,292.1 $(2,491.3) $2,578.5
===== ====== ====== ====== ======== ========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of September 30, 2000,
the related condensed consolidated statements of income for the three
month and nine month periods ended September 30, 2000 and 1999, and the
related condensed consolidated statements of cash flows and
stockholders' equity for the nine month periods ended September 30,
2000 and 1999 are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments included restructuring
and other nonrecurring charges, write-downs of goodwill in 1999 and
normal recurring items. Interim results may not be indicative of
results for a full year.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain
information included in the Company's annual consolidated financial
statements and notes. The year-end condensed consolidated balance sheet
was derived from the Company's audited financial statements, but does
not include all disclosures required by generally accepted accounting
principles. This Form 10-Q should be read in conjunction with the
Company's consolidated financial statements and notes incorporated by
reference in its 1999 Annual Report on Form 10-K.
2. Change in Accounting for Goodwill
During 1999, the Company elected to change its method for
assessing recoverability of goodwill from one based on undiscounted
cash flows to one based on discounted cash flows. As a result of the
change to a discounted cash flow methodology, the Company recorded a
non-cash write-down of goodwill of $1,126 million in the second quarter
of 1999. Because of this change, goodwill amortization decreased $6.1
million for the nine months ended September 30, 2000 as compared to the
same period last year.
3. Joint Venture/Acquisitions
In January 2000, the Company's spirits and wine business made an
additional cash investment of $25.6 million in its international sales
and distribution joint venture, named Maxxium International B.V.
Maxxium was formed in 1999 by the Company's spirits and wine business,
Remy-Cointreau and Highland Distillers to distribute and sell premium
wines and spirits in key markets outside the United States.
In 1999, the home products business acquired NHB Group Ltd., a Canadian
manufacturer of ready-to-assemble kitchen and bath cabinetry, and the
office products business acquired Boone International Inc., a U.S. -
based manufacturer of dry-erase boards and markers, bulletin
8
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Joint Venture/Acquisitions (Concluded)
boards, easels and other presentation products. The aggregate cost of
these acquisitions was $103.6 million, including fees and expenses. The
cost exceeded fair value of net assets acquired by $78 million.
Pro forma financial statements are not presented for the NHB and Boone
acquisitions as their results of operation are not material to these
financial statements.
4. Information on Business Segments
Net sales and operating company contribution are as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
Operating
Net Company
Sales Contribution
----------------------- -----------------------
2000 1999 2000 1999
----- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Home products $1,589.0 $1,379.9 $241.2 $210.9
Office products 1,020.3 963.2 49.2 47.0
Golf products 793.4 801.6 137.9 139.5
Spirits and wine 865.0 907.6 196.7 186.7
-------- -------- ------ ------
$4,267.7 $4,052.3 $625.0 $584.1
======== ======== ====== ======
Three Months Ended September 30,
-------------------------------
Operating
Net Company
Sales Contribution
----------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
Home products $ 541.2 $ 474.9 $ 84.1 $ 71.3
Office products 362.2 338.9 23.2 25.1
Golf products 208.3 222.0 25.5 28.9
Spirits and wine 291.6 303.5 71.2 69.1
-------- -------- ------ ------
$1,403.3 $1,339.3 $204.0 $194.4
======== ======== ====== ======
</TABLE>
9
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Information on Business Segments (Concluded)
Operating company contribution is net sales less all costs and expenses
other than restructuring and other nonrecurring charges, write-down of
goodwill, amortization of intangibles, corporate administrative expense,
interest and related expenses, other (income) expenses, net and income
taxes.
A reconciliation of operating company contribution to consolidated
income (loss) before income taxes is as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
------- --------
(In millions)
<S> <C> <C>
Operating company contribution $ 625.0 $ 584.1
Amortization of intangibles 59.6 65.7
Write-down of goodwill - 1,126.0
Restructuring and other
nonrecurring charges 30.4 146.3
Interest and related expenses 100.5 77.4
Non-operating expenses 38.4 54.9
-------- --------
Income (loss) before income taxes $ 396.1 $ (886.2)
======== ========
Three Months Ended September 30,
-------------------------------
2000 1999
------ -------
(In millions)
Operating company contribution $ 204.0 $ 194.4
Amortization of intangibles 19.8 19.2
Restructuring and other
nonrecurring charges 12.3 37.5
Interest and related expenses 34.8 26.2
Non-operating expenses 12.3 20.2
------- --------
Income (loss) before income taxes $ 124.8 $ 91.3
======= ========
</TABLE>
10
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Earnings Per Share
The computation of basic and diluted earnings per common share for
"Net income (loss)" is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- -----------------
2000 1999 2000 1999
------ ------- ------- -------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Net income (loss) $235.0 $(991.8) $73.3 $48.2
Less: Preferred stock dividends 0.6 0.7 0.2 0.2
------ ------- ------- -------
Income available to Common
stockholders - basic 234.4 (992.5) 73.1 48.0
Convertible Preferred stock
dividend requirements 0.6 - 0.2 0.2
------ ------- ------- -------
Income available to Common
stockholders - diluted $235.0 $(992.5) $73.3 $48.2
====== ======= ======= ======
Weighted average number of Common
shares outstanding - basic 158.6 167.6 156.5 163.9
Conversion of Convertible
Preferred stock 2.0 - 1.9 2.0
Exercise of stock options 0.4 - 0.4 1.5
------ ------- ------- -------
Weighted average number of Common
shares outstanding - diluted 161.0 167.6 158.8 169.4
====== ======= ======= ======
Earnings per Common share
Basic $ 1.48 $ (5.92) $0.47 $0.29
====== ======= ======= ======
Diluted $1.46 $ (5.92) $0.46 $0.28
====== ======= ======= ======
</TABLE>
The calculations of earnings per share on a diluted basis for the
nine months ended September 30, 1999 excludes the impact of the
Convertible Preferred stock and stock options, since they would result
in an antidilutive effect.
6. Restructuring and Other Nonrecurring Charges
During 1999, the Company recorded $196.0 million of pre-tax
restructuring and other nonrecurring charges. These included employee
termination costs, lease termination costs, asset write-offs, inventory
write-offs due to discontinuance of certain product lines and
relocation costs associated with establishing a new corporate
headquarters.
11
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Restructuring and Other Nonrecurring Charges (Continued)
In connection with the restructuring program established in 1999,
the Company recorded pre-tax restructuring charges for the three month
and nine month periods ended September 30, 2000 as follows:
<TABLE>
<CAPTION>
Restructuring Charges
-----------------------------------------------------
Nine Months Ended Three Months Ended
September 30, 2000 September 30, 2000
-------------------- -------------------
(In millions)
<S> <C> <C>
Home products $3.6 $ 1.2
Office products 3.8 -
Golf products 2.8 0.9
----- -----
Total $10.2 $2.1
===== =====
</TABLE>
The above charges include costs associated with the elimination of
608 and 137 positions for the nine months and three months ended
September 30, 2000, respectively.
Home products include charges related to employee termination
costs.
Office products include charges related to employee termination
costs and asset write-offs.
Golf products include charges related to lease cancellation and
employee termination costs.
Reconciliation of the restructuring liability, as of September 30,
2000 is as follows:
<TABLE>
<CAPTION>
Balance at 2000 Cash Non-Cash Balance at
12/31/99 Provision Expenditures Write-offs 9/30/00
---------- ---------- ------------ ---------- ----------
(In millions)
<S> <C> <C> <C> <C> <C>
Rationalization of
Operations
Employment
termination costs (1) $ 38.3 $ 9.4 $ (31.4) $ (0.5) $ 15.8
Other 1.5 (1.5) (0.2) (0.3) (0.5)
International distribution
and lease agreements 16.3 1.4 (1.9) (8.3) 7.5
Loss on disposal of assets 0.8 0.9 - (1.0) 0.7
------ ------ ------- ------ ------
$ 56.9 $ 10.2 $ (33.5) $(10.1) $ 23.5
====== ====== ======= ====== ======
</TABLE>
(1) Of the 1,866 positions planned for elimination, 1,613 had been
eliminated as of September 30, 2000.
12
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Restructuring and Other Nonrecurring Charges (Concluded)
The Company expects that substantially all remaining payments and
write-offs will be made within the next twelve months.
During the three month and nine month periods ended September 30,
2000, the Company recorded pre-tax other nonrecurring charges as follows:
<TABLE>
<CAPTION>
Other Nonrecurring Charges
--------------------------------------------------------------------------------------
Nine Months Ended Three Months Ended
September 30, 2000 September 30, 2000
--------------------------- -------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Cost of Cost of
Sales SG&A Sales SG&A
Charges Charges Total Charges Charges Total
------- ------- ----- ------- ------- -----
Home Products $ 6.4 $ 2.5 $ 8.9 $ 3.2 $ 0.2 $ 3.4
Office Products 6.4 1.8 8.2 4.5 1.8 6.3
Golf Products 0.2 0.6 0.8 - 0.5 0.5
Corporate Office - 2.3 2.3 - - -
------- ----- ------ ------ ----- ------
Total $ 13.0 $ 7.2 $20.2 $ 7.7 $ 2.5 $ 10.2
======= ===== ====== ====== ===== ======
</TABLE>
Other nonrecurring charges include charges related to the
restructuring activities as follows:
Home products include costs associated with a plant relocation and
the establishment of a distribution center.
Office products include relocation costs for manufacturing facilities
and outside consulting costs.
Golf products include plant relocation costs.
Corporate office includes relocation costs associated with
establishing a new corporate headquarters.
13
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) are as
follows:
<TABLE>
<CAPTION> Foreign Minimum Accumulated
currency pension liability other comprehensive
adjustments adjustment income (loss)
----------- ---------- -------------------
(In millions)
<S> <C> <C> <C>
Balance at December 31, 1998 $ 12.5 $(7.8) $ 4.7
Changes in nine months (15.8) - (15.8)
------ ------ ------
Balance at September 30, 1999 $(3.3) $(7.8) $(11.1)
====== ====== ======
Balance at December 31, 1999 $(11.9) $(3.0) $(14.9)
Changes in nine months (61.0) - (61.0)
------ ----- ------
Balance at September 30, 2000 $(72.9) $(3.0) $(75.9)
====== ===== =====
</TABLE>
For the three month periods ended September 30, 2000 and 1999, total
comprehensive income amounted to $54.7 million and $61.9 million,
respectively.
8. Subsequent Event
On October 9, 2000, the Company announced that it is exploring
strategic options for its office products unit. The evaluation, which
includes the possible sale of the office products business, is a result
of the Company's ongoing strategic review of its portfolio of brands
and businesses initiated earlier this year.
9. Pending Litigation
Tobacco Litigation and Indemnification
On December 22, 1994, the Company sold The American Tobacco
Company subsidiary to Brown & Williamson Tobacco Corporation, a wholly-
owned subsidiary of B.A.T Industries p.l.c. In connection with the
sale, Brown & Williamson Tobacco Corporation and The American Tobacco
Company ("the Indemnitors") agreed to indemnify the Company against
claims including legal expenses arising from smoking and health and
fire safe cigarette matters relating to the tobacco business of The
American Tobacco Company.
14
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
9. Pending Litigation (Concluded)
Tobacco Litigation and Indemnification (Concluded)
The Company is a defendant in numerous actions based upon
allegations that human ailments have resulted from tobacco use.
Management believes that there are meritorious defenses to the pending
actions and these actions are being vigorously contested by the
Indemnitors. However, it is not possible to predict the outcome of the
pending litigation, and it is possible that some of these actions could
be decided unfavorably. Management is unable to make a meaningful
estimate of the amount or range of loss that could result from an
unfavorable outcome of the pending litigation. Management believes that
the pending actions will not have a material adverse effect upon the
results of operations, cash flows or financial condition of the Company
as long as the Indemnitors continue to fulfill their obligations to
indemnify the Company under the aforementioned indemnification
agreement.
Other Litigation
In addition to the lawsuits described above, the Company and its
subsidiaries are defendants in lawsuits associated with their business
and operations. It is not possible to predict the outcome of the
pending actions, but management believes that there are meritorious
defenses to these actions and that these actions will not have a
material adverse effect upon the results of operations, cash flows or
financial condition of the Company. These actions are being vigorously
contested.
10. Environmental
The Company is subject to laws and regulations relating to the
protection of the environment. 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.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors of Fortune Brands, Inc.:
We have reviewed the condensed consolidated balance sheet of
Fortune Brands, Inc. and Subsidiaries as of September 30, 2000, the
related condensed consolidated statements of income, for the three
month and nine month periods ended September 30, 2000, and 1999 and the
related consolidated statements of cash flows and stockholders' equity
for the nine month periods ended September 30, 2000 and 1999. 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 interim
financial statements for them to be in conformity with accounting
principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet
as of December 31, 1999, 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, 2000, 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,
1999 is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Chicago, Illinois 60601
October 19, 2000
16
<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 Nine Months Ended September 30, 2000 as
Compared to the Nine Months Ended September 30, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating Company
Net Sales Contribution/(1)/
----------------- ------------------------
2000 1999 2000 1999
----- ---- ----- ----
(In millions)
<S> <C> <C> <C> <C>
Home products $1,589.0 $1,379.9 241.2 210.9
Office products 1,020.3 963.2 49.2 47.0
Golf products 793.4 801.6 137.9 139.5
Spirits and wine 865.0 907.6 196.7 186.7
-------- -------- ------ ------
$4,267.7 $4,052.3 $625.0 $584.1
======== ======== ====== ======
</TABLE>
/(1)/ Operating company contribution is net sales less all costs and expenses
other than restructuring and other nonrecurring charges, write-down of
goodwill, amortization of intangibles, corporate administrative expense,
interest and related expenses, other (income) expenses, net and income
taxes.
CONSOLIDATED
------------
Net sales increased $215.4 million, or 5%, principally on the benefits of line
extensions and new products, acquisitions made in 1999 in the home and office
products segments and price increases. These increases were partly offset by
changes in the way the Company sells international spirits and wine as a result
of the Maxxium spirits and wine joint venture, volume declines in some existing
products and lower average foreign exchange rates. Operating company
contribution increased $40.9 million, or 7%, on the benefit of overall volume
increases in all segments except within golf, improved product mix and the
acquisitions made in 1999.
On October 9, 2000, we announced that we are exploring strategic options for our
office products unit. The evaluation, which includes the possible sale of the
office products business, is a result of our ongoing strategic review of our
portfolio of brands and businesses initiated earlier this year.
17
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
------------
During 1999, we elected to change our method for assessing recoverability of
goodwill from one based on undiscounted cash flows to one based on discounted
cash flows. As a result of the change to a discounted cash flow methodology, we
recorded a non-cash write-down of goodwill of $1,126 million in the second
quarter of 1999. Because of this change, goodwill amortization decreased $6.1
million for the nine months ended September 30, 2000 as compared to the same
period last year.
For the nine months ended September 30, 2000, we recorded pre-tax restructuring
and other nonrecurring charges of $30.4 million, $19.2 million after-tax, or
twelve cents per share. These charges principally relate to the downsizing and
relocation of the Corporate office, product discontinuances and manufacturing
consolidation in the golf segment, rationalization of operations in the home
segment, relocation costs for manufacturing facilities in the office segment and
other workforce reduction initiatives across these segments.
Interest and related expenses increased $23.1 million, or 30%, reflecting higher
average borrowings to fund share repurchases, acquisitions and investments in a
joint venture and higher average interest rates. In addition, corporate
administrative expense decreased $20.3 million, or 39%, due to the restructuring
program initiated in 1999.
The effective income tax rate comparison was distorted by the write-down of
goodwill taken in the second quarter of 1999 and the impact of significant
restructuring and other nonrecurring charges taken in the second quarter of 1999
and the first nine months of 2000. Excluding these, the effective income tax
rates for the nine months ended September 30, 2000 and 1999 were 40.4% and
41.1%, respectively.
Net income of $235.0 million, or $1.48 basic and $1.46 diluted per share,
compared with a net loss of $991.8 million, or $5.92 per share, for the same
nine month period last year.
Income from operations before net charges, which represents income before the
$30.4 million ($19.2 million after-tax) restructuring and other nonrecurring
charges taken in the nine month period ended September 30, 2000, and the $1,126
million goodwill write-down and the $146.3 million ($93.3 million after-tax)
restructuring and other nonrecurring charges taken in the nine month period
ended September 30, 1999, was $254.2 million, or $1.60 basic and $1.58 diluted
per share, for the nine months ended September 30, 2000, as compared with $227.5
million, or $1.35 basic and $1.33 diluted per share for the same nine month
period last year.
18
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
In June 1999, FAS Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133,"
was issued, deferring the effective date of FAS Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," from January 1, 2000 to
January 1, 2001. FAS Statement No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. It requires recognition
of all derivatives as either assets or liabilities on the balance sheet and
measurement of those instruments at fair value. We will adopt SFAS 133, as
amended by FAS Statement No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities, an amendment of FAS Statement No. 133",
beginning January 1, 2001.
We currently enter into foreign currency and commodity hedges to mitigate any
unforeseen risks in the fluctuation of the underlying foreign currencies and
commodities. We are in the process of completing our review to determine the
impact of the new standard on income and equity. At this time, we do not expect
these new Statements to have a material impact on our balance sheet, income
statement or footnote disclosures.
19
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Home Products
-------------
Net sales increased $209.1 million, or 15%. The increase was primarily
attributable to overall volume increases, the acquisition of NHB Group in
October 1999 and price increases. The overall volume increases reflect higher
volume in existing products, line extensions and the introduction of new
products. Operating company contribution increased $30.3 million, or 14%. The
operating company contribution increase was attributable to the higher sales,
improved product mix and restructuring related savings, partly offset by
increased operating expenses, principally selling expenses, costs associated
with the startup of manufacturing and distribution facilities and increased
research and development and distribution costs.
Office Products
---------------
Net sales increased $57.1 million, or 6%. The improvement resulted primarily
from the acquisition of Boone in October 1999 and the introduction of new
products. The increase in net sales was partly offset by volume declines in some
existing products and lower average foreign exchange rates. Operating company
contribution increased $2.2 million, or 5%. The increase was achieved primarily
through the acquisition of Boone, savings achieved through our restructuring
program initiated in 1999 and higher margins in Europe due to the absence of
integration inefficiencies in the U.K. in the current period. This increase was
partly offset by higher operating expenses, the impact of lower average foreign
exchange, a continued sales decline in our time management business, and, as
anticipated, higher rebates and allowances in the United States. The increased
operating expenses reflected higher general and administrative expenses and
increased selling and distribution expenses (to support higher overall unit
volumes).
Certain major customers of our office products business have recently announced
a slowing in sales. Management anticipates that if this situation and other
factors affecting the business continue, results of our office products business
in the fourth quarter of 2000 may be adversely affected.
Golf Products
-------------
Net sales decreased $8.2 million, or 1%, principally due to lower volumes in
existing products, primarily Cobra golf clubs, partly offset by line extensions
and new product introductions in the Titleist and FootJoy brands. Operating
company contribution decreased $1.6 million, or 1% on the lower sales and
increased operating expenses, partly offset by improved gross margins in all
golf product categories. The higher operating expenses were attributable to
increased advertising, selling and general and administrative expenses.
20
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Golf Products (Concluded)
-------------
As expected, new golf ball competitors have achieved increased sales, resulting
in an adverse share impact of about 2% to Titleist and about 1 1/2% to our
aggregate golf ball business.
The United States Golf Association (USGA) establishes standards for golf
equipment used in competitive play in the United States. On November 2, 1998,
the USGA announced the immediate implementation of a new golf club performance
rule that established a rebound velocity standard for driving clubs. The Royal
and Ancient Golf Club (R&A) establishes standards for golf equipment used in
competitive play outside the United States and Mexico. On September 21, 2000,
the R&A issued a Notice to Manufacturers announcing its decision not to adopt
the USGA's rebound velocity standard or any new rule or test protocol for
driving clubs. The R&A's decision not to adopt the rule implemented by the USGA
will result in conflicting conformance standards for driving clubs in the United
States and the rest of the world. The divergence between the USGA and the R&A on
this issue may cause confusion to consumers and could be disruptive to the
United States and world markets for driving clubs. In addition, the USGA 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 the USGA rule or the divergence in rules will have a
material effect on the golf club industry and our golf products segment.
The USGA has announced its intention to propose new rules addressing the initial
velocity and overall distance standards for golf balls. Until more details
regarding such potential rule changes become available, we cannot determine
whether they would have a material effect on our group's golf ball business
and/or the golf ball industry. However, the new rules being considered could
incorporate rules that would shorten the overall distance that golf balls are
allowed to travel and that could hamper innovation in the design and manufacture
of golf balls. The adoption of any such rules could materially impact our golf
business and/or the golf ball industry.
21
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Spirits and Wine
----------------
Net sales decreased $42.6 million, or 5%, principally on the effect of the
Maxxium joint venture and lower average foreign exchange rates. Product is now
sold to Maxxium, net of excise taxes in certain markets, at a lower price since
the related distribution costs are now incurred by Maxxium. On a comparable
basis to prior periods, excluding the impact of Maxxium, net sales would have
been $52.0 million higher with an adjusted sales percentage improvement of 1%.
This underlying increase was led by volume increases and higher prices. The
volume increases primarily reflect increased volumes in existing premium, super
premium and wine products, line extensions and introductions of new products,
principally in the United States.
Operating company contribution increased $10.0 million, or 5%. The increase
resulted primarily from favorable price and volume changes in the United States
as well as reduced costs from the Maxxium distribution joint venture. This
increase was partly offset by adverse foreign exchange.
In August 1999, the spirits and wine business formed an international sales and
distribution joint venture named Maxxium International B.V. with Remy-Cointreau
and Highland Distillers. Maxxium, which began operating in August 1999,
distributes and sells premium wines and spirits in key markets outside the
United States. The Company agreed to contribute assets related to its
international distribution network and periodic cash payments invested with a
total estimated value of $110 million in return for a one-third interest in the
venture. Our investment in Maxxium is accounted for under the equity method.
(See Note 3.)
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash provided from operating activities was $281.3 million for the nine
months ended September 30, 2000 compared with $348.3 million for the same nine
month period last year, principally reflecting increased inventories in our
office and home segments.
Net cash used by investing activities for the nine months ended September 30,
2000 was $156.7 million, as compared with $143.2 million in the same nine month
period last year.
22
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Liquidity and Capital Resources (Concluded)
-------------------------------
Net cash used by financing activities for the nine months ended September 30,
2000 was $111.7 million, as compared with $173.9 in the same nine month period
last year. During the nine months ended September 30, 2000, we purchased
7,595,500 shares through open market purchases.
Total debt at September 30, 2000 was $2.0 billion, an increase of $178.6 million
from December 31, 1999. The ratio of total debt to total capital increased from
40.3% at December 31, 1999 to 44.0% at September 30, 2000. The increase
principally reflects increased borrowings to finance share repurchases and
investments in a joint venture.
We believe that our internally generated funds, together with access to global
credit markets, are adequate to meet our capital needs.
23
<PAGE>
Item 2.
------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for the Three Months Ended September 30, 2000 as
Compared to the Three Months Ended September 30, 1999
---------------------------------------------------------------------------
<TABLE>
<CAPTION>
Operating
Net Sales Company Contribution/(1)/
----------------- --------------------------
2000 1999 2000 1999
---- ---- ---- -------
(In millions)
<S> <C> <C> <C> <C>
Home products $ 541.2 $ 474.9 $ 84.1 $ 71.3
Office products 362.2 338.9 23.2 25.1
Golf products 208.3 222.0 25.5 28.9
Spirits and wine 291.6 303.5 71.2 69.1
-------- -------- ------ ------
$1,403.3 $1,339.3 $204.0 $194.4
======== ======== ====== ======
</TABLE>
(1) Operating company contribution is net sales less all costs and expenses
other than restructuring and other nonrecurring charges, amortization of
intangibles, corporate administrative expense, interest and related
expenses, other (income) expenses, net and income taxes.
CONSOLIDATED
------------
Net sales increased $64.0 million, or 5%, principally on the benefits of line
extensions and acquisitions made in 1999 in the home and office products
segments and the introduction of new products. These increases were partly
offset by lower volume in some existing products, principally in golf and office
products, lower average foreign exchange rates and changes in the way the
Company sells international spirits and wine as a result of the Maxxium spirits
and wine joint venture. Operating company contribution increased $9.6 million,
or 5% on the higher sales partly offset by increased selling, general and
administrative and advertising and marketing expenses.
24
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
------------
During the three month period ended September 30, 2000, the Company recorded
pre-tax restructuring and nonrecurring charges of $12.3 million, $7.7 million
after-tax, or five cents basic and diluted per share. (See Note 6 and the
section on "Consolidated" describing the nine months results for additional
information on restructuring and other nonrecurring charges.)
Interest and related expenses increased $8.6 million, or 33%, reflecting higher
average borrowings to fund share repurchases, acquisitions and an investment in
a joint venture and higher interest rates. In addition, corporate administrative
expense decreased $8.1 million, or 46%, due to the restructuring program
initiated in 1999.
The effective income tax rate comparison was distorted by the impact of the
restructuring and other nonrecurring charges taken in the third quarter of 1999
and the three months ended September 30, 2000. Excluding these, the effective
income tax rates for the three months ended September 30, 2000 and 1999 were
40.9% and 44.4%, respectively. The higher effective tax rate last year
principally reflects the tax consequences associated with the contribution of
assets to the Maxxium joint venture in the same period last year.
Net income of $73.3 million, or 47 cents basic and 46 cents diluted per share,
for the three months ended September 30, 2000, compared with net income of $48.2
million, or 29 cents basic and 28 cents diluted per share, for the same three
month period last year. In the current year period, adverse foreign exchange
negatively impacted our earnings per share by two cents.
Income from operations before net charges, which represents income before the
$12.3 million ($7.7 million after-tax) restructuring and other nonrecurring
charges taken in the three month period September 30, 2000, and the $37.5
million ($23.4 million after-tax) restructuring and other nonrecurring charges
taken in the three month period ended September 30, 1999, was $81.0 million, or
52 cents basic and 51 cents diluted per share, for the three months ended
September 30, 2000, as compared with $71.6 million, or 43 cents and 42 cents
basic and diluted per share, for the same three month period last year.
25
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Home Products
-------------
Net sales increased $66.3 million, or 14%. The increase was primarily related to
overall volume increases and the acquisition of NHB Group in October 1999. The
overall volume increases reflect higher volume on existing products and line
extensions. Operating company contribution increased $12.8 million, or 18%. The
increase reflects the higher sales, favorable product mix and improved
productivity, partly offset by higher operating expenses. The higher operating
expenses were principally due to increased volume-related selling expenses,
costs associated with the startup of manufacturing and distribution facilities
and higher advertising and marketing expenses.
Office Products
---------------
Net sales increased $23.3 million, or 7%. The increase resulted from the
acquisition of Boone in 1999 and the introduction of new products. These
increases were partly offset by lower average foreign exchange and lower volumes
in some existing products in the United States and a continued sales decline in
our time management business. Operating company contribution decreased $1.9
million, or 8%. The decline reflects, as anticipated, higher rebates and
allowances in the current period and lower average foreign exchange, partly
offset by restructuring related savings and the acquisition of Boone.
Golf Products
-------------
Net sales decreased $13.7 million, or 6%. The decrease in sales was primarily
due to lower volumes in Cobra brand golf clubs, gloves and a shift in the
product mix within our golf ball brands. This decrease was partly offset by
volume increases in shoes, line extensions and the introduction of new products.
Operating company contribution decreased $3.4 million, or 12%. Productivity
improvements in the current period were offset by increased selling expenses and
higher advertising and marketing expenses.
26
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Spirits and Wine
----------------
Net sales decreased $11.9 million, or 4%, principally on the impact of lower
average foreign exchange rates and the effect of the Maxxium joint venture.
Product is now sold to Maxxium net of excise taxes in certain markets and at a
lower price since the related distribution costs are now incurred by Maxxium. On
a comparable basis to prior periods, excluding the impact of Maxxium, net sales
would have been $7.6 million higher in the quarter with an adjusted sales
percentage decline of 1%. The underlying decrease was primarily attributable to
lower average foreign exchange.
Operating company contribution increased $2.1 million, or 3%, on strong
performance in our pre-mix products in Australia, benefiting from the Olympic
Games in Sydney, and Jim Beam bourbon, premium and super-premium products in
North America. This increase was partly offset by adverse foreign exchange.
27
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
CAUTIONARY STATEMENT
--------------------
This quarterly 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. 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, changes in interest rates, competitive product and
pricing pressures, trade consolidations, 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, challenges in the integration of acquisitions and joint ventures, risks
associated with the Company's implementation of strategic options for ACCO World
Corporation, as well as other risks and uncertainties detailed from time to time
in the Company's Securities and Exchange Commission filings.
28
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
--------------------------
(a) Smoking and Health Proceedings
Indemnification Agreement
On December 22, 1994, 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 (collectively, 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.
Individual Cases
As of November 6, 2000, there were approximately 103 smoking and
health cases pending on behalf of individual plaintiffs in which Registrant has
been named as one of the defendants, compared with approximately 94 such cases
as of March 23, 2000. Previously, Registrant had reported in its Annual Report
on Form 10-K for the fiscal year ended December 31, 1999 that there were
approximately 93 such cases as of March 23, 2000.
Class Actions
As of November 6, 2000, there were approximately 19 purported smoking
and health class actions pending in which Registrant has been named as one of
the defendants, compared with approximately 22 such cases on March 23, 2000, as
reported by Registrant in its Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
Health Care Cost Recovery Actions
As of November 6, 2000, there were approximately three health care
cost recovery actions pending in which Registrant had been named as one of the
defendants, compared with approximately three such cases as of March 23, 2000,
as reported by Registrant in its Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
Certain Developments in Cases Involving the Indemnitors
In Engle v. R.J. Reynolds Tobacco Company, et al. (reported under Part
I, Item 3, "Legal Proceedings" of Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998), the jury in Phase I of the trial found
for the plaintiffs and against certain tobacco manufacturers (including B&W
individually and as successor by merger to ATCO). Phase II of the trial, in
which the same jury addressed the
29
<PAGE>
individual claims of named class representatives, commenced on November 1, 1999.
On April 17, 2000, the jury awarded an approximate aggregate amount of $12.7
million to three of the named class representatives, although it also found that
the claims of one of the three class representatives may have been barred by the
statute of limitations. On July 14, 2000, the jury awarded a total of $144.87
billion in punitive damages against the defendants, including $17.59 billion
against Brown and Williamson. On November 6, 2000, Florida Circuit Judge Robert
Kaye upheld this jury award, and held that the class of plaintiffs eligible to
recover damages should be extended to smokers with illnesses diagnosed more than
four years before the lawsuit was filed in 1994. Defendants have expressed their
intention to appeal these awards. Florida law sets a cap of $100 million on the
bond that companies must pay while the appeals process is under way. Plaintiffs
have argued that this cap is unconstitutional. Registrant is not a party to the
Engle litigation.
In the recoupment lawsuit filed by the United States government in
September 1999 against the leading tobacco manufacturers (including Brown &
Williamson individually and as successor to ATCO), a U.S. District Court for the
District of Columbia ruled that the government could not use the Medical Care
Recovery Act or Medicare Secondary Payor insurance provisions as a basis to try
to recover government expenses relating to tobacco smokers, and dismissed the
counts of the lawsuit relating to these laws. The court ruled that the
government could proceed with two counts under the federal RICO statute under
which the government seeks disgorgement of all of defendants' profits from the
sale of tobacco. A tentative trial date of July 15, 2003 has been set with
respect to these claims. Registrant is not a party to this action.
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
as a defendant and not previously reported.
List of Terminated Cases
See Exhibit 99 to this Form 10-Q for a list of smoking and health
proceedings, in which Registrant has been named as a defendant, 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
30
<PAGE>
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.
(b) Reference is made to Note 9, "Pending Litigation", in the Notes
to Condensed Consolidated Financial Statements set forth in Part I, Item 1 of
this Quarterly Report on Form 10-Q.
Item 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------ --------------------------------------------------------
There are no material changes in the information provided in Item 7A
of the Company's Form 10-K for the fiscal year ended December 31,
1999.
31
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
------ --------------------------------
(a) Exhibits
--------
10a1. Severance Agreement dated as of January 1, 2000 between Registrant and
Thomas J. Flocco.*
10b1. Compensation Agreement dated as of September 1, 2000 between
Registrant and Thomas J. Flocco.*
12. Statement re computation of ratio of earnings to fixed charges.
19. Report from PricewaterhouseCoopers LLP dated October 19, 2000 re
unaudited financial information.
27. Financial Data Schedule (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 10, 2000,
in respect of Registrant's press release dated October 9, 2000, announcing that
Registrant is exploring strategic options for its ACCO World Corporation office
products unit.(Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated October 19, 2000,
in respect of Registrant's press release dated October 19, 2000 announcing
Registrant's financial results for the three month and nine month periods ended
September 30, 2000 (Items 5 and 7(c)).
32
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FORTUNE BRANDS, INC.
--------------------
(Registrant)
Date: November 13, 2000 By /s/ M.R. Mathieson
------------------ --------------------
M.R. Mathieson
Vice President, Controller
and Chief Accounting Officer
33
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
------- -------------
10a1. Severance Agreement dated as of January 1, 2000 between Registrant
and Thomas J. Flocco.*
10b1. Compensation Agreement dated as of September 1, 2000 between
Registrant and Thomas J. Flocco.*
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP
dated November 13, 2000 re unaudited
financial information.
27. Financial Data Schedule (Article 5).
99. List of Pending/Terminated Cases.
* Indicates that exhibit is a management contract or compensatory
plan or arrangement
