FORTUNE BRANDS INC - 10-K Annual Report

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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, 2002 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.)

300 TOWER PARKWAY, LINCOLNSHIRE, IL 60069-3640

(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 484-4400

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

Indicate by check mark whether 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 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/

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes /X/ No / /

The aggregate market value of registrant's voting stock held by non-affiliates
of registrant, at June 28, 2002, was $8,404,677,167.25. The number of shares
outstanding of registrant's common stock, par value $3.125 per share, at
February 3, 2003, were 146,617,467.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Certain information contained in the Proxy Statement for the Annual Meeting
of Stockholders of registrant to be held on April 29, 2003 (to be filed not
later than 120 days after the end of registrant's fiscal year) is
incorporated by reference into Part III hereof.

FORM 10-K TABLE OF CONTENTS

PART I

ITEM 1. Business.

(a) General development of business.

Fortune Brands, Inc. ("we" or "the Company") is a holding company with
subsidiaries engaged in the manufacture, production and sale of home
products, spirits and wine, golf products and office products.

The Company was incorporated under the laws of Delaware in 1985 and until
1986 conducted no business. Prior to 1986, the businesses of the Company'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 the Company. In addition, the
Company 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, the Company's name was changed from American Brands,
Inc. to Fortune Brands, Inc.

As a holding company, the Company is a legal entity separate and distinct
from its subsidiaries. Accordingly, the right of the Company, and thus the
right of the Company'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 the Company
itself as a creditor of such subsidiary may be recognized, in which event the
Company's claims may in certain circumstances be subordinate to certain
claims of others. In addition, as a holding company, a principal source of
the Company's unconsolidated revenues and funds is dividends and other
payments from its subsidiaries. The Company'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 the Company.

The Company seeks to strategically enhance the operations of its principal
operating companies. Pursuant to this strategy, in April 2002, our home
products business acquired Omega Holdings, Inc. (Omega), a U.S.-based
manufacturer of custom and semi-custom cabinetry. This acquisition broadens
our cabinet product line, providing additional selling opportunities across
customers, and is expected to produce purchasing and manufacturing
efficiencies. The cost of the acquisition was $538 million.

The Company's spirits and wine business completed transactions with V&S Vin &
Sprit AB (V&S), maker of ABSOLUT vodka, creating a joint venture named Future
Brands LLC (Future Brands) to distribute both companies' spirits and wine
brands in the United States. V&S paid $270 million to gain access to our
spirits and wine business' U.S. distribution network and to acquire a 49%
interest in Future Brands, and paid $375 million to purchase a 10% equity
interest in the Company's spirits and wine subsidiary, Jim Beam Brands
Worldwide, Inc. (JBBW), in the form of convertible preferred stock. V&S also
received a three-year option to increase its equity stake in JBBW by up to an
additional 9.9%. V&S may require the Company to purchase the JBBW preferred
stock in whole or in part at any time after May 31, 2004 or upon a change in
control of JBBW, Jim Beam Brands Co. (JBBCo.), or certain other events.

In 1999, JBBW formed an international sales and distribution joint venture,
Maxxium Worldwide B.V. (Maxxium), with Remy-Cointreau and Highland Distillers
to distribute and sell spirits in key markets outside the United States. JBBW
agreed to contribute assets related to its international distribution network
and periodic cash payments with a total estimated value of $110 million in
return for a one-third interest in the venture. JBBW's investment of $110
million is contingent upon achievement of certain contractual performance
measures, which were not met in 2002. During 1999 and 2000, JBBW made cash
investments of approximately $30 million and $25 million in Maxxium. The
investments of JBBW in Maxxium were recorded at the book value of assets
contributed plus cash invested.

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Also in 1999, subsidiaries of the Company completed two acquisitions, one in
our home products business and another in the office products business, for
an aggregate cost of $103.6 million in cash, including fees and expenses. In
1998, the Company's subsidiaries 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.

The Company has also sold a number of other nonstrategic businesses and
product lines. In 2001, the Company's spirits and wine business sold its
U.K.-based Scotch whisky business for $280 million in cash. The sale of the
business consisted of the Invergordon private-label and bulk Scotch
operations and several regional brands in the U.K. In 1998, one of the
Company's home products subsidiaries sold assets relating to the manufacture
of door locks and related hardware.

The Company reviews on an ongoing basis the portfolio of brands owned by its
operating companies and evaluates its options for increasing shareholder
value. 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, the Company might finance such
acquisitions by issuing additional debt or equity securities. The possible
additional debt from any acquisitions, if consummated, would increase the
Company'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. The
Company also continues to consider other corporate strategies intended to
enhance stockholder value, including share repurchases. The Company cannot
predict whether or when any such strategies might be implemented or what the
financial effect thereof might be upon the Company's debt or equity
securities.

Another aspect of the Company'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 the Company's and its subsidiaries' cost
structure. This strategy led the Company to record restructuring charges of
$45.9 million in 2002 and $45.4 million in 2001.

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, as defined in the Private Securities Litigation Reform Act of
1995, 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,

- - changes in interest rates,

- - returns on pension assets,

- - competitive product and pricing pressures,

- - customer consolidations,

- - the impact of excise tax increases with respect to distilled spirits and
wine,

- - regulatory developments,

- - the uncertainties of litigation,

- - changes in golf equipment regulatory standards,

- - the impact of weather, particularly on the home and golf products groups,

- - expenses and disruptions related to shifts in manufacturing to different
locations and sources, and

other risks and uncertainties detailed from time to time in the Company's
Securities and Exchange Commission filings.

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(b) Financial information about industry segments

See Note #16 -- "Information on Business Segments" in the Notes to
Consolidated Financial Statements, Item 8 to this Form 10-K.

(c) Narrative description of business.

The following is a description of the business of the subsidiaries of the
Company in the industry segments of Home Products, Spirits and Wine, Golf
Products and Office Products. For financial information about these industry
segments, see Note #16 -- "Information on Business Segments" in the Notes to
Consolidated Financial Statements, Item 8 to this Form 10-K.

HOME PRODUCTS

MasterBrand Industries, Inc. (MasterBrand) is a holding company for
subsidiaries in the home products business. Subsidiaries include Moen
Incorporated (Moen), MasterBrand Cabinets, Inc. (MasterBrand Cabinets),
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 that affect MasterBrand's results of operations include
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, bath furnishings and accessories and
parts in the U.S. and East Asia. Moen branded faucets are sold under a
variety of trade names including Asceri, Villeta, extensa, Boutique,
Traditional, Touch Control, One-Touch, Monticello, PureTouch, Concentrix,
Chateau and Legend and other products are sold under the Moen and CSI Donner
brand names. The Cleveland Faucet Group (CFG), a division of Moen,
manufactures and packages faucets in the U.S. and East Asia, and sells under
the trade name Cornerstone, Flagstone and Dimensions. 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. CFG sales are
made through CFG's and Moen's sales force primarily to the multi-family and
manufactured housing markets. 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 is engaged in manufacturing ready-to-assemble, stock,
and semi-custom kitchen cabinets and bathroom vanities. MasterBrand Cabinets
sells under brand names including Aristokraft, Decora', Schrock, Diamond,
Kemper, Omega, Kitchen Craft and HomeCrest. MasterBrand Cabinets sells direct
to large homebuilders and through stocking distributors for resale to kitchen
and bath specialty dealers, home centers, lumber and building material
dealers, remodelers and builders. MasterBrand Cabinets also sells to The Home
Depot for resale under the Thomasville brand. In April 2002, MasterBrand
Cabinets acquired all of the outstanding common stock of Omega, a Delaware
corporation based in Waterloo, Iowa, for $538 million. Omega is a leader in
the growing semi-custom kitchen and bath cabinet category. MasterBrand
Cabinets' competitors include Masco's Merillat, KraftMaid and Mills Pride
brands, Armstrong World Industries' Triangle Pacific brand and American
Woodmark Corporation.

Master Lock manufactures key-controlled and combination padlocks, bicycle and
cable locks, built-in locker locks, automotive, trailer and towing locks and
other specialty security devices. Sales of products designed for consumer use
are made to wholesale distributors, home centers and hardware and other
retail outlets. Sales of lock systems are made to industrial and
institutional users, original equipment manufacturers and retail outlets.
Master Lock competes with Abus, Kryptonite, Hampton, American Lock, Winner
and various imports in the padlock segment.

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Waterloo manufactures tool storage products, principally high quality steel
toolboxes, tool chests, workbenches and related products. Waterloo sells to
Sears for resale under the Craftsman brand owned by Sears and under the
Waterloo brand name to specialty industrial and automotive dealers, mass
merchandisers, home centers and hardware stores. 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.

SPIRITS AND WINE

JBBW is a holding company for subsidiaries in the distilled spirits and wine
business. Principal subsidiaries include JBBCo., Future Brands and Jim Beam
Brands Australia Pty. Limited.

On October 16, 2001, the Company's spirits and wine business announced that
it had sold its U.K.-based Scotch whisky business for $280 million in cash.
The sale of the business consisted of the Invergordon private-label and bulk
Scotch operations and several regional brands in the U.K. The business that
was sold generated sales of approximately $235 million (including excise
taxes) in 2000. The Company recorded an after-tax gain of $21.8 million
related to the sale.

On May 31, 2001, the Company's spirits and wine business completed
transactions with V&S, maker of ABSOLUT vodka, creating a joint venture named
Future Brands to distribute both companies' spirits and wine brands in the
United States. V&S paid $270 million to gain access to JBBCo.'s U.S.
distribution network and to acquire a 49% interest in Future Brands and paid
$375 million to purchase a 10% equity interest in JBBW in the form of
convertible preferred stock. V&S also received a three-year option to
increase its equity stake in JBBW by up to an additional 9.9%. V&S may
require the Company to purchase the JBBW preferred stock in whole or in part
at any time after May 31, 2004 or upon a change in control of JBBW, JBBCo.,
or certain other events.

In August 1999, JBBW formed an international sales and distribution joint
venture, named Maxxium Worldwide B.V., to distribute and sell premium wines
and spirits in key markets outside the United States. At the same time as the
formation of Future Brands was announced on May 31, 2001, V&S invested 107
million Euros (approximately $90 million) to acquire a 25% interest in
Maxxium.

In addition, in August 1998, JBBW 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 Geyser Peak Reserve,
Geyser Peak and Canyon Road.

Principal markets for the products of JBBW's subsidiaries are the U.S.,
Australia and the U.K. Approximately 90% of JBBW subsidiary sales are to
these three markets with the U.S., Australia and the U.K. representing 79%,
9% and 2% of sales, respectively.

JBBW'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 the Kamchatka vodka
brand in California are claimed by another entity.

JBBCo., 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 and rum. JBBCo. and its predecessors
have been distillers of bourbon whiskey since 1795. JBBCo.'s leading brand
names are Jim Beam bourbon whiskey, DeKuyper cordials, Windsor Canadian
supreme whisky, Kessler American blended whiskey, Kamora coffee liqueur, Knob
Creek, Booker's, Baker's and Basil Hayden's small batch bourbons, Ronrico
rum, Vox vodka, Lord Calvert Canadian and Gilbey's Gin. As discussed above,
in 1998 JBBCo.'s also added wines to

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its product offerings. Products of JBBW's subsidiaries are sold through
various distributors. In the 18 "control" states (and one county) in the U.S.
that have established government control over certain aspects of the purchase
and distribution of alcoholic beverages, products are sold through
government-controlled liquor authorities.

The distilled spirits business is highly competitive, with many brands sold
in the consumer market. Management believes that, based on units and sales
value, the JBBW 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 major competitors worldwide. JBBW's
subsidiaries compete on the basis of product quality, price, service and
responsiveness to consumer preferences.

Over the past several years, there has been a trend toward consolidation of
supplier, distributor and retailer tiers in the highly competitive global
spirits and wine business. Continued consolidation may present pricing and
service challenges for our spirits and wine business and its competitors. It
may also present opportunities, particularly for the most efficient and
innovative competitors.

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 a limited number of major sources, one of which is
owned by a competitor. JBBCo. has entered into a long-term supply agreement
for new oak barrels.

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 that may limit production.
In fiscal 2002, approximately 7 to 8% 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 JBBW 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. In addition, JBBW may from time to time
seek to purchase bulk whiskey if necessary to meet estimated future demand.

The production, storage, transportation, distribution and sale of the
products of JBBW'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 and other class action litigation, some commentators have
suggested that other industries, including beverage alcohol, may be the
targets of litigation. The Company believes, and counsel has advised
generally, that in the event such actions are commenced, the Company and its
subsidiaries would have meritorious defenses to such lawsuits, and the
Company would vigorously contest any such litigation.

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. Beverage alcohol sales are particularly sensitive to higher
excise tax rates. Although no federal excise tax increase is presently
pending in the U.S., our largest market, many states are considering possible
excise tax increases and the possibility of future increases cannot be ruled
out. The effect of any future excise tax increases in any jurisdiction cannot
be determined, but it is possible that any future excise tax increases would
have an adverse effect on unit sales and increase existing competitive
pressures.

At various times in prior years, there has been discussion and legislation
introduced to ban U.S. television advertising of spirits. No federal
legislation has been enacted, and one major U.S. network briefly accepted
spirits advertising in 2002. However, no broadcast network in the U.S.
currently accepts distilled spirits advertising. Many local U.S. cable and
radio stations accept distilled spirits advertising and JBBW advertises
through U.S. radio. JBBW's operating subsidiaries outside the U.S. have
conducted broadcast advertising in markets where legal.

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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 golf bags, dress and athletic shoes as well as
socks, accessories and apparel outerwear. Acushnet's leading brands are
Titleist and Pinnacle golf balls; Titleist and Cobra golf clubs; Scotty
Cameron by Titleist and Bulls Eye putters; FootJoy golf shoes; and FootJoy
and Titleist golf gloves. Acushnet products are sold primarily to on-course
golf pro shops and selected off-course specialty stores throughout the United
States. Sales are made in the U.K., Canada, Germany, Austria, Denmark,
Ireland, France, Sweden, The Netherlands, South Africa, Thailand, Singapore
and Japan through subsidiaries and outside these areas through distributors
or agents.

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, Maxfli, Bridgestone, Nike and Callaway. In
golf clubs, Callaway, TaylorMade, Cleveland, Wilson, Ping, Adams and Orlimar
are the main competitors. In golf shoes, Nike, Etonic, Adidas and Dexter are
the main competitors. In golf gloves, Nike, Etonic, Wilson and
TaylorMade/Maxfli are the main competitors.

Acushnet's advertising and promotional campaigns rely in part on a large
number of touring professionals and club professionals using and endorsing
its products. The market for the endorsement and promotional services of
touring professionals has been and will continue to be increasingly
competitive.

There is currently a substantial market in "knock-off" and counterfeit golf
clubs which imitate or copy the protected features of original equipment
manufacturers' golf club products. Acushnet has an active program of
enforcing its intellectual property rights against those who make or sell
such products.

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, paper-based 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, Mexico, Western Europe, Australia, New Zealand, 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. ACCO Mexicana (ACCO Mexicana) manufactures binders and fasteners,
and distributes in Mexico 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 and Boone presentation products. Products are sold
throughout the U.S., Canada and Mexico by in-house sales forces and
independent representatives to office and computer products wholesalers,
retailers, dealers, mail order companies and mass merchandisers. Our
acquisitions of office products companies in the past five years include the
following: in February 1998, the Apollo group of companies, a North American
leader in presentation products; and in October 1999, Boone International
Inc., a leading manufacturer of bulletin and dry-erase boards, chalkboards
and dry-erase markers and accessories for home, home office and commercial
use. Boone sales are concentrated in the U.S. and Canada.

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

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subsidiaries' sales forces and through distributors. Principal brands sold by
ACCO Europe's subsidiaries include ACCO fastening products, Kensington
computer accessories, Rexel filing, stapling, binding, and laminating
products, Nyrex and Twinlock filing products, Nobo and Sasco presentation
products and, in Australia, Marbig products.

Day-Timers, Inc. (Day-Timers), a subsidiary of ACCO, manufactures personal
organizers and planners in the U.S. Products are sold in the U.S. by
Day-Timers and in Canada, Australia 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.

Management believes that manufacturing within the office products industry
remains highly fragmented. 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
Rubbermaid, Fellowes, Cardinal and GBC. Primary competitors for personal
organizers in the North American market are Franklin Quest and Day-Runner. In
computer accessories, ACCO competes against Fellowes, Logitech, Microsoft,
Targus, Belkin and others, as well as products sold under private labels at
retailers. ACCO's operating companies compete on the basis of product
quality, price, service and responsiveness to consumer preferences.

The Company is currently repositioning and restructuring the business to
improve both financial results and the long-term value of the business. Under
this plan, our office products group is realigning and streamlining its
worldwide operations, intensifying its focus on growing profitable core
product categories, divesting or discontinuing non-strategic and low-return
product categories and reducing overhead expenses and excess capacity.

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 has established
substantial production operations in Mexico, helping to reduce its cost base.

OTHER MATTERS

EMPLOYEES

As of December 31, 2002, the Company and its subsidiaries had approximately
the following number of employees:

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ENVIRONMENTAL MATTERS

The Company 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 the Company's subsidiaries may undertake in the future, in the opinion
of management of the Company, 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 the Company and its subsidiaries.

(d) Financial information about foreign and domestic operations and export
sales

The Company'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" in Note 16 of the Notes to
Consolidated Financial Statements, Item 8 to this Form 10-K. The Company has
investments in various foreign countries, principally the United Kingdom, as
well as Australia and Canada, and, therefore, changes in the value of the
currencies of these countries can have an effect on the Company's financial
statements when translated into U.S. dollars.

WEB SITE ACCESS TO SEC REPORTS

The Company's website address is www.fortunebrands.com. The Company's annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and any amendments to these reports are available free of charge on the
Financial Info page of the Company's website as soon as reasonably
practicable after the reports are filed electronically with the Securities
and Exchange Commission.

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ITEM 2. Properties.

The Company leases its principal executive offices in Lincolnshire, Illinois.
Additionally, the Company continues to lease and has sublet substantially all
of its premises in Old Greenwich, Connecticut, that formerly served as its
executive offices. The following table indicates the principal properties of
the Company's subsidiaries:

The Company 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.

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ITEM 3. Legal Proceedings.

OVERVIEW

On December 22, 1994, the Company 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, which has merged into B&W (together, the Indemnitor), 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 ATCO. The Indemnitor has complied with the terms of the
indemnification agreement since 1994 and the Company is not aware of any
inability on the part of the Indemnitor to satisfy its indemnitor obligations.

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. The Company 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, health trusts, federal and state taxpayers and others seeking
reimbursement for health care expenditures allegedly caused by cigarette
smoking. As noted below, in 1998 certain United States tobacco companies,
including B&W, entered into a Master Settlement Agreement (the MSA) 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.

INDIVIDUAL CASES

As of February 24, 2003, there were approximately 34 smoking and health cases
pending on behalf of individual plaintiffs in which the Company has been
named as one of the defendants, compared with approximately 76 such cases as
of March 1, 2002. See "List of Pending Cases" below.

CLASS ACTIONS

As of February 24, 2003, there were approximately nine purported smoking and
health class actions pending in which the Company has been named as one of
the defendants compared with approximately 13 such cases as of March 1, 2002.
See "List of Pending Cases" below.

HEALTH CARE COST RECOVERY ACTIONS

As of February 24, 2003, there were approximately four health care recovery
actions pending in which the Company has been named as one of the defendants,
compared with approximately two such cases as of March 1, 2002. See "List of
Pending Cases" below.

CERTAIN DEVELOPMENTS AFFECTING THE INDEMNITOR

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.). The jury in Phase
I of the trial found for the plaintiffs and against certain tobacco
manufacturers (including B&W individually and as successor by merger to
ATCO). In Phase II of the trial, the same jury addressed the individual
claims of the named class representatives. The trial court judge ruled that
the jury in Phase II could award an aggregate classwide lump-sum amount of
punitive damages. On April 17, 2000, the jury awarded an approximate
aggregate amount of $12.7 million to three of the named class
representatives, although it also found that the claims of one of the three
class representatives may have been barred by the statute of limitations. On
July 14, 2000, the jury awarded a total of $144.87 billion in punitive

12

damages against the defendants, including $17.59 billion against Brown and
Williamson. On November 6, 2000, Florida Circuit Judge Robert Kaye upheld
this jury award, and held that the class of plaintiffs eligible to recover
damages should be extended to smokers with illnesses diagnosed more than four
years before the lawsuit was filed in 1994. Defendants' appeal is pending.
The Company is not a party to the Engle litigation.

In September of 1999, the United States government filed a recoupment lawsuit
in Federal Court in Washington, D.C. against the leading tobacco
manufacturers (including B&W individually and as a successor to ATCO) seeking
recovery of costs paid by the Federal government for claimed smoking-related
illness. In September 2000, the U.S. District Court for the District of
Columbia ruled that the government could not use the Medical Care Recovery
Act (MCRA) or Medicare Secondary Payor (MSP) insurance provisions as a basis
to try to recover government expenses relating to tobacco smokers, and
dismissed the counts of the lawsuit relating to these laws. The court ruled
that the government could proceed with two counts under the federal RICO
statute under which the government seeks disgorgement of all of defendants'
profits from the sale of tobacco. In October 2000, the United States
Government filed a motion for reconsideration seeking a partial reinstatement
of the MCRA claim, and, in February 2001, filed an amended complaint
repleading the MSP claim. By orders dated July 27, 2001, the Court denied the
motion for reconsideration and dismissed with prejudice the MSP claim. A
tentative trial date of September 15, 2004 has been set with respect to all
remaining claims. The Company is not a party to this action.

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 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. The Company
is not a party to the MSA and is not bound by any of the payment obligations
or other restrictions of the MSA.

Under the MSA, the settling States agreed 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.

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. The Company
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

13

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.

Prior to the MSA, health care cost recovery actions filed by the states of
Minnesota, Texas, Florida and Mississippi were settled separately on terms
which included monetary payments of several billion dollars. The Company was
not a party to the Minnesota or Texas action and was voluntarily dismissed
from the Florida and Mississippi actions. The Company is not a party to any
of the settlements nor is it required to pay any money under these
settlements.

LIST OF PENDING CASES

For a list of pending cases, see Exhibit 99.1 to this Form 10-K and, for a
discussion of other pending litigation, see Note #21 "Pending Litigation" in
the Notes to Consolidated Financial Statements, Item 8 to this Form 10-K.

LIST OF TERMINATED CASES

For a list of terminated cases, see Exhibit 99.1 to this Form 10-K.

CONCLUSION

It is not possible to predict the outcome of the pending litigation, and, as
with any litigation, 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. However, management believes that there are a number
of meritorious defenses to the pending actions, including the fact that the
Company never made or sold tobacco, and these actions are being vigorously
contested by the Indemnitor. 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 because it believes it has
meritorious defenses and the Company is indemnified under the previously
mentioned indemnification agreement.

ITEM 4. Submission of Matters to a Vote of Security Holders.

None.

14

ITEM 4A. Executive Officers of the Company.

The name, present positions and offices with the Company, principal
occupations during the past five years and age of each of the Company's
present executive officers are as follows:

In the case of each of the above-listed executive officers, the occupation or
occupations given were the 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 the executive officer and any other
person. All executive officers are elected annually.

15

PART II

ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters.

QUARTERLY COMMON STOCK CASH DIVIDEND PAYMENTS

QUARTERLY COMPOSITE COMMON STOCK PRICES

The common stock is listed on the New York Stock Exchange, which is the
principal market for this security. The high and low prices are as reported in
the consolidated transaction reporting system.

On February 17, 2003, there were 29,006 record holders of the Company's common
stock, par value $3.125 per share.

16

ITEM 6. Selected Financial Data.

(a) See pages 18 through 38 of Management's Discussion and Analysis of Financial
Condition and Results of Operations.

(b) See Note 4 in the Notes to Consolidated Financial Statements, Item 8 to this
Form 10-K, regarding acquisitions, dispositions and joint ventures.

(c) Net sales and gross profit have been restated for 2001 and 2000 to conform
to the 2002 presentation due to the reclassification of certain expenses in
accordance with Emerging Issues Task Force Issue No. 01-09. Amounts prior
to 2000 have not been restated.

(d) On January 31, 2003, there were 27,922 common stockholders of record, not
necessarily reflecting beneficial ownership.

17

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

(1) Operating company contribution (OCC) is net sales less all costs and
expenses other than restructuring and restructuring-related charges,
write-downs of identifiable intangibles and goodwill, amortization of
intangibles, corporate administrative expense, interest and related
expenses, other (income) expense, net, income taxes and minority
interests. OCC, which is not a measure under generally accepted
accounting principles, is one of the key measures by which we gauge the
underlying operating performance of our business segments. We use this
and other measures to allocate capital resources, evaluate acquisitions
and dispositions and evaluate and identify cost-reduction initiatives.
OCC should not be considered as a substitute for any measure derived in
accordance with generally accepted accounting principles. This measure
may differ from similar measures presented by other companies depending
upon which items other companies include.

(2) Other operating expenses represent the sum of corporate administrative
expense, intangible amortization and restructuring and restructuring-related
charges.

CONSOLIDATED

Fortune Brands, Inc. is a holding company with subsidiaries that manufacture or
produce and sell leading consumer branded products in the following industries:
home products, spirits and wine, golf equipment and office products. It earns
cash and profits by building its consumer brands to grow sales, including the
development of new products and effective marketing campaigns and improving its
productivity and cost structure. It strives to enhance shareholder value by
strategically positioning its businesses to achieve higher growth and higher
returns, including through acquisitions, dispositions and joint ventures and
through other

18

shareholder value initiatives such as using its financial resources to
repurchase shares and pay attractive dividends.

The Company's net income increased 36% in 2002 due primarily to the benefit of
the acquisition of the Omega Group cabinet company and strong operating
performance. Management considers 2002 to have been a very successful year for
Fortune Brands, especially given uneven economic conditions in its primary
markets. Management believes the Company is well positioned in 2003 to meet its
long-term goals of increased returns and double-digit EPS growth, excluding any
special charges or gains. In 2003, the Company may confront continued economic
uncertainty and may be adversely impacted by increased expenses for pension,
post-retirement benefit plans and insurance. The Company's operating units will
also face both challenges and opportunities unique to their industries, as
discussed in this report.

2002 Compared to 2001

NET SALES

Net sales increased $118.1 million, or 2%, to $5.7 billion. Sales benefited from
the acquisition of Omega Holdings, Inc., a U.S.-based manufacturer of custom and
semi-custom cabinetry, increased volumes with the introduction of new products
and line extensions, principally in the golf products business, and favorable
foreign exchange of $20 million. These benefits were partly offset by lower
volumes in certain existing product lines in the golf and office products
businesses, the sale of the U.K.-based Scotch whisky business in October 2001,
the absence of ABSOLUT revenues recorded on an interim basis in 2001 and five
fewer selling days in 2002 for the cabinets business due to the use of the
53-week and 52-week business calendar in consecutive years.

The percentage increase in net sales would have been higher if the net impact of
revenues for the U.K.-based Scotch whisky business and the sales of ABSOLUT
vodka recorded on an interim basis in 2001, as well as the benefit of the
Omega acquisition in 2002, were excluded.

COST OF PRODUCTS SOLD

Cost of products sold decreased $53.7 million, or 2%, due to positive operating
leverage and cost reductions.

EXCISE TAXES ON SPIRITS AND WINE

Excise taxes on spirits and wine decreased $49.3 million, or 14%. The decrease
was principally due to the absence of the ABSOLUT revenues recorded on an
interim basis in 2001 and the absence of the U.K.-based Scotch whisky business
in 2002. The Company's spirits and wine business incurs federal excise taxes in
the U.S., and in addition to the U.S., had incurred excise taxes in the United
Kingdom for the first nine months of 2001 prior to the sale of the U.K.-based
Scotch whisky business.

ADVERTISING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Advertising, selling, general and administrative expenses increased
$85.2 million, or 6%, on higher advertising and marketing expenditures and
pension expense, partially offset by cost savings achieved from the Future
Brands LLC joint venture established in June 2001 and our restructuring actions
and other cost containment initiatives across all of our operations,
particularly in our office products business.

AMORTIZATION OF INTANGIBLES

Amortization of intangibles decreased $46.6 million, or 74%, due to the adoption
of the Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142) as of
January 1, 2002.

WRITE-DOWN OF IDENTIFIABLE INTANGIBLES AND GOODWILL

In 2002, we did not record a write-down of either identifiable intangibles or
goodwill. In 2001, we did record a non-cash write-down identifiable intangibles
of $73.3 million, $67.1 million after-tax (44 cents basic and 43 cents diluted
per share). The write-down recognized the diminished fair values of select
identifiable intangibles resulting from the structuring of office products and
the consolidation of non-core tradenames in

19

home products. The write-down by business segment were: office
products -- $64.4 million; and home products -- $8.9 million.

RESTRUCTURING CHARGES

For the year ended December 31, 2002, we recorded pre-tax restructuring charges
of $45.9 million ($29.8 million after tax). The charges principally related to
planned workforce reduction costs, asset write-offs and costs associated with
the consolidation of manufacturing facilities, principally in the office
products business, and the sale of certain non-strategic product lines in the
home products and spirits and wine businesses.

For the year ended December 31, 2001, we recorded pre-tax restructuring charges
of $45.4 million ($29.8 million after tax). These charges principally related to
product line discontinuances, expenses associated with the exploration of
strategic options and planned workforce reduction initiatives across the
operations of the office products business, lease cancellation costs in the
specialty plumbing parts business and capacity reductions in select technology
platforms in the golf products business.

INTEREST AND RELATED EXPENSES

Interest and related expenses decreased $22.7 million, or 23%. This decrease
primarily reflected lower average borrowings as we repaid short-term debt using
proceeds received from V&S and from the sale of the U.K.-based Scotch whisky
business and increased operating cash flow as well as lower interest rates,
partially offset by commercial paper borrowings used to finance the Omega
cabinets acquisition.

OTHER INCOME, NET

Other income, net decreased $13.7 million to $43.7 million for the year ended
December 31, 2002 due principally to (1) the absence of the $16.6 million gain
on the sale of the U.K.-based Scotch whisky business and (2) lower interest
income on a tax receivable in 2002 as compared to 2001.

The significant components of other income, net for the years ended
December 31, 2002 and 2001 are as follows:

INCOME TAXES

Income taxes increased $119.8 million, or 127%. The reported effective income
tax rate for the years ended December 31, 2002 and 2001 were 28.3% and 19.2%,
respectively. The increase was principally due to the higher operating income
and lower interest and related expenses partially offset by the tax credit of
$61.7 million recorded in June 2002. The effective income tax rate comparison
was impacted by the recognition, during the second quarter of 2002, of a
$61.7 million tax credit resulting from new IRS regulations that reinterpret the
capital loss disallowance rules. The new regulations now enable us to utilize a
capital loss incurred in 1994 to offset capital gains taxed in 1996 and 1997.
The other factors affecting the effective income tax rate comparison include:
interest on the $61.7 million tax credit of $14.9 million ($9.6 million after
tax); the reversal of a $31.0 million tax reserve for the years 1990 through
1992 in the second quarter of 2001; and the $72.9 million net tax benefit
recognized as a result of the recapitalization of the office products business
in the fourth quarter of 2001. Excluding these tax-related items, the effective
income tax rates for the years ended December 31, 2002 and 2001 were 36.5% and
37.9%, respectively. This lower effective tax rate principally reflects lower
goodwill amortization related to the adoption of SFAS 142.

20

MINORITY INTERESTS

Minority interests increased $4.9 million, or 43%, principally on the
recognition of five additional months of preferred dividends payable to V&S, on
their 10% interest in JBBW, in 2002 as compared to 2001.

NET INCOME

Net income of $525.6 million, or $3.51 basic and $3.41 diluted per share, for
the year ended December 31, 2002 compared with net income of $386.0 million, or
$2.55 basic and $2.49 diluted per share, for the year ended December 31, 2001.
The increase in net income of $139.6 million was principally due to the higher
sales, the lower cost of sales, lower intangible amortization and interest and
related expenses, partly offset by higher income taxes, increased advertising
and marketing expenditures and higher pension expense.

Net income for the year ended December 31, 2002 includes the following net gains
and charges: the recognition of a $61.7 million tax credit and related interest
income of $14.9 million ($9.6 million after tax) and the $55.8 million
($36.2 million after tax) in restructuring and restructuring-related charges. In
addition, net income for the year ended December 31, 2001, includes the
following net gains and charges: the recognition of a $72.9 million net tax
benefit and related interest income of $28.5 million ($17.3 million after tax);
the reversal of a $31.0 million tax reserve that was no longer required; the
$16.6 million ($21.8 million after tax) gain on the sale of the U.K-based Scotch
whisky business; the $98.1 million ($63.3 million after tax) of restructuring
and restructuring-related charges; and the $73.3 million ($67.1 million after
tax) write-down of certain identifiable intangibles.

On a periodic basis, we evaluate the assumptions used in determining our pension
liabilities and assets as well as pension expense based upon historical returns
on plan assets and current economic conditions at the time the assumptions are
set.

We initially reexamined in December 2001 the economic assumptions that underlie
determination of our pension expense and year-end disclosure. This review led to
a reduction in both our weighted-average discount rate from 7.2% to 7.0% and
weighted-average expected rate of return from 9.6% to 8.3%. These revisions led
to an increase in pension expense of approximately $15 million to $21.9 million
in 2002. Once again, in late 2002, we reviewed our economic assumptions and
lowered our weighted-average discount rate from 7.0% to 6.6% for 2003. Our
weighted-average expected return on plan assets remained unchanged at 8.3%. Our
management believes that these assumptions are appropriate. The 2002 revisions
will result in an increase to our pension expense of approximately $10 to
$15 million in 2003.

In addition, we expect in 2003 to provide cash contributions of approximately
$30 million to fund existing pension liabilities for our qualified
defined-benefit plans. Additional cash contributions in 2003 will be required as
benefits are paid for our various supplemental defined-benefit plans. In 2002,
our total defined-benefit plan cash contributions were $16.4 million.

We derived approximately 21% of our 2002 and 22% of our 2001 operating company
contribution from international markets, principally the United Kingdom, Canada
and Australia. Fluctuations in the exchange rates of foreign currencies may
affect results in future periods. Fluctuations in average foreign exchange
reduced 2002 operating company contribution by approximately 1%. We cannot
accurately predict fluctuations in foreign exchange rates. A 10% change in
average exchange rates for the foreign currencies from 2002 average rates would
have resulted in a change in operating company contribution of approximately
$19 million, or about 2%.

Pending Litigation

TOBACCO LITIGATION AND INDEMNIFICATION

On December 22, 1994, the Company sold ATCO subsidiary to B&W, a wholly-owned
subsidiary of B.A.T Industries p.l.c. In connection with the sale, B&W and ATCO,
which has since merged into B&W (the Indemnitor), 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 ATCO. The
Indemnitor has

21

complied with the terms of the indemnification agreement since 1994 and the
Company is not aware of any inability on the part of the Indemnitor to satisfy
its indemnity obligations.

The Company is a defendant in numerous actions based upon allegations that human
ailments have resulted from tobacco use. It is not possible to predict the
outcome of the pending litigation, and, as with any litigation, 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. However, management believes
that there are a number of meritorious defenses to the pending actions,
including the fact that the Company never made or sold tobacco, and these
actions are being vigorously contested by the Indemnitor. 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 because
it believes it has meritorious defenses and the Company is indemnified under the
previously mentioned indemnification agreement.

OTHER LITIGATION

There is an increasing volume of asbestos-related personal injury litigation in
the United States generally. A subsidiary of the Company, Moen Incorporated, has
been named as a defendant in approximately 110 cases claiming personal injury
from asbestos. All of these suits name multiple defendants and, in most cases,
in excess of 75 defendants are named in addition to Moen. None of these cases
identify any Moen products or premises as the cause of the alleged injury to any
of the plaintiffs identified. It is not possible to predict the outcome of the
pending litigation, and, as with any litigation, it is possible that some of
these actions could be decided unfavorably. Management believes it has
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.

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, and, as with any
litigation, it is possible that some of these actions could be decided
unfavorably. 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 13, 2003, various of our
subsidiaries had been designated as potentially responsible parties under
"Superfund" or similar state laws in 58 instances. We have reached settlements
in 40 of these instances. We believe that the cost 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. At
December 31, 2002 and 2001, we have accrued $50.6 million and $51.7 million,
respectively, to cover these matters.

Related Party Transactions

FUTURE BRANDS, LLC

In 2001, the Company's spirits and wine business completed transactions with
Vin & Sprit AB of Sweden creating a joint venture, named Future Brands LLC, to
distribute both companies' spirits and wine brands in the United States. As part
of forming this joint venture, our spirits and wine business has, in the event
of default of Future Brands, a continuing obligation to satisfy any financial
obligations of Future Brands that may arise in the event that Future Brands
fails to fulfill its operating obligations and which results in a claim. These
financial obligations include, but are not limited to, making payments to
suppliers, employees and other parties with which Future Brands has contracts.
At December 31, 2002 and 2001, JBBCo. did not have any outstanding obligations
as a result of this arrangement. JBBCo.'s transactions with Future Brands
amounted to: sales of $515.6 million and $498.7 for the years ended
December 31, 2002 and 2001, respectively, accounts receivable of $68.8 million
and $92.0 million as of December 31, 2002 and 2001, respectively, accounts
payable of $15.6 million and $23.7 million as of December 31, 2002 and 2001,
respectively, and an investment of

22

$11.7 million and $9.4 million as of December 31, 2002 and 2001, respectively.
In addition, the Company had accrued liabilities with Future Brands amounting to
$29.1 million and $4.5 million as of December 31, 2002 and 2001, respectively.

MAXXIUM INTERNATIONAL BV

In 1999, the spirits and wine business formed an international sales and
distribution joint venture named Maxxium International B.V. with Remy-Cointreau
and Highland Distillers, which began operating in August 1999, to distribute and
sell spirits in key markets outside the United States. As a result of forming
this joint venture, JBBW has guaranteed certain credit facilities and bank loans
entered into by Maxxium up to an amount totaling $66 million, of which
$57 million was outstanding as of December 31, 2002. At December 31, 2001, the
guarantees totaled $55 million, of which $48 million was outstanding. JBBW has
also executed a Shareholder Loan Facility (Loan Facility) with Maxxium. There
were no amounts outstanding under the Loan Facility as of either December 31,
2002 or December 31, 2001. The Loan Facility expires December 31, 2003. JBBCo.'s
transactions with Maxxium included the following: sales of $179.1 million,
$168.2 million and $160.0 million for the years ended December 31, 2002, 2001
and 2000, respectively, accounts receivable of $34.6 million and $39.5 million
as of December 31, 2002 and 2001, respectively, accounts payable of
$12.3 million and $6.1 million as of December 31, 2002 and 2001, respectively,
and an investment of $64.3 million and $63.0 million as of December 31, 2002 and
2001, respectively.

Recently Issued Accounting Standards

In April 2002, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 145 (SFAS 145), "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." This Statement rescinds Statement of Financial Accounting
Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
Statement of Financial Accounting Standards No. 44, "Accounting for Intangible
Assets of Motor Carriers," and Statement of Financial Accounting Standards
No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements."
This Statement requires gains and losses from debt extinguishments that are used
as part of the Company's risk management strategy to be classified as income
from operations rather than as extraordinary items, net of tax. The Company will
apply the provisions of SFAS 145 prospectively to all debt extinguishments
beginning in 2003.

On July 30, 2002, the FASB issued Statement of Financial Accounting Standard
No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by SFAS 146
include lease termination costs and certain employee severance costs that are
associated with a restructuring, discontinued operation, plant closing or other
exit or disposal activity. SFAS 146 also supercedes, in its entirety, previous
accounting guidance that was provided by Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)."

SFAS 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company will apply the provisions of SFAS 146
prospectively to exit or disposal activities beginning in 2003.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." The interpretation expands on the
accounting guidance of Statement of Financial Accounting Standards Nos. 5, 57
and 107 and incorporates without change the provisions of FIN No. 34, which is
superceded. The interpretation elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees, such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair or
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements.

23

The Company will apply the initial recognition and measurement provisions on a
prospective basis to guarantees issued or modified in 2003. In addition, the
Company has applied the disclosure requirements for its financial statements for
the year ended December 31, 2002.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities." The objective of FIN 46 is to improve financial
reporting by companies involved with variable interest entities. Prior to FIN
46, companies generally included another entity in its consolidated financial
statements only if it controlled the entity through voting interests. FIN 46
changes that by requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk or loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. Consolidation by a primary beneficiary of the
assets, liabilities and results of activities of variable interest entities will
provide more complete information about the resources, obligations, risks and
opportunities of the consolidated company.

Critical Accounting Policies

Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies" requires all registrants, including the
Company, to include a discussion of "critical" accounting policies or methods
used in the preparation of financial statements. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.

ALLOWANCES FOR DOUBTFUL ACCOUNTS

Trade receivables are stated less allowances for discounts, doubtful accounts
and returns. The allowances represent estimated uncollectible receivables
associated with potential customer defaults on contractual obligations, usually
due to customers' potential insolvency or early payment of accounts receivables
by our customers. The allowances include amounts for certain customers where a
risk of default has been specifically identified. In addition, the allowances
include a provision for customer defaults on a general formula basis when it is
determined the risk of some default is probable and estimable, but cannot yet be
associated with specific customers. The assessment of the likelihood of customer
defaults is based on various factors, including the length of time the
receivables are past due, historical experience and existing economic
conditions. In accordance with this policy, our allowance for discounts,
doubtful accounts and returns was $65.8 million and $61.0 million as of
December 31, 2002 and December 31, 2001, respectively.

Alternatively, if we provided an allowance of 0.50% for net sales to customers
for cash discounts and returns and allowances and 2% of our year-end customer
receivables for doubtful accounts, our allowance for discounts, doubtful
accounts and returns would have been approximately $40 million as of
December 31, 2002 and 2001, respectively.

INVENTORIES

Inventories are priced at the lower of cost (principally first-in, first-out and
average, with 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 the majority 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. Estimated useful lives
of the related assets are as follows:

Buildings and improvements to leaseholds 5 to 40 years
Machinery and equipment 3 to 12 years

LONG-LIVED ASSETS

In accordance with our adoption, in January 2002, of Statement of Financial
Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or
Disposal of Long-lived Assets," a long-lived asset or asset group

24

is tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. When such events
occur, the Company compares the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset or asset group to the
carrying amount of a long-lived asset or asset group. If this comparison
indicates that there is an impairment, the amount of the impairment is typically
calculated using discounted expected future cash flows. The discount rate
applied to these cash flows is based on the Company's weighted-average cost of
capital, which represents the blended after-tax costs of debt and equity. The
adoption of SFAS 144 did not have any impact on the Company.

INTANGIBLES

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
We adopted the requirements under SFAS 142 as of January 1, 2002. SFAS 142
requires goodwill to be tested for impairment on an annual basis and under
certain circumstances, and written down when impaired, rather than amortized as
previous standards required. In addition, SFAS 142 requires purchased intangible
assets other than goodwill to be amortized over their useful lives unless these
lives are determined to be indefinite. Certain of our tradenames have been
assigned an indefinite life as it was deemed that these tradenames are currently
anticipated to contribute cash flows to the Company indefinitely.
Indefinite-lived intangible assets will not be amortized, but are required to be
evaluated at each reporting period to determine whether the indefinite useful
life is appropriate.

We evaluate the recoverability of goodwill by estimating the future discounted
cash flows of the businesses to which the goodwill relates. The rate used in
determining discounted cash flows is a rate corresponding to our cost of
capital, risk adjusted where necessary. Estimated cash flows are then determined
by disaggregating our business segments to a reporting level for which
meaningful identifiable cash flows can be determined. When estimated future
discounted cash flows are less than the carrying value of the net assets
(tangible and identifiable intangibles) and related goodwill, impairment losses
of goodwill are charged to operations. Impairment losses, limited to the
carrying value of goodwill, represent the excess of the sum of the carrying
value of the net assets (tangible and identifiable intangibles) and goodwill
over the discounted cash flows of the business being evaluated. In determining
the estimated future cash flows, we consider current and projected future levels
of income as well as business trends, prospects and market and economic
conditions. In accordance with this accounting policy, during the fourth quarter
of 2000, we recorded a non-cash write-down of goodwill of $502.6 million,
$487.3 million after-tax ($3.09 per share) for office products. This action
resulted from the significant shortfall in office products earnings, the
softening conditions in the office products industry and the ongoing
repositioning process, which led to the implementation of additional
restructuring plans.

In conjunction with our ongoing review of the carrying value of our identifiable
intangibles as prescribed by Statement of Financial Accounting Standards
Statement 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," in December 2001, the Company recorded a
non-cash write-down of identifiable intangibles of $73.3 million, $67.1 million
after tax (44 cents basic and 43 cents diluted per share). The write-down
recognized the diminished fair values of select identifiable intangibles
resulting from the restructuring of office products and the consolidation of
non-core tradenames in home products. The write-downs by business segment were:
office products -- $64.4 million and home products -- $8.9 million.

WARRANTY RESERVES

We offer our customers various warranty terms based upon the type of product
that is sold. In addition, we do not offer extended warranty terms on any of the
products we sell.

25

A reconciliation of beginning and ending balances of warranty reserves for the
year ended December 31, 2002 is as follows:

EMPLOYEE BENEFIT PLANS

We provide a range of benefits to our employees and retired employees, including
pensions, post-retirement, post-employment and health care benefits. We record
annual amounts relating to these plans based on calculations specified by
generally accepted accounting principles, which include various actuarial
assumptions, including discount rates, assumed rates of return, compensation
increases, turnover rates and health care cost trend rates. We review our
actuarial assumptions on an annual basis and make modifications to the
assumptions based on current rates and trends when it is deemed appropriate to
do so. As required by United States generally accepted accounting principles,
the effect of our modifications are generally recorded and amortized over future
periods. We believe that the assumptions utilized in recording its obligations
under its plans are reasonable based on our experience and advice from our
actuaries. We will continue to monitor these assumptions as market conditions
warrant.

We expect pension expense of approximately $32 million to $37 million and
post-retirement benefit expense of approximately $10 million to $15 million in
2003. A 25 basis point (i.e., 0.25%) change in our discount rate assumption
would lead to an increase or decrease in our pension expense and post-retirement
benefit expense of approximately $3 million and $1 million, respectively, for
2003.

REVENUE RECOGNITION

In accordance with Staff Accounting Bulletin No. 101, we recognize revenue as
products are shipped to customers, net of applicable provisions for discounts,
returns and allowances. We also provide for our estimate of potential bad debt
at the time of revenue recognition.

Amounts billed for shipping and handling are classified in "net sales" in the
consolidated income statement. Costs incurred for shipping and handling are
classified in "advertising, selling, general and administrative expenses."

CUSTOMER PROGRAM COSTS

We generally recognize customer program costs in either "net sales to customers"
or the category "advertising, selling and general and administrative expenses"
at the time the program is initiated and/or the revenue is recognized. The costs
generally recognized in "net sales to customers" include, but are not limited
to, general customer program generated expenses, cooperative advertising
programs, volume allowances, shared media and promotional allowances. The costs
generally recognized in "advertising, selling and general and administrative
expenses" include point of sale materials and store service fees.

STOCK-BASED COMPENSATION

We apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for our stock
options. Accordingly, no compensation expense has been recognized for the stock
option plans. Statement of Financial Accounting Standards No. 148 (SFAS 148),
"Accounting for Stock-Based Compensation -- Transition and Disclosure," requires
disclosure of pro forma net income and pro forma earnings per share amounts as
if compensation expense was recognized. For the required disclosure, SFAS 148
allows the use of a fair-value method to measure compensation expense.
Accordingly, we have adopted the use of the Black-Scholes option-pricing model
to determine our compensation expense for disclosure purposes. The model
requires the use of the following assumptions: an expected dividend yield;

26

expected volatility; risk-free interest rate; and expected term. The
weighted-average fair value of options granted during the year ended
December 31, 2002, 2001 and 2000 were $11.63, $8.91 and $6.15, respectively, per
option. Based upon the range provided for the assumptions utilized, any
alternative fair-values per option would not have materially differed from the
fair values listed above.

Derivative Financial Instruments

Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities" and its related amendment Statement of Financial Accounting
Standards No. 138 (SFAS 138), "Accounting for Certain Derivative Instruments and
Certain Hedging Activities." These statements establish accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires recognition
of all derivatives as either assets or liabilities on the balance sheet and the
measurement of those instruments at fair value. If the derivative is designated
as a fair value hedge and is effective, the changes in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings in the same period. If the derivative is designated as a cash flow
hedge, the effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized in the income
statement when the hedged item affects earnings. Ineffective portions of changes
in the fair value of cash flow hedges are recognized in earnings.

The impact of the adoption of SFAS 133 and SFAS 138 on January 1, 2001 was not
material. Derivative gains or losses included in OCI are reclassified into
earnings at the time the forecasted revenue or expense is recognized. During
each of the years ended December 31, 2002 and 2001, $0.6 million in deferred
gain amounts were reclassified to cost of sales. The Company estimates that
$1.1 million of derivative loss included in OCI as of December 31, 2002 will be
reclassified to earnings within the next twelve months.

FOREIGN CURRENCY RISK

Certain forecasted transactions, assets and liabilities are exposed to foreign
currency risk. We continually monitor our foreign currency exposures in order to
maximize the overall effectiveness of our foreign currency hedge positions.
Principal currencies hedged include the Pound sterling, the Euro, the Canadian
dollar and the Australian dollar.

INTEREST RATE RISK

We may, from time to time, enter into interest rate swap agreements 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
amounts. We record the payments or receipts on the agreements as adjustments to
interest expense. As of December 31, 2002 and 2001, we did not have any
outstanding interest rate swap agreements.

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
reorganization of operations or the relocation of manufacturing or assembly to
locations generally having lower costs. Implementing any significant cost
reduction and efficiency opportunities could result in charges.

2001 Compared to 2000

NET SALES

Net sales decreased $75.8 million, or 1%. The decrease was principally caused by
volume declines in certain existing product lines, primarily in the office, home
and golf segments, the sale of the U.K.-based private-label Scotch business in
October 2001 as well as unfavorable foreign exchange ($72 million). These
factors were partly offset by the introduction of new products and line
extensions and higher average selling prices. Additionally, as a result of the
establishment of V&S' new U.S. subsidiary as the exclusive importer of V&S'
products, revenues under the interim distribution agreement were no longer
recorded by our spirits and wine business as of January 1, 2002.

The percentage decrease in net sales would have been greater if the net impact
of the revenues recorded under the interim distribution agreement with V&S in
2001 and revenues for the U.K. private-label Scotch business in either 2001 or
2000 were excluded.

COST OF PRODUCTS SOLD

Cost of products sold increased $39.3 million, or 1%, due to substantial adverse
operating leverage in our office products business.

27

EXCISE TAXES ON SPIRITS AND WINE

Excise taxes on spirits and wine increased $7.7 million, or 2%. This increase
was due principally to an increase in bourbon volumes in the United States and
the impact of revenues recorded under the interim distribution agreement with
V&S, and were partly offset by the absence of U.K. excise taxes for the final
three months of 2001 following the sale of the U.K.-based Scotch whisky business
in October 2001.

ADVERTISING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Advertising, selling, general and administrative expenses decreased
$55.8 million, or 4%, on cost savings achieved from the Future Brands joint
venture established in June 2001 and our restructuring actions and other cost
containment initiatives across all of our operations, particularly in our office
products business.

AMORTIZATION OF INTANGIBLES

Amortization of intangibles decreased $16.9 million, or 21% due to the
write-down in December 2000 of goodwill in our office products business.

WRITE-DOWN OF IDENTIFIABLE INTANGIBLES AND GOODWILL

In 2001, we did record a non-cash write-down of identifiable intangibles of
$73.3 million, $67.1 million after-tax (44 cents basic and 43 cents diluted per
share). The write-down recognized the diminished fair values of select
identifiable intangibles resulting from the restructuring of office products and
the consolidation of non-core tradenames in home products. The write-downs by
business segment were: office products -- $64.4 million; and home
products -- $8.9 million. In 2000, we recorded a non-cash write-down of goodwill
of $502.6 million, $487.3 million after-tax ($3.09 per share) for office
products. This action resulted from the significant shortfall in office products
earnings, the softening conditions in the office products industry and the
ongoing repositioning process, which led to the implementation of additional
restructuring plans.

RESTRUCTURING CHARGES

For the year ended December 31, 2001, we recorded pre-tax restructuring charges
of $45.4 million ($29.8 million after tax). These charges principally related to
product line discontinuances, expenses associated with the exploration of
strategic options and planned workforce reduction initiatives across the
operations of the office products business, lease cancellation costs in the
specialty plumbing parts business and capacity reductions in select technology
platforms in the golf products business.

For the year ended December 31, 2000, we recorded pre-tax restructuring charges
of $19.7 million ($12.5 million after tax). These charges principally related to
planned employee termination costs, asset write-offs and lease cancellation
costs.

INTEREST AND RELATED EXPENSES

Interest and related expenses decreased $37.0 million, or 28%. This decline
primarily reflected lower interest rates in 2001 and the repayment of debt using
proceeds received from V&S and from the sale of the U.K. private-label Scotch
business.

OTHER INCOME, NET

Other income, net increased from zero to $57.4 million for the year ended
December 31, 2001 due principally to (1) the amortization of deferred income
recognized as a result of the contribution of assets to the Future Brands LLC
joint venture (2) the interest income on a tax receivable and (3) the gain on
the sale of the U.K.-based Scotch whisky business.

The significant components of other income, net for the years ended
December 31, 2001 and 2000 were as follows:

28

INCOME TAXES

Income taxes decreased $82.2 million, or 47%. The decrease was due principally
to the $72.9 million net tax benefit recognized as a result of the
recapitalization of the office products business and a $31.0 million tax reserve
reversal. The effective income tax rate comparison was distorted primarily by
the absence of tax benefits on the write-down of goodwill, and the recognition
of a net tax benefit and prior year tax reserve reversal. Excluding these items,
the effective income tax rates were 37.9% for 2001 and 40.4% for 2000.

MINORITY INTERESTS

Minority interests increased $6.4 million to $11.5 million on the sale in
June 2001 of a 10% minority interest in our spirits and wine business to V&S and
the recognition of preferred dividends payable to V&S in 2001.

NET INCOME

Net income in 2001 of $386.0 million, or $2.55 basic and $2.49 diluted per
share, compared with a net loss of 137.7 million, or 88 cents per share, for
2000. The higher net income was attributable to the absence of a write-down of
goodwill in 2001 and lower income taxes.

Net income for the year ended December 31, 2001 includes the following net gains
and charges: the recognition of a $72.9 million net tax benefit recognized as a
result of the recapitalization of the office products business, a $31.0 million
tax reserve reversal, the $28.5 million ($17.3 million after tax) interest
income on the tax refund, the $16.6 million ($21.8 million after tax) gain on
the sale of the U.K. private-label Scotch business, the $98.1 million
($63.3 million after tax) restructuring and restructuring-related charges and a
$73.3 million ($67.1 million after tax) writedown of identifiable intangibles.

During the fourth quarter of 2001, we recorded a non-cash write-down of
identifiable intangibles of $73.3 million, ($67.1 million after tax, or
44 cents per basic and 43 cents per diluted share). The write-down recognized
the diminished fair values of select identifiable intangibles resulting from the
restructuring of office products and the consolidation of tradenames in home
products. The write-downs by business segment were: office
products -- $64.4 million and home products -- $8.9 million.

We reported increases in deferred income and minority interest in consolidated
subsidiaries as of December 31, 2001 as compared with December 31, 2000. The
change in deferred income arose from the payment of $270 million from V&S to
gain access to our spirits and wine business's U.S. distribution network and to
acquire a 49% interest in Future Brands. This amount will be amortized to other
(income) expenses, net on a straight-line basis over the next ten years as
JBBCo. has, in the event of a default of Future Brands, continuing operating
obligations including, but not limited to, making payments to suppliers,
employees and other parties with which the joint venture has contracts. The
change in minority interest resulted from the payment in June 2001 of
$375 million from V&S to acquire a 10% equity interest in our spirits and wine
business in the form of convertible preferred stock.

In December 2001, we recapitalized our office products business through the sale
of a minority interest of less than 1% of our common shares in the business to a
passive investor. The transaction allowed us to access a capital tax loss that
offset other gains, resulting in a net tax benefit of $72.9 million, or
48 cents per basic and 47 cents per diluted share. An additional sale of our
common shares in this business was completed in January 2002. Coupled with
common shares sold in December, we recognized a minority interest of less than
2% in the business. Additionally, the transaction resulted in a substantial
capital tax loss, which carries forward and will be realized in the event that
the Company has qualified taxable capital gains.

On October 16, 2001, the Company announced that its spirits and wine business
sold its U.K.-based Scotch whisky business for $280 million in cash. The sale of
the business consisted of the Invergordon private-label and bulk Scotch
operations and several regional brands in the U.K. The products included in the
agreement generated sales of approximately $235 million (including excise
taxes). The Company also recorded an after-tax gain of $21.8 million, or
15 cents per basic and 14 cents per diluted share.

29

HOME PRODUCTS

2002 Compared to 2001

Net sales improved $463.4 million, or 22%, to $2.5 billion as a result of the
acquisition of Omega Holdings, Inc. and strong underlying sales growth
reflecting share gains and a robust building and remodeling market. Underlying
sales growth also benefited from new product introductions and line extensions
and higher volumes in certain existing product lines, primarily cabinets and
Moen faucets. Partially offsetting these benefits were increased rebates and
five fewer selling days in 2002 for the cabinets business, due to the use of the
53-week and 52-week business calendar in consecutive years, as well as
unfavorable foreign exchange of $2 million.

Operating company contribution increased $99.9 million, or 32%, to
$416.6 million. The higher operating company contribution resulted from the
acquisition of Omega Holdings, Inc., higher underlying sales across all of our
home businesses, positive operating leverage, and ongoing cost and productivity
gains.

In April 2002, the home products business acquired Omega, a U.S.-based
manufacturer of custom and semi-custom cabinetry. This acquisition broadens our
cabinet product line and is providing additional selling opportunities across
customers, while producing purchasing and manufacturing efficiencies. The cost
of this acquisition was $538 million. As a result of the acquisition of Omega,
the home products business recorded goodwill and other identifiable intangibles
of $349.9 million and $212.0 million, respectively. The $212.0 million of other
identifiable intangibles consists of $138.5 million of indefinite-lived
tradenames and $73.5 million of customer-relationship intangibles which are
amortized over a weighted-average useful life of approximately 15 years.

Management expects that our home products business will benefit from its
strength in the home improvement market and expected long-term growth in the net
number of U.S. households and in new home and apartment construction.

The continued consolidation of the customer base in the home products industry
and increased price competition will continue to present challenges to us and
our competitors. Customer consolidation will also present opportunities for the
most innovative and efficient manufacturers.

Our home products business may be impacted by the continued uncertain
U.S. economic outlook and its potential impact on the U.S. housing and
remodeling markets.

2001 Compared to 2000

Net sales decreased $19.3 million, or 1%, on lower volumes in certain existing
product lines, particularly tool storage, higher rebates as well as unfavorable
foreign exchange rates ($6 million). These factors were largely offset by the
introduction of new products and line extensions and higher average selling
prices. Our results were tempered by the events of September 11 and the weak
economy, including wholesale inventory reductions in the faucet segment.

Operating company contribution decreased $22.9 million, or 7%. The decrease in
operating company contribution resulted from adverse operating leverage,
specifically associated with the specialty plumbing parts unit, which was
exiting a significant portion of its low-margin retail business, higher
operating expenses and unfavorable product mix. This decrease was partly offset
by higher average selling prices and savings from outsourcing initiatives.

SPIRITS AND WINE

2002 Compared to 2001

Net sales decreased $335.5 million, or 25%, to $1.0 billion principally due to
the divestiture of the U.K.-based Scotch whisky business in October 2001, and
sales of ABSOLUT vodka no longer recorded on an interim basis in 2002. These
factors were partially offset by higher average selling prices for Jim Beam
bourbon and

30

DeKuyper products, increased sales of Beam ready-to-drink products in Australia
and of premium and superpremium products in the U.S., and favorable foreign
exchange of $9 million. Net sales would have increased if the net impact of
sales of ABSOLUT recorded on an interim basis and revenues for the U.K.-based
Scotch whisky business in 2001 were excluded. With the establishment of the
U.S. subsidiary of V&S as the exclusive importer of V&S' products, revenues and
expenses under the interim arrangement were no longer recorded by our spirits
and wine business beginning February 1, 2002.

Operating company contribution decreased $20.9 million, or 7%, to
$285.1 million, as a result of the absence of the U.K.-based Scotch whisky
business in 2002. In addition, other factors impacting this decrease were
increased brand advertising and support costs, specifically for our premium and
superpremium brands in the U.S. and After Shock liqueur in the U.K., lower sales
of bulk wine, lower cooperage income from the sale of used oak barrels, and
lower sales of After Shock in the U.K. These factors were partly offset by lower
distribution costs in the United States as a result of the Future Brands joint
venture established in June 2001 and the higher comparable sales as well as
favorable foreign exchange ($6 million).

On May 31, 2001, the Company's spirits and wine business completed transactions
with V&S creating a joint venture named Future Brands to distribute over an
initial ten-year period both companies' spirits and wine brands in the United
States. The Company's spirits and wine business has accounted for this joint
venture using the equity method of accounting. Pursuant to EITF 96-16, Future
Brands is not consolidated into our spirits and wine business as V&S has
substantive participating rights which preclude consolidation. V&S paid
$270 million to gain access to our spirits and wine business's
U.S. distribution network and to acquire a 49% interest in Future Brands, and
paid $375 million to purchase a 10% equity interest in JBBW in the form of
convertible preferred stock. The shares of JBBW convertible preferred stock
issued to V&S are convertible into 10% of the JBBW common stock and have voting
power equivalent to a 10% interest in JBBW common stock. The preferred stock is
entitled to a dividend equal to the greater of 10% of the dividend paid upon
JBBW common stock or 3% of the preferred stock's face value ($375 million) plus
unpaid accrued dividends; no dividends may be paid on common stock unless all
unpaid accrued JBBW preferred stock dividends have been paid. V&S also received
a 3-year option to increase its equity stake in JBBW by up to an additional
9.9%. V&S may require the Company to purchase the JBBW preferred stock at fair
value in whole or in part at any time after May 31, 2004, or upon a change in
control of JBBW, JBBCo., or certain other events. The Company has accounted for
the $270 million gain on the sale of 49% of Future Brands as deferred income and
the resulting tax on sale as a deferred income tax asset due to certain
continuing obligations of JBBCo., including, but not limited to, making payments
to suppliers, employees and other parties with which Future Brands has contracts
in the event of a default of Future Brands. In June 2001, the Company began
amortizing these amounts to other income and income taxes on a straight-line
basis over the initial term of the agreement. The 10-year amortization period is
based on the non-cancelable 10-year term of the management agreement for Future
Brands.

In addition to the investment in Future Brands, V&S invested 107 million Euros
(approximately $90 million) to acquire a 25% interest in Maxxium. As a result of
this investment by V&S, our spirits and wine business received an $8.2 million
dividend from Maxxium, which reduced its investment in the joint venture.

Management expects that our spirits and wine business will benefit from growth
in the premium and super-premium spirits market, and has focused its product
development and marketing activities on those segments. Negative factors that
may affect results include the possibility of excise tax increases or increased
regulation. In addition, results could be impacted by the continued trend
towards consolidation of the supplier, distributor and retailer tiers in the
highly competitive spirits and wine business. Continued consolidation may
present pricing and service challenges for our spirits and wine business and its
competitors. It may also present opportunities, particularly for the most
efficient and innovative competitors.

2001 Compared to 2000

Net sales increased $140.7 million, or 11%, principally as a result of ABSOLUT
vodka revenues recorded by the spirits and wine business on an interim basis
pending establishment of V&S' U.S. subsidiary, as well as volume increases in
certain existing product lines and an increase in average selling prices in our
Jim Beam bourbon and

31

DeKuyper product lines. The volume increases included gains in our Jim Beam
pre-mix product in Australia, cordials in the United Kingdom and premium and
super-premium product lines in the United States. These benefits were partially
offset by lower average foreign exchange rates during the year ($21 million).
The percentage increase in net sales would have been lower if the revenues
recorded under the interim distribution agreement with V&S and the
U.K. private-label Scotch business for the fourth quarter of 2000 were excluded.

Operating company contribution decreased $3.1 million, or 1%, due to the sale of
the U.K. private-label Scotch business in October 2001, and unfavorable foreign
exchange rates ($8 million). This decrease was partly offset by the higher
average selling prices and volume increases in certain existing product lines
(as noted above) and lower selling costs as a result of the Future Brands joint
venture, as discussed above. Reported operating company contribution would have
increased had we excluded the impact of the U.K. private-label Scotch business
in the fourth quarter of 2000 and foreign exchange.

GOLF PRODUCTS

2002 Compared to 2001

Net sales increased $61.1 million, or 6%, to $1.0 billion due to successful new
products and line extensions, particularly in golf clubs, partly offset by lower
volumes in certain existing product lines and favorable foreign exchange of
$0.6 million.

Operating company contribution increased $1.3 million, or 1%, to $132.6 million
on the higher sales, partly offset by increased marketing spending to support
new product initiatives and a more challenging pricing environment.

Management believes our golf products business will benefit by the increasing
attraction of golf to maturing baby boomers and long-term low single-digit
growth in U.S. rounds of play.

Competitors with significant brand awareness have introduced golf balls into
their product offerings in the past four years and the golf ball industry has
experienced increased price competition, partially as a result of such
introductions. Largely as a result of the introduction of the new Titleist Pro
V1, Titleist NXT and Pinnacle golf balls, our golf ball business has recovered
U.S. market share initially lost to new competitors during 2000. The ability of
the Company's golf business to maintain and increase revenues will depend upon
continued strong innovation and marketing, including the promotion of its
products by professional golfers.

The United States Golf Association (USGA) and the Royal and Ancient Golf Club
(R&A) establish standards for golf equipment used in the United States and
outside the United States, respectively. On August 6, 2002, the USGA and R&A
announced a joint decision to unify the rule relating to golf club head
performance. The USGA will retain its current Coefficient of Restitution limit
of .830. Beginning in 2003, the R&A will adopt the .830 limit for its Open
Championship and in 2008 for all play in R&A jurisdictions. All Acushnet Company
products currently conform to the USGA and R&A regulations.

Each of the USGA and the R&A has proposed new rules addressing the overall
distance standard for golf balls, golf club head size and golf club shaft
length. Until more details regarding such potential rule changes become
available, we cannot determine whether they would have a material effect on our
golf products business and/or the golf products industry.

2001 Compared to 2000

Net sales decreased $18.7 million, or 2%, principally due to unfavorable foreign
exchange rates ($18 million). In addition, the business experienced lower
volumes in certain existing golf club, golf shoe and golf glove product lines
and price competition largely offset by an increase in golf ball volumes and the
introduction of new products across all product lines. Sales were adversely
affected by a 1% decline in rounds played, soft economic conditions and a
decline in destination travel after the events of September 11.

32

Operating company contribution decreased $13.9 million, or 10% on the lower
sales, the discontinuance of certain product lines and unfavorable foreign
exchange ($3 million). These conditions were partially offset by reduced
operating expenses.

OFFICE PRODUCTS

2002 Compared to 2001

Net sales decreased $70.9 million, or 6%, to $1.1 billion, primarily due to
lower volumes in the United States and Europe. Approximately half of the sales
decrease was due to the full year effect of discontinued product lines resulting
from initiatives to refocus the business around its core product categories. The
balance of the sales decrease was caused primarily by weakness in the U.S. and
European economies, a sales decrease in our paper-based time management business
and price reductions related to a mix shift to private-label products. In
addition, a decrease in the number of office workers negatively impacted the
demand for the business's products. The introduction of new products, improved
product mix, lower customer rebates and favorable foreign exchange of
$12 million partly offset the decrease in net sales.

Operating company contribution improved $19.5 million, or 39%, to $69.6 million
reflecting the substantial cost savings achieved by the business' restructuring
actions and its focus on its most profitable product categories.

The office products industry is increasingly concentrated in a small number of
major customers, principally office products superstores, large retailers,
wholesalers and contract stationers. Customer consolidation and growth of
private label products continue to increase pricing pressures, presenting
challenges to our office products group and its competitors.

We decided, in April 2001 not to divest our office products business due to
weakness in the overall economy that has particularly impacted the office
products industry. We are currently repositioning and restructuring the business
to improve both financial results and the long-term value of the business. Under
this plan, our office products group is realigning and streamlining its
worldwide operations, intensifying its focus on growing profitable core product
categories, divesting or discontinuing non-strategic and low-return product
categories and reducing overhead expenses and excess capacity. As a result of
this plan, during the twelve months ended December 31, 2002, we recorded total
after-tax restructuring and restructuring-related charges of $26.4 million
($40.1 million pre tax) to complete the first phase of our repositioning program
and initiate the final phase of our office products repositioning. Once
completed, this restructuring action will have reduced the size of the business'
manufacturing and distribution facilities by approximately one-third; and we
also expect it will provide significant cost savings. These actions have already
provided significant working capital improvements. We expect to record
additional after-tax charges of $25 to 30 million ($40 to $50 million pre tax)
to complete this final phase. The overall office products repositioning program
will continue to be self-funding within the office products business.

2001 Compared to 2000

Sales decreased $178.5 million, or 13%, resulting principally from lower volumes
in the United States across all product categories, including discontinuing
certain unprofitable product lines, and lower average foreign exchange rates
($27 million). In addition, U.S. and European economic softness and demand
weakness caused by corporate layoffs, coupled with ongoing inventory reductions
by major customers have prolonged industry-wide volume challenges. These factors
were partially offset by the introduction of new products, higher selling prices
for select products, favorable product mix and reduced customer rebates due to
the lower volumes.

Operating company contribution decreased $29.4 million, or 37%. The lower
operating company contribution was primarily attributable to the lower sales,
substantial adverse operating leverage as well as unfavorable foreign exchange
rates ($2 million). In addition, unfavorable foreign exchange adversely impacted
gross margins due to higher purchase costs. This decrease was partly offset by
reduced operating expenses and savings achieved

33

as a result of restructuring initiatives. These restructuring initiatives
resulted in a one-third reduction in headcount since the beginning of 2000,
including 1,200 positions in 2001.

QUARTERLY FINANCIAL DATA
UNAUDITED

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

(1) Operating income is operating company contribution less all corporate
administrative expense, intangible amortization, restructuring and
restructuring-related charges and write-downs of identifiable intangibles
and goodwill.

(2) In 2002, net income and basic and diluted earnings per common share
reflected restructuring and restructuring-related charges of $3.2 million
($2.2 million after tax, or one cent per share) (See Note 15), in the
first quarter; restructuring and restructuring-related charges of $19.5
million ($12.9 million after tax, or eight cents per share) (See Note
15), a tax benefit of $61.7 million recognized as a result of new IRS
regulations, issued in March 2002, that reinterpret the capital loss
disallowance rules and enabled the Company to utilize a tax loss incurred
in 1994 to offset capital gains in 1996 and 1997 (41 cents basic and 40
cents diluted per share) (See Note 13), and interest income on the tax
benefit of $14.9 million ($9.6 million after tax, or six cents per share)
(See Note 13), in the second quarter; restructuring and
restructuring-related charges of $22.2 million ($14.3 million after tax,
or ten cents basic and nine cents diluted per share) (See Note 15), in
the third quarter; and restructuring and restructuring-related charges of
$10.9 million ($6.8 million after tax, or five cents per share) (See Note
15), in the fourth quarter.

(3) Net sales and gross profit have been restated to conform to the 2002
presentation due to the reclassification of certain expenses -- previously
included in selling and general and administrative expenses -- in
accordance with Emerging Issues Task Force Issue No. 01-09.

For 2001, the restatement resulted in a reduction in net sales amounting
to $29.6 million in the first quarter; $28.0 million in the second
quarter; $29.6 million in the third quarter; and $31.9 million in the
fourth quarter. (See Note 1.)

(4) In 2001, net income and basic and diluted earnings per common share
reflected restructuring and restructuring-related charges of $42.3 million
($27.8 million after tax, or 18 cents per share) (See Note 15) and a
$31.0 million tax reserve reversal, or 20 cents per share, in the second
quarter (See Note 13); and restructuring and restructuring-related
charges of $55.8 million ($35.5 million after tax, or 24 cents basic and
23 cents diluted per share) (See Note 15), a net tax benefit of $72.9
million recognized as a result of the recapitalization of the office
products business (49 cents basic and 48 cents diluted per share) (See
Note 3), a write-down of identifiable intangibles of $73.3 million ($67.1
million after tax or 45 cents basic and 44 cents diluted per share) (See
Note 1), interest income on tax refund of $28.5 million on tax refund
($17.3 million after tax, or 12 cents basic and 11 cents diluted per
share) (See Note 13) and the gain from the sale of the U.K. private-label
Scotch business of $16.6 million ($21.8 million after tax, or 15 cents
basic and 14 cents diluted per share) (See Note 4), in the fourth quarter.

34

FINANCIAL CONDITION

CASH FLOW DATA

Net Cash Provided by Operating Activities

Net cash provided by operating activities in 2002 was $787.0 million compared
with $638.7 million in 2001. The principal reasons for the increase were the
higher net income in 2002 and improvements in working capital management.

For the year ended December 31, 2002, free cash flow of $447.2 million
represents cash provided by operating activities less capital expenditures, net,
and dividends to stockholders. Free cash flow is expected to decrease to
approximately $250 million to $300 million in 2003 due to the return to a more
normalized cash flow and increased capital expenditures. For the year ended
December 31, 2001, free cash flow was $286.7 million.

Net Cash (Used) Provided by Investing Activities

Net cash used by investing activities for the year ended December 31, 2002 was
$600.8 million, as compared with net cash provided of $339.7 million for the
year ended December 31, 2001.

CAPITAL EXPENDITURES

We focus our capital spending on growth initiatives and becoming the lowest cost
producers of the highest quality products. Capital expenditures in 2002 were
$194.3 million as compared with $207.3 million in 2001. This includes
$4.9 million in 2002 related to restructuring activities (principally land and
buildings related to relocation of certain operations to Mexico). We currently
estimate 2003 capital expenditures will be approximately $230 million. We expect
to generate these funds internally.

ACQUISITIONS, DISPOSITIONS AND JOINT VENTURES

In the second quarter of 2002, our home products business acquired Omega
Holdings, Inc. for cash of $433.0 million. In addition, in the third quarter of
2002, we received proceeds of $3.8 million on the sale of a non-strategic
product line in our spirits and wine business, and, in the fourth quarter, we
received net proceeds of $14.8 million for the sale of the specialty plumbing
parts business in our home products segment.

In 2001, our spirits and wine business entered into the Future Brands joint
venture and received proceeds totaling $270 million from V&S for the assets
contributed; and received proceeds totaling $280 million from the sale of the
U.K.-based Scotch whisky business. In addition, the spirits and wine business
acquired long-term distribution rights for its super-premium tequila brands in
2001 for $6.5 million.

In 2000, our spirits and wine business invested $25.6 million in its Maxxium
joint venture toward its total investment of $110 million.

Net Cash Used by Financing Activities

Net cash used by financing activities for the year ended December 31, 2002 was
$219.1 million, as compared with $952.8 million in 2001. During the year ended
December 31, 2002, we increased short-term debt borrowings, net
($122.5 million), which were partly offset by the redemption of Omega debt
securities with a principal amount of $100 million, repurchased $271.1 million
(5,729,400 shares repurchased) of our common stock and received proceeds from
the exercise of stock options ($135.4 million), which increased because the
volume of option exercises was higher in 2002 than the year before.

DIVIDENDS

We paid common dividends in 2002 of $1.02 per share. Dividends paid to common
stockholders in 2002 increased to $152.7 million from $147.2 million in 2001 as
the increase in our dividend offset the lower shares outstanding. With the
December 2, 2002 dividend payment, we increased the common stock quarterly
dividend by 8% to $.27 per share, or an indicated annual rate of $1.08 per
share.

35

FINANCIAL POSITION

At December 31, 2002, total debt increased $146.4 million to $1.1 billion.
Short-term debt increased $123.5 million and long-term decreased
$108.6 million, as we reclassified our $106.9 million 8 1/2% Notes, due in
October 2003, to current liabilities. Our total debt-to-total capital ratio
increased to 29.5% at December 31, 2002 from 28.4% at December 31, 2001. The
increase was primarily a result of commercial paper borrowings used to finance
the Omega cabinets acquisition.

At December 31, 2002, $1 billion of debt securities were available for public
sale under our shelf registration with the Securities and Exchange Commission.

At December 31, 2002, we maintained two credit facilities, which we entered into
in 2001 and 2002. Such agreements include a $750 million 5-Year Revolving Credit
Agreement, which expires in 2006, and a $500 million 364-Day Revolving Credit
Agreement, which expires in 2003 and includes the option to extend payment for
one year at our discretion for an incremental fee of .25% of the outstanding
amount. These facilities are available for general corporate purposes, including
acquisitions and share repurchases, and to 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 adequate to meet our capital needs.

Working capital decreased $353.2 million to $388.4 million at December 31, 2002.
Increased short-term debt (reflecting the reclassification of our
$106.9 million 8 1/2% Notes, due October 2003, to current liabilities and
increased commercial paper borrowings used to finance the Omega acquisition) as
well as decreased cash and inventories was the principal reasons for the
reduction, partly offset by lower accounts payable. We believe that our 2002
working capital level was adequate to support continued growth.

FOREIGN EXCHANGE

Our subsidiaries 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.

Interest Rates

We may, from time to time, enter into interest rate swap agreements 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, 2002 and 2001, we did not have any outstanding
interest rate swap agreements.

Interest rates on our total indebtedness are primarily fixed.

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 $974.6 million and $951.7 million total long-term
debt (including current portion) at December 31, 2002 and 2001 was approximately
$1,094.3 million and $980.3 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.

MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES

Minority interest in consolidated subsidiaries increased $8.1 million
principally due to the completion, in January 2002, of the second of two
transactions to sell shares in our wholly-owned office products business.

STOCKHOLDERS' EQUITY

Stockholders' equity at year-end 2002 increased $210.5 million principally due
to our higher net income. We purchased, through open market purchases,
5.7 million and 7.5 million shares of common stock during 2002 and 2001,
respectively.

36

CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS

The following table and discussion represent our obligations and commitments to
make future payments under contracts, such as debt and lease agreements, and
under contingent commitments, such as debt guarantees, as of December 31, 2002.

In addition to the contractual obligations listed above, we also had other
commercial commitments for which we are contingently liable as of December 31,
2002. These include the guarantee of certain credit facilities and bank loans
entered into by Maxxium up to an amount totaling $66.0 million, which expires in
less than one year; a Shareholder Loan Facility executed by JBBW and Maxxium
amounting to $15.7 million, for which no amounts were outstanding and which
expires in less than one year; Standby Letters of Credit of $64.1 million of
which $61.4 million were due in less than one year with the remaining
$2.7 million due in one to three years; and Surety Bonds of $19.2 million which
were due in less than one year. In addition, V&S holds an option which may
require us to repurchase JBBW preferred stock at fair value in whole or in part
any time after May 31, 2004 or upon a change in control of JBBW, JBBCo., or
certain other events. These contingent commitments are not expected to have a
significant impact on our liquidity.

In addition to the obligations described above, JBBCo., a subsidiary of the
Company, in the event of the default of Future Brands, is required to satisfy
certain of Future Brands' financial obligations. These obligations include, but
are not limited to, making payments to suppliers, employees and other parties
with which Future Brands has contracts.

37

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.

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 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 do not enter into financial instruments for trading or speculative
purposes. Financial instruments are principally 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 our 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.

We enter into forward foreign exchange contracts principally to hedge
currency fluctuations in transactions denominated in foreign currencies,
thereby limiting our 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. We periodically enter
into forward foreign exchange contracts to hedge a portion of our net
investments in foreign operating companies.

As part of our risk management procedure, we use a value-at-risk (VAR)
computation to estimate the potential economic loss that we could incur from
adverse changes in foreign exchange rates. The VAR estimations are intended
to measure the maximum amount of our loss from adverse market movements in
foreign exchange rates, given a specified confidence level, over a given
period of time. The VAR model uses historical foreign exchange rates to
estimate the volatility and correlation of these rates in future periods. It
estimates a loss in fair market value using statistical modeling techniques.
The estimated fair value loss shown in the table below does not have a
material impact on current results of operations or financial condition.
Also, the use of the VAR model should not be construed as an endorsement of
its accuracy or the accuracy of the related assumptions.

The following table summarizes our estimated loss under the VAR model as of
December 31, 2002 and 2001, respectively.

The 95% confidence interval signifies our degree of confidence that actual
losses would not exceed the estimated losses shown above. The amounts shown
here disregard the possibility that foreign currency exchange rates could
move in our favor. The VAR model assumes that all movements in the foreign
exchange rates will be adverse. These amounts should not be considered
projections of future losses, since actual results may differ significantly
depending upon activity in the global financial markets.

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, 2002 and 2001, the fair value
of all outstanding contracts and the contract amounts were essentially the
same.

Commodities

We are subject to price volatility caused by weather, supply conditions,
geopolitical and economic variables, and other unpredictable external
factors. While we do use futures contracts to manage the volatility of
pricing for certain commodities, the exposures are not considered material to
our financial statements.

38

ITEM 8. Financial Statements and Supplementary Data.

CONSOLIDATED STATEMENT OF INCOME Fortune Brands, Inc. and Subsidiaries

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

39

CONSOLIDATED BALANCE SHEET Fortune Brands, Inc. and Subsidiaries

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

40

CONSOLIDATED BALANCE SHEET Fortune Brands, Inc. and Subsidiaries

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

41

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

42

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

43

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

1. Significant Accounting Policies

BASIS OF PRESENTATION The consolidated financial statements include the
accounts of Fortune Brands, Inc., after elimination of intercompany
transactions, its majority-owned subsidiaries (excluding a subsidiary, Future
Brands LLC, in which a third party has substantive participating rights) and
a subsidiary, Acushnet Lionscore Limited, in which it holds a minority
interest but has substantive control as a result of the Company having
operational decision-making powers over the entity. The accounts of certain
foreign subsidiaries are consolidated as of November 30. The consolidated
financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America, 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.

Certain reclassifications have been made in the prior years' financial
statements to conform to the current year presentation.

CASH AND CASH EQUIVALENTS Highly liquid investments with an original
maturity of three months or less are included in cash and cash equivalents.

ALLOWANCES FOR DOUBTFUL ACCOUNTS Trade receivables are stated less
allowances for discounts, doubtful accounts and returns. The allowances
represent estimated uncollectible receivables associated with potential
customer defaults on contractual obligations, usually due to customers'
potential insolvency. The allowances include amounts for certain customers
where a risk of default has been specifically identified. In addition, the
allowances include a provision for customer defaults on a general formula
basis when it is determined the risk of some default is probable and
estimable, but cannot yet be associated with specific customers. The
assessment of the likelihood of customer defaults is based on various
factors, including the length of time the receivables are past due,
historical experience and existing economic conditions.

INVENTORIES Inventories are priced at the lower of cost (principally
first-in, first-out and average, with 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 the majority 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. Estimated useful lives of the related assets are as
follows:

Buildings and improvements to leaseholds 5 to 40 years
Machinery and equipment 3 to 12 years

LONG-LIVED ASSETS In accordance with our adoption, in January 2002, of
Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for
the Impairment or Disposal of Long-lived Assets," a long-lived asset or asset
group is tested for recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. When such events
occur, the Company compares the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset or asset group to the
carrying amount of a long-lived asset or asset group. If this comparison
indicates that there is an impairment, the amount of the impairment is typically
calculated using discounted expected future cash flows. The discount rate
applied to these cash flows is based on the Company's weighted-average cost of
capital, which represents the blended after-tax costs of debt and equity. The
adoption of SFAS 144 did not have any impact on the Company.

INTANGIBLES In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). The Company adopted

44

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

1. Significant Accounting Policies (Continued)

the requirements under SFAS 142 as of January 1, 2002. SFAS 142 requires
goodwill to be tested for impairment on an annual basis and under certain
circumstances, and written down when impaired, rather than amortized as
previous standards required. In addition, SFAS 142 requires purchased
intangible assets other than goodwill to be amortized over their useful lives
unless these lives are determined to be indefinite. Certain of our tradenames
have been assigned an indefinite life as it was deemed that these tradenames
are currently anticipated to contribute cash flows to the Company
indefinitely. Indefinite-lived intangible assets will not be amortized, but
are required to be evaluated at each reporting period to determine whether
the indefinite useful life is appropriate. See Footnote 2 for further
discussion regarding the adoption of SFAS 142.

The Company evaluates the recoverability of goodwill by estimating the future
discounted cash flows of the businesses to which the goodwill relates. The
rate used in determining discounted cash flows is a rate corresponding to the
Company's cost of capital, risk adjusted where necessary. Estimated cash
flows are then determined by disaggregating the Company's business segments
to a reporting level for which meaningful identifiable cash flows can be
determined. When estimated future discounted cash flows are less than the
carrying value of the net assets (tangible and identifiable intangibles) and
related goodwill, impairment losses of goodwill are charged to operations.
Impairment losses, limited to the carrying value of goodwill, represent the
excess of the sum of the carrying value of the net assets (tangible and
identifiable intangible) and goodwill over the discounted cash flows of the
business being evaluated. In determining the estimated future cash flows, the
Company considers current and projected future levels of income as well as
business trends, prospects and market and economic conditions. In accordance
with this accounting policy, during the fourth quarter of 2000, the Company
recorded a non-cash write-down of goodwill of $502.6 million, $487.3 million
after tax ($3.09 per share) for office products. This action resulted from
the significant shortfall in office products earnings, the softening
conditions in the office products industry and the ongoing repositioning
process, which led to the implementation of additional restructuring plans.

In conjunction with our ongoing review of the carrying value of our
identifiable intangibles as prescribed by Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," in December 2001, the Company
recorded a non-cash write-down of identifiable intangibles of $73.3 million,
$67.1 million after tax (44 cents basic and 43 cents diluted per share). The
write-down recognized the diminished fair values of select identifiable
intangibles resulting from the restructuring of office products and the
consolidation of non-core tradenames in home products. The write-downs by
business segment were: office products -- $64.4 million; and home products --
$8.9 million.

WARRANTY RESERVES The Company offers its customers various warranty terms
based upon the type of product that is sold. In addition, the Company does
not offer extended warranty terms on any of the products it sells.

EMPLOYEE BENEFIT PLANS The Company and its subsidiaries provide a range of
benefits to their employees and retired employees, including pensions,
post-retirement, post-employment and health care benefits. The Company
records annual amounts relating to these plans based on calculations
specified by generally accepted accounting principles, which include various
actuarial assumptions, including discount

45

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

1. Significant Accounting Policies (Continued)

rates, assumed rates of return, compensation increases, turnover rates and
health care cost trend rates. The Company reviews its actuarial assumptions
on an annual basis and makes modifications to the assumptions based on
current rates and trends when it is deemed appropriate to do so. As required
by United States generally accepted accounting principles, the effect of the
modifications generally recorded or amortized over future periods. The
Company believes that the assumptions utilized in recording its obligations
under its plans, which are presented in Note 11 to the consolidated financial
statements, are reasonable based on its experience and on input from its
actuaries. The Company will continue to monitor these assumptions as market
conditions warrant.

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. At December 31, 2002
and 2001, such accruals amounted to $50.6 million and $51.7 million,
respectively.

INCOME TAXES In accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for 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 $300.8 million at December 31, 2002, as such
earnings are expected to be permanently reinvested in these companies.

SALE OF STOCK IN A SUBSIDIARY The Company recognizes in consolidation
changes in the Company's ownership percentage caused by sales of a
subsidiary's stock as an adjustment to "Paid-in Capital."

REVENUE RECOGNITION In accordance with Staff Accounting Bulletin No. 101,
the Company recognizes revenue as products are shipped to customers, net of
applicable provisions for discounts, returns and allowances. The Company also
provides for its estimate of potential bad debt at the time of revenue
recognition.

Amounts billed for shipping and handling are classified in "net sales" in the
consolidated income statement. Costs incurred for shipping and handling are
classified in "advertising, selling, general and administrative expenses."

NET SALES Net sales in 2002 reflect the adoption of Emerging Issues Task
Force No. 01-09 relating to the reporting of certain expenses -- previously
included primarily in "advertising, selling, general and administrative
expenses" -- as a reduction of net sales. These reclassifications reduced
reported net sales by $119.1 million and $116.6 million for the years ended
December 31, 2001 and 2000, respectively. These reclassifications did not
result in a change in the Company's earnings or earnings per share in any of
the periods affected.

CUSTOMER PROGRAM COSTS The Company generally recognizes customer program
costs in either "net sales to customers" or the category "advertising,
selling, general and administrative expenses" at the time the program is
initiated and/or the revenue is recognized. The costs generally recognized in
"net sales to customers" include, but are not limited to, general customer
program generated expenses, cooperative advertising programs, volume
allowances, shared media and promotional allowances. The costs generally
recognized in "advertising, selling, general and administrative expenses"
include point of sale materials and store service fees. Customer program
costs totaled $441.2 million, $405.2 million, and $426.1 million for the
years ended December 31, 2002, 2001 and 2000, respectively, and primarily
relate to those costs that are recognized in "net sales to customers."

46

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

1. Significant Accounting Policies (Continued)

In addition, "accrued customer programs" principally include general customer
program costs, cooperative advertising, volume allowances and shared media.

ADVERTISING COSTS Advertising costs, which amounted to $451.5 million,
$430.2 million and $451.7 million in 2002, 2001 and 2000, respectively, are
principally charged to expense as incurred.

The Company capitalizes certain direct-response advertising costs, which
comprises costs to acquire new customers. Such costs are generally amortized
in proportion to when revenues are recognized. The amounts of direct response
advertising capitalized in 2002 and 2001 were $7.2 million and $20.5 million,
respectively. Amortization of $16.5 million, $20.0 million and $20.7 million
was recorded in the years ended December 31, 2002, 2001 and 2000,
respectively and is included in the above amounts. The Company amortizes
capitalized direct-response advertising costs over at most a three-year
period as benefits are realized.

RESEARCH AND DEVELOPMENT Research and development expenses, which amounted
to $55.9 million, $54.3 million and $55.5 million in 2002, 2001 and 2000,
respectively, are charged to expense as incurred.

STOCK-BASED COMPENSATION The Company applies Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its stock options. Accordingly, no
compensation expense has been recognized for the stock option plans.
Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting
for Stock-Based Compensation -- Transition and Disclosure," requires
disclosure of pro forma net income and pro forma earnings per share amounts
as if compensation expense was recognized.

Pursuant to SFAS 148, the Company, for purposes of its pro forma disclosure
in Note 10, determined its compensation expense in accordance with the
Black-Scholes option-pricing model.

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 loss" caption
in stockholders' equity. Some transactions are made in currencies different
from an entity's functional currency. Gains and losses on these foreign
currency transactions are generally included in income as they occur.

DERIVATIVE FINANCIAL INSTRUMENTS Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards Statement No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities" and its
related amendment Statement of Financial Accounting Standards Statement No.
138 (SFAS 138), "Accounting for Certain Derivative Instruments and Certain
Hedging Activities." These statements establish accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires recognition of all derivatives as either assets or liabilities on
the balance sheet and the measurement of those instruments at fair value. If
the derivative is designated as a fair value hedge and is effective, the
changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings in the same
period. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in other
comprehensive income (OCI) and are recognized in the income statement when
the hedged item affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings.

The impact of the adoption of SFAS 133 and SFAS 138 on January 1, 2001, was
not material. Derivative gains or losses included in OCI are reclassified
into earnings at the time the forecasted revenue or expense is recognized.
During each of the years ended December 31, 2002 and 2001, $0.6 million in
deferred gain amounts were reclassified to cost of sales. The Company
estimates that $1.1 million of derivative loss included in OCI as of December
31, 2002 will be reclassified to earnings within the next twelve months.

47

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

1. Significant Accounting Policies (Continued)

FOREIGN CURRENCY RISK Certain forecasted transactions, assets and
liabilities are exposed to foreign currency risk. The Company continually
monitors its foreign currency exposures in order to maximize the overall
effectiveness of its foreign currency hedge positions. Principal currencies
hedged include the Pound sterling, the Euro, the Canadian dollar and the
Australian dollar.

INTEREST RATE RISK The Company may, from time to time, enter 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 amounts. The Company records the
payments or receipts on the agreements as adjustments to interest expense. As
of December 31, 2002 and 2001, the Company did not have any outstanding
interest rate swap agreements.

RECENTLY ISSUED ACCOUNTING STANDARDS In April 2002, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
145 (SFAS 145), "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13 and Technical Corrections." This Statement rescinds
Statement of Financial Accounting Standards No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," Statement of Financial Accounting
Standards No. 44, "Accounting for Intangible Assets of Motor Carriers," and
Statement of Financial Accounting Standards No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." This Statement requires gains and
losses from debt extinguishments that are used as part of the Company's risk
management strategy to be classified as income from operations rather than as
extraordinary items, net of tax. The Company will apply the provisions of
SFAS 145 prospectively to all debt extinguishments beginning in 2003.

On July 30, 2002, the FASB issued Statement of Financial Accounting Standard
No. 146 (SFAS 146), "Accounting for Costs Associated with Exit or Disposal
Activities." SFAS 146 requires companies to recognize costs associated with
exit or disposal activities when they are incurred rather than at the date of
a commitment to an exit or disposal plan. Examples of costs covered by SFAS
146 include lease termination costs and certain employee severance costs that
are associated with a restructuring, discontinued operation, plant closing or
other exit or disposal activity. SFAS 146 also supercedes, in its entirety,
previous accounting guidance that was provided by Emerging Issues Task Force
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)."

SFAS 146 is effective for exit or disposal activities that are initiated
after December 31, 2002. The Company will apply the provisions of SFAS 146
prospectively to exit or disposal activities beginning in 2003.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." The interpretation expands on
the accounting guidance of Statement of Financial Accounting Standards Nos.
5, 57 and 107 and incorporates without change the provisions of FIN No. 34,
which is superceded. The interpretation elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees, such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair or
market value of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. See
the "Warranty Reserves" disclosure above regarding the Company's accounting
policy for warranty claims and Note 20 for guarantees not recognized on the
Company's Consolidated Balance Sheet.

The Company will apply the initial recognition and measurement provisions on
a prospective basis to guarantees issued or modified in 2003. In addition,
the Company has applied the disclosure requirements to its financial
statements for the year ended December 31, 2002.

48

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

1. Significant Accounting Policies (Continued)

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." The objective of FIN 46 is to
improve financial reporting by companies involved with variable interest
entities. Prior to FIN 46, companies generally included another entity in its
consolidated financial statements only if it controlled the entity through
voting interests. FIN 46 changes that by requiring a variable interest entity
to be consolidated by a company if that company is subject to a majority of
the risk or loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both. Consolidation
by a primary beneficiary of the assets, liabilities and results of activities
of variable interest entities will provide more complete information about
the resources, obligations, risks and opportunities of the consolidated
company.

The Company currently has two leases totaling approximately $11 million that
are potentially subject to the initial measurement and recognition provisions
of FIN 46. The Company is reviewing its application, but has not yet
determined its impact. The consolidation requirements for pre-existing
entities are effective as of July 1, 2003.

2. Goodwill and Purchased Intangible Assets

SFAS 142 is effective for all fiscal years beginning after December 15, 2001.
In accordance with SFAS 142, of the total intangibles of $1.8 billion, the
Company ceased amortizing intangibles totaling $1.4 billion, including $1.1
billion of goodwill and $0.3 billion of indefinite-lived tradenames, as of
January 1, 2002.

In addition, other purchased intangible assets, primarily definite-lived
tradenames, are carried at cost less accumulated amortization. The remaining
tradenames are amortized over their estimated useful lives, either 15 or 30
years. The gross carrying value and accumulated amortization of the Company's
amortizable intangible assets were $584.6 million and $178.8 million,
respectively, as of December 31, 2002. The Company's intangible amortization
was $16.1 million, $62.7 million and $79.6 million, for the years ended
December 31, 2002, 2001 and 2000, respectively.

The Company expects to record intangible amortization of approximately $19.0
million for each of the next five fiscal years ending December 31, 2003
through December 31, 2007.

The change in goodwill during the year ended December 31, 2002 was $348.3
million, net of foreign currency fluctuations, and was due to the acquisition
of Omega Holdings, Inc. in April 2002. See Note 4 for further discussion.

49

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

2. Goodwill and Purchased Intangible Assets (Continued)

The following table presents the impact of SFAS 142 on net income and net income
per share had the non-amortization provisions of the standard been in effect for
the years ended December 31, 2001 and 2000, respectively:

As of January 1, 2002, we performed our transitional tests and no impairment
of goodwill or other intangible assets was recognized under SFAS 142. In
addition, the Company performs its annual impairment test as of December 31
of each fiscal year. For 2002, the Company performed its impairment tests as
of December 31, 2002 and no impairment of goodwill or other intangible assets
were recognized.

3. Sale of Stock of Subsidiary

In January 2002, the Company completed the second of two transactions to sell
shares in its wholly-owned office products subsidiary, ACCO World Corporation
(ACCO). These two transactions resulted in an aggregate reduction of less
than 2% of the Company's interest in ACCO. The Company treated the sale as an
equity transaction in accordance with Company policy, recording the
difference between the purchase price and the book value of the subsidiary's
stock to "Paid-in-capital." As a result of the first of the two transactions,
the Company recognized a net tax benefit of $72.9 million in 2001. The two
transactions resulted in a substantial tax loss carryforward that will be
realized in the event the Company has qualified taxable capital gains.

4. Acquisitions, Disposals and Joint Ventures

In November 2002, the home products business sold its non-strategic plumbing
parts business for net proceeds of approximately $15 million. The Company
recorded an after-tax loss of $10.2 million related to the sale.

In April 2002, the home products business acquired Omega Holdings, Inc.
(Omega), a U.S.-based manufacturer of custom and semi-custom cabinetry. This
acquisition broadens our cabinet product line and is providing additional
selling opportunities across customers, while producing purchasing and
manufacturing efficiencies. The cost of this acquisition was $538 million. As
a result of the acquisition of Omega, the home products business recorded
goodwill and other identifiable intangibles of $349.9 million and $212.0
million, respectively. The $212.0 million of other identifiable intangibles
consists of $138.5 million of indefinite-lived tradenames and $73.5 million
of customer-relationship intangibles which are amortized over a
weighted-average useful life of approximately 15 years.

50

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

4. Acquisitions, Disposals and Joint Ventures (Continued)

The following table provides an allocation of the purchase price:

If Omega had been included in consolidated results from January 1, 2001, the
Company's unaudited pro forma net sales, net income and diluted earnings per
share would each have been 2% higher, for the year ended December 31, 2002
and 6%, 4% and 4% higher, respectively, for the year ended December 31, 2001.

On May 31, 2001, the Company's spirits and wine business completed
transactions with V&S creating a joint venture named Future Brands LLC to
distribute over an initial ten-year period both companies' spirits and wine
brands in the United States. The Company's spirits and wine business has
accounted for this joint venture using the equity method of accounting.
Pursuant to EITF 96-16, Future Brands is not consolidated into our spirits
and wine business as V&S has substantive participating rights which preclude
consolidation. V&S paid $270 million to gain access to our spirits and wine
business's U.S. distribution network and to acquire a 49% interest in Future
Brands, and paid $375 million to purchase a 10% equity interest in JBBW in
the form of convertible preferred stock. The shares of JBBW convertible
preferred stock issued to V&S are convertible into 10% of the JBBW common
stock and have voting power equivalent to a 10% interest in JBBW common
stock. The preferred stock is entitled to a dividend equal to the greater of
10% of the dividend paid upon JBBW common stock or 3% of the preferred
stock's face value ($375 million) plus unpaid accrued dividends; no dividends
may be paid on common stock unless all unpaid accrued JBBW preferred stock
dividends have been paid. V&S also received a three-year option to increase
its equity stake in JBBW by up to an additional 9.9%. V&S may require the
Company to purchase the JBBW preferred stock at fair value in whole or in
part at any time after May 31, 2004, or upon a change in control of JBBW,
JBBCo. or certain other events. The Company has accounted for the $270
million gain on the sale of 49% of Future Brands as deferred income and the
resulting tax on sale as a deferred income tax asset due to certain
continuing obligations of JBBCo., including, but not limited to, making
payments to suppliers, employees and other parties with which Future Brands
has contracts in the event of a default of Future Brands. In June 2001, the
Company began amortizing these amounts to other income and income taxes on a
straight-line basis over the initial term of the agreement. The 10-year
amortization period is based on the non-cancelable 10-year term of the
management agreement for Future Brands. For the years ended December 31, 2002
and 2001, the Company's spirits and wine business recorded minority interest
for the 10% ownership that V&S maintains in the business of $11.3 million and
$6.6 million, respectively.

51

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

4. Acquisitions, Disposals and Joint Ventures (Continued)

In 1999, the spirits and wine business formed an international sales and
distribution joint venture named Maxxium Worldwide B.V. (Maximum) with
Remy-Cointreau and Highland Distillers, which began operating in August 1999,
to distribute and sell spirits in key markets outside of the United States.
In addition to the investment in Future Brands, V&S invested 107 million
Euros (approximately $90 million) in June 2001 to acquire a 25% interest in
Maxxium. As a result of this investment by V&S, our spirits and wine business
received an $8.2 million dividend from Maxxium, which reduced its investment
in the joint venture.

JBBW made a cash investment of $25.6 million in 2000. JBBW's total
anticipated investment of $110 million in Maxxium is contingent upon
achievement of certain contractual performance measures, which were not met
in 2002.

In addition, the Company guarantees certain credit facilities and bank loans
entered into by Maxxium up to an amount totaling $66.0 million, of which
$57.0 million was outstanding at December 31, 2002. At December 31, 2001, the
guarantees totaled $55.0 million, of which $48.0 million was outstanding.
JBBW has also executed a Shareholder Loan Facility (Loan Facility) with
Maxxium amounting to $15.7 million. There were no amounts outstanding under
the Loan Facility as of either December 31, 2002 or December 31, 2001. The
Loan Facility expires December 31, 2003.

In October 2001, the Company's spirits and wine business sold its U.K.-based
Scotch whisky business for $280 million in cash. The sale of the business
consisted of the Invergordon private-label and bulk Scotch operations and
several regional brands in the U.K. The products included in the agreement
generated sales of approximately $235 million (including excise taxes). The
Company recorded an after-tax gain of $21.8 million related to the sale.

The business acquired has been included in consolidated results from the date
of acquisition.

5. Short-Term Borrowings and Credit Facilities

At December 31, 2002 and 2001, there were $161.3 million and $37.8 million of
short-term borrowings outstanding, respectively, comprised of notes payable
to banks and commercial paper that is used for general corporate purposes,
including acquisitions. Included in this amount as of December 31, 2002 and
2001, there were $6.5 million and $4.4 million outstanding under committed
bank credit agreements, which provide for unsecured borrowings of up to $17.6
million and $16.5 million, respectively. In addition, the Company had
uncommitted bank lines of credit, which provide for unsecured borrowings for
working capital, of up to $197.1 million of which $31.3 million was
outstanding at December 31, 2002 and $139.9 million of which $33.4 million
was outstanding as of December 31, 2001. The weighted-average interest rate
on these borrowings was 2.1% and 5.3%, respectively.

See Note 14 for a description of the Company's use of financial instruments.

52

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

6. Long-Term Debt

The components of long-term debt are as follows:

At December 31, 2002, the Company maintained two revolving credit agreements
with various banks, which the Company entered into in 2001 and 2002. Such
agreements include a $750 million 5-Year Revolving Credit Agreement, which
expires in 2006, and a $500 million 364-Day Revolving Credit Agreement, which
expires in 2003 and includes the option to extend payment for one year at the
Company's discretion for an incremental fee of .25% of the outstanding
amount. The interest rate was set at the time of each borrowing. The facility
fees of .08% and .06% per annum were paid on the $750 million 5-Year
Revolving Credit Agreement and the $500 million 364-Day Revolving Credit
Agreement, respectively. The fee for the $750 million 5-Year Revolving Credit
Agreement was 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 are made for general corporate purposes,
including acquisitions, share repurchases and support for the Company's
short-term borrowings in the commercial paper market.

Estimated payments for maturing debt during the next five years are as
follows: 2003, $132.9 million; 2004, $200.3 million; 2005, $0.3 million;
2006, $0.1 million; and no payments in 2007.

7. $2.67 Convertible Preferred Stock -- Redeemable at Company's Option

Shares of the $2.67 Convertible Preferred stock issued and outstanding at
December 31, 2002, 2001 and 2000 were 258,656 shares, 281,515 shares and
302,399 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 to 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 22,859
shares, 20,884 shares and 20,926 shares during 2002, 2001 and 2000,
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 $0.7 million,
$0.8 million and $0.8 million was paid in each of the years ended December
31, 2002, 2001 and 2000, respectively.

8. Capital Stock

The Company has 750 million authorized shares of common stock and 60 million
authorized shares of Preferred stock.

53

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

8. Capital Stock (Continued)

There were 146,990,735 and 147,997,773 common shares outstanding at December
31, 2002 and 2001, respectively.

The cash dividends paid on the common stock for the years ended December 31,
2002, 2001 and 2000 aggregated $152.7 million, $147.2 million and $146.9
million, respectively.

Treasury shares purchased and received as consideration for stock options
exercised amounted to 5,769,440 shares in 2002; 7,546,333 shares in 2001;
10,021,166 shares in 2000. 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 4,762,402 shares in 2002;
2,035,239 shares in 2001; 286,992 shares in 2000. At December 31, 2002 and
2001 there were 82,579,289 and 81,572,251 common treasury shares,
respectively.

9. 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%
acquirer, 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. In December 2002, the Company's Board of
Directors approved an amendment to the Rights plan that adds a three-year
independent director evaluation provision.

All 2.5 million of the authorized Series A Preferred shares are reserved for
issuance upon exercise of Rights, and at December 31, 2002, outstanding
Rights would have been exercisable as described above in the aggregate for
1,469,907 of such shares.

10. Stock Plans

The 1999 Long-Term Incentive Plan 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, 2004 for up to 12 million shares of common stock, but no
more than two million shares may be granted to any one individual. Stock
options, stock appreciation rights, restricted stock, performance awards and
other stock-based awards may no longer be granted under the Company's 1990
Long-Term Incentive Plan, as amended. Outstanding awards under the 1990
Long-Term Incentive Plan may continue to be exercised or paid pursuant to
their terms.

Stock options under the Plans have exercise prices equal to fair market
values at dates of grant. Options generally may not be exercised prior to one
year or more than ten years from the date of grant. Options granted since
November 1998 generally vest one-third each year over a three year period
after the date of grant. 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 SFAS 148. Had compensation cost for the

54

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

10. Stock Plans (Continued)

fixed stock options granted in 2002, 2001 and 2000 been determined consistent
with SFAS 148, pro forma net income (loss) and earnings per common share would
have been as follows:

Changes during the three years ended December 31, 2002 in shares under options
were as follows:

Options exercisable at the end of each of the three years ended December 31,
2002 were as follows:

The weighted-average fair values of options granted during 2002, 2001 and
2000 were $11.63, $8.91 and $6.15, 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 2002, 2001 and 2000:

55

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

10. Stock Plans (Continued)

Options outstanding at December 31, 2002 were as follows:

Options exercisable at December 31, 2002 were as follows:

At December 31, 2002, performance awards were outstanding pursuant to which
up to 137,400 shares, 217,950 shares, 197,850 shares and 195,000 shares may
be issued in 2003, 2004, 2005, and 2006, respectively, depending on the
extent to which certain specified performance objectives are met. 181,197
shares, 120,034 shares and 99,781 shares were issued pursuant to performance
awards during 2002, 2001 and 2000, respectively. The costs of performance
awards are expensed over the performance period.

Compensation expense for stock based plans recorded for 2002, 2001 and 2000
was $10.0 million, $5.4 million and $3.5 million, respectively.

Shares available in connection with future awards under the Company's stock
plans at December 31, 2002, 2001 and 2000 were: 1,053,597; 3,979,940; and
6,465,498, respectively. Authorized but unissued shares are reserved for
issuance in connection with awards, but treasury shares may be and are
delivered.

11. Pension and Other Retiree Benefits

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 made, as necessary, to ensure legal funding
requirements are satisfied.

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. Many employees and retirees outside the
United States are covered by government health care programs.

56

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

11. Pension and Other Retiree Benefits (Continued)

The components of net pension and postretirement costs are as follows:

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:

57

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

11. Pension and Other Retiree Benefits (Continued)

Amounts recognized in the balance sheet are as follows:

As of December 31, 2002, the Company recorded an increase in its additional
minimum liability of $117.0 million as a result of a market-related shortfall
between the Company's accumulated benefit obligation and fair value of plan
assets.

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 $712.8 million, $629.9 million and
$488.9 million, respectively, as of December 31, 2002 and 330.4 million,
$284.1 million and $233.4 million, respectively, as of December 31, 2001.

The assumed health care cost trend rate used in measuring the health care
portion of the postretirement cost for 2003 is 10%, gradually declining to 5%
by the year 2008 and remaining at that level thereafter. Assumed health care
cost trend rates have a significant effect on the amounts reported for
postretirement benefits. A one-percentage-point increase in assumed health
care cost trend rates would increase the total of the service and interest
cost components for 2002 and the postretirement benefit obligation as of
December 31, 2002 by $1.2 million and $12.5 million, respectively. A
one-percentage-point decrease in assumed health care cost trend rates would
decrease the total of the service and interest cost components for 2002 and
the postretirement benefit obligation by $1.0 million and $11.3 million,
respectively.

The Company sponsors a number of defined contribution plans. Contributions
are determined under various formulas. Costs related to such plans amounted
to $22.8 million, $22.4 million and $21.9 million in 2002, 2001 and 2000,
respectively.

58

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

12. Lease Commitments

Future minimum rental payments under non-cancelable operating leases as of
December 31, 2002 are as follows:

Total rental expense for all operating leases (reduced by minor amounts from
subleases) amounted to $52.4 million, $50.9 million and $53.9 million in
2002, 2001 and 2000, respectively.

13. Income Taxes

The components of income from continuing operations before income taxes are
as follows:

A reconciliation of income taxes at the 35% federal statutory income tax rate to
income taxes as reported is as follows:

(a) In 2001, the Company recorded a tax reserve reversal of $31.0 million
reflecting conclusion of the routine IRS examinations for the years 1990
through 1992. In 2000, the Company recorded a tax reserve reversal of
$30.0 million.

In June 2002, the Company recorded a tax benefit of $61.7 million plus
after-tax interest of $9.6 million. This resulted from new IRS regulations
issued in March 2002 that reinterpret the capital loss disallowance rules and
enabled the Company to utilize a tax loss incurred in 1994 to offset capital
gains taxed in 1996 and 1997. The Company will receive cash representing the
tax refund and related interest upon the conclusion of the IRS's regular
audit of our 1997 tax returns.

59

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

13. Income Taxes (Continued)

In 2001, the Company received a one-time non-operating adjustment of
$17.3 million in interest income (after tax), which was recorded in other
income, as a result of the conclusion of the routine IRS examinations for the
years 1990 through 1992.

Income taxes are as follows:

The components of net deferred tax assets (liabilities) are as follows:

60

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

14. Financial Instruments

The Company does not enter into financial instruments for trading or
speculative purposes. Financial instruments are principally 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 foreign operating companies.

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, 2002 and 2001, the fair value
of all outstanding contracts and the contract amounts were essentially the
same.

The Company may, from time to time, enter 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, 2002 and 2001, the Company did not
have any outstanding interest rate swap agreements.

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 $974.6 million and $951.7 million
total long-term debt (including current portion) at December 31, 2002 and
2001 was approximately $1,094.3 million and $980.3 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.

Raw materials used by the Company are subject to price volatility caused by
weather, supply conditions, geopolitical and economic variables, and other
unpredictable external factors. While the Company does use futures contracts
to manage the volatility of pricing for certain commodities, the exposures
are not considered material to the Company's financial statements.

15. Restructuring and Restructuring-related Charges

RESTRUCTURING AND RESTRUCTURING-RELATED CHARGES PROGRAM -- 2001 On April 19,
2001, the Company announced that as a result of its evaluation of strategic
options for its office products business, it would immediately begin
implementing a plan designed to improve both financial results and the
long-term value of the business. At that time, the Company determined that it
would not divest its office products business due to weakness in the overall
economy and conditions in the office products industry. In addition, the home
segment recorded restructuring and restructuring-related charges for
workforce reductions and rationalization of the specialty plumbing parts
business while the golf segment recorded charges for capacity reductions in
select technology platforms.

61

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

15. Restructuring and Restructuring-related Charges (Continued)

In addition, in the third quarter of 2002, the home products and spirits and
wine businesses recorded restructuring charges related to the sale of certain
non-strategic product lines, including the loss on sale of the product lines
and employment termination costs.

As a result of these actions, the Company recorded pre-tax restructuring
charges for the year ended December 31, 2002 as follows:

The home products charges relate to the sale of the low-return plumbing parts
business, including the loss on the disposal of the business and planned
employee termination costs (seven positions) that have been announced.

The spirits and wine charges relate to the sale of a minor product line.

The office products charges principally relate to planned employee
termination costs that have been announced (724 positions), asset write-offs
and costs associated with the consolidation of manufacturing and distribution
facilities.

During 2001, the Company recorded pre-tax restructuring charges as follows:

Home products includes charges related to planned workforce reduction
initiatives that have been announced (342 positions) and lease cancellation
costs.

Golf products includes charges related to asset write-offs associated with a
reduction in wound golf ball capacity.

Office products includes charges related to product line discontinuances,
rationalization of operations, expenses associated with the exploration of
strategic options for the office products business and planned workforce
reduction initiatives (779 positions) across its operations.

62

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

15. Restructuring and Restructuring-related Charges (Continued)

Reconciliation of the restructuring liability, as of December 31, 2001, is as
follows:

(a) Of the planned downsizing of 1,121 positions, 526 reductions had been
implemented as of December 31, 2001. The employee groups affected by these
restructuring actions were predominantly in the office products business
and include plant and administrative hourly and salaried employees.

Reconciliation of the restructuring liability, as of December 31, 2002, is as
follows:

(a) Of the planned downsizing of 1,852 positions planned for elimination, 1,545
had been implemented as of December 31, 2002. The employee groups affected
by these restructuring actions were predominantly in the office products
business and include plant and administrative hourly and salaried employees.

(b) Included in the 2002 provision were the reversals of certain costs that were
reflected as a reduction of restructuring charges recorded in 2002. These
included $1.1 million of employee termination costs, $0.6 million of other
costs, and $0.1 million of loss on disposal costs.

The Company expects that substantially all remaining payments will be made
within the next twelve months.

During 2002, the Company recorded restructuring-related charges as follows:

63

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

15. Restructuring and Restructuring-related Charges (Continued)

The restructuring-related charges include charges related to the 2002
restructuring activities:

The home products charges include the write-down of a long-lived asset and costs
associated with the sale of the non-strategic specialty plumbing parts business
and the reversal of certain accruals that were no longer deemed necessary.

The office products charges include the relocation of manufacturing and
distribution facilities and inventory write-offs associated with the
discontinuance of certain unprofitable product lines.

During 2001, the Company recorded restructuring-related charges as follows:

The restructuring-related charges include charges related to the 2001
restructuring activities:

Home products includes costs due to inventory write-offs related to the
downsizing of the low-margin specialty plumbing parts business.

Golf products includes inventory write-offs due to the discontinuance of certain
golf ball manufacturing processes.

Office products includes inventory write-offs due to the discontinuance of
certain unprofitable product lines and expenses associated with the exploration
of strategic options for the office products business.

RESTRUCTURING AND RESTRUCTURING-RELATED CHARGES PROGRAM -- 1999 In connection
with the restructuring program established in 1999, the Company recorded pre-tax
restructuring charges for the year ended December 31, 2000 as follows:

The above charges include costs associated with the elimination of 648 positions
for the year ended December 31, 2000.

Home products includes charges related to planned employee termination costs
(89 positions).

Golf products includes charges related to lease cancellation and planned
employee termination costs (97 positions).

64

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

15. Restructuring and Restructuring-related Charges (Continued)

Office products includes charges related to planned employee termination costs
(462 positions) and asset write-offs.

Reconciliation of the restructuring liability, as of December 31, 2000, is as
follows:

(a) Of the planned downsizing of 2,270 positions, 2,052 reductions had been
implemented as of December 31, 2000. The employee groups affected by these
restructuring actions include plant and administrative hourly and salaried
employees.

Reconciliation of the restructuring liability, as of December 31, 2001, is as
follows:

(a) Of the planned downsizing of 2,306 positions, 2,282 reductions had been
implemented as of December 31, 2001.

(b) Non-cash write-offs include reclasses to reduce international spirits and
wine distribution and lease agreements restructuring reserves by
$5.4 million related to the formation of Maxxium and employment termination
costs by $0.1 million.

65

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

15. Restructuring and Restructuring-related Charges (Continued)

Reconciliation of the restructuring liability, as of December 31, 2002, is as
follows:

(a) 2,299 positions had been eliminated as of December 31, 2002 with no
additional reductions planned.

(b) $0.7 million of the $2.3 million classified as non-cash write-offs
represents the reversal of certain employee termination costs that were
reflected as a reduction of restructuring charges recorded in 2001. The
remaining $1.6 million represents a restructuring charge reversal for
employment termination costs not anticipated to be spent.

(c) The amount classified as non-cash write-offs represents a reclassification
to reduce certain lease termination costs.

During 2000, The Company recorded restructuring-related charges as follows:

The restructuring-related charges include charges related to the 2000
restructuring activities:

Home products includes costs associated with a plant relocation and the
establishment of a distribution center.

Golf products includes relocation costs for certain manufacturing facilities and
inventory write-offs due to the discontinuance of certain product lines.

Office products includes relocation costs for manufacturing facilities, product
line discontinuances, and the write-off of a note receivable related to a
previously sold operation.

Corporate office includes relocation costs associated with establishing a new
corporate headquarters.

16. Information on Business Segments

The Company's subsidiaries operate principally in the following business
segments:

Home products includes: kitchen and bathroom faucets and accessories
manufactured, marketed or distributed by Moen; Aristokraft, Schrock and Omega
kitchen and bath cabinets manufactured, marketed and distributed by MasterBrand
Cabinets; locks manufactured, marketed or distributed by Master Lock; and tool
storage products manufactured and distributed by Waterloo.

66

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

16. Information on Business Segments (Continued)

Spirits and wine includes products produced, marketed or distributed by
Jim Beam Brands Worldwide, Inc. subsidiaries.

Golf products includes Titleist golf balls, and Titleist and Cobra golf clubs
and FootJoy golf shoes and gloves manufactured, marketed or distributed by
Acushnet Company.

Office products includes paper fastening, document management, computer
accessories, time management, presentation and other office products
manufactured, marketed or distributed by ACCO World Corporation subsidiaries.

Net sales, segment assets by business segments and net sales by geographic areas
for the period 1997 through 2002, are shown on page 74.

The Company's subsidiaries operate principally in the United States, Canada, the
United Kingdom and Australia.

A reconciliation of operating company contribution to operating income as
follows:

67

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

16. Information on Business Segments (Continued)

Reconciliation of segment assets to consolidated total assets is as follows:

Long-lived assets are as follows:(a)

(a) Represents property, plant and equipment, net.

Net sales by geographic region are as follows:

Depreciation is as follows:

68

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

16. Information on Business Segments (Continued)

Amortization of intangibles is as follows:

Capital expenditures are as follows:

17. Other Income, net

The components of other income, net for the years ended December 31, 2002, 2001
and 2000 are as follows:

18. 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 and stock
options, amounting to 2.5 million shares, were not included in the computation
of diluted earnings per common share for 2000 since they would have resulted in
an anti-dilutive effect.

69

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

18. Earnings Per Share (Continued)

The computation of basic and diluted earnings per common share for "Net income
(loss)" is as follows:

19. Comprehensive Loss

Comprehensive loss 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 loss are as follows:

Included in the foreign currency adjustments balance at December 31, 2002 is
total deferred forward foreign exchange contract losses of $1.1 million. (See
Note 1.)

20. Related Party Transactions

FUTURE BRANDS LLC In 2001, the Company's spirits and wine business completed
transactions with Vin & Sprit AB of Sweden creating a joint venture, named
Future Brands LLC, to distribute both companies' spirits and wine brands in the
United States. As part of forming this joint venture, our spirits and wine
business has, in the event of default of Future Brands, a continuing obligation
to satisfy any financial obligations of Future Brands that may arise in the
event that Future Brands fails to fulfill its operating obligations and which
results in a claim. These financial obligations include, but are not limited to,
making payments to suppliers, employees

70

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

20. Related Party Transactions (Continued)

and other parties with which Future Brands has contracts. At December 31, 2002
and 2001, JBBCo. did not have any outstanding obligations as a result of this
arrangement. JBBCo.'s transactions with Future Brands amounted to: sales of
$515.6 million and $498.7 for the years ended December 31, 2002 and 2001,
respectively, accounts receivable of $68.8 million and $92.0 million as of
December 31, 2002 and 2001, respectively, accounts payable of $15.6 million and
$23.7 million as of December 31, 2002 and 2001, respectively, and an investment
of $11.7 million and $9.4 million as of December 31, 2002 and 2001,
respectively. In addition, the Company had accrued liabilities with Future
Brands amounting to $29.1 million and $4.5 million as of December 31, 2002 and
2001, respectively.

MAXXIUM INTERNATIONAL BV In 1999, the spirits and wine business formed an
international sales and distribution joint venture named Maxxium
International B.V. with Remy-Cointreau and Highland Distillers, which began
operating in August 1999, to distribute and sell spirits in key markets outside
the United States. As a result of forming this joint venture, JBBW has
guaranteed certain credit facilities and bank loans entered into by Maxxium up
to an amount totaling $66 million, of which $57 million was outstanding as of
December 31, 2002. At December 31, 2001, the guarantees totaled $55 million, of
which $48 million was outstanding. JBBW has also executed a Shareholder Loan
Facility (Loan Facility) with Maxxium amounting to $15.7 million. There were no
amounts outstanding under the Loan Facility as of either December 31, 2002 or
December 31, 2001. The Loan Facility expires December 31, 2003. JBBCo.'s
transactions with Maxxium included the following: sales of $179.1 million,
$168.2 million and $160.0 million for the years ended December 31, 2002, 2001
and 2000, respectively, accounts receivable of $34.6 million and $39.5 million
as of December 31, 2002 and 2001, respectively, accounts payable of
$12.3 million and $6.1 million as of December 31, 2002 and 2001, respectively,
and an investment of $64.3 million and $63.0 million as of December 31, 2002 and
2001, respectively.

21. 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, which has since merged into
Brown & Williamson Tobacco Corporation (the "Indemnitor"), 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 Indemnitor has complied with the terms of the
indemnification agreement since 1994 and the Company is not aware of any
inability on the part of the Indemnitor to satisfy its indemnity obligations.

The Company is a defendant in numerous actions based upon allegations that human
ailments have resulted from tobacco use. It is not possible to predict the
outcome of the pending litigation, and, as with any litigation, 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. However, management believes
that there are a number of meritorious defenses to the pending actions,
including the fact that the Company never made or sold tobacco, and these
actions are being vigorously contested by the Indemnitor. 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 because
it believes it has meritorious defenses and the Company is indemnified under the
previously mentioned indemnification agreement.

71

NOTES TO CONSOLIDATED FINANCIAL Fortune Brands, Inc. and
STATEMENTS Subsidiaries

21. Pending Litigation (Continued)

OTHER LITIGATION

There is an increasing volume of asbestos-related personal injury litigation in
the United States generally. A subsidiary of the Company, Moen Incorporated, has
been named as a defendant in approximately 110 cases claiming personal injury
from asbestos. All of these suits name multiple defendants and, in most cases,
in excess of 75 defendants are named in addition to Moen. None of these cases
identify any Moen products or premises as the cause of the alleged injury to any
of the plaintiffs identified. It is not possible to predict the outcome of the
pending litigation, and, as with any litigation, it is possible that some of
these actions could be decided unfavorably. Management believes it has
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.

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, and, as with any
litigation, it is possible that some of these actions could be decided
unfavorably. 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.

22. Environmental

The Company is subject to laws and regulations 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 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.

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF FORTUNE BRANDS, INC.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, cash flows and stockholders' equity present
fairly, in all material respects, the financial position of Fortune
Brands, Inc. and Subsidiaries at December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. In addition, in our opinion the
financial statement schedule listed in Item 15(a)(2) of this Form 10-K presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial statement schedule 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 our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and intangible assets in fiscal
2002.

PricewaterhouseCoopers LLP
Chicago, Illinois
January 21, 2003

72

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, 2002 and 2001, and the related consolidated
statements of income, cash flows and stockholders' equity for each of the three
years in the period ended December 31, 2002. The financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America. Financial information elsewhere in this Annual Report
on Form 10-K 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/ NORMAN H. WESLEY
- ---------------------------------------
Norman H. Wesley
Chairman of the Board and
Chief Executive Officer

/s/ CRAIG P. OMTVEDT
- ---------------------------------------
Craig P. Omtvedt
Senior Vice President and
Chief Financial Officer

73

INFORMATION ON BUSINESS SEGMENTS(a) Fortune Brands, Inc. and Subsidiaries

(a) See Note 16 for further information on business segments.

(b) Net sales has been restated for 2001 and 2000 to conform to the 2002
presentation due to the reclassification of certain expenses in accordance
with Emerging Issues Task Force Issue No. 01-09. Amounts prior to 2000 have
not been restated.

(c) Represents total assets excluding intercompany receivables and intangibles
resulting from business acquisitions, net.

(d) Net sales are attributed to countries based on location of customer.

74

ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.

None.

PART III

ITEM 10. Directors and Executive Officers of the Company.

See the information under the caption "Election of Directors" contained in the
Proxy Statement for the Annual Meeting of Stockholders of the Company to be held
on April 29, 2003 (to be filed not later than 120 days after the end of the
Company's fiscal year), which information is incorporated herein by reference.
See also the information with respect to executive officers of the Company under
Item #4A of Part I hereof.

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 the Company to be held on April 29, 2003 (to be filed
not later than 120 days after the end of the Company's fiscal year), which
information is incorporated herein by reference.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management.

EQUITY COMPENSATION PLAN INFORMATION

(1) 874,639 shares remain available for issuance under the Company's 1999
Long-Term Incentive Plan, which allows for grants of performance stock
awards, restricted stock awards and other stock-based awards. 68,400 shares
remain available for issuance under the Stock Plan for Non-Employee Directors,
which provides for stock grants.

See the information under the caption "Certain Information Regarding Security
Holdings" contained in the Proxy Statement for the Annual Meeting of
Stockholders of the Company to be held on April 29, 2003 (to be filed not later
than 120 days after the end of the Company's fiscal year), which information is
incorporated herein by reference.

ITEM 13. Certain Relationships and Related Transactions.

None.

75

ITEM 14. Controls and Procedures

(a) Evaluation of controls and procedures.

The Company's Chief Executive Officer and Chief Financial Officer have reviewed
and evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in the Exchange Act) within the past ninety days. Based
on that evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that the Company's current disclosure controls and procedures are
effective in providing them on a timely basis with material information relating
to the Company required to be disclosed in the reports the Company files or
submits under the Exchange Act.

(b) Changes in internal controls.

There have not been any significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation. There were no significant deficiencies or material
weaknesses and therefore no corrective actions were taken.

PART IV

ITEM 15. 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 the
Company and its consolidated subsidiaries):

Consolidated Statement of Income for the years ended December 31, 2002, 2001
and 2000 contained in Item 8 hereof.

Consolidated Balance Sheet as of December 31, 2002 and 2001 contained in
Item 8 hereof.

Consolidated Statement of Cash Flows for the years ended December 31, 2002,
2001 and 2000 contained in Item 8 hereof.

Consolidated Statement of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000 contained in Item 8 hereof.

Notes to Consolidated Financial Statements contained in Item 8 hereof.

Report of Independent Accountants contained in Item 8 hereof.

(2) Financial Statement Schedules

See Financial Statement Schedule of the Company and subsidiaries at
page 82.

(3) Exhibits

3(i). Restated Certificate of Incorporation of the Company as in
effect on the date hereof is incorporated herein by
reference to Exhibit 3(i) to our Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.

3(ii)a. Amendment to By-laws of the Company.

3(ii)b. By-laws of the Company as in effect on the date hereof.

4a1. Rights Agreement dated as of November 19, 1997 between the
Company and First Chicago Trust Company of New York as
Rights Agent is incorporated herein by reference to
Exhibit 4a to our Current Report on Form 8-K dated
December 2, 1997.

76

4a2. Amendment to the Rights Agreement dated as of December 24,
2002 between the Company and EquiServe, Inc. (a successor to
First Chicago Trust Company of New York) as Rights Agent.

4b1. Indenture dated as of July 15, 1988 between the Company and
Chemical Bank (as successor by merger to Manufacturers
Hanover Trust Company) as Trustee ("Chemical") is
incorporated herein by reference to Exhibit 4a to our
Current Report on Form 8-K dated June 27, 1989 maintained in
Commission File No. 1-9076.

4b2. First Supplemental Indenture dated as of November 14, 1990
between the Company and Chemical, amending and supplementing
the Indenture constituting Exhibit 4b1 hereto, is
incorporated herein by reference to Exhibit 4b to our
Current Report on Form 8-K dated November 19, 1990
maintained in Commission File No. 1-9076.

4b3. Second Supplemental Indenture dated as of September 1, 1991
between the Company and Chemical, further amending and
supplementing the Indenture constituting Exhibits 4b1
and 4b2 hereto, is incorporated herein by reference to
Exhibit 4c to our Current Report on Form 8-K dated
October 10, 1991 maintained in Commission File No. 1-9076.

4c1. Indenture dated as of April 15, 1999 between the Company and
The Chase Manhattan Bank ("Chase") as Trustee is
incorporated herein by reference to Exhibit 4 to our Current
Report on Form 8-K dated December 10, 1999.

10a1. Fortune Brands, Inc. Annual Executive Incentive Compensation
Plan is incorporated herein by reference to Exhibit 10a1
to our Quarterly Report on Form 10-Q dated August 12, 1997.*

10b1. Fortune Brands, Inc. 1990 Long-Term Incentive Plan (As
Amended and Restated as of January 1, 1994) is incorporated
herein by reference to Exhibit 10a to our Quarterly Report
on Form 10-Q dated August 11, 1994 maintained in Commission
File No. 1-9076.*

10b2. Amendment to Fortune Brands, Inc. 1990 Long-Term Incentive
Plan constituting Exhibit 10b1 hereto is incorporated
herein by reference to Exhibit 10a1 to our Quarterly Report
on Form 10-Q dated November 11, 1997.*

10b3. Amendment to Fortune Brands, Inc. 1990 Long-Term Incentive
Plan and Amendment thereto constituting Exhibits 10b1
and 10b2 hereto is incorporated herein by reference to
Exhibit 10a1 to our Quarterly Report on Form 10-Q dated
November 13, 2001.*

10c1. Fortune Brands, Inc. 1999 Long-Term Incentive Plan is
incorporated herein by reference to Exhibit 4e1 to our
Registration Statement on Form S-8, dated February 1, 2000,
for the Fortune Brands, Inc. 1999 Long-Term Incentive Plan.*

10c2. Amendment to Fortune Brands, Inc. 1999 Long-Term Incentive
Plan constituting Exhibit 10c1 hereto is incorporated
herein by reference to Exhibit 10b1 to our Quarterly Report
on Form 10-Q dated November 13, 2001.*

10d1. Fortune Brands, Inc. Non-Employee Director Stock Option Plan
is incorporated herein by reference to Exhibit 10b1 to our
Quarterly Report on Form 10-Q dated August 12, 1997.*

10d2. Amendment to Fortune Brands, Inc. Non-Employee Director
Stock Option Plan constituting Exhibit 10d1 hereto is
incorporated herein by reference to Exhibit 10a1 to our
Quarterly Report on Form 10-Q dated August 12, 1998.*

10d3. Amendment to Fortune Brands Inc. Non-Employee Director Stock
Option Plan and Amendment thereto constituting
Exhibits 10d1 and 10d2 hereto is incorporated herein by
reference to Exhibit 10b9 to our Annual Report on Form 10-K
for the fiscal year ended December 31, 1999.*

10d4. Amendment to Fortune Brands, Inc. Non-Employee Director
Stock Option Plan and Amendments thereto constituting
Exhibits 10d1, 10d2 and 10d3 hereto is incorporated herein
by reference to Exhibit 10a1 to our Quarterly Report on
Form 10-Q dated May 15, 2001.*

77

10e1. Fortune Brands, Inc. 2002 Non-Employee Director Stock Option
Plan is incorporated by reference to Exhibit B to our
Definitive Schedule 14A filed on March 19, 2001.*

10f1. Fortune Brands, Inc. Stock Plan for Non-employee Directors
is incorporated by reference to Exhibit 10b9 to our Annual
Report on Form 10-K for the Fiscal Year ended December 31,
1998.*

10f2. Fortune Brands, Inc. Stock Plan for Non-employee Directors
is incorporated by reference to Exhibit A to our Definitive
Schedule 14A filed on March 14, 2000.*

10g1. Fortune Brands, Inc. Supplemental Plan, as Amended, is
incorporated by reference to Exhibit 10g1 to our Annual
Report on Form 10-K for the fiscal year ended December 31,
2001.*

10g2. Amendment to Fortune Brands, Inc. Supplemental Plan
effective December 10, 2002.*

10h1. Form of Trust Agreement among the Company, The Northern
Trust Company ("Northern"), et al. establishing an aggregate
rabbi trust in favor of certain executive officers for
purposes of paying amounts under the Supplemental Plan
constituting Exhibit 10g1 hereto.*

10i1. Form of Amended and Restated Trust Agreement among the
Company, Northern, et al. establishing an employee grantor
trust in favor of certain executive officers for purposes of
paying amounts under the Supplemental Plan constituting
Exhibit 10g1 hereto.*

10i2. Schedule identifying substantially identical agreements to
the Trust Agreement constituting Exhibit 10i1 hereto in
favor of Thomas J. Flocco, Mark Hausberg, Craig P. Omtvedt,
Mark A. Roche and Norman H. Wesley.*

10j1. Resolutions of the Board of Directors of the Company adopted
on October 28, 1986 and July 26, 1988 adopting and amending
a retirement plan for directors of the Company who are not
officers or employees of the Company or a subsidiary thereof
are incorporated herein by reference to Exhibit 10e1 to our
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 maintained in Commission File
No. 1-9076.*

10j2. Resolution of the Board of Directors of the Company adopted
on July 26, 1994 amending the resolutions constituting
Exhibit 10j1 hereto is incorporated herein by reference to
Exhibit 10e2 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 1994 maintained in Commission
File No. 1-9076.*

10k1. Resolution of the Board of Directors of the Company adopted
on July 26, 1988 with respect to retirement and health
benefits provided to Mark A. Roche is incorporated herein by
reference to Exhibit 10f2 to our Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.*

10l1. Letter dated August 11, 1995 from the Company with respect
to deferred payment of fees to Gordon R. Lohman is
incorporated herein by reference to Exhibit 10b to our
Quarterly Report on Form 10-Q dated November 9, 1995
maintained in Commission File No. 1-9076.*

10m1. Form of Agreement between the Company and each of certain
executive officers is incorporated herein by reference to
Exhibit 10m1 of our Form 10-K for the fiscal year ended
December 31, 2001.*

10m2. Schedule identifying substantially identical agreements to
the Agreement constituting Exhibit 10m1 hereto entered into
by the Company with, Mark Hausberg, Craig P. Omtvedt, Mark
A. Roche and Norman H. Wesley.*

10m3. Form of amendment dated December 1, 2000 to the Agreement
constituting Exhibit 10ml hereto between the Company and
each of certain executive officers is incorporated herein by
reference to Exhibit 10m3 of our Form 10-K for the fiscal
year ended December 31, 2001.*

10m4. Schedule identifying substantially identical agreements to
the Agreement constituting Exhibit 10m3 hereto entered into
by the Company with Mark Hausberg and Mark A. Roche.*

78

10n1. Form of Trust Agreement among the Company, Northern, et al.
establishing an aggregate rabbi trust in favor of certain
executive officers for purposes of paying amounts under the
agreement constituting Exhibit 10m1 hereto in favor of Mark
Hausberg, Craig P. Omtvedt, Mark A. Roche and Norman H.
Wesley.*

10o1. Severance and Retirement Agreement dated as of January 1,
2000 between the Company and Norman H. Wesley is
incorporated herein by reference to Exhibit 10c1 to our
Quarterly Report on Form 10-Q dated May 12, 2000.*

10p1. Severance Agreement dated as of January 29, 1996 between the
Company and Craig P. Omtvedt is incorporated herein by
reference to Exhibit 10p1 of our Form 10-K for fiscal year
ended December 31, 2001.*

10p2. Amendment effective as of January 27, 1997 to the Agreement
constituting Exhibit 10p1 hereto between the Company and
Craig P. Omtvedt is incorporated herein by reference to
Exhibit 10p2 of our Form 10-K for the fiscal year ended
December 31, 2001.*

10p3. Amendment dated as of August 1, 1998 to the Agreement and
Amendment thereto constituting Exhibits 10p1 and 10p2 hereto
between the Company and Craig P. Omtvedt is incorporated by
reference to Exhibit 10j8 to our Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.*

10p4. Schedule identifying substantially identical agreements to
the Agreement and Amendments thereto constituting
Exhibits 10p1, 10p2 and 10p3 hereto entered into by the
Company with Mark A. Roche.*

10p5. Amendment dated as of December 18, 2000 to the Agreement and
Amendments thereto constituting Exhibits 10p1, 10p2 and 10p3
hereto between the Company and Mark A. Roche is incorporated
by reference to Exhibit 10j15 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.*

10p6. Schedule identifying substantially identical agreement to
the Amendment constituting Exhibit 10p5 hereto entered into
by the Company with Mark Hausberg.*

10q1. Severance Agreement dated as of January 1, 2000 between the
Company and Thomas J. Flocco is incorporated by reference to
Exhibit 10a1 to our Quarterly Report on Form 10-Q dated
November 13, 2000.*

10r1. Fortune Brands, Inc. Severance Plan for Vice Presidents,
adopted as of January 1, 2000, is incorporated by reference
to Exhibit 10a1 to our Quarterly Report on Form 10-Q dated
August 11, 2000.*

10s1. Indemnification Agreement dated as of December 22, 1994
among the Company, The American Tobacco Company and Brown &
Williamson Tobacco Corporation is incorporated herein by
reference to Exhibit 10m1 to our Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.

10t1. Five-Year Revolving Credit Agreement, dated as of July 12,
2001 among the Company and Fortune Brands Finance UK, plc as
Borrowers, Chase as Administrative Agent, Citibank, N.A. as
Syndication Agent and 14 financial institutions as Lenders
is incorporated herein by reference to Exhibit 10a1 to our
Quarterly Report on Form 10-Q dated August 14, 2001.

10u1. 364-Day Revolving Credit Agreement, dated as of July 12,
2001 among the Company as Borrower, Chase as Administrative
Agent, Citibank, N.A. as Syndication Agent and 14 financial
institutions as Lenders is incorporated herein by reference
to Exhibit 10b1 to our Quarterly Report on Form 10-Q dated
August 14, 2001.

79

10u2. Termination, Replacement and Restatement Agreement dated
June 25, 2002 among the Company as Borrower, JPMorgan Chase
Bank as Administrative Agent, Citibank N.A. as
Administrative Agent and 14 financial institutions as
lenders is incorporated herein by reference to Exhibit 10a1
to our Quarterly Report on Form 10-Q dated August 12, 2002.

10v1. Master Transaction Agreement dated March 20, 2001 by and
among V&S Vin & Sprit AB, The Absolut Spirits Company,
Incorporated, Jim Beam Brands Worldwide, Inc., Jim Beam
Brands Co. and the Company is incorporated herein by
reference to Exhibit 10b1 to our Quarterly Report on
Form 10-Q dated May 15, 2001.

12. Statement re computation of ratio of earnings to fixed
charges.

21. Subsidiaries of the Company.

23(i). Consent of Independent Accountants,
PricewaterhouseCoopers LLP.

24. Powers of Attorney relating to execution of this Annual
Report on Form 10-K.

99.1 List of Pending/Terminated Cases.

99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* 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, the Company agrees to furnish a
copy of such instruments to the Securities and Exchange Commission upon request.

(b) Reports on Form 8-K.

The Company filed a Current Report on Form 8-K, dated September 24, 2002, in
respect of the Company's press release dated September 24, 2002 reporting an
increase in the dividend on the Company's common stock (Items 5 and 7).

The Company filed a Current Report on Form 8-K, dated October 17, 2002, in
respect of the Company's press release announcing third quarter earnings
(Items 5 and 7).

The Company furnished a Current Report on Form 8-K, dated October 29, 2002 for
the purpose of furnishing an investment brochure pursuant to Regulation FD
(Items 7 and 9).

The Company furnished a Current Report on Form 8-K, dated November 12, 2002, for
the purpose of furnishing an investment brochure pursuant to Regulation FD
(Items 7 and 9).

The Company filed a Current Report on Form 8-K, dated November 13, 2002, in
respect of the Company's press release dated November 12, 2002 reporting the
Company's reaffirmation of 2002 earnings guidance (Items 5 and 7).

80

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FORTUNE BRANDS, INC.
(The Company)

By: /s/ NORMAN H. WESLEY
---------------------------------------
Norman H. Wesley
Chairman of the Board and
Chief Executive Officer
Date: March 12, 2003

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 the
Company and in the capacities and on the dates indicated.

/s/ NORMAN H. WESLEY /s/ GORDON R. LOHMAN*
- ---------------------------------------- --------------------------------------
Norman H. Wesley, Chairman of the Board Gordon R. Lohman, Director
and Chief Executive Officer (principal Date: March 12, 2003
executive officer)
Date: March 12, 2003

/s/ CRAIG P. OMTVEDT /s/ EUGENE A. RENNA*
- ---------------------------------------- --------------------------------------
Craig P. Omtvedt, Senior Vice President Eugene A. Renna, Director
and Chief Financial Officer (principal Date: March 12, 2003
financial officer)
Date: March 12, 2003

/s/ NADINE A. HEIDRICH /s/ J. CHRISTOPHER REYES*
- ---------------------------------------- --------------------------------------
Nadine A. Heidrich, Vice President and J. Christopher Reyes, Director
Corporate Controller (principal Date: March 12, 2003
accounting officer)
Date: March 12, 2003

/s/ PATRICIA O. EWERS* /s/ ANNE M. TATLOCK*
- ---------------------------------------- --------------------------------------
Patricia O. Ewers, Director Anne M. Tatlock, Director
Date: March 12, 2003 Date: March 12, 2003

/s/ THOMAS C. HAYS* /s/ DAVID M. THOMAS*
- ---------------------------------------- --------------------------------------
Thomas C. Hays, Director David M. Thomas, Director
Date: March 12, 2003 Date: March 12, 2003

/s/ JOHN W. JOHNSTONE, JR.* /s/ PETER M. WILSON*
- ---------------------------------------- --------------------------------------
John W. Johnstone, Jr., Director Peter M. Wilson, Director
Date: March 12, 2003 Date: March 12, 2003

*By: /s/ MARK A. ROCHE
---------------------------------------
Mark A. Roche, Attorney-in-Fact

81

SCHEDULE II Valuation and Qualifying Accounts

(1) Cash discounts and returns allowed to customers.

(2) Doubtful accounts written off, net of recoveries.

(3) Balance at acquisition date of subsidiaries.

(4) Balance at disposition date of subsidiaries.

(5) Foreign exchange rate changes.

82

CERTIFICATION

I, Norman H. Wesley, certify that:

1. I have reviewed this annual report on Form 10-K of Fortune Brands, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 12, 2003

/s/ NORMAN H. WESLEY
---------------------------------------
Norman H. Wesley
Chairman and Chief Executive Officer

83

CERTIFICATION

I, C.P. Omtvedt, certify that:

1. I have reviewed this annual report on Form 10-K of Fortune Brands, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: March 12, 2003

/s/ C.P. OMTVEDT
---------------------------------------
C.P. Omtvedt
Senior Vice President and
Chief Financial Officer

84

EXHIBIT INDEX

* Indicates that exhibit is a management contract or compensatory plan or
arrangement.