UNITED STATES SECURITIES and EXCHANGE COMMISSION Washington, D.C

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996 Commission file number 1-9076

AMERICAN BRANDS, INC. ------(Exact name of registrant as specified in its charter)

DELAWARE 13-3295276 ------(State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

1700 East Putnam Avenue, Old Greenwich,Connecticut 06870-0811 ------(Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203) 698-5000

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange Title of each class on which registered ------Common Stock, par value $3.125 per share New York Stock Exchange, Inc. $2.67 Convertible Preferred Stock, without par value New York Stock Exchange, Inc. 9% Notes Due 1999 New York Stock Exchange, Inc. 8 5/8% Debentures Due 2021 New York Stock Exchange, Inc. 8 1/2% Notes Due 2003 New York Stock Exchange, Inc. 7 7/8% Debentures Due 2023 New York Stock Exchange, Inc. 7 1/2% Notes Due 1999 New York Stock Exchange, Inc. Preferred Share Purchase Rights New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act: None ------

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[X] No[ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of Registrant's voting stock held by non- affiliates of Registrant, at February 13, 1997, was $9,269,858,740. The number of shares outstanding of Registrant's Common Stock, par value $3.125 per share, at March 3, 1997, was 171,670,172.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Certain information contained in the Annual Report to Stockholders of Registrant for the fiscal year ended December 31, 1996 is incorporated by reference into Part I, Part II and Part IV hereof.

(2) Certain information contained in the Proxy Statement for the Annual Meeting of Stockholders of Registrant to be held on April 30, 1997 is incorporated by reference into Part III hereof.

PART I Item 1. Business.

(a) General development of business.

Registrant is a holding company with subsidiaries engaged in various businesses. Subsidiaries of Registrant are engaged in the manufacture and sale of cigarettes, cigars and smoking tobaccos, principally in the United Kingdom ("U.K."), distilled spirits, various types of hardware and home improvement products, golf and leisure products and office products, supplies and accessories.

Registrant was incorporated under the laws of Delaware in 1985 and until 1986 conducted no business. Prior to 1986, the businesses of Registrant's subsidiaries were conducted by American Brands, Inc., a New Jersey corporation organized in 1904 ("American New Jersey"), and its subsidiaries. American New Jersey was merged into The American Tobacco Company on December 31, 1985, and the shares of the principal first-tier subsidiaries formerly held by American New Jersey were transferred to Registrant. In addition, Registrant assumed all liabilities and obligations in respect of the public debt securities of American New Jersey outstanding immediately prior to the merger. Unless the context otherwise indicates, references herein to American Brands, Inc. and to Registrant for all periods prior to January 1, 1986 are to American New Jersey.

As a holding company, Registrant is a legal entity separate and distinct from its subsidiaries. Accordingly, the right of Registrant, and thus the right of Registrant's creditors (including holders of its debt securities and other obligations) and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject to the claims of creditors of the subsidiary, except to the extent that claims of Registrant itself as a creditor of such subsidiary may be recognized, in which event Registrant's claims may in certain circumstances be subordinate to certain claims of others. In addition, as a holding company, a principal source of Registrant's unconsolidated revenues and funds is dividends and other payments from its subsidiaries. Registrant's principal subsidiaries currently are not limited by long-term debt or other agreements in their abilities to pay cash dividends or to make other distributions with respect to their capital stock or other payments to Registrant.

In recent years Registrant has been engaged in a strategy seeking to enhance the operations of its subsidiaries in certain major businesses. Pursuant to such strategy Registrant has made acquisitions in the distilled spirits business, the office products business and the hardware and home improvement products business, and, in January 1996, acquired all the outstanding capital stock of Cobra Golf Incorporated ("Cobra"), a leader in golf clubs, for an aggregate cost of $712 million in cash, including fees and expenses. These acquisitions were financed at least in part by debt or debt securities convertible into Common Stock. In addition, Registrant has been making dispositions of businesses considered to be nonstrategic to its long-term operations. Since January 1, 1994, these dispositions have included the sale of American Franklin Company, Registrant's life insurance business, to

American General Corporation for $1.17 billion on January 31, 1995, the sale of The American Tobacco Company ("ATCO"), Registrant's domestic tobacco subsidiary, to Brown & Williamson Tobacco Corporation, a subsidiary of B.A.T Industries p.l.c. ("B.A.T"), for $1 billion on December 22, 1994, and the sale of Dollond & Aitchison Group PLC, a subsidiary of Gallaher Limited ("Gallaher"), for total consideration of $146 million on July 12, 1994. Registrant has also disposed of a number of other nonstrategic businesses and product lines, including U.K.- based Forbuoys (retail distribution) and Prestige (housewares), both subsidiaries of Gallaher. The sale of Prestige was completed on May 2, 1995. The sale of the retail distribution group was completed on July 24, 1995.

On October 8, 1996, Registrant announced plans to spin off its U.K.- based Gallaher tobacco business. Completion of the transaction, which is expected around mid-1997, is pending receipt of favorable tax rulings and relevant stockholder approvals. When the spin-off is completed, the financial statements will be restated to show tobacco operations (Gallaher and ATCO) as discontinued operations. Following the transaction, Registrant's stockholders will own shares in two publicly-traded companies - the Registrant (renamed Fortune Brands, Inc.) ("Fortune Brands") and Gallaher. To allocate the overall debt burden of Registrant at the time of the spin-off, Gallaher will borrow and pay to Fortune Brands pounds sterling in the range of 925 million. Fortune Brands will use the net cash proceeds of approximately $1.25 billion initially to pay down short-term debt. The Gallaher debt will be in addition to its seasonal working capital requirements.

Registrant continues to pursue its strategy of enhancing the operations of its subsidiaries in certain major businesses and in furtherance thereof explores other possible acquisitions in fields related to its major businesses. Registrant also cannot exclude the possibility of acquisitions in other fields or further dispositions. Although no assurance can be given as to whether or when any acquisitions or dispositions will be consummated, if agreement with respect to any acquisitions were to be reached, Registrant might finance such acquisitions by issuance of additional debt or equity securities. The additional debt from any acquisitions, if consummated, would increase Registrant's debt-to- equity ratio and such debt or equity securities might, at least in the near term, have a dilutive effect on earnings per share. Registrant also continues to consider other corporate strategies intended to enhance stockholder value. It cannot be predicted whether or when any such strategies might be implemented or what the financial effect thereof might be upon Registrant's debt or equity securities.

Cautionary Statement

Except for the historical information contained in this Annual Report on Form 10-K, certain statements herein, including without limitation, certain matters discussed in Part I, Item 1 -- Business and Item 3 -- Legal Proceedings and in Part II, Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations, are forward looking statements that involve a number of risks and uncertainties. Actual results could differ materially from such forward looking statements depending upon such risks and uncertainties including, but not limited to, the following: general economic conditions, foreign

exchange rate fluctuations, competitive product and pricing pressures, the impact of excise tax increases with respect to international tobacco and distilled spirits, regulatory developments, the uncertainties of litigation, as well as other risks and uncertainties detailed from time to time in Registrant's Securities and Exchange Commission filings.

(b) Financial information about industry segments.

See "Information on Business Segments" in the Notes to Consolidated Financial Statements contained in the 1996 Annual Report to Stockholders of Registrant, which information is incorporated herein by reference.

The following is a description of the business of the subsidiaries of Registrant in the industry segments of International Tobacco, Distilled Spirits, Hardware and Home Improvement Products, Golf and Leisure Products and Office Products. For financial information about the above industry segments, see "Information on Business Segments" in the Notes to Consolidated Financial Statements contained in the 1996 Annual Report to Stockholders of Registrant, which information is incorporated herein by reference.

International Tobacco

Gallaher is the largest manufacturer of tobacco products for the U.K. market and manufactures and markets a range of cigarettes, cigars and pipe and handrolling tobacco products. Gallaher is the leader in each of the cigarette, cigar and pipe tobacco markets in the U.K., with market shares of consumer sales of 39.1%, 49.7% and 46.2%, respectively, and is the second largest handrolling tobacco manufacturer in the U.K., with a 38.0% market share. Gallaher is also the U.K. market leader in the growing low tar cigarette sector. Gallaher's sales of cigarettes, principally in the premium sector, accounted for 92.7% of its total U.K. tobacco sales in 1996. The sale of Gallaher's cigarettes in selected international markets is an important part of its operations, accounting for 28.9% of Gallaher's total cigarette unit sales in 1996. The sale of Gallaher's tobacco products in selected international markets accounted for 13.7% of sales in 1996, and Gallaher sold tobacco products in over 35 countries, with international sales concentrated primarily in the Republic of Ireland, continental western Europe and the former Soviet Union. Gallaher manufactures substantially all of its products, for both domestic and international markets, in the U.K. and the Republic of Ireland. A significant factor affecting Gallaher's operations is the government duty on tobacco products. The current U.K. government has expressed an intent to increase duty on tobacco products by an average of at least 3% per annum in excess of the rate of inflation. This represents an annual direct increase in cost of sales for Gallaher, which, if passed on to the retail trade, would be expected to affect the consumption of tobacco products. The continuing impact of price increases in the U.K. cigarette market, principally due to substantial duty increases in recent years, has reduced annual industry volumes, led to greater price competition and accelerated trading down by consumers to

lower price cigarette brands, resulting in pressure on margins. These changes are particularly affecting Gallaher, the majority of whose sales are in the premium sector of the U.K. cigarette market.

The imposition of duty increases in the U.K. government's budget announcement also affects the annual pattern of Gallaher's sales and inventory values. Historically, Gallaher's sales in the U.K. have peaked in the weeks preceding the budget announcement, as trade customers have sought to avoid the expected duty increases by acquiring inventories of tobacco products at pre- budget prices. In addition, as a result of paying duty at the pre-budget rate, Gallaher has held significantly higher inventory values in the months immediately following the U.K. government's budget announcement. Any change in the timing of the budget announcement or in the regulations relating to the application of duty increases could have a material impact on Gallaher's operating performance, as could the outcome of pending litigation, not involving Gallaher, if it resulted in commercial organizations being entitled to act as agents for U.K. individuals to bring into the U.K. tobacco products on which duty had been paid in another European Union ("EU") member state without the need to pay U.K. excise duty. Manufacturers' price increases in the U.K. have tended to be annual, most recently in the spring of each year, resulting in a second, less accentuated, peak in sales prior to such an increase.

Sales of cigarettes in the U.K. have been in a gradual decline since their peak in 1973, with cigarette consumer sales falling by an average of 2.5% per annum over the period from 1992 to 1996. Within this overall downward trend, however, growth has been apparent in certain sectors of the U.K. market, more recently in those for lower tar products and lower price brands. Gallaher's share of the U.K. unit sales to consumers increased significantly from a level of 32.3% in 1985 to a peak of 42.9% in 1990, and was 39.1% in 1996. The reduction in market share in recent years has been primarily a result of the trend away from premium price cigarettes to lower price products. The trend away from premium price cigarettes to lower price products in the last six years is also reflected in the total market shares of Gallaher's premium Benson and Hedges and Silk Cut brands, which have declined from 20.4% and 10.3%, respectively, in 1990 to 14.3% and 9.9% in 1996.

Gallaher launched Mayfair in February 1992 and Sovereign in March 1996 in the lower price sector of the U.K. market to capitalize on this growing market. The launch of Sovereign was the largest brand launch ever undertaken by Gallaher and its introduction, together with the growth of sales of Mayfair cigarettes, enabled Gallaher's low price cigarette brands to increase their share of the total market from 1.8% in January 1996 to 4.1% in December 1996. Gallaher classifies the U.K. cigarette market in terms of three price sectors based on the recommended retail price for a standard pack of 20 cigarettes: the premium sector (presently (Pounds)2.97 and above); the mid-price sector (presently (Pounds)2.82 to (Pounds)2.96); and the low-price sector (presently (Pounds)2.81 or less). The premium sector represents 48.5% of the U.K. cigarette market and the mid-price sector and low-price sector represent 23.9% and 27.6%, respectively. Gallaher's market position is particularly strong in the premium sector, where it earns margins superior to the margins on its products in the mid and low-price sectors. Gallaher has a 53.6% share of the premium sector principally through its Benson and Hedges and Silk Cut brands, the two

largest selling brands in the premium sector. Gallaher also has a 41.4% market share in the mid-price sector, through its Berkeley Superkings and Benson and Hedges Superkings brands, and an 11.7% market share in the low-price sector, principally through its Mayfair and Sovereign brands. The average tar content of cigarettes sold in the U.K. has been gradually falling for more than 20 years, reflecting trends in consumer preferences and regulatory initiatives to reduce the tar content of cigarettes. In addition to the main brand, lower tar variants are also sold under the Benson and Hedges, Berkeley, Mayfair and Sovereign brand names. Lower tar cigarettes have accounted for a growing share of the U.K. market and Gallaher believes that it is well positioned to take advantage of what it believes will be a continuing trend. Gallaher is the market leader in the U.K. in the low tar cigarette sector, which it presently classifies as cigarettes with a tar yield of six milligrams or less. Within this sector, the Silk Cut brand has a 63.4% share. To capitalize on this position, Gallaher launched Silk Cut Ultra, with a tar yield of one milligram, in 1992.

Gallaher's principal competitor in the U.K. market is Imperial Tobacco Group PLC ("Imperial Tobacco"). Imperial Tobacco has a 37.8% share of the cigarette market. The second main competitor in the U.K. cigarette market is The Rothmans (U.K.) Partnership ("Rothmans"). Brands distributed by Rothmans have a 13.3% share of the cigarette market. Gallaher also has competition from imported brands, including those of R. J. Reynolds Tobacco Company.

Gallaher's international activities are concentrated in the markets of the Republic of Ireland, the former Soviet Union, France, Greece, Germany, Belgium and the Canary Islands. Gallaher plans to develop niche positions in certain markets in the Asia Pacific region. In addition to sales in duty paid markets, duty free sales to travelers and tourists are also a significant part of Gallaher's international business. Market trends in continental western Europe are generally similar to those in the U.K., with a longer term overall decline in the demand for cigarettes and increasing regulatory intervention. In the emerging economies of the former Soviet Union and Asia Pacific, however, sales of western-style cigarettes are generally increasing.

The Republic of Ireland represents an important international market for Gallaher and in 1996 accounted for 23.3% of Gallaher's international cigarette sales. Gallaher is the leading cigarette manufacturing company in the Republic of Ireland with a 44.2% share of the cigarette market. Gallaher has had a manufacturing operation in the Republic of Ireland for more than 30 years and manages its Irish operations independently of its other international operations. The tobacco market in the Republic of Ireland is different from that in the U.K., primarily because Irish legislation creates a framework for the price at which different cigarette brands can be sold. The advertising and promotion of tobacco products is also subject to greater restrictions in the Republic of Ireland than in the U.K.

Continental western Europe is also significant for Gallaher and in 1996 accounted for 38.2% of Gallaher's international cigarette sales. A major contributor to Gallaher's sales growth in continental western Europe has been the strategic acquisition in 1993 of the rights to the

Benson and Hedges trademark for the EU and countries in the European Free Trade Association ("EFTA"), with the exception of duty free markets. In terms of volume, Gallaher's principal markets in continental western Europe are France, Germany and Greece, which together accounted for 28.8% of Gallaher's international cigarette sales, and in each of which Gallaher sold more than one billion cigarettes in 1996. Belgium and the Canary Islands are also important contributors to Gallaher's international operating profits.

In 1996, Gallaher sold more than 2.4 billion cigarettes in the former Soviet Union, principally in Russia and Kazakhstan, which accounted for 18.6% of Gallaher's international cigarette sales, but at sales prices and associated margins which were considerably lower than those achieved in continental western European markets. Gallaher's cigarette sales to the former Soviet Union have increased significantly in recent years. Gallaher does not own the rights to the Benson and Hedges or Silk Cut trademarks in the former Soviet Union. Gallaher's principal brand in these markets is Sovereign. Gallaher believes that in 1996 Sovereign accounted for between 5% and 10% of the cigarette market in Kazakhstan. Gallaher has acquired a site and intends to construct a factory in Kazakhstan. Gallaher intends to pursue opportunities for development in the Asia Pacific region which it believes will become increasingly important to its international operations.

In 1996, Gallaher's duty free sales were in excess of one billion cigarettes and accounted for 8.4% of its international cigarette sales. The principal outlets for Gallaher duty free sales are ferries, airports, the Channel tunnel, airlines and British service personnel serving overseas. A significant proportion of duty free sales relates to travel within the EU and is threatened by plans to abolish intra-EU duty free sales in 1999. While the extent of the impact of such abolition cannot be predicted, Gallaher believes that the loss of duty free sales may be partially offset by some expected flow back of sales into domestic European markets. Gallaher expects the effect of any flow back on its domestic European sales to be enhanced by the elimination of intra-EU duty free sales of Benson and Hedges cigarettes, currently made by B.A.T in duty free markets.

Gallaher's principal raw materials for the manufacture of cigarettes, tobacco and cigars are tobacco leaf, cigarette paper, acetate tow (for the production of filter tips), cardboard and other packaging materials, which are purchased from a number of suppliers. Gallaher is not unduly reliant on any one supplier and has not suffered any significant production interruption as a result of an interruption in the supply of raw materials.

Gallaher has several principal suppliers for its cigarette, tobacco and cigar machinery and failure of machinery has not historically created significant supply problems. Although Gallaher has operations in Northern Ireland, where there has been social and political unrest, there has been no consequential damage to Gallaher's manufacturing facilities there.

The advertising, sale and consumption of cigarettes and other tobacco products in the U.K. and many other countries have been subject to pressure from governments, health officials and anti-smoking groups, who claim that the smoking of cigarettes and tobacco products is harmful to health. A number of substantial restrictions on the marketing, advertising, product design and consumption of cigarettes have been introduced by regulation or voluntary agreements as a result of this pressure. In addition, anti-smoking groups are seeking to diminish the social acceptability of smoking. Currently, advertising and promotion in the tobacco industry in the U.K. is restricted under the terms of voluntary agreements entered into with the government and under the requirements of legislation. These restrictions limit the amount that tobacco companies may spend on certain activities, restrict the types of media and forms of advertising used and require the placement of a health warning on every advertisement and on the packaging of tobacco products. The nature of the labeling of health warnings (both in the U.K. and in other EU countries) is governed by EU directives. These directives provide that packs of tobacco products must carry a health warning on their most visible surface together with a second warning label.

An EU directive on television broadcasting has prohibited television advertising for all tobacco products throughout the EU since 1991. There is a proposal for an EU directive which would provide for a total ban on the advertising of tobacco products throughout the EU and would restrict the use of tobacco brand names on non-tobacco products. This proposed directive would have to be adopted by the Council of Ministers of the member states of the EU by a qualified majority of such states prior to it becoming effective.

The advertising, sponsorship and promotion of tobacco products in the Republic of Ireland is more restrictive than in the U.K. Tobacco products may only be advertised in newspapers, magazines or other similar publications, in retail sale premises, in duty free zones and on packs of tobacco products. Consumer promotions are prohibited. In addition, the maximum amount which tobacco manufacturers may spend annually on the advertising and sponsorship of tobacco products is determined by the Irish Minister for Health.

There are also various country-specific restrictions in other EU countries and in the non-EU countries to which Gallaher currently sells its tobacco products. These include a ban on advertising and the prohibition of sponsorship of sport and other events in France, except in limited circumstances.

An EU directive currently limits the tar yield of cigarettes to 15 milligrams per cigarette, which is to be reduced to 12 milligrams per cigarette by December 31, 1997. This directive has been implemented in the U.K. and in most other EU countries. A new voluntary agreement on the approval and use of new additives in tobacco products in the U.K. is expected to be implemented in 1997. The voluntary agreement regulates the additives which may be used in tobacco products and includes limits on their use. It also makes provision for certain information on additives to be provided to the U.K. Department of Health and to be made public, and includes guidelines for the testing and use of new additives in tobacco products and for the certification of compliance with the voluntary agreement by U.K. tobacco manufacturers.

In December 1996, the Commission of the European Communities adopted a communication on the present and proposed role of the EU in reducing tobacco consumption. The purpose of the communication is to contribute to a review of existing and possible future anti-smoking strategies aimed at reducing the alleged public health impact of smoking on European citizens.

Excise duties represent a significant percentage of the retail price of tobacco products in duty paid markets and have been steadily increased by governments in many of the countries in which Gallaher sells its products. In addition, an EU directive requires that the minimum excise tax (excluding Value Added Tax) on the most popular price category of cigarette in each EU country must represent not less than 57% of the total recommended retail price.

Gallaher has successfully managed its business within the current regulatory climate. It is not possible to predict whether additional or more restrictive legislation, regulations, directives or actions will be implemented or taken in the U.K. or in other countries in which Gallaher sells its products or the nature of any such legislation, regulations, directives or actions. It is possible, however, that any further regulation in respect of advertising and promotion in its key markets would have an adverse effect on Gallaher's sales and operating performance. A general election is to take place in the U.K. before the end of May 1997. A change in government could lead to changes in the regulatory environment. The U.K. Labour Party has indicated that, if it were to form the next government, it would initiate a ban on advertising of tobacco products in the U.K. by way of legislation. It is unclear which forms of marketing and promotion would be affected and it is also not possible to predict the effect any such legislation, regulations, directives or actions may have on Gallaher or on the tobacco industry generally.

See Item 3, "Legal Proceedings".

Distilled Spirits

JBB Worldwide, Inc. ("JBB Worldwide") is a holding company for subsidiaries in the distilled spirits business. Principal subsidiaries include Jim Beam Brands Co. ("Beam"), Alberta Distillers Limited ("Alberta"), JBB (Asia- Pacific) Pty. Limited ("JBB (Asia-Pacific)") (formerly Fortune Brands Pty. Limited) and JBB (Greater Europe) PLC ("JBB (Greater Europe)") (formerly The Whyte & Mackay Group PLC).

JBB Worldwide's principal markets are the U.S., the U.K. and Australia. Approximately 85% of JBB Worldwide's sales are to these three markets, with the U.S. and the U.K. representing 58% and 19% of sales, respectively.

JBB Worldwide's leading brands are owned by its subsidiaries, except that DeKuyper cordials are produced and sold in the U.S. under a perpetual license, Gilbey's gin and Gilbey's vodka are produced and sold in the U.S. under a license expiring September 30, 2007 and the Kamchatka vodka brand is claimed by another entity in California.

Beam, located primarily in the U.S., currently produces, or imports, and markets a broad line of distilled spirits, including Bourbon and other whiskeys, cordials, gin, vodka, rum, tequila and cognac. Alberta, located in Canada, produces and sells in Canada a line of distilled spirits, produces Canadian whisky and other distilled spirit products for export to the U.S., and sells bulk Canadian whisky into a variety of export markets. JBB (Asia-Pacific) is located in Australia and sells JBB Worldwide products (primarily Jim Beam Bourbon whiskey) as well as several brands under agency agreements. JBB (Greater Europe) is located in the U.K. and produces, bottles, and sells blended and single malt Scotch whiskies, markets and sells vodka, and sells Scotch whisky in bulk. Under the JBB Worldwide holding company, Beam, Alberta, JBB (Greater Europe) and JBB (Asia-Pacific) have each been given the responsibility of selling the combined branded product portfolio in defined markets around the world. Beam and its predecessors have been distillers of Bourbon whiskey since 1795. Beam's nine leading brand names are Jim Beam Bourbon whiskey, Windsor Canadian Supreme Whisky, Lord Calvert Canadian Whisky, DeKuyper cordials, Gilbey's gin, Gilbey's vodka, Kamchatka vodka, Wolfschmidt vodka and Kessler American Blended Whiskey. Principal Bourbon whiskey brand names are Jim Beam, the largest-selling Bourbon whiskey in the U.S. and in the world, Old Grand-Dad, Old Crow, Old Taylor, four premium and super premium Bourbon whiskeys (Booker's, Knob Creek, Baker's and Basil Hayden's) sold under the Small Batch Bourbon whiskey name grouping, and Jim Beam & Cola, which combines Jim Beam Bourbon whiskey with a cola soft drink. DeKuyper is the top-selling cordial line in the U.S. Beam also produces Chateaux and Leroux cordials, Beam's 8-Star Blend and Calvert Extra blended whiskeys, Dark Eyes vodka and Calvert gin, and imports, in bottle or in bulk, Canada House Canadian Whisky (produced by Alberta), The Dalmore and The Claymore Scotch whiskies (both produced by JBB (Greater Europe)), Kamora coffee liqueur, After Shock cinnamon liqueur and Avalanche Blue peppermint schnapps (both produced by Alberta), Ronrico and Pusser's rums, El Tesoro and Chinaco tequilas and A. de Fussigny cognac.

JBB (Greater Europe) has its origins as a distiller of Scotch whisky in 1844. During the fourth quarter of 1993, JBB (Greater Europe) completed the acquisition of Invergordon Distillers Group PLC, another distiller, blender and marketer of Scotch whisky. Its principal brand names are Whyte & Mackay Special Reserve, The Claymore, The Dalmore, Cluny, Mackinlay, Isle of Jura and Bruichladdich Scotch whiskies, Glayva Scotch whisky liqueur and Vladivar vodka. JBB (Greater Europe)'s products are sold in the U.K. through its own sales force, in the U.S. and Australia through the affiliated company distribution networks, and through independent distributors in other areas of the world.

Products of JBB Worldwide's subsidiaries are sold through various distributors and, in the 18 "control" states (and one county) in the U.S. which have established government control over certain aspects of the purchase and distribution of alcoholic beverages, through government controlled liquor authorities.

The distilled spirits business is highly competitive, with many brands sold in the consumer market. Management believes there are approximately ten major competitors worldwide and many smaller distillers

and bottlers. Management also believes that, based on units and sales value, JBB Worldwide, with four brands which each sell over one million cases worldwide, is the second or third largest producer and marketer of distilled spirits in the U.S. and is among the ten major competitors worldwide. JBB Worldwide competes on the basis of product quality and price and its responsiveness to consumer preferences.

Raw materials for the production, storage and aging of products of JBB Worldwide's subsidiaries are principally corn, other grains, and new oak barrels, and are readily available from a number of sources except that new oak barrels are available from only two major sources, one of which is owned by a competitor. Blended Scotch whiskies are composed of a variety of grain and malt whiskies blended to provide a consistent product. The Scotch industry is therefore dependent on the trading of whiskies between whisky companies.

Because whiskeys are aged for various periods, generally from three to eight years, subsidiaries of JBB Worldwide maintain, in accordance with industry practice, substantial inventories of bulk whiskey in warehouse facilities. Whiskey production is generally scheduled to meet demand years into the future, and production schedules are adjusted from time to time to bring inventories into balance with estimated future demand.

The production, storage, transportation, distribution and sale of JBB Worldwide's products are subject to regulation by federal, state, local and foreign authorities. Various local jurisdictions prohibit or restrict the sale of distilled spirits in whole or in part.

In the U.S., U.K. and many other countries, distilled spirits are subject to excise taxes and/or custom duties. State, local and other governmental authorities in such countries also impose taxes on distilled spirits. On January 1, 1991, the U.S. federal excise tax on distilled spirits was increased by one dollar per proof gallon. There have been no subsequent increases in the U.S. federal excise tax, although proposals to increase such taxes have been made from time to time. In addition, there are proposals pending to increase or impose new distilled spirits taxes in various jurisdictions.

The United Kingdom Finance Acts, 1993 and 1994 did not provide for any increase in the excise duties on distilled spirits, whereas the Finance Act, 1995 provided for an increase in the excise duties on distilled spirits equivalent to 26 pence on the price of a typical 700 milliliter bottle of Scotch whisky. The U.K. budgets introduced on November 26, 1996 and November 28, 1995 provided for a decrease in the excise duties on distilled spirits with the result that the price of a typical 700 milliliter bottle of Scotch whisky decreased by 26 and 27 pence, respectively.

It is believed that the U.S. federal excise tax increase in 1991 contributed to the decline in distilled spirits unit sales for the industry, including Beam. The effect of any future excise tax increases in any jurisdiction cannot be determined, but it is possible that any future tax increases would have an adverse effect on unit sales and increase existing competitive pressures.

The Alcoholic Beverage Labeling Act of 1988 and regulations promulgated thereunder by the Bureau of Alcohol, Tobacco and Firearms of the Department of the Treasury (the "Bureau") require that containers of alcoholic beverages bottled on or after November 18, 1989 for sale or distribution in the U.S. or for sale, distribution or shipment to members of the United States Armed Forces abroad bear the statement: "GOVERNMENT WARNING: (1) According to the Surgeon General, women should not drink alcoholic beverages during pregnancy because of the risk of birth defects. (2) Consumption of alcoholic beverages impairs your ability to drive a car or operate machinery, and may cause health problems." The Alcoholic Beverage Labeling Act of 1988 and the regulations prohibit any other requirement of a statement relating to alcoholic beverages and health on any beverage alcohol container or package containing such a container. If the Secretary of the Treasury, after appropriate investigation and consultation with the Surgeon General, finds available scientific information justifying a change in, addition to or deletion of all or part of the required statement, he is required to report such information to the United States Congress together with specific recommendations with respect thereto. It is not possible to state whether any legislation or additional regulations or action imposing additional labeling or other warning statement requirements will be enacted, promulgated or taken in the U.S. or other markets in which JBB Worldwide sells products, nor is it possible to predict the effect, if any, that the existing labeling requirement or any additional labeling or other warning statement requirements may have on the industry generally or on JBB Worldwide.

During 1996, certain competitors of JBB Worldwide began television and radio broadcast advertising of distilled spirits products in the U.S. market, and the national distilled spirits industry association retracted a previous voluntary ban on such activities. These developments have created a certain amount of controversy and threats of governmental regulation and other action at federal, state and local levels. JBB Worldwide, through its Beam subsidiary, has not begun any such advertising but may yet do so in response to competitive conditions. Other operating units outside the U.S. have previously begun such broadcast advertising in markets where legal and not in violation of voluntary restrictions by industry groups. It is not possible to state whether any legislation or additional regulation or other government action will be enacted, promulgated or taken in the U.S. market, nor is it possible to predict the effect, if any, of the ultimate resolution of this matter on the industry generally or the business of JBB Worldwide specifically.

Hardware and Home Improvement Products

MasterBrand Industries, Inc. ("MasterBrand") is a holding company for subsidiaries in the hardware and home improvement products business. Subsidiaries include Moen Incorporated ("Moen"), Master Lock Company ("Master Lock"), Aristokraft, Inc. ("Aristokraft") and Waterloo Industries, Inc. ("Waterloo"). The hardware and home improvement products business is highly competitive. MasterBrand's operating companies compete on the basis of product quality and price and their responsiveness to consumer preferences.

Moen manufactures and packages single- and two-handle faucets, sinks and plumbing accessories and parts and a wide variety of plumbing supply and repair products in the U.S. and East Asia. Faucets are sold under a variety of trade names, including Moen, Moentrol, Touch Control, One-Touch, Riser, Monticello, Concentrix, Chateau, Legend, Pulsation and Sani-Stream, and other products are sold under the Moen, Chicago Specialty, Dearborn Brass, Wrightway, Anchor Brass and Hoov-R-Line brand names. Composite kitchen sinks are sold under the MoenStone brand name. Sales are made through Moen's own sales force and independent manufacturers' representatives primarily to wholesalers, mass merchandisers and home centers and also to industrial distributors, repackagers and original equipment manufacturers. Some of the plumbing parts and repair products are purchased from other manufacturers. Products are sold principally in the U.S. and Canada and also in East Asia, Mexico and Latin America. Moen's chief competitors include Masco's Delta/Peerless, Black & Decker's Price Pfister, Kohler and American Standard.

Legislation has been introduced in the U.S. Congress that would, if enacted, endorse a voluntary industry standard that establishes maximum allowable leachate levels of certain substances, including lead from plumbing fittings and pumps, and which would require the Environmental Protection Agency ("EPA") to evaluate the effectiveness of the standard within twelve months of enactment. The legislation that was introduced previously in the Congress would, if enacted, require a reduction in the lead content of plumbing fittings and pumps used for drinking water, if an appropriate maximum leachate standard for lead is not voluntarily adopted. In September 1994, the EPA endorsed a voluntary standard that establishes maximum leachate levels of those substances, including lead from new plumbing fittings and fixtures. It is not possible to predict whether federal, state or local legislation, regulations or action will be enacted, promulgated or taken or the nature of any such legislation, regulations or action, nor is it possible to predict the effect any such legislation, regulations or action may have on the industry generally or on Moen.

Master Lock manufactures key-controlled and combination padlocks, chain and cable locks, bicycle locks, built-in locker locks and other specialty security devices, and also manufactures door lock sets and door hardware. Sales of products designed for consumer use are made to wholesale distributors and to home centers, hardware and other retail outlets, while sales of lock systems are made to industrial and institutional users, original equipment manufacturers and retail outlets. Most sales are brokered through independent manufacturers' representatives, primarily in the U.S. and Canada. Master Lock encounters competition from Abus, Belwith, Hampton, American Lock, and various imports in the padlock segment, and from Black & Decker's Kwikset, Schlage, Masco's Weiser, and Weslock in the door hardware segment.

Aristokraft manufactures kitchen cabinets and bathroom vanities. Stock and semi-custom cabinets are sold under the brand names of Aristokraft and Decora, respectively. Sales under the Aristokraft brand name are made in the U.S. primarily through stocking distributors for resale to kitchen and bath specialty dealers, lumber and building material dealers, remodelers and builders. Decora products are sold

primarily to kitchen and bath specialty dealers. Aristokraft competes with a number of manufacturers, including Masco's Merillat and KraftMaid, American Woodmark, Schrock, Triangle Pacific and Mill's Pride.

Waterloo manufactures tool storage products, consisting primarily of high quality steel tool boxes, tool chests, workbenches and related products manufactured for private label sale by one of the largest national retailers in the U.S. Similar products are sold under the Waterloo and All American brand names to specialty industrial and automotive dealers, mass merchandisers, home centers and hardware stores. Waterloo also manufactures hospital carts and storage units and sells such products to institutional users. Waterloo competes with Snap-on, Kennedy, Stanley, Stack-On, and others in the metal storage segment, and with Contico, Plano, Rubbermaid and others in the plastic storage segment.

Raw materials used for the manufacture of products offered by MasterBrand's operating companies are primarily red oak lumber, particleboard, rolled steel, brass, zinc, copper, nickel, and various plastic resins. These materials are available from a number of sources.

Golf and Leisure Products Acushnet Company ("Acushnet") is comprised of the Titleist and Foot-Joy Worldwide Division, the Acushnet Golf Division and Cobra. The Titleist and Foot-Joy Worldwide Division is a leading manufacturer and distributor of golf balls, golf shoes, golf clubs and golf gloves. Other products include bags, carts, dress and athletic shoes as well as socks and accessories. Acushnet's leading brands are Titleist and Pinnacle golf balls, DCI, Scotty Cameron by Titleist and Bulls Eye golf clubs and putters, Classics and DryJoys golf shoes and Sta-Sof and Weather-Sof golf gloves. Acushnet products are sold primarily to golf pro shops throughout the U.S. by the Titleist and Foot-Joy Worldwide sales force and to sporting goods stores and mass merchants through the Acushnet Golf Division. Sales are made in the U.K., Canada, Germany, Austria, Denmark, France, Sweden, The Netherlands and South Africa through subsidiaries, in Japan through a majority-owned joint venture, in Ireland through a branch of a U.K. subsidiary and outside these areas through distributors or agents. Cobra is a leading manufacturer and distributor of golf clubs, with emphasis on oversized graphite shafted golf clubs marketed and sold under the King Cobra brand name. Other Cobra products include specialty golf clubs, putters, golf bags and golf accessories. Cobra's products are sold to on-course golf pro shops and selected off-course specialty stores throughout the U.S. by independent sales representatives. Cobra markets its products internationally through subsidiaries in the U.K., continental Europe and Japan, through exclusive licensees in Australia and Canada and outside these areas through distributors.

In golf balls, Titleist's main competition is Spalding, Wilson, Dunlop/Slazenger and Bridgestone. In golf shoes, Etonic, Nike, Dexter, Reebok, Mizuno, Stylo and Adidas are the main competition. In golf clubs, Callaway, Taylor Made, Ping, Tommy Armour, Spalding, Mizuno, Maruman, Dunlop, Bridgestone and Daiwa are the main competition. In golf gloves, Wilson, Daiwa, Dunlop/Maxfli, Kasco, Slazenger, Tommy Armour, Mizuno and Bridgestone are the main competition. Acushnet's subsidiaries

compete on the basis of product quality and price and their responsiveness to consumer preferences.

Office Products

ACCO World Corporation ("ACCO") and its subsidiaries are engaged in designing, developing, manufacturing and marketing a wide variety of traditional and computer-related office products and supplies, personal computer accessory products, time management products and presentation aids. Products are manufactured by subsidiaries, joint ventures and licensees of ACCO, or manufactured to such subsidiaries' specifications by third party suppliers, throughout the world, principally in the U.S., Canada, western Europe and Australia.

ACCO USA, Inc., a subsidiary of ACCO, manufactures binders, fasteners, paper clips, punches, staples, stapling equipment and storage products, as well as computer binders, supplies and accessories, in the U.S. ACCO Canada Inc., a subsidiary of ACCO, manufactures and distributes a similar range of office products in Canada. Principal brands include ACCO products, Swingline staples and stapling equipment, Wilson Jones binders and columnar pads and Perma Products corrugated board storage products. Products are sold throughout the U.S. and Canada by their respective sales forces to office and computer products wholesalers, retailers, dealers, mail order companies and mass merchandisers.

Kensington Microware Limited ("Kensington"), a subsidiary of ACCO, designs, develops and markets a range of computer accessories and supplies. In 1995, Silicon Sports and STATX lines of computer accessories and cleaning products were acquired. In 1996 a subsidiary of Kensington acquired the outstanding common shares of Advanced Gravis Computer Technology Ltd. ("Gravis"), a leading marketer of products for the personal computer entertainment market. Gravis designs and sells joysticks, game pads and sound cards for both Macintosh and IBM-compatible computers.

Subsidiaries of ACCO Europe PLC, a subsidiary of ACCO, manufacture and distribute a wide range of office supplies and machines and storage and retrieval filing systems. Their products are sold primarily in the U.K., Ireland, western Europe and Australia through their own sales forces and distributors.

Day-Timers, Inc., a subsidiary of ACCO, manufactures personal organizers and planners in the U.S. and is estimated by management to be the leading direct marketer of time management aids in North America. Products are sold in the U.S. by Day-Timers, and in Canada, Australia and Europe by subsidiaries, through direct mail advertising and catalogs to consumers and businesses. In addition, products are sold through ACCO USA, Inc. and ACCO Canada Inc. to retailers and mass merchandisers. A subsidiary also conducts time management seminars for personnel of corporations, as well as other entities throughout the U.S., Canada, Australia and Europe. Another subsidiary markets, principally in the U.S., arts and crafts supplies primarily to schools.

Management believes that manufacturing within the office products industry is highly fragmented. Due to local market preferences for product design and paper sizes, many office product manufacturers

supply on a domestic basis only. Additionally, many manufacturers supply a relatively narrow range of products, usually concentrating on one product category. Management believes that ACCO's key competitors on a world-wide basis include Avery Dennison, Esselte, Fellowes, Atapco and GBC. Management also believes that its primary competitors for personal organizers in the North American market are Franklin Quest and Day-Runner, and its key competitors in the international market for personal organizers, although less developed than in the North American market, include Filo Fax in the U.K. and Quo Vadis in France. ACCO's operating companies compete on the basis of product quality and price and their responsiveness to consumer preferences.

Other Matters

Employees

Registrant and its subsidiaries had, as of December 31, 1996, the following number of employees, a substantial number of whom were covered by collective bargaining agreements with various unions:

Registrant and subsidiaries excluding Gallaher: ------

Distilled Spirits 2,390 Hardware and Home Improvement Products 8,460 Golf and Leisure Products 4,780 Office Products 8,470 Corporate Headquarters 200 ------24,300 ------Gallaher Limited: ------Tobacco Products 3,700 ------Total 28,000 ======

Environmental matters

Registrant and its subsidiaries are subject to federal, state and local laws and regulations concerning the discharge of materials into the environment and the handling, disposal and clean-up of waste materials and otherwise relating to the protection of the environment. While it is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that Registrant's subsidiaries may undertake in the future, in the opinion of management of Registrant, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon the capital expenditures, financial condition, results of operations or competitive position of Registrant and its subsidiaries.

(d) Financial information about foreign and domestic operations and export sales. Registrant's subsidiaries operate in the United States, Europe (principally the U.K.) and other areas (principally Canada and Australia). See the table captioned "Information on Business Segments" contained in the 1996 Annual Report to Stockholders of Registrant, which table is incorporated herein by reference. As is disclosed in such table, Registrant has sizable investments in, and derives substantial income from, Europe (principally the U.K.), and, therefore, changes in the value of foreign currencies (principally sterling) can have a material effect on Registrant's financial statements when translated into U.S. dollars.

Item 2. Properties.

Registrant leases its principal executive offices in Old Greenwich, Connecticut. The following is a description of properties of Registrant's subsidiaries.

International Tobacco

Gallaher's principal properties are its factories in Lisnafillan, Northern Ireland, Hyde, England, Cardiff, Wales and Dublin, the Republic of Ireland, its head office in Weybridge, England, its U.K. national distribution center in Crewe, England, and administration facilities in Northolt, England. Apart from the Dublin factory, part of the Lisnafillan factory and some land adjacent to the Hyde factory which Gallaher leases, all of these are freehold properties owned by Gallaher.

Gallaher has entered into a contract for the sale of its facilities in Northolt and an agreement to lease new premises in Perivale, west London. Completion of the sale and new lease, which is conditional on completion of certain works at the premises in Perivale, is expected to take place in late summer of 1997. In addition, Gallaher has announced its plans to expand the Lisnafillan factory and close the Hyde factory over the next three to four years.

Distilled Spirits

JBB Worldwide operates from executive offices leased by Beam in Deerfield, Illinois. Other subsidiaries of JBB Worldwide lease offices in Glasgow, Scotland; Burnaby, British Columbia, Canada; and Gordon, New South Wales, Australia. Subsidiaries of JBB Worldwide and a joint venture in India, own and operate seven bottling plants, twelve distilleries (of which three are malt distilleries not currently in use) and numerous warehouses for the aging of bulk whiskeys all located in the U.S., Scotland, Canada and India. In addition, JBB Worldwide subsidiaries lease sales offices and warehouse space for the storage of promotional material in various locations throughout the world.

Hardware and Home Improvement Products

MasterBrand leases its executive offices in Deerfield, Illinois and a subsidiary, Moen, owns its executive offices in North Olmsted, Ohio. Principal properties of subsidiaries of MasterBrand include

nineteen plants and two distribution centers owned and operated in the U.S. A 60%-owned joint venture in China owns and operates one plant. In addition, subsidiaries of MasterBrand lease and operate three plants and four warehouses in the U.S. and ten distribution centers, of which seven are in the U.S. and one is in each of Canada, Japan and Mexico.

Golf and Leisure Products

Acushnet owns a combined executive office and research and development facility and a distribution and packaging facility in Fairhaven, Massachusetts. In addition, it owns and operates five plants and a test facility, all located in the U.S. Acushnet also leases three warehouses, a manufacturing facility, a test facility, and two research and development facilities, all located in the U.S. Acushnet also leases an office in Taiwan. A subsidiary of Acushnet leases two combined sales office and warehouse facilities in Canada. Other Acushnet subsidiaries own and operate a plant and a warehouse in England, lease a sales office and warehouse in each of Germany, France and Sweden and lease a sales office in each of Austria, Denmark, The Netherlands, the Republic of Ireland and South Africa. Acushnet's majority-owned joint venture in Japan leases two sales offices and a warehouse facility there. Acushnet's majority-owned joint ventures in Thailand lease and operate two plants there. Acushnet's minority-owned joint venture in China leases and operates one plant. Cobra leases a combined executive office and distribution center, a combined administrative and assembly facility, a combined warehouse and distribution center and a graphite shaft production facility all located in Carlsbad, California. Principal properties of subsidiaries of Cobra are leased and include one combined sales and distribution and assembly facility in France, one combined sales and distribution office in the U.K. and one combined sales and administrative facility in Japan.

Office Products

ACCO leases its executive offices in Deerfield, Illinois. Principal properties of subsidiaries of ACCO include seven plants owned and operated in the U.S., seven in the U.K., and one in each of France, Germany, Italy, Australia, the Republic of Ireland and Mexico. In addition, subsidiaries of ACCO lease and operate nine facilities in the U.S., three in Mexico, five in Canada, two in each of Australia and the U.K., and one in each of France, Germany and Italy. Of these leased facilities, (i) three in the U.S., two in Canada and one in each of Australia, the U.K., and Germany, are combined manufacturing and distribution facilities, (ii) five in the U.S., two in each of Canada and Mexico and one in each of the U.K., Italy, Australia and France are distribution facilities and (iii) one in each of the U.S., Canada and Mexico are manufacturing facilities.

Registrant and its subsidiaries are of the opinion that their properties are suitable to their respective businesses and have productive capacities adequate to the needs of such businesses.

Item 3. Legal Proceedings.

(a) (i) Registrant's former subsidiary, The American Tobacco Company ("ATCO"), and other leading tobacco manufacturers have been sued by parties seeking damages for cancer and other ailments claimed to have resulted from tobacco use and by certain asbestos manufacturers seeking unspecified amounts in indemnity or contribution in third-party actions against all or most of the major domestic tobacco manufacturers. On December 22, l994, Registrant sold ATCO to Brown & Williamson Tobacco Corporation ("B&W"), a wholly-owned subsidiary of B.A.T. B&W and ATCO have agreed to indemnify Registrant against claims arising from smoking and health and fire safe cigarette matters relating to the tobacco business of ATCO.

In 1988, there was a jury award against another tobacco manufacturer that was subsequently overturned on appeal and remanded for a new trial. The plaintiff in this case later withdrew the action with prejudice. In 1996, there was a jury award against B&W, successor by merger to ATCO, which is pending appeal. The smallest of the five major domestic cigarette manufacturers has announced a settlement of certain tobacco related claims. The other four major domestic cigarette manufacturers have continued to vigorously defend these lawsuits. Registrant has been named as a defendant in some of the cases brought against ATCO and is currently named in sixty-eight of these cases, although it has not been served in eleven of such cases. One such action is brought by an individual alleging health ailments caused by the inhalation of environmental tobacco smoke (Dunn, described below); eight are brought by the attorneys general (or on behalf of the attorney general) of Hawaii (State of Hawaii, described below), Ohio (Coyne, described below), Louisiana (Ieyoub, described below), Michigan (Kelley, described below), West Virginia (McGraw, described below), Iowa (State of Iowa, described below), Oklahoma (State of Oklahoma, described below), and Utah (State of Utah, described below) respectively, seeking unspecified compensatory and punitive damages and various forms of relief, including restitution of the expenditures by the state for the cost of medical care provided by the state to its citizens for numerous diseases allegedly caused by cigarette and other tobacco products; seventeen allege state or nationwide class actions on behalf of individuals allegedly addicted to cigarettes through the manipulation of nicotine levels or individuals who have suffered personal injury from the use of cigarettes. The seventeen cases are Arch (purporting to be a Pennsylvania class action, described below), Chamberlain (purporting to be an Ohio class action, described below), Conner (purporting to be a New Mexico class action, described below), Crozier (purporting to be an Alabama class action, described below), Emig (purporting to be a Kansas class action, described below), Harris (purporting to be a Pennsylvania class action, described below), Masepohl (purporting to be a Minnesota class action, described below), McCune (purporting to be a West Virginia class action, described below), McGinty (purporting to be an Arkansas class action, described below), Norton (purporting to be an Indiana class action, described below), Peterson (purporting to be a Hawaii class action, described below), Reed (purporting to be a District of Columbia class action, described below), Richardson (purporting to be a Maryland class action, described below), Ruiz (purporting to be a Puerto Rico class action, described below), Scott (purporting to be a Louisiana class action, described below), Walls (purporting to be an Oklahoma class

action, described below) and Zito (purporting to be a New York class action, described below). There are also forty-two individual cases where the plaintiffs allege personal injury from the use of cigarettes (Castano, Creech, Cresser, Dymits, Dzak, Evans, Fernandez, Galvan, M.L., Gossett, Hagness, E., Harris, G., Heitsch, Hellen, Hernandez, M., Hulsey, Inzerilla, Knutsen, Kristich, Lewis, Lucca, Luna, Magill, Margolin, Martinez, Nociforo, Oglesby, Perez, Portnoy, Ramirez, Ramirez, J., Ramirez, O., Reed, M., Reitano, Rose, Salinas, Sanchez, Schwartz, Siegel, Sola, Stern, Vacquera, and Whirley - all described below).

The following sets forth the principal parties to the above-described sixty-eight proceedings in which Registrant is currently named as a defendant, the court in which such proceedings are pending and the date such proceedings were instituted against Registrant: Arch v. The American Tobacco Company, et al., United States District Court for the Eastern District of Pennsylvania, August 8, 1996; Castano v. The American Tobacco Company, et al., United States District Court for the Eastern District of Louisiana, March 29, 1994; Chamberlain v. The American Tobacco Company, et al., United States District Court for the Northern District of Ohio, August 14, 1996; Conner v. The American Tobacco Company, et al., Second Judicial District Court of Bernalillo County, New Mexico, October 10, 1996; Coyne v. American Brands, et al., United States District Court for the Northern District of Ohio, September 17, 1996; Creech v. The American Tobacco Company, et al., Supreme Court of the State of New York, Richmond County, January 6, 1997; Cresser v. The American Tobacco Company, et al., Supreme Court of the State of New York, Kings County, October 10, 1996; Crozier v. The American Tobacco Company, et al., United States District Court for the Middle District of Alabama, August 8, 1996; Dunn v. The American Tobacco Company, et al., Circuit Court of Delaware County, Indiana, May 28, 1993; Dymits v. American Brands, et al., United States District Court for the Northern District of California, May 22, 1996; Dzak v. The American Tobacco Company, et al., Supreme Court of the State of New York, Queens County, December 8, 1996; Emig v. The American Tobacco Company, et al., 18th Judicial District Court of Sedgwick County, Kansas, Civil Department, February 6, 1997; Evans v. The American Tobacco Company, et al., Supreme Court of the State of New York, Kings County, August 23, 1996; Fernandez v. American Brands, et al., District Court of Nueces County, Texas, November 13, 1996; Galvan v. American Brands, et al., District Court of Nueces County, Texas, March 3, 1997; Gossett v. American Brands, et al., United States District Court for the Southern District of Texas, Brownsville Division, November 14, 1996; E. Hagness v. American Brands, et al., District Court of Nueces County, Texas, December 27, 1996; G. Harris v. American Brands, et al., United States District Court for the Southern District of Texas, December 2, 1996; Harris v. The American Tobacco Company, et al., United States District Court for the Eastern District of Pennsylvania, October 14, 1996; State of Hawaii v. Brown & Williamson Tobacco Corporation, et al., Circuit Court of the First Circuit, Hawaii, January 31, 1997; Heitsch v. American Brands, et al., District Court of Hidalgo County, Texas, December 23, 1996; Hellen v. The American Tobacco Company, et al., Supreme Court of the State of New York, Kings County, August 23, 1996; M. Hernandez v. American Brands, et al., District Court of Nueces County, Texas, December 16, 1996; Hulsey v. American Brands, et al., United States District Court for the Southern District of Texas, December 2, 1996; Ieyoub (State of Louisiana) v. The American Tobacco Company, et al, District Court of Calcasieu Parish, Louisiana, March 13, 1996; Inzerilla

v. The American Tobacco Company, et al., Supreme Court of the State of New York, Queens County, May 29, 1996; Kelley (State of Michigan) v. The American Tobacco Company, et al., Circuit Court for the 30th Judicial Circuit, Michigan, August 21, 1996; Knutsen v. The American Tobacco Company, et al., Supreme Court of the State of New York, Kings County, October 11, 1996; Kristich v. The American Tobacco Company, et al., Supreme Court of the State of New York, Suffolk County, November 15, 1996; Lewis v. American Brands, et al., District Court of Hidalgo County, Texas, January 24, 1997; Lucca v. The American Tobacco Company, et al., Supreme Court of the State of New York, Kings County, February 3, 1997; Luna v. American Brands, et al., District Court of Nueces County, Texas, November 13, 1996; Magill v. American Brands, et al., District Court of Nueces County, Texas, December 23, 1996; Margolin v. The American Tobacco Company, et al., Supreme Court of the State of New York, Queens County, November 22, 1996; Martinez v. The American Tobacco Company, et al., District Court of Nueces County, Texas, November 19, 1996; Masepohl v. The American Tobacco Company, et al., United States District Court for the District of Minnesota, September 3, 1996; McCune v. The American Tobacco Company, et al., United States District Court for the Southern District of West Virginia, January 31, 1997; McGinty v. The American Tobacco Company, et al., United States District Court for the Eastern District of Arkansas, Western Division, November 4, 1996; McGraw (State of West Virginia) v. The American Tobacco Company, et al., Circuit Court of Kanawha County, West Virginia, September 20, 1994; Nociforo v. The American Tobacco Company, et al., Supreme Court of the State of New York, Suffolk County, July 16, 1996; Norton v. Brown & Williamson Tobacco Corporation, et al., United States District Court for the Southern District of Indiana, May 3, 1996; Oglesby v. American Brands, et al., United States District Court for the Southern District of Texas, December 2, 1996; Oklahoma (State of Oklahoma) v. The American Tobacco Company, et al., District Court for Cleveland County, Oklahoma, August 22, 1996; G. Perez v. American Brands, et al., District Court of Hidalgo County, Texas, November 26, 1996; Peterson v. The American Tobacco Company, et al., Circuit Court of the First Circuit, Hawaii, February 6, 1997; Portnoy v. The American Tobacco Company, et al., Supreme Court for the State of New York, Suffolk County, July 15, 1996; Ramirez v. American Brands, et al., District Court of Hidalgo County, Texas, November 12, 1996; J. Ramirez v. American Brands, et al., District Court of Hidalgo County, Texas, December 23, 1996; O. Ramirez v. American Brands, et al., District Court of Brooks County, Texas, December 23, 1996; Reed v. Philip Morris Incorporated, et al., Superior Court of the District of Columbia, June 21, 1996; M. Reed v. American Brands, et al., United States District Court for the Southern District of Texas, December 6, 1996; Reitano v. The American Tobacco Company, et al., Supreme Court of the State of New York, Kings County, August 22, 1996; Richardson v. Philip Morris Inc., et al., County Court of Baltimore, Maryland, May 24, 1996; Rinaldi v. The American Tobacco Company, et al., Supreme Court of the State of New York, Kings County, January 6, 1997; Rose v. The American Tobacco Company, et al., Supreme Court of the State of New York, New York County, December 18, 1996; Ruiz v. The American Tobacco Company, et al., United States District Court for the District of Puerto Rico, December 9, 1996; Salinas v. American Brands, et al., District Court of Webb County, Texas, February 20, 1997; Sanchez v. American Brands, et al., Circuit Court of the State of Texas, Starr County, December 6, 1996; Schwartz v. The American Tobacco Company, et al., Supreme Court for the State of New York, Kings County, December 9, 1996; Scott v. The American Tobacco

Company, et al., United States District Court for the Eastern District of Louisiana, Orleans Parish, May 25, 1996; Siegel v. The American Tobacco Company, et al., Supreme Court of the State of New York, Kings County, August 22, 1996; Sola v. The American Tobacco Company, et al., Supreme Court for the State of New York, Bronx County, July 12, 1996; State of Iowa v. The American Tobacco Company, et al., District Court of Iowa, Polk County, November 27, 1996; State of Utah v. The American Tobacco Company, et al., United States District Court for the District of Utah, Central Division, September 30, 1996; Stern v. The American Tobacco Company, et al., United States District Court for the Southern District of New York January 29, 1997; Vacquera v. American Brands, et al., District Court of Hidalgo County, Texas, December 4, 1996; Walls v. The American Tobacco Company, et al., District Court of Creek County, Oklahoma, February 6, 1997; Whirley v. American Brands, et al., United States District Court for the Southern District of Texas, December 2, 1996; and Zito v. The American Tobacco Company, et al., Supreme Court of the State of New York, New York County, June 19, 1996.

Reference is made to the description of Dymits v. American Brands, et al., United States District Court for the Northern District of California, in paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. By order dated December 31, 1996, Registrant's motion to dismiss for lack of personal jurisdiction was granted with prejudice. The plaintiff in this case has indicated that he will appeal the trial court's order.

Reference is made to the description of State of Maryland v. Philip Morris Inc., et al., Circuit Court of Baltimore, Maryland, in paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996. On November 11, 1996, Registrant was dismissed by stipulation as a defendant in such case.

Reference is made to the description of Banks v. Philip Morris Companies Inc., et al., Circuit Court of Okaloosa County, Florida, in paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1996. On December 10, 1996, this action was voluntarily dismissed by the plaintiff.

Reference is made to the description of Daniels v. Brown & Williamson Tobacco Corp., et al., United States District Court for the Eastern District of New York, in paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. On November 18, 1996, a consent order was filed dismissing Registrant from this action.

Reference is made to the description of Pollan v. Brown & Williamson Tobacco Corp., et al., United States District Court for the Eastern District of New York, in paragraph (a) of Part II, Item 1, "Legal Proceedings", of Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996. On November 18, 1996, a consent order was filed dismissing Registrant from this action.

In addition, Registrant was named as a defendant, together with leading tobacco manufacturers, in Pazienza v. B.A.T Industries P.L.C., et al., Superior Court of New Jersey, Middlesex County, December 13, 1996, and Attanazio v. B.A.T Industries P.L.C., et al., Superior Court of New Jersey, Middlesex County, January 6, 1997. Pazienza and Attanazio are individual cases where the plaintiffs allege personal injury from the use of cigarettes. On January 22, 1997 and February 12, 1997, respectively, consent orders were filed dismissing Registrant from these actions.

Registrant has been informed that (1) two actions involving the smoking and health controversy were filed in the District Court of Nueces County, Texas on December 12 and December 16, 1996, (2) an action involving the smoking and health controversy was filed in the District Court of Starr County, Texas on December 16, 1996, (3) an action involving the smoking and health controversy was filed in the District Court of Willacy County, Texas on December 16, 1996, and (4) an action involving the smoking and health controversy was filed in the District Court of Kleberg County, Texas on December 23, 1996, and that Registrant has been named as a defendant in the foregoing actions. As of the date hereof, Registrant has not been served nor has it obtained copies of the complaints in respect of these actions.

Registrant's counsel have advised that, in their opinion, on the basis of their investigations generally with respect to suits and claims of this character, Registrant has meritorious defenses to the above-mentioned actions and threatened actions. The actions will be vigorously contested.

It has been reported that certain groups of attorneys, and attorneys general of various states, are interested in promoting product liability and other suits against the tobacco manufacturers. It has also been reported that other claims against the tobacco manufacturers may be made seeking damages for alleged injuries claimed to have resulted from exposure to tobacco smoking of others. It has also been reported that civil and criminal investigations of tobacco manufacturers are pending before certain prosecutorial and other authorities.

(ii) (A) To date limited legal aid has been granted to claimants in alleged health-related actions against tobacco manufacturers in the U.K. Gallaher is currently involved in four actions in the U.K. in respect of which plaintiffs are alleging health damage resulting from tobacco use and have made applications for legal aid. Two of these actions, in Scotland, were stayed pending applications for legal aid and those applications were subsequently refused. In the third action, in Northern Ireland, legal aid was granted but the case has made no significant progress since the writ was served in 1990. In the fourth action, in Northern Ireland, the claimant has received limited legal aid, but has not received legal aid to issue proceedings.

In England, applications for legal aid were filed with the Legal Aid Board commencing in 1992 and were subsequently rejected after opposition by a number of tobacco manufacturers. The Legal Aid Board subsequently reconsidered the applications and in January 1995 granted limited legal aid to approximately 200 claimants seeking to bring proceedings against tobacco manufacturers for alleged smoking-related ailments. A number of tobacco manufacturers thereafter submitted further

representations in opposition to the applicants' requests for full legal aid and the Legal Aid Board announced in July 1996 that all legal aid was being withdrawn.

Notwithstanding the denial of legal aid, in November 1996 proceedings were issued in England by 12 plaintiffs against Gallaher and Imperial Tobacco alleging that the claimants had contracted lung cancer as a result of smoking tobacco products. Seven of these plaintiffs allege that they smoked tobacco products manufactured by Gallaher. In December 1996 another writ was issued by the same legal advisers on behalf of a further 11 plaintiffs, eight of whom allege that they smoked tobacco products manufactured by Gallaher. These proceedings have been brought without any legal aid but with the plaintiffs' legal advisers acting on a conditional fee basis whereby they will receive a fee only if the proceedings are successful. Gallaher has been informed by the plaintiffs' solicitors that, in total, the plaintiffs' solicitors are processing approximately 100 claims.

(B) The first action against a tobacco manufacturer in the U.K. alleging smoking-related health effects was brought against Gallaher. Dean v. Gallaher Limited was an action commenced in the High Court in Northern Ireland in which the plaintiff sought unspecified damages against Gallaher Limited and its subsidiary and predecessor, Hergall (1981) Limited (In liquidation) ("Hergall") for peripheral vascular disease, probably Buerger's disease, allegedly caused by cigarette smoking. In 1988, the plaintiff obtained legal aid to proceed up to the point of setting down for trial. He served his Writ later that year and his statement of claim in 1989. Beginning on October 14, 1996, the Court heard evidence at a trial of the preliminary issue as to whether the plaintiff was suffering from Buerger's disease or peripheral vascular disease. After three days of testimony, the hearing was adjourned at the plaintiff's request. On October 21, 1996, the plaintiff consented to judgment being entered in favor of the defendants in both actions.

(C) In Brennan v. Hergall (1981) Limited (In Liquidation), in the High Court in Northern Ireland, the plaintiff, a former employee of Hergall (then called Gallaher Limited), is seeking unspecified damages for peripheral arterial disease allegedly caused by cigarette smoking. The plaintiff received legal aid and issued a writ in October 1990, but no statement of claim has been served to date. The writ was originally served on Gallaher, but in March 1995, the plaintiff obtained leave to substitute Hergall as the named defendant in the action, and in November 1995, the plaintiff filed an amended writ of summons naming Hergall as the proper defendant.

(D) In Havelin v. Gallaher Limited et al., in the Court of Session in Scotland, the pursuer commenced his action in May 1995 against Gallaher by issuing a summons and condescendence. The pursuer seeks (Pounds)100,000 plus interest for Buerger's disease allegedly caused by cigarette smoking. In February 1995, prior to commencing this action, the pursuer applied to the Scottish Legal Aid Board for legal aid to fund his action. Gallaher submitted representations in opposition and in June 1995, the pursuer's application for legal aid was refused. The pursuer sought a review of this decision, which was unsuccessful in November 1995. This litigation is currently stayed.

(E) In Burnett v. Gallaher Limited, in the Court of Session in Scotland, the pursuer commenced his action in July 1995 by issuing a summons and condescendence. The pursuer seeks (Pounds)100,000 plus interest for heart disease allegedly caused by cigarette smoking. In July 1995, the pursuer applied to the Scottish Legal Aid Board for legal aid to fund his action. Gallaher submitted representations in opposition and in June 1996, the pursuer's application for legal aid was refused. This litigation is currently stayed.

(F) In Shiels v. Gallaher Limited et al., in the High Court in Northern Ireland, the plaintiff issued a writ in October 1995 and served it in October 1996. The plaintiff, the representative of the deceased, seeks unspecified damages for Buerger's disease and/or premature atherosclerosis suffered by the deceased allegedly caused by cigarette smoking. The plaintiff sought legal aid to issue proceedings and in November 1995, Gallaher submitted representations in opposition to the grant of legal aid. To date, the plaintiff has received only limited legal aid but has not received legal aid to issue proceedings. On January 10, 1997, plaintiff's application for an extension of time in which to serve a statement of claim was adjourned by consent until May 16, 1997.

(G) On November 12, 1996, a writ was issued by the London law firm of Leigh, Day & Co. in the High Court of England and Wales on behalf of 12 plaintiffs (Hodgson, et al. v. Imperial Tobacco Limited and Gallaher Limited). Each of the plaintiffs claims to have contracted lung cancer as a result of smoking tobacco products. Seven of the 12 plaintiffs claim to have smoked Gallaher's products. Those plaintiffs are John Barrie Hodgson, Denis William House, Leslie Marsden, Martin Margolis, Murdo Ian Macmillan, Sarah Marie Hore and James Alan Beech. On December 10, 1996, Leigh Day & Co. issued another writ on behalf of 11 further plaintiffs (Bywater et al. v. Imperial Tobacco Limited and Gallaher Limited), each of whom also claims to have developed lung cancer as a result of smoking tobacco products. Eight of the 11 plaintiffs claim to have smoked Gallaher's products. Those plaintiffs are Anthony John Bywater, Thomas Patrick Keating, David Michael Knight, Peter Joseph Keating, John Alan Lightfoot, Susan Virginia Auton, John Matthew Williams and Frances Wilcox. On December 11, 1996, the plaintiffs' lawyers requested the early assignment of a High Court judge to these cases. On December 31, 1996, the Senior Master and Queen's Remembrancer of the High Court denied the plaintiffs' request for a recommendation to the Lord Chief Justice for the assignment of a single judge to the cases. The Senior Master recommended that the plaintiffs' lawyers take various steps to clarify the nature, scope and scale of the litigation and indicated that he would be prepared to hear the application again once such steps have been taken. Leigh, Day & Co. has proposed that 20 cases be identified as lead cases and that these 20 cases be tried together as a group action in October 1998 and has advised the Court that it and other associated law firms are working together on approximately 100 cases (including the 23 filed in November and December 1996). It is not possible at the outset of this litigation to predict what form the proceedings might ultimately take or the time frame in which the litigation might proceed.

(H) In addition to the actions described above, from time to time Gallaher has received a small number of letters before action

alleging smoking-related health effects as a result of smoking cigarettes manufactured by Gallaher. As of the date hereof, Gallaher was not aware of any proceeding commenced against it in relation to these allegations.

(I) Registrant has been advised by its legal advisers that, in their opinion on the basis of their investigations generally with respect to actions and claims of this character, Gallaher has meritorious defenses to these actions and claims. The pending actions and claims will be vigorously contested.

(b) It is not possible to predict the outcome of the pending litigation, but management believes that there are meritorious defenses to the pending actions and that the pending actions will not have a material adverse effect upon the results of operations, cash flow or financial condition of the Registrant. See the note captioned "Pending Litigation" in the Notes to Consolidated Financial Statements contained in the 1996 Annual Report to Stockholders of Registrant, which note is incorporated herein by reference.

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

None.

Item 4a. Executive Officers of the Registrant.

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

Present positions and offices with Registrant and principal occupations Name during the past five years Age ------

Thomas C. Hays Chairman of the Board and Chief 61 Executive Officer of Registrant since January 1995; President and Chief Operating Officer of Registrant prior thereto

John T. Ludes President and Chief Operating Officer 60 of Registrant since January 1995; Group Vice President of Registrant and President and Chief Executive Officer of Acushnet prior thereto

Dudley L. Bauerlein, Jr. Senior Vice President and Chief 50 Financial Officer of Registrant since January 1995; Vice President and Treasurer of Registrant prior thereto

Gilbert L. Klemann, II Senior Vice President and General 46 Counsel of Registrant

Present positions and offices with Registrant and principal occupations Name during the past five years Age ------

Charles H. McGill Senior Vice President -- Corporate 55 Development of Registrant since January 1996; Vice President -- Corporate Development of Registrant during 1995; Corporate Vice President -- Acquisitions of The Dun & Bradstreet Corporation prior thereto

Steven C. Mendenhall Senior Vice President and Chief 48 Administrative Officer of Registrant since January 1995; Vice President and Chief Administrative Officer of Registrant from 1993 through 1994; Vice President -- Human Resources of Registrant prior thereto

Robert J. Rukeyser Senior Vice President -- Corporate 54 Affairs of Registrant

Craig P. Omtvedt Vice President and Chief Accounting 47 Officer of Registrant since January 1997; Vice President -- Deputy Controller and Chief Internal Auditor of Registrant during 1996; Deputy Controller and Chief Internal Auditor of Registrant during 1995; Deputy Controller of Registrant prior thereto

Mr. Peter M. Wilson, who has been a member of the Executive Committee of the Board of Directors of Registrant and Chairman and Chief Executive of Gallaher since February 1, 1994, is deemed to be an executive officer of Registrant for the purposes of this Item 4a. Mr. Wilson was Deputy Chairman of Gallaher and Chairman and Chief Executive of Gallaher Tobacco Limited prior thereto. His age is 55.

In the case of each of the above-listed executive officers, the occupation or occupations given were his principal occupation and employment during the period or periods indicated. None of such executive officers is related to any other such executive officer. None was selected pursuant to any arrangement or understanding between him and any other person. All executive officers are elected annually.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

See the information in the tables captioned "Quarterly Common Stock Dividend Payments" and "Quarterly Composite Common Stock Prices"

and the discussion relating thereto contained in the 1996 Annual Report to Stockholders of Registrant, which information and discussion are incorporated herein by reference. On March 3, 1997, there were 51,855 record holders of Registrant's Common Stock, par value $3.125 per share.

Item 6. Selected Financial Data.

See the information for 1992 through 1996 in the table captioned "Six- Year Consolidated Selected Financial Data" contained in the 1996 Annual Report to Stockholders of Registrant, which information is incorporated herein by reference.

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

See the discussion and analysis under the captions "Results of Operations" and "Financial Condition" contained in the 1996 Annual Report to Stockholders of Registrant, which discussion and analysis are incorporated herein by reference.

Item 8. Financial Statements and Supplementary Data.

See the information in the Consolidated Balance Sheet, Consolidated Statement of Income, Consolidated Statement of Cash Flows, Consolidated Statement of Stockholders' Equity, Notes to Consolidated Financial Statements and Report of Independent Accountants contained in the 1996 Annual Report to Stockholders of Registrant, which information is incorporated herein by reference. For unaudited selected quarterly financial data, see the table captioned "Quarterly Financial Data" contained in the 1996 Annual Report to Stockholders of Registrant, which table is incorporated herein by reference.

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

None.

PART III

Item 10. Directors and Executive Officers of Registrant.

See the information under the caption "Election of Directors" contained in the Proxy Statement for the Annual Meeting of Stockholders of Registrant to be held on April 30, 1997, which information is incorporated herein by reference. See also the information with respect to executive officers of Registrant under Item 4a of Part I hereof, which information is incorporated herein by reference.

Item 11. Executive Compensation.

See the information up to but not including the subcaption "Report of the Compensation and Stock Option Committee on Executive Compensation" under the caption "Executive Compensation" contained in the Proxy Statement for the Annual Meeting of Stockholders of Registrant to

be held on April 30, 1997, which information is incorporated herein by reference.

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

See the information in the table and notes related thereto and in the last paragraph under the caption "Election of Directors" and the information under the caption "Certain Information Regarding Security Holdings" contained in the Proxy Statement for the Annual Meeting of Stockholders of Registrant to be held on April 30, 1997, which information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions.

None.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Financial Statements, Financial Statement Schedules and Exhibits.

(1) Financial Statements (all financial statements listed below are of Registrant and its consolidated subsidiaries)

Consolidated Balance Sheet as of December 31, 1996 and 1995 contained in the 1996 Annual Report to Stockholders of Registrant is incorporated herein by reference.

Consolidated Statement of Income for the years ended December 31, 1996, 1995 and 1994 contained in the 1996 Annual Report to Stockholders of Registrant is incorporated herein by reference.

Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 contained in the 1996 Annual Report to Stockholders of Registrant is incorporated herein by reference.

Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 contained in the 1996 Annual Report to Stockholders of Registrant is incorporated herein by reference.

Notes to Consolidated Financial Statements contained in the 1996 Annual Report to Stockholders of Registrant are incorporated herein by reference.

Report of Independent Accountants contained in the 1996 Annual Report to Stockholders of Registrant is incorporated herein by reference.

(2) Financial Statement Schedules

See Index to Financial Statement Schedule of Registrant and subsidiaries at page F-1, which Index is incorporated herein by reference.

(3) Exhibits

3(i). Certificate of Incorporation of Registrant as in effect on the date hereof is incorporated herein by reference to Exhibit 3a2 to the Quarterly Report on Form 10-Q of Registrant dated May 14, 1990.

3(ii). By-laws of Registrant as in effect on the date hereof are incorporated herein by reference to Exhibit 3(ii)(b) to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.

10a1. Article XII ("Incentive Compensation") of the By-laws of Registrant is incorporated herein by reference to Exhibit 3(ii) hereof.*

10b1. 1986 Stock Option Plan of American Brands, Inc. and amendments thereto are incorporated herein by reference to Exhibit 10b2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.*

10b2. Amendment to 1986 Stock Option Plan of American Brands, Inc. constituting Exhibit 10b1 hereto is incorporated herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated November 11, 1993.*

10b3. Amendment to 1986 Stock Option Plan of American Brands, Inc. constituting Exhibits 10b1 and 10b2 hereto is incorporated herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated August 11, 1994.* 10b4. 1990 Long-Term Incentive Plan of American Brands, Inc. (As Amended and Restated as of January 1, 1994) is incorporated herein by reference to Exhibit 10a to the Quarterly Report on Form 10-Q of Registrant dated August 11, 1994.*

10c1. Amended Supplemental Plan of American Brands, Inc. is incorporated herein by reference to Exhibit 10c1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.*

10c2. Trust Agreement, made as of the 2nd day of January, 1991, among Registrant, The Chase Manhattan Bank (National Association) ("Chase"), et al. establishing a trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Amended Supplemental Plan constituting Exhibit 10c1 hereto is incorporated herein by reference to Exhibit 10c2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.*

10c3. Amendment made as of the 1st day of November, 1993 to Trust Agreement constituting Exhibit 10c2 hereto is incorporated herein by reference to Exhibit 10c3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.*

10c4. Amendment made as of the 1st day of January, 1995, to the Trust Agreement constituting Exhibits 10c2 and 10c3 hereto is incorporated herein by reference to Exhibit 10c4 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.*

10c5. Schedule identifying substantially identical agreements to the Trust Agreement and the Amendments thereto constituting Exhibits 10c2, 10c3 and 10c4 hereto, respectively, in favor of Thomas C. Hays, John T. Ludes, Robert J. Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein, Jr. and Charles H. McGill.*

10c6. Trust Agreement, made as of the 1st day of November, 1993, among Gilbert L. Klemann, II, Registrant and Chase establishing a grantor trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Amended Supplemental Plan constituting Exhibit 10c1 hereto is incorporated herein by reference to Exhibit 10c6 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.*

10c7. Amendment made as of 1st day of January, 1996 to Trust Agreement constituting Exhibit 10c6 hereto is incorporated herein by reference to the Quarterly Report on Form 10-Q of Registrant dated August 8, 1996.*

10c8. Schedule identifying substantially identical agreements to the Trust Agreement and Amendment thereto constituting Exhibits 10c6 and 10c7 hereto, respectively, in favor of Thomas C. Hays, John T. Ludes, Robert J. Rukeyser, Steven C. Mendenhall and Dudley L. Bauerlein, Jr.*

10d1. Resolutions of the Board of Directors of Registrant adopted on October 28, 1986 and July 26, 1988 adopting and amending a retirement plan for directors of Registrant who are not officers or employees of Registrant or a subsidiary thereof are incorporated herein by reference to Exhibit 10e1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991.*

10d2. Resolutions of the Board of Directors of Registrant adopted on July 26, 1994 amending the resolutions constituting Exhibit 10d1 hereto is incorporated herein by reference to Exhibit 10e2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

10e1. Retirement Agreement, made as of January 1, 1995, between Registrant and Thomas C. Hays is incorporated herein by reference to Exhibit 10f1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

10f1. Gallaher Limited Executive Incentive Plan adopted on October 20, 1994 is incorporated herein by reference to Exhibit 10g1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

10f2. Trust Deed dated March 24, 1983 between Gallaher Limited ("Gallaher") and Gallaher Pensions Limited, and amendments thereto, providing supplemental retirement benefits to certain executives of Gallaher are incorporated herein by reference to Exhibits 10g2 and 10g3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1989.*

10f3. Trust Deed dated June 3, 1992 further amending Exhibit 10f2 hereto is incorporated herein by reference to Exhibit 10g3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.*

10f4. Trust Deed dated January 24, 1994 further amending Exhibits 10f2 and 10f3 hereto is incorporated herein by reference to Exhibit 10g4 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1993.*

10f5. Trust Deed dated April 8, 1994 further amending Exhibits 10f2, 10f3 and 10f4 hereto is incorporated herein by reference to Exhibit 10f5 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.*

10g1. Resolution of the Board of Directors of Registrant adopted on November 27, 1990 with respect to retirement and health benefits provided to Gilbert L. Klemann, II is incorporated herein by reference to Exhibit 10p1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991.*

10h1. Service Agreement dated March 11, 1997 between Gallaher and Peter M. Wilson.*

10h2. Letter dated September 20, 1991 from Gallaher in respect of retirement benefits provided to Peter M. Wilson is incorporated herein by reference to Exhibit 10o2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1993.*

10h3. Letter dated March 15, 1994 amending Exhibit 10h2 hereto is incorporated herein by reference to Exhibit 10o3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1993.*

10i1. Letter dated January 23, 1996 from Registrant with respect to deferred payment of fees to Eugene R. Anderson is incorporated herein by reference to Exhibit 10k1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1995.*

10i2. Letter dated August 11, 1995 from Registrant with respect to deferred payment of fees to Gordon R. Lohman is incorporated

herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated November 9, 1995.*

10j1. Agreement dated January 2, 1991 between Registrant and Gilbert L. Klemann, II is incorporated herein by reference to Exhibit 10s1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.*

10j2. Amendment dated November 28, 1994 to the Agreement constituting Exhibit 10j1 hereto is incorporated herein by reference to Exhibit 10r2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

10j3. Schedule identifying substantially identical agreements to the Agreement and the Amendment thereto constituting Exhibits 10j1 and 10j2 hereto, respectively, entered into by Registrant with Thomas C. Hays, John T. Ludes, Robert J. Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein, Jr., Charles H. McGill and Craig P. Omtvedt.* 10k1. Trust Agreement, made as of the 2nd day of January, 1991, among Registrant, Chase, et al. establishing a trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Agreement constituting Exhibits 10j1 and 10j2 hereto is incorporated herein by reference to Exhibit 10s1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

10k2. Amendment made as of the 1st day of November, 1993 to Trust Agreement constituting Exhibit 10k1 hereto is incorporated herein by reference to Exhibit 10s2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

10k3. Schedule identifying substantially identical agreements to the Trust Agreement and Amendment thereto constituting Exhibits 10k1 and 10k2 hereto, respectively, in favor of Thomas C. Hays, John T. Ludes, Robert J. Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein, Jr. and Craig P. Omtvedt.*

10l1. Agreement dated as of March 1, 1988 and amendments thereto between Registrant and Thomas C. Hays are incorporated herein by reference to Exhibit 10v1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.*

10l2. Amendment effective as of January 1, 1995 to the Agreement constituting Exhibit 10l1 hereto is incorporated herein by reference to Exhibit 10t2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

10l3. Amendment effective as of January 1, 1995 to the Agreement and Amendment thereto constituting Exhibits 10l1 and 10l2 hereto, respectively, is incorporated herein by reference to Exhibit 10t3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

10m1. Agreement dated as of January 2, 1991 between Registrant and Gilbert L. Klemann, II and amendment thereto is incorporated herein by reference to Exhibit 10y1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1991.*

10m2. Agreement dated as of October 28, 1991 amending the Agreement constituting Exhibit 10m1 hereto is incorporated herein by reference to Exhibit 10w2 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.*

10m3. Amendment effective as of January 1, 1995 to the Agreement and Amendment thereto constituting Exhibits 10m1 and 10m2 hereto, respectively, is incorporated herein by reference to Exhibit 10u3 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

10m4. Schedule identifying substantially identical agreements to the Agreement and Amendments thereto constituting Exhibits 10m1, 10m2 and 10m3 hereto entered into by Registrant with John T. Ludes, Robert J. Rukeyser, Steven C. Mendenhall, Dudley L. Bauerlein, Jr. and Craig P. Omtvedt.*

10n1. Agreement dated February 24, 1995 between Registrant and Charles H. McGill is incorporated herein by reference to Exhibit 10w1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.* l0o1. Rights Agreement dated as of December 13, 1987 between Registrant and First Chicago Trust Company of New York, as Rights Agent, and amendments thereto is incorporated herein by reference to Exhibit 10aa1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1992.*

11. Statement setting forth net income for computation of earnings per Common share, primary and fully diluted, and statement setting forth computation of weighted average number of Common shares outstanding on a fully diluted basis. 12. Statement re computation of ratio of earnings to fixed charges.

13. 1996 Annual Report to Stockholders of Registrant.

21. Subsidiaries of Registrant.

23(i)a. Consent of Independent Accountants, Coopers & Lybrand L.L.P.

23(i)b. Consent of Counsel, Chadbourne & Parke LLP.

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

27. Financial Data Schedule (Article 5).

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

In lieu of filing certain instruments with respect to long-term debt of the kind described in Item 601(b)(4) of Regulation S-K, Registrant agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request.

(b) Reports on Form 8-K.

Registrant filed a Current Report on Form 8-K, dated October 8, 1996, in respect of Registrant's press release dated October 8, 1996 announcing Registrant's plan to spin off the U.K.-based tobacco business of its Gallaher Limited subsidiary (Items 5 and 7(c)).

Registrant filed a Current Report on Form 8-K, dated October 16, 1996, in respect of Registrants' press release dated October 15, 1996 announcing that Registrant will redeem its 7 3/4% Eurodollar Convertible Debentures Due 2002, its 5-3/8% Eurodollar Convertible Debentures Due 2003 and its 5- 3/4% Eurodollar Convertible Debentures Due 2005. (Items 5 and 7 (c)).

Registrant filed a Current Report on Form 8-K, dated October 22, 1996, in respect of Registrant's press release dated October 22, 1996 announcing Registrant's financial results for the three-month and nine-month periods ended September 30, 1996 (Items 5 and 7(c)).

Registrant filed a Current Report on Form 8-K, dated December 19, 1996, in respect of Registrant's press release dated December 19, 1996 announcing Registrant's plan to consolidate production at its Gallaher tobacco unit (Items 5 and 7(c)).

Registrant filed a Current Report on Form 8-K, dated January 24, 1997, in respect of Registrant's press release dated January 24, 1997 announcing Registrant's financial results for the three-month and twelve-month periods ended December 31, 1996 (Items 5 and 7(c)).

SIGNATURES

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

AMERICAN BRANDS, INC. (Registrant)

By Thomas C. Hays Thomas C. Hays Chairman of the Board and Date: March 13, 1997 Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of Registrant and in the capacities and on the dates indicated. Thomas C. Hays Thomas C. Hays, Chairman of the Board and Chief Executive Officer (principal executive officer) and Director Date: March 13, 1997

John T. Ludes* John T. Ludes, President and Chief Operating Officer and Director Date: March 13, 1997

Dudley L. Bauerlein, Jr. Dudley L. Bauerlein, Jr., Senior Vice President and Chief Financial Officer (principal financial officer) Date: March 13, 1997

Craig P. Omtvedt Craig P. Omtvedt, Vice President and Chief Accounting Officer (principal accounting officer) Date: March 13, 1997

Eugene R. Anderson* Eugene R. Anderson, Director Date: March 13, 1997

Patricia O. Ewers* Patricia O. 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 M. Tatlock* Anne M. Tatlock, Director Date: March 13, 1997

John W. Thompson* John W. Thompson, Director Date: March 13, 1997

Peter M. Wilson* Peter M. Wilson, Director Date: March 13, 1997

*By A. Robert Colby A. Robert Colby, Attorney-in-Fact

INDEX TO FINANCIAL STATEMENT SCHEDULE

Pages ----- AMERICAN BRANDS, INC. AND SUBSIDIARIES

Report of Independent Accountants F-2

Schedule ------

II Valuation and qualifying accounts For the years ended December 31, 1996, 1995 and 1994 F-3

F-1

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of American Brands, Inc.:

Our report on the consolidated financial statements of American Brands, Inc. and Subsidiaries has been incorporated by reference in this Form 10-K from the 1996 Annual Report to Stockholders of American Brands, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page F-1 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.

COOPERS & LYBRAND L.L.P.

1301 Avenue of the Americas New York, New York February 3, 1997

F-2

AMERICAN BRANDS, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1996, 1995 and 1994 (In millions) Col. A Col. B Col. C Col. D Col. E ------Additions ------Balance at Charged Balance Beginning to Costs at End Description of Period and Expenses Deductions of Period ------

1996: Allowance for cash discounts $ 5.5 $ 64.4 $ 73.4 (1) $ 7.8 (11.3)(3) Allowance for returns 15.6 131.2 130.3 (1) 18.9 (2.4)(3) Allowance for doubtful accounts 26.1 6.7 8.1 (2) 26.8 (2.1)(3) ------$47.2 $202.3 $ 196.0 $53.5 ======1995: Allowance for cash discounts $ 5.3 $ 42.8 $ 42.6 (1) $ 5.5 Allowance for returns 12.6 98.3 95.3 (1) 15.6 Allowance for doubtful accounts 34.1 7.2 15.2 (2) 26.1 ------$52.0 $148.3 $ 153.1 $47.2 ======1994: Allowance for cash discounts $ 6.3 $ 93.0 $ 92.7 (1) $ 5.3 1.3 (4) Allowance for returns 21.9 90.9 93.2 (1) 12.6 7.0 (4) Allowance for doubtful accounts 34.3 11.3 (0.9)(5) 34.1 9.5 (2) 2.9 (4) ------$62.5 $195.2 $ 205.7 $52.0 ======

(1) Cash discounts and returns allowed customers. (2) Doubtful accounts written off, net of recoveries. (3) Balance at acquisition date of subsidiaries. (4) Balance at disposal date of subsidiaries. (5) Effect of changes in foreign exchange rates.

F-3

EXHIBIT INDEX

10a1. Article XII ("Incentive Compensation") of the By-laws of Registrant is incorporated herein by reference to Exhibit 3(ii) hereof.*

10b4. 1990 Long-Term Incentive Plan of American Brands, Inc. (As Amended and Restated as of January 1, 1994) is incorporated herein by reference to Exhibit 10a to the Quarterly Report on Form 10-Q of Registrant dated August 11, 1994.*

10h1. Service Agreement dated March 11, 1997 between Gallaher and Peter M. Wilson.*

10i2. Letter dated August 11, 1995 from Registrant with respect to deferred payment of fees to Gordon R. Lohman is incorporated herein by reference to Exhibit 10b to the Quarterly Report on Form 10-Q of Registrant dated November 9, 1995.*

10k1. Trust Agreement, made as of the 2nd day of January, 1991, among Registrant, Chase, et al. establishing a trust in favor of Gilbert L. Klemann, II for purposes of paying amounts under the Agreement constituting Exhibits 10j1 and 10j2 hereto is incorporated herein by reference to Exhibit 10s1 to the Annual Report on Form 10-K of Registrant for the Fiscal Year ended December 31, 1994.*

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

13. 1996 Annual Report to Stockholders of Registrant.

21. Subsidiaries of Registrant.

23(i)a. Consent of Independent Accountants, Coopers & Lybrand L.L.P.

23(i)b. Consent of Counsel, Chadbourne & Parke LLP.

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

27. Financial Data Schedule (Article 5).

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

EXHIBIT 10c5

Schedule identifying substantially identical agreements, among American Brands, Inc. ("American") and The Chase Manhattan Bank (National Association), et al. establishing a trust in favor of each of the following persons, to the Trust Agreement and Amendments thereto constituting Exhibits 10c2, 10c3 and 10c4, respectively, to the Annual Report on Form 10-K of American for the Fiscal Year ended December 31, 1996

------

Name ----

Thomas C. Hays John T. Ludes Robert J. Rukeyser Steven C. Mendenhall Dudley L. Bauerlein, Jr. Charles H. McGill

EXHIBIT 10c8

Schedule identifying substantially identical agreements, among American Brands, Inc. ("American") and The Chase Manhattan Bank (National Association), et al. establishing a grantor trust in favor of each of the following persons, to the Trust Agreement and Amendment thereto constituting Exhibits 10c6 and 10c7, respectively, to the Annual Report on Form 10-K of American for the Fiscal Year ended December 31, 1996

------

Name ----

Thomas C. Hays John T. Ludes Robert J. Rukeyser Steven C. Mendenhall Dudley L. Bauerlein, Jr.

EXHIBIT 10h1

THIS AGREEMENT is made the 11th day of March 1997

BETWEEN:

(1) GALLAHER LIMITED a company in England under number 1501573 whose registered office is at Members Hill, Brooklands Road, Weybridge, Surrey KT13 0QU ("the Company") and

(2) PETER MICHAEL WILSON of The Stable Old Odiham Road Alton Hampshire GU234 4BW ("the Executive")

WHEREBY IT IS AGREED AS FOLLOWS:

INTERPRETATION

1. (A) DEFINITIONS

UNLESS the context otherwise requires, in this Agreement and in the Schedule hereto the following words and phrases shall have the meanings given below:

(1) "subsidiary" or "subsidiary company" and "holding company" shall have the meanings ascribed to them Part XXVI of the Companies Act 1985;

(2) "Group" means the Company, the company incorporated in England under number 3299793 currently named Gallaher Group Limited ("Gallaher Group") and all the subsidiaries of the Company and Gallaher Group and "Group Company" shall be construed accordingly;

(3) "the Board" means the Board of Directors of the Company;

(4) "the Business" means (taken together) the business of the Company and the business of any other Group Company with which the Executive is required by the Board under Clause 3 of this Agreement to be concerned;

(5) "Contractual Retirement Date" means the date specified in paragraph 8 of the Schedule hereto;

(6) "the Effective Date" means the date specified in Paragraph 2 of the Schedule hereto;

(7) "month" means a calendar month; and

(8) "Restricted Client" means any person who on the date of termination of the Executive's employment or at any time during the period of eighteen months immediately prior to the date of termination was a client of the Company and with whom during the same period the Executive shall have had business dealings.

(9) "Demerger" means the demerger of the Company and its subsidiaries from American Brands, Inc. (ABI") which is to be effected by, inter alia, the transfer of all the issued shares in the Company to a new company to be owned by ABI and to be known as Gallaher Group Plc ("Gallaher Group"), the distribution by ABI of all the issued shares in Gallaher Group to the shareholders of ABI in the same proportions as those shareholders hold shares in ABI and the listing of all the issued shares in Gallaher Group on the London Stock Exchange and in the form of American depository shares on the New York Stock Exchange.

Other words and phrases the definition of which is contained or referred to in Part XXVI of the Companies Act 1985 shall be construed as having the meanings thereby attributed to them.

(B) CONSTRUCTION OF CERTAIN REFERENCES

Unless the context otherwise requires any references in this Agreement to:

(1) a "person" shall include any individual company corporation firm partnership joint venture association organisation or trust (in each case whether or not having separate legal personality) and references to any of the same shall include a reference to the others;

(2) "writing" or "written" shall include any means of visible reproduction;

(3) words denoting the singular shall include the plural and vice versa;

(4) sub-clauses are references to sub-clauses of the Clause in which the reference appears;

(5) statutory provisions shall be construed as references to those provisions as respectively amended or re-enacted or as their application is modified by other

provisions (whether before or after the date hereof) from time to time and shall include any provisions of which they are re-enactments (whether with or without modification); and

(6) the masculine gender shall be deemed to include the feminine gender.

Clause headings are inserted for convenience only and shall not affect the construction of this Agreement.

(D) REASONABLE OF RESTRICTIONS

The restrictions contained in Clause 13 hereof are considered reasonable by the parties hereto. In particular, the Executive agrees that the restrictions are reasonable and necessary for the protection of the business of the Company and any Group Company as appropriate.

APPOINTMENT ------

2. THE Company shall employ the Executive and the Executive agrees to serve the Company in the capacity specified in paragraph 1 of the Schedule hereto as at and with effect from the Effective Date and continuing thereafter (subject to termination as hereinafter provided) unless and until terminated by the Company giving to the Executive not less than the period of prior notice in writing specified in paragraph 3(a) of the Schedule hereto or the Executive giving to the Company not less than the period of prior notice in writing specified in paragraph 3(b) of the Schedule hereto but so that the employment of the Executive hereunder shall terminate in any event on the Contractual Retirement Date. The Company will be entitled from time to time to appoint any other person or persons to act jointly with the Executive in the performance of his duties.

DUTIES, POWERS AND MOBILITY ------

3. (A) THE Executive shall exercise such powers perform such duties (if any) and comply with such directions in relation to the business of the Company and any other Group Company or Group Companies consistent with his employment hereunder as the Board or any person authorized by the Board for the purpose may from time to time confer upon or assign or give to him.

(B) The Executive shall during the continuance of his employment hereunder (unless prevented by ill health or accident) devote so much of his time and attention and abilities to the Business as the Board may reasonably require for the proper performance of his duties hereunder and shall use his best endeavors to promote and protect the general interests and welfare of the Company.

(C) The Executive shall at all times promptly give to the Board (in writing if so requested) all such information explanations and assistance as it may require in connection with the Business and his employment hereunder.

(D) The Executive may be required to travel on the business of the Company or any other Group Company both inside and outside the United Kingdom in the proper performance of his duties hereunder.

(E) The Executive shall work in such place or places (whether within or outside the United Kingdom) as the Board may reasonably require for the proper performance of his duties hereunder.

REMUNERATION

4. (A) SUBJECT to Clause 8(B) below the Company shall pay to the Executive during the continuance of his employment hereunder as remuneration for his services a salary at the annual rate specified in paragraph 4 of the Schedule hereto payable in arrear by equal installments on or before the last day of each month which said salary shall be deemed to accrue from day to day. Such salary shall include any sum receivable by the Executive as Director's fees from the Company or any other Group Company.

(B) The remuneration payable to the Executive by the Company pursuant to sub-clause (A) shall be subject to review in accordance with the Company's practice from time to time. The Company shall be under no obligation to increase remuneration on such review but shall not in any event reduce remuneration on review.

(C) The Executive may be entitled to a bonus in addition to salary. Entitlement to bonus will be at the absolute discretion of the Company.

EXPENSES

5. THE Company shall pay or refund or procure to be paid or refunded to the Executive all reasonable traveling entertainment and other similar out of pocket expenses necessarily and wholly incurred by him in the performance of his duties hereunder but the Company shall be entitled as a condition of reimbursement to such evidence from the Executive as to such expenses as the Board may reasonably require (including without limitation proper accounts with vouchers).

COMPANY CAR

6. (A) THE Company shall make available to the Executive a motor car ("the Car") for his use of such type as the Board may in its absolute discretion decide is suitable for him.

(B) The Company shall pay the costs of insuring, testing and taxing the Car and shall reimburse the Executive in respect of all running expenses in connection with the use of the Car (including petrol, lubrication, maintenance and repairs of the Car) but excluding any petrol for private mileage outside the United Kingdom.

(D) The Executive shall be permitted to use the Car for his own personal purposes including use on holiday outside the United Kingdom and traveling to and from his normal place of business.

(E) The Executive shall ensure that at all times when the Car is driven on a public highway it is in the state and condition required by law and that if so required a current test certificate is in force in respect of it.

(F) The Executive shall at all times conform to all regulations which may from time to time be made or imposed by the Company or any other Group Company as appropriate in regard to motor cars provided for the use of executives.

(G) It shall be a condition of the provision of the Car to the Executive that in the event of the termination of the employment of the Executive for whatever

reason and howsoever caused, the Executive shall immediately upon demand deliver up the Car to the Company. HOLIDAYS

7. (A) IN addition to statutory and bank holidays the Executive shall be entitled to paid holiday in each calendar year of the period specified in paragraph 5 of the Schedule hereto at such time or times as the Business may permit.

(B) Holidays may not be carried forward from one year to the next and the Executive will not be entitled to any payment (whether during the continuance or on termination of this Agreement) in lieu of holidays not taken.

SICKNESS AND INCAPACITY

8. (A) IF the Executive is absent from work as a result of sickness or injury he will

(1) if the period of absence is less than eight consecutive calendar days, submit to the Company on his return a certificate of sickness completed by himself;

(2) if it is eight consecutive calendar days or more submit to the Company without delay a medical certificate signed by a practicing medical practitioner in respect of each week of absence after the first.

(B) Subject to compliance with sub-clause (A) above the Executive will be entitled to payment of his salary at the full rate (less any social security or other benefits payable to him) during the first twelve months of absence from work as a result of sickness or injury. Thereafter the Executive shall be entitled to such salary and other benefits (if any) as the Company shall in its absolute discretion decide.

(C) The Company will pay Statutory Sick Pay, where appropriate, in accordance with the legislation in force at the time of absence and any payment of salary in accordance with this Clause will go towards discharging its liability to pay Statutory Sick Pay.

(D) If the Executive is absent from work due to the act or default of a third party, and claim for damages, if made, shall include a claim for "loss of earnings". Any

sum recovered under this head shall subsequently be refunded to the Company.

(E) The Executive shall submit himself to a medical examination at the request and reasonable expense of the Board at any time during the continuance of his employment hereunder whether or not the Executive is absent by reason of sickness injury or other incapacity.

PENSION

9. (A) In this clause "Pension Scheme" means the Gallaher 'M' Pension Scheme and includes, unless the context otherwise requires, any replacement scheme as provided below.

(B) The Executive shall, while in employment hereunder, be entitled to be and to remain a member of the Pension Scheme on a non-contributory basis, subject to the terms and conditions of the Pension Scheme from time to time in force, including the powers of amendment and discontinuance.

(1) no material adverse amendment will be made to the benefits payable or prospectively or contingently payable under the Pension Scheme to or in respect of the Executive apart from any such amendment which is made in order to comply with any applicable law, regulation or requirement or is made with the prior written consent of the Executive;

(2) if while the Executive is in employment hereunder the Pension Scheme is terminated or the Executive is unable to continue in pensionable service under the Pension Scheme: (a) the Executive will be provided with the benefit of a replacement retirement benefits scheme (the "replacement scheme") which is approved or is treated by the Board of Inland Revenue as approved under Chapter I, Part XIV, Income and Corporation Taxes Act 1988;

(b) subject to (c) below, the benefits payable or prospectively or contingently payable under the replacement scheme to or in respect of the Executive will be no less favorable overall than those so payable under the Pension Scheme immediately prior to the Pension Scheme being terminated or, as the case may be, the Executive ceasing to be in pensionable service under it;

(c) where a transfer value is not made from the Pension Scheme to the replacement scheme in lieu of all the benefits otherwise payable under the Pension Scheme to or in respect of the Executive or where such a transfer value has been paid but a subsequent transfer value is before the Executive ceases to employed hereunder paid from the replacement scheme in respect of all or any of the benefits otherwise payable under the replacement scheme in respect of the Executive's membership of the Pension Scheme a reasonable deduction, as determined by the Company on actuarial advice, shall be made from the benefits otherwise payable pursuant to (b) above for any benefits which are not payable under the replacement scheme but which are payable or, as the case may be, have been paid in respect of the Executive's membership of the Pension Scheme.

(D) The Company undertakes to procure if the Executive on ceasing to be employed by the Company becomes employed by another person (the "New Employer") pursuant to the Transfer of Undertakings (Protection of Employment) Regulations 1981 the Executive is employed by the New Employer on the terms with regard to relevant benefits which are identical to those contained in this clause and that in relation to the provision of relevant benefits employment with the Company is treated as employment with the New Employer (where "relevant benefits" has the same meaning as in section 612, Income and Corporation Taxes Act 1988).

(E) A contracting-out certificate is in force in relation to the Pension Scheme for the purposes of the Pension Scheme Act 1993.

PRIVATE HEALTH INSURANCE AND OTHER INSURANCE

10. THE Company shall pay all premiums and make all necessary payments to provide the Executive with medical insurance under the provisions of the Company's membership of such medical insurance scheme or schemes as the Board may from time to time determine and of which the Executive is or may become during the continuance of his employment hereunder a member.

EXCLUSIVE SERVICE

11. DURING the continuance of his employment hereunder the Executive shall not (save with the prior consent of the Board communicated in writing by the Secretary of the Company to the Executive) either as principal servant or agent carry on or be engaged concerned or interested directly or indirectly whether alone or on his behalf or on behalf of or in association or conjunction with any other person and whether as an employee or in any capacity in any trade business or occupation whatsoever other than that of the Company or of any other Group Company (otherwise than as a holder for investment purposes only of any units of an authorized unit trust and as a holder directly or through nominees of not more than 5 per cent of the shares or debentures in any company or companies).

INVENTIONS AND IMPROVEMENTS

12. (A) IN this Clause 12, the term "Intellectual Property" means inventions (whether patentable or not, and whether or not patent protection has been applied for or granted),improvements, developments, discoveries, proprietary information, trade marks, trade names, logos, art work, slogans, know-how, processes, designs (whether or not registrable and whether or not design rights subsist in them), utility models, works in which copyright may subsist (including computer software and preparatory and design materials therefor), and all works protected by rights or forms of protection of a similar nature or having equivalent effect anywhere in the world.

(B) Subject to the provisions of the Patents Act 1977, the Registered Designs Act 1949 and the Copyright Designs and Patents Act 1988, if at any time in the course of or in connection with his employment under this Agreement the Executive makes or discovers or participates in the making or discovery of any Intellectual Property directly or indirectly relating to or capable of being used in the

business carried on by the Company or by any Group Company, full details of the Intellectual Property shall immediately be disclosed in writing by him to the Company and the Intellectual Property shall be the absolute property of the Company. At the request and expense of the Company, the Executive shall give and supply all such information, data, drawings and assistance as may be necessary or in the opinion of the Company desirable to enable the Company to exploit the Intellectual Property to the best advantage, and shall execute all documents and do all things which may be necessary or in the opinion of the Company desirable for obtaining patent or other protection for the Intellectual Property in such parts of the world as may be specified by the Company and for vesting the same in the Company or as it may direct.

PROTECTION OF INTERESTS OF COMPANY: CONFIDENTIALITY, NON-ENTICEMENT, NON- SOLICITATION AND NON-COMPETITION

13. (A) THE Executive shall not at any time either before or after the termination of his employment with the Company use disclose or communicate to any person whatsoever any confidential information relating to the business of the Company or any Group Company or any customers suppliers or agents thereof or their affairs or any trade secrets of which he may have become possessed during the continuance of his employment with the Company or supply the names or addresses of any customers or agents of the Company or any Group Company to any person except in the proper course of his duties hereunder or as authorized in writing by the Board or as ordered by a Court of competent jurisdiction.

(B) The Executive shall not at any time during the continuance of his employment with the Company make otherwise than for the benefit of the Company or any Group Company any notes or memoranda relating to any matter within the scope of the Business or concerning any of the dealings or affairs of any Group Company.

(C) The Executive shall not utter any statement (whether written or oral) to any representative of television radio film newspaper or other similar media and shall not write any article for the press or otherwise for publication on any matter connected with or relating to the business of any Group Company except in the proper course of his duties or with the approval of the Board.

(D) The Executive hereby covenants that he shall not without the consent in writing of the Board during the

continuance of his employment by the Company or during the period specified in paragraph 9 of the Schedule hereto after the date of termination of his employment except in the event of an unlawful termination by the Company either on his own account or in conjunction with or on behalf of any other person solicit or entice away or endeavor to solicit or to entice away from the Company or any Group Company any individual:

(a) who is a senior employee or director of the Company or any Group Company; or

(b) who is contracted to render services to any such company and in either case with whom the Executive has business dealings during his employment with the Company whether or not any such person would commit a breach of contract by reason of his leaving service. (E) The Executive hereby covenants that he shall not during the period specified in paragraph 10 of the Schedule hereto immediately following the termination of his employment except in the event of an unlawful termination by the Company on his own behalf or on behalf of or in conjunction with any other person solicit interfere with or entice away or attempt to solicit interfere with or entice away any person who is a Restricted Client provided always that nothing contained in this sub-clause shall be deemed to prohibit the seeking or doing of business not in direct or indirect competition with the Business.

(F) The Executive hereby covenants that he shall not during the period specified in paragraph 10 of the Schedule hereto immediately following the termination of his employment except in the event of an unlawful termination by the Company on his own behalf or on behalf of in conjunction with any other person have business dealings directly or indirectly with any person who is a Restricted Client provided always that nothing contained in this sub-clause shall be deemed to prohibit the seeking or doing of business not in direct or indirect competition with the Business.

(G) The Executive hereby covenants that he shall not, without the prior consent in writing of the Company, during the 12-month period immediately following the termination of his employment except in the event of an unlawful termination by the Company either alone or jointly, be engaged, concerned or interested either directly or

indirectly in any capacity in the business of the manufacture or sale of tobacco products.

(H) The Executive hereby covenants with the Company in terms identical to those contained in sub-clauses (D), (E), (F) and (G) save that the reference to the termination of the Executive's employment shall refer to the termination of the Executive's employment for any reason whatsoever whether lawful or unlawful.

SCOPE OF RESTRICTIONS AND APPLICATION

14. THE Executive agrees that in the event of his receiving from any person an offer of employment either during the continuance of this Agreement or during the continuance in force of all or any of the restrictions set out in Clause 13 of this Agreement he shall forthwith inform the Company Secretary.

TERMINATION UPON AMALGAMATION OR RECONSTRUCTION

15. (A) THE provisions of subclause 15(B) shall not apply to a termination employment occurring within two years after a Change of Control (as defined in sub-clause 17(F)).

(B) If the employment of the Executive with the Company shall be terminated either by reason of the liquidation of the Company for the purpose of reconstruction or amalgamation or as part of any arrangement for the amalgamation or reconstruction of the Company not involving insolvency and the Executive shall be offered employment with any concern or undertaking resulting from such amalgamation or reconstruction on terms and conditions which taken as a whole are not less favorable than the terms of this Agreement then the Executive shall have no claim against the Company in respect of such termination of his employment with the Company.

DIRECTORSHIPS

16. (A) THE Executive shall accept appointment as a Director of any such Group Company as the Board may require in connection with his appointment hereunder and as a Director of any other company as the Board may reasonably so require and he shall resign without claim for compensation from office as a Director of any such company (other than the Company) at any time on request by the Company which resignation shall not affect continuance in any way of this Agreement. The Executive shall forthwith account to the

Company for any director's fees or other emoluments remuneration or payments either receivable or received by him by virtue of his holding office as such director as aforesaid (or waive any right to the same if so required by the Company).

(B) Upon the termination of the Executive's employment with the Company for whatsoever reason the Executive shall unless requested by the Board not to do so resign promptly from

(1) office as a director of the Company or of any Group Company or of any other company as is referred to in sub-clause (A) of which he is a director and

(2) from all offices held by him in any or all of such companies and

(3) all trusteeships held by him of any pension schemes or other trusts established by the Company or any other Group Company or any other company with which the Executive has had dealings as a consequence of his employment by the Company.

(C) Should the Executive fail to resign from office as a director or from any other office or trusteeship as if referred to in sub-clauses (A) or (B) either during his employment when requested by the Company so to do or on termination thereof the Company is hereby irrevocably authorized to appoint some person in his name and on his behalf to execute any documents and to do all things requisite to give effect thereto.

(D) Save with the prior agreement in writing of the Board the Executive shall not during the continuance of his employment hereunder resign office as a director of the Company or any Group Company or any other company as is referred to in sub-clause (A) or do anything that would cause him to be disqualified from continuing to hold office as a director.

TERMINATION

17. (A) THE Executive's employment with the Company may be terminated forthwith by the Company without prior notice if the Executive shall at any time:

(1) commit any serious breach or repeated or continual breach of any of his obligations hereunder; or

(2) be guilty of any serious misconduct or serious neglect in the discharge of his duties hereunder; or

(3) have a bankruptcy order made against him or if he shall make any arrangement or composition with his creditors or have an interim order made against him pursuant to Section 252 of the Insolvency Act 1986; or

(4) tend by his actions or omissions to bring the name or reputation of the Company or any Group Company into serious disrepute or prejudice the interests of the business of the Company or any other Group Company (bearing in mind the nature of the duties he is engaged in hereunder and the capacity in which he is employed); or

(5) be convicted of an offense under any present or future statutory enactment or regulation relating to insider dealing; or

(6) be or become prohibited by law from being a director.

(B) In the event of termination pursuant to sub-clause (A) the Company shall not be obliged to make any further payment to the Executive beyond the amount of any remuneration actually accrued due to the date of such termination and the Company shall be entitled to deduct from such remuneration any sums owing to it or to any other Group Company by the Executive.

(C) In the event of the termination of the employment of the Executive hereunder for whatever reason and whether by notice or in any other manner whatsoever the Executive agrees that he will not at any time after such termination represent himself as still having any connection with the Company or any Group Company.

(D) In the event of the termination of the employment of the Executive hereunder by notice given pursuant to Clause 2 of this Agreement by either party, the Executive agrees that the Company may in its absolute discretion require the Executive not to render all or any of his duties hereunder or to exclude him from any premises of the Company (without providing any reason therefor) during the relevant notice period or (if the date of termination is disputed) at any time after the disputed date of termination and that such action (if taken) on the part of the Company shall not constitute a breach of this Agreement of any kind whatsoever in respect of which the Executive has any claim

against the Company provided always that throughout the period of any such action the Executive's salary and contractual benefits shall not cease to be payable by reason thereof.

(E) At any time within two years after the Executive becoming aware of a Change of Control (as defined in sub-clause (F) below) of the Company and except as otherwise provided in sub-clauses (G), (H), (I) and (J) below, the Executive will, either on being dismissed by the Company (otherwise than under sub-clause (A) above) or upon terminating his employment with or without notice following any of the events set out in sub-clause (K) below, be entitled to be paid by the Company a sum equivalent to two years' salary at the rate in effect immediately prior to the date of the termination plus a sum equal to twice the last bonus received by the Executive prior to the Change of Control plus twice the tax value of the benefits in kind received by the Executive in respect of the twelve month period preceding the Change of Control. Payment will be made within 21 days of termination of employment and will be accepted by the Executive in full and final settlement of all or any claims the Executive has or may have arising out of the termination of his employment including such claims (if any) that the Executive has or may have arising from the failure (if any) by the Company to give to the Executive the period of notice specified in paragraph 3(a) of the Schedule hereto. For the avoidance of any doubt it is agreed that no discount or deduction shall be made from any payment under this clause 17(E) to take account of any mitigation on the part of the Executive of the loss arising from the termination of his employment or accelerated receipt of the payment.

(F) For the purposes of this clause "Change of Control" shall subject to the provisions of sub-clause (H) below be regarded as occurring if and only if

(i) any person, firm or company who or which does not at 1 January 1997 possess Control of the Company acquires Control of the Company or

(ii) any person firm or company who or which does not immediately following Demerger possess Control of the Company acquires Control of the Company except that prior to Demerger a Change of Control shall be regarded as occurring if and only if the Company ceases to

be beneficially owned (directly or indirectly) to the extent of at least 50% by American Brands, Inc ("ABI") or if 20% or more of the common stock of ABI shall come within the beneficial ownership of one person or one concerted group of persons.

For these purposes:

(1) "Person firm or company" shall include any person acting in concert (within the definition of that expression in the City Code on Takeovers or Mergers as at 1 January 1997) with that person firm or company; and

(2) "Control" bears the meaning as at 1 January 1997 given to that expression in section 840 of Income and Corporation Taxes Act 1988.

(G) In the event that the employment of the Executive would be terminated upon the expiry of a notice of termination of this Agreement which has been served by either party prior to the date of the Change of Control then the provisions of sub-clause (E) above shall not apply. (H) Demerger shall not constitute a Change of Control for the purposes of sub-clause (E) above.

(I) In the event that the employment of the Executive would be terminated automatically on the Contractual Retirement Date within two years of the Change of Control the payment under sub-clause (E) shall be reduced pro rata by reference to the proportion of the two year period which falls after the Contractual Retirement Date.

(J) In the event that the Executive terminates his employment by giving notice following any of the events set out in sub-clause (K) that part of the payment under sub-clause (E) which is related to salary and the tax value of benefits in kind shall be reduced pro rata by reference to the period of notice worked by the Executive.

(K) The events referred to in sub-clause (E) above are as follows:

(1) without the Executive's express written consent any material reduction in the aggregate duties responsibilities and authority assigned to him pursuant to Clause 3(A) of this Agreement or the assignment to him of any duties responsibilities or authority

inconsistent with the duties responsibilities and authority previously assigned to him pursuant to Clause 3(A) of this Agreement or a change in his title or position below that in effect on the date of the Change of Control;

(2) a reduction by the Company in the Executive's salary in effect on the date hereof as increased subsequently pursuant to Clause 4(B);

(3) the failure of the Company substantially to maintain and to continue the Executive's participation in the Company's benefit plans as in effect on the date hereof as increased by improvements made subsequent thereto or the taking of any action which would materially reduce the Executive's benefits under any of such plans or deprive the Executive of any material fringe benefit enjoyed by him on the date hereof or subsequently. For the purposes hereof such benefit plans shall include but not be limited to the Company's pension plans. The substituting for any existing benefit plan of a similar plan providing no less favorable benefits shall be deemed not to be a failure by the Company to maintain or continue the Executive's participation in any such benefit plan and any reference in this sub-clause to any benefit plan shall be deemed to include a reference to any such substituted benefit plan;

(4) either of the next two annual bonuses following a Change of Control is less than the bonus (if any) paid in respect of the Last Year provided that if the consolidated profits before tax of the Group for the Last Year are greater than the consolidated profits before tax of the Group for the Current Year then for the purposes of this Clause 17(K)(4) the bonus in respect of the Last Year shall be deemed to be reduced pro rata by reference to the proportion which the consolidated profits before tax of the Group for the Current Year bear to the consolidate profits before tax of the Group for the Last Year. In this Clause 17(K)(4)

"the Current Year" means either of the two financial years of the Group immediately following the Last Year.

"the Last Year" means:

(i) if a Change of Control takes place between the ending of a financial year of the Group and the payment of a bonus in respect of that financial year or, as the case may be, a declaration that there will be no bonus in respect of that financial year, the financial year of the Group next but one immediately preceding the financial year of the Group during which the Change of Control takes place; and in all other circumstances

(ii) the financial year of the Group immediately preceding the financial year of the Group during which the Change of Control takes place

save that

(i) if the Last Year is the financial year ended 31 December 1996 or 31 December 1997 then the consolidated profits before tax of the Company and its subsidiaries shall be substituted for those of the Group for the purposes of this Clause 17(K)(4)

(ii) if the Last Year is the financial year ended 31 December 1996 then the bonus paid in respect of the Last Year shall be deemed to be (Pounds)160,500

(iii) if following a Change of Control there is a significant change in the nature or scale of the business of the Group the profits before tax of the Current Year will be deemed to be equal to the profits before tax of the Last Year

For the avoidance of doubt if no bonus is paid in respect of the Last Year nothing in this Clause 17(K)(4) shall entitle the Executive to terminate his employment or to receive a payment pursuant to Clause 17(E).

(5) notwithstanding Clause 3(E) the relocation of the offices at which the Executive was required to work at the time of the Change of Control arising to a location more than 35 miles away except for required travel on

the Company's business to an extent substantially consistent with his business travel obligations on the date hereof;

(6) the failure of the Company to provide the Executive during a calendar year with a number of paid holidays at least equal to the number of paid holidays to which he was entitled at the date hereof pursuant to Clause 7 of this Agreement as increased subsequent thereto;

(7) circumstances arise which entitle the Executive to terminate this Agreement without notice because of the Company's conduct (ie, the circumstances of constructive dismissal).

STATUTORY PARTICULARS

18. THE following particulars are set forth in compliance with the requirements of the Employment Rights Act 1996:

(A) The employment of the Executive by the Company and his continuous period of employment with the Company began on the respective dates specified in paragraphs 13 and 7 of the Schedule hereto.

(B) Save as contained herein or otherwise notified to the Executive in writing there are no terms or conditions of employment relating to hours of work or to normal working hours or to holidays or to holiday pay or to incapacity for work due to sickness or injury or to sick pay or to pensions or pension schemes or to disciplinary rules and procedures or to collective agreements.

(C) If the Executive is dissatisfied with any disciplinary decision relating to him or if he has any grievance arising from his employment hereunder he may refer any such matter to the Board which will deal with the matter by discussion and by a decision of those present at the relevant Board Meeting at which the matter is discussed.

(D) The Executive's hours of work shall be such as may be requisite for the proper discharge of his duties hereunder.

(E) The Executive hereby authorizes the Company to deduct and to retain from any remuneration accrued due to him under the terms of this Agreement (whether or not

actually paid during the continuance of his employment hereunder) those sums set out in paragraph 12 of the Schedule hereto. RETURN OF PROPERTY ON TERMINATION

19 (A) UPON the termination of his employment with the Company for whatsoever cause the Executive shall forthwith deliver up to the Company or its authorized representative any property of the Company or any other Group Company which may be in his possession custody or under his control including without limitation the Car and the keys relating thereto minutes memoranda correspondence notes records reports sketches plans or other documents and any copies thereof, whether or not the same were originally supplied to him by the Company or any other Group Company.

(B) If so requested the Executive shall provide to the Board a signed statement confirming that he has fully complied with sub-clause (A).

NOTICES

20. ANY notice to be given hereunder shall be given in writing and may be given either personally or may be sent addressed in the case of the Company to its registered office for the time being and in the case of the Executive to him at his last known place of residence and any notice given by post shall be deemed to have been served on the day which is three days following that on which it was posted.

CONSTRUCTION

21. (A) THE provisions of the Schedule hereto and any special terms endorsed in writing by or on behalf of the parties hereto shall be read and construed as part of this Agreement and shall be enforceable accordingly.

(B) The benefit of each agreement and obligation of the Executive under Clause 13 of this Agreement may be assigned to successors for the time being carrying on the Business and enforced by such assignees for the time being carrying on the Business and such agreements and obligations shall operate and remain binding notwithstanding the termination of this Agreement.

LAW OF AGREEMENT

22. THIS Agreement shall be governed by and interpreted according to the Law of England.

PRIOR AGREEMENTS ------

23. THIS Agreement shall be in substitution for any subsisting service agreement or contract of employment (oral or otherwise) made between the Company and the Executive or between any other Group Company and the Executive which shall be deemed to have been terminated by mutual consent with effect from the Effective Date.

IN WITNESS whereof this Agreement has been entered into the day and year first above written.

{ The common seal of GALLAHER { LIMITED was hereunto [SEAL] { affixed in the presence of:

[Signature illegible] Director

N.P. Bulpitt Secretary

{ SIGNED and DELIVERED Peter M. Wilson { by the EXECUTIVE as a deed { in the presence of:

C.T. Fielden Solicitor Members Hill Weybridge 21

THE SCHEDULE above referred to

1. Capacity of the Executive: Chairman and Chief (Clause 2) Executive of Gallaher Limited

2. The Effective Date: 1st January 1997 (Clause 2)

3. Minimum Notice Period: (a) Two Years (Clause 2) (b) One year

4. Remuneration: (Pounds)485,000 (Clause 4)

5. Holidays: 25 Working days (Clause 7)

6. Pension Schemes: The Gallaher "M" Pension (Clause 9) Scheme

7. The continuous period of employment of the Executive with the Company for statutory 06 October 1969 purposes began on: (Clause 18(A))

8. Contractual Retirement Date: 30 June 2001 (Clause 2)

9. Period of Non-Enticement: Twelve months (Sub-clause 13(D))

10. Period of Non-solicitation: Twelve months (Sub-clause 13(E))

11. Period of dealing: Twelve months (Sub-clause 13(F))

12. Deduction authorized pursuant to the Employment Rights Act 1996:

any debt owed by the Executive to the Company;

any pension or other similar contribution owed by the Executive as a consequence of the Executive's membership of the pension schemes referred to in paragraph 6 above;

any deduction from remuneration the Executive's consent to which has previously been signified to the Company in writing and the deduction of any other sum or sums which may from time to time be required or authorized pursuant to subsection 13(1)(a) of the Employment Rights Act 1996.

(Sub-Clause 18(E))

13. The employment of the Executive by the Company began on: 01 January 1981. (Clause 18(A))

EXHIBIT 10j3

Schedule identifying substantially identical agreements, among American Brands, Inc. ("American") and each of the following persons, to the Agreement and the Amendment thereto constituting Exhibits 10j1 and 10j2, respectively, to the Annual Report on Form 10-K of American for the Fiscal Year ended December 31, 1996

------

Name ----

Thomas C. Hays John T. Ludes Robert J. Rukeyser Steven C. Mendenhall Dudley L. Bauerlein, Jr. Charles H. McGill Craig P. Omtvedt

EXHIBIT 10k3

Schedule identifying substantially identical agreements, among American Brands, Inc. ("American") and The Chase Manhattan Bank (National Association), et al. establishing a trust in favor of each of the following persons, to the Trust Agreement and Amendment thereto constituting Exhibits 10kl and 10k2, respectively, to the Annual Report on Form 10-K of American for the Fiscal Year ended December 31, 1996

------

Name ----

Thomas C. Hays John T. Ludes Robert J. Rukeyser Steven C. Mendenhall Dudley L. Bauerlein, Jr. Craig P. Omtvedt

EXHIBIT 10m4

Schedule identifying substantially similar agreements, among American Brands, Inc. ("American") and each of the following persons, to the Agreement and the Amendments thereto constituting Exhibits 10m1, 10m2 and 10m3, respectively, to the Annual Report on Form 10-K of American for the Fiscal Year ended December 31, 1996

------

Name ----

John T. Ludes Robert J. Rukeyser Steven C. Mendenhall Dudley L. Bauerlein, Jr. Craig P. Omtvedt

EXHIBIT 11

AMERICAN BRANDS, INC.

Statement setting forth net income for computation of earnings per Common share - primary and fully diluted:

Years Ended December 31, 1996 1995 1994 ------(In millions)

Income from continuing operations before extraordinary items $496.8 $543.1 $ 885.1 Preferred stock dividend requirements 1.2 1.3 1.4 ------Income from continuing operations before extraordinary items for computing earnings per Common share - Primary 495.6 541.8 883.7 Loss from discontinued operations - - (151.0) Extraordinary items (10.3) (2.7) ------

Net income for computing earnings per Common share - Primary 485.3 539.1 732.7 Interest and related expenses on Convertible debentures, net of income taxes 2.4 12.7 21.5 Convertible Preferred stock dividend requirements 1.2 1.3 1.4 ------Net Income for computing earnings per Common share - Fully diluted $488.9 $553.1 $ 755.6 ======

Statement setting forth net income for computation of earnings per Common share - primary and fully diluted:

Years Ended December 31, 1996 1995 1994 ------(In millions, except per share amounts)

Weighted average number of Common shares outstanding during each year - Primary 173.3 186.9 201.6 Addition from assumed conversion as of the beginning of each year of the Convertible Preferred stock outstanding at the end of each year 1.7 1.9 2.1 Addition from assumed conversion of Convertible debentures - 3.7 9.3 Other additions 3.4 3.2 0.7 ------Weighted average number of Common shares outstanding during each year on a Fully diluted basis 178.4 195.7 213.7 ======EARNINGS PER COMMON SHARE Primary Income from continuing operations $ 2.86 $ 2.90 $ 4.38 Loss from discontinued operations - - (.75) Extraordinary items (.06) (.01) ------Net income $ 2.80 $ 2.89 $ 3.63 ======Fully diluted Income from continuing operations $ 2.80 $ 2.84 $ 4.24 Loss from discontinued operations - - (.71) Extraordinary items (.06) (.01) ------Net income $ 2.74 $ 2.83 $ 3.53 ======

EXHIBIT 12

AMERICAN BRANDS, INC.

Statement Re Computation of Ratio of Earnings to Fixed Charges (Dollar amounts in millions)

Years Ended December 31, ------1992 1993 1994 1995 1996 ------

Continuing Operations ------

Earnings Available:

Income before provision for taxes on income and minority interest $1,255.1 $ 878.9 $1,354.0 $ 895.3 $ 824.8

Less: Excess of earnings over dividends of less than fifty percent owned companies 0.3 0.8 0.4 0.2 0.2

Capitalized interest 1.0 2.5 1.4 0.2 0.3 ------1,253.8 875.6 1,352.2 894.9 824.3 ------Fixed Charges:

Interest expense (including capitalized interest) and amortization of debt discount and expenses 283.4 258.7 224.9 170.4 185.9

Portion of rentals representative of an interest factor 32.3 29.8 27.1 20.6 16.2 ------Total Fixed Charges 315.7 288.5 252.0 191.0 202.1 ------

Total Earnings Available $1,569.5 $1,164.1 $1,604.2 $1,085.9 $1,026.4 ======

Ratio of Earnings to Fixed Charges 4.97 4.04 6.37 5.69 5.08 ======

EXHIBIT 13

Financial Contents

Results of Operations ...... page 27

Financial Condition ...... page 36

Consolidated Statement of Income ...... page 39

Consolidated Balance Sheet ...... page 40

Consolidated Statement of Cash Flows ...... page 42

Consolidated Statement of Stockholders' Equity ...... page 43

Notes to Consolidated Financial Statements ...... page 44

Report of Independent Accountants ...... page 57

Report of Management ...... page 57

Information on Business Segments ...... page 58

Six-Year Consolidated Selected Financial Data ...... page 59

Results of Operations American Brands, Inc. and Subsidiaries

Net sales Operating income(1) ------(In millions) 1996 1995 1994 1996 1995 1994 ------

Ongoing operations International tobacco $ 6,861.6 $ 6,439.0 $ 6,174.8 $ 488.2 $ 554.1 $ 521.1 Distilled spirits 1,303.5 1,288.6 1,268.2 208.4 189.7 221.2 Hardware and home improvement products 1,374.1 1,306.8 1,270.6 184.1 178.3 176.5 Golf and leisure products 811.4 579.3 507.1 109.0 83.0 73.3 Office products 1,228.7 1,206.1 1,049.7 95.6 84.5 74.5 ------11,579.3 10,819.8 10,270.4 1,085.3 1,089.6 1,066.6 Domestic tobacco(2) -- -- 1,594.7 -- -- 247.6 Other businesses(2) -- 547.3 1,281.4 -- 3.4 (1.8) ------Continuing operations $11,579.3 $11,367.1 $13,146.5 $ 1,085.3 $ 1,093.0 $ 1,312.4 ======

(1) Operating income represents net sales less all costs and expenses excluding corporate administrative expenses, interest and related expenses and other (income) expenses, net. (2) See page 46 for Dispositions.

CONSOLIDATED

1996 Compared to 1995

Net sales and operating income from continuing operations increased 2% and decreased 1%, respectively.

Net sales and operating income from ongoing operations, which exclude other businesses sold in 1995 (see page 46 for Dispositions), increased 7% and decreased 0.4%, respectively. Net sales increased due to price increases (including international tobacco excise tax increases), new products and line extensions (principally in international tobacco), and the inclusion of Cobra Golf, acquired in January 1996, partly offset by volume declines, principally in international tobacco and distilled spirits. Excluding restructuring charges of $88.8 million in international tobacco in 1996 and $17.8 million in distilled spirits in 1995, operating income from ongoing operations was up 6% on the higher sales, partly offset by increased operating expenses. The effects of lower average exchange rates on sales and operating income were not significant.

Interest and related expenses increased $18.9 million (12%) due to higher average borrowings to fund the purchase of Cobra and Common share purchases.

The unfavorable change in other (income) expenses, net, reflected interest income in 1995 from the investment of proceeds from the disposition of The American Tobacco Company and of the Franklin life insurance business.

The 1996 restructuring charge in international tobacco amounted to $88.8 million ($59.5 million after taxes), or 34 cents and 33 cents on a primary and fully diluted per share basis. The 1995 restructuring charge in distilled spirits amounted to $17.8 million ($12.2 million after taxes), or six cents per share on both a primary and fully diluted per share basis.

The 1995 gain on disposal of businesses, net, reflected a $20 million reversal of the $245 million loss provision recorded in 1994 in connection with the disposal of nonstrategic businesses and increased 1995 primary and fully diluted E.P.S. by ten cents and nine cents, respectively.

Income from continuing operations was $496.8 million, or $2.86 per Common share, compared with $543.1 million, or $2.90 per share, last year. Excluding restructuring charges and amounts related to businesses disposed, income from continuing operations was $556.3 million, or $3.20 per Common share, compared with $539.6 million, or $2.88 per share, last year.

The extraordinary item charge in 1996 of $10.3 million ($15.8 million pre-tax), or six cents per share, and the 1995 charge of $2.7 million ($4.1 million pre-tax), or one cent per share, reflected the

extinguishment of debt. See page 55 for Extraordinary Items.

Net income of $486.5 million, or $2.80 per Common share, compared with $540.4 million, or $2.89 per share, last year. The Company, through Common share purchases and redemption of convertible debentures, reduced outstanding fully diluted shares by 12.8 million and 30 million in 1996 and 1995, respectively. During 1996, the Company purchased 10 million Common shares at an aggregate cost of $444.3 million, which, after consideration of the related impact on borrowing levels, interest expense and net income, benefited primary earnings per share by 16 cents and fully diluted earnings per share by 20 cents.

On October 8, 1996, the Company announced plans to spin off its U.K.-based Gallaher tobacco business. Completion of the transaction, which is expected around mid-1997, is pending receipt of favorable tax rulings and relevant stockholder approvals. When the spin-off is completed, the name of the Company will be changed to Fortune Brands and the financial statements will be restated to show tobacco operations (Gallaher and The American Tobacco Company) as discontinued operations. Following the transaction, the Company's stockholders will own shares in two publicly-traded companies--Fortune Brands and Gallaher.

Earnings per Common share in 1997 will continue to benefit from the Company's 1996 purchase of shares of Common stock. Following the proposed spin-off of Gallaher, the Company will consider purchasing up to 10 million additional Common shares depending on market conditions and investment needs and opportunities. The Company is also reviewing productivity-enhancing opportunities at the non-tobacco operations, and anticipates that this review may result in restructuring charges in 1997.

The Company derived 49% of its operating income in 1996 from Europe, primarily the United Kingdom. As a result, fluctuations in foreign currencies, principally sterling, can have a significant effect on dollar results in future periods. If the planned spin-off of Gallaher occurs, changes in the sterling exchange rate will have significantly less impact on the results of operations of Fortune Brands.

For a description of certain pending litigation, see page 56. As stated therein, it is not possible to predict the outcome of such litigation, but management believes that there are meritorious defenses to the pending actions and that the pending actions will not have a material adverse effect upon the results of operations, cash flow or financial condition of the Company.

Subsidiaries of the Company are involved in proceedings concerning the discharge of materials into the environment and the handling, disposal and clean-up of waste materials and otherwise relating to the protection of the environment. As of February 3, 1997, various subsidiaries of the Company had been designated as potentially responsible parties under "Superfund" or similar state laws with respect to 44 sites. While it is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company's subsidiaries may undertake in the future, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon the results of operations, cash flow or financial condition of the Company.

1995 Compared to 1994

Net sales and operating income from continuing operations decreased 14% and 17%, respectively.

Net sales and operating income from ongoing operations, which exclude domestic tobacco and other businesses sold in 1995 and 1994, increased 5% and 2%, respectively. Excluding the favorable effects of higher average foreign exchange rates of $197.2 million and $15.5 million, net sales and operating income from ongoing operations were up 3% and 1%, respectively. Net sales increased due to price increases (including international tobacco excise tax increases), new products and line extensions, partly offset by volume declines, principally in international tobacco. Operating income increased due to the higher sales, partly offset by increased operating expenses.

Interest and related expenses decreased $52.3 million (25%) due to lower average borrowings. Higher interest income caused the favorable change in other (income) expenses, net. Both changes reflected the use of proceeds from the disposition of The American Tobacco Company and of the Franklin life insurance business.

The net gain on disposal of businesses in 1995 reflected a $20 million reversal of the estimated loss recorded in 1994 in connection with the businesses disposed. 1994 reflected a $577.9 million pre-tax gain on the sale of domestic tobacco, partly offset by a $245 million pre-tax loss in connection with the businesses disposed.

The effective income tax rate of 39.2% in 1995 increased from 34.5% in 1994, principally as a result of the lower effective income tax rate on 1994's net gain on disposal of businesses and lower reversals of tax provisions no longer required in 1995. Income from continuing operations was $543.1 million, or $2.90 per Common share in 1995, compared with $885.1 million, or $4.38 per share in 1994. The decrease was largely due to 1994's $267 million, or $1.32 per share, net gain on disposal of businesses as well as the absence of The American Tobacco Company's results of operations, partly offset by 1995's $20 million provision reversal for disposal of businesses.

The extraordinary item resulted from a charge of $2.7 million ($4.1 million pre-tax), or one cent per share, for the extinguishment of debt. See page 55 for Extraordinary Items.

Net income of $540.4 million, or $2.89 per Common share, compared with $734.1 million, or $3.63 per share, in 1994, which included a loss of $151 million, or 75 cents per share, from the discontinued life insurance operations. The Company, through Common share purchases and the extinguishment of debt, reduced outstanding fully diluted shares by 30 million, or more than 14% in 1995. During 1995, the Company purchased 24.7 million Common shares at an aggregate cost of $981.1 million, which, after consideration of the related impact on borrowing levels, interest expense and net income, benefited primary earnings per share by 11 cents and fully diluted earnings per share by 14 cents.

International Tobacco

General

The tobacco market in developed economies has been subject to significant regulatory influence and/or voluntary agreements with governments in recent years, including the levying of substantial tax and duty charges, the imposition of restrictions on advertising and marketing, the introduction of health warnings on packaging, restrictions on the tar content of cigarettes and the prohibition of smoking in many public places. Partly as a result of certain of these measures, tobacco consumption in certain of Gallaher's principal markets has declined in recent years and Gallaher expects this trend to continue. Gallaher has taken steps to limit the impact of this decline on its operations. Gallaher has invested heavily in its brands to build brand recognition and thereby strengthen its position in the event that further restrictions are imposed on tobacco advertising. In the U.K., its

principal market, Gallaher has broadened its portfolio through product launches and brand extensions in order to benefit from growth in specific sectors of the market, such as those for lower tar and lower price cigarettes, and to increase its ability to compete for market share. Gallaher has also established market positions in the Republic of Ireland, key markets in continental western Europe and part of the former Soviet Union, further reducing its sensitivity to regulatory changes in any single country.

Advertising, promotion and brand building play a key role in Gallaher's business, with significant expenditures on programs in the U.K. and overseas to support its key brands and to develop the markets for new brands and brand extensions. It is possible, however, that any further regulation in respect of advertising and promotion in its key markets would have an adverse effect on Gallaher's sales and operating performance. A general election is to take place in the U.K. before the end of May 1997. The U.K. Labour Party has indicated that if it were to form the next government, it would legislate further advertising restrictions on tobacco products. It is unclear which forms of marketing and promotion would be affected and to what extent, if any, this would affect sales and profitability in the U.K. tobacco market.

A significant factor affecting Gallaher's operations is the government duty on tobacco products. Continuing the trend of tax increases in recent years, the U.K. budget announcements in November 1996 and 1995 each resulted in 15 pence increases and in November 1994 a 10 pence increase in the tax on a typical pack of cigarettes. A supplemental budget announcement in December 1994 resulted in a further increase of 6 pence in the tax on a typical pack of cigarettes effective January 1, 1995. The current U.K. government has expressed an intent to increase duty on tobacco products by an average of at least 3% per annum in excess of the rate of inflation. This represents an annual direct increase in cost of sales for Gallaher, which, if passed on to the retail trade, would be expected to affect the consumption of tobacco products. Gallaher has generally passed on the full duty increases to its customers in recent years with the result that these amounts are included in net sales and cost of sales. The continuing impact of price increases, principally due to substantial duty increases in recent years, has reduced annual industry volumes, led to greater price competition and accelerated trading down by consumers to lower price brands, resulting in pressure on margins. These changes are particularly affecting Gallaher, the majority of whose sales are in the premium sector.

In 1996, 86% of Gallaher's tobacco sales of (Pounds Sterling) 4.4 billion and 83% of operating income of (Pounds Sterling) 367.1 million, excluding the restructuring charge, were in the U.K. Over the period 1992 to 1996, total cigarette consumption in certain of Gallaher's principal markets declined, with total consumer sales in the U.K. falling by an average of 2.5% per annum. Within this overall downward trend, however, growth has been apparent in certain sectors of the U.K. market, particularly those for lower tar products, lower price brands and distributors' and retailers' own-label product lines.

Gallaher's share of U.K. unit sales to consumers increased significantly from a level of 32.3% in 1985 to a peak of 42.9% in 1990 and was 39.1% in 1996. In 1988, Gallaher became the cigarette market leader in the U.K. The growth in share was achieved through, among other measures, the introduction of a series of creative advertising campaigns to build consumer awareness of Gallaher's products and the launches of new brands and brand extensions. The reduction in share in recent years has been primarily a result of the trend away from premium price cigarettes to lower price products.

Historically, Gallaher's sales in the U.K. have peaked in the weeks preceding the budget announcement, as trade customers have sought to avoid the expected duty increases by acquiring inventories of tobacco products at pre-budget prices. Shipments were affected by such changes in trade buying patterns related to the U.K. budget announcements at the end of 1996, 1995 and 1994. In addition, as a result of paying duty at the pre-budget rate, Gallaher has held significantly higher inventory values in the months immediately following the U.K. government's budget announcement. Any unexpected change in the timing of the budget announcement or in the regulations relating

to the application of duty increases could have a material impact on Gallaher's operating performance, as could the outcome of pending litigation, not involving Gallaher, if it resulted in commercial organizations being entitled to act as agents for U.K. individuals to bring into the U.K. tobacco products on which duty had been paid in another European Union member state without the need to pay U.K. excise duty.

1996 Compared to 1995

Net sales in sterling were up 7% on price increases (principally resulting from higher U.K. tobacco taxes and the April 1996 and 1995 manufacturers' price increases), the inclusion of one additional month's results for Gallaher (Dublin) (change to a calendar year-end added (Pounds Sterling) 26 million sterling to net sales and an immaterial amount to operating income) and a slight increase in U.K. cigarette unit sales, reflecting benefits from the launch of Sovereign and growth in Mayfair. Gallaher's estimated share of U.K. consumer sales was 39.1% in 1996, as compared with 39.2% in 1995. Gallaher's share of U.K. cigarette market shipments was estimated to be 39.3% for the year, as compared with 40% in 1995. Gallaher (Dublin) also benefited from volume gains and favorable exchange rates. Gallaher's worldwide cigarette unit sales were up 3%. Operating income in sterling decreased 10%. Excluding a (Pounds Sterling) 53.3 million restructuring charge in 1996, operating income in sterling was up 5%, on higher sales, partly offset by increased advertising and promotional costs to support the launch of Sovereign in the U.K. In dollars, net sales and operating income, excluding the restructuring charge, increased 7% and 4%, respectively, reflecting translation at lower average foreign exchange rates.

The restructuring charge, primarily covering termination costs, reflects Gallaher's plan announced in December 1996 to consolidate cigarette production in the U.K. into one factory. The three- to four-year program will result in the expansion of Gallaher's factory and installation of new high-speed cigarette machinery at Lisnafillan, Northern Ireland, creating about 300 new positions, and the closing of the Hyde factory in Manchester, England with the elimination of all 950 positions. The timetable of the plan reflects the lead time needed for the manufacture and installation of the new cigarette machinery. 1995 Compared to 1994

Net sales in sterling were up 2%, principally on price increases resulting from higher U.K. tobacco taxes and manufacturers' price increases in April 1995 and 1994. The effect of these price increases was partly offset by a 5.8% U.K. cigarette unit sales decline, which was affected by changes in trade buying patterns related to the U.K. budget announcements at the end of 1995 and 1994. Gallaher's worldwide cigarette unit sales were down 5.3%. Operating income in sterling increased 4% on higher sales, partly offset by higher operating expenses, including increased advertising and promotional costs on U.K. support for Benson and Hedges Special Filter. In dollars, net sales and operating income increased 4% and 6%, respectively, reflecting translation at higher average foreign exchange rates.

Distilled Spirits

1996 Compared to 1995

Net sales and operating income increased 1% and 10%, respectively. Excluding the 1995 restructuring charge of $17.8 million, operating income increased slightly. The 1995 restructuring charge reflected a bottling plant closing, write-down of property, plant and equipment, and related employee termination costs on a 5% reduction in workforce.

The sales increase reflects one additional month (change to calendar year-end added $34.3 million) of Whyte & Mackay U.K. operations, higher volume applicable to international sales (primarily Jim Beam bourbon and premixed cocktails) and private label Scotch whisky sales, price increases on certain products (primarily Jim Beam bourbon and, in the U.S. market, DeKuyper cordials), and the benefit of new product introductions in the U.S. market, largely offset by volume declines (primarily in the U.S. market and on branded products from the U.K. operations) and the effect of the reduction in U.K. excise taxes.

The small increase in operating income, excluding the 1995 restructuring charge, reflects improved results from Jim Beam bourbon international sales, particularly in Australia, and the private label Scotch whisky business, partly offset by lower profits in the U.S. domestic market and from U.K.-based branded products. The inclusion of the additional month of the Whyte & Mackay business had an immaterial effect on operating income. U.S. domestic results were negatively impacted by volume declines, including the effects of lower distributor inventories, and higher brand support spending, offset in part by price increases on key brands such as Jim Beam bourbon and DeKuyper cordials and by higher earnings from new product introductions. U.K.-based branded products profitability was negatively impacted by lower volume and increased brand support spending. Total marketing expenses increased 17%, reflecting higher support of new products in the North American market and Whyte & Mackay branded products in the U.K.

The November 1996 U.K. budget resulted in a 26 pence tax reduction on a typical bottle following a similar reduction of 27 pence in November 1995. The supplemental 1994 U.K. budget resulted in a 26 pence tax increase on a typical bottle effective January 1, 1995, whereas the 1993 U.K. budget did not result in any tax change. While considered from time to time, the last excise tax increase on distilled spirits in the U.S. was an 8% increase effective January 1, 1991.

In recent years, distilled spirits consumption in many countries, including the U.S., continued its long-term decline. It is estimated that overall sales of distilled spirits in the U.S. declined by 2-3% in each year since 1993. Total unit depletions (sales into retail distribution) by JBB Worldwide in the U.S. decreased by 3.3%, 3.4% and 2.8% in 1996, 1995 and 1994, respectively. Whiskey consumption has declined faster than the overall rate of decline of distilled spirits consumption in the U.S. Whiskeys comprise over 50% of JBB Worldwide's U.S. unit sales, a larger percentage than the estimated 34% of unit sales for the overall U.S. market. In recent years, the market for beverage alcohol has demanded an increasingly broad variety of products, particularly in the U.S.

While it is impossible to predict any future U.K. and U.S. tax increases, as well as any restrictions on advertising, any such increases or restrictions may have an adverse effect on unit sales and add to continuing industry declines.

1995 Compared to 1994

Net sales increased 2% and operating income decreased 14%. Excluding the $17.8 million restructuring charge in 1995 and nonrecurring benefits (including one-time bulk sales) at Whyte & Mackay in 1994, operating income increased 3%.

Beam's sales increased 2% on the introduction of After Shock cordial, higher international shipments, and price increases, partly offset by lower domestic shipments. Operating income increased 2% on the higher sales, partly offset by higher marketing expenses and increased costs of materials. The increased marketing expenses included costs to promote Jim Beam bourbon's 200th anniversary and the introduction of After Shock as well as higher international expenditures. International sales and operating income increased on higher shipments, principally in Australia and Germany.

Whyte & Mackay's sales in sterling decreased 1% on unfavorable comparison to last year's benefit from one-time bulk sales, partly offset by the effects of the supplemental 1994 U.K. budget 26 pence tax increase on a typical bottle, effective January 1, 1995 and export volume increases in Scotch whisky. Operating income in sterling decreased 80%, principally due to the 1995 restructuring charge and an unfavorable comparison to 1994's benefits from one-time bulk sales and other nonrecurring benefits.

Hardware and Home Improvement Products

1996 Compared to 1995

Net sales increased 5% on price increases, line extensions, new products and higher overall volume. All four companies in the group reported increased sales except Master Lock, which was flat. The overall volume increase resulted from Moen, while the other companies reported lower volume. Price, line extension and new product increases were reported by all companies.

Operating income increased 3% on the sales increase, and a $2.2 million gain on the sale of Moen's joint venture in Taiwan, partly offset by increased manufacturing and operating expenses. The manufacturing expense increase reflects higher labor and overhead costs. The higher operating expenses reflect higher selling and distribution expenses (principally Moen and Master Lock to meet competitive activities), increased research and development expenses at Moen, and an unfavorable comparison to last year's reversal of reserves related to a joint venture. All companies but Master Lock reported increased operating income. Master Lock declined on lower volume and increased spending on selling and pricing programs as a result of a shift by mass merchants to competitors' value-priced products. In response to these competitive conditions, on January 1, 1997, Master Lock decreased prices on its core padlock products by an average of 15% and aggressive restructuring actions are being considered to reduce costs.

As the home building industry continues to consolidate, the growth of large mass merchants and home centers will continue to present pricing and service challenges to manufacturers.

1995 Compared to 1994

Net sales increased 3% on price increases, line extensions and new products, partly offset by volume declines. All four companies in the group achieved higher sales. Operating income increased 1% as the sales increase and lower operating expenses were largely offset by increased raw material costs and effects of lower volume. All companies reported improved operating income, except Moen. Moen's decline reflected a downturn in its U.S. market, principally in the second and third quarters, higher raw material and marketing costs and the effects of difficult economic conditions in Taiwan and Canada.

Golf and Leisure Products

1996 Compared to 1995

Net sales increased 40% on the inclusion of Cobra, acquired January 24, 1996, and volume gains in all product lines, reflecting benefits from line extensions and new products, partly offset by lower average foreign exchange rates. Operating income was up 31% on the inclusion of Cobra and an increase at Titleist and Foot-Joy Worldwide. Cobra's lower than expected results were due primarily to startup production problems and marketing costs associated with new products. Titleist's increased operating income reflected the higher sales, partly offset by higher operating expenses, principally associated with the support and development of new products to meet competitive activity.

1995 Compared to 1994

Net sales were up 14% on increased volume in all product lines, reflecting benefits from line extensions and new products. Operating income increased 13% on higher sales, partly offset by higher operating expenses, principally marketing and volume-related expenses including costs related to European expansion.

Office Products

1996 Compared to 1995

Net sales increased 2%. Excluding the office furniture operations sold in 1995 and the acquisition of Advanced Gravis in September 1996, sales increased 5% on new products and price increases, partly offset by volume declines in existing product lines and lower average foreign exchange rates. Operating income increased 13% reflecting the sales increase and improved gross margin (principally reflecting the price increases), partly offset by higher operating expenses, principally customer programs and new product and business development costs in North America and increased freight and distribution expenses in Europe. Comparisons for Day-Timers were adversely affected by the impact of strong initial sales into the retail channel in 1995.

As the office products industry continues to consolidate, the growth of large retailers will continue to present pricing and service challenges to manufacturers.

1995 Compared to 1994

Net sales increased 15% on new products and volume increases reflecting continued market share gains, higher average foreign exchange rates and limited price increases. Operating income was up 13%, principally in domestic businesses, reflecting the sales increase, partly offset by higher raw material costs, which were not fully recovered by the price increases, and higher marketing and volume-related expenses.

Quarterly Financial Data unaudited

(In millions, except per share amounts)

1996 1st 2nd 3rd 4th ------Net sales $2,737.9 $2,486.0 $2,920.1 $3,435.3 Gross profit 678.7 667.7 710.0 837.7 Operating income 274.3 254.6 293.1 263.3 Income from continuing operations $124.1 $122.0 $136.7 $114.0 Extraordinary items (10.3) ------Net income $113.8 $122.0 $136.7 $114.0 ------Earnings per Common share Primary Continuing operations $.70 $.69 $.80 $.67 Extraordinary items (.06) ------Net income $.64 $.69 $.80 $.67 ------

Fully diluted Continuing operations $.68 $.68 $.79 $.65 Extraordinary items (.06) ------Net income $.62 $.68 $.79 $.65 ======

1995 1st 2nd 3rd 4th ------Net sales $2,792.5 $2,594.7 $2,895.3 $3,084.6 Gross profit 688.3 676.9 690.1 739.7 Operating income 262.2 238.3 278.4 314.1 Income from continuing operations $116.6 $119.1 $153.3 $154.1 Extraordinary items -- (2.7) ------Net income $116.6 $116.4 $153.3 $154.1 ------Earnings per Common share Primary Continuing operations $.60 $.63 $.82 $.85 Extraordinary items -- (.01) ------Net income $.60 $.62 $.82 $.85 ------Fully diluted Continuing operations $.59 $.62 $.80 $.83 Extraordinary items -- (.01) ------Net income $.59 $.61 $.80 $.83 ======

The fourth quarter of 1996 includes a restructuring charge of $88.8 million ($59.5 million after taxes), or $.34 and $.33 per Common share primary and fully diluted, respectively, in international tobacco related to the closing of a U.K. cigarette factory.

Financial Condition

American Brands, Inc. and Subsidiaries

CASH FLOW

Net Cash Provided from Continuing Operating Activities

Net cash provided from continuing operating activities in 1996 was $474.4 million, as compared with $591.6 million in 1995. Fluctuations in inventories, accounts payable, accrued taxes and accounts receivable are principally attributable to the impact of U.K. budget announcements, including the U.K. supplemental budget announcement in 1994, and the absence of U.K. retail distribution operations sold in 1995. Net cash provided in 1996 was also impacted unfavorably by the inclusion of Cobra's working capital requirements and the change to a calendar year-end at Gallaher (Dublin). The 1995 net cash provided included the payment of $29.4 million related to the "put" exercise premium on the 5-3/4% Eurodollar Convertible Debentures.

Net Cash (Used) Provided by Investing Activities

Net cash used by investing activities in 1996 was $918 million, as compared with net cash provided in 1995 of $1.1 billion. The net cash used in 1996 was principally attributable to the acquisition of Cobra in 1996. Net cash provided in 1995 was principally attributable to proceeds received from the disposition of operations.

Capital expenditures. Capital spending is focused on the operating companies becoming the lowest cost producers of the highest quality products. Capital expenditures in 1996 were $239.6 million, as compared with $208 million in 1995. This increase is principally attributable to higher expenditures in golf and leisure due primarily to the expansion of a ball plant. See page 55 for capital expenditures. Funds for 1997 capital expenditures, estimated at $220 million, are expected to be generated internally.

Dispositions. Proceeds from the disposition of the Franklin life insurance business and of other nonstrategic businesses in 1995 were $1.3 billion. On December 22, 1994, the Company sold American Tobacco for $1 billion.

Acquisitions. In January 1996, Cobra was acquired for $712 million, including fees and expenses.

Net Cash Provided (Used) by Financing Activities

Net cash provided by financing activities in 1996 was $424.2 million, as compared with net cash used in 1995 of $1.7 billion. The change resulted principally from 1996 borrowings, primarily in the short-term capital markets, and lower purchases of Common stock for treasury. The Company's purchases of Common stock amounted to $444.3 million during 1996, as compared with $988.4 million in 1995.

PROPOSED SPIN-OFF OF GALLAHER TOBACCO

On October 8, 1996, the Company announced plans to spin off its U.K.-based Gallaher tobacco business. To allocate the overall debt burden of the Company at the time of the spin-off, Gallaher will borrow and pay to Fortune Brands approximately $1.4 billion. Fortune Brands will use the proceeds (approximately $1.25 billion after taxes) initially to pay down short-term debt. The Gallaher debt will be in addition to its seasonal working capital requirements.

DIVIDENDS

Dividends paid per Common share in 1996 were $2.00 per share. Dividends paid to Common stockholders in 1996 decreased to $347.2 million from $376.2 million, reflecting lower shares outstanding during 1996.

Although the dividend payout ratio continues to be higher than it has been in the past, the ratio may be brought down over time with future growth in earnings per share. The payout ratio for Fortune Brands is anticipated to be lower than that of American Brands.

Following the completion of the proposed spin-off of Gallaher, the combined initial annualized dividend per share currently contemplated by the management of both companies (Fortune Brands and Gallaher) will equal, based on a $1.56 sterling exchange rate on the date of the announcement, the existing $2.00 per share American Brands dividend. U.S. and eligible U.K. taxpayers will effectively receive about another 30 cents, or 15%, for a total of about $2.30 per share. This added benefit comes in the form of a refund or credit of the U.K. Advance Corporation Tax ("A.C.T.") that is paid by Gallaher on its dividends. U.S. taxpayers will be entitled to a cash refund of the A.C.T. paid by Gallaher less applicable U.K. withholding taxes which can be credited against their U.S. income tax liability. The U.S. foreign tax credit is subject to complicated limitations.

Future dividends for Fortune Brands and Gallaher will be determined by, and will be at the discretion of, the respective Board of each company following the spin-off, subject to available profits and other considerations.

It is currently contemplated that any post spin-off dividend payable by Gallaher in respect of 1997 will be paid as to 50% of such dividend in the form of an interim dividend in 1997 and as to the other 50% as a final 1997 dividend, subject to Gallaher shareholder approval, payable in 1998. Thereafter, Gallaher anticipates that any dividends will be paid in the form of a one-third interim dividend and a two-thirds final dividend, as is customary for many U.K. companies.

FINANCIAL POSITION

At December 31, 1996, total debt increased $1.2 billion to $3.1 billion. Short-term debt increased $748.9 million and long-term debt increased $443.7 million. The ratio of total debt to total capital increased to 45.4% at year-end 1996, from 32.5% at year-end 1995. The increase was principally due to increased commercial paper borrowings primarily for the Cobra acquisition and additional Common share purchases.

On March 5, 1996, the Company redeemed its $150 million 7-5/8% Eurodollar Convertible Debentures, Due 2001, at a redemption price of 103.8125% of the principal amount plus accrued interest. On March 1, 1996, the Company redeemed its $150 million 9-1/8% Debentures, Due 2016, at a redemption price of 104.4375% of the principal amount plus accrued interest. In connection with the redemptions, the Company reduced the number of fully diluted shares outstanding by 2.8 million. The Company redeemed these debentures from existing resources.

At December 31, 1996, the Company had $850 million of debt securities (including Medium Term Notes) available for sale under its shelf registration with the Securities and Exchange Commission.

At year-end 1996, the Company had $4 billion of long-term credit facilities, substantially all of which remained unused. These facilities are available for general corporate purposes, including acquisitions and support for the Company's short-term borrowings in the commercial paper market. In addition, Gallaher had (Pounds Sterling) 150 million ($257 million) in committed, short-term revolving credit agreements available for general corporate purposes, including acquisitions.

Management believes that the Company's internally generated funds, together with its access to global credit markets, are more than adequate to meet the Company's capital needs.

Working capital decreased to $178.1 million in 1996 from $752.7 million in 1995 principally due to higher levels of short-term debt, partly offset by other increases in working capital. Management believes that the 1996 level was adequate to support continued growth. Accounts receivable increased principally due to higher sales in the fourth quarter of 1996, the inclusion of Cobra and the higher sterling foreign exchange rate at December 31, 1996. The increase in inventories reflects higher levels of duty paid finished goods inventories in international tobacco, higher sterling foreign exchange rate and the inclusion of Cobra.

FOREIGN EXCHANGE

The Company has sizable investments in Europe, primarily in the U.K. Therefore, changes in the value of foreign currencies, principally sterling, affect the Company's balance sheet and cash flow statements when translated into U.S. dollars.

If the planned spin-off of Gallaher occurs, changes in the sterling exchange rate will have significantly less impact on the financial statements of Fortune Brands.

FINANCIAL INSTRUMENTS

The Company does not enter into financial instruments for trading or speculative purposes. Financial instruments, principally forward foreign exchange contracts, are used to reduce the impact of changes in foreign currency exchange rates with respect to short-term loans, dividends declared by foreign operating companies and a portion of the Company's investments in U.K. operating companies. Interest rate swaps are used to reduce the impact of changes in interest rates. The counterparties are major financial institutions. Although the Company's theoretical risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring credit losses is remote and that such losses, if any, would be immaterial.

The Company enters into forward foreign exchange contracts principally to hedge the currency fluctuations in transactions denominated in foreign currencies, principally short-term loans to Gallaher, thereby limiting the Company's risk that would otherwise result from changes in exchange rates. The periods of the forward foreign exchange contracts correspond to the periods of the hedged transactions. Gains and losses on forward foreign exchange contracts and the offsetting losses and gains on hedged transactions are reflected in the income statement. The Company also enters into forward foreign exchange contracts to hedge a portion of its investments in U.K. operating companies. The gains and losses on these contracts effectively offset losses and gains on the portion of the investment being hedged and are reflected in stockholders' equity.

At December 31, 1996, the Company had outstanding forward foreign exchange contracts to purchase $148 million and sell $2.1 billion of various foreign currencies (principally sterling), with a weighted average maturity of 142 days. At December 31, 1995, the Company had outstanding forward foreign exchange contracts to purchase $141 million and sell $346 million of various foreign currencies (principally sterling), with a weighted average maturity of 58 days. The increased activity in 1996 reflects the decision to hedge a greater portion of the investments in U.K. operating companies.

If the planned spin-off of Gallaher occurs, the Company's foreign exchange activity will be greatly reduced.

The Company enters into interest rate swap agreements to manage its exposure to interest rate changes. The swaps involve the exchange of fixed and variable interest rate payments without exchanging the notional principal amount. Payments or receipts on the agreements are recorded as adjustments to interest expense, and did not have a significant effect on interest expense for 1996, 1995 or 1994. At December 31, 1996 and 1995, the Company had outstanding interest rate swap agreements denominated in dollars, maturing at various dates through 1999, with aggregate notional principal amounts of $500 million and $200 million, respectively. See page 53 for additional information on Financial Instruments.

STOCKHOLDERS' EQUITY

Stockholders' equity at year-end 1996 decreased $193 million to $3.7 billion principally from the purchase of Common shares and dividends to stockholders, partly offset by net income. Return on average Common stockholders' equity was 13.1% during 1996 as compared with 13% last year.

During 1996, the Company purchased 10 million shares of Common stock. Following the proposed spin-off of Gallaher, Fortune Brands will consider purchasing up to 10 million additional Common shares, depending on market conditions and investment needs and opportunities.

During the year, the Common stock traded within a range of $39.875 to $50.125. The Common stock generated a total return of 266.4%, or 13.9% compounded annually, over the ten-year period ended December 31, 1996.

Book value per Common share was $21.52 at year end.

Cautionary Statement

This annual report contains statements relating to future results, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to changes in general economic conditions, foreign exchange rate fluctuations, competitive product and pricing pressures, the impact of excise tax increases with respect to international tobacco and distilled spirits, regulatory developments, the uncertainties of litigation, as well as other risks and uncertainties detailed from time to time in the Company's Securities and Exchange Commission filings.

Quarterly Common Stock Dividend Payments

1996 1995 ------Payment date Per share Per share ------March 1 $.50 $.50 June 1 .50 .50 September 1 .50 .50 December 1 .50 .50 ------$2.00 $2.00 ======

Quarterly Composite Common Stock Prices

1996 1995 ------High Low High Low ------First 47-7/8 42-3/8 39-7/8 36-5/8 Second 46-1/8 39-7/8 42-1/8 37-1/2 Third 46-7/8 40 43-1/2 38-5/8 Fourth 50-1/8 41-3/4 47-1/4 40-3/8 ======

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

Consolidated Statement of Income

American Brands, Inc. and Subsidiaries

For years ended December 31 (In millions, except per share amounts) 1996 1995 1994 ------

Net sales $11,579.3 $11,367.1 $13,146.5 Cost of products sold 2,882.2 3,109.9 3,765.1 Excise taxes on products sold 5,803.0 5,462.2 5,656.8 Advertising, selling, general and administrative expenses 1,698.5 1,665.3 2,385.8 Amortization of intangibles 107.4 95.1 96.3 Restructuring charges 88.8 17.8 -- Interest and related expenses 178.7 159.8 212.1 Other (income) expenses, net (3.6) (16.8) 12.1 Gain on disposal of businesses, net -- 20.0 332.9 ------Income from continuing operations before income taxes 824.3 893.8 1,351.2 Income taxes 327.5 350.7 466.1 ------Income from continuing operations 496.8 543.1 885.1 Loss from discontinued operations -- -- (151.0) Extraordinary items (10.3) (2.7) ------Net income $486.5 $540.4 $734.1 ======Earnings per Common share Primary Income from continuing operations $2.86 $2.90 $4.38 Loss from discontinued operations -- -- (.75) Extraordinary items (.06) (.01) ------Net income $2.80 $2.89 $3.63 ======Fully diluted Income from continuing operations $2.80 $2.84 $4.24 Loss from discontinued operations -- -- (.71) Extraordinary items (.06) (.01) ------Net income $2.74 $2.83 $3.53 ======Dividends paid per Common share $2.00 $2.00 $1.9925 ======Average number of Common shares outstanding Primary 173.3 186.9 201.6 ======Fully diluted 178.4 195.7 213.7 ======See Notes to Consolidated Financial Statements.

Consolidated Balance Sheet

American Brands, Inc. and Subsidiaries

December 31 (In millions, except per share amounts) 1996 1995 ------ASSETS Current assets Cash and cash equivalents $ 119.7 $ 139.9 Accounts receivable less allowances for discounts, doubtful accounts and returns, 1996 $53.5; 1995 $47.2 1,125.0 984.4 Inventories Leaf tobacco 196.3 148.1 Bulk whiskey 379.3 343.7 Other raw materials, supplies and work in process 313.1 271.6 Finished products 1,367.5 1,076.8 ------2,256.2 1,840.2 ------Other current assets 372.5 199.5 ------Total current assets 3,873.4 3,164.0 ------Property, plant and equipment Land and improvements 76.3 76.8 Buildings and improvements to leaseholds 552.3 524.0 Machinery and equipment 1,650.0 1,456.3 Construction in progress 96.8 76.2 ------2,375.4 2,133.3 Less accumulated depreciation 1,144.5 996.0 ------Property, plant and equipment, net 1,230.9 1,137.3 Intangibles resulting from business acquisitions, net of cumulative amortization, 1996 $665.4; 1995 $550.8 3,936.4 3,305.2 Other assets 463.5 414.7 ------Total assets $9,504.2 $8,021.2 ======

See Notes to Consolidated Financial Statements.

1996 1995 ------LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Notes payable to banks $ 482.9 $ 297.4 Commercial paper 922.9 -- Accounts payable 475.2 301.9 Accrued excise and other taxes 855.9 826.8 Accrued expenses and other liabilities 904.5 571.8 Current portion of long-term debt 53.9 413.4 ------Total current liabilities 3,695.3 2,411.3 ------Long-term debt 1,598.3 1,154.6 Deferred income taxes 119.5 127.6 Postretirement and other liabilities 406.9 450.5 ------Total liabilities 5,820.0 4,144.0 ------Stockholders' equity $2.67 Convertible Preferred stock 12.9 14.1 Common stock, par value $3.125 per share, 229.6 shares issued 717.4 717.4 Paid-in capital 166.5 171.6 Foreign currency adjustments (195.9) (234.6) Retained earnings 5,025.4 4,887.3 Treasury stock, at cost (2,042.1) (1,678.6) ------Total stockholders' equity 3,684.2 3,877.2 ------Total liabilities and stockholders' equity $9,504.2 $8,021.2 ======

Consolidated Statement of Cash Flows

American Brands, Inc. and Subsidiaries

For years ended December 31 (In millions) 1996 1995 1994 ------

Operating activities Net income $ 486.5 $ 540.4 $ 734.1 Loss from discontinued operations -- -- 151.0 Extraordinary items 10.3 2.7 -- Restructuring charges 88.8 17.8 -- Gain on disposals, net (1.3) (20.0) (331.5) Depreciation and amortization 274.8 257.5 314.4 (Increase) decrease in accounts receivable (55.9) 33.6 168.4 (Increase) decrease in inventories (299.7) 82.7 (425.5) Increase in other assets (30.0) (47.7) (19.1) (Decrease) increase in accrued excise and other taxes (107.0) (229.0) 362.8 Increase (decrease) in accounts payable, accrued expenses and other liabilities 169.9 (192.3) 10.4 (Decrease) increase in deferred income taxes (11.0) 4.2 38.0 Other operating activities, net (51.0) 141.7 (6.6) ------Net cash provided from continuing operating activities 474.4 591.6 996.4 ------Investing activities Additions to property, plant and equipment (239.6) (208.0) (201.4) Proceeds from the disposition of property, plant and equipment 20.1 17.7 21.1 Proceeds from the disposition of operations, net of cash 8.0 1,312.3 1,121.8 Acquisitions, net of cash acquired (700.3) (24.1) (19.9) Other investing activities, net (6.2) (2.3) (0.5) ------Net cash (used) provided by investing activities (918.0) 1,095.6 921.1 ------Financing activities Increase (decrease) in short-term debt, net 1,090.6 100.0 (1,147.3) Issuance of long-term debt 513.1 94.1 35.9 Repayment of long-term debt (421.0) (523.2) (376.6) Dividends to stockholders (348.4) (377.5) (403.1) Cash purchases of Common stock for treasury (444.3) (988.4) (20.1) Other financing activities, net 34.2 25.5 1.9 ------Net cash provided (used) by financing activities 424.2 (1,669.5) (1,909.3) ------Effect of foreign exchange rate changes on cash (0.8) 12.1 1.6 ------Cash provided by discontinued operations -- -- 37.8 ------Net (decrease) increase in cash and cash equivalents $(20.2) $29.8 $47.6 ======Cash and cash equivalents at beginning of year $139.9 $110.1 $62.5 Cash and cash equivalents at end of year $119.7 $139.9 $110.1 ======Cash paid during the year for Interest, net of capitalized amount $198.9 $206.6 $226.1 Income taxes $393.1 $295.5 $354.2 ======

See Notes to Consolidated Financial Statements. 42

Consolidated Statement of Stockholders' Equity

American Brands, Inc. and Subsidiaries

$2.67 Convertible Foreign Treasury Preferred Common Paid-in currency Retained stock, (In millions) stock stock capital adjustments earnings at cost ------

Balance at January 1, 1994 $17.1 $717.4 $173.3 $(317.4) $4,393.4 $(717.7) Net income ------734.1 -- Cash dividends ------(403.1) -- Translation adjustments ------68.4 -- -- Purchases ------(32.5) Conversion of securities and delivery of stock plan shares (1.4) -- 1.3 -- -- 4.6 ------Balance at December 31, 1994 15.7 717.4 174.6 (249.0) 4,724.4 (745.6) Net income ------540.4 -- Cash dividends ------(377.5) -- Translation adjustments ------14.4 -- -- Purchases ------(981.1) Conversion of securities and delivery of stock plan shares (1.6) -- (3.0) -- -- 48.1 ------Balance at December 31, 1995 14.1 717.4 171.6 (234.6) 4,887.3 (1,678.6) Net income ------486.5 -- Cash dividends ------(348.4) -- Translation adjustments ------38.7 -- -- Purchases ------(444.3) Conversion of securities and delivery of stock plan shares (1.2) -- (5.1) -- -- 80.8 ------Balance at December 31, 1996 $12.9 $717.4 $166.5 $(195.9) $5,025.4 $(2,042.1) ======

See Notes to Consolidated Financial Statements.

Notes to Consolidated Financial Statements

American Brands, Inc. and Subsidiaries

SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries.

The Company is presenting its consolidated statement of income in a "single-step" format and, accordingly, certain reclassifications of prior year amounts have been made to conform to this presentation.

The consolidated financial statements are prepared in conformity with generally accepted accounting principles, which require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales and expenses for the reporting periods. Actual results for future periods could differ from those estimates.

Cash and Cash Equivalents

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

Inventories Inventories are priced at the lower of cost (principally average and first-in, first-out and minor amounts at last-in, first-out) or market. In accordance with generally recognized trade practice, the leaf tobacco and bulk whiskey inventories are classified as current assets, although part of such inventories, due to the duration of aging processes, ordinarily will not be sold within one year.

Property, Plant and Equipment

Property, plant and equipment are carried at cost. Depreciation is provided, principally on a straight-line basis, over the estimated useful lives of the assets. Gains or losses resulting from dispositions are included in income. Betterments and renewals which improve and extend the life of an asset are capitalized; maintenance and repair costs are expensed.

Intangibles Resulting from Business Acquisitions

Intangibles resulting from business acquisitions, comprising cost in excess of net assets of businesses acquired, and brands and trademarks, are being amortized on a straight-line basis over 40 years, except for intangibles acquired prior to 1971, which are not being amortized because they are considered to have a continuing value over an indefinite period. The Company periodically evaluates the recoverability of intangibles resulting from business acquisitions and measures the amount of impairment, if any, by assessing current and future levels of income and cash flows as well as other factors, such as business trends, prospects and market and economic conditions.

Advertising Costs

Advertising costs, which amounted to $433 million and $390.3 million in 1996 and 1995, respectively, are principally charged to expense as incurred.

Income Taxes

Deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is established for any deferred tax asset for which realization is not likely.

Deferred income taxes are not provided on undistributed earnings of foreign subsidiaries, aggregating approximately $596.6 million at December 31, 1996, as such earnings are expected to be permanently reinvested in these companies.

Foreign Currency Translation

Foreign currency balance sheet accounts are translated into U.S. dollars at the rates of exchange at the balance sheet date. Income and expenses are translated at the average rates of exchange in effect during the year. The related translation adjustments are made directly to a separate component of stockholders' equity.

The Company has sizable investments in Europe, primarily in the U.K. Therefore, changes in the value of foreign currencies, principally sterling, affect the Company's consolidated financial statements when translated into U.S. dollars.

Derivative Financial Instruments

Derivative financial instruments are utilized by the Company to reduce foreign exchange and interest rate risks. The Company has established policies and procedures for risk assessment and the approval, reporting and monitoring of derivative financial instrument activities. The Company does not enter into financial instruments for trading or speculative purposes.

Gains and losses on forward foreign exchange contracts used to hedge the currency fluctuations on transactions denominated in foreign currencies and the offsetting losses and gains on hedged transactions are recorded in the "Other (income) expenses, net" caption in the income statement. Gains and losses on forward foreign exchange contracts used to hedge a portion of the Company's investment in foreign subsidiaries and the offsetting losses and gains on the portion of the investment being hedged are recorded in the "Foreign currency adjustments" caption in stockholders' equity.

Payments or receipts on interest rate swap agreements are recorded in the "Interest and related expenses" caption in the income statement.

Earnings Per Share

Earnings per Common share are based on the weighted average number of Common shares outstanding in each year and after preferred stock dividend requirements.

Fully diluted earnings per Common share assume that any convertible debentures and convertible preferred shares outstanding at the beginning of each year were converted at those dates, with related interest, preferred stock dividend requirements and outstanding Common shares adjusted accordingly. It also assumes that outstanding Common shares were increased by shares issuable upon exercise of those stock options for which market price exceeds exercise price, less shares which could have been purchased by the Company with related proceeds.

PROPOSED SPIN-OFF OF GALLAHER TOBACCO

To allocate the overall debt burden of the Company at the time of the spin-off, Gallaher will borrow and pay to Fortune Brands approximately $1.4 billion. Fortune Brands will use the proceeds (approximately $1.25 billion after taxes) initially to pay down short-term debt. The Gallaher debt will be in addition to its seasonal working capital requirements.

ACQUISITIONS

In January 1996, Cobra Golf Incorporated ("Cobra"), a leader in golf clubs, was acquired for an aggregate cost of $712 million in cash, including fees and expenses. In connection with this acquisition, liabilities amounting to $60 million were included at the date of acquisition. The cost exceeded the fair value of net assets acquired by $657 million. Cobra's operations have been included in consolidated results from date of acquisition. Had operations been consolidated from January 1, 1995, they would not have materially affected 1995 results.

DISPOSITIONS

In December 1994, the Company sold The American Tobacco Company, its domestic tobacco business, for $1 billion in cash, before related expenses.

In the fourth quarter of 1994, the Company recorded a $245 million charge to income in connection with plans to dispose of a number of nonstrategic businesses and product lines, including U.K.-based Forbuoys (retail distribution) and Prestige (housewares), both subsidiaries of Gallaher. The sale of Prestige was completed in May 1995. With the sale of the retail distribution operations in July 1995, the Company completed the disposition of nonstrategic businesses and product lines. As a result, $20 million of the $245 million provision that was recorded in 1994 in connection with the dispositions was reversed in the third quarter of 1995.

In July 1994, the Company sold Dollond & Aitchison (optical), a subsidiary of Gallaher, for total consideration of $146 million, which approximated the carrying value of the company.

The components of the gain on the disposal of businesses, net are as follows:

1995 1994 ------(In millions, Other Domestic Other except per share amounts) businesses tobacco businesses Total ------Pre-tax gain (loss) $20.0 $577.9 $(245.0) $332.9 Income taxes -- 69.6 (3.7) 65.9 ------Net income $20.0 $508.3 $(241.3) $267.0 ------Earnings per Common share $.10 $2.52 $(1.20) $1.32 ======

DISCONTINUED OPERATIONS

In the fourth quarter of 1994, the Company entered into an agreement to sell its Franklin life insurance business for $1.17 billion in cash, before related expenses. The sale was completed in January 1995.

The results of operations of Franklin were reclassified as discontinued operations. Summarized results of operations for Franklin, net of allocation of interest expense based on a normal debt to equity ratio for a life insurance company, were as follows:

(In millions) 1994 ------Revenues $ 951.8 ======Income from operations Income before taxes $91.3 Income taxes 35.5 ------Net income from operations 55.8 ------Loss on disposal of operations Income during the phase-out period, net of $4.2 million of income taxes 4.2 Loss on disposal(a) (211.0) ------Net loss on disposal (206.8) ------Loss from discontinued operations $(151.0) ======

(a) No income tax benefit was recorded since the loss was non-deductible.

SHORT-TERM BORROWINGS AND CREDIT FACILITIES

At December 31, 1996 and 1995, there were $1,405.8 million and $297.4 million of short-term borrowings outstanding, respectively, comprised of notes payable to banks and commercial paper. The weighted average interest rate on these borrowings was 5.8% and 6.5%, respectively.

At December 31, 1996 and 1995, there were $23.2 million and $17.8 million outstanding under committed bank credit agreements, which provide for unsecured borrowings of up to $313 million and $286 million, respectively, for general corporate purposes, including acquisitions. Fees of 0.10% per annum are paid on Gallaher's credit agreements totaling (Pounds Sterling) 150 million ($257 million).

In addition, the Company had uncommitted bank lines of credit, which provide for unsecured borrowings for working capital of up to $794 million of which $447 million was outstanding at year end.

See page 53 for a description of the Company's use of financial instruments.

LONG-TERM DEBT

The components of long-term debt are as follows: (In millions) 1996 1995 ------Notes payable(a) $ 400.0 $ -- Revolving credit notes(a) 204.9 97.0 Other notes(b) 150.3 251.3 8-1/2% Notes, Due 2003 200.0 200.0 8-5/8% Debentures, Due 2021 150.0 150.0 7-7/8% Debentures, Due 2023 150.0 150.0 7-1/2% Notes, Due 1999 150.0 150.0 9% Notes, Due 1999 100.0 100.0 9-1/4% Eurosterling Notes, Due 1998 85.6 77.7 12-1/2% Sterling Loan Stock, Due 2009 51.4 46.6 7-5/8% Eurodollar Convertible Debentures, Due 2001(c) -- 150.0 9-1/8% Debentures, Due 2016(c) -- 150.0 Miscellaneous 10.0 45.4 ------1,652.2 1,568.0 Less current portion 53.9 413.4 ------$1,598.3 $1,154.6 ======

(a) The Company maintains revolving credit agreements expiring in 2000 with various banks, which provide for unsecured borrowings of up to $4 billion including $1 billion in various Eurocurrencies. The interest rate is set at the time of each borrowing. A commitment fee of 0.15% per annum is paid on the unused portion. The fee is subject to increases up to a maximum of 0.25% per annum in the event the Company's long-term debt rating falls below specified levels. Borrowings under these agreements may be made for general corporate purposes, including acquisitions and support for the Company's short-term borrowings in the commercial paper market. The Company, in the event that it becomes advisable, intends to exercise its rights under these agreements to refinance $400 million of short-term notes payable; accordingly, short-term notes payable in this amount have been classified as long-term debt at December 31, 1996. (b) The Other notes have maturity dates ranging from one to five years, with a weighted average coupon of 8.6%. (c) In March 1996, the Company redeemed the 7-5/8% Eurodollar Convertible Debentures, Due 2001, and the 9-1/8% Debentures, Due 2016. An extraordinary charge of $10.3 million, or six cents per Common share, was recorded in the first quarter of 1996.

Estimated payments for maturing debt during the next five years are as follows: 1997, $53.9 million; 1998, $178.6 million; 1999, $252.7 million; 2000, $601.5 million; and 2001, $11.5 million.

$2.67 CONVERTIBLE PREFERRED STOCK-- REDEEMABLE AT COMPANY'S OPTION

Shares of the $2.67 Convertible Preferred stock issued and outstanding at December 31, 1996, 1995 and 1994 were 422,732 shares, 461,008 shares and 516,186 shares, respectively. Reacquired, redeemed or converted authorized shares that are not outstanding are required to be retired or restored to the status of authorized but unissued shares of preferred stock without series designation. The holders of $2.67 Convertible Preferred stock are entitled to cumulative dividends, three-tenths of a vote per share (in certain events, to the exclusion of the Common shares), preference in liquidation over holders of Common stock of $30.50 per share plus accrued dividends and convert each share of such stock into 4.08 shares of Common stock. Authorized but unissued Common shares are reserved for issuance upon such conversions, but treasury shares may be and are delivered. During 1996, 1995 and 1994, 38,276 shares, 55,178 shares and 45,100 shares, respectively, were converted. The Company may redeem such Preferred stock at a price of $30.50 per share, plus accrued dividends.

A cash dividend of $2.67 per share in the aggregate amounts of $1.2 million, $1.3 million and $1.4 million was paid in each of the years ended December 31, 1996, 1995 and 1994, respectively.

CAPITAL STOCK

The Company has 750 million authorized shares of Common stock and 60 million authorized shares of preferred stock. There were 170,565,785 and 178,130,371 Common shares outstanding at December 31, 1996 and 1995, respectively.

The cash dividends paid on the Common stock for the years ended December 31, 1996, 1995 and 1994 aggregated $347.2 million, $376.2 million and $401.7 million, respectively.

Treasury shares purchased and received as consideration for stock options exercised amounted to 10,108,848 shares in 1996, 24,790,403 shares in 1995 and 950,220 shares in 1994. Treasury shares delivered in connection with exercise of stock options and grants of other stock awards and conversion of preferred stock and debentures amounted to 2,544,262 shares in 1996, 1,710,151 shares in 1995 and 416,795 shares in 1994. At December 31, 1996 and 1995, there were 59,004,239 and 51,439,653 Common treasury shares, respectively.

PREFERRED SHARE PURCHASE RIGHTS

Each outstanding share of Common stock also evidences one Preferred Share Purchase Right ("Right"). The Rights will generally become exercisable only in the event of an acquisition of or a tender offer for 10% or more of the Common stock. If exercisable, each Right is exercisable for 1/200th of a share of Series A Junior Participating Preferred Stock at an exercise price of $52.50. Also, upon an acquisition of 10% or more of the Common stock, or upon an acquisition of the Company or the transfer of 50% or more of its assets or earning power, each Right (other than Rights held by the 10% acquiror, if applicable), if exercisable, will generally be exercisable for common shares of the Company or the acquiring company, as the case may be, having a market value of twice the exercise price. In certain events, however, Rights may be exchanged by the Company for Common stock at a rate of one share per Right. The Rights may be redeemed at any time prior to an acquisition of 10% or more of the Common stock at a redemption price of $.005 per Right. Until a Right is exercised, the holder, as such, will have no voting, dividend or other rights as a stockholder of the Company. Unless either redeemed or exchanged, the Rights will expire on December 24, 1997.

All 1.4 million of the authorized Series A Preferred shares are reserved for issuance upon exercise of Rights, and at December 31, 1996, outstanding Rights were exercisable as described above in the aggregate for 852,829 of such shares.

STOCK PLANS

The 1990 Long-Term Incentive Plan, as amended, authorizes the granting to key employees of the Company and its subsidiaries of incentive and nonqualified stock options, stock appreciation rights, restricted stock, performance awards and other stock-based awards, any of which may be granted alone or in combination with other types of awards or dividend equivalents. Such grants may be made on or before December 31, 1999 for up to 12 million shares of the Common stock. The Company's Long-Term Incentive Plan for Key Employees of Subsidiaries also authorizes the granting to key employees of the Company's subsidiaries of similar types of awards other than stock options and stock appreciation rights, and one million shares have been reserved for issuance upon payment of any awards granted thereunder after December 31, 1990. Stock options and stock appreciation rights may no longer be granted under the Company's 1986 Stock Option Plan, but outstanding awards may continue to be exercised until their expiration dates.

Stock options under the Plans have exercise prices equal to fair market values at dates of grant. Options generally may not be exercised prior to one year or more than ten years from the date of grant. Stock appreciation rights, which may be granted in conjunction with option grants, permit the optionees to receive shares of Common stock, cash or a combination of shares and cash measured by the difference between the option exercise price and the fair market value of the Common stock at the time of exercise of such right.

The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock plans as allowed under FAS Statement No. 123, "Accounting for Stock-Based Compensation." Accordingly, the adoption of this statement did not affect the Company's results of operations, financial position or liquidity. Had compensation cost for the fixed stock options granted in 1996 and 1995 been determined consistent with FAS No. 123, pro forma net income and earnings per share would have been as follows:

(In millions, except per share amounts) 1996 1995 ------Net income $477.5 $539.6 ======Earnings per Common share Primary $2.75 $2.88 ======Fully diluted $2.69 $2.82 ======

The effects of applying FAS No. 123 in this pro forma disclosure are not necessarily indicative of future amounts.

Changes during the three years ended December 31, 1996 in shares under option were as follows:

1996 1995 1994 ------Weighted- Weighted- Weighted- average average average exercise exercise exercise Options price Options price Options price ------

Outstanding at beginning of year 9,919,560 $38.34 9,674,840 $37.33 8,779,060 $37.85 Granted 1,772,550 48.65 1,760,400 42.20 2,562,200 35.12 Exercised (1,721,260) 35.17 (869,030) 33.15 (239,650) 30.60 Lapsed (189,700) 44.84 (646,650) 40.69 (953,880) 39.70 Canceled ------(472,890) 33.67 ------Outstanding at end of year 9,781,150 $40.64 9,919,560 $38.34 9,674,840 $37.33 ======Options exercisable at end of year 8,075,350 $38.93 8,159,160 $37.51 7,464,240 $37.98 ======Weighted-average fair value of options granted during year $7.11 $5.98 ======

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995:

1996 1995 ------Expected dividend yield 5.0% 5.0% Expected forfeiture rate 12.5% 2.2% Expected volatility 19.0% 19.0% Risk-free interest rate 5.9% 5.6% Expected term 5 Years 5 Years ======

Options outstanding and exercisable at December 31, 1996 were as follows:

Options outstanding Options exercisable ------Weighted- Weighted- Weighted- average average average Range of Number remaining exercise Number exercise exercise prices outstanding contractual life price exercisable price ------$21.25 to $29.84 348,290 1.6 $28.26 348,290 $28.26 31.44 to 37.44 3,802,170 6.1 34.42 3,802,170 34.42 40.19 to 48.75 5,630,690 7.7 45.60 3,924,890 44.25 ------$21.25 to $48.75 9,781,150 6.8 $40.64 8,075,350 $38.93 ======

At December 31, 1996, performance awards were outstanding pursuant to which up to 68,837 shares, 90,750 shares, 111,450 shares and 91,950 shares may be issued in 1997, 1998, 1999 and 2000, respectively, depending on the extent to which certain specified performance objectives are met. 45,890 shares, 112,994 shares and 14,135 shares were issued pursuant to performance awards during 1996, 1995 and 1994, respectively. The costs of restricted and deferred shares and performance awards are expensed over the restriction or performance period.

The compensation expense for stock based plans recorded for 1996 was $2.3 million.

Shares available in connection with future awards under the Company's stock plans at December 31, 1996, 1995 and 1994 were 7,193,139, 8,955,039 and 10,598,855, respectively. Authorized but unissued shares are reserved for issuance in connection with awards, but treasury shares may be and are delivered.

Pension and Other Retiree Benefits

The Company has a number of pension plans covering substantially all employees. The plans provide for payment of retirement benefits, mainly commencing between the ages of 60 and 65, and also for payment of certain disability and severance benefits. After meeting certain qualifications, an employee acquires a vested right to future benefits. The benefits payable under the plans are generally determined on the basis of an employee's length of service and earnings. Annual contributions to the plans are sufficient to satisfy legal funding requirements.

U.S. Pension Plans

The components of net pension cost are as follows:

(In millions) 1996 1995 1994 ------Service cost $18.1 $13.9 $24.3 Interest cost 31.1 28.9 67.6 Actual return on plan assets (60.3) (77.3) (48.8) Net amortization and deferral 26.1 46.0 (23.9) ------$15.0 $11.5 $19.2 ======

The funded status of the U.S. plans as of December 31 was as follows:

1996 1995 ------Assets Accumulated Assets Accumulated exceed benefits exceed benefits accumulated exceed accumulated exceed (In millions) benefits assets benefits assets ------

Accumulated benefit obligation Vested $243.6 $122.1 $253.2 $102.4 Nonvested 13.6 3.6 10.5 1.8 ------$257.2 $125.7 $263.7 $104.2 ======Projected benefit obligation $312.0 $137.6 $313.2 $113.6 Fair value of plan assets, principally equity securities and corporate bonds 366.0 103.1 333.3 72.3 ------Excess (deficiency) of assets over projected benefit obligation 54.0 (34.5) 20.1 (41.3) Unrecognized net transition (gain) loss (7.4) 0.8 (9.1) 1.2 Unrecognized net (gain) loss from experience differences (17.2) 17.5 14.5 21.3 Unrecognized prior service cost (0.9) 24.6 (0.2) 23.4 Adjustment needed to recognize minimum liability -- (30.0) -- (35.0) ------Prepaid pension cost (pension liability) $28.5 $(21.6) $25.3 $(30.4) ======Actuarial assumptions Discount rate 7.75% 7.75% 7.25% 7.25% Weighted average rate of compensation increase 4.7% 5.1% 4.2% 4.6% Expected long-term rate of return on plan assets 10.0% 10.0% 10.0% 10.0% ======

Non-U.S. Pension Plans

The components of net pension cost are as follows:

(In millions) 1996 1995 1994 ------Service cost $ 26.3 $ 25.3 $ 38.8 Interest cost 66.2 65.9 68.7 Actual return on plan assets (125.6) (124.4) (61.0) Net amortization and deferral 29.7 28.7 (32.7) ------$ (3.4) $ (4.5) $ 13.8 ======

The funded status (assets exceed accumulated benefits) of the non-U.S. plans as of December 31 was as follows:

(In millions) 1996 1995 ------Accumulated benefit obligation Vested $ 824.3 $ 686.5 Nonvested 4.2 3.2 ------$ 828.5 $ 689.7 ======Projected benefit obligation $ 929.7 $ 784.4 Fair value of plan assets, principally equity securities and corporate bonds 1,265.2 1,034.1 ------Excess of assets over projected benefit obligation(a) 335.5 249.7 Unrecognized net transition gain (16.0) (18.3) Unrecognized net gain from experience differences (74.2) (43.7) Unrecognized prior service cost 31.3 33.8 ------Prepaid pension cost $ 276.6 $ 221.5 ======Actuarial assumptions Weighted average discount rate 8.3% 8.5% Weighted average rate of compensation increase 6.9% 7.0% Expected long-term rate of return on plan assets 9.5% 9.5% ======

(a) The excess of assets over the projected benefit obligation, calculated under the valuation method mandated by FAS Statement No. 87, "Employers' Accounting for Pensions," arises principally in the U.K. Under current U.K. legislation, no part of this excess could be repaid to the Company from the U.K. plans.

Defined Contribution Plans

The Company sponsors a number of defined contribution plans. Contributions are determined under various formulas. Cost related to such plans amounted to $18.1 million, $16.9 million and $26.2 million in 1996, 1995 and 1994, respectively.

Other Retiree Benefits

The Company provides postretirement health care and life insurance benefits to certain employees and retirees in the United States and certain employee groups outside the United States. Most employees and retirees outside the United States are covered by government health care programs.

The components of the postretirement benefit cost are as follows: (In millions) 1996 1995 1994 ------Service cost $ 3.1 $ 3.7 $ 8.1 Interest cost 11.5 14.4 26.9 ------$ 14.6 $ 18.1 $ 35.0 ======

The status of the plans as of December 31 was as follows:

(In millions) 1996 1995 ------Accumulated postretirement benefit obligation Retirees $ 107.5 $ 130.0 Fully eligible active plan participants 13.3 16.5 Other active plan participants 40.5 52.9 ------161.3 199.4 Unrecognized prior service cost 3.9 3.1 Unrecognized net gain from experience differences 18.8 ------Accrued postretirement cost $ 184.0 $ 202.5 ======Assumed weighted average discount rate 7.9% 7.7% ======

The assumed health care cost trend rate used in measuring the health care portion of the postretirement benefit cost for 1997 is 10.25%, gradually declining to 6% by the year 2007 and remaining at that level thereafter. A 1% increase in the assumed health care cost trend rate for each year would increase the accumulated benefit obligation as of December 31, 1996 and postretirement benefit cost for 1996 by approximately 11% and 13%, respectively.

LEASE COMMITMENTS

Future minimum rental payments under noncancelable operating leases as of December 31, 1996 are as follows:

(In millions) ------1997 $45.3 1998 39.4 1999 33.7 2000 27.3 2001 24.4 Remainder 202.9 ------Total minimum rental payments 373.0 Less minimum rentals to be received under noncancelable subleases 45.8 ------$327.2 ======

Total rental expense for all operating leases (reduced by minor amounts from subleases) amounted to $45.7 million, $58.5 million and $81.3 million in 1996, 1995 and 1994, respectively.

INCOME TAXES

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

(In millions) 1996 1995 1994 ------Domestic operations $ 219.7 $ 236.7 $ 924.7 Foreign operations 604.6 657.1 426.5 ------$ 824.3 $ 893.8 $1,351.2 ======

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

(In millions) 1996 1995 1994 ------Income taxes computed at federal statutory income tax rate $ 288.5 $ 312.8 $ 472.9 Other income taxes, net of federal tax benefit 18.4 12.9 22.3 Lower effective rate on disposal of businesses -- (7.0) (50.6) Goodwill not deductible for income tax purposes 32.4 27.9 28.4 Miscellaneous, including reversals of tax provisions no longer required (11.8) 4.1 (6.9) ------Income taxes as reported $ 327.5 $ 350.7 $ 466.1 ======

Income taxes are as follows:

(In millions) 1996 1995 1994 ------Currently payable Federal $ 124.5 $ 129.0 $ 208.9 Foreign 185.7 201.8 186.0 Other 24.5 16.5 26.2 Deferred Federal and other 5.8 3.0 39.8 Foreign (13.0) 0.4 5.2 ------$ 327.5 $ 350.7 $ 466.1 ======

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

(In millions) 1996 1995 ------Current assets Compensation and benefits $ 23.0 $ 14.2 Other reserves 32.0 16.5 Product coupons 9.8 9.8 Capitalized interest-inventory 12.1 12.2 Restructuring 37.2 14.1 Interest 13.6 11.4 Accounts receivable 15.3 11.8 Miscellaneous 40.7 33.1 ------183.7 123.1 ------Current liabilities Inventories (22.9) (23.6) Miscellaneous (17.9) (14.6) ------(40.8) (38.2) ------Deferred income taxes included in Other current assets 142.9 84.9 ------Noncurrent assets Compensation and benefits 17.6 21.9 Other retiree benefits 61.2 70.1 Other reserves 23.4 24.1 Foreign exchange 52.0 9.8 Miscellaneous 23.4 13.8 ------177.6 139.7 ------Noncurrent liabilities Depreciation (112.1) (110.3) Pensions (92.2) (78.5) Trademark amortization (69.2) (55.2) Miscellaneous (23.6) (23.3) ------(297.1) (267.3) ------Deferred income taxes (119.5) (127.6) ------Net deferred tax asset (liability) $ 23.4 $ (42.7) ======

FINANCIAL INSTRUMENTS

The Company does not enter into financial instruments for trading or speculative purposes. Financial instruments are used to reduce the impact of changes in foreign currency exchange rates and interest rates. The principal financial instruments used are forward foreign exchange contracts and interest rate swaps. The counterparties are major financial institutions. Although the Company's theoretical risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring credit losses is remote and that such losses, if any, would be immaterial.

At December 31, 1996, the Company had outstanding forward foreign exchange contracts to purchase $148 million and sell $2.1 billion of various foreign currencies (principally sterling), with maturities ranging from January 2, 1997 to December 29, 1997, with a weighted average maturity of 142 days. At December 31, 1995, the Company had outstanding forward foreign exchange contracts to purchase $141 million and sell $346 million of various foreign currencies (principally sterling), with maturities ranging from January 2, 1996 to December 31, 1996, with a weighted average maturity of 58 days. The increased activity in 1996 reflects the decision to hedge a greater portion of the investments in U.K. operating companies.

The estimated fair value of foreign currency contracts represents the amount required to enter into offsetting contracts with similar remaining maturities based on quoted market prices. At December 31, 1996, the Company would have paid $140 million, the difference between the contract amounts and fair values, to offset the existing contracts. At December 31, 1995, the difference between the contract amounts and fair values was immaterial.

At December 31, 1996 and 1995, the Company had outstanding interest rate swap agreements denominated in dollars, maturing at various dates through 1999, with aggregate notional principal amounts of $500 million and $200 million, respectively. Under these agreements the Company receives a floating rate based on thirty day commercial paper rates, or a weighted average rate of 5.7% and 5.8% at December 31, 1996 and 1995, and pays a weighted average fixed interest rate of 6.6% and 7.8% for 1996 and 1995, respectively. The fair value of these interest rate swap agreements represents the estimated receipts or payments that would be made to terminate the agreements. At December 31, 1996, the Company would have paid $8.7 million and at December 31, 1995 would have paid $15.4 million to terminate the agreements. The fair value is based on dealer quotes, considering current interest rates.

The estimated fair value of the Company's cash and cash equivalents, notes payable to banks and commercial paper, approximates the carrying amounts due principally to their short maturities.

The estimated fair value of the Company's $1,652.2 million and $1,568 million total long-term debt (including current portion) at December 31, 1996 and 1995 was approximately $1,726.1 million and $1,687.8 million, respectively. The fair value is determined from quoted market prices, where available, and from investment bankers using current interest rates considering credit ratings and the remaining terms to maturity.

Concentration of credit risk with respect to accounts receivables is limited because a large number of geographically diverse customers make up the operating companies' domestic and international customer base, thus spreading the credit risk.

SUPPLEMENTARY PROFIT AND LOSS INFORMATION

Supplementary profit and loss information is as follows:

(In millions) 1996 1995 1994 ------Federal and foreign excise taxes included in net sales International tobacco $5,349.8 $4,976.5 $4,742.6 Distilled spirits 453.2 485.7 488.9 Domestic tobacco -- -- 425.3 ------$5,803.0 $5,462.2 $5,656.8 ======Research and development expenses $ 40.2 $ 31.8 $ 43.5 ======

RESTRUCTURING CHARGES

The 1996 restructuring charge in international tobacco of $88.8 million, primarily covering termination costs, reflected Gallaher's plan announced in December 1996 to consolidate cigarette production in the U.K. into one factory. The three- to four-year program will result in the expansion of Gallaher's factory and installation of new high-speed cigarette machinery at Lisnafillan, Northern Ireland, and the closure of the Hyde factory in Manchester, England with the elimination of all 950 positions. There were no payments or terminations during 1996.

The 1995 restructuring charge of $17.8 million reflected distilled spirits' bottling plant closing, write-down of property, plant and equipment, and related employee termination costs on a 5% reduction in workforce. This restructuring was substantially completed by December 31, 1996.

Information on Business Segments

The Company's subsidiaries operate principally in the following business segments: International tobacco includes cigarettes and other tobacco products manufactured by Gallaher.

Distilled spirits includes products produced or imported by Jim Beam and Whyte & Mackay.

Hardware and home improvement products includes kitchen and bathroom faucets, plumbing supply and repair products manufactured, packaged or distributed by Moen, locks manufactured by Master Lock, kitchen cabinets and bathroom vanities manufactured by Aristokraft, and tool storage products manufactured by Waterloo.

Golf and leisure products includes golf balls, shoes, gloves and clubs manufactured and marketed by Titleist and Foot-Joy Worldwide and golf clubs manufactured and marketed by Cobra acquired in January 1996.

Office products includes paper fastening, computer accessories, time management systems and other office products manufactured by ACCO World subsidiaries.

Domestic tobacco included cigarettes manufactured by American Tobacco, which was sold in December 1994.

Other businesses included optical (Dollond & Aitchison), sold in July 1994, rubber products, sold in December 1994, housewares (Prestige), sold in May 1995, and retail distribution (Forbuoys), sold in July 1995.

The Company's subsidiaries operate in the United States, Europe (principally in the U.K.) and other areas (principally in Canada and Australia).

Net sales and operating income for the years 1996, 1995 and 1994, and identifiable assets for the related year ends by business segments and by geographic areas, are shown on page 58.

Operating income represents net sales less all costs and expenses excluding corporate administrative expenses, interest and related expenses and other (income) expenses, net. A reconciliation of operating income to income from continuing operations before income taxes is as follows:

(In millions) 1996 1995 1994 ------Operating income $1,085.3 $1,093.0 $1,312.4 Interest and related expenses 178.7 159.8 212.1 Non-operating expenses 82.3 59.4 82.0 Gain on disposal of businesses, net -- (20.0) (332.9) ------Income from continuing operations before income taxes as reported $ 824.3 $ 893.8 $1,351.2 ======

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

(In millions) 1996 1995 1994 ------Identifiable assets $9,355.3 $7,845.9 $8,452.0 Corporate 148.9 175.3 172.4 Net assets of discontinued operations -- -- 1,170.0 ------$9,504.2 $8,021.2 $9,794.4 ======

Depreciation is as follows:

(In millions) 1996 1995 1994 ------International tobacco $ 31.8 $ 28.5 $ 41.1 Distilled spirits 39.4 35.9 36.2 Hardware and home improvement products 40.8 35.2 34.4 Golf and leisure products 13.4 10.0 8.9 Office products 39.2 35.8 36.7 Corporate 2.8 2.9 2.7 ------Ongoing operations 167.4 148.3 160.0 Domestic tobacco -- -- 23.9 Other businesses -- 14.1 34.2 ------$ 167.4 $ 162.4 $ 218.1 ======

Amortization of intangibles is as follows:

(In millions) 1996 1995 1994 ------International tobacco $ 4.7 $ 5.1 $ 5.1 Distilled spirits 35.7 34.4 33.9 Hardware and home improvement products 30.0 30.1 30.1 Golf and leisure products 16.3 1.2 1.1 Office products 20.7 21.0 20.5 ------Ongoing operations 107.4 91.8 90.7 Other businesses -- 3.3 5.6 ------$ 107.4 $ 95.1 $ 96.3 ======

Capital expenditures are as follows:

(In millions) 1996 1995 1994 ------International tobacco $ 39.9 $ 32.4 $ 33.0 Distilled spirits 46.5 39.5 34.3 Hardware and home improvement products 60.6 68.1 45.3 Golf and leisure products 50.4 20.6 15.5 Office products 40.9 36.1 33.5 Corporate 1.3 0.9 1.1 ------Ongoing operations 239.6 197.6 162.7 Domestic tobacco -- -- 10.8 Other businesses -- 10.4 27.9 ------$ 239.6 $ 208.0 $ 201.4 ======

EXTRAORDINARY ITEMS

In March 1996, the Company redeemed $149.6 million of the $150 million 7-5/8% Eurodollar Convertible Debentures, Due 2001, at a redemption price of 103.8125% of the principal amount plus accrued interest and redeemed its $150 million 91/8% Debentures, Due 2016, at a redemption price of 104.4375% of the principal amount plus accrued interest. In connection with the redemptions, the Company recorded a charge of $10.3 million ($15.8 million pre-tax), or six cents per Common share.

In April 1995, holders of $199.5 million of the $200 million 53/4% Eurodollar Convertible Debentures, Due 2005, exercised their right to "put" their debentures at a price of 114.74%, plus accrued interest. This resulted in a total payment by the Company of $240.4 million, including premium and accrued interest, and reduced the number of fully diluted shares outstanding by 5.1 million. The extinguishment of debt resulted in a charge of $2.7 million ($4.1 million pre-tax), or one cent per Common share.

PRO FORMA HISTORICAL FINANCIAL INFORMATION (Unaudited)

The pro forma information represents the historical amounts of the Company restated to show the tobacco operations of Gallaher and The American Tobacco Company as discontinued operations, including an allocation of interest expense.

The pro forma results are presented for informational purposes only and do not purport to be indicative of the results of operations which would actually have been obtained if the transactions had occurred in such periods, or which may exist or be obtained in the future. The pro forma information does not reflect the use of the $1.25 billion net cash proceeds to be received when the spin-off of Gallaher is completed. 55

The pro forma information is as follows:

(In millions, except per share amounts) 1996 1995 1994 ------Net sales Continuing operations Ongoing operations $ 4,717.7 $ 4,380.8 $ 4,095.6 Other businesses -- 547.3 1,281.4 ------$ 4,717.7 $ 4,928.1 $ 5,377.0 ======

Income (loss) from continuing operations Ongoing operations $ 181.7 $ 170.2 $ 167.0 Other businesses(1) -- 15.7 (245.8) ------181.7 185.9 (78.8)

Discontinued operations(2) 315.1 357.2 812.9 Extraordinary items (10.3) (2.7) ------Net income $ 486.5 $ 540.4 $ 734.1 ======Earnings per Common share Primary Continuing operations Ongoing operations(3) $ 1.04 $ .91 $ .82 Other businesses(1) -- .08 (1.22) ------1.04 .99 (.40)

Discontinued operations(2) 1.82 1.91 4.03 Extraordinary items (.06) (.01) ------Net income $ 2.80 $ 2.89 $ 3.63 ======Fully diluted Continuing operations Ongoing operations(3) $ 1.03 $ .93 $ .88 Other businesses(1) -- .08 (1.15) ------1.03 1.01 (.27)

Discontinued operations(2) 1.77 1.83 3.80 Extraordinary items (.06) (.01) ------Net income $ 2.74 $ 2.83 $ 3.53 ======

(1) 1995 includes a $20 million (no taxes required) reversal of a portion of the 1994 loss on disposal of businesses, or $.10 and $.09 primary and fully diluted E.P.S., respectively. 1994 includes a $245 million ($241.3 million after taxes) loss on disposal of businesses, or $1.20 and $1.13 primary and fully diluted E.P.S., respectively. (2) Discontinued operations for 1994 also includes the gain on the sale of American Tobacco of $508.3 million, or $2.52 and $2.38 per Common share on a primary and fully diluted basis, respectively, and $55.8 million of income from the results of operations of the Franklin life insurance business, (net of allocated interest) and a $206.8 million loss on its disposal, for a net loss of $151 million, or $.75 and $.71 primary and fully diluted E.P.S., respectively. (3) Pro forma as adjusted earnings per Common share for 1996 of $1.32 primary and $1.30 fully diluted gives effect to the benefit of $1.25 billion net proceeds resulting from the payment that Gallaher will make to Fortune Brands when the transaction is consummated, as if the proceeds were received and used for the possible purchase of 10 million shares of Fortune Brands Common stock and the repayment of debt at January 1, 1996.

PENDING LITIGATION The Company and its subsidiaries are defendants in various lawsuits associated with their business and operations, including actions based upon allegations that human ailments have resulted from tobacco use. It is not possible to predict the outcome of the pending litigation, but management believes that there are meritorious defenses to the pending actions and that the pending actions will not have a material adverse effect upon the results of operations, cash flow or financial condition of the Company. These actions are being vigorously contested.

On December 22, 1994, the Company sold The American Tobacco Company subsidiary to Brown & Williamson Tobacco Corporation, a wholly- owned subsidiary of B.A.T Industries p.l.c. In connection with the sale, Brown & Williamson Tobacco Corporation and The American Tobacco Company agreed to indemnify the Company against claims arising from smoking and health and fire safe cigarette matters relating to the tobacco business of The American Tobacco Company.

ENVIRONMENTAL

The Company is subject to laws and regulations relating to the protection of the environment. While it is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that the Company's subsidiaries may undertake in the future, in the opinion of management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon the results of operations, cash flow or financial condition of the Company.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of American Brands, Inc.

We have audited the accompanying consolidated balance sheet of American Brands, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and stockholders' equity for the years ended December 31, 1996, 1995 and 1994. These financial statements are the responsibility of the management of American Brands, Inc. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Brands, Inc. and Subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years ended December 31, 1996, 1995 and 1994, in conformity with generally accepted accounting principles.

/s/ Coopers & Lybrand L.L.P. 1301 Avenue of the Americas New York, New York February 3, 1997

REPORT OF MANAGEMENT

To the Stockholders of American Brands, Inc.

We have prepared the consolidated balance sheet of American Brands, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, cash flows and stockholders' equity for the years ended December 31, 1996, 1995 and 1994. The financial statements have been prepared in accordance with generally accepted accounting principles. Financial information elsewhere in this Annual Report is consistent with that in the financial statements. The system of internal controls of the Company and its subsidiaries is designed to provide reasonable assurances that the financial records are adequate and can be relied upon to provide information for the preparation of financial statements and that established policies and procedures are carefully followed.

Independent accountants are elected annually by the stockholders of the Company to audit the financial statements. Coopers & Lybrand L.L.P., independent accountants, are currently engaged to perform such audit. Their audit is in accordance with generally accepted auditing standards and includes tests of transactions and selective tests of internal accounting controls.

The Audit Committee of the Board of Directors, consisting solely of outside directors, meets periodically with the independent accountants, internal auditors and management to review accounting, auditing, and financial reporting matters. The auditors have direct access to the Audit Committee.

/s/ Thomas C. Hays

Thomas C. Hays Chairman of the Board and Chief Executive Officer

/s/ Craig P. Omtvedt

Craig P. Omtvedt Vice President and Chief Accounting Officer

Information on Business Segments American Brands, Inc. and Subsidiaries

(In millions) 1996 1995 1994 1993 1992 1991 ------

BUSINESS SEGMENTS(1) Net sales International tobacco $ 6,861.6 $ 6,439.0 $ 6,174.8 $ 5,946.8 $ 6,387.3 $ 6,384.3 Distilled spirits 1,303.5 1,288.6 1,268.2 1,194.6 1,268.3 1,061.2 Hardware and home improvement products 1,374.1 1,306.8 1,270.6 1,119.5 1,014.8 902.3 Golf and leisure products 811.4 579.3 507.1 452.7 416.2 391.0 Office products 1,228.7 1,206.1 1,049.7 977.2 1,003.5 982.3 ------Ongoing operations 11,579.3 10,819.8 10,270.4 9,690.8 10,090.1 9,721.1 Domestic tobacco -- -- 1,594.7 1,501.5 1,820.9 1,784.6 Other businesses -- 547.3 1,281.4 1,438.2 1,747.1 1,687.7 ------$11,579.3 $11,367.1 $13,146.5 $12,630.5 $13,658.1 $13,193.4 ======Operating income International tobacco $ 488.2 $ 554.1 $ 521.1 $ 487.2 $ 558.8 $ 532.0 Distilled spirits 208.4 189.7 221.2 214.7 195.8 151.6 Hardware and home improvement products 184.1 178.3 176.5 155.5 159.0 141.5 Golf and leisure products 109.0 83.0 73.3 63.6 53.3 45.9 Office products 95.6 84.5 74.5 63.2 58.1 37.7 ------Ongoing operations 1,085.3 1,089.6 1,066.6 984.2 1,025.0 908.7 Domestic tobacco -- -- 247.6 169.2 540.4 547.8 Other businesses -- 3.4 (1.8) 27.2 24.3 22.5 ------$ 1,085.3 $ 1,093.0 $ 1,312.4 $ 1,180.6 $ 1,589.7 $ 1,479.0 ======Identifiable assets International tobacco $ 2,448.3 $ 1,909.2 $ 1,893.2 $ 1,540.2 $ 1,251.0 $ 1,690.2 Distilled spirits 2,250.1 2,176.7 2,208.1 2,229.7 1,830.9 1,947.4 Hardware and home improvement products 1,809.3 1,824.7 1,806.6 1,809.0 1,786.4 1,734.6 Golf and leisure products 1,239.2 381.7 336.2 308.9 264.0 240.6 Office products 1,608.4 1,553.6 1,540.4 1,465.7 1,510.5 1,588.4 ------Ongoing operations 9,355.3 7,845.9 7,784.5 7,353.5 6,642.8 7,201.2 Domestic tobacco ------702.1 806.0 762.9 Other businesses -- -- 667.5 973.7 916.0 1,088.7 ------$ 9,355.3 $ 7,845.9 $ 8,452.0 $ 9,029.3 $ 8,364.8 $ 9,052.8 ======GEOGRAPHIC AREAS(1) Net sales United States $ 3,452.0 $ 3,232.6 $ 4,676.4 $ 4,415.2 $ 4,591.2 $ 4,206.8 Europe 7,662.2 7,724.0 8,073.9 7,881.8 8,740.9 8,736.3 Other countries 465.1 410.5 396.2 333.5 326.0 250.3 ------$11,579.3 $11,367.1 $13,146.5 $12,630.5 $13,658.1 $13,193.4 ======Operating income United States $ 475.2 $ 425.7 $ 671.4 $ 558.1 $ 914.5 $ 843.8 Europe 536.7 599.3 585.8 578.4 633.7 594.7 Other countries 73.4 68.0 55.2 44.1 41.5 40.5 ------$ 1,085.3 $ 1,093.0 $ 1,312.4 $ 1,180.6 $ 1,589.7 $ 1,479.0 ======Identifiable assets United States $ 5,103.8 $ 4,539.9 $ 4,494.1 $ 5,043.7 $ 5,150.4 $ 5,030.2 Europe 4,012.8 3,051.8 3,709.4 3,767.3 3,019.8 3,840.1 Other countries 238.7 254.2 248.5 218.3 194.6 182.5 ------$ 9,355.3 $ 7,845.9 $ 8,452.0 $ 9,029.3 $ 8,364.8 $ 9,052.8 ======

(1) See page 54 for further Information on Business Segments.

Six-Year Consolidated Selected Financial Data American Brands, Inc. and Subsidiaries

(In millions, except per share amounts and number of Common stockholders) 1996(2) 1995(2) 1994(2) 1993(2) 1992 1991(2) ------

OPERATING DATA(1) Net sales $11,579.3 $11,367.1 $13,146.5 $12,630.5 $13,658.1 $13,193.4 Gross profit 2,894.1 2,795.0 3,724.6 3,629.0 4,051.3 3,823.0 Depreciation and amortization 274.8 257.5 314.4 293.9 289.0 266.2 Operating income from continuing operations 1,085.3 1,093.0 1,312.4 1,180.6 1,589.7 1,479.0 Interest and related expenses 178.7 159.8 212.1 227.6 251.6 246.6 Income taxes 327.5 350.7 466.1 334.2 464.4 387.4 Income from continuing operations 496.8 543.1 885.1 541.2 786.9 716.2 Income (loss) from discontinued operations -- -- (151.0) 127.0 96.9 89.9 Extraordinary items (10.3) (2.7) ------Cumulative effect of accounting changes(3) ------(198.4) -- -- Net income(4) 486.5 540.4 734.1 469.8 883.8 806.1 Earnings per Common share Primary Continuing operations(4) $ 2.86 $ 2.90 $ 4.38 $ 2.67 $ 3.81 $ 3.47 Discontinued operations -- -- (.75) .63 .48 .44 Extraordinary items (.06) (.01) ------Accounting changes(3) ------(.98) ------Net income $ 2.80 $ 2.89 $ 3.63 $ 2.32 $ 4.29 $ 3.91 ------Fully diluted Continuing operations(4) $ 2.80 $ 2.84 $ 4.24 $ 2.63 $ 3.69 $ 3.33 Discontinued operations -- -- (.71) .60 .44 .41 Extraordinary items (.06) (.01) ------Accounting changes(3) ------(.94) ------Net income $ 2.74 $ 2.83 $ 3.53 $ 2.29 $ 4.13 $ 3.74 ======COMMON SHARE DATA(1) Dividends paid $ 347.2 $ 376.2 $ 401.7 $ 397.5 $ 368.0 $ 323.7 Dividends paid per share $ 2.00 $ 2.00 $ 1.9925 $ 1.97 $ 1.805 $ 1.5925 Average number of shares outstanding 173.3 186.9 201.6 201.8 204.0 202.6 Book value per share $ 21.52 $ 21.69 $ 22.97 $ 21.09 $ 21.14 $ 20.42 Number of stockholders, December 31(5) 52,832 56,769 60,611 63,537 63,929 66,950 ======BALANCE SHEET DATA(1) Inventories $2,256.2 $1,840.2 $2,015.7 $2,043.2 $1,810.2 $2,141.5 Current assets(6) 3,873.4 3,164.0 4,670.9 3,733.1 3,453.1 3,869.8 Working capital(6) 178.1 752.7 1,555.4 575.4 664.4 609.4 Property, plant and equipment, net 1,230.9 1,137.3 1,212.7 1,472.1 1,406.4 1,472.4 Intangibles, net 3,936.4 3,305.2 3,549.1 3,637.9 3,104.0 3,284.0 Net assets of discontinued operations ------1,344.0 1,274.2 1,239.0 Total assets 9,504.2 8,021.2 9,794.4 10,566.5 9,868.8 10,521.9 Short-term debt 1,459.7 710.8 705.8 1,182.9 824.7 730.6 Long-term debt 1,598.3 1,154.6 1,512.1 2,492.4 2,406.8 2,551.9 Stockholders' equity 3,684.2 3,877.2 4,637.5 4,271.4 4,301.6 4,316.0 Capital expenditures 239.6 208.0 201.4 243.4 285.7 232.0 ======

(1) See pages 26 through 38 of Financial Section. (2) See pages 45 and 46 for Acquisitions and Dispositions, respectively. 1991 includes the acquisition in December of certain distilled spirits trademarks and 1993 includes the acquisition in December of Invergordon and the acquisition in June of the Benson and Hedges cigarette trademark in Europe. (3) Principally represents a change in the method of accounting for postretirement benefits. (4) Net income and primary and fully diluted earnings per Common share in 1994 include $267 million and $1.32 and $1.25, respectively, on the net gain on disposal of businesses (see page 46 for Dispositions). (5) On January 31, 1997, there were 52,412 Common stockholders of record, not necessarily reflecting beneficial ownership. (6) Includes $1,170 million of net assets of discontinued life insurance operations in 1994.

EXHIBIT 21

SUBSIDIARIES OF REGISTRANT

The following is a list of subsidiaries of Registrant as of the date hereof and the state or other jurisdiction of incorporation of each. Except as indicated below, each subsidiary does business under its own name. Indentations indicate that the voting securities of a subsidiary are wholly owned by the subsidiary immediately preceding the indentation, unless otherwise indicated.

The names of certain subsidiaries are omitted. Such subsidiaries would not, if considered in the aggregate as a single subsidiary, constitute a significant subsidiary within the meaning of Item 601(b)(21)(ii) of Regulation S-K.

State or Other Jurisdiction Subsidiary of Incorporation ------

ACCO World Corporation Delaware ACCO Canada Inc. Ontario, Canada Plymouth Tool & Stamping Limited Ontario, Canada ACCO Europe PLC England ACCO France S.A. France ACCO-Rexel Group Services PLC England ACCO UK Limited England Hetzel GmbH & Co. KG Germany ACCO Eastlight Limited England Marbig Rexel Pty. Limited Australia ACCO Australia Limited Australia ACCO-Rexel Limited 1 Republic of Ireland Don Gresswell Limited England ACCO USA, Inc. Delaware Day-Timers, Inc. Delaware Day-Timers of Canada, Ltd. Canada Day-Timers Pty. Limited Australia Sax Arts and Crafts, Inc. Delaware International Business Controls, B.V. 2 Netherlands ACCO Italia S.p.A. Italy Kensington Microware Limited Delaware Advanced Gravis Computer Technology Ltd. British Columbia, Canada

------1 66.67% owned by ACCO-Rexel Group Services PLC and 33.33% owned by ACCO World Corporation. 2 Does business in the Republic of Ireland through a branch named "ACCO Ireland."

State or Other Jurisdiction Subsidiary of Incorporation ------

Acushnet Company Delaware Acushnet Cayman Limited British West Indies Acushnet Lionscore Limited 3 British West Indies Acushnet Foreign Sales Corporation Barbados Acushnet International Inc. Delaware Acushnet Canada Inc. Canada Acushnet Limited England Acushnet South Africa (Pty.) Ltd. South Africa Acushnet GmbH Germany Acushnet-Danmark ApS Denmark Acushnet France S.A. France Acushnet Nederland B.V. Netherlands Acushnet Osterreich GmbH Austria Acushnet Sverige A.B. Sweden Titleist Japan, Inc. 4 Japan Foot-Joy (Thailand) Limited 5 Thailand Titleist & Foot-Joy (Thailand) Limited 5 Thailand Cobra Golf Incorporated Delaware Cobra Golf Europe, S.A. France Cobra Golf Export, Inc. Barbados Cobra Golf-Japan Incorporated Delaware Cobra Golf U.K. England AmeriBrands Finance Canada Ltd. Ontario, Canada American Brands Finance Europe B.V. Netherlands American Brands International Corporation Delaware ATIC Group, Inc. Delaware Gallaher Limited England Benson & Hedges Limited England J. R. Freeman & Son Limited England Gallaher Canarias S.A. Spain Gallaher (Dublin) Limited Republic of Ireland Gallaher Hellas S.A. Greece Gallaher International Limited England Gallaher Kazakhstan Ltd. Kazakhstan The Galleon Insurance Company Limited Isle of Man The Schooner Insurance Company Limited Isle of Man

------3 40% owned by Acushnet Cayman Limited. 4 80% owned by Acushnet International Inc. 5 70% owned by Acushnet Company.

State or Other Jurisdiction Subsidiary of Incorporation ------

JBB Worldwide, Inc. Delaware Jim Beam Brands Co. Delaware James B. Beam Distilling International Co., Inc. Barbados JBB Spirits (New York) Inc. New York JBB (Asia-Pacific) Pty. Limited New South Wales, Australia JBB (Asia-Pacific) Superannuation Pty. Limited New South Wales, Australia JBB (Greater Europe) PLC 6 Scotland Whyte & Mackay (India) Limited 7 Delhi, India Alberta Distillers Limited Alberta, Canada Carrington Distillers Limited Ontario, Canada Featherstone & Co. Limited Ontario, Canada John de Kuyper & Son, Incorporated Delaware Wood Terminal Company Delaware MasterBrand Industries, Inc. Delaware Aristokraft, Inc. Delaware Master Lock Company Delaware Master Lock Europe, S.A. 8 France Master Lock Pacific Limited 9 Hong Kong Moen Incorporated Delaware Moen China, Limited Hong Kong Moen de Mexico, S.A. de C.V. Mexico Moen Guangzhou Faucet Co., Ltd. 10 China Moen, Inc. Ontario, Canada Moen of Pennsylvania, Inc. Delaware Moen Japan K.K. Japan 21st Century Companies, Inc. Delaware Waterloo Industries, Inc. Delaware 1700 Insurance Company Ltd. Bermuda

------6 428,055,999 shares owned by JBB Worldwide; 1 share owned by Jim Beam Brands Co. 7 Shares owned 51% by JBB (Greater Europe) PLC. 8 99.68% owned by Master Lock Company. 9 99.9% owned by Master Lock Company; 0.1% owned by American Brands International Corporation. 10 60% owned by Moen Incorporated.

EXHIBIT 23(i)a

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference into (a) the Registration Statement on Form S-8 (Registration No. 33-64071) relating to the Defined Contribution Plan of American Brands, Inc. and Participating Operating Companies, the Registration Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term Incentive Plan of American Brands, Inc., and the prospectuses related thereto, and (b) the prospectuses related to the Registration Statements on Form S-3 (Registration Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of American Brands, Inc. of:

(1) our report dated February 3, 1997, accompanying the consolidated financial statements of American Brands, Inc. and its subsidiaries as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995 and 1994, incorporated by reference into this Annual Report on Form 10-K of American Brands, Inc., and

(2) our report dated February 3, 1997, accompanying the consolidated financial statement schedule of American Brands, Inc. and its subsidiaries, included in this Annual Report on Form 10-K.

We also consent to the references to our firm as experts in the prospectuses related to the Registration Statements on Form S-3 referred to above.

COOPERS & LYBRAND L.L.P.

1301 Avenue of the Americas New York, New York 10019 March 13, 1997

EXHIBIT 23(i)b

CONSENT OF COUNSEL

We consent to the incorporation by reference of our opinions contained in Item 3, "Legal Proceedings", of this Annual Report on Form 10-K of American Brands, Inc. into (a) the Registration Statement on Form S-8 (Registration No. 33-64071) relating to the Defined Contribution Plan of American Brands, Inc. and Participating Operating Companies, the Registration Statement on Form S-8 (Registration No. 33-64075) relating to the MasterBrand Industries, Inc. Hourly Employee Savings Plan, the Registration Statement on Form S-8 (Registration No. 33-58865) relating to the 1990 Long-Term Incentive Plan of American Brands, Inc., and the prospectuses related thereto, and (b) the prospectuses related to the Registration Statements on Form S-3 (Registration Nos. 33-50832, 33-42397, 33-23039 and 33-3985) of American Brands, Inc.

CHADBOURNE & PARKE LLP

30 Rockefeller Plaza New York, New York 10112 March 13, 1997

EXHIBIT 24

POWER OF ATTORNEY

The undersigned, acting in the capacity or capacities stated with their respective names below, hereby constitute and appoint GILBERT L. KLEMANN, II, EDWARD P. SMITH and A. ROBERT COLBY, and each of them severally, the attorneys- in-fact of the undersigned with full power to them and each of them to sign for and in the name of the undersigned in the capacities indicated below the Annual Report on Form 10-K of American Brands, Inc. for the fiscal year ended December 31, 1996, and any and all amendments thereto:

Signature Title Date

Thomas C. Hays ------Chairman of the Board February 19, 1997 Thomas C. Hays and Chief Executive Officer (principal executive officer) and Director

John T. Ludes ------President and Chief February 24, 1997 John T. Ludes Operating Officer and Director

Dudley L. Bauerlein, Jr. ------Senior Vice President February 24, 1997 Dudley L. Bauerlein, Jr. and Chief Financial Officer (principal financial officer)

Craig P. Omtvedt ------Vice President February 24, 1997 Craig P. Omtvedt and Chief Accounting Officer (principal accounting officer)

Eugene R. Anderson ------Director February 24, 1997 Eugene R. Anderson

Patricia O. Ewers ------Director February 24, 1997 Patricia O. Ewers

John W. Johnstone, Jr. ------Director February 25, 1997 John W. Johnstone, Jr.

Wendell J. Kelley ------Director February 24, 1997 Wendell J. Kelley Sidney Kirschner ------Director February 24, 1997 Sidney Kirschner

Gordon R. Lohman ------Director February 24, 1997 Gordon R. Lohman

Charles H. Pistor, Jr. ------Director February 24, 1997 Charles H. Pistor, Jr.

Anne M. Tatlock ------Director February 24, 1997 Anne M. Tatlock

John W. Thompson ------Director February 24, 1997 John W. Thompson

Peter M. Wilson ------Director February 20, 1997 Peter M. Wilson

5 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND RELATED STATEMENT OF INCOME AS OF DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000

12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 $ 120 0 1,178 53 2,256 3,873 2,375 1,144 9,504 $ 3,695 1,598 717 0 13 2,954 9,504 $11,579 11,579 2,882 2,882 5,803 7 179 824 327 497 0 (10) 0 $ 487 $2.80 $2.74