item 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed registrant consolidated subsidiaries consolidated statement income years ended december 31 1993 1992 1991 contained 1993 annual report stockholders registrant incorporated herein reference consolidated balance sheet december 31 1993 1992 contained 1993 annual report stockholders registrant incorporated herein reference consolidated statement cash flows years ended december 31 1993 1992 1991 contained 1993 annual report stockholders registrant incorporated herein reference consolidated statement common stockholders equity years ended december 31 1993 1992 1991 contained 1993 annual report stockholders registrant incorporated herein reference notes consolidated financial statements contained 1993 annual report stockholders registrant incorporated herein reference report independent accountants contained 1993 annual report stockholders registrant incorporated herein reference 2 financial statement schedules see index financial statement schedules registrant subsidiaries page index incorporated herein reference 3 exhibits 3i certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3a2 quarterly report form 10q registrant dated may 14 1990 3ii bylaws registrant effect date hereof incorporated herein reference exhibit 3iib quarterly report form 10q registrant dated november 11 1993 10a1 article xii incentive compensation bylaws registrant incorporated herein reference exhibit 3iib quarterly report form 10q registrant dated november 11 1993 10b1 stock option plan american brands inc amended incorporated herein reference exhibit 10b1 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment stock option plan american brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10a quarterly report form 10q registrant dated november 11 1993 10b3 1986 stock option plan american brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b4 amendment 1986 stock option plan american brands inc constituting exhibit 10b3 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b5 1990 longterm incentive plan american brands inc incorporated herein reference exhibit 10b4 annual report form 10k registrant fiscal year ended december 31 1990 10b6 amendment 1990 longterm incentive plan american brands inc constituting exhibit 10b5 hereto incorporated herein reference exhibit 10 quarterly report form 10q registrant dated may 13 1993 10b7 stock plan nonemployee directors american brands inc incorporated herein reference exhibit 10b5 annual report form 10k registrant fiscal year ended december 31 1990 10c1 amended supplemental retirement plan american brands inc 10c2 trust agreement made 1st day february 1989 among registrant chase manhattan bank national association chase et al establishing trust favor william j alley purposes paying amounts amended supplemental retirement plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1988 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto 10c4 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10c2 10c3 hereto respectively favor thomas c hays arnold henson robert l plancher gilbert l klemann ii john ludes robert j rukeyser randall w larrimore steven c mendenhall 10c5 trust agreement made 1st day november 1993 among william j alley registrant chase establishing grantor trust favor william j alley purposes paying amounts amended supplemental retirement plan constituting exhibit 10c1 hereto 10c6 schedule identifying substantially identical agreements trust agreement constituting exhibit 10c5 hereto favor thomas c hays arnold henson robert l plancher gilbert l klemann ii john ludes robert j rukeyser randall w larrimore steven c mendenhall 10d1 executive mortgage program registrant connection relocation corporate headquarters incorporated herein reference exhibit 10d1 annual report form 10k registrant fiscal year ended december 31 1991 10e1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 10f1 franklin life insurance company supplemental retirement plan effective january 1 1988 amended restated effective january 1 1993 10f2 trust agreement made 25th day january 1990 among franklin life insurance company franklin marine bank springfield milliman robertson establishing trust favor howard c humphrey purposes paying amounts supplemental retirement plan constituting exhibit 10f1 hereto incorporated herein reference exhibit 10f2 annual report form 10k registrant fiscal year ended december 31 1990 10f4 trust agreement made 16th day december 1993 among howard c humphrey franklin bank one springfield state association establishing grantor trust favor howard c humphrey purposes paying amounts supplemental retirement plan constituting exhibit 10f1 hereto 10g1 gallaher limited executive incentive plan adopted june 20 1990 incorporated herein reference exhibit 10g1 annual report form 10k registrant fiscal year ended december 31 1990 10g2 trust deed dated march 24 1983 gallaher limited gallaher pensions limited amendments thereto providing supplemental retirement benefits certain executives gallaher incorporated herein reference exhibits 10g2 10g3 annual report form 10k registrant fiscal year ended december 31 1989 10g3 trust deed dated june 3 1992 amending exhibit 10g2 hereto incorporated herein reference exhibit 10g3 annual report form 10k registrant fiscal year ended december 31 1992 10g4 trust deed dated january 24 1994 amending exhibit 10g2 hereto 10h1 acco world corporation management incentive plan incorporated herein reference exhibit 10h1 annual report form 10k registrant fiscal year ended december 31 1991 10i1 acco world corporation supplemental benefit plan key employees incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1989 10j1 american franklin company senior executive key manager incentive plan incorporated herein reference exhibit 10j1 annual report form 10k registrant fiscal year ended december 31 1990 10k1 jim beam brands co senior executive key manager incentive plan incorporated herein reference exhibit 10m4 annual report form 10k registrant fiscal year ended december 31 1991 10k2 jim beam brands co amended excess benefit plan 10k3 trust agreement made december 24 1991 among jim beam brands co beam chase hewitt associates establishing trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10k2 hereto incorporated herein reference exhibit 10m3 annual report form 10k registrant fiscal year ended december 31 1991 10k4 amendment made 17th day november 1993 trust agreement constituting exhibit 10k3 hereto 10k5 trust agreement made 15th day december 1993 among barry berish beam chase establishing grantor trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10k2 hereto 10l1 resolution board directors registrant adopted december 11 1985 respect retirement health benefits provided william j alley incorporated herein reference exhibit 10e2 registration statement form 8b registrant dated january 27 1986 10l2 agreement dated march 1 1988 registrant william j alley amendments thereto providing certain retirement benefits incorporated herein reference exhibit 10l2 annual report form 10k registrant fiscal year ended december 31 1992 10m1 resolutions board directors registrant adopted december 11 1985 february 23 1988 respect retirement health benefits provided arnold henson incorporated herein reference exhibit 10m1 annual report form 10k registrant fiscal year ended december 31 1992 10n1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 10o1 service agreement dated february 11 1994 gallaher peter wilson 10o2 letter dated september 20 1991 gallaher respect retirement benefits provided peter wilson 10o3 letter dated march 15 1994 amending exhibit 10o2 hereto 10o4 service agreement dated may 15 1989 gallaher anthony househam amendments thereto incorporated herein reference exhibits 10p1 10q2 annual reports form 10k registrant fiscal years ended december 31 1989 1990 respectively 10o5 letter dated september 20 1991 gallaher respect retirement benefits provided anthony househam incorporated herein reference exhibit 10q2 annual report form 10k registrant fiscal year ended december 31 1991 10p1 acco world corporation supplemental retirement plan amendment thereto incorporated herein reference exhibit 10r1 annual report form 10k registrant fiscal year ended december 31 1991 10p2 amendment acco world corporation supplemental retirement plan constituting exhibit 10p1 hereto incorporated herein reference exhibit 10p2 annual report form 10k registrant fiscal year ended december 31 1992 10q1 employment agreement entered june 8 1987 acco international inc predecessor acco usa inc norman h wesley incorporated herein reference exhibit 10r1 annual report form 10k registrant fiscal year ended december 31 1990 10r1 letters dated july 31 1984 february 26 1990 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10t1 annual report form 10k registrant fiscal year ended december 31 1991 10s1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10s2 schedule identifying substantially identical agreements agreement constituting exhibit 10s1 hereto entered registrant william j alley thomas c hays arnold henson howard c humphrey robert l plancher john ludes robert j rukeyser randall w larrimore steven c mendenhall 10s3 agreement dated april 14 1992 franklin howard c humphrey incorporated herein reference exhibit 10s3 annual report form 10k registrant fiscal year ended december 31 1992 10t1 trust agreement made 1st day february 1989 among registrant chase et al establishing trust favor william j alley purposes paying amounts agreement form constituting exhibit 10s1 hereto incorporated herein reference exhibit 10gg1 annual report form 10k registrant fiscal year ended december 31 1988 10t2 amendment made 1st day november 1993 trust agreement constituting exhibit 10t1 hereto 10t3 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10t1 10t2 hereto respectively favor thomas c hays arnold henson robert l plancher gilbert l klemann ii john ludes howard c humphrey robert j rukeyser randall w larrimore steven c mendenhall 10u1 agreement dated march 1 1988 amendments thereto registrant william j alley incorporated herein reference exhibit 10u1 annual report form 10k registrant fiscal year ended december 31 1992 10v1 agreement dated march 1 1988 amendments thereto registrant thomas c hays incorporated herein reference exhibit 10v1 annual report form 10k registrant fiscal year ended december 31 1992 10v2 schedule identifying substantially identical agreements agreement constituting exhibit 10v1 hereto entered registrant arnold henson robert l plancher john ludes robert j rukeyser steven c mendenhall 10w1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 10w2 agreement dated october 28 1991 amending agreement constituting exhibit 10w1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10x1 agreement dated march 7 1988 registrant randall w larrimore amendments thereto incorporated herein reference exhibit 10x1 annual report form 10k registrant fiscal year ended december 31 1992 l0y1 agreement dated february 1 1990 american franklin howard c humphrey incorporated herein reference exhibit l0mm1 annual report form 10k registrant fiscal year ended december 31 1989 l0z1 agreement dated february 1 1990 beam barry berish incorporated herein reference exhibit 10pp1 annual report form 10k registrant fiscal year ended december 31 1990 l0aa1 rights agreement dated december 13 1987 registrant first chicago trust company new york rights agent amendments thereto incorporated herein reference exhibit 10aa1 annual report form 10k registrant fiscal year ended december 31 1992 10bb1 stock purchase agreement dated july 20 1990 among mi acquisition inc stanadyne partners forstmann little co subordinated debt equity management buyout partnership iii mbo certain individual shareholders moen group inc amendment 1 stock purchase agreement dated august 21 1990 incorporated herein reference exhibit 2a current report form 8k registrant dated august 29 1990 10bb2 escrow agreement dated august 21 1990 among mi acquisition inc stanadyne partners mbo chemical bank successor merger manufacturers hanover trust company incorporated herein reference exhibit 2b current report form 8k registrant dated august 29 1990 11 statement setting forth net income computation earnings per common share primary fully diluted statement setting forth computation weighted average number common shares outstanding fully diluted basis 12 statement computation ratio earnings fixed charges 13 1993 annual report stockholders registrant 22 subsidiaries registrant 23ia consent independent accountants coopers lybrand 23ib consent counsel chadbourne parke 24 powers attorney relating execution annual report form 10k indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon request b reports form 8k registrant filed current report form 8k dated october 20 1993 respect registrants press release dated october 20 1993 announcing registrants financial results threemonth ninemonth periods ended september 30 1993 items 5 7c registrant filed current report form 8k dated october 21 1993 respect registrants press release dated october 21 1993 announcing acquisition whyte mackay group plc united kingdom subsidiary registrants gallaher limited subsidiary additional share interest invergordon distillers group plc mandatory cash offer remaining shares invergordon items 5 7c registrant filed current report form 8k dated november 23 1993 respect settlement reached registrant remaining defendants forstmann leff associates inc et al v american brands inc et al described paragraph c item 3 herein item 5 registrant filed current report form 8k dated january 26 1994 respect registrants press release dated january 24 1994 announcing registrants financial results threemonth twelvemonth periods ended december 31 1993 items 5 7c registrant filed current report form 8k dated february 22 1994 respect managements discussion analysis results operations 1993 compared 1992 compared 1991 financial review ii consolidated statement income years ended december 31 1993 1992 1991 iii consolidated balance sheet december 31 1993 1992 iv consolidated statement cash flows years ended december 31 1993 1992 1991 v consolidated statement common stockholders equity years ended december 31 1993 1992 1991 vi notes consolidated financial statements vii report independent accountants viii report management ix information business segments x elevenyear consolidated selected financial data registrant consolidated subsidiaries items 5 7 c annual report shall construed waiver right contest validity scope provisions securities exchange act 1934 amended constitution united states validity rule regulation made act signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized american brands inc registrant william j alley william j alley chairman board date march 28 1994 chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated william j alley william j alley chairman board chief executive officer principal executive officer director date march 28 1994 tc hays tc hays president chief operating officer director date march 28 1994 henson executive vice president chief financial officer principal financial officer director date march 28 1994 rl plancher rl plancher senior vice president chief accounting officer principal accounting officer date march 28 1994 howard c humphrey howard c humphrey vice president life insurance director date march 28 1994 eugene r anderson eugene r anderson director date march 28 1994 patricia ewers patricia ewers director date march 28 1994 john w johnstone jr john w johnstone jr director date march 28 1994 wendell j kelley wendell j kelley director date march 28 1994 sidney kirschner sidney kirschner director date march 28 1994 gordon r lohman gordon r lohman director date march 28 1994 charles h pistor jr charles h pistor jr director date march 28 1994 peter wilson peter wilson director date march 28 1994 robert colby robert colby attorneyinfact index financial statement schedules pages american brands inc subsidiaries report independent accountants schedules iii condensed financial information registrant december 31 1993 1992 years ended december 31 1993 1992 1991 viii valuation qualifying accounts years ended december 31 1993 1992 1991 ix shortterm borrowings years ended december 31 1993 1992 1991 x supplementary income statement information years ended december 31 1993 1992 1991 schedules listed omitted information either applicable required furnished financial statements notes thereto incorporated reference item 8 hereof report independent accountants board directors stockholders american brands inc report consolidated financial statements american brands inc subsidiaries incorporated reference form 10k 1993 annual report stockholders american brands inc connection audits financial statements also audited related financial statement schedules listed index page form 10k opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein coopers lybrand 1301 avenue americas new york new york february 1 1994 american brands inc parent company schedule iii condensed financial information registrant balance sheet millions december 31 1993 1992 assets current assets receivables affiliated companies 5658 5680 current assets 514 596 total current assets 6172 6276 investment subsidiaries 35665 37046 longterm receivables affiliated companies 37248 32913 assets 1412 1749 total assets 80497 77984 liabilities stockholders equity current liabilities commercial paper 7113 4334 payables affiliated companies 1132 1458 current liabilities 2659 3386 current portion longterm debt 1565 1336 total current liabilities 12469 10514 longterm debt 24384 23605 postretirement liabilities 930 849 total liabilities 37783 34968 convertible preferred stock redeemable companys option 171 191 common stockholders equity 42543 42825 total liabilities stockholders equity 80497 77984 notes consolidated financial statements american brands inc subsidiaries contained 1993 annual report stockholders registrant integral part statements see accompanying notes condensed financial information registrant american brands inc parent company schedule iii condensed financial information registrant statement income millions years ended december 31 1993 1992 1991 interest affiliates 3326 3578 3419 expenses corporate administrative expenses 781 807 1345 interest affiliates 129 82 176 nonaffiliates 2203 2383 2400 expenses net 129 121 125 total expenses 3242 3393 4046 income loss income tax benefit equity net income subsidiaries cumulative effect accounting changes 84 185 627 income tax benefit 14 94 506 income loss equity net income subsidiaries cumulative effect accounting changes 98 279 121 equity net income subsidiaries 4697 8559 8182 income cumulative effect accounting changes 4795 8838 8061 cumulative effect accounting changes net income taxes 74 97 net income 4698 8838 8061 notes consolidated financial statements american brands inc subsidiaries contained 1993 annual report stockholders registrant integral part statements see accompanying notes condensed financial information registrant american brands inc parent company schedule iii condensed financial information registrant statement cash flows millions years ended december 31 1993 1992 1991 net cash provided operating activities 6635 6802 7124 investing activities additional investment subsidiary 18 net 44 40 45 net cash provided used investing activities 44 58 45 financing activities increase decrease shortterm debt 2780 2616 4841 issuance longterm debt 4730 3514 11554 repayment longterm debt 3647 6726 5123 dividends stockholders 3991 3778 3376 cash purchases common stock treasury 579 1004 1067 change intercompany balances net 5923 142 4278 redemption purchases 275 preferred stock 1344 18 financing activities net 49 120 63 net cash used financing activities 6679 6744 7086 net decrease cash equivalents 07 cash equivalents beginning year 07 end year cash paid year interest 2202 2336 2184 income taxes 2385 2808 2230 notes consolidated financial statements american brands inc subsidiaries contained 1993 annual report stockholders registrant integral part statements see accompanying notes condensed financial information registrant notes condensed financial information registrant 1basis presentation pursuant rules regulations securities exchange commission condensed financial statements registrant include information notes normally included financial statements prepared accordance generally accepted accounting principles therefore condensed financial statements read conjunction consolidated financial statements notes thereto included annual report stockholders registrant referenced form 10k part ii item 8 certain 1992 balance sheet amounts reclassified conform 1993 presentation 2accounting changes january 1 1993 registrant adopted fas statement 106 employers accounting postretirement benefits pension fas 112 employers accounting postemployment benefits initial effects adopting statements recorded cumulative changes accounting principles 3investment subsidiaries 1993 1348 million intercompany debt contributed capital subsidiary registrant 4cash dividends subsidiaries dividends 6798 million 1993 6481 million 1992 6815 million 1991 paid registrant subsidiaries notes condensed financial information registrant concluded 5debt components longterm debt follows millions 1993 1992 notes payable 3000 2000 revolving credit notes 1958 2032 notes 3565 3765 5 34 eurodollar convertible debentures due 2005 2000 7 58 eurodollar convertible debentures due 2001 1500 eurodollar convertible debentures 410 434 8 12 notes due 2003 2000 5 14 notes due 1995 2000 8 58 debentures due 2021 1500 9 18 debentures due 2016 1500 7 78 debentures due 2023 1500 7 12 notes due 1999 1500 9 34 eurosterling notes due 1993 1136 9 notes due 1999 1000 9 12 eurosterling notes due 1994 740 757 9 14 eurosterling notes due 1998 740 757 12 eurosterling notes due 1995 592 606 12 sterling loan stock due 2009 444 454 25949 24941 less current portion 1565 1336 24384 23605 estimated payments maturing longterm debt requirements next five years assuming onetime put options exercised follows 1994 1565 million 1995 7777 million 1996 101 million 1997 538 million 1998 1685 million december 31 1993 registrant guaranteed shortterm committed credit facilities ukbased subsidiary provided unsecured borrowings 444 million 44 million outstanding american brands inc subsidiaries schedule viii valuation qualifying accounts years ended december 31 1993 1992 1991 millions col b col c col e additions charged balance costs end beginning description period expenses deductions period 1993 allowance cash discounts 79 873 8891 63 allowance returns 173 1506 14601 219 allowance doubtful accounts 348 117 1173 343 052 600 2496 2471 625 1992 allowance cash discounts 75 886 8821 79 allowance returns 93 1143 10601 173 032 allowance doubtful accounts 393 119 1313 348 332 561 2148 2109 600 1991 allowance cash discounts 65 848 8381 75 allowance returns 108 1144 11571 93 022 allowance doubtful accounts 378 88 663 393 072 551 2080 2070 561 1 cash discounts returns allowed customers 2 effect changes foreign exchange rates 3 doubtful accounts written net recoveries american brands inc subsidiaries schedule ix shortterm borrowings years ended december 31 1993 1992 1991 millions col b col c col e col f weighted average maximum average category balance interest amount interest aggregate rate outstanding rate shortterm end borrowings 1 period 2 period 3 1993 notes payable banks 2989 58 4249 2707 67 commercial paper 7113 34 7113 4271 34 1992 notes payable banks 2471 81 3020 1946 100 commercial paper 4334 36 6734 3910 41 1991 notes payable banks 1310 102 2176 1286 121 commercial paper 2718 53 7705 4497 69 1 notes payable banks represents borrowings various currencies primarily credit agreements banks commercial paper represents paper sold american brands inc 2 calculated monthend outstanding balances year 3 average amount outstanding year divided actual interest expense incurred american brands inc subsidiaries schedule xsupplementary income statement information years ended december 31 1993 1992 1991 millions col b charged costs item 1 expenses 1993 5 advertising costs 5102 1992 5 advertising costs 5510 1991 5 advertising costs 5191 1 items listed either exceed one percent revenues set forth financial statements notes thereto incorporated reference item 8 hereof exhibit index 10c1 amended supplemental retirement plan american brands inc 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto 10c4 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10c2 10c3 hereto respectively favor thomas c hays arnold henson robert l plancher gilbert l klemann ii john ludes robert j rukeyser randall w larrimore steven c mendenhall 10c5 trust agreement made 1st day november 1993 among william j alley registrant chase establishing grantor trust favor william j alley purposes paying amounts amended supplemental retirement plan constituting exhibit 10c1 hereto 10c6 schedule identifying substantially identical agreements trust agreement constituting exhibit 10c5 hereto favor thomas c hays arnold henson robert l plancher gilbert l klemann ii john ludes robert j rukeyser randall w larrimore steven c mendenhall 10f1 franklin life insurance company supplemental retirement plan effective january 1 1988 amended restated effective january 1 1993 10f3 trust agreement made 16th day december 1993 among howard c humphrey franklin life insurance company bank one springfield state association establishing grantor trust favor howard c humphrey purposes paying amounts supplemental retirement plan constituting exhibit 10f1 hereto 10g4 trust deed dated january 24 1994 amending exhibit 10g2 hereto 10k2 jim beam brands co amended excess benefit plan 10k4 amendment made 17th day november 1993 trust agreement constituting exhibit 10k3 hereto 10k5 trust agreement made 15th day december 1993 among barry berish beam chase establishing grantor trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10k2 hereto 10o1 service agreement dated february 11 1994 gallaher peter wilson 10o2 letter dated september 20 1991 gallaher respect retirement benefits provided peter wilson 10o3 letter dated march 15 1994 amending exhibit 10o2 hereto 10s2 schedule identifying substantially identical agreements agreement constituting exhibit 10s1 hereto entered registrant william j alley thomas c hays arnold henson howard c humphrey robert l plancher john ludes robert j rukeyser randall w larrimore steven c mendenhall 10t2 amendment made 1st day november 1993 trust agreement constituting exhibit 10t1 hereto 10t3 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10t1 10t2 hereto respectively favor thomas c hays arnold henson robert l plancher gilbert l klemann ii john ludes howard c humphrey robert j rukeyser randall w larrimore steven c mendenhall 10v2 schedule identifying substantially identical agreements agreement constituting exhibit 10v1 hereto entered registrant arnold henson robert l plancher john ludes robert j rukeyser steven c mendenhall 11 statement setting forth net income computation earnings per common share primary fully diluted statement setting forth computation weighted average number common shares outstanding fully diluted basis 12 statement computation ratio earnings fixed charges 13 1993 annual report stockholders registrant 22 subsidiaries registrant 23ia consent independent accountants coopers lybrand 23ib consent counsel chadbourne parke 24 powers attorney relating execution annual report form 10k indicates exhibit management contract compensatory plan arrangementitem 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed registrant consolidated subsidiaries consolidated balance sheet december 31 1995 1994 contained 1995 annual report stockholders registrant incorporated herein reference consolidated statement income years ended december 31 1995 1994 1993 contained 1995 annual report stockholders registrant incorporated herein reference consolidated statement cash flows years ended december 31 1995 1994 1993 contained 1995 annual report stockholders registrant incorporated herein reference consolidated statement common stockholders equity years ended december 31 1995 1994 1993 contained 1995 annual report stockholders registrant incorporated herein reference notes consolidated financial statements contained 1995 annual report stockholders registrant incorporated herein reference report independent accountants contained 1995 annual report stockholders registrant incorporated herein reference 2 financial statement schedules see index financial statement schedule registrant subsidiaries page index incorporated herein reference 3 exhibits 3i certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3a2 quarterly report form 10q registrant dated may 14 1990 3iiaamendment bylaws registrant adopted effective february 27 1996 3iibbylaws registrant effect date hereof 10a1 article xii incentive compensation bylaws registrant incorporated herein reference exhibit 3iib hereof 10b1 1986 stock option plan american brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment 1986 stock option plan american brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b3 amendment 1986 stock option plan american brands inc constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b4 1990 longterm incentive plan american brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10c1 amended supplemental plan american brands inc 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank national association chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto 10c4 amendment made 1st day january 1995 trust agreement constituting exhibits 10c2 10c3 hereto 10c5 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto respectively favor thomas c hays john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill 10c6 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto 10c7 schedule identifying substantially identical agreements trust agreement constituting exhibit 10c6 hereto favor thomas c hays john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 retirement agreement made january 1 1995 registrant thomas c hays incorporated herein reference exhibit 10f1 annual report form 10k registrant fiscal year ended december 31 1994 10f1 gallaher limited executive incentive plan adopted october 20 1994 incorporated herein reference exhibit 10g1 annual report form 10k registrant fiscal year ended december 31 1994 10f2 trust deed dated march 24 1983 gallaher limited gallaher pensions limited amendments thereto providing supplemental retirement benefits certain executives gallaher incorporated herein reference exhibits 10g2 10g3 annual report form 10k registrant fiscal year ended december 31 1989 10f3 trust deed dated june 3 1992 amending exhibit 10f2 hereto incorporated herein reference exhibit 10g3 annual report form 10k registrant fiscal year ended december 31 1992 10f4 trust deed dated january 24 1994 amending exhibits 10f2 10f3 hereto incorporated herein reference exhibit 10g4 annual report form 10k registrant fiscal year ended december 31 1993 10f5 trust deed dated april 8 1994 amending exhibits 10f2 10f3 10f4 hereto 10g1 jim beam brands co senior executive key manager incentive plan incorporated herein reference exhibit 10m4 annual report form 10k registrant fiscal year ended december 31 1991 10g2 jim beam brands co amended excess benefit plan incorporated herein reference exhibit 10j2 annual report form 10k registrant fiscal year ended december 31 1994 10g3 trust agreement made december 24 1991 among jim beam brands co beam chase hewitt associates establishing trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10g2 hereto incorporated herein reference exhibit 10m3 annual report form 10k registrant fiscal year ended december 31 1991 10g4 amendment made 17th day november 1993 trust agreement constituting exhibit 10g3 hereto incorporated herein reference exhibit 10k4 annual report form 10k registrant fiscal year ended december 31 1993 10g5 trust agreement made 15th day december 1993 among barry berish beam chase establishing grantor trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10g2 hereto incorporated herein reference exhibit 10k5 annual report form 10k registrant fiscal year ended december 31 1993 10h1 resolution board directors registrant adopted december 11 1985 respect retirement health benefits provided william j alley incorporated herein reference exhibit 10e2 registration statement form 8b registrant dated january 27 1986 10i1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 10j1 service agreement dated november 9 1994 gallaher peter wilson incorporated herein reference exhibit 10n1 annual report form 10k registrant fiscal year ended december 31 1994 10j2 letter dated september 20 1991 gallaher respect retirement benefits provided peter wilson incorporated herein reference exhibit 10o2 annual report form 10k registrant fiscal year ended december 31 1993 10j3 letter dated march 15 1994 amending exhibit 10j2 hereto incorporated herein reference exhibit 10o3 annual report form 10k registrant fiscal year ended december 31 1993 10k1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson 10k2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10l1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10l2 amendment dated november 28 1994 agreement constituting exhibit 10l1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10l3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10l1 10l2 hereto respectively entered registrant thomas c hays john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill 10m1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement constituting exhibits 10l1 10l2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10m2 amendment made 1st day november 1993 trust agreement constituting exhibit 10m1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10m3 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10m1 10m2 hereto respectively favor thomas c hays john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr 10n1 agreement dated march 1 1988 amendments thereto registrant thomas c hays incorporated herein reference exhibit 10v1 annual report form 10k registrant fiscal year ended december 31 1992 10n2 amendment effective january 1 1995 agreement constituting exhibit 10n1 hereto incorporated herein reference exhibit 10t2 annual report form 10k registrant fiscal year ended december 31 1994 10n3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10n1 10n2 hereto respectively incorporated herein reference exhibit 10t3 annual report form 10k registrant fiscal year ended december 31 1994 10o1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 10o2 agreement dated october 28 1991 amending agreement constituting exhibit 10o1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10o3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10o1 10o2 hereto respectively incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10o4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10o1 10o2 10o3 hereto entered registrant john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr 10p1 agreement dated february 24 1995 registrant charles h mcgill incorporated herein reference exhibit 10w1 annual report form 10k registrant fiscal year ended december 31 1994 l0q1 agreement dated february 1 1990 beam barry berish incorporated herein reference exhibit 10pp1 annual report form 10k registrant fiscal year ended december 31 1990 l0r1 rights agreement dated december 13 1987 registrant first chicago trust company new york rights agent amendments thereto incorporated herein reference exhibit 10aa1 annual report form 10k registrant fiscal year ended december 31 1992 11 statement setting forth net income computation earnings per common share primary fully diluted statement setting forth computation weighted average number common shares outstanding fully diluted basis 12 statement computation ratio earnings fixed charges 13 1995 annual report stockholders registrant 21 subsidiaries registrant 23ia consent independent accountants coopers lybrand llp 23ib consent counsel chadbourne parke llp 24 powers attorney relating execution annual report form 10k 27 financial data schedule article 5 indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon request b reports form 8k registrant filed current report form 8k dated october 23 1995 respect registrants press release dated october 23 1995 announcing registrants financial results threemonth ninemonth periods ended september 30 1995 items 5 7c registrant filed current report form 8k dated january 18 1996 respect registrants press release dated january 17 1996 announcing registrant redeem 758 eurodollar convertible debentures due 2001 918 debentures due 2016 march 1996 items 5 7c registrant filed current report form 8k dated january 22 1996 respect registrants press release dated january 22 1996 announcing registrants financial results threemonth twelvemonth periods ended december 31 1995 items 5 7c registrant filed current report form 8k dated january 29 1996 announcing registrants acquisition cobra golf incorporated completed january 29 1996 items 5 7c signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized american brands inc registrant thomas c hays thomas c hays chairman board date march 29 1996 chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated thomas c hays thomas c hays chairman board chief executive officer principal executive officer director date march 29 1996 john ludes john ludes president chief operating officer director date march 29 1996 dudley l bauerlein jr dudley l bauerlein jr senior vice president chief financial officer principal financial officer date march 29 1996 robert l plancher robert l plancher senior vice president chief accounting officer principal accounting officer date march 29 1996 william j alley william j alley director date march 29 1996 eugene r anderson eugene r anderson director date march 29 1996 patricia ewers patricia ewers director date march 29 1996 john w johnstone jr john w johnstone jr director date march 29 1996 wendell j kelley wendell j kelley director date march 29 1996 sidney kirschner sidney kirschner director date march 29 1996 gordon r lohman gordon r lohman director date march 29 1996 charles h pistor jr charles h pistor jr director date march 29 1996 anne tatlock anne tatlock director date march 29 1996 peter wilson peter wilson director date march 29 1996 robert colby robert colby attorneyinfact index financial statement schedule pages american brands inc subsidiaries report independent accountants schedule ii valuation qualifying accounts years ended december 31 1995 1994 1993 report independent accountants board directors stockholders american brands inc report consolidated financial statements american brands inc subsidiaries incorporated reference form 10k 1995 annual report stockholders american brands inc connection audits financial statements also audited related financial statement schedule listed index page form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp 1301 avenue americas new york new york february 1 1996 american brands inc subsidiaries schedule ii valuation qualifying accounts years ended december 31 1995 1994 1993 millions col b col c col e additions charged balance costs end beginning description period expenses deductions period 1995 allowance cash discounts 53 428 426 1 55 allowance returns 126 983 953 1 156 allowance doubtful accounts 341 72 152 2 261 520 1483 1531 472 1994 allowance cash discounts 63 930 927 1 53 13 3 allowance returns 219 909 932 1 126 70 3 allowance doubtful accounts 343 113 094 341 95 2 29 3 625 1952 2057 520 1993 allowance cash discounts 79 873 889 1 63 allowance returns 173 1506 1460 1 219 allowance doubtful accounts 348 117 2 343 05 4 600 2496 2471 625 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance disposal date subsidiaries 4 effect changes foreign exchange rates exhibit index 3i certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3a2 quarterly report form 10q registrant dated may 14 1990 3iiaamendment bylaws registrant adopted effective february 27 1996 3iibbylaws registrant effect date hereof 10a1 article xii incentive compensation bylaws registrant incorporated herein reference exhibit 3iib hereof 10b1 1986 stock option plan american brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment 1986 stock option plan american brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b3 amendment 1986 stock option plan american brands inc constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b4 1990 longterm incentive plan american brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10c1 amended supplemental plan american brands inc 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank national association chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto 10c4 amendment made 1st day january 1995 trust agreement constituting exhibits 10c2 10c3 hereto 10c5 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto respectively favor thomas c hays john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill 10c6 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto 10c7 schedule identifying substantially identical agreements trust agreement constituting exhibit 10c6 hereto favor thomas c hays john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 retirement agreement made january 1 1995 registrant thomas c hays incorporated herein reference exhibit 10f1 annual report form 10k registrant fiscal year ended december 31 1994 10f1 gallaher limited executive incentive plan adopted october 20 1994 incorporated herein reference exhibit 10g1 annual report form 10k registrant fiscal year ended december 31 1994 10f2 trust deed dated march 24 1983 gallaher limited gallaher pensions limited amendments thereto providing supplemental retirement benefits certain executives gallaher incorporated herein reference exhibits 10g2 10g3 annual report form 10k registrant fiscal year ended december 31 1989 10f3 trust deed dated june 3 1992 amending exhibit 10f2 hereto incorporated herein reference exhibit 10g3 annual report form 10k registrant fiscal year ended december 31 1992 10f4 trust deed dated january 24 1994 amending exhibits 10f2 10f3 hereto incorporated herein reference exhibit 10g4 annual report form 10k registrant fiscal year ended december 31 1993 10f5 trust deed dated april 8 1994 amending exhibits 10f2 10f3 10f4 hereto 10g1 jim beam brands co senior executive key manager incentive plan incorporated herein reference exhibit 10m4 annual report form 10k registrant fiscal year ended december 31 1991 10g2 jim beam brands co amended excess benefit plan incorporated herein reference exhibit 10j2 annual report form 10k registrant fiscal year ended december 31 1994 10g3 trust agreement made december 24 1991 among jim beam brands co beam chase hewitt associates establishing trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10g2 hereto incorporated herein reference exhibit 10m3 annual report form 10k registrant fiscal year ended december 31 1991 10g4 amendment made 17th day november 1993 trust agreement constituting exhibit 10g3 hereto incorporated herein reference exhibit 10k4 annual report form 10k registrant fiscal year ended december 31 1993 10g5 trust agreement made 15th day december 1993 among barry berish beam chase establishing grantor trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10g2 hereto incorporated herein reference exhibit 10k5 annual report form 10k registrant fiscal year ended december 31 1993 10h1 resolution board directors registrant adopted december 11 1985 respect retirement health benefits provided william j alley incorporated herein reference exhibit 10e2 registration statement form 8b registrant dated january 27 1986 10i1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 10j1 service agreement dated november 9 1994 gallaher peter wilson incorporated herein reference exhibit 10n1 annual report form 10k registrant fiscal year ended december 31 1994 10j2 letter dated september 20 1991 gallaher respect retirement benefits provided peter wilson incorporated herein reference exhibit 10o2 annual report form 10k registrant fiscal year ended december 31 1993 10j3 letter dated march 15 1994 amending exhibit 10j2 hereto incorporated herein reference exhibit 10o3 annual report form 10k registrant fiscal year ended december 31 1993 10k1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson 10k2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10l1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10l2 amendment dated november 28 1994 agreement constituting exhibit 10l1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10l3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10l1 10l2 hereto respectively entered registrant thomas c hays john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill 10m1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement constituting exhibits 10l1 10l2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10m2 amendment made 1st day november 1993 trust agreement constituting exhibit 10m1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10m3 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10m1 10m2 hereto respectively favor thomas c hays john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr 10n1 agreement dated march 1 1988 amendments thereto registrant thomas c hays incorporated herein reference exhibit 10v1 annual report form 10k registrant fiscal year ended december 31 1992 10n2 amendment effective january 1 1995 agreement constituting exhibit 10n1 hereto incorporated herein reference exhibit 10t2 annual report form 10k registrant fiscal year ended december 31 1994 10n3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10n1 10n2 hereto respectively incorporated herein reference exhibit 10t3 annual report form 10k registrant fiscal year ended december 31 1994 10o1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 10o2 agreement dated october 28 1991 amending agreement constituting exhibit 10o1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10o3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10o1 10o2 hereto respectively incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10o4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10o1 10o2 10o3 hereto entered registrant john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr 10p1 agreement dated february 24 1995 registrant charles h mcgill incorporated herein reference exhibit 10w1 annual report form 10k registrant fiscal year ended december 31 1994 l0q1 agreement dated february 1 1990 beam barry berish incorporated herein reference exhibit 10pp1 annual report form 10k registrant fiscal year ended december 31 1990 l0r1 rights agreement dated december 13 1987 registrant first chicago trust company new york rights agent amendments thereto incorporated herein reference exhibit 10aa1 annual report form 10k registrant fiscal year ended december 31 1992 11 statement setting forth net income computation earnings per common share primary fully diluted statement setting forth computation weighted average number common shares outstanding fully diluted basis 12 statement computation ratio earnings fixed charges 13 1995 annual report stockholders registrant 21 subsidiaries registrant 23ia consent independent accountants coopers lybrand llp 23ib consent counsel chadbourne parke llp 24 powers attorney relating execution annual report form 10k 27 financial data schedule article 5 indicates exhibit management contract compensatory plan arrangementitem 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed registrant consolidated subsidiaries consolidated balance sheet december 31 1996 1995 contained 1996 annual report stockholders registrant incorporated herein reference consolidated statement income years ended december 31 1996 1995 1994 contained 1996 annual report stockholders registrant incorporated herein reference consolidated statement cash flows years ended december 31 1996 1995 1994 contained 1996 annual report stockholders registrant incorporated herein reference consolidated statement stockholders equity years ended december 31 1996 1995 1994 contained 1996 annual report stockholders registrant incorporated herein reference notes consolidated financial statements contained 1996 annual report stockholders registrant incorporated herein reference report independent accountants contained 1996 annual report stockholders registrant incorporated herein reference 2 financial statement schedules see index financial statement schedule registrant subsidiaries page index incorporated herein reference 3 exhibits 3i certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3a2 quarterly report form 10q registrant dated may 14 1990 3ii bylaws registrant effect date hereof incorporated herein reference exhibit 3iib annual report form 10k registrant fiscal year ended december 31 1995 10a1 article xii incentive compensation bylaws registrant incorporated herein reference exhibit 3ii hereof 10b1 1986 stock option plan american brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment 1986 stock option plan american brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b3 amendment 1986 stock option plan american brands inc constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b4 1990 longterm incentive plan american brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10c1 amended supplemental plan american brands inc incorporated herein reference exhibit 10c1 annual report form 10k registrant fiscal year ended december 31 1995 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank national association chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1995 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1995 10c4 amendment made 1st day january 1995 trust agreement constituting exhibits 10c2 10c3 hereto incorporated herein reference exhibit 10c4 annual report form 10k registrant fiscal year ended december 31 1995 10c5 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill 10c6 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c6 annual report form 10k registrant fiscal year ended december 31 1995 10c7 amendment made 1st day january 1996 trust agreement constituting exhibit 10c6 hereto incorporated herein reference quarterly report form 10q registrant dated august 8 1996 10c8 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10c6 10c7 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 retirement agreement made january 1 1995 registrant thomas c hays incorporated herein reference exhibit 10f1 annual report form 10k registrant fiscal year ended december 31 1994 10f1 gallaher limited executive incentive plan adopted october 20 1994 incorporated herein reference exhibit 10g1 annual report form 10k registrant fiscal year ended december 31 1994 10f2 trust deed dated march 24 1983 gallaher limited gallaher pensions limited amendments thereto providing supplemental retirement benefits certain executives gallaher incorporated herein reference exhibits 10g2 10g3 annual report form 10k registrant fiscal year ended december 31 1989 10f3 trust deed dated june 3 1992 amending exhibit 10f2 hereto incorporated herein reference exhibit 10g3 annual report form 10k registrant fiscal year ended december 31 1992 10f4 trust deed dated january 24 1994 amending exhibits 10f2 10f3 hereto incorporated herein reference exhibit 10g4 annual report form 10k registrant fiscal year ended december 31 1993 10f5 trust deed dated april 8 1994 amending exhibits 10f2 10f3 10f4 hereto incorporated herein reference exhibit 10f5 annual report form 10k registrant fiscal year ended december 31 1995 10g1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 10h1 service agreement dated march 11 1997 gallaher peter wilson 10h2 letter dated september 20 1991 gallaher respect retirement benefits provided peter wilson incorporated herein reference exhibit 10o2 annual report form 10k registrant fiscal year ended december 31 1993 10h3 letter dated march 15 1994 amending exhibit 10h2 hereto incorporated herein reference exhibit 10o3 annual report form 10k registrant fiscal year ended december 31 1993 10i1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1995 10i2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10j1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10j2 amendment dated november 28 1994 agreement constituting exhibit 10j1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10j3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10j1 10j2 hereto respectively entered registrant thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill craig p omtvedt 10k1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement constituting exhibits 10j1 10j2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10k2 amendment made 1st day november 1993 trust agreement constituting exhibit 10k1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10k3 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10k1 10k2 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr craig p omtvedt 10l1 agreement dated march 1 1988 amendments thereto registrant thomas c hays incorporated herein reference exhibit 10v1 annual report form 10k registrant fiscal year ended december 31 1992 10l2 amendment effective january 1 1995 agreement constituting exhibit 10l1 hereto incorporated herein reference exhibit 10t2 annual report form 10k registrant fiscal year ended december 31 1994 10l3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10l1 10l2 hereto respectively incorporated herein reference exhibit 10t3 annual report form 10k registrant fiscal year ended december 31 1994 10m1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 10m2 agreement dated october 28 1991 amending agreement constituting exhibit 10m1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10m3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10m1 10m2 hereto respectively incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10m4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10m1 10m2 10m3 hereto entered registrant john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr craig p omtvedt 10n1 agreement dated february 24 1995 registrant charles h mcgill incorporated herein reference exhibit 10w1 annual report form 10k registrant fiscal year ended december 31 1994 l0o1 rights agreement dated december 13 1987 registrant first chicago trust company new york rights agent amendments thereto incorporated herein reference exhibit 10aa1 annual report form 10k registrant fiscal year ended december 31 1992 11 statement setting forth net income computation earnings per common share primary fully diluted statement setting forth computation weighted average number common shares outstanding fully diluted basis 12 statement computation ratio earnings fixed charges 13 1996 annual report stockholders registrant 21 subsidiaries registrant 23ia consent independent accountants coopers lybrand llp 23ib consent counsel chadbourne parke llp 24 powers attorney relating execution annual report form 10k 27 financial data schedule article 5 indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon request b reports form 8k registrant filed current report form 8k dated october 8 1996 respect registrants press release dated october 8 1996 announcing registrants plan spin ukbased tobacco business gallaher limited subsidiary items 5 7c registrant filed current report form 8k dated october 16 1996 respect registrants press release dated october 15 1996 announcing registrant redeem 7 34 eurodollar convertible debentures due 2002 538 eurodollar convertible debentures due 2003 5 34 eurodollar convertible debentures due 2005 items 5 7 c registrant filed current report form 8k dated october 22 1996 respect registrants press release dated october 22 1996 announcing registrants financial results threemonth ninemonth periods ended september 30 1996 items 5 7c registrant filed current report form 8k dated december 19 1996 respect registrants press release dated december 19 1996 announcing registrants plan consolidate production gallaher tobacco unit items 5 7c registrant filed current report form 8k dated january 24 1997 respect registrants press release dated january 24 1997 announcing registrants financial results threemonth twelvemonth periods ended december 31 1996 items 5 7c signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized american brands inc registrant thomas c hays thomas c hays chairman board date march 13 1997 chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated thomas c hays thomas c hays chairman board chief executive officer principal executive officer director date march 13 1997 john ludes john ludes president chief operating officer director date march 13 1997 dudley l bauerlein jr dudley l bauerlein jr senior vice president chief financial officer principal financial officer date march 13 1997 craig p omtvedt craig p omtvedt vice president chief accounting officer principal accounting officer date march 13 1997 eugene r anderson eugene r anderson director date march 13 1997 patricia ewers patricia ewers director date march 13 1997 john w johnstone jr john w johnstone jr director date march 13 1997 wendell j kelley wendell j kelley director date march 13 1997 sidney kirschner sidney kirschner director date march 13 1997 gordon r lohman gordon r lohman director date march 13 1997 charles h pistor jr charles h pistor jr director date march 13 1997 anne tatlock anne tatlock director date march 13 1997 john w thompson john w thompson director date march 13 1997 peter wilson peter wilson director date march 13 1997 robert colby robert colby attorneyinfact index financial statement schedule pages american brands inc subsidiaries report independent accountants schedule ii valuation qualifying accounts years ended december 31 1996 1995 1994 report independent accountants board directors stockholders american brands inc report consolidated financial statements american brands inc subsidiaries incorporated reference form 10k 1996 annual report stockholders american brands inc connection audits financial statements also audited related financial statement schedule listed index page form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp 1301 avenue americas new york new york february 3 1997 american brands inc subsidiaries 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance acquisition date subsidiaries 4 balance disposal date subsidiaries 5 effect changes foreign exchange rates exhibit index 3i certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3a2 quarterly report form 10q registrant dated may 14 1990 3ii bylaws registrant effect date hereof incorporated herein reference exhibit 3iib annual report form 10k registrant fiscal year ended december 31 1995 10a1 article xii incentive compensation bylaws registrant incorporated herein reference exhibit 3ii hereof 10b1 1986 stock option plan american brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment 1986 stock option plan american brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b3 amendment 1986 stock option plan american brands inc constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b4 1990 longterm incentive plan american brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10c1 amended supplemental plan american brands inc incorporated herein reference exhibit 10c1 annual report form 10k registrant fiscal year ended december 31 1995 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank national association chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1995 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1995 10c4 amendment made 1st day january 1995 trust agreement constituting exhibits 10c2 10c3 hereto incorporated herein reference exhibit 10c4 annual report form 10k registrant fiscal year ended december 31 1995 10c5 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill 10c6 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c6 annual report form 10k registrant fiscal year ended december 31 1995 10c7 amendment made 1st day january 1996 trust agreement constituting exhibit 10c6 hereto incorporated herein reference quarterly report form 10q registrant dated august 8 1996 10c8 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10c6 10c7 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 retirement agreement made january 1 1995 registrant thomas c hays incorporated herein reference exhibit 10f1 annual report form 10k registrant fiscal year ended december 31 1994 10f1 gallaher limited executive incentive plan adopted october 20 1994 incorporated herein reference exhibit 10g1 annual report form 10k registrant fiscal year ended december 31 1994 10f2 trust deed dated march 24 1983 gallaher limited gallaher pensions limited amendments thereto providing supplemental retirement benefits certain executives gallaher incorporated herein reference exhibits 10g2 10g3 annual report form 10k registrant fiscal year ended december 31 1989 10f3 trust deed dated june 3 1992 amending exhibit 10f2 hereto incorporated herein reference exhibit 10g3 annual report form 10k registrant fiscal year ended december 31 1992 10f4 trust deed dated january 24 1994 amending exhibits 10f2 10f3 hereto incorporated herein reference exhibit 10g4 annual report form 10k registrant fiscal year ended december 31 1993 10f5 trust deed dated april 8 1994 amending exhibits 10f2 10f3 10f4 hereto incorporated herein reference exhibit 10f5 annual report form 10k registrant fiscal year ended december 31 1995 10g1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 10h1 service agreement dated march 11 1997 gallaher peter wilson 10h2 letter dated september 20 1991 gallaher respect retirement benefits provided peter wilson incorporated herein reference exhibit 10o2 annual report form 10k registrant fiscal year ended december 31 1993 10h3 letter dated march 15 1994 amending exhibit 10h2 hereto incorporated herein reference exhibit 10o3 annual report form 10k registrant fiscal year ended december 31 1993 10i1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1995 10i2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10j1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10j2 amendment dated november 28 1994 agreement constituting exhibit 10j1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10j3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10j1 10j2 hereto respectively entered registrant thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill craig p omtvedt 10k1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement constituting exhibits 10j1 10j2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10k2 amendment made 1st day november 1993 trust agreement constituting exhibit 10k1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10k3 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10k1 10k2 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr craig p omtvedt 10l1 agreement dated march 1 1988 amendments thereto registrant thomas c hays incorporated herein reference exhibit 10v1 annual report form 10k registrant fiscal year ended december 31 1992 10l2 amendment effective january 1 1995 agreement constituting exhibit 10l1 hereto incorporated herein reference exhibit 10t2 annual report form 10k registrant fiscal year ended december 31 1994 10l3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10l1 10l2 hereto respectively incorporated herein reference exhibit 10t3 annual report form 10k registrant fiscal year ended december 31 1994 10m1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 10m2 agreement dated october 28 1991 amending agreement constituting exhibit 10m1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10m3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10m1 10m2 hereto respectively incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10m4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10m1 10m2 10m3 hereto entered registrant john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr craig p omtvedt 10n1 agreement dated february 24 1995 registrant charles h mcgill incorporated herein reference exhibit 10w1 annual report form 10k registrant fiscal year ended december 31 1994 l0o1 rights agreement dated december 13 1987 registrant first chicago trust company new york rights agent amendments thereto incorporated herein reference exhibit 10aa1 annual report form 10k registrant fiscal year ended december 31 1992 11 statement setting forth net income computation earnings per common share primary fully diluted statement setting forth computation weighted average number common shares outstanding fully diluted basis 12 statement computation ratio earnings fixed charges 13 1996 annual report stockholders registrant 21 subsidiaries registrant 23ia consent independent accountants coopers lybrand llp 23ib consent counsel chadbourne parke llp 24 powers attorney relating execution annual report form 10k 27 financial data schedule article 5 indicates exhibit management contract compensatory plan arrangementitem 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed registrant consolidated subsidiaries consolidated statement income years ended december 31 1999 1998 1997 contained 1999 annual report stockholders registrant incorporated herein reference consolidated balance sheet december 31 1999 1998 contained 1999 annual report stockholders registrant incorporated herein reference consolidated statement cash flows years ended december 31 1999 1998 1997 contained 1999 annual report stockholders registrant incorporated herein reference consolidated statement stockholders equity years ended december 31 1999 1998 1997 contained 1999 annual report stockholders registrant incorporated herein reference notes consolidated financial statements contained 1999 annual report stockholders registrant incorporated herein reference report independent accountants contained 1999 annual report stockholders registrant incorporated herein reference 2 financial statement schedules see index financial statement schedule registrant subsidiaries page index incorporated herein reference 3 exhibits 3i restated certificate incorporation registrant incorporated herein reference exhibit 3i annual report form 10k registrant fiscal year ended december 31 1998 3iia amendment bylaws registrant 3iib bylaws registrant effect date hereof 10a1 fortune brands inc annual executive incentive compensation plan incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1997 10b1 1986 stock option plan fortune brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 maintained commission file 19076 10b2 amendment 1986 stock option plan fortune brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 maintained commission file 19076 10b3 amendment 1986 stock option plan fortune brands inc amendment thereto constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 maintained commission file 19076 10b4 amendment 1986 stock option plan fortune brands inc amendments thereto constituting exhibits 10b1 10b2 10b3 hereto incorporated herein reference exhibit 10a2 quarterly report form 10q registrant dated november 11 1997 10b5 1990 longterm incentive plan fortune brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 maintained commission file 19076 10b6 amendment 1990 longterm incentive plan fortune brands inc constituting exhibit 10b5 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1997 10b7 fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated august 12 1997 10b8 amendment registrants nonemployee director stock option plan constituting exhibit 10b7 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1998 10b9 amendment registrants nonemployee director stock option plan amendment thereto constituting exhibits 10b7 10b8 hereto 10b10 fortune brands inc 1999 longterm incentive plan incorporated herein reference exhibit 4e1 registration statement fortune brands inc 1999 longterm incentive plan filed registrant form s8 dated february 1 2000 10c1 amended supplemental plan fortune brands inc 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1995 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1995 10c4 amendment made 1st day january 1995 trust agreement amendment thereto constituting exhibits 10c2 10c3 hereto incorporated herein reference exhibit 10c4 annual report form 10k registrant fiscal year ended december 31 1995 10c5 amendment made 1st day january 1997 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto incorporated herein reference exhibit 10c5 annual report form 10k registrant fiscal year ended december 31 1997 10c6 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr mark hausberg anne c linsday craig p omtvedt mark roche robert j rukeyser 10c7 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto relating trust established favor thomas c hays incorporated herein reference exhibit 10c7 annual report form 10k registrant fiscal year ended december 31 1997 10c8 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c6 annual report form 10k registrant fiscal year ended december 31 1995 10c9 amendment made 1st day january 1996 trust agreement constituting exhibit 10c8 hereto incorporated herein reference quarterly report form 10q registrant dated august 8 1996 10c10 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10c8 10c9 hereto incorporated herein reference exhibit 10c1 quarterly report form 10q registrant dated august 12 1997 10c11 amendment made 1st day august 1998 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1998 10c12 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 10c11 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr mark hausberg anne c linsdau craig p omtvedt mark roche robert j rukeyser 10c13 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 10c11 hereto among thomas c hays registrant chase incorporated herein reference exhibit 10c12 annual report form 10k registrant fiscal year ended december 31 1997 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 severance retirement agreement made february 24 1997 registrant thomas c hays incorporated herein reference exhibit 10d1 quarterly report form 10q registrant dated august 12 1997 10f1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 1 9076 10f2 resolution board directors registrant adopted july 26 1988 respect retirement health benefits provided mark roche incorporated herein reference exhibit 10f2 annual report form 10k registrant fiscal year ended december 31 1998 10g1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1995 10g2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10h1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 maintained commission file 19076 10h2 amendment dated november 28 1994 agreement constituting exhibit 10h1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10h3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10h1 10h2 hereto entered registrant thomas c hays norman h wesley john ludes dudley l bauerlein jr mark hausberg anne c linsdau craig p omtvedt mark roche robert j rukeyser 10i1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement amendment thereto constituting exhibits 10h1 10h2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10i2 amendment made 1st day november 1993 trust agreement constituting exhibit 10i1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10i3 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10i1 10i2 hereto incorporated herein reference exhibit 10i3 annual report form 10k registrant fiscal year ended december 31 1997 10i4 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10i1 10i2 10i3 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr mark hausberg anne c linsdau craig p omtvedt mark roche robert j rukeyser 10j1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10j2 agreement dated october 28 1991 amending agreement constituting exhibit 10j1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 maintained commission file 19076 10j3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10j1 10j2 hereto incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10j4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto entered registrant norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser incorporated reference exhibit 10j4 annual report form 10k registrant fiscal year ended december 31 1998 10j5 amendment dated august 1 1998 agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated november 11 1998 10j6 schedule identifying substantially identical agreements amendment constituting exhibit 10j5 hereto entered registrant norman h wesley john ludes dudley l bauerlein jr mark roche robert j rukeyser incorporated reference exhibit 10j6 annual report form 10k registrant fiscal year ended december 31 1998 10j7 amendment dated september 29 1998 registrant john ludes agreement amendments registrant mr ludes substantially identical exhibits 10j1 10j2 10j3 10j5 hereto incorporated herein reference exhibit 10b5 quarterly report form 10q registrant dated november 11 1998 10j8 amendment dated august 1 1998 registrant craig c omtvedt agreement amendments registrant mr omtvedt substantially identical exhibits 10j1 10j2 10j3 hereto incorporated reference exhibit 10j8 annual report form 10k registrant fiscal year ended december 31 1998 10j9 schedule identifying substantially identical agreements amendment constituting exhibit 10j8 hereto entered registrant norman wesley mark roche incorporated reference exhibit 10j9 annual report form 10k registrant fiscal year ended december 31 1998 10j10 amendment dated july 26 1999 agreement dated january 2 1991 registrant gilbert l klemann ii amendments thereto constituting exhibits 10j1 10j2 10j3 10j5 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 12 1999 10j11 schedule identifying substantially identical agreements amendment constituting exhibit 10j10 hereto favor dudley l bauerlein jr robert j rukeyser mark hausberg 10j12 agreement dated november 18 1997 registrant anne c linsdau 10j13 schedule identifying identical agreement constituting exhibit 10j12 hereto favor mark hausberg 10k1 rights agreement dated november 19 1997 registrant first chicago trust company new york rights agent incorporated herein reference exhibit 4a current report form 8k registrant dated december 2 1997 10l1 indemnification agreement dated december 22 1994 among registrant american tobacco company brown williamson tobacco corporation incorporated herein reference exhibit 10m1 annual report form 10k registrant fiscal year ended december 31 1997 12 statement computation ratio earnings fixed charges 13 1999 annual report stockholders registrant 21 subsidiaries registrant 23i consent independent accountants pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 27 financial data schedules fiscal year ended december 31 1999 article 5 99 list pendingterminated cases indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon request b reports form 8k registrant filed current report form 8k dated october 21 1999 respect registrants press release dated october 21 1999 announcing registrants financial results threemonth nine month periods ended september 30 1999 items 5 7c registrant filed current report form 8k dated december 10 1999 respect issuance sale registrant november 2 1999 200000000 aggregate principal amount 7 18 notes due 2004 private placement items 5 7c registrant filed current report form 8k dated january 11 2000 respect registrants press release dated january 11 2000 announcing registrants estimate earnings per share growth 1999 expectation earnings per share growth 2000 items 5 7c registrant filed current report form 8k dated january 20 2000 respect registrants press release dated january 20 2000 announcing registrants financial results threemonth twelvemonth periods ended december 31 1999 items 5 7c signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc registrant craig p omtvedt craig p omtvedt senior vice president date march 29 2000 chief financial officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated norman h wesley norman h wesley chairman board chief executive officer principal executive officer director date march 29 2000 craig p omtvedt craig p omtvedt senior vice president chief financial officer principal financial officer date march 29 2000 michael r mathieson michael r mathieson vice president controller chief accounting officer principal accounting officer date march 29 2000 eugene r anderson eugene r anderson director date march 29 2000 patricia ewers patricia ewers director date march 29 2000 thomas c hays thomas c hays director date march 29 2000 john w johnstone jr john w johnstone jr director date march 29 2000 sidney kirschner sidney kirschner director date march 29 2000 gordon r lohman gordon r lohman director date march 29 2000 charles h pistor jr charles h pistor jr director date march 29 2000 eugene renna eugene renna director date march 29 2000 anne tatlock anne tatlock director date march 29 2000 peter wilson peter wilson director date march 29 2000 mark roche mark roche attorneyinfact index financial statement schedule pages fortune brands inc subsidiaries report independent accountants schedule ii valuation qualifying accounts years ended december 31 1999 1998 1997 report independent accountants financial statement schedule board directors stockholders fortune brands inc audits consolidated financial statements referred report dated february 3 2000 appearing page 57 1999 annual report stockholders fortune brands inc report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedule listed item 14a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp new york new york 10010 february 3 2000 fortune brands inc subsidiaries schedule ii valuation qualifying accounts years ended december 31 1999 1998 1997 millions 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance acquisition date subsidiaries exhibit index 10b8 amendment registrants nonemployee director stock option plan constituting exhibit 10b7 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1998 10b9 amendment registrants nonemployee director stock option plan amendment thereto constituting exhibits 10b7 10b8 hereto 10b10 fortune brands inc 1999 longterm incentive plan incorporated herein reference exhibit 4e1 registration statement fortune brands inc 1999 longterm incentive plan filed registrant form s8 dated february 1 2000 10c1 amended supplemental plan fortune brands inc 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1995 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1995 10c4 amendment made 1st day january 1995 trust agreement amendment thereto constituting exhibits 10c2 10c3 hereto incorporated herein reference exhibit 10c4 annual report form 10k registrant fiscal year ended december 31 1995 10c5 amendment made 1st day january 1997 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto incorporated herein reference exhibit 10c5 annual report form 10k registrant fiscal year ended december 31 1997 10c6 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr mark hausberg anne c linsdau craig p omtvedt mark roche robert j rukeyser 10c7 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto relating trust established favor thomas c hays incorporated herein reference exhibit 10c7 annual report form 10k registrant fiscal year ended december 31 1997 10c8 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c6 annual report form 10k registrant fiscal year ended december 31 1995 10c9 amendment made 1st day january 1996 trust agreement constituting exhibit 10c8 hereto incorporated herein reference quarterly report form 10q registrant dated august 8 1996 10c10 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10c8 10c9 hereto incorporated herein reference exhibit 10c1 quarterly report form 10q registrant dated august 12 1997 10c11 amendment made 1st day august 1998 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1998 10c12 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 10c11 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr mark hausberg anne c linsdau craig p omtvedt mark roche robert j rukeyser 10c13 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 10c11 hereto among thomas c hays registrant chase incorporated herein reference exhibit 10c12 annual report form 10k registrant fiscal year ended december 31 1997 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 severance retirement agreement made february 24 1997 registrant thomas c hays incorporated herein reference exhibit 10d1 quarterly report form 10q registrant dated august 12 1997 10f1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10f2 resolution board directors registrant adopted july 26 1988 respect retirement health benefits provided mark roche incorporated herein reference exhibit 10f2 annual report form 10k registrant fiscal year ended december 31 1998 10g1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1995 10g2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10h1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 maintained commission file 19076 10h2 amendment dated november 28 1994 agreement constituting exhibit 10h1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10h3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10h1 10h2 hereto entered registrant thomas c hays norman h wesley john ludes dudley l bauerlein jr mark hausberg anne c linsdau craig p omtvedt mark roche robert j rukeyser 10i1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement amendment thereto constituting exhibits 10h1 10h2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10i2 amendment made 1st day november 1993 trust agreement constituting exhibit 10i1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10i3 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10i1 10i2 hereto incorporated herein reference exhibit 10i3 annual report form 10k registrant fiscal year ended december 31 1997 10i4 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10i1 10i2 10i3 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark hausberg anne c linsdau mark roche robert j rukeyser 10j1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10j2 agreement dated october 28 1991 amending agreement constituting exhibit 10j1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 maintained commission file 19076 10j3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10j1 10j2 hereto incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10j4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto entered registrant norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser incorporated reference exhibit 10j4 annual report form 10k registrant fiscal year ended december 31 1998 10j5 amendment dated august 1 1998 agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated november 11 1998 10j6 schedule identifying substantially identical agreements amendment constituting exhibit 10j5 hereto entered registrant norman h wesley john ludes dudley l bauerlein jr mark roche robert j rukeyser incorporated reference exhibit 10j6 annual report form 10k registrant fiscal year ended december 31 1998 10j7 amendment dated september 29 1998 registrant john ludes agreement amendments registrant mr ludes substantially identical exhibits 10j1 10j2 10j3 10j5 hereto incorporated herein reference exhibit 10b5 quarterly report form 10q registrant dated november 11 1998 10j8 amendment dated august 1 1998 registrant craig c omtvedt agreement amendments registrant mr omtvedt substantially identical exhibits 10j1 10j2 10j3 hereto incorporated reference exhibit 10j8 annual report form 10k registrant fiscal year ended december 31 1998 10j9 schedule identifying substantially identical agreements amendment constituting exhibit 10j8 hereto entered registrant norman wesley mark roche incorporated reference exhibit 10j9 annual report form 10k registrant fiscal year ended december 31 1998 10j10 amendment dated july 26 1999 agreement dated january 2 1991 registrant gilbert l klemann ii amendments thereto constituting exhibits 10j1 10j2 10j3 10j5 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 12 1999 10j11 schedule identifying substantially identical agreements amendment constituting exhibit 10j10 hereto favor dudley l bauerlein jr robert j rukeyser mark hausberg 10j12 agreement dated november 18 1997 registrant anne c linsdau 10j13 schedule identifying identical agreement constituting exhibit 10j12 hereto favor mark hausberg 10k1 rights agreement dated november 19 1997 registrant first chicago trust company new york rights agent incorporated herein reference exhibit 4a current report form 8k registrant dated december 2 1997 10l1 indemnification agreement dated december 22 1994 among registrant american tobacco company brown williamson tobacco corporation incorporated herein reference exhibit 10m1 annual report form 10k registrant fiscal year ended december 31 1997 12 statement computation ratio earnings fixed charges 13 1999 annual report stockholders registrant 21 subsidiaries registrant 23i consent independent accountants pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 27 financial data schedules fiscal year ended december 31 1999 article 5 99 list pendingterminated casesitem 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed registrant consolidated subsidiaries consolidated statement income years ended december 31 2000 1999 1998 contained 2000 annual report stockholders registrant incorporated herein reference consolidated balance sheet december 31 2000 1999 contained 2000 annual report stockholders registrant incorporated herein reference consolidated statement cash flows years ended december 31 2000 1999 1998 contained 2000 annual report stockholders registrant incorporated herein reference consolidated statement stockholders equity years ended december 31 2000 1999 1998 contained 2000 annual report stockholders registrant incorporated herein reference notes consolidated financial statements contained 2000 annual report stockholders registrant incorporated herein reference report independent accountants contained 2000 annual report stockholders registrant incorporated herein reference 2 financial statement schedules see index financial statement schedule registrant subsidiaries page index incorporated herein reference 3 exhibits 3i restated certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3i annual report form 10k registrant fiscal year ended december 31 1998 3ii bylaws registrant effect date hereof incorporated reference exhibit 3iib annual report form 10k registrant fiscal year ended december 31 1999 10a1 fortune brands inc annual executive incentive compensation plan incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1997 10b1 1990 longterm incentive plan fortune brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 maintained commission file 19076 10b2 amendment 1990 longterm incentive plan fortune brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1997 10b3 fortune brands inc 1999 longterm incentive plan incorporated herein reference exhibit 4el registration statement fortune brands inc 1999 longterm incentive plan filed registrant form s8 dated february 1 2000 10b4 fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated august 12 1997 10b5 amendment registrants nonemployee director stock option plan constituting exhibit 10b7 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1998 10b6 amendment registrants nonemployee director stock option plan amendment thereto constituting exhibits 10b4 10b5 hereto incorporated herein reference exhibit 10b9 annual report form 10k registrant fiscal year ended december 31 1999 10b7 fortune brands inc stock plan nonemployee directors incorporated reference exhibit 10b5 annual report form 10k registrant fiscal year ended december 31 1999 10c1 amended supplemental plan fortune brands inc incorporated herein reference exhibit 10c1 annual report form 10k registrant fiscal year ended december 31 1995 maintained commission file 19076 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1995 maintained commission file 19076 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1995 maintained commission file 19076 10c4 amendment made 1st day january 1995 trust agreement amendment thereto constituting exhibits 10c2 10c3 hereto incorporated herein reference exhibit 10c4 annual report form 10k registrant fiscal year ended december 31 1995 maintained commission file 19076 10c5 amendment made 1st day january 1997 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto incorporated herein reference exhibit 10c5 annual report form 10k registrant fiscal year ended december 31 1997 10c6 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto favor norman h wesley mark hausberg anne c linsdau craig p omtvedt mark roche 10c7 amendment made january 1 2000 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto relating trust established favor norman h wesley incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated may 12 2000 10c8 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c6 annual report form 10k registrant fiscal year ended december 31 1995 maintained commission file 19076 10c9 amendment made 1st day january 1996 trust agreement constituting exhibit 10c8 hereto incorporated herein reference quarterly report form 10q registrant dated august 8 1996 10c10 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10c8 10c9 hereto incorporated herein reference exhibit 10c1 quarterly report form 10q registrant dated august 12 1997 10c11 amendment made 1st day august 1998 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1998 10c12 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 10c11 hereto favor norman h wesley mark hausberg anne c linsdau craig p omtvedt mark roche 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 maintained commission file 19076 10e1 fortune brands inc severance plan vice presidents adopted january 1 2000 incorporated reference exhibit 10a1 quarterly report form 10q registrant dated august 11 2000 10f1 resolution board directors registrant adopted july 26 1988 respect retirement health benefits provided mark roche incorporated herein reference exhibit 10f2 annual report form 10k registrant fiscal year ended december 31 1998 10g1 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 maintained commission file 1 9076 10h1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 maintained commission file 19076 10h2 amendment dated november 28 1994 agreement constituting exhibit 10h1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 maintained commission file 1 9076 10h3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10h1 10h2 hereto entered registrant norman h wesley mark hausberg anne c linsdau craig p omtvedt mark roche 10h4 amendment made march 16 2000 amending agreement constituting exhibits 10h1 10h2 hereto registrant norman h wesley incorporated reference exhibit 10b2 quarterly report form 10q registrant dated may 12 2000 10h5 schedule identifying substantially identical agreements amendment constituting exhibit 10h4 hereto entered registrant mark hausberg mark roche 10h6 agreement dated september 1 2000 registrant thomas j flocco incorporated reference exhibit 10b1 quarterly report form 10q registrant dated november 13 2000 10i1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement amendment thereto constituting exhibits 10h1 10h2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 maintained commission file 19076 10i2 amendment made 1st day november 1993 trust agreement constituting exhibit 10i1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 maintained commission file 19076 10i3 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10i1 10i2 hereto incorporated herein reference exhibit 10i3 annual report form 10k registrant fiscal year ended december 31 1997 10i4 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10i1 10i2 10i3 hereto favor norman h wesley mark hausberg anne c linsdau craig p omtvedt mark roche 10j1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10j2 agreement dated october 28 1991 amending agreement constituting exhibit 10j1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 maintained commission file 19076 10j3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10j1 10j2 hereto incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 maintained commission file 19076 10j4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto entered registrant norman h wesley craig p omtvedt mark roche 10j5 amendment dated august 1 1998 agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated november 11 1998 10j6 schedule identifying substantially identical agreements amendment constituting exhibit 10j5 hereto entered registrant norman h wesley mark roche 10j7 amendment dated august 1 1998 registrant craig p omtvedt agreement amendments registrant mr omtvedt substantially identical exhibits 10j1 10j2 10j3 hereto incorporated herein reference exhibit 10j8 annual report form 10k fiscal year ended december 31 1998 10j8 schedule identifying substantially identical agreements amendment constituting exhibit 10j7 hereto entered registrant norman h wesley mark roche incorporated herein reference exhibit 10j9 annual report form 10k registrant fiscal year ended december 31 1998 10j9 amendment dated july 26 1999 agreement dated january 2 1991 registrant gilbert l klemann ii amendments thereto constituting exhibits 10j1 10j2 10j3 10j5 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 12 1999 10j10 schedule identifying substantially identical agreement amendment constituting exhibit 10j9 hereto favor mark hausberg 10j11 agreement dated november 18 1997 registrant anne c linsdau incorporated herein reference exhibit 10j12 annual report form 10k registrant fiscal year ended december 31 1999 10j12 schedule identifying substantially identical agreement constituting exhibit 10j11 hereto favor mark hausberg incorporated herein reference exhibit 10j13 annual report form 10k registrant fiscal year ended december 31 1999 10j13 severance retirement agreement made january 1 2000 registrant norman h wesley amending restating agreement referred exhibits 10j1 10j2 10j3 10j5 10j7 hereto norman h wesley incorporated herein reference exhibit 10c1 quarterly report form 10q registrant dated may 12 2000 10j14 severance agreement dated january 1 2000 registrant thomas j flocco incorporated reference exhibit 10a1 quarterly report form 10q registrant dated november 13 2000 10j15 amendment dated december 18 2000 registrant mark roche agreement amendments registrant mr roche substantially identical exhibits 10j1 10j2 10j3 10j5 10j7 hereto 10j16 schedule identifying substantially identical agreements amendment constituting exhibit 10j10 hereto entered registrant mark hausberg 10k1 rights agreement dated november 19 1997 registrant first chicago trust company new york rights agent incorporated herein reference exhibit 4a current report form 8k registrant dated december 2 1997 10l1 indemnification agreement dated december 22 1994 among registrant american tobacco company brown williamson tobacco corporation incorporated herein reference exhibit 10m1 annual report form 10k registrant fiscal year ended december 31 1997 12 statement computation ratio earnings fixed charges 13 2000 annual report stockholders registrant 21 subsidiaries registrant 23i consent independent accountants pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 99 list pendingterminated cases indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon request b reports form 8k registrant filed current report form 8k dated october 10 2000 respect registrants press release dated october 9 2000 announcing registrant exploring strategic options acco world corporation office products unit items 5 7c registrant filed current report form 8k dated october 20 2000 respect registrants press release dated october 20 2000 announcing registrants financial results threemonth ninemonth periods ended september 30 2000 items 5 7c registrant furnished current report form 8k dated november 13 2000 purpose furnishing investment brochure pursuant regulation fd items 7c 9 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc registrant norman h wesley norman h wesley chairman board date march 9 2001 chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated norman h wesley norman h wesley chairman board chief executive officer principal executive officer date march 9 2001 craig p omtvedt craig p omtvedt senior vice president chief financial officer principal financial officer date march 9 2001 michael r mathieson michael r mathieson vice president controller chief accounting officer principal accounting officer date march 9 2001 patricia ewers patricia ewers director date march 9 2001 thomas c hays thomas c hays director date march 9 2001 john w johnstone jr john w johnstone jr director date march 9 2001 sidney kirschner sidney kirschner director date march 9 2001 gordon r lohman gordon r lohman director date march 9 2001 charles h pistor jr charles h pistor jr director date march 9 2001 eugene renna eugene renna director date march 9 2001 anne tatlock anne tatlock director date march 9 2001 david thomas david thomas director date march 9 2001 peter wilson peter wilson director date march 9 2001 robert colby robert colby attorneyinfact index financial statement schedule pages fortune brands inc subsidiaries report independent accountants schedule ii valuation qualifying accounts years ended december 31 2000 1999 1998 report independent accountants financial statement schedule board directors stockholders fortune brands inc report consolidated financial statements fortune brands inc subsidiaries incorporated reference form 10k page 55 2000 annual report stockholders fortune brands inc connection audits financial statements also audited related financial statement schedule listed index page form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein pricewaterhousecoopers llp chicago illinois 60601 january 24 2001 fortune brands inc subsidiaries schedule ii valuation qualifying accounts years ended december 31 2000 1999 1998 millions 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance acquisition date subsidiaries 4 foreign exchange rate changes exhibit index item 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed registrant consolidated subsidiaries consolidated statement income years ended december 31 2001 2000 1999 contained 2001 annual report stockholders registrant incorporated herein reference consolidated balance sheet december 31 2001 2000 contained 2001 annual report stockholders registrant incorporated herein reference consolidated statement cash flows years ended december 31 2001 2000 1999 contained 2001 annual report stockholders registrant incorporated herein reference consolidated statement stockholders equity years ended december 31 2001 2000 1999 contained 2001 annual report stockholders registrant incorporated herein reference notes consolidated financial statements contained 2001 annual report stockholders registrant incorporated herein reference report independent accountants contained 2001 annual report stockholders registrant incorporated herein reference 2 financial statement schedules see index financial statement schedule registrant subsidiaries page index incorporated herein reference 3 exhibits 3i restated certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3i annual report form 10k registrant fiscal year ended december 31 1998 3iia amendment bylaws registrant 3iib bylaws registrant effect date hereof 4a1 rights agreement dated november 19 1997 registrant first chicago trust company new york rights agent incorporated herein reference exhibit 4a current report form 8k registrant dated december 2 1997 4b1 indenture dated july 15 1988 registrant chemical bank successor merger manufacturers hanover trust company trustee chemical incorporated herein reference exhibit 4a current report form 8k registrant dated june 27 1989 maintained commission file 19076 4b2 first supplemental indenture dated november 14 1990 registrant chemical amending supplementing indenture constituting exhibit 4b1 hereto incorporated herein reference exhibit 4b current report form 8k registrant dated november 19 1990 maintained commission file 19076 4b3 second supplemental indenture dated september 1 1991 registrant chemical amending supplementing indenture constituting exhibits 4b1 4b2 hereto incorporated herein reference exhibit 4c current report form 8k registrant dated october 10 1991 maintained commission file 19076 4c1 indenture dated april 15 1999 registrant chase manhattan bank chase trustee incorporated herein reference exhibit 4 current report form 8k registrant dated december 10 1999 10a1 fortune brands inc annual executive incentive compensation plan incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1997 10b1 fortune brands inc 1990 longterm incentive plan amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 maintained commission file 19076 10b2 amendment fortune brands inc 1990 longterm incentive plan constituting exhibit 10b1 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1997 10b3 amendment fortune brands inc 1990 longterm incentive plan amendment thereto constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 13 2001 10c1 fortune brands inc 1999 longterm incentive plan incorporated herein reference exhibit 4e1 registration statement form s8 registrant dated february 1 2000 fortune brands inc 1999 longterm incentive plan 10c2 amendment fortune brands inc 1999 longterm incentive plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated november 13 2001 10d1 fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated august 12 1997 10d2 amendment fortune brands inc nonemployee director stock option plan constituting exhibit 10d1 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1998 10d3 amendment fortune brands inc nonemployee director stock option plan amendment thereto constituting exhibits 10d1 10d2 hereto incorporated herein reference exhibit 10b9 annual report form 10k registrant fiscal year ended december 31 1999 10d4 amendment fortune brands inc nonemployee director stock option plan amendments thereto constituting exhibits 10d1 10d2 10d3 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated may 15 2001 10e1 fortune brands inc 2002 nonemployee director stock option plan incorporated reference exhibit b definitive schedule 14a registrant filed march 19 2001 10f1 fortune brands inc stock plan nonemployee directors incorporated reference exhibit 10b9 annual report form 10k registrant fiscal year ended december 31 1998 10f2 fortune brands inc stock plan nonemployee directors incorporated reference exhibit definitive schedule 14a registrant filed march 14 2000 10g1 fortune brands inc supplemental plan amended 10h1 form trust agreement among registrant chase manhattan bank chase et al establishing trust favor certain executive officers purposes paying amounts supplemental plan constituting exhibit 10g1 hereto 10h2 schedule identifying substantially identical agreements trust agreement constituting exhibit 10h1 hereto favor mark hausberg craig p omtvedt mark roche norman h wesley 10h3 amendment made 1st day january 2000 trust agreement constituting exhibit 10h1 hereto relating trust favor norman h wesley incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated may 12 2000 10i1 form trust agreement among certain executive officers registrant chase establishing grantor trust favor officers purposes paying amounts supplemental plan constituting exhibit 10g1 hereto 10i2 schedule identifying substantially identical agreements trust agreement constituting exhibit 10i1 hereto favor mark hausberg craig p omtvedt mark roche norman h wesley 10j1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10j2 resolution board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10j1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 maintained commission file 19076 10k1 resolution board directors registrant adopted july 26 1988 respect retirement health benefits provided mark roche incorporated herein reference exhibit 10f2 annual report form 10k registrant fiscal year ended december 31 1998 10l1 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 maintained commission file 19076 10m1 form agreement registrant certain executive officers 10m2 schedule identifying substantially identical agreements agreement constituting exhibit 10m1 hereto entered registrant thomas j flocco mark hausberg craig p omtvedt mark roche norman h wesley 10m3 form amendment dated december 1 2000 agreement constituting exhibit 10m1 hereto registrant certain executive officers 10m4 schedule identifying substantially identical agreements agreement constituting exhibit 10m3 hereto entered registrant mark hausberg mark roche 10n1 form trust agreement among registrant chase et al establishing trust favor certain executive officers purposes paying amounts agreement constituting exhibit 10m1 hereto 10n2 schedule identifying substantially identical agreements trust agreement constituting exhibit 10n1 hereto favor mark hausberg craig p omtvedt mark roche norman h wesley 10o1 severance retirement agreement dated january 1 2000 registrant norman h wesley incorporated herein reference exhibit 10c1 quarterly report form 10q registrant dated may 12 2000 10p1 severance agreement dated january 29 1996 registrant craig p omtvedt 10p2 amendment effective january 27 1997 agreement constituting exhibit 10p1 hereto registrant craig p omtvedt 10p3 amendment dated august 1 1998 agreement amendment thereto constituting exhibits 10p1 10p2 hereto registrant craig p omtvedt incorporated reference exhibit 10j8 annual report form 10k fiscal year ended december 31 1998 10p4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10p1 10p2 10p3 hereto entered registrant mark roche 10p5 amendment dated december 18 2000 agreement amendments thereto constituting exhibits 10p1 10p2 10p3 hereto registrant mark roche incorporated reference exhibit 10j15 annual report form 10k fiscal year ended december 31 2001 10p6 schedule identifying substantially identical agreement amendment constituting exhibit 10p5 hereto entered registrant mark hausberg 10q1 severance agreement dated january 1 2000 registrant thomas j flocco incorporated reference exhibit 10a1 quarterly report form 10q registrant dated november 13 2000 10r1 fortune brands inc severance plan vice presidents adopted january 1 2000 incorporated reference exhibit 10a1 quarterly report form 10q registrant dated august 11 2000 10s1 indemnification agreement dated december 22 1994 among registrant american tobacco company brown williamson tobacco corporation incorporated herein reference exhibit 10m1 annual report form 10k registrant fiscal year ended december 31 1997 10t1 fiveyear revolving credit agreement dated july 12 2001 among registrant fortune brands finance uk plc borrowers chase administrative agent citibank na syndication agent 14 financial institutions lenders incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 14 2001 10u1 364day revolving credit agreement dated july 12 2001 among registrant borrower chase administrative agent citibank na syndication agent 14 financial institutions lenders incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated august 14 2001 10v1 master transaction agreement dated march 20 2001 among vs vin sprit ab absolut spirits company incorporated jim beam brands worldwide inc jim beam brands co registrant incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated may 15 2001 12 statement computation ratio earnings fixed charges 13 2001 annual report stockholders registrant 21 subsidiaries registrant 23i consent independent accountants pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 99 list pendingterminated cases indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon request b reports form 8k registrant filed current report form 8k dated october 16 2001 respect registrants press release dated october 16 2001 announcing registrant sold ukbased scotch whisky business items 5 7c registrant filed current report form 8k dated october 18 2001 respect registrants press release dated october 18 2001 announcing registrants financial results threemonth ninemonth periods ended september 30 2001 items 5 7c registrant furnished current report form 8k dated november 6 2001 purpose furnishing investment brochure pursuant regulation fd items 7c 9 signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc registrant norman h wesley norman h wesley chairman board date march 29 2002 chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated norman h wesley norman h wesley chairman board chief executive officer principal executive officer date march 29 2002 craig p omtvedt craig p omtvedt senior vice president chief financial officer principal financial officer date march 29 2002 nadine heidrich nadine heidrich vice president corporate controller principal accounting officer date march 29 2002 patricia ewers patricia ewers director date march 29 2002 thomas c hays thomas c hays director date march 29 2002 john w johnstone jr john w johnstone jr director date march 29 2002 gordon r lohman gordon r lohman director date march 29 2002 charles h pistor jr charles h pistor jr director date march 29 2002 eugene renna eugene renna director date march 29 2002 anne tatlock anne tatlock director date march 29 2002 david thomas david thomas director date march 29 2002 peter wilson peter wilson director date march 29 2002 mark roche mark roche attorneyinfact index financial statement schedule report independent accountants financial statement schedule board directors stockholders fortune brands inc audits consolidated financial statements referred report dated january 22 2002 appearing 2001 annual report shareholders fortune brands inc subsidiaries report consolidated financial statements incorporated reference form 10k also included audit financial statement schedule listed item 14a2of form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp chicago illinois january 22 2002 fortune brands inc subsidiaries schedule ii valuation qualifying accounts years ended december 31 2001 2000 1999 millions 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance disposition date subsidiaries 4 foreign exchange rate changes exhibit index indicates exhibit management contract compensatory plan arrangementitem 14 controls procedures evaluation controls procedures companys chief executive officer chief financial officer reviewed evaluated effectiveness companys disclosure controls procedures defined exchange act within past ninety days based evaluation chief executive officer chief financial officer concluded companys current disclosure controls procedures effective providing timely basis material information relating company required disclosed reports company files submits exchange act b changes internal controls significant changes companys internal controls factors could significantly affect controls subsequent date evaluation significant deficiencies material weaknesses therefore corrective actions taken part iv item 15item 14 principal accountant fees services see information caption “independent accountants’ fees” proxy statement annual meeting stockholders company held april 27 2004 file later 120 days end company’s fiscal year information incorporated herein reference part iv item 15item 14 principal accountant fees services see information caption “fees registered public accounting firm” 2006 proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services see information caption fees independent registered public accounting firm 2007 proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services see information caption “fees independent registered public accounting firm” 2008 proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services see information caption “fees independent registered public accounting firm” 2009 proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services see information caption “fees independent registered public accounting firm” 2010 proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services see information captions “fees independent registered public accounting firm” “approval audit nonaudit services” 2011 proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services see information captions “fees independent registered public accounting firm” “approval audit nonaudit services” 2012 proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services see information captions “fees independent registered public accounting firm” “approval audit nonaudit services” 2013 proxy statement information incorporated herein reference part iv item 15item 14 principal accountant fees services see information captions “fees independent registered public accounting firm” “approval audit nonaudit services” filed amendment form 10k incorporated reference definitive proxy statement election directors extent required later 120 days december 31 2013 part iv item 15item 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed registrant consolidated subsidiaries consolidated balance sheet december 31 1994 1993 contained 1994 annual report stockholders registrant incorporated herein reference consolidated statement income years ended december 31 1994 1993 1992 contained 1994 annual report stockholders registrant incorporated herein reference consolidated statement cash flows years ended december 31 1994 1993 1992 contained 1994 annual report stockholders registrant incorporated herein reference consolidated statement common stockholders equity years ended december 31 1994 1993 1992 contained 1994 annual report stockholders registrant incorporated herein reference notes consolidated financial statements contained 1994 annual report stockholders registrant incorporated herein reference report independent accountants contained 1994 annual report stockholders registrant incorporated herein reference 2 financial statement schedules see index financial statement schedules registrant subsidiaries page index incorporated herein reference 3 exhibits 3i certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3a2 quarterly report form 10q registrant dated may 14 1990 3ii bylaws registrant effect date hereof incorporated herein reference exhibit 3iib current report form 8k registrant dated february 8 1995 10a1 article xii incentive compensation bylaws registrant incorporated herein reference exhibit 3iib current report form 8k registrant dated february 8 1995 10b1 stock option plan american brands inc amended incorporated herein reference exhibit 10b1 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment stock option plan american brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10a quarterly report form 10q registrant dated november 11 1993 10b3 1986 stock option plan american brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b4 amendment 1986 stock option plan american brands inc constituting exhibit 10b3 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b5 amendment 1986 stock option plan american brands inc constituting exhibits 10b3 10b4 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b6 1990 longterm incentive plan american brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10c1 amended supplemental retirement plan american brands inc 10c2 trust agreement made 1st day february 1989 among registrant chase manhattan bank national association chase et al establishing trust favor william j alley purposes paying amounts amended supplemental retirement plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1988 maintained commission file 19076 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1993 10c4 amendment made 1st day january 1995 trust agreement constituting exhibits 10c2 10c3 hereto 10c5 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto respectively favor thomas c hays arnold henson john ludes robert l plancher gilbert l klemann ii robert j rukeyser randall w larrimore steven c mendenhall dudley l bauerlein jr 10c6 trust agreement made 1st day november 1993 among william j alley registrant chase establishing grantor trust favor william j alley purposes paying amounts amended supplemental retirement plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c5 annual report form 10k registrant fiscal year ended december 31 1993 10c7 schedule identifying substantially identical agreements trust agreement constituting exhibit 10c6 hereto favor thomas c hays arnold henson john ludes robert l plancher gilbert l klemann ii robert j rukeyser randall w larrimore steven c mendenhall dudley l bauerlein jr 10d1 executive mortgage program registrant connection relocation corporate headquarters incorporated herein reference exhibit 10d1 annual report form 10k registrant fiscal year ended december 31 1991 10e1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 10e2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10e1 hereto 10f1 retirement agreement made january 1 1995 registrant thomas c hays 10g1 gallaher limited executive incentive plan adopted october 20 1994 10g2 trust deed dated march 24 1983 gallaher limited gallaher pensions limited amendments thereto providing supplemental retirement benefits certain executives gallaher incorporated herein reference exhibits 10g2 10g3 annual report form 10k registrant fiscal year ended december 31 1989 maintained commission file 19076 10g3 trust deed dated june 3 1992 amending exhibit 10g2 hereto incorporated herein reference exhibit 10g3 annual report form 10k registrant fiscal year ended december 31 1992 10g4 trust deed dated january 24 1994 amending exhibits 10g2 10g3 hereto incorporated herein reference exhibit 10g4 annual report form 10k registrant fiscal year ended december 31 1993 10h1 acco world corporation management incentive plan incorporated herein reference exhibit 10h1 annual report form 10k registrant fiscal year ended december 31 1991 10i1 acco world corporation supplemental benefit plan key employees incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1989 maintained commission file 1 9076 10j1 jim beam brands co senior executive key manager incentive plan incorporated herein reference exhibit 10m4 annual report form 10k registrant fiscal year ended december 31 1991 10j2 jim beam brands co amended excess benefit plan 10j3 trust agreement made december 24 1991 among jim beam brands co beam chase hewitt associates establishing trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10j2 hereto incorporated herein reference exhibit 10m3 annual report form 10k registrant fiscal year ended december 31 1991 10j4 amendment made 17th day november 1993 trust agreement constituting exhibit 10j3 hereto incorporated herein reference exhibit 10k4 annual report form 10k registrant fiscal year ended december 31 1993 10j5 trust agreement made 15th day december 1993 among barry berish beam chase establishing grantor trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10j2 hereto incorporated herein reference exhibit 10k5 annual report form 10k registrant fiscal year ended december 31 1993 10k1 resolution board directors registrant adopted december 11 1985 respect retirement health benefits provided william j alley incorporated herein reference exhibit 10e2 registration statement form 8b registrant dated january 27 1986 10k2 agreement dated march 1 1988 registrant william j alley amendments thereto providing certain retirement benefits incorporated herein reference exhibit 10l2 annual report form 10k registrant fiscal year ended december 31 1992 10l1 resolutions board directors registrant adopted december 11 1985 february 23 1988 respect retirement health benefits provided arnold henson incorporated herein reference exhibit 10m1 annual report form 10k registrant fiscal year ended december 31 1992 10m1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 10n1 service agreement dated november 9 1994 gallaher peter wilson 10n2 letter dated september 20 1991 gallaher respect retirement benefits provided peter wilson incorporated herein reference exhibit 10o2 annual report form 10k registrant fiscal year ended december 31 1993 10n3 letter dated march 15 1994 amending exhibit 10n2 hereto incorporated herein reference exhibit 10o3 annual report form 10k registrant fiscal year ended december 31 1993 10o1 acco world corporation supplemental retirement plan 10o2 trust agreement made 1st day july 1994 among acco world corporation chase et al establishing trust favor norman h wesley purposes paying amounts acco world corporation supplemental retirement plan constituting exhibit 10o1 hereto 10o3 trust agreement made 1st day july 1994 among norman h wesley acco world corporation chase establishing grantor trust favor norman h wesley purposes paying amounts acco world corporation supplemental retirement plan constituting exhibit 10o1 hereto 10p1 employment agreement entered june 8 1987 acco international inc predecessor acco usa inc norman h wesley incorporated herein reference exhibit 10r1 annual report form 10k registrant fiscal year ended december 31 1990 10q1 letters dated july 31 1984 february 26 1990 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10t1 annual report form 10k registrant fiscal year ended december 31 1991 10r1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10r2 amendment dated november 28 1994 agreement constituting exhibit 10r1 hereto 10r3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10r1 10r2 hereto respectively entered registrant thomas c hays john ludes robert l plancher robert j rukeyser randall w larrimore steven c mendenhall dudley l bauerlein jr charles h mcgill 10s1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement constituting exhibits 10r1 10r2 hereto 10s2 amendment made 1st day november 1993 trust agreement constituting exhibit 10s1 hereto 10s3 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10s1 10s2 hereto respectively favor thomas c hays john ludes robert l plancher robert j rukeyser randall w larrimore steven c mendenhall dudley l bauerlein jr 10t1 agreement dated march 1 1988 amendments thereto registrant thomas c hays incorporated herein reference exhibit 10v1 annual report form 10k registrant fiscal year ended december 31 1992 10t2 amendment effective january 1 1995 agreement constituting exhibit 10t1 hereto 10t3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10t1 10t2 hereto respectively 10u1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 10u2 agreement dated october 28 1991 amending agreement constituting exhibit 10u1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10u3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10u1 10u2 hereto respectively 10u4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10u1 10u2 10u3 hereto entered registrant john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr 10v1 agreement dated march 7 1988 registrant randall w larrimore amendments thereto incorporated herein reference exhibit 10x1 annual report form 10k registrant fiscal year ended december 31 1992 10v2 amendment effective january 1 1995 agreement constituting exhibit 10v1 hereto 10w1 agreement dated february 24 1995 registrant charles h mcgill l0x1 agreement dated february 1 1990 beam barry berish incorporated herein reference exhibit 10pp1 annual report form 10k registrant fiscal year ended december 31 1990 l0y1 rights agreement dated december 13 1987 registrant first chicago trust company new york rights agent amendments thereto incorporated herein reference exhibit 10aa1 annual report form 10k registrant fiscal year ended december 31 1992 11 statement setting forth net income computation earnings per common share primary fully diluted statement setting forth computation weighted average number common shares outstanding fully diluted basis 12 statement computation ratio earnings fixed charges 13 1994 annual report stockholders registrant 21 subsidiaries registrant 23ia consent independent accountants coopers lybrand llp 23ib consent counsel chadbourne parke 24 powers attorney relating execution annual report form 10k 27 financial data schedule article 5 indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon request b reports form 8k registrant filed current report form 8k dated october 21 1994 respect registrants press release dated october 21 1994 announcing registrants financial results threemonth ninemonth periods ended september 30 1994 items 5 7c registrant filed current report form 8k dated october 28 1994 respect registrants press release dated october 27 1994 announcing federal trade commission would challenge sale american tobacco company items 5 7c registrant filed current report form 8k dated november 30 1994 respect registrants press release dated november 30 1994 announcing registrant executed definitive agreement sale registrants franklin life insurance business american general corporation 117 billion cash items 5 7c registrant filed current report form 8k dated december 22 1994 respect registrants press releases dated december 22 1994 announcing federal trade commission ftc approved settlement bat industries plc removed ftcs opposition sale registrants subsidiary american tobacco company bat registrant bat completed sale day simultaneous transfer registrants uk based subsidiary gallaher limited silk cut trademark bat exchange longterm manufacturing arrangement items 5 7c registrant filed current report form 8k dated january 5 1995 respect registrants pro forma financial information connection sale registrants subsidiary american tobacco company december 22 1994 items 2 7b c registrant filed current report form 8k dated january 24 1995 respect registrants press release dated january 24 1995 announcing registrants financial results threemonth twelvemonth periods ended december 31 1994 items 5 7c registrant filed current report form 8k dated january 31 1995 announcing sale registrants franklin life insurance business american general corporation 117 billion cash completed january 31 1995 items 5 7c registrant filed current report form 8k dated february 8 1995 respect registrants pro forma financial information connection sale registrants franklin life insurance business january 31 1995 ii amendments registrants laws adopted january 31 1995 items 2 7b c registrant filed current report form 8k dated february 16 1995 respect certain statements registrant consumer analyst group items 5 7c annual report shall construed waiver right contest validity scope provisions securities exchange act 1934 amended constitution united states validity rule regulation made act signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized american brands inc registrant thomas c hays thomas c hays chairman board date march 28 1995 chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated thomas c hays thomas c hays chairman board chief executive officer principal executive officer director date march 28 1995 john ludes john ludes president chief operating officer director date march 28 1995 robert l plancher robert l plancher senior vice president chief accounting officer principal accounting officer date march 28 1995 dudley l bauerlein jr dudley l bauerlein jr senior vice president chief financial officer principal financial officer date march 28 1995 william j alley william j alley director date march 28 1995 eugene r anderson eugene r anderson director date march 28 1995 patricia ewers patricia ewers director date march 28 1995 john w johnstone jr john w johnstone jr director date march 28 1995 wendell j kelley wendell j kelley director date march 28 1995 sidney kirschner sidney kirschner director date march 28 1995 gordon r lohman gordon r lohman director date march 28 1995 charles h pistor jr charles h pistor jr director date march 28 1995 peter wilson peter wilson director date march 28 1995 robert colby robert colby attorneyinfact index financial statement schedules pages american brands inc subsidiaries report independent accountants schedules condensed financial information registrant december 31 1994 1993 years ended december 31 1994 1993 1992 ii valuation qualifying accounts years ended december 31 1994 1993 1992 report independent accountants board directors stockholders american brands inc report consolidated financial statements american brands inc subsidiaries incorporated reference form 10k 1994 annual report stockholders american brands inc connection audits financial statements also audited related financial statement schedules listed index page form 10k opinion financial statement schedules referred considered relation basic financial statements taken whole present fairly material respects information required included therein coopers lybrand llp 1301 avenue americas new york new york february 1 1995 american brands inc parent company schedule condensed financial information registrant balance sheet millions december 31 1994 1993 restated assets current assets cash equivalents 34 receivables affiliated companies 5797 5658 net assets discontinued operations 11700 current assets 320 514 total current assets 17851 6172 investment subsidiaries 23824 22225 longterm receivables affiliated companies 31430 37248 net assets discontinued operations 13440 assets 1385 1412 total assets 74490 80497 liabilities stockholders equity current liabilities commercial paper 1033 7113 payables affiliated companies 1289 1132 current liabilities 4772 2659 current portion longterm debt 4854 1565 total current liabilities 11948 12469 longterm debt 14936 24384 postretirement liabilities 1231 930 total liabilities 28115 37783 convertible preferred stock redeemable companys option 157 171 common stockholders equity 46218 42543 total liabilities stockholders equity 74490 80497 notes consolidated financial statements american brands inc subsidiaries contained 1994 annual report stockholders registrant integral part statements see accompanying notes condensed financial information registrant american brands inc parent company schedule condensed financial information registrant statement income millions years ended december 31 1994 1993 1992 restatedrestated interest affiliates 2965 3326 3578 expenses corporate administrative expenses 699 781 807 interest affiliates 100 129 82 nonaffiliates 1916 2037 2198 expenses net 163 129 121 total expenses 2878 3076 3208 gain disposal business 5779 income continuing operations income taxes items 5866 250 370 income tax expense benefit 542 41 31 income continuing operations equity net income subsidiaries cumulative effect accounting changes 5324 209 401 equity net income subsidiaries 3527 3495 7468 income continuing operations cumulative effect accounting changes 8851 3704 7869 income loss discontinued operations 1510 1270 969 cumulative effect accounting changes net income taxes 169 276 net income 7341 4698 8838 notes consolidated financial statements american brands inc subsidiaries contained 1994 annual report stockholders registrant integral part statements see accompanying notes condensed financial information registrant american brands inc parent company schedule condensed financial information registrant statement cash flows millions years ended december 31 1994 1993 1992 restatedrestated net cash provided operating activities 3907 6184 6251 investing activities proceeds disposition operations 9894 additional investment subsidiary 18 net 08 44 40 net cash provided used investing activities 9886 44 58 financing activities decrease increase shortterm debt 9080 2780 2616 issuance longterm debt 326 4730 3514 repayment longterm debt 3595 3647 6726 dividends stockholders 4031 3991 3778 cash purchases common stock treasury 201 579 1004 change intercompany balances net 2425 5923 142 redemption purchases 275 preferred stock 1344 financing activities net 19 49 120 net cash used financing activities 14137 6679 6744 cash provided discontinued operations 378 451 551 net increase cash equivalents 34 cash equivalents beginning year end year 34 cash paid year interest 2077 2202 2336 income taxes 1953 2385 2808 notes consolidated financial statements american brands inc subsidiaries contained 1994 annual report stockholders registrant integral part statements see accompanying notes condensed financial information registrant notes condensed financial information registrant 1 basis presentation pursuant rules regulations securities exchange commission condensed financial statements registrant include information notes normally included financial statements prepared accordance generally accepted accounting principles therefore condensed financial statements read conjunction consolidated financial statements notes thereto included annual report stockholders registrant referenced form 10k part ii item 8 financial statements restated discontinued operations accompanying notes present amounts related continuing operations 2 dispositions december 22 1994 registrant sold american tobacco company domestic tobacco business 1 billion cash related expenses gain disposal increased income continuing operations income taxes 5779 million 5083 million applicable income taxes 696 million 3 discontinued operations november 30 1994 registrant entered agreement sell franklin life insurance business franklin 117 billion cash related expenses sale completed january 31 1995 net assets results operations franklin reclassified identify discontinued operations 4 accounting changes january 1 1993 registrant adopted fas statement 106 employers accounting postretirement benefits pensions fas 112 employers accounting postemployment benefits initial effects adopting statements recorded cumulative changes accounting principles 5 investment subsidiaries 1994 361 million longterm receivables affiliated companies contributed capital subsidiaries registrant 1993 1348 million receivables affiliated companies contributed capital subsidiary registrant 6 cash dividends subsidiaries dividends 3746 million 1994 6347 million 1993 593 million 1992 paid registrant subsidiaries excluding franklin notes condensed financial information registrant concluded 7 debt components longterm debt follows millions 1994 1993 notes payable 3000 revolving credit notes 264 1958 notes 2740 3565 5 34 eurodollar convertible debentures due 2005 2000 7 58 eurodollar convertible debentures due 2001 1500 eurodollar convertible debentures 407 410 8 12 notes due 2003 2000 5 14 notes due 1995 2000 8 58 debentures due 2021 1500 9 18 debentures due 2016 1500 7 78 debentures due 2023 1500 7 12 notes due 1999 1500 9 notes due 1999 1000 9 12 eurosterling notes due 1994 740 9 14 eurosterling notes due 1998 783 740 12 eurosterling notes due 1995 626 592 12 sterling loan stock due 2009 470 444 19790 25949 less current portion 4854 1565 14936 24384 estimated payments maturing debt sinking fund requirements next five years assuming onetime put option 5 34 eurodollar convertible debentures exercised 1995 follows 1995 4854 million 1996 101 million 1997 538 million 1998 1728 million 1999 2809 million december 31 1994 registrant guaranteed shortterm committed credit facilities ukbased subsidiary provided unsecured borrowings 513 million 578 million outstanding american brands inc subsidiaries schedule ii valuation qualifying accounts years ended december 31 1994 1993 1992 millions col b col c col e additions charged balance costs end beginning description period expenses deductions period 1994 allowance cash discounts 63 930 927 1 53 13 4 allowance returns 219 909 932 1 126 70 4 allowance doubtful accounts 343 113 092 341 95 3 29 4 625 1952 2057 520 1993 allowance cash discounts 79 873 889 1 63 allowance returns 173 1506 1460 1 219 allowance doubtful accounts 348 117 3 343 05 2 600 2496 2471 625 1992 allowance cash discounts 75 886 882 1 79 allowance returns 93 1143 1060 1 173 03 2 allowance doubtful accounts 393 119 131 3 348 33 2 561 2148 2109 600 1 cash discounts returns allowed customers 2 effect changes foreign exchange rates 3 doubtful accounts written net recoveries 4 balance disposal date subsidiaries exhibit index 3i certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3a2 quarterly report form 10q registrant dated may 14 1990 3ii bylaws registrant effect date hereof incorporated herein reference exhibit 3iib current report form 8k registrant dated february 8 1995 10a1 article xii incentive compensation bylaws registrant incorporated herein reference exhibit 3iib current report form 8k registrant dated february 8 1995 10b1 stock option plan american brands inc amended incorporated herein reference exhibit 10b1 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment stock option plan american brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10a quarterly report form 10q registrant dated november 11 1993 10b3 1986 stock option plan american brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b4 amendment 1986 stock option plan american brands inc constituting exhibit 10b3 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b5 amendment 1986 stock option plan american brands inc constituting exhibits 10b3 10b4 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b6 1990 longterm incentive plan american brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10c1 amended supplemental retirement plan american brands inc 10c2 trust agreement made 1st day february 1989 among registrant chase manhattan bank national association chase et al establishing trust favor william j alley purposes paying amounts amended supplemental retirement plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1988 maintained commission file 19076 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1993 10c4 amendment made 1st day january 1995 trust agreement constituting exhibits 10c2 10c3 hereto 10c5 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto respectively favor thomas c hays arnold henson john ludes robert l plancher gilbert l klemann ii robert j rukeyser randall w larrimore steven c mendenhall dudley l bauerlein jr 10c6 trust agreement made 1st day november 1993 among william j alley registrant chase establishing grantor trust favor william j alley purposes paying amounts amended supplemental retirement plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c5 annual report form 10k registrant fiscal year ended december 31 1993 10c7 schedule identifying substantially identical agreements trust agreement constituting exhibit 10c6 hereto favor thomas c hays arnold henson john ludes robert l plancher gilbert l klemann ii robert j rukeyser randall w larrimore steven c mendenhall dudley l bauerlein jr 10d1 executive mortgage program registrant connection relocation corporate headquarters incorporated herein reference exhibit 10d1 annual report form 10k registrant fiscal year ended december 31 1991 10e1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 10e2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10e1 hereto 10f1 retirement agreement made january 1 1995 registrant thomas c hays 10g1 gallaher limited executive incentive plan adopted october 20 1994 10g2 trust deed dated march 24 1983 gallaher limited gallaher pensions limited amendments thereto providing supplemental retirement benefits certain executives gallaher incorporated herein reference exhibits 10g2 10g3 annual report form 10k registrant fiscal year ended december 31 1989 maintained commission file 19076 10g3 trust deed dated june 3 1992 amending exhibit 10g2 hereto incorporated herein reference exhibit 10g3 annual report form 10k registrant fiscal year ended december 31 1992 10g4 trust deed dated january 24 1994 amending exhibits 10g2 10g3 hereto incorporated herein reference exhibit 10g4 annual report form 10k registrant fiscal year ended december 31 1993 10h1 acco world corporation management incentive plan incorporated herein reference exhibit 10h1 annual report form 10k registrant fiscal year ended december 31 1991 10i1 acco world corporation supplemental benefit plan key employees incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1989 maintained commission file 1 9076 10j1 jim beam brands co senior executive key manager incentive plan incorporated herein reference exhibit 10m4 annual report form 10k registrant fiscal year ended december 31 1991 10j2 jim beam brands co amended excess benefit plan 10j3 trust agreement made december 24 1991 among jim beam brands co beam chase hewitt associates establishing trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10j2 hereto incorporated herein reference exhibit 10m3 annual report form 10k registrant fiscal year ended december 31 1991 10j4 amendment made 17th day november 1993 trust agreement constituting exhibit 10j3 hereto incorporated herein reference exhibit 10k4 annual report form 10k registrant fiscal year ended december 31 1993 10j5 trust agreement made 15th day december 1993 among barry berish beam chase establishing grantor trust favor barry berish purposes paying amounts amended excess benefit plan constituting exhibit 10j2 hereto incorporated herein reference exhibit 10k5 annual report form 10k registrant fiscal year ended december 31 1993 10k1 resolution board directors registrant adopted december 11 1985 respect retirement health benefits provided william j alley incorporated herein reference exhibit 10e2 registration statement form 8b registrant dated january 27 1986 10k2 agreement dated march 1 1988 registrant william j alley amendments thereto providing certain retirement benefits incorporated herein reference exhibit 10l2 annual report form 10k registrant fiscal year ended december 31 1992 10l1 resolutions board directors registrant adopted december 11 1985 february 23 1988 respect retirement health benefits provided arnold henson incorporated herein reference exhibit 10m1 annual report form 10k registrant fiscal year ended december 31 1992 10m1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 10n1 service agreement dated november 9 1994 gallaher peter wilson 10n2 letter dated september 20 1991 gallaher respect retirement benefits provided peter wilson incorporated herein reference exhibit 10o2 annual report form 10k registrant fiscal year ended december 31 1993 10n3 letter dated march 15 1994 amending exhibit 10n2 hereto incorporated herein reference exhibit 10o3 annual report form 10k registrant fiscal year ended december 31 1993 10o1 acco world corporation supplemental retirement plan 10o2 trust agreement made 1st day july 1994 among acco world corporation chase et al establishing trust favor norman h wesley purposes paying amounts acco world corporation supplemental retirement plan constituting exhibit 10o1 hereto 10o3 trust agreement made 1st day july 1994 among norman h wesley acco world corporation chase establishing grantor trust favor norman h wesley purposes paying amounts acco world corporation supplemental retirement plan constituting exhibit 10o1 hereto 10p1 employment agreement entered june 8 1987 acco international inc predecessor acco usa inc norman h wesley incorporated herein reference exhibit 10r1 annual report form 10k registrant fiscal year ended december 31 1990 10q1 letters dated july 31 1984 february 26 1990 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10t1 annual report form 10k registrant fiscal year ended december 31 1991 10r1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10r2 amendment dated november 28 1994 agreement constituting exhibit 10r1 hereto 10r3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10r1 10r2 hereto respectively entered registrant thomas c hays john ludes robert l plancher robert j rukeyser randall w larrimore steven c mendenhall dudley l bauerlein jr charles h mcgill 10s1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement constituting exhibits 10r1 10r2 hereto 10s2 amendment made 1st day november 1993 trust agreement constituting exhibit 10s1 hereto 10s3 schedule identifying substantially identical agreements trust agreement amendment thereto constituting exhibits 10s1 10s2 hereto respectively favor thomas c hays john ludes robert l plancher robert j rukeyser randall w larrimore steven c mendenhall dudley l bauerlein jr 10t1 agreement dated march 1 1988 amendments thereto registrant thomas c hays incorporated herein reference exhibit 10v1 annual report form 10k registrant fiscal year ended december 31 1992 10t2 amendment effective january 1 1995 agreement constituting exhibit 10t1 hereto 10t3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10t1 10t2 hereto respectively 10u1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 10u2 agreement dated october 28 1991 amending agreement constituting exhibit 10u1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10u3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10u1 10u2 hereto respectively 10u4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10u1 10u2 10u3 hereto entered registrant john ludes robert l plancher robert j rukeyser steven c mendenhall dudley l bauerlein jr 10v1 agreement dated march 7 1988 registrant randall w larrimore amendments thereto incorporated herein reference exhibit 10x1 annual report form 10k registrant fiscal year ended december 31 1992 10v2 amendment effective january 1 1995 agreement constituting exhibit 10v1 hereto 10w1 agreement dated february 24 1995 registrant charles h mcgill l0x1 agreement dated february 1 1990 beam barry berish incorporated herein reference exhibit 10pp1 annual report form 10k registrant fiscal year ended december 31 1990 l0y1 rights agreement dated december 13 1987 registrant first chicago trust company new york rights agent amendments thereto incorporated herein reference exhibit 10aa1 annual report form 10k registrant fiscal year ended december 31 1992 11 statement setting forth net income computation earnings per common share primary fully diluted statement setting forth computation weighted average number common shares outstanding fully diluted basis 12 statement computation ratio earnings fixed charges 13 1994 annual report stockholders registrant 21 subsidiaries registrant 23ia consent independent accountants coopers lybrand llp 23ib consent counsel chadbourne parke 24 powers attorney relating execution annual report form 10k 27 financial data schedule article 5 indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon requestitem 14 principal auditor fees services see information caption “fees registered public accounting firm” 2005 proxy statement information incorporated herein reference part iv item 15item 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed registrant consolidated subsidiaries consolidated balance sheet december 31 1997 1996 contained 1997 annual report stockholders registrant incorporated herein reference consolidated statement income years ended december 31 1997 1996 1995 contained 1997 annual report stockholders registrant incorporated herein reference consolidated statement cash flows years ended december 31 1997 1996 1995 contained 1997 annual report stockholders registrant incorporated herein reference consolidated statement stockholders equity years ended december 31 1997 1996 1995 contained 1997 annual report stockholders registrant incorporated herein reference notes consolidated financial statements contained 1997 annual report stockholders registrant incorporated herein reference report independent accountants contained 1997 annual report stockholders registrant incorporated herein reference 2 financial statement schedules see index financial statement schedule registrant subsidiaries page index incorporated herein reference 3 exhibits 3i certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3b current report form 8k registrant dated december 2 1997 3ii bylaws registrant effect date hereof incorporated herein reference exhibit 3iib quarterly report form 10q registrant dated august 12 1997 10a1 fortune brands inc annual executive incentive compensation plan incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1997 10b1 1986 stock option plan fortune brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment 1986 stock option plan fortune brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b3 amendment 1986 stock option plan fortune brands inc constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b4 amendment 1986 stock option plan fortune brands inc constituting exhibits 10b1 10b2 10b3 hereto incorporated herein reference exhibit 10a2 quarterly report form 10q registrant dated november 11 1997 10b5 1990 longterm incentive plan fortune brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10b6 amendment 1990 longterm incentive plan fortune brands inc constituting exhibit 10b5 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1997 10b7 fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated august 12 1997 10c1 amended supplemental plan fortune brands inc incorporated herein reference exhibit 10c1 annual report form 10k registrant fiscal year ended december 31 1995 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank national association chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1995 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1995 10c4 amendment made 1st day january 1995 trust agreement constituting exhibits 10c2 10c3 hereto incorporated herein reference exhibit 10c4 annual report form 10k registrant fiscal year ended december 31 1995 10c5 amendment made 1st day january 1997 trust agreement constituting exhibits 10c2 10c3 10c4 hereto 10c6 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr 10c7 amendment made 24th day february 1997 trust agreement constituting exhibits 10c2 10c3 10c4 10c5 hereto relating trust established favor thomas c hays 10c8 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c6 annual report form 10k registrant fiscal year ended december 31 1995 10c9 amendment made 1st day january 1996 trust agreement constituting exhibit 10c8 hereto incorporated herein reference quarterly report form 10q registrant dated august 8 1996 10c10 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10c8 10c9 hereto respectively incorporated herein reference exhibit 10c1 quarterly report form 10q registrant dated august 12 1997 10c11 schedule identifying substantially identical agreements trust agreement amendments constituting exhibits 10c8 10c9 10c10 hereto favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill craig p omtvedt 10c12 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 hereto among thomas c hays registrant chase 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 severance retirement agreement made february 24 1997 registrant thomas c hays incorporated herein reference exhibit 10d1 quarterly report form 10q registrant dated august 12 1997 10f1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10g1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1995 10g2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10h1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10h2 amendment dated november 28 1994 agreement constituting exhibit 10h1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10h3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10h1 10h2 hereto respectively entered registrant thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill craig p omtvedt incorporated herein reference exhibit 10j3 annual report form 10k registrant fiscal year ended december 31 1996 10i1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement constituting exhibits 10h1 10h2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10i2 amendment made 1st day november 1993 trust agreement constituting exhibit 10i1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10i3 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10i1 10i2 hereto respectively 10i4 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10i1 10i2 10i3 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill craig p omtvedt 10j1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10j2 agreement dated october 28 1991 amending agreement constituting exhibit 10j1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10j3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10j1 10j2 hereto respectively incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10j4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto entered registrant john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr craig p omtvedt incorporated herein reference exhibit 10m4 annual report form 10k registrant fiscal year ended december 31 1996 10k1 agreement dated february 24 1995 registrant charles h mcgill incorporated herein reference exhibit 10w1 annual report form 10k registrant fiscal year ended december 31 1994 10k2 amendment made january 29 1996 agreement constituting exhibit 10k1 hereto 10l1 rights agreement dated november 19 1997 registrant first chicago trust company new york rights agent incorporated herein reference exhibit 4a current report form 8k registrant dated december 2 1997 10m1 indemnification agreement dated december 22 1994 among registrant american tobacco company brown williamson tobacco corporation 12 statement computation ratio earnings fixed charges 13 1997 annual report stockholders registrant 21 subsidiaries registrant 23ia consent independent accountants coopers lybrand llp 23ib consent counsel chadbourne parke llp 24 powers attorney relating execution annual report form 10k 27a financial data schedule fiscal year ended december 31 1997 article 5 27b restated financial data schedule interim period ended september 30 1997 article 5 27c restated financial data schedule interim period ended june 30 1997 article 5 27d restated financial data schedule interim period ended march 31 1997 article 5 27e restated financial data schedule fiscal year ended december 31 1996 article 5 27f restated financial data schedule interim period ended september 30 1996 article 5 27g restated financial data schedule interim period ended june 30 1996 article 5 27h restated financial data schedule interim period ended march 31 1996 article 5 27i restated financial data schedule fiscal year ended december 31 1995 article 5 indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon request b reports form 8k registrant filed current report form 8k dated october 1 1997 respect registrants press release dated september 30 1997 announcing increase quarterly dividend registrants common stock items 5 7c registrant filed current report form 8k dated october 21 1997 respect registrants press release dated october 21 1997 announcing registrants financial results threemonth ninemonth periods ended september 30 1997 items 5 7c registrant filed current report form 8k dated december 2 1997 respect declaration board directors registrant dividend preferred share purchase rights registrants common stock items 5 7c registrant filed current report form 8k dated january 12 1998 respect registrants press release dated january 12 1998 announcing anticipated pro forma earnings growth registrant 1998 items 5 7c registrant filed current report form 8k dated january 23 1998 respect registrants press release dated january 23 1998 announcing registrants financial results threemonth twelvemonth periods ended december 31 1997 items 5 7c registrant filed current report form 8k dated february 10 1998 respect registrants press release dated february 6 1998 announcing signing acco world corporation definitive agreement acquire apollo presentation products business items 5 7c registrant filed current report form 8k dated february 20 1998 respect registrants press release dated february 6 1998 respect anticipated pro forma earnings growth registrant 1998 items 5 7c registrant filed current report form 8k dated march 2 1998 respect registrants press release dated february 27 1998 announcing completion acco world corporation acquisition apollo presentation products business items 5 7c registrant filed current report form 8k dated march 4 1998 respect registrants press release dated march 3 1998 respect anticipated overall earnings growth outlook registrant 1998 items 5 7c signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc registrant thomas c hays thomas c hays chairman board date march 30 1998 chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated thomas c hays thomas c hays chairman board chief executive officer principal executive officer director date march 30 1998 john ludes john ludes president chief operating officer director date march 30 1998 dudley l bauerlein jr dudley l bauerlein jr senior vice president chief financial officer principal financial officer date march 30 1998 craig p omtvedt craig p omtvedt senior vice president chief accounting officer principal accounting officer date march 30 1998 eugene r anderson eugene r anderson director date march 30 1998 patricia ewers patricia ewers director date march 30 1998 john w johnstone jr john w johnstone jr director date march 30 1998 wendell j kelley wendell j kelley director date march 30 1998 sidney kirschner sidney kirschner director date march 30 1998 gordon r lohman gordon r lohman director date march 30 1998 charles h pistor jr charles h pistor jr director date march 30 1998 anne tatlock anne tatlock director date march 30 1998 john w thompson john w thompson director date march 30 1998 peter wilson peter wilson director date march 30 1998 robert colby robert colby attorneyinfact index financial statement schedule pages fortune brands inc subsidiaries report independent accountants schedule ii valuation qualifying accounts years ended december 31 1997 1996 1995 report independent accountants board directors stockholders fortune brands inc report consolidated financial statements fortune brands inc subsidiaries incorporated reference form 10k 1997 annual report stockholders fortune brands inc connection audits financial statements also audited related financial statement schedule listed index page form 10k opinion financial statement schedule referred considered relation basic financial statements taken whole presents fairly material respects information required included therein coopers lybrand llp 1301 avenue americas new york new york february 4 1998 fortune brands inc subsidiaries schedule ii valuation qualifying accounts years ended december 31 1997 1996 1995 millions col b col c col e additions balance charged balance beginning costs end description period expenses deductions period 1997 allowance cash discounts 74 711 703 1 82 allowance returns 189 1290 1275 1 204 allowance doubtful accounts 233 119 106 2 257 113 496 2120 2073 543 1996 4 allowance cash discounts 51 641 731 1 74 1133 allowance returns 156 1312 1306 1 189 273 allowance doubtful accounts 216 53 57 2 233 213 423 2006 1933 496 1995 4 allowance cash discounts 50 421 420 1 51 allowance returns 124 974 942 1 156 allowance doubtful accounts 233 58 75 2 216 407 1453 1437 423 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance acquisition date subsidiaries 4 restated discontinued operations exhibit index sequentially exhibit numbered page 3i certificate incorporation registrant effect date hereof incorporated herein reference exhibit 3b current report form 8k registrant dated december 2 1997 3ii bylaws registrant effect date hereof incorporated herein reference exhibit 3iib quarterly report form 10q registrant dated august 12 1997 10a1 fortune brands inc annual executive incentive compensation plan incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1997 10b1 1986 stock option plan fortune brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment 1986 stock option plan fortune brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b3 amendment 1986 stock option plan fortune brands inc constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b4 amendment 1986 stock option plan fortune brands inc constituting exhibits 10b1 10b2 10b3 hereto incorporated herein reference exhibit 10a2 quarterly report form 10q registrant dated november 11 1997 10b5 1990 longterm incentive plan fortune brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10b6 amendment 1990 longterm incentive plan fortune brands inc constituting exhibit 10b5 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1997 10b7 fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated august 12 1997 10c1 amended supplemental plan fortune brands inc incorporated herein reference exhibit 10c1 annual report form 10k registrant fiscal year ended december 31 1995 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank national association chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1995 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1995 10c4 amendment made 1st day january 1995 trust agreement constituting exhibits 10c2 10c3 hereto incorporated herein reference exhibit 10c4 annual report form 10k registrant fiscal year ended december 31 1995 10c5 amendment made 1st day january 1997 trust agreement constituting exhibits 10c2 10c3 10c4 hereto 10c6 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr 10c7 amendment made 24th day february 1997 trust agreement constituting exhibits 10c2 10c3 10c4 10c5 hereto relating trust established favor thomas c hays 10c8 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c6 annual report form 10k registrant fiscal year ended december 31 1995 10c9 amendment made 1st day january 1996 trust agreement constituting exhibit 10c8 hereto incorporated herein reference quarterly report form 10q registrant dated august 8 1996 10c10 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10c8 10c9 hereto respectively incorporated herein reference exhibit 10c1 quarterly report form 10q registrant dated august 12 1997 10c11 schedule identifying substantially identical agreements trust agreement amendments constituting exhibits 10c8 10c9 10c10 hereto favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill craig p omtvedt 10c12 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 hereto among thomas c hays registrant chase 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 severance retirement agreement made february 24 1997 registrant thomas c hays incorporated herein reference exhibit 10d1 quarterly report form 10q registrant dated august 12 1997 10f1 resolution board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10g1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1995 10g2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10h1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10h2 amendment dated november 28 1994 agreement constituting exhibit 10h1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10h3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10h1 10h2 hereto respectively entered registrant thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill craig p omtvedt incorporated herein reference exhibit 10j3 annual report form 10k registrant fiscal year ended december 31 1996 10i1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement constituting exhibits 10h1 10h2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10i2 amendment made 1st day november 1993 trust agreement constituting exhibit 10i1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10i3 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10i1 10i2 hereto respectively 10i4 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10i1 10i2 10i3 hereto respectively favor thomas c hays john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr charles h mcgill craig p omtvedt 10j1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10j2 agreement dated october 28 1991 amending agreement constituting exhibit 10j1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10j3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10j1 10j2 hereto respectively incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10j4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto entered registrant john ludes robert j rukeyser steven c mendenhall dudley l bauerlein jr craig p omtvedt incorporated herein reference exhibit 10m4 annual report form 10k registrant fiscal year ended december 31 1996 10k1 agreement dated february 24 1995 registrant charles h mcgill incorporated herein reference exhibit 10w1 annual report form 10k registrant fiscal year ended december 31 1994 10k2 amendment made january 29 1996 agreement constituting exhibit 10k1 hereto 10l1 rights agreement dated november 19 1997 registrant first chicago trust company new york rights agent incorporated herein reference exhibit 4a current report form 8k registrant dated december 2 1997 10m1 indemnification agreement dated december 22 1994 among registrant american tobacco company brown williamson tobacco corporation 12 statement computation ratio earnings fixed charges 13 1997 annual report stockholders registrant 21 subsidiaries registrant 23ia consent independent accountants coopers lybrand llp 23ib consent counsel chadbourne parke llp 24 powers attorney relating execution annual report form 10k 27a financial data schedules fiscal year ended december 31 1997 article 5 27b restated financial data schedule interim period ended september 30 1997 article 5 27c restated financial data schedule interim period ended june 30 1997 article 5 27d restated financial data schedule interim period ended march 31 1997 article 5 27e restated financial data schedule fiscal year ended december 31 1996 article 5 27f restated financial data schedule interim period ended september 30 1996 article 5 27g restated financial data schedule interim period ended june 30 1996 article 5 27h restated financial data schedule interim period ended march 31 1996 article 5 27i restated financial data schedule fiscal year ended december 31 1995 article 5 indicates exhibit management contract compensatory plan arrangementitem 14 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed registrant consolidated subsidiaries consolidated statement income years ended december 31 1998 1997 1996 contained 1998 annual report stockholders registrant incorporated herein reference consolidated balance sheet december 31 1998 1997 contained 1998 annual report stockholders registrant incorporated herein reference consolidated statement cash flows years ended december 31 1998 1997 1996 contained 1998 annual report stockholders registrant incorporated herein reference consolidated statement stockholders equity years ended december 31 1998 1997 1996 contained 1998 annual report stockholders registrant incorporated herein reference notes consolidated financial statements contained 1998 annual report stockholders registrant incorporated herein reference report independent accountants contained 1998 annual report stockholders registrant incorporated herein reference 2 financial statement schedules see index financial statement schedule registrant subsidiaries page index incorporated herein reference 3 exhibits 3i restated certificate incorporation registrant effect date hereof 3iia amendments bylaws registrant 3iib bylaws registrant effect date hereof 10a1 fortune brands inc annual executive incentive compensation plan incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1997 10b1 1986 stock option plan fortune brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment 1986 stock option plan fortune brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b3 amendment 1986 stock option plan fortune brands inc amendment thereto constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b4 amendment 1986 stock option plan fortune brands inc amendments thereto constituting exhibits 10b1 10b2 10b3 hereto incorporated herein reference exhibit 10a2 quarterly report form 10q registrant dated november 11 1997 10b5 1990 longterm incentive plan fortune brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10b6 amendment 1990 longterm incentive plan fortune brands inc constituting exhibit 10b5 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1997 10b7 fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated august 12 1997 10b8 amendment registrants nonemployee director stock option plan constituting exhibit 10b7 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1998 10b9 fortune brands inc stock plan nonemployee directors 10c1 amended supplemental plan fortune brands inc incorporated herein reference exhibit 10c1 annual report form 10k registrant fiscal year ended december 31 1995 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1995 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1995 10c4 amendment made 1st day january 1995 trust agreement amendment thereto constituting exhibits 10c2 10c3 hereto incorporated herein reference exhibit 10c4 annual report form 10k registrant fiscal year ended december 31 1995 10c5 amendment made 1st day january 1997 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto incorporated herein reference exhibit 10c5 annual report form 10k registrant fiscal year ended december 31 1997 10c6 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10c7 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto relating trust established favor thomas c hays incorporated herein reference exhibit 10c7 annual report form 10k registrant fiscal year ended december 31 1997 10c8 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c6 annual report form 10k registrant fiscal year ended december 31 1995 10c9 amendment made 1st day january 1996 trust agreement constituting exhibit 10c8 hereto incorporated herein reference quarterly report form 10q registrant dated august 8 1996 10c10 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10c8 10c9 hereto incorporated herein reference exhibit 10c1 quarterly report form 10q registrant dated august 12 1997 10c11 amendment made 1st day august 1998 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1998 10c12 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 10c11 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10c13 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 10c11 hereto among thomas c hays registrant chase incorporated herein reference exhibit 10c12 annual report form 10k registrant fiscal year ended december 31 1997 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 severance retirement agreement made february 24 1997 registrant thomas c hays incorporated herein reference exhibit 10d1 quarterly report form 10q registrant dated august 12 1997 10f1 resolutions board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10f2 resolutions board directors registrant adopted july 26 1988 respect retirement health benefits provided mark roche 10g1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1995 10g2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10h1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10h2 amendment dated november 28 1994 agreement constituting exhibit 10h1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10h3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10h1 10h2 hereto entered registrant thomas c hays norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10i1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement amendment thereto constituting exhibits 10h1 10h2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10i2 amendment made 1st day november 1993 trust agreement constituting exhibit 10i1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10i3 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10i1 10i2 hereto incorporated herein reference exhibit 10i3 annual report form 10k registrant fiscal year ended december 31 1997 10i4 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10i1 10i2 10i3 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10j1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10j2 agreement dated october 28 1991 amending agreement constituting exhibit 10j1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10j3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10j1 10j2 hereto incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10j4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto entered registrant norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10j5 amendment dated august 1 1998 agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated november 11 1998 10j6 schedule identifying substantially identical agreements amendment constituting exhibit 10j5 hereto entered registrant john ludes dudley l bauerlein jr robert j rukeyser 10j7 amendment dated september 29 1998 registrant john ludes agreement amendments registrant mr ludes substantially identical exhibits 10j1 10j2 10j3 10j5 hereto incorporated herein reference exhibit 10b5 quarterly report form 10q registrant dated november 11 1998 10j8 amendment dated august 1 1998 registrant craig p omtvedt agreement amendments thereto substantially identical exhibits 10j1 10j2 10j3 hereto 10j9 schedule identifying substantially identical agreements amendment constituting exhibit 10j8 hereto entered registrant norman h wesley mark roche 10k1 rights agreement dated november 19 1997 registrant first chicago trust company new york rights agent incorporated herein reference exhibit 4a current report form 8k registrant dated december 2 1997 10l1 indemnification agreement dated december 22 1994 among registrant american tobacco company brown williamson tobacco corporation incorporated herein reference exhibit 10m1 annual report form 10k registrant fiscal year ended december 31 1997 12 statement computation ratio earnings fixed charges 13 1998 annual report stockholders registrant 21 subsidiaries registrant 23i consent independent accountants pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 27 financial data schedule fiscal year ended december 31 1998 article 5 99 list pendingterminated cases indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk registrant agrees furnish copy instruments securities exchange commission upon request b reports form 8k registrant filed current report form 8k dated october 23 1998 respect registrants press release dated october 23 1998 announcing registrants financial results threemonth ninemonth periods ended september 30 1998 items 5 7c registrant filed current report form 8k dated january 13 1999 respect registrants press release dated january 12 1999 announcing registrants expectation earnings per share growth 1999 items 5 7c registrant filed current report form 8k dated january 22 1999 respect registrants press release dated january 22 1999 announcing registrants financial results threemonth twelvemonth periods ended december 31 1998 items 5 7c registrant filed current report form 8k dated february 18 1999 respect speech delivered february 18 1999 chairman chief executive officer registrant executive vice president chief operating officer jim beam brands worldwide inc whollyowned subsidiary registrant 1999 consumer analyst group new york cagny conference items 5 7c signatures pursuant requirements section 13 15d securities exchange act 1934 amended registrant duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc registrant gilbert l klemann ii gilbert l klemann ii executive vice president corporate date march 30 1999 pursuant requirements securities exchange act 1934 amended report signed following persons behalf registrant capacities dates indicated thomas c hays thomas c hays chairman board chief executive officer principal executive officer director date march 30 1999 norman h wesley norman h wesley president chief operating officer director date march 30 1999 john ludes john ludes vice chairman director date march 30 1999 gilbert l klemann ii gilbert l klemann ii executive vice president corporate director date march 30 1999 dudley l bauerlein jr dudley l bauerlein jr senior vice president chief financial officer principal financial officer date march 30 1999 craig p omtvedt craig p omtvedt senior vice president chief accounting officer principal accounting officer date march 30 1999 eugene r anderson eugene r anderson director date march 30 1999 patricia ewers patricia ewers director date march 30 1999 john w johnstone jr john w johnstone jr director date march 30 1999 sidney kirschner sidney kirschner director date march 30 1999 gordon r lohman gordon r lohman director date march 30 1999 charles h pistor jr charles h pistor jr director date march 30 1999 eugene renna eugene renna director date march 30 1999 anne tatlock anne tatlock director date march 30 1999 john w thompson john w thompson director date march 30 1999 peter wilson peter wilson director date march 30 1999 robert colby robert colby attorneyinfact index financial statement schedule pages fortune brands inc subsidiaries report independent accountants schedule ii valuation qualifying accounts years ended december 31 1998 1997 1996 report independent accountants financial statement schedule board directors stockholders fortune brands inc audits consolidated financial statements referred report dated february 3 1999 appearing page 57 1998 annual report stockholders fortune brands inc report consolidated financial statements incorporated reference annual report form 10k also included audit financial statement schedule listed item 14a2 form 10k opinion financial statement schedule presents fairly material respects information set forth therein read conjunction related consolidated financial statements pricewaterhousecoopers llp 11 madison avenue new york new york 10010 february 3 1999 fortune brands inc subsidiaries schedule ii valuation qualifying accounts years ended december 31 1998 1997 1996 millions col b col c col e additions balance charged balance beginning costs end description period expenses deductions period 1998 allowance cash discounts 82 931 924 1 89 allowance returns 204 1503 1516 1 191 allowance doubtful accounts 257 143 99 2 334 333 543 2577 2506 614 1997 allowance cash discounts 74 711 703 1 82 allowance returns 189 1290 1275 1 204 allowance doubtful accounts 233 119 106 2 257 113 496 2120 2073 543 1996 allowance cash discounts 51 641 731 1 74 1133 allowance returns 156 1312 1306 1 189 273 allowance doubtful accounts 216 53 57 2 233 213 423 2006 1933 496 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance acquisition date subsidiaries exhibit index sequentially exhibit numbered page 3i restated certificate incorporation registrant effect date hereof 3iia amendments bylaws registrant 3iib bylaws registrant effect date hereof 10a1 fortune brands inc annual executive incentive compensation plan incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1997 10b1 1986 stock option plan fortune brands inc amendments thereto incorporated herein reference exhibit 10b2 annual report form 10k registrant fiscal year ended december 31 1992 10b2 amendment 1986 stock option plan fortune brands inc constituting exhibit 10b1 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 11 1993 10b3 amendment 1986 stock option plan fortune brands inc amendment thereto constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10b quarterly report form 10q registrant dated august 11 1994 10b4 amendment 1986 stock option plan fortune brands inc amendments thereto constituting exhibits 10b1 10b2 10b3 hereto incorporated herein reference exhibit 10a2 quarterly report form 10q registrant dated november 11 1997 10b5 1990 longterm incentive plan fortune brands inc amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q registrant dated august 11 1994 10b6 amendment 1990 longterm incentive plan fortune brands inc constituting exhibit 10b5 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1997 10b7 fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated august 12 1997 10b8 amendment registrants nonemployee director stock option plan constituting exhibit 10b7 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated august 12 1998 10b9 fortune brands inc stock plan nonemployee directors 10c1 amended supplemental plan fortune brands inc incorporated herein reference exhibit 10c1 annual report form 10k registrant fiscal year ended december 31 1995 10c2 trust agreement made 2nd day january 1991 among registrant chase manhattan bank chase et al establishing trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c2 annual report form 10k registrant fiscal year ended december 31 1995 10c3 amendment made 1st day november 1993 trust agreement constituting exhibit 10c2 hereto incorporated herein reference exhibit 10c3 annual report form 10k registrant fiscal year ended december 31 1995 10c4 amendment made 1st day january 1995 trust agreement amendment thereto constituting exhibits 10c2 10c3 hereto incorporated herein reference exhibit 10c4 annual report form 10k registrant fiscal year ended december 31 1995 10c5 amendment made 1st day january 1997 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 hereto incorporated herein reference exhibit 10c5 annual report form 10k registrant fiscal year ended december 31 1997 10c6 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10c7 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c2 10c3 10c4 10c5 hereto relating trust established favor thomas c hays incorporated herein reference exhibit 10c7 annual report form 10k registrant fiscal year ended december 31 1997 10c8 trust agreement made 1st day november 1993 among gilbert l klemann ii registrant chase establishing grantor trust favor gilbert l klemann ii purposes paying amounts amended supplemental plan constituting exhibit 10c1 hereto incorporated herein reference exhibit 10c6 annual report form 10k registrant fiscal year ended december 31 1995 10c9 amendment made 1st day january 1996 trust agreement constituting exhibit 10c8 hereto incorporated herein reference quarterly report form 10q registrant dated august 8 1996 10c10 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10c8 10c9 hereto incorporated herein reference exhibit 10c1 quarterly report form 10q registrant dated august 12 1997 10c11 amendment made 1st day august 1998 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q registrant dated november 11 1998 10c12 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 10c11 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10c13 amendment made 24th day february 1997 trust agreement amendments thereto constituting exhibits 10c8 10c9 10c10 10c11 hereto among thomas c hays registrant chase incorporated herein reference exhibit 10c12 annual report form 10k registrant fiscal year ended december 31 1997 10d1 resolutions board directors registrant adopted october 28 1986 july 26 1988 adopting amending retirement plan directors registrant officers employees registrant subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10d2 resolutions board directors registrant adopted july 26 1994 amending resolutions constituting exhibit 10d1 hereto incorporated herein reference exhibit 10e2 annual report form 10k registrant fiscal year ended december 31 1994 10e1 severance retirement agreement made february 24 1997 registrant thomas c hays incorporated herein reference exhibit 10d1 quarterly report form 10q registrant dated august 12 1997 10f1 resolutions board directors registrant adopted november 27 1990 respect retirement health benefits provided gilbert l klemann ii incorporated herein reference exhibit 10p1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10f2 resolutions board directors registrant adopted july 26 1988 respect retirement health benefits provided mark roche 10g1 letter dated january 23 1996 registrant respect deferred payment fees eugene r anderson incorporated herein reference exhibit 10k1 annual report form 10k registrant fiscal year ended december 31 1995 10g2 letter dated august 11 1995 registrant respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q registrant dated november 9 1995 10h1 agreement dated january 2 1991 registrant gilbert l klemann ii incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1992 10h2 amendment dated november 28 1994 agreement constituting exhibit 10h1 hereto incorporated herein reference exhibit 10r2 annual report form 10k registrant fiscal year ended december 31 1994 10h3 schedule identifying substantially identical agreements agreement amendment thereto constituting exhibits 10h1 10h2 hereto entered registrant thomas c hays norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10i1 trust agreement made 2nd day january 1991 among registrant chase et al establishing trust favor gilbert l klemann ii purposes paying amounts agreement amendment thereto constituting exhibits 10h1 10h2 hereto incorporated herein reference exhibit 10s1 annual report form 10k registrant fiscal year ended december 31 1994 10i2 amendment made 1st day november 1993 trust agreement constituting exhibit 10i1 hereto incorporated herein reference exhibit 10s2 annual report form 10k registrant fiscal year ended december 31 1994 10i3 amendment made 1st day january 1997 trust agreement amendment thereto constituting exhibits 10i1 10i2 hereto incorporated herein reference exhibit 10i3 annual report form 10k registrant fiscal year ended december 31 1997 10i4 schedule identifying substantially identical agreements trust agreement amendments thereto constituting exhibits 10i1 10i2 10i3 hereto favor thomas c hays norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10j1 agreement dated january 2 1991 registrant gilbert l klemann ii amendment thereto incorporated herein reference exhibit 10y1 annual report form 10k registrant fiscal year ended december 31 1991 maintained commission file 19076 10j2 agreement dated october 28 1991 amending agreement constituting exhibit 10j1 hereto incorporated herein reference exhibit 10w2 annual report form 10k registrant fiscal year ended december 31 1992 10j3 amendment effective january 1 1995 agreement amendment thereto constituting exhibits 10j1 10j2 hereto incorporated herein reference exhibit 10u3 annual report form 10k registrant fiscal year ended december 31 1994 10j4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto entered registrant norman h wesley john ludes dudley l bauerlein jr craig p omtvedt mark roche robert j rukeyser 10j5 amendment dated august 1 1998 agreement amendments thereto constituting exhibits 10j1 10j2 10j3 hereto incorporated herein reference exhibit 10b1 quarterly report form 10q registrant dated november 11 1998 10j6 schedule identifying substantially identical agreements amendment constituting exhibit 10j5 hereto entered registrant john ludes dudley l bauerlein jr robert j rukeyser 10j7 amendment dated september 29 1998 registrant john ludes agreement amendments registrant mr ludes substantially identical exhibits 10j1 10j2 10j3 10j5 hereto incorporated herein reference exhibit 10b5 quarterly report form 10q registrant dated november 11 1998 10j8 amendment dated august 1 1998 registrant craig p omtvedt agreement amendments thereto substantially identical exhibits 10j1 10j2 10j3 hereto 10j9 schedule identifying substantially identical agreements amendment constituting exhibit 10j8 hereto entered registrant norman h wesley mark roche 10k1 rights agreement dated november 19 1997 registrant first chicago trust company new york rights agent incorporated herein reference exhibit 4a current report form 8k registrant dated december 2 1997 10l1 indemnification agreement dated december 22 1994 among registrant american tobacco company brown williamson tobacco corporation incorporated herein reference exhibit 10m1 annual report form 10k registrant fiscal year ended december 31 1997 12 statement computation ratio earnings fixed charges 13 1998 annual report stockholders registrant 21 subsidiaries registrant 23i consent independent accountants pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 27 financial data schedule fiscal year ended december 31 1998 article 5 99 list pendingterminated cases indicates exhibit management contract compensatory plan arrangement item 7 managements discussion analysis financial condition results operations see discussion analysis captions results operations financial review contained 1993 annual report stockholders registrant discussion analysis incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations see discussion analysis captions results operations financial condition contained 1995 annual report stockholders registrant discussion analysis incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations see discussion analysis captions results operations financial condition contained 1996 annual report stockholders registrant discussion analysis incorporated herein reference item 8item 7 managements discussion analysis financial condition results operations see discussion analysis captions results operations financial condition contained 1999 annual report stockholders registrant discussion analysis incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations see discussion analysis captions results operations financial condition contained 2000 annual report stockholders registrant discussion analysis incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations see discussion analysis captions managements discussion analysis results financial condition contained 2001 annual report stockholders registrant discussion analysis incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations 1 operating company contribution occ net sales less costs expenses restructuring restructuringrelated charges writedowns identifiable intangibles goodwill amortization intangibles corporate administrative expense interest related expenses income expense net income taxes minority interests occ measure generally accepted accounting principles one key measures gauge underlying operating performance business segments use measures allocate capital resources evaluate acquisitions dispositions evaluate identify costreduction initiatives occ considered substitute measure derived accordance generally accepted accounting principles measure may differ similar measures presented companies depending upon items companies include 2 operating expenses represent sum corporate administrative expense intangible amortization restructuring restructuringrelated charges consolidated fortune brands inc holding company subsidiaries manufacture produce sell leading consumer branded products following industries home products spirits wine golf equipment office products earns cash profits building consumer brands grow sales including development new products effective marketing campaigns improving productivity cost structure strives enhance shareholder value strategically positioning businesses achieve higher growth higher returns including acquisitions dispositions joint ventures shareholder value initiatives using financial resources repurchase shares pay attractive dividends companys net income increased 36 2002 due primarily benefit acquisition omega group cabinet company strong operating performance management considers 2002 successful year fortune brands especially given uneven economic conditions primary markets management believes company well positioned 2003 meet longterm goals increased returns doubledigit eps growth excluding special charges gains 2003 company may confront continued economic uncertainty may adversely impacted increased expenses pension postretirement benefit plans insurance companys operating units also face challenges opportunities unique industries discussed report 2002 compared 2001 net sales net sales increased 1181 million 2 57 billion sales benefited acquisition omega holdings inc usbased manufacturer custom semicustom cabinetry increased volumes introduction new products line extensions principally golf products business favorable foreign exchange 20 million benefits partly offset lower volumes certain existing product lines golf office products businesses sale ukbased scotch whisky business october 2001 absence absolut revenues recorded interim basis 2001 five fewer selling days 2002 cabinets business due use 53week 52week business calendar consecutive years percentage increase net sales would higher net impact revenues ukbased scotch whisky business sales absolut vodka recorded interim basis 2001 well benefit omega acquisition 2002 excluded cost products sold cost products sold decreased 537 million 2 due positive operating leverage cost reductions excise taxes spirits wine excise taxes spirits wine decreased 493 million 14 decrease principally due absence absolut revenues recorded interim basis 2001 absence ukbased scotch whisky business 2002 companys spirits wine business incurs federal excise taxes us addition us incurred excise taxes united kingdom first nine months 2001 prior sale ukbased scotch whisky business advertising selling general administrative expenses advertising selling general administrative expenses increased 852 million 6 higher advertising marketing expenditures pension expense partially offset cost savings achieved future brands llc joint venture established june 2001 restructuring actions cost containment initiatives across operations particularly office products business amortization intangibles amortization intangibles decreased 466 million 74 due adoption financial accounting standards boards statement financial accounting standards 142 goodwill intangible assets sfas 142 january 1 2002 writedown identifiable intangibles goodwill 2002 record writedown either identifiable intangibles goodwill 2001 record noncash writedown identifiable intangibles 733 million 671 million aftertax 44 cents basic 43 cents diluted per share writedown recognized diminished fair values select identifiable intangibles resulting structuring office products consolidation noncore tradenames home products writedown business segment office products 644 million home products 89 million restructuring charges year ended december 31 2002 recorded pretax restructuring charges 459 million 298 million tax charges principally related planned workforce reduction costs asset writeoffs costs associated consolidation manufacturing facilities principally office products business sale certain nonstrategic product lines home products spirits wine businesses year ended december 31 2001 recorded pretax restructuring charges 454 million 298 million tax charges principally related product line discontinuances expenses associated exploration strategic options planned workforce reduction initiatives across operations office products business lease cancellation costs specialty plumbing parts business capacity reductions select technology platforms golf products business interest related expenses interest related expenses decreased 227 million 23 decrease primarily reflected lower average borrowings repaid shortterm debt using proceeds received vs sale ukbased scotch whisky business increased operating cash flow well lower interest rates partially offset commercial paper borrowings used finance omega cabinets acquisition income net income net decreased 137 million 437 million year ended december 31 2002 due principally 1 absence 166 million gain sale ukbased scotch whisky business 2 lower interest income tax receivable 2002 compared 2001 significant components income net years ended december 31 2002 2001 follows income taxes income taxes increased 1198 million 127 reported effective income tax rate years ended december 31 2002 2001 283 192 respectively increase principally due higher operating income lower interest related expenses partially offset tax credit 617 million recorded june 2002 effective income tax rate comparison impacted recognition second quarter 2002 617 million tax credit resulting new irs regulations reinterpret capital loss disallowance rules new regulations enable us utilize capital loss incurred 1994 offset capital gains taxed 1996 1997 factors affecting effective income tax rate comparison include interest 617 million tax credit 149 million 96 million tax reversal 310 million tax reserve years 1990 1992 second quarter 2001 729 million net tax benefit recognized result recapitalization office products business fourth quarter 2001 excluding taxrelated items effective income tax rates years ended december 31 2002 2001 365 379 respectively lower effective tax rate principally reflects lower goodwill amortization related adoption sfas 142 minority interests minority interests increased 49 million 43 principally recognition five additional months preferred dividends payable vs 10 interest jbbw 2002 compared 2001 net income net income 5256 million 351 basic 341 diluted per share year ended december 31 2002 compared net income 3860 million 255 basic 249 diluted per share year ended december 31 2001 increase net income 1396 million principally due higher sales lower cost sales lower intangible amortization interest related expenses partly offset higher income taxes increased advertising marketing expenditures higher pension expense net income year ended december 31 2002 includes following net gains charges recognition 617 million tax credit related interest income 149 million 96 million tax 558 million 362 million tax restructuring restructuringrelated charges addition net income year ended december 31 2001 includes following net gains charges recognition 729 million net tax benefit related interest income 285 million 173 million tax reversal 310 million tax reserve longer required 166 million 218 million tax gain sale ukbased scotch whisky business 981 million 633 million tax restructuring restructuringrelated charges 733 million 671 million tax writedown certain identifiable intangibles periodic basis evaluate assumptions used determining pension liabilities assets well pension expense based upon historical returns plan assets current economic conditions time assumptions set initially reexamined december 2001 economic assumptions underlie determination pension expense yearend disclosure review led reduction weightedaverage discount rate 72 70 weightedaverage expected rate return 96 83 revisions led increase pension expense approximately 15 million 219 million 2002 late 2002 reviewed economic assumptions lowered weightedaverage discount rate 70 66 2003 weightedaverage expected return plan assets remained unchanged 83 management believes assumptions appropriate 2002 revisions result increase pension expense approximately 10 15 million 2003 addition expect 2003 provide cash contributions approximately 30 million fund existing pension liabilities qualified definedbenefit plans additional cash contributions 2003 required benefits paid various supplemental definedbenefit plans 2002 total definedbenefit plan cash contributions 164 million derived approximately 21 2002 22 2001 operating company contribution international markets principally united kingdom canada australia fluctuations exchange rates foreign currencies may affect results future periods fluctuations average foreign exchange reduced 2002 operating company contribution approximately 1 cannot accurately predict fluctuations foreign exchange rates 10 change average exchange rates foreign currencies 2002 average rates would resulted change operating company contribution approximately 19 million 2 pending litigation tobacco litigation indemnification december 22 1994 company sold atco subsidiary bw whollyowned subsidiary bat industries plc connection sale bw atco since merged bw indemnitor agreed indemnify company claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco indemnitor complied terms indemnification agreement since 1994 company aware inability part indemnitor satisfy indemnity obligations company defendant numerous actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably management unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however management believes number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor management believes pending actions material adverse effect upon results operations cash flows financial condition company believes meritorious defenses company indemnified previously mentioned indemnification agreement litigation increasing volume asbestosrelated personal injury litigation united states generally subsidiary company moen incorporated named defendant approximately 110 cases claiming personal injury asbestos suits name multiple defendants cases excess 75 defendants named addition moen none cases identify moen products premises cause alleged injury plaintiffs identified possible predict outcome pending litigation possible actions could decided unfavorably management believes meritorious defenses actions material adverse effect upon results operations cash flows financial condition company actions vigorously contested addition lawsuits described company subsidiaries defendants lawsuits associated business operations possible predict outcome pending actions litigation possible actions could decided unfavorably management believes meritorious defenses actions material adverse effect upon results operations cash flows financial condition company actions vigorously contested environmental matters along responsible parties subsidiaries face claims relating protection environment february 13 2003 various subsidiaries designated potentially responsible parties superfund similar state laws 58 instances reached settlements 40 instances believe cost complying present environmental protection laws considering estimated recoveries either responsible parties insurance material adverse effect upon results operations cash flows financial condition december 31 2002 2001 accrued 506 million 517 million respectively cover matters related party transactions future brands llc 2001 companys spirits wine business completed transactions vin sprit ab sweden creating joint venture named future brands llc distribute companies spirits wine brands united states part forming joint venture spirits wine business event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2002 2001 jbbco outstanding obligations result arrangement jbbcos transactions future brands amounted sales 5156 million 4987 years ended december 31 2002 2001 respectively accounts receivable 688 million 920 million december 31 2002 2001 respectively accounts payable 156 million 237 million december 31 2002 2001 respectively investment 117 million 94 million december 31 2002 2001 respectively addition company accrued liabilities future brands amounting 291 million 45 million december 31 2002 2001 respectively maxxium international bv 1999 spirits wine business formed international sales distribution joint venture named maxxium international bv remycointreau highland distillers began operating august 1999 distribute sell spirits key markets outside united states result forming joint venture jbbw guaranteed certain credit facilities bank loans entered maxxium amount totaling 66 million 57 million outstanding december 31 2002 december 31 2001 guarantees totaled 55 million 48 million outstanding jbbw also executed shareholder loan facility loan facility maxxium amounts outstanding loan facility either december 31 2002 december 31 2001 loan facility expires december 31 2003 jbbcos transactions maxxium included following sales 1791 million 1682 million 1600 million years ended december 31 2002 2001 2000 respectively accounts receivable 346 million 395 million december 31 2002 2001 respectively accounts payable 123 million 61 million december 31 2002 2001 respectively investment 643 million 630 million december 31 2002 2001 respectively recently issued accounting standards april 2002 financial accounting standards board fasb issued statement financial accounting standards 145 sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections statement rescinds statement financial accounting standards 4 reporting gains losses extinguishment debt statement financial accounting standards 44 accounting intangible assets motor carriers statement financial accounting standards 64 extinguishments debt made satisfy sinkingfund requirements statement requires gains losses debt extinguishments used part companys risk management strategy classified income operations rather extraordinary items net tax company apply provisions sfas 145 prospectively debt extinguishments beginning 2003 july 30 2002 fasb issued statement financial accounting standard 146 sfas 146 accounting costs associated exit disposal activities sfas 146 requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered sfas 146 include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 also supercedes entirety previous accounting guidance provided emerging issues task force issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 effective exit disposal activities initiated december 31 2002 company apply provisions sfas 146 prospectively exit disposal activities beginning 2003 november 2002 fasb issued interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation expands accounting guidance statement financial accounting standards nos 5 57 107 incorporates without change provisions fin 34 superceded interpretation elaborates existing disclosure requirements guarantees including loan guarantees standby letters credit also clarifies time company issues guarantee company must recognize initial liability fair market value obligations assumes guarantee must disclose information interim annual financial statements company apply initial recognition measurement provisions prospective basis guarantees issued modified 2003 addition company applied disclosure requirements financial statements year ended december 31 2002 january 2003 fasb issued interpretation 46 fin 46 consolidation variable interest entities objective fin 46 improve financial reporting companies involved variable interest entities prior fin 46 companies generally included another entity consolidated financial statements controlled entity voting interests fin 46 changes requiring variable interest entity consolidated company subject majority risk loss variable interest entitys activities entitled receive majority entitys residual returns consolidation primary beneficiary assets liabilities results activities variable interest entities provide complete information resources obligations risks opportunities consolidated company critical accounting policies financial reporting release 60 cautionary advice regarding disclosure critical accounting policies requires registrants including company include discussion critical accounting policies methods used preparation financial statements believe following critical accounting policies affect significant judgments estimates used preparation consolidated financial statements allowances doubtful accounts trade receivables stated less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers potential insolvency early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns 658 million 610 million december 31 2002 december 31 2001 respectively alternatively provided allowance 050 net sales customers cash discounts returns allowances 2 yearend customer receivables doubtful accounts allowance discounts doubtful accounts returns would approximately 40 million december 31 2002 2001 respectively inventories priced lower cost principally firstin firstout average minor amounts lastin firstout market accordance generally recognized trade practice bulk whiskey inventories classified current assets although majority inventories due duration aging processes ordinarily sold within one year property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed estimated useful lives related assets follows longlived assets accordance adoption january 2002 statement financial accounting standards 144 sfas 144 accounting impairment disposal longlived assets longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group comparison indicates impairment amount impairment typically calculated using discounted expected future cash flows discount rate applied cash flows based companys weightedaverage cost capital represents blended aftertax costs debt equity adoption sfas 144 impact company intangibles july 2001 financial accounting standards board issued statement financial accounting standards 142 goodwill intangible assets adopted requirements sfas 142 january 1 2002 sfas 142 requires goodwill tested impairment annual basis certain circumstances written impaired rather amortized previous standards required addition sfas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life deemed tradenames currently anticipated contribute cash flows company indefinitely indefinitelived intangible assets amortized required evaluated reporting period determine whether indefinite useful life appropriate evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates rate used determining discounted cash flows rate corresponding cost capital risk adjusted necessary estimated cash flows determined disaggregating business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill impairment losses goodwill charged operations impairment losses limited carrying value goodwill represent excess sum carrying value net assets tangible identifiable intangibles goodwill discounted cash flows business evaluated determining estimated future cash flows consider current projected future levels income well business trends prospects market economic conditions accordance accounting policy fourth quarter 2000 recorded noncash writedown goodwill 5026 million 4873 million aftertax 309 per share office products action resulted significant shortfall office products earnings softening conditions office products industry ongoing repositioning process led implementation additional restructuring plans conjunction ongoing review carrying value identifiable intangibles prescribed statement financial accounting standards statement 121 accounting impairment longlived assets longlived assets disposed december 2001 company recorded noncash writedown identifiable intangibles 733 million 671 million tax 44 cents basic 43 cents diluted per share writedown recognized diminished fair values select identifiable intangibles resulting restructuring office products consolidation noncore tradenames home products writedowns business segment office products 644 million home products 89 million warranty reserves offer customers various warranty terms based upon type product sold addition offer extended warranty terms products sell reconciliation beginning ending balances warranty reserves year ended december 31 2002 follows employee benefit plans provide range benefits employees retired employees including pensions postretirement postemployment health care benefits record annual amounts relating plans based calculations specified generally accepted accounting principles include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current rates trends deemed appropriate required united states generally accepted accounting principles effect modifications generally recorded amortized future periods believe assumptions utilized recording obligations plans reasonable based experience advice actuaries continue monitor assumptions market conditions warrant expect pension expense approximately 32 million 37 million postretirement benefit expense approximately 10 million 15 million 2003 25 basis point ie 025 change discount rate assumption would lead increase decrease pension expense postretirement benefit expense approximately 3 million 1 million respectively 2003 revenue recognition accordance staff accounting bulletin 101 recognize revenue products shipped customers net applicable provisions discounts returns allowances also provide estimate potential bad debt time revenue recognition amounts billed shipping handling classified net sales consolidated income statement costs incurred shipping handling classified advertising selling general administrative expenses customer program costs generally recognize customer program costs either net sales customers category advertising selling general administrative expenses time program initiated andor revenue recognized costs generally recognized net sales customers include limited general customer program generated expenses cooperative advertising programs volume allowances shared media promotional allowances costs generally recognized advertising selling general administrative expenses include point sale materials store service fees stockbased compensation apply accounting principles board apb opinion 25 accounting stock issued employees related interpretations accounting stock options accordingly compensation expense recognized stock option plans statement financial accounting standards 148 sfas 148 accounting stockbased compensation transition disclosure requires disclosure pro forma net income pro forma earnings per share amounts compensation expense recognized required disclosure sfas 148 allows use fairvalue method measure compensation expense accordingly adopted use blackscholes optionpricing model determine compensation expense disclosure purposes model requires use following assumptions expected dividend yield expected volatility riskfree interest rate expected term weightedaverage fair value options granted year ended december 31 2002 2001 2000 1163 891 615 respectively per option based upon range provided assumptions utilized alternative fairvalues per option would materially differed fair values listed derivative financial instruments effective january 1 2001 adopted statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities related amendment statement financial accounting standards 138 sfas 138 accounting certain derivative instruments certain hedging activities statements establish accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities requires recognition derivatives either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings impact adoption sfas 133 sfas 138 january 1 2001 material derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized years ended december 31 2002 2001 06 million deferred gain amounts reclassified cost sales company estimates 11 million derivative loss included oci december 31 2002 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions principal currencies hedged include pound sterling euro canadian dollar australian dollar interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes swaps involve exchange fixed variable interest rate payments without exchanging notional principal amounts record payments receipts agreements adjustments interest expense december 31 2002 2001 outstanding interest rate swap agreements cost initiatives continuously evaluate productivity product lines existing asset base actively seek identify opportunities improve cost structure future opportunities may involve among things reorganization operations relocation manufacturing assembly locations generally lower costs implementing significant cost reduction efficiency opportunities could result charges 2001 compared 2000 net sales net sales decreased 758 million 1 decrease principally caused volume declines certain existing product lines primarily office home golf segments sale ukbased privatelabel scotch business october 2001 well unfavorable foreign exchange 72 million factors partly offset introduction new products line extensions higher average selling prices additionally result establishment vs new us subsidiary exclusive importer vs products revenues interim distribution agreement longer recorded spirits wine business january 1 2002 percentage decrease net sales would greater net impact revenues recorded interim distribution agreement vs 2001 revenues uk privatelabel scotch business either 2001 2000 excluded cost products sold cost products sold increased 393 million 1 due substantial adverse operating leverage office products business excise taxes spirits wine excise taxes spirits wine increased 77 million 2 increase due principally increase bourbon volumes united states impact revenues recorded interim distribution agreement vs partly offset absence uk excise taxes final three months 2001 following sale ukbased scotch whisky business october 2001 advertising selling general administrative expenses advertising selling general administrative expenses decreased 558 million 4 cost savings achieved future brands joint venture established june 2001 restructuring actions cost containment initiatives across operations particularly office products business amortization intangibles amortization intangibles decreased 169 million 21 due writedown december 2000 goodwill office products business writedown identifiable intangibles goodwill 2001 record noncash writedown identifiable intangibles 733 million 671 million aftertax 44 cents basic 43 cents diluted per share writedown recognized diminished fair values select identifiable intangibles resulting restructuring office products consolidation noncore tradenames home products writedowns business segment office products 644 million home products 89 million 2000 recorded noncash writedown goodwill 5026 million 4873 million aftertax 309 per share office products action resulted significant shortfall office products earnings softening conditions office products industry ongoing repositioning process led implementation additional restructuring plans restructuring charges year ended december 31 2001 recorded pretax restructuring charges 454 million 298 million tax charges principally related product line discontinuances expenses associated exploration strategic options planned workforce reduction initiatives across operations office products business lease cancellation costs specialty plumbing parts business capacity reductions select technology platforms golf products business year ended december 31 2000 recorded pretax restructuring charges 197 million 125 million tax charges principally related planned employee termination costs asset writeoffs lease cancellation costs interest related expenses interest related expenses decreased 370 million 28 decline primarily reflected lower interest rates 2001 repayment debt using proceeds received vs sale uk privatelabel scotch business income net income net increased zero 574 million year ended december 31 2001 due principally 1 amortization deferred income recognized result contribution assets future brands llc joint venture 2 interest income tax receivable 3 gain sale ukbased scotch whisky business significant components income net years ended december 31 2001 2000 follows income taxes income taxes decreased 822 million 47 decrease due principally 729 million net tax benefit recognized result recapitalization office products business 310 million tax reserve reversal effective income tax rate comparison distorted primarily absence tax benefits writedown goodwill recognition net tax benefit prior year tax reserve reversal excluding items effective income tax rates 379 2001 404 2000 minority interests minority interests increased 64 million 115 million sale june 2001 10 minority interest spirits wine business vs recognition preferred dividends payable vs 2001 net income net income 2001 3860 million 255 basic 249 diluted per share compared net loss 1377 million 88 cents per share 2000 higher net income attributable absence writedown goodwill 2001 lower income taxes net income year ended december 31 2001 includes following net gains charges recognition 729 million net tax benefit recognized result recapitalization office products business 310 million tax reserve reversal 285 million 173 million tax interest income tax refund 166 million 218 million tax gain sale uk privatelabel scotch business 981 million 633 million tax restructuring restructuringrelated charges 733 million 671 million tax writedown identifiable intangibles fourth quarter 2001 recorded noncash writedown identifiable intangibles 733 million 671 million tax 44 cents per basic 43 cents per diluted share writedown recognized diminished fair values select identifiable intangibles resulting restructuring office products consolidation tradenames home products writedowns business segment office products 644 million home products 89 million reported increases deferred income minority interest consolidated subsidiaries december 31 2001 compared december 31 2000 change deferred income arose payment 270 million vs gain access spirits wine businesss us distribution network acquire 49 interest future brands amount amortized income expenses net straightline basis next ten years jbbco event default future brands continuing operating obligations including limited making payments suppliers employees parties joint venture contracts change minority interest resulted payment june 2001 375 million vs acquire 10 equity interest spirits wine business form convertible preferred stock december 2001 recapitalized office products business sale minority interest less 1 common shares business passive investor transaction allowed us access capital tax loss offset gains resulting net tax benefit 729 million 48 cents per basic 47 cents per diluted share additional sale common shares business completed january 2002 coupled common shares sold december recognized minority interest less 2 business additionally transaction resulted substantial capital tax loss carries forward realized event company qualified taxable capital gains october 16 2001 company announced spirits wine business sold ukbased scotch whisky business 280 million cash sale business consisted invergordon privatelabel bulk scotch operations several regional brands uk products included agreement generated sales approximately 235 million including excise taxes company also recorded aftertax gain 218 million 15 cents per basic 14 cents per diluted share home products 2002 compared 2001 net sales improved 4634 million 22 25 billion result acquisition omega holdings inc strong underlying sales growth reflecting share gains robust building remodeling market underlying sales growth also benefited new product introductions line extensions higher volumes certain existing product lines primarily cabinets moen faucets partially offsetting benefits increased rebates five fewer selling days 2002 cabinets business due use 53week 52week business calendar consecutive years well unfavorable foreign exchange 2 million operating company contribution increased 999 million 32 4166 million higher operating company contribution resulted acquisition omega holdings inc higher underlying sales across home businesses positive operating leverage ongoing cost productivity gains april 2002 home products business acquired omega usbased manufacturer custom semicustom cabinetry acquisition broadens cabinet product line providing additional selling opportunities across customers producing purchasing manufacturing efficiencies cost acquisition 538 million result acquisition omega home products business recorded goodwill identifiable intangibles 3499 million 2120 million respectively 2120 million identifiable intangibles consists 1385 million indefinitelived tradenames 735 million customerrelationship intangibles amortized weightedaverage useful life approximately 15 years management expects home products business benefit strength home improvement market expected longterm growth net number us households new home apartment construction continued consolidation customer base home products industry increased price competition continue present challenges us competitors customer consolidation also present opportunities innovative efficient manufacturers home products business may impacted continued uncertain us economic outlook potential impact us housing remodeling markets 2001 compared 2000 net sales decreased 193 million 1 lower volumes certain existing product lines particularly tool storage higher rebates well unfavorable foreign exchange rates 6 million factors largely offset introduction new products line extensions higher average selling prices results tempered events september 11 weak economy including wholesale inventory reductions faucet segment operating company contribution decreased 229 million 7 decrease operating company contribution resulted adverse operating leverage specifically associated specialty plumbing parts unit exiting significant portion lowmargin retail business higher operating expenses unfavorable product mix decrease partly offset higher average selling prices savings outsourcing initiatives spirits wine 2002 compared 2001 net sales decreased 3355 million 25 10 billion principally due divestiture ukbased scotch whisky business october 2001 sales absolut vodka longer recorded interim basis 2002 factors partially offset higher average selling prices jim beam bourbon dekuyper products increased sales beam readytodrink products australia premium superpremium products us favorable foreign exchange 9 million net sales would increased net impact sales absolut recorded interim basis revenues ukbased scotch whisky business 2001 excluded establishment us subsidiary vs exclusive importer vs products revenues expenses interim arrangement longer recorded spirits wine business beginning february 1 2002 operating company contribution decreased 209 million 7 2851 million result absence ukbased scotch whisky business 2002 addition factors impacting decrease increased brand advertising support costs specifically premium superpremium brands us shock liqueur uk lower sales bulk wine lower cooperage income sale used oak barrels lower sales shock uk factors partly offset lower distribution costs united states result future brands joint venture established june 2001 higher comparable sales well favorable foreign exchange 6 million may 31 2001 companys spirits wine business completed transactions vs creating joint venture named future brands distribute initial tenyear period companies spirits wine brands united states companys spirits wine business accounted joint venture using equity method accounting pursuant eitf 9616 future brands consolidated spirits wine business vs substantive participating rights preclude consolidation vs paid 270 million gain access spirits wine businesss us distribution network acquire 49 interest future brands paid 375 million purchase 10 equity interest jbbw form convertible preferred stock shares jbbw convertible preferred stock issued vs convertible 10 jbbw common stock voting power equivalent 10 interest jbbw common stock preferred stock entitled dividend equal greater 10 dividend paid upon jbbw common stock 3 preferred stocks face value 375 million plus unpaid accrued dividends may paid common stock unless unpaid accrued jbbw preferred stock dividends paid vs also received 3year option increase equity stake jbbw additional 99 vs may require company purchase jbbw preferred stock fair value whole part time may 31 2004 upon change control jbbw jbbco certain events company accounted 270 million gain sale 49 future brands deferred income resulting tax sale deferred income tax asset due certain continuing obligations jbbco including limited making payments suppliers employees parties future brands contracts event default future brands june 2001 company began amortizing amounts income taxes straightline basis initial term agreement 10year amortization period based noncancelable 10year term management agreement future brands addition investment future brands vs invested 107 million euros approximately 90 million acquire 25 interest maxxium result investment vs spirits wine business received 82 million dividend maxxium reduced investment joint venture management expects spirits wine business benefit growth premium superpremium spirits market focused product development marketing activities segments negative factors may affect results include possibility excise tax increases increased regulation addition results could impacted continued trend towards consolidation supplier distributor retailer tiers highly competitive spirits wine business continued consolidation may present pricing service challenges spirits wine business competitors may also present opportunities particularly efficient innovative competitors 2001 compared 2000 net sales increased 1407 million 11 principally result absolut vodka revenues recorded spirits wine business interim basis pending establishment vs us subsidiary well volume increases certain existing product lines increase average selling prices jim beam bourbon dekuyper product lines volume increases included gains jim beam premix product australia cordials united kingdom premium superpremium product lines united states benefits partially offset lower average foreign exchange rates year 21 million percentage increase net sales would lower revenues recorded interim distribution agreement vs uk privatelabel scotch business fourth quarter 2000 excluded operating company contribution decreased 31 million 1 due sale uk privatelabel scotch business october 2001 unfavorable foreign exchange rates 8 million decrease partly offset higher average selling prices volume increases certain existing product lines noted lower selling costs result future brands joint venture discussed reported operating company contribution would increased excluded impact uk privatelabel scotch business fourth quarter 2000 foreign exchange golf products 2002 compared 2001 net sales increased 611 million 6 10 billion due successful new products line extensions particularly golf clubs partly offset lower volumes certain existing product lines favorable foreign exchange 06 million operating company contribution increased 13 million 1 1326 million higher sales partly offset increased marketing spending support new product initiatives challenging pricing environment management believes golf products business benefit increasing attraction golf maturing baby boomers longterm low singledigit growth us rounds play competitors significant brand awareness introduced golf balls product offerings past four years golf ball industry experienced increased price competition partially result introductions largely result introduction new titleist pro v1 titleist nxt pinnacle golf balls golf ball business recovered us market share initially lost new competitors 2000 ability companys golf business maintain increase revenues depend upon continued strong innovation marketing including promotion products professional golfers united states golf association usga royal ancient golf club ra establish standards golf equipment used united states outside united states respectively august 6 2002 usga ra announced joint decision unify rule relating golf club head performance usga retain current coefficient restitution limit 830 beginning 2003 ra adopt 830 limit open championship 2008 play ra jurisdictions acushnet company products currently conform usga ra regulations usga ra proposed new rules addressing overall distance standard golf balls golf club head size golf club shaft length details regarding potential rule changes become available cannot determine whether would material effect golf products business andor golf products industry 2001 compared 2000 net sales decreased 187 million 2 principally due unfavorable foreign exchange rates 18 million addition business experienced lower volumes certain existing golf club golf shoe golf glove product lines price competition largely offset increase golf ball volumes introduction new products across product lines sales adversely affected 1 decline rounds played soft economic conditions decline destination travel events september 11 operating company contribution decreased 139 million 10 lower sales discontinuance certain product lines unfavorable foreign exchange 3 million conditions partially offset reduced operating expenses office products 2002 compared 2001 net sales decreased 709 million 6 11 billion primarily due lower volumes united states europe approximately half sales decrease due full year effect discontinued product lines resulting initiatives refocus business around core product categories balance sales decrease caused primarily weakness us european economies sales decrease paperbased time management business price reductions related mix shift privatelabel products addition decrease number office workers negatively impacted demand businesss products introduction new products improved product mix lower customer rebates favorable foreign exchange 12 million partly offset decrease net sales operating company contribution improved 195 million 39 696 million reflecting substantial cost savings achieved business restructuring actions focus profitable product categories office products industry increasingly concentrated small number major customers principally office products superstores large retailers wholesalers contract stationers customer consolidation growth private label products continue increase pricing pressures presenting challenges office products group competitors decided april 2001 divest office products business due weakness overall economy particularly impacted office products industry currently repositioning restructuring business improve financial results longterm value business plan office products group realigning streamlining worldwide operations intensifying focus growing profitable core product categories divesting discontinuing nonstrategic lowreturn product categories reducing overhead expenses excess capacity result plan twelve months ended december 31 2002 recorded total aftertax restructuring restructuringrelated charges 264 million 401 million pre tax complete first phase repositioning program initiate final phase office products repositioning completed restructuring action reduced size business manufacturing distribution facilities approximately onethird also expect provide significant cost savings actions already provided significant working capital improvements expect record additional aftertax charges 25 30 million 40 50 million pre tax complete final phase overall office products repositioning program continue selffunding within office products business 2001 compared 2000 sales decreased 1785 million 13 resulting principally lower volumes united states across product categories including discontinuing certain unprofitable product lines lower average foreign exchange rates 27 million addition us european economic softness demand weakness caused corporate layoffs coupled ongoing inventory reductions major customers prolonged industrywide volume challenges factors partially offset introduction new products higher selling prices select products favorable product mix reduced customer rebates due lower volumes operating company contribution decreased 294 million 37 lower operating company contribution primarily attributable lower sales substantial adverse operating leverage well unfavorable foreign exchange rates 2 million addition unfavorable foreign exchange adversely impacted gross margins due higher purchase costs decrease partly offset reduced operating expenses savings achieved result restructuring initiatives restructuring initiatives resulted onethird reduction headcount since beginning 2000 including 1200 positions 2001 quarterly financial data unaudited millions except per share amounts 1 operating income operating company contribution less corporate administrative expense intangible amortization restructuring restructuringrelated charges writedowns identifiable intangibles goodwill 2 2002 net income basic diluted earnings per common share reflected restructuring restructuringrelated charges 32 million 22 million tax one cent per share see note 15 first quarter restructuring restructuringrelated charges 195 million 129 million tax eight cents per share see note 15 tax benefit 617 million recognized result new irs regulations issued march 2002 reinterpret capital loss disallowance rules enabled company utilize tax loss incurred 1994 offset capital gains 1996 1997 41 cents basic 40 cents diluted per share see note 13 interest income tax benefit 149 million 96 million tax six cents per share see note 13 second quarter restructuring restructuringrelated charges 222 million 143 million tax ten cents basic nine cents diluted per share see note 15 third quarter restructuring restructuringrelated charges 109 million 68 million tax five cents per share see note 15 fourth quarter 3 net sales gross profit restated conform 2002 presentation due reclassification certain expenses previously included selling general administrative expenses accordance emerging issues task force issue 0109 2001 restatement resulted reduction net sales amounting 296 million first quarter 280 million second quarter 296 million third quarter 319 million fourth quarter see note 1 4 2001 net income basic diluted earnings per common share reflected restructuring restructuringrelated charges 423 million 278 million tax 18 cents per share see note 15 310 million tax reserve reversal 20 cents per share second quarter see note 13 restructuring restructuringrelated charges 558 million 355 million tax 24 cents basic 23 cents diluted per share see note 15 net tax benefit 729 million recognized result recapitalization office products business 49 cents basic 48 cents diluted per share see note 3 writedown identifiable intangibles 733 million 671 million tax 45 cents basic 44 cents diluted per share see note 1 interest income tax refund 285 million tax refund 173 million tax 12 cents basic 11 cents diluted per share see note 13 gain sale uk privatelabel scotch business 166 million 218 million tax 15 cents basic 14 cents diluted per share see note 4 fourth quarter financial condition cash flow data net cash provided operating activities net cash provided operating activities 2002 7870 million compared 6387 million 2001 principal reasons increase higher net income 2002 improvements working capital management year ended december 31 2002 free cash flow 4472 million represents cash provided operating activities less capital expenditures net dividends stockholders free cash flow expected decrease approximately 250 million 300 million 2003 due return normalized cash flow increased capital expenditures year ended december 31 2001 free cash flow 2867 million net cash used provided investing activities net cash used investing activities year ended december 31 2002 6008 million compared net cash provided 3397 million year ended december 31 2001 capital expenditures focus capital spending growth initiatives becoming lowest cost producers highest quality products capital expenditures 2002 1943 million compared 2073 million 2001 includes 49 million 2002 related restructuring activities principally land buildings related relocation certain operations mexico currently estimate 2003 capital expenditures approximately 230 million expect generate funds internally acquisitions dispositions joint ventures second quarter 2002 home products business acquired omega holdings inc cash 4330 million addition third quarter 2002 received proceeds 38 million sale nonstrategic product line spirits wine business fourth quarter received net proceeds 148 million sale specialty plumbing parts business home products segment 2001 spirits wine business entered future brands joint venture received proceeds totaling 270 million vs assets contributed received proceeds totaling 280 million sale ukbased scotch whisky business addition spirits wine business acquired longterm distribution rights superpremium tequila brands 2001 65 million 2000 spirits wine business invested 256 million maxxium joint venture toward total investment 110 million net cash used financing activities net cash used financing activities year ended december 31 2002 2191 million compared 9528 million 2001 year ended december 31 2002 increased shortterm debt borrowings net 1225 million partly offset redemption omega debt securities principal amount 100 million repurchased 2711 million 5729400 shares repurchased common stock received proceeds exercise stock options 1354 million increased volume option exercises higher 2002 year dividends paid common dividends 2002 102 per share dividends paid common stockholders 2002 increased 1527 million 1472 million 2001 increase dividend offset lower shares outstanding december 2 2002 dividend payment increased common stock quarterly dividend 8 27 per share indicated annual rate 108 per share financial position december 31 2002 total debt increased 1464 million 11 billion shortterm debt increased 1235 million longterm decreased 1086 million reclassified 1069 million 8 12 notes due october 2003 current liabilities total debttototal capital ratio increased 295 december 31 2002 284 december 31 2001 increase primarily result commercial paper borrowings used finance omega cabinets acquisition december 31 2002 1 billion debt securities available public sale shelf registration securities exchange commission december 31 2002 maintained two credit facilities entered 2001 2002 agreements include 750 million 5year revolving credit agreement expires 2006 500 million 364day revolving credit agreement expires 2003 includes option extend payment one year discretion incremental fee 25 outstanding amount facilities available general corporate purposes including acquisitions share repurchases support shortterm borrowings commercial paper market believe internally generated funds together access global credit markets adequate meet capital needs working capital decreased 3532 million 3884 million december 31 2002 increased shortterm debt reflecting reclassification 1069 million 8 12 notes due october 2003 current liabilities increased commercial paper borrowings used finance omega acquisition well decreased cash inventories principal reasons reduction partly offset lower accounts payable believe 2002 working capital level adequate support continued growth foreign exchange subsidiaries investments various foreign countries principally united kingdom well australia canada therefore changes value currencies countries affect balance sheet cash flow statements translated us dollars interest rates may time enter interest rate swap agreements manage exposure interest rate changes swaps involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense december 31 2002 2001 outstanding interest rate swap agreements interest rates total indebtedness primarily fixed fair market value longterm fixed interest rate debt subject interest rate risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value 9746 million 9517 million total longterm debt including current portion december 31 2002 2001 approximately 10943 million 9803 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity minority interest consolidated subsidiaries minority interest consolidated subsidiaries increased 81 million principally due completion january 2002 second two transactions sell shares whollyowned office products business stockholders equity stockholders equity yearend 2002 increased 2105 million principally due higher net income purchased open market purchases 57 million 75 million shares common stock 2002 2001 respectively contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2002 addition contractual obligations listed also commercial commitments contingently liable december 31 2002 include guarantee certain credit facilities bank loans entered maxxium amount totaling 660 million expires less one year shareholder loan facility executed jbbw maxxium amounting 157 million amounts outstanding expires less one year standby letters credit 641 million 614 million due less one year remaining 27 million due one three years surety bonds 192 million due less one year addition vs holds option may require us repurchase jbbw preferred stock fair value whole part time may 31 2004 upon change control jbbw jbbco certain events contingent commitments expected significant impact liquidity addition obligations described jbbco subsidiary company event default future brands required satisfy certain future brands financial obligations include limited making payments suppliers employees parties future brands contracts item 7aitem 7 management’s discussion analysis financial condition results operations consolidated summary fortune brands inc holding company subsidiaries make sell leading consumer branded products following industries home hardware spirits wine golf equipment office products generate cash earn profits building leading consumer brands grow sales attempt developing new products increasing demand effective marketing campaigns expanding market share developing expanding customer relationships also seek increase profits improving operations enhance productivity cost structures first priority internal growth also strive achieve higher growth higher returns acquisitions dispositions joint ventures finally aim enhance shareholder value initiatives using financial resources repurchase shares pay attractive dividends believe 2003 excellent year broadbased success fortune brands company’s net income 2003 increased 10 5792 million diluted earnings per share increased 13 386 increase profits due primarily benefit strong operating performance aided favorable foreign exchange rates impact acquisitions company’s net sales increased 95 62 billion result increased sales new products extensions existing product lines acquisitions favorable foreign exchange higher average selling prices indicated segments achieved solid performance 2003 • home hardware business achieved strong doubledigit growth operating income 21 sales 15 resulting sustained sales gains kitchen bath cabinets fullyear consolidation growth omega acquisition thermatru successful line extensions new product introductions well productivity improvements • spirits wine business achieved 10 growth operating income 6 growth sales due favorable foreign exchange growth international sales readytodrink products selected price increases us higher sales cordials superpremium spirits • successful advanced technology new products golf brands vastly outperformed industry achieving 11 growth sales significant share gains 7 increase operating income • office business achieved 110 growth operating income despite flat sales benefiting successful cost reduction asset management initiatives well favorable foreign exchange 2004 company well positioned another year excellent performance management believes company benefit following trends businesses • longterm demographics home improvement housing industries particularly kitchen bath segment • continued growth spirits wine market especially premium superpremium segments • effect continued favorable foreign exchange sales profits company also identified following risks challenges may impact business • potential reductions number rounds play overall golf ball demand • potential impact changes interest rates housing market • impact increases commodity costs particularly fuel steel costs • weak conditions leisure travel industry golf spirits wine businesses • continued consolidation company’s trade customers particularly office home hardware businesses • increased competition privatelabel products 2003 compared 2002 net sales net sales increased 5368 million 95 62 billion sales benefited principally increased volume associated line extensions introduction new products golf home hardware businesses 241 million aggregate acquisitions 220 million including omega 2002 favorable foreign exchange 137 million benefits partly offset lower volumes existing product lines office business well divestiture nonstrategic plumbing parts business home hardware november 2002 53 million advertising selling general administrative expenses advertising selling general administrative expenses increased 1279 million 9 increased support cabinet growth golf marketing costs commissions higher sales amortization intangibles amortization intangibles increased 28 million 17 due full year amortization finitelived intangibles 2002 omega acquisition writedown identifiable intangibles recorded writedown identifiable intangibles 120 million 80 million tax recognize diminished values certain trade names conjunction repositioning plans office business restructuring charges 2003 recorded pretax restructuring charges 195 million 138 tax charges principally related consolidation manufacturing distribution facilities employee termination costs office business 173 million pre tax well consolidation ball plant facilities golf business 22 million pre tax 195 million restructuring charges 115 million related disposal assets 69 million employee terminations costs 11 million termination lease agreements income net income net decreased 30 million 407 million components income net years ended december 31 2003 2002 follows income taxes income taxes increased 750 million 35 recorded lower taxrelated gain 2003 compared 2002 reported effective income tax rates twelve months ended december 31 2003 2002 327 283 respectively effective income tax rate affected following items 2003 audit 19931996 tax returns resulted reduction tax expense 35 million recording 29 million tax receivable net decrease tax reserves 6 million 2002 recorded 617 million tax credit resulted new irs regulations reinterpreted capital loss disallowance rules new regulations enabled us utilize previously disallowed capital tax loss offset capital gains taxed 1996 1997 addition 2003 effective rate affected nondeductible noncash restructuring restructuringrelated charges net income net income increased 536 million 10 5792 million due primarily strong broadbased operating performance benefit favorable foreign exchange 23 million lower restructuring charges 16 million impact acquisitions 15 million part offset lower taxrelated gains 2002 350 million 2003 compared 617 million 2002 diluted earnings per share 386 2003 13 2002 earnings per share benefited higher net income share repurchase program pension plans periodic basis evaluate assumptions used determining pension liabilities assets well pension expense based historical returns plan assets current economic conditions time assumptions set december 2002 review economic assumptions underlying pension expense yearend disclosure led reduction weightedaverage discount rate 70 66 weightedaverage expected rate return remained unchanged 83 2002 revisions led increase approximately 3 million pension expense 281 million 2003 december 2003 review economic assumptions led reduction weightedaverage discount rate 66 61 weightedaverage expected rate return remained unchanged 83 management believes assumptions appropriate 2003 revisions result increase pension expense approximately 5 million 2004 2003 total pension plan cash contributions 1235 million 2004 expect make cash contributions approximately 5075 million fund existing pension liabilities definedbenefit plans international performance derived approximately 28 2003 22 2002 operating income international markets principally united kingdom canada australia increase portion operating income attributable international markets resulted partly benefit foreign exchange well higher restructuringrelated charges us 2003 fluctuations exchange rates foreign currencies may affect results future periods fluctuations average foreign exchange rates increased 2003 operating income approximately 4 cannot accurately predict fluctuations foreign exchange rates 10 change average exchange rates foreign currencies 2003 average rates would resulted change operating income approximately 20 million 2 pending litigation tobacco litigation indemnification december 22 1994 company sold atco subsidiary bw whollyowned subsidiary bat industries plc connection sale bw atco since merged bw “indemnitor” agreed indemnify company claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco indemnitor complied terms indemnification agreement since 1994 company aware inability part indemnitor satisfy indemnity obligations company defendant numerous actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably management unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however management believes number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor management believes pending actions material adverse effect upon results operations cash flows financial condition company believes meritorious defenses company indemnified previously mentioned indemnification agreement litigation increasing volume asbestosrelated personal injury litigation united states generally subsidiary company moen incorporated named defendant approximately 160 cases claiming personal injury asbestos suits name multiple defendants cases excess 75 defendants named addition moen possible predict outcome pending litigation possible actions could decided unfavorably management believes meritorious defenses actions material adverse effect upon results operations cash flows financial condition company actions vigorously contested addition lawsuits described company subsidiaries defendants lawsuits associated business operations possible predict outcome pending actions litigation possible actions could decided unfavorably management believes meritorious defenses actions material adverse effect upon results operations cash flows financial condition company actions vigorously contested environmental matters along responsible parties subsidiaries face claims relating protection environment february 17 2004 various subsidiaries designated potentially responsible parties “superfund” similar state laws 59 instances reached settlements 40 instances believe cost complying present environmental protection laws considering estimated recoveries either responsible parties insurance material adverse effect upon results operations cash flows financial condition december 31 2003 2002 accrued 485 million 506 million respectively cover matters related party transactions future brands llc 2001 company’s spirits wine business completed transactions vs vin sprit ab vs creating future brands joint venture distributes companies’ spirits brands united states provides related selling invoicing services future brands receives commission partners services provided part forming joint venture jbbco event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2003 2002 jbbco outstanding obligations result arrangement jbbco’s balances related future brands included following maxxium worldwide bv 1999 spirits wine business formed international sales distribution joint venture named maxxium worldwide bv maxxium distribute sell spirits wine key markets outside united states joint venture partners include remycointreau highland distillers vs jbbco records sales time spirits sold third parties rather time shipment maxxium result forming joint venture company guaranteed certain credit facilities bank loans entered maxxium amount totaling 79 million 69 million outstanding december 31 2003 december 31 2002 guarantees totaled 66 million 57 million outstanding jbbw executed shareholder loan facility loan facility maxxium amounts outstanding loan facility either december 31 2003 december 31 2002 loan facility expires june 30 2006 jbbco’s balances related maxxium included following recently issued accounting standards january 2003 fasb issued interpretation 46 fin 46 “consolidation variable interest entities” objective fin 46 improve financial reporting companies transactions involving variable interest entities prior fin 46 companies generally included another entity consolidated financial statements controlled entity voting interests fin 46 changes requiring variable interest entity consolidated company subject majority risk loss variable interest entity’s activities entitled receive majority entity’s residual returns consolidation primary beneficiary assets liabilities results activities variable interest entities provide complete information resources obligations risks opportunities consolidated company fin 46 effective newly created variable interest entities january 31 2003 effective existing variable interest entities october 1 2003 december 2003 fasb issued revision fin 46 46r clarify certain provisions fin 46 exempt certain entities requirements special effective dates apply enterprises fully partially applied interpretation 46 prior issuance 46r otherwise application 46r fin 46 required financial statements public entities interests structures specialpurpose entities periods ending december 15 2003 company still assessing impact 46r fin 46 company’s results financial position november 2003 fasb issued staff position fas 1503 fsp 1503 “effective date disclosure transition mandatorily redeemable financial instruments certain nonpublic entities certain mandatorily redeemable noncontrolling interest fasb statement 150 “accounting certain financial instruments characteristics liabilities equity’ ” fsp 1503 defers effective date certain mandatorily redeemable noncontrolling interests indefinitely pending fasb action initial adoption sfas 150 impact company’s results financial position company evaluate impact additional requirements standard finalized january 2004 fasb issued financial accounting standards 1061 sfas 1061 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fas 1061 permits sponsor postretirement health care plan provides prescription drug benefit make onetime election defer accounting effects medicare prescription drug improvement modernization act 2003 “act” company elected defer accounting effects act fasb issues guidance account federal subsidy provided plan sponsors act result accompanying financial statements notes reflect effects act however upon final issuance accounting company could required change previously reported information critical accounting policies estimates financial reporting release 60 “cautionary advice regarding disclosure critical accounting policies” requires registrants including company include discussion “critical” accounting policies methods used preparation financial statements company makes estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe following company’s critical accounting policies due significant judgments estimates used preparing consolidated financial statements company regularly reviews assumptions estimates based historical experience allowances doubtful accounts trade receivables stated less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns 635 million 658 million december 31 2003 december 31 2002 respectively alternatively provided allowance 050 net sales customers cash discounts returns allowances 3 yearend customer receivables doubtful accounts allowance discounts doubtful accounts returns would approximately 55 million december 31 2003 49 million december 31 2002 actual rates used companyspecific based upon nature business inventories priced lower cost principally firstin firstout average minor amounts lastin firstout market accordance generally recognized trade practice bulk whiskey inventories classified current assets although majority inventories due duration aging processes ordinarily sold within one year inventory reserves recorded obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns specific identification items components finished goods property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed estimated useful lives related assets follows longlived assets accordance statement financial accounting standards 144 sfas 144 “accounting impairment disposal longlived assets” longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based management’s best estimate time future cash flow derived recent business projections comparison indicates impairment amount impairment calculated using quoted market price unavailable using discounted expected future cash flows discount rate applied cash flows based company’s weightedaverage cost capital represents blended aftertax costs debt equity intangibles accordance statement financial accounting standards 142 sfas 142 “goodwill intangible assets” goodwill tested impairment annual basis certain circumstances written impaired addition sfas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life deemed tradenames currently anticipated contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated reporting period determine whether indefinite useful life appropriate evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates rate used determining discounted cash flows rate corresponding cost capital risk adjusted appropriate estimated cash flows determined disaggregating business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill impairment losses goodwill charged operations impairment losses limited carrying value goodwill represent excess sum carrying value net assets tangible identifiable intangibles goodwill discounted cash flows business evaluated determining estimated future cash flows consider current projected future levels income well business trends prospects market economic conditions indefinitelived intangibles reviewed annually whenever market business events indicate may potential impact intangible management developing executing shortterm longterm plans considers implications external eg market growth pricing competition technology internal factors eg product costs margins support expenses capital investment potential impact cash flows business near long term well impact identifiable intangible asset associated business based recent business results consideration significant external internal factors resulting business projections indefinitelived intangible assets associated segment reviewed determine whether likely remain indefinitelived whether finite life appropriate addition based events period future expectations management considers whether potential impairment exists required sfas 142 predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize excess earnings methodology establish reasonable royalty rate excess earnings represented actual projected earnings divided reasonable pretax return net tangible assets additionally independent valuation experts used periodic review testing management’s assumptions relative significant trade valuations lives independent research market competitive dynamics conjunction ongoing review carrying value identifiable intangibles year ended december 31 2003 company recorded noncash writedown identifiable intangibles 120 million 80 million tax five cents basic diluted per share recognize diminished values certain trade names conjunction repositioning plans office business 2001 company recorded noncash writedown identifiable intangibles 733 million 671 million tax 44 cents basic 43 cents diluted per share writedown recognized diminished fair values certain identifiable intangibles resulting restructuring office business consolidation noncore tradenames home hardware writedowns business segment office 644 million home hardware 89 million warranty reserves offer customers various warranty terms based upon type product sold warranty expense determined accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category warranty expense generally recorded time sale reconciliation beginning ending balances warranty reserves years ended december 31 2003 2002 2001 follows 1 reclassified 2002 2001 warranty reserve activity conform 2003 disclosure alternatively provided provision 05 net sales customers warranty provision would 274 million 249 million 249 million december 31 2003 2002 2001 respectively employee benefit plans provide range benefits employees retired employees including pensions postretirement postemployment health care benefits record annual amounts relating plans based calculations specified generally accepted accounting principles include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current rates trends deemed appropriate required united states generally accepted accounting principles effect modifications generally recorded amortized future periods believe assumptions utilized recording obligations company’s plans reasonable based experience advice actuaries continue monitor assumptions market conditions warrant 2002 pension postretirement expenses 219 million 101 million respectively 2003 pension postretirement expenses 281 million 115 million respectively expect pension expense approximately 35 million postretirement benefit expense approximately 15 million 2004 25 basis point change 025 discount rate assumption would lead increase decrease pension expense postretirement benefit expense approximately 3 million 1 million respectively 2004 25 basis point change longterm rate return used accounting company’s pension plans would 2 million impact pension expense revenue recognition accordance staff accounting bulletin 104 “revenue recognition” recognize revenue products shipped customers net applicable provisions discounts returns allowances criteria recognition revenue persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility reasonably assured also provide estimate potential bad debt time revenue recognition amounts billed shipping handling classified “net sales” consolidated income statement costs incurred shipping handling classified “advertising selling general administrative expenses” customer program costs customer programs incentives common practice many businesses customer program costs incentives including rebates promotion volume allowances accounted reductions gross sales costs recorded time sale based management’s best estimates based historical experience type program customer management periodically reviews accruals rebates allowances accruals adjusted circumstances typically expected volume deviations indicate stockbased compensation apply accounting principles board opinion 25 “accounting stock issued employees” related interpretations accounting stock options accordingly compensation expense recognized stock option plans statement financial accounting standards 148 sfas 148 “accounting stockbased compensation transition disclosure” requires disclosure pro forma net income pro forma earnings per share amounts compensation expense recognized required disclosure sfas 148 allows use fairvalue method measure compensation expense accordingly adopted use blackscholes optionpricing model determine compensation expense disclosure purposes model requires use following assumptions expected dividend yield expected volatility riskfree interest rate expected term weightedaverage fair value options granted years ended december 31 2003 2002 2001 1340 1163 891 respectively per option based upon range provided assumptions utilized alternative fairvalues per option would materially differed fair values listed example change expected term 45 5 years would 077 6 impact weightedaverage fair value options granted year ended december 31 2003 sfas 148 applied pro forma diluted eps impact would decrease 012 010 per share respectively 2003 2002 2001 derivative financial instruments accordance statement financial accounting standards 133 sfas 133 “accounting derivative instruments hedging activities” related amendment statement financial accounting standards 138 sfas 138 “accounting certain derivative instruments certain hedging activities” derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized years ended december 31 2003 2002 respectively 33 million deferred losses 06 million deferred gains reclassified cost sales company estimates 11 million derivative loss included oci december 31 2003 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions principal currencies hedged include pound sterling euro canadian dollar australian dollar interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amounts record payments receipts agreements adjustments interest expense december 31 2003 outstanding interest rate swap agreements aggregate notional principal amount 200 million swap agreements based outstanding 2875 notes due 2006 allow swap agreements classified fair value hedge accordance sfas 133 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate december 31 2002 outstanding interest rate swap agreements cost initiatives continuously evaluate productivity supply chains existing asset base actively seek identify opportunities improve cost structure future opportunities may involve among things reorganization operations relocation manufacturing assembly locations generally lower costs efficient sourcing products components third party suppliers implementing significant cost reduction efficiency opportunities could result charges 2002 compared 2001 net sales net sales increased 1181 million 2 57 billion sales benefited acquisition omega holdings inc usbased manufacturer custom semicustom cabinetry increased volumes introduction new products line extensions principally golf business favorable foreign exchange 20 million benefits partly offset lower volumes certain existing product lines golf office businesses sale ukbased scotch whisky business october 2001 absence absolut revenues recorded interim basis 2001 five fewer selling days 2002 cabinets business due use 53week 52week business calendar consecutive years excise taxes spirits wine excise taxes spirits wine decreased 493 million 14 decrease principally due absence absolut revenues recorded interim basis 2001 absence ukbased scotch whisky business 2002 company’s spirits wine business incurred federal excise taxes us addition us incurred excise taxes uk first nine months 2001 prior sale ukbased scotch whisky business advertising selling general administrative expenses advertising selling general administrative expenses increased 852 million 6 higher advertising marketing expenditures pension expense partially offset cost savings achieved future brands llc joint venture established june 2001 restructuring actions cost containment initiatives across operations particularly office business amortization intangibles amortization intangibles decreased 466 million 74 due adoption financial accounting standards board’s statement financial accounting standards 142 “goodwill intangible assets” sfas 142 january 1 2002 writedown identifiable intangibles goodwill 2002 record writedown either identifiable intangibles goodwill 2001 record noncash writedown identifiable intangibles 733 million 671 million aftertax 44 cents basic 43 cents diluted per share writedown recognized diminished fair values select identifiable intangibles resulting restructuring office business consolidation noncore tradenames home hardware write downs business segment office 644 million home hardware 89 million restructuring charges year ended december 31 2002 recorded pretax restructuring charges 459 million 298 million tax charges principally related planned workforce reduction costs asset writeoffs costs associated consolidation manufacturing facilities primarily office business 343 million pre tax sale certain nonstrategic product lines home hardware 109 million pre tax spirits wine 07 million pre tax businesses year ended december 31 2001 recorded pretax restructuring charges 454 million 298 million tax charges principally related product line discontinuances expenses associated exploration strategic options planned workforce reduction initiatives across operations office business 272 million pre tax lease cancellation costs specialty plumbing parts business 152 million pre tax capacity reductions select technology platforms golf business 30 million pre tax interest expense interest expense decreased 227 million 23 decrease primarily reflected lower average borrowings repaid shortterm debt using proceeds received vs sale ukbased scotch whisky business increased operating cash flow well lower interest rates partially offset commercial paper borrowings used finance omega acquisition income net income net decreased 137 million 437 million year ended december 31 2002 due principally absence 166 million gain sale ukbased scotch whisky business lower interest income tax receivable 2002 compared 2001 components income net years ended december 31 2002 2001 follows income taxes income taxes increased 1198 million 127 reported effective income tax rate years ended december 31 2002 2001 283 192 respectively increase principally due higher operating income lower interest expense partially offset tax credit 617 million recorded june 2002 effective income tax rate comparison impacted recognition second quarter 2002 617 million tax credit resulting new irs regulations reinterpret capital loss disallowance rules new regulations enabled us utilize capital loss incurred 1994 offset capital gains taxed 1996 1997 factors affecting effective income tax rate comparison include reversal 310 million tax reserve years 1990 1992 second quarter 2001 729 million net tax benefit recognized result recapitalization office business fourth quarter 2001 excluding taxrelated items effective income tax rates years ended december 31 2002 2001 365 379 respectively lower effective tax rate principally reflects lower goodwill amortization related adoption sfas 142 minority interests minority interests increased 49 million 43 principally recognition five additional months preferred dividends payable vs 10 interest jbbw 2002 compared 2001 net income net income 5256 million 351 basic 341 diluted per share year ended december 31 2002 compared net income 3860 million 255 basic 249 diluted per share year ended december 31 2001 increase net income 1396 million principally due higher sales lower cost sales lower intangible amortization interest expense partly offset higher income taxes increased advertising marketing expenditures higher pension expense net income year ended december 31 2002 included following net gains charges recognition 617 million tax credit related interest income 149 million 96 million tax 558 million 362 million tax restructuring restructuringrelated charges addition net income year ended december 31 2001 included following net gains charges recognition 729 million net tax benefit related interest income 285 million 173 million tax reversal 310 million tax reserve longer required 166 million 218 million tax gain sale ukbased scotch whisky business 981 million 633 million tax restructuring restructuringrelated charges 733 million 671 million tax writedown certain identifiable intangibles home hardware 2003 compared 2002 net sales increased 3677 million 15 29 billion increase attributable strong underlying operating performance fullyear consolidation omega acquisitions thermatru american lock capital cabinet 163 million acquisitions aggregate successful line extensions new product introductions 157 million principally cabinets faucets well expanded customer relationships sales growth tempered absence divested plumbing parts business 53 million soft retail volume tool storage business operating income increased 828 million 21 4813 million higher sales productivity improvements absence lowreturn plumbing product lines sold 2002 4 million partially offset higher operating expenses including increased commissions higher sales additional support cabinet business growth increased amortization instore cabinet displays november 2003 home hardware business acquired thermatru holdings inc leading manufacturer residential entry door systems united states acquisition price 9240 million net cash june 2003 home hardware business acquired capital cabinet corporation usbased manufacturer kitchen bath cabinets april 2003 home hardware business acquired american lock company largest usbased manufacturer solid body commercial padlocks april 2002 home hardware business acquired omega usbased manufacturer custom semicustom cabinetry acquisition broadened cabinet product line providing additional selling opportunities across customers producing purchasing manufacturing efficiencies cost acquisition 538 million october 2003 waterloo announced plans close muskogee ok manufacturing facility 2004 related action expect record approximately 7 million 12 million pre tax restructuring restructuringrelated charges management expects home hardware business continue benefit strong demographic trends supporting home repair remodeling new home construction markets particularly kitchen bath products residential door systems trends include growth number us households increases household wealth aging housing stock home hardware business may impacted longterm us economic conditions including mortgage interest rates potential impact us housing remodeling markets addition continue face pricing pressure associated consolidation industry customer base consolidation may also present opportunities business 2002 compared 2001 net sales improved 4634 million 22 25 billion result acquisition omega strong underlying sales growth reflecting share gains robust building remodeling market underlying sales growth also benefited new product introductions line extensions higher volumes certain existing product lines primarily cabinets moen faucets partially offsetting benefits increased rebates five fewer selling days 2002 cabinets business due use 53week 52week business calendar consecutive years well unfavorable foreign exchange 2 million operating income increased 1478 million 59 3985 million higher operating income resulted acquisition omega holdings inc higher underlying sales across home hardware businesses positive operating leverage ongoing cost productivity gains reduction intangible amortization due adoption sfas 142 lower restructuring restructuringrelated charges absence goodwill writedowns spirits wine 2003 compared 2002 net sales increased 585 million 6 11 billion benefit foreign exchange 35 million growth underlying sales 17 million primarily jim beam readytodrink products australia higher sales dekuyper cordials superpremium spirits us higher pricing jim beam bourbon benefits partly offset decreased volumes nonpremium products us operating income increased 265 million 10 3028 million benefiting favorable foreign exchange 22 million higher revenues partly offset increased selling marketing administration costs 12 million july 2003 spirits wine business acquired wild horse winery californiabased producer premium ultrapremium wines december 2003 spirits wine business extended rights manufacture distribute gilbey’s gin vodka additional 20 years acquired trademark rights kamchatka vodka california may 31 2001 company’s spirits wine business completed transactions vs creating joint venture named future brands distribute initial tenyear period companies’ spirits brands united states company’s spirits wine business accounted joint venture using equity method accounting future brands consolidated spirits wine business vs substantive participating rights preclude consolidation vs paid 270 million gain access spirits wine business’s us distribution network acquire 49 interest future brands paid 375 million purchase 10 equity interest jbbw company amortizes 270 million gain sale 49 future brands deferred income straightline basis initial tenyear term agreement addition investment future brands vs acquired 25 interest maxxium result investment vs spirits wine business received 82 million dividend maxxium thereby reducing investment joint venture management expects spirits wine business continue benefit growth premium superpremium spirits market focused product development marketing activities factors could adversely affect results include possibility excise tax increases increased regulation class actions andor litigation pricing activity key brands continued soft demand restaurant bar channel addition spirits wine industry could impacted continued trend towards consolidation supplier distributor retailer tiers 2002 compared 2001 net sales decreased 3355 million 25 10 billion principally due divestiture ukbased scotch whisky business october 2001 sales absolut vodka longer recorded interim basis 2002 factors partially offset higher average selling prices jim beam bourbon us dekuyper products increased sales beam readytodrink products australia sales premium superpremium products us favorable foreign exchange 9 million establishment us subsidiary vs exclusive importer vs’ products revenues expenses interim arrangement longer recorded spirits wine business beginning february 1 2002 operating income decreased 94 million 3 2763 million result absence ukbased scotch whisky business 2002 addition factors impacting decrease increased brand advertising support costs specifically premium superpremium brands us shock liqueur uk lower sales bulk wine lower cooperage income sale used oak barrels lower sales shock uk factors partly offset lower distribution costs united states result future brands joint venture established june 2001 higher comparable sales favorable foreign exchange 6 million lower intangible amortization result adoption sfas 142 golf 2003 compared 2002 net sales increased 1141 million 11 billion increase led significant share gains across product categories benefiting line extensions introduction successful new golf club golf ball products 78 million well favorable foreign exchange 30 million favorable product mix golf business achieved sales growth share gains despite 3 reduction rounds play us operating income increased 93 million 7 1391 million benefiting higher sales favorable foreign exchange 4 million increase partially offset higher marketing costs well restructuringrelated charges 6 million april 2003 golf business announced plans consolidate three golf ball manufacturing facilities two newest production facilities believe consolidation create manufacturing efficiencies preserving capacity meet expected future demand consolidation recorded restructuring restructuringrelated charges 35 million 58 million pre tax 2004 expect record additional restructuring restructuringrelated charges approximately 4 million 7 million pre tax complete restructuring activities us golf industry negatively impacted past four years decrease rounds play management believes decrease due combination weak economic conditions poor weather conditions decrease destination travel corporate spending lower rounds play entrance significant competitors category led increased competition despite market conditions company’s us market share golf balls clubs shoes gloves accessories increased future success company’s golf business depend upon continued strong innovation marketing across product categories united states golf association usga royal ancient golf club ra establish standards golf equipment used united states outside united states respectively usga ra enacted new rules restricting golf club head size golf club shaft length proposed new rules addressing overall distance standard golf balls newly enacted proposed rules combined existing rules could reduce golf products industry’s ability innovate deploy new technologies potentially impacting golf business 2002 compared 2001 net sales increased 611 million 6 10 billion due successful new products line extensions particularly golf clubs partly offset lower volumes certain existing product lines favorable foreign exchange 06 million operating income increased 57 million 5 1298 million higher sales absence restructuring restructuringrelated charges 2002 partly offset increased marketing spending support new product initiatives challenging pricing environment office 2003 compared 2002 net sales 11 billion flat last year sales benefited favorable foreign exchange 56 million new products offset lower sales us uk due soft industry conditions including higher us whitecollar unemployment continued share gain privatelabel products operating income increased 302 million 110 576 million benefiting business’s ongoing repositioning program including successful cost reductions well favorable foreign exchange 7 million since 2001 repositioning restructuring office business improve financial results longterm value business plan office business significantly realigned streamlined worldwide operations intensified focus growing profitable core product categories reduced overhead expenses excess capacity related final phase office repositioning 2003 recorded total aftertax restructuring restructuringrelated charges 209 million 279 million pre tax expect record additional aftertax charges approximately 15 million 20 25 million pre tax complete final phase first six months 2004 completed restructuring program reduced business’s manufacturing distribution square footage approximately forty percent providing significant cost savings responsive supply chain actions combined major working capital improvements improved business’s return capital office products industry increasingly concentrated small number major customers principally office products superstores large retailers wholesalers contract stationers continued customer consolidation share growth privatelabel products increasing pricing pressures may adversely affect margins office group competitors 2002 compared 2001 net sales decreased 709 million 6 11 billion primarily due lower volumes united states europe approximately half sales decrease due fullyear effect discontinued product lines resulting initiatives refocus business around core product categories balance sales decrease caused primarily weakness us european economies sales decrease paperbased time management business price reductions related mix shift privatelabel products addition decrease number office workers negatively impacted demand business’s products introduction new products improved product mix lower customer rebates favorable foreign exchange 12 million partly offset decrease net sales operating income improved 1177 million 130 274 million reflecting substantial cost savings achieved business’s restructuring actions repositioning focus profitable product categories well absence 2001’s goodwill writedown lower restructuring restructuringrelated charges lower intangible amortization due adoption sfas 142 writedown intangibles 2001 quarterly financial data fortune brands inc subsidiaries unaudited financial condition cash flow data net cash provided operating activities company’s cash generation continued strong 2003 net cash provided operating activities 2003 7907 million compared 7870 million 2002 principal reasons change higher net income partially offset lower working capital 2003 free cash flow year ended december 31 2003 free cash flow 4419 million represents cash provided operating activities less capital expenditures net dividends stockholders free cash flow targeted range 400 million 2004 free cash flow years ended december 31 2003 2002 2001 1 free cash flow measure derived generally accepted accounting principles gaap considered substitute measure derived accordance gaap management believes free cash flow provides investors helpful supplemental information company’s ability fund internal growth make acquisitions repay debt repurchase common stock measure may also inconsistent similar measures presented companies net cash used investing activities net cash used investing activities year ended december 31 2003 12296 million compared net cash used 6008 million year ended december 31 2002 capital expenditures focus capital spending growth initiatives becoming lowest cost producers highest quality products capital expenditures 2003 194 million essentially 2002 currently estimate 2004 capital expenditures range 225 250 million expect generate funds internally acquisitions dispositions joint ventures fourth quarter 2003 home hardware business acquired thermatru holdings inc net cash 9240 million addition subsidiaries also acquired wild horse winery capital cabinet corporation american lock company renewed licenses gilbey’s gin vodka acquired trademark rights kamchatka vodka brand california aggregate cost acquisitions 1237 million 2002 home hardware business acquired omega holdings inc 4330 million cash 1000 million subsequentlyretired debt addition received proceeds sale nonstrategic product line spirits wine business sale specialty plumbing parts business home hardware segment aggregating 186 million 2001 spirits wine business entered future brands joint venture received proceeds totaling 270 million vs assets contributed received proceeds totaling 280 million sale ukbased scotch whisky business addition spirits wine business acquired longterm distribution rights superpremium tequila brands 2001 65 million net cash provided used financing activities net cash provided financing activities year ended december 31 2003 5154 million compared net cash used 2191 million 2002 increase primarily related shortterm longterm debt issuance finance acquisition thermatru 3652 million 5990 million respectively partly offset maturing longterm debt 1326 million share repurchases 2072 million 41 million shares higher dividend payments november 2003 acquired thermatru holdings inc net cash 9240 million initial financing acquisition executed issuance commercial paper subsequently partially paid two longterm debt issues totaling 600 million included 300 million threeyear notes 300 million tenyear notes dividends 2003 paid common dividends 114 per share dividends paid common stockholders 2003 increased 1669 million 1534 million 2002 increase dividend rate offset lower shares outstanding september 2 2003 dividend payment increased common stock quarterly dividend 11 30 per share indicated annual rate 120 per share financial position december 31 2003 total debt increased 8376 million 20 billion shortterm debt increased 4367 million longterm increased 4009 million total debttototal capital ratio increased 390 december 31 2003 295 december 31 2002 increase primarily result debt issued finance thermatru acquisition december 31 2003 400 million debt securities available public sale shelf registration securities exchange commission december 31 2003 maintained two credit facilities entered 2001 2003 agreements include 750 million 5year revolving credit agreement expires 2006 250 million 364day revolving credit agreement expires 2004 includes option extend payment one year discretion incremental fee 25 outstanding amount facilities available general corporate purposes including acquisitions share repurchases support shortterm borrowings commercial paper market believe internally generated funds together access global credit markets adequate meet capital needs working capital current assets net current liabilities decreased 2403 million 1481 million december 31 2003 principal reasons reduction increased shortterm debt used finance acquisition thermatru holdings inc partly offset impact foreign exchange higher accounts receivable due higher fourth quarter sales increased inventories bulk whiskey new golf products believe 2003 working capital level adequate support continued growth foreign exchange investments various foreign countries principally united kingdom well australia canada therefore changes value currencies countries affect balance sheet cash flow statements translated us dollars interest rates may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense december 31 2003 company outstanding interest rate swap agreements aggregate notional principal amount 200 million swap agreements based outstanding 2875 notes due 2006 allow agreements classified fair value hedge accordance sfas 133 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate december 31 2002 outstanding interest rate swap agreements fair market value longterm fixed interest rate debt subject interest rate risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value 14431 million 9746 million total longterm debt including current portion december 31 2003 2002 approximately 15648 million 10943 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity minority interest consolidated subsidiaries minority interest consolidated subsidiaries decreased 294 million principally due return capital jbbw stockholders vs vin sprit ab company stockholders’ equity stockholders’ equity yearend 2003 increased 4063 million principally due higher net income partly offset dividends share repurchases purchased open market purchases 41 million 57 million shares common stock 2003 2002 respectively contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2003 1 purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures 2 minimum pension funding requirements beyond 2004 immaterial addition contractual obligations listed also commercial commitments contingently liable december 31 2003 include guarantee certain credit facilities bank loans entered maxxium amount totaling 79 million 16 million expires less one year remaining 63 million due one three years shareholder loan facility executed jbbw maxxium amounting 19 million amounts outstanding expires one three years standby letters credit 405 million 375 million due less one year remaining 30 million due one three years surety bonds 216 million 214 million due less one year remaining 02 million due one three years addition vs holds option may require us repurchase jbbw preferred stock vs purchased 3445 million net returns capital fair value whole part time may 31 2004 upon change control jbbw jbbco certain events contingent commitments expected significant impact liquidity addition obligations described jbbco event default future brands required satisfy certain future brands’ financial obligations include limited making payments suppliers employees parties future brands contracts company material balance sheet obligations item 7aitem 7 management’s discussion analysis financial condition results operations consolidated summary fortune brands inc holding company subsidiaries make sell leading consumer branded products following industries home hardware spirits wine golf products enhance shareholder value profitably building leading consumer brands drive sales earnings well generate cash developing innovative new products effective marketing campaigns expanding customer relationships also seek increase profits improving operations increasing productivity enhancing cost structures first priority internal growth also strive achieve growth high returns acquisitions dispositions joint ventures finally enhance shareholder value initiatives using financial resources repurchase shares pay attractive dividends 2005 sharpened focus highperformance consumer brands company august 2005 completed spinoff office products business connection received cash dividend 613 million addition july 2005 acquired 25 spirits wine brands well distribution assets pernod ricard sa enhancing spirits wine business strengthening distribution capabilities international markets economic benefit acquired assets closing acquisition substantially completed final legal transfer assets january 27 2006 result acquisition january 2006 refinanced portion shortterm debt utilized acquisition issued dollar eurodenominated longterm debt amount 2 billion 800 million approximately 1 billion refer notes 5 “acquisitions disposals joint ventures” 6 “longterm debt” consolidated financial statements item 8 form 10k february 2006 announced agreement acquire sbr inc privately held company owns 3 vinylframed window brand north america assurance given acquisition close terms contemplated refer note 24 “subsequent events” consolidated financial statements 2005 year broadbased performance fortune brands net income diluted earnings per share decreased 21 2005 6211 million 413 respectively decrease profits due primarily currency hedge accounting expense related exchange rate day spirits wine acquisition closed 072 per diluted share substantial tax credits recorded 2004 069 per diluted share absence income due spinoff office products business profit benefited strong operating performance business segments incremental impact spirits wine acquisition continuing operations basis income diluted earnings per share decreased 19 2005 5816 million 387 respectively net sales increased 15 71 billion result strong underlying growth successful new products line extensions expanding customer relationships benefit spirits wine acquisition favorable foreign exchange price increases implemented 2004 help offset commodity cost increases business segments achieved excellent performance 2005 home hardware business achieved doubledigit growth operating income 9 sales 10 resulting successful line extensions new product introductions expanding customer relationships cabinets residential entry doors partly offset weak tool storage sales volume sears spirits wine business achieved 20 growth operating income 40 growth sales primarily impact spirits wine acquisition well due worldwide volume growth premium superpremium spirits favorable foreign exchange strength successful new products golf clubs golf shoes gloves continued share gain golf balls absence restructuring related charges golf brands achieved 12 increase operating income 4 growth sales 2006 believe company well positioned another year strong performance believe company benefit following trends businesses aging population trends us favorably impact conditions home improvement golf spirits wine industries additional favorable longterm demographics home improvement housing industries particularly kitchen bath segment including rising household formations increasing household wealth record existing home sales 2004 2005 effect replaceremodel projects often trail existing home sales 12 18 months new products existing new markets expanding customer relationships particularly home hardware incremental benefit spirits wine acquisition continued growth premium spirits wine markets worldwide continuous innovation international growth opportunities golf business company also identified following risks challenges may impact businesses continued consolidation company’s trade customers particularly home hardware business potential impact moderation growth rate housing market possible continuing increases commodity costs particularly particleboard fuelrelated costs challenges integration spirits wine acquisition impact external conditions economic conditions weather destination travel corporate spending overall demand golf products results operations 2005 compared 2004 fortune brands achieved 15 increase net sales 14 increase operating income net income 21 primarily due currency hedge accounting expense related spirits wine acquisition purchase price substantial tax credits recorded 2004 absence income due spinoff office products business net income benefited strong broadbased operating performance three business segments sales increase driven growth home hardware spirits wine golf businesses successful new products line extensions expanding customer relationships impact spirits wine acquired businesses price increases primarily implemented last year help offset energy raw material cost increases favorable foreign exchange net income benefited increased sales volume however benefit offset currency hedge accounting expense related spirits wine acquisition purchase price tax credits recorded 2004 absence income due spinoff office products business operating units face challenges opportunities unique industries discussed report net sales net sales continuing operations increased 9160 million 15 71 billion sales benefited newly introduced products line extensions across businesses 564 million total net impact 472 million aggregate acquisitions primarily spirits wine acquisition 444 million minor dispositions price increases approximately 64 million primarily home hardware golf businesses help offset energy raw material cost increases expanding customer relationships particularly cabinet entry door businesses favorable foreign exchange 27 million increase net sales partly offset lower sales 260 million certain products discontinued replaced new products golf business well decrease sales home hardware tool storage products result weak volumes sears cost products sold cost products sold increased 5008 million 15 impact spirits wine acquired businesses 2050 million higher net sales increased yearoveryear costs energy raw material costs range 80 85 million largely offset price increases unfavorable inventory adjustment home hardware tool storage business excise taxes spirits wine us excise taxes spirits wine decreased percentage sales approximately 25 basis points due higher international sales including spirits wine acquired businesses higher concentration sales international markets us excise taxes levied based proof content spirits wine products consistent industry practice us excise taxes collected customers reflected sales corresponding payments government cost sales advertising selling general administrative expenses advertising selling general administrative expenses increased 2609 million 18 primarily result spirits wine acquisition 1281 million addition increases due higher sales increased advertising new product introductions higher brand investment expenses home hardware spirits wine including new starbucks coffee liqueur well due restructuringrelated integration costs associated spirits wine acquisition 184 million amortization intangibles amortization intangibles decreased 20 million 334 million primarily due 2004 first quarter amortization adjustment related finalization purchase accounting associated 2003 thermatru acquisition 26 million partly offset amortization finitelived intangible assets associated spirits wine acquired businesses 05 million restructuring charges twelve months ended december 31 2005 record restructuring charges twelve months ended december 31 2004 recorded pretax restructuring charges 98 million charges principally related consolidation manufacturing facilities employee termination costs mainly home hardware business interest expense interest expense increased 816 million 1056 1589 million primarily result higher debt associated spirits wine acquired businesses expense income net expense income net increased 1259 million net expense 789 million primarily due unfavorable impact currency hedge accounting expense related spirits wine acquisition purchase price 1209 million income taxes income taxes increased 634 million 24 3245 million reported effective income tax rate twelve months ended december 31 2005 december 31 2004 350 263 respectively higher effective rate primarily related low tax benefit associated acquisitionrelated currency hedge accounting expense year well lower tax credits year compared last year net income net income 6211 million 426 per basic share 413 per diluted share year ended december 31 2005 compared net income 7838 million 540 per basic share 523 per diluted share year ended december 31 2004 income continuing operations 5816 million 399 per basic share 387 per diluted share year ended december 31 2005 compared income continuing operations 7160 million 493 per basic share 478 diluted per share year ended december 31 2004 decrease income continuing operations 1344 million 19 primarily due currency hedge accounting expense related spirits wine acquisition purchase price 1090 million 072 per diluted share lower tax credits 77 million year compared 1037 million last year decrease 064 per diluted share absence income due spinoff office products business income continuing operations benefited higher sales volume income discontinued operations net tax decreased 283 million 42 primarily result absence income spinoff office products business august 16 2005 2004 compared 2003 fortune brands achieved strong results net sales continuing operations increased 20 income continuing operations increased 30 net income grew 35 net sales grew result strong growth consumer brands driven share gains key markets resulting successful new products expanded customer relationships benefit acquisitions solid market growth home hardware spirits wine markets favorable foreign exchange net income increased strong operating performance benefit acquisitions favorable foreign exchange higher taxrelated benefits partly offset increased commodity costs operating units face challenges opportunities unique industries discussed report net sales net sales continuing operations increased 10326 million 20 61 billion sales benefited newly introduced products line extensions home hardware golf businesses 494 million total partly offset lower sales certain products discontinued golf home hardware businesses net impact 388 million acquisitions primarily thermatru dispositions expanded customer relationships driving increased volume primarily cabinet entry door businesses favorable foreign exchange 81 million cost products sold cost products sold increased 6556 million 24 higher net sales increased costs major commodities approximately 65 million particularly steel particleboard primarily home hardware business excise taxes spirits wine us excise taxes spirits wine decreased percentage sales due greater international sales well favorable mix shift midtier brands premium superpremium spirits wines us excise taxes levied based proof content spirits wine products consistent industry practice us excise taxes collected customers reflected sales corresponding payments government cost products sold advertising selling general administrative expenses advertising selling general administrative expenses increased 1972 million 16 result higher sales acquisitions well increased advertising marketing expenditures amortization intangibles amortization intangibles increased 182 million 106 primarily due amortization identifiable intangibles associated acquisition thermatru restructuring charges 2004 recorded pretax restructuring charges 98 million compared 22 million 2003 charges 2004 principally related consolidation manufacturing facilities primarily home hardware business income net income net increased 88 million 470 million primarily due 120 million gain recorded 2004 result insurance proceeds related kentucky bourbon warehouse fire 2003 partly offset lower taxrelated interest income taxes income taxes decreased 142 million 5 higher net income recorded higher taxrelated benefits 2004 1016 million compared 2003 350 million reported effective income tax rates twelve months ended december 31 2004 2003 263 327 respectively items set forth impacted effective income tax rate third quarter 2004 internal revenue service concluded field examination phase routine review 19972001 tax returns result audit recorded net tax reserve reversal 455 million continuing operations net reversal accounts release reserves items resolved favorably anticipated partly offset disallowance deduction reserve established fourth quarter 2004 congressional joint committee taxation completed review results routine irs examination 19972001 tax returns continuing operations recorded total tax benefit 515 million 035 per diluted share reflecting completion joint committee review resulted reversal tax reserves 395 million net tax adjustment 120 million result conclusion irs examination 19972001 tax years 2005 received tax refund approximately 59 million fourth quarter 2004 also recorded onetime nonoperating adjustment interest income taxes receivable related taxrelated benefits 21 million tax 001 per diluted share recorded income fourth quarter 2004 recorded tax benefit 46 million 003 per diluted share associated foreign earnings repatriation provisions american jobs creation act 2004 2003 audit 19931996 tax returns resulted reduction tax expense 35 million 023 per diluted share result also recorded onetime nonoperating adjustment 69 million interest income tax recorded income net income net income increased 2046 million 35 7838 million due primarily strong broadbased operating performance higher taxrelated benefits 1077 million 2004 compared 419 million 2003 benefit favorable foreign exchange 18 million impact acquisitions income continuing operations increased 1639 million 30 7160 million due primarily strong broadbased operating performance higher taxrelated benefits 1037 million 2004 compared 419 million 2003 benefit favorable foreign exchange 13 million impact acquisitions income discontinued operations net tax increased 407 million 150 primarily benefit business’ ongoing repositioning program including successful supply chain realignment cost reduction initiatives favorable foreign exchange higher sales volume diluted earnings per share 523 2004 35 2003 diluted earnings per share continuing operations 478 2004 30 2003 diluted earnings per share discontinued operations 045 2004 150 2003 quarterly financial data fortune brands inc subsidiaries unaudited millions except per share amounts results operations segment home hardware 2005 compared 2004 net sales increased 3897 million 10 41534 million increase primarily due underlying volume growth fueled line extensions new products 346 million total mainly faucets cabinets exterior doors expanding customer relationships particularly cabinet residential entry door businesses raw materialrelated price increases select products well benefits acquisitions made 2005 2004 28 million increase sales net disposition last year favorable foreign exchange 13 million increase net sales partially offset lower tool storage sales due weak volumes sears operating income increased 566 million 9 6551 million higher sales absence restructuringrelated charges year 145 million partially offset unfavorable inventory adjustment tool storage business higher energyrelated costs capacity global supply chain initiatives cabinets june 2004 thermatru acquired sentinel doors ltd leading uk manufacturer installer complete composite entry door systems master lock acquired assets dudley inc leading brand school locker locks canada although us housing market forecasted moderate nearterm anticipate home hardware business continue benefit expanding customer relationships well longterm demographic trends supporting home repair remodeling new home construction markets particularly kitchen bath products residential entry door systems trends include factors growth number households increases household wealth aging housing stock home hardware business may impacted us economic conditions including level new construction sales existing homes potential impact us housing remodeling markets business may also affected increases costs certain commodities including higher fuelrelated costs although higher costs believe continue largely offset select price increases addition continue face pricing pressure associated consolidation industry customer base consolidation may also present opportunities business due leading brands customer service 2004 compared 2003 net sales increased 8638 million 30 37637 million increase attributable impact acquisitions thermatru capital cabinets american lock dudley sentinel aggregate 382 million excluding internal growth line extensions new products 317 million expanded customer relationships particularly cabinets entry doors robust housing market price increases select products well favorable foreign exchange 24 million operating income increased 1172 million 24 5985 million benefit acquisitions higher sales productivity improvements partially offset higher commodity costs particularly steel particleboard restructuring restructuringrelated charges year spirits wine 2005 compared 2004 net sales increased 4727 million 40 16420 million principally due impact spirits wine acquired businesses 444 million sales also benefited higher us sales premium superpremium spirits including new starbucks coffee liqueur strong case volume growth international markets favorable foreign exchange 5 million partly offset lower sales nonpremium brands us operating income increased 673 million 20 4010 million higher sales partly offset brand spending support launch starbucks coffee liqueur restructuringrelated integration costs 184 million operating income affected accounting financial accounting standards board interpretation 46r fin 46r “consolidation variable interest entities” since many assets acquired owned entities also owned assets acquired pernod ricard pernod ricard accordance fin 46r fully consolidated entities primary beneficiary even brands assets pernod ricard ultimately owned primary beneficiary obligation absorb majority expected losses right receive majority expected residual returns entity addition fair value assets acquired us less 50 fair value entity accounted investment using cost method meaning sales expenses related brands assets acquired fortune brands entities included statement income fully consolidated basis therefore reported sales operating income representative future results operations refer note 4 “acquisitions disposals joint ventures” consolidated financial statements full description accounting treatment acquisition factors could adversely affect results include possibility federal excise state tax increases international trade policies increased regulation class actions andor litigation competitive pricing activities addition spirits wine industry could impacted consolidation suppliers distributors retailers also may present opportunities business due leading brands customer service 2004 compared 2003 net sales increased 783 million 7 11693 million principally favorable foreign exchange 27 million strong worldwide growth jim beam bourbon higher pricing jim beam bourbon midtier brands us acquisition wild horse winery operating income increased 309 million 10 3337 million higher sales favorable foreign exchange partly offset increased investment key brandbuilding initiatives golf 2005 compared 2004 net sales increased 536 million 4 12658 million increase attributable sales growth product categories new product introductions golf clubs favorable mix shift toward premium titleist brand balls clubs well favorable foreign exchange 9 million operating income increased 177 million 12 1715 million higher sales favorable mix shift toward higher margin titleist branded golf balls clubs favorable foreign exchange absence restructuring related charges 6 million even though new competitors entered category recent years golf business significantly grown sales market share profit innovative new products despite favorable demographics aging population rounds play generally increase age rounds play us decreased 2000 2003 result combination decreased golfrelated travel economic conditions lower corporate spending weather conditions us rounds play flat 2004 2005 future success golf business depend upon continued strong innovation marketing across product categories brands selling regions international market opportunities especially pacific basin region provided expected continue provide growth golf business 2004 compared 2003 net sales increased 905 million 8 12122 million increase attributable continued volume growth across categories golf clubs golf balls golf footwear gloves accessories 66 million driven introduction successful new golf products line extensions well favorable foreign exchange 31 million operating income increased 147 million 11 1538 million higher sales favorable foreign exchange increased sales higher margin titleist golf balls liquidity capital resources primary liquidity needs fund dividends acquisitions share repurchases capital expenditures service indebtedness support working capital requirements principal sources liquidity cash flows operating activities commercial paper borrowings credit agreements longterm notes operating income generated subsidiaries result dependent earnings cash flows distributions advances provide funds necessary meet obligations significant restrictions ability subsidiaries pay dividends make distributions fortune brands priority cash flow near term internal growth dividends reduction debt increased result spirits wine acquisition description debt see “ capitalization” notes 6 “longterm debt” 13 “financial instruments” consolidated financial statements description spirits wine acquisition see note 5 “acquisitions disposals joint ventures” consolidated financial statements cash flows net cash provided operating activities 8027 million year ended december 31 2005 compared 7919 million year ended december 31 2004 increase 108 million principally due 2005 income tax refund timing sales receivables collections well benefit lower steel prices inventory management programs benefit receivables inventory include impact spirits wine acquisition subsequent acquisition improvement cash flow provided operations partly offset increased payments customer programs primarily volumerelated employee performance incentives accrued 2004 nonacquisitionrelated cash flow operating activities unfavorably impacted acquisitionrelated interest expense working capital current assets net current liabilities decreased 2311 million 3748 million december 31 2005 primarily due absence discontinued operations increase current portion longterm debt partly offset assets liabilities acquired businesses net cash used investing activities year ended december 31 2005 46642 million compared 2453 million year ended december 31 2004 increase 44 billion primarily due spirits wine acquisition 5 billion partly offset dividend received acco world corporation conjunction spinoff office products business 6133 million focus capital spending growth initiatives becoming lowest cost producers highest quality products capital expenditures 2005 2219 million 198 million lower 2004 primarily due completion capacity expansion projects 2004 currently estimate 2006 capital expenditures range 225 250 million expect generate funds internally net cash provided financing activities year ended december 31 2005 37837 million compared net cash used 5156 million 2004 change 43 billion primarily attributable proceeds debt incurred finance spirits wine acquired businesses partly offset lack share repurchases year capitalization total debt increased 39 billion 58 billion year ended december 31 2005 ratio total debt total capital increased 592 december 31 2005 354 december 31 2004 primarily result debt associated spirits wine acquisition see note 5 “acquisitions disposals joint ventures” consolidated financial statements additional information spirits wine acquisition april 20 2005 fortune brands entered bridge credit agreement 60 billion 18month term initial drawdown july 26 2005 amended existing 60 billion bridge credit agreement converting 50 billion 9month revolving credit agreement option extend term additional 9 months incremental fee 0375 outstanding amount interest rate set time borrowing facility fee 010 per annum subject increases maximum fee 0175 per annum event longterm debt rating falls specified levels borrowings agreement made general corporate purposes including support borrowings commercial paper market october 6 2005 entered two new revolving credit agreements various banks agreements include 20 billion 5year revolving credit agreement matures 2010 500 million 364day revolving credit agreement matures 2006 includes option extend payment one year discretion incremental fee 025 outstanding amount new facilities replaced previously existing 10 billion revolving credit agreement amounts outstanding interest rate set time borrowing facility fees 011 per annum 5year agreement 009 per annum 364day agreement subject increases maximum fees 020 0175 per annum 5year agreement 364day agreement respectively event longterm debt rating falls specified levels borrowings agreements made general corporate purposes including support borrowings commercial paper market subsequent executing two new revolving credit agreements reduced bridge credit agreement 30 billion 149 million outstanding december 31 2005 connection issuance eurodenominated longterm debt discussed february 7 2006 repaid amounts outstanding terminated bridge credit agreement january 2006 issued longterm debt securities totaling 20 billion shelf registration statement filed securities exchange commission 20 billion notes consist 750 million 5 18 notes due january 2011 950 million 5 38 notes due january 2016 300 million 5 78 notes due january 2036 proceeds used pay commercial paper issued connection spirits wine acquisition net proceeds 19774 million less price discounts 93 million underwriting fees 133 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses refer note 13 “financial instruments” consolidated financial statements treasury rate locks associated usdenominated longterm debt addition january 2006 issued longterm debt securities totaling 800 million approximately 1 billion transaction exempt registration accordance regulation securities act 1933 notes consist 300 million 3 12 notes due january 2009 500 million 4 notes due january 2013 proceeds used pay commercial paper issued connection spirits wine acquisition borrowings outstanding 30 billion bridge credit agreement net proceeds 7945 million less price discounts  31 million underwriting fees 24 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses refer note 13 “financial instruments” consolidated financial statements interest rate swaps associated eurodenominated longterm debt spinoff office products business part spinoff office products business august 16 2005 acco world corporation office products business paid cash dividend 625 million fortune brands received 6133 million minority shareholder received 117 million fact fortune brands longer receive cash flows acco world corporation result spinoff expected material impact longterm liquidity company spirits wine acquisition april 21 2005 announced would acquire certain spirits wine brands well distribution assets pernod ricard approximately £27 billion 52 billion july 2005 closed purchase price remained £27 billion dollar purchase value reduced approximately 335 million 49 billion result hedging program benefit lower foreign exchange rates see note 4 “acquisitions disposals joint ventures” consolidated financial statements information acquisition including purchase price adjustments near term intend utilize cash flow pay newly incurred debt used finance acquisition long term expect operations newly acquired spirits wine business generate positive cash flow interest payments debt incurred result acquisition common stock repurchase program february 22 2005 board directors approved share repurchase program authorized management purchase 5000000 shares open market transactions privately negotiated transactions march 1 2005 february 28 2006 board directors also granted authority board’s executive committee authorize purchase additional 5000000 shares prior february 28 2006 extent executive committee determines appropriate repurchase shares program 2005 dividends summary 2005 cash dividend activity company’s common stock shown summary 2005 dividend activity company’s 267 convertible preferred stock shown pension plans periodic basis evaluate assumptions used determining pension liabilities assets well pension expense based historical returns plan assets current economic conditions time assumptions set december 2004 review economic assumptions cash flow spot rate yield curve analysis led reduction weightedaverage discount rate 61 59 weightedaverage expected rate return remained unchanged 83 management believes assumptions appropriate 2004 revisions resulted increase pension expense approximately 4 million 2005 december 2005 review economic assumptions cash flow spot rate yield curve analysis led reduction weightedaverage discount rate 59 57 weightedaverage expected rate return remained unchanged 83 management believes assumptions appropriate 2005 revisions result increase pension expense approximately 4 million 2006 total pension plan cash contributions 480 million 1007 million respectively 2005 2004 company maintains pension plans many operations pension plans aggregate funded excess current liability defined internal revenue code 2006 expect make cash contributions approximately 40 70 million fund existing pension liabilities definedbenefit plans believe internally generated funds adequate make pension plan cash contributions adequacy liquidity sources believe internally generated funds together access global credit markets adequate meet longterm shortterm capital needs including resulting spirits wine acquired businesses however cash flows operations borrowing availability overall liquidity subject certain risks uncertainties including set forth item 1 “business cautionary statement” foreign exchange investments various foreign countries principally australia canada mexico spain france therefore changes value related currencies affect balance sheet cash flow statements translated us dollars addition 2006 issued eurodenominated longterm debt designated eurodenominated debt net investment hedges eurofunctional currency operations see note 6 “longterm debt” consolidated financial statements interest rates may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense 2003 entered swap agreements connection outstanding 2875 notes due december 2006 classified agreements fair value hedge accordance fas 133 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuance new longterm debt second quarter 2005 entered treasury rate locks aggregate notional value 125 billion order hedge risk earnings associated fluctuations interest rates relating anticipated issuances dollardenominated debt associated spirits wine acquisition fourth quarter 2005 entered additional treasury rate locks aggregate notional value 500 million terminated treasury rate locks january 5 2006 issued dollardenominated longterm debt addition fourth quarter 2005 entered interest rate swaps aggregate notional value 800 million classified interest rate swaps cash flow hedges since swaps hedged fluctuations interest rates relating anticipated issuance eurodenominated debt associated spirits wine acquisition terminated swap agreements january 27 2006 issued new euro denominated longterm debt information new dollar eurodenominated longterm debt issued connection spirits wine acquisition see notes 6 “longterm debt” 24 “subsequent events” consolidated financial statements information regarding treasury rate locks interest rate swaps including accounting gains losses respect locks swaps see note 13 “financial instruments” consolidated financial statements fair market value longterm fixed interest rate debt subject interest rate risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value 51868 million 12399 million total longterm debt including current portion december 31 2005 2004 approximately 52493 million 13400 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity minority interest consolidated subsidiaries minority interest consolidated subsidiaries increased 168 million 3748 million principally due minority interests subsidiaries associated spirits wine acquired businesses stockholders’ equity stockholders’ equity yearend 2005 increased 5149 million compared yearend 2004 principally due net income partially offset dividends paid stockholders guarantees commitments thirdparty guarantees debt maxxium worldwide bv maxxium spirits wine business’ international sales distribution joint venture totaled approximately 74 million required perform guarantees event maxxium fails make contractual payments december 12 2005 renewed guarantees maxxium’s credit facilities renewal extended expiration date committed portion credit facilities december 15 2010 accordance financial accounting standards board interpretation 45 fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” recorded liability 07 million december 31 2005 reflect fair value guarantees maxxium also guaranteed various leases acco world corporation office products business divested spinoff august 16 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 50 million april 2013 accordingly recorded fair value guarantees financial statements accordance fin 45 december 31 2005 recorded liability 20 million refer note 3 “discontinued operation” consolidated financial statements additional information spinoff office products business addition part formation future brands llc future brands joint venture vs vin sprit ab jim beam brands co jbbco guaranteed financial obligations future brands may arise event future brands default fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands conducts business cannot estimate possible future obligations future brands agreement december 31 2005 jbbco outstanding obligations result arrangement contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2005 1 purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures addition contractual obligations listed also commercial commitments contingently liable december 31 2005 include guarantee certain credit facilities bank loans entered maxxium amount totaling 74 million amount expires less one year entire 74 million due four five years shareholder loan facility executed jbbw maxxium amounting 18 million amounts outstanding expires four five years standby letters credit 655 million 382 million due less one year remaining 273 million due one three years surety bonds 471 million 470 million due less one year remaining 01 million due one three years addition vs holds option may require us repurchase jbbw preferred stock vs purchased 3445 million net returns capital fair value whole part time may 31 2004 upon change control jbbw jbbco certain events contingent commitments expected significant impact liquidity addition obligations described jbbco event default future brands required satisfy certain future brands’ financial obligations include limited making payments suppliers employees parties future brands contracts material offbalance sheet obligations recently issued accounting standards application tax deduction qualified production activities within american jobs creation act 2004 december 2004 financial accounting standards board fasb issued fasb staff position 1091 fsp 1091 “application tax deduction qualified production activities within american jobs creation act 2004 act” act provides tax deduction qualified production activities tax benefit phased beginning 2005 impact company material results financial position inventory costs november 2004 fasb issued statement financial accounting standards 151 fas 151 “inventory costs amendment arb 43 chapter 4” fas 151 clarifies accounting abnormal amounts idle facility expense freight handling costs spoilage addition fas 151 requires companies base allocation fixed production overhead costs conversion normal capacity production facilities fas 151 effective company 2006 fas 151 significant impact results financial position sharebased payment december 2004 fasb issued statement financial accounting standards 123 revised 2004 fas 123r “sharebased payment” fas 123r replaces fas 123 “accounting stockbased compensation” supersedes apb opinion 25 “accounting stock issued employees” fas 123r requires compensation expense measured fair value share common stock date grant related sharebased payment transactions recognized financial statements period employee provides service exchange award adopted fas 123r effective january 1 2006 using “modified prospective” transition method defined fas 123r based current estimates aftertax impact expensing stock option diluted earnings per share full year 2006 expected approximately 018 per share including effect options granted 2006 critical accounting policies estimates significant accounting policies described note 1 notes consolidated financial statements consolidated financial statements prepared conformity generally accepted accounting principles preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe following company’s critical accounting policies due significant subjective complex judgments estimates used preparing consolidated financial statements regularly review assumptions estimates based historical experience allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns trade receivables include interest allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 524 million 425 million december 31 2005 december 31 2004 respectively inventories priced lower cost principally firstin firstout lesser amounts average lastin firstout market accordance generally recognized trade practice bulk spirits wine inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory reserves recorded obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns specific identification items product discontinuance engineeringmaterial changes property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed estimated useful lives related assets follows buildings leasehold improvements 15 40 years machinery equipment 3 10 years longlived assets accordance statement financial accounting standards 144 fas 144 “accounting impairment disposal longlived assets” longlived asset including amortizable identifiable intangibles asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate time future cash flow derived recent business projections comparison indicates impairment amount impairment calculated using quoted market price unavailable using discounted expected future cash flows discount rate applied cash flows based weightedaverage cost capital represents blended aftertax costs debt equity goodwill indefinitelived intangibles accordance statement financial accounting standards 142 fas 142 “goodwill intangible assets” goodwill tested impairment annual basis certain circumstances written impaired interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates use rate corresponding cost capital risk adjusted appropriate determining discounted cash flows estimated cash flows determined disaggregating business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill perform impairment test measure recognize amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting unit’s goodwill implied fair value goodwill determining estimated future cash flows consider current projected future levels income well business trends prospects market economic conditions fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangibles impairment annually whenever market business events indicate may potential impact intangible consider implications external eg market growth pricing competition technology internal factors eg product costs margins support expenses capital investment potential impact cash flows business near long term well impact identifiable intangible asset associated business developing executing shortterm longterm plans based recent business results consideration significant external internal factors resulting business projections indefinitelived intangible assets associated segment reviewed determine whether likely remain indefinitelived whether finite life appropriate addition based events period future expectations management considers whether potential impairment exists required fas 142 predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize profit split methodology customary valuation practice establish reasonable royalty rate profit split analyses allocate economic income ebitda less returns working capital fixed assets employed tradename residual assets economic unit determine expected profit margin associated commercialization tradename additionally independent valuation experts used periodic review testing management’s assumptions relative significant trade valuations lives independent research market competitive dynamics conjunction ongoing review carrying value identifiable intangibles years ended december 31 2005 2004 writedowns intangible assets year ended december 31 2003 recorded noncash writedown identifiable intangibles 120 million 80 million tax 005 basic diluted per share discontinued operations recognize diminished values certain trade names conjunction repositioning plans office products business warranty reserves offer customers various warranty terms based upon type product sold determine warranty expense accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category generally record warranty expense cost products sold time sale refer note 15 “product warranties” consolidated financial statements warranty expense years ended december 31 2005 2004 2003 337 million 339 million 287 million respectively employee benefit plans provide range benefits employees retired employees including pensions postretirement postemployment health care benefits record annual amounts relating plans based calculations specified generally accepted accounting principles include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current rates trends deemed appropriate expected return plan assets determined based historical experience nature plans’ investments expectations longterm rates return discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments bond portfolio used selection interest rates top quartile bonds rated nationally recognized statistical rating organizations includes noncallable bonds deemed sufficiently marketable discount rate december 31 2005 2004 57 59 respectively weighted average remaining service period pension plans december 31 2005 134 years required united states generally accepted accounting principles effect modifications generally accumulated specified corridor amortized average remaining service period employees cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees total unrecognized net losses pension postretirement benefit plans 282 million december 31 2005 reduction 58 million december 31 2004 primarily result spinoff acco world corporation partly offset decrease discount rate lower expected returns plan assets believe assumptions utilized recording obligations company’s plans reasonable based experience advice independent actuaries however difference actual experience changes assumptions may materially affect company’s financial position results operations postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases result assumption december 31 2005 2004 assumed rate increase 10 next year declining 50 basis points year reaching ultimate assumed rate increase 5 per year pension expenses 390 million 374 million 281 million respectively years ended december 31 2005 2004 2003 postretirement expenses 140 million 141 million 115 million respectively years ended december 31 2005 2004 2003 2006 expect pension expense approximately 43 million postretirement benefit expense approximately 17 million 25 basis point change 025 discount rate assumption would lead increase decrease pension expense postretirement benefit expense approximately 37 million 05 million respectively 2006 25 basis point change longterm rate return used accounting company’s pension plans would 16 million impact pension expense income taxes accordance statement financial accounting standards 109 “accounting income taxes” establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse provide deferred taxes undistributed earnings foreign subsidiaries expect permanently reinvest undistributed earnings foreign subsidiaries aggregate 2944 million december 31 2005 revenue recognition accordance staff accounting bulletin 104 “revenue recognition” recognize revenue products shipped customers net applicable provisions discounts returns allowances criteria recognition revenue title risk loss passed customer persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility reasonably assured also provide estimate potential bad debt time revenue recognition amounts billed shipping handling classified “net sales” consolidated income statement costs incurred shipping handling classified “advertising selling general administrative expenses” shipping handling costs included “advertising selling general administrative expenses” 2194 million 1853 million 1508 million 2005 2004 2003 respectively customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sellthrough business’ products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances accounted reductions gross sales costs recorded time sale based management’s best estimates based historical projected experience type program customer management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations stockbased compensation apply accounting principles board opinion 25 “accounting stock issued employees” related interpretations accounting stock options accordingly compensation expense recognized stock option plans statement financial accounting standards 148 fas 148 “accounting stockbased compensation transition disclosure” requires disclosure pro forma net income pro forma earnings per share amounts compensation expense recognized required disclosure fas 148 allows use fairvalue method measure compensation expense accordingly adopted use blackscholes optionpricing model determine compensation expense disclosure purposes model requires use following assumptions expected dividend yield expected volatility riskfree interest rate expected term weightedaverage fair value options granted years ended december 31 2005 2004 2003 1614 1647 1340 respectively per option based upon range provided assumptions utilized alternative fairvalues per option would materially differed fair values listed example change expected term weighted average 39 44 years would 096 6 impact weightedaverage fair value options granted year ended december 31 2005 fas 148 applied pro forma diluted eps impact would decrease 015 017 012 per share respectively 2005 2004 2003 derivative financial instruments accordance statement financial accounting standards 133 fas 133 “accounting derivative instruments hedging activities” related amendment statement financial accounting standards 138 fas 138 “accounting certain derivative instruments certain hedging activities” derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2005 72 million deferred currency losses reclassified cost sales year ended december 31 2004 deferred currency losses less 01 million reclassified cost sales estimate 40 million currency derivative gains included oci december 31 2005 reclassified earnings within next twelve months paid purchase price spirits wine acquisition british pounds sterling connection acquisition 2005 entered call options buy british pounds sterling hedge currency exposure related purchase price terminated call options early july 2005 also entered forward contracts buy british pounds hedge currency exposure related purchase price settled forward contracts upon consummation acquisition july 2005 connection acquisition also entered treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuance new longterm debt finance acquisition terminated locks swaps upon issuance new longterm debt january 2006 see note 13 “financial instruments” consolidated financial statements foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk principal currencies hedged include canadian dollar australian dollar euro pound sterling also exposed foreign currency risk result new eurodenominated debt designated eurodenominated debt net investment hedges respect spirits wine acquired businesses eurodenominated operations continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuances new longterm debt see note 13 “financial instruments” information management interest rate risk cost initiatives continuously evaluate productivity supply chains existing asset base actively seek identify opportunities improve cost structure future opportunities may involve among things reorganization operations relocation manufacturing assembly locations generally lower costs efficient sourcing products components third party suppliers implementing significant cost reduction efficiency opportunities could result charges pending litigation see note 22 consolidated financial statements environmental matters along responsible parties subsidiaries face claims relating protection environment february 10 2006 various subsidiaries designated potentially responsible parties “superfund” similar state laws 43 instances reached settlements 27 instances believe cost complying present environmental protection laws considering estimated recoveries either responsible parties insurance material adverse effect upon results operations cash flows financial condition december 31 2005 2004 accruals 415 million 462 million respectively cover matters related party transactions future brands llc spirits wine business partner vs vin sprit ab vs joint venture named future brands llc future brands distributes companies’ spirits brands united states provides related selling invoicing services future brands receives commission partners services provided spirits wine business records revenue time shipment future brands’ customers part forming joint venture jbbco event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2005 2004 jbbco outstanding obligations result arrangement spirits wine business’ balances related future brands included following maxxium worldwide bv bgsw partner international sales distribution joint venture named maxxium worldwide bv maxxium distributes sells spirits wine key markets outside united states joint venture partners include rémy cointreau highland distillers vs spirits wine business records sales time spirits sold third parties rather time shipment maxxium result forming joint venture company guaranteed certain credit facilities bank loans entered maxxium amount totaling 74 million 50 million outstanding december 31 2005 december 31 2004 guarantees totaled 85 million 76 million outstanding jbbw executed shareholder loan facility loan facility maxxium amounts outstanding loan facility either december 31 2005 december 31 2004 loan facility renewed 2005 expires december 12 2010 spirits wine business’ balances related maxxium included following item 7aitem 7 managements discussion analysis financial condition results operations consolidated summary fortune brands inc holding company subsidiaries make sell leading consumer branded products following industries spirits wine home hardware golf products enhance shareholder value profitably building leading consumer brands drive sales earnings well generate cash developing innovative new products effective marketing campaigns expanding customer relationships also seek increase profits improving operations increasing productivity enhancing cost structures first priority internal growth also strive achieve growth high returns acquisitions dispositions joint ventures finally enhance shareholder value initiatives using financial resources repurchase shares pay attractive dividends net income increased 34 diluted earnings per share increased 31 2006 8301 million 542 respectively increase profits due primarily underlying sales growth benefit acquisitions absence 2005 currency hedge accounting expense related exchange rate day spirits wine acquisition closed 072 per diluted share substantial tax credits recorded 2006 057 per diluted share increase partly offset impact statement financial accounting standards 123 revised 2004 sharebased payment fas 123r adopted january 1 2006 incremental 016 per diluted share higher restructuring restructuringrelated charges incremental 007 per share absence income due spinoff office products business last year 026 per diluted share continuing operations basis income increased 43 diluted earnings per share increased 40 2006 business segments performed well 2006 •our home hardware business achieved 13 growth sales 6 growth operating income result successful line extensions new product introductions expanding customer relationships cabinetry residential entry doors well benefit addition simonton aggressive cost management benefits partly offset impact downturn us housing market restructuring restructuringrelated costs related supply chain initiatives even challenging market conditions home products brands outperformed home products market continued gain share •our spirits wine business achieved 68 growth sales 78 growth operating income primarily fullyear benefit spirits wine acquisition well worldwide volume growth premium superpremium spirits favorable foreign exchange •on strength sales growth product categories successful new products golf clubs golf shoes golf brands achieved 4 increase sales operating income 3 adversely impacted higher raw materials costs fas 123r expensing stock option compensation january 2006 substantially completed final legal transfer spirits wine assets acquired july 2005 result spirits wine acquisition january 2006 refinanced portion shortterm debt utilized acquisition issued dollar eurodenominated longterm debt amount 2 billion €800 million approximately 1 billion refer note 4 acquisitions disposals joint ventures note 6 longterm debt consolidated financial statements item 8 form 10k june 2006 acquired sbr inc simonton holdings inc privately held company owns leading vinylframed window brand north america refer note 4 acquisitions disposals joint ventures consolidated financial statements 2007 believe company benefit following trends businesses •continued growth premium spirits wine worldwide •sustained innovation new product development across segments •international growth opportunities segments •expanding customer relationships particularly home hardware •aging population trends us favorably impact conditions home improvement golf spirits wine industries company also identified following risks challenges may impact businesses •negative impact downturn overall us home products market could decline doubledigit rate 2007 •possible continuing increases commodities costs particularly copper zinc well earnings volatility created marktomarket accounting commodity hedges •impact external conditions economic conditions weather destination travel corporate spending overall demand golf products •continued consolidation companys trade customers particularly home hardware business results operations 2006 compared 2005 fortune brands achieved 24 increase net sales 29 increase operating income continuing operations 43 net income 34 net income benefited •the fullyear benefit spirits wine acquisition acquired july 2005 •underlying growth home hardware spirits wine golf businesses •successful new products line extensions expanding customer relationships extending brands new markets •brand investments sharegain initiatives •price increases including implemented help offset energy raw material cost increases •the absence last years currency hedge accounting expense related spirits wine acquisition purchase price •higher tax credits year benefits partially offset impact fas 123r stock option compensation cost higher restructuring restructuringrelated costs year absence income due spinoff office products business operating units face challenges opportunities unique industries discussed report net sales net sales continuing operations increased 17 billion 24 88 billion sales benefited •newly introduced products line extensions across businesses •the net impact spirits wine simonton acquisitions 12 billion aggregate •select price increases across businesses particularly home hardware including help offset energy raw material cost increases •expanding customer relationships particularly cabinetry entry door brands •extending brands new markets •favorable foreign exchange 42 million increase net sales tempered impact downturn us housing market particularly second half 2006 cost products sold cost products sold increased 7759 million 20 result spirits wine simonton acquisitions higher net sales increased yearoveryear costs energy raw material costs approximately 45 million largely offset price increases well productivity improvements excise taxes spirits wine us excise taxes spirits wine increased percentage sales approximately 120 basis points due higher percentage spirits wine sales fortune brands total revenues result 2005 spirits wine acquisition us excise taxes levied based proof content spirits wine products consistent industry practice us excise taxes collected customers reflected sales corresponding payments government cost sales advertising selling general administrative expenses advertising selling general administrative expenses increased 3757 million 22 primarily result spirits wine acquisition addition increases due higher sales increased advertising new product introductions higher brand investment expenses business segments well stock option compensation cost amortization intangibles amortization intangibles increased 101 million 435 million primarily due amortization finitelived intangible assets associated spirits wine acquisition 55 million well amortization associated simonton acquisition 46 million restructuring charges twelve months ended december 31 2006 recorded pretax restructuring charges 212 million charges principally related consolidation manufacturing facilities workforce reductions home hardware spirits wine businesses twelve months ended december 31 2005 record restructuring charges restructuring projects provide return excess cost capital expected payback less three years interest expense interest expense increased 1735 million 1092 3324 million primarily result debt associated spirits wine simonton acquisitions well higher interest rates expense income net expense income net increased 1191 million 402 million income increase primarily due absence 2005s unfavorable impact currency hedge accounting expense related spirits wine acquisition purchase price 1209 million income taxes income taxes decreased 134 million 4 3111 million effective income tax rate twelve months ended december 31 2006 december 31 2005 257 350 respectively lower effective rate primarily related higher tax credits year associated recently enacted reductions foreign income tax rates applied foreign deferred income taxes well favorable resolution routine federal state tax audits net income net income 8301 million 556 per basic share 542 per diluted share year ended december 31 2006 results compared net income 6211 million 426 per basic share 413 per diluted share year ended december 31 2005 income continuing operations net income 2006 8301 million 556 per basic share 542 per diluted share year ended december 31 2006 results compared income continuing operations 5816 million 399 per basic share 387 diluted per share year ended december 31 2005 increase net income 2090 million 34 primarily due benefit spirits wine acquisition underlying growth businesses absence 2005 currency hedge accounting expense related spirits wine acquisition purchase price 1090 million 072 per diluted share substantial tax credits recorded 2006 865 million 2006 compared 77 million 2005 increase 052 per diluted share benefits partly offset higher restructuring restructuringrelated costs incremental 157 million 007 per diluted share stock option compensation cost 251 million 016 per diluted share absence income due spinoff office products business 026 per diluted share discontinued operations 2006 2005 compared 2004 fortune brands achieved 15 increase net sales 14 increase operating income net income 21 primarily due currency hedge accounting expense related spirits wine acquisition purchase price substantial tax credits recorded 2004 absence income due spinoff office products business net income benefited strong broadbased operating performance three business segments sales increase driven •growth home hardware spirits wine golf businesses •successful new products line extensions expanding customer relationships •the impact spirits wine acquisition •price increases primarily implemented 2004 help offset energy raw material cost increases •favorable foreign exchange net income benefited increased sales volume however benefit offset •currency hedge accounting expense related spirits wine acquisition purchase price •tax credits recorded 2004 •the absence income due spinoff office products business net sales net sales continuing operations increased 9160 million 15 71 billion sales benefited •newly introduced products line extensions across businesses 564 million total •the net impact 472 million aggregate acquisitions primarily spirits wine acquisition 444 million minor dispositions •price increases approximately 64 million primarily home hardware golf businesses help offset energy raw material cost increases •expanding customer relationships particularly cabinetry entry door brands •favorable foreign exchange 27 million increase net sales partly offset lower sales 260 million certain products discontinued replaced new products golf business well decrease sales home hardware tool storage products result weak volumes sears cost products sold cost products sold increased 5008 million 15 impact spirits wine acquisition 2050 million higher net sales increased yearoveryear costs energy raw material costs range 80 85 million largely offset price increases 79 million unfavorable steel purchaseprice variance lifo inventory home hardware tool storage category variance occurred 2004 identified recorded 2005 excise taxes spirits wine us excise taxes spirits wine decreased percentage sales approximately 25 basis points due higher international sales including spirits wine acquisition higher concentration sales international markets us excise taxes levied based proof content spirits wine products consistent industry practice us excise taxes collected customers reflected sales corresponding payments government cost sales advertising selling general administrative expenses advertising selling general administrative expenses increased 2609 million 18 primarily result spirits wine acquisition 1281 million addition increases due higher sales increased advertising new product introductions higher brand investment expenses home hardware spirits wine well due restructuringrelated integration costs associated spirits wine acquisition 184 million amortization intangibles amortization intangibles decreased 20 million 334 million primarily due 2004 first quarter amortization adjustment related finalization purchase accounting associated 2003 thermatru acquisition 26 million partly offset amortization finitelived intangible assets associated spirits wine acquisition 05 million restructuring charges twelve months ended december 31 2005 record restructuring charges twelve months ended december 31 2004 recorded pretax restructuring charges 98 million charges principally related consolidation manufacturing facilities workforce reductions mainly home hardware business interest expense interest expense increased 816 million 1056 1589 million primarily result higher debt associated spirits wine acquisition expense income net expense income net increased 1259 million net expense 789 million primarily due unfavorable impact currency hedge accounting expense related spirits wine acquisition purchase price 1209 million income taxes income taxes increased 634 million 24 3245 million reported effective income tax rate twelve months ended december 31 2005 december 31 2004 350 263 respectively higher effective rate primarily related low tax benefit associated acquisitionrelated currency hedge accounting expense year well lower tax credits 2005 compared 2004 net income net income 6211 million 426 per basic share 413 per diluted share year ended december 31 2005 results compared net income 7838 million 540 per basic share 523 per diluted share year ended december 31 2004 income continuing operations 5816 million 399 per basic share 387 per diluted share year ended december 31 2005 results compared income continuing operations 7160 million 493 per basic share 478 diluted per share year ended december 31 2004 decrease income continuing operations 1344 million 19 primarily due currency hedge accounting expense related spirits wine acquisition purchase price 1090 million 072 per diluted share lower tax credits 77 million 2005 compared 1037 million 2004 decrease 064 per diluted share absence income due spinoff office products business income continuing operations benefited higher sales volume income discontinued operations net tax decreased 283 million 42 primarily result absence income spinoff office products business august 16 2005 quarterly financial data fortune brands inc subsidiaries unaudited millions except per share amounts results operations segment home hardware 2006 compared 2005 net sales increased 5408 million 13 46942 million increase primarily attributable continued growth share gains cabinetry faucet padlock brands well benefit acquisitions 344 million primarily simonton acquisition sales also benefited new products line extensions 43 million total expanding customer relationships home centers major builders expansion adjacent categories eg bath accessories patio doors impactresistant windows automotive towing accessories growth international markets favorable foreign exchange 23 million addition sales benefited price increases implemented help offset higher costs raw materials energy net sales increase tempered impact downturn overall us home products market particularly fourth quarter 2006 operating income increased 403 million 6 6954 million operating income benefited sales growth productivity improvements reversal legal reserve approximately 7 million well absence expenses 2006 related lower cost sourcing initiative cabinets 2005 unfavorable steel purchaseprice variance lifo inventory tool storage category 2005 79 million benefits partially offset higher commodity energy costs net impact approximately 3035 million restructuring restructuringrelated charges 263 million inclusion stock option compensation cost beginning 2006 upon adoption fas 123r june 2006 home hardware business acquired sbr inc simonton including simonton windows leading brand vinylframed windows simonton products manufactured sold primarily united states expect downturn overall us home products market could decline doubledigit rate 2007 continue impact results home products brands impact mitigated proactive cost controls better align supplychain administrative costs expected demand however believe well positioned continue outperforming market due sustained share gains successful extension brands new markets expanding customer relationships strong presence less cyclical replaceandremodel segment housing market business may also affected increases costs certain commodities although continue working offset higher costs productivity initiatives select price increases 2005 compared 2004 net sales increased 3897 million 10 41534 million increase primarily due underlying volume growth fueled line extensions new products 346 million total mainly faucets cabinetry exterior doors expanding customer relationships particularly cabinetry residential entry door brands raw materialrelated price increases select products well benefits acquisitions made 2005 2004 28 million increase sales net disposition last year favorable foreign exchange 13 million increase net sales partially offset lower tool storage sales due weak volumes sears operating income increased 566 million 9 6551 million higher sales absence restructuringrelated charges 2005 145 million partially offset unfavorable inventory adjustment tool storage category higher energyrelated costs capacity global supply chain initiatives cabinets unfavorable inventory adjustment 79 million steel purchaseprice variance lifo inventory tool storage category occurred 2004 identified recorded 2005 spirits wine 2006 compared 2005 net sales increased 11194 million 68 27614 million principally due addition net sales spirits wine acquisition prior year 826 million well yearoveryear sales growth combined business favorable foreign exchange 22 million growth brands including jim beam bourbon sauza tequila makers mark bourbon clos du bois wines well superpremium brands several regionalnational brands contributed increase reported net sales 2005 impacted accounting acquisition accordance financial accounting standards board interpretation 46r fin 46r consolidation variable interest entities prior legal transfer acquired brands assets refer note 4 acquisitions disposals joint ventures consolidated financial statements consolidated variable interest entities deemed primary beneficiary certain entities consolidated december 31 2006 consolidated december 31 2005 certain assets liabilities consolidated december 31 2005 longer owned entities consolidated december 31 2006 operating income increased 3130 million 78 7140 million benefit higher sales synergy benefits spirits wine acquisition lower transition costs partly offset inclusion stock option compensation cost beginning 2006 operating income margin unfavorably impacted approximately 90 million recorded revenues generated operating income primarily related shortterm costonly transitional bottling agreements pernod ricard sa pernod ricard addition operating income affected accounting fin 46r see discussion fin 46r factors could adversely affect results include potential changes distribution competitive pricing activities increased regulation class actions andor litigation possibility excise tax increases including internationally 2005 compared 2004 net sales increased 4727 million 40 16420 million principally due impact spirits wine acquired assets 444 million sales also benefited higher us sales premium superpremium spirits including new starbucks coffee liqueur strong case volume growth international markets favorable foreign exchange 5 million partly offset lower sales nonpremium brands us operating income increased 673 million 20 4010 million higher sales partly offset brand spending support launch starbucks coffee liqueur restructuringrelated integration costs 184 million operating income affected accounting fin 46r since many assets acquired owned entities also owned assets acquired pernod ricard accordance fin 46r fully consolidated entities primary beneficiary even brands assets pernod ricard ultimately owned primary beneficiary obligation absorb majority expected losses right receive majority expected residual returns entity addition fair value assets acquired us less 50 fair value entity accounted investment using cost method meaning sales expenses related brands assets acquired fortune brands entities included statement income fully consolidated basis therefore reported sales operating income representative future results operations refer note 4 acquisitions disposals joint ventures consolidated financial statements full description accounting treatment acquisition golf 2006 compared 2005 net sales increased 476 million 4 13134 million higher sales resulted sales growth product categories driven part successful new products golf clubs golf shoes continued growth international markets europe asia operating income decreased 55 million 3 1660 million primarily due higher commodity energy costs approximately 810 million inclusion stock option compensation cost beginning year expect golf industry benefit favorable longterm demographic trends including aging us population rounds play increase age near term participation levels impacted factors including weather economic conditions golfrelated travel corporate spending us rounds play flat 2004 2005 modestly 2006 future success golf business depend upon continued innovation product quality successful marketing across product categories well continued growth international markets 2005 compared 2004 net sales increased 536 million 4 12658 million increase attributable sales growth product categories new product introductions golf clubs favorable mix shift toward premium titleist brand balls clubs well favorable foreign exchange 9 million operating income increased 177 million 12 1715 million higher sales favorable mix shift toward higher margin titleist branded golf balls clubs favorable foreign exchange absence restructuringrelated charges 6 million corporate 2006 compared 2005 corporate expenses 741 million include salaries benefits expenses related corporate office employees increased 104 million 16 primarily due required expensing stock option compensation cost beginning 2006 upon adoption fas 123r 2005 compared 2004 corporate expenses 637 million include salaries benefits expenses related corporate office employees increased 23 million 4 primarily due higher litigation expenses liquidity capital resources primary liquidity needs support working capital requirements fund capital expenditures service indebtedness pay dividends well finance acquisitions share repurchases deemed appropriate principal sources liquidity cash flows operating activities commercial paper borrowings credit agreements longterm notes operating income generated subsidiaries significant restrictions ability subsidiaries pay dividends make distributions fortune brands currently focus use free cash flow internal growth dividends reduction debt incurred result spirits wine acquisition order increase financial flexibility despite current focus debt reduction past continue periodically review portfolio brands evaluate strategic options increase shareholder value cannot predict whether may enter acquisition disposition joint venture strategic transaction impact transaction could results operations cash flows financial condition whether result issuance debt equity securities otherwise description debt see capitalization note 6 longterm debt note 13 financial instruments consolidated financial statements description spirits wine acquisition see note 4 acquisitions disposals joint ventures consolidated financial statements cash flows net cash provided operating activities 9827 million year ended december 31 2006 compared 8027 million year ended december 31 2005 increase cash provided 1800 million principally due higher cash flow home hardware business partly due lower working capital increases result slower fourth quarter growth spirits wine business primarily higher net income favorable timing interest payments newly issued debt working capital current assets net current liabilities increased 10399 million 14147 million december 31 2006 primarily due consolidation balance sheet accounts spirits wine acquired assets transferred january 2006 net 406 million increase higher net cash flow well higher spirits wine inventory net cash used investing activities year ended december 31 2006 7623 million compared 46642 million year ended december 31 2005 decrease 39019 million primarily due payments 2005 spirits wine acquisition 48988 million less dividend spinoff acco world corporation 6133 million partly offset payments 2006 spirits wine acquisition 3095 million simonton acquisition 2714 million focus capital spending growth initiatives becoming lowest cost producers highest quality products capital expenditures 2006 1814 million 342 million lower 2005 primarily due sale selected assets currently estimate 2007 net capital expenditures range 225 250 million expect generate funds internally net cash used financing activities year ended december 31 2006 1455 million compared net cash provided 37837 million 2005 change 39292 million primarily attributable higher debt result spirits wine acquisition last year partly offset proceeds 1530 million received vs group order maintain 10 interest spirits wine business capitalization total debt 58 billion essentially december 31 2006 2005 ratio total debt total capital decreased 524 december 31 2006 592 december 31 2005 primarily result higher equity mainly due higher net income 8301 million debt assumed stock issued acquisition simonton 2979 million partly offset lower debt due cash flow operations may 2006 filed securities exchange commission new universal shelf registration statement covering offer sale undetermined amount various securities two revolving credit agreements various banks agreements include 20 billion 5year revolving credit agreement matures 2010 500 million 364day revolving credit agreement october 5 2006 renewed 364day revolving credit facility mature 2007 agreement includes option extend payment one year companys discretion incremental fee 0125 outstanding amount facility replaces previous 364day facility amounts outstanding interest rates variable based market interest rates time borrowing companys longterm credit rating facility fees 008 per annum subject increases maximum fees 015 per annum event longterm debt rating falls specified levels facility supports companys commercial paper borrowings commercial paper market december 31 2005 30 billion bridge credit agreement bridge credit agreement terminated upon issuance new longterm debt january 2006 issued longterm debt securities totaling 20 billion shelf registration statement filed securities exchange commission 20 billion notes consists 750 million 5125 notes due january 2011 950 million 5375 notes due january 2016 300 million 5875 notes due january 2036 net proceeds 19774 million less price discounts 93 million underwriting fees 133 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses proceeds used pay commercial paper issued connection spirits wine acquisition addition january 2006 issued longterm debt securities totaling €800 million approximately 1 billion transaction exempt registration accordance regulation securities act 1933 €800 million notes consist €300 million 35 notes due january 2009 €500 million 4 notes due january 2013 net proceeds €7945 million less price discounts €31 million underwriting fees €24 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses proceeds used pay commercial paper issued connection spirits wine acquisition borrowings bridge credit agreement see note 6 longterm debt additional information new debt refer note 13 financial instruments consolidated financial statements treasury rate locks associated usdenominated longterm debt spinoff office products business part spinoff office products business august 16 2005 acco world corporation office products business paid cash dividend 625 million fortune brands received 6133 million minority shareholder received 117 million fact fortune brands longer receive cash flows acco world corporation result spinoff expected material impact longterm liquidity company spirits wine acquisition april 21 2005 announced would acquire certain spirits wine brands well distribution assets pernod ricard approximately 525 billion july 2005 closed purchase see note 4 acquisitions disposals joint ventures consolidated financial statements information acquisition including 2006 purchase price adjustments currently intend utilize cash flow net capital expenditures dividend payments pay debt incurred finance acquisition operations newly acquired spirits wine business generate positive cash flow interest payments debt incurred result acquisition simonton acquisition june 7 2006 closed acquisition sbr inc simonton privately held company brands including simonton windows leading vinylframed window brand north america purchase price approximately 5998 million based price fortune brands common stock closing paid combination stock cash assumed debt based valuation stock component 50 total purchase price assumed 859 million simontons debt 554 million paid closing dividends summary 2006 cash dividend activity companys common stock shown july 25 2006 increased quarterly dividend common stock 8 036 per share 039 per share summary 2006 dividend activity companys 267 convertible preferred stock shown currently expect pay quarterly cash dividends future payments dependent upon financial condition results operations capital requirements factors including set forth business cautionary statement pension plans periodic basis evaluate assumptions used determining pension liabilities assets well pension expense based historical returns plan assets current economic conditions time assumptions set december 2006 review economic assumptions cash flow spot rate yield curve analysis led increase weightedaverage discount rate 57 59 weightedaverage expected rate return decreased 83 82 management believes assumptions appropriate 2006 revisions result decrease pension postretirement expense approximately 35 million 04 million respectively 2007 december 2005 review economic assumptions cash flow spot rate yield curve analysis led reduction weightedaverage discount rate 59 57 weightedaverage expected rate return assets remained unchanged 83 management believes assumptions appropriate 2005 revisions resulted increase total pension postretirement expense approximately 4 million 2006 total pension plan cash contributions 181 million 480 million respectively 2006 2005 company maintains pension plans many operations pension plans aggregate funded excess current liability defined internal revenue code 2007 expect make cash contributions approximately 30 50 million fund existing pension liabilities definedbenefit plans believe internally generated funds adequate make pension plan cash contributions adequacy liquidity sources believe internally generated funds together access global credit markets adequate meet longterm shortterm capital needs including resulting spirits wine acquired assets however cash flows operations borrowing availability overall liquidity subject certain risks uncertainties including set forth item 1 business cautionary statement foreign exchange investments various foreign countries principally australia canada mexico spain uk france therefore changes value related currencies affect balance sheet cash flow statements translated us dollars addition 2006 issued eurodenominated longterm debt designated eurodenominated debt net investment hedges eurofunctional currency operations see note 6 longterm debt consolidated financial statements interest rates may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuance new longterm debt second quarter 2005 entered treasury rate locks aggregate notional value 125 billion order hedge risk earnings associated fluctuations interest rates relating anticipated issuances dollardenominated debt associated spirits wine acquisition fourth quarter 2005 entered additional treasury rate locks aggregate notional value 500 million terminated treasury rate locks january 5 2006 issued dollardenominated longterm debt addition fourth quarter 2005 entered interest rate swaps aggregate notional value €800 million terminated swap agreements january 27 2006 issued new eurodenominated longterm debt classified treasury rate locks interest rate swaps cash flow hedges since hedged fluctuations interest rates relating anticipated issuance debt associated spirits wine acquisition information new dollar eurodenominated longterm debt issued connection spirits wine acquisition see note 6 longterm debt consolidated financial statements information regarding treasury rate locks interest rate swaps including accounting gains losses respect locks swaps see note 13 financial instruments consolidated financial statements fair market value longterm fixed interest rate debt subject interest rate risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value 50349 million 51869 million total longterm debt including current portion december 31 2006 2005 approximately 49189 million 52493 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity investments unconsolidated subsidiaries investments unconsolidated subsidiaries decreased 10700 million 835 million primarily due consolidation spirits wine acquired assets transferred fortune brands january 27 2006 investment recorded consolidated balance sheet december 31 2005 10832 million minority interest consolidated subsidiaries minority interest consolidated subsidiaries increased 1849 million 5597 million principally due contribution vs group 1530 million maintain 10 interest spirits wine business well adjustment 478 million recorded minority interest expense consolidated statement income representing increase estimated fair value convertible redeemable preferred stock held vs partly offset absence fin 46r accounting spirits wine acquisition assets transferred fortune brands january 2006 stockholders equity stockholders equity yearend 2006 increased 10824 million compared yearend 2005 principally due higher net income 8301 million acquisition simonton 50 paid stock 2979 million increase cumulative foreign translation adjustments 1624 million impact stockbased compensation 1183 million partly offset dividends paid 2240 million impact adoption fas 158 postretirement plan accounting 1199 million guarantees commitments thirdparty guarantees debt maxxium worldwide bv maxxium spirits wine business international sales distribution joint venture totaled approximately 82 million required perform guarantees event maxxium fails make contractual payments december 12 2005 renewed guarantees maxxiums credit facilities renewal extended expiration date committed portion credit facilities december 15 2010 accordance financial accounting standards board interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others recorded liability 06 million december 31 2006 reflect fair value guarantees maxxium also guaranteed various leases acco world corporation office products segment divested spinoff august 16 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 43 million april 2013 accordingly recorded fair value guarantees financial statements accordance fin 45 december 31 2006 recorded liability 15 million refer note 3 discontinued operation consolidated financial statements additional information spinoff office products segment addition part formation future brands llc future brands joint venture vs group jim beam brands co jbbco guaranteed financial obligations future brands may arise event future brands default fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands conducts business cannot estimate possible future obligations future brands agreement december 31 2006 jbbco outstanding obligations result arrangement contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2006 apurchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures addition contractual obligations listed also commercial commitments contingently liable december 31 2006 include guarantee certain credit facilities bank loans entered maxxium amount totaling 825 million 132 million expires less one year remaining 693 million due four five years shareholder loan facility executed bgsw maxxium amounting 198 million amounts outstanding expires four five years standby letters credit 673 million 624 million due less one year remaining 49 million due one three years surety bonds 479 million 478 million due less one year remaining 01 million due one three years contingent commitments expected significant impact liquidity derivative financial instruments accordance statement financial accounting standards 133 fas 133 accounting derivative instruments hedging activities related amendment statement financial accounting standards 138 fas 138 accounting certain derivative instruments certain hedging activities derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2006 19 million deferred currency gains reclassified cost sales year ended december 31 2005 72 million deferred currency losses reclassified cost sales year ended december 31 2004 deferred currency losses less 01 million reclassified cost sales estimate 42 million currency derivative losses included oci december 31 2006 reclassified earnings within next twelve months paid purchase price spirits wine acquisition british pounds sterling connection acquisition 2005 entered call options buy british pounds sterling hedge currency exposure related purchase price terminated call options early july 2005 also entered forward contracts buy british pounds hedge currency exposure related purchase price settled forward contracts upon consummation acquisition july 2005 connection acquisition also entered treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuance new longterm debt finance acquisition terminated locks swaps upon issuance new longterm debt january 2006 see note 13 financial instruments consolidated financial statements foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk principal currencies hedged include canadian dollar euro british pound sterling australian dollar also exposed foreign currency risk result new eurodenominated debt designated eurodenominated debt net investment hedges respect spirits wine acquired assets eurodenominated operations continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuances new longterm debt see note 13 financial instruments consolidated financial statement item 8 form 10k information management interest rate risk recently issued accounting standards accounting uncertainty income taxes july 2006 fasb issued interpretation 48 fin 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 two step process first step recognition determine whether likely tax position sustained upon examination based technical merits position second step measurement determine amount benefit recognize financial statements fin 48 requires upon adoption record change net assets results application fin 48 adjustment opening retained earnings result adjustment net assets retained earnings 020 million fin 48 effective january 1 2007 fair value measurement september 2006 fasb issued statement financial accounting standards 157 fair value measurement fas 157 fas 157 defines fair value establishes framework measuring fair value expands disclosures assets liabilities measured fair value statement require new fair value measurements fas 157 effective financial statements issued fiscal years beginning november 15 2007 calendar 2008 fortune brands evaluating impact fas 157 results operations financial position critical accounting policies estimates significant accounting policies described note 1 notes consolidated financial statements consolidated financial statements prepared conformity generally accepted accounting principles preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe following companys critical accounting policies due significant subjective complex judgments estimates used preparing consolidated financial statements regularly review assumptions estimates based historical experience allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns trade receivables include interest allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers potential insolvency early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 491 million 524 million december 31 2006 december 31 2005 respectively inventories firstin firstout inventory method principal inventory method accordance generally recognized trade practice maturing spirits wine inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory reserves recorded obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns specific identification items product discontinuance engineeringmaterial changes property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed estimated useful lives related assets follows buildings leasehold improvements 15 40 years machinery equipment 3 10 years longlived assets accordance statement financial accounting standards 144 fas 144 accounting impairment disposal longlived assets longlived asset including amortizable identifiable intangibles asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate time future cash flow derived recent business projections comparison indicates impairment amount impairment calculated using quoted market price unavailable using discounted expected future cash flows discount rate applied cash flows based weightedaverage cost capital represents blended aftertax costs debt equity goodwill indefinitelived intangibles accordance statement financial accounting standards 142 fas 142 goodwill intangible assets goodwill tested impairment annual basis certain circumstances written impaired interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates use rate corresponding cost capital risk adjusted appropriate determining discounted cash flows estimated cash flows determined disaggregating business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill perform impairment test measure recognize amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting units goodwill implied fair value goodwill determining estimated future cash flows consider current projected future levels income well business trends prospects market economic conditions fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangibles impairment annually whenever market business events indicate may potential impact intangible consider implications external eg market growth pricing competition technology internal factors eg product costs margins support expenses capital investment potential impact cash flows business near long term well impact identifiable intangible asset associated business developing executing shortterm longterm plans based recent business results consideration significant external internal factors resulting business projections indefinitelived intangible assets associated segment reviewed determine whether likely remain indefinitelived whether finite life appropriate addition based events period future expectations management considers whether potential impairment exists required fas 142 predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize profit split methodology customary valuation practice establish reasonable royalty rate profit split analyses allocate economic income ebitda less returns working capital fixed assets employed tradename residual assets economic unit determine expected profit margin associated commercialization tradename additionally independent valuation experts used periodic review testing managements assumptions relative significant trade valuations lives independent research market competitive dynamics conjunction ongoing review carrying value goodwill identifiable intangible assets years ended december 31 2006 2005 2004 writedowns goodwill identifiable intangible assets warranty reserves offer customers various warranty terms based upon type product sold determine warranty expense accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category generally record warranty expense cost products sold time sale refer note 15 product warranties consolidated financial statements warranty expense years ended december 31 2006 2005 2004 413 million 337 million 339 million respectively employee benefit plans provide range benefits employees retired employees including pensions postretirement postemployment health care benefits record annual amounts relating plans based calculations specified generally accepted accounting principles include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current rates trends deemed appropriate expected return plan assets determined based historical experience nature plans investments expectations longterm rates return discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments bond portfolio used selection interest rates top quartile bonds rated nationally recognized statistical rating organizations includes noncallable bonds deemed sufficiently marketable discount rate december 31 2006 2005 59 57 respectively weighted average remaining service period pension plans december 31 2006 122 years required united states generally accepted accounting principles effects modifications generally accumulated specified corridor amortized average remaining service period employees cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees total net actuarial losses pension postretirement benefit plans 263 million december 31 2006 reduction 65 million december 31 2005 primarily result increase discount rate loss recognition pension expense 19 million asset gains excess expected rate return believe assumptions utilized recording obligations companys plans reasonable based experience advice independent actuaries however difference actual experience changes assumptions may materially affect companys financial position results operations postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases result assumption december 31 2005 assumed rate increase 95 next year declining 50 basis points year reaching ultimate assumed rate increase 5 december 31 2006 better reflect differing market experience medical prescription drug claims bifurcated rates postretirement medical assumption assumed rate increase 825 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year postretirement prescription drugs assumed rate increase 1125 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year pension expenses 433 million 390 million 374 million respectively years ended december 31 2006 2005 2004 postretirement expenses 168 million 140 million 141 million respectively years ended december 31 2006 2005 2004 2007 expect pension expense approximately 41 million postretirement benefit expense approximately 14 million 25 basis point change 025 discount rate assumption would lead increase decrease pension expense postretirement benefit expense approximately 35 million 04 million respectively 2007 25 basis point change longterm rate return used accounting companys pension plans would 15 million impact pension expense income taxes accordance statement financial accounting standards 109 accounting income taxes establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse provide deferred taxes undistributed earnings foreign subsidiaries expect permanently reinvest undistributed earnings foreign subsidiaries considered permanently invested aggregate 5543 million december 31 2006 revenue recognition accordance staff accounting bulletin 104 revenue recognition recognize revenue products shipped customers net applicable provisions discounts returns allowances criteria recognition revenue title risk loss passed customer persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility reasonably assured also provide estimate potential bad debt time revenue recognition amounts billed shipping handling classified net sales consolidated income statement costs incurred shipping handling classified advertising selling general administrative expenses shipping handling costs included advertising selling general administrative expenses 2573 million 2194 million 1853 million 2006 2005 2004 respectively customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sellthrough business products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances accounted reductions gross sales costs recorded time sale based managements best estimates based historical projected experience type program customer management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations stockbased compensation january 1 2006 adopted statement financial accounting standards 123 revised 2004 sharebased payment fas 123r fas 123r requires sharebased compensation expense measured fair value award date grant recognized financial statements period employee provides service exchange award fas 123r supplemented securities exchange commission staff accounting bulletin 107 sharebased payment adopted fas 123r effective january 1 2006 using modified prospective transition method defined fas 123r requires compensation cost recorded unvested stock options remaining service period beginning january 1 2006 fair value option award estimated date grant using blackscholes optionpricing model requires use following assumptions expected dividend yield expected volatility riskfree interest rate expected term fair value september 2006 option grant 1389 per share change exercise price 5 per share would increased fair value 085 per share 6 change expected volatility 100 basis points would increased fair value 049 per share 4 prior 2006 applied accounting principles board opinion 25 apb 25 accounting stock issued employees related interpretations accounting stock option portion stockbased compensation granted stock options employees exercise prices equal fair market value date grant compensation cost recognized options granted periods prior 2006 cost initiatives continuously evaluate productivity supply chains existing asset base actively seek identify opportunities improve cost structure future opportunities may involve among things reorganization operations relocation manufacturing assembly locations generally lower costs efficient sourcing products components third party suppliers implementing significant cost reduction efficiency opportunities could result charges pending litigation see note 22 consolidated financial statements item 8 form 10k environmental matters involved numerous remediation activities clean hazardous wastes required federal state laws liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties uncertainties status laws regulations technology information related individual sites make difficult develop estimates environmental remediation exposures potential liabilities relate sites relate sites longer never owned february 1 2007 various subsidiaries designated potentially responsible parties prp superfund similar state laws 44 instances 27 dismissed settled otherwise resolved calendar year 2006 identified prp one new instance one previously resolved matter reopened one prp claim dismissed settled otherwise resolved average settlement amount approximately 6600 instances named prp enter costsharing arrangements prps give notice insurance carriers potential prp liability rarely ever receive reimbursement insurance believe cost complying present environmental protection laws considering estimated recoveries either responsible parties insurance material adverse effect upon results operations cash flows financial condition december 31 2006 2005 accruals 331 million 415 million respectively cover environmental compliance clean including limited mentioned superfund sites decrease primarily relates expiration contractual indemnification period divested business related party transactions future brands llc spirits wine business partner vs group vs joint venture named future brands llc future brands distributes companies spirits brands united states provides related selling invoicing services future brands receives commission partners services provided spirits wine business records revenue time shipment future brands customers part forming joint venture jbbco event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2006 2005 jbbco outstanding obligations result arrangement spirits wine business balances related future brands included following increase accounts receivable accounts payable due higher distribution future brands due sales resulting spirits wine acquisition maxxium worldwide bv bgsw partner international sales distribution joint venture named maxxium worldwide bv maxxium distributes sells spirits wine key markets outside united states joint venture partners include rémy cointreau edrington group vs november 2006 rémy cointreau gave notice maxxium terminate distribution arrangement maxxium effective march 30 2009 expect rémy cointreaus eventual departure material adverse impact either operations maxxium financial results company spirits wine business rémy cointreau brands account 15 maxxiums case volume spirits wine business records sales time spirits sold third parties rather time shipment maxxium result forming joint venture company guaranteed certain credit facilities bank loans entered maxxium amount totaling 82 million 77 million outstanding december 31 2005 december 31 2004 guarantees totaled 85 million 76 million outstanding bgsw executed shareholder loan facility loan facility maxxium amounts outstanding loan facility either december 31 2006 december 31 2005 loan facility renewed 2005 expires december 12 2010 spirits wine business balances related maxxium included following increase accounts receivable accounts payable due higher distribution maxxium due international sales resulting spirits wine acquisition item 7aitem 7 management’s discussion analysis financial condition results operations consolidated summary fortune brands inc holding company subsidiaries make sell leading consumer branded products worldwide following markets spirits home hardware golf products first enhance shareholder value profitably building leading consumer brands drive sales earnings growth well enhance longterm returns drive growth positioning brands businesses outperform respective markets developing innovative new products effective marketing campaigns expanding customer relationships extending brands adjacent categories developing international growth opportunities second pursue business improvements operating lean flexible supply chains business processes third promote organizational excellence developing winning cultures associates fourth seek enhance returns leveraging breadth balance financial strength drive shareholder value first priority internal growth also strive achieve growth high returns acquisitions dispositions joint ventures finally time enhance shareholder value initiatives using financial resources repurchase shares pay attractive dividends 2007 net income decreased 8 diluted earnings per share decreased 10 7626 million 487 respectively compared 2006 income continuing operations decreased 8 diluted earnings per share continuing operations decreased 10 decrease profits due primarily impact downturn us housing products market higher restructuring restructuringrelated charges incremental 030 per diluted share absence 2007 tax credits recorded 2006 865 million 057 per diluted share decreases partially offset benefit new product sales price increases implemented offset higher commodity costs home hardware spirits businesses productivity improvements global sourcing initiatives cost reduction efforts lower corporate expenses absence 2007 2006 minority interest charge related increase fair value spirits business following summarizes performance business segments 2007 spirits business achieved 4 growth sales 16 growth operating income compared 2006 net sales increased primarily worldwide volume growth premium superpremium spirits higher pricing favorable foreign exchange significant portion increase operating income due gain sale dalmore scotch whisky us distribution rights related assets dalmore well higher sales cost containment excluding gain sale dalmore operating income increased 9 sales home hardware business declined 3 primarily result downturn us home products market partly offset addition simonton successful line extensions new product introductions expanded customer relationships cabinetry residential entry doors even challenging market conditions home products brands continued gain share cabinetry faucets entry doors security products operating income 28 result lower underlying sales related unfavorable coverage manufacturing overhead costs well higher restructuring restructuringrelated costs related supplychain initiatives decreases partly offset higher pricing productivity improvements aggressive cost management golf brands achieved 7 increase sales compared 2006 strength sales growth product categories successful new products golf clubs golf shoes strong growth international markets continued share gains key product categories favorable shift golf ball demand premium models favorable foreign exchange operating income essentially prior year higher sales offset increased brand support expenses higher oilbased commodity costs patent litigation related costs december 2007 sold remaining us wine assets constellation brands inc 8845 million subject purchase price adjustments cash working capital levels selling two wine brands related assets e j gallo winery august 2007 sale constellation brands inc resulted net aftertax gain sale 52 million addition december 2007 sold us distribution rights related assets dalmore 580 million resulting gain sale 285 million net tax january 2006 substantially completed final legal transfer spirits wine assets acquired july 2005 result acquisition january 2006 refinanced portion shortterm debt utilized acquisition issued dollar eurodenominated longterm debt amount 2 billion 800 million approximately 1 billion refer note 4 “acquisitions disposals” note 8 “longterm debt” consolidated financial statements item 8 form 10k june 2006 acquired sbr inc simonton holdings inc privately held company owns leading vinylframed window brand north america refer note 4 “acquisitions disposals” consolidated financial statements 2008 believe company benefit following trends businesses continued growth premium spirits worldwide sustained development innovative new products across segments international growth opportunities segments expanding customer relationships particularly home hardware aging population trends us favorably impact conditions home products golf industries company also identified following risks challenges may impact businesses adverse impact downturn overall us home products market economists project decline low doubledigit rate 2008 potential continuing increases commodities costs particularly copper zinc petroleum impact external conditions weather destination travel corporate spending overall demand golf products results operations 2007 compared 2006 fortune brands net sales slightly higher 2007 operating income 5 lower net income decreased 8 primarily due impact downturn us home products markets higher restructuring restructuringrelated charges absence 2006 tax credits net sales net sales 421 million 05 benefiting newly introduced products line extensions across businesses approximately 510 million total net discontinued products impact simonton acquisition 182 million strong international growth favorable foreign exchange 135 million targeted price increases implemented offset higher commodity costs home hardware business certain premium spirits brands net sales negatively impacted downturn us home products market cost products sold cost products sold increased 878 million 2 primarily acquisition simonton 127 million increased commodity costs partly offset benefits productivity improvements global sourcing initiatives facility consolidationdownsizing home hardware business excise taxes spirits excise taxes spirits essentially prior year percentage sales excise taxes generally levied based alcohol content spirits products consistent industry practice excise taxes collected customers reflected net sales corresponding payments governments expenses advertising selling general administrative expenses advertising selling general administrative expenses increased 92 million 05 primarily result higher brand investment spirits business support global premium brands golf business support new product introductions well due impact simonton acquisition increases partly offset benefit cost reduction initiatives particularly home hardware business lower corporate expenses reflecting projected reduction incentive compensation program payouts amortization intangibles amortization intangibles increased 47 million 476 million primarily due amortization intangible assets associated june 2006 simonton acquisition restructuring charges twelve months ended december 31 2007 recorded pretax restructuring charges 735 million charges predominantly related supply chain initiatives home hardware business including tangible intangible asset impairment charges resulting consolidation facilities cabinetry window tool storage closure cabinetry component operation planned exits entry door market united kingdom decorative column product lines us home hardware business closed downsized several facilities optimize supply chains better align cost structures capacity navigate current downturn us housing product market support longterm growth 2007 charges consisted primarily 163 million workforce reduction costs 496 million asset writedowns 76 million contract termination related costs additional information home hardware restructuring refer results operations segment home hardware 2007 compared 2006 twelve months ended december 31 2006 recorded pretax restructuring charges 212 million primarily related supplychain initiatives home hardware business gain sale dalmore scotch whisky us distribution rights 2007 recorded pretax gain sale dalmore scotch whisky us distribution rights related assets 456 million operating income operating income decreased 716 million 5 13763 million primarily due lower sales home hardware business resulting unfavorable coverage manufacturing overhead costs greater brand investment higher restructuring restructuringrelated charges operating income benefited new product sales price increases implemented offset higher commodity costs home hardware business spirits business mix shift premium products golf spirits businesses gain sale dalmore scotch whisky us distribution rights related assets 456 million productivity improvements global sourcing initiatives cost reduction efforts lower corporate expenses favorable foreign exchange interest expense interest expense decreased 152 million 5 2936 million due lower average debt partly offset increase commercial paper rates income net income net decreased 27 million 375 million income net includes nonoperating income expense amortization deferred income related future brands llc spirits business’s us sales distribution joint venture interest income foreign currency transaction gains losses income taxes effective income tax rates twelve months ended december 31 2007 2006 309 254 respectively increase effective rate primarily resulted absence 2006 tax credits 859 million primarily associated favorable resolution routine federal state tax audits changes foreign tax laws lowered income tax rates apply foreign deferred income taxes addition 2007 effective tax rate impacted higher foreign income generally taxed lower statutory rates changes foreign tax laws lowered income tax rates apply foreign deferred taxes minority interests minority interest expense decreased 435 million 244 million primarily due adjustment minority interest expense 478 million recorded third quarter 2006 representing increase estimated fair value vs group’s aggregate 10 ownership convertible redeemable preferred stock spirits business estimated fair value vs group’s minority interest bgsw change 2007 refer note 5 “minority interest held vs group” consolidated financial statements item 8 form 10k net income net income 7626 million 498 per basic share 487 per diluted share twelve months ended december 31 2007 compared net income 8301 million 556 per basic share 542 per diluted share twelve months ended december 31 2006 income continuing operations excluding us wine business 7495 million 489 per basic share 479 per diluted share compared income continuing operations 2006 8121 million 544 per basic share 531 per diluted share 8 626 million decrease income continuing operations primarily due lower operating income absence 2007 tax credits recorded 2006 865 million partially offset lower minority interest expense related spirits business 478 million income discontinued operations declined 49 million 27 primarily due lower us wine sales higher operating expenses 2006 compared 2005 fortune brands achieved 24 increase net sales 26 increase operating income continuing operations 41 net income 34 net income benefited fullyear benefit 2005 spirits acquisition acquired july 2005 underlying growth home hardware spirits golf businesses successful new products line extensions expanding customer relationships extending brands new markets brand investments sharegain initiatives price increases including implemented help offset energy raw material cost increases absence currency hedge accounting expense incurred related 2005 spirits acquisition purchase price higher tax credits 2006 benefits partially offset impact recording stock option compensation cost due adoption statement financial accounting standards 123 revised 2004 “sharebased payment” fas 123r higher restructuring restructuringrelated costs 2006 compared 2005 absence income due spinoff office products business net sales net sales increased 16 billion 24 85 billion sales benefited newly introduced products line extensions across businesses net impact simonton acquisition 2005 spirits acquisition 11 billion aggregate select price increases across businesses particularly home hardware including help offset energy raw material cost increases expanding customer relationships particularly cabinetry entry door brands extending brands new markets favorable foreign exchange 42 million increase net sales tempered impact downturn us housing market particularly second half 2006 cost products sold cost products sold increased 7458 million 20 primarily result spirits simonton acquisitions higher net sales productivity improvements increased yearoveryear costs energy raw materials approximately 45 million partially offset price increases productivity improvements excise taxes spirits us excise taxes spirits increased percentage sales approximately 120 basis points due higher percentage spirits sales fortune brands’ total revenues result 2005 spirits acquisition us excise taxes levied based proof content spirits products consistent industry practice us excise taxes collected customers reflected sales corresponding payments governments cost sales advertising selling general administrative expenses advertising selling general administrative expenses increased 3711 million 22 primarily result 2005 spirits acquisition addition increases due higher sales increased advertising new product introductions higher brand investment expenses business segments well stock option compensation cost amortization intangibles amortization intangibles increased 100 million 429 million primarily due amortization finitelived intangible assets associated 2005 spirits acquisition 49 million well amortization associated simonton acquisition 46 million restructuring charges twelve months ended december 31 2006 recorded pretax restructuring charges 212 million charges principally related consolidation manufacturing facilities workforce reductions home hardware spirits businesses twelve months ended december 31 2005 record restructuring charges restructuring projects provide return excess cost capital expected payback less three years operating income operating income 2006 increased 2966 million 26 compared 2005 increase primarily due benefit 2005 spirits acquisition well underlying growth businesses partly offset higher restructuring restructuringrelated costs incremental 157 million stock option compensation cost result adoption fas 123r 251 million interest expense interest expense increased 1552 million 101 3088 million primarily result debt associated spirits simonton acquisitions well higher interest rates income expense net income expense net increased 1186 million 402 million income increase primarily due absence 2005’s unfavorable impact currency hedge accounting expense related 2005 spirits acquisition purchase price 1209 million income taxes income taxes decreased 225 million 7 2993 million effective income tax rate twelve months ended december 31 2006 december 31 2005 254 350 respectively lower effective rate primarily related higher tax credits 2006 associated reductions foreign income tax rates applied foreign deferred income taxes well favorable resolution routine federal state tax audits minority interests minority interest expense increased 479 million 679 million primarily due adjustment minority interest expense 478 million representing increase estimated fair value vs group’s aggregate 10 ownership convertible redeemable preferred stock spirits business refer note 5 “minority interest held vs group” consolidated financial statements item 8 form 10k net income net income 8301 million 556 per basic share 542 per diluted share year ended december 31 2006 compared net income 6211 million 426 per basic share 413 per diluted share year ended december 31 2005 income continuing operations 8121 million 544 per basic share 531 per diluted share year ended december 31 2006 results compared income continuing operations 5775 million 396 per basic share 384 per diluted share year ended december 31 2005 increase income continuing operations 2346 million 41 primarily due higher operating income well substantial tax credits recorded 2006 865 million 2006 compared 77 million 2005 increase 052 per diluted share benefits partly offset higher restructuring restructuringrelated costs incremental 157 million 007 per diluted share stock option compensation cost 251 million 016 per diluted share absence income due spinoff office products business 026 per diluted share discontinued operations 2005 income discontinued operations decreased 180 million 2006 436 million 2005 primarily 2005 included income office business spunoff 2005 quarterly financial data fortune brands inc subsidiaries unaudited millions except per share amounts results operations segment spirits 2007 compared 2006 net sales increased 934 million 4 26068 million primarily due mix shift toward higher priced premium brands particularly sauza tequila jim beam maker’s mark bourbons favorable foreign exchange 83 million growth international markets especially australia global travel retail emerging markets select price increases premium spirits brands increases partly offset negative impact winddown transitional bottling agreement pernod ricard sa pernod ricard produce certain products cost subsequent 2005 spirits acquisition well adverse first quarter 2007 impact 2006 transition distribution spain maxxium worldwide bv joint venture net impact operating income decreased net sales 442 million aggregate information 2005 spirits acquisition refer note 4 “acquisitions disposals” consolidated financial statements item 8 form 10k operating income increased 1061 million 16 7667 million primarily due increase net sales gain sale dalmore scotch whisky us distribution rights related assets 456 million favorable foreign exchange faster growth higher margin premium superpremium brands cost synergies resulting 2005 spirits acquisition partly offset higher raw material costs global case volumes increased lowsingle digits 2007 compared last year primarily due higher consumer demand company’s premium brands company measures global case volumes based primarily case shipments company’s distributors retailers spirits business partner international sales distribution joint venture named maxxium worldwide bv maxxium distributes sells spirits select markets outside united states representing approximately onethird international spirits sales company retains 25 ownership interest maxxium accounts investment using equity method company’s 25 partners maxxium rémy cointreau sa rémy edrington group ltd vs group vs november 2006 rémy gave notice maxxium terminate distribution agreement maxxium effective march 30 2009 connection rémy’s termination expected rémy pay substantial termination penalty maxxium based expected impact rémy’s termination distribution agreement maxxium’s financial position results operations company currently estimates investment maxxium 963 million recoverable additional information refer note 6 “related party transactions” consolidated financial statements item 8 form 10k government sweden commenced process expected result privatization vs one joint venture partners maxxium worldwide bv international sales distribution us subsidiary joint venture partner future brands llc us sales distribution addition vs owns 10 interest convertible preferred stock beam global spirits wine inc spirits business time cannot predict impact change ownership vs would vs’s participation sales distribution joint ventures remain interested acquiring vs factors could adversely affect results include potential changes distribution competitive pricing activities changes us wholesale distributor inventory levels possibility excise tax increases including internationally 2006 compared 2005 net sales increased 10416 million 71 25134 million principally due incremental net sales 2005 spirits acquisition 763 million well yearoveryear sales growth combined business favorable foreign exchange 22 million growth brands including jim beam bourbon sauza tequila maker’s mark bourbon well superpremium brands several regionalnational brands contributed increase reported net sales 2005 impacted accounting acquisition accordance financial accounting standards board interpretation 46r fin 46r “consolidation variable interest entities” prior legal transfer acquired brands assets refer note 4 “acquisitions disposals” consolidated financial statements item 8 form 10k consolidated variable interest entities deemed primary beneficiary certain entities consolidated december 31 2006 consolidated december 31 2005 certain assets liabilities consolidated december 31 2005 longer owned entities consolidated december 31 2006 operating income increased 2722 million 70 6606 million benefit higher sales synergy benefits 2005 spirits acquisition lower transition costs partly offset inclusion stock option compensation cost beginning 2006 operating income margin unfavorably impacted approximately 90 million recorded revenues generated operating income primarily related shortterm costonly transitional bottling agreements pernod ricard addition operating income affected accounting fin 46r home hardware 2007 compared 2006 net sales decreased 1433 million 3 45509 million decrease primarily attributable adverse impact estimated low doubledigit decline us home products market sales benefited acquisition simonton 182 million new products line extensions approximately 428 million total particularly faucets related products cabinetry entry doors share gains including cabinetry faucets entry doors security products expansion key customers impact select commodity costrelated price increases favorable foreign exchange operating income decreased 1924 million 28 5030 million operating income negatively impacted lower underlying sales resulting unfavorable coverage manufacturing overhead costs well higher restructuring restructuringrelated costs related supply chain initiatives incremental 70 million price increases offset effect higher commodity costs approximately 80 million including absence commodity hedge gains 2007 operating income benefited productivity improvements global sourcing initiatives reduction overhead administrative costs facility closuresdownsizing 2007 home hardware business recorded pretax restructuring charges 702 million restructuringrelated charges 261 million 147 million recorded cost sales 114 million recorded advertising selling general administrative costs charges related supply chain initiatives including consolidation facilities cabinetry window tool storage production closure cabinetry component operation planned exit entry door market united kingdom decorative column product lines us closed downsized facilities optimize supply chains better align cost structures capacity navigate current downturn us housing products market support longterm growth 2007 home hardware restructuring charges 702 million consisted primarily 135 million workforce reduction costs 495 million tangible intangible asset writedowns 72 million contract termination related costs expect incur additional charges approximately 1015 million 2008 related completion home hardware restructuring programs initiated fourth quarter 2007 restructuringrelated charges 2007 261 million comprised cost sales charges inventory writedowns well advertising selling general administrative charges accounts receivable reserves doubtful accounts warranty reserves retention costs related exit entry door market uk decorative column products line us 2008 expect record incurred cash outlays approximately 2530 million related completion programs 2008 2009 expect cash proceeds sale assets related restructuring programs approximately 20 million anticipate programs commenced second half 2006 generate annual cost savings 20 30 million beginning 2008 addition savings achieved 2007 approximately 10 million 2006 home hardware business recorded pretax restructuring restructuringrelated charges 169 million 94 million respectively also primarily related supplychain initiatives june 2006 home hardware business acquired sbr inc including simonton windows leading brand vinylframed windows downturn overall us home products market projected economists decline lowdoubledigits 2008 continue negatively impact results operations home hardware business strive mitigate impact downturn net sales market share gain initiatives successful extension brands new markets expanding existing customer relationships building substantial presence stable replaceandremodel segment us home products market previously announced restructuring activities ongoing cost control initiatives work align supplychain administrative costs expected demand order mitigate impact downturn operating income operating margins anticipate 2008 benefit lower restructuring restructuringrelated charges business may also continue affected competitive pricing well increases costs certain commodities 2006 compared 2005 net sales increased 5408 million 13 46942 million increase primarily attributable continued growth share gains cabinetry faucet padlock brands well benefit acquisitions 344 million primarily simonton acquisition sales also benefited new products line extensions 43 million total expanding customer relationships home centers major builders expansion adjacent categories eg bath accessories patio doors impactresistant windows automotive towing accessories growth international markets favorable foreign exchange 23 million addition sales benefited price increases implemented help offset higher costs raw materials energy net sales increase tempered impact downturn overall us home products market particularly fourth quarter 2006 operating income increased 403 million 6 6954 million operating income benefited sales growth productivity improvements reversal legal reserve approximately 7 million well absence expenses 2006 related lower cost sourcing initiative cabinets 2005 unfavorable steel purchaseprice variance lifo inventory tool storage category 2005 79 million benefits partially offset higher commodity energy costs net impact approximately 3035 million restructuring restructuringrelated charges 263 million inclusion stock option compensation cost beginning 2006 upon adoption fas 123r golf 2007 compared net sales increased 920 million 7 14054 million net sales increase largely due new product introductions strong international growth continued share gains key product categories favorable shift golf ball demand premium models net sales also benefited higher sales product categories golf balls golf clubs shoes gloves accessories well favorable foreign exchange 28 million operating income decreased 05 million 1655 million primarily expenses related international market expansion investments research development well higher patent litigation related costs decreases nearly offset higher sales well growth premium golf balls clubs expect golf industry benefit favorable longterm demographic trends including aging us population rounds play increase retirement increasing popularity golf internationally near term participation levels impacted factors including weather economic conditions golfrelated travel corporate spending future success golf business depend upon continued innovation product quality successful marketing across product categories well continued market growth 2006 compared net sales increased 476 million 4 13134 million higher sales resulted sales growth product categories driven part successful new products golf clubs golf shoes continued growth international markets europe asia operating income decreased 55 million 3 1660 million primarily due higher commodity energy costs inclusion stock option compensation cost beginning year corporate 2007 compared 2006 corporate expenses include salaries benefits expenses related corporate office employees well public company expenses decreased 152 million 21 589 million expenses decreased primarily due lower incentive compensation expense mainly resulting lower expected payouts longterm incentive compensation programs 2006 compared 2005 corporate expenses increased 104 million 16 741 million primarily due required expensing stock option compensation cost beginning 2006 upon adoption fas 123r liquidity capital resources primary liquidity needs support working capital requirements fund capital expenditures service indebtedness pay dividends well finance acquisitions share repurchases deemed appropriate principal sources liquidity cash flows operating activities commercial paper borrowings credit agreements longterm notes operating income generated subsidiaries significant restrictions ability subsidiaries pay dividends make distributions fortune brands focus use free cash flow proceeds divestitures internal growth paydown debt incurred result 2005 spirits acquisition resulting reduction total debt 2007 15 billion sale us wine business significantly improved financial flexibility periodically review portfolio brands evaluate strategic options increase shareholder value cannot predict whether may enter acquisition disposition joint venture strategic options including share repurchase program impact transaction could results operations cash flows financial condition whether result issuance debt equity securities otherwise description 2005 spirits acquisition debt incurred connection acquisition refer note 4 “acquisitions disposals” consolidated financial statements item 8 form 10k cash flows net cash provided operating activities 9653 million year ended december 31 2007 compared 9827 million year ended december 31 2006 decrease cash provided 174 million principally due timing interest payments debt issued 2006 70 million higher first quarter 2007 payments 2006 customer programs primarily volumerelated employee performance incentives accrued 2006 increased pension contributions 31 million lower net income decrease cash provided operating activities favorably impacted absence buildup acquisitionrelated spirits inventory 2006 net cash provided investing activities year ended december 31 2007 7442 million compared net cash used investing activities 7623 million year ended december 31 2006 increase cash 15065 million primarily due net proceeds 9483 million sale us wine business well absence 2006 acquisition spending 2005 spirits acquisition 3095 million 2006 acquisition simonton 2714 million focus capital spending growth initiatives becoming lowest cost producers highest quality products capital spending 2007 2671 million 11 million higher 2006 currently estimate 2008 net capital expenditures range 175 225 million expect generate funds internally net cash used financing activities year ended december 31 2007 17130 million compared 1455 million year ended december 31 2006 increase 15675 million primarily due paydown debt year cash flow operating activities sale us wine business cash outflows partly offset absence 2007 proceeds received 2006 vs group maintain 10 interest spirits business 1530 million capitalization total debt decreased 14505 million year ended december 31 2007 44 billion primarily due proceeds received sale us wine business 9483 million dalmore scotch whisky us distribution rights related assets 58 million well due cash operating activities ratio total debt total capital decreased 412 december 31 2007 524 december 31 2006 primarily due paydown debt 2007 net income increased foreign translation adjustments stockholders’ equity two revolving credit agreements various banks agreements include 20 billion 5year revolving credit agreement matures 2010 500 million 364day revolving credit agreement amounts outstanding october 4 2007 renewed 364day 500 million revolving credit facility mature 2008 agreement includes option extend payment one year company’s discretion incremental fee 0125 outstanding amount facility replaces previous 364day facility interest rates variable based market interest rates time borrowing company’s longterm credit rating facility fees 008 per annum subject increases maximum fees 015 per annum event longterm debt rating falls specified levels facility supports company’s commercial paper borrowings commercial paper market may 2006 filed securities exchange commission new universal shelf registration statement covering offer sale undetermined amount various securities minority interest held vs group minority interest spirits business bgsw form shares redeemable convertible preferred stock held vs group “the bgsw minority interest” vs may require company purchase bgsw minority interest fair value whole part upon one year’s notice time upon change control bgsw jim beam brands co certain events company right acquire bgsw minority interest fair value whole part upon change control absolut spirits company incorporated sale absolut brand dissolution future brands llc us sales distribution joint venture bgsw minority interest cannot transferred sold third party vs without company’s consent account redemption feature accordance eitf topic d98 “classification measurement redeemable securities” measure minority interest fair value changes fair value reflected net income continuing operations bgsw publicly traded entity therefore quoted market price common preferred shares reporting period estimate fair value based combination marketbased earnings multiples discounted cash flow techniques ultimate fair value upon redemption based upon numerous factors subject assessment bgsw board independent appraiser board unable reach consensus fair value minority interest recorded december 31 2007 5429 million dividends july 2007 increased dividend common stock 8 annual rate 168 per common share summary 2007 dividend activity company’s common stock shown summary 2007 dividend activity company’s 267 convertible preferred stock shown adequacy liquidity sources believe internally generated funds together access global credit markets adequate meet longterm shortterm capital needs cash flows operations borrowing availability overall liquidity subject certain risks uncertainties including set forth item 1 “business forwardlooking statements” pension plans periodic basis evaluate assumptions used determining pension liabilities assets well pension expense based historical returns plan assets current economic conditions time assumptions set december 2007 review economic assumptions cash flow spot rate yield curve analysis led increase weightedaverage discount rate 59 64 weightedaverage expected rate return increased 82 83 management believes assumptions appropriate december 2006 review economic assumptions cash flow spot rate yield curve analysis led increase weightedaverage discount rate 57 59 weightedaverage expected rate return decreased 83 82 total pension plan cash contributions 489 million 181 million respectively 2007 2006 company maintains pension plans many operations pension plans aggregate funded excess current liability defined internal revenue code 2008 expect make cash contributions approximately 30 50 million fund existing pension liabilities definedbenefit plans believe internally generated funds adequate make pension plan cash contributions foreign exchange investments various foreign countries principally australia canada mexico spain uk france therefore changes value related currencies affect balance sheet cash flow statements translated us dollars addition 2006 issued eurodenominated longterm debt see note 8 “longterm debt” consolidated financial statements item 8 form 10k interest rates may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense interest rate swaps outstanding 2007 also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuance new longterm debt second quarter 2005 entered treasury rate locks aggregate notional value 125 billion order hedge risk earnings associated fluctuations interest rates relating anticipated issuances dollardenominated debt associated 2005 spirits acquisition fourth quarter 2005 entered additional treasury rate locks aggregate notional value 500 million terminated treasury rate locks january 5 2006 issued dollardenominated longterm debt addition fourth quarter 2005 entered interest rate swaps aggregate notional value  800 million terminated swap agreements january 27 2006 issued new eurodenominated longterm debt classified treasury rate locks interest rate swaps cash flow hedges since hedged fluctuations interest rates relating anticipated issuance debt associated 2005 spirits acquisition information new dollar eurodenominated longterm debt issued connection 2005 spirits acquisition see note 8 “longterm debt” consolidated financial statements item 8 form 10k information regarding treasury rate locks interest rate swaps including accounting gains losses respect locks swaps see note 15 “financial instruments” consolidated financial statements item 8 form 10k fair market value longterm fixed interest rate debt subject interest rate risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value 41427 million 50366 million total longterm debt including current portion december 31 2007 2006 approximately 40056 million 49189 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity guarantees commitments thirdparty guarantees debt maxxium worldwide bv maxxium spirits business’s international sales distribution joint venture totaled 912 million required perform guarantees event maxxium fails make contractual payments december 12 2005 renewed guarantees maxxium’s credit facilities renewal extended expiration date committed portion credit facilities december 12 2010 accordance financial accounting standards board interpretation 45 fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” recorded liability 04 million december 31 2007 reflect fair value guarantees maxxium addition part formation future brands llc future brands joint venture vs group 2001 jim beam brands co jbbco guaranteed financial obligations future brands may arise event future brands default fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands conducts business cannot estimate possible future obligations future brands agreement december 31 2007 jbbco outstanding obligations result arrangement also guaranteed various leases acco world corporation office products segment divested august 16 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 361 million april 2013 accordingly recorded fair value guarantees financial statements accordance fin 45 december 31 2007 recorded liability 10 million refer note 3 “discontinued operations” consolidated financial statements item 8 form 10k additional information spinoff office products segment contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2007 purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures b minimum required pension contributions cannot determined beyond 2008 due uncertainty timing settlement taxing authorities unable make reasonably reliable estimates period cash settlement unrecognized tax benefits therefore 4114 million unrecognized tax benefits december 31 2007 excluded contractual obligations table see note 14 “income taxes” consolidated financial statements item 8 form 10k addition contractual obligations listed also commercial commitments contingently liable december 31 2007 include guarantee certain credit facilities bank loans entered maxxium amount totaling 773 million 61 million expires less one year remaining 712 million due two three years shareholder loan facility executed bgsw maxxium amounting 219 million amounts outstanding expires three four years standby letters credit 948 million 607 million expires less one year remaining 341 million expiring one three years surety bonds 239 million 238 million expires less one year remaining 01 million expiring one three years contingent commitments expected significant impact liquidity derivative financial instruments accordance statement financial accounting standards 133 fas 133 “accounting derivative instruments hedging activities” related amendment financial accounting standards 138 fas 138 “accounting certain derivative instruments certain hedging activities” derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2007 154 million deferred currency losses reclassified cost sales year ended december 31 2006 19 million deferred currency gains reclassified cost sales year ended december 31 2005 deferred currency losses 72 million reclassified cost sales estimate 34 million currency derivative losses included oci december 31 2007 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk principal currencies hedged include canadian dollar australian dollar euro mexican peso british pound sterling also exposed foreign currency risk result new eurodenominated debt continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuances new longterm debt see note 15 “financial instruments” consolidated financial statement item 8 form 10k information management interest rate risk recently issued accounting standards fair value measurement september 2006 fasb issued statement financial accounting standards 157 “fair value measurement” fas 157 fas 157 defines fair value establishes framework measuring fair value expands disclosures assets liabilities measured fair value statement require new fair value measurements fas 157 effective financial statements issued fiscal years beginning november 15 2007 calendar 2008 fortune brands expect fas 157 materially impact results operations financial position fair value option february 2007 fasb issued statement financial accounting standards 159 “fair value option financial assets financial liabilities” fas 159 fas 159 permits entities choose specified election dates measure many financial instruments certain items fair value currently required measured fair value fas 159 effective first fiscal year begins november 15 2007 calendar 2008 fortune brands make election current financial assets liabilities business combinations december 2007 fasb issued statement financial accounting standards 141 revised 2007 fas 141r “business combinations” fas 141r replaces fas 141 “business combinations” fas 141r establishes principles requirements acquirer recognizes measures assets acquired liabilities assumed noncontrolling interest acquiree b recognizes measures goodwill acquired c determines information disclose fas 141r also requires acquisitionrelated costs including restructuring recognized separately acquisition fas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 calendar 2009 fortune brands statement eliminates adjustments goodwill changes deferred tax assets uncertain tax positions acquisition accounting measurement period limited one year acquisition including acquisitions prior adoption fas 141r noncontrolling interests consolidated financial statements december 2007 fasb issued statement financial accounting standards 160 fas 160 “noncontrolling interests consolidated financial statements amendment arb 51” fas 160 amends accounting research bulletin 51 establishing accounting reporting standards noncontrolling interest currently referred minority interest subsidiary deconsolidation subsidiary statement changes consolidated balance sheet presentation noncontrolling interests mezzanine level liabilities stockholders’ equity component stockholders’ equity however minority interest spirits business held vs group form redeemable preferred stock continue classified mezzanine level liabilities stockholders’ equity december 31 2007 carrying value minority interest held vs group 5429 million carrying value minority interestsnoncontrolling interests reclassified equity upon adoption fas 160 156 million fas 160 requires expanded disclosures consolidated financial statements clearly identify distinguish interests parent’s owners interests noncontrolling owners subsidiary fas 160 effective financial statements issued fiscal years beginning december 15 2008 calendar 2009 fortune brands statement applies prospectively except presentation disclosure requirements applied retrospectively periods presented fas 160 impact presentation noncontrolling interests fortune brands’ statements income financial position stockholders’ equity critical accounting policies estimates significant accounting policies described note 1 notes consolidated financial statements consolidated financial statements prepared conformity us generally accepted accounting principles preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe following company’s critical accounting policies due significant subjective complex judgments estimates used preparing consolidated financial statements regularly review assumptions estimates allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 538 million 491 million december 31 2007 2006 respectively inventories firstin firstout inventory method principal inventory method accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns specific identification items product discontinuance engineeringmaterial changes longlived assets accordance statement financial accounting standards 144 fas 144 “accounting impairment disposal longlived assets” longlived asset including amortizable identifiable intangibles asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated using quoted market price unavailable using discounted expected future cash flows 2007 recorded restructuring expense noncash impairments identifiable definitelived intangibles 126 million well property plant equipment 370 million goodwill indefinitelived intangibles accordance statement financial accounting standards 142 fas 142 “goodwill intangible assets” goodwill tested impairment least annually written impaired interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates estimated cash flows related goodwill grouped reporting unit level reporting unit operating segment certain circumstances component operating segment constitutes business estimated future discounted cash flows less carrying value net assets tangible identifiable intangible assets related goodwill perform impairment test measure recognize amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting unit’s goodwill implied fair value goodwill determining estimated future cash flows consider current projected future levels income well business trends prospects market economic conditions fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually whenever market business events indicate may potential impact intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize profit split methodology customary valuation practice establish reasonable royalty rate profit split analyses allocate economic income ebitda less returns working capital fixed assets employed tradename residual assets economic unit determine expected profit margin associated commercialization tradename writedowns goodwill indefinitelived identifiable intangible assets 2007 2006 2005 company cannot predict occurrence certain events might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment particularly related home hardware companies material negative change relationships significant customers strategic decisions made response economic competitive conditions minority interest held vs group vs group vs owns 10 minority interest spirits business bgsw minority interest form shares redeemable convertible preferred stock “the bgsw minority interest” carrying value minority interest december 31 2007 5429 million vs may require company purchase bgsw minority interest fair value whole part upon one year’s notice time upon change control bgsw jim beam brands co certain events company right acquire bgsw minority interest fair value whole part upon change control absolut spirits company incorporated sale absolut brand dissolution future brands llc us sales distribution joint venture bgsw minority interest cannot transferred sold third party vs without company’s consent account redemption feature accordance eitf topic d98 “classification measurement redeemable securities” measure minority interest fair value changes fair value reflected income continuing operations bgsw publicly traded entity therefore quoted market price common preferred shares reporting period estimate fair value based combination marketbased earnings multiples discounted cash flow techniques ultimate fair value upon redemption based upon numerous factors subject assessment bgsw board independent appraiser board unable reach consensus pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits record annual amounts relating plans based calculations specified us generally accepted accounting principles include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current rates trends deemed appropriate expected return plan assets determined based historical experience nature plans’ investments expectations longterm rates return discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments bond portfolio used selection interest rates top quartile bonds rated nationally recognized statistical rating organizations includes noncallable bonds deemed sufficiently marketable moody’s credit rating aa higher discount rate december 31 2007 2006 64 59 respectively weighted average remaining service period pension plans december 31 2007 approximately 110 years compensation increases reflect expected future compensation trends required us generally accepted accounting principles effects modifications generally accumulated specified corridor amortized average remaining service period employees cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees total net actuarial losses pension postretirement benefit plans 177 million december 31 2007 reduction 86 million december 31 2006 primarily result actuarial gains 2007 70 million primarily due increase discount rate well loss recognition pension expense 16 million believe assumptions utilized recording obligations company’s plans reasonable based experience advice independent actuaries however difference actual experience changes assumptions may materially affect company’s financial position results operations postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases december 31 2007 postretirement medical assumption assumed rate increase 75 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year postretirement prescription drugs assumed rate increase 105 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year assumption december 31 2006 postretirement medical assumed rate increase 825 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year postretirement prescription drugs assumed rate increase 1125 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year pension expenses 418 million 433 million 390 million respectively years ended december 31 2007 2006 2005 postretirement expenses 93 million 168 million 140 million respectively years ended december 31 2007 2006 2005 25 basis point change discount rate assumption would lead increase decrease pension expense postretirement benefit expense approximately 40 million 02 million respectively 2008 25 basis point change longterm rate return used accounting company’s pension plans would 21 million impact pension expense income taxes accordance statement financial accounting standards 109 “accounting income taxes” establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse company records valuation allowance reducing deferred tax assets likely assets realized record liabilities uncertain income tax positions accordance fasb interpretation 48 fin 48 “accounting uncertainty income taxes interpretation fasb statement 109” january 1 2007 adopted fin 48 fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained zero tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ company’s estimates future periods changes facts circumstances new information may require company change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur december 31 2007 company liabilities unrecognized tax benefits pertaining uncertain tax positions totaling 4114 million reasonably possible unrecognized tax benefits may decrease range 205 230 million next 12 months primarily result conclusion us federal state foreign income tax proceedings customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sellthrough business’s products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “net sales” category “advertising selling general administrative expenses” time program initiated andor revenue recognized costs recognized “net sales” include limited general customer programgenerated expenses cooperative advertising programs volume allowances promotional allowances costs typically recognized “advertising selling general administrative expenses” include point sale materials costs recorded time sale based management’s best estimates based historical projected experience type program customer management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations cost initiatives continuously evaluate productivity supply chains existing asset base actively seek identify opportunities improve cost structure future opportunities may involve among things reorganization operations relocation manufacturing assembly locations generally lower costs efficient sourcing products components thirdparty suppliers implementing significant cost reduction efficiency opportunities could result charges pending litigation see note 23 consolidated financial statements item 8 form 10k environmental matters involved numerous remediation activities clean hazardous wastes required federal state laws liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties uncertainties status laws regulations technology information related individual sites make difficult develop estimates environmental remediation exposures potential liabilities relate sites relate sites longer never owned february 1 2008 various subsidiaries designated potentially responsible parties “prp” “superfund” similar state laws 48 instances 27 dismissed settled otherwise resolved calendar year 2007 identified prp four new instances named prp enter costsharing arrangements prps give notice insurance carriers potential prp liability rarely ever receive reimbursement insurance believe cost complying present environmental protection laws considering estimated recoveries either responsible parties insurance material adverse effect upon results operations cash flows financial condition december 31 2007 2006 accruals 321 million 331 million respectively cover environmental compliance clean including limited mentioned superfund sites item 7aitem 7 management’s discussion analysis financial condition results operations consolidated summary fortune brands inc fortune brands holding company subsidiaries make sell leading consumer branded products worldwide following markets distilled spirits home hardware golf products strive enhance shareholder value variety ways including profitably building leading consumer brands drive sales earnings growth enhance returns longterm basis positioning brands businesses outperform respective markets developing innovative new products effective marketing programs expanding customer relationships extending brands adjacent categories developing international growth opportunities pursuing business improvements operating lean flexible supply chains business processes promoting organizational excellence developing winning cultures associates leveraging breadth balance financial resources drive shareholder value first priority internal growth also strive create shareholder value addon acquisitions dispositions joint ventures addition time enhance shareholder value initiatives using financial resources pay debt repurchase shares pay dividends description certain factors may future significant impact business financial condition results operations see “forwardlooking statements” 2008 net income diluted earnings per share decreased 59 3111 million 202 respectively compared 2007 income diluted earnings per share continuing operations decreased 79 decrease profits primarily due asset impairment charges 6594 million tax impact downturn us housing products market global economic environment writedowns spirits business’s investment maxxium 505 million absence 2007’s gain sale dalmore scotch whisky dalmore us distribution rights related assets 285 million tax income continuing operations benefited income due termination spirits us distribution agreement related deferred gain recognition 1909 million tax aggregate taxrelated credits 984 million gain due reduction fair value minority interest spirits business 819 million tax new product sales price increases implemented offset higher commodity costs home hardware business well targeted price increases spirits business productivity improvements aggressive cost management including global sourcing initiatives lower interest expense following summarizes performance business segments 2008 sales spirits business declined 5 operating income decreased 29 compared 2007 net sales decreased primarily impact new us distribution program facilitate lower consistent distributor inventory levels adverse impact unexpected australian excise tax increase readytodrink spirits products impact winddown transitional manufacturing agreements pernod ricard sa pernod ricard produce certain products subsequent 2005 acquisition unfavorable foreign exchange addition economic pressures resulted lower net sales certain markets sales benefited continued shift premium end portfolio targeted price increases impact acquisition cruzan rum operating income lower primarily due decline sales absence 2007’s gain sale dalmore’s us distribution rights related assets restructuring restructuringrelated charges 2008 reposition business including supplychain activities routetomarket initiatives well impairment charges certain regional nonus tradenames factors partially offset favorable mix shift toward higher margin premium brands outside australia sales home hardware business declined 17 primarily result downturn us home products market deteriorated year progressed due us recession credit crisis sales benefited new products line extensions well expansion adjacent product categories operating income 9686 million 2007 result asset impairment charges 7583 million lower sales related unfavorable coverage manufacturing overhead costs adverse operating leverage higher commodity costs decreases partly offset productivity improvements aggressive cost management lower restructuring restructuringrelated costs related supplychain initiatives sales golf brands declined 3 compared 2007 lower sales us result soft consumer demand discretionary purchases impact reduction inventory retailers sales benefited strong international growth particularly asia favorable foreign currency favorable sales mix operating income decreased 24 primarily due brand investment support growth initiatives lower sales resulting adverse operating leverage higher patent license expense increased commodity costs 2008 acquired premium cruzan rum business pernod ricard sa pernod ricard 1032 million cash addition repurchased 10 minority interest spirits business vin sprit group vs 4550 million also redeemed 49 interest spirits business’s us distribution joint venture held vs related transaction received 2300 million pernod ricard early termination us distribution agreement vs subsequent acquisition pernod ricard december 2007 sold remaining us wine assets constellation brands 8870 million selling two wine brands related assets e j gallo winery august 2007 sale constellation brands resulted net aftertax gain sale 52 million 2007 addition december 2007 sold us distribution rights related assets dalmore 580 million resulting gain sale 285 million net tax june 2006 acquired sbr inc simonton holdings inc privately held company owns leading vinylframed window brand north america 2009 expect remain focused initiatives designed outperform markets aggressively focus supplychain cost initiatives partly offset impact adverse operating leverage benefit strength brands new products across segments continue targeted brandbuilding investment innovation expansion new markets including international growth opportunities segments also identified following risks challenges may impact businesses broadbased global recession decrease consumer discretionary spending continuing adverse impact downturn overall us home products market home hardware business including adverse impact operating leverage fixed manufacturing costs customers continuing maintain lean inventories across categories foreign exchange rates results operations 2008 compared 2007 net sales net sales decreased 9542 million 11 76 billion primarily due downturn us home products market impact home hardware business weak consumer sentiment reduced demand discretionary purchases including adverse impact home hardware golf businesses lower sales certain markets spirits business including impact australian excise tax increase readytodrink spirit products sales benefited newly introduced products line extensions across businesses approximately 241 million total net discontinued products price increases implemented offset higher costs materials home hardware business well targeted price increases spirits business growth international markets golf business cost products sold cost products sold decreased 5198 million 11 primarily lower sales well cost reduction programs global sourcing initiatives productivity improvements factors partly offset adverse operating leverage well higher commodity costs approximately 8590 million excise taxes spirits excise taxes spirits 65 basis points percentage sales compared prior year due lower home hardware sales higher international spirits sales obligor percentage spirits sales excise taxes generally levied based alcohol content spirits products consistent industry practice excise taxes collected customers reflected net sales corresponding payments governments reflected expenses advertising selling general administrative expenses advertising selling general administrative expenses decreased 380 million 2 primarily due lower salesrelated variable costs cost reductions home hardware business partly offset restructuringrelated organization repositioning routetomarket initiatives business repositioning costs spirits business well increased brand investment golf business support growth initiatives amortization intangible assets amortization intangible assets increased 20 million 4 primarily due changes foreign currency rates asset impairment charges recorded pretax asset impairment charges home hardware spirits businesses 7855 million 6594 million tax home hardware charges 7583 million included writedowns goodwill tradenames longlived assets confident longterm prospects home hardware business charges result impact steeper anticipated decline us home products market general economy current year well expectation slower previously anticipated recovery additional information refer results operations home hardware segment addition recorded 272 million writedown certain nonus regional spirits tradenames restructuring charges twelve months ended december 31 2008 recorded restructuring charges 818 million home hardware business charges 495 million total primarily related supplychain initiatives designed align costs capacities marketplace conditions including announced closing eight manufacturing facilities charges also included costs exit select lowreturn product offerings 105 million addition recorded charges spirits business 323 million related business repositioning including supplychain activities routetomarket initiatives us internationally twelve months ended december 31 2007 recorded pretax restructuring charges 735 million home hardware 702 million spirits 27 million golf 06 million operating income operating income decreased 12307 million 1456 million primarily due asset impairment charges 7858 million lower sales home hardware golf businesses resulting adverse operating leverage higher commodity costs increased brand investment golf business absence 2007 gain sale dalmore scotch whisky us distribution rights related assets 456 million operating income benefited new products line extensions price increases implemented offset higher commodity costs home hardware business spirits business cost reduction programs global sourcing initiatives productivity improvements interest expense interest expense decreased 565 million 19 primarily result lower average debt well lower average interest rates income net income net increased 2424 million predominantly due 2300 million cash received pernod ricard early termination spirits us distribution agreement well 720 million due recognition remaining unamortized deferred income initial establishment joint venture amounts partially offset 505 million writedown investment maxxium income net also includes nonoperating income expense interest income transaction gainslosses related foreign currency denominated transactions 2009 results unfavorably impacted absence amortization deferred gain vs’s initial investment joint venture 203 million 2008 270 million annual basis longer amortized income net income tax expense effective income tax rates twelve months ended december 31 2008 2007 507 309 respectively 2008 effective income tax rate unfavorably impacted absence tax benefit goodwill impairment charges 4513 million 505 million writedown investment maxxium joint venture well income associated termination spirits business’s us distribution agreement higher us tax rate 2008 effective income tax rate favorably impacted 984 million tax benefit related final settlement federal income tax audit 20012002 federal tax returns additionally effective income tax rate favorably impacted tax credits associated conclusion 20042005 federal income tax audit nongoodwill impairment charges higher restructuring charges 2008 benefited higher us tax rates higher portion foreign income taxed lower statutory rates minority interest income expense minority interest income 658 million 2008 compared expense 244 million 2007 favorable change 902 million primarily due 879 million gain reduction fair value 10 minority interest spirits business bgsw based upon final settlement amount determined connection repurchase minority interest july 2008 result redemption 10 minority interest bgsw vs effective july 25 2008 future results favorably impacted reduced minority interest expense longer pay preferred dividend vs totaled 174 million tax annual basis benefit partially offset interest expense debt incurred finance repurchase minority interest net income net income 3111 million 205 per basic share 202 per diluted share twelve months ended december 31 2008 compared net income 7626 million 498 per basic share 487 per diluted share twelve months ended december 31 2007 income continuing operations excluding us wine business sold 2007 1586 million 104 per basic share 103 per diluted share twelve months ended december 31 2008 results compared 7495 million 489 per basic share 479 per diluted share twelve months ended december 31 2007 respectively 5909 million decrease income continuing operations primarily due lower operating income including asset impairment charges writedowns spirits business’s investment maxxium 505 million income continuing operations benefited income due termination spirits us distribution agreement related deferred gain recognition 1909 million tax aggregate well gain due reduction fair value minority interest spirits business 819 million lower interest expense taxrelated credits 984 million income discontinued operations 1525 million twelve months ended december 31 2008 101 per basic share 099 per diluted share included pretax income 40 million tax 25 million settlement outstanding working capital claims related sale us wine business also recorded 431 million tax benefit related finalization tax accounting sale us wine business tax credits associated conclusion 20042005 federal income tax audit pertained discontinued operations addition congressional joint committee taxation completed review tax refund associated capital loss carryforward item favorably resolved irs administrative proceeding relating 20012002 federal tax returns result final settlement audit 20012002 federal tax returns removed uncertainty relating utilization capital loss carryforward recorded 980 million tax benefit 987 million unrecognized tax benefit less interest 07 million related capital loss carryforward position associated sale us wine business compared income discontinued operations twelve months ended december 31 2007 131 million 009 per basic share 008 per diluted share 2007 compared 2006 fortune brands’ net sales slightly higher 2007 compared 2006 operating income 5 lower net income decreased 8 primarily due impact downturn us home products markets higher restructuring restructuringrelated charges absence 2006 tax credits net sales net sales 421 million 05 benefiting newly introduced products line extensions across businesses approximately 510 million total net discontinued products impact simonton acquisition 182 million strong international growth favorable foreign exchange 135 million targeted price increases implemented offset higher commodity costs home hardware business certain premium spirits brands net sales negatively impacted downturn us home products market cost products sold cost products sold increased 878 million 2 primarily acquisition simonton 127 million increased commodity costs partly offset benefits productivity improvements global sourcing initiatives facility consolidationdownsizing home hardware business excise taxes spirits excise taxes spirits essentially prior year percentage sales excise taxes generally levied based alcohol content spirits products consistent industry practice excise taxes collected customers reflected net sales corresponding payments governments expenses advertising selling general administrative expenses advertising selling general administrative expenses increased 92 million 05 primarily result higher brand investment spirits business support global premium brands golf business support new product introductions well due impact simonton acquisition increases partly offset benefit cost reduction initiatives particularly home hardware business lower corporate expenses reflecting projected reduction incentive compensation program payouts amortization intangible assets amortization intangible assets increased 47 million 476 million primarily due amortization intangible assets associated june 2006 simonton acquisition restructuring charges twelve months ended december 31 2007 recorded pretax restructuring charges 735 million charges predominantly related supplychain initiatives home hardware business including tangible intangible asset impairment charges resulting consolidation facilities cabinetry window tool storage closure cabinetry component operation planned exits entry door market united kingdom decorative column product lines us home hardware business closed downsized several facilities optimize supply chains better align cost structures capacity navigate current downturn us housing product market support longterm growth 2007 charges consisted primarily 163 million workforce reduction costs 496 million asset writedowns 76 million contract termination related costs additional information home hardware restructuring refer results operations segment home hardware 2007 compared 2006 twelve months ended december 31 2006 recorded pretax restructuring charges 212 million primarily related supplychain initiatives home hardware business gain sale dalmore scotch whisky us distribution rights 2007 recorded pretax gain sale dalmore scotch whisky us distribution rights related assets 456 million operating income operating income decreased 716 million 5 13763 million primarily due lower sales home hardware business adverse operating leverage greater brand investment higher restructuring restructuringrelated charges operating income benefited new product sales price increases implemented offset higher commodity costs home hardware business spirits business mix shift premium products golf spirits businesses gain sale dalmore scotch whisky us distribution rights related assets 456 million productivity improvements global sourcing initiatives cost reduction efforts lower corporate expenses favorable foreign exchange interest expense interest expense decreased 152 million 5 2936 million due lower average debt partly offset increase commercial paper rates income net income net decreased 27 million 375 million income net includes nonoperating income expense amortization deferred income related future brands llc spirits business’s us sales distribution joint venture interest income foreign currency transaction gains losses income taxes effective income tax rates twelve months ended december 31 2007 2006 309 254 respectively increase effective rate primarily resulted absence 2006 tax credits 859 million primarily associated favorable resolution routine federal state tax audits changes foreign tax laws lowered income tax rates apply foreign deferred income taxes addition 2007 effective tax rate impacted higher foreign income generally taxed lower statutory rates changes foreign tax laws lowered income tax rates apply foreign deferred taxes minority interest income expense minority interest expense decreased 435 million 244 million primarily due adjustment minority interest expense 478 million recorded third quarter 2006 representing increase estimated fair value vs group’s aggregate 10 ownership convertible redeemable preferred stock spirits business estimated fair value vs group’s minority interest bgsw change 2007 refer note 6 “minority interest held vs group” consolidated financial statements item 8 form 10k net income net income 7626 million 498 per basic share 487 per diluted share twelve months ended december 31 2007 compared net income 8301 million 556 per basic share 542 per diluted share twelve months ended december 31 2006 income continuing operations excluding us wine business 7495 million 489 per basic share 479 per diluted share compared income continuing operations 2006 8121 million 544 per basic share 531 per diluted share 8 626 million decrease income continuing operations primarily due lower operating income absence 2007 tax credits recorded 2006 865 million partially offset lower minority interest expense related spirits business 478 million income discontinued operations declined 49 million 27 primarily due lower us wine sales higher operating expenses quarterly financial data fortune brands inc subsidiaries unaudited millions except per share amounts results operations segment spirits 2008 compared 2007 net sales decreased 1259 million 5 24809 million primarily due decline sales adverse impact unexpected australian excise tax readytodrink spirits products instituted april approximately 47 million impact winddown transitional manufacturing agreements pernod ricard sa pernod ricard produce certain products subsequent 2005 acquisition approximately 28 million impact reduced fourth quarter 2008 sales due new us distributor program facilitates lower consistent us distributor inventory levels going forward unfavorable foreign exchange 25 million addition economic pressures resulted lower net sales certain markets particularly spain germany mexico approximately 32 million aggregate sales portfolio brands continued shift toward premium end though slower rate addition sales benefited impact price mix approximately 35 million aggregate acquisition cruzan rum 125 million operating income decreased 2230 million 29 5437 million primarily due lower sales 636 million restructuring restructuringrelated charges related business repositioning including supplychain activities routetomarket initiatives well absence 2007 gain sale dalmore us distribution rights assets 456 million 2008 writedown certain nonus regional tradenames 272 million addition operating income impacted higher operating expenses approximately 12 million primarily due increased information technology costs us distribution costs bgsw partner maxxium international sales distribution joint venture account using equity method bgsw 25 ownership interest maxxium company’s equal partners maxxium rémy edrington group ltd teg vs november 2006 rémy gave notice maxxium terminate distribution agreement maxxium effective march 30 2009 september 2008 bgsw entered settlement agreement settlement agreement maxxium partners resulted termination vs’s distribution agreement maxxium effective september 30 2008 result exit vs rémy shareholders maxxium effective march 30 2009 second quarter 2008 recorded 251 million writedown maxxium investment income net primarily reflect share goodwill writedown recorded financial statements maxxium resulted impending departures rémy vs third quarter result settlement agreement recorded additional 254 million writedown investment maxxium carrying value investment maxxium december 31 2008 543 million september 30 2008 closed transaction resulted early termination september 30 2008 us distribution agreement bgsw us business vs early termination agreement pernod ricard paid fortune brands 2300 million cash exchange early termination distribution agreement recorded income net statement income addition recognized balance unamortized deferred income 720 million resulting initial payment vs 2001 establish us distribution joint venture early termination us distribution agreement allows us simplify route market us exercise greater control distribution better align resources sharpen focus key market segments proceeds compensate us advance higher costs distribution remaining term joint venture agreement part early termination us distribution agreement bgsw redeemed 49 interest future brands held vs future brands consolidated september 30 2008 consolidation material impact financial statements vs owned 10 interest spirits business result government sweden’s sale vs exercised call option repurchase vs’s 10 equity stake spirits business july 2008 repurchased minority interest carrying value 4550 million 2008 recorded minority interest income expense 879 million gain reduction fair value 10 minority interest spirits business bgsw based upon final settlement amount determined connection repurchase minority interest third quarter 2008 purchased premium cruzan rum business pernod ricard 1032 million cash september 2008 bgsw teg established international distribution alliance combination jointlyowned companyowned sales forces 24 maxxium markets beginning april 1 2009 alliance provides bgsw teg equal joint ownership sales distribution companies certain markets bgswcontrolled tegcontrolled distribution companies distribute companies’ products certain markets result alliance sales organizations 100 owned us distribute nearly half international sales giving us significantly greater influence distribution key markets bgsw teg work together facilitate orderly transition winding maxxium operations april 2008 australian government increased excise taxes readytodrink products 70 equating 25 price increase consumers adversely impacted demand beam’s premixed products including jim beam cola operating income continue negatively affected excise tax increase impact annualized end april 2009 expect incur additional restructuring restructuringrelated charges approximately 20 million next 6 12 months related us international routetomarket strategic initiatives 2009 expect operating income adversely affected net impact approximately 3035 million due costs associated us international routetomarket initiatives us dollar strengthened fourth quarter 2008 major foreign currencies associated spirits business’s international operations exchange rates december 31 2008 remain effect 2009 operating income may negatively affected approximately 35 45 million 2007 compared 2006 net sales increased 934 million 4 26068 million primarily due mix shift toward higher priced premium brands particularly sauza tequila jim beam maker’s mark bourbons favorable foreign exchange 83 million growth international markets especially australia global travel retail emerging markets select price increases premium spirits brands increases partly offset negative impact winddown transitional bottling agreement pernod ricard sa pernod ricard produce certain products cost subsequent 2005 spirits acquisition well adverse first quarter 2007 impact 2006 transition distribution spain maxxium worldwide bv joint venture net impact operating income decreased net sales 442 million aggregate information 2005 spirits acquisition refer note 5 “acquisitions disposals” consolidated financial statements item 8 form 10k operating income increased 1061 million 16 7667 million primarily due increase net sales gain sale dalmore scotch whisky us distribution rights related assets 456 million favorable foreign exchange faster growth higher margin premium superpremium brands cost synergies resulting 2005 spirits acquisition partly offset higher raw material costs home hardware 2008 compared 2007 net sales decreased 7918 million 17 37591 million decrease primarily attributable downturn us home products market deteriorated year progressed due us economic recession credit crisis decreasing home prices declining consumer confidence combination factors contributed reductions new home construction shift lowerpriced products also adversely impacted big ticket repair remodeling historically stable housing downturns sales benefited new products line extensions approximately 336 million total particularly faucets cabinetry continued extension brands adjacent product categories market share gains key product categories faucets security products impact select price increases operating income decreased 9686 million resulting loss 4656 million primarily due lower sales resulting adverse operating leverage well 2008 asset impairment charges 7583 million addition operating income negatively impacted higher commodity costs approximately 70 million excluding benefit price increases operating income benefited reduction manufacturing overhead administrative cost structures restructuring restructuringrelated charges 556 million 2008 compared 963 million 2007 charges 2008 related supplychain realignment capacity cost reduction initiatives exit select low return product offerings since december 31 2006 reduced number home hardware segment manufacturing facilities 35 headcount reductions implemented across levels organization anticipate initiatives generate savings pay back cash costs three years less restructuring restructuringrelated charges 2009 currently approved projects expected approximately 40 million including noncash accelerated depreciation approximately 20 million estimate overall us home products market declined estimated highteens percentage rate 2008 anticipate decline 2009 range 20 result believe sales 2009 lower 2008 business continue face margin pressures resulting significant adverse operating leverage potential increased price competition addition may see increases bad debt expenses customers face increased financial pressures may also incur additional restructuring charges rationalize supply chains continue strive mitigate impact downturn ongoing cost reductions well market share gain initiatives successful extension brands new markets expanding existing customer relationships building substantial presence replaceandremodel segment us home products market goodwill impairment charges home hardware 4513 million predominantly related thermatru entry door 3995 million simonton 488 million reporting units two recent acquisitions second quarter 2008 primarily due impact worse anticipated decline us home products market financial results company concluded necessary accordance statement financial accounting standards 142 fas 142 “goodwill intangible assets” conduct interim goodwill impairment test result test company recorded goodwill impairment charges totaling 2889 million fourth quarter company conducted regular annual goodwill impairment test december 31 2008 recorded goodwill impairment charges totaling 1624 million fourth quarter charges primarily result expectation slower recovery us home products market current effect recession market forecasts sales operating income cash flows reporting unit home hardware business finalized course annual planning process forecast us home products market two segments new home construction segment repairremodel segment reporting unit impairment charge measured excess carrying value goodwill implied fair value implied fair value goodwill estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance requirements fas 142 consistent historical practice company estimates fair value reporting unit based estimate future cash flows discounted market participant derived weighted average cost capital estimate discounted future cash flows decreased significantly yearend 2007 primarily due reduction current year forecasted revenues cash flows compared original plan resulted projecting future revenue cash flow growth significantly lower base shifting cash flow growth beyond 2008 later years cash flow projections assumed declining revenue cash flows 2009 significant recovery would begin 2010 december 31 2008 company longlived assets home hardware segment totaled 29522 million including goodwill indefinitelived tradenames 14618 million 6514 million respectively dollar amounts goodwill indefinitelived tradenames associated reporting units within home hardware segment december 31 2008 follows confident longterm growth return prospects segment generally accepted accounting principles require us assess impairment goodwill indefinitelived tradenames based upon current fair value goodwill assessed reporting unit level key recoverability longlived assets forecast depth duration us home products market downturn impact future revenues operating margins cash flows projection us home products market global economic conditions inherently subject number uncertain factors depth duration global economic slowdown well us changes home prices unsold homes inventory levels credit availability borrowing rates unemployment levels overall consumer confidence near term monitor factors possible may change revenue cash flow projections home hardware segment may require recording additional asset impairment charges accordance provisions fas 142 statement financial accounting standards 144 “accounting impairment disposal longlived assets” currently believe reporting units risk future goodwill trade name impairment entry door products window products reporting units reporting units recently acquired entry door products acquired 2003 window products acquired 2006 therefore historical cost closer current fair value reporting units 10 decline reporting unit fair value could trigger impairment goodwill tradenames longlived assets addition continue respond downturn us home products market restructuring initiatives reduce manufacturing capacity administrative costs exit lower return product lines may result impairments assets 2007 compared 2006 net sales decreased 1433 million 3 45509 million decrease primarily attributable adverse impact estimated low doubledigit decline us home products market sales benefited acquisition simonton 182 million new products line extensions approximately 428 million total particularly faucets related products cabinetry entry doors share gains including cabinetry faucets entry doors security products expansion key customers impact select commodity costrelated price increases favorable foreign exchange operating income decreased 1924 million 28 5030 million operating income negatively impacted lower underlying sales resulting unfavorable coverage manufacturing overhead costs well higher restructuring restructuringrelated costs related supply chain initiatives incremental 70 million price increases offset effect higher commodity costs approximately 80 million including absence commodity hedge gains 2007 operating income benefited productivity improvements global sourcing initiatives reduction overhead administrative costs facility closuresdownsizing golf 2008 compared 2007 net sales decreased 365 million 3 13689 million sales decrease primarily due soft demand us including impact lower consumer demand discretionary purchases golf clubs impact reduction inventory retailers net sales benefited higher constant currency sales asian markets 38 million favorable foreign exchange 17 million favorable mix 17 million result new product introductions sales higher margin golf clubs operating income decreased 402 million 24 1253 million primarily due increase brand investment support growth initiatives lower sales resulting adverse operating leverage higher patent license expense increased commodity costs 2009 expect incur approximately 25 million restructuring charges workforce reduction costs adjust cost structure response current anticipated softening us european markets golf products us dollar strengthened fourth quarter 2008 major foreign currencies associated golf business’s international operations exchange rates december 31 2008 remain effect 2009 operating income may negatively affected approximately 25 35 million expect golf industry benefit favorable longterm demographic trends including aging us population rounds play increase age retirement increasing popularity golf internationally near term participation levels consumer spending golf products expected adversely impacted general economic conditions declines golfrelated travel corporate spending united states golf association usga royal ancient golf club ra establish standards golf equipment used united states outside united states respectively recent years usga ra enacted new rules restricting dimensions performance golf clubs golf balls march 2005 usga ra requested manufacturers participate golf ball research project manufacturing submitting balls would conform overall distance standard 15 25 yards shorter current standard 317 yards result recent research regarding spin usga adopted rule change effective january 1 2010 reducing groove volume limiting groove edge angle allowable irons wedges usga ra adopted rule change allow greater adjustability golf clubs went effect january 1 2008 existing rules new rules could change golf products industry’s ability innovate deploy new technologies competitive dynamic among industry participants potentially impacting golf business 2007 compared 2006 net sales increased 920 million 7 14054 million net sales increase largely due new product introductions strong international growth continued share gains key product categories favorable shift golf ball demand premium models net sales also benefited higher sales product categories golf balls golf clubs shoes gloves accessories well favorable foreign exchange 28 million operating income decreased 05 million 1655 million primarily expenses related international market expansion investments research development well higher patent litigation related costs decreases nearly offset higher sales well growth premium golf balls clubs corporate 2008 compared 2007 corporate expenses 578 million include salaries benefits expenses related corporate office employees decreased 11 million 2007 compared 2006 corporate expenses include salaries benefits expenses related corporate office employees well public company expenses decreased 152 million 21 589 million expenses decreased primarily due lower incentive compensation expense mainly resulting lower expected payouts longterm incentive compensation programs liquidity capital resources global credit crisis general economic conditions worsened fourth quarter 2008 addition recent volatility capital credit markets may continue heighten risks near term believe however sufficient liquidity fund operations foreseeable future liquidity primary liquidity needs support working capital requirements fund capital expenditures service indebtedness pay dividends well finance acquisitions share repurchases deemed appropriate principal sources liquidity cash flows operating activities borrowings credit agreements longterm notes operating income generated subsidiaries restrictions ability subsidiaries pay dividends make distributions fortune brands periodically review portfolio brands evaluate strategic options increase shareholder value cannot predict whether may enter acquisition disposition joint venture strategic options impact transaction could results operations cash flows financial condition whether result issuance debt equity securities otherwise committed unused credit facilities provide sufficient liquidity fund current operating financing needs believe credit facilities arranged strong diversified group financial institutions currently investment grade credit rating three credit rating agencies downgrade credit ratings noninvestment grade prolonged global economic decline credit crisis may impact access longterm capital markets increase interest rates corporate debt weaken operating cash flow liquidity potentially impacting ability pay dividends fund acquisitions repurchase shares future cash flows net cash provided operating activities 8176 million twelve months ended december 31 2008 compared 9653 million twelve months ended december 31 2007 decrease cash provided 1477 million principally due lower net income higher pension contributions 1145 million 2008 compared 489 million 2007 increase inventories maturing spirits business 2008 compared 2007 including foreign exchange impacts well taxes paid related 2007 sale us wine business cash flow favorably impacted income termination spirits us distribution agreement 1435 million tax refund 932 million net cash used investing activities twelve months ended december 31 2008 2742 million compared cash provided 7442 million twelve months ended december 31 2007 increase cash used 10184 million primarily due acquisition cruzan rum business 1032 million well absence 2007 proceeds sale us wine business 9483 million focus capital spending growth initiatives becoming lowest cost producers highest quality products net capital spending 2008 1571 million 406 million lower 2007 due reduced capital spending home hardware business resulting contraction us home products market currently estimate 2009 net capital expenditures range 150 175 million expect generate funds internally net cash used financing activities twelve months ended december 31 2008 5558 million compared 17130 million twelve month period ended december 31 2007 decrease 11572 million primarily due absence 2007’s paydown debt cash flow operating activities sale us wine business 9483 million 2008 cash outflows impacted redemption 10 minority interest spirits business 4550 million share repurchases 2786 million capitalization total debt increased 3516 million twelvemonth period ended december 31 2008 47 billion ratio total debt total capital increased 501 december 31 2008 412 december 31 2007 primarily due repurchase minority interest spirits business decrease accumulated comprehensive income due foreign currency translation effects deferred pension asset losses common share repurchase activity 20 billion 5year committed revolving credit agreement matures october 2010 total 7900 million outstanding credit agreement december 31 2008 october 2008 executed 400 million 3year term loan agreement various banks matures october 2011 used repay 300 million note due january 30 2009 interest rates term loan agreement variable based us libor time borrowing company’s longterm credit rating credit facilities general corporate purposes revolving credit agreement term loan include minimum consolidated interest coverage ratio requirement 35 10 financial covenant consolidated interest coverage ratio defined credit facilities ratio adjusted ebitda consolidated interest expense adjusted ebitda defined consolidated net income interest expense income taxes depreciation amortization intangible assets well noncash restructuring nonrecurring charges losses asset impairments gains losses resulting sale assets ordinary course business consolidated interest expense disclosed financial statements december 31 2008 december 31 2007 exceeded ratio wide margin currently believe possibility violating covenant remote debt instruments require financial ratio covenants customer credit risk routinely grant unsecured credit customers normal course business trade receivables total 9185 million december 31 2008 recorded stated amount less allowances discounts doubtful accounts returns allowances doubtful accounts include provisions certain customers risk default specifically identified well provisions determined general formula basis determined default probable estimable yet clearly associated specific customer assessment likelihood customer default based variety factors including length time receivables past due historical collection experience existing economic conditions accordance policy allowance discounts doubtful accounts returns 575 million december 31 2008 current conditions global credit markets may reduce customers’ ability access sufficient liquidity capital fund operations make estimation customer defaults inherently uncertain believe current allowances doubtful accounts adequate possible adverse impact us housing downturn global credit crisis may cause significantly higher levels customer defaults bad debt expense future periods counterparty risk counterparties derivative contracts major financial institutions although theoretical risk replacement cost estimated fair value instruments believe risk incurring losses unlikely losses would immaterial fair value derivative assets december 31 2008 490 million estimated fair value derivative contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices insured risks review exposure insurance risk believe material changes related availability cost liability property casualty forms insurance continue closely monitor events ratings insurance companies associated insurance programs pension plans sponsor defined benefit pension plans partially funded portfolio investments maintained within benefit plan trusts total pension plan cash contributions 1145 million 489 million respectively 2008 2007 result 2008 pension funding currently anticipate minimal pension funding required 2009 defined benefit plans believe sufficient liquidity meet 2009 minimum funding may required pension protection act 2006 december 31 2008 fair value total pension plan assets 82 accumulated benefit obligation liability minority interest held vs group vs group owned 10 interest spirits business bgsw result sale vs pernod ricard april 2008 exercised call option repurchase minority interest july 2008 repurchased minority interest carrying value 4550 million accounted redemption feature convertible redeemable preferred stock accordance eitf topic d98 “classification measurement redeemable securities” measured minority interest fair value changes fair value reflected income continuing operations bgsw publicly traded entity therefore quoted market price common preferred shares reporting period prior june 30 2008 estimated fair value based combination marketbased earnings multiples discounted cash flow techniques fair value june 30 2008 4550 million based upon final settlement amount determined connection repurchase minority interest valuation reflected features preferred stock could sold third party unique shareholder rights preferred security result three months ended june 30 2008 recorded 879 million decrease fair value minority interest minority interest income dividends july 2008 increased dividend common stock 5 annual rate 176 per common share summary 2008 dividend activity company’s common stock shown summary 2008 dividend activity company’s 267 convertible preferred stock shown adequacy liquidity sources given uncertainty global economic conditions volatility financial markets focused liquidity capital preservation continue assess economic conditions evaluate funding potential acquisitions share repurchases dividend policy believe internally generated funds together access global credit markets adequate meet longterm shortterm capital needs cash flows operations borrowing availability overall liquidity subject certain risks uncertainties including set forth item 1 “business forwardlooking statements” foreign exchange investments various foreign countries principally australia canada mexico spain uk france therefore changes value related currencies affect balance sheet cash flow statements translated us dollars addition 2006 issued eurodenominated longterm debt see note 9 “longterm debt” consolidated financial statements item 8 form 10k interest rates may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense second quarter 2008 entered interest rate swaps aggregate notional principal amount 400 million swap agreements hedged changes fair value portion fixed rate 5375 notes due 2016 resulted changes benchmark interest rate us libor swaps designated classified fair value hedges accordance statement financial accounting standards 133 fas 133 “accounting derivative instruments hedging activities” october 2008 terminated settled swaps recorded 156 million gain amortized income reduction interest expense remaining life debt using effective interest method interest rate swaps outstanding 2007 fair market value longterm fixed interest rate debt subject interest rate risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value 46936 million 41427 million total longterm debt including current portion december 31 2008 2007 approximately 43836 million 40056 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity guarantees commitments thirdparty guarantees executed connection formation maxxium spirits international sales distribution joint venture totaled approximately 89 million december 31 2008 required perform guarantees event maxxium fails make contractual payments conjunction third quarter 2008 execution settlement agreement providing withdrawal rémy vs maxxium’s credit facilities guaranteed joint venture partners renegotiated banks effective october 1 2008 guarantee onethird maxxium’s credit facilities expire march 31 2009 following expiration maxxium facilities expect finance operations new spirits business international distribution alliance mix local bank debt shareholder facilities may guaranteed company also guarantee various leases acco world corporation office business divested spinoff 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 295 million april 2013 accordingly recorded fair value guarantees financial statements accordance fin 45 liability related guarantee 07 million december 31 2008 contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2008 purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures b minimum required pension postretirement contributions cannot determined beyond 2009 due uncertainty timing settlement taxing authorities unable make reasonably reliable estimates period cash settlement unrecognized tax benefits therefore 2484 million unrecognized tax benefits december 31 2008 excluded contractual obligations table see note 16 “income taxes” consolidated financial statements item 8 form 10k addition contractual obligations listed also commercial commitments contingently liable december 31 2008 include guarantee certain credit facilities bank loans entered maxxium amount totaling 889 million expires less one year shareholder loan facility executed bgsw maxxium amounting 210 million 98 million outstanding expires less one year addition corporate commercial commitments include standby letters credit 790 million 789 million expires less one year remaining 01 million expiring one three years surety bonds 176 million 175 million expires less one year remaining 01 million expiring one three years contingent commitments expected significant impact liquidity derivative financial instruments accordance fas 133 related amendment financial accounting standards 138 “accounting certain derivative instruments certain hedging activities” derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2008 deferred currency gains 39 million reclassified cost sales year ended december 31 2007 154 million deferred currency losses reclassified cost sales year ended december 31 2006 19 million deferred currency gains reclassified cost sales based foreign exchange rates december 31 2008 estimate 345 million currency derivative gains included oci december 31 2008 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk principal currencies hedged include canadian dollar euro australian dollar japanese yen british pound sterling also exposed foreign currency risk result eurodenominated debt continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuances new longterm debt see note 18 “financial instruments” consolidated financial statements item 8 form 10k information management interest rate risk recently issued accounting standards fair value measurement february 2008 financial accounting standards board fasb issued fasb staff position 1572 fsp fas 1572 “effective date fasb statement 157” delays effective date fas 157 nonrecurring fair value measurements nonfinancial assets liabilities fiscal years beginning november 15 2008 calendar 2009 fortune brands elected defer adoption nonrecurring fair value measurement disclosures nonfinancial assets liabilities adoption fsp fas 1572 expected material impact results operations cash flows financial position disclosures derivative instruments hedging activities march 2008 fasb issued statement financial accounting standards 161 fas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” fas 161 establishes disclosure requirements derivatives instruments hedging activities order provide users financial statements enhanced understanding derivatives used b derivative instruments related hedged items accounted c affect financial position financial performance cash flows fas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 calendar 2009 fortune brands fas 161 require additional disclosures derivative instruments hedging activities business combinations december 2007 fasb issued statement financial accounting standards 141 revised 2007 fas 141r “business combinations” fas 141r replaces fas 141 “business combinations” fas 141r establishes principles requirements acquirer recognizes measures assets acquired liabilities assumed noncontrolling interest acquiree b recognizes measures goodwill acquired c determines information disclose fas 141r also requires acquisitionrelated costs including restructuring recognized separately acquisition fas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 calendar 2009 fortune brands statement eliminates adjustments goodwill changes deferred tax assets uncertain tax positions acquisition accounting measurement period limited one year acquisition including acquisitions prior adoption fas 141r adoption fas 141r may result increased volatility results operations extent uncertain tax positions related prior acquisitions resolved less favorably originally estimated noncontrolling interests consolidated financial statements december 2007 fasb issued statement financial accounting standards 160 fas 160 “noncontrolling interests consolidated financial statements amendment arb 51” fas 160 amends accounting research bulletin 51 establishing accounting reporting standards noncontrolling interest currently referred minority interest subsidiary deconsolidation subsidiary statement changes consolidated balance sheet presentation noncontrolling interests mezzanine level liabilities stockholders’ equity component stockholders’ equity december 31 2008 carrying value minority interestsnoncontrolling interests would reclassified equity upon adoption fas 160 136 million fas 160 requires expanded disclosures consolidated financial statements clearly identify distinguish interests parent’s owners interests noncontrolling owners subsidiary fas 160 effective financial statements issued fiscal years beginning december 15 2008 calendar 2009 fortune brands statement applies prospectively except presentation disclosure requirements applied retrospectively periods presented fas 160 impact presentation noncontrolling interests fortune brands’ statements income financial position stockholders’ equity disclosures postretirement benefit plans december 2008 fasb issued financial statement position fas 132r1 fsp fas 132r1 “employers’ disclosures postretirement benefit plan assets” fsp fas 132r1 amends statement financial accounting standards 132 revised 2003 “employers’ disclosure pensions postretirement benefits” providing guidance employer’s disclosures plans assets defined benefit pension postretirement plan fsp fas 132r1 effective fiscal years ending december 15 2009 calendar yearend 2009 fortune brands fsp fas 132r1 require additional disclosure plan assets critical accounting policies estimates significant accounting policies described note 1 notes consolidated financial statements item 8 form 10k consolidated financial statements prepared conformity us generally accepted accounting principles preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe following company’s critical accounting policies due significant subjective complex judgments estimates used preparing consolidated financial statements regularly review assumptions estimates allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency discounts related early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 575 million 538 million december 31 2008 2007 respectively inventories firstin firstout inventory method principal inventory method accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns specific identification items product discontinuance engineeringmaterial changes longlived assets accordance statement financial accounting standards 144 fas 144 “accounting impairment disposal longlived assets” longlived asset including amortizable identifiable intangible assets asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated using quoted market price unavailable using discounted expected future cash flows 2008 recorded longlived pretax asset impairment charges 1838 million 1131 million tax definitelived identifiable intangible assets fixed assets home hardware segment additional information refer management’s discussion analysis home hardware segment form 10k addition recorded restructuring expense pretax noncash impairments identifiable definitelived intangible assets 75 million well property plant equipment 227 million 2007 recorded restructuring expense noncash impairments identifiable definitelived intangible assets 126 million well property plant equipment 370 million goodwill indefinitelived intangible assets accordance statement financial accounting standards 142 fas 142 “goodwill intangible assets” goodwill tested impairment least annually written impaired interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates estimated cash flows related goodwill grouped reporting unit level reporting unit operating segment certain circumstances component operating segment constitutes business estimated future discounted cash flows less carrying value net assets tangible identifiable intangible assets related goodwill perform impairment test measure recognize amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting unit’s goodwill implied fair value goodwill determining estimated future cash flows consider current projected future levels income well business trends prospects market economic conditions fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually whenever market business events indicate may potential impact intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life company cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment particularly related home hardware business material negative change relationships significant customers strategic decisions made response economic competitive conditions pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits record annual amounts relating plans based calculations specified us generally accepted accounting principles include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions used determine pension liabilities assets well pension expense annual basis make modifications assumptions based current economic conditions trends expected return plan assets determined based nature plans’ investments expectations longterm rates return discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments bond portfolio used selection interest rates top half bonds rated nationally recognized statistical rating organizations includes noncallable bonds deemed sufficiently marketable moody’s credit rating aa higher discount rate december 31 2008 2007 65 64 respectively use marketrelated value method plan assets calculate pension costs recognizing year’s asset gains losses fiveyear period compensation increases reflect expected future compensation trends required us generally accepted accounting principles effects deviations assumptions generally accumulated specified corridor amortized average remaining service period employees weighted average remaining service period pension plans december 31 2008 approximately 108 years cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees total net actuarial losses pension postretirement benefit plans 447 million december 31 2008 increase 270 million december 31 2007 primarily result actuarial losses 2008 280 million primarily due decline fair value pension assets partly offset amortization loss recognition pension expense 8 million believe assumptions utilized recording obligations company’s plans reasonable based experience advice independent actuaries however differences actual experience changes assumptions may materially affect company’s financial position results operations postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases december 31 2008 postretirement medical assumption assumed rate increase 675 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year postretirement prescription drugs assumed rate increase 975 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year assumption december 31 2007 postretirement medical assumed rate increase 75 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year postretirement prescription drugs assumed rate increase 105 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year pension expenses 325 million 418 million 433 million respectively years ended december 31 2008 2007 2006 postretirement expenses 88 million 93 million 168 million respectively years ended december 31 2008 2007 2006 25 basis point change discount rate assumption would lead increase decrease pension expense postretirement benefit expense approximately 41 million 02 million respectively 2008 25 basis point change longterm rate return plan assets used accounting company’s pension plans would 23 million impact pension expense income taxes accordance statement financial accounting standards 109 “accounting income taxes” establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse company records valuation allowance reducing deferred tax assets likely assets realized record liabilities uncertain income tax positions accordance fasb interpretation 48 fin 48 “accounting uncertainty income taxes interpretation fasb statement 109” january 1 2007 adopted fin 48 fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties disclosure transition evaluation tax position accordance fin 48 twostep process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained zero tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ company’s estimates future periods changes facts circumstances new information may require company change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur december 31 2008 company liabilities unrecognized tax benefits pertaining uncertain tax positions totaling 2484 million reasonably possible unrecognized tax benefits may decrease range 5 100 million next 12 months primarily result conclusion us federal state foreign income tax proceedings customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sellthrough business’s products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “net sales” category “advertising selling general administrative expenses” time program initiated andor revenue recognized costs recognized “net sales” include limited general customer program generated expenses cooperative advertising programs volume allowances promotional allowances costs typically recognized “advertising selling general administrative expenses” include point sale materials costs recorded time sale based management’s best estimates based historical projected experience type program customer management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations cost initiatives continuously evaluate productivity supply chains existing asset base actively seek identify opportunities improve cost structure future opportunities may involve among things reorganization operations relocation manufacturing assembly locations generally lower costs efficient sourcing products components thirdparty suppliers implementing significant cost reduction efficiency opportunities could result charges pending litigation see note 25 “pending litigation” consolidated financial statements item 8 form 10k environmental matters involved numerous remediation activities clean hazardous wastes required federal state laws liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties uncertainties status laws regulations technology information related individual sites make difficult develop estimates environmental remediation exposures potential liabilities relate sites relate sites longer never owned february 1 2009 several subsidiaries designated potentially responsible parties “prp” “superfund” similar state laws 50 instances 31 dismissed settled otherwise resolved calendar year 2008 identified prp two new instances three prp claims dismissed settled otherwise resolved average settlement approximately 56539 january 2009 additional prp claim resolved 1667 instances named prp enter costsharing arrangements prps give notice insurance carriers potential prp liability rarely ever receive reimbursement insurance believe cost complying present environmental protection laws considering estimated recoveries either responsible parties insurance material adverse effect upon results operations cash flows financial condition december 31 2008 2007 accruals 291 million 321 million respectively cover environmental compliance clean including limited mentioned superfund sites item 7aitem 7 management’s discussion analysis financial condition results operations consolidated summary fortune brands holding company subsidiaries make sell leading consumer branded products worldwide following markets distilled spirits home security golf products strive enhance shareholder value variety ways including profitably building leading consumer brands drive sales earnings growth enhance returns longterm basis positioning brands businesses outperform respective markets developing innovative new products effective marketing programs expanding customer relationships extending brands adjacent categories developing international growth opportunities pursuing business improvements operating lean flexible supply chains business processes promoting organizational excellence developing winning cultures associates leveraging breadth balance financial resources drive shareholder value first priority internal growth continue focus paying debt also strive create shareholder value addon acquisitions dispositions joint ventures addition enhance shareholder value initiatives using financial resources pay dividends repurchase shares description certain factors may future significant impact business financial condition results operations see “item 1a risk factors” 2009 net income attributable fortune brands diluted earnings per share decreased 22 21 respectively compared 2008 income diluted earnings per share continuing operations increased 53 55 respectively sales decreased 12 67 billion sales unfavorably impacted effect global economic environment reduced consumer discretionary spending businesses downturn us housing products market impact home security business unfavorable foreign exchange 135 million sales benefited impact acquisitions approximately 106 million successful new products line extensions segments selected price increases spirits home security businesses market share gains principally home security golf segments income continuing operations benefited lower asset impairment charges 2009 668 million tax compared 2008 6594 million tax reduced cost structures lower advertising selling general administrative expenses 562 million absence writedowns spirits business’s investment maxxium worldwide bv maxxium recorded 2008 505 million income continuing operations unfavorably impacted lower sales related unfavorable operating leverage absence gains recorded 2008 income due termination spirits us distribution agreement related deferred gain recognition 1908 million tax aggregate income taxrelated credits 984 million associated favorable resolution uncertain income tax positions gain due reduction fair value noncontrolling interest spirits business 819 million tax 2009 paid 499 million approximately 662 million net cash acquired purchase 100 interest seven subsidiaries maxxium former international spirits sales distribution joint venture addition paid  309 million approximately 417 million acquire 50 ownership five maxxium joint venture entities addition 2009 acquired effen superpremium vodka brand related assets sazerac company inc conjunction transaction sold old taylor whiskey brand assets sazerac company inc 2008 acquired premium cruzan rum business pernod ricard sa pernod ricard 1032 million cash addition repurchased 10 noncontrolling interest spirits business vin sprit group vs 4550 million also redeemed 49 interest spirits business’s us distribution joint venture held vs related transaction received 2300 million pernod ricard early termination us distribution agreement vs subsequent acquisition pernod ricard 2007 sold remaining us wine assets constellation brands 8870 million selling two wine brands related assets e j gallo winery addition 2007 sold us distribution rights related assets dalmore scotch whisky 580 million resulting gain sale 285 million net tax 2010 expect remain focused initiatives designed outperform markets benefit strength brands new products across segments continue targeted brandbuilding investment well innovation expansion new markets including international growth opportunities segments also identified certain risks challenges may impact businesses 2010 including current economic conditions including decrease consumer discretionary spending consumers trading lowerpriced products continuing uncertainty regard overall us home products market changes foreign exchange rates see “item 1a risk factors” description risks uncertainties may material businesses results operations 2009 compared 2008 net sales net sales decreased 9142 million 12 67 billion primarily due impact slowdown global economy reduced consumer discretionary spending businesses downturn us home products markets impact home security business unfavorable foreign exchange approximately 135 million sales benefited impact acquisitions approximately 106 million including cruzan rum sales third party brands within distribution businesses acquired maxxium former international spirits sales distribution joint venture newly introduced products line extensions segments selected price increases spirits home security businesses market share gains principally home security golf segments cost products sold cost products sold decreased 4943 million 12 primarily due lower sales across segments cost reduction programs home security golf businesses excise taxes spirits excise taxes spirits 69 basis points percentage sales compared prior year due higher spirits segment sales percentage total company sales excise taxes generally levied based alcohol content spirits products vary significantly country consistent industry practice excise taxes collected customers reflected net sales corresponding payments governments expenses advertising selling general administrative expenses advertising selling general administrative expenses decreased 562 million 3 primarily result lower variable salesrelated expenses decrease advertising promotion spending partly offset increased operating costs associated us international sales distribution initiatives spirits business higher incentive compensation expense amortization intangible assets amortization intangible assets decreased 159 million 337 million due impact intangible asset impairment charges definitelived intangible assets 2008 asset impairment charges fourth quarter 2009 recorded impairment charges 925 million 668 million tax primarily related indefinitelived tradenames sauza tequila spirits business company remains confident longterm growth prospects spirits brands however charges result combined effect current economic downturn sales key geographic markets particularly mexico us expectation moderate market growth rates overall tequila spirits category foreseeable future additional information refer results operations spirits segment 2008 recorded pretax asset impairment charges home security spirits businesses 7855 million 6594 million tax home security charges 7583 million included writedowns goodwill tradenames longlived assets additional information refer results operations home security segment addition recorded 272 million writedown certain nonus regional spirits tradenames restructuring charges twelve months ended december 31 2009 recorded restructuring charges 819 million charges related workforce reductions across segments 602 million including announced closure seven home security manufacturing facilities us closure golf shoe manufacturing facility announced closure spirits facility next year fixed asset writedowns totaled 103 million addition recorded 114 million lease contract termination costs well reductions general administrative costs charges associated spirits business repositioning twelve months ended december 31 2008 recorded restructuring charges 818 million home security business charges 495 million total primarily related supplychain initiatives designed align costs capacities marketplace conditions including announced closing six manufacturing facilities charges also included costs exit select lowreturn product offerings 105 million addition recorded charges spirits business 323 million related business repositioning including supplychain activities sales distribution initiatives us internationally operating income operating income increased 3596 million 247 primarily due lower asset impairment charges 6930 million lesser degree reduced cost structures lower advertising promotion spending operating income unfavorably impacted lower sales related adverse operating leverage higher costs spirits business associated enhanced sales distribution structures unfavorable comparison lower level incentive compensation 2008 interest expense interest expense decreased 213 million 9 2158 million primarily due lower average interest rates expense income net expense increased 2859 million net expense 60 million predominantly due absence following items recognized 2008 income 2300 million pernod ricard early termination future brands us spirits distribution agreement 720 million remaining unamortized deferred income initial establishment future brands deferred income 203 million related future brands result purchase remaining balance noncontrolling interest september 2008 expense income net benefited 125 million gain maxxium dividend distribution absence 2008 505 million writedown investment maxxium recorded reflect share goodwill writedown recorded financial statements maxxium expense income net also includes nonoperating income expense interest income transaction gainslosses related foreign currencydenominated transactions income taxes effective income tax rates twelve months ended december 31 2009 2008 128 507 respectively 2009 effective tax rate favorably impacted higher 2009 restructuring charges us taxed higher rate addition effective tax rate favorably impacted higher proportion foreign income 2009 taxed lower rate relative us income 2009 income tax rate also favorably impacted annual trueup adjustments related tax returns filed current period 2009 income tax rate unfavorably impacted net tax expense 133 million related correction prior year items prior year items primarily related goodwill tax benefits net operating loss carryforwards certain deferred tax adjustments determined immaterial years relate 2008 effective income tax rate favorably impacted 984 million tax benefit related final settlement federal income tax audit related 2001 2002 federal tax returns tax credits associated conclusion 2004 2005 federal tax audit nongoodwill impairment restructuring charges benefited higher us tax rates 2008 effective income tax rate unfavorably impacted absence tax benefit goodwill impairment charges 4513 million 505 million writedown investment maxxium joint venture well income associated termination spirits business’s us distribution agreement higher us tax rate noncontrolling interests noncontrolling interest expense 43 million 2009 compared income 658 million last year unfavorable change 701 million primarily due 879 million gain recorded 2008 reduction fair value noncontrolling interest spirits business repurchased july 2008 partially offset absence 98 million preferred dividends paid noncontrolling interest expenses associated repurchase noncontrolling interest income continuing operations attributable common shareholders income continuing operations 2428 million 161 per basic share 160 per diluted share twelve months ended december 31 2009 results compared 1586 million 104 per basic share 103 per diluted share twelve months ended december 31 2008 842 million increase income continuing operations primarily due higher operating income result lower asset impairment charges 5926 million well 2008 writedowns spirits business’s investment maxxium 505 million 2009 gain maxxium dividend distribution 125 million income continuing operations unfavorably impacted absence following items recognized 2008 income termination spirits us distribution agreement related deferred gain recognition 1908 million tax aggregate gain due reduction fair value noncontrolling interest spirits business 819 million taxrelated credits 984 million 2008 compared 2007 net sales net sales decreased 9542 million 11 76 billion primarily due downturn us home products market impact home security business weak consumer sentiment reduced demand discretionary purchases including adverse impact home security golf businesses lower sales certain markets spirits business including impact australian excise tax increase readytodrink spirit products sales benefited newly introduced products line extensions across businesses approximately 241 million total net discontinued products price increases implemented offset higher costs materials home security business well targeted price increases spirits business growth international markets golf business cost products sold cost products sold decreased 5198 million 11 primarily lower sales well cost reduction programs global sourcing initiatives productivity improvements factors partly offset adverse operating leverage well higher commodity costs approximately 8590 million excise taxes spirits excise taxes spirits 65 basis points percentage sales compared prior year due lower home security sales higher international spirits sales obligor percentage spirits sales excise taxes generally levied based alcohol content spirits products consistent industry practice excise taxes collected customers reflected net sales corresponding payments governments reflected expenses advertising selling general administrative expenses advertising selling general administrative expenses decreased 380 million 2 primarily due lower salesrelated variable costs cost reductions home security business partly offset costs organization repositioning sales distribution initiatives spirits business well increased brand investment golf business support growth initiatives amortization intangible assets amortization intangible assets increased 20 million 4 primarily due changes foreign currency rates asset impairment charges recorded pretax asset impairment charges home security spirits businesses 7855 million 6594 million tax home security charges 7583 million included writedowns goodwill tradenames longlived assets charges result impact steeper anticipated decline us home products market general economy 2008 well expectation slower previously anticipated recovery additional information refer results operations home security segment addition recorded 272 million writedown certain nonus regional spirits tradenames 2008 restructuring charges twelve months ended december 31 2008 recorded restructuring charges 818 million home security business charges 495 million total primarily related supplychain initiatives designed align costs capacities marketplace conditions including announced closing eight manufacturing facilities charges also included costs exit select lowreturn product offerings 105 million addition recorded charges spirits business 323 million related business repositioning including supplychain activities sales distribution initiatives us internationally twelve months ended december 31 2007 recorded pretax restructuring charges 735 million home security 702 million spirits 27 million golf 06 million operating income operating income decreased 12307 million 1456 million primarily due asset impairment charges 7855 million lower sales home security golf businesses resulting adverse operating leverage higher commodity costs increased brand investment golf business absence 2007 gain sale dalmore scotch whisky us distribution rights related assets 456 million operating income benefited new products line extensions price increases implemented offset higher commodity costs home security business spirits business cost reduction programs global sourcing initiatives productivity improvements interest expense interest expense decreased 565 million 19 primarily result lower average debt well lower average interest rates income net income net increased 2424 million predominantly due 2300 million cash received pernod ricard early termination spirits us distribution agreement well 720 million due recognition remaining unamortized deferred income initial establishment joint venture amounts partially offset 505 million writedown investment maxxium income net also includes nonoperating income expense interest income transaction gainslosses related foreign currency denominated transactions income taxes effective income tax rates twelve months ended december 31 2008 2007 507 309 respectively 2008 effective income tax rate unfavorably impacted absence tax benefit goodwill impairment charges 4513 million 505 million writedown investment maxxium joint venture well income associated termination spirits business’s us distribution agreement higher us tax rate 2008 effective income tax rate favorably impacted 984 million tax benefit related final settlement federal income tax audit 20012002 federal tax returns additionally effective income tax rate favorably impacted tax credits associated conclusion 20042005 federal income tax audit nongoodwill impairment charges higher restructuring charges 2008 benefitted higher us tax rates higher portion foreign income taxed lower statutory rates noncontrolling interests noncontrolling interest income 658 million 2008 compared expense 244 million 2007 favorable change 902 million primarily due 879 million gain reduction fair value 10 noncontrolling interest spirits business based upon final settlement amount determined connection repurchase noncontrolling interest july 2008 income continuing operations attributable common shareholders income continuing operations 928 million twelve months ended december 31 2008 results compared 7739 million twelve months ended december 31 2007 6811 million decrease income continuing operations primarily due lower operating income including asset impairment charges 6594 million tax writedowns spirits business’s investment maxxium 505 million income continuing operations benefited income due termination spirits us distribution agreement related deferred gain recognition 1908 million tax aggregate well gain due reduction fair value noncontrolling interest spirits business 819 million lower interest expense taxrelated credits 984 million income discontinued operations income discontinued operations 1525 million twelve months ended december 31 2008 101 per basic share 099 per diluted share included pretax income 40 million tax 25 million settlement outstanding working capital claims related sale us wine business also recorded 431 million tax benefit related finalization tax accounting sale us wine business tax credits associated conclusion 20042005 federal income tax audit pertained discontinued operations addition congressional joint committee taxation completed review tax refund associated capital loss carryforward item favorably resolved irs administrative proceeding relating 20012002 federal tax returns result final settlement audit 20012002 federal tax returns removed uncertainty relating utilization capital loss carryforward recorded 980 million tax benefit 987 million unrecognized tax benefit less interest 07 million related capital loss carryforward position associated sale us wine business compared income discontinued operations twelve months ended december 31 2007 131 million 009 per basic share 008 per diluted share results operations segment spirits 2009 compared 2008 net sales flat compared 2008 higher us sales offset lower international sales net sales us higher due benefit acquisitions approximately 106 million including cruzan rum sales third party brands within distribution businesses acquired maxxium higher pricing introduction new products us distributor program resulted stable wholesale inventory levels us net sales unfavorably impacted weak industry conditions international net sales decreased unfavorable foreign exchange 51 million addition net sales lower constant currency basis certain markets largely due economic weakness western europe mexico impact 2008 australian excise tax increase readytodrink products change distributors mexico operating income decreased 590 million 11 4847 million operating income lower due higher tradename impairment charges 925 million 2009 compared 272 million 2008 increased operating costs associated enhanced us international sales distribution structures approximately 40 million unfavorable foreign exchange operating income benefited lower advertising promotional spending select price increases lower restructuring charges 333 million spirits business indefinitelived tradenames carrying value 19054 million december 31 2009 connection regular annual impairment testing fourth quarter 2009 recorded impairment charges 925 million primarily related indefinitelived tradename sauza tequila reducing book value impaired brands 7828 million aggregate tradenames acquired 2005 fair value closely approximates book value company remains confident longterm growth prospects spirits brands however generally accepted accounting principles require indefinitelived tradenames valued based current fair value impairment charges recorded reflect decline estimated fair value impaired tradenames book value accordance authoritative guidance goodwill intangibles assets asc 350 impaired tradenames believe current fair value declined book value primarily due combined effect current economic downturn sales key geographic markets particularly mexico us expectation moderate market growth rates overall tequila spirits category foreseeable future estimate fair value using standard relieffromroyalty method estimates present value royalty income could hypothetically earned licensing brand name third party method consistent method employed prior periods method employed value tradenames date original acquisition methodology important judgments estimates influence tradename’s fair value include expected branded product sales included final 2010 2012 operating plans longerterm market growth rates particular spirits categories geographies expected profit margins products sold using brands terminal value revenue growth rates weighted average cost capital company certain indefinitelived tradenames spirits business 10 reduction fair value would trigger impairment charge future periods tradenames aggregate book value 8659 million december 31 2009 expect incur additional restructuring charges approximately 1520 million next twelve eighteen months related previously announced organization repositioning us supply chain initiatives undertaken align business closer customers consumers support brand building longterm profitable growth october 2009 entered longterm agreement us virgin islands continue produce rum st croix mutually beneficial agreement structured promote increased tax revenue us virgin islands provide cost effective production rum spirits business september 2008 beam global spirits wine inc bgsw edrington group ltd teg entered agreement establishing international distribution alliance combination jointlyowned companyowned sales forces 24 markets operations new alliance began april 1 2009 alliance simplifies international routes market gives us greater control distribution alliance provides bgsw teg joint 5050 ownership sales distribution companies certain markets bgsw whollyowned teg whollyowned distribution companies distribute companies’ products third party products certain markets prior april 1 2009 bgsw 25 partner maxxium international sales distribution joint venture equal partners maxxium rémy cointreau sa rémy vs teg accordance settlement agreement executed september 2008 march 30 2009 rémy vs exited maxxium joint venture bgsw became 50 owner maxxium teg bgsw teg facilitating orderly transition winding maxxium operations substantially complete factors could adversely affect future results spirits business include consumers trading lower price points competitive pricing activities changes customer inventory levels international markets potential impairment charges possibility future excise tax increases globally regulatory enforcement trends reduction government financial incentives related rum production 2008 compared 2007 net sales decreased 1259 million 5 24809 million primarily due decline sales adverse impact unexpected australian excise tax readytodrink spirits products instituted april approximately 47 million impact winddown transitional manufacturing agreements pernod ricard produce certain products subsequent 2005 acquisition approximately 28 million impact reduced fourth quarter 2008 sales due new us distributor program facilitates lower consistent us distributor inventory levels going forward unfavorable foreign exchange 25 million addition economic pressures resulted lower net sales certain markets particularly spain germany mexico approximately 32 million aggregate sales portfolio brands continued shift toward premium end though slower rate addition sales benefited impact price mix approximately 35 million aggregate acquisition cruzan rum 125 million operating income decreased 2230 million 29 5437 million primarily due lower sales 636 million restructuring charges related business repositioning including supplychain activities sales distribution initiatives well absence 2007 gain sale dalmore us distribution rights assets 456 million 2008 writedown certain nonus regional tradenames 272 million addition operating income impacted higher operating expenses approximately 12 million primarily due increased information technology costs us distribution costs home security 2009 compared 2008 net sales decreased 7523 million 20 30068 million decrease primarily attributable downturn us housing home products market us economic recession factors resulted lower repair remodeling spending particularly bigticket items cabinetry entry doors substantial decrease new home construction well mix shift lowerpriced products net sales benefited share gains key customers impact select price increases new products line extensions operating income increased 5526 million income 870 million primarily due asset impairment charges recorded 2008 recur 2009 7583 million cost reduction supply chain improvements areas business 2009 partially offset continuing adverse operating leverage substantially lower sales unfavorable mix shift restructuring charges slightly lower 2009 520 million 2009 compared 556 million 2008 2009 announced closure seven additional plants addition six closures announced 2008 since december 31 2006 reduced number home security segment manufacturing facilities positions approximately 40 headcount reductions implemented across levels organization anticipate initiatives generate savings pay back cash costs three years less restructuring restructuringrelated charges currently approved projects expected approximately 5 million 2010 estimate categories us home products market compete declined 2009 range 20 expect market relatively stable 2010 may face higher raw material costs event market continues decline business may face pressures including impact adverse operating leverage continue strive mitigate impact weak market conditions ongoing cost reductions well market share gain initiatives successful extension brands new markets expanding existing customer relationships goodwill indefinitelived tradename impairment charges recorded home security business 2009 december 31 2009 company longlived assets home security segment totaled 29003 million including goodwill indefinitelived tradenames 14527 million 6626 million respectively dollar amounts goodwill indefinitelived tradenames associated reporting units within home security segment december 31 2009 follows confident longterm growth return prospects segment generally accepted accounting principles require us assess impairment goodwill indefinitelived tradenames based upon current fair value goodwill assessed reporting unit level key estimating fair value longlived assets forecast depth duration us home products market downturn impact future revenues operating margins cash flows projection us home products market global economic conditions inherently subject number uncertain factors depth duration global economic slowdown well us changes home prices unsold homes inventory levels credit availability borrowing rates unemployment levels overall consumer confidence near term monitor factors possible may change revenue cash flow projections home security segment may require recording additional asset impairment charges accordance authoritative guidance goodwill intangible assets well property plant equipment currently believe reporting unit higher risk future goodwill trade name impairment window products reporting unit reporting unit recently acquired 2006 therefore cost closest current fair value window products reporting unit 10 decline reporting unit fair value could trigger impairment goodwill tradename longlived assets addition continue respond current conditions us home products market possible may initiate restructuring actions reduce manufacturing capacity administrative costs may result impairments assets 2008 compared 2007 net sales decreased 7918 million 17 37591 million decrease primarily attributable downturn us home products market deteriorated year progressed due us economic recession credit crisis decreasing home prices declining consumer confidence combination factors contributed reductions new home construction shift lowerpriced products also adversely impacted big ticket repair remodeling historically stable housing downturns sales benefited new products line extensions approximately 336 million total particularly faucets cabinetry continued extension brands adjacent product categories market share gains key product categories faucets security products impact select price increases operating income decreased 9686 million resulting loss 4656 million primarily due lower sales resulting adverse operating leverage well 2008 asset impairment charges 7583 million addition operating income negatively impacted higher commodity costs approximately 70 million excluding benefit price increases operating income benefited reduction manufacturing overhead administrative cost structures restructuring charges 556 million 2008 compared 963 million 2007 charges 2008 related supplychain realignment capacity cost reduction initiatives exit select low return product offerings goodwill impairment charges home security 4513 million 2008 predominantly related thermatru entry door 3995 million simonton 488 million reporting units two recent acquisitions second quarter 2008 primarily due impact worse anticipated decline us home products market financial results company concluded necessary accordance authoritative guidance goodwill asc 350 conduct interim goodwill impairment test result test company recorded goodwill impairment charges totaling 2889 million fourth quarter company conducted regular annual goodwill impairment test december 31 2008 recorded goodwill impairment charges totaling 1624 million fourth quarter charges primarily result expectation slower recovery previously expected us home products market current effect recession market forecasts sales operating income cash flows reporting unit home security business finalized course annual planning process forecast us home products market two segments new home construction segment repairremodel segment impairments thermatru simonton occurred reporting units significantly impacted new home construction recently acquired therefore newer historical carrying values home security segment reporting units components one level home security operating segment generally correspond major product lines related brands reporting unit goodwill impairment charges measured excess carrying value goodwill implied fair value implied fair value goodwill estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance authoritative guidance goodwill intangible assets consistent historical practice company estimates fair value reporting unit based estimate projection future cash flows discounted marketparticipantderived weightedaverage cost capital estimate discounted future cash flows decreased significantly yearend 2007 primarily due reduction current year forecasted revenues cash flows compared original plan resulted projecting future revenue cash flow growth significantly lower base shifting cash flow growth beyond 2008 later years december 31 2008 cash flow projections assumed declining revenue cash flows 2009 significant recovery would begin 2010 addition fair value declined due increase weightedaverage cost capital golf 2009 compared 2008 net sales decreased 1506 million 11 12183 million primarily due impact decreased demand us western europe particularly golf clubs custom golf balls well unfavorable foreign exchange 52 million net sales benefited market share gains doubledigit percentage increase constant currency sales asian markets operating income decreased 1003 million 80 250 million primarily due lower sales related unfavorable operating leverage restructuring charges 352 million mainly related workforce reductions closure footwear manufacturing facility unfavorable foreign currency 21 million higher incentive compensation expense operating income benefited cost recovery actions lower operating expenses including reduced advertising promotion lower discretionary expenses expect golfers remain cautious 2010 expect golf industry benefit favorable longterm demographic trends including aging us population rounds play increase age retirement increasing popularity golf internationally united states golf association usga royal ancient golf club ra establish standards golf equipment used united states outside united states respectively recent years usga ra enacted new rules restricting dimensions performance golf clubs golf balls march 2005 usga ra requested manufacturers participate golf ball research project manufacturing submitting balls would conform overall distance standard 15 25 yards shorter current standard 317 yards recently adopted rule change allow greater adjustability golf clubs went effect january 1 2008 august 2008 usga ra adopted rule change effective january 1 2010 restricting golf club grooves reducing groove volume limiting groove edge angle allowable irons wedges rules change apply golfers january 1 2024 implemented professional tours beginning 2010 elite amateur competitions beginning 2014 products shipped marketplace december 31 2010 must comply new groove specification existing rules new rules could change golf products industry’s ability innovate deploy new technologies well impact competitive dynamic among industry participants potentially impacting golf business 2008 compared 2007 net sales decreased 365 million 3 13689 million sales decrease primarily due soft demand us including impact lower consumer demand discretionary purchases golf clubs impact reduction inventory retailers net sales benefited higher constant currency sales asian markets 38 million favorable foreign exchange 17 million favorable mix 17 million result new product introductions sales higher margin golf clubs operating income decreased 402 million 24 1253 million primarily due increase brand investment support growth initiatives lower sales resulting adverse operating leverage higher patent license expense increased commodity costs corporate 2009 compared 2008 corporate expenses 915 million include salaries benefits expenses related corporate office services employees increased 337 million primarily due unfavorable comparison low level incentive compensation 2008 pension settlement costs expenses associated disposition fixed assets 2008 compared 2007 corporate expenses 578 million include salaries benefits expenses related corporate office services employees decreased 11 million liquidity capital resources global credit crisis abated course 2009 general economic conditions remained challenging volatility capital credit markets continued believe however sufficient liquidity fund operations liquidity capitalization primary liquidity needs support working capital requirements fund capital expenditures service indebtedness pay dividends well finance acquisitions share repurchases deemed appropriate principal sources liquidity cash flows operating activities availability credit agreements operating income generated subsidiaries restrictions ability subsidiaries domestic foreign pay dividends make distributions fortune brands periodically review portfolio brands evaluate strategic options increase shareholder value current focus cash flow paying debt cannot predict whether may enter acquisition disposition joint venture strategic options impact transaction could results operations cash flows financial condition whether result issuance debt equity securities otherwise april 28 2009 announced reduction indicative annual dividend rate common stock 176 per share 076 per share align dividend historical payout ratio range believe prudent course action current environment best longterm interest stockholders change dividend rate decreased cash required dividend payments 109 million 2009 150 million annual basis currently expect pay quarterly cash dividends future payments dependent upon financial condition results operations capital requirements factors including set forth section titled “item 1a risk factors” currently investment grade credit rating three credit rating agencies downgrade credit ratings noninvestment grade modestly increase interest rates existing corporate debt well increase interest rate new debt addition may impact access longterm capital markets weaken operating cash flow liquidity potentially impacting ability pay dividends fund acquisitions repurchase shares future total debt decreased 2606 million twelvemonth period ended december 31 2009 45 billion ratio total debt total capital decreased 467 december 31 2009 501 december 31 2008 primarily due use cash flow pay debt well higher equity due net income 2009 increase accumulated comprehensive income resulting foreign currency translation effects february 3 2010 executed 750 million 3year committed revolving credit agreement used general corporate purposes credit facility replaced existing 20 billion 5year committed revolving credit agreement balance outstanding december 31 2009 interest rates credit facility variable based libor time borrowing company’s longterm credit rating credit facility includes minimum consolidated interest coverage ratio requirement 30 10 2011 35 10 2012 consolidated interest coverage ratio defined ratio adjusted ebitda consolidated interest expense adjusted ebitda defined consolidated net income interest expense income taxes depreciation amortization intangible assets well noncash restructuring nonrecurring charges losses asset impairments gains losses resulting sale assets ordinary course business consolidated interest expense disclosed financial statements credit facility also includes maximum debt total capital ratio 055 10 total capital defined debt plus equity including deferred taxes equity excludes future impairment charges covenants existence december 31 2009 2008 would complied ratios wide margin believe possibility violating covenants remote debt instruments include financial ratio covenants believe committed unused credit facility provides sufficient liquidity fund current operating financing needs believe credit facility arranged strong diversified group financial institutions june 2009 issued longterm debt securities 500 million shelf registration statement filed securities exchange commission 6 38 notes mature june 2014 proceeds used pay balances revolving credit facility net proceeds 4967 million less price discounts 03 million underwriting fees 30 million november 2009 issued longterm debt securities 400 million shelf registration statement filed securities exchange commission 3 notes mature june 2012 proceeds used extinguish three year term loan net proceeds 3984 million less price discounts 04 million underwriting fees 12 million cash flows net cash provided operating activities 8663 million twelve months ended december 31 2009 compared 8176 million twelve months ended december 31 2008 increase cash provided 487 million principally due lower working capital due decrease sales working capital improvement initiatives across businesses net cash used investing activities twelve months ended december 31 2009 2132 million compared 2742 million twelve months ended december 31 2008 decrease cash used 610 million primarily due return investment maxxium 584 million lower capital spending 188 million partly offset higher spending acquisitions 165 million total cost acquisitions 2009 1219 million primarily consisted approximately 662 million purchase 100 interest seven subsidiaries maxxium former international spirits sales distribution joint venture approximately 417 million acquire 50 ownership five maxxium joint venture entities acquisition effen vodka compares 2008’s cost acquisitions 1054 million 1032 million related acquisition cruzan rum net cash used financing activities twelve months ended december 31 2009 4323 million compared 5558 million twelve month period ended december 31 2008 decrease 1235 million primarily due absence 2008 redemption 10 noncontrolling interest spirits business 4550 million 2008 share repurchases 2786 million well lower dividends 1090 million partly offset higher repayments debt 6746 million net issuance debt dividends summary 2009 dividend activity company’s common stock shown summary 2009 dividend activity company’s 267 convertible preferred stock shown adequacy liquidity sources given uncertainty global economic conditions volatility financial markets focused liquidity capital preservation continue assess economic conditions evaluate funding potential acquisitions share repurchases dividend policy believe internally generated funds together access global credit markets adequate meet longterm shortterm capital needs cash flows operations borrowing availability overall liquidity subject certain risks uncertainties including section titled “item 1a risk factors” customer credit risk routinely grant unsecured credit customers normal course business accounts receivables 9490 million december 31 2009 recorded stated amount less allowances discounts doubtful accounts returns allowances doubtful accounts include provisions certain customers risk default specifically identified well provisions determined general formula basis determined default probable estimable yet clearly associated specific customer assessment likelihood customer default based variety factors including length time receivables past due historical collection experience existing economic conditions accordance policy allowance discounts doubtful accounts returns 720 million 575 million december 31 2009 2008 respectively current conditions global economy credit markets may reduce customers’ ability access sufficient liquidity capital fund operations make estimation customer defaults inherently uncertain believe current allowances doubtful accounts adequate possible continued weak economic conditions may cause significantly higher levels customer defaults bad debt expense future periods counterparty risk counterparties derivative contracts major financial institutions although theoretical risk replacement cost estimated fair value instruments believe risk incurring losses unlikely losses would immaterial fair value derivative assets december 31 2009 199 million estimated fair value derivative contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices pension plans sponsor defined benefit pension plans partially funded portfolio investments maintained within benefit plan trusts total pension plan cash contributions 264 million 1145 million respectively 2009 2008 believe sufficient liquidity meet minimum funding required us pension protection act 2006 december 31 2009 fair value total pension plan assets 8217 million representing 82 accumulated benefit obligation liability february 3 2010 made voluntary contribution us defined benefit pension plans 156 million shares common stock held treasury stock fair value 679 million foreign exchange investments various foreign countries principally australia canada mexico spain uk france therefore changes value related currencies affect balance sheet cash flow statements translated us dollars addition 2006 issued eurodenominated longterm debt see note 7 “debt financing arrangements” consolidated financial statements item 8 form 10k interest rates may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount fourth quarter 2009 entered fixed floating interest rate swaps aggregate notional principal amount 400 million second quarter 2009 entered interest rate swaps aggregate notional principal amount 500 million interest rate swaps outstanding december 31 2009 notional value totaling 900 million swap agreements hedge changes fair value portion existing fixed rate debt result changes benchmark interest rate us libor swap agreements designated classified fair value hedges accordance authoritative guidance derivatives hedging asc 815 second quarter 2008 entered fixed floating interest rate swaps aggregate notional principal amount 400 million october 2008 terminated settled 2008 interest rate swap agreements recorded 156 million gain amortized income reduction interest expense remaining life debt using effective interest method interest rate swaps outstanding december 31 2008 interest rate swaps outstanding 2007 fair market value longterm fixed interest rate debt impacted interest rate risk credit risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value 44133 million 46936 million total longterm debt including current portion december 31 2009 2008 approximately 44330 million 43836 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity guarantees commitments march 31 2009 terminated guarantees related debt maxxium spirits business’s former international sales distribution joint venture since april 1 2009 providing similar guarantees 50 credit facilities maxxium españa sl expire less two years amount 11 million approximately 157 million reflecting ownership joint venture teg december 31 2009 65 million approximately 93 million outstanding liability related guarantees material bgsw teg also executed uncommitted multicurrency shareholder loan facility amount 30 million approximately 429 million bgswteg joint ventures share 50 share outstanding balance december 31 2009 £5 million approximately 81 million also guaranteed various leases acco world corporation office business divested spinoff 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 226 million april 2013 result recorded fair value guarantees financial statements liability related guarantee 04 million december 31 2009 contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2009 purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures b minimum required pension postretirement contributions cannot determined beyond 2010 due uncertainty timing settlement taxing authorities unable make reasonably reliable estimates period cash settlement unrecognized tax benefits therefore 4605 million unrecognized tax benefits december 31 2009 excluded contractual obligations table see note 15 “income taxes” consolidated financial statements item 8 form 10k addition contractual obligations guarantees commitments listed described also commercial commitments contingently liable december 31 2009 corporate commercial commitments include standby letters credit 830 million 462 million expires less one year remaining 368 million expiring one three years surety bonds 303 million expires less one year contingent commitments expected significant impact liquidity derivative financial instruments accordance authoritative guidance derivatives hedging asc 815 derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized statement income hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2009 deferred currency gains 220 million reclassified earnings year ended december 31 2008 39 million deferred currency gains reclassified earnings year ended december 31 2007 154 million deferred currency losses reclassified earnings based foreign exchange rates december 31 2009 estimate 105 million currency derivative losses included oci december 31 2009 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk principal currencies hedged include us dollar euro australian dollar canadian dollar japanese yen also exposed foreign currency risk result eurodenominated debt continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuances new longterm debt see note 8 “financial instruments” consolidated financial statements item 8 form 10k information management interest rate risk recently issued accounting standards accounting standards codification july 2009 financial accounting standards board fasb established fasb accounting standards codification asc source authoritative accounting principles recognized fasb applied nongovernmental entities preparation financial statements conformity generally accepted accounting principles gaap rules interpretive releases securities exchange commission sec authority federal securities laws also sources authoritative gaap sec registrants asc supersedes existing nonsec accounting reporting standards intended change gaap use asc effective financial statements issued periods ending september 15 2009 transfer financial assets june 2009 fasb amended existing authoritative guidance transfer financial assets asc 860 new guidance eliminates concept qualifying specialpurpose entity b clarifies changes derecognition criteria transfer c enhances disclosure risks transferor retains exposure due continuing involvement transferred financial assets amendment effective annual reporting periods beginning november 15 2009 calendar year 2010 fortune brands effect calendar year 2009 asc 860 would current impact financial statements disclosure consolidation variable interest entities june 2009 fasb amended existing authoritative guidance variable interest entities asc 810 new authoritative guidance includes new approach determining variable interest entity vie consolidated b changes necessary reassess consolidate vie new approach requires enterprise qualitatively assess determination primary beneficiary consolidator amendment effective annual reporting periods beginning november 15 2009 calendar year 2010 fortune brands believe adoption standard material impact financial statements disclosures revenue arrangements multiple deliverables october 2009 fasb issued accounting standards update 200913 “multipledeliverable revenue arrangements consensus fasb emerging issues task force” guidance allows entities allocate consideration multiple deliverable arrangements manner reflects transaction’s economics guidance requires expanded disclosure effective fiscal years beginning june 15 2010 calendar year 2011 fortune brands applied either prospectively retrospectively believe adoption standard material impact financial statements disclosures critical accounting policies estimates significant accounting policies described note 1 notes consolidated financial statements item 8 form 10k consolidated financial statements prepared conformity us gaap preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe following company’s critical accounting policies due significant subjective complex judgments estimates used preparing consolidated financial statements regularly review assumptions estimates allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency discounts related early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 720 million 575 million december 31 2009 2008 respectively inventories firstin firstout inventory method principal inventory method across segments accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns product spoilage specific identification items product discontinuance engineeringmaterial changes longlived assets accordance authoritative guidance property plant equipment asc 360 longlived asset including amortizable identifiable intangible assets asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows market participant basis goodwill indefinitelived intangible assets accordance authoritative guidance goodwill intangibles assets asc 350 goodwill tested impairment least annually written impaired interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future cash flows reporting units goodwill relates discount future cash flows marketparticipantderived weightedaverage cost capital determining estimated future cash flows consider current projected future levels income based management’s plans business trends prospects market economic conditions marketparticipant considerations reporting unit operating segment case home security segment one level operating segment estimated fair value reporting unit less carrying value measure recognize amount goodwill impairment loss impairment losses limited carrying value goodwill represent excess carrying value reporting unit’s goodwill implied fair value goodwill implied fair value reporting unit estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance requirements asc 350 asc 350 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually whenever market business events indicate may potential impairment intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party remaining useful life company cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits record amounts relating plans based calculations specified us gaap include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets calculate pension costs recognizing year’s asset gains losses fiveyear period compensation increases reflect expected future compensation trends discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments expected return plan assets determined based nature plans’ investments expectations longterm rates return bond portfolio used selection interest rates top quartile bonds rated nationally recognized statistical rating organizations includes noncallable bonds deemed sufficiently marketable moody’s credit rating aa higher weightedaverage discount rate pension postretirement benefit liabilities december 31 2009 2008 59 65 respectively required us gaap effects actuarial deviations assumptions generally accumulated specified corridor amortized average remaining service period employees weighted average remaining service period pension plans december 31 2009 approximately 104 years cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees total net actuarial losses pension postretirement benefit plans 429 million december 31 2009 decrease 18 million december 31 2008 primarily result amortization loss recognition pension expense 12 million recognition curtailments settlements 15 million partly offset net actuarial losses 2009 9 million believe assumptions utilized recording obligations company’s plans reasonable based experience advice independent actuaries however differences actual experience changes assumptions may materially affect company’s financial position results operations postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases december 31 2009 postretirement medical prescription drugs assumption assumed rate increase 75 next year declining 50 basis points year reaching ultimate assumed rate increase 5 per year assumption december 31 2008 postretirement medical assumed rate increase 675 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year postretirement prescription drugs assumed rate increase 975 next year declining 75 basis points year reaching ultimate assumed rate increase 5 per year pension expenses 489 million 325 million 418 million respectively years ended december 31 2009 2008 2007 including net curtailment settlement losses 176 million 28 million zero years ended december 31 2009 2008 2007 respectively postretirement expenses 79 million 88 million 93 million respectively years ended december 31 2009 2008 2007 including net curtailment gains 01 million 26 million 28 million years ended december 31 2009 2008 2007 respectively 25 basis point change discount rate assumption would lead increase decrease pension expense postretirement benefit expense approximately 41 million 02 million respectively 2009 25 basis point change longterm rate return plan assets used accounting company’s pension plans would 24 million impact pension expense income taxes accordance authoritative guidance income taxes asc 740 establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse company records valuation allowance reducing deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest foreign subsidiary earnings remitted without incremental taxes record liabilities uncertain income tax positions based two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained zero tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ company’s estimates future periods changes facts circumstances new information may require company change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur december 31 2009 company liabilities unrecognized tax benefits pertaining uncertain tax positions totaling 4605 million reasonably possible unrecognized tax benefits may decrease range 85 140 million next 12 months primarily result conclusion us federal state foreign income tax proceedings customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sellthrough business’s products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “net sales” category “advertising selling general administrative expenses” time program initiated andor revenue recognized costs recognized “net sales” include limited general customer program generated expenses cooperative advertising programs volume allowances promotional allowances costs typically recognized “advertising selling general administrative expenses” include point sale materials shared media costs recorded latter time sale implementation program based management’s best estimates based historical projected experience type program customer volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough merchandising support levels returns customer training management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations cost initiatives continuously evaluate productivity supply chains existing asset base actively seek identify opportunities improve cost structure future opportunities may involve among things reorganization operations relocation manufacturing assembly locations generally lower costs efficient sourcing products components thirdparty suppliers implementing significant cost reduction efficiency opportunities could result charges pending litigation see note 24 “pending litigation” consolidated financial statements item 8 form 10k environmental matters involved numerous remediation activities clean hazardous wastes required federal state laws liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties uncertainties status laws regulations technology information related individual sites make difficult develop estimates environmental remediation exposures potential liabilities relate sites relate sites longer never owned february 1 2010 several subsidiaries designated potentially responsible parties “prp” “superfund” similar state laws 51 instances 37 dismissed settled otherwise resolved calendar year 2009 identified prp one new instance six prp claims dismissed settled otherwise resolved average settlement approximately 7333 instances named prp enter costsharing arrangements prps give notice insurance carriers potential prp liability rarely ever receive reimbursement insurance believe cost complying present environmental protection laws considering estimated recoveries either responsible parties insurance material adverse effect upon results operations cash flows financial condition december 31 2009 2008 accruals 245 million 291 million respectively cover environmental compliance clean including limited mentioned superfund sites item 7aitem 7 management’s discussion analysis financial condition results operations consolidated summary fortune brands holding company operating companies make sell leading consumer branded products worldwide following markets distilled spirits home security golf products strive enhance shareholder value variety ways including profitably building leading consumer brands drive sales earnings growth enhance returns longterm basis positioning brands businesses outperform respective markets developing innovative new products effective marketing programs expanding customer relationships extending brands adjacent categories developing international growth opportunities pursuing business improvements operating lean flexible supply chains business processes promoting organizational excellence developing winning cultures associates leveraging breadth balance financial resources drive shareholder value pursuing investments highest return opportunities first priority internal growth also strive create shareholder value addon acquisitions dispositions joint ventures strategic alternatives addition seek enhance shareholder value initiatives using financial resources pay dividends repurchase shares deemed appropriate current priority pay debt december 8 2010 announced board directors approved principle separation company’s three business segments proposed separation broad plan includes continuation fortune brands independent publiclytraded company focused solely spirits business taxfree spinoff shareholders home security business independent publiclytraded company exploring sale taxfree spinoff golf business company currently expects complete transactions end 2011 years benefits breadth balance portfolio facilitated building three large leading profitable consumer businesses business reached point strength scale coming recent economic downturn believe benefits focus substantially greater separate businesses believe significantly enhance business’s longterm growth return prospects well offer substantially greater total longterm value shareholders focused capital structures share ownership business create even greater strategic flexibility pursue profitable organic growth investments well compete high return acquisitions addition dedicated management teams boards directors business enable faster effective operational strategic decisionmaking lastly standalone companies concentrated building brands outperforming respective consumer categories business able provide targeted equitybased incentive compensation effective management tool attract motivate retain key employees description certain factors may future significant impact business financial condition results operations see “item 1a risk factors” certain items significant impact results 2010 2009 2008 included impact changes foreign currency exchange rates acquisition dispositionrelated items restructuring charges income taxrelated items 2010 financial results included favorable impact foreign currency changes compared 2009 approximately 90 million net sales 40 million operating income 30 million net income approximately 020 per diluted share lower net sales result sale cobra golf brand related assets 524 million certain nonstrategic spirits brands approximately 16 million restructuring charges 413 million tax 195 million tax 013 per diluted share net loss sale certain nonstrategic brands related assets cobra golf brand local german spirits brands cockburn port brand 47 million tax 92 million tax 005 per diluted share costs related proposed separation 23 million 15 million tax 001 per share incometax related credits 835 million 054 per diluted share related resolution routine foreign us income tax audit examinations 2009 financial results included unfavorable impact foreign currency changes compared 2008 approximately 135 million net sales 30 million operating income net income approximately 185 per diluted share incremental impact acquisitions net sales 106 million including cruzan rum sales third party brands within distribution businesses acquired maxxium prior international spirits sales distribution joint venture restructuring charges 1212 million tax 717 million tax 047 per diluted share asset impairment charges related spirits business’s indefinitelived tradenames 925 million 668 million tax 044 per diluted share gain related dividend distribution maxxium investment 125 million 008 per diluted share 2008 financial results included restructuring charges 1192 million tax 735 million tax 048 per diluted share asset impairment charges related home security spirits businesses 7855 million 6594 million tax 429 per diluted share writedown maxxium international spirits distribution joint venture investment 505 million 512 million tax 033 per diluted share aftertax gain resulting repurchase beam global minority interest 818 million 053 per diluted share gain termination future brands us spirits distribution joint venture 2337 million 1459 million tax 095 per diluted share accelerated future brand deferred gain 720 million 449 million tax 029 per diluted share vin sprit group vs auction process costs 82 million 52 million tax 003 per diluted share taxrelated credits 982 million 064 per diluted share april 2010 sold cobra golf product line puma north america inc 889 million asset sale included cobra golf brand related inventory intellectual property endorsement contracts sale resulted pretax gain 113 million 100 million tax 2009 full year cobra net sales approximately 130 million august 2010 sold certain nonstrategic german spirits brands related assets recorded pretax loss 86 million 124 million tax december 2010 sold cockburn port brand inventory result recorded pretax loss 74 million 68 million tax sale proceeds two spirits transactions totaled 492 million 2009 paid 499 million approximately 662 million net cash acquired purchase 100 interests seven subsidiaries maxxium former international spirits sales distribution joint venture addition paid 309 million approximately 417 million acquire 50 ownership five maxxium joint venture entities addition 2009 acquired effen superpremium vodka brand related assets sazerac company inc conjunction transaction sold old taylor whiskey brand assets sazerac company inc 2008 repurchased 10 noncontrolling interest spirits business vs 4550 million also redeemed 49 interest spirits business’s us distribution joint venture held vs related transaction received 2300 million pernod ricard sa pernod ricard early termination us distribution agreement vs subsequent acquisition pernod ricard addition 2008 acquired premium cruzan rum business pernod ricard 1032 million cash 2011 expect remain focused initiatives designed outperform markets benefit strength brands new products across segments continue targeted brandbuilding investment well innovation expansion new markets including international growth opportunities segments also identified certain risks challenges may impact businesses 2011 including current economic conditions including gradual uneven recovery consumers’ discretionary spending trading lowerpriced products continuing uncertainty regard overall us home products market changes foreign exchange rates detailed discussion risk factors may impact business results operations cash flows financial condition see “item 1a risk factors” results operations 2010 compared 2009 net sales net sales increased 4468 million 7 71 billion primarily due higher sales home security business due expanding relationships key customers new product introductions stable market conditions us increased sales spirits business us internationally benefiting new product introductions market growth increased strategic investment well higher excise taxes 817 million increased titleist footjoy brand golf sales across product lines benefit favorable foreign exchange approximately 90 million sales unfavorably impacted sale cobra golf product line approximately 52 million certain nonstrategic spirits brands approximately 16 million cost products sold cost products sold increased 1379 million 4 primarily due higher sales across segments increased raw material transportation costs approximately 35 million predominantly home security business partially offset lower charges related restructuring programs 2010 compared 2009 248 million primarily home security business impact cost reduction programs mainly home security golf segments excise taxes spirits excise taxes collected customers reflected net sales equal corresponding payments governments reflected expenses excise taxes generally levied based alcohol content spirits products vary significantly country excise taxes spirits increased 817 million primarily due impact acquisition consolidation former maxxium joint venture entities april 2009 first quarter 2010 change selling terms major customer australia higher us sales volume advertising selling general administrative expenses advertising selling general administrative expenses increased 1136 million 6 primarily due increased sales higher levels advertising promotion spending segments support longterm growth new product launches new business well first quarter costs associated spirits business’s new international sales distribution structures restructuring charges 2010 recorded restructuring charges 261 million related additional organizational streamlining initiatives spirits business 154 million product line integration facility consolidations home security business 80 million facility consolidations golf business 27 million charges consisted 217 million workforce reductions 43 million fixed asset writedowns costs 2009 recorded restructuring charges 819 million charges related workforce reductions across segments 602 million including announced closure seven home security manufacturing facilities us closure golf shoe manufacturing facility announced closure spirits facility 2010 fixed asset writedowns totaled 103 million addition recorded 114 million lease contract termination costs well reductions general administrative costs charges associated spirits business repositioning loss sale brands related assets net april 2010 sold cobra golf product line puma north america inc asset sale included cobra golf brand related inventory intellectual property endorsement contracts sale resulted pretax gain 113 million august 2010 sold certain nonstrategic german spirits brands related assets recorded pretax loss 86 million connection sale december 2010 sold cockburn port brand us uk portugal inventory recorded pretax loss 74 million connection transaction operating income operating income increased 2587 million 51 7639 million primarily due higher net sales segments lower restructuring charges 776 million favorable impact foreign currency rates approximately 40 million reduced cost structures home security golf businesses operating income unfavorably impacted higher advertising promotion spending higher raw material transportation costs increased operating costs associated new international sales distribution structures spirits business interest expense interest expense decreased 20 million 1 due lower average borrowings partially offset higher average interest rates income expense net income expense net income 375 million 2010 compared expense 60 million 2009 primarily due income recognized upon receipt tax indemnification payments 371 million pernod ricard connection spanish income tax audit settlements income expense net also includes nonoperating income expense interest income transaction gainslosses related foreign currencydenominated transactions losses early extinguishment debt income taxes effective income tax rates twelve months ended december 31 2010 2009 156 128 respectively effective tax rate 2010 favorably impacted due final settlement us spanish federal income tax audits effective tax rate 2010 also favorably impacted taxfree treatment indemnification income received connection settlement spanish income tax audit effective tax rate 2010 unfavorably impacted higher proportion domestic income 2010 taxed higher rate relative foreign income effective income tax rate 2009 favorably impacted tax benefits restructuring charges relative lowertaxed income charges 2010 spanish tax authorities issued three assessments tax andor interest spanish spirits companies include assets acquired pernod ricard july 2005 assessments related 19881990 20042006 periods majority related preacquisition tax years spanish tax authorities issued net assessments approximately 422 million 275 million tax 147 million related interest paid july october december 2010 pursuant acquisition agreement negotiated received 371 million tax indemnification payments pernod ricard related assessments recorded payments income expense net difference represents items company receive future income tax benefits also 2010 company settled 20042005 irs audit appeal irs concluded routine examinations company’s 20062007 tax years result resolution us spanish audit examinations recorded approximately 465 million previously unrecognized tax benefits net current deferred taxes provision income taxes noncontrolling interests noncontrolling interest expense 84 million 43 million twelve months ended december 31 2010 2009 respectively increase due higher earnings consolidated subsidiaries noncontrolling interest income attributable fortune brands common stockholders income continuing operations 4876 million 320 per basic share 316 per diluted share twelve months ended december 31 2010 results compared 2428 million 161 per basic share 160 per diluted share twelve months ended december 31 2009 2448 million increase income primarily due higher operating income well favorable resolution us international tax audits 835 million total 2009 compared 2008 net sales net sales decreased 9142 million 12 67 billion primarily due impact slowdown global economy reduced consumer discretionary spending businesses downturn us home products markets impact home security business unfavorable impact changes foreign exchange rates approximately 135 million sales benefited impact acquisitions approximately 106 million including cruzan rum sales third party brands within distribution businesses acquired maxxium former international spirits sales distribution joint venture newly introduced products line extensions segments selected price increases spirits home security businesses market share gains principally home security golf segments cost products sold cost products sold decreased 4943 million 12 primarily due lower sales across segments cost reduction programs home security golf businesses excise taxes spirits excise taxes spirits 69 basis points percentage sales compared prior year due higher spirits segment sales percentage total company sales advertising selling general administrative expenses advertising selling general administrative expenses decreased 562 million 3 primarily result lower variable salesrelated expenses decrease advertising promotion spending partly offset increased operating costs associated us international sales distribution initiatives spirits business higher incentive compensation expense amortization intangible assets amortization intangible assets decreased 159 million 337 million due impact intangible asset impairment charges definitelived intangible assets 2008 asset impairment charges fourth quarter 2009 recorded impairment charges 925 million 668 million tax primarily related indefinitelived tradenames sauza tequila spirits business charges result combined effect current economic downturn sales key geographic markets particularly mexico us expectation moderate market growth rates overall tequila spirits category foreseeable future additional information refer results operations spirits segment 2008 recorded pretax asset impairment charges home security spirits businesses 7855 million 6594 million tax home security charges 7583 million included writedowns goodwill tradenames longlived assets additional information refer results operations home security segment addition recorded 272 million writedown certain nonus regional spirits tradenames restructuring charges twelve months ended december 31 2009 recorded restructuring charges 819 million charges related workforce reductions across segments 602 million including announced closure seven home security manufacturing facilities us closure golf shoe manufacturing facility announced closure spirits facility fixed asset writedowns totaled 103 million addition recorded 114 million lease contract termination costs well reductions general administrative costs charges associated spirits business repositioning twelve months ended december 31 2008 recorded restructuring charges 818 million home security business charges 495 million total primarily related supplychain initiatives designed align costs capacities marketplace conditions including announced closing six manufacturing facilities charges also included costs exit select lowreturn product offerings 105 million addition recorded charges spirits business 323 million related business repositioning including supplychain activities sales distribution initiatives us internationally operating income operating income increased 3596 million 247 primarily due lower asset impairment charges 6930 million lesser degree reduced cost structures lower advertising promotion spending operating income unfavorably impacted lower sales related adverse operating leverage higher costs spirits business associated enhanced sales distribution structures unfavorable foreign currency approximately 30 million unfavorable comparison lower level incentive compensation 2008 interest expense interest expense decreased 213 million 9 2158 million primarily due lower average interest rates income expense net expense increased 2859 million net expense 60 million predominantly due absence following items recognized 2008 income 2300 million pernod ricard early termination future brands us spirits distribution agreement 720 million remaining unamortized deferred income initial establishment future brands us spirits distribution arrangement deferred income 203 million related future brands result purchase remaining balance noncontrolling interest september 2008 income expense net benefited 125 million gain maxxium dividend distribution absence 2008 505 million writedown investment maxxium recorded reflect share goodwill writedown recorded financial statements maxxium income expense net also includes nonoperating income expense interest income transaction gainslosses related foreign currencydenominated transactions income taxes effective income tax rates twelve months ended december 31 2009 2008 128 507 respectively 2009 effective tax rate favorably impacted higher 2009 restructuring charges us taxed higher rate addition effective tax rate favorably impacted higher proportion foreign income 2009 taxed lower rate relative us income 2008 effective income tax rate favorably impacted 984 million tax benefit related final settlement federal income tax audit related 2001 2002 federal tax returns tax credits associated conclusion 2004 2005 federal tax audit nongoodwill impairment restructuring charges benefited higher us tax rates 2008 effective income tax rate unfavorably impacted absence tax benefit goodwill impairment charges 4513 million 505 million writedown investment maxxium joint venture well income associated termination spirits business’s us distribution agreement higher us tax rate noncontrolling interests noncontrolling interest expense 43 million 2009 compared income 658 million 2008 unfavorable change 701 million primarily due 879 million gain recorded 2008 reduction fair value noncontrolling interest spirits business repurchased july 2008 partially offset absence 98 million preferred dividends paid noncontrolling interest expenses associated repurchase noncontrolling interest income continuing operations attributable common stockholders income continuing operations 2428 million 161 per basic share 160 per diluted share twelve months ended december 31 2009 results compared 1586 million 104 per basic share 103 per diluted share twelve months ended december 31 2008 842 million increase income continuing operations primarily due higher operating income result lower asset impairment charges 5926 million well 2008 writedowns spirits business’s investment maxxium 505 million 2009 gain maxxium dividend distribution 125 million income continuing operations unfavorably impacted absence following items recognized 2008 income termination spirits us distribution agreement related deferred gain recognition 1908 million tax aggregate gain due reduction fair value noncontrolling interest spirits business 819 million taxrelated credits 984 million results operations segment spirits 2010 compared 2009 net sales increased 1963 million 8 26659 million excise taxes included net sales net impact operating income increased 817 million principally due new international distribution structure change selling terms major customer australia required inclusion excise taxes net sales higher us sales volume excluding impact excise taxes net sales increased 1146 million 6 net sales increased primarily due higher sales volume us internationally benefiting new product introductions market growth increased strategic investment foreign exchange also favorably impacted net sales approximately 20 million increases partially offset unfavorable impact divesting certain nonstrategic brands approximately 16 million operating income increased 596 million 12 5443 million certain items significant impact change operating income including absence 925 million impairment charge occurred 2009 2010 losses sale certain nonstrategic brands 160 million lower restructuring charges 43 million excluding items spirits operating income decreased 212 million 3 decrease due higher strategic investment including advertising promotion expense selling distribution costs associated new international sales distribution structures price reductions result proactive price repositioning primarily economy vodkas tequila australia expect incur additional restructuring charges approximately 10 million next twelve eighteen months related previously announced initiatives august 2010 sold certain nonstrategic german spirits brands related assets recorded pretax loss 86 million 124 million tax connection sale december 2010 sold cockburn port brand us uk portugal inventory result recorded pretax loss 74 million 68 million tax sale proceeds two dispositions 492 million longterm demographic trends favorable continued growth western premium spirits believe continued focus best growth return opportunities well increased investment innovation advertising effective routes market position us well longterm growth factors could adversely affect future results spirits business include competitive pricing activities reductions customer inventory levels potential reduction government financial incentives related rum production increases commodity energy prices future excise tax increases continued consolidation distributor retail tiers increased regulatory enforcement potential impairment charges 2009 compared 2008 net sales flat 2009 compared 2008 due higher us sales offset lower international sales net sales us higher due benefit acquisitions approximately 106 million including cruzan rum sales third party brands within distribution businesses acquired maxxium higher pricing introduction new products us distributor program resulted stable wholesale inventory levels us net sales unfavorably impacted weak industry conditions international net sales decreased unfavorable foreign exchange approximately 50 million addition net sales lower constant currency basis certain markets largely due economic weakness western europe mexico impact 2008 australian excise tax increase readytodrink products change distributors mexico operating income decreased 590 million 11 4847 million operating income lower due higher tradename impairment charges 925 million 2009 compared 272 million 2008 increased operating costs associated enhanced us international sales distribution structures approximately 40 million unfavorable foreign exchange approximately 10 million operating income benefited lower advertising promotional spending select price increases lower restructuring charges 333 million spirits business indefinitelived tradenames carrying value 19054 million december 31 2009 connection regular annual impairment testing fourth quarter 2009 recorded impairment charges 925 million primarily related indefinitelived tradename sauza tequila reducing book value impaired brands 7828 million aggregate tradenames acquired 2005 fair value closely approximates book value company remains confident longterm growth prospects spirits brands however generally accepted accounting principles require indefinitelived tradenames valued based current fair value book value impairment charges recorded reflect decline estimated fair value impaired tradenames book value accordance authoritative guidance goodwill intangibles assets asc 350 impaired tradenames believed fair value declined book value primarily due combined effect economic downturn sales key geographic markets particularly mexico us expectation moderate market growth rates overall tequila spirits category foreseeable future estimate fair value using standard relieffromroyalty method estimates present value royalty income could hypothetically earned licensing brand name third party method consistent method employed prior periods method employed value tradenames date original acquisition methodology important judgments estimates influence tradename’s fair value include expected branded product sales included operating plans longerterm market growth rates particular spirits categories geographies expected profit margins products sold using brands terminal value revenue growth rates weighted average cost capital october 2009 entered longterm agreement us virgin islands continue produce rum st croix mutually beneficial agreement structured promote increased tax revenue us virgin islands provide cost effective production rum spirits business september 2008 beam global spirits wine inc bgsw edrington group ltd teg entered agreement establishing international distribution alliance combination jointlyowned companyowned sales forces 24 markets operations new alliance began april 1 2009 alliance simplified international routes market gave us greater control distribution alliance provides bgsw teg joint 5050 ownership sales distribution companies certain markets bgsw whollyowned teg wholly owned distribution companies distribute companies’ products third party products certain markets prior april 1 2009 bgsw 25 partner maxxium international sales distribution joint venture equal partners maxxium rémy cointreau sa rémy vs teg accordance settlement agreement executed september 2008 march 30 2009 rémy vs exited maxxium joint venture bgsw became 50 owner maxxium teg home security 2010 compared 2009 net sales increased 2272 million 8 32340 million increase primarily due expanding relationships key customers new product introductions including offerings new price points well stable market conditions us home products market favorable foreign exchange rates approximately 40 million operating income increased 1350 million 2220 million primarily due higher sales benefit favorable operating leverage well cost savings prior year restructuring initiatives addition operating income benefited lower restructuring charges 395 million due completion many 2009 projects undertaken reduce manufacturing capacity administrative costs foreign currency changes favorably impacted operating income approximately 15 million operating income unfavorably impacted higher raw material transportation costs approximately 35 million well costs support new business believe us home product market recovery continue gradual uneven expect near term results continue challenging consumers remain cautious recovery us home products market depend employment home prices credit availability rate foreclosures addition expect costs may higher raw material transportation well investments support rollouts new business long term believe market benefit favorable population immigration trends drive demand new housing units aging housing stock continue need remodeled repaired 2009 compared 2008 net sales decreased 7523 million 20 30068 million decrease primarily attributable downturn us housing home products market us economic recession factors resulted lower repair remodeling spending particularly bigticket items cabinetry entry doors substantial decrease new home construction well mix shift lowerpriced products net sales benefited share gains key customers impact select price increases new products line extensions operating income increased 5526 million income 870 million primarily due asset impairment charges recorded 2008 recur 2009 7583 million cost reduction supply chain improvements areas business 2009 partially offset continuing adverse operating leverage substantially lower sales unfavorable mix shift restructuring charges slightly lower 2009 520 million 2009 compared 556 million 2008 2009 announced closure seven plants addition six closures announced 2008 since december 31 2006 reduced number home security segment manufacturing facilities positions approximately 40 headcount reductions implemented across levels organization golf 2010 compared 2009 net sales increased 233 million 2 12416 million excluding impact april 2010 sale cobra golf product line approximately 52 million favorable foreign exchange approximately 30 million net sales increased 439 million 4 higher titleist footjoy brand sales operating income increased 637 million 887 million due lower restructuring charges 324 million favorable foreign exchange rates approximately 20 million pretax gain sale cobra golf product line 113 million operating income adversely impacted higher advertising expense increased selling marketing spending support longterm growth key asian markets expect golfers remain cautious purchases equipment expect golf industry benefit favorable longterm demographic trends including aging us population rounds play increase age retirement increasing popularity golf internationally april 2010 sold cobra golf product line puma north america inc 889 million concentrate resources behind growth titleist footjoy brands asset sale included cobra golf brand related inventory intellectual property endorsement contracts 2009 cobra net sales approximately 130 million connection transition services agreement puma north america inc expect record revenues distribute cobra products select international markets march 31 2011 united states golf association usga royal ancient golf club ra establish standards golf equipment used united states outside united states respectively recent years usga ra enacted new rules restricting dimensions performance golf clubs golf balls march 2005 usga ra requested manufacturers participate golf ball research project manufacturing submitting balls would conform overall distance standard 15 25 yards shorter current standard 317 yards recently adopted rule change allow greater adjustability golf clubs went effect january 1 2008 august 2008 usga ra adopted rule change effective january 1 2010 restricting golf club grooves reducing groove volume limiting groove edge angle allowable irons wedges rule change apply golfers january 1 2024 however implemented professional tours beginning 2010 implemented elite amateur competitions beginning 2014 products manufactured december 31 2010 must comply new groove specification existing rules new rules could change industry’s ability innovate deploy new technologies well impact competitive dynamic among industry participants potentially impacting golf business 2009 compared net sales decreased 1506 million 11 12183 million primarily due impact decreased demand us western europe particularly golf clubs custom golf balls well impact unfavorable foreign exchange rates approximately 50 million net sales benefited market share gains doubledigit percentage increase constant currency sales asian markets operating income decreased 1003 million 80 250 million primarily due lower sales related unfavorable operating leverage restructuring charges 352 million mainly related workforce reductions closure footwear manufacturing facility unfavorable foreign currency approximately 20 million higher incentive compensation expense operating income benefited cost recovery actions lower operating expenses including reduced advertising promotion lower discretionary expenses corporate 2010 compared 2009 corporate expenses 911 million include salaries benefits expenses related corporate office employees decreased 04 million decrease primarily due absence pension settlement costs expenses associated disposition fixed assets 2009 partially offset higher sharebased compensation 2010 compared lower level incentive compensation 2009 2011 excluding business separation costs expect corporate expenses approximately 80 million result lower expenses related stockbased incentive compensation costs 2009 compared 2008 corporate expenses 915 million include salaries benefits expenses related corporate office services employees increased 337 million primarily due unfavorable comparison low level incentive compensation 2008 pension settlement costs expenses associated disposition fixed assets business separation costs business separation costs external costs directly related implementing proposed separation company’s three businesses costs predominately consist required financial legal related advisory fees company estimates may incur business separation costs 50 million 60 million 2011 liquidity capital resources believe internally generated funds together access global credit markets availability existing revolving credit agreement adequate meet longterm shortterm liquidity capital needs primary liquidity needs support working capital requirements fund capital expenditures service indebtedness pay dividends well finance acquisitions share repurchases deemed appropriate principal sources liquidity cash hand cash flows operating activities availability credit agreements operating income generated subsidiaries restrictions ability subsidiaries pay dividends make distributions fortune brands periodically review portfolio brands evaluate strategic options increase shareholder value current priority paying debt however cannot predict whether may enter acquisition disposition joint venture strategic transactions impact transaction could results operations cash flows financial condition whether result issuance debt equity securities otherwise addition company cannot predict impact proposed separation may future liquidity capitalization cash flows operations borrowing availability overall liquidity subject certain risks uncertainties including described section titled “item 1a risk factors” liquidity capitalization total debt decreased 1837 million year ended december 31 2010 43 billion second quarter 2010 repurchased 1594 million notes due january 15 2011 remainder decrease primarily due change foreign currency rates ratio total debt total capital decreased 430 december 31 2010 467 december 31 2009 primarily due lower debt level higher equity resulting 2010 net income first quarter 2010 stock contribution defined benefit pension plans partially offset dividends paid february 3 2010 executed 750 million 3year committed revolving credit agreement used general corporate purposes december 31 2010 facility balance outstanding credit facility replaced prior 20 billion 5year committed revolving credit agreement interest rates credit facility variable based libor time borrowing company’s longterm credit rating credit facility includes minimum consolidated interest coverage ratio requirement 30 10 2011 35 10 2012 consolidated interest coverage ratio defined ratio adjusted ebitda consolidated interest expense adjusted ebitda defined consolidated net income interest expense income taxes depreciation amortization intangible assets well noncash restructuring nonrecurring charges losses asset impairments gains losses resulting sale assets ordinary course business consolidated interest expense disclosed financial statements credit facility also includes maximum debt total capital ratio 055 10 total capital defined debt plus equity deferred taxes less impairment charges december 31 2010 compliance ratios wide margin believe possibility violating financial covenants remote believe unused committed credit facility provides sufficient liquidity fund current operating financing needs believe credit facility arranged strong diversified group financial institutions first quarter 2011 company entered uncommitted lines credit totaling 200 million seasonal working capital needs one uncommitted lines credit references financial ratio covenant revolving credit agreement june 2009 issued longterm debt securities 500 million shelf registration statement filed sec 6 38 notes mature june 2014 net proceeds 4967 million less price discounts 03 million underwriting fees 30 million proceeds used pay balances revolving credit facility november 2009 issued longterm debt securities 400 million shelf registration statement filed securities exchange commission 3 notes mature june 2012 net proceeds 3984 million less price discounts 04 million underwriting fees 12 million proceeds used pay three year term loan second quarter 2010 repurchased outstanding notes face value 1594 million scheduled mature january 15 2011 loss repurchase 44 million recognized income expense net january 2011 repaid remaining 5906 million outstanding notes matured january 15 2011 using cash hand april 28 2009 announced reduction indicative annual dividend rate common stock 176 per share 076 per share align dividend historical payout ratio range believe prudent course action given economic environment best longterm interest shareholders currently expect pay quarterly cash dividends future payments dependent upon financial condition results operations capital requirements factors including set forth section titled “item 1a risk factors” investment grade credit rating three credit rating agencies downgrade credit ratings noninvestment grade renewed global economic decline credit crisis may impact access longterm capital markets increase interest rates corporate debt weaken operating cash flow liquidity potentially adversely impacting ability pay dividends fund acquisitions repurchase shares future cash flows summary cash flows years ended december 31 2010 2009 2008 management believes free cash flow provides investors useful supplemental information ability fund internal growth make acquisitions repay debt pay dividends repurchase common stock free cash flow shown cash operating activities less net capital expenditures capital expenditures less proceeds sale assets including property plant equipment free cash flow measure derived accordance us generally accepted accounting principles gaap may consistent similar measures presented companies net cash provided operating activities 7706 million twelve months ended december 31 2010 compared 8663 million period last year decrease cash provided 957 million primarily due higher accounts receivable due increased sales higher inventory levels home security golf businesses support anticipated growth new product introductions 2011 partially offset higher net income net cash used investing activities twelve months ended december 31 2010 decreased 1402 million 730 million compared cash used investing activities 2132 million period last year change primarily due proceeds 2010 asset sales including dispositions cobra golf product line certain german spirits brands related assets cockburn port brand high cash receipts partially offset higher capital expenditures 655 million addition net cash used investing activities 2009 included purchase beam international sales distribution companies april 2009 approximately 66 million net cash acquired approximately 42 million acquire 50 ownership five maxxium joint ventures return investment maxxium approximately 58 million net cash used financing activities twelve months ended december 31 2010 2485 million compared 4323 million period last year decrease cash used 1838 million primarily due lower debt repayments 1222 million net issuance debt lower dividends paid 2010 360 million higher cash exercise stock options 337 million dividends summary 2010 dividend activity company’s common stock shown summary 2010 dividend activity company’s 267 convertible preferred stock shown customer credit risk routinely grant unsecured credit customers normal course business accounts receivable 9474 million december 31 2010 recorded stated amount less allowances discounts doubtful accounts returns allowances doubtful accounts include provisions certain customers risk default specifically identified well provisions determined general formula basis determined default probable estimable yet clearly associated specific customer assessment likelihood customer default based variety factors including length time receivables past due historical collection experience existing economic conditions accordance policy allowance discounts doubtful accounts returns 819 million 720 million december 31 2010 2009 respectively current conditions global economy credit markets may reduce customers’ ability access sufficient liquidity capital fund operations make estimation customer defaults inherently uncertain believe current allowances doubtful accounts adequate possible weakening economic conditions may cause significantly higher levels customer defaults bad debt expense future periods counterparty risk counterparties derivative contracts major financial institutions although theoretical risk replacement cost estimated fair value instruments believe risk incurring losses unlikely losses would immaterial results operations cash flows financial condition fair value derivative assets december 31 2010 664 million estimated fair value derivative contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices pension plans sponsor defined benefit pension plans funded portfolio investments maintained within benefit plan trusts met us minimum funding requirements 2010 foreseeable future believe sufficient liquidity meet minimum funding may required pension protection act 2006 december 31 2010 fair value total pension plan assets 9894 million representing 93 accumulated benefit obligation liability foreign exchange investments various foreign countries principally australia canada mexico spain uk france therefore changes value related currencies affect balance sheet cash flow statements translated us dollars addition eurodenominated longterm debt outstanding see note 7 “debt financing arrangements” consolidated financial statements item 8 form 10k interest rates may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount fourth quarter 2009 entered fixed floating interest rate swaps aggregate notional principal amount 400 million second quarter 2009 entered interest rate swaps aggregate notional principal amount 500 million interest rate swaps outstanding december 31 2010 2009 notional value totaling 900 million swap agreements hedge changes fair value portion existing fixed rate debt result changes benchmark interest rate us libor swap agreements designated classified fair value hedges accordance authoritative guidance derivatives hedging asc 815 second quarter 2008 entered fixed floating interest rate swaps aggregate notional principal amount 400 million october 2008 terminated settled 2008 interest rate swap agreements recorded 156 million gain amortized income reduction interest expense remaining life debt using effective interest method interest rate swaps outstanding december 31 2008 fair market value longterm fixed interest rate debt impacted interest rate risk credit risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value 42280 million 44133 million total longterm debt including current portion december 31 2010 2009 approximately 43236 million 44330 million respectively fair value determined quoted market prices available investment bankers respect interest rates considering credit ratings remaining terms maturity guarantees commitments guarantee 50 certain credit facilities maxxium españa sl amount 90 million approximately 120 million denview ltd amount 90 million approximately 120 million maxxium cyprus ltd amount 40 million approximately 54 million reflecting ownership joint ventures teg liability related guarantees material bgsw teg also uncommitted multicurrency shareholder loan facility bgswteg joint ventures share 50 15 million approximately 201 million also guarantee lease acco world corporation office products business divested spinoff 2005 guaranteed lease payments total approximately 159 million april 2013 liability related guarantee material contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2010 purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures b minimum required pension postretirement contributions cannot determined beyond 2011 due uncertainty timing settlement taxing authorities unable make reasonably reliable estimates period cash settlement unrecognized tax benefits therefore 1345 million unrecognized tax benefits december 31 2010 excluded contractual obligations table see note 15 “income taxes” consolidated financial statements item 8 form 10k addition contractual obligations guarantees commitments listed described also commercial commitments contingently liable december 31 2010 corporate commercial commitments include standby letters credit 711 million expire less one year contingent commitments expected significant impact liquidity derivative financial instruments accordance authoritative guidance derivatives hedging asc 815 derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized statement income hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized years ended december 31 2010 2009 2008 deferred currency gains 115 million 220 million 39 million respectively reclassified earnings based foreign exchange rates december 31 2010 estimate 84 million currency derivative losses included oci december 31 2010 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk principal currencies hedged include us dollar canadian dollar euro australian dollar japanese yen british pound also exposed foreign currency risk result eurodenominated debt regularly monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuances new longterm debt see note 8 “financial instruments” consolidated financial statements item 8 form 10k information management interest rate risk recently issued accounting standards consolidation variable interest entities june 2009 financial accounting standards board fasb amended existing authoritative guidance variable interest entities asc 810 new authoritative guidance includes new approach determining variable interest entity vie consolidated b changes necessary reassess consolidate vie new approach requires enterprise qualitatively assess determination primary beneficiary consolidator amendment effective interim annual reporting periods beginning november 15 2009 calendar year 2010 fortune brands adoption standard impact financial statements disclosures revenue arrangements multiple deliverables october 2009 fasb issued accounting standards update 200913 “multipledeliverable revenue arrangements consensus fasb emerging issues task force” guidance requires entities allocate consideration multiple deliverable arrangements manner reflects transaction’s economics guidance requires expanded disclosure effective fiscal years beginning june 15 2010 calendar year 2011 fortune brands applied either prospectively retrospectively believe adoption standard material impact financial statements disclosures critical accounting policies estimates significant accounting policies described note 1 notes consolidated financial statements item 8 form 10k consolidated financial statements prepared conformity us gaap preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe policies discussed company’s critical accounting policies include significant subjective complex judgments estimates made preparing consolidated financial statements allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency discounts related early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 819 million 720 million december 31 2010 2009 respectively inventories firstin firstout inventory method principal inventory method across segments accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory levels turns product spoilage specific identification items product discontinuance engineeringmaterial changes regulatoryrelated changes longlived assets accordance authoritative guidance property plant equipment asc 360 longlived asset including amortizable identifiable intangible assets asset group held use tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows market participant basis goodwill indefinitelived intangible assets accordance authoritative guidance goodwill intangible assets asc 350 goodwill tested impairment least annually fourth quarter written impaired interim impairment test performed event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future cash flows reporting units goodwill relates discount future cash flows marketparticipantderived weightedaverage cost capital determining estimated future cash flows consider current projected future levels income based management’s plans business trends prospects market economic conditions marketparticipant considerations reporting unit operating segment case home security segment one level operating segment estimated fair value reporting unit less carrying value measure recognize amount goodwill impairment loss impairment losses limited carrying value goodwill represent excess carrying value reporting unit’s goodwill implied fair value goodwill implied fair value reporting unit estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance requirements asc 350 asc 350 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite determination useful life intangible asset goodwill based factors including historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated least annually determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually fourth quarter whenever market business events indicate may potential impairment intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party remaining useful life company two indefinitelived tradenames 10 reduction fair value would trigger impairment charge future periods tradenames spirits business aggregate book value 6524 million december 31 2010 significant estimates assumptions influence tradename’s fair value include expected branded product sales included operating plans longerterm market growth rates particular spirits categories geographies expected profit margins products sold using brands terminal value revenue growth rates weighted average cost capital cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits record amounts relating plans based calculations specified us gaap include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets calculate pension costs recognizing year’s asset gains losses fiveyear period expected return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments bond portfolio used selection discount rate top quartile bonds rated nationally recognized statistical rating organizations includes noncallable bonds deemed sufficiently marketable moody’s credit rating aa higher weightedaverage discount rate pension postretirement benefit liabilities december 31 2010 2009 57 59 respectively required us gaap effects actuarial deviations assumptions generally accumulated outside specified corridor amortized average remaining service period employees weighted average remaining service period pension plans december 31 2010 approximately 103 years cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees total net actuarial losses pension postretirement benefit plans 408 million december 31 2010 decrease 21 million december 31 2009 primarily result amortization loss recognition pension expense believe assumptions utilized recording obligations plans reasonable based experience advice independent actuaries however differences actual experience changes assumptions may materially affect financial position results operations postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases december 31 2010 2009 postretirement medical prescription drugs assumption assumed rate increase 75 next year declining 50 basis points year reaching ultimate assumed rate increase 5 per year pension expenses 389 million 489 million 325 million years ended december 31 2010 2009 2008 respectively including net curtailment settlement losses 24 million 176 million 28 million years ended december 31 2010 2009 2008 respectively postretirement expenses 40 million 79 million 88 million respectively years ended december 31 2010 2009 2008 including net curtailment gains 01 million 26 million years ended december 31 2009 2008 respectively curtailments 2010 25 basis point change discount rate assumption would lead increase decrease pension expense postretirement benefit expense approximately 43 million 03 million respectively 2011 25 basis point change longterm rate return plan assets used accounting pension plans would 25 million impact pension expense income taxes accordance authoritative guidance income taxes asc 740 establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse record valuation allowance reducing deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest record liabilities uncertain income tax positions based twostep process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ estimates future periods changes facts circumstances new information may require us change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur december 31 2010 liabilities unrecognized tax benefits pertaining uncertain tax positions totaling 1345 million reasonably possible unrecognized tax benefits may decrease range 5 million 20 million next 12 months primarily result conclusion us federal state foreign income tax proceedings result proposed separation related transactions possible tax assertions regarding permanent reinvestment foreign earnings assumptions respect realization certain deferred assets could change customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sales products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “net sales” category “advertising selling general administrative expenses” time program initiated andor revenue recognized costs recognized “net sales” include limited volume allowances rebates promotional allowances cooperative advertising programs costs typically recognized “advertising selling general administrative expenses” include point sale materials media costs recorded latter time sale implementation program based management’s best estimates based historical projected experience type program customer volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new products store sellthrough merchandising support levels returns customer training management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations litigation contingencies businesses subject risks related threatened pending litigation routinely defendants lawsuits associated normal conduct business addition golf business faces patent litigation could result significant costs well potentially impact ability sell products liabilities costs associated litigation related loss contingencies require estimates judgments based knowledge facts circumstances surrounding matter advice legal counsel record liabilities litigation related losses loss probable reasonably estimate amount loss accordance asc 450 evaluate measurement recorded liabilities reporting period based current facts circumstances specific matter ultimate losses incurred upon final resolution litigation related loss contingencies may differ materially estimated liability recorded particular balance sheet date changes estimates recorded earnings period changes occur cost initiatives continuously evaluate productivity supply chains existing asset base actively seek identify opportunities improve cost structure future opportunities may involve among things reorganization operations relocation manufacturing assembly locations generally lower costs efficient sourcing products components thirdparty suppliers implementing significant cost reduction efficiency opportunities could result charges pending litigation see note 24 “pending litigation” consolidated financial statements item 8 form 10k environmental matters involved numerous remediation activities clean hazardous wastes required federal state laws liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties uncertainties status laws regulations technology information related individual sites make difficult develop estimates environmental remediation exposures potential liabilities relate sites relate sites longer never owned february 4 2011 several subsidiaries designated potentially responsible parties “prp” “superfund” similar state laws 53 instances 38 dismissed settled otherwise resolved calendar year 2010 one previously resolved matter reopened resettled identified prp two new instances one dismissed settled otherwise resolved average settlement approximately 1224 instances named prp enter costsharing arrangements prps give notice insurance carriers potential prp liability rarely ever receive reimbursement insurance believe cost complying present environmental protection laws considering estimated recoveries either potentially responsible parties insurance material adverse effect upon results operations cash flows financial condition december 31 2010 2009 accruals 213 million 245 million respectively cover environmental compliance clean including limited mentioned superfund sites item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements related notes included elsewhere annual report form 10k addition historical information discussion analysis contains forwardlooking statements involve risks uncertainties assumptions could cause actual results differ materially management’s expectations please see “disclosure regarding forwardlooking statements” section part item 1 report “risk factors” section part item 1a report use terms “beam” “the company” “we” “us” “our” refer business beam inc subsidiaries executive summary leading premium spirits company makes sells branded distilled spirits products major markets worldwide principal products include bourbon whiskey scotch whisky canadian whisky tequila cognac rum cordials readytodrink premixed cocktails portfolio includes several world’s top premium spirits brands industry’s fastest growing innovations separation transactions december 8 2010 beam known fortune brands inc announced board directors approved principle separation company’s three business segments announced plan included taxfree spinoff home security products business sale taxfree spinoff golf business continuation beam independent publiclytraded pureplay spirits company concluded separation three businesses would significantly enhance business’s longterm growth return prospects offer substantially greater total longterm value shareholders july 29 2011 completed sale acushnet company golf business “golf business” company formed fila korea ltd mirae asset private equity korea october 3 2011 completed spinoff fortune brands home security inc “home security” distributing 100 outstanding shares common stock home security holders common stock “spinoff” sale golf business spinoff together referred form 10k “separation transactions” golf business home security reported discontinued operations periods presented upon completion spinoff changed name fortune brands inc beam inc began trading nyse ticker “beam” october 4 2011 operating segments following separation transactions operating segments based internal regional organization used management making operating decisions assessing performance follows segment key countriesmarkets north america united states canada mexico emea europemiddle eastafrica spain united kingdom germany russia turkey ireland italy hungary czech republic romania south africa north america duty free europe travel retail apsa asiapacificsouth america australia new zealand south east asia china brazil india south korea japan operating segment derives revenues sale distilled spirits financial impact separation transactions matters certain items significant impact financial results 2011 2010 2009 include impact separation transactions changes foreign currency exchange rates acquisition dispositionrelated items restructuring related charges income tax related matters 2011 financial results included following • business separation costs 838 million 676 million net tax 043 per share incurred connection separation transactions principally transaction professional advisory fees severance employee related costs • corporate general administrative overhead costs related former fortune brands inc management structure spinoff october 3 2011 605 million 381 million net tax 024 per share • acquisition related contingent consideration 28 million 174 million net tax 011 per share recorded based actual forecasted performance business acquired 2011 • restructuring related charges 254 million 160 million net tax 010 per share primarily related facility consolidation supply chain distribution cost reduction initiatives north america well organizational streamlining initiatives • higher net sales 463 million operating income 236 million 165 million net tax 010 per share related onetime sale product recorded connection transition new longterm distribution agreement australia • favorable impact foreign exchange compared 2010 64 million net sales 16 million operating income 11 million net tax 007 per share • asset impairment charges related indefinitelived trade names whisky dyc larios 313 million 219 million net tax 014 per share • income benefited nontaxable distribution maxxium investment 102 million 006 per share nontaxable income tax indemnification payments 27 million 017 per share related foreign tax jurisdictions periods prior acquisitions businesses • loss early extinguishment debt 1492 million 962 million net tax 061 per share • income tax expense impacted tax effects significant items described impact tax assessments associated resolution routine foreign us income tax audit examinations including unfavorable 255 million related mexican tax audits favorable 19 million related germany tax audits 2010 financial results included following • favorable impact foreign exchange compared 2009 112 million net sales 33 million operating income • business separation costs 23 million 15 million net tax 001 per share incurred connection separation transactions principally transaction professional advisory fees • corporate general administrative overhead costs related former fortune brands inc management structure 858 million 554 million net tax 036 per share • restructuring related charges 26 million 167 million net tax 011 per share primarily related facility consolidation supply chain distribution cost reduction initiatives north america well organizational streamlining initiatives • lower net sales result sale certain nonstrategic spirits brands germany cockburn’s port brand loss sale brands 16 million 19 million net tax 012 per share • income benefited nontaxable income tax indemnification payments 37 million related foreign tax jurisdictions periods prior acquisitions business • income tax expense impacted tax effects significant items described favorable 46 million related tax assessments associated resolution routine foreign us income tax audit examinations 2009 financial results included following • incremental impact acquisitions net sales 106 million cruzan rum sales thirdparty brands within distribution businesses acquired maxxium prior international spirits sales distribution venture • restructuring related charges 34 million 22 million net tax 014 per share • asset impairment charges related indefinitelive intangible tradenames north america 925 million 668 million net tax 044 per share business outlook believe longterm demographic trends favorable continued profitable growth western premium spirits believe continued management investment focus best growth return opportunities including innovation advertising effective routes market position us well longterm growth expect global spirits market grow value range 3 2012 supported solid growth mature markets us doubledigit growth key emerging markets brazil india china russia factors could adversely affect future results business include macroeconomic challenges changes market trends competitive pricing activities changes foreign exchange rates reductions customer inventory levels changes government financial incentives increases commodity energy prices future increases excise taxes customs duties continued consolidation distributor retail tiers increased regulatory enforcement potential impairment charges results operations following discussion analysis results continuing operations 2011 compared 2010 compared 2009 addresses changes net sales operating expenses income continuing operations calculate foreign exchange translation effects translating current year results prior year exchange rates approximately 50 percent business outside us therefore changes foreign exchange rates particularly australian dollar euro significant impact reported results operations translated presented us dollars consolidated results 2011 compared 2010 net sales net sales increased 2162 million 10 21 billion 2010 23 billion 2011 increase net sales driven increase volume 3 well favorable product mix 5 power brands rising stars brands grew 12 52 respectively reflecting strong growth premium end portfolio achieved significant increase advertising marketing expense behind brands well innovation 2011 remaining increase net sales attributed favorable foreign currency exchange 3 impact onetime sale inventory related transitioning new longterm distribution agreement australia 2 partially offset combination ongoing impact australia distributor agreement net impact acquisitions divestitures primarily due sale nonstrategic german spirits brands inventories cockburn’s port business 2010 3 2011 transitioned agency agreement manufacturing distribution agreement australia new agreement net sales lower distributor responsible incurs distribution selling costs previously incurred beam cost goods sold cost goods sold increased 1228 million 14 865 million 2010 988 million 2011 cost goods sold increased 10 primarily due higher sales startup costs associated new products increase commodities including corn rye grains raw material costs approximately 20 million partially offset favorable impact productivity initiatives achieved “fuel growth” strategy remaining increase cost goods sold primarily attributed unfavorable impact foreign currency translation approximately 34 million impact onetime sale inventory related transitioning new longterm distribution agreement australia net ongoing impact australia agreement 10 million higher charges 2011 versus 2010 partially offset mentioned net impact acquisition divestitures advertising marketing expense advertising marketing expense increased 51 million 17 308 million 2010 359 million 2011 substantially increased advertising marketing expense year build enhance core brand equities principally power brands rising stars drive net sales growth year position brands longterm growth increased advertising marketing expense across segments principally north america asiapacificsouth america selling general administrative expense selling general administrative expense increased 14 million 3 416 million 2010 430 million 2011 increased strategic investments new product development support innovation initiatives higher variable selling costs north america resulting strong sales growth particularly us selling administrative costs apsa incurred build infrastructure regionally within key emerging markets increased selling general administrative expense collectively approximately 7 higher costs partially offset favorable impact lower fortune brands corporate overhead 2011 selling general administrative expenses included corporate general administrative overhead costs related former fortune brands inc management structure spinoff october 3 2011 approximately 61 million compared approximately 86 million 2010 decrease 25 million partially offset incremental corporate costs incurred beam fourth quarter 2011 selling general administrative expense 2011 also included acquisitionrelated contingent consideration 28 million based actual forecasted performance acquired business selling expenses new manufacturing distribution agreement australia decreased 2011 distributor responsible selling costs new agreement addition charges included selling general administrative expense decreased 6 million 2010 business separation costs business separation costs incurred connection separation transactions 838 million 23 million years ended december 31 2011 2010 respectively business separation costs 2011 consisted 434 million financial legal separationrelated advisory fees well 404 million employeerelated costs primarily related termination benefits incremental stockbased compensation expense incurred result modification certain outstanding fortune brands equity awards anticipation conversion awards beam home security equity awards business separation costs 23 million 2010 principally related transaction professional advisory fees incurred connection separation transactions restructuring charges 2011 restructuring charges 77 million related distribution supplychain initiatives facility consolidations organizational streamlining initiatives completed significant supplychain initiative towards end 2011 consolidation us bottling facilities expanded operations center excellence frankfort kentucky 2010 restructuring charges 154 million related organizational streamlining initiatives asset impairment charges recorded noncash impairment charge 31 million reduce larios dyc tradenames estimated fair value december 2011 asset impairment due combined effect economic downturn sales key geographic markets principally spain well effect substantially higher interest rates refer “critical accounting policies estimates goodwill indefinitelived intangible assets” note 12 goodwill intangible assets notes consolidated financial statements part ii item 8 report information asset impairment charges 2010 loss sale brands related assets december 2010 sold cockburn’s port brand related us uk portugal inventory connection sale recorded pretax loss 74 million 68 million tax august 2010 sold certain nonstrategic german spirits brands related assets connection sale recorded pretax loss 86 million 124 million tax operating income operating income decreased 61 million 13 4562 million 2010 3955 million 2011 consolidated operating income significantly impacted several unusual items described including business separation costs 838 million asset impairment charges 313 million contingent consideration business acquisition 25 million partially offset onetime benefit sale product new australia distribution agreement 24 million unfavorable increase unusual costs also partially offset favorable foreign currency impacts 155 million lower fortune brands corporate costs 2011 compared 2010 25 million result spinoff occurring start fourth quarter 2011 absence loss sale nonstrategic brands 2010 16 million interest expense interest expense decreased 263 million 18 primarily due lower average borrowings well lower average interest rates reduced outstanding debt approximately 23 billion 2011 refer section “liquidity capital resources” additional information regarding reduction debt 2011 loss early extinguishment debt loss early extinguishment debt 1492 million consists 1550 million purchase premiums 72 million accelerated unamortized debt issuance costs partially offset 130 million attributed amortizationwriteoff deferred gains terminated interest rate swaps related extinguished debt refer section “liquidity capital resources” additional information regarding reduction debt 2011 income expense income increased 72 million 22 332 million 2010 404 million 2011 recognized income 26 million upon receipt tax indemnification payments pernod ricard connection mexican income tax audit settlements 10 million distribution related winding joint venture investment 2010 recognized income 37 million upon receipt tax indemnification payments pernod ricard connection spanish income tax audit settlements income expense also includes nonoperating income expense interest income transaction gains losses related foreign currency denominated transactions well equity income expense income taxes effective income tax rate 213 105 2011 2010 respectively effective income tax rate 2011 unfavorably impacted nondeductible business separation costs tax assessment related settlement mexican income tax audit effective tax rate 2011 favorably impacted taxfree treatment indemnification income received connection settlement mexican income tax audit resolution german tax audit effective income tax rate 2010 favorably impacted tax benefits approximately 46 million related final settlement us spanish federal income tax audits effective tax rate 2010 also favorably impacted taxfree treatment indemnification proceeds received connection settlement spanish income tax audit see note 9 income taxes notes consolidated financial statements additional information related effective tax rate 2011 2010 income discontinued operations income discontinued operations net tax 7822 million 2011 compared 1865 million 2010 reflecting discontinued operations former golf business former home security business 2011 recorded gain 687 million sale golf business segment results 2011 compared 2010 following table sets forth net sales operating income operating segment 2011 2010 reported adjusted exclude impact foreign exchange translation nongaap measure described millions segment net sales operating income following discussion stated excluding impact foreign exchange translation calculate foreign exchange translation effects translating current year results prior year exchange rates amounts nongaap measures management believes useful evaluating performance without foreign exchange impacts measures may comparable similar measures used companies north america north america net sales increased 1045 million 9 12 billion 2010 13 billion 2011 favorable product mix increased volume contributed roughly equally yearoveryear sales growth net sales volume product mix benefited new product innovations pucker flavored vodka jim beam devil’s cut red stag well acquisition growth skinnygirl readytodrink cocktail brand addition strength power brands rising stars brands geographic market sales increases us canada partially offset decrease mexico driven transition new distributor fourth quarter north america operating income increased 3 million 1 360 million 2010 363 million 2011 operating income increased rate increase net sales principally due double digit increases advertising marketing expense new product startup innovation costs including skinnygirl well higher commodity costs without benefit price increases europemiddle eastafrica emea net sales increased 6 million 1 478 million 2010 484 million 2011 increase net sales includes adverse impact july 2010 divestiture nonstrategic local german brands approximately 30 million 7 net sales benefited primarily volume favorable product mix including new product innovations sourz raspberry jim beam red stag well strong growth power brands germany russia travel retail partially offset decreases economically challenged markets including uk spain emea operating income increased 12 million 13 99 million 2010 111 million 2011 resulting favorable product market mix including power brands germany russia uk travel retail well effective cost management productivity initiatives divestiture nonstrategic german brands cockburn’s port business 2010 carried lower average margins asiapacificsouth america apsa net sales decreased 4 million 1 455 million 2010 451 million 2011 driven adverse impact net sales 9 related ongoing impact new distribution agreement australia 2011 transitioned agency agreement manufacturing distribution agreement australia new agreement net sales lower distributor responsible incurs distribution selling costs previously incurred beam adverse impact new australian agreement reported net sales mostly offset volume increases power brands jim beam canadian club teacher’s apsa segment primarily australia emerging markets india apsa operating income decreased 11 million 12 94 million 2010 83 million 2011 result planned investments within segment support longterm growth including investment sales distribution infrastructure india brazil well double digit increases advertising marketing support brandbuilding australia consolidated results 2010 compared 2009 net sales net sales increased 115 million 6 20 billion 2009 21 billion 2010 driven growth operating segments growth predominantly driven volume growth power brands benefiting innovation strength emerging markets travel retail channel increased brand investment foreign exchange also favorably impacted net sales approximately 11 million divestitures nonstrategic brands germany august 2010 adversely impacted net sales growth approximately 16 million 1 cost goods sold cost goods sold increased 823 million 10 783 million 2009 865 million 2010 growth cost goods sold primarily due increased sales volume increased cost associated product mix 2010 compared 2009 cost increases moderate concentrated price energy grains advertising marketing expense advertising marketing expense increased 319 million 12 primarily due planned increases segments support core brand equities new product innovations longterm growth spend focused power brands including jim beam maker’s mark courvoisier concentrated us across several emerging markets emea apsa selling general administrative expense selling general administrative costs increased 319 million 8 384 million 2009 416 million 2010 selling general administrative expense unfavorably impacted 2010 costs associated new international sales distribution structures following dissolution 2009 maxxium international joint venture accounted approximately 2 percentage points growth selling general administrative expenses excluding impact selling general administrative expense grew approximately 6 driven higher salesrelated costs foreign currency inflationary pressures general administrative costs restructuring charges 2010 restructuring charges 154 million related organizational streamlining initiatives 2009 restructuring charges 288 million related business repositioning including strategic sales distribution initiatives international markets us supply chain activities asset impairment charges connection annual indefinitelived intangible asset impairment testing fourth quarter 2009 recorded impairment charges 925 million adjust carrying value tradenames primarily sauza estimated aggregate fair value 7828 million fair value declined book value primarily due combined effect economic downturn excess agave supply sales key geographic markets particularly mexico us expectation moderate market growth rates overall tequila spirits category foreseeable future refer “critical accounting policies estimates goodwill indefinitelived intangible assets” note 12 goodwill intangible assets notes consolidated financial statements part ii item 8 report information loss sale brands related assets december 2010 sold nonstrategic cockburn’s port brand related us uk portugal inventory connection sale recorded pretax loss 74 million 68 million tax august 2010 sold certain nonstrategic german spirits brands related assets connection sale recorded pretax loss 86 million 124 million tax operating income operating income increased 571 million 143 399 million 2009 456 million 2010 increase operating income primarily due 115 million increase net sales partially offset higher costs goods sold expenses due increase net sales addition discussed consolidated operating income impacted certain charges impact comparability yearoveryear results significant charges 925 million impairment charge 2009 primarily decrease carrying value sauza tradename estimated fair value company incur tradename impairments 2010 income expense income expense net income 332 million 2010 compared expense 75 million 2009 2010 period included tax indemnification income 37 million pernod ricard connection spanish income tax audit settlements 2009 period included distribution 125 million related former maxxium joint venture income taxes effective income tax rate 105 54 2010 2009 respectively effective income tax rate 2010 favorably impacted tax benefits approximately 46 million related final settlement us spanish federal income tax audits effective tax rate 2010 also favorably impacted taxfree treatment indemnification proceeds received connection settlement spanish income tax audit effective income tax rate 2009 favorably impacted tax benefits restructuring charges relative lower taxed income charges income tax rate 2009 unfavorably impacted net tax expense 88 million related correction prior year items determined immaterial years relate see note 9 income taxes notes consolidated financial statements additional information related effective tax rate 2010 2009 income discontinued operations net tax discontinued operations include results former golf home businesses sold spunoff 2011 income discontinued operations net tax increased 124 million 2009 1865 million 2010 primarily due increased sales lower restructuring charges approximately 70 million pretax gain sale cobra golf product line approximately 11 million segment results 2010 compared 2009 following table sets forth net sales operating income operating segment 2010 2009 reported adjusted exclude impact foreign exchange translation nongaap measure millions following discussion presents segment net sales operating income excluding impact foreign exchange nongaap presentation see discussion “segment results 2011 compared 2010” additional information related use nongaap measures north america net sales increased 58 million 5 109 billion 2009 115 billion 2010 north america regionally market north america segment recorded yearoveryear sales increases us significant driver growth volume growth concentrated bourbon cognac categories volume gains partially offset proactive price repositionings north america primarily us tequila bourbon economy vodka north america operating income decreased 2 million 1 355 million 2009 353 million 2010 operating income decrease north america driven double digit increase advertising marketing expense focused supporting core brand equities new product innovations red stag jim beam longterm growth europemiddle eastafrica emea net sales increased 3 14 million 489 million 2009 503 million 2010 despite challenging economic conditions western europe divestiture german brands mid2010 emea delivered growth strength distribution gains uk growth power brands russia rebound global travel retail business operating income emea declined 9 million 7 120 million 2009 111 million 2010 due investment marketing advertising rate ahead sales adverse product mix across highest growth markets asiapacificsouth america net sales apsa grew 32 million 8 400 million 2009 432 million 2010 net sales apsa benefited growth emerging markets including india brazil southeast asia offset price declines core product lines australia challenging pricing environment combined unfavorable market mix transitional costs select emerging markets drove 7 decrease operating income 99 million 2009 92 million 2010 liquidity capital resources liquidity capitalization total debt decreased 23 billion year ended december 31 2011 19 billion ratio total debt total capital decreased 320 december 31 2011 427 december 31 2010 primarily due retirement debt discussed partly offset spinoff home security changes foreign exchange rates december 2011 executed 750 million 5year committed revolving credit agreement “credit agreement” used general corporate purposes december 31 2011 amounts outstanding credit agreement credit agreement replaced beam’s 750 million 3year credit agreement scheduled mature february 2013 amounts may borrowed credit agreement us dollars euros british pounds sterling interest eurocurrency loans accrue libor interest periods 1 2 3 6 months plus spreads based credit ratings assigned beam’s outstanding senior unsecured debt interest alternate base rate loans accrue highest administrative agent’s prime rate ii federal funds effective rate plus 12 1 per annum iii adjusted london interbank offered rate defined credit agreement plus 1 per annum beam may also request competitive bids negotiated rates interest loans credit agreement beam may subject satisfaction certain conditions request aggregate principal amount facility increased 250 million aggregate credit agreement contains among things conditions precedent covenants representations warranties events default customary facilities type covenants include certain limitations secured debt saleleaseback transactions subsidiary debt guarantees fundamental changes transactions affiliates credit agreement also includes financial covenants beam required maintain minimum ratio consolidated ebitda consolidated interest expense 300 100 ii maximum ratio debt capitalization 055 100 consolidated interest expense disclosed financial statements total capital defined debt plus equity deferred taxes excluding impact future impairment charges events default credit agreement december 31 2011 none debt instruments include financial ratio covenants believe cash hand together funds operations credit agreement provide sufficient liquidity fund current operating financing needs believe credit agreement arranged strong diversified group financial institutions november 2011 extinguished portion outstanding 4 notes due 2013 total cash paid holders 4 notes approximately 298 million 408 million included approximately 281 million 386 million debt principal approximately 9 million 12 million accrued interest approximately 8 million 10 million purchase premiums also november 2011 repaid full outstanding 3 notes due 2012 total cash paid holders 3 notes approximately 411 million included 400 million debt principal approximately 5 million accrued interest approximately 6 million purchase premiums august 2011 completed tender offer repurchased 9110 million aggregate principal amount various notes debentures total cash paid holders tendered notes debentures approximately 106 billion consisted 9110 million debt principal 79 million accrued interest 1390 million purchase premiums tender offer financed cash received sale golf business closed july 29 2011 january 2011 repaid remaining 5906 million outstanding notes matured january 15 2011 using cash hand investment grade credit rating three credit rating agencies downgrade credit ratings renewed global economic decline credit crisis may impact access longterm capital markets increase interest rates corporate debt weaken operating cash flow liquidity potentially adversely impacting ability pay dividends fund acquisitions repurchase shares future december 31 2011 total cash equivalents 2183 million majority held foreign currencies nonus subsidiaries manage global cash requirements considering available funds among many subsidiaries conduct business ii geographic location liquidity needs iii cost access international cash balances permanent repatriation nonus cash balances certain subsidiaries could adverse tax consequences may required pay record income tax expense funds extent previously considered permanently reinvested believe transfer cash would material impact results operations financial position 2012 expected pension plan contributions include approximately 30 million required settlement pension liabilities certain former fortune executives due termination connection separation transactions first quarter 2012 used approximately 95 million available cash acquire outstanding common shares cooley distillery plc repay outstanding debt cash flows summary cash flows years ended december 31 2011 2010 2009 millions cash flows presented include results discontinued operations net decrease cash related discontinued operations represents change specifically identifiable cash discontinued operations total cash activity operating activities net cash provided operating activities 4545 million 2011 compared 7706 million 2010 decrease 3161 million primarily due decrease cash provided golf business sold july 2011 home security business spunoff october 2011 higher cash payments related business separation costs net cash provided operating activities 7706 million 2010 compared 8663 million 2009 decrease 957 million mostly due higher accounts receivable due increased sales higher inventory levels home security golf businesses support anticipated growth new products introductions 2011 partially offset higher net income investing activities net cash provided investing activities 9182 million 2011 compared 730 million net cash used investing activities 2010 increase 9912 million primarily due higher net proceeds received 2011 sale assets including net proceeds 13 billion sale golf business partially offsetting increase 1158 million cash transferred home security connection spinoff net cash used 2011 acquisitions 456 million capital expenditures 2185 million 2011 166 million related continuing operations net cash used investing activities 730 million 2010 compared 2132 million 2009 decrease 1402 million primarily due proceeds 2010 asset sales including dispositions cobra golf product line certain german spirits brands related assets cockburn’s port brand favorable impact asset sales partially offset higher capital expenditures 655 million addition net cash used investing activities 2009 included purchase beam international sales distribution companies april 2009 approximately 66 million net cash acquired approximately 42 million acquire 50 ownership five maxxium joint ventures return investment maxxium approximately 58 million financing activities net cash used financing activities 20025 million 2011 compared 2485 million 2010 increase 17540 million primarily due higher repayments debt 23 billion discussed “liquidity capitalization” section partially offsetting cash used repay debt 500 million dividend received home security connection spinoff reflected “issuance debt” consolidated statement cash flows immediately prior effective time spinoff received debt proceeds 500 million shortterm debt financing issued home security guaranteed company prior debt refinanced longterm home security debt issuance spinoff also partially offsetting increase cash used financing activities higher proceeds exercise stock options net cash used financing activities 2485 million 2010 compared 4323 million 2009 decrease 1838 million primarily due lower debt repayments 1222 million net issuance debt lower dividends paid 2010 360 million higher proceeds exercise stock options 337 million dividends summary 2011 dividend activity company’s common stock shown january 27 2012 announced board directors approved 8 increase dividend company’s common stock beginning payment date march 1 2012 dividend increase 6 cents per share annual rate 082 payable 205 cents per quarter 076 per share 19 cents per quarter currently expect pay quarterly cash dividends future payments dependent upon financial condition results operations capital requirements factors including set forth section entitled “item 1a risk factors” customer credit risk routinely grant unsecured credit customers normal course business accounts receivable 3858 million december 31 2011 recorded stated amount less allowances discounts doubtful accounts allowances doubtful accounts include provisions certain customers risk default specifically identified well provisions based factors evaluation historical writeoffs aging balances qualitative quantitative factors determined default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical collection experience existing economic conditions accordance policy allowance discounts doubtful accounts 98 million 109 million december 31 2011 2010 respectively adverse conditions global economy credit markets may reduce customers’ ability access sufficient liquidity capital fund operations make estimation customer defaults inherently uncertain believe current allowances doubtful accounts adequate possible weakening economic conditions may cause significantly higher levels customer defaults bad debt expense future periods counterparty risk counterparties derivative contracts major financial institutions although theoretical risk replacement cost estimated fair value instruments believe risk incurring losses unlikely losses would immaterial results operations cash flows financial condition fair value derivative assets december 31 2011 37 million estimated fair value derivative contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices pension plans sponsor defined benefit pension plans funded portfolio investments maintained within benefit plan trusts met us minimum funding requirements 2011 2012 required contribute approximately 30 million distribution pension benefits certain fortune brands executives due terminations end 2011 connection separation transactions company required make contributions 2012 comply us minimum funding requirements foreseeable future believe sufficient liquidity meet minimum funding may required law including pension protection act 2006 december 31 2011 fair value total pension plan assets 3195 million representing 71 accumulated benefit obligation liability guarantees commitments three 50owned foreign joint ventures eurodenominated credit facilities partially guaranteed maximum guarantee exposure assuming credit facilities fully utilized total us dollar equivalent 222 million guarantee exposure 162 million based facilities utilized december 31 2011 company recorded liability guarantees also guarantee lease acco world corporation office products business divested spinoff 2005 liability related guarantee material continue guarantee payment certain real estate leases lease payments totaling approximately 99 million april 2013 contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2011 millions total contractual obligations include income taxes payable longterm income taxes payable uncertain tax positions unable reasonably estimate timing future payments related uncertain tax positions refer note 9 income taxes notes consolidated financial statements item 8 form 10k information uncertain tax positions b future payments longterm debt exclude deferred gains related interest rate swaps recorded longterm debt c purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures minimum required pension postretirement contributions cannot determined beyond 2012 recently issued accounting standards information required item provided note 1 notes consolidated financial statements item 8 form 10k hereby incorporated herein reference critical accounting policies estimates significant accounting policies described note 1 notes consolidated financial statements item 8 form 10k consolidated financial statements prepared conformity gaap preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe policies discussed company’s critical accounting policies include significant subjective complex judgments estimates made preparing consolidated financial statements customer program costs customer programs incentives common practice business incur customer program costs promote sales products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “sales” “advertising marketing expense” later time program initiated revenue recognized costs recognized “sales” include limited volume allowances rebates promotional allowances costs typically recognized “advertising marketing expense” include point sale materials media costs recorded later time sale implementation program based management’s best estimates based historical projected experience type program customer volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough support management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations income taxes accordance authoritative guidance income taxes establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse record valuation allowance reducing deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest inventories record inventory firstin firstout “fifo” method accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns product spoilage specific identification items product discontinuance engineeringmaterial changes regulatoryrelated changes longlived assets test longlived asset including amortizable identifiable intangible assets asset group recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows marketparticipant basis goodwill indefinitelived intangible assets accordance authoritative guidance goodwill intangible assets goodwill amortized tested impairment least annually fourth quarter written impaired interim impairment test performed event occurs conditions change would likely reduce fair value reporting unit carrying value result separation transactions corresponding change operating segments reevaluated reporting units allocated goodwill new reporting units completed interim goodwill impairment test result interim impairment test company concluded impairment goodwill existed 2011 adopted new authoritative accounting guidance allows us first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test longer required calculate fair value reporting unit unless determine based qualitative assessment likely fair value less carrying amount determine based qualitative assessment likely fair value reporting unit less carrying amount evaluate recoverability goodwill estimating future cash flows reporting units goodwill relates discount future cash flows marketparticipantderived weightedaverage cost capital determining estimated future cash flows consider current projected future levels income based management’s plans business trends prospects market economic conditions marketparticipant considerations reporting units operating segments estimated fair value reporting unit less carrying value measure recognize amount goodwill impairment loss impairment losses limited carrying value goodwill represent excess carrying value reporting unit’s goodwill implied fair value goodwill implied fair value reporting unit’s goodwill estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance authoritative guidance goodwill intangible assets cash flow projections significantly influenced longerterm market growth rates particular spirits categories geographies expected profit margins result qualitative assessment completed december 31 2011 company concluded impairment goodwill exists based estimates fair value reporting units believe reporting units decline fair value 10 could trigger impairment goodwill amortize purchased intangible assets goodwill useful lives unless lives determined indefinite determination useful life intangible asset goodwill based factors including historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated least annually determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually fourth quarter whenever market business events indicate may potential impairment intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party remaining useful life company recorded impairment indefinitelived tradenames 313 million 925 million 2011 2009 respectively refer note 12 goodwill intangible assets notes consolidated financial statements part ii item 8 report information december 31 2011 impairment charge two tradenames impaired 2011 aggregate book value 1574 million december 31 2011 except two tradenames impaired 2011 10 reduction fair value company’s indefinitelived tradenames would trigger impairment charge significant estimates assumptions influence fair value tradename include expected branded product sales included operating plans longerterm market growth rates particular spirits categories geographies expected profit margins products sold using brands terminal value revenue growth rates weighted average cost capital company cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions addition certain assumptions estimates used determining fair value goodwill indefinitelived tradenames outside control management including interest rates us abroad exchange rates cost capital tax rates due uncertainty aforementioned items company cannot predict whether future impairment result pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits record amounts relating plans based calculations specified gaap include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets calculate pension costs recognizing year’s asset gains losses fiveyear period expected return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments bond portfolio used selection discount rate generally comprised high quality bonds specific country plan effects actual results differing assumptions effects changing assumptions included unamortized net gains losses unamortized gains losses outside specified corridor amortized future periods therefore generally affect recognized expense future periods amounts recognized component net expense expected future years service approximately 25 years 13 years us plans nonus plans respectively amortization period actuarial losses much longer us plans compared nonus plans us plans amortize losses estimated life participant rather service period due freezing benefits related us plans believe assumptions utilized recording obligations plans reasonable based experience however differences actual experience changes assumptions may materially affect financial position results operations unfunded status us pension plans increased approximately 50 million 2011 primarily due significant decrease assumed discount rate plan asset returns essentially flat 2011 see note 17 pension postretirement benefits notes consolidated financial statements part ii item 8 report information related plan assets obligations assumptions hypothetical 25 basis point increasedecrease assumed weightedaverage discount rate used actuarial valuation pension plan obligation december 31 2011 would decreaseincrease estimated pretax annual 2012 expense approximately 04 million hypothetical 25 basis point increasedecrease assumed weightedaverage longterm rate return plan assets used actuarial valuation pension plan obligation december 31 2011 would decreaseincrease estimated pretax annual 2012 expense approximately 09 million refer note 17 pension postretirement benefits notes consolidated financial statements part ii item 8 report information pension plans impact 1 increasedecrease health care cost trend rate expense related postretirement benefit plan obligation expense litigation contingencies subject risks related threatened pending litigation routinely defendants lawsuits associated normal conduct business liabilities costs associated litigation related loss contingencies require estimates judgments based knowledge facts circumstances surrounding matter advice legal counsel record liabilities litigation related losses loss probable reasonably estimate amount loss evaluate measurement recorded liabilities reporting period based current facts circumstances specific matter ultimate losses incurred upon final resolution litigation related loss contingencies may differ materially estimated liability recorded particular balance sheet date changes estimates recorded earnings period changes occur see note 18 commitments contingencies consolidated financial statements item 8 form 10k environmental matters required federal state laws involved remediation activities address hazardous waste contamination uncertainties status laws regulations remediation technologies information related individual sites make difficult develop accurate financial estimates environmental remediation exposures accrue expenses associated environmental remediation obligations amounts probable reasonably estimated adjust accruals new information develops circumstances change accruals discounted december 31 2011 2010 accruals 86 million 109 million respectively cover environmental compliance remediation activities believe cost complying present environmental protection laws material adverse effect results operations cash flows financial condition item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements related notes included elsewhere annual report form 10k addition historical information discussion analysis contains forwardlooking statements involve risks uncertainties assumptions could cause actual results differ materially management’s expectations please see “disclosure regarding forwardlooking statements” section part item 1 report “risk factors” section part item 1a report leading premium spirits company makes sells branded distilled spirits products major markets worldwide principal products include bourbon whiskey tequila scotch whisky canadian whisky vodka cognac rum cordials readytodrink premixed cocktails diverse portfolio includes several world’s top premium spirits brands described notes consolidated financial statements included form 10k discontinued operations include former fortune brands golf home security segments disposed 2011 portfolio consists brands identify power brands rising stars local jewels value creators power brands core brand equities global reach premium categories large annual sales volume rising stars smaller premium brands priority markets believe excellent growth profiles receive substantial brand investment drive expansion brands identified local jewels act power brands local markets value creators include variety brands providing scale profit across multiple categories power brands rising stars combined local jewelsvalue creators including nonbranded sales represent approximately 60 15 25 respectively net sales power brands rising stars focus brand investment listed power brands jim beam bourbon maker’s mark bourbon sauza tequila courvoisier cognac canadian club whisky teacher’s scotch pinnacle vodka rising stars laphroaig scotch knob creek bourbon basil hayden’s bourbon kilbeggan irish whiskey cruzan rum hornitos tequila skinnygirl cocktails sourz liqueurs principal markets spirits products united states australia germany spain united kingdom canada continue invest emerging markets india brazil mexico russia central europe asia geographies operate business basis geographical regions consisting north america europemiddle eastafrica “emea” asiapacificsouth america “apsa” executive summary operational financial highlights 2012 operational financial highlights year ended december 31 2012 include following • diluted earnings per share continuing operations 248 2012 compared 085 per share 2011 yearoveryear improvement earnings per share largely attributable significant nonrecurring costs incurred 2011 due separation transactions noted addition results 2012 benefited operating strategy create famous brands building winning markets fueling growth well acquisitions completed 2012 results included 11 increase advertising marketing expenditures well higher investment aging spirits inventory production capacity innovation capability support future profitable growth • net sales increased 7 6 comparable basis exceeding growth global market estimate grew approximately 3 value 2012 comparable net sales growth driven power brands rising stars benefiting strong demand bourbon growth core markets including united states australia germany well emerging markets • strategies create famous brands resulted record new product innovations red stag honey tea red stag spiced jim beam devil’s cut jim beam honey skinnygirl wine vodka piña colada readytoserve higher pricing select categories favorable pricemix contributed net sales growth faster operating income growth • strategies build winning markets resulted enhanced distribution capability many countries australia china mexico also contributed net sales growth faster operating income growth • strategies fuel growth consolidation us bottling facilities expanded center excellence frankfort kentucky “design value” program focuses brand attributes consumers value led substantial cost savings largely offset impact higher raw material related costs contributed increased gross margin • completed acquisition pinnacle vodka brand related assets “pinnacle assets” create shareholder value driving cost revenue synergies enhancing participation premium vodka category also entered irish whiskey category acquisition cooley distillery “cooley” • issued longterm debt aggregate principal amount 600 million fund acquisition pinnacle assets • january 2012 increased quarterly dividend 8 205 cents per share common stock subsequently increased quarterly dividend 10 225 cents per share common stock january 2013 beginning march 1 2013 dividend payment certain items significant impact financial results 2012 2011 2010 include impact separation transactions completed 2011 changes foreign currency exchange rates acquisition related items restructuring related charges income tax related matters 2012 financial results include following • acquisition integration charges 22 million 17 million net tax 011 per share related acquisition integration pinnacle assets cooley 2012 acquisition related adjustments impacting sga expense consist transactionrelated expenses 5 million contract termination expenses 10 million integration related expenses 2 million addition acquisition related adjustments include amounts charged costs goods sold 1 million restructuring charges 3 million primarily relate accelerated depreciation employee retention income tax expense includes tax benefit related charges partially offset tax earnings distributed within certain beam’s foreign tax jurisdictions incurred connection funding portion capital requirement cooley 5 million • sga charges 4 million associated internal review respect india operation • business separation costs 14 million 9 million net tax 005 per share primarily related 15 million pension settlement charge associated required 29 million lump sum distribution benefits paid former fortune brands inc executives july 2012 connection separation transactions completed 2011 • asset impairment charges 16 million 11 million net tax 007 per share related larios tradename spain • income benefited nontaxable indemnification payment 18 million 011 per share received pernod ricard sa “pernod ricard” resolution certain tax matters years prior ownership businesses nontaxable distribution former maxxium investment 2 million 001 per share • income tax expense benefits approximately 33 million 020 per share primarily included 22 million net foreign tax credit related repatriation current year earnings 17 million net benefit arising resolution certain foreign us federal state tax audit matters 6 million expense primarily related annual reconciliation 2011 income tax filing 2011 provision income taxes • compared 2011 foreign exchange translation rates hedge results unfavorable 32 million impact net sales favorable 9 million impact operating income 2011 financial results included following • business separation costs 84 million 68 million net tax 043 per share incurred connection separation transactions principally transaction professional advisory fees severance employee related costs • corporate general administrative overhead costs related former fortune brands inc management structure spinoff october 3 2011 61 million 38 million net tax 024 per share • acquisition related contingent consideration 28 million 17 million net tax 011 per share recorded based actual forecasted performance skinnygirl business acquired 2011 • restructuring related charges 25 million 16 million net tax 010 per share primarily related facility consolidation supply chain distribution cost reduction initiatives north america well organizational streamlining initiatives • higher net sales 46 million operating income 24 million 17 million net tax 010 per share related onetime sale product recorded connection transition new longterm distribution agreement australia • favorable impact foreign exchange compared 2010 64 million net sales 16 million operating income 11 million net tax 007 per share • asset impairment charges 31 million 22 million net tax 014 per share related dyc larios tradenames spain • income benefited nontaxable distribution maxxium investment 10 million 006 per share nontaxable income tax indemnification payments 27 million 017 per share pernod ricard related foreign tax jurisdictions periods prior ownership businesses • loss early extinguishment debt 149 million 96 million net tax 061 per share • income tax expense impacted tax effects significant items described impact tax assessments associated resolution routine foreign us income tax audit examinations including unfavorable 26 million related mexican tax audits favorable 19 million related germany tax audits 2010 financial results include following • business separation costs 2 million 001 per share incurred connection separation transactions principally transaction professional advisory fees • corporate general administrative overhead costs related former fortune brands inc management structure 86 million 55 million net tax 036 per share • restructuring related charges 26 million 17 million net tax 011 per share primarily related facility consolidation supply chain distribution cost reduction initiatives north america well organizational streamlining initiatives • loss sale certain nonstrategic brands germany cockburn’s port brand 16 million 19 million net tax 012 per share • income benefited nontaxable income tax indemnification payments 37 million related foreign tax jurisdictions periods prior acquisitions business • income tax expense impacted tax effects significant items described favorable 46 million related tax assessments associated resolution routine foreign us income tax audit examinations business outlook believe longterm demographic trends favorable continued profitable growth western premium spirits globally estimate global spirits market grow value approximately 3 2013 supported continued growth us emerging markets potential slower growth western europe emerging economies could adversely impact trading conditions addition 2013 expect another year higher raw materialrelated costs mostly offset cost savings limited opportunities increase pricing yearoveryear declines india operation third quarter reposition business india comprised 2 total 2012 net sales less 2 total 2012 operating income see note 18 commitments contingencies notes consolidated financial statements part ii item 8 report information believe continued management investment focus best growth return opportunities brand portfolio geographic markets including innovation advertising effective routes market position us well growth 2013 long term 2013 also expect benefit carryover benefit 2012 price increases abovemarket growth bourbon category globally efficiency effectiveness agenda fullyear benefit 2012 acquisitions including cost synergies enhanced distribution please see “forwardlooking statements” discussion certain factors may cause actual results vary materially expected date filing report results operations presentation basis nongaap measures volume measured nine liter equivalent unit basis divide readytodrink cases 10 obtain nine liter case equivalent pricemix number percentage points comparable net sales changes exceeds change attributable volume difference arises changes composition sales higher lower priced brands price changes comparable net sales growth rate nongaap measure use evaluate sales growth yearoveryear basis exclusive certain items indicative underlying sales performance business calculate comparable net sales gaap net sales growth rates adjusted impact foreign exchange acquisitionsdivestures impact transitioning 2011 new manufacturing distribution model australia calculating comparable net sales acquisitiondivesture impact determined comparing actual reported revenue current period including revenue attributable acquired companies adjusted revenue prioryear period arriving adjusted prioryear revenue include revenue acquired companies remove revenue divested companies prioryear periods comparable currentyear periods companies included actual reported revenue foreign exchange impact calculated translating current year results prior year exchange rates excluding hedge impacts approximately 45 percent business outside us 2012 result changes foreign exchange rates significant impact reported results operations translated presented us dollars discussion results operations segment includes use “constant currency” net sales operating income nongaap measures exclude impact foreign exchange translation management believes measures useful evaluating performance fluctuations exchange rates impact underlying yearoveryear growth rates segments comparable net sales constant currency net sales operating income segment measures may comparable similar measures used companies measures considered isolation substitute measure derived accordance gaap consolidated results 2012 compared 2011 net sales following table presents reconciliation gaap net sales growth comparable net sales growth 2012 compared 2011 see “presentation basis nongaap measures” description adjustments gaap net sales increased 155 million 7 2311 million 2011 2466 million 2012 7 increase gaap net sales 2012 period primarily due benefit sales pinnacle assets cooley 4 acquired 2012 partially offset impact 2011 onetime sale inventory related transitioning new longterm distribution agreement australia 2011 2 adverse impact foreign exchange rate fluctuations 1 discussed segments results operations increase comparable net sales primarily due impact higher volumes 3 favorable mix 2 favorable price 1 2012 compared 2011 higher volumes primarily due strong growth jim beam reflecting higher sales jim beam white well brand’s premium innovations red stag jim beam honey devil’s cut addition comparable sales growth pinnacle vodka maker’s mark courvoisier skinnygirl brands favorable mix due impact innovations premiumization product portfolio price benefit 2012 due targeted price increases certain brands markets jim beam maker’s mark us well courvoisier asia travel retail comparable net sales increase 6 driven net sales growth three segments described cost goods sold 40 million 4 increase cost goods sold 2012 largely due impact acquisitions approximately 55 million increased organic sales described partially offset yearoveryear benefit foreign currency 30 million transition new longterm manufacturing distribution agreement australia including prior year impact onetime sale inventory 23 million impact higher raw materialrelated costs inflation approximately 35 million largely offset savings organizational streamlining cost sourcingsaving initiatives 2013 expect net increases raw materialrelated costs likely range 35 million impacted bottling selling bourbon barreled time corn prices higher four five years ago gross profit percentage margin increased approximately 100 basis points 2012 compared 2011 largely due absence low margin onetime sale 2011 related australia distribution change described well reflecting benefit pricemix accretive innovations advertising marketing expense 40 million increase advertising marketing expense 2012 primarily due expansion successful innovations equity building programs related power brands rising stars advertising marketing expense percentage net sales increased 155 162 2012 selling general administrative expense selling general administrative expense decreased 17 million 2012 primarily due lower beam standalonecompany costs compared former fortune brands inc corporate cost structure 36 million absence 28 million acquisitionrelated charges incurred prioryear period connection contingent consideration related skinnygirl acquisition favorable foreign currency impact 5 million benefits 2012 partially offset inflation increased selling costs drive higher sales acquisition integrationrelated costs 17 million contract termination expenses 10 million transactionrelated expenses 5 million integration related expenses 2 million connection acquisition pinnacle assets cooley well approximately 4 million charges associated internal investigation respect india operations refer note 21 segment information financial statements included report information estimating standalone corporate cost structure following table summarizes information related certain operating expenses percentage net sales business separation costs recorded 14 million 84 million business separation costs years ended december 31 2012 2011 respectively business separation costs 2012 primarily consist 15 million pension settlement charge associated required 29 million lump sum distribution benefits paid former fortune brands executives july 2012 partially offset decrease accrued liabilities estimated costs complete separation transactions business separation costs 2011 consisted 44 million financial legal advisory fees related separation transactions well 40 million employeerelated costs primarily related termination benefits restructuring charges 2012 restructuring charges 4 million primarily related relocation certain us finance human resource shared services deerfield headquarters kentucky ongoing integration pinnacle assets includes plans move pinnacle bottling operations maine existing facilities kentucky early 2014 2011 restructuring charges 8 million primarily related distribution supplychain initiatives facility consolidations organizational streamlining initiatives company employed lean techniques throughout organization meet goal achieving 12 annual improvement inflation total cost goods sold selling general administrative expenses expect future cash charges related integration pinnacle assets approximately 5 million actual costs may vary estimates depending timing extent initiatives implement factors asset impairment charges 2012 recorded impairment charge 16 million reduce larios tradename estimated fair value 55 million impairment primarily due lower projected future revenue brand compared projected revenues estimated impairment test conducted fourth quarter 2011 factors contributed lower revenue projections included comparison actual results 2012 outlook continued economic challenges spanish market current competitive outlook within spirits category tradename competes among factors 2011 recorded noncash impairment charge 31 million reduce dyc larios tradenames estimated fair value december 2011 asset impairments due combined effect economic downturn sales key geographic markets principally spain well effect substantially higher interest rates refer “critical accounting policies estimates intangible assets” note 12 goodwill intangible assets note 15 fair value measurements notes consolidated financial statements part ii item 8 report information operating income operating income increased 180 million 46 396 million 2011 576 million 2012 increase operating income primarily due lower business separation acquisition restructuring chargesgains collectively approximately 93 million lower beam corporate cost structure compared fortune brands inc cost structure 36 million lower intangible asset impairment charges 15 million increased gross profit 115 million higher sales driven volume mix price described increase operating income 2012 also due 9 million favorable impact changes foreign currency rates related hedge impacts benefits partially offset increases advertising marketing selling general administrative expenses excluding fortune brands cost structure impact chargesgains noted absence 24 million gross profit onetime sale inventory related australia distribution change 2011 interest expense interest expense decreased 8 million 7 117 million 2011 109 million 2012 due lower average borrowings principally due debt reduction approximately 23 billion 2011 related separation transactions well additional debt reductions scheduled debt payments made 2011 new borrowings 600 million may 2012 used fund acquisition pinnacle assets partially offset benefit loss early extinguishment debt loss early extinguishment debt 149 million 2011 consists 155 million purchase premiums 7 million accelerated unamortized debt issuance costs partially offset 13 million attributed amortizationwriteoff deferred gains terminated interest rate swaps related extinguished debt refer section “liquidity capital resources” additional information regarding reduction debt 2011 income decreased 5 million 13 40 million 2011 35 million 2012 change 2011 2012 primarily due lower nontaxable indemnification payments received pernod ricard related settlement tax matters 8 million lower distributions related wind maxxium joint venture investment 8 million partially offset increase equity income related international distribution joint ventures edrington group 5 million higher foreign currency transaction gains 4 million income taxes effective income tax rates 2012 2011 207 213 respectively several significant items impacted comparability effective rates 2012 2011 effective tax rate 2012 favorably impacted primarily net foreign tax credits 22 million tax benefits recorded 2012 result final audit settlements expiration foreign jurisdiction income tax review periods 17 million 7 million expense related correction prior year items effective tax rate 2011 favorably impacted taxfree treatment indemnification income received connection settlement mexican income tax audit resolution german tax audit partially offset impact nondeductible business separation costs tax assessment related settlement mexican income tax audit see note 9 income taxes financial statements included report additional information relating foreign audit settlements related indemnification payments factors impacting effective tax rate compared us federal statutory rate loss income discontinued operations net tax loss discontinued operations net tax 16 million 2012 primarily related increase estimated tax indemnification liabilities associated disposed golf business increase environmental liability 4 million net tax related discontinued operation included separation transactions partially offset net tax benefit related charges certain tax matters income discontinued operations net tax 782 million 2011 primarily due 687 million gain sale golf business income former golf home security businesses generated prior disposition see note 3 discontinued operations financial statements included report additional information segment results 2012 compared 2011 evaluate segment net sales operating income excluding certain items considered management unusual infrequent nature indicative segments’ underlying operating performance consequently segment results presented accordance gaap exclude items following table sets forth net sales operating income operating segment 2012 2011 reported adjusted exclude impact foreign exchange translation millions foreign exchange impact calculated translating current year results prior year exchange rates excluding hedge impacts also evaluate segment net sales “comparable basis” nongaap measure following discussion refer sales presented basis “comparable net sales” reconciliation gaap segment net sales growth comparable segment net sales growth 2012 compared 2011 see “presentation basis nongaap measures” description adjustments north america compared 2011 north america net sales increased 14 gaap basis 15 constancy currency basis 2012 adjusting constant currency net sales impact acquisitionsdivestitures north america’s comparable net sales increased 7 2012 acquisition impact 7 due acquisition pinnacle assets cooley acquired may 2012 january 2012 respectively comparable net sales increase due higher organic volumes 4 well favorable pricemix 3 largest contributors organic volume growth increased demand bourbon brands expansion pinnacle brand addition innovations helped drive volume pricemix benefits innovations included new jim beam red stag flavors extensions skinnygirl family products including vodka wine new pinnacle vodka flavor well knob creek rye geographically us canada mexico contributed comparable net sales growth compared 2011 north america operating income increased 33 million 9 gaap basis 8 constant currency basis 2012 constant currency operating income increased principally increased gross profit higher net sales operating leverage partially offset significant increase advertising marketing expense europemiddle eastafrica compared 2011 emea net sales increased 1 gaap basis 7 constancy currency basis 2012 negative foreign currency exchange impact gaap results primarily due decreases euro exchange rate relative us dollar adjusting constant currency net sales impact acquisitionsdivestures emea’s comparable net sales increased 5 2012 acquisition impact 2 due cooley acquisition january 2012 comparable net sales increase due favorable pricemix 3 higher organic volumes 2 pricemix benefit primarily related jim beam courvoisier laphroaig volume growth across emea primarily due jim beam family products well courvoisier partially offset declines related certain spanish value creator brands comparable net sales growth primarily due increased sales markets germany russia travel retail offset adverse impacts economically challenged markets particularly spain value spirits market declined midtohigh singledigit rate compared 2011 emea operating income increased 3 million 3 gaap basis 7 constant currency basis 2012 negative foreign currency exchange impact gaap results primarily due decreases euro exchange rate relative us dollar constant currency operating income benefited increased gross profit higher net sales discussed reversal nonincome tax accrual closed review period reduction bad debt expense partially offset increase advertising marketing expense asiapacificsouth america compared 2011 apsa net sales increased 3 gaap basis constant currency basis adjusting constant currency net sales impact australia distribution margin structure change 2011 2 apsa comparable net sales increased 5 2012 apsa comparable net sales growth due higher organic volumes 4 pricemix benefit 1 higher volume driven growth jim beam courvoisier canadian club teacher’s volume benefited innovations partially offset decreased sales value creators pricemix also benefited strength power brands volume growth primarily due increased sales markets australia china brazil north asia compared 2011 apsa operating income increased 24 million 26 gaap basis 15 constant currency basis 2012 difference gaap constant currency operating income growth rates 11 primary due australia constant currency operating income benefited increased gross profit due higher sales enhanced routes market china southeast asia india ongoing conduct internal investigation implementation remedial measures likely continue near term disruptive effect anticipate yearoveryear growth rates apsa adversely impacted third quarter 2013 result refer note 18 commitments contingencies financial statements included report additional information consolidated results 2011 compared 2010 net sales net sales increased 216 million 10 21 billion 2010 23 billion 2011 increase net sales driven increase volume 3 well favorable product mix 5 power brands rising stars brands grew 12 52 respectively reflecting strong growth premium end portfolio achieved significant increase advertising marketing expense behind brands well innovation 2011 remaining increase net sales attributed favorable foreign currency exchange 3 impact onetime sale inventory related transitioning new longterm distribution agreement australia 2 partially offset combination ongoing impact australia distributor agreement net impact acquisitions divestitures primarily due sale nonstrategic german spirits brands inventories cockburn’s port business 2010 3 2011 transitioned agency agreement manufacturing distribution agreement australia new agreement net sales lower distributor responsible incurs distribution selling costs previously incurred beam cost goods sold cost goods sold increased 123 million 14 865 million 2010 988 million 2011 cost goods sold increased 10 primarily due higher sales startup costs associated new products increase commodities including corn rye grains raw material costs approximately 20 million partially offset favorable impact productivity initiatives achieved “fuel growth” strategy remaining increase cost goods sold primarily attributed unfavorable impact foreign currency translation approximately 34 million impact onetime sale inventory related transitioning new longterm distribution agreement australia net ongoing impact australia agreement 10 million higher charges 2011 versus 2010 partially offset mentioned net impact acquisition divestitures advertising marketing expense advertising marketing expense increased 51 million 17 308 million 2010 359 million 2011 substantially increased advertising marketing expense year build enhance core brand equities principally power brands rising stars drive net sales growth year position brands longterm growth increased advertising marketing expense across segments principally north america asiapacificsouth america selling general administrative expense selling general administrative expense increased 14 million 3 416 million 2010 430 million 2011 increased strategic investments new product development support innovation initiatives higher variable selling costs north america resulting strong sales growth particularly us selling administrative costs apsa incurred build infrastructure regionally within key emerging markets increased selling general administrative expense collectively approximately 7 higher costs partially offset favorable impact lower fortune brands inc corporate overhead 2011 selling general administrative expenses included corporate general administrative overhead costs related former fortune brands inc management structure spinoff october 3 2011 approximately 61 million compared approximately 86 million 2010 decrease 25 million partially offset incremental corporate costs incurred fourth quarter 2011 selling general administrative expense 2011 also included acquisitionrelated contingent consideration 28 million based actual forecasted performance acquired business selling expenses new manufacturing distribution agreement australia decreased 2011 distributor responsible selling costs new agreement addition charges included selling general administrative expense decreased 6 million 2010 business separation costs business separation costs incurred connection separation transactions 84 million 2 million years ended december 31 2011 2010 respectively business separation costs 2011 consisted 44 million financial legal separationrelated advisory fees well 40 million employeerelated costs primarily related termination benefits incremental stockbased compensation expense incurred result modification certain outstanding fortune brands inc equity awards anticipation conversion awards beam home security equity awards business separation costs 2 million 2010 principally related transaction professional advisory fees incurred connection separation transactions restructuring charges 2011 restructuring charges 8 million related distribution supplychain initiatives facility consolidations organizational streamlining initiatives completed significant supplychain initiative towards end 2011 consolidation us bottling facilities expanded operations center excellence frankfort kentucky 2010 restructuring charges 15 million related organizational streamlining initiatives asset impairment charges recorded noncash impairment charge 31 million reduce dyc larios tradenames estimated fair value december 2011 asset impairments due combined effect economic downturn sales key geographic markets principally spain well effect substantially higher interest rates refer “critical accounting policies estimates intangible assets” note 12 goodwill intangible assets notes consolidated financial statements part ii item 8 report information asset impairment charges 2010 loss sale brands related assets december 2010 sold cockburn’s port brand related us uk portugal inventory connection sale recorded pretax loss 7 million 7 million tax august 2010 sold certain nonstrategic german spirits brands related assets connection sale recorded pretax loss 9 million 12 million tax operating income operating income decreased 61 million 13 456 million 2010 396 million 2011 consolidated operating income significantly impacted several unusual items described including business separation costs 84 million asset impairment charges 31 million contingent consideration business acquisition 25 million partially offset onetime benefit sale product new australia distribution agreement 24 million unfavorable increase unusual costs also partially offset favorable foreign currency impacts 16 million lower fortune brands inc corporate costs 2011 compared 2010 25 million result spinoff occurring start fourth quarter 2011 absence loss sale nonstrategic brands 2010 16 million interest expense interest expense decreased 26 million 18 primarily due lower average borrowings well lower average interest rates reduced outstanding debt approximately 23 billion 2011 refer section “liquidity capital resources” additional information regarding reduction debt 2011 loss early extinguishment debt loss early extinguishment debt 149 million consists 155 million purchase premiums 7 million accelerated unamortized debt issuance costs partially offset 13 million attributed amortizationwriteoff deferred gains terminated interest rate swaps related extinguished debt refer section “liquidity capital resources” additional information regarding reduction debt 2011 income increased 7 million 22 33 million 2010 40 million 2011 recognized income 26 million upon receipt tax indemnification payments pernod ricard connection mexican income tax audit settlements 10 million related distribution wind maxxium joint venture investment 2010 recognized income 37 million upon receipt tax indemnification payments pernod ricard connection spanish income tax audit settlements income also includes nonoperating income expense interest income transaction gains losses related foreign currency denominated transactions well equity income expense income taxes effective income tax rate 213 105 2011 2010 respectively effective income tax rate 2011 unfavorably impacted nondeductible business separation costs tax assessment related settlement mexican income tax audit effective tax rate 2011 favorably impacted taxfree treatment indemnification income received connection settlement mexican income tax audit resolution german tax audit effective income tax rate 2010 favorably impacted tax benefits approximately 46 million related final settlement us spanish federal income tax audits effective tax rate 2010 also favorably impacted taxfree treatment indemnification proceeds received connection settlement spanish income tax audit see note 9 income taxes notes consolidated financial statements additional information related effective tax rate 2011 2010 income discontinued operations income discontinued operations net tax 782 million 2011 compared 187 million 2010 reflecting discontinued operations former golf business former home security business 2011 recorded gain 687 million sale golf business segment results 2011 compared 2010 following table sets forth net sales operating income operating segment 2011 2010 reported adjusted exclude impact foreign exchange translation millions foreign exchange impact calculated translating current year results prior year exchange rates excluding hedge impacts segment net sales operating income following discussion stated excluding impact foreign exchange translation related hedging impacts north america north america net sales increased 105 million 9 12 billion 2010 13 billion 2011 favorable product mix increased volume contributed roughly equally yearoveryear sales growth net sales volume product mix benefited new product innovations pucker flavored vodka jim beam devil’s cut red stag well acquisition growth skinnygirl readytodrink cocktail brand addition strength power brands rising stars brands geographic market sales increases us canada partially offset decrease mexico driven transition new distributor fourth quarter north america operating income increased 3 million 1 360 million 2010 363 million 2011 operating income increased rate increase net sales principally due double digit increases advertising marketing expense new product startup innovation costs including skinnygirl well higher commodity costs without benefit price increases europemiddle eastafrica emea net sales increased 6 million 1 478 million 2010 484 million 2011 increase net sales includes adverse impact july 2010 divestiture nonstrategic local german brands approximately 30 million 7 net sales benefited primarily volume favorable product mix including new product innovations sourz raspberry jim beam red stag well strong growth power brands germany russia travel retail partially offset decreases economically challenged markets including uk spain emea operating income increased 12 million 13 99 million 2010 111 million 2011 resulting favorable product market mix including power brands germany russia uk travel retail well effective cost management productivity initiatives divestiture nonstrategic german brands cockburn’s port business 2010 carried lower average margins asiapacificsouth america apsa net sales decreased 4 million 1 455 million 2010 451 million 2011 driven adverse impact net sales 9 related ongoing impact new distribution agreement australia 2011 transitioned agency agreement manufacturing distribution agreement australia new agreement net sales lower distributor responsible incurs distribution selling costs previously incurred beam adverse impact new australian agreement reported net sales mostly offset volume increases power brands jim beam canadian club teacher’s apsa segment primarily australia emerging markets india apsa operating income decreased 11 million 12 94 million 2010 83 million 2011 result planned investments within segment support longterm growth including investment sales distribution infrastructure india brazil well double digit increases advertising marketing support brandbuilding australia liquidity capital resources liquidity capitalization ratio total debt total capital increased 352 december 31 2012 320 december 31 2011 primarily due increase outstanding debt discussed partially offset higher equity resulting 2012 net income proceeds stock option exercises changes foreign currency exchange rates may 2012 issued 300 million aggregate principal amount 1875 notes due 2017 “2017 notes” 300 million aggregate principal amount 3250 notes due 2022 “2022 notes” together 2017 notes “notes” net proceeds used finance acquisition pinnacle assets may 31 2012 2017 notes mature may 15 2017 bear interest fixed rate 1875 per annum 2022 notes mature may 15 2022 bear interest fixed rate 3250 per annum company pays interest notes semiannually arrears may 15 november 15 year notes constitute unsecured unsubordinated obligations company rank parity company’s unsecured unsubordinated indebtedness time outstanding december 2011 executed 750 million 5year committed revolving credit agreement “credit agreement” used general corporate purposes december 31 2012 amounts outstanding credit agreement company may subject satisfaction certain conditions request aggregate principal amount facility increased 250 million aggregate december 31 2012 total cash equivalents 366 million majority held foreign currencies nonus subsidiaries permanent repatriation nonus cash balances certain subsidiaries indefinitely reinvested earnings could adverse tax consequences may required pay record income tax expense funds extent previously considered indefinitely reinvested however currently expect repatriation nature believe able maintain required liquidity due following • manage global cash requirements considering operating cash flows generated domestic operations available funds among many subsidiaries conduct business ii geographic location liquidity needs iii cost access international cash balances • require additional funding us generated domestic operations could elect repatriate future earnings foreign jurisdictions raise capital us debt equity issuances believe access debt markets including access committed revolving credit facility 750 million viable alternative repatriation indefinitely reinvested foreign earnings would subject additional us tax expense actions could result higher effective tax rates increased interest expense dilution earnings investment grade credit rating three credit rating agencies believe cash operations credit agreement sources liquidity sufficient fund current operations service outstanding indebtedness pay dividends january 2013 repaid upon maturity remaining principal 219 million 297 million 4 notes primarily existing cash supplemented shortterm borrowings cash flows summary cash flows years ended december 31 2012 2011 2010 millions operating investing financing cash flows presented include cash flows related discontinued operations ie recast statement cash flows remove cash activity related discontinued operations line item “change cash included assets discontinued operations” represents net change specifically identifiable cash accounts discontinued operations operating activities net cash provided operating activities 378 million 2012 compared 455 million 2011 operating cash flow lower 2012 period due decrease cash provided golf business sold july 2011 home security business spunoff october 2011 increased expenditures produce store aging spirits inventory support future growth partially offset net benefit associated timing amount certain working capital items operating cash flows 2012 included approximately 85 million cash outflows related discontinued operations liabilities related separation transactions completed 2011 primarily consisting incentive compensation severance pension benefits former fortune brands executives indemnity payments related tax matters settlement legal matter net cash provided operating activities 455 million 2011 compared 771 million 2010 decrease 316 million primarily due decrease cash provided golf business sold july 2011 home security business spunoff october 2011 higher cash payments related business separation costs investing activities net cash used investing activities 802 million 2012 compared cash provided investing activities 918 million 2011 net cash used 2012 primarily due cash used acquisitions pinnacle assets cooley business totaling 685 million net cash provided 2011 primarily due proceeds 13 billion sale golf business capital expenditures 137 million 2012 primarily related purchase new oak barrels required produce bourbon completion new global innovation center american stillhouse visitors center kentucky warehouse capacity expansion maker’s mark capacity expansion support future growth bourbon scotch cognac capitalized software additions capital expenditures 2011 included capital expenditures continuing beam business approximately 166 million net cash provided investing activities 918 million 2011 compared 73 million net cash used investing activities 2010 increase 991 million primarily due higher net proceeds received 2011 sale assets including net proceeds 13 billion sale golf business partially offsetting increase 116 million cash transferred home security connection spinoff net cash used 2011 acquisitions 46 million capital expenditures 219 million 2011 166 million related continuing operations financing activities net cash provided financing activities 564 million 2012 compared 2003 million net cash used 2011 cash proceeds 593 million received 2012 period issuance longterm debt fund acquisition pinnacle assets net cash outflows 19 billion 2011 period related repayment outstanding longterm debt primarily due 2011 separation transactions partially offset 500 million dividend received home security connection spinoff discussed net cash used financing activities 2003 million 2011 compared 249 million 2010 increase 1754 million primarily due higher repayments debt 23 billion primarily related separation transactions partially offsetting cash used repay debt 500 million dividend received home security connection spinoff reflected “issuance debt” consolidated statement cash flows immediately prior effective time spinoff received debt proceeds 500 million shortterm debt financing issued home security guaranteed company prior debt refinanced longterm home security debt issuance spinoff also partially offsetting increase cash used financing activities higher proceeds exercise stock options dividends summary 2012 dividend activity company’s common stock shown summary 2012 dividend activity company’s 267 convertible preferred stock shown january 25 2013 announced board directors approved 10 increase dividend common stock beginning payment march 1 2013 dividend increase 8 cents per share annual rate 090 payable 225 cents per quarter 082 per share 205 cents per quarter currently expect pay quarterly cash dividends common stock future payments dependent upon financial condition results operations capital requirements factors including set forth section annual report form 10k entitled “item 1a risk factors” november 20 2012 completed previously announced redemption outstanding shares 49590 shares 267 convertible preferred stock converted accordance terms shares common stock result redemption longer issued outstanding shares 267 convertible preferred stock pursuant redemption stockholders received aggregate redemption price 3102 3050 per share plus accrued unpaid dividends 052 per share redeemed customer credit risk routinely grant unsecured credit customers normal course business accounts receivable 456 million 386 million december 31 2012 2011 respectively recorded stated amount less allowances doubtful accounts allowances doubtful accounts include provisions certain customers risk default specifically identified well provisions based factors evaluation historical writeoffs aging balances qualitative quantitative factors determined default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical collection experience existing economic conditions accordance policy allowance doubtful accounts 14 million 10 million december 31 2012 2011 respectively adverse conditions global economy credit markets may reduce customers’ ability access sufficient liquidity capital fund operations make estimation customer defaults inherently uncertain believe current allowances doubtful accounts adequate possible weakening economic conditions factors may cause significantly higher levels customer defaults bad debt expense future periods counterparty risk counterparties derivative contracts major financial institutions although theoretical risk replacement cost estimated fair value instruments believe risk incurring losses unlikely losses would immaterial results operations cash flows financial condition fair value derivative assets december 31 2012 6 million estimated fair value derivative contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices pension plans sponsor defined benefit pension plans funded portfolio investments maintained within benefit plan trusts required make contributions 2012 comply us minimum funding requirements july 2012 paid approximately 29 million distribution pension benefits certain fortune brands executives due departures company end 2011 connection separation transactions required make contributions 2013 comply us minimum funding requirements based current assumptions december 31 2012 foreseeable future believe sufficient liquidity meet minimum funding may required law respect pension plans including pension protection act 2006 december 31 2012 fair value total pension plan assets 354 million representing 74 accumulated benefit obligation liability guarantees commitments partially guaranteed credit facilities entered certain joint ventures maximum guarantee exposure assuming credit facilities fully utilized total us dollar equivalent 256 million guarantee exposure 231 million based facilities utilized december 31 2012 company recorded liability guarantees part sale golf business agreed indemnify buyer certain estimated tax related obligations paid buyer relate periods owned golf business estimate liabilities tax indemnifications approximately 50 million 40 million december 31 2012 2011 respectively december 31 2012 approximately 20 million recorded within “other current liabilities” approximately 30 million recorded within “other noncurrent liabilities” consolidated balance sheet change liability amount primarily due increased obligations related state foreign income taxes indemnified agreement offset payment portion estimated obligation actual obligation may differ based closure tax period taxing authorities tax authority audit resulting change amount tax due refundable including related interest andor penalties applicable contractual obligations commercial commitments following table discussion present obligations commitments make future payments contracts debt lease agreements december 31 2012 millions total contractual obligations include income taxes payable longterm income taxes payable uncertain tax positions unable reasonably estimate timing future payments related uncertain tax positions refer note 9 income taxes notes consolidated financial statements item 8 form 10k information uncertain tax positions b future payments longterm debt exclude deferred gains related interest rate swaps recorded longterm debt c purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures minimum required pension postretirement contributions cannot determined beyond 2013 recently issued accounting standards information required item provided note 1 description business basis presentation summary significant accounting policies notes consolidated financial statements item 8 form 10k hereby incorporated herein reference critical accounting policies estimates significant accounting policies described note 1 description business basis presentation summary significant accounting policies notes consolidated financial statements item 8 form 10k consolidated financial statements prepared conformity gaap preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe policies discussed company’s critical accounting policies include significant subjective complex judgments estimates made preparing consolidated financial statements customer program costs provide variety sales incentives promote sales maintain competitive pricing incentive programs primarily intended distributors maintain competitive pricing recorded reduction net sales additional types incentive programs utilize include volumebased incentives typically involve rebates refunds specified amount cash distributor reaches specified level sales net sales reduced estimated amount volumebased incentives expected earned customers estimates based expectations distributors achieving contractual volume targets payouts associated targets cooperative advertising arrangements reimburse distributors portion costs incurred distributors advertise promote certain products generally recognize cost cooperative advertising programs manner consistent advertising cost policy described note 1 description business basis presentation summary significant accounting policies notes consolidated financial statements part ii item 8 report incentives typically utilized certain nonus markets typically classified advertising marketing expense income taxes establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse record valuation allowance reducing deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect indefinitely reinvest record liabilities uncertain income tax positions based two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ estimates future periods changes facts circumstances new information may require us change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur inventories record inventory firstin firstout “fifo” method accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes maturing spirits inventory includes costs production warehousing insurance inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns product spoilage specific identification items product discontinuance material changes regulatoryrelated changes longlived assets test longlived asset including amortizable identifiable intangible assets asset group recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows marketparticipant basis goodwill amortized tested impairment least annually fourth quarter frequently circumstances warrant reporting units operating segments initially perform qualitative assessment determine whether likely fair value reporting unit less carrying amount result qualitative assessment completed december 31 2012 2011 concluded goodwill impaired qualitative test indicates likely fair value reporting unit less carrying amount perform additional twostep impairment test step one carrying value reporting unit compared fair value step two applied carrying value fair value amount goodwill impairment derived deducting fair value reporting unit’s assets liabilities fair value reporting unit total comparing amount carrying amount goodwill based estimates fair value reporting units december 31 2012 believe reporting units decline fair value 10 could trigger impairment goodwill intangible assets amortize purchased intangible assets goodwill useful lives unless lives determined indefinite determination useful life intangible asset goodwill based factors including historical projected tradename performance consumer name recognition geographic market presence market share plans ongoing tradename support promotion certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated least annually determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually fourth quarter whenever market business events indicate may potential impairment intangible similar impairment testing goodwill initially perform qualitative assessment determine whether likely fair value indefinitelived tradename less carrying amount qualitative test indicates likely fair indefinitelived tradename less carrying amount compare carrying value indefinitelived tradename fair value impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party remaining useful life connection annual impairment tests indefinitelived tradenames 2012 recorded 156 million impairment charge related larios tradename 2011 recorded 313 million impairment related dyc larios tradenames refer note 12 goodwill intangible assets notes consolidated financial statements part ii item 8 report information december 31 2012 impairment charge larios tradename carrying value 547 million also reassessed remaining life larios tradename concluded longer indefinite december 31 2012 reclassified larios tradename definitelived asset estimated remaining life 30 years based expectations brand’s contributions future cash flows considering factors current longterm market outlook plans ongoing tradename support promotion strength brand strength brand category brand competes among factors december 31 2012 one indefinitelived tradename dyc carrying value approximately 90 million 10 reduction fair value would trigger impairment significant estimates assumptions influence fair value tradenames include expected branded product sales included operating plans longerterm market growth rates particular spirits categories geographies expected profit margins products sold using brands terminal revenue growth rates weighted average cost capital pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates utilized recognize expense obligations associated plans review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets calculate pension costs recognizing year’s asset gains losses fiveyear period expected return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments bond portfolio used selection discount rate generally comprised high quality bonds specific country plan effects actual results differing assumptions effects changing assumptions included unamortized net gains losses unamortized gains losses outside specified corridor amortized future periods therefore generally affect recognized expense future periods amounts recognized component net expense approximately 25 years 13 years us plans nonus plans respectively amortization period actuarial losses much longer us plans compared nonus plans us plans amortize losses estimated life participant rather service period benefits us plans frozen believe assumptions utilized recording obligations plans reasonable based experience however differences actual experience changes assumptions may materially affect business results operations cash flows financial condition unfunded status us pension plans decreased approximately 11 million 2012 primarily due plan asset returns settlement obligations related certain former fortune brands executives partially offset interest cost actuarial losses partly attributable decrease assumed discount rate see note 17 pension postretirement benefits notes consolidated financial statements item 8 report information related plan assets obligations assumptions hypothetical 25 basis point increasedecrease assumed weightedaverage discount rate used actuarial valuation pension plan obligation december 31 2012 would decreaseincrease estimated pretax annual 2013 expense approximately 03 million hypothetical 25 basis point increasedecrease assumed weightedaverage longterm rate return plan assets used actuarial valuation pension plan obligation december 31 2012 would decreaseincrease estimated pretax annual 2013 expense approximately 08 million refer note 17 pension postretirement benefits notes consolidated financial statements item 8 report information pension plans impact 1 increasedecrease health care cost trend rate expense related postretirement benefit plan obligation expense litigation contingencies subject risks related threatened pending litigation routinely defendants lawsuits associated normal conduct business liabilities costs associated litigation related loss contingencies require estimates judgments based knowledge facts circumstances surrounding matter advice legal counsel record liabilities litigation related losses loss probable reasonably estimate amount loss evaluate measurement recorded liabilities reporting period based current facts circumstances specific matter ultimate losses incurred upon final resolution litigation related loss contingencies may differ materially estimated liability recorded particular balance sheet date changes estimates recorded earnings period changes occur see note 18 commitments contingencies consolidated financial statements item 8 form 10k environmental matters subject federal state laws regulations relating protection environment including regulations related remediating hazardous wastes december 31 2012 2011 environmental accruals amounted 150 million 86 million respectively included noncurrent liabilities consolidated balance sheet liabilities remediation obligations based undiscounted future cash flows fourth quarter 2012 increased estimated liability reflect revised remediation plan site related discontinued operation revision remediation plan made increase certainty completing required remediation expense associated increase estimated liability recorded “loss income discontinued operations net tax” consolidated statement income possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts may undertake future due status laws regulations technology information related individual sites uncertainties believe cost complying present environmental protection laws material adverse effect results operations cash flows financial condition item 7aitem 7 management’s discussion analysis financial condition results operations following information read conjunction consolidated financial statements related notes included elsewhere annual report form 10k addition historical information discussion analysis contains forwardlooking statements involve risks uncertainties assumptions could cause actual results differ materially management’s expectations please see “disclosure regarding forwardlooking statements” section part item 1 report “risk factors” section part item 1a report leading premium spirits company makes sells branded distilled spirits products major markets worldwide principal products include bourbon whiskey tequila scotch whisky canadian whisky vodka cognac rum cordials readytodrink premixed cocktails diverse portfolio includes several world’s top premium spirits brands described notes consolidated financial statements included form 10k discontinued operations include former fortune brands golf home security segments disposed 2011 operate business basis geographical regions consisting north america europemiddle eastafrica “emea” asiapacificsouth america “apsa” principal markets spirits products united states australia germany spain united kingdom canada continue invest emerging markets india brazil mexico russia central europe eastern europe asia geographies portfolio consists brands identify power brands rising stars local jewels value creators power brands core brand equities global reach premium categories large annual sales volume rising stars smaller premium brands priority markets believe excellent growth profiles receive substantial advertising marketing program support drive expansion brands identified local jewels act power brands local markets value creators include variety brands providing scale profit across multiple categories power brands rising stars combined local jewelsvalue creators including nonbranded sales represent approximately 60 15 25 respectively annual net sales based net sales year ended december 31 2013 power brands rising stars focus advertising marketing programs listed executive summary merger agreement discussed “part iitem 1 businessmerger agreement” january 12 2014 entered merger agreement suntory holdings privately held japanese corporation subsidiary companies leading producers distributors alcoholic nonalcoholic beverages subject terms conditions merger agreement unanimously approved boards directors suntory holdings acquire outstanding shares beam common stock 8350 per share cash consummation merger subject satisfaction waiver specified conditions including adoption merger holders majority outstanding shares beam common stock entitled vote thereon ii receipt antitrust approvals us european union iii absence occurrence company material adverse effect defined merger agreement date merger agreement iv customary closing conditions consummation merger subject financing condition revision prior period financial statements connection preparing consolidated financial statements three six months ended june 30 2013 identified errors affected prior interim annual periods related timing recognition sales nonbranded spirits primarily canadian whisky immaterial outofperiod items discussed note 1 description business basis presentation summary significant accounting policies revision prior period financial statements notes consolidated financial statements prior period errors material previously issued financial statements prior period financial statements included annual report form 10k revised correct errors certain immaterial errors identified 2013 2012 following discussion analysis based revised financial results operational financial highlights 2013 following overview operational financial results year ended december 31 2013 • net sales increased 4 2013 compared 2012 primarily due full year sales benefit may 2012 pinnacle acquisition 2 favorable pricemix 3 partially offset lower volumes 1 • operating income increased 8 2013 compared 2012 largely due increased gross profit higher net sales 43 million decrease selling general administrative expense 21 million includes 12 million benefit related adjustment estimated fair value measurement acquisitionrelated contingent consideration skinnygirl readytoserve cocktail business absence business separation costs 14 million gain sale brands 13 million partially offset higher impairment trade names 34 million higher restructuring charges 11 million • diluted earnings per share continuing operations 224 2013 compared 251 2012 decrease due primarily 57 million loss early extinguishment debt lower income 26 million partially offset higher operating income discussed lower interest expense 17 million • reduced outstanding debt approximately 450 million 2013 addition refinanced outstanding indebtedness issuance 500 million aggregate principal amount longterm debt • increased indicated annual rate quarterly dividend 10 225 cents per share common stock january 2013 beginning march 1 2013 dividend payment certain items significant impact financial results 2013 2012 2011 include impact separation transactions completed 2011 changes foreign currency exchange rates acquisitionrelated items restructuring related charges income tax related matters 2013 financial results include following • sga charges 9 million 6 million net tax 003 per diluted share associated internal investigation respect india operation • restructuring charges 15 million 10 million net tax 006 per diluted share primarily related organizational restructuring plan improve efficiency effectiveness across organization part fueling growth strategy • acquisition integrationrelated credits 9 million 6 million net tax 004 per diluted share mostly connection 12 million benefit related adjustment fair value acquisitionrelated contingent consideration described • asset impairment charges 50 million 35 million net tax 021 per diluted share related dyc trade name spain • gain sale brands related assets 13 million 8 million net tax 005 per diluted share primarily related sale certain nonstrategic economy brands related assets • loss early extinguishment debt 57 million 38 million net tax 023 per diluted share connection early extinguishment debt related tender offer subsequent redemption senior notes • income tax expense benefits approximately 8 million 005 per diluted share primarily include 8 million benefit arising resolution certain foreign tax return matters 6 million benefit related decision 2013 participate tax amnesty program resulting adjustment uncertain tax positions 4 million benefit related repatriation foreign earnings partially offset tax expense 10 million connection foreign tax law changes • compared 2012 foreign exchange translation rates hedge results unfavorable 02 million impact net sales unfavorable 7 million impact operating income 2012 financial results include following • acquisition integration charges 22 million 17 million net tax 011 per diluted share related acquisition integration pinnacle vodka calico jack rum brands certain related assets “pinnacle assets” cooley distillery plc “cooley” 2012 acquisitionrelated adjustments impacting sga expense consist transactionrelated expenses 5 million contract termination expenses 10 million integration related expenses 2 million addition acquisition related adjustments include amounts charged costs goods sold 1 million restructuring charges 3 million primarily relate accelerated depreciation employee retention income tax expense includes tax benefit related charges partially offset tax earnings distributed within certain beam’s foreign tax jurisdictions incurred connection funding portion capital requirement cooley 5 million • sga charges 4 million associated internal review respect india operation • business separation costs 14 million 9 million net tax 005 per diluted share primarily related 15 million pension settlement charge associated required 29 million lump sum distribution benefits paid former fortune brands inc executives july 2012 connection separation transactions completed 2011 • asset impairment charges 16 million 11 million net tax 007 per diluted share related larios trade name spain • benefit income nontaxable indemnification payment 18 million 011 per diluted share received pernod ricard sa “pernod ricard” resolution certain tax matters years prior ownership businesses nontaxable distribution former maxxium investment 2 million 001 per diluted share • income tax expense benefits approximately 38 million 023 per diluted share primarily included 22 million net foreign tax credit related repatriation current year earnings 17 million net benefit arising resolution certain foreign us federal state tax audit matters • compared 2011 foreign exchange translation rates hedge results unfavorable 32 million impact net sales favorable 9 million impact operating income 2011 financial results included following • business separation costs 84 million 68 million net tax 043 per diluted share incurred connection separation transactions principally transaction professional advisory fees severance employee related costs • corporate general administrative overhead costs related former fortune brands inc management structure spinoff october 3 2011 61 million 38 million net tax 024 per diluted share • acquisitionrelated contingent consideration 28 million 17 million net tax 011 per diluted share recorded based actual forecasted performance skinnygirl business acquired 2011 • restructuring related charges 25 million 16 million net tax 010 per diluted share primarily related facility consolidation supply chain distribution cost reduction initiatives north america well organizational streamlining initiatives • higher net sales 46 million operating income 24 million 17 million net tax 010 per diluted share related onetime sale product recorded connection transition new longterm distribution agreement australia • asset impairment charges 31 million 22 million net tax 014 per diluted share related dyc larios trade names spain • benefit income nontaxable distribution maxxium investment 10 million 006 per diluted share nontaxable income tax indemnification payments 27 million 017 per diluted share pernod ricard related foreign tax jurisdictions periods prior ownership businesses • loss early extinguishment debt 149 million 96 million net tax 061 per diluted share • income tax expense impacted tax effects significant items described impact tax assessments associated resolution routine foreign us income tax audit examinations including unfavorable 26 million related mexican tax audits favorable 19 million related germany tax audits business outlook believe longterm trends favorable improvement overall spirits market globally particularly australia emerging markets believe opportunities leverage distribution strengths key profit markets united states addition believe potential pricing opportunities key categories premium whiskies opportunities growth continued innovation distribution alliances acquisition opportunities expect continue benefit growth key categories premium whiskies bourbon globally efficiency effectiveness agenda could adversely impacted softening emerging markets well potential shifts consumer preferences certain spirits categories ongoing execution us distributors threetier system increasing competition customer distributor consolidation continues spirits sector large small competitors aggressively promote new brands moreover anticipate increased costs 2014 uncertain whether price increases organizational changes would offset costs increases please see “forwardlooking statements” discussion certain factors may cause actual results vary materially expected date filing report results operations presentation basis nongaap measures volume measured based branded nine liter equivalent units divide readytodrink cases 10 obtain nine liter case equivalent pricemix number percentage points comparable net sales changes exceeds change attributable branded volume difference arises changes composition sales higher lower priced brands price changes include financial measures including nongaap financial measures discussion results operations comparable net sales growth rate nongaap measure use evaluate sales growth yearoveryear basis exclusive certain items indicative underlying sales performance business calculate comparable net sales gaap net sales growth rates adjusted impact acquisitionsdivestures foreign exchange impact transitioning 2011 new manufacturing distribution model australia calculating comparable net sales acquisitiondivesture impact determined comparing actual reported net sales current period including net sales attributable acquired companies acquisition date adjusted net sales prioryear period arriving adjusted prioryear net sales include net sales acquired companies brands remove net sales divested companies brands prioryear periods comparable currentyear periods companies included actual reported revenue foreign exchange impact calculated translating current year results prior year exchange rates excluding hedge impacts approximately 43 net sales outside us year ended december 31 2013 result changes foreign exchange rates significant impact reported results operations translated presented us dollars discussion results operations segment includes use “constant currency” net sales operating income nongaap measures exclude impact foreign exchange translation comparable net sales constant currency net sales operating income segment measures may comparable similar measures used companies measures considered isolation substitute measure derived accordance gaap management believes measures useful evaluating performance impact acquisitionsdivestitures fluctuations exchange rates impact underlying yearoveryear growth rates company segments consolidated results 2013 compared 2012 net sales following table presents reconciliation gaap net sales growth comparable net sales growth nongaap 2013 compared 2012 see “presentation basis nongaap measures” information related description methodology adjustments significant acquisitions divestitures identified discussed gaap net sales increased 88 million 4 2460 million 2012 2547 million 2013 4 increase gaap net sales 2013 primarily due may 2012 acquisition pinnacle assets 2 increase comparable net sales 2 comparable net sales increased 2 2013 compared 2012 primarily due favorable pricemix 3 partially offset lower volumes 1 price benefit due predominantly carryover effect prior targeted price increases certain brands markets maker’s mark jim beam us favorable mix due impact innovations premiumization within product portfolio yearoveryear decline volumes largely due decreases value creator local jewels brands also driven volume decrease skinnygirl pinnacle courvoisier teacher’s decreases largely offset volume increases jim beam maker’s mark canadian club sauza substantial decline skinnygirl largely due substantial decrease us readytoserve spirits category 2013 decline teacher’s scotch largely due impact repositioning india decreased net sales india primarily due india investigation repositioning business negatively impacted consolidated net sales growth approximately one point comparable net sales increase 2 driven net sales growth north america emea partially offset decrease apsa following table summarizes information related certain operating expenses percentage net sales cost goods sold 44 million 4 increase cost goods sold 2013 primarily due higher rawmaterial production related costs approximately 34 million net 8 million benefit recognition contractual incentive related 2012 production become realizable first quarter 2013 net increase acquisitionsdivestitures approximately 29 million primarily attributable acquisition pinnacle assets foreign exchange rates 8 million well higher cost associated increased sales premium products higher raw material labor costs largely offset benefit organizational streamlining procurement savings initiatives approximately 33 million advertising marketing expense advertising marketing expense increased approximately 2 million 2013 advertising marketing expense percentage net sales 157 2013 consistent prior year levels 162 2012 156 2011 selling general administrative expense 21 million 5 decrease selling general administrative expense 2013 mostly due lower acquisition integrationrelated expenses 30 million includes 12 million benefit related adjustment fair value acquisitionrelated contingent consideration lower incentive compensation expense accruals lower bad debt expense partially offset inflation growth business support functions well additional 5 million costs 2013 compared 2012 related india investigation repositioning business gain sale brands related assets 13 million gain sale brands related assets primarily relates 12 million gain january 2013 sale certain nonstrategic economy brands related assets restructuring charges 2013 company approved organizational restructuring plan improve efficiency effectiveness across organization plan includes elimination certain sales marketing operations positions within company’s three operating segments corporate function restructuring charges 15 million 2013 primarily relate mentioned plan mostly consist employeerelated costs expect additional significant charges related mentioned plan restructuring charges 4 million 2012 primarily relate relocation certain us finance human resource shared services deerfield illinois headquarters kentucky business separation costs business separation costs 14 million 2012 primarily consist 15 million pension settlement charge associated required 29 million lump sum distribution benefits paid former fortune brands inc executives july 2012 connection separation transactions partially offset decrease accrued liabilities estimated costs complete separation transactions asset impairment charges 2013 recorded impairment charge 50 million reduce dyc trade name estimated fair value 44 million impairment primarily due lower projected future revenues profitability brand compared projected revenues profitability estimated impairment test conducted fourth quarter 2012 factors contributed lower revenue profitability projections included comparison actual results 2013 outlook continued economic challenges spanish market competitive outlook within spirits category trade name competes among factors 2012 recorded impairment charge 16 million reduce larios trade name estimated fair value 55 million impairment primarily due lower projected future revenue brand compared projected revenues estimated impairment test conducted fourth quarter 2011 factors contributed lower revenue projections included comparison actual results 2012 outlook continued economic challenges spanish market competitive outlook within spirits category trade name competes among factors operating income operating income increased 44 million 8 574 million 2012 617 million 2013 operating income increased due increased gross profit 43 million higher sales largely driven acquisition pinnacle assets pricemix benefits increase operating income 2013 also benefited lower acquisition integrationrelated expenses 29 million includes 12 million benefit related adjustment fair value acquisitionrelated contingent consideration lower incentive compensation expense accruals absence business separation costs 14 million 13 million gain sale brands related assets 2013 period partially offset higher impairment trade names 34 million higher restructuring charges 2013 11 million unfavorable foreign exchange rate changes 7 million higher costs 2013 related india investigation repositioning business 5 million interest expense interest expense decreased 17 million 16 109 million 2012 92 million 2013 primarily due lower weightedaverage interest rates outstanding borrowings including fair value hedge impacts lower debt balances lower weightedaverage interest rates largely related debt refinancing june july 2013 loss early extinguishment debt loss early extinguishment debt 57 million incurred connection repayment aggregate principal amount 485 million outstanding notes debentures june july 2013 loss early extinguishment debt primarily consists 42 million premiums paid repurchase debt 14 million related contractual redemption premium repayment primarily related 6375 notes due 2014 326 million principal amount 5875 notes due 2036 138 million principal amount income decreased 26 million 35 million 2012 9 million 2013 change 2012 2013 primarily due nontaxable indemnification payment approximately 18 million received 2012 pernod ricard related tax matters connection assets acquired pernod ricard july 2005 lower foreign currency transaction gains 3 million net hedging impacts decrease equity income related international distribution joint ventures edrington group 3 million absence distribution related wind maxxium joint venture investment received 2012 period 2 million income taxes effective income tax rates 2013 2012 234 193 respectively several significant items impacted comparability effective tax rates 2013 2012 effective tax rate 2013 less us federal statutory rate due foreign income taxed lower rates reduction unrecognized tax benefits 6 million primarily due participation tax amnesty program second quarter election made one subsidiaries new tax law allowed increase value assets resulting 5 million reduction income tax expense implementation tax planning strategy utilize net operating losses benefit previously recorded reduced income tax expense 4 million resolution certain foreign income tax matters resulted reduction tax expense 8 million favorable items offset 10 million deferred income tax expense 6 million current income tax expense associated mexican french tax law changes enacted fourth quarter effective tax rate 2012 less us federal statutory rate primarily due foreign income taxed lower rates receipt nontaxable indemnification income pernod ricard net foreign tax credits 22 million tax benefits recorded 2012 result final audit settlements expiration foreign jurisdiction income tax review periods 17 million see note 9 income taxes notes consolidated financial statements additional information related effective tax rates 2013 2012 segment results 2013 compared following table sets forth net sales operating income operating segment 2013 2012 reported adjusted exclude impact foreign exchange translation millions see “presentation basis nongaap measures” information related rationale presenting nongaap information foreign exchange impact calculated translating current year results prior year exchange rates excluding hedge impacts reconciliation gaap segment net sales growth comparable segment net sales growth 2013 compared 2012 see “presentation basis nongaap measures” information related description methodology adjustments b significant acquisitions divestitures identified discussed north america north america net sales increased 8 gaap basis constant currency basis 2013 compared 2012 adjusting constant currency net sales impact acquisitionsdivestitures north america’s comparable net sales increased 5 2013 acquisitiondivestiture impact 3 primarily due may 2012 acquisition pinnacle assets 5 comparable net sales increase primarily due favorable pricemix 6 partially offset decline volumes 1 pricemix benefit primarily related maker’s mark jim beam pinnacle includes impacts premiumpriced innovation faster growth premium brands mix innovations benefited current year include jim beam honey jacob’s ghost jim beam maple sauza sparkling margarita hornitos lime shot 1 volume decrease predominantly due skinnygirl declined largely due substantial decrease us readytoserve category 2013 well declines local jewels value creators brands addition pinnacle volume also compared yearago period reflecting higher distributor inventory last year related transition beam’s network volume decreases largely offset volume increases jim beam sauza maker’s mark geographically comparable net sales growth due increased sales us canada mexico north america operating income increased 56 million 14 gaap basis 15 constant currency basis 2013 compared 2012 constant currency operating income increased principally increased gross profit higher net sales benefiting favorable mix operating leverage cost containment partially offset higher advertising marketing expense europemiddle eastafrica emea net sales increased 7 gaap basis 4 constant currency basis 2013 compared 2012 positive foreign currency exchange impact gaap results primarily due weightedaverage impact stronger euro relative us dollar adjusting constant currency net sales impact divestitures emea’s comparable net sales increased 6 2013 divestiture impact relates 2012 termination thirdparty distribution agreement connection 2012 acquisition cooley business 6 comparable net sales increase mostly due favorable pricemix 4 benefiting faster growth premium brands including jim beam courvoisier laphroaig geographically comparable net sales growth primarily due increased sales germany uk russia central europe partially offset decreases spain reflecting challenging market conditions emea operating income increased 10 million 8 gaap basis 6 constant currency basis 2013 compared 2012 positive foreign currency exchange impact gaap results primarily due weightedaverage impact stronger euro relative us dollar increase constant currency operating income mostly due net sales growth operating leverage cost containment partially offset higher advertising marketing expense asiapacificsouth america apsa net sales decreased 11 gaap basis 9 comparable basis 2013 compared 2012 difference gaap comparable net sales due negative foreign currency exchange impact gaap results sales australia brazil india comparable net sales decrease due unfavorable impact pricemix 8 lower volumes 1 comparable net sales decrease largely driven challenging market conditions australia emerging markets including china southeast asia particularly impacted sales jim beam readytodrink products courvoisier addition comparable net sales adversely impacted three percentage points 2013 decline teacher’s resulting repositioning business india apsa operating income decreased 28 million 24 gaap basis 18 constant currency basis 2013 compared 2012 difference gaap constant currency operating income primarily due negative foreign exchange impact related australia brazil decrease constant currency operating income primarily due decreased net sales described unfavorable mix negative operating leverage partially offset decreased advertising marketing expense refer note 18 commitments contingencies notes consolidated financial statements included report additional information related internal investigation implementation remedial measures india consolidated results 2012 compared 2011 net sales following table presents reconciliation gaap net sales growth comparable net sales growth 2012 compared 2011 see “presentation basis nongaap measures” description adjustments gaap net sales increased 161 million 7 2299 million 2011 2460 million 2012 7 increase gaap net sales 2012 period primarily due benefit sales pinnacle assets cooley 4 acquired 2012 partially offset impact 2011 onetime sale inventory related transitioning new longterm distribution agreement australia 2011 2 adverse impact foreign exchange rate fluctuations 2 discussed segment results operations increase comparable net sales primarily due favorable pricemix 4 impact higher volumes 3 2012 compared 2011 higher volumes primarily due strong growth jim beam reflecting higher sales jim beam white well brand’s premium innovations red stag jim beam honey devil’s cut addition comparable sales growth pinnacle vodka maker’s mark courvoisier skinnygirl brands favorable mix due impact innovations premiumization product portfolio price benefit 2012 due targeted price increases certain brands markets jim beam maker’s mark us well courvoisier asia travel retail comparable net sales increase 7 driven net sales growth three segments described following table summarizes information related certain operating expenses percentage net sales cost goods sold 38 million 4 increase cost goods sold 2012 largely due impact acquisitions approximately 55 million increased organic sales described partially offset yearoveryear benefit foreign currency 30 million transition new longterm manufacturing distribution agreement australia including prior year impact onetime sale inventory 23 million impact higher raw materialrelated costs inflation approximately 35 million largely offset savings organizational streamlining cost sourcingsaving initiatives gross profit percentage margin increased approximately 130 basis points 2012 compared 2011 largely due absence low margin onetime sale 2011 related australia distribution change described well reflecting benefit pricemix accretive innovations advertising marketing expense 40 million increase advertising marketing expense 2012 primarily due expansion successful innovations equity building programs related power brands rising stars advertising marketing expense percentage net sales increased 156 162 2012 selling general administrative expense selling general administrative expense decreased 17 million 2012 primarily due lower beam standalonecompany costs compared former fortune brands inc corporate cost structure 36 million absence 28 million acquisitionrelated charges incurred prioryear period connection contingent consideration related skinnygirl acquisition favorable foreign currency impact 5 million benefits 2012 partially offset inflation increased selling costs drive higher sales acquisition integrationrelated costs 17 million contract termination expenses 10 million transactionrelated expenses 5 million integration related expenses 2 million connection acquisition pinnacle assets cooley well approximately 4 million charges associated internal investigation respect india operations refer note 22 segment information notes consolidated financial statements included report information estimating standalone corporate cost structure restructuring charges 2012 restructuring charges 4 million primarily related relocation certain us finance human resource shared services deerfield headquarters kentucky ongoing integration pinnacle assets included planned move pinnacle bottling operations maine existing facilities kentucky early 2014 2011 restructuring charges 8 million primarily related distribution supplychain initiatives facility consolidations organizational streamlining initiatives business separation costs recorded 14 million 84 million business separation costs years ended december 31 2012 2011 respectively business separation costs 2012 primarily consist 15 million pension settlement charge associated required 29 million lump sum distribution benefits paid former fortune brands executives july 2012 partially offset decrease accrued liabilities estimated costs complete separation transactions business separation costs 2011 consisted 44 million financial legal advisory fees related separation transactions well 40 million employeerelated costs primarily related termination benefits asset impairment charges 2012 recorded impairment charge 16 million reduce larios trade name estimated fair value 55 million impairment primarily due lower projected future revenue brand compared projected revenues estimated impairment test conducted fourth quarter 2011 factors contributed lower revenue projections included comparison actual results 2012 outlook continued economic challenges spanish market competitive outlook within spirits category trade name competes among factors 2011 recorded noncash impairment charge 31 million reduce dyc larios trade names estimated fair value december 2011 asset impairments due combined effect economic downturn sales key geographic markets principally spain well effect substantially higher interest rates refer “critical accounting policies estimates intangible assets” note 12 goodwill intangible assets note 15 fair value measurements notes consolidated financial statements part ii item 8 report information operating income operating income increased 188 million 49 386 million 2011 574 million 2012 increase operating income primarily due lower business separation acquisition restructuring chargesgains collectively approximately 93 million lower beam corporate cost structure compared fortune brands inc cost structure 36 million lower intangible asset impairment charges 15 million increased gross profit 123 million higher sales driven volume mix price described increase operating income 2012 also due 9 million favorable impact changes foreign currency rates related hedge impacts benefits partially offset increases advertising marketing selling general administrative expenses excluding fortune brands cost structure impact chargesgains noted absence 24 million gross profit onetime sale inventory related australia distribution change 2011 interest expense interest expense decreased 8 million 7 117 million 2011 109 million 2012 due lower average borrowings principally due debt reduction approximately 23 billion 2011 related separation transactions well additional debt reductions scheduled debt payments made 2011 new borrowings 600 million may 2012 used fund acquisition pinnacle assets partially offset benefit loss early extinguishment debt loss early extinguishment debt 149 million 2011 consists 155 million purchase premiums 7 million accelerated unamortized debt issuance costs partially offset 13 million attributed amortizationwriteoff deferred gains terminated interest rate swaps related extinguished debt refer section “liquidity capital resources” additional information regarding reduction debt 2011 income decreased 5 million 13 40 million 2011 35 million 2012 change 2011 2012 primarily due lower nontaxable indemnification payments received pernod ricard related settlement tax matters 8 million lower distributions related wind maxxium joint venture investment 8 million partially offset increase equity income related international distribution joint ventures edrington group 5 million higher foreign currency transaction gains 4 million income taxes effective income tax rates 2012 2011 193 250 respectively several significant items impacted comparability effective rates 2012 2011 effective tax rate 2012 favorably impacted primarily net foreign tax credits 22 million tax benefits recorded 2012 result final audit settlements expiration foreign jurisdiction income tax review periods 17 million effective tax rate 2011 favorably impacted taxfree treatment indemnification income received connection settlement mexican income tax audit resolution german tax audit partially offset impact nondeductible business separation costs tax assessment related settlement mexican income tax audit see note 9 income taxes notes consolidated financial statements additional information relating foreign audit settlements related indemnification payments factors impacting effective tax rate compared us federal statutory rate loss income discontinued operations net tax loss discontinued operations net tax 18 million 2012 primarily related increase estimated tax indemnification liabilities associated disposed golf business increase environmental liability 4 million net tax related discontinued operation included separation transactions partially offset net tax benefit related charges income discontinued operations net tax 787 million 2011 primarily due 687 million gain sale golf business income former golf home security businesses generated prior disposition see note 3 discontinued operations notes consolidated financial statements additional information segment results 2012 compared 2011 evaluate segment net sales operating income excluding certain items considered management unusual infrequent nature indicative segments’ underlying operating performance consequently segment results presented accordance gaap exclude items following table sets forth net sales operating income operating segment 2012 2011 reported adjusted exclude impact foreign exchange translation millions see “presentation basis nongaap measures” information related rationale presenting nongaap information foreign exchange impact calculated translating current year results prior year exchange rates excluding hedge impacts also evaluate segment net sales “comparable basis” nongaap measure following discussion refer sales presented basis “comparable net sales” following table reconciliation gaap segment net sales growth comparable segment net sales growth nongaap 2012 compared 2011 see “presentation basis nongaap measures” description adjustments north america north america net sales increased 14 gaap basis 15 constancy currency basis 2012 compared 2011 adjusting constant currency net sales impact acquisitionsdivestitures north america’s comparable net sales increased 7 2012 acquisition impact 7 due acquisition pinnacle assets cooley acquired may 2012 january 2012 respectively comparable net sales increase due higher organic volumes 4 well favorable pricemix 3 largest contributors organic volume growth increased demand bourbon brands expansion pinnacle brand addition innovations helped drive volume pricemix benefits innovations included new jim beam red stag flavors extensions skinnygirl family products including vodka wine new pinnacle vodka flavor well knob creek rye geographically us canada mexico contributed comparable net sales growth north america operating income increased 36 million 10 gaap basis 9 constant currency basis 2012 compared 2011 constant currency operating income increased principally increased gross profit higher net sales operating leverage partially offset significant increase advertising marketing expense europemiddle eastafrica emea net sales increased 2 gaap basis 7 constancy currency basis 2012 compared 2011 negative foreign currency exchange impact gaap results primarily due decreases euro exchange rate relative us dollar adjusting constant currency net sales impact acquisitionsdivestures emea’s comparable net sales increased 5 2012 acquisition impact 2 due cooley acquisition january 2012 comparable net sales increase due favorable pricemix 3 higher organic volumes 2 pricemix benefit primarily related jim beam courvoisier laphroaig volume growth across emea primarily due jim beam family products well courvoisier partially offset declines related certain spanish value creator brands comparable net sales growth primarily due increased sales markets germany russia travel retail offset adverse impacts economically challenged markets particularly spain value spirits market declined midtohigh singledigit rate emea operating income increased 5 million 5 gaap basis 9 constant currency basis 2012 compared 2011 negative foreign currency exchange impact gaap results primarily due decreases euro exchange rate relative us dollar constant currency operating income benefited increased gross profit higher net sales discussed reversal nonincome tax accrual closed review period reduction bad debt expense partially offset increase advertising marketing expense asiapacificsouth america apsa net sales increased 3 gaap basis constant currency basis compared 2011 adjusting constant currency net sales impact australia distribution margin structure change 2011 2 apsa comparable net sales increased 5 2012 apsa comparable net sales growth due higher organic volumes 4 pricemix benefit 1 higher volume driven growth jim beam courvoisier canadian club teacher’s volume benefited innovations partially offset decreased sales value creators pricemix also benefited strength power brands volume growth primarily due increased sales markets australia china brazil north asia apsa operating income increased 26 million 29 gaap basis 17 constant currency basis 2012 compared 2011 difference gaap constant currency operating income growth rates 12 primary due australia constant currency operating income benefited increased gross profit due higher sales enhanced routes market china southeast asia liquidity capital resources liquidity capitalization ratio total debt total capital decreased 286 december 31 2013 352 december 31 2012 primarily due lower outstanding debt discussed higher equity resulting 2013 net income proceeds stock option exercises december 2013 repaid maturing notes 181 million using cash hand june 2013 issued 250 million aggregate principal amount 1750 notes due 2018 “2018 notes” 250 million aggregate principal amount 3250 notes due 2023 “2023 notes” together “2018 notes” “notes” net proceeds used repurchase redeem outstanding debt june july 2013 discussed 2018 notes mature june 15 2018 bear interest fixed rate 1750 per annum 2023 notes mature june 15 2023 bear interest fixed rate 3250 per annum interest payable notes june 15 2013 semiannually arrears june 15 december 15 year beginning december 15 2013 notes constitute unsecured unsubordinated obligations company rank parity company’s unsecured unsubordinated indebtedness time outstanding july 2013 used portion net proceeds issuance notes cash hand redeem remaining outstanding principal amount 248 million 6375 notes due 2014 recorded loss early extinguishment debt approximately 14 million third quarter 2013 primarily related contractual redemption premium june 2013 used portion net proceeds issuance notes cash hand repay aggregate principal amount 237 million outstanding debentures accordance tender offer announced may 2013 resulting loss early extinguishment debt 43 million primarily consisted 42 million premiums paid repay debt repayments primarily related 6375 notes due 2014 78 million principal amount 5875 notes due 2036 138 million principal amount january 2013 repaid maturity remaining principal amount 219 million 297 million 4 notes december 31 2013 total cash equivalents 277 million 144 million held nonus subsidiaries permanent repatriation nonus cash balances certain subsidiaries indefinitely reinvested earnings could adverse tax consequences may required pay record income tax expense funds extent previously considered indefinitely reinvested however currently expect repatriation nature believe able maintain required liquidity due following • manage global cash requirements considering operating cash flows generated domestic operations available funds among many subsidiaries conduct business ii geographic location liquidity needs iii cost access international cash balances • require funding us generated domestic operations could elect repatriate future earnings foreign jurisdictions raise capital us debt equity issuances believe access debt markets including access committed revolving credit facility 750 million available december 31 2013 viable alternative repatriation indefinitely reinvested foreign earnings would subject additional us tax expense repatriating nonus cash balances issuing debt equity raise capital could result higher effective tax rates increased interest expense dilution earnings investment grade credit rating three credit rating agencies believe cash operations committed revolving credit facility sources liquidity sufficient fund current operations service outstanding indebtedness pay dividends additional matters affecting liquidity merger agreement merger agreement described “part iitem 1 businessmerger agreement” provides certain termination rights company suntory holdings company obligated pay suntory holdings 425 million termination fee certain circumstances including without limitation board directors changes recommendation absence competing proposal defined merger agreement board directors determined good faith consultation company’s outside financial advisors outside legal counsel failure board directors effect change recommendation would reasonably likely inconsistent fiduciary duties applicable law suntory holdings terminates merger agreement b company terminates merger agreement february 26 2014 order enter definitive agreement third party respect superior proposal defined merger agreement however company terminates merger agreement prior 500 pm us central time february 26 2014 enters definitive agreement third party respect superior proposal termination fee payable suntory holdings would 275 million share repurchase program share repurchase plan authorized board directors may repurchase 3 million shares company’s common stock par value 3125 per share either open market privately negotiated transactions share repurchase plan expiration date repurchased shares plan date merger agreement described “part iitem 1 businessmerger agreement” prohibited repurchasing company’s outstanding common stock cash flows summary cash flows years ended december 31 2013 2012 2011 millions operating investing financing cash flows presented include cash flows related discontinued operations ie recast statement cash flows remove cash activity related discontinued operations line item “change cash included assets discontinued operations” represents net change specifically identifiable cash accounts discontinued operations operating activities net cash provided operating activities 424 million 2013 compared 378 million 2012 increase cash due cash impact increased sales largely due acquisition pinnacle assets lower cash used related discontinued operations discussed operating cash flows 2013 included approximately 17 million cash outflows related discontinued operations liabilities related separation transactions completed 2011 primarily consisting indemnity payments related tax matters compared approximately 85 million discontinued operationsrelated payments primarily consisting incentive compensation severance pension benefits former fortune brands executives settlement legal matter 2012 net cash provided operating activities 378 million 2012 compared 455 million 2011 operating cash flow lower 2012 period due decrease cash provided golf business sold july 2011 home security business spunoff october 2011 increased expenditures produce store aging spirits inventory support future growth partially offset net benefit associated timing amount certain working capital items operating cash flows 2012 included approximately 85 million cash outflows related discontinued operations liabilities related separation transactions completed 2011 primarily consisting incentive compensation severance pension benefits former fortune brands executives indemnity payments related tax matters settlement legal matter investing activities net cash used investing activities 42 million 2013 compared 802 million 2012 net cash used investing activities 2013 primarily due capital expenditures period 129 million mostly related purchase new oak barrels required produce bourbon warehouse capacity expansion maker’s mark capacity expansion support future growth bourbon scotch cognac partially offset proceeds received sale certain nonstrategic economy brands related assets january 2013 63 million sale property plant equipment 25 million net cash used investing activities 2012 predominately related acquisition cooley business january 2012 74 million pinnacle assets may 2012 608 million capital expenditures period 137 million discussed partially offset 6 million cash received home security agreements related spinoff net cash used investing activities 802 million 2012 compared cash provided investing activities 918 million 2011 net cash used 2012 primarily due cash used acquisitions described totaling 685 million net cash provided 2011 primarily due proceeds 13 billion sale golf business capital expenditures 137 million 2012 primarily related purchase new oak barrels required produce bourbon completion new global innovation center american stillhouse visitors center kentucky warehouse capacity expansion maker’s mark capacity expansion support future growth bourbon scotch cognac capitalized software additions capital expenditures 2011 included capital expenditures continuing beam business approximately 166 million also transferred 116 million cash home security 2011 connection spinoff financing activities net cash used financing activities 469 million 2013 compared 564 million net cash provided financing activities 2012 discussed repaid longterm debt 2013 1 billion partially offset issuance longterm debt 496 million aggregate principal net discounts 2013 2012 issued 606 million longterm debt aggregate principal net discounts largely finance acquisition pinnacle assets may 2012 also received cash 2013 result increased option exercise activity 64 million net cash provided financing activities 564 million 2012 compared 2003 million net cash used 2011 cash proceeds 593 million received 2012 issuance longterm debt fund acquisition pinnacle assets 2011 included cash outflows 24 billion related repayment outstanding longterm debt primarily due 2011 separation transactions partially offset 500 million dividend received home security connection spinoff dividends summary 2013 dividend activity company’s common stock shown currently expect pay quarterly cash dividends common stock future payments dependent upon financial condition results operations capital requirements factors including set forth section annual report form 10k entitled “item 1a risk factors” merger agreement described “part iitem 1 businessmerger agreement” prohibited paying dividend distribution common stock quarterly dividends holders common shares per share amount greater quarterly dividend declared paid company fiscal quarter ended december 31 2013 0225 per share record payment dates accordance company’s customary dividend schedule customer credit risk routinely grant unsecured credit customers normal course business accounts receivable 427 million 453 million december 31 2013 2012 respectively recorded stated amount less allowances doubtful accounts allowances doubtful accounts include provisions certain customers risk default specifically identified well provisions based factors evaluation historical writeoffs aging balances qualitative quantitative factors determined default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical collection experience existing economic conditions accordance policy allowance doubtful accounts 12 million 14 million december 31 2013 2012 respectively adverse conditions global economy credit markets may reduce customers’ ability access sufficient liquidity capital fund operations make estimation customer defaults inherently uncertain believe current allowances doubtful accounts adequate possible weakening economic conditions factors may cause significantly higher levels customer defaults bad debt expense future periods counterparty risk counterparties derivative contracts major financial institutions although theoretical risk replacement cost estimated fair value instruments believe risk incurring losses unlikely losses would immaterial results operations cash flows financial condition fair value derivative assets december 31 2013 6 million estimated fair value derivative contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices pension plans sponsor defined benefit pension plans funded portfolio investments maintained within benefit plan trusts required make contributions 2014 comply us minimum funding requirements based assumptions december 31 2013 foreseeable future believe sufficient liquidity meet minimum funding may required law respect pension plans including pension protection act 2006 december 31 2013 fair value pension plan assets 377 million representing 84 accumulated benefit obligation liability guarantees commitments partially guaranteed credit facilities entered certain joint ventures maximum guarantee exposure assuming credit facilities fully utilized total us dollar equivalent 39 million guarantee exposure 26 million based facilities utilized december 31 2013 recorded liability guarantees part sale golf business agreed indemnify buyer certain obligations primarily taxes paid buyer relate periods owned golf business estimate liabilities indemnification obligations approximately 33 million december 31 2013 approximately 26 million recorded within “other current liabilities” approximately 7 million recorded within “other noncurrent liabilities” consolidated balance sheet actual obligation taxrelated indemnities accrued may differ based closure tax period taxing authorities tax authority audit resulting change amount tax due refundable including related interest penalties applicable contractual obligations commercial commitments following table discussion present obligations commitments make future payments contracts debt lease agreements december 31 2013 millions total contractual obligations include income taxes payable longterm income taxes payable uncertain tax positions unable reasonably estimate timing future payments related uncertain tax positions refer note 9 income taxes notes consolidated financial statements part ii item 8 form 10k information uncertain tax positions b includes principal c purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures minimum required pension postretirement contributions cannot determined beyond 2014 recently issued accounting standards information required item provided note 1 description business basis presentation summary significant accounting policies notes consolidated financial statements part ii item 8 form 10k hereby incorporated herein reference critical accounting policies estimates significant accounting policies described note 1 description business basis presentation summary significant accounting policies notes consolidated financial statements part ii item 8 form 10k consolidated financial statements prepared conformity gaap preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods related disclosures believe policies discussed company’s critical accounting policies include significant subjective complex judgments estimates made preparing consolidated financial statements customer program costs provide variety sales incentives promote sales maintain competitive pricing incentive programs primarily intended distributors maintain competitive pricing recorded reduction net sales additional types incentive programs utilize include volumebased incentives typically involve rebates refunds specified amount cash distributor reaches specified level sales net sales reduced estimated amount volumebased incentives expected earned customers estimates based expectations distributors achieving contractual volume targets payouts associated targets cooperative advertising arrangements reimburse distributors portion costs incurred distributors advertise promote certain products generally recognize cost cooperative advertising programs manner consistent advertising cost policy described note 1 description business basis presentation summary significant accounting policies notes consolidated financial statements part ii item 8 report incentives typically used certain nonus markets typically classified advertising marketing expense income taxes establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse record valuation allowance reduces deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect indefinitely reinvest record liabilities uncertain income tax positions based twostep process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes record tax benefit tax positions currently estimated less 50 likelihood sustained tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ estimates future periods changes facts circumstances new information may require us change recognition measurement estimates regard individual tax positions record changes recognition measurement estimates results operations financial position period changes occur inventories record inventory firstin firstout “fifo” method accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes maturing spirits inventory includes costs production warehousing insurance inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns product spoilage specific identification items product discontinuance material changes regulatoryrelated changes longlived assets test longlived asset including amortizable identifiable intangible assets asset group recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows marketparticipant basis goodwill amortized tested impairment least annually fourth quarter frequently circumstances warrant reporting units operating segments initially perform qualitative assessment determine whether likely fair value reporting unit less carrying amount result qualitative assessment completed december 31 2013 2012 concluded goodwill impaired qualitative test indicates likely fair value reporting unit less carrying amount perform additional twostep impairment test step one carrying value reporting unit compared fair value step two applied carrying value fair value amount goodwill impairment derived deducting fair value reporting unit’s assets liabilities fair value reporting unit total comparing amount carrying amount goodwill based estimates fair value reporting units december 31 2013 believe reporting units decline fair value 10 could trigger impairment goodwill intangible assets amortize purchased intangible assets goodwill useful lives unless lives determined indefinite determination useful life intangible asset goodwill based factors including historical projected trade name performance consumer name recognition geographic market presence market share plans ongoing trade name support promotion certain trade names assigned indefinite life currently anticipate trade names contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated least annually determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually fourth quarter whenever market business events indicate may potential impairment intangible compare carrying value indefinitelived trade name fair value impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party estimated remaining useful life connection annual impairment tests indefinitelived trade names recorded following impairments 2013 recorded 50 million impairment charge related dyc trade name 2012 recorded 16 million impairment charge related larios trade name 2011 recorded 31 million impairment related dyc larios trade names refer note 12 goodwill intangible assets notes consolidated financial statements part ii item 8 report information december 31 2013 impairment charge dyc trade name carrying value 44 million also reassessed remaining life dyc trade name concluded longer indefinite december 31 2013 reclassified dyc trade name definitelived asset estimated remaining life 30 years based expectations brand’s contributions future cash flows considering factors current longterm market outlook plans ongoing trade name support promotion strength brand strength brand category brand competes among factors december 31 2013 two indefinitelived trade names pinnacle sauza aggregate carrying value approximately 692 million 10 reduction fair value would trigger impairment significant estimates assumptions influence fair value trade names include expected branded product sales included operating plans longerterm market growth rates particular spirits categories geographies expected profit margins products sold using brands terminal revenue growth rates weighted average cost capital pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits use various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates recognize expense obligations associated plans review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets calculate pension costs recognizing year’s asset gains losses fiveyear period expected return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments bond portfolio used selection discount rate generally comprised high quality bonds specific country plan effects actual results differing assumptions effects changing assumptions included unamortized net gains losses unamortized gains losses outside specified corridor amortized future periods therefore generally affect recognized expense future periods amounts recognized component net expense approximately 26 years 12 years us plans nonus plans respectively amortization period actuarial losses much longer us plans compared nonus plans us plans amortize losses estimated life participant rather service period benefits us plans frozen believe assumptions utilized recording obligations plans reasonable based experience however differences actual experience changes assumptions may materially affect business results operations cash flows financial condition unfunded status us pension plans decreased approximately 46 million 2013 primarily due plan asset returns actuarial gains partly attributable increase assumed discount rate partially offset interest cost see note 17 pension postretirement benefits notes consolidated financial statements part ii item 8 report information related plan assets obligations assumptions hypothetical 25 basis point increasedecrease assumed weightedaverage discount rate used actuarial valuation pension plan obligation december 31 2013 would decreaseincrease estimated pretax annual 2014 expense approximately 05 million hypothetical 25 basis point increasedecrease assumed weightedaverage longterm rate return plan assets used actuarial valuation pension plan obligation december 31 2013 would decreaseincrease estimated pretax annual 2014 expense approximately 10 million refer note 17 pension postretirement benefits notes consolidated financial statements part ii item 8 report information pension plans impact 1 increasedecrease health care cost trend rate expense related postretirement benefit plan obligation expense litigation contingencies subject risks related threatened pending litigation routinely defendants lawsuits associated normal conduct business liabilities costs associated litigation related loss contingencies require estimates judgments based knowledge facts circumstances surrounding matter advice legal counsel record liabilities litigation related losses loss probable reasonably estimate amount loss evaluate measurement recorded liabilities reporting period based current facts circumstances specific matter ultimate losses incurred upon final resolution litigation related loss contingencies may differ materially estimated liability recorded particular balance sheet date changes estimates recorded earnings period changes occur see note 18 commitments contingencies notes consolidated financial statements part ii item 8 form 10k environmental matters subject federal state laws regulations relating protection environment including regulations related remediating hazardous wastes december 31 2013 2012 estimated liabilities related environmental matters 16 million 15 million respectively included noncurrent liabilities consolidated balance sheet liabilities remediation obligations based undiscounted future cash flows fourth quarter 2012 increased estimated liability reflect revised remediation plan site related discontinued operation revision remediation plan made increase certainty completing required remediation expense associated increase estimated liability recorded “loss income discontinued operations net tax” consolidated statement income possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts may undertake future due status laws regulations technology information related individual sites uncertainties believe cost complying present environmental protection laws material adverse effect results operations cash flows financial condition item 7aitem 7 managements discussion analysis financial condition results operations see discussion analysis captions results operations financial condition contained 1994 annual report stockholders registrant discussion analysis incorporated herein reference item 8item 7 management’s discussion analysis financial condition results operations consolidated summary fortune brands inc holding company subsidiaries make sell leading consumer branded products following industries home hardware spirits wine golf products office products enhance shareholder value building leading consumer brands drive sales earn profits generate cash developing innovative new products effective marketing campaigns expanding customer relationships also seek increase profits improving operations increasing productivity enhancing cost structures first priority internal growth also strive achieve growth high returns acquisitions dispositions joint ventures finally enhance shareholder value initiatives using financial resources repurchase shares pay attractive dividends 2004 excellent year broadbased success fortune brands net income diluted earnings per share increased 35 2004 7838 million 523 respectively increase profits due primarily benefit strong operating performance well taxrelated benefits favorable foreign exchange rates impact acquisitions net sales increased 18 73 billion result strong underlying growth benefit acquisitions favorable foreign exchange price increases implemented help offset commodity cost increases indicated business segments achieved excellent performance 2004 home hardware business achieved strong doubledigit growth operating income 24 sales 30 resulting successful line extensions new product introductions expanded customer relationships cabinets doors fullyear consolidation growth thermatru well productivity improvements acquisitions contributed approximately half increase sales spirits wine business achieved 10 growth operating income 7 growth sales due strong worldwide volume growth jim beam bourbon brand higher pricing favorable foreign exchange strength successful new products golf brands achieved 11 increase operating income 8 growth sales office business achieved 91 growth operating income 7 increase sales benefiting continuing savings repositioning program sharper marketplace focus well favorable foreign exchange 2005 company well positioned another year strong performance believe company benefit following trends businesses aging population trends us favorably impact conditions home improvement golf spirits wine industries additional favorable longterm demographics home improvement housing industries particularly kitchen bath segment including rising household formations increasing household wealth expanded customer relationships particularly home hardware continued growth key spirits wine markets especially premium superpremium segments investments behind brands segments continuous innovation international growth opportunities golf business improving conditions whitecollar employment benefiting office products industry company also identified following risks challenges may impact businesses continued consolidation company’s trade customers increased competition privatelabel products particularly office home hardware businesses potential impact changes interest rates housing market possible continuing increases commodity costs particularly steel particleboard fuelrelated costs impact external conditions economic conditions weather destination travel corporate spending overall golf ball demand results operations 2004 compared 2003 fortune brands achieved strong results net sales increased 18 net income increased 35 net sales grew result strong growth consumer brands driven share gains key markets resulting successful new products expanded customer relationships solid market growth home hardware spirits wine markets net income increased partly offset increased commodity costs operating units face challenges opportunities unique industries discussed report net sales net sales increased 11064 million 18 73 billion sales benefited newly introduced products line extensions home hardware golf office businesses 622 million total partly offset lower sales certain products discontinued golf office home hardware businesses net impact 388 million acquisitions primarily thermatru dispositions expanded customer relationships driving increased volume primarily cabinet entry door businesses cost products sold cost products sold increased 6792 million 20 higher net sales increased costs major commodities range 6570 million particularly steel particleboard primarily home hardware office businesses partly offset supply chain efficiencies excise taxes spirits wine us excise taxes spirits wine decreased percentage sales due greater international sales well favorable mix shift midtier brands premium superpremium spirits wines us excise taxes levied based proof content spirits wine products consistent industry practice us excise taxes collected customers reflected sales corresponding payments government cost products sold advertising selling general administrative expenses advertising selling general administrative expenses increased 2083 million 13 result higher sales acquisitions well increased advertising marketing expenditures partially offset cost savings achieved result restructuring programs particularly office business amortization intangibles amortization intangibles increased 178 million 94 primarily due amortization identifiable intangibles associated acquisition thermatru restructuring charges 2004 recorded pretax restructuring charges 292 million compared 195 million 2003 charges 2004 principally related consolidation manufacturing facilities supply chain streamlining largely office home hardware businesses income net income net increased 95 million 502 million primarily due 120 million gain recorded 2004 result insurance proceeds related kentucky bourbon warehouse fire 2003 partly offset lower taxrelated interest income components income net years ended december 31 2004 2003 follows income taxes income taxes decreased 62 million 2 higher net income recorded higher taxrelated benefits 2004 1056 million compared 2003 350 million reported effective income tax rates twelve months ended december 31 2004 2003 261 327 respectively items set forth impacted effective income tax rate third quarter 2004 internal revenue service concluded field examination phase routine review 19972001 tax returns result audit recorded net tax reserve reversal 492 million net reversal accounts release reserves items resolved favorably anticipated partly offset disallowance deduction reserve established fourth quarter 2004 congressional joint committee taxation completed review results routine irs examination 19972001 tax returns recorded total tax benefit 530 million 036 per diluted share reflecting completion joint committee review resulted reversal tax reserves 395 million net tax adjustment 135 million result conclusion irs examination 19972001 tax years expect receive tax refund approximately 56 million first half 2005 fourth quarter 2004 also recorded onetime nonoperating adjustment interest income taxes receivable related taxrelated benefits 21 million tax 001 per diluted share recorded income fourth quarter 2004 recorded tax benefit 34 million 003 per diluted share associated foreign earnings repatriation provisions american jobs creation act 2004 2003 audit 19931996 tax returns resulted reduction tax expense 35 million 023 per diluted share result also recorded onetime nonoperating adjustment 69 million interest income tax recorded income net income net income increased 2046 million 35 7838 million due primarily strong broadbased operating performance higher taxrelated benefits 1077 million 2004 compared 419 million 2003 benefit favorable foreign exchange 18 million impact acquisitions diluted earnings per share 523 2004 35 2003 pension plans periodic basis evaluate assumptions used determining pension liabilities assets well pension expense based historical returns plan assets current economic conditions time assumptions set december 2003 review economic assumptions underlying pension expense yearend disclosure led reduction weightedaverage discount rate 66 61 weightedaverage expected rate return remained unchanged 83 2003 revisions led increase approximately 5 million pension expense 374 million 2004 december 2004 review economic assumptions led reduction weightedaverage discount rate 61 59 weightedaverage expected rate return remained unchanged 83 management believes assumptions appropriate 2004 revisions result increase pension expense approximately 4 million 2005 total pension plan cash contributions 1007 million 1235 million respectively 2004 2003 company maintains pension plans operations pension plans aggregate funded excess accumulated benefit obligation 2005 expect make cash contributions approximately 40 70 million fund existing pension liabilities definedbenefit plans believe internally generated funds adequate make pension plan cash contributions international performance derived approximately 27 2004 28 2003 operating income international markets principally canada united kingdom australia decrease portion operating income attributable international markets resulted primarily incremental sales acquisitions mainly us fluctuations exchange rates foreign currencies may affect results future periods fluctuations average foreign exchange rates increased 2004 operating income approximately 3 cannot accurately predict fluctuations foreign exchange rates 10 change average exchange rates foreign currencies 2004 average rates would resulted change operating income approximately 26 million 2 2003 compared 2002 net sales net sales increased 5368 million 95 62 billion sales benefited principally increased volume associated line extensions introduction new products golf home hardware businesses 241 million aggregate acquisitions 220 million including omega 2002 favorable foreign exchange 137 million benefits partly offset lower volumes existing product lines office business well divestiture nonstrategic plumbing parts business home hardware november 2002 53 million cost products sold cost products sold increased 2987 million 10 primarily higher sales excise taxes spirits wine us excise taxes spirits wine decreased 91 million 3 due lower volume nonpremium products us advertising selling general administrative expenses advertising selling general administrative expenses increased 1279 million 9 increased support cabinet growth golf marketing costs commissions higher sales amortization intangibles amortization intangibles increased 28 million 17 due full year amortization finitelived intangibles 2002 omega acquisition writedown identifiable intangibles recorded writedown identifiable intangibles 120 million 80 million tax recognize diminished values certain trade names conjunction repositioning plans office business restructuring charges 2003 recorded pretax restructuring charges 195 million charges principally related consolidation manufacturing distribution facilities employee termination costs office business 173 million well consolidation ball plant facilities golf business 22 million 195 million restructuring charges 115 million related disposal assets 69 million employee terminations costs 11 million termination lease agreements income net income net decreased 30 million 407 million components income net years ended december 31 2003 2002 follows income taxes income taxes increased 750 million 35 recorded lower taxrelated benefit 2003 compared 2002 reported effective income tax rates twelve months ended december 31 2003 2002 327 283 respectively effective income tax rate affected following items 2003 audit 19931996 tax returns resulted reduction tax expense 35 million 2002 recorded 617 million tax benefit resulted new irs regulations reinterpreted capital loss disallowance rules new regulations enabled us utilize previously disallowed capital tax loss offset capital gains taxed 1996 1997 addition 2003 effective rate affected nondeductible noncash restructuring restructuringrelated charges net income net income increased 536 million 10 5792 million due primarily strong broadbased operating performance benefit favorable foreign exchange 23 million lower restructuring charges 16 million impact acquisitions 15 million part offset lower taxrelated benefit 2002 350 million 2003 compared 617 million 2002 diluted earnings per share 386 2003 13 2002 earnings per share benefited higher net income share repurchase program pending litigation see note 23 “pending litigaiton” consolidated financial statements item 8 10k environmental matters along responsible parties subsidiaries face claims relating protection environment february 10 2005 various subsidiaries designated potentially responsible parties “superfund” similar state laws 60 instances reached settlements 40 instances believe cost complying present environmental protection laws considering estimated recoveries either responsible parties insurance material adverse effect upon results operations cash flows financial condition december 31 2004 2003 accrued 462 million 485 million respectively cover matters related party transactions future brands llc 2001 spirits wine business completed transactions vs vin sprit ab vs creating future brands joint venture distributes companies’ spirits brands united states provides related selling invoicing services future brands receives commission partners services provided jbbco records revenue time shipment future brands’ customers part forming joint venture jbbco event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2004 2003 jbbco hav e outstanding obligations result arrangement jbbco’s balances related future brands included following maxxium worldwide bv 1999 spirits wine business formed international sales distribution joint venture named maxxium worldwide bv maxxium distribute sell spirits wine key markets outside united states joint venture partners include remycointreau highland distillers vs jbbco records sales time spirits sold third parties rather time shipment maxxium result forming joint venture company guaranteed certain credit facilities bank loans entered maxxium amount totaling 85 million 76 million outstanding december 31 2004 december 31 2003 guarantees totaled 79 million 69 million outstanding jbbw executed shareholder loan facility loan facility maxxium amounts outstanding loan facility either december 31 2004 december 31 2003 loan facility expires june 30 2006 jbbco’s balances related maximum included following recently issued accounting standards january 2003 financial accounting standards board fasb issued interpretation 46 fin 46 “consolidation variable interest entities” effective newly created variable interested entities january 31 2003 effective existing variable interest entities october 1 2003 objective fin 46 improve financial reporting companies transactions involving variable interest entities december 2003 fasb issued revision fin 46 fin46r fin 46 fin 46r material impact results financial position may 2004 fasb issued fasb staff position 1062 fsp 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 ’the medicare prescription act’” fsp 1062 provides guidance accounting disclosure effects medicare prescription act enacted december 2003 medicare prescription act provide prescription drug benefit medicare part well provide federal subsidy employers provide program prescription drug benefits least actuarially equivalent medicare part adopted fsp 1062 prospectively third quarter 2004 several postretirement plans qualify federal subsidy however adoption fsp 1062 material impact results operations subsidy result lower future expense reduced accumulated postretirement benefit obligation 109 million 6 december 2004 fasb issued fasb staff position 1092 fsp 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 act” act provides special onetime dividends received deduction repatriation foreign earnings result fsp 1092 recorded income tax benefit 34 million 2004 see note 13 “income taxes” consolidated financial statements december 2004 fasb issued financial accounting standards 123 revised 2004 fas 123r “sharebased payment” fas 123r replaces fas 123 “accounting stockbased compensation” supersedes apb opinion 25 “accounting stock issued employees” fas 123r requires compensation expense measured fair value grant date related sharebased payment transactions recognized financial statements period employee provides service exchange award intend adopt fas 123r using “modified prospective” transition method defined fas 123r modified prospective method companies required record compensation cost new modified awards related vesting period awards prospectively record compensation cost prospectively unvested portion date adopti fas 123r previously issued outstanding awards remaining vesting period awards fas 123r effective third quarter 2005 evaluating impact fas 123r results operations financial position critical accounting policies estimates accounting policies described note 1 “significant accounting policies” consolidated financial statements consolidated financial statements prepared conformity generally accepted accounting principles preparation financial statements requires us make judgments estimates assumptions affect amounts assets liabilities financial statements revenues expenses reporting periods believe following company’s critical accounting policies due significant subjective complex judgments estimates used preparing consolidated financial statements regularly review assumptions estimates based historical experience allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns trade receivables include interest allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns 610 million 635 million december 31 2004 december 31 2003 respectively inventories priced lower cost principally firstin firstout average minor amounts lastin firstout market accordance generally recognized trade practice bulk whiskey inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory reserves recorded obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns specific identification items product discontinuance engineeringmaterial changes property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed estimated useful lives related assets follows longlived assets accordance statement financial accounting standards 144 fas 144 “accounting impairment disposal longlived assets” longlived asset including amortizable identifiable intangibles asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate time future cash flow derived recent business projections comparison indicates impairment amount impairment calculated using quoted market price unavailable using discounted expected future cash flows discount ra te applied cash flows based weightedaverage cost capital represents blended aftertax costs debt equity goodwill indefinitelived intangibles accordance statement financial accounting standards 142 fas 142 “goodwill intangible assets” goodwill tested impairment annual basis certain circumstances written impaired interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates use rate corresponding cost capital risk adjusted appropriate determining discounted cash flows estimated cash flows determined disaggregating business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill perform impairment test measure recognize amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting unit’s goodwill implied fair value goodwill determining estimated future cash flows consider current nd projected future levels income well business trends prospects market economic conditions fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangibles impairment annually whenever market business events indicate may potential impact intangible consider implications external eg market growth pricing competition technology internal factors eg product costs margins support expenses capital investment potential impact cash flows business near long term well impact identifiable intangible asset associated business based recent business results consideration significant external internal factors resulting business projections indefinitelived intangible assets associated segment reviewed determine whether likely remain indefinitelived whether finite life appropriate addition based events period future expectations management considers whether potential impairment exists required fas 142 predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize profit split methodology customary valuation practice establish reasonable royalty rate profit split analyses allocate economic income ebitda less returns working capital fixed assets employed tradename residual assets economic unit determine expected profit margin associated commercialization tr adename additionally independent valuation experts used periodic review testing management’s assumptions relative significant trade valuations lives independent research market competitive dynamics conjunction ongoing review carrying value identifiable intangibles year ended december 31 2004 writedowns intangible assets year ended december 31 2003 recorded noncash writedown identifiable intangibles 120 million 80 million tax 005 basic diluted per share recognize diminished values certain trade names conjunction repositioning plans office business warranty reserves offer customers various warranty terms based upon type product sold determine warranty expense accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category generally record warranty expense cost products sold time sale refer note 16 “product warranties” consolidated financial statements warranty expense years ended december 31 2004 2003 2002 339 million 287 million 234 million respectively employee benefit plans provide range benefits employees retired employees including pensions postretirement postemployment health care benefits record annual amounts relating plans based calculations specified generally accepted accounting principles include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current rates trends deemed appropriate required united states generally accepted accounting principles effect modifications generally recorded amortized future periods believe assumptions utilized recording obligations company’s plans reasonable based experience advice inde pendent actuaries pension expenses 374 million 281 million 217 million respectively years ended december 31 2004 2003 2002 postretirement expenses 141 million 115 million 101 million respectively years ended december 31 2004 2003 2002 2005 expect pension expense approximately 41 million postretirement benefit expense approximately 15 million 25 basis point change 025 discount rate assumption would lead increase decrease pension expense postretirement benefit expense approximately 5 million 05 million respectively 2005 25 basis point change longterm rate return used accounting company’s pension plans would 26 million impact pension expense income taxes accordance statement financial accounting standards 109 “accounting income taxes” establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse provide deferred taxes undistributed earnings foreign subsidiaries expect permanently reinvest undistributed earnings foreign subsidiaries aggregate 3976 million december 31 2004 revenue recognition accordance staff accounting bulletin 104 “revenue recognition” recognize revenue products shipped customers net applicable provisions discounts returns allowances criteria recognition revenue whether title risk loss passed customer persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility reasonably assured also provide estimate potential bad debt time revenue recognition amounts billed shipping handling classified “net sales” consolidated income statement costs incurred shipping handling classified “advertising selling general administrative expenses” shipping handling costs included “advertising selling general administrative expenses” 2853 million 2436 million 2345 2004 2003 2002 respectively customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sellthrough business’ products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances accounted reductions gross sales costs recorded time sale based management’s best estimates based historical projected experience type program customer management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations stockbased compensation apply accounting principles board opinion 25 “accounting stock issued employees” related interpretations accounting stock options accordingly compensation expense recognized stock option plans statement financial accounting standards 148 fas 148 “accounting stockbased compensationtransition disclosure” requires disclosure pro forma net income pro forma earnings per share amounts compensation expense recognized required disclosure fas 148 allows use fairvalue method measure compensation expense accordingly adopted use blackscholes optionpricing model determine compensation expense disclosure purposes model requires use following assumptions expected dividend yield expected volatility riskfree interest rate expected term weighted average fair value options granted years ended december 31 2004 2003 2002 1647 1340 1163 respectively per option based upon range provided assumptions utilized alternative fairvalues per option would materially differed fair values listed example change expected term 45 5 years would 078 5 impact weightedaverage fair value options granted year ended december 31 2004 fas 148 applied pro forma diluted eps impact would decrease 017 012 010 per share respectively 2004 2003 2002 derivative financial instruments accordance statement financial accounting standards 133 fas 133 “accounting derivative instruments hedging activities” related amendment statement financial accounting standards 138 fas 138 “accounting certain derivative instruments certain hedging activities” derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affe cts earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized years ended december 31 2004 2003 23 million 33 million deferred losses respectively reclassified cost products sold estimate 96 million derivative loss included oci december 31 2004 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions principal currencies hedged include canadian dollar euro australian dollar pound sterling interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amounts record payments receipts agreements adjustments interest expense december 31 2004 2003 outstanding interest rate swap agreements aggregate notional principal amount 200 million swap agreements based outstanding 2875 notes due 2006 allow swap agreements classified fair value hedge accordance fas 133 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate cost initiatives continuously evaluate productivity supply chains existing asset base actively seek identify opportunities improve cost structure future opportunities may involve among things reorganization operations relocation manufacturing assembly locations generally lower costs efficient sourcing products components third party suppliers implementing significant cost reduction efficiency opportunities could result charges results operations segment home hardware 2004 compared 2003 net sales increased 8638 million 30 increase attributable impact acquisitions thermatru capital cabinets american lock dudley sentinel aggregate 382 million excluding internal growth line extensions new products 317 million expanded customer relationships particularly cabinets entry doors robust housing market price increases select products well favorable foreign exchange 24 million operating income increased 1172 million 24 benefit acquisitions higher sales productivity improvements partially offset higher commodity costs particularly steel particleboard restructuring restructuringrelated charges year june 2004 thermatru acquired sentinel doors ltd leading uk manufacturer installer complete composite entry door systems master lock acquired assets dudley inc leading brand school locker locks canada aggregate purchase price two acquisitions 309 million november 2003 home hardware business acquired thermatru holdings inc leading manufacturer residential entry door systems united states acquisition price 9240 million june 2003 masterbrand cabinets acquired capital cabinet corporation usbased manufacturer kitchen bath cabinets april 2003 master lock acquired american lock company largest us based manufacturer solid body commercial padlocks october 2003 waterloo industries announced plans consolidate manufacturing four facilities three related action 2004 waterloo recorded restructuring restructuringrelated charges complete program expect home hardware business continue benefit expanding customer relationships well strong longterm demographic trends supporting home repair remodeling new home construction markets particularly kitchen bath products residential door systems trends include factors growth number us households increases household wealth aging housing stock home hardware business may impacted us economic conditions including mortgage interest rates potential impact us housing remodeling markets business may also affected additional increases costs certain commodities including higher fuelrelated costs although higher costs believe continue largely offset select price increases addition home hardware business continues face pricing pressure associated consolidation industry customer base consolidation may also present opportunities efficient suppliers 2003 compared 2002 net sales increased 3677 million 15 increase attributable strong underlying operating performance fullyear consolidation omega acquired 2002 acquisitions thermatru american lock capital cabinet 163 million acquisitions aggregate successful line extensions new product introductions 157 million principally cabinets faucets well expanded customer relationships sales growth tempered absence divested plumbing parts business 53 million soft retail volume tool storage business operating income increased 828 million 21 higher sales productivity improvements absence lowreturn plumbing product lines sold 2002 4 million partially offset higher operating expenses including increased commissions higher sales additional support cabinet business growth increased amortization instore cabinet displays spirits wine 2004 compared 2003 net sales increased 783 million 7 principally favorable foreign exchange 27 million strong worldwide growth jim beam bourbon higher pricing jim beam bourbon midtier brands us acquisition wild horse winery operating income increased 309 million 10 higher sales favorable foreign exchange partly offset increased investment key brandbuilding initiatives expect spirits wine business benefit growth premium superpremium spirits markets focuses product development marketing activities factors spirits wine industry could adversely affect results include possible consolidation suppliers distributors retailers possible excise tax increases increased regulation class actions andor litigation price competition 2003 compared 2002 net sales increased 585 million 6 benefit foreign exchange 35 million growth underlying sales 17 million primarily jim beam readytodrink products australia higher sales dekuyper cordials superpremium spirits us higher pricing jim beam bourbon benefits partly offset decreased volumes nonpremium products us operating income increased 265 million 10 benefiting favorable foreign exchange higher revenues partly offset increased selling marketing administration costs 12 million golf 2004 compared 2003 net sales increased 905 million 8 increase attributable continued volume growth across categories golf clubs golf balls golf footwear gloves accessories66 million driven introduction successful new golf products line extensions well favorable foreign exchange 31 million operating income increased 147 million 11 higher sales favorable foreign exchange increased sales higher margin titleist golf balls april 2003 golf business announced plans consolidate three golf ball manufacturing facilities two newest production facilities consolidation created manufacturing efficiencies preserving capacity meet expected demand related consolidation 2004 recorded 62 million pretax restructuring restructuringrelated charges complete program us golf industry highly competitive despite favorable demographics aging population rounds play increase age rounds play us decreased past four years essentially flat 2004 result combination decreased golfrelated travel economic conditions lower corporate spending weather conditions competitors high inventories marketplace especially clubs resorted significant price discounting retail inventories golf products excessive maintained relatively strong pricing current products future success golf business depend upon continued innovation marketing across product categories 2003 compared 2002 net sales increased 1141 million 11 increase led significant share gains across product categories benefiting line extensions introduction successful new golf club golf ball products 78 million well favorable foreign exchange 30 million favorable product mix golf business achieved sales growth share gains despite 3 reduction rounds play us operating income increased 93 million 7 benefiting higher sales favorable foreign exchange increase partially offset higher marketing costs well restructuringrelated charges 6 million office 2004 compared 2003 net sales increased 738 million 7 increase principally related favorable foreign exchange 55 million higher sales us driven volume growth including kensington computer accessories swingline stapling products wilson jones bindery products operating income increased 522 million 91 1098 million benefit business’ ongoing repositioning program including successful supply chain realignment cost reduction initiatives favorable foreign exchange increases sales volume partly offset higher commodity costs particularly steel office products industry concentrated small number major customers principally office products superstores large retailers wholesalers contract stationers customer consolidation share growth privatelabel products continue increase pricing pressures may adversely affect margins office products group competitors office business addresses challenges design innovation valueadded features services since 2001 repositioning restructuring office business improve financial results longterm value business plan office business significantly realigned streamlined worldwide operations intensified focus growing profitable core products reduced overhead expenses excess capacity recorded final charges restructuring program second quarter 2004 recorded total pretax restructuring restructuringrelated charges 276 million reduced business’ manufacturing distribution square footage approximately 40 percent providing significant cost savings actions also generated significant working capital improvements 2003 compared 2002 net sales 11 billion flat 2002 sales benefited favorable foreign exchange 56 million new products offset lower sales us uk due soft industry conditions including higher us whitecollar unemployment continued share gain privatelabel products operating income increased 302 million 110 576 million benefiting business’ ongoing repositioning program including successful cost reductions well favorable foreign exchange quarterly financial data fortune brands inc subsidiaries unaudited millions except per share amounts financial condition net cash provided operating activities cash generation continued strong 2004 net cash provided operating activities 2004 7919 million compared 7907 million 2003 principal items impacting change higher net income 2004 improved working capital efficiency receipt insurance proceeds jim beam warehouse fire last year offset higher working capital support sales growth accounts receivable inventory well timing accounts receivable payments receivable 2005 instead 2004 absence tax refund received 2003 net cash used investing activities net cash used investing activities year ended december 31 2004 2453 million compared net cash used 12296 million year ended december 31 2003 main reason decrease less investment acquisitions 2004 capital expenditures focus capital spending growth initiatives becoming lowest cost producers highest quality products capital expenditures 2004 2417 million 48 million higher 2003 primarily due 2004 spending thermatru home hardware acquired november 2003 currently estimate 2005 capital expenditures range 225 250 million expect generate funds internally acquisitions dispositions joint ventures 2004 thermatru acquired sentinel doors ltd leading uk manufacturer installer complete composite entry door systems master lock acquired assets dudley inc leading brand school locker locks canada aggregate purchase price two acquisitions 309 million 2003 home hardware business acquired thermatru holdings inc net cash 9240 million addition subsidiaries also acquired wild horse winery capital cabinet corporation american lock company renewed licenses gilbey’s gin vodka acquired trademark rights kamchatka vodka brand california aggregate cost acquisitions 1237 million net cash provided used financing activities net cash used financing activities year ended december 31 2004 5156 million compared net cash provided 5154 million 2003 change 10 billion primarily due issuance longterm debt 599 million net 2003 fund acquisition thermatru higher share repurchases 2004 november 2003 acquired thermatru holdings inc net cash 9240 million initial financing acquisition executed issuance commercial paper subsequently partially paid two longterm debt issues totaling 600 million included 300 million threeyear notes 300 million tenyear notes dividends 2004 paid common dividends 126 per share dividends paid common stockholders 2004 increased 1829 million 1669 million 2003 increase dividend rate offset lower shares outstanding september 28 2004 dividend payment increased common stock quarterly dividend 10 033 per share indicated annual rate 132 per share reflecting strength cash flow operating performance confidence liquidity capital resources december 31 2004 total debt decreased 638 million 19 billion shortterm debt longterm debt decreased 607 million 31 million respectively total debttototal capital ratio decreased 348 december 31 2004 390 december 31 2003 decrease primarily result lower debt coupled higher equity due net income excess dividends share repurchases december 31 2004 2 billion debt equity securities available public sale universal shelf registration securities exchange commission december 31 2004 maintained 10 billion fiveyear revolving credit agreement various banks company entered july 2004 interest rate set time borrowing facility fee 008 per annum subject increases maximum fee 015 per annum event longterm debt rating falls specified levels borrowings agreements made general corporate purposes including acquisitions share repurchases support company’s shortterm borrowings commercial paper market believe internally generated funds together access global credit markets adequate meet capital needs short longterm working capital current assets net current liabilities increased 4578 million 6059 million december 31 2004 principal reasons increase higher accounts receivable primarily due fourth quarter sales growth increased inventories support growth home hardware companies higher bulk inventories spirits wine partly offset improvements working capital efficiency foreign exchange investments various foreign countries principally united kingdom well australia canada therefore changes value currencies countries affect balance sheet cash flow statements translated us dollars interest rates may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense december 31 2004 2003 company outstanding interest rate swap agreements aggregate notional principal amount 200 million swap agreements based outstanding 2875 notes due 2006 allow agreements classified fair value hedge accordance fas 133 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate fair market value longterm fixed interest rate debt subject interest rate risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value 12399 million 14431 million total longterm debt including current portion december 31 2004 2003 approximately 13418 million 15648 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity minority interest consolidated subsidiaries minority interest consolidated subsidiaries increased 39 million 3734 million stockholders’ equity stockholders’ equity yearend 2004 increased 4901 million principally due higher net income partly offset dividends share repurchases purchased open market purchases 3264 million 44 million shares 2072 million 41 million shares common stock 2004 2003 respectively common stock repurchase program february 24 2004 board directors approved share repurchase program pursuant could purchase 5000000 shares common stock march 1 2004 february 28 2005 2004 repurchased aggregate 44 million shares common stock average purchase price 7358 per share program february 22 2005 board directors approved new share repurchase program authorizes management purchase 5000000 shares open market transactions privately negotiated transactions march 1 2005 february 28 2006 program approved february 22 2005 replaces similar program described expired february 28 2005 prior program board directors also granted authority board’s executive committee authorize purchase upto additional 5000000 shares prior february 28 2006 extent executive committee determines appropriate contractual obligations commercial commitments following table discussion represent obligations commitments make future payments contracts debt lease agreements contingent commitments debt guarantees december 31 2004 1 purchase obligations include contracts raw material finished goods purchases advertising selling administrative services capital expenditures addition contractual obligations listed also commercial commitments contingently liable december 31 2004 include guarantee certain credit facilities bank loans entered maxxium amount totaling 85 million amount expires less one year entire 85 million due one three years shareholder loan facility executed jbbw maxxium amounting 20 million amounts outstanding expires one three years standby letters credit 541 million 406 million due less one year remaining 135 million due one three years surety bonds 220 million 215 million due less one year remaining 05 million due one three years addition vs holds option may require us repurchase jbb w preferred stock vs purchased 3445 million net returns capital fair value whole part time may 31 2004 upon change control jbbw jbbco certain events contingent commitments expected significant impact liquidity addition obligations described jbbco event default future brands required satisfy certain future brands’ financial obligations include limited making payments suppliers employees parties future brands contracts material offbalance sheet obligations item 7aitem 7 managements discussion analysis financial condition results operations see discussion analysis captions results operations financial condition contained 1997 annual report stockholders registrant discussion analysis incorporated herein reference item 7aitem 7 managements discussion analysis financial condition results operations see discussion analysis captions results operations financial condition contained 1998 annual report stockholders registrant discussion analysis incorporated herein reference item 7a nannannanitem 7a quantitative qualitative disclosures market risk see discussion analysis market risk foreign exchange contracts interest rates caption financial condition 1999 annual report stockholders registrant discussion incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk see discussion analysis market risk foreign exchange contracts interest rates caption financial condition 2000 annual report stockholders registrant discussion incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk see discussion analysis market risk foreign exchange contracts interest rates caption financial condition 2001 annual report stockholders registrant discussion incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes foreign currency exchange rates interest rates market risk potential loss arising adverse changes market rates prices foreign currency exchange interest rates enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes foreign currency exchange rates interest rates counterparties major financial institutions foreign exchange contracts enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates principal financial instruments used forward foreign exchange contracts interest rate swaps counterparties major financial institutions although theoretical risk replacement cost estimated fair value instruments management believes risk incurring losses remote losses would immaterial enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign operating companies part risk management procedure use valueatrisk var computation estimate potential economic loss could incur adverse changes foreign exchange rates var estimations intended measure maximum amount loss adverse market movements foreign exchange rates given specified confidence level given period time var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimates loss fair market value using statistical modeling techniques estimated fair value loss shown table material impact current results operations financial condition also use var model construed endorsement accuracy related assumptions following table summarizes estimated loss var model december 31 2002 2001 respectively 95 confidence interval signifies degree confidence actual losses would exceed estimated losses shown amounts shown disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices december 31 2002 2001 fair value outstanding contracts contract amounts essentially commodities subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use futures contracts manage volatility pricing certain commodities exposures considered material financial statements item 8item 7aquantitative qualitative disclosures market risk market risk exposed various market risks including changes foreign currency exchange rates interest rates market risk potential loss arising adverse changes market rates prices foreign currency exchange interest rates enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes foreign currency exchange rates interest rates counterparties major financial institutions interest rate risk disclosure interest rate risk required provided item set forth “item 7 mda financial condition interest rates” incorporated herein reference foreign exchange contracts enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries part risk management procedure use valueatrisk var computation estimate potential economic loss could incur adverse changes foreign exchange rates var estimations intended measure maximum amount loss adverse market movements foreign exchange rates given specified confidence level given period time var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimates loss fair market value using statistical modeling techniques estimated fair value loss shown table material impact current results operations financial condition also use var model construed endorsement accuracy related assumptions following table summarizes estimated loss var model december 31 2003 2002 respectively 95 confidence interval signifies degree confidence actual losses would exceed estimated losses shown amounts shown disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices december 31 2003 2002 fair value outstanding contracts contract amounts essentially commodities subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility exposures contracts considered material financial statements item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes foreign currency exchange rates interest rates market risk potential loss arising adverse changes market rates prices foreign currency exchange interest rates enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes foreign currency exchange rates interest rates counterparties major financial institutions interest rate risk disclosure interest rate risk required provided item set forth “item 7 management’s discussion analysis liquidity capital resources interest rates” incorporated herein reference hypothetical 20 basis point change interest rates affecting company’s variable rate borrowings would material effect results operations foreign exchange risk enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries indicated analysis follows estimated potential loss foreign exchange contracts movement foreign exchange rates would material impact current results operations financial condition part risk management procedure use valueatrisk var computation estimate potential economic loss could incur adverse changes foreign exchange rates var estimations intended measure maximum amount loss adverse market movements foreign exchange rates given specified confidence level given period time var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimates loss fair market value using statistical modeling techniques estimated fair value loss shown table material impact current results operations financial condition also use var model construed endorsement var model accuracy related assumptions following table summarizes estimated loss var model december 31 2005 2004 respectively 95 confidence interval signifies degree confidence actual losses foreign exchange contracts would exceed estimated losses shown amounts shown disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices december 31 2005 2004 fair value outstanding contracts book value contracts essentially commodities subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility exposures contracts considered material financial statements item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes interest rates foreign currency exchange rates commodity prices market risk potential loss arising adverse changes market rates prices interest rates foreign currency exchange rates commodity prices enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes interest rates foreign currency exchange rates commodity prices counterparties major financial institutions interest rate risk disclosure interest rate risk required provided item set forth item 7 managements discussion analysis liquidity capital resources interest rates incorporated herein reference hypothetical 20 basis point change interest rates affecting companys variable rate borrowings would material effect results operations foreign exchange rate risk enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries indicated analysis follows estimated potential loss foreign exchange contracts movement foreign exchange rates would material impact current results operations financial condition part risk management procedure use valueatrisk var computation estimate potential economic loss could incur adverse changes foreign exchange rates var estimations intended measure maximum amount loss foreign exchange contracts due adverse market movements foreign exchange rates given specified confidence level given period time var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimates loss fair market value using statistical modeling techniques estimated fair value loss shown table material impact current results operations financial condition also use var model construed endorsement var model accuracy related assumptions following table summarizes estimated loss var model december 31 2006 2005 respectively 95 confidence interval signifies degree confidence actual losses foreign exchange contracts would exceed estimated losses shown amounts shown disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices december 31 2006 2005 fair value outstanding contracts book value contracts essentially commodity price risk subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility exposures contracts could material financial statements item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes interest rates foreign currency exchange rates commodity prices market risk potential loss arising adverse changes market rates prices interest rates foreign currency exchange rates commodity prices enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes interest rates foreign currency exchange rates commodity prices counterparties major financial institutions interest rate risk disclosure interest rate risk required provided item set forth “item 7 management’s discussion analysis liquidity capital resources interest rates” incorporated herein reference hypothetical 100 basis point change interest rates affecting company’s variable rate borrowings would material effect results operations foreign exchange rate risk enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries indicated analysis follows estimated potential loss foreign exchange contracts movement foreign exchange rates would material impact current results operations financial condition part risk management procedure use valueatrisk var computation estimate potential economic loss could incur adverse changes foreign exchange rates var estimations intended measure maximum amount loss foreign exchange contracts due adverse market movements foreign exchange rates given specified confidence level given period time var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimates loss fair market value using statistical modeling techniques also use var model construed endorsement var model accuracy related assumptions following table summarizes estimated loss var model december 31 2007 2006 respectively 95 confidence interval signifies degree confidence actual losses foreign exchange contracts would exceed estimated losses shown amounts shown disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices commodity price risk subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility exposures contracts could material financial statements item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes interest rates foreign currency exchange rates commodity prices market risk potential loss arising adverse changes market rates prices interest rates foreign currency exchange rates commodity prices enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes interest rates foreign currency exchange rates commodity prices counterparties major financial institutions interest rate risk disclosure interest rate risk required provided item set forth “item 7 management’s discussion analysis liquidity capital resources interest rates” incorporated herein reference hypothetical 100 basis point change interest rates affecting company’s variable rate borrowings would impact pretax interest expense 85 million foreign exchange rate risk enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries indicated analysis follows estimated potential loss foreign exchange contracts movement foreign exchange rates would material impact current results operations financial condition part risk management procedure use valueatrisk var computation estimate potential economic loss could incur adverse changes foreign exchange rates var estimations intended measure maximum amount loss foreign exchange contracts due adverse market movements foreign exchange rates given specified confidence level given period time var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimates loss fair market value using statistical modeling techniques also use var model construed endorsement var model accuracy related assumptions following table summarizes estimated loss var model december 31 2008 2007 respectively increase var results foreign exchanges contracts greater volatility foreign exchange markets 95 confidence interval signifies degree confidence actual losses foreign exchange contracts would exceed estimated losses shown amounts shown disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices commodity price risk subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility exposures contracts could material financial statements item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes interest rates foreign currency exchange rates commodity prices market risk potential loss arising adverse changes market rates prices interest rates foreign currency exchange rates commodity prices enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes interest rates foreign currency exchange rates commodity prices counterparties major financial institutions interest rate risk disclosure interest rate risk required provided item set forth “item 7 management’s discussion analysis liquidity capital resources interest rates” incorporated herein reference hypothetical 100 basis point change interest rates affecting company’s variable rate borrowings would impact pretax interest expense 99 million foreign exchange rate risk enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries indicated analysis follows estimated potential loss foreign exchange contracts movement foreign exchange rates would material impact current results operations financial condition part risk management procedure use valueatrisk var computation estimate potential economic loss could incur adverse changes foreign exchange rates var estimations intended measure maximum amount loss foreign exchange contracts due adverse market movements foreign exchange rates given specified confidence level given period time var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimates loss fair market value using statistical modeling techniques also use var model construed endorsement var model accuracy related assumptions following table summarizes estimated loss var model december 31 2009 2008 respectively decrease var results foreign exchanges contracts greater volatility foreign exchange markets 95 confidence interval signifies degree confidence actual losses foreign exchange contracts would exceed estimated losses shown amounts shown disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices commodity price risk subject commodity price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors time use derivative contracts manage exposure commodity price volatility item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes interest rates foreign currency exchange rates commodity prices market risk potential loss arising adverse changes market rates prices interest rates foreign currency exchange rates commodity prices enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes interest rates foreign currency exchange rates commodity prices counterparties major financial institutions interest rate risk disclosure interest rate risk required provided item set forth “item 7 management’s discussion analysis liquidity capital resources interest rates” incorporated herein reference hypothetical 100 basis point change interest rates affecting company’s variable rate borrowings would impact pretax interest expense 98 million foreign exchange rate risk enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices estimated potential loss foreign exchange contracts movement foreign exchange rates would material impact results operations cash flows financial condition part risk management procedure use valueatrisk var sensitivity analysis model estimate maximum potential economic loss adverse changes foreign exchange rates oneday period given 95 confidence level var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimated maximum oneday loss company’s foreign currency exchange contracts using var model 51 million 55 million december 31 2010 2009 respectively 95 confidence interval signifies degree confidence actual losses foreign exchange contracts would exceed estimated losses amounts disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets var model risk analysis tool construed endorsement var model accuracy related assumptions commodity price risk subject commodity price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors time use derivative contracts manage exposure commodity price volatility item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes interest rates foreign currency exchange rates commodity prices market risk potential loss arising adverse changes market rates prices interest rates foreign currency exchange rates commodity prices enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes interest rates foreign currency exchange rates commodity prices counterparties major financial institutions interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount notional amount swaps outstanding december 31 2010 900 million swap agreements hedged changes fair value portion existing fixed rate debt result changes benchmark interest rate us libor swap agreements designated classified fair value hedges accordance authoritative guidance derivatives hedging third quarter 2011 terminated interest rate swaps notional amount 900 million conjunction planned debt retirements see note 15 debt notes consolidated financial statements part ii item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes interest rates foreign currency exchange rates commodity prices market risk potential loss arising adverse changes market rates prices interest rates foreign currency exchange rates commodity prices enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes interest rates foreign currency exchange rates may also enter financial instruments manage reduce impact changes commodity prices counterparties major financial institutions interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount 2012 entered fixedtofloating interest rate swaps aggregate notional amount 200 million swap agreements hedge changes fair value portion fixedrate debt result changes interest rates counterparty pays us fixed interest rate equal coupon debt pay counterparty floating interest rate based us libor plus fixed spread swap agreements designated fair value hedges third quarter 2011 terminated interest rate swaps outstanding time notional amount 900 million conjunction planned debt retirements see note 13 debt notes consolidated financial statements item 8item 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes interest rates foreign currency exchange rates commodity prices market risk potential loss arising adverse changes market rates prices interest rates foreign currency exchange rates commodity prices enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes interest rates foreign currency exchange rates may also enter financial instruments manage reduce impact changes commodity prices counterparties major financial institutions interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amount december 31 2013 aggregate notional amount outstanding interest rate swaps 600 million swap agreements hedge changes fair value portion fixedrate debt result changes interest rates counterparty pays us fixed interest rate equal coupon debt pay counterparty floating interest rate based us libor plus fixed spread swap agreements designated fair value hedges fair market value longterm fixed interest rate debt impacted interest rate risk credit risk generally fair market value fixed interest rate debt increase interest rates fall decrease interest rates rise estimated fair value total longterm debt including current portion december 31 2013 2012 approximately 2099 million 2707 million respectively fair value determined quoted market prices available investment bankers respect interest rates considering credit ratings remaining terms maturity hypothetical 10 increase prevailing interest rates would resulted decrease fair value fixed interest rate debt 36 million 39 million december 31 2013 2012 respectively hypothetical decrease fair value fixed rate debt december 31 2013 would partially offset increase fair value interest rate swap obligation discussed significant variable rate borrowings december 31 2013 hypothetical 100 basis point change interest rates affecting interest rate swaps would impact pretax interest expense 6 million december 31 2013 foreign exchange rate risk enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices sensitive fluctuations exchange rates major foreign currencies operate including australian dollar brazilian real british pound sterling euro canadian dollar indian rupee mexican peso singaporean dollar us dollar part risk management procedure use valueatrisk “var” sensitivity analysis model estimate maximum potential economic loss adverse changes foreign exchange rates oneday period given 95 confidence level var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimated maximum oneday loss company’s foreign currency exchange contracts using var model 49 million 25 million december 31 2013 2012 respectively 95 confidence interval signifies degree confidence actual losses foreign exchange contracts would exceed estimated losses amounts disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets var model risk analysis tool construed endorsement var model accuracy related assumptions commodity price risk subject commodity price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors time may use derivative contracts manage exposure commodity price volatility item 8nanitem 7a quantitative qualitative disclosures market risk market risk exposed various market risks including changes foreign currency exchange rates interest rates market risk potential loss arising adverse changes market rates prices foreign currency exchange interest rates enter derivatives financial instruments trading speculative purposes enter financial instruments manage reduce impact changes foreign currency exchange rates interest rates counterparties major financial institutions interest rate risk disclosure interest rate risk required provided item set forth “item 7 management’s discussion analysis financial condition interest rates” incorporated herein reference hypothetical 20 basis point change interest rates affecting company’s variable rate borrowings would material effect results operations foreign exchange contracts enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries indicated analysis follows estimated potential loss foreign exchange contracts movement foreign exchange rates would material impact current results operations financial condition part risk management procedure use valueatrisk var computation estimate potential economic loss could incur adverse changes foreign exchange rates var estimations intended measure maximum amount loss adverse market movements foreign exchange rates given specified confidence level given period time var model uses historical foreign exchange rates estimate volatility correlation rates future periods estimates loss fair market value using statistical modeling techniques estimated fair value loss shown table material impact current results f operations financial condition also use var model construed endorsement var model accuracy related assumptions following table summarizes estimated loss var model december 31 2004 2003 respectively 95 confidence interval signifies degree confidence actual losses foreign exchange contracts would exceed estimated losses shown amounts shown disregard possibility foreign currency exchange rates could move favor var model assumes movements foreign exchange rates adverse amounts considered projections future losses since actual results may differ significantly depending upon activity global financial markets estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices december 31 2004 2003 fair value outstanding contracts book value contracts essentially commodities subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility exposures contracts considered material financial statements item 8item 7a quantitative qualitative disclosures market risk see discussion analysis market risk foreign exchange contracts interest rates caption financial condition 1997 annual report stockholders registrant discussion incorporated herein reference item 8item 7a quantitative qualitative disclosures market risk see discussion analysis market risk foreign exchange contracts interest rates caption financial condition 1998 annual report stockholders registrant discussion incorporated herein reference item 8 item 8 financial statements supplementary data see information consolidated statement income consolidated balance sheet consolidated statement cash flows consolidated statement common stockholders equity notes consolidated financial statements report independent accountants contained 1993 annual report stockholders registrant information incorporated herein reference unaudited selected quarterly financial data see table captioned quarterly financial data contained 1993 annual report stockholders registrant table incorporated herein reference item 9item 8 financial statements supplementary data see information consolidated balance sheet consolidated statement income consolidated statement cash flows consolidated statement common stockholders equity notes consolidated financial statements report independent accountants contained 1995 annual report stockholders registrant information incorporated herein reference unaudited selected quarterly financial data see table captioned quarterly financial data contained 1995 annual report stockholders registrant table incorporated herein reference item 9item 8 financial statements supplementary data see information consolidated balance sheet consolidated statement income consolidated statement cash flows consolidated statement stockholders equity notes consolidated financial statements report independent accountants contained 1996 annual report stockholders registrant information incorporated herein reference unaudited selected quarterly financial data see table captioned quarterly financial data contained 1996 annual report stockholders registrant table incorporated herein reference item 9item 8 financial statements supplementary data see information consolidated statement income consolidated balance sheet consolidated statement cash flows consolidated statement stockholders equity notes consolidated financial statements report independent accountants contained 1999 annual report stockholders registrant information incorporated herein reference unaudited selected quarterly financial data see table captioned quarterly financial data contained 1999 annual report stockholders registrant table incorporated herein reference item 9item 8 financial statements supplementary data see information consolidated statement income consolidated balance sheet consolidated statement cash flows consolidated statement stockholders equity notes consolidated financial statements report independent accountants contained 2000 annual report stockholders registrant information incorporated herein reference unaudited selected quarterly financial data see table captioned quarterly financial data contained 2000 annual report stockholders registrant table incorporated herein reference item 9item 8 financial statements supplementary data see information consolidated statement income consolidated balance sheet consolidated statement cash flows consolidated statement stockholders equity notes consolidated financial statements report independent accountants contained 2001 annual report stockholders registrant information incorporated herein reference unaudited selected quarterly financial data see table captioned quarterly financial data contained 2001 annual report stockholders registrant table incorporated herein reference item 9item 8 financial statements supplementary data consolidated statement income fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements see notes consolidated financial statements see notes consolidated financial statements notes consolidated financial fortune brands inc statements subsidiaries 1 significant accounting policies basis presentation consolidated financial statements include accounts fortune brands inc elimination intercompany transactions majorityowned subsidiaries excluding subsidiary future brands llc third party substantive participating rights subsidiary acushnet lionscore limited holds minority interest substantive control result company operational decisionmaking powers entity accounts certain foreign subsidiaries consolidated november 30 consolidated financial statements prepared conformity accounting principles generally accepted united states america require management make estimates assumptions affect reported amounts assets liabilities sales expenses reporting periods actual results future periods could differ estimates certain reclassifications made prior years financial statements conform current year presentation cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables stated less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers potential insolvency allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions inventories priced lower cost principally firstin firstout average minor amounts lastin firstout market accordance generally recognized trade practice bulk whiskey inventories classified current assets although majority inventories due duration aging processes ordinarily sold within one year property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed estimated useful lives related assets follows longlived assets accordance adoption january 2002 statement financial accounting standards 144 sfas 144 accounting impairment disposal longlived assets longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group comparison indicates impairment amount impairment typically calculated using discounted expected future cash flows discount rate applied cash flows based companys weightedaverage cost capital represents blended aftertax costs debt equity adoption sfas 144 impact company intangibles july 2001 financial accounting standards board issued statement financial accounting standards 142 goodwill intangible assets sfas 142 company adopted notes consolidated financial fortune brands inc statements subsidiaries 1 significant accounting policies continued requirements sfas 142 january 1 2002 sfas 142 requires goodwill tested impairment annual basis certain circumstances written impaired rather amortized previous standards required addition sfas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life deemed tradenames currently anticipated contribute cash flows company indefinitely indefinitelived intangible assets amortized required evaluated reporting period determine whether indefinite useful life appropriate see footnote 2 discussion regarding adoption sfas 142 company evaluates recoverability goodwill estimating future discounted cash flows businesses goodwill relates rate used determining discounted cash flows rate corresponding companys cost capital risk adjusted necessary estimated cash flows determined disaggregating companys business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill impairment losses goodwill charged operations impairment losses limited carrying value goodwill represent excess sum carrying value net assets tangible identifiable intangible goodwill discounted cash flows business evaluated determining estimated future cash flows company considers current projected future levels income well business trends prospects market economic conditions accordance accounting policy fourth quarter 2000 company recorded noncash writedown goodwill 5026 million 4873 million tax 309 per share office products action resulted significant shortfall office products earnings softening conditions office products industry ongoing repositioning process led implementation additional restructuring plans conjunction ongoing review carrying value identifiable intangibles prescribed statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed december 2001 company recorded noncash writedown identifiable intangibles 733 million 671 million tax 44 cents basic 43 cents diluted per share writedown recognized diminished fair values select identifiable intangibles resulting restructuring office products consolidation noncore tradenames home products writedowns business segment office products 644 million home products 89 million warranty reserves company offers customers various warranty terms based upon type product sold addition company offer extended warranty terms products sells employee benefit plans company subsidiaries provide range benefits employees retired employees including pensions postretirement postemployment health care benefits company records annual amounts relating plans based calculations specified generally accepted accounting principles include various actuarial assumptions including discount notes consolidated financial fortune brands inc statements subsidiaries 1 significant accounting policies continued rates assumed rates return compensation increases turnover rates health care cost trend rates company reviews actuarial assumptions annual basis makes modifications assumptions based current rates trends deemed appropriate required united states generally accepted accounting principles effect modifications generally recorded amortized future periods company believes assumptions utilized recording obligations plans presented note 11 consolidated financial statements reasonable based experience input actuaries company continue monitor assumptions market conditions warrant environmental company subject laws regulations relating protection environment company provides expenses associated environmental remediation obligations amounts probable reasonably estimated accruals adjusted new information develops circumstances change discounted december 31 2002 2001 accruals amounted 506 million 517 million respectively income taxes accordance statement financial accounting standards 109 accounting income taxes deferred tax liabilities assets established temporary differences financial tax reporting bases subsequently adjusted reflect changes tax rates expected effect temporary differences reverse deferred income taxes provided undistributed earnings foreign subsidiaries aggregating 3008 million december 31 2002 earnings expected permanently reinvested companies sale stock subsidiary company recognizes consolidation changes companys ownership percentage caused sales subsidiarys stock adjustment paidin capital revenue recognition accordance staff accounting bulletin 101 company recognizes revenue products shipped customers net applicable provisions discounts returns allowances company also provides estimate potential bad debt time revenue recognition amounts billed shipping handling classified net sales consolidated income statement costs incurred shipping handling classified advertising selling general administrative expenses net sales net sales 2002 reflect adoption emerging issues task force 0109 relating reporting certain expenses previously included primarily advertising selling general administrative expenses reduction net sales reclassifications reduced reported net sales 1191 million 1166 million years ended december 31 2001 2000 respectively reclassifications result change companys earnings per share periods affected customer program costs company generally recognizes customer program costs either net sales customers category advertising selling general administrative expenses time program initiated andor revenue recognized costs generally recognized net sales customers include limited general customer program generated expenses cooperative advertising programs volume allowances shared media promotional allowances costs generally recognized advertising selling general administrative expenses include point sale materials store service fees customer program costs totaled 4412 million 4052 million 4261 million years ended december 31 2002 2001 2000 respectively primarily relate costs recognized net sales customers notes consolidated financial fortune brands inc statements subsidiaries 1 significant accounting policies continued addition accrued customer programs principally include general customer program costs cooperative advertising volume allowances shared media advertising costs advertising costs amounted 4515 million 4302 million 4517 million 2002 2001 2000 respectively principally charged expense incurred company capitalizes certain directresponse advertising costs comprises costs acquire new customers costs generally amortized proportion revenues recognized amounts direct response advertising capitalized 2002 2001 72 million 205 million respectively amortization 165 million 200 million 207 million recorded years ended december 31 2002 2001 2000 respectively included amounts company amortizes capitalized directresponse advertising costs threeyear period benefits realized research development research development expenses amounted 559 million 543 million 555 million 2002 2001 2000 respectively charged expense incurred stockbased compensation company applies accounting principles board apb opinion 25 accounting stock issued employees related interpretations accounting stock options accordingly compensation expense recognized stock option plans statement financial accounting standards 148 sfas 148 accounting stockbased compensation transition disclosure requires disclosure pro forma net income pro forma earnings per share amounts compensation expense recognized pursuant sfas 148 company purposes pro forma disclosure note 10 determined compensation expense accordance blackscholes optionpricing model foreign currency translation foreign currency balance sheet accounts translated us dollars rates exchange balance sheet date income expenses translated average rates exchange effect year related translation adjustments made directly separate component accumulated comprehensive loss caption stockholders equity transactions made currencies different entitys functional currency gains losses foreign currency transactions generally included income occur derivative financial instruments effective january 1 2001 company adopted statement financial accounting standards statement 133 sfas 133 accounting derivative instruments hedging activities related amendment statement financial accounting standards statement 138 sfas 138 accounting certain derivative instruments certain hedging activities statements establish accounting reporting standards derivative instruments including certain derivative instruments embedded contracts hedging activities requires recognition derivatives either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings impact adoption sfas 133 sfas 138 january 1 2001 material derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized years ended december 31 2002 2001 06 million deferred gain amounts reclassified cost sales company estimates 11 million derivative loss included oci december 31 2002 reclassified earnings within next twelve months notes consolidated financial fortune brands inc statements subsidiaries 1 significant accounting policies continued foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk company continually monitors foreign currency exposures order maximize overall effectiveness foreign currency hedge positions principal currencies hedged include pound sterling euro canadian dollar australian dollar interest rate risk company may time enter interest rate swap agreements manage exposure interest rate changes swaps involve exchange fixed variable interest rate payments without exchanging notional principal amounts company records payments receipts agreements adjustments interest expense december 31 2002 2001 company outstanding interest rate swap agreements recently issued accounting standards april 2002 financial accounting standards board fasb issued statement financial accounting standards 145 sfas 145 rescission fasb statements 4 44 64 amendment fasb statement 13 technical corrections statement rescinds statement financial accounting standards 4 reporting gains losses extinguishment debt statement financial accounting standards 44 accounting intangible assets motor carriers statement financial accounting standards 64 extinguishments debt made satisfy sinkingfund requirements statement requires gains losses debt extinguishments used part companys risk management strategy classified income operations rather extraordinary items net tax company apply provisions sfas 145 prospectively debt extinguishments beginning 2003 july 30 2002 fasb issued statement financial accounting standard 146 sfas 146 accounting costs associated exit disposal activities sfas 146 requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered sfas 146 include lease termination costs certain employee severance costs associated restructuring discontinued operation plant closing exit disposal activity sfas 146 also supercedes entirety previous accounting guidance provided emerging issues task force issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 146 effective exit disposal activities initiated december 31 2002 company apply provisions sfas 146 prospectively exit disposal activities beginning 2003 november 2002 fasb issued interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others interpretation expands accounting guidance statement financial accounting standards nos 5 57 107 incorporates without change provisions fin 34 superceded interpretation elaborates existing disclosure requirements guarantees including loan guarantees standby letters credit also clarifies time company issues guarantee company must recognize initial liability fair market value obligations assumes guarantee must disclose information interim annual financial statements see warranty reserves disclosure regarding companys accounting policy warranty claims note 20 guarantees recognized companys consolidated balance sheet company apply initial recognition measurement provisions prospective basis guarantees issued modified 2003 addition company applied disclosure requirements financial statements year ended december 31 2002 notes consolidated financial fortune brands inc statements subsidiaries 1 significant accounting policies continued january 2003 fasb issued interpretation 46 fin 46 consolidation variable interest entities objective fin 46 improve financial reporting companies involved variable interest entities prior fin 46 companies generally included another entity consolidated financial statements controlled entity voting interests fin 46 changes requiring variable interest entity consolidated company subject majority risk loss variable interest entitys activities entitled receive majority entitys residual returns consolidation primary beneficiary assets liabilities results activities variable interest entities provide complete information resources obligations risks opportunities consolidated company currently two leases totaling approximately 11 million potentially subject initial measurement recognition provisions fin 46 company reviewing application yet determined impact consolidation requirements preexisting entities effective july 1 2003 2 goodwill purchased intangible assets sfas 142 effective fiscal years beginning december 15 2001 accordance sfas 142 total intangibles 18 billion company ceased amortizing intangibles totaling 14 billion including 11 billion goodwill 03 billion indefinitelived tradenames january 1 2002 addition purchased intangible assets primarily definitelived tradenames carried cost less accumulated amortization remaining tradenames amortized estimated useful lives either 15 30 years gross carrying value accumulated amortization companys amortizable intangible assets 5846 million 1788 million respectively december 31 2002 companys intangible amortization 161 million 627 million 796 million years ended december 31 2002 2001 2000 respectively company expects record intangible amortization approximately 190 million next five fiscal years ending december 31 2003 december 31 2007 change goodwill year ended december 31 2002 3483 million net foreign currency fluctuations due acquisition omega holdings inc april 2002 see note 4 discussion notes consolidated financial fortune brands inc statements subsidiaries 2 goodwill purchased intangible assets continued following table presents impact sfas 142 net income net income per share nonamortization provisions standard effect years ended december 31 2001 2000 respectively january 1 2002 performed transitional tests impairment goodwill intangible assets recognized sfas 142 addition company performs annual impairment test december 31 fiscal year 2002 company performed impairment tests december 31 2002 impairment goodwill intangible assets recognized 3 sale stock subsidiary january 2002 company completed second two transactions sell shares whollyowned office products subsidiary acco world corporation acco two transactions resulted aggregate reduction less 2 companys interest acco company treated sale equity transaction accordance company policy recording difference purchase price book value subsidiarys stock paidincapital result first two transactions company recognized net tax benefit 729 million 2001 two transactions resulted substantial tax loss carryforward realized event company qualified taxable capital gains 4 acquisitions disposals joint ventures november 2002 home products business sold nonstrategic plumbing parts business net proceeds approximately 15 million company recorded aftertax loss 102 million related sale april 2002 home products business acquired omega holdings inc omega usbased manufacturer custom semicustom cabinetry acquisition broadens cabinet product line providing additional selling opportunities across customers producing purchasing manufacturing efficiencies cost acquisition 538 million result acquisition omega home products business recorded goodwill identifiable intangibles 3499 million 2120 million respectively 2120 million identifiable intangibles consists 1385 million indefinitelived tradenames 735 million customerrelationship intangibles amortized weightedaverage useful life approximately 15 years notes consolidated financial fortune brands inc statements subsidiaries 4 acquisitions disposals joint ventures continued following table provides allocation purchase price omega included consolidated results january 1 2001 companys unaudited pro forma net sales net income diluted earnings per share would 2 higher year ended december 31 2002 6 4 higher respectively year ended december 31 2001 may 31 2001 companys spirits wine business completed transactions vs creating joint venture named future brands llc distribute initial tenyear period companies spirits wine brands united states companys spirits wine business accounted joint venture using equity method accounting pursuant eitf 9616 future brands consolidated spirits wine business vs substantive participating rights preclude consolidation vs paid 270 million gain access spirits wine businesss us distribution network acquire 49 interest future brands paid 375 million purchase 10 equity interest jbbw form convertible preferred stock shares jbbw convertible preferred stock issued vs convertible 10 jbbw common stock voting power equivalent 10 interest jbbw common stock preferred stock entitled dividend equal greater 10 dividend paid upon jbbw common stock 3 preferred stocks face value 375 million plus unpaid accrued dividends may paid common stock unless unpaid accrued jbbw preferred stock dividends paid vs also received threeyear option increase equity stake jbbw additional 99 vs may require company purchase jbbw preferred stock fair value whole part time may 31 2004 upon change control jbbw jbbco certain events company accounted 270 million gain sale 49 future brands deferred income resulting tax sale deferred income tax asset due certain continuing obligations jbbco including limited making payments suppliers employees parties future brands contracts event default future brands june 2001 company began amortizing amounts income taxes straightline basis initial term agreement 10year amortization period based noncancelable 10year term management agreement future brands years ended december 31 2002 2001 companys spirits wine business recorded minority interest 10 ownership vs maintains business 113 million 66 million respectively notes consolidated financial fortune brands inc statements subsidiaries 4 acquisitions disposals joint ventures continued 1999 spirits wine business formed international sales distribution joint venture named maxxium worldwide bv maximum remycointreau highland distillers began operating august 1999 distribute sell spirits key markets outside united states addition investment future brands vs invested 107 million euros approximately 90 million june 2001 acquire 25 interest maxxium result investment vs spirits wine business received 82 million dividend maxxium reduced investment joint venture jbbw made cash investment 256 million 2000 jbbws total anticipated investment 110 million maxxium contingent upon achievement certain contractual performance measures met 2002 addition company guarantees certain credit facilities bank loans entered maxxium amount totaling 660 million 570 million outstanding december 31 2002 december 31 2001 guarantees totaled 550 million 480 million outstanding jbbw also executed shareholder loan facility loan facility maxxium amounting 157 million amounts outstanding loan facility either december 31 2002 december 31 2001 loan facility expires december 31 2003 october 2001 companys spirits wine business sold ukbased scotch whisky business 280 million cash sale business consisted invergordon privatelabel bulk scotch operations several regional brands uk products included agreement generated sales approximately 235 million including excise taxes company recorded aftertax gain 218 million related sale business acquired included consolidated results date acquisition 5 shortterm borrowings credit facilities december 31 2002 2001 1613 million 378 million shortterm borrowings outstanding respectively comprised notes payable banks commercial paper used general corporate purposes including acquisitions included amount december 31 2002 2001 65 million 44 million outstanding committed bank credit agreements provide unsecured borrowings 176 million 165 million respectively addition company uncommitted bank lines credit provide unsecured borrowings working capital 1971 million 313 million outstanding december 31 2002 1399 million 334 million outstanding december 31 2001 weightedaverage interest rate borrowings 21 53 respectively see note 14 description companys use financial instruments notes consolidated financial fortune brands inc statements subsidiaries 6 longterm debt components longterm debt follows december 31 2002 company maintained two revolving credit agreements various banks company entered 2001 2002 agreements include 750 million 5year revolving credit agreement expires 2006 500 million 364day revolving credit agreement expires 2003 includes option extend payment one year companys discretion incremental fee 25 outstanding amount interest rate set time borrowing facility fees 08 06 per annum paid 750 million 5year revolving credit agreement 500 million 364day revolving credit agreement respectively fee 750 million 5year revolving credit agreement subject increases maximum 20 per annum event companys longterm debt rating falls specified levels borrowings agreements made general corporate purposes including acquisitions share repurchases support companys shortterm borrowings commercial paper market estimated payments maturing debt next five years follows 2003 1329 million 2004 2003 million 2005 03 million 2006 01 million payments 2007 7 267 convertible preferred stock redeemable companys option shares 267 convertible preferred stock issued outstanding december 31 2002 2001 2000 258656 shares 281515 shares 302399 shares respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share stock 6205 shares common stock authorized unissued common shares reserved issuance upon conversions treasury shares may delivered shares converted 22859 shares 20884 shares 20926 shares 2002 2001 2000 respectively company may redeem preferred stock price 3050 per share plus accrued dividends cash dividend 267 per share aggregate amounts 07 million 08 million 08 million paid years ended december 31 2002 2001 2000 respectively 8 capital stock company 750 million authorized shares common stock 60 million authorized shares preferred stock notes consolidated financial fortune brands inc statements subsidiaries 8 capital stock continued 146990735 147997773 common shares outstanding december 31 2002 2001 respectively cash dividends paid common stock years ended december 31 2002 2001 2000 aggregated 1527 million 1472 million 1469 million respectively treasury shares purchased received consideration stock options exercised amounted 5769440 shares 2002 7546333 shares 2001 10021166 shares 2000 treasury shares delivered connection exercise stock options grants stock awards conversion preferred stock debentures amounted 4762402 shares 2002 2035239 shares 2001 286992 shares 2000 december 31 2002 2001 82579289 81572251 common treasury shares respectively 9 preferred share purchase rights outstanding share common stock also evidences one preferred share purchase right rights generally become exercisable event acquisition tender offer 15 common stock exercisable right exercisable 1100th share series junior participating preferred stock exercise price 150 also upon acquisition 15 common stock upon acquisition company transfer 50 assets earning power right rights held 15 acquirer applicable exercisable generally exercisable common shares company acquiring company case may market value twice exercise price certain events however rights may exchanged company common stock rate one share per right rights may redeemed time prior acquisition 15 common stock redemption price 01 per right exercised holder voting dividend rights stockholder company rights expire december 24 2007 december 2002 companys board directors approved amendment rights plan adds threeyear independent director evaluation provision 25 million authorized series preferred shares reserved issuance upon exercise rights december 31 2002 outstanding rights would exercisable described aggregate 1469907 shares 10 stock plans 1999 longterm incentive plan authorizes granting key employees company subsidiaries incentive nonqualified stock options stock appreciation rights restricted stock performance awards stockbased awards may granted alone combination types awards dividend equivalents grants may made december 31 2004 12 million shares common stock two million shares may granted one individual stock options stock appreciation rights restricted stock performance awards stockbased awards may longer granted companys 1990 longterm incentive plan amended outstanding awards 1990 longterm incentive plan may continue exercised paid pursuant terms stock options plans exercise prices equal fair market values dates grant options generally may exercised prior one year ten years date grant options granted since november 1998 generally vest onethird year three year period date grant stock appreciation rights may granted conjunction option grants permit optionees receive shares common stock cash combination shares cash measured difference option exercise price fair market value common stock time exercise right company applies apb opinion 25 accounting stock issued employees related interpretations accounting stock plans allowed sfas 148 compensation cost notes consolidated financial fortune brands inc statements subsidiaries 10 stock plans continued fixed stock options granted 2002 2001 2000 determined consistent sfas 148 pro forma net income loss earnings per common share would follows changes three years ended december 31 2002 shares options follows options exercisable end three years ended december 31 2002 follows weightedaverage fair values options granted 2002 2001 2000 1163 891 615 respectively fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2002 2001 2000 notes consolidated financial fortune brands inc statements subsidiaries 10 stock plans continued options outstanding december 31 2002 follows options exercisable december 31 2002 follows december 31 2002 performance awards outstanding pursuant 137400 shares 217950 shares 197850 shares 195000 shares may issued 2003 2004 2005 2006 respectively depending extent certain specified performance objectives met 181197 shares 120034 shares 99781 shares issued pursuant performance awards 2002 2001 2000 respectively costs performance awards expensed performance period compensation expense stock based plans recorded 2002 2001 2000 100 million 54 million 35 million respectively shares available connection future awards companys stock plans december 31 2002 2001 2000 1053597 3979940 6465498 respectively authorized unissued shares reserved issuance connection awards treasury shares may delivered 11 pension retiree benefits company number pension plans principally united states covering substantially employees plans provide payment retirement benefits mainly commencing ages 60 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employees length service earnings annual contributions plans made necessary ensure legal funding requirements satisfied company provides postretirement health care life insurance benefits certain employees retirees united states certain employee groups outside united states many employees retirees outside united states covered government health care programs notes consolidated financial fortune brands inc statements subsidiaries 11 pension retiree benefits continued components net pension postretirement costs follows reconciliation beginning ending balances benefit obligations fair value plan assets funded status plans follows notes consolidated financial fortune brands inc statements subsidiaries 11 pension retiree benefits continued amounts recognized balance sheet follows december 31 2002 company recorded increase additional minimum liability 1170 million result marketrelated shortfall companys accumulated benefit obligation fair value plan assets projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 7128 million 6299 million 4889 million respectively december 31 2002 3304 million 2841 million 2334 million respectively december 31 2001 assumed health care cost trend rate used measuring health care portion postretirement cost 2003 10 gradually declining 5 year 2008 remaining level thereafter assumed health care cost trend rates significant effect amounts reported postretirement benefits onepercentagepoint increase assumed health care cost trend rates would increase total service interest cost components 2002 postretirement benefit obligation december 31 2002 12 million 125 million respectively onepercentagepoint decrease assumed health care cost trend rates would decrease total service interest cost components 2002 postretirement benefit obligation 10 million 113 million respectively company sponsors number defined contribution plans contributions determined various formulas costs related plans amounted 228 million 224 million 219 million 2002 2001 2000 respectively notes consolidated financial fortune brands inc statements subsidiaries 12 lease commitments future minimum rental payments noncancelable operating leases december 31 2002 follows total rental expense operating leases reduced minor amounts subleases amounted 524 million 509 million 539 million 2002 2001 2000 respectively 13 income taxes components income continuing operations income taxes follows reconciliation income taxes 35 federal statutory income tax rate income taxes reported follows 2001 company recorded tax reserve reversal 310 million reflecting conclusion routine irs examinations years 1990 1992 2000 company recorded tax reserve reversal 300 million june 2002 company recorded tax benefit 617 million plus aftertax interest 96 million resulted new irs regulations issued march 2002 reinterpret capital loss disallowance rules enabled company utilize tax loss incurred 1994 offset capital gains taxed 1996 1997 company receive cash representing tax refund related interest upon conclusion irss regular audit 1997 tax returns notes consolidated financial fortune brands inc statements subsidiaries 13 income taxes continued 2001 company received onetime nonoperating adjustment 173 million interest income tax recorded income result conclusion routine irs examinations years 1990 1992 income taxes follows components net deferred tax assets liabilities follows notes consolidated financial fortune brands inc statements subsidiaries 14 financial instruments company enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates principal financial instruments used forward foreign exchange contracts interest rate swaps counterparties major financial institutions although companys theoretical risk replacement cost estimated fair value instruments management believes risk incurring losses remote losses would immaterial company enters forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting companys risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions company periodically enters forward foreign exchange contracts hedge portion net investments foreign operating companies estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices december 31 2002 2001 fair value outstanding contracts contract amounts essentially company may time enter interest rate swap agreements manage exposure interest rate changes swaps involve exchange fixed variable interest rate payments without exchanging notional principal amount december 31 2002 2001 company outstanding interest rate swap agreements estimated fair value companys cash equivalents notes payable banks commercial paper approximates carrying amounts due principally short maturities estimated fair value companys 9746 million 9517 million total longterm debt including current portion december 31 2002 2001 approximately 10943 million 9803 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity concentration credit risk respect accounts receivable limited large number geographically diverse customers make operating companies domestic international customer base thus spreading credit risk raw materials used company subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors company use futures contracts manage volatility pricing certain commodities exposures considered material companys financial statements 15 restructuring restructuringrelated charges restructuring restructuringrelated charges program 2001 april 19 2001 company announced result evaluation strategic options office products business would immediately begin implementing plan designed improve financial results longterm value business time company determined would divest office products business due weakness overall economy conditions office products industry addition home segment recorded restructuring restructuringrelated charges workforce reductions rationalization specialty plumbing parts business golf segment recorded charges capacity reductions select technology platforms notes consolidated financial fortune brands inc statements subsidiaries 15 restructuring restructuringrelated charges continued addition third quarter 2002 home products spirits wine businesses recorded restructuring charges related sale certain nonstrategic product lines including loss sale product lines employment termination costs result actions company recorded pretax restructuring charges year ended december 31 2002 follows home products charges relate sale lowreturn plumbing parts business including loss disposal business planned employee termination costs seven positions announced spirits wine charges relate sale minor product line office products charges principally relate planned employee termination costs announced 724 positions asset writeoffs costs associated consolidation manufacturing distribution facilities 2001 company recorded pretax restructuring charges follows home products includes charges related planned workforce reduction initiatives announced 342 positions lease cancellation costs golf products includes charges related asset writeoffs associated reduction wound golf ball capacity office products includes charges related product line discontinuances rationalization operations expenses associated exploration strategic options office products business planned workforce reduction initiatives 779 positions across operations notes consolidated financial fortune brands inc statements subsidiaries 15 restructuring restructuringrelated charges continued reconciliation restructuring liability december 31 2001 follows planned downsizing 1121 positions 526 reductions implemented december 31 2001 employee groups affected restructuring actions predominantly office products business include plant administrative hourly salaried employees reconciliation restructuring liability december 31 2002 follows planned downsizing 1852 positions planned elimination 1545 implemented december 31 2002 employee groups affected restructuring actions predominantly office products business include plant administrative hourly salaried employees b included 2002 provision reversals certain costs reflected reduction restructuring charges recorded 2002 included 11 million employee termination costs 06 million costs 01 million loss disposal costs company expects substantially remaining payments made within next twelve months 2002 company recorded restructuringrelated charges follows notes consolidated financial fortune brands inc statements subsidiaries 15 restructuring restructuringrelated charges continued restructuringrelated charges include charges related 2002 restructuring activities home products charges include writedown longlived asset costs associated sale nonstrategic specialty plumbing parts business reversal certain accruals longer deemed necessary office products charges include relocation manufacturing distribution facilities inventory writeoffs associated discontinuance certain unprofitable product lines 2001 company recorded restructuringrelated charges follows restructuringrelated charges include charges related 2001 restructuring activities home products includes costs due inventory writeoffs related downsizing lowmargin specialty plumbing parts business golf products includes inventory writeoffs due discontinuance certain golf ball manufacturing processes office products includes inventory writeoffs due discontinuance certain unprofitable product lines expenses associated exploration strategic options office products business restructuring restructuringrelated charges program 1999 connection restructuring program established 1999 company recorded pretax restructuring charges year ended december 31 2000 follows charges include costs associated elimination 648 positions year ended december 31 2000 home products includes charges related planned employee termination costs 89 positions golf products includes charges related lease cancellation planned employee termination costs 97 positions notes consolidated financial fortune brands inc statements subsidiaries 15 restructuring restructuringrelated charges continued office products includes charges related planned employee termination costs 462 positions asset writeoffs reconciliation restructuring liability december 31 2000 follows planned downsizing 2270 positions 2052 reductions implemented december 31 2000 employee groups affected restructuring actions include plant administrative hourly salaried employees reconciliation restructuring liability december 31 2001 follows planned downsizing 2306 positions 2282 reductions implemented december 31 2001 b noncash writeoffs include reclasses reduce international spirits wine distribution lease agreements restructuring reserves 54 million related formation maxxium employment termination costs 01 million notes consolidated financial fortune brands inc statements subsidiaries 15 restructuring restructuringrelated charges continued reconciliation restructuring liability december 31 2002 follows 2299 positions eliminated december 31 2002 additional reductions planned b 07 million 23 million classified noncash writeoffs represents reversal certain employee termination costs reflected reduction restructuring charges recorded 2001 remaining 16 million represents restructuring charge reversal employment termination costs anticipated spent c amount classified noncash writeoffs represents reclassification reduce certain lease termination costs 2000 company recorded restructuringrelated charges follows restructuringrelated charges include charges related 2000 restructuring activities home products includes costs associated plant relocation establishment distribution center golf products includes relocation costs certain manufacturing facilities inventory writeoffs due discontinuance certain product lines office products includes relocation costs manufacturing facilities product line discontinuances writeoff note receivable related previously sold operation corporate office includes relocation costs associated establishing new corporate headquarters 16 information business segments companys subsidiaries operate principally following business segments home products includes kitchen bathroom faucets accessories manufactured marketed distributed moen aristokraft schrock omega kitchen bath cabinets manufactured marketed distributed masterbrand cabinets locks manufactured marketed distributed master lock tool storage products manufactured distributed waterloo notes consolidated financial fortune brands inc statements subsidiaries 16 information business segments continued spirits wine includes products produced marketed distributed jim beam brands worldwide inc subsidiaries golf products includes titleist golf balls titleist cobra golf clubs footjoy golf shoes gloves manufactured marketed distributed acushnet company office products includes paper fastening document management computer accessories time management presentation office products manufactured marketed distributed acco world corporation subsidiaries net sales segment assets business segments net sales geographic areas period 1997 2002 shown page 74 companys subsidiaries operate principally united states canada united kingdom australia reconciliation operating company contribution operating income follows 1 operating company contribution occ net sales less costs expenses restructuring restructuringrelated charges writedowns identifiable intangibles goodwill amortization intangibles corporate administrative expense interest related expenses income expense net income taxes minority interests occ measure generally accepted accounting principles one key measures gauge underlying operating performance business segments use measures allocate capital resources evaluate acquisitions dispositions evaluate identify costreduction initiatives occ considered substitute measure derived accordance generally accepted accounting principles measure may differ similar measures presented companies depending upon items companies include 2 operating expenses represent sum corporate administrative expense intangible amortization restructuring restructuringrelated charges 3 operating income operating company contribution less corporate administrative expense intangible amortization restructuring restructuringrelated charges writedowns identifiable intangibles goodwill reconciliation segment net sales consolidated net sales follows notes consolidated financial fortune brands inc statements subsidiaries 16 information business segments continued reconciliation segment assets consolidated total assets follows longlived assets followsa represents property plant equipment net sales geographic region follows depreciation follows notes consolidated financial fortune brands inc statements subsidiaries 16 information business segments continued amortization intangibles follows capital expenditures follows 17 income net components income net years ended december 31 2002 2001 2000 follows 18 earnings per share basic earnings per common share based weightedaverage number common shares outstanding year preferred stock dividend requirements diluted earnings per common share assume dilutive convertible debentures convertible preferred shares outstanding beginning year converted dates related interest preferred stock dividend requirements outstanding common shares adjusted accordingly also assumes outstanding common shares increased shares issuable upon exercise stock options market price exceeds exercise price less shares could purchased company related proceeds convertible preferred stock options amounting 25 million shares included computation diluted earnings per common share 2000 since would resulted antidilutive effect notes consolidated financial fortune brands inc statements subsidiaries 18 earnings per share continued computation basic diluted earnings per common share net income loss follows 19 comprehensive loss comprehensive loss defined net income changes stockholders equity transactions events sources stockholders components changes comprehensive loss follows included foreign currency adjustments balance december 31 2002 total deferred forward foreign exchange contract losses 11 million see note 1 20 related party transactions future brands llc 2001 companys spirits wine business completed transactions vin sprit ab sweden creating joint venture named future brands llc distribute companies spirits wine brands united states part forming joint venture spirits wine business event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees notes consolidated financial fortune brands inc statements subsidiaries 20 related party transactions continued parties future brands contracts december 31 2002 2001 jbbco outstanding obligations result arrangement jbbcos transactions future brands amounted sales 5156 million 4987 years ended december 31 2002 2001 respectively accounts receivable 688 million 920 million december 31 2002 2001 respectively accounts payable 156 million 237 million december 31 2002 2001 respectively investment 117 million 94 million december 31 2002 2001 respectively addition company accrued liabilities future brands amounting 291 million 45 million december 31 2002 2001 respectively maxxium international bv 1999 spirits wine business formed international sales distribution joint venture named maxxium international bv remycointreau highland distillers began operating august 1999 distribute sell spirits key markets outside united states result forming joint venture jbbw guaranteed certain credit facilities bank loans entered maxxium amount totaling 66 million 57 million outstanding december 31 2002 december 31 2001 guarantees totaled 55 million 48 million outstanding jbbw also executed shareholder loan facility loan facility maxxium amounting 157 million amounts outstanding loan facility either december 31 2002 december 31 2001 loan facility expires december 31 2003 jbbcos transactions maxxium included following sales 1791 million 1682 million 1600 million years ended december 31 2002 2001 2000 respectively accounts receivable 346 million 395 million december 31 2002 2001 respectively accounts payable 123 million 61 million december 31 2002 2001 respectively investment 643 million 630 million december 31 2002 2001 respectively 21 pending litigation tobacco litigation indemnification december 22 1994 company sold american tobacco company subsidiary brown williamson tobacco corporation whollyowned subsidiary bat industries plc connection sale brown williamson tobacco corporation american tobacco company since merged brown williamson tobacco corporation indemnitor agreed indemnify company claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business american tobacco company indemnitor complied terms indemnification agreement since 1994 company aware inability part indemnitor satisfy indemnity obligations company defendant numerous actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably management unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however management believes number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor management believes pending actions material adverse effect upon results operations cash flows financial condition company believes meritorious defenses company indemnified previously mentioned indemnification agreement notes consolidated financial fortune brands inc statements subsidiaries 21 pending litigation continued litigation increasing volume asbestosrelated personal injury litigation united states generally subsidiary company moen incorporated named defendant approximately 110 cases claiming personal injury asbestos suits name multiple defendants cases excess 75 defendants named addition moen none cases identify moen products premises cause alleged injury plaintiffs identified possible predict outcome pending litigation possible actions could decided unfavorably management believes meritorious defenses actions material adverse effect upon results operations cash flows financial condition company actions vigorously contested addition lawsuits described company subsidiaries defendants lawsuits associated business operations possible predict outcome pending actions litigation possible actions could decided unfavorably management believes meritorious defenses actions material adverse effect upon results operations cash flows financial condition company actions vigorously contested 22 environmental company subject laws regulations relating protection environment possible quantify certainty potential impact actions regarding environmental matters particularly remediation compliance efforts companys subsidiaries may undertake future opinion management compliance present environmental protection laws taking account estimated recoveries third parties material adverse effect upon results operations cash flows financial condition company report independent accountants board directors stockholders fortune brands inc opinion accompanying consolidated balance sheets related consolidated statements income cash flows stockholders equity present fairly material respects financial position fortune brands inc subsidiaries december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed item 15a2 form 10k presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements financial statement schedule free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 2 consolidated financial statements company changed method accounting goodwill intangible assets fiscal 2002 pricewaterhousecoopers llp chicago illinois january 21 2003 report management stockholders fortune brands inc prepared consolidated balance sheet fortune brands inc subsidiaries december 31 2002 2001 related consolidated statements income cash flows stockholders equity three years period ended december 31 2002 financial statements prepared accordance accounting principles generally accepted united states america financial information elsewhere annual report form 10k consistent financial statements system internal controls company subsidiaries designed provide reasonable assurances financial records adequate relied upon provide information preparation financial statements established policies procedures carefully followed independent accountants elected annually stockholders company audit financial statements pricewaterhousecoopers llp independent accountants currently engaged perform audit accordance generally accepted auditing standards includes tests transactions selective tests internal accounting controls audit committee board directors consisting solely outside directors meets periodically independent accountants internal auditors management review accounting auditing financial reporting matters auditors direct access audit committee norman h wesley norman h wesley chairman board chief executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer information business segmentsa fortune brands inc subsidiaries see note 16 information business segments b net sales restated 2001 2000 conform 2002 presentation due reclassification certain expenses accordance emerging issues task force issue 0109 amounts prior 2000 restated c represents total assets excluding intercompany receivables intangibles resulting business acquisitions net sales attributed countries based location customer item 9item 8 financial statements supplementary data consolidated statement income fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement cash flows fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement stockholders’ equity fortune brands inc subsidiaries see notes consolidated financial statements notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies basis presentation consolidated financial statements include accounts fortune brands inc elimination intercompany transactions majorityowned subsidiaries excluding subsidiary future brands llc third party substantive participating rights subsidiary acushnet lionscore limited holds minority interest substantive control result company operational decisionmaking powers entity accounts certain foreign subsidiaries consolidated november 30 consolidated financial statements prepared conformity accounting principles generally accepted united states america require management make estimates assumptions affect reported amounts assets liabilities sales expenses reporting periods actual results future periods could differ estimates certain reclassifications made prior years’ financial statements conform current year presentation cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables stated less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions inventories priced lower cost principally firstin firstout average minor amounts lastin firstout market accordance generally recognized trade practice bulk whiskey inventories classified current assets although majority inventories due duration aging processes ordinarily sold within one year property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred estimated useful lives related assets follows longlived assets accordance statement financial accounting standards 144 sfas 144 “accounting impairment disposal longlived assets” longlived asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur company compares sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group comparison indicates impairment amount impairment typically calculated using discounted expected future cash flows discount rate applied cash flows based company’s weightedaverage cost capital risk adjusted appropriate represents blended aftertax costs debt equity intangibles statement financial accounting standards 142 sfas 142 “goodwill intangible assets” requires goodwill tested impairment annual basis certain circumstances written impaired rather amortized previous standards required addition sfas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life deemed tradenames currently anticipated contribute cash flows company indefinitely indefinitelived intangible assets amortized required evaluated reporting period determine whether indefinite useful life appropriate see footnote 2 discussion regarding adoption sfas 142 company evaluates recoverability goodwill estimating future discounted cash flows businesses goodwill relates rate used determining discounted cash flows rate corresponding company’s cost capital risk adjusted appropriate estimated cash flows determined disaggregating company’s business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill impairment losses goodwill charged operations impairment losses limited carrying value goodwill represent excess sum carrying value net assets tangible identifiable intangible goodwill discounted cash flows business evaluated determining estimated future cash flows company considers current projected future levels income based management’s plans business well business trends prospects market economic conditions indefinitelived intangibles reviewed annually whenever market business events indicate may potential impact intangible management developing executing shortterm longterm plans considers implications external eg market growth pricing competition technology internal factors eg product costs margins support expenses capital investment potential impact cash flows business near long term well impact identifiable intangible asset associated business based recent business results consideration significant external internal factors resulting business projections indefinitelived intangible assets associated segment reviewed determine whether likely remain indefinitelived whether finite life appropriate addition based events period future expectations management considers whether potential impairment exists required sfas 142 predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize excess earnings methodology establish reasonable royalty rate excess earnings represented actual projected earnings divided reasonable pretax return net tangible assets additionally independent valuation experts used periodic review testing management’s assumptions relative significant trade valuations lives independent research market competitive dynamics conjunction ongoing review carrying value identifiable intangibles 2003 company recorded noncash writedown identifiable intangibles 120 million 80 tax conjunction repositioning office business 2001 company recorded noncash writedown identifiable intangibles 733 million 671 million tax writedown recognized diminished fair values certain tradenames resulting repositioning office business consolidation noncore tradenames home hardware writedowns business segment office 644 million home hardware 89 million warranty reserves company offers customers various warranty terms based upon type product sold reconciliation beginning ending balances warranty reserves years ended december 31 2003 2002 2001 follows 1 reclassified 2002 2001 warranty reserve activity conform 2003 disclosure employee benefit plans company subsidiaries provide range benefits employees retired employees including pensions postretirement postemployment health care benefits company records annual amounts relating plans based calculations specified generally accepted accounting principles reflect various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates company reviews actuarial assumptions annual basis makes modifications assumptions based current rates trends deemed appropriate required us generally accepted accounting principles effect modifications generally recorded amortized future periods company believes assumptions utilized recording obligations plans presented note 11 consolidated financial statements reasonable based experience advice actuaries company continue monitor assumptions market conditions warrant environmental company subject laws regulations relating protection environment company provides expenses associated environmental remediation obligations amounts probable reasonably estimated accruals adjusted new information develops circumstances change accruals discounted december 31 2003 2002 accruals amounted 485 million 506 million respectively included noncurrent liabilities balance sheet income taxes accordance statement financial accounting standards 109 “accounting income taxes” deferred tax liabilities assets established temporary differences financial tax reporting bases subsequently adjusted reflect changes tax rates expected effect temporary differences reverse deferred income taxes provided undistributed earnings foreign subsidiaries aggregating 4084 million december 31 2003 earnings expected permanently reinvested companies sale stock subsidiary company recognizes consolidation changes company’s ownership percentage caused sales subsidiary’s stock adjustment “paidin capital” revenue recognition accordance staff accounting bulletin 104 “revenue recognition” company recognizes revenue products shipped customers net applicable provisions discounts returns allowances company also provides estimate potential bad debt time revenue recognition amounts billed shipping handling classified “net sales customers” consolidated income statement costs incurred shipping handling classified “advertising selling general administrative expenses” customer program costs company generally recognizes customer program costs either “net sales customers” category “advertising selling general administrative expenses” time program initiated andor revenue recognized costs generally recognized “net sales customers” include limited general customer program generated expenses cooperative advertising programs volume allowances promotional allowances costs generally recognized “advertising selling general administrative expenses” include point sale materials store service fees addition “accrued customer programs” principally include general customer program costs cooperative advertising volume allowances shared media volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements advertising costs advertising costs amounted 4705 million 4515 million 4302 million 2003 2002 2001 respectively principally charged expense incurred company capitalizes certain directresponse advertising costs comprises costs acquire new customers costs generally amortized proportion revenues recognized direct response advertising costs capitalized 2003 amount direct response advertising capitalized 2002 72 million 2002 company ceased direct prospecting advertising amortization 04 million 165 million 200 million recorded years ended december 31 2003 2002 2001 respectively included amounts company amortized capitalized directresponse advertising costs twoyear period benefits realized research development research development expenses amounted 581 million 559 million 543 million 2003 2002 2001 respectively charged expense incurred stockbased compensation company applies accounting principles board opinion 25 “accounting stock issued employees” related interpretations accounting stock plans allowed financial accounting standards 148 sfas 148 “accounting stockbased compensation transition disclosure” result compensation expense recognized stock options plans accordance sfas 148 company purposes pro forma disclosure determined compensation expense accordance blackscholes optionpricing model compensation cost fixed stock options determined consistent sfas 148 pro forma net income earnings per common share 2003 2002 2001 would follows foreign currency translation foreign currency balance sheet accounts translated us dollars rates exchange balance sheet date income expenses translated average rates exchange effect year related translation adjustments made directly separate component “accumulated comprehensive loss” caption stockholders’ equity transactions made currencies different entity’s functional currency gains losses foreign currency transactions classified statement income depending nature item derivative financial instruments accordance statement financial accounting standards statement 133 sfas 133 “accounting derivative instruments hedging activities” related amendment statement financial accounting standards statement 138 sfas 138 “accounting certain derivative instruments certain hedging activities” derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized years ended december 31 2003 2002 33 million deferred losses 06 million deferred gains respectively reclassified cost sales company estimates 11 million derivative loss included oci december 31 2003 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk company continually monitors foreign currency exposures order maximize overall effectiveness foreign currency hedge positions principal currencies hedged include pound sterling euro canadian dollar australian dollar interest rate risk company may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amounts company records payments receipts agreements adjustments interest expense december 31 2003 company outstanding interest rate swap agreements outstanding 2875 notes due 2006 allow agreements classified fair value hedge accordance sfas 133 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate december 31 2002 company outstanding interest rate swap agreements recently issued accounting standards january 2003 fasb issued interpretation 46 fin 46 “consolidation variable interest entities” objective fin 46 improve financial reporting companies involved variable interest entities prior fin 46 companies generally included another entity consolidated financial statements controlled entity voting interests fin 46 effective newly created variable interest entities january 31 2003 effective existing variable interest entities october 1 2003 december 2003 fasb issued revision fin 46 46r clarify provisions fin 46 exempt certain entities requirements special effective dates apply enterprises fully partially applied interpretation 46 prior issuance 46r otherwise application 46r fin 46 required financial statements public entities interests structures specialpurpose entities periods ending december 15 2003 company still assessing impact 46r fin 46 company’s results financial position november 2003 fasb issued staff position fas 1503 fsp 1503 “effective date disclosure transition mandatorily redeemable financial instruments certain nonpublic entities certain mandatorily redeemable noncontrolling interest fasb statement 150 “accounting certain financial instruments characteristics liabilities equity’ ” fsp 1503 defers effective date certain mandatorily redeemable noncontrolling interests indefinitely pending fasb action initial adoption sfas 150 impact company’s results financial position company evaluate impact additional requirements standard finalized january 2004 fasb issued financial accounting standards 1061 sfas 1061 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fas 1061 permits sponsor postretirement health care plan provides prescription drug benefit make onetime election defer accounting effects medicare prescription drug improvement modernization act 2003 “act” company elected defer accounting effects act fasb issues guidance account federal subsidy provided plan sponsors act result accompanying financial statements notes reflect effects act however upon final issuance accounting company could required change previously reported information 2 goodwill identifiable intangibles company carries finitelived intangibles principally tradenames subject amortization estimated useful lives either 15 30 years based assessment number factors may impact useful life factors include historical expected future tradename performance terms geographic markets volumes prices well plans ongoing tradename support estimated useful lives relevant factors may impact remaining useful lives tradenames gross carrying value accumulated amortization company’s amortizable intangible assets 5901 million 1976 million respectively december 31 2003 gross carrying value accumulated amortization company’s amortizable intangible assets 5846 million 1788 million respectively december 31 2002 twelve months ended december 31 2003 company recorded writedown identifiable intangibles 120 million 80 million tax recognize diminished values certain trade names office business company’s intangible amortization 189 million 161 million 627 million years ended december 31 2003 2002 2001 respectively company expects record intangible amortization approximately 36 million next five fiscal years ending december 31 2004 december 31 2008 anticipated increase reflects addition finitelived identifiable intangibles related acquisitions made 2003 company’s goodwill segment follows 1 excess purchase price fair value assets thermatru currently classified goodwill identifiable intangibles disaggregated first quarter 2004 goodwill increased year ended december 31 2003 9959 million due acquisitions thermatru capital cabinet american lock wild horse winery well conclusion omega purchase accounting 2003 foreign currency fluctuations see note 4 discussion following table presents impact fasb statement financial accounting standards 142 sfas 142 “goodwill intangible assets” net income net income per share nonamortization provisions standard effect year ended december 31 2001 january 1 2002 performed transitional tests impairment goodwill intangible assets recognized sfas 142 addition company performs annual impairment test december 31 fiscal year 2003 2002 impairment goodwill intangible assets recognized result annual impairment tests 3 sale stock subsidiary january 2002 company completed second two transactions sell shares whollyowned office products subsidiary acco world corporation acco two transactions resulted aggregate reduction less 2 company’s interest acco company treated sale equity transaction accordance company policy recording difference purchase price book value subsidiary’s stock “paidincapital” result first two transactions company recognized net tax benefit 729 million 2001 two transactions resulted substantial tax loss carryforward realized event company qualified taxable capital gains 4 acquisitions disposals joint ventures november 2003 home hardware business acquired thermatru holdings inc thermatru leading manufacturer residential entry door systems united states acquisition fits strategic focus leading brands shares beneficial demographics market fundamentals home hardware brands creates valuable synergies within home hardware business purchase financed issuance commercial paper subsequently partially refinanced issuance longterm debt securities company’s outstanding shelf registration statement filed securities exchange commission results operations included company’s consolidated financial statements acquisition date acquisition price 9240 million net cash allocation purchase price yet finalized thirdparty valuation acquired assets tradenames complete expect complete thermatru purchase price allocation first quarter 2004 excess purchase price recorded goodwill amount 9347 million december 31 2003 financial statements based recent estimate goodwill disaggregated identifiable intangibles 4898 million consisting 2342 million indefinitelived tradenames 771 million proprietary technology intangibles 1785 million customer relationship intangibles proprietary technology customer relationship intangibles amortized weightedaverage useful life approximately 15 years following table summarizes current estimated fair values thermatru assets acquired liabilities assumed date acquisition unaudited pro forma results december 31 2003 2002 presented thermatru acquisition occurred january 1 2002 information based historical results operations adjusted acquisition costs opinion management represent results would occurred company operated thermatru since beginning year july 2003 spirits wine business acquired wild horse winery californiabased producer premium ultrapremium wines december 2003 spirits wine business obtained extension rights manufacture distribute gilbey’s gin vodka additional 20 years extended license agreement expires 2027 addition december 2003 trademark rights california kamchatka vodka acquired spirits wine business june 2003 home hardware business acquired capital cabinet corporation usbased manufacturer kitchen bath cabinets addition april 2003 home hardware business acquired american lock company largest usbased manufacturer solid body commercial padlocks aggregate cost acquisitions 1237 million aggregate goodwill indefinitelived intangibles definitelived intangibles 629 million 145 million 128 million respectively businesses acquired included consolidated results date acquisition acquisitions consolidated january 1 2002 would materially affected results november 2002 home hardware business sold nonstrategic plumbing parts business net proceeds approximately 15 million company recorded aftertax loss 102 million related sale april 2002 home hardware business acquired omega holdings inc omega usbased manufacturer custom semicustom cabinetry acquisition broadened cabinet product line providing additional selling opportunities across customers producing purchasing manufacturing efficiencies cost acquisition 538 million result acquisition omega home products business recorded goodwill identifiable intangibles 3452 million 2120 million respectively 2120 million identifiable intangibles consists 1385 million indefinitelived tradenames 735 million customerrelationship intangibles amortized weightedaverage useful life approximately 15 years following table provides allocation purchase price omega included consolidated results january 1 2001 company’s unaudited pro forma net sales net income diluted earnings per share would 2 higher year ended december 31 2002 6 4 higher respectively year ended december 31 2001 may 31 2001 company’s spirits wine business completed transactions vs creating joint venture named future brands llc distribute initial tenyear period companies’ spirits brands united states company’s spirits wine business accounted joint venture using equity method accounting future brands consolidated spirits wine business vs substantive participating rights preclude consolidation vs paid 270 million gain access spirits wine business’s us distribution network acquire 49 interest future brands paid 375 million purchase 10 equity interest jbbw form convertible preferred stock shares jbbw convertible preferred stock issued vs convertible 10 jbbw common stock voting power equivalent 10 interest jbbw common stock preferred stock entitled dividend equal greater 10 dividend paid upon jbbw common stock 3 preferred stock’s face value 375 million plus unpaid accrued dividends may paid common stock unless unpaid accrued jbbw preferred stock dividends paid vs also acquired threeyear option increase equity stake jbbw additional 99 vs may require company purchase jbbw preferred stock fair value whole part time may 31 2004 upon change control jbbw jbbco certain events company accounted 270 million gain sale 49 future brands deferred income resulting tax sale deferred income tax asset due certain continuing obligations jbbco including limited making payments suppliers employees parties future brands contracts event default future brands june 2001 company began amortizing amounts income taxes straightline basis initial term agreement 10year amortization period based noncancelable 10year term management agreement future brands years ended december 31 2003 2002 company’s spirits wine business recorded minority interest 10 ownership vs maintains business 113 million 113 million respectively redemption feature jbbw convertible preferred stock accounted accordance eitf topic d98 “classification measurement redeemable securities” result cumulative adjustment 487000 recorded minority interest income consolidated statement income representing decrease fair value convertible redeemable preferred stock april 2003 3041 million return portion invested capital spirits wine business shareholders vs company return capital related disposition jbbw’s ukbased scotch whisky business 2001 result preferred stock face value 3446 million dividend rate 32647 1999 spirits wine business formed international sales distribution joint venture named maxxium worldwide bv maxxium remycointreau highland distillers distribute sell spirits wine key markets outside united states addition investment future brands vs acquired 25 interest maxxium 2001 result investment vs spirits wine business received 82 million dividend maxxium reduced investment joint venture jbbw’s total potential investment 100 million maxxium contingent upon achievement certain contractual performance measures met 2003 addition company guarantees certain credit facilities bank loans entered maxxium amount totaling 79 million 69 million outstanding december 31 2003 december 31 2002 guarantees totaled 66 million 57 million outstanding jbbw also executed shareholder loan facility loan facility maxxium amounting 19 million amounts outstanding loan facility either december 31 2003 december 31 2002 loan facility expires june 30 2006 october 2001 company’s spirits wine business sold ukbased scotch whisky business 280 million cash sale business consisted invergordon privatelabel bulk scotch operations several regional brands uk products included agreement generated sales approximately 235 million including excise taxes company recorded aftertax gain 218 million related sale 5 shortterm borrowings credit facilities december 31 2003 2002 5304 million 1613 million shortterm borrowings outstanding respectively comprised notes payable banks commercial paper used general corporate purposes including acquisitions included amount december 31 2003 2002 13 million 65 million outstanding committed bank credit agreements provide unsecured borrowings 96 million 176 million respectively addition company uncommitted bank lines credit provide unsecured borrowings working capital 2185 million 228 million outstanding december 31 2003 1971 million 313 million outstanding december 31 2002 weightedaverage interest rate borrowings 12 21 respectively see note 14 description company’s use financial instruments 6 longterm debt components longterm debt follows november 2003 issued longterm debt securities totaling 600 million shelf registration filed securities exchange commission 600 million notes consist 300 million 2875 notes due december 2006 300 million 4875 notes due december 2013 proceeds used pay commercial paper issued connection acquisition thermatru net proceeds 5955 million less price discounts 12 million underwriting rating agency fees 33 million effective interest rate debt issue approximates stated coupon rate december 31 2003 company maintained two revolving credit agreements various banks company entered 2001 2003 agreements include 750 million 5year revolving credit agreement expires 2006 250 million 364day revolving credit agreement expires 2004 includes option extend payment one year company’s discretion incremental fee 25 outstanding amount interest rate set time borrowing facility fees 08 06 per annum paid 750 million 5year revolving credit agreement 250 million 364day revolving credit agreement respectively fee 750 million 5year revolving credit agreement subject increases maximum 20 per annum event company’s longterm debt rating falls specified levels borrowings agreements made general corporate purposes including acquisitions share repurchases support company’s shortterm borrowings commercial paper market estimated payments maturing debt next five years follows 2004 2005 million 2005 04 million 2006 3011 million 2007 01 million 2008 2000 million 7 267 convertible preferred stock redeemable company’s option shares 267 convertible preferred stock issued outstanding december 31 2003 2002 2001 245093 shares 258656 shares 281515 shares respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share stock 6205 shares common stock authorized unissued common shares reserved issuance upon conversions treasury shares may delivered shares converted 13563 shares 22859 shares 20884 shares 2003 2002 2001 respectively company may redeem preferred stock price 3050 per share plus accrued dividends cash dividend 267 per share aggregate amounts 07 million 07 million 08 million paid years ended december 31 2003 2002 2001 respectively 8 capital stock company 750 million authorized shares common stock 60 million authorized shares preferred stock 146264641 146990735 common shares outstanding december 31 2003 2002 respectively cash dividends paid common stock years ended december 31 2003 2002 2001 aggregated 1662 million 1527 million 1472 million respectively shares purchased connection company’s share repurchase program converted treasury shares amounted 4094842 shares 2003 5769440 shares 2002 7546333 shares 2001 treasury shares delivered connection exercise stock options grants stock awards conversion preferred stock debentures amounted 3368848 2003 4762402 shares 2002 2035239 shares 2001 december 31 2003 2002 83305383 82579289 common treasury shares respectively 9 preferred share purchase rights outstanding share common stock also evidences one preferred share purchase right rights generally become exercisable event acquisition tender offer 15 common stock exercisable right exercisable 1100th share series junior participating preferred stock exercise price 150 also upon acquisition 15 common stock upon acquisition company transfer 50 assets earning power right rights held 15 acquirer applicable exercisable generally exercisable common shares company acquiring company case may market value twice exercise price certain events however rights may exchanged company common stock rate one share per right rights may redeemed time prior acquisition 15 common stock redemption price 01 per right exercised holder voting dividend rights stockholder company rights expire december 24 2007 december 2002 company’s board directors approved amendment rights plan requires independent director evaluation plan least every three years 25 million authorized series preferred shares reserved issuance upon exercise rights december 31 2003 outstanding rights would exercisable described aggregate 1462646 shares 10 stock plans 1999 2003 longterm incentive plans authorize granting key employees company subsidiaries incentive nonqualified stock options stock appreciation rights restricted stock performance awards stockbased awards may granted alone combination types awards dividend equivalents grants 1999 longterm incentive plan may made december 31 2004 12 million shares common stock grants 2003 longterm incentive plan may made december 31 2008 12 million shares common stock plan two million shares may granted one individual new stockbased awards may made company’s 1990 longterm incentive plan existing awards already issued may continue exercised paid pursuant terms stock options plans exercise prices equal fair market values dates grant options generally may exercised prior one year ten years date grant options granted since november 1998 generally vest onethird year threeyear period date grant stock appreciation rights may granted conjunction option grants permit optionees receive shares common stock cash combination shares cash measured difference option exercise price fair market value common stock time exercise right 2002 nonemployee director stock option plan authorizes granting stock options company’s nonemployee directors grants plan may made december 31 2006 200000 shares common stock options plan exercise prices equal fair market values dates grant may exercised prior one year ten years date grant changes three years ended december 31 2003 shares options follows options exercisable end three years ended december 31 2003 follows weightedaverage fair values options granted 2003 2002 2001 1340 1163 891 respectively fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2003 2002 2001 options outstanding december 31 2003 follows options exercisable december 31 2003 follows december 31 2003 performance awards outstanding pursuant 202950 shares 197850 shares 188550 shares 233250 shares may issued 2003 2004 2005 2006 respectively depending extent certain specified performance objectives met 123344 shares 181197 shares 120034 shares issued pursuant performance awards 2003 2002 2001 respectively costs performance awards expensed performance period compensation expense stock based plans recorded 2003 2002 2001 190 million 100 million 54 million respectively shares available connection future awards company’s stock plans december 31 2003 2002 2001 10146614 1053597 3979940 respectively authorized unissued shares reserved issuance connection awards treasury shares may delivered 11 pension retiree benefits company number pension plans principally united states covering substantially employees plans provide payment retirement benefits mainly commencing ages 60 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service earnings annual contributions plans made necessary ensure legal funding requirements satisfied company provides postretirement health care life insurance benefits certain employees retirees united states certain employee groups outside united states many employees retirees outside united states covered government health care programs december 8 2003 president bush signed law bill expands medicare primarily adding prescription drug benefit medicareeligible retirees starting 2006 company anticipates benefits pays 2006 lower result new medicare provisions however retiree medical obligations costs reported reflect impact legislation deferring recognition new medicare provisions’ impact permitted financial accounting standards board staff position 1061 due open questions new medicare provisions lack specific authoritative accounting guidance certain matters final accounting guidance could require changes previously reported information amounts recognized balance sheet consist accumulated benefit obligation defined benefit pension plans 8637 million 7497 million december 31 2003 2002 respectively company’s expected 85 longterm rate return domestic plan assets based melded allocation targeted equity allocation 62 annual return 10 targeted fixed income allocation 38 annual return 60 assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint change assumed health care cost trend rates would following effects plan assets company’s domestic pension plan weightedaverage asset allocations december 31 2003 2002 follows investment strategy company numerous domestic pension plans several master trusts optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility domestic defined benefit asset allocation policy trusts allows equity allocation 45 75 fixed income allocation 25 50 cash allocation 25 master trust different target asset allocation based underlying liability structure contributions company expects contribute 5075 million pension plans 2004 company sponsors number defined contribution plans contributions determined various formulas costs related plans amounted 234 million 228 million 224 million 2003 2002 2001 respectively 12 lease commitments future minimum rental payments noncancelable operating leases december 31 2003 follows total rental expense operating leases reduced minor amounts subleases amounted 441 million 524 million 509 million 2003 2002 2001 respectively 13 income taxes components income continuing operations income taxes follows reconciliation income taxes 35 federal statutory income tax rate income taxes reported follows 2003 2001 company recorded tax reserve reversals 350 310 million respectively reflecting conclusion routine irs examinations years 1993 1996 1990 1992 respectively june 2003 audit 19931996 tax returns resulted reduction tax expense 35 million recording 29 million tax receivable net decrease tax reserves 6 million irs conduct routine review 19972001 tax years intends fasttrack review completion 2004 number complex tax items related years including spinoff gallaher 1997 believe appropriate levels reserves applicable tax years favorable resolution audit early stages could result reserve reversals would benefit earnings 2004 june 2002 company recorded tax benefit 617 million plus aftertax interest 96 million resulted new irs regulations issued march 2002 reinterpret capital loss disallowance rules enabled company utilize tax loss incurred 1994 offset capital gains taxed 1996 1997 company receive cash representing tax refund related interest upon conclusion irs’s regular audit 1997 tax returns 2003 2001 company received onetime nonoperating adjustments 69 million 173 million respectively interest income tax recorded income result conclusion routine irs examinations years 1993 1996 1990 1992 respectively income taxes follows components net deferred tax assets liabilities follows 14 financial instruments company enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates principal financial instruments used forward foreign exchange contracts interest rate swaps counterparties major financial institutions although company’s theoretical risk replacement cost estimated fair value instruments management believes risk incurring losses remote losses would immaterial company enters forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting company’s risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions company periodically enters forward foreign exchange contracts hedge portion net investments foreign subsidiaries estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices december 31 2003 2002 fair value outstanding contracts contract amounts essentially company may time enter interest rate swap agreements manage exposure interest rate changes swaps involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense december 31 2003 company outstanding interest rate swap agreements aggregate notional principal amount 200 million swap agreements based outstanding 2875 notes due 2006 allow agreements classified fair value hedge accordance sfas 133 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate december 31 2002 company outstanding interest rate swap agreements estimated fair value company’s cash equivalents notes payable banks commercial paper approximates carrying amounts due principally short maturities estimated fair value company’s 14431 million 9746 million total longterm debt including current portion december 31 2003 2002 approximately 15648 million 10943 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity concentration credit risk respect accounts receivable limited large number geographically diverse customers make operating companies’ domestic international customer base thus spreading credit risk raw materials used company subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors company uses derivative contracts manage exposure commodity price volatility exposures considered material company’s financial statements 15 guarantees commitments december 31 2003 company thirdparty guarantees totaling approximately 79 million represent guarantees debt maxxium worldwide bv maxxium company’s spirits wine business’s international sales distribution joint venture company required perform guarantees event maxxium fails make contractual payments twelve months ended december 31 2003 company renewed guarantee maxxium’s credit facilities renewal resulted extension expiration date credit facility’s committed portion november 14 2003 june 13 2006 guarantees maxxium debt modified effective date financial accounting standards board interpretation 45 fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantee’s indebtedness others” company recorded liability 18 million december 31 2003 reflect fair value guarantees maxxium reduction credit facility’s interest rate company provided certain indemnities pursuant may required make payments indemnified party connection certain divestitures indemnities related various representations typically included divestiture agreements environmental tax product liability employee liability contingencies depending transactions several divestitures maximum obligation certain contingencies specified atypical transactions accordingly pursuant fin 45 payments divestiturerelated indemnity obligations reasonably estimated duration indemnities varies cases indefinite indemnities entered prior december 31 2002 recorded liability indemnities consolidated financial statements company made payments related indemnity obligations material company’s financial position results operations quarter furthermore company expect sums may pay connection indemnity obligations would material adverse effect consolidated financial position results operations cash flows fiscal 2003 subsequent periods purchase obligations company december 31 2003 1 purchase obligations include contracts raw materials finished goods purchases advertising selling administrative services capital expenditures 16 restructuring restructuringrelated charges restructuring charges april 2001 company announced result evaluation strategic options office business would immediately begin implementing plan designed improve financial results longterm value business conjunction restructuring program company’s office business recorded charges associated consolidating manufacturing distribution facilities employee terminations addition 2003 company’s golf business recorded pretax restructuring charges associated consolidation three golf ball manufacturing facilities two newest production facilities result actions company recorded pretax restructuring charges year ended december 31 2003 follows 2003 net provision 195 million comprised new provision 215 million less adjustments accruals excess original estimates 20 million golf charges relate asset writeoffs associated consolidation office charges principally relate employment termination costs asset writeoffs pursuant provisions sfas 146 following table represents reconciliation restructuring charges supplemental information actions initiated december 31 2002 loss disposal positive due proceeds disposal assets company expects substantially remaining payments made within next twelve months addition 2002 company recorded pretax restructuring charges follows home hardware charges relate sale lowreturn plumbing parts business including loss disposal business planned employee termination costs seven positions announced spirits wine charges relate sale minor product line office charges principally relate planned employee termination costs 724 positions asset writeoffs costs associated consolidation manufacturing distribution facilities 2001 company recorded pretax restructuring charges follows home hardware includes charges related planned workforce reduction initiatives announced 342 positions lease cancellation costs golf includes charges related asset writeoffs associated reduction wound golf ball capacity office includes charges related product line discontinuances rationalization operations expenses associated exploration strategic options office business planned workforce reduction initiatives 779 positions across operations 2004 expect record additional restructuring related charges approximately 26 million 39 44 million pre tax related closure home hardware’s muskogee ok manufacturing facility completion golf business’s facility consolidation final phase office business repositioning reconciliation restructuring liability reconciliation restructuring liability december 31 2003 follows accrual adjustments accruals excess original estimates b loss disposal positive due proceeds disposal assets company expects substantially remaining payments made within next twelve months reconciliation restructuring liability december 31 2002 follows planned downsizing 1852 positions planned elimination 1545 implemented december 31 2002 employee groups affected restructuring actions predominantly office business include plant administrative hourly salaried employees b included 2002 provision reversals certain costs reflected reduction restructuring charges recorded 2002 included 11 million employee termination costs 06 million costs 01 million loss disposal costs reconciliation restructuring liability december 31 2001 follows planned downsizing 1121 positions 526 implemented december 31 2001 employee groups affected restructuring actions predominantly office business include plant administrative hourly salaried employees restructuringrelated charges 2003 company recorded restructuringrelated charges follows restructuringrelated charges 2003 reflect golf restructuringrelated charges consolidation golf ball manufacturing operations accelerated depreciation assets associated facility consolidation office restructuringrelated charges rationalization manufacturing distribution facilities inventory writedown associated discontinuance certain unprofitable product lines 2002 company recorded restructuringrelated charges follows restructuringrelated charges 2002 reflect home hardware charges writedown longlived asset costs associated sale nonstrategic specialty plumbing parts business reversal certain accruals longer deemed necessary office charges rationalization manufacturing distribution facilities inventory writeoffs associated discontinuance certain unprofitable product lines 2001 company recorded restructuringrelated charges follows restructuringrelated charges 2001 reflect home hardware inventory writeoffs related downsizing lowmargin specialty plumbing parts business golf inventory writeoffs due discontinuance certain golf ball manufacturing processes office inventory writeoffs due discontinuance certain unprofitable product lines expenses associated exploration strategic options office products business 17 information business segments company’s subsidiaries operate principally following business segments home hardware includes kitchen bathroom faucets accessories manufactured marketed distributed moen kitchen bath cabinets manufactured marketed distributed masterbrand cabinets residential entry door systems designed manufactured thermatru locks manufactured marketed distributed master lock american lock tool storage products manufactured distributed waterloo spirits wine includes products produced marketed distributed jim beam brands worldwide inc subsidiaries golf includes golf balls golf clubs golf shoes gloves manufactured marketed distributed acushnet company office includes paper fastening document management computer accessories time management presentation office products manufactured marketed distributed acco world corporation subsidiaries net sales segment assets business segments net sales geographic areas period 1998 2003 provided page 79 company’s subsidiaries operate principally united states canada united kingdom australia reconciliation segment net sales consolidated net sales follows operating income follows segment assetsa follows represents total assets excluding intercompany receivables reconciliation segment assetsa consolidated total assets follows represents total assets excluding intercompany receivables intangibles resulting business acquisitions net longlived assets followsa represents property plant equipment net sales geographic region follows depreciation follows amortization intangibles follows capital expenditures follows 18 income net components income net years ended december 31 2003 2002 2001 follows 19 earnings per share basic earnings per common share based weightedaverage number common shares outstanding year preferred stock dividend requirements diluted earnings per common share assume dilutive convertible debentures convertible preferred shares outstanding beginning year converted dates related interest preferred stock dividend requirements outstanding common shares adjusted accordingly also assumes outstanding common shares increased shares issuable upon exercise stock options market price exceeds exercise price less shares could purchased company related proceeds computation basic diluted earnings per common share “net income” follows 20 comprehensive loss comprehensive loss defined net income changes stockholders’ equity transactions events sources stockholders components changes comprehensive loss follows included foreign currency adjustments balance december 31 2003 total deferred forward foreign exchange contract losses 11 million see note 1 21 related party transactions future brands llc 2001 company’s spirits wine business completed transactions vs vin sprit ab vs creating future brands joint venture distributes companies’ spirits brands united states provides related selling invoicing services future brands receives commission partners services provided part forming joint venture jbbco event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2003 2002 jbbco outstanding obligations result arrangement jbbco’s balances related future brands included following maxxium worldwide bv 1999 spirits wine business formed international sales distribution joint venture named maxxium worldwide bv maxxium distribute sell spirits wine key markets outside united states joint venture partners include remycointreau highland distillers vs jbbco records sales time spirits sold third parties rather time shipment maxxium result forming joint venture company guaranteed certain credit facilities bank loans entered maxxium amount totaling 79 million 69 million outstanding december 31 2003 december 31 2002 guarantees totaled 66 million 57 million outstanding jbbw executed shareholder loan facility loan facility maxxium amounting 19 million amounts outstanding loan facility either december 31 2003 december 31 2002 loan facility expires june 30 2006 jbbco’s balances related maxxium included following 22 pending litigation tobacco litigation indemnification december 22 1994 company sold american tobacco company atco subsidiary brown williamson tobacco corporation bw whollyowned subsidiary bat industries plc connection sale bw atco since merged bw “indemnitor” agreed indemnify company claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco indemnitor complied terms indemnification agreement since 1994 company aware inability part indemnitor satisfy indemnity obligations october 27 2003 british american tobacco plc rj reynolds tobacco holdings inc announced signing definitive agreement combine assets respective us tobacco businesses bw rj reynolds tobacco co new publicly traded holding company reynolds american inc indemnification agreement provides indemnitor shall consolidate merge transfer substantially business unless person formed merger consolidation transfer business expressly assumes indemnification obligations proposed transaction indemnitor reynolds structured one forms combined entity would required expressly assume indemnitor’s obligation indemnify company proposed transaction consummated form indemnification obligations indemnitor would continue company defendant numerous actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably management unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however management believes number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor management believes pending actions material adverse effect upon results operations cash flows financial condition company believes meritorious defenses company indemnified previously mentioned indemnification agreement litigation increasing volume asbestosrelated personal injury litigation united states generally subsidiary company moen incorporated named defendant approximately 160 cases claiming personal injury asbestos suits name multiple defendants cases excess 75 defendants named addition moen possible predict outcome pending litigation possible actions could decided unfavorably management believes meritorious defenses actions material adverse effect upon results operations cash flows financial condition company actions vigorously contested addition lawsuits described company subsidiaries defendants lawsuits associated business operations possible predict outcome pending actions litigation possible actions could decided unfavorably management believes meritorious defenses actions material adverse effect upon results operations cash flows financial condition company actions vigorously contested 23 environmental company subject laws regulations relating protection environment possible quantify certainty potential impact actions regarding environmental matters particularly remediation compliance efforts company’s subsidiaries may undertake future opinion management compliance present environmental protection laws taking account estimated recoveries third parties material adverse effect upon results operations cash flows financial condition company report independent auditors board directors stockholders fortune brands inc opinion accompanying consolidated balance sheets related consolidated statements income cash flows stockholders’ equity present fairly material respects financial position fortune brands inc subsidiaries december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed item 15a2 form 10k presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements financial statement schedule free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 2 consolidated financial statements company changed method accounting goodwill intangible assets fiscal 2002 pricewaterhousecoopers llp chicago illinois january 22 2004 report management stockholders fortune brands inc prepared consolidated balance sheet fortune brands inc subsidiaries december 31 2003 2002 related consolidated statements income cash flows stockholders’ equity three years period ended december 31 2003 financial statements prepared accordance accounting principles generally accepted united states america financial information elsewhere annual report form 10k consistent financial statements system internal controls company subsidiaries designed provide reasonable assurances financial records adequate relied upon provide information preparation financial statements established policies procedures carefully followed independent auditors elected annually stockholders company audit financial statements pricewaterhousecoopers llp independent auditors currently engaged perform audit accordance generally accepted auditing standards includes tests transactions selective tests internal accounting controls audit committee board directors consisting solely outside directors meets periodically independent auditors internal auditors management review accounting auditing financial reporting matters auditors direct access audit committee norman h wesley norman h wesley chairman board chief executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer information business segmentsa fortune brands inc subsidiaries see note 17 information business segments b net sales attributed countries based location customer c represents total assets excluding intercompany receivables intangibles resulting business acquisitions net item 9item 8 financial statements supplementary data consolidated statement income fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement cash flows fortune brands inc subsidiaries includes cash equivalents discontinued operations december 31 2004 798 million see notes consolidated financial statements consolidated statement stockholders’ equity fortune brands inc subsidiaries see notes consolidated financial statements notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies basis presentation consolidated financial statements include accounts fortune brands inc elimination intercompany transactions majorityowned subsidiaries excluding subsidiary future brands llc third party substantive participating rights subsidiary acushnet lionscore limited holds minority interest substantive control result company operational decisionmaking powers entity addition consolidate variable interest entities vies deemed primary beneficiary refer note 4 “acquisitions disposals joint ventures” discussion vies consolidated financial statements prepared conformity accounting principles generally accepted united states america require management make estimates assumptions affect reported amounts assets liabilities sales expenses reporting periods actual results future periods could differ estimates certain reclassifications made prior years’ financial statements conform current year presentation accordance statement financial accounting standards 144 “accounting impairment disposal longlived assets” results operations related 2005 spinoff acco world corporation reclassified separately stated accompanying consolidated statements income years ended december 31 2005 2004 2003 assets liabilities discontinued operation reclassified accompanying consolidated balance sheets december 31 2004 cash flows discontinued operations years ending december 31 2005 2004 2003 separately classified accompanying consolidated statements cash flows cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns trade receivables include interest allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions inventories priced lower cost principally firstin firstout lesser amounts average lastin firstout market lastin firstout inventories december 31 2005 1711 million current cost 1812 million total inventories 16639 million accordance generally recognized trade practice bulk spirits wine inventories classified current assets although majority inventories due duration aging processes ordinarily sold within one year property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred estimated useful lives related assets follows buildings leasehold improvements 15 40 years machinery equipment 3 10 years longlived assets accordance statement financial accounting standards 144 fas 144 “accounting impairment disposal longlived assets” longlived asset including amortizable identifiable intangibles asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group comparison indicates impairment amount impairment typically calculated using discounted expected future cash flows discount rate applied cash flows based company’s weightedaverage cost capital risk adjusted appropriate represents blended aftertax costs debt equity notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued goodwill indefinitelived intangibles statement financial accounting standards 142 fas 142 “goodwill intangible assets” requires goodwill tested impairment annual basis certain circumstances written impaired rather amortized previous standards required interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates use rate corresponding cost capital risk adjusted appropriate determining discounted cash flows estimated cash flows determined disaggregating business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill perform impairment test measure amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting unit’s goodwill implied fair value goodwill determining estimated future cash flows consider current projected future levels income based management’s plans business well business trends prospects market economic conditions fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life deemed tradenames currently anticipated contribute cash flows company indefinitely indefinitelived intangible assets amortized required evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangibles impairment annually whenever market business events indicate may potential impact intangible consider implications external eg market growth pricing competition technology internal factors eg product costs margins support expenses capital investment potential impact cash flows business near long term well impact identifiable intangible asset associated business developing executing shortterm longterm plans based recent business results consideration significant external internal factors resulting business projections indefinitelived intangible assets associated segment reviewed determine whether likely remain indefinitelived whether finite life appropriate addition based events period future expectations management considers whether potential impairment exists required fas 142 predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize profit split methodology customary valuation practice establish reasonable royalty rate profit split analyses allocate economic income ebitda less returns working capital fixed assets employed tradename residual assets economic unit determination expected profit margin associated commercialization tradename additionally independent valuation experts used periodic review testing management’s assumptions relative significant trade valuations lives independent research market competitive dynamics conjunction ongoing review carrying value identifiable intangibles 2003 company recorded noncash writedown identifiable intangibles 120 million 80 tax discontinued operations conjunction repositioning office business writedowns 2005 2004 warranty reserves offer customers various warranty terms based upon type product sold determine warranty expense accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category warranty expense generally recorded cost products sold time sale refer note 15 “product warranties” notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued employee benefit plans provide range benefits employees retired employees including pensions postretirement postemployment health care benefits record annual amounts relating plans based calculations specified generally accepted accounting principles reflect various actuarial assumptions including discount rates expected longterm rates return plan assets compensation increases turnover rates health care cost trend rates discount rate based high quality fixed income bonds maturities corresponding benefit obligations longterm expected rate return plan assets reflects mix plan asset investments compensation increases reflect expected future compensation trends health care cost trend rates reflect expected changes health care costs based historical rates estimates future changes review actuarial assumptions annual basis makes modifications assumptions based current rates trends deemed appropriate required us generally accepted accounting principles effect modifications generally recorded amortized future periods believe assumptions utilized recording obligations plans presented note 10 “pension retiree benefits” reasonable based experience advice independent actuaries continue monitor assumptions market conditions warrant environmental company subject laws regulations relating protection environment company provides expenses associated environmental remediation obligations amounts probable reasonably estimated adjust accruals new information develops circumstances change accruals discounted december 31 2005 2004 environmental accruals amounted 415 million 462 million respectively included noncurrent liabilities balance sheet income taxes accordance statement financial accounting standards 109 “accounting income taxes” establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest undistributed earnings foreign subsidiaries aggregated 2944 million december 31 2005 revenue recognition accordance sec staff accounting bulletin 104 “revenue recognition” company recognizes revenue products shipped customers net applicable provisions discounts returns allowances also provide estimate potential bad debt time revenue recognition amounts billed shipping handling classified “net sales” consolidated income statement costs incurred shipping handling classified “advertising selling general administrative expenses” shipping handling costs included “advertising selling general administrative expenses” 2194 million 1853 1508 million 2005 2004 2003 respectively customer program costs company generally recognizes customer program costs either “net sales” category “advertising selling general administrative expenses” time program initiated andor revenue recognized costs recognized “net sales” include limited general customer programgenerated expenses cooperative advertising programs volume allowances promotional allowances costs typically recognized “advertising selling general administrative expenses” include point sale materials store service fees addition “accrued customer programs” principally include general customer program costs cooperative advertising volume allowances shared media volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough merchandising support level returns customer employee training advertising costs advertising costs amounted 4711 million 4306 million 3957 million 2005 2004 2003 respectively principally expensed incurred advertising costs include media costs point sale materials cooperative advertising product endorsements notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued research development research development expenses amounted 659 million 606 million 498 million 2005 2004 2003 respectively expensed incurred stockbased compensation elected apply accounting principles board opinion 25 “accounting stock issued employees” related interpretations accounting stock plans allowed financial accounting standards 148 fas 148 “accounting stockbased compensation transition disclosure” result compensation expense recognized stock options plans accordance fas 148 purposes pro forma disclosure determined compensation expense accordance blackscholes option pricing model compensation cost fixed stock options determined consistent fas 148 pro forma net income earnings per common share 2005 2004 2003 would follows pro forma amounts may representative future disclosures since estimated fair value stock options amortized expense vesting period additional options may granted future years apply “nominal vesting period approach” apb 25 recognizing pro forma compensation cost threeyear vesting period including awards held individuals eligible retirement provisions applicable plan adopt statement financial accounting standards 123 revised 2004 “sharebased payment” january 1 2006 change approach recognize expense retirement eligible employees twelvemonth period since retiree options vest entirety held least one year retirement period retirement longer impact change pro forma net income diluted earnings per share year ended december 31 2005 2004 2003 would material result spinoff office products business see note 3 “discontinued operation” company adjusted number shares granted stock options option exercise prices preserve economic value options existed time spinoff adjustment based fortune brands stock price close stock market immediately spinoff opening stock price day spinoff impact statement income result modification number stock options exercise prices foreign currency translation foreign currency balance sheet accounts translated us dollars rates exchange balance sheet date income expenses translated average rates exchange effect year related translation adjustments made directly separate component “accumulated comprehensive income loss” caption stockholders’ equity transactions made currencies different entity’s functional currency gains losses foreign currency transactions classified statement income depending nature item derivative financial instruments accordance statement financial accounting standards statement 133 fas 133 “accounting derivative instruments hedging activities” related amendment statement financial accounting standards statement 138 fas 138 “accounting certain derivative instruments certain hedging activities” derivatives notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings connection 2005 spirits wine purchase price paid british pound sterling entered call options hedge currency exposure related purchase price terminated call options early july 2005 also entered forward contracts buy british pounds hedge currency exposure related purchase price settled forward contracts upon consummation acquisition july 2005 connection acquisition also entered treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuance new longterm debt finance acquisition terminated locks swaps upon issuance new longterm debt january 2006 additional information see note 13 “financial instruments” derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2005 72 million deferred currency losses reclassified cost products sold year ended december 31 2004 less 01 million deferred currency losses reclassified cost products sold estimate 40 million currency derivative gains included oci december 31 2005 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions principal currencies hedged include canadian dollar australian dollar euro pound sterling interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuances new longterm debt see note 13 “financial instruments” information management interest rate risk recently issued accounting standards application tax deduction qualified production activities within american jobs creation act 2004 december 2004 financial accounting standards board fasb issued fasb staff position 1091 fsp 1091 “application tax deduction qualified production activities within american jobs creation act 2004 act” act provides tax deduction qualified production activities tax benefit phased beginning 2005 impact company material results financial position inventory costs november 2004 fasb issued statement financial accounting standards 151 fas 151 “inventory costs amendment arb 43 chapter 4” fas 151 clarifies accounting abnormal amounts idle facility expense freight handling costs spoilage addition fas 151 requires companies base allocation fixed production overhead costs conversion normal capacity production facilities fas 151 effective company 2006 fas 151 significant effect results financial position sharebased payment december 2004 fasb issued statement financial accounting standards 123 revised 2004 fas 123r “sharebased payment” fas 123r replaces fas 123 “accounting stock based compensation” supersedes apb opinion 25 “accounting stock issued notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued employees” fas 123r requires compensation expense measured fair value share common stock date grant related sharebased payment transactions recognized financial statements period employee provides service exchange award adopted fas 123r effective january 1 2006 using “modified prospective” transition method defined fas 123r based current estimates using blackscholes value date grant aftertax impact expensing stock options diluted earnings per share full year 2006 expected approximately 018 per share including effect options granted 2006 2 goodwill identifiable intangibles net goodwill 36335 million december 31 2005 increase goodwill twelve months ended december 31 2005 16284 million 20051 million december 31 2004 principally attributable spirits wine acquisition refer note 4 “acquisitions disposals joint ventures” change net carrying amount goodwill segment follows also indefinitelived intangible assets principally tradenames 26909 million december 31 2005 compared 7018 million december 31 2004 increase 19891 million primarily due spirits wine acquisition amortizable identifiable intangible assets principally tradenames subject amortization estimated useful life either 15 30 years based assessment number factors may impact useful life factors include historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion financial results relevant factors gross carrying value accumulated amortization amortizable intangible assets 7383 million 1822 million respectively december 31 2005 compared 6772 million 1469 million respectively december 31 2004 gross carrying value increase principally due spirits wine acquisition notes consolidated financial statements fortune brands inc subsidiaries 2 goodwill identifiable intangibles continued gross carrying value accumulated amortization class intangible assets december 31 2005 2004 follows 1 accumulated amortization prior adoption financial accounting standards 142 “goodwill intangible assets” intangible amortization 334 million 354 million 172 million years ended december 31 2005 2004 2003 respectively company expects record intangible amortization approximately 38 million next five fiscal years ending december 31 2006 december 31 2010 performed annual impairment test december 31 fiscal year 2005 2004 impairment goodwill indefinitelived intangible assets recognized result annual impairment tests 3 discontinued operation august 16 2005 company completed spinoff office products business acco world corporation acco company’s shareholders addition retaining shareholdings fortune brands fortune brands shareholder received one share acco brands corporation 4255 shares fortune brands stock held fortune brands record gain loss transaction result spinoff part spinoff acco paid cash dividend 625 million fortune brands received 6133 million minority shareholder received 117 million statements income consolidated balance sheets prior periods adjusted reflect presentation spinoff acco discontinued operation results discontinued operations include expenses paid fortune brands behalf acco based actual direct costs incurred well interest expense associated outstanding debt fortune brands allocated acco allocation debt based average net assets acco percent average net assets plus average consolidated debt attributable operations fortune brands notes consolidated financial statements fortune brands inc subsidiaries 3 discontinued operation continued following table summarizes results discontinued operations years ended december 31 2005 2004 2003 lower effective tax rate year ending december 31 2004 resulted primarily 2004 tax benefit recognized due reversal deferred tax valuation allowance approximately 7 million deferred tax valuation allowance relates office products business’ nonus operations connection change expectations utilization certain net operating loss carryforwards following table summarizes major classes assets liabilities acco world corporation reflected discontinued operation consolidated balance sheet december 31 2004 4 acquisitions disposals joint ventures july 2005 company purchased 25 spirits wine brands well certain distribution assets acquired businesses pernod ricard sa pernod ricard brands acquired include sauza tequila maker’s mark bourbon courvoisier cognac canadian club whisky laphroaig singlemalt scotch clos du bois superpremium wines leading regional national brands distribution networks uk germany spain expect complementary brands acquired significantly enhance highmargin spirits wine business strengthen distribution key international markets july 2005 affiliate company received tracker shares issued goal acquisitions limited goal pernod ricard subsidiary formed acquire allied domecq plc allied domecq tracker shares gave company certain economic rights respect acquired businesses prior actual legal transfer company legal transfer acquired businesses completed company held tracker shares company also certain rights manage operations acquired businesses legally transferred company january 27 2006 substantially acquired businesses legally transferred fortune brands notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals joint ventures continued acquisition structured way result negotiations pernod ricard considering various factors including commercial desire obtain economic benefits associated owning operating acquired businesses soon possible funding purchase price assets many former allied domecq subsidiaries owned assets company pernod ricard would separately retain including integrated manufacturing distribution marketing licensing operations involving multiple brands separation transfer commingled shared assets pernod ricard company involved significant reorganization business operations contractual arrangements many companies involved light company pernod ricard agreed sixmonth period ending january 26 2006 assets liabilities allied domecq would evaluated specific assets identified legally separated company pernod ricard transferred accordingly actual legal transfer acquired businesses required evaluate alternative ways separate acquired businesses retained pernod ricard obtain required consents structure negotiate document complete transfer acquired businesses within parameters established agreement pernod ricard time net assets particular acquired business actually transferred company number goal tracker shares held company reduced proportion value ascribed net assets transferred using methodology prescribed company’s agreement pernod ricard agreement pernod ricard provided net assets acquired businesses would legally transferred one subsidiaries fortune brands six month period began july 26 2005 december 31 2005 net assets following acquired businesses transferred courvoisier maker’s mark certain california wine assets january 27 2006 substantially net assets acquired businesses legally transferred fortune brands initial cost spirits wine acquisition approximately £27 billion 49 billion subject change based purchase price adjustments accordance purchase agreement final purchase price based specified multiples historic profit fiscal year ended august 31 2004 brands purchased well working capital levels july 26 2005 adjustments company’s agreement pernod ricard provides assessment pernod ricard historic profitability brands company purchased subsequent review company historic profits binding determination third party company pernod ricard cannot agree reached agreement pernod ricard january 27 2006 confirmed global consideration acquired businesses adjusted additional payment £1994 million approximately 352 million pernod ricard partially offset payment pernod ricard company £822 million approximately 145 million estimated working capital adjustments may made refer note 24 “subsequent events” additional information related separate transaction company acquired larios brands primarily gin related assets affiliate pernod ricard subsidiary september 8 2005 cost larios acquisition additional 1356 million assets legally transferred reporting accordance financial accounting standards board interpretation 46r fin 46r “consolidation variable interest entities” since many allied domecq assets acquired fortune brands commingled entities owned assets also acquired pernod ricard accordance fin 46r interest goal subsidiaries deemed variable interest entities fair value specified assets half total fair value entity’s assets variable interest entities primary beneficiary bearing obligation absorb majority expected losses right receive majority expected residual returns consolidated accounted accordance fin 46r statement financial accounting standards 141 fas 141 “business combinations” recognized minority interest pernod ricard assets fair value pernod ricard assets legally transferred ceased recognizing minority interest fair value assets acquired fortune brands less 50 fair value entity primary beneficiary accounted investment using cost notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals joint ventures continued method addition since tracker shares gave company ownership rights incomelosses generated fortune brands assets date acquisition legal transfer assets recorded income amount 573 million unconsolidated subsidiaries period july 26 2005 december 31 2005 fortune brands assets legally transferred cost investments replaced actual fortune assets acquired fair value basis date acquisition accordance fas 141 december 31 2005 fortune brands assets accounted cost method 11 billion included investments unconsolidated subsidiaries condensed consolidated balance sheet december 31 2005 investments included assets company paid approximately 10 billion total purchase price approximately 50 billion vies investment considered primary beneficiary maximum exposure loss december 31 2005 11 billion net assets pertaining investment legally transferred january 1 2006 january 27 2006 aware losses occurred transfer period initially financed spirits wine acquisition borrowings bank credit agreements subsequently financed commercial paper market april 20 2005 executed bridge credit agreement 60 billion 18month term initial drawdown january 2006 issued dollar eurodenominated longterm debt securities 2 billion 800 million approximately 1 billion repaid cancelled bridge credit agreement see notes 6 “longterm debt” 24 “subsequent events” additional information financing spirits wine acquisition expect finalize purchase price allocation 2006 december 31 2005 recorded 16234 million goodwill tax deductible acquired fortune brands assets consolidated identifiable intangible assets dates acquisitions acquired fortune brands consolidated follows following table summarizes estimated fair value spirits wine assets acquired liabilities assumed date acquisitions includes liability 380 million connection planned restructuring acquired businesses primarily related workplace reduction costs distribution termination costs accordance fas 141 disclosure requirements unaudited pro forma results years ended december 31 2005 2004 presented spirits wine acquisition legal transfer assets occurred january 1 2004 information based historical results operations adjusted impact acquisition costs notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals joint ventures continued pro forma results include preacquisition onetime unusual charges adjustments compensation expense changes fair value allied domecq stock well allocations selling marketing general administrative expenses representative expenses ongoing basis addition result fin 46r accounting acquired businesses july 26 2005 december 31 2005 results operations representative results acquired businesses legally transferred fortune brands december 31 2005 also 2005 results fortune brands exclude income office products business subsequent august 16 2005 spinoff include acquisitionrelated charges hedge accounting expense integration costs given significant factors adjustments impacting pro forma disclosure results presented deemed representative either historical results future results acquired businesses actually transferred fortune brands january 1 2004 transfer fortune brands certain acquired spirits wine assets accomplished various stock sales mergers asset sales could result assumption transfer fortune brands liability certain litigation contingent liabilities contingent indemnity rights assumption transfer might ultimately require establishment additional reserves diligence date assets identified liabilities assurance given final results diligence june 2004 home hardware business acquired sentinel doors ltd leading uk manufacturer installer complete composite entry door systems acquisition gives thermatru corp thermatru stronger growth platform uk june 2004 home hardware acquired assets dudley inc leading brand school locker locks canada aggregate purchase price acquisitions 309 million acquisitions material impact consolidated financial statements december 2003 spirits wine business obtained 20year extension rights manufacture distribute gilbey’s gin vodka us extending license agreement 2027 july 2003 spirits wine business acquired wild horse winery californiabased producer superpremium ultrapremium wines june 2003 home hardware business acquired capital cabinet corporation usbased manufacturer kitchen bath cabinets april 2003 home hardware business acquired american lock company usbased manufacturer solid body commercial padlocks aggregate cost acquisitions 1237 million cost exceeded estimated fair value net assets acquired approximately 90 million acquired businesses included consolidated results date acquisition acquisitions consolidated january 1 2003 would materially affected results november 2003 home hardware business acquired thermatru leading manufacturer residential entry door systems united states acquisition fits strategic focus leading brands shares beneficial demographics market fundamentals home hardware brands creates valuable synergies within home hardware business purchase financed issuance commercial paper subsequently partially refinanced issuance longterm debt securities outstanding shelf registration statement filed securities exchange commission results operations included consolidated financial statements acquisition date acquisition price 9240 million net cash unaudited pro forma results december 31 2003 presented thermatru acquisition occurred january 1 2003 information based historical results operations notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals joint ventures continued adjusted acquisition costs opinion management represent results would occurred company operated thermatru since january 1 2003 april 2003 spirits wine business returned portion invested capital 3041 million company vs vin sprit ab shareholders spirits wine business return capital related disposition jim beam brands worldwide inc’s ukbased scotch whisky business 2001 impact financial statements reduction minority interests 304 million may 31 2001 spirits wine business completed transactions vs creating joint venture named future brands llc distribute initial tenyear period companies’ spirits brands united states spirits wine business accounted joint venture using equity method accounting future brands consolidated spirits wine business vs substantive participating rights preclude consolidation vs paid 270 million gain access spirits wine business’ us distribution network acquire 49 interest future brands paid 375 million purchase 10 equity interest jbbw form convertible preferred stock shares jbbw convertible preferred stock issued vs convertible 10 jbbw common stock voting power equivalent 10 interest jbbw common stock preferred stock entitled dividend equal greater 10 dividend paid upon jbbw common stock 3 preferred stock’s face value 375 million plus unpaid accrued dividends may paid common stock unless unpaid accrued jbbw preferred stock dividends paid vs may require company purchase jbbw preferred stock fair value whole part time may 31 2004 upon change control jbbw jbbco certain events accounted 270 million gain sale 49 future brands deferred income resulting tax sale deferred income tax asset due certain continuing obligations jbbco including limited making payments suppliers employees parties future brands contracts event default future brands june 2001 began amortizing amounts income taxes straightline basis initial term agreement 10year amortization period based noncancelable 10year term management agreement future brands years ended december 31 2005 2004 spirits wine business recorded minority interest 10 ownership vs maintains business 113 million year redemption feature jbbw convertible preferred stock accounted accordance eitf topic d98 “classification measurement redeemable securities” 2003 cumulative adjustment 487000 recorded minority interest income consolidated statement income representing decrease estimated fair value convertible redeemable preferred stock 2005 2004 recorded value convertible redeemable preferred stock deemed reasonable approximation fair value 5 shortterm borrowings credit facilities december 31 2005 2004 6372 million 6698 million shortterm borrowings outstanding respectively comprised notes payable banks commercial paper used general corporate purposes including acquisitions included amount december 31 2005 2004 09 million 01 million outstanding committed bank credit agreements provide unsecured borrowings 09 million 100 million respectively addition company uncommitted bank lines credit provide unsecured borrowings working capital 1247 million 196 million outstanding december 31 2005 2405 million 230 million outstanding december 31 2004 weightedaverage interest rate borrowings 39 10 respectively including shortterm debt 38 billion classified longterm debt see note 13 description company’s use financial instruments notes consolidated financial statements fortune brands inc subsidiaries 6 longterm debt components longterm debt follows based longterm credit facilities support commercial paper borrowings classified 38 billion borrowings longterm consolidated balance sheet december 31 2005 amount represents commercial paper anticipated new longterm debt balance company believes remain outstanding next twelve months b includes adjustment interest rate swap valuation april 20 2005 fortune brands entered bridge credit agreement 60 billion 18month term initial drawdown july 26 2005 amended existing 60 billion bridge credit agreement converting 50 billion 9month revolving credit agreement option extend term additional 9 months incremental fee 0375 outstanding amount interest rate set time borrowing facility fee 010 per annum subject increases maximum fee 0175 per annum event company’s longterm debt rating falls specified levels borrowings agreement made general corporate purposes including support company’s borrowings commercial paper market october 6 2005 entered two new revolving credit agreements various banks agreements include 20 billion 5year revolving credit agreement matures 2010 500 million 364day revolving credit agreement matures 2006 includes option extend payment one year company’s discretion incremental fee 025 outstanding amount new facilities replaced company’s previously existing 10 billion revolving credit agreement amounts outstanding interest rate set time borrowing facility fees 011 per annum 5year agreement 009 per annum 364day agreement subject increases maximum fees 020 0175 per annum 5year agreement 364day agreement respectively event longterm debt rating falls specified levels borrowings agreements made general corporate purposes including support company’s commercial paper borrowings commercial paper market subsequent executing two new revolving credit agreements reduced bridge credit agreement 30 billion 149 million outstanding december 31 2005 connection issuance eurodenominated longterm debt discussed february 7 2006 repaid amounts outstanding terminated bridge credit agreement january 2006 issued longterm debt securities totaling 20 billion shelf registration statement filed securities exchange commission 20 billion notes consist 750 million 5 18 notes due january 2011 950 million 5 38 notes due january 2016 300 million 5 78 notes due january 2036 proceeds used pay commercial paper issued connection spirits wine acquisition net proceeds 19774 million less price discounts 93 million underwriting fees 133 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses refer note 13 “financial instruments” treasury rate locks associated usdenominated longterm debt notes consolidated financial statements fortune brands inc subsidiaries 6 longterm debt continued addition january 2006 issued longterm debt securities totaling 800 million approximately 1 billion transaction exempt registration accordance regulation securities act 1933 notes consist 300 million 3 12 notes due january 2009 500 million 4 notes due january 2013 proceeds used pay commercial paper issued connection spirits wine acquisition borrowings bridge credit agreement net proceeds 7945 million less price discounts 31 million underwriting fees 24 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses refer note 13 “financial instruments” interest rate swaps associated eurodenominated longterm debt estimated payments maturing debt next five years december 31 2005 follows 2006 3002 million 2007 19488 million 2008 2001 million 2010 20000 million 7 267 convertible preferred stock redeemable company’s option 215047 233327 shares 267 convertible preferred stock issued outstanding december 31 2005 2004 respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share together holders common stock certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share convertible preferred stock 6205 shares common stock authorized unissued common shares reserved issuance upon conversions treasury shares may delivered holders converted 18280 shares 11766 shares 2005 2004 respectively company may redeem convertible preferred stock price 3050 per share plus accrued dividends company paid cash dividend 267 per share aggregate amount 06 million 06 million 07 million years ended december 31 2005 2004 2003 respectively 8 capital stock 750 million authorized shares common stock 60 million authorized shares preferred stock 146290063 144285095 common shares outstanding december 31 2005 2004 respectively cash dividends paid common stock years ended december 31 2005 2004 2003 aggregated 2010 million 1829 million 1662 million respectively repurchase shares connection company’s share repurchase program year ended december 31 2005 2004 purchased 4402978 shares connection company’s share repurchase program converted treasury shares treasury shares delivered connection exercise stock options grants stock awards conversion preferred stock debentures amounted 2032854 2005 2423432 2004 december 31 2005 2004 83279961 85284929 common treasury shares respectively 9 stock plans use stock options performance awards compensate key employees awards outstanding three longterm incentive plans december 31 2005 grants 2003 longterm incentive plan may made december 31 2008 12 million shares common stock grants 1999 longterm incentive plan made december 31 2004 1999 plan also maximum share grant limit 12 million shares new stockbased awards made 1990 1999 longterm incentive plans existing awards continue exercisable stock options exercise prices equal fair values dates grant options granted september 2005 generally may exercised prior one year date grant ten years date grant options granted beginning september 2005 may exercised prior notes consolidated financial statements fortune brands inc subsidiaries 9 stock plans continued one year date grant seven years date grant options issued since november 1998 generally vest onethird year threeyear period date grant performance awards currently amortized expense threeyear vesting period generally paid stock paid cash individual stock ownership guidelines met 2002 nonemployee director stock option plan authorizes granting stock options company’s nonemployee directors grants plan may made december 31 2006 200000 shares common stock options plan exercise prices equal fair market values dates grant may exercised prior one year ten years date grant changes three years ended december 31 2005 shares issuable pursuant options follows august 16 2005 connection office products business spinoff company adjusted number shares options option exercise prices preserve closely possible economic value options existed time spinoff weightedaverage fair values options granted 2005 2004 2003 1614 1647 1340 respectively fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2005 2004 2003 notes consolidated financial statements fortune brands inc subsidiaries 9 stock plans continued options outstanding december 31 2005 follows options exercisable end three years ended december 31 2005 follows 1 reported basis spinoff office products business options exercisable december 31 2005 follows december 31 2005 performance awards outstanding pursuant 214444 208586 177409 shares 142875 shares may issued 2006 2007 2008 2009 respectively depending extent certain specified performance objectives met performance award shares issued result spinoff office products business shares issued pursuant performance awards 2005 2004 2003 204300 194705 123233 shares respectively shares prespin basis since issued spinoff office products business costs performance awards expensed performance period compensation expense stock based plans recorded 2005 2004 2003 164 million 191 million 190 million respectively shares available connection future awards company’s stock plans december 31 2005 2004 2003 5710136 7126664 10146614 respectively shares available connection future awards december 31 2004 2003 basis conversion result spinoff office products business authorized unissued shares reserved issuance connection awards treasury shares may delivered 10 pension retiree benefits number pension plans principally united states covering many company’s employees plans provide payment retirement benefits mainly commencing ages 60 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service earnings annual contributions plans made necessary ensure legal funding requirements satisfied notes consolidated financial statements fortune brands inc subsidiaries 10 pension retiree benefits continued company provides postretirement health care life insurance benefits certain employees retirees united states certain employee groups outside united states many employees retirees outside united states covered government health care programs may 2004 fasb issued fasb staff position 1062 fsp 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 ‘the medicare prescription act’” fsp 1062 provides guidance accounting disclosure effects medicare prescription act enacted december 2003 medicare prescription act provide prescription drug benefit medicare part well provide federal subsidy employers provide program prescription drug benefits least actuarially equivalent medicare part adopted fsp 1062 prospectively third quarter 2004 several postretirement plans qualify federal subsidy however adoption fsp 1062 material impact results operations accumulated postretirement benefit obligation changes benefit obligation reflect amount associated medicare subsidy company rather postretirement plans entitled medicare prescription act subsidy notes consolidated financial statements fortune brands inc subsidiaries 10 pension retiree benefits continued amounts recognized balance sheet consist pension benefit obligation accumulated benefit obligation fair value plans assets pension plans accumulated benefit obligation excess plan assets underfunded abo shown notes consolidated financial statements fortune brands inc subsidiaries 10 pension retiree benefits continued assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint change assumed health care cost trend rates would following effects plan assets domestic pension plan weightedaverage asset allocations december 31 2005 2004 follows investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility us defined benefit asset allocation policy trusts allows equity allocation 45 75 fixed income allocation 25 50 cash allocation 25 nonus investment trust targets may differ allowing 90 equity 10 real estate asset allocations based underlying liability structure local regulations retirement asset allocations reviewed periodically ensure allocation meets needs liability structure expected 84 longterm rate return plan assets determined based longterm historical performance plan assets current asset allocation projected longterm rates return pension investment consultants expected longterm rates return 10 equities 6 fixed income contributions expect contribute approximately 40 70 million pension plans 2006 sponsor number defined contribution plans contributions determined various formulas costs related plans amounted 250 million 288 million 234 million 2005 2004 2003 respectively notes consolidated financial statements fortune brands inc subsidiaries 10 pension retiree benefits continued estimated future benefit payments following benefit payments reflect expected future service expected paid 11 lease commitments future minimum rental payments noncancelable operating leases december 31 2005 follows total rental expense operating leases reduced minor amounts subleases amounted 532 million 537 million 441 million 2005 2004 2003 respectively 12 income taxes components income continuing operations income taxes follows notes consolidated financial statements fortune brands inc subsidiaries 12 income taxes continued reconciliation income taxes 35 federal statutory income tax rate income taxes reported follows 1 refer note 5 “acquisitions disposals joint ventures” additional information fin 46r accounting following items impacted effective income tax rate second third quarter 2005 recorded currency hedge accounting expense related spirits wine acquisition purchase price totaling 879 million accordance hedge tax accounting rules losses tax deductible included tax basis investment noncash expense tax deductible effective tax rate year ended december 31 2005 increased see note 13 “financial instruments” additional information currency hedges second quarter 2005 recorded 77 million tax credit result conclusion various state tax audits third quarter 2004 internal revenue service concluded field examination phase routine review 19972001 tax returns result audit recorded net tax reserve reversal 455 million continuing operations well 37 million discontinued operations net reversal accounts release reserves items resolved favorably anticipated partly offset disallowance deduction reserve established fourth quarter 2004 congressional joint committee taxation completed review results routine irs examination 19972001 tax returns continuing operations recorded total tax benefit 515 million 035 per diluted share reflecting completion joint committee review resulted additional reversal tax reserves 395 million net tax adjustment 120 million result conclusion irs examination 19972001 tax years 2005 received total tax refund 56 million fourth quarter 2004 also recorded onetime nonoperating adjustment interest income taxes receivable related taxrelated benefits 21 million tax recorded expense fourth quarter 2004 recorded tax benefit 46 million continuing operations associated foreign earnings repatriation provisions american jobs creation act 2004 2003 audit 19931996 tax returns resulted reduction tax expense 35 million result also recorded onetime nonoperating adjustment 69 million interest income tax recorded income notes consolidated financial statements fortune brands inc subsidiaries 12 income taxes continued income taxes follows components net deferred tax assets liabilities follows 13 financial instruments enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates principal financial instruments used forward foreign exchange contracts interest rate swaps counterparties major financial institutions although theoretical risk notes consolidated financial statements fortune brands inc subsidiaries 13 financial instruments continued replacement cost estimated fair value instruments management believes risk incurring losses remote losses would immaterial enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices december 31 2005 2004 fair value outstanding contracts book value contracts essentially may time enter interest rate swap agreements manage exposure interest rate changes swaps involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense 2003 entered swap agreements connection outstanding 2875 notes due december 2006 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate classified agreements fair value hedge accordance fas 133 second quarter 2005 entered call options forward contracts buy british pounds order mitigate currency exposure related spirits wine acquisition closed july 2005 addition entered treasury rate locks interest rate swaps related anticipated issuance debt associated acquisition hedges described detail established acquisition cost hedges consisted call options forward contacts buy british pounds terminated call options early july 2005 settled forward contracts july 26 2005 closed spirits wine acquisition year ended december 31 2005 recorded total pretax net acquisition hedge expense 1209 million 1090 million tax expense income net condensed consolidated statement income included hedge program costs call options pretax amount 330 million 211 million tax hedge accounting expense forward contracts result marktomarket accounting day acquisition closed amount 879 million tax hedge accounting expense forward contracts tax deductible offset corresponding reduction bookbasis investment acquisition consolidated balance sheet second quarter 2005 entered treasury rate locks aggregate notional value 125 billion locks hedged risk earnings associated fluctuations interest rates relating anticipated issuances dollardenominated debt associated spirits wine acquisition accounted hedges cash flow hedges since treasury rate locks hedged variability interest payments future issuance debt fourth quarter 2005 company entered additional treasury rate locks aggregate notional value 500 million december 31 2005 total deferred gains 104 million 67 million net deferred taxes result increase longterm interest rates january 5 2006 terminated treasury rate locks issued us dollardenominated longterm debt recorded 26 million pretax gain rate locks accumulated comprehensive income amortize gain earnings adjustment interest expense corresponding recognition interest expense related new us dollardenominated debt information new longterm debt see note 6 “longterm debt” note 24 “subsequent events” addition fourth quarter 2005 entered interest rate swaps aggregate notional value 800 million classified interest rate swaps cash flow hedges since swaps hedged fluctuations interest rates relating anticipated issuances eurodenominated debt associated spirits wine acquisition december 31 2005 deferred losses 53 million 34 million net deferred taxes terminated swap agreements january 27 2006 issued new eurodenominated longterm debt recorded 06 million pretax gain swaps accumulated comprehensive income amortize gain earnings notes consolidated financial statements fortune brands inc subsidiaries 13 financial instruments continued adjustment interest expense corresponding recognition interest expense new eurodenominated debt information new longterm debt see notes 6 “longterm debt” 24 “subsequent events” order hedge net investment position subsidiaries acquired businesses eurodenominated operations january 2006 issued longterm debt amount 800 million approximately 1 billion designated foreign currency debt net investment hedge estimated fair value company’s cash equivalents notes payable banks commercial paper approximates carrying amounts due principally short maturities estimated fair value company’s 51868 million 12399 million total longterm debt including current portion december 31 2005 2004 approximately 52493 million 13400 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity concentration credit risk respect accounts receivable limited large number geographically diverse customers make operating companies’ domestic international customer base thus spreading credit risk raw materials used company subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility exposures considered material financial statements 14 guarantees commitments december 31 2005 74 million thirdparty guarantees debt maxxium worldwide bv maxxium spirits wine business’ international sales distribution joint venture required perform guarantees event maxxium fails make contractual payments december 12 2005 renewed guarantees maxxium’s credit facilities renewal extended expiration date committed portion credit facilities december 12 2010 accordance financial accounting standards board interpretation 45 fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” recorded liability 07 million december 31 2005 reflect fair value guarantees maxxium also guaranteed various leases acco world corporation office products business divested spinoff august 16 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 50 million april 2013 accordingly recorded fair value guarantees financial statements accordance fin 45 december 31 2005 recorded liability 20 million refer note 3 “discontinued operation” additional information spinoff office products business provided typical indemnities connection divestitures indemnities relate various representations generally included divestiture agreements environmental tax product liability employee liability contingencies depending transactions several divestitures maximum obligation certain contingencies specified unusual transactions accordingly pursuant fin 45 potential payments divestiturerelated indemnity obligations cannot reasonably estimated indemnities vary duration cases durations indefinite fin 45 effective december 31 2002 recorded liability consolidated financial statements indemnities entered prior date made indemnity payments material financial position results operations quarter furthermore expect potential payments connection indemnity obligations would material adverse effect consolidated financial position results operations liquidity 2004 future periods notes consolidated financial statements fortune brands inc subsidiaries 14 guarantees commitments continued purchase obligations company december 31 2005 1 purchase obligations include contracts raw materials finished goods purchases advertising selling administrative services capital expenditures 15 product warranties generally record warranty expense time sale offer customers various warranty terms based upon type product sold warranty expense determined accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category warranty expense generally recorded time sale following table summarizes activity related product warranty liability years ended december 31 2005 2004 2003 16 restructuring restructuringrelated charges restructuring charges company record restructuring charges year ended december 31 2005 home hardware business recorded charges 2004 primarily workplace reduction costs associated consolidation waterloo industries’ manufacturing four three facilities charges related golf business 2004 2003 relate asset writeoffs associated consolidation golf ball manufacturing facilities result actions recorded pretax restructuring charges years ended december 31 2004 2003 follows reconciliation restructuring liability restructuring liability december 31 2005 2004 material notes consolidated financial statements fortune brands inc subsidiaries 16 restructuring restructuringrelated charges continued restructuringrelated charges restructuringrelated charges years ended december 31 2005 2004 2003 follows 2005 spirits wine restructuringrelated charges integration costs associated spirits wine acquisition 2005 corporate restructuringrelated charges relate writeoff leasehold improvements related spinoff office products business 2004 home hardware restructuringrelated charges primarily relate costs associated consolidation waterloo industries’ manufacturing facilities 2004 2003 golf restructuringrelated charges include costs related consolidation golf ball manufacturing 17 information business segments company organized business segments based products markets served business segment headed officer reports chief executive officer company responsible strategies drive growth profitability segment company’s business segments described home hardware includes kitchen bathroom faucets accessories manufactured marketed distributed moen kitchen bath cabinets manufactured marketed distributed masterbrand cabinets residential entry door patio door systems designed manufactured thermatru locks manufactured marketed distributed master lock american lock tool storage organization products manufactured distributed waterloo spirits wine includes products made marketed distributed beam global spirits wine inc subsidiaries affiliates golf includes golf balls golf clubs golf shoes gloves manufactured marketed distributed acushnet company notes consolidated financial statements fortune brands inc subsidiaries 17 information business segments continued company’s subsidiaries operate principally united states canada australia europe primarily united kingdom france based country destination b represents total assets excluding intercompany receivables intangibles resulting business acquisitions net c represents property plant equipment net notes consolidated financial statements fortune brands inc subsidiaries 17 information business segments continued 19 earnings per share basic earnings per common share based weightedaverage number common shares outstanding year preferred stock dividend requirements diluted earnings per common share assume dilutive convertible debentures convertible preferred shares outstanding beginning year converted dates related interest preferred stock dividend requirements outstanding common shares adjusted accordingly also assumes outstanding common shares increased shares issuable upon exercise stock options market price exceeds exercise price less shares could purchased company related proceeds notes consolidated financial statements fortune brands inc subsidiaries 19 earnings per share continued computation basic diluted earnings per common share “net income” follows shares antidilutive included average shares outstanding diluted earnings per share calculation 20 comprehensive income total comprehensive income consists net income changes stockholders’ equity transactions events sources stockholders includes currency translation gains losses unrealized gains losses derivative instruments designated cash flow hedges net minimum pension liability adjustments components changes comprehensive loss follows 21 related party transactions future brands llc spirits wine business partner vs vin sprit ab vs joint venture named future brands llc future brands distributes companies’ spirits brands united states provides related selling invoicing services future brands receives commission partners services provided spirits wine business records revenue time shipment future brands’ customers part forming joint venture jbbco event default future brands continuing obligation satisfy financial obligations notes consolidated financial statements fortune brands inc subsidiaries 21 related party transactions continued future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2005 2004 jbbco outstanding obligations result arrangement spirits wine business’ balances related future brands included following maxxium worldwide bv jbbco partner international sales distribution joint venture named maxxium worldwide bv maxxium distributes sells spirits wine key markets outside united states joint venture partners include rémy cointreau highland distillers vs spirits wine business records sales time spirits sold third parties rather time shipment maxxium result forming joint venture guaranteed certain credit facilities bank loans entered maxxium amount totaling 74 million 50 million outstanding december 31 2005 december 31 2004 guarantees totaled 85 million 76 million outstanding jbbw executed shareholder loan facility loan facility maxxium amounting 18 million amounts outstanding loan facility either december 31 2005 december 31 2004 loan facility renewed 2005 expires december 12 2010 spirits wine business’ balances related maxxium included following 22 pending litigation tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation bw time whollyowned subsidiary bat industries plc connection sale bw atco subsequently merged bw agreed indemnification agreement indemnification agreement indemnify fortune brands inc claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company “indemnitor” indemnification agreement indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations company defendant number actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably unable notes consolidated financial statements fortune brands inc subsidiaries 22 pending litigation continued make meaningful estimate amount range loss could result unfavorable outcome pending litigation however believe number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor believe pending actions material adverse effect upon results operations cash flows financial condition believe meritorious defenses company indemnified indemnification agreement litigation company spirits wine business numerous manufacturers importers beer spirits wine named defendants purported class action lawsuits michigan new york west virginia seeking damages injunctive relief regarding alleged deceptive negligent marketing beverage alcohol people legal purchase age alcohol company spirits wine business yet served lawsuit pending new york plaintiffs seek disgorgement unspecified profits earned company’s spirits wine business past unspecified damages equitable relief company denies allegations company believes company spirits wine business meritorious defenses allegations actions material adverse effect results operations cash flows financial condition company spirits wine business vigorously contesting litigation march 7 2005 bridgestone sports co ltd bridgestone golf inc collectively bridgestone filed lawsuit acushnet company united states district court district delaware bridgestone alleges various golf balls manufactured acushnet violate ten bridgestone’s us patents company believes counsel advised acushnet meritorious defenses plaintiffs’ claims possible predict outcome pending litigation possible action could decided unfavorably acushnet vigorously contesting action company believes material adverse affect results company’s operations cash flow financial condition addition acushnet filed counterclaim action seeking damages infringement five patents february 9 2006 callaway golf company filed lawsuit acushnet company united states district court district delaware callaway alleges certain golf balls manufactured acushnet company infringe four callaway’s patents acushnet believes counsel advised meritorious defenses callaway’s allegations possible predict outcome pending litigation possible action could decided unfavorably acushnet vigorously contesting action company believes lawsuit material adverse effect results company’s operations cash flow financial condition addition lawsuits described company subsidiaries defendants lawsuits associated businesses operations possible predict outcome pending actions litigation possible actions could decided unfavorably believe meritorious defenses actions material adverse effect upon results operations cash flows financial condition actions vigorously contested 23 environmental subject laws regulations relating protection environment possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts subsidiaries may undertake future opinion however compliance current environmental protection laws taking account estimated recoveries third parties material adverse effect upon results operations cash flows financial condition 24 subsequent events issuance longterm debt january 2006 issued longterm debt securities totaling 20 billion shelf registration statement filed securities exchange commission 20 billion unsecured notes consist 750 million 5 18 notes due january 2011 950 million 5 38 notes due january 2016 300 million 5 78 notes due january 2036 proceeds used pay commercial paper issued connection spirits wine acquisition net proceeds 19774 million less price discounts 93 million underwriting fees 133 million addition january 2006 issued longterm debt securities totaling 800 million approximately 1 billion transaction exempt registration accordance regulation securities act 1933 notes consist 300 million 3 12 notes due january 2009 500 million 4 notes due january 2013 proceeds used pay commercial paper issued connection spirits wine acquisition borrowings bridge credit agreement net proceeds 7945 million less price discounts 31 million underwriting fees 24 million designated eurodenominated debt net investment hedges acquired eurofunctional currency operations spirits wine acquired businesses january 27 2006 substantially spirits wine acquired businesses legally transferred fortune brands refer note 4 “acquisitions disposals joint ventures” prospectively cease apply provisions fin 46r fully consolidate acquired businesses condensed balance sheet december 31 2005 disclosing amount assigned major asset liability caption businesses follows january 31 2006 announced process finalizing purchase price adjustments spirits wine acquisition nearly complete anticipate two principal adjustments result net payment fortune brands approximately £1172 million approximately 207 million net payment reflected december 31 2005 balance sheet current liability result payment pernod ricard £1994 million primarily determined brands acquired fortune brands higher actual historical earnings anticipated prior due diligence payment fortune brands approximately £822 million due working capital adjustments home hardware acquisition february 10 2006 announced agreement acquire sbr inc privately held company owns 3 vinylframed window brand north america purchase price approximately 630 million financed combination stock debt expect stock component 60 70 total purchase price contingent election sbr’s shareholders acquisition expected close within next months assurance given close terms contemplated report independent registered public accounting firm board directors shareholders fortune brands inc completed integrated audits fortune brands inc’s 2005 2004 consolidated financial statements internal control financial reporting december 31 2005 audit 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits report auditors presented consolidated financial statements financial statement schedule opinion based audits report auditors consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position fortune brands inc subsidiaries december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america addition opinion based audits financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits audit financial statements fulham acquisition corp wholly owned subsidiary statements reflect total assets 64 billion december 31 2005 total revenues 3871 million period july 26 2005 december 31 2005 statements audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included fulham acquisition corp based solely report auditors conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included management’s report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion based audit company maintained material respects effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described management’s report internal control financial reporting management excluded fulham acquisition corp assessment internal control financial reporting december 31 2005 acquired company purchase business combination 2005 also excluded fulham acquisition corp audit internal control financial reporting fulham acquisition corp whollyowned subsidiary statements reflect total assets 64 billion december 31 2005 total revenues 3871 million period july 26 2005 december 31 2005 pricewaterhousecoopers llp chicago illinois march 7 2006 report independent registered public accounting firm board directors stockholder fulham acquisition corp audited consolidated balance sheet fulham acquisition corp subsidiaries december 31 2005 related consolidated statements operations stockholder’s equity cash flows period july 26 2005 december 31 2005 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position fulham acquisition corp subsidiaries december 31 2005 results operations cash flows period july 26 2005 december 31 2005 conformity us generally accepted accounting principles kpmg audit plc london england february 20 2006 shareholders fortune brands inc prepared consolidated balance sheet fortune brands inc subsidiaries december 31 2005 2004 related consolidated statements income cash flows stockholders’ equity three years period ended december 31 2005 financial statements prepared accordance accounting principles generally accepted united states america financial information elsewhere annual report form 10k consistent financial statements internal control financial reporting company subsidiaries designed provide reasonable assurances financial records adequate relied upon provide information preparation financial statements established policies procedures carefully followed company’s stockholders annually ratify appointment company’s independent registered public accounting firm company’s financial statements pricewaterhousecoopers llp audit performed accordance standards public company accounting oversight board united states audit committee board directors consisting solely independent directors meets periodically independent auditors internal auditors management review accounting auditing financial reporting matters auditors direct access audit committee norman h wesley norman h wesley chairman board chief executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer item 9item 8 financial statements supplementary data consolidated statement income fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement cash flows fortune brands inc subsidiaries aincludes cash equivalents discontinued operations december 31 2004 798 million see notes consolidated financial statements consolidated statement stockholders equity fortune brands inc subsidiaries see notes consolidated financial statements notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies basis presentation consolidated financial statements include accounts fortune brands inc elimination intercompany transactions majorityowned subsidiaries subsidiary acushnet lionscore limited holds minority interest substantive control result company operational decisionmaking powers entity addition consolidate variable interest entities vies deemed primary beneficiary refer note 4 acquisitions disposals joint ventures discussion vies consolidated financial statements prepared conformity accounting principles generally accepted united states america require management make estimates assumptions affect reported amounts assets liabilities sales expenses reporting periods actual results future periods could differ estimates accordance statement financial accounting standards 144 accounting impairment disposal longlived assets results operations related 2005 spinoff acco world corporation reclassified separately stated discontinued operations accompanying consolidated statements income years ended december 31 2005 2004 cash flows discontinued operations years ending december 31 2005 2004 separately classified accompanying consolidated statements cash flows cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns trade receivables include interest allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers potential insolvency allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions inventories firstin firstout fifo inventory method principal inventory method across segments home hardware segment use lastin firstout lifo inventory method product groups metals inventories comprise significant portion inventories lifo inventories december 31 2006 2005 1776 million current cost 1991 million total inventories 21870 million 1711 million current cost 1812 million total inventories 16639 million respectively december 31 2005 approximately 291 million spirits wine inventory recorded using average cost inventory method january 2006 conformed spirits wine inventory accounting policies upon completion legal transfer majority spirits wine assets acquired pernod spirits wine inventories accounted using fifo inventory method impact accounting change immaterial minor amount similar types inventory within home hardware business accounted utilizing fifo average cost based method place time acquisition impact statement income balance sheet accounting inventories using average cost method versus fifo inventory method inconsequential accordance generally recognized trade practice maturing spirits wine inventories classified current assets although majority inventories due duration aging processes ordinarily sold within one year regarding change accounting method spirits wine inventory average cost fifo impact change immaterial therefore preferability letter required independent accountants provide disclosures required paragraph 17 sfas 154 impact change accounting inventory 03 less december 31 2005 2004 01 march june september 2006 impact net income 03 less twelve months ended december 31 2005 2004 2003 impact net income 06 less three months ended march june september 2006 property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred estimated useful lives related assets follows buildings leasehold improvements 15 40 years machinery equipment 3 10 years longlived assets accordance statement financial accounting standards 144 fas 144 accounting impairment disposal longlived assets longlived asset including amortizable identifiable intangibles asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group comparison indicates impairment amount impairment typically calculated using discounted expected future cash flows discount rate applied cash flows based companys weightedaverage cost capital risk adjusted appropriate represents blended aftertax costs debt equity goodwill indefinitelived intangibles statement financial accounting standards 142 fas 142 goodwill intangible assets requires goodwill tested impairment annual basis certain circumstances written impaired rather amortized previous standards required interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates use rate corresponding cost capital risk adjusted appropriate determining discounted cash flows estimated cash flows determined disaggregating business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill perform impairment test measure amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting units goodwill implied fair value goodwill determining estimated future cash flows consider current projected future levels income based managements plans business well business trends prospects market economic conditions fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life deemed tradenames currently anticipated contribute cash flows company indefinitely indefinitelived intangible assets amortized required evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangibles impairment annually whenever market business events indicate may potential impact intangible consider implications external eg market growth pricing competition technology internal factors eg product costs margins support expenses capital investment potential impact cash flows business near long term well impact identifiable intangible asset associated business developing executing shortterm longterm plans based recent business results consideration significant external internal factors resulting business projections indefinitelived intangible assets associated segment reviewed determine whether likely remain indefinitelived whether finite life appropriate addition based events period future expectations management considers whether potential impairment exists required fas 142 predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize profit split methodology customary valuation practice establish reasonable royalty rate profit split analyses allocate economic income ebitda less returns working capital fixed assets employed tradename residual assets economic unit determination expected profit margin associated commercialization tradename additionally independent valuation experts used periodic review testing managements assumptions relative significant trade valuations lives independent research market competitive dynamics writedowns goodwill identifiable intangible assets 2006 2005 2004 warranty reserves offer customers various warranty terms based upon type product sold determine warranty expense accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category warranty expense generally recorded cost products sold time sale refer note 15 product warranties employee benefit plans provide range benefits employees retired employees including pensions postretirement postemployment health care benefits record amounts relating plans based calculations specified generally accepted accounting principles reflect various actuarial assumptions including discount rates expected longterm rates return plan assets compensation increases turnover rates health care cost trend rates discount rate based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments longterm expected rate return plan assets reflects mix plan asset investments compensation increases reflect expected future compensation trends health care cost trend rates reflect expected changes health care costs based historical rates estimates future changes review actuarial assumptions annual basis make modifications assumptions based current rates trends deemed appropriate required us generally accepted accounting principles effects modifications generally recorded amortized future periods believe assumptions utilized recording obligations plans presented note 10 pension retiree benefits reasonable based experience advice independent actuaries continue monitor assumptions market conditions warrant environmental company subject laws regulations relating protection environment company provides expenses associated environmental remediation obligations amounts probable reasonably estimated adjust accruals new information develops circumstances change accruals discounted december 31 2006 2005 environmental accruals amounted 331 million 415 million respectively included noncurrent liabilities balance sheet opinion compliance current environmental protection laws taking account estimated recoveries third parties including insurers material adverse effect upon results operations cash flows financial condition income taxes accordance statement financial accounting standards 109 accounting income taxes establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest undistributed earnings foreign subsidiaries considered permanently invested aggregated 5543 million december 31 2006 revenue recognition accordance sec staff accounting bulletin 104 revenue recognition company recognizes revenue products shipped customers net applicable provisions discounts returns allowances also provide estimate potential bad debt time revenue recognition amounts billed shipping handling classified net sales consolidated income statement costs incurred shipping handling classified advertising selling general administrative expenses shipping handling costs included advertising selling general administrative expenses 2573 million 2194 million 1853 million 2006 2005 2004 respectively customer program costs company generally recognizes customer program costs either net sales category advertising selling general administrative expenses time program initiated andor revenue recognized costs recognized net sales include limited general customer programgenerated expenses cooperative advertising programs volume allowances promotional allowances costs typically recognized advertising selling general administrative expenses include point sale materials store service fees addition accrued customer programs principally include general customer program costs cooperative advertising volume allowances shared media volume allowances accrued based managements estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough merchandising support level returns customer employee training advertising costs advertising costs amounted 6113 million 4711 million 4306 million 2006 2005 2004 respectively principally expensed incurred advertising costs include media costs point sale materials cooperative advertising product endorsements advertising costs recorded reduction net sales primarily cooperative advertising 539 million 535 million 445 million 2006 2005 2004 respectively advertising costs recorded advertising selling general administrative expenses 5574 million 4176 million 3861 million 2006 2005 2004 respectively research development research development expenses include product development product improvement product engineering process improvement costs research development expenses 727 million 659 million 606 million 2006 2005 2004 respectively expensed incurred stockbased compensation january 1 2006 adopted statement financial accounting standards 123 revised 2004 sharebased payment fas 123r supplemented securities exchange commission staff accounting bulletin 107 sharebased payment used modified prospective transition method defined fas 123r requires compensation cost recorded unvested stock options remaining service period beginning january 1 2006 subsequent adoption fas 123r recognized sharebased compensation expense measured fair value award date grant financial statements period employee provides service exchange award fair value option award estimated date grant using blackscholes optionpricing model prior 2006 elected apply accounting principles board opinion 25 accounting stock issued employees related interpretations accounting stock plans allowed financial accounting standards 148 fas 148 accounting stockbased compensation transition disclosure prior adoption fas 123r applied nominal vesting period approach recognizing pro forma compensation cost threeyear vesting period including awards held individuals eligible retirement provisions applicable plan adopted fas 123r january 1 2006 changed approach recognize expense retirement eligible employees twelvemonth period since retiree options vest entirety held least one year retirement period retirement eligible longer impact change pro forma net income diluted earnings per share years ended december 31 2005 2004 would material foreign currency translation foreign currency balance sheet accounts translated us dollars rates exchange balance sheet date income expenses translated average rates exchange effect period related translation adjustments made directly separate component accumulated comprehensive income loss caption stockholders equity transactions made currencies different entitys functional currency gains losses foreign currency transactions classified statement income depending nature item derivative financial instruments accordance statement financial accounting standards statement 133 fas 133 accounting derivative instruments hedging activities related amendment statement financial accounting standards statement 138 fas 138 accounting certain derivative instruments certain hedging activities derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized statement income hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings connection 2005 spirits wine acquisition purchase price paid british pounds sterling entered call options hedge currency exposure related purchase price terminated call options early july 2005 also entered forward contracts buy british pounds hedge currency exposure related purchase price settled forward contracts upon consummation acquisition july 2005 connection acquisition also entered treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuance new longterm debt finance acquisition terminated locks swaps upon issuance new longterm debt january 2006 additional information see note 13 financial instruments derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2006 19 million deferred currency gains reclassified cost products sold year ended december 31 2005 72 million deferred currency losses reclassified cost products sold estimate 42 million currency derivative losses included oci december 31 2006 reclassified earnings within next twelve months foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions principal currencies hedged include canadian dollar euro british pound sterling australian dollar interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes also may time enter treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuances new longterm debt see note 13 financial instruments information management interest rate risk recently issued accounting standards accounting uncertainty income taxes july 2006 fasb issued interpretation 48 fin 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return interpretation also provides guidance derecognition classification interest penalties accounting interim periods disclosure transition evaluation tax position accordance fin 48 two step process first step recognition determine whether likely tax position sustained upon examination based technical merits position second step measurement determine amount benefit recognize financial statements fin 48 requires upon adoption record change net assets results application fin 48 adjustment opening retained earnings result adjustment net assets retained earnings 020 million fin 48 effective january 1 2007 fair value measurement september 2006 fasb issued statement financial accounting standards 157 fair value measurement fas 157 fas 157 defines fair value establishes framework measuring fair value expands disclosures assets liabilities measured fair value statement require new fair value measurements fas 157 effective financial statements issued fiscal years beginning november 15 2007 calendar 2008 fortune brands evaluating impact fas 157 results operations financial position 2 goodwill identifiable intangibles net goodwill 43456 million december 31 2006 increase goodwill twelve months ended december 31 2006 7121 million 36335 million december 31 2005 primarily due goodwill spirits wine acquired assets legally transferred first quarter 2006 finalization valuation spirits wine identifiable intangible assets together 5271 million well goodwill acquisition simonton 1804 million refer note 4 acquisitions disposals joint ventures change net carrying amount goodwill segment follows also indefinitelived intangible assets principally tradenames 33384 million december 31 2006 compared 26909 million december 31 2005 increase 6475 million primarily due consolidation spirits wine acquired assets transferred december 31 2005 finalization valuation spirits wine acquired indefinitelived intangible assets together 4415 million well sbr inc simonton indefinitelived intangible assets 2060 million amortizable identifiable intangible assets principally tradenames subject amortization estimated useful life 5 30 years based assessment number factors may impact useful life factors include historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion financial results relevant factors gross carrying value accumulated amortization amortizable intangible assets 9864 million 2279 million respectively december 31 2006 compared 7383 million 1822 million respectively december 31 2005 gross carrying value increase 2481 million principally due amortizable identifiable intangible assets associated acquisition simonton 1485 million primarily customer relationships spirits wine amortizable identifiable intangible assets associated acquired assets transferred december 31 2005 990 million gross carrying value accumulated amortization class intangible assets december 31 2006 2005 follows 1accumulated amortization prior adoption financial accounting standards 142 goodwill intangible assets intangible amortization 435 million 334 million 354 million years ended december 31 2006 2005 2004 respectively increase amortization twelve months ended december 31 2006 compared december 31 2005 primarily due increase finitelived intangible assets associated spirits wine acquisition 55 million well amortization associated simonton acquisition 46 million company expects record intangible amortization approximately 48 million next five fiscal years ending december 31 2007 december 31 2011 performed annual impairment test december 31 fiscal year 2006 2005 2004 impairment goodwill indefinitelived intangible assets recognized result annual impairment tests 3 discontinued operation august 16 2005 company completed spinoff office business segment acco world corporation acco companys shareholders acco merged general binding corporation creating acco brands corporation leading supplier branded office products statements income twelve months ended december 31 2005 2004 adjusted reflect office business segment discontinued operation results discontinued operation include expenses paid fortune brands behalf acco based actual direct costs incurred well interest expense associated outstanding debt fortune brands allocated acco allocation debt based average net assets acco percent average net assets plus average consolidated debt attributable operations fortune brands following table summarizes results discontinued operations years ended december 31 2005 2004 4 acquisitions disposals joint ventures acquisition simonton june 7 2006 completed acquisition sbr inc simonton privately held company consisting brands including simonton windows leading vinylframed window brand north america purchase price approximately 5998 million net cash acquired including assumed debt consideration paid included stock based price fortune brands common stock closing cash stock component 50 total purchase price assumed 859 million simontons debt 554 million paid closing simonton included consolidated results date acquisition material purposes supplemental disclosure accordance statement financial accounting standards 141 fas 141 business combinations acquisition spirits wine brands assets july 2005 company purchased 25 spirits wine brands well certain distribution assets acquired assets pernod ricard sa pernod ricard brands acquired include sauza tequila makers mark bourbon courvoisier cognac canadian club whisky laphroaig singlemalt scotch clos du bois superpremium wines leading regional national brands distribution networks uk germany spain expected acquired assets significantly enhanced spirits wine business strengthened distribution key global markets july 2005 affiliate company received tracker shares issued goal acquisitions limited goal pernod ricard subsidiary formed acquire allied domecq plc allied domecq tracker shares gave company certain economic rights respect acquired assets prior actual legal transfer company legal transfer acquired assets completed company held tracker shares company also certain rights manage operations acquired assets yet legally transferred company january 26 2006 substantially acquired assets legally transferred fortune brands acquisition structured way result negotiations pernod ricard considering various factors including 1 commercial desire obtain economic benefits associated owning operating acquired assets soon possible funding purchase price assets 2 assets transferred pernod ricard commingled shared assets involving significant reorganization business operations 3 actual legal transfer acquired assets required evaluate alternative ways separate acquired assets retained pernod ricard obtain required consents structure negotiate document complete transfer acquired assets time net assets particular acquired assets actually transferred company number goal tracker shares held company reduced proportion value ascribed net assets transferred using methodology prescribed companys agreement pernod ricard agreement pernod ricard provided net assets acquired assets would legally transferred one subsidiaries fortune brands six month period began july 26 2005 closing december 31 2005 net assets courvoisier makers mark well certain california wine assets transferred january 27 2006 substantially acquired net assets legally transferred fortune brands initial cost spirits wine acquisition closing approximately 50 billion consisted approximately £27 billion 49 billion paid july 26 2005 assets formerly owned allied domecq 1356 million paid september 8 2005 purchase larios brand directly pernod ricard subsidiary purchase price assets formerly owned allied domecq subject change based adjustments accordance purchase agreement final purchase price based specified multiples historic profit allied domecq fiscal year ended august 31 2004 brands purchased well working capital levels july 26 2005 adjustments companys agreement pernod ricard provided assessment pernod ricard historic profitability brands company purchased subsequent review company historic profits binding determination third party company pernod ricard could agree reached agreement pernod ricard may 19 2006 adjust global consideration acquired assets result higher actual historical profits anticipated working capital adjustments additional adjustments achieve economic results consistent parties intention complete companys acquisition acquired assets cashfree debtfree basis net payment £1343 million approximately 252 million total recorded investment spirits wine acquisition included initial payment purchase larios supplemental brands purchased purchase price adjustments settlements well transactions costs approximately 525 billion assets legally transferred reporting accordance financial accounting standards board interpretation 46r consolidation variable interest entities fin 46r assets substantially legally transferred january 2006 since many allied domecq assets acquired fortune brands commingled entities owned assets also acquired pernod ricard accordance fin 46r interest goal subsidiaries deemed variable interest entities fair value specified assets half total fair value entitys assets variable interest entities primary beneficiary bearing obligation absorb majority expected losses right receive majority expected residual returns consolidated accounted accordance fin 46r fas 141 recognized minority interest pernod ricard assets fair value pernod ricard assets legally transferred ceased recognizing minority interest fair value assets acquired fortune brands less 50 fair value entity primary beneficiary accounted investment using cost method addition since tracker shares gave company ownership rights incomelosses generated fortune brands assets date acquisition legal transfer assets recorded income amount 573 million unconsolidated subsidiaries period july 26 2005 december 31 2005 fortune brands assets legally transferred cost investments replaced actual fortune assets acquired fair value basis date acquisition accordance fas 141 december 31 2005 fortune brands assets accounted cost method 11 billion included investments unconsolidated subsidiaries consolidated balance sheet december 31 2005 investments included assets company paid approximately 10 billion total purchase price approximately 50 billion vies investment considered primary beneficiary maximum exposure loss december 31 2005 11 billion net assets pertaining investment legally transferred january 1 2006 january 27 2006 aware losses occurred transfer period initially financed acquisition acquired assets borrowings bank credit agreements subsequently financed commercial paper market april 20 2005 executed bridge credit agreement 60 billion 18month term initial drawdown january 2006 issued dollar eurodenominated longterm debt securities 2 billion €800 million approximately 1 billion repaid terminated bridge credit agreement see note 6 longterm debt additional information financing spirits wine acquisition december 31 2006 recorded 21480 million goodwill 1987 million tax deductible related acquisition identifiable intangible assets dates acquisitions acquired assets follows following table summarizes fair value spirits wine assets acquired liabilities assumed date acquisitions aincludes liability 496 million connection planned restructuring acquired assets primarily related workforce reduction costs distribution termination costs bincludes transaction fees accordance fas 141 disclosure requirements unaudited pro forma results twelve months ended december 31 2005 2004 presented spirits wine acquisition legal transfer assets occurred january 1 2004 information based historical results operations adjusted impact acquisition costs pro forma results include allocations selling marketing general administrative expenses representative expenses ongoing basis addition pro forma results give effect events expected continuing impact business therefore arrangements pernod ricard limited duration reflected given significant factors adjustments impacting pro forma disclosure pro forma results presented deemed representative either historical results future results acquired assets actually transferred fortune brands january 1 2004 transfer fortune brands certain acquired assets accomplished various stock sales mergers asset sales could result assumption transfer fortune brands liability certain litigation contingent liabilities contingent indemnity rights assumption transfer might ultimately require establishment additional reserves liabilities contingent liabilities would material total spirits wine business identified date southern millwork corporation may 2005 home hardware business acquired assets southern millwork corporation us prehanger entry doors acquisition material impact consolidated financial statements 2004 acquisition june 2004 home hardware business acquired sentinel doors ltd leading uk manufacturer installer complete composite entry door systems acquisition gives thermatru corp thermatru stronger growth platform uk june 2004 home hardware acquired assets dudley inc leading brand school locker locks canada aggregate purchase price acquisitions 309 million acquisitions material impact consolidated financial statements minority interest july 1 2006 vs group vs contributed 1530 million purchase 45 shares series a2 convertible preferred stock beam global spirits wine inc bgsw maintain 10 interest spirits wine business fortune brands continues 90 capital stock business may 2001 vs paid 375 million purchase initial 10 equity interest spirits wine business form series a1 convertible preferred stock 2003 spirits wine business returned portion invested capital company vs reducing vs investment 3446 million shares bgsw convertible preferred stock issued vs convertible 10 bgsw common stock voting power equivalent 10 interest bgsw common stock dividend preferred stock equal greater 10 dividend paid bgsw common stock dividends paid preferred stock series a1 preferred stock entitled dividend 32647 preferred stocks face value 3446 million plus unpaid accrued dividends series a2 preferred stock entitled dividend 4 preferred stocks face value 1530 million plus unpaid accrued dividends may paid common stock unless unpaid accrued bgsw preferred stock dividends paid year ended december 31 2006 bgsw paid total preferred dividends 143 million vs recorded minority interest expense years ended december 31 2005 2004 bgsw paid total preferred dividends 113 million vs recorded minority interest expense year vs may require company purchase bgsw preferred stock fair value whole part upon one years prior notice time upon change control bgsw jim beam brands co jbbco certain events account redemption feature convertible redeemable preferred stock accordance eitf topic d98 classification measurement redeemable securities 2006 recorded adjustment 478 million minority interest expense fortune brands consolidated statement income representing increase estimated fair value vss aggregate 10 ownership convertible redeemable preferred stock increase fair value primarily result enhanced value spirits wine business due greater global presence position opportunities leverage growth historical newly acquired brands spirits wine business synergies combined companies 2005 2004 recorded value convertible redeemable preferred stock deemed reasonable approximation fair value may 2001 spirits wine business completed transactions vs creating joint venture named future brands llc distribute initial tenyear period companies spirits brands united states bgsw accounted joint venture using equity method accounting vs paid 270 million gain access spirits wine business us distribution network acquire 49 interest future brands accounted 270 million gain sale 49 future brands deferred income resulting tax sale deferred income tax asset due certain continuing obligations jbbco including limited making payments suppliers employees parties future brands contracts event default future brands june 2001 began amortizing amounts income taxes straightline basis initial term agreement 10year amortization period based 10year term management agreement future brands 5 shortterm borrowings credit facilities december 31 2006 2005 7876 million 6372 million shortterm borrowings outstanding respectively comprised notes payable banks commercial paper used general corporate purposes including acquisitions included amount december 31 2006 2005 81 million 09 million outstanding committed bank credit agreements provide unsecured borrowings 90 million 09 million respectively addition company uncommitted bank lines credit provide unsecured borrowings working capital 1710 million 175 million outstanding december 31 2006 1247 million 196 million outstanding december 31 2005 weightedaverage interest rate borrowings 52 39 respectively including shortterm debt 10 billion classified longterm debt see note 13 description companys use financial instruments 6 longterm debt components longterm debt follows abased longterm credit facilities support commercial paper borrowings classified 10 billion 38 billion borrowings longterm consolidated balance sheet december 31 2006 2005 respectively amount represents commercial paper amount company believes remain outstanding next twelve months december 31 2006 20 billion 5year revolving credit agreement matures 2010 october 5 2006 renewed 500 million 364day revolving credit facility mature 2007 agreement includes option extend payment one year companys discretion incremental fee 0125 outstanding amount facility replaces previous 364day facility amounts outstanding interest rates variable based market interest rates time borrowing companys longterm credit rating facility fees 008 per annum subject increases maximum fees 015 per annum event longterm debt rating falls specified levels facilities support companys commercial paper borrowings commercial paper market january 2006 issued longterm debt securities totaling 20 billion shelf registration statement filed securities exchange commission 20 billion notes consist 750 million 518 notes due january 2011 950 million 538 notes due january 2016 300 million 578 notes due january 2036 proceeds used pay commercial paper issued connection spirits wine acquisition net proceeds 19774 million less price discounts 93 million underwriting fees 133 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses refer note 13 financial instruments treasury rate locks associated usdenominated longterm debt addition january 2006 issued longterm debt securities totaling €800 million approximately 1 billion transaction exempt registration accordance regulation securities act 1933 notes consist €300 million 312 notes due january 2009 €500 million 4 notes due january 2013 proceeds used pay commercial paper issued connection spirits wine acquisition borrowings bridge credit agreement net proceeds €7945 million less price discounts €31 million underwriting fees €24 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses refer note 13 financial instruments interest rate swaps associated eurodenominated longterm debt estimated payments maturing debt next five years december 31 2006 follows 2007 17 million 2008 2045 million 2009 4056 million 2010 10000 million 2011 7500 million 7 267 convertible preferred stock redeemable companys option 204980 215047 shares 267 convertible preferred stock issued outstanding december 31 2006 2005 respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share together holders common stock certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share convertible preferred stock 6205 shares common stock authorized unissued common shares reserved issuance upon conversions treasury shares may delivered holders converted 10067 shares 18280 shares 2006 2005 respectively company may redeem convertible preferred stock price 3050 per share plus accrued dividends company paid cash dividend 267 per share aggregate amount 06 million years ended december 31 2006 2005 2004 8 capital stock 750 million authorized shares common stock 60 million authorized shares preferred stock 151909241 146290063 common shares outstanding net treasury shares december 31 2006 2005 respectively cash dividends paid common stock years ended december 31 2006 2005 2004 aggregated 2234 million 2010 million 1829 million respectively repurchase shares connection companys share repurchase program year ended december 31 2006 2005 treasury shares delivered connection exercise stock options grants stock awards conversion preferred stock amounted 1580877 2006 2032854 2005 december 31 2006 2005 82968295 83279961 common treasury shares respectively 9 stock plans use stock options performance awards compensate key employees stock awards compensate outside directors stock option awards outstanding three longterm incentive plans december 31 2006 grants 2003 longterm incentive plan may made december 31 2008 124 million shares common stock adjusted spinoff acco world corporation new stockbased awards made 1990 1999 longterm incentive plans existing awards plans continue exercisable stock options exercise prices equal fair value share common stock date grant options generally may exercised prior one year date grant options issued prior december 2005 generally expire ten years date grant options issued beginning december 2005 expire seven years date grant options issued since november 1998 generally vest onethird year threeyear period beginning first anniversary date grant fair value option award estimated date grant using blackscholes optionpricing model based weightedaverage assumptions shown following table determination expected volatility based historical volatility stock period commensurate expected term stock options well relevant factors riskfree interest rate based us government issues remaining term equal expected life stock options weighted average expected term determined based historical employee exercise behavior contractual term options weightedaverage grant date fair value stock options granted twelve months ended december 31 2006 2005 1405 1614 respectively fas 123r also requires estimate forfeitures calculating expense related stockbased compensation opposed recognizing forfeitures corresponding reduction expense occur prior january 1 2006 pro forma disclosure amortized stock option compensation cost threeyear graded vesting schedule effective january 1 2006 elected amortize stock option compensation cost straightline basis service period twelve months ended december 31 2006 recognized pretax stockbased compensation expense stock options 336 million 251 million tax 017 per basic share 016 per diluted share manufacturing fixed assetrelated compensation costs capitalized material impact adoption fas 123r cash flow operations decrease 108 million offsetting increase cash flow financing due reclassification tax benefits exercise stock options compensation cost stockbased compensation determined based fair value award date grant accordance provisions statement financial accounting standards 123 accounting stockbased compensation amortized expense service period pro forma basis net income earnings per share would follows 2005 2004 following table summarizes stock options outstanding three years ended december 31 2006 2005 2004 well activity twelve months ended aon august 16 2005 connection office products business spinoff company adjusted number shares options option exercise prices preserve closely possible economic value options existed time spinoff bthe intrinsic value stock options exercised twelve months ended december 31 2006 529 million source shares issued treasury stock cat december 31 2006 weightedaverage remaining contractual life options outstanding 60 years aggregate intrinsic value options outstanding 3420 million options outstanding exercisable december 31 2006 follows 1at december 31 2006 weighted average remaining contractual life options exercisable 56 years aggregate intrinsic value options exercisable 2947 million 2as reported basis spinoff office products business summary activity nonvested stock options december 31 2006 activity twelve months ended december 31 2006 presented remaining unrecognized compensation cost related unvested awards december 31 2006 approximately 474 million weightedaverage period time cost recognized 19 years fair value options vested twelve months ended december 31 2006 360 million use stock awards compensate outside directors 2005 nonemployee director stock plan awards issued annually second quarter part compensation outside directors addition outside directors elect directors fees paid stock compensation cost expensed time award based fair value share fortune brands stock date award twelve months ended december 31 2006 awarded 13150 shares weighted average stock price 7515 pretax compensation cost 10 million twelve months ended december 2005 issued 6300 shares common stock outside directors fair value date award 8628 pretax compensation cost 05 million performance awards granted certain officers company payout based achievement targeted cumulative diluted earnings per share average consolidated return equity changed average consolidated return invested capital beginning 20062008 cycle compensation cost amortized expense threeyear performance period awards granted prior december 2005 performance awards could settled stock cash depending whether individual satisfied companys stock ownership guidelines result compensation cost based stock price balance sheet date performance awards granted december 2005 may paid stock fair value based stock price date grant following table summarizes performance awards outstanding three years ended december 31 2006 2005 2004 well activity twelve months ended aon august 16 2005 connection office products business spinoff company adjusted number shares performance awards preserve closely possible economic value performance awards existed time spinoff pretax compensation cost performance awards recorded twelve months ended december 31 2006 130 million 81 million tax remaining unrecognized pretax compensation cost related unvested awards december 31 2006 approximately 84 million weightedaverage period time cost recognized 16 years cash used settle performance awards twelve months ended december 31 2006 156 million addition payment cash issued 8709 shares common stock treasury shares available issuance connection future awards companys stock plans december 31 2006 2005 2004 3122917 5710136 7126664 respectively shares available connection future awards december 31 2004 basis conversion result spinoff office products business authorized unissued shares reserved issuance connection awards treasury shares may delivered 10 pension retiree benefits number pension plans principally united states covering many companys employees plans provide payment retirement benefits mainly commencing ages 60 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employees length service earnings annual contributions plans made necessary ensure legal funding requirements satisfied company provides postretirement health care life insurance benefits certain employees retirees united states certain employee groups outside united states many employees retirees outside united states covered government health care programs september 2006 fasb issued statement financial accounting standards 158 employers accounting defined benefit pension postretirement plans fas 158 amendment fasb statements 87 88 106 132r fas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability consolidated balance sheet recognize changes funded status year changes occur adjustments comprehensive income funded status benefit plan difference plan assets fair value benefit obligation pension plans benefit obligation projected benefit obligation pbo postretirement benefit plans benefit obligation accumulated postretirement benefit obligation apbo previously unrecognized gainslosses prior service costscredits transition assetsobligations recognized accumulated comprehensive income continue amortized components net periodic benefit cost statement effective publicly traded companies end fiscal year ending december 15 2006 december 31 2006 fortune brands amounts recognized balance sheet consist amounts accumulated comprehensive income balance sheet yet recognized components net periodic benefit cost december 31 2006 follows incremental effect fas 158 individual line items december 31 2006 consolidated balance sheet shown amounts accumulated comprehensive income expected recognized components net periodic benefit cover next fiscal year shown pension benefit obligation accumulated benefit obligation fair value plans assets pension plans accumulated benefit obligation excess plan assets underfunded abo shown components net periodic benefit cost follows effective december 31 2006 better reflect different market experience medical postretirement drug claims bifurcated assumptions used postretirement health care costs medical prescription drug costs assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint change assumed health care cost trend rates would following effects plan assets pension plan weightedaverage asset allocations december 31 2006 2005 follows investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility master trusts established hold assets domestic defined benefit plans us defined benefit asset allocation policy trusts allows equity allocation 45 75 fixed income allocation 25 50 cash allocation 25 investments 20 nonus investment trust targets may differ depending country allowing 90 equity 100 fixed investments 20 real estate asset allocations based underlying liability structure local regulations retirement asset allocations reviewed periodically ensure allocation meets needs liability structure expected 82 longterm rate return plan assets determined based longterm historical performance plan assets current asset allocation projected longterm rates return pension investment consultants expected longterm rates return 10 equities 5 fixed income 10 investments contributions expect contribute approximately 30 50 million pension plans 2007 sponsor number defined contribution plans contributions determined various formulas cash contributions related plans amounted 336 million 250 million 242 million 2006 2005 2004 respectively estimated future benefit payments following benefit payments reflect expected future service expected paid 11 lease commitments future minimum rental payments noncancelable operating leases december 31 2006 follows total rental expense operating leases reduced minor amounts subleases amounted 667 million 532 million 537 million 2006 2005 2004 respectively 12 income taxes components income continuing operations income taxes follows reconciliation income taxes 35 federal statutory income tax rate income taxes reported follows arefer note 4 acquisitions disposals joint ventures additional information fin 46r accounting following items impacted effective income tax rate effective income tax rates twelve months ended december 31 2006 2005 2004 257 350 263 respectively 2006 recorded total tax credits 859 million tax credits primarily associated favorable resolution routine federal state tax audits changes foreign tax laws lowered income tax rates apply foreign deferred income taxes foreign taxes impacted increased foreign activity associated 2005 spirits wine acquisition 2005 recorded currency hedge accounting expense related spirits wine acquisition purchase price totaling 879 million continuing operations accordance hedge tax accounting rules losses tax deductible included tax basis investment noncash expense tax deductible 308 million unfavorable impact effective tax rate see note 13 financial instruments additional information currency hedges addition 2005 recorded 77 million tax credit result conclusion various state tax audits 2004 internal revenue service concluded routine review 19972001 tax returns result recorded total taxrelated credits 959 million continuing operations primarily due release reserves items resolved favorably anticipated well 37 million discontinued operations 2004 also recorded tax benefit 46 million continuing operations associated foreign earnings repatriation provisions american jobs creation act 2004 result conclusion irs examination 19972001 tax years 2005 received total tax refund 56 million income taxes follows components net deferred tax assets liabilities follows 13 financial instruments enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates principal financial instruments used forward foreign exchange contracts interest rate swaps enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions enter net investment hedges hedge portion net investments certain foreign subsidiaries counterparties major financial institutions although theoretical risk replacement cost estimated fair value instruments management believes risk incurring losses remote losses would immaterial estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices may time enter interest rate swap agreements manage exposure interest rate changes swaps involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense december 31 2006 outstanding interest rate swap agreements second quarter 2005 entered call options forward contracts buy british pounds order mitigate currency exposure related spirits wine acquisition closed july 2005 addition entered treasury rate locks interest rate swaps related anticipated issuance debt associated acquisition hedges described detail established acquisition cost hedges consisted call options forward contracts buy british pounds terminated call options early july 2005 settled forward contracts july 26 2005 closed spirits wine acquisition year ended december 31 2005 recorded total pretax net acquisition hedge expense 1209 million 1090 million tax expense income net condensed consolidated statement income included hedge program costs call options pretax amount 330 million 211 million tax hedge accounting expense forward contracts result marktomarket accounting day acquisition closed amount 879 million tax hedge accounting expense forward contracts tax deductible offset corresponding reduction bookbasis investment acquisition consolidated balance sheet 2005 entered treasury rate locks aggregate notional value 175 billion locks hedged risk earnings associated fluctuations interest rates relating anticipated issuances dollardenominated debt associated spirits wine acquisition accounted hedges cash flow hedges since treasury rate locks hedged variability interest payments future issuance debt december 31 2005 total deferred gains 104 million 67 million net deferred taxes january 5 2006 terminated treasury rate locks issued us dollardenominated longterm debt recorded 26 million pretax net gain rate locks accumulated comprehensive income amortize gain earnings maturities corresponding debt adjustment interest expense corresponding recognition interest expense related new us dollardenominated debt information new longterm debt see note 6 longterm debt addition fourth quarter 2005 entered interest rate swaps aggregate notional value €800 million classified interest rate swaps cash flow hedges since swaps hedged fluctuations interest rates relating anticipated issuances eurodenominated debt associated spirits wine acquisition terminated swap agreements january 27 2006 issued new eurodenominated longterm debt recorded 06 million pretax gain swaps accumulated comprehensive income amortize gain earnings maturities corresponding debt adjustment interest expense corresponding recognition interest expense new eurodenominated debt information new longterm debt see note 6 longterm debt order hedge net investment position subsidiaries acquired spirits wine assets eurodenominated operations january 2006 issued longterm debt amount €800 million approximately 1 billion designated foreign currency debt net investment hedge investments certain foreign subsidiaries estimated fair value companys cash equivalents notes payable banks commercial paper approximates carrying amounts due principally short maturities estimated fair value companys 50349 million 51868 million total longterm debt including current portion december 31 2006 2005 approximately 49189 million 52493 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity concentration credit risk respect accounts receivable limited large number geographically diverse customers make operating companies domestic international customer base spirits wine sales distributed future brands llc us maxxium worldwide bv internationally accounts receivable balances related parties included accounts receivable related parties consolidated balance sheet see note 21 related party transactions raw materials used company subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility exposures contracts may material financial statements 14 guarantees commitments december 31 2006 825 million thirdparty guarantees debt maxxium worldwide bv maxxium spirits wine business international sales distribution joint venture required perform guarantees event maxxium fails make contractual payments renewal extended expiration date committed portion credit facilities december 12 2010 accordance financial accounting standards board interpretation 45 fin 45 guarantors accounting disclosure requirements guarantees including indirect guarantees indebtedness others liability offsetting increase investment maxxium 06 million existed december 31 2006 reflect fair value guarantees maxxium also guaranteed various leases acco world corporation office products business divested spinoff august 16 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 43 million april 2013 accordingly recorded fair value guarantees financial statements accordance fin 45 december 31 2006 recorded liability 15 million refer note 3 discontinued operation additional information spinoff office products business provided typical indemnities connection divestitures indemnities relate various representations generally included divestiture agreements environmental tax product liability employee liability contingencies depending transactions several divestitures maximum obligation certain contingencies specified unusual transactions accordingly pursuant fin 45 potential payments divestiturerelated indemnity obligations cannot reasonably estimated indemnities vary duration cases durations indefinite fin 45 effective december 31 2002 recorded liability consolidated financial statements indemnities entered prior date made indemnity payments material financial position results operations quarter furthermore expect potential payments connection indemnity obligations would material adverse effect consolidated financial position results operations liquidity 2006 future periods purchase obligations company december 31 2006 apurchase obligations include contracts raw materials finished goods purchases advertising selling administrative services capital expenditures 15 product warranties generally record warranty expense time sale offer customers various warranty terms based upon type product sold warranty expense determined accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category warranty expense generally recorded time sale following table summarizes activity related product warranty liability years ended december 31 2006 2005 2004 16 restructuring restructuringrelated charges pretax restructuring restructuringrelated charges twelve months ended december 31 2006 aadvertising selling general administrative expenses 2006 home hardware charges related supplychain initiatives including consolidation manufacturing facilities resulting closure cabinetry plant tool storage plant 2006 spirits wine charges related integration spirits wine acquisition record restructuring charges 2005 recorded pretax restructuringrelated integration costs 196 million advertising selling general administrative expense primarily related spirits wine acquisition 2004 recorded pretax restructuring charges 98 million primarily related workforce reduction costs home hardware business recorded restructuringrelated charges 109 million primarily cost sales related consolidation facilities home hardware business well golf business reconciliation restructuring liability restructuring liability december 31 2006 2005 material 17 information business segments report operating segments home hardware spirits wine golf based organized segments within company making operating decisions assessing performance based markets served companys operating segments types products segment derives revenues described home hardware includes kitchen bathroom faucets accessories manufactured marketed distributed moen kitchen bath cabinetry manufactured marketed distributed masterbrand cabinets residential entry door patio door systems designed manufactured thermatru vinylframed windows manufactured marketed distributed simonton locks manufactured marketed distributed master lock american lock tool storage organization products manufactured distributed waterloo spirits wine includes products made marketed distributed beam global spirits wine inc subsidiaries affiliates golf includes golf balls golf clubs golf shoes gloves manufactured marketed distributed acushnet company companys subsidiaries operate principally united states canada australia europe primarily spain united kingdom france acorporate expenses include salaries benefits expenses related corporate office employees functions benefit operating segments corporate expenses include expenses directly allocable reportable segments allocating indirect expenses operating segments would require imprecise allocation methodology amounts elimination reversal transactions reportable segments bbased country destination crepresents total assets excluding intercompany receivables intangibles resulting business acquisitions net dcorporate assets include cash certain receivables related taxes insurance claims cash surrender value life insurance policies corporate assets include assets directly allocable reportable segments allocating indirect assets operating segments would require imprecise allocation methodology erepresents property plant equipment net 18 income expense net components income expense net years ended december 31 2006 2005 2004 follows 19 earnings per share basic earnings per common share based weightedaverage number common shares outstanding year preferred stock dividend requirements diluted earnings per common share assume convertible preferred shares outstanding beginning year converted dates related interest preferred stock dividend requirements outstanding common shares adjusted accordingly also assumes outstanding common shares increased shares issuable upon exercise stock options market price exceeds exercise price less shares could purchased company related proceeds computation basic diluted earnings per common share net income follows twelve months ended december 31 2006 stock options excluded calculation weighted average shares diluted eps antidilutive exercise price exceeded average stock price excluded stock options approximately 31 million shares 2 weighted average shares outstanding shares antidilutive included average shares outstanding diluted earnings per share calculation twelve months ended december 31 2005 2004 20 accumulated comprehensive income total accumulated comprehensive income consists net income changes stockholders equity transactions events sources stockholders includes currency translation gains losses unrealized gains losses derivative instruments designated cash flow hedges postretirement liability adjustments components changes accumulated comprehensive loss follows 21 related party transactions future brands llc spirits wine business partner vs group vs joint venture named future brands llc future brands distributes companies spirits brands united states provides related selling invoicing services future brands receives commission partners services provided spirits wine business records revenue time shipment future brands customers part forming joint venture jbbco event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2006 2005 jbbco outstanding obligations result arrangement spirits wine business balances related future brands included following increase accounts receivable accounts payable due higher distribution future brands due sales resulting spirits wine acquisition maxxium worldwide bv jbbco partner international sales distribution joint venture named maxxium worldwide bv maxxium distributes sells spirits wine key markets outside united states joint venture partners include rémy cointreau edrington group vs november 2006 rémy cointreau gave notice maxxium terminate ownership stake maxxium effective march 30 2009 expect rémy cointreaus eventual departure material adverse impact either operations maxxium financial results company spirits wine business rémy cointreau brands account 15 maxxiums case volume spirits wine business records sales time spirits sold third parties rather time shipment maxxium result forming joint venture guaranteed certain credit facilities bank loans entered maxxium amount totaling 82 million 77 million outstanding december 31 2006 december 31 2005 guarantees totaled 74 million 50 million outstanding bgsw executed shareholder loan facility loan facility maxxium amounting 20 million amounts outstanding loan facility either december 31 2006 december 31 2005 loan facility renewed 2005 expires december 12 2010 spirits wine business balances related maxxium included following increase accounts receivable accounts payable due higher distribution maxxium due international sales resulting spirits wine acquisition 22 pending litigation tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation bw time whollyowned subsidiary bat industries plc connection sale bw atco subsequently merged bw agreed indemnification agreement indemnification agreement indemnify fortune brands inc claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company indemnitor indemnification agreement indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations company defendant number actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however believe number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor believe pending actions material adverse effect upon results operations cash flows financial condition believe meritorious defenses company indemnified indemnification agreement litigation company spirits wine business numerous manufacturers importers beer spirits wine named defendants purported class action lawsuit michigan seeking damages injunctive relief regarding alleged deceptive negligent marketing beverage alcohol people legal purchase age alcohol case removed federal court company voluntarily dismissed without prejudice matter court later dismissed prejudice claims remaining defendants including spirits wine business plaintiffs appealed dismissal united states court appeals sixth circuit action consolidated appeal another case company spirits wine business numerous manufacturers beer spirits wine ohio seeking similar damages also dismissed district court appeal cases fully briefed spirits wine business numerous manufacturers importers beer spirits wine named defendants purported class action lawsuit west virginia seeking damages injunctive relief regarding alleged deceptive negligent marketing beverage alcohol people legal purchase age alcohol company previously dismissed defendant matter district court later dismissed prejudice claims remaining defendants including spirits wine business plaintiffs appealed dismissal united states court appeals fourth circuit appeal fully briefed company believes company spirits wine business meritorious defenses allegations actions material adverse effect results operations cash flows financial condition company spirits wine business vigorously contesting litigation march 7 2005 bridgestone sports co ltd bridgestone golf inc collectively bridgestone filed lawsuit acushnet company one companys subsidiaries united states district court district delaware bridgestone complaint alleges various golf balls manufactured acushnet violate ten bridgestones us patents company believes counsel advised acushnet meritorious defenses plaintiffs claims possible predict outcome pending litigation possible action could decided unfavorably acushnet vigorously contesting action company believes material adverse effect results companys operations cash flows financial condition addition acushnet filed counterclaim action seeking damages infringement five patents february 9 2006 callaway golf company filed lawsuit acushnet company united states district court district delaware callaway alleges certain golf balls manufactured acushnet company infringe four callaways patents acushnet believes counsel advised meritorious defenses callaways allegations possible predict outcome pending litigation possible action could decided unfavorably acushnet vigorously contesting action company believes lawsuit material adverse effect results companys operations cash flows financial condition addition lawsuits described company subsidiaries defendants lawsuits associated businesses operations possible predict outcome pending actions litigation possible actions could decided unfavorably believe meritorious defenses actions material adverse effect upon results operations cash flows financial condition actions vigorously contested 23 environmental subject laws regulations relating protection environment possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts subsidiaries may undertake future due uncertainties status laws regulations technology information related individual sites involved numerous remediation actions clean hazardous wastes required federal state laws based evaluation cleanup cost estimates compliance programs believe reasonable possibility material loss exceeding amounts already recognized may incurred liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties report independent registered public accounting firm board directors shareholders fortune brands inc completed integrated audits fortune brands incs consolidated financial statements internal control financial reporting december 31 2006 accordance standards public company accounting oversight board united states opinions based audits report auditors presented consolidated financial statements financial statement schedule opinion based audits report auditors consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position fortune brands inc subsidiaries december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america addition opinion based audits financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility companys management responsibility express opinion financial statements financial statement schedule based audits audit financial statements fulham acquisition corp wholly owned subsidiary statements reflect total assets 64 billion december 31 2005 total revenues 3871 million period july 26 2005 december 31 2005 statements audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included fulham acquisition corp inc based solely report auditors conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion discussed notes 9 10 consolidated financial statements company changed manner accounts stockbased compensation january 1 2006 manner accounts pension postretirement plans december 31 2006 internal control financial reporting also opinion managements assessment included managements report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion based audit company maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued coso companys management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions managements assessment effectiveness companys internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating managements assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions companys internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles companys internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition companys assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described managements report internal control financial reporting management excluded simonton holdings inc assessment internal control financial reporting december 31 2006 acquired company purchase business combination 2006 also excluded simonton holdings inc audit internal control financial reporting simonton holdings inc whollyowned subsidiary statements reflect total assets 8162 million december 31 2006 total revenues 3171 million period june 7 2006 december 31 2006 pricewaterhousecoopers llp chicago illinois february 26 2007 report independent registered public accounting firm board directors stockholder fulham acquisition corp audited consolidated balance sheet fulham acquisition corp subsidiaries december 31 2005 related consolidated statements operations stockholders equity cash flows period july 26 2005 december 31 2005 consolidated financial statements responsibility companys management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position fulham acquisition corp subsidiaries december 31 2005 results operations cash flows period july 26 2005 december 31 2005 conformity us generally accepted accounting principles kpmg audit plc london england february 20 2006 shareholders fortune brands inc prepared consolidated balance sheet fortune brands inc subsidiaries december 31 2006 2005 related consolidated statements income cash flows stockholders equity three years period ended december 31 2006 financial statements prepared accordance accounting principles generally accepted united states america financial information elsewhere annual report form 10k consistent financial statements internal control financial reporting company subsidiaries designed provide reasonable assurances financial records adequate relied upon provide information preparation financial statements established policies procedures carefully followed companys stockholders annually ratify appointment companys independent registered public accounting firm companys financial statements pricewaterhousecoopers llp audit performed accordance standards public company accounting oversight board united states audit committee board directors consisting solely independent directors meets periodically independent auditors internal auditors management review accounting auditing financial reporting matters auditors direct access audit committee norman h wesley norman h wesley chairman board chief executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer item 9item 8 financial statements supplementary data consolidated statement income fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement cash flows fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement stockholders’ equity fortune brands inc subsidiaries see notes consolidated financial statements notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies basis presentation consolidated financial statements include accounts fortune brands inc elimination intercompany transactions majorityowned subsidiaries subsidiary acushnet lionscore limited holds minority interest substantive control result company operational decisionmaking powers entity addition consolidate variable interest entities vies deemed primary beneficiary refer note 4 “acquisitions disposals” discussion vies certain company’s subsidiaries operate 52 53week fiscal year accordance statement financial accounting standards 144 “accounting impairment disposal longlived assets” results operations related 2007 sale us wine business 2005 spinoff acco world corporation reclassified separately stated discontinued operations accompanying consolidated statements income years ended december 31 2007 2006 2005 cash flows discontinued operations years ending december 31 2007 2006 2005 separately classified accompanying consolidated statements cash flows presentation financial statements accordance us generally accepted accounting principles requires us make estimates assumptions affect reported amounts related disclosures actual results future periods could differ estimates cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 538 million 491 million december 31 2007 2006 respectively inventories firstin firstout fifo inventory method principal inventory method across segments accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns specific identification items product discontinuance engineeringmaterial changes home hardware segment use lastin firstout lifo inventory method product groups metals inventories comprise significant portion inventories lifo inventories december 31 2007 2006 1662 million current cost 1879 million notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued total inventories 20476 million 1776 million current cost 1991 million total inventories 19378 million respectively minor amount similar types inventory within home hardware business accounted utilizing either fifo average cost based method place time acquisition impact statement income balance sheet accounting inventories using average cost method versus fifo inventory method inconsequential property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included operating income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred estimated useful lives related assets follows buildings leasehold improvements 15 40 years machinery equipment 3 10 years software 3 7 years longlived assets accordance statement financial accounting standards 144 fas 144 “accounting impairment disposal longlived assets” longlived asset including amortizable identifiable intangible assets asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated using quoted market price unavailable using discounted expected future cash flows 2007 recorded restructuring expense noncash impairments definitelived identifiable intangible assets 126 million well property plant equipment 370 million goodwill indefinitelived intangibles accordance statement financial accounting standards 142 fas 142 “goodwill intangible assets” goodwill tested impairment least annually written impaired interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates estimated cash flows related goodwill grouped reporting unit level reporting unit operating segment certain circumstances component operating segment constitutes business estimated future discounted cash flows less carrying value net assets tangible identifiable intangible assets related goodwill perform impairment test measure recognize amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting unit’s goodwill implied fair value goodwill determining estimated future cash flows consider current projected future levels income based management’s plans business well business trends prospects market economic conditions notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangibles impairment annually whenever market business events indicate may potential impact intangible impairment losses recorded extent carrying value indefinitelived intangible assets exceeds fair value predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize profit split methodology customary valuation practice establish reasonable royalty rate profit split analyses allocate economic income ebitda less returns working capital fixed assets employed tradename residual assets economic unit determine expected profit margin associated commercialization tradename writedowns goodwill indefinitelived identifiable intangible assets 2007 2006 2005 company cannot predict occurrence certain events might adversely affect carrying value goodwill intangible assets events may include limited impact economic environment particularly related home hardware companies material negative change relationships significant customers strategic decisions made response economic competitive conditions investments company makes investments include longterm investments andor joint ventures either complement expand existing businesses accordance accounting principles bulletin 18 “the equity method accounting investments common stock” equity method accounting used account investments company ability exercise significant influence operating financial policies investee equity method requires impairment losses recognized temporary losses investment value carrying value warranty reserves offer customers various warranty terms based upon type product sold determine warranty expense accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category warranty expense generally recorded cost products sold time sale refer note 17 “product warranties” pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits record amounts relating plans based calculations specified us generally accepted accounting principles include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued assumptions based current rates trends deemed appropriate discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments expected rate return plan assets determined based historical experience nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases required us generally accepted accounting principles effects modifications generally accumulated specified corridor amortized remaining service period employees cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees believe assumptions utilized recording obligations company’s plans presented note 12 “pension retiree benefits” reasonable based experience advice independent actuaries however difference actual experience changes assumptions may materially affect company’s financial position results operations continue monitor assumptions market conditions warrant environmental company subject laws regulations relating protection environment company provides expenses associated environmental remediation obligations amounts probable reasonably estimated adjust accruals new information develops circumstances change accruals discounted december 31 2007 2006 environmental accruals amounted 321 million 331 million respectively included noncurrent liabilities balance sheet opinion compliance current environmental protection laws taking account estimated recoveries third parties including insurers material adverse effect upon results operations cash flows financial condition income taxes accordance statement financial accounting standards 109 “accounting income taxes” establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse company records valuation allowance reducing deferred tax assets likely assets realized record liabilities uncertain income tax positions accordance fasb interpretation 48 fin 48 “accounting uncertainty income taxes interpretation fasb statement 109” january 1 2007 adopted fin 48 fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties disclosure transition evaluation tax position accordance fin 48 two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained zero tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ company’s estimates future periods changes facts circumstances notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued new information may require company change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur december 31 2007 company liabilities unrecognized tax benefits pertaining uncertain tax positions totaling 4114 million reasonably possible unrecognized tax benefits may decrease range 205 230 million next 12 months primarily result conclusion us federal state foreign income tax proceedings provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest foreign subsidiary earnings remitted without incremental taxes undistributed earnings foreign subsidiaries considered aggregated 7787 million december 31 2007 revenue recognition recognize revenue either upon shipment upon delivery based contractual terms criteria recognition revenue accordance staff accounting bulletin 104 “revenue recognition” title risk loss passed customer persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility reasonably assured revenue recorded net applicable provisions discounts returns allowances record estimates doubtful accounts receivable resulting inability customers make payment record estimates reductions revenue customer programs incentives including price discounts volumebased incentives promotions advertising allowances cooperative advertising sales returns based historical returns current trends forecasts product demand amounts billed shipping handling classified “net sales” consolidated income statement costs incurred shipping handling classified “advertising selling general administrative expenses” shipping handling costs included “advertising selling general administrative expenses” 2247 million 2573 million 2194 million 2007 2006 2005 respectively customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sellthrough business’s products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “net sales” category “advertising selling general administrative expenses” costs recognized “net sales” include limited general customer programgenerated expenses cooperative advertising programs volume allowances promotional allowances costs typically recognized “advertising selling general administrative expenses” include point sale materials shared media costs recorded latter time sale implementation program based management’s best estimates based historical projected experience type program customer volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough merchandising support level returns customer training management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations advertising costs advertising costs amounted 7001 million 7039 million 4807 million 2007 2006 2005 respectively principally expensed incurred notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued advertising costs include media costs point sale materials cooperative advertising product endorsements advertising costs recorded reduction net sales primarily cooperative advertising 570 million 539 million 535 million 2007 2006 2005 respectively advertising costs recorded advertising selling general administrative expenses 6431 million 6500 million 4272 million 2007 2006 2005 respectively research development research development expenses include product development product improvement product engineering process improvement costs research development expenses 807 million 727 million 659 million 2007 2006 2005 respectively expensed incurred stockbased compensation january 1 2006 adopted statement financial accounting standards 123 revised 2004 “sharebased payment” fas 123r supplemented securities exchange commission staff accounting bulletin 107 “sharebased payment” used “modified prospective” transition method defined fas 123r requires compensation cost recorded unvested stock options remaining service period beginning january 1 2006 subsequent adoption fas 123r recognized sharebased compensation expense measured fair value award date grant financial statements period employee provides service exchange award fair value option award estimated date grant using blackscholes optionpricing model prior 2006 elected apply accounting principles board opinion 25 “accounting stock issued employees” related interpretations accounting stock plans allowed financial accounting standards 148 fas 148 “accounting stockbased compensation transition disclosure” prior adoption fas 123r applied “nominal vesting period approach” recognizing pro forma compensation cost threeyear vesting period including awards held individuals eligible retirement provisions applicable plan adopted fas 123r january 1 2006 changed approach recognize expense retirement eligible employees twelvemonth period since retiree options vest entirety held least one year retirement period retirement eligible longer impact change pro forma net income diluted earnings per share year ended december 31 2005 would material foreign currency translation foreign currency balance sheet accounts translated us dollars actual rates exchange balance sheet date income expenses translated average rates exchange effect period related translation adjustments made directly separate component “accumulated comprehensive income loss” caption stockholders’ equity transactions denominated currency functional currency subsidiary translated functional currency resulting transaction gains losses recorded incomeexpense derivative financial instruments accordance financial accounting standards statement 133 fas 133 “accounting derivative instruments hedging activities” related amendment financial accounting standards statement 138 fas 138 “accounting certain derivative instruments certain hedging activities” derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued fair value derivative recorded comprehensive income oci recognized statement income hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings connection 2005 spirits acquisition purchase price paid british pounds sterling entered call options hedge currency exposure related purchase price terminated call options early july 2005 also entered forward contracts buy british pounds hedge currency exposure related purchase price settled forward contracts upon consummation acquisition july 2005 connection acquisition also entered treasury rate locks interest rate swaps hedge risk associated fluctuation interest rates related anticipated issuance new longterm debt finance acquisition terminated locks swaps upon issuance new longterm debt january 2006 additional information see note 15 “financial instruments” derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2007 154 million deferred currency losses reclassified cost products sold year ended december 31 2006 19 million deferred currency gains reclassified cost products sold estimate 34 million currency derivative losses included oci december 31 2007 reclassified earnings within next twelve months recently issued accounting standards fair value measurement september 2006 fasb issued statement financial accounting standards 157 “fair value measurement” fas 157 fas 157 defines fair value establishes framework measuring fair value expands disclosures assets liabilities measured fair value statement require new fair value measurements fas 157 effective financial statements issued fiscal years beginning november 15 2007 calendar 2008 fortune brands expect fas 157 materially impact results operations financial position fair value option february 2007 fasb issued statement financial accounting standards 159 “fair value option financial assets financial liabilities” fas 159 fas 159 permits entities choose specified election dates measure many financial instruments certain items fair value currently required measured fair value fas 159 effective first fiscal year begins november 15 2007 calendar 2008 fortune brands make election current financial assets liabilities business combinations december 2007 fasb issued statement financial accounting standards 141 revised 2007 fas 141r “business combinations” fas 141r replaces fas 141 “business combinations” fas 141r establishes principles requirements acquirer recognizes measures assets acquired liabilities assumed noncontrolling interest acquiree b recognizes measures goodwill acquired c determines information notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued disclose fas 141r also requires acquisitionrelated costs including restructuring recognized separately acquisition fas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 calendar 2009 fortune brands statement eliminates adjustments goodwill changes deferred tax assets uncertain tax positions acquisition accounting measurement period limited one year acquisition including acquisitions prior adoption fas 141r noncontrolling interests consolidated financial statements december 2007 fasb issued statement financial accounting standards 160 fas 160 “noncontrolling interests consolidated financial statements amendment arb 51” fas 160 amends accounting research bulletin 51 establishing accounting reporting standards noncontrolling interest currently referred minority interest subsidiary deconsolidation subsidiary statement changes consolidated balance sheet presentation noncontrolling interests mezzanine level liabilities stockholders’ equity component stockholders’ equity however minority interest spirits business held vs group form redeemable preferred stock continue classified mezzanine level liabilities stockholders’ equity december 31 2007 carrying value minority interest held vs group 5429 million carrying value minority interestsnoncontrolling interests reclassified equity upon adoption fas 160 156 million fas 160 requires expanded disclosures consolidated financial statements clearly identify distinguish interests parent’s owners interests noncontrolling owners subsidiary fas 160 effective financial statements issued fiscal years beginning december 15 2008 calendar 2009 fortune brands statement applies prospectively except presentation disclosure requirements applied retrospectively periods presented fas 160 impact presentation noncontrolling interests fortune brands’ statements income financial position stockholders’ equity 2 goodwill identifiable intangibles net goodwill 41965 million december 31 2007 decrease goodwill twelve months ended december 31 2007 699 million 42664 million december 31 2006 primarily due acquisitionrelated adjustments related purchase spirits wine brands well certain distribution assets 2005 spirits acquisition principally related income taxes partly offset foreign currency translation adjustments finalization 2007 purchase accounting adjustments acquisition sbr inc refer note 4 “acquisitions disposals” change net carrying amount goodwill segment follows notes consolidated financial statements fortune brands inc subsidiaries 2 goodwill identifiable intangibles continued also indefinitelived intangible assets principally tradenames 31361 million december 31 2007 compared 30297 million december 31 2006 increase 1064 million primarily due changes foreign currency rates amortizable identifiable intangible assets principally tradenames customer relationships subject amortization estimated useful life 5 30 years based assessment number factors may impact useful life factors include historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion financial results relevant factors gross carrying value accumulated amortization amortizable intangible assets 10116 million 2810 million respectively december 31 2007 compared 9692 million 2266 million respectively december 31 2006 gross carrying value increase 424 million principally due acquisition license certain golf patents changes foreign currency rates partially offset 2007 amortization 126 million impairment charges associated restructuring programs home hardware business gross carrying value accumulated amortization class intangible assets december 31 2007 2006 follows accumulated amortization prior adoption financial accounting standards 142 “goodwill intangible assets” intangible amortization 476 million 429 million 329 million years ended december 31 2007 2006 2005 respectively increase amortization twelve months ended december 31 2007 compared december 31 2006 primarily due amortization associated simonton acquisition 46 million company expects record intangible amortization ranging approximately 45 million 50 million next five fiscal years ending december 31 2008 december 31 2012 performed annual impairment test december 31 fiscal year 2007 2006 2005 impairment goodwill indefinitelived intangible assets recognized result tests notes consolidated financial statements fortune brands inc subsidiaries 2 goodwill identifiable intangibles continued 2007 recorded restructuring expense noncash impairments identifiable intangibles 126 million impairment charges associated planned exit entry door market united kingdom decorative column product lines us company cannot predict occurrence certain events might adversely affect carrying value goodwill intangible assets events may include limited impact economic environment particularly related us home products industry material negative change relationships significant customers strategic decisions made response economic competitive conditions 3 discontinued operations third quarter 2007 sold william hill canyon road wine brands related assets e j gallo winery december 2007 sold remaining us wine assets constellation brands inc constellation brands 8845 million subject purchase price adjustments cash working capital levels sale constellation brands inc resulted tax gain 52 million august 16 2005 company completed spinoff office business segment acco world corporation “acco” company’s shareholders acco merged general binding corporation creating acco brands corporation leading supplier branded office products statements income twelve months ended december 31 2007 2006 2005 adjusted reflect us wine office businesses discontinued operations results discontinued operations include expenses paid fortune brands behalf acco based actual direct costs incurred interest expense associated outstanding debt fortune brands allocated discontinued operations assuming discontinued operations debt equity ratio consistent debt equity ratio fortune brands accordance provisions eitf 8724 “allocation interest discontinued operations” following table summarizes results discontinued operations years ended december 31 2007 2006 2005 income discontinued operations includes tax gain sale us wine assets constellation brands 2007 52 million effective income tax rate 2007 higher 2006 due taxes associated gain sale us wine business notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals acquisition simonton june 7 2006 completed acquisition sbr inc simonton privately held company consisting brands including simonton windows leading vinylframed window brand north america purchase price approximately 5998 million net cash acquired including assumed debt consideration paid included stock based price fortune brands’ common stock closing cash stock component 50 total purchase price assumed 859 million simonton’s debt 554 million paid closing simonton included consolidated results date acquisition material purposes supplemental disclosure accordance statement financial accounting standards 141 fas 141 “business combinations” acquisition spirits brands assets july 2005 company purchased 25 spirits wine brands well certain distribution assets 2005 spirits acquisition pernod ricard sa pernod ricard brands acquired include sauza tequila maker’s mark bourbon courvoisier cognac canadian club whisky laphroaig singlemalt scotch clos du bois superpremium wines sold december 2007 leading regional national brands distribution networks uk germany spain july 2005 affiliate company received tracker shares issued goal acquisitions limited goal pernod ricard subsidiary formed acquire allied domecq plc allied domecq tracker shares gave company certain economic rights respect 2005 spirits acquisition prior actual legal transfer company also certain rights manage operations 2005 spirits acquisition yet legally transferred company january 26 2006 substantially 2005 spirits acquisition assets legally transferred fortune brands acquisition structured way result negotiations pernod ricard considering various factors including 1 commercial desire obtain economic benefits associated owning operating 2005 spirits acquisition soon possible funding purchase price assets 2 assets transferred pernod ricard commingled shared assets involving significant reorganization business operations 3 actual legal transfer 2005 spirits acquisition assets required evaluate alternative ways separate 2005 spirits acquisition retained pernod ricard obtain required consents structure negotiate document complete transfer 2005 spirits acquisition assets time net assets particular 2005 spirits acquisition assets actually transferred company number goal tracker shares held company reduced proportion value ascribed net assets transferred using methodology prescribed company’s agreement pernod ricard agreement pernod ricard provided net assets 2005 spirits acquisition assets would legally transferred one subsidiaries fortune brands six month period began july 26 2005 december 31 2005 net assets courvoisier maker’s mark well certain california wine assets transferred january 27 2006 substantially acquired net assets legally transferred fortune brands notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals continued total recorded investment 2005 spirits acquisition included initial payment purchase larios supplemental brands purchased purchase price adjustments settlements well transactions costs approximately 525 billion purchase price assets formerly owned allied domecq subject change based adjustments accordance purchase agreement final purchase price based specified multiples historic profit allied domecq fiscal year ended august 31 2004 brands purchased well working capital levels july 26 2005 adjustments company’s agreement pernod ricard provided assessment pernod ricard historic profitability brands company purchased subsequent review company historic profits binding determination third party company pernod ricard could agree reached agreement pernod ricard may 19 2006 adjust global consideration 2005 spirits acquisition result higher actual historical profits anticipated working capital adjustments additional adjustments achieve economic results consistent parties’ intention complete company’s acquisition 2005 spirits acquisition cashfree debtfree basis net payment £1343 million approximately 252 million assets legally transferred reporting accordance financial accounting standards board interpretation 46r “consolidation variable interest entities” fin 46r since many allied domecq assets acquired fortune brands commingled entities owned assets also acquired pernod ricard accordance fin 46r interest goal subsidiaries deemed variable interest entities fair value specified assets half total fair value entity’s assets variable interest entities primary beneficiary bearing obligation absorb majority expected losses right receive majority expected residual returns consolidated accounted accordance fin 46r fas 141 recognized minority interest pernod ricard assets fair value pernod ricard assets legally transferred ceased recognizing minority interest fair value assets acquired fortune brands less 50 fair value entity primary beneficiary accounted investment using cost method addition since tracker shares gave company ownership rights incomelosses generated fortune brands assets date acquisition legal transfer assets recorded income amount 573 million unconsolidated subsidiaries period july 26 2005 december 31 2005 fortune brands assets legally transferred cost investments replaced actual fortune assets acquired fair value basis date acquisition accordance fas 141 december 31 2005 fortune brands assets accounted cost method 11 billion included investments unconsolidated subsidiaries consolidated balance sheet december 31 2005 investments included assets company paid approximately 10 billion total purchase price approximately 5 billion vies investment considered primary beneficiary maximum exposure loss december 31 2005 11 billion net assets pertaining investment legally transferred january 1 2006 january 27 2006 aware losses occurred transfer period notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals continued initially financed acquisition 2005 spirits acquisition borrowings bank credit agreements subsequently financed commercial paper market april 20 2005 executed bridge credit agreement 60 billion 18month term initial drawdown january 2006 issued dollar eurodenominated longterm debt securities 2 billion 800 million approximately 1 billion repaid terminated bridge credit agreement see note 8 “longterm debt” additional information financing 2005 spirits acquisition accordance fas 141 disclosure requirements unaudited pro forma results twelve months ended december 31 2005 presented 2005 spirits acquisition legal transfer assets occurred january 1 2005 information based historical results operations adjusted impact acquisition costs pro forma results include allocations selling marketing general administrative expenses representative expenses ongoing basis addition pro forma results give effect events expected continuing impact business therefore arrangements pernod ricard limited duration reflected given significant factors adjustments impacting pro forma disclosure pro forma results presented deemed representative either historical results future results 2005 spirits acquisition assets actually transferred fortune brands january 1 2005 transfer fortune brands certain 2005 spirits acquisition assets accomplished various stock sales mergers asset sales resulted assumption transfer fortune brands liability certain litigation contingent liabilities contingent indemnity rights assumption transfer might ultimately require establishment additional reserves liabilities contingent liabilities would material total spirits business identified date disposal dalmore scotch whisky us distribution rights december 2007 sold us distribution rights related assets dalmore scotch whisky 58 million sale resulted pretax gain 456 million 285 million tax gain disposal cockburn’s port wine assets third quarter 2006 sold cockburn’s port wine production assets retained ownership brand cash proceeds sale 664 million gain loss recorded proceeds equal book value assets notes consolidated financial statements fortune brands inc subsidiaries 5 minority interest held vs group vs group vs owns 10 minority interest spirits business bgsw minority interest form shares redeemable convertible preferred stock “the bgsw minority interest” carrying value minority interest december 31 2007 5429 million fortune brands continues 90 capital stock business vs group may require company purchase bgsw minority interest fair value whole part upon one year’s notice time upon change control bgsw jim beam brands co certain events company right acquire bgsw minority interest owned vs group fair value whole part upon change control absolut spirits company incorporated sale absolut brand dissolution future brands llc us sales distribution joint venture bgsw minority interest cannot transferred sold third party vs without company’s consent shares bgsw convertible preferred stock issued vs convertible 10 bgsw common stock voting power equivalent 10 interest bgsw common stock dividend preferred stock equal greater 10 dividend paid bgsw common stock dividends paid preferred stock series a1 preferred stock entitled dividend 32647 preferred stock’s face value 3446 million plus unpaid accrued dividends series a2 preferred stock entitled dividend 4 preferred stock’s face value 1530 million plus unpaid accrued dividends may paid common stock unless unpaid accrued bgsw preferred stock dividends paid years ended december 31 2007 2006 2005 bgsw paid total preferred dividends 174 million 143 million 113 million respectively vs recorded minority interest expense year account redemption feature convertible redeemable preferred stock accordance eitf topic d98 “classification measurement redeemable securities” measure minority interest fair value changes fair value reflected income continuing operations bgsw publicly traded entity therefore quoted market price common preferred shares reporting period estimate fair value based combination marketbased earnings multiples discounted cash flow techniques ultimate fair value upon redemption based upon numerous factors subject assessment bgsw board independent appraiser board unable reach consensus 2006 recorded adjustment 478 million minority interest expense fortune brands consolidated statement income representing increase estimated fair value convertible redeemable preferred stock increase fair value primarily result enhanced value spirits business due greater global presence position opportunities leverage growth historical newly acquired brands spirits business synergies combination bgsw 2005 spirits acquisition adjustments fair value recorded 2007 6 related party transactions future brands llc may 2001 spirits business completed transactions vs creating joint venture named future brands llc distribute initial tenyear period companies’ spirits brands united states provide related selling invoicing services bgsw accounted joint venture using equity method accounting vs paid 270 million gain access spirits business’s us distribution network acquire equity interest future brands accounted 270 million gain sale equity interest future brands deferred income resulting tax sale deferred income tax asset due notes consolidated financial statements fortune brands inc subsidiaries 6 related party transactions continued certain continuing obligations jbbco including limited making payments suppliers employees parties future brands contracts event default future brands june 2001 began amortizing amounts income taxes straightline basis initial term agreement 10year amortization period based 10year term management agreement future brands future brands receives commission partners services provided spirits business records revenue time shipment future brands’ customers part forming joint venture jbbco event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2007 2006 jbbco outstanding obligations result arrangement spirits business’s balances related future brands included following maxxium worldwide bv jbbco partner international sales distribution joint venture named maxxium worldwide bv maxxium distributes sells spirits key markets outside united states representing approximately onethird international spirits sales company owns 25 interest maxxium carried 963 million december 31 2007 accounted using equity method 25 partners maxxium rémy cointreau sa rémy edrington group ltd vs group vs spirits business records sales time spirits sold third parties rather time shipment maxxium result forming joint venture guaranteed certain credit facilities bank loans entered maxxium amount totaling 91 million 77 million outstanding december 31 2007 december 31 2006 guarantees totaled 82 million 77 million outstanding bgsw executed shareholder loan facility loan facility maxxium amounting 22 million amounts outstanding loan facility either december 31 2007 december 31 2006 loan facility renewed 2005 expires december 12 2010 november 2006 rémy gave notice maxxium terminate distribution agreement maxxium effective march 30 2009 connection rémy’s termination expected rémy pay substantial termination penalty maxxium based expected impact rémy’s termination distribution agreement maxxium’s financial position results operations company currently estimates investment maxxium recoverable notes consolidated financial statements fortune brands inc subsidiaries 6 related party transactions continued spirits business’s balances related maxxium included following decrease accounts payable primarily due timing payments bgsw maxxium 7 shortterm borrowings credit facilities december 31 2007 2006 2310 million 7876 million shortterm borrowings outstanding respectively comprised notes payable banks commercial paper used general corporate purposes including acquisitions included amount december 31 2007 2006 134 million 81 million outstanding committed bank credit agreements provide unsecured borrowings 545 million 90 million respectively addition company uncommitted bank lines credit provide unsecured borrowings working capital 1349 million 190 million outstanding december 31 2007 1710 million 175 million outstanding december 31 2006 weightedaverage interest rate borrowings 54 52 39 respectively 2007 2006 2005 including shortterm debt 10 billion 38 billion classified longterm debt consolidated balance sheet december 31 2006 2005 see note 15 description company’s use financial instruments notes consolidated financial statements fortune brands inc subsidiaries 8 longterm debt components longterm debt follows based longterm credit facilities support commercial paper borrowings classified 10 billion borrowings longterm consolidated balance sheet december 31 2006 amount represents commercial paper amount company believes remain outstanding next twelve months commercial paper borrowings classified longterm consolidated balance sheet december 31 2007 december 31 2007 20 billion 5year revolving credit agreement matures 2010 october 4 2007 renewed 500 million 364day revolving credit facility mature 2008 agreement includes option extend payment one year company’s discretion incremental fee 0125 outstanding amount facility replaces previous 364day facility amounts outstanding either facility december 31 2007 2006 interest rates variable based market interest rates time borrowing company’s longterm credit rating facility fees 008 per annum subject increases maximum fees 015 per annum event longterm debt rating falls specified levels facilities support company’s commercial paper borrowings commercial paper market january 2006 issued longterm debt securities totaling 20 billion shelf registration statement filed securities exchange commission 20 billion notes consist 750 million 5 18 notes due january 2011 950 million 5 38 notes due january 2016 300 million 5 78 notes due january 2036 proceeds used pay commercial paper issued connection 2005 spirits acquisition net proceeds 19774 million less price discounts 93 million underwriting fees 133 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses refer note 15 “financial instruments” treasury rate locks associated usdenominated longterm debt addition january 2006 issued longterm debt securities totaling 800 million approximately 1 billion transaction exempt registration accordance regulation securities act 1933 securities offered sold outside united states notes consolidated financial statements fortune brands inc subsidiaries 8 longterm debt continued persons u persons notes consist 300 million 3 12 notes due january 2009 500 million 4 notes due january 2013 us dollar value eurodenominated securities subject fluctuations foreign exchange rates proceeds used pay commercial paper issued connection 2005 spirits acquisition borrowings bridge credit agreement net proceeds 7945 million less price discounts 31 million underwriting fees 24 million stated coupon rate debt issue approximates effective interest rate excluding hedging gains losses estimated payments maturing debt next five years december 31 2007 follows 2008 2000 million 2009 4480 million 2010 none 2011 7500 million 2012 none 9 267 convertible preferred stock redeemable company’s option 187347 204980 shares 267 convertible preferred stock issued outstanding december 31 2007 2006 respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share together holders common stock certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share convertible preferred stock 6601 shares common stock authorized unissued common shares reserved issuance upon conversions treasury shares may delivered holders converted 17633 shares 10067 shares 2007 2006 respectively company may redeem convertible preferred stock price 3050 per share plus accrued dividends company paid cash dividend 267 per share aggregate amount 05 million year ended december 31 2007 company paid cash dividends 06 million years ended december 31 2006 2005 10 capital stock 750 million authorized shares common stock 60 million authorized shares preferred stock 153913500 151909241 common shares outstanding net treasury shares december 31 2007 2006 respectively cash dividends paid common stock years ended december 31 2007 2006 2005 aggregated 2481 million 2234 million 2010 million respectively treasury shares delivered connection exercise stock options grants stock awards conversion preferred stock amounted 2015063 2007 1580877 2006 december 31 2007 2006 80964036 82968295 common treasury shares respectively notes consolidated financial statements fortune brands inc subsidiaries 11 stockbased compensation use stock options performance awards compensate key employees stock awards compensate outside directors stock option awards outstanding four longterm incentive plans december 31 2007 shareholders approved 2007 longterm incentive plan authorized 13 million shares common stock awards may made february 27 2017 new stockbased awards made 1990 1999 2003 longterm incentive plans existing awards plans continue exercisable stock options exercise prices equal fair value share common stock date grant options generally may exercised prior one year date grant options issued prior december 2005 generally expire ten years date grant options issued beginning december 2005 expire seven years date grant options issued since november 1998 generally vest onethird year threeyear period beginning first anniversary date grant fair value option award estimated date grant using blackscholes optionpricing model based weightedaverage assumptions shown following table determination expected volatility based historical volatility stock period commensurate expected term stock options well relevant factors riskfree interest rate based us government issues remaining term equal expected life stock options weighted average expected term determined based historical employee exercise behavior contractual term options weightedaverage grant date fair value stock options granted twelve months ended december 31 2007 2006 1379 1405 respectively fas 123r requires estimate forfeitures calculating expense related stockbased compensation opposed recognizing forfeitures corresponding reduction expense occur prior january 1 2006 pro forma disclosure amortized stock option compensation cost threeyear graded vesting schedule effective january 1 2006 elected amortize stock option compensation cost straightline basis service period twelve months ended december 31 2007 recognized pretax stockbased compensation expense stock options income continuing operations 291 million 203 million tax 013 per basic diluted share twelve months ended december 31 2006 recognized pretax stockbased compensation expense stock options income continuing operations 330 million 247 million tax 017 per basic share 016 per diluted share manufacturing fixed assetrelated compensation costs capitalized material result adoption fas 123r cash flow operations years ended december 31 2007 2006 decreased 228 million 108 million respectively offsetting increase cash flow financing due reclassification tax benefits exercise stock options notes consolidated financial statements fortune brands inc subsidiaries 11 stockbased compensation continued compensation cost stockbased compensation determined based fair value award date grant accordance provisions statement financial accounting standards 123 “accounting stockbased compensation” amortized expense service period pro forma basis net income earnings per share would follows 2005 following table summarizes stock options outstanding three years ended december 31 2007 2006 2005 well activity twelve months ended august 16 2005 connection office products business spinoff company adjusted number shares options option exercise prices preserve closely possible economic value options existed time spinoff notes consolidated financial statements fortune brands inc subsidiaries 11 stockbased compensation continued b intrinsic value stock options exercised twelve months ended december 31 2007 2006 745 million 529 million respectively source shares issued treasury stock c december 31 2007 weightedaverage remaining contractual life options outstanding 54 years aggregate intrinsic value options outstanding 1388 million options outstanding exercisable december 31 2007 follows december 31 2007 weighted average remaining contractual life options exercisable 51 years aggregate intrinsic value options exercisable 1388 million summary activity nonvested stock options years ended december 31 2006 2007 well activity twelve months ended remaining unrecognized compensation cost related unvested awards december 31 2007 approximately 415 million weightedaverage period time cost recognized 20 years fair value options vested twelve months ended december 31 2007 373 million use stock awards compensate outside directors 2005 nonemployee director stock plan awards issued annually second quarter part compensation outside directors addition outside directors elect director’s fees paid stock compensation cost expensed time award based fair value share fortune brands stock date award twelve months ended december 31 2007 awarded 11887 shares common stock outside directors fair value date award 8054 pretax compensation cost 10 million twelve months ended december 2006 issued 13150 shares common stock outside directors fair value date award 7515 pretax compensation cost 10 million notes consolidated financial statements fortune brands inc subsidiaries 11 stockbased compensation continued performance awards granted certain officers company payout based achievement targeted cumulative diluted earnings per share average consolidated return equity changed average consolidated return invested capital beginning 20062008 cycle compensation cost amortized expense threeyear performance period awards granted prior december 2005 performance awards could settled stock cash depending whether individual satisfied company’s stock ownership guidelines result compensation cost based stock price balance sheet date performance awards granted december 2005 may paid stock fair value based stock price date grant following table summarizes performance awards outstanding three years ended december 31 2007 2006 2005 well activity twelve months ended august 16 2005 connection office products business spinoff company adjusted number shares performance awards preserve closely possible economic value performance awards existed time spinoff pretax compensation cost performance awards recorded twelve months ended december 31 2007 benefited 13 million 08 million tax result decrease stock price reductions related lower expected incentive program payouts remaining unrecognized pretax compensation cost related unvested awards december 31 2007 cash used settle performance awards twelve months ended december 31 2007 157 million addition payment cash issued 8248 shares common stock treasury shares available issuance connection future awards company’s stock plans december 31 2007 2006 2005 11021672 3253083 5853452 respectively authorized unissued shares reserved issuance connection awards treasury shares may delivered notes consolidated financial statements fortune brands inc subsidiaries 12 pension retiree benefits number pension plans principally united states covering many company’s employees plans provide payment retirement benefits mainly commencing ages 60 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service earnings annual contributions plans made necessary ensure legal funding requirements satisfied company provides postretirement health care life insurance benefits certain employees retirees united states certain employee groups outside united states many employees retirees outside united states covered government health care programs september 2006 fasb issued statement financial accounting standards 158 “employers’ accounting defined benefit pension postretirement plans” fas 158 amendment fasb statements 87 88 106 132r fas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability consolidated balance sheet recognize changes funded status year changes occur adjustments comprehensive income funded status benefit plan difference plan assets fair value benefit obligation pension plans benefit obligation projected benefit obligation pbo postretirement benefit plans benefit obligation accumulated postretirement benefit obligation apbo previously unrecognized gainslosses prior service costscredits transition assetsobligations recognized accumulated comprehensive income continue amortized components net periodic benefit cost adoption fas 158 resulted decrease accumulated comprehensive income 1199 million notes consolidated financial statements fortune brands inc subsidiaries 12 pension retiree benefits continued amounts recognized balance sheet consist notes consolidated financial statements fortune brands inc subsidiaries 12 pension retiree benefits continued amounts accumulated comprehensive income balance sheet yet recognized components net periodic benefit cost december 31 2007 follows amounts accumulated comprehensive income expected recognized components net periodic benefit cost next fiscal year shown pension benefit obligation accumulated benefit obligation fair value plans assets pension plans accumulated benefit obligation excess plan assets underfunded abo shown notes consolidated financial statements fortune brands inc subsidiaries 12 pension retiree benefits continued components net periodic benefit cost follows assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint change assumed health care cost trend rates would following effects notes consolidated financial statements fortune brands inc subsidiaries 12 pension retiree benefits continued plan assets pension plan weightedaverage asset allocations december 31 2007 2006 follows investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility master trusts established hold assets domestic defined benefit plans us defined benefit asset allocation policy trusts allows equity allocation 45 75 fixed income allocation 25 50 cash allocation 25 investments 20 nonus investment trust targets may differ depending country allowing 90 equity 100 fixed investments 20 real estate asset allocations based underlying liability structure local regulations retirement asset allocations reviewed periodically ensure allocation meets needs liability structure expected 83 longterm rate return plan assets determined based longterm historical performance plan assets current asset allocation projected longterm rates return pension investment consultants expected longterm rates return 10 equities 6 fixed income 8 investments defined contribution plan contributions sponsor number defined contribution plans contributions determined various formulas cash contributions related plans amounted 341 million 336 million 250 million 2007 2006 2005 respectively estimated future benefit payments following benefit payments reflect expected future service expected paid notes consolidated financial statements fortune brands inc subsidiaries 13 lease commitments future minimum rental payments noncancelable operating leases december 31 2007 follows total rental expense operating leases reduced minor amounts subleases amounted 648 million 610 million 513 million 2007 2006 2005 respectively 14 income taxes components income continuing operations income taxes follows reconciliation income taxes 35 federal statutory income tax rate income taxes continuing operations follows refer note 4 “acquisitions disposals” additional information fin 46r accounting notes consolidated financial statements fortune brands inc subsidiaries 14 income taxes continued january 1 2007 adopted fasb interpretation 48 fin 48 “accounting uncertainty income taxes interpretation fasb statement 109” fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties disclosure transition evaluation tax position accordance fin 48 two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained zero tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ company’s estimates future periods changes facts circumstances new information may require company change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur differences amounts recognized statement financial position prior adoption fin 48 amounts recognized adoption accounted cumulative effect adjustment recorded beginning balance retained earnings cumulative effect adjustment 36 million recognized decrease beginning retained earnings upon implementation fin 48 january 1 2007 third quarter 2007 spanish tax authorities concluded routine audit spanish spirits companies included part 2005 spirits acquisition pursuant acquisition agreement pernod ricard indemnified company preacquisition income tax contingencies liabilities tax returns subject examination included 2000 2004 tax periods preceded date acquisition spanish tax authorities issued net tax assessment approximately 110 million 917 million tax 183 million related interest penalties paid october 2007 also third quarter 2007 received 993 million tax indemnification payment pernod ricard related tax assessment 110 million net associated tax benefits order reflect impact spanish tax assessment increased liability unrecognized tax benefits utb’s additionally increased liability utb’s reflect tax issues similar raised course audit relating tax periods subsequent audit period majority spanish utb’s pertain preacquisition periods subject tax indemnification agreement pernod ricard reconciliation beginning ending amount utb’s follows notes consolidated financial statements fortune brands inc subsidiaries 14 income taxes continued amount utb’s recognized january 1 2007 would affect company’s effective tax rate 1903 million compared 3159 million december 31 2007 reasonably possible within next twelve months total utb’s may decrease range 205 230 million primarily result conclusion us federal state foreign income tax proceedings continue apply accounting policy classifying interest penalties accruals related utb’s income tax expense years ended december 31 2007 2006 2005 company recognized approximately 77 million 00 million 76 million interest penalties december 31 2007 2006 accruals payment interest penalties 681 million 320 million respectively company subsidiaries file income tax returns us federal jurisdiction various states foreign jurisdictions us internal revenue service irs currently examining company’s 2004 2005 federal income tax returns however company technically subject irs examination years 1997 2003 due unexpired statute limitations periods company one subsidiaries subject nonus income taxes examination tax authorities following major taxing jurisdictions canada years 1998 france years 2003 mexico years 2001 spain years 2004 united kingdom years 2003 income taxes follows notes consolidated financial statements fortune brands inc subsidiaries 14 income taxes continued components net deferred tax assets liabilities follows 15 financial instruments enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates principal financial instruments used forward foreign exchange contracts interest rate swaps enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions enter net investment hedges hedge portion net investments certain foreign subsidiaries notes consolidated financial statements fortune brands inc subsidiaries 15 financial instruments continued counterparties major financial institutions although theoretical risk replacement cost estimated fair value instruments management believes risk incurring losses remote losses would immaterial estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices may time enter interest rate swap agreements manage exposure interest rate changes swaps involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense december 31 2007 outstanding interest rate swap agreements second quarter 2005 entered call options forward contracts buy british pounds order mitigate currency exposure related 2005 spirits acquisition closed july 2005 addition entered treasury rate locks interest rate swaps related anticipated issuance debt associated acquisition hedges described detail established acquisition cost hedges consisted call options forward contracts buy british pounds terminated call options early july 2005 settled forward contracts july 26 2005 closed 2005 spirits acquisition year ended december 31 2005 recorded total pretax net acquisition hedge expense 1209 million 1090 million tax income expense net condensed consolidated statement income included hedge program costs call options pretax amount 330 million 211 million tax hedge accounting expense forward contracts result marktomarket accounting day acquisition closed amount 879 million tax hedge accounting expense forward contracts tax deductible offset corresponding reduction bookbasis investment acquisition consolidated balance sheet 2005 entered treasury rate locks aggregate notional value 175 billion locks hedged risk earnings associated fluctuations interest rates relating anticipated issuances dollardenominated debt associated 2005 spirits acquisition accounted hedges cash flow hedges since treasury rate locks hedged variability interest payments future issuance debt december 31 2005 total deferred gains 104 million 67 million net deferred taxes january 5 2006 terminated treasury rate locks issued us dollardenominated longterm debt recorded 26 million pretax net gain rate locks accumulated comprehensive income amortize gain earnings maturities corresponding debt adjustment interest expense corresponding recognition interest expense related new us dollardenominated debt information longterm debt see note 8 “longterm debt” addition fourth quarter 2005 entered interest rate swaps aggregate notional value  800 million classified interest rate swaps cash flow hedges since swaps hedged fluctuations interest rates relating anticipated issuances eurodenominated debt associated 2005 spirits acquisition terminated swap agreements january 27 2006 issued new eurodenominated longterm debt recorded 06 million pretax gain swaps accumulated comprehensive income notes consolidated financial statements fortune brands inc subsidiaries 15 financial instruments continued amortize gain earnings maturities corresponding debt adjustment interest expense corresponding recognition interest expense new eurodenominated debt information longterm debt see note 8 “longterm debt” order hedge net investment position subsidiaries acquired spirits assets eurodenominated operations january 2006 issued longterm debt amount 800 million approximately 1 billion estimated fair value company’s cash equivalents notes payable banks commercial paper approximates carrying amounts due principally short maturities estimated fair value company’s 41427 million 50366 million total longterm debt including current portion december 31 2007 2006 approximately 40056 million 49189 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity concentration credit risk respect accounts receivable limited large number geographically diverse customers make operating companies’ domestic international customer base spirits sales distributed future brands llc us maxxium worldwide bv internationally accounts receivable balances related parties included accounts receivable related parties consolidated balance sheet see note 6 “related party transactions” raw materials used company subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility december 31 2007 material derivative contracts outstanding related raw materials 16 guarantees commitments december 31 2007 912 million thirdparty guarantees debt maxxium worldwide bv maxxium spirits business’s international sales distribution joint venture required perform guarantees event maxxium fails make contractual payments renewal extended expiration date committed portion credit facilities december 12 2010 accordance financial accounting standards board interpretation 45 fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” liability offsetting increase investment maxxium 04 million existed december 31 2007 reflect fair value guarantees maxxium addition part formation future brands llc future brands joint venture vs group 2001 jim beam brands co jbbco guaranteed financial obligations future brands may arise event future brands default fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands conducts business cannot estimate possible future obligations future brands agreement december 31 2007 jbbco outstanding obligations result arrangement notes consolidated financial statements fortune brands inc subsidiaries 16 guarantees commitments continued also guaranteed various leases acco world corporation office products business divested spinoff august 16 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 36 million april 2013 accordingly recorded fair value guarantees financial statements accordance fin 45 december 31 2007 recorded liability 10 million refer note 3 “discontinued operations” additional information spinoff office products business provided typical indemnities connection divestitures indemnities relate various representations generally included divestiture agreements environmental tax product liability employee liability contingencies depending transactions several divestitures maximum obligation certain contingencies specified unusual transactions accordingly pursuant fin 45 potential payments divestiturerelated indemnity obligations cannot reasonably estimated indemnities vary duration cases durations indefinite fin 45 effective december 31 2002 recorded liability consolidated financial statements indemnities entered prior date made indemnity payments material financial position results operations quarter furthermore expect potential payments connection indemnity obligations would material adverse effect consolidated financial position results operations liquidity 2007 future periods purchase obligations company december 31 2007 purchase obligations include contracts raw materials finished goods purchases advertising selling administrative services capital expenditures 17 product warranties generally record warranty expense time sale offer customers various warranty terms based upon type product sold warranty expense determined accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category warranty expense generally recorded time sale following table summarizes activity related product warranty liability years ended december 31 2007 2006 2005 notes consolidated financial statements fortune brands inc subsidiaries 18 restructuring restructuringrelated charges pretax restructuring restructuringrelated charges twelve months ended december 31 2007 advertising selling general administrative expenses twelve months ended december 31 2007 recorded pretax restructuring charges 735 million principally related supply chain initiatives home hardware business including facility closures including consolidation facilities cabinetry window tool storage production closure cabinetry component operation well planned exit entry door market united kingdom decorative column products lines us home hardware business closed downsized several facilities order improve longterm efficiency productivity flexibility supply chains also provide nearterm benefits aligning costs capacity navigate current downturn us home products market 2007 restructuring charges consisted primarily 163 million workforce reduction costs 496 million tangible intangible asset writedowns 76 million contract termination costs restructuringrelated cost sales charges inventory writedowns associated exited markets product lines restructuringrelated advertising selling general administrative charges consisted accounts receivable reserves doubtful accounts warranty reserves retention costs related exit entry door market uk decorative column products line us expect record incurred approximately 1015 million charges first half 2008 complete home hardware business restructuring activities initiated fourth quarter 2007 twelve months ended december 31 2006 recorded pretax restructuring charges 212 million primarily related supplychain initiatives related home hardware business pretax restructuring restructuringrelated charges twelve months ended december 31 2006 advertising selling general administrative expenses 2006 spirits charges related integration 2005 spirits acquisition 2006 home hardware charges related supplychain initiatives including consolidation manufacturing notes consolidated financial statements fortune brands inc subsidiaries 18 restructuring restructuringrelated charges continued facilities resulting closure cabinetry plant tool storage plant record restructuring charges 2005 recorded pretax restructuringrelated integration costs 196 million advertising selling general administrative expense primarily related 2005 spirits acquisition reconciliation restructuring liability restructuring liability december 31 2006 2005 activity years ended december 31 2006 2005 material 19 information business segments report operating segments spirits home hardware golf based organized segments within company making operating decisions assessing performance based markets served company’s operating segments types products segment derives revenues described spirits includes products made marketed distributed beam global spirits wine inc subsidiaries affiliates home hardware includes kitchen bathroom faucets accessories manufactured marketed distributed moen kitchen bath cabinetry manufactured marketed distributed masterbrand cabinets residential entry door patio door systems designed manufactured thermatru vinylframed windows manufactured marketed distributed simonton locks manufactured marketed distributed master lock american lock tool storage organization products manufactured distributed waterloo golf includes golf balls golf clubs golf shoes gloves manufactured marketed distributed acushnet company notes consolidated financial statements fortune brands inc subsidiaries 19 information business segments continued company’s subsidiaries operate principally united states canada europe primarily spain united kingdom france australia mexico corporate expenses include salaries benefits expenses related corporate office employees functions benefit operating segments corporate expenses include expenses directly allocable reportable segments allocating indirect expenses operating segments would require imprecise allocation methodology amounts elimination reversal transactions reportable segments b based country destination c represents total assets excluding intercompany receivables intangibles resulting business acquisitions net corporate assets include cash certain receivables related taxes insurance claims cash surrender value life insurance policies corporate assets include assets directly allocable reportable segments allocating indirect assets operating segments would require imprecise allocation methodology notes consolidated financial statements fortune brands inc subsidiaries 19 information business segments continued notes consolidated financial statements fortune brands inc subsidiaries 20 income expense net components income expense net years ended december 31 2007 2006 2005 follows 21 earnings per share basic earnings per common share based weightedaverage number common shares outstanding year preferred stock dividend requirements diluted earnings per common share assume convertible preferred shares outstanding beginning year converted dates preferred stock dividend requirements outstanding common shares adjusted accordingly also assumes outstanding common shares increased shares issuable upon exercise stock options market price exceeds exercise price less shares could purchased company related proceeds computation basic diluted earnings per common share “net income” follows notes consolidated financial statements fortune brands inc subsidiaries 21 earnings per share continued years ended december 31 2007 2006 stock options excluded calculation weighted average shares diluted eps antidilutive exercise price exceeded average stock price excluded stock options approximately 58 million 31 million shares weighted average shares outstanding respectively shares antidilutive excluded average shares outstanding diluted earnings per share calculation twelve months ended december 31 2005 22 accumulated comprehensive income total accumulated comprehensive income consists net income changes stockholders’ equity transactions events sources stockholders includes currency translation gains losses unrealized gains losses derivative instruments designated cash flow hedges pension postretirement liability adjustments components changes accumulated comprehensive income follows 23 pending litigation tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation bw time whollyowned subsidiary bat industries plc connection sale bw atco subsequently merged bw agreed indemnification agreement indemnification agreement indemnify fortune brands inc claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company “indemnitor” indemnification agreement indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations notes consolidated financial statements fortune brands inc subsidiaries 23 pending litigation continued company defendant number actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however believe number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor believe pending actions material adverse effect upon results operations cash flows financial condition believe meritorious defenses company indemnified indemnification agreement litigation company spirits business numerous manufacturers importers beer spirits wine named defendants purported class action lawsuits michigan ohio wisconsin west virginia seeking damages declaratory andor injunctive relief regarding alleged deceptive negligent marketing beverage alcohol people legal purchase age alcohol actions dismissed michigan ohio cases remanded trial court dismissed vacated lack standing later dismissed respective trial courts dismissal wisconsin case affirmed wisconsin appellate court appeal west virginia case voluntarily dismissed plaintiffs ohio michigan cases filed motion seeking review united states supreme court plaintiffs later filed stipulation dismissing cases prejudice march 7 2005 bridgestone sports co ltd bridgestone golf inc collectively bridgestone filed lawsuit acushnet company one company’s subsidiaries united states district court district delaware bridgestone complaint alleged various golf balls manufactured acushnet company acushnet violate ten bridgestone’s us patents addition acushnet filed counterclaim action seeking damages infringement five patents september 2007 acushnet entered final settlement agreement bridgestone resolved claims asserted parties action resolution matter material effect company’s results operations financial position february 9 2006 callaway golf company filed lawsuit seeking unspecified damages acushnet company united states district court district delaware callaway alleges certain golf balls manufactured acushnet company infringe four callaway’s patents acushnet believes counsel advised meritorious defenses callaway’s allegations acushnet stipulated infringement jury trial invalidity conducted december 2007 jury returned mixed verdict finding one claim invalid eight claims valid acushnet filed motion judgment matter law overturn inconsistent jury verdict alternative requesting new trial callaway filed motion seeking permanent injunction possible predict outcome pending litigation possible action could decided unfavorably acushnet vigorously contesting action company believes lawsuit material adverse effect results company’s operations cash flows financial condition notes consolidated financial statements fortune brands inc subsidiaries 23 pending litigation continued june 8 2007 callaway golf company filed lawsuit seeking unspecified damages acushnet company united states district court district delaware callaway alleges certain golf clubs manufactured acushnet company infringe five callaway’s patents acushnet believes counsel advised meritorious defenses callaway’s allegations possible predict outcome pending litigation possible action could decided unfavorably acushnet vigorously contesting action company believes lawsuit material adverse effect results company’s operations cash flows financial condition addition acushnet filed counterclaim action seeking damages infringement two golf club patents addition lawsuits described company subsidiaries defendants lawsuits associated businesses operations possible predict outcome pending actions litigation possible actions could decided unfavorably believe meritorious defenses actions material adverse effect upon results operations cash flows financial condition actions vigorously contested 24 environmental subject laws regulations relating protection environment possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts subsidiaries may undertake future due uncertainties status laws regulations technology information related individual sites involved numerous remediation actions clean hazardous wastes required federal state laws based evaluation cleanup cost estimates compliance programs believe reasonable possibility material loss exceeding amounts already recognized may incurred liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties report independent registered public accounting firm board directors shareholders fortune brands inc opinion based audits report auditors consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position fortune brands inc subsidiaries december 31 2007 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america addition opinion based audits financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits audit financial statements fulham acquisition corp wholly owned subsidiary statements reflect total revenues 3871 million period july 26 2005 december 31 2005 financial statements fulham acquisition corp audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included fulham acquisition corp based solely report auditors conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits report auditors provide reasonable basis opinions discussed notes 11 12 14 consolidated financial statements company changed manner accounts stockbased compensation january 1 2006 manner accounts pension postretirement plans december 31 2006 manner accounts uncertain tax positions january 1 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp chicago illinois february 25 2008 report independent registered public accounting firm board directors stockholder fulham acquisition corp audited consolidated balance sheet fulham acquisition corp subsidiaries december 31 2005 related consolidated statements operations stockholders’ equity cash flows period july 26 2005 december 31 2005 consolidated financial statements responsibility company’s management responsibility express opinion consolidated financial statements based audit conducted audit accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audit provides reasonable basis opinion consolidated financial statements referred present fairly material respects financial position fulham acquisition corp subsidiaries december 31 2005 results operations cash flows period july 26 2005 december 31 2005 conformity us generally accepted accounting principles kpmg audit plc london england february 20 2006 shareholders fortune brands inc prepared consolidated balance sheet fortune brands inc subsidiaries december 31 2007 2006 related consolidated statements income cash flows stockholders’ equity three years period ended december 31 2007 financial statements prepared accordance accounting principles generally accepted united states america financial information elsewhere annual report form 10k consistent financial statements internal control financial reporting company subsidiaries designed provide reasonable assurances financial records adequate relied upon provide information preparation financial statements established policies procedures carefully followed company’s stockholders annually ratify appointment company’s independent registered public accounting firm company’s financial statements pricewaterhousecoopers llp audit performed accordance standards public company accounting oversight board united states audit committee board directors consisting solely independent directors meets periodically independent auditors internal auditors management review accounting auditing financial reporting matters auditors direct access audit committee bruce carbonari bruce carbonari president chief executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer item 9item 8 financial statements supplementary data consolidated statement income fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement cash flows fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement stockholders’ equity fortune brands inc subsidiaries see notes consolidated financial statements notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies basis presentation consolidated financial statements include accounts fortune brands inc elimination intercompany transactions majorityowned subsidiaries subsidiary acushnet lionscore limited holds minority interest substantive control result company operational decisionmaking powers entity certain company’s subsidiaries operate 52 53week fiscal year accordance statement financial accounting standards 144 “accounting impairment disposal longlived assets” results operations related 2007 sale us wine business reclassified separately stated discontinued operations accompanying consolidated statements income years ended december 31 2008 2007 2006 cash flows discontinued operations years ending december 31 2008 2007 2006 separately classified accompanying consolidated statements cash flows presentation financial statements accordance us generally accepted accounting principles requires us make estimates assumptions affect reported amounts related disclosures actual results future periods could differ estimates cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency discounts related early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 575 million 538 million december 31 2008 2007 respectively inventories firstin firstout fifo inventory method principal inventory method across segments accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns specific identification items product discontinuance engineeringmaterial changes home hardware segment use lastin firstout lifo inventory method product groups metals inventories comprise significant portion inventories lifo inventories december 31 2008 2007 1658 million current cost 1843 million total inventories 19754 million 1662 million current cost 1879 million total inventories 20476 million respectively notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included operating income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred estimated useful lives related assets follows buildings leasehold improvements 15 40 years machinery equipment 3 10 years software 3 7 years longlived assets accordance statement financial accounting standards 144 fas 144 “accounting impairment disposal longlived assets” longlived asset including amortizable identifiable intangible assets asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value using quoted market price unavailable using discounted expected future cash flows goodwill indefinitelived intangible assets accordance statement financial accounting standards 142 fas 142 “goodwill intangible assets” goodwill tested impairment least annually written impaired interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates estimated cash flows related goodwill grouped reporting unit level reporting unit operating segment certain circumstances component operating segment constitutes business discrete financial information available segment management regularly reviews estimated future discounted cash flows less carrying value net assets tangible identifiable intangible assets related goodwill perform impairment test measure recognize amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting unit’s goodwill implied fair value goodwill determining estimated future cash flows consider current projected future levels income based management’s plans business well business trends prospects market economic conditions fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually whenever market business events indicate may potential impact intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life company cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment particularly related home hardware companies material negative change relationships significant customers strategic decisions made response economic competitive conditions investments company makes investments include longterm investments andor joint ventures either complement expand existing businesses accordance accounting principles bulletin 18 “the equity method accounting investments common stock” equity method accounting used account investments company ability exercise significant influence operating financial policies investee equity method requires impairment losses recognized temporary losses investment value carrying value pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits record amounts relating plans based calculations specified us generally accepted accounting principles include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets calculated pension costs recognizing year’s asset gains losses fiveyear period discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments expected rate return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases required us generally accepted accounting principles effects deviations assumptions generally accumulated specified corridor amortized remaining service period employees cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees believe assumptions utilized recording obligations company’s plans presented note 13 “pension retiree benefits” reasonable based experience advice independent actuaries however differences actual experience changes assumptions may materially affect company’s financial position results operations continue monitor assumptions market conditions warrant environmental company subject laws regulations relating protection environment company provides expenses associated environmental remediation notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued obligations amounts probable reasonably estimated adjust accruals new information develops circumstances change accruals discounted december 31 2008 2007 environmental accruals amounted 291 million 321 million respectively included noncurrent liabilities balance sheet opinion compliance current environmental protection laws taking account estimated recoveries third parties including insurers material adverse effect upon results operations cash flows financial condition income taxes accordance statement financial accounting standards 109 “accounting income taxes” establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse company records valuation allowance reducing deferred tax assets likely assets realized record liabilities uncertain income tax positions accordance fasb interpretation 48 fin 48 “accounting uncertainty income taxes interpretation fasb statement 109” january 1 2007 adopted fin 48 fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties disclosure transition evaluation tax position accordance fin 48 two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained zero tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ company’s estimates future periods changes facts circumstances new information may require company change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur december 31 2008 company liabilities unrecognized tax benefits pertaining uncertain tax positions totaling 2484 million reasonably possible unrecognized tax benefits may decrease range 5 100 million next 12 months primarily result conclusion us federal state foreign income tax proceedings provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest foreign subsidiary earnings remitted without incremental taxes revenue recognition recognize revenue either upon shipment upon delivery based contractual terms criteria recognition revenue accordance staff accounting bulletin 104 “revenue recognition” title risk loss passed customer persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility reasonably assured revenue recorded net applicable provisions discounts returns allowances record estimates doubtful accounts receivable resulting inability customers make payment record estimates notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued reductions revenue customer programs incentives including price discounts volume based incentives promotions advertising allowances cooperative advertising sales returns based historical returns current trends forecasts product demand cost products sold cost products sold includes costs make products saleable inbound freight purchasing receiving costs inspection costs internal transfer costs addition depreciation expense associated assets used manufacture products make saleable included cost products sold customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sellthrough business’s products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “net sales” category “advertising selling general administrative expenses” costs recognized “net sales” include limited general customer programgenerated expenses cooperative advertising programs volume allowances promotional allowances costs typically recognized “advertising selling general administrative expenses” include point sale materials shared media costs recorded latter time sale implementation program based management’s best estimates based historical projected experience type program customer volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough merchandising support level returns customer training management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations advertising selling general administrative expenses advertising selling general administrative expenses include advertising marketing selling including commissions research development shipping handling including warehousing costs general administrative expenses shipping handling costs included advertising selling general administrative expenses 2228 million 2247 million 2573 million 2008 2007 2006 respectively advertising costs amounted 7055 million 7001 million 7039 million 2008 2007 2006 respectively principally expensed incurred advertising costs include media costs point sale materials product endorsements advertising costs recorded reduction net sales primarily cooperative advertising 512 million 570 million 539 million 2008 2007 2006 respectively advertising costs recorded advertising selling general administrative expenses 6543 million 6431 million 6500 million 2008 2007 2006 respectively research development research development expenses include product development product improvement product engineering process improvement costs research development expenses 712 million 807 million 727 million 2008 2007 2006 respectively expensed incurred stockbased compensation recognize sharebased compensation expense measured fair value award date grant financial statements period notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued employee provides service exchange award fair value option award estimated date grant using blackscholes optionpricing model foreign currency translation foreign currency balance sheet accounts translated us dollars actual rates exchange balance sheet date income expenses translated average rates exchange effect period related translation adjustments made directly separate component “accumulated comprehensive income loss” caption stockholders’ equity transactions denominated currency functional currency subsidiary translated functional currency resulting transaction gains losses recorded income net derivative financial instruments accordance statement financial accounting standards 133 fas 133 “accounting derivative instruments hedging activities” related amendment financial accounting standards statement 138 “accounting certain derivative instruments certain hedging activities” derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized statement income hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2008 39 million deferred currency gains reclassified earnings year ended december 31 2007 154 million deferred currency losses reclassified earning based foreign exchange rates december 31 2008 estimate 345 million net currency derivative gains included oci december 31 2008 reclassified earnings within next twelve months recently issued accounting standards fair value measurement february 2008 financial accounting standards board fasb issued fasb staff position 1572 fsp fas 1572 “effective date fasb statement 157” delays effective date fas 157 nonrecurring fair value measurements nonfinancial assets liabilities fiscal years beginning november 15 2008 calendar 2009 fortune brands elected defer adoption nonrecurring fair value measurement disclosures nonfinancial assets liabilities adoption fsp fas 1572 expected material impact results operations cash flows financial position disclosures derivative instruments hedging activities march 2008 fasb issued statement financial accounting standards 161 fas 161 “disclosures derivative instruments hedging activities amendment fasb statement 133” fas 161 establishes disclosure requirements derivatives instruments notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued hedging activities order provide users financial statements enhanced understanding derivatives used b derivative instruments related hedged items accounted c affect financial position financial performance cash flows fas 161 effective financial statements issued fiscal years interim periods beginning november 15 2008 calendar 2009 fortune brands fas 161 require additional disclosures derivative instruments hedging activities business combinations december 2007 fasb issued statement financial accounting standards 141 revised 2007 fas 141r “business combinations” fas 141r replaces fas 141 “business combinations” fas 141r establishes principles requirements acquirer recognizes measures assets acquired liabilities assumed noncontrolling interest acquiree b recognizes measures goodwill acquired c determines information disclose fas 141r also requires acquisitionrelated costs including restructuring recognized separately acquisition fas 141r applies prospectively business combinations acquisition date beginning first annual reporting period beginning december 15 2008 calendar 2009 fortune brands statement eliminates adjustments goodwill changes deferred tax assets uncertain tax positions acquisition accounting measurement period limited one year acquisition including acquisitions prior adoption fas 141r adoption fas 141r may result increased volatility results operations extent uncertain tax positions related prior acquisitions resolved less favorably originally estimated noncontrolling interests consolidated financial statements december 2007 fasb issued statement financial accounting standards 160 fas 160 “noncontrolling interests consolidated financial statements amendment arb 51” fas 160 amends accounting research bulletin 51 establishing accounting reporting standards noncontrolling interest currently referred minority interest subsidiary deconsolidation subsidiary statement changes consolidated balance sheet presentation noncontrolling interests mezzanine level liabilities stockholders’ equity component stockholders’ equity december 31 2008 carrying value minority interestsnoncontrolling interests would reclassified equity upon adoption fas 160 136 million fas 160 requires expanded disclosures consolidated financial statements clearly identify distinguish interests parent’s owners interests noncontrolling owners subsidiary fas 160 effective financial statements issued fiscal years beginning december 15 2008 calendar 2009 fortune brands statement applies prospectively except presentation disclosure requirements applied retrospectively periods presented fas 160 impact presentation noncontrolling interests fortune brands’ statements income financial position stockholders’ equity disclosures postretirement benefit plans december 2008 fasb issued financial statement position fas 132r1 fsp fas 132r1 “employers’ disclosures postretirement benefit plan assets” fsp fas 132r1 amends statement financial accounting standards 132 revised 2003 “employers’ disclosure pensions postretirement benefits” providing guidance employer’s disclosures notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued plans assets defined benefit pension postretirement plan fsp fas 132r1 effective fiscal years ending december 15 2009 calendar yearend 2009 fortune brands fsp fas 132r1 require additional disclosure plan assets 2 asset impairment charges 2008 recorded impairment charges 7855 million comprised 3243 million second quarter well 4612 million fourth quarter asset impairment charges twelve months ended december 31 2008 follows goodwill impairment charges home hardware predominantly related thermatru entry door 3995 million simonton 488 million reporting units two recent acquisitions second quarter 2008 primarily due impact worse anticipated decline us home products market financial results company concluded necessary accordance statement financial accounting standards 142 fas 142 “goodwill intangible assets” conduct interim goodwill impairment test result test company recorded goodwill impairment charges totaling 2889 million fourth quarter company conducted regular annual goodwill impairment test december 31 2008 recorded additional goodwill impairment charges totaling 1624 million fourth quarter charges primarily result expectation slower expected recovery us home products market current effect recession market forecasts sales operating income cash flows reporting unit home hardware business finalized course annual planning process forecast us home products market two segments new home construction segment repairremodel segment impairments thermatru simonton occurred reporting units significantly impacted new home construction recently acquired therefore newer historical carrying values home hardware segment reporting units components one level home hardware operating segment generally correspond major product lines related brands reporting unit goodwill impairment charges measured excess carrying value goodwill implied fair value implied fair value goodwill estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance requirements fas 142 consistent historical practice company estimates fair value reporting unit based projection future cash flows discounted marketparticipantderived weighted average cost capital significant estimates assumptions use estimating future cash flows home hardware reporting units based upon view longerterm broad market trends companyspecific pointintime factors evaluate broad market trends review data includes external longterm forecasts us home products notes consolidated financial statements fortune brands inc subsidiaries 2 asset impairment charges continued markets new construction repair remodel portions market combine trend data pointintime estimates current realities including current economic conditions us availability credit competitor behavior mix product sales commodity costs wage rates level manufacturing capacity pricing environment addition estimates fair value impacted estimates marketparticipantderived weighted average cost capital changes fair value reporting units triggered impairment charges primarily attributable changes assumptions regard decline us home products market 2008 timing recovery next three five years impact future revenues operating margins cash flows changed market assumptions based deterioration actual market conditions experienced throughout 2008 negatively impacted performance versus original 2008 plan given current economic conditions us assumptions regard us home products market reporting unit specific factors noted may change near term estimate discounted future cash flows decreased significantly yearend 2007 primarily due reduction current year forecasted revenues cash flows compared original plan resulted projecting future revenue cash flow growth significantly lower base shifting cash flow growth beyond 2008 later years december 31 2008 cash flow projections assumed declining revenue cash flows 2009 significant recovery would occur 2010 addition fair value declined due increase weighted average cost capital home hardware indefinitelived tradename impairment charges related thermatru entry door simonton windows tradenames review indefinitelived intangible assets impairment annually whenever market business events indicate may potential impact intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure impairment using relieffromroyalty approach based royalty income could hypothetically earned licensing brand name third party result downward revision sales forecasts used goodwill impairment testing related tradename valuations tested second fourth quarter resulting impairment charges tradenames totaling 312 million 920 million second fourth quarters 2008 respectively indefinitelived tradename impairment charges 272 million spirits business related writedown certain nonus regional spirits tradenames due local market factors statement financial accounting standards 144 “accounting impairment disposal longlived assets” requires impairment loss recognized held used longlived assets carrying amount recoverable exceeds fair value due decline projected cash flows thermatru simonton reporting units discussed concluded necessary test depreciating amortizable assets impairment result recorded asset impairment charges 1622 million definitelived intangible assets developed technology customer relationships 216 million land building required fas 142 impairments quantified determined prior performing goodwill impairment tests determine fair values definitelived intangible assets applied income approach using excess earnings methodology entails estimation discounted tax income expected derived intangible assets deductions contributory assets valuation method consistent method used value assets dates original acquisition underlying cash flow assumptions used test recoverability assets measure impairment consistent cash flow projections used evaluate goodwill indefinitelived intangible assets impairment notes consolidated financial statements fortune brands inc subsidiaries 3 goodwill identifiable intangible assets net goodwill 35718 million december 31 2008 decrease goodwill 6247 million twelve months ended december 31 2008 due goodwill impairment charges 4513 million home hardware business refer note 2 “asset impairments” additional information foreign currency translation adjustments 1948 million partly offset impact acquisition cruzan rum acquisitionrelated adjustments decrease goodwill twelve months ended december 31 2007 699 million 42664 million december 31 2006 primarily due acquisitionrelated adjustments related 2005 purchase spirits wine brands well certain distribution assets 2005 spirits acquisition principally related income taxes partly offset foreign currency translation adjustments finalization 2007 purchase accounting adjustments acquisition sbr inc simonton refer note 5 “acquisitions disposals” regarding acquisitions cruzan rum simonton change net carrying amount goodwill segment follows also indefinitelived intangible assets principally tradenames 26824 million december 31 2008 compared 31361 million december 31 2007 decrease 4537 million due writedowns 1504 million changes foreign currency rates 3033 million amortizable identifiable intangible assets principally tradenames customer relationships subject amortization estimated useful life 5 30 years based assessment number factors may impact useful life factors include historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion financial results relevant factors gross carrying value accumulated amortization amortizable intangible assets 8542 million 3252 million respectively december 31 2008 compared 10116 million 2810 million respectively december 31 2007 gross carrying value decrease 1574 million due impairment charges 1622 million changes foreign currency rates 262 million partially offset acquisition cruzan rum tradename 310 million notes consolidated financial statements fortune brands inc subsidiaries 3 goodwill identifiable intangible assets continued gross carrying value accumulated amortization class intangible assets december 31 2008 2007 follows accumulated amortization prior adoption fas 142 intangible amortization 496 million 476 million 429 million years ended december 31 2008 2007 2006 respectively increase amortization twelve months ended december 31 2008 compared december 31 2007 primarily due impact change foreign currency rates increase amortization twelve months ended december 31 2007 compared december 31 2006 primarily due amortization associated simonton acquisition 46 million company expects record intangible amortization 35 million 2009 trending 27 million 2013 decrease 2008 2009 due absence amortization resulting writedown certain amortizable intangible assets 2008 refer note 2 “asset impairments” company cannot predict occurrence certain events might adversely affect carrying value goodwill intangible assets events may include limited impact economic environment particularly related us home products industry material negative change relationships significant customers strategic decisions made response economic competitive conditions 4 discontinued operations third quarter 2007 sold william hill canyon road wine brands related assets e j gallo winery december 2007 sold remaining us wine assets constellation brands inc constellation brands 8870 million sale constellation brands resulted tax gain 52 million 2007 statements income twelve months ended december 31 2008 2007 2006 adjusted reflect us wine business discontinued operation interest expense associated outstanding debt fortune brands allocated discontinued operations assuming notes consolidated financial statements fortune brands inc subsidiaries 4 discontinued operations continued discontinued operations debt equity ratio consistent debt equity ratio fortune brands accordance provisions eitf 8724 “allocation interest discontinued operations” following table summarizes results discontinued operations years ended december 31 2008 2007 2006 income discontinued operations 2007 includes tax gain sale us wine assets constellation brands 52 million 2008 recorded net income 1525 million discontinued operations included pretax income 40 million tax 25 million settlement outstanding working capital claims related sale us wine business also recorded 431 million tax benefit related finalization tax accounting sale us wine business tax credits associated conclusion 20042005 federal income tax audit pertained discontinued operations addition congressional joint committee taxation completed review tax refund associated capital loss carryforward item favorably resolved irs administrative proceeding relating 20012002 federal tax returns result final settlement audit 20012002 federal tax returns removed uncertainty relating utilization capital loss carryforward recorded 980 million tax benefit 987 million unrecognized tax benefits less interest 07 million related capital loss carryforward position associated sale us wine business effective income tax rate 2007 impacted taxes associated gain sale us wine business 5 acquisitions disposals acquisition cruzan rum september 30 2008 acquired premium cruzan rum business pernod ricard sa pernod ricard 1032 million cash final purchase price allocation completed asset liability valuations finalized final adjustments affect fair value assigned assets including intangible assets assumed liabilities acquisition material purposes supplemental disclosure accordance statement financial accounting standards 141 fas 141 “business combinations” acquisition simonton june 7 2006 completed acquisition sbr inc simonton privately held company consisting brands including simonton windows leading vinylframed window brand north notes consolidated financial statements fortune brands inc subsidiaries 5 acquisitions disposals continued america purchase price approximately 5998 million net cash acquired including assumed debt consideration paid included stock based price fortune brands’ common stock closing cash stock component 50 total purchase price assumed 859 million simonton’s debt 554 million paid closing simonton included consolidated results date acquisition material purposes supplemental disclosure accordance fas 141 sale us wine business refer note 4 “discontinued operations” information disposition us wine business disposal dalmore scotch whisky us distribution rights december 2007 sold us distribution rights related assets dalmore scotch whisky 58 million sale resulted pretax gain 456 million 285 million tax gain disposal cockburn’s port wine assets 2006 sold cockburn’s port wine production assets retained ownership brand cash proceeds sale 664 million gain loss recorded proceeds equal book value assets 6 minority interest held vs group vs owned 10 interest spirits business bgsw result sale vs pernod ricard april 2008 exercised call option repurchase minority interest july 2008 repurchased minority interest carrying value 4550 million accounted redemption feature convertible redeemable preferred stock accordance eitf topic d98 “classification measurement redeemable securities” measured minority interest fair value changes fair value reflected income continuing operations bgsw publicly traded entity therefore quoted market price common preferred shares reporting period prior june 30 2008 estimated fair value based combination marketbased earnings multiples discounted cash flow techniques fair value june 30 2008 4550 million based upon final settlement amount determined connection repurchase minority interest valuation reflected features preferred stock could sold third party unique shareholder rights preferred security result three months ended june 30 2008 recorded 879 million decrease fair value minority interest minority interest income adjustments fair value recorded twelve months ended december 31 2007 twelve month periods ended december 31 2008 2007 2006 bgsw declared preferred dividends 98 million 174 million 143 million respectively vs recorded minority interest expense notes consolidated financial statements fortune brands inc subsidiaries 7 related party transactions future brands llc may 2001 spirits business completed transactions vs creating joint venture named future brands llc future brands distribute initial tenyear period companies’ spirits brands united states provide related selling invoicing services bgsw accounted joint venture using equity method accounting vs paid 270 million gain access spirits business’s us distribution network acquire equity interest future brands accounted 270 million gain sale equity interest future brands deferred income resulting tax sale deferred income tax asset due certain continuing obligations jim beam brands co jbbco including limited making payments suppliers employees parties future brands contracts event default future brands june 2001 began amortizing amounts income net income taxes straightline basis initial term agreement 10year amortization period based 10year term management agreement future brands future brands received commission partners services provided spirits business recorded revenue time shipment future brands’ customers september 30 2008 closed transaction resulted early termination september 30 2008 us distribution agreement bgsw us business vs acquired pernod ricard distribution joint venture future brands scheduled remain place february 2012 agreement pernod ricard paid fortune brands 2300 million cash exchange early termination distribution agreement recorded income net statement income part early termination us distribution agreement bgsw redeemed 49 interest future brands held vs future brands consolidated september 30 2008 consolidation material impact financial statements result early termination us distribution agreement recorded income net pretax gain 2337 million recognized balance unamortized deferred income 720 million resulting initial vs payment 2001 total 3057 million pretax 1909 million tax deferred gain recognized income obligations joint venture partner vs financially operationally support joint venture ceased redeemed vs’s shares future brands future brands joint venture cost sharing initiative considered integral operations classified equity earnings advertising selling general administrative expense spirits business’s balances related future brands year ended december 31 2007 included following maxxium worldwide bv bgsw partner international sales distribution joint venture named maxxium worldwide bv maxxium accounted using equity method bgsw 25 interest maxxium equal partners maxxium rémy cointreau sa rémy edrington group ltd teg vs november 2006 rémy gave notice maxxium notes consolidated financial statements fortune brands inc subsidiaries 7 related party transactions continued terminate distribution agreement maxxium effective march 30 2009 september 2008 entered settlement agreement settlement agreement maxxium partners resulted termination vs’s distribution agreement maxxium effective september 30 2008 result exit vs rémy shareholders maxxium effective march 30 2009 september 2008 bgsw teg established international distribution alliance combination jointlyowned companyowned sales forces 24 maxxium markets beginning april 1 2009 alliance simplify distribution giving us greater control distribution alliance provides bgsw teg equal joint ownership sales distribution companies certain markets bgswcontrolled tegcontrolled distribution companies distribute companies’ products certain markets select maxxium units sold third parties bgsw teg work together facilitate orderly transition winding maxxium operations spirits business records sales maxxium markets time spirits sold third parties rather time shipment maxxium result forming maxxium joint venture guaranteed certain credit facilities bank loans entered maxxium amount totaling 89 million 84 million outstanding december 31 2008 december 31 2007 guarantees totaled 91 million 77 million outstanding bgsw executed shareholder loan facility loan facility maxxium amounting 210 million 98 million outstanding loan facility december 31 2008 amounts outstanding december 31 2007 maxxium’s credit facilities guaranteed joint venture partners renegotiated banks effective october 1 2008 consistent prior guarantees continue guarantee proportionate share maxxium’s credit facilities guarantees expire march 31 2009 second quarter 2008 recorded 251 million writedown investment maxxium joint venture statement income net primarily reflect share goodwill writedown recorded financial statements maxxium resulted impending departures rémy vs third quarter 2008 result settlement agreement defined terms vs rémy’s exit recorded additional 254 million writedown investment maxxium reflect otherthantemporary decline value writedown determined accordance provisions accounting principles board opinion 18 “the equity method accounting investments common stock” based value intended future use maxxium’s remaining net assets departure rémy vs evaluated expected impact vs rémy’s exit maxxium’s financial position results operations believe investment maxxium 543 million recoverable spirits business’s balances related maxxium included following notes consolidated financial statements fortune brands inc subsidiaries 8 shortterm borrowings credit facilities december 31 2008 2007 316 million 2310 million shortterm borrowings outstanding respectively comprised notes payable banks andor commercial paper used general corporate purposes including acquisitions included amounts december 31 2008 2007 178 million 134 million outstanding committed bank credit agreements provide unsecured borrowings 467 million 545 million respectively addition december 31 2008 2007 company uncommitted bank lines credit provide unsecured borrowings working capital 1217 million 138 million outstanding 1349 million 190 million outstanding respectively weightedaverage interest rates borrowings 30 54 52 respectively 2008 2007 2006 9 longterm debt components longterm debt follows based intent ability refinance 3 12 notes due 2009 longterm basis classified longterm borrowing consolidated balance sheet december 31 2008 20 billion 5year committed revolving credit agreement matures october 2010 total 7900 million outstanding credit agreement december 31 2008 weightedaverage interest rate revolving credit borrowings 30 2008 october 2008 executed 400 million 3year term loan agreement various banks matures october 2011 january 2009 drew term loan used proceeds repay 300 million note due january 30 2009 interest rates revolving credit term loan agreements variable based us libor time borrowing company’s longterm credit rating credit facilities general corporate purposes revolving credit agreement term loan minimum consolidated interest coverage ratio requirement 35 10 consolidated interest coverage ratio defined credit facilities ratio adjusted ebitda consolidated interest expense adjusted ebitda defined consolidated net income interest expense income taxes depreciation amortization intangible assets well notes consolidated financial statements fortune brands inc subsidiaries 9 longterm debt continued noncash restructuring nonrecurring charges losses asset impairments gains losses resulting sale assets ordinary course business consolidated interest expense disclosed financial statements compliance debt covenants december 31 2008 debt instruments required financial ratio covenants debt agreements normal customary events default would permit lenders debt agreement accelerate debt cured within applicable grace periods failure pay principal interest due change control company events default december 31 2008 estimated payments maturing debt next five years december 31 2008 follows 2009 4244 million 2010 7900 million 2011 7500 million 2012 none 2013 9991 million 10 267 convertible preferred stock redeemable company’s option 60 million authorized shares preferred stock 178504 187347 shares 267 convertible preferred stock issued outstanding december 31 2008 2007 respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share together holders common stock certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share convertible preferred stock 6601 shares common stock authorized unissued common shares reserved issuance upon conversions treasury shares may delivered holders converted 8843 17633 shares 2008 2007 respectively company may redeem convertible preferred stock price 3050 per share plus accrued dividends company paid cash dividends 267 per share aggregate amount 05 million 05 million 06 million years ended december 31 2008 2007 2006 11 capital stock 750 million authorized shares common stock number shares common stock treasury stock share activity follows cash dividends paid common stock years ended december 31 2008 2007 2006 aggregated 2607 million 2481 million 2234 million respectively notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation use stock options performance awards restricted stock units rsus compensate key employees stock awards compensate outside directors awards outstanding three longterm incentive plans december 31 2008 grants 2007 longterm incentive plan may made february 27 2017 13 million shares new stockbased awards made 1999 2003 longterm incentive plans existing awards plans continue exercisable stock options exercise prices equal fair value share common stock date grant options generally may exercised prior one year date grant options issued prior december 2005 generally expire ten years date grant options issued beginning december 2005 expire seven years date grant options issued since november 1998 generally vest onethird year threeyear period beginning first anniversary date grant fair value option award estimated date grant using blackscholes optionpricing model based weightedaverage assumptions shown following table determination expected volatility based historical volatility stock period commensurate expected term stock options well relevant factors riskfree interest rate based us government issues remaining term equal expected life stock options weighted average expected term determined based historical employee exercise behavior contractual term options weightedaverage grant date fair value stock options granted twelve months ended december 31 2008 2007 2006 894 1379 1405 respectively statement financial accounting standards 123r fas 123r “share based payment” requires estimate forfeitures calculating expense related stockbased compensation opposed recognizing forfeitures corresponding reduction expense occur effective january 1 2006 elected amortize stock option compensation cost straightline basis service period twelve months ended december 31 2008 recognized pretax stockbased compensation expense stock options income continuing operations 233 million 168 million tax 011 per basic per diluted share twelve months ended december 31 2007 recognized pretax stockbased compensation expense stock options income continuing operations 291 million 203 million tax 013 per basic diluted share twelve months ended december 31 2006 recognized pretax stockbased compensation expense stock options income continuing operations 330 million 247 million tax 017 per basic share 016 per diluted share manufacturing fixed assetrelated compensation costs capitalized material notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation continued following table summarizes stock options outstanding three years ended december 31 2008 2007 2006 well activity twelve months ended intrinsic value stock options exercised twelve months ended december 31 2008 2007 2006 111 million 745 million 529 million respectively source shares issued treasury stock b december 31 2008 weightedaverage remaining contractual life options outstanding 50 years aggregate intrinsic value options outstanding 141 million options outstanding exercisable december 31 2008 follows december 31 2008 weighted average remaining contractual life options exercisable 44 years aggregate intrinsic value options exercisable 141 million options outstanding exercisable december 31 2007 2006 follows notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation continued summary activity nonvested stock options years ended december 31 2008 2007 2006 well activity twelve months ended follows remaining unrecognized compensation cost related unvested awards december 31 2008 approximately 379 million weightedaverage period time cost recognized 19 years fair value options vested twelve months ended december 31 2008 302 million use stock awards compensate outside directors 2005 nonemployee director stock plan awards issued annually second quarter part compensation outside directors addition outside directors elect director’s fees paid stock compensation cost expensed time award based fair value share fortune brands’ stock date award twelve months ended december 31 2008 awarded 13326 shares common stock outside directors weighted average fair value date award 6751 pretax compensation cost 09 million twelve months ended december 31 2007 awarded 11887 shares common stock outside directors fair value date award 8054 pretax compensation cost 10 million twelve months ended december 31 2006 issued 13150 shares common stock outside directors fair value date award 7515 pretax compensation cost 10 million performance awards granted certain officers company represent right receive unrestricted shares stock based achievement targeted cumulative diluted earnings per share average consolidated return invested capital compensation cost amortized expense performance period fair value performance award based stock price date grant notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation continued following table summarizes performance awards outstanding three years ended december 31 2008 2007 2006 well activity twelve months ended nominal benefit pretax compensation cost performance awards recorded twelve months ended december 31 2008 result reductions related lower expected incentive program payouts remaining unrecognized pretax compensation cost related unvested awards december 31 2008 cash used settle performance awards twelve months ended december 31 2008 2007 2006 11 million 157 million 156 million respectively addition payment cash issued 67035 8248 8709 shares common stock treasury shares twelve months ended december 31 2008 2007 2006 rsus granted certain officers company represent right receive unrestricted shares stock based service achievement certain performance targets compensation cost amortized expense service period fair value rsu granted equal share price date grant summary company’s rsu activity twelve months ended december 31 2008 follows notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation continued pretax compensation cost rsus recorded twelve months ended december 31 2008 15 million 09 million tax remaining unrecognized pretax compensation costs related rsus expected vest totaled 26 million december 31 2008 expected amortized twoyear period shares available issuance connection future awards company’s stock plans december 31 2008 2007 2006 7884617 11021672 3253083 respectively authorized unissued shares reserved issuance connection awards treasury shares may delivered 13 pension retiree benefits number pension plans principally united states covering many company’s employees plans provide payment retirement benefits mainly commencing ages 55 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service earnings annual contributions plans made necessary ensure legal funding requirements satisfied company provides postretirement health care life insurance benefits certain retirees many employees retirees outside united states covered government health care programs september 2006 fasb issued statement financial accounting standards 158 fas 158 “employers’ accounting defined benefit pension postretirement plans” amendment fasb statements 87 88 106 132r fas 158 requires employer recognize overfunded underfunded status defined benefit postretirement plan asset liability consolidated balance sheet recognize changes funded status year changes occur adjustments comprehensive income funded status benefit plan difference plan assets fair value benefit obligation pension plans benefit obligation projected benefit obligation postretirement benefit plans benefit obligation accumulated postretirement benefit obligation previously unrecognized gainslosses prior service costscredits transition assetsobligations recognized accumulated comprehensive income continue amortized components net periodic benefit cost adoption fas 158 december 31 2006 resulted decrease accumulated comprehensive income 1199 million notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued amounts recognized balance sheet consist notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued amounts accumulated comprehensive income balance sheet yet recognized components net periodic benefit cost december 31 2008 follows amounts accumulated comprehensive income expected recognized components net periodic benefit cost income next fiscal year shown notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued pension benefit obligation accumulated benefit obligation fair value plans assets pension plans accumulated benefit obligations excess plan assets underfunded abo shown increase projected benefit obligation accumulated benefit obligation resulted additional underfunded plans due decline fair value investments components net periodic benefit cost follows notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint change assumed health care cost trend rates would following effects plan assets pension plan weightedaverage asset allocations december 31 2008 2007 follows investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility master trusts established hold assets domestic defined benefit plans us defined benefit asset allocation policy trusts allows equity allocation 45 75 fixed income allocation 25 50 cash allocation 25 investments 20 nonus investment trust targets may differ depending country allowing 90 equity 100 fixed investments 20 real estate asset allocations based underlying liability structure local regulations retirement asset allocations reviewed periodically ensure allocation meets needs liability structure notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued expected 83 longterm rate return plan assets determined based longterm historical performance plan assets current asset allocation projected longterm rates return pension investment consultants expected longterm rates return 10 equities 6 fixed income 8 investments defined contribution plan contributions sponsor number defined contribution plans contributions determined various formulas cash contributions related plans amounted 298 million 341 million 336 million 2008 2007 2006 respectively estimated future benefit payments following benefit payments reflect expected future service expected paid 14 fair value measurements january 1 2008 adopted statement financial accounting standards 157 fas 157 “fair value measurement” fas 157 defines fair value establishes framework measuring fair value expands disclosures assets liabilities measured fair value fas 157 establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels level 1 inputs highest priority quoted prices active markets identical assets liabilities level 2 inputs reflect quoted prices included level 1 either observable directly corroboration observable market data level 3 inputs unobservable inputs due little market activity asset liability internallydeveloped valuation models permitted fas 157 elected defer adoption nonrecurring fair value measurement disclosures nonfinancial assets liabilities goodwill indefinitelived intangible assets january 1 2009 impact adopting fas 157 material notes consolidated financial statements fortune brands inc subsidiaries 14 fair value measurements continued assets liabilities measured fair value recurring basis december 31 2008 follows derivatives either foreign exchange contracts recorded fair value hedge currency fluctuations transactions denominated foreign currencies commodity swaps forecasted commodity purchases deferred compensation programs assets liabilities programs select employees defer compensation death disability termination employment assets liabilities measured fair value using unobservable inputs require significant degree judgment estimates regarding assumptions including limited projected future levels income based management’s plans well business trends prospects market economic conditions result changes fair values could material impact results operations liquidity realized reconciliation assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 year ended december 31 2008 reporting period prior june 30 2008 estimated fair value minority interest spirits business based combination marketbased earnings multiples discounted cash flow techniques second quarter 2008 based upon final settlement amount determined connection repurchase minority interest recorded 879 million decrease fair value minority interest spirits business minority interest income july 2008 repurchased minority interest bgsw vs carrying value 4550 million additional information accounting minority interest spirits business refer note 6 “minority interest held vs group” notes consolidated financial statements fortune brands inc subsidiaries 15 lease commitments future minimum rental payments noncancelable operating leases december 31 2008 follows total rental expense operating leases reduced minor amounts subleases amounted 679 million 648 million 610 million 2008 2007 2006 respectively 16 income taxes components income loss continuing operations income taxes follows reconciliation income taxes 35 federal statutory income tax rate income taxes continuing operations follows january 1 2007 adopted fasb interpretation 48 fin 48 “accounting uncertainty income taxes interpretation fasb statement 109” fin 48 prescribes recognition threshold measurement attribute financial statement recognition measurement tax notes consolidated financial statements fortune brands inc subsidiaries 16 income taxes continued position taken expected taken tax return fin 48 also provides guidance derecognition classification interest penalties disclosure transition evaluation tax position accordance fin 48 two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained zero tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ company’s estimates future periods changes facts circumstances new information may require company change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur differences amounts recognized statement financial position prior adoption fin 48 amounts recognized adoption accounted cumulative effect adjustment recorded beginning balance retained earnings cumulative effect adjustment 36 million recognized decrease beginning retained earnings upon implementation fin 48 january 1 2007 third quarter 2007 spanish tax authorities concluded routine audit spanish spirits companies included part 2005 spirits acquisition pursuant acquisition agreement pernod ricard indemnified company preacquisition income tax contingencies liabilities tax returns subject examination included 2000 2004 tax periods preceded date acquisition spanish tax authorities issued net tax assessment approximately 110 million 917 million tax 183 million related interest penalties paid october 2007 also third quarter 2007 received 993 million tax indemnification payment pernod ricard related tax assessment 110 million net associated tax benefits order reflect impact spanish tax assessment increased liability unrecognized tax benefits utbs additionally increased liability utbs reflect tax issues similar raised course audit relating tax periods subsequent audit period majority spanish utbs pertain preacquisition periods subject tax indemnification agreement pernod ricard second quarter 2008 congressional joint committee taxation completed review tax refund associated capital loss carryforward item favorably resolved irs administrative proceeding relating 20012002 federal tax returns utbs approximately 768 million reversed income relating approval refund associated 20012002 federal tax returns fourth quarter 2008 received refund accrued interest totaling 932 million additionally final settlement audit 20012002 federal tax returns removed uncertainty relating utilization capital loss carryforward reversed 144 million utbs relating utilization portion capital loss carryforward 2007 capital gain sale us distribution rights dalmore scotch whisky recorded income discontinued operations reversal 987 million utbs associated utilization portion capital loss carryforward capital gain sale us wine business notes consolidated financial statements fortune brands inc subsidiaries 16 income taxes continued reconciliation beginning ending amount utbs follows amount utbs recognized december 31 2008 would affect company’s effective tax rate 2397 million compared 3159 million december 31 2007 reasonably possible within next twelve months total utbs may decrease range 5 100 million primarily result conclusion us federal state foreign income tax proceedings continue apply accounting policy classifying interest penalties accruals related utbs income tax expense years ended december 31 2008 2007 2006 company recognized approximately 144 million 77 million 00 million interest penalties december 31 2008 2007 accruals payment interest penalties 795 million 681 million respectively company subsidiaries file income tax returns us federal jurisdiction various states foreign jurisdictions us internal revenue service irs currently examining company’s 2006 2007 federal income tax returns however company technically subject irs examination years 1997 2005 due unexpired statute limitations periods company one subsidiaries tax years remain open subject examination tax authorities following major taxing jurisdictions canada years 1998 france years 2003 mexico years 2001 spain years 2003 united kingdom years 2004 income taxes follows notes consolidated financial statements fortune brands inc subsidiaries 16 income taxes continued components net deferred tax assets liabilities follows provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest foreign subsidiary earnings remitted without incremental taxes undistributed earnings foreign subsidiaries either considered permanently invested remitted without incremental taxes aggregated 8435 million december 31 2008 quantification associated deferred tax liability undistributed earnings made determination liability practicable notes consolidated financial statements fortune brands inc subsidiaries 17 detail current liabilities detail current liabilities december 31 2008 2007 follows 18 financial instruments enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates commodities used raw materials products principal financial instruments used forward foreign exchange contracts interest rate swaps commodity swaps second quarter 2008 entered interest rate swaps aggregate notional principal amount 400 million swap agreements hedged changes fair value portion fixed rate 5375 notes due 2016 resulted changes benchmark interest rate us libor swaps designated classified fair value hedges accordance statement financial accounting standards 133 “accounting derivative instruments hedging activities” october 2008 terminated settled interest rate swap agreements recorded 156 million gain amortized income reduction interest expense remaining life debt using effective interest method interest rate swaps outstanding december 31 2008 december 31 2007 enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions also enter forward foreign exchange contracts hedge portion net investments certain foreign subsidiaries enter commodity swaps correspond periods forecasted commodity purchases account commodity derivatives economic hedges effective portions cash flow hedges reported comprehensive income recognized statement income hedged item affects earnings ineffective portion hedges recognized current period earnings changes fair value economic hedges recorded directly current period earnings counterparties derivative contracts major financial institutions subject credit risk contracts equal fair value instruments management currently believes risk incurring material losses unlikely losses would immaterial fair value derivative assets december 31 2008 490 million estimated fair value derivative contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices estimated fair value company’s cash equivalents notes payable banks bank revolver borrowings approximates carrying amounts due principally floating rate nature notes consolidated financial statements fortune brands inc subsidiaries 18 financial instruments continued company’s 46936 million 41427 million total longterm debt including current portion december 31 2008 2007 fair value approximately 43836 million 40056 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity concentration credit risk respect accounts receivable limited large number geographically diverse customers make operating companies’ domestic international customer base spirits sales distributed maxxium internationally accounts receivable balances maxxium included accounts receivable related parties consolidated balance sheet see note 7 “related party transactions” raw materials used company subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility december 31 2008 material derivative contracts outstanding related raw materials 19 guarantees commitments december 31 2008 thirdparty guarantees totaling approximately 89 million represent guarantees debt maxxium spirits business’s international sales distribution joint venture required perform guarantees event maxxium fails make contractual payments conjunction third quarter 2008 execution settlement agreement providing withdrawal rémy vs maxxium’s credit facilities guaranteed joint venture partners renegotiated banks effective october 1 2008 guarantee onethird maxxium’s credit facilities expire march 31 2009 also guaranteed various leases acco world corporation office business divested spinoff 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 295 million april 2013 accordingly recorded fair value guarantees financial statements accordance fin 45 liability related guarantee 07 million december 31 2008 provided typical indemnities connection divestitures indemnities relate various representations generally included divestiture agreements environmental tax product liability employee liability contingencies depending transactions several divestitures maximum obligation certain contingencies specified unusual transactions pursuant fin 45 cannot reasonably estimate potential payments divestiturerelated indemnity obligations indemnities vary duration cases durations indefinite fin 45 effective december 31 2002 recorded liability consolidated financial statements indemnities entered prior date made indemnity payments material financial position results operations quarter furthermore expect potential payments connection indemnity obligations would material adverse effect consolidated financial position results operations liquidity 2008 future periods notes consolidated financial statements fortune brands inc subsidiaries 19 guarantees commitments continued purchase obligations company december 31 2008 purchase obligations include contracts raw materials finished goods purchases advertising selling administrative services capital expenditures 20 restructuring restructuringrelated charges pretax restructuring restructuringrelated charges twelve months ended december 31 2008 advertising selling general administrative expenses pretax charges spirits business twelve months ended december 31 2008 636 million related business repositioning including supply chain activities routetomarket initiatives restructuring charges related asset writedowns 82 million employeerelated costs 147 million lease contract termination costs 94 million spirits restructuringrelated charges twelve months ended december 31 2008 313 million primarily costs organizational repositioning strategic routetomarket initiative us pretax charges 2008 home hardware business 556 million primarily due efforts align costs capacity marketplace conditions including announced closure eight additional us manufacturing facilities well exit select lowreturn product offerings 2008 restructuring charges consisted 249 million workforce reduction costs 214 million tangible intangible asset writedowns 32 million contract termination costs restructuringrelated cost sales charges inventory writedowns associated exited markets product lines restructuringrelated advertising selling general administrative charges consisted retention costs offset favorable translation adjustments related substantial liquidation foreign entity 83 million notes consolidated financial statements fortune brands inc subsidiaries 20 restructuring restructuringrelated charges continued pretax restructuring restructuringrelated charges twelve months ended december 31 2007 advertising selling general administrative expenses twelve months ended december 31 2007 recorded pretax restructuring charges 735 million principally related supply chain initiatives home hardware business including facility closures including consolidation facilities cabinetry window tool storage production closure cabinetry component operation well planned exit entry door market united kingdom decorative column products lines us home hardware business closed downsized several facilities order improve longterm efficiency productivity flexibility supply chains also provide nearterm benefits aligning costs capacity navigate current downturn us home products market 2007 restructuring charges consisted primarily 163 million workforce reduction costs 496 million tangible intangible asset writedowns 76 million contract termination costs restructuringrelated cost sales charges inventory writedowns associated exited markets product lines restructuringrelated advertising selling general administrative charges consisted accounts receivable reserves doubtful accounts warranty reserves retention costs related exit entry door market uk decorative column products line us spirits pretax charges 2007 primarily related distribution model change australia pretax restructuring restructuringrelated charges twelve months ended december 31 2006 advertising selling general administrative expenses 2006 spirits charges related integration 2005 spirits acquisition 2006 home hardware charges related supplychain initiatives including consolidation manufacturing facilities resulting closure cabinetry plant tool storage plant notes consolidated financial statements fortune brands inc subsidiaries 20 restructuring restructuringrelated charges continued reconciliation restructuring liability cash expenditures asset writedowns include proceeds received asset disposals b noncash writeoffs include longlived asset impairment charges attributable restructuring actions impact foreign exchange rate changes workforce reduction costs benefited noncash benefit plan curtailment gains 21 information business segments report operating segments spirits home hardware golf based organized segments within company making operating decisions assessing performance based markets served company’s operating segments types products segment derives revenues described spirits includes products made marketed distributed beam global spirits wine inc subsidiaries affiliates home hardware includes kitchen bathroom faucets accessories manufactured marketed distributed moen kitchen bath cabinetry manufactured marketed distributed masterbrand cabinets residential entry door patio door systems designed manufactured thermatru vinylframed windows manufactured marketed distributed simonton locks manufactured marketed distributed master lock american lock tool storage organization products manufactured distributed waterloo golf includes golf balls golf clubs golf shoes gloves manufactured marketed distributed acushnet company notes consolidated financial statements fortune brands inc subsidiaries 21 information business segments continued company’s subsidiaries operate principally united states canada europe primarily spain united kingdom france australia mexico corporate expenses include salaries benefits expenses related corporate office employees functions benefit operating segments corporate expenses include expenses directly allocable reportable segments allocating indirect expenses operating segments would require imprecise allocation methodology amounts elimination reversal transactions reportable segments b based country destination c corporate assets include cash certain receivables related taxes insurance claims cash surrender value life insurance policies corporate assets include assets directly allocable reportable segments allocating indirect assets operating segments would require imprecise allocation methodology notes consolidated financial statements fortune brands inc subsidiaries 21 information business segments continued notes consolidated financial statements fortune brands inc subsidiaries 22 income net components income net years ended december 31 2008 2007 2006 follows 23 earnings per share basic earnings per common share based weightedaverage number common shares outstanding year preferred stock dividend requirements diluted earnings per common share assume convertible preferred shares outstanding beginning year converted dates preferred stock dividend requirements outstanding common shares adjusted accordingly also assumes outstanding common shares increased shares issuable upon exercise stock options market price exceeds exercise price less shares could purchased company related proceeds computations basic diluted earnings per common share follows notes consolidated financial statements fortune brands inc subsidiaries 23 earnings per share continued years ended december 31 2008 2007 2006 stock options excluded calculation weighted average shares diluted eps antidilutive exercise price exceeded average stock price excluded stock options approximately 94 million 58 million 31 million shares weighted average shares outstanding respectively 24 accumulated comprehensive income total accumulated comprehensive income consists net income changes stockholders’ equity transactions events sources stockholders includes currency translation gains losses unrealized gains losses derivative instruments designated cash flow hedges pension postretirement adjustments components changes accumulated comprehensive income follows 2008 change foreign currency adjustments derivative hedging position result strengthening us dollar major currencies 2008 change pension postretirement adjustment primarily result decrease fair value plan assets 25 pending litigation tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation bw time whollyowned subsidiary bat industries plc connection sale bw atco subsequently merged bw agreed indemnification agreement indemnification agreement indemnify fortune brands inc claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company “indemnitor” indemnification agreement notes consolidated financial statements fortune brands inc subsidiaries 25 pending litigation continued indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations company defendant number actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however believe number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor believe pending actions material adverse effect upon results operations cash flows financial condition believe meritorious defenses company indemnified indemnification agreement litigation february 9 2006 callaway golf company filed lawsuit seeking unspecified damages acushnet company united states district court district delaware callaway alleged models pro v1 golf balls manufactured acushnet company infringed four callaway’s patents acushnet defending action vigorously acushnet stipulated infringement jury trial validity patent claims asserted callaway conducted december 2007 jury provided evidence related nine claims contained four patents returned mixed verdict finding one claim invalid eight claims valid november 10 2008 trial court issued order enjoining sales accused pro v1 pro v1x golf ball models january 1 2009 acushnet appealed matter united states court appeals federal circuit requesting appellate court reverse verdict vacate trial court’s injunction find matter law callaway’s asserted patents invalid separately subsequent trial united states district court us patent trademark office pto issued final actions determining four patents callaway’s infringement claims based invalid pto also issued right appeal notice one patents providing callaway opportunity appeal determination patent board appeals callaway done acushnet believes counsel advises asserted meritorious arguments appeal federal circuit court adverse determination appeal would likely result case remanded trial damages possible time assess likelihood adverse outcome determine reasonable estimate range estimates potential damages decided unfavorably however lawsuit could material adverse effect results company’s operations cash flows financial condition late 2008 acushnet introduced believes noninfringing modified versions current pro v1 models market february 2009 acushnet introduced new improved versions pro v1 models also believes noninfringing ongoing proceedings relate acushnet’s modified pro v1 balls acushnet’s new 2009 versions pro v1 ball callaway alleged products infringe new callaway patents filed litigation related claims acushnet believes outside counsel advised notes consolidated financial statements fortune brands inc subsidiaries 25 pending litigation continued meritorious defenses claims event callaway pursues claims litigation ultimately prevails however acushnet could potentially lose ability sell products could material adverse effect results company’s operations cash flows financial condition addition lawsuits described company subsidiaries defendants lawsuits associated businesses operations possible predict outcome pending actions litigation possible actions could decided unfavorably believe meritorious defenses actions material adverse effect upon results operations cash flows financial condition actions vigorously contested 26 environmental subject laws regulations relating protection environment possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts subsidiaries may undertake future due uncertainties status laws regulations technology information related individual sites involved numerous remediation actions clean hazardous wastes required federal state laws based evaluation cleanup cost estimates compliance programs believe reasonable possibility material loss exceeding amounts already recognized may incurred liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties report independent registered public accounting firm board directors shareholders fortune brands inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position fortune brands inc subsidiaries december 31 2008 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed notes 13 16 consolidated financial statements company changed manner accounts pension postretirement plans december 31 2006 manner accounts uncertain tax positions january 1 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp chicago illinois february 27 2009 shareholders fortune brands inc prepared consolidated balance sheet fortune brands inc subsidiaries december 31 2008 2007 related consolidated statements income cash flows stockholders’ equity three years period ended december 31 2008 financial statements prepared accordance accounting principles generally accepted united states america financial information elsewhere annual report form 10k consistent financial statements internal control financial reporting company subsidiaries designed provide reasonable assurances financial records adequate relied upon provide information preparation financial statements established policies procedures carefully followed company’s stockholders annually ratify appointment company’s independent registered public accounting firm company’s financial statements pricewaterhousecoopers llp audit performed accordance standards public company accounting oversight board united states audit committee board directors consisting solely independent directors meets periodically independent auditors internal auditors management review accounting auditing financial reporting matters auditors direct access audit committee bruce carbonari bruce carbonari chairman chief executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer item 9item 8 financial statements supplementary data consolidated statement income fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement cash flows fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement equity fortune brands inc subsidiaries net income 2008 2007 consolidated statement stockholders’ equity includes 721 million 174 million respectively income noncontrolling interest repurchased september 30 2008 classified balance sheet mezzanine equity repurchased b total comprehensive income loss attributable fortune brands 5094 million 5164 million 10738 million years ended december 31 2009 2008 2007 respectively see notes consolidated financial statements notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies basis presentation consolidated financial statements include accounts fortune brands inc elimination intercompany transactions majorityowned subsidiaries subsidiary acushnet lionscore limited holds noncontrolling interest substantive control result company operational decisionmaking powers entity certain company’s subsidiaries operate 52 53week fiscal year subsequent events evaluated february 23 2010 date financial statements issued accordance authoritative guidance property plant equipment asc 360 results operations related 2007 sale us wine business reclassified separately stated discontinued operations accompanying consolidated statements income years ended december 31 2008 2007 cash flows discontinued operations years ending december 31 2008 2007 separately classified accompanying consolidated statements cash flows consolidated financial statements retrospectively adjusted adoption authoritative guidance noncontrolling interests accounting standards codification asc 810 presentation financial statements accordance us generally accepted accounting principles gaap requires us make estimates assumptions affect reported amounts related disclosures actual results future periods could differ estimates cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency discounts related early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 720 million 575 million december 31 2009 2008 respectively inventories firstin firstout fifo inventory method principal inventory method across segments accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns product spoilage specific identification items product discontinuance engineeringmaterial changes home security segment use lastin firstout lifo inventory method product groups metals inventories comprise significant portion inventories lifo inventories notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued december 31 2009 2008 1536 million current cost 1769 million 1658 million current cost 1843 million respectively property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included operating income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred estimated useful lives related assets follows buildings leasehold improvements 15 40 years machinery equipment 3 10 years software 3 7 years longlived assets accordance authoritative guidance property plant equipment asc 360 longlived asset including amortizable identifiable intangible assets asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows marketparticipant basis goodwill indefinitelived intangible assets accordance authoritative guidance goodwill intangible assets asc 350 goodwill tested impairment least annually written impaired interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future cash flows reporting units goodwill relates discount future cash flows marketparticipantderived weightedaverage cost capital determining estimated future cash flows consider current projected future levels income based management’s plans business trends prospects market economic conditions marketparticipant considerations reporting unit operating segment case home security segment one level operating segment estimated fair value reporting unit less carrying value measure recognize amount goodwill impairment loss impairment losses limited carrying value goodwill represent excess carrying value reporting unit’s goodwill implied fair value goodwill implied fair value reporting unit estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance requirements asc 350 asc 350 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued reporting period determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually whenever market business events indicate may potential impairment intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party remaining useful life company cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions investments company makes investments include joint ventures either complement expand existing businesses accordance authoritative guidance investments asc 323 equity method accounting used account investments company ability exercise significant influence operating financial policies joint venture record share joint venture’s income increase investment dividends received reduction investment equity method requires impairment losses recognized temporary losses investment value carrying value pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits record amounts relating plans based calculations specified us gaap include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets recognizes difference expected return actual return plan assets fiveyear period discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments expected rate return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases required us gaap effects actuarial deviations assumptions generally accumulated specified corridor amortized remaining service period employees cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees believe assumptions utilized recording obligations company’s plans presented note 13 “pension retiree benefits” reasonable based experience advice independent actuaries however differences actual experience changes assumptions may materially affect company’s financial position results operations continue monitor assumptions market conditions warrant notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued environmental company subject laws regulations relating protection environment company provides expenses associated environmental remediation obligations amounts probable reasonably estimated adjust expense new information develops circumstances change accruals discounted december 31 2009 2008 environmental accruals amounted 245 million 291 million respectively included noncurrent liabilities balance sheet opinion compliance current environmental protection laws taking account estimated recoveries third parties including insurers material adverse effect upon results operations cash flows financial condition income taxes accordance authoritative guidance income taxes asc 740 establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse company records valuation allowance reducing deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest foreign subsidiary earnings remitted without incremental taxes record liabilities uncertain income tax positions based two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained zero tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ company’s estimates future periods changes facts circumstances new information may require company change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur december 31 2009 company liabilities unrecognized tax benefits pertaining uncertain tax positions totaling 4605 million reasonably possible unrecognized tax benefits may decrease range 85 140 million next 12 months primarily result conclusion us federal state foreign income tax proceedings revenue recognition recognize revenue either upon shipment upon delivery based contractual terms criteria recognition revenue accordance authoritative guidance revenue recognition asc 605 title risk loss passed customer persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility reasonably assured revenue recorded net applicable provisions discounts returns allowances record estimates doubtful accounts receivable resulting inability customers make payment record estimates reductions revenue customer programs incentives including price discounts volumebased incentives promotions advertising allowances cooperative advertising sales returns based historical returns current trends forecasts product demand notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued cost products sold cost products sold includes costs make products saleable inbound freight purchasing receiving costs inspection costs internal transfer costs addition depreciation expense associated assets used manufacture products make saleable included cost products sold customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sellthrough business’s products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “net sales” category “advertising selling general administrative expenses” time program initiated andor revenue recognized costs recognized “net sales” include limited general customer programgenerated expenses cooperative advertising programs volume allowances promotional allowances costs typically recognized “advertising selling general administrative expenses” include point sale materials shared media costs recorded latter time sale implementation program based management’s best estimates based historical projected experience type program customer volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough merchandising support level returns customer training management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations advertising selling general administrative expenses advertising selling general administrative expenses include advertising marketing selling including commissions research development shipping handling including warehousing costs general administrative expenses shipping handling costs included advertising selling general administrative expenses 1751 million 2228 million 2247 million 2009 2008 2007 respectively advertising costs amounted 6292 million 7055 million 7001 million 2009 2008 2007 respectively principally expensed incurred advertising costs include media costs point sale materials product endorsements advertising costs recorded reduction net sales primarily cooperative advertising 478 million 512 million 570 million 2009 2008 2007 respectively advertising costs recorded advertising selling general administrative expenses 5814 million 6543 million 6431 million 2009 2008 2007 respectively research development research development expenses include product development product improvement product engineering process improvement costs research development expenses 678 million 712 million 807 million 2009 2008 2007 respectively expensed incurred stockbased compensation recognize sharebased compensation expense measured fair value award date grant financial statements period employee provides service exchange award fair value option award estimated date grant using blackscholes optionpricing model notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued foreign currency translation foreign currency balance sheet accounts translated us dollars actual rates exchange balance sheet date income expenses translated average rates exchange effect period related translation adjustments made directly separate component “accumulated comprehensive income loss” caption stockholders’ equity transactions denominated currency functional currency subsidiary translated functional currency resulting transaction gains losses recorded expense income net derivative financial instruments accordance authoritative guidance derivatives hedging asc 815 derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized statement income hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized year ended december 31 2009 220 million deferred currency gains reclassified earnings year ended december 31 2008 39 million deferred currency gains reclassified earnings year ended december 31 2007 154 million deferred currency losses reclassified earnings based foreign exchange rates december 31 2009 estimate 105 million net currency derivative losses included oci december 31 2009 reclassified earnings within next twelve months recently issued accounting standards accounting standards codification july 2009 financial accounting standards board fasb established fasb accounting standards codification asc source authoritative accounting principles recognized fasb applied nongovernmental entities preparation financial statements conformity gaap rules interpretive releases securities exchange commission sec authority federal securities laws also sources authoritative gaap sec registrants asc supersedes existing nonsec accounting reporting standards intended change gaap use asc effective financial statements issued periods ending september 15 2009 transfer financial assets june 2009 fasb amended existing authoritative guidance transfer financial assets asc 860 new guidance eliminates concept qualifying specialpurpose entity b clarifies changes derecognition criteria transfer c enhances disclosure risks transferor retains exposure due continuing involvement transferred financial assets amendment effective annual reporting periods beginning november 15 2009 calendar notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued year 2010 fortune brands inc fortune brands effect calendar year 2009 asc 860 would current impact financial statements disclosures consolidation variable interest entities june 2009 fasb amended existing authoritative guidance variable interest entities asc 810 new authoritative guidance includes new approach determining variable interest entity vie consolidated b changes necessary reassess consolidate vie new approach requires enterprise qualitatively assess determination primary beneficiary consolidator amendment effective annual reporting periods beginning november 15 2009 calendar year 2010 fortune brands believe adoption standard material impact financial statements disclosures revenue arrangements multiple deliverables october 2009 fasb issued accounting standards update 200913 “multipledeliverable revenue arrangements consensus fasb emerging issues task force” guidance allows entities allocate consideration multiple deliverable arrangements manner reflects transaction’s economics guidance requires expanded disclosure effective fiscal years beginning june 15 2010 calendar year 2011 fortune brands applied either prospectively retrospectively believe adoption standard material impact financial statements disclosures 2 asset impairment charges 2009 impairment charges spirits business indefinitelived tradenames book value 19054 million december 31 2009 connection regular annual impairment testing fourth quarter 2009 recorded impairment charges 925 million primarily related indefinitelived tradename sauza tequila reducing book value impaired brands 7828 million aggregate company remains confident longterm growth prospects spirits brands however gaap requires indefinitelived tradenames valued based current fair value impairment charges recorded reflect decline estimated fair value impaired tradenames book value accordance requirements asc 350 tradenames acquired 2005 fair value closely approximates book value impaired tradenames believe current fair value declined book value primarily due combined effect current economic downturn sales key geographic markets particularly mexico us expectation moderate market growth rates overall tequila spirits category foreseeable future estimate fair value using standard relieffromroyalty method estimates present value hypothetical royalty payments avoided due ownership tradename method consistent method employed prior periods method employed value tradenames date original acquisition methodology important judgments estimates influence tradename’s fair value include expected branded product sales included final 2010 2012 operating plans longerterm market growth rates particular spirits categories geographies expected profit margins products sold using brands terminal value revenue growth rates notes consolidated financial statements fortune brands inc subsidiaries 2 asset impairment charges continued weighted average cost capital company certain indefinitelived tradenames spirits business 10 reduction fair value would trigger impairment charge future periods tradenames aggregate book value 8659 million december 31 2009 goodwill indefinitelived tradename impairment charges recorded home security business 2009 december 31 2009 company longlived assets home security segment totaled 29003 million including goodwill indefinitelived tradenames 14527 million 6626 million respectively dollar amounts goodwill indefinitelived tradenames associated reporting units within home security segment december 31 2009 follows window reporting unit 10 decline reporting unit fair value could trigger impairment goodwill tradename longlived assets future periods estimates fair value reporting units tradenames significantly influenced assumptions regarding us home products market given current economic conditions us home products market assumptions could change near term goodwill impairment charges identified golf spirits businesses 2009 2008 impairment charges 2008 recorded impairment charges 7855 million comprised 3243 million second quarter well 4612 million fourth quarter asset impairment charges twelve months ended december 31 2008 follows goodwill impairment charges home security business predominantly related thermatru entry door 3995 million simonton 488 million reporting units two recent home security business acquisitions second quarter 2008 primarily due impact worse anticipated decline us home products market financial results company concluded necessary accordance authoritative guidance goodwill intangible assets asc 350 conduct interim goodwill impairment test result test company recorded goodwill impairment charges totaling 2889 million notes consolidated financial statements fortune brands inc subsidiaries 2 asset impairment charges continued fourth quarter 2008 company conducted regular annual goodwill impairment test december 31 2008 recorded additional goodwill impairment charges totaling 1624 million fourth quarter charges primarily result expectation slower previously expected recovery us home products market current effect recession market forecasts sales operating income cash flows reporting unit home security business finalized course annual planning process forecast us home products market two segments new home construction segment repairremodel segment impairments thermatru simonton occurred reporting units significantly impacted new home construction recently acquired therefore newer historical carrying values home security segment reporting units components one level home security operating segment generally correspond major product lines related brands reporting unit goodwill impairment charges measured excess carrying value goodwill implied fair value implied fair value goodwill estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance requirements authoritative guidance goodwill intangibles assets asc 350 consistent historical practice company estimates fair value reporting unit based projection future cash flows discounted marketparticipantderived weighted average cost capital significant estimates assumptions use estimating future cash flows home security reporting units based upon view longerterm broad market trends companyspecific pointintime factors evaluate broad market trends review data includes external longterm forecasts us home products markets new construction repair remodel portions market combine trend data pointintime estimates current realities including current economic conditions us availability credit competitor behavior mix product sales commodity costs wage rates level manufacturing capacity pricing environment addition estimates fair value impacted estimates marketparticipantderived weighted average cost capital changes fair value reporting units triggered impairment charges primarily attributable changes assumptions regard decline us home products market 2008 timing recovery next three five years impact future revenues operating margins cash flows changed market assumptions based deterioration actual market conditions throughout 2008 negatively impacted performance versus original 2008 plan estimate discounted future cash flows decreased significantly yearend 2007 primarily due reduction current year forecasted revenues cash flows compared original plan resulted projecting future revenue cash flow growth significantly lower base shifting cash flow growth beyond 2008 later years december 31 2008 cash flow projections assumed declining revenue cash flows 2009 significant recovery would occur 2010 addition fair value declined due increase weighted average cost capital home security indefinitelived tradename impairment charges related thermatru entry door simonton windows tradenames review indefinitelived intangible assets impairment annually whenever market business events indicate may potential impact intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned notes consolidated financial statements fortune brands inc subsidiaries 2 asset impairment charges continued licensing brand name third party remaining useful life result downward revision sales forecasts used goodwill impairment testing related tradename valuations tested second fourth quarter resulting impairment charges tradenames totaling 312 million 920 million second fourth quarters 2008 respectively indefinitelived tradename impairment charges 272 million spirits business related writedown certain nonus regional spirits tradenames due local market factors authoritative guidance property plant equipment asc 360 requires impairment loss recognized held used longlived assets carrying amount recoverable exceeds fair value fourth quarter 2008 due decline projected cash flows thermatru simonton reporting units discussed concluded necessary test depreciating amortizable assets impairment result recorded asset impairment charges 1622 million definitelived intangible assets developed technology customer relationships 216 million land building required asc 360 impairments quantified determined prior performing goodwill impairment tests determine fair values definitelived intangible assets applied income approach using excess earnings methodology entails estimation discounted tax income expected derived intangible assets deductions contributory assets valuation method consistent method used value assets dates original acquisition underlying cash flow assumptions used test recoverability assets measure impairment consistent cash flow projections used evaluate goodwill indefinitelived intangible assets impairment 3 goodwill identifiable intangible assets change net carrying amount goodwill segment follows notes consolidated financial statements fortune brands inc subsidiaries 3 goodwill identifiable intangible assets continued also indefinitelived intangible assets principally tradenames 26231 million december 31 2009 compared 26824 million december 31 2008 decrease 593 million primarily due impairment charges related certain tradenames spirits business reclassification tradename indefinitelived amortizable intangible asset partly offset foreign currency translation adjustments refer note 2 “asset impairment charges” information impairment charges spirits business amortizable identifiable intangible assets principally tradenames customer relationships subject amortization estimated useful life 5 30 years based assessment number factors may impact useful life factors include historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion financial results relevant factors gross carrying value accumulated amortization amortizable intangible assets 9321 million 3668 million respectively december 31 2009 compared 8542 million 3252 million respectively december 31 2008 gross carrying value increase 779 million primarily due changes foreign currency translation adjustments reclassification tradename indefinitelived amortizable intangible asset gross carrying value accumulated amortization class intangible assets december 31 2009 2008 follows accumulated amortization prior adoption revised authoritative guidance goodwill intangibles assets asc 350 intangible amortization 337 million 496 million 476 million years ended december 31 2009 2008 2007 respectively company expects record intangible amortization 34 million 2010 trending 27 million 2015 company cannot predict occurrence certain events might adversely affect carrying value goodwill intangible assets events may include limited notes consolidated financial statements fortune brands inc subsidiaries 3 goodwill identifiable intangible assets continued impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions 4 acquisitions disposals acquisitions 2009 april 2009 paid 499 million approximately 662 million net cash acquired purchase 100 interests seven maxxium worldwide bv maxxium subsidiaries acquisitions accounted using purchase method accordance authoritative guidance business combinations asc 805 addition paid 309 million approximately 417 million acquire 50 ownership five alliance joint venture entities accounted equity method additional information refer note 6 “related party transactions” june 2009 acquired effen superpremium vodka brand related assets sazerac company inc conjunction transaction sold old taylor whiskey brand assets sazerac company inc acquisitions included consolidated results dates acquisition acquisitions material purposes supplemental disclosure accordance authoritative guidance business combinations asc 805 acquisitions divestiture material impact consolidated financial statements acquisition 2008 september 30 2008 acquired premium cruzan rum business pernod ricard sa pernod ricard 1032 million cash acquisition included consolidated results date acquisition material purposes supplemental disclosure accordance authoritative guidance business combinations asc 805 acquisition material impact consolidated financial statements disposal 2007 december 2007 sold us distribution rights related assets dalmore scotch whisky 58 million sale resulted pretax gain 456 million 285 million tax refer note 5 “discontinued operations” information disposition us wine business 5 discontinued operations third quarter 2007 sold william hill canyon road wine brands related assets e j gallo winery december 2007 sold remaining us wine assets constellation brands inc constellation brands 8870 million statements income twelve months ended december 31 2008 2007 adjusted reflect us wine business discontinued operation interest expense associated outstanding debt fortune brands allocated discontinued operations assuming notes consolidated financial statements fortune brands inc subsidiaries 5 discontinued operations continued discontinued operations debt equity ratio consistent debt equity ratio fortune brands accordance authoritative guidance discontinued operations asc 205 following table summarizes results discontinued operations years ended december 31 2008 2007 impact 2009 2008 recorded net income 1525 million discontinued operations included pretax income 40 million tax 25 million settlement outstanding working capital claims related sale us wine business also recorded 431 million tax benefit related finalization tax accounting sale us wine business tax credits associated conclusion 20042005 federal income tax audit pertained discontinued operations addition congressional joint committee taxation completed review tax refund associated capital loss carryforward item favorably resolved irs administrative proceeding relating 20012002 federal tax returns result final settlement audit 20012002 federal tax returns removed uncertainty relating utilization capital loss carryforward recorded 980 million tax benefit 987 million unrecognized tax benefits less interest 07 million related capital loss carryforward position associated sale us wine business effective income tax rate 2007 impacted taxes associated gain sale us wine business 6 related party transactions edrington alliance maxxium worldwide bv prior april 1 2009 beam global spirits wine inc bgsw owned 25 interest maxxium international spirits sales distribution joint venture equal partners maxxium rémy cointreau sa rémy vin sprit group vs edrington group ltd teg accordance settlement agreement executed september 2008 march 30 2009 rémy vs exited joint venture bgsw became 50 owner maxxium teg bgsw teg facilitating orderly transition winding maxxium operations substantially complete account maxxium using equity method april 2009 december 31 2009 received dividend distributions maxxium totaling 429 million approximately 584 million current carrying value investment maxxium zero third quarter 2009 recorded gain 125 million representing dividend distributions excess carrying value september 2008 bgsw teg entered agreement establishing international distribution alliance combination jointlyowned companyowned sales forces 24 markets distribution alliance provided bgsw teg acquire portions certain distribution companies whollyowned maxxium operations new alliance began notes consolidated financial statements fortune brands inc subsidiaries 6 related party transactions continued april 1 2009 alliance simplifies international routes market gives us greater control distribution alliance provides bgsw teg joint 5050 ownership sales distribution companies certain markets bgsw whollyowned teg whollyowned distribution companies distribute companies’ products third party products certain markets april 2009 paid 499 million approximately 662 million net cash acquired purchase 100 interests seven maxxium subsidiaries acquisitions accounted using purchase method accordance authoritative guidance business combinations asc 805 addition paid 309 million approximately 417 million acquire 50 ownership five alliance joint venture entities accounted equity method final purchase price allocation completed within required measurement period asset liability valuations finalized final adjustments may affect fair value assigned assets including intangible assets assumed liabilities march 31 2009 terminated guarantees related debt maxxium since april 1 2009 providing similar guarantees 50 credit facilities maxxium españa sl amount 11 million approximately 157 million reflecting ownership joint venture teg december 31 2009 65 million approximately 93 million outstanding liability related guarantees material bgsw teg also executed uncommitted multicurrency shareholder loan facility amount 30 million approximately 429 million bgswteg joint ventures share 50 share outstanding balance december 31 2009 £5 million approximately 81 million 2008 recorded writedowns investment maxxium joint venture 505 million statement income expense income net primarily reflect share goodwill writedown recorded financial statements maxxium resulted impending departures rémy vs otherthantemporary decline value writedown determined accordance authoritative guidance investments asc 323 based value intended future use maxxium’s remaining net assets departure rémy vs spirits business’s balances related equity method investments years ended december 31 2009 2008 included following future brands llc may 2001 spirits business completed transactions vs creating joint venture named future brands llc future brands distribute initial tenyear period companies’ spirits brands united states provide related selling invoicing services bgsw accounted joint venture using equity method accounting vs paid 270 million gain access spirits business’s us distribution network acquire equity interest future notes consolidated financial statements fortune brands inc subsidiaries 6 related party transactions continued brands accounted 270 million gain sale equity interest future brands deferred income due certain continuing obligations jim beam brands co including limited making payments suppliers employees parties future brands contracts event default future brands june 2001 began amortizing amounts expense net income taxes straightline basis initial term agreement future brands joint venture cost sharing initiative considered integral operations classified equity earnings advertising selling general administrative expense september 30 2008 closed transaction resulted early termination september 30 2008 us distribution agreement bgsw us business vs acquired pernod ricard agreement pernod ricard paid fortune brands 2300 million cash exchange early termination distribution agreement recorded expense income net statement income recognized balance unamortized deferred income 720 million resulting initial payment 2001 vs establish us distribution joint venture 1908 million tax aggregate deferred gain recognized income obligations joint venture partner vs financially operationally support joint venture ceased redeemed vs’s shares future brands part early termination us distribution agreement bgsw redeemed interest future brands held vs future brands consolidated september 30 2008 material impact financial statements noncontrolling interest held vs group vs owned 10 interest bgsw repurchased noncontrolling interest july 2008 carrying value 4550 million accounted redemption feature convertible redeemable preferred stock measured noncontrolling interest fair value changes fair value reflected income continuing operations accordance authoritative guidance classification measurement redeemable securities bgsw publicly traded entity therefore quoted market price common preferred shares reporting period prior june 30 2008 estimated fair value based combination marketbased earnings multiples discounted cash flow techniques fair value june 30 2008 4550 million based upon final settlement amount determined connection repurchase noncontrolling interest valuation reflected features preferred stock could sold third party unique shareholder rights preferred security result three months ended june 30 2008 recorded 879 million decrease fair value noncontrolling interest noncontrolling interest income adjustments fair value recorded twelve months ended december 31 2007 twelve months periods ended december 31 2008 2007 bgsw declared preferred dividends 98 million 174 million respectively vs recorded noncontrolling interest expense 7 debt financing arrangements december 31 2009 2008 513 million 316 million shortterm borrowings outstanding respectively comprised notes payable banks used general corporate purposes including acquisitions included amounts december 31 2009 2008 399 million 178 million outstanding committed bank credit agreements provide unsecured borrowings 994 million 467 million respectively addition notes consolidated financial statements fortune brands inc subsidiaries 7 debt financing arrangements continued december 31 2009 2008 company uncommitted bank lines credit provide unsecured borrowings working capital 1159 million 114 million outstanding 1217 million 138 million outstanding respectively weightedaverage interest rates borrowings 14 30 54 respectively 2009 2008 2007 components longterm debt follows based intent ability refinance 3 12 notes due 2009 longterm basis classified longterm borrowing consolidated balance sheet december 31 2008 february 3 2010 executed 750 million 3year committed revolving credit agreement used general corporate purposes credit facility replaced existing 20 billion 5year committed revolving credit agreement balance outstanding december 31 2009 interest rates credit facility variable based libor time borrowing company’s longterm credit rating weightedaverage interest rate revolving credit borrowings 09 2009 2010 credit facility includes minimum consolidated interest coverage ratio requirement 30 10 2011 35 10 2012 consolidated interest coverage ratio defined ratio adjusted ebitda consolidated interest expense adjusted ebitda defined consolidated net income interest expense income taxes depreciation amortization intangible assets well noncash restructuring nonrecurring charges losses asset impairments gains losses resulting sale assets ordinary course business consolidated interest expense disclosed financial statements credit facility also includes maximum debt total capital ratio 055 10 total capital defined debt plus equity including deferred taxes equity excludes future impairment charges debt instruments include financial ratio covenants october 2008 executed 400 million 3year term loan agreement various banks matures october 2011 january 2009 borrowed 400 million threeyear term loan notes consolidated financial statements fortune brands inc subsidiaries 7 debt financing arrangements continued matures october 2011 repay 300 million note approximately 394 million due january 30 2009 interest rate term loan variable based us libor time borrowing company’s longterm credit rating june 2009 issued longterm debt securities 500 million shelf registration statement filed securities exchange commission 6 38 notes mature june 2014 proceeds used pay balances revolving credit facility net proceeds 4967 million less price discounts 03 million underwriting fees 30 million november 2009 issued 400 million 30month notes due june 2012 used proceeds repay 400 million term loan net proceeds 3984 million less price discounts 04 million underwriting fees 12 million debt agreements normal customary events default would permit lenders debt agreement accelerate debt cured within applicable grace periods failure pay principal interest due change control company events default december 31 2009 estimated payments maturing debt next five years december 31 2009 follows 2010 none 2011 7500 million 2012 3964 million 2013 10325 million 2014 5000 million 8 financial instruments derivative financial instruments either foreign exchange contracts recorded fair value hedge currency fluctuations transactions denominated foreign currencies interest rate swaps commodity swaps forecasted commodity purchases deferred compensation program assets liabilities programs select employees defer compensation death disability termination employment january 1 2009 adopted amendment existing authoritative guidance disclosures derivatives hedging asc 815 guidance established disclosure requirements derivative financial instruments hedging activities order provide users financial statements enhanced understanding derivatives used b derivative financial instruments related hedged items accounted c affect financial position financial performance cash flows enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates commodities used raw materials products principal derivative financial instruments enter routine basis foreign exchange contracts addition time enter interest rate swaps commodity swaps raw materials used company subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors timetotime enter commodity swaps manage price risk associated forecasted purchase materials used operations account commodity derivatives economic hedges cash flow hedges changes fair value economic hedges recorded directly current period earnings material commodity swaps outstanding december 31 2009 notes consolidated financial statements fortune brands inc subsidiaries 8 financial instruments continued fourth quarter 2009 entered fixed floating interest rate swaps aggregate notional principal amount 400 million second quarter 2009 entered fixed floating interest rate swaps aggregate notional principal amount 500 million interest rate swaps outstanding december 31 2009 notional value totaling 900 million swap agreements hedge changes fair value portion existing fixed rate debt result changes benchmark interest rate us libor swap agreements designated classified fair value hedges accordance authoritative guidance derivatives hedging asc 815 second quarter 2008 entered fixed floating interest rate swaps aggregate notional principal amount 400 million october 2008 terminated settled 2008 interest rate swap agreements recorded 156 million gain amortized income reduction interest expense remaining life debt using effective interest method interest rate swaps outstanding december 31 2008 interest rate swaps outstanding 2007 enter foreign exchange contracts primarily hedge forecasted sales purchases denominated select foreign currencies thereby limiting currency risk would otherwise result changes exchange rates periods foreign exchange contracts correspond periods forecasted transactions generally exceed 12 15 months subsequent latest balance sheet date also enter foreign exchange contracts hedge risk changes fair value recognized foreign currency denominated assets liabilities hedge portion net investments certain foreign subsidiaries effective portions cash flow hedges reported comprehensive income recognized statement income hedged item affects earnings ineffective portion hedges recognized current period earnings addition changes fair value economic hedge transactions immediately recognized current period earnings primary foreign currency hedge contracts pertain us dollar euro australian dollar canadian dollar japanese yen gross us dollar equivalent notional amount foreign currency derivative hedges outstanding december 31 2009 5646 million counterparties derivative contracts major financial institutions subject credit risk contracts equal fair value instruments management currently believes risk incurring material losses unlikely losses would immaterial fair values foreign exchange derivative instruments condensed consolidated balance sheet december 31 2009 notes consolidated financial statements fortune brands inc subsidiaries 8 financial instruments continued effect derivative financial instruments statement income comprehensive income oci twelve months ended december 31 2009 advertising selling general administrative expenses twelve months ended december 31 2009 ineffective portion cash flow hedges recognized expense income net insignificant company designated certain foreigncurrencydenominated nonderivative financial instruments hedges currency exposure net investments foreign operations accordance authoritative guidance foreign currency translation asc 830 derivatives hedging asc 815 company’s 44133 million 46936 million total longterm debt including current portion december 31 2009 2008 fair value approximately 44330 million 43836 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity estimated fair value company’s notes payable banks bank revolving credit borrowings approximates carrying amounts due principally floating rate nature 9 fair value measurements january 1 2008 adopted authoritative guidance fair value measurement asc 820 defines fair value establishes framework measuring fair value expands disclosures assets liabilities measured fair value guidance established fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels level 1 inputs highest priority quoted prices active markets identical assets liabilities level 2 inputs reflect quoted prices included level 1 either observable directly corroboration observable market data level 3 inputs unobservable inputs due little market activity asset liability internallydeveloped valuation models permitted asc 820 january 1 2009 adopted fair value measurement disclosures nonfinancial assets liabilities goodwill indefinitelived intangible assets notes consolidated financial statements fortune brands inc subsidiaries 9 fair value measurements continued assets liabilities measured fair value recurring basis december 31 2009 december 31 2008 follows derivatives either foreign exchange contracts recorded fair value hedge currency fluctuations transactions denominated foreign currency interest rate swaps commodity swaps forecasted commodity purchases assets liabilities deferred compensation programs select employees defer compensation death disability termination employment assets liabilities measured fair value using unobservable inputs require significant degree judgment estimates regarding assumptions including limited projected future levels income based management’s plans well business trends prospects market economic conditions result changes fair values could material impact results operations liquidity realized reconciliation assets liabilities measured fair value recurring basis using significant unobservable inputs level 3 year ended december 31 2008 reporting period prior june 30 2008 estimated fair value noncontrolling interest spirits business based combination marketbased earnings multiples discounted cash flow techniques second quarter 2008 based upon final settlement amount determined connection repurchase noncontrolling interest recorded 879 million decrease fair value noncontrolling interest spirits business noncontrolling interest income july 2008 repurchased noncontrolling interest bgsw vs carrying value 4550 million additional information accounting noncontrolling interest spirits business refer note 6 “related party transactions” notes consolidated financial statements fortune brands inc subsidiaries 9 fair value measurements continued 2009 recorded intangible asset impairment charges 925 million refer note 2 “asset impairments” additional information accordance asc 820 disclosure assets measured fair value nonrecurring basis 10 267 convertible preferred stock redeemable company’s option 60 million authorized shares preferred stock 171138 178504 shares 267 convertible preferred stock issued outstanding december 31 2009 2008 respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share together holders common stock certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share convertible preferred stock 6601 shares common stock authorized unissued common shares reserved issuance upon conversions treasury shares may delivered holders converted 7366 8843 shares 2009 2008 respectively company may redeem convertible preferred stock price 3050 per share plus accrued dividends company paid cash dividends 267 per share aggregate amount 05 million years ended december 31 2009 2008 2007 11 capital stock 750 million authorized shares common stock number shares common stock treasury stock share activity follows cash dividends paid common stock years ended december 31 2009 2008 2007 aggregated 1517 million 2607 million 2481 million respectively february 3 2010 made voluntary contribution us defined benefit pension plans 156 million shares common stock held treasury stock fair value 679 million notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation use stock options performance awards restricted stock units rsus compensate key employees stock awards compensate outside directors awards outstanding three longterm incentive plans employees two directors december 31 2009 grants 2007 longterm incentive plan may made february 27 2017 13 million shares new stockbased awards made 1999 2003 longterm incentive plans 1997 2002 nonemployee director stock option plans existing awards plans continue exercisable stock options exercise prices equal fair value share common stock date grant options generally may exercised prior one year date grant options issued prior december 2005 august 2009 generally expire ten years date grant options issued december 2005 august 2009 expire seven years date grant options issued generally vest onethird year threeyear period beginning first anniversary date grant fair value option award estimated date grant using blackscholes optionpricing model based weightedaverage assumptions shown following table determination expected volatility based historical volatility stock period commensurate expected term stock options well relevant factors riskfree interest rate based us government issues remaining term equal expected life stock options weighted average expected term determined based historical employee exercise behavior contractual term options weightedaverage grant date fair value stock options granted twelve months ended december 31 2009 2008 2007 1081 894 1379 respectively twelve months ended december 31 2009 recognized pretax stockbased compensation expense stock options income continuing operations 234 million 170 million tax 011 per basic diluted share twelve months ended december 31 2008 recognized pretax stockbased compensation expense stock options income continuing operations 233 million 168 million tax 011 per basic per diluted share twelve months ended december 31 2007 recognized pretax stockbased compensation expense stock options income continuing operations 291 million 203 million tax 013 per basic diluted share total pretax stockbased compensation expense amounts included advertising selling general administrative expenses consolidated statement income 208 million 210 million 267 million 2009 2008 2007 respectively balance included cost products sold manufacturing fixed assetrelated compensation costs capitalized material notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation continued following table summarizes stock options outstanding three years ended december 31 2009 2008 2007 well activity twelve months ended intrinsic value stock options exercised twelve months ended december 31 2009 2008 2007 23 million 111 million 745 million respectively source shares issued treasury stock b december 31 2009 weightedaverage remaining contractual life options outstanding 45 years aggregate intrinsic value options outstanding 136 million options outstanding exercisable december 31 2009 follows december 31 2009 weighted average remaining contractual life options exercisable 37 years aggregate intrinsic value options exercisable 131 million options outstanding exercisable december 31 2009 2008 2007 follows notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation continued summary activity nonvested stock options years ended december 31 2009 2008 2007 well activity twelve months ended follows remaining unrecognized compensation cost related unvested awards december 31 2009 approximately 378 million weightedaverage period time cost recognized 19 years fair value options vested twelve months ended december 31 2009 243 million use stock awards compensate outside directors 2005 nonemployee director stock plan awards issued annually second quarter part compensation outside directors addition outside directors elect director’s fees paid stock compensation cost expensed time award based fair value share fortune brands’ stock date award twelve months ended december 31 2009 awarded 27000 shares common stock outside directors weighted average fair value date award 3876 pretax compensation cost 10 million twelve months ended december 31 2008 awarded 13326 shares common stock outside directors weighted average fair value date award 6751 pretax compensation cost 09 million twelve months ended december 31 2007 awarded 11887 shares common stock outside directors fair value date award 8054 pretax compensation cost 10 million performance awards granted certain officers company represent right receive unrestricted shares stock based achievement targeted cumulative diluted earnings per share average consolidated return invested capital compensation cost amortized expense performance period based probability meeting performance targets fair value performance award based stock price date grant notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation continued following table summarizes performance awards outstanding three years ended december 31 2009 2008 2007 well activity twelve months ended pretax compensation cost performance awards recorded twelve months ended december 31 2009 100 million 62 million tax nominal benefit pretax compensation cost performance awards recorded twelve months ended december 31 2008 2007 result reductions related lower expected incentive program payouts remaining unrecognized pretax compensation costs related unvested awards december 31 2009 approximately 57 million weightedaverage period time cost recognized 16 years cash shares issued performance awards 2009 cash used settle performance awards twelve months ended december 31 2008 2007 11 million 157 million respectively addition payment cash issued 67035 8248 shares common stock treasury shares twelve months ended december 31 2008 2007 rsus granted certain officers company represent right receive unrestricted shares stock based service achievement certain performance targets compensation cost amortized expense service period fair value rsu granted equal share price date grant summary company’s rsu activity years ended december 31 2009 2008 follows notes consolidated financial statements fortune brands inc subsidiaries 12 stockbased compensation continued pretax compensation cost rsus recorded twelve months ended december 31 2009 63 million 39 million tax pretax compensation cost rsus recorded twelve months ended december 31 2008 15 million 09 million tax remaining unrecognized pretax compensation costs related rsus december 31 2009 approximately 26 million weightedaverage period time cost recognized 14 years shares available issuance connection future awards company’s stock plans december 31 2009 2008 2007 6840158 8779347 11368856 respectively authorized unissued shares reserved issuance connection awards treasury shares may delivered 13 pension retiree benefits number pension plans principally united states covering many company’s employees plans provide payment retirement benefits mainly commencing ages 55 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service andor earnings employer contributions plans made necessary ensure legal funding requirements satisfied addition time may make contributions excess legal funding requirements company provides postretirement health care life insurance benefits certain retirees many employees retirees outside united states covered government health care programs notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued amounts recognized balance sheet consist notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued amounts accumulated comprehensive income balance sheet yet recognized components net periodic benefit cost december 31 2009 follows amounts accumulated comprehensive income expected recognized components net periodic benefit cost next fiscal year shown notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued pension benefit obligation accumulated benefit obligation fair value plans assets pension plans accumulated benefit obligations excess plan assets underfunded abo shown components net periodic benefit cost follows notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint change assumed health care cost trend rates would following effects plan assets pension assets major category plan assets type fair value measurement december 31 2009 follows reconciliation level 3 measurements 2009 follows notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued pension plan weighted average asset allocations december 31 2008 1 cash 51 equity securities 42 fixed income 3 real estate 3 hedge funds defined benefit trusts variety assets including equity fixed income real estate securities well group annuity insurance contracts fundofhedge funds equity securities traded national stock exchanges valued daily closing prices fixed income securities valued daily closing prices institutional midevaluation prices provided independent industryrecognized pricing sources real estate securities valued based recent market appraisals underlying property well valuation methodologies determine probable cash price competitive market valuations group annuity insurance contracts fundofhedge funds based daily closing institutional evaluation prices underlying securities consistent industry practices investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility master trusts established hold assets domestic defined benefit plans us defined benefit asset allocation policy trusts allows equity allocation 45 75 fixed income allocation 25 50 cash allocation 25 investments 20 nonus investment trust targets may differ depending country allowing 90 equity 100 fixed income investments 20 real estate asset allocations based underlying liability structure local regulations retirement asset allocations reviewed periodically ensure allocation meets needs liability structure expected 83 blended longterm rate return plan assets determined based longterm historical performance plan assets current asset allocation projected longterm rates return pension investment consultants defined contribution plan contributions sponsor number defined contribution plans contributions determined various formulas cash contributions related plans amounted 308 million 298 million 341 million 2009 2008 2007 respectively estimated future retirement benefit payments following retirement benefit payments reflect expected future service expected paid notes consolidated financial statements fortune brands inc subsidiaries 13 pension retiree benefits continued estimated future retirement benefits payments estimates could change significantly based differences actuarial assumptions actual events decisions related lump sum distribution options available participants certain plans 14 lease commitments future minimum rental payments noncancelable operating leases december 31 2009 follows total rental expense operating leases reduced minor amounts subleases amounted 719 million 679 million 648 million 2009 2008 2007 respectively 15 income taxes components income loss continuing operations income taxes follows reconciliation income taxes 35 federal statutory income tax rate income taxes continuing operations follows notes consolidated financial statements fortune brands inc subsidiaries 15 income taxes continued effective income tax rates twelve months ended december 31 2009 2008 128 507 respectively 2009 effective tax rate favorably impacted higher 2009 restructuring charges us taxed higher rate addition effective tax rate favorably impacted higher proportion foreign income 2009 taxed lower rate relative us income 2009 income tax rate also favorably impacted annual trueup adjustments related tax returns filed current period 2009 income tax rate unfavorably impacted net tax expense 133 million related correction prior year items prior year items primarily related goodwill tax benefits net operating loss carryforwards certain deferred tax adjustments determined immaterial years relate 2008 effective income tax rate favorably impacted 984 million tax benefit related final settlement federal income tax audit related 20012002 federal tax returns tax credits associated conclusion 20042005 federal tax audit nongoodwill impairment restructuring charges benefited higher us tax rates 2008 effective income tax rate unfavorably impacted absence tax benefit goodwill impairment charges 4513 million 505 million writedown investment maxxium joint venture well income associated termination spirits business’s us distribution agreement higher us tax rate second quarter 2008 congressional joint committee taxation completed review tax refund associated capital loss carryforward item favorably resolved irs administrative proceeding relating 20012002 federal tax returns unrecognized tax benefits utbs approximately 768 million reversed income relating approval refund associated 20012002 federal tax returns fourth quarter 2008 received refund accrued interest totaling 932 million additionally final settlement audit 20012002 federal tax returns removed uncertainty relating utilization capital loss carryforward reversed 144 million utbs relating utilization portion capital loss carryforward 2007 capital gain sale us distribution rights dalmore scotch whisky recorded income discontinued operations reversal 987 million utbs associated utilization portion capital loss carryforward capital gain sale us wine business third quarter 2007 spanish tax authorities concluded routine audit spanish spirits companies included part spirits wine brands well certain distribution assets acquired pernod ricard sa july 2005 spirits acquisition pursuant acquisition agreement pernod ricard indemnified company preacquisition income tax contingencies liabilities tax returns subject examination included 2000 2004 tax periods preceded date acquisition spanish tax authorities issued net tax assessment approximately 110 million 917 million tax 183 million related interest penalties paid october 2007 also third quarter 2007 received 993 million tax indemnification payment pernod ricard related tax assessment 110 million net associated tax benefits order reflect impact spanish tax assessment increased liability utbs additionally increased liability utbs reflect tax issues similar raised course audit relating tax periods subsequent audit period majority spanish utbs pertain preacquisition periods subject tax indemnification agreement pernod ricard notes consolidated financial statements fortune brands inc subsidiaries 15 income taxes continued reconciliation beginning ending amount utbs follows 2008 2007 utb beginning balances foreign exchange impacts resulting ending balances adjusted reflect additional 133 million related 2005 spirits acquisition net effect company’s statement income balance sheet amount utbs recognized december 31 2009 would affect company’s effective tax rate 4471 million reasonably possible within next twelve months total utbs may decrease range 85 140 million primarily result conclusion us federal state foreign income tax proceedings classify interest penalties accruals related utbs income tax expense years ended december 31 2009 2008 2007 company recognized approximately 56 million 144 million 77 million interest penalties december 31 2009 2008 accruals payment interest penalties 820 million 795 million respectively company subsidiaries file income tax returns us federal jurisdiction various states foreign jurisdictions us internal revenue service irs currently examining company’s 2006 2007 federal income tax returns however company technically subject irs examination years 1997 2008 due unexpired statute limitations periods company one subsidiaries tax years remain open subject examination tax authorities following major taxing jurisdictions canada years 1998 france years 2004 mexico years 2001 spain years 2003 united kingdom years 2004 notes consolidated financial statements fortune brands inc subsidiaries 15 income taxes continued income taxes follows components net deferred tax assets liabilities follows notes consolidated financial statements fortune brands inc subsidiaries 15 income taxes continued december 31 2009 2008 company net operating loss tax carryforwards 1212 million 735 million respectively approximately 284 million expire 2013 2019 remainder expire 2020 thereafter company provided valuation allowance reduce carrying value certain deferred tax assets management conclude based available evidence likely deferred tax assets fully realized provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest foreign subsidiary earnings remitted without incremental taxes undistributed earnings foreign subsidiaries either considered permanently invested remitted without incremental taxes aggregated 5899 million december 31 2009 quantification associated deferred tax liability undistributed earnings made determination liability practicable third quarter 2009 determined approximately 524 million foreign subsidiary earnings longer considered permanently reinvested current deferred taxes associated earnings recorded material 16 detail current liabilities detail current liabilities december 31 2009 2008 follows 17 guarantees commitments march 31 2009 terminated guarantees related debt maxxium spirits business’s former international sales distribution joint venture since april 1 2009 providing similar guarantees 50 credit facilities maxxium españa sl amount 11 million approximately 157 million reflecting ownership joint venture teg december 31 2009 65 million approximately 93 million outstanding liability related guarantees material bgsw teg also executed uncommitted multicurrency shareholder loan facility amount  30 million approximately 429 million bgswteg joint ventures share 50 share outstanding balance december 31 2009 £5 million approximately 81 million also guaranteed various leases acco world corporation office business divested spinoff 2005 continue guarantee payment certain real estate leases lease payments totaling approximately 226 million april 2013 accordingly recorded fair value guarantees 04 million december 31 2009 liability financial statements notes consolidated financial statements fortune brands inc subsidiaries 17 guarantees commitments continued provided typical indemnities connection divestitures indemnities relate various representations generally included divestiture agreements environmental tax product liability employee liability contingencies depending transactions several divestitures maximum obligation certain contingencies specified unusual transactions cannot reasonably estimate potential payments divestiturerelated indemnity obligations indemnities vary duration cases durations indefinite authoritative guidance guarantees effective december 31 2002 record liabilities consolidated financial statements indemnities entered prior date made indemnity payments material financial position results operations quarter furthermore expect potential payments connection indemnity obligations would material adverse effect consolidated financial position results operations liquidity 2010 future periods purchase obligations company december 31 2009 purchase obligations include contracts raw materials finished goods purchases advertising selling administrative services capital expenditures 18 restructuring charges pretax restructuring charges twelve months ended december 31 2009 “other charges” represent charges directly related restructuring initiatives cannot reported restructuring us gaap costs may include losses disposal inventories trade receivables allowances exiting product lines accelerated depreciation resulting closure facilities b advertising selling general administrative expenses pretax restructuring charges spirits business 2009 251 million primarily related business repositioning including strategic sales distribution initiatives international markets us supply chain activities consisted 195 million work force reductions 56 million contract termination costs spirits business charges primarily associated business repositioning including realignment us business fully notes consolidated financial statements fortune brands inc subsidiaries 18 restructuring charges continued integrated category business teams reduction number international regions four three home security business restructuring charges 520 million primarily due supply chain realignment capacity cost reduction initiatives including announced closure seven additional us manufacturing facilities well workforce reductions home security restructuring charges 218 million primarily consisted 115 million workforce reductions 52 million fixed assets writedowns 51 million lease contract termination costs home security charges consisted primarily accelerated depreciation associated facilities closed golf business restructuring charges 313 million twelve months ended december 31 2009 primarily due companywide workforce reduction 292 million closure shoe manufacturing facility 13 million golf charges primarily associated closure shoe manufacturing facility corporate charges related disposal fixed assets pretax restructuring charges twelve months ended december 31 2008 “other charges” represent charges directly related restructuring initiatives cannot reported restructuring us gaap costs may include losses disposal inventories trade receivables allowances exiting product lines accelerated depreciation resulting closure facilities b advertising selling general administrative expenses pretax charges spirits business twelve months ended december 31 2008 636 million related business repositioning including supply chain activities sales distribution initiatives restructuring charges related asset writedowns 82 million employeerelated costs 147 million lease contract termination costs 94 million spirits charges twelve months ended december 31 2008 313 million primarily costs organizational repositioning strategic routetomarket initiative us pretax charges 2008 home security business 556 million primarily due efforts align costs capacity marketplace conditions including announced closure six additional us manufacturing facilities well exit select lowreturn product offerings 2008 restructuring charges consisted 249 million workforce reduction costs 214 million tangible intangible asset writedowns 32 million contract termination costs cost products sold charges inventory writedowns associated exited markets product lines advertising selling general administrative charges consisted retention costs offset favorable translation adjustments related substantial liquidation foreign entity 83 million notes consolidated financial statements fortune brands inc subsidiaries 18 restructuring charges continued pretax restructuring charges twelve months ended december 31 2007 “other charges” represent charges directly related restructuring initiatives cannot reported restructuring us gaap costs may include losses disposal inventories trade receivables allowances exiting product lines accelerated depreciation resulting closure facilities b advertising selling general administrative expenses twelve months ended december 31 2007 recorded pretax restructuring charges 735 million principally related supply chain initiatives home security business including facility closures including consolidation facilities cabinetry window tool storage production closure cabinetry component operation well planned exit entry door market united kingdom decorative column products lines us home security business closed downsized several facilities order improve longterm efficiency productivity flexibility supply chains also provide nearterm benefits aligning costs capacity navigate current downturn us home products market 2007 restructuring charges consisted primarily 163 million workforce reduction costs 496 million tangible intangible asset writedowns 76 million contract termination costs cost products sold charges inventory writedowns associated exited markets product lines advertising selling general administrative charges consisted accounts receivable reserves doubtful accounts warranty reserves retention costs related exit entry door market uk decorative column products line us spirits pretax charges 2007 primarily related distribution model change australia reconciliation restructuring liability cash expenditures asset writedowns include proceeds received asset disposals b noncash writeoffs include longlived asset impairment charges attributable restructuring actions impact foreign exchange rate changes workforce reduction costs related noncash benefit plan curtailments settlements notes consolidated financial statements fortune brands inc subsidiaries 18 restructuring charges continued cash expenditures asset writedowns include proceeds received asset disposals b noncash writeoffs include longlived asset impairment charges attributable restructuring actions impact foreign exchange rate changes workforce reduction costs benefited noncash benefit plan curtailment gains 19 information business segments report operating segments spirits home security golf based organized segments within company making operating decisions assessing performance based markets served company’s operating segments types products segment derives revenues described spirits includes products made marketed distributed beam global spirits wine inc subsidiaries affiliates home security includes kitchen bathroom faucets accessories manufactured marketed distributed moen kitchen bath cabinetry manufactured marketed distributed masterbrand cabinets residential entry door patio door systems designed manufactured thermatru vinylframed windows manufactured marketed distributed simonton locks tool storage organization products manufactured marketed distributed storage security golf includes golf balls golf clubs golf shoes gloves manufactured marketed distributed acushnet company notes consolidated financial statements fortune brands inc subsidiaries 19 information business segments continued company’s subsidiaries operate principally united states canada europe primarily spain united kingdom france australia mexico corporate expenses include salaries benefits expenses related corporate office employees functions benefit operating segments corporate expenses include expenses directly allocable reportable segments allocating indirect expenses operating segments would require imprecise allocation methodology amounts elimination reversal transactions reportable segments b based country destination c corporate assets include cash certain receivables related taxes insurance claims cash surrender value life insurance policies corporate assets include assets directly allocable reportable segments allocating indirect assets operating segments would require imprecise allocation methodology notes consolidated financial statements fortune brands inc subsidiaries 19 information business segments continued notes consolidated financial statements fortune brands inc subsidiaries 20 quarterly financial data unaudited millions except per share amounts 21 expense income net components expense income net years ended december 31 2009 2008 2007 follows refer note 6 “related party transactions” additional information notes consolidated financial statements fortune brands inc subsidiaries 22 earnings per share basic earnings per common share based weightedaverage number common shares outstanding year preferred stock dividend requirements diluted earnings per common share assume convertible preferred shares outstanding beginning year converted dates preferred stock dividend requirements outstanding common shares adjusted accordingly also assumes outstanding common shares increased shares issuable upon exercise stock options market price exceeds exercise price less shares could purchased company related proceeds computations basic diluted earnings per common share follows years ended december 31 2009 2008 2007 stockbased awards excluded calculation weighted average shares diluted eps antidilutive exercise price exceeded average stock price excluded stockbased awards approximately 161 million 99 million 62 million shares weighted average shares outstanding respectively notes consolidated financial statements fortune brands inc subsidiaries 23 accumulated comprehensive income total accumulated comprehensive income consists net income changes stockholders’ equity transactions events sources stockholders includes currency translation gains losses unrealized gains losses derivative instruments designated cash flow hedges pension postretirement adjustments components changes accumulated comprehensive income follows 2009 change foreign currency adjustments derivative hedging position result weakening us dollar major currencies 2008 change foreign currency adjustments derivative hedging position result strengthening us dollar major currencies 2008 change pension postretirement adjustment primarily result decrease fair value plan assets 24 pending litigation tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation bw time whollyowned subsidiary bat industries plc connection sale bw atco subsequently merged bw agreed indemnification agreement indemnification agreement indemnify fortune brands inc claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company “indemnitor” indemnification agreement indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations notes consolidated financial statements fortune brands inc subsidiaries 24 pending litigation continued company defendant number actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however believe number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor believe pending actions material adverse effect upon results operations cash flows financial condition believe meritorious defenses company indemnified indemnification agreement litigation february 9 2006 callaway golf company filed lawsuit seeking unspecified damages acushnet company united states district court district delaware callaway alleged pro v1 golf balls manufactured acushnet company infringed four callaway’s patents acushnet stipulated infringement jury trial validity patent claims asserted callaway conducted december 2007 jury provided evidence related nine claims contained four patents returned mixed verdict finding one claim invalid eight claims valid november 10 2008 trial court issued order enjoining sales 2007 pro v1 golf balls january 1 2009 acushnet appealed united states court appeals federal circuit august 14 2009 court appeals overturned judgment vacated injunction sent case back district court appeals also found district court erred rejecting acushnet defense trial certain evidence supporting defense may available acushnet new trial district court scheduled new trial march 2010 separately subsequent first trial district court us patent trademark office pto issued final actions determining four patents callaway’s infringement claims based invalid pto also issued right appeal notice four patents providing callaway opportunity appeal determination patent board appeals callaway filed appeals regarding four patents patent board appeals late 2008 acushnet introduced believes noninfringing pro v1 balls february 2009 acushnet introduced new improved versions pro v1 balls also believes noninfringing march 3 2009 callaway filed lawsuit seeking unspecified damages acushnet united states district court district delaware callaway alleged acushnet’s modified pro v1 balls acushnet’s new 2009 versions pro v1 balls infringe two additional patents owned callaway march 3 2009 acushnet also filed lawsuit seeking unspecified damages callaway united states district court district delaware acushnet alleged callaway’s tour ix balls infringe nine acushnet’s patents addition march 3 2009 acushnet filed pto reexamination request two additional patents asserted callaway pto accepted reexaminations issued first office actions reject claims patents invalid multiple grounds notes consolidated financial statements fortune brands inc subsidiaries 24 pending litigation continued believe counsel advises acushnet meritorious defenses litigation brought callaway matters vigorously contested possible time assess likelihood adverse outcome determine reasonable estimate range estimates potential damages decided unfavorably however litigation could material adverse effect results company’s operations cash flows financial condition addition lawsuits described company subsidiaries defendants lawsuits associated normal conduct businesses operations possible predict outcome pending actions litigation possible actions could decided unfavorably believe meritorious defenses actions material adverse effect upon results operations cash flows financial condition actions vigorously contested 25 environmental subject laws regulations relating protection environment possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts subsidiaries may undertake future due uncertainties status laws regulations technology information related individual sites involved numerous remediation actions clean hazardous wastes required federal state laws based evaluation cleanup cost estimates compliance programs believe reasonable possibility material loss exceeding amounts already recognized may incurred liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties report independent registered public accounting firm board directors shareholders fortune brands inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position fortune brands inc subsidiaries december 31 2009 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed manner accounts noncontrolling interests 2009 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate described management’s report internal control financial reporting appearing item 9a management excluded sales distribution companies acquired maxxium worldwide bv assessment internal control financial reporting december 31 2009 acquired purchase business combination april 2009 also excluded sales distribution companies acquired maxxium worldwide bv audit internal control financial reporting maxxium worldwide bv sales distribution companies whollyowned subsidiaries whose total assets total revenues represent 2478 million 4357 million respectively related consolidated financial statement amounts year ended december 31 2009 pricewaterhousecoopers llp chicago illinois february 24 2010 shareholders fortune brands inc prepared consolidated balance sheet fortune brands inc subsidiaries december 31 2009 2008 related consolidated statements income cash flows stockholders’ equity three years period ended december 31 2009 financial statements prepared accordance accounting principles generally accepted united states america financial information elsewhere annual report form 10k consistent financial statements internal control financial reporting company subsidiaries designed provide reasonable assurances financial records adequate relied upon provide information preparation financial statements established policies procedures carefully followed company’s stockholders annually ratify appointment company’s independent registered public accounting firm company’s financial statements pricewaterhousecoopers llp audit performed accordance standards public company accounting oversight board united states audit committee board directors consisting solely independent directors meets periodically independent auditors internal auditors management review accounting auditing financial reporting matters auditors direct access audit committee bruce carbonari bruce carbonari chairman board chief executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer item 9item 8 financial statements supplementary data consolidated statement income fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement cash flows fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement equity fortune brands inc subsidiaries net income 2008 consolidated statement stockholders’ equity includes 721 million income noncontrolling interests repurchased september 30 2008 classified balance sheet mezzanine equity repurchase b total comprehensive income loss attributable fortune brands 5274 million 5094 million 5164 million respectively years ended december 31 2010 2009 2008 respectively see notes consolidated financial statements notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies basis presentation consolidated financial statements include accounts fortune brands inc elimination intercompany transactions majorityowned subsidiaries subsidiary holds noncontrolling interest substantive control result company operational decisionmaking powers entity certain company’s subsidiaries operate 52 53week fiscal year references “we” “our” “the company” refer fortune brands inc consolidated subsidiaries whole unless context otherwise requires accordance authoritative guidance property plant equipment asc 360 results operations related 2007 sale us wine business reclassified separately stated discontinued operations accompanying consolidated statements income year ended december 31 2008 cash flows discontinued operations year ended december 31 2008 separately classified accompanying consolidated statements cash flows consolidated financial statements retrospectively adjusted adoption authoritative guidance noncontrolling interests accounting standards codification asc 810 presentation financial statements accordance us generally accepted accounting principles gaap requires us make estimates assumptions affect reported amounts related disclosures actual results future periods could differ estimates cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency discounts related early payment accounts receivables customers allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions accordance policy allowance discounts doubtful accounts returns continuing operations 819 million 720 million december 31 2010 2009 respectively inventories firstin firstout fifo inventory method principal inventory method across segments accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns product spoilage specific identification items product discontinuance engineeringmaterial changes regulatoryrelated changes home security segment use lastin firstout lifo inventory method product groups metals inventories comprise significant portion inventories lifo inventories december 31 2010 2009 1326 million current cost 1595 million 1536 million current cost 1769 million respectively 1 significant accounting policies continued property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included operating income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred assets held use disposed future date depreciated remaining useful life assets sold written fair value time assets actively marketed sale december 31 2010 2009 carrying value assets held sale material estimated useful lives related assets follows longlived assets accordance authoritative guidance property plant equipment asc 360 longlived asset including amortizable identifiable intangible assets asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows marketparticipant basis goodwill indefinitelived intangible assets accordance authoritative guidance goodwill intangible assets asc 350 goodwill tested impairment least annually fourth quarter written impaired interim impairment test performed event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future cash flows reporting units goodwill relates discount future cash flows marketparticipantderived weightedaverage cost capital determining estimated future cash flows consider current projected future levels income based management’s plans business trends prospects market economic conditions marketparticipant considerations reporting unit operating segment case home security segment one level operating segment estimated fair value reporting unit less carrying value measure recognize amount goodwill impairment loss impairment losses limited carrying value goodwill represent excess carrying value reporting unit’s goodwill implied fair value goodwill implied fair value reporting unit estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance requirements asc 350 asc 350 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite determination useful life intangible asset goodwill based factors including historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated 1 significant accounting policies continued least annually determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually fourth quarter whenever market business events indicate may potential impairment intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party remaining useful life company cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions investments company makes investments include joint ventures either complement expand existing businesses accordance authoritative guidance investments asc 323 equity method accounting used account investments company ability exercise significant influence operating financial policies joint venture record share joint venture’s income increase investment dividends received reduction investment equity method requires impairment losses recognized temporary losses investment value carrying value pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits record amounts relating plans based calculations specified us gaap include various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets recognizes difference expected return actual return plan assets fiveyear period discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments expected rate return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases required us gaap effects actuarial deviations assumptions generally accumulated outside specified corridor amortized remaining service period employees cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees believe assumptions utilized recording obligations company’s plans presented note 13 “pension retiree benefits” reasonable based experience advice independent actuaries however differences actual experience changes assumptions may materially affect company’s financial position results operations continue monitor assumptions market conditions warrant environmental company subject laws regulations relating protection environment company provides expenses associated environmental remediation obligations amounts probable reasonably estimated adjust expense 1 significant accounting policies continued new information develops circumstances change accruals discounted december 31 2010 2009 environmental accruals amounted 213 million 245 million respectively included noncurrent liabilities balance sheet company management believes compliance current environmental protection laws taking account estimated recoveries third parties including insurers material adverse effect upon results operations cash flows financial condition income taxes accordance authoritative guidance income taxes asc 740 establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse record valuation allowance reducing deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest record liabilities uncertain income tax positions based two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ estimates future periods changes facts circumstances new information may require us change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur december 31 2010 liabilities unrecognized tax benefits pertaining uncertain tax positions totaling 1345 million reasonably possible unrecognized tax benefits may decrease range 5 million 20 million next 12 months primarily result conclusion us federal state foreign income tax proceedings revenue recognition revenue recorded persuasive evidence arrangement exists delivery occurred price fixed determinable collectibility reasonably assured revenue recorded net applicable provisions discounts returns allowances record estimates reductions revenue customer programs incentives including price discounts volumebased incentives promotions advertising allowances cooperative advertising sales returns based historical returns current trends forecasts product demand cost products sold cost products sold includes costs make products saleable inbound freight purchasing receiving costs inspection costs internal transfer costs addition depreciation expense associated assets used manufacture products make saleable included cost products sold customer program costs customer programs incentives common practice many businesses incur customer program costs obtain favorable product placement promote sales products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “net sales” category “advertising selling general administrative expenses” time 1 significant accounting policies continued program initiated andor revenue recognized costs recognized “net sales” include limited volume allowances rebates promotional allowances cooperative advertising programs costs typically recognized “advertising selling general administrative expenses” include point sale materials media costs recorded latter time sale implementation program based management’s best estimates based historical projected experience type program customer volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough merchandising support level returns customer training management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations advertising selling general administrative expenses advertising selling general administrative expenses include advertising marketing selling including commissions research development shipping handling including warehousing costs general administrative expenses shipping handling costs included advertising selling general administrative expenses 1876 million 1751 million 2228 million 2010 2009 2008 respectively advertising costs amounted 6816 million 6292 million 7055 million 2010 2009 2008 respectively principally expensed incurred advertising costs include media costs point sale materials product endorsements advertising costs recorded reduction net sales primarily cooperative advertising 535 million 478 million 512 million 2010 2009 2008 respectively advertising costs recorded advertising selling general administrative expenses 6281 million 5814 million 6543 million 2010 2009 2008 respectively research development research development expenses include product development product improvement product engineering process improvement costs research development expenses 707 million 678 million 712 million 2010 2009 2008 respectively expensed incurred stockbased compensation recognize sharebased compensation expense measured fair value award date grant financial statements period employee required provide services exchange award fair value option award measured date grant using blackscholes optionpricing model fair value performance award based stock price date grant probability meeting performance targets fair value restricted stock unit granted equal share price date grant see note 12 “stockbased compensation” additional information earnings per share basic earnings per common share calculated dividing net income attributable fortune brands less preferred stock dividends weighted average number shares common stock outstanding year diluted earnings per common share calculated dividing net income available common stockholders plus preferred stock dividends weighted average number shares common stock outstanding assuming conversion potentially dilutive preferred stock options awards see note 22 “earnings per share” discussion foreign currency translation foreign currency balance sheet accounts translated us dollars actual rates exchange balance sheet date income expenses 1 significant accounting policies continued translated average rates exchange effect period foreign subsidiaries local currency functional currency related translation adjustments made directly separate component “accumulated comprehensive loss” caption stockholders’ equity transactions denominated currency functional currency subsidiary translated functional currency resulting transaction gains losses recorded income expense net derivative financial instruments accordance authoritative guidance derivatives hedging asc 815 derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge highly effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized statement income hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized years ended december 31 2010 2009 2008 deferred currency gains 115 million 220 million 39 million respectfully reclassified earnings based foreign exchange rates december 31 2010 estimate 84 million net currency derivative losses included oci december 31 2010 reclassified earnings within next twelve months recently issued accounting standards consolidation variable interest entities june 2009 financial accounting standards board fasb amended existing authoritative guidance variable interest entities accounting standards codification asc 810 new authoritative guidance includes new approach determining variable interest entity vie consolidated b changes necessary reassess consolidate vie new approach requires enterprise qualitatively assess determination primary beneficiary consolidator amendment effective interim annual reporting periods beginning november 15 2009 calendar year 2010 fortune brands adoption standard impact financial statements disclosures revenue arrangements multiple deliverables october 2009 fasb issued accounting standards update 200913 “multipledeliverable revenue arrangements consensus fasb emerging issues task force” guidance requires entities allocate consideration multiple deliverable arrangements manner reflects transaction’s economics guidance requires expanded disclosure effective fiscal years beginning june 15 2010 calendar year 2011 fortune brands applied either prospectively retrospectively believe adoption standard material impact financial statements disclosures 2 goodwill intangible assets change net carrying amount goodwill segment follows also indefinitelived intangible assets principally tradenames 25653 million december 31 2010 compared 26231 million december 31 2009 decrease 578 million primarily due disposition cobra golf product line 648 million partially offset changes foreign currency translation adjustments 70 million amortizable identifiable intangible assets principally tradenames customer relationships subject amortization estimated useful life 5 30 years based assessment number factors may impact useful life factors include historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion relevant factors gross carrying value accumulated amortization amortizable intangible assets 8746 million 3910 million respectively december 31 2010 compared 9321 million 3668 million respectively december 31 2009 gross carrying value decrease 575 million primarily due disposition certain nonstrategic spirits brands related assets 456 million changes foreign currency translation adjustments 123 million 2 goodwill intangible assets continued gross carrying value accumulated amortization class intangible assets december 31 2010 2009 follows accumulated amortization prior adoption revised authoritative guidance goodwill intangibles assets asc 350 indefinitelived tradenames december 31 2010 comprised 18975 million spirits segment 6659 million home security segment 19 million golf segment company expects record intangible amortization 33 million 2011 trending 27 million 2016 company cannot predict occurrence certain events might adversely affect carrying value goodwill intangible assets events may include limited impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions 3 acquisitions dispositions 2010 december 2010 sold cockburn port brand us uk portugal inventory remaining inventory sold march 2011 recorded pretax loss 74 million 68 million tax august 2010 sold certain nonstrategic german spirits brands related assets recorded pretax loss 86 million 124 million tax proceeds two dispositions 492 million april 2010 sold cobra golf product line puma north america inc 889 million asset sale included cobra golf brand related inventory intellectual property endorsement contracts sale resulted pretax gain 113 million 100 million tax 2009 full year cobra net sales approximately 130 million acquisitions 2009 april 2009 paid 499 million approximately 662 million net cash acquired purchase 100 interests seven subsidiaries maxxium worldwide bv maxxium former international spirits sales distribution joint venture acquisitions accounted using purchase method accordance authoritative guidance business combinations asc 805 addition 3 acquisitions dispositions continued paid 309 million approximately 417 million acquire 50 ownership five alliance joint venture entities edrington group teg maxxium joint venture partner entities accounted equity method additional information refer note 6 “related party transactions” june 2009 spirits business acquired effen superpremium vodka brand related assets sazerac company inc conjunction transaction sold old taylor whiskey brand assets sazerac company inc acquisition included consolidated results date acquisition material purposes supplemental disclosure accordance authoritative guidance business combinations asc 805 acquisitions included consolidated results dates acquisition acquisitions material purposes supplemental disclosure accordance authoritative guidance business combinations asc 805 acquisitions divestiture material impact consolidated financial statements acquisition 2008 september 30 2008 acquired premium cruzan rum business pernod ricard sa pernod ricard 1032 million cash acquisition included consolidated results date acquisition material purposes supplemental disclosure accordance authoritative guidance business combinations asc 805 acquisition material impact consolidated financial statements 4 discontinued operations third quarter 2007 sold william hill canyon road wine brands related assets e j gallo winery december 2007 sold remaining us wine assets constellation brands inc constellation brands 8870 million statement income twelve months ended december 31 2008 reflects us wine business discontinued operation interest expense associated outstanding debt fortune brands allocated discontinued operations assuming discontinued operations debt equity ratio consistent debt equity ratio fortune brands accordance authoritative guidance discontinued operations asc 205 following table summarizes results discontinued operations year ended december 31 2008 impact 2010 2009 2008 recorded net income 1525 million discontinued operations included pretax income 40 million tax 25 million settlement outstanding working capital claims related sale us wine business also recorded 431 million tax benefit related finalization tax accounting sale us wine business tax credits associated conclusion 20042005 federal income tax audit pertained discontinued 4 discontinued operations continued operations addition recorded 980 million tax benefit 987 million unrecognized tax benefits less interest 07 million related capital loss carryforward position associated sale us wine business 5 asset impairment charges goodwill intangible asset impairment charges recorded 2010 company two indefinitelived tradenames 10 reduction fair value would trigger impairment charge future periods tradenames spirits business aggregate book value 6524 million december 31 2010 significant estimates assumptions influence tradename’s fair value include expected branded product sales included operating plans longerterm market growth rates particular spirits categories geographies expected profit margins products sold using brands terminal value revenue growth rates weighted average cost capital december 31 2010 company longlived assets home security segment totaled 22532 million including goodwill indefinitelived tradenames 14543 million 6659 million respectively dollar amounts goodwill indefinitelived tradenames associated reporting units within home security segment december 31 2010 follows estimates fair value reporting units tradenames significantly influenced assumptions regarding us home products market given current economic conditions us home products market assumptions could change near term 2009 impairment charges spirits business indefinitelived tradenames book value 19054 million december 31 2009 connection regular annual impairment testing fourth quarter 2009 recorded impairment charges 925 million primarily related indefinitelived tradename sauza tequila reducing book value impaired brands 7828 million aggregate remain confident longterm growth prospects spirits brands however gaap requires indefinitelived tradenames valued based current fair value lower book value impairment charges recorded reflect decline estimated fair value impaired tradenames book value accordance requirements asc 350 tradenames acquired 2005 fair value closely approximates book value impaired tradenames believe fair value declined book value primarily due combined effect economic downturn sales key geographic markets particularly mexico us expectation moderate market growth rates overall tequila spirits category foreseeable future estimate fair value using standard relieffromroyalty method estimates present value hypothetical royalty payments avoided due ownership tradename method consistent method employed prior periods method employed value tradenames date original acquisition 5 asset impairment charges continued goodwill indefinitelived tradename impairment charges recorded home security golf businesses 2009 goodwill impairment charges identified spirits businesses 2009 2008 impairment charges 2008 recorded impairment charges 7855 million comprised 3243 million second quarter well 4612 million fourth quarter asset impairment charges twelve months ended december 31 2008 follows goodwill impairment charges home security business predominantly related thermatru entry door 3995 million simonton 488 million reporting units two recent home security business acquisitions second quarter 2008 primarily due impact worse anticipated decline us home products market financial results company concluded necessary accordance authoritative guidance goodwill intangible assets asc 350 conduct interim goodwill impairment test result test company recorded goodwill impairment charges totaling 2889 million fourth quarter 2008 company conducted regular annual goodwill impairment test december 31 2008 recorded additional goodwill impairment charges totaling 1624 million fourth quarter charges primarily result expectation slower previously expected recovery us home products market current effect recession market forecasts sales operating income cash flows reporting unit home security business finalized course annual planning process forecast us home products market two segments new home construction segment repairremodel segment impairments thermatru simonton occurred reporting units significantly impacted new home construction recently acquired therefore newer historical carrying values home security segment reporting units components one level home security operating segment generally correspond major product lines related brands reporting unit goodwill impairment charges measured excess carrying value goodwill implied fair value implied fair value goodwill estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance requirements authoritative guidance goodwill intangibles assets asc 350 consistent historical practice company estimates fair value reporting unit based projection future cash flows discounted marketparticipantderived weighted average cost capital significant estimates assumptions use estimating future cash flows home security reporting units based upon view longerterm broad market trends companyspecific pointintime factors evaluate broad market trends review data includes external longterm forecasts us home products markets new construction repair remodel portions market combine trend data pointintime estimates current realities including current economic conditions us availability credit competitor 5 asset impairment charges continued behavior mix product sales commodity costs wage rates level manufacturing capacity pricing environment addition estimates fair value impacted estimates marketparticipantderived weighted average cost capital changes fair value reporting units triggered impairment charges primarily attributable changes assumptions regard decline us home products market 2008 timing recovery next three five years impact future revenues operating margins cash flows changed market assumptions based deterioration actual market conditions throughout 2008 negatively impacted performance versus original 2008 plan estimate discounted future cash flows decreased significantly yearend 2007 primarily due reduction current year forecasted revenues cash flows compared original plan resulted projecting future revenue cash flow growth significantly lower base shifting cash flow growth beyond 2008 later years december 31 2008 cash flow projections assumed declining revenue cash flows 2009 significant recovery would occur 2010 addition fair value declined due increase weighted average cost capital home security indefinitelived tradename impairment charges related thermatru entry door simonton windows tradenames review indefinitelived intangible assets impairment annually whenever market business events indicate may potential impact intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party remaining useful life result downward revision sales forecasts used goodwill impairment testing related tradename valuations tested second fourth quarter resulting impairment charges tradenames totaling 312 million 920 million second fourth quarters 2008 respectively indefinitelived tradename impairment charges 272 million spirits business related writedown certain nonus regional spirits tradenames due local market factors authoritative guidance property plant equipment asc 360 requires impairment loss recognized held used longlived assets carrying amount recoverable exceeds fair value fourth quarter 2008 due decline projected cash flows thermatru simonton reporting units discussed concluded necessary test depreciating amortizable assets impairment result recorded asset impairment charges 1622 million definitelived intangible assets developed technology customer relationships 216 million land building required asc 360 impairments quantified determined prior performing goodwill impairment tests determine fair values definitelived intangible assets applied income approach using excess earnings methodology entails estimation discounted tax income expected derived intangible assets deductions contributory assets valuation method consistent method used value assets dates original acquisition underlying cash flow assumptions used test recoverability assets measure impairment consistent cash flow projections used evaluate goodwill indefinitelived intangible assets impairment 6 related party transactions edrington alliance maxxium worldwide bv prior april 1 2009 beam global spirits wine inc bgsw owned 25 interest maxxium international spirits sales distribution joint venture equal partners maxxium rémy cointreau sa rémy vin sprit group vs teg accordance settlement agreement executed september 2008 march 30 2009 rémy vs exited joint venture bgsw became 50 owner maxxium teg accounted maxxium using equity method 2009 received dividend distributions maxxium totaling 429 million approximately 584 million 2009 recorded gain 125 million representing dividend distributions excess carrying value september 2008 bgsw teg entered agreement establishing international distribution alliance combination jointlyowned companyowned sales forces 24 markets accordance distribution alliance bgsw teg acquired portions certain distribution companies previously whollyowned maxxium operations new alliance began april 1 2009 alliance simplified international routes market gives us greater control distribution alliance provides bgsw teg joint 5050 ownership sales distribution companies certain markets bgsw whollyowned teg whollyowned distribution companies distribute companies’ products third party products certain markets april 2009 paid 499 million approximately 662 million net cash acquired purchase 100 interests seven maxxium subsidiaries acquisitions accounted using purchase method accordance authoritative guidance business combinations asc 805 addition paid 309 million approximately 417 million acquire 50 ownership five alliance joint venture entities accounted equity method march 31 2009 terminated guarantees related debt maxxium provide similar guarantees certain credit facilities maxxium españa sl amount 90 million approximately 120 million denview ltd amount 90 million approximately 120 million maxxium cyprus ltd amount 40 million approximately 54 million reflecting ownership joint ventures teg liability related guarantees material bgsw teg also uncommitted multicurrency shareholder loan facility bgswteg joint ventures share 50 15 million approximately 201 million 2008 recorded writedowns investment maxxium joint venture 505 million statement income expense net primarily reflect impact impending departures rémy vs otherthantemporary decline value writedowns determined accordance authoritative guidance investments asc 323 based value intended future use maxxium’s remaining net assets departure rémy vs spirits business’s balances related equity method investments years ended december 31 2010 2009 included following future brands llc september 30 2008 closed transaction resulted early termination september 30 2008 us distribution agreement bgsw us business vs 6 related party transactions continued acquired pernod ricard agreement pernod ricard paid fortune brands 2300 million cash exchange early termination distribution agreement recorded income expense net statement income recognized balance unamortized deferred income 720 million resulting initial payment 2001 vs establish us distribution joint venture 1908 million tax aggregate deferred gain recognized income obligations joint venture partner vs financially operationally support joint venture ceased redeemed vs’s shares future brands part early termination us distribution agreement bgsw redeemed interest future brands held vs future brands consolidated september 30 2008 material impact financial statements noncontrolling interest held vs group vs owned 10 interest bgsw repurchased noncontrolling interest july 2008 carrying value 4550 million accounted redemption feature convertible redeemable preferred stock measured noncontrolling interest fair value changes fair value reflected income continuing operations accordance authoritative guidance classification measurement redeemable securities bgsw publicly traded entity therefore quoted market price common preferred shares reporting period prior june 30 2008 estimated fair value based combination marketbased earnings multiples discounted cash flow techniques fair value june 30 2008 4550 million based upon final settlement amount determined connection repurchase noncontrolling interest valuation reflected features preferred stock could sold third party unique shareholder rights preferred security result 2008 recorded 879 million decrease fair value noncontrolling interest noncontrolling interest income twelve months period ended december 31 2008 bgsw declared preferred dividends 98 million vs recorded noncontrolling interest expense reconciliation noncontrolling interest shown 7 debt financing arrangements december 31 2010 2009 529 million 513 million shortterm borrowings outstanding respectively comprised notes payable banks used general corporate purposes including acquisitions included amounts december 31 2010 2009 208 million 399 million outstanding committed bank credit agreements provide unsecured borrowings 621 million 994 million respectively addition december 31 2010 2009 company uncommitted bank lines credit provide unsecured borrowings working capital 1359 million 320 million outstanding 1159 million 114 million outstanding respectively weightedaverage interest rates borrowings 28 14 30 respectively 2010 2009 2008 7 debt financing arrangements continued components longterm debt follows february 3 2010 executed 750 million 3year committed revolving credit agreement used general corporate purposes december 31 2010 facility balance outstanding credit facility replaced prior 20 billion 5year committed revolving credit agreement interest rates credit facility variable based libor time borrowing company’s longterm credit rating credit facility includes minimum consolidated interest coverage ratio requirement 30 10 2011 35 10 2012 consolidated interest coverage ratio defined ratio adjusted ebitda consolidated interest expense adjusted ebitda defined consolidated net income interest expense income taxes depreciation amortization intangible assets well noncash restructuring nonrecurring charges losses asset impairments gains losses resulting sale assets ordinary course business consolidated interest expense disclosed financial statements credit facility also includes maximum debt total capital ratio 055 10 total capital defined debt plus equity deferred taxes less future impairment charges none debt instruments include financial ratio covenants october 2008 executed 400 million 3year term loan agreement various banks matures october 2011 january 2009 borrowed 400 million threeyear term loan matures october 2011 repay 300 million note approximately 394 million due january 30 2009 interest rate term loan variable based us libor time borrowing company’s longterm credit rating june 2009 issued longterm debt securities 500 million shelf registration statement filed securities exchange commission 6 38 notes mature june 2014 proceeds used pay balances revolving credit facility net proceeds 4967 million less price discounts 03 million underwriting fees 30 million november 2009 issued 400 million 30month notes due june 2012 used proceeds repay 400 million term loan net proceeds 3984 million less price discounts 04 million underwriting fees 12 million second quarter 2010 repurchased outstanding notes scheduled mature january 15 2011 face value 1594 million loss repurchase 44 million recognized income expense net january 2011 repaid remaining 5906 million outstanding notes matured january 15 2011 using cash hand 7 debt financing arrangements continued debt agreements normal customary events default would permit lenders debt agreement accelerate debt cured within applicable grace periods failure pay principal interest due change control company events default december 31 2010 estimated payments maturing debt next five years december 31 2010 follows 2011 5906 million 2012 4151 million 2013 9846 million 2014 5000 million 2015 none 8 financial instruments january 1 2009 adopted amendment existing authoritative guidance disclosures derivatives hedging asc 815 guidance established disclosure requirements derivative financial instruments hedging activities order provide users financial statements enhanced understanding derivatives used b derivative financial instruments related hedged items accounted c affect financial position financial performance cash flows enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates commodities used raw materials products principal derivative financial instruments enter routine basis foreign exchange contracts addition time enter interest rate swaps commodity swaps derivative financial instruments recorded fair value raw materials used company subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors time enter commodity swaps manage price risk associated forecasted purchase materials used operations account commodity derivatives economic hedges cash flow hedges changes fair value economic hedges recorded directly current period earnings material commodity swaps outstanding december 31 2010 fourth quarter 2009 entered fixed floating interest rate swaps aggregate notional principal amount 400 million second quarter 2009 entered fixed floating interest rate swaps aggregate notional principal amount 500 million interest rate swaps outstanding december 31 2010 2009 notional value totaling 900 million swap agreements hedge changes fair value portion existing fixed rate debt result changes benchmark interest rate us libor swap agreements designated classified fair value hedges accordance authoritative guidance derivatives hedging asc 815 second quarter 2008 entered fixed floating interest rate swaps aggregate notional principal amount 400 million october 2008 terminated settled 2008 interest rate swap agreements recorded 156 million gain amortized income reduction interest expense remaining life debt using effective interest method interest rate swaps outstanding december 31 2008 unrealized gain interest rate swap contracts offsetting unrealized loss related debt 367 million 81 million twelve months ended december 31 2010 2009 respectively enter foreign exchange contracts primarily hedge forecasted sales purchases denominated select foreign currencies thereby limiting currency risk would otherwise result changes exchange rates periods foreign exchange contracts correspond periods forecasted transactions generally exceed 12 15 months subsequent latest balance sheet date also enter foreign exchange contracts hedge risk changes fair value recognized foreign currency denominated assets liabilities 8 financial instruments continued hedge portion net investments certain foreign subsidiaries derivative instruments designated fair value hedges gain loss derivative instrument well offsetting loss gain hedged item recognized line income statement ineffectiveness immaterial effective portions cash flow hedges reported comprehensive income oci recognized statement income hedged item affects earnings ineffective portion hedges recognized current period earnings addition changes fair value economic hedge transactions immediately recognized current period earnings primary foreign currency hedge contracts pertain us dollar canadian dollar euro australian dollar japanese yen british pound sterling gross us dollar equivalent notional amount foreign currency derivative hedges outstanding december 31 2010 9577 million representing net settlement obligation 100 million counterparties derivative contracts major financial institutions subject credit risk contracts equal fair value instruments management currently believes risk incurring losses unlikely losses would immaterial company fair values foreign exchange derivative instruments consolidated balance sheet december 31 2010 2009 effect derivative financial instruments statement income comprehensive income oci twelve months ended december 31 2010 2009 advertising selling general administrative expenses 8 financial instruments continued twelve months ended december 31 2010 2009 ineffective portion cash flow hedges recognized income expense net immaterial company designated certain foreigncurrencydenominated nonderivative financial instruments hedges currency exposure net investments foreign operations accordance authoritative guidance foreign currency translation asc 830 derivatives hedging asc 815 changes net unrealized gains nonderivative financial instruments accumulated comprehensive loss twelve months ended december 31 2010 2009 283 million 52 million respectively 9 fair value measurements assets liabilities measured fair value recurring basis december 31 2010 2009 follows derivatives either foreign exchange contracts recorded fair value hedge currency fluctuations transactions denominated foreign currency interest rate swaps commodity swaps forecasted commodity purchases assets liabilities deferred compensation programs select employees defer compensation death disability termination employment assets liabilities measured fair value using unobservable inputs require significant degree judgment estimates regarding assumptions including limited projected future levels income based management’s plans well business trends prospects market economic conditions result changes fair values could material impact results operations liquidity realized authoritative guidance fair value measurement asc 820 establishes fair value hierarchy prioritizes inputs valuation techniques used measure fair value three levels level 1 inputs highest priority quoted prices active markets identical assets liabilities level 2 inputs reflect quoted prices included level 1 either observable directly corroboration observable market data level 3 inputs unobservable inputs due little market activity asset liability internallydeveloped valuation models fair value company’s longterm debt including current portion determined quoted market prices available using current interest rates consider credit ratings remaining terms maturity fair value longterm debt december 31 2010 approximately 43236 million compared aggregate carrying value 42280 million fair value longterm debt december 31 2009 approximately 44330 million compared aggregate carrying value 44133 million 9 fair value measurements continued 2009 recorded intangible asset impairment charges 925 million refer note 5 “asset impairment charges” additional information accordance asc 820 disclosure assets measured fair value nonrecurring basis 10 267 convertible preferred stock redeemable company’s option 60 million authorized shares preferred stock 160729 171138 shares 267 convertible preferred stock issued outstanding december 31 2010 2009 respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share together holders common stock certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share convertible preferred stock 6601 shares common stock authorized unissued shares common stock reserved issuance upon conversions treasury shares may delivered holders converted 10409 7366 shares preferred stock common stock 2010 2009 respectively company may redeem convertible preferred stock price 3050 per share plus accrued dividends company paid cash dividends 267 per share preferred stock aggregate amount 04 million year ended december 31 2010 05 million years ended december 31 2009 2008 11 capital stock 750 million authorized shares common stock number shares common stock treasury stock share activity follows cash dividends paid common stock years ended december 31 2010 2009 2008 aggregated 1158 million 1517 million 2607 million respectively february 3 2010 made voluntary contribution us defined benefit pension plans 156 million shares common stock held treasury stock fair value 671 million 12 stockbased compensation use stock options performance awards restricted stock units rsus compensate key employees stock awards compensate outside directors awards outstanding three longterm incentive plans employees two directors december 31 2010 grants 2007 longterm incentive plan may made february 27 2017 13 million shares new stockbased awards made 1999 2003 longterm incentive plans 1997 2002 nonemployee director stock option plans existing awards plans continue exercisable stock options exercise prices equal fair value share fortune brands’ common stock date grant options generally may exercised prior one year date grant options awarded prior september 2005 generally expire ten years date grant options awarded september 2005 expire seven years date grant options issued generally vest onethird year threeyear period beginning first anniversary date grant fair value option award estimated date grant using blackscholes optionpricing model based weightedaverage assumptions shown following table determination expected volatility based historical volatility stock period commensurate expected term stock options well relevant factors riskfree interest rate based us government issues remaining term equal expected life stock options weighted average expected term determined based historical employee exercise behavior contractual term options weightedaverage grant date fair value stock options granted twelve months ended december 31 2010 2009 2008 1128 1081 894 respectively twelve months ended december 31 2010 recognized pretax stockbased compensation expense stock options income continuing operations 362 million 248 million tax 016 per basic diluted share twelve months ended december 31 2009 recognized pretax stockbased compensation expense stock options income continuing operations 234 million 170 million tax 011 per basic per diluted share twelve months ended december 31 2008 recognized pretax stockbased compensation expense stock options income continuing operations 233 million 168 million tax 011 per basic diluted share total pretax stockbased compensation expense amounts included advertising selling general administrative expenses consolidated statement income 305 million 208 million 210 million 2010 2009 2008 respectively balance included cost products sold compensation costs capitalized cost products sold material 12 stockbased compensation continued following table summarizes stock options outstanding years ended december 31 2010 2009 2008 well activity twelve months ended intrinsic value stock options exercised twelve months ended december 31 2010 2009 2008 210 million 23 million 111 million respectively source shares issued treasury stock b december 31 2010 weightedaverage remaining contractual life options outstanding 39 years aggregate intrinsic value options outstanding 1111 million options outstanding exercisable december 31 2010 follows december 31 2010 weighted average remaining contractual life options exercisable 32 years aggregate intrinsic value options exercisable 436 million options outstanding exercisable december 31 2010 2009 2008 follows 12 stockbased compensation continued summary activity nonvested stock options years ended december 31 2010 2009 2008 well activity twelve months ended follows remaining unrecognized compensation cost related unvested awards december 31 2010 approximately 283 million weightedaverage period time cost recognized 17 years fair value options vested twelve months ended december 31 2010 228 million use stock awards compensate outside directors 2005 nonemployee director stock plan awards issued annually second quarter part compensation outside directors addition outside directors may elect director’s fees paid stock compensation cost expensed time award based fair value share fortune brands’ stock date award twelve months ended december 31 2010 awarded 18900 shares common stock outside directors weighted average fair value date award 5383 pretax compensation cost 10 million twelve months ended december 31 2009 awarded 27000 shares common stock outside directors weighted average fair value date award 3876 pretax compensation cost 10 million twelve months ended december 31 2008 awarded 13326 shares common stock outside directors weighted average fair value date award 6751 pretax compensation cost 09 million performance awards granted certain officers company represent right receive unrestricted shares stock based achievement targeted cumulative diluted earnings per share average consolidated return invested capital compensation cost amortized expense performance period based probability meeting performance targets fair value performance award based stock price date grant 12 stockbased compensation continued following table summarizes performance awards outstanding three years ended december 31 2010 2009 2008 well activity twelve months ended pretax compensation cost performance awards recorded twelve months ended december 31 2010 140 million 87 million tax pretax compensation cost performance awards recorded twelve months ended december 31 2009 100 million 62 million tax nominal benefit pretax compensation cost performance awards recorded twelve months ended december 31 2008 result reductions related lower expected incentive program payouts remaining unrecognized pretax compensation costs related unvested awards december 31 2010 approximately 27 million weightedaverage period time cost recognized 17 years issued 11106 shares common stock treasury shares performance awards twelve months ended december 31 2010 cash shares issued performance awards twelve months ended december 31 2009 cash used settle performance awards twelve months ended december 31 2008 11 million addition payment cash issued 67035 shares common stock treasury shares twelve months ended december 31 2008 rsus granted certain officers company represent right receive unrestricted shares stock based service compensation cost amortized expense service period fair value rsu granted equal share price date grant summary company’s rsu activity years ended december 31 2010 2009 follows 12 stockbased compensation continued pretax compensation cost rsus recorded twelve months ended december 31 2010 2009 2008 40 million 25 million tax 63 million 39 million tax 15 million 09 million tax respectively remaining unrecognized pretax compensation costs related rsus december 31 2010 approximately 16 million weightedaverage period time cost recognized 17 years twelve months ended december 31 2010 issued 38959 shares common stock treasury shares settle rsus shares issued rsus 2009 2008 shares available issuance connection future awards company’s stock plans december 31 2010 2009 2008 5383931 6840158 8779347 respectively authorized unissued shares reserved issuance connection awards treasury shares may delivered 13 pension retiree benefits number pension plans principally united states covering many company’s employees plans provide payment retirement benefits mainly commencing ages 55 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service andor earnings employer contributions plans made necessary ensure legal funding requirements satisfied addition time may make contributions excess legal funding requirements 13 pension retiree benefits continued company provides postretirement health care life insurance benefits certain retirees many employees retirees outside united states covered government health care programs amounts recognized balance sheet consist 13 pension retiree benefits continued amounts accumulated comprehensive income balance sheet yet recognized components net periodic benefit cost follows amounts accumulated comprehensive income expected recognized components net periodic benefit cost next fiscal year shown pension benefit obligation accumulated benefit obligation fair value plans assets pension plans accumulated benefit obligations excess plan assets underfunded abo shown 13 pension retiree benefits continued components net periodic benefit cost follows assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint change assumed health care cost trend rates would following effects 13 pension retiree benefits continued plan assets pension assets major category plan assets type fair value measurement december 31 2010 follows reconciliation level 3 measurements 2010 follows 13 pension retiree benefits continued pension assets major category plan assets type fair value measurement december 31 2009 follows reconciliation level 3 measurements 2009 follows defined benefit trusts variety assets including equity fixed income real estate securities well group annuityinsurance contracts fundofhedge funds equity securities traded national stock exchanges valued daily closing prices fixed income securities valued daily closing prices institutional midevaluation prices provided independent industryrecognized pricing sources real estate securities valued based recent market appraisals underlying property well valuation methodologies determine probable cash price competitive market valuations group annuityinsurance contracts fundofhedge funds based daily closing prices underlying securities institutional evaluation prices consistent industry practices investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility master trusts established hold assets domestic defined benefit plans us defined benefit asset allocation policy trusts allows equity allocation 45 75 fixed income allocation 25 50 cash allocation 25 investments 20 nonus investment trust targets may differ depending country allowing 90 equity 100 fixed investments 20 real estate asset allocations based underlying 13 pension retiree benefits continued liability structure local regulations retirement asset allocations reviewed periodically ensure allocation meets needs liability structure expected 82 blended longterm rate return plan assets determined based longterm historical performance plan assets current asset allocation projected longterm rates return pension investment consultants defined contribution plan contributions sponsor number defined contribution plans contributions determined various formulas cash contributions related plans amounted 339 million 308 million 298 million 2010 2009 2008 respectively estimated future retirement benefit payments following retirement benefit payments reflect expected future service expected paid estimated future retirement benefits payments estimates could change significantly based differences actuarial assumptions actual events decisions related lump sum distribution options available participants certain plans 14 lease commitments future minimum rental payments noncancelable operating leases december 31 2010 follows total rental expense operating leases reduced minor amounts subleases amounted 715 million 719 million 679 million 2010 2009 2008 respectively 15 income taxes components income loss continuing operations income taxes follows reconciliation income taxes 35 federal statutory income tax rate income taxes continuing operations follows effective tax rate 2010 favorably impacted due final settlement us spanish federal income tax audits taxfree treatment indemnification income received connection settlement spanish income tax audits effective tax rate 2010 unfavorably impacted higher proportion domestic income 2010 taxed higher rate relative foreign income effective income tax rate 2009 favorably impacted tax benefits restructuring charges relative lower taxed income charges income tax rate 2009 unfavorably impacted net tax expense 133 million related correction prior year items determined immaterial years relate 2010 spanish tax authorities issued three assessments tax andor interest spanish spirits companies include assets acquired pernod ricard july 2005 assessments related 19881990 20042006 periods majority related preacquisition tax years spanish tax authorities issued net assessments approximately 422 million 275 million tax 147 million related interest paid july october december 2010 pursuant acquisition agreement negotiated received 371 million tax indemnification payments pernod ricard related assessments recorded payments income expense net difference represents items company receive future income tax benefits also 2010 company settled 20042005 irs audit appeal irs concluded routine examination company’s 20062007 tax years 15 income taxes continued result conclusion abovementioned us spanish audit examinations recorded approximately 465 million previously unrecognized tax benefits net current deferred taxes net income tax benefit included “net adjustments uncertain tax positions” line item tax rate reconciliation 2008 congressional joint committee taxation completed review tax refund associated capital loss carryforward item favorably resolved irs administrative proceeding relating 20012002 federal tax returns unrecognized tax benefits utbs approximately 768 million reversed income relating approval refund associated 20012002 federal tax returns fourth quarter 2008 received refund accrued interest totaling 932 million additionally final settlement audit 20012002 federal tax returns removed uncertainty relating utilization capital loss carryforward reversed 144 million utbs relating utilization portion capital loss carryforward 2007 capital gain sale us distribution rights dalmore scotch whisky recorded income discontinued operations reversal 987 million utbs associated utilization portion capital loss carryforward capital gain sale us wine business reconciliation beginning ending amount utbs follows amount utbs recognized december 31 2010 would affect company’s effective tax rate 1331 million reasonably possible within next twelve months total utbs may decrease range 5 million 20 million primarily result conclusion us federal state foreign income tax proceedings classify interest penalties accruals related utbs income tax expense year ended december 31 2010 company recognized interest penalty benefit approximately 130 million primarily driven audit resolutions years ended december 31 2009 2008 company recognized 56 million 144 million interest penalty expense december 31 2010 2009 accruals payment interest penalties 487 million 820 million respectively company subsidiaries file income tax returns us federal jurisdiction various states foreign jurisdictions us internal revenue service irs currently examining company’s 2008 2009 federal income tax returns however company technically subject irs examination years 2006 2009 due unexpired statute limitations periods company one subsidiaries tax years remain open subject examination tax authorities following major taxing jurisdictions canada years 2000 france years 2007 mexico years 2001 spain years 2005 united kingdom years 2004 15 income taxes continued income taxes follows components net deferred tax assets liabilities follows accordance authoritative guidance accounting income taxes asc 740 deferred taxes classified balance sheet december 31 2010 2009 december 31 2010 2009 company deferred tax assets relating net operating loss capital loss tax carryforwards 2986 million 1212 million respectively approximately 2196 million expire 2013 2015 remainder expire 2016 thereafter increase tax carryforward amount primarily driven capital loss carryover deferred tax asset 205 million resulting sale cobra golf 15 income taxes continued product line company provided valuation allowance reduce carrying value certain deferred tax assets management concluded based available evidence likely deferred tax assets fully realized full valuation allowance established abovementioned capital loss carryover provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest undistributed earnings foreign subsidiaries considered permanently reinvested 4877 million aggregate december 31 2010 quantification associated deferred tax liability undistributed earnings made determination liability practicable 16 balance sheet information supplemental information yearend balance sheets follows accrued expenses current liabilities include accruals advertising promotion insurance restructuring benefit accruals 17 guarantees commitments guarantee 50 certain credit facilities maxxium españa sl amount 90 million approximately 120 million denview ltd amount 90 million approximately 120 million maxxium cyprus ltd amount 40 million approximately 54 million reflecting ownership joint ventures teg liability related guarantees material bgsw teg also uncommitted multicurrency shareholder loan facility bgswteg joint ventures share 50 15 million approximately 201 million 17 guarantees commitments continued also guarantee lease acco world corporation office products business divested spinoff 2005 guaranteed lease payments total approximately 159 million april 2013 liability related guarantee material purchase obligations company december 31 2010 purchase obligations include contracts raw materials finished goods purchases advertising selling administrative services capital expenditures 18 restructuring charges pretax restructuring charges twelve months ended december 31 2010 “other charges” represent charges directly related restructuring initiatives cannot reported restructuring us gaap costs may include losses disposal inventories trade receivables allowances exiting product lines accelerated depreciation resulting closure facilities b advertising selling general administrative expenses pretax restructuring charges 413 million 2010 primarily related additional organizational streamlining initiatives spirits business 260 million product line integration facility consolidations home security business 125 million charges consisted 236 million workforce reductions 63 million primarily accelerated depreciation facilities closed 114 million lease contract termination costs pretax restructuring charges twelve months ended december 31 2009 “other charges” represent charges directly related restructuring initiatives cannot reported restructuring us gaap costs may include losses disposal inventories trade receivables allowances exiting product lines accelerated depreciation resulting closure facilities b advertising selling general administrative expenses 18 restructuring charges continued pretax restructuring charges spirits business 2009 251 million primarily related business repositioning including strategic sales distribution initiatives international markets us supply chain activities consisted 195 million work force reductions 56 million contract termination costs spirits charges primarily associated business repositioning including realignment us business fully integrated category business teams reduction number international regions four three home security business restructuring charges 520 million primarily due supply chain realignment capacity cost reduction initiatives including announced closure seven additional us manufacturing facilities well workforce reductions home security restructuring charges 218 million primarily consisted 115 million workforce reductions 52 million fixed assets writedowns 51 million lease contract termination costs home security charges consisted primarily accelerated depreciation associated facilities closed golf business restructuring charges 313 million twelve months ended december 31 2009 primarily due companywide workforce reduction 292 million closure shoe manufacturing facility 13 million golf charges primarily associated closure shoe manufacturing facility corporate charges related disposal fixed assets pretax restructuring charges twelve months ended december 31 2008 “other charges” represent charges directly related restructuring initiatives cannot reported restructuring us gaap costs may include losses disposal inventories trade receivables allowances exiting product lines accelerated depreciation resulting closure facilities b advertising selling general administrative expenses pretax charges spirits business 2008 636 million related business repositioning including supply chain activities sales distribution initiatives restructuring charges related asset writedowns 82 million employeerelated costs 147 million lease contract termination costs 94 million spirits charges twelve months ended december 31 2008 313 million primarily costs organizational repositioning strategic routetomarket initiative us pretax charges 2008 home security business 556 million primarily due efforts align costs capacity marketplace conditions including announced closure six additional us manufacturing facilities well exit select lowreturn product offerings 2008 restructuring charges consisted 249 million workforce reduction costs 214 million tangible intangible asset writedowns 32 million contract termination costs cost products sold charges inventory writedowns associated exited markets product lines advertising selling general administrative charges consisted retention costs offset favorable translation adjustments related substantial liquidation foreign entity 83 million 18 restructuring charges continued reconciliation restructuring liability cash expenditures asset writedowns include proceeds received asset disposals b noncash writeoffs include longlived asset impairment charges attributable restructuring actions impact foreign exchange rate changes workforce reduction costs related noncash benefit plan curtailments settlements cash expenditures asset writedowns include proceeds received asset disposals b noncash writeoffs include longlived asset impairment charges attributable restructuring actions impact foreign exchange rate changes workforce reduction costs benefited noncash benefit plan curtailment gains 19 information business segments report operating segments spirits home security golf based organized segments within company making operating decisions assessing performance based markets served company’s operating segments types products segment derives revenues described spirits includes products made marketed distributed beam global spirits wine inc subsidiaries affiliates home security includes kitchen bathroom faucets accessories manufactured marketed distributed moen incorporated subsidiaries affiliates kitchen bath cabinetry manufactured marketed distributed masterbrand cabinets inc subsidiaries affiliates residential entry door patio door systems designed manufactured thermatru corp subsidiaries affiliates vinylframed windows manufactured marketed distributed simonton holdings inc subsidiaries affiliates locks tool storage organization products manufactured marketed distributed storage security business comprised master lock waterloo product lines golf includes golf balls golf clubs golf shoes gloves manufactured marketed distributed acushnet company subsidiaries affiliates company’s subsidiaries operate principally united states canada europe primarily spain united kingdom france australia mexico 19 information business segments continued corporate expenses include salaries benefits expenses related corporate office employees functions benefit operating segments corporate expenses include expenses directly allocable reportable segments allocating indirect expenses operating segments would require imprecise allocation methodology amounts elimination reversal transactions reportable segments b based country destination c corporate assets include cash certain receivables related taxes insurance claims cash surrender value life insurance policies corporate assets include assets directly allocable reportable segments allocating indirect assets operating segments would require imprecise allocation methodology 19 information business segments continued 20 quarterly financial data unaudited millions except per share amounts 21 income expense net components income expense net years ended december 31 2010 2009 2008 follows refer note 15 “income taxes” additional information b refer note 6 “related party transactions” additional information 22 earnings per share basic earnings per common share given year based weightedaverage number common shares outstanding year preferred stock dividend requirements satisfied diluted earnings per common share assume convertible preferred shares 22 earnings per share continued outstanding beginning year converted dates preferred stock dividend requirements outstanding common shares adjusted accordingly also assumes outstanding common shares increased shares issuable upon exercise stock options market price exceeds exercise price less shares could purchased company related proceeds computations basic diluted earnings per common share follows 23 accumulated comprehensive loss total accumulated comprehensive loss consists net income changes stockholders’ equity transactions events sources stockholders includes currency translation gains losses unrealized gains losses derivative instruments designated cash flow hedges pension postretirement adjustments components changes accumulated comprehensive loss follows 24 pending litigation tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation bw time whollyowned subsidiary bat industries plc connection sale bw atco subsequently merged bw agreed indemnification agreement indemnification agreement indemnify fortune brands inc claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company “indemnitor” indemnification agreement indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations company defendant number actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however believe number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor believe pending actions material adverse effect upon results operations cash flows financial condition believe meritorious defenses company indemnified indemnification agreement callaway litigation 2006 callaway litigation february 9 2006 callaway golf company callaway filed lawsuit seeking unspecified damages company’s subsidiary acushnet company acushnet united states district court district delaware 2006 callaway litigation callaway alleged pro v1 golf balls manufactured acushnet infringed four callaway’s patents december 2007 trial validity nine claims contained four patents tried jury returned mixed verdict finding one claim invalid eight claims valid november 10 2008 trial court issued order enjoining sales 2007 pro v1 golf balls january 1 2009 acushnet appealed united states court appeals federal circuit august 14 2009 court appeals overturned judgment vacated injunction sent case back district court appeals also found district court erred rejecting acushnet defense trial 24 pending litigation continued march 29 2010 following new trial jury found favor acushnet counts specifically jury concluded acushnet liable patents asserted callaway invalid obvious anticipated earlier patents following trial callaway filed motion asking court enter judgment matter law favor alternatively grant new trial validity callaway patents court currently considering posttrial motion 2009 callaway litigation late 2008 acushnet introduced believes noninfringing pro v1 balls february 2009 acushnet introduced new improved versions pro v1 balls also believes noninfringing march 3 2009 callaway filed another lawsuit seeking unspecified damages acushnet united states district court district delaware 2009 callaway litigation callaway alleged acushnet’s modified pro v1 balls acushnet’s new 2009 versions pro v1 balls infringe two additional patents owned callaway march 3 2009 acushnet also filed lawsuit seeking unspecified damages callaway united states district court district delaware acushnet alleged several callaway ball models infringe nine acushnet patents proceedings us patent trademark office separate proceedings february 19 2006 acushnet filed requests us patent trademark office pto reexamination four patents asserted callaway 2006 callaway litigation pto issued final office actions finding four patents invalid callaway subsequently filed appeals regarding four patents patent board appeals patent board appeals conducted hearing january 19 2011 decision expected later year regard patents asserted callaway 2009 callaway litigation acushnet also filed request reexamination pto accepted reexaminations issued office actions reject claims patents invalid multiple grounds believe acushnet meritorious defenses litigation brought callaway matters vigorously contested given favorable jury verdict first callaway suit favorable developments pto respect validity patents asserted callaway patent suits well speculative nature damages asserted callaway suits possible time assess likelihood adverse outcome determine reasonable estimate range estimates potential damages decided unfavorably however litigation could material adverse effect results company’s operations cash flows financial conditions litigation addition lawsuits described company subsidiaries defendants lawsuits associated normal conduct businesses operations possible predict outcome pending actions litigation possible actions could decided unfavorably believe meritorious defenses actions material adverse effect upon results operations cash flows financial condition actions vigorously contested 25 environmental subject laws regulations relating protection environment possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts subsidiaries may undertake future due uncertainties status laws regulations technology information related individual sites involved numerous remediation actions clean hazardous wastes required federal state laws based evaluation cleanup cost estimates compliance programs believe reasonable possibility material loss exceeding amounts already recognized may incurred liabilities remediation costs site based best estimate undiscounted future costs excluding possible insurance recoveries third parties 26 subsequent event first quarter 2011 company entered uncommitted lines credit totaling 200 million seasonal working capital needs one uncommitted lines credit references financial ratio covenant revolving credit agreement report independent registered public accounting firm board directors shareholders fortune brands inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position fortune brands inc subsidiaries december 31 2010 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois february 23 2011 shareholders fortune brands inc prepared consolidated balance sheets fortune brands inc subsidiaries december 31 2010 2009 related consolidated statements income cash flows equity three years period ended december 31 2010 financial statements prepared accordance accounting principles generally accepted united states america financial information elsewhere annual report form 10k consistent financial statements internal control financial reporting company subsidiaries designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles includes policies procedures 1 pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company 2 provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company 3 provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements company’s stockholders annually ratify appointment company’s independent registered public accounting firm pricewaterhousecoopers llp audit performed accordance standards public company accounting oversight board united states audit committee board directors consisting solely independent directors meets periodically independent auditors internal auditors management review accounting auditing financial reporting matters auditors direct access audit committee bruce carbonari bruce carbonari chairman board chief executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer item 9item 8 financial statements supplementary data beam inc subsidiaries consolidated statement income see notes consolidated financial statements beam inc subsidiaries consolidated balance sheet see notes consolidated financial statements beam inc subsidiaries consolidated statement cash flows see notes consolidated financial statements beam inc subsidiaries consolidated statement equity total comprehensive income attributable beam inc 6715 million 5274 million 5094 million years ended december 31 2011 2010 2009 respectively see notes consolidated financial statements beam inc subsidiaries notes consolidated financial statements 1 description business basis presentation summary significant accounting policies description business beam inc subsidiaries “company” operate beverage alcohol industry references “we” “our” “us” “beam” “the company” refer beam inc consolidated subsidiaries whole unless context otherwise requires company’s reportable segments north america europemiddle eastafrica “emea” asiapacificsouth america “apsa” discussed note 22 segment information company leading premium spirits company makes sells branded distilled spirits products major markets worldwide principal products include bourbon whiskey scotch whisky canadian whisky tequila cognac rum cordials readytodrink premixed cocktails following completion spinoff discussed note 3 discontinued operations effective 1201 new york city time october 4 2011 fortune brands inc changed name beam inc name change effected pursuant section 253 delaware general corporation law merging beam inc whollyowned subsidiary fortune brands inc fortune brands inc company continuing surviving corporation merger outstanding shares company common stock continued trade new york stock exchange new symbol “beam” basis presentation basis consolidation consolidated financial statements include accounts beam inc elimination intercompany transactions majorityowned subsidiaries use estimates presentation financial statements accordance generally accepted accounting principles us “gaap” requires us make estimates assumptions affect reported amounts related disclosures actual results future periods could differ estimates reclassifications made prior year financial information conform current year presentation revenue net excise tax discussed changes basis presentation accounting presentation advertising marketing expenses separate selling general administrative expenses “sga” presentation home security golf businesses discontinued operations discussed changes basis presentation accounting changes basis presentation accounting results operations home security golf businesses reclassified discontinued operations accompanying statement income years ended december 31 2011 2010 2009 assets liabilities home security golf businesses reclassified discontinued operations accompanying consolidated balance sheet december 31 2010 cash flows discontinued operations years ended december 31 2011 2010 2009 separately stated classified accompanying consolidated statement cash flows footnote disclosures relate continuing operations except noted otherwise information business segments include discontinued operations accordance authoritative accounting guidance company allocated corporate overhead discontinued operations however allocated interest expense accordance gaap taxes collected customers remitted governmental authorities may presented either gross basis included sales costs net basis excluded sales 2011 changed presentation excise taxes gross method net method refer presentation excise tax net basis “net sales” financial statements change presentation net method preferable consistency comparison internal beam financial statements reviewed management evaluate business also external financial statements standalone spirits companies historical periods reclassified conform new presentation beam inc subsidiaries notes consolidated financial statements continued summary significant accounting policies revenue recognition revenue recorded persuasive evidence arrangement exists delivery occurred price fixed determinable collectability reasonably assured revenue recorded net applicable provisions discounts allowances referred financial statements “sales” record estimates reductions revenue customer programs incentives including price discounts volumebased incentives promotions advertising allowances cost goods sold cost goods sold includes costs make products saleable inbound outbound freight purchasing receiving costs inspection costs internal transfer costs addition depreciation expense associated assets used produce goods make saleable included cost goods sold customer program costs customer programs incentives common practice business incur customer program costs promote sales products maintain competitive pricing customer program costs incentives including rebates promotion volume allowances generally accounted either “sales” “advertising marketing expense” later time program initiated revenue recognized costs recognized “sales” include limited volume allowances rebates promotional allowances costs typically recognized “advertising marketing expense” include point sale materials media costs recorded later time sale implementation program based management’s best estimates based historical projected experience type program customer volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough support management periodically reviews accruals rebates allowances adjusts accruals circumstances indicate typically result change volume expectations advertising costs advertising costs include media costs point sale materials product endorsements generally expensed incurred advertising costs recorded “advertising marketing expense” 3023 million 2517 million 2267 million 2011 2010 2009 respectively selling general administrative expense selling general administrative expense includes selling including commissions research development general administrative expenses research development research development expenses include product development product improvement product engineering process improvement costs total research development costs charged expense 25 million 16 million 13 million 2011 2010 2009 respectively stockbased compensation recognize stockbased compensation expense measured fair value award date grant financial statements period employee required provide services exchange award see note 5 stockbased compensation additional information beam inc subsidiaries notes consolidated financial statements continued cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts record allowance doubtful accounts based variety factors historical writeoffs aging balances andor specifically identified risks estimated losses resulting inability customers make required payments allowance discounts doubtful accounts continuing operations 98 million 109 million december 31 2011 2010 respectively inventories record inventory firstin firstout “fifo” method accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns product spoilage specific identification items product discontinuance regulatoryrelated changes property plant equipment property plant equipment stated cost less accumulated depreciation generally calculated using straightline method estimated useful lives assets gains losses resulting dispositions included operating income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred assets held use disposed future date depreciated remaining useful life assets sold written fair value time assets actively marketed sale december 31 2011 2010 carrying value assets held sale material estimated useful lives related assets follows longlived assets test longlived asset including amortizable identifiable intangible assets asset group recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows marketparticipant basis goodwill indefinitelived intangible assets accordance authoritative guidance goodwill intangible assets goodwill amortized tested impairment least annually fourth quarter written impaired interim impairment test performed event occurs conditions change would likely reduce fair value reporting unit carrying value result separation transactions corresponding change operating segments reevaluated reporting units allocated goodwill new reporting units completed interim goodwill impairment test result interim impairment test company concluded impairment goodwill existed 2011 adopted new authoritative accounting guidance allows us first assess qualitative factors determine whether necessary perform twostep quantitative goodwill impairment test longer required calculate fair value reporting unit unless determine based qualitative assessment likely beam inc subsidiaries notes consolidated financial statements continued fair value less carrying amount determine based qualitative assessment likely fair value reporting unit less carrying amount evaluate recoverability goodwill estimating future cash flows reporting units goodwill relates discount future cash flows marketparticipantderived weightedaverage cost capital determining estimated future cash flows consider current projected future levels income based management’s plans business trends prospects market economic conditions marketparticipant considerations reporting units operating segments estimated fair value reporting unit less carrying value measure recognize amount goodwill impairment loss impairment losses limited carrying value goodwill represent excess carrying value reporting unit’s goodwill implied fair value goodwill implied fair value reporting unit’s goodwill estimated based hypothetical allocation reporting unit’s fair value underlying assets liabilities accordance authoritative guidance goodwill intangible assets cash flow projections significantly influenced longerterm market growth rates particular spirits categories geographies expected profit margins result qualitative assessment completed december 31 2011 company concluded impairment goodwill exists amortize purchased intangible assets goodwill useful lives unless lives determined indefinite determination useful life intangible asset goodwill based factors including historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated least annually determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually fourth quarter whenever market business events indicate may potential impairment intangible impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party remaining useful life company recorded impairment indefinitelived tradenames 313 million 925 million 2011 2009 respectively refer note 12 goodwill intangible assets information december 31 2011 impairment charge two tradenames impaired 2011 aggregate book value 1574 million significant estimates assumptions influence fair value tradename include expected branded product sales included operating plans longerterm market growth rates particular spirits categories geographies expected profit margins products sold using brands terminal value revenue growth rates weighted average cost capital investments make investments include joint ventures either complement expand existing businesses accordance authoritative guidance investments equity method accounting used account investments company ability exercise significant influence operating financial policies joint venture record share joint venture’s income increase investment dividends received reduction investment record share joint venture’s earnings income expense equity method requires impairment losses recognized temporary losses investment value carrying value pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits amounts recorded plans based various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets recognizes difference expected return actual return plan assets fiveyear period discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments expected rate return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases effects actuarial deviations assumptions generally accumulated outside specified corridor amortized remaining service period employees active plans expected remaining life participants plans substantially frozen cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining beam inc subsidiaries notes consolidated financial statements continued service period related employees believe assumptions utilized recording obligations company’s plans presented note 17 pension postretirement benefits reasonable based experience however differences actual experience changes assumptions may materially affect company’s financial position results operations income taxes establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse record valuation allowance reducing deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest record liabilities uncertain income tax positions based two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ estimates future periods changes facts circumstances new information may require us change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur foreign currency translation foreign currency balance sheet accounts translated us dollars actual rates exchange balance sheet date income expenses translated average rates exchange effect period foreign subsidiaries local currency functional currency related translation adjustments made directly separate component “accumulated comprehensive income loss” “aoci” caption stockholders’ equity transactions denominated currency functional currency subsidiary translated functional currency resulting transaction gains losses recorded income expense derivative financial instruments derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge highly effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded aoci recognized statement income hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings recently issued accounting standards fair value measurement may 2011 fasb issued new guidance fair value measurement disclosure requirements asu 201104 fair value measurements topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs guidance results consistent definition fair value common requirements measurement disclosure fair value gaap international financial reporting standards ifrs guidance effective interim annual periods beginning december 15 2011 calendar year 2012 beam believe adoption guidance material impact financial statements disclosures presentation comprehensive income june 2011 fasb issued asu 201105 statement comprehensive income guidance requires entities present items net income comprehensive income either one continuous statement two separate consecutive statements new presentation requirements effective public entities beginning fiscal year begins december 15 2011 calendar year 2012 beam full retrospective application required early adoption permitted believe adoption guidance material impact results operations financial position beam inc subsidiaries notes consolidated financial statements continued 2 acquisitions dispositions acquisitions 2011 march 2011 acquired skinnygirl readytodrink cocktail business acquisition included inventory identifiable intangible assets recorded estimated fair value contingent consideration based achievement certain sales targets acquisition date subsequent acquisition recorded increase 28 million estimated contingent consideration liability “selling general administrative expense” accompanying consolidated statement income future periods company may required record contingent consideration amount excess approximately 2 million change estimated liability contingent consideration increase decrease operating income future periods dispositions 2011 refer note 3 discontinued operations information separation transactions described note 3 discontinued operations dispositions 2010 december 2010 sold cockburn’s port brand related us uk portugal inventory connection sale recorded pretax loss 74 million 68 million tax august 2010 sold certain nonstrategic german spirits brands related assets connection sale recorded pretax loss 86 million 124 million tax proceeds two dispositions 492 million acquisitions 2009 april 2009 paid 499 million approximately 662 million net cash acquired purchase 100 interests seven subsidiaries maxxium worldwide bv “maxxium” former international spirits sales distribution joint venture acquisitions accounted using purchase method accordance authoritative guidance business combinations addition paid 309 million approximately 417 million acquire 50 ownership five alliance joint venture entities edrington group “teg” maxxium joint venture partner entities accounted equity method additional information refer note 4 investments unconsolidated affiliated companies june 2009 acquired effen superpremium vodka brand related assets sazerac company inc conjunction transaction sold old taylor whiskey brand assets sazerac beam inc subsidiaries notes consolidated financial statements continued 3 discontinued operations october 3 2011 beam inc formerly fortune brands inc “fortune brands” completed spinoff “spinoff” fortune brands home security inc “home security” effectuate spinoff 1159 pm new york city time october 3 2011 company paid pro rata dividend one share common stock par value 001 per share home security share common stock par value 3125 per share company outstanding 600 pm new york city time record date september 20 2011 spinoff completed without payment consideration exchange shares company’s stockholders october 4 2011 result spinoff home security became independent public company trading symbol “fbhs” new york stock exchange spinoff completed pursuant separation distribution agreement company home security dated september 27 2011 “separation agreement” terms separation agreement immediately prior effective time spinoff home security paid cash dividend company amount 500 million using proceeds new debt financing arrangement entered home security july 29 2011 company completed sale golf business company formed fila korea ltd mirae asset private equity korea cash purchase price 1275 billion excludes cash sold includes payment working capital adjustment received october 2011 spinoff sale golf business together referred herein “separation transactions” april 2010 sold cobra golf product line puma north america inc 889 million following table summarizes results home security golf businesses date disposition years ended december 31 2011 2010 2009 millions second quarter 2011 recorded 2153 million reduction valuation allowance related golf business previously established respect capital loss carryforward valuation allowance reduced utilized capital loss carryforward offset capital gains associated sale also result sale golf business second quarter 2011 provided deferred tax expense 247 million related expected repatriation undistributed foreign earnings expected gains associated sale foreign subsidiary stock deemed taxable us dividends interest expense associated company’s outstanding debt allocated discontinued operations based ratio net assets home security golf businesses sum company’s total net assets plus consolidated debt directly attributable operations company amount interest expense allocated discontinued operations years ended december 31 2011 2010 2009 462 million 695 million 715 million respectively beam inc subsidiaries notes consolidated financial statements continued following table summarizes assets liabilities home security golf businesses included discontinued operations year ended december 31 2010 millions 4 investments unconsolidated affiliated companies prior april 1 2009 beam owned 25 interest maxxium international spirits sales distribution joint venture equal partners maxxium rémy cointreau sa “rémy” vin sprit group “vs” teg accordance settlement agreement executed september 2008 march 30 2009 rémy vs exited joint venture beam became 50 owner maxxium teg accounted maxxium using equity method 2009 received distributions maxxium totaling 429 million approximately 584 million 2011 2009 recorded gains 102 million 125 million respectively representing distributions excess carrying value september 2008 beam teg entered agreement establishing international distribution alliance combination jointlyowned companyowned sales forces 20 markets accordance distribution alliance beam teg acquired portions certain distribution companies previously whollyowned maxxium operations new alliance began april 1 2009 alliance simplified international routes market gives us greater control distribution alliance provides beam teg joint 5050 ownership sales distribution companies certain markets beam whollyowned teg whollyowned distribution companies distribute companies’ products third party products certain markets april 2009 paid 499 million approximately 662 million net cash acquired purchase 100 interests seven maxxium subsidiaries acquisitions accounted using purchase method accordance authoritative guidance business combinations addition paid 309 million approximately 417 million acquire 50 ownership five alliance joint venture entities accounted equity method investment affiliates amounts due payable unconsolidated affiliated companies identified related party amounts accompanying consolidated balance sheet refer note 18 commitments contingencies guarantees information guarantees certain credit loan facilities 50 owned foreign joint ventures beam inc subsidiaries notes consolidated financial statements continued 5 stockbased compensation use stock options performance share awards “psus” restricted stock units “rsus” compensate key employees stock awards compensate outside directors december 31 2011 5955748 shares available issuance connection future awards company’s stock plans approved stockholders stock option stock appreciation right granted company’s stock plans reduce number shares available future grants onethird share subject option stock appreciation right authorized unissued shares reserved issuance connection awards treasury shares may historically delivered following table summarizes stockbased compensation expense continuing operations years ended december 31 2011 2010 2009 millions amount relates modification certain outstanding fortune brands equity awards august 2011 antidilution provisions anticipation conversion awards beam home security equity awards fortune brands equity awards modified third quarter 2011 add antidilutive protection provisions anticipation spinoff additional expense determined comparing fair values awards prior immediately modification stockbased compensation costs capitalized inventory material years ended december 31 2011 2010 2009 connection spinoff provided company’s equity plans number stock options rsus psus outstanding spinoff exercise prices stock options adjusted maintain fair value awards stock options vested prior spinoff split beam andor home security equity awards using conversion ratios determined separation agreement conversion ratios based ratios prespin fortune brands closing price beam home security three day volumeweighted average price postspin nonvested stock options held beam employees number options exercise prices modified using aforementioned ratio pre postspin beam inc stock prices nonvested rsus adjusted using ratio nonvested performance share awards converted rsu awards adjusted manner nonvested rsu awards addition nonvested equity awards relating company’s employees became employees home security terminated home security replaced fortune awards stock combined impact award activity collectively referred “adjustments” adjustments resulted aggregate decrease approximately 23 million equity awards separately included line item “adjustment due spinoff” tables follow modifications outstanding equity awards date spinoff made pursuant existing antidilution provisions company’s equity plans result additional compensation expense beam inc subsidiaries notes consolidated financial statements continued stock options exercise prices stock options equal fair value share beam inc common stock date grant plan provisions require exercise prices adjusted certain events spinoff options generally may exercised prior one year date grant options awarded prior september 2005 generally expire ten years date grant options awarded september 2005 expire seven ten years date grant options issued generally vest equal installments three four year period fair value option award estimated date grant using blackscholes optionpricing model based weightedaverage assumptions shown following table volatility assumptions used determine fair value modified awards august 2011 options granted august 2011 based analysis historical implied volatility publiclytraded companies similar characteristics including industry stage life cycle size financial leverage volatility used historical volatility fortune brands representative beam inc’s expected volatility standalone spirits company volatility assumptions used determine fair value awards prior august 2011 based historical volatility fortune brands inc’s stock price period commensurate expected term stock options well relevant factors riskfree rate assumptions based us government issues remaining term equal expected life stock options expected term assumptions used determine fair value awards august 2011 based simplified method expected term assumptions used determine fair value modified awards august 2011 based simplified method adjusted time already elapsed vested shares awards prior august 2011 weighted average expected term determined based historical employee exercise behavior contractual term options following table summarizes stock option activity year ended december 31 2011 weightedaverage exercise price stock options included line item “adjustment due spinoff” equal prespinoff weightedaverage exercise price stock options reduced adjustments weightedaverage exercise price stock options outstanding exercisable vested expected vest december 31 2011 also reflects decrease exercise price result adjustments weightedaverage grant date fair value stock options granted years ended december 31 2011 2010 2009 1497 1128 1081 respectively intrinsic value stock options exercised years ended december 31 2011 2010 2009 325 million 210 million 23 million respectively beam inc subsidiaries notes consolidated financial statements continued performance share awards performance share awards granted select management employees company represent right receive unrestricted shares stock based achievement targeted cumulative diluted earnings per share average consolidated return invested capital compensation cost amortized expense performance period generally three years based probability meeting performance targets fair value performance share award based stock price date grant probability meeting performance targets following table summarizes nonvested performance share awards december 31 2011 well activity year ended weightedaverage grant date fair value performance awards granted 2010 2009 4372 2991 respectively total fair value performance share awards vested 2010 2009 106 million 05 million respectively restricted stock units rsus granted select management employees company represent right receive unrestricted shares stock based service compensation cost amortized expense service period generally three four years fair value rsu granted equal share price date grant following table summarizes nonvested rsus outstanding december 31 2011 well activity year ended weightedaverage grant date fair value awards vested spinoff reflect revised grant date fair value result adjustments b weightedaverage grant date fair value nonvested awards december 31 2011 reflects revised grant date fair value result adjustments weightedaverage grant date fair value rsus granted 2010 2009 4367 2846 respectively total fair value rsus vested 2011 2010 58 million 17 million respectively compensation cost related nonvested awards yet recognized 281 million december 31 2011 expected recognized weightedaverage period 29 years beam inc subsidiaries notes consolidated financial statements continued stock awards outside directors use stock awards compensate outside directors nonemployee director stock plans awards issued annually second quarter part compensation outside directors addition outside directors may elect director’s fees paid stock awards granted outside directors vest immediately related compensation cost expensed time award based fair value share beam’s stock date award following table summarizes rsus granted outside directors years ended december 31 2011 2010 2009 6 business separation costs business separation costs directly related implementing separation transactions refer note 3 discontinued operations additional information separation transactions recorded 838 million 23 million business separation costs years ended december 31 2011 2010 respectively business separation costs year ended december 31 2011 consisted 434 million financial legal separationrelated advisory fees well 404 million employeerelated costs primarily related termination benefits included within employeerelated business separation costs 2011 incremental stockbased compensation expense approximately 57 million related modification certain outstanding fortune brands equity awards discussed note 5 stockbased compensation 7 restructuring charges restructuring charges following summary restructuring charges continuing operations years ended december 31 2011 2010 2009 millions restructuring charges summarized table represent substantially charges expected incurred connection restructuring activities 2011 restructuring charges related distribution supplychain initiatives facility consolidations organizational streamlining initiatives 2010 restructuring charges related facility consolidations organizational streamlining initiatives 2009 restructuring charges related business repositioning including strategic sales distribution initiatives international markets us supply chain activities beam inc subsidiaries notes consolidated financial statements continued changes balance restructuring liability years ended december 31 2011 2010 follows millions noncash writeoffs primarily include impact foreign exchange rate changes company expects remaining liability related workforce reductions paid 2012 remaining liability related lease costs paid lease term charges addition restructuring charges income continuing operations years ended december 31 2011 2010 2009 impacted following significant items millions relates acquisitionrelated contingent consideration included “sga” consolidated income statement refer note 2 acquisitions dispositions information b relates onetime margin impact associated transition new longterm distribution agreement australia amount consists 463 million included “net sales” 227 million included “cost goods sold” consolidated income statement c consists primarily restructuringrelated activities described section restructuring charges primarily relate consulting fees related restructuring activities workforce reduction costs writedown fixed assets related restructuring activities writedown inventory associated discontinued brands included “cost goods sold” consolidated income statements 2011 2010 2009 156 million 36 million 06 million respectively included “selling general administrative expense” consolidated income statement 2011 2010 2009 09 million 69 million 46 million 2011 2010 2009 respectively 8 income expense components income expense years ended december 31 2011 2010 2009 follows millions refer note 9 income taxes additional information b refer note 4 investments unconsolidated affiliated companies additional information beam inc subsidiaries notes consolidated financial statements continued 9 income taxes components income loss continuing operations income taxes follows millions reconciliation income taxes 35 federal statutory income tax rate income taxes continuing operations follows millions 2011 mexico tax authorities issued assessment tax interest mexican spirits companies include assets acquired pernod ricard sa “pernod ricard” july 2005 pursuant acquisition agreement pernod ricard indemnified company preacquisition income tax contingencies liabilities assessment related 2004 2005 preacquisition tax years mexican tax authorities issued net assessment approximately 255 million 148 million tax 107 million related interest penalties paid september 2011 pursuant acquisition agreement negotiated received 260 million tax indemnification payment pernod ricard related assessment recorded payment income expense 2011 german tax authorities completed audit german spirits companies’ 20032007 tax returns recorded approximately 19 million previously recorded unrecognized tax benefits reduction tax expense 2010 spanish tax authorities issued three assessments tax andor interest spanish spirits companies include assets acquired pernod ricard july 2005 assessments related 19881990 20042006 periods majority related preacquisition tax years spanish tax authorities issued net assessments approximately 422 million 275 million tax 147 million related interest paid july october december 2010 pursuant acquisition agreement negotiated received 371 million tax indemnification payments pernod ricard related assessments recorded payments income expense net difference represents items company receive future income tax benefits also 2010 company settled 20042005 irs audit appeal irs concluded routine examination company’s 20062007 tax years result conclusion abovementioned us spanish audit examinations recorded approximately 46 million previously unrecognized tax benefits net current deferred taxes reduction income tax expense 2010 tax benefit included “net adjustments uncertain tax positions” line item tax rate reconciliation beam inc subsidiaries notes consolidated financial statements continued reconciliation beginning ending amount unrecognized tax benefits “utbs” follows millions amount utbs recognized december 31 2011 would affect company’s effective tax rate 968 million reasonably possible within next 12 months total utbs may decrease range 5 million 60 million primarily result conclusion us federal state foreign income tax proceedings classify interest penalty accruals related utbs income tax expense year ended december 31 2011 company recognized 10 million interest penalty benefit 2010 company recognized interest penalty benefit approximately 122 million primarily driven audit resolutions 2009 company recognized 62 million interest penalty expense december 31 2011 2010 accruals payment interest penalties 346 million 381 million respectively company subsidiaries file income tax returns us federal jurisdiction various states foreign jurisdictions irs currently examining company’s 2008 2009 federal income tax returns company one subsidiaries tax years remain open subject examination tax authorities following major taxing jurisdictions canada years 2005 france years 2008 germany years 2007 mexico years 2003 spain years 2005 united kingdom years 2008 income taxes follows millions beam inc subsidiaries notes consolidated financial statements continued components net deferred tax assets liabilities follows millions deferred taxes classified balance sheet december 31 2011 2010 millions december 31 2011 2010 company deferred tax assets relating net operating loss capital loss tax carryforwards 702 million 2795 million respectively approximately 25 million expire 2012 2015 remainder expire 2016 thereafter decrease deferred tax assets 2011 primarily due recognition capital loss carryforward resulted sale cobra golf product line 2011 change valuation allowance primarily due utilization approximately 205 million tax loss carryforwards related sale golf business discussed note 3 discontinued operations partially offset 25 million increase valuation allowance increased tax expense loss carryforwards certain countries company’s valuation allowance increased 6 million december 31 2009 215 million december 31 2010 primarily due establishment approximate 205 million valuation allowance golfrelated capital loss carryforwards 2010 sale cobra product line material valuation allowance activity 2009 provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest undistributed earnings foreign subsidiaries considered permanently reinvested 2695 million aggregate december 31 2011 quantification associated deferred tax liability undistributed earnings made determination liability practicable beam inc subsidiaries notes consolidated financial statements continued 10 earnings per share basic earnings per common share “eps” calculated dividing net income attributable common stockholders weighted average number shares common stock outstanding year diluted eps calculated using treasury share method giving effect potentially dilutive securities outstanding computations basic diluted eps share follows millions except per share data beam inc subsidiaries notes consolidated financial statements continued 11 balance sheet information supplemental balance sheet information december 31 2011 2010 follows millions 12 goodwill intangible assets change net carrying amount goodwill follows millions acquisitionrelated adjustments 2011 related acquisition skinnygirl readytodrink cocktail business tax adjustments related prioryear acquisition acquisitionrelated adjustments 2010 related tax adjustments related prioryear acquisitions result separation transactions described note 3 discontinued operations company reevaluated reporting units allocated goodwill new reporting units refer note 22 segment information additional information segments goodwill allocated new reporting units based relative fair values reporting units fair value calculated using expected present value future cash flows included estimates judgments assumptions consistent market participant management believes appropriate circumstances estimates judgments significantly affect fair value calculations assumptions related longterm growth rates particular spirits categories geographies expected profit margins discount rates company recast priorperiod goodwill balances new reporting units impractical goodwill reporting unit follows millions beam inc subsidiaries notes consolidated financial statements continued amortizable identifiable intangible assets principally tradenames customer relationships subject amortization estimated useful life 5 40 years based assessment number factors may impact useful life factors include historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion relevant factors gross carrying value accumulated amortization class intangible assets december 31 2011 2010 follows millions tradename carrying value impacted foreign currency exchange rates 2011 impairment charge described b applicable expected amortization expense intangible assets recorded december 31 2011 follows millions company cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions addition certain assumptions estimates used determining fair value goodwill indefinitelived tradenames outside control management including interest rates us abroad exchange rates cost capital tax rates due uncertainty aforementioned items company cannot predict whether future impairment result 2011 asset impairment charges connection annual indefinitelived intangible asset impairment testing fourth quarter 2011 recorded impairment charges 313 million reduce larios dyc tradenames estimated combined fair value 1574 million remain confident longterm growth prospects brands however gaap requires indefinitelived tradenames valued based current fair value lower carrying value estimated fair value using discounted cash flow analysis fair value considered level 3 fair value measure due use significant unobservable inputs including expected profit margins products sold using brands revenue growth rates impairment due combined effect economic downturn sales key geographic markets well effect substantially higher discount rate used estimate fair value higher discount rate attributable deterioration sovereign risk spread associated spain 2009 asset impairment charges indefinitelived tradenames book value 19054 million december 31 2009 connection annual indefinitelived intangible asset impairment testing fourth quarter 2009 recorded impairment charges 925 million adjust carrying value tradenames primarily sauza estimated aggregate fair value 7828 million fair value considered level 3 fair value measure due use significant unobservable inputs including expected profit margins products sold using brands revenue growth rates fair value declined book value primarily due combined effect economic downturn excess agave supply sales key geographic markets particularly mexico us expectation moderate market growth rates overall tequila spirits category foreseeable future beam inc subsidiaries notes consolidated financial statements continued 13 derivative instruments enter financial instruments trading speculative purposes principally use financial instruments reduce impact changes foreign currency exchange rates interest rates principal derivative financial instruments enter routine basis foreign exchange contracts addition time enter interest rate swaps enter foreign exchange contracts primarily hedge forecasted sales purchases denominated select foreign currencies thereby limiting currency risk would otherwise result changes exchange rates periods foreign exchange contracts correspond periods forecasted transactions generally exceed 12 15 months subsequent latest balance sheet date also enter foreign exchange contracts hedge risk changes fair value recognized foreign currency denominated assets liabilities effective portions cash flow hedges reported comprehensive income recognized statement income hedged item affects earnings ineffective portion hedges recognized current period earnings addition changes fair value economic hedge transactions immediately recognized current period earnings primary foreign currency hedge contracts pertain us dollar mexican peso canadian dollar euro australian dollar gross us dollar equivalent notional amount foreign currency derivative hedges outstanding december 31 2011 2010 5501 million 5955 million respectively counterparties derivative contracts major financial institutions subject credit risk contracts equal fair value instruments date financial statements management believes risk incurring material losses unlikely losses would immaterial fair values derivative instruments consolidated balance sheet december 31 2011 2010 millions effects derivative financial instruments statement income oci years ended december 31 2011 2010 millions represents gain recorded prior third quarter 2011 termination interest rate swaps notional amount 9000 million hedged fair value certain fixed rate debt amounts recorded swap offset corresponding debt fair value adjustments also recorded interest expense received cash proceeds approximately 45 million upon termination swaps performed conjunction planned debt retirements see note 15 debt adjustment fair value debt recognized term debt including accelerated amortization related early debt extinguishments interest rate swaps outstanding december 31 2011 estimate less 1 million net derivative gains included oci december 31 2011 reclassified earnings within next twelve months years ended december 31 2011 2010 ineffective portion cash flow hedges recognized income expense insignificant beam inc subsidiaries notes consolidated financial statements continued 14 fair value measurements authoritative accounting guidance establishes three tier fair value hierarchy prioritizes inputs used measuring fair values follows • level 1 observable inputs quoted prices identical assets active markets • level 2 inputs quoted prices identical assets active markets observable either directly indirectly • level 3 unobservable inputs little market data requires use valuation techniques development assumptions following methods assumptions used estimate fair values company’s financial instruments derivative financial instruments carried fair value based standard valuation techniques use possible current marketbased independently sourced pricing units interest rates currency rates implied volatilities assets liabilities measured fair value recurring basis december 31 2011 2010 follows millions fair value company’s longterm debt including current portion determined quoted market prices available estimates using discounted cash flow analyses based current borrowing rates similar types borrowing arrangements fair value longterm debt december 31 2011 approximately 20154 million compared aggregate carrying value 19021 million fair value longterm debt december 31 2010 approximately 42588 million compared aggregate carrying value 42112 million also recorded certain tradenames fair value due annual indefinitelived intangible asset testing fourth quarters 2011 2009 fair value measures considered nonrecurring level 3 fair value measures refer note 12 goodwill intangible assets information beam inc subsidiaries notes consolidated financial statements continued 15 debt shortterm debt borrowings consisted amounts outstanding committed bank credit agreements uncommitted bank lines credit weightedaverage interest rate shortterm debt borrowings 16 34 2011 2010 respectively amount available unused committed credit lines 7754 million december 31 2011 includes entire 750 million available credit agreement discussed components longterm debt follows millions december 2011 executed 750 million 5year committed revolving credit agreement “credit agreement” used general corporate purposes credit agreement replaced beam’s 750 million 3year credit agreement scheduled mature february 2013 amounts may borrowed credit agreement us dollars euros british pounds sterling interest eurocurrency loans accrue libor interest periods 1 2 3 6 months plus spreads based credit ratings assigned beam’s outstanding senior unsecured debt interest alternate base rate loans accrue highest administrative agent’s prime rate ii federal funds effective rate plus 12 1 per annum iii adjusted london interbank offered rate defined credit agreement plus 1 per annum beam may also request competitive bids negotiated rates interest loans credit agreement beam may subject satisfaction certain conditions request aggregate principal amount facility increased 250 million aggregate credit agreement contains among things conditions precedent covenants representations warranties events default customary facilities type covenants include certain limitations secured debt saleleaseback transactions subsidiary debt guarantees fundamental changes transactions affiliates credit agreement also includes financial covenants beam required maintain minimum ratio consolidated ebitda consolidated interest expense 300 100 ii maximum ratio debt capitalization 055 100 consolidated interest expense disclosed financial statements total capital defined debt plus equity deferred taxes excluding impact future impairment charges events default credit agreement december 31 2011 none debt instruments include financial ratio covenants november 2011 redeemed portion outstanding 4 notes due 2013 500 million aggregate principal amount outstanding prior redemption total cash paid holders notes approximately 298 million 408 million included approximately 281 million 386 million debt principal approximately 9 million 12 million accrued interest approximately 8 million 10 million purchase premiums november 2011 redeemed full outstanding 3 notes due 2012 400 million aggregate principal amount outstanding prior redemption total cash paid holders 3 notes approximately 411 million included 400 million aggregate principal approximately 5 million accrued interest approximately 6 million purchase premiums beam inc subsidiaries notes consolidated financial statements continued related fourth quarter 2011 financing activities 160 million purchase premiums acceleration unamortized debt issuance costs fees 17 million gain associated amortizationwriteoff deferred gains related terminated interest rate swaps 25 million recorded loss early extinguishment debt accompanying consolidated statement income august 2011 used proceeds sale golf business complete early extinguishment debt consisting following principal amounts millions total cash paid holders tendered notes debentures august 2011 approximately 106 billion included 9110 million debt principal 79 million accrued interest 1390 million purchase premiums 1390 million purchase premiums gain associated amortizationwriteoff deferred gains related terminated interest rate swaps 105 million acceleration unamortized debt issuance costs 55 million recorded loss early extinguishment debt accompanying consolidated statement income see note 13 derivative instruments additional information termination interest rate swaps third quarter 2011 january 2011 repaid maturing notes 5906 million using cash hand second quarter 2010 repurchased outstanding notes scheduled mature january 15 2011 face value 1594 million loss repurchase 44 million recognized income expense debt agreements normal customary events default would permit lenders debt agreement accelerate debt cured within applicable grace periods failure pay principal interest due change control company events default december 31 2011 estimated payments maturing debt next five years december 31 2011 follows millions 16 leases future minimum rental payments noncancelable operating leases december 31 2011 follows millions total rental expense operating leases reduced insignificant amounts subleases amounted 205 million 239 million 213 million 2011 2010 2009 respectively beam inc subsidiaries notes consolidated financial statements continued 17 pension postretirement benefits number pension plans covering many company’s current former employees plans provide payment retirement benefits mainly commencing ages 55 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service andor earnings employer contributions plans made necessary ensure legal funding requirements satisfied addition time may make contributions excess legal funding requirements part separation transactions described note 3 discontinued operations pension plans directly related discontinued operations transferred assets liabilities disposed businesses fortune brands pension plans related fortune brands corporate operations remained beam following spinoff however pursuant spinoff agreements portion corporate pension plan assets liabilities related fortune brands corporate employees obtained employment home security subsequent spinoff transferred home security “corporate plan transfer” historical information prespinoff presented footnote recast impracticable related effects insignificant amounts presented related assets liabilities shown transfers plan asset obligation activity tables third quarter 2011 company amended certain pension plans us freeze accrual future benefits effective december 31 2011 freeze relates beam nonunion employees company provides postretirement health care life insurance benefits certain retirees many employees retirees outside united states covered government health care programs pension plans following tables provide reconciliation changes benefit obligations fair value assets years ended december 31 2011 2010 millions beam inc subsidiaries notes consolidated financial statements continued amounts recognized balance sheet consist millions amounts included accumulated oci consist following millions approximately 5 million us plans 1 million international plans amounts accumulated comprehensive income expected recognized components net periodic benefit cost 2012 primarily relating net actuarial losses addition company expects settlement charge approximately 15 million connection expected second quarter 2012 settlement pension liabilities related certain former fortune executives pension benefit obligation accumulated benefit obligation fair value plans assets pension plans accumulated benefit obligations excess plan assets shown millions components net periodic benefit cost continuing operations follows 2011 addition net periodic benefit cost shown company recognized costs 135 million related special postretirement termination benefits certain departing executives result separation transactions costs included within business separation costs consolidated statement income weightedaverage assumptions used determine future benefit obligations december 31 2011 2010 follows beam inc subsidiaries notes consolidated financial statements continued weightedaverage assumptions used determine net periodic benefit cost years ended december 31 2011 2010 2009 follows expected return plan assets expected blended longterm rate return plan assets determined based longterm historical performance plan assets current asset allocation projected longterm rates return pension investment consultants beam inc subsidiaries notes consolidated financial statements continued fair value plan assets us pension plan assets major category plan assets type fair value measurement december 31 2011 2010 follows millions reconciliation level 3 measurements assets us pension plans years ended december 31 2011 2010 follows millions beam inc subsidiaries notes consolidated financial statements continued international pension plan assets major category plan assets type fair value measurement december 31 2011 2010 follows millions reconciliation level 3 measurements assets international pension plans years ended december 31 2011 2010 follows millions beam inc subsidiaries notes consolidated financial statements continued defined benefit trusts variety assets including equity fixed income real estate securities well group annuityinsurance contracts commingled funds commingled trust fund valuations based net asset value nav funds determined administrator fund reviewed us nav represents underlying assets owned fund minus liabilities divided number shares units outstanding equity securities traded national stock exchanges valued daily closing prices fixed income securities valued daily closing prices institutional midevaluation prices provided independent industryrecognized pricing sources real estate securities valued based recent market appraisals underlying property well valuation methodologies determine probable cash price competitive market valuations group annuityinsurance contracts based daily closing prices underlying securities institutional evaluation prices consistent industry practices investment policy strategy investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility us defined benefit asset allocation policy allows equity allocation 45 75 fixed income allocation 25 50 cash allocation 25 investments 20 nonus investment asset allocation targets may differ depending country allowing 90 equity 100 fixed investments 20 real estate asset allocations based underlying liability structure local regulations retirement asset allocations reviewed periodically ensure allocation meets needs liability structure cash flows contributions based current assumptions company expects contribute approximately 312 million 32 million respectively us international pension plans 2012 expected contribution amount related us pension plans 2012 includes approximately 30 million required settlement pension liabilities certain former fortune executives estimated future retirement benefit payments estimated future benefit payments pension plans follows december 31 2011 millions estimated future retirement benefits payments estimates could change significantly based differences actuarial assumptions actual events decisions related lump sum distribution options available participants certain plans beam inc subsidiaries notes consolidated financial statements continued postretirement benefit plans following tables provide reconciliation changes benefit obligations fair value assets years ended december 31 2011 2010 company’s postretirement benefit plans millions amounts recognized balance sheet consist millions amounts included accumulated comprehensive income consist following company’s postretirement benefit plans millions approximately 36 million amounts accumulated comprehensive income expected recognized components net periodic benefit cost 2012 primarily relating amortization prior service credits certain postretirement benefit plans components net periodic benefit income cost continuing operations follows company’s postretirement benefit plans millions beam inc subsidiaries notes consolidated financial statements continued weightedaverage assumptions used determine future benefit obligations december 31 2011 2010 follows weightedaverage assumptions used determine net periodic benefit cost years ended december 31 2011 2010 2009 follows weightedaverage health care trend rates used determine future benefit obligations net period benefit cost december 31 2011 2010 follows onepercentagepoint increasedecrease assumed health care cost trend rates would increasedecrease postretirement benefit obligation 05 million impact onepercentage point increasedecrease service interest cost significant cash flows based current assumptions company expects contribute approximately 12 million retiree healthcare plan 2012 estimated future benefit payments company’s retiree healthcare plan approximately 1 million per year next five years aggregate 5 million five years thereafter estimated future retirement benefits payments estimates could change significantly based differences actuarial assumptions actual events defined contribution plan contributions sponsor number defined contribution plans contributions determined various formulas expense recognized plans 130 million 126 million 118 million 2011 2010 2009 respectively beam inc subsidiaries notes consolidated financial statements continued 18 commitments contingencies legal tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation known brown williamson holding inc bw connection sale bw atco subsequently merged bw agreed indemnification agreement indemnification agreement indemnify company claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company “indemnitor” indemnification agreement indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations numerous legal actions proceedings claims pending various jurisdictions leading tobacco manufacturers including bw individually successor merger atco based upon allegations cancer ailments resulted tobacco use company named defendant cases claims generally fallen within three categories smoking health cases alleging personal injury brought behalf individual plaintiffs ii smoking health cases alleging personal injury damages purporting brought behalf classes individual plaintiffs iii health care cost recovery cases including class actions brought foreign governments unions health trusts taxpayers others seeking reimbursement health care expenditures allegedly caused cigarette smoking damages claimed cases range billions dollars possible predict outcome pending tobaccorelated litigation possible actions could decided unfavorably management unable make reasonable estimate amount range loss could result unfavorable outcome pending litigation management believes number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor management believes pending actions material adverse effect upon results operations cash flows financial condition company believes meritorious defenses company indemnified indemnification agreement september 14 2011 connection spinoff company agreed indemnify home security losses arising smoking health firesafe cigarette matters relating tobacco business company’s predecessors former subsidiaries litigation time company subject various lawsuits claims disputes investigations normal conduct operations include limited commercial disputes including purported class actions employment claims actions tax customs authorities environmental matters legal proceedings include claims substantial unspecified damages believe meritorious defenses actions contesting vigorously believe currently pending legal proceedings party material adverse effect results operations cash flows financial condition guarantees three 50owned foreign joint ventures eurodenominated credit facilities partially guaranteed maximum guarantee exposure assuming credit facilities fully utilized total us dollar equivalent 222 million guarantee exposure 162 million based facilities utilized december 31 2011 company recorded liability guarantees beam inc subsidiaries notes consolidated financial statements continued also guarantee lease acco world corporation office products business divested spinoff 2005 liability related guarantee material continue guarantee payment certain real estate leases lease payments totaling approximately 99 million april 2013 part sale golf business agreed indemnify buyer certain estimated tax related obligations paid buyer relate periods owned golf business estimate liabilities tax indemnifications approximately 40 million recorded liability consolidated balance sheet december 31 2011 actual obligation may differ based closure tax period taxing authorities environmental subject laws regulations relating protection environment december 31 2011 2010 environmental accruals amounted 86 million 109 million respectively included noncurrent liabilities balance sheet possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts subsidiaries may undertake future due status laws regulations technology information related individual sites uncertainties involved remediation actions clean hazardous wastes required federal state laws based evaluation cleanup cost estimates compliance programs believe reasonable possibility material loss exceeding amounts already recognized incurred liabilities remediation costs site based best estimate undiscounted future costs commitments purchase obligations include contracts raw materials finished goods purchases advertising selling administrative services capital expenditures company’s purchase obligations december 31 2011 millions customer concentration years ended december 31 2011 2010 2009 two customers accounted aggregate approximately 30 total sales one includes impact company’s 50 owned joint ventures teg 19 267 convertible preferred stock redeemable company’s option 60 million authorized shares preferred stock 153710 160729 shares 267 convertible preferred stock issued outstanding december 31 2011 2010 respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share together holders common stock certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share convertible preferred stock 8411 shares common stock authorized unissued shares common stock reserved issuance upon conversions treasury shares may delivered holders converted 7019 10409 shares preferred stock common stock 2011 2010 respectively company may redeem convertible preferred stock price 3050 per share plus accrued dividends company paid cash dividends 267 per share preferred stock aggregate amount 04 million years ended december 31 2011 2010 05 million year ended december 31 2009 beam inc subsidiaries notes consolidated financial statements continued 20 capital stock 750 million authorized shares common stock number shares common stock treasury stock share activity follows company paid cash dividends common stock aggregate amount 1174 million 076 per share 1158 million 076 per share 1517 million 101 per share years ended december 31 2011 2010 2009 respectively 21 comprehensive income loss comprehensive income loss includes activity relating discontinued operations prior spinoff components comprehensive income loss years ended december 31 2011 2010 2009 follows millions reclassification adjustments included earnings related pension postretirement benefits includes amortization actuarial gains losses prior service credits costs recognition actuarial gains prior service cost related curtailments settlements reclassification adjustments 2011 include amounts recorded earnings due sale golf business see note 17 pension postretirement benefits information components accumulated comprehensive loss net tax follows millions beam inc subsidiaries notes consolidated financial statements continued 22 segment information connection separation transactions described note 3 discontinued operations reevaluated reportable segments standalone spirits company three operating segments also reportable segments north america emea europemiddle eastafrica apsa asiapacificsouth america reportable segments based internal organization business used management making operating decisions assessing performance key countriesmarkets included north america canada mexico us key countriesmarkets included emea spain united kingdom germany russia turkey ireland italy hungary czech republic romania south africa north america duty free europe travel retail key countriesmarkets included apsa australia new zealand south east asia china brazil india south korea japan operating segment derives revenues sale distilled spirits segment net sales net sales excluding items considered management unusual infrequent nature “segment net sales” measure segment profitability regularly reviewed chief operating decision maker segment operating income operating income excluding restructuring restructuringrelated expense items considered management unusual infrequent nature “segment income” unallocated corporate costs periods reflect estimated incremental historical fortune brands corporate structure compared estimated beam corporate structure following spinoff financial information segment presented tables asset information segment presented information provided reviewed company’s chief operating decision maker refer note 7 restructuring charges information restructuring charges beam inc subsidiaries notes consolidated financial statements continued net sales longlived assets location follows millions based country destination 23 quarterly financial data unaudited company began reporting former golf segment discontinued operation beginning quarter ended june 30 2011 former home security segment discontinued operation beginning quarter ended december 31 2011 prior period results reclassified conform discontinued operations presentation selected quarterly financial data years ended december 31 2011 2010 follows millions except per share data beam inc subsidiaries notes consolidated financial statements continued net sales reduced 1489 million 1325 million 1280 million 1511 million first second third fourth quarters 2011 respectively 1264 million 1280 million 1283 million 1883 million first second third fourth quarters 2010 respectively excise taxes related continuing operations previously within “cost goods sold” classified reduction sales described note 1 description business basis presentation summary significant accounting policies changes basis presentation accounting b unusual items impacting quarter ended march 31 2011 include pretax basis 463 million favorable onetime sales impact 236 million favorable onetime operating income impact associated transition new longterm distribution agreement australia 92 million related business separation costs c unusual items impacting quarter ended june 30 2011 include pretax basis 81 million business separation costs unusual items impacting quarter ended september 30 2011 include pretax basis 1340 million loss early extinguishment debt 686 million business separation costs 250 million acquisitionrelated contingent consideration 76 million gain related distribution maxxium investment e unusual items impacting quarter ended december 31 2011 include pretax basis 313 million impairment tradenames 19 million tax benefit related resolution routine foreign tax audits 152 million loss early extinguishment debt f unusual items impacting quarter ended june 30 2010 include pretax basis 424 million tax benefit 256 million tax indemnification income related resolution routine foreign tax audits g unusual items impacting quarter ended september 30 2010 include pretax basis 145 million restructuring charges 86 million loss sale brands related assets h unusual items impacting quarter ended december 31 2010 include pretax basis 74 million loss sale brands related assets 53 million income tax credits related resolution routine foreign tax audit 24 subsequent event first quarter 2012 company acquired outstanding common shares cooley distillery plc awardwinning independent irish whiskey producer purchase price approximately 95 million including repayment outstanding debt acquisition included beam’s consolidated financial statements date acquisition report independent registered public accounting firm board directors shareholders beam inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position beam inc subsidiaries december 31 2011 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 1 consolidated financial statements company changed presentation excise taxes collected customers remitted governmental authorities gross basis presenting net basis company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois february 28 2012 item 9item 8 financial statements supplementary data beam inc subsidiaries consolidated statement income see notes consolidated financial statements beam inc subsidiaries consolidated statement comprehensive income see notes consolidated financial statements beam inc subsidiaries consolidated balance sheet see notes consolidated financial statements beam inc subsidiaries consolidated statement cash flows see notes consolidated financial statements beam inc subsidiaries consolidated statement equity see notes consolidated financial statements beam inc subsidiaries notes consolidated financial statements 1 description business basis presentation summary significant accounting policies description business beam inc subsidiaries “company” operate beverage alcohol industry references “we” “our” “us” “beam” “the company” refer beam inc consolidated subsidiaries whole unless context otherwise requires company’s reportable segments north america europemiddle eastafrica “emea” asiapacificsouth america “apsa” discussed note 21 segment information company leading premium spirits company makes sells branded distilled spirits products major markets worldwide principal products include bourbon whiskey tequila scotch whisky canadian whisky vodka cognac rum cordials readytodrink premixed cocktails basis presentation basis consolidation consolidated financial statements include accounts beam inc majorityowned subsidiaries elimination intercompany transactions use estimates presentation financial statements accordance generally accepted accounting principles us “gaap” requires us make estimates assumptions affect reported amounts related disclosures actual results future periods could differ estimates presentation matters company formerly known fortune brands inc separated three business segments 2011 completed sale golf business “golf business” july 2011 taxfree spinoff “spinoff” fortune brands home security inc “home security” october 2011 consolidated statements comprehensive income cash flows separately state classify activity relating discontinued operations 2011 2010 reclassification adjustments presented component comprehensive income 2011 periods include amounts recorded earnings due sale golf business footnote disclosures relate continuing operations except noted otherwise 2011 consolidated balance sheet included report reflects immaterial revision correct classification 36 million “other current liabilities” “accounts payable vendors” summary significant accounting policies revenue recognition record revenue referred financial statements “sales” persuasive evidence arrangement exists delivery occurred price fixed determinable collectability reasonably assured delivery considered occurred title risk loss passes customer according terms contract customer us title risk loss usually transferred upon shipment receipt customers’ locations determined specific sales terms transactions record revenue sales joint ventures product sold end customersretail outlets joint venture sales terms allow right return except matters related manufacturing defects part revenue recorded net applicable provisions discounts allowances including earlypay discounts customer programs discussed taxes collected customers remitted governmental authorities reported net basis within “net sales” customer program costs provide variety sales incentives promote sales maintain competitive pricing incentive programs primarily intended distributors maintain competitive pricing recorded reduction net sales additional types incentive programs utilize include volumebased incentives typically involve rebates refunds specified amount cash distributor reaches specified level sales net sales reduced estimated amount volumebased incentives expected earned customers estimates based expectations distributors achieving contractual volume targets payouts associated targets cooperative advertising arrangements reimburse distributors portion costs incurred distributors advertise promote certain products generally recognize cost cooperative advertising programs manner consistent advertising cost policy described incentives typically used certain nonus markets typically classified advertising marketing expense cost goods sold cost goods sold includes costs make products saleable inbound outbound freight purchasing receiving costs inspection costs internal transfer costs addition depreciation expense associated assets used produce goods make saleable included cost goods sold advertising costs advertising costs include media costs point sale materials product endorsements generally expensed incurred advertising costs recorded “advertising marketing expense” 3352 million 3023 million 2517 million 2012 2011 2010 respectively selling general administrative expense selling general administrative expense includes selling expenses including commissions research development general administrative expenses research development research development expenses include product development product improvement product engineering process improvement costs total research development costs charged expense 34 million 25 million 16 million 2012 2011 2010 respectively stockbased compensation recognize stockbased compensation expense measured fair value award date grant financial statements period employee required provide services exchange award see note 5 stockbased compensation additional information cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts record allowance doubtful accounts based variety factors historical writeoffs aging balances andor specifically identified risks estimated losses resulting inability customers make required payments allowance doubtful accounts 140 million 98 million december 31 2012 2011 respectively inventories record inventory firstin firstout “fifo” method accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes maturing spirits inventory includes costs production warehousing insurance inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns product spoilage specific identification items product discontinuance regulatoryrelated changes property plant equipment property plant equipment stated cost less accumulated depreciation generally calculated using straightline method estimated useful lives assets gains losses resulting dispositions included operating income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred assets held use disposed future date depreciated remaining useful life assets sold written fair value time assets actively marketed sale december 31 2012 2011 carrying value assets held sale material estimated useful lives related assets follows longlived assets test longlived asset including amortizable identifiable intangible assets asset group recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows marketparticipant basis goodwill amortized tested impairment least annually fourth quarter frequently circumstances warrant reporting units operating segments initially perform qualitative assessment determine whether likely fair value reporting unit less carrying amount result qualitative assessment completed december 31 2012 2011 concluded goodwill impaired qualitative test indicates likely fair value reporting unit less carrying amount perform additional twostep impairment test step one carrying value reporting unit compared fair value step two applied carrying value fair value amount goodwill impairment derived deducting fair value reporting unit’s assets liabilities fair value reporting unit total comparing amount carrying amount goodwill intangible assets amortize purchased intangible assets goodwill useful lives unless lives determined indefinite determination useful life intangible asset goodwill based factors including historical projected tradename performance consumer name recognition geographic market presence market share plans ongoing tradename support promotion certain tradenames assigned indefinite life currently anticipate tradenames contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated least annually determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually fourth quarter whenever market business events indicate may potential impairment intangible similar impairment testing goodwill initially perform qualitative assessment determine whether likely fair value indefinitelived tradename less carrying amount qualitative test indicates likely fair indefinitelived tradename less carrying amount compare carrying value indefinitelived tradename fair value impairment losses recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing brand name third party remaining useful life refer note 12 goodwill intangible assets information related impairments recorded 2012 2011 change indefinite life assumption one tradenames factors impacting fair value intangibles assets including possible future impairments joint venture investments make investments include joint ventures either complement expand existing businesses equity method accounting used account investments ability exercise significant influence operating financial policies joint venture record share joint venture’s income increase investment dividends received reduction investment record share joint venture’s earnings income equity method requires impairment losses recognized otherthantemporary losses investment value carrying value pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates utilized recognize expense obligations associated plans review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets recognizes difference expected return actual return plan assets fiveyear period discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments expected rate return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases effects actuarial deviations assumptions generally accumulated outside specified corridor amortized remaining service period employees active plans expected remaining life participants plans substantially frozen cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees believe assumptions utilized recording obligations plans presented note 17 pension postretirement benefits reasonable based experience however differences actual experience changes assumptions may materially affect business results operations cash flows financial condition income taxes establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse record valuation allowance reduces deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect indefinitely reinvest record liabilities uncertain income tax positions based two step process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes tax positions currently estimated less 50 likelihood sustained tax benefit recorded tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ estimates future periods changes facts circumstances new information may require us change recognition measurement estimates regard individual tax positions changes recognition measurement estimates recorded results operations financial position period changes occur foreign currency translation foreign currency balance sheet accounts translated us dollars actual rates exchange balance sheet date income expenses translated average rates exchange effect period foreign subsidiaries local currency functional currency related translation adjustments recorded comprehensive income loss transactions denominated currency functional currency subsidiary translated functional currency resulting transaction gains losses recorded income derivative financial instruments derivatives recognized either assets liabilities balance sheet derivative designated fair value hedge highly effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income loss recognized net income hedged item affects earnings ineffective portions changes fair value cash flow hedges immediately recognized net income environmental matters subject federal state laws regulations relating protection environment including regulations related remediating hazardous wastes december 31 2012 2011 environmental accruals amounted 150 million 86 million respectively included noncurrent liabilities consolidated balance sheet liabilities remediation obligations based undiscounted future cash flows fourth quarter 2012 increased estimated liability reflect revised remediation plan site related discontinued operation revision remediation plan made increase certainty completing required remediation expense associated increase estimated liability recorded “loss income discontinued operations net tax” consolidated statement income possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts may undertake future due status laws regulations technology information related individual sites uncertainties believe cost complying present environmental protection laws material adverse effect results operations cash flows financial condition recently issued accounting standards reporting amounts reclassified accumulated comprehensive income january 2013 financial accounting standards board “fasb” issued accounting standards update “asu” 201302 “reporting amounts reclassified accumulated comprehensive income” guidance requires entity present either face statement net income presented notes significant amounts reclassified accumulated comprehensive income respective line items net income amount reclassified required gaap reclassified net income entirety reporting period amounts required gaap reclassified entirety net income eg net periodic pension benefit cost entity required crossreference disclosures required gaap provide additional detail amounts believe guidance adopt 2013 material impact consolidated financial statements intangible assets july 2012 fasb issued asu 201202 “intangibles goodwill topic 350 testing indefinitelived intangible assets impairment” guidance adopted 2012 allows us first assess qualitative factors determine whether necessary perform quantitative impairment test guidance required calculate fair value indefinitelived intangible asset unless determine based qualitative assessment likely indefinitelived intangible asset impaired 2 acquisitions dispositions acquisitions 2012 pinnacle calico jack brands assets may 2012 acquired pinnacle vodka calico jack rum brands certain related assets collectively referred “pinnacle assets” white rock distilleries inc “white rock” shareholders approximately 608 million consisting 602 million paid closing plus working capital adjustment 6 million paid august 2012 connection acquisition also paid 3 million closing white rock related postclosing compensation agreements certain employees recognized expense service period employees acquisition significantly enhanced beam’s us participation vodka category creating opportunities drive cost savings expand distribution following table summarizes values assets acquired liabilities assumed acquisition date millions goodwill calculated excess consideration paid net assets acquired represents synergies organic growth benefits expected arise integrating pinnacle assets operations goodwill recorded north america segment expected deductible tax purposes year ended december 31 2012 addition pinnacle assets increased net sales approximately 87 million operating income approximately 3 million amounts inclusive direct acquisition charges well charges associated integration pinnacle assets operations cost synergies realized december 31 2012 following table summarizes supplemental pro forma consolidated results operations acquired pinnacle assets january 1 2011 years ended december 31 2012 2011 millions except per share information historical financial information adjusted give effect pro forma adjustments directly attributable acquisition ii factually supportable pro forma consolidated results necessarily indicative consolidated results operations actually would completed acquisition january 1 2011 historical results included pro forma consolidated results purport project future results operations combined company reflect expected realization cost savings revenue synergies associated acquisition addition pro forma consolidated results adjust impact restructuring chargesgains incurred periods presented charges directly attributable acquisition pro forma consolidated results primarily reflect following pro forma pretax adjustments • adjustment amortization expense reflect pro forma amortization expense based amortization intangible assets acquired based fair values useful lives assigned see note 12 goodwill intangible assets estimated annual amortization expense associated pinnacle assets approximately 04 million • additional interest expense associated incremental debt issued finance acquisition approximately 68 million 164 million years ended december 31 2012 2011 respectively • incurred acquisitionrelated charges approximately 12 million 2012 charges primarily include legal financial advisory fees contract termination fees continuing impact combined company’s operating results order present pro forma net income assuming acquisition occurred january 1 2011 impact charges eliminated pro forma net income year ended december 31 2012 included pro forma net income year ended december 31 2011 • adjustment reflect tax expense pinnacle pretax earnings pro forma adjustments assumed 38 combined federal state tax rate cooley distillery plc january 2012 acquired cooley distillery plc “cooley” irish whiskey producer purchase price approximately 60 million 75 million plus repayment outstanding debt acquisition enabled beam leverage global distribution platform enter irish whiskey category following table summarizes values assets acquired liabilities assumed acquisition date millions none goodwill primarily relates north america emea segments expected deductible tax purposes cooley’s results operations material 2012 results included consolidated financial statements date acquisition repayment indebtedness connection transaction included “decrease shortterm debt net” within accompanying consolidated statement cash flows acquisitions 2011 march 2011 acquired skinnygirl readytodrink cocktail business acquisition included inventory identifiable intangible assets recorded estimated fair value contingent consideration based achievement certain sales targets acquisition date subsequent acquisition 2011 recorded increase 28 million estimated contingent consideration liability “selling general administrative expense” accompanying consolidated statement income first quarter 2012 paid approximately 2 million previously accrued contingent consideration based attainment skinnygirl’s contractual earnouts 2011 december 31 2012 recorded liability estimated fair value remaining contingent consideration approximately 18 million excludes earned amounts 8 million payable yearend due first quarter 2013 future periods may required record additional contingent consideration amount excess approximately 2 million change estimated liability contingent consideration increase decrease operating income future periods dispositions 2011 refer note 3 discontinued operations information dispositions 2011 dispositions 2010 december 2010 sold cockburn’s port brand related us uk portugal inventory connection sale recorded pretax loss 74 million 68 million tax august 2010 sold certain nonstrategic german spirits brands related assets connection sale recorded pretax loss 86 million 124 million tax proceeds two dispositions 492 million 3 discontinued operations 2012 recorded adjustments amounts previously reported discontinued operations primarily related 2011 spinoff home security 2011 sale golf business described adjustments consist pretax charges 33 million 18 million related increase estimated tax indemnification obligations buyer golf 8 million primarily related reduction indemnification receivable home security due conclusion 20082009 us tax audit 7 million related increase estimated environmental obligation related business disposed prior 2011 recorded 17 million net tax benefit related previously reported discontinued operations primarily due 6 million net tax benefit related golf business 8 million tax benefit related mentioned home security pretax expense 3 million tax benefit related pretax increase environmental obligations 6 million net tax benefit related golf business due tax benefits associated increase indemnification obligation additional benefits identified filing state tax returns 2012 partially offset decrease estimated foreign tax credits available offset taxes due sale golf business additional adjustments may recorded future periods continue settle liabilities related discontinued operations primarily related prejuly 2011 taxes golf business refer note 1 description business basis presentation summary significant accounting policies information liability environmental matters note 9 income taxes information conclusion tax audits 2011 separation transactions october 2011 beam completed spinoff home security paying pro rata dividend one share common stock par value 001 per share home security share common stock par value 3125 per share company outstanding 600 pm new york city time record date spinoff completed without payment consideration exchange shares company’s stockholders october 4 2011 result spinoff home security became independent public company trading symbol “fbhs” new york stock exchange spinoff completed pursuant separation distribution agreement company home security dated september 27 2011 “separation agreement” terms separation agreement immediately prior effective time spinoff home security paid cash dividend company amount 500 million using proceeds new debt financing arrangement entered home security july 2011 completed sale golf business company formed fila korea ltd mirae asset private equity korea cash purchase price 1275 billion excludes cash sold includes working capital adjustment received october 2011 spinoff sale golf business together referred herein “separation transactions” following table summarizes results home security golf businesses date disposition years ended december 31 2011 2010 millions second quarter 2011 recorded 2153 million reduction valuation allowance related golf business previously established respect capital loss carryforward valuation allowance reduced utilized capital loss carryforward offset capital gains associated sale also result sale golf business second quarter 2011 provided deferred tax expense 247 million related expected repatriation undistributed foreign earnings expected gains associated sale foreign subsidiary stock deemed taxable us dividends interest expense associated debt directly associated discontinued segment allocated discontinued operations based ratio net assets home security golf businesses sum total net assets plus consolidated debt directly attributable operations allocated 462 million 695 million interest expense discontinued operations years ended december 31 2011 2010 respectively april 2010 sold cobra golf product line puma north america inc 889 million 4 investments unconsolidated affiliated companies account 50 ownership three alliance joint ventures entities entered edrington group “teg” april 2009 using equity method investment affiliates amounts due payable unconsolidated affiliated companies identified related party amounts accompanying consolidated balance sheet net sales 50 owned joint venture entities collectively totaled approximately 275 million years ended december 31 2012 2011 refer note 18 commitments contingencies guarantees information guarantees certain credit loan facilities 50 owned foreign joint ventures 5 stockbased compensation use stock options performance share awards restricted stock units “rsus” compensate key employees stock awards compensate outside directors december 31 2012 5525036 shares available issuance connection future awards stock plans approved stockholders stock option granted company’s stock plans reduce number shares available future grants onethird share subject option authorized unissued shares reserved issuance connection awards treasury shares may historically delivered following table summarizes stockbased compensation expense continuing operations years ended december 31 2012 2011 2010 millions amount relates modification certain outstanding fortune brands equity awards august 2011 antidilution provisions anticipation conversion awards beam home security equity awards fortune brands equity awards modified third quarter 2011 add antidilutive protection provisions anticipation spinoff additional expense determined comparing fair values awards prior immediately modification stockbased compensation costs capitalized inventory material years ended december 31 2012 2011 2010 compensation cost related nonvested awards yet recognized 337 million december 31 2012 expected recognized weightedaverage period 22 years stock options exercise prices stock options equal fair value share beam inc common stock date grant plan provisions require exercise prices adjusted certain events spinoff options generally may exercised prior one year date grant options awarded prior september 2005 generally expire ten years date grant options awarded september 2005 expire seven ten years date grant options issued generally vest equal installments three four year period estimated fair value option award date grant using blackscholes optionpricing model based weightedaverage assumptions shown following table volatility assumptions used determine fair value options granted august 2011 options modified august 2011 based analysis historical implied volatility publiclytraded companies similar characteristics including industry stage life cycle size financial leverage historical volatility fortune brands representative beam’s expected volatility standalone spirits company volatility assumptions used determine fair value options granted prior august 2011 based historical volatility fortune brands’ stock price period commensurate expected term stock options well relevant factors riskfree rate assumptions based us government issues remaining term equal expected life stock options expected term assumptions used determine fair value options granted august 2011 based simplified method use simplified method due lack sufficient historical data representative business standalone spirits company following separation transactions expected term assumptions used determine fair value options modified august 2011 based simplified method adjusted time already elapsed vested shares options granted prior august 2011 weighted average expected term determined based historical employee exercise behavior contractual term options following table summarizes stock option activity year ended december 31 2012 weightedaverage grant date fair value stock options granted years ended december 31 2012 2011 2010 1514 1497 1128 respectively intrinsic value stock options exercised years ended december 31 2012 2011 2010 408 million 325 million 210 million respectively performance share awards performance share awards represent right receive unrestricted shares stock based achievement targeted cumulative diluted earnings per share average consolidated return invested capital compensation cost amortized expense performance period generally three years based probability meeting performance targets fair value beam’s stock price date grant following table summarizes nonvested performance share awards outstanding december 31 2012 well activity year ended weightedaverage grant date fair value performance share awards granted 2010 4372 performance share awards granted 2011 total fair value performance share awards vested 2010 106 million performance share awards vested 2012 2011 restricted stock units rsus represent right receive unrestricted shares stock based service compensation cost amortized expense service period generally three four years fair value rsu granted equal share price date grant following table summarizes nonvested rsus outstanding december 31 2012 well activity year ended weightedaverage grant date fair value rsus granted 2011 2010 5257 4367 respectively total fair value rsus vested 2012 2011 2010 200 million 58 million 17 million respectively stock awards outside directors use stock awards compensate outside directors nonemployee director stock plans awards issued annually second quarter part compensation outside directors addition outside directors may elect director’s fees paid stock awards granted outside directors vest immediately related compensation cost expensed time award based fair value share beam’s stock date award following table summarizes shares beam’s common stock granted outside directors years ended december 31 2012 2011 2010 6 business separation costs business separation costs directly related implementing separation transactions refer note 3 discontinued operations additional information separation transactions recorded 138 million 838 million 23 million business separation costs years ended december 31 2012 2011 2010 respectively business separation costs 2012 primarily consist 151 million pension settlement charge associated required 29 million lump sum distribution benefits paid former fortune brands executives july 2012 partially offset decrease accrued liabilities estimated costs complete separation transactions settlement charge primarily consists recognition pension losses previously deferred aoci 29 million distribution amount executives’ unfunded pension benefit business separation costs 2011 consisted 434 million financial legal advisory fees related separation transactions well 404 million employeerelated costs primarily related termination benefits included within employeerelated business separation costs 2011 incremental stockbased compensation expense approximately 57 million related modification certain outstanding fortune brands equity awards discussed note 5 stockbased compensation 7 restructuring charges restructuring charges following summary restructuring charges continuing operations years ended december 31 2012 2011 2010 millions 2012 restructuring charges related organizational streamlining initiatives primarily relate relocation certain us finance human resource shared services deerfield headquarters kentucky ongoing integration pinnacle assets includes plans move pinnacle bottling operations maine existing operations kentucky 2011 restructuring charges related distribution supplychain initiatives facility consolidations organizational streamlining initiatives 2010 restructuring charges related facility consolidations organizational streamlining initiatives presently expect future cash charges related integration pinnacle assets approximately 5 million actual costs may vary estimates depending timing extent initiatives implement changes balance restructuring liability years ended december 31 2012 2011 follows millions expect remaining liability related workforce reductions paid 2013 remaining liability related lease costs paid lease term charges pretax operating income years ended december 31 2012 2011 2010 impacted following additional items millions relates onetime sale inventory associated transition new longterm manufacturing distribution agreement australia amount consists 463 million included “net sales” 227 million included “cost goods sold” consolidated statement income b amounts 2012 primarily consist costs associated acquisition integration pinnacle assets cooley business acquisition integrationrelated charges primarily included “selling general administrative expense” consolidated statement income 2012 acquisition integrationrelated charges included sga primarily consist contract termination expenses 10 million transactionrelated expenses 5 million professional advisory consulting transaction fees contract termination costs incurred align distribution acquired brands existing distribution structure based actual costs incurred amount 2011 consists acquisitionrelated contingent consideration related skinnygirl acquisition c amounts 2012 primarily consist legal forensic accounting fees related internal investigation foreign corrupt practices act compliance india operations amounts 2011 primarily consist charges related pension curtailment accelerated depreciation fixed assets taken service early writedown inventory associated discontinued brands partially offset net benefit related settlement nonincome tax matter amounts 2010 primarily relate organizational streamlining activities 8 income components income years ended december 31 2012 2011 2010 follows millions refer note 9 income taxes additional information b refer note 4 investments unconsolidated affiliated companies additional information 9 income taxes components income loss continuing operations income taxes years ended december 31 2012 2011 2010 follows millions reconciliation income taxes 35 federal statutory income tax rate income taxes continuing operations years ended december 31 2012 2011 2010 follows millions fourth quarter 2012 us tax authorities concluded routine audit us companies 2008 2009 tax years joint committee taxation approved refund approximately 255 million formal acknowledgement notice irs district director issuance refund expected received first quarter 2013 2012 effective tax rate includes unfavorable impact adjustments income tax expense approximately 7 million related correction prior year items determined immaterial periods impacted fourth quarter 2012 spanish tax authorities concluded routine audit spanish spirits companies 2006 2009 tax years spanish tax authorities issued tax assessment approximately 17 million 134 million income tax 36 million related interest payment made first quarter 2013 second quarter 2012 spanish supreme court issued judgment connection disputed income taxes amount approximately 20 million spanish subsidiaries include assets acquired pernod ricard sa “pernod ricard” july 2005 paid assessment spanish tax authorities may 2012 pursuant acquisition agreement pernod ricard indemnified us preacquisition income tax contingencies liabilities negotiated received reimbursement approximately 18 million pernod ricard nontaxable indemnification payment received pernod ricard related judgment recorded income 2012 2011 mexican tax authorities issued assessment tax interest mexican spirits companies include assets acquired pernod ricard july 2005 pursuant acquisition agreement pernod ricard indemnified us preacquisition income tax contingencies liabilities assessment related 2004 2005 pre acquisition tax years mexican tax authorities issued net assessment approximately 255 million 148 million tax 107 million related interest penalties paid september 2011 pursuant acquisition agreement negotiated received 260 million tax indemnification payment pernod ricard related assessment recorded payment income 2011 german tax authorities completed audit german spirits companies’ 20032007 tax returns recorded approximately 19 million previously unrecognized tax benefits reduction tax expense 2010 spanish tax authorities issued three assessments tax andor interest spanish spirits companies include assets acquired pernod ricard july 2005 assessments related 19881990 20042006 periods majority related preacquisition tax years spanish tax authorities issued net assessments approximately 422 million 275 million tax 147 million related interest paid 2010 pursuant acquisition agreement negotiated received 371 million tax indemnification payments pernod ricard related assessments recorded payments income net difference represents future income tax benefits also 2010 settled 20042005 irs audit appeal irs concluded routine examination company’s 20062007 tax years reduction unrecognized tax benefits “utbs” audits concluded 2010 presented tabular reconciliation beginning ending amount utbs years ended december 31 2012 2011 2010 follows millions 2012 amount includes 102 million recorded “loss income discontinued operations net tax” amount utbs recognized december 31 2012 would affect effective tax rate 350 million various us federal state foreign income tax examinations currently progress reasonably possible liability associated unrecognized tax benefit liabilities increase decrease within next twelve months result examinations expiration statutes limitation december 31 2012 believe reasonably possible within next 12 months total utbs may decrease range 49 million 110 million classify interest penalty accruals related utbs income tax expense years ended december 31 2012 2011 2010 recognized interest penalty benefit 95 million 10 million 122 million respectively primarily driven audit resolutions december 31 2012 2011 accruals payment interest penalties 181 million 346 million respectively file us federal income tax returns various state local foreign income tax returns major tax jurisdictions tax years remain open subject examination tax authorities include united states years 2007 canada years 2007 france years 2008 germany years 2007 mexico years 2006 spain years 2009 united kingdom years 2010 income tax expense benefit years ended december 31 2012 2011 2010 follows millions components net deferred tax assets liabilities december 31 2012 2011 follows millions deferred taxes classified balance sheet december 31 2012 2011 follows millions december 31 2012 2011 deferred tax assets relating net operating loss capital loss tax carryforwards 445 million 702 million respectively approximately 06 million expire 2013 2015 remainder expire 2016 thereafter 2012 change valuation allowance primarily due spain audit settlement 2011 change valuation allowance primarily due utilization approximately 205 million tax loss carryforwards related sale golf business discussed note 3 discontinued operations partially offset 25 million increase valuation allowance increased tax expense loss carryforwards certain countries valuation allowance increased 6 million december 31 2009 215 million december 31 2010 primarily due establishment approximate 205 million valuation allowance golfrelated capital loss carryforwards 2010 sale cobra product line provide deferred income taxes undistributed earnings foreign subsidiaries consider indefinitely reinvested based ongoing review business requirements capital needs combined cash flows domestic operations available fulfill requirements determined undistributed earnings certain subsidiaries indefinitely invested fund current future growth related nonus business activities undistributed earnings foreign subsidiaries considered indefinitely invested 230 million aggregate december 31 2012 though current expectation repatriate aforementioned amount estimated net federal income tax liability would arise earnings distributed us range approximately 30 million 50 million estimate based assumptions would required distribute entire amount earnings december 31 2012 local country tax restrictions making distributions tax liability would result actual distribution future date would likely result different tax amount depending upon repatriation action utilized tax laws effect local country us 10 earnings per share basic earnings per common share “eps” calculated dividing net income attributable common stockholders weighted average number shares common stock outstanding year diluted eps calculated using treasury share method giving effect potentially dilutive securities outstanding computations basic diluted eps share years ended december 31 2012 2011 2010 follows millions except per share data 11 balance sheet information supplemental balance sheet information december 31 2012 2011 follows millions beginning ending balances component accumulated comprehensive loss december 31 2012 changes components 2012 follows millions 12 goodwill intangible assets change net carrying amount goodwill years ended december 31 2012 2011 follows millions acquisitionrelated adjustments 2012 relate acquisition pinnacle assets acquisition cooley see note 2 acquisitions dispositions information acquisitions acquisitionrelated adjustments 2011 related acquisition skinnygirl readytodrink cocktail business tax adjustments related prioryear acquisition goodwill reporting unit december 31 2012 2011 follows millions result separation transactions described note 3 discontinued operations reevaluated reporting units allocated goodwill reporting units december 31 2011 goodwill allocated reporting units based relative fair values reporting units fair value based combination market multiple approach discounted cash flow approach weighted 50 fair value market multiple approach reflected prices relevant observable information generated market transactions involving comparable businesses fair value discounted cash flow approach calculated using expected present value future cash flows included estimates judgments assumptions consistent market participant management believes appropriate circumstances estimates judgments significantly affect fair value calculations assumptions related longterm growth rates particular spirits categories geographies expected profit margins discount rates amortizable identifiable intangible assets principally tradenames customer relationships subject amortization estimated useful life 5 40 years based assessment number factors may impact useful life factors include historical projected tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion relevant factors gross carrying value accumulated amortization class intangible assets december 31 2012 2011 follows millions carrying value tradenames 2012 impacted primarily acquisitions note 2 acquisitions dispositions reclassification larios tradename indefinitelived tradename amortizable tradename described 2012 2011 foreign currency exchange rates impairment charges described pinnacle tradename acquired 2012 estimated fair value 150 million indefinite useful life calico jack tradename acquired 2012 estimated fair value 6 million useful life 15 years tradenames acquired 2012 cooley acquisition primarily indefinitelived intangible assets expected amortization expense next five years intangible assets recorded december 31 2012 follows millions cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions addition certain assumptions estimates used determining fair value goodwill indefinitelived tradenames outside control management including interest rates us abroad exchange rates cost capital tax rates due uncertainty aforementioned items cannot predict whether future impairment result december 31 2012 one indefinitelived tradename dyc carrying value approximately 90 million 10 reduction fair value would trigger impairment based estimates fair value reporting units december 31 2012 believe reporting units decline fair value 10 could trigger impairment goodwill 2012 asset impairment charges connection annual indefinitelived intangible asset impairment testing fourth quarter 2012 recorded impairment charge 156 million reduce larios tradename estimated fair value 547 million considered level 3 fair value measure refer note 15 fair value measurements information estimating fair value tradenames impairment primarily due lower projected future revenue brand compared projected revenues estimated impairment test conducted fourth quarter 2011 factors contributed lower revenue projections included 2012 actual results compared 2012 outlook continued economic challenges spanish market current competitive outlook within spirits category tradename competes among factors also reassessed remaining life larios tradename concluded longer indefinite december 31 2012 reclassified larios tradename definitelived asset estimated remaining life 30 years based expectations brand’s contributions future cash flows considering factors described 2011 asset impairment charges connection annual indefinitelived intangible asset impairment testing fourth quarter 2011 recorded impairment charges 313 million reduce dyc larios tradenames estimated combined fair value 1574 million level 3 fair value measure refer note 15 fair value measurements information estimating fair value tradenames impairments due combined effect economic downturn sales key geographic markets well effect substantially higher discount rate used estimate fair value higher discount rate attributable increase sovereign risk spread associated spain 13 debt shortterm debt borrowings consisted amounts outstanding committed bank credit agreements uncommitted bank lines credit weightedaverage interest rate shortterm debt borrowings 13 16 2012 2011 respectively amount available unused committed credit lines 776 million december 31 2012 components longterm debt december 31 2012 2011 follows millions may 2012 issued 300 million aggregate principal amount 1875 notes due 2017 “2017 notes” 300 million aggregate principal amount 3250 notes due 2022 “2022 notes” together 2017 notes “notes” net proceeds used finance acquisition pinnacle assets 2017 notes mature may 15 2017 bear interest fixed rate 1875 per annum 2022 notes mature may 15 2022 bear interest fixed rate 3250 per annum company pays interest notes semiannually arrears may 15 november 15 year notes constitute unsecured unsubordinated obligations company rank parity company’s unsecured unsubordinated indebtedness time outstanding december 2011 executed 750 million 5year committed revolving credit agreement “credit agreement” used general corporate purposes credit agreement replaced beam’s 750 million 3year credit agreement scheduled mature february 2013 amounts may borrowed credit agreement us dollars euros british pounds sterling interest eurocurrency loans accrue libor interest periods 1 2 3 6 months plus spreads based credit ratings assigned beam’s outstanding senior unsecured debt interest alternate base rate loans accrue highest administrative agent’s prime rate ii federal funds effective rate plus 12 1 per annum iii adjusted london interbank offered rate defined credit agreement plus 1 per annum beam may also request competitive bids negotiated rates interest loans credit agreement beam may subject satisfaction certain conditions request aggregate principal amount facility increased 250 million aggregate credit agreement contains among things conditions precedent covenants representations warranties events default customary facilities type covenants include certain limitations secured debt saleleaseback transactions subsidiary debt guarantees fundamental changes transactions affiliates credit agreement also includes financial covenants beam required maintain minimum ratio consolidated ebitda consolidated interest expense 300 100 ii maximum ratio debt capitalization 055 100 consolidated interest expense disclosed financial statements total capital defined debt plus equity deferred taxes excluding impact impairment charges incurred december 14 2011 none debt instruments include financial ratio covenants december 31 2012 compliance debt covenants november 2011 redeemed portion outstanding 4 notes due 2013 500 million aggregate principal amount outstanding prior redemption total cash paid holders notes approximately 298 million 408 million included approximately 281 million 386 million debt principal approximately 9 million 12 million accrued interest approximately 8 million 10 million purchase premiums november 2011 redeemed full outstanding 3 notes due 2012 400 million aggregate principal amount outstanding prior redemption total cash paid holders 3 notes approximately 411 million included 400 million aggregate principal approximately 5 million accrued interest approximately 6 million purchase premiums related fourth quarter 2011 financing activities 160 million purchase premiums acceleration unamortized debt issuance costs fees 17 million gain associated amortizationwriteoff deferred gains related terminated interest rate swaps 25 million recorded “loss early extinguishment debt” accompanying consolidated statement income august 2011 used proceeds sale golf business complete early extinguishment debt consisting following principal amounts millions total cash paid holders tendered notes debentures august 2011 approximately 106 billion included 9110 million debt principal 79 million accrued interest 1390 million purchase premiums 1390 million purchase premiums gain associated amortizationwriteoff deferred gains related terminated interest rate swaps 105 million acceleration unamortized debt issuance costs 55 million recorded “loss early extinguishment debt” accompanying consolidated statement income see note 14 derivative instruments additional information termination interest rate swaps third quarter 2011 january 2011 repaid maturing notes 5906 million using cash hand second quarter 2010 repurchased outstanding notes scheduled mature january 15 2011 face value 1594 million loss repurchase 44 million recognized income debt agreements normal customary events default would permit lenders debt agreement accelerate debt cured within applicable grace periods failure pay principal interest due change control company estimated payments maturing debt next five years december 31 2012 follows millions 14 derivative instruments enter financial instruments trading speculative purposes principally use foreign exchange contracts interest rate swap contracts reduce impact changes foreign currency exchange rates interest rates enter foreign exchange contracts hedge forecasted sales purchases denominated select foreign currencies thereby limiting currency risk would otherwise result changes exchange rates periods foreign exchange contracts correspond periods forecasted transactions generally exceed 12 15 months recent balance sheet date also enter foreign exchange contracts hedge risk changes fair value recognized foreign currency denominated assets liabilities primary foreign currency hedge contracts pertain mexican peso canadian dollar euro british pound australian dollar us dollar equivalent notional amount foreign currency derivative hedges outstanding december 31 2012 2011 2538 million 4504 million respectively 2012 entered fixedtofloating interest rate swaps aggregate notional amount 200 million swap agreements hedge changes fair value portion fixedrate debt result changes interest rates counterparty pays us fixed interest rate equal coupon debt pay counterparty floating interest rate based us libor plus fixed spread swap agreements designated fair value hedges 2011 fixedtofloating interest rate swaps notional value 900 million outstanding prior termination swaps due separation transactions prior termination third quarter 2011 swaps designated fair value hedges counterparties derivative contracts major financial institutions subject credit risk contracts equal fair value instruments date financial statements management believes risk incurring material losses unlikely losses would immaterial derivatives recognized fair value date derivative contract entered designate derivative 1 hedge fair value recognized asset liability fair value hedge 2 hedge forecasted transaction variability cash flow paid cash flow hedge 3 undesignated instrument changes fair value derivative qualified designated highly effective fair value hedge along offsetting gain loss hedged asset liability recorded current earnings company includes gain loss hedged items line item offsetting loss gain related derivatives changes fair value derivative qualified designated highly effective cash flow hedge recorded comprehensive income reclassified net income period periods hedged transaction affects net income changes fair value undesignated derivative instruments ineffective portion designated derivative instruments reported net income fair values derivative instruments consolidated balance sheet december 31 2012 2011 millions effects derivative instruments consolidated statements income comprehensive income years ended december 31 2012 2011 millions estimate net derivative losses included aoci reclassified net income within next twelve months december 31 2012 insignificant years ended december 31 2012 2011 ineffective portion cash flow hedges recognized income insignificant 15 fair value measurements authoritative accounting guidance establishes threetier fair value hierarchy prioritizes inputs used measuring fair values follows • level 1 observable inputs quoted prices identical assets active markets • level 2 inputs quoted prices identical assets active markets observable either directly indirectly • level 3 unobservable inputs little market data requires use valuation techniques development assumptions assets liabilities measured fair value recurring basis december 31 2012 2011 follows millions fair value derivative financial instruments based standard valuation techniques use possible current marketbased independently sourced pricing units interest rates currency rates implied volatilities estimated fair value acquisitionrelated contingent consideration excludes earned amounts payable yearend considered level 3 measurement probabilityweighted discounted cash flow methodology used estimate fair value includes use significant unobservable inputs primarily contractual contingent consideration sales targets assumed probabilities achieving targets change assumed inputs cannot increase estimated obligation 2 million significant change either estimated contingent consideration fair value fair value inputs 2012 change fair value estimated contingent consideration liability 2012 related actual amounts earned 2012 cash equivalents consist bank deposits carried cost due shortterm nature cash balances cost approximates fair value carrying value estimated fair value cash equivalents considered level 2 fair value measurement december 31 2012 2011 3657 million 2183 million respectively fair value longterm debt including current portion determined quoted market prices available estimates using discounted cash flow analyses based current borrowing rates similar types borrowing arrangements fair value longterm debt considered level 2 fair value measurement approximately 27065 million 20154 million december 31 2012 2011 respectively 2012 2011 recorded certain tradenames fair value due annual indefinitelived intangible asset testing fourth quarter years refer note 12 goodwill intangible assets information estimated fair value using discounted cash flow analysis fair values considered level 3 fair value measures due use significant unobservable inputs including future expected revenue profit margins generated brands key assumptions fair value measure include discount rates estimates fair market royalty rates increases decreases expected revenue profit margin discount rate royalty rate isolation would change fair value estimate larios tradename 10 decrease fair value larios tradename would result impairment approximately 55 million december 31 2012 16 leases future minimum rental payments noncancelable operating leases december 31 2012 follows millions total rental expense operating leases reduced insignificant amounts subleases amounted 206 million 205 million 239 million 2012 2011 2010 respectively 17 pension postretirement benefits number pension plans covering many current former employees plans provide payment retirement benefits mainly commencing ages 55 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service andor earnings employer contributions plans made necessary ensure legal funding requirements satisfied addition time may make contributions excess legal funding requirements part separation transactions described note 3 discontinued operations pension plans directly related discontinued operations transferred assets liabilities disposed businesses 2011 fortune brands pension plans related fortune brands corporate operations remained beam following spinoff however pursuant spinoff agreements portion corporate pension plan assets liabilities related fortune brands corporate employees obtained employment home security subsequent spinoff transferred home security historical information prespinoff presented footnote recast impracticable related effects insignificant amounts presented related assets liabilities shown transfers plan asset obligation activity tables third quarter 2011 amended certain pension plans us freeze accrual future benefits effective december 31 2011 freeze relates beam nonunion employees provide postretirement health care life insurance benefits certain retirees many employees retirees outside united states covered government health care programs pension plans following tables provide reconciliation changes benefit obligations fair value assets years ended december 31 2012 2011 millions amounts recognized balance sheet december 31 2012 2011 consist millions amounts included accumulated comprehensive loss december 31 2012 2011 consist following millions approximately 70 million us plans 12 million international plans amounts accumulated comprehensive loss expected recognized components net periodic benefit cost 2013 primarily relating net actuarial losses pension benefit obligation accumulated benefit obligation fair value plans assets pension plans accumulated benefit obligations excess plan assets december 31 2012 2011 shown millions components net periodic benefit cost continuing operations years ended december 31 2012 2011 2010 follows millions discussed note 6 business separation costs recorded 151 million pension settlement charge 2012 associated required 29 million lump sum distribution benefits paid former fortune brands executives july 2012 2011 addition net periodic benefit cost shown recognized costs 135 million related special postretirement termination benefits certain departing executives result separation transactions costs included within “business separation costs” consolidated statement income weightedaverage assumptions used determine future benefit obligations december 31 2012 2011 follows weightedaverage assumptions used determine net periodic benefit cost years ended december 31 2012 2011 2010 follows fair value plan assets us pension plan assets major category plan assets type fair value measurement december 31 2012 2011 follows millions reconciliation level 3 measurements assets us pension plans years ended december 31 2012 2011 follows millions international pension plan assets major category plan assets type fair value measurement december 31 2012 2011 follows millions reconciliation level 3 measurements assets international pension plans years ended december 31 2012 2011 follows millions defined benefit trusts variety assets including equity fixed income real estate securities well group annuityinsurance contracts commingled funds commingled trust fund valuations based net asset value nav funds determined administrator fund reviewed us nav represents underlying assets owned fund minus liabilities divided number shares units outstanding valuations group annuityinsurance contracts based daily closing prices underlying securities institutional evaluation prices consistent industry practices investment policy strategy investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility us defined benefit plan adopted dynamic strategy reduce plan’s investment risk funded status improves strategy reduce allocation return seeking assets increase allocation liability hedging assets time intention reducing volatility funded status pension costs us investment policy currently targets 60 allocation return seeking assets 40 liability hedging assets based plan’s current funded status return seeking assets comprised approximately 85 equity 15 investments liability hedging assets comprised intermediateterm longterm investment grade corporate bonds nonus investment asset allocation targets may differ depending country allowing 90 equity 100 fixed investments 20 real estate asset allocations based underlying liability structure local regulations retirement asset allocations reviewed periodically ensure allocation meets needs liability structure cash flows contributions based current assumptions december 31 2012 expect contribute approximately 17 million 34 million respectively us international pension plans 2013 estimated future retirement benefit payments estimated future benefit payments pension plans follows december 31 2012 millions estimated future retirement benefits payments estimates could change significantly based differences actuarial assumptions actual events decisions related lump sum distribution options available participants certain plans postretirement benefit plans following tables provide reconciliation changes benefit obligations fair value assets years ended december 31 2012 2011 postretirement benefit plans millions amounts recognized balance sheet december 31 2012 2011 consist millions amounts included accumulated comprehensive loss consist following postretirement benefit plans december 31 2012 2011 millions approximately 08 million amounts accumulated comprehensive loss expected recognized components net periodic benefit cost 2013 primarily relating amortization prior service credits certain postretirement benefit plans components net periodic income continuing operations postretirement benefit plans years ended december 31 2012 2011 2010 follows millions weightedaverage assumptions used determine future benefit obligations december 31 2012 2011 follows weightedaverage assumptions used determine net periodic benefit cost years ended december 31 2012 2011 2010 follows assumed weightedaverage health care trend rates december 31 2012 2011 follows onepercentagepoint increasedecrease assumed health care cost trend rates would increasedecrease postretirement benefit obligation 05 million impact onepercentage point increasedecrease service interest cost significant cash flows based current assumptions expect contribute approximately 12 million retiree healthcare plan 2013 estimated future benefit payments retiree healthcare plan approximately 1 million per year next five years aggregate 5 million five years thereafter estimated future retirement benefits payments estimates could change significantly based differences actuarial assumptions actual events defined contribution plan contributions sponsor number defined contribution plans contributions determined various formulas expense recognized plans 152 million 130 million 126 million 2012 2011 2010 respectively 18 commitments contingencies legal tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation known brown williamson holding inc bw connection sale bw atco subsequently merged bw agreed indemnification agreement indemnification agreement indemnify company claims including legal expenses arising smoking health firesafe cigarette matters relating tobacco business atco july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company “indemnitor” indemnification agreement indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations numerous legal actions proceedings claims pending various jurisdictions leading tobacco manufacturers including bw individually successor merger atco based upon allegations cancer ailments resulted tobacco use company named defendant cases claims generally fallen within three categories smoking health cases alleging personal injury brought behalf individual plaintiffs ii smoking health cases alleging personal injury damages purporting brought behalf classes individual plaintiffs iii health care cost recovery cases including class actions brought foreign governments unions health trusts taxpayers others seeking reimbursement health care expenditures allegedly caused cigarette smoking damages claimed cases range billions dollars possible predict outcome pending tobaccorelated litigation possible actions could decided unfavorably management unable make reasonable estimate amount range loss could result unfavorable outcome pending litigation management believes number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor management believes pending actions material adverse effect upon results operations cash flows financial condition company believes meritorious defenses company indemnified indemnification agreement september 14 2011 connection spinoff company agreed indemnify home security losses arising smoking health firesafe cigarette matters relating tobacco business company’s predecessors former subsidiaries internal investigation previously disclosed performing investigation whether business india conducted compliance company policies applicable law including foreign corrupt practices act commenced investigation result information obtained internal compliance procedures internal audit india business voluntarily notified us department justice “doj” sec investigation providing doj sec updates progress presently unable predict duration scope result related costs internal investigation potential investigations doj sec authority time also cannot reasonably estimate potential liabilities may result doj’s sec’s review accruals potential liabilities established december 31 2012 however reasonably possible liabilities could material impact results operations cash flows financial condition addition ongoing conduct investigation implementation remedial measures likely continue near term disruptive effect india business india business accounted approximately 2 consolidated net sales approximately 9 apsa net sales twelve months ended december 31 2012 smaller percentage consolidated operating income legal matters time company subject various lawsuits claims disputes investigations normal conduct operations include limited commercial disputes purported class actions employment claims actions tax customs authorities internal investigations environmental matters legal proceedings include claims substantial unspecified damages believe meritorious defenses actions contesting vigorously believe currently pending legal proceedings investigations party material adverse effect results operations cash flows financial condition guarantees partially guaranteed credit facilities entered certain joint ventures maximum guarantee exposure assuming credit facilities fully utilized total us dollar equivalent 256 million guarantee exposure 231 million based facilities utilized december 31 2012 recorded liability guarantees part sale golf business agreed indemnify buyer certain estimated tax related obligations paid buyer relate periods owned golf business estimate liabilities tax indemnifications approximately 50 million 40 million december 31 2012 2011 respectively december 31 2012 approximately 20 million recorded within “other current liabilities” approximately 30 million recorded within “other noncurrent liabilities” consolidated balance sheet change liability amount primarily due increased obligations related state foreign income taxes indemnified agreement offset payment portion estimated obligation actual obligation may differ based closure tax period taxing authorities tax authority audit resulting change amount tax due refundable including related interest andor penalties applicable commitments purchase obligations primarily include contracts raw materials advertising selling administrative services capital expenditures purchase obligations december 31 2012 millions customer concentration year ended december 31 2012 top three customers southern wine spirits company’s 50 owned joint ventures edrington group cocacola amatil collectively accounted 40 net sales accounts receivable three customers similarly concentrated december 31 2012 net sales accounts receivable prior years believe relationships top three customers good collection amounts due three customers december 31 2012 reasonably assured loss customers would offset availability distributors products minimal disruption operations 19 267 convertible preferred stock november 20 2012 completed previously announced redemption outstanding shares 49590 shares 267 convertible preferred stock converted accordance terms shares common stock result redemption longer issued outstanding shares 267 convertible preferred stock pursuant redemption stockholders tendered outstanding shares payment aggregate redemption price 3102 per share 3050 per share plus accrued unpaid dividends 052 per share paid aggregate redemption price shares cash fourth quarter 2012 153710 shares 267 convertible preferred stock outstanding december 31 2011 paid cash dividends preferred stock aggregate amount 03 million 252 per share year ended december 31 2012 04 million 267 per share years ended december 31 2011 2010 20 capital stock 750 million authorized shares common stock number shares common stock treasury stock share activity years ended december 31 2012 2011 follows paid cash dividends common stock aggregate amount 1298 million 082 per share 1174 million 076 per share 1158 million 076 per share years ended december 31 2012 2011 2010 respectively 21 segment information three operating segments also reportable segments north america emea europemiddle eastafrica apsa asiapacificsouth america reportable segments based internal organization business used management making operating decisions assessing performance key countriesmarkets included north america united states canada mexico key countriesmarkets included emea germany spain united kingdom russia turkey ireland italy hungary czech republic romania south africa north america duty free europe travel retail key countriesmarkets included apsa australia new zealand southeast asia china brazil india south korea japan operating segment derives revenues sale distilled spirits segment net sales net sales excluding items considered management unusual infrequent nature measure segment profitability regularly reviewed chief operating decision maker operating income chargesgains management believes considered indicative segments’ underlying operating performance consequently segment results presented accordance gaap exclude items chargesgains excluded segment results include asset impairment charges restructuring charges related restructuring initiatives cannot reported restructuring charges gaap acquisition integrationrelated costs business separation costs onetime sales impact transitioning longterm distribution agreement australia certain items believe considered indicative ongoing performance unallocated corporate costs 2011 2010 reflect estimated incremental historical fortune brands corporate structure compared estimated beam corporate structure following spinoff estimated lower corporate cost structure based analysis projections costs expected incurred us separation transactions occurred january 1 2011 financial information segment presented tables asset information segment presented information provided reviewed chief operating decision maker refer note 7 restructuring charges information restructuring charges net sales based country destination years ended december 31 2012 2011 2010 longlived assets december 31 2012 2011 location follows millions 22 quarterly financial data unaudited selected quarterly financial data years ended december 31 2012 2011 follows millions except per share data unusual items impacting quarter ended june 30 2012 include pretax basis 138 million business separation costs 121 million acquisition integrationrelated charges incurred connection may 2012 acquisition pinnacle assets 180 million tax indemnification income related resolution routine foreign tax audits b unusual items impacting quarter ended september 30 2012 include unfavorable income tax adjustment 7 million related correction prior year items determined immaterial periods impacted c unusual items impacting quarter ended december 31 2012 include 156 million pretax impairment larios tradename 22 million excess net foreign tax credits related us taxes applicable repatriation current year foreign earnings 9 million net tax benefit related resolution certain foreign us federal tax audits fourth quarter 2012 discovered certain income tax errors related discontinued golf operations primarily relating 2011 tax return filing process income tax errors resulted third quarter 2012 loss discontinued operations overstated net income understated approximately 11 million addition income discontinued operations net income 2011 understated 5 million related errors correction errors fourth quarter 2012 understated loss discontinued operations overstated net income 16 million consider errors immaterial quarterly annual periods impacted based several factors including fact errors impact businesses previously discontinued impact continuing operations unusual items impacting quarter ended march 31 2011 include pretax basis 463 million favorable onetime sales impact 236 million favorable onetime operating income impact associated transition new longterm manufacturing distribution agreement australia 92 million related business separation costs e unusual items impacting quarter ended june 30 2011 include pretax basis 80 million business separation costs f unusual items impacting quarter ended september 30 2011 include pretax basis 1340 million loss early extinguishment debt 686 million business separation costs 250 million acquisitionrelated contingent consideration 76 million gain related distribution maxxium investment g unusual items impacting quarter ended december 31 2011 include 313 million pretax impairment dyc larios tradenames 19 million tax benefit related resolution routine foreign tax audits 152 million pretax loss early extinguishment debt 23 subsequent events january 2013 sold certain nonstrategic economy brands related inventory approximately 65 million expect sale assets including allocated goodwill significant aftertax impact 2013 results operations brands sold north america generated 2012 revenues approximately 30 million volumes approximately 18 million cases part sale agreement continue produce bottle brands buyer january 2014 january 2013 repaid upon maturity remaining principal 2188 million 2969 million 4 notes primarily existing cash supplemented shortterm borrowings january 2013 entered cross currency interest rate swap aggregate notional amount 60 million derivative structured swap floating usd libor floating euribor floating interest rates reset paid quarterly termination swaps july 2014 swap expected minimal impact statement operations also 60 million nonfunctional currency intercompany notes receivable subject foreign currency translation gainloss however cash settlement gainloss upon termination swap may significant report independent registered public accounting firm board directors shareholders beam inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position beam inc subsidiaries december 31 2012 2011 results operations cash flows three years period ended december 31 2012 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2012 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois february 26 2013 item 9item 8 financial statements supplementary data beam inc subsidiaries consolidated statement income see notes consolidated financial statements beam inc subsidiaries consolidated statement comprehensive income see notes consolidated financial statements beam inc subsidiaries consolidated balance sheet see notes consolidated financial statements beam inc subsidiaries consolidated statement cash flows see notes consolidated financial statements beam inc subsidiaries consolidated statement equity see notes consolidated financial statements beam inc subsidiaries notes consolidated financial statements 1 description business basis presentation summary significant accounting policies description business beam inc subsidiaries “company” operate beverage alcohol industry references “we” “our” “us” “beam” “the company” refer beam inc consolidated subsidiaries whole unless context otherwise requires company’s reportable segments north america europemiddle eastafrica “emea” asiapacificsouth america “apsa” discussed note 22 segment information company leading premium spirits company makes sells branded distilled spirits products major markets worldwide principal products include bourbon whiskey tequila scotch whisky canadian whisky vodka cognac rum cordials readytodrink premixed cocktails basis presentation basis consolidation consolidated financial statements include accounts beam inc majorityowned subsidiaries elimination intercompany transactions use estimates presentation financial statements accordance generally accepted accounting principles us “gaap” requires us make judgments estimates assumptions affect amount assets liabilities financial statements revenues expenses reporting periods related disclosures actual results future periods could differ estimates presentation matters company formerly known fortune brands inc “fortune brands” separated three business segments 2011 completed sale golf business “golf business” july 2011 taxfree spinoff “spinoff” fortune brands home security inc “home security” october 2011 consolidated statements comprehensive income cash flows separately state classify activity relating discontinued operations 2011 reclassification adjustments presented component comprehensive income 2011 periods include amounts recorded earnings due sale golf business footnote disclosures relate continuing operations except noted otherwise revision prior period financial statements connection preparing consolidated financial statements three six months ended june 30 2013 identified errors affected prior interim annual periods related timing recognition sales nonbranded spirits primarily canadian whisky evaluated whether previously issued consolidated financial statements materially misstated considering guidance accounting standards codification “asc” 25010 sec staff accounting bulletin 99 materiality concluded errors individually aggregate material previously issued financial statements accordance accounting guidance asc 25010 sec staff accounting bulletin 108 considering effects prior year misstatements quantifying misstatements current year financial statements revised previously issued financial statements correct effect errors correction errors decreased net sales gross profit income continuing operations earnings per share continuing operations 62 million 14 million 11 million beam inc subsidiaries notes consolidated financial statements continued 001 respectively year ended december 31 2012 increased inventory deferred revenue 261 million 421 million respectively december 31 2012 correction errors decreased net sales gross profit income continuing operations earnings per share continuing operations 121 million 54 million 41 million 003 respectively year ended december 31 2011 increased inventory deferred revenue 213 million 359 million respectively december 31 2011 cumulative impact correction errors prior 2011 decrease stockholders’ equity 69 million also revised previously issued 2012 2011 financial statements correct following immaterial outofperiod adjustments identified connection preparing second quarter 2013 financial statements 2012 • revised 2012 2011 financial statements reflect outofperiod errors identified preparation second quarter 2013 interim financial statements correction outofperiod adjustments decreased gross profit income continuing operations earnings per share continuing operations 10 million 06 million 000 respectively year ended december 31 2012 decreased gross profit income continuing operations earnings per share continuing operations 45 million 27 million 002 respectively year ended december 31 2011 cumulative impact immaterial outofperiod adjustments prior 2011 decrease stockholders’ equity 10 million • 2012 recorded outofperiod adjustments correct errors related income taxes continuing discontinued operations previously disclosed adjustments increased decreased income tax expense related continuing operations discontinued operations 69 million 25 million respectively reversal outofperiod adjustments recording items proper periods following impacts revised financial statements • income continuing operations earnings per share continuing operations year ended december 31 2012 increased 69 million 004 respectively income continuing operations earnings per share continuing operations decreased 69 million 004 respectively year ended december 31 2011 • loss discontinued operations loss per share discontinued operations year ended december 31 2012 increased 25 million 002 respectively income discontinued operations earnings per share discontinued operations increased 50 million 003 respectively year ended december 31 2011 fourth quarter 2013 identified income tax error related pre2011 financial statements correction error resulted increase 134 million current assets retained earnings january 1 2012 consolidated balance sheet impact error material previously issued financial statements impacts revisions financial statements shown following tables cumulative impact correction errors prior 2011 increase stockholder’s equity 30 million refer accompanying consolidated statement equity beam inc subsidiaries notes consolidated financial statements continued following tables present effect corrections company’s consolidated statement income beam inc subsidiaries notes consolidated financial statements continued following tables present effect corrections company’s consolidated statement comprehensive income addition impact net income described following table presents effect corrections company’s consolidated balance sheet december 31 2012 corrections noncash revisions impact company’s cash flows prior periods following tables present effect corrections company’s consolidated statement cash flows summary significant accounting policies revenue recognition record revenue referred financial statements “sales” persuasive evidence arrangement exists delivery occurred price fixed determinable collectability reasonably assured delivery considered occurred title risk loss passes customer according terms contract customer us title risk loss usually beam inc subsidiaries notes consolidated financial statements continued transferred upon shipment receipt customers’ locations determined specific sales terms transactions record revenue sales joint ventures product sold end customersretail outlets joint venture sales terms allow right return except matters related manufacturing defects part revenue recorded net applicable provisions discounts allowances including earlypay discounts customer programs discussed taxes collected customers remitted governmental authorities reported net basis within “net sales” customer program costs provide variety sales incentives promote sales maintain competitive pricing incentive programs primarily intended distributors maintain competitive pricing recorded reduction net sales additional types incentive programs utilize include volumebased incentives typically involve rebates refunds specified amount cash distributor reaches specified level sales net sales reduced estimated amount volumebased incentives expected earned customers estimates based expectations distributors achieving contractual volume targets payouts associated targets cooperative advertising arrangements reimburse distributors portion costs incurred distributors advertise promote certain products generally recognize cost cooperative advertising programs manner consistent advertising cost policy described incentives typically used certain nonus markets typically classified advertising marketing expense cost goods sold cost goods sold includes costs make products saleable inbound outbound freight purchasing receiving costs inspection costs internal transfer costs addition depreciation expense associated assets used produce goods make saleable included cost goods sold advertising costs advertising costs include media costs point sale materials product endorsements generally expensed incurred advertising costs recorded “advertising marketing expense” 3386 million 3352 million 3023 million 2013 2012 2011 respectively selling general administrative expense selling general administrative expense includes selling expenses including commissions research development general administrative expenses stockbased compensation recognize stockbased compensation expense measured fair value award date grant financial statements period employee required provide services beam inc subsidiaries notes consolidated financial statements continued exchange award forfeitures estimated date grant revised actual expected forfeiture activity differs materially original estimates see note 5 stockbased compensation additional information cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts record allowance doubtful accounts based variety factors historical writeoffs aging balances specifically identified risks estimated losses resulting inability customers make required payments allowance doubtful accounts 123 million 140 million 98 million december 31 2013 2012 2011 respectively inventories record inventory firstin firstout “fifo” method accordance generally recognized trade practice maturing spirits inventories classified current assets although majority inventories ordinarily sold within one year due duration aging processes maturing spirits inventory includes costs production warehousing insurance inventory provisions recorded reduce inventory lower cost market value obsolete slow moving inventory based assumptions future demand marketability products impact new product introductions inventory turns product spoilage specific identification items product discontinuance material changes regulatoryrelated changes property plant equipment property plant equipment stated cost less accumulated depreciation generally calculated using straightline method estimated useful lives assets gains losses resulting dispositions included operating income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred assets held use disposed future date depreciated remaining useful life assets sold written fair value time assets actively marketed sale december 31 2013 2012 carrying value assets held sale material estimated useful lives related assets follows longlived assets test longlived asset including amortizable identifiable intangible assets asset group recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group cash flows based best estimate future cash flows derived beam inc subsidiaries notes consolidated financial statements continued recent business projections comparison indicates impairment amount impairment calculated based fair value fair value estimated primarily using discounted expected future cash flows marketparticipant basis goodwill amortized tested impairment least annually fourth quarter frequently circumstances warrant reporting units operating segments initially perform qualitative assessment determine whether likely fair value reporting unit less carrying amount result qualitative assessment completed december 31 2013 2012 2011 concluded goodwill impaired qualitative test indicates likely fair value reporting unit less carrying amount perform additional twostep impairment test step one carrying value reporting unit compared fair value step two applied carrying value fair value amount goodwill impairment derived deducting fair value reporting unit’s assets liabilities fair value reporting unit total comparing amount carrying amount goodwill intangible assets amortize purchased intangible assets goodwill useful lives unless lives determined indefinite determination useful life intangible asset goodwill based factors including historical projected trade name performance consumer name recognition geographic market presence market share plans ongoing trade name support promotion certain trade names assigned indefinite life currently anticipate trade names contribute cash flows company indefinitely indefinitelived intangible assets amortized evaluated least annually determine whether indefinite useful life appropriate review indefinitelived intangible assets impairment annually fourth quarter whenever market business events indicate may potential impairment intangible compare carrying value indefinitelived trade name fair value impairment losses trade names recorded extent carrying value indefinitelived intangible asset exceeds fair value measure fair value using standard relieffromroyalty approach estimates present value royalty income could hypothetically earned licensing trade name third party estimated remaining useful life refer note 12 goodwill intangible assets information related impairments recorded 2013 2012 changes indefinite life assumptions two trade names factors impacting fair value intangibles assets including possible future impairments joint venture investments make investments include joint ventures either complement expand existing businesses equity method accounting used account investments ability exercise significant influence operating financial policies joint venture record share joint venture’s income increase investment dividends received reduction investment record share joint venture’s earnings income equity method requires impairment losses recognized otherthantemporary losses investment value carrying value beam inc subsidiaries notes consolidated financial statements continued pension postretirement benefit plans provide range benefits employees retired employees including pension postretirement postemployment health care benefits use various actuarial assumptions including discount rates assumed rates return compensation increases turnover rates health care cost trend rates recognize expense obligations associated plans review actuarial assumptions annual basis make modifications assumptions based current economic conditions trends use marketrelated value method plan assets recognizes difference expected return actual return plan assets fiveyear period discount rate used measure obligations based spotrate yield curve matches projected future benefit payments appropriate interest rate applicable timing projected future benefit payments expected rate return plan assets determined based nature plans’ investments expectations longterm rates return compensation increases reflect expected future compensation trends postretirement benefits health care trend rate assumption based historical cost increases expectations longterm increases effects actuarial deviations assumptions generally accumulated outside specified corridor amortized remaining service period employees active plans expected remaining life participants plans substantially frozen cost benefit plan changes increasing decreasing benefits prior employee service prior service cost deferred included expense straightline basis average remaining service period related employees believe assumptions use record obligations plans presented note 17 pension postretirement benefits reasonable based experience however differences actual experience changes assumptions may materially affect business results operations cash flows financial condition income taxes establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse record valuation allowance reduces deferred tax assets likely assets realized provide deferred income taxes undistributed earnings foreign subsidiaries expect indefinitely reinvest record liabilities uncertain income tax positions based twostep process first step recognition evaluate whether individual tax position likelihood greater 50 sustained upon examination based technical merits position including resolution related appeals litigation processes record tax benefit tax positions currently estimated less 50 likelihood sustained tax positions met recognition threshold first step perform second step measuring benefit recorded actual benefits ultimately realized may differ estimates future periods changes facts circumstances new information may require us change recognition measurement estimates regard individual tax positions record changes recognition measurement estimates results operations financial position period changes occur foreign currency translation translate foreign currency balance sheet accounts us dollars actual rates exchange balance sheet date translate income expenses average rates exchange effect period foreign subsidiaries local currency functional currency record related translation adjustments comprehensive income loss transactions denominated currency functional currency subsidiary translated functional currency resulting transaction gains losses recorded income beam inc subsidiaries notes consolidated financial statements continued derivative financial instruments recognize derivatives either assets liabilities balance sheet derivative designated fair value hedge highly effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income loss recognized net income hedged item affects earnings ineffective portions changes fair value cash flow hedges immediately recognized net income environmental matters subject federal state laws regulations relating protection environment including regulations related remediating hazardous wastes december 31 2013 2012 estimated liabilities related environmental matters 155 million 150 million respectively included noncurrent liabilities consolidated balance sheet liabilities remediation obligations based undiscounted future cash flows possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts may undertake future due status laws regulations technology information related individual sites uncertainties believe cost complying present environmental protection laws material adverse effect results operations cash flows financial condition recently issued accounting standards presentation unrecognized tax benefits july 2013 financial accounting standards board “fasb” issued accounting standards update “asu” 201311 “presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists” guidance requires netting unrecognized tax benefits “utbs” deferred tax assets loss carryforward would apply settlement uncertain tax positions guidance effective annual reporting periods beginning december 15 2013 calendar year 2014 beam believe adoption guidance material impact financial statements disclosures reporting amounts reclassified accumulated comprehensive income february 2013 fasb issued asu 201302 “reporting amounts reclassified accumulated comprehensive income” guidance requires entity present either face statement net income presented notes significant amounts reclassified accumulated comprehensive income “aoci” respective line items net income amount reclassified required gaap reclassified net income entirety reporting period amounts required gaap reclassified entirety net income eg net periodic pension benefit cost entity required crossreference disclosures required gaap provide additional detail amounts guidance effective beam beginning first quarter 2013 adoption guidance material impact consolidated financial statements beam inc subsidiaries notes consolidated financial statements continued 2 acquisitions dispositions divestitures 2013 january 2013 sold certain nonstrategic economy brands related inventory approximately 63 million brands whose sales component north america segment generated revenues approximately 30 million year ended december 31 2012 connection sale recorded pretax gain 120 million 80 million tax 2013 acquisitions 2012 pinnacle calico jack brands assets may 2012 acquired pinnacle vodka calico jack rum brands certain related assets collectively referred “pinnacle assets” white rock distilleries inc “white rock” shareholders approximately 608 million consisting 602 million paid closing plus working capital adjustment 6 million paid august 2012 connection acquisition also paid 3 million closing white rock related postclosing compensation agreements certain employees recognized expense service period employees following table summarizes values assets acquired liabilities assumed acquisition date millions goodwill calculated excess consideration paid net assets acquired represents synergies organic growth benefits expected arise integrating pinnacle assets operations goodwill recorded north america segment expected deductible tax purposes year ended december 31 2012 addition pinnacle assets increased net sales approximately 87 million operating income approximately 3 million amounts inclusive direct acquisition charges well charges associated integration pinnacle assets operations cost synergies realized december 31 2012 beam inc subsidiaries notes consolidated financial statements continued following table summarizes supplemental pro forma consolidated results operations acquired pinnacle assets january 1 2011 years ended december 31 2012 2011 millions except per share information historical financial information adjusted give effect pro forma adjustments directly attributable acquisition ii factually supportable pro forma consolidated results necessarily indicative consolidated results operations actually would completed acquisition january 1 2011 historical results included pro forma consolidated results purport project future results operations combined company reflect expected realization cost savings revenue synergies associated acquisition addition pro forma consolidated results adjust impact restructuring chargesgains incurred periods presented charges directly attributable acquisition pro forma consolidated results primarily reflect following pro forma pretax adjustments • adjustment amortization expense reflect pro forma amortization expense based amortization intangible assets acquired based fair values useful lives assigned see note 12 goodwill intangible assets estimated annual amortization expense associated pinnacle assets approximately 04 million • additional interest expense associated incremental debt issued finance acquisition approximately 68 million 164 million years ended december 31 2012 2011 respectively • incurred acquisitionrelated charges approximately 12 million 2012 charges primarily include legal financial advisory fees contract termination fees continuing impact combined company’s operating results order present pro forma net income assuming acquisition occurred january 1 2011 impact charges eliminated pro forma net income year ended december 31 2012 included pro forma net income year ended december 31 2011 • adjustment reflect tax expense pinnacle pretax earnings pro forma adjustments assumed 38 combined federal state tax rate beam inc subsidiaries notes consolidated financial statements continued cooley distillery plc january 2012 acquired cooley distillery plc “cooley” irish whiskey producer purchase price approximately 60 million 75 million plus repayment outstanding debt following table summarizes values assets acquired liabilities assumed acquisition date millions none goodwill primarily relates north america emea segments expected deductible tax purposes cooley’s results operations material 2012 results included consolidated financial statements date acquisition repayment indebtedness connection transaction included “decrease shortterm debt net” within accompanying consolidated statement cash flows acquisitions 2011 march 2011 acquired skinnygirl readytodrink cocktail business acquisition included inventory identifiable intangible assets recorded estimated fair value contingent consideration based achievement certain sales targets acquisition date 2013 2011 recorded decrease increase 12 million 28 million respectively estimated contingent consideration liability “selling general administrative expense” accompanying consolidated statement income refer note 15 fair value measurements information related estimated fair value acquisitionrelated contingent consideration december 31 2013 dispositions 2011 refer note 3 discontinued operations information dispositions 2011 3 discontinued operations 2013 costs primarily related increase estimated environmental obligation related business disposed prior 2011 well additional tax expense related golf business home security beam inc subsidiaries notes consolidated financial statements continued 2012 recorded adjustments amounts previously reported discontinued operations primarily related 2011 spinoff home security 2011 sale golf business described note 1 adjustments consist pretax charges 33 million 18 million related increase estimated tax indemnification obligations buyer golf 8 million primarily related reduction indemnification receivable home security due conclusion 20082009 us tax audit 7 million related increase estimated environmental obligation related business disposed prior 2011 recorded 15 million net tax benefit related previously reported discontinued operations primarily due 4 million net tax benefit related golf business 8 million tax benefit related mentioned home security pretax expense 3 million tax benefit related pretax increase environmental obligations 4 million net tax benefit related golf business primarily due tax benefits associated increase indemnification obligation partially offset decrease estimated foreign tax credits available offset taxes due sale golf business additional adjustments may recorded future periods continue settle liabilities related discontinued operations primarily related prejuly 2011 taxes golf business refer note 9 income taxes information conclusion tax audits 2011 separation transactions october 2011 beam completed spinoff home security paying pro rata dividend one share common stock par value 001 per share home security share common stock par value 3125 per share company outstanding 600 pm new york city time record date spinoff completed without payment consideration exchange shares company’s stockholders october 4 2011 result spinoff home security became independent public company trading symbol “fbhs” new york stock exchange spinoff completed pursuant separation distribution agreement company home security dated september 27 2011 “separation agreement” terms separation agreement immediately prior effective time spinoff home security paid cash dividend company amount 500 million using proceeds new debt financing arrangement entered home security july 2011 completed sale golf business company formed fila korea ltd mirae asset private equity korea cash purchase price 1275 billion excludes cash sold includes working capital adjustment received october 2011 spinoff sale golf business together referred herein “separation transactions” beam inc subsidiaries notes consolidated financial statements continued following table summarizes results home security golf businesses date disposition year ended december 31 2011 millions 2011 recorded 2153 million reduction valuation allowance related golf business previously established respect capital loss carryforward valuation allowance reduced utilized capital loss carryforward offset capital gains associated sale also result sale golf business 2011 provided deferred tax expense 247 million related expected repatriation undistributed foreign earnings expected gains associated sale foreign subsidiary stock deemed taxable us dividends interest expense associated debt directly associated discontinued segment allocated discontinued operations based ratio net assets home security golf businesses sum total net assets plus consolidated debt directly attributable operations allocated 462 million interest expense discontinued operations year ended december 31 2011 4 investments unconsolidated affiliated companies account 50 ownership three alliance joint ventures entities entered edrington group “teg” april 2009 using equity method investment affiliates amounts due payable unconsolidated affiliated companies identified related party amounts accompanying consolidated balance sheet net sales 50 owned joint venture entities collectively totaled approximately 275 million years ended december 31 2013 2012 2011 respectively refer note 18 commitments contingencies guarantees information guarantees certain credit loan facilities 50 owned foreign joint ventures 5 stockbased compensation terms agreement plan merger “merger agreement” suntory holdings described note 24 subsequent events result merger whollyowned subsidiary suntory holdings company “merger” outstanding options restricted stock units “rsus” outstanding company’s equity plans granted prior date merger agreement fully vest outstanding performance share awards granted prior date vest prorated basis performance deemed achieved target level forfeiture restrictions respect vested options rsus performance share awards lapse disclosures follow surrounding stockbased compensation provided without regard possibility merger occurring use stock options performance share awards rsus compensate key employees stock awards compensate outside directors december 31 2013 5466533 shares available beam inc subsidiaries notes consolidated financial statements continued issuance connection future awards stock plans approved stockholders stock option granted stock plans reduce number shares available future grants onethird share subject option authorized unissued shares reserved issuance connection awards treasury shares may historically delivered following table summarizes stockbased compensation expense continuing operations years ended december 31 2013 2012 2011 millions amount relates modification certain outstanding fortune brands equity awards august 2011 antidilution provisions anticipation conversion awards beam home security equity awards fortune brands equity awards modified third quarter 2011 add antidilutive protection provisions anticipation spinoff additional expense determined comparing fair values awards prior immediately modification compensation cost related nonvested awards yet recognized 296 million december 31 2013 expected recognized weightedaverage period 17 years stock options exercise prices stock options equal fair value share beam inc common stock date grant plan provisions require exercise prices adjusted certain events spinoff options generally may exercised prior one year date grant options awarded prior september 2005 generally expire ten years date grant options awarded september 2005 expire seven ten years date grant options issued generally vest equal installments three four year period estimate fair value option award date grant using blackscholes optionpricing model based weightedaverage assumptions shown following table volatility assumptions used determine fair value options granted august 2011 options modified august 2011 based analysis historical implied volatility publiclytraded companies similar characteristics including industry stage life cycle size financial beam inc subsidiaries notes consolidated financial statements continued leverage historical volatility fortune brands representative beam’s expected volatility standalone spirits company volatility assumptions used determine fair value options granted prior august 2011 based historical volatility fortune brands’ stock price period commensurate expected term stock options well relevant factors riskfree rate assumptions based us government issues remaining term equal expected life stock options expected term assumptions used determine fair value options granted august 2011 based simplified method use simplified method due lack sufficient historical data representative business standalone spirits company following separation transactions expected term assumptions used determine fair value options modified august 2011 based simplified method adjusted time already elapsed vested shares options granted prior august 2011 weightedaverage expected term based historical employee exercise behavior contractual term options following table summarizes stock option activity year ended december 31 2013 weightedaverage grant date fair value stock options granted years ended december 31 2013 2012 2011 1572 1514 1497 respectively intrinsic value stock options exercised years ended december 31 2013 2012 2011 361 million 408 million 325 million respectively performance share awards performance share awards represent right receive unrestricted shares beam inc common stock based achievement targeted cumulative diluted earnings per share average consolidated return invested capital compensation cost amortized expense performance period generally three years based probability meeting performance targets fair value beam’s stock price date grant beam inc subsidiaries notes consolidated financial statements continued following table summarizes nonvested performance share awards outstanding december 31 2013 well activity year ended actual shares may vest may range zero 200 original target grant depending achievement performance targets weightedaverage grant date fair value performance share awards granted 2012 5576 performance share awards granted 2011 performance share awards vested 2013 2012 2011 restricted stock units rsus represent right receive unrestricted shares beam inc common stock based service compensation cost amortized expense service period generally three four years fair value rsu granted equal share price date grant following table summarizes nonvested rsus outstanding december 31 2013 well activity year ended weightedaverage grant date fair value rsus granted 2012 2011 5655 5257 respectively total fair value rsus vested 2013 2012 2011 73 million 200 million 58 million respectively stock awards outside directors use stock awards compensate outside directors nonemployee director stock plans awards issued annually second quarter part compensation outside directors addition outside directors may elect director’s fees paid stock awards granted outside directors vest immediately related compensation cost expensed time award based fair value share beam’s stock date award beam inc subsidiaries notes consolidated financial statements continued following table summarizes shares beam’s common stock granted outside directors years ended december 31 2013 2012 2011 6 business separation costs business separation costs directly related implementing separation transactions refer note 3 discontinued operations additional information separation transactions recorded 138 million 838 million business separation costs years ended december 31 2012 2011 respectively business separation costs 2012 primarily consist 151 million pension settlement charge associated required 29 million lump sum distribution benefits paid former fortune brands executives connection separation transactions july 2012 partially offset decrease accrued liabilities estimated costs complete separation transactions settlement charge primarily consists recognition pension losses previously deferred aoci 29 million distribution amount executives’ unfunded pension benefit business separation costs 2011 consisted 434 million financial legal advisory fees related separation transactions well 404 million employeerelated costs primarily related termination benefits included within employeerelated business separation costs 2011 incremental stockbased compensation expense approximately 57 million related modification certain outstanding fortune brands equity awards discussed note 5 stockbased compensation 7 restructuring charges restructuring charges following summary restructuring charges continuing operations years ended december 31 2013 2012 2011 millions 2013 company approved organizational restructuring plan improve efficiency effectiveness across organization plan included elimination certain sales marketing operations positions within company’s three operating segments corporate function company accrued restructuring charges 138 million 2013 connection plan mostly consisting future employeerelated costs addition company incurred additional restructuring charges related ongoing pinnacle integration partially offset reversal restructuring accruals beam inc subsidiaries notes consolidated financial statements continued determined longer required described note 22 segment information restructuring charges included measure segment profitability 2012 restructuring charges related organizational streamlining initiatives primarily relate relocation certain us finance human resource shared services deerfield illinois headquarters kentucky ongoing integration pinnacle assets includes costs move pinnacle bottling operations maine existing operations kentucky 2011 restructuring charges related distribution supplychain initiatives facility consolidations organizational streamlining initiatives expect additional significant charges related restructuring plans discussed actual restructuring charges may vary estimate depending timing extent initiatives implement change balance restructuring liability years ended december 31 2013 2012 follows millions expect remaining liability related workforce restructurings paid predominantly 2014 remaining liability related contract lease termination costs paid june 2017 respective lease terms charges credits pretax operating income years ended december 31 2013 2012 2011 impacted following additional items millions relates onetime sale inventory associated transition new longterm manufacturing distribution agreement australia amount consists 463 million beam inc subsidiaries notes consolidated financial statements continued included “net sales” 227 million included “cost goods sold” consolidated statement income b 2013 gain primarily relates 122 million decrease fair value estimated contingent consideration skinnygirl readytoserve cocktail business included “selling general administrative expense” based revised estimated sales levels partially offset accelerated depreciation expense included “cost goods sold” incurred integrating pinnacle business operations c 2012 charges relate acquisition integration pinnacle business cooley business charges 2012 impacting “selling general administrative expense” primarily consist contract termination expenses 10 million transactionrelated expenses 5 million contract termination fees primarily based actual settlement agreements settlement agreement reached recorded estimated liability 2011 charge relates increase fair value estimated contingent consideration skinnygirl readytoserve cocktails business based revised estimated sales levels e charges 2011 primarily consist charges related pension curtailment accelerated depreciation fixed assets taken service early writedown inventory associated discontinued brands partially offset net benefit related settlement nonincome tax matter f charges 2013 2012 primarily represent legal forensic accounting thirdparty expenses related india investigation 8 income components income years ended december 31 2013 2012 2011 follows millions refer note 9 income taxes additional information b refer note 4 investments unconsolidated affiliated companies additional information 9 income taxes components income loss continuing operations income taxes years ended december 31 2013 2012 2011 follows millions beam inc subsidiaries notes consolidated financial statements continued reconciliation income taxes 35 federal statutory income tax rate income taxes continuing operations years ended december 31 2013 2012 2011 follows millions 2013 income tax expense favorably impacted first quarter reduction utbs 59 million primarily due participation tax amnesty program election made one subsidiaries new tax law allowed increase value assets resulting 47 million reduction income tax expense second quarter implementation tax planning strategy utilize net operating losses benefit previously recorded reduced income tax expense 42 million third quarter resolution certain foreign income tax matters resulted reduction utbs 78 million fourth quarter additionally fourth quarter 2013 mexican french income tax legislation enacted resulted additional deferred income tax expense 97 million additional current income tax expense 59 million fourth quarter 2012 us tax authorities concluded routine audit us companies 2008 2009 tax years joint committee taxation approved refund approximately 255 million received first quarter 2013 fourth quarter 2012 spanish tax authorities concluded routine audit spanish spirits companies 2006 2009 tax years spanish tax authorities issued tax assessment approximately 17 million 134 million income tax 36 million related interest payment made first quarter 2013 second quarter 2012 spanish supreme court issued judgment connection disputed income taxes amount approximately 20 million spanish subsidiaries include assets acquired pernod ricard sa “pernod ricard” july 2005 paid assessment spanish tax authorities may 2012 pursuant acquisition agreement pernod ricard indemnified us preacquisition income tax contingencies liabilities negotiated received reimbursement approximately 18 million pernod ricard nontaxable indemnification payment received pernod ricard related judgment recorded income 2012 beam inc subsidiaries notes consolidated financial statements continued 2011 mexican tax authorities issued assessment tax interest mexican spirits companies include assets acquired pernod ricard july 2005 pursuant acquisition agreement pernod ricard indemnified us preacquisition income tax contingencies liabilities assessment related 2004 2005 preacquisition tax years mexican tax authorities issued net assessment approximately 255 million 148 million tax 107 million related interest penalties paid september 2011 pursuant acquisition agreement negotiated received 260 million tax indemnification payment pernod ricard related assessment recorded payment income 2011 german tax authorities completed audit german spirits companies’ 20032007 tax returns recorded approximately 19 million previously unrecognized tax benefits reduction tax expense reconciliation beginning ending amount utbs years ended december 31 2013 2012 2011 follows millions 2011 amount includes 40 million recorded “loss income discontinued operations net tax” b 2013 2012 amounts include 09 million 102 million respectively recorded “loss income discontinued operations net tax” amount utbs recognized december 31 2013 would affect effective tax rate 377 million various us federal state foreign income tax examinations currently progress reasonably possible liability associated unrecognized tax benefit liabilities increase decrease within next twelve months result examinations expiration statutes limitation december 31 2013 believe reasonably possible within next 12 months total utbs may decrease range 3 million 10 million classify interest penalty accruals related utbs income tax expense years ended december 31 2013 2012 2011 recognized interest penalty benefit 68 million 95 million 10 million respectively primarily driven audit resolutions december 31 2013 2012 accruals payment interest penalties 116 million 181 million respectively file us federal income tax returns various state local foreign income tax returns major tax jurisdictions tax years remain open subject examination tax authorities include united states years 2009 canada years 2007 france years 2009 germany years 2007 mexico years 2006 spain years 2009 united kingdom years 2010 beam inc subsidiaries notes consolidated financial statements continued income tax expense benefit years ended december 31 2013 2012 2011 follows millions components net deferred tax assets liabilities december 31 2013 2012 follows millions deferred taxes classified balance sheet december 31 2013 2012 follows millions beam inc subsidiaries notes consolidated financial statements continued december 31 2013 2012 deferred tax assets relating net operating loss capital loss tax carryforwards 863 million 445 million respectively 19 million expire prior 2019 remainder either expires thereafter indefinite carryforward period 2013 change valuation allowance primarily due uncertainty nol utilization future years 2012 change valuation allowance primarily due spain audit settlement 2011 change valuation allowance primarily due utilization approximately 205 million tax loss carryforwards related sale golf business discussed note 3 discontinued operations partially offset 25 million increase valuation allowance increased tax expense loss carryforwards certain countries provide deferred income taxes undistributed earnings foreign subsidiaries consider indefinitely reinvested based ongoing review business requirements capital needs combined cash flows domestic operations available fulfill requirements determined undistributed earnings certain subsidiaries indefinitely invested fund current future growth related nonus business activities undistributed earnings foreign subsidiaries considered indefinitely invested approximately 232 million aggregate december 31 2013 though current expectation repatriate aforementioned amount estimated net income tax liability would arise earnings distributed us range approximately 20 million 40 million estimate based assumptions would required distribute entire amount earnings december 31 2013 local country tax restrictions making distributions tax liability would result actual distribution future date would likely result different tax amount depending upon repatriation action utilized tax laws effect local country us discussed note 24 subsequent events january 12 2014 entered merger agreement suntory holdings merger consummated income tax attributes may adversely impacted cannot estimate adverse impact consolidated financial statements may result adverse change income tax attributes beam inc subsidiaries notes consolidated financial statements continued 10 earnings per share basic earnings per common share “eps” calculated dividing net income attributable common stockholders weightedaverage number shares common stock outstanding year diluted eps calculated using treasury share method giving effect potentially dilutive securities outstanding computation basic diluted eps share years ended december 31 2013 2012 2011 follows millions except per share data beam inc subsidiaries notes consolidated financial statements continued 11 balance sheet information supplemental balance sheet information december 31 2013 2012 follows millions revised presentation distilled spirits inventory balances included component “maturing distilled spirits” inventory previously presented distilled spirits inventory balances component “other raw materials supplies work process” revised presentation distilled spirits inventory aged unaged presented one inventory subcomponent impact revision resulted reduction previously reported december 31 2012 “other raw materials supplies work process” inventory balance 14 million increase “maturing distilled spirits” inventory balance 14 million total inventory impacted result revision presentation 12 goodwill intangible assets change net carrying amount goodwill years ended december 31 2013 2012 follows millions beam inc subsidiaries notes consolidated financial statements continued acquisitionrelated adjustments 2013 relate tax adjustments related prioryear acquisition acquisitionrelated adjustments 2012 relate acquisition pinnacle assets acquisition cooley see note 2 acquisitions dispositions information acquisitions goodwill reporting unit december 31 2013 2012 follows millions amortizable identifiable intangible assets principally trade names customer relationships subject amortization estimated useful life 5 40 years based assessment number factors may impact useful life factors include historical projected trade name performance respect consumer name recognition geographic market presence market share plans ongoing trade name support promotion relevant factors gross carrying value accumulated amortization class intangible assets december 31 2013 2012 follows millions carrying value trade names 2013 impacted primarily reclassification dyc trade name indefinitelived trade name amortizable trade name described sale certain nonstrategic economy brands note 2 acquisitions dispositions foreign currency exchange rates impairment charges described carrying value trade names 2012 impacted primarily acquisitions note 2 acquisitions dispositions reclassification larios trade name indefinitelived trade name amortizable trade name described foreign currency exchange rates impairment charges described pinnacle trade name acquired 2012 estimated fair value 150 million indefinite useful life calico jack trade name acquired 2012 estimated fair value 6 million useful life 15 years trade names acquired 2012 cooley acquisition primarily indefinitelived intangible assets beam inc subsidiaries notes consolidated financial statements continued expected amortization expense next five years intangible assets recorded december 31 2013 follows millions cannot predict occurrence certain events changes circumstances might adversely affect carrying value goodwill indefinitelived intangible assets events may include limited impact economic environment material negative change relationships significant customers strategic decisions made response economic competitive conditions addition certain assumptions estimates used determining fair value goodwill indefinitelived trade names outside control management including interest rates us abroad exchange rates cost capital tax rates due uncertainty aforementioned items cannot predict whether future impairment result december 31 2013 two indefinitelived trade names pinnacle sauza aggregate carrying value approximately 692 million 10 reduction fair value would trigger impairment based estimates fair value reporting units december 31 2013 believe reporting units decline fair value 10 could trigger impairment goodwill 2013 asset impairment charge connection annual indefinitelived intangible asset impairment testing fourth quarter 2013 recorded impairment charge 495 million reduce dyc trade name estimated fair value 44 million considered level 3 fair value measure refer note 15 fair value measurements information estimating fair value trade names impairment primarily due lower projected future revenues profitability brand compared projected revenues profitability estimated impairment test conducted fourth quarter 2012 factors contributed lower revenue profitability projections included 2013 actual results compared 2013 outlook continued economic challenges spanish market competitive outlook within spirits category trade name competes among factors also reassessed remaining life dyc trade name concluded longer indefinite december 31 2013 reclassified dyc trade name definitelived asset estimated remaining life 30 years based expectations brand’s contributions future cash flows considering factors described 2012 asset impairment charge connection annual indefinitelived intangible asset impairment testing fourth quarter 2012 recorded impairment charge 156 million reduce larios trade name estimated fair value 547 million considered level 3 fair value measure refer note 15 fair value measurements information estimating fair value trade names impairment primarily due lower projected future revenue brand compared projected revenues estimated impairment test conducted fourth quarter 2011 factors contributed lower revenue projections included 2012 actual results compared 2012 outlook continued economic challenges spanish market competitive outlook within spirits category trade name competes among factors also reassessed remaining life larios trade name concluded longer indefinite december 31 2012 reclassified larios trade name definitelived asset estimated remaining life 30 years based expectations brand’s contributions future cash flows considering factors described beam inc subsidiaries notes consolidated financial statements continued 13 debt shortterm borrowings shortterm debt borrowings consisted amounts outstanding committed bank credit agreements uncommitted bank lines credit weightedaverage interest rate shortterm debt borrowings 11 13 2013 2012 respectively amount available unused committed credit lines 767 million december 31 2013 committed credit lines include 750 million 5year committed revolving credit agreement “credit agreement” used general corporate purposes due mature december 2016 amounts may borrowed credit agreement us dollars euros british pounds sterling interest eurocurrency loans accrue libor interest periods 1 2 3 6 months plus spreads based credit ratings assigned beam’s outstanding senior unsecured debt interest alternate base rate loans accrue highest administrative agent’s prime rate ii federal funds effective rate plus 12 1 per annum iii adjusted london interbank offered rate defined credit agreement plus 1 per annum beam may also request competitive bids negotiated rates interest loans credit agreement beam may subject satisfaction certain conditions request aggregate principal amount facility increased 250 million aggregate credit agreement contains among things conditions precedent covenants representations warranties events default customary facilities type covenants include certain limitations secured debt saleleaseback transactions subsidiary debt guarantees fundamental changes transactions affiliates credit agreement also includes financial covenants beam required maintain minimum ratio consolidated ebitda consolidated interest expense 300 100 ii maximum ratio debt capitalization 055 100 consolidated interest expense disclosed financial statements total capital defined debt plus equity deferred taxes excluding impact impairment charges incurred december 14 2011 longterm debt components longterm debt december 31 2013 2012 follows millions december 2013 repaid maturing notes 1805 million using cash hand beam inc subsidiaries notes consolidated financial statements continued june 2013 issued 250 million aggregate principal amount 1750 notes due 2018 “2018 notes” 250 million aggregate principal amount 3250 notes due 2023 “2023 notes” net proceeds used repurchase redeem outstanding debt june 2013 july 2013 discussed 2018 notes mature june 15 2018 bear interest fixed rate 1750 per annum 2023 notes mature june 15 2023 bear interest fixed rate 3250 per annum interest payable 2018 notes 2023 notes june 15 2013 semiannually arrears june 15 december 15 year beginning december 15 2013 2018 notes 2023 notes constitute unsecured unsubordinated obligations company rank parity company’s unsecured unsubordinated indebtedness time outstanding june 2013 used portion net proceeds issuance 2018 notes 2023 notes repurchase aggregate principal amount 2368 million outstanding debt securities accordance tender offer announced may 2013 resulting loss early extinguishment debt 431 million primarily consisted 419 million premiums paid repurchase debt repurchases primarily related 6375 notes due 2014 784 million principal amount 5875 notes due 2036 1382 million principal amount july 2013 used portion net proceeds issuance 2018 notes 2023 notes discussed cash hand redeem remaining outstanding 248 million principal amount 6375 notes due 2014 recorded loss early extinguishment debt approximately 138 million third quarter 2013 primarily due contractual redemption premium january 2013 repaid maturity remaining principal amount 2188 million 2969 million 4 notes may 2012 issued 300 million aggregate principal amount 1875 notes due 2017 “2017 notes” 300 million aggregate principal amount 3250 notes due 2022 “2022 notes” net proceeds used finance acquisition pinnacle assets may 2012 2017 notes mature may 15 2017 bear interest fixed rate 1875 per annum 2022 notes mature may 15 2022 bear interest fixed rate 3250 per annum company pays interest 2017 notes 2012 notes semiannually arrears may 15 november 15 year 2017 notes 2022 notes constitute unsecured unsubordinated obligations company rank parity company’s unsecured unsubordinated indebtedness time outstanding 2011 recorded aggregate loss early extinguishment debt 1492 million primarily consisted 155 million purchase premiums partially offset 14 million gains associated amortizationwriteoff deferred gains related terminated interest rate swaps loss early extinguishment debt 2011 primarily connection redemption 911 million principal amount tendered notes debentures redemption approximately 808 million aggregate principal amount outstanding notes used mostly proceeds sale golf business see note 3 debt redemptions 2011 beam inc subsidiaries notes consolidated financial statements continued estimated payments maturing debt next five years december 31 2013 follows millions debt agreements normal customary events default would permit lenders debt agreement accelerate debt cured within applicable grace periods failure pay principal interest due downgrade credit ratings investment grade rating agencies connection change control company none debt instruments except credit agreement discussed include financial ratio covenants december 31 2013 compliance debt covenants 14 derivative instruments enter financial instruments trading speculative purposes principally use foreign exchange contracts interest rate swap contracts reduce impact changes foreign currency exchange rates interest rates enter foreign exchange contracts hedge forecasted sales purchases denominated select foreign currencies thereby limiting currency risk would otherwise result changes exchange rates periods foreign exchange contracts correspond periods forecasted transactions generally exceed 12 15 months recent balance sheet date also enter foreign exchange contracts hedge risk changes fair value recognized foreign currency denominated assets liabilities primary foreign currency hedge contracts pertain australian dollar british pound brazilian real canadian dollar euro mexican peso singaporean dollar 2013 entered fixedtofloating interest rate swaps aggregate notional amounts 400 million swap agreements hedge changes fair value portion fixedrate debt result changes interest rates counterparty pays us fixed interest rate equal coupon debt pay counterparty floating interest rate based us libor plus fixed spread swap agreements designated fair value hedges 2013 also entered cross currency interest rate swap notional amount 60 million derivative structured swap floating us libor floating euribor floating interest rates reset paid quarterly termination swap june 2014 undesignated economic hedge exposure european assets 2012 entered fixedtofloating interest rate swaps aggregate notional amount 200 million swap agreements hedge changes fair value portion fixedrate debt result changes interest rates counterparty pays us fixed interest rate equal coupon debt pay counterparty floating interest rate based us libor plus fixed spread swap agreements designated fair value hedges counterparties derivative contracts major financial institutions subject credit risk contracts equal fair value instruments date financial beam inc subsidiaries notes consolidated financial statements continued statements management believes risk incurring material losses unlikely losses would immaterial derivatives recognized fair value date derivative contract entered designate derivative 1 hedge fair value recognized asset liability fair value hedge 2 hedge forecasted transaction variability cash flow paid cash flow hedge 3 undesignated instrument changes fair value derivative qualified designated highly effective fair value hedge along offsetting gain loss hedged asset liability recorded current earnings include gain loss hedged items line item offsetting loss gain related derivatives changes fair value derivative qualified designated highly effective cash flow hedge recorded comprehensive income “oci” reclassified net income period periods hedged transaction affects net income changes fair value undesignated derivative instruments ineffective portion designated derivative instruments reported net income us dollar equivalent notional amount foreign exchange contracts interest rate swaps outstanding december 31 2013 december 31 2012 follows millions fair values derivative instruments consolidated balance sheet december 31 2013 2012 millions beam inc subsidiaries notes consolidated financial statements continued effects derivative instruments consolidated statements income comprehensive income years ended december 31 2013 2012 millions estimate net derivative gains included accumulated comprehensive loss december 31 2013 reclassified earnings within next twelve months insignificant years ended december 31 2013 2012 ineffective portion cash flow hedges recognized income insignificant 15 fair value measurements authoritative accounting guidance establishes threetier fair value hierarchy prioritizes inputs used measuring fair values follows • level 1 observable inputs quoted prices identical assets active markets • level 2 inputs quoted prices identical assets active markets observable either directly indirectly • level 3 unobservable inputs little market data requires use valuation techniques development assumptions recurring fair value measurements assets liabilities measured fair value recurring basis december 31 2013 2012 follows millions beam inc subsidiaries notes consolidated financial statements continued derivative financial instruments fair value derivative financial instruments based standard valuation techniques use possible current marketbased independently sourced pricing units interest rates currency rates implied volatilities acquisitionrelated contingent consideration estimated fair value acquisitionrelated contingent consideration excludes earned amounts payable december 31 2013 2012 considered level 3 measurement probabilityweighted discounted cash flow methodology used estimate fair value includes use significant unobservable inputs principally contractual contingent consideration sales targets current estimate achieving targets remaining contractual earn period recorded adjustment decrease approximately 12 million estimated fair value obligation 2013 reflected reduction “selling general administrative expense” accompanying consolidated statement income decrease fair value 2013 result actual sales results business change estimated sales volumes growth rates beyond 2013 remaining contractual period fair value estimated obligation december 31 2013 46 million maximum remaining amount could required pay terms contract 19 million average increase decrease approximately 10 sales volume thresholds assumed probabilityweighted discounted cash flow calculation would increase decrease estimated fair value contingent consideration approximately 1 million lower projected sales volumes noted significant change fair value inputs 2013 2012 following reconciliation opening closing balances related liability acquisitionrelated contingent consideration millions reflects amounts earned current year payable first quarter following year b included “selling general administrative expenses” consolidated statement income cash equivalents cash equivalents consist bank deposits carried cost due shortterm nature cash balances cost approximates fair value carrying value estimated fair value cash equivalents considered level 2 fair value measurement december 31 2013 2012 2772 million 3657 million respectively longterm debt fair value longterm debt including current portion determined quoted market prices available estimates using discounted cash flow analyses based current borrowing beam inc subsidiaries notes consolidated financial statements continued rates similar types borrowing arrangements fair value longterm debt considered level 2 fair value measurement approximately 20988 million 27065 million december 31 2013 2012 respectively nonrecurring fair value measurements 2013 2012 recorded dyc 2013 larios 2012 trade names fair value connection annual indefinitelived intangible asset testing fourth quarter years refer note 12 goodwill intangible assets information estimated fair value using discounted cash flow analysis fair values considered level 3 fair value measures due use significant unobservable inputs including future expected revenue profit margins generated brands key assumptions fair value measure include discount rates estimates fair market royalty rates increases decreases expected revenue profit margin discount rate royalty rate isolation would change fair value estimate dyc trade name december 31 2013 10 decrease fair value dyc trade name would resulted additional impairment approximately 44 million december 31 2013 16 leases future minimum rental payments noncancelable operating leases december 31 2013 follows millions total rental expense operating leases reduced insignificant amounts subleases amounted 232 million 206 million 205 million 2013 2012 2011 respectively 17 pension postretirement benefits number pension plans covering many current former employees plans provide payment retirement benefits mainly commencing ages 55 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service andor earnings employer contributions plans made necessary ensure legal funding requirements satisfied addition time may make contributions excess legal funding requirements provide postretirement health care life insurance benefits certain retirees many employees retirees outside united states covered government health care programs beam inc subsidiaries notes consolidated financial statements continued pension plans following tables provide reconciliation changes benefit obligations fair value assets years ended december 31 2013 2012 millions amounts recognized balance sheet december 31 2013 2012 consist millions amounts included accumulated comprehensive loss december 31 2013 2012 consist following millions approximately 44 million us plans 08 million international plans amounts accumulated comprehensive loss expected recognized components net periodic benefit cost 2014 primarily relating net actuarial losses beam inc subsidiaries notes consolidated financial statements continued pension benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets december 31 2013 2012 shown millions components net periodic benefit cost continuing operations years ended december 31 2013 2012 2011 follows millions discussed note 6 business separation costs recorded 151 million pension settlement charge 2012 associated required 29 million lump sum distribution benefits paid former fortune brands executives july 2012 2011 addition net periodic benefit cost shown recognized costs 135 million related special postretirement termination benefits certain departing executives result separation transactions costs included within “business separation costs” consolidated statement income weightedaverage assumptions used determine future benefit obligations december 31 2013 2012 follows weightedaverage assumptions used determine net periodic benefit cost years ended december 31 2013 2012 2011 follows beam inc subsidiaries notes consolidated financial statements continued fair value plan assets us pension plan assets major category plan assets type fair value measurement december 31 2013 2012 follows millions beam inc subsidiaries notes consolidated financial statements continued reconciliation level 3 measurements assets us pension plans years ended december 31 2013 2012 follows millions international pension plan assets major category plan assets type fair value measurement december 31 2013 2012 follows millions beam inc subsidiaries notes consolidated financial statements continued reconciliation level 3 measurements assets international pension plans years ended december 31 2013 2012 follows millions defined benefit trusts variety assets including equity fixed income real estate securities well group annuityinsurance contracts commingled funds commingled trust fund valuations based net asset value nav funds determined administrator fund reviewed us nav represents underlying assets owned fund minus liabilities divided number shares units outstanding valuations group annuityinsurance contracts based daily closing prices underlying securities institutional evaluation prices consistent industry practices investment policy strategy investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility us defined benefit plan adopted dynamic strategy reduce plan’s investment risk funded status improves strategy aims reduce allocation return seeking assets increase allocation liability hedging assets time intention reducing volatility funded status pension costs beginning 2013 us investment policy targeted 60 allocation return seeking assets 40 liability hedging assets based plan’s funded status 2013 based asset returns improved funded status goal reduce riskvolatility us investment policy revised target allocation approximately 45 return seeking assets 55 liability hedging assets year end 2013 return seeking assets comprised approximately 85 equity 15 investments liability hedging assets comprised intermediateterm longterm investment grade corporate bonds nonus investment asset allocation targets may differ depending country allowing 75 equity 100 fixed investments 15 real estate asset allocations based underlying liability structure local regulations retirement asset allocations reviewed periodically ensure allocation meets needs liability structure beam inc subsidiaries notes consolidated financial statements continued cash flows contributions based current assumptions december 31 2013 expect contribute approximately 17 million 58 million us international pension plans respectively 2014 estimated future retirement benefit payments estimated future benefit payments pension plans follows december 31 2013 millions estimated future retirement benefits payments estimates could change significantly based differences actuarial assumptions actual events decisions related lump sum distribution options available participants certain plans postretirement benefit plans following tables provide reconciliation changes benefit obligations fair value assets years ended december 31 2013 2012 postretirement benefit plans millions beam inc subsidiaries notes consolidated financial statements continued amounts recognized balance sheet december 31 2013 2012 consist millions amounts included accumulated comprehensive loss consist following postretirement benefit plans december 31 2013 2012 millions approximately 07 million amounts accumulated comprehensive loss expected recognized components net periodic benefit cost 2014 primarily relating amortization prior service credits certain postretirement benefit plans components net periodic income continuing operations postretirement benefit plans years ended december 31 2013 2012 2011 follows millions weightedaverage assumptions used determine future benefit obligations december 31 2013 2012 follows weightedaverage assumptions used determine net periodic benefit cost years ended december 31 2013 2012 2011 follows beam inc subsidiaries notes consolidated financial statements continued assumed weightedaverage health care trend rates december 31 2013 2012 follows onepercentagepoint increasedecrease assumed health care cost trend rates would increasedecrease postretirement benefit obligation 04 million impact onepercentage point increasedecrease service interest cost significant cash flows based current assumptions december 31 2013 expect contribute approximately 09 million retiree healthcare plan 2014 december 31 2013 estimated future benefit payments retiree healthcare plan approximately 09 million per year next five years aggregate 4 million five years thereafter estimated future retirement benefits payments estimates could change significantly based differences actuarial assumptions actual events defined contribution plan contributions sponsor number defined contribution plans contributions determined various formulas expense recognized plans 162 million 152 million 130 million 2013 2012 2011 respectively 18 commitments contingencies legal tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation known brown williamson holding inc bw connection sale bw atco subsequently merged bw agreed indemnification agreement indemnification agreement indemnify company claims including legal expenses arising smoking health firesafe cigarette matters relating tobacco business atco july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company “indemnitor” indemnification agreement indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations beam inc subsidiaries notes consolidated financial statements continued numerous legal actions proceedings claims pending various jurisdictions leading tobacco manufacturers including bw individually successor merger atco based upon allegations cancer ailments resulted tobacco use company named defendant cases claims generally fallen within three categories smoking health cases alleging personal injury brought behalf individual plaintiffs ii smoking health cases alleging personal injury damages purporting brought behalf classes individual plaintiffs iii health care cost recovery cases including class actions brought foreign governments unions health trusts taxpayers others seeking reimbursement health care expenditures allegedly caused cigarette smoking damages claimed cases range billions dollars possible predict outcome pending tobaccorelated litigation possible actions could decided unfavorably management unable make reasonable estimate amount range loss could result unfavorable outcome pending litigation management believes number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor management believes pending actions material adverse effect upon results operations cash flows financial condition company believes meritorious defenses company indemnified indemnification agreement september 14 2011 connection spinoff company agreed indemnify home security losses arising smoking health firesafe cigarette matters relating tobacco business company’s predecessors former subsidiaries internal investigation previously disclosed performing investigation whether business india conducted compliance company policies applicable law including foreign corrupt practices act commenced investigation result information obtained internal compliance procedures internal audit india business voluntarily notified us department justice “doj” us securities exchange commission “sec” investigation providing doj sec updates progress investigation continuing presently unable predict duration scope result related costs internal investigation potential investigations doj sec authority time also cannot reasonably estimate potential amount range loss may result doj’s sec’s review accruals potential liabilities established december 31 2013 however reasonably possible liabilities could material impact results operations cash flows financial condition addition ongoing conduct investigation implementation remedial measures likely continue near term disruptive effect india business litigation related merger refer note 24 subsequent events information regarding litigation related merger described note 24 legal matters time company subject various lawsuits claims disputes investigations normal conduct operations include limited commercial disputes including beam inc subsidiaries notes consolidated financial statements continued purported class actions employment claims actions tax customs authorities internal investigations environmental matters legal proceedings subject include claims substantial unspecified damages believe meritorious defenses legal proceedings contesting vigorously believe currently pending legal proceedings party material adverse effect individually aggregate results operations cash flows financial condition guarantees partially guaranteed credit facilities entered certain joint ventures maximum guarantee exposure assuming credit facilities fully utilized total us dollar equivalent 390 million guarantee exposure 264 million based facilities utilized december 31 2013 recorded liability guarantees part sale golf business agreed indemnify buyer certain obligations primarily taxes paid buyer relate periods owned golf business estimate liabilities indemnification obligations approximately 33 million december 31 2013 approximately 26 million recorded within “other current liabilities” approximately 7 million recorded within “other noncurrent liabilities” consolidated balance sheet actual obligation taxrelated indemnities accrued may differ based closure tax period taxing authorities tax authority audit resulting change amount tax due refundable including related interest andor penalties applicable commitments purchase obligations primarily include contracts raw materials advertising selling administrative services capital expenditures purchase obligations december 31 2013 millions customer concentration year ended december 31 2013 top three customers southern wine spirits company’s 50 owned joint ventures edrington group cocacola amatil collectively accounted 40 net sales accounts receivable three customers similarly concentrated december 31 2013 net sales accounts receivable prior years believe relationships top three customers good collection amounts due three customers december 31 2013 reasonably assured loss customers would offset availability distributors products minimal disruption operations 19 267 convertible preferred stock november 20 2012 completed previously announced redemption outstanding shares 49590 shares 267 convertible preferred stock converted accordance terms shares common stock result redemption longer issued outstanding shares 267 convertible preferred stock pursuant redemption stockholders tendered outstanding shares payment aggregate redemption price 3102 per share beam inc subsidiaries notes consolidated financial statements continued 3050 per share plus accrued unpaid dividends 052 per share paid aggregate redemption price shares cash fourth quarter 2012 paid cash dividends preferred stock aggregate amount 03 million 252 per share year ended december 31 2012 04 million 267 per share year ended december 31 2011 20 capital stock 750 million authorized shares common stock number shares common stock treasury stock share activity years ended december 31 2013 2012 follows paid cash dividends common stock aggregate amount 1457 million 090 per share 1298 million 082 per share 1174 million 076 per share years ended december 31 2013 2012 2011 respectively 21 accumulated comprehensive loss following tables present changes accumulated comprehensive loss component net tax millions pretax amounts reclassified aoci year ended december 31 2013 reported net sales 54 million gain loss early extinguishment debt 31 million gain b pretax amounts reclassified aoci represent amortization net loss included computation net periodic benefit cost see note 17 pension postretirement benefits beam inc subsidiaries notes consolidated financial statements continued 22 segment information three operating segments also reportable segments north america emea europemiddle eastafrica apsa asiapacificsouth america reportable segments based internal organization business used management making operating decisions assessing performance key countriesmarkets included north america united states canada virgin islands mexico key countriesmarkets included emea germany spain united kingdom russia turkey ireland italy hungary czech republic romania south africa north america duty free europe travel retail key countriesmarkets included apsa australia new zealand southeast asia china brazil india south korea japan operating segment derives revenues sale distilled spirits measure segment profitability regularly reviewed chief operating decision maker operating income excluding charges gains management believes considered indicative segments’ underlying operating performance consequently segment results presented accordance gaap exclude items chargesgains excluded segment results include asset impairment charges restructuring charges related restructuring initiatives cannot reported restructuring charges gaap acquisition integrationrelated costs gains sale brands related assets business separation costs onetime sales impact transitioning longterm distribution agreement australia items believe considered indicative ongoing performance unallocated corporate costs 2011 reflect estimated incremental historical fortune brands corporate structure compared estimated beam corporate structure following spinoff estimated lower corporate cost structure based analysis projections costs expected incurred us separation transactions occurred january 1 2011 beam inc subsidiaries notes consolidated financial statements continued financial information segment presented tables asset information segment presented information provided reviewed chief operating decision maker beam inc subsidiaries notes consolidated financial statements continued refer note 7 restructuring charges information restructuring charges net sales based country destination years ended december 31 2013 2012 2011 longlived assets december 31 2013 2012 location follows millions 23 quarterly financial data unaudited selected quarterly financial data years ended december 31 2013 2012 follows millions except per share data beam inc subsidiaries notes consolidated financial statements continued unusual items impacting quarter ended march 31 2013 include 128 million pretax gain sale brands related assets mostly related sale certain nonstrategic economy brands related inventory january 2013 59 million income tax benefit related decision participate tax amnesty program resulting adjustment uncertain tax positions b unusual items impacting quarter ended june 30 2013 include 431 million pretax loss early extinguishment debt related tender offer note 13 c unusual items impacting quarter ended september 30 2013 include pretax basis 138 million loss early extinguishment debt related redemption outstanding senior notes 122 million decrease fair value estimated contingent consideration skinnygirl readytoserve cocktail business based revised estimated sales levels 112 million charges primarily related organizational restructuring plan improve efficiency effectiveness across organization unusual items impacting quarter ended december 31 2013 include 495 million pretax noncash impairment dyc trade name tax expense 97 million connection foreign tax law enacted quarter 78 million benefit arising resolution certain foreign income tax return matters e unusual items impacting quarter ended june 30 2012 include 180 million pretax tax indemnification income related resolution routine foreign tax audits 138 million pretax business separation costs 121 million pretax acquisition integrationrelated charges incurred connection may 2012 acquisition pinnacle assets 58 million income tax benefit related favorable resolution foreign tax audit examinations f unusual items impacting quarter ended december 31 2012 include 22 million excess net foreign tax credits related us taxes applicable repatriation 2012 foreign earnings 9 million net tax benefit related resolution certain foreign us federal tax audits 156 million pretax noncash impairment larios trade name g discussed note 1 second quarter 2013 2012 company identified errors impacting prior interim periods following impacts revisions quarterly financial statements yet reflected quarterly reports form 10q previously filed sec • three months ended march 31 2013 correction errors resulted decrease net sales gross profit income continuing operations taxes 62 million 18 million 18 million respectively impact error corrections decrease 001 earnings per share beam inc subsidiaries notes consolidated financial statements continued • three months ended march 31 2012 correction errors resulted decrease net sales gross profit income continuing operations taxes 70 million 27 million 27 million respectively impact error corrections decrease 001 earnings per share • three months ended december 31 2012 correction errors related continuing operations resulted 01 million increase net sales gross profit 001 increase basic earnings per share continuing operations addition correction errors related discontinued operations resulted 154 million increase loss discontinued operations net tax 010 per share discontinued operations revision relates prefourth quarter 2012 errors identified corrected fourth quarter 2012 previously disclosed refer 2012 10k errors related discontinued golf business primarily relating 2011 tax return filing process combined impact corrections decrease net income 154 million 009 010 per basic diluted share respectively 24 subsequent events merger agreement january 12 2014 beam entered agreement plan merger “merger agreement” suntory holdings limited japanese corporation “suntory holdings” sus merger sub limited delaware corporation whollyowned subsidiary suntory holdings “sub” providing subject satisfaction waiver specified conditions acquisition beam suntory holdings price 8350 per share cash subject terms conditions merger agreement sub merged beam “merger” beam surviving merger whollyowned subsidiary suntory holdings merger agreement consummation transactions contemplated merger agreement unanimously approved company’s board directors “board directors” pursuant merger agreement effective time merger “effective time” share “share” common stock company “company common stock” issued outstanding immediately prior effective time shares held stockholders company properly exercised perfected appraisal rights delaware law ii shares held treasury company owned record whollyowned subsidiary company suntory holdings whollyowned subsidiary suntory holdings converted right receive 8350 per share cash without interest consummation merger subject satisfaction waiver specified closing conditions including adoption merger agreement holders majority voting power outstanding shares entitled vote thereon ii receipt required antitrust approvals us european union iii absence occurrence company material adverse effect defined merger agreement date merger agreement iv customary closing conditions consummation merger subject financing condition additional information merger agreement set forth current report form 8k filed sec january 13 2014 litigation related merger following announcement merger various putative class action complaints filed beam board directors suntory holdings sub beam currently aware eleven beam inc subsidiaries notes consolidated financial statements continued complaints filed delaware chancery court cook county illinois chancery court circuit court nineteenth judicial circuit lake county illinois complaints allege generally defendants breached fiduciary duties aided abetted others’ breaches fiduciary duties connection proposed transaction suntory holdings among things authorizing transaction plaintiffs claim inadequate consideration pursuant plaintiffs claim inadequate process relief sought various complaints includes among things enjoining proposed transaction rescinding extent already implemented directing defendants account damages sustained putative class defendants believe claims without merit intend vigorously defend suits cannot yet conclude reasonably possible loss occur estimate range potential outcomes report independent registered public accounting firm board directors shareholders beam inc opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position beam inc subsidiaries december 31 2013 2012 results operations cash flows three years period ended december 31 2013 conformity accounting principles generally accepted united states america also opinion company maintained material respects effective internal control financial reporting december 31 2013 based criteria established internal control integrated framework 1992 issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included management’s report internal control financial reporting appearing item 9a responsibility express opinions financial statements company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp pricewaterhousecoopers llp chicago illinois february 18 2014 item 9item 8 financial statements supplementary data see information consolidated balance sheet consolidated statement income consolidated statement cash flows consolidated statement common stockholders equity notes consolidated financial statements report independent accountants contained 1994 annual report stockholders registrant information incorporated herein reference unaudited selected quarterly financial data see table captioned quarterly financial data contained 1994 annual report stockholders registrant table incorporated herein reference item 9item 8 financial statements supplementary data consolidated statement income fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated balance sheet fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement cash flows fortune brands inc subsidiaries see notes consolidated financial statements consolidated statement stockholder’ equity fortune brands inc subsidiaries consolidated statement stockholder’ equity fortune brands inc subsidiaries see notes consolidated financial statements notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies basis presentation consolidated financial statements include accounts fortune brands inc elimination intercompany transactions majorityowned subsidiaries excluding subsidiary future brands llc third party substantive participating rights subsidiary acushnet lionscore limited holds minority interest substantive control result company operational decisionmaking powers entity accounts certain foreign subsidiaries consolidated november 30 consolidated financial statements prepared conformity accounting principles generally accepted united states america require management make estimates assumptions affect reported amounts assets liabilities sales expenses reporting periods actual results future periods could differ estimates cash equivalents highly liquid investments original maturity three months less included cash equivalents allowances doubtful accounts trade receivables recorded stated amount less allowances discounts doubtful accounts returns trade receivables include interest allowances represent estimated uncollectible receivables associated potential customer defaults contractual obligations usually due customers’ potential insolvency allowances include amounts certain customers risk default specifically identified addition allowances include provision customer defaults general formula basis determined risk default probable estimable cannot yet associated specific customers assessment likelihood customer defaults based various factors including length time receivables past due historical experience existing economic conditions inventories priced lower cost principally firstin firstout average minor amounts lastin firstout market accordance generally recognized trade practice bulk whiskey inventories classified current assets although majority inventories due duration aging processes ordinarily sold within one year property plant equipment property plant equipment carried cost depreciation provided principally straightline basis estimated useful lives assets gains losses resulting dispositions included income betterments renewals improve extend life asset capitalized maintenance repair costs expensed incurred estimated useful lives related assets follows buildings leasehold improvements 15 40 years machinery equipment 3 10 years long lived assets accordance statement financial accounting standards 144 fas 144 “accounting impairment disposal longlived assets” longlived asset including amortizable identifiable intangibles asset group tested recoverability whenever events changes circumstances indicate carrying amount may recoverable events occur compare sum undiscounted cash flows expected result use eventual disposition asset group carrying amount longlived asset group comparison indicates impairment amount impairment typically calculated using discounted expected future cash flows discount rate applied cash flows based company’s weightedaverage cost capital risk adjusted appropriate represents blended aftertax costs debt equity notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued goodwill indefinite lived intangibles statement financial accounting standards 142 fas 142 “goodwill intangible assets” requires goodwill tested impairment annual basis certain circumstances written impaired rather amortized previous standards required interim impairment test required event occurs conditions change would likely reduce fair value reporting unit carrying value evaluate recoverability goodwill estimating future discounted cash flows businesses goodwill relates use rate corresponding cost capital risk adjusted appropriate determining discounted cash flows estimated cash flows determined disaggregating business segments reporting level meaningful identifiable cash flows determined estimated future discounted cash flows less carrying value net assets tangible identifiable intangibles related goodwill perform impairment test measure amount impairment loss impairment losses limited carrying value goodwill represent excess carrying amount reporting unit’s goodwill implied fair value goodwill determining estimated future cash flows consider current projected future levels income based management’s plans business well business trends prospects market economic conditions fas 142 requires purchased intangible assets goodwill amortized useful lives unless lives determined indefinite certain tradenames assigned indefinite life deemed tradenames currently anticipated contribute cash flows company indefinitely indefinitelived intangible assets amortized required evaluated reporting period determine whether indefinite useful life appropriate review indefinitelived intangibles impairment annually whenever market business events indicate may potential impact intangible consider implications external eg market growth pricing competition technology internal factors eg product costs margins support expenses capital investment potential impact cash flows business near long term well impact identifiable intangible asset associated business based recent business results consideration significant external internal factors resulting business projections indefinitelived intangible assets associated segment reviewed determine whether likely remain indefinitelived whether finite life appropriate addition based events period future expectations management considers whether potential impairment exists required fas 142 predominant method approximating fair value determining whether impairment exists use cash flow projections measure impairment based discounted expected future cash flows attributable tradename compared carrying value tradename separate cash flow information available use relieffromroyalty approach fair value represented present value hypothetical royalty income remaining useful life information available determine appropriate royalty rate utilize profit split methodology customary valuation practice establish reasonable royalty rate profit split analyses allocate economic income ebitda less returns working capital fixed assets employed tradename residual assets economic unit determination expected profit margin associated commercialization tradename additionally independent valuation experts used periodic review testing management’s assumptions relative significant trade valuations lives independent research market competitive dynamics notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued conjunction ongoing review carrying value identifiable intangibles 2003 company recorded noncash writedown identifiable intangibles 120 million 80 tax conjunction repositioning office business writedowns 2004 warranty reserves offer customers various warranty terms based upon type product sold determine warranty expense accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category warranty expense generally recorded cost products sold time sale refer note 16 “product warranties” employee benefit plans provide range benefits employees retired employees including pensions postretirement postemployment health care benefits record annual amounts relating plans based calculations specified generally accepted accounting principles reflect various actuarial assumptions including discount rates expected longterm rates return plan assets compensation increases turnover rates health care cost trend rates discount rate based high quality fixed income bonds maturities corresponding benefit obligations longterm expected rate return plan assets reflects mix plan asset investments compensation increases reflect expected future compensation trends health care cost trend rates reflect expected changes health care costs based historical rates estimates future changes review actuarial assumptions annual basis makes modifications assumptions based current rates trends deemed appropriate required us generally accepted accounting principles effect modifications generally recorded amortized future periods believe assumptions utilized recording obligations plans presented note 11 “pension retiree benefits” reasonable based experience advice independent actuaries continue monitor assumptions market conditions warrant environmental company subject laws regulations relating protection environment company provides expenses associated environmental remediation obligations amounts probable reasonably estimated adjust accruals new information develops circumstances change accruals discounted december 31 2004 2003 environmental accruals amounted 462 million 485 million respectively included noncurrent liabilities balance sheet income taxes accordance statement financial accounting standards 109 “accounting income taxes” establish deferred tax liabilities assets temporary differences financial tax reporting bases subsequently adjust reflect changes tax rates expected effect temporary differences reverse provide deferred income taxes undistributed earnings foreign subsidiaries expect permanently reinvest undistributed earnings foreign subsidiaries aggregated 3976 million december 31 2004 sale stock subsidiary consolidation changes company’s ownership percentage caused sales shares acco recognized adjustment “paidin capital” see note 3 “sale stock subsidiary” notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued revenue recognition accordance sec staff accounting bulletin 104 “revenue recognition” company recognizes revenue products shipped customers net applicable provisions discounts returns allowances also provide estimate potential bad debt time revenue recognition amounts billed shipping handling classified “net sales customers” consolidated income statement costs incurred shipping handling classified “advertising selling general administrative expenses” shipping handling costs included “advertising selling general administrative expenses” 2853 million 2436 million 2345 2004 2003 2002 respectively customer program costs company generally recognizes customer program costs either “net sales customers” category “advertising selling general administrative expenses” time program initiated andor revenue recognized costs recognized “net sales customers” include limited general customer programgenerated expenses cooperative advertising programs volume allowances promotional allowances costs typically recognized “advertising selling general administrative expenses” include point sale materials store service fees addition “accrued customer programs” principally include general customer program costs cooperative advertising volume allowances shared media volume allowances accrued based management’s estimates customer volume achievement factors incorporated customer agreements new product purchases store sellthrough merchandising support level returns customer employee training advertising costs advertising costs amounted 5120 million 4705 million 4515 million 2004 2003 2002 respectively principally expensed incurred capitalize certain direct response advertising costs relate catalogs mailed new existing customers office business amortize direct response advertising costs life advertising usually longer three months deferred direct response advertising december 31 2004 2003 05 million 04 million respectively research development research development expenses amounted 687 million 581 million 559 million 2004 2003 2002 respectively expensed incurred stock based compensation elected apply accounting principles board opinion 25 “accounting stock issued employees” related interpretations accounting stock plans allowed financial accounting standards 148 fas 148 “accounting stockbased compensationtransition disclosure” result compensation expense recognized stock options plans accordance fas 148 purposes pro forma disclosure determined compensation expense accordance blackscholes optionpricing model compensation notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued cost fixed stock options determined consistent fas 148 pro forma net income earnings per common share 2004 2003 2002 would follows foreign currency translation foreign currency balance sheet accounts translated us dollars rates exchange balance sheet date income expenses translated average rates exchange effect year related translation adjustments made directly separate component “accumulated comprehensive income loss” caption stockholders’ equity transactions made currencies different entity’s functional currency gains losses foreign currency transactions classified statement income depending nature item derivative financial instruments accordance statement financial accounting standards statement 133 fas 133 “accounting derivative instruments hedging activities” related amendment statement financial accounting standards statement 138 fas 138 “accounting certain derivative instruments certain hedging activities” derivatives recognized either assets liabilities balance sheet measurement instruments fair value derivative designated fair value hedge effective changes fair value derivative hedged item attributable hedged risk recognized earnings period derivative designated cash flow hedge effective portions changes fair value derivative recorded comprehensive income oci recognized income statement hedged item affects earnings ineffective portions changes fair value cash flow hedges recognized earnings derivative gains losses included oci reclassified earnings time forecasted revenue expense recognized years ended december 31 2004 2003 23 million 33 million deferred losses respectively reclassified cost products sold year ended december 31 2002 06 million deferred gains reclassified cost products sold estimate 96 million derivative loss included oci december 31 2004 reclassified earnings within next twelve months notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued foreign currency risk certain forecasted transactions assets liabilities exposed foreign currency risk continually monitor foreign currency exposures order maximize overall effectiveness foreign currency hedge positions principal currencies hedged include canadian dollar euro australian dollar pound sterling interest rate risk may time enter interest rate swap agreements manage exposure interest rate changes swap agreements involve exchange fixed variable interest rate payments without exchanging notional principal amounts record payments receipts agreements adjustments interest expense december 31 2004 2003 outstanding interest rate swap agreements outstanding 2875 notes due 2006 allow agreements classified fair value hedge accordance fas 133 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate recently issued accounting standards january 2003 financial accounting standards board fasb issued interpretation 46 fin 46 “consolidation variable interest entities” effective newly created variable interest entities january 31 2003 effective existing variable interest entities october 1 2003 objective fin 46 improve financial reporting companies transactions involving variable interest entities december 2003 fasb issued revision fin 46 fin46r fin 46 fin 46r material impact results financial position may 2004 fasb issued fasb staff position 1062 fsp 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 ’the medicare prescription act’” fsp 1062 provides guidance accounting disclosure effects medicare prescription act enacted december 2003 medicare prescription act provide prescription drug benefit medicare part well provide federal subsidy employers provide program prescription drug benefits least actuarially equivalent medicare part adopted fsp 1062 prospectively third quarter 2004 several postretirement plans qualify federal subsidy however adoption fsp 1062 material impact results operations subsidy result lower future expense reduced accumulated postretirement benefit obligation 109 million 6 december 2004 fasb issued fasb staff position 1092 fsp 1092 “accounting disclosure guidance foreign earnings repatriation provision within american jobs creation act 2004 act” act provides special onetime dividends received deduction repatriation foreign earnings result fsp 1092 recorded income tax benefit 34 million 2004 see note 13 “income taxes” december 2004 fasb issued financial accounting standards 123 revised 2004 fas 123r “sharebased payment” fas 123r replaces fas 123 “accounting stockbased compensation” supersedes apb opinion 25 “accounting stock issued employees” fas 123r requires compensation expense measured fair value grant date related sharebased payment transactions recognized financial statements period employee provides service notes consolidated financial statements fortune brands inc subsidiaries 1 significant accounting policies continued exchange award intend adopt fas 123r using “modified prospective” transition method defined fas 123r modified prospective method companies required record compensation cost new modified awards related vesting period awards prospectively record compensation cost prospectively unvested portion date adoption fas 123r previously issued outstanding awards remaining vesting period awards fas 123r effective third quarter 2005 evaluating impact fas 123r results operations financial position 2 goodwill identifiable intangibles net goodwill approximately 20 billion december 31 2004 decrease goodwill twelve months ended december 31 2004 4344 million 24 billion december 31 2003 principally attributable recognition identifiable intangible assets previously included goodwill 2003 acquisition thermatru 4881 million partly offset goodwill 2004 acquisitions adjustments 2003 acquisitions goodwill increased year ended december 31 2003 9959 million due acquisitions thermatru capital cabinet american lock wild horse winery well conclusion omega purchase accounting 2003 foreign currency fluctuations company’s goodwill segment follows also indefinitelived intangibles principally tradenames 7986 million december 31 2004 compared 4966 million december 31 2003 increase 3020 million primarily due recognition identifiable intangible assets previously included goodwill acquisition thermatru 2342 million reclassification tradename result assessing factors noted 648 million carry identifiable intangibles principally tradenames subject amortization estimated useful life either 15 30 years based assessment number factors may impact useful life factors include historical tradename performance respect consumer name recognition geographic market presence market share plans ongoing tradename support promotion financial results relevant factors gross carrying value accumulated amortization amortizable intangible assets 7162 million 1657 million respectively december 31 2004 compared 5451 million 1526 million respectively december 31 2003 gross carrying value increase principally due recognition identifiable intangible assets previously included goodwill acquisition thermatru 2539 million partly offset reclassification tradename result heightened consumer name recognition recent years due increased ongoing plans tradename promotion successful product research development efforts plans continued investment notes consolidated financial statements fortune brands inc subsidiaries 2 goodwill identifiable intangibles continued favorable consumer perceptions regarding product quality innovation 856 million twelve months ended december 31 2003 company recorded writedown identifiable intangibles 120 million 80 million tax recognize diminished values certain tradenames office business gross carrying value accumulated amortization class intangible assets december 31 2004 2003 follows 1 accumulated amortization prior adoption financial accounting standards 142 “goodwill intangible assets” intangible amortization 367 million 189 million 161 million years ended december 31 2004 2003 2002 respectively increases intangible amortization primarily reflect addition amortizable intangible assets related acquisitions company expects record intangible amortization approximately 35 million next five fiscal years ending december 31 2005 december 31 2009 performed annual impairment test december 31 fiscal year 2004 2003 impairment goodwill indefinitelived intangible assets recognized result annual impairment tests 3 sale stock subsidiary january 2002 completed second two transactions sell shares whollyowned office products subsidiary acco world corporation acco two transactions resulted aggregate reduction less 2 interest acco treated sale equity transaction accordance company policy recording difference sale price book value acco’s stock “paidin capital” result first two transactions notes consolidated financial statements fortune brands inc subsidiaries 3 sale stock subsidiary continued recognized net tax benefit 729 million 2001 two transactions resulted substantial tax loss carryforward realize event qualified taxable capital gains 4 acquisitions disposals joint ventures june 2004 thermatru acquired sentinel doors ltd leading uk manufacturer installer complete composite entry door systems acquisition gives thermatru stronger growth platform uk june master lock acquired assets dudley inc leading brand school locker locks canada aggregate purchase price acquisitions 309 million pro forma impact net sales acquisitions material december 2003 spirits wine business obtained 20year extension rights manufacture distribute gilbey’s gin vodka us extending license agreement 2027 acquired trademark distribution rights california kamchatka vodka spirits wine business previously owned us rights kamchatka july 2003 spirits wine business acquired wild horse winery californiabased producer super premium ultrapremium wines june 2003 masterbrand cabinets acquired capital cabinet corporation usbased manufacturer kitchen bath cabinets april 2003 master lock acquired american lock company usbased manufacturer solid body commercial padlocks aggregate cost acquisitions 1237 million cost exceeded estimated fair value net assets acquired approximately 90 million acquired businesses included consolidated results date acquisition acquisitions consolidated january 1 2002 would materially affected results november 2003 home hardware business acquired thermatru leading manufacturer residential entry door systems united states acquisition fits strategic focus leading brands shares beneficial demographics market fundamentals home hardware brands created valuable synergies within home hardware business purchase financed issuance commercial paper subsequently partially refinanced issuance longterm debt securities outstanding shelf registration statement filed securities exchange commission results operations included consolidated financial statements acquisition date acquisition price 9240 million net cash notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals joint ventures continued following table summarizes fair values thermatru assets acquired liabilities assumed date acquisition unaudited pro forma results december 31 2003 2002 presented thermatru acquisition occurred january 1 2002 information based historical results operations adjusted acquisition costs opinion management represent results would occurred company operated thermatru since beginning year april 2003 spirits wine business returned portion invested capital 3041 million company vs vin sprit ab shareholders spirits wine business return capital related disposition jim beam brands worldwide inc’s ukbased scotch whisky business 2001 impact financial statements reduction minority interests 304 million november 2002 moen sold nonstrategic plumbing parts business net proceeds approximately 15 million recorded aftertax loss 102 million related sale april 2002 masterbrand cabinets acquired omega holdings inc omega usbased manufacturer custom semicustom cabinetry acquisition broadened cabinet product line providing additional selling opportunities across customers producing purchasing manufacturing efficiencies cost acquisition 538 million result acquisition omega home hardware business recorded goodwill identifiable intangibles 3452 million 2120 million respectively 2120 million identifiable intangibles consists 1385 million indefinitelived tradenames notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals joint ventures continued 735 million customerrelationship intangibles amortized weightedaverage useful life approximately 15 years omega included consolidated results january 1 2002 company’s unaudited pro forma net sales net income diluted earnings per share would 2 higher year ended december 31 2002 may 31 2001 spirits wine business completed transactions vs creating joint venture named future brands llc distribute initial tenyear period companies’ spirits brands united states spirits wine business accounted joint venture using equity method accounting future brands consolidated spirits wine business vs substantive participating rights preclude consolidation vs paid 270 million gain access spirits wine business’ us distribution network acquire 49 interest future brands paid 375 million purchase 10 equity interest jbbw form convertible preferred stock shares jbbw convertible preferred stock issued vs convertible 10 jbbw common stock voting power equivalent 10 interest jbbw common stock preferred stock entitled dividend equal greater 10 dividend paid upon jbbw common stock 3 preferred stock’s face value 375 million plus unpaid accrued dividends may paid common stock unless unpaid accrued jbbw preferred stock dividends paid vs also acquired threeyear option expired unexercised increase equity stake jbbw additional 99 vs may require company purchase jbbw preferred stock fair value whole part time may 31 2004 upon change control jbbw jbbco certain events accounted 270 million gain sale 49 future brands deferred income resulting tax sale deferred income tax asset due certain continuing obligations jbbco including limited making payments suppliers employees parties future brands contracts event default future brands june 2001 began amortizing amounts income taxes straightline basis initial term agreement 10year amortization period based noncancelable 10year term management agreement future brands years ended december 31 2004 2003 spirits wine business recorded minority interest 10 ownership vs maintains business 113 million year redemption feature jbbw convertible preferred stock accounted accordance eitf topic d98 “classification measurement redeemable securities” 2003 cumulative adjustment 487000 recorded minority interest income consolidated statement income representing decrease estimated fair value convertible redeemable preferred stock 2004 recorded value convertible redeemable preferred stock deemed reasonable approximation fair value october 2001 spirits wine business sold ukbased scotch whisky business 280 million cash sale business consisted invergordon privatelabel bulk scotch operations several regional brands uk products included agreement generated sales approximately 235 million including excise taxes recorded aftertax gain 218 million related sale 2004 company determined allocation cumulative foreign currency adjustments included determination gain sale business adjusted aftertax gain sale comprehensive income 164 million adjustment also reflected beginning balances reported december 31 2001 consolidated statement stockholders’ equity eps 2001 “item 6 selected financial data” restated reducing eps 012 per basic share 011 per diluted notes consolidated financial statements fortune brands inc subsidiaries 4 acquisitions disposals joint ventures continued share result adjustment cumulative translation adjustment change net stockholders’ equity 5 shortterm borrowings credit facilities december 31 2004 2003 6698 million 5304 million shortterm borrowings outstanding respectively comprised notes payable banks commercial paper used general corporate purposes including acquisitions included amount december 31 2004 2003 01 million 13 million outstanding committed bank credit agreements provide unsecured borrowings 100 million 96 million respectively addition company uncommitted bank lines credit provide unsecured borrowings working capital 2405 million 230 million outstanding december 31 2004 2185 million 228 million outstanding december 31 2003 weightedaverage interest rate borrowings 15 12 respectively see note 14 description company’s use financial instruments 6 longterm debt components longterm debt follows includes adjustment interest rate swap valuation november 2003 issued longterm debt securities totaling 600 million shelf registration filed securities exchange commission 600 million notes consist 300 million 2875 notes due december 2006 300 million 4875 notes due december 2013 proceeds used pay commercial paper issued connection acquisition thermatru net proceeds 5955 million less price discounts 12 million underwriting rating agency fees 33 million effective interest rate debt issue approximates stated coupon rate december 31 2004 maintained 10 billion fiveyear revolving credit agreement various banks company entered july 2004 interest rate set time borrowing facility fee 008 per annum subject increases maximum fee 015 per annum event longterm debt rating falls specified levels borrowings agreements made general corporate purposes including acquisitions share repurchases support company’s shortterm borrowings commercial paper market notes consolidated financial statements fortune brands inc subsidiaries 6 longterm debt continued estimated payments maturing debt next five years follows 2005 04 million 2006 3002 million 2007 01 million 2008 2000 million 7 267 convertible preferred stock redeemable company’s option shares 267 convertible preferred stock issued outstanding december 31 2004 2003 2002 233327 shares 245093 shares 258656 shares respectively reacquired redeemed converted authorized shares outstanding required retired restored status authorized unissued shares preferred stock without series designation holders 267 convertible preferred stock entitled cumulative dividends threetenths vote per share certain events exclusion common shares preference liquidation holders common stock 3050 per share plus accrued dividends convert share convertible preferred stock 6205 shares common stock authorized unissued common shares reserved issuance upon conversions treasury shares may delivered shares converted 11766 shares 13563 shares 22859 shares 2004 2003 2002 respectively company may redeem convertible preferred stock price 3050 per share plus accrued dividends cash dividend 267 per share aggregate amount 06 million 07 million 07 million paid years ended december 31 2004 2003 2002 respectively 8 capital stock 750 million authorized shares common stock 60 million authorized shares preferred stock 144285095 146264641 common shares outstanding december 31 2004 2003 respectively cash dividends paid common stock years ended december 31 2004 2003 2002 aggregated 1829 million 1662 million 1527 million respectively shares purchased connection company’s share repurchase program converted treasury shares amounted 4402978 shares 2004 4094842 shares 2003 5769440 shares 2002 treasury shares delivered connection exercise stock options grants stock awards conversion preferred stock debentures amounted 2423432 2004 3368848 2003 4762402 shares 2002 december 31 2004 2003 85284929 83305383 common treasury shares respectively 9 preferred share purchase rights company amended preferred share purchase rights plan terminate plan effective december 24 2004 10 stock plans use stock options performance awards compensate key employees awards outstanding three longterm incentive plans “plans” december 31 2004 grants 2003 longterm incentive plan may made december 31 2008 12 million shares common stock grants 1999 longterm incentive plan made december 31 2004 1999 plan also maximum share grant limit 12 million shares new stockbased awards made 1990 1999 longterm incentive plans existing awards continue exercisable notes consolidated financial statements fortune brands inc subsidiaries 10 stock plans continued stock options exercise prices equal fair values dates grant options generally may exercised prior one year date grant ten years date grant options issued since november 1998 generally vest onethird year threeyear period date grant performance awards currently amortized expense threeyear vesting period generally paid stock paid cash individual stock ownership guidelines met 2002 nonemployee director stock option plan authorizes granting stock options company’s nonemployee directors grants plan may made december 31 2006 200000 shares common stock options plan exercise prices equal fair market values dates grant may exercised prior one year ten years date grant changes three years ended december 31 2004 shares options follows weightedaverage fair values options granted 2004 2003 2002 1647 1340 1163 respectively fair value option grant estimated date grant using blackscholes optionpricing model following weightedaverage assumptions used grants 2004 2003 2002 notes consolidated financial statements fortune brands inc subsidiaries 10 stock plans continued options outstanding december 31 2004 follows options exercisable end three years ended december 31 2004 follows options exercisable december 31 2004 follows december 31 2004 performance awards outstanding pursuant 204300 shares 204300 shares 201750 shares 173550 shares may issued 2005 2006 2007 2008 respectively depending extent certain specified performance objectives met 194705 shares 123344 shares 181197 shares issued pursuant performance awards 2004 2003 2002 respectively costs performance awards expensed performance period compensation expense stock based plans recorded 2004 2003 2002 191 million 190 million 100 million respectively shares available connection future awards company’s stock plans december 31 2004 2003 2002 7126664 10146614 1053597 respectively authorized unissued shares reserved issuance connection awards treasury shares may delivered 11 pension retiree benefits number pension plans principally united states covering substantially employees plans provide payment retirement benefits mainly commencing ages 60 65 also payment certain disability severance benefits meeting certain qualifications employee acquires vested right future benefits payable plans generally determined basis employee’s length service earnings annual contributions plans made necessary ensure legal funding requirements satisfied notes consolidated financial statements fortune brands inc subsidiaries 11 pension retiree benefits continued company provides postretirement health care life insurance benefits certain employees retirees united states certain employee groups outside united states many employees retirees outside united states covered government health care programs may 2004 fasb issued fasb staff position 1062 fsp 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003 ‘the medicare prescription act’” fsp 1062 provides guidance accounting disclosure effects medicare prescription act enacted december 2003 medicare prescription act provide prescription drug benefit medicare part well provide federal subsidy employers provide program prescription drug benefits least actuarially equivalent medicare part adopted fsp 1062 prospectively third quarter 2004 several postretirement plans qualify federal subsidy however adoption fsp 1062 material impact results operations subsidy result lower future expense reduced accumulated postretirement benefit obligation 109 million 6 notes consolidated financial statements fortune brands inc subsidiaries 11 pension retiree benefits continued amounts recognized balance sheet consist pension benefit obligation accumulated benefit obligation fair value plans assets pension plans accumulated benefit obligation excess plan assets underfunded abo shown decreases include impact contributions made 2004 notes consolidated financial statements fortune brands inc subsidiaries 11 pension retiree benefits continued assumed health care cost trend rates significant effect amounts reported health care plans onepercentagepoint change assumed health care cost trend rates would following effects plan assets pension plan weightedaverage asset allocations december 31 2004 2003 follows notes consolidated financial statements fortune brands inc subsidiaries 11 pension retiree benefits continued investment strategy optimize investment returns diversified portfolio investments taking consideration underlying plan liabilities asset volatility master trusts established hold assets domestic defined benefit plans defined benefit asset allocation policy trusts allows equity allocation 45 75 fixed income allocation 25 50 cash allocation 25 master trust different target asset allocation reviewed periodically based underlying liability structure nonus plans allow investment real estate expected 83 longterm rate return plan assets based investment strategy reflects melded allocation expected annual return equity 10 targeted fixed income annual return 60 contributions expect contribute approximately 40 70 million pension plans 2005 sponsor number defined contribution plans contributions determined various formulas costs related plans amounted 288 million 234 million 228 million 2004 2003 2002 respectively estimated future benefit payments following benefit payments reflect expected future service expected paid notes consolidated financial statements fortune brands inc subsidiaries 12 lease commitments future minimum rental payments noncancelable operating leases december 31 2004 follows total rental expense operating leases reduced minor amounts subleases amounted 537 million 441 million 524 million 2004 2003 2002 respectively 13 income taxes components income continuing operations income taxes follows reconciliation income taxes 35 federal statutory income tax rate income taxes reported follows following items impacted effective income tax rate third quarter 2004 internal revenue service concluded field examination phase routine review 19972001 tax returns result audit recorded net tax reserve reversal notes consolidated financial statements fortune brands inc subsidiaries 13 income taxes continued 492 million net reversal accounts release reserves items resolved favorably anticipated partly offset disallowance deduction reserve established fourth quarter 2004 congressional joint committee taxation completed review results routine irs examination 19972001 tax returns recorded total tax benefit 530 million 036 per diluted share reflecting completion joint committee review resulted reversal tax reserves 395 million net tax adjustment 135 million result conclusion irs examination 19972001 tax years expect receive tax refund approximately 56 million first half 2005 fourth quarter 2004 also recorded onetime nonoperating adjustment interest income taxes receivable related taxrelated benefits 21 million tax 001 per diluted share recorded income fourth quarter 2004 recorded tax benefit 34 million 003 per diluted share associated foreign earnings repatriation provisions american jobs creation act 2004 2003 audit 19931996 tax returns resulted reduction tax expense 35 million result also recorded onetime nonoperating adjustment 69 million interest income tax recorded income taxes follows notes consolidated financial statements fortune brands inc subsidiaries 13 income taxes continued components net deferred tax assets liabilities follows notes consolidated financial statements fortune brands inc subsidiaries 14 financial instruments enter financial instruments trading speculative purposes financial instruments principally used reduce impact changes foreign currency exchange rates interest rates principal financial instruments used forward foreign exchange contracts interest rate swaps counterparties major financial institutions although theoretical risk replacement cost estimated fair value instruments management believes risk incurring losses remote losses would immaterial enter forward foreign exchange contracts principally hedge currency fluctuations transactions denominated foreign currencies thereby limiting risk would otherwise result changes exchange rates periods forward foreign exchange contracts correspond periods hedged transactions periodically enter forward foreign exchange contracts hedge portion net investments foreign subsidiaries estimated fair value foreign currency contracts represents amount required enter offsetting contracts similar remaining maturities based quoted market prices december 31 2004 2003 fair value outstanding contracts book value contracts essentially may time enter interest rate swap agreements manage exposure interest rate changes swaps involve exchange fixed variable interest rate payments without exchanging notional principal amount record payments receipts agreements adjustments interest expense december 31 2004 2003 outstanding interest rate swap agreements aggregate notional principal amount 200 million swap agreements based outstanding 2875 notes due 2006 allow agreements classified fair value hedge accordance fas 133 agreements effectively convert interest paid 200 million underlying debt securities fixed rate floating rate based libor reference rate estimated fair value company’s cash equivalents notes payable banks commercial paper approximates carrying amounts due principally short maturities estimated fair value company’s 12399 million 14431 million total longterm debt including current portion december 31 2004 2003 approximately 13418 million 15648 million respectively fair value determined quoted market prices available investment bankers using current interest rates considering credit ratings remaining terms maturity concentration credit risk respect accounts receivable limited large number geographically diverse customers make operating companies’ domestic international customer base thus spreading credit risk raw materials used company subject price volatility caused weather supply conditions geopolitical economic variables unpredictable external factors use derivative contracts manage exposure commodity price volatility exposures considered material financial statements notes consolidated financial statements fortune brands inc subsidiaries 15 guarantees commitments december 31 2004 thirdparty guarantees totaling approximately 85 million represent guarantees debt maxxium worldwide bv maxxium spirits wine business’ international sales distribution joint venture required perform guarantees event maxxium fails make contractual payments 2003 renewed guarantees maxxium’s credit facilities renewal extended expiration date committed portion credit facilities november 14 2003 june 13 2006 guarantees maxxium debt modified effective date financial accounting standards board interpretation 45 fin 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” recorded liability 11 million december 31 2004 reflect fair value guarantees maxxium provided typical indemnities connection divestitures indemnities relate various representations generally included divestiture agreements environmental tax product liability employee liability contingencies depending transactions several divestitures maximum obligation certain contingencies specified unusual transactions accordingly pursuant fin 45 potential payments divestiturerelated indemnity obligations cannot reasonably estimated indemnities vary duration cases durations indefinite fin 45 effective december 31 2002 recorded liability consolidated financial statements indemnities entered prior date made indemnity payments material financial position results operations quarter furthermore expect potential payments connection indemnity obligations would material adverse effect consolidated financial position results operations liquidity 2004 future periods purchase obligations company december 31 2004 1 purchase obligations include contracts raw materials finished goods purchases advertising selling administrative services capital expenditures 16 product warranties generally record warranty expense time sale offer customers various warranty terms based upon type product sold warranty expense determined accordance policy established operating company main consideration historic claim experience companyspecific based upon nature product category warranty expense generally recorded time sale 16 product warranties continued following table summarizes activity related product warranty liability years ended december 31 2004 2003 2002 notes consolidated financial statements fortune brands inc subsidiaries 1 reclassified 2002 warranty reserve activity conform 2004 2003 disclosure 17 restructuring restructuringrelated charges restructuring charges april 2001 announced result evaluation strategic options office business would begin implementing repositioning plan designed improve financial results longterm value business second quarter 2004 office business recorded final charges associated consolidation manufacturing distribution facilities workplace reductions home hardware business recorded charges 2004 primarily workplace reduction costs associated consolidation waterloo industries’ manufacturing four three facilities charges 2002 relate sale lowreturn plumbing parts business including loss disposal business planned employee termination costs seven positions announced golf charges 2004 2003 relate asset writeoffs associated consolidation golf ball manufacturing facilities spirits wine charges 2002 related sale minor product line result actions recorded pretax restructuring charges years ended december 31 2004 2003 2002 follows 2004 net provision 292 million comprised new provision 307 million less adjustments 15 million accruals excess original estimates 2003 net provision 195 million comprised new provision 215 million less adjustments 20 million accruals excess original estimates notes consolidated financial statements fortune brands inc subsidiaries 17 restructuring restructuringrelated charges continued reconciliation restructuring liability pursuant provisions fas 146 following tables represent reconciliation restructuring charges supplemental information actions initiated december 31 2002 1 loss disposal positive due proceeds disposal assets 1 loss disposal positive due proceeds disposal assets 2 accrual adjustments reversal accruals excess original estimates cash expenditures beyond 2004 relate carrying costs real estate leases facilities longer use notes consolidated financial statements fortune brands inc subsidiaries 17 restructuring restructuringrelated charges continued following tables represent reconciliation restructuring liability restructuring charges recognized prior january 1 2003 accordance emerging issues task force issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” 1 accrual adjustments reversal accruals excess original estimates 2 includes impact foreign exchange 3 planned downsizing 2065 positions 1952 reductions implemented december 31 2004 additional reductions planned employee groups affected restructuring actions primarily office business include plant administrative hourly salaried employees cash expenditures beyond 2004 relate employee severance payments 2005 carrying costs real estate leases facilities longer use notes consolidated financial statements fortune brands inc subsidiaries 17 restructuring restructuringrelated charges continued restructuringrelated charges restructuringrelated charges years ended december 31 2004 2003 2002 follows 2004 home hardware restructuringrelated charges primarily relate costs associated consolidation waterloo industries’ manufacturing facilities 2002 home hardware charges relate writedown longlived asset costs associated sale nonstrategic specialty plumbing parts business reversal certain accruals longer deemed necessary 2004 2003 golf restructuringrelated charges include costs related consolidation golf ball manufacturing 2004 office restructuringrelated charges include charges related operating expense reduction initiatives relocation manufacturing facilities inventory writeoffs associated discontinuance manufacturing certain product lines 2003 2002 office restructuringrelated charges include relocation manufacturing distribution facilities inventory writeoffs associated discontinuance certain unprofitable product lines notes consolidated financial statements fortune brands inc subsidiaries 18 information business segments company organized business segments based products markets served business segment headed officer reports chief executive officer company responsible strategies drive growth profitability segment company’s business segments described home hardware includes kitchen bath cabinets manufactured marketed distributed masterbrand cabinets kitchen bathroom faucets accessories manufactured marketed distributed moen residential entry door patio door systems designed manufactured thermatru locks manufactured marketed distributed master lock american lock tool storage organization products manufactured distributed waterloo spirits wine includes products made marketed distributed jim beam brands worldwide inc subsidiaries golf includes golf balls golf clubs golf shoes gloves manufactured marketed distributed acushnet company office includes paper fastening document management computer accessories time management presentation office products manufactured marketed distributed acco world corporation subsidiaries company’s subsidiaries operate principally united states canada united kingdom australia reconciliation segment net sales consolidated net sales follows operating income follows notes consolidated financial statements fortune brands inc subsidiaries 18 information business segments segment assetsa follows represents total assets excluding intercompany receivables intangibles resulting business acquisitions net reconciliation segment assetsa consolidated total assets follows represents total assets excluding intercompany receivables intangibles resulting business acquisitions net longlived assets followsa represents property plant equipment net sales geographic region follows notes consolidated financial statements fortune brands inc subsidiaries 18 information business segments continued depreciation follows amortization intangibles follows capital expenditures follows 19 income net components income net years ended december 31 2004 2003 2002 follows notes consolidated financial statements fortune brands inc subsidiaries 20 earnings per share basic earnings per common share based weightedaverage number common shares outstanding year preferred stock dividend requirements diluted earnings per common share assume dilutive convertible debentures convertible preferred shares outstanding beginning year converted dates related interest preferred stock dividend requirements outstanding common shares adjusted accordingly also assumes outstanding common shares increased shares issuable upon exercise stock options market price exceeds exercise price less shares could purchased company related proceeds computation basic diluted earnings per common share “net income” follows 21 comprehensive income total comprehensive income consists net income changes stockholders’ equity transactions events sources stockholders includes currency translation gains losses unrealized gains losses derivative instruments designated cash flow hedges net minimum pension liability adjustments components changes comprehensive loss follows notes consolidated financial statements fortune brands inc subsidiaries 21 comprehensive income continued included foreign currency adjustments balance december 31 2004 total deferred forward foreign exchange contract losses 96 million see note 1 “significant accounting policies” see note 4 “acquisitions disposals joint ventures” regarding restatement december 31 2002 2003 foreign currency adjustment accumulated comprehensive loss 22 related party transactions future brands llc 2001 spirits wine business completed transactions vs vin sprit ab vs creating future brands joint venture distributes companies’ spirits brands united states provides related selling invoicing services future brands receives commission partners services provided jbbco records revenue time shipment future brands’ customers part forming joint venture jbbco event default future brands continuing obligation satisfy financial obligations future brands may arise event future brands fails fulfill operating obligations results claim financial obligations include limited making payments suppliers employees parties future brands contracts december 31 2004 2003 jbbco outstanding obligations result arrangement jbbco’s balances related future brands included following maxxium world wide b v 1999 spirits wine business formed international sales distribution joint venture named maxxium worldwide bv maxxium distribute sell spirits wine key markets outside united states joint venture partners include remycointreau highland distillers vs jbbco records sales time spirits sold third parties rather time shipment maxxium result forming joint venture guaranteed certain credit facilities bank loans entered maxxium amount totaling 85 million 76 million outstanding december 31 2004 december 31 2003 guarantees totaled 79 million 69 million outstanding jbbw executed shareholder loan facility loan facility maxxium amounting 20 million amounts outstanding loan facility either december 31 2004 december 31 2003 loan facility expires june 30 2006 jbbco’s balances related maxxium included following notes consolidated financial statements fortune brands inc subsidiaries 23 pending litigation tobacco litigation indemnification december 22 1994 sold american tobacco company atco subsidiary brown williamson tobacco corporation bw time whollyowned subsidiary bat industries plc connection sale bw atco subsequently merged bw agreed indemnification agreement indemnify fortune brands inc company claims including legal expenses arising smoking health fire safe cigarette matters relating tobacco business atco indemnification agreement july 30 2004 bw rj reynolds tobacco holdings inc announced completed combination respective us tobacco businesses previously conducted bw atco rj reynolds tobacco co forming new combined company known rj reynolds tobacco company result combination accordance indemnification agreement new rj reynolds tobacco company assumed indemnification obligations indemnification agreement relating us business previously conducted bw atco bw released obligations indemnification agreement refer bw new rj reynolds tobacco company “indemnitor” indemnification agreement indemnitor complied terms indemnification agreement since 1994 aware inability part indemnitor satisfy indemnity obligations company defendant number actions based upon allegations human ailments resulted tobacco use possible predict outcome pending litigation possible actions could decided unfavorably unable make meaningful estimate amount range loss could result unfavorable outcome pending litigation however believe number meritorious defenses pending actions including fact company never made sold tobacco actions vigorously contested indemnitor believe pending actions material adverse effect upon results operations cash flows financial condition believe meritorious defenses company indemnified indemnification agreement litigation company spirits wine business numerous manufacturers importers beer spirits wine defendants purported class action lawsuit ohio seeking damages injunctive relief regarding alleged deceptive negligent marketing beverage alcohol people legal purchase age alcohol plaintiffs seek disgorgement unspecified profits earned company’s spirits wine business past unspecified damages equitable relief purported class actions pending producers alcoholic beverages alleged deceptive marketing company denies allegations company believes company spirits wine business meritorious defenses allegations actions material adverse effect results operations cash flows financial condition company spirits wine business vigorously contesting litigation increasing volume asbestosrelated personal injury litigation united states generally subsidiary company moen incorporated currently defendant approximately 130 cases claiming personal injury asbestos dismissed defendant approximately 93 cases suits name multiple defendants cases excess 75 defendants named addition moen notes consolidated financial statements fortune brands inc subsidiaries 23 pending litigation continued possible predict outcome pending litigation possible actions could decided unfavorably believe meritorious defenses actions material adverse effect upon results operations cash flows financial condition actions vigorously contested addition lawsuits described company subsidiaries defendants lawsuits associated businesses operations possible predict outcome pending actions litigation possible actions could decided unfavorably believe meritorious defenses actions material adverse effect upon results operations cash flows financial condition actions vigorously contested 24 environmental subject laws regulations relating protection environment possible quantify certainty potential impact actions relating environmental matters particularly remediation compliance efforts subsidiaries may undertake future opinion however compliance current environmental protection laws taking account estimated recoveries third parties material adverse effect upon results operations cash flows financial condition report independent registered public accounting firm board directors shareholders fortune brands inc completed integrated audit fortune brands inc’s 2004 consolidated financial statements internal control financial reporting december 31 2004 audits 2003 2002 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 present fairly material respects financial position fortune brands inc subsidiaries december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whethe financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included management’s report internal control financial reporting appearing item 9a company maintained effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2004 based criteria established internal controlintegrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control fina ncial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide resonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp chicago illinois march 4 2005 shareholders fortune brands inc prepared consolidated balance sheet fortune brands inc subsidiaries december 31 2004 2003 related consolidated statements income cash flows stockholders’ equity three years period ended december 31 2004 financial statements prepared accordance accounting principles generally accepted united states america financial information elsewhere annual report form 10k consistent financial statements system internal control financial reporting company subsidiaries designed provide reasonable assurances financial records adequate relied upon provide information preparation financial statements established policies procedures carefully followed company’s stockholders annually ratify appointment company’s independent registered public accounting firm company’s financial statements pricewaterhousecoopers llp audit performed accordance standards public company accounting oversight board united states audit committee board directors consisting solely independent directors meets periodically independent auditors internal auditors management review accounting auditing financial reporting matters auditors direct access audit committee norman h wesley norman h wesley chairman board chief executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer item 9item 8 financial statements supplementary data see information consolidated balance sheet consolidated statement income consolidated statement cash flows consolidated statement stockholders equity notes consolidated financial statements report independent accountants contained 1997 annual report stockholders registrant information incorporated herein reference unaudited selected quarterly financial data see table captioned quarterly financial data contained 1997 annual report stockholders registrant table incorporated herein reference item 9item 8 financial statements supplementary data see information consolidated statement income consolidated balance sheet consolidated statement cash flows consolidated statement stockholders equity notes consolidated financial statements report independent accountants contained 1998 annual report stockholders registrant information incorporated herein reference unaudited selected quarterly financial data see table captioned quarterly financial data contained 1998 annual report stockholders registrant table incorporated herein reference item 9 nannannannannannanitem 15 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2002 2001 2000 contained item 8 hereof consolidated balance sheet december 31 2002 2001 contained item 8 hereof consolidated statement cash flows years ended december 31 2002 2001 2000 contained item 8 hereof consolidated statement stockholders equity years ended december 31 2002 2001 2000 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent accountants contained item 8 hereof 2 financial statement schedules see financial statement schedule company subsidiaries page 82 3 exhibits indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments securities exchange commission upon request b reports form 8k company filed current report form 8k dated september 24 2002 respect companys press release dated september 24 2002 reporting increase dividend companys common stock items 5 7 company filed current report form 8k dated october 17 2002 respect companys press release announcing third quarter earnings items 5 7 company furnished current report form 8k dated october 29 2002 purpose furnishing investment brochure pursuant regulation fd items 7 9 company furnished current report form 8k dated november 12 2002 purpose furnishing investment brochure pursuant regulation fd items 7 9 company filed current report form 8k dated november 13 2002 respect companys press release dated november 12 2002 reporting companys reaffirmation 2002 earnings guidance items 5 7 signatures pursuant requirements section 13 15d securities exchange act 1934 amended company duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 amended report signed following persons behalf company capacities dates indicated schedule ii valuation qualifying accounts 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance acquisition date subsidiaries 4 balance disposition date subsidiaries 5 foreign exchange rate changes certification norman h wesley certify 1 reviewed annual report form 10k fortune brands inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 12 2003 certification cp omtvedt certify 1 reviewed annual report form 10k fortune brands inc 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrants certifying officers responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrants disclosure controls procedures date within 90 days prior filing date annual report evaluation date c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrants certifying officers disclosed based recent evaluation registrants auditors audit committee registrants board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrants ability record process summarize report financial data identified registrants auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrants internal controls 6 registrants certifying officers indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses date march 12 2003 exhibit index indicates exhibit management contract compensatory plan arrangementitem 15 exhibits financial statement schedules reports form 8k financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2003 2002 2001 contained item 8 hereof consolidated balance sheet december 31 2003 2002 contained item 8 hereof consolidated statement cash flows years ended december 31 2003 2002 2001 contained item 8 hereof consolidated statement stockholders’ equity years ended december 31 2003 2002 2001 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent auditors contained item 8 hereof 2 financial statement schedules see financial statement schedule company subsidiaries page 89 3 exhibits indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments securities exchange commission upon request b reports form 8k company filed current report form 8k dated november 24 2003 respect completion company’s acquisition thermatru holdings inc issuance 600 million debt securities items 2 5 7 signatures pursuant requirements section 13 15d securities exchange act 1934 amended company duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 amended report signed following persons behalf company capacities dates indicated schedule ii valuation qualifying accounts years ended december 31 2003 2002 2001 fortune brands inc subsidiaries 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance acquisition date subsidiaries 4 balance disposition date subsidiaries 5 foreign exchange rate changes exhibit index indicates exhibit management contract compensatory plan arrangementitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2005 2004 2003 contained item 8 hereof consolidated balance sheet december 31 2005 2004 contained item 8 hereof consolidated statement cash flows years ended december 31 2005 2004 2003 contained item 8 hereof consolidated statement stockholders’ equity years ended december 31 2005 2004 2003 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent registered public accounting firm contained item 8 hereof 2 financial statement schedules see financial statement schedule company subsidiaries page 89 3 exhibits indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 amended company duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc company date march 9 2006 norman h wesley norman h wesley chairman board chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf company capacities dates indicated mark roche mark roche attorneyinfact schedule ii valuation qualifying accounts years ended december 31 2005 2004 2003 fortune brands inc subsidiaries 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance acquisition date subsidiaries 4 foreign exchange rate changesitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits 1financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2006 2005 2004 contained item 8 hereof consolidated balance sheet december 31 2006 2005 contained item 8 hereof consolidated statement cash flows years ended december 31 2006 2005 2004 contained item 8 hereof consolidated statement stockholders equity years ended december 31 2006 2005 2004 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent registered public accounting firm contained item 8 hereof 2financial statement schedules see financial statement schedule company subsidiaries page 115 3exhibits 3i restated certificate incorporation company effect date hereof incorporated herein reference exhibit 3i annual report form 10k fiscal year ended december 31 1998 3ii bylaws fortune brands inc amended september 26 2006 incorporated herein reference exhibit 3ii companys current report form 8k dated september 29 2006 41 indenture dated july 15 1988 company chemical bank successor merger manufacturers hanover trust company trustee chemical incorporated herein reference exhibit 4a current report form 8k dated june 27 1989 42 first supplemental indenture dated november 14 1990 company chemical incorporated herein reference exhibit 4b current report form 8k dated november 19 1990 43 second supplemental indenture dated september 1 1991 company chemical incorporated herein reference exhibit 4c current report form 8k dated october 10 1991 44 indenture dated april 15 1999 company jpmorgan chase bank formerly chase manhattan bank trustee incorporated herein reference exhibit 4 current report form 8k dated december 10 1999 45 conformed copy fiscal agency agreement dated february 1 2006 fortune brands inc jpmorgan chase bank na including exhibits thereto incorporated herein reference exhibit 41 companys current report form 8k dated february 1 2006 101 fortune brands inc annual executive incentive compensation plan incorporated herein reference exhibit definitive proxy statement filed march 11 2002 102 fortune brands inc 1990 longterm incentive plan amended restated january 1 1994 incorporated herein reference exhibit 10a quarterly report form 10q dated august 11 1994 103 amendment fortune brands inc 1990 longterm incentive plan hereto incorporated herein reference exhibit 10a1 quarterly report form 10q dated november 12 1997 104 amendment fortune brands inc 1990 longterm incentive plan amendment thereto incorporated herein reference exhibit 10a1 quarterly report form 10q dated november 13 2001 105 fortune brands inc 1999 longterm incentive plan amended incorporated herein reference exhibit 10a1 quarterly report form 10q dated august 14 2003 106 fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10b1 quarterly report form 10q dated august 13 1997 107 amendment fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10a1 quarterly report form 10q dated august 13 1998 108 amendment fortune brands inc nonemployee director stock option plan amendment thereto incorporated herein reference exhibit 10b9 annual report form 10k fiscal year ended december 31 1999 109 amendment fortune brands inc nonemployee director stock option plan amendments thereto incorporated herein reference exhibit 10a1 quarterly report form 10q dated may 15 2001 1010 fortune brands inc 2002 nonemployee director stock option plan amended incorporated herein reference exhibit 10a1 quarterly report form 10q dated november 12 2003 1011 form stock option agreement awards fortune brands inc 2002 nonemployee director stock option plan incorporated reference herein exhibit 10d1 quarterly report form 10q dated november 9 2004 1012 fortune brands inc stock plan nonemployee directors incorporated herein reference exhibit definitive proxy statement filed march 14 2000 1013 fortune brands inc 2005 nonemployee director stock plan incorporated herein reference exhibit definitive proxy statement filed march 14 2005 1014 fortune brands inc supplemental plan amended incorporated herein reference exhibit 10g1 annual report form 10k fiscal year ended december 31 2001 1015 amendment fortune brands inc supplemental plan effective december 10 2002 incorporated herein reference exhibit 10g2 annual report form 10k fiscal year ended december 31 2002 1016 form trust agreement among company northern trust company northern et al establishing aggregate rabbi trust favor certain executive officers purposes paying amounts supplemental plan incorporated herein reference exhibit 10h1 annual report form 10k fiscal year ended december 31 2002 1017 form amended restated trust agreement among company northern et al establishing employee grantor trust favor certain executive officers purposes paying amounts supplemental plan incorporated herein reference exhibit 10i1 annual report form 10k fiscal year ended december 31 2002 1018 schedule identifying agreements substantially identical employee grantor trust agreement constituting exhibit 10i1 hereto favor mark hausberg craig p omtvedt mark roche norman h wesley incorporated reference exhibit 10i2 annual report form 10k year ended december 31 2003 1019 resolutions board directors company adopted october 28 1986 july 26 1988 adopting amending retirement plan directors company officers employees company subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k fiscal year ended december 31 1991 1020 resolution board directors company adopted july 26 1994 amending resolutions regarding nonemployee director retirement plan incorporated herein reference exhibit 10e2 annual report form 10k fiscal year ended december 31 1994 1021 resolutions board directors company adopted january 28 1997 providing accrual benefits nonemployee director retirement plan cease terminating nonemployee director retirement plan directors elected 1997 1022 resolution board directors company adopted july 26 1988 respect retirement health benefits provided mark roche incorporated herein reference exhibit 10f2 annual report form 10k fiscal year ended december 31 1998 1023 letter dated august 11 1995 company respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q dated november 9 1995 1024 letter dated march 3 2005 company respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10l2 annual report form 10k fiscal year ended december 31 2005 1025 letter dated march 3 2005 company respect deferred payment stock gordon r lohman incorporated herein reference exhibit 10l3 annual report form 10k fiscal year ended december 31 2005 1026 form agreement company certain executive officers provide payments event change control incorporated herein reference exhibit 10m1 form 10k fiscal year ended december 31 2001 1027 schedule identifying agreements substantially identical agreement constituting exhibit 10m1 hereto entered company mark hausberg craig p omtvedt mark roche norman h wesley incorporated reference exhibit 10m2 annual report form 10k year ended december 31 2003 1028 form amendment dated december 1 2000 agreement constituting exhibit 1026 hereto company certain executive officers incorporated herein reference exhibit 10m3 form 10k fiscal year ended december 31 2001 1029 schedule identifying amendments substantially identical amendment constituting exhibit 1028 hereto entered company mark hausberg mark roche incorporated reference exhibit 10m4 annual report form 10k year ended december 31 2003 1030 amendment dated january 1 2003 change control agreement company norman h wesley incorporated reference exhibit 10a1 quarterly report form 10q dated may 15 2003 1031 agreement dated august 1 2003 company christopher j klein provide payments event change control incorporated herein reference exhibit 10b1 quarterly report form 10q dated november 12 2003 1032 form trust agreement among company northern et al establishing aggregate rabbi trust favor certain executive officers purposes paying amounts change control agreement favor mark hausberg craig p omtvedt mark roche norman h wesley incorporated herein reference exhibit 10n1 annual report form 10k fiscal year ended december 31 2002 1033 severance retirement agreement dated january 1 2000 company norman h wesley incorporated herein reference exhibit 10c1 quarterly report form 10q dated may 12 2000 1034 amendment dated february 3 2003 severance retirement agreement company norman h wesley incorporated reference exhibit 10a2 quarterly report form 10q dated may 15 2003 1035 severance agreement dated january 29 1996 company craig p omtvedt incorporated herein reference exhibit 10p1 form 10k fiscal year ended december 31 2001 1036 amendment effective january 27 1997 agreement constituting exhibit 1035 hereto company craig p omtvedt incorporated herein reference exhibit 10p2 form 10k fiscal year ended december 31 2001 1037 amendment dated august 1 1998 severance agreement amended company craig p omtvedt incorporated reference exhibit 10j8 annual report form 10k fiscal year ended december 31 1998 1038 schedule identifying agreements amendments substantially identical agreement amendments thereto constituting exhibits 1035 1036 1037 hereto entered company mark roche incorporated reference exhibit 10p4 annual report form 10k year ended december 31 2003 1039 amendment dated december 18 2000 agreement amendments thereto constituting exhibits 1035 1036 1037 hereto company mark roche incorporated reference exhibit 10j15 annual report form 10k fiscal year ended december 31 2001 1040 schedule identifying agreements substantially identical amendment constituting exhibit 1039 hereto entered company mark hausberg incorporated reference exhibit 10p6 annual report form 10k year ended december 31 2003 1041 severance agreement dated august 1 2003 company christopher j klein incorporated reference exhibit 10c1 quarterly report form 10q dated november 12 2003 1042 fortune brands inc severance plan vice presidents adopted january 1 2000 incorporated reference exhibit 10a1 quarterly report form 10q dated august 11 2000 1043 indemnification agreement dated december 22 1994 among company american tobacco company brown williamson tobacco corporation incorporated herein reference exhibit 10m1 annual report form 10k fiscal year ended december 31 1997 1044 supplemental agreement dated july 30 2004 among fortune brands inc brown williamson tobacco corporation bw rj reynolds tobacco company formerly known brown williamson usa inc incorporated reference herein exhibit 10a2 quarterly report form 10q dated august 9 2004 1045 termination replacement restatement agreement dated july 10 2003 among company borrower jpmorgan chase bank administrative agent citibank na administrative agent 14 financial institutions lenders incorporated herein reference exhibit 10b1 quarterly report form 10q dated august 14 2003 1046 master transaction agreement dated march 20 2001 among vs vin sprit ab absolut spirits company incorporated jim beam brands worldwide inc jim beam brands co company incorporated herein reference exhibit 10b1 quarterly report form 10q dated may 15 2001 1047 five year revolving credit agreement dated october 6 2005 among fortune brands inc fortune brands finance uk plc lenders party thereto jpmorgan chase bank na administrative agent barclays bank plc citibank north america inc syndication agents incorporated reference herein exhibit 992 current report form 8k dated october 11 2005 1048 credit agreement dated april 20 2005 among fortune brands inc lenders party hereto credit suisse first boston administrative agent incorporated reference herein exhibit 101 quarterly report form 10q dated august 8 2005 1049 amendment 1 dated july 24 2005 credit agreement dated april 20 2005 credit agreement among fortune brands inc lenders defined article credit agreement credit suisse formerly credit suisse first boston administrative agent lenders incorporated reference herein exhibit 105 quarterly report form 10q dated august 8 2005 1050 amended restated credit agreement dated july 26 2005 among fortune brands inc lenders party thereto credit suisse administrative agent incorporated reference herein exhibit 99 current report form 8k dated july 27 2005 1051 364day revolving credit agreement dated october 6 2005 among fortune brands inc fortune brands finance uk plc lenders party thereto jpmorgan chase bank na administrative agent barclays bank plc citicorp north america inc syndication agents incorporated reference herein exhibit 991 current report form 8k dated october 11 2005 1052 364day revolving credit agreement dated october 5 2006 among fortune brands inc fortune brands finance uk plc lenders party thereto jpmorgan chase bank na administrative agent barclays bank plc citicorp north america inc syndication agents incorporated herein reference exhibit 991 companys current report form 8k dated october 10 2006 1053 fortune brands inc 2003 longterm incentive plan incorporated herein reference exhibit b proxy statement filed march 12 2003 1054 amendment 2003 longterm incentive plan incorporated reference herein exhibit 10a1 quarterly report form 10q dated may 5 2004 1055 amendment 2003 longterm incentive plan amendment incorporated reference herein exhibit 101 current report form 8k dated september 30 2005 1056 form nonqualified stock option award notice terms conditions awards fortune brands inc 2003 longterm incentive plan incorporated reference herein exhibit 10a1 quarterly report form 10q dated november 9 2004 1057 september 2005 nonqualified stock option terms conditions awards fortune brands inc 2003 longterm incentive plan incorporated reference herein exhibit 103 current report form 8k dated september 30 2005 1058 september 2006 nonqualified stock option terms conditions awards fortune brands inc 2003 longterm incentive plan 1059 form incentive stock option award notice terms conditions awards fortune brands inc 2003 longterm incentive plan incorporated reference herein exhibit 10b1 quarterly report form 10q dated november 9 2004 1060 september 2005 incentive stock option terms conditions awards fortune brands inc 2003 longterm incentive plan incorporated reference herein exhibit 102 current report form 8k dated september 30 2005 1061 september 2006 incentive stock option terms conditions awards fortune brands inc 2003 longterm incentive plan 1062 form performance award notice terms conditions awards fortune brands inc 2003 longterm incentive plan incorporated reference herein exhibit 10c1 quarterly report form 10q dated november 9 2004 1063 form performance award notice terms conditions 20062008 awards fortune brands inc 2003 longterm incentive plan incorporated reference herein exhibit 102 current report form 8k dated march 2 2006 1064 form performance award notice terms conditions 20072009 awards fortune brands inc 2003 longterm incentive plan 1065 longterm incentive plan payment matrix 20052007 performance period performance awards fortune brands inc 2003 longterm incentive plan incorporated reference herein exhibit 101 current report form 8k dated february 23 2005 1066 long term incentive plan payment matrix 20062008 performance period performance awards 2003 longterm incentive plan incorporated herein reference exhibit 101 companys current report form 8k dated march 2 2006 1067 description salary incentive pay awards certain executive officers fortune brands inc 2007 1068 agreement plan merger dated march 15 2005 among company acco world corporation gemini acquisition sub inc general binding corporation incorporated reference herein exhibit 21 current report form 8k dated march 21 2005 1069 amendment agreement plan merger dated august 4 2005 among fortune brands inc acco world corporation gemini acquisition sub inc general binding corporation incorporated reference herein exhibit 21 current report form 8k dated august 8 2005 1070 distribution agreement dated march 15 2005 fortune brands inc acco world corporation incorporated reference herein exhibit 22 current report form 8k dated march 21 2005 1071 amendment distribution agreement dated august 4 2005 fortune brands inc acco world corporation incorporated reference herein exhibit 22 current report form 8k dated august 8 2005 1072 tax allocation agreement dated august 16 2005 fortune brands inc acco world corporation incorporated reference herein exhibit 10 current report form 8k dated august 22 2005 1073 asset purchase agreement dated april 21 2005 among larios pernod ricard sa fortune brands inc pernod ricard sa incorporated reference herein exhibit 104 quarterly report form 10q dated august 8 2005 1074 amended restated framework agreement dated 21 april 2005 pernod ricard sa fortune brands inc amended deed variations dated 24 july 2005 incorporated reference herein exhibit 104 quarterly report form 10q dated august 8 2005 1075 amended restated transaction cooperation agreement dated 21 april 2005 among pernod ricard sa fortune brands inc goal acquisitions limited amended deed variations dated 24 july 2005 incorporated reference herein exhibit 102 quarterly report form 10q dated august 8 2005 1076 agreement dated january 27 2006 fortune brands inc pernod ricard sa incorporated reference herein exhibit 991 current report form 8k dated february 2 2006 1077 agreement plan merger dated february 9 2006 among fortune brands inc brightstar acquisition llc sbr inc incorporated reference exhibit 21 current report form 8k dated february 10 2006 1078 agreement plan merger dated february 21 2006 among fortune brands inc tres acquisition co tres investment company incorporated reference exhibit 22 current report form 8ka dated february 22 2006 1079 agreement plan merger dated february 21 2006 among fortune brands inc sb ross acquisition co byrl ross enterprises inc incorporated reference exhibit 23 current report form 8ka dated february 22 2006 1080 escrow exchange agent agreement dated june 7 2006 among fortune brands inc brightstar acquisition llc sbr inc bank new york escrow agent samuel b ross ii holders representative incorporated herein reference exhibit 101 companys quarterly report form 10q period ended june 30 2006 1081 letter agreement dated january 2 2002 company bruce carbonari provide benefits upon retirement 12 statement computation ratio earnings fixed charges 21 subsidiaries company 231 consent independent registered public accounting firm pricewaterhousecoopers llp 232 consent independent registered public accounting firm kpmg audit plc 24 powers attorney relating execution annual report form 10k 311 certificate chief executive officer required section 302 sarbanesoxley act 2002 312 certificate chief financial officer required section 302 sarbanesoxley act 2002 32 joint ceocfo certification required section 906 sarbanesoxley act 2002 99 list pending cases indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc company date february 27 2007 norman h wesley norman h wesley chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated norman h wesley norman h wesley chairman board chief executive officer principal executive officer date february 27 2007 ad david mackay ad david mackay date february 27 2007 craig p omtvedt craig p omtvedt senior vice president chief financial officer principal financial officer date february 27 2007 eugene renna eugene renna director date february 27 2007 patricia ewers patricia ewers director date february 27 2007 anne tatlock anne tatlock director date february 27 2007 richard goldstein richard goldstein director date february 27 2007 david thomas david thomas director date february 27 2007 pierre e leroy pierre e leroy director date february 27 2007 peter wilson peter wilson director date february 27 2007 gordon r lohman gordon r lohman director date february 27 2007 mark roche mark roche attorneyinfact schedule ii valuation qualifying accounts years ended december 31 2006 2005 2004 fortune brands inc subsidiaries acash discounts returns allowed customers bdoubtful accounts written net recoveries dbalance acquisition date subsidiaries dforeign exchange rate changes documents incorporated reference form 10k table contents fortune brands inc stock price performance dividend reinvestment notes consolidated financial statements fortune brands inc subsidiaries signaturesitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2007 2006 2005 contained item 8 hereof consolidated balance sheet december 31 2007 2006 contained item 8 hereof consolidated statement cash flows years ended december 31 2007 2006 2005 contained item 8 hereof consolidated statement stockholders’ equity years ended december 31 2007 2006 2005 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent registered public accounting firm contained item 8 hereof 2 financial statement schedules see financial statement schedule company subsidiaries page 111 3 exhibits indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized mark roche mark roche attorneyinfact schedule ii valuation qualifying accounts years ended december 31 2007 2006 2005 fortune brands inc subsidiaries balance acquisition date subsidiaries net dispositions b net recoveries amounts written prior years immaterial foreign currency impactitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2008 2007 2006 contained item 8 hereof consolidated balance sheet december 31 2008 2007 contained item 8 hereof consolidated statement cash flows years ended december 31 2008 2007 2006 contained item 8 hereof consolidated statement stockholders’ equity years ended december 31 2008 2007 2006 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent registered public accounting firm contained item 8 hereof 2 financial statement schedules see financial statement schedule company subsidiaries page 116 3 exhibits indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized mark roche mark roche attorneyinfact schedule ii valuation qualifying accounts years ended december 31 2008 2007 2006 fortune brands inc subsidiaries balance acquisition date subsidiaries net dispositions b net recoveries amounts written prior years immaterial foreign currency impactitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2009 2008 2007 contained item 8 hereof consolidated balance sheet december 31 2009 2008 contained item 8 hereof consolidated statement cash flows years ended december 31 2009 2008 2007 contained item 8 hereof consolidated statement stockholders’ equity years ended december 31 2009 2008 2007 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent registered public accounting firm contained item 8 hereof 2 financial statement schedules see financial statement schedule company subsidiaries page 120 3 exhibits indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments securities exchange commission upon request accordance rule 406t regulation st xbrl related information exhibit 101 shall deemed “filed” purposes section 18 exchange act otherwise subject liability section shall part registration statement document filed securities act exchange act except shall expressly set forth specific reference filing signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc company date february 24 2010 bruce carbonari bruce carbonari chairman board chief executive officer principal executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated mark roche mark roche attorneyinfact schedule ii valuation qualifying accounts years ended december 31 2009 2008 2007 fortune brands inc subsidiaries balance acquisition date subsidiaries net dispositions b net recoveries amounts written prior years immaterial foreign currency impactitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2010 2009 2008 contained item 8 hereof consolidated balance sheet december 31 2010 2009 contained item 8 hereof consolidated statement cash flows years ended december 31 2010 2009 2008 contained item 8 hereof consolidated statement equity years ended december 31 2010 2009 2008 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent registered public accounting firm contained item 8 hereof 2 financial statement schedules see financial statement schedule company subsidiaries page 117 3 exhibits indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments sec upon request accordance rule 406t regulation st xbrl related information exhibit 101 shall deemed “filed” purposes section 18 exchange act otherwise subject liability section shall part registration statement document filed securities act exchange act except shall expressly set forth specific reference filing signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc company date february 23 2011 bruce carbonari bruce carbonari chairman board chief executive officer principal executive officer craig p omtvedt craig p omtvedt senior vice president chief financial officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated mark roche mark roche attorneyinfact schedule ii valuation qualifying accounts years ended december 31 2010 2009 2008 fortune brands inc subsidiaries balance acquisition date subsidiaries net dispositions b net recoveries amounts written prior years immaterial foreign currency impactitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2011 2010 2009 contained item 8 hereof consolidated balance sheet december 31 2011 2010 contained item 8 hereof consolidated statement cash flows years ended december 31 2011 2010 2009 contained item 8 hereof consolidated statement equity years ended december 31 2011 2010 2009 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent registered public accounting firm contained item 8 hereof 2 financial statement schedules omitted required information shown financial statements notes thereto 3 exhibits acquisitions dispositions 21 stock purchase agreement dated may 19 2011 company alexandria operations corp incorporated reference exhibit 21 quarterly report form 10q period ended june 30 2011 commission file number 19076 amendment 1 stock purchase agreement dated july 29 2011 company alexandria operations corp incorporated reference exhibit 22 quarterly report form 10q period ended june 30 2011 commission file number 19076 22 separation distribution agreement dated september 27 2011 company fortune brands home security inc incorporated reference exhibit 21 current report form 8k filed september 30 2011 commission file number 19076 articles incorporation bylaws 3i restated certificate incorporation company incorporated reference exhibit 31 current report form 8k filed october 7 2011 commission file number 19076 3ii bylaws company incorporated reference exhibit 32 current report form 8k filed october 7 2011 commission file number 19076 instruments defining rights security holders  41 indenture dated july 15 1988 company jpmorgan chase bank successor manufacturers hanover trust company trustee “jpmorgan chase” incorporated reference exhibit 4a current report form 8k filed june 27 1989 commission file number 19076 first supplemental indenture dated november 14 1990 company jpmorgan chase incorporated reference exhibit 4b current report form 8k filed november 19 1990 commission file number 19076 ii second supplemental indenture dated september 1 1991 company jpmorgan chase incorporated reference exhibit 4c current report form 8k filed october 10 1991 commission file number 19076 iii third supplemental indenture dated may 28 1997 company jpmorgan chase incorporated reference exhibit 4a1 quarterly report form 10q period ended june 30 1997 commission file number 19076 42 indenture dated april 15 1999 company jpmorgan chase incorporated reference exhibit 4 current report form 8k filed december 10 1999 commission file number 19076 43 conformed copy fiscal agency agreement dated february 1 2006 company jpmorgan chase incorporated reference exhibit 41 current report form 8k filed february 6 2006 commission file number 19076 44 registration rights agreement company greatbanc trust company investment manager accounts held beam inc formerly fortune brands inc master retirement trust incorporated reference exhibit 991 current report form 8k filed february 3 2010 commission file number 19076 material contracts management contracts compensatory plans arrangements 101 annual executive incentive compensation plan incorporated reference exhibit definitive proxy statement filed march 9 2007 commission file number 19076 102 1999 longterm incentive plan amended incorporated reference exhibit 10a1 quarterly report form 10q period ended june 30 2003 commission file number 19076 103 2003 longterm incentive plan incorporated reference exhibit b proxy statement filed march 12 2003 commission file number 19076 amendment 2003 longterm incentive plan incorporated reference exhibit 10a1 quarterly report form 10q period ended march 31 2004 commission file number 19076 ii form nonqualified stock option award notice terms conditions incorporated reference exhibit 10a1 quarterly report form 10q period ended september 30 2004 commission file number 19076 iii form incentive stock option award notice terms conditions incorporated reference exhibit 10b1 quarterly report form 10q period ended september 30 2004 commission file number 19076 iv amendment 2003 longterm incentive plan incorporated reference exhibit 101 current report form 8k filed september 30 2005 commission file number 19076 v september 2005 nonqualified stock option terms conditions incorporated reference exhibit 103 current report form 8k filed september 30 2005 commission file number 19076 vi september 2005 incentive stock option terms conditions incorporated reference exhibit 102 current report form 8k filed september 30 2005 commission file number 19076 vii september 2006 nonqualified stock option terms conditions incorporated reference exhibit 1058 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 viii september 2006 incentive stock option terms conditions incorporated reference exhibit 1061 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 ix amendment 2003 longterm incentive plan incorporated reference exhibit 109 quarterly report form 10q period ended september 30 2007 commission file number 19076 104 2007 longterm incentive plan incorporated reference exhibit b proxy statement filed march 9 2007 commission file number 19076 form incentive stock option terms conditions incorporated reference exhibit 1021 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 ii form nonqualified stock option terms conditions incorporated reference exhibit 1016 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 iii february 2008 nonqualified stock option terms conditions award made bruce carbonari incorporated reference exhibit 1017 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 iv form restricted stock unit agreement company certain executives incorporated reference exhibit 101 current report form 8k filed february 28 2008 commission file number 19076 v first amendment 2007 longterm incentive plan incorporated reference exhibit 102 current report form 8k filed october 3 2008 commission file number 19076 vi form 2007 longterm incentive plan restricted stock unit agreement company certain executives incorporated reference exhibit 101 current report form 8k filed february 27 2009 commission file number 19076 vii second amendment 2007 longterm incentive plan incorporated reference exhibit 101 current report form 8k filed march 19 2009 commission file number 19076 viii form performance award notice terms conditions 20092011 awards incorporated reference exhibit 101 quarterly report form 10q period ended march 31 2009 commission file number 19076 ix performance award notice agreement company bruce carbonari july 1 2009 june 30 2011 award granted july 27 2009 incorporated reference exhibit 103 quarterly report form 10q period ended september 30 2009 commission file number 19076 x form amendment restricted stock unit agreements awards granted certain executives february 25 2008 incorporated reference exhibit 101 quarterly report form 10q period ended september 30 2009 commission file number 19076 xi restricted stock unit agreement company patrick j koley effective february 3 2009 incorporated reference exhibit 1032 annual report form 10k year ended december 31 2009 commission file number 19076 xii september 2009 nonqualified stock option terms conditions incorporated reference exhibit 1016 annual report form 10k fiscal year ended december 31 2009 commission file number 19076 xiii february 2010 nonqualified stock option terms conditions incorporated reference exhibit 1017 annual report form 10k fiscal year ended december 31 2010 commission file number 19076 105 supplemental plan amended restated incorporated reference exhibit 101 current report form 8k filed august 6 2007 commission file number 19076 form trust agreement among company northern trust company “northern” et al establishing aggregate rabbi trust favor certain executive officers incorporated reference exhibit 10h1 annual report form 10k fiscal year ended december 31 2002 commission file number 19076 ii form amended restated trust agreement among company northern et al establishing employee grantor trust favor certain executive officers incorporated reference exhibit 10i1 annual report form 10k fiscal year ended december 31 2002 commission file number 19076 iii schedule identifying employee grantor trust agreements favor certain executives incorporated reference exhibit 10i2 annual report form 10k fiscal year ended december 31 2003 commission file number 19076 iv amendment supplemental plan incorporated reference exhibit 101 current report form 8k filed july 31 2008 commission file number 19076 v second amendment supplemental plan amended restated effective january 1 2008 october 1 2010 incorporated reference exhibit 101 quarterly report form 10q filed november 8 2010 commission file number 19076 106 2011 longterm incentive plan incorporated herein reference appendix c proxy statement filed march 7 2011 commission file number 19076 first amendment 2011 longterm incentive plan incorporated herein reference annex additional definitive proxy materials schedule 14a filed march 29 2011 commission file number 19076 ii form founders grant restricted stock unit agreement terms conditions incorporated reference exhibit 101 current report form 8k filed october 3 2011 commission file number 19076 iii form founders grant nonqualified stock options terms conditions incorporated reference exhibit 102 current report form 8k filed october 3 2011 commission file number 19076 107 beam inc 2012 employee stock purchase plan incorporated reference exhibit 101 company’s registration statement form s8 filed november 9 2011 commission file number 333177865 108 nonemployee director stock option plan incorporated reference exhibit 10b1 quarterly report form 10q period ended june 30 1997 commission file number 19076 1998 amendment nonemployee director stock option plan incorporated reference exhibit 10a1 quarterly report form 10q period ended june 30 1998 commission file number 19076 ii 1999 amendment nonemployee director stock option plan incorporated reference exhibit 10b9 annual report form 10k fiscal year ended december 31 1999 commission file number 19076 iii 2001 amendment nonemployee director stock option plan incorporated reference exhibit 10a1 quarterly report form 10q period ended march 31 2001 commission file number 19076 iv 2007 amendment nonemployee director stock option plan incorporated reference exhibit 1010 quarterly report form 10q period ended september 30 2007 commission file number 19076 109 2002 nonemployee director stock option plan amended incorporated reference exhibit 10a1 quarterly report form 10q period ended september 30 2003 commission file number 19076 form stock option agreement incorporated reference exhibit 10d1 quarterly report form 10q period ended september 30 2004 commission file number 19076 ii amendment 2002 nonemployee director stock option plan incorporated reference exhibit 1011 quarterly report form 10q period ended september 30 2007 commission file number 19076 1010 stock plan nonemployee directors incorporated reference exhibit definitive proxy statement filed march 14 2000 commission file number 19076 1011 2005 nonemployee director stock plan incorporated reference exhibit definitive proxy statement filed march 14 2005 commission file number 19076 1012 2010 nonemployee director stock plan incorporated reference appendix b definitive proxy statement filed march 8 2010 commission file number 19076 1013 directors deferred compensation plan incorporated reference exhibit 106 quarterly report form 10q period ended september 30 2007 commission file number 19076 1014 resolutions board directors company adopted october 28 1986 july 26 1988 adopting amending retirement plan directors company officers employees company subsidiary thereof incorporated reference exhibit 10e1 annual report form 10k fiscal year ended december 31 1991 commission file number 19076 resolution board directors company adopted july 26 1994 amending resolutions regarding nonemployee director retirement plan incorporated reference exhibit 10e2 annual report form 10k fiscal year ended december 31 1994 commission file number 19076 ii resolutions board directors company adopted january 28 1997 providing accrual benefits nonemployee director retirement plan cease terminating nonemployee director retirement plan directors elected 1997 incorporated reference exhibit 1021 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 1015 resolution board directors company adopted july 26 1988 respect retirement health benefits provided mark roche incorporated reference exhibit 10f2 annual report form 10k fiscal year ended december 31 1998 commission file number 19076 1016 trust agreement among moen incorporated northern trust company bruce carbonari establishing employee grantor trust purposes paying amounts moen incorporated supplemental plan incorporated reference exhibit 1036 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 1017 severance plan vice presidents amended restated july 15 2011 incorporated reference exhibit 101 quarterly report form 10q period ended june 30 2011 commission file number 19076 1018 form change control agreement company messrs carbonari omtvedt roche hausberg incorporated reference exhibit 101 current report form 8k filed september 21 2007 commission file number 19076 form trust agreement among company northern et al establishing aggregate rabbi trust favor certain executive officers purposes paying amounts change control agreements incorporated reference exhibit 10n1 annual report form 10k fiscal year ended december 31 2002 commission file number 19076 ii form amendment change control agreements company messrs carbonari omtvedt roche hausberg incorporated reference exhibit 1036 annual report form 10k fiscal year ended december 31 2008 commission file number 19076 1019 severance agreement dated september 19 2007 company bruce carbonari incorporated reference exhibit 103 current report form 8k filed september 21 2007 commission file number 19076 1020 letter agreement dated january 2 2002 company bruce carbonari provide benefits upon retirement incorporated reference exhibit 1081 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 form amendment letter agreement dated january 2 2002 company bruce carbonari provide benefits upon retirement incorporated reference exhibit 101 current report form 8k filed october 3 2008 commission file number 19076 1021 form severance agreement company messrs omtvedt roche hausberg incorporated reference exhibit 102 current report form 8k filed september 21 2007 commission file number 19076 form amendment severance agreements company messrs carbonari omtvedt roche hausberg incorporated reference exhibit 1043 annual report form 10k fiscal year ended december 31 2008 commission file number 19076 1022 agreement payment benefits following termination employment company mr koley dated april 28 2009 incorporated reference exhibit 1050 annual report form 10k fiscal year ended december 31 2009 1023 form agreement payment benefits following termination employment dated october 4 2011 company messrs shattock probst newlands baladi baldock 1024 form aircraft timesharing agreement company messrs carbonari omtvedt incorporated reference exhibit 101 current report form 8k filed january 28 2008 commission file number 19076 1025 success bonus agreement dated september 8 2011 company bruce carbonari incorporated reference exhibit 101 quarterly report form 10q period ended september 30 2011 commission file number 19076 1026 success bonus consulting agreement dated september 8 2011 company craig p omtvedt incorporated reference exhibit 102 quarterly report form 10q period ended september 30 2011 commission file number 19076 material contracts 1027 credit agreement dated december 14 2011 among beam inc lenders party thereto jpmorgan chase bank na administrative agent incorporated reference exhibit 101 current report form 8k filed december 16 2011 commission file number 19076 1028 indemnification agreement dated september 14 2011 company fortune brands home security inc incorporated reference exhibit 101 current report form 8k filed september 15 2011 commission file number 19076 1029 tax allocation agreement dated september 28 2011 company fortune brands home security inc incorporated reference exhibit 101 current report form 8k filed september 30 2011 commission file number 19076 1030 employee matters agreement dated september 28 2011 company fortune brands home security inc incorporated reference exhibit 102 current report form 8k filed september 30 2011 commission file number 19076 1031 indemnification agreement dated december 22 1994 among company american tobacco company brown williamson tobacco corporation incorporated reference exhibit 1064 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 1032 supplemental agreement dated july 30 2004 among company brown williamson tobacco corporation rj reynolds tobacco company formerly known brown williamson usa inc incorporated reference exhibit 10a2 quarterly report form 10q period ended june 30 2004 commission file number 19076 12 statement computation ratio earnings combined fixed charges preferred dividends 18 preferability letter independent registered public accounting firm pricewaterhousecoopers llp 21 subsidiaries company 23 consent independent registered public accounting firm pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 311 certificate chief executive officer required section 302 sarbanesoxley act 2002 312 certificate chief financial officer required section 302 sarbanesoxley act 2002 32 joint ceocfo certification required section 906 sarbanesoxley act 2002 99 list pendingterminated cases 101 following materials beam inc annual report form 10k year ended december 31 2011 formatted extensible business reporting language xbrl consolidated statement income ii consolidated balance sheet iii consolidated statement cash flows iv consolidated statement equity v notes consolidated financial statements filed herewith  company agrees furnish supplementally copy omitted schedule sec upon request  lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments sec upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated kenton r rose kenton r rose attorneyinfactitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2012 2011 2010 contained item 8 hereof consolidated statement comprehensive income years ended december 31 2012 2011 2010 contained item 8 hereof consolidated balance sheet december 31 2012 2011 contained item 8 hereof consolidated statement cash flows years ended december 31 2012 2011 2010 contained item 8 hereof consolidated statement equity years ended december 31 2012 2011 2010 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent registered public accounting firm contained item 8 hereof 2 financial statement schedules omitted required information shown financial statements notes thereto 3 exhibits 2 acquisitions dispositions 21 stock purchase agreement dated may 19 2011 company alexandria operations corp incorporated reference exhibit 21 quarterly report form 10q period ended june 30 2011 commission file number 19076 amendment 1 stock purchase agreement dated july 29 2011 company alexandria operations corp incorporated reference exhibit 22 quarterly report form 10q period ended june 30 2011 commission file number 19076 22 separation distribution agreement dated september 27 2011 company fortune brands home security inc incorporated reference exhibit 21 current report form 8k filed september 30 2011 commission file number 19076 3 articles incorporation bylaws 31 restated certificate incorporation company incorporated reference exhibit 33 current report form 8k filed november 27 2012 commission file number 19076 32 bylaws company incorporated reference exhibit 32 current report form 8k filed october 7 2011 commission file number 19076 4 instruments defining rights security holders  41 indenture dated july 15 1988 company jpmorgan chase bank successor manufacturers hanover trust company trustee “jpmorgan chase” incorporated reference exhibit 4a current report form 8k filed june 27 1989 commission file number 19076 first supplemental indenture dated november 14 1990 company jpmorgan chase incorporated reference exhibit 4b current report form 8k filed november 19 1990 commission file number 19076 ii second supplemental indenture dated september 1 1991 company jpmorgan chase incorporated reference exhibit 4c current report form 8k filed october 10 1991 commission file number 19076 iii third supplemental indenture dated may 28 1997 company jpmorgan chase incorporated reference exhibit 4a1 quarterly report form 10q period ended june 30 1997 commission file number 19076 42 indenture dated april 15 1999 company bank new york mellon trust company na incorporated reference exhibit 4 current report form 8k filed december 10 1999 commission file number 19076 form global note company’s 1875 notes due 2017 incorporated reference exhibit 41 current report form 8k filed may 22 2012 commission file number 19076 ii form global note company’s 3250 notes due 2022 incorporated reference exhibit 42 current report form 8k filed may 22 2012 commission file number 19076 43 conformed copy fiscal agency agreement dated february 1 2006 company jpmorgan chase incorporated reference exhibit 41 current report form 8k filed february 6 2006 commission file number 19076 10 material contracts management contracts compensatory plans arrangements 101 annual executive incentive compensation plan incorporated reference exhibit b definitive proxy statement filed march 9 2012 commission file number 19076 102 1999 longterm incentive plan amended incorporated reference exhibit 10a1 quarterly report form 10q period ended june 30 2003 commission file number 19076 103 2003 longterm incentive plan incorporated reference exhibit b proxy statement filed march 12 2003 commission file number 19076 amendment 2003 longterm incentive plan incorporated reference exhibit 10a1 quarterly report form 10q period ended march 31 2004 commission file number 19076 ii form nonqualified stock option award notice terms conditions incorporated reference exhibit 10a1 quarterly report form 10q period ended september 30 2004 commission file number 19076 iii form incentive stock option award notice terms conditions incorporated reference exhibit 10b1 quarterly report form 10q period ended september 30 2004 commission file number 19076 iv amendment 2003 longterm incentive plan incorporated reference exhibit 101 current report form 8k filed september 30 2005 commission file number 19076 v september 2005 nonqualified stock option terms conditions incorporated reference exhibit 103 current report form 8k filed september 30 2005 commission file number 19076 vi september 2005 incentive stock option terms conditions incorporated reference exhibit 102 current report form 8k filed september 30 2005 commission file number 19076 vii september 2006 nonqualified stock option terms conditions incorporated reference exhibit 1058 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 viii september 2006 incentive stock option terms conditions incorporated reference exhibit 1061 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 ix amendment 2003 longterm incentive plan incorporated reference exhibit 109 quarterly report form 10q period ended september 30 2007 commission file number 19076 104 2007 longterm incentive plan incorporated reference exhibit b proxy statement filed march 9 2007 commission file number 19076 form incentive stock option terms conditions incorporated reference exhibit 1021 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 ii form nonqualified stock option terms conditions incorporated reference exhibit 1016 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 iii first amendment 2007 longterm incentive plan incorporated reference exhibit 102 current report form 8k filed october 3 2008 commission file number 19076 iv second amendment 2007 longterm incentive plan incorporated reference exhibit 101 current report form 8k filed march 19 2009 commission file number 19076 v september 2009 nonqualified stock option terms conditions incorporated reference exhibit 1016 annual report form 10k fiscal year ended december 31 2009 commission file number 19076 vi february 2010 nonqualified stock option terms conditions incorporated reference exhibit 1017 annual report form 10k fiscal year ended december 31 2010 commission file number 19076 vii form performance award notice terms conditions 20102012 awards incorporated reference exhibit 1023 annual report form 10k period ended december 31 2010 commission file number 19076 viii form amendment february 2009 july 2009 february 2010 performance stock awards terms conditions incorporated reference exhibit 1023 annual report form 10k period ended december 31 2010 commission file number 19076 ix february 2011 nonqualified stock option terms conditions incorporated reference exhibit 104 xvi annual report form 10k fiscal year ended december 31 2011 commission file number 19076 x form performance award notice terms conditions 20112013 awards incorporated reference exhibit 104 xvii annual report form 10k fiscal year ended december 31 2011 commission file number 19076 xi form 2007 longterm incentive plan restricted stock unit agreement company certain executives incorporated reference exhibit 104 xviii annual report form 10k fiscal year ended december 31 2011 commission file number 19076 105 supplemental plan amended restated incorporated reference exhibit 101 current report form 8k filed august 6 2007 commission file number 19076 form trust agreement among company northern trust company “northern” et al establishing aggregate rabbi trust favor certain executive officers incorporated reference exhibit 10h1 annual report form 10k fiscal year ended december 31 2002 commission file number 19076 ii form amended restated trust agreement among company northern et al establishing employee grantor trust favor certain executive officers incorporated reference exhibit 10i1 annual report form 10k fiscal year ended december 31 2002 commission file number 19076 iii amendment supplemental plan incorporated reference exhibit 101 current report form 8k filed july 31 2008 commission file number 19076 iv second amendment supplemental plan amended restated effective january 1 2008 october 1 2010 incorporated reference exhibit 101 quarterly report form 10q filed november 8 2010 commission file number 19076 106 2011 longterm incentive plan incorporated herein reference appendix c proxy statement filed march 7 2011 commission file number 19076 first amendment 2011 longterm incentive plan incorporated herein reference annex additional definitive proxy materials schedule 14a filed march 29 2011 commission file number 19076 ii form founders grant restricted stock unit agreement terms conditions incorporated reference exhibit 101 current report form 8k filed october 3 2011 commission file number 19076 iii form founders grant nonqualified stock options terms conditions incorporated reference exhibit 102 current report form 8k filed october 3 2011 commission file number 19076 iv form performance share award agreement 20122014 awards 2011 longterm incentive plan incorporated reference exhibit 101 quarterly report form 10q period ended march 31 2012 commission file number 19076 v form restricted stock unit agreement awards granted certain executives february 2012 2011 longterm incentive plan incorporated reference exhibit 102 quarterly report form 10q period ended march 31 2012 commission file number 19076 vi form nonqualified stock option terms conditions awards granted certain executives february 2012 2011 longterm incentive plan incorporated reference exhibit 103 quarterly report form 10q period ended march 31 2012 commission file number 19076 107 beam inc 2012 employee stock purchase plan incorporated reference exhibit 101 company’s registration statement form s8 filed november 9 2011 commission file number 333177865 108 2002 nonemployee director stock option plan amended incorporated reference exhibit 10a1 quarterly report form 10q period ended september 30 2003 commission file number 19076 form stock option agreement incorporated reference exhibit 10d1 quarterly report form 10q period ended september 30 2004 commission file number 19076 ii amendment 2002 nonemployee director stock option plan incorporated reference exhibit 1011 quarterly report form 10q period ended september 30 2007 commission file number 19076 109 2010 nonemployee director stock plan incorporated reference appendix b definitive proxy statement filed march 8 2010 commission file number 19076 1010 directors deferred compensation plan incorporated reference exhibit 106 quarterly report form 10q period ended september 30 2007 commission file number 19076 1011 resolutions board directors company adopted october 28 1986 july 26 1988 adopting amending retirement plan directors company officers employees company subsidiary thereof incorporated reference exhibit 10e1 annual report form 10k fiscal year ended december 31 1991 commission file number 19076 resolution board directors company adopted july 26 1994 amending resolutions regarding nonemployee director retirement plan incorporated reference exhibit 10e2 annual report form 10k fiscal year ended december 31 1994 commission file number 19076 ii resolutions board directors company adopted january 28 1997 providing accrual benefits nonemployee director retirement plan cease terminating nonemployee director retirement plan directors elected 1997 incorporated reference exhibit 1021 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 1012 severance plan vice presidents amended restated july 15 2011 incorporated reference exhibit 101 quarterly report form 10q period ended june 30 2011 commission file number 19076 1013 form agreement payment benefits following termination employment dated october 4 2011 company messrs shattock probst newlands baladi baldock incorporated reference exhibit 1023 annual report form 10k period ended december 31 2011 commission file number 19076 1014 beam executive deferred compensation plan effective january 1 2013 incorporated reference exhibit 101 current report form 8k filed october 10 2012 commission file number 19076 material contracts 1015 underwriting agreement dated may 10 2012 company barclays capital inc credit suisse securities usa llc merrill lynch pierce fenner smith incorporated behalf several underwriters named therein incorporated reference exhibit 1 current report form 8k filed may 16 2012 commission file number 19076 1016 credit agreement dated december 14 2011 among beam inc lenders party thereto jpmorgan chase bank na administrative agent incorporated reference exhibit 101 current report form 8k filed december 16 2011 commission file number 19076 1017 indemnification agreement dated september 14 2011 company fortune brands home security inc incorporated reference exhibit 101 current report form 8k filed september 15 2011 commission file number 19076 1018 tax allocation agreement dated september 28 2011 company fortune brands home security inc incorporated reference exhibit 101 current report form 8k filed september 30 2011 commission file number 19076 1019 employee matters agreement dated september 28 2011 company fortune brands home security inc incorporated reference exhibit 102 current report form 8k filed september 30 2011 commission file number 19076 1020 indemnification agreement dated december 22 1994 among company american tobacco company brown williamson tobacco corporation incorporated reference exhibit 1064 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 1021 supplemental agreement dated july 30 2004 among company brown williamson tobacco corporation rj reynolds tobacco company formerly known brown williamson usa inc incorporated reference exhibit 10a2 quarterly report form 10q period ended june 30 2004 commission file number 19076 12 statement computation ratio earnings combined fixed charges preferred dividends 21 subsidiaries company 23 consent independent registered public accounting firm pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 311 certificate chief executive officer required section 302 sarbanesoxley act 2002 312 certificate chief financial officer required section 302 sarbanesoxley act 2002 32 joint ceocfo certification required section 906 sarbanesoxley act 2002 99 list pendingterminated cases 101 following materials beam inc annual report form 10k year ended december 31 2012 formatted extensible business reporting language xbrl consolidated statement income ii consolidated statement comprehensive income iii consolidated balance sheet iv consolidated statement cash flows v consolidated statement equity vi notes consolidated financial statements filed herewith  company agrees furnish supplementally copy omitted schedule sec upon request  lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments sec upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized beam inc date february 26 2013 matthew j shattock matthew j shattock president chief executive officer principal executive officer robert f probst robert f probst senior vice president chief financial officer principal financial officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated kenton r rose kenton r rose attorneyinfactitem 15 exhibits financial statement schedules financial statements financial statement schedules exhibits 1 financial statements financial statements listed company consolidated subsidiaries consolidated statement income years ended december 31 2013 2012 2011 contained item 8 hereof consolidated statement comprehensive income years ended december 31 2013 2012 2011 contained item 8 hereof consolidated balance sheet december 31 2013 2012 contained item 8 hereof consolidated statement cash flows years ended december 31 2013 2012 2011 contained item 8 hereof consolidated statement equity years ended december 31 2013 2012 2011 contained item 8 hereof notes consolidated financial statements contained item 8 hereof report independent registered public accounting firm contained item 8 hereof 2 financial statement schedules omitted required information shown financial statements notes thereto 3 exhibits 2 acquisitions dispositions 21 stock purchase agreement dated may 19 2011 company alexandria operations corp incorporated reference exhibit 21 quarterly report form 10q period ended june 30 2011 commission file number 19076 amendment 1 stock purchase agreement dated july 29 2011 company alexandria operations corp incorporated reference exhibit 22 quarterly report form 10q period ended june 30 2011 commission file number 19076 22 separation distribution agreement dated september 27 2011 company fortune brands home security inc incorporated reference exhibit 21 current report form 8k filed september 30 2011 commission file number 19076 23 agreement plan merger dated january 12 2014 among suntory holdings limited sus merger sub limited beam inc incorporated reference exhibit 21 current report form 8k filed january 13 2014 commission file number 19076 3 articles incorporation bylaws 31 restated certificate incorporation company incorporated reference exhibit 33 current report form 8k filed november 27 2012 commission file number 19076 32 bylaws company incorporated reference exhibit 31 current report form 8k filed december 10 2013 commission file number 19076 4 instruments defining rights security holders  41 indenture dated july 15 1988 company jpmorgan chase bank successor manufacturers hanover trust company trustee “jpmorgan chase” incorporated reference exhibit 4a current report form 8k filed june 27 1989 commission file number 19076 first supplemental indenture dated november 14 1990 company jpmorgan chase incorporated reference exhibit 4b current report form 8k filed november 19 1990 commission file number 19076 ii second supplemental indenture dated september 1 1991 company jpmorgan chase incorporated reference exhibit 4c current report form 8k filed october 10 1991 commission file number 19076 iii third supplemental indenture dated may 28 1997 company jpmorgan chase incorporated reference exhibit 4a1 quarterly report form 10q period ended june 30 1997 commission file number 19076 42 indenture dated april 15 1999 company bank new york mellon trust company na incorporated reference exhibit 4 current report form 8k filed december 10 1999 commission file number 19076 form global note company’s 1875 notes due 2017 incorporated reference exhibit 41 current report form 8k filed may 22 2012 commission file number 19076 ii form global note company’s 3250 notes due 2022 incorporated reference exhibit 42 current report form 8k filed may 22 2012 commission file number 19076 iii form global 1750 notes due 2018 incorporated reference exhibit 41 current report form 8k filed june 11 2013 commission file number 19076 iv form global 3250 notes due 2023 incorporated reference exhibit 41 current report form 8k filed june 11 2013 commission file number 19076 43 conformed copy fiscal agency agreement dated february 1 2006 company jpmorgan chase incorporated reference exhibit 41 current report form 8k filed february 6 2006 commission file number 19076 10 material contracts management contracts compensatory plans arrangements 101 annual executive incentive compensation plan incorporated reference exhibit b definitive proxy statement filed march 9 2012 commission file number 19076 102 1999 longterm incentive plan amended incorporated reference exhibit 10a1 quarterly report form 10q period ended june 30 2003 commission file number 19076 103 2003 longterm incentive plan incorporated reference exhibit b proxy statement filed march 12 2003 commission file number 19076 amendment 2003 longterm incentive plan incorporated reference exhibit 10a1 quarterly report form 10q period ended march 31 2004 commission file number 19076 ii form nonqualified stock option award notice terms conditions incorporated reference exhibit 10a1 quarterly report form 10q period ended september 30 2004 commission file number 19076 iii form incentive stock option award notice terms conditions incorporated reference exhibit 10b1 quarterly report form 10q period ended september 30 2004 commission file number 19076 iv amendment 2003 longterm incentive plan incorporated reference exhibit 101 current report form 8k filed september 30 2005 commission file number 19076 v september 2005 nonqualified stock option terms conditions incorporated reference exhibit 103 current report form 8k filed september 30 2005 commission file number 19076 vi september 2005 incentive stock option terms conditions incorporated reference exhibit 102 current report form 8k filed september 30 2005 commission file number 19076 vii september 2006 nonqualified stock option terms conditions incorporated reference exhibit 1058 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 viii september 2006 incentive stock option terms conditions incorporated reference exhibit 1061 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 ix amendment 2003 longterm incentive plan incorporated reference exhibit 109 quarterly report form 10q period ended september 30 2007 commission file number 19076 104 2007 longterm incentive plan incorporated reference exhibit b proxy statement filed march 9 2007 commission file number 19076 form incentive stock option terms conditions incorporated reference exhibit 1021 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 ii form nonqualified stock option terms conditions incorporated reference exhibit 1016 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 iii first amendment 2007 longterm incentive plan incorporated reference exhibit 102 current report form 8k filed october 3 2008 commission file number 19076 iv second amendment 2007 longterm incentive plan incorporated reference exhibit 101 current report form 8k filed march 19 2009 commission file number 19076 v september 2009 nonqualified stock option terms conditions incorporated reference exhibit 1016 annual report form 10k fiscal year ended december 31 2009 commission file number 19076 vi february 2010 nonqualified stock option terms conditions incorporated reference exhibit 1017 annual report form 10k fiscal year ended december 31 2010 commission file number 19076 vii form amendment february 2009 july 2009 february 2010 performance stock awards terms conditions incorporated reference exhibit 1023 annual report form 10k period ended december 31 2010 commission file number 19076 viii february 2011 nonqualified stock option terms conditions incorporated reference exhibit 104 xvi annual report form 10k fiscal year ended december 31 2011 commission file number 19076 ix form performance award notice terms conditions 20112013 awards incorporated reference exhibit 104 xvii annual report form 10k fiscal year ended december 31 2011 commission file number 19076 x form 2007 longterm incentive plan restricted stock unit agreement company certain executives incorporated reference exhibit 104 xviii annual report form 10k fiscal year ended december 31 2011 commission file number 19076 xi form performance share award 20132015 awards 2011 longterm incentive plan incorporated reference exhibit 101 quarterly report form 10q fiscal quarter ended march 31 2013 xii form restricted stock unit agreement awards granted certain executives february 2013 2011 longterm incentive plan incorporated reference exhibit 102 quarterly report form 10q fiscal quarter ended march 31 2013 xiii form nonqualified stock option terms conditions awards granted certain executives february 2013 2011 longterm incentive plan incorporated reference exhibit 103 quarterly report form 10q fiscal quarter ended march 31 2013 105 supplemental plan amended restated incorporated reference exhibit 101 current report form 8k filed august 6 2007 commission file number 19076 form trust agreement among company northern trust company “northern” et al establishing aggregate rabbi trust favor certain executive officers incorporated reference exhibit 10h1 annual report form 10k fiscal year ended december 31 2002 commission file number 19076 ii form amended restated trust agreement among company northern et al establishing employee grantor trust favor certain executive officers incorporated reference exhibit 10i1 annual report form 10k fiscal year ended december 31 2002 commission file number 19076 iii amendment supplemental plan incorporated reference exhibit 101 current report form 8k filed july 31 2008 commission file number 19076 iv second amendment supplemental plan amended restated effective january 1 2008 october 1 2010 incorporated reference exhibit 101 quarterly report form 10q filed november 8 2010 commission file number 19076 106 2011 longterm incentive plan incorporated herein reference appendix c proxy statement filed march 7 2011 commission file number 19076 first amendment 2011 longterm incentive plan incorporated herein reference annex additional definitive proxy materials schedule 14a filed march 29 2011 commission file number 19076 ii form founders grant restricted stock unit agreement terms conditions incorporated reference exhibit 101 current report form 8k filed october 3 2011 commission file number 19076 iii form founders grant nonqualified stock options terms conditions incorporated reference exhibit 102 current report form 8k filed october 3 2011 commission file number 19076 iv form performance share award agreement 20122014 awards 2011 longterm incentive plan incorporated reference exhibit 101 quarterly report form 10q period ended march 31 2012 commission file number 19076 v form restricted stock unit agreement awards granted certain executives february 2012 2011 longterm incentive plan incorporated reference exhibit 102 quarterly report form 10q period ended march 31 2012 commission file number 19076 vi form nonqualified stock option terms conditions awards granted certain executives february 2012 2011 longterm incentive plan incorporated reference exhibit 103 quarterly report form 10q period ended march 31 2012 commission file number 19076 107 beam inc 2012 employee stock purchase plan incorporated reference exhibit 101 company’s registration statement form s8 filed november 9 2011 commission file number 333177865 108 2002 nonemployee director stock option plan amended incorporated reference exhibit 10a1 quarterly report form 10q period ended september 30 2003 commission file number 19076 form stock option agreement incorporated reference exhibit 10d1 quarterly report form 10q period ended september 30 2004 commission file number 19076 ii amendment 2002 nonemployee director stock option plan incorporated reference exhibit 1011 quarterly report form 10q period ended september 30 2007 commission file number 19076 109 2010 nonemployee director stock plan incorporated reference appendix b definitive proxy statement filed march 8 2010 commission file number 19076 1010 directors deferred compensation plan incorporated reference exhibit 106 quarterly report form 10q period ended september 30 2007 commission file number 19076 1011 resolutions board directors company adopted october 28 1986 july 26 1988 adopting amending retirement plan directors company officers employees company subsidiary thereof incorporated reference exhibit 10e1 annual report form 10k fiscal year ended december 31 1991 commission file number 19076 resolution board directors company adopted july 26 1994 amending resolutions regarding nonemployee director retirement plan incorporated reference exhibit 10e2 annual report form 10k fiscal year ended december 31 1994 commission file number 19076 ii resolutions board directors company adopted january 28 1997 providing accrual benefits nonemployee director retirement plan cease terminating nonemployee director retirement plan directors elected 1997 incorporated reference exhibit 1021 annual report form 10k fiscal year ended december 31 2006 commission file number 19076 1012 severance plan vice presidents amended restated july 15 2011 incorporated reference exhibit 101 quarterly report form 10q period ended june 30 2011 commission file number 19076 1013 form agreement payment benefits following termination employment dated october 4 2011 company messrs shattock probst newlands baladi baldock incorporated reference exhibit 1023 annual report form 10k period ended december 31 2011 commission file number 19076 1014 beam executive deferred compensation plan effective january 1 2013 incorporated reference exhibit 101 current report form 8k filed october 10 2012 commission file number 19076 material contracts 1015 underwriting agreement dated june 3 2013 company credit suisse securities usa llc merrill lynch pierce fenner smith incorporated behalf several underwriters named therein incorporated reference exhibit 1 current report form 8k filed june 4 2013 commission file number 19076 1016 credit agreement dated december 14 2011 among beam inc lenders party thereto jpmorgan chase bank na administrative agent incorporated reference exhibit 101 current report form 8k filed december 16 2011 commission file number 19076 1017 indemnification agreement dated september 14 2011 company fortune brands home security inc incorporated reference exhibit 101 current report form 8k filed september 15 2011 commission file number 19076 1018 tax allocation agreement dated september 28 2011 company fortune brands home security inc incorporated reference exhibit 101 current report form 8k filed september 30 2011 commission file number 19076 1019 employee matters agreement dated september 28 2011 company fortune brands home security inc incorporated reference exhibit 102 current report form 8k filed september 30 2011 commission file number 19076 1020 indemnification agreement dated december 22 1994 among company american tobacco company brown williamson tobacco corporation incorporated reference exhibit 1064 annual report form 10ka fiscal year ended december 31 2007 commission file number 19076 1021 supplemental agreement dated july 30 2004 among company brown williamson tobacco corporation rj reynolds tobacco company formerly known brown williamson usa inc incorporated reference exhibit 10a2 quarterly report form 10q period ended june 30 2004 commission file number 19076 12 statement computation ratio earnings fixed charges 21 subsidiaries company 23 consent independent registered public accounting firm pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 311 certificate chief executive officer required section 302 sarbanesoxley act 2002 312 certificate chief financial officer required section 302 sarbanesoxley act 2002 32 joint ceocfo certification required section 906 sarbanesoxley act 2002 99 list pendingterminated cases 101 following materials beam inc annual report form 10k year ended december 31 2013 formatted extensible business reporting language xbrl consolidated statement income ii consolidated statement comprehensive income iii consolidated balance sheet iv consolidated statement cash flows v consolidated statement equity vi notes consolidated financial statements filed herewith  company agrees furnish supplementally copy omitted schedule sec upon request  lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments sec upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities dates indicated kenton r rose kenton r rose attorneyinfactnanitem 15 exhibits financial statement schedules 10b2 amendment fortune brands inc 1990 longterm incentive plan hereto incorporated herein reference exhibit 10a1 quarterly report form 10q dated november 11 1997 10b3 amendment fortune brands inc 1990 longterm incentive plan amendment thereto constituting exhibits 10b1 10b2 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q dated november 13 2001 10c1 fortune brands inc 1999 longterm incentive plan amended incorporated herein reference exhibit 10a1 quarterly report form 10q dated august 14 2003 10d1 fortune brands inc nonemployee director stock option plan incorporated herein reference exhibit 10b1 quarterly report form 10q dated august 12 1997 10d2 amendment fortune brands inc nonemployee director stock option plan constituting exhibit 10d1 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q dated august 12 1998 10d3 amendment fortune brands inc nonemployee director stock option plan amendment thereto constituting exhibits 10d1 10d2 hereto incorporated herein reference exhibit 10b9 annual report form 10k fiscal year ended december 31 1999 10d4 amendment fortune brands inc nonemployee director stock option plan amendments thereto constituting exhibits 10d1 10d2 10d3 hereto incorporated herein reference exhibit 10a1 quarterly report form 10q dated may 15 2001 10e1 fortune brands inc 2002 nonemployee director stock option plan amended incorporated herein reference exhibit 10a1 quarterly report form 10q dated november 12 2003 10e2 form stock option agreement awards fortune brands inc 2002 nonemployee director stock option plan constituting exhibit 10e1 hereto incorporated reference herein exhibit 10d1 quarterly report form 10q dated november 9 2004 10f1 fortune brands inc stock plan nonemployee directors incorporated herein reference exhibit definitive schedule 14a filed march 14 2000 10g1 fortune brands inc supplemental plan amended incorporated herein reference exhibit 10g1 annual report form 10k fiscal year ended december 31 2001 10g2 amendment fortune brands inc supplemental plan effective december 10 2002 incorporated herein reference exhibit 10g2 annual report form 10k fiscal year ended december 31 2002 10h1 form trust agreement among company northern trust company “northern” et al establishing aggregate rabbi trust favor certain executive officers purposes paying amounts supplemental plan constituting exhibit 10g1 hereto incorporated herein reference exhibit 10h1 annual report form 10k fiscal year ended december 31 2002 10i1 form amended restated trust agreement among company northern et al establishing employee grantor trust favor certain executive officers purposes paying amounts supplemental plan constituting exhibit 10g1 hereto incorporated herein reference exhibit 10i1 annual report form 10k fiscal year ended december 31 2002 10i2 schedule identifying substantially identical agreements trust agreement constituting exhibit 10i1 hereto favor mark hausberg craig p omtvedt mark roche norman h wesley incorporated reference exhibit 10i2 annual report form 10k year ended december 31 2003 10j1 resolutions board directors company adopted october 28 1986 july 26 1988 adopting amending retirement plan directors company officers employees company subsidiary thereof incorporated herein reference exhibit 10e1 annual report form 10k fiscal year ended december 31 1991 maintained commission file 19076 10j2 resolution board directors company adopted july 26 1994 amending resolutions constituting exhibit 10j1 hereto incorporated herein reference exhibit 10e2 annual report form 10k fiscal year ended december 31 1994 maintained commission file 19076 10k1 resolution board directors company adopted july 26 1988 respect retirement health benefits provided mark roche incorporated herein reference exhibit 10f2 annual report form 10k fiscal year ended december 31 1998 10l1 letter dated august 11 1995 company respect deferred payment fees gordon r lohman incorporated herein reference exhibit 10b quarterly report form 10q dated november 9 1995 maintained commission file 19076 10m1 form agreement company certain executive officers incorporated herein reference exhibit 10m1 form 10k fiscal year ended december 31 2001 10m2 schedule identifying substantially identical agreements agreement constituting exhibit 10m1 hereto entered company mark hausberg craig p omtvedt mark roche norman h wesley incorporated reference exhibit 10m2 annual report form 10k year ended december 31 2003 10m3 form amendment dated december 1 2000 agreement constituting exhibit 10ml hereto company certain executive officers incorporated herein reference exhibit 10m3 form 10k fiscal year ended december 31 2001 10m4 schedule identifying substantially identical agreements agreement constituting exhibit 10m3 hereto entered company mark hausberg mark roche incorporated reference exhibit 10m4 annual report form 10k year ended december 31 2003 10m5 amendment effective february 3 2003 agreement constituting exhibit 10m1 hereto company norman h wesley incorporated reference exhibit 10a1 quarterly report form 10q dated may 15 2003 10m6 agreement dated august 1 2003 company christopher j klein incorporated herein reference exhibit 10b1 quarterly report form 10q dated november 12 2003 10n1 form trust agreement among company northern et al establishing aggregate rabbi trust favor certain executive officers purposes paying amounts agreement constituting exhibit 10m1 hereto favor mark hausberg craig p omtvedt mark roche norman h wesley incorporated herein reference exhibit 10n1 annual report form 10k fiscal year ended december 31 2002 10o1 severance retirement agreement dated january 1 2000 company norman h wesley incorporated herein reference exhibit 10c1 quarterly report form 10q dated may 12 2000 10o2 amendment dated february 3 2003 severance retirement agreement constituting exhibit 10o1 hereto company norman h wesley incorporated reference exhibit 10a2 quarterly report form 10q dated may 15 2003 10p1 severance agreement dated january 29 1996 company craig p omtvedt incorporated herein reference exhibit 10p1 form 10k fiscal year ended december 31 2001 10p2 amendment effective january 27 1997 agreement constituting exhibit 10p1 hereto company craig p omtvedt incorporated herein reference exhibit 10p2 form 10k fiscal year ended december 31 2001 10p3 amendment dated august 1 1998 agreement amendment thereto constituting exhibits 10p1 10p2 hereto company craig p omtvedt incorporated reference exhibit 10j8 annual report form 10k fiscal year ended december 31 1998 10p4 schedule identifying substantially identical agreements agreement amendments thereto constituting exhibits 10p1 10p2 10p3 hereto entered company mark roche incorporated reference exhibit 10p4 annual report form 10k year ended december 31 2003 10p5 amendment dated december 18 2000 agreement amendments thereto constituting exhibits 10p1 10p2 10p3 hereto company mark roche incorporated reference exhibit 10j15 annual report form 10k fiscal year ended december 31 2001 10p6 schedule identifying substantially identical agreement amendment constituting exhibit 10p5 hereto entered company mark hausberg incorporated reference exhibit 10p6 annual report form 10k year ended december 31 2003 10q1 severance agreement dated august 1 2003 company christopher j klein incorporated reference exhibit 10c1 quarterly report form 10q dated november 12 2003 10r1 fortune brands inc severance plan vice presidents adopted january 1 2000 incorporated reference exhibit 10a1 quarterly report form 10q dated august 11 2000 10s1 indemnification agreement dated december 22 1994 among company american tobacco company brown williamson tobacco corporation incorporated herein reference exhibit 10m1 annual report form 10k fiscal year ended december 31 1997 10s2 supplemental agreement dated july 30 2004 among fortune brands inc brown williamson tobacco corporation bw rj reynolds tobacco company formerly known brown williamson usa inc indemnification agreement dated december 22 1994 among fortune brands inc bw american tobacco company constituting exhibit 10s1 hereto incorporated reference herein exhibit 10a2 quarterly report form 10q dated august 9 2004 10t2 termination replacement restatement agreement dated july 10 2003 among company borrower jpmorgan chase bank administrative agent citibank na administrative agent 14 financial institutions lenders incorporated herein reference exhibit 10b1 quarterly report form 10q dated august 14 2003 10u1 master transaction agreement dated march 20 2001 among vs vin sprit ab absolut spirits company incorporated jim beam brands worldwide inc jim beam brands co company incorporated herein reference exhibit 10b1 quarterly report form 10q dated may 15 2001 10v1 five year revolving credit agreement dated july 8 2004 among fortune brands inc fortune brands finance uk plc lenders party thereto jpmorgan chase bank administrative agent citibank na syndication agent incorporated reference herein exhibit 10a1 quarterly report form 10q dated august 9 2004 10w1 fortune brands inc 2003 longterm incentive plan incorporated herein reference exhibit b proxy statement 2003 annual meeting stockholders 10w2 amendment 2003 longterm incentive plan constituting exhibit 10x1 hereto incorporated reference herein exhibit 10a1 quarterly report form 10q dated may 5 2004 10w3 form nonqualified stock option award notice terms conditions awards fortune brands inc 2003 longterm incentive plan constituting exhibit 10x1 hereto incorporated reference herein exhibit 10a1 quarterly report form 10q dated november 9 2004 10w4 form incentive stock option award notice terms conditions awards fortune brands inc 2003 longterm incentive plan constituting exhibit 10x1 hereto incorporated reference herein exhibit 10b1 quarterly report form 10q dated november 9 2004 10w5 form performance award notice terms conditions awards fortune brands inc 2003 longterm incentive plan constituting exhibit 10x1hereto incorporated reference herein exhibit 10c1 quarterly report form 10q dated november 9 2004 10w6 description award performance measures 20052007 performance awards fortune brands inc 2003 longterm incentive plan incorporated reference herein exhibit 101 current report form 8k dated february 23 2005 10x1 description awards approved company’s annual executive incentive compensation plan 2004 incorporated reference herein current report form 8k dated january 28 2005 10x2 description award performance measures company’s annual executive incentive compensation plan 2005 incorporated reference herein current report form 8k dated february 23 2005 10y1 description base salary fortune brands inc’s named executive officers defined item 402a2 regulation sk securities act 1933 amended 12 statement computation ratio earnings fixed charges 21 subsidiaries company 23 consent independent registered public accounting firm pricewaterhousecoopers llp 24 powers attorney relating execution annual report form 10k 311 certificate chief executive officer required section 302 sarbanesoxley act 2002 312 certificate chief financial officer required section 302 sarbanesoxley act 2002 32 joint ceocfo certification required section 906 sarbanesoxley act 2002 99 list pendingterminated cases indicates exhibit management contract compensatory plan arrangement lieu filing certain instruments respect longterm debt kind described item 601b4 regulation sk company agrees furnish copy instruments securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 amended company duly caused report signed behalf undersigned thereunto duly authorized fortune brands inc company norman h wesley date march 14 2005 norman h wesley chairman board chief executive officer pursuant requirements securities exchange act 1934 amended report signed following persons behalf company capacities dates indicated norman h wesley gordon r lohman norman h wesley chairman board chief executive officer principal executive officer gordon r lohman director date march 14 2005 date march 14 2005 craig p omtvedt eugene renna craig p omtvedt senior vice president chief financial officer principal financial officer eugene renna director date march 14 2005 date march 14 2005 nadine heidrich j christopher reyes nadine heidrich vice president corporate controller principal accounting officer j christopher reyes director date march 14 2005 date march 14 2005 patricia ewers anne tatlock patricia ewers director anne tatlock director date march 14 2005 date march 14 2005 thomas c hays david thomas c hays director david thomas director date march 14 2005 date march 14 2005 pierre e leroy peter wilson pierre e leroy director peter wilson director date march 14 2005 date march 14 2005 mark roche mark roche attorneyinfact schedule ii valuation qualifying accounts years ended december 31 2004 2003 2002 fortune brands inc subsidiaries 1 cash discounts returns allowed customers 2 doubtful accounts written net recoveries 3 balance acquisition date subsidiaries 4 foreign exchange rate changesnannan