-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NiiiiHAiRVjKAE7d3xoA5BD8IullNamStMz2fVEMDAy4KBoNXriOdX3UW7bauVOb rbI7SOpUZdpDcr4AIpAIeA== 0000893838-99-000094.txt : 19990402 0000893838-99-000094.hdr.sgml : 19990402 ACCESSION NUMBER: 0000893838-99-000094 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 21 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FORTUNE BRANDS INC CENTRAL INDEX KEY: 0000789073 STANDARD INDUSTRIAL CLASSIFICATION: HEATING EQUIP, EXCEPT ELEC & WARM AIR & PLUMBING FIXTURES [3430] IRS NUMBER: 133295276 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09076 FILM NUMBER: 99579929 BUSINESS ADDRESS: STREET 1: 1700 E PUTNAM AVE CITY: OLD GREENWICH STATE: CT ZIP: 06870-0811 BUSINESS PHONE: 2036985000 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN BRANDS INC /DE/ DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 Commission file number 1-9076 FORTUNE BRANDS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-3295276 ---------------- --------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1700 East Putnam Avenue, Old Greenwich, Connecticut 06870-0811 -------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 698-5000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered --------------------- --------------------- Common Stock, par value $3.125 per share New York Stock Exchange, Inc. $2.67 Convertible Preferred Stock, without par value New York Stock Exchange, Inc. 9% Notes Due 1999 New York Stock Exchange, Inc. 8 5/8% Debentures Due 2021 New York Stock Exchange, Inc. 8 1/2% Notes Due 2003 New York Stock Exchange, Inc. 7 7/8% Debentures Due 2023 New York Stock Exchange, Inc. 7 1/2% Notes Due 1999 New York Stock Exchange, Inc. Preferred Share Purchase Rights New York Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: None -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of Registrant's voting stock held by non-affiliates of Registrant, at February 11, 1999, was $5,273,997,000. The number of shares outstanding of Registrant's Common Stock, par value $3.125 per share, at March 12, 1999, was 167,900,121. DOCUMENTS INCORPORATED BY REFERENCE (1) Certain information contained in the Annual Report to Stockholders of Registrant for the fiscal year ended December 31, 1998 is incorporated by reference into Part I, Part II and Part IV hereof. (2) Certain information contained in the Proxy Statement for the Annual Meeting of Stockholders of Registrant to be held on April 27, 1999 is incorporated by reference into Part III hereof. PART I Item 1. Business. (a) General development of business. Registrant is a holding company with subsidiaries engaged in the manufacture and sale of home products, office products, golf products and spirits and wine. Registrant was incorporated under the laws of Delaware in 1985 and until 1986 conducted no business. Prior to 1986, the businesses of Registrant's subsidiaries were conducted by American Brands, Inc., a New Jersey corporation organized in 1904 ("American New Jersey"), and its subsidiaries. American New Jersey was merged into The American Tobacco Company on December 31, 1985, and the shares of the principal first-tier subsidiaries formerly held by American New Jersey were transferred to Registrant. In addition, Registrant assumed all liabilities and obligations in respect of the public debt securities of American New Jersey outstanding immediately prior to the merger. On May 30, 1997, Registrant's name was changed from American Brands, Inc. to Fortune Brands, Inc. As a holding company, Registrant is a legal entity separate and distinct from its subsidiaries. Accordingly, the right of Registrant, and thus the right of Registrant's creditors (including holders of its debt securities and other obligations) and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject to the claims of creditors of the subsidiary, except to the extent that claims of Registrant itself as a creditor of such subsidiary may be recognized, in which event Registrant's claims may in certain circumstances be subordinate to certain claims of others. In addition, as a holding company, a principal source of Registrant's unconsolidated revenues and funds is dividends and other payments from its subsidiaries. Registrant's principal subsidiaries currently are not limited by long-term debt or other agreements in their abilities to pay cash dividends or to make other distributions with respect to their capital stock or other payments to Registrant. In recent years, Registrant has been engaged in a strategy of seeking to enhance the operations of its principal operating companies. Pursuant to this strategy, in 1998, Registrant completed three acquisitions of home products, office products and spirits and wine businesses for an aggregate cost of $271.8 million in cash, including fees and expenses. In 1997, Registrant completed five acquisitions of office products, golf clubs and home products businesses for an aggregate cost of $92 million, including fees and expenses. In 1996, Registrant acquired Cobra Golf Incorporated ("Cobra"), a leading manufacturer of golf clubs, for an aggregate cost of $712 million in cash, including fees and expenses. Most recently, on March 30, 1999, Registrant announced that its Jim Beam Brands subsidiary along with Highland Distillers and Remy-Cointreau have signed a memorandum of understanding to establish a jointly owned international distribution company for markets outside the United States. Pursuant to this arrangement, Jim Beam, Highland Distillers and Remy-Cointreau would each contribute distribution assets and/or cash having an approximate value of $110 million to, and own equal shares in, the distribution company. It is anticipated that the distribution company will operate in approximately 50 countries. The arrangement is subject to certain conditions, including completion of due diligence, execution of definitive agreements and necessary approvals. Registrant has also disposed of subsidiaries having significant revenues but engaged in businesses considered by Registrant to be nonstrategic to its long-term operations. For example, in 1994, Registrant sold The American Tobacco Company, a subsidiary engaged in the domestic tobacco business, to Brown & Williamson Tobacco Corporation (a subsidiary of B.A.T Industries p.l.c.) for $1 billion. In 1995, Registrant sold American Franklin Company, whose subsidiaries were engaged in the life insurance business, to American General Corporation for $1.17 billion. In 1997, Registrant completed the spin-off of Gallaher Group Plc ("Gallaher Group") to Registrant's stockholders. Subsidiaries of Gallaher Group compete in the international tobacco business. In addition, a number of other nonstrategic businesses and product lines have been sold. In 1997, one of Registrant's office products subsidiaries sold Sax Arts & Crafts, a marketer to schools of arts and crafts supplies. In 1998, one of Registrant's home products subsidiaries sold assets relating to the manufacture of door locks and related hardware. Registrant continues to pursue the above strategy and in furtherance thereof explores other possible acquisitions in fields related to its principal operating companies. Registrant also cannot exclude the possibility of acquisitions in other fields or further dispositions. Although no assurance can be given as to whether or when any acquisitions or dispositions will be consummated, if agreement with respect to any acquisitions were to be reached, Registrant might finance such acquisitions by issuance of additional debt or equity securities. The additional debt from any acquisitions, if consummated, would increase Registrant's debt-to-equity ratio and such debt or equity securities might, at least in the near term, have a dilutive effect on earnings per share. Registrant also continues to consider other corporate strategies intended to enhance stockholder value. It cannot be predicted whether or when any such strategies might be implemented or what the financial effect thereof might be upon Registrant's debt or equity securities. 2 Another aspect of Registrant's strategy to enhance the operations of its principal operating companies has been to continuously evaluate the productivity of their product lines and existing asset base and actively seek to identify opportunities to improve Registrant's and its subsidiaries cost structure. This strategy led Registrant to record, in 1997, pre-tax restructuring and other nonrecurring charges totaling $298.2 million across all of its principal operating companies. Future opportunities may involve, among other things, the relocation of manufacturing or assembly to locations generally having lower costs, the reorganization of operations and a possible downsizing and move of the corporate office. Cautionary Statement Except for the historical information contained in this Annual Report on Form 10-K, certain statements in this document, including without limitation, certain matters discussed in Part I, Item 1 -- Business and Item 3 -Legal Proceedings and in Part II, Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements that involve a number of risks and uncertainties. Readers are cautioned that these forward-looking statements speak only as of the date hereof. Actual results may differ materially from those projected as a result of certain risks and uncertainties including, but not limited to, changes in general economic conditions, foreign exchange rate fluctuations, competitive product and pricing pressures, the impact of excise tax increases with respect to distilled spirits, regulatory developments, the uncertainties of litigation, changes in golf equipment regulatory standards, the impact of weather, particularly on the home products and golf brand groups, expenses and disruptions related to shifts in manufacturing to different locations and sources, delays in the integration of recent acquisitions, the timely resolution of the Year 2000 issue, as well as other risks and uncertainties detailed from time to time in Registrant's Securities and Exchange Commission filings. (b) Financial information about industry segments. See Note 15 "Information on Business Segments" in the Notes to Consolidated Financial Statements contained in the 1998 Annual Report to Stockholders of Registrant, which Note is incorporated herein by reference. (c) Narrative description of business. The following is a description of the business of the subsidiaries of Registrant in the industry segments of Home Products, Office Products, Golf Products and Spirits and Wine. For financial information about the above industry segments, see Note 15 "Information on Business Segments" in the Notes to Consolidated Financial Statements contained in the 1998 Annual Report to 3 Stockholders of Registrant, which Note is incorporated herein by reference. Home Products MasterBrand Industries, Inc. ("MasterBrand") is a holding company for subsidiaries in the home products business. Subsidiaries include Moen Incorporated ("Moen"), Aristokraft, Inc. ("Aristokraft"), Schrock Cabinet Company ("Schrock"), Master Lock Company ("Master Lock") and Waterloo Industries, Inc. ("Waterloo"). The home products business is highly competitive. MasterBrand's operating companies compete on the basis of product quality, price, service and responsiveness to distributor and retailer needs and end-user consumer preferences. Factors which affect MasterBrand's results of operations include the levels of home improvement and residential construction activity principally in the U.S. (including repair and remodeling and new construction). Moen manufactures and packages faucets, sinks, bath furnishings and plumbing accessories and parts and a wide variety of plumbing supply and repair products in the U.S. and East Asia. Faucets are sold under a variety of trade names, including Moen, Moentrol, Touch Control, One-Touch, Riser, Monticello, PureTouch, Concentrix, Chateau, Legend, Pulsation and Sani-Stream, and other products are sold under the Moen, Chicago Specialty, Dearborn Brass, Wrightway, Anchor Brass, Hoov-R-Line and Donner brand names. Composite kitchen sinks are sold under the MoenStone brand name. Sales are made through Moen's own sales force and independent manufacturers' representatives primarily to wholesalers, mass merchandisers and home centers and also to industrial distributors, repackagers and original equipment manufacturers. Some plumbing parts and repair products are purchased from other manufacturers and repackaged for resale. Products are sold principally in the U.S. and Canada and also in East Asia, Mexico and Latin America. Moen's chief competitors include Masco's Delta/Peerless, Black & Decker's Price Pfister, Kohler and American Standard. MasterBrand Cabinets, Inc. ("MasterBrand Cabinets") is a holding company for two subsidiaries, Aristokraft and Schrock, both of which are engaged in manufacturing stock and semi-stock custom kitchen cabinets and bathroom vanities. MasterBrand Cabinets was formed in June 1998 in connection with the acquisition of certain assets and liabilities of Schrock from White Consolidated Industries, Inc., a wholly-owned subsidiary of AB Electrolux of Sweden. Schrock sells under the brand names Schrock, Kemper and Diamond; Aristokraft's brand names are Aristokraft and Decora. The Schrock, Kemper and Diamond brand names are primarily sold in the U.S. to home centers and kitchen and bath specialty dealers. Sales under the Aristokraft brand name are made in the U.S. primarily through stocking distributors for resale to kitchen and bath specialty dealers, lumber and building material dealers, remodelers and builders. Decora brands are sold primarily in the U.S. to kitchen and bath specialty dealers. Schrock 4 and Aristokraft both compete with a number of manufacturers, including Masco's Merillat and KraftMaid, Armstrong World Industries, Triangle Pacific, American Woodmark and Mill's Pride. Master Lock manufactures key-controlled and combination padlocks, chain and cable locks, bicycle locks, built-in locker locks and other specialty security devices. Sales of products designed for consumer use are made to wholesale distributors and to home centers, hardware and other retail outlets, while sales of lock systems are made to industrial and institutional users, original equipment manufacturers and retail outlets. Sales are made through independent manufacturers' representatives, primarily in the U.S. and Canada, as well as through Master Lock's own sales force. Master Lock competes with Abus, Belwith, Kryptonite, Hampton, American Lock, and various imports in the padlock segment. In March 1998, Master Lock sold its Door Hardware Division to Ingersoll Rand's Schlage subsidiary. Waterloo manufactures tool storage products, consisting primarily of high quality steel tool boxes, tool chests, workbenches and related products manufactured for private label sale by a number of the largest national retailers in the U.S. Similar products are sold under the Waterloo brand name to specialty industrial and automotive dealers, mass merchandisers, home centers and hardware stores. Waterloo also manufactures hospital carts and storage units and sells such products to institutional users. Waterloo competes with Snap-On, Kennedy, Stanley, Stack-On, and others in the metal storage segment, and with Contico, Zag, Rubbermaid and others in the plastic hand box category. Raw materials used for the manufacture of products offered by MasterBrand's operating companies are primarily red oak and maple lumber, particleboard, rolled steel, brass, zinc, copper, nickel, and various plastic resins. These materials are available from a number of sources. The MasterBrand operating companies are each evaluating opportunities for increasing their purchases of components and finished goods from domestic and international lower-cost third-party vendors. Such actions are being taken in order to improve their respective cost and competitive positions. Sales of MasterBrand operating companies' products are becoming increasingly concentrated in a smaller number of major customers, principally mass merchant superstores, home centers and large distributors and home builders. The MasterBrand operating companies also are increasingly facing competition on a value-priced basis. The continued consolidation of MasterBrand's customers and the growth of large mass merchants and home centers will continue to present pricing and service challenges to manufacturers and will present opportunities for the most efficient manufacturers. 5 Office Products ACCO World Corporation ("ACCO") is a holding company for subsidiaries engaged in designing, developing, manufacturing and marketing a wide variety of traditional and computer-related office products, supplies, personal computer accessory products, time management products, presentation aids and label products. Products are manufactured by subsidiaries, joint ventures and licensees of ACCO, or manufactured to such subsidiaries' specifications by third party suppliers, throughout the world, principally in the U.S., Canada, western Europe, Australia, Taiwan and China. ACCO Brands, Inc. ("ACCO Brands"), ACCO's primary U.S. operating company, manufactures or sells binders, fasteners, paper clips, punches, staples, stapling equipment and storage products, computer supplies and accessories, labels and presentation products. ACCO Canada Inc. ("ACCO Canada"), a subsidiary of ACCO, manufactures a limited product range and distributes in Canada a range of office products similar to that distributed by ACCO Brands in the U.S. Principal office products brands include ACCO fastener products, Swingline staples and stapling equipment, Wilson Jones binders and columnar pads, Perma Products corrugated storage products, Kensington computer accessories and supplies, MACO and Wilson Jones labels and Apollo presentation products. Products are sold throughout the U.S. and Canada by in-house sales forces and independent representatives to office and computer products wholesalers, retailers, dealers, mail order companies and mass merchandisers. Recent acquisitions of North American office products companies include the following: in 1997, Advanced Gravis Computer Technology Ltd., a leading marketer of personal computer joysticks and game pads, and also in 1997, May Tag & Label Corp., a manufacturer of labeling products sold under the MACO brand; and in February 1998, the Apollo group of companies, a North American leader in presentation products. Subsidiaries of ACCO Europe PLC ("ACCO Europe"), another subsidiary of ACCO, manufacture and distribute a wide range of office supplies and machines, storage and retrieval filing systems and presentation products. ACCO Europe's products are sold primarily in the U.K., Ireland, western Europe and Australia through its subsidiaries' sales forces and through distributors. Principal brands used by ACCO Europe's subsidiaries include ACCO fastening products, Kensington computer accessories, Rexel stapling products, Nyrex and Twinlock filing products, Nobo and Sasco presentation products and, in Australia, Marbig products. In 1997, a subsidiary of ACCO Europe acquired Nobo Group plc, a leading manufacturer of presentation aids, principally in the U.K. and continental Europe. Day-Timers, Inc.("Day-Timers"), a subsidiary of ACCO, manufactures personal organizers, planners and time management computer software in the U.S. Management believes Day-Timers is the leading direct marketer of time management aids in North America. Products are sold in the U.S. by Day-Timers, and in Canada, Australia 6 and Europe by subsidiaries of Day-Timers, through direct mail advertising, catalogs to consumers and businesses, and electronic commerce. In addition, products are sold through ACCO Brands and ACCO Canada to retailers and mass merchandisers. ACCO Brands also conducts time management seminars for personnel of corporations in the U.S. and similar activities are conducted by Day-Timer's subsidiaries in Canada, Australia and Europe. The office products business is increasingly concentrated in a small number of major customers, principally office products superstores, wholesalers and contract stationers. The continuing consolidation of both competitors and customers is causing increased pricing pressures that have negatively affected results. The reduction in net prices, particularly in the fourth quarter of 1998, was compounded by the decision of several customers to reduce inventory levels. These conditions are expected to affect comparisons for the first half of 1999 and generally will continue to present challenges for the office products group and its competitors. They also will present opportunities for the most efficient manufacturers. Management believes that manufacturing within the office products industry remains highly fragmented; however, significant manufacturing consolidations occurred during 1998, particularly the acquisition of Leitz by Esselte and of IBICO by GBC. Due to local market preferences for product design and paper sizes, many office product manufacturers supply on a regional basis only. Many manufacturers supply a relatively narrow range of products. ACCO's key competitors on a world-wide basis include Avery Dennison, Esselte, Newell, Fellowes, Atapco and GBC. Primary competitors for personal organizers in the North American market are Franklin Quest and Day-Runner, and key competitors in the international market for personal organizers, although less developed than in the North American market, include Filo Fax in the U.K. and Quo Vadis in France. In computer accessories, ACCO competes against Logitech, Fellowes, Microsoft and others. ACCO's operating companies compete on the basis of product quality, price, service and responsiveness to consumer preferences. ACCO's subsidiaries purchase raw materials, components and products from a variety of sources, including non-U.S. vendors, on competitively available terms that fluctuate based on market conditions. ACCO is establishing substantial and growing production operations in Mexico, helping to reduce its cost base. Golf Products Acushnet Company ("Acushnet"), together with its subsidiaries, is a leading manufacturer and distributor of golf balls, golf clubs, golf shoes and golf gloves. Other products include bags, carts, dress and athletic shoes as well as socks and accessories. Acushnet's leading brands are Titleist and Pinnacle golf balls; DCI, Titleist Titanium, Vokey design, Scotty Cameron by Titleist and Bulls Eye golf clubs and putters; FootJoy Classics and DryJoys golf shoes; 7 and FootJoy Sta-Sof and Weather-Sof golf gloves. Acushnet products are sold primarily to golf pro shops throughout the U.S. by the Titleist and FootJoy Worldwide Division sales force and to sporting goods stores and mass merchants through the Acushnet Golf Division. Sales are made in the U.K., Canada, Germany, Austria, Denmark, France, Sweden, The Netherlands, Thailand, South Africa and Japan through subsidiaries, in Ireland through a branch of a U.K. subsidiary, and outside these areas through distributors or agents. Cobra is a subsidiary that is a leading manufacturer and distributor of golf clubs, with emphasis on oversized graphite shafted golf clubs marketed and sold under the Cobra brand name. Other Cobra products include specialty golf clubs, Bobby Grace by Cobra putters, golf balls, golf bags and golf accessories. Cobra's products are sold to on-course golf pro shops and selected off-course specialty stores throughout the U.S. by Cobra's sales force. Cobra markets its products internationally through Acushnet's subsidiaries in the U.K., continental Europe, Canada, Japan and Thailand, through an exclusive licensee in Australia and outside these areas through distributors. Acushnet and its subsidiaries compete on the basis of product quality, price, service and responsiveness to consumer preferences. In golf balls, Acushnet's main competitors are Spalding, Wilson, Dunlop/Slazenger and Bridgestone. In golf clubs, Callaway, Taylor Made, Ping, Tommy Armour, Spalding, Wilson and Mizuno are the main competitors. In golf shoes, Etonic, Nike, Dexter, Reebok, Mizuno, Stylo and Adidas are the main competitors. In golf gloves, Wilson, Etonic, Daiwa, Dunlop/Maxfli, Kasco, Slazenger, Tommy Armour, Mizuno and Bridgestone are the main competitors. The United States Golf Association establishes standards for golf equipment used in competitive play in the United States. The USGA has announced its intention to propose a new rule in the late summer of 1999 addressing the initial velocity and overall distance standard for golf balls. Until more details regarding the proposed rule change become available, we cannot determine whether it would have an effect on Acushnet's group's golf ball business and/or the golf ball industry. Taylor Made Golf and Nike have recently introduced golf balls into their product offerings. Callaway Golf announced it intends to do so in the near future. Each company has significant brand awareness in the golf market that could encourage purchases of their respective golf ball products by the trade and by consumers. It is not possible to predict what effect, if any, the Callaway, Taylor Made and Nike golf balls will have on Acushnet's or its competitors' business. The golf club market was adversely affected in 1998 by lower consumer demand, leading to increased inventory and price discounting. These changes led to an estimated revenue decline in the U.S. market in the range of 10-15%. Both the Titleist and Cobra brands were affected by the overall weakness in the market for irons, though both achieved volume gains in metal woods. Titleist golf club net sales were up on a favorable product mix and firm pricing. For Cobra, sales 8 results were more in line with the overall market trend and profits declined significantly, particularly in the second half of the year. Conditions in the club market and the overall inventory levels are likely to affect comparisons in 1999. Aggressive actions are underway to bring Cobra expenses in line with lower demand and to identify further synergies between Titleist and Cobra. On November 2, 1998, the USGA announced the immediate implementation of a new rule with respect to the performance of golf clubs. Registrant believes that most or all of Acushnet's group's golf products currently marketed and under development will conform to this new rule. In the long term, this new rule could hamper innovation and make it more difficult to use technological advances to produce USGA conforming products. However, it is not possible to determine whether in the long term this new rule will have a material effect on the golf club industry and on Registrant's golf products segment. Acushnet's advertising and promotional campaigns rely in part on a large number of touring professionals and club professionals using and endorsing its products. Acushnet has been competing for the endorsement and promotional services of touring professionals. As a result, these costs have risen and may continue to rise. There is currently a substantial market in "knock-off" and counterfeit golf clubs which imitate or copy the protected features of original equipment manufacturer golf club products. Acushnet has an active program of enforcing its intellectual property rights against those who make or sell such products. Spirits and Wine Jim Beam Brands Worldwide, Inc. ("JBB Worldwide") is a holding company for subsidiaries in the distilled spirits and wine business. Principal subsidiaries include Jim Beam Brands Co. ("Beam"), Alberta Distillers Limited ("Alberta"), JBB (Asia-Pacific) Pty. Limited ("JBB (Asia-Pacific)") and JBB (Greater Europe) PLC ("JBB (Greater Europe)"). Principal markets for the products of JBB Worldwide's subsidiaries are the U.S., the U.K. and Australia. Approximately 80% of JBB Worldwide subsidiary sales are to these three markets, with the U.S. and the U.K. representing 54% and 16% of sales, respectively. JBB Worldwide's leading brands are owned by its subsidiaries, except that DeKuyper cordials are produced and sold in the U.S. under a perpetual license, Gilbey's gin and Gilbey's vodka are produced and sold in the U.S. under a license expiring September 30, 2007 and the rights to Kamchatka vodka brand in California are claimed by another entity. 9 Beam, whose operations are located in the U.S., currently produces, or imports, and markets a broad line of distilled spirits, including bourbon and other whiskeys, cordials, gin, vodka, rum, tequila and cognac. As discussed below, in 1998 Beam also added wines to its product offerings. Alberta, located in Canada, produces and sells in Canada a line of distilled spirits; produces Canadian whisky and other distilled spirit products for export to the U.S.; sells bulk Canadian whisky into a variety of export markets; and imports and distributes wines. JBB (Asia-Pacific) is located in Australia and sells JBB Worldwide subsidiary products (primarily Jim Beam bourbon whiskey) as well as several brands under agency agreements. JBB (Greater Europe) is located in the U.K. and produces, bottles, and sells blended and single malt Scotch whiskies, markets and sells vodka, and sells Scotch whisky in bulk. Under the JBB Worldwide holding company structure, Beam, Alberta, JBB (Greater Europe), and JBB (Asia-Pacific) have each been given the responsibility of selling the combined branded product portfolio in designated markets around the world. Beam and its predecessors have been distillers of bourbon whiskey since 1795. Beam's nine leading brand names are Jim Beam Bourbon Whiskey, Windsor Canadian Supreme Whisky, Lord Calvert Canadian Whisky, DeKuyper cordials, Gilbey's gin, Gilbey's vodka, Kamchatka vodka, Wolfschmidt vodka and Kessler American Blended Whiskey. Principal bourbon whiskey brand names are Jim Beam, the largest-selling bourbon whiskey in the U.S. and in the world, four premium and super premium bourbon whiskeys (Booker's, Knob Creek, Baker's and Basil Hayden's) sold under the Small Batch bourbon whiskey designation, Jim Beam & Cola, which combines Jim Beam bourbon whiskey with a cola soft drink, Old Grand-Dad, Old Crow and Old Taylor. DeKuyper is the top-selling cordial line in the U.S. Beam also produces Chateaux and Leroux cordials, Beam's 8-Star Blend and Calvert Extra blended whiskeys, Dark Eyes vodka and Calvert gin, and imports, in bottle or in bulk, Canada House Canadian Whisky (produced by Alberta), The Dalmore and The Claymore Scotch whiskies (both produced by JBB (Greater Europe)), Kamora coffee liqueur, After Shock cinnamon liqueur (produced by Alberta), Ronrico and Pusser's rums, El Tesoro and Chinaco tequilas and A. de Fussigny cognacs. In August 1998, JBB Worldwide purchased the Geyser Peak wine business and adjacent vineyard property. The winery is located in Alexander Valley, Sonoma County, California. Geyser Peak wine brands include ultra-premium Geyser Peak Reserve and Venezia, super-premium Geyser Peak and popular premium Canyon Road. The premium category is generally divided by the trade into three segments: ultra premium wines that retail at over $14 per bottle; super premium wines that retail between $7 and $14 per bottle; and popular premium wines that retail between $3 and $7 per bottle. In February 1998, JBB Worldwide formed a joint venture to distribute the Barwang brand of Australian wines on a global basis, except in Australia and New Zealand. 10 JBB (Greater Europe) has its origins as a distiller of Scotch whisky in 1844. In 1993, JBB (Greater Europe) completed the acquisition of Invergordon Distillers Group PLC, another distiller, blender and marketer of Scotch whisky. JBB (Greater Europe)'s principal brand names are Whyte & Mackay Special Reserve, The Claymore, The Dalmore, Cluny, Mackinlay, Isle of Jura and Bruichladdich Scotch whiskies, Glayva Scotch whisky liqueur and Vladivar vodka. JBB (Greater Europe)'s products are sold in the U.K. through its own sales force, in the U.S. and Australia through the affiliated company distribution networks, and through independent distributors in other areas of the world. Products of JBB Worldwide's subsidiaries are sold through various distributors and, in the 18 "control" states (and one county) in the U.S. which have established government control over certain aspects of the purchase and distribution of alcoholic beverages, through government controlled liquor authorities. The distilled spirits business is highly competitive, with many brands sold in the consumer market. Management believes there are approximately nine major competitors worldwide and many smaller distillers and bottlers. Management also believes that, based on units and sales value, the JBB Worldwide group, with four brands that each sell over one million cases worldwide, is the second or third largest producer and marketer of distilled spirits in the U.S. and is among the nine major competitors worldwide. JBB Worldwide's subsidiaries compete on the basis of product quality, price, service and responsiveness to consumer preferences. Through 1995, consumption of distilled spirits declined in many countries, including the U.S. However, since 1996, consumption in the U.S. has been steady or increased slightly, indicating that the historic decline may be reversing. Since 1996, Beam's total depletions (sales from distributors to retailers) have declined. In 1998, total depletions were down slightly in the U.S., although the rate of decline slowed from prior years, and depletions of Jim Beam bourbon and DeKuyper cordials increased. The decline in the total number of cases sold by Beam may be due to its historic concentration of mid-to-low priced products that may not be benefiting from the factors influencing the recent industry trends. The number of cases sold by Beam also may be affected by price increases taken in recent years to increase its profits as compared to unit sales. The merger of Grand Metropolitan PLC and Guinness PLC to create Diageo PLC in late 1997 may reflect a trend towards consolidation in the highly competitive global spirits business. The creation of Diageo PLC, and the breadth of its portfolio, as well as the continued consolidation of the supplier, distributor and retailer tiers may present pricing and service challenges for distilled spirits producers, as well as opportunities for the most efficient producers. 11 The principal raw materials for the production, storage and aging of distilled products are primarily corn, other grains, and new oak barrels, and are readily available from a number of sources except that new oak barrels are available from only two major sources, one of which is owned by a competitor. Beam has entered into a long-term supply agreement for new oak barrels. Blended Scotch whiskies are composed of a variety of grain and malt whiskies blended to provide a consistent product. The Scotch industry is therefore dependent on the trading of whiskies between whisky companies. The principal raw materials used in the production of wines are grapes, barrels and packaging materials. Grapes are primarily purchased from independent growers under long-term supply contracts and, from time to time, are adversely affected by weather and other forces which may limit production. In fiscal 1998, approximately 5-10% of Geyser Peak's total grape supply came from company-owned land. Because whiskeys are aged for various periods, generally from three to eight years, subsidiaries of JBB Worldwide maintain, in accordance with industry practice, substantial inventories of bulk whiskey in warehouse facilities. Whiskey production is generally scheduled to meet demand years into the future, and production schedules are adjusted from time to time to bring inventories into balance with estimated future demand. The production, storage, transportation, distribution and sale of the products of JBB Worldwide's subsidiaries are subject to regulation by federal, state, local and foreign authorities. Various local jurisdictions prohibit or restrict the sale of distilled spirits and wine in whole or in part. As a result of the publicity surrounding litigation against manufacturers of tobacco products, some commentators have speculated that other industries, including beverage alcohol, may some day also be targets of litigation. Registrant believes, and counsel has advised generally, that if such actions were commenced, Registrant and its subsidiaries would have meritorious defenses to such suits and they would be vigorously contested. In the U.S., U.K. and many other countries, distilled spirits and wine are subject to federal excise taxes and/or customs duties as well as state, local and other taxes. There have been no increases in the U.S. federal excise tax since January 1, 1991, although proposals to increase such taxes have been made from time to time. In addition, there are proposals pending to increase or impose new distilled spirits taxes in various jurisdictions. The U.K. budget announced in March 1998 raised duties on a typical pint of beer by one pence and a typical bottle of wine by four pence. The U.K. budget announced in March 1999 did not provide for an increase on duties on a typical pint of beer or a typical bottle of wine. 12 The U.K. budget announcements in March 1998 and 1999 did not provide for an increase in excise tax duties on distilled spirits. Changes in the U.K. excise duties on distilled spirits in recent years have resulted in increases or decreases in the price of a typical 700 milliliter bottle of Scotch whisky as follows: Amount of Effective Increase Date (Decrease) ----------------- ---------- January 1, 1995 26 Pence November 28, 1995 (27 pence) November 26, 1996 (26 pence) January 1, 1998 19 pence It is believed that the U.S. Federal excise tax increase in 1991 contributed to a decline in distilled spirits unit sales for the industry, including Beam. The effect of any future excise tax increases in any jurisdiction cannot be determined, but it is possible that any future tax increases would have an adverse effect on unit sales and increase existing competitive pressures. The Alcoholic Beverage Labeling Act of 1988 (the "Labeling Act") and regulations promulgated thereunder by the Bureau of Alcohol, Tobacco and Firearms of the Department of the Treasury (the "Bureau") require that containers of alcoholic beverages for sale or distribution in the U.S. and to members of the United States Armed Forces abroad bear a specific written warning statement. It is not possible to state whether any additional or different requirements imposing further labeling or other warning statement requirements will be enacted in the U.S. Requirements that distilled spirits containers bear warning statements have been established in certain other markets in which JBB Worldwide subsidiaries sell products, notably South Korea, Thailand and Japan. It is not possible to predict the effect, if any, that existing or future labeling or other warning statement requirements may have on the industry generally or on JBB Worldwide specifically. Previously, there has been discussion and legislation introduced to ban U.S. television advertising of spirits. Although no legislation is currently pending or has been enacted, most TV networks and local affiliated stations in the U.S. currently decline to accept distilled spirits advertising. JBB Worldwide's operating subsidiaries outside the U.S. have conducted broadcast advertising in markets where legal. In addition, the Bureau recently approved two statements for wine labels referencing the health effects of wine consumption. Producers may voluntarily place these statements on wine labels, but Beam has no present intention of placing either statement on its wine labels. The Bureau has not yet authorized such statements for beer or spirits labels. It is not possible to predict the effect, if any, the use of these statements may have on Beam's or its competitors' businesses. The approval of these statements also has generated 13 criticism and calls for additional legislative restrictions on beverage alcohol advertising, although to date, no such legislation has been proposed or is pending. It is also not possible to predict when or whether additional restrictions on advertising may be implemented in the U.S. or elsewhere. If new restrictions are implemented, they may have an adverse effect on unit sales and industry trends. Other Matters Employees Registrant and its subsidiaries had, as of December 31, 1998, the following number of employees: Home Products 10,500 Office Products 8,400 ------ Home and Office Products 18,900 Golf Products 4,650 Spirits and Wine 2,300 Corporate Headquarters 190 ------ Total 26,040 ====== Environmental matters Registrant and its subsidiaries are subject to federal, state and local laws and regulations concerning the discharge of materials into the environment and the handling, disposal and clean-up of waste materials and otherwise relating to the protection of the environment. While it is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that Registrant's subsidiaries may undertake in the future, in the opinion of management of Registrant, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon the capital expenditures, financial condition, results of operations or competitive position of Registrant and its subsidiaries. (d) Financial information about foreign and domestic operations and export sales. Registrant's subsidiaries operate in the United States, Europe (principally the U.K.) and other areas (principally Canada and Australia). See the table captioned "Information on Business Segments" contained in the 1998 Annual Report to Stockholders of Registrant, which table is incorporated herein. Registrant has investments in various foreign countries, principally the United 14 Kingdom, as well as Australia and Canada, and, therefore, changes in the value of the currencies of these countries can have an effect on Registrant's financial statements when translated into U.S. dollars. Item 2. Properties. Registrant leases its principal executive offices in Old Greenwich, Connecticut. The following is a description of the principal properties of Registrant's subsidiaries. Home Products MasterBrand leases its executive offices in Lincolnshire, Illinois and a subsidiary, Moen, owns its executive offices in North Olmsted, Ohio. Principal properties of subsidiaries of MasterBrand include twenty-four plants and two distribution centers owned and operated in the U.S. A 60%-owned joint venture in China owns and operates one plant. In addition, subsidiaries of MasterBrand lease and operate two plants and four warehouses in the U.S. and nine distribution centers, of which seven are in the U.S. and one is in each of Canada and Mexico. Office Products ACCO leases its executive offices in Lincolnshire, Illinois from a subsidiary. Principal properties of subsidiaries of ACCO include seven plants which are owned and operated in the U.S., six in the U.K., and two in each of Australia and Mexico, and one each in Germany, Italy, France and the Republic of Ireland. In addition, subsidiaries of ACCO lease and operate six facilities in the U.S., two in Mexico, three in each of Canada and the U.K., and one in each of France and Italy. Of these leased facilities, (i) five in the U.S. and one in each of Canada and the U.K. are combined manufacturing and distribution facilities, (ii) two in Canada and one in each of Mexico, the U.K., Italy and France are distribution facilities and (iii) one in each of the U.S., Mexico and the U.K. are manufacturing facilities. Golf Products Acushnet owns a combined executive office and research and development facility and a distribution and packaging facility in Fairhaven, Massachusetts. In addition, it owns and operates five plants and two test facilities, all located in the U.S. Acushnet also leases three warehouses, two manufacturing facilities, a test facility, and three research and development facilities, all located in the U.S. Acushnet also leases an office in Taiwan. A subsidiary of Acushnet leases three combined sales office and warehouse facilities in Canada. Other Acushnet subsidiaries own and operate a plant and a warehouse in England, lease a sales office and warehouse in each of Germany, France, Sweden, Austria, Denmark, The Netherlands and South Africa and lease a sales office in the Republic of Ireland. A subsidiary of Acushnet in Japan leases two sales offices and one 15 warehouse facility. A subsidiary of Acushnet in Thailand leases a sales office and warehouse facility in addition to leasing two manufacturing plants through a majority owned joint venture. Acushnet's minority-owned joint venture in China leases and operates one plant. Cobra leases a combined executive office and distribution center, a combined administrative and assembly facility, and a combined warehouse and distribution center all located in Carlsbad, California. Spirits and Wine JBB Worldwide operates from executive offices leased by Beam in Deerfield, Illinois. Other subsidiaries of JBB Worldwide lease offices in Glasgow, Scotland; Burnaby, British Columbia, Canada; and Gordon, New South Wales, Australia. Subsidiaries of JBB Worldwide own and operate seven bottling plants, twelve distilleries (of which three are malt distilleries not currently in use), a winery (including vineyards, production and bottling facilities on site) and numerous warehouses for the aging of bulk whiskeys all located in the U.S., Scotland and Canada. In addition, JBB Worldwide subsidiaries lease sales offices and warehouse space for the storage of promotional material in various locations throughout the world. Registrant and its subsidiaries are of the opinion that their properties are suitable to their respective businesses and have productive capacities adequate to the needs of such businesses. Item 3. Legal Proceedings. Overview On December 22, l994, Registrant sold The American Tobacco Company ("ATCO") to Brown & Williamson Tobacco Corporation ("B&W"), at the time a wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with the sale, B&W and ATCO ("the Indemnitors") agreed to indemnify Registrant against claims including legal expenses arising from smoking and health and fire safe cigarette matters relating to the tobacco business of ATCO. Numerous legal actions, proceedings and claims are pending in various jurisdictions against leading tobacco manufacturers, including B&W both individually and as successor by merger to ATCO, based upon allegations that cancer and other ailments have resulted from tobacco use. Registrant has been named as a defendant in some of these cases. These claims generally fall within three categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and other damages and purporting to be brought on behalf of classes of individual plaintiffs, and (iii) health care cost recovery cases, including class actions, brought by foreign governments, unions, federal and state taxpayers and others seeking reimbursement for health care expenditures allegedly caused by cigarette smoking. 16 As noted below, in 1998, certain United States tobacco companies, including B&W, entered into a Master Settlement Agreement that resolved all remaining health care cost recovery cases brought by the various States, U.S. territories, and the District of Columbia. Damages claimed in some of the smoking and health class actions and remaining health care cost recovery cases range into the billions of dollars. Certain former asbestos manufacturers and asbestos manufacturers' personal injury settlement trusts have also sought unspecified amounts in indemnity or contribution in third party actions against all or most of the major domestic tobacco manufacturers. It has also been reported that civil and criminal investigations of tobacco manufacturers are pending before certain prosecutorial and other authorities. Reports have also stated that the federal government is considering filing an action seeking reimbursement for health care expenditures allegedly related to cigarette smoking. President Clinton advocated the filing of such a lawsuit during his State of the Union Address to Congress on January 19, 1999. In recent years there has been a substantial increase in the number of smoking and health cases filed in the United States, a trend which continued to accelerate in 1998. Individual Cases As of March 29, 1999, there were approximately 230 smoking and health cases pending on behalf of individual plaintiffs in which Registrant has been named as one of the defendants, compared with approximately 97 such cases as of March 27, 1998. See "List of Pending Cases" below. Class Actions As of March 29, 1999, there were approximately 28 purported smoking and health class actions pending in which Registrant has been named as one of the defendants (including four that involve allegations of various personal injuries relating to exposure to environmental tobacco smoke ("ETS"), compared with approximately 25 such cases as of March 27, 1998. See "List of Pending Cases" below. Health Care Cost Recovery Actions As of March 29, 1999, there were approximately 9 health care recovery actions pending in which Registrant has been named as one of the defendants, compared with approximately 17 such cases as of March 27, 1998. See "List of Pending Cases" below. 17 Recent Case Developments On June 22, 1998, a Florida appellate court overturned a verdict by a Florida jury that had awarded a former smoker and his spouse $750,000 in a smoking and health case against B&W (as successor by merger to ATCO) (Carter v. American Tobacco Company, et al.). The court found, among other things, that the action had been time-barred. On July 7, 1998, plaintiffs moved for rehearing and clarification, which the appellate court denied on December 31, 1998. Plaintiffs have filed a petition seeking discretionary review by the Florida Supreme Court of the appellate court's June 22, 1998 and December 31, 1998 decisions. B&W has opposed this petition. Registrant was not a party to the Carter litigation. On June 10, 1998, a jury in a Florida case awarded the estate of a smoker $52,249 for medical expenses, $500,000 to his surviving widow for loss of companionship and protection, and for pain and suffering, and $450,000 in punitive damages, in a smoking and health case against B&W (individually and as successor by merger to ATCO) (Widdick v. Brown & Williamson Tobacco Corporation, et al.). On June 22, 1998, B&W filed a motion for judgment notwithstanding the verdict or for a new trial. While a decision on that motion was pending, on August 13, 1998, a Florida appellate court ruled that the trial court should have granted B&W's motion prior to the trial to transfer the case to the Circuit Court of Palm Beach or Broward County. On January 29, 1999, pursuant to a motion by B&W, and based on its August 13, 1998 decision, the appellate court vacated the final judgment and set aside the jury verdict. On February 11, 1999, plaintiff filed a motion for rehearing or, in the alternative, for certification to the Florida Supreme Court. The appellate court denied plaintiff's motion for rehearing and certification on March 10, 1999. Registrant is not a party to the Widdick litigation. In July of 1998, trial began in a Florida action against B&W (individually and as successor by merger to ATCO) and other U.S. tobacco manufacturer defendants brought on behalf of a class of Florida residents allegedly injured as a result of their alleged addiction to cigarettes containing nicotine (Engle v. R.J. Reynolds Tobacco Company, et al.). This trial is still in progress. Registrant is not a party to the Engle litigation. In January of 1999, trial began in four consolidated cases brought against certain tobacco manufacturers in state court in Memphis, Tennessee. B&W is a defendant in two of the cases, and is a defendant as successor to ATCO in another of the cases. (Newcomb v. R.J. Reynolds Tobacco Company, et al.; McDaniel v. Brown & Williamson Tobacco Corporation, et al.; Settle v. Brown & Williamson Tobacco Corporation). Plaintiffs allege that their decedents died as a result of smoking cigarettes manufactured by defendants. This trial is still in progress. Registrant is not a party to this litigation. 18 In February of 1999, trial began in federal court in Akron, Ohio in a class action brought on behalf of a variety of union health funds located in Ohio against B&W (individually and as successor by merger to ATCO) and others to recover health care expenditures allegedly caused by smoking. (Iron Workers Local Union No. 17 Insurance Fund v. Philip Morris, Inc., et al.). On March 18, 1999, the jury returned a verdict in favor of defendants. Registrant is not a party to the Ohio Ironworkers litigation. On February 9, 1999, a jury in San Francisco, California returned a verdict in favor of a former smoker who claimed that she contracted lung cancer as a result of smoking. (Henley v. Philip Morris Incorporated, et al.) The jury awarded the plaintiff $1.5 million in compensatory damages and $50 million in punitive damages. Philip Morris is the sole defendant to this action and has filed motions for judgment notwithstanding the verdict. Resolution of Health Care Cost Recovery Actions By States, U.S. Territories and the District of Columbia On November 23, 1998, certain U.S. tobacco companies, including B&W, entered into a Master Settlement Agreement (the "MSA") with certain state attorneys general that would result in the dismissal of all remaining health care reimbursement lawsuits brought by the various States, U.S. territories, and the District of Columbia. Registrant is not a party to the MSA and is not bound by any of the payment obligations or other restrictions of the MSA. As discussed below, health care cost recovery actions filed by the states of Minnesota, Texas, Florida and Mississippi were settled separately prior to the MSA. Under the MSA, the settling States agree to dismiss their current health care reimbursement lawsuits and not to refile such suits in the future. The MSA provides for the release by the settling States of claims for past conduct, acts or omissions (including future damages resulting from past conduct, acts or omissions) in any way related, in whole or in part, to the use, sale, distribution, manufacture, development, advertising, marketing or health effects of, the exposure to, or research, statements or warnings about, tobacco products. The release includes any claim that was brought or comparable claims that could have been brought by the States in their health care cost recovery actions. It also includes claims for future conduct, acts or omissions, or claims in any way related, in whole or in part, to the use of or exposure to tobacco products manufactured in the ordinary course of business, including future claims for reimbursement of health care costs allegedly associated with the use of or exposure to tobacco products. All 52 government entities permitted to participate in the MSA, including 46 States, American Samoa, Guam, Puerto Rico, the U.S. Virgin Islands, the Northern Mariana Islands and the District of Columbia, have dismissed their health care reimbursement suits pursuant to the MSA. 19 The MSA provides for the release of claims against participating manufacturers, as well as their predecessors, successors, and past, present, and future affiliates. "Affiliate" is defined to include past or present persons or entities who own or control, are owned by or controlled by, or are under common ownership of a 10% or more equity interest. Registrant understands that it is a released party under the terms of the MSA. Under the MSA, participating manufacturers are required to make initial "upfront" payments totaling nearly $13 billion between 1998 and 2003 to the settling States. Additional annual payments must be made beginning in 2000 in perpetuity (starting at $4.5 billion in 2000 and increasing to $9 billion in 2018 and thereafter), and payments to several funds (a "strategic contribution" fund to reward individual States for their contributions to the settlement, a public health foundation, and a public advertising and awareness fund) are also required. Further payments of $300 million per year will also be required, if the market share of the participating manufacturers in the preceding year was at least 99.05%. These payments are subject to various credits and adjustments, depending on industry volume, inflation, and other factors. The initial up front payment will be allocated among the participating manufacturers according to market capitalizations; all other payments are to be allocated according to market share. Moreover, participating manufacturers have agreed to a variety of additional restrictions and limitations, including, for example, restrictions on advertising, marketing and lobbying. The MSA also calls for the participating manufacturers to pay attorneys' fees for the States' attorneys in the settled litigation. Minnesota A settlement with the State of Minnesota was reached on May 8, 1998. Under the terms of this settlement, the settling defendants must make initial payments to the State of Minnesota totaling approximately $1.3 billion in annual installments from 1998 through 2003. (Certain of these amounts may be adjusted for inflation and changes in sales volume.) In addition, annual payments due to Minnesota totaled $102 million in 1998, and are to increase incrementally to a total of $204 million for 2003, and continue in that amount thereafter. Total annual payments may be adjusted for inflation and changes in sales. The Minnesota settlement also requires payments totaling $469 million to Blue Cross and Blue Shield of Minnesota in installments beginning in 1998 and ending in 2003. The settling defendants are also to pay a total of $10 million per year for ten years to a national research account. The settling defendants have also agreed to a number of non-financial terms in the settlement of the Minnesota action, including restrictions on advertising and merchandising. The settling defendants have further agreed to pay the plaintiffs' attorneys' fees. 20 In addition, because of the Minnesota settlement, Texas, Florida and Mississippi will receive increased payments under their own settlement agreements, which provide that terms of subsequent state tobacco settlement agreements may be incorporated into the Texas, Florida and Mississippi agreements. Texas, Florida and Mississippi will receive these additional payments, because the Minnesota agreement requires payments different from the Texas, Florida and Mississippi agreements. Registrant was not a party to the Minnesota case. It is neither a party to the settlement agreement nor required to pay any money under it. Texas A settlement with the State of Texas was reached on January 16, 1998. Under the terms of this settlement, the settling defendants were required to pay the State of Texas initial payments totaling $725 million and $264 million to fund anti-smoking initiatives. In addition, annual payments due to Texas totaled $290 million in 1998, and are to increase incrementally to a total of $580 million for 2003, and continue in that amount thereafter. Total annual payments may be adjusted for inflation and changes in sales. Allocation of payment among individual companies is based on their share of domestic cigarette sales. Total payments to the State of Texas are to increase by $2.275 billion due to the Minnesota settlement; this additional amount is to be paid in installments over several years. The settling defendants have further agreed to pay the State's attorneys fees. Registrant was not a party to the Texas case. It is neither a party to the settlement agreement nor required to pay any money under it. Florida A settlement with the State of Florida was reached on August 25, 1997. Under the terms of this settlement, the settling defendants were required to pay a total of $550 million into a special escrow account as well as $200 million to support a pilot program aimed at reducing youth smoking. In addition, annual payments due to Florida totaled $220 million in 1998, and are to increase incrementally to $440 million in 2003, and continue in that amount thereafter. Total annual payments may be adjusted for inflation and changes in sales. Allocation of payment among individual companies is based on their share of domestic cigarette sales. Total payments to the State of Florida are to increase by $1.75 billion due to the Minnesota settlement; this additional amount is to be paid in installments over several years. The settling defendants have further agreed to pay the State's attorneys fees. 21 Registrant was dismissed as a defendant from this action, and is neither a party to the settlement nor required to pay any money under it. Mississippi A settlement of the State of Mississippi action was reached on July 2, 1997. Under the terms of this settlement, the settling defendants were required to make initial payments to the State totaling $170 million. In addition, annual payments due to Mississippi totaled $68 million in 1998 and are to increase incrementally to a total of $136 million for 2003, and continue in that amount thereafter. Total annual payments may be adjusted for inflation and changes in sales. Allocation of payment among individual companies is based on their share of domestic cigarette sales. Total payments to the State of Mississippi are to increase by $550 million due to the Minnesota settlement; this additional amount is to be paid in installments over several years. The settling defendants have further agreed to pay the State's attorneys fees. Registrant was voluntarily dismissed from this action, and is neither a party to the settlement nor required to pay any money under it. List of Pending Cases For a list of pending cases, see Exhibit 99 to this Form 10-K and, for a discussion of other pending litigation, see Note 19 "Pending Litigation" in the Notes to Consolidated Financial Statements contained in the 1998 Annual Report to Stockholders of Registrant, which Note is incorporated herein by reference. List of Terminated Cases For a list of terminated cases, see Exhibit 99 to this Form 10-K. Conclusion Management believes that there are meritorious defenses to the pending actions referred to in Exhibit 99 of this Form 10-K and these actions are being vigorously contested. However, it is not possible to predict the outcome of the pending litigation, and it is possible that some of these actions could be decided unfavorably. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of the pending litigation. Management believes that the pending actions will not have a material adverse effect upon the results of operations, cash flows or financial condition of Registrant as long as the Indemnitors continue to fulfill their obligations to indemnify Registrant under the aforementioned indemnification agreement (see "Overview" on page 16). 22 Item 4. Submission of Matters to a Vote of Security Holders. None. Item 4a. Executive Officers of the Registrant. The name, present positions and offices with Registrant, principal occupations during the past five years and age of each of Registrant's present executive officers are as follows: Present positions and offices with Registrant and principal occupations during Name during the past five years Age - ---- ------------------------------------ --- Thomas C. Hays Chairman of the Board and Chief Executive 63 Officer of Registrant since January 1995; President and Chief Operating Officer of Registrant prior thereto Norman H. Wesley President and Chief Operating Officer of 49 Registrant since January 1999; Chairman of the Board and Chief Executive Officer of Fortune Brands Home and Office, Inc. since December 1997 and MasterBrand Industries, Inc. since April 1997 and Chairman of ACCO World Corporation since October 1998; Chairman and Chief Executive Officer of ACCO World Corporation from May 1997 to October 1998; President and Chief Executive Officer of ACCO World Corporation prior thereto John T. Ludes Vice Chairman of Registrant since January 62 1999; President and Chief Operating Officer of Registrant from January 1995 to December 1998; Group Vice President of Registrant and President and Chief Executive Officer of Acushnet prior thereto Gilbert L. Klemann, II Executive Vice President - Corporate of 48 Registrant since January 1999; Executive Vice President - Strategic and Legal Affairs of Registrant during 1998; Senior Vice President and General Counsel of Registrant prior thereto Dudley L. Bauerlein, Jr. Senior Vice President and Chief Financial 52 Officer of Registrant since January 1995; Vice President and Treasurer of Registrant prior thereto 23 Present positions and offices with Registrant and principal occupations during Name during the past five years Age - ---- ------------------------------------ --- Craig P. Omtvedt Senior Vice President and Chief Accounting 49 Officer of Registrant since January 1998; Vice President and Chief Accounting Officer of Registrant during 1997; Vice President - Deputy Controller and Chief Internal Auditor of Registrant during 1996; Deputy Controller and Chief Internal Auditor of Registrant during 1995; Deputy Controller of Registrant prior thereto Mark A. Roche Senior Vice President and General Counsel of 44 Registrant since January 1999; Vice President and General Counsel during 1998; Vice President and Associate General Counsel of Registrant from January 1996 to December 1997; Associate General Counsel of Registrant prior thereto Robert J. Rukeyser Senior Vice President - Corporate Affairs of 56 Registrant In the case of each of the above-listed executive officers, the occupation or occupations given were his principal occupation and employment during the period or periods indicated. None of such executive officers is related to any other such executive officer. None was selected pursuant to any arrangement or understanding between him and any other person. All executive officers are elected annually. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. See the information in the tables captioned "Quarterly Common Stock Dividend Payments" and "Quarterly Composite Common Stock Prices" and the discussion relating thereto contained in the 1998 Annual Report to Stockholders of Registrant, which information and discussion are incorporated herein by reference. On February 26, 1999, there were 40,968 record holders of Registrant's Common Stock, par value $3.125 per share. Item 6. Selected Financial Data. See the information for 1994 through 1998 in the table captioned "Six-Year Consolidated Selected Financial Data" contained in the 1998 Annual Report to Stockholders of Registrant, which information is incorporated herein by reference. 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. See the discussion and analysis under the captions "Results of Operations" and "Financial Condition" contained in the 1998 Annual Report to Stockholders of Registrant, which discussion and analysis are incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. See the discussion and analysis under "Market Risk," "Foreign Exchange Contracts" and "Interest Rates" under the caption "Financial Condition" in the 1998 Annual Report to Stockholders of Registrant, which discussion is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data. See the information in the Consolidated Statement of Income, Consolidated Balance Sheet, Consolidated Statement of Cash Flows, Consolidated Statement of Stockholders' Equity, Notes to Consolidated Financial Statements and Report of Independent Accountants contained in the 1998 Annual Report to Stockholders of Registrant, which information is incorporated herein by reference. For unaudited selected quarterly financial data, see the table captioned "Quarterly Financial Data" contained in the 1998 Annual Report to Stockholders of Registrant, which table is incorporated herein by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of Registrant. See the information under the caption "Election of Directors" contained in the Proxy Statement for the Annual Meeting of Stockholders of Registrant to be held on April 27, 1999, which information is incorporated herein by reference. See also the information with respect to executive officers of Registrant under Item 4a of Part I hereof, which information is incorporated herein by reference. Item 11. Executive Compensation. See the information up to but not including the subcaption "Report of the Compensation and Stock Option Committee on Executive Compensation" under the caption "Executive Compensation" contained in the Proxy Statement for the Annual Meeting of Stockholders of 25 Registrant to be held on April 27, 1999, which information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. See the information under the caption "Certain Information Regarding Security Holdings" contained in the Proxy Statement for the Annual Meeting of Stockholders of Registrant to be held on April 27, 1999, which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. None. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits. (1) Financial Statements (all financial statements listed below are of Registrant and its consolidated subsidiaries) Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996 contained in the 1998 Annual Report to Stockholders of Registrant is incorporated herein by reference. Consolidated Balance Sheet as of December 31, 1998 and 1997 contained in the 1998 Annual Report to Stockholders of Registrant is incorporated herein by reference. Consolidated Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996 contained in the 1998 Annual Report to Stockholders of Registrant is incorporated herein by reference. Consolidated Statement of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 contained in the 1998 Annual Report to Stockholders of Registrant is incorporated herein by reference. Notes to Consolidated Financial Statements contained in the 1998 Annual Report to Stockholders of Registrant are incorporated herein by reference. Report of Independent Accountants contained in the 1998 Annual Report to Stockholders of Registrant is incorporated herein by reference. 26 (2) Financial Statement Schedules See Index to Financial Statement Schedule of Registrant and subsidiaries at page F-1, which Index is incorporated herein by reference. (3) Exhibits 3(i). Restated Certificate of Incorporation of Registrant as in effect on the date hereof. 3(ii)a. Amendments to By-laws of Registrant. 3(ii)b. By-laws of Registrant as in effect on the date hereof. 10a1. Fortune Brands, Inc. Annual Executive Incentive Compensation Plan is incorporated herein by reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1997.* 10b1. 1986 Stock Option Plan of Fortune Brands, Inc. and amendments thereto are incorporated herein by reference to Exhibit 10b2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.* 10b2. Amendment to 1986 Stock Option Plan of Fortune Brands, Inc. constituting Exhibit 10b1 hereto is incorporated herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1993.* 10b3. Amendment to 1986 Stock Option Plan of Fortune Brands, Inc. and Amendment thereto constituting Exhibits 10b1 and 10b2 hereto is incorporated herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated August 11, 1994.* 10b4. Amendment to the 1986 Stock Option Plan of Fortune Brands, Inc. and Amendments thereto constituting Exhibits 10b1, 10b2 and 10b3 hereto is incorporated herein by reference to Exhibit 10a2 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1997.* 10b5. 1990 Long-Term Incentive Plan of Fortune Brands, Inc. (As Amended and Restated as of January 1, 1994) is incorporated herein by reference to Exhibit 10a to the Quarterly Report on Form 10-Q of Registrant dated August 11, 1994.* 10b6. Amendment to 1990 Long-Term Incentive Plan of Fortune Brands, Inc. constituting Exhibit 10b5 hereto is incorporated herein by reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1997.* 27 10b7. Fortune Brands, Inc. Non-Employee Director Stock Option Plan is incorporated herein by reference to Exhibit 10b1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1997.* 10b8. Amendment to Registrant's Non-Employee Director Stock Option Plan constituting Exhibit 10b7 hereto is incorporated herein by reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1998.* 10b9. Fortune Brands, Inc. Stock Plan for Non-employee Directors.* 10c1. Amended Supplemental Plan of Fortune Brands, Inc. is incorporated herein by reference to Exhibit 10c1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c2. Trust Agreement, made as of the 2nd day of January, 1991, among Registrant, The Chase Manhattan Bank ("Chase"), et al. establishing a trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Amended Supplemental Plan constituting Exhibit 10c1 hereto is incorporated herein by reference to Exhibit 10c2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c3. Amendment made as of the 1st day of November, 1993 to Trust Agreement constituting Exhibit 10c2 hereto is incorporated herein by reference to Exhibit 10c3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c4. Amendment made as of the 1st day of January, 1995, to the Trust Agreement and Amendment thereto constituting Exhibits 10c2 and 10c3 hereto is incorporated herein by reference to Exhibit 10c4 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c5. Amendment made as of the 1st day January, 1997, to Trust Agreement and Amendments thereto constituting Exhibits 10c2, 10c3 and 10c4 hereto is incorporated herein by reference to Exhibit 10c5 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997.* 10c6. Schedule identifying substantially identical agreements to Trust Agreement and Amendments thereto constituting Exhibits 10c2, 10c3, 10c4 and 10c5 hereto in favor of Thomas C. Hays, Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 28 10c7. Amendment made as of the 24th day of February, 1997, to Trust Agreement and Amendments thereto constituting Exhibits 10c2, 10c3, 10c4 and 10c5 hereto relating to the trust established in favor of Thomas C. Hays, is incorporated herein by reference to Exhibit 10c7 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997.* 10c8. Trust Agreement, made as of the 1st day of November, 1993, among Gilbert L. Klemann, II, Registrant and Chase establishing a grantor trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Amended Supplemental Plan constituting Exhibit 10c1 hereto is incorporated herein by reference to Exhibit 10c6 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c9. Amendment made as of 1st day of January, 1996 to Trust Agreement constituting Exhibit 10c8 hereto is incorporated herein by reference to the Quarterly Report on Form 10-Q of Registrant dated August 8, 1996.* 10c10. Amendment made as of the 1st day of January, 1997 to Trust Agreement and Amendment thereto constituting Exhibits 10c8 and 10c9 hereto is incorporated herein by reference to Exhibit 10c1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1997.* 10c11. Amendment made as of the 1st day of August, 1998 to Trust Agreement and Amendments thereto constituting Exhibits 10c8, 10c9 and 10c10 hereto is incorporated herein by reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1998.* 10c12. Schedule identifying substantially identical agreements to the Trust Agreement and Amendments thereto constituting Exhibits 10c8, 10c9, 10c10 and 10c11 hereto in favor of Thomas C. Hays, Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 10c13. Amendment made as of the 24th day of February, 1997 to Trust Agreement and Amendments thereto constituting Exhibits 10c8, 10c9, 10c10 and 10c11 hereto, among Thomas C. Hays, Registrant and Chase, is incorporated herein by reference to Exhibit 10c12 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997.* 10d1. Resolutions of the Board of Directors of Registrant adopted on October 28, 1986 and July 26, 1988 adopting and amending a retirement plan for directors of Registrant who are not officers or employees of Registrant or a subsidiary thereof 29 are incorporated herein by reference to Exhibit 10e1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991 maintained in Commission File No. 1-9076.* 10d2. Resolutions of the Board of Directors of Registrant adopted on July 26, 1994 amending the resolutions constituting Exhibit 10d1 hereto is incorporated herein by reference to Exhibit 10e2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10e1. Severance and Retirement Agreement made as of February 24, 1997, between Registrant and Thomas C. Hays is incorporated herein by reference to Exhibit 10d1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1997. 10f1. Resolutions of the Board of Directors of Registrant adopted on November 27, 1990 with respect to retirement and health benefits provided to Gilbert L. Klemann, II is incorporated herein by reference to Exhibit 10p1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991 maintained in Commission File No. 1-9076.* 10f2. Resolutions of the Board of Directors of Registrant adopted on July 26, 1988 with respect to retirement and health benefits provided to Mark A. Roche.* 10g1. Letter dated January 23, 1996 from Registrant with respect to deferred payment of fees to Eugene R. Anderson is incorporated herein by reference to Exhibit 10k1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10g2. Letter dated August 11, 1995 from Registrant with respect to deferred payment of fees to Gordon R. Lohman is incorporated herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated November 9, 1995.* 10h1. Agreement dated January 2, 1991 between Registrant and Gilbert L. Klemann, II is incorporated herein by reference to Exhibit 10s1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.* 10h2. Amendment dated November 28, 1994 to the Agreement constituting Exhibit 10h1 hereto is incorporated herein by reference to Exhibit 10r2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10h3. Schedule identifying substantially identical agreements to the Agreement and Amendment thereto constituting Exhibits 10h1 and 10h2 hereto entered into by Registrant with Thomas C. Hays, Norman H. Wesley, John T. Ludes, Dudley L. 30 Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 10i1. Trust Agreement, made as of the 2nd day of January, 1991, among Registrant, Chase, et al. establishing a trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Agreement and Amendment thereto constituting Exhibits 10h1 and 10h2 hereto is incorporated herein by reference to Exhibit 10s1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10i2. Amendment made as of the 1st day of November, 1993 to Trust Agreement constituting Exhibit 10i1 hereto is incorporated herein by reference to Exhibit 10s2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10i3. Amendment made as of the 1st day of January, 1997 to Trust Agreement and Amendment thereto constituting Exhibits 10i1 and 10i2 hereto is incorporated herein by reference to Exhibit 10i3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997.* 10i4. Schedule identifying substantially identical agreements to the Trust Agreement and Amendments thereto constituting Exhibits 10i1, 10i2 and 10i3 hereto in favor of Thomas C. Hays, Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 10j1. Agreement dated as of January 2, 1991 between Registrant and Gilbert L. Klemann, II and amendment thereto is incorporated herein by reference to Exhibit 10y1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991 maintained in Commission File No. 1-9076.* 10j2. Agreement dated as of October 28, 1991 amending the Agreement constituting Exhibit 10j1 hereto is incorporated herein by reference to Exhibit 10w2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.* 10j3. Amendment effective as of January 1, 1995 to the Agreement and Amendment thereto constituting Exhibits 10j1 and 10j2 hereto is incorporated herein by reference to Exhibit 10u3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10j4. Schedule identifying substantially identical agreements to the Agreement and Amendments thereto constituting Exhibits 10j1, 10j2 and 10j3 hereto entered into by Registrant with 31 Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 10j5. Amendment dated as of August 1, 1998 to the Agreement and Amendments thereto constituting Exhibits 10j1, 10j2 and 10j3 hereto is incorporated herein by reference to Exhibit 10b1 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1998.* 10j6. Schedule identifying substantially identical agreements to the Amendment constituting Exhibit 10j5 hereto entered into by Registrant with John T. Ludes, Dudley L. Bauerlein, Jr. and Robert J. Rukeyser.* 10j7. Amendment dated as of September 29, 1998 between Registrant and John T. Ludes to the Agreement and Amendments between Registrant and Mr. Ludes substantially identical to Exhibits 10j1, 10j2, 10j3 and 10j5 hereto is incorporated herein by reference to Exhibit 10b5 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1998.* 10j8. Amendment dated as of August 1, 1998 between Registrant and Craig P. Omtvedt to the Agreement and Amendments thereto substantially identical to Exhibits 10j1, 10j2 and 10j3 hereto.* 10j9. Schedule identifying substantially identical agreements to the Amendment constituting Exhibit 10j8 hereto entered into by Registrant with Norman H. Wesley and Mark A. Roche.* 10k1. Rights Agreement, dated as of November 19, 1997, between Registrant and First Chicago Trust Company of New York, as Rights Agent, is incorporated herein by reference to Exhibit 4a to the Current Report on Form 8-K of Registrant dated December 2, 1997. 10l1. Indemnification Agreement, dated as of December 22, 1994, among Registrant, The American Tobacco Company and Brown & Williamson Tobacco Corporation, is incorporated herein by reference to Exhibit 10m1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997. 12. Statement re computation of ratio of earnings to fixed charges. 13. 1998 Annual Report to Stockholders of Registrant. 21. Subsidiaries of Registrant. 23(i). Consent of Independent Accountants, PricewaterhouseCoopers LLP. 32 24. Powers of Attorney relating to execution of this Annual Report on Form 10-K. 27. Financial Data Schedule for Fiscal Year ended December 31, 1998 (Article 5). 99. List of Pending/Terminated Cases. * Indicates that exhibit is a management contract or compensatory plan or arrangement. In lieu of filing certain instruments with respect to long-term debt of the kind described in Item 601(b)(4) of Regulation S-K, Registrant agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. (b) Reports on Form 8-K. Registrant filed a Current Report on Form 8-K, dated October 23, 1998, in respect of Registrant's press release dated October 23, 1998 announcing Registrant's financial results for the three-month and nine-month periods ended September 30, 1998 (Items 5 and 7(c)). Registrant filed a Current Report on Form 8-K, dated January 13, 1999, in respect of Registrant's press release dated January 12, 1999 announcing Registrant's expectation of earnings per share growth in 1999 (Items 5 and 7(c)). Registrant filed a Current Report on Form 8-K, dated January 22, 1999, in respect of Registrant's press release dated January 22, 1999 announcing Registrant's financial results for the three-month and twelve-month periods ended December 31, 1998 (Items 5 and 7(c)). Registrant filed a Current Report on Form 8-K, dated February 18, 1999, in respect of a speech delivered on February 18, 1999 by the Chairman and Chief Executive Officer of Registrant and Executive Vice President and Chief Operating Officer of Jim Beam Brands Worldwide, Inc., a wholly-owned subsidiary of Registrant, at the 1999 Consumer Analyst Group of New York (CAGNY) Conference (Items 5 and 7(c)). 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FORTUNE BRANDS, INC. (Registrant) By /s/ Gilbert L. Klemann, II --------------------------------- Gilbert L. Klemann, II Executive Vice President - Corporate Date: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated. /s/ Thomas C. Hays * - ----------------------------- Thomas C. Hays, Chairman of the Board and Chief Executive Officer (principal executive officer) and Director Date: March 30, 1999 /s/ Norman H. Wesley * - ----------------------------- Norman H. Wesley, President and Chief Operating Officer and Director Date: March 30, 1999 /s/ John T. Ludes * - ----------------------------- John T. Ludes, Vice Chairman and Director Date: March 30, 1999 /s/ Gilbert L. Klemann, II - ----------------------------- Gilbert L. Klemann, II, Executive Vice President - Corporate and Director Date: March 30, 1999 /s/ Dudley L. Bauerlein, Jr. - ----------------------------- Dudley L. Bauerlein, Jr., Senior Vice President and Chief Financial Officer (principal financial officer) Date: March 30, 1999 34 /s/ Craig P. Omtvedt - ----------------------------- Craig P. Omtvedt, Senior Vice President and Chief Accounting Officer (principal accounting officer) Date: March 30, 1999 /s/ Eugene R. Anderson * - ----------------------------- Eugene R. Anderson, Director Date: March 30, 1999 /s/ Patricia O. Ewers * - ----------------------------- Patricia O. Ewers, Director Date: March 30, 1999 /s/ John W. Johnstone, Jr. * - ----------------------------- John W. Johnstone, Jr., Director Date: March 30, 1999 /s/ Sidney Kirschner * - ----------------------------- Sidney Kirschner, Director Date: March 30, 1999 /s/ Gordon R. Lohman * - ----------------------------- Gordon R. Lohman, Director Date: March 30, 1999 /s/ Charles H. Pistor, Jr. * - ----------------------------- Charles H. Pistor, Jr., Director Date: March 30, 1999 /s/ Eugene A. Renna * - ----------------------------- Eugene A. Renna, Director Date: March 30, 1999 /s/ Anne M. Tatlock * - ----------------------------- Anne M. Tatlock, Director Date: March 30, 1999 /s/ John W. Thompson * - ----------------------------- John W. Thompson, Director Date: March 30, 1999 35 /s/ Peter M. Wilson * - ----------------------------- Peter M. Wilson, Director Date: March 30, 1999 *By /s/ A. Robert Colby - ----------------------------- A. Robert Colby, Attorney-in-Fact 36 INDEX TO FINANCIAL STATEMENT SCHEDULE Pages ----- FORTUNE BRANDS, INC. AND SUBSIDIARIES Report of Independent Accountants F-2 Schedule -------- II Valuation and qualifying accounts For the years ended December 31, 1998, 1997 and 1996 F-3 F-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Fortune Brands, Inc.: Our audits of the consolidated financial statements referred to in our report dated February 3, 1999 appearing on page 57 of the 1998 Annual Report to Stockholders of Fortune Brands, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP 11 Madison Avenue New York, New York 10010 February 3, 1999 F-2 FORTUNE BRANDS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1998, 1997 and 1996 (In millions) ---------------------------------------------------------------------- Col. A Col. B Col. C Col. D Col. E ------ ------ ------ ------ ------ Additions --------- Balance at Charged Balance Beginning to Costs at End Description of Period and Expenses Deductions of Period - ------------------------------------------------------------------------ 1998: Allowance for cash discounts $ 8.2 $ 93.1 $ 92.4 (1) $ 8.9 Allowance for returns 20.4 150.3 151.6 (1) 19.1 Allowance for doubtful accounts 25.7 14.3 9.9 (2) 33.4 (3.3)(3) ----- ------ ------ ----- $54.3 $257.7 $250.6 $61.4 ===== ====== ====== ===== 1997: Allowance for cash discounts $ 7.4 $ 71.1 $ 70.3 (1) $ 8.2 Allowance for returns 18.9 129.0 127.5 (1) 20.4 Allowance for doubtful accounts 23.3 11.9 10.6 (2) 25.7 (1.1)(3) ----- ------ ------ ----- $49.6 $212.0 $207.3 $54.3 ===== ====== ====== ===== 1996: Allowance for cash discounts $ 5.1 $ 64.1 $ 73.1 (1) $ 7.4 (11.3)(3) Allowance for returns 15.6 131.2 130.6 (1) 18.9 (2.7)(3) Allowance for doubtful accounts 21.6 5.3 5.7 (2) 23.3 (2.1)(3) ----- ------ ------ ----- $42.3 $200.6 $193.3 $49.6 ===== ====== ====== ===== (1) Cash discounts and returns allowed customers. (2) Doubtful accounts written off, net of recoveries. (3) Balance at acquisition date of subsidiaries. F-3 EXHIBIT INDEX ------------- Sequentially Exhibit Numbered Page - ------- ------------- 3(i). Restated Certificate of Incorporation of Registrant as in effect on the date hereof. 3(ii)a. Amendments to By-laws of Registrant. 3(ii)b. By-laws of Registrant as in effect on the date hereof. 10a1. Fortune Brands, Inc. Annual Executive Incentive Compensation Plan is incorporated herein by reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1997.* 10b1. 1986 Stock Option Plan of Fortune Brands, Inc. and amendments thereto are incorporated herein by reference to Exhibit 10b2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.* 10b2. Amendment to 1986 Stock Option Plan of Fortune Brands, Inc. constituting Exhibit 10b1 hereto is incorporated herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1993.* 10b3. Amendment to 1986 Stock Option Plan of Fortune Brands, Inc. and Amendment thereto constituting Exhibits 10b1 and 10b2 hereto is incorporated herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated August 11, 1994.* 10b4. Amendment to the 1986 Stock Option Plan of Fortune Brands, Inc. and Amendments thereto constituting Exhibits 10b1, 10b2 and 10b3 hereto is incorporated herein by reference to Exhibit 10a2 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1997.* 10b5. 1990 Long-Term Incentive Plan of Fortune Brands, Inc. (As Amended and Restated as of January 1, 1994) is incorporated herein by reference to Exhibit 10a to the Quarterly Report on Form 10-Q of Registrant dated August 11, 1994.* 10b6. Amendment to 1990 Long-Term Incentive Plan of Fortune Brands, Inc. constituting Exhibit 10b5 hereto is incorporated herein by reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1997.* 10b7. Fortune Brands, Inc. Non-Employee Director Stock Option Plan is incorporated herein by reference to Exhibit 10b1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1997.* 10b8. Amendment to Registrant's Non-Employee Director Stock Option Plan constituting Exhibit 10b7 hereto is incorporated herein by reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1998.* 10b9. Fortune Brands, Inc. Stock Plan for Non-employee Directors.* 10c1. Amended Supplemental Plan of Fortune Brands, Inc. is incorporated herein by reference to Exhibit 10c1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c2. Trust Agreement, made as of the 2nd day of January, 1991, among Registrant, The Chase Manhattan Bank ("Chase"), et al. establishing a trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Amended Supplemental Plan constituting Exhibit 10c1 hereto is incorporated herein by reference to Exhibit 10c2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c3. Amendment made as of the 1st day of November, 1993 to Trust Agreement constituting Exhibit 10c2 hereto is incorporated herein by reference to Exhibit 10c3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c4. Amendment made as of the 1st day of January, 1995, to the Trust Agreement and Amendment thereto constituting Exhibits 10c2 and 10c3 hereto is incorporated herein by reference to Exhibit 10c4 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c5. Amendment made as of the 1st day January, 1997, to Trust Agreement and Amendments thereto constituting Exhibits 10c2, 10c3 and 10c4 hereto is incorporated herein by reference to Exhibit 10c5 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997.* 10c6. Schedule identifying substantially identical agreements to Trust Agreement and Amendments thereto constituting Exhibits 10c2, 10c3, 10c4 and 10c5 hereto in favor of Thomas C. Hays, Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 10c7. Amendment made as of the 24th day of February, 1997, to Trust Agreement and Amendments thereto constituting Exhibits 10c2, 10c3, 10c4 and 10c5 hereto relating to the trust established in favor of Thomas C. Hays, is incorporated herein by reference to Exhibit 10c7 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997.* 10c8. Trust Agreement, made as of the 1st day of November, 1993, among Gilbert L. Klemann, II, Registrant and Chase establishing a grantor trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Amended Supplemental Plan constituting Exhibit 10c1 hereto is incorporated herein by reference to Exhibit 10c6 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10c9. Amendment made as of 1st day of January, 1996 to Trust Agreement constituting Exhibit 10c8 hereto is incorporated herein by reference to the Quarterly Report on Form 10-Q of Registrant dated August 8, 1996.* 10c10. Amendment made as of the 1st day of January, 1997 to Trust Agreement and Amendment thereto constituting Exhibits 10c8 and 10c9 hereto is incorporated herein by reference to Exhibit 10c1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1997.* 10c11. Amendment made as of the 1st day of August, 1998 to Trust Agreement and Amendments thereto constituting Exhibits 10c8, 10c9 and 10c10 hereto is incorporated herein by reference to Exhibit 10a1 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1998.* 10c12. Schedule identifying substantially identical agreements to the Trust Agreement and Amendments thereto constituting Exhibits 10c8, 10c9, 10c10 and 10c11 hereto in favor of Thomas C. Hays, Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 10c13. Amendment made as of the 24th day of February, 1997 to Trust Agreement and Amendments thereto constituting Exhibits 10c8, 10c9, 10c10 and 10c11 hereto, among Thomas C. Hays, Registrant and Chase, is incorporated herein by reference to Exhibit 10c12 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997.* 10d1. Resolutions of the Board of Directors of Registrant adopted on October 28, 1986 and July 26, 1988 adopting and amending a retirement plan for directors of Registrant who are not officers or employees of Registrant or a subsidiary thereof are incorporated herein by reference to Exhibit 10e1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991 maintained in Commission File No. 1-9076.* 10d2. Resolutions of the Board of Directors of Registrant adopted on July 26, 1994 amending the resolutions constituting Exhibit 10d1 hereto is incorporated herein by reference to Exhibit 10e2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10e1. Severance and Retirement Agreement made as of February 24, 1997, between Registrant and Thomas C. Hays is incorporated herein by reference to Exhibit 10d1 to the Quarterly Report on Form 10-Q of Registrant dated August 12, 1997. 10f1. Resolutions of the Board of Directors of Registrant adopted on November 27, 1990 with respect to retirement and health benefits provided to Gilbert L. Klemann, II is incorporated herein by reference to Exhibit 10p1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991 maintained in Commission File No. 1-9076.* 10f2. Resolutions of the Board of Directors of Registrant adopted on July 26, 1988 with respect to retirement and health benefits provided to Mark A. Roche.* 10g1. Letter dated January 23, 1996 from Registrant with respect to deferred payment of fees to Eugene R. Anderson is incorporated herein by reference to Exhibit 10k1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.* 10g2. Letter dated August 11, 1995 from Registrant with respect to deferred payment of fees to Gordon R. Lohman is incorporated herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated November 9, 1995.* 10h1. Agreement dated January 2, 1991 between Registrant and Gilbert L. Klemann, II is incorporated herein by reference to Exhibit 10s1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.* 10h2. Amendment dated November 28, 1994 to the Agreement constituting Exhibit 10h1 hereto is incorporated herein by reference to Exhibit 10r2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10h3. Schedule identifying substantially identical agreements to the Agreement and Amendment thereto constituting Exhibits 10h1 and 10h2 hereto entered into by Registrant with Thomas C. Hays, Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 10i1. Trust Agreement, made as of the 2nd day of January, 1991, among Registrant, Chase, et al. establishing a trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Agreement and Amendment thereto constituting Exhibits 10h1 and 10h2 hereto is incorporated herein by reference to Exhibit 10s1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10i2. Amendment made as of the 1st day of November, 1993 to Trust Agreement constituting Exhibit 10i1 hereto is incorporated herein by reference to Exhibit 10s2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10i3. Amendment made as of the 1st day of January, 1997 to Trust Agreement and Amendment thereto constituting Exhibits 10i1 and 10i2 hereto is incorporated herein by reference to Exhibit 10i3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997.* 10i4. Schedule identifying substantially identical agreements to the Trust Agreement and Amendments thereto constituting Exhibits 10i1, 10i2 and 10i3 hereto in favor of Thomas C. Hays, Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 10j1. Agreement dated as of January 2, 1991 between Registrant and Gilbert L. Klemann, II and amendment thereto is incorporated herein by reference to Exhibit 10y1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991 maintained in Commission File No. 1-9076.* 10j2. Agreement dated as of October 28, 1991 amending the Agreement constituting Exhibit 10j1 hereto is incorporated herein by reference to Exhibit 10w2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.* 10j3. Amendment effective as of January 1, 1995 to the Agreement and Amendment thereto constituting Exhibits 10j1 and 10j2 hereto is incorporated herein by reference to Exhibit 10u3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* 10j4. Schedule identifying substantially identical agreements to the Agreement and Amendments thereto constituting Exhibits 10j1, 10j2 and 10j3 hereto entered into by Registrant with Norman H. Wesley, John T. Ludes, Dudley L. Bauerlein, Jr., Craig P. Omtvedt, Mark A. Roche and Robert J. Rukeyser.* 10j5. Amendment dated as of August 1, 1998 to the Agreement and Amendments thereto constituting Exhibits 10j1, 10j2 and 10j3 hereto is incorporated herein by reference to Exhibit 10b1 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1998.* 10j6. Schedule identifying substantially identical agreements to the Amendment constituting Exhibit 10j5 hereto entered into by Registrant with John T. Ludes, Dudley L. Bauerlein, Jr. and Robert J. Rukeyser.* 10j7. Amendment dated as of September 29, 1998 between Registrant and John T. Ludes to the Agreement and Amendments between Registrant and Mr. Ludes substantially identical to Exhibits 10j1, 10j2, 10j3 and 10j5 hereto is incorporated herein by reference to Exhibit 10b5 to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1998.* 10j8. Amendment dated as of August 1, 1998 between Registrant and Craig P. Omtvedt to the Agreement and Amendments thereto substantially identical to Exhibits 10j1, 10j2 and 10j3 hereto.* 10j9. Schedule identifying substantially identical agreements to the Amendment constituting Exhibit 10j8 hereto entered into by Registrant with Norman H. Wesley and Mark A. Roche.* 10k1. Rights Agreement, dated as of November 19, 1997, between Registrant and First Chicago Trust Company of New York, as Rights Agent, is incorporated herein by reference to Exhibit 4a to the Current Report on Form 8-K of Registrant dated December 2, 1997. 10l1. Indemnification Agreement, dated as of December 22, 1994, among Registrant, The American Tobacco Company and Brown & Williamson Tobacco Corporation, is incorporated herein by reference to Exhibit 10m1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1997. 12. Statement re computation of ratio of earnings to fixed charges. 13. 1998 Annual Report to Stockholders of Registrant. 21. Subsidiaries of Registrant. 23(i). Consent of Independent Accountants, PricewaterhouseCoopers LLP. 24. Powers of Attorney relating to execution of this Annual Report on Form 10-K. 27. Financial Data Schedule for Fiscal Year ended December 31, 1998 (Article 5). 99. List of Pending/Terminated Cases. * Indicates that exhibit is a management contract or compensatory plan or arrangement. EX-3 2 EXHIBIT 3(I) EXHIBIT 3(i) Restated Certificate of Incorporation of Fortune Brands, Inc. (Pursuant to Section 245 of the General Corporation Law of the State of Delaware) Fortune Brands, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Company"), DOES HEREBY CERTIFY that: FIRST: The name of the Company is Fortune Brands, Inc. and the name under which the Company originally was incorporated is American Brands Holding Company. SECOND: The original Certificate of Incorporation of the Company was filed with the Secretary of State of the State of Delaware on October 1, 1985. THIRD: The provisions of the Certificate of Incorporation of the Company, as heretofore amended or supplemented, are hereby restated and integrated into this Restated Certificate of Incorporation of the Company, without further amendment and without any discrepancy between such provisions and the provisions of this Restated Certificate of Incorporation of the Company, as follows: ARTICLE I The name of the Corporation is Fortune Brands, Inc. (the "Company"). ARTICLE II The address of the Company's registered office in the State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is United States Corporation Company. ARTICLE III The purpose of the Company is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE IV 1. The total number of shares of all classes of stock that the Company shall have authority to issue is eight hundred and ten million (810,000,000) shares, of which seven hundred and fifty million (750,000,000) shares shall be Common Stock, par value $3.125 per share, and sixty million (60,000,000) shares shall be Preferred Stock, without par value. The designations and the powers, preferences and rights of the Common Stock and the Preferred Stock, and the qualifications, limitations or restrictions thereof, are as provided in or pursuant to this Article IV. 2. (a) The rights of holders of Common Stock to receive dividends or to share in the distribution of assets in the event of liquidation, dissolution or winding up of the affairs of the Company shall be subject to the preferences and other rights of the Preferred Stock as may be fixed in this Certificate of Incorporation or in the resolution or resolutions of the Board of Directors providing for the issue of such Preferred Stock. (b) The holders of Common Stock shall be entitled to one vote for each share of Common Stock held by them of record at the time for determining the holders thereof entitled to vote. 3. Authority is hereby vested in the Board of Directors to issue from time to time the Preferred Stock in one or more series and to fix by the resolution of resolutions providing for the issue of shares of any such series the voting powers, designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof, of such series to the full extent permitted by this Certificate of Incorporation and the law of the State of Delaware. The authority of the Board of Directors with respect to each such series shall include, but not be limited to, determination of the following: (i) The number of shares to constitute such series, and the distinctive designations thereof; (ii) The voting powers, full or limited, if any, of such series; (iii) The rate of dividends payable on shares of such series, the conditions on which and the times when such dividends are payable, the preference to, or the relations to, the payment of the dividends payable on any other class, classes or series of stock, whether cumulative or noncumulative, and, if cumulative, the dates from which dividends on shares of such series shall be cumulative; (iv) The right, if any, of the Company to redeem shares of such series and the terms and conditions of such redemption; (v) The requirement of any sinking fund or funds to be applied to the purchase or redemption of shares of such series and, if so, the amount of such fund or funds and the manner of application; (vi) The rights of shares of such series upon the liquidation, dissolution or winding up of, or upon any distribution of the assets of, the Company; (vii) The rights, if any, of the holders of shares of such series to convert such shares into, or to exchange such shares for, shares of any other class, classes or series of stock and the price or prices or rate or rates of exchange and the adjustments at which such shares shall be convertible or exchangeable, and any other terms and conditions of such conversion or exchange; and (viii) Any other preferences and relative, participating, optional or other special rights of shares of such series, and qualifications, limitations or restrictions including, without limitation, any restriction on an increase in the number of shares of any series theretofore authorized and any qualifications, limitations or restrictions of rights or powers to which shares of any future series shall be subject; provided that the voting powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, of the $2.67 Convertible Preferred Stock and the Series A Junior Participating Preferred Stock are as set forth or incorporated by reference in Sections 6 and 7 of this Article IV. 4. The number of authorized shares of any class or classes of stock of the Company may be increased or decreased by the affirmative vote of the holders of a majority of the stock of the Company that is entitled to vote, without a separate class vote of any class or classes of stock of the Company, except as may be otherwise provided in this Certificate of Incorporation or in the resolution or resolutions fixing the voting rights of any series of the Preferred Stock. 5. No holder of Common Stock or Preferred Stock, as such, shall have or be entitled to any preemptive right whatsoever. 6. The shares of Preferred Stock are hereby divided to create a series of Preferred Stock, and it is hereby determined that such series shall consist of 5,514,459 shares, which shall have the following designation, 2 relative rights, preferences and limitations and a stated capital at least equal to the par value of the stock into which such shares are made convertible: (a) The distinctive serial designation of the series is $2.67 Convertible Preferred Stock (hereinafter called "$2.67 Preferred"). (b) (1) Holders of shares of $2.67 Preferred shall be entitled to three-tenths of a vote per share, and, except as provided in subparagraphs (2) and (3) of this paragraph (b) or by present or future law otherwise specifically provided, shall not be entitled to vote as a class. (2) If payment of six or more quarterly dividends (whether or not consecutive) payable on Preferred Stock of any series shall be in default, in whole or in part, the holders of shares of $2.67 Preferred (in addition to any other rights of holders of shares of any series of Preferred Stock to vote, including any right to vote with the holders of Common Stock for the election of directors) shall be entitled, until such time as all such dividends in default have been paid in full, at each annual meeting of stockholders, voting separately as a class with all other holders of Preferred Stock having the right to vote for directors at such meeting regardless of series, to elect two of the directors then being elected. If, while the holders of shares of Preferred Stock as a class are entitled to vote for the election of such two directors, any vacancy occurs among the directors elected by the holders of shares of Preferred Stock, the remaining director so elected by the holders of shares of Preferred Stock shall be entitled to nominate for election by the Board of Directors a successor director to hold office for the unexpired term of the director whose position has become vacant. If the vacancy is not filled by nomination by the remaining director, or if there is then in office no director who has been elected by the holders of shares of Preferred Stock (whether or not prior to the initial election of any such director), the Company shall, as soon as possible, call (on at least 20 days' notice) a special meeting of the holders of shares of Preferred Stock having the right to vote for directors at such meeting for the purpose of filling such vacancy or vacancies in the Board of Directors. If the Company fails to call such a meeting within 30 days after a written request by any three or more holders of shares of Preferred Stock, then such three or more holders of shares of Preferred Stock may call (on at least 20 days' notice) a special meeting of the holders of shares of Preferred Stock having the right to vote for directors at such meeting for such purpose and, if the vacancy or vacancies are not theretofor filled as hereinabove provided, it or they may be filled at such meeting by the holders of shares of Preferred Stock, voting separately as a class regardless of series. (3) The affirmative vote of the holders of at least two-thirds of the shares of $2.67 Preferred, voting separately as a class, given in person or by proxy at any special or annual meeting called to take action thereon, shall be necessary to permit, effect or validate any amendment of the Certificate of Incorporation of the Company, or approve any agreement of merger or consolidation which contains any provision, to (i) exclude or limit the right of the holders of $2.67 Preferred to vote on any matter, except as such right may be limited by voting rights given to new shares then being authorized of any existing or new series of Preferred Stock; (ii) reduce the rate or change the time for accumulation or payment of dividends on the shares of $2.67 Preferred; (iii) cancel or otherwise adversely affect dividends which have accrued but have not been declared on the shares of $2.67 Preferred; (iv) effect a conversion, exchange or reclassification of the shares of $2.67 Preferred; (v) change the designation, preferences, limitations, conversion rate, call provisions or relative rights of the shares of $2.67 Preferred; or (vi) change shares of $2.67 Preferred then outstanding into a different number of shares, or into the same number of shares of another class or series. Nothing herein shall be deemed to restrict or limit the right of the Board of Directors of the Company to create, or authorize the Board to create, a new series of Preferred Stock having, or convertible into shares having, rights or preferences prior or superior to those of the shares of $2.67 Preferred; provided that the Board of Directors of the Company shall not have the right to issue any shares with equal, prior or superior rights to those of the $2.67 Preferred as a dividend or distribution on any junior stock (which shall mean for the purposes of this Section 6 the Common Stock and any other class of stock of the Company hereafter authorized over which the $2.67 Preferred has preference or priority in the payment of dividends or in the distribution of assets on any dissolution, liquidation or winding up of the Company). (c) (1) The holders of shares of $2.67 Preferred shall be entitled to receive, out of funds legally available therefor, cumulative cash dividends of a limited and preferential nature at a rate of $2.67 per share per annum, and no more, payable quarterly on the tenth day of March, June, September and December commencing 3 March 10, 1986, as and when declared by the Board of Directors. Dividends on each share of $2.67 Preferred shall be cumulative and shall commence to accrue from the date of the original issuance of shares of this series. Accumulations of dividends shall not bear interest. (2) No dividend shall be paid or declared on any junior stock, other than a dividend payable in junior stock, nor shall any shares of junior stock be acquired for a consideration by the Company or by any subsidiary (which shall mean any corporation or entity, the majority of the voting power to elect directors of which is held directly or indirectly by the Company), unless all dividends on the $2.67 Preferred accrued for all past quarter-yearly dividend periods shall have been paid and unless, in the case of dividends on any junior stock, the full dividends on the $2.67 Preferred for the then current quarter-yearly dividend period provided in accordance with subparagraph (1) of this paragraph (c) shall have been or shall then be paid or declared. The foregoing restriction on acquisition of shares of junior stock shall be inapplicable to any payments in lieu of issuance of fractional shares thereof whether upon any merger, conversion, stock dividend or otherwise. (d) (1) In the event of any liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, the holder of each share of $2.67 Preferred then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders before any distribution or payment shall be made to the holders of any junior stock, an amount equal to the sum of (i) $30.50 per share plus (ii) an additional sum computed at the rate of $2.67 per share per annum, for the period from the date on which dividends on such share became cumulative to and including the date fixed for such payment, less the aggregate of dividends that on or before the date fixed for such payment shall have been paid or declared and set aside for payment, but computed without interest. If the assets of the Company available for distribution to its stockholders shall be insufficient to pay in full all amounts to which the holders of $2.67 Preferred are entitled, the amount available for distribution to the holders of shares of $2.67 Preferred shall be shared pro rata by them. (2) Notice of any payment in full pursuant to subparagraph (1) of this paragraph (d) shall be given by publication at least once in a newspaper of general circulation in the Borough of Manhattan, The City of New York, printed in the English language and customarily published on each business day, such publication to be not more than 60 days and not less than 30 days prior to the payment date. Notice of such payment shall also be given in the same manner as provided for mailing notice of redemption in subparagraph (2) of paragraph (e) as if the date for payment were the date fixed for redemption referred to in said subparagraph (2), except that such notice shall be mailed not less than 30 days prior to the date fixed for payment. Neither failure to publish or mail such notice nor defect therein or in the publication or mailing thereof shall affect the validity of the proceedings for such payment. (3) For the purposes of this Paragraph (d), a consolidation or merger of the Company with any other corporation shall not constitute or be deemed to constitute a liquidation, dissolution or winding up of the Company. (e) (1) The Company may, at its option, at any time or from time to time redeem the whole or any part of the $2.67 Preferred outstanding at the time of redemption, upon notice given as hereinafter specified, by paying in cash the following redemption prices per share: If Redeemed during the 12-Month Period Redemption Beginning March 10 Price per Share ------------------------- --------------- 1985.......................... $32.10 1986.......................... 31.70 1987.......................... 31.30 1988.......................... 30.90 and thereafter at a redemption price per share of $30.50; together with an additional sum, for each share so to be redeemed, computed at the rate of $2.67 per share per annum for the period from the date on which dividends on such share became cumulative to and including the date fixed for such redemption, less the aggregate of the 4 dividends that on or before the date fixed for such redemption shall have been paid or declared and set aside for payment, but computed without interest. Notwithstanding the foregoing, the Company may not redeem less than the whole of the $2.67 Preferred at the time outstanding unless all dividends on the $2.67 Preferred for all past quarter-yearly dividend periods shall have been paid or declared and set aside for payment. (2) Notice of any such redemption pursuant to this paragraph (e) shall be deemed given if mailed by certified mail, return receipt requested, not less than 90 days prior to the date fixed for redemption, to each stockholder of record of shares so to be redeemed at his address as it appears on the books of the Company. Neither failure to mail such notice nor defect therein or in the mailing thereof shall affect the validity of the proceedings for the redemption of any shares so to be redeemed. (3) If only part of the $2.67 Preferred at the time outstanding is to be redeemed, the selection of the shares to be redeemed may be made pro rata, by lot or in any other equitable manner. The Board of Directors shall have the power to prescribe the manner in which the selection is to be made. (4) When any shares of $2.67 Preferred are redeemed out of capital, their redemption shall effect their retirement. When any shares of $2.67 Preferred are otherwise redeemed or reacquired, the Company shall retire such shares by resolution of the Board of Directors. In either event, the Board of Directors shall cause to be filed with the Office of the Secretary of State of Delaware an appropriate certificate which shall have the effect of restoring such shares to the status of authorized but unissued shares of Preferred Stock without series designation. (f) (1) If notice of payment in full to holders of shares of $2.67 Preferred of the amounts to which they are entitled in accordance with subparagraph (2) of paragraph (d) or notice of redemption in accordance with subparagraph (2) of paragraph (e) shall have been given or if the Company shall have given to the bank or trust company hereinafter referred to irrevocable authority promptly to give or complete such notice, and if on or before the payment date, or redemption date specified therein, the funds necessary for such payment or redemption shall have been deposited by the Company with a bank or trust company in good standing, designated in such notice, organized under the laws of the United States of America or of the State of New York, in trust for the pro rata benefit of the holders of the shares entitled to such payment or so called for redemption, as the case may be, then, notwithstanding that any certificate for shares entitled to such payment or so called for redemption, as they case may be, shall not have been surrendered for retirement, from and after the time of such deposit by the Company, or from and after the time such notice to holders of $2.67 Preferred is given, whichever is later, all such shares shall be deemed no longer to be outstanding and all rights appertaining to such shares shall forthwith terminate, except only the right of the holders thereof to receive from such bank or trust company the funds so deposited, without interest, and the right to exercise on or before but not later than the fifth day next preceding the date fixed for payment or redemption, as the case may be, any privilege of conversion that has not theretofore expired. Any interest accrued on such funds shall be paid to the Company from time to time. (2) Any funds deposited by the Company pursuant to subparagraph (1) of this paragraph (f) that shall not be required for such payment or redemption because of the exercise of any right of conversion subsequent to the date of such deposit shall be released and repaid to the Company forthwith. Any funds so deposited that have not been paid by the end of five years from such payment or redemption date shall be released and repaid to the Company forthwith, after which the holders of the shares of $2.67 Preferred entitled to such payment or of the shares of $2.67 Preferred so called for redemption, as the case may be, shall be entitled to receive payment thereof only from the Company, but subject to applicable law. (g) (1) Subject to the provisions for adjustment hereinafter set forth, each share of $2.67 Preferred shall be convertible, at the option of the holder thereof, into 1.02 (1-2/100) of a fully paid and non-assessable share of Common Stock of the Company upon surrender to any Transfer Agent for the $2.67 Preferred, or to the Company if no such Transfer Agent exists, of the certificate for the share so to be converted, together with such form of notice of election to convert as may be provided from time to time by the Company. The number of shares of Common Stock deliverable upon conversion of a share of $2.67 Preferred is hereinafter sometimes called "the conversion rate." 5 (2) Any share of $2.67 Preferred called for redemption or for which payment is provided upon any liquidation, dissolution or winding up of the Company may be converted as in this paragraph (g); provided that it is converted at any time on or before but not later than the fifth day next preceding the date fixed for redemption or payment, as the case may be. No allowance or adjustment for dividends on either class of stock shall be made upon conversion, except that where conversion is made of any share of $2.67 Preferred called for redemption or for which payment is provided upon any liquidation, dissolution or winding up of the Company there shall be paid cumulative cash dividends on the $2.67 Preferred prorated from the next preceding date on which said cash dividends have been paid to the date the shares of $2.67 Preferred shall be deemed to have been converted. Shares of the $2.67 Preferred shall be deemed to have been converted as of the date of the surrender for conversion of the certificates therefor, together with the form of notice provided by the Company duly signed by the holder thereof, and the person entitled to receive shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. (3) The number of shares of Common Stock deliverable upon conversion of each share of $2.67 Preferred shall be subject to adjustment from time to time as follows: (A) In case the Company shall (i) declare a dividend or other distribution on its Common Stock in shares of its capital stock, (ii) subdivide or combine the outstanding shares of Common Stock or (iii) issue by reclassification or change of its outstanding shares of Common Stock (including any such reclassification or change in connection with a consolidation or merger in which the Company is the continuing corporation) any capital stock (all shares so issued to be included in the term "Common Stock" as used in this subparagraph (3)), the conversion rate in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination, reclassification or change shall be adjusted so that the holder of each share of $2.67 Preferred surrendered for conversion after such time shall be entitled to receive the number and kind of shares that he would have owned or have been entitled to receive had such share of $2.67 Preferred been converted immediately prior to such time. Such adjustment shall be made successively whenever any event listed above shall occur. (B) In case the Company shall, while any shares of $2.67 Preferred remain outstanding, enter into any consolidation with or merger into any other corporation wherein the Company is not the surviving corporation, or sell or convey its property as an entirety or substantially as an entirety, and in connection with such consolidation, merger, sale or conveyance, shares of stock or other securities shall be issuable or deliverable in exchange for the Common Stock of the Company, proper provision shall be made that the holder of any share of $2.67 Preferred may thereafter convert the same into the same kind and amount of securities as may be issuable by the terms of such consolidation, merger, sale or conveyance with respect to the number of shares of Common Stock of the Company into which such share of $2.67 Preferred is convertible at the time of such consolidation, merger, sale or conveyance. (C) In case the Company shall fix a record date for the determination of stockholders entitled to receive rights or warrants to be issued to holders of its Common Stock as such entitling such holders (for a period expiring within 60 days after such record date) to subscribe for or purchase Common Stock at a price per share less than the Current Market Price per share of Common Stock (as defined in clause (E) of this subparagraph (3)) on such record date, then in each such case the conversion rate shall be changed so that on and after such record date it shall be the product obtained by multiplying the conversion rate immediately prior to such record date by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on such record date plus the number of additional shares of Common Stock issuable upon exercise of such rights and warrants, and of which the denominator shall be the number of shares of Common Stock outstanding on such record date plus a number of shares of Common Stock equal to that obtained by dividing the aggregate consideration receivable on exercise of such rights or warrants by such Current Market Price. For the purposes of this clause (C), the issuance of rights or warrants (exercisable for a period expiring within 60 days after the record date with respect thereto) to purchase stock or securities convertible into shares of Common Stock shall be deemed to be the issuance of rights or warrants to purchase the maximum number of shares of Common Stock into which such stock or securities are convertible and the aggregate consideration receivable on exercise of such rights or 6 warrants shall be deemed equal to the aggregate consideration receivable for such securities when such rights or warrants are exercised plus the minimum aggregate amount, if any, payable upon conversion of such stock or securities into Common Stock. An adjustment pursuant to this clause (C) shall be made whenever any such rights or warrants are issued, and shall be made as of the record date for the determination of stockholders entitled to receive such rights or warrants. In the event that such rights or warrants are not so issued, the conversion rate shall again be adjusted, effective as of the date on which the Board of Directors of the Company determines not to issue such rights or warrants, as if such record date had not been fixed. (D) In case the Company shall fix a record date for making a distribution (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) on its Common Stock of evidences of its indebtedness or corporate assets (excluding dividends paid in, or distributions of, cash) or subscription rights or warrants (excluding those referred to in clause (C) of this subparagraph (3)), the conversion rate shall be increased effective immediately following such record date to a new conversion rate which shall be the product obtained by multiplying the conversion rate immediately prior to such record date by a fraction of which the numerator shall be the Current Market Price per share of Common Stock (as defined in clause (E) of this subparagraph (3)) on such record date and of which the denominator shall be such Current Market Price per share of Common Stock less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights or warrants applicable to one share of Common Stock. Such adjustment shall be made successively whenever such a record date is fixed. In the event that such distribution is not so made, the conversion rate shall again be adjusted, effective as of the date on which the Board of Directors determines not to make such distribution, as if such record date had not been fixed. (E) For the purpose of any computation under clauses (C) and (D) of this subparagraph (3), the "Current Market Price" per share of Common Stock on any record date shall be deemed to be the average of the daily closing prices for the 30 consecutive full business days commencing 45 such business days before such record date. For the purpose of this clause (E), the "Current Market Price" per share of Common Stock of American Brands, Inc., a New Jersey corporation organized under an Agreement of Consolidation in 1904 (hereinafter called "American") calculated as provided in this clause (E) for Common Stock of the Company, shall be deemed to be the "Current Market Price" per share of Common Stock of the Company for any relevant period or periods up to the date of issuance of the $2.67 Preferred. The "closing price" of the Common Stock for any day shall be the last sale price regular way on such day, or in case no such sale takes place on such day, the average of the closing bid and asked prices regular way, in either case as officially quoted on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or if the Common Stock is not listed or admitted to trading on any national securities exchange, the average of the bid and asked prices as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose or, if such bid and asked prices are not available, such other prices as may be selected by the Board of Directors for the purpose. (F) No adjustment pursuant to this subparagraph (3) shall be required unless the particular event involved would require an increase or decrease of at least 1% in the conversion rate; provided, however, that any adjustments that by reason of this clause (F) are not required to be made shall be carried forward and taken into account in any subsequent adjustment, and provided further, however, that such adjustment shall be made no later than the earlier of (i) 3 years after the date of the particular event involved, or (ii) the date as to which the aggregate adjustments not previously made would require a total increase or decrease of 1% in the conversion rate. For the purpose of this clause (F), any adjustment not required to be made with respect to the $2.67 Preferred Stock of American under the terms of conversion rate adjustment provisions applicable thereto because the particular event involved did not require an increase or decrease of at least 1% in the conversion rate and not carried forward and taken into account in any subsequent 7 adjustment pursuant to such terms at the date of issuance of the $2.67 Preferred, shall be taken into account with respect to adjustments required to be made pursuant to this clause (F). (G) In the event that at any time as a result of an adjustment made pursuant to clause (A) of this subparagraph (3), the holder of any share of $2.67 Preferred thereafter surrendered for conversion shall become entitled to receive any shares of capital stock of the Company other than Common Stock, thereafter the number of such other shares so receivable upon conversion of any share of $2.67 Preferred shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in clauses (A) to (F) of this subparagraph (3) and the other provisions of this resolution fixing terms of the $2.67 Preferred with respect to the Common Stock, to the extent they can appropriately apply on like terms to such other shares. (H) The Company shall, simultaneously with any action that would require an adjustment pursuant to this subparagraph (3), take all necessary action to make the aggregate amount of state capital represented by the outstanding shares of $2.67 Preferred at least equal to the aggregate par value of the shares of Common Stock into which such shares of $2.67 Preferred will be convertible as the result of such adjustment. (I) Whenever any adjustment is required by this subparagraph (3), the Company shall promptly file with each Transfer Agent, if any, for the $2.67 Preferred a statement describing in reasonable detail the adjustment and the method of calculation used, and mail a copy of such statement to each holder of shares of $2.67 Preferred of record on the date as of which such adjustment was made. (4) The Company shall at all times on and after the issuance of the $2.67 Preferred keep available for delivery the full number of issued or unissued shares of Common Stock into which all outstanding shares of $2.67 Preferred are convertible. (5) No certificate for a fraction of a share shall be delivered upon the conversion, but, in lieu of any fractional share that would otherwise be required to be delivered in accordance with the foregoing provisions, the Company shall pay to the person otherwise entitled to such fractional share a sum in cash equal to such fraction multiplied by the closing price (as defined in clause (E) of subparagraph (3) of this paragraph (g)) of the Common Stock on the day prior to the day of the conversion. (6) The certificate of any independent firm of public accountants selected by the Board of Directors shall be evidence of the correctness of any adjustment made pursuant to this paragraph (g). All calculations of adjustments under this paragraph (g) shall be made to the nearest one-thousandth of a share. (7) Conversion of shares of $2.67 Preferred shall effect their retirement. Shares of $2.67 Preferred otherwise reacquired by the Company shall be retired by resolution of the Board of Directors. In either event, the Board of Directors shall cause to be filed with the Office of the Secretary of State of Delaware an appropriate certificate which shall have the effect of restoring such shares to the status of authorized but unissued shares of Preferred Stock without series designation. 7. The designation and amount of the Series A Junior Participating Preferred Stock, and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such Series, and the qualifications, limitations or restrictions thereof, are stated and expressed in Exhibit A attached hereto and incorporated herein by reference. ARTICLE V Except for any By-law that by its terms states that it may be amended or repealed only by action of the stockholders, the Board of Directors is authorized to adopt, amend or repeal the By-laws of the Company. 8 ARTICLE VI Any action required or permitted to be taken by the stockholders of the Company must be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing by stockholders. ARTICLE VII 1. Except as otherwise provided in Section 2 of this Article VII, in addition to any affirmative vote required by law, this Certificate of Incorporation or the By-laws of the Company, the affirmative vote of at least 66 2/3% of the votes cast by the stockholders of the Company, voting together as a single class at a meeting at which a quorum is present, shall be required for (i) the adoption of any amendment to, or repeal of any provision of, this Certificate of Incorporation (other than the adoption of any amendment authorized pursuant to Section 3 of Article IV of this Certificate of Incorporation or the increase or decrease of the number of shares of any series of Preferred Stock or the elimination thereof by action of the Board of Directors as authorized by the General Corporation Law of Delaware), (ii) any merger or consolidation of the Company with or into any other corporation, (iii) any sale or lease of all or substantially all of the assets of the Company to any other corporation, person or other entity or (iv) the dissolution of the Company. Except as otherwise provided in Section 2 of this Article VII, such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, in other provisions of this Certificate of Incorporation, by law, in any agreement with any national securities exchange or otherwise. 2. Nothing contained in Section 1 of this Article VII shall require the approval of the stockholders of the Company to authorize (i) a merger or consolidation in which the Company is the surviving corporation if (A) the agreement of merger does not amend in any respect this Certificate of Incorporation, (B) each share of stock of the Company outstanding immediately prior to the effective date of the merger is to be an identical outstanding or treasury share of the Company after the effective date of the merger, and (C) either no shares of Common Stock of the Company and no shares, securities or obligations convertible into such stock are to be issued or delivered under the plan of merger, or the authorized unissued shares or the treasury shares of Common Stock of the Company to be issued or delivered under the plan of merger plus those initially issuable upon conversion of any other shares, securities or obligations to be issued or delivered under such plan do not exceed 20% of the shares of Common Stock of the Company outstanding immediately prior to the effective date of the merger, or (ii) a merger into the Company of any other corporation if at least 90% of the outstanding shares of each class of stock of such other corporation is owned by the Company. ARTICLE VIII 1. Except as otherwise provided for, or fixed by, or pursuant to the provisions of Article IV of this Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock, the number of the directors of the Company shall be fixed from time to time by or pursuant to the By-laws of the Company but shall not exceed 20. The directors, other than those who may be elected by the holders of any class or series of stock having a preference over the Common Stock, shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as reasonably possible, with the directors in each class to hold office until their successors are elected and qualified. Each member of the Board of Directors in the first class of directors shall hold office until the Annual Meeting of stockholders in 1987, each member of the Board of Directors in the second class of directors shall hold office until the Annual Meeting of stockholders in 1988 and each member of the Board of Directors in the third class of directors shall hold office until the Annual Meeting of stockholders in 1989. At each annual meeting of the stockholders of the Company, the successors to the class of directors whose terms expire at that meeting shall be elected to hold office for terms expiring at the later of the annual meeting of stockholders held in the third year following the year of their election or the election and qualification of the successors to such class of directors. 2. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock, nominations for the election of directors may be made by the Board of Directors or by any record owner of 9 stock of the Company authorized to be issued from time to time under Article IV of this Certificate of Incorporation and entitled to be voted generally in the election of directors ("Voting Stock"). Any such stockholder, however, may nominate one or more persons for election as director at a meeting only if written notice of such stockholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Company not later than (a) with respect to an election to be held at an annual meeting of stockholders, one hundred twenty (120) days in advance of such meeting, and (b) with respect to an election to be held at a special meeting of stockholders for the election of directors, the close of business on the seventh day following the earlier of (i) the date on which notice of such meeting is first given to stockholders and (ii) the date on which a public announcement of such meeting is first made. Each such notice shall include: (1) the name and address of each stockholder of record who intends to appear in person or by proxy to make the nomination and of the person or persons to be nominated; (2) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (3) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (4) the consent of each nominee to serve as a director of the Company if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. 3. Except as otherwise provided for, or fixed by, or pursuant to the provisions of Article IV of this Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the Common Stock, newly created directorships resulting from any increase in the number of directors or any vacancy on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 4. Subject to the rights of holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors under specified circumstances, any one or more directors of the Company may be removed, only for cause, only by the affirmative vote of at least 80% of the combined voting power of the then outstanding shares of Voting Stock, voting together as a single class, at any annual meeting of stockholders of the Company or at any special meeting of stockholders of the Company, the notice of which shall state that the removal of a director or directors is among the purposes of the meeting. 5. Notwithstanding any other provision of this Certificate of Incorporation or the By-laws of the Company (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law, this Certificate of Incorporation or the By-laws of the Company), the affirmative vote of at least 80% of the combined voting power of the then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article VIII; provided, however, that the preceding provisions of this Section 5 shall not apply to any amendment to this Article VIII, and such amendment shall require only such affirmative vote as is required by law and any other provisions of this Certificate of Incorporation or the By-laws of the Company, if such amendment shall have been approved by at least three-fourths of the members of the Board of Directors then in office. ARTICLE IX No director of the Company shall be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that the foregoing clause shall not apply to any liability of a director to the extent provided by applicable law (i) for any breach of the director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. Neither the amendment nor 10 the repeal of this Article IX, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article IX, shall be effective with respect to any cause of action, suit, claim or other matter that, but for this Article IX, would accrue or arise prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE X The Company reserves the right to amend, alter or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights of stockholders herein are subject to this reservation. FOURTH: The Board of Directors of the Company has duly adopted this Restated Certificate of Incorporation of the Company in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Company has caused its corporate seal to be affixed hereto and this certificate to be signed by its officer thereunto duly authorized and attested by its Vice President and Secretary this second day of February, 1999. By Thomas C. Hays --------------------------------- Thomas C. Hays Chairman of the Board and Chief Executive Officer [Corporate Seal] Louis F. Fernous, Jr. - ------------------------------- Louis F. Fernous, Jr. Vice President and Secretary 11 EXHIBIT A SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF FORTUNE BRANDS, INC. The designation and amount of the Series A Junior Participating Preferred Stock, and the voting powers, preferences and relative, participating, optional or other special rights of the shares of such Series, and the qualifications, limitations or restrictions thereof, are as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" ("Series A Preferred Stock") and the number of shares constituting such series shall be 2,500,000. Such number of shares may be adjusted by appropriate action of the Board of Directors. Section 2. Dividends and Distributions. (A) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (i) cash dividends in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate per share amount of all cash dividends contemporaneously declared on the Common Stock of the Company presently of the par value of $3.125 per share ("Common Stock") and (ii) a preferential cash dividend ("Preferential Dividends"), if any, on the tenth day of March, June, September and December of each year (each a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount equal to $10 per share of Series A Preferred Stock less the per share amount of all cash dividends declared on the Series A Preferred Stock pursuant to clause (i) of this sentence since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Company shall, at any time after the issuance of any share or fraction of a share of Series A Preferred Stock, make any distribution on the shares of Common Stock of the Company, whether by way of a dividend or a reclassification of stock, a recapitalization, reorganization or partial liquidation of the Company or otherwise, which is payable in cash or any debt security, debt instrument, real or personal property or any other property (other than cash dividends subject to the immediately preceding sentence and other than a distribution of rights or warrants to acquire any such share, including any debt security convertible into or exchangeable for any such share, at a price less than the Current Market Price of such share), then and in each such event the Company shall simultaneously pay on each then outstanding share of Series A Preferred Stock of the Company a distribution, in like kind, of 100 times (subject to the provisions for adjustment hereinafter set forth) such distribution paid on a share of Common Stock. The dividends and distributions on the Series A Preferred Stock to which holders thereof are entitled pursuant to clause (i) of the first sentence of this paragraph and pursuant to the second sentence of this paragraph are hereinafter referred to as "Participating Dividends" and the multiple of such cash and non-cash dividends on the Common Stock applicable to the determination of the Participating Dividends, which shall be 100 initially but shall be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Dividend Multiple". In the event the Company shall at any time after November 19, 1997 declare or pay any dividend or make any distribution on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Dividend Multiple thereafter applicable to the determination of the amount of Participating Dividends which holders of shares of Series A Preferred Stock shall be entitled to receive shall be the Dividend Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Company shall declare each Participating Dividend at the same time it declares any cash or non-cash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required to be paid. No cash or non-cash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required to be paid shall be paid or set aside for payment on the Common Stock unless a Participating Dividend in respect of such dividend or distribution on the Common Stock shall be simultaneously paid, or set aside for payment, on the Series A Preferred Stock. (C) Preferential Dividends shall begin to accrue on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of any shares of Series A Preferred Stock. Accrued but unpaid Preferential Dividends shall cumulate but shall not bear interest. Preferential Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. Section 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Company. The number of votes which a holder of Series A Preferred Stock is entitled to cast, as the same may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Vote Multiple". In the event the Company shall at any time after November 19, 1997 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Vote Multiple thereafter applicable to the determination of the number of votes per share to which holders of shares of Series A Preferred Stock shall be entitled after such event shall be the Vote Multiple immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Company. (C) In the event that the Preferential Dividends accrued on the Series A Preferred Stock for four or more quarterly dividend periods, whether consecutive or not, shall not have been declared and paid or set apart for payment, the holders of record of preferred stock of the Company of all series (including the Series A Preferred Stock), other than any series in respect of which the right is expressly withheld by the Certificate of Incorporation or the authorizing resolutions included in the Certificate of Designation therefor, shall have the right, at the next meeting of stockholders called for the election directors, to elect two members of the Board of Directors, which directors shall be in addition to the number required by the By-laws prior to such event, to serve until the next annual meeting of the stockholders and until their successors are elected and qualified or their earlier resignation, removal or incapacity or until such earlier time as all accrued and unpaid Preferential Dividends upon the outstanding shares of Series A Preferred Stock shall have been paid (or set aside for payment) in full. The holders of shares of Series A Preferred Stock shall continue to have the right to elect directors as provided by the immediately preceding sentence until all accrued and unpaid Preferential Dividends upon the outstanding shares of Series A Preferred Stock shall have been paid (or set aside for payment) in full. Such directors may be removed and replaced by such stockholders, and vacancies in such directorships may be filled only by such stockholders (or by the remaining director elected by such stockholders, if there be one) in the manner permitted by law; provided, however, that any such action by stockholders shall be taken at a meeting of stockholders and shall not be taken by written consent thereof. (D) Except as otherwise required by law or set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action. Section 4. Certain Restrictions. (A) Whenever Preferential Dividends or Participating Dividends are in arrears or the Company shall be in default of payment thereof, thereafter and until all accrued and unpaid Preferential Dividends and Participating Dividends, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid or set aside for payment in full, and in addition to any and all other rights which any holder of shares of Series A Preferred Stock may have in such circumstances, the Company shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to, the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity as to dividends with the Series A Preferred Stock, unless dividends are paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) except as permitted by subparagraph (iv) of this paragraph 4(A), redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock (either as to dividends or upon liquidation, dissolution or winding up), except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. (C) The Company shall not issue any shares of Series A Preferred Stock except upon exercise of Rights issued pursuant to that certain Rights Agreement dated as of November 19, 1997 between the Company and First Chicago Trust Company of New York, a copy of which is on file with the Secretary of the Company at its principal executive office and shall be made available to stockholders of record without charge upon written request therefor addressed to the Secretary. Notwithstanding the foregoing sentence, nothing contained in the provisions hereof shall prohibit or restrict the Company from issuing for any purpose any series of preferred stock with rights and privileges similar to, different from, or greater than, those of the Series A Preferred Stock. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. The Company shall cause all such shares upon their retirement and cancellation to become authorized but unissued shares of preferred stock, without designation as to a series, and such shares may be reissued as part of a new series of preferred stock to be created by resolution or resolutions of the Board of Directors. Section 6. Liquidation, Dissolution or Winding Up. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless the holders of shares of Series A Preferred Stock shall have received, subject to adjustment as hereinafter provided, (A) $100 per share plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (B) if greater than the amount specified in clause (i)(A) of this sentence, the amount equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (ii) to the holders of stock ranking on a parity upon liquidation, dissolution or winding up with the Series A Preferred Stock, unless simultaneously therewith distributions are made ratably on the Series A Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Series A Preferred Stock are entitled under clause (i)(A) of this sentence and to which the holders of such parity shares are entitled, in each case upon such liquidation, dissolution or winding up. The amount to which holders of Series A Preferred Stock may be entitled upon liquidation, dissolution or winding up of the Company pursuant to clause (i)(B) of the foregoing sentence is hereinafter referred to as the "Participating Liquidation Amount" and the multiple of the amount to be distributed to holders of shares of Common Stock upon the liquidation, dissolution or winding up of the Company applicable pursuant to such clause to the determination of the Participating Liquidation Amount, as such multiple may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Liquidation Multiple". In the event the Company shall at any time after November 19, 1997 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Liquidation Multiple thereafter applicable to the determination of the Participating Liquidation Amount to which holders of Series A Preferred Stock shall be entitled after such event shall be the Liquidation Multiple applicable immediately prior to such event multiplied by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Certain Reclassifications and Other Events. (A) In the event that holders of shares of Common Stock of the Company receive after November 19, 1997 in respect of their shares of Common Stock any share of capital stock of the Company (other than any share of Common Stock of the Company), whether by way of reclassification, recapitalization, reorganization, dividend or other distribution or otherwise ("Transaction"), then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Company of the shares of Series A Preferred Stock shall be adjusted so that after such event the holders of Series A Preferred Stock shall be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such adjustment, to (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such Transaction multiplied by the additional dividends which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock, (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such Transaction multiplied by the additional voting rights which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock and (iii) such additional distributions upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such Transaction multiplied by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company by virtue of the receipt in the Transaction of such capital stock, as the case may be, all as provided by the terms of such capital stock. (B) In the event that holders of shares of Common Stock of the Company receive after November 19, 1997 in respect of their shares of Common Stock any right or warrant to purchase Common Stock (including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for Common Stock) at a purchase price per share less than the Current Market Price (as hereinafter defined) of a share of Common Stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Company of the shares of Series A Preferred Stock shall be adjusted so that after such event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple shall each be the product of the Dividend Multiple, the Vote Multiple and the Liquidation Multiple, as the case may be, in effect immediately prior to such event multiplied by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock which could be acquired upon exercise in full of all such rights or warrants and the denominator of which shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased, at the Current Market Price of the Common Stock at the time of such issuance, by the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (C) In event that holders of shares of Common Stock of the Company receive after November 19, 1997 in respect of their shares of Common Stock any right or warrant to purchase capital stock of the Company (other than shares of Common Stock), including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for capital stock of the Company (other than Common Stock), at a purchase price per share less than the Current Market Price of such shares of capital stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon liquidation, dissolution or winding up of the Company of the shares of Series A Preferred Stock shall each be adjusted to that after such event each holder of a share of Series A Preferred Stock shall each be entitled, in respect of each share of Series A Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled immediately prior to such event, to receive (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such event multiplied, first, by the additional dividends to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the stock capital which could be acquired upon such exercise and multiplied again by the Discount Fraction (as hereinafter defined) and (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such event multiplied, first, by the additional voting rights to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction and (iii) such additional distributions upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such event multiplied, first, by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction. For purposes of this paragraph, the "Discount Fraction" shall be a fraction the numerator of which shall be the difference between the Current Market Price (as hereinafter defined) of a share of the capital stock subject to a right or warrant distributed to holders of shares of Common Stock of the Company as contemplated by this paragraph immediately after the distribution thereof and the purchase price per share for such share of capital stock pursuant to such right or warrant and the denominator of which shall be the Current Market Price of a share of such capital stock immediately after the distribution of such right or warrant. (D) For purposes of this Section 7, the "Current Market Price" of a share of capital stock of the Company (including a share of Common Stock) on any date shall be deemed to be the average of the daily closing prices per share thereof over the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that, in the event that such Current Market Price of any such share of capital stock is determined during a period which includes any date that is within 30 Trading Days after the ex-dividend date for (i) a dividend or distribution on stock payable in shares of such stock or securities convertible into shares of such stock, or (ii) any subdivision, split, combination, consolidation, reverse stock split or reclassification of such stock, then, and in each such case, the Current Market Price shall be appropriately adjusted by the Board of Directors of the Company to reflect the Current Market Price of such stock to take into account ex-dividend trading. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares are listed or admitted to trading or, if the shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") or such other system then in use, or if on any such date the shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the shares selected by the Board of Directors of the Company. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares are listed or admitted to trading is open for the transaction of business or, if the shares are not listed or admitted to trading on any national securities exchange, on which the New York Stock Exchange or such other national securities exchange as may be selected by the Board of Directors of the Company is open. If the shares are not publicly held or not so listed or traded on any day within the period of 30 Trading Days applicable to the determination of Current Market Price thereof as aforesaid, "Current Market Price" shall mean the fair market value thereof per share as determined in good faith by the Board of Directors of the Company. In either case referred to in the foregoing sentence, the determination of Current Market Price shall be described in a statement filed with the Secretary of the Company. Section 8. Consolidation, Merger, etc. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each outstanding share of Series A Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash and/or other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed or exchanged multiplied by the highest of the Vote Multiple, the Dividend Multiple or the Liquidation Multiple in effect immediately prior to such event. Section 9. Effective Time of Adjustments. (A) Adjustments to the Series A Preferred Stock required by the provisions hereof shall be effective as of the time at which the event requiring such adjustments occurs. (B) The Company shall give prompt written notice to each holder of a share of Series A Preferred Stock of the effect of any adjustment to the voting rights, dividend rights or rights upon liquidation, dissolution or winding up of the Company of such shares required by the provisions hereof. Notwithstanding the foregoing sentence, the failure of the Company to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. Section 10. No Redemption. The shares of Series A Preferred Stock shall not be redeemable at the option of the Company or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Company may acquire shares of Series A Preferred Stock in any other manner permitted by law, the provisions hereof and the Certificate of Incorporation of the Company. Section 11. Ranking. Unless otherwise provided in the Certificate of Incorporation of the Company or a Certificate of Designation relating to a subsequent series of preferred stock of the Company, the Series A Preferred Stock shall rank junior to all other series of the Company's preferred stock as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and senior to the Common Stock. Section 12. Amendment. The provisions hereof and the Certificate of Incorporation of the Company shall not be amended in any manner which would materially affect the rights, privileges or powers of the Series A Preferred Stock without, in addition to any other vote of stockholders required by law, the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series A Preferred Stock, voting together as a single class. EX-3 3 EXHIBIT 3(II)A EXHIBIT 3(ii)a FORTUNE BRANDS, INC. BY-LAW AMENDMENTS ADOPTED ON SEPTEMBER 29, 1998 EFFECTIVE JANUARY 1, 1999 Article I, Section 1 was amended to read in its entirety as follows: SECTION 1. The number of directors constituting the entire Board of Directors of the Company, which shall be no fewer than ten and no greater than twenty, shall be determined by action of the Board of Directors adopted at any regular or special meeting of the Board of Directors by the affirmative vote of at least two-thirds of all directors then in office, provided notice of the proposed change in the number of directors shall be given in writing to each of the directors then in office. Any amendment to this Section 1 of these By-laws may be adopted at any regular or special meeting of the Board of Directors by the affirmative vote of at least two-thirds of all the directors then in office. Article IV, Section 1 was amended to read in its entirety as follows: SECTION 1. The Board of Directors shall annually choose from amongst its members a Chairman of the Board. The Board shall also annually choose a Vice Chairman (if any), a President (if any), one or more Executive Vice Presidents (if any), one or more Senior Vice Presidents (if any), a principal financial officer, a principal accounting officer, such other Vice Presidents (if any) as it shall determine, a Secretary, a Treasurer and a Controller (if any), who need not be directors. Article IV, Section 8 was amended to read in its entirety as follows: SECTION 8. The Vice Chairman (if any), the President (if any), the Executive Vice Presidents (if any), the Senior Vice Presidents (if any) and such other Vice Presidents as shall have been chosen shall have such powers and perform such duties as shall at any time be delegated to them by the Board of Directors. At the request of the Chairman of the Board, or in case of his absence or disability, the President (if any), or if there is no President such other elected officer designated by the Chairman of the Board in a writing filed with the records of the Secretary, shall perform the duties of the Chairman of the Board, subject to the control of the Board of Directors. Article VII, Section 1 was amended to read in its entirety as follows: SECTION 1. All checks or bank drafts shall be signed by any two of the following named officers: Chairman of the Board, Vice Chairman, President, the principal financial officer, the principal accounting officer, any Vice President, Secretary, any Assistant Secretary, Treasurer, any Assistant Treasurer, Controller, any Assistant Controller; and in such other manner as the Board of Directors may from time to time designate. Article VII, Section 2 was amended to read in its entirety as follows: SECTION 2. All notes or other obligations or contracts shall be signed by the Chairman of the Board, the Vice Chairman, the President, the principal financial officer, the principal accounting officer, or any Vice President and also by one of the following officers: the Secretary, an Assistant Secretary, the Treasurer, an Assistant Treasurer, the Controller, or an Assistant Controller (provided that no individual shall sign the instrument in two capacities), or shall be signed by the Chairman of the Board, the Vice Chairman, the President, the principal financial officer, the principal accounting officer, or any Vice President, with the corporate seal or a facsimile thereof affixed thereto or imprinted thereon, attested by the Secretary or an Assistant Secretary; or such notes, obligations or contracts shall be signed in such manner and by one or more of such officers or other persons on behalf of the Company as the Board of Directors may from time to time authorize or direct. When and as authorized or directed by the Board of Directors, the signatures of such officers or other persons or any of them signing on behalf of the Company may be facsimiles. EX-3 4 EXHIBIT 3(II)B EXHIBIT 3(ii)b BY-LAWS of FORTUNE BRANDS, INC. (As Amended) ARTICLE I Directors Section 1. The number of directors constituting the entire Board of Directors of the Company, which shall be no fewer than ten and no greater than twenty, shall be determined by action of the Board of Directors adopted at any regular or special meeting of the Board of Directors by the affirmative vote of at least two-thirds of all directors then in office, provided notice of the proposed change in the number of directors shall be given in writing to each of the directors then in office. Any amendment to this Section 1 of these By-laws may be adopted at any regular or special meeting of the Board of Directors by the affirmative vote of at least two-thirds of all the directors then in office. Section 2. Each director shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Any director of the Company may resign at any time upon written notice to the Company. Except as otherwise provided for, or fixed by, or pursuant to the provisions of Article IV of the Certificate of Incorporation relating to the rights of the holders of any class or series of stock having a preference over the 1-1-99 2 BY-LAWS - ------------------------------------------------------------------------------- Common Stock, newly created directorships resulting from any increase in the number of directors or any vacancy on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled solely by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director. Section 3. In order to qualify to hold office as a director of the Company, a person must hold at least one share of stock of the Company. Section 4. The directors may hold their meetings and have an office and keep the books of the Company in Old Greenwich, Connecticut, or elsewhere outside of the State of Delaware. Section 5. The Board of Directors, by resolution adopted by a majority of the entire Board, may appoint from among its members an Executive Committee which shall have at least three members. To the extent provided in such resolution, such committee shall have and may exercise all the powers and authority of the Board, including the power to authorize the seal of the Company to be affixed to all papers that require it, except that such 10-30-90 BY-LAWS 3 - ------------------------------------------------------------------------------- committee shall not have such power and authority in reference to (1) amending the Certificate of Incorporation (except that such committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Company or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Company or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series); (2) adopting an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware; (3) recommending to the stockholders any action that requires stockholders' approval; 1-1-86 4 BY-LAWS - ------------------------------------------------------------------------------- (4) making, amending or repealing any By-law of the Company; (5) electing or appointing any director, or removing any officer or director; (6) amending or repealing any resolution theretofore adopted by the Board of Directors; (7) fixing compensation of the directors for serving on the Board of Directors or on any committee; or (8) unless the resolution shall expressly so provide, declaring a dividend, authorizing the issuance of stock or adopting a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. Actions taken at a meeting of such committee shall be reported to the Board of Directors at its next meeting following such committee meeting; except that, when the meeting of the Board is held within two days after the committee meeting, such report shall be made to the Board at either its first or second meeting following such committee meeting. 1-1-86 BY-LAWS 5 - ------------------------------------------------------------------------------- ARTICLE II Meetings of Stockholders Section l. The annual meeting of the stockholders of the Company for the election of directors, and such other business as may properly come before the meeting, shall be held at such place as may from time to time be designated by the directors, on the first Wednesday of May, at ten o'clock in the forenoon, or at such other hour as the directors may designate, or on such other day and at such hour as the directors may designate. If the day fixed for the meeting is a legal holiday, the meeting shall be held at the same hour on the next business day which is not a legal holiday. Section 2. Special meetings of the stockholders, to be held at such place as may from time to time be designated by the directors, may be called only by the Chairman of the Board, the President or the Board of Directors, by resolution adopted by a majority of the entire Board, for such purposes as shall be specified in the call. Section 3. Except as otherwise provided by law, due notice of each annual meeting of the stockholders shall be given by a written or printed notice signed by the Secretary 10-30-90 6 BY-LAWS - ------------------------------------------------------------------------------- or an Assistant Secretary of the Company and mailed, postage prepaid, at least ten days prior to such meeting to each stockholder of record entitled to vote thereat appearing on the books of the Company at the address given thereon. Due notice of each special meeting shall be given also in the manner above provided. The notice shall state the object of the special meeting, and no other business shall be transacted at such meeting. Section 4. The holders of a majority in voting power of the outstanding shares of capital stock entitled to vote, present in person or represented by proxy, shall constitute a quorum at a meeting of stockholders. Except as otherwise required by law or the Certificate of Incorporation, the affirmative vote of shares representing a majority in voting power of the shares present in person or represented by proxy at a meeting at which a quorum is present and entitled to vote on the subject matter shall be the act of the stockholders, and except that directors shall be elected by a plurality of votes cast at an election. The stockholders present at a duly convened meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 10-30-90 BY-LAWS 7 - ------------------------------------------------------------------------------- Section 5. Each meeting of the stockholders, whether annual or special, shall be presided over by the Chairman of the Board if present, and if he is not present by the President if present. If neither officer specified in the preceding sentence is present, the meeting shall be presided over by the person designated in writing by the Chairman of the Board, or if the Chairman of the Board has made no designation, by the person designated by the President, or if the President has made no designation, by the person designated by the Board of Directors. If neither officer specified in the first sentence of this section is present, and no one designated by the Chairman of the Board or the President or the Board of Directors is present, the meeting may elect any stockholder of record who is entitled to vote for directors, or any person present holding a proxy for such a stockholder, to preside. The Secretary of the Company (or in his absence any Assistant Secretary) shall be the Secretary of any such meeting; in the absence of the Secretary and Assistant Secretaries, any person may be elected by the meeting to act as Secretary of the meeting. Section 6. Any voting proxy given by a stockholder must be in writing, executed by the stockholder, or, in lieu thereof, to the extent permitted by law, may be transmitted in a telegram, cablegram or other means of 10-30-90 8 BY-LAWS - ------------------------------------------------------------------------------- electronic transmission setting forth or submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. A copy, facsimile transmission or other reliable reproduction of a written or electronically-transmitted proxy authorized by this Section 6 may be substituted for or used in lieu of the original writing or electronic transmission to the extent permitted by law. Section 7. Any previously scheduled annual or special meeting of stockholders may, by resolution of the Board of Directors, be postponed upon public announcement made prior to the date previously scheduled for such meeting of stockholders. For purposes of this Article II, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. The person presiding over any meeting of stockholders, or a majority of the voting power of the shares entitled to vote, present in person or represented by proxy, even if less than a quorum, may adjourn the meeting from time to time. No notice of the time and 10-30-90 BY-LAWS 9 - ------------------------------------------------------------------------------- place of adjourned meetings need be given except as required by law. Section 8. The directors shall appoint one or more inspectors of election and of the vote at any time prior to the date of any meeting of stockholders at which an election is to be held or a vote is to be taken. In the event any inspector so appointed is absent from such meeting or for any other reason fails to act as such at the meeting, the person presiding pursuant to these By-laws may appoint a substitute who shall have all the powers and duties of such inspector. The inspector or inspectors so appointed shall act at such meeting, make such reports thereof and take such other action as shall be provided by law and as may be directed by the person presiding over the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. Section 9. The directors may, at any time prior to any annual or special meeting of the stockholders, adopt an order of business for such meeting which shall be the order of business to be followed at such meeting. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at 10-30-90 10 BY-LAWS - ------------------------------------------------------------------------------- such meeting shall be announced at such meeting by the person presiding over such meeting. Section l0. At any meeting of stockholders a stock vote shall be taken on any resolution or other matter presented to the meeting for action if so ordered by the person presiding over the meeting or on the demand of any stockholder of record entitled to vote at the meeting or any person present holding a proxy for such a stockholder. Such order or demand for a stock vote may be made either before or after a vote has been taken on such resolution or other matter in a manner other than by stock vote and before or after the result of the vote taken otherwise than by stock vote has been announced. The result of a stock vote taken in accordance with this By-law shall supersede the result of any vote previously taken in any manner other than by stock vote. Section 11. (A) Nominations of persons for election to the Board of Directors of the Company may be made as provided in the Certificate of Incorporation. The proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (1) pursuant to the Company's notice of meeting, (2) by or at the direction of the Board of Directors or (3) by any stockholder of the Company who was a stockholder of record at the time of giving of the notice provided for 10-30-90 BY-LAWS 11 - ------------------------------------------------------------------------------- in this Section 11, who is entitled to vote thereon at the meeting and who complies with the notice procedures set forth in this Section 11. (B) For business (other than the nomination of persons for election to the Board of Directors) to be properly brought before an annual meeting by a stockholder pursuant to clause (3) of paragraph (A) of this Section 11, the stockholder must have given timely notice thereof in writing to the Secretary of the Company. To be timely, a stockholder's notice shall be delivered, either by personal delivery or by United States mail, postage prepaid, to the Secretary not later than one hundred twenty (120) days in advance of such meeting. Such stockholder's notice shall set forth (1) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made and (2) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (a) the name and address of such stockholder, as they appear on the Company's books, and of such beneficial owner and (b) the class and number of shares of the Company which are owned beneficially and of record by such stockholder and such beneficial owner. 10-30-90 12 BY-LAWS - ------------------------------------------------------------------------------- (C) The person presiding over an annual meeting of stockholders shall have the power and duty to determine whether any business proposed by any stockholder to be brought before the meeting was made in accordance with the procedures set forth in this Section 11 and, if any proposed business is not in compliance with this Section 11, to declare that such defective proposal shall be disregarded. (D) In addition to the foregoing provisions of this Section 11, a stockholder shall comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule l4a-8 under such Act. 10-30-90 BY-LAWS 13 - ------------------------------------------------------------------------------- ARTICLE III Meetings of Directors Section 1. Regular meetings of the Board of Directors shall be held at the office of the Company in Old Greenwich, Connecticut, or at such other place as may from time to time be designated by the directors, the Chairman of the Board or the President, at ten o'clock in the forenoon on the last Tuesday of each month other than March, May, June, August and December and at three o'clock in the afternoon on the day on which the annual meeting of stockholders is held. If any such day shall be a holiday, the meeting scheduled for that day shall be held on the next business day. Special meetings may be held as determined by the Board of Directors, and may be called by the Chairman of the Board at any time and shall be called by him on the request of three directors, or, if the Chairman of the Board fails to call such meeting when so requested, the same may be called by any three directors. Section 2. No notice need be given of regular meetings of the directors, except that at least one day's notice shall be given of any place other than the office of the Company in Old Greenwich, Connecticut at which any 1-31-89 14 BY-LAWS - ------------------------------------------------------------------------------- such meeting is to be held, but such notice need not be given to any director who signs a written waiver of notice before or after the meeting. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except when the director attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 3. At any meeting six directors shall constitute a quorum unless otherwise provided for in these By-laws or in the Certificate of Incorporation or in any applicable statute, but in no case less than one-third of all the directors then in office. Section 4. Members of the Board of Directors or of any Committee thereof may participate in meetings of the Board of Directors or of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. Section 5. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or of such committee, 1-1-86 BY-LAWS 15 - ------------------------------------------------------------------------------- as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or of such committee. ARTICLE IV Officers Section 1. The Board of Directors shall annually choose from amongst its members a Chairman of the Board. The Board shall also annually choose a Vice Chairman (if any), a President (if any), one or more Executive Vice Presidents (if any), one or more Senior Vice Presidents (if any), a principal financial officer, a principal accounting officer, such other Vice Presidents (if any) as it shall determine, a Secretary, a Treasurer and a Controller (if any), who need not be directors. Section 2. The Board of Directors may elect other officers and define their powers and duties. Section 3. Any two offices not inconsistent with each other may be held by the same person. Section 4. All officers elected by the Board of Directors shall hold office, subject to removal by the Board, until their successors are chosen and qualified. The affirmative vote of at least two-thirds of all of the directors 1-1-99 16 BY-LAWS - ------------------------------------------------------------------------------- then in office shall be required to remove or reduce the salary of any officer elected by the Board of Directors. Section 5. All agents and employees shall be appointed and may be removed by the Chairman of the Board, subject to the control of the Board of Directors. Section 6. Vacancies among officers of the Company shall be filled as, and to the extent that, the Board of Directors shall determine by vote of a majority of the directors present at any regular or special meeting at which not less than a majority of all the directors then in office are present. Section 7. The Chairman of the Board shall be the Chief Executive Officer of the Company and shall have general direction of its business affairs, subject, however, to the control of the Board of Directors. He shall, if present, preside at all meetings of the Board of Directors and shall perform such other duties and have such responsibilities as the Board may from time to time determine. SECTION 8. The Vice Chairman (if any), the President (if any), the Executive Vice Presidents (if any), the Senior Vice Presidents (if any) and such other Vice Presidents as shall have been chosen shall have such powers and perform such duties as shall at any time be delegated to them by the Board of Directors. At the request of the Chairman of the Board, or in case of his absence or disability, the President (if any), or if there is no President such 1-1-99 BY-LAWS 17 - ------------------------------------------------------------------------------- other elected officer designated by the Chairman of the Board in a writing filed with the records of the Secretary, shall perform the duties of the Chairman of the Board, subject to the control of the Board of Directors. Section 9. The Secretary shall give the requisite notice of meetings of stockholders and directors and shall record the proceedings of such meetings, shall have the custody of the seal of the Company and shall affix it or cause it to be affixed to such instruments as require the seal and attest it and, besides his powers and duties prescribed by law, shall have such other powers and perform such other duties as shall at any time be required of him by the Board of Directors. Section 10. The Assistant Secretaries shall assist the Secretary in the discharge of his duties and shall have such powers and perform such other duties as shall at any time be delegated to them by the Board of Directors, and in the absence or disability of the Secretary, shall perform the duties of his office, subject to the control of the Board. Section 11. The Treasurer shall have charge of the funds and securities of the Company and shall have such 1-1-99 18 BY-LAWS - ------------------------------------------------------------------------------- powers and perform such duties as shall at any time be delegated to him by the Board of Directors. Section 12. The Assistant Treasurers shall assist the Treasurer in the discharge of his duties and shall have such powers and perform such other duties as shall at any time be delegated to them by the Board of Directors, and in the absence or disability of the Treasurer, shall perform the duties of his office subject to the control of the Board. Section 13. Any other officer, agent or employee of the Company may be required to give such security for the faithful performance of his duties as shall be determined by the Board of Directors, who shall also determine the custody of any security given. ARTICLE V Salaries Section 1. The salaries of all officers elected by the Board of Directors who hold offices of a rank of Vice President or above shall be fixed by the Compensation and Stock Option Committee. Section 2. Salaries of all other officers elected by the Board and all other agents and employees shall be fixed by or in the manner determined by the Board. 3-1-93 BY-LAWS 19 - ------------------------------------------------------------------------------- Section 3. The Board of Directors, by the affirmative vote of a majority of directors in office and irrespective of any personal interest of any directors, shall have authority to establish reasonable compensation of directors for services to the Company as directors, officers or otherwise, except that the Compensation and Stock Option Committee, by the affirmative vote of a majority of Committee members in office and irrespective of any personal interest of any Committee members or other directors, shall have authority to establish such compensation of directors who also are officers elected by the Board and hold offices of a rank of Vice President or above. ARTICLE VI Seal Section 1. The Seal of the Company shall be in such form as the Board of Directors may from time to time prescribe and it may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE VII Signatures on Commercial Instruments and Contracts Section 1. All checks or bank drafts shall be signed by any two of the 3-1-93 20 BY-LAWS - ------------------------------------------------------------------------------- following named officers: Chairman of the Board, Vice Chairman, President, the principal financial officer, the principal accounting officer, any Vice President, Secretary, any Assistant Secretary, Treasurer, any Assistant Treasurer, Controller, any Assistant Controller; and in such other manner as the Board of Directors may from time to time designate. SECTION 2. All notes or other obligations or contracts shall be signed by the Chairman of the Board, the Vice Chairman, the President, the principal financial officer, the principal accounting officer, or any Vice President and also by one of the following officers: the Secretary, an Assistant Secretary, the Treasurer, an Assistant Treasurer, the Controller, or an Assistant Controller (provided that no individual shall sign the instrument in two capacities), or shall be signed by the Chairman of the Board, the Vice Chairman, the President, the principal financial officer, the principal accounting officer, or any Vice President, with the corporate seal or a facsimile thereof affixed thereto or imprinted thereon, attested by the Secretary or an Assistant Secretary; or such notes, obligations or contracts shall be signed in such manner and by one or more of such officers or other persons on behalf of the Company as the Board of Directors may from time to time authorize or direct. 1-1-99 BY-LAWS 21 - ------------------------------------------------------------------------------- When and as authorized or directed by the Board of Directors, the signatures of such officers or other persons or any of them signing on behalf of the Company may be facsimiles. ARTICLE VIII Capital Stock Section 1. Certificates of the capital stock of the Company shall be issued for shares duly numbered and registered in the order of their issue, and shall be in the form the directors shall prescribe. Section 2. The capital stock shall be transferable on the transfer books of the Company, subject to these By-laws, by the owner in person, or by attorney or legal representative, written evidence of whose authority shall be filed with the Company. Section 3. No transfer of capital stock can be required except upon surrender and cancellation of the certificate representing the same. Section 4. The Board of Directors may at any time, in its discretion, appoint one or more transfer agents or registrars of the shares of stock of the Company and terminate the appointment of any transfer agent or registrar. The Board of Directors may also designate the Company to perform such functions alone or in conjunction with one or more other transfer agents or registrars. 1-1-99 22 BY-LAWS - ------------------------------------------------------------------------------- Section 5. (A) For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or for the purpose of determining stockholders entitled to receive payment of any dividend or allotment of any right, or for the purpose of any other action, the Board of Directors may fix, in advance, a date as the record date for any such determination of stockholders. Such date shall be not more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. (B) When a determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders has been made as provided in this Section 5, such determination shall apply to any adjournment thereof, unless the Board of Directors fixes a new record date under this Section 5 for the adjourned meeting. ARTICLE IX Committee on Conflicts of Interests Section 1. The Board of Directors, by resolution adopted by a majority of the entire Board, shall appoint a Committee on Conflicts of Interests which shall have at 10-30-90 BY-LAWS 23 - ------------------------------------------------------------------------------- least three members. To the extent provided by resolution of the Board, such committee shall have the power to interpret, administer and apply the policies of the Company as established by the Board from time to time with respect to conflicts of interests. ARTICLE X Dividends Section 1. Dividends on the Preferred Stock and the Common Stock of the Company may be declared by the Board of Directors, at any regular or special meeting, as provided by law and the Certificate of Incorporation. ARTICLE XI Amendments Section 1. The Board of Directors shall, except as otherwise provided in these By-laws or the Certificate of Incorporation, have the power to alter, amend or repeal these By-laws at any meeting by the affirmative vote of two-thirds of the directors then in office, provided notice of the proposed alteration, amendment or repeal be given in writing to each of the directors, and provided also that 10-30-90 24 BY-LAWS - ------------------------------------------------------------------------------- no alteration, amendment or repeal of a specification in any section of these By-laws of a stated fraction of directors as the minimum number whose presence or vote is requisite for action under such section may be made without the presence or vote or both, as the case may be, of the minimum number so specified. ARTICLE XII [Repealed effective April 30, 1997.] 4-30-97 25 BY-LAWS - ------------------------------------------------------------------------------- ARTICLE XIII Indemnification Section 1. (A) Each person (an "indemnitee") who was or is made or threatened to be made a party to or was or is involved (as a witness or otherwise) in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom 5-3-94 BY-LAWS 26 - ------------------------------------------------------------------------------- he or she is the legal representative was or is a director, officer or employee of the Company or was or is serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding was or is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Company to the fullest extent permitted by the General Corporation Law of the State of Delaware as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees and retainers therefor, judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended, and amounts paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to 10-30-90 27 BY-LAWS - ------------------------------------------------------------------------------- the benefit of his or her heirs, executors and administrators; provided, however, that except as provided in Section 3 of this Article XIII with respect to proceedings seeking to enforce rights to indemnification, the Company shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company. (B) The right to indemnification conferred in this Article XIII is and shall be a contract right. The right to indemnification conferred in this Article XIII shall include the right to be paid by the Company the expenses (including attorneys' fees and retainers therefor) reasonably incurred in connection with any such proceeding in advance of its final disposition, such advances to be paid by the Company within 20 days after the receipt by the Company of a statement or statements from the indemnitee requesting such advance or advances from time to time; provided, however, that if the General Corporation Law of the State of Delaware requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without 10-30-90 BY-LAWS 28 - ------------------------------------------------------------------------------- limitation, service to an employee benefit plan) in advance of the final disposition of a proceeding, shall be made only upon delivery to the Company of an undertaking by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Article XIII or otherwise. Section 2. (A) To obtain indemnification under this Article XIII, an indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to the indemnitee and is reasonably necessary to determine whether and to what extent the indemnitee is entitled to indemnification. Upon written request by an indemnitee for indemnification pursuant to the first sentence of this Section 2(A), a determination, if required by applicable law, with respect to the indemnitee's entitlement thereto shall be made as follows: (1) if requested by the indemnitee, by Independent Counsel (as hereinafter defined), or (2) if no request is made by the indemnitee for a determination by Independent Counsel, (a) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (b) if a quorum of the Board of Directors consisting of Disinterested Directors is not 10-30-90 29 BY-LAWS - ------------------------------------------------------------------------------- obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to the indemnitee, or (c) by the stockholders of the Company. In the event the determination of entitlement to indemnification is to be made by Independent Counsel at the request of the indemnitee, the Independent Counsel shall be selected by the indemnitee unless the indemnitee shall request that such selection be made by the Board of Directors, in which event the Independent Counsel shall be selected by the Board of Directors. If it is so determined that the indemnitee is entitled to indemnification, payment to the indemnitee shall be made within 10 days after such determination. (B) In making a determination with respect to entitlement to indemnification hereunder, the person, persons or entity making such determination shall presume that the indemnitee is entitled to indemnification under this Article XIII, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. Section 3. (A) If a claim under Section 1 of this Article XIII is not paid in full by the Company within 10-30-90 BY-LAWS 30 - ------------------------------------------------------------------------------- 30 days after a written claim pursuant to Section 2(A) of this Article XIII has been received by the Company, or if an advance is not made within 20 days after a request therefor pursuant to Section 1(B) of this Article XIII has been received by the Company, the indemnitee may at any time thereafter bring suit (or, at the indemnitee's option, an arbitration proceeding before a single arbitrator pursuant to the rules of the American Arbitration Association) against the Company to recover the unpaid amount of the claim or the advance and, if successful in whole or in part, the indemnitee shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such suit or proceeding (other than a suit or proceeding brought to enforce a claim for expenses incurred in connection with any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Company) that the indemnitee has not met the standards of conduct which make it permissible under the General Corporation Law of the State of Delaware for the Company to indemnify the indemnitee for the amount claimed or that such indemnification otherwise is not permitted under the General Corporation Law of the State of Delaware, but the burden of proving such defense shall be on the Company. 10-30-90 31 BY-LAWS - ------------------------------------------------------------------------------- (B) Neither the failure of the Company (including its Board of Directors, Independent Counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the indemnitee is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Company (including its Board of Directors, Independent Counsel or stockholders) that the indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the indemnitee has not met the applicable standard of conduct. (C) If a determination shall have been made pursuant to Section 2(A) of this Article XIII that the indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to paragraph (A) of this Section 3. (D) The Company shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to paragraph (A) of this Section 3 that the procedures and presumptions of this Article XIII are not valid, binding and enforceable and shall stipulate in any 10-30-90 BY-LAWS 32 - ------------------------------------------------------------------------------- such court or before any such arbitrator that the Company is bound by all the provisions of this Article XIII. Section 4. The right to indemnification and the payment of expenses incurred in connection with a proceeding in advance of its final disposition conferred in this Article XIII shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, By-laws, agreement, vote of stockholders or Disinterested Directors or otherwise. Section 5. The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the General Corporation Law of the State of Delaware. To the extent that the Company maintains any policy or policies providing such insurance, each such director, officer or employee, and each such agent to which rights to indemnification have been granted as provided in Section 6 of this Article XIII, shall be covered by such policy or policies in accordance with its or their terms to the 10-30-90 33 BY-LAWS - ------------------------------------------------------------------------------- maximum extent of the coverage thereunder for any such director, officer, employee or agent. Section 6. The Company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to be paid by the Company the expenses incurred in connection with any proceeding in advance of its final disposition, to any agent of the Company to the fullest extent of the provisions of this Article XIII with respect to the indemnification and advancement of expenses of directors, officers and employees of the Company. Section 7. If any provision or provisions of this Article XIII shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (A) the validity, legality and enforceability of the remaining provisions of this Article XIII (including without limitation, each portion of any Section of this Article XIII containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (B) to the fullest extent possible, the provisions of this Article XIII (including, without limitation, each portion of any Section of this Article XIII containing any such provision held to be invalid, illegal or unenforceable) shall be 10-30-90 BY-LAWS 34 - ------------------------------------------------------------------------------- construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. Section 8. For purposes of this Article XIII: (A) "Disinterested Director" means a director of the Company who is not and was not a party to the matter in respect of which indemnification is sought by the indemnitee. (B) "Independent Counsel" means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (1) the Company or the indemnitee in any matter material to either such party, or (2) any other party to the matter giving rise to a claim for indemnification. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or the indemnitee in an action to determine the indemnitee's rights under this Article XIII. Section 9. Any notice, request or other communication required or permitted to be given to the Company under this Article XIII shall be in writing and either 10-30-90 35 BY-LAWS - ------------------------------------------------------------------------------- delivered in person or sent by telecopy, telex, telegram or certified or registered mail, postage prepaid, return receipt requested, to the Secretary of the Company and shall be effective only upon receipt by the Secretary. EX-10 5 EXHIBIT 10B9 EXHIBIT 10b9 AMERICAN BRANDS, INC. STOCK PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purpose of Plan The purpose of the American Brands, Inc. Stock Plan for Non-employee Directors (the "Plan") is to enable American Brands, Inc. ("American") to provide its Non-employee Directors (as defined below) with shares of common stock of American ("Common Stock") and thereby to attract and retain non-employee directors of exceptional ability and further align their interests with those of the other stockholders of American by increasing their proprietary interests in American. 2. Administration of Plan The Plan shall be administered by the Salary Committee (the "Committee") of the Board of Directors of American. None of the members of the Committee shall be eligible to receive shares of Common Stock under the Plan or have been so eligible for receipt within one year prior thereto. The Committee shall have the power and authority to administer, construe and interpret the Plan, to make rules for carrying it out and to make changes in such rules. 3. Participation All Non-employee Directors shall participate in the Plan. The term "Non-employee Director" means a member of the Board of Directors of American who is not at the time of receipt of shares of Common Stock pursuant to the Plan a full-time employee of American or any subsidiary thereof. 4. Payment of Shares of Common Stock (a) Subject to all the terms and conditions of the Plan, each Non-employee Director shall receive 300 shares of Common Stock per year for services as a Non-employee Director during such year. To be entitled to receive such shares with respect to any year, a Non-employee Director must be serving as such immediately following the Annual Meeting of stockholders of American held during such year. Except as otherwise provided in Section 4(b), certificates representing such shares shall be delivered to such Non-employee Director as soon as practicable thereafter. (b) A Non-employee Director may elect to defer receipt of shares of Common Stock under this Section 4. The election shall (i) be made in writing to the Secretary of American before the November 1 immediately preceding the year in which the shares of Common Stock are to be received, (ii) specify the future date or dates on which the shares of Common Stock are to be paid or the future event or events upon the occurrence of which the shares are to be paid and (iii) be irrevocable. On each future date or upon the occurrence of each future event so specified, certificates representing the shares whose receipt has been deferred until such date or such future event shall be delivered to the Non-employee Director, together with an amount representing the dividends on such shares that would have been paid prior to such future date or such future event if receipt of such shares had not been so deferred ("unpaid dividends"), together, in the case of cash unpaid dividends, with interest thereon, accrued quarterly from the respective dates such dividends would have been paid, at a rate equal to the average quarterly United States Treasury bill rate. The obligation of American to make payment of any deferred shares of Common Stock or any unpaid dividends (and interest thereon) as provided in this Section 4(b) is not required to be funded. (c) An election by a Non-employee Director pursuant to Section 4(b) to defer receipt of any shares of Common Stock shall confer no rights upon such Non-employee Director, as a stockholder of the Company or otherwise, with respect to such shares, but shall confer only the right to receive such shares and unpaid dividends (and interest thereon) as and when provided in Section 4(b). (d) Notwithstanding anything to the contrary in Section 4(b) or 4(c), in the event a Non-employee Director has elected to defer receipt of shares of Common Stock pursuant to Section 4(b) and in the event of such person's death prior to receipt thereof, such shares and any unpaid dividends (and interest thereon) provided for in Section 4(b) shall be promptly paid to the beneficiary or beneficiaries designated by such person in writing to the Secretary of American or, if no beneficiary has been so designated, to such person's estate. (e) Notwithstanding anything to the contrary in Section 4(b) or 4(c), in the event a Non-employee Director has elected to defer receipt of shares of Common Stock pursuant to Section 4(b) and in the event of a Change in Control (as defined in this Section 4(e)), such shares and any unpaid dividends (and interest thereon) provided for in Section 4(b) shall be promptly paid to such Non-employee Director. A "Change in Control" shall be deemed to have occurred if (i) any person (as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on February 28, 1995) is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, as in effect on February 28, 1995) of stock of American entitled to cast more than 20% of the votes at the time entitled to be cast generally for the election of directors, (ii) more than 50% of the members of the Board of Directors of American shall not be Continuing Directors (which term, as used herein, means the directors of American (A) who are members of the Board of Directors on February 28, 1995 or (B) who subsequently became directors of American and who were elected or designated to be candidates for election as nominees of the Board of Directors, or whose election or nomination for election by American's stockholders was otherwise approved, by a vote of a majority of the Continuing Directors then on the Board of 2 Directors), (iii) American shall be merged or consolidated with, or, in any transaction or series of transactions, substantially all of the business or assets of American shall be sold or otherwise acquired by, another corporation or entity and, as a result thereof, either (x) the stockholders of American immediately prior thereto shall not directly or indirectly have at least 50% or more of the combined voting power of the surviving, resulting or transferee corporation or entity immediately thereafter or (y) any person (as that term is used in Sections 13(d) and 14(d) of the Exchange Act, as in effect on February 28, 1995) is or becomes the beneficial owner (as that term is used in Section 13(d) of the Exchange Act, and the rules and regulations promulgated thereunder, as in effect on February 28, 1995) of more than 20% of the combined voting power of the surviving, resulting or transferee corporation or entity, or (iv) any change in control of American shall have occurred of a nature that would be required to be reported in response to Item 1(a) of Form 8-K promulgated under the Exchange Act as in effect on February 28, 1995, regardless of whether American is at the time of such change in control subject to the reporting requirement thereof. Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred if an acquisition of stock that would otherwise constitute a Change in Control pursuant to clause (i) or (iv) of the preceding sentence is made by American or a direct or indirect subsidiary thereof, by any corporation in a merger or consolidation that does not constitute a Change in Control pursuant to clause (iii) of the preceding sentence or by any employee benefit plan (or related trust) sponsored or maintained by American or a direct or indirect subsidiary thereof. (f) The right to receive shares of Common Stock, the receipt of which has been deferred by a Non-employee Director pursuant to Section 4(b) shall not be transferable by such Non-employee Director otherwise than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Internal Revenue Code of 1986, as amended. (g) The shares of Common Stock issued hereunder shall be in addition to any other fees to which a Non-employee Director may be entitled. 5. Taxes Any taxes that are required to be withheld upon delivery of shares of Common Stock issued pursuant to the Plan to a Non-employee Director shall be paid to American in cash by such Non-employee Director unless deducted and withheld from any cash fees payable by American to such Non-employee Director or paid by such Non-employee Director in shares of Common Stock in an exempt transaction under Section 16 of the Exchange Act. 6. Limitations and Conditions (a) The total number of shares of Common Stock that may be issued to Non-employee Directors under the Plan is 20,000. Such total number of shares may consist, in 3 whole or in part, of authorized but unissued shares or shares held in American's treasury. The foregoing number may be increased or decreased by the events set forth in Section 7 below. (b) Prior to each issuance to a Non-employee Director of shares of Common Stock pursuant to the Plan, such Non-employee Director must make representations satisfactory to the Committee to the effect that such shares are to be held for investment purposes and not with a view to or for resale or distribution except in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and must give a written undertaking to American in form and substance satisfactory to the Committee that he or she will not publicly offer or sell or otherwise distribute such shares other than (i) in the manner and to the extent permitted by Rule 144 promulgated by the Securities and Exchange Commission under the Securities Act, (ii) pursuant to any other exemption from the registration provisions of the Securities Act or (iii) pursuant to an effective registration statement thereunder. (c) Nothing contained herein shall be deemed to create the right in any Non-employee Director to remain a member of the Board of Directors of American, to be nominated for reelection or to be reelected as such or, after ceasing to be such a member, to receive any shares of Common Stock under the Plan to which he or she is not already entitled with respect to any year. 7. Stock Adjustments In the event of any merger, consolidation, stock or other non-cash dividend, extraordinary cash dividend, split-up, spin-off, combination or exchange of shares, reorganization or recapitalization or change in capitalization, or any other similar corporate event, the Committee may make such adjustments in (i) the aggregate number of shares of Common Stock that may be issued under the Plan as set forth in Section 6(a) and the number of shares that may be issued to a Non-employee Director with respect to any year as set forth in Section 4(a), (ii) the kind of shares that may be issued under the Plan and (iii) the amount and kind of payment that may be made in respect of unpaid dividends on shares of Common Stock whose receipt has been deferred pursuant to Section 4(b), as the Committee shall deem appropriate in the circumstances. The determination by the Committee as to the terms of any of the foregoing adjustments shall be conclusive and binding. 8. Amendment and Termination (a) The Board of Directors of American shall have the power to amend or terminate the Plan at any time; provided, however, that, to be effective, any amendment of the Plan shall comply with the requirements of the rules and regulations promulgated under Section 16(b) of the Exchange Act to the extent necessary so that the receipt of shares of Common Stock by a Non-employee Director under the Plan shall be exempt from such Section 16(b); 4 and provided, further, that no termination of the Plan shall adversely affect the rights of any Non-employee Director with respect to any otherwise payable shares of Common Stock whose receipt has been deferred or with respect to unpaid dividends (and interest thereon) pursuant to Section 4(b). Notwithstanding the preceding sentence, no amendment or modification of any provision of the Plan relating to the amount, price and timing of any security that may be granted hereunder may be amended more often than once in every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended. (b) Subject to any prior termination of the Plan by the Board of Directors of American, shares of Common Stock shall be issuable under the Plan only with respect to the calendar years 1995 through 1999 inclusive. 9. Effective Date The Plan shall be subject to and effective upon its approval by the stockholders of American. 5 EX-10 6 EXHIBIT 10C6 EXHIBIT 10c6 Schedule identifying substantially identical agreements, among Fortune Brands, Inc. ("Fortune") and The Chase Manhattan Bank, et al., establishing a trust in favor of each of the following persons, to the Agreement and the Amendments thereto constituting Exhibits 10c2, 10c3, 10c4 and 10c5 to the Annual Report on Form 10-K of Fortune for the Fiscal Year ended December 31, 1998 - -------------------------------------------------------------------------------- Name ---- Thomas C. Hays Norman H. Wesley John T. Ludes Dudley L. Bauerlein, Jr. Craig P. Omtvedt Mark A. Roche Robert J. Rukeyser EX-10 7 EXHIBIT 10C12 EXHIBIT 10c12 Schedule identifying substantially identical agreements, among Fortune Brands, Inc. ("Fortune"), The Chase Manhattan Bank and each of the following persons, to the Trust Agreement and Amendments constituting Exhibits 10c8, 10c9, 10c10 and 10c11 to the Annual Report on Form 10-K of Fortune for the Fiscal Year ended December 31, 1998 - -------------------------------------------------------------------------------- Name ---- Thomas C. Hays Norman H. Wesley John T. Ludes Dudley L. Bauerlein, Jr. Craig P. Omtvedt Mark A. Roche Robert J. Rukeyser EX-10 8 EXHIBIT 10F2 EXHIBIT 10f2 Resolutions Adopted by the Board of Directors of Fortune Brands, Inc. on July 26, 1988 - ------------------------------------- RESOLVED, that there be paid to Mr. Mark A. Roche (or to him and any beneficiary designated by him in accordance with the Retirement Plan for Employees and Former Employees of American Brands, Inc. (the "Retirement Plan"), or any superseding plan then in effect, or to Mr. Roche's surviving spouse if eligible for a spouse's benefit thereunder) from and after termination of Mr. Roche's employment, any benefits as would be payable under the Retirement Plan and this Company's Supplemental Retirement Plan, or any superseding plans, as then in effect if, for the purpose of determining eligibility for benefits and the amount thereof, Mr. Roche had been in continuous service with this Company since July 27, 1981; and further RESOLVED, that this Company pay to Mr. Roche (or to such beneficiary), concurrently with the payment of whatever benefits become payable under the Retirement Plan and this Company's Supplemental Retirement Plan, or any superseding plans, outside-the-Plan benefits in an amount equal to the difference between (i) the benefits payable from the Retirement Plan and such Supplemental Retirement Plan and (ii) the total amount of benefits payable pursuant to the foregoing resolutions, provided that Mr. Roche may select any actuarially equivalent method of payment for the outside-the-Plan benefits as is permitted under the Retirement Plan, which need not be the same form of payment as actually elected under the Retirement Plan; and further RESOLVED, that the Corporate Employee Benefits Committee (or any successor committee) may direct that the retirement benefits payable to Mr. Roche pursuant to the preceding resolutions be paid in an actuarially equivalent single sum payment, provided that except as set forth in the following resolutions, no such payment shall be made prior to termination of employment; and further RESOLVED, that in the event the Company segregates assets which are intended to be a source for payment of such retirement benefits to Mr. Roche and the benefits are determined to be taxable to Mr. Roche prior to actual receipt thereof, a single sum payment shall be made to Mr. Roche in an amount sufficient to pay such taxes notwithstanding that Mr. Roche may not then have terminated employment, which tax payment shall then be used as an offset to the retirement benefits thereafter payable pursuant to the preceding resolutions of this Board, which retirement benefits shall also be paid in an actuarially equivalent single sum payment promptly upon termination of employment; and further RESOLVED, that in determining actuarial equivalency of a single sum payment, there shall be used the interest rate which would be used as of the first day of the month preceding the month in which the distribution occurs by the Pension Benefit Guaranty Corporation for the purposes of determining the present value of a single sum distribution on plan termination and the 1974 George B. Buck Mortality Table, set forward one year; and further RESOLVED, that from and after Mr. Roche's termination of employment, Mr. Roche shall be eligible for retiree medical and life insurance benefits to the same extent as retired executives of the Company are entitled to such benefits generally; and further RESOLVED, that for purposes of determining eligibility and amount of benefits under this Company's Sick Leave and Long-Term Disability Plans and Dental Plan, the date of July 27, 1981 shall be deemed Mr. Roche's commencement date of credited service; and further RESOLVED, that the Chairman of the Board, the President, the Executive Vice President and Chief Financial Officer, the Senior Vice President and Chief Accounting Officer, the Senior Vice President and General Counsel and the Senior Vice President and Chief Administrative Officer of this Company be and each of them is hereby directed to execute and deliver to Mr. Roche the agreement of this Company confirming its obligations undertaken in the preceding resolutions pursuant to which retirement benefits, sick leave and long-term disability benefits and dental benefits will be provided for Mr. Roche. 2 EX-10 9 EXHIBIT 10H3 EXHIBIT 10h3 Schedule identifying substantially identical agreements, between Fortune Brands, Inc. ("Fortune") and each of the following persons, to the Agreement and Amendment constituting Exhibits 10h1 and 10h2 to the Annual Report on Form 10-K of Fortune for the Fiscal Year ended December 31, 1998 - -------------------------------------------------------------------------------- Name ---- Thomas C. Hays Norman H. Wesley John T. Ludes Dudley L. Bauerlein, Jr. Craig P. Omtvedt Mark A. Roche Robert J. Rukeyser EX-10 10 EXHIBIT 10I4 EXHIBIT 10i4 Schedule identifying substantially identical agreements, among Fortune Brands, Inc. ("Fortune") and The Chase Manhattan Bank, et al. in favor of each of the following persons, to the Trust Agreement and Amendments thereto constituting Exhibits 10i1, 10i2 and 10i3 to the Annual Report on Form 10-K of Fortune for the Fiscal Year ended December 31, 1998 - -------------------------------------------------------------------------------- Name ---- Thomas C. Hays Norman H. Wesley Dudley L. Bauerlein, Jr. Craig P. Omtvedt Mark A. Roche Robert J. Rukeyser EX-10 11 EXHIBIT 10J4 EXHIBIT 10j4 Schedule identifying substantially identical agreements, between Fortune Brands, Inc. ("Fortune") and each of the following persons, to the Agreement and Amendments thereto constituting Exhibits 10j1, 10j2 and 10j3 to the Annual Report on Form 10-K of Fortune for the Fiscal Year ended December 31, 1998 - -------------------------------------------------------------------------------- Name ---- Norman H. Wesley John T. Ludes Dudley L. Bauerlein, Jr. Mark A. Roche Robert J. Rukeyser EX-10 12 EXHIBIT 10J6 EXHIBIT 10j6 Schedule identifying substantially identical agreements, between Fortune Brands, Inc. ("Fortune") and each of the following persons, to the Amendment constituting Exhibit 10j5 to the Annual Report on Form 10-K of Fortune for the Fiscal Year ended December 31, 1998 - -------------------------------------------------------------------------------- Name ---- Norman H. Wesley John T. Ludes Dudley L. Bauerlein, Jr. Mark A. Roche Robert J. Rukeyser EX-10 13 EXHIBIT 10J8 EXHIBIT 10j8 AMENDMENT TO SEVERANCE AGREEMENT This AMENDMENT dated as of August 1, 1998 to the Severance Agreement (the "Agreement") dated as of January 29, 1996, as amended, between AMERICAN BRANDS, INC., a Delaware corporation (the "Company") and CRAIG P. OMTVEDT (the "Executive"), W I T N E S S E T H : WHEREAS, the Company (now known as Fortune Brands, Inc.) and the Executive entered into the Agreement in order to provide severance benefits in the event of termination of the Executive's employment; and WHEREAS, the Company and the Executive desire to amend the Agreement in order to provide severance benefits in the event that the Executive terminates employment for Good Reason (as defined herein); NOW, THEREFORE, in consideration of the premises and to further assure the retention of the Executive in the employ of the Company after the date of this Amendment to Severance Agreement, the parties hereto do hereby agree as follows: 1. Section 1(a) of the Agreement is hereby amended in its entirety as follows: "(a) Entitlement to Benefits. If and only if during the term of the Agreement the Executive's employment with the Company is terminated by the Company other than for Disability or Cause or by the Executive for Good Reason (as defined in this Section 1), the Executive shall be entitled to benefits as provided in Section 2. The Executive shall not be entitled to any benefits hereunder in the event his employment with the Company is terminated as a result of his death, by the Company for Disability or Cause or by the Executive other than for Good Reason." 2. Section 1(d) of the Agreement is hereby amended by changing the first sentence thereof as follows: "Any termination by the Company for Disability or Cause shall be communicated by Notice of Termination to the Executive and any termination by the Executive for Good Reason shall be communicated by Notice of Termination to the Company." 3. Section 1(e) of the Agreement is hereby amended in its entirety as follows: "(e) Termination Date. As used herein, 'Termination Date' shall mean (i) if employment is terminated by the Company for Disability, 30 days after Notice of Termination is given (provided that the Executive shall not have returned to the performance of his duties on a full-time basis during such 30-day period), (ii) if employment is terminated by the Company for Cause, the date on which a Notice of Termination is given, (iii) if employment is terminated for Good Reason, the date specified in the Notice of Termination, and (iv) if employment is terminated for any other reason, the date on which the Executive ceases to perform his duties for the Company; provided, however, that if within 30 days 2 after any Notice of Termination is given the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Termination Date shall be the date on which the dispute is finally determined, either by written agreement of the parties or by a final judgment, order or decree of court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected); provided, further, however, that if the dispute is resolved in favor of the Company, the Termination Date shall not be so extended but shall be the date determined under clauses (i) through (iv) of this Section 1(e)." 4. Section 1(f) is hereby added to the Agreement as follows: "(f) Good Reason. Termination of employment by the Executive for Good Reason shall be deemed to have occurred only if the Executive terminates his employment and provides a Notice of Termination to the Company prior to such date for any of the following reasons: (i) a reduction by the Company in the Executive's base salary as in effect on August 1, 1998 plus all increases therein subsequent thereto; (ii) the failure of the Company substantially to maintain and to continue the Executive's participation in the Company's benefit plans as in effect on August 1, 1998 and with all improvements therein subsequent thereto (other than those plans or improvements that have expired thereafter in accordance with their original terms), or the taking of any action which would materially reduce the Executive's benefits under any of such plans or 3 deprive the Executive of any material fringe benefit enjoyed by him on August 1, 1998 or subsequently. For the purposes hereof such benefit plans shall include, but not be limited to, the Incentive Compensation Plans, the Pension Plans, the Defined Contribution Plan and the Company's Long-Term Incentive Plan; (iii) the sum of the Executive's base salary and the amount paid to the Executive as incentive compensation under the Incentive Compensation Plans for any calendar year during the term hereof is less than 90% of the sum of the Executive's base salary and the amount paid to the Executive under the Incentive Compensation Plans for 1997 or any subsequent year during the term hereof for which the sum of such amounts was greater; provided, however, that this paragraph shall not be applicable if the cause of the reduction of the sum of the Executive's base salary and incentive compensation is a failure of the Company to meet performance goals under the Incentive Compensation Plans; (iv) the failure of the Company to provide the Executive during each calendar year with a number of paid vacation days at least equal to the number of paid vacation days to which he was entitled at the date hereof plus any increases therein subsequent thereto; (v) any purported termination of the Executive's employment by the Company which is not effected pursuant to a Notice of Termination, and for purposes of this Agreement, no such purported termination shall be effective; or (vi) any failure of the Company to comply with and satisfy Section 3; provided, however, that termination of employment by the Executive under clauses (i), (ii) and (iii) above shall not be deemed to have occurred for Good Reason if the reason for the compensation reduction or failure of benefit plan coverage thereunder is due to a change in the individual elements of aggregate compensation, which change is applicable to officers of the Company generally, without a material reduction in aggregate compensation." 5. Section 2(a) of the Agreement is hereby amended in its entirety as follows: "(a) If the Executive's employment is terminated by the Company for Disability or Cause or by the Executive other than for Good Reason, the Company shall have no obligation to pay any compensation to the Executive under this Agreement in respect of periods beginning on or after the Termination Date, but this Agreement shall have no effect on any other obligation the Company may have to pay the Executive compensation to which he may otherwise be entitled." 6. Section 2(b) of the Agreement is hereby amended by adding "or the Executive terminates his employment for Good Reason," after the words "Disability or Cause," in the first sentence thereof. 7. Section 2(c) of the Agreement is hereby amended by adding "or the Executive terminates his employment for Good Reason," after the words "Disability or Cause," in the first sentence thereof. 5 8. Section 2(d) of the Agreement is hereby amended by adding "or the Executive terminates his employment for Good Reason," after the words "Disability or Cause," in the first sentence thereof and to delete the following sentence therefrom: "Benefits hereunder which commence prior to age 60 shall be actuarially reduced to reflect early commencement to the extent, if any, provided in the Retirement Plan as if the Executive's Termination Date were an Early Retirement Date." 9. Section 2(e) of the Agreement is hereby amended by adding "or the Executive terminates his employment for Good Reason," after the words "Disability or Cause," therein. 10. Section 2(f) of the Agreement is hereby amended by adding "or the Executive terminates his employment for Good Reason," after the words "Disability or Cause," in the first sentence thereof as well as to add "and reduced by the amount actually paid for such calendar year under the Incentive Compensation Plans" at the end of clause (ii) thereof. 11. Section 2(g) of the Agreement is hereby amended by adding "or the Executive terminates his employment for Good Reason" after the words "Disability or Cause" therein. 6 12. Section 2(k) is hereby added to the Agreement as follows: "(l) In addition to any other benefits which may be payable to the Executive under the Pension Plans and Section 2(d) hereof, if the Executive's employment with the Company is terminated by the Company other than for Disability or Cause, or by the Executive for Good Reason, and the Termination Date occurs before the Executive attains Early Retirement Date (as defined in the Retirement Plan), the Company shall pay to the Executive a supplemental pension benefit in an amount equal to the difference between (i) the benefits payable from the Pension Plans and Section 2(d) hereof and (ii) 65% of the Executive's accrued benefit under the Pension Plans and Section 2(d) hereof, provided that the Executive's full accrued benefit under the Pension Plans and Section 2(d) hereof shall be paid without reduction for early payment if the Executive has completed at least 30 years of Qualifying Employment (as defined in the Retirement Plan) at the date of the Executive's termination of employment with entitlement to a benefit hereunder. This additional pension benefit shall be payable outside the Pension Plans and shall commence on the first day of the month following the Executive's termination of employment with the Company even though pension benefits may not yet then be payable under the Pension Plans and Section 2(d) hereof. The benefit payable under this Section 2(k) shall be paid to the Executive in the form of a 100% joint and survivor annuity with the Executive's spouse as contingent annuitant if the Executive is married at the date of commencement of payments hereunder in which event the benefit shall be further reduced for the joint and survivor annuity coverage to the same extent as provided in the Supplemental Plan; provided that if the Executive is not married at the date the enhanced pension benefits commence hereunder, the enhanced pension benefits under this Section 2(k) shall be paid as an annuity for the Executive's life only. At the time that benefits commence under the Supplemental Plan, the 7 monthly benefits payable hereunder shall then be actuarially adjusted to the form of benefit payable under the Supplemental Plan and shall be paid in the same form as the benefit payable under the Supplemental Plan, with survivorship benefits hereunder then payable after the Executive's death to the same contingent annuitant to whom benefits are payable under the Supplemental Plan, if any, that survives the Executive. In the event that an employee grantor trust ("Grantor Trust") has been established among the Company, the Executive and a trustee, the Company may provide the additional pension benefits payable pursuant to Section 2(d) and Section 2(k) through the Grantor Trust (or, at the Executive's request, the Segregated Account referred to in the Grantor Trust) as soon as practicable after the termination of employment of the Executive using the same actuarial basis and methodology as for other Supplemental Plan benefits which are provided through the Grantor Trust and assuming that the underlying monthly pension benefits which are valued for Grantor Trust funding purposes are payable in the form of an annuity for the life of the Executive only and commencing immediately upon termination of employment but with the early payment reduction calculated as if the Executive had terminated employment at age 55." 13. All references to "American Brands, Inc." in the Agreement be and they are hereby changed to references to "Fortune Brands, Inc." IN WITNESS WHEREOF, the Company has caused this Amendment to Severance Agreement to be signed by its officer 8 thereunto duly authorized and its seal to be hereunder affixed and attested and the Executive has hereunto set his hand as of the date first written above. FORTUNE BRANDS, INC. (Corporate Seal) By Steven C. Mendenhall -------------------------------- Steven C. Mendenhall ATTEST: Senior Vice President and Chief Administrative Officer Louis F. Fernous, Jr. Craig P. Omtvedt - ------------------------------- ----------------------------- Secretary CRAIG P. OMTVEDT EX-10 14 EXHIBIT 10J9 EXHIBIT 10j9 Schedule identifying substantially identical agreements, between Fortune Brands, Inc. ("Fortune") and each of the following persons, to the Amendment constituting Exhibit 10j8 to the Annual Report on Form 10-K of Fortune for the Fiscal Year ended December 31, 1998 - -------------------------------------------------------------------------------- Name ---- Norman H. Wesley Mark A. Roche EX-12 15 EXHIBIT 12 EXHIBIT 12 FORTUNE BRANDS, INC. Statement Re Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in millions)
Years Ended December 31, ----------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ------ ------ ------ ------ ------ Continuing Operations - ------------------------------ Earnings Available: Income before provision for taxes on income and minority interest $ 43.4 $358.9 $340.1 $145.2 $ 516.4 Less: Excess of earnings over dividends of less than fifty percent owned companies - 0.2 0.2 0.2 0.2 Capitalized interest 0.2 - 0.3 - - --------- --------- ------- ------- -------- 43.2 358.7 339.6 145.0 516.2 -------- --------- ------- ------- -------- Fixed Charges: Interest expense (including capitalized interest) and amortization of debt discount and expenses 184.6 147.1 172.6 122.4 105.4 Portion of rentals representative of an interest factor 12.8 13.5 15.1 14.7 17.0 ------- ------- ------- -------- -------- Total Fixed Charges 197.4 160.6 187.7 137.1 122.4 ------- ------- ------- -------- -------- Total Earnings Available $240.6 $519.3 $527.3 $282.1 $638.6 ===== ===== ====== ===== ===== Ratio of Earnings to Fixed Charges 1.22 3.23 2.81 2.06 5.22 ==== ==== ==== ==== ====
EX-13 16 EXHIBIT 13 EXHIBIT 13 FINANCIAL HIGHLIGHTS FORTUNE BRANDS, INC. AND SUBSIDIARIES
Reported Pro Forma Basis(1) - ---------------------------------------------------------------------------------------------- (In millions, except per share amounts) 1998 1997 1998 1997 Change - ---------------------------------------------------------------------------------------------- Net sales Home products $ 1,624.4 $ 1,394.0 $ 1,624.4 $ 1,394.0 Office products 1,387.7 1,294.2 1,387.7 1,294.2 - ---------------------------------------------------------------------------------------------- Home and office products 3,012.1 2,688.2 3,012.1 2,688.2 Golf products 962.9 911.6 962.9 911.6 Spirits and wine 1,265.9 1,244.7 1,265.9 1,244.7 - ---------------------------------------------------------------------------------------------- $ 5,240.9 $ 4,844.5 $ 5,240.9 $ 4,844.5 8% ============================================================================================== Operating company contribution(2) Home products $ 252.5 $ 222.9 $ 252.5 $ 222.9 Office products 134.0 128.1 134.0 128.1 - ---------------------------------------------------------------------------------------------- Home and office products 386.5 351.0 386.5 351.0 Golf products 142.9 138.2 142.9 138.2 Spirits and wine 268.9 257.2 268.9 257.2 - ---------------------------------------------------------------------------------------------- $ 798.3 $ 746.4 $ 798.3 $ 746.4 7% ============================================================================================== Income from continuing operations $ 293.6 $ 41.5 $ 293.6 $ 257.8 14% ============================================================================================== Earnings per Common share from continuing operations ============================================================================================== Basic $ 1.70 $ .24 $ 1.70 $ 1.51 13% ============================================================================================== Diluted $ 1.67 $ .23 $ 1.67 $ 1.48 13% ============================================================================================== EBITDA(3) $ 865.7 $ 499.1 $ 865.7 $ 797.3 9% ============================================================================================== =============================================================================================== Dividends paid per Common share $ .85 $ 1.41 $ .85 $ .81 5% ============================================================================================== Average number of Common shares outstanding 172.2 171.6 172.2 170.3 ==============================================================================================
(1) Unaudited pro forma results exclude restructuring and other nonrecurring charges in 1997 (See Note 14) and reflect the net cash payment Gallaher Group Plc made to the Company in connection with the spin-off on May 30, 1997 (See Note 3) and the assumption that such proceeds were used to purchase 2.5 million Common shares and repay debt as of January 1, 1997. Pro forma information is presented for informational purposes only and does not purport to be indicative of the results of operations which would actually have been obtained if the transactions had occurred on January 1, 1997. (2) Operating company contribution is net sales less all costs and expenses other than restructuring and other nonrecurring charges, amortization of intangibles, corporate administrative expenses, interest and related expenses, other (income) expenses, net and income taxes. (3) EBITDA is defined as income from continuing operations before interest expense, income taxes and depreciation and amortization. EBITDA is a measure commonly used by analysts and investors. Accordingly, this information has been presented to permit a more complete analysis of the Company's operating performance. EBITDA should not be considered a substitute for net income or cash flow prepared in accordance with generally accepted accounting principles as a measure of the profitability or liquidity of the Company.Fortune Brands, Inc. is a holding company with subsidiaries engaged in the manufacture and sale of home products, office products, golf products and distilled spirits and wine. To make this annual report easier to read, we've used the words "we," "our" and similar terms to describe the activities of Fortune Brands or its subsidiary companies or both, depending upon the context. Fortune Brands, Inc. is a holding company with subsidiaries engaged in the manufacture and sale of home products, office products, golf products and distilled spirits and wine. To make this annual report easier to read, we've used the words "we," "our" and similar terms to describe the activities of Fortune Brands or its subsidiary companies or both, depending upon the context. 4 Financial Contents Results of Operations 29 Financial Condition 36 Consolidated Statement of Income 39 Consolidated Balance Sheet 40 Consolidated Statement of Cash Flows 42 Consolidated Statement of Stockholders' Equity 43 Notes to Consolidated Financial Statements 44 Report of Independent Accountants 57 Report of Management 57 Information on Business Segments 58 Six-Year Consolidated Selected Financial Data 59 28 RESULTS OF OPERATIONS FORTUNE BRANDS, INC. AND SUBSIDIARIES
Net Sales Operating Company Contribution(1) - --------------------------------------------------------------------------------------------------- (In millions) 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------------------- Home products $1,624.4 $1,394.0 $1,374.1 $252.5 $222.9 $214.1 Office products 1,387.7 1,294.2 1,228.7 134.0 128.1 116.3 - --------------------------------------------------------------------------------------------------- Home and office products 3,012.1 2,688.2 2,602.8 386.5 351.0 330.4 Golf products 962.9 911.6 811.4 142.9 138.2 125.3 Spirits and wine 1,265.9 1,244.7 1,303.5 268.9 257.2 244.1 - --------------------------------------------------------------------------------------------------- Continuing operations $5,240.9 $4,844.5 $4,717.7 $798.3 $746.4 $699.8 ===================================================================================================
(1) Operating company contribution (OCC) is net sales less all costs and expenses other than restructuring and other nonrecurring charges, amortization of intangibles, corporate administrative expenses, interest and related expenses, other (income) expenses, net and income taxes. (See Note 15.) CONSOLIDATED 1998 Compared to 1997 Net sales grew by $396.4 million, an increase of 8%. The introduction of new products and line extensions, acquisitions, and price increases primarily caused the increase. The net sales increase was tempered by fewer units sold of some existing products, the sale of nonstrategic businesses and the effects of lower average foreign exchange rates (primarily the Australian dollar). Operating company contribution is the key measure by which we gauge performance. In 1998, OCC grew $51.9 million, up 7%. The higher sales principally caused this increase. The increase was tempered by lower average foreign exchange rates and higher operating expenses. OCC benefited from the restructuring activities initiated in 1997. If the exchange rates had remained constant at their 1997 levels, net sales and operating company contribution would have increased 9%. During 1997, we recorded an aggregate of $298.2 million of pre-tax restructuring and other nonrecurring charges. (See Notes to Consolidated Financial Statements, Note 14.) During 1998, the program was substantially completed. The following activities are in the process of being finalized: the completion of the Nogales, Mexico, operation related to office products' Swingline stapling production and a significant portion of home products' Master Lock assembly operations, and the resultant reduction of workforces (approximately 500 positions) in the home and office products segments. These remaining restructuring activities are expected to be completed during 1999. When the restructuring activities are completed, we expect these actions to produce annualized savings exceeding $50 million. Much of these savings were achieved in 1998. Interest and related expenses decreased $14 million, or 12%. This decrease reflects lower average borrowings principally because of the use of a portion of the proceeds paid to us by Gallaher Group Plc in 1997 in connection with its spin-off from the Company. (See Note 3.) Lower pre-tax income in 1997 due to restructuring and other nonrecurring charges distorted the effective income tax rate comparisons for 1998 and 1997. Excluding these charges, the effective income tax rates were 42.6% and 44.6%, respectively. We had a lower effective tax rate this year principally because of foreign and state tax initiatives and nondeductible goodwill had a smaller impact on higher pre-tax income. Income from continuing operations of $293.6 million, or $1.70 per basic Common share, for 1998 compared with $41.5 million, or 24 cents per share, for 1997. The significant increase occurred principally because in 1997 we recorded $201 million, or $1.17 per share ($1.16 diluted), in net restructuring and other nonrecurring charges. Excluding these charges, income from continuing operations was up $51.1 million, or 21%. Income from discontinued operations for 1997 represented Gallaher's net income before the spin-off. It was $65.1 million, or 38 cents per share. (See Note 3.) In 1998, we incurred extraordinary items charges of $30.5 million ($46.9 million pre-tax), or 18 cents per share, and in 1997 the charge was $8.1 million ($12.4 million pre-tax), or five cents per share. In both years, the charges related to purchasing or redeeming debt. (See Note 16.) Net income of $263.1 million, or $1.52 per share, compared with $98.5 million, or 57 cents per share, for 1997. Pro forma financial information is discussed because of the significant changes to our businesses that occurred in 1997. Pro forma results reflect the exclusion of the 1997 restructuring and other nonrecurring charges, the inclusion of a net cash payment that approximated $1.25 billion, after taxes, that Gallaher paid to us in connection with its spin-off and the assumption that as of January 1, 1997 we used those proceeds to purchase 2.5 million Common shares and repay debt. Income from continuing operations of $293.6 million, and basic and diluted earnings per share of $1.70 and $1.67, respectively, for 1998 compared with pro forma income from continuing operations of $257.8 million, and pro forma basic and diluted earnings per share of $1.51 and $1.48, respectively, in 1997. This pro forma information is provided for informational purposes only. We cannot state for certain that these results of operations actually would have been obtained if the transactions had occurred on January 1, 1997. The Company derived 26% of its 1998 and 1997 operating company contribution from foreign countries, principally the United Kingdom, Australia and Canada. Fluctuations in the 29 RESULTS OF OPERATIONS FORTUNE BRANDS, INC. AND SUBSIDIARIES exchange rates of foreign currencies represent a principal exposure that may affect results in future periods. Lower average foreign exchange rates reduced 1998 OCC by $11.7 million. We cannot accurately predict fluctuations in foreign exchange rates. A 10% change in average exchange rates for the foreign currencies from the 1998 average rates would result in a change in 1998 OCC of approximately $20 million, or about 21/2%. Pending Litigation On December 22, 1994, the Company sold The American Tobacco Company subsidiary to Brown & Williamson Tobacco Corporation, a wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with the sale, Brown & Williamson Tobacco Corporation and The American Tobacco Company ("the Indemnitors") agreed to indemnify the Company against claims including legal expenses arising from smoking and health and fire safe cigarette matters relating to the tobacco business of The American Tobacco Company. The Company is a defendant in numerous actions based upon allegations that human ailments have resulted from tobacco use. Management believes that there are meritorious defenses to the pending actions and these actions are being vigorously contested. However, it is not possible to predict the outcome of the pending litigation, and it is possible that some of these actions could be decided unfavorably. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of the pending litigation. Management believes that the pending actions will not have a material adverse effect upon the results of operations, cash flows or financial condition of the Company as long as the Indemnitors continue to fulfill their obligations to indemnify the Company under the aforementioned indemnification agreement. In addition to the lawsuits described above, the Company and its subsidiaries are defendants in lawsuits associated with their business and operations. It is not possible to predict the outcome of the pending actions, but management believes that there are meritorious defenses to these actions and that these actions will not have a material adverse effect upon the results of operations, cash flows or financial condition of the Company. These actions are being vigorously contested. Environmental Matters Along with other responsible parties, our subsidiaries face claims relating to the protection of the environment. As of February 15, 1999, various of our subsidiaries had been designated as potentially responsible parties under "Superfund" or similar state laws with respect to 47 sites. We believe that the costs of complying with the present environmental protection laws, before considering estimated recoveries either from other responsible parties or insurance, will not have a material adverse effect upon our results of operations, cash flows or financial condition. Recently Issued Accounting Standards In June 1998, FAS Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued. It will become effective for us beginning on January 1, 2000. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. We are in the process of evaluating the effect of adoption on future results and the disclosure requirements under this standard. In March 1998, AICPA Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," was issued. It became effective on January 1, 1999. SOP 98-1 provides guidance on which types of costs should be capitalized and expensed for computer software developed or obtained for internal use. We do not currently expect the adoption of SOP 98-1 to have a material effect on our financial statements. Year 2000 Issue General. The "Year 2000", or "Y2K", problem exists because many computer programs and computerized devices use only the last two digits to refer to a year. As a result, these programs and devices may not properly recognize a year that begins with "20" instead of "19." If this problem is not corrected, many computer applications could fail or produce erroneous results. In early 1997, we established a task force, comprised of our and our subsidiaries' information technology specialists, to develop an action plan to address the Year 2000 issues. The task force functions primarily as a means to coordinate information sharing across our operating companies, to assess and facilitate the progress towards becoming Y2K compliant and to regularly advise our management and Board of Directors regarding the project's status. Project Overview. We and our operating companies have focused our Y2K compliance efforts in three areas: information technology ("IT") related systems and processes such as operating systems, applications and programs; embedded logic ("non-IT") systems and processes such as manufacturing machines, security devices, etc.; and compliance efforts of third parties (such as suppliers, customers, joint venture partners, government, utilities and other service providers). Within each of the IT and non-IT areas, the project includes inventorying all programs and devices and identifying those that are affected by the Y2K issue, developing strategies to resolve the issues, testing such strategies and installing the solutions. The third party aspect of the project involves contacting and, where appropriate, visiting with significant third parties to request that they confirm their own Y2K compliance. In addition to the efforts that have been focused on resolution of the Year 2000 issue, some of our business segments also have undertaken the normal course replacement of older IT systems and non-IT devices with enterprise programs and other system solutions to improve business processes. These enterprise programs also will result in making the affected systems Year 2000 compliant. 30 Internal State Of Readiness. The non-IT portion of the project is substantially complete, and we currently anticipate that all critical non-IT systems will be Y2K compliant by June 30, 1999. A significant amount of the IT portion of the project also has been completed, and we anticipate that all IT systems also will be Y2K compliant by June 30, 1999. Third Party Risks. Many third parties have responded to our requests for information and more extensive inquiries are ongoing with significant suppliers and customers. If one or more significant third parties fails to be Y2K compliant, results may include, among other things, temporary plant closings, delays in the delivery of products, delays in the receipt of supplies and invoice and collection errors. The Y2K compliance of third parties is inherently difficult to assess. As a result, each of our business segments consider disruptions caused by the failure of such parties to be Y2K compliant to present the most reasonably likely worst-case scenarios. In addition to the risks facing businesses generally, such as the failure of significant service providers in the utilities, communications, transportation, banking, financial and government sectors to be Y2K compliant, we face certain risks specific to our businesses. The continuing rationalization of manufacturing activities in the home, office and golf segments has resulted in an increase in the level of manufacturing, and purchases from vendors and suppliers in less-developed countries. The Y2K compliance in such countries is particularly difficult to assess, and the failure of key suppliers to be Y2K compliant could cause disruptions in these segments. Also, the continued trend towards consolidation among the customer base in the home and office products segments presents special risks. Because the sales in these segments are becoming concentrated on a number of larger customers, the failure of one or more such customers to be Y2K compliant could result in interruptions in sales to affected customers. Finally, the spirits and wine segment faces potential disruptions in the U.S. related to non-compliance by any of the state and local government entities that control the distribution and sale of spirits and wine in 18 "control" states. In essence, the requirement that spirits and wine be sold only through the government in such jurisdictions may legally prohibit the spirits and wine segment from taking the necessary steps to continue to sell or distribute products until such government entities' Y2K problems are successfully resolved. Contingency Planning. We have been focusing our efforts on compliance, and we believe the critical IT and non-IT portions of the project will be compliant in time. In addition, we are engaged in continuing efforts to evaluate the Y2K compliance of our significant third party suppliers and customers. The Year 2000 problem presents a number of risks that are beyond our reasonable control. Accordingly, contingency plans focusing on critical activities are being developed and will be implemented to the extent necessary. Among the plans being considered are arranging for contingent raw material, component and manufacturing capacity sources; building supplies and inventory; escrowing the computer source codes of key software applications; reviewing data recovery disaster plans; and rescheduling normal year-end plant shutdowns to the initial days of 2000. Costs To Address Year 2000 Issues. Based on the efforts to date and on project plans, we currently estimate that the total costs (including costs of existing internal resources) will be approximately $25 million, which is being provided by internally generated sources. Of the total cost, we spent approximately 72% as of December 31, 1998. This cost estimate may change as the program progresses. Conclusion. Based on current assessment efforts, we anticipate that our internal Year 2000 issues will be resolved in a timely manner. However, the Year 2000 problem presents a number of risks that are beyond our reasonable control, particularly with respect to the Y2K compliance of third parties, both domestic and international. Although we believe that our Y2K program is designed to appropriately identify and address those issues which are within our reasonable control, there can be no assurance that our efforts will be fully effective or that Y2K issues will not have a material adverse effect upon our results of operations, cash flows or financial condition. Conversion to the Euro On January 1, 1999, eleven participating countries of the European Union converted to the Euro as their common national currency. The previous national currencies of these countries will still be accepted as legal tender until at least January 1, 2002. We do not expect the conversion to the Euro to have a material effect on our results of operations, cash flows or financial condition. Cost Initiatives We continuously evaluate the productivity of our product lines and existing asset base and actively seek to identify opportunities to improve our cost structure. Future opportunities may involve, among other things, the relocation of manufacturing or assembly to locations generally having lower costs or the reorganization of operations. Implementing any significant identified cost reduction and efficiency opportunities could result in charges. 1997 Compared to 1996 On May 30, 1997, we spun off Gallaher Group Plc, our international tobacco subsidiary, and changed our name from American Brands, Inc. to Fortune Brands, Inc. As a result, our stockholders owned shares in two publicly-traded companies -- Fortune Brands, Inc. and Gallaher. (See Note 3.) Net sales increased $126.8 million, up 3%. New products and line extensions primarily caused the increase, which was partly offset by volume declines. Acquisitions in home and office products and nonstrategic divestitures largely offset one another. We included an additional month in distilled spirits' U.K. operations in 1996 (change to calendar year-end), which also benefited net sales. Operating company contribution 31 RESULTS OF OPERATIONS FORTUNE BRANDS, INC. AND SUBSIDIARIES increased by $46.6 million, up 7%. Higher sales and gross margin primarily caused this increase. The OCC increase was tempered by increased marketing and research and development expenses. Lower average foreign exchange rates did not significantly affect sales and OCC. We reviewed productivity-enhancing opportunities throughout the year and recorded pre-tax restructuring and other nonrecurring charges of $298.2 million. In connection with the restructuring, the home and office products segments will be terminating 1,125 individuals (about 7% of the combined workforce), principally production employees. Cash payments account for approximately 30% of the charge, principally relating to employee termination costs. (See Note 14.) Interest and related expenses decreased $48.8 million, or 29%; average borrowings were lower because we had the use of the proceeds from the Gallaher spin-off. The effective income tax rate comparisons were distorted by the restructuring and other nonrecurring charges. Excluding these charges, the effective income tax rates for 1997 and 1996 were 44.6% and 46.5%, respectively. Income from continuing operations of $41.5 million, or 24 cents per basic Common share, compared with $181.7 million, or $1.04 per share, for 1996. Restructuring and other nonrecurring charges of $201 million after taxes, or $1.17 per share, caused this significant decrease. Excluding these charges, income from continuing operations was $242.5 million, or $1.41 per share. Income from discontinued operations represents Gallaher's net income before the spin-off. It was $65.1 million, or 38 cents per share, in 1997, compared with $315.1 million, or $1.82 per share, for the full year 1996. In addition, the 1997 amount included $67.1 million in pre-tax spin-off expenses. (See Note 3.) In 1997 and 1996, we incurred the extraordinary items charges in purchasing or redeeming our debt. In 1997, the charge was $8.1 million ($12.4 million pre-tax), or five cents per share, and in 1996 the charge was $10.3 million ($15.8 million pre-tax), or six cents per share. (See Note 16.) Net income in 1997 of $98.5 million, or 57 cents per share, compared with $486.5 million, or $2.80 per share in 1996. HOME PRODUCTS 1998 Compared to 1997 Net sales increased $230.4 million, or 17%. The increase was attributable primarily to the acquisitions of Schrock cabinets in June 1998 and Donner bath products in December 1997 and the benefit of overall volume and price increases. The overall volume increase reflects line extensions and the introduction of new products, but was partially offset by volume declines in some existing products. Master Lock disposed of its door hardware business in early 1998 and Moen disposed of its operations in Japan in 1997, actions which tempered the segment's sales increase. All companies except Master Lock reported higher sales. Operating company contribution increased $29.6 million, up 13%. The increase principally reflects the increased sales, and was partially offset by a lower gross margin (principally lower margins at acquired companies) and increased operating expenses. Moen's higher volume-related selling programs, advertising and Y2K spending were the principal reasons for the increased operating expenses. Sales of our companies' home products are becoming increasingly concentrated in a smaller number of major customers, principally mass merchant superstores, home centers and large distributors and home builders. Our products also are increasingly facing competition on a value-priced basis. As the home building industry continues to consolidate, the growth of large mass merchants and home centers will continue to present us and our competitors with pricing and service challenges. It will also present opportunities for the most efficient manufacturers. 1997 Compared to 1996 Net sales increased $19.9 million, or 1%. The increase was the result of an overall volume increase partially offset by the absence of Moen's operations in Taiwan and Japan. This overall volume increase reflects line extensions and new products, partially offset by lower volume on some existing products. All companies except Master Lock reported higher sales. Operating company contribution increased $8.8 million, or 4%, on the sales increase and an improved gross margin. A more favorable product mix at Moen was the principal factor leading to the margin improvement. These increases were partially offset by higher operating expenses and unfavorable comparison to 1996's $2.2 million gain on the sale of Moen's joint venture in Taiwan. The increased operating expenses resulted from higher volume-related selling expenses at Moen and increased research and development expenses, but was partly offset by lower general and administrative expenses. Operating company contribution increased at all companies except Master Lock. Operating company contribution at Master Lock declined principally due to the January 1, 1997 average price reduction of 15% taken in response to a shift by mass merchants to competitors' value-priced imported products. OFFICE PRODUCTS 1998 Compared to 1997 Net sales increased $93.5 million, up 7%. The increase was primarily attributable to acquisitions made in each year as well as an overall volume increase. The sales increase was tempered by lower prices and the absence of two nonstrategic businesses sold in 1997. The overall volume increase reflects the introduction of new products, partially offset by volume declines in some existing 32 products. Excluding acquisitions and divestitures, net sales were down slightly because increases in North America and Continental Europe were more than offset by declines in Australia (largely due to lower average foreign exchange rates). Operating company contribution increased $5.9 million, up 5%. This increase reflects the sales increase and an improvement in gross margin, partially offset by higher operating expenses. The gross margin increase principally reflects stabilized raw material costs and other cost reductions, mostly offset by lower gross margins at acquired companies. The increased operating expenses reflected higher volume-related freight and distribution costs, higher customer service costs incurred to maintain customer service levels while undergoing restructuring programs, higher customer program costs, advertising and Y2K expenses. Operating company contribution benefited from the acquisitions and was hurt by lower average foreign exchange rates. The office products business is increasingly concentrated in a small number of major customers, principally office products superstores, wholesalers and contract stationers. The continuing consolidation of both competitors and customers is causing increased pricing pressures that have negatively affected results. The reduction in net prices, particularly in the fourth quarter of 1998, was compounded by the decision of several customers to reduce inventory levels. These conditions are expected to affect comparisons for the first half of 1999 and generally will continue to present challenges for our office products group and its competitors. They also will present opportunities for the most efficient manufacturers. 1997 Compared to 1996 Net sales increased $65.5 million, up 5%. An overall volume increase (new products, partly offset by volume declines in some existing products) primarily accounted for the increase. The increase was partially offset by lower prices and lower average foreign exchange rates. Acquisitions and nonstrategic divestitures largely offset one another. The majority of the sales increase occurred in North America and Europe, primarily reflecting higher Kensington computer accessories sales (new products) and higher Day-Timer time-management products sold through the retail channel. Operating company contribution increased $11.8 million, up 10%. This increase reflects the sales increase and an improved gross margin (reflecting manufacturing efficiencies in North America and Europe, stabilized raw material costs and a more favorable product mix). It was partially offset by higher operating expenses. The increased operating expenses principally reflected higher costs in the areas of North American customer programs; marketing, freight and distribution; research and development associated with the new products; and general and administration. GOLF PRODUCTS 1998 Compared to 1997 Net sales increased $51.3 million, up 6%. An overall volume increase in golf balls, clubs and gloves (new products and line extensions) and price increases primarily caused the increase. The increase was tempered by volume declines in golf shoes and irons and by trade incentives on existing club models in connection with introducing new product lines. Operating company contribution increased $4.7 million, up 3%. This increase primarily reflects the higher sales. It was partially offset by higher operating expenses, including increased advertising and promotional expenditures and research and development expenses associated with the support of existing products and the development of new products. The golf club market was adversely affected in 1998 by lower consumer demand, leading to increased inventory and price discounting. These changes led to an estimated revenue decline in the U.S. market in the range of 10 - 15%. Both the Titleist and Cobra brands were affected by the overall weakness in the market for irons, though both achieved volume gains in metal woods. Titleist golf club net sales were up on a favorable product mix and firm pricing. For Cobra, sales results were more in line with the overall market trend and profits declined significantly, particularly in the second half of the year. Conditions in the club market and the overall inventory levels are likely to affect comparisons in 1999. Aggressive actions are underway to bring Cobra expenses in line with lower demand and to identify further synergies between Titleist and Cobra. The United States Golf Association establishes standards for golf equipment used in competitive play in the United States. On November 2, 1998, the USGA announced the immediate implementation of a new rule with respect to the performance of golf clubs. We believe that most or all of our group's golf products currently marketed and under development will conform to this new rule. In the long term, this new rule could hamper innovation and make it more difficult to use technological advances to produce USGA conforming products. However, it is not possible to determine whether in the long term this new rule will have a material effect on the golf club industry and on our golf products segment. The USGA has also announced its intention to propose a new rule in the spring of 1999 addressing the initial velocity and overall distance standard for golf balls. Until more details regarding the proposed rule change become available, we cannot determine whether it would have an effect on our group's golf ball business and/or the golf ball industry. Taylor Made Golf and Nike have recently introduced golf balls into their product offerings. Callaway Golf announced it intends to do so in the near future. Each company has significant brand awareness in the golf market that could encourage purchases of their respective golf ball products by the trade 33 RESULTS OF OPERATIONS FORTUNE BRANDS, INC. AND SUBSIDIARIES and by consumers. It is not possible to predict what effect, if any, the Callaway, Taylor Made and Nike golf balls will have on our or our competitors' businesses. 1997 Compared to 1996 Net sales were up $100.2 million, or 12%. Line extensions and new products, volume increases in golf balls, clubs, gloves and shoes and one additional month of Cobra results in 1997 (acquired January 24, 1996) primarily caused the increase. The trade incentives on existing club models in connection with introducing new product lines and lower average foreign exchange rates partially offset the increase. Operating company contribution increased $12.9 million, or 10%, reflecting the higher sales. The OCC increase was tempered by a shift in product mix and increases in material costs, advertising and promotional expenditures and research and development expenses associated with the development of new products. Spirits And Wine 1998 Compared to 1997 Net sales increased $21.2 million, up 2%. Price and overall volume increases and the benefit of the Geyser Peak wine business (acquired August 1998) were the primary drivers of this growth. The increase was partially offset by lower average foreign exchange rates and the unfavorable comparison to a one-time domestic bulk sale in 1997. The overall volume increase principally reflected higher case shipments in the U.S. (benefits from reduced trade inventories in late 1997), Australia and Canada, line extensions and new products. Volume in Europe was lower. Operating company contribution increased $11.7 million, up 5%. The sales increase and an improved gross margin (principally reflecting price increases and more favorable product mix) were the primary reasons for this increase. Increased operating expenses, chiefly increased domestic brand spending on Jim Beam bourbon, DeKuyper cordials and Small Batch Bourbons, tempered the amount of the OCC increase. Operating results improved in North America and Europe. Australian results declined primarily because the average foreign exchange rate was 15% lower than the prior year. The merger of Grand Metropolitan PLC and Guinness PLC to create Diageo PLC in late 1997 may reflect a trend towards consolidation in the highly competitive global spirits business. The creation of Diageo PLC and the breadth of its portfolio, as well as continued consolidation of the supplier, distributor and retailer tiers, may present pricing and service challenges for our subsidiaries and their competitors. It may also present opportunities, particularly for the most efficient competitors. Beverage alcohol sales are particularly sensitive to higher excise tax rates. In the past, governments raised excise taxes in our operating companies' two largest markets, the U.S. and the U.K. Although no such increases are presently pending, the possibility of future increases cannot be ruled out. In addition, previously there has been discussion and legislation introduced to ban U.S. television advertising of spirits. Although no legislation is pending or has been enacted, most TV networks and local affiliated stations in the U.S. currently decline to accept distilled spirits advertising. Our operating subsidiaries outside the U.S. have conducted broadcast advertising in markets where legal. It is impossible to predict any future U.K. and U.S. excise tax increases, as well as any restrictions on advertising. If they occur, they may have an adverse effect on unit sales and industry trends. Through 1995, consumption of distilled spirits declined in many countries, including our major market, the U.S. However, since 1996, consumption in the U.S. has been steady or increased slightly, indicating that the historic decline may be reversing. Since 1996, our depletions (sales from distributors to retailers) have declined. In 1998, total depletions were down slightly in the U.S., although the rate of decline slowed from prior years, and depletions of Jim Beam bourbon and DeKuyper cordials increased. The decline in the total number of cases we sold may be due to our historic concentration on mid-to-low priced products that may not be benefiting from the factors influencing the recent industry trends. The number of cases sold also may be affected by price increases we have taken in recent years to increase profits as compared to unit sales. 1997 Compared to 1996 Net sales decreased $58.8 million, down 5%. Lower volume and inclusion of an additional month of sales for the U.K. operations in 1996 (change to calendar year-end added $34.3 million) primarily caused the decrease. Price increases, new products and line extensions, the benefit from a one-time domestic bulk sale in 1997 and higher average foreign exchange rates partially offset the sales decrease. The volume declines reflect lower case shipments in the U.S., in part to reduce trade inventories, and fewer case shipments in the U.K. These volume declines were partially offset by higher case shipments in selected international markets (principally Australia and Germany) for Jim Beam bourbon and pre-mixed cocktails, higher case shipments in Canada, line extensions and new products. Operating company contribution increased $13.1 million, up 5%. The increase was led by an improved product mix, price increases and lower operating expenses (lower advertising and promotional support on selected brands and effective cost controls). Operating results improved in North America, Australia and the U.K. In North America the reason was price increases and lower brand support spending, partially offset by lower U.S. case shipments. In Australia, the reason was higher volume, partially offset by unfavorable average foreign exchange rates. In the U.K., lower operating expenses, partly offset by lower volume caused the increase. The inclusion of an additional month of U.K. operations in 1996 immaterially affected operating company contribution. 34 QUARTERLY FINANCIAL DATA (unaudited) FORTUNE BRANDS, INC. AND SUBSIDIARIES
(In millions, except per share amounts) 1998 1st 2nd 3rd 4th - --------------------------------------------------------------------------------------------- Net sales $ 1,203.5 $ 1,326.2 $ 1,300.3 $ 1,410.9 Gross profit 497.7 545.8 511.8 574.0 Operating company contribution 168.1 209.2 183.5 237.5 Income from continuing operations $ 53.0 $ 87.9 $ 56.8 $ 95.9 Extraordinary items (8.4) (22.1) -- -- - --------------------------------------------------------------------------------------------- Net income $ 44.6 $ 65.8 $ 56.8 $ 95.9 - --------------------------------------------------------------------------------------------- Earnings per Common share Basic Continuing operations $ .31 $ .50 $ .33 $ .56 Extraordinary items (.05) (.13) -- -- - --------------------------------------------------------------------------------------------- Net income $ .26 $ .37 $ .33 $ .56 - --------------------------------------------------------------------------------------------- Diluted Continuing operations $ .30 $ .50 $ .32 $ .55 Extraordinary items (.05) (.13) -- -- - --------------------------------------------------------------------------------------------- Net income $ .25 $ .37 $ .32 $ .55 ============================================================================================= 1997 1st 2nd 3rd 4th - --------------------------------------------------------------------------------------------- Net sales $ 1,105.1 $ 1,235.5 $ 1,185.5 $ 1,318.4 Gross profit 448.6 469.0 452.6 515.2 Operating company contribution 151.9 195.1 172.9 226.5 Income (loss) from continuing operations(1) $ 35.0 $ 4.3 $ 28.0 $ (25.8) Income (loss) from discontinued operations 101.6 (36.5) -- -- Extraordinary items -- -- -- (8.1) - --------------------------------------------------------------------------------------------- Net income (loss) $ 136.6 $ (32.2) $ 28.0 $ (33.9) - --------------------------------------------------------------------------------------------- Earnings per Common share Basic Continuing operations(1) $ .20 $ .03 $ .16 $ (.15) Discontinued operations .60 (.22) -- -- Extraordinary items -- -- -- (.05) - --------------------------------------------------------------------------------------------- Net income $ .80 $ (.19) $ .16 $ (.20) - --------------------------------------------------------------------------------------------- Diluted Continuing operations(1) $ .20 $ .02 $ .16 $ (.15) Discontinued operations .58 (.20) -- -- Extraordinary items -- -- -- (.05) - --------------------------------------------------------------------------------------------- Net income $ .78 $ (.18) $ .16 $ (.20) =============================================================================================
(1) In 1997, income (loss) from continuing operations and basic and diluted earnings per Common share reflected restructuring and other nonrecurring charges of $65.4 million ($89.3 million pre-tax) and 38 cents and 38 cents in the second quarter, $23 million ($38.1 million pre-tax) and 13 cents and 12 cents in the third quarter, and $112.6 million ($170.8 million pre-tax) and 66 cents and 66 cents in the fourth quarter, respectively. (See Note 14.) 35 FINANCIAL CONDITION FORTUNE BRANDS, INC. AND SUBSIDIARIES CASH FLOW Net Cash Provided from Continuing Operating Activities Net cash provided from continuing operating activities in 1998 was $404.2 million. This compared with $426.3 million in 1997. Increases in various components of working capital principally caused the decrease in net cash provided. Higher operating company contribution and lower interest expense partly offset the increase in working capital. Net Cash Used by Investing Activities Net cash used by investing activities in 1998 was $502.8 million. This compared with $227.6 million in 1997. Capital expenditures. We focus our capital spending on becoming the lowest cost producers of the highest quality products. Capital expenditures in 1998 were $251.9 million as compared with $196.9 million in 1997. This includes $64.7 million in 1998 and $5.5 million in 1997 related to the 1997 restructuring (principally land and buildings related to transferring operations to Mexico). See Note 15 for capital expenditures. We estimate the 1999 capital expenditures to be $240 million. We expect to generate these funds internally. Acquisitions. In 1998, we acquired Apollo Presentation Products, Schrock Cabinet Company and Geyser Peak Winery for a total of $271.8 million, net of cash acquired. In 1997, we acquired five companies for $84.6 million, net of cash acquired. In 1996, our acquisitions, net of cash acquired, amounted to $700.3 million, principally Cobra Golf. See Note 2 for acquisitions. Dispositions. In 1998, Master Lock Company disposed of its door hardware business for $17 million. In 1997, we disposed of two nonstrategic businesses for a total of $48 million. Net Cash Provided (Used) by Financing Activities Net cash provided by financing activities in 1998 was $90.2 million. This compared with $1.5 billion of net cash used in 1997. At the time of the spin-off, Gallaher paid us an amount that approximated $1.25 billion, after taxes. We used a portion of these proceeds to repay debt in 1997. The purchases of our Common stock, including those shares purchased pursuant to the systematic share purchase program approved in 1997, amounted to $112 million during 1998, as compared with $90 million during 1997. Cash Provided by Discontinued Operations To allocate the overall debt burden of the Company at the time of the Gallaher spin-off in 1997, Gallaher borrowed and paid to us approximately $1.25 billion, after taxes. As mentioned above, we used a portion of the proceeds to pay down debt. DIVIDENDS We paid dividends in 1998 of $.85 per Common share. Dividends paid to Common stockholders in 1998 decreased to $146.5 million from $242.3 million. We paid the lower dividends in 1998 because we reset the dividend rate in 1997 to an indicated annual rate of $.80 per share when we spun off Gallaher. On December 1, 1997, we increased the Common stock quarterly dividend by 5% to $.21 per share, or an indicated annual rate of $.84 per share. On December 1, 1998 we increased it again by 5% to $.22 per share, or an indicated annual rate of $.88 per share. FINANCIAL POSITION At December 31, 1998, total debt increased $342.7 million to $1.5 billion. Short-term debt increased $100.1 million and long-term debt increased $242.6 million. Our total debt to total capital ratio increased to 26.6% at year end 1998 from 22.2% at year end 1997. During 1998, we issued $200 million of 65/8% Debentures, Due 2028 and $200 million of 61/4% Notes, Due 2008. In 1998, we purchased or redeemed $175.1 million principal amount of our debt, and in 1997 we purchased $95.8 million. (See Note 16.) At December 31, 1998, $450 million of debt securities were available for public sale under our shelf registration with the Securities and Exchange Commission. At year end 1998, we had $2.5 billion of long-term credit facilities, substantially all of which remained unused. These facilities are available for general corporate purposes, including acquisitions. They also support our short-term borrowings in the commercial paper market. We believe that our internally generated funds, together with access to global credit markets, are more than adequate to meet our capital needs. Working capital increased to $420.7 million in 1998 from $327.1 million in 1997. Increases in accounts receivable and inventories, primarily resulting from the 1998 acquisitions, were the principal causes for the increase, but higher levels of short-term debt tempered the increase. The increase in inventories also reflects the customer inventory reduction programs in office products and lower consumer demand in the golf club market. We believe that our 1998 working capital level was adequate to support continued growth. 36 FOREIGN EXCHANGE We have investments in various foreign countries, principally the United Kingdom, as well as Australia and Canada. Therefore, changes in the value of the currencies of these countries affect our balance sheet and cash flow statements when translated into U.S. dollars. MARKET RISK We are exposed to various market risks, including changes in foreign currency exchange rates and interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates and interest rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes. We enter into financial instruments to manage and reduce the impact of changes in foreign currency exchange rates and interest rates. The counterparties are major financial institutions. Foreign Exchange Contracts We enter into forward foreign exchange contracts principally to hedge the currency fluctuations in transactions denominated in foreign currencies. These contracts limit the risk that would otherwise result from changes in exchange rates. We primarily hedge short-term intercompany loans, intercompany purchases and dividends declared by foreign operating companies. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. We reflect any gains and losses on forward foreign exchange contracts and the offsetting losses and gains from hedged transactions on our income statement. At December 31, 1998, we had outstanding forward foreign exchange contracts to purchase $35 million and sell $201 million of various currencies (principally pound sterling) with a weighted average maturity of 110 days. At December 31, 1997, we had outstanding forward foreign exchange contracts to purchase $72 million and sell $164 million in various currencies (principally pound sterling) with a weighted average maturity of 121 days. The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. At December 31, 1998 and 1997, the fair value of all outstanding contracts and the contract amounts were essentially the same. A 10% fluctuation in exchange rates for these currencies would change the fair value by approximately $17 million and $9 million, respectively. However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts will equal the changes in the underlying value of the transactions being hedged. Interest Rates We enter into interest rate swap agreements in order to manage our exposure to interest rate changes. The swaps involve the exchange of fixed and variable interest rate payments without exchanging the notional principal amount. We record the payments or receipts on the agreements as adjustments to interest expense. At December 31, 1998 and 1997, we had outstanding interest rate swap agreements denominated in dollars, maturing at various dates in 1999, with an aggregate notional principal amount of $200 million. Under these agreements, we receive a floating rate based on thirty day commercial paper rates and pay a fixed interest rate. These swaps effectively convert our interest rate on $200 million of debt from a variable rate into a fixed rate. The fair value of these interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements. At December 31, 1998, we would have paid $4.2 million to terminate the agreements, compared with $6.6 million in 1997. If the thirty day commercial paper rates decreased 1%, it would increase the amount paid by approximately $1 million at December 31, 1998 and $3 million at December 31, 1997. We based the fair value on dealer quotes, considering current interest rates. The fair market value of long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The estimated fair value of our total long-term debt (including current portion) at December 31, 1998 was $1,252.3 million; in 1997 it was $1,013 million. If the prevailing interest rates at December 31, 1998 and 1997 increased by 1%, that would result in the fair value of our total long-term debt decreasing by approximately $76 million and $51 million, respectively. We based fair values on quoted market prices, where available, and on investment bankers' quotes using current interest rates considering credit ratings and the remaining terms to maturity. See Notes 1 and 13 for a discussion of the accounting policies for Derivative Financial Instruments and information on Financial Instruments, respectively. STOCKHOLDERS' EQUITY Stockholders' equity at year end 1998 increased $80.4 million to $4.1 billion. This increase principally reflects net income partially offset by dividends to stockholders and purchases of Common shares. During 1998 and 1997, pursuant to a systematic share purchase program and other open market purchases, we purchased 3.4 million and 2.5 million shares of Common stock, respectively. At its July 29, 1997 meeting, our Board of Directors authorized a systematic share purchase program principally to cover future stock option exercises and other stock awards. 37 FINANCIAL CONDITION FORTUNE BRANDS, INC. AND SUBSIDIARIES CAUTIONARY STATEMENT This annual report contains statements relating to future results. They are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. We caution readers that these forward-looking statements speak only as of the date hereof. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to: o changes in general economic conditions, o foreign exchange rate fluctuations, o competitive product and pricing pressures, o the impact of excise tax increases with respect to distilled spirits, o regulatory developments, o the uncertainties of litigation, o changes in golf equipment regulatory standards, o the impact of weather, particularly on the home products and golf brand groups, o expenses and disruptions related to shifts in manufacturing to different locations and sources, o delays in the integration of recent acquisitions, o the timely resolution of the Year 2000 issue, and o other risks and uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings. QUARTERLY COMMON STOCK DIVIDEND PAYMENTS Fortune Brands American Brands ---------------------------------------- 1998 1997* 1997 - -------------------------------------------------------------------------------- Payment date Per share Per share Per share - -------------------------------------------------------------------------------- March 1 $ .21 $ -- $ .50 June 1 .21 -- .50 September 1 .21 .20 -- December 1 .22 .21 -- - -------------------------------------------------------------------------------- $ .85 $ 1.41 ================================================================================ QUARTERLY COMPOSITE COMMON STOCK PRICES Fortune Brands American Brands ------------------------------------------------------------------ 1998 1997* 1997 - -------------------------------------------------------------------------------- High Low High Low High Low - -------------------------------------------------------------------------------- First 411 3/16 35 -- -- 53 7/8 48 3/8 Second 42 1/4 35 9/16 38 30 1/2 56 47 3/4 Third 391 5/16 25 1/4 37 5/16 32 5/8 -- -- Fourth 36 5/16 26 3/8 37 5/8 30 3/8 -- -- ================================================================================ * From June 2, 1997, our initial trading date as Fortune Brands. Our Common stock is listed on the New York Stock Exchange, its principal market. The high and low prices are as reported in the consolidated transaction reporting system. 38 CONSOLIDATED STATEMENT OF INCOME FORTUNE BRANDS, INC. AND SUBSIDIARIES
For years ended December 31 (In millions, except per share amounts) 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- Net sales $ 5,240.9 $ 4,844.5 $ 4,717.7 Cost of products sold 2,667.9 2,540.4 2,401.1 Excise taxes on spirits and wine 443.7 418.7 453.2 Advertising, selling, general and administrative expenses 1,401.5 1,301.6 1,249.5 Amortization of intangibles 108.2 104.2 102.7 Restructuring charges -- 209.1 -- Interest and related expenses 102.7 116.7 165.5 Other (income) expenses, net 5.0 14.1 6.1 - -------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 511.9 139.7 339.6 Income taxes 218.3 98.2 157.9 - -------------------------------------------------------------------------------------------------------- Income from continuing operations 293.6 41.5 181.7 Income from discontinued operations -- 65.1 315.1 Extraordinary items (30.5) (8.1) (10.3) - -------------------------------------------------------------------------------------------------------- Net income $ 263.1 $ 98.5 $ 486.5 ======================================================================================================== Earnings per Common share Basic Income from continuing operations $ 1.70 $ .24 $ 1.04 Income from discontinued operations -- .38 1.82 Extraordinary items (.18) (.05) (.06) - -------------------------------------------------------------------------------------------------------- Net income $ 1.52 $ .57 $ 2.80 ======================================================================================================== Diluted Income from continuing operations $ 1.67 $ .23 $ 1.03 Income from discontinued operations -- .38 1.79 Extraordinary items (.18) (.05) (.06) - -------------------------------------------------------------------------------------------------------- Net income $ 1.49 $ .56 $ 2.76 ======================================================================================================== Dividends paid per Common share $ .85 $ 1.41 $ 2.00 ======================================================================================================== Average number of Common shares outstanding Basic 172.2 171.6 173.3 ======================================================================================================== Diluted 176.2 173.3 176.1 ========================================================================================================
See Notes to Consolidated Financial Statements.39 39 CONSOLIDATED BALANCE SHEET FORTUNE BRANDS, INC. AND SUBSIDIARIES
December 31 (In millions, except per share amounts) 1998 1997 - ------------------------------------------------------------------------------------------ ASSETS Current assets Cash and cash equivalents $ 40.3 $ 54.2 Accounts receivable less allowances for discounts, doubtful accounts and returns, 1998 $61.4; 1997 $54.3 919.9 862.0 Inventories Bulk whiskey 338.0 338.1 Other raw materials, supplies and work in process 280.8 258.7 Finished products 468.8 358.4 - ------------------------------------------------------------------------------------------ 1,087.6 955.2 Other current assets 217.5 224.2 - ------------------------------------------------------------------------------------------ Total current assets 2,265.3 2,095.6 - ------------------------------------------------------------------------------------------ Property, plant and equipment Land and improvements 76.8 65.8 Buildings and improvements to leaseholds 529.8 494.8 Machinery and equipment 1,389.0 1,262.7 Construction in progress 165.3 106.8 - ------------------------------------------------------------------------------------------ 2,160.9 1,930.1 Less accumulated depreciation 1,041.0 949.2 - ------------------------------------------------------------------------------------------ Property, plant and equipment, net 1,119.9 980.9 Intangibles resulting from business acquisitions, net of cumulative amortization, 1998 $857.1; 1997 $747.7 3,761.3 3,674.1 Other assets 213.2 191.9 - ------------------------------------------------------------------------------------------ Total assets $7,359.7 $6,942.5 ==========================================================================================
See Notes to Consolidated Financial Statements.39 40
1998 1997 - ------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable to banks $ 71.5 $ 36.8 Commercial paper 249.9 191.6 Current portion of long-term debt 183.3 176.2 Accounts payable 274.9 254.6 Accrued taxes 472.4 475.2 Accrued expenses and other liabilities 592.6 634.1 - ------------------------------------------------------------------------------------------ Total current liabilities 1,844.6 1,768.5 - ------------------------------------------------------------------------------------------ Long-term debt 981.7 739.1 Deferred income taxes 49.9 38.5 Postretirement and other liabilities 386.0 379.3 - ------------------------------------------------------------------------------------------ Total liabilities 3,262.2 2,925.4 - ------------------------------------------------------------------------------------------ Stockholders' equity $2.67 Convertible Preferred stock 10.5 11.3 Common stock, par value $3.125 per share, 229.6 shares issued 717.4 717.4 Paid-in capital 147.6 151.1 Accumulated other comprehensive income 4.7 6.9 Retained earnings 5,245.4 5,129.7 Treasury stock, at cost (2,028.1) (1,999.3) - ------------------------------------------------------------------------------------------ Total stockholders' equity 4,097.5 4,017.1 - ------------------------------------------------------------------------------------------ Total liabilities and stockholders' equity $7,359.7 $6,942.5 ==========================================================================================
41 CONSOLIDATED STATEMENT OF CASH FLOWS FORTUNE BRANDS, INC. AND SUBSIDIARIES
For years ended December 31 (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Operating activities Net income $ 263.1 $ 98.5 $ 486.5 Income from discontinued operations -- (65.1) (315.1) Extraordinary items 30.5 8.1 10.3 Restructuring charges -- 209.1 -- Depreciation and amortization 251.1 242.7 238.3 (Increase) decrease in accounts receivable (38.0) 29.8 (74.4) (Increase) decrease in inventories (89.7) 31.9 (34.2) Increase in other assets (20.6) (4.5) (5.1) Increase (decrease) in accrued taxes 38.6 (27.8) 43.4 (Decrease) increase in accounts payable, accrued expenses and other liabilities (63.1) (16.0) 20.3 Increase (decrease) in deferred income taxes 44.0 (74.8) (1.6) Other operating activities, net (11.7) (5.6) (34.9) - ------------------------------------------------------------------------------------------------- Net cash provided from continuing operating activities 404.2 426.3 333.5 - ------------------------------------------------------------------------------------------------- Investing activities Additions to property, plant and equipment (251.9) (196.9) (199.7) Acquisitions, net of cash acquired (271.8) (84.6) (700.3) Proceeds from the disposition of property, plant and equipment 6.5 5.5 14.5 Proceeds from the disposition of operations, net of cash 17.0 48.0 5.9 Other investing activities, net (2.6) 0.4 12.3 - ------------------------------------------------------------------------------------------------- Net cash used by investing activities (502.8) (227.6) (867.3) - ------------------------------------------------------------------------------------------------- Financing activities Increase (decrease) in short-term debt, net 92.8 (506.4) 670.7 Issuance of long-term debt 624.1 18.6 604.7 Repayment of long-term debt (376.0) (756.0) (421.0) Dividends to stockholders (147.4) (243.4) (348.4) Cash purchases of Common stock for treasury (112.0) (90.0) (444.3) Other financing activities, net 8.7 82.3 34.2 - ------------------------------------------------------------------------------------------------- Net cash provided (used) by financing activities 90.2 (1,494.9) 95.9 - ------------------------------------------------------------------------------------------------- Effect of foreign exchange rate changes on cash (5.5) (6.4) (3.6) Cash provided by discontinued operations -- 1,321.9 244.4 - ------------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents $ (13.9) $ 19.3 $ (197.1) ================================================================================================= Cash and cash equivalents at beginning of year $ 54.2 $ 34.9 $ 232.0 Cash and cash equivalents at end of year $ 40.3 $ 54.2 $ 34.9 ================================================================================================= Cash paid during the year for Interest, net of capitalized amount $ 211.8 $ 126.1 $ 193.8 Income taxes $ 124.1 $ 300.6 $ 132.942 =================================================================================================
See Notes to Consolidated Financial Statements. 42 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FORTUNE BRANDS, INC. AND SUBSIDIARIES
$2.67 Accumulated Convertible Other Treasury Preferred Common Paid-in Comprehensive Retained Stock, (In millions) Stock Stock Capital Income Earnings at Cost Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 $ 14.1 $ 717.4 $ 171.6 $ (247.8) $ 4,887.3 $ (1,678.6) $ 3,864.0 Comprehensive income Net income -- -- -- -- 486.5 -- 486.5 Changes during the year -- -- -- 43.7 -- -- 43.7 - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income -- -- -- 43.7 486.5 -- 530.2 Dividends -- -- -- -- (348.4) -- (348.4) Purchases -- -- -- -- -- (444.3) (444.3) Conversion of preferred stock and delivery of stock plan shares (1.2) -- (5.1) -- -- 80.8 74.5 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 12.9 717.4 166.5 (204.1) 5,025.4 (2,042.1) 3,676.0 Comprehensive income Net income -- -- -- -- 98.5 -- 98.5 Changes during the year -- -- -- (49.7) -- -- (49.7) - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income -- -- -- (49.7) 98.5 -- 48.8 Dividends -- -- -- -- (243.4) -- (243.4) Purchases -- -- -- -- -- (86.2) (86.2) Conversion of preferred stock and delivery of stock plan shares (1.6) -- (15.3) -- -- 119.4 102.5 Shares issued in connection with an acquisition -- -- (0.1) -- -- 9.6 9.5 Gallaher spin-off -- -- -- 260.7 249.2 -- 509.9 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 11.3 717.4 151.1 6.9 5,129.7 (1,999.3) 4,017.1 Comprehensive income Net income -- -- -- -- 263.1 -- 263.1 Changes during the year -- -- -- (2.2) -- -- (2.2) - ---------------------------------------------------------------------------------------------------------------------------------- Total comprehensive income -- -- -- (2.2) 263.1 -- 260.9 Dividends -- -- -- -- (147.4) -- (147.4) Purchases -- -- -- -- -- (112.2) (112.2) Conversion of preferred stock and delivery of stock plan shares (0.8) -- (3.5) -- -- 83.4 79.1 - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 10.5 $ 717.4 $ 147.6 $ 4.7 $ 5,245.4 $ (2,028.1) $4,097.543 ==================================================================================================================================
See Notes to Consolidated Financial Statements.43 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FORTUNE BRANDS, INC. AND SUBSIDIARIES 1 SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. The consolidated financial statements are prepared in conformity with generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses for the reporting periods. Actual results for future periods could differ from those estimates. Cash and Cash Equivalents Highly liquid investments with an original maturity of three months or less are included in cash and cash equivalents. Inventories Inventories are priced at the lower of cost (principally first-in, first-out, and average and minor amounts at last-in, first-out) or market. In accordance with generally recognized trade practice, bulk whiskey inventories are classified as current assets, although part of such inventories, due to the duration of aging processes, ordinarily will not be sold within one year. Property, Plant and Equipment Property, plant and equipment are carried at cost. Depreciation is provided, principally on a straight-line basis, over the estimated useful lives of the assets. Gains or losses resulting from dispositions are included in income. Betterments and renewals which improve and extend the life of an asset are capitalized; maintenance and repair costs are expensed. Intangibles Resulting From Business Acquisitions Intangibles resulting from business acquisitions, comprising cost in excess of net assets of businesses acquired, and brands and trademarks, are being amortized on a straight-line basis over 40 years, except for intangibles acquired prior to 1971, which are not being amortized because they are considered to have a continuing value over an indefinite period. The Company periodically evaluates the recoverability of intangibles resulting from business acquisitions and measures the amount of impairment, if any, by assessing current and future levels of income and undiscounted cash flows as well as other factors, such as business trends, prospects and market and economic conditions. Advertising Costs Advertising costs, which amounted to $318.6 million, $303 million and $290.2 million in 1998, 1997 and 1996, respectively, are principally charged to expense as incurred. Research and Development Research and development expenses, which amounted to $54 million, $46.6 million and $34.2 million in 1998, 1997 and 1996, respectively, are charged to expense as incurred. Income Taxes Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries, aggregating approximately $214.1 million at December 31, 1998, as such earnings are expected to be permanently reinvested in these companies. Foreign Currency Translation Foreign currency balance sheet accounts are translated into U.S. dollars at the rates of exchange at the balance sheet date. Income and expenses are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to a separate component of the "Accumulated other comprehensive income" caption in stockholders' equity. Derivative Financial Instruments Derivative financial instruments are utilized by the Company to reduce foreign currency exchange and interest rate risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes. Gains and losses on forward foreign exchange contracts used to hedge the currency fluctuations on transactions denominated in foreign currencies and the offsetting losses and gains on hedged transactions are recorded in the "Other (income) expenses, net" caption in the income statement. Gains and losses on forward foreign exchange contracts used to hedge a portion of the Company's investment in foreign subsidiaries and the offsetting losses and gains on the portion of the investment being hedged are recorded in the "Accumulated other comprehensive income" caption in stockholders' equity. Payments or receipts on interest rate swap agreements are recorded in the "Interest and related expenses" caption in the income statement. 44 Recently Issued Accounting Standards In June 1998, FAS Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued, to be effective January 1, 2000. FAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. The Company is in the process of evaluating the effect of adoption on its financial condition and the disclosure requirements under this standard. 2 ACQUISITIONS During 1998, acquisitions were made in home products, office products and spirits and wine segments for an aggregate cost of $271.8 million, including fees and expenses. In connection with these acquisitions, liabilities amounting to $51 million were included at the dates of acquisition. The cost exceeded the fair value of net assets acquired by $193.7 million. During 1997, acquisitions were made in the home and office products segments for an aggregate cost of $92 million, including fees, expenses and $9.5 million resulting from the issuance of Common shares. In connection with the 1997 acquisitions, liabilities amounting to $72 million were included at the dates of acquisition. The cost exceeded the fair value of net assets acquired by $90 million. In January 1996, Cobra Golf Incorporated was acquired for an aggregate cost of $712 million in cash, including fees and expenses. In connection with this acquisition, liabilities amounting to $60 million were included at the date of acquisition. The cost exceeded the fair value of net assets acquired by $657 million. These operations have been included in consolidated results from the dates of acquisition. Had the acquisitions been consolidated at the beginning of the year prior to the acquisitions, they would not have materially affected results. 3 DISCONTINUED OPERATIONS On May 30, 1997, Gallaher Group Plc ("Gallaher"), the Company's international tobacco subsidiary, was spun off and the Company's name was changed from American Brands, Inc. to Fortune Brands, Inc. As a result, the Company's stockholders owned shares in two publicly-traded companies -- Fortune Brands, Inc. and Gallaher. To allocate the overall debt burden of the Company at the time of the spin-off, Gallaher borrowed and paid to the Company an amount that approximated $1.25 billion, after taxes. The Company used the proceeds to pay down debt. Also, in connection with the spin-off, Gallaher and Gallaher Limited agreed to indemnify the Company against claims arising from smoking and health and fire safe cigarette matters relating to the tobacco business of Gallaher and its subsidiaries. The consolidated financial statements were reclassified to identify Gallaher's international tobacco operations as discontinued operations for all periods. Summarized data for the discontinued operations, net of allocation of interest expense based on a ratio of Gallaher's net assets to consolidated net assets of the Company, is as follows: Results of Operations (In millions, except per share amounts) 1997(a) 1996 - ------------------------------------------------------------------------------- Net sales $ 2,575.0 $ 6,861.6 - ------------------------------------------------------------------------------- Income before taxes $ 186.4 $ 484.7 Spin-off expenses (67.1) -- Income taxes (54.2) (169.6) - ------------------------------------------------------------------------------- Income from discontinued operations $ 65.1 $ 315.1 =============================================================================== Earnings per Common share Basic $ .38 $ 1.82 =============================================================================== Diluted $ .38 $ 1.79 =============================================================================== (a) Includes results through May 30, 1997. 4 SHORT-TERM BORROWINGS AND CREDIT FACILITIES At December 31, 1998 and 1997, there were $321.4 million and $228.4 million of short-term borrowings outstanding, respectively, comprised of notes payable to banks and commercial paper. The weighted average interest rate on these borrowings was 5.3% and 5.7%, respectively. At December 31, 1998 and 1997, there were $40.8 million and $26.4 million outstanding under committed bank credit agreements, which provide for unsecured borrowings of up to $56 million and $63 million, respectively, for general corporate purposes, including acquisitions. In addition, the Company had uncommitted bank lines of credit, which provide for unsecured borrowings for working capital of up to $28 million of which $20.4 million was outstanding at year end. See Note 13 for a description of the Company's use of financial instruments. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FORTUNE BRANDS, INC. AND SUBSIDIARIES 5 LONG-TERM DEBT The components of long-term debt are as follows: (in millions) 1998 1997 - -------------------------------------------------------------------------------- Notes payable(a) $ 200.0 $ -- Revolving credit notes(a) 16.6 18.5 Other notes(b) 11.0 101.0 61/4% Notes, Due 2008 200.0 -- 65/8% Debentures, Due 2028 200.0 -- 81/2% Notes, Due 2003(c) 106.9 157.3 85/8% Debentures, Due 2021(c) 90.9 123.6 77/8% Debentures, Due 2023 150.0 150.0 71/2% Notes, Due 1999(c) 118.6 150.0 9% Notes, Due 1999(c) 62.8 73.3 91/4% Eurosterling Notes, Due 1998 -- 82.5 121/2% Sterling Loan Stock, Due 2009(c) -- 49.4 Miscellaneous 8.2 9.7 - -------------------------------------------------------------------------------- 1,165.0 915.3 Less current portion 183.3 176.2 - -------------------------------------------------------------------------------- $ 981.7 $ 739.1 ================================================================================ (a) The Company maintains revolving credit agreements expiring in 2002 with various banks, which provide for unsecured borrowings of up to $2.5 billion. The interest rate is set at the time of each borrowing. A commitment fee of .10% per annum is paid on the unused portion. The fee is subject to increases up to a maximum of .20% per annum in the event the Company's long-term debt rating falls below specified levels. Borrowings under these agreements may be made for general corporate purposes, including acquisitions and support for the Company's short-term borrowings in the commercial paper market. The Company, in the event that it becomes advisable, intends to exercise its rights under these agreements to refinance $200 million of short-term notes payable; accordingly, short-term notes payable in this amount have been classified as long-term debt at December 31, 1998. (b) The Other notes mature in 2001, with a weighted average coupon of 8.8 %. (c) See Note 16. Estimated payments for maturing debt during the next five years are as follows: 1999, $183.3 million; 2000, $3.4 million; 2001, $13 million; 2002, $216.5 million; and 2003, $107.6 million. 6 $2.67 CONVERTIBLE PREFERRED STOCK -- REDEEMABLE AT COMPANY'S OPTION Shares of the $2.67 Convertible Preferred stock issued and outstanding at December 31, 1998, 1997 and 1996 were 344,831 shares, 369,939 shares and 422,732 shares, respectively. Reacquired, redeemed or converted authorized shares that are not outstanding are required to be retired or restored to the status of authorized but unissued shares of preferred stock without series designation. The holders of $2.67 Convertible Preferred stock are entitled to cumulative dividends, three-tenths of a vote per share (in certain events, to the exclusion of the Common shares), preference in liquidation over holders of Common stock of $30.50 per share plus accrued dividends and convert each share of such stock into 6.205 shares of Common stock. Authorized but unissued Common shares are reserved for issuance upon such conversions, but treasury shares may be and are delivered. Shares converted were 25,108 shares, 52,793 shares and 38,276 shares during 1998, 1997 and 1996, respectively. The Company may redeem such Preferred stock at a price of $30.50 per share, plus accrued dividends. A cash dividend of $2.67 per share in the aggregate amounts of $0.9 million, $1.1 million and $1.2 million was paid in each of the years ended December 31, 1998, 1997 and 1996, respectively. 7 CAPITAL STOCK The Company has 750 million authorized shares of Common stock and 60 million authorized shares of preferred stock. There were 170,884,270 and 171,855,989 Common shares outstanding at December 31, 1998 and 1997, respectively. The cash dividends paid on the Common stock for the years ended December 31, 1998, 1997 and 1996 aggregated $146.5 million, $242.3 million and $347.2 million, respectively. Treasury shares purchased and received as consideration for stock options exercised amounted to 3,444,180 shares in 1998, 2,507,737 shares in 1997 and 10,108,848 shares in 1996. Treasury shares delivered in connection with exercise of stock options and grants of other stock awards and conversion of preferred stock and debentures amounted to 2,472,461 shares in 1998, 3,521,779 shares in 1997 and 2,544,262 shares in 1996. In connection with a 1997 acquisition, 276,162 shares were issued. At December 31, 1998 and 1997 there were 58,685,754 and 57,714,035 Common treasury shares, respectively. 46 8 PREFERRED SHARE PURCHASE RIGHTS Each outstanding share of Common stock also evidences one Preferred Share Purchase Right ("Right"). The Rights will generally become exercisable only in the event of an acquisition of, or a tender offer for, 15% or more of the Common stock. If exercisable, each Right is exercisable for 1/100th of a share of Series A Junior Participating Preferred Stock at an exercise price of $150. Also, upon an acquisition of 15% or more of the Common stock, or upon an acquisition of the Company or the transfer of 50% or more of its assets or earning power, each Right (other than Rights held by the 15% acquiror, if applicable), if exercisable, will generally be exercisable for common shares of the Company or the acquiring company, as the case may be, having a market value of twice the exercise price. In certain events, however, Rights may be exchanged by the Company for Common stock at a rate of one share per Right. The Rights may be redeemed at any time prior to an acquisition of 15% or more of the Common stock at a redemption price of $.01 per Right. Until a Right is exercised, the holder, as such, will have no voting, dividend or other rights as a stockholder of the Company. The Rights expire on December 24, 2007. All 2.5 million of the authorized Series A Preferred shares are reserved for issuance upon exercise of Rights, and at December 31, 1998, outstanding Rights would have been exercisable as described above in the aggregate for 1,708,843 of such shares. 9 STOCK PLANS The 1990 Long-Term Incentive Plan, as amended, authorizes the granting to key employees of the Company and its subsidiaries of incentive and nonqualified stock options, stock appreciation rights, restricted stock, performance awards and other stock-based awards, any of which may be granted alone or in combination with other types of awards or dividend equivalents. Such grants may be made on or before December 31, 1999 for up to 17 million shares of the Common stock. The Company's Long-Term Incentive Plan for Key Employees of Subsidiaries also authorizes the granting to key employees of the Company's subsidiaries of similar types of awards other than stock options and stock appreciation rights, and one million shares have been reserved for issuance upon payment of any awards granted thereunder after December 31, 1990. Stock options and stock appreciation rights may no longer be granted under the Company's 1986 Stock Option Plan, but outstanding awards may continue to be exercised until their expiration dates. Stock options under the Plans have exercise prices equal to fair market values at dates of grant. All options granted expire at the end of ten years from date of grant. Options granted before November 1998 generally become vested after one year. Options granted in November 1998 generally become vested one-third each year over a three-year period. Stock appreciation rights, which may be granted in conjunction with option grants, permit the optionees to receive shares of Common stock, cash or a combination of shares and cash measured by the difference between the option exercise price and the fair market value of the Common stock at the time of exercise of such right. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock plans as allowed under FAS Statement No. 123, "Accounting for Stock-Based Compensation." Had compensation cost for the fixed stock options granted in 1998, 1997 and 1996 been determined consistent with FAS No. 123, pro forma net income and earnings per Common share would have been as follows: (In millions, except per share amounts) 1998 1997 1997(a) 1996 - ------------------------------------------------------------------------------- Net income $252.9 $78.7 $90.6 $477.5 =============================================================================== Earnings per Common share Basic $ 1.46 $ .45 $ .52 $ 2.75 =============================================================================== Diluted $ 1.43 $ .45 $ .52 $ 2.71 =============================================================================== (a) Excludes incremental fair value, as calculated under the Black-Scholes option-pricing model, related to the adjustment of options in the Gallaher spin-off. These pro forma amounts are not necessarily indicative of future amounts. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FORTUNE BRANDS, INC. AND SUBSIDIARIES Changes during the three years ended December 31, 1998 in shares under options were as follows: Weighted-Average Options Exercise Price - ------------------------------------------------------------------------------- Outstanding at January 1, 1996 9,919,560 $ 38.34 Granted 1,772,550 48.65 Exercised (1,721,260) 35.17 Lapsed (189,700) 44.84 - ------------------------------------------------------------------------------- Outstanding at December 31, 1996 9,781,150 40.64 Granted 99,100 52.75 Exercised (2,267,110) 37.04 Lapsed (43,000) 48.66 Cancelled (297,400) 46.65 - ------------------------------------------------------------------------------- Outstanding at May 30, 1997 7,272,740 41.63 Gallaher spin-off adjustment(a) 4,427,250 -- - ------------------------------------------------------------------------------- Outstanding at May 30, 1997 after Gallaher spin-off 11,699,990 25.88 Granted 1,786,000 35.63 Exercised (1,325,538) 23.38 Lapsed (56,653) 30.26 - ------------------------------------------------------------------------------- Outstanding at December 31, 1997 12,103,799 27.57 Granted 2,612,300 35.01 Exercised (2,230,843) 25.58 Lapsed (69,930) 34.55 - ------------------------------------------------------------------------------- Outstanding at December 31, 1998 12,415,326 $29.45 =============================================================================== (a) On May 30, 1997, in connection with the Gallaher spin-off, the Company adjusted the number of shares under options and the option exercise prices to preserve, as closely as possible, the economic value of the options that existed at the time of the spin-off. Options exercisable at the end of each of the three years ended December 31, 1998 were as follows: Options Weighted-Average Exercisable Exercise Price - -------------------------------------------------------------------------------- December 31, 1998 9,732,526 $27.92 December 31, 1997 10,166,612 $26.07 December 31, 1996 8,075,350 $38.93 The weighted-average fair values of options granted during 1998, 1997 and 1996 were $6.70, $7.66 and $7.11, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996: 1998 1997 1996 - -------------------------------------------------------------------------------- Expected dividend yield 2.7% 2.6% 5.0% Expected volatility 21.0% 20.9% 19.0% Risk-free interest rate 4.8% 5.8% 5.9% Expected term 4.5 Years 4.5 Years 5 Years Options outstanding at December 31, 1998 were as follows: Weighted-Average Range Of Number Remaining Weighted-Average Exercise Prices Outstanding Contractual Life Exercise Price - -------------------------------------------------------------------------------- $19.75 to $23.27 2,530,028 4.5 $21.49 26.03 to 29.10 3,498,885 4.8 27.42 30.30 to 38.69 6,386,413 9.0 33.72 - -------------------------------------------------------------------------------- $19.75 to $38.69 12,415,326 6.9 $29.45 ================================================================================ Options exercisable at December 31, 1998 were as follows: Number Weighted-Average Exercisable Exercise Price ------------------------------- 2,530,028 $21.49 3,498,885 27.42 3,703,613 32.78 ------------------------------- 9,732,526 $27.92 =============================== At December 31, 1998, performance awards were outstanding pursuant to which up to 155,412 shares, 142,140 shares, 147,300 shares and 223,950 shares may be issued in 1999, 2000, 2001 and 2002, respectively, depending on the extent to which certain specified performance objectives are met. 81,569 shares, 40,240 shares and 45,890 shares were issued pursuant to performance awards during 1998, 1997 and 1996, respectively. The costs of performance awards are expensed over the performance period. Compensation expense for stock based plans recorded for 1998, 1997 and 1996 was $4.3 million, $5 million and $1.9 million, respectively. Shares available in connection with future awards under the Company's stock plans at December 31, 1998, 1997 and 1996 were: 6,843,255; 8,216,471; and 7,193,139, respectively. Authorized but unissued shares are reserved for issuance in connection with awards, but treasury shares may be and are delivered. 48 10 PENSION AND OTHER RETIREE BENEFITS In 1998, the Company adopted FAS Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." FAS 132 standardizes the disclosure requirements for pensions and other postretirement benefits. Prior years' information has been restated to conform with the new requirements. The Company has a number of pension plans, principally in the United States, covering substantially all employees. The plans provide for payment of retirement benefits, mainly commencing between the ages of 60 and 65, and also for payment of certain disability and severance benefits. After meeting certain qualifications, an employee acquires a vested right to future benefits. The benefits payable under the plans are generally determined on the basis of an employee's length of service and earnings. Annual contributions to the plans are sufficient to satisfy legal funding requirements. The Company provides postretirement health care and life insurance benefits to certain employees and retirees in the United States and certain employee groups outside the United States. Most employees and retirees outside the United States are covered by government health care programs. The components of net pension and postretirement costs are as follows: Pension Benefits Postretirement Benefits - ------------------------------------------------------------------------------- (In millions) 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------- Service cost $ 31.4 $ 26.2 $ 24.0 $ 2.1 $ 1.9 $ 2.5 Interest cost 50.5 46.5 42.4 8.5 8.2 9.1 Expected return on plan assets (66.3) (58.5) -- -- -- -- Net amortization and deferral 4.2 3.3 4.3 (1.5) (2.8) (1.2) - ------------------------------------------------------------------------------- $ 19.8 $ 17.5 $ 18.1 $ 9.1 $ 7.3 $ 10.4 =============================================================================== The reconciliation of beginning and ending balances of benefit obligations and fair value of plan assets, and the funded status of the plans are as follows:
Pension Benefits Postretirement Benefits - ---------------------------------------------------------------------------------------- (In millions) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------- Change in Benefit Obligation: Benefit obligation at beginning of year $ 718.7 $ 608.2 $ 125.2 $ 118.5 Service cost 31.4 26.2 2.1 1.9 Interest cost 50.5 46.5 8.5 8.2 Actuarial loss (gain) 22.8 67.4 (6.8) 0.7 Participants' contributions 4.3 4.2 0.9 0.9 Acquisitions 15.1 -- 1.2 -- Exchange rate changes 0.1 (2.1) (0.2) -- Benefits paid (39.6) (42.1) (9.3) (7.9) Other items 0.4 10.4 -- 2.9 - ---------------------------------------------------------------------------------------- Benefit obligation at end of year 803.7 718.7 121.6 125.2 - ---------------------------------------------------------------------------------------- Change in Plan Assets: Fair value of plan assets at beginning of year 750.2 651.8 -- -- Actual return on plan assets 59.2 107.6 -- -- Employer contributions 14.3 27.5 8.4 7.0 Participants' contributions 4.3 4.2 0.9 0.9 Acquisitions 12.0 -- -- -- Exchange rate changes (1.2) 0.1 -- -- Benefits paid (35.4) (38.8) (9.3) (7.9) Other items 3.1 (2.2) -- -- - ---------------------------------------------------------------------------------------- Fair value of plan assets at end of year 806.5 750.2 -- -- - ---------------------------------------------------------------------------------------- Funded Status 2.8 31.5 (121.6) (125.2) Unrecognized actuarial loss (gain) 39.1 12.6 (24.0) (18.5) Unrecognized transition gain (4.2) (5.9) -- -- Unrecognized prior service cost 25.0 27.4 (2.7) (3.0) Other (1.8) (2.2) -- -- - ---------------------------------------------------------------------------------------- Net amount recognized $ 60.9 $ 63.4 $(148.3) $(146.7) ========================================================================================
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FORTUNE BRANDS, INC. AND SUBSIDIARIES Amounts recognized in the balance sheet are as follows:
Pension Benefits Postretirement Benefits - ---------------------------------------------------------------------------------------- (In millions) 1998 1997 1998 1997 - ---------------------------------------------------------------------------------------- Pension benefit cost $ 73.9 $ 77.0 $ -- $ -- Accrued benefit liability (43.4) (43.4) (148.3) (146.7) Intangible assets 17.5 16.8 -- -- Accumulated other comprehensive income 12.9 13.0 -- -- - ---------------------------------------------------------------------------------------- Net amount recognized $ 60.9 $ 63.4 $(148.3) $(146.7) ======================================================================================== Weighted-average assumptions: Discount rate 6.7% 7.0% 6.7% 7.0% Expected long-term rate of return on plan assets 9.5% 10.0% -- -- Rate of compensation increase 4.3% 4.5% 6.0% 6.0% ========================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $230.6 million, $215.3 million and $186 million, respectively, as of December 31, 1998 and $234.7 million, $213.5 million and $183.7 million, respectively, as of December 31, 1997. The assumed health care cost trend rate used in measuring the health care portion of the postretirement cost for 1999 is 7.75%, gradually declining to 5% by the year 2007 and remaining at that level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for postretirement benefits. A 1% increase in assumed health care cost trend rates would increase the total of the service and interest cost components for 1998 and the postretirement benefit obligation as of December 31, 1998 by $1 million and $10.8 million, respectively. A 1% decrease in assumed health care cost trend rates would decrease the total of the service and interest cost components for 1998 and the postretirement benefit obligation as of December 31, 1998 by approximately $0.9 million and $9.6 million, respectively. The Company sponsors a number of defined contribution plans. Contributions are determined under various formulas. Costs related to such plans amounted to $22.7 million, $21.4 million and $18.1 million in 1998, 1997 and 1996, respectively. 11 LEASE COMMITMENTS Future minimum rental payments under noncancelable operating leases as of December 31, 1998 are as follows: (in millions) - ------------------------------------------------------------------------------- 1999 $ 48.0 2000 41.0 2001 35.5 2002 31.0 2003 25.7 Remainder 138.0 - ------------------------------------------------------------------------------- Total minimum rental payments 319.2 Less minimum rentals to be received under noncancelable subleases 16.6 - ------------------------------------------------------------------------------- $302.6 =============================================================================== Total rental expense for all operating leases (reduced by minor amounts from subleases) amounted to $49.8 million, $42.5 million and $43.3 million in 1998, 1997 and 1996, respectively. 12 INCOME TAXES The components of income from continuing operations before income taxes are as follows: (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Domestic operations $407.1 $120.8 $215.2 Foreign operations 104.8 18.9 124.4 - ------------------------------------------------------------------------------- $511.9 $139.7 $339.6 =============================================================================== A reconciliation of income taxes at the 35% federal statutory income tax rate to income taxes as reported is as follows: (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Income taxes computed at federal statutory income tax rate $179.2 $ 48.9 $118.9 Other income taxes, net of federal tax benefit 17.4 10.9 18.4 Goodwill amortization not deductible for income tax purposes 33.4 32.9 32.4 Miscellaneous, including reversals of tax provisions no longer required (11.7) 5.5 (11.8) - ------------------------------------------------------------------------------- Income taxes as reported $218.3 $ 98.2 $157.9 =============================================================================== 50 Income taxes are as follows: (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Currently payable Federal $106.7 $100.3 $104.4 Foreign 35.3 38.2 26.2 Other 25.3 21.1 24.5 Deferred Federal and other 42.2 (42.3) 0.2 Foreign 8.8 (19.1) 2.6 - ------------------------------------------------------------------------------- $218.3 $ 98.2 $157.9 =============================================================================== The components of net deferred tax assets (liabilities) are as follows: (In millions) 1998 1997 - ------------------------------------------------------------------------------- Current assets Compensation and benefits $ 11.1 $ 12.6 Other reserves 28.3 30.6 Capitalized interest-inventory 13.5 12.7 Restructuring 20.5 30.1 Interest 1.9 14.8 Accounts receivable 14.8 14.1 Miscellaneous 29.3 26.8 - ------------------------------------------------------------------------------- 119.4 141.7 - ------------------------------------------------------------------------------- Current liabilities Inventories (10.3) (13.0) Miscellaneous (10.5) (1.9) - ------------------------------------------------------------------------------- (20.8) (14.9) - ------------------------------------------------------------------------------- Deferred income taxes included in Other current assets 98.6 126.8 - ------------------------------------------------------------------------------- Noncurrent assets Compensation and benefits 27.3 18.8 Other retiree benefits 48.7 49.8 Other reserves 35.1 42.0 Foreign exchange 0.8 6.3 Miscellaneous 16.0 18.6 - ------------------------------------------------------------------------------- 127.9 135.5 - ------------------------------------------------------------------------------- Noncurrent liabilities Depreciation (63.1) (85.2) Pensions (9.4) (11.5) Trademark amortization (67.2) (60.9) Miscellaneous (38.1) (16.4) - ------------------------------------------------------------------------------- (177.8) (174.0) - ------------------------------------------------------------------------------- Deferred income taxes (49.9) (38.5) - ------------------------------------------------------------------------------- Net deferred tax asset $ 48.7 $ 88.3 =============================================================================== 13 FINANCIAL INSTRUMENTS The Company does not enter into financial instruments for trading or speculative purposes. Financial instruments are used to reduce the impact of changes in foreign currency exchange rates and interest rates. The principal financial instruments used are forward foreign exchange contracts and interest rate swaps. The counterparties are major financial institutions. Although the Company's theoretical risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring losses is remote and that such losses, if any, would be immaterial. The Company enters into forward foreign exchange contracts principally to hedge currency fluctuations in transactions denominated in foreign currencies, thereby limiting the Company's risk that would otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. The Company periodically enters into forward foreign exchange contracts to hedge a portion of its net investments in U.K. operating companies. At December 31, 1998, the Company had outstanding forward foreign exchange contracts to purchase $35 million and sell $201 million of various foreign currencies (principally pound sterling), with maturities ranging from January 4, 1999 to January 28, 2000, with a weighted average maturity of 110 days. At December 31, 1997, the Company also had outstanding forward foreign exchange contracts to purchase $72 million and sell $164 million of various foreign currencies (principally pound sterling), with maturities ranging from January 5, 1998 to November 30, 1998, with a weighted average maturity of 121 days. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FORTUNE BRANDS, INC. AND SUBSIDIARIES The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. At December 31, 1998 and 1997, the difference between the contract amounts and fair values was immaterial. The Company enters into interest rate swap agreements to manage its exposure to interest rate changes. The swaps involve the exchange of fixed and variable interest rate payments without exchanging the notional principal amount. At December 31, 1998 and 1997, the Company had outstanding interest rate swap agreements denominated in dollars, maturing at various dates in 1999, with an aggregate notional principal amount of $200 million. Under these agreements the Company receives a floating rate based on thirty day commercial paper rates, or a weighted average rate of 5.2% and 5.8% at December 31, 1998 and 1997, respectively, and pays weighted average fixed interest rates of 7.8% at December 31, 1998 and 1997. The fair value of these interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements. At December 31, 1998 and 1997, the Company would have paid $4.2 million and $6.6 million, respectively, to terminate the agreements. The fair value is based on dealer quotes, considering current interest rates. The estimated fair value of the Company's cash and cash equivalents, notes payable to banks and commercial paper, approximates the carrying amounts due principally to their short maturities. The estimated fair value of the Company's $1,165 million and $915.3 million total long-term debt (including current portion) at December 31, 1998 and 1997 was approximately $1,252.3 million and $1,013 million, respectively. The fair value is determined from quoted market prices, where available, and from investment bankers using current interest rates considering credit ratings and the remaining terms to maturity. Concentration of credit risk with respect to accounts receivable is limited because a large number of geographically diverse customers make up the operating companies' domestic and international customer base, thus spreading the credit risk. 14 RESTRUCTURING AND OTHER NONRECURRING CHARGES Restructuring and other nonrecurring charges are as follows: 1997 ---------------------------------------- Cost of Sales (In millions) Restructuring Charges Total - ------------------------------------------------------------------------------- Home products $ 79.5 $ 17.3 $ 96.8 Office products 82.5 4.8 87.3 - ------------------------------------------------------------------------------- Home and office products 162.0 22.1 184.1 Golf products 15.9 34.8 50.7 Spirits and wine 31.2 32.2 63.4 - ------------------------------------------------------------------------------- $209.1 $ 89.1 $298.2 =============================================================================== Home products include charges related to the disposition of certain product lines and the rationalization of operations. Office products include charges related to the rationalization of operations, the discontinuance of certain product lines and lease cancellation costs, partly offset by a $12.6 million pre-tax gain on the sale of nonstrategic businesses. Golf products include charges related to the discontinuance of certain product lines and the rationalization of operations. Spirits and wine include charges related to a change in estimate for bulk whiskey valuations which resulted from the integration of the worldwide distilled spirits business, international distribution and lease agreements and the discontinuance of certain product lines. The rationalization of operations referred to above includes the closure of certain manufacturing facilities, the consolidation of certain selling facilities, the termination of a foreign joint venture, and the sale or disposal of certain facilities. 52 Restructuring and other nonrecurring charges by category of expenditures relates to the following: 1997 ----------------------------------------- Cost of Sales (In millions) Restructuring Charges Total - -------------------------------------------------------------------------------- Rationalization of operations Employment termination costs(a) $ 59.3 -- $ 59.3 Facilities closing costs 19.2 -- 19.2 Other 35.7 $ 19.1 54.8 Inventories -- 70.0 70.0 International distribution and lease agreements 27.2 -- 27.2 Loss on disposal of fixed assets and businesses 67.7 -- 67.7 - -------------------------------------------------------------------------------- $209.1 $ 89.1 $298.2 ================================================================================ (a) Home products and office products combined workforce reduction of 7%, or 1,125 individuals, primarily production employees. Reconciliation of the restructuring and other nonrecurring charges liability is as follows: Cost of Sales (In millions) Restructuring Charges Total - ------------------------------------------------------------------------------- 1997 provision $209.1 $ 89.1 $298.2 Cash expenditures (20.5) (8.5) (29.0) Non-cash write-offs (127.0) (80.6) (207.6) - ------------------------------------------------------------------------------- Balance at December 31, 1997 61.6 -- 61.6 Cash expenditures (41.1) -- (41.1) Non-cash write-offs (2.1) -- (2.1) - ------------------------------------------------------------------------------- Balance at December 31, 1998 $ 18.4 $ -- $ 18.4 =============================================================================== During 1998, the program was substantially completed. The following activities are in the process of being finalized: the completion of the Nogales, Mexico operation related to office products' Swingline stapling production and a significant portion of the home products' Master Lock assembly operations, and the resultant reduction of workforces in the home and office products segments. As of December 31, 1998, approximately 600 positions were eliminated. These remaining restructuring activities are expected to be completed during 1999. 15 INFORMATION ON BUSINESS SEGMENTS The Company's subsidiaries operate principally in the following business segments: Home products include kitchen and bathroom faucets, plumbing supply and repair products manufactured, packaged or distributed by Moen, locks manufactured by Master Lock, kitchen cabinets and bathroom vanities manufactured by Aristokraft and Schrock, and tool storage products manufactured by Waterloo. Office products include paper fastening, computer accessories, time management systems, presentation products and other office products manufactured by ACCO World subsidiaries. Golf products include golf balls, shoes, gloves and clubs manufactured and marketed by Titleist and FootJoy Worldwide and golf clubs manufactured and marketed by Cobra. Spirits and wine include products produced or imported by Jim Beam Brands Worldwide subsidiaries. The Company's subsidiaries operate principally in the United States, the United Kingdom, Canada and Australia. Net sales and operating company contribution for the years 1998, 1997 and 1996 and segment assets for the related year ends by business segments and by geographic areas, are shown on page 58. Operating company contribution is net sales less all costs and expenses other than restructuring and other nonrecurring charges, amortization of intangibles, corporate administrative expenses, interest and related expenses, other (income) expenses, net and income taxes. A reconciliation of operating company contribution to consolidated income from continuing operations before income taxes is as follows: (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Operating company contribution $798.3 $746.4 $699.8 Restructuring and other nonrecurring charges -- 298.2 -- Amortization of intangibles 108.2 104.2 102.7 Interest and related expenses 102.7 116.7 165.5 Non-operating expenses 75.5 87.6 92.0 - ------------------------------------------------------------------------------- Income from continuing operations before income taxes as reported $511.9 $139.7 $339.6 =============================================================================== Reconciliation of segment assets to consolidated total assets is as follows: (In millions) 1998 1997 1996 - -------------------------------------------------------------------------------- Segment assets $3,473.2 $3,113.7 $3,176.3 Intangibles resulting from business acquisitions, net 3,761.3 3,674.1 3,730.7 Corporate 125.2 154.7 147.0 Net assets of discontinued operations -- -- 683.3 - -------------------------------------------------------------------------------- $7,359.7 $6,942.5 $7,737.3 ================================================================================ 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FORTUNE BRANDS, INC. AND SUBSIDIARIES Long-lived assets are as follows:(a) (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- United States $ 852.3 $724.2 $721.0 United Kingdom 194.8 203.1 194.1 Canada 21.2 22.9 23.2 Australia 16.8 4.3 6.1 Other countries 34.8 26.4 28.2 - ------------------------------------------------------------------------------- $1,119.9 $980.9 $972.6 =============================================================================== (a) Represents property, plant and equipment, net. Depreciation is as follows: (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Home products $ 41.8 $ 42.3 $ 40.8 Office products 42.5 39.9 39.2 - ------------------------------------------------------------------------------- Home and office products 84.3 82.2 80.0 Golf products 20.0 16.3 13.4 Spirits and wine 35.7 37.1 39.4 Corporate 2.9 2.9 2.8 - ------------------------------------------------------------------------------- $142.9 $138.5 $135.6 =============================================================================== Amortization of intangibles is as follows: (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Home products $ 31.7 $ 29.9 $ 30.0 Office products 23.3 21.5 20.7 - ------------------------------------------------------------------------------- Home and office products 55.0 51.4 50.7 Golf products 17.4 17.8 16.3 Spirits and wine 35.8 35.0 35.7 - ------------------------------------------------------------------------------- $108.2 $104.2 $102.7 =============================================================================== Capital expenditures are as follows: (In millions) 1998 1997 1996 - ------------------------------------------------------------------------------- Home products $ 57.6 $ 55.6 $ 60.6 Office products 107.2 43.0 40.9 - ------------------------------------------------------------------------------- Home and office products 164.8 98.6 101.5 Golf products 39.9 59.4 50.4 Spirits and wine 46.3 37.5 46.5 Corporate 0.9 1.4 1.3 - ------------------------------------------------------------------------------- $251.9 $196.9 $199.7 =============================================================================== 16 EXTRAORDINARY ITEMS During 1998, the Company purchased or redeemed the following principal amounts of its outstanding debt: $31.4 million of 7 1/2% Notes, Due 1999, $50.4 million of 8 1/2% Notes, Due 2003, $10.5 million of 9% Notes, Due 1999 and $32.7 million of 8 5/8% Debentures, Due 2021, and the Company also redeemed the outstanding $50.1 million of 12 1/2% Sterling Loan Stock, Due 2009. The extinguishment of debt resulted in a charge of $30.5 million ($46.9 million pre-tax), or 18 cents per Common share. In 1997, the Company purchased the following principal amounts of its outstanding debt: $42.7 million of 8 1/2% Notes, Due 2003, $26.7 million of 9% Notes, Due 1999 and $26.4 million of 8 5/8% Debentures, Due 2021. The extinguishment of debt resulted in a charge of $8.1 million ($12.4 million pre-tax), or five cents per share. In 1996, the Company redeemed $149.6 million of its $150 million 7 5/8% Eurodollar Convertible Debentures, Due 2001, at a redemption price of 103.8125% of the principal amount plus accrued interest and redeemed its $150 million 9 1/8% Debentures, Due 2016, at a redemption price of 104.4375% of the principal amount plus accrued interest. The extinguishment of debt resulted in a charge of $10.3 million ($15.8 million pre-tax), or six cents per share. 54 17 EARNINGS PER SHARE Basic earnings per Common share are based on the weighted average number of Common shares outstanding in each year and after preferred stock dividend requirements. Diluted earnings per Common share assume that any dilutive convertible debentures and convertible preferred shares outstanding at the beginning of each year were converted at those dates, with related interest, preferred stock dividend requirements and outstanding Common shares adjusted accordingly. It also assumes that outstanding Common shares were increased by shares issuable upon exercise of those stock options for which market price exceeds exercise price, less shares which could have been purchased by the Company with related proceeds. The Convertible Preferred stock was not included in the computation of diluted earnings per Common share for 1997 since it would have resulted in an antidilutive effect. The computation of basic and diluted earnings per Common share for "Income from continuing operations" is as follows: (In millions, except per share amounts) 1998 1997 1996 - ------------------------------------------------------------------------------- Income from continuing operations $293.6 $ 41.5 $181.7 Less: Preferred stock dividends 0.9 1.1 1.2 - ------------------------------------------------------------------------------- Income available to Common stockholders - basic 292.7 40.4 180.5 Convertible Preferred stock dividend requirements 0.9 -- 1.2 - ------------------------------------------------------------------------------- Income available to Common stockholders - diluted $293.6 $ 40.4 $181.7 =============================================================================== Weighted average number of Common shares outstanding - basic 172.2 171.6 173.3 Conversion of Convertible Preferred stock 2.2 -- 1.8 Exercise of stock options 1.8 1.7 1.0 - ------------------------------------------------------------------------------- Weighted average number of Common shares outstanding - diluted 176.2 173.3 176.1 =============================================================================== Earnings per Common share Basic $ 1.70 $ .24 $ 1.04 =============================================================================== Diluted $ 1.67 $ .23 $ 1.03 =============================================================================== 18 COMPREHENSIVE INCOME During 1998, the Company adopted FAS Statement No. 130, "Reporting Comprehensive Income" and has elected to report Comprehensive Income in the Consolidated Statement of Stockholders' Equity. Comprehensive Income is defined as net income and other changes in stockholders' equity from transactions and other events from sources other than stockholders. The components of and changes in other comprehensive income (expense) are as follows: Accumulated Foreign Minimum Other Currency Pension Liability Comprehensive (In millions) Adjustments Adjustment Income - ------------------------------------------------------------------------------- Balance at January 1, 1996 $(234.6) $(13.2) $(247.8) Changes during year (including taxes of $41.3) 38.7 5.0 43.7 - ------------------------------------------------------------------------------- Balance at December 31, 1996 (195.9) (8.2) (204.1) Comprehensive income changes during year (including taxes of $30.1) (44.9) (4.8) (49.7) Gallaher spin-off 260.7 -- 260.7 - ------------------------------------------------------------------------------- Balance at December 31, 1997 19.9 (13.0) 6.9 Changes during year (net of taxes of $7.1) (7.4) 5.2 (2.2) - ------------------------------------------------------------------------------- Balance at December 31, 1998 $ 12.5 $ (7.8) $ 4.7 =============================================================================== 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (concluded) FORTUNE BRANDS, INC. AND SUBSIDIARIES 19 PENDING LITIGATION Tobacco Litigation and Indemnification On December 22, 1994, the Company sold The American Tobacco Company subsidiary to Brown & Williamson Tobacco Corporation, a wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with the sale, Brown & Williamson Tobacco Corporation and The American Tobacco Company ("the Indemnitors") agreed to indemnify the Company against claims including legal expenses arising from smoking and health and fire safe cigarette matters relating to the tobacco business of The American Tobacco Company. The Company is a defendant in numerous actions based upon allegations that human ailments have resulted from tobacco use. Management believes that there are meritorious defenses to the pending actions and these actions are being vigorously contested. However, it is not possible to predict the outcome of the pending litigation, and it is possible that some of these actions could be decided unfavorably. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of the pending litigation. Management believes that the pending actions will not have a material adverse effect upon the results of operations, cash flows or financial condition of the Company as long as the Indemnitors continue to fulfill their obligations to indemnify the Company under the aforementioned indemnification agreement. Other Litigation In addition to the lawsuits described above, the Company and its subsidiaries are defendants in lawsuits associated with their business and operations. It is not possible to predict the outcome of the pending actions, but management believes that there are meritorious defenses to these actions and that these actions will not have a material adverse effect upon the results of operations, cash flows or financial condition of the Company. These actions are being vigorously contested. 20 ENVIRONMENTAL The Company is subject to laws and regulations relating to the protection of the environment. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change and are not discounted. While it is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company's subsidiaries may undertake in the future, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon the results of operations, cash flows or financial condition of the Company. 56 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Fortune Brands, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, cash flows and stockholders' equity present fairly, in all material respects, the consolidated financial position of Fortune Brands, Inc. and Subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the management of Fortune Brands, Inc.; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP 11 Madison Avenue New York, New York 10010 February 3, 1999 REPORT OF MANAGEMENT To the Stockholders of Fortune Brands, Inc. We have prepared the consolidated balance sheet of Fortune Brands, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and stockholders' equity for the years ended December 31, 1998, 1997 and 1996. The financial statements have been prepared in accordance with generally accepted accounting principles. Financial information elsewhere in this Annual Report is consistent with that in the financial statements. The system of internal controls of the Company and its subsidiaries is designed to provide reasonable assurances that the financial records are adequate and can be relied upon to provide information for the preparation of financial statements and that established policies and procedures are carefully followed. Independent accountants are elected annually by the stockholders of the Company to audit the financial statements. PricewaterhouseCoopers LLP, independent accountants, are currently engaged to perform such audit. Their audit is in accordance with generally accepted auditing standards and includes tests of transactions and selective tests of internal accounting controls. The Audit Committee of the Board of Directors, consisting solely of outside directors, meets periodically with the independent accountants, internal auditors and management to review accounting, auditing, and financial reporting matters. The auditors have direct access to the Audit Committee. /s/ Thomas C. Hays Thomas C. Hays Chairman of the Board and Chief Executive Officer /s/ Craig P. Omtvedt Craig P. Omtvedt Senior Vice President and Chief Accounting Officer 57 INFORMATION ON BUSINESS SEGMENTS(1) FORTUNE BRANDS, INC. AND SUBSIDIARIES
(In millions) 1998 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------ BUSINESS SEGMENTS Net sales Home products $1,624.4 $1,394.0 $1,374.1 $1,306.8 $1,270.6 $1,119.5 Office products 1,387.7 1,294.2 1,228.7 1,206.1 1,049.7 977.2 - ------------------------------------------------------------------------------------------------ Home and office products 3,012.1 2,688.2 2,602.8 2,512.9 2,320.3 2,096.7 Golf products 962.9 911.6 811.4 579.3 507.1 452.7 Spirits and wine 1,265.9 1,244.7 1,303.5 1,288.6 1,268.2 1,194.6 - ------------------------------------------------------------------------------------------------ Ongoing operations 5,240.9 4,844.5 4,717.7 4,380.8 4,095.6 3,744.0 Other businesses(2) -- -- -- 547.3 1,281.4 1,438.2 - ------------------------------------------------------------------------------------------------ $5,240.9 $4,844.5 $4,717.7 $4,928.1 $5,377.0 $5,182.2 ================================================================================================ Operating company contribution Home products $ 252.5 $ 222.9 $ 214.1 $ 208.4 $ 206.6 $ 190.3 Office products 134.0 128.1 116.3 105.5 95.0 87.7 - ------------------------------------------------------------------------------------------------ Home and office products 386.5 351.0 330.4 313.9 301.6 278.0 Golf products 142.9 138.2 125.3 84.2 74.4 64.6 Spirits and wine 268.9 257.2 244.1 241.9 255.1 231.1 - ------------------------------------------------------------------------------------------------ Ongoing operations 798.3 746.4 699.8 640.0 631.1 573.7 Other businesses(2) -- -- -- 6.8 4.0 33.1 - ------------------------------------------------------------------------------------------------ $ 798.3 $ 746.4 $ 699.8 $ 646.8 $ 635.1 $ 606.8 ================================================================================================ Segment assets(3) Home products $ 826.2 $ 735.8 $ 752.7 $ 738.1 $ 686.5 $ 658.7 Office products 1,011.5 861.4 856.9 794.1 750.8 658.8 - ------------------------------------------------------------------------------------------------ Home and office products 1,837.7 1,597.2 1,609.6 1,532.2 1,437.3 1,317.5 Golf products 667.6 617.1 579.8 361.9 315.3 286.7 Spirits and wine 967.9 899.4 986.9 939.4 932.2 956.5 - ------------------------------------------------------------------------------------------------ Ongoing operations 3,473.2 3,113.7 3,176.3 2,833.5 2,684.8 2,560.7 Other businesses(2) -- -- -- -- 527.6 796.4 - ------------------------------------------------------------------------------------------------ $3,473.2 $3,113.7 $3,176.3 $2,833.5 $3,212.4 $3,357.1 ================================================================================================ GEOGRAPHIC AREAS Net sales(4) United States $3,814.7 $3,432.4 $3,330.6 $3,116.5 $2,917.2 $2,749.1 United Kingdom 551.7 499.5 522.8 498.6 492.9 417.9 Canada 235.6 223.9 194.2 184.7 183.6 169.1 Australia 158.4 199.6 190.9 160.6 141.3 106.2 Other countries 480.5 489.1 479.2 420.4 360.6 301.7 - ------------------------------------------------------------------------------------------------ Ongoing operations $5,240.9 $4,844.5 $4,717.7 $4,380.8 $4,095.6 $3,744.0 ================================================================================================
(1) See Note 15 for further Information on Business Segments. (2) Other businesses included retail distribution and housewares sold during 1995 and optics sold in 1994. (3) Represents total assets excluding intercompany receivables and intangibles resulting from business acquisitions, net. (4) Net sales are attributed to countries based on location of customer. 58 SIX-YEAR CONSOLIDATED SELECTED FINANCIAL DATA FORTUNE BRANDS, INC. AND SUBSIDIARIES
(In millions, except per share amounts and number of Common stockholders) 1998(2) 1997(2) 1996(2) 1995 1994(3) 1993(2) - --------------------------------------------------------------------------------------------------------------------------------- Operating Data(1) Net sales $5,240.9 $4,844.5 $4,717.7 $4,928.1 $5,377.0 $5,182.2 Gross profit 2,129.3 1,885.4 1,863.4 1,816.4 1,971.1 1,947.0 Depreciation and amortization 251.1 242.7 238.3 224.0 244.5 240.4 Operating company contribution 798.3 746.4 699.8 646.8 635.1 606.8 Interest and related expenses 102.7 116.7 165.5 136.6 173.0 188.2 Income taxes 218.3 98.2 157.9 171.5 119.8 126.7 Income (loss) from continuing operations 293.6 41.5 181.7 185.9 (78.8) 120.1 Income from discontinued operations -- 65.1 315.1 357.2 812.9 548.1 Extraordinary items (30.5) (8.1) (10.3) (2.7) -- -- Cumulative effect of accounting changes(4) -- -- -- -- -- (198.4) Net income(5) 263.1 98.5 486.5 540.4 734.1 469.8 Earnings per Common share Basic Continuing operations(5) $1.70 $.24 $1.04 $.99 $(.40) $.59 Discontinued operations -- .38 1.82 1.91 4.03 2.71 Extraordinary items (.18) (.05) (.06) (.01) -- -- Accounting changes(4) -- -- -- -- -- (.98) - --------------------------------------------------------------------------------------------------------------------------------- Net income $1.52 $.57 $2.80 $2.89 $3.63 $2.32 ================================================================================================================================= Diluted Continuing operations(5) $1.67 $.23 $1.03 $.98 $(.40) $.59 Discontinued operations -- .38 1.79 1.89 4.03 2.71 Extraordinary items (.18) (.05) (.06) (.01) -- -- Accounting changes(4) -- -- -- -- -- (.98) - --------------------------------------------------------------------------------------------------------------------------------- Net income $1.49 $.56 $2.76 $2.86 $3.63 $2.32 ================================================================================================================================= Common Share Data(1) Dividends paid $146.5 $242.3 $347.2 $376.2 $401.7 $397.5 Dividends paid per share $.85 $1.41 $2.00 $2.00 $1.9925 $1.97 Average number of shares outstanding 172.2 171.6 173.3 186.9 201.6 201.8 Book value per share $23.92 $23.31 $21.48 $21.61 $22.95 $21.01 Number of stockholders, December 31(6) 41,603 46,537 52,832 56,769 60,611 63,537 ================================================================================================================================= Balance Sheet Data(1) Inventories $1,087.6 $955.2 $1,037.9 $950.9 $1,156.0 $1,198.7 Current assets(7) 2,265.3 2,095.6 2,842.1 2,112.5 3,726.1 2,597.7 Working capital(7) 420.7 327.1 774.0 651.7 1,673.4 1,110.6 Property, plant and equipment, net 1,119.9 980.9 972.6 904.3 979.7 1,065.0 Intangibles, net 3,761.3 3,674.1 3,730.7 3,103.2 3,346.4 3,429.9 Net assets of discontinued operations -- -- -- 520.7 334.9 1,320.3 Total assets 7,359.7 6,942.5 7,737.3 6,833.4 8,557.9 8,598.0 Short-term debt 504.7 404.6 782.2 470.0 553.7 333.2 Long-term debt 981.7 739.1 1,598.3 1,063.0 1,485.5 2,492.0 Stockholders' equity 4,097.5 4,017.1 3,676.0 3,864.0 4,633.1 4,256.0 Capital expenditures 251.9 196.9 199.7 175.6 157.6 178.5 =================================================================================================================================
(1) See pages 28 through 38 of Financial Section. (2) See Notes 2 and 3. 1993 includes the acquisition in December of Invergordon Distillers Group PLC. (3) The years 1994 and prior reflect as discontinued operations, the results of the former domestic tobacco subsidiary, The American Tobacco Company, and the former Franklin life insurance business. (4) Principally represents a change in the method of accounting for postretirement benefits. (5) Net income and both basic and diluted earnings per Common share in 1994 include $241.3 million and $1.20, respectively, on the loss on disposal of businesses. (6) On January 31, 1999, there were 41,285 Common stockholders of record, not necessarily reflecting beneficial ownership. (7) 1996, 1994 and 1993 include net assets of discontinued operations as current assets. 59 EX-21 17 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT The following is a list of subsidiaries of Registrant as of the date hereof and the state or other jurisdiction of incorporation of each. Except as indicated below, each subsidiary does business under its own name. Indentations indicate that the voting securities of a subsidiary are wholly owned by the subsidiary immediately preceding the indentation, unless otherwise indicated. The names of certain subsidiaries are omitted. Such subsidiaries would not, if considered in the aggregate as a single subsidiary, constitute a significant subsidiary within the meaning of Item 601(b)(21)(ii) of Regulation S-K. State or Other Jurisdiction Subsidiary of Incorporation - -------------- ---------------- ACCO World Corporation Delaware ACCO Brands, Inc. Delaware ACCO Canada Inc. Ontario, Canada Plymouth Tool & Stamping Limited Ontario, Canada ACCO Europe PLC England ACCO-Rexel Group Services Limited England ACCO Australia Pty. Limited Australia ACCO Eastlight Limited England ACCO Manufacturing Limited Australia ACCO-Rexel Limited (1) Republic of Ireland ACCO UK Limited England Apollo Audio Visual Europe S.A. Belgium Apollo Presentation Products Limited England/Wales Hetzel Vermogensverwaltungs GmbH Germany Hetzel GmbH & Co. KG (Limited Partnership) Germany Nobo Group Limited England ACCO France S.A. France Elite Optics Limited England - -------------------- (1) 66.67% owned by ACCO-Rexel Group Services Limited and 33.33% owned by ACCO World Corporation. State or Other Jurisdiction Subsidiary of Incorporation - -------------- ---------------- NOBO Limited England Nobo Holdings BV Netherlands NOBO BV Netherlands Nobo (UK) Limited England Velos- Perforex Limited England ACCO Mexicana S.A. de C.V. Mexico Day-Timers, Inc. Delaware Day-Timers of Canada, Ltd. Canada Day-Timers Pty. Limited Australia International Business Controls, B.V. Netherlands ACCO Italia S.p.A. Italy Acushnet Company Delaware Acushnet Cayman Limited Cayman Islands Acushnet Lionscore, Ltd. (2) Cayman Islands Acushnet Foot-Joy (Thailand) Limited (3) Thailand Acushnet Foreign Sales Corporation Barbados Acushnet International Inc. Delaware Acushnet Canada Inc. Canada Acushnet Manufacturing Inc./Fabrication Acushnet Inc. Canada Acushnet Golf Thailand Ltd. Thailand Acushnet GmbH Germany Acushnet-Danmark ApS Denmark Acushnet France S.A. France Acushnet Nederland B.V. Netherlands Acushnet Osterreich GmbH Austria Acushnet South Africa (Pty.) Ltd. South Africa Acushnet Sverige AB Sweden Acushnet Japan, Inc. Japan Acushnet Limited England Cobra Golf Incorporated Delaware Cobra Golf Export Incorporated Barbados Fortune Brands Finance Canada Ltd. Ontario, Canada Fortune Brands Finance Europe B.V. Netherlands Fortune Brands International Corporation Delaware - -------------------- (2) 40% owned by Acushnet Cayman Limited. (3) 70% owned by Acushnet Company. State or Other Jurisdiction Subsidiary of Incorporation - -------------- ---------------- Jim Beam Brands Worldwide, Inc. Delaware Alberta Distillers Limited Alberta, Canada Carrington Distillers Limited Ontario, Canada Featherstone & Co. Limited Ontario, Canada JBB (Asia-Pacific) Pty. Limited New South Wales, Australia JBB (Asia-Pacific) Superannuation Pty. Limited New South Wales, Australia Barwang International Pty Ltd (4) Australia JBB (Greater Europe) PLC (5) Scotland Jim Beam Brands Co. Delaware James B. Beam Distilling International Co., Inc. Barbados JBB Spirits (New York) Inc. New York John de Kuyper & Son, Incorporated Delaware Wood Terminal Company Delaware MasterBrand Industries, Inc. Delaware MasterBrand Cabinets, Inc. Delaware Aristokraft Inc. Delaware Schrock Cabinet Company Delaware Master Lock Company Delaware Master Lock de Nogales, S.A. de C.V. Mexico Master Lock Europe, S.A. (6) France Moen Incorporated Delaware Creative Specialties, Inc. California Creative Specialties International California Creative Specialties International Company Limited (7) Hong Kong Moen China, Limited Hong Kong Moen de Mexico, S.A. de C.V. Mexico Moen Guangzhou Faucet Co., Ltd. (8) China Moen, Inc. Ontario, Canada Moen of Pennsylvania, Inc. Delaware 21st Century Companies, Inc. Delaware Waterloo Industries, Inc. Delaware May Tag & Label Corp. Delaware 1700 Insurance Company Ltd. Bermuda - -------------------- (4) 50% owned by JBB (Asia-Pacific) Pty. Limited. (5) 428,055,999 shares owned by Jim Beam Brands Worldwide, Inc.; 1 share owned by Jim Beam Brands Co. (6) 99.68% owned by Master Lock Company. (7) 60% owned by Creative Specialties, Inc. (8) 60% owned by Moen Incorporated. EX-23 18 EXHIBIT 23(I) EXHIBIT 23(i) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference into (a) the Registration Statement on Form S-8 (Registration No. 33-64071) relating to the Defined Contribution Plan of Fortune Brands, Inc. and Participating Operating Companies, the Registration Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term Incentive Plan of Fortune Brands, Inc., the Registration Statement on Form S-8 (Registration No. 333-51173) relating to the Fortune Brands, Inc. Non-Employee Director Stock Option Plan, and the prospectuses related thereto, and (b) the prospectuses related to the Registration Statements on Form S-3 (Registration Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of Fortune Brands, Inc. of our report dated February 3, 1999, relating to the consolidated financial statements, which appears in the 1998 Annual Report to Stockholders of Fortune Brands, Inc., which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the consolidated financial statement schedule which appears in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP 11 Madison Avenue New York, New York 10010 March 30, 1999 EX-24 19 EXHIBIT 24 EXHIBIT 24 POWER OF ATTORNEY The undersigned, acting in the capacity or capacities stated with their respective names below, hereby constitute and appoint MARK A. ROCHE, EDWARD P. SMITH and A. ROBERT COLBY, and each of them severally, the attorneys-in-fact of the undersigned with full power to them and each of them to sign for and in the name of the undersigned in the capacities indicated below the Annual Report on Form 10-K of Fortune Brands, Inc. for the fiscal year ended December 31, 1998, and any and all amendments thereto: Signature Title Date /s/ Thomas C. Hays - ---------------------- Chairman of the Board February 8, 1999 Thomas C. Hays and Chief Executive Officer (principal executive officer) and Director /s/ John T. Ludes - ---------------------- Vice Chairman and February 22, 1999 John T. Ludes Director /s/ Norman H. Wesley - ---------------------- President and Chief February 8, 1999 Norman H. Wesley Operating Officer and Director /s/ Gilbert L. Klemann, II - ---------------------- Executive Vice February 10, 1999 Gilbert L. Klemann, II President - Corporate and Director /s/ Dudley L. Bauerlein, Jr. - ---------------------- Senior Vice President February 11, 1999 Dudley L. Bauerlein, Jr. and Chief Financial Officer (principal financial officer) /s/ Craig P. Omtvedt - --------------------- Senior Vice President February 10, 1999 Craig P. Omtvedt and Chief Accounting Officer (principal accounting officer) /s/ Eugene R. Anderson - ---------------------- Director February 22, 1999 Eugene R. Anderson /s/ Patricia O. Ewers - ---------------------- Director February 22, 1999 Patricia O. Ewers /s/ John W. Johnstone, Jr. - ---------------------- Director February 22, 1999 John W. Johnstone, Jr. /s/ Sidney Kirschner - ---------------------- Director February 22, 1999 Sidney Kirschner /s/ Gordon R. Lohman - ---------------------- Director February 26, 1999 Gordon R. Lohman /s/ Charles H. Pistor, Jr. - ---------------------- Director February 22, 1999 Charles H. Pistor, Jr. /s/ Eugene A. Renna - ---------------------- Director February 22, 1999 Eugene A. Renna /s/ Anne M. Tatlock - ---------------------- Director February 23, 1999 Anne M. Tatlock /s/ John W. Thompson - ---------------------- Director February 23, 1999 John W. Thompson /s/ Peter M. Wilson - ---------------------- Director February 19, 1999 Peter M. Wilson EX-27 20 EXHIBIT 27
5 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT OF INCOME AS OF DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 $ 40 0 981 61 1,088 2,265 2,161 1,041 7,360 $1,845 982 717 0 11 3,370 7,360 $5,241 5,241 2,668 2,668 444 14 103 512 218 294 0 (31) 0 $ 263 $1.52 $1.49
EX-99 21 EXHIBIT 99 EXHIBIT 99 List of Pending Cases The following sets forth the principal parties to the proceedings referred to in Item 3 of this Form 10-K in which Registrant is currently named as a defendant, the court in which such proceedings are pending and the date such proceedings were instituted against Registrant: Adkins v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Akers v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Allen v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Altman v. Fortune Brands, Inc., et al., Supreme Court of New York, New York County, December 16, 1997; Anderson, C. v. Fortune Brands, Inc., et al., Supreme Court of New York, Kings County, October 30, 1997; Anderson, D. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Anderson, J. v. The American Tobacco Company, et al., Circuit Court of Knox County, Tennessee, May 23, 1997; Anes v. The American Tobacco Co., et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, July 1, 1997; Arnett v. The American Tobacco Company, et al., Supreme Court of New York, New York County, May 28, 1998; Austin v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Avallone v. The American Tobacco Company, et al., Superior Court of New Jersey, Middlesex County, April 23, 1998; Badillo v. The American Tobacco Company, et al., United States District Court for the District of Nevada, October 8, 1997; Badon v. R.J.R. Nabisco, Inc., et al., Judicial District Court, Parish of Cameron, Louisiana, May 23, 1994; Baum v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Beckom (State of Tennessee) v. The American Tobacco Company, et al., United States District Court, Eastern Division of Tennessee, May 8, 1997; Bellows v. The American Tobacco Company, et al., Supreme Court of New York, New York County, December 1, 1997; City of Birmingham v. The American Tobacco Company, et al., United States District Court of the Northern District of Alabama, May 28, 1997; Bishop v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Bland v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Bocook v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Boggess v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Bolin v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Boone v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; 2 Bowden v. The American Tobacco Company, et al., United States District Court, Western District of Virginia, January 6, 1999; Bradford v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Brammer v. The American Tobacco Company, et al., United States District Court for the Southern District of Iowa, June 30, 1997; Brogan v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Brown, A. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Brown, E. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Brown, W. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Brown-Jones v. The American Tobacco Company, et al., Superior Court of Georgia, Richmond County, January 13, 1998; Brumfield v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Bryant v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Burdette v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Byus v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; 3 Caiazzo v. The American Tobacco Company, et al., Supreme Court of New York, Richmond County, September 26, 1997; Cameron v. The American Tobacco Company, et al., Supreme Court of New York, Nassau County, June 30, 1997; Carll v. The American Tobacco Company, et al., Supreme Court of New York, New York County, July 20, 1997; Carter v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Castano v. The American Tobacco Company, et al., United States District Court for the Eastern District of Louisiana, March 29, 1994; Cavanagh v. The American Tobacco Company, et al., Supreme Court of New York, Richmond County, May 6, 1997; Chamberlain v. The American Tobacco Company, et al., United States District Court for the Northern District of Ohio, August 14, 1996; Childers v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Clay, D. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Clay, J. v. The American Tobacco Company, et al., United States District Court for the Southern District of Illinois, May 22, 1997; Clayton v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Coleman, I. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Coleman, L. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; 4 Colfield v. The American Tobacco Co., et al., United States District Court for the Eastern District of California, September 3, 1998; Collins v. The American Tobacco Company, et al., Supreme Court of New York, Westchester County, May 16, 1997; Combs v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Compton v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Condon v. The American Tobacco Company, et al., Supreme Court of New York, New York County, May 13, 1997; Conley v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Connor v. The American Tobacco Company, et al., Second Judicial District Court of Bernalillo County, New Mexico, October 10, 1996; Construction Laborers of Greater St. Louis Welfare Fund, et al. v. The American Tobacco Co., et al., United States District Court for the Eastern District of Missouri, October 20, 1998; Cook v. The American Tobacco Co., et al., United States District Court for the Eastern District of California, September 3, 1998; Cooper v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Cotroneo v. Fortune Brands, Inc., Supreme Court of New York, New York County, October 21, 1997; Cottrill, C. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; 5 Cottrill, L. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; County of Allegheny v. The American Tobacco Co., et al., United States District Court for the Western District of Pennsylvania, March 12, 1999; Coyne v. American Brands, et al., United States District Court for the Northern District of Ohio, September 16, 1996; Craig v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Crane v. The American Tobacco Company, et al., Supreme Court of New York, New York County, April 4, 1997; Creech v. The American Tobacco Company, et al., Supreme Court of New York, Richmond County, January 6, 1997; Creekmoore v. Brown & Williamson Tobacco Corporation, et al., Superior Court of the State of North Carolina, Buncombe County, July 31, 1998; Crites v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Cunningham v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Daley v. The American Tobacco Company, et al., Circuit Court of Cook County, Illinois, July 7, 1997; Daly v. The American Tobacco Company, et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, July 1, 1997; Daniels v. The American Tobacco Company, et al., United States District Court, Southern District of California, April 2, 1998; DaSilva v. The American Tobacco Company, et al., Supreme Court of New York, New York County, April 3, 1997; 6 Davis v. R.J. Reynolds Tobacco Company, et al., Iowa District Court, Polk County, October 23, 1997; Dean v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Dempsey v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; DiBacco v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; DiGirolamo v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Duffield v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Duncan v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Dzak v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, December 8, 1996; Eanes v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Edwards v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; El-Haddi v The American Tobacco Company, et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, May 29, 1997; Emig v. The American Tobacco Company, et al., 18th Judicial District Court of Sedgwick County, Kansas, Civil Department, February 6, 1997; Evans, B. v. Philip Morris Incorporated, et al., Circuit Court of Jasper County, Mississippi, June 10, 1997; 7 Evans, R. v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, August 23, 1996; Ferguson v. The American Tobacco Company, et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, May 29, 1997; Fife v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Fink v. The American Tobacco Company, et al., Supreme Court of New York, New York County, June 6, 1997; Folkman v. The American Tobacco Co., et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, October 28, 1998; Freeman v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Fuller v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Gauze v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Geiger v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, May 1, 1997; Gelfond v. Fortune Brands, Inc., et al., Supreme Court of New York, New York County, May 1, 1998; Gillespie v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Gilman v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Glaser v. The American Tobacco Co., et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, July 21, 1997; 8 Golden v. The American Tobacco Company, et al., Supreme Court of New York, New York County, July 3, 1997; Graham v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Greco v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, June 27, 1997; Greenfield v. The American Tobacco Co., et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, January 28, 1998; Gruder v. Fortune Brands, Inc., et al., Supreme Court of New York, Kings County, December 17, 1997; Guilloteau v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, December 1, 1997; Hall v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Hansen, C., v. The American Tobacco Company, et al., Supreme Court of New York, Suffolk County, October 16, 1997; Hansen, P. v. The American Tobacco Company, et al., United States District Court for the State of Arkansas, Western Division, November 4, 1996 (under caption "McGinty"); Harbert v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Harding v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Harley v. The American Tobacco Co., et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, August 28, 1998; 9 Heaster v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Hellen v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, August 23, 1996; Helt v. The American Tobacco Co., et al., United States District Court for the Eastern District of California, September 3, 1998; Hibbs v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Hieneman v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Hodge v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Hodges v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Holbrook v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Huffman v. American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, February 13, 1998; Humphreys v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Husty v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Inzerilla v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, July 16, 1996; Jackson v. Philip Morris Incorporated, et al., District Court of Salt Lake County, Utah, March 10, 1998; 10 Jaust v. The American Tobacco Company, et al., Supreme Court of New York, New York County, September 10, 1997; Jenkins v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Jividen v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Mason County, January 13, 1999; Johnson v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Jones v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Juliano v. The American Tobacco Company, et al., Supreme Court of New York, Richmond County, July 24, 1997; Keenan v. The American Tobacco Company, et al., Supreme Court of New York, New York County, September 15, 1997; Keene v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Kennon v. Brown & Williamson Tobacco Corp., et al., District Court for East Baton Rouge, State of Louisiana, October 3, 1997; Kestenbaum v. The American Tobacco Company, et al., Supreme Court of New York, New York County, May 23, 1997; Keyes v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; King, D. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; 11 King, J. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Knutsen v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, October 11, 1996; Kotlyar v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, December 1, 1997; Krochtengel v. The American Tobacco Co., et al., Supreme Court of New York, Kings County, July 15, 1998 (under caption "Newberg"); Kupat Holim Clalit v. Philip Morris, Inc., et al., Jerusalem District Court, September 28, 1998; Labriola v. The American Tobacco Company, et al., Supreme Court of New York, Suffolk County, May 28, 1997; Larkin v. The American Tobacco Company, et al., Court of Common Pleas of Pennsylvania, Allegheny County, June 27, 1997; LeBrun v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Lehman v. The American Tobacco Company, et al., Supreme Court of New York, New York County, July 10, 1997; Leibstein v. The American Tobacco Company, et al., Supreme Court of New York, Nassau County, June 30, 1997; Leiderman v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, July 2, 1997; Lennon v. The American Tobacco Company, et al., Supreme Court of New York, New York County, November 5, 1997; Lien v. The American Tobacco Company, et al., Supreme Court of New York, Suffolk County, April 28, 1997; Likens v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; 12 Litke v. American Brands, Inc., et al., Supreme Court of New York, Kings County, May 7, 1997; Little v. Brown & Williamson Tobacco Corp., et al., Court of Common Pleas, Charleston, South Carolina, May 26, 1998; Lombardo v. The American Tobacco Company, et al., Supreme Court of New York, Nassau County, June 6, 1997; Long, J. v. The American Tobacco Company, et al., Supreme Court of New York, Bronx County, September 24, 1997; Long, S. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; LoPardo v. The American Tobacco Company, et al., Supreme Court of New York, Nassau County, September 25, 1997; Lucca v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, February 3, 1997; Lynch v. The American Tobacco Company, et al., Supreme Court of New York, New York County, September 24, 1997; Magnus v. The American Tobacco Company, et al., United States District Court for the Eastern District of New York, May 6, 1998; Maisonet v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, May 12, 1997; Mallett v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Margolin v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, November 22, 1996; Martin v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, June 30, 1997; Maynard v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; 13 McCormick v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; McCune v. The American Tobacco Company, et al., United States District Court for the Southern District of West Virginia, January 31, 1997; McGuinness v. The American Tobacco Company, et al., Supreme Court of New York, New York County, June 30, 1997; McLane v. The American Tobacco Company, et al., Supreme Court of New York, Richmond County, May 13, 1997; McNelly v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Mednick v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, August 20, 1997; Miller, B. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Miller, J. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Mishk v. The American Tobacco Company, et al., Supreme Court of New York, New York County, May 2, 1997; Mitchem v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Morris v. R.J. Reynolds, et al., Circuit Court of the State of West Virginia, Kanawha County, March 13, 1998; Mounts v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Murphy v. The American Tobacco Company, et al., United States District Court for the District of Nevada, Southern Division, January 6, 1998; 14 National Asbestos Workers Medical Fund v. The American Tobacco Company, et al., United States District Court, Eastern District of New York, March 27, 1988; Newell v. The American Tobacco Company, et al., Supreme Court of New York, Suffolk County, October 3, 1997; Newkirk v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Norton v. Brown & Williamson Tobacco Corporation, et al., United States District Court for the Southern District of Indiana, May 3, 1996; O'Hara v. The American Tobacco Company, et al., Supreme Court of New York, New York County, February 23, 1998; Orr v. The American Tobacco Company, et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, May 29, 1997; Owen v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Panama (Republic of Panama) v. The American Tobacco Co., et al., United States District Court of Louisiana, August 25, 1998; Parsons v. AC&S, Inc., et al., Circuit Court of the State of West Virginia, Kanawha County, February 27, 1998; Pennetti v. The American Tobacco Co., et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, April 13, 1998; Perez v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, June 23, 1997; Perri v. The American Tobacco Company, et al., Supreme Court of New York, Nassau County, October 17, 1997; Peterson v. The American Tobacco Company, et al., Circuit Court of the First Circuit, Hawaii, February 6, 1997; 15 Phillips v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Piccione v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, September 29, 1997; Piscitello v. Philip Morris Incorporated, et al., Superior Court of New Jersey Law Division, Middlesex County, July 28, 1997; Portnoy v. The American Tobacco Company, et al., Supreme Court of New York, New York County, October 21, 1997; Price v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Ramsey v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Randolph v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Reitano v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, August 22, 1996; Rico v. The American Tobacco Company, et al., Supreme Court of New York, New York County, November 30, 1998; Rinaldi v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, January 6, 1997; Ritchie v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Ritenour v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Rose, G. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; 16 Rose, N. v. The American Tobacco Company, et al., Supreme Court of New York, New York County, December 18, 1996; Roseff v. The American Tobacco Company, et al., Supreme Court of New York, New York County, December 2, 1997; Rubinobitz v. The American Tobacco Company, et al., Supreme Court of New York, Nassau County, May 28, 1997; Sanders v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Schulhoff v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, October 7, 1997; Schwartz, I. v. The American Tobacco Company, et al., Supreme Court of New York, Nassau County, May 19, 1997; Schwartz, P. v. The American Tobacco Company, et al., Supreme Court New York, Kings County, December 9, 1996; Scott v. The American Tobacco Company, et al., United States District Court for the Eastern District of Louisiana, Orleans Parish, May 28, 1996; Senzer v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, May 13, 1997; Shamblen v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Shapiro v. The American Tobacco Company, et al., Supreme Court of New York, New York County, June 17, 1997; Shipunoff v. The American Tobacco Co., et al., United States District Court for the Eastern District of California, September 3, 1998; Shultz v. The American Tobacco Co., et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, December 5, 1997; Siegel v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, August 22, 1996; 17 Simmons v. The American Tobacco Company, et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, April 1, 1998; Smith, B.J. v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, August 27, 1997; Smith, C. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Sola v. The American Tobacco Company, et al., Supreme Court of New York, Bronx County, July 16, 1996; Sopsher, C. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Sopsher, C. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Speece v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Sprung v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, May 13, 1997; Standish v. The American Tobacco Company, Supreme Court of New York, Bronx County, July 11, 1997; Stern v. Liggett Group, Inc., Supreme Court of New York, New York County, January 29, 1997; Stockton v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Stone v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Sumpter v. American Tobacco Company, et al., Superior Court of Indiana, Marion County, February 26, 1998; 18 Surgeon v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Sweeney v. The American Tobacco Co., et al., Court of Common Pleas, State of Pennsylvania, Allegheny County, October 30, 1998; Tantum v. The American Tobacco Company, et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, December 21, 1998; Tepper v. Philip Morris Incorporated, et al., Superior Court of New Jersey, Law Division, Bergen County, May 28, 1997; Thomas v. The American Tobacco Co., et al., Circuit Court, State of Missouri, Jefferson County, October 9, 1998; Thompson, B. v. The American Tobacco Co., et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Thompson, E. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Thompson, G. v. The American Tobacco Co., et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, October 30, 1997; Thompson, J. v. American Tobacco Company, Inc., et al., State of Minnesota District Court, County of Ramsey Judicial District, September 4, 1996 (under caption "Masepohl"); Tiscavitch v. The American Tobacco Co., et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, May 28, 1998; Tranquill v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; University of South Alabama v. The American Tobacco Company, et al., United States District Court, Southern Division of Alabama, May 23, 1997; 19 Upshur v. The American Tobacco Company, et al., Court of Common Pleas for the County of Philadelphia, Pennsylvania, October 10, 1997; Utah Laborers, et al. v. The American Tobacco Company, et al., United States District Court for the District of Utah, June 4, 1998; Valentin v. Fortune Brands, Inc., et al., Supreme Court of New York, Queens County, September 2, 1997; Vance v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Van Fossen v. The American Tobacco Co., et al., United States District Court for the Eastern District of California, September 3, 1998; Vaughn v. Philip Morris, Inc., et al., United States District Court for the Western District of Virginia, December 17, 1998; Wagner v. The American Tobacco Company, et al., Supreme Court of New York, Kings County, April 17, 1997; Walgreen v. The American Tobacco Company, et al., Supreme Court of New York, New York County, May 23, 1997; Walls v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Wayne v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, July 31, 1998; Weese v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Werner v. Fortune Brands, Inc., et al., Supreme Court of New York, Queens County, December 12, 1997; Whaley v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; 20 Whiddon v. The American Tobacco Company, Inc., et al., 36th Judicial District Court, Parish of Beauregard, Louisiana, December 19, 1997; Wilkinson v. The American Tobacco Company, et al., Circuit Court, Putnam County, West Virginia, January 19, 1999; Williams v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 28, 1998; Wills v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Wiseman v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Woods, D. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Woods, H. v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Wright v. The American Tobacco Company, et al., Circuit Court of the State of West Virginia, Kanawha County, October 1, 1998; Young v. The American Tobacco Company, et al., Civil District Court for the Parish of Orleans, Louisiana, November 12, 1997; Zarudsky v. The American Tobacco Company, et al., Supreme Court of New York, Nassau County, May 28, 1997; Zeringue v. The American Tobacco Co., et al., District Court of Louisiana, Jefferson Parish, September 9, 1998; and Zuzalski v. The American Tobacco Company, et al., Supreme Court of New York, Queens County, April 3, 1997. 21 List of Cases Terminated With regard to proceedings of the above types which have been terminated and not previously reported as such: Aksamit v. Brown & Williamson Tobacco Corporation, et al., which was previously pending in the United States District Court for the District of South Carolina, and instituted on November 20, 1997, was voluntarily dismissed without prejudice on June 18, 1998; Coyle v. The American Tobacco Company, et al., which was previously pending in the United States District Court for the Northern District of Nevada, and instituted on January 26, 1998, was dismissed without prejudice on August 12, 1998; Cresser v. The American Tobacco Company, et al., which was previously pending in the Supreme Court of New York, Kings County, and instituted on October 10, 1996, was dismissed per stipulation with prejudice on November 19, 1998; Demos v. John Doe/Manufacturer, which was previously pending in the United States District Court for the District of Connecticut, and instituted on September 11, 1997, was dismissed on appeal by the U.S. Court of Appeals for the Second Circuit on November 9, 1998 and no Petition of Certiorari was filed with the Supreme Court of the United States within the statutory filing period; Gallup v. The American Tobacco Company, et al., which was previously pending in the United States District Court for the Northern District of Nevada, and instituted on May 21, 1998, was voluntarily dismissed by the plaintiffs on August 25, 1998; State of Hawaii v. Brown & Williamson Tobacco Corporation, et al., which was previously pending in the Circuit Court of the First Circuit, Hawaii, and instituted on January 31, 1997, was dismissed on December 10, 1998 pursuant to the Master Settlement Agreement entered into by certain U.S. tobacco companies, including Brown & Williamson Tobacco Corporation ("MSA"); Herrera v. The American Tobacco Company, et al., which was previously pending in the Fourth Judicial District 22 of Utah County, Utah, and was instituted on January 28, 1998, was dismissed by the plaintiffs without prejudice on October 1, 1998; Ieyoub (State of Louisiana) v. The American Tobacco Company, et al., which was previously pending in the District Court of Calcasieu Parish, Louisiana, and instituted on March 13, 1996, was dismissed pursuant to the MSA on December 11, 1998; State of Iowa v. The American Tobacco Company, et al., which was previously pending in the District Court of Iowa, Polk County, and instituted on November 27, 1996, was dismissed pursuant to the MSA on December 7, 1998; Kelley (State of Michigan) v. The American Tobacco Company, et al., which was previously pending in the Circuit Court of Ingham County, Michigan, and instituted on August 21, 1996, was dismissed pursuant to the MSA on December 7, 1998; Knowles v. The American Tobacco Company, et al., which was previously pending in the Civil District Court of Louisiana, Parish of Orleans County, and instituted on June 30, 1997, was voluntarily dismissed by the plaintiffs without prejudice on December 28, 1998; Landry v. The American Tobacco Company, et al., which was previously pending in the District Court for East Baton Rouge, State of Louisiana, and instituted on May 18, 1998, was voluntarily dismissed by the plaintiffs in September, 1998; Lyons v. Brown & Williamson Tobacco Company, et al., which was previously pending in the Superior Court of Georgia, Fulton County, and instituted on May 27, 1997, was voluntarily dismissed without prejudice on December 7, 1998; McGraw (State of West Virginia) v. The American Tobacco Company, et al., which was previously pending in the Circuit Court of the State of West Virginia, Kanawha County, and instituted on September 20, 1994, was dismissed pursuant to the MSA on December 11, 1998; State of Missouri v. The American Tobacco Company, et al., which was previously pending in the Circuit Court of Missouri, St. Louis County, and instituted on May 12, 1997, was dismissed pursuant to the MSA on March 5, 1999; 23 State of Nevada v. Philip Morris Incorporated, et al., which was previously pending in the Second Judicial District of Nevada, Washoe County, and instituted on May 21, 1997, was dismissed pursuant to the MSA on December 10, 1998; State of New Mexico v. The American Tobacco Company, et al., which was previously pending in the First Judicial District of New Mexico, Santa Fe County, and instituted on May 27, 1997, was dismissed pursuant to the MSA on December 11, 1998; State of New York v. Philip Morris, Incorporated, et al., which was previously pending in the United States District Court, Southern District of New York, and instituted on January 27, 1997, was dismissed pursuant to the MSA on December 23, 1998; Oklahoma (State of Oklahoma) v. The American Tobacco Company, et al., which was previously pending in the District Court for Cleveland County, Oklahoma, and instituted on August 22, 1996, was dismissed pursuant to the MSA on December 1, 1998; Commonwealth of Puerto Rico v. Brown & Williamson Tobacco Company, et al., which was previously pending in the United States District Court, Division of Puerto Rico, and instituted on June 17, 1997, was dismissed pursuant to the MSA on December 9, 1998; Rhode Island (State of Rhode Island) v. Brown & Williamson as Successor, which was previously pending in the Superior Court of Providence, Rhode Island, and instituted on July 17, 1997, was dismissed pursuant to the MSA on December 17, 1998; Rivenburgh v. The American Tobacco Company, et al., which was previously pending in the United States District Court for the Southern District of Nevada, and instituted on January 6, 1998, was voluntarily dismissed by the plaintiffs on November 6, 1998; State of South Carolina v. Brown & Williamson Tobacco Company, et al., which was previously pending in the Court of Common Pleas of South Carolina, Richmond County, and instituted on May 12, 1997, was dismissed pursuant to the MSA on December 31, 1998; 24 Sparks v. Brown & Williamson Tobacco Corp., et al., which was previously pending in the Court of Common Pleas for Trumbull County, Ohio, and instituted on July 16, 1998, was voluntarily dismissed on July 30, 1998; Tucker v. The American Tobacco Company, et al., which was previously pending in the United States District Court for the Northern District of Nevada, and was instituted on January 26, 1998, was dismissed without prejudice on August 12, 1998; Ulrich, S. v. The American Tobacco Company, et al., which was previously pending in the United States District Court for the Southern District of Nevada, and was instituted on January 6, 1998, was voluntarily dismissed by the plaintiffs on November 6, 1998; State of Utah v. The American Tobacco Company, et al., which was previously pending in the United States District Court for the District of Utah, Central Division, and instituted on September 30, 1996, was dismissed pursuant to the MSA on January 6, 1999; and White v. The American Tobacco Company, et al., which was previously pending in the United States District Court for the Southern District of Mississippi, Western Division, and instituted on April 18, 1997, was voluntarily dismissed by the plaintiffs without prejudice on September 18, 1998. 25 -----END PRIVACY-ENHANCED MESSAGE-----