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.

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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.

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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:

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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 w