-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BPIM7YBBcbdE7Miw5gEhnzwqMQDxWR/VJJTEmw3utYkt/02bkeAnyyLEpHP9+L9Q JFuRJzFzajjYqQflgtcl8A== 0000041499-04-000080.txt : 20040729 0000041499-04-000080.hdr.sgml : 20040729 20040729080928 ACCESSION NUMBER: 0000041499-04-000080 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040729 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GILLETTE CO CENTRAL INDEX KEY: 0000041499 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 041366970 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-00922 FILM NUMBER: 04937393 BUSINESS ADDRESS: STREET 1: PRUDENTIAL TOWER BLDG STREET 2: SUITE 4800 CITY: BOSTON STATE: MA ZIP: 02199 BUSINESS PHONE: 6174217000 MAIL ADDRESS: STREET 1: PRUDENTIAL TOWER BLDG STREET 2: SUITE 4800 CITY: BOSTON STATE: MA ZIP: 02199 FORMER COMPANY: FORMER CONFORMED NAME: GILLETTE SAFETY RAZOR CO DATE OF NAME CHANGE: 19660911 10-Q 1 f10q_063004-tgc.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 2004 Commission File Number 1-922 THE GILLETTE COMPANY (Exact name of registrant as specified in its charter) Incorporated in Delaware 04-1366970 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) Prudential Tower Building, Boston, Massachusetts 02199 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 421-7000 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Title of each class Common Stock, $1.00 par value Shares Outstanding July 26, 2004 . . . . . . . . . . . . . . . . . 1,001,845,362 PAGE 1 PART I. FINANCIAL INFORMATION THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF INCOME (Millions, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------------ ------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net Sales .......................................... $ 2,443 $ 2,254 $ 4,678 $ 4,225 Cost of Sales ...................................... 968 915 1,846 1,733 ------- ------- ------- ------- Gross Profit ..................................... 1,475 1,339 2,832 2,492 Selling, General and Administrative Expenses ....... 865 834 1,666 1,607 ------- ------- ------- ------- Profit from Operations ........................... 610 505 1,166 885 Nonoperating Charges (Income): Interest income .................................. (3) (3) (6) (6) Interest expense ................................. 11 16 23 30 Exchange ......................................... (2) 3 18 5 Other charges - net .............................. 3 6 - (3) ------- ------- ------- ------- 9 22 35 26 ------- ------- ------- ------- Income before Income Taxes ......................... 601 483 1,131 859 Income Taxes ....................................... 175 145 329 258 ------- ------- ------- ------- Net Income ....................................... $ 426 $ 338 $ 802 $ 601 ======= ======= ======= ======= Net Income per Common Share: Basic ............................................ $ .43 $ .33 $ .80 $ .58 ======= ======= ======= ======= Assuming full dilution ........................... $ .42 $ .33 $ .79 $ .58 ======= ======= ======= ======= Dividends per Common Share: Declared ......................................... $ .1625 $ .3250 $ .3250 $ .3250 Paid ............................................. $ .1625 $ .1625 $ .3250 $ .3250 Weighted average number of common shares outstanding Basic ............................................ 1,003 1,021 1,004 1,029 Assuming full dilution ........................... 1,012 1,023 1,012 1,031
See Accompanying Notes to Consolidated Financial Statements. PAGE 2 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET ASSETS (Millions)
June 30, December 31, June 30, 2004 2003 2003 ------------ ------------ ------------ (Unaudited) (Unaudited) Current Assets: Cash and cash equivalents .............................. $ 644 $ 681 $ 614 Trade receivables, less allowances, June 2004, $51; December 2003, $53; June 2003, $55 .................. 884 920 1,135 Other receivables ...................................... 332 351 395 Inventories Raw materials and supplies .......................... 122 114 116 Work in process ..................................... 250 196 221 Finished goods ...................................... 1,035 784 822 ------- ------- ------- Total Inventories ................................. 1,407 1,094 1,159 ------- ------- ------- Deferred income taxes .................................. 302 322 314 Other current assets ................................... 190 282 292 ------- ------- ------- Total Current Assets .............................. 3,759 3,650 3,909 ------- ------- ------- Property, Plant and Equipment, at cost ................... 7,162 7,099 6,696 Less accumulated depreciation ............................ (3,638) (3,455) (3,185) ------- ------- ------- Net Property, Plant and Equipment ................. 3,524 3,644 3,511 ------- ------- ------- Goodwill ................................................. 1,024 1,023 975 Intangible Assets, less accumulated amortization ......... 570 494 390 Other Assets ............................................. 1,082 1,144 1,096 ------- ------- ------- $ 9,959 $ 9,955 $ 9,881 ======= ======= =======
See Accompanying Notes to Consolidated Financial Statements. PAGE 3 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET LIABILITIES AND STOCKHOLDERS' EQUITY (Millions, except per share amount)
June 30, December 31, June 30, 2004 2003 2003 ------------ ------------ ------------ (Unaudited) (Unaudited) Current Liabilities: Loans payable .................................... $ 345 $ 117 $ 364 Current portion of long-term debt ................ 717 742 584 Accounts payable ................................. 598 574 549 Accrued liabilities .............................. 1,705 1,769 1,646 Dividends payable ................................ 163 163 166 Income taxes ..................................... 271 293 232 -------- -------- -------- Total Current Liabilities ..................... 3,799 3,658 3,541 -------- -------- -------- Long-Term Debt ..................................... 2,050 2,453 2,740 Deferred Income Taxes .............................. 652 626 625 Other Long-Term Liabilities ........................ 932 929 887 Minority Interest .................................. 69 65 42 Stockholders' Equity: Common stock, par value $1.00 per share: Authorized 2,320 shares Issued: June 2004, 1,378 shares; Dec. 2003, 1,374 shares; June 2003, 1,372 shares ................ 1,378 1,374 1,372 Additional paid-in capital ....................... 1,375 1,273 1,233 Earnings reinvested in the business .............. 7,809 7,333 6,877 Accumulated other comprehensive loss ............. (1,082) (1,088) (1,257) Treasury stock, at cost: June 2004, 376 shares; Dec. 2003, 367 shares; and June 2003, 352 shares (7,021) (6,665) (6,179) Deferred stock-based compensation ................ (2) (3) - -------- -------- -------- Total Stockholders' Equity ............... 2,457 2,224 2,046 -------- -------- -------- $ 9,959 $ 9,955 $ 9,881 ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements. PAGE 4 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (Millions) (Unaudited)
Six Months Ended June 30 ------------------ 2004 2003 ---- ---- Operating Activities Net income ....................................... $ 802 $ 601 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization .................. 299 278 Deferred income taxes .......................... 32 39 Other .......................................... 14 11 Changes in assets and liabilities, excluding effects of acquisitions and divestitures: Trade and other accounts receivable .......... 38 59 Inventories .................................. (330) (188) Accounts payable and accrued liabilities ..... (21) 227 Other working capital items .................. (3) (68) Other noncurrent assets and liabilities ...... 90 45 ----- ----- Net cash provided by operating activities 921 1,004 ----- ----- Investing Activities Additions to property, plant and equipment ....... (228) (132) Disposals of property, plant and equipment ....... 30 23 Acquisitions, net of cash acquired ............... (115) - Other ............................................ 1 - ----- ----- Net cash used in investing activities ...... (312) (109) ----- ----- Financing Activities Purchase of treasury stock ....................... (355) (786) Proceeds from exercise of stock option and purchase plans .............................. 100 37 Proceeds from long-term debt ..................... - 684 Repayment of long-term debt ...................... (389) (382) Increase (Decrease) in loans payable ............. 228 (311) Dividends paid ................................... (327) (335) Net settlements, debt-related derivative contracts 100 7 ----- ----- Net cash used in financing activities ...... (643) (1,086) ----- ----- Effect of Exchange Rate Changes on Cash .............. (3) 4 ----- ----- Decrease in Cash and Cash Equivalents ................ (37) (187) Cash and Cash Equivalents at Beginning of Period ..... 681 801 ----- ----- Cash and Cash Equivalents at End of Period ........... $ 644 $ 614 ===== ===== Supplemental disclosure of cash paid for: Interest ......................................... $ 21 $ 29 Income taxes ..................................... $ 237 $ 212
See Accompanying Notes to Consolidated Financial Statements. PAGE 5 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Millions) (Unaudited)
Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net Income, as reported $ 426 $ 338 $ 802 $ 601 Other Comprehensive Income, net of tax: Foreign Currency Translation (4) 171 7 262 Cash Flow Hedges (1) 2 (1) 4 ----- ----- ----- ----- Comprehensive Income $ 421 $ 511 $ 808 $ 867 ===== ===== ===== =====
Accumulated Other Comprehensive Loss - ------------------------------------ The balances for the components of Accumulated Other Comprehensive Loss are: Accumulated Foreign Other Currency Pension Cash Flow Comprehensive Translation Adjustment Hedges Loss ----------- ---------- ----------- ------------- Balance December 31, 2002 $(1,332) $ (186) $ (5) $(1,523) Change in period 2 - 3 5 Income tax benefit (expense) 89 - (1) 88 ------ ------ ------ ------ Balance March 31, 2003 $(1,241) $ (186) $ (3) $(1,430) Change in period 185 - 3 188 Income tax benefit (expense) (14) - (1) (15) ------ ------ ------ ------ Balance June 30, 2003 $(1,070) $ (186) $ (1) $(1,257) ====== ====== ====== ====== Balance December 31, 2003 $ (898) $ (193) $ 3 $(1,088) Change in period 2 - - 2 Income tax benefit (expense) 9 - - 9 ------ ------ ------ ------ Balance March 31, 2004 $ (887) (193) 3 (1,077) Change in period (7) - (2) (9) Income tax benefit (expense) 3 - 1 4 ------ ------ ------ ------ Balance June 30, 2004 $ (891) $ (193) $ 2 $(1,082) ====== ====== ====== ====== See Accompanying Notes to Consolidated Financial Statements.
PAGE 6 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Accounting Comments - ------------------- Reference is made to the registrant's 2003 Annual Report to Shareholders, which contains, at pages 37 through 66, the audited consolidated financial statements and the notes thereto, which are incorporated by reference into the registrant's Annual Report on Form 10-K for the year ended December 31, 2003. With respect to the financial information for the interim periods included in this report, which is unaudited, the management of the Company believes that all adjustments necessary for a fair presentation of the results for such interim periods have been included. The Company's annual financial statements are prepared on a calendar year basis. For interim reporting, the Company divides the calendar year into thirteen-week quarterly reporting periods. The first and fourth quarter may be more or less than 13 weeks, by zero to six days, which can affect comparability between periods. The first quarter of 2003 consisted of 12 weeks and 4 days, while the first quarter of 2004 consisted of 12 weeks and 3 days. The fourth quarter of 2003 consisted of 13 weeks and 4 days, while the fourth quarter of 2004 will consist of 13 weeks and 6 days. Under generally accepted accounting principles, shipping and handling costs may be reported as a component of either cost of sales or selling, general and administrative expenses. The Company formerly reported all such costs related to outbound freight in the Consolidated Statement of Income as a component of selling, general and administrative expenses. Beginning in 2004, the Company has elected to report the costs related to outbound freight in cost of sales. This change resulted in the following reclassifications to the second quarter, 2003 and six months ended June 30, 2003, Consolidated Statement of Income: increased cost of sales and reduced gross profit and selling, general and administrative expenses by $45 million and $85 million, respectively; and reduced gross profit as a percentage of net sales from 61.4% to 59.4% and from 61.0% to 59.0%, respectively. There was no impact on profit from operations, net income or earnings per share as a result of this reclassification. The Company accounts for its stock option plans under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No compensation cost is recorded on the date of grant, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock. The Company recognizes stock-based compensation expense related to stock appreciation rights. The following table illustrates the effect on net income and net income per common share if the Company had applied the fair-value-based method under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," to record expense for stock options.
Three Months Six Months Ended June 30, Ended June 30, (Millions, except per share amounts) 2004 2003 2004 2003 ---- ---- ---- ---- Net income, as reported $ 426 $ 338 $ 802 $ 601 Add: Compensation expense included in reported net income, net of related tax effects 1 - 1 - Less: Compensation expense for option awards determined by the fair- value-based method, net of related tax effects (24) (25) (48) (50) ------ ------ ------ ------ Pro forma net income $ 403 $ 313 $ 755 $ 551 ====== ====== ====== ====== Net income per common share Basic As reported $ .43 $ .33 $ .80 $ .58 Pro forma .40 .31 .75 .54 Assuming full dilution As reported $ .42 $ .33 $ .79 $ .58 Pro forma .40 .31 .75 .54
PAGE 7 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Accounting Comments (Continued) - ------------------- In May 2004, the Company's shareholders approved the 2004 Long-Term Incentive Plan (the "Plan"), which authorizes the Board of Directors, or a delegate thereof, to grant stock options, stock appreciation rights, restricted stock units, cash awards and other stock-based awards. Key employees and non-employee directors of the Company and its subsidiaries are eligible to participate in the Plan. The Plan became effective on May 20, 2004 and expires on May 19, 2014. The number of shares authorized for grant under the Plan is 37,380,295. At June 30, 2004, 25,949,635 shares were available for future grants. The fair value of each option grant for the Company's plans is estimated on the date of the grant using the Black-Scholes option pricing model. Certain amounts in the prior year financial statements have been reclassified to conform to the 2004 presentation. Accounting Pronouncements - ------------------------- In May 2004, the FASB issued FASB Staff Position (FSP) No. FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act ("the Act") of 2003" which supersedes FSP FAS 106-1 of the same title. The Staff Position clarifies the accounting for the benefits attributable to new government subsidies for companies that provide prescription drug benefits to retirees. The new accounting requirements are not effective until the third quarter 2004. In accordance with FSP FAS 106-1, the Company elected to defer accounting for the economic effects of the new Medicare Act. Accordingly, any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the financial statements or accompanying notes do not reflect the effect of the subsidy because the Company is unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act. PAGE 8 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Goodwill and Intangible Assets - ------------------------------ Total goodwill by segment follows.
Net Carrying Amount June 30, December 31, June 30, (Millions) 2004 2003 2003 ------------ ------------ ------------ Blades & Razors $ 140 $ 140 $ 140 Duracell 633 632 584 Oral Care 191 191 172 Braun 60 60 79 Personal Care - - - ----- ----- ----- Total $1,024 $1,023 $ 975 ===== ===== =====
The difference between the December 31, 2003 balance versus the June 30, 2003 balance is due to the acquisition of a majority interest in the Fujian Nanping Nanfu Battery Co., Ltd. in China in August 2003 and the impact of foreign currency translation. The values for the Nanfu intangibles, as well as the related goodwill, may be adjusted in future periods as the purchase price accounting for the acquisition is not yet final. PAGE 9 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The detail of intangible assets follows.
Weighted Average June 30, 2004 December 31,2003 June 30, 2003 Amortization ---------------------- ---------------------- ---------------------- Period Carrying Accumulated Carrying Accumulated Carrying Accumulated (Millions) (Years) Amount Amortization Amount Amortization Amount Amortization ------------ -------- ------------ -------- ------------ -------- ------------ Amortized Intangible Assets Patents 7 $ 83 $ 58 $ 101 $ 69 $ 101 $ 61 Trademarks 9 16 10 16 9 14 6 Endorsements - 61 61 61 61 61 61 Other 19 23 5 23 3 11 3 ---- ---- ----- ----- ----- ----- Total $ 183 $ 134 $ 201 $ 142 $ 187 $ 131 ---- ---- ----- ----- ----- ----- Unamortized Intangible Assets Trademarks $ 509 $ 423 $ 319 Pension 12 12 15 ---- ----- ----- Total $ 521 $ 435 $ 334 ---- ----- ----- Intangible Assets, net $ 570 $ 494 $ 390 ==== ===== ===== Aggregate Amortization Expense: For the three months ended June 30, 2004 $ 5 June 30, 2003 $ 5 For the six months ended: June 30, 2004 $ 11 June 30, 2003 $ 11 Estimated Amortization Expense: For the Years ending December 31, 2004 $ 21 2005 $ 8 2006 $ 5 2007 $ 4 2008 $ 4 2009 $ 3
In the second quarter of 2004, the Company made two acquisitions within the Oral Care business segment. In April 2004, the Company completed the acquisition of assets associated with the Rembrandt brand of at-home and professional teeth-whitening products from the Den-Mat Corporation. The values of both indefinite-lived and definite-lived intangible assets may be adjusted in future periods as the purchase price allocation for the acquisition is not final. The preliminary purchase price allocation resulted in the capitalization of $87 million related to the Rembrandt trademark as an indefinite-lived intangible asset. In June 2004, the Company acquired shares representing all equity interests in Zooth, Inc., a leader in licensed manual and power childrens' toothbrushes. The purchase price accounting for this transaction is not yet final. Both acquisitions had, in addition to the base purchase price, a contingent cash consideration component based on certain revenue-based financial metrics. In total, contingent cash consideration payments are capped at a maximum of $72 million and are expected to be substantially paid over a period of four years. PAGE 10 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Share Repurchase Program - ------------------------ In the three and six months ended June 30, 2004, the Company repurchased four million and nine million shares for $167 million and $355 million, respectively. As of June 30, 2004, there are 42 million shares remaining on the share repurchase program which was authorized on September 16, 2003. These shares may be purchased in the open market or in privately-negotiated transactions, depending on market conditions and other factors. Financial Information by Business Segment - ----------------------------------------- Net sales, profit (loss) from operations and identifiable assets for each of the Company's business segments are set forth below. There are no material intersegment revenues.
Net Sales -------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 --------------------- --------------------- (Millions) 2004 2003 2004 2003 ------ ------ ------ ------ Blades & Razors $1,099 $1,003 $2,136 $1,896 Duracell 456 432 870 816 Oral Care 358 316 673 611 Braun 294 284 553 499 Personal Care 236 219 446 403 ------ ------ ------ ------ Total $2,443 $2,254 $4,678 $4,225 ====== ====== ====== ====== Profit/(Loss) from Operations ---------------------------------------------------- Three Months Ended Six Months Ended June 30 June 30 --------------------------- ----------------------- (Millions) 2004 2003 2004 2003 ------ ------ ------ ------ Blades & Razors $ 420 $ 377 $ 837 $ 708 Duracell 89 54 163 93 Oral Care 68 53 123 102 Braun 24 28 45 21 Personal Care 24 24 37 24 ------ ------ ------ ------ Subtotal Reportable Segments 625 536 1,205 948 All Other (15) (31) (39) (63) ------ ------ ------ ------ Total $ 610 $ 505 $1,166 $ 885 ====== ====== ====== ======
PAGE 11 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Identifiable Assets ------------------------------- June 30, Dec. 31, June 30, (Millions) 2004 2003 2003 --------- ------- --------- Blades & Razors $ 3,175 $ 3,099 $ 3,343 Duracell 2,656 2,754 2,559 Oral Care 1,437 1,269 1,230 Braun 1,299 1,224 1,130 Personal Care 480 470 539 ------- ------- ------- Subtotal Reportable Segments 9,047 8,816 8,801 All Other 912 1,139 1,080 ------- ------- ------- Total $ 9,959 $ 9,955 $ 9,881 ======= ======= =======
PAGE 12 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Computation of net income per common share (Millions, except per share amounts) - ------------------------------------------
Three Months Ended Six Months Ended June 30 June 30 ------------------ ------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net Income ............................. $ 426 $ 338 $ 802 $ 601 ====== ====== ====== ====== Common shares, basic .................. 1,003 1,021 1,004 1,029 Effect of dilutive securities: Stock options ...................... 9 2 8 2 ------ ------ ------ ------ Common shares, assuming full dilution 1,012 1,023 1,012 1,031 ====== ====== ====== ====== Net Income per Common Share: Basic ................................ $ 0.43 $ 0.33 $ 0.80 $ 0.58 ====== ====== ====== ====== Assuming full dilution ............... $ 0.42 $ 0.33 $ 0.79 $ 0.58 ====== ====== ====== ======
For the three-month periods ended June 30, 2004 and 2003, respectively, 29.9 million and 66.0 million shares of common stock issuable under stock options, respectively, were not included in the calculation of diluted earnings per share because the option exercise price was above the average market price for the quarter. For the six-month periods ended June 30, 2004 and 2003, 28.5 million and 60.8 million shares of common stock issuable under stock options, respectively, were not included in the calculation of diluted earnings per share because the option exercise price was above the average market price for the period.
Pensions and Other Retiree Benefits - ----------------------------------- (Millions) Other Other Pension Benefits Retiree Benefits Pension Benefits Retiree Benefits ------------------ ------------------ ------------------ ------------------ Three Months Ended Three Months Ended Six Months Ended Six Months Ended June 30, June 30, June 30, June 30, ------------------ ------------------ ------------------ ------------------ 2004 2003 2004 2003 2004 2003 2004 2003 ---- ---- ---- ---- ---- ---- ---- ---- Components of Net Defined Benefit Expense Service cost-benefits earned $20 $17 $ 1 $ 1 $40 $34 $ 2 $ 2 Interest cost on benefit obligation 40 37 7 7 80 74 14 14 Estimated return on assets (46) (40) (1) (1) (91) (80) (2) (2) Net amortization and other 21 22 1 2 42 44 2 2 --- --- --- --- --- --- --- --- Net defined benefit expense $35 $36 $ 8 $ 9 $71 $72 $16 $16 === === === === === === === ===
The Company contributed $26 million and $34 million to its pension plans, respectively, for the three and six months ended June 30, 2004. The Company expects to contribute an additional $18 million to its pension plans in 2004 for a total contribution of $52 million. The Company's contribution to other retiree benefit plans was $3 million for the three and six months ended June 30, 2004. The Company does not expect to make any further contributions to other retiree benefit plans in 2004. The Company previously disclosed total 2004 estimated contributions of $35 million to pension and $0 to other postretirement benefit plans. PAGE 13 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Functional Excellence, 2003 Manufacturing Realignment, Restructuring, and Asset Impairments - ------------------------------------------------------- Functional Excellence - --------------------- In the second quarter of 2002, the Company began actions associated with its Functional Excellence initiative. This initiative impacts all business segments and is focused on upgrading capabilities, while reducing overhead costs by improving processes and eliminating duplication across all functions. Specific program activities include outsourcing certain information technology functions, implementing new worldwide technology tools and processes, streamlining customer management and marketing programs, and consolidating financial functions. Total pretax charges under the Functional Excellence initiative, including employee termination benefits and other costs, were $12 million and $42 million for the three months ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004 and 2003, total pretax charges under the program were $19 million and $86 million, respectively. Functional excellence charges in 2004 included $0 and $4 million which were recorded to cost of goods sold, and $7 million and $15 million which were recorded to selling, general and administrative expense in the the three and six month periods ended June 30, 2004, respectively. Employee-related terminations are intended to be completed within 12 months of accrual. The employee-related termination benefits are calculated using the Company's long-standing severance formulas and vary on a country-by-country basis, depending on local statutory requirements and local practices. Other costs include items such as consulting, lease buy-outs, project team expenses, and asset write-downs related to Functional Excellence programs. 2003 Manufacturing Realignment Program - -------------------------------------- During December, 2003, the Company announced a blade and razor manufacturing, packaging and warehouse operations realignment program throughout Europe and Russia. The program will significantly reduce costs, improve operating efficiency, and streamline manufacturing, packaging, and warehouse operations. The program began in December 2003 and is expected to be completed by 2007. The Company recorded, in the three and six months ended June 30, 2004, approximately $10 million and $16 million, respectively to cost of sales related to project expenses and accelerated depreciation on the Isleworth, U.K. facility which will cease to be used as a manufacturing facility after 2006. This facility will eventually be sold but does not yet meet the requirements of "held for sale" accounting treatment. Other project expenses consisted primarily of severance, based on the amounts that have been earned as of June 30, 2004, at current service levels and pay rates and expenses related to the relocation of equipment between impacted locations. Severance payments will span through 2007, when the Isleworth facility will be completely closed. PAGE 14 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Functional Excellence and 2003 Manufacturing Realignment Program - --------------------------------- Charges Charges Accrual Accrual and Uses and Uses Charges Accrual through Second through Second and Uses Balance March 31, Quarter Total March 31, Quarter Since June 30, (Millions) 2004 2004 Accruals 2004 2004 Inception 2004 ------- ------ -------- -------- ------- --------- ------- Functional Excellence: Employee-related expenses $229 $ 7 $236 $(165) $ (8) $(173) $ 63 Other 36 5 41 (32) (5) (37) 4 ---- ---- ---- ----- ----- ----- ----- Total Functional Excellence Program $265 $ 12 $277 $(197) $ (13) $(210) $ 67 ---- ---- ---- ----- ----- ----- ----- 2003 Manufacturing Realignment Program: Employee-related expenses Severance payments 33 2 35 - (1) (1) 34 Other benefits 6 - 6 - - - 6 Asset-related expenses: Asset write-offs 5 - 5 (5) - (5) - Loss on sales of assets 4 - 4 - - - 4 Contractual obligations and other 8 8 16 (5) (8) (13) 3 ---- ---- ---- ----- ----- ----- ----- Total 2003 Realignment Program 56 10 66 (10) (9) (19) 47 ---- ---- ---- ----- ----- ----- ----- Total $321 $ 22 $343 $(207) $ (22) $(229) $ 114 ==== ==== ==== ===== ===== ===== =====
PAGE 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations The Gillette Company and Subsidiary Companies - ----------------------------------------------------------------------- EXECUTIVE OVERVIEW - ------------------ The Gillette Company achieved record second-quarter and first-half net sales, profit from operations, net income and net income per common share, diluted, in the second quarter of 2004 and for the six months ended June 30, 2004. For the second quarter of 2004, net sales increased 8% as compared with 2003, driven by strong sell-in of new products, the ongoing strength of existing products, strong growth in emerging markets, and the impact of favorable foreign currency, partially moderated by a lower rate of growth in key Western European markets. Net sales growth was supported by a 39% increase in advertising. The Company's various cost-savings programs, including Functional Excellence and other manufacturing-related initiatives, contributed to improvements in profit from operations and operating profit margin in the second quarter of 2004 as compared with the prior year. Profit from operations rose 21%, and operating profit margin increased by 4 percentage points. Profit from operations grew at a faster pace than sales due to strong growth of new, premium product offerings, cost savings and overhead cost reductions, offset in part by higher advertising spending. Net interest expense and foreign exchange expenses were lower as compared with 2003, and the Company's effective income tax rate was reduced 1 percentage point to 29%. Net income climbed 26% and net income per common share, diluted, increased 27%, slightly outpacing the percentage increase in net income due to share repurchase activity. Blades and Razors net sales for the second quarter of 2004 increased versus the comparable period in 2003, driven by new premium product launches despite weakness in several Western European markets. Blades and Razors profit from operations increased due to higher sales of new, premium products, higher prices, and lower overhead costs offset partially by an increase in advertising spending. Duracell's net sales increased as compared with the second quarter of 2003 due to the acquisition in August, 2003 of the Nanfu battery company, category growth in emerging markets and lower trade and consumer spending. In the U.S., Duracell's dollar share remained stable during the second quarter of 2004 partially due to stepped-up advertising levels and strong consumer marketing programs, despite significant promotional activity by value brands and private-label. Duracell profit from operations rose significantly reflecting cost and expense reduction activities, offset in part by higher advertising expenses. Oral Care net sales increased due to successful new product launches, the acquisition of the Rembrandt brand of whitening products, and growth in the manual toothbrush segment. In the second quarter of 2004, the Company acquired the Rembrandt brand of at-home and professional tooth-whitening products and also Zooth, Inc., a leader in licensed manual and power toothbrushes for children. Oral Care profit from operations increased due to the higher sales, and cost and expense reduction activities partially offset by higher advertising expenses. Braun net sales increased in the quarter due to favorable foreign exchange, strong performance in the Africa, Middle East and Eastern Europe (AMEE) region and Southern Europe, and male shaver growth in China, partially offset by male shaver category softness in Europe and North America. Year-to-year comparisons were also affected by the unmatched SARS-related spike in demand for Thermoscan products in 2003. Braun profit from operations was lower as reductions in overhead costs were offset by higher exchange-driven European-based manufacturing costs and increased advertising expenses. Personal Care net sales increased in all regions, driven by new product introductions. Personal Care profit from operations was higher, due to strong new product sales and cost reduction activities. For the six month period ended June 30, 2004, net sales increased 11%, profit from operations increased 32% and operating profit margin increased by 4 percentage points. The higher operating profit margin was driven by favorable product mix and lower costs. Lower net interest expense was offset by higher foreign exchange expense. The effective income tax rate declined by 1 percentage point to 29%. Net income climbed 33% and net income per common share, diluted, increased 36%, outpacing the percentage increase in net income due to share repurchase activity. The Company delivered strong free cash flow (as defined in the Financial Condition section) of $723 million in the period. PAGE 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- Second Quarter 2004 versus 2003 - ------------------------------- Selected statement of income data is presented below.
For Three Months Ended June 30 --------------------------------------- % of % of % (millions, except per share Net Net Increase/ amounts and percentages) 2004 Sales 2003 Sales (Decrease) - --------------------------- -------------------------------------- Net sales $2,443 $2,254 8 Gross profit $1,475 60.4 $1,339 59.4 10 Advertising $ 258 10.6 $ 186 8.3 39 Sales promotion $ 93 3.8 $ 96 4.3 (3) Other selling, general and administrative (SG&A) expense $ 514 21.0 $ 552 24.5 (7) Total SG&A expense $ 865 35.4 $ 834 37.0 4 Profit from operations $ 610 25.0 $ 505 22.4 21 Other (income) and expense Net interest expense 8 13 (38) Foreign exchange (2) 3 (>100) Other 3 6 (50) ---- ---- Total other income and expense 9 0.4 22 1.0 (59) ---- ---- Income taxes $ 175 7.2 $ 145 6.4 21 Net income $ 426 17.4 $ 338 15.0 26 Net income per common share, diluted $ 0.42 $ 0.33 27
Total Company - ------------- Net sales for the second quarter of 2004 were $2.44 billion, an increase of 8% versus $2.25 billion in the second quarter of 2003, of which 2% resulted from the impact of favorable foreign exchange. Volume/mix added 6%, and pricing was flat, as price increases in Blades and Razors were offset by higher promotional spending for merchandising activities in Oral Care and Personal Care. Sales increased due to strong new product introductions, including M3 Power in Blades and Razors and Brush-Ups in the Oral Care segment, strong growth in the emerging markets of Latin America and AMEE, and the ongoing strength of established products. The increase in net sales was further supported by the August, 2003 acquisition of the Nanfu battery business, as well as the Rembrandt brand in June, 2004. Together, these businesses added 1% to net sales in the quarter. A 39% increase in advertising in the quarter further supported the increase in net sales. Net sales were higher in all regions, though European sales were not as strong due to weaker consumer confidence especially in France and Italy, as well as unfavorable comparisons to the prior year launch of Mach3 Turbo. Gross profit was $1.48 billion in the second quarter of 2004, compared with $1.34 billion in the second quarter of 2003. As a percent of net sales, gross profit was 60.4%, compared with 59.4% in 2003. The improvement in gross profit was due mainly to strong growth of new, premium product offerings and manufacturing cost savings, particularly at Duracell. PAGE 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total selling, general and administrative expenses amounted to 35.4% of second quarter 2004 net sales, compared with 37.0% in the comparable period of 2003. Within selling, general and administrative expenses, advertising expenses increased 39% to 10.6% of net sales, from 8.3% of net sales in the prior year. In each operating segment and in each region, advertising grew by a double-digit percentage. Advertising expenses increased in support of new product programs, and helped to drive stepped-up demand in developing markets. Sales promotion was lower as a percentage of sales at 3.8% in the second quarter of 2004 versus 4.3% in the prior year. Other selling, general and administrative expenses decreased 7%, and were down as a percentage of sales, to 21.0% from 24.5% in the second quarter of 2003, reflecting cost reduction efforts and lower Functional Excellence expenses due to the timing of programs. Profit from operations was $610 million in the second quarter of 2004 (25.0% of net sales), compared with $505 million in the comparable period of 2003 (22.4% of net sales). The 21% profit increase was driven by favorable mix to higher-margin premium products, manufacturing productivity and overhead cost-saving programs, partially offset by higher advertising expenses. Within nonoperating charges/income, net interest expense amounted to $8 million in the second quarter of 2004, as compared to $13 million in 2003, reflecting lower debt levels. Net foreign exchange in the second quarters of 2004 and 2003 were $2 million (income) and $3 million (expense), respectively. The effective income tax rate was 29% in the second quarter of 2004, compared with 30% for the same period of 2003. The reduction in the 2004 effective income tax rate was primarily due to a favorable change in the mix of earnings to countries taxed at rates lower than the U.S. statutory rate. The effective income tax rate is expected to remain close to the current level for the balance of 2004. Net income was $426 million in the second quarter of 2004 (17.4% of net sales), compared with $338 million in the second quarter of 2003 (15.0% of net sales), representing growth of 26%. Net income per common share, diluted, was $.42, compared with $.33 in the second quarter of 2003, representing growth of 27%. The 2004 percentage growth in net income per common share, diluted, which outpaced the percentage growth in net income, was favorably impacted by share repurchase program activity. Six Months Ended June 30, 2004 versus 2003 - ------------------------------------------ Selected statement of income data is presented below.
For Six Months Ended June 30 --------------------------------------- % of % of % (millions, except per share Net Net Increase/ amounts and percentages) 2004 Sales 2003 Sales (Decrease) - --------------------------- ---------------------------------------- Net sales $4,678 $4,225 11 Gross profit $2,832 60.5 $2,492 59.0 14 Advertising $ 494 10.6 $ 353 8.4 40 Sales promotion $ 166 3.5 $ 171 4.0 (3) Other selling, general and administrative (SG&A) expense $1,006 21.5 $1,083 25.6 (7) Total SG&A expense $1,666 35.6 $1,607 38.0 4 Profit from operations $1,166 24.9 $ 885 20.9 32 Other (income) and expense Net interest expense 17 24 (29) Foreign exchange 18 5 >100 Other - (3) >100 ---- ---- Total other income and expense 35 0.7 26 0.6 35 ---- ---- Income taxes $ 329 7.0 $ 258 6.1 28 Net income $ 802 17.1 $ 601 14.2 33 Net income per common share, diluted $ 0.79 $ 0.58 36
PAGE 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Total Company - ------------- Net sales for the six months ended June 30, 2004 were $4.68 billion, an increase of 11% versus $4.23 billion in the first six months of 2003. Favorable foreign exchange had a 5% impact, favorable volume/mix added 6% and pricing was flat. Sales increased due to new product introductions, ongoing trade-up to premium products, the ongoing strength of established products, favorable foreign exchange, the acquisition of the Nanfu battery company in the third quarter of 2003 and the acquisition of the Rembrandt brand in the second quarter of 2004. Gross profit was $2.83 billion in the first six months of 2004, compared with $2.49 billion in the first six months of 2003. As a percent of net sales, gross profit was 60.5% in the first six months of 2004, compared with 59.0% in the first six months of 2003. The improvement in gross profit was due mainly to favorable product mix towards higher margin, premium products and manufacturing cost savings, particularly in Duracell. Total selling, general and administrative expenses amounted to 35.6% of net sales for the first six months of 2004, compared with 38.0% in the comparable period of 2003. Within selling, general and administrative expenses, advertising expenses increased 40% to 10.6% of net sales, from 8.4% of net sales in 2003. Sales promotion declined slightly as compared with 2003. Other selling, general and administrative expenses decreased 7%, and were down as a percentage of sales, to 21.5% from 25.6% in the first six months of 2003, reflecting cost reduction efforts and lower Functional Excellence expenses. Functional Excellence expenses were $19 million for the first six months of 2004, and are expected to ramp up in the second half of 2004. Profit from operations was $1.17 billion in the first six months of 2004 (24.9% of net sales), compared with $885 million in the comparable period of 2003 (20.9% of net sales). The 32% profit increase was driven by favorable mix to higher-margin premium products, manufacturing productivity and overhead cost-saving programs, partially offset by higher advertising expenses. Within nonoperating charges/income, net interest expense amounted to $17 million in the first six months of 2004, as compared to $24 million in 2003, reflecting lower debt levels. Net foreign exchange expense in the first six months of 2004 and 2003 was $18 million and $5 million, respectively. The 2004 result was driven by the reclassification of a non-cash loss to the Consolidated Statement of Income from the accumulated other comprehensive loss section of the Consolidated Balance Sheet related to the liquidation of certain international subsidiaries. The effective income tax rate was 29% for the six months ended June 30, 2004, compared with 30% for the same period of 2003. The reduction in the 2004 effective income tax rate was primarily due to a favorable change in the mix of earnings to countries taxed at rates lower than the U.S. statutory rate. The effective income tax rate is expected to remain close to the current level for the remainder of 2004. Net income was $802 million in the first half of 2004 (17.1% of net sales), compared with $601 million in the first six months of 2003 (14.2% of net sales), representing growth of 33%. Net income per common share, diluted, was $.79, compared with $.58 in the first six months of 2003, representing growth of 36%. The 2004 percentage growth in net income per common share, diluted, which outpaced the percentage growth in net income, was favorably impacted by share repurchase program activity. PAGE 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Segments - ------------------ Second Quarter 2004 versus 2003 - ------------------------------- The following table summarizes the key operating metrics for the second quarter of 2004 versus the second quarter of 2003 for each of the Company's five operating segments.
Blades & Oral Personal Corporate/ Total Three Months Ended June 30, Razors Duracell Care Braun Care Other Company - ------------------------------ --------- -------- ---- ----- -------- --------- ------- (millions, except percentages) Net Sales: Net sales, 2004 $1,099 $456 $358 $294 $236 $ - $2,443 Net sales, 2003 1,003 432 316 284 219 - 2,254 % Incr/(Decr) vs. 2003 10 5 14 4 8 8 Impact of exchange 2 2 3 5 3 2 Impact of volume/mix 7 3 15 - 8 6 Impact of pricing 1 - (4) (1) (3) - Profit from operations (PFO): PFO, 2004 $ 420 $ 89 $ 68 $ 24 $ 24 $(15) $ 610 PFO, 2003 377 54 53 28 24 (31) 505 % Incr/(Decr) vs. 2003 11.3 64.6 28.1 (13.1) 3.0 21.5 PFO as % of net sales, 2004 38.2 19.5 19.1 8.1 10.3 25.0 PFO as % of net sales, 2003 37.6 12.5 16.9 9.7 10.8 Blades and Razors - ----------------- Net sales of $1.10 billion in the second quarter of 2004 were 10% higher than the comparable period of 2003, including a 2% favorable foreign exchange impact. Sales growth was driven by new premium offerings including M3 Power and Venus Divine. Net sales were higher in North America, and consumption and trade-up in the AMEE market were strong. Sales growth was not as strong in Europe, due to reduced consumer spending and the 2003 Mach3 Turbo launch. The Company drove U.S. Blade/Razor market growth of 14% in June due to the launch of M3 Power. The M3 Power razor reached a 30% dollar share in its first month at retail and was the top-selling U.S. razor in June. Profit from operations of $420 million was up 11% from the second quarter of 2003, and profit margin increased from 37.6% to 38.2%. The impacts of higher sales from new products, price increases and lower overhead costs were partially offset by a double-digit percentage increase in advertising. Duracell - -------- Duracell net sales of $456 million increased 5% versus the second quarter of 2003, including a 2% favorable foreign exchange impact. Net sales gains were driven by the August, 2003 acquisition of the Nanfu battery business, strong emerging market growth in the AMEE region and lower trade and consumer promotional spending. These gains were partially offset by lower net sales in North America where the business was impacted by steep price discounting and promotional activity from low-price brands and private label. The Company held its dollar share of the market in the second quarter of 2004 through stepped-up advertising levels and the positive impact of strong consumer marketing programs, including promotional tie-ins with the "Lord of the Rings" DVD release and NASCAR. However, 2004 is expected to continue to be challenging due to the ongoing, intense competitive environment. In the second quarter of 2004, profit from operations of $89 million increased 65%, and profit margin grew by 7.0 percentage points, compared with the second quarter of 2003. This increase was due to higher sales and significant benefits from cost-savings and overhead reduction programs, partially offset by higher brand-building advertising expenses. PAGE 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Oral Care - --------- Oral Care net sales in the second quarter of 2004 of $358 million were 14% higher than the second quarter of 2003, of which 3% represented favorable foreign exchange. Sales increased in all regions with the exception of Asia Pacific, in line with the Company's strategy to grow net sales in the core brushing category as well as in related categories. New products, including Brush-Ups and the Hummingbird power flosser, contributed significantly to net sales growth in the quarter, while the acquisition of the Rembrandt brand added 4% to net sales for the period. In core brushing, the manual toothbrush segment was a driver of growth, particularly in the North America, Latin America, and AMEE regions. The Company extended its number one global dollar share position in the total brushing category versus the prior year to 34%, driven by trade up within manual and the global rollout of CrossAction Power. In the second quarter of 2004, profit from operations of $68 million increased 28%, and profit margin increased by 2.2 percentage points. The increase in profits was driven by higher net sales, improved product mix and lower overhead costs, offset partially by a double-digit percentage increase in advertising. Braun - ----- Braun net sales of $294 million in the second quarter of 2004 increased 4% over the second quarter of 2003. Favorable foreign exchange of 5% was offset partially by a 1% negative impact of pricing. Sales growth was driven by strong performance in female epilators in AMEE and Southern Europe, household appliance gains in Russia and Turkey, and male shaver growth in China, offset partially by male shaver category softness in Europe and North America and comparisons with the unmatched 2003 SARS-related spike in demand for Thermoscan products. Braun shavers continued to gain dollar share in key markets, despite price discounting by competitors. Profit from operations in the second quarter of 2004 of $24 million was lower than the $28 million in the second quarter of 2003. Profit was down in the quarter as lower overhead costs were offset by higher European-based manufacturing costs and increased advertising expenses. Personal Care - ------------- In the second quarter of 2004, Personal Care net sales increased 8% versus the second quarter of 2003, with foreign exchange contributing 3% of the growth. Sales growth, achieved in all regions, was driven by the introduction of the Gillette Complete Skincare line in the United States, Soft & Dri antiperspirants in Latin America and Right Guard Cool Spray in the United Kingdom. Profit from operations increased slightly to $24 million in the second quarter of 2004 as compared with the second quarter of 2003. Profit improvement came from growth in new products, manufacturing and procurement cost savings, and lower overhead costs, which more than offset a double-digit percentage increase in advertising. PAGE 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six Months Ended June 30, 2004 versus 2003 - ------------------------------------------ The following table summarizes the key operating metrics for the six months ended June 30, 2004 versus 2003 for each of the Company's five operating segments. Blades & Oral Personal Corporate/ Total Six Months Ended June 30, Razors Duracell Care Braun Care Other Company - ------------------------------ --------- -------- ---- ----- -------- --------- ------- (millions, except percentages) Net Sales: Net sales, 2004 $2,136 $870 $673 $553 $446 $ - $4,678 Net sales, 2003 1,896 816 611 499 403 - 4,225 % Incr/(Decr) vs. 2003 13 7 10 11 10 11 Impact of exchange 5 4 5 7 4 5 Impact of volume/mix 6 3 7 5 7 6 Impact of pricing 2 - (2) (1) (1) - Profit from operations (PFO): PFO, 2004 $ 837 $163 $123 $ 45 $ 37 $(39) $1,166 PFO, 2003 708 93 102 21 24 (63) 885 % Incr/(Decr) vs. 2003 18.1 75.8 20.9 109.8 52.9 32.1 PFO as % of net sales, 2004 39.2 18.8 18.4 8.1 8.3 24.9 PFO as % of net sales, 2003 37.4 11.4 16.7 4.3 6.0 20.9
Blades and Razors - ----------------- Net sales of $2.14 billion in the six months ended June 30, 2004 were 13% higher than in the comparable period of 2003, including a 5% favorable foreign exchange impact. Volume/mix and pricing were favorable by 6% and 2%, respectively. Sales growth was driven by successful new product introductions such as M3 Power, Venus Divine and Sensor Excel 3, ongoing trade-up to premium products such as Mach3 Turbo, and price increases. Profit from operations of $837 million was up 18% from the first half of 2003, and profit margin increased 1.8 percentage points to 39.2%. The impact of higher sales, favorable product mix and lower overhead costs was partially offset by a double-digit percentage increase in advertising support. Duracell - -------- Duracell net sales of $870 million increased 7% versus the first six months of 2003, including a 4% favorable foreign exchange impact. Net sales gains were driven by the August, 2003 addition of the Nanfu battery business in China. These gains were partially offset by lower sales in North America due to comparisons against the first quarter 2003, when demand spiked due to homeland security concerns and incremental military sales. The Company held its dollar share of the market in the first six months of 2004, though 2004 is expected to continue to be challenging due to the ongoing, intense competitive environment. In the first six months of 2004, profit from operations of $163 million increased 76%, and profit margin grew by 7.4 percentage points, compared with the first six months of 2003. This increase was due to higher sales and significant benefits from cost-savings and overhead reduction programs, partially offset by higher advertising expenses. PAGE 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Oral Care - --------- Oral Care net sales in the six month period ended June 30, 2004 of $673 million were 10% higher than the comparable period of 2003, with favorable foreign exchange contributing 5%. Sales gains were driven by new products, including Brush-Ups and the Hummingbird power flosser, the acquisition of the Rembrandt brand and strength in most regions behind manual brushes. In the first six months of 2004, profit from operations of $123 million increased 21%, and profit margin increased by 1.7 percentage points. The increase in profits was driven by higher sales from new products and improved product mix, offset partially by a double-digit percentage increase in advertising. Braun - ----- Braun net sales of $553 million in the six months ended June 30, 2004 climbed 11% versus the comparable period of 2003, with favorable foreign exchange representing 7% of the increase. Growth was driven by strong performance in the AMEE region, particularly in Russia and Turkey, partially offset by comparisons with the unmatched 2003 SARS-related spike in demand for Thermoscan products in both Asia and North America. Profit from operations in the first six months of 2004 of $45 million compared with $21 million in the first six months of 2003. Profit improvement was driven by a favorable mix towards higher margin products, particularly male shavers and female epilators, tempered by currency-related increases in European-based manufacturing costs. Personal Care - ------------- In the six months ended June 30, 2004, Personal Care net sales increased 10% versus the first six months of 2003, with foreign exchange contributing 4% of the growth. Sales growth was achieved in all regions due to strong demand and trade-up in shave preparations, particularly in Europe and North America. Net sales growth was also driven by new products, including the Gillette Complete skin care line in North America, and the new side-activated Right Guard Cool Spray in the United Kingdom. Profit from operations increased to $37 million for the six months ended June 30, 2004 as compared with $24 million in the comparable period of 2003. Profit improvement came from growth in new products, manufacturing and procurement cost savings, and lower overhead costs, which more than offset a double-digit percentage increase in advertising. PAGE 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION - ------------------- Cash Flow - --------- Cash provided by operations is the Company's primary source of funds to finance operations, capital expenditures, share repurchases, and dividends. Free cash flow, defined as net cash provided by operating activities net of additions to and disposals of property, plant and equipment, is used by the Company as a measure of its liquidity, as well as its ability to fund future growth and to provide a return to shareholders. Free cash flow is not a measure of the residual cash flow that is available for discretionary expenditures, since the Company has certain non-discretionary obligations, such as debt service, that are not deducted from the measure. A reconciliation of free cash flow to the increase in cash and cash equivalents in accordance with Generally Accepted Accounting Principles (GAAP) follows.
2004 2003 ---------------------------------------- Free GAAP Free GAAP Cash Cash Cash Cash Six Months Ended June 30, Flow Flow Flow Flow - ------------------------- ---------------------------------------- (millions) Net income $ 802 $ 601 Depreciation and amortization 299 278 Deferred income taxes and other 46 50 Decrease in accounts receivable 38 59 Increase in inventories (330) (188) Net change in other assets and liabilities 66 204 ---- ----- ----- ----- Net cash provided by operating activities $ 921 $ 921 $1,004 $ 1,004 ---- ----- ----- ----- Additions to property, plant and equipment (A) (228) (132) Disposals of property, plant and equipment (B) 30 23 ---- ----- Free cash flow $ 723 $ 895 ---- ----- Net cash used in investing activities (C)* $ (312) $ (109) Net cash used in financing activities $ (643) $(1,086) Effect of exchange rate changes on cash (3) 4 ----- ----- Decrease in cash and cash equivalents $ (37) $ (187) ===== =====
*C is the sum of A, B, and $(114) million and $0 in other investing activities, including acquisitions, net of cash acquired, in the six months ended June 30, 2004 and 2003, respectively. Free cash flow for the six months ended June 30, 2004, was $723 million, as compared with $895 million in the six months ended June 30, 2003. Free cash flow was dampened in 2004 by higher inventory balances and additions to property, plant and equipment. Inventory increased in anticipation of new product launches in Oral Care and Braun, and also due to a planned build up of safety stock related to the blade and razor manufacturing, packaging and warehouse operations realignment program throughout Europe and Russia. Capital expenditures in 2004 are primarily for new product programs. The Company expects capital expenditures to average approximately 6% of net sales for the full year of 2004. PAGE 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company used its free cash flow to finance the repurchase of 9 million shares of Company stock for $355 million, pay dividends of $327 million, reduce debt by $200 million, and to fund two acquisitions, the Rembrandt brand of at-home and professional teeth-whitening products and Zooth, Inc., a leader in licensed manual and power children's toothbrushes, totaling $115 million. In February 2004, the Company received $103 million upon settlement of a currency swap that hedged a maturing Euro-denominated bond. Net cash used in financing activities for the first six months of 2004 were below last year mainly due to lower share repurchases. Net cash used in investing activities for the first six months of 2004 increased as compared with the prior year due to higher capital expenditures and the two acquisitions in the second quarter of 2004. Debt - ---- Total debt decreased by $200 million during the six months ended June 30, 2004, from $3.31 billion at December 31, 2003, to $3.11 billion at June 30, 2004. This decrease was principally due to repayments of long-term debt of $389 million, partially offset by an increase in short-term loans payable of $228 million. Cash and cash equivalents decreased by $37 million for the same period. Cash equivalents are invested in highly liquid deposits and marketable securities of institutions with high credit quality. The Company's investment grade long-term credit ratings of AA- from Standard & Poor's and Aa3 from Moody's and commercial paper ratings of A1+ from Standard & Poor's and P1 from Moody's provide a high degree of flexibility in obtaining funds. The Company has the ability to issue up to $1.53 billion in commercial paper in the U.S. and Euro markets. The Company's commercial paper program is supported by its revolving credit facility and other sources of liquidity, primarily the Company's cash flow from operations. At June 30, 2004, there was $270 million outstanding under the Company's commercial paper program, compared with $55 million at December 31, 2003. On October 14, 2003, the Company entered into revolving bank credit facilities in an aggregate amount of $1.15 billion, of which $863 million is available on a 364-day basis, expiring October 2004, and $288 million is available for five years, expiring October 2008. Liquidity is enhanced through a provision in the 364-day facility that gives the Company the option to enter into a one-year term loan in an amount up to $863 million. The Company believes it has sufficient alternative sources of funding available to replace its commercial paper program, if necessary. During 2002, two shelf registration statements were filed allowing the Company to issue up to $2.80 billion in debt securities in the U.S. It is currently anticipated that the proceeds from the sale of any debt securities issued under these shelf registrations will be used to repay commercial paper borrowings and replace other maturing debt, although the proceeds may also be used for other corporate purposes, including repurchase of the Company's common stock. At June 30, 2004, $1.54 billion, at face value, was issued under these shelf registrations, and a total of $1.26 billion was available for future debt issuance. All proceeds from these issuances were used to reduce commercial paper borrowings. With its strong brands, leading market shares, strong financial condition and substantial cash-generating capability, the Company expects to continue to have funds available for growth through both internally generated cash flow and significant credit resources. The Company has substantial unused lines of credit and access to worldwide financial markets, enabling the Company to raise funds at favorable interest rates. Market Risk - ----------- The Company is subject to market risks, such as changes in foreign currency and interest rates that arise from normal business operations. The Company regularly assesses these risks and has established business strategies to provide natural offsets, supplemented by the use of derivative financial instruments, to protect against the adverse effects of these and other market risks. The Company uses foreign-denominated debt and forward contracts to hedge the impact of foreign currency changes on its net foreign investments, normally in currencies with low interest rates. Most of the Company's transactional exchange exposure is managed through centralized cash management. The Company hedges net residual transactional exchange exposures primarily through forward contracts. The Company uses primarily floating rate debt in order to match interest costs to the impact of inflation on earnings. The Company manages its mix of fixed and floating-rate debt by entering into interest rate swaps and forward rate agreements. PAGE 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS More detailed information about the strategies, policies, and use of derivative financial instruments is provided in the Company's 2003 Form 10-K under the Financial Instruments and Risk Management Activities note in Notes to Consolidated Financial Statements. The Company has established policies, procedures, and internal controls governing the use of derivative financial instruments and does not use them for trading, investment, or other speculative purposes. In addition, the Company's use of derivative instruments is reviewed by the Finance Committee of the Board of Directors annually. Financial instrument positions are monitored using a value-at-risk model. Value at risk is estimated for each instrument based on historical volatility of market rates and a 95% confidence level. Based on the Company's overall evaluation of its market risk exposures from all of its financial instruments at June 30, 2004, a near-term change in market rates would not materially affect the consolidated financial position, results of operations, or cash flows of the Company. FUNCTIONAL EXCELLENCE AND 2003 MANUFACTURING REALIGNMENT PROGRAM Functional Excellence - --------------------- In the second quarter of 2002, the Company began actions associated with its Functional Excellence initiative, which is described in Notes to Consolidated Financial Statements. During the three and six month periods ended June 30, 2004 and 2003, the Company recorded the following expenses related to this initiative.
Three Months Ended Six Months Ended June 30 June 30 ------------------- ------------------- (millions) 2004 2003 2004 2003 - ---------- ----- ---- ----- ---- Functional Excellence expense recorded in: Cost of goods sold $ 4 $12 $ 4 $13 Selling, general and administrative expense $ 8 $30 $15 $73 --- --- --- --- Total functional excellence expense $12 $42 $19 $86 === === === ===
2003 Manufacturing Realignment Program - -------------------------------------- During 2003, the Company announced a blade and razor manufacturing, packaging and warehouse operations realignment program throughout Europe and Russia. The program will significantly reduce costs, improve operating efficiency, and streamline operations. The program began in December 2003 and will be completed during 2007. This program is further described in Notes to Consolidated Financial Statements. During the three and six months ended June 30, 2004, the Company recorded charges of $10 million and $16 million, respectively, to cost of goods sold for this program, related mainly to accelerated depreciation of certain assets, severance accruals and costs related to the relocation of equipment between impacted locations. PAGE 26 DISCLOSURE CONTROLS AND PROCEDURES Item 4. Controls and Procedures Our management, under the supervision and with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), has evaluated the effectiveness of our disclosure controls and procedures as defined in Securities and Exchange Commission ("SEC") Rule 13a-15(e) as of the end of the period covered by this report. Based upon that evaluation, management has concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Further, during the fiscal quarter covered by this report, there have been no changes in internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PAGE 27 PART II. OTHER INFORMATION Item 1. Legal Proceedings We are subject, from time to time, to legal proceedings and claims arising out of our business, which cover a wide range of matters, including antitrust and trade regulation, advertising, product liability, contracts, environmental issues, patent and trademark matters and taxes. Management, after review and consultation with legal counsel, considers that any liability from all of these legal proceedings and claims would not materially affect our consolidated financial position, results of operations or liquidity. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. Total Number of Shares Maximum Number Purchased as Part of Shares Total Number Average of Publicly that May Yet Be of Shares Price Paid Announced Plans Purchased Under the Period Purchased (3) per Share or Programs(1) Plans or Programs - ------ ----------- ---------- ----------------- ------------------- 04/01/04 - 04/30/04 4,840 $40.80 - 46,000,000 05/01/04 - 05/31/04 2,694,536 $41.09 2,694,100 43,305,900 06/01/04 - 06/30/04 1,305,989 $43.22 1,305,900 42,000,000 Total Second Quarter 4,005,365 (2) $41.78 4,000,000 42,000,000
(1) The share repurchase program was announced on 9/16/03 and authorizes the purchase of up to 50 million shares of the Company's common stock. There is no expiration date specified for this program. (2) Includes 5,365 shares which were repurchased by the Company under equity-based programs. (3) All share repurchases were effected in accordance with the safe harbor provisions of Rule 10b-18 of the Securities Exchange Act. PART II Item 4. Submission of Matters to a Vote of Security Holders At its Annual Meeting on May 20, 2004, the shareholders of The Gillette Company took the following actions: 1. Elected the following four directors for terms to expire at the 2007 Annual Meeting of Shareholders, with votes as indicated opposite each director's name: For Withheld ----------- ---------- Edward F. DeGraan 649,308,442 232,145,002 Wilbur H. Gantz 649,794,321 231,659,123 James M. Kilts 649,048,302 232,405,143 Jorge Paulo Lemann 649,649,409 231,804,036 The directors whose term of office as a director continued after the meeting are Roger K. Deromedi, Michael B. Gifford, Ray J. Groves, Dennis F. Hightower, Herbert H. Jacobi, Nancy J. Karch, Fred H. Langhammer, and Marjorie M. Yang. 2. Approved the ratification of the appointment of KPMG LLP as auditor for the year 2004. The vote was 845,717,159 for the proposal, 34,262,266 against, with 1,480,336 abstentions. 3. Approved the 2004 Long-Term Incentive Plan. The vote was 678,986,585 for the proposal and 66,922,841 against, with 7,737,562 abstentions and 127,812,773 broker nonvotes. 4. Approved a shareholder proposal recommending the declassification of the Board of Directors. The vote was 507,153,817 for the proposal and 237,783,465 against, with 8,687,594 abstentions and 127,834,885 broker nonvotes. 5. Rejected a shareholder proposal to limit the services provided by the auditor. The vote was 84,829,697 for the proposal and 659,809,461 against, with 9,004,086 abstentions and 127,816,517 broker nonvotes. 6. Rejected a shareholder proposal that the Company establish a policy of expensing stock options. The vote was 308,916,221 for the proposal and 329,534,532 against, with 113,772,029 abstentions and 129,236,979 broker nonvotes. PAGE 28 PART II. OTHER INFORMATION Cautionary Statement - -------------------- Certain statements that we may make from time to time, including statements contained in this report, constitute "forward-looking statements" under the federal securities laws. Forward-looking statements may be identified by words such as "plans," "expects," "believes," "anticipates," "estimates," "projects," "will" and other words of similar meaning used in conjunction with, among other things, discussions of future operations, acquisitions and divestitures, financial performance, our strategy for growth, product development and new product launches, market position, and expenditures. Forward-looking statements are based on current expectations of future events, but actual results could vary materially from our expectations and projections. Investors are cautioned not to place undue reliance on any forward-looking statements. We assume no obligation to update any forward-looking statements. We caution that historical results should not be relied upon as indications of future performance. Factors that could cause actual results to differ materially from those expressed in any forward-looking statement include the following, some of which are described in greater detail below: - - the pattern of our sales, including variations in sales volume within periods; - - consumer demands and preferences, including the acceptance by our customers and consumers of new products and line extensions; - - the mix of products sold; - - our ability to control and reduce our internal costs and the cost of raw materials; - - competitive factors, including prices, promotional incentives, and trade terms for our products, and our response, as well as those of our customers and competitors, to changes in these terms; - - product introductions and innovations by us and our competitors; - - technological advances by us and our competitors; - - new patents granted to us and our competitors; - - changes in exchange rates in one or more of our geographic markets; - - changes in laws and regulations, including trade regulations, accounting standards and tax laws, governmental actions affecting the manufacturing and sale of our products, unstable governments and legal systems, and nationalization of industries; - - changes in accounting policies; - - acquisition, divestitures and similar transactions by us, our competitors, or customers; and - - the impact of general political and economic conditions or hostilities in the United States and in other parts of the world. PAGE 29 PART II. OTHER INFORMATION Competitive Environment - ----------------------- We experience intense competition for sales of our products in most markets. Our products compete with widely advertised, well-known, branded products, as well as private label products, which typically are sold at lower prices. In most of our markets, we have major competitors, some of which are larger and more diversified than we are. Aggressive competition within our markets to preserve, gain, or regain market share can affect our results in any given period. Changes in Technology and New Product Introductions - --------------------------------------------------- In most product categories in which we compete, there are continuous technological changes and frequent introductions of new products and line extensions. Our ability to introduce new products and/or extend lines of established products successfully will depend on, among other things, our ability to identify changing consumer tastes and needs, develop new technologies, differentiate our products, and gain market acceptance of new products. We cannot be certain that we will successfully achieve these goals. With respect specifically to primary alkaline batteries, category growth could be adversely affected by the following additional factors: - - technological or design changes in portable electronic and other devices that use batteries as a power source; - - continued improvement in the service life of primary batteries; - - improvements in rechargeable battery technology; or - - the development of new battery technologies. Intellectual Property - --------------------- We rely upon patent, copyright, trademark, and trade secret laws in the United States and in other countries to establish and maintain our proprietary rights in technology, products, and our brands. Our intellectual property rights, however, could be challenged, invalidated, or circumvented. We do not believe that our products infringe the intellectual property rights of others, but any such claims, if they were successful, could result in material liabilities or loss of business. Cost-Savings Strategy - --------------------- We have implemented and approved a number of programs designed to reduce costs. Such programs will require, among other things, the consolidation and integration of facilities, functions, systems, and procedures, all of which present significant management challenges. There can be no assurance that such actions will be accomplished as rapidly as anticipated or that the full extent of expected cost reductions will be achieved. PAGE 30 PART II. OTHER INFORMATION Sales and Operations Outside of the United States - ------------------------------------------------- Sales outside of the United States represent a substantial portion of our business. In addition, we have a number of manufacturing facilities and suppliers located outside of the United States. Accordingly, the following factors could adversely affect operating results in any reporting period: - - changes in political or economic conditions; - - trade protection measures; - - import or export licensing requirements; - - changes in the mix of earnings taxed at varying rates; - - changes in regulatory requirements or tax laws; and - - longer payment cycles in certain countries. We are also exposed to foreign currency exchange rate risk with respect to our sales, profits, and assets and liabilities denominated in currencies other than the U.S. dollar. Although we use instruments to hedge certain foreign currency risks (through foreign currency forward, swap, and option contracts and non-U.S. dollar denominated financings) and we are partially hedged through our foreign manufacturing operations, there can be no assurance that we will be fully protected against foreign currency fluctuations and our reported earnings will be affected by changes in exchange rates. Retail Environment - ------------------ With the growing trend toward retail trade consolidation, especially in developed markets such as the United States and Europe, we are increasingly dependent upon key retailers whose bargaining strength is growing. Accordingly, we face greater pressure from significant retail trade customers to provide more favorable trade terms. We can be negatively affected by changes in the policies of our retail trade customers, such as trade inventory levels, access to shelf space, and other conditions. Many of our customers, particularly our high-volume retail trade customers, have engaged in accelerated efforts to reduce inventory levels and shrinkage and to change inventory delivery systems. While we expect the level of trade inventory of our products to decline over time, the speed and magnitude of such reductions and/or our inability to develop satisfactory inventory delivery systems could adversely affect operating results in any reporting period. Effect of Potential Military Action or War - ------------------------------------------ Recent military hostilities and the threat of future hostilities, as well as attendant political activity, have created an atmosphere of economic uncertainty throughout the world. A disruption in our supply chain, an increase in import or export costs, and/or other macroeconomic events resulting from military or political events could adversely affect operating results in any reporting period. PAGE 31 PART II. OTHER INFORMATION Item 6(a) Exhibits The following exhibits are included herewith: 10.1 The Gillette Company Deferred Compensation Plan, filed herewith. 10.2 The Gillette Company 2004 Long-Term Incentive Plan, as corrected for typographical errors, filed herewith. 12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. Item 6(b) Reports on Form 8-K The following reports on Form 8-K were filed or furnished to the Commission: (a) The Company furnished, on April 29, 2004, a current report on Form 8-K containing one exhibit: a press release announcing the Company's financial results for the first quarter of 2004. PAGE 32 SIGNATURE SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE GILLETTE COMPANY (Registrant) /s/ Joseph J. Schena - -------------------------------- Joseph J. Schena Vice President, Controller and Principal Accounting Officer July 29, 2004 EXHIBIT INDEX Exhibit Number and Description Exhibit 10.1 The Gillette Company Deferred Compensation Plan, filed herewith. Exhibit 10.2 The Gillette Company 2004 Long-Term Incentive Plan, as corrected for typographical errors, filed herewith. Exhibit 12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges. Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a). Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a). Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. EX-10 2 ex10i_063004.txt EXHIBIT 10.1 Exhibit 10.1 THE GILLETTE COMPANY DEFERRED COMPENSATION PLAN (effective June 1, 2004) 1. Purpose. The Gillette Company Deferred Compensation Plan (the "Plan") has been adopted by The Gillette Company (the "Company") to enable certain executive employees of the Company and its Participating Subsidiaries to defer a portion of their compensation on a tax-effective basis in addition to their eligible savings under The Gillette Company Employees' Savings Plan (the "Savings Plan") and The Gillette Company Supplemental Savings Plan. The Plan is intended to constitute an unfunded plan of deferred compensation described in Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and in Sections 3121(v)(2) and 3306(r)(2) of the Internal Revenue Code of 1986, as amended ("Code"). Under the terms of the Plan as approved by the Company's Board of Directors, eligible employees may elect to defer salary and incentive bonus. This document, which is effective June 1, 2004, addresses the salary deferral feature of the Plan. 2. Eligible Employees. Employees of the Company and Participating Subsidiaries who are full-time or part-time regular employees, have a job grade or a personal grade of 21 or above, and who are generally treated by The Gillette Company as a United States employee for employment and benefit purposes, are eligible to participate in this Plan for any calendar year. 3. Plan Features. Eligible employees who elect to participate in the Plan ("Participants") may defer a portion of their salary ("Deferred Salary"). 4. Recordkeeper. The day-to-day recordkeeping and administrative functions with respect to the Plan shall be performed by a person or persons appointed by the Committee ("Recordkeeper"). In accordance with procedures determined by the Committee, Participants' elections under the Plan may be made by way of written, telephonic or electronic instruction to the Recordkeeper. 5. Administration. The Plan shall be administered by the Savings Plan Committee appointed by the Board of Directors of the Company (the "Committee"), which shall have the discretionary power and authority to construe and interpret the provisions of the Plan, to determine the eligibility of employees to participate in the Plan and the amount and timing of payment of any benefits due under the Plan, and to determine all other matters in carrying out the intended purposes of the Plan. In administering this Plan, including but not limited to considering appeals from the denial of claims for benefits and issuing decisions thereon, rules and procedures substantially similar to those set forth in the Savings Plan shall govern. - -------------------------------------------------------------------------------- 1 Subsequent to a Change in Control of the Company, the Plan shall be administered by the trustee of the trust established by the Company for the purposes of satisfying the Company's payment obligations under the Plan (the "Trustee"). The Trustee shall be appointed by and serve at the pleasure of the Committee, but may not be removed following a Change in Control of the Company until all the Company's obligations under the Plan have been satisfied. 6. Construction of Terms. Except as expressly provided in this Plan to the contrary, capitalized terms referenced herein shall have the same meanings as are applied to such terms in the Savings Plan as in effect from time to time. 7. Deferred Salary. (a) An eligible employee may elect to defer, in whole percentages, up to 60% of his or her gross salary. (b) A Participant may defer his or her salary on a pre-tax basis until termination of employment or a later elected date as provided in this Plan if termination is by reason of retirement or determination of Total and Permanent Disability status. (c) The Deferred Salary will be recorded in an account maintained by the Recordkeeper, entitled the "Deferred Salary Account". A Participant shall always be fully vested in amounts credited to the Deferred Salary Account maintained for such Participant. (d) A salary deferral election will become effective as of the next practicable payroll period following receipt by the Recordkeeper in such time and manner as prescribed by the Committee. (e) A Participant may at any time change or discontinue his or her salary deferral election, effective as of the next practicable payroll period following receipt by the Recordkeeper in such time and manner as prescribed by the Committee. (f) Such change in salary deferral election shall operate prospectively and shall have no effect on prior deferrals under this Plan. An individual who has previously participated in the Plan shall be considered a Participant for the purposes of the Plan until final distribution is made of amounts credited to his or her Deferred Salary Account. 8. Additional Credits to Deferred Salary Accounts. (a) The Committee shall, from time to time, select one or more of the Investment Funds from the Savings Plan ("Investment Fund") for Participants to elect to have their Deferred Salary deemed invested. - -------------------------------------------------------------------------------- 2 (b) Each Participant, upon electing to participate in the Plan, shall designate the Investment Fund or Funds with respect to which such Participant's Deferred Salary shall be deemed invested, in such a time and manner prescribed by the Committee for such purpose. The election shall be in whole percentage increments of each such Investment Fund. A Participant's election shall remain in effect with respect to all future Deferred Salary unless and until changed by the Participant in accordance with Section 8(c) below. If a Participant fails to make an election hereunder, all of his or her Deferred Salary shall be deemed invested in a Money Market Fund until the Participant makes an election hereunder. (c) A Participant may change the Investment Fund or Funds in which his or her future Deferred Salary is deemed to be invested. Such change in election shall be effective as of the close of the Business Day on which the Recordkeeper receives such instruction or, if such instruction is received after the close of a Business Day, as of the close of the next following Business Day. (d) Amounts recorded in the Deferred Salary Account maintained for each Participant shall be credited or debited with amounts equivalent to gains or losses realized by the Investment Funds in which the Participant elects to have his or her Deferred Salary deemed invested from time to time. (e) Subject to the limitations set forth in paragraphs (i) and (ii) below, a Participant may elect at any time to have amounts credited to his or her Deferred Salary Account transferred from any Investment Fund to any of the other Investment Funds, by designating the percentage of the Deferred Salary Account invested in the transferring Investment Fund to be transferred (in whole percentage increments) and the percentage of such transferred amount to be invested in the receiving Investment Fund or Funds (in whole percentage increments). Such transfer election shall be effective, and the applicable Investment Funds shall be valued for the purpose of implementing such election, as of the close of the Business Day on which the Recordkeeper receives such instruction or, if such instruction is received after the close of a Business Day, as of the close of the next following Business Day. Elections by Participants under this Section 8(e) shall be limited in the following respects: (i) The minimum amount that may be deemed transferred from any Investment Fund shall be $250 or, if less, the entire balance of the Participant's Deferred Salary Account deemed invested in such Investment Fund. - -------------------------------------------------------------------------------- 3 (ii) The Committee may in its discretion limit the number of transfers that may be made to or from any Investment Fund at any time. The Committee also shall have the discretionary right to suspend the availability of transfers among any or all of the Investment Funds at any time without prior notice to Participants. (f) Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control, the Trustee shall have the authority to prescribe alternative investment funds in which Participants' accounts under this Plan shall be deemed invested; provided, however, that (i) if Participants retain the right to designate the investment funds for deemed investment of their respective accounts, then the investment funds selected by the Trustee shall include at least an Equity Index Fund and a Money Market Fund, and (ii) if Participants are no longer entitled to designate the investment funds for deemed investment of their respective accounts, then all accounts under this Plan shall automatically be deemed invested in a Money Market Fund pending distribution in accordance with Section 9 below. 9. Payments from Deferred Salary Account. (a) Except as otherwise provided in this Section, no amounts shall be payable under the Plan to any Participant while he or she is employed by the Company or any Participating Subsidiary. Unless an election is made in accordance with Section 9(b) or (c) below or unless Section 9(d) below applies, all amounts credited to a Participant's Deferred Salary Account shall be paid in a single lump sum as soon as practicable following the termination of the Participant's employment with the Company and all Participating Subsidiaries, valued as of the first business day following such termination date. (b) A Participant may elect to defer payment of his or her Deferred Salary Account to the first business day of the month coincident with or next following the 1st to 10th anniversary of the Participant's termination of employment with the Company and all Participating Subsidiaries, provided (i) the Participant's termination of employment is on account of Retirement or Total and Permanent Disability, and (ii) the Participant's deferral election is made at least six months prior to the date of such termination. Such deferred payment shall be valued as of the first business day following the 1st to 10th anniversary, as applicable, of the Participant's termination of employment, and shall be made in a single lump sum as soon as practicable thereafter. Pending final distribution, the Participant's Deferred Salary Account shall continue to be credited or debited with amounts equivalent to gains and losses realized by the Investment Funds in which such account is invested from time to time. - -------------------------------------------------------------------------------- 4 (c) A Participant may elect to receive payment of his Deferred Salary Account in the form of two to ten annual installments commencing in the calendar year following the year of the Participant's termination of employment with the Company and all Participating Subsidiaries, provided (i) the Participant's termination of employment is on account of Retirement or Total and Permanent Disability, and (ii) the Participant's installment payment election is made at least six months prior to the date of such termination. Each installment payment shall be valued as of the close of the first business day of the month following the applicable anniversary of the Participant's termination of employment, and shall be paid as soon as practicable thereafter. Pending final distribution, the remaining balance in the Participant's Deferred Salary Account shall continue to be credited or debited with amounts equivalent to gains and losses realized by the Investment Funds in which such account is invested from time to time. (d) Prior to the occurrence of a Change of Control, in accordance with rules prescribed by the Committee, a Participant making a deferral election pursuant to Section 9(b) above or an installment election pursuant to Section 9(c) above may provide for the revocation of such deferral or installment election in the event of a Change of Control and for the payment by the Company of the Participant's Deferred Salary Account in a single lump sum as soon as practicable following the Change of Control valued as of the close of the Business Day on which the Change of Control occurs, or another date if so directed by the Committee or the Trustee. In the absence of a Participant's affirmative direction to retain a deferral or installment election, in the event of a Change of Control the Participant's Deferred Salary Account will be paid by the Company in a single lump sum as soon as practicable following the Change of Control valued as of the close of the Business Day on which the Change of Control occurs, or another date if so directed by the Committee or the Trustee. (e) In the event of the death of a Participant, whether or not then employed by the Company or a Participating Subsidiary, all amounts credited to the Participant's Deferred Salary Account shall be paid to the Participant's estate in a single lump sum valued the first business day of the month following the date of death. (f) All determinations of value of Participants' Deferred Salary Accounts shall be made in accordance with the relevant provisions of the Savings Plan. (g) All payments under the Plan shall be subject to any required withholding of Federal, state and local taxes. (h) The opportunity provided to a Participant to defer payment of his or her compensation beyond termination of employment shall serve as partial - -------------------------------------------------------------------------------- 5 consideration for a settlement of all claims which the Participant may have against the Company, its Subsidiaries, employees and agents and shall be subject to execution by the Participant of a release and settlement agreement in a form prescribed by the Committee. 10. Source of Payments. All amounts payable under the Plan shall be paid by the Company and Participating Subsidiaries from their general assets. No Participant shall have any right to or interest in any assets of the Company or any Participating Subsidiary other than as an unsecured general creditor, and no separate fund shall be established in which any Participant has any right or interest. The foregoing shall not prevent the Company or any Subsidiary from establishing one or more funds from which payments under the Plan shall be made, including but not limited to circumstances under which payments are to be made following a Change of Control. 11. Plan Amendment and Termination. The Plan may be amended or terminated by the Company at any time and in any manner prior to the happening of any event in connection with or in anticipation of a Change of Control that actually occurs, provided that no amendment or termination shall adversely affect the rights and benefits of Participants with respect to Compensation deferred pursuant to the Plan prior to such action. After the happening of any event in connection with or in anticipation of a Change of Control that actually occurs: (a) no amendment shall be made which adversely affects the rights and benefits of Participants with respect to compensation deferred or benefits accrued pursuant to the Plan prior to such amendment; and (b) no amendment may be made with respect to any provision of the Plan which becomes operative upon a Change of Control. 12. No Right of Employment. The adoption and operation of this Plan shall not create in any Participant a right of continued employment with the Company or any Subsidiary. 13. No Assignment of Interest. The interest of any Participant under the Plan may not be assigned, alienated, encumbered or otherwise transferred, and shall not be subject to attachment, garnishment, execution or levy; and any attempted assignment, alienation, encumbrance, transfer, attachment, garnishment, execution or levy shall be void and of no force or effect. THE GILLETTE COMPANY Date: June 1, 2004 By: /s/ Edward E. Guillet -------------------------------- Edward E. Guillet Senior Vice President - Human Resources - -------------------------------------------------------------------------------- 6 EX-10 3 ex10ii_063004.txt EXHIBIT 10.2 Exhibit 10.2 The Gillette Company 2004 Long-Term Incentive Plan Effective May 20, 2004 Contents Article 1. Establishment, Purpose, and Duration 1 Article 2. Administration 1 Article 3. Shares Subject to the Plan and Maximum Awards 2 Article 4. Eligibility and Participation 4 Article 5. Stock Options 4 Article 6. Stock Appreciation Rights 7 Article 7. Restricted Stock and Restricted Stock Units 8 Article 8. Performance Shares 10 Article 9. Cash-Based Awards and Other Stock-Based Awards 11 Article 10. Performance Measures 11 Article 11. Dividend Equivalents 13 Article 12. Additional Conditions of Awards 13 Article 13. Deferrals 15 Article 14. Rights of Participants 15 Article 15. Covered Transactions and Change of Control 16 Article 16. Amendment, Modification, Suspension, and Termination 17 Article 17. Withholding 18 Article 18. Successors 19 Article 19. General Provisions 19 Article 20. Definitions 21 The Gillette Company 2004 Long-Term Incentive Plan Article 1. Establishment, Purpose, and Duration 1.1 Establishment. The Gillette Company, a Delaware corporation has established this 2004 Long-Term Incentive Plan (the "Plan") as a long-term incentive compensation plan. The Plan permits the grant of Cash-Based Awards, Nonqualified Stock Options, Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, and Other Stock-Based Awards. The Plan shall become effective on the date of stockholder approval (the "Effective Date") and shall remain in effect as provided in Section 1.3 hereof. 1.2 Purpose of the Plan. The purpose of the Plan is to promote the interests of the Company and its stockholders by strengthening the Company's ability to attract, motivate, and retain Employees (including employees who are also Directors) and Nonemployee Directors of the Company upon whose judgment, initiative, and efforts the financial success and growth of the business of the Company depend, and to provide an additional incentive for such individuals through stock ownership and other rights that promote and recognize the financial success and growth of the Company and create value for stockholders. 1.3 Duration of the Plan. Unless sooner terminated as provided herein, the Plan shall terminate ten years from the Effective Date. After the Plan is terminated, no Awards may be granted but Awards previously granted shall remain outstanding in accordance with their applicable terms. No Incentive Stock Options may be granted more than ten years after December 9, 2003. Article 2. Administration 2.1 General. The Committee shall be responsible for administering the Plan, subject to this Article 2 and the other provisions of the Plan. The Committee may employ attorneys, consultants, accountants, agents, and other persons, any of whom may be an Employee, and shall be entitled to rely upon the advice, opinions, or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participants, the Company, and all other interested persons. 2.2 Authority of the Committee. The Committee shall have full discretionary power to interpret the terms and the intent of the Plan and any Award Agreement or other agreement or document ancillary to or in connection with the Plan, to determine eligibility for Awards and to adopt such rules, regulations, forms, instruments, and guidelines for administering the Plan, as it may deem necessary or proper. Such authority shall include, but not be limited to, selecting Award recipients including prospective Employees and establishing all Award terms and conditions, including the terms and conditions set forth in Award Agreements. Notwithstanding the foregoing, Awards to Nonemployee Directors shall be made by the Board, and all references in the Plan to the Committee, where the Committee is referred to as having discretion or authority to grant Awards, shall, as applied to Awards made to Nonemployee Directors, be construed to refer to the Board. Awards to Nonemployee Directors are not subject to management's discretion. - -------------------------------------------------------------------------------- 1 2.3 Delegation. The Committee may delegate to one or more of its members or to one or more officers of the Company, and/or its Subsidiaries or to one or more agents or advisors such administrative duties or powers as it may deem advisable. The Committee may also delegate to one or more officers (each, a "delegated officer") of the Company the power to designate Employees (other than the delegated officer and other than any officer subject to Section 16 of the Exchange Act) to receive Awards under the Plan, on such terms as the delegated officer determines, subject to the following: (i) any such delegation with respect to Options or other rights described in Section 157 of the Delaware General Corporation Law, or any successor provision, shall comply with the requirements set forth therein, and (ii) in the case of any such delegation with respect to other Awards involving the issuance of Shares, the Committee shall authorize the issuance of the Shares, limiting the aggregate number thereof that shall be subject to Awards to which the delegation applies, and shall determine the price, if any, to be paid therefor. Any officer to whom a delegation under the preceding sentence is made shall report periodically to the Committee, in such detail as the Committee may require, concerning Awards allocated or granted pursuant to such delegation. References to the Committee herein shall be deemed to include any person to whom the Committee has delegated responsibilities under this Section 2.3, to the extent of such delegation. Article 3. Shares Subject to the Plan and Maximum Awards 3.1 Number of Shares Available for Awards. (a) Subject to adjustment as provided in Section 3.4, the maximum number of Shares available for issuance to Participants under the Plan (the "Share Authorization") shall be: (i) Nineteen million (19,000,000), plus (ii) The sum of (1) the authorized Shares not issued or subject to outstanding awards under the Company's Prior Plan as of the Effective Date plus (2) any unissued Shares subject to outstanding awards as of the Effective Date under the Prior Plan that on or after the Effective Date cease for any reason to be subject to such awards (other than by reason of exercise or settlement of the awards to the extent they are exercised for or settled in vested and nonforfeitable Shares). (b) Subject to the foregoing limit on the number of Shares that may be issued in the aggregate under the Plan, the maximum number of Shares that may be issued in the following categories shall be as follows: (i) No more than thirty seven million (37,000,000) Shares may be issued pursuant to Awards in the form of ISOs; and (ii) No more than thirty seven million (37,000,000) Shares may be issued pursuant to Awards in the form of NQSOs; and (iii)No more than one million (1,000,000) Shares may be issued pursuant to Awards made to Nonemployee Directors. - -------------------------------------------------------------------------------- 2 3.2 Share Usage. (a) Shares related to Awards that terminate by expiration, forfeiture, cancellation, or otherwise without the issuance of such Shares, are settled in cash in lieu of Shares, or are exchanged with the Committee's permission, prior to the issuance of Shares, for Awards not involving Shares, are not issued Shares and, consistent with Section 3.1 above, shall be available for Awards granted under the Plan. If the Option Price of any Option granted under the Plan or the tax withholding requirements with respect to any Award granted under the Plan are satisfied by tendering Shares to the Company (by either actual delivery or by attestation), or if shares are tendered for any other purpose under any other form of Award, the number of Shares treated as issued under the Plan for purposes of Section 3.1 above shall be determined net of any Shares tendered to the Company. The Shares available for issuance under the Plan may be authorized and unissued Shares or treasury Shares, as the Committee determines. (b) The Committee shall have the authority to grant Awards as an alternative to or as the form of payment for grants or rights earned or due under other compensation plans or arrangements of the Company. 3.3 Annual Award Limits. The following limits (each an "Annual Award Limit," and, collectively, "Annual Award Limits") shall apply to grants of Awards under the Plan: (a) Options: The maximum aggregate number of Shares subject to Options granted in any one Plan Year to any one Participant shall be three million (3,000,000) plus the amount of the Participant's unused applicable Annual Award Limit as of the close of the previous Plan Year. (b) SARs: The maximum number of Shares subject to Stock Appreciation Rights granted in any one Plan Year to any one Participant shall be three million (3,000,000) plus the amount of the Participant's unused applicable Annual Award Limit as of the close of the previous Plan Year. (c) Restricted Stock or Restricted Stock Units: The maximum aggregate grant with respect to Awards of Restricted Stock or Restricted Stock Units granted in any one Plan Year to any one Participant shall be two million (2,000,000) plus the amount of the Participant's unused applicable Annual Award Limit as of the close of the previous Plan Year. (d) Performance Shares: The maximum aggregate grant of Performance Shares in any one Plan Year to any one Participant shall be one and one-half million (1,500,000) Shares plus the amount of the Participant's unused applicable Annual Award Limit as of the close of the previous Plan Year. (e) Cash-Based Awards: The maximum aggregate grant amount with respect to Cash-Based Awards granted in any one Plan Year to any one Participant may not - -------------------------------------------------------------------------------- 3 exceed ten million dollars ($10,000,000) plus the amount of the Participant's unused applicable Annual Award Limit as of the close of the previous Plan Year. (f) Other Stock-Based Awards. The maximum aggregate grant with respect to Other Stock-Based Awards granted in any one Plan Year to any one Participant shall be one and one-half million (1,500,000) Shares plus the amount of the Participant's unused applicable Annual Award Limit as of the close of the previous Plan Year. (g) Awards to Nonemployee Directors. The maximum aggregate grant with respect to Awards made in any one Plan Year to any one Nonemployee Director shall be twenty thousand (20,000) Shares plus the amount of the Participant's unused applicable Annual Award Limit as of the close of the previous Plan Year. 3.4 Adjustments in Authorized Shares. In the event of any corporate event or transaction (including, but not limited to, a change in the shares of the Company or the capitalization of the Company) such as a merger, consolidation, reorganization, recapitalization, separation, stock dividend, stock split, reverse stock split, split up, spin-off, or other distribution of stock or property of the Company, combination of Shares, exchange of Shares, dividend in kind, or other like change in capital structure, or a distribution (other than a normal cash dividend) to stockholders of the Company, or any similar corporate event or transaction, the Committee, in order to prevent dilution or enlargement of Participants' rights under the Plan, shall substitute or adjust, as applicable, the number and kind of Shares that may be issued under the Plan or under particular forms of Award, the number and kind of Shares subject to outstanding Awards, the Option Price or Grant Price applicable to outstanding Awards, the Annual Award Limits, and other value determinations applicable to outstanding Awards. The Committee may also make such other adjustments in Awards as are authorized by Article 15 or Article 16. Any adjustment made pursuant to this Section 3.4 or pursuant to Article 15 or Article 16 that is made with respect to an Award intended to be an ISO shall be made only to the extent consistent with such intent, and any such adjustment that is made with respect to an Award to a Covered Employee that is intended to qualify for the performance-based compensation exception under Section 162(m) of the Code shall be made consistent with that intent. The determination of the Committee as to Award adjustments, if any, shall be conclusive and binding on Participants under the Plan. Article 4. Eligibility and Participation 4.1 Eligibility. Individuals eligible to participate in this Plan include all Nonemployee Directors and all key Employees. 4.2 Actual Participation. Subject to the provisions of the Plan, the Committee may, from time to time, select from all eligible individuals those to whom Awards shall be granted and the amount, type, and terms of each Award. Article 5. Stock Options 5.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants in such number, and upon such terms, and at any time and from time to time - -------------------------------------------------------------------------------- 4 as shall be determined by the Committee; provided that ISOs may be granted only to eligible Employees of the Company or of any parent or subsidiary corporation (as these terms are defined in Section 424 of the Code and the regulations thereunder). 5.2 Award Agreement. Each Option grant shall be evidenced by an Award Agreement that shall specify the Option Price, the maximum duration of the Option, the number of Shares to which the Option pertains, the conditions upon which an Option shall become vested and exercisable, and such other provisions as the Committee shall determine that are not inconsistent with the terms of the Plan. The Award Agreement also shall specify whether the Option is intended to be an ISO or a NQSO. 5.3 Option Price. The Option Price for each grant of an Option under this Plan shall be as determined by the Committee and shall be specified in the Award Agreement. The Option Price may be fixed or indexed and shall be equal to or greater than the FMV on the date of grant of the Shares subject to the Option. 5.4 Duration of Options. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary of the date of its grant. 5.5 Exercise of Options. Options shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which terms and restrictions need not be the same for each grant or for each Participant. 5.6 Payment. Options granted under this Article 5 shall be exercised by the delivery of a notice of exercise to the Company or an agent designated by the Company in a form specified or accepted by the Committee, or by complying with any alternative procedures which may be authorized by the Committee, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The issuance of Shares with respect to any Option exercise shall be conditioned on full payment of the related Option Price. The Option Price of any Option shall be payable to the Company either: (a) in cash or its equivalent; (b) by tendering (either by actual delivery or attestation) previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the Option Price (provided that, except as otherwise determined by the Committee, the Shares that are tendered must have been held by the Participant for at least six (6) months prior to their tender to satisfy the Option Price or have been purchased on the open market); (c) by any other method approved or accepted by the Committee, including, without limitation, if the Committee so determines, a cashless (broker-assisted) exercise; or (d) by any combination of the foregoing. Subject to any governing rules or regulations, as soon as practicable after receipt of written notification of exercise and full payment (including satisfaction of any applicable tax withholding), the Company shall deliver to the person exercising the Option evidence of book entry Shares, or upon such person's request, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). - -------------------------------------------------------------------------------- 5 Unless otherwise determined by the Committee, all cash payments under all of the methods indicated above shall be paid in United States dollars. 5.7 Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option granted under this Article 5 as it may deem advisable, including, without limitation, minimum holding period requirements, restrictions under applicable securities laws, or under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded. 5.8 Termination of Employment. Each Participant's Award Agreement shall set forth the extent, if any, to which the Participant shall have the right to exercise the Option following termination of the Participant's employment with or provision of services to the Company and/or its Subsidiaries, as the case may be. Such provisions shall be determined by the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Options issued pursuant to this Article 5, and may reflect distinctions based on the reasons for termination. 5.9 Transferability of Options. (a) Incentive Stock Options. No ISO granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all ISOs granted to a Participant under this Article 5 shall be exercisable during his or her lifetime only by such Participant. (b) Nonqualified Stock Options. Except as otherwise provided in a Participant's Award Agreement or otherwise at any time by the Committee, no NQSO granted under this Article 5 may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution; provided that the Board or Committee may permit further transferability, on a general or a specific basis, and may impose conditions and limitations on any permitted transferability. Further, except as otherwise provided in a Participant's Award Agreement or otherwise at any time by the Committee, or unless the Board or Committee decides to permit further transferability, all NQSOs granted to a Participant under this Article 5 shall be exercisable during his or her lifetime only by such Participant. With respect to those NQSOs, if any, that are permitted to be transferred to another person, relevant references in the Plan to the Participant, as determined by the Committee, shall be deemed to include the Participant's permitted transferee. 5.10 Notification of Disqualifying Disposition. If any Participant shall make any disposition of Shares issued pursuant to the exercise of an ISO under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions), such Participant shall notify the Company of such disposition within ten (10) days thereof. 5.11. Substituting SARs. In the event the Company no longer uses APB Opinion 25 to account for equity compensation and is required to or elects to expense the cost of Options pursuant - -------------------------------------------------------------------------------- 6 to FAS 123 (or a successor standard), the Committee shall have the ability to substitute, without receiving Participant permission, SARs paid only in Stock (or SARs paid in Stock or cash at the Committee's discretion) for outstanding Options awarded after the adoption of FAS 123; provided, the terms of the substituted Stock SARs correspond in relevant respects to the terms of the Options and the difference between the Fair Market Value of the underlying Shares and the Grant Price of the SARs is equivalent to the difference between the Fair Market Value of the underlying Shares and the Option Price of the Options, as determined by the Committee. Article 6. Stock Appreciation Rights 6.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Participants in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. The Committee may grant Freestanding SARs, Tandem SARs, or any combination of these forms of SARs. The Grant Price for each grant of a Freestanding SAR shall be determined by the Committee and shall be specified in the Award Agreement. The Grant Price for a Freestanding SAR may be fixed or indexed and shall be equal to or greater than the FMV on the date of grant of the Shares subject to the Freestanding SAR. The Grant Price of Tandem SARs shall be equal to the Option Price of the related Option. 6.2 SAR Agreement. Each SAR Award shall be evidenced by an Award Agreement that shall specify the Grant Price, the maximum duration of the SAR, the number of Shares to which the SAR pertains, the conditions upon which a SAR shall become vested and exercisable, and such other provisions as the Committee shall determine that are not inconsistent with the terms of the Plan. 6.3 Duration of SAR. Each SAR shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no SAR shall be exercisable later than the tenth (10th) anniversary of the date of its grant. 6.4 Exercise of Freestanding SARs. Freestanding SARs shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which terms and restrictions need not be the same for each grant or for each Participant. 6.5 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part of the Shares subject to the related Option upon the surrender of the right to exercise the equivalent portion of the related Option. A Tandem SAR may be exercised only with respect to the Shares for which its related Option is then exercisable. Notwithstanding any other provision of this Plan to the contrary, with respect to a Tandem SAR granted in connection with an ISO: (a) the Tandem SAR will expire no later than the expiration of the underlying ISO; (b) the value of the payout with respect to the Tandem SAR may be for no more than one hundred percent (100%) of the difference between the Option Price of the underlying ISO and the Fair Market Value of the Shares subject to the underlying ISO at the time the Tandem SAR is exercised; and (c) the Tandem SAR may be exercised only when the Fair Market Value of the Shares subject to the ISO exceeds the Option Price of the ISO. - -------------------------------------------------------------------------------- 7 6.6 Payment of SAR Amount. Upon the exercise of an SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying: (a) The difference between the Fair Market Value of a Share on the date of exercise over the Grant Price; by (b) The number of Shares with respect to which the SAR is exercised. The payment upon SAR exercise may be in cash, Shares, or any combination thereof, or in any other manner approved by the Committee. The Committee's determination regarding the form of SAR payout shall be set forth in the Award Agreement pertaining to the grant of the SAR. 6.7 Termination of Employment. Each Award Agreement shall set forth the extent, if any, to which the Participant shall have the right to exercise the SAR following termination of the Participant's employment with or provision of services to the Company and/or its Subsidiaries, as the case may be. Such provisions shall be determined by the Committee, shall be included in the Award Agreement entered into with Participants, need not be uniform among all SARs issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination. 6.8 Nontransferability of SARs. Except as otherwise provided in a Participant's Award Agreement or otherwise at any time by the Committee, no SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement or otherwise at any time by the Committee, all SARs granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. With respect to those SARs, if any, that are permitted to be transferred to another person, relevant references in the Plan to the Participant, as determined by the Committee, shall be deemed to include the Participant's permitted transferee. 6.9 Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares received upon exercise of a SAR granted pursuant to the Plan as it may deem advisable or desirable. These restrictions may include, but shall not be limited to, a requirement that the Participant hold any Shares received upon exercise of a SAR for a specified period of time. Article 7. Restricted Stock and Restricted Stock Units 7.1 Grant of Restricted Stock or Restricted Stock Units. Subject to the terms and provisions of the Plan, Shares of Restricted Stock and/or Restricted Stock Units may be granted to Participants in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. 7.2 Restricted Stock or Restricted Stock Unit Agreement. Each Restricted Stock and/or Restricted Stock Unit grant shall be evidenced by an Award Agreement that shall specify the Period(s) of Restriction, the number of Shares of Restricted Stock or the number of Restricted Stock Units granted, the conditions upon which Restricted Stock or Restricted Stock Units shall become vested, and such other provisions as the Committee shall determine that are not inconsistent with the terms of the Plan. - -------------------------------------------------------------------------------- 8 7.3 Transferability. Except as provided in this Plan or an Award Agreement, the Shares of Restricted Stock and/or Restricted Stock Units granted herein may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction established by the Committee and specified in the Award Agreement or otherwise at anytime by the Committee (and in the case of Restricted Stock Units until the date of delivery or other payment), or upon earlier satisfaction of any other conditions, as specified by the Committee, and set forth in the Award Agreement or otherwise at any time by the Committee. All rights with respect to the Restricted Stock and/or Restricted Stock Units granted to a Participant under the Plan shall be available during his or her lifetime only to such Participant, except as otherwise provided in an Award Agreement or at any time by the Committee. 7.4 Other Restrictions. The Committee shall impose such other conditions and/or restrictions on any Shares of Restricted Stock or Restricted Stock Units granted pursuant to the Plan as it may deem advisable including, without limitation, a requirement that Participants pay a stipulated purchase price for each Share of Restricted Stock or each Restricted Stock Unit, restrictions based upon the achievement of specific performance goals, time-based restrictions, and/or restrictions under applicable laws or under the requirements of any stock exchange or market upon which such Shares are listed or traded, or holding requirements or sale restrictions placed on the Shares by the Company upon vesting of such Restricted Stock or Restricted Stock Units. Except with respect to a maximum of five percent (5%) of the Shares authorized in Section 3.1(a) and disregarding the impact of Article 15, any Awards of Restricted Stock or Restricted Stock Units that vest on the basis of the Participant's continued employment with or provision of service to the Company shall provide for vesting at a rate that is not more rapid than annual pro rata vesting over a three (3) year period and any Awards of Restricted Stock or Restricted Stock Units that vest upon the attainment of performance goals shall provide for a performance period of at least twelve (12) months. To the extent deemed appropriate by the Committee, the Company may retain the certificates representing Shares of Restricted Stock in the Company's possession until such time as all conditions and/or restrictions applicable to such Shares have been satisfied or lapse. After all conditions and restrictions under the Plan applicable to an Award under this Article 7 have been satisfied or have lapsed, including the satisfaction of all applicable tax withholding obligations, then (a) if the Award was an Award of Restricted Stock, the Shares subject to the Award shall be free of all transfer restrictions imposed under the Plan, and (b) if the Award was an Award of Restricted Stock Units, the Shares subject to the Award, or cash in lieu thereof, or a combination of Shares and cash, as the Committee determines, shall be issued and delivered to the holder of the Award. 7.5 Voting Rights. Except as otherwise specified in an Award Agreement, Participants holding Shares of Restricted Stock shall have full voting rights with respect to those Shares during the Period of Restriction. A Participant shall have no voting rights with respect to any Restricted Stock Units granted hereunder except as to Shares actually issued and delivered under such Units. 7.6 Termination of Employment. Each Award Agreement shall set forth the extent, if any, to which the Participant shall have the right to retain Restricted Stock and/or Restricted Stock Units - -------------------------------------------------------------------------------- 9 following termination of the Participant's employment with or provision of services to the Company and/or its Subsidiaries, as the case may be. Such provisions shall be determined by the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Shares of Restricted Stock or Restricted Stock Units issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination. 7.7 Section 83(b) Election. The Committee may provide in an Award Agreement relating to Restricted Stock that the Award is conditioned upon the Participant making or refraining from making an election with respect to the Restricted Stock under Section 83(b) of the Code. If a Participant makes an election pursuant to Section 83(b) of the Code concerning Restricted Stock, the Participant shall be required to file promptly a copy of such election with the Company. Article 8. Performance Shares 8.1 Grant of Performance Shares. Subject to the terms and provisions of the Plan, Performance Shares may be granted in such number, and upon such terms, which may include requirements of continued service as well as performance conditions, and at any time and from time to time as shall be determined by the Committee. Each Award under this Article 8 shall specify the performance measures applicable to the Award, as determined by the Committee, and the period or periods (each, a "Performance Period") over which the performance measures so determined are to be measured. Each Performance Share shall be expressed in units of Shares or fractions or multiples of Shares and shall provide for payout, if the applicable performance and other Award conditions are met, based on the value of the underlying Shares, or on appreciation in such value, or on such other Share-related measures of value as the Committee may determine. For the avoidance of doubt, an Award granted under Articles 5, 6, 7 or 9 may provide for the acceleration of vesting or payment upon the satisfaction of performance conditions and shall not thereby be considered a Performance Share Award under this Article 8, but a share based Award that would otherwise be described in Articles 5, 6, 7 or 9 but under which the satisfaction of performance conditions (other than service) is a precondition to any vesting or exercisability shall be considered a Performance Share for purposes of the Plan. 8.2 Payment of Performance Shares. Subject to the terms of this Plan, after the applicable Performance Period has ended, the holder of a Performance Share shall be entitled to receive such payout, if any, as the Committee determines is owed based on the terms of the Award. Payment with respect to a Performance Share may be made in the form of cash or in Shares (or in a combination thereof), as the Committee determines. 8.3 Termination of Employment. Each Award Agreement shall set forth the extent, if any, to which the Participant shall have the right to retain Performance Shares following termination of the Participant's employment with or provision of services to the Company and/or its Subsidiaries, as the case may be. Such provisions shall be determined by the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Awards of Performance Shares issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination. 8.4 Nontransferability. Except as otherwise provided in a Participant's Award Agreement or otherwise at any time by the Committee, Performance Shares may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of - -------------------------------------------------------------------------------- 10 descent and distribution. Further, except as otherwise provided in a Participant's Award Agreement or otherwise at any time by the Committee, a Participant's rights under the Plan shall be exercisable during his or her lifetime only by such Participant. With respect to those Performance Shares, if any, that are permitted to be transferred to another person, relevant references in the Plan to a Participant, as determined by the Committee, shall be deemed to include the Participant's permitted transferee. Article 9. Cash-Based Awards and Other Stock-Based Awards 9.1 Grant of Cash-Based Awards. Subject to the terms and provisions of the Plan, Cash-Based Awards may be granted in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. Each such Award shall be evidenced by an Award Agreement that shall specify the maximum duration of the Cash-Based Award, the amount of cash to which the Cash-Based Award pertains, the conditions upon which the Cash-Based Award shall become vested or exercisable, and such other provisions as the Committee shall determine which are not inconsistent with the terms of the Plan. 9.2 Other Stock-Based Awards. Subject to the terms and provisions of the Plan, Other Stock-Based Awards may be granted in such number, and upon such terms, and at any time and from time to time as shall be determined by the Committee. Such Awards shall be evidenced by an Award Agreement that shall specify the maximum duration of the Other Stock-Based Award, the number of Shares to which the Other Stock-Based Award pertains, the conditions upon which the Other Stock-Based Award shall become vested and exercisable, and such other provisions as the Committee shall determine which are not inconsistent with the terms of the Plan. 9.3 Payment of Cash-Based and Other Stock-Based Awards. Each Cash-Based Award shall specify a cash-denominated payment amount or payment ranges as determined by the Committee. Each Other Stock-Based Award shall be expressed in terms of Shares or units based on Shares, as determined by the Committee. Payment, if any, with respect to a Cash-Based Award or an Other Stock-Based Award shall be made in accordance with the terms of the Award and, subject to such terms, may be made under either form of Award in cash or in Shares, as the Committee determines. 9.4 Termination of Employment. Each Participant's Award Agreement shall set forth the extent, if any, to which the Participant shall have the right to receive payment under Cash-Based Awards or Other Stock-Based Awards following termination of the Participant's employment with or provision of services to the Company and/or its Subsidiaries, as the case may be. Such provisions shall be determined by the Committee, shall be included in the Award Agreement entered into with each Participant, need not be uniform among all Cash-Based Awards or Other Stock-Based Awards issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination. 9.5 Nontransferability. Except as otherwise determined by the Committee, neither Cash-Based Awards nor Other Stock-Based Awards may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, except as otherwise provided by the Committee, a Participant's rights under the Plan, if exercisable, shall be exercisable during his or her lifetime only by such Participant. With respect to those Cash-Based Awards or Other Stock-Based Awards, if any, that are permitted to be transferred to another person, relevant references in the Plan to a Participant, as determined by the Committee, shall be deemed to include the Participant's permitted transferee. - -------------------------------------------------------------------------------- 11 Article 10. Performance Measures 10.1 Performance Measures. The performance goals upon which the payment or vesting of an Award to a Covered Employee that is intended to qualify as Performance-Based Compensation shall be objectively determinable goals based upon one or more of the following Performance Measures: (a) Net earnings or net income (before or after taxes); (b) Net income per share; (c) Net sales growth; (d) Net operating profit; (e) Return measures (including, but not limited to, return on invested capital, assets, equity, or net sales); (f) Cash flow (including, but not limited to, operating cash flow, free cash flow, and cash flow return on capital); (g) Income before or after taxes, interest, depreciation, and/or amortization; (h) Gross or operating margins; (i) Productivity ratios; (j) Share price (including, but not limited to, growth measures and total stockholder return); (k) Expense targets; (l) Margins; (m) Operating efficiency; (n) Working capital targets; and (o) Economic Value Added or EVA(R)(net operating profit after taxes minus the sum of capital multiplied by the cost of capital) Performance Measures may be applied to any or any combination of the Company and its Subsidiaries on a consolidated basis or, as the context permits, on a divisional, entity, line of business, project or geographical basis or in combinations thereof. If the Committee so determines, performance goals may relate to performance under one or more of the Performance Measures as hereinabove described compared to the performance of a group of comparator companies or another index or indices. The Committee also has the authority to provide for accelerated vesting of any Award based on the achievement of performance goals pursuant to the Performance Measures specified in this Article 10. 10.2 Evaluation of Performance. The Committee may provide in any such Award that any evaluation of performance may include or exclude any of the following events that are objectively determinable and that occur during a Performance Period: (a) asset write-downs, (b) litigation, claims, judgments, or settlements, (c) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results, (d) any reorganization and restructuring programs, (e) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in management's discussion and analysis of financial condition and results of operations appearing in the Company's annual report to stockholders for the applicable year, (f) acquisitions, divestitures, joint ventures, or alliances, and (g) foreign exchange gains and losses. To the extent such inclusions or exclusions affect Awards to Covered Employees, they shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility. - -------------------------------------------------------------------------------- 12 10.3 Adjustment of Performance-Based Compensation. Awards that are designed to qualify as Performance-Based Compensation, and that are held by Covered Employees, may not be adjusted upward. The Committee may adjust such Awards downward, either on a formula or a discretionary basis or any combination, as the Committee determines. 10.4 Other Changes. In the event that applicable tax and/or securities laws change to permit Committee discretion to alter the governing Performance Measures without obtaining stockholder approval of such changes, the Committee may make such changes without obtaining stockholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards that shall not qualify as Performance-Based Compensation, the Committee may make such grants without satisfying the requirements of Code Section 162(m) and may base vesting on Performance Measures other than those set forth in Section 10.1. Article 11. Dividend Equivalents Any Participant selected by the Committee may be granted dividend equivalents based on the dividends declared on Shares that are subject to any Award but that have not been issued or delivered, to be credited as of dividend payment dates during the period between the date the Award is granted and the date the Award is exercised, vests or expires, as determined by the Committee. Such dividend equivalents shall be converted to cash or additional Shares by such formula and at such time and subject to such limitations as may be determined by the Committee. Article 12. Additional Conditions of Awards Except as otherwise provided in an Award Agreement or an employment agreement between an Employee Participant and the Company, the following additional provisions shall govern Awards granted under the Plan. 12.1 Additional Conditions of Awards. With respect to any Option or other Award granted under this Plan, the following terms and conditions shall apply: (a) Unless otherwise provided pursuant to a termination settlement agreement with the Company or any of its subsidiaries, while the Participant is employed by the Company and for a period of eighteen (18) months after the termination or cessation of such employment for any reason, the Participant shall not directly or indirectly: (i) As an employee, consultant, independent contractor, officer, director, individual proprietor, investor, partner, stockholder, agent, principal, joint venturer, or in any other capacity whatsoever (other than as the holder of not more than one percent of the combined voting power of the outstanding stock of a publicly held corporation or company), be employed, work, consult, advise, assist, or engage in any activity regarding any business, product, service or other matter which: (A) is substantially similar to or competes with any business, product, service or other matter regarding which the Participant worked for the Company, or any of its subsidiaries, during the three (3) years prior to Participant's termination of employment; or (B) concerns subject matters about which Participant gained proprietary information of the Company, or any of its subsidiaries, during the three (3) year period prior to the Participant's termination of employment; - -------------------------------------------------------------------------------- 13 (ii) Either alone or in association with others, solicit, divert or take away, or attempt to divert or to take away, the business or patronage of any of the clients, customers or accounts, or prospective clients, customers or accounts, of the Company which were contacted, solicited or served, directly or indirectly, by Participant while employed by the Company; or (iii)Either alone or in association with others: (A) solicit or encourage any employee or independent contractor of the Company to terminate his or her relationship with the Company; or (B) recruit, hire or solicit for employment or for engagement as an independent contractor, any person who is or was employed by the Company at any time during the Participant's employment with the Company; provided, that this Paragraph (iii) shall not apply to such person whose employment with the Company has been terminated for a period of six months or longer. (b) The Participant shall not disclose or use at any time any secret or confidential information or knowledge obtained or acquired by the Participant during, after, or by reason of, employment with the Company or any of its subsidiaries, as provided under applicable law and any and all agreements between the Participant and the Company or any of its subsidiaries regarding Participant's employment with the Company or the subsidiary. (c) In accordance with any and all agreements between the Participant and the Company or any of its subsidiaries regarding the Participant's employment, the Participant shall disclose promptly and transfer and assign to the Company all improvements and inventions in certain fields made or conceived by the Participant during employment with the Company or the subsidiary and within the prescribed periods thereafter. (d) To the extent permitted by law, the Participant shall not make, publish or state, or cause to be made, published or stated, any defamatory or disparaging statement, writing or communication pertaining to the character, reputation, business practices, competence or conduct of the Company, its subsidiaries, stockholders, directors, officers, employees, agents, representatives or successors. 12.2 Geographic Scope of Provisions. The geographic scope of the provisions of Section 12.1(a) above shall extend to anywhere the Company or any of its subsidiaries is doing business, has done business or intends to do business. If any restriction set forth in Section 12.1(a) above is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. 12.3 Effect of Change of Control on Conditions. In the event of a Change of Control, the restrictions contained in Sections 12.1(a)(i), 12.1(a)(iii) and 12.1(d) above shall cease and the Participant shall no longer be bound by the obligations thereunder. 12.4 Consequences of Violation of Conditions. If the Company reasonably determines that a Participant has materially violated any of the Participant's obligations under Section 12.1 above, or if - -------------------------------------------------------------------------------- 14 a Participant is terminated for Cause, then, in addition to any other remedies at law or in equity it may have, the Company shall have the following rights and remedies: (a) The Company may cancel any and all Awards granted to the Participant, including grants that according to their terms are vested, effective as of the date on which such violation began (the "Violation Date"); and (b) The Company may demand the return of any gain realized by the Participant as a result of the Participant's exercise of, vesting in or receipt of any Award during the period commencing one year prior to the Participant's termination of employment and continuing through the Violation Date. Upon demand, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of such exercises, vestings, or receipts. At the option of the Company, such payment shall be made by returning to the Company the number of shares of common stock of the Company which the Participant received in connection with such exercise (with the Company then refunding the option price paid by the Participant), vesting, or receipt, or in cash in the amount of the gain realized. If after such demand the Participant fails to return said shares or amounts, the Company shall have the right to offset said amounts against any amounts, including compensation, owed to the Participant by the Company or to commence judicial proceedings against the Participant to recover said shares or amounts. The provisions of this Section 12.4 shall be in addition to any other forfeitures or penalties required by applicable law. 12.5 Effect on Other Non-Competition Restrictions. The non-competition restrictions set forth in Section 12.1(a) supersede any non-competition restrictions of less than eighteen (18) months in duration set forth in any employment agreement between a Participant and the Company or any subsidiary or predecessor. Article 13. Deferrals The Committee may permit or require a Participant to defer such Participant's receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option or SAR, the lapse or waiver of restrictions with respect to Restricted Stock Units, or payment in respect of Performance Shares, Cash-Based Awards, and Other Stock-Based Awards. If any such deferral election is required or permitted, the Committee shall establish rules and procedures for such payment deferrals. Article 14. Rights of Participants 14.1 Employment. Nothing in the Plan or an Award Agreement shall interfere with or limit in any way the right of the Company and/or its Subsidiaries to terminate any Participant's employment or service on the Board at any time or for any reason or confer upon any Participant any right to continue his or her employment or service as a Nonemployee Director for any specified period of time. - -------------------------------------------------------------------------------- 15 Neither an Award nor any benefits arising under this Plan shall constitute an employment contract with the Company and/or its Subsidiaries. Subject to Articles 2 and 16, this Plan and the benefits hereunder may be terminated at any time pursuant to Article 16 without giving rise to any liability on the part of the Company and/or its Subsidiaries. 14.2 Participation. No individual shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award. 14.3 Rights as a Stockholder. Except as otherwise provided herein, a Participant shall have none of the rights of a stockholder with respect to Shares covered by any Award until the Participant becomes the record holder of such Shares. Article 15. Covered Transactions and Change of Control 15.1 Covered Transactions. Unless otherwise specified in an Award Agreement, in the event of a "covered transaction" (as hereinafter defined) in which there is an acquiring or surviving entity, the Committee may provide for the assumption of some or all outstanding Awards, or for the grant of new Awards in substitution therefor, by the acquirer or survivor or an affiliate of the acquirer or survivor, in each case on such terms and subject to such conditions as the Committee determines. The terms and conditions of any substitute Award shall be substantially equivalent to the terms and conditions of the Award that it replaces, taking into account changes necessitated by the covered transaction, all as determined by the Committee. In the absence of such an assumption or if there is no substitution, except as otherwise provided in the Award each Stock Option, SAR and other Award requiring exercise will become fully exercisable, and the delivery of Shares or cash issuable or payable under each other outstanding Award will be accelerated, prior to the covered transaction, in each case (where Shares are to be delivered) on a basis that gives the holder of the Award a reasonable opportunity, as determined by the Committee, following exercise of the Award or the issuance of the Shares, as the case may be, to participate as a stockholder in the covered transaction, and the Award will terminate upon consummation of the covered transaction. In the case of Restricted Stock or other Award subject to restrictions, the Committee may require that any amounts delivered, exchanged or otherwise paid in respect of such Shares or under the Award in connection with the covered transaction be placed in escrow or otherwise made subject to such restrictions as the Committee deems appropriate to carry out the intent of the Plan. For purposes of the foregoing, a "covered transaction" is any of (i) a consolidation, merger, or similar transaction or series of related transactions in which the Company is not the surviving corporation or which results in the acquisition of all or substantially all of the Company's then outstanding common stock by a single person or entity or by a group of persons and/or entities acting in concert, (ii) a sale or transfer of all or substantially all the Company's assets, or (iii) a dissolution or liquidation of the Company. Where a covered transaction involves a tender offer that is reasonably expected to be followed by a merger described in clause (i) (as determined by the Committee), the covered transaction shall be deemed to have occurred upon consummation of the tender offer. 15.2 Change of Control of the Company. Unless otherwise specified in an Award Agreement or an employment agreement between an Employee Participant and the Company, in the event of a Change of Control, whether or not such Change of Control also constitutes a "covered transaction" as defined in Section 15.1 above, the following provisions shall apply. In the case of a transaction that qualifies as both a Change of Control and a "covered transaction" as so defined, the vesting provisions of this Section 15.2 shall be applied whether or not there is an assumption or - -------------------------------------------------------------------------------- 16 substitution under Section 15.1, but the provisions of this Section 15.2 relating to exercise or enjoyment of an Award following the Change of Control shall apply only to the extent the Award is continued (through assumption or substitution) in connection with the transaction. (a) All outstanding Options and SARs held by Participants which are not yet exercisable on the date such Change of Control first occurs shall become immediately exercisable and all the rights and benefits relating to such Options and SARs including, but not limited to, periods during which such Options and SARs may be exercised shall become fixed and not subject to change or revocation by the Company except as otherwise provided under Article 16; (b) In the event that, within two (2) years of a Change of Control, the employment of an employee Participant is terminated by the Company for any reason other than for Cause, or the employee Participant terminates employment for Good Reason, or the service as a Nonemployee Director is terminated, the applicable exercise period for all Options and SARs (including substituted or assumed Awards, if any, in the case of a Change of Control that is also subject to Section 15.1) held by him or her at termination of employment shall be a period of two (2) years from the date of termination; provided, however, that in no event shall any Option or SAR be exercisable beyond ten (10) years from its date of grant; (c) Any Period of Restriction and restrictions imposed on Restricted Stock or Restricted Stock Units shall lapse, and, any Shares subject to Restricted Stock Unit Awards shall be delivered on a basis that gives the holder of the Award a reasonable opportunity, as determined by the Committee, to participate as a stockholder in the Change of Control transaction; (d) The target payout opportunities attainable under all outstanding Awards subject to performance conditions shall be deemed to have been fully earned on the same basis as if targeted performance had been attained for the Performance Period; (i) The vesting of all Awards denominated in Shares shall be accelerated as of the effective date of the Change of Control, and shall be paid out to Participants prior to the effective date of the Change of Control. The Committee has the authority to pay all or any portion of the value of the Shares in cash; and (ii) Awards denominated in cash shall be paid to Participants in cash prior to the effective date of the Change of Control; and (e) Upon a Change of Control, unless otherwise specifically provided in a written agreement entered into between the Participant and the Company, all conditions for payment to which outstanding Cash-Based Awards and Other Stock-Based Awards may be subject will be deemed satisfied, and the Committee shall pay out all such Awards. - -------------------------------------------------------------------------------- 17 Article 16. Amendment, Modification, Suspension, and Termination 16.1 Amendment of the Plan or Awards. The Board of Directors or the Committee may, at any time and from time to time, alter, amend, modify, suspend, or terminate the Plan or any Award Agreement in whole or in part; provided, however, that, no amendment of the Plan shall be made without shareholder approval if shareholder approval is required by law, regulation, or stock exchange rule; and further provided no such amendment shall adversely affect the rights of any Participant (without his or her consent) under any Award theretofore granted or other contractual arrangements entered into before or after a "covered transaction" or Change of Control or deprive any Participant of any right or benefit which became operative in the event of a "covered transaction" or Change of Control. 16.2 Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events. The Committee may make adjustments in the terms and conditions of, and the criteria included in, Awards in recognition of unusual or nonrecurring events (including, without limitation, the events described in Section 3.4 hereof) affecting the Company or the financial statements of the Company or of changes in applicable laws, regulations, or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent unintended dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan. The determination of the Committee as to the foregoing adjustments, if any, shall be conclusive and binding on Participants under the Plan. In the case of performance-based awards to a Covered Employee that are intended to be exempt under Section 162(m) of the Code, adjustments by the Committee shall be made consistent with Article 10 and only to the extent consistent with such exemption. 16.3 Replacement Awards. The Company may grant Awards under the Plan on terms differing from those provided for in the Plan where such Awards are granted in substitution for Awards held by employees of other corporations who concurrently become employees of the Company or a subsidiary as the result of a merger or consolidation of the employing corporation with the Company or subsidiary, or the acquisition by the Company or a subsidiary of property or stock of the employing corporation. The Committee may direct that the substitute Awards be granted on such terms and conditions as the Committee considers appropriate in the circumstances. Shares subject to a substitute or replacement Award granted pursuant to this Section 16.3, or subject to Awards assumed in connection with a transaction described in this Section 16.3, shall not count against the Share limitations described in Article 3, nor shall the Award limitations described in Article 3 apply to such substitute, replacement, or assumed Awards, in each case except as may otherwise be required to satisfy the ISO rules under Section 422 of the Code or other applicable legal or stock exchange requirements. Article 17. Withholding 17.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, such amounts as the Company determines are necessary or desirable to satisfy, or are required by law or regulation to be withheld, with respect to any taxable event arising as a result of this Plan. 17.2 Share Withholding. With respect to withholding required upon the exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock and Restricted Stock Units, or upon the achievement of performance goals related to Performance Shares, or any other taxable event arising - -------------------------------------------------------------------------------- 18 as a result of an Award granted hereunder, Participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax that could be imposed on the transaction. All such elections shall be irrevocable, made in writing, and signed by the Participant, and shall be subject to any restrictions or limitations that the Committee deems appropriate. Article 18. Successors All obligations of the Company under the Plan with respect to Awards granted hereunder shall be binding on any successor to the Company, its business or its assets whether by direct or indirect purchase, merger, consolidation, or otherwise. Article 19. General Provisions 19.1 Forfeiture Events. The Committee may specify in an Award Agreement that the Participant's rights, payments, and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of certain specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to, termination of employment for cause, termination of the Participant's provision of services to the Company and/or Subsidiary, violation of material Company and/or Subsidiary policies, breach of noncompetition, confidentiality, or other restrictive covenants that may apply to the Participant, or other conduct by the Participant that is detrimental to the business or reputation of the Company and/or its Subsidiaries. 19.2 Legend. The certificates for Shares may include any legend which the Committee deems appropriate to reflect any restrictions on transfer of such Shares. 19.3 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 19.4 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 19.5 Inability to Obtain Authority. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 19.6 Investment Representations. The Committee may require any person receiving Shares pursuant to an Award under this Plan to represent and warrant in writing that the person is acquiring the Shares for investment and without any present intention to sell or distribute such Shares. 19.7 Employees Based Outside of the United States. Notwithstanding any provision of the Plan to the contrary, in order to comply with the laws in other countries in which the Company and/or its Subsidiaries operate or have Employees and/or Nonemployee Directors, the Committee - -------------------------------------------------------------------------------- 19 shall have the power and authority, in addition to such power and authority it otherwise has under the Plan, to: (a) Determine which Subsidiaries shall be covered by the Plan; (b) Determine which Employees and/or Nonemployee Directors, outside the United States are eligible to participate in the Plan; (c) Modify the terms and conditions of any Award granted to Employees and/or Nonemployee Directors, outside the United States to comply with applicable foreign laws; (d) Establish subplans and modify exercise procedures and other terms and procedures, to the extent such actions may be necessary or advisable. Any subplans and modifications to Plan terms and procedures established under this Section 19.7 by the Committee shall be attached to this Plan document as appendices; and (e) Take any action, before or after an Award is made, that it deems advisable to obtain approval or comply with any necessary local government regulatory exemptions or approvals. Notwithstanding the above, the Committee may not take any actions hereunder, and no Awards shall be granted, that would violate applicable law. 19.8 Uncertificated Shares. To the extent that the Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of such Shares may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange. 19.9 Unfunded Plan. Participants shall have no right, title, or interest whatsoever in or to any investments that the Company, and/or its Subsidiaries may make to aid it in meeting its obligations under the Plan. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Participant, beneficiary, legal representative, or any other person. To the extent that any person acquires a right to receive payments from the Company and/or its Subsidiaries under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Company or a Subsidiary, as the case may be. All payments to be made hereunder shall be paid from the general funds of the Company or a Subsidiary, as the case may be and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in the Plan. The Plan is not subject to ERISA. 19.10 No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award. The Committee shall determine whether cash, Awards, or other property shall be issued or paid in lieu of fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated. - -------------------------------------------------------------------------------- 20 19.11 Retirement and Welfare Plans. Neither Awards made under the Plan nor Shares or cash paid pursuant to such Awards, except pursuant to Covered Employee Annual Incentive Awards, will be included as "compensation" for purposes of computing the benefits payable to any Participant under the Company's or any Subsidiary's retirement plans (both qualified and non-qualified) or welfare benefit plans unless such other plan expressly provides that such compensation shall be taken into account in computing a participant's benefit. 19.12 Nonexclusivity of the Plan. The adoption of this Plan shall not be construed as creating any limitations on the power of the Board or Committee, or the Company or any Subsidiary, to adopt such other compensation arrangements as it may deem desirable in the case of any Participant. 19.13 No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (i) limit, impair, or otherwise affect the Company's or a Subsidiary's right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or, (ii) limit the right or power of the Company or a Subsidiary to take any other action which such entity deems to be necessary or appropriate. 19.14 Governing Law. Except as to matters concerning the issuance of Shares or other matters of corporate governance, which shall be determined and related Plan and Award provisions construed under the General Corporation Law of the State of Delaware, the Plan and each Award Agreement shall be governed by the laws of the Commonwealth of Massachusetts, excluding any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of the Plan to the substantive law of another jurisdiction. Unless otherwise provided in the Award Agreement, recipients of an Award under the Plan are deemed to submit to the exclusive jurisdiction and venue of the federal or state courts of Massachusetts, to resolve any and all issues that may arise out of or relate to the Plan or any related Award Agreement. Article 20. Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below, and when the meaning is intended, the initial letter of the word shall be capitalized. 20.1 "Annual Award Limit" or "Annual Award Limits" have the meaning set forth in Section 3.3. 20.2 "Award" means, individually or collectively, a grant under this Plan of Cash-Based Awards, Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Restricted Stock Units, Performance Shares, or Other Stock-Based Awards, in each case subject to the terms of this Plan. 20.3 "Award Agreement" means an agreement entered into and executed by the Company and a Participant setting forth the terms and provisions applicable to an Award granted under this Plan. 20.4 "Board" or "Board of Directors" means the Board of Directors of the Company. - -------------------------------------------------------------------------------- 21 20.5 "Cash-Based Award" means an Award granted to a Participant as described in Section 9.1. 20.6 "Cause": For the purposes of the Plan, unless otherwise provided under the terms of an employment agreement with the Company or any of its Subsidiaries, in which case the definition contained therein shall control, a discharge for "Cause" shall have occurred where a Participant is terminated because of: (a) The Participant's continued failure to perform substantially his or her duties with the Company or any of its Subsidiaries (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for performance is delivered to Participant by an officer or a senior manager of the Company or the Subsidiary which identifies the manner in which the Board or the elected officer or manager believes that Participant has not performed his or her duties; (b) The Participant's engaging in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company or the subsidiary; or (c) The Participant's conviction of a felony or a plea of nolo contendere by Participant with respect to a felony. 20.7 "Change of Control" means any of the following events: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this Paragraph (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its subsidiaries or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B) and (C) of Paragraph (c) below; (b) Individuals who, as of December 16, 1999, constitute the Board of Directors (the "Board") of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date thereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a - -------------------------------------------------------------------------------- 22 result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; (c) Consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or (d) Approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. 20.8 "Code" means the U.S. Internal Revenue Code of 1986, as amended from time to time. 20.9 "Committee" means the Compensation and Human Resources Committee of the Board. 20.10"Company" means The Gillette Company, a Delaware corporation, and any successor thereto as provided in Article 18 herein. 20.11"Covered Employee" means a Participant who is a "covered employee," as defined in Code Section 162(m) and the regulations promulgated under Code Section 162(m), or any successor statute. 20.12"Director" means any individual who is a member of the Board of Directors of the Company. - -------------------------------------------------------------------------------- 23 20.13"Effective Date" has the meaning set forth in Section 1.1. 20.14"Employee" means any employee of the Company and/or Subsidiaries. 20.15"Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. 20.16"Fair Market Value" or "FMV" means a price that is based on the opening, closing, actual, high, low, or average selling prices of a Share on the New York Stock Exchange on the applicable date, the preceding trading days, the next succeeding trading day, or an average of trading days, as determined by the Committee. In the case of any Option intended to qualify as an ISO, or an Option or SAR intended to satisfy the performance-based compensation exception requirements of Section 162(m) of the Code by reason of the special stock option/stock appreciation right rules under Section 162(m) of the Code, Fair Market Value (FMV) shall be determined on a basis that is consistent with such intent. 20.17"Freestanding SAR" means an SAR that is granted independently of any Options, as described in Article 6. 20.18"Good Reason" means, for the purposes of the Plan, unless otherwise provided under the terms of an employment agreement with the Company or any of its Subsidiaries, in which case the definition contained therein shall control, an employee Participant terminating his or her employment as a direct result of: (a) The assignment to the Participant of any duties materially inconsistent in any respect with the Participant's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as in effect immediately prior to the Change of Control, or any other action by the Company or its Subsidiaries that results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is promptly remedied by the Company and/or the Subsidiary; (b) A decrease in the Participant's compensation, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and that is promptly remedied by the Company and/or the Subsidiary; or (c) The Company's or the Subsidiary's requiring the Participant to be based at any office or location other than (A) the office or where the Participant was based and performed services immediately prior to the Change of Control or (B) any other location less than 35 miles from such office, or the Company's or the Subsidiary's requiring the Participant to travel on business to a substantially greater extent than required immediately prior to the Change of Control. 20.19"Grant Price" means the price established at the time of grant of a SAR pursuant to Article 6, used to determine whether there is any payment due upon exercise of the SAR. - -------------------------------------------------------------------------------- 24 20.20"Incentive Stock Option" or "ISO" means an Option to purchase Shares granted under Article 5 to an Employee and that is designated as an Incentive Stock Option and that is intended to meet the requirements of Code Section 422, or any successor provision. 20.21"Nonemployee Director" has the same meaning set forth in Rule 16b-3 promulgated under the Exchange Act, or any successor definition adopted by the United States Securities and Exchange Commission. 20.22"Nonqualified Stock Option" or "NQSO" means an Option that is intended not to be an ISO, or that otherwise does not meet the requirements of Code Section 422. 20.23"Option" means an Incentive Stock Option or a Nonqualified Stock Option, as described in Article 5. 20.24"Option Price" means the price at which a Share may be purchased by a Participant pursuant to an Option. 20.25"Other Stock-Based Award" means an Award denominated in Shares that is not described in Articles 5, 6, 7, or 8. 20.26"Participant" means any eligible person as set forth in Article 4 to whom an Award is granted. 20.27"Performance-Based Compensation" means an Award that is intended to deliver compensation that satisfies the performance-based compensation exception requirements of Section 162(m) of the Code, other than any such Award that is an Option or an SAR and that satisfies such requirements by reason of the special stock option/stock appreciation right rules under Section 162(m). 20.28"Performance Measures" means the performance measures listed in Article 10. 20.29"Performance Period" means the period of time over which attainment of performance goals is to be measured. 20.30"Performance Share" means an Award denominated in Shares under which vesting of the Award or the right to payment under the Award (and not merely the possible acceleration of vesting or payment) depends on the satisfaction of one or more performance goals. 20.31"Period of Restriction" means the period when Restricted Stock or Restricted Stock Units are subject to a substantial risk of forfeiture (based on the passage of time, the achievement of performance goals, or upon the occurrence of other events as determined by the Committee), as provided in Article 7. 20.32"Plan" means The Gillette Company 2004 Long-Term Incentive Plan as from time to time amended and in effect. - -------------------------------------------------------------------------------- 25 20.33 "Plan Year" means the calendar year (January 1 to December 31). 20.34 "Prior Plan" means the Company's 1971 Stock Option Plan. 20.35"Restricted Stock" means an Award of restricted Stock pursuant to Article 7. 20.36"Restricted Stock Unit" means an Award pursuant to Article 7 under which the Participant is given a conditional right to receive Stock in the future. 20.37"Share" means a Share of common stock of the Company, $1.00 par value per Share. 20.38"Stock Appreciation Right" or "SAR" means an Award pursuant to the terms of Article 6. 20.39"Subsidiary" means any corporation or other entity, whether domestic or foreign, in which the Company has or obtains, directly or indirectly, a proprietary interest of more than fifty percent (50%) by reason of stock ownership or otherwise. 20.40"Tandem SAR" means an SAR that is granted in connection with a related Option pursuant to Article 6, the exercise of which shall require forfeiture of the right to purchase a Share under the related Option (and when a Share is purchased under the Option, the Tandem SAR shall similarly be canceled). - -------------------------------------------------------------------------------- 26 EX-12 4 ex12_063004-10q.txt EXHIBIT 12
Exhibit 12 The Gillette Company Ratio of Earnings to Fixed Charges Six months Six months Dollars in millions ended ended June 30, 2004 June 30, 2003 2003 2002 2001 2000 1999 --------------- --------------- ----- ----- ----- ----- ----- Earnings: Income from continuing operations before income taxes $ 1,131 859 1,964 1,752 1,342 1,288 1,912 Interest expense 23 30 54 84 145 223 136 Interest portion of rental expense 21 22 41 43 31 25 20 Amortization of capitalized interest 4 5 10 10 9 6 5 ----- ----- ----- ----- ----- ----- ----- Earnings available for fixed charges $ 1,179 916 2,069 1,889 1,527 1,542 2,073 ===== ===== ===== ===== ===== ===== ===== Fixed Charges: Interest expense $ 23 30 54 84 145 223 136 Interest capitalized 1 1 2 4 11 23 13 Interest portion of rental expense 21 22 41 43 31 25 20 ----- ----- ----- ----- ----- ----- ----- Total fixed charges $ 45 53 97 131 187 271 169 ===== ===== ===== ===== ===== ===== ===== Ratio of Earnings to Fixed Charges 26.2 17.3 21.4 14.5 8.2 5.7 12.3 ===== ===== ===== ===== ===== ===== =====
EX-31 5 ex31i_063004-10q.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, James M. Kilts, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Gillette Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [intentionally omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 29, 2004 /s/ James M. Kilts ------------------------------------ James M. Kilts Chairman of the Board, President and Chief Executive Officer EX-31 6 ex31ii_063004-10q.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION I, Charles W. Cramb, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Gillette Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [intentionally omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 29, 2004 /s/ Charles W. Cramb ____________________________________ Charles W. Cramb Senior Vice President and Chief Financial Officer EX-32 7 ex32i_063004-10q.txt EXHIBIT 32.1 Exhibit 32.1 THE GILLETTE COMPANY Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code, the undersigned, James M. Kilts, Chief Executive Officer of The Gillette Company, a Delaware corporation (the "Company"), does hereby certify, to his knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Exchange Act and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 29, 2004 /s/ James M. Kilts ___________________________________ James M. Kilts Chairman of the Board, President and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to The Gillette Company (the "Company") and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 8 ex32ii_063004-10q.txt EXHIBIT 32.2 Exhibit 32.2 THE GILLETTE COMPANY Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) Pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code, the undersigned, Charles W. Cramb, Chief Financial Officer of The Gillette Company, a Delaware corporation (the "Company"), does hereby certify, to his knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Exchange Act and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: July 29, 2004 /s/ Charles W. Cramb ___________________________________ Charles W. Cramb Senior Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to The Gillette Company (the "Company") and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----