-----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, AvUvsl7aKwUec4PV/uAZGzJPpGH9v2tBolkJ2HZpJtm2DlPDwKXdgtKlJIqWDGyO NOyrZc2LcgRUzqfDzycm4w== 0000950135-99-001702.txt : 19990402 0000950135-99-001702.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950135-99-001702 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K SEC ACT: SEC FILE NUMBER: 001-00922 FILM NUMBER: 99580069 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-K 1 THE GILLETTE COMPANY 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------------ (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NO. I-922 THE GILLETTE COMPANY - ------------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) INCORPORATED IN DELAWARE 04-1366970 --------------------------- ------------ (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
PRUDENTIAL TOWER BUILDING, BOSTON, MASSACHUSETTS 02199 - ---------------------------------------------------- ------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 617-421-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE BOSTON STOCK EXCHANGE CHICAGO STOCK EXCHANGE PACIFIC STOCK EXCHANGE
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((sec.)229.405 of this chapter) is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Gillette Common Stock held by non-affiliates as of February 26, 1999 was approximately $51,422,000,000.* The number of shares of Gillette Common Stock outstanding as of February 26, 1999 was 1,107,183,549. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the following documents have been incorporated by reference into this Form 10-K as indicated:
DOCUMENTS 10-K PARTS --------- ---------- 1. The Gillette Company 1998 Annual Report to Stockholders (the "1998 Annual Report")............................... Parts I and II 2. The Gillette Company 1999 Proxy Statement (The "1999 Proxy Statement")......................................... Part III
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- * This amount does not include the value of 147,862 shares of Series C ESOP Convertible Preferred Stock issued for $602.875 per share. For purposes of this calculation only, Gillette Common Stock held by Executive Officers or directors of the Company has been treated as owned by affiliates. 2 PART I ITEM 1. DESCRIPTION OF BUSINESS GENERAL The Gillette Company was incorporated under the laws of the State of Delaware in 1917 as the successor of a Massachusetts corporation incorporated in 1912 which corporation was the successor of a Maine corporation organized in 1901 by King C. Gillette, inventor of the safety razor. The Company's businesses range across several industry segments, including blades and razors, toiletries, stationery products, electric shavers, small household appliances, hair care appliances, oral care appliances, oral care products and alkaline batteries for consumer products. A description of the Company and its businesses appears in the 1998 Annual Report on the inside front cover and at pages 6 through 17, the texts of which are incorporated by reference. See also Item 7, "Management's Discussion" at page 5 of this report. INDUSTRY SEGMENTS "Operating Segments and Related Information," containing information on net sales, profit from operations, identifiable assets, capital expenditures and depreciation for each of the last three years, appears in the 1998 Annual Report at page 38 and is incorporated by reference. DISTRIBUTION In the Company's major geographic markets, traditional Gillette product lines, Duracell batteries and Oral-B products are sold to wholesalers, chain stores and large retailers and are resold to consumers primarily through food, drug, discount, stationery, hardware, toy, tobacco and department stores. Waterman and Parker products are sold to wholesalers and retailers and are resold to consumers through fine jewelry, fine stationery and department stores, pen specialists and other retail outlets. Braun products are sold to wholesalers and retailers and are resold to consumers mainly through department, discount, catalogue and specialty stores (Braun personal diagnostic appliances are also sold directly to medical professionals). Oral-B products are marketed directly to dental professionals for distribution to patients as well as through standard distribution channels. In many small Gillette, Duracell, Braun and Oral-B markets, products are distributed through local distributors and sales agents. PATENTS Certain of the Company's patents and licenses in the blade and razor segment are of substantial value and importance when considered in the aggregate. Additionally, the Company holds significant patents in its toiletries, stationery products, Duracell, Braun, and Oral-B businesses. No patent or license held by the Company is considered to be of material importance when judged from the standpoint of the Company's total business. Gillette has licensed many of its blade and razor patents to other manufacturers. In all of these categories, Gillette competitors also have significant patent positions. The patents and licenses held by the Company are of varying remaining durations. TRADEMARKS In general, the Company's principal trademarks have been registered in the United States and throughout the world where the Company's products are sold. Gillette products are marketed outside the United States under various trademarks, many of which are the same as those used in the United States. The trademark "Gillette" is of principal importance to the Company. In addition, a number of other trademarks owned by the Company and its subsidiaries have significant importance within their industries. The Company's rights in these trademarks endure for as long as they are used or registered. COMPETITION The blades and razors segment is marked by competition in new technology, as well as by competition in price, marketing, advertising and promotion to retail outlets and to consumers. The Company's major 1 3 competitors worldwide are Warner-Lambert Company, with its Schick and, in North America and Europe, its Wilkinson Sword product lines, and Societe Bic S.A., a French company. Additional competition in the United States and in certain other markets is provided by the American Safety Razor Company, Inc. under its own brands and a number of private label brands, as well as other private label suppliers. The toiletries segment is highly competitive in terms of price, product innovation and market positioning, with frequent introduction of new brands and marketing concepts, especially for products sold through retail outlets, and with product life cycles typically shorter than in the other businesses of the Company. Competition in the stationery products segment, particularly in the writing instruments market, is marked by a high degree of competition from domestic and foreign suppliers and low entry barriers, and is focused on a wide variety of factors including product performance, design and price, with price an especially important factor in the commercial sector. Competition in the Braun products markets is based primarily on product performance, innovation, price and professional endorsement, with numerous competitors in the small household and hair care appliances segments. Competition in the Oral-B products markets is focused on product performance, price and dental profession endorsement. The Duracell products markets are marked by competition in product performance, innovation and price and in marketing, advertising and promotion to retail outlets and to consumers. Many of the Company's competitors are larger and have greater resources than the Company. EMPLOYEES At year-end, Gillette employed approximately 43,100 persons, three-quarters of them outside the United States. RESEARCH AND DEVELOPMENT In 1998, research and development expenditures were $209 million, compared with $212 million in 1997 and $204 million in 1996. RAW MATERIALS The raw materials used by Gillette in the manufacture of products are purchased from a number of suppliers, and substantially all such materials are readily available. OPERATIONS BY GEOGRAPHIC AREA The following table indicates the geographic sources of consolidated net sales and profit from operations of the Company for the last three years:
1998 1997 1996 --------------- --------------- --------------- NET NET NET SALES PROFIT SALES PROFIT SALES PROFIT ----- ------ ----- ------ ----- ------ United States.................................. 38% 44% 37% 38% 37% 41% Foreign........................................ 62% 56% 63% 62% 63% 59%
Net sales by geographic area for each of the last three years appear in the 1998 Annual Report at page 39 and are incorporated by reference. ITEM 2. DESCRIPTION OF PROPERTY The Company owns and leases manufacturing facilities and other real estate properties in the United States and a number of foreign countries. The Company's executive offices are located in the Prudential 2 4 Center, Boston, Massachusetts where it holds a long term lease. The following table sets forth the Company's principal plants:
BUSINESS SEGMENT LOCATION OWNED/LEASED ---------------- -------- ------------ Blades & Razors Boston, MA (US) Owned Isleworth, UK Owned Berlin, Germany Owned Shanghai, China* Leased Naucalli, Mexico* Owned Manaus, Brazil* Owned Devens, MA(US) Leased Toiletries St. Paul, MN (US)* Owned/Leased Andover, MA (US) Owned Reading, UK Owned/Leased Stationery Santa Monica, CA (US) Leased Saint Herblain, France Owned/Leased Newhaven, UK Owned Braun Kronberg, Germany Owned/Leased Barcelona, Spain Owned/Leased Walldurn, Germany Owned/Leased Marktheidenfeld, Germany Owned Mexico City, Mexico Owned/Leased Oral-B Iowa City, IA (US) Owned Duracell Port Elizabeth, S. Africa Owned Aarschot, Belgium Owned Lancaster, SC (US) Owned LaGrange, GA (US) Owned
The above facilities are in good repair, adequately meet the Company's needs and operate at reasonable levels of production capacity. - --------------- * Engaged in the manufacture of products for two or more business segments. ITEM 3. LEGAL PROCEEDINGS The Company is subject, from time to time, to legal proceedings and claims arising out of its business, which cover a wide range of matters, including antitrust and trade regulation, product liability, advertising contracts, environmental issues, patent and trademark matters and taxes. Management, after review and consultation with counsel, considers that any liability from all of these legal proceedings and claims would not materially affect the consolidated financial position, results of operations or liquidity of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ------------------------ 3 5 EXECUTIVE OFFICERS OF REGISTRANT Information regarding the Executive Officers of the Company as of March 18, 1999 is set out below.
NAME AND CURRENT POSITION FIVE-YEAR BUSINESS HISTORY AGE ------------------------- -------------------------- --- Alfred M. Zeien Chairman of the Board and Chief Executive Officer since 69 Chairman of the Board and Chief February 1991 Executive Officer Michael C. Hawley President and Chief Operating Officer since April 1995; 61 President and Chief Operating Executive Vice President, International Group, December Officer 1993 - March 1995; President, Oral-B Laboratories, Inc., May 1989 - November 1993 Edward F. DeGraan Executive Vice President, Global Business Management, 55 Executive Vice President Gillette Grooming Products and Duracell, since January 1999; Executive Vice President, Duracell North Atlantic Group, January 1997 - December 1998; Senior Vice President, Manufacturing and Technical Operations, Gillette North Atlantic Group, May 1991 - December 1996 Robert G. King Executive Vice President, Commercial Operations, Western 53 Executive Vice President Hemisphere, since January 1999; Executive Vice President, Gillette North Atlantic Group, February 1997 - December 1998; Executive Vice President, International Group, April 1995 - January 1997; Group Vice President - Latin America, March 1991 - March 1995 Archibald Livis Executive Vice President, Global Business Management, 60 Executive Vice President Diversified Group, since January 1999; Executive Vice President, Diversified Group, May 1998 - December 1998; Chairman, Braun Board of Management, October 1993 - April 1998 Jorgen Wedel Executive Vice President, Commercial Operations, Eastern 50 Executive Vice President Hemisphere, since January 1999; Executive Vice President, International Group since February 1997 - December 1998; President, Oral-B Laboratories, Inc., November 1993 - January 1997; Group General Manager, Braun North America, November 1991 - October 1993 Charles W. Cramb Senior Vice President, Finance, Chief Financial Officer and 52 Senior Vice President, Principal Accounting Officer since July 1997; Vice Chief Financial Officer President and Controller, July 1995 - June 1997; Vice and Principal Accounting Officer President, Finance, Planning and Administration, Diversified Group, October 1992 - June 1995 Robert E. DiCenso Senior Vice President, Personnel and Administration, since 58 Senior Vice President July 1994; Vice President, Investor Relations, January 1993 -June 1994
The Executive Officers hold office until the first meeting of the Board of Directors following the annual meeting of the stockholders and until their successors are elected or appointed and qualified, unless a shorter period shall have been specified by the terms of their election or appointment, or until their earlier resignation, removal or death. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS The information required by this item with respect to the Company's common stock appears in the 1998 Annual Report on the inside back cover under the caption "Common Stock" and at page 40 under the caption, 4 6 "Quarterly Financial Information," and is incorporated by reference. As of February 26, 1999, the record date for the 1999 Annual Meeting, there were 61,686 Gillette stockholders of record. ITEM 6. SELECTED FINANCIAL DATA The information required by this item appears in the 1998 Annual Report at page 41 under the caption, "Historical Financial Summary," and is incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item appears in the 1998 Annual Report at pages 18 through 23 under the caption, "Management's Discussion," and is incorporated by reference. CAUTIONARY STATEMENT From time to time, the Company may make statements which constitute or contain "forward-looking" information as that term is defined within the meaning of the Federal securities laws. These statements may be identified by such forward-looking words as "expect," "look," "believe," "anticipate," "may," "will" and variations of these words or other forward-looking terminology. Forward-looking statements made by the Company are not guarantees of future performance. Actual results may differ materially from those in the forward-looking statements as the result of risks and uncertainties including those listed below. The Company assumes no obligation to update any forward-looking information: - the pattern of the Company's sales, including variations in sales volume within periods, which makes forward-looking statements about sales and earnings difficult and may result in variance of actual results from those contained in statements made at any time prior to the period's close; - vigorous competition within the Company's product markets, including pricing and promotional, advertising or other activities in order to preserve or gain market share, the timing of which cannot be foreseen by the Company; - the Company's reliance on the development of new products and the inherent risks associated with new product introductions, including uncertainty of trade and customer acceptance and competitive reaction; - the costs and effects of unanticipated legal and administrative proceedings; - the impacts of unusual items resulting from ongoing evaluations of business strategies, asset valuations and organizational structure; - a substantial portion of the Company's sales having been made outside the United States, making forecasting of sales more difficult; - the impact on sales or earnings of fluctuations in exchange rates in one or more of the Company's geographic markets; - the impact of the year 2000 issue on the Company's order, production, distribution and financial systems and the systems of its suppliers and customers; - the possibility of one or more of the global markets in which the Company competes being impacted by variations in political, economic or other factors, such as inflation rates, recessionary or expansive trends, tax changes, legal and regulatory changes or other external factors over which the Company has no control. - the effects of rapid technological change on product development differentiation, acceptance and costs including technological advances of competitors; 5 7 - the effects of patents including possible new patents granted to competitors or challenges to Company patents and expiration of patents, which affect competition and product acceptance. ITEM 7A. DISCLOSURES CONCERNING MARKET RISK SENSITIVE INSTRUMENTS The information required by this item appears in the 1998 Annual Report at page 21 under the caption, "Market Risk," and is incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Financial Statements and Supplementary Data for The Gillette Company and Subsidiary Companies appear in the 1998 Annual Report at the pages indicated below and are incorporated by reference. (1) Independent Auditors' Report................................ Page 39 (2) Consolidated Statement of Income for the Years Ended December 31, 1998, 1997 and 1996............................ Page 24 (3) Consolidated Balance Sheet at December 31, 1998 and 1997.... Page 25 (4) Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............................ Page 26 (5) Consolidated Statement of Stockholders' Equity for the periods ended December 31, 1998, 1997 and 1996.............. Page 27 (6) Notes to Consolidated Financial Statements.................. Pages 28 through 40 (7) Computation of per share earnings........................... Pages 24, 28, 40 and 41 (8) Quarterly Financial Information............................. Page 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this item with respect to the Directors of the Company appears in the 1999 Proxy Statement at pages 2 through 4, 7 and 8 under the caption "Company Transactions with Directors and Officers," and at page 21 under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," the texts of which are incorporated by reference. The information required for Executive Officers of the Company appears at the end of Part I of this report at page 4. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in the 1999 Proxy Statement at pages 8 through 17 under the captions "Compensation of Non-Employee Directors", "Personnel Committee Report on Executive Compensation", "Gillette Comparative Five-Year Investment Performance", and "Executive Compensation" and is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item concerning the security ownership of certain beneficial owners and management appears in the 1999 Proxy Statement at pages 6 and 7 under the caption "Stock Ownership of Five Percent Beneficial Owners and Management" and is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item appears in the 1999 Proxy Statement at pages 7 and 8 under the caption "Company Transactions with Directors and Officers" and is incorporated by reference. 6 8 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K A. FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS FINANCIAL STATEMENTS The following appear in the 1998 Annual Report at the pages indicated below and are incorporated into Part II by reference. (1) Independent Auditor's Report................................ Page 39 (2) Consolidated Statement of Income for the Years Ended December 31, 1998, 1997 and 1996............................ Page 24 (3) Consolidated Balance Sheet at December 31, 1998 and 1997.... Page 25 (4) Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............................ Page 26 (5) Consolidated Statement of Stockholders' Equity for the periods ended December 31, 1998, 1997 and 1996.............. Page 27 (6) Notes to Consolidated Financial Statements.................. Pages 28 through 40 (7) Computation of per share earnings........................... Pages 24, 28 and 40 and 41
SCHEDULES The following schedule appears at page 12 of this report: II. Valuation and Qualifying Accounts Schedules other than those listed above are omitted because they are either not required or not applicable. EXHIBITS 3(a) Composite Certificate of Incorporation of The Gillette Company, as amended, filed as Exhibit 3(i) to The Gillette Company Quarterly Report on Form 10-Q for the period ended March 31, 1998, Commission File No. 1-922, incorporated by reference herein. (b) The Bylaws of The Gillette Company, as amended October 15, 1998, filed as Exhibit 3 to The Gillette Company Quarterly Report on Form 10-Q for the period ended September 30, 1998, incorporated by reference herein. 4 Instruments Defining the Rights of Security Holders, Including Indentures. (a) Specimen of form of certificate representing ownership of The Gillette Company Common Stock, $1.00 par value, effective December 10, 1996, filed as Exhibit 4(a) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-922, incorporated by reference herein. (b) Form of Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of the Gillette Company filed as Exhibit A to Exhibit 1 to The Gillette Company Current Report on Form 8-K, dated December 30, 1985, Commission File No. 1-911, incorporated by reference as Exhibit 4(c) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-922, incorporated by reference herein. (c) Amendment to Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock dated December 9, 1996, filed as Exhibit 4(c) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-922, incorporated by reference herein. (d) Renewed Rights Agreement dated as of December 14, 1995 between The Gillette Company and The First National Bank of Boston, filed as Exhibit 4 to The Gillette Company Current Report on Form 8-K, dated December 18, 1995, Commission File No. 1-911, incorporated by reference herein.
7 9 (e) Certificate of Designation of the Series C ESOP Convertible Preferred Stock of The Gillette Company, dated January 17, 1990, filed as Exhibit 4(e) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1989, Commission File No. 1-922, incorporated by reference herein. (f) Certificate of Amendment relating to an increase in the amount of authorized shares of preferred stock and common stock, filed as Exhibit 3(i) to The Gillette Company Quarterly Report on Form 10-Q for the period ended March 31, 1998, Commission File No. 1-922, incorporated by reference herein. (g) Form of $150,000,000 6.25% note due August 15, 2003, issued pursuant to Registration Statement No. 33-54974 of The Gillette Company, filed November 24, 1992, as amended May 14, 1993 and June 24, 1993 and the Trust Indenture filed therewith as Exhibit 4.1, filed as part of Exhibit 4(f) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-922, incorporated by reference herein. (h) Form of $150,000,000 and $50,000,000 5.75% notes due October 15, 2005, issued pursuant to Registration Statement No. 33-50303 of The Gillette Company, filed September 17, 1993 and the Trust Indenture filed as Exhibit 4.1 to Registration Statement No. 3354974 of The Gillette Company, as amended May 14, 1993 and June 24, 1993, filed as part of Exhibit 4(f) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-922, incorporated by reference herein. The Company has issued non-registered debt instruments copies of which will be furnished to the Commission upon request. 10 Material Contracts *(a) The Gillette Company 1971 Stock Option Plan, as amended filed as Appendix A to the 1997 Proxy Statement, Commission File No. 1-922, incorporated by reference herein. *(b) The Gillette Company Stock Equivalent Unit Plan, as amended, filed herewith. *(c) The Gillette Company Incentive Bonus Plan, as amended, filed as Exhibit 10(c) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1997, incorporated by reference herein. *(d) The Gillette Company Executive Life Insurance Program, filed as Exhibit 10(d) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1997, incorporated by reference herein. (e) Directors and Officers and Company Reimbursement Indemnity Insurance and Pension and Welfare Fund Fiduciary Responsibility Insurance policy, filed as Exhibit 10(e) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-922, incorporated by reference herein. *(f) Description of Conversion of Outside Directors' Vested Pension Benefit into Deferred Stock Units, filed as Exhibit 10(f) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-922, incorporated by reference herein. *(g) The Gillette Company Deferred Compensation Plan for Outside Directors, filed as Exhibit 10(g) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-922, incorporated by reference herein. *(h) Description of severance pay and benefit arrangements for employees in the event of a change in control, filed as Exhibit 10(j) to The Gillette Company Annual Report on Form 10-K for the year ending December 31, 1989, Commission File No. 1-922, incorporated by reference herein. (i) Letter Agreement, dated July 20, 1989, between The Gillette Company and Berkshire Hathaway Inc., filed as Exhibit 4(a) to The Gillette Company Current Report on Form 8-K, dated July 20, 1989, Commission File No. 1-922, incorporated by reference herein. *(j) Description of agreement between The Gillette Company and Robert J. Murray effective January 1, 1996, filed as Exhibit 10(l) to The Gillette Company Annual Report on Form 10-K for the year ending December 31, 1995, Commission File No. 1-922, incorporated by reference herein.
8 10 *(k) Description of The Gillette Company Estate Planning Program, filed as Exhibit 10(o) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1993, Commission File No. 1-922, incorporated by reference herein. *(l) The Gillette Company Estate Preservation Plan, filed as Exhibit 10(l) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1997, incorporated by reference herein. *(m) The Gillette Company Supplemental Retirement Plan, as amended and restated June 16, 1994, filed as Exhibit 10(a) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1994, Commission File No. 1-922, incorporated by reference herein. *(n) The Gillette Company Supplemental Savings Plan, as amended, filed as Exhibit 10(n) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-922 incorporated by reference herein. (o) Multi-year Credit Agreement dated as of December 20, 1996 among The Gillette Company, Morgan Guaranty Trust Company of New York, as agent, and a syndicate of domestic and foreign banks, filed as Exhibit 10(o) to The Gillette Company Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 1-922, incorporated by reference herein. (p) $2,000,000,000 364-Day Credit Agreement dated as of December 20, 1996 and amended and restated as of October 20, 1997 and October 19, 1998 among The Gillette Company, Morgan Guaranty Trust Company of New York, as agent and a syndicate of domestic and foreign banks, filed herewith. (q) Registration Rights Agreement dated as of September 12, 1996 among The Gillette Company, KKR Partners II, L.P. and DI Associates, L.P., filed as Exhibit 10.2 to The Gillette Company Current Report on Form 8-K filed September 16, 1996, Commission File No. 1-922, incorporated by reference herein. 12 Computation of the ratios of current assets to current liabilities for the years 1998, 1997 and 1996, filed herewith. 13 Portions of the 1998 Annual Report to Stockholders of The Gillette Company incorporated by reference in this Form 10-K, filed herewith. 22 List of subsidiaries of The Gillette Company, filed herewith. 23 Independent Auditors' Consent, filed herewith. 24 Power of Attorney, filed herewith. 27 Financial Data Schedule (not considered to be filed).
- --------------- * Filed pursuant to Item 14(c). B. REPORTS ON FORM 8-K There were no reports on Form 8-K filed by the registrant during the fourth quarter of the period covered by this report. OTHER MATTERS For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into the following Registration Statements of the registrant on Form S-8 (1) No. 33-27916, filed April 10, 1989, and amended thereafter, which incorporates by reference therein Registration Statements on Form S-8 Nos. 2-90276, 2-63951 and 1-50710, and all amendments thereto, all relating to shares issuable and deliverable under The Gillette Company 1971 Stock Option Plan and 1974 Stock Purchase Plan and on Form S-7 No. 2-41016 relating to shares issuable and deliverable under The Gillette Company 1971 Stock Option Plan; (2) No. 33-9495, filed October 20, 1986, and all amendments thereto, relating to shares and plan interests in The Gillette Company Employees' Savings Plan; (3) No. 2-93230, filed September 12, 1984, and all amendments thereto, relating to shares and plan interests in the 9 11 Oral B Laboratories Savings Plan; (4) No. 33-56218, filed December 23, 1992, relating to shares and plan interests in The Gillette Company Employees' Savings Plan; (5) No. 33-52465, filed March 1, 1994, and all amendments thereto, relating to shares issuable and deliverable under The Gillette Company Global Employee Stock Ownership Plan; (6) No. 33-53257, filed April 25, 1994, and all amendments thereto, relating to shares issuable and deliverable under The Gillette Company Outside Director's Stock Ownership Plan; (7) No. 33-53258, filed April 25, 1994, and all amendments thereto, relating to shares issuable and deliverable under The Gillette Company 1971 Stock Option Plan; (8) No. 33-59125, filed May 5, 1995, and all amendments thereto, relating to shares and plan interests in The Gillette Company Employees' Savings Plan; (9) No. 33-63707 filed October 26, 1995, and all amendments thereto, relating to shares and plan interests in the Parker Pen 401(K) Plan; (10) No. 333-19133 filed December 31, 1996, and all amendments thereto, relating to shares issuable and deliverable under the Duracell Shares Plan and Stock Option Plan for Key Employees of Duracell International Inc. and Subsidiaries and (11) No. 333-25533 filed April 21, 1997, and all amendments thereto, relating to shares issuable and deliverable under The Gillette Company 1971 Stock Option Plan. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than the payments by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. 10 12 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors of THE GILLETTE COMPANY: Under date of February 11, 1999, we reported on the consolidated balance sheet of The Gillette Company and subsidiary companies as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1998, as contained in the 1998 Annual Report to Stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also audited the financial statement schedule on page 12 of this report. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Boston, Massachusetts February 11, 1999 11 13 THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (MILLIONS OF DOLLARS)
ADDITIONS DEDUCTIONS ---------------------- ---------- CHARGED LOSSES BALANCE AT TO CHARGED BALANCE AT BEGINNING PROFIT CHARGED TO TO END OF DESCRIPTION OF YEAR AND LOSS OTHER RESERVES YEAR ----------- ---------- -------- ---------- -------- ---------- 1998 - ----- Reserves deducted from assets: Receivables....................... $74 $43 -- $38 $79 === === === === === 1997 - ----- Reserves deducted from assets: Receivables....................... $81 $42 -- $49 $74 === === === === === 1996 - ----- Reserves deducted from assets: Receivables....................... $82 $42 $ 1* $44 $81 === === === === ===
* Acquisition balances 12 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) By CHARLES W. CRAMB ------------------------------------ Charles W. Cramb Senior Vice President, Chief Financial Officer and Principal Accounting Officer Date: March 31, 1999 Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- * ALFRED M. ZEIEN Chairman of the Board March 31, 1999 - ----------------------------------------------------- of Directors, Chief Executive Officer Alfred M. Zeien and Director * MICHAEL C. HAWLEY President, Chief Operating Officer March 31, 1999 - ----------------------------------------------------- and Director Michael C. Hawley * CHARLES W. CRAMB Senior Vice President, March 31, 1999 - ----------------------------------------------------- Chief Financial Officer and Charles W. Cramb Principal Accounting Officer * WARREN E. BUFFETT Director March 31, 1999 - ----------------------------------------------------- Warren E. Buffett * WILBUR H. GANTZ Director March 31, 1999 - ----------------------------------------------------- Wilbur H. Gantz * MICHAEL B. GIFFORD Director March 31, 1999 - ----------------------------------------------------- Michael B. Gifford * CAROL R. GOLDBERG Director March 31, 1999 - ----------------------------------------------------- Carol R. Goldberg * HERBERT H. JACOBI Director March 31, 1999 - ----------------------------------------------------- Herbert H. Jacobi * HENRY R. KRAVIS Director March 31, 1999 - ----------------------------------------------------- Henry R. Kravis * JORGE PAULO LEMANN Director March 31, 1999 - ----------------------------------------------------- Jorge Paulo Lemann * RICHARD R. PIVIROTTO Director March 31, 1999 - ----------------------------------------------------- Richard R. Pivirotto * ALEXANDER B. TROWBRIDGE Director March 31, 1999 - ----------------------------------------------------- Alexander B. Trowbridge * MARJORIE M. YANG Director March 31, 1999 - ----------------------------------------------------- Marjorie M. Yang *By CHARLES W. CRAMB --------------------------------------------------- Charles W. Cramb as Attorney-In-Fact
13 EX-10.B 2 THE GILLETTE CO. STOCK EQUIVALENT UNIT PLAN 1 Exhibit 10(b) THE GILLETTE COMPANY STOCK EQUIVALENT UNIT PLAN, AS AMENDED 1. PURPOSE The purpose of the Stock Equivalent Unit Plan is to provide an incentive and reward to key salaried employees of The Gillette Company and its subsidiaries who can make substantial contributions to the success of the business. To that end, the Plan provides an opportunity for such key salaried employees to participate in that success through awards of stock equivalent units, subject to the conditions set forth in the Plan. DEFINITIONS Unless the context otherwise requires, the following words have the following meanings for purposes of the Plan. 2.1 Basic stock unit - A stock equivalent unit awarded to a participant pursuant to Section 4.2. 2.2 Committee - The Personnel Committee established by the Board of Directors of the Company. 2.3 Company - The Gillette Company, a Delaware corporation. 2.4 Disability - Mental or physical disability, either occupational or non-occupational in cause, which, in the opinion of the Committee, on the basis of medical evidence satisfactory to it, prevents the employee from engaging in any occupation or employment for wage or profit and is likely to be permanent. 2.5 Dividend equivalent unit - A stock equivalent unit, which is credited to a participant's account as the result of conversion of amounts, credited to the account in respect of dividends, as provided in Section 5.2. 2.6 Employee - Any person, whether or not an officer or director of the Company or any subsidiary, who is regularly employed by the Company or a subsidiary on a salaried full-time basis, or who, under conditions approved by the Committee, is regularly employed by the Company or subsidiary on a salaried part-time basis. 2.7.1 Maturity date (with respect to awards made on or before 12/31/83) - When used with respect to an award, March 15 of the tenth calendar year following the calendar year in which the award was made. 2.7.2 Maturity date (with respect to awards made after 12/31/83) - When used with respect to an award, March 15 of the seventh calendar year following the calendar year in which the award was made. 2.8 Normal retirement date - In the case of any participant, the date established by his employer as his normal retirement date (or, if no such plan is maintained by his employer, the normal retirement date prescribed under The Gillette Company Retirement Plan). 2.9 Plan - The Stock Equivalent Unit Plan set forth herein, as from time to time amended. 2 2.10 Share - A share of the Company's common stock as the same is constituted from time to time. 2.11 Stock equivalent unit - A measure of value equal in amount to the value of one share at the time of reference. 2.12 Subsidiary - Any corporation in which the Company owns, directly or indirectly, stock possessing fifty percent or more of the total combined voting power of all classes of stock or over which the company has effective operating control. 2.13(A) Total credits - When used with respect to an individual account, the sum of (a) the excess, if any, of (i) the value of that number of shares which is equal to the number of basic stock units credited to the account in respect of awards in designated years, after adjustment for any prior payments, over (ii) the value on the date of the respective awards of that number of shares which corresponds, after adjustment for stock splits, stock dividends and similar capital changes, to the number of basic stock units referred to in (i), except that for awards made after 12/31/78, the amount of the excess cannot exceed an amount equal to the value on the date of the respective awards of that number of shares which corresponds, after adjustment for stock splits, stock dividends and similar capital changes, to the number of basic stock units referred to in (i), plus (b) the value of that number of shares which is equal to the number of dividend equivalent units then credited to the account in respect of such awards plus (c) any amounts then credited to the account based on dividend payments attributable to such awards which have not been converted into dividend equivalent units. 2.14 Value - When used with respect to a share. (a) On the date of an award of basic stock units, the average of the reported high and low sales prices of the shares as quoted on a composite basis; (b) For purposes of converting dividend credits into dividend equivalent units, the average of the reported closing prices of the shares as quoted on a composite basis on the last business day of the months of December, January, and February immediately preceding the March 15 on which such conversion occurs; (c) For purposes of determining the amount payable in respect of an interest which becomes vested or for purposes of determining the amount payable, in cases not covered by (d) or (e) below, in respect of an interest which previously became vested, the average of the reported closing prices of the shares as quoted on a composite basis on the last business day of the twelve calendar months immediately preceding the March 15 on which such vesting occurs or the month in which such payment becomes payable; (d) For purposes of determining the amount payable to a terminating participant or to the estate of a deceased participant, the average of the reported closing prices of the shares as quoted on a composite basis on the last business day of the twelve calendar months immediately preceding the month in which the participant's employment terminates or the participant dies or the twelve consecutive calendar months including and ending with that month if such termination or death occurs on or after the last business day of that month; (e) For purposes of determining the amount payable with respect to an award on or after the maturity date thereof, the average of the reported closing prices of the shares as quoted on a 2 3 composite basis on the last business day of the twelve calendar months immediately preceding such maturity date; 2.15 Unapproved Change in Control shall mean the happening of any one of the following events, which, in each case, was not recommended to the shareholders by a vote of at least two-thirds of the non-employee directors of the Company then still in office who were in office two years prior to such event: (a) Any person within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "1934 Act"), other than the Company or any of its subsidiaries, has become the beneficial owner, within the meaning of Rule 13d-3 under the 1934 Act, of 20% or more of the combined voting securities; (b) A tender offer or exchange offer, other than an offer by the Company, pursuant to which shares of the Company's common stock have been purchased; (c) The stockholders or directors of the Company have approved an agreement to merge or consolidate with or into another corporation and the Company is not the surviving corporation or an agreement to sell or otherwise dispose of all or substantially all of the Company's assets (including a plan of liquidation); or (d) During any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors cease for any reason to constitute at least a majority thereof. For this purpose, new directors who were elected, or nominated (or approved for nomination in the case of nomination by a Committee of the Board) for election by shareholders of the Company, by at least two thirds of the directors then still in office who were, or are deemed to have been directors at the beginning of the period, shall be deemed to have been directors at the beginning of the period. 2.16 Approved Change in Control shall mean the happening of any one of the following events, which, in each case was recommended to the shareholders by a vote of at least two-thirds of the non-employee directors of the Company then still in office who were in office two years prior to such event: (a) Any person within the meaning of Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "1934 Act"), other than the Company or any of its subsidiaries, has become the beneficial owner, within the meaning of Rule 13d-3 under the 1934 Act, of 20% or more of the combined voting securities; (b) A tender offer or exchange offer, other than an offer by the Company, pursuant to which shares of the Company's common stock have been purchased; (c) The stockholders or directors of the Company have approved an agreement to merge or consolidate with or into another corporation and the Company is not the surviving corporation or an agreement to sell or otherwise dispose of all or substantially all of the Company's assets (including a plan of liquidation); or (d) During any period of two consecutive years, individuals who at the beginning of such period constituted the board of directors cease for any reason to constitute at least a majority thereof. For this purpose, new directors who were elected, or nominated (or approved for nomination in the case of nomination by a Committee of the Board) for election by shareholders of the Company, by the beginning of the period, shall be deemed to have been directors at the beginning of the period. 3 4 ADMINISTRATION 3.1 The Plan shall be administered by the Personnel Committee heretofore established by the Board of Directors of the Company no member of which shall be an employee of the Company or of any subsidiary. The Committee shall have authority, not inconsistently with the Plan, (a) to determine which of the eligible employees of the Company and its subsidiaries shall be awarded basic stock units; (b) to determine the times when basic stock units shall be awarded and the number of basic stock units to be awarded to each participant; (c) to determine the time or times when amounts may become payable with respect to stock equivalent units within the limits provided in the Plan; (d) to prescribe the form of the instruments evidencing any basic stock units awarded under the Plan (which forms need not be identical); (e) to adopt, amend and rescind rules and regulations for the administration of the Plan and the stock equivalent units and for its own acts and proceedings; and (f) to decide all questions and settle all controversies and disputes which may arise in connection with the Plan. All decisions, determinations and interpretations of the Committee shall be binding on all parties concerned. 3.2 The maximum number of basic stock units which may be awarded under the Plan is 41,400,000 subject to adjustment as determined by the Committee in event of a dividend payable in shares, a stock split or a combination of shares. No basic stock units may be awarded under the Plan after April 18, 2002. PARTICIPATION 4.1 The participants in the Plan shall be such key salaried employees as may be selected from time to time by the Committee. Directors who are not employees shall not be eligible. The employees to whom basic stock units are awarded at any time may include employees to whom basic stock units were previously granted under the Plan. 4.2 Awards of basic stock units shall be made from time to time by the Committee in its discretion. In addition, with respect to any award, the Committee shall have discretion to provide that all or any portion of that award shall be contingent on achievement by the participant or by any unit or units of the Company of any performance goal or goals over any period or periods of time ending before March 15 of the third year following the date of the award. Notwithstanding the above, the Committee may not award more than 100,000 basic stock units to any participant in any calendar year subject to adjustment as provided under Section 8.3. INDIVIDUAL ACCOUNTS 5.1 The Committee shall maintain a separate account for each award made under the Plan. Each such account shall show the information necessary to compute the participant's total credits in respect of each award, including the number of basic stock units awarded to the participant, the value of an equal number of shares on the date of the award, the amount credited to the account in respect of dividends, as provided below, the number of dividend equivalent units credited to the account and details as to any payments under the Plan which are deducted from the account. 4 5 5.2 Whenever the Company pays a dividend (other than a stock dividend) upon its outstanding common stock, there shall be credited to the separate account for each award a dollar amount equal to the value of such dividend per share multiplied by the number of stock equivalent units credited to the account on the record date for such dividend. However, no such credits shall be made with respect to any award after the maturity date thereof or after the date on which the participant ceases to be an employee. As of March 15 in each year the aggregate of the amounts so credited to the account since the prior March 15 shall be converted into a number of dividend equivalent units by dividing such aggregate by the value of a share. 5.3 In the event of a dividend payable in shares, or in the event of a stock split or combination of shares, the Committee shall make a corresponding change in the number of basic stock units and dividend equivalent units then credited to the account. 5.4 On the maturity date of an award, the total amount payable with respect to such award shall become a fixed amount which will not change thereafter except that the Committee may provide for the payment of interest beginning at maturity on amounts whose payment is deferred to a date thereafter. Such fixed amount shall be the total credits in respect of such award on such maturity date. 5.5 Whenever a payment is made under the Plan to a participant with respect to any award, there shall be a corresponding reduction in the number of stock equivalent units and other amounts credited to the participant's account in respect of such award, or in the case of a payment after maturity date or after the date on which the participant ceases to be an employee, in the amount then credited to the account. A similar reduction shall be made if a participant forfeits any portion of his interest in any awards. PAYMENT 6.1 Payments to a participant under the Plan may be made from time to time when segments of his total credits in respect of an award become vested, or payment may be deferred, all in accordance with rules established from time to time by the Committee. 6.2.1 With respect to awards made on or before 12/31/83 fifteen percent of the total credits in respect of an award shall become vested on March 15 of the fourth calendar year following the calendar year of the award, an additional fifteen percent thereof (or, in cases of vesting after one or more prior payments under Section 6.3, the applicable vesting percentage thereof as provided below) shall become vested on March 15 of the fifth, sixth, seventh, eighth, and ninth calendar years following the calendar year of the award, and any unvested balance thereof shall become vested on the maturity date of such award. 6.2.2 With respect to awards made after 12/31/83 twenty percent of the total credits in respect of an award shall become vested on March 15 of the third calendar year following the calendar year of the award, an additional twenty percent thereof (or, in cases of vesting after one or more prior payments under Section 6.3, the applicable vesting percentage thereof as provided below) shall become vested on March 15 of the fourth, fifth, and sixth calendar years following the calendar 5 6 year of the award, and any unvested balance thereof shall become vested on the maturity date of such award. 6.2.3 Such vesting as described above shall occur only if the participant is an employee on the date of vesting and has been an employee continuously since the date of the award. The total credits in respect of all awards not at that time subject to any contingency pursuant to Section 4.2 shall become fully vested if the participant, while an employee, dies, incurs a disability, retires prior to his normal retirement date with the consent of the Company and under conditions approved by the Committee, or retires on or after his normal retirement date, and the total amount payable with respect thereto shall become a fixed amount which will not change thereafter, except that the Committee may provide for the payment of interest on amounts whose payment is deferred to a date thereafter. If the employment of a participant terminates as a result of the merger, sale or other absorption or termination of operations of a subsidiary or a division, all credits in respect of any such participant's award not at that time subject to any contingency pursuant to Section 4.2 may become vested if the Committee, in its sole discretion, determines such action to be in the best interests of the Company, and the total amount payable with respect thereto shall become a fixed amount which will not change thereafter, except that the Committee may provide for the payment of interest on amounts whose payment is deferred to a date thereafter. In connection with the determination of any participant's vested rights under this paragraph 6.2.3, the Committee may retroactively remove any contingency in effect pursuant to Section 4.2. Notwithstanding the above, in the event of an Unapproved or Approved Change in Control, if a participant retires prior to his normal retirement date the consent of the Company shall not be required and all credits and all contingencies with respect to the awards of such participant shall become fully vested and immediately payable. 6.2.3.1 In the event of an Unapproved Change in Control, all contingencies then in effect pursuant to Section 4.2 shall be automatically removed and the total credits in respect of all awards of a participant shall become fully vested and payable (1) upon termination of the employment of a participant for any reason within one year of the Unapproved Change in Control, or (2) upon termination of the employment of a participant at any time after an Unapproved Change in Control if such termination (a) is initiated by the Company, except that termination for willful misconduct shall not be treated as a termination under this subparagraph (2), or (b) is initiated by the participant for Good Reason. In the event of an Approved Change in Control, all contingencies then in effect pursuant to Section 4.2 shall be automatically removed and the total credits in respect of all awards of a participant shall become fully vested and payable upon termination of the employment of a participant after an Approved Change in Control if such termination is (i) initiated by the Company, except that termination for willful misconduct shall not be treated as a termination under this sentence, or (ii) initiated by the participant for Good Reason. Good Reason, as used herein, shall mean any of the following: Assignment of any duties inconsistent with the position, duties, responsibilities and status of the employee or reduction or adverse change in the nature or status of responsibilities of the employee from those which existed on the date immediately preceding an Approved or Unapproved Change in Control; any reduction by the Company or any successor entity in the employees' compensation including benefits, other than such reduction required by law or required to maintain the tax-qualified status of any benefit Plan, from those which existed on the date immediately preceding an Approved or Unapproved Change in Control; 6 7 or the Company or any successor entity requiring the employee to be based at a location in excess of fifty miles from the location where the employee is based on the date immediately preceding an Approved or Unapproved Change in Control. 6.2.3.2 Notwithstanding any other provision of this Plan, (a) upon an employer-initiated termination of employment of a participant pursuant to the Restructuring Plan approved by the Board of Directors of the Company at its meeting on December 18, 1986, or the Reorganization Plan approved by the Board of Directors of the Company at its meeting on December 14, 1989, the Realignment Plan and Parker Integration Plan approved by the Board of Directors at its meeting held on January 7, 1994 or the Realignment Program approved by the Board of Directors at its meeting held on September 28, 1998, or (b) upon the sale or other disposition of the unit, division or subsidiary in which a participant is employed pursuant to the Restructuring Plan approved by the Board of Directors of the Company at its meeting on December 18, 1986, the Reorganization Plan approved by the Board of Directors of the Company at its meeting on December 14, 1989 or the Reorganization and Realignment Program approved by the Board of Directors at its meeting held on September 28, 1998, which sale or other disposition results in the participant no longer being employed by the Company or any of its subsidiaries, or (c) upon the sale of the Jafra Cosmetics business pursuant to a certain Acquisition Agreement dated January 26, 1998 ("Jafra Sale") where a participant either (i) continues to be employed by Jafra immediately following the Jafra Sale or (ii) is terminated from the employment of the Company or any of its subsidiaries as a direct result of the Jafra Sale, all contingencies then in effect pursuant to Section 4.2 shall be automatically removed except with respect to contingencies which expire on February 19, 1987. Further, in such event, the total credits in respect of all awards of a participant for which no contingencies remain in effect shall become fully vested and the amount of such awards shall be fixed and payable. With respect to awards or segments of awards which become vested under this subparagraph or any other award or segment thereof which becomes payable by reason of the participant's termination of employment, the participant may elect to receive such awards upon termination of employment or may, prior to the date participant's employment with the Company or any subsidiary terminates, elect to defer such award in accordance with the provisions of Paragraph 6.2.3 and rules established from time to time by the Committee. Notwithstanding the above, the removal of contingencies and the granting of vesting and deferral rights provided for in this Subparagraph 6.2.3.2 shall serve as partial consideration for a settlement of all claims and disputes which the participant may have against the Company, its subsidiaries, employees and agents and shall be subject to the execution by the participant of a release and settlement agreement in a form to be prescribed by the Committee. 6.2.4 In order to make proper adjustment for any previous payments under Section 6.3, the applicable vesting percentage to be used in computing vested segments under the foregoing provisions of this Section 6.2 and in computing the amount of a payment under Section 6.3 or Section 6.4 shall be determined as follows: (a) In computing such vested segment or the amount or a payment under section 6.3 for awards made prior to 12/31/83, the applicable vesting percentage to be applied to the total credits in respect of a particular award shall be equal in value to a fraction whose numerator is fifteen (or ten in the case of the final vested installment) and whose denominator is (i) 100 minus (ii) fifteen 7 8 multiplied by the number of vested segments previously paid to the participant under Section 6.3. Payment of each vested segment shall be considered a separate payment. (b) In the case of a payment under section 6.4 for awards made prior to 12/31/83, the applicable vesting percentage to be applied to the total credits in respect of a particular award shall be equal in value to a fraction whose numerator is (i) fifteen multiplied by the number of segments of the award which have become vested in accordance with the foregoing provisions prior to the date on which the participant ceases to be an employee (but not more than 100) minus (ii) fifteen multiplied by the number of vested segments previously paid to the participant under Section 6.3, and whose denominator is 100 minus (ii) above. (c) In computing such vested segment or the amount or a payment under section 6.3 for awards made after 12/31/83, the applicable vesting percentage to be applied to the total credits in respect of a particular award shall be equal in value to a fraction whose numerator is twenty and whose denominator is (i) 100 minus (ii) twenty multiplied by the number of vested segments previously paid to the participant under Section 6.3. Payment of each vested segment shall be considered a separate payment. (d) In the case of a payment under section 6.4 for awards made after 12/31/83, the applicable vesting percentage to be applied to the total credits in respect of a particular award shall be equal in value to a fraction whose numerator is (i) twenty multiplied by the number of segments of the award which have become vested in accordance with the foregoing provisions prior to the date on which the participant ceases to be an employee (but not more than 100) minus (ii) twenty multiplied by the number of vested segments previously paid to the participant under Section 6.3, and whose denominator is 100 minus (ii) above. 6.3 Prior to any date on which a participant is to acquire a vested interest or additional vested interest in the total credits in respect of an award, the participant shall make an election, at the time and in a manner specified by the Committee, as to the time when payment is to be made of the segment or segments of such total credits which may become vested on such date. The participant may elect (a) to receive payment within a reasonable time after such date or (b) to defer payment in accordance with rules established from time to time by the Committee. In the event of an Approved or Unapproved Change in Control, the participant may, upon any date, revoke his election to defer receipt of any or all interests in respect of an award and the Company shall make payment to the participant of the value of any vested interest or interests, within a reasonable time after such revocation and with respect to interests which have not yet vested as of the date of such revocation, within a reasonable time after such interests become vested. If no such election is made, payment shall be made within a reasonable time after the date on which such vested interest or additional vested interest is acquired. The amount of any payment shall be computed by multiplying the total credits in respect of the award at the time of payment, or in the case of revocation of an election to defer, at the time of such revocation, by the applicable vesting percentage. The Committee may provide for the payment of interest beginning upon maturity for amounts deferred beyond maturity. 6.4 If a participant ceases to be an employee for any reason not specified in Section 6.2, his vested interest in respect of each award shall thereupon become a fixed amount, which will not change thereafter. Such fixed amounts shall be determined by multiplying the total credits in respect of 8 9 each award on the date of termination of employment by the applicable vesting percentage. The participant shall thereupon forfeit his interest in any amounts then credited to his account to the extent his interest has not become vested. Payment of vested interests shall be made in accordance with rules established from time to time by the Committee. 6.5 If a participant dies prior to termination of his employment, an amount equal to his total credits in respect of all awards not subject to any contingency pursuant to Section 4.2 shall be paid to his executor or administrator or as otherwise provided by law valued as of the date of death. 6.6 All payments will be made in cash and will be subject to any required tax withholdings. AMENDMENT AND TERMINATION 7.1 The Board of Directors of the Company or the Personnel Committee of the Board of Directors if and to the extent authorized may at any time amend the Plan for the purposes of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may be permitted by law, except that neither the Board of Directors or the Personnel Committee of the Board of Directors may, without the approval of the stockholders of the Company, increase the maximum number of basic stock units that may be awarded under the Plan or increase the time within which basic stock units may be awarded, as provided in Section 3.2, or extend the maturity date of an award beyond March 15 of the tenth calendar year following the calendar year in which the award was made. Notwithstanding the above, in the event of an Approved or Unapproved Change in Control, no amendment to the Plan which provides for prospective Plan benefits and other terms and conditions any less favorable to Plan participants than those which existed prior to the amendment shall be effective unless it provides that all contingencies which are then in existence be removed and all awards which are unvested prior to such amendment shall become immediately vested and payable. 7.2 The Board of Directors of the Company may terminate the Plan at any time except that after an Approved or Unapproved Change in Control such Plan may not be terminated without providing that all contingencies then in existence shall be removed and all unvested awards shall become immediately vested and payable. 7.3 No such amendment or termination shall adversely affect the rights of any participant (without his consent) under any award previously made or after an Approved Change in Control deprive a participant of a benefit or right which became operative upon an Approved Change in Control or after an Unapproved Change in Control deprive a participant of a benefit or right which became operative upon an Unapproved Change in Control. MISCELLANEOUS 8.1 The interest under the Plan of any participant, his heirs or legatees shall not be alienable by the participant, his heirs or legatees by assignment or any other method and shall not be subject to being taken by his creditors by any process whatsoever. 9 10 8.2 The Plan shall not be deemed to give any participant or employee the right to be retained in the employ of the Company or any subsidiary nor shall the Plan interfere with the right of the Company or any subsidiary to discharge any employee at any time. 8.3 In the event of a stock dividend, split-up or combinations of shares, recapitalization for merger in which the Company is the surviving corporation or other similar capital change, the number and kind of shares of stock or securities of the Company to be used as a basis for granting awards under the Plan, the units then outstanding or to be granted thereunder, the maximum number of basic stock units which may be granted, the unit value and other relevant provisions shall be appropriately adjusted by the Board of Directors of the Company, whose determination shall be binding on all persons. In the event of a consolidation or a merger in which the Company is not the surviving corporation or complete liquidation of the Company, all outstanding basic stock units and dividend equivalent units shall thereafter accrue no further value, provided that at least twenty days prior to the effective date of any such consolidation or merger, the Board of Directors shall either (a) make all outstanding basic units and dividend equivalent units immediately vested and payable, or (b) arrange to have the surviving corporation grant replacement units to the participants. SEPTEMBER, 1998 10 EX-10.P 3 $2,000,000,000 364-DAY CREDIT AGREEMENT 1 EXHIBIT 10(P) COMPOSITE CONFORMED COPY $2,000,000,000 364 - DAY CREDIT AGREEMENT dated as of December 20, 1996 and amended and restated as of October 20, 1997 and amended and restated as of October 19, 1998 among The Gillette Company, The Banks Listed Herein and Morgan Guaranty Trust Company of New York, as Agent -------------------------- J.P. Morgan Securities Inc., Arranger 2 TABLE OF CONTENTS Page ---- The parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Definitions ............................................. 1 SECTION 1.02. Accounting Terms and Determinations ..................... 13 SECTION 1.03. Types of Borrowings ..................................... 13 ARTICLE II THE CREDITS SECTION 2.01. Commitments to Lend ..................................... 14 SECTION 2.02. Notice of Committed Borrowing ........................... 14 SECTION 2.03. Money Market Borrowings ................................. 14 SECTION 2.04. Notice to Banks; Funding of Loans ....................... 19 SECTION 2.05. Notes ................................................... 20 SECTION 2.06. Maturity of Loans ....................................... 20 SECTION 2.07. Interest Rates .......................................... 21 SECTION 2.08. Facility Fee ............................................ 24 SECTION 2.09. Termination or Reduction of Commitments ................. 25 SECTION 2.10. Scheduled Termination of Commitments .................... 25 SECTION 2.11. Optional Prepayments .................................... 25 SECTION 2.12. General Provisions as to Payments ....................... 26 SECTION 2.13. Funding Losses .......................................... 26 SECTION 2.14. Computation of Interest and Fees ........................ 27 SECTION 2.15. Judgment Currency ....................................... 27 SECTION 2.16. Foreign Withholding Taxes and Other Costs ............... 28 SECTION 2.17. Regulation D Compensation ............................... 28 SECTION 2.18. Withholding Tax Exemption ............................... 29 ARTICLE III CONDITIONS SECTION 3.01. Effectiveness ........................................... 30 SECTION 3.02. Borrowings .............................................. 31 - ---------- * The Table of Contents is not a part of this Agreement. i 3 Page ---- SECTION 3.03. First Borrowing by Each Eligible Subsidiary ............. 32 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY SECTION 4.01. Corporate Existence and Power ........................... 32 SECTION 4.02. Corporate and Governmental Authorization; Contravention ........................................... 33 SECTION 4.03. Binding Effect .......................................... 33 SECTION 4.04. Financial Information ................................... 33 SECTION 4.05. No Material Adverse Change .............................. 34 SECTION 4.06. Compliance with ERISA ................................... 34 SECTION 4.07. Litigation .............................................. 34 SECTION 4.08. Taxes ................................................... 34 SECTION 4.09. Full Disclosure ......................................... 35 ARTICLE V COVENANTS SECTION 5.01. Information ............................................. 35 SECTION 5.02. Maintenance of Property; Insurance ...................... 37 SECTION 5.03. Conduct of Business and Maintenance of Existence ............................................... 38 SECTION 5.04. Compliance with Laws .................................... 38 SECTION 5.05. Earnings to Interest Expense Ratio ...................... 38 SECTION 5.06. Negative Pledge ......................................... 38 SECTION 5.07. Consolidations, Mergers and Sales of Assets ............. 39 SECTION 5.08. Material Subsidiary Cash Flow ........................... 40 SECTION 5.09. Use of Proceeds ......................................... 40 ARTICLE VI DEFAULTS SECTION 6.01. Events of Default ....................................... 40 SECTION 6.02. Notice of Default ....................................... 43 ARTICLE VII THE AGENT SECTION 7.01. Appointment and Authorization ........................... 43 SECTION 7.02. Agent and Affiliates .................................... 43 SECTION 7.03. Action by Agent ......................................... 43 SECTION 7.04. Consultation with Experts ............................... 43 SECTION 7.05. Liability of Agent ...................................... 44 ii 4 PAGE ---- SECTION 7.06. Indemnification ......................................... 44 SECTION 7.07. Credit Decision ......................................... 44 SECTION 7.08. Successor Agent ......................................... 45 SECTION 7.09. Agent's Fee ............................................. 45 ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair ................................... 45 SECTION 8.02. Illegality ............................................. 46 SECTION 8.03. Increased Cost and Reduced Return ...................... 47 SECTION 8.04. Base Rate Loans Substituted for Affected Fixed Rate Loans ....................................... 49 ARTICLE IX REPRESENTATIONS AND WARRANTIES OF ELIGIBLE SUBSIDIARIES SECTION 9.01. Corporate Existence and Power ........................... 50 SECTION 9.02. Corporate and Governmental Authorization; Contravention ........................................... 50 SECTION 9.03. Binding Effect .......................................... 50 SECTION 9.04. Taxes ................................................... 50 ARTICLE X GUARANTY SECTION 10.01. The Guaranty ............................................ 51 SECTION 10.02. Guaranty Unconditional .................................. 51 SECTION 10.03. Discharge Only Upon Payment In Full; Reinstatement In Certain Circumstances .................. 52 SECTION 10.04. Waiver by the Company ................................... 52 SECTION 10.05. No Subrogation .......................................... 52 SECTION 10.06. Stay of Acceleration .................................... 53 ARTICLE XI MISCELLANEOUS SECTION 11.01. Notices ................................................. 53 SECTION 11.02. No Waivers .............................................. 53 SECTION 11.03. Expenses; Indemnification ............................... 54 SECTION 11.04. Sharing of Set-Offs ..................................... 54 SECTION 11.05. Amendments and Waivers .................................. 55 iii 5 PAGE ---- SECTION 11.06. Successors and Assigns .................................... 55 SECTION 11.07. Collateral ................................................ 57 SECTION 11.08. Governing Law; Submission to Jurisdiction; Service of Process ........................................ 57 SECTION 11.09. Counterparts; Integration ................................. 58 SECTION 11.10. WAIVER OF JURY TRIAL ...................................... 58 Commitment Schedule Exhibit A - Note Exhibit B - Money Market Quote Request Exhibit C - Invitation for Money Market Quotes Exhibit D - Money Market Quote Exhibit E - Opinion of Counsel for the Company Exhibit F - Opinion of Special Counsel for the Agent Exhibit G - Form of Election to Participate Exhibit H - Form of Election to Terminate Exhibit I - Opinion of Counsel for the Borrower (Borrowings by Eligible Subsidiaries) Exhibit J - Assignment and Assumption Agreement iv 6 CREDIT AGREEMENT AGREEMENT dated as of December 20, 1996 among THE GILLETTE COMPANY, the BANKS listed on the signature pages hereof and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent. The parties hereto agree as follows. ARTICLE I DEFINITIONS SECTION 1.01. DEFINITIONS. The following terms, as used herein, have the following meanings: "Absolute Rate Auction" means a solicitation of Money Market Quotes setting forth Money Market Absolute Rates pursuant to Section 2.03. "Adjusted CD Rate" has the meaning set forth in Section 2.07(b). "Administrative Questionnaire" means, with respect to each Bank, an administrative questionnaire in the form prepared by the Agent and submitted to the Agent duly completed by such Bank. "Agent" means Morgan Guaranty Trust Company of New York in its capacity as agent for the Banks hereunder, and its successors in such capacity. "Applicable Lending Office" means, with respect to any Bank, (i) in the case of its Domestic Loans, its Domestic Lending Office, (ii) in the case of its Euro-Dollar Loans, its Euro-Dollar Lending Office and (iii) in the case of its Money Market Loans, its Money Market Lending Office. "Assessment Rate" has the meaning set forth in Section 2.07(b). "Assignee" has the meaning set forth in Section 11.06 (c). 7 "Bank" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 11.06(c), and their respective successors. "Base Rate" means, for any day, a rate per annum equal to the higher of (i) the Prime Rate for such day and (ii) the sum of 1/2 of 1% plus the Federal Funds Rate for such day. "Base Rate Loan" means a Committed Loan to be made by a Bank as a Base Rate Loan in accordance with the applicable Notice of Committed Borrowing or pursuant to Article VIII. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3 (3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group and not excepted by Section 4(b) of ERISA. "Borrower" means the Company or any Eligible Subsidiary, as the context may require, and their respective successors, and "Borrowers" means all of the foregoing. "Borrowing" has the meaning set forth in Section 1.03. "CD Base Rate" has the meaning set forth in Section 2.07(b). "CD Loan" means a Committed Loan to be made by a Bank as a CD Loan in accordance with the applicable Notice of Committed Borrowing. "CD Margin" has the meaning set forth in Section 2.07(b). "CD Reference Banks" means The First National Bank of Boston, The First National Bank of Chicago and Morgan Guaranty Trust Company of New York. "Commitment" means (i) with respect to each Bank listed on the Commitment Schedule, the amount set forth opposite the name of such Bank on the Commitment Schedule and (ii) with respect to any Assignee, the amount of the transferor Bank's Commitment assigned to it pursuant to Section 11.06(c), in each case as such amount may be changed from time to time pursuant to Section 2.09 or 11.06(c). "Commitment Schedule" means the Commitment Schedule attached hereto. 2 8 "Committed Loan" means a loan made by a Bank pursuant to Section 2.01. "Company" means The Gillette Company, a Delaware corporation, and its successors. "Company's Latest Form 10-Q" means the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1998, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Company's 1997 Form 10-K" means the Company's annual report on Form 10-K for 1997, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. "Consolidated Assets" means at any date the consolidated assets of the Company and its Consolidated Subsidiaries determined as of such date. "Consolidated Earnings Before Interest and Taxes" means, for any fiscal period, the sum of (i) Consolidated Net Income plus (ii) Gross Interest Expense plus (iii) to the extent deducted in determining Consolidated Net Income, provision for taxes on income, all determined on a consolidated basis for the Company and its Consolidated Subsidiaries for such fiscal period. "Consolidated Net Income" means, for any fiscal period, the net income (before preferred and common stock dividends) of the Company and its Consolidated Subsidiaries, determined on a consolidated basis for such fiscal period. "Consolidated Subsidiary" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Company in its consolidated financial statements if such statements were prepared as of such date. "Debt" of any Person means at any date, without duplication, (i) all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles, (v) all Debt of others secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an 3 9 obligation of such Person, and (vi) all Debt of others Guaranteed by such Person. "Default" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "Derivatives Obligations" of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or any other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions, excluding any amounts which the Borrower is entitled to set-off against its obligations under applicable law. "Dollars" and the sign "$" mean lawful money of the United States of America. "Domestic Business Day" means any day except a Saturday, Sunday or other day on which commercial banks in New York City or Boston, Massachusetts are authorized by law to close. "Domestic Lending Office" means, as to each Bank, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Domestic Lending Office) or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Company and the Agent; PROVIDED that any Bank may so designate separate Domestic Lending Offices for its Base Rate Loans, on the one hand, and its CD Loans, on the other hand, in which case all references herein to the Domestic Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Domestic Loans" means CD Loans or Base Rate Loans or both. "Domestic Reserve Percentage" has the meaning set forth in Section 2.07(b). "Duracell Credit Facility" means the Second Amended and Restated Credit Agreement dated as of March 29, 4 10 1991, as amended, among Duracell International Inc., Duracell Inc., the financial institutions listed on the signature pages thereof and The First National Bank of Chicago, as agent. "Effective Date" means the date this Agreement becomes effective in accordance with Section 3.01. "Election to Participate" means an Election to Participate substantially in the form of Exhibit G hereto. "Election to Terminate" means an Election to Terminate substantially in the form of Exhibit H hereto. "Eligible Subsidiary" means any Substantially Owned Consolidated Subsidiary of the Company as to which an Election to Participate shall have been delivered to the Agent and as to which an Election to Terminate shall not have been delivered to the Agent. Each such Election to Participate and Election to Terminate shall be duly executed on behalf of such Substantially-Owned Consolidated Subsidiary and the Company in such number of copies as the Agent may request. The delivery of an Election to Terminate shall not affect any obligation of an Eligible Subsidiary theretofore incurred. The Agent shall promptly give notice to the Banks of the receipt of any Election to Participate or Election to Terminate. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA Group" means the Company, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Company or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Euro-Dollar Business Day" means any Domestic Business Day on which commercial banks are open for international business (including dealings in Dollar deposits) in London. "Euro-Dollar Lending Office" means, as to each Bank, its office, branch or affiliate located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Euro-Dollar Lending Office) or such other office, branch or affiliate of such Bank as it may hereafter designate as its Euro-Dollar Lending Office by notice to the Company and the Agent. 5 11 "Euro-Dollar Loan" means a Committed Loan to be made by a Bank as a Euro-Dollar Loan in accordance with the applicable Notice of Committed Borrowing. "Euro-Dollar Margin" has the meaning set forth in Section 2.07 (c). "Euro-Dollar Reference Banks" means the principal London offices of The First National Bank of Boston, Credit Suisse and Morgan Guaranty Trust Company of New York. "Euro-Dollar Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "Eurocurrency liabilities" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on Euro-Dollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). "Event of Default" has the meaning set forth in Section 6.01. "Existing 364-Day Credit Agreement" means the 364 Day Credit Agreement dated as of April 30, 1996, among the Company, the bank parties thereto and Morgan Guaranty Trust Company of New York, as agent, as amended to the Effective Date. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day,as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, PROVIDED that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Morgan Guaranty Trust Company of New York on such day on such transactions as determined by the Agent. 6 12 "Fixed Rate Loans" means CD Loans or Euro-Dollar Loans or Money Market Loans (excluding Money Market LIBOR Loans bearing interest at the Base Rate pursuant to Section 8.01(ii)) or any combination of the foregoing. "Gross Interest Expense" means, for any fiscal period, the consolidated interest expense of the Company and its Consolidated Subsidiaries for such period (calculated without deducting or otherwise netting consolidated interest income of the Company and its Consolidated Subsidiaries). "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions, by "comfort letter" or other similar undertaking of support or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), PROVIDED that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. "Indemnitee" has the meaning set forth in Section 11.03 (b). "Interest Period" means: (1) with respect to each Euro-Dollar Borrowing, the period commencing on the date of such Borrowing and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable Notice of Borrowing; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day 7 13 in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (2) with respect to each CD Borrowing, the period commencing on the date of such Borrowing and ending 30, 60, 90, or 180 days thereafter, as the Borrower may elect in the applicable Notice of Borrowing; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (3) with respect to each Base Rate Borrowing, the period commencing on the date of such Borrowing and ending 30 days thereafter; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (4) with respect to each Money Market LIBOR Borrowing, the period commencing on the date of such Borrowing and ending such whole number of months thereafter as the Borrower may elect in accordance with Section 2.03; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (c) below, be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Euro-Dollar Business Day; (b) any Interest Period which begins on the last Euro-Dollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day 8 14 in the calendar month at the end of such Interest Period) shall, subject to clause (c) below, end on the last Euro-Dollar Business Day of a calendar month; and (c) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. (5) with respect to each Money Market Absolute Rate Borrowing, the period commencing on the date of such Borrowing and ending such number of days thereafter (but not less than 15 days) as the Borrower may elect in accordance with Section 2.03; PROVIDED that: (a) any Interest Period which would otherwise end on a day which is not a Euro-Dollar Business Day shall, subject to clause (b) below, be extended to the next succeeding Euro-Dollar Business Day; and (b) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended, or any successor statute. "LIBOR Auction" means a solicitation of Money Market Quotes setting forth Money Market Margins based on the London Interbank Offered Rate pursuant to Section 2.03. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, the Company or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "Loan" means a Domestic Loan or a Euro-Dollar Loan or a Money Market Loan and "Loans" means Domestic Loans or Euro-Dollar Loans or Money Market Loans or any combination of the foregoing. "London Interbank Offered Rate" has the meaning set forth in Section 2.07(c). "Material Debt" means Debt (other than the Notes) of the Company and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal amount exceeding $50,000,000. 9 15 "Material Financial Obligations" means a principal amount of Debt and/or payment obligations in respect of Derivatives Obligations of the Company and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $50,000,000. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $50,000,000. "Material Subsidiary" means any Subsidiary which either (A) is an Eligible Subsidiary or (B) has consolidated assets, together with its Subsidiaries, exceeding 5% of Consolidated Assets at the date of determination of its status hereunder. "Money Market Absolute Rate" has the meaning set forth in Section 2.03(d). "Money Market Absolute Rate Loan" means a loan to be made by a Bank pursuant to an Absolute Rate Auction. "Money Market Lending Office" means, as to each Bank, its Domestic Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its Money Market Lending Office by notice to the Company and the Agent; PROVIDED that any Bank may from time to time by notice to the Company and the Agent designate separate Money Market Lending Offices for its Money Market LIBOR Loans, on the one hand, and its Money Market Absolute Rate Loans, on the other hand, in which case all references herein to the Money Market Lending Office of such Bank shall be deemed to refer to either or both of such offices, as the context may require. "Money Market LIBOR Loan" means a loan to be made by a Bank pursuant to a LIBOR Auction (including such a loan bearing interest at the Base Rate pursuant to Section 8.01(ii)). "Money Market Loan" means a Money Market LIBOR Loan or a Money Market Absolute Rate Loan. "Money Market Margin" has the meaning set forth in Section 2.03(d). "Money Market Quote" means an offer by a Bank to make a Money Market Loan in accordance with Section 2.03. 10 16 "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a) (3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Notes" means promissory notes of a Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of such Borrower to repay the Loans made to it, and "Note" means any one of such promissory notes issued hereunder. "Notice of Borrowing" means a Notice of Committed Borrowing (as defined in Section 2.02) or a Notice of Money Market Borrowing (as defined in Section 2.03(f)) . "Parent" means, with respect to any Bank, any Person controlling such Bank. "Participant" has the meaning set forth in Section ll.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, a corporation, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Prime Rate" means the rate of interest publicly announced by Morgan Guaranty Trust Company of New York in New York City from time to time as its Prime Rate. 11 17 "Reference Banks" means the CD Reference Banks or the Euro-Dollar Reference Banks, as the context may require, and "Reference Bank" means any one of such Reference Banks. "Refunding Borrowing" means a Committed Borrowing which, after application of the proceeds thereof, results in no net increase in the outstanding principal amount of Committed Loans made by any Bank to any Borrower. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Required Banks" means at any time Banks having at least 66 2/3% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 66 2/3% of the aggregate unpaid principal amount of the Loans. "Revolving Credit Period" means the period from and including the Effective Date to but excluding the Termination Date. "Subsidiary" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "Subsidiary" means a Subsidiary of the Company. "Substantially-Owned Consolidated Subsidiary" means any Consolidated Subsidiary not less than 90% of the outstanding shares of each class of capital stock or other ownership interests of which are at the time directly or indirectly owned by the Company. "Termination Date" means October 18, 1999, or, if such day is not a Euro-Dollar Business Day, the next preceding Euro-Dollar Business Day. "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of 12 18 a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "United States" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. SECTION 1.02. ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Company's independent public accountants) with the most recent audited consolidated financial statements of the Company and its Consolidated Subsidiaries delivered to the Banks; PROVIDED that, if the Company notifies the Agent that the Company wishes to amend any covenant in Article V to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Company that the Required Banks wish to amend Article V for such purpose), then the Company's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Company and the Required Banks. SECTION 1.03. TYPES OF BORROWINGS. The term "Borrowing" denotes the aggregation of Loans of one or more Banks to be made to a single Borrower pursuant to Article II on a single date and for a single Interest Period. Borrowings are classified for purposes of this Agreement either by reference to the pricing of Loans comprising such Borrowing (E.G., a "Euro-Dollar Borrowing" is a Borrowing comprised of Euro-Dollar Loans) or by reference to the provisions of Article II under which participation therein is determined (I.E., a "Committed Borrowing" is a Borrowing under Section 2.01 in which all Banks participate in proportion to their Commitments, while a "Money Market Borrowing" is a Borrowing under Section 2.03 in which the Bank participants are determined on the basis of their bids in accordance therewith). 13 19 ARTICLE II THE CREDITS SECTION 2.01. COMMITMENTS TO LEND. During the Revolving Credit Period each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Company or any Eligible Subsidiary pursuant to this Section from time to time in amounts such that the aggregate principal amount of Committed Loans by such Bank at any one time outstanding to all Borrowers shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $15,000,000 or any larger multiple of $1,000,000 (except that any such Borrowing may be in the aggregate amount available in accordance with Section 3.02(b)) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, a Borrower may borrow under this Section, repay or, to the extent permitted by Section 2.11, prepay Loans and reborrow at any time during the Revolving Credit Period under this Section. SECTION 2.02. NOTICE OF COMMITTED BORROWING. The Borrower shall give the Agent notice (a "Notice of Committed Borrowing") not later than 11:00 A.M. (New York City time) on (x) the date of each Base Rate Borrowing, (y) the Domestic Business Day before each CD Borrowing and (z) the third Euro-Dollar Business Day before each Euro-Dollar Borrowing, specifying: (a) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Domestic Borrowing or a Euro-Dollar Business Day in the case of a Euro-Dollar Borrowing, (b) the aggregate amount of such Borrowing, (c) whether the Loans comprising such Borrowing are to be CD Loans, Base Rate Loans or Euro-Dollar Loans, and (d) in the case of a Fixed Rate Borrowing, the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. SECTION 2.03. MONEY MARKET BORROWINGS. 14 20 (a) THE MONEY MARKET OPTION. In addition to Committed Borrowings pursuant to Section 2.01, any Borrower may, as set forth in this Section, request the Banks during the Revolving Credit Period to make offers to make Money Market Loans to such Borrower. The Banks may, but shall have no obligation to, make such offers and the Borrower may, but shall have no obligation to, accept any such offers in the manner set forth in this Section. (b) MONEY MARKET QUOTE REQUEST. When a Borrower wishes to request offers to make Money Market Loans under this Section, it shall transmit to the Agent by telex or facsimile transmission a Money Market Quote Request substantially in the form of Exhibit B hereto so as to be received no later than 10:30 A.M. (New York City time) on (x) the fifth Euro-Dollar Business Day prior to the date of Borrowing proposed therein, in the case of a LIBOR Auction or (y) the Domestic Business Day next preceding the date of Borrowing proposed therein, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Company and the Agent shall have mutually agreed and the Agent shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective) specifying: (i) the proposed date of Borrowing, which shall be a Euro-Dollar Business Day in the case of a LIBOR Auction or a Domestic Business Day in the case of an Absolute Rate Auction, (ii) the aggregate amount of such Borrowing, which shall be $15,000,000 or a larger multiple of $1,000,000, (iii) the duration of the Interest Period applicable thereto, subject to the provisions of the definition of Interest Period, and (iv) whether the Money Market Quotes requested are to set forth a Money Market Margin or a Money Market Absolute Rate. The Borrower may request offers to make Money Market Loans for more than one Interest Period in a single Money Market Quote Request. No Money Market Quote Request shall be given within five Euro-Dollar Business Days (or such other number of days as the Company and the Agent may agree) of any other Money Market Quote Request. 15 21 (c) INVITATION FOR MONEY MARKET QUOTES. Promptly upon receipt of a Money Market Quote Request, the Agent shall send to the Banks by telex or facsimile transmission an Invitation for Money Market Quotes substantially in the form of Exhibit C hereto, which shall constitute an invitation by the Borrower to each Bank to submit Money Market Quotes offering to make the Money Market Loans to which such Money Market Quote Request relates in accordance with this Section. (d) SUBMISSION AND CONTENTS OF MONEY MARKET QUOTES. (i) Each Bank may submit a Money Market Quote containing an offer or offers to make Money Market Loans in response to any Invitation for Money Market Quotes. Each Money Market Quote must comply with the requirements of this subsection (d) and must be submitted to the Agent by telex or facsimile transmission at its offices referred to in or pursuant to Section 11.01 not later than (x) 2:00 P.M. (New York City time) on the fourth Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) 9:30 A.M. (New York City time) on the proposed, date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Company and the Agent shall have mutually agreed and the Agent shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective); PROVIDED that Money Market Quotes submitted by the Agent (or any affiliate of the Agent) in the capacity of a Bank may be submitted, and may only be submitted, if the Agent or such affiliate notifies the Borrower of the terms of the offer or offers contained therein not later than (x) one hour prior to the deadline for the other Banks, in the case of a LIBOR Auction or (y) 15 minutes prior to the deadline for the other Banks, in the case of an Absolute Rate Auction. Subject to Articles III and VI, any Money Mark et Quote so made shall be irrevocable except with the written consent of the Agent given on the instructions of the Borrower. (ii) Each Money Market Quote shall be in substantially the form of Exhibit D hereto and shall in any case specify: (A) the proposed date of Borrowing, (B) the principal amount of the Money Market Loan for which each such offer is being made, which principal amount (w) may be greater than or less than the Commitment of the quoting Bank, (x) must be $5,000,000 or a larger multiple of $1,000,000 (y) may 16 22 not exceed the principal amount of Money Market Loans for which offers were requested and (z) may be subject to an aggregate limitation as to the principal amount of Money Market Loans for which offers being made by such quoting Bank may be accepted, (C) in the case of a LIBOR Auction, the margin above or below the applicable London Interbank Offered Rate (the "Money Market Margin") offered for each such Money Market Loan, expressed as a percentage (specified to the nearest 1/10,000th of 1%) to be added to or subtracted from such base rate, (D) in the case of an Absolute Rate Auction, the rate of interest per annum (specified to the nearest 1/10,000th of 1%) (the "Money Market Absolute Rate") offered for each such Money Market Loan, and (E) the identity of the quoting Bank. A Money Market Quote may set forth up to five separate offers by the quoting Bank with respect to each,Interest Period specified in the related Invitation for Money Market Quotes. (iii) Any Money Market Quote shall be disregarded if it: (A) is not substantially in conformity with Exhibit D hereto or does not specify all of the information required by subsection (d) (ii); (B) contains qualifying, conditional or similar language; (C) proposes terms other than or in addition to those set forth in the applicable Invitation for Money Market Quotes; or (D) arrives after the time set forth in subsection (d) (i). (e) NOTICE TO BORROWER. The Agent shall promptly notify the Borrower of the terms (x) of any Money Market Quote submitted by a Bank that is in accordance with subsection (d) and (y) of any Money Market Quote that amends, modifies or is otherwise inconsistent with a previous Money Market Quote submitted by such Bank with respect to the same Money Market Quote Request. Any such subsequent Money Market Quote shall be disregarded by the Agent unless such subsequent Money Market Quote is submitted 17 23 solely to correct a manifest error in such former Money Market Quote. The Agent's notice to the Borrower shall specify (A) the aggregate principal amount of Money Market Loans for which offers have been received for each Interest Period specified in the related Money Market Quote Request, (B) the respective principal amounts and Money Market Margins or Money Market Absolute Rates, as the case may be, so offered and (C) if applicable, limitations on the aggregate principal amount of Money Market Loans for which offers in any single Money Market Quote may be accepted. (f) ACCEPTANCE AND NOTICE BY BORROWER. Not later than 10:30 A.M. (New York City time) on (x) the third Euro-Dollar Business Day prior to the proposed date of Borrowing, in the case of a LIBOR Auction or (y) the proposed date of Borrowing, in the case of an Absolute Rate Auction (or, in either case, such other time or date as the Company and the Agent shall have mutually agreed and the Agent shall have notified to the Banks not later than the date of the Money Market Quote Request for the first LIBOR Auction or Absolute Rate Auction for which such change is to be effective), the Borrower shall notify the Agent of its acceptance or non-acceptance of the offers so notified to it pursuant to subsection (e). In the case of acceptance, such notice (a "Notice of Money Market Borrowing") shall specify the aggregate principal amount of offers for each Interest Period that are accepted. The Borrower may accept any Money Market Quote in whole or in part; PROVIDED that: (i) the aggregate principal amount of each Money Market Borrowing may not exceed the applicable amount set forth in the related Money Market Quote Request, (ii) the principal amount of each Money Market Borrowing must be $15,000,000 or a larger multiple of $1,000,000, (iii) acceptance of offers may only be made on the basis of ascending Money Market Margins or Money Market Absolute Rates, as the case may be, and (iv) the Borrower may not accept any offer that is described in subsection (d) (iii) or that otherwise fails to comply with the requirements of this Agreement. (g) ALLOCATION BY AGENT. If offers are made by two or more Banks with the same Money Market Margins or Money Market Absolute Rates, as the case may be, for a greater aggregate principal amount than the amount in respect of which such offers are accepted for the related 18 24 Interest Period, the principal amount of Money Market Loans in respect of which such offers are accepted shall be allocated by the Agent among such Banks as nearly as possible (in multiples of $1,000,000, as the Agent may deem appropriate) in proportion to the aggregate principal amounts of such offers. Determinations by the Agent of the amounts of Money Market Loans shall be conclusive in the absence of manifest error. SECTION 2.04. NOTICE TO BANKS; FUNDING OF LOANS. (a) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's share (if any) of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (b) Not later than 12:00 Noon (New York City time) on the date of each Borrowing, each Bank participating therein shall (except as provided in subsection (c) of this Section) make available its share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 11.01. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (c) If any Bank makes a new Loan hereunder to a Borrower on a day on which such Borrower is to repay all or any part of an outstanding Loan from such Bank, such Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed by such Borrower and the amount being repaid shall be made available by such Bank to the Agent as provided in subsection (b), or remitted by such Borrower to the Agent as provided in Section 2.12, as the case may be. (d) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsections (b) and (c) of this Section 2.04 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together 19 25 with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.07 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.05. NOTES. (a) The Loans of each Bank to each. Borrower shall be evidenced by a single Note of such Borrower payable to the order of such Bank for the account of its Applicable Lending Office in an amount equal to the aggregate unpaid principal amount of such Bank's Loans to such Borrower. (b) Each Bank may, by notice to a Borrower and the Agent, request that its Loans of a particular type to such Borrower be evidenced by a separate Note of such Borrower in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to a "Note" or the "Notes" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(b) or 3.03(a), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount, type and maturity of each Loan made by it to each Borrower and the date and amount of each payment of principal made with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note of any Borrower, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan to such Borrower then outstanding; PROVIDED that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of any Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by each Borrower so to endorse its Notes and to attach to and make a part of any Note a continuation of any such schedule as and when required. SECTION 2.06. MATURITY OF LOANS. Each Loan included in any Borrowing shall mature, and the principal 20 26 amount thereof shall be due and payable, on the last day of the Interest Period applicable to such Borrowing. SECTION 2.07. INTEREST RATES. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof, for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable for each Interest Period on the last day thereof. Any overdue principal of or interest on any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each CD Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to such Interest Period; PROVIDED that if any CD Loan shall, as a result of clause (2) (b) of the definition of Interest Period, have an Interest Period of less than 30 days, such CD Loan shall bear interest during such Interest Period at the rate applicable to Base Rate Loans during such period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than 90 days, at intervals of 90 days after the first day thereof. Any overdue principal of or interest on any CD Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the higher of (i) the sum of the CD Margin for such day plus the Adjusted CD Rate applicable to the Interest Period for such Loan and (ii) the rate applicable to Base Rate Loans for such day. "CD Margin" means a rate per annum equal to 0.270%. The "Adjusted CD Rate" applicable to any Interest Period means a rate per annum determined pursuant to the following formula: 21 27 [ CDBR ]* ACDR = [------------] + AR [ 1.00 - DRP ] ACDR = Adjusted CD Rate CDBR = CD Base Rate DRP = Domestic Reserve Percentage AR = Assessment Rate - ---------- * The amount in brackets being rounded upward, if necessary, to the next higher 1/100 of 1% The "CD Base Rate" applicable to any Interest Period is the rate of interest determined by the Agent to be the average (rounded upward, if necessary, to the next higher 1/100 of 1%) of the prevailing rates per annum bid at 10:00 A.M. (New York City time) (or as soon thereafter as practicable) on the first day of such Interest Period by two or more New York certificate of deposit dealers of recognized standing for the purchase at face value from each CD Reference Bank of its certificates of deposit in an amount comparable to the principal amount of the CD Loan of such CD Reference Bank to which such Interest Period applies and having a maturity comparable to such Interest Period. "Domestic Reserve Percentage" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of new non-personal time deposits in dollars in New York City having a maturity comparable to the related Interest Period and in an amount of $100,000 or more. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Domestic Reserve Percentage. "Assessment Rate" means for any day the annual assessment rate in effect on such day which is payable by a member of the Bank Insurance Fund classified as adequately capitalized and within supervisory subgroup "A" (or a comparable successor assessment risk classification) within the meaning of 12 C.F.R. ss. 327.4(a) (or any successor provision) to the Federal Deposit Insurance Corporation (or any successor) for such Corporation's (or such successor's) insuring time deposits at offices of such institution in the 22 28 United States. The Adjusted CD Rate shall be adjusted automatically on and as of the effective date of any change in the Assessment Rate. (c) Each Euro-Dollar Loan shall bear interest on the outstanding principal amount thereof, for each day during the Interest Period applicable thereto, at a rate per annum equal to the sum of the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. "Euro-Dollar Margin" means a rate per annum equal to 0.145%. The "London Interbank Offered Rate" applicable to any Interest Period means the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which deposits in dollars are offered to each of the Euro-Dollar Reference Banks in the London interbank market at approximately 11:00 A.M. (London time) two Euro-Dollar Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Euro-Dollar Loan of such Euro-Dollar Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. (d) Any overdue principal of or interest on any Euro-Dollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 1% plus the Euro-Dollar Margin for such day plus the London Interbank Offered Rate applicable to the Interest Period for such Loan and (ii) the sum of 1% plus the Euro-Dollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three Euro-Dollar Business Days, then for such other period of time not longer than six months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to each of the Euro-Dollar Reference Banks are offered to such Euro-Dollar Reference Bank in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the Euro-Dollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 1% plus the rate applicable to Base Rate Loans for such day). 23 29 (e) Subject to Section 8.01(ii), each Money Market LIBOR Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the sum of the London Interbank Offered Rate for such Interest Period (determined in accordance with Section 2.07(c) as if the related Money Market LIBOR Borrowing were a Committed Euro-Dollar Borrowing) plus (or minus) the Money Market Margin quoted by the Bank making such Loan in accordance with Section 2.03. Each Money Market Absolute Rate Loan shall bear interest on the outstanding principal amount thereof, for the Interest Period applicable thereto, at a rate per annum equal to the Money Market Absolute Rate quoted by the Bank making such Loan in accordance with Section 2.03. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. Any overdue principal of or interest on any Money Market Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 1% plus the Base Rate for such day. (f) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of manifest error. (g) Each Reference Bank agrees to use its best efforts to furnish quotations to the Agent as contemplated by this Section. If any Reference Bank does not furnish a timely quotation, the Agent shall determine the relevant interest rate on the basis of the quotation or quotations furnished by the remaining Reference Bank or Banks or, if none of such quotations is available on a timely basis, the provisions of Section 8.01 shall apply. SECTION 2.08. FACILITY FEE. (a) The Company shall pay to the Agent for the account of the Banks ratably, a facility fee at the rate of 0.030% per annum. Such facility fee shall accrue (i) from and including the Effective Date to but excluding the Termination Date (or earlier date of termination of the Commitments in their entirety), on the daily aggregate amount of the Commitments (whether used or unused) and (ii) from and including the Termination Date or such earlier date of termination to but excluding the date the Loans shall be repaid in their entirety, on the daily aggregate outstanding principal amount of the Loans. 24 30 (b) Payments. Accrued facility fees under this Section shall be payable quarterly on each March 31, June 30, September 30 and December 31, beginning with March 31, 1997, and upon the date of termination of the Commitments in their entirety (and, if later, the date the Loans shall be repaid in their entirety). SECTION 2.09. TERMINATION OR REDUCTION OF COMMITMENTS. The Company may, upon at least three Domestic Business Days' notice to the Agent, (i) terminate the Commitments at any time, if no Loans are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $25,000,000 or any larger multiple thereof, the aggregate amount of the Commitments in excess of the aggregate outstanding principal amount of the Loans. Promptly after receiving a notice pursuant to this subsection, the Agent shall notify each Bank of the contents thereof. SECTION 2.10. SCHEDULED TERMINATION OF COMMITMENTS. The Commitments shall terminate on the Termination Date and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. SECTION 2.11. OPTIONAL PREPAYMENTS. (a) Subject in the case of Fixed Rate Loans to Section 2.13, the Borrower may, upon at least one Domestic Business Day's notice to the Agent, prepay any Domestic Borrowing (or any Money Market Borrowing bearing interest at the Base Rate pursuant to Section 8.01(ii)) or upon at least three EuroDollar Business Days' notice to the Agent, prepay any EuroDollar Borrowing, in each case in whole at any time, or from time to time in part in amounts aggregating $15,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Borrowing. (b) Except as provided in subsection (a) above, the Borrower may not prepay all or any portion of the principal amount of any Money Market Loan prior to the maturity thereof. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share (if any) of such prepayment and such notice shall not thereafter be revocable by the Borrower. 25 31 SECTION 2.12. GENERAL PROVISIONS AS TO PAYMENTS. (a) The Borrowers shall make each payment of principal of, and interest on, the Loans and of fees hereunder, not later than 12:00 Noon (New York City time) on the date when due, in Dollars in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 11.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of, or interest on, the Domestic Loans or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of, or interest on, the Euro-Dollar Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day unless such Euro-Dollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding Euro-Dollar Business Day. Whenever any payment of principal of, or interest on, the Money Market Loans shall be due on a day which is not a Euro-Dollar Business Day, the date for payment thereof shall be extended to the next succeeding Euro-Dollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from a Borrower prior to the date on which any payment is due from such Borrower to the Banks hereunder that such Borrower will not make such payment in full, the Agent may assume that such Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent that such Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank-repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.13. FUNDING LOSSES. If a Borrower makes any payment of principal with respect to any Fixed Rate Loan (pursuant to Article VI or VIII or otherwise) on any day other than the last day of the Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.07(d), or if a Borrower fails to borrow or prepay any Fixed Rate Loans after notice has been given to any Bank in accordance with Section 2.04(a) or 26 32 2.11(c), such Borrower shall reimburse each Bank on demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or failure to borrow or prepay, PROVIDED that such Bank shall have delivered to such Borrower a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error. SECTION 2.14. COMPUTATION OF INTEREST AND FEES. Interest based on the Prime Rate hereunder shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and paid for the actual number of days elapsed (including the first day but excluding the last day). All other interest and all facility fees shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.15. JUDGMENT CURRENCY. If for the purpose of obtaining judgment in any court it is necessary to convert a sum due from any Borrower hereunder or under any of the Notes in Dollars into another currency, the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures the Agent could purchase Dollars with such other currency at the Agent's New York office on the Domestic Business Day preceding that on which final judgment is given. The obligations of each Borrower in respect of any sum due to any Bank or the Agent hereunder or under any Note shall, notwithstanding any judgment in a currency other than Dollars, be discharged only to the extent that on the Domestic Business Day following receipt by such Bank or the Agent (as the case may be) of any sum adjudged to be so due in such other currency such Bank or the Agent (as the case may be) may in accordance with normal banking procedures purchase Dollars with such other currency; if the amount of Dollars so purchased is less than the sum originally due to such Bank or the Agent, as the case may be, in Dollars, each Borrower agrees, to the fullest extent that it may effectively do so, as a separate obligation and notwithstanding any such judgment, to indemnify such Bank or the Agent, as the case may be, against such loss, and if the amount of Dollars so purchased exceeds (a) the sum originally due to any Bank or the Agent, as the case may be, and (b) any amounts shared with other Banks as a result of allocations of such excess as a disproportionate payment to 27 33 such Bank under Section 11.04, such Bank or the Agent, as the case may be, agrees to remit such excess to the appropriate Borrower. SECTION 2.16. FOREIGN WITHHOLDING TAXES AND OTHER COSTS. (a) All payments by an Eligible Subsidiary of principal of and interest on its Notes and of all other amounts payable under this Agreement are payable without deduction for or on account of any present or future taxes, duties or other charges levied or imposed by the government of any jurisdiction outside the United States or by any political subdivision or taxing authority thereof or therein through withholding or deduction with respect to any such payments. If any such taxes, duties or other charges are so levied or imposed, such Eligible Subsidiary will pay additional interest or will make additional payments in such amounts so that every net payment of principal of and interest on its Notes and of all other amounts payable by it under this Agreement, after withholding or deduction for or on account of any such present or future taxes, duties or other charges, will not be less than the amount provided for herein. Such Eligible Subsidiary shall furnish promptly to the Agent official receipts evidencing such withholding or deduction. (b) If the cost to any Bank of making or maintaining any Loan to an Eligible Subsidiary is increased, or the amount of any sum received or receivable by any Bank (or its Applicable Lending Office) is reduced by an amount deemed by such Bank to be material, by reason of the fact that such Eligible Subsidiary is incorporated in, or conducts business in, a jurisdiction outside the United States the Borrower shall indemnify such Bank for such increased costs or reduction within 15 days after demand by such Bank (with a copy to the Agent and the Company). A certificate of such Bank claiming compensation under this subsection (b) and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. (c) Each Bank will promptly notify the Company and the Agent of any event of which it has knowledge that will entitle such Bank to additional interest or payments pursuant to subsection (b) and will designate a different Applicable Lending Office, if, in the judgment of such Bank, such designation will avoid the need for, or reduce the amount of, such compensation and will not be otherwise disadvantageous to such Bank. SECTION 2.17. REGULATION D COMPENSATION. Each Bank may require any Borrower to pay, contemporaneously with 28 34 each payment of interest on the Euro-Dollar Loans to such Borrower, additional interest on the related Euro-Dollar Loan to such Borrower of such Bank at a rate per annum determined by such Bank up to but not exceeding the excess of (i) (A) the applicable London Interbank Offered Rate divided by (B) one MINUS the Euro-Dollar Reserve Percentage over (ii) the applicable London Interbank Offered Rate. Any Bank wishing to require payment of such additional interest (x) shall so notify such Borrower and the Agent, in which case such additional interest on the Euro-Dollar Loans to such Borrower of such Bank shall be payable to such Bank at the place indicated in such notice with respect to each Interest Period commencing at least three Euro-Dollar Business Days after the giving of such notice, and (y) shall notify such Borrower at least five Euro-Dollar Business Days prior to each date on which interest is payable on the Euro-Dollar Loans to such Borrower of the amount then due it under this Section. SECTION 2.18. WITHHOLDING TAX EXEMPTION. At least five Domestic Business Days prior to the first date on which interest or fees are payable hereunder for the account of any Bank, each Bank that is not incorporated under the laws of the United States or a state thereof agrees that it will deliver to each of the Company and the Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, certifying in either case that such Bank is entitled to receive payments from the Company under this Agreement and the Notes without deduction or withholding of any United States federal income taxes. Each Bank which so delivers a Form 1001 or 4224 further undertakes to deliver to each of the Company and the Agent two additional copies of such form (or a successor form) on or before the date that such form expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form so delivered by it, and such amendments thereto or extensions or renewals thereof as may be reasonably requested by the Company or the Agent, in each case certifying that such Bank is entitled to receive payments from the Company under this Agreement and the Notes without deduction or withholding of any United States federal income taxes, unless an event (including without limitation any change in treaty, law or regulation) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such form with respect to it and such Bank advises the Company and the Agent that it is not capable of receiving such payments without any deduction or withholding of United States federal income tax. 29 35 ARTICLE III CONDITIONS SECTION 3.01. EFFECTIVENESS. This Agreement shall become effective on the date that each of the following conditions shall have been satisfied (or waived in accordance with Section 11.05): (a) receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telegraphic, telex, facsimile transmission or other written confirmation from such party of execution of a counterpart hereof by such party); (b) receipt by the Agent for the account of each Bank of a duly executed Note of the Company dated on or before the Effective Date complying with the provisions of Section 2.05; (c) receipt by the Agent of an opinion of the General Counsel of the Company (or other counsel for the Company reasonably satisfactory to the Agent), substantially in the form of Exhibit E hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (d) receipt by the Agent of an opinion of Davis Polk & Wardwell, special counsel for the Agent, substantially in the form of Exhibit F hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; (e) receipt by the Agent of all documents it may reasonably request relating to the existence of the Company, the corporate authority for and the validity of this Agreement and the Notes, and any other matters relevant hereto, all in form and substance satisfactory to the Agent; and (f) receipt by the Agent of evidence satisfactory to it of the payment of all principal and interest on any loans outstanding under, and of all other amounts payable under, the Existing 364-Day Credit Agreement; 3O 36 PROVIDED that this Agreement shall not become effective or be binding on any party hereto unless all of the foregoing conditions are satisfied no later than January 31, 1997. The Agent shall promptly notify the Company and the Banks of the Effective Date, and such notice shall be conclusive and binding on all parties hereto. The Banks that are parties to the Existing 364-Day Credit Agreement, comprising the "Required Banks" as defined therein, and the Company agree to eliminate the requirement under Section 2.09 of the Existing 364-Day Credit Agreement that notice of optional termination of the commitments thereunder be given three Domestic Business Days in advance, and further agree that the commitments under the Existing 364-Day Credit Agreement shall terminate in their entirety simultaneously with and subject to the effectiveness of this Agreement and that the Company shall be obligated to pay the accrued facility fees thereunder to but excluding the date of such effectiveness. The Company shall, within 30 days after the Effective Date, cause the commitments under the Duracell Credit Facility to be terminated in their entirety and all principal, interest and other amounts payable thereunder to be repaid in full. SECTION 3.02. BORROWINGS. The obligation of any Bank to make a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions: (a) receipt by the Agent of a Notice of Borrowing as required by Section 2.02 or 2.03, as the case may be; (b) the fact that, immediately after such Borrowing, the aggregate outstanding principal amount of the Loans will not exceed the aggregate amount of the Commitments less the aggregate principal amount committed or outstanding (without duplication) under the Duracell Credit Facility; (c) the fact that, immediately before and after such Borrowing, no Default shall have occurred and be continuing; and (d) the fact that the representations and warranties of the Company and the Borrower (if other than the Company) contained in this Agreement (except, in the case of a Refunding Borrowing, the representations and warranties set forth in Sections 4.05 and 4.07 as to any matter which has theretofore been disclosed in writing by the Company to the Banks) shall be true in all material respects on and as of the date of such Borrowing. 31 37 Each Borrowing hereunder shall be deemed to be a representation and warranty by the Company and the Borrower (if other than the Company) on the date of such Borrowing as to the facts specified in clauses (b), (c) and (d) of this Section. SECTION 3.03. FIRST BORROWING BY EACH ELIGIBLE SUBSIDIARY. The obligation of each Bank to make a Loan on the occasion of the first Borrowing by each Eligible Subsidiary is subject to the satisfaction of the following further conditions: (a) receipt by the Agent for the account of each Bank of a duly executed Note of such Eligible Subsidiary, dated on or before the date of such Borrowing complying with the provisions of Section 2.05; (b) receipt by the Agent of an opinion of counsel for such Eligible Subsidiary acceptable to the Agent, substantially in the form of Exhibit I hereto and covering such additional matters relating to the transactions contemplated hereby as the Required Banks may reasonably request; and (c) receipt by the Agent of all documents which it may reasonably request relating to the existence of such Eligible Subsidiary, the corporate authority for and the validity of the Election to Participate of such Eligible Subsidiary, this Agreement and the Notes of such Eligible Subsidiary, and any other matters relevant thereto, all in form and substance satisfactory to the Agent. The documents referred to in this Section 3.03 shall be delivered to the Agent by an Eligible Subsidiary no later than the date of the first Borrowing by such Eligible Subsidiary. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants that: SECTION 4.01. CORPORATE EXISTENCE AND POWER. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, and has all corporate powers and all material governmental licenses, 32 38 authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.02. CORPORATE AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and its Notes are within the Company's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. SECTION 4.03. BINDING EFFECT. This Agreement constitutes a valid and binding agreement of the Company and its Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of the Company, in each case enforceable in accordance with their respective terms except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. SECTION 4.04. FINANCIAL INFORMATION. (a) The consolidated balance sheet of the Company and its Consolidated Subsidiaries as of December 31, 1996 and the related consolidated statements of income and cash flows for the fiscal year then ended, reported on by KPMG Peat Marwick LLP and set forth in the Company's Annual Report to Shareholders for 1996 incorporated by reference in the Company's 1997 Form 10-K, a copy of which has been delivered to each of the Banks, fairly present, in conformity with generally accepted accounting principles, the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year. (b) The unaudited consolidated balance sheet of the Company and its Consolidated Subsidiaries as of June 30, 1998 and the related unaudited consolidated statements of income and cash flows for the six months then ended, set forth in the Company's Latest Form 10-Q, a copy of which has been delivered to each of the Banks, fairly present, on a basis consistent with the financial statements referred to in subsection (a) of this Section, the consolidated financial position of the Company and its Consolidated Subsidiaries as of such date and their consolidated results 33 39 of operations and cash flows for such six-month period (subject to normal year-end adjustments). SECTION 4.05. NO MATERIAL ADVERSE CHANGE. Since June 30, 1998, there has been no material adverse change in the business, operations or financial condition of the Company and its Consolidated Subsidiaries, considered as a whole. SECTION 4.06. COMPLIANCE WITH ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, if such failure or amendment has resulted, or there is a reasonable possibility that it could result, in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. SECTION 4.07. LITIGATION. Except as disclosed in the Company's 1997 Form 10-K and the Company's Latest Form 10-Q, there is no action, suit, investigation or proceeding pending against, or to the knowledge of the Company threatened against or affecting, the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, operations or financial condition of the Company and its Consolidated Subsidiaries, taken as a whole, or which in any manner draws into question the validity of this Agreement or the Notes. SECTION 4.08. TAXES. The Company has filed (or has obtained extensions of the time by which it is required to file) all United States federal income tax returns and all other material tax returns required to be filed by it and has paid all taxes shown due on the returns so filed as well as all other material taxes, assessments and governmental charges which have become due, except such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. 34 40 SECTION 4.09. FULL DISCLOSURE. All information heretofore furnished by the Company to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Company to the Agent or any Bank will be, true and accurate in all material respects on the date as of which such information is stated or certified. The Company has disclosed to the Banks in writing any and all facts which materially and adversely affect or may affect (to the extent the Company can now reasonably foresee), the business, operations or financial condition of the Company and its Consolidated Subsidiaries, taken as a whole, or the ability of the Company to perform its obligations under this Agreement. ARTICLE V COVENANTS The Company agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note remains unpaid: SECTION 5.01. INFORMATION. The Company will deliver to each of the Banks: (a) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission by KPMG Peat Marwick LLP or other independent public accountants of nationally recognized standing; (b) as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Company, (i) a consolidated balance sheet of the Company and its Consolidated Subsidiaries as of the end of such quarter, (ii) the related consolidated statements of income for such quarter and for the portion of the Company's fiscal year ended at the end of such quarter and (iii) the related consolidated statement of cash flows for the portion of the Company's fiscal year ended at the end of such quarter, setting forth in 35 41 cases (ii) and (iii) in comparative form the figures for the corresponding quarter and the corresponding portion of the Company's previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer or the principal accounting officer of the Company; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the chief financial officer or the principal accounting officer of the Company (i) setting forth in reasonable detail the calculations required to establish whether the Company was in compliance with the requirements of Section 5.05 on the date of such financial statements and (ii) stating whether there exists on the date of such certificate any Default and, if any Default then exists, setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (d) simultaneously with the delivery of each set of financial statements referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements (i) stating whether anything has come to their attention to cause them to believe that there existed on the date of such statements any Default and (ii) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; (e) forthwith upon the occurrence of any Default, a certificate of the chief financial officer or the principal accounting officer of the Company setting forth the details thereof and the action which the Company is taking or proposes to take with respect thereto; (f) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (g) promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and annual, quarterly or monthly 36 42 reports which the Company shall have filed with the Securities and Exchange Commission; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might reasonably constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; or (iv) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement, if such failure or amendment has resulted, or there is a reasonable possibility that it could result, in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code, a certificate of the chief financial officer, the principal accounting officer or the treasurer of the Company setting forth details as to such occurrence and action, if any, which the Company or applicable member of the ERISA Group is required or proposes to take; (i) promptly upon any change in the rating by Standard & Poor's Ratings Services or Moody's Investors Service, Inc. of the Company's outstanding public senior unsecured long-term debt securities or the Company's outstanding commercial paper, a notice reporting such change and stating the date on which such change was announced by the relevant rating agency; and (j) from time to time such additional information regarding the business, operations or financial condition of the Company and its Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 5.02. MAINTENANCE OF PROPERTY; INSURANCE. The Company will keep, and will cause each Subsidiary to 37 43 keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted; will maintain, and will cause each Subsidiary to maintain (either in the name of the Company or in such Subsidiary's own name) with financially sound and reputable insurance companies, insurance on all their property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies of established repute engaged in the same or a similar business; and will furnish to the Banks, upon written request from the Agent, such information as may be reasonably requested as to the insurance carried. SECTION 5.03. CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The Company will preserve, renew and keep in full force and effect its corporate existence and its rights, privileges and franchises necessary or desirable in the normal conduct of business. SECTION 5.04. COMPLIANCE WITH LAWS. The Company will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings. SECTION 5.05. EARNINGS TO INTEREST EXPENSE RATIO. At the end of each fiscal quarter of the Company, the ratio of (x) Consolidated Earnings Before Interest and Taxes for the four fiscal quarters then ended to (y) Gross Interest Expense for the four fiscal quarters then ended will not be less than 6.50:1. SECTION 5.06. NEGATIVE PLEDGE. Neither the Company nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date hereof securing Debt outstanding on the date hereof in an aggregate principal amount not exceeding $25,000,000; (b) any Lien existing on any asset of any corporation at the time such corporation becomes a Subsidiary and not created in contemplation of such event; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part 38 44 of the cost of acquiring such asset, PROVIDED that such Lien attaches to such asset concurrently with or within 90 days after the acquisition thereof; (d) any Lien on any asset of any corporation existing at the time such corporation is merged or consolidated with or into the Company or a Subsidiary and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Company or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, PROVIDED that such Debt is not increased and is not secured by any additional assets; (g) any Lien arising pursuant to any order of attachment, distraint or similar legal process arising in connection with court proceedings so long as the execution or other enforcement thereof is effectively stayed and the claims secured thereby are being contested in good faith by appropriate proceedings; (h) Liens incidental to the conduct of its business or the ownership of its assets which (i) do not secure Debt or Derivatives Obligations and (ii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (i) Liens on cash. and cash equivalents securing Derivatives Obligations, PROVIDED that the aggregate amount of cash and cash equivalents subject to such Liens may at no time exceed $25,000,000; and (j) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt in an aggregate principal amount at any time outstanding not to exceed 5% of Consolidated Assets. SECTION 5.07. CONSOLIDATIONS, MERGERS AND SALES OF ASSETS. The Company will not (i) consolidate or merge with or into any other Person or (ii) sell, lease or otherwise transfer, directly or indirectly, all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any other Person; PROVIDED that the Company may merge with a Subsidiary if (A) the Company is the corporation surviving such merger and (B) 39 45 immediately after giving effect to such merger, no Default shall have occurred and be continuing. SECTION 5.08. MATERIAL SUBSIDIARY CASH FLOW. The Company will not, and will not permit any Material Subsidiary to, enter into any arrangement which restricts the ability of any Material Subsidiary, directly or indirectly, to make funds available to the Company, whether by way of dividend or other distribution, advance or otherwise. SECTION 5.09. USE OF PROCEEDS. The proceeds of Loans hereunder will be used by the Borrowers for their general corporate purposes, including without limitation, any purchase, redemption, retirement or acquisition of outstanding shares of capital stock of the Company ("Stock Repurchases"). Except for permitted Stock Repurchases referred to in the immediately preceding sentence, none of such proceeds will be used, directly or indirectly, for the purpose, whether immediate, incidental or ultimate, of purchasing or carrying any "margin stock" within the meaning of Regulation U. ARTICLE VI DEFAULTS SECTION 6.01. EVENTS OF DEFAULT. If one or more of the following events ("Events of Default") shall have occurred and be continuing: (a) any principal of any Loan shall not be paid when due, or any interest, any fees or any other amount payable hereunder shall not be paid within five days of the due date thereof; (b) the Company shall fail to observe or perform any covenant contained in Sections 5.05 to 5.09, inclusive; (c) any Borrower shall fail to observe or perform any covenant or agreement contained in this Agreement (other than those covered by clause (a) or (b) above) for 30 days after written notice thereof has been given to the Company by the Agent at the request of any Bank; (d) any representation, warranty, certification or statement made or deemed to have been made by any Borrower in this Agreement or in any certificate, 4O 46 financial statement or other document delivered pursuant to this Agreement shall prove to have been incorrect in any material respect when made (or deemed made); (e) the Company or any Subsidiary shall fail to make any payment in respect of any Material Debt or any Material Financial Obligations when due or within any applicable grace period; (f) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; (g) the Company or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorize any of the foregoing; (h) an involuntary case or other proceeding shall be commenced against the Company or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Company or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (i) any member of the ERISA Group shall fail to pay when due (including any approved extensions) an 41 47 amount or amounts aggregating in excess of $50,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $50,000,000; (j) a judgment or order for the payment of money in excess of $50,000,000 shall be rendered against the Company or any Material Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days; or (k) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 30% or more of the outstanding shares of voting stock of the Company; or, during any two-year period, the individuals who were serving on the board of directors of the Company at the beginning of such period or who were nominated for election or elected to such board during such period with the affirmative vote of at least two-thirds of such individuals still in office cease to constitute a majority of such board; then, and in every such event, the Agent shall (i) if requested by Banks having more than 50% in aggregate amount of the Commitments, by notice to the Company terminate the Commitments and they shall thereupon terminate, and (ii) if requested by Banks holding Notes evidencing more than 50% in aggregate principal amount of the Loans, by notice to the Company declare the Notes (together with accrued interest thereon and all accrued fees and other amounts payable by any Borrower hereunder) to be, and the Notes shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower; PROVIDED that in the 42 48 case of any of the Events of Default specified in clause (g) or (h) above with respect to any Borrower, without any notice to any Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Notes (together with accrued interest thereon and all accrued fees and other amounts payable by any Borrower hereunder) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by each Borrower. SECTION 6.02. NOTICE OF DEFAULT. The Agent shall give notice to the Company under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. ARTICLE VII THE AGENT SECTION 7.01. APPOINTMENT AND AUTHORIZATION. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto. SECTION 7.02. AGENT AND AFFILIATES. Morgan Guaranty Trust Company of New York shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and Morgan Guaranty Trust Company of New York and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with any Borrower or any Subsidiary or affiliate of any Borrower as if it were not the Agent hereunder. SECTION 7.03. ACTION BY AGENT. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article VI. SECTION 7.04. CONSULTATION WITH EXPERTS. The Agent may consult with legal counsel (who may be counsel for any Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in 43 49 accordance with the advice of such counsel, accountants or experts. SECTION 7.05. LIABILITY OF AGENT. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (i) with the consent or at the request of the Required Banks (or when expressly required hereby, all the Banks) or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of any Borrower; (iii) the satisfaction of any condition specified in Article III, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties. SECTION 7.06. INDEMNIFICATION. Each Bank shall, ratably in accordance with its Commitment, indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrowers) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with its role as Agent hereunder or any action taken or omitted by such indemnitees in connection therewith. SECTION 7.07. CREDIT DECISION. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such 44 50 documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.08. SUCCESSOR AGENT. The Agent may resign at any time by giving notice thereof to the Banks and the Company. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent, which shall be a commercial bank organized or licensed under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. SECTION 7.09. AGENT'S FEE. The Company shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Company and the Agent. ARTICLE VIII CHANGE IN CIRCUMSTANCES SECTION 8.01. BASIS FOR DETERMINING INTEREST RATE INADEQUATE OR UNFAIR. If on or prior to the first day of any Interest Period for any Fixed Rate Borrowing: (a) the Agent is advised by the Reference Banks that deposits in dollars (in the applicable amounts) are not being offered to the Reference Banks in the relevant market for such Interest Period, or 45 51 (b) in the case of a Committed Borrowing, Banks having 50% or more of the aggregate amount of the Commitments advise the Agent that the Adjusted CD Rate or the London Interbank Offered Rate, as the case may be, as determined by the Agent will not adequately and fairly reflect the cost to such Banks of funding their CD Loans or Euro-Dollar Loans, as the case may be, for such Interest Period, the Agent shall forthwith give notice thereof to the Borrowers and the Banks, whereupon until the Agent notifies the Borrowers that the circumstances giving rise to such suspension no longer exist, the obligations of the Banks to make CD Loans or Euro-Dollar Loans, as the case may be, shall be suspended. Unless a Borrower notifies the Agent at least one Domestic Business Day before the date of any Fixed Rate Borrowing for which a Notice of Borrowing has previously been given that it elects not to borrow on such date, (i) if such Fixed Rate Borrowing is a Committed Borrowing, such Borrowing shall instead be made as a Base Rate Borrowing and (ii) if such Fixed Rate Borrowing is a Money Market LIBOR Borrowing, the Money Market LIBOR Loans comprising such Borrowing shall bear interest for each day from and including the first day to but excluding the last day of the Interest Period applicable thereto at the Base Rate for such day. SECTION 8.02. ILLEGALITY. If, on or after the date hereof, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Euro-Dollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its Euro-Dollar Lending Office) to make, maintain or fund its Euro-Dollar Loans to any Borrower and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and such Borrower, whereupon until such Bank notifies such Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make Euro-Dollar Loans to such Borrower shall be suspended. Before giving any notice to the Agent pursuant to this Section, such Bank shall designate a different Euro-Dollar Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank shall determine 46 52 that it may not lawfully continue to maintain and fund any of its outstanding Euro-Dollar Loans to such Borrower to maturity and shall so specify in such notice, such Borrower shall immediately prepay in full the then outstanding principal amount of each such Euro-Dollar Loan, together with accrued interest thereon. Concurrently with prepaying each such Euro-Dollar Loan, such Borrower shall borrow a Base Rate Loan in an equal principal amount from such Bank (on which interest and principal shall be payable contemporaneously with the related Euro-Dollar Loans of the other Banks), and such Bank shall make such a Base Rate Loan. SECTION 8.03. INCREASED COST AND REDUCED RETURN. (a) If on or after (x) the date hereof, in the case of any Committed Loan or any obligation to make Committed Loans or (y) the date of the related Money Market Quote, in the case of any Money Market Loan, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall subject any Bank (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Fixed Rate Loans, its Notes or its obligation to make Fixed Rate Loans, or shall change the basis of taxation of payments to any Bank (or its Lending Office) of the principal of or interest on its Fixed Rate Loans or any other amounts due under this Agreement in respect of its Fixed Rate Loans or its obligation to make Fixed Rate Loans (except for changes in the rate of tax on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank's principal executive office or Applicable Lending Office is located); or (ii) shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding (i) with respect to any CD Loan any such requirement included in an applicable Domestic Reserve Percentage and (ii) with respect to any Euro-Dollar Loan any such requirement with respect 47 53 to which such Bank is entitled to compensation during the relevant Interest Period under Section 2.17), special deposit, insurance assessment (excluding, with respect to any CD Loan, any such requirement reflected in an applicable Assessment Rate) or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the London interbank market any other condition affecting its Fixed Rate Loans, its Notes or its obligation to make Fixed Rate Loans; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Fixed Rate Loan, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Bank to be material, then, within 15 days after demand by such Bank (with a copy to the Agent), the Company shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, on or after the date hereof, the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency (including any determination by any such authority, central bank or comparable agency that, for purposes of capital adequacy requirements, the Commitments hereunder do not constitute commitments with an original maturity of one year or less, which shall be deemed to be a change in the interpretation and administration of such requirements), has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, within 15 days after demand by such Bank (with a copy to the Agent), the Company shall pay to such Bank such additional amount or amounts as 48 54 will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Company and the Agent of any event of which it has knowledge, occurring on or after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation un der this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.04. BASE RATE LOANS SUBSTITUTED FOR AFFECTED FIXED RATE LOANS. If (i) the obligation of any Bank to make Euro-Dollar Loans to any Borrower has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03(a) with respect to its CD Loans or Euro-Dollar Loans and a Borrower shall, by at least three Euro-Dollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this Section shall apply to such Ban k, then, unless and until such Bank notifies such Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans to such Borrower which would otherwise be made by such Bank as CD Loans or Euro-Dollar Loans, as the case may be, shall be made instead as Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related Fixed Rate Loans of the other Banks), and (b) after each of its CD Loans or Euro-Dollar Loans, as the case may be, to such Borrower has been repaid, all payments of principal which would otherwise be applied to repay such Fixed Rate Loans shall be applied to repay its Base Rate Loans to such Borrower instead. 49 55 ARTICLE IX REPRESENTATIONS AND WARRANTIES OF ELIGIBLE SUBSIDIARIES Each Eligible Subsidiary shall be deemed by the execution and delivery of its Election to Participate to have represented and warranted as of the date thereof that: SECTION 9.01. CORPORATE EXISTENCE AND POWER. It is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as then conducted. SECTION 9.02. CORPORATE AND GOVERNMENTAL AUTHORIZATION; CONTRAVENTION. The execution and delivery by it of its Election to Participate and its Notes, and the performance by it of this Agreement and its Notes, are within its corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of its certificate of incorporation or by-laws or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or such Eligible Subsidiary or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. SECTION 9.03. BINDING EFFECT. This Agreement constitutes a valid and binding agreement of such Eligible Subsidiary and its Notes, when executed and delivered in accordance with this Agreement, will constitute valid and binding obligations of such Eligible Subsidiary, in each case enforceable in accordance with their respective terms except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. SECTION 9.04. TAXES. Except as disclosed to the Banks in writing prior to the delivery of such Election to Participate, there is no income, stamp or other tax of any country, or any taxing authority thereof or therein, imposed by or in the nature of withholding or otherwise, which is imposed on any payment to be made by such Eligible Subsidiary pursuant hereto or on its Notes, or is imposed on 5O 56 or by virtue of the execution, delivery or enforcement of its Election to Participate, this Agreement or its Notes. ARTICLE X GUARANTY SECTION 10.01. THE GUARANTY. The Company hereby unconditionally guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of the principal of and interest on each Note issued by any Eligible Subsidiary pursuant to this Agreement, and the full and punctual payment of all other amounts payable by any Eligible Subsidiary under this Agreement. Upon failure by any Eligible Subsidiary to pay punctually any such amount, the Company shall forthwith on demand pay the amount not so paid at the place and in the manner specified in this Agreement. SECTION 10.02. GUARANTY UNCONDITIONAL. The obligations of the Company hereunder shall be unconditional and absolute and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by: (i) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any Eligible Subsidiary under this Agreement or any Note, by operation of law or otherwise; (ii) any modification or amendment of or supplement to this Agreement or any Note; (iii) any release, impairment, non-perfection or invalidity of any direct or indirect security for any obligation of any Eligible Subsidiary under this Agreement or any Note; (iv) any change in the corporate existence, structure or ownership of any Eligible Subsidiary, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any Eligible Subsidiary or its assets, or any resultant release or discharge of the obligations of any Eligible Subsidiary hereunder or under any Note; (v) the existence of any claim, set-off or other rights which the Company may have at any time against 51 57 any Eligible Subsidiary, the Agent, any Bank or any other Person, whether in connection herewith or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim; (vi) any invalidity or unenforceability relating to or against any Eligible Subsidiary for any reason of this Agreement or any Note, or any provision of applicable law or regulation purporting to prohibit the payment by any Eligible Subsidiary of the principal of or interest on any Note or any other amount payable by it under this Agreement; or (vii) any other act or omission to act or delay of any kind by any Eligible Subsidiary, the Agent, any Bank or any other Person or any other circumstance whatsoever which might, out for the provisions of this paragraph, constitute a legal or equitable discharge of or defense to the Company's obligations hereunder. SECTION 10.03. DISCHARGE ONLY UPON PAYMENT IN FULL; REINSTATEMENT IN CERTAIN CIRCUMSTANCES. The Company's obligations hereunder shall remain in full force and effect until the Commitments shall have terminated and the principal of and interest on the Notes and all other amounts payable by the Company and each Eligible Subsidiary under this Agreement shall have been paid in full. If at any time any payment of any principal of or interest on any Note or any other amount payable by any Eligible Subsidiary under this Agreement is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of any Eligible Subsidiary or otherwise, the Company's obligations hereunder with respect to such payment shall be reinstated at such time as though such payment had been due but not made at such time. SECTION 10.04. WAIVER BY THE COMPANY. The Company irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any Person against any Eligible Subsidiary or any other Person. SECTION 10.05. NO SUBROGATION. If the Company makes any payment under this Article X in respect of any obligation of an Eligible Subsidiary, the Company shall not be subrogated to the rights of the holder of such obligation against such Eligible Subsidiary with respect to such payment. 52 58 SECTION 10.06. STAY OF ACCELERATION. In the event that acceleration of the time for payment of any amount payable by any Eligible Subsidiary under this Agreement or the Notes is stayed upon the insolvency, bankruptcy or reorganization of such Eligible Subsidiary, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless be payable by the Company hereunder forthwith on demand by the Agent made at the request of the Required Banks. ARTICLE XI MISCELLANEOUS SECTION 11.01. NOTICES. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (x) in the case of any Borrower or the Agent, at its address, facsimile number or telex number set forth on the signature pages hereof (or, in the case of an Eligible Subsidiary, its Election to Participate), (y) in the case of any Bank, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (z) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Agent and the Company. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified in this Section and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified in this Section and confirmation of receipt is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address specified in this Section; PROVIDED that notices to the Agent under Article II or Article VIII shall not be effective until received. SECTION 11.02. NO WAIVERS. No failure or delay by the Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. 53 59 SECTION 11.03. EXPENSES; INDEMNIFICATION. (a) The Company shall pay (i) all out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all out-of-pocket expenses incurred by the Agent or any Bank, including (without duplication) the reasonable fees and disbursements of outside counsel and the allocated cost of inside counsel, in connection with such Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. The Company shall indemnify each Bank against any transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of this Agreement, any Election to Participate or Election to Terminate or any Note. (b) The Company agrees to indemnify the Agent and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "Indemnitee") and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; PROVIDED that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 11.04. SHARING OF SET-OFFS. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to the Note of any Borrower held by it which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to the Note of such Borrower held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes of such Borrower held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to 54 60 the Notes of such Borrower held by the Banks shall be shared by the Banks pro rata; PROVIDED that nothing in this Section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of a Borrower other than its indebtedness hereunder. Each Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Borrower in the amount of such participation. SECTION 11.05. AMENDMENTS AND WAIVERS. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Company and the Required Banks (and, if the rights or duties of the Agent are affected thereby, by the Agent); PROVIDED that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or any fees hereunder or for termination of any Commitment, (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Banks, which shall be required for the Banks or any of them to take any action under this Section or any other provision of this Agreement or (v) change the provisions of Article X; PROVIDED FURTHER that no such amendment, waiver or modification shall, unless signed by an Eligible Subsidiary, (w) subject such Eligible Subsidiary to any additional obligation, (x) increase the principal of or rate of interest on any outstanding Loan of such Eligible Subsidiary, (y) accelerate the stated maturity of any outstanding Loan of such Eligible Subsidiary or (z) change this PROVISO. SECTION 11.06. SUCCESSORS AND ASSIGNS. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that no Borrower may assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks. (b) Any Bank may at any time grant to one or more banks or other institutions (each a "Participant") participating interests in its Commitment or any or all of 55 61 its Loans. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrowers and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrowers and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrowers hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; PROVIDED that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 11.05 without the consent of the Participant. The Borrowers agree that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article VIII with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "Assignee") all, or a proportionate part (equivalent to an initial Commitment of not less than $5,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit J hereto executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Company and the Agent; PROVIDED that if an Assignee is an affiliate of such transferor Bank or was a Bank immediately prior to such assignment, no such consent shall be required, but the Assignee and the transferor Bank shall provide prompt notice of such assignment, together with information concerning addresses and related information with respect to the Assignee, to the Agent; and PROVIDED FURTHER that such assignment may, but need not, include rights of the transferor Bank in respect of outstanding Money Market Loans. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, 56 62 and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrowers shall make appropriate arrangements so that, if required, new Notes are issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States or a state thereof, it shall deliver to the Company and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 2.18. (d) Any Bank may at any time assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank. No such assignment shall release the transferor Bank from its obligations hereunder. (e) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or ll.03(a) than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Company's prior written consent or by reason of the provisions of Section 8.02 or 8.03 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (f) If any Reference Bank transfers its Notes to an unaffiliated institution, the Agent shall, in consultation with the Company and with the consent of the Required Banks, appoint another Bank to act as a Reference Bank hereunder. SECTION 11.07. COLLATERAL. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 11.08. GOVERNING LAW; SUBMISSION TO JURISDICTION; SERVICE OF PROCESS. This Agreement, each Election to Participate, each Election to Terminate and each Note shall be governed by and construed in accordance with the laws of the State of New York. Each Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York 57 63 and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Each Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Each Borrower hereby appoints CT Corporation System its authorized agent to accept and acknowledge service of any and all processes which may be served in any suit, action or proceeding of the nature referred to in this Section 11.08 and consents to process being served in any such suit, action or proceeding upon CT Corporation System in any manner or by the mailing of a copy thereof by registered or certified mail, postage prepaid, return receipt requested, to such Borrower's address referred to in Section 11.01; and (d) agrees that such service (i) shall be deemed in every respect effective service of process upon it in any such suit, action or proceeding and (ii) shall, to the fullest extent permitted by law, be taken and held to be valid personal service upon and personal delivery to it. A copy of any summons or complaint served on an Eligible Subsidiary pursuant to the foregoing shall be sent to the Company by registered or certified mail. Each Eligible Subsidiary represents and warrants that CT Corporation System has agreed in writing to accept such appointment and that true copies of such acceptance will be furnished to the Agent prior to or concurrently with delivery of such Eligible Subsidiary's Election to Participate. Nothing in this Section 11.08 shall affect the right of any Bank to serve process in any manner permitted by law or limit the right of any Bank to bring proceedings against the Company or any Eligible Subsidiary in the courts of any jurisdiction or jurisdictions. SECTION 11.09. COUNTERPARTS; INTEGRATION. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. SECTION 11.10. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. 58 64 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE GILLETTE COMPANY By --------------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK By --------------------------------------- Title: CREDIT SUISSE FIRST BOSTON By --------------------------------------- Title: By --------------------------------------- Title: ABN AMRO BANK N.V. By --------------------------------------- Title: By --------------------------------------- Title: 59 65 BANKBOSTON, N.A. By ---------------------------------------- Title: THE FIRST NATIONAL BANK OF CHICAGO By ---------------------------------------- Title: BANCA COMMERCIALE ITALIANA, NEW YORK BRANCH By ---------------------------------------- Title: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By ---------------------------------------- Title: THE CHASE MANHATTAN BANK By ---------------------------------------- Title: CITIBANK, N.A. By ---------------------------------------- Title: 6O 66 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By ----------------------------------------- Title: By ----------------------------------------- Title: MELLON BANK, N.A. By ----------------------------------------- Title: ROYAL BANK OF CANADA By ----------------------------------------- Title: BANCO SANTANDER By ----------------------------------------- Title: THE BANK OF NOVA SCOTIA By ----------------------------------------- Title: BANQUE PARIBAS By ----------------------------------------- Title: By ----------------------------------------- Title: 61 67 FLEET NATIONAL BANK By ----------------------------------------- Title: GENERALE BANK, NEW YORK BRANCH By ----------------------------------------- Title: SOCIETE GENERALE By ----------------------------------------- Title: STATE STREET BANK AND TRUST COMPANY By ----------------------------------------- Title: WACHOVIA BANK OF GEORGIA, N.A. By ----------------------------------------- Title: MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By ----------------------------------------- Title: 62 68 COMMITMENT SCHEDULE
Bank Commitment ---- ---------- Morgan Guaranty Trust Company of New York $220,000,000 Credit Suisse First Boston 200,000,000 ABN AMRO Bank N.V. 160,000,000 BankBoston, N.A. 160,000,000 The First National Bank of Chicago 160,000,000 Banca Commerciale Italiana, New York Branch 100,000,000 Bank of America National Trust and Savings Association 100,000,000 The Chase Manhattan Bank 100,000,000 Citibank, N.A. 100,000,000 Deutsche Bank AG, New York and/or Cayman Islands Branches 100,000,000 Mellon Bank, N.A. 100,000,000 Royal Bank of Canada 100,000,000 Banco Santander 50,000,000 The Bank of Nova Scotia 50,000,000 Banque Paribas 50,000,000 Fleet National Bank 50,000,000 Genera!e Bank, New York Branch 50,000,000 Societe Generale 50,000,000 State Street Bank and Trust Company 50,000,000 Wachovia Bank of Georgia, N.A. 50,000,000 -------------- Total $2,000,000,000 ==============
69 EXHIBIT A NOTE New York, New York , 19 For value received, [name of Borrower], a [jurisdiction of incorporation] corporation (the "Borrower"), promises to pay to the order of (the "Bank"), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the last day of the Interest Period relating to such Loan. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United State s in Federal or other immediately available funds at the office of Morgan Guaranty Trust Company of New York, 60 Wall Street, New York, New York. All Loans made by the Bank, the respective types and maturities thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; PROVIDED that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the 364-Day Credit Agreement dated as of December 20, 1996 among The Gillette Company, the banks listed on the signature pages thereof and Morgan Guaranty Trust Company of New York, as 70 Agent (as the same may be amended from time to time, the "Credit Agreement"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. The Gillette Company has, pursuant to the provisions of the Credit Agreement, unconditionally guaranteed the payment in full of the principal of and interest on this note. [NAME OF BORROWER] By ---------------------------------------- Title: - ---------- * To be deleted in case of Notes executed and delivered by the Company. 2 71 Note (cont'd) LOANS AND PAYMENTS OF PRINCIPAL - -------------------------------------------------------------------------------- Amount Type Amount of Maturity Notation Date of Loan of Loan Principal Date Made By - -------------------------------------------------------------------------------- ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 3 72 EXHIBIT B FORM OF MONEY MARKET QUOTE REQUEST [Date] To: Morgan Guaranty Trust Company of New York (the "Agent") From: [Name of Borrower] Re: 364-Day Credit Agreement (the "Credit Agreement") dated as of December 20, 1996 among The Gillette Company, the Banks listed on the signature pages thereof and the Agent We hereby give notice pursuant to Section 2.03 of the Credit Agreement that we request Money Market Quotes for the following proposed Money Market Borrowing(s): Date of Borrowing: _______________________ Principal Amount* Interest Period** Maturity Date - ---------------- --------------- ------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] '---------- * Amount must be $15,000,000 or a larger multiple of $1,000,000. ** Not less than one month (LIBOR Auction) or not less than 15 days (Absolute Rate Auction), subject to the provisions of the definition of Interest Period. 73 Terms used herein have the meanings assigned to them in the Credit Agreement. [NAME OF BORROWER] By ------------------------------------ Title 2 74 EXHIBIT C FORM OF INVITATION FOR MONEY MARKET QUOTES To: [Name of Bank] Re: Invitation for Money Market Quotes to [Name of Borrower] (the "Borrower") Pursuant to Section 2.03 of the 364-Day Credit Agreement dated as of December 20, 1996 among The Gillette Company, the Banks parties thereto and the undersigned, as Agent, we are pleased on behalf of the Borrower to invite you to submit Money Market Quotes to the Borrower for the following proposed Money Market Borrowing(s) : Date of Borrowing: __________________ Principal Amount Interest Period Maturity Date - ---------------- --------------- ------------- $ Such Money Market Quotes should offer a Money Market [Margin] [Absolute Rate]. [The applicable base rate is the London Interbank Offered Rate.] Please respond to this invitation by no later than [2:00 P.M.] [9:30 A.M.] (New York City time) on [date]. MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ----------------------------------------- Authorized Officer 75 EXHIBIT D FORM OF MONEY MARKET QUOTE To: Morgan Guaranty Trust Company of New York, as Agent Re: Money Market Quote to [Name of Borrower] (the "Borrower" In response to your invitation on behalf of the Borrower dated _______, 19__ , we hereby make the following Money Market Quote on the following terms: 1. Quoting Bank: ____________________________________________________________ 2. Person to contact at Quoting Bank: _______________________________________ 3. Date of Borrowing:_______________________________________________________* 4. We hereby offer to make Money Market Loan(s) in the following principal amounts, for the following Interest Periods and at the following rates: Principal Interest Money Market Amount** Period*** [Margin****] [Absolute Rate*****] - --------- --------- ------------ ------------------- $ $ [Provided, that the aggregate principal amount of Money Market Loans for which the above offers may be accepted shall not exceed $ .]** - ---------- * As specified in the related Invitation. ** Principal amount bid for each Interest Period may not exceed principal amount requested. Specify aggregate limitation if the sum of the individual offers exceeds the (notes continued on following page) 76 We understand and agree that the offer(s) set forth above, subject to the satisfaction of the applicable conditions set forth in the 364-Day Credit Agreement dated as of December 20, 1996 among The Gillette Company, the Banks listed on the signature pages thereof and yourselves, as Agent, irrevocably obligates us to make the Money Market Loan(s) for which any offer(s) are accepted, in whole or in part. Very truly yours, [NAME OF BANK] Dated: ______________________ By: ______________________________________ Authorized Officer - ---------- amount the Bank is willing to lend. Bids must be made for $5,000,000 or a larger multiple of $1,000,000. *** Not less than one month or not less than 15 days, as specified in the related Invitation. No more than five bids are permitted for each Interest Period. **** Margin over or under the London Interbank Offered Rate determined for the applicable Interest Period. Specify percentage (to the nearest 1/10,000 of 1%) and specify whether "PLUS" or "MINUS" ***** Specify rate of interest per annum (to the nearest 1/10,000th of 1%). 77 EXHIBIT E OPINION OF COUNSEL FOR THE COMPANY ----------------------- [Effective Date] To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260 Dear Sirs: I am Vice Chairman of the Board of The Gillette Company (the "Company"), and I am rendering this opinion pursuant to Section 3.01(c) of the 364-Day Credit Agreement dated as of December 20, 1996 among the Company, the banks parties thereto and Morgan Guaranty Trust Company of New York, as Agent (the "Credit Agreement"). Terms defined in the Credit Agreement are used herein as therein defined. I have examined or caused to be examined by counsel retained by or on the staff of the Company, among other things, originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted or have had conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. I am admitted to practice in the State of Ohio and the Commonwealth of Massachusetts. No opinion is expressed herein with respect to or as to the effect of any laws other than the laws of the Commonwealth of Massachusetts, the federal laws of the United States of America and the General Corporation Law of the State of Delaware. Upon the basis of the foregoing, I am of the opinion that: 78 \ 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. 2. The execution, delivery and performance by the Company of the Credit Agreement and the Notes issued by it are within the Company's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company and known to me or, to the best of my knowledge, result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. 3. The provision in Section 11.08 of the Credit Agreement that the Credit Agreement and each Note shall be construed in accordance with and governed by the law of the State of New York is a valid choice of law provision under Massachusetts law and should be respected by a court sitting in Massachusetts. 4. If a court sitting in Massachusetts were to apply Massachusetts law as the law governing the Credit Agreement and the Notes, the Credit Agreement would constitute a valid and binding agreement of the Company and the Notes issued by it would constitute valid and binding obligations of the Company, in each case enforceable in accordance with their respective terms. 5. Except as disclosed in the Company's 1995 Form 10-K and the Company's Latest Form 10-Q, there is no action, suit or proceeding pending against, or to the best of my knowledge threatened against or affecting, the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official, in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, operations or financial condition of the Company and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of the Credit Agreement or the Notes. My opinion in paragraph 4 above as to the enforceability of the Credit Agreement and the Notes issued 2 79 by the Company is subject to bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforceability of creditors' rights in general, usury laws and the general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). With respect to the foregoing, I express no opinion, however, as to the enforceability of Section ll.03(b) of the Credit Agreement to the extent the rights to indemnification provided for therein are violative of any law, rule or regulation (including any federal or state securities law, rule or regulation) or public policy. To the extent that the obligations of the Company may be dependent upon such matters, I assume for purposes of this opinion that each Bank is duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation; and that the Credit Agreement has been duly authorized, executed and delivered by the Banks and constitutes the legal, valid and binding obligation of the Banks, enforceable against the Banks in accordance with its terms. I do not express any opinion as to the effect of the compliance by any of the Banks with any state or federal laws or as to the regulatory status or nature of the business of any of the Banks. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without my prior written consent. Very truly yours, Joseph E. Mullaney 3 80 EXHIBIT F OPINION OF DAVIS POLK & WARDWELL, SPECIAL COUNSEL FOR THE AGENT -------------------------------------- [Effective Date] To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260 Dear Sirs: We have participated in the preparation of the 364-Day Credit Agreement (the "Credit Agreement") dated as of December 20, 1996 among The Gillette Company, a Delaware corporation (the "Company"), the banks parties thereto (the "Banks") and Morgan Guaranty Trust Company of New York, as Agent (the "Agent"), and have acted as special counsel for the Agent for the purpose of rendering this opinion pursuant to Section 3.01(d) of the Credit Agreement. Terms defined in the Credit Agreement are us ed herein as therein defined. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The execution, delivery and performance by the Company of the Credit Agreement and its Notes are within the Company's corporate powers and have been duly authorized by all necessary corporate action. 81 2. The Credit Agreement constitutes a valid and binding agreement of the Company and each Note issued by it constitutes a valid and binding obligation of the Company, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. We are members of the Bar of the State of New York and the foregoing opinion is limited to the laws of the State of New York, the federal laws of the United States of America and the General Corporation Law of the State of Delaware. In giving the foregoing opinion, we express no opinion as to the effect (if any) of any law of any jurisdiction (except the State of New York) in which any Bank is located which limits the rate of interest that such Bank may charge or collect. This opinion is rendered solely to you in connection with the above matter. This opinion may not be relied upon by you for any other purpose or relied upon by any other person without our prior written consent. Very truly yours, 2 82 EXHIBIT G FORM OF ELECTION TO PARTICIPATE , 19 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent for the Banks named in the 364-Day Credit Agreement dated as of December 20, 1996 among The Gillette Company, such Banks and such Agent (as amended from time to time, the "Credit Agreement") Dear Sirs: Reference is made to the Credit Agreement described above. Terms not defined herein which are defined in the Credit Agreement shall have for the purposes hereof the meaning provided therein. The undersigned, [name of Eligible Subsidiary], a [jurisdiction of incorporation] corporation, hereby elects to be an Eligible Subsidiary for purposes of the Credit Agreement, effective from the date hereof until an Election to Terminate shall have been delivered on behalf of the undersigned in accordance with the Credit Agreement. The undersigned confirms that the representations and warranties set forth in Article IX of the Credit Agreement are true and correct as to the undersigned as of the date hereof, and the undersigned hereby agrees to perform all the obligations of an Eligible Subsidiary under, and to be bound in all respects by the terms of, the Credit Agreement, including without limitation Sections 11.08 and 11.10 thereof, as if the undersigned were a signatory party thereto. [Tax disclosure pursuant to Section 9.04, if any] 83 The address to which all notices to the undersigned Eligible Subsidiary under the Credit Agreement should be directed is: . This instrument shall be construed in accordance with and governed by the laws of the State of New York. Very truly yours, [NAME OF ELIGIBLE SUBSIDIARY] By ------------------------------------- Title: The undersigned hereby confirms that [name of Eligible Subsidiary] is an Eligible Subsidiary for purposes of the Credit Agreement described above. THE GILLETTE COMPANY By ------------------------------------- Title: Receipt of the above Election to Participate is hereby acknowledged on and as of the date set forth above. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By ------------------------------------- Title: 2 84 EXHIBIT H FORM OF ELECTION TO TERMINATE , 19 MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent for the Banks named in the 364-Day Credit Agreement dated as of December 20, 1996 among The Gillette Company, such Banks and such Agent (as amended from time to time, the "Credit Agreement") Dear Sirs: Reference is made to the Credit Agreement described above. Terms not defined herein which are defined in the Credit Agreement shall have for the purposes hereof the meaning provided therein. The undersigned, [name of Eligible Subsidiary], a [jurisdiction of incorporation] corporation, hereby elects to terminate its status as an Eligible Subsidiary for purposes of the Credit Agreement, effective as of the date hereof. The undersigned hereby represents and warrants that all principal and interest on all Notes of the undersigned and all other amounts payable by the undersigned pursuant to the Credit Agreement have been paid in full on or prior to the date hereof. Notwithstanding the foregoing, this Election. to Terminate shall not affect any obligation of the undersigned under the Credit Agreement or under any Note heretofore incurred. This instrument shall be construed in accordance with and governed by the laws of the State of New York. Very truly yours, [NAME OF ELIGIBLE SUBSIDIARY] 85 By ------------------------------------- Title: The undersigned hereby confirms that the status of [name of Eligible Subsidiary] as an Eligible Subsidiary for purposes of the Credit Agreement described above is terminated as of the date hereof. THE GILLETTE COMPANY By ------------------------------------- Title: Receipt of the above Election to Terminate is hereby acknowledged on and as of the date set forth above. MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent By ------------------------------------- Title: 2 86 EXHIBIT I OPINION OF COUNSEL FOR THE BORROWER (BORROWINGS BY ELIGIBLE SUBSIDIARIES) [date] To the Banks and the Agent Referred to Below c/o Morgan Guaranty Trust Company of New York, as Agent 60 Wall Street New York, New York 10260 Dear Sirs: I am counsel to [name of Eligible Subsidiary, jurisdiction of incorporation] (the "Borrower") and give this opinion pursuant to Section 3.03(b) of the 364-Day Credit Agreement (as amended to the date hereof, the "Credit Agreement") dated as of December 20, 1996 among The Gillette Company (the "Company"), the banks parties thereto and Morgan Guaranty Trust Company of New York, as Agent. Terms defined in the Credit Agreement are used herein as therein defined. I have examined originals or copies, certified or otherwise identified to my satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as I have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, I am of the opinion that: 1. The Borrower is a corporation validly existing and in good standing under the laws of [jurisdiction of incorporation] and is a Substantially-Owned Consolidated Subsidiary of the Company. 2. The execution and delivery by the Borrower of its Election to Participate and its Notes and the performance by the Borrower of the Credit Agreement and its 87 Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding, upon the Borrower. 3. The execution and delivery by the Borrower of its Election to Participate and its Notes and the performance by the Borrower of the Credit Agreement and its Notes do not contravene, or constitute a default under, any provision of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or any of its Subsidiaries and known to me or, to the best of my knowledge, result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries. 4. The Credit Agreement constitutes a valid and binding agreement of the Borrower and its Notes constitute valid and binding obligations of the Borrower, in each case enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. Very truly yours, - ---------- * The opinion in this paragraph may be given by Counsel for the Company. 2 88 EXHIBIT J ASSIGNMENT AND ASSUMPTION AGREEMENT AGREEMENT dated as of ______, 19 __ among [ASSIGNOR] (the "Assignor"), [ASSIGNEE] (the '"Assignee") , THE GILLETTE COMPANY (the "Company") and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as Agent (the "Agent"). W I T N E S S E T H WHEREAS, this Assignment and Assumption Agreement (the "Agreement") relates to the 364-Day Credit Agreement dated as of December 20, 1996 among the Company, the Assignor and the other Banks party thereto, as Banks, and the Agent (as amended and in effect on the date hereof, the "Credit Agreement"); WHEREAS, as provided under the Credit Agreement, the Assignor has a Commitment to make Loans in an aggregate principal amount at any time outstanding not to exceed $______________; WHEREAS, Committed Loans made by the Assignor under the Credit Agreement in the aggregate principal amount of $_______________ are outstanding at the date hereof; and WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Credit Agreement in respect of [a portion of] its Commitment thereunder in an amount equal to $___________ (the "Assigned Amount"), together with [a corresponding portion of] its outstanding Committed Loans, and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms; NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. DEFINITIONS. All capitalized terms not otherwise defined herein shall have the respective meanings set forth in the Credit Agreement. 89 SECTION 2. ASSIGNMENT. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Credit Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Credit Agreement to the extent of the Assigned Amount, including the purchase from the Assignor of the corresponding portion of the principal amount of the Committed Loans made by the Assignor outstanding at the date hereof. Upon the execution and delivery hereof by the Assignor, the Assignee, the Company and the Agent and the payment of the amounts specified in Section 3 required to be paid on the date hereof (i) the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Bank under the Credit Agreement with a Commitment in an amount equal to the Assigned Amount, and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and the Assignor released from its obligations under the Credit Agreement to the extent such obligations have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor. SECTION 3. PAYMENTS. As consideration for the assignment and sale contemplated in Section 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them.* It is understood that commitment and/or facility fees accrued to the date hereof are for the account of the Assignor and such fees accruing from and including the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee hereby agrees that if i t receives any amount under the Credit Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party's interest therein and shall promptly pay the same to such other party. [SECTION 4. CONSENT OF THE COMPANY AND THE AGENT. This Agreement is conditioned upon the consent of the Company and the Agent pursuant to Section 11.06(c) of the Credit Agreement. The execution of this Agreement by the - ---------- * Amount should combine principal together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum. 2 90 Company and the Agent is evidence of this consent. Pursuant to Section 11.06(c) the Borrower agrees to execute and deliver a Note [and to cause each Eligible Subsidiary to execute and deliver a Note] payable to the order of the Assignee to evidence the assignment and assumption provided for herein.]* SECTION 5. NON-RELIANCE ON ASSIGNOR. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of any Borrower, or the validity and enforceability of the obligations of any Borrower in respect of the Credit Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrowers. SECTION 6. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. SECTION 7. COUNTERPARTS. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written. [ASSIGNOR] By: ------------------------------------ Title - ---------- * Consent is required if the Assignee is not an affiliate of the Assignor and was not a Bank immediately prior to the assignment. 3 91 [ASSIGNEE] By: ------------------------------------ Title [THE GILLETTE COMPANY] By: ------------------------------------ Title MORGAN GUARANTY TRUST COMPANY OF NEW YORK By ------------------------------------- Title: 4 EX-12 4 COMPUTATION OF THE RATIOS 1 EXHIBIT 12 COMPUTATION OF THE RATIOS OF CURRENT ASSETS TO CURRENT LIABILITIES FOR THE YEARS 1998, 1997 AND 1996 1998 1997 1996 ---- ---- ---- Current Assets 5440 4690 4753 Current Liabilities 3478 2641 2935 ---- ---- ---- Current Ratio 1.56 1.78 1.62 EX-13 5 PORTIONS OF THE ANNUAL REPORT 1 EXHIBIT 13 THE GILLETTE COMPANY Founded in 1901, The Gillette Company is the world leader in male grooming, a category that includes blades, razors and shaving preparations. Gillette also holds the number one position worldwide in selected female grooming products, such as wet shaving products and hair epilation devices. The Company is the world's top seller of writing instruments and correction products, toothbrushes and oral care appliances. In addition, the Company is the world leader in alkaline batteries. Gillette manufacturing operations are conducted at 62 facilities in 25 countries, and products are distributed through wholesalers, retailers and agents in over 200 countries and territories.
CONTENTS FINANCIAL HIGHLIGHTS 1 MISSION AND VALUES 2 LETTER TO STOCKHOLDERS 3 REVIEW OF OPERATIONS 6 MANAGEMENT'S DISCUSSION 18 FINANCIAL STATEMENTS 24 HISTORICAL FINANCIAL SUMMARY 41 PRINCIPAL DIVISIONS AND SUBSIDIARIES 42 DIRECTORS AND OFFICERS 44 CORPORATE AND STOCKHOLDER INFORMATION 45
2 BLADES & RAZORS
BUSINESS SEGMENT SALES $ Millions ---------- 94 2351 95 2635 96 2836 97 2881 98 3028
Extending a remarkable record of achievement, Gillette again strengthened its clear global leadership in blades and razors, its principal line of business. Sales registered good progress in 1998. Profits were marginally lower, reflecting spending to support the introduction of the revolutionary Mach3 shaving system. Offering the first major blade edge innovation in 30 years, the Mach3 is the only shaving system to feature three progressively aligned and independently suspended blades to provide a closer shave in fewer strokes with less irritation. Since its introduction in June in North America and in September in Western Europe, the Mach3 system has proven itself the most successful blade product ever sold. It has surpassed every market performance measure the Company has established, with sales and share growth increasing at a rate well ahead of the record set by the Sensor system in its debut in 1990. By year-end, the Mach3 shaving system was the best-selling blade and razor in every country in which it was sold. In the United States, the Gillette share of the blade market soared to its highest level in nearly 40 years. Plans call for distribution of the Mach3 system to be extended to all major markets worldwide in 1999. As expected, the Mach3 system drew sales from other Gillette blades and razors, although the decline in those sales was much less than the Mach3 system's sales contribution. The Sensor family of shaving systems, the Company's previous technological standard-bearer, generated sales above $1 billion for the fourth consecutive year. Both the SensorExcel and Sensor shaving systems retained leading share positions in many countries. The SensorExcel for Women shaving system substantially increased its share of market in North America and Western Europe, while posting exceptional sales progress in its newer markets of Latin America and Eastern Europe. Although sales weakened, the Atra and Trac II shaving systems maintained important share positions in 1998, more than 20 years after their introductions. Gillette disposable razor sales rose moderately, fueled by the strong growth of CustomPlus razors, especially in Latin America, where they are sold under the Prestobarba Max name. Much higher sales of the Agility women's disposable razor also contributed to the gain. Gillette disposable razors remained the clear market leaders worldwide, with the Good News brand the top seller in the United States for the 23rd year in a row. The double edge blade market continued to decline. Gillette sales fell sharply, but the Company retained its longtime world leadership position. Underlying its history of unparalleled success in the blade and razor market, the Company's commitment to technological innovation and excellence will remain the wellspring of outstanding growth prospects in the years ahead. [PHOTOGRAPH OF GILLETTE RAZORS] The Mach3 shaving system PAGE 6 3 SensorExcel Sensor for Women Excel Gillette MACH 3 [PHOTOGRAPH OF GILLETTE MACH 3 RAZOR] ContourPlus Sensor Gillette for Women Agility 4 Gillette Series RIGHT GUARD Gillette for Women Satin Care [PHOTOGRAPH OF GILLETTE FOR WOMEN SATIN CARE SHAVE GEL] SOFT Dry &DRI Idea 5 TOILETRIES
BUSINESS SEGMENT SALES $ Millions ---------- 94 1162 95 1236 96 1375 97 1410 98 1214 Jafra Sales
Sales and profits of the Company's toiletries business were substantially below those of 1997, due in large part to the divestiture of the Jafra skin care and cosmetics business in April 1998. Profits also were reduced by investment spending to support the international rollout of the Gillette Series and Satin Care brands. Worldwide sales of deodorants/antiperspirants, the largest Gillette toiletries category, recorded a slight decrease. In the United States, where the Company's well-established deodorant/antiperspirant brands remained among the leaders, technologically innovative clear stick versions of the Right Guard and Gillette Series brands were the top performers, generating sales well above those of the year before. International deodorant/antiperspirant sales showed little change, as considerable growth throughout Western Europe and the Middle East, primarily reflecting brisk demand for the Gillette Series brand, was offset by weaker sales in other regions. During the year, Satin Care deodorants/antiperspirants for women were introduced in selected markets in Eastern Europe and Latin America. Consumer response in both areas was quite favorable. Paced by sizable advances in Western Europe, worldwide sales of Gillette shave preparations rose moderately. This was chiefly attributable to the Gillette Series brand, which posted notably higher sales in established markets and was well-received in a number of introductory markets. Another contributor was popular Satin Care for Women soap-free shaving gel, whose nonaerosol form in an innovative soft touch bottle has generated strong demand. Reflecting these gains, Gillette brands improved their share in the United States and many key markets abroad. This progress enabled the Company to strengthen further its leading position in the global shave preparations business. Worldwide sales of Gillette after-shaves declined significantly, due principally to shortfalls in international markets. The Company's shower gels, sold primarily under the Gillette Series name, also recorded notably lower sales. In the hair care products category, the White Rain brand registered a sizable decrease in sales. Gillette is exploring the possible sale of this brand. Although White Rain is the third largest hair care brand in the United States, it is not a global brand, nor is hair care one of the Company's core product categories. Supported by technologically innovative products, marketed with an increasingly strong global perspective, the Company's tightly focused toiletries business has a sound basis for future growth. [PHOTOGRAPH OF GILLETTE SHAVING GELS AND DEODORANTS] Satin Care for Women shaving gels PAGE 9 6 STATIONERY PRODUCTS
BUSINESS SEGMENT SALES $ Millions ---------- 94 807 95 862 96 915 97 924 98 856
The steady growth that has long characterized the Gillette stationery products business was interrupted in 1998. Sales were well below those of the previous year, and profits decreased significantly. These results were due primarily to substantially lower sales of Parker writing instruments, chiefly related to economic weakness in the Asia-Pacific region. Nonetheless, the Company retained its standing as the worldwide leader in the highly competitive writing instruments and correction products businesses. With its well-established Paper Mate, Parker and Waterman franchises, Gillette holds a strong position within all writing systems, price levels, distribution channels and geographic areas. Paper Mate writing instruments are the largest franchise in the Company's stationery products business. Paced by advances in the United States and Western Europe, worldwide Paper Mate sales climbed moderately, with a broad array of writing instruments contributing. In the low-priced category, which recorded higher sales, the strongest gains were generated by the Comfort Mate stick ball pen. A retractable model, introduced in the United States during the year, also was well-received. Mid-priced Paper Mate pens achieved good sales progress worldwide. Sales of the Flexgrip family of refillable pens moved well above those of the year before. Dynagrip pens, led by continued brisk demand for the disposable Dynagrip, posted a sizable gain in sales, as did Eraser Mate erasable ink pens. At year-end, the Company introduced the Paper Mate Gel-Roller ball pen, featuring a spring-loaded point and technologically advanced Gel-Glide ink for superior writing performance. Initial trade and consumer response has been very positive. Worldwide sales of Parker writing instruments declined significantly. New products planned for 1999, together with broadened distribution, are expected to revitalize this well-respected brand. Waterman writing instruments recorded somewhat lower sales, as a good showing in the United States was unable to offset weaker sales abroad. In the important prestige segment, the Waterman Carene fountain pen turned in a strong sales performance in the United States and several major international markets. Sales of Liquid Paper correction products were below those of 1997. This reflected a substantial shortfall in sales of Liquid Paper correction fluids, which retained their longtime position as the worldwide market leader. Liquid Paper correction pen sales matched the prior year's record, while sales of Liquid Paper DryLine correction films climbed sharply, fueled by sustained demand for disposable films. Strategies for growth in stationery products will center on further developing this business area's strong combination of superior products, powerful brand names and an expanding global presence. [PHOTOGRAPH OF GILLETE STATIONERY PRODUCTS] The Paper Mate Gel-Roller pen PAGE 10 7 FLEXGRIPultra PARKER Liquid PAPER MATE Paper Gel-Roller [PHOTOGRAPH OF THE PAPER MATE GEL-ROLLER PEN] DYNAGRIP WATERMAN 8 BRAUN ThermoScan Flex Integral ultra speed Braun Oral-B Plaque Remover [PHOTOGRAPH OF BRAUN ORAL-B PLAQUE REMOVER] AromaSelect Shave & Shape 9 BRAUN
BUSINESS SEGMENT SALES $ Millions ---------- 94 1348 95 1621 96 1773 97 1744 98 1740
Braun sales showed little change in 1998, as good progress in North America and Western Europe was offset by the negative effects of a severe economic downturn in other key regions. Profits were somewhat below the previous year's record level. Although sales of men's electric shavers were considerably lower, Braun remained a leader in the worldwide market. This position was well-supported by the Flex Integral family of pivoting head shavers, which registered unit volume growth well above that of the year before. The principal contributor to this advance was the top-of-the-line Flex Integral ultra speed shaver. Excellent consumer acceptance of this premium shaver enabled Braun to improve its sizable share positions in several major markets. Consumers also responded positively to moderately priced Flex Integral shavers in attractive colors with youthful appeal. The Braun Silk-epil family of electric hair epilators for women was strengthened by the launch in early 1998 of the Silk-epil SuperSoft brand. Offering more comfortable hair removal, this premium epilator helped Braun maintain its global market leadership. The strong momentum of Braun's oral care appliance business accelerated in 1998, driven chiefly by the continued resounding success of Braun Oral-B plaque removers. The latest addition to this line, the Braun Oral-B 3D plaque remover, was introduced at midyear in North America and Western Europe. Utilizing breakthrough technology, the new plaque remover provides a unique three-dimensional brushing action that combines two distinct motions -- rapid pulsation to loosen plaque and rapid oscillation to sweep it away. Trade and consumer response has been highly favorable, and dental professionals have reacted with exceptional enthusiasm. The substantial growth in Braun Oral-B plaque remover sales has generated an increasingly important market in replacement brush heads. In 1998, refill sales rose at a rate nearly twice that of plaque removers. Reflecting these advances, Braun again enlarged the worldwide leadership position in oral care appliances it has held for six consecutive years. Among household appliances, which posted somewhat lower sales, Braun retained its number one standing in the world handblender market. Braun hair care appliance sales recorded a sharp decline. Although sales of personal diagnostic appliances were well below those of 1997, Braun ThermoScan infrared ear thermometers remained the top seller worldwide. At midyear, Braun entered a new category with the launch of VitalScan blood pressure monitors in Europe. Supported by technological innovation, outstanding design and superior quality throughout its product categories, Braun has a solid foundation for sustained growth in the years to come. [PHOTOGRAPH OF BRAUN PRODUCTS] The Braun Oral-B 3D plaque remover PAGE 13 1 10 ORAL-B
BUSINESS SEGMENT SALES $ Millions ---------- 94 402 95 440 96 547 97 624 98 642
Building on the record results of 1997, Oral-B again last year strengthened its position as the clear leader of the global toothbrush market. Sales moved slightly higher, while profits climbed sharply from those of the year before. Oral-B has long been recognized for its broad range of superior oral care products. Chief among these are Oral-B toothbrushes, the brand used by more dentists and consumers than any other in the United States and many major international markets. Worldwide sales of Oral-B toothbrushes advanced modestly in 1998, restrained by market contraction in the Asia-Pacific region, but supported by the performance of both new and established products. The most recent addition to Oral-B's array of powerful brands -- the new CrossAction premium toothbrush -- was introduced in the United States at year-end, following three years of development. Featuring uniquely engineered CrissCross bristles angled in opposing directions for a more effective brush stroke, this innovative toothbrush is clinically proven to offer a new standard in plaque removal. Trade and consumer response has been excellent. Distribution is under way throughout the United States and will expand to key markets abroad later in 1999. Among established products, the best-selling Oral-B Advantage line of toothbrushes turned in another good performance, with worldwide sales well above those of the prior year. Substantial gains by the Contura and Prudent toothbrush brands, both sold overseas, also contributed to Oral-B's upward sales trend. In the children's toothbrush market, Oral-B remained the leader in the United States on the strength of a good sales increase. This was due largely to Oral-B's continuing partnership with the top-rated Nickelodeon cable television network. Through this partnership, Oral-B markets popular Nickelodeon and Rugrats toothbrushes and toothpastes. Building on the success of this approach, Oral-B has reached similar licensing agreements involving a variety of animated children's characters in international markets. Interdental products posted worldwide sales well above those of the previous year, primarily reflecting significant growth in Oral-B dental floss, especially in Western Europe and Latin America. This spring, Oral-B is introducing SatinFloss, a shred-resistant dental floss whose oval shape and satin-like finish help it slide comfortably through even the tightest spaces, thus encouraging regular flossing. Despite considerable gains in children's toothpaste, worldwide sales of Oral-B specialty toothpastes were somewhat lower. Mouth rinse sales moved ahead moderately, while sales of professional products showed good progress. Superior new products developed in partnership with dental professionals, a broader geographic presence and momentum from its 1998 performance offer Oral-B excellent prospects for the future. [PHOTOGRAPH OF ORAL-B PRODUCTS] Oral-B CrossAction toothbrushes PAGE 14 11 ADVANTAGE Squish Grip Oral-B CrossAction [PHOTOGRAPH OF ORAL-B CROSSACTION TOOTHBRUSHES] contura indicator GRiPPER 12 DURACELL DURACELL ULTRA DURACELL ULTRA [PHOTOGRAPH OF DURACELL ULTRA BATTERIES] DURACELL 13 DURACELL
BUSINESS SEGMENT SALES $ Millions ---------- 94 1865 95 2040 96 2251 97 2478 98 2576
Buoyed by record results in 1998, Duracell further expanded its clear global leadership position in the rapidly growing alkaline battery business. Sales of Duracell products registered a moderate increase, and profits were markedly above those of the prior year. Duracell's highly successful business development in its second year as part of The Gillette Company reflected the refocusing of technical efforts toward alkaline battery improvements, enlargement of its presence internationally and continued upgrading of consumers to new and better-performing alkaline batteries. A disposable energy source that powers a broad range of consumer products, alkaline batteries are Duracell's principal line of business. Worldwide sales of alkaline batteries moved well above those of the year before, due largely to the excellent market performance of new Duracell Ultra high-tech batteries. Introduced last spring in North America and Western Europe in AA and AAA sizes only, Duracell Ultra was the first alkaline battery specifically designed to deliver long life and enhanced performance in high technology consumer devices. A fast-growing market, these devices include cellular phones, digital and flash cameras and camcorders. This spring, Duracell is launching an improved Duracell Ultra battery technology that significantly increases battery life. At the same time, Duracell is extending the Duracell Ultra battery range, both geographically, through introduction to a large number of international markets, and by offering the brand's improved technology in C, D and 9-volt battery sizes. In all, the full line of Duracell Ultra alkaline batteries will provide up to 50 percent longer life than ordinary batteries across the spectrum of high-tech consumer devices. Duracell's specialty battery business consists primarily of lithium batteries, used chiefly in cameras, and zinc air batteries, which power hearing aids. Led by good advances in the United States and Western Europe, worldwide sales rose moderately. During 1999, Duracell will introduce under the Duracell Ultra brand a line of superior photo lithium batteries in four popular sizes. In addition to its technological achievements, Duracell has strengthened its leadership position through strategic acquisitions in important battery markets abroad. During 1998, Duracell made two such moves. With the acquisition of the Geep battery business, Duracell greatly expanded its presence in India, the world's fourth largest battery market. In South Korea, Duracell gained market leadership after acquiring the top-selling Rocket battery brand. Innovative new products resulting from a high level of research and development spending, together with continued geographic expansion and selective acquisitions, should enhance Duracell's bright prospects around the world. [PHOTOGRAPH OF DURACELL AND DURACELL ULTRA BATTERIES] Duracell Ultra high-tech alkaline batteries PAGE 17 14 The Gillette Company and Subsidiary Companies MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- NET SALES Net sales in 1998 were $10.1 billion, matching those of 1997. Volume/new products and prices contributed equally to a 3% sales increase, which was offset by unfavorable exchange rates. Excluding unfavorable exchange and the divestiture of Jafra Cosmetics International, sales growth was 5%. In 1997, sales growth of 4% was due to a 7% gain from volume and new products, as well as a 1% increase from pricing, while the effect of unfavorable exchange rates depressed sales by 4%. Sales in the United States grew 4% in 1998, following a 3% increase in 1997. Foreign sales declined 2%, after a 4% gain in 1997. Excluding exchange, foreign sales grew 3%. Sales in Western Europe rose 8% from the 1997 level. Sales in Latin America were 10% below those of 1997, due to the divestiture of Jafra in April 1998 and trade destocking in Brazil, related to higher interest rates. Sales in other international markets were 12% below those of 1997, due to the economic deterioration in Russia and the Asian financial crisis. Sales of operations outside the United States represented 62% of sales in 1998 and 63% of sales in 1997. An analysis of sales by business segment follows.
% Increase/ (Millions of dollars) (Decrease) -------------------------- ------------- 1998 1997 1996 98/97 97/96 ======= ======= ====== ===== ===== Blades & Razors.............. $ 3,028 $ 2,881 $2,836 5 2 Toiletries................... 1,214 1,410 1,375 (14) 3 Stationery Products.......... 856 924 915 (7) 1 Braun Products............... 1,740 1,744 1,773 -- (2) Oral-B Products.............. 642 624 547 3 14 Duracell Products............ 2,576 2,478 2,251 4 10 Other........................ -- 1 1 -- -- ------- ------- ------ ----- ----- $10,056 $10,062 $9,698 -- 4 ======= ======= ====== ===== =====
Further information by business segment is set forth on pages 6 through 17. Sales of blades and razors were above those of a year earlier. This reflected gains in the United States and rapid growth in Western Europe, both driven by the launch of the Mach3 shaving system. Results in other international markets were lower, due to broad-based negative economic factors. Blade and razor sales rose slightly in 1997, as considerably higher sales in developing markets and marginally higher sales in the United States were partially offset by sales in Western Europe that were well below those of the prior year, due to foreign exchange. In 1998, toiletries sales were substantially below those of the prior year, due to the divestiture of Jafra and a significant decrease in sales of White Rain hair care products. Sales rose modestly in 1997, reflecting the continued expansion of the Gillette Series male grooming line, the success of Satin Care female grooming products and the growth of clear deodorants/antiperspirants. Sales of stationery products were well below those of 1997, due primarily to the substantial negative impact of the Asian financial crisis. Sales in the United States and Western Europe were virtually unchanged from those of the prior year. In 1997, sales of stationery products were level, as decreases in Western Europe, due to foreign exchange, offset gains in other international markets and in the United States. Braun product sales in 1998 showed little change from those of the prior year, as higher sales in Western Europe and the United States countered substantially lower sales in Asia. Sales in 1997 were marginally below those of 1996, due to adverse economic conditions and unfavorable exchange rates in Japan and Western Europe. Sales of Oral-B products were slightly higher than in 1997. Sales well above those of the prior year in the United States were partially offset by significantly lower sales in Asia. Sales grew substantially in 1997, reflecting increased volume in the United States and the success of new products in other major markets. In 1998, sales of Duracell products were moderately higher, as the launch of Duracell Ultra batteries and price increases contributed to notably higher sales in the United States and to sales well above those of the prior year in Western Europe. Sales rose considerably in 1997, particularly in the United States, as well as in the AMEE and Asia-Pacific regions. Growth in the latter two areas was aided by the full-year impact of acquisitions in South Africa and South Korea in 1996. Excluding these acquisitions, sales in 1997 were higher than in 1996. - -------------------------------------------------------------------------------- GROSS PROFIT Gross profit decreased $28 million in 1998 and increased $215 million in 1997. As a percent of sales, gross profit was 61.7% in 1998, compared with 61.9% in 1997 and 62.0% in 1996. The slight decrease in 1998 and 1997 was due to a less favorable product mix. PAGE 18 15 The Gillette Company and Subsidiary Companies MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses amounted to 38.6% of sales, compared with 38.8% and 40.9% in 1997 and 1996, respectively. In absolute terms, these expenses declined 1% in 1998 and 2% in 1997. In 1998, $613 million was spent on advertising, including sampling, and $1,165 million on sales promotion, for a total of $1,778 million, an increase of 5% over the 1997 spending level. Spending in 1998 included the major marketing effort behind the launch of the Mach3 shaving system, as well as support for other new products, such as Duracell Ultra batteries. This compares with 1997 amounts of $641 million, $1,060 million and $1,701 million, respectively. In 1996, these were $710 million, $978 million and $1,688 million, respectively. The spending in 1998 represented 17.7% of sales, compared with 16.9% and 17.4% in 1997 and 1996, respectively. Spending for research and development decreased 2% in 1998, compared with an increase of 4% in 1997. Other marketing and administrative expenses declined 5% in 1998 and 4% in 1997. - -------------------------------------------------------------------------------- PROFIT FROM OPERATIONS After a reorganization and realignment charge of $535 million, profit from operations in 1998 was $1.79 billion, compared with $2.32 billion in 1997 and $1.64 billion in 1996, after merger-related costs. Profit from operations in 1998, excluding the charge, represented 23.1% of sales, compared with 23.1% in 1997 and 21.1% in 1996, before merger-related costs. The charge to operations for reorganization and realignment in 1998 reduced net income by $347 million and fully diluted net income per common share by $.30. Costs related to the merger with Duracell International Inc. in 1996 reduced profit from operations by $413 million, net income by $283 million and fully diluted net income per common share by $.25. Within the United States, profit from operations rose 6%, compared with an increase of 5% in 1997. Outside the United States, it decreased 9%, compared with a gain of 17% in 1997. In the following table, the reorganization and realignment charge and the merger-related costs are included in Corporate/Other. An analysis by business segment follows.
% Increase/ (Millions of dollars) (Decrease) 1998 1997 1996 98/97 97/96 ====== ====== ====== ===== ===== Blades & Razors.............. $1,153 $1,186 $1,098 (3) 8 Toiletries................... 54 124 91 (56) 36 Stationery Products.......... 108 156 122 (31) 28 Braun Products............... 291 304 300 (4) 1 Oral-B Products.............. 101 85 58 20 47 Duracell Products............ 597 526 450 13 17 ------ ------ ------ ----- ----- 2,304 2,381 2,119 (3) 12 ------ ------ ------ ----- ----- Corporate/Other.............. (515) (57) (483) ------ ------ ------ $1,789 $2,324 $1,636 ====== ====== ======
See Notes to Consolidated Financial Statements for segment and geographic area data. Profits for the blade and razor segment were modestly lower in 1998, due to start-up expenses for the Mach3 shaving system. Profits moved well ahead in 1997, due to sales growth, improved product mix and lower product costs. In 1998, toiletries reported sharply lower profits, due to the divestiture of Jafra and significantly lower sales of White Rain hair care products. Profits in 1997 rose substantially, as a result of sales growth, improved product mix and lower operating expenses. Profits for the stationery products segment were much lower in 1998, due primarily to sales declines in the Asia-Pacific region. Profits climbed sharply in 1997, reflecting sales growth driven by new products, improved product mix and lower product costs. In 1998, Braun profits were somewhat below those of the prior year, due to lower sales of higher margin products and the Asian financial crisis. In 1997, Braun profits were about the same as in 1996. Oral-B profits grew significantly in both 1998 and 1997. The 1998 increase was due to improved product mix and cost containment. The progress in 1997 reflected the success of new products with higher margins, as well as lower operating expenses. The Duracell segment reported a strong profit advance in 1998, due to sales gains and the higher margin of Duracell Ultra batteries. Excellent profit growth was achieved in 1997, led by the developing international markets. PAGE 19 16 The Gillette Company and Subsidiary Companies MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- NONOPERATING CHARGES/INCOME Net interest expense amounted to $86 million in 1998, $69 million in 1997 and $67 million in 1996. Net interest expense was higher in 1998, due to increased borrowings to fund the Company's share repurchase program, capital investments and its pension plans in Germany. The increase in 1997 reflected higher average borrowing levels, due to the full-year impact of 1996 acquisitions and significant capital spending. Net exchange losses of $23 million in 1998, which compared with 1997 and 1996 totals of $18 million and $32 million, respectively, were attributable primarily to subsidiaries in highly inflationary countries. Translation adjustments resulting from currency fluctuations in non-highly inflationary countries are accumulated in a separate section of stockholders' equity, as noted on page 29. In 1998, the negative adjustment was $36 million, compared with negative adjustments of $268 million in 1997, reflecting significant exchange rate movements, and $22 million in 1996. - -------------------------------------------------------------------------------- TAXES AND NET INCOME The effective tax rate was 35.3% in 1998, compared with rates of 35.8% in 1997 and 37.8% in 1996. Net income for 1998 was $1,081 million, compared with $1,427 million in 1997 and $949 million in 1996. Fully diluted net income per common share in 1998 was $.95, compared with $1.24 and $.83 in 1997 and 1996, respectively. Excluding the charge in 1998 for reorganization and realignment costs, 1998 net income of $1,428 million matched that of 1997, and fully diluted net income per common share of $1.25 rose 1% over the 1997 level. Excluding the charge for merger-related costs in 1996, 1997 net income increased 16% over the $1,232 million in 1996, and fully diluted net income per common share rose 15% over the $1.08 in 1996. - -------------------------------------------------------------------------------- FINANCIAL CONDITION The Company's financial condition continued to be strong in 1998. Net debt increased $1.31 billion during 1998, reflecting significant spending under the Company's share repurchase and capital investment programs. Net debt (total debt net of associated swaps, less cash and cash equivalents) at December 31, 1998, amounted to $3.18 billion, compared with $1.87 billion and $2.08 billion at December 31, 1997 and 1996, respectively. The market value of Gillette equity was over $52 billion at the end of 1998. The Company's book equity position amounted to $4.54 billion at the end of 1998, compared with $4.84 billion at the end of 1997 and $4.47 billion at the end of 1996. The reduced book equity in 1998 was due to Gillette share repurchase activity. Net cash provided by operating activities in 1998 was $1.29 billion, compared with $1.28 billion in 1997 and $1.01 billion in 1996. The current ratio of the Company was 1.56 for 1998, compared with ratios of 1.78 for 1997 and 1.62 for 1996. The decrease in the 1998 current ratio was primarily attributable to the Company's increased short-term debt at December 31, 1998. Capital spending in 1998 amounted to a record $1.0 billion, compared with $973 million in 1997 and $830 million in 1996. Spending in all three years reflected significant investments in the blade and razor, Duracell and Braun product segments. In 1998, the Company made acquisitions in the battery segment for $100 million, while 1997 acquisition activity of $3 million was in oral care. In 1996, the Company made acquisitions, principally in the battery business, for $361 million. In 1998, the Jafra business was sold for $200 million. Share repurchase funding in 1998, net of proceeds received from the sale of put options on Company stock, amounted to $1.01 billion, compared with $26 million in 1997 and $11 million in 1996. Enhancing its financial flexibility, the Company replaced its $1.0 billion revolving credit agreement with a new $2.0 billion revolving credit facility, expiring in October 1999. The Company also has a $1.1 billion revolving credit agreement, which expires in December 2001. Both facilities are used by the Company to provide back-up to its commercial paper program. At year-end 1998, there was $1.66 billion outstanding under the Company's commercial paper program, compared with $780 million at the end of 1997 and $1.09 billion at the end of 1996. During 1998, the Company issued $200 million, 5.75% Notes due August 2001 and $300 million, 5.00% Notes due December 2006. In early 1999, the Company issued Euro 300 million, 3.25% Notes due February 2004. The net proceeds were used to refinance existing short-term debt and for other general corporate purposes. During 1998, both Standard & Poor's and Moody's maintained the Company's current credit ratings. Stan- PAGE 20 17 The Gillette Company and Subsidiary Companies MANAGEMENT'S DISCUSSION dard & Poor's rates the Company's long-term debt at AA, while Moody's rating is Aa3. The commercial paper rating is A1+ by Standard & Poor's and P1 by Moody's. Gillette will continue to have capital available for growth through both internally generated funds and substantial credit resources. The Company has substantial unused lines of credit and access to worldwide financial market sources for funds. - -------------------------------------------------------------------------------- MARKET RISK The Company uses financial instruments such as derivatives to hedge its exposure to market risk arising from changes in interest rates and foreign currency exchange rates. Gillette has established clear policies, procedures and internal accounting and administrative controls governing the use of financial instruments to manage its exposure to such risks. The Company does not purchase, sell or hold any derivative financial instruments for trading, profit or speculative purposes. Gillette uses product sourcing and pricing as a natural hedge to its foreign currency revenues and costs, thus limiting the Company's profit exposure to foreign currency fluctuations. In addition, when considered appropriate, the Company purchases foreign currency options with periods consistent with the related underlying exposures. Gillette enters into currency forwards, swaps and interest rate swaps in order to effectively mitigate financial risk. The swaps are entered into with notional amounts, interest rates and time periods that match the underlying debt. The Company uses swaps and options to hedge equity-linked compensation liability exposures with terms that match the underlying exposures. The Company sells equity put options to supplement open market purchases of its common stock. Financial instrument positions are monitored using value-at-risk techniques. 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 December 31, 1998 and 1997, a near-term change in market rates would not materially affect the consolidated financial position, results of operations or cash flows of the Company. - -------------------------------------------------------------------------------- REORGANIZATION AND REALIGNMENT On September 28, 1998, the Company announced a reorganization and realignment program that resulted in a third-quarter charge to operations of $535 million ($347 million after taxes, or $.30 in net income per common share, fully diluted). The worldwide reorganization of operations will aid the Company in several ways. It will strengthen the global business management focus on the six core product categories, enhance the global focus on new product development and manufacturing, achieve more effective leveraging of global resources, respond to changing worldwide business conditions and improve the Company's ability to rapidly expand product offerings to consumers through worldwide trade channels. The program will result in a reduction of approximately 4,700 employees across all business segments, geographies and employee groups. Pretax cash outlays were $16 million in 1998 and are estimated at approximately $180 million in 1999 and $160 million in 2000. Cash severance payments will extend beyond the completion of program activities, due to the severance payment options available to affected employees. In 1999, cash expenditures from the program are expected to be greater than the cash benefits generated. Cash requirements will be funded from operations. When fully implemented in 2000, the program will generate pretax savings of approximately $200 million annually. After a year-long review, the Company identified manufacturing rationalization opportunities for 14 factories and 12 warehouses. During this review, it was determined that some factories have underutilized capacity, others are technologically obsolete and, due to the Company's recent redesign of portions of the worldwide supply chain, others are no longer required. The customer management function -- selling, merchandising and product promotion -- will undergo a global rationalization that will consolidate these activities into core product teams. The Commercial Operations groups will be serviced by common administrative support functions located in each geography. These shared service centers will enable the closure of 30 office facilities. The assets affected by this program include factories, warehouses and office facilities, as well as manufacturing, distribution and office equipment. The carrying amount of the assets held for disposal is $39 million. Asset disposals began at the end of 1998 PAGE 21 18 The Gillette Company and Subsidiary Companies MANAGEMENT'S DISCUSSION and will be substantially completed within 18 months. Nearly all of the revenue-generating activities related to the assets held for disposal will continue as a result of more effective utilization of other assets. Although all assets held for disposal may be removed from use at any time, they will be removed in stages to allow for an orderly implementation of all actions. Buildings that are owned will be sold, and equipment will be disposed of through sale or abandonment. The fair value of the impaired assets was determined based on past experience with the disposal of comparable assets and third-party appraisals. The closure of two manufacturing facilities in late 1998 contributed to fourth-quarter savings of $4 million. Employee reductions through December 31, 1998, totaled 620 employees. Progress to date has met expectations, and the pace of realignment activities is accelerating. In 1999, approximately 40% of the annual benefit should be achieved, with the majority of the estimated annual savings realized in 2000, when the program is completed. Additional details are provided in the Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- YEAR 2000 The Company is undertaking a comprehensive approach to address its potential exposure to the Year 2000 issue -- covering all potentially affected areas (applications, computers, facilities, manufacturing equipment, suppliers, customers, etc.) at all locations. Efforts to address the Year 2000 issue began in 1995 at major sites, and a formal Program Management Office was established in 1997. This office has focused on setting program policy, tracking progress, identifying best practices and leveraging common solutions. The Year 2000 Program Management Office developed a structured, six-phase program that is being consistently implemented at all locations worldwide. The first phase is discovery. This phase includes identifying all potentially affected items, including information technology and noninformation technology items, assessing compliance and defining the potential business impact of each noncompliant item. The second phase is planning. A specific resolution strategy is designed for each noncompliant item. Non-compliant items are prioritized by their importance to the overall operations of the business. Once the items are prioritized, the planning phase includes identifying the tasks and resources necessary to remedy noncompliance, as well as determining when the work will be finished. The third phase is resolution, where the actual corrective work is done. In addition to work within the Company, Year 2000 readiness of all significant external business relationships is assessed in this phase. The fourth phase is testing, validating that the corrective work activities have been completed. The fifth phase is implementation, where the corrected items are placed back in operation. The sixth and final phase is certification that the corrective work has been successful. At December 31, 1998, 90% of the affected items identified were at the sixth phase, i.e., certified to be Year 2000 compliant, or their risks have been minimized to an appropriate level. The Company expects to make substantial progress on the remaining items by June 30, 1999. The remaining tasks have been identified and are well understood. Resources have been assigned, and the work is under way. The Company also has an extensive quality assurance program in place, designed to ensure that Year 2000 activities are accomplishing their objectives. Several multiyear initiatives have been in progress to support the changing business and, secondarily, to address the Year 2000 issue, such as implementation of SAP, PeopleSoft and JDE software applications. The Company continues to develop detailed contingency plans to deal with unexpected issues, which may occur. These plans include the identification of appropriate resources and response teams. Despite this comprehensive approach, the Company cannot be completely sure that issues will not arise, nor events occur, that could have material adverse effects on the Company's results of operations or financial condition. Nevertheless, Gillette does not expect a material failure. The Company's Year 2000 program is designed to minimize the likelihood of any failure occurring. The most reasonably likely worst-case scenario is that a short-term disruption will occur with a small number of customers or suppliers, requiring an appropriate response. In addition, Gillette operations depend on infrastructures within all countries in which the Company operates and, therefore, a failure of any one of those infrastructures could materially adversely affect its operations. Spending for the program is budgeted, expensed as incurred and not expected to be material. PAGE 22 19 The Gillette Company and Subsidiary Companies MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- EURO CONVERSION The Company has a Euro project team responsible for ensuring the Company's ability to operate effectively during the Euro transition phase and through final Euro conversion. Total costs for the entire Euro conversion program are not expected to be material. Conversion to the Euro may affect competition between markets, due to price transparency. Gillette is carefully monitoring its marketing and pricing strategies throughout the more open European market. The Company also is converting finance and information technology systems to make and receive payments in Euros in early 1999 and to use the Euro as its base currency in relevant markets from January 1, 2001, onward. Existing contracts are being reviewed for any required modifications. Based on the analysis and actions taken to date, the Company does not expect the Euro conversion to materially affect the consolidated financial position, results of operations or cash flows of the Company. - -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS AND CAUTIONARY STATEMENT This report contains "forward-looking statements" about the Company's prospects and progress. Investors should be aware of factors that could have a negative impact on prospects and the consistency of progress. These include political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, taxes and regulations and laws affecting the worldwide business in each of the Company's markets; competitive product, advertising, promotional and pricing activity; dependence on the rate of development and degree of acceptance of new product introductions in the marketplace; and the difficulty of forecasting sales at certain times in certain markets. Any such "forward-looking statements" also are qualified by the detailed statement under Item 7, Cautionary Statement, in the Company's most recent Annual Report on Form 10-K, and under Item 5, Cautionary Statement, in the Company's most recent Quarterly Report on Form 10-Q. - -------------------------------------------------------------------------------- RESPONSIBILITY FOR FINANCIAL STATEMENTS The Company is responsible for the objectivity and integrity of the accompanying consolidated financial statements, which have been prepared in conformity with generally accepted accounting principles. The financial statements of necessity include the Company's estimates and judgments relating to matters not concluded by year-end. Financial information contained elsewhere in the Annual Report is consistent with that included in the financial statements. The Company maintains a system of internal accounting controls that includes careful selection and development of employees, division of duties, and written accounting and operating policies and procedures augmented by a continuing internal audit program. Although there are inherent limitations to the effectiveness of any system of accounting controls, the Company believes that its system provides reasonable, but not absolute, assurance that its assets are safeguarded from unauthorized use or disposition and that its accounting records are sufficiently reliable to permit the preparation of financial statements that conform in all material respects with generally accepted accounting principles. KPMG Peat Marwick LLP, independent auditors, are engaged to render an independent opinion regarding the fair presentation in the financial statements of the Company's financial condition and operating results. Their report appears on page 39. Their examination was made in accordance with generally accepted auditing standards and included a review of the system of internal accounting controls to the extent they considered necessary to determine the audit procedures required to support their opinion. The Audit Committee of the Board of Directors is composed solely of directors who are not employees of the Company. The Committee meets periodically and privately with the independent auditors, with the internal auditors and with the financial officers of the Company to review matters relating to the quality of the financial reporting of the Company, the internal accounting controls and the scope and results of audit examinations. The Committee also reviews compliance with the Company's statement of policy as to the conduct of its business, including proper accounting, financial reporting and management of the relationship with the auditors. In addition, it is responsible for recommending the appointment of the Company's independent auditors, subject to stockholder approval. PAGE 23 20 The Gillette Company and Subsidiary Companies CONSOLIDATED STATEMENT OF INCOME
(Millions of dollars, except per share amounts) Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 =============================================================== ======= ======= ====== NET SALES ..................................................... $10,056 $10,062 $9,698 Cost of Sales ................................................. 3,853 3,831 3,682 ------- ------- ------ GROSS PROFIT .................................................. 6,203 6,231 6,016 Selling, General and Administrative Expenses .................. 3,879 3,907 3,967 Reorganization and Realignment Expenses ....................... 535 -- -- Merger-Related Costs .......................................... -- -- 413 ------- ------- ------ PROFIT FROM OPERATIONS ........................................ 1,789 2,324 1,636 Nonoperating Charges (Income) Interest income .............................................. (8) (9) (10) Interest expense ............................................. 94 78 77 Other charges - net .......................................... 34 34 44 ------- ------- ------ 120 103 111 ------- ------- ------ INCOME BEFORE INCOME TAXES .................................... 1,669 2,221 1,525 Income Taxes .................................................. 588 794 576 ------- ------- ------ NET INCOME .................................................... $ 1,081 $ 1,427 $ 949 ======= ======= ====== NET INCOME PER COMMON SHARE, BASIC ............................ $ .96 $ 1.27 $ .85 NET INCOME PER COMMON SHARE, ASSUMING FULL DILUTION ........... $ .95 $ 1.24 $ .83 Weighted average number of common shares outstanding (millions) Basic ........................................................ 1,117 1,118 1,107 Assuming full dilution ....................................... 1,144 1,148 1,140 =============================================================== ======= ======= ======
See accompanying Notes to Consolidated Financial Statements. PAGE 24 21 The Gillette Company and Subsidiary Companies CONSOLIDATED BALANCE SHEET
(Millions of dollars) December 31, 1998 and 1997 1998 1997 ============================================================================ ======= ======= ASSETS CURRENT ASSETS Cash and cash equivalents ................................................. $ 102 $ 105 Receivables, less allowances: 1998 - $79; 1997 - $74 ...................... 2,943 2,522 Inventories ............................................................... 1,595 1,500 Deferred income taxes ..................................................... 517 320 Other current assets ...................................................... 283 243 ------- ------- TOTAL CURRENT ASSETS ..................................................... 5,440 4,690 ------- ------- PROPERTY, PLANT AND EQUIPMENT, at cost less accumulated depreciation ....... 3,472 3,104 INTANGIBLE ASSETS, less accumulated amortization ........................... 2,448 2,423 OTHER ASSETS ............................................................... 542 647 ------- ------- $11,902 $10,864 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Loans payable ............................................................. $ 981 $ 552 Current portion of long-term debt ......................................... 9 9 Accounts payable and accrued liabilities .................................. 2,170 1,794 Income taxes .............................................................. 318 286 ------- ------- TOTAL CURRENT LIABILITIES ................................................ 3,478 2,641 ------- ------- LONG-TERM DEBT ............................................................. 2,256 1,476 DEFERRED INCOME TAXES ...................................................... 411 359 OTHER LONG-TERM LIABILITIES ................................................ 898 1,101 MINORITY INTEREST .......................................................... 39 39 CONTINGENT REDEMPTION VALUE OF COMMON STOCK PUT OPTIONS .................... 277 407 STOCKHOLDERS' EQUITY 8.0% Cumulative Series C ESOP Convertible Preferred, without par value, Issued: 1998 - 148,627 shares; 1997 - 154,156 shares ..................... 90 93 Unearned ESOP compensation ................................................ (10) (17) Common stock, par value $1 per share Authorized: 2,320,000,000 shares Issued: 1998 - 1,357,913,938 shares; 1997 - 1,352,581,842 shares ......... 1,358 1,353 Additional paid-in capital ................................................ 621 309 Earnings reinvested in the business ....................................... 5,529 5,021 Accumulated other comprehensive income Foreign currency translation ............................................. (826) (790) Pension adjustment ....................................................... (47) (20) Treasury stock, at cost: 1998 - 252,507,187 shares; 1997 - 231,643,130 shares ..................... (2,172) (1,108) ------- ------- TOTAL STOCKHOLDERS' EQUITY ............................................... 4,543 4,841 ------- ------- $11,902 $10,864 ======= ======= =================================================================================================
See accompanying Notes to Consolidated Financial Statements. PAGE 25 22 The Gillette Company and Subsidiary Companies CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars) Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 ================================================================================== ====== ====== ====== OPERATING ACTIVITIES Net income ...................................................................... $1,081 $1,427 $ 949 Adjustments to reconcile net income to net cash provided by operating activities: Provision for reorganization and realignment ................................... 535 -- -- Merger-related costs ........................................................... -- -- 413 Depreciation and amortization .................................................. 459 422 381 Other .......................................................................... (46) (23) -- Changes in assets and liabilities, net of effects from acquisition of businesses: Accounts receivable ........................................................... (435) (340) (459) Inventories ................................................................... (123) (157) (105) Accounts payable and accrued liabilities ...................................... 72 29 67 Other working capital items ................................................... (121) 80 (227) Other noncurrent assets and liabilities ....................................... (133) (158) (11) ------ ------ ------ Net cash provided by operating activities .................................... 1,289 1,280 1,008 ------ ------ ------ INVESTING ACTIVITIES Additions to property, plant and equipment ...................................... (1,000) (973) (830) Disposals of property, plant and equipment ...................................... 88 59 41 Acquisition of businesses, less cash acquired ................................... (91) (3) (299) Sale of business ................................................................ 200 -- -- Other ........................................................................... 5 12 (1) ------ ------ ------ Net cash used in investing activities ........................................ (798) (905) (1,089) ------ ------ ------ FINANCING ACTIVITIES Purchase of treasury stock ...................................................... (1,066) (53) (11) Proceeds from sale of put options ............................................... 56 27 -- Proceeds from exercise of stock option and purchase plans ....................... 126 210 150 Funding German pension plans..................................................... (252) -- -- Proceeds from long-term debt .................................................... 500 300 -- Decrease in long-term debt ...................................................... (12) (6) (165) Increase (decrease) in loans payable ............................................ 708 (383) 578 Dividends paid .................................................................. (552) (466) (451) ------ ------ ------ Net cash provided by (used in) financing activities .......................... (492) (371) 101 ------ ------ ------ EFFECT OF EXCHANGE RATE CHANGES ON CASH .......................................... (2) (7) (19) NET CASH FROM HARMONIZATION PERIOD ............................................... -- 24 -- ------ ------ ------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................. (3) 21 1 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ................................... 105 84 83 ------ ------ ------ CASH AND CASH EQUIVALENTS AT END OF YEAR ......................................... $ 102 $ 105 $ 84 ====== ====== ====== Supplemental disclosure of cash paid for: Interest ....................................................................... $ 120 $ 101 $ 94 Income taxes ................................................................... $ 478 $ 451 $ 586 Noncash investing and financing activities: Acquisition of businesses Fair value of assets acquired ................................................. $ 100 $ 3 $ 361 Cash paid ..................................................................... 91 3 300 ------ ------ ------ Liabilities assumed .......................................................... $ 9 $ -- $ 61 ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. PAGE 26 23 The Gillette Company and Subsidiary Companies CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unearned Additional Preferred ESOP Common Paid-in (Millions of dollars) Shares Compensation Stock Capital ========================================= ========= ============ ====== ========== Balance at December 31, 1995 ............ $ 97 $ (34) $1,334 $345 ---- ----- ------ ---- Net income ............................. -- -- -- -- Cumulative translation adjustments -- -- -- -- Minimum liability adjustment .......... -- -- -- -- Other comprehensive income ........... -- -- -- -- Comprehensive income ................ Dividends declared ..................... -- -- -- -- Stock option and purchase plans (8,725,960 shares) .................... -- -- 9 141 Conversion of Series C ESOP preferred stock (222,132 shares) ...... (2) -- -- 1 Purchase of Gillette treasury stock (420,800 shares) ...................... -- -- -- -- Earned ESOP compensation ............... -- 9 -- -- ---- ----- ------ ---- Balance at December 31, 1996 ............ 95 (25) 1,343 487 ---- ----- ------ ---- Net income ............................. -- -- -- -- Net results of year-end harmonization -- -- -- -- Cumulative translation adjustments -- -- -- -- Other comprehensive income ........... -- -- -- -- Comprehensive income ................ Dividends declared ..................... -- -- -- -- Stock option and purchase plans (9,718,242 shares) .................... -- -- 10 201 Conversion of Series C ESOP preferred stock (301,444 shares) ...... (2) -- -- 1 Purchase of Gillette treasury stock (1,237,200 shares) .................... -- -- -- -- Proceeds from sale of put options ...... -- -- -- 27 Contingent liability of put options .... -- -- -- (407) Earned ESOP compensation ............... -- 8 -- -- ---- ----- ------ ---- Balance at December 31, 1997 ............ 93 (17) 1,353 309 ---- ----- ------ ---- Net income ............................. -- -- -- -- Cumulative translation adjustments -- -- -- -- Minimum liability adjustment .......... -- -- -- -- Other comprehensive income ........... -- -- -- -- Comprehensive income ................ Dividends declared ..................... -- -- -- -- Stock option and purchase plans (5,332,096 shares) .................... -- -- 5 125 Conversion of Series C ESOP preferred stock (442,343 shares) ...... (3) -- -- 1 Purchase of Gillette treasury stock (21,306,400 shares) ................... -- -- -- -- Proceeds from sale of put options ...... -- -- -- 56 Contingent liability of put options .... -- -- -- 130 Earned ESOP compensation ............... -- 7 -- -- ---- ----- ------ ---- Balance at December 31, 1998 ............ $ 90 $ (10) $1,358 $621 ==== ===== ====== ==== Other Total Earnings Treasury Comprehensive Stockholders' (Millions of dollars) Reinvested Stock Income Equity ========================================= ========== ======== ============= ============= Balance at December 31, 1995 ............ $3,704 $(1,046) $(521) $3,879 ------ ------- ----- ------ Net income ............................. 949 -- -- 949 Cumulative translation adjustments -- -- (22) (22) Minimum liability adjustment .......... -- -- 1 1 ----- ------ Other comprehensive income ........... -- -- (21) (21) ----- ------ Comprehensive income ................ 928 ------ Dividends declared ..................... (484) -- -- (484) Stock option and purchase plans (8,725,960 shares) .................... -- -- -- 150 Conversion of Series C ESOP preferred stock (222,132 shares) ...... -- 1 -- -- Purchase of Gillette treasury stock (420,800 shares) ...................... -- (11) -- (11) Earned ESOP compensation ............... -- -- -- 9 ------ ------- ----- ------ Balance at December 31, 1996 ............ 4,169 (1,056) (542) 4,471 ------ ------- ----- ------ Net income ............................. 1,427 -- -- 1,427 Net results of year-end harmonization (89) -- -- (89) Cumulative translation adjustments -- -- (268) (268) ----- ------ Other comprehensive income ........... -- -- (268) (268) ----- ------ Comprehensive income ................ 1,070 ------ Dividends declared ..................... (486) -- -- (486) Stock option and purchase plans (9,718,242 shares) .................... -- -- -- 211 Conversion of Series C ESOP preferred stock (301,444 shares) ...... -- 1 -- -- Purchase of Gillette treasury stock (1,237,200 shares) .................... -- (53) -- (53) Proceeds from sale of put options ...... -- -- -- 27 Contingent liability of put options .... -- -- -- (407) Earned ESOP compensation ............... -- -- -- 8 ------ ------- ----- ------ Balance at December 31, 1997 ............ 5,021 (1,108) (810) 4,841 ------ ------- ----- ------ Net income ............................. 1,081 -- -- 1,081 Cumulative translation adjustments -- -- (36) (36) Minimum liability adjustment .......... -- -- (27) (27) ----- ------ Other comprehensive income ........... -- -- (63) (63) ----- ------ Comprehensive income ................ 1,018 ------ Dividends declared ..................... (573) -- -- (573) Stock option and purchase plans (5,332,096 shares) .................... -- -- -- 130 Conversion of Series C ESOP preferred stock (442,343 shares) ...... -- 2 -- -- Purchase of Gillette treasury stock (21,306,400 shares) ................... -- (1,066) -- (1,066) Proceeds from sale of put options ...... -- -- -- 56 Contingent liability of put options .... -- -- -- 130 Earned ESOP compensation ............... -- -- -- 7 ------ ------- ----- ------ Balance at December 31, 1998 ............ $5,529 $(2,172) $(873) $4,543 ====== ======= ===== ======
Dividends declared per common share in 1998, 1997 and 1996 were $.51, $.43 and $.36, respectively, for Gillette, and in 1996, $.58 for Duracell. ================================================================================ See accompanying Notes to Consolidated Financial Statements. PAGE 27 24 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- NATURE OF OPERATIONS The Gillette Company is a global consumer products firm, with manufacturing operations conducted at 62 facilities in 25 countries. Products are distributed through wholesalers, retailers and agents in over 200 countries and territories. Gillette is the world leader in male grooming, a category that includes blades, razors and shaving preparations, and also in female grooming products, such as wet shaving products and hair epilation devices. The Company is the world's top seller of writing instruments and correction products and is the world leader in toothbrushes, oral care appliances and alkaline batteries. - -------------------------------------------------------------------------------- BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses. Actual results could differ from those estimates. The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany accounts and transactions are eliminated. At the end of 1997, the year-ends of all operating groups were harmonized, with a common calendar year-end of December 31. The results of the accounting period necessary for harmonization -- in the aggregate a loss of $24 million -- are reflected as a charge in the stockholders' equity section of the balance sheet. Also reflected in this section is a charge of $51 million, adjusting for seasonality of advertising. In the first quarter of 1997, Duracell entities outside North America changed their year-end reporting periods to coincide with those of Gillette operations, resulting in a charge of $14 million to stockholders' equity. - -------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, time deposits and all highly liquid debt instruments with an original maturity of three months or less. - -------------------------------------------------------------------------------- INVENTORIES Inventories are stated at the lower of cost or market. In general, cost is currently adjusted standard cost, which approximates actual cost on a first-in, first-out basis. - -------------------------------------------------------------------------------- DEPRECIATION Depreciation is computed primarily on a straight-line basis over the estimated useful lives of assets. - -------------------------------------------------------------------------------- ADVERTISING Advertising costs are expensed in the year incurred. - -------------------------------------------------------------------------------- INTANGIBLE ASSETS Intangible assets, principally goodwill, are amortized on the straight-line method, generally over a period of 40 years. The carrying amounts of intangible assets are assessed for impairment when operating profit from the related business indicates that the carrying amounts of the assets may not be recoverable. - -------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE Basic net income per common share is calculated by dividing net income less dividends on preferred stock, net of tax benefits, by the weighted average number of common shares outstanding. The calculation of fully diluted net income per common share assumes conversion of preferred stock and stock options into common stock, and also adjusts net income for the effect of converting the preferred stock to common stock. Net income and shares used to compute net income per share, basic and assuming full dilution, are reconciled below.
(Millions) 1998 1997 1996 ========================================== ====== ====== ===== Net income as reported.................... $1,081 $1,427 $ 949 Less: Preferred stock dividends........... 4 4 5 ------ ------ ----- Net income, basic......................... $1,077 $1,423 $ 944 ------ ------ ----- Effect of dilutive securities: Convertible preferred stock.............. 5 4 4 ------ ------ ----- Net income, assuming full dilution $1,082 $1,427 $ 948 ====== ====== ===== Common shares, basic...................... 1,117 1,118 1,107 Effect of dilutive securities: Convertible preferred stock.............. 12 12 13 Stock options............................ 15 18 20 ------ ------ ----- Common shares, assuming full dilution................................. 1,144 1,148 1,140 ====== ====== =====
PAGE 28 25 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- INCOME TAXES The Company reinvests unremitted earnings of foreign operations and, accordingly, does not provide for Federal income taxes that could result from the remittance of such earnings. These unremitted earnings amounted to $3.7 billion at December 31, 1998. - -------------------------------------------------------------------------------- RECLASSIFICATION OF PRIOR YEARS Prior year financial statements have been reclassified to conform to the 1998 presentations. - -------------------------------------------------------------------------------- EFFECT OF ACCOUNTING CHANGES In 1998, the Financial Accounting Standards Board issued SFAS 132, "Employers' Disclosure about Pensions and Other Postretirement Benefits," and SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 132 has been adopted. SFAS 133 will be adopted no later than January 1, 2000. Its impact on the consolidated financial statements is still being evaluated, but is not expected to be material. Also in 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up Activities." The Company adopted SOP 98-1 on January 1, 1998, with no material effect on the consolidated financial statements. The Company will adopt SOP 98-5 in 1999. It will not materially affect the consolidated financial statements. - -------------------------------------------------------------------------------- FOREIGN CURRENCY TRANSLATION Net exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries, except those in highly inflationary economies, are accumulated in a separate section of stockholders' equity. Also included are the effects of exchange rate changes on intercompany transactions of a long-term investment nature and transactions designated as hedges of net foreign investments. An analysis of cumulative translation adjustments follows.
(Millions of dollars) 1998 1997 1996 ======================================= ===== ===== ===== Balance at beginning of year........... $(790) $(522) $(500) Translation adjustments, including the effect of hedging................. (86) (222) 18 Related income tax effect.............. 50 (46) (40) ----- ----- ----- Balance at end of year................. $(826) $(790) $(522) ===== ===== =====
Included in Other charges in the Consolidated Statement of Income are net exchange losses of $23 million, $18 million and $32 million for 1998, 1997 and 1996, respectively. - -------------------------------------------------------------------------------- INVENTORIES
December 31, December 31, (Millions of dollars) 1998 1997 ==================================== ============ ============ Raw materials and supplies.......... $ 244 $ 279 Work in process..................... 232 186 Finished goods...................... 1,119 1,035 ------ ------ $1,595 $1,500 ====== ======
- -------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------------------------------- Land..................................... $ 69 $ 80 Buildings................................ 745 734 Machinery and equipment.................. 4,891 4,377 ------ ------ 5,705 5,191 Less accumulated depreciation............ 2,233 2,087 ------ ------ $3,472 $3,104 ====== ======
- -------------------------------------------------------------------------------- INTANGIBLE ASSETS
- ------------------------------------------------------------ Goodwill ($44 million not subject to amortization)................ $2,068 $2,023 Other intangible assets.................. 1,194 1,128 ------ ------ 3,262 3,151 Less accumulated amortization............ 814 728 ------ ------ $2,448 $2,423 ====== ======
- -------------------------------------------------------------------------------- ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
- ------------------------------------------------------------ Accounts payable......................... $ 606 $ 542 Advertising and sales promotion.......... 391 360 Payroll and payroll taxes................ 175 221 Other taxes.............................. 85 25 Dividends payable on common stock 141 120 Reorganization/realignment expense 308 -- Merger-related costs..................... -- 101 Miscellaneous............................ 464 425 ------ ------ $2,170 $1,794 ====== ======
PAGE 29 26 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- OTHER LONG-TERM LIABILITIES
December 31, December 31, (Millions of dollars) 1998 1997 ======================================== ============ ============ Pensions................................ $242 $ 450 Postretirement medical.................. 305 302 Incentive plans......................... 183 171 Reorganization/realignment expense...... 38 -- Miscellaneous........................... 130 178 ---- ------ $898 $1,101 ==== ======
- -------------------------------------------------------------------------------- DEBT Commercial paper included in Loans payable was $557 million at December 31, 1998, and nil at December 31, 1997. The Company's commercial paper program is supported by its revolving credit facilities. A summary of long-term debt follows.
December 31, December 31, (Millions of dollars) 1998 1997 ========================================= ============== ============= Commercial paper......................... $1,100 $ 780 5.00% Notes due 2006..................... 300 -- 5.75% Notes due 2005..................... 200 200 6.25% Notes due 2003..................... 150 150 5.75% Notes due 2001..................... 200 -- 6.00% Notes due 2000..................... 300 300 8.03% Guaranteed ESOP notes due through 2000........................ 13 22 Other, multicurrency borrowings.......... 2 33 ------ ------ Total long-term debt..................... 2,265 1,485 Less current portion..................... 9 9 ------ ------ Long-term portion........................ $2,256 $1,476 ====== ======
At December 31, 1998, the Company had swap agreements that converted $1.15 billion U.S. dollar-denominated long-term fixed rate debt notes into Deutschmark and U.S. dollar principal and floating interest rate obligations, over the terms of the respective issues, resulting in an aggregate principal amount of $1.13 billion, at a weighted average interest rate of 4.7%. As of December 31, 1997, the Company's swap agreements converted $650 million in U.S. dollar-denominated long-term fixed rate debt notes into Deutschmark and U.S. dollar principal and floating interest rate obligations with an aggregate principal amount of $604 million, at a weighted average interest rate of 4.8%. The Company also had forward exchange contracts at December 31, 1998, maturing in 1999 and 2000, that established $818 million in multicurrency principal, 2.7% interest obligations, with respect to $731 million of U.S. dollar commercial paper debt included in Long-Term Debt and $32 million of foreign currency debt included in Loans payable. At December 31, 1997, the Company's forward exchange contracts established $373 million in multicurrency principal, 4.2% interest obligations, with respect to $356 million of U.S. dollar commercial paper debt included in Long-Term Debt and $33 million of foreign currency debt included in Loans payable. Exchange rate movements give rise to changes in the values of the foreign currency-related agreements that offset changes in the values of the underlying exposures. Amounts associated with these agreements were payables of $33 million at December 31, 1998, and receivables of $62 million at December 31, 1997. The weighted average interest rate on Loans payable, including associated swaps, was 4.8% at December 31, 1998, and 4.2% at December 31, 1997. The weighted average interest rate on total long-term debt, including associated swaps and excluding the guaranteed ESOP notes, was 4.1% and 5.3% at December 31, 1998 and 1997, respectively. The Company has a $2.0 billion revolving bank credit agreement that expires in October 1999 and a $1.1 billion revolving bank credit agreement expiring in December 2001, both of which may be used for general corporate purposes. Under the agreements, the Company has the option to borrow at various interest rates, including the prime rate, and is required to pay an average facility fee of .039% per annum. At year-end 1998 and 1997, there were no borrowings under such agreements. Based on the Company's intention and ability to maintain its $1.1 billion revolving credit agreement beyond 1999, $1.1 billion of commercial paper borrowing was classified as long-term debt at December 31, 1998. As of December 31, 1997, $780 million of commercial paper borrowings and $20 million of Loans payable were so classified. Aggregate maturities of total long-term debt for the five years subsequent to December 31, 1998, are $9 million in 1999, $305 million in 2000, $200 million in 2001 and $150 million in 2003. Unused lines of credit, including the revolving bank credit agreements, amounted to $3.8 billion at December 31, 1998. PAGE 30 27 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- FINANCIAL INSTRUMENTS The Company uses financial instruments, principally swaps, forward contracts and options, to achieve its financing strategy and to hedge foreign currency, commodity and equity-linked employee compensation exposures. These contracts hedge transactions and balances for periods consistent with their committed exposures and do not constitute investments independent of these exposures. The Company does not hold or issue financial instruments for trading purposes, nor is it a party to any leveraged contracts. Realized and unrealized foreign exchange gains and losses on financial instruments are recognized and offset foreign exchange gains and losses on the underlying exposures. Any gain or loss from a financial instrument that ceases to be an effective hedge is recognized in the income statement. The interest differential paid or received on swap and forward agreements is recognized as an adjustment to interest expense. During 1998, the Company purchased foreign currency put options, with a strike price of $159 million and a cost of $12 million, to protect 1998 U.S. dollar results. The options expired $14 million in the money and all related gains and expenses were included within 1998 profit from operations. At December 31, 1998, the Company had purchased a foreign currency put option to protect 1999 U.S. dollar results, with a strike price of $111 million and a cost of $4 million. At December 31, 1997, there were no foreign currency put options outstanding. The Company also has fixed the cost of certain employee benefit expenses linked to its stock price by entering into equity swap and option contracts that mature in 1999, 2002 and 2003. At December 31, 1998 and 1997, the notional principal amounts of such contracts were $62 million and $53 million, respectively, at a cost of $8 million each. The cost is amortized over the duration of the contracts, and gains or losses are recognized as adjustments to the carrying amount of the underlying liabilities. In addition, the Company utilizes commodity swaps to fix the price on a portion of certain raw materials used in the manufacturing process. As of year-end 1998, $22 million of commodity swaps was outstanding, maturing through December 1999. Such contracts at December 31, 1997, amounted to $31 million. The maturity of the contracts highly correlates to the actual purchases of the commodity, and contract values are reflected in the cost of the commodity as it is actually purchased. The above amounts exclude the swap and forward agreements described in the Debt note, as well as the equity put options associated with the share repurchase program, which are described separately in the Notes. Several major international financial institutions are counterparties to the Company's financial instruments. It is Company practice to monitor the financial standing of the counterparties and to limit the amount of exposure with any one institution. The Company may be exposed to credit loss in the event of nonperformance by the counterparties to these contracts, but does not anticipate such nonperformance. With respect to trade receivables, concentration of credit risk is limited, due to the diverse geographic areas covered by Gillette operations. Any probable bad debt loss has been provided for in the allowance for doubtful accounts. The estimated fair values of the Company's financial instruments are summarized below.
Carrying Estimated (Millions of dollars) Amount Fair Value ==================================== ========== =========== DECEMBER 31, 1998 Long-term investments............... $ 177 $ 177 Total long-term debt................ (2,265) (2,277) Foreign currency, interest rate and commodity contracts............ 11 16 Equity contracts.................... 15 10 DECEMBER 31, 1997 Long-term investments............... $ 146 $ 148 Total long-term debt................ (1,485) (1,485) Foreign currency, interest rate and commodity contracts............ 70 65 Equity contracts.................... 28 28
The carrying amounts for cash, short-term investments, receivables, accounts payable and accrued liabilities, and loans payable approximate fair value because of the short maturity of these instruments. The fair value of long-term investments is estimated based on quoted market prices. The fair value of long-term debt, including the current portion, is estimated based on current rates offered to the Company for debt of the same remaining maturities. The fair value of foreign currency, interest rate, equity and commodity contracts is estimated based on dealer quotes. These values represent the estimated amounts the Company would receive or pay to terminate agreements, taking into consideration current market rates and the current credit-worthiness of the counterparties. PAGE 31 28 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- CONTINGENCIES The Company is subject to legal proceedings and claims arising out of its business that cover a wide range of matters, including antitrust and trade regulation, contracts, environmental issues, product liability, patent and trademark matters and taxes. Management, after review and consultation with counsel, considers that any liability from all of these pending lawsuits and claims would not materially affect the consolidated financial position, results of operations or liquidity of the Company. - -------------------------------------------------------------------------------- COMMITMENTS Minimum rental commitments under noncancellable leases, primarily for office and warehouse facilities, are $57 million in 1999, $46 million in 2000, $37 million in 2001, $31 million in 2002, $18 million in 2003 and $47 million for years thereafter. Rental expense amounted to $103 million in 1998, $93 million in 1997 and $93 million in 1996. - -------------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT Research and development costs, included in selling, general and administrative expenses, amounted to $209 million in 1998, $212 million in 1997 and $204 million in 1996. - -------------------------------------------------------------------------------- MERGER-RELATED COSTS In December 1996, Gillette completed a merger with Duracell International Inc. In connection with the merger, the Company recorded a charge to operating expenses of $413 million for direct and other merger-related costs pertaining to the merger transaction and the combination of the worldwide businesses. In 1998, the Company utilized the remaining $130 million from the reserve. All programs were completed, and all program objectives were accomplished. - -------------------------------------------------------------------------------- BUSINESS COMBINATIONS AND DIVESTITURES In 1998, the Company sold its Jafra skin care and color cosmetics business for $200 million. The transaction did not have a material impact on financial results. Also during 1998, the Company acquired two businesses in the Duracell segment, in South Korea and India, for an aggregate purchase price of $100 million. These two acquisitions have been accounted for by the purchase method of accounting. Their results of operations since acquisition, which have been included in the Company's consolidated financial statements in 1998, have not materially affected the consolidated financial position, results of operations or liquidity of the Company. In 1997, the Company acquired an oral care business for $3 million. - -------------------------------------------------------------------------------- REORGANIZATION AND REALIGNMENT On September 28, 1998, the Company announced a reorganization that would realign its worldwide operations. The reorganization includes formation of a new management structure and the consolidation of business management and commercial operations and related administrative functions. This will result in the closure of 14 factories, 12 warehouses and 30 office facilities. The program began in the fourth quarter of 1998, and will be implemented in stages over an 18-month period. It will result in the reduction of approximately 4,700 employees across all business functions, business segments, geographic areas and employee groups. Two manufacturing facilities were closed in 1998, accounting for most of the 620 employee reductions in 1998. In connection with the reorganization and realignment, and in accordance with EITF issue 94-3 and SFAS 121, the Company recorded in the third quarter of 1998 a charge to operating expenses of $535 million ($347 million after taxes, or $.30 in net income per common share, fully diluted). Employee severance and related benefits, shown below, includes salary continuation, fringe benefits, outplacement fees and special termination benefits related to pensions. Details of the reorganization and realignment charges follow.
1998 Utilized (Millions of dollars) Provision 1998 Balance ================================== ========= ======== ======= Employee severance and related benefits .............. $385 $ 51 $334 Asset impairments ................ 135 135 -- Distributor buyout costs ......... 15 3 12 ---- ---- ---- Total............................. $535 $189 $346 ==== ==== ====
------------------------------- The effect of suspending depreciation for impaired assets in the fourth quarter was $3 million. PAGE 32 29 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- INCOME TAXES Deferred income taxes are recognized for the expected tax consequences of temporary differences by applying enacted statutory tax rates, applicable to future years, to differences between the financial reporting basis and tax basis of assets and liabilities. Income before income taxes and income tax expense are summarized below.
(Millions of dollars) 1998 1997 1996 ================================== ====== ====== ====== Income before income taxes United States ................... $1,026 $1,119 $ 880 Foreign ......................... 643 1,102 645 ------ ------ ------ Total income before income taxes .................... $1,669 $2,221 $1,525 ====== ====== ====== Current tax expense Federal ......................... $ 340 $ 247 $ 320 Foreign ......................... 330 311 307 State ........................... 58 59 67 Deferred tax expense Federal ......................... (56) 77 (66) Foreign ......................... (76) 87 (52) State ........................... (8) 13 -- ------ ------ ------ Total income tax expense ......... $ 588 $ 794 $ 576 ======= ====== ======
A reconciliation of the statutory Federal income tax rates to the Company's effective tax rate follows.
(Percent) 1998 1997 1996 ======================================= ==== ==== ==== Statutory Federal tax rate............. 35.0% 35.0% 35.0% Goodwill amortization.................. .3 .3 .3 Rate differential on foreign income........................ 1.6 .4 -- Effect of foreign currency translation........................... .2 .1 .2 State taxes (net of Federal tax benefits)................. 1.9 2.1 2.6 Other differences...................... (3.7) (2.1) (1.7) ---- ---- ---- Effective tax rate before merger-related costs.................. 35.3% 35.8% 36.4% Merger-related costs................... -- -- 1.4 ---- ---- ---- Effective tax rate..................... 35.3% 35.8% 37.8% ==== ==== ====
The components of deferred tax assets and deferred tax liabilities are shown below.
1998 1997 ---------------------- --------------------- Deferred Deferred Deferred Deferred Tax Tax Tax Tax (Millions of dollars) Assets Liabilities Assets Liabilities ============================== ========== ============= ========== ============ CURRENT Advertising and sales promotion................... $ 23 $ -- $ 32 $ -- Benefit plans................ 81 -- 77 -- Merger-related costs and certain realignment programs.................... 161 -- 36 -- Miscellaneous reserves and accruals................ 81 -- 91 -- Operating loss and credit carryforwards............... 11 -- 7 -- Other........................ 160 -- 77 -- ---- ---- ---- ---- Total current............... 517 $ -- 320 $ -- ---- ==== ---- ==== Net current................. $517 $320 ==== ==== NONCURRENT Benefit plans................ $180 $ -- $163 $ -- Intangibles.................. -- 210 -- 230 Merger-related costs and certain realignment programs.................... 13 -- 12 -- Operating loss and credit carryforwards............... 31 -- 33 -- Property, plant and equipment................... -- 385 -- 246 Other........................ -- 11 -- 60 ---- ---- ---- ---- Total noncurrent............ 224 606 208 536 ---- ---- ---- ---- Valuation allowance.......... $(29) $(31) ==== ==== Net noncurrent............... $411 $359 ==== ==== TOTAL Net deferred tax assets/ liabilities................. $106 $ 39 ==== ====
PAGE 33 30 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- PENSION PLANS AND OTHER RETIREE BENEFITS The Company has various retirement programs, including defined benefit, defined contribution and other plans, that cover most employees worldwide. In 1998, the Company began funding its pension plans in Germany by contributing $252 million to a newly established pension trust. Other retiree benefits are health care and life insurance benefits provided to eligible retired employees, principally in the United States. The components of benefit expense follow.
Pension Benefits Other Retiree Benefits ------------------------ ------------------------ (Millions of dollars) 1998 1997 1996 1998 1997 1996 ============================================== ==== ====== ====== ==== ==== ==== COMPONENTS OF NET BENEFIT EXPENSE Service cost-benefits earned ................ $ 67 $ 64 $ 61 $ 6 $ 5 $ 2 Interest cost on benefit obligation ......... 123 115 109 17 17 19 Estimated return on assets .................. (157) (118) (103) (3) (2) (2) Net amortization ............................ 6 6 12 (7) (8) (3) ---- ---- ---- --- --- --- 39 67 79 13 12 16 Defined contribution plans .................. 2 4 4 -- -- -- Foreign plans not on SFAS 87 ................ 10 8 7 -- -- -- ---- ---- ---- --- --- --- Total benefit expense ........................ $ 51 $ 79 $ 90 $13 $12 $16 ==== ==== ==== === === ===
The funded status of the Company's principal defined benefit and other retiree benefit plans and the amounts recognized in the balance sheet at December 31 follow.
Pension Benefits Other Retiree Benefits ---------------- ---------------------- (Millions of dollars) 1998 1997 1998 1997 ======================================================================== ====== ====== ===== ====== CHANGE IN BENEFIT OBLIGATION: Balance at beginning of year .......................................... $1,790 $1,689 $ 248 $ 266 Benefit payments ...................................................... (105) (83) (14) (13) Service and interest costs ............................................ 191 179 23 22 Amendments ............................................................ 48 4 1 1 Actuarial (gains) losses .............................................. 88 52 (16) (28) Currency translation adjustment ....................................... 10 (51) (2) -- ------ ------ ----- ------ Balance at end of year ................................................ 2,022 1,790 240 248 CHANGE IN FAIR VALUE OF PLAN ASSETS: Balance at beginning of year .......................................... 1,540 1,278 33 24 Actual return on plan assets .......................................... 204 272 6 6 Employer contribution ................................................. 299 57 (3) 3 Benefit payments ...................................................... (86) (69) -- -- Currency translation adjustment ....................................... -- 2 -- -- ------ ------ ----- ------ Balance at end of year ................................................ 1,957 1,540 36 33 Plan assets less than benefit obligation ............................... (65) (250) (204) (215) Unrecognized prior service cost and transition obligation .............. 57 36 (1) -- Unrecognized net loss (gain) ........................................... 54 17 (100) (87) Minimum liability adjustment included in: Intangible assets ..................................................... (17) (15) -- -- Stockholders' equity .................................................. (47) (20) -- -- ------ ------ ----- ------ Net accrued benefit cost included in consolidated balance sheet ........ $ (18) $ (232) $(305) $ (302) ====== ====== ===== ======
PAGE 34 31 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The values at December 31 for pension plans with accumulated benefit obligations in excess of plan assets follow.
(Millions of dollars) 1998 1997 ========================================= ==== ==== Projected benefit obligation............. $570 $506 Accumulated benefit obligation........... 506 429 Fair value of plan assets................ 304 30
The weighted average assumptions used in determining related obligations of pension benefit plans are shown below.
(Percent) 1998 1997 1996 =============================================== ==== ==== ==== Discount rate.................................. 6.3 7.1 7.1 Long-term rate of return on assets............. 8.6 9.3 9.4 Rate of compensation increase.................. 3.9 4.9 4.8
The weighted average assumptions used in determining related obligations of other retiree benefit plans are shown below.
(Percent) 1998 1997 1996 =============================================== ==== ==== ==== Discount rate.................................. 6.5 7.0 7.0 Long-term rate of return on assets............. 9.0 9.0 9.0
The assumed health care cost trend rate for 1999 is 6.5%, decreasing to 4.5% by 2001. A one percentage point increase in the trend rate would have increased the accumulated postretirement benefit obligation by 12%, and interest and service cost by 13%. A one percentage point decrease in the trend rate would have decreased the accumulated postretirement benefit obligation by 10%, and interest and service cost by 11%. The Employee Stock Ownership Plan (ESOP) was established to assist Gillette employees in financing retiree medical costs. ESOP shares allocated to eligible participants reduce the Company's obligations over the period of allocation. Account balances are assumed to have an annual yield of 12%. A retiree health benefits account within the Company's principal domestic pension plan will also be used to pay these costs. - -------------------------------------------------------------------------------- EMPLOYEE STOCK OWNERSHIP PLAN In 1990, the Company sold to the ESOP 165,872 shares of a new issue of 8% cumulative Series C convertible preferred stock for $100 million, or $602.875 per share. Each share of Series C stock is entitled to vote as if it were converted to common stock and is convertible into 80 common shares at $7.53594 per share. At December 31, 1998, 148,627 Series C shares were outstanding, of which 132,282 shares were allocated to employees and the remaining 16,345 shares were held in the ESOP trust for future allocations. The 148,627 Series C shares are equivalent to 11,890,147 shares of common stock, about 1.1% of the Company's outstanding voting stock. The Series C stock is redeemable upon the occurrence of certain change in control or other events, at the option of the Company or the holder, depending on the event, at varying prices not less than the purchase price plus accrued dividends. The ESOP purchased the Series C shares with borrowed funds guaranteed by the Company. Gillette contributions to the ESOP and the dividends paid on the Series C shares are used to pay loan principal and interest semiannually over a 10-year period. As the ESOP loan is repaid, a corresponding amount of Series C stock held in the trust is released to participant accounts. Allocations are made quarterly to the accounts of eligible employees, generally on the basis of an equal amount per participant. In general, regular U.S. employees participate in the ESOP after completing one year of service with the Company. The unpaid balance of this loan is reported as a liability of the Company. An unearned ESOP compensation amount is reported as an offset to the Series C shares in the equity section. Plan costs and activity follow.
(Millions of dollars) 1998 1997 1996 ============================================ ==== ==== ==== Compensation expense........................ $ 2 $ 3 $ 4 Cash contributions and dividends paid....... 10 11 13 Principal payments.......................... 9 9 10 Interest payments........................... 1 2 3
- -------------------------------------------------------------------------------- STOCK COMPENSATION PLANS At December 31, 1998, the Company had stock-based compensation plans described below that include the pre-merger plans of Duracell. Stock option plans authorize the granting of options on shares of the Company's common stock to selected key employees, including those who also may be officers, and to nonemployee directors, at not less than the fair market value of the stock on the date of grant. Outstanding options have seven- to 10-year terms. Options granted prior to April 17, 1997, are exercisable one year from the date of grant (except the Duracell options, which became exercisable upon the merger), provided the employee optionee is still employed or the director continues to serve. For options granted after PAGE 35 32 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS April 16, 1997, one-third of the options become vested on each of the first three anniversaries of the stock option award date. The plans also permit payment for options exercised in shares of the Company's common stock (except Duracell options) and the granting of incentive stock options. The Company applied APB 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans in its results of operations. Had the Company recorded a charge for the fair value of options granted consistent with SFAS 123, net income would have been reduced by $100 million in 1998, $88 million in 1997 and $47 million in 1996. The impact of this charge on net income per common share, both basic and assuming full dilution, would have been $.09, $.08 and $.04 in 1998, 1997 and 1996, respectively. 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, with the following weighted average assumptions used for grants in 1998, 1997 and 1996.
1998 1997 1996* ========= ========= ============== Risk-free interest rates .. 5.7% 6.6% 6.5/6.7% Expected option lives ..... 4.5 years 4.6 years 4.6/7.0 years Expected volatilities ..... 19.2% 19.2% 22.0/29.0% Expected dividend yields .. .9% .9% 1.2/2.1%
* Gillette/Duracell - -------------------------------------------------------------------------------- A summary of the status of the Company's stock option plans at December 31, 1998, 1997 and 1996 follows.
1998 1997 1996 -------------------------- ------------------------- -------------------------- Weighted Average Weighted Average Weighted Average (Thousands of shares) Shares Exercise Price Shares Exercise Price Shares Exercise Price ======================================= ======= ================ ====== ================ ======= ================ Outstanding at beginning of year* ..... 38,828 $ 27.18 38,536 $18.71 41,500 $14.80 Granted ............................... 10,984 56.29 10,586 47.15 8,918 29.01 Exercised ............................. (5,635) 17.53 (10,094) 15.59 (9,966) 13.16 Cancelled ............................. (518) 48.59 (200) 37.49 (986) 20.49 ------ ------ ------ Outstanding at year-end* .............. 43,659 35.49 38,828 27.18 39,466 18.29 ====== ====== ====== Options exercisable at year-end ....... 26,321 28,334 31,410 ====== ====== ====== Weighted average fair value of options granted during the year .............. $14.12 $12.92 $ 8.39
* Options outstanding at year-end 1996 include 9,710 pre-merger Duracell options. Options outstanding at the beginning of 1997 reflect the conversion of each Duracell option to .904 of a Gillette option. The following table summarizes information about fixed stock options outstanding at December 31, 1998.
Options Outstanding Options Exercisable ---------------------------------------------------------- --------------------------------- Number Weighted Average Number Outstanding Remaining Years Weighted Average Exercisable Weighted Average Range of Exercise Prices (Thousands) of Contractual Life Exercise Price (Thousands) Exercise Price ========================== ============= ===================== ================== ============= ================= $ 3- 9.................... 1,455 2.0 $ 8 1,455 $ 8 11-14 ................... 3,334 4.1 12 3,334 12 16-21 ................... 10,997 5.2 19 10,997 19 21-26 ................... 378 3.0 24 378 24 27-30 ................... 6,571 7.5 29 6,571 29 35-48 ................... 10,049 8.5 47 3,586 47 50-60 ................... 10,875 9.5 56 -- ------ ------ $ 3-60.................... 43,659 7.1 $35 26,321 $24 ====== ======
PAGE 36 33 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Eligible Gillette employees participate in the Stock Equivalent Unit Plan, which provides for awards of basic stock units to key employees, although awards have not been made to executive officers since 1990. Each unit is treated as equivalent to one share of the Company's common stock. However, the employee only receives appreciation, if any, in the market value of the stock and dividend equivalent units as dividends are paid. Appreciation on basic stock units is limited to 100% of the original market value. Benefits accrue over seven years, and vesting commences in the third year. Plan expense amounted to $9 million in 1998, $21 million in 1997 and $23 million in 1996. - -------------------------------------------------------------------------------- SHARE REPURCHASE PROGRAM On September 18, 1997, the Company's Board of Directors authorized a share repurchase program to purchase up to 50 million shares in the open market or in privately negotiated transactions, depending on market conditions and other factors. The Company repurchased 21 million shares in the open market for $1,066 million in 1998. Since the inception of the program, the Company has repurchased 22 million shares in the open market for $1,119 million. During 1997 and 1998, the Company sold equity put options as an enhancement to its ongoing share repurchase program and collected $83 million in premiums. These options provide the Company with an additional source to supplement open-market purchases of its common stock. The option prices were based on the market value of the Company's stock at the date of issuance. The redemption value of the outstanding options, which represents the options' price multiplied by the number of shares under option, is presented in the accompanying consolidated balance sheet as "Contingent Redemption Value of Common Stock Put Options." At December 31, 1998 and 1997, no shares of outstanding common stock were subject to repurchase under the terms and conditions of these options. - -------------------------------------------------------------------------------- PREFERRED STOCK PURCHASE RIGHTS At December 31, 1998, the Company had 1,117,296,898 preferred stock purchase rights outstanding as follows: one right for each share of common stock outstanding and a total of 11,890,147 rights for the outstanding Series C preferred stock. Each right may be exercised to purchase one ten-thousandth of a share of junior participating preferred stock for $225. The rights will only become exercisable, or separately transferable, on the earlier of the tenth business day after the Company announces that a person has acquired 15% or more, or the tenth business day after a tender offer commences that could result in ownership of more than 15%, of the Company's common stock. If any person acquires 15% or more of the common stock (except in an offer for all common stock that has been approved by the Board of Directors), or in the event of certain mergers or other transactions involving a 15% or more stockholder, each right not owned by that person or related parties will enable its holder to purchase, at the right's exercise price, common stock (or a combination of common stock and other assets) having double that value. In the event of certain merger or asset sale transactions with another party, similar terms would apply to the purchase of that party's common stock. The rights, which have no voting power, expire on December 14, 2005, subject to extension. Upon approval by the Board of Directors, the rights may be redeemed for $.01 each under certain conditions, which may change after any person becomes a 15% stockholder. At December 31, 1998, there were authorized 5,000,000 shares of preferred stock without par value, of which 148,627 Series C shares were issued and outstanding and 400,000 Series A shares were reserved for issuance upon exercise of the rights. PAGE 37 34 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- OPERATING SEGMENTS AND RELATED INFORMATION The following table presents certain operating segment information.
(Millions of dollars) Blades & Toiletries Stationery Braun Oral-B Duracell All 1998 Razors Products Products Products Products Other Total =============================== ======== ========== ========== ======== ======== ======== ===== ======= Net sales ................... $3,028 $1,214 $ 856 $1,740 $642 $2,576 $ -- $10,056 Profit from operations ........ 1,153 54 108 291 101 597 (515) 1,789 Identifiable assets ........... 3,378 771 1,330 1,679 680 3,288 776 11,902 Capital expenditures .......... 453 69 48 135 62 144 89 1,000 Depreciation .................. 167 27 24 73 18 51 13 373 ------ ------ ------ ------ ---- ------ ---- ------- 1997 - ---- Net sales ................... $2,881 $1,410 $ 924 $1,744 $624 $2,478 $ 1 $10,062 Profit from operations ........ 1,186 124 156 304 85 526 (57) 2,324 Identifiable assets ........... 3,006 1,004 1,299 1,544 622 3,138 251 10,864 Capital expenditures .......... 423 88 40 126 45 165 86 973 Depreciation .................. 111 37 23 77 17 58 7 330 ------ ------ ------ ------ ---- ------ ---- ------- 996 - ---- Net sales ................... $2,836 $1,375 $ 915 $1,773 $547 $2,251 $ 1 $ 9,698 Profit from operations ........ 1,098 91 122 300 58 450 (483) 1,636 Identifiable assets ........... 2,591 874 1,244 1,534 595 3,154 423 10,415 Capital expenditures .......... 353 65 43 120 38 201 10 830 Depreciation .................. 96 26 20 78 15 51 7 293 - ------------------------------- ====== ====== ====== ====== ==== ====== ==== =======
Each operating segment is individually managed and has separate financial results that are reviewed by the Company's chief operating decision-makers. Each segment contains closely related products that are unique to the particular segment. The principal products included in each of the Company's operating segments are described in the review of operations, which appears earlier. Profit from operations is net sales less cost of sales and selling, general and administrative expenses, but is not affected either by nonoperating charges/income or by income taxes. Nonoperating charges/income consists principally of net interest expense and the effect of exchange. In calculating profit from operations for individual operating segments, substantial administrative expenses incurred at the operating level that are common to more than one segment are allocated on a net sales basis. Certain headquarters expenses of an operational nature also are allocated to segments and geographic areas. All intercompany transactions have been eliminated, and intersegment revenues are not significant. The $535 million charge to profit from operations in 1998 for reorganization and realignment is not assigned to the operating segments in the accompanying table, since the elements of the charge are managed separately from the segments. Had the Company allocated the charge by segment, the amounts would have been as follows: Blades & Razors, $117 million; Toiletries, $47 million; Stationery Products, $95 million; Braun Products, $69 million; Oral-B Products, $68 million; Duracell Products, $128 million; and All Other, $11 million. Profit from operations in 1996 has been restated for SFAS 131. The $413 million charge for merger-related costs is now included in All Other. The charge was previously reported by segment as follows: Blades & Razors, $36 million; Toiletries, $4 million; Duracell Products, $308 million; and All Other, $65 million. PAGE 38 35 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The All Other column includes items not allocated to operating segments. Profit from operations includes the $535 million charge for reorganization and realignment in 1998, the $413 million charge for merger-related costs in 1996 and all unallocated income/expense items, including corporate headquarters expenses. Identifiable assets includes deferred income tax assets, nonqualified benefit trusts, construction-in-progress costs related to Corporate Information Technology initiatives and other financial instruments managed by the Corporate Treasury Department. Capital expenditures is primarily related to Corporate Information Technology initiatives. Net sales by geographic area follow.
(Millions of dollars) 1998 1997 1996 ========================== ======= ======= ====== Foreign................... $ 6,241 $ 6,380 $6,117 United States............. 3,815 3,682 3,581 ------- ------- ------ $10,056 $10,062 $9,698 ======= ======= ======
Long-lived assets at December 31 follow.
========================================================== Germany.................. $ 575 $ 438 $ 426 Other Foreign............ 1,261 1,202 1,030 ------ ------ ------ Total Foreign............ 1,836 1,640 1,456 United States............ 1,636 1,464 1,130 ------ ------ ------ $3,472 $3,104 $2,586 ====== ====== ======
INDEPENDENT AUDITORS' REPORT [KPMG Logo] - -------------------------------------------------------------------------------- THE STOCKHOLDERS AND BOARD OF DIRECTORS OF THE GILLETTE COMPANY We have audited the accompanying consolidated balance sheet of The Gillette Company and subsidiary companies as of December 31, 1998 and 1997, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Gillette Company and subsidiary companies at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Boston, Massachusetts February 11, 1999 PAGE 39 36 The Gillette Company and Subsidiary Companies NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Three Months Ended (Millions of dollars, except per share amounts) ---------------------------------------------------- 1998* March 31 June 30 September 30 December 31 Total Year ========================================================== ======== ======= ============ =========== =========== Net sales................................................. $2,025 $2,325 $2,531 $ 3,175 $10,056 Gross profit.............................................. 1,242 1,443 1,557 1,961 6,203 Profit from operations.................................... 434 595 40 720 1,789 Income before income taxes................................ 414 575 9 671 1,669 Net income................................................ 268 372 6 435 1,081 Net income per common share, basic........................ .24 .33 -- .39 .96 Net income per common share, assuming full dilution....... .23 .33 -- .39 .95 Dividends declared per common share....................... -- .12 3/4 .12 3/4 .25 1/2 .51 Stock price range: (composite basis) High..................................................... 61.09 62.66 62.56 49.38 62.66 Low...................................................... 48.59 54.75 35.31 37.06 35.31 1997 (Recast)** ========================================================== ======== ======= ============ =========== =========== Net sales................................................. $1,999 $2,366 $2,701 $ 2,996 $10,062 Gross profit.............................................. 1,249 1,443 1,668 1,871 6,231 Profit from operations.................................... 388 549 702 685 2,324 Income before income taxes................................ 367 523 680 651 2,221 Net income................................................ 236 336 437 418 1,427 Net income per common share, basic........................ .21 .30 .39 .37 1.27 Net income per common share, assuming full dilution....... .21 .29 .38 .36 1.24 1997 (Previously Reported) ========================================================== ======== ======= ============ =========== =========== Net sales................................................. $2,180 $2,285 $2,437 $ 3,160 $10,062 Gross profit.............................................. 1,355 1,426 1,507 1,943 6,231 Profit from operations.................................... 466 518 575 765 2,324 Income before income taxes................................ 442 496 550 733 2,221 Net income................................................ 283 319 354 471 1,427 Net income per common share, basic........................ .25 .29 .31 .42 1.27 Net income per common share, assuming full dilution....... .25 .28 .30 .41 1.24 Dividends declared per common share....................... -- .10 3/4 .10 3/4 .21 1/2 .43 Stock price range: (composite basis) High..................................................... 43.06 49.81 53.19 51.16 53.19 Low...................................................... 36.00 36.13 38.94 41.94 36.00 =============================================================================================================================
- ------------------------------------------------------------------------ * In the third quarter of 1998, a charge for reorganization and realignment expenses reduced profit from operations and income before income taxes by $535 million, net income by $347 million, basic net income per share by $.31 and net income per share, assuming full dilution, by $.30. ** Quarterly financial information has been recast to reflect the harmonization of operating groups on a common calendar year basis. PAGE 40 37 The Gillette Company and Subsidiary Companies HISTORICAL FINANCIAL SUMMARY - -------------------------------------------------------------------------------- HISTORICAL FINANCIAL SUMMARY (In millions, except per share amounts, stock prices and employees)
Net Income Per Common Share ------------------- Average Profit Income Assuming Common Net from before Net Full Shares Year-end Year Sales Operations Taxes Income Basic Dilution Outstanding Stock Price ============= ======= ========== ======== ====== ===== ======== =========== ============ 1998(a) $10,056 $1,789 $1,669 $1,081 $ .96 $ .95 1,117 $47.81 1997 10,062 2,324 2,221 1,427 1.27 1.24 1,118 50.22 - ----- ------- ------ ------ ------ ----- ----- ----- ------ 1996(b) 9,698 1,636 1,525 949 .85 .83 1,107 38.88 1995 8,834 1,799 1,700 1,069 .97 .95 1,100 26.06 1994 7,935 1,615 1,458 919 .83 .82 1,096 18.72 1993(c) 7,085 1,091 907 421 .38 .37 1,090 14.91 1992(d) 6,752 1,263 1,061 601 .55 1,082 14.22 1991(d) 6,188 1,144 844 432 .41 1,018 14.03 1990(d) 5,709 1,020 633 382 .36 906 7.84 ===== ======= ====== ====== ====== ===== ===== ======
Dividends Declared Net Depreciation Net Property, Per Common Share Interest and Capital Plant and Total Long-term Stockholders' ------------------- Year Expense Amortization Expenditures Equipment Assets Debt Equity Gillette Duracell Employees ==== ========= ============ ============ ============= ======= ========== ============= ======== ======== ========= 1998 $ 86 $459 $1,000 $3,472 $11,902 $2,256 $4,543 $.51 43,100 1997 69 422 973 3,104 10,864 1,476 4,841 .43 44,000 - ---- ---- ---- ------ ------ ------- ------ ------ ----- ------ 1996 67 381 830 2,586 10,415 1,490 4,471 .36 $.58 44,100 1995 73 343 593 2,053 8,918 1,048 3,879 .30 .52 41,900 1994 68 303 498 1,750 7,766 1,073 3,257 .25 .44 40,700 1993 66 303 396 1,507 7,116 1,234 2,582 .21 .32 41,000 1992 114 298 370 1,396 6,400 1,124 2,538 .18 .08 38,800 1991 225 277 339 1,262 6,169 1,473 2,134 .155 -- 39,200 1990 319 259 285 1,183 5,921 2,456 607 .135 -- 38,300 ==== ==== ==== ====== ====== ======= ====== ====== ===== ==== ======
Per common share amounts, shares outstanding and stock prices have been restated to reflect two-for-one stock splits in 1998, 1995 and 1991. (a) In 1998, a charge for reorganization and realignment expenses reduced profit from operations and income before income taxes by $535 million, net income by $347 million, basic net income per common share by $.31 and net income per common share, assuming full dilution, by $.30. (b) In 1996, charges for merger-related costs reduced profit from operations and income before income taxes by $413 million, net income by $283 million, basic net income per common share by $.26 and net income per common share, assuming full dilution, by $.25. (c) In 1993, charges for realignment and restructuring expenses reduced profit from operations and income before income taxes by $328 million, net income by $212 million, basic net income per common share by $.19 and net income per common share, assuming full dilution, by $.19. In addition, in 1993, the cumulative effect of adopting mandated changes in the methods of accounting for income taxes, postretirement benefits and postemployment benefits reduced net income by $139 million and net income per common share, basic and assuming full dilution, by $.13 and $.12, respectively. (d) Charges for extraordinary items reduced net income by $75 million in 1992, $109 million in 1991 and $6 million in 1990 and basic net income per common share by $.07 in 1992, $.11 in 1991 and $.01 in 1990. PAGE 41 38 CORPORATE AND STOCKHOLDER INFORMATION - ------------------------------------------------------------------------------- ANNUAL MEETING The Annual Meeting of stockholders will take place on Thursday, April 15, 1999, at the John F. Kennedy Library and Museum, Columbia Point, Boston, Massachusetts. The meeting will convene at 10 a.m. - ------------------------------------------------------------------------------- CORPORATE HEADQUARTERS Prudential Tower Building Boston, Massachusetts 02199 (617)421-7000 World Wide Web users can access Gillette information at http://www.gillette.com, the Company's Internet site. - ------------------------------------------------------------------------------- INCORPORATED State of Delaware - ------------------------------------------------------------------------------- COMMON STOCK Major stock exchanges: New York, Boston, Chicago, Pacific, Frankfurt New York Stock Exchange Symbol: G At year-end, stockholders numbered 61,500, living in all 50 states and more than 30 countries abroad. - ------------------------------------------------------------------------------- TRANSFER AGENT AND REGISTRAR BankBoston, N.A. c/o EquiServe L.P. P.O. Box 8040 Boston, Massachusetts 02266-8040 (781) 575-2322 By fax: (781)828-8813 Toll-free: (888) 218-2841 Hearing impaired: (800) 952-9245 (TTY/TDD) Via Internet: http://www.EQUISERVE.com - ------------------------------------------------------------------------------- AUDITORS KPMG - ------------------------------------------------------------------------------- FORM 10-K The Company's 1998 Annual Report on Form 10-K, filed with the Securities and Exchange Commission, will be available in late March without charge from the Office of the Secretary by written request, or by calling toll-free (800)291-7615. The report also will be available at http://www.gillette.com, the Company's Internet site. - ------------------------------------------------------------------------------- INVESTLINK(SM) -- DIRECT STOCK PURCHASE PROGRAM InvestLink(SM) is a direct stock purchase program designed to promote long-term ownership among investors who are committed to investing a minimum amount and building their Gillette share ownership over time. The program is sponsored and administered by BankBoston, N.A., the Company's transfer agent. InvestLink(SM) provides an economical, convenient way to purchase your first shares or to purchase additional shares of Gillette common stock directly from the Company. Program participants may also reinvest their cash dividends through InvestLink(SM). You may request an enrollment application and a brochure from: BankBoston, N.A. "InvestLink" Program P.O.Box 8040 Boston, Massachusetts 02266-8040 (781) 575-2322 Toll-free: (800) 643-6989 Hearing impaired: (800) 952-9245 (TTY/TDD) - ------------------------------------------------------------------------------- QUARTERLY REPORTS The Company mails quarterly reports only to registered holders of Gillette common stock. If your shares are registered in the name of a broker or other nominee, and you would like to receive the quarterly reports, the Company will gladly mail them directly to you. You may add your name to our mailing list by writing to the Office of the Secretary, or by calling toll-free (800) 291-7615. Gillette quarterly reports also are available at http://www.gillette.com, the Company's Internet site. EX-22 6 SUBSIDIARIES 1 EXHIBIT 22 THE GILLETTE COMPANY SUBSIDIARIES OF REGISTRANT
ORGANIZED UNDER LAWS OF NAME --------- Gillette Argentina S.A. .................................... Argentina Gillette Australia Pty Ltd.................................. Australia Duracell Batteries Limited.................................. United Kingdom Duraname Corp. ............................................. Delaware NV Duracell Batteries S.A................................... Belgium Duracell GmbH............................................... Germany Duracell SpA................................................ Italy Gillette Beteiligungs -- GmbH............................... Germany Its subsidiaries: Gillette Deutschland GmbH & Co. ....................... Germany Societe de Participations Financieres Gillette......... France Its subsidiary: Waterman S.A. .................................... France Braun -- GmbH............................................... Germany Its subsidiaries: Braun Electric Austria Gesellschaft mbH........... Austria Braun Espanola, S.A. ............................. Spain Braun Finland Oy.................................. Finland Braun France S.A. ................................ France Braun Ireland Ltd. ............................... Ireland Braun Italia S.r.l. .............................. Italy Braun Japan K.K. ................................. Japan Braun de Mexico y Cia. de C.V. ................... Mexico Braun Nederland B.V. ............................. Netherlands Braun (U.K.) Ltd. ................................ United Kingdom Gillette do Brasil, Inc. ................................... Delaware Its subsidiary: Gillette do Brazil Ltda. ......................... Brazil Gillette Canada Inc. ....................................... Canada Its subsidiaries: Oral-B Laboratories Pty. Limited....................... Australia Oral-B Laboratories GmbH............................... Germany Oral-B Laboratorios, S.A. de C.V. ..................... Mexico Gillette de Colombia S.A. .................................. Colombia Colton Gulf Coast, Inc. .................................... Delaware Colton North Central, Inc. ................................. Delaware Gillette Czech Inc. Delaware Gillette Eastern Europe, Inc.............................. Gillette Espanola, S.A. .................................... Spain Gillette Far East Trading Limited........................... Hong Kong Gillette Foreign Sales Corporation Limited.................. Jamaica Gillette France S.A. ....................................... France Gilfin B.V. ................................................ Netherlands Its subsidiary: Parkfin Limited........................................ United Kingdom Compania Giva, S.A. ........................................ Delaware Indian Shaving Products Limited............................. India Compania Interamericana Gillette, S.A. ..................... Panama Gillette Egypt S.A.E. ...................................... Egypt Gillette Pakistan Limited................................... Pakistan Inversiones Gilco (Chile) Limitada.......................... Chile Gillette Group Italy S.p.A.................................. Italy Gillette (Japan) Inc. ...................................... Delaware Grupo Gillette S.A. de C.V. ................................ Mexico
14 2 THE GILLETTE COMPANY SUBSIDIARIES OF REGISTRANT -- (CONTINUED)
ORGANIZED UNDER LAWS OF NAME --------- Its subsidiary: Gillette de Mexico S.A. de C.V. ....................... Mexico Gillette del Peru, Inc. and Lima Manufacturing Company...... Delaware Partners in: Gillette del Peru, S.C. ............................... Peru Gillette (Philippines), Inc. ............................... Philippines Gillette Sanayi ve Ticaret A.S. ............................ Turkey Gillette (Shanghai) Limited................................. China Shenmei Daily Use Products Limited Company.................. China Gillette Trading Limited.................................... South Africa Gillette Group South Africa (pty) Limited................... South Africa Gillette South Asia Inc. and Saratoga Investment, Inc....... Delaware Their subsidiaries: Gillette India Private Limited......................... India Luxor Writing Instruments Private Ltd.................. India Gillette (Switzerland) AG................................... Switzerland Gillette Industries Plc..................................... United Kingdom Its subsidiaries: Gillette U.K. Limited.................................. United Kingdom Parker Pen Holdings.................................... United Kingdom Gillette Poland S.A. ....................................... Poland Gillette Home Diagnostics, Inc.............................. Delaware Its subsidiary: Thermoscan Inc......................................... Delaware Gillette Oral Care, Inc..................................... Delaware
All of the voting securities of each subsidiary listed above are owned by its parent company or parent partners except that the percentage ownership in Indian Shaving Products Limited, Shenmei Daily Use Products Limited Company, Gillette (Shanghai) Limited, Gillette Pakistan Limited, Gillette Egypt S.A.E. and Luxor Pen Company is 58%, 50%, 70%, 76.80%, 92% and 50%, respectively. There are a number of additional subsidiaries in the United States and foreign countries which, considered in the aggregate, do not constitute a significant subsidiary. 15 EX-23 7 CONSENT OF KPMG 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT The Stockholders and Board of Directors of THE GILLETTE COMPANY: We consent to incorporation by reference in the following registration statements of The Gillette Company and any amendments thereto (1) No. 33-9495 on Form S-8, (2) No. 2-93230 on Form S-8, (3) Nos. 33-56218 and 33-27916 on Form S-8 which incorporate by reference therein registration statements on Form S-8 Nos. 2-90276, 2-63951 and 1-50710 and No. 2-41016 on Form S-7, (4) No. 33-54974 on Form S-3, (5) No. 33-50303 on Form S-3, (6) No. 33- 52465 on Form S-8, (7) No. 33-53257 on Form S-8, (8) No. 33-53258 on Form S-8, (9) No. 33-55051 on Form S-3, (10) No. 33-59125 on Form S-8, (11) No. 33-63707 on Form S-8 (12) No. 333-16735 on Form S-4, (13) No. 333-19133 on Form S-8, (14), No. 333-25533 on Form S-8 and (15) 333-44257 on Form S-3 of our report dated February 11, 1999, relating to the consolidated balance sheet of The Gillette Company and subsidiary companies as of December 31, 1998 and 1997, consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1998 and the Valuation and Qualifying Account Schedule, which reports appear or are incorporated by reference in the December 31, 1998 Annual Report on Form 10-K of The Gillette Company. KPMG PEAT MARWICK LLP Boston, Massachusetts March 31, 1999 16 EX-24 8 POWER OF ATTORNEY 1 EXHIBIT 24 POWER OF ATTORNEY We, the undersigned hereby constitute James P. Connolly and Charles W. Cramb, or either of them, our true and lawful attorneys with full power to sign for us in our name and in the capacity indicated below the Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, filed for the Company with the Securities and Exchange Commission for the year ended December 31, 1998, and any and all amendments and supplements thereto, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or either of them, to said Report and to any and all amendments and supplements to said Report. WITNESS Our Hand and Seal on the Date set forth below.
SIGNATURES TITLE DATE ---------- ----- ---- ALFRED M. ZEIEN Chairman of the Board March 18, 1999 - ----------------------------------------------------- of Directors, Chief Executive Officer Alfred M. Zeien and Director MICHAEL C. HAWLEY President, Chief Operating Officer March 18, 1999 - ----------------------------------------------------- and Director Michael C. Hawley CHARLES W. CRAMB Senior Vice President, Chief March 18, 1999 - ----------------------------------------------------- Financial Officer and Charles W. Cramb Principal Accounting Officer WARREN E. BUFFETT Director March 18, 1999 - ----------------------------------------------------- Warren E. Buffett WILBUR H. GANTZ Director March 18, 1999 - ----------------------------------------------------- Wilbur H. Gantz MICHAEL B. GIFFORD Director March 18, 1999 - ----------------------------------------------------- Michael B. Gifford CAROL R. GOLDBERG Director March 18, 1999 - ----------------------------------------------------- Carol R. Goldberg HERBERT H. JACOBI Director March 18, 1999 - ----------------------------------------------------- Herbert H. Jacobi HENRY R. KRAVIS Director March 18, 1999 - ----------------------------------------------------- Henry R. Kravis JORGE PAULO LEMANN Director March 18, 1999 - ----------------------------------------------------- Jorge Paulo Lemann RICHARD R. PIVIROTTO Director March 18, 1999 - ----------------------------------------------------- Richard R. Pivirotto ALEXANDER B. TROWBRIDGE Director March 18, 1999 - ----------------------------------------------------- Alexander B. Trowbridge MARJORIE M. YANG Director March 18, 1999 - ----------------------------------------------------- Marjorie M. Yang
17 EX-27 9 FINANCIAL DATA SCHEDULE
5 THE DATA REPORTED IN THIS EXHIBIT ARE BASED ON UNAUDITED STATEMENTS BUT INCLUDE ALL ADJUSTMENTS WHICH THE COMPANY CONSIDERS NECESSARY FOR A FAIR PRESENTATION OF RESULTS FOR THIS PERIOD. 0000041499 THE GILLETTE COMPANY 1,000 12-MOS DEC-31-1998 DEC-31-1998 102,000 0 3,022,000 79,000 1,595,000 5,440,000 5,705,000 2,233,000 11,902,000 3,478,000 2,256,000 0 90,000 1,358,000 3,095,000 11,902,000 10,056,000 10,056,000 3,853,000 3,853,000 4,414,000 0 94,000 1,669,000 588,000 1,081,000 0 0 0 1,081,000 .96 .95
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