<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 March 31, 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 April 30, 2000 was 158,328,127 shares.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
- ------ --------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 95.1 $ 71.9
Accounts receivable, net 922.8 956.5
Inventories
Bulk whiskey 325.0 326.0
Other raw materials, supplies and
work in process 302.9 284.3
Finished products 471.2 451.1
-------- --------
1,099.1 1,061.4
Other current assets 237.3 223.0
-------- --------
Total current assets 2,354.3 2,312.8
Property, plant and equipment, net 1,169.4 1,176.5
Intangibles resulting from
business acquisitions, net 2,565.0 2,592.1
Other assets 344.4 335.7
-------- --------
Total assets $6,433.1 $6,417.1
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ -----------
(Unaudited)
Liabilities and stockholders' equity
Current liabilities
<S> <C> <C>
Notes payable to banks $ 38.2 $ 35.1
Commercial paper 869.0 602.2
Current portion of long-term debt 2.3 2.7
Accounts payable 270.6 272.2
Accrued taxes 465.9 436.3
Accrued expenses and other liabilities 512.6 654.4
-------- --------
Total current liabilities 2,158.6 2,002.9
Long-term debt 1,163.6 1,204.8
Deferred income taxes 54.5 48.3
Postretirement and other liabilities 417.7 422.9
-------- --------
Total liabilities 3,794.4 3,678.9
-------- --------
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 9.8 9.9
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 130.0 130.8
Accumulated other
comprehensive loss (27.5) (14.9)
Retained earnings 4,231.9 4,205.2
Treasury stock, at cost (2,422.9) (2,310.2)
-------- --------
Total stockholders' equity $ 2,638.7 $ 2,738.2
-------- ---------
Total liabilities and
stockholders' equity $ 6,433.1 $ 6,417.1
======== =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended March 31, 2000 and 1999
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Net sales $1,363.8 $1,292.3
Cost of products sold 727.4 677.7
Excise taxes on spirits and wine 80.3 96.7
Advertising, selling, general and
administrative expenses 391.6 364.3
Amortization of intangibles 19.9 27.3
Restructuring charges 2.5 -
Interest and related expenses 31.9 25.3
Other expenses, net 0.8 0.9
-------- --------
Income before income taxes 109.4 100.1
Income taxes 45.1 44.0
-------- --------
Net income $ 64.3 $ 56.1
======== ========
Earnings per share
Basic $ .40 $ .33
==== ====
Diluted $ .39 $ .32
==== ====
Dividends paid per share $ .23 $ .22
==== ====
Average number of shares outstanding
Basic 161.1 169.9
===== =====
Diluted 163.5 173.2
===== =====
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months Ended March 31, 2000 and 1999
-----------------------------------------------------
(In millions)
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
-------- --------
Operating activities
<S> <C> <C>
Net income $ 64.3 $ 56.1
Restructuring charges 2.5 -
Depreciation and amortization 59.6 63.8
Decrease (increase) in accounts receivable 29.4 (15.5)
Increase in inventories (40.1) (5.8)
Decrease in accounts payable, accrued
expenses and other liabilities (107.9) (98.5)
Increase in accrued taxes 29.2 25.0
Other operating activities, net (29.2) (22.8)
------- -------
Net cash provided from operating activities 7.8 2.3
Investing activities
Additions to property, plant and equipment (39.3) (38.7)
Investment in joint venture (25.2) -
Proceeds from disposition of operations 1.4 -
Other investing activities, net 1.2 0.8
--------- -------
Net cash used by investing activities (61.9) (37.9)
--------- -------
Financing activities
Increase in short-term debt, net 270.3 187.4
Issuance of long-term debt - 0.4
Repayment of long-term debt (41.5) (7.8)
Dividends to stockholders (37.6) (37.9)
Cash purchases of stock for treasury (114.2) (110.3)
Other financing activities, net 0.7 4.6
--------- -------
Net cash provided by financing activities 77.7 36.4
--------- -------
Effect of foreign exchange rate changes on cash (0.4) 2.5
--------- -------
Net increase in cash and cash equivalents 23.2 3.3
Cash and cash equivalents at beginning of period $ 71.9 $ 40.3
--------- -------
Cash and cash equivalents at end of period $ 95.1 $ 43.6
========= =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the Three Months Ended March 31, 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 income - - - - 56.1 - 56.1
Changes during the period - - - (23.6) - - (23.6)
------ ------ ------ ------- ------- --------- --------
Total comprehensive (loss) 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
====== ====== ====== ======= ======== ========= ========
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 - - - - 64.3 - 64.3
Changes during the period - - - (12.6) - - (12.6)
------ ------ ------ ------- ------- --------- --------
Total comprehensive (loss) income - - - (12.6) 64.3 - 51.7
Dividends - - - - (37.6) - (37.6)
Purchases - - - - - (115.2) (115.2)
Conversion of preferred stock and
delivery of stock plan shares (0.1) - (0.8) - - 2.5 1.6
------ ------ ------ ------- ------- --------- --------
Balance at March 31, 2000 $ 9.8 $717.4 $130.0 $(27.5) $4,231.9 $(2,422.9) $2,638.7
====== ====== ====== ======= ======== ========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<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, 2000, the
related condensed consolidated statements of income for the three month
periods ended March 31, 2000 and 1999, and the related condensed
consolidated statements of cash flows and stockholders' equity for the
three month periods ended March 31, 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 in 2000 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. Joint Venture/Acquisitions
In January 2000, the Company's spirits and wine business made an
additional cash investment of approximately $25 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 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.
<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:
<TABLE>
<CAPTION>
Operating
Net Company
Sales Contribution
------------- -------------
Three Months Ended March 31,
2000 1999 2000 1999
---- ---- ---- ----
(In millions)
<S> <C> <C> <C> <C>
Home products $ 503.8 $ 441.2 $ 74.8 $ 68.7
Office products 326.3 315.2 15.5 15.5
Golf products 261.1 250.1 38.2 36.5
Spirits and wine 272.6 285.8 54.0 50.1
-------- -------- ------ ------
$1,363.8 $1,292.3 $182.5 $170.8
======== ======== ====== ======
</TABLE>
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.
A reconciliation of operating company contribution to consolidated income
before income taxes is as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------
2000 1999
---- ----
(In millions)
<S> <C> <C>
Operating company contribution $182.5 $170.8
Amortization of intangibles 19.9 27.3
Restructuring charges 2.5 -
Other nonrecurring charges 4.5 -
Interest and related expenses 31.9 25.3
Non-operating expenses 14.3 18.1
------ ------
Income before income taxes $109.4 $100.1
====== ======
</TABLE>
<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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------
2000 1999
------ ------
(In millions,
except per
share amounts)
<S> <C> <C>
Income before extraordinary items $ 64.3 $ 56.1
Less: Preferred stock dividends 0.2 0.2
------ ------
Income available to
stockholders - basic 64.1 55.9
Convertible Preferred stock
dividend requirements 0.2 0.2
------ ------
Income available to
stockholders - diluted $ 64.3 $ 56.1
====== ======
Weighted average number of
shares outstanding - basic 161.1 169.9
Conversion of Convertible
Preferred stock 2.0 2.1
Exercise of stock options 0.4 1.2
------ ------
Weighted average number of
shares outstanding - diluted 163.5 173.2
====== ======
Earnings per share
Basic $ .40 $ .33
====== ======
Diluted $ .39 $ .32
====== ======
</TABLE>
5. 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.
In connection with the restructuring program established in 1999, the
Company recorded pre-tax restructuring charges for the three month period
ended March 31, 2000 as follows:
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Restructuring and Other Nonrecurring Charges (Continued)
<TABLE>
<CAPTION>
Restructuring Charges
---------------------
Three Months Ended
March 31, 2000
---------------------
(In millions)
<S> <C>
Office products $1.3
Golf products 1.2
----
Total $2.5
====
</TABLE>
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 March 31, 2000 is as
follows:
<TABLE>
<CAPTION>
Balance at 2000 Cash Non-Cash Balance at
12/31/99 Provision Expenditures Write-offs 3/31/00
---------- --------- ------------ ---------- ----------
(In millions)
<S> <C> <C> <C> <C> <C>
Rationalization of
Operations
Employment
termination costs (1) $ 38.3 $ 1.1 $(18.9) $ - $ 20.5
Other 1.5 - (1.8) 1.7 1.4
International distribution
and lease agreements 16.3 0.9 (0.9) (7.3) 9.0
Loss on disposal of assets 0.8 0.5 - (0.6) 0.7
------ ------ ------ ------ ------
$ 56.9 $ 2.5 $(21.6) $(6.2) $ 31.6
====== ====== ====== ====== =======
</TABLE>
(1) As of March 31, 2000 1,291 of the 1,729 positions were eliminated.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Restructuring and Other Nonrecurring Charges (Concluded)
The Company expects that substantially all remaining cash expenditures
will be made within the next twelve months.
During the three month period ended March 31, 2000, the Company recorded
pre-tax other nonrecurring charges as follows:
<TABLE>
<CAPTION>
Other Nonrecurring Charges
-----------------------------
Three Months Ended
March 31, 2000
-----------------------------
(In millions)
Cost of
Sales SG&A
Charges Charges Total
------- ------- -----
<S> <C> <C> <C>
Home products $1.3 $0.2 $1.5
Golf products 0.1 0.1 0.2
Office products 0.5 - 0.5
Corporate office - 2.3 2.3
---- ---- ----
Total $1.9 $2.6 $4.5
==== ==== ====
</TABLE>
Other nonrecurring charges include charges related to the restructuring
activities as follows:
Corporate office includes relocation costs associated with establishing a
new corporate headquarters.
Home products include the establishment of a distribution center and
plant relocation costs.
Office products include relocation costs for manufacturing facilities.
Golf products include plant relocation costs.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. 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 three months (23.6) - (23.6)
------- ------- -------
Balance at March 31, 1999 $(11.1) $(7.8) $(18.9)
======= ======= =======
Balance at December 31, 1999 $(11.9) $(3.0) $(14.9)
Changes in three months (12.6) - (12.6)
------- ------- -------
Balance at March 31, 2000 $(24.5) $(3.0) $(27.5)
======= ======= =======
</TABLE>
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.
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.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
7. Pending Litigation (Continued)
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.
<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, 2000, the related condensed
consolidated statements of income, consolidated statements of cash flows
and stockholders' equity for the three month periods ended March 31, 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 generally accepted accounting principles.
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
April 19, 2000
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
<TABLE>
<CAPTION>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for the Three Months Ended March 31, 2000 as Compared to
the Three Months Ended March 31, 1999
- --------------------------------------------------------------------------------
Operating Company
Net Sales Contribution(1)
--------- ------------------
2000 1999 2000 1999
-------- -------- ------ ------
(In millions)
<S> <C> <C> <C> <C>
Home products $ 503.8 $ 441.2 $ 74.8 $ 68.7
Office products 326.3 315.2 15.5 15.5
Golf products 261.1 250.1 38.2 36.5
Spirits and wine 272.6 285.8 54.0 50.1
-------- -------- ------ ------
$1,363.8 $1,292.3 $182.5 $170.8
======== ======== ====== ======
</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 $71.5 million, or 6%, principally on the benefits of line
extensions and new products, acquisitions made in 1999 in the home and office
products segment and price increases. These increases were partly offset by
volume declines in some existing products, changes in the way the Company sells
through the Maxxium spirits and wine joint venture and lower average foreign
exchange rates. Operating company contribution increased $11.7 million, or 7%,
on the benefit of price increases and overall volume increases.
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 $7.4
million for the three months ended March 31, 2000 as compared to the same period
last year.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
- ------------
For the three months ended March 31, 2000, we recorded pre-tax restructuring and
other nonrecurring charges of $7.0 million, $4.5 million after-tax, or three
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 and other workforce reduction initiatives across these segments.
Interest and related expenses increased 26%, or $6.6 million, reflecting higher
average borrowings to fund share repurchases, acquisitions, and investments in a
joint venture and higher interest rates.
The effective income tax rates for the three months ended March 31, 2000 and
1999 were 41.2% and 44.0%, respectively. The lower effective tax rate this year
principally reflected lower goodwill amortization and foreign income taxes.
Net income of $64.3 million, or 40 cents basic and 39 cents diluted per share,
compared with net income of $56.1 million, or 33 cents basic and 32 cents
diluted per share, for the same three month period last year.
Income from operations before net charges, which represents income before the
$7.0 million ($4.5 million after-tax) restructuring and other nonrecurring
charges taken in the three month period ended March 31, 2000, was $68.8 million,
or 43 cents basic and 42 cents diluted per share, respectively, for the three
months ended March 31, 2000, as compared with $56.1 million, or 33 cents basic
and 32 cents diluted per share for the same three month period last year.
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 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.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Home Products
- -------------
Net sales increased $62.6 million, or 14%. The increase was primarily
attributable to the acquisition of NHB Group in October 1999 and overall volume
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 $6.1 million, or 9%. The operating
company contribution increase was caused by the higher sales and was partly
offset by increased operating expenses, principally selling and costs associated
with the startup of manufacturing and distribution facilities. The increased
selling expenses were caused by higher customer program costs with both
wholesalers and home centers (principally at Moen) and increased general and
administrative expenses.
Office Products
- ---------------
Net sales increased $11.1 million, or 4%. The improvement resulted primarily
from the acquisition of Boone in October 1999 and to a lesser extent the
introduction of new products. The increase in net sales was partly offset by
volume declines in existing products and lower average foreign exchange rates.
Operating company contribution was flat. Although gross margins weakened
slightly due to increased rebates and allowances, the decline was offset by
reduced Y2K related expenses and lower advertising and marketing expenses.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Golf Products
- -------------
Net sales grew $11 million, or 4%, on volume and price increases through new
products and line extensions in the Titleist and FootJoy brands. Titleist
branded golf clubs had sustained sales and volume gains, partially offset by
lower Cobra golf club volume for the three months ended March 31, 2000 as
compared with the same period last year. The prior year period included
significant sales of discounted Cobra product lines. Operating company
contribution increased $1.7 million, or 5%, on improved gross margins in all
golf product categories, particularly Titleist and Cobra golf clubs and FootJoy
shoes, and the higher sales. This gross margin growth was partly offset by
increased volume-related selling and administrative expenses.
The United States Golf Association (USGA) establishes standards for golf
equipment used in competitive play in the United States. On November 2, 1998,
the USGA announced the immediate implementation of a new rule with respect to
the performance of golf clubs. All of our group's golf products currently
marketed conform to this new rule. In the long term, this new rule could hamper
innovation and make it more difficult to use technological advances to produce
USGA conforming products. However, it is not possible to determine whether in
the long term this new rule will have a material effect on the golf club
industry and 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 create a two-tiered set of standards for golf
balls, one for tour professionals and one for consumers, and that would shorten
the overall distance that golf balls are allowed to travel. The adoption of
either change could materially impact our golf business.
Spirits and Wine
- ----------------
Net sales decreased $13.2 million, or 5%, principally on the effect of the
Maxxium joint venture and to a lesser extent lower average foreign exchange
rates. 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, net sales would have been
$20.3 million higher in the quarter with an adjusted sales
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Spirits and Wine (Concluded)
- ----------------
percentage improvement of 2.5%. The decrease was partly offset by volume
increases and higher prices. The volume increases reflect line extensions, new
products and increases in existing product lines, principally in the U.S.
Operating company contribution increased $3.9 million, or 8%. The increase
resulted primarily from the improved gross margin (principally reflecting
favorable product mix and price increases) and increased contribution from our
wine business, partly offset by higher operating expenses, net of a reduction in
distribution expenses that are now incurred by the Maxxium joint venture. The
higher operating expenses were caused by increased volume-related selling
expenses. Operating results improved in the United States while pre-mix unit
volumes declined in Australia on a year over year comparison. The decline was
principally attributable to increased competition and reduced buy-in for the
three months ended March 31, 2000 as compared to the same period last year.
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, which began operating in August 1999, to distribute and
sell premium wines and spirits in key markets outside the United States. Jim
Beam Brands Worldwide, Inc. 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. The investment in Maxxium is accounted for under the equity method.
(See Note 2.)
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided from operating activities of $7.8 million for the three months
ended March 31, 2000 compared with $2.3 million for the same three month period
last year.
Net cash used by investing activities for the three months ended March 31, 2000
was $61.9 million, as compared with $37.9 million in the same three month period
last year, principally reflecting an additional investment in the Maxxium joint
venture.
Net cash provided by financing activities for the three months ended March 31,
2000 was $77.7 million, compared with $36.4 million in the same three month
period last year. During the three months ended March 31, 2000, we purchased
4,598,100 shares through open market purchases.
<PAGE>
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Liquidity and Capital Resources (Concluded)
- -------------------------------
Total debt at March 31, 2000 was $2.1 billion, an increase of $228.3 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 March 31, 2000. The increase principally
reflected 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.
CAUTIONARY STATEMENT
- --------------------
This annual report contains statements relating to future results. They are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. We caution readers that these forward-looking
statements speak only as of the date hereof. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including but not limited to: 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, delays in the integration of acquisitions and joint ventures, as well
as other risks and uncertainties detailed from time to time in the Company's
Securities and Exchange Commission filings.
<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 sale cigarette matters relating to the tobacco business of ATCO.
Individual Cases
As of May 10, 2000, there were approximately 94 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 May 10, 2000, there were approximately 22 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 May 10, 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 will address the individual claims of named class
representatives, commenced on November 1, 1999. On April 17, 2000, the jury
awarded an approximate aggregate amount
<PAGE>
Item 1. LEGAL PROCEEDINGS. (Concluded)
- -------------------------------------
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. Defendants have expressed their intention
to appeal these awards.
The trial court judge has ruled that the jury in Phase II may award an
aggregate classwide lump-sum amount of punitive damages. This ruling is being
challenged by the defendants in Florida's appellate courts. Registrant is not a
party to the Engle litigation.
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 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 Consolidation 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
--------
10a1. Amendment made as of January 1, 2000, to Trust Agreement and
Amendments thereto, constituting Exhibits 10c2, 10c3, 10c4 and 10c5 to
the Annual Report on Form 10-K of Registrant for the Fiscal Year ended
December 31, 1999, relating to the trust established in favor of
Norman H. Wesley.*
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. (Concluded)
- ------- --------------------------------------------
10b1. Amendment made as of March 16, 2000, amending the Agreement,
constituting Exhibits 10h1 and 10h2 to the Annual Report on Form 10-K
of Registrant for the Fiscal Year ended December 31, 1999, between
Registrant and Norman H. Wesley.*
10c1. Severance and Retirement Agreement made as of January 1, 2000, between
Registrant and Norman H. Wesley amending and restating the Agreement
referred to in Exhibits 10j1, 10j2, 10j3, 10j5 and 10j8 to the Annual
Report on Form 10-K of Registrant for the Fiscal Year ended December
31, 1999, for Mr. Norman H. Wesley.*
12. Statement re computation of ratio of earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP dated May 11, 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 April 20, 2000, in respect
of Registrant's press release dated April 20, 2000 announcing Registrant's
financial results for the three-month period ended March 31, 2000 (Items 5 and 7
(c)).
<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 12, 2000 By /s/ M.R. Mathieson
------------------- --------------------
M.R. Mathieson
Vice President, Controller
and Chief Accounting Officer
<PAGE>
EXHIBIT INDEX
-------------
Sequentially
Exhibit Numbered Page
- ------- -------------
10a1. Amendment made as of January 1, 2000, to
Trust Agreement and Amendments thereto,
constituting Exhibits 10c2, 10c3, 10c4 and
10c5 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December
31, 1999, relating to the trust established
in favor of Norman H. Wesley.*
10b1. Amendment made as of March 16, 2000, amending
the Agreement, constituting Exhibits 10h1 and
10h2 to the Annual Report on Form 10-K of
Registrant for the Fiscal Year ended December
31, 1999, between Registrant and Norman H. Wesley.*
10c1 Severance and Retirement Agreement made as of
January 1, 2000, between Registrant and
Norman H. Wesley amending and restating the
Agreement referred to in Exhibits 10j1, 10j2,
10j3, 10j5 and 10j8 to the Annual Report on
Form 10-K of Registrant for the Fiscal Year
ended December 31, 1999, for Norman H. Wesley.*
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP
dated May 11, 2000 re unaudited
financial information.
27. Financial Data Schedule (Article 5).
99. List of Pending/Terminated Cases.
<PAGE>
EXHIBIT 10a1
AMENDMENT TO TRUST AGREEMENT
THIS AMENDMENT, made as of the first day of January, 2000, among
FORTUNE BRANDS, INC., a Delaware corporation (the "Company"), THE CHASE
MANHATTAN BANK, a New York banking corporation (the "Trustee") and HEWITT
ASSOCIATES LLC, a limited liability company formed under the laws of Illinois
("Hewitt")
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Trustee have entered into a Trust
Agreement made as of January 1, 1999 (the "Trust Agreement") for the purpose of
establishing a trust in order to provide a source of benefits under the terms of
the Company's Supplemental Plan (the "Plan") for the benefit of Mr. Norman H.
Wesley and Hewitt is designated as Trustee's Contractor thereunder; and
WHEREAS, the Company and the Executive entered into an agreement made
as of January 1, 2000 providing for severance benefits and certain supplemental
retirement benefits to the Executive under certain circumstances (the "Severance
and Retirement Agreement"); and
WHEREAS, it is desired that the trust may be used for the purpose of
providing a source of payments under the supplemental retirement provisions of
the Severance and Retirement Agreement as well as under the Plan;
NOW, THEREFORE, in consideration of the premises, the parties agree
that the Trust Agreement is hereby amended as follows:
1. Section 1.2 is hereby amended by changing the third sentence
thereof to read as follows:
"Upon the establishment of this Trust, and from time to time
thereafter, the Company shall contribute to the Trust such amount in
cash as the Company shall determine to be appropriate to provide a
source of the payments required under the terms of the Plan and the
supplemental retirement provisions of the agreement between the
Company and the Executive dated January 1, 2000 providing certain
supplemental severance and retirement benefits to the Executive
(`Severance and Retirement Agreement')."
<PAGE>
2. Section 2.2 is hereby amended by changing the first four sentences
thereof to read as follows:
"The Company represents and agrees that the Trust established
under this Agreement does not fund and is not intended to fund the
Plan or benefits which may be payable under the supplemental
retirement provisions of the Severance and Retirement Agreement, or
any other employee benefit plan or program of the Company. Such Trust
is and is intended to be a depository arrangement with the Trustee for
the setting aside of cash and other assets of the Company for the
meeting of part or all of its future obligations to the Executive and
his Beneficiaries under the Plan and the supplemental retirement
provisions of the Severance and Retirement Agreement. Contributions by
the Company to this Trust shall be in respect of only the Executive.
The purpose of this Trust is to provide a fund from which benefits may
be payable under the Plan and the supplemental retirement provisions
of the Severance and Retirement Agreement and as to which the
Executive and his Beneficiaries may, by exercising the procedures set
forth herein, have access to some or all of their benefits as such
become due without having the payment of such benefits subject to the
administrative control of the Company unless the Company becomes
insolvent as defined in Section 2.1."
3. Section 3.2 is hereby amended by changing the first sentence
thereof to read as follows:
"Except for the records dealing solely with the Fund and its
investment, which shall be maintained by the Trustee, the Trustee's
Contractor shall maintain all the Executive's records contemplated by
this Agreement, including records of the Executive's compensation and
benefits from the Company, the amount of his benefits accrued under
the Plan and the supplemental retirement provisions of the Severance
and Retirement Agreement, the Executive's Beneficiary designation, the
Company's contributions to the Fund and such other records as may be
necessary for determining the amount payable to the Executive or his
Beneficiary under the Plan and the supplemental retirement provisions
of the Severance and Retirement Agreement."
4. Section 3.4 is hereby amended by changing the first two sentences
2
<PAGE>
thereof to read as follows:
"Upon the direction of the Company or upon the application of the
Executive or Beneficiary of a deceased Executive by submission of a
Payment Demand Notice in the form attached hereto as Schedule A, a
copy of which shall be delivered by the Trustee's Contractor to the
Company, the Trustee's Contractor shall prepare and deliver to the
Trustee within thirty days of receipt of such direction or application
a certification to the Trustee that the Executive's benefits under the
Plan and the supplemental retirement provisions of the Severance and
Retirement Agreement have become payable, and shall deliver a copy of
such certification to the Company and to the Executive or Beneficiary.
In preparing such certification, the Trustee's Contractor shall obtain
updated information from the Company for calculating benefits under
the Plan and the supplemental retirement provisions of the Severance
and Retirement Agreement."
5. Section 3.5 is hereby amended by changing the first two sentences
thereof as follows:
"Upon the payment of all Company liabilities under the Plan and
the supplemental retirement provisions of the Severance and Retirement
Agreement to the Executive and Beneficiaries, the Trustee's Contractor
shall prepare a certification to the Trustee, the Executive or his
Beneficiary and to the Company, and the Trustee shall thereupon hold
or distribute the Fund in accordance with the written instructions of
the Company. At no time prior to the Company's insolvency, as defined
in Section 2.1, or the payment of all liabilities of the Company under
the Plan and the supplemental retirement provisions of the Severance
and Retirement Agreement in respect of the Executive and his
Beneficiaries shall any part of the Fund revert to the Company."
6. Section 3.6 is hereby amended by changing the first sentence
thereof to read as follows:
"Nothing provided in this Agreement shall relieve the Company of
its liabilities to pay the benefits provided under the Plan and the
supplemental retirement provisions of the Severance and Retirement
Agreement except to the extent such liabilities are met by application
of Fund assets."
7. Section 4.1 is hereby amended by changing the first sentence
thereof
3
<PAGE>
to read as follows:
"The Company shall provide the Trustee's Contractor with a
complete copy of the Plan and the Severance and Retirement Agreement
and all amendments thereto and of the resolutions of the Board of
Directors of the Company or its Compensation and Stock Option
Committee approving the Plan and the Severance and Retirement
Agreement and all amendments thereto, promptly upon their adoption."
8. Section 4.1 is hereby further amended by changing the last
sentence thereof to read as follows:
"The Company shall be responsible for keeping accurate books and
records with respect to the Executive, his compensation and his rights
and interests in the Fund under the Plan and the supplemental
retirement provisions of the Severance and Retirement Agreement."
9. Section 9.1 is hereby amended by changing the second sentence
thereof to read as follows:
"Upon receipt by the Company and the Executive or his Beneficiaries of
a written certification from the Trustee's Contractor that all
liabilities have been paid with respect to the Executive or his
Beneficiaries under the Plan and the supplemental retirement
provisions of the Severance and Retirement Agreement, the Company
pursuant to a resolution of its Board of Directors of the Company or
its Executive Committee or Compensation and Stock Option Committee may
terminate the Trust upon delivery to the Trustee and the Executive or
his Beneficiaries of (a) a certified copy of such resolution, (b) an
original certification of the Trustee's Contractor that all such
liabilities have been paid and (c) a written instrument of termination
duly executed and acknowledged in the same form as this Agreement."
10. Section 11.3 is hereby amended by changing the first sentence
thereof to read as follows:
"No right or interest of the Executive or his Beneficiary under
the Plan, under the supplemental retirement provisions of the
Severance and Retirement Agreement or in the Fund shall be
transferable or assignable or shall be subject to alienation,
anticipation or encumbrance, and no right or interest of the Executive
or Beneficiary in
4
<PAGE>
the Plan or in the Fund shall be subject to any garnishment,
attachment or execution."
IN WITNESS WHEREOF, the parties have caused this AMENDMENT to be duly
executed as of the day and year first written above.
FORTUNE BRANDS, INC.
Attest:
/s/ Barb Brisinte By /s/ Anne C. Linsdau
- -------------------- ------------------------------
Anne C. Linsdau
Vice President-Human Resources
THE CHASE MANHATTAN BANK
Attest:
/s/ Sue A. Simpson By /s/ Mark J. Altschuler
- -------------------- ------------------------------
Mark J. Altschuler
Vice President
HEWITT ASSOCIATES LLC
Attest:
/s/ Barbara Checkin By: /s/ C.L. Connolly, III
- -------------------- -----------------------------
C.L. Connolly, III
I hereby consent to the foregoing AMENDMENT.
Witness:
/s/ Kent Rose /s/ Norman H. Wesley
- --------------------- ----------------------------
Norman H. Wesley
5
<PAGE>
EXHIBIT 10b1
Fortune Brands, Inc.
Anne C. Linsdau
Vice President
Human Resources
March 16, 2000
Mr. Norman H. Wesley
[Address]
Dear Mr. Wesley:
Reference is made to the agreement dated January 1, 1999 between
Fortune Brands, Inc. (the "Company") and you covering the Company's obligation
to make certain payments and provide certain benefits in the event of a
termination of your employment following a change in control of the Company (the
"Agreement"). In order to more precisely define the circumstances under which a
change in control of the Company would occur and to change the reference of your
Severance Agreement to your Severance and Retirement Agreement, it is hereby
agreed that the Agreement is amended as follows:
1. The second paragraph of the Agreement is amended in its entirety as
follows:
The Company must, of course, remain free to effect changes in management
and terminate employment. However, in order to induce you to remain in the
employ of the Company, this letter agreement sets forth the severance
benefits which the Company agrees will be provided to you in the event your
employment with the Company is terminated subsequent to a Change in Control
(as defined below) under the circumstances described below. You shall also
be entitled to any Gross-Up Payment provided by the last section hereof
with respect to the exercise of stock options, performance awards, limited
rights and other awards under the Company's Long-Term Incentive Plan and
any successor plans whether or not your employment is terminated. For
purposes of this Agreement, a "Change in Control" shall be deemed to have
occurred if (i) any person (as that term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") as in effect on February 28, 2000) is or becomes the beneficial owner
(as that term is used in Section 13(d) of the Exchange Act, and the rules
and regulations promulgated thereunder, as in effect on February 28, 2000)
of 20% or more of the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors ("Voting
Securities") of the Company, excluding, however, the following: (A) any
acquisition directly from the Company, other than an acquisition by virtue
of the exercise of a conversion privilege unless the security being so
converted was itself acquired directly from the Company, (B) any
acquisition by the Company, (C) any acquisition by an employee benefit plan
(or related trust) sponsored or maintained by the Company or entity
controlled by the Company, or (D) any acquisition pursuant to a transaction
that complies with clauses (A), (B) and (C) of clause (iii) below, (ii)
more than 50% of the members of the Board of Directors of the Company shall
not be Continuing Directors (which term, as used herein, means the
directors of the Company (A) who were members of the Board of Directors of
the
<PAGE>
Company on February 28, 2000 or (B) who subsequently became directors of
the Company and who were elected or designated to be candidates for
election as nominees of the Board of Directors, or whose election or
nomination for election by the Company's stockholders was otherwise
approved, by a vote of a majority of the Continuing Directors then on the
Board of Directors but shall not include, in any event, any individual
whose initial assumption of office occurs as a result of either an actual
or threatened election contest (as such terms are used in Rule 14(a)-11 of
Regulation 14A promulgated under the Exchange Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a person
other than the Board of Directors), (iii) the Company shall be merged or
consolidated with, or, in any transaction or series of transactions,
substantially all of the business or assets of the Company shall be sold or
otherwise acquired by, another corporation or entity unless, as a result
thereof, (A) the stockholders of the Company immediately prior thereto
shall beneficially own, directly or indirectly, at least 60% of the
combined Voting Securities of the surviving, resulting or transferee
corporation or entity (including, without limitation, a corporation that as
a result of such transaction owns the Company or all or substantially all
of the Company's assets either directly or through one or more
subsidiaries) ("Newco") immediately thereafter in substantially the same
proportions as their ownership immediately prior to such corporate
transaction, (B) no person beneficially owns (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act, and the rules and regulations
promulgated thereunder (as in effect on February 28, 2000)), directly or
indirectly, 20% or more of the combined Voting Securities of Newco
immediately after such corporate transaction except to the extent that such
ownership of the Company existed prior to such corporate transaction and
(C) more than 50% of the members of the Board of Directors of Newco shall
be Continuing Directors or (iv) the stockholders of the Company approve a
complete liquidation or dissolution of the Company.
2. Section 2(i) of the Agreement is amended by changing the second sentence
thereof as follows:
Any benefits to which you are entitled under Section 2 shall be reduced by
the amount of any payments made to you pursuant to the Severance and
Retirement Agreement dated as of January 1, 2000 between you and the
Company.
Except as amended hereby, all provisions of the Agreement remain in full
force and effect.
Sincerely,
FORTUNE BRANDS, INC.
By /s/ Anne C. Linsdau
------------------------
Anne C. Linsdau
Vice President-Human Resources
Accepted this 16th day of March, 2000.
/s/ Norman H. Wesley
----------------------
Norman H. Wesley
2
<PAGE>
EXHIBIT 10c1
SEVERANCE AND RETIREMENT AGREEMENT
AGREEMENT dated as of January 1, 2000 between FORTUNE BRANDS, INC., a
Delaware corporation (the "Company"), and NORMAN H. WESLEY (the "Executive"),
W I T N E S S E T H :
-------------------
WHEREAS, the Company and the Executive entered into a Severance
Agreement dated as of January 1, 1999 (the "Severance Agreement"), in order to
provide severance benefits in the event of termination of employment of the
Executive under certain circumstances; and
WHEREAS, the Company and the Executive desire to amend the Severance
Agreement in order to provide certain supplemental retirement benefits and
enhanced severance benefits as an added inducement to the Executive to remain in
the employ of the Company;
NOW, THEREFORE, in consideration of the premises and to further assure
the retention of the Executive in the employ of the Company after the date of
this Agreement, the parties hereto do hereby agree that the Severance Agreement
is amended in its entirety as follows:
<PAGE>
Section 1. Severance Benefits.
------------------
(a) If and only if during the term of this Agreement the Executive's
employment with the Company is terminated by the Company other than for
Disability or Cause or by the Executive for Good Reason, the Executive shall be
entitled to the severance benefits as provided in this Section 1. The Executive
shall not be entitled to any benefits as provided in this Section 1 in the event
his employment with the Company is terminated by the Company for Disability or
Cause or by the Executive other than for Good Reason.
(b) If the Executive is entitled to severance benefits, then the
Company shall pay to the Executive as severance pay following the Termination
Date the following amounts:
(i) the unpaid portion of his full base salary through the
Termination Date at the rate in effect on the date hereof plus any
increases therein subsequent thereto;
(ii) an amount equal to the Executive's base salary shall
continue to be paid at the rate in effect on the date hereof plus any
increases therein subsequent thereto until the third anniversary of the
Termination Date or, if the Executive's Normal Retirement Date (as defined
in the Retirement Plan for Employees and Former Employees of Fortune
Brands, Inc. (the "Retirement Plan")) occurs prior to the third anniversary
of the Termination Date, then payment shall be made until the
2
<PAGE>
Executive's Normal Retirement Date, such payments to be made at the
Company's regular payroll dates; and
(iii) in lieu of any further annual incentive compensation
awards, the greater of the amount awarded to the Executive under the
Incentive Compensation Plans for 1999 and the amount awarded to him under
the Incentive Compensation Plans for the calendar year immediately
preceding the year in which the Termination Date occurs, multiplied by the
lesser of three and the number of years (and fraction thereof) from the
Termination Date to the Executive's Normal Retirement Date, payable in
three equal installments at the time awards are normally paid under the
Incentive Compensation Plans; and
(iv) in lieu of any further defined contribution plan
allocations, the greater of the amount that was allocated to the
Executive's account under the Defined Contribution Plan, including the
Company 401(k) matching contribution thereto, the profit-sharing provisions
of the Supplemental Plan, including the Company matching award related to
the supplemental tax deferred amounts therein, and any other defined
contribution plan of the Company or an affiliate thereof for 1999 and the
amount that would have been required to be so allocated to him for the year
immediately preceding the year in which the Termination Date occurs,
multiplied by the lesser of the number three and the number of years (and
fraction thereof) from the
3
<PAGE>
Termination Date to the Executive's Normal Retirement Date, payable in
three equal installments on the first three April 15ths following the
Termination Date; and
(v) all legal fees and expenses incurred by the Executive as a
result of such termination (including, but not limited to, all such fees
and expenses, if any, incurred in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement).
(c) If the Executive is entitled to severance benefits, the Company
shall maintain in full force and effect, for the Executive's continued benefit
for a three-year period (or, if shorter, the period until his Normal Retirement
Date) after the Termination Date, all employee life, health, accident,
disability, medical and other employee welfare benefit plans, programs or
arrangements in which he was participating immediately prior to the date hereof
plus all improvements therein subsequent thereto, provided that his continued
participation is possible under the terms and provisions of such plans, programs
and arrangements. In the event that the Executive's participation in any such
plan, program or arrangement is barred, the Company shall arrange to provide him
with benefits substantially similar to those which he would have been entitled
to receive under such plan, program or arrangement if he had remained a
participant for such additional three-year period (or, if shorter, such
additional
4
<PAGE>
period until his Normal Retirement Date) after the Termination Date.
(d) If the Executive is entitled to severance benefits, the Executive
shall be entitled to the following as incentive compensation through the
Termination Date:
(i) the unpaid portion of the amount awarded to him as
incentive compensation under the Incentive Compensation Plans for the
calendar year immediately preceding the year in which the Termination Date
occurs, payable at the time awards thereunder are normally paid; and
(ii) incentive compensation under the Incentive Compensation
Plans for the calendar year in which the Termination Date occurs, payable
at the time awards thereunder are normally paid, in an amount equal to the
amount the Executive would have received thereunder for such period if he
had been awarded an amount for the year in which the Termination Date
occurs equal to the amount awarded to him for the calendar year immediately
preceding the year in which the Termination Date occurs. The incentive
compensation provided by this Section 1(d)(ii) shall be prorated for the
portion of the year through the Termination Date.
The payments under this Section 1(d)(ii) shall be reduced by the amount actually
paid to the Executive under the Incentive
5
<PAGE>
Compensation Plans for the calendar year in which the Termination Date occurs.
(e) If the Company shall terminate the Executive's employment other
than for Disability or Cause or if the Executive shall terminate his employment
for Good Reason and a dispute exists concerning the termination as set forth in
Section 10(n), the Company shall continue to pay the Executive's full base
salary through the date the dispute is finally resolved as provided in Section
10(n).
Section 2. Retirement Benefits. Upon the retirement of the Executive
-------------------
and if benefits are not payable pursuant to Section 3(a), the Company shall pay
to or on behalf of the Executive, monthly beginning on the date payments
commence under the Supplemental Plan an amount equal to the excess of (i) over
(ii) below where
(i) equals the sum of the aggregate monthly amounts of pension
payments (determined as a straight life annuity) to which the Executive
would have been entitled under the terms of the Pension Plans (without
regard to any termination or amendment made subsequent to the date hereof
which adversely affects in any manner the computation of the Executive's
benefits) determined as if Average Actual Earnings under the Supplemental
Plan were determined based on the three consecutive Plan Years of
6
<PAGE>
Qualifying Employment that provide the highest aggregate of Actual
Earnings, divided by three, instead of five,
and where
(ii) equals the sum of the aggregate monthly amounts of pension
payments (determined as a straight life annuity) which the Executive is
paid under the terms of the Pension Plans.
Section 3. Retirement Benefits in the Event of Termination of
--------------------------------------------------
Employment Prior to Normal Retirement Date by Reason of Death or Disability, by
- -------------------------------------------------------------------------------
the Company other than for Cause or by the Executive for Good Reason.
- --------------------------------------------------------------------
(a) If the Executive's employment is terminated by death or
disability, or if the Company shall terminate the Executive's employment other
than for Cause, or if the Executive shall terminate his employment for Good
Reason, then in addition to the retirement benefits to which the Executive is
entitled under the Pension Plans, the Company shall pay to or on behalf of the
Executive, monthly beginning at the date payments commence under the
Supplemental Plan an amount equal to the excess of (i) over (ii) below where
(i) equals the sum of the aggregate monthly amounts of pension
payments (determined as a straight life annuity) to which the Executive
would have been entitled under the terms of the Pension Plans (without
regard to any termination or amendment made subsequent to the date
7
<PAGE>
hereof which adversely affects in any manner the computation of the
Executive's benefits) determined as if (x) Average Actual Earnings under
the Supplemental Plan were determined based on the three consecutive Plan
Years of Qualifying Employment that provide the highest aggregate of Actual
Earnings, divided by three, instead of five and (y) the Executive had
accumulated an additional period of Service thereunder (subsequent to his
Termination Date) to his Normal Retirement Date at his rate of Actual
Earnings in effect on the date hereof plus any increases subsequent
thereto,
and where
(ii) equals the sum of the aggregate monthly amounts of pension
payments (determined as a straight life annuity) which the Executive is
paid under the terms of the Pension Plans.
For purposes of clause (i) there shall be considered as part of the Executive's
Actual Earnings for the period from the Termination Date to his Normal
Retirement Date for purposes of determining his highest consecutive calendar
three-year average rate of Actual Earnings the sum of (x) the Executive's annual
base salary at the rate in effect on the date hereof plus any increases
subsequent thereto plus (y) the amount awarded to the Executive under the
Incentive Compensation Plans for the year immediately prior to the Termination
Date or, if higher, for
8
<PAGE>
the year in which the Termination Date occurs (whether or not paid).
(b) The supplemental pension benefits determined under Sections 2 and
3 of this Agreement shall be payable by the Company to the Executive and his
contingent annuitant, if any, or as a spouse's benefit to the Executive's spouse
if the Executive dies prior to commencement of benefits, in the same manner and
for the same period as his pension benefits under the Supplemental Plan and
shall be adjusted actuarially as set forth in the Retirement Plan to reflect
payment in a form other than a straight life annuity or prior to age 60. In the
event that the Corporate Employee Benefits Committee (or successor thereto) of
the Company directs that the Executive's benefits under the Supplemental Plan
are to be paid as a single sum, such Committee may also direct that an
actuarially equivalent single sum payment be made of the retirement benefits
payable under this Agreement. In the event the Company segregates assets which
are intended to be a source for payment of benefits under this Agreement and the
benefits are determined to be taxable to the Executive prior to actual receipt
thereof, a payment shall be made to the Executive in an amount sufficient to pay
such taxes and any interest and penalties notwithstanding that the Executive may
not then have terminated employment, which payment for taxes shall then be used
as an offset to the benefits thereafter payable pursuant to this Agreement which
shall also be paid in an actuarially equivalent
9
<PAGE>
single sum payment promptly upon termination of employment. Actuarial
equivalence of a single sum payment shall be determined using an interest rate
equal to the average monthly yield on ten year coupon U.S. Treasury bonds (as
published by the Federal Reserve) for the month of termination of Qualifying
Employment and the prior five months and the mortality table used at the time
under the Retirement Plan for funding purposes.
Section 4. Notice of Termination; No Mitigation; No Derogation.
---------------------------------------------------
(a) Any termination by the Company for Disability or Cause or by the
Executive for Good Reason shall be communicated by Notice of Termination to the
other party hereto.
(b) The Executive shall not be required to mitigate the amount of any
payment provided for in this Agreement by seeking other employment or otherwise,
nor shall the amount of any payment provided for in this Agreement be reduced by
any compensation earned by the Executive as the result of employment by another
employer after the Termination Date or by any other compensation.
(c) Subject to Section 5, this Agreement and the obligations of the
Company hereunder shall not be in derogation of any other obligations of the
Company not set forth herein to pay any compensation or to pay or provide any
benefit to the Executive.
10
<PAGE>
Section 5. Other Compensation and Benefits. Notwithstanding any
-------------------------------
other provision of this Agreement, (a) any amount otherwise payable to the
Executive pursuant to the agreement dated January 1, 1999 between the Company
and the Executive, providing for compensation after termination of employment
following a change in control of the Company, shall be reduced by the amount of
any payments made by the Company to the Executive under Sections 1 and 3 of this
Agreement, and (b) any benefits to which the Executive is entitled under the
Company's severance pay program covering salaried employees generally shall be
reduced by benefits paid under Section 1(b)(ii) of this Agreement.
Section 6. Confidential Information.
------------------------
(a) The Executive acknowledges that given his high level position with the
Company, he has had and will have access to highly confidential information
of the Company and its affiliates, including, but not limited to, financial
information, supply and service information, marketing information,
personnel data, customer lists, business and financial plans and
strategies, and product costs, sources and pricing. The Company and the
Executive consider their relation to be one of high confidence with respect
to all such information ("Confidential Trade Secrets"). Accordingly, the
Executive agrees that during and for a period of eighteen (18) months after
the termination of his employment with the
11
<PAGE>
Company, regardless of the reasons that such employment might end, the
Executive will:
(i) hold all Confidential Trade Secrets in confidence and not
discuss, communicate, disclose or transmit to others, or make any
unauthorized copy of or use the Confidential Trade Secrets in any capacity,
position or business unrelated to the Company;
(ii) use the Confidential Trade Secrets only in furtherance of
proper Company employment related business reasons; and
(iii) take all reasonable action that the Company deems necessary
and appropriate to prevent unauthorized use or disclosure of or to protect
the Company's interests in the Confidential Trade Secrets.
(b) It is understood and agreed that the Executive's obligations under
Section 6(a) do not extend to any knowledge or information which is or hereafter
may become available to the public or to competitors otherwise than by
disclosure by the Executive in breach of this Agreement nor to disclosure
compelled by judicial or administrative proceedings after the Executive
diligently tries to avoid each disclosure and affords the Company the
opportunity to obtain assurance that compelled disclosures will receive
confidential treatment.
Section 7. Loyalty. The Executive further acknowledges that the
-------
loyalty and dedicated service of the
12
<PAGE>
Company's and its affiliates' employees is critical to the Company's business.
Accordingly, the Executive agrees that during and after his employment by the
Company, regardless of the reasons the employment might end, he will not,
without the prior written consent of the Company, induce or attempt to induce
any employee or agency representative of the Company or any of its affiliates to
leave the employment or representation of the Company or of any affiliate. The
Executive also agrees that during and after his employment, he will not take any
action, or make any statements, that could discredit or disparage the Company or
its affiliates, or its or their officers, directors, employees or products.
Section 8. Non-Competition.
---------------
(a) The Executive acknowledges that the Company and its affiliates
have invested time and money in establishing or planning to establish one or
more aspects of its business throughout the United States, Canada, Mexico and
Europe. Therefore, the Executive agrees that during his employment by the
Company and for a period of eighteen (18) months after the termination of his
employment, the Executive will not, directly or indirectly, individually engage
in nor be competitively employed or retained by, or render any competing
services for, or be financially interested in, any firm or corporation engaged
in any business in the United States, Canada, Mexico or Europe which is directly
competitive with any significant
13
<PAGE>
business in which the Company or any of its affiliates was engaged during the
two-year period preceding the date the Executive's employment terminates,
including, but not limited to, any significant business in which, during such
two-year period, the Executive was involved in the Company's or any affiliate's
planning to enter such business.
(b) The restriction in Section 8(a) shall not apply to
(i) the purchase by the Executive of stock not to exceed 5% of
the outstanding shares of capital stock of any corporation whose securities
are listed on any national securities exchange; or
(ii) the employment of the Executive by a non-competitive
subsidiary or non-competitive affiliated entity of a competitor of the
Company or any affiliate upon written consent of the Company, which consent
shall not unreasonably be withheld.
(c) The Executive also agrees that for a period of eighteen (18)
months after the termination of his employment with the Company he will not
solicit business from nor directly or indirectly cause others to solicit
business that competes with the Company's or any affiliate's line of products
from any entities which have been customers of the Company during the
Executive's employment or which were targeted as potential customers during
Executive's employment.
14
<PAGE>
Section 9. Remedies. The Executive recognizes and agrees:
--------
(a) that the covenants and restrictions in Sections 6, 7 and 8 of this
agreement are reasonable and valid and all defenses to the strict enforcement
thereof by the Company are waived by the Executive to the full extent permitted
by law. In the event, however, that a court of competent jurisdiction should
determine in any case that the enforcement of any provision contained in such
paragraphs would not be reasonable, it is intended that enforcement of a
provision which is determined by such court to be reasonable shall be given
effect; and
(b) that a breach of the covenants and restrictions in Sections 6, 7
and 8 of this Agreement would result in irreparable harm to the Company which
could not be compensated by money damages alone. Accordingly, the Executive
agrees that should there by a breach of any or all of these provisions or a
threatened breach, the Company shall be entitled to cease paying amounts under
Sections 1 and 3 and to offset any amount it owes to Executive against any
damage that it has suffered as a result of the breach of any of the covenants
and restrictions in Sections 6, 7 and 8 and in addition to its other remedies,
to an order enjoining any such breach or threatened breach without bond. In
addition, the Executive agrees that, in the event the he breaches any of the
covenants or restrictions in Section 6, 7 or 8 of the Agreement, he will
promptly repay to the Company upon demand of the Company any amounts paid to him
15
<PAGE>
pursuant to Sections 1 and 3. The Executive further agrees that he will
reimburse the Company for its attorney fees and costs incurred in pursuing any
action to enforce these provisions.
Section 10. Definitions. The following words shall have the
-----------
following meanings in this Agreement:
(a) Actual Earnings. Actual Earnings shall have the same meaning
---------------
as set forth in the Retirement Plan on the date hereof or any amendment
thereto which has the effect of increasing Actual Earnings.
(b) Cause. Termination of employment by the Company for Cause
-----
shall be deemed to have occurred only if (i) termination shall have been
the result of (A) an act or acts of dishonesty on the Executive's part
constituting a felony and intended to result directly or indirectly in
substantial gain or personal enrichment to him at the expense of the
Company, or (B) the Executive's willful and continued failure substantially
to perform his duties and responsibilities (other than any such failure
resulting from his incapacity due to physical or mental illness) after a
demand for substantial performance is delivered to the Executive by the
Board of Directors of the Company which specifically identifies the manner
in which such Board believes that the Executive has not substantially
performed his duties and the Executive is given
16
<PAGE>
a reasonable time after such demand substantially to perform his duties,
and (ii) there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than three-
quarters of the members of the Board of Directors of the Company at a
meeting thereof called and held for the purpose (after reasonable notice to
the Executive and an opportunity for him, together with his counsel, to be
heard before such Board), finding that in the good faith opinion of the
Board of Directors of the Company the Executive was guilty of conduct set
forth above in clause (i)(A) or (i)(B) of this paragraph and specifying the
particulars thereof in detail. The Executive's employment shall in no event
be considered to have been terminated by the Company for Cause if the act
or failure to act upon which such termination is based (x) was done or
omitted to be done (1) as a result of bad judgment or negligence on his
part, or (2) without intent of gaining therefrom directly or indirectly a
profit to which the Executive was not legally entitled or (3) as a result
of his good faith belief that such act or failure to act was in or was not
opposed to the interests of the Company, or (y) is an act or failure to act
in respect of which the Executive meets the applicable standard of conduct
prescribed for indemnification or reimbursement of payment of expenses
under the By-laws of the Company or the laws of the state
17
<PAGE>
of its incorporation or the directors' or officers' liability insurance of
the Company, in each case as in effect at the time of such act or failure
to act.
(c) Defined Contribution Plan. Defined Contribution Plan means
-------------------------
the Fortune Brands Retirement Savings Plan.
(d) Disability. Termination of employment by the Company for
----------
Disability shall be deemed to have occurred only if, as a result of the
Executive's incapacity due to physical or mental illness, the Executive
shall have been absent from his duties with the Company on a full-time
basis for 180 consecutive days and, within 30 days after Notice of
Termination is given to the Executive by the Company, the Executive shall
not have returned to the full-time performance of his duties.
(e) Good Reason. Termination of employment by the Executive for
-----------
Good Reason shall be deemed to have occurred only if the Executive
terminates his employment for any of the following reasons:
(i) without the Executive's express written consent, any
material reduction in the aggregate duties, responsibilities and
authority assigned to him as of the date hereof, or the assignment to
him of any duties, responsibilities or authority inconsistent with the
duties, responsibilities and authority assigned to him as of the date
hereof, or a change in his reporting
18
<PAGE>
responsibilities, titles, offices or other positions as in effect on
the date hereof, or any removal of the Executive from, or any failure
to re-elect the Executive to, any of such positions, except in
connection with the termination of his employment as a result of his
death or by the Company for Disability or Cause or by the Executive
other than for Good Reason;
(ii) a reduction by the Company in the Executive's base salary
as in effect on the date hereof plus all increases therein subsequent
thereto;
(iii) the failure of the Company substantially to maintain and
to continue the Executive's participation in the Company's benefit
plans as in effect on the date hereof and with all improvements
therein subsequent thereto (other than those plans or improvements
that have expired thereafter in accordance with their original terms),
or the taking of any action which would materially reduce the
Executive's benefits under any of such plans or deprive the Executive
of any material fringe benefit enjoyed by him on the date hereof or
subsequently. For the purposes hereof such benefit plans shall
include, but not be limited to, the Incentive Compensation Plans, the
Pension Plans, the
19
<PAGE>
Defined Contribution Plan and the Company's Long-Term Incentive Plan;
(iv) the sum of the Executive's base salary and the amount paid
to the Executive as incentive compensation under the Incentive
Compensation Plans for any calendar year during the term hereof is
less than 90% of the sum of the Executive's base salary and the amount
paid to the Executive under the Incentive Compensation Plans for 1999
or any subsequent year during the term hereof for which the sum of
such amounts was greater; provided, however, that this paragraph shall
not be applicable if the cause of the reduction of the sum of the
Executive's base salary and incentive compensation is a failure of the
Company to meet performance goals under the Incentive Compensation
Plans;
(v) the failure of the Company to provide the Executive during
each calendar year with a number of paid vacation days at least equal
to the number of paid vacation days to which he was entitled at the
date hereof plus any increases therein subsequent thereto;
(vi) any purported termination of the Executive's employment
which is not effected pursuant to a Notice of Termination, and for
purposes of this
20
<PAGE>
Agreement, no such purported termination shall be effective; or
(vii) any failure of the Company to comply with and satisfy
Section 11.
(f) Incentive Compensation Plans. Incentive Compensation Plans
----------------------------
means the Fortune Brands, Inc. Annual Executive Incentive Compensation Plan
and any other plans and arrangements of the Company and its affiliates
providing for an annual incentive bonus, but not any long-term incentive
compensation.
(g) Normal Retirement Date. Normal Retirement Date means the last
----------------------
day of the month in which the Executive attains age 65.
(h) Notice of Termination. Notice of Termination means a notice
---------------------
in writing which shall indicate the specific termination provision in this
Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated.
(i) Pension Plans. Pension Plans means the Retirement Plan, the
-------------
Supplemental Plan and any other program, practice or arrangement (other
than this Agreement) of the Company or any present or former affiliate
thereof to provide the Executive with a defined
21
<PAGE>
pension benefit after termination of employment and in effect on the date
hereof or hereafter adopted.
(j) Qualifying Employment. Qualifying Employment has the meaning
---------------------
set forth in the Retirement Plan on the date hereof.
(k) Retirement Plan. Retirement Plan means the Retirement Plan
---------------
for Employees and Former Employees of Fortune Brands, Inc.
(l) Service. Service has the meaning set forth in the Retirement
-------
Plan on the date hereof.
(m) Supplemental Plan. Supplemental Plan means the Supplemental
-----------------
Plan of Fortune Brands, Inc.
(n) Termination Date. Termination Date means (i) if employment is
----------------
terminated by the Company for Disability, 30 days after Notice of Termination is
given (provided that the Executive shall not have returned to the performance of
his duties on a full-time basis during such 30-day period), (ii) if employment
is terminated for Good Reason, the date specified in the Notice of Termination,
(iii) if employment is terminated by the Company for Cause, the date on which a
Notice of Termination is given and (iv) if employment is terminated for any
other reason, the date on which the Executive ceases to perform his duties as an
officer of the Company; provided, however, that if within 30 days after any
Notice of Termination is given the party receiving such notice of termination
notifies the other party that a dispute exists concerning the
22
<PAGE>
termination, the Termination Date shall be the date on which the dispute is
finally determined, either by written agreement of the parties or by a final
judgment, order or decree of court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected); provided
further, however, that if the dispute is resolved in favor of the Company, the
Termination Date shall not be so extended but shall be the date determined under
clauses (i) through (iv) of this Section 10(n).
Section 11. Successors; Binding Agreement.
-----------------------------
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company, and any parent
company thereof, by agreement or agreements in form and substance satisfactory
to the Executive, expressly to assume and agree to perform this Agreement, and
in the case of any such parent company expressly to guarantee and agree to cause
the performance of this Agreement, in the same manner and to the same extent as
the Company would be required to perform it if no such succession had taken
place. As used in this Agreement, "Company" shall mean the Company as defined
in the first sentence of this Agreement and any successor to all or
substantially all its business or assets or which otherwise becomes bound by all
the
23
<PAGE>
terms and provisions of this Agreement, whether by the terms hereof, by
operation of law or otherwise.
(b) This Agreement is personal to the Executive and without the prior
written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive and, in the
event of his death, his spouse or contingent annuitant, if any, and his personal
or legal representatives.
Section 12. Funding. The Company may, but shall not be obligated to,
-------
set aside any funds to fulfill its obligations under Section 3 of this
Agreement. Benefits under Section 3 of this Agreement may also be funded in
accordance with the terms of the employee grantor trust arrangement set forth in
the Trust Agreement made as of January 1, 1999 among the Executive, the Company
and The Chase Manhattan Bank or the Segregated Account referred to in such Trust
Agreement.
Section 13. Notice. Any notice, demand or other communication
------
required or permitted under this Agreement shall be effective only if it is in
writing and delivered personally or sent by registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:
24
<PAGE>
If to the Company:
Fortune Brands, Inc.
300 Tower Parkway
Lincolnshire, Illinois 60069
Attention: Secretary
If to the Executive:
Norman H. Wesley
[Address]
or to such other address as either party may designate by notice to the other
and shall be deemed to have been given as of the date so personally delivered or
mailed.
Section 14. Miscellaneous. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Delaware. This Agreement
cannot be modified or any term or condition waived in whole or in part except by
a writing signed by the party against whom enforcement of the modification or
waiver is sought. No waiver by either party hereto at any time of any beach by
the other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. The headings in this Agreement are included for convenience of
reference only and shall not in any way affect the meaning or interpretation of
this Agreement.
25
<PAGE>
Section 15. Separability. The invalidity or unenforceability of any
------------
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
Section 16. Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which so executed shall be deemed to be an
original, and such counterparts will together constitute but one Agreement.
Section 17. Withholding of Taxes. The Company may withhold from any
--------------------
benefits payable under this Agreement all federal, state, city or other taxes as
shall be required pursuant to any law or governmental regulation or ruling.
Section 18. Prior Agreements. Effective as of the date first written
----------------
above, this Agreement shall replace and supersede the Severance Agreement and
the Severance Agreement
26
<PAGE>
shall be deemed null and void and shall have no further force or effect.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its officer thereunto duly authorized and its seal to be hereunto
affixed and attested and the Executive has hereunto set his hand as of the 17th
day of March, 2000.
[Seal] FORTUNE BRANDS, INC.
Attest: By: /s/ Anne C. Linsdau
----------------------------------
Anne C. Linsdau
Vice President-Human Resources
/s/ Kenton R. Rose
- -----------------------------
Asst. Secretary
/s/ Norman H. Wesley
---------------------------------
Norman H. Wesley
27
<PAGE>
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,
----------------------------------------------- ------------
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings Available:
Income (loss) from continuing operations
before income taxes, minority
interest and extraordinary items............... $358.9 $340.1 $145.2 $516.4 $(725.2) $109.4
Less: Excess of earnings over
dividends of less than
fifty percent owned
companies............................... 0.2 0.2 0.2 0.2 0.2 0.1
Capitalized interest...................... - 0.3 - - 4.1 0.3
------ ------ ------ ------ ------ -------
358.7 339.6 145.0 516.2 (720.9) 109.0
====== ====== ====== ====== ===== =======
Fixed Charges:
Interest expense (including
capitalized interest) and
amortization of debt discount
and expenses................................. 147.1 172.6 122.4 105.4 113.9 32.7
Portion of rentals representative
of an interest factor........................ 13.5 15.1 14.7 17.0 19.0 4.1
------ ------ ------ ------ ------ ------
Total Fixed Charges....................... 160.6 187.7 137.1 122.4 132.9 36.8
------ ------ ------ ------ ------ ------
Total Earnings Available.................. $519.3 $527.3 $282.1 $638.6 $(588.0) $145.8
====== ====== ====== ====== ====== ======
Ratio of Earnings to Fixed Charges............... 3.23 2.81 2.06 5.22 (A) 3.96
====== ====== ====== ====== ====== ======
</TABLE>
(A) As a result of the loss reported for the year ended December 31, 1999,
earnings were insufficient to cover fixed charges by $588.0 million.
Included in earnings was a second quarter 1999 goodwill write-down of
$1,126 million as disclosed in Note 2 of the Company's Condensed
Consolidated Financial Statements. If the write-down were excluded from
earnings, the ratio of earnings to fixed charges for the year ended
December 31, 1999 would have been 4.05.
<PAGE>
PART II - EXHIBIT 15
---------------------
May 12, 2000
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 April 19, 2000, on our review of interim
financial information of Fortune Brands, Inc. and Subsidiaries for the three
month period ended March 31, 2000 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. 333-95909) relating to the 1999 Long-Term Incentive Plan of
Fortune Brands, Inc., the Registration Statement on Form S-8 (Registration No.
333-95919) relating to the Fortune Brands Retirement Savings Plan, the
Registration Statement on Form S-8 (Registration No. 333-95925) relating to the
Fortune Brands Hourly Employee Retirement Savings Plan, 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, 33-3985 and 333-76371) 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
Chicago, IL 60601
<TABLE> <S> <C>
<PAGE>
<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, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> $ 95
<SECURITIES> 0
<RECEIVABLES> 986
<ALLOWANCES> 64
<INVENTORY> 1,099
<CURRENT-ASSETS> 2,354
<PP&E> 2,200
<DEPRECIATION> 1,031
<TOTAL-ASSETS> 6,433
<CURRENT-LIABILITIES> 2,159
<BONDS> 1,164
<COMMON> 717
0
10
<OTHER-SE> 1,911
<TOTAL-LIABILITY-AND-EQUITY> 6,433
<SALES> 1,364
<TOTAL-REVENUES> 1,364
<CGS> 727
<TOTAL-COSTS> 727
<OTHER-EXPENSES> 80
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 32
<INCOME-PRETAX> 109
<INCOME-TAX> 45
<INCOME-CONTINUING> 64
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64
<EPS-BASIC> .40
<EPS-DILUTED> .39
</TABLE>
<PAGE>
EXHIBIT 99
List of Pending Cases
In addition to those pending cases previously reported in Exhibit 99
of Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1999, Registrant has been named as a defendant in the following smoking and
health proceeding:
Taylor, D., et al. v. Lorillard, Inc., et al., Superior Court of
California, Alameda County, December 21, 1999.
List of Terminated Cases
The following smoking and health proceedings have been terminated and
were not previously reported as such:
Crayton, R. v. Safeway, Inc., et al., Superior Court of the State of
California, County of Alameda, which was instituted on March 22, 2000, was
dismissed with respect to Registrant on April 28, 2000.
