10-K

TABLE OF CONTENTS

EXHIBIT 2.1

EXHIBIT 10.1

EXHIBIT 10.2

EXHIBIT 10.3

EXHIBIT 10.8

EXHIBIT 11

EXHIBIT 12

EXHIBIT 13

EXHIBIT 21

EXHIBIT 23

EXHIBIT 99.1

EXHIBIT 99.2

EXHIBIT 99.3

EXHIBIT 99.4

EXHIBIT 99.5

THE PROCTER & GAMBLE COMPANY
AND SUBSIDIARIES

==================================

ANNUAL REPORT ON FORM 10-K
TO THE
SECURITIES AND EXCHANGE COMMISSION
FOR THE
YEAR ENDED JUNE 30, 2001

******************************************

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

ANNUAL REPORT ON FORM 10-K PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2001 Commission File No. 1-434

THE PROCTER & GAMBLE COMPANY
One Procter & Gamble Plaza, Cincinnati, Ohio 45202
Telephone (513) 983-1100
IRS Employer Identification No. 31-0411980
State of Incorporation: Ohio

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

Title of each class	Name of each Exchange on which registered
Common Stock, without Par Value	New York, Cincinnati, Amsterdam, Paris, Basle, Geneva, Lausanne, Zurich, Frankfurt, Brussels, Tokyo

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

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

There were 1,296,093,087 shares of Common Stock outstanding as of July 31, 2001. The aggregate market value of the voting stock held by non-affiliates amounted to $92 billion on July 31, 2001.

Documents Incorporated By Reference

Portions of the Annual Report to Shareholders for the fiscal year ended June 30, 2001 are incorporated by reference into Part I, Part II and Part IV of this report.

Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

1

PART I

Item 1. Business.

General Development of Business

      The Procter & Gamble Company was incorporated in Ohio in 1905, having been built from a business founded in 1837 by William Procter and James Gamble. Today, the Company manufactures and markets a broad range of consumer products in many countries throughout the world.

      Unless the context indicates otherwise, the term the “Company” as used herein refers to The Procter & Gamble Company (the registrant) and its subsidiaries.

      In 1999, the Company announced its intention to transition from its previous geographic-based structure to a product-based global business unit structure. Concurrent with that change, the Company initiated its Organization 2005 restructuring program, a discussion of which is incorporated herein by reference to Note 2, Restructuring Program, which appears on pages 27-28 of the Annual Report to Shareholders for the fiscal year ended June 30, 2001. Additional information required by this item is incorporated herein by reference to the Letter to Shareholders, which appears on pages 1-3 of the Annual Report to Shareholders for the fiscal year ended June 30, 2001.

Financial Information About Industry Segments

      The Company’s products fall into five business segments: fabric and home care, paper, beauty care, health care, and food and beverage.

      Additional information required by this item is incorporated herein by reference to Note 12, Segment Information, of the Notes to the Consolidated Financial Statements, which appears on page 34, and Financial Review, which appears on pages 10-19 of the Annual Report to Shareholders for the fiscal year ended June 30, 2001.

Narrative Description of Business

      The Company’s business, represented by the aggregate of its fabric and home care, paper, beauty care, health care, and food and beverage segments, is essentially homogeneous. Many of the factors necessary for an understanding of these five segments are essentially identical. The markets in which the Company’s products are sold are highly competitive. The products of the Company’s business segments compete with many large and small companies, and there is no dominant competitor or competitors. Advertising is used in conjunction with an extensive sales force because the Company believes this combination provides the most efficient method of marketing these types of products. Product quality, performance, value and packaging are also important competitive factors. Most of the Company’s products in each of its segments are distributed through food, drug, mass and other retail outlets.

2

      The laundry and diaper categories constitute approximately 20% and 12% of consolidated fiscal 2001 sales, respectively. These results are comparable to the year before. The creation of new products and the development of new performance benefits for consumers on the Company’s existing products are vital ingredients in its continuing progress in the highly competitive markets in which it does business. Basic research and product development activities continued to carry a high priority during the past fiscal year. While many of the benefits from these efforts will not be realized until future years, the Company believes these activities demonstrate its commitment to future growth.

      The Company has registered trademarks and owns or has licenses under patents which are used in connection with its business in all segments. Some of these patents or licenses cover significant product formulation and processing of the Company’s products. The trademarks of all major products in each segment are registered. In part, the Company’s success can be attributed to the existence of these trademarks, patents and licenses.

      Most of the raw materials used by the Company are purchased from others. Additionally, some raw materials, primarily chemicals, are produced by the Company for further use in the manufacturing process. The Company purchases and produces a substantial variety of raw materials, no one of which is material to the Company’s business taken as a whole.

      Expenditures in fiscal year 2001 for compliance with federal, state and local environmental laws and regulations were not materially different from such expenditures in the prior year, and no material increase is expected in fiscal year 2002.

      Operations outside the United States are generally characterized by the same conditions discussed in the description of the business above and may also be affected by additional elements including changing currency values and different rates of inflation and economic growth.

      The Company has approximately 106,000 employees. The decline of approximately 4,000 employees versus the prior year is primarily due to the Company’s restructuring program.

      Additional information required by this item is incorporated herein by reference to Note 12, Segment Information, which appears on page 34; Financial Summary, which appears on page 35; and Financial Review, which appears on pages 10-19 of the Annual Report to Shareholders for the fiscal year ended June 30, 2001.

Financial Information About Foreign and Domestic Operations

      The information required by this item is incorporated herein by reference to Note 12, Segment Information, which appears on page 34, and Financial Review, which appears on pages 10-19 of the Annual Report to Shareholders for the fiscal year ended June 30, 2001. Company sales by geography for the fiscal year ended June 30, 2001 were as follows: North America — 55%; Europe, Middle East and Africa — 27%; Asia — 10% and Latin America — 8%.

3

      Assets and net sales in the United States and internationally were as follows (in millions):

	Net Sales (for the year ended June 30)						Assets (as of June 30)
	2001		2000		1999		2001		2000		1999
United States	$	20,334	$	20,038	$	18,314	$	18,318	$	17,398	$	15,221
International		18,910		19,913		19,811		16,069		16,968		16,971

Item 2. Properties.

      In the United States, the Company owns and operates 40 manufacturing facilities and leases and operates 2 manufacturing facilities. These facilities are located in 23 different states. In addition, the Company owns and operates 92 manufacturing facilities in 45 other countries. Fabric and home care products are produced at 47 of these locations; paper products at 50; health care products at 27; beauty care products at 34; and food and beverage products at 15. Management believes that the Company’s production facilities are adequate to support the business efficiently and that the properties and equipment have been well maintained.

Item 3. Legal Proceedings.

The Company is involved in clean-up efforts at off-site Superfund locations, many of which are in the preliminary stages of investigation. The amount accrued at the end of June 30, 2001 representing the Company’s probable future costs that can be reasonably estimated was $6 million.

On June 8, 2001, the Company announced it had reached an agreement in principle to settle a lawsuit alleging damages under the U.S. Securities laws relating to our March 7, 2000 and June 8, 2000 earnings releases. If approved by the Court, the Company will pay $49 million in cash.

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

      Not applicable.

4

Executive Officers of the Registrant

      The names, ages and positions held by the executive officers of the Company on September 1, 2001 are:

				Elected to
Name	Position	Age		Officer Position
John E. Pepper	Chairman of the Board. Director since June 12, 1984		63		1978
Alan G. Lafley	President and Chief Executive. Director since June 8, 2000		54		1992
Richard L. Antoine	Global Human Resources Officer		55		1998
Bruce L. Byrnes	President — Global Beauty Care and Global Health Care		53		1991
R. Kerry Clark	President — Global Market Development and Business Operations		49		1995
G. Gilbert Cloyd	Chief Technology Officer		55		2000
Clayton C. Daley Jr.	Chief Financial Officer and Comptroller		49		1998
Stephen N. David	Chief Information Officer and Business-to-Business Officer		52		1998
R. Keith Harrison, Jr.	Global Product Supply Officer		53		2001
James J. Johnson	Chief Legal Officer		54		1991
Mark D. Ketchum	President — Global Baby, Feminine and Family Care		51		1996
Robert A. McDonald	President — Global Fabric & Home Care		48		1999
Jorge P. Montoya	President — Global Food & Beverage and Latin America		55		1991
Charlotte R. Otto	Global External Relations Officer		48		1996
Michael J. Power	Global Business Services Officer		53		2001
James R. Stengel	Global Marketing Officer		46		2001

All of the above named Executive Officers, except James J. Johnson, are members of the Executive Committee of the Global Leadership Council of The Procter & Gamble Company. All of the Executive Officers named above have been employed by the Company for more than five years.

5

PART II

Item 5. Market for the Common Stock and Related Stockholder Matters

      The information required by this item is incorporated by reference to Shareholder Information, which appears on the inside back cover of the Annual Report to Shareholders for the fiscal year ended June 30, 2001.

Item 6. Selected Financial Data

      The information required by this item is incorporated by reference to Financial Summary, which appears on page 35 of the Annual Report to Shareholders for the fiscal year ended June 30, 2001.

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

      The information required by this item is incorporated by reference to Financial Review, which appears on pages 10-19; Note 2, Restructuring Program, which appears on pages 27-28; Note 11, Commitments and Contingencies, which appears on page 33; Note 12, Segment Information, which appears on page 34 of the Annual Report to Shareholders for the fiscal year ended June 30, 2001; and the Company’s Current Report on Form 8-K dated August 15, 2001.

      The Company has made and will make certain forward-looking statements in the Annual Report to Shareholders for the fiscal year ended June 30, 2001 and in other contexts relating to volume growth, increases in market shares, Organization 2005, financial goals and cost reduction, among others.

      These forward-looking statements are based on assumptions and estimates regarding competitive activity, pricing, product introductions, economic conditions, technological innovation, currency movements, governmental action and the development of certain markets. Among the key factors necessary to achieve the Company’s goals are: (1) the successful execution of Organization 2005 within the Company’s planned timing, including achievement of expected cost and tax savings and successful management of organizational and work process restructuring; (2) the ability to achieve business plans, including volume growth and pricing plans, despite high levels of competitive activity, especially with respect to the product categories and geographical markets in which the Company has chosen to focus; (3) the ability to maintain key customer relationships; (4) the achievement of growth in significant developing markets such as China, Korea, Mexico, the Southern Cone of Latin America and the countries of Central and Eastern Europe; (5) the ability to successfully manage regulatory, tax and legal matters, including resolution of pending matters within current estimates; (6) the successful and timely execution of planned brand divestitures; (7) the ability to successfully implement cost improvement plans in manufacturing and overhead areas; (8) the timely execution of definitive agreements and the receipt of timely and successful regulatory clearances with respect to a potential transaction with The Coca-Cola Company; (9) the timely and successful receipt of regulatory clearances and subsequent successful integration of the Clairol business; and (10) the ability to successfully manage currency, interest rate and certain commodity cost exposures. If the Company’s assumptions and estimates are incorrect or do not come to fruition, or if the Company does not achieve all of these key factors, then the Company’s actual performance could vary materially from the forward-looking statements made herein.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

      The information required by this item is incorporated by reference to Financial Review, which appears on pages 10-19, and Note 6, Risk Management Activities, which appears on pages 29-30 of the Annual Report to Shareholders for the fiscal year ended June 30, 2001.

6

Item 8. Financial Statements and Supplemental Data

      The financial statements and supplemental data are incorporated by reference to pages 21-35 of the Annual Report to Shareholders for the fiscal year ended June 30, 2001.

Item 9. Disagreements on Accounting and Financial Disclosure

      Not applicable.

PART III

Item 10. Directors and Executive Officers

      The information required by this item is incorporated by reference to pages 4-9 and 22 of the proxy statement filed since the close of the fiscal year ended June 30, 2001, pursuant to Regulation 14A which involved the election of directors. Pursuant to Item 401(b) of Regulation S-K, Executive Officers of the Registrant are reported in Part I of this report.

Item 11. Executive Compensation

      The information required by this item is incorporated by reference to pages 9-17 of the proxy statement filed since the close of the fiscal year ended June 30, 2001, pursuant to Regulation 14A which involved the election of directors.

Item 12. Security Ownership of Certain Beneficial Owners and Management

      The information required by this item is incorporated by reference to pages 19-21 of the proxy statement filed since the close of the fiscal year ended June 30, 2001, pursuant to Regulation 14A which involved the election of directors.

Item 13. Certain Relationships and Related Transactions

      The information required by this item is incorporated by reference to page 22 of the proxy statement filed since the close of the fiscal year ended June 30, 2001, pursuant to Regulation 14A which involved the election of directors.

PART IV

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

A.	1.	Financial Statements:
		The following consolidated financial statements of The Procter & Gamble Company and subsidiaries and the independent auditors’ report are incorporated by reference in Part II, Item 8.
		- Independent Auditors’ Report
		- Consolidated statements of earnings — for years ended June 30, 2001, 2000 and 1999
		- Consolidated balance sheets — as of June 30, 2001 and 2000
		- Consolidated statements of shareholders’ equity — for years ended June 30, 2001, 2000 and 1999
		- Consolidated statements of cash flows — for years ended June 30, 2001, 2000 and 1999
		- Notes to consolidated financial statements
	2.	Financial Statement Schedules:
		These schedules are omitted because of the absence of the conditions under which they are required or because the information is set forth in the financial statements or notes thereto.

7

3.	Exhibits:
	Exhibit (2-1)	—	Stock and Asset Purchase Agreement for Clairol Incorporated.
	(3-1)	—	Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).
	(3-2)	—	Regulations (Incorporated by reference to Exhibit (3-2) of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
	Exhibit (4)	—	Registrant agrees to file a copy of documents defining the rights of holders of long-term debt upon request of the Commission.
	Exhibit (10-1)	—	The Procter & Gamble 2001 Stock and Incentive Compensation Plan (adopted by the Board of Directors on July 10, 2001, subject to approval by the Company’s shareholders at the Company’s annual meeting of shareholders to be held on October 9, 2001).
	(10-2)	—	The Procter & Gamble 1992 Stock Plan (as amended June 12, 2001) which was adopted by the shareholders at the annual meeting on October 13, 1992.
	(10-3)	—	The Procter & Gamble 1983 Stock Plan (as amended June 12, 2001) which was adopted by the shareholders at the annual meeting on October 11, 1983.
	(10-4)	—	The Procter & Gamble Executive Group Life Insurance Policy (each executive officer is covered for an amount equal to annual salary plus bonus) (Incorporated by reference to Exhibit (10-3) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).
	(10-5)	—	Additional Remuneration Plan (as amended July 11, 2000) which was adopted by the Board of Directors on April 12, 1949 (Incorporated by reference to Exhibit (10-4) of the Company’s Annual Report on Form 10-K for the year ended June 30, 2000).
	(10-6)	—	The Procter & Gamble Deferred Compensation Plan for Directors which was adopted by the Board of Directors on September 9, 1980 (Incorporated by reference to Exhibit (10-5) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).
	(10-7)	—	The Procter & Gamble Board of Directors Charitable Gifts Program which was adopted by the Board of Directors on November 12, 1991 (Incorporated by reference to Exhibit (10-6) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).

8

(10-8)	—	The Procter & Gamble 1993 Non-Employee Directors’ Stock Plan (as amended December 12, 2000), which was adopted by the shareholders at the annual meeting on October 11, 1994.
(10-9)	—	Richardson-Vicks Inc. Special Stock Equivalent Incentive Plan which was authorized by the Board of Directors of The Procter & Gamble Company and adopted by the Board of Directors of Richardson-Vicks Inc. on December 31, 1985. (Incorporated by reference to Exhibit (10-8) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1999).
(10-10)	—	The Procter & Gamble Executive Group Life Insurance Policy (Additional Policy) (Incorporated by reference to Exhibit (10-9) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).
Exhibit (11)	—	Computation of earnings per share.
Exhibit (12)	—	Computation of ratio of earnings to fixed charges.
Exhibit (13)	—	Annual Report to Shareholders (pages 1-3, 10-35 and inside back cover).
Exhibit (21)	—	Subsidiaries of the registrant.
Exhibit (23)	—	Independent Auditors’ Consent
Exhibit (99-1)	—	Directors and Officers Liability Policy.
(99-2)	—	Directors and Officers (First) Excess Liability Binder of Insurance.
(99-3)	—	Directors and Officers (Second and Fifth) Excess Liability Binder of Insurance.

9

(99-4) —	Directors and Officers (Third) Excess Liability Binder of Insurance.
(99-5) —	Directors and Officers (Fourth) Excess Liability Binder of Insurance.

The exhibits listed are filed with the Securities and Exchange Commission but are not included in this booklet. Copies of these exhibits may be obtained by sending a request to: Linda D. Rohrer, Assistant Secretary, The Procter & Gamble Company, P. O. Box 599, Cincinnati, Ohio 45201.

B. Reports on Form 8-K:

During the quarter ended June 30, 2001, the Company filed Current Reports on Form 8-K containing information pursuant to Item 5 (“Other Events”) dated May 1, 2001, relating to the announcement of earnings for the January-March 2001 quarter; dated May 21, 2001, relating to the announcement that the Company has entered into an agreement to purchase the Clairol business from Bristol-Myers Squibb Company; dated June 8, 2001, relating to the announcement that the Company has reached an agreement in principle to settle the securities class action litigation filed against it in conjunction with the Company’s March 2000 earnings announcement; and dated June 15, 2001, relating to confirmation of previously issued guidance for fiscal year 2001.

10

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 in the city of Cincinnati, State of Ohio.

THE PROCTER & GAMBLE COMPANY
By	A.G. LAFLEY
	(A.G. Lafley)
	President and Chief Executive September 12, 2001

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

Signature	Title		Date
A.G. LAFLEY	President and Chief Executive	)
	(Principal Executive Officer)	)
(A.G. Lafley)		)
		)
JOHN E. PEPPER	Chairman of the Board	)
		)
(John E. Pepper)		)
		)
CLAYTON C. DALEY JR.	Chief Financial Officer & Comptroller	)
	(Principal Financial and Accounting Officer)	)
(Clayton C. Daley Jr.)		)
		)
	Director	)
		)
(Norman R. Augustine)		)	September 12, 2001
		)
DONALD R. BEALL	Director	)
		)
(Donald R. Beall)		)
		)
SCOTT D. COOK	Director	)
		)
(Scott D. Cook)		)
		)
DOMENICO DE SOLE	Director	)
		)
(Domenico De Sole)		)
		)
RICHARD J. FERRIS	Director	)
		)
(Richard J. Ferris)		)

11

Signature	Title		Date
	Director	)
		)
(Joseph T. Gorman)		)
		)
CHARLES R. LEE	Director	)
		)
(Charles R. Lee)		)
		)
LYNN M. MARTIN	Director	)
		)
(Lynn M. Martin)		)
		)
JOHNATHAN A. RODGERS	Director	)
		)
(Johnathan A. Rodgers)		)	September 12, 2001
		)
JOHN F. SMITH, JR.	Director	)
		)
(John F. Smith, Jr.)		)
		)
RALPH SNYDERMAN	Director	)
		)
(Ralph Snyderman)		)
		)
ROBERT D. STOREY	Director	)
		)
(Robert D. Storey)		)
		)
	Director	)
		)
(Marina v.N. Whitman)		)
		)
ERNESTO ZEDILLO	Director	)
		)
(Ernesto Zedillo)		)

12

EXHIBIT INDEX

Exhibit (2-1)	—	Stock and Asset Purchase Agreement for Clairol Incorporated.
Exhibit (3-1)	—	Amended Articles of Incorporation (Incorporated by reference to Exhibit (3-1) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).
(3-2)	—	Regulations (Incorporated by reference to Exhibit (3-2) of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998).
Exhibit (4)	—	Registrant agrees to file a copy of documents defining the rights of holders of long-term debt upon request of the Commission.
Exhibit (10-1)	—	The Procter & Gamble 2001 Stock and Incentive Compensation Plan (adopted by the Board of Directors on July 10, 2001, subject to approval by the Company’s shareholders at the Company’s annual meeting of shareholders to be held on October 9, 2001).
(10-2)	—	The Procter & Gamble 1992 Stock Plan (as amended June 12, 2001) which was adopted by the shareholders at the annual meeting on October 13, 1992.
(10-3)	—	The Procter & Gamble 1983 Stock Plan (as amended June 12, 2001) which was adopted by the shareholders at the annual meeting on October 11, 1983.
(10-4)	—	The Procter & Gamble Executive Group Life Insurance Policy (each executive officer is covered for an amount equal to annual salary plus bonus) (Incorporated by reference to Exhibit (10-3) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).
(10-5)	—	Additional Remuneration Plan (as amended July 11, 2000) which was adopted by the Board of Directors on April 12, 1949 (Incorporated by reference to Exhibit (10-4) of the Company’s Annual Report on Form 10-K for the year ended June 30, 2000).
(10-6)	—	The Procter & Gamble Deferred Compensation Plan for Directors which was adopted by the Board of Directors on September 9, 1980 (Incorporated by reference to Exhibit (10-5) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).
(10-7)	—	The Procter & Gamble Board of Directors Charitable Gifts Program which was adopted by the Board of Directors on November 12, 1991 (Incorporated by reference to Exhibit (10-6) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).
(10-8)	—	The Procter & Gamble 1993 Non-Employee Directors’ Stock Plan (as amended December 12, 2000), which was adopted by the shareholders at the annual meeting on October 11, 1994.

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(10-9)	—	Richardson-Vicks Inc. Special Stock Equivalent Incentive Plan which was authorized by the Board of Directors of The Procter & Gamble Company and adopted by the Board of Directors of Richardson-Vicks Inc. on December 31, 1985. (Incorporated by reference to Exhibit (10-8) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1999).
(10-10)	—	The Procter & Gamble Executive Group Life Insurance Policy (Additional Policy) (Incorporated by reference to Exhibit (10-9) of the Company’s Annual Report on Form 10-K for the year ended June 30, 1998).
Exhibit (11)	—	Computation of earnings per share.
Exhibit (12)	—	Computation of ratio of earnings to fixed charges.
Exhibit (13)	—	Annual Report to Shareholders (pages 1-3, 10-35 and inside back cover).
Exhibit (21)	—	Subsidiaries of the registrant.
Exhibit (23)	—	Independent Auditors’ Consent
Exhibit (99-1)	—	Directors and Officers Liability Policy.
(99-2)	—	Directors and Officers (First) Excess Liability Binder of Insurance.
(99-3)	—	Directors and Officers (Second and Fifth) Excess Liability Binder of Insurance.
(99-4)	—	Directors and Officers (Third) Excess Liability Binder of Insurance.
(99-5)	—	Directors and Officers (Fourth) Excess Liability Binder of Insurance.

14 EX-2.1 3 l90238aex2-1.txt EXHIBIT 2.1 1 EXHIBIT (2-1) Stock and Asset Purchase Agreement for Clairol Incorporated The exhibits referenced at the end of the Table of Contents will be furnished to the Commission upon request. 2 CONFORMED COPY STOCK AND ASSET PURCHASE AGREEMENT between BRISTOL-MYERS SQUIBB COMPANY and THE PROCTER & GAMBLE COMPANY Dated as of May 20, 2001 SALE OF CLAIROL INCORPORATED and RELATED STOCK AND ASSETS 3 TABLE OF CONTENTS Page ---- ARTICLE I Purchase and Sale of the Clairol Shares, the International Shares and the Acquired Assets SECTION 1.01. Purchase and Sale of the Clairol Shares, the International Shares and the Acquired Assets .............................................2 SECTION 1.02. Assumption of the Assumed Liabilities .......................4 SECTION 1.03. Consents of Third Parties ...................................4 ARTICLE II Closing; Purchase Price Adjustment SECTION 2.01. Closing .....................................................5 SECTION 2.02. Purchase Price Adjustment ...................................7 ARTICLE III Conditions to Closing SECTION 3.01. Buyer's Obligation ..........................................12 SECTION 3.02. Seller's Obligation .........................................14 SECTION 3.03. Frustration of Closing Conditions ...........................16 ARTICLE IV Representations and Warranties of Seller SECTION 4.01. Authority ...................................................16 SECTION 4.02. No Conflicts; Consents ......................................17 SECTION 4.03. The Clairol Shares and the International Shares ......................................................18 SECTION 4.04. Organization and Standing; Books and Records ................19 SECTION 4.05. Capital Stock of the Company ................................19 SECTION 4.06. Clairol Subsidiaries; Equity Interests ......................20 SECTION 4.07. Financial Statements ........................................21 SECTION 4.08. Taxes .......................................................22 4 SECTION 4.09. Assets Other than Real Property Interests ...................24 SECTION 4.10. Title to Real Property ......................................24 SECTION 4.11. Intellectual Property .......................................25 SECTION 4.12. Contracts ...................................................27 SECTION 4.13. Litigation ..................................................33 SECTION 4.14. Benefit Plans ...............................................34 SECTION 4.15. Absence of Changes or Events ................................37 SECTION 4.16. Compliance with Applicable Laws .............................37 SECTION 4.17. Employee and Labor Matters ..................................39 SECTION 4.18. Limitations on Representations and Warranties ..................................................40 ARTICLE V Covenants of Seller SECTION 5.01. Access ......................................................41 SECTION 5.02. Ordinary Conduct ............................................41 SECTION 5.03. Insurance ...................................................44 SECTION 5.04. No Use of Clairol Names .....................................44 SECTION 5.05. Intercompany Accounts .......................................45 ARTICLE VI Representations and Warranties of Buyer SECTION 6.01. Authority ...................................................45 SECTION 6.02. No Conflicts; Consents ......................................45 SECTION 6.03. Securities Act ..............................................46 SECTION 6.04. Actions and Proceedings, etc. ...............................47 SECTION 6.05. Availability of Funds .......................................47 ARTICLE VII Covenants of Buyer SECTION 7.01. Confidentiality .............................................47 SECTION 7.02. No Additional Representations ...............................48 SECTION 7.03. No Use of Certain Names .....................................48 SECTION 7.04. Buyer Activity on Closing Date ..............................49 SECTION 7.05. Securities Act ..............................................49 SECTION 7.06. Guarantees ..................................................49 5 ARTICLE VIII Mutual Covenants SECTION 8.01. Consents ....................................................50 SECTION 8.02. Cooperation .................................................50 SECTION 8.03. Publicity ...................................................51 SECTION 8.04. Best Efforts ................................................51 SECTION 8.05. Antitrust Notification and Other Regulatory Filings .....................................................52 SECTION 8.06. Records .....................................................53 SECTION 8.07. Support Services ............................................54 SECTION 8.08. Collection of Receivables; Forwarding of Payments ....................................................54 SECTION 8.09 Advisory Committees .........................................54 SECTION 8.10. Transitional Relabeling Services ............................55 ARTICLE IX Employee and Related Matters SECTION 9.01. Employee Matters ............................................55 SECTION 9.02. Bargaining Unit Employees ...................................56 SECTION 9.03. Continuity of Employment ....................................57 SECTION 9.04. Pension Plan ................................................58 SECTION 9.05. Savings and Investment Plan .................................59 SECTION 9.06. Non-Qualified Plans .........................................59 SECTION 9.07. Welfare Benefit Plans .......................................60 SECTION 9.08. Severance ...................................................62 SECTION 9.09. Vacation Benefits ...........................................62 SECTION 9.10. Relocation Benefits .........................................62 SECTION 9.11. Expatriates .................................................63 SECTION 9.12. Other Agreements and Benefits ...............................63 SECTION 9.13. Annual Bonuses ..............................................63 SECTION 9.14. Retention Bonus Arrangements ................................63 SECTION 9.15. International Pension and Savings Plans .....................64 ARTICLE X Further Assurances SECTION 10.01. Further Assurances .........................................64 6 ARTICLE XI Indemnification SECTION 11.01. Tax Indemnification ......................................64 SECTION 11.02. Other Indemnification by Seller ..........................66 SECTION 11.03. Other Indemnification by Buyer ...........................67 SECTION 11.04. Limitations on Liability; Cooperation ....................67 SECTION 11.05. Losses Net of Insurance, etc. ............................68 SECTION 11.06. Termination of Indemnification ...........................69 SECTION 11.07. Procedures Relating to Indemnification for Third Party Claims .......................................69 SECTION 11.08. Procedures Related to Indemnification for Other Claims (Other than Tax Claims under Section 11.01) ...........................................71 SECTION 11.09. Procedures Relating to Indemnification of Tax Claims ............................................71 ARTICLE XII Tax Matters SECTION 12.01. Responsibility for Preparation and Filing of Tax Returns and Amendment .............................72 SECTION 12.02. Cooperation ..............................................73 SECTION 12.03. Refunds and Credits ......................................74 SECTION 12.04. Section 338(h)(10) .......................................75 SECTION 12.05. Purchase Price Allocations ...............................76 SECTION 12.06. Transfer Taxes ...........................................76 SECTION 12.07. FIRPTA Certificate .......................................77 SECTION 12.08. Buyer Activity Post-Closing ..............................77 ARTICLE XIII Termination SECTION 13.01. Termination ..............................................77 SECTION 13.02. Return of Confidential Information .......................78 SECTION 13.03. Consequences of Termination ..............................78 SECTION 13.04. Payment ..................................................79 7 ARTICLE XIV Survival of Representations SECTION 14.01. Survival of Representations ..............................79 ARTICLE XV Miscellaneous SECTION 15.01. Assignment ...............................................79 SECTION 15.02. No Third-Party Beneficiaries .............................80 SECTION 15.03. Expenses .................................................80 SECTION 15.04. Attorney Fees ............................................80 SECTION 15.05. Amendments ...............................................80 SECTION 15.06. Notices ..................................................80 SECTION 15.07. Interpretation; Exhibits and the Seller Disclosure Schedule; Definitions .........................81 SECTION 15.08. Counterparts .............................................89 SECTION 15.09. Entire Agreement .........................................89 SECTION 15.10. Broker and Finder Fees ...................................89 SECTION 15.11. Severability .............................................90 SECTION 15.12. Bulk Transfer Laws .......................................90 SECTION 15.13. Consent to Jurisdiction ..................................90 SECTION 15.14. Waiver of Jury Trial .....................................91 SECTION 15.15. GOVERNING LAW ............................................91 EXHIBIT A International Stock Selling Entities and International Subsidiaries EXHIBIT B-1 U.S. Asset Selling Entities EXHIBIT B-2 International Asset Selling Entities EXHIBIT C Form of International Stock Purchase Agreement EXHIBIT D Form of International Asset Purchase Agreement EXHIBIT E Allocations EXHIBIT F-1 CMO Acquired Assets EXHIBIT F-2 CMO Excluded Assets 8 EXHIBIT G-1 CMO Assumed Liabilities EXHIBIT G-2 CMO Excluded Liabilities EXHIBIT H-1 International Acquired Assets EXHIBIT H-2 International Excluded Assets EXHIBIT I-1 International Assumed Liabilities EXHIBIT I-2 International Excluded Liabilities EXHIBIT J-1 Other U.S. Acquired Assets EXHIBIT J-2 Other U.S. Excluded Assets EXHIBIT K-1 Other U.S. Assumed Liabilities EXHIBIT K-2 Other U.S. Excluded Liabilities EXHIBIT L-1 CMO Transitional Services Agreement EXHIBIT L-2 GBS Transitional Service Agreement EXHIBIT L-3 International Transitional Services Agreement EXHIBIT L-4 Information Management Agreement EXHIBIT M Employee Benefits EXHIBIT N Clairol Enhanced Severance/Retention Program APPENDIX A International Pension and Savings Plans 9 CONFORMED COPY STOCK AND ASSET PURCHASE AGREEMENT dated as of May 20, 2001 (this "AGREEMENT"), between BRISTOL-MYERS SQUIBB COMPANY, a Delaware corporation ("SELLER"), and THE PROCTER & GAMBLE COMPANY, an Ohio corporation ("BUYER"). Buyer desires to purchase from Seller, and Seller desires to sell to Buyer, all the issued and outstanding shares of Common Stock, par value $10 per share (the "CLAIROL SHARES"), of Clairol Incorporated, a Delaware corporation and wholly owned subsidiary of Seller (the "COMPANY") Buyer also desires to purchase from the subsidiaries of Seller set forth under the relevant caption in Exhibit A (each, an "INTERNATIONAL STOCK SELLING ENTITY"), and Seller desires to cause the International Stock Selling Entities to sell to Buyer and its designated Buyer Subsidiaries, all the issued and outstanding capital stock owned by Seller and its subsidiaries (the "INTERNATIONAL SHARES") of each of the subsidiaries of Seller set forth under the relevant caption in Exhibit A attached hereto (each, an "INTERNATIONAL CLAIROL SUBSIDIARY"). Seller's customer management organization in the United States (the "CMO") distributes and sells products of the Company, together with products of other businesses of Seller and its Affiliates. Buyer and Seller desire that Buyer acquire all Seller's CMO business and operations and that, following such acquisition, Buyer provide certain transitional distribution and sales services to Seller and its Affiliates as contemplated by the CMO Transitional Services Agreement. Accordingly, Buyer desires to acquire from Seller, and Seller desires to sell to Buyer, the CMO Acquired Assets. Buyer desires to assume, and Seller desires to assign, the CMO Assumed Liabilities. Seller and certain of its subsidiaries set forth in Exhibit B-1 (each, a "U.S. ASSET SELLING ENTITY") hold certain assets of, and provide certain services to, the Acquired Business. Buyer and Seller desire that Buyer acquire such assets and certain other assets related to the provision of such services and assume certain liabilities related thereto. Accordingly, Buyer desires to acquire from Seller and the U.S. Asset Selling Entities, and Seller and the U.S. Asset Selling 10 2 Entities desire to sell to Buyer, the Other U.S. Acquired Assets. Buyer desires to assume, and Seller and the U.S. Asset Selling Entities desire to assign, the Other U.S. Assumed Liabilities. Seller and certain of its subsidiaries set forth in Exhibit B-2 (each, an "INTERNATIONAL ASSET SELLING ENTITY") manufacture, market, distribute or sell the products of the Acquired Business (other than the CMO) or otherwise have assets or liabilities of the Acquired Business (other than the CMO) in each of the corresponding countries set forth in Exhibit B-2. Buyer desires to acquire, or to cause its designated Buyer Subsidiaries to acquire, from Seller and the Asset Selling Entities, and Seller desires to transfer, and to cause the Asset Selling Entities to transfer, to Buyer and its designated Buyer Subsidiaries, the International Acquired Assets. Buyer desires to assume, and Seller desires to assign, the International Assumed Liabilities. Buyer desires to hire certain employees associated with the Acquired Business, as set forth in this Agreement and the Other Transaction Documents. Section 15.07(c) identifies the Sections of this Agreement in which capitalized terms used in this Agreement are defined. Accordingly, Seller and Buyer hereby agree as follows: ARTICLE I PURCHASE AND SALE OF THE CLAIROL SHARES, THE INTERNATIONAL SHARES AND THE ACQUIRED ASSETS SECTION 1.01. PURCHASE AND SALE OF THE CLAIROL SHARES, THE INTERNATIONAL SHARES AND THE ACQUIRED ASSETS. (a) On the terms and subject to the conditions set forth in this Agreement, (i) Seller will sell, transfer and deliver to Buyer, and Buyer will purchase from Seller, the Clairol Shares, (ii) Seller will cause the International Stock Selling Entities to sell, transfer and deliver to Buyer or its designated Buyer Subsidiaries, and Buyer will purchase or cause such Buyer Subsidiaries to purchase from the International Stock Selling Entities, the International Shares, (iii) Seller will, and will cause the U.S. Asset 11 3 Selling Entities to, sell, convey, transfer, assign and deliver to Buyer or its designated Buyer Subsidiaries, and Buyer will purchase or cause such Buyer Subsidiaries to purchase from Seller and the U.S. Asset Selling Entities, the U.S. Acquired Assets and (iv) Seller will, and will cause the International Asset Selling Entities to, sell, convey, transfer, assign and deliver to Buyer or its designated Buyer Subsidiaries, and Buyer will purchase or cause such Buyer Subsidiaries, to purchase from the International Asset Selling Entities, the International Acquired Assets, for (A) an aggregate purchase price equal to $4.95 billion (the "PURCHASE PRICE") together with, if the Closing shall occur after the Six Month Anniversary, interest on the Purchase Price accrued from the Six Month Anniversary to the Closing Date at the Prime Rate, payable and subject to adjustment as set forth in Article II, and (B) the assumption of the Assumed Liabilities. The purchase and sale of the Clairol Shares, the International Shares, the U.S. Acquired Assets and the International Acquired Assets and the assumption of the Assumed Liabilities is referred to in this Agreement, collectively, as the "TRANSACTION". (b) The purchase and sale of the International Shares with respect to each International Clairol Subsidiary will be effected pursuant to short-form stock purchase agreements (each, an "INTERNATIONAL STOCK PURCHASE AGREEMENT") in substantially the same form as the form of International Stock Purchase Agreement attached as Exhibit C to this Agreement, except (as Buyer and Seller shall reasonably agree) for (i) the deletion of provisions which are inapplicable to such International Clairol Subsidiary, (ii) such changes as may be necessary to satisfy the requirements of applicable local law, (iii) such changes as may be reasonably agreed upon by Seller and Buyer regarding employees and employee benefits matters in order to adapt such agreement to the particular circumstances of the relevant International Clairol Subsidiary and country or countries in which it operates, provided that such changes shall be consistent with the principles underlying the corresponding provisions of this Agreement and (iv) such other changes as may be agreed by Seller and Buyer. (c) The transfer of each International Business Unit (including the International Acquired Assets and International Assumed Liabilities) will be effected pursuant to short-form asset purchase agreements (the "INTERNATIONAL ASSET PURCHASE AGREEMENTS") on a country-by-country basis. Each International Asset Purchase Agreement shall be in 12 4 substantially the same form as the form of International Asset Purchase Agreement attached as Exhibit D, except (as Buyer and Seller shall reasonably agree) for (i) the deletion of provisions which are inapplicable to such International Business Unit, (ii) such changes as may be necessary to satisfy the requirements of applicable local law, (iii) such changes as may be reasonably agreed upon by Seller and Buyer regarding employees and employee benefits matters in order to adapt such agreement to the particular circumstances of the relevant International Business Unit and country, provided that such changes shall be consistent with the terms and conditions of, and principles underlying, the corresponding provisions of this Agreement, and (iv) such other changes as may be agreed by Seller and Buyer. (d) Buyer and Seller agree to allocate a portion of the Purchase Price (as adjusted pursuant to Section 2.02) to the International Shares and the Acquired Assets in accordance with Exhibit E, and the remainder of the Purchase Price (as adjusted pursuant to Section 2.02) to the Clairol Shares, in each case in accordance with Section 12.05. Buyer and Seller shall further agree on the allocation of the Purchase Price (as adjusted pursuant to Section 2.02) with respect to the Acquired Assets on a country-by-country or asset-by-asset basis. A proposed Exhibit E shall be prepared by Seller and delivered to Buyer not later than 30 days prior to Closing and Buyer and Seller shall reach agreement on a final Exhibit E no later than 120 days after the Closing Date. If Buyer and Seller are unable to reach agreement on a final Exhibit E by the end of such 120-day period, either party may refer any items of disagreement to the Accounting Firm for resolution within 45 days of the receipt of such submission using procedures comparable to those provided in Section 2.02(a)(iii). SECTION 1.02. ASSUMPTION OF THE ASSUMED LIABILITIES. On the terms and subject to the conditions of this Agreement, Buyer shall, on the Closing Date, assume and shall pay, honor, perform and discharge (or cause to be assumed, paid, honored, performed and discharged) when due all the U.S. Assumed Liabilities and the International Assumed Liabilities (collectively, the "ASSUMED LIABILITIES"). SECTION 1.03. CONSENTS OF THIRD PARTIES. (a) Notwithstanding anything in this Agreement to the contrary, this Agreement shall not constitute an agreement to assign any asset or any claim or right or any benefit arising under or resulting from such asset if an attempted assignment thereof, 13 5 without the consent of a third party, would constitute a breach or other contravention of the rights of such third party, would be ineffective with respect to any party to an agreement concerning such asset, or would in any way adversely affect the rights of Seller or the Seller Entities or, upon transfer, Buyer or its designated Buyer Subsidiary under such asset. If any transfer or assignment by Seller or any Seller Entity to, or any assumption by Buyer or its designated Buyer Subsidiary of, any interest in, or liability, obligation or commitment under, any asset requires the consent of a third party, then such assignment or assumption shall be made subject to such consent being obtained. (b) If any such consent is not obtained prior to the Closing, Seller and the Seller Entities, on the one hand, and Buyer and the Buyer Subsidiaries, on the other hand, shall cooperate (at their own expense) in any lawful and commercially reasonable arrangement reasonably proposed by Buyer under which (i) Buyer or its designated Buyer Subsidiary shall obtain (without infringing upon the legal rights of such third party or outside party or violating any Applicable Law) the economic claims, rights and benefits (net of the amount of any related Tax costs imposed on Seller and its Affiliates) under the asset, claim or right with respect to which the consent has not been obtained in accordance with this Agreement, and (ii) Buyer shall assume any related economic burden (including the amount of any related Tax costs imposed on Seller and its Affiliates) with respect to the asset, claim or right with respect to which the consent has not been obtained (including any related Assumed Liability). ARTICLE II CLOSING; PURCHASE PRICE ADJUSTMENT SECTION 2.01. CLOSING. (a) Each of the Buyer and Seller are obligated to consummate the closing (the "CLOSING") of the Transaction on the earlier of (i) the second business day after the first date on which all the conditions to the Closing set forth in Article III shall have been satisfied and (ii) the Twelve Month Anniversary; PROVIDED, HOWEVER, that if on the Twelve Month Anniversary, (x) any of the conditions set forth in Section 3.01 (other than the conditions set forth in Sections 3.01(b) and (c)) shall not have been satisfied (or waived in writing by Buyer), (y) any of the conditions set forth in Section 3.02 shall not have been satisfied (or waived 14 6 in writing by Seller) or (z) any statute, rule, regulation, executive order, decree, temporary restraining order, preliminary or permanent injunction or other similar legal restraint or prohibition or other order enacted, entered, promulgated, enforced or issued by any U.S. Governmental Entity shall be in effect that prevents the purchase and sale of the Clairol Shares, then the Closing shall occur no later than the second business day after the satisfaction of such conditions or the termination of such restraint or prohibition, as applicable. The Closing shall be held on the Closing Date at 10:00 a.m. at the offices of Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New York, New York. The date on which the Closing shall occur is hereinafter referred to as the "Closing Date." (b) At the Closing, Buyer shall deliver to Seller, by wire transfer to a bank account designated in writing by Seller at least two business days prior to the Closing Date, immediately available funds in an amount equal to the sum of (i) the Purchase Price plus or minus (ii) an estimate, prepared by Seller and delivered to Buyer at least two business days prior to the Closing Date, of any adjustment to the Purchase Price under Section 2.02(b) plus (iii) any interest payable to Seller pursuant to Section 1.01(a). The Purchase Price plus or minus such estimate of any such adjustment under Section 2.02(b) is hereinafter called the "CLOSING DATE AMOUNT". (c) Seller shall deliver or cause to be delivered to Buyer certificates representing the Clairol Shares, duly endorsed in blank or accompanied by stock powers duly endorsed in blank in proper form for transfer, with appropriate transfer stamps, if any, affixed. (d) Seller (acting as agent for the International Stock Selling Entities) shall deliver or cause to be delivered to Buyer or its designated Buyer Subsidiary with respect to each International Clairol Subsidiary (i) certificates representing the International Shares for such International Clairol Subsidiary, duly endorsed in blank or accompanied by stock powers duly endorsed in blank in proper form for transfer, with appropriate transfer stamps, if any, affixed, or other appropriate instruments sufficient to evidence the transfer of the International Shares under the Applicable Laws of the relevant jurisdiction, and (ii) an appropriately executed International Stock Purchase Agreement for each such International Clairol Subsidiary. Buyer shall deliver, or cause its designated Buyer Subsidiary to deliver, to Seller 15 7 (acting as agent for the International Stock Selling Entities) an appropriately executed International Stock Purchase Agreement for each International Clairol Subsidiary. (e)(i) Seller (acting for itself and as agent for the Asset Selling Entities) shall deliver or cause to be delivered to Buyer or its designated Buyer Subsidiary such appropriately executed instruments of sale, assignment, transfer and conveyance (including its counterpart signature page to each applicable International Asset Purchase Agreement) in form and substance reasonably satisfactory to Buyer and Seller and their respective counsel evidencing and effecting the sale, assignment, and transfer to Buyer or designated Buyer Subsidiaries of the U.S. Acquired Assets and the International Acquired Assets (collectively, the "ACQUIRED ASSETS") (it being understood that such instruments shall not require the Seller or, as the case may be, the Asset Selling Entities to make any additional representations, warranties or covenants, expressed or implied, not contained in this Agreement) and (ii) Buyer shall deliver or cause to be delivered by its applicable Buyer Subsidiaries to Seller appropriately executed counterparts to such instruments of sale, assignment, transfer and conveyance (including its counterpart signature page to each applicable International Asset Purchase Agreement), and appropriately executed instruments of assumption (it being understood that such instruments described above shall not require Buyer or, as the case may be, Buyer Subsidiaries, to make any additional representations, warranties or covenants, expressed or implied, or assume any additional liabilities, expressed or implied, not contained in this Agreement) by Buyer or its applicable Buyer Subsidiaries of the Assumed Liabilities, in form and substance reasonably satisfactory to Buyer, Seller and their respective counsel. The documents and instruments referred to in Section 2.01(c), (d) and (e), together with the International Stock Purchase Agreements and the International Asset Purchase Agreements, are collectively referred to herein as the "TRANSFER DOCUMENTS". SECTION 2.02. PURCHASE PRICE ADJUSTMENT. (a) (i) Within 90 days after the Closing Date, Buyer shall prepare and deliver to Seller a statement (the "WORKING CAPITAL STATEMENT"), setting forth Working Capital as of the close of business on the Closing Date ("CLOSING WORKING CAPITAL"). The Working Capital Statement is hereinafter sometimes referred to as the "STATEMENT". The Statement shall be accompanied by a certificate of Buyer stating that the Statement has been 16 8 prepared in compliance with the applicable requirements of this Section 2.02. (ii) The Statement shall become final and binding on the parties on the sixtieth day following receipt thereof by the Seller, unless Seller gives written notice of its disagreement with the Statement (a "NOTICE OF DISAGREEMENT") to Buyer prior to such date. Any Notice of Disagreement shall (A) specify in reasonable detail the nature of any disagreement so asserted and (B) only include disagreements based on mathematical errors or based on Closing Working Capital not being calculated in accordance with this Section 2.02. If a Notice of Disagreement is received by Buyer in a timely manner, then the Statement (as revised in accordance with clause (1) or (2) below) shall become final and binding upon Seller and Buyer, on the earlier of (1) the date Seller and Buyer resolve in writing any differences they have with respect to the matters specified in such Notice of Disagreement and (2) the date all disputed matters specified in such Notice of Disagreement are finally resolved in writing by the Accounting Firm. (iii) During the 60-day period following the delivery of a Notice of Disagreement, Seller and Buyer shall seek in good faith to resolve in writing any differences which they may have with respect to the matters specified in such Notice of Disagreement. At the end of such 60-day period, Seller and Buyer shall submit to an internationally recognized independent accounting firm mutually agreed upon by Seller and Buyer (the "ACCOUNTING FIRM") for review and resolution of any and all matters which remain in dispute and which were properly included in such Notice of Disagreement. The scope of the Accounting Firm's review shall be limited to only those matters which remain in dispute and which were properly included in such Notice of Disagreement. Seller and Buyer shall use reasonable efforts to cause the Accounting Firm to render a decision resolving the matters submitted to the Accounting Firm within 45 days of the receipt of such submission. Seller and Buyer agree that judgment may be entered upon the determination of the Accounting Firm in any court having jurisdiction over the party against which such determination is to be enforced. The Accounting Firm's determination shall be accompanied by a certificate of the Accounting Firm that it reached its decision in accordance with the provisions of this Section 2.02(a). The cost of any arbitration (including the fees and expenses of the Accounting Firm) with respect to any Notice of Disagreement pursuant to 17 9 this Section 2.02(a) shall be borne by Buyer and Seller in inverse proportion as they may prevail on matters resolved by the Accounting Firm with respect to such Notice of Disagreement, which proportionate allocation also shall be determined by the Accounting Firm at the time the determination of the Accounting Firm is rendered on the merits of the matter submitted. (b) (i) The Purchase Price shall be increased by the amount by which Closing Working Capital exceeds $164,900,000 (the "W.C. AMOUNT"), and the Purchase Price shall be decreased by the amount by which Closing Working Capital is less than the W.C. Amount (the Purchase Price as so increased or decreased shall hereinafter be referred to as the "ADJUSTED CLOSING DATE AMOUNT"). If the Closing Date Amount is less than the Adjusted Closing Date Amount, Buyer shall, and if the Closing Date Amount is greater than the Adjusted Closing Date Amount, Seller shall, within 10 business days after the Working Capital Statement becomes final and binding on the parties, make payment by wire transfer in immediately available funds of the amount of such difference, together with interest thereon accrued from the Closing Date to the date of payment at the Prime Rate. Notwithstanding the foregoing provisions of this Section 2.02(b), no adjustment to the Purchase Price pursuant to this Section 2.02(b) shall be made unless such adjustment (whether an increase or a decrease) would exceed $12,500,000, and if the adjustment would exceed such amount, then the full amount of the adjustment shall be made. (ii) The term "WORKING CAPITAL" shall mean Current Assets minus Current Liabilities. The W.C. Amount equals Working Capital on December 31, 2000, as reflected in the Clairol Balance Sheet, the Boclaro Working Capital Statement and the CMO Working Capital Statement, and shall not be subject to change regardless of whether the items included therein were in accordance with generally accepted accounting principles or the Seller Accounting Policies. The term "CURRENT ASSETS" shall mean the combined net account receivables, net inventory and prepaid and other current assets of the Acquired Business, all calculated (A) in accordance with the Bristol-Myers Squibb Company Accounting Policies and Procedures previously delivered to Buyer and in effect as of December 31, 2000, (B) to give effect to the requirements of Emerging Issues Task Force Issue No. 00-14 "ACCOUNTING FOR CERTAIN SALES INCENTIVES" and (C) otherwise in conformity with the basis of presentation described in the 18 10 notes to the Financial Statements (clauses (A), (B) and (C), collectively, the "SELLER ACCOUNTING POLICIES"). The term "CURRENT LIABILITIES" shall mean the sum of (x) combined accounts payable and accrued liabilities of the Acquired Business (other than the CMO) and (y)(1) the sum of 50% of combined accounts payable and accrued liabilities of the CMO other than brokers' commissions and (2) all brokers' commissions related to Clairol included in combined accounts payable of the CMO, all calculated in accordance with the Seller Accounting Policies. For the avoidance of doubt, current assets and current liabilities relating to cash and cash equivalents, Taxes, deferred Tax assets and deferred Tax liabilities, intercompany transactions, any other Excluded Assets and any other Excluded Liabilities are not included in the Clairol Balance Sheet, the Boclaro Working Capital Statement or the CMO Working Capital Statement shall not be taken into account in determining Working Capital. Items for which Buyer and its Affiliates (including the Clairol Entities and any Buyer Subsidiaries that acquire Acquired Assets or assume Assumed Liabilities) are indemnified by Seller pursuant to Article XI shall not be taken into account in determining Working Capital. The parties agree that the adjustment contemplated by Section 2.02(b) is intended to show the change in Working Capital from December 31, 2000, to the Closing Date and that such change can only be measured if the calculation is done in the same way, using the Seller Accounting Policies at both dates. (c) The scope of the disputes to be resolved by the Accounting Firm is limited to whether such calculations were done in accordance with Section 2.02(b), including whether the calculations were in compliance with Seller Accounting Policies and whether there were mathematical errors in the Statement, and the Accounting Firm is not to make any other determination, including any determination as to whether the Seller Accounting Policies are in accordance with GAAP or whether GAAP was followed for the Statement or as to whether the W.C. Amount is correct. Any items on or omissions from the Clairol Balance Sheet, the Boclaro Working Capital Statement or the CMO Working Capital Statement that are based upon errors of fact or mathematical errors or that are not in accordance with the Seller Accounting Policies shall be carried forward for purposes of calculating Closing Working Capital, as applicable. (d) Until the later to occur of (i) the date on which the Statement shall become final and binding on the 19 11 parties pursuant to Section 2.02(a)(ii) and (ii) the date on which the Assumed Liabilities Statement (as defined in the CMO Transitional Services Agreement) shall become final and binding on the parties pursuant to Section 5.03 of the CMO Transitional Services Agreement, Buyer agrees that following the Closing it shall not take any actions with respect to the accounting books and records of Clairol on which the Statement is to be based that are not consistent with the Acquired Business' past practices except to the extent that such changes are, in the written opinion of outside counsel, necessary to comply with Applicable Law. Without limiting the generality of the foregoing, no changes shall be made during such period in any reserve or other account existing as of December 31, 2000, except as a result of events occurring after December 31, 2000 and, in such event, only in a manner consistent with past practices. (e) Until the later to occur of (i) the date on which the Statement shall become final and binding on the parties pursuant to Section 2.02(a)(ii) and (ii) the date on which the Assumed Liabilities Statement (as defined in the CMO Transitional Services Agreement) shall become final and binding on the parties pursuant to Section 5.03 of the CMO Transitional Services Agreement, Buyer agrees that following the Closing it shall, and shall cause the Acquired Business (including the Clairol Entities and any Buyer Subsidiaries that acquire Acquired Assets or assume Assumed Liabilities) to, afford to Seller and any accountants, counsel or financial advisors retained by Seller in connection with any adjustment to the Purchase Price contemplated by this Section 2.02 and the calculation of each of the BMS Division's Allocable Portion of the CMO Accounts Payable and Accrued Liabilities reasonable access upon reasonable notice during normal business hours to the properties, books, contracts, personnel and records of the Acquired Business (including the Clairol Entities and any Buyer Subsidiaries that acquire Acquired Assets or assume Assumed Liabilities) and Buyer's and its accountant's work papers relating to the Statement and the Assumed Liabilities Statement relevant to the adjustment contemplated by this Section 2.02 and the calculation of each of the BMS Division's Allocable Portion of the CMO Accounts Payable and Accrued Liabilities and shall provide Seller upon Seller's reasonable request and at Seller's expense, with copies of any such books, contracts and records, including Buyer's and its accountants, work papers relating to the Statement. 20 12 ARTICLE III CONDITIONS TO CLOSING SECTION 3.01. BUYER'S OBLIGATION. The obligation of Buyer to purchase and pay for the Clairol Shares, the International Shares and the Acquired Assets and to assume the Assumed Liabilities is subject to the satisfaction (or written waiver by Buyer) as of the Closing of the following conditions: (a) (i) The representations and warranties of Seller made in this Agreement shall be true and correct in all material respects on and as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects, on and as of such earlier date) and (ii) the representations and warranties of Seller made in Sections 4.01, 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.10, 4.11 and 4.14 shall be true and correct in all material respects as of the date hereof and as of the time of the Closing as though made as of such time, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects, on and as of such earlier date), in each case in clauses (i) and (ii) except for breaches as to matters that, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. Seller shall have performed or complied in all material respects with all obligations and covenants required by this Agreement to be performed or complied with by Seller by the time of the Closing; PROVIDED, HOWEVER, that for purposes of this condition each of the covenants in Section 5.02 with respect to the conduct by Seller of the Acquired Business from the date hereof to the Closing that are qualified by references to the phrase "consistent with past practice" shall be read as if such phrase were deleted from such covenants. Seller shall have delivered to Buyer a certificate dated the Closing Date and signed by an authorized officer of Seller confirming the foregoing. (b) No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary or permanent injunction or other order enacted, entered, 21 13 promulgated, enforced or issued by any Federal, state, local or foreign government or any court of competent jurisdiction, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a "GOVERNMENTAL ENTITY"), or other legal restraint or prohibition shall be in effect preventing (i) the purchase and sale of the Clairol Shares or (ii) prior to the Twelve Month Anniversary, the purchase or sale of any portion of the International Shares or any portion of the Acquired Assets or the assumption of any portion of the Assumed Liabilities, to the extent the exclusion of such portion of the International Shares, Acquired Assets or Assumed Liabilities would be reasonably likely to have a Material Adverse Effect. (c) (i) The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR ACT"), the Mexican Federal Economic Competition Law (the "MEXICAN MERGER REGULATION") and Section 123 of the Competition Act (Canada) (the "CANADA COMPETITION ACT"), if applicable to the Transaction, shall have expired or been terminated and in Canada, Buyer shall have been advised in writing, in a form and upon terms reasonably satisfactory to Buyer, that the Commissioner of Competition does not oppose the Transaction and will not make an application under Section 92 or any other section of the Competition Act in relation to the Transaction. Any consents, authorizations, orders, approvals, declarations and filings under the HSR Act, the Mexican Merger Regulation, the Canada Competition Act or any other applicable antitrust law, the absence of which would prohibit the consummation of (i) the purchase and sale of the Clairol Shares or (ii) the purchase and sale of any portion of the International Shares or any portion of the Acquired Assets, or the assumption of any portion of the Assumed Liabilities, to the extent the exclusion of such portion of the International Shares, Acquired Assets or Assumed Liabilities would be reasonably likely to have a Material Adverse Effect, shall have been made or obtained. (ii) The Office of Fair Trading shall have indicated, in terms and a form reasonably satisfactory to Buyer, that it is not the intention of the Secretary of the State for Trade and Industry to refer the proposed acquisition of the Clairol Shares, the International Shares and the Acquired Assets and the assumption of the 22 14 Assumed Liabilities, or any matter arising therefrom, to the Competition Commission; and/or if the Secretary of the State for Trade and Industry makes a reference to the Competition Commission, either: (A) the Competition Commission has concluded, in terms and a form reasonably satisfactory to Buyer, that neither the acquisition of the Clairol Shares, the International Shares and the Acquired Assets and the assumption of the Assumed Liabilities, nor any matter arising therefrom, may be expected to operate against the public interest; and/or (B) the Secretary of the State for Trade and Industry allowing the acquisition of the Clairol Shares, the International Shares and the Acquired Assets and the assumption of the Assumed Liabilities to proceed on terms reasonably satisfactory to the Buyer. Notwithstanding anything else to the contrary herein, on and after the Twelve Month Anniversary of the date of this Agreement, the conditions set forth in Section 3.01(b)(ii) and Section 3.01(c) shall cease to be conditions to Buyer's obligation to purchase and pay for the Clairol Shares, the International Shares and the Acquired Assets and to assume the Assumed Liabilities. (d) Seller shall have executed and delivered, or shall have caused its Affiliates named as parties to any Transaction Document other than this Agreement (the "OTHER TRANSACTION DOCUMENTS") to execute and deliver, the Other Transaction Documents. SECTION 3.02. SELLER'S OBLIGATION. The obligation of Seller to sell and deliver the Clairol Shares, the International Shares, the Acquired Assets and the Assumed Liabilities to Buyer is subject to the satisfaction (or written waiver by Seller) as of the Closing of the following conditions: (a) The representations and warranties of Buyer made in this Agreement shall be true and correct in all material respects, as of the date hereof and as of the time of the Closing as though made as of such time, except to the extent such representations and warranties 23 15 expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects, on and as of such earlier date), in each case except for breaches as to matters that, individually or in the aggregate, would not be reasonably likely to have a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby. Buyer shall have performed or complied in all material respects with all obligations and covenants required by this Agreement to be performed or complied with by Buyer by the time of the Closing. Buyer shall have delivered to Seller a certificate dated the Closing Date and signed by an authorized officer of Buyer confirming the foregoing. (b) No statute, rule, regulation, executive order, decree, temporary restraining order, preliminary or permanent injunction or other order enacted, entered, promulgated, enforced or issued by any Governmental Entity or other legal restraint or prohibition shall be in effect preventing (i) the purchase and sale of the Clairol Shares or (ii) the purchase and sale of any portion of the International Shares material, individually or in the aggregate, to the Acquired Business or any portion of the Acquired Assets material, individually or in the aggregate, to the Acquired Business or the assumption of any portion of the Assumed Liabilities material, individually or in the aggregate, to the Acquired Business. (c) The waiting period under the HSR Act, the Mexican Merger Regulation and the Canada Competition Act and the merger control act in the United Kingdom or any other antitrust law, if applicable to the Transaction, shall have expired or been terminated. Any consents, authorizations, orders, approvals, declarations and filings under the HSR Act, the Mexican Merger Regulation, the Canada Competition Act or any other applicable antitrust law, the absence of which would prohibit the consummation of (i) the purchase of the Clairol Shares or (ii) the purchase and sale of any portion of the International Shares material, individually or in the aggregate, to the Acquired Business or any portion of the Acquired Assets material, individually or in the aggregate, to the Acquired Business or the assumption of any portion of the Assumed Liabilities material, 24 16 individually or in the aggregate, to the Acquired Business, shall have been made or obtained. (d) Buyer shall have executed and delivered, or shall have caused its Affiliates named as parties to any Other Transaction Document to execute and deliver, the Other Transaction Documents. SECTION 3.03. FRUSTRATION OF CLOSING CONDITIONS. Neither Buyer nor Seller may rely on the failure of any condition set forth in Section 3.01 or 3.02, respectively, to be satisfied if such failure was caused by such party's failure to act in good faith or to use its best efforts to cause the Closing to occur, as required by Section 8.04. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER Except as set forth in the Seller Disclosure Schedule attached hereto (the "SELLER DISCLOSURE SCHEDULE"), Seller hereby represents and warrants to Buyer with respect to Sections 4.01, 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11 and 4.14, as of the date hereof and as of the Closing Date, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects, on and as of such earlier date) and with respect to all other representations and warranties, as of the date hereof, except to the extent such representations and warranties expressly relate to an earlier date (in which case such representations and warranties shall be true and correct in all material respects, on and as of such earlier date), as follows: SECTION 4.01. AUTHORITY. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to enter into this Agreement. Each Seller Entity is a legal entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Seller and the Seller Entities have all requisite corporate power to consummate the transactions contemplated hereby. All corporate acts and other proceedings required to be taken by Seller and the Seller Entities to authorize the execution, delivery and 25 17 performance of this Agreement, the Transfer Documents and the Transitional Services Agreements (collectively, the "TRANSACTION DOCUMENTS"), to the extent such persons are parties to such agreements, and the consummation of the transactions contemplated hereby and thereby have been, or in the case of the Seller Entities will have been by the Closing Date, duly and properly taken. This Agreement and each of the Other Transaction Documents has been, or in the case of the Other Transaction Documents will have been by the Closing Date, duly executed and delivered by Seller or the applicable Seller Entity or Seller Entities and constitutes a legal, valid and binding obligation of Seller or such Seller Entity or Seller Entities, enforceable against Seller or such Seller Entity or Seller Entities in accordance with its terms. SECTION 4.02. NO CONFLICTS; CONSENTS. (a) The execution and delivery of this Agreement by Seller do not, and the execution and delivery of the Other Transaction Documents by Seller or the Seller Entities, as applicable, will not, and the consummation of the transactions contemplated hereby and thereby and compliance with the terms hereof and thereof will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or loss of a material benefit under, or result in the creation of any liens, claims, encumbrances, security interests, options, charges or restrictions of any kind ("Liens") upon any of the properties or assets of the Clairol Entities or the Acquired Assets under, any provision of (i) the Certificate of Incorporation or By-laws (or the comparable governing instruments) of Seller, any Seller Entity or any Clairol Entity, (ii) as of the date of this Agreement, any note, bond, mortgage, indenture, deed of trust, license, lease, contract, commitment, agreement or arrangement to which Seller, any Seller Entity or any Clairol Entity is a party (in the case of Seller or any Seller Entity, solely to the extent such note, bond, mortgage, indenture, deed of trust, license, lease, contract, commitment, agreement or arrangement relates to the Acquired Business) or by which any of the properties or assets of any Clairol Entity or any Acquired Assets are bound or (iii) as of the date of this Agreement, any judgment, order or decree, or, subject to the matters referred to in clauses (i), (ii) and (iii) of paragraph (b) below, statute, law, ordinance, rule or regulation applicable to Seller, any Seller Entity or any Clairol Entity (in the case of Seller or any Seller Entity, solely to the extent such judgment, order, 26 18 decree, statute, law, ordinance, rule or regulation relates to the Acquired Business) or the properties or assets of any Clairol Entity or any Acquired Assets, other than, in the case of clauses (ii) and (iii) above, any such items that, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. (b) No material consent, approval, license, permit, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required to be obtained or made by or with respect to Seller, any Seller Entity or any Clairol Entity in connection with the execution, delivery and performance of this Agreement, the Other Transaction Documents or the consummation of the transactions contemplated hereby or thereby other than (i) compliance with and filings under the HSR Act, the Mexican Merger Regulation, the Canada Competition Act, the merger control acts in the United Kingdom and Germany and the Irish Mergers Act, if applicable, (ii) those that may be required solely by reason of Buyer's or any Buyer Subsidiary's (as opposed to any other third party's) participation in the transactions contemplated hereby or by the Other Transaction Documents, (iii) those required to transfer environmental permits, and (iv) such consents, approvals, licenses, permits, orders, authorizations, registrations, declarations and filings the absence of which, or the failure to make or obtain which, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. SECTION 4.03. THE CLAIROL SHARES AND THE INTERNATIONAL SHARES. (a) Seller has good and valid title to the Clairol Shares, free and clear of any Liens. Assuming Buyer has the requisite power and authority to be the lawful owner of the Clairol Shares, upon delivery to Buyer at the Closing of certificates representing the Clairol Shares, duly endorsed by Seller for transfer to Buyer, and upon Seller's receipt of the Closing Date Amount (including any interest payable on the Purchase Price pursuant to Section 1.01(a)), good and valid title to the Clairol Shares will pass to Buyer, free and clear of any Liens, other than those arising from acts of Buyer or its Affiliates. Other than this Agreement, the Clairol Shares are not subject to any voting trust agreement or other contract, agreement, arrangement, commitment or understanding, including any such agreement, arrangement, preemptive rights, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of the Clairol Shares. 27 19 (b) Each International Stock Selling Entity has good and valid title to the International Shares corresponding to its applicable International Clairol Subsidiary, free and clear of any Liens. Assuming Buyer or its designated Buyer Subsidiary has the requisite power and authority to be the lawful owner of such International Shares, upon delivery to Buyer at the Closing of certificates representing such International Shares, duly endorsed by the applicable International Stock Selling Entity for transfer to Buyer or such Buyer Subsidiary, or other appropriate instruments sufficient to evidence the transfer of the International Shares under the Applicable Laws of the relevant jurisdiction, and upon Seller's receipt of the Closing Date Amount (including any interest payable on the Purchase Price pursuant to Section 1.01(a)), good and valid title to such International Shares will pass to Buyer or such Buyer Subsidiary, free and clear of any Liens, other than those arising from acts of Buyer or its Affiliates. Other than this Agreement, the International Shares are not subject to any voting trust agreement or other contract, agreement, arrangement, preemptive rights, commitment or understanding, including any such agreement, arrangement, commitment or understanding restricting or otherwise relating to the voting, dividend rights or disposition of the International Shares. SECTION 4.04. ORGANIZATION AND STANDING; BOOKS AND RECORDS. Each of the Company and each of the Clairol Subsidiaries is an entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization. Each of the Company and each of the Clairol Subsidiaries has full corporate power and authority and possesses all governmental franchises, licenses, permits, authorizations and approvals necessary to enable it to own, lease or otherwise hold its properties and assets and to carry on its business as presently conducted, other than such franchises, licenses, permits, authorizations and approvals the lack of which, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. Each of the Company and each of the Clairol Subsidiaries is duly qualified and in good standing to do business as a foreign corporation in each jurisdiction in which the conduct or nature of its business or the ownership, leasing or holding of its properties makes such qualification necessary, except such jurisdictions where the failure to be so qualified or in good standing, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. Seller has prior to the Closing Date delivered to Buyer true and 28 20 complete copies of the organizational documents, each as amended to the date hereof, of the Company, and the Clairol Subsidiaries. SECTION 4.05. CAPITAL STOCK OF THE COMPANY. The authorized capital stock of the Company consists of 200,000 shares of common stock, $10 par value per share. Of such 200,000 duly authorized shares, 100,000 shares (constituting the Clairol Shares) are validly issued and outstanding, fully paid and nonassessable. Seller is the record and beneficial owner of the Clairol Shares. Except for the Clairol Shares, there are no shares of capital stock or other equity securities of the Company outstanding. The Clairol Shares have not been issued in violation of, and are not subject to, any preemptive, subscription or similar rights under any provision of applicable law, the Certificate of Incorporation or By-laws of the Company, any contract, agreement or instrument to which the Company is subject, bound or a party or otherwise. There are no outstanding warrants, options, rights, "phantom" stock rights, agreements, convertible or exchangeable securities or other commitments (other than this Agreement) (a) pursuant to which Seller or the Company is or may become obligated to issue, sell, purchase, return or redeem any shares of capital stock or other securities of the Company or (b) that give any person the right to receive any benefits or rights similar to any rights enjoyed by or accruing to the holders of shares of capital stock of the Company. There are no equity securities of the Company reserved for issuance for any purpose. There are no outstanding bonds, debentures, notes or other indebtedness having the right to vote on any matters on which stockholders of the Company may vote. SECTION 4.06. CLAIROL SUBSIDIARIES; EQUITY INTERESTS. (a) Section 4.06(a) of the Seller Disclosure Schedule lists, for each company that is a subsidiary of the Company as of the date of this Agreement (the "U.S. CLAIROL SUBSIDIARIES"), its jurisdiction of organization and its authorized and outstanding capital stock. All the outstanding shares of capital stock of each U.S. Clairol Subsidiary have been validly issued and are fully paid and nonassessable and are as of the date of this Agreement owned by the Company or by an Affiliate of the Company or by the Company and an Affiliate of the Company, free and clear of all Liens. (b) Section 4.06(b) of the Seller Disclosure Schedule lists, for each International Clairol Subsidiary, its jurisdiction of organization and its authorized and 29 21 outstanding capital stock. All of the outstanding shares of capital stock of each International Clairol Subsidiary have been validly issued and are fully paid and nonassessable and, except as set forth in Section 4.06(b) of the Seller Disclosure Schedule, are as of the date of this Agreement owned by the applicable International Stock Selling Entity or International Stock Selling Entities, free and clear of all Liens. (c) None of the outstanding shares of capital stock of any U.S. Clairol Subsidiary or any International Clairol Subsidiary have been issued in violation of, and is subject to, any preemptive, subscription or similar rights under any provision of Applicable Law, the Certificate of Incorporation or By-laws of such Subsidiary, any contract, agreement or instrument to which such Subsidiary is subject, bound or a party or otherwise. There are no outstanding warrants, options, rights, "phantom" stock rights, agreements, convertible or exchangeable securities or other commitments (other than this Agreement) (i) pursuant to which Seller, the applicable Clairol Subsidiary or any such Subsidiary is or may become obligated to issue, sell, purchase, return or redeem any shares of capital stock or other securities of U.S. Clairol Subsidiaries or the International Clairol Subsidiaries or (ii) that give any person the right to receive any benefits or rights similar to any rights enjoyed by or accruing to the holders of shares of capital stock of the applicable Clairol Subsidiaries or any such Subsidiaries. There are no equity securities of any U.S. Clairol Subsidiary or International Clairol Subsidiary reserved for issuance for any purpose. There are no outstanding bonds, debentures, notes or other indebtedness having the right to vote on any matters on which stockholders of any U.S. Clairol Subsidiary or International Clairol Subsidiary may vote. (d) As of the date of this Agreement, except for the Company's interests in the U.S. Clairol Subsidiaries, none of the Clairol Entities as of the date of this Agreement owns, directly or indirectly, and the Acquired Assets do not include any capital stock, membership interest, partnership interest, joint venture interest or other equity interest with a net book value as of the date of this Agreement in excess of $5,000,000 in any person. SECTION 4.07. FINANCIAL STATEMENTS. (a) Section 4.07 (a) of the Seller Disclosure Schedule sets forth (i) the audited combined statements of assets to be acquired and liabilities to be assumed as of December 31, 2000, of Clairol 30 22 (the "CLAIROL BALANCE SHEET") and the audited combined statement of earnings before taxes of Clairol for the year ended December 31, 2000, together with the notes to such financial statements, (ii) the audited combined statement of assets to be acquired and liabilities to be assumed as of December 31, 1999, of Clairol, and the audited statement of earnings before taxes of Clairol for the years ended December 31, 1998 and 1999, together with the notes to such financial statements (the financial statements described in clauses (i) and (ii) above, together with the notes to such financial statements, collectively, the "FINANCIAL STATEMENTS"). (b) Section 4.07(b) of the Seller Disclosure Schedule sets forth (i) the unaudited Boclaro Working Capital Statement as of December 31, 2000 (the "BOCLARO WORKING CAPITAL STATEMENT") and (ii) the unaudited CMO Working Capital Statement as of December 31, 2000 (the "CMO WORKING CAPITAL STATEMENT") (the statements in (i) and (ii) collectively, the "ADDITIONAL FINANCIAL STATEMENTS"). (c) The Financial Statements do not include any Other U.S. Assumed Liabilities related to Boclaro, Inc. or any CMO Assumed Liabilities. The Financial Statements have been prepared in conformity with GAAP consistently applied (except in each case as described in the notes thereto) and on a basis that fairly presents in all material respects the combined financial condition and results of operations of Clairol as of the respective dates thereof and for the respective periods indicated in conformity with the basis of presentation described in the notes to the Financial Statements. The Additional Financial Statements have been prepared in good faith in substantial conformity with the Seller Accounting Policies, in each case consistently applied. The Clairol Balance Sheet, the Boclaro Working Capital Statement and the CMO Working Capital Statement, collectively, fairly present in all material respects the combined financial condition of the Acquired Business as of December 31, 2000 in conformity with the basis of presentation described in the notes to the Financial Statements. SECTION 4.08. TAXES. (a) For purposes of this Agreement, (i) "TAX" or "TAXES" shall mean all Federal, state, local and foreign taxes and similar assessments, including all interest, penalties and additions imposed with respect to such amounts; (ii) "PRE-CLOSING TAX PERIOD" shall mean all taxable periods ending on or before the Closing Date and the portion ending on the Closing Date of any taxable period that includes 31 23 (but does not end on) the Closing Date; and (iii) "CODE" shall mean the U.S. Internal Revenue Code of 1986, as amended. (b) (i) All material Tax returns, reports and forms required to be filed by the Code or by applicable state, local or foreign Tax laws by or on behalf of the Clairol Entities or with respect to the Acquired Assets have been duly filed in a timely manner (within any applicable extension periods), and such returns, reports and forms are true, complete and correct in all material respects, (ii) all Taxes shown to be due on such returns, reports and forms and all material Taxes otherwise due and payable have been timely paid in full or will be timely paid in full by the due date thereof, and (iii) no material Tax liens have been filed with respect to the assets of the Clairol Entities or with respect to the Acquired Assets and no material claims are being asserted in writing with respect to any Taxes of the Clairol Entities or with respect to the Acquired Assets. (c) (i) None of the Clairol Entities has filed a consent under Section 341(f) of the Code concerning collapsible corporations, (ii) no property of the Clairol Entities and none of the Acquired Assets is "tax exempt use property" within the meaning of Section 168(h) of the Code, and (iii) none of the Clairol Entities is a party to any lease, and none of the Acquired Assets are subject to any lease, made pursuant to Section 168(f)(8) of the Internal Revenue Code of 1954. (d) None of the Clairol Entities has been a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. None of the Acquired Assets constitutes a "United States real property interest" within the meaning of Section 897(c)(1) of the Code. (e) Seller is not a "foreign person" within the meaning of Section 1445(f)(3) of the Code. (f) None of the Clairol Entities has entered into any compensatory agreements with respect to the performance of services that would, as a result of the transactions contemplated by this Agreement, reasonably be likely to result in a nondeductible expense pursuant to Section 280G of the Code or an excise tax pursuant to Section 4999 of the Code to the recipient of a payment under any such compensatory 32 24 agreement as a result of the transactions contemplated by this Agreement. (g) None of the Clairol Entities has participated in an international boycott within the meaning of Section 999 of the Code. (h) None of the Clairol Entities has been a member of an affiliated group filing consolidated returns other than the Seller's group. (i) As of the Closing Date, none of the Clairol Entities will be a party to any written Tax sharing agreement or will be liable for any material Taxes of any person under any contract, in each case except for any such agreement or contract with, between or among any Clairol Entity. (j) Except as set forth in Section 4.08(j) of the Seller Disclosure Schedule, none of the Clairol Entities has made an election to be treated as a partnership or as an entity disregarded from its single owner for U.S. federal income tax purposes pursuant to Treasury Regulation Section 301.7701-3. SECTION 4.09. ASSETS OTHER THAN REAL PROPERTY INTERESTS. (a) The Clairol Entities have, or as of the Closing Date will have, good and valid title to all material assets reflected on the Clairol Balance Sheet or thereafter acquired (other than the Acquired Assets), except those sold or otherwise disposed of since the date of the Clairol Balance Sheet in the ordinary course of business consistent with past practice and not in violation of this Agreement, in each case free and clear of all Liens, except Permitted Liens. (b) Seller and the Asset Selling Entities have, or as of the Closing Date will have, good and valid title to all material Acquired Assets reflected on the Clairol Balance Sheet or thereafter acquired, except those sold or otherwise disposed of since the date of the Clairol Balance Sheet in the ordinary course of business consistent with past practice and not in violation of this Agreement, in each case free and clear of all Liens, except Permitted Liens. (d) This Section 4.09 does not relate to real property or interests in real property, Intellectual Property or Contracts, such items being the subjects of Section 4.10, Section 4.11 and Section 4.12, respectively. 33 25 SECTION 4.10. TITLE TO REAL PROPERTY. (a) Section 4.10(a)(i) of the Seller Disclosure Schedule sets forth a list of all real property and interests in real property owned in fee by the Clairol Entities, Seller and the Seller Entities (in the case of Seller and the Seller Entities, solely to the extent such property and interests are included in the Acquired Assets) (individually, an "OWNED PROPERTY"). Section 4.10(a)(ii) of the Seller Disclosure Schedule sets forth a complete list of all real property and interests in real property leased by the Clairol Entities, Seller and the Seller Entities (in the case of Seller and the Seller Entities, solely to the extent such property and interests are included in the Acquired Assets) (individually, a "LEASED PROPERTY"). The Clairol Entities, Seller and the Seller Entities, as applicable, have good and insurable fee title to all Owned Property and have good and valid title to the leasehold estates in all Leased Property (an Owned Property or Leased Property being sometimes referred to herein, individually, as a "COMPANY PROPERTY"), in each case free and clear of all mortgages, Liens, leases, assignments, subleases, easements, covenants, rights-of-way and other similar restrictions of any nature whatsoever, except (1) such as are set forth in Section 4.10 of the Seller Disclosure Schedule; (2) leases, subleases and similar agreements set forth in Section 4.12 of the Seller Disclosure Schedule; (3) Permitted Liens; (4) easements, covenants, rights-of-way and other similar restrictions of record; (5) (A) zoning, building and other similar restrictions, (B) mortgages, Liens, easements, covenants, rights-of-way and other similar restrictions that have been placed by any developer, landlord or other third party on property over which the Clairol Entities, Seller or the Asset Selling Entities, as applicable, have easement rights or on any Company Property and subordination or similar agreements relating thereto, and (C) unrecorded easements, covenants, rights-of-way and other similar restrictions, none of which items set forth in clause (5), individually or in the aggregate, materially impairs the continued use and operation of the property to which they relate in the Acquired Business. (b) Section 4.10(b) of the Seller Disclosure Schedule sets forth a list of all material real property premises occupied by the Acquired Business other than any Company Property. SECTION 4.11. INTELLECTUAL PROPERTY. (a) Section 4.11(a) of the Seller Disclosure Schedule sets forth a list of 34 26 all material registered and unregistered trademarks and service marks, trade names and domain names and registered copyrights, owned or licensed and used or held for use by the Seller and its Affiliates with respect to the Acquired Business (the "INTELLECTUAL PROPERTY"). With respect to trademarks, registered and pending, Section 4.11(a) of the Seller Disclosure Schedule sets forth a list of all jurisdictions in which such trademarks are registered or applied for and all the respective registration and application numbers. Seller, the Asset Selling Entities and the Clairol Entities own, or as of the Closing Date will own, free and clear of all Liens (except as set forth in Section 4.16(a) of the Seller Disclosure Schedule and except to the extent the Intellectual Property may be licensed from third parties, as specified on Section 4.11(c) of the Seller Disclosure Schedule), all the Intellectual Property and the consummation of the transactions contemplated hereby will not conflict with, alter or impair any such rights in any material respect. The Intellectual Property contains all material registered and unregistered trademarks and service marks, trade names, domain names, including pending intent-to-use applications, and registered copyrights necessary for the conduct of the Acquired Business. No claims are pending or, to the knowledge of Seller, threatened in writing, as of the date of this Agreement, against Seller or any of its Affiliates by any person with respect to the ownership, validity, enforceability, effectiveness or use of any Intellectual Property. (b) Section 4.11(b) of the Seller Disclosure Schedule sets forth a list of all material patents owned, used, filed by or licensed to Seller and its Affiliates with respect to the Acquired Business (the "Patents"). The Company has the right (or will have the right as of the Closing Date) to use all the Patents and all material processes, specifications and know-how (including trade secrets and proprietary knowledge to the extent existing) necessary for the conduct of the Acquired Business (collectively, the "OTHER INTELLECTUAL PROPERTY" and, together with the Intellectual Property, the "CLAIROL INTELLECTUAL PROPERTY") without payment to any other person (except to the extent the Other Intellectual Property may be licensed from third parties, as specified on Section 4.11(c) of the Seller Disclosure Schedule), and the consummation of the transactions contemplated hereby will not conflict with, alter or impair any such rights in any material respect. To the knowledge of Seller, there are no claims of others or Liens with respect to 35 27 the Other Intellectual Property that conflict with or prohibit the Company's use of the Other Intellectual Property. No claims are pending or, to the knowledge of Seller, threatened, as of the date of this Agreement, against Seller or its Affiliates by any person with respect to the ownership, validity, enforceability, effectiveness or the use by the Company of any Other Intellectual Property. (c) None of Seller, the Seller Entities or the Clairol Entities has granted any material options, licenses or agreements relating to Clairol Intellectual Property or the marketing or distribution thereof, except non-exclusive implied licenses to end-users in the ordinary course of business. None of Seller, the Seller Entities or the Clairol Entities as of the date hereof is bound by or a party to any material options, licenses or agreements of any kind relating to the intellectual property of any other person (in the case of Seller and the Seller Entities, solely to the extent relating to the Acquired Business), except for agreements relating to computer software licensed to Seller or its Affiliates in the ordinary course of business. SECTION 4.12. CONTRACTS. (a) As of the date of this Agreement, except as set forth in Section 4.12(a) of the Seller Disclosure Schedule, no contract that constitutes an Acquired Asset or an Assumed Liability is, and none of the Clairol Entities is a party to, any of the following: (i) an employment agreement or employment contract that has an aggregate future liability in excess of $250,000 and is not terminable by Seller, an Asset Selling Entity or a Clairol Entity, as applicable, by notice of not more than 90 days for a cost of less than $250,000 (excluding, for this purpose, any such agreements or contracts, express or implied, oral or written, which are required to be provided or are imposed under applicable law, practice, code, industry-wide collective or social plan); (ii) an employee collective bargaining agreement; (iii) a covenant not to compete (other than pursuant to any radius restriction contained in any lease, reciprocal easement or development, construction, operating or similar agreement) or other covenant restricting the development, manufacture, marketing or distribution of the products and services of the Acquired 36 28 Business, in each case that materially impairs the operation of the Acquired Business; (iv) an agreement, contract or other arrangement with (1) Seller or any Affiliate of Seller (other than a Clairol Entity or an Employee) or (2) any officer, director or employee of Seller or any Affiliate of Seller (other than employment agreements covered by clause (i) above); PROVIDED, HOWEVER, that the foregoing shall be deemed not to include any Transitional Services Agreement and any agreement, contract or other arrangement that will expire or be terminated at or prior to Closing; (v) a lease, sublease or similar agreement with any person under which Seller, an Asset Selling Entity or a Clairol Entity, as applicable, is a lessor or sublessor of, or makes available for use, to any person or any Company Property; (vi) a lease or similar agreement with any person under which (1) Seller, an Asset Selling Entity or a Clairol Entity, as applicable, is lessee of, or holds or uses, any machinery, equipment, vehicle or other tangible personal property owned by any person or (2) Seller, an Asset Selling Entity or a Clairol Entity, as applicable, is a lessor or sublessor of, or makes available for use by any person, any tangible personal property owned or leased by Seller or such Asset Selling Entity or Clairol Entity, as applicable, in any such case which has an aggregate future liability or receivable, as the case may be, in excess of $1,000,000 and is not terminable by Seller or such Asset Selling Entity or Clairol Entity, as applicable, by notice of not more than 180 days for a cost of less than $1,000,000; (vii) (1) a continuing contract for the future purchase of materials, supplies or equipment (other than purchase contracts and orders for inventory in the ordinary course of business consistent with past practice); (2) a management, service, consulting or other similar type of contract (other than contracts for services in the ordinary course of business) or (3) an advertising agreement or arrangement, in any such case which has an aggregate future liability to any person in excess of $1,000,000 and is not terminable by Seller, an Asset Selling Entity or a Clairol Entity, as applicable, by notice of not more than 180 days for a cost of less than $1,000,000; 37 29 (viii) a material license, option or other agreement relating in whole or in part to the Clairol Intellectual Property (including any license or other agreement under which Seller, an Asset Selling Entity or a Clairol Entity, as applicable, is licensee or licensor of any such Clairol Intellectual Property); (ix) an agreement, contract or other instrument under which Seller, an Asset Selling Entity or a Clairol Entity, as applicable, has borrowed any money from, or issued any note, bond, debenture or other evidence of indebtedness to, any person or any other note, bond, debenture or other evidence of indebtedness issued to any person in any such case which, individually, is in excess of $1,000,000; PROVIDED, HOWEVER, that the foregoing shall be deemed not to include Transitional Services Agreements and any agreement, contract or other arrangement that will expire or be terminated at or prior to Closing; (x) an agreement, contract or other instrument (including so-called take-or-pay or keepwell agreements) under which (1) any person has directly or indirectly guaranteed indebtedness, liabilities or obligations of Seller, an Asset Selling Entity or a Clairol Entity, as applicable, or (2) Seller, an Asset Selling Entity or a Clairol Entity, as applicable, has directly or indirectly guaranteed indebtedness, liabilities or obligations of any person (in each case other than endorsements for the purpose of collection in the ordinary course of business), in any such case which, individually, is in excess of $1,000,000, PROVIDED, HOWEVER, that the foregoing shall be deemed not to include any Transitional Services Agreement and any agreement, contract or other arrangement that will expire or be terminated at or prior to Closing; (xi) an agreement, contract or other instrument under which Seller, an Asset Selling Entity or a Clairol Entity, as applicable, has, directly or indirectly, made any advance, loan, extension of credit or capital contribution to, or other investment in, any person, in any such case which, individually, is in excess of $1,000,000; PROVIDED, HOWEVER, that the foregoing shall be deemed not to include Transitional Services Agreements and any agreement, contract or other arrangement that will expire or be terminated at or prior to Closing; 38 30 (xii) a material mortgage, pledge, security agreement, deed of trust or other instrument granting a Lien upon any Company Property, which Lien is not set forth in Section 4.10 of the Seller Disclosure Schedule; (xiii) an agreement or instrument providing for indemnification of any person with respect to material liabilities relating to any former business of Seller, an Asset Selling Entity or a Clairol Entity, as applicable, or any predecessor person; or (xiv) another agreement, contract, lease, license, commitment or instrument to which Seller, an Asset Selling Entity or a Clairol Entity, as applicable, is a party or by or to which it or any of its assets or business is bound or subject which has an aggregate future liability to any person in excess of $1,000,000 and is not terminable by Seller or such Asset Selling Entity or Clairol Entity, as applicable, by notice of not more than 180 days for a cost of less than $1,000,000. Except as set forth in Section 4.12(a) of the Seller Disclosure Schedule, as of the date of this Agreement, each agreement, contract, lease, license, commitment or instrument of Seller, an Asset Selling Entity and a Clairol Entity listed in Section 4.12(a) of the Seller Disclosure Schedule (collectively, the "CONTRACTS") is valid, binding and in full force and effect and, to the knowledge of Seller, is enforceable by Seller or such Clairol Entity or Asset Selling Entity, as applicable, in accordance with its terms subject to applicable bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and other laws affecting creditors' rights generally, general principles of equity and the discretion of courts in granting equitable remedies and except to the extent that the failure of a Contract to be valid, binding and in full force and effect would not be reasonably likely to have a Material Adverse Effect. Each of Seller, the Asset Selling Entities and the Clairol Entities, as applicable, has performed all material obligations required to be performed by it to the date of this Agreement under the Contracts and, as of the date of this Agreement, it is not (with or without the lapse of time or the giving of notice, or both) in breach or default in any material respect thereunder and, to the knowledge of Seller, no other party to any of the Contracts, as of the date of this Agreement, is (with or without the lapse of time or the giving of notice, or both) in breach or default in any material respect thereunder, except 39 31 to the extent that such breach or default would not be reasonably likely to have a Material Adverse Effect. (b) As of the date of this Agreement, except as set forth in Section 4.12(b) of the Seller Disclosure Schedule, no contract related to the Acquired Business that is not an Acquired Asset, Assumed Liability or a contract to which a Clairol Entity is a party is any of the following: (i) an employment agreement or employment contract for an Employee that has an aggregate future liability in excess of $250,000 and is not terminable by a Seller or one of its Affiliates, as applicable, by notice of not more than 90 days for a cost of less than $250,000 (excluding, for this purpose, any such agreements or contracts, express or implied, oral or written, which are required to be provided or are imposed under applicable law, practice, code, industry-wide collective or social plan); (ii) an employee collective bargaining agreement; (iii) a covenant not to compete (other than pursuant to any radius restriction contained in any lease, reciprocal easement or development, construction, operating or similar agreement) or other covenant restricting the development, manufacture, marketing or distribution of the products and services of the Acquired Business, in each case that materially impairs the operation of the Acquired Business; (iv) an agreement, contract or other arrangement with (1) Seller or any Affiliate of Seller (other than a Clairol Entity or an Employee) or (2) any officer, director or employee of Seller or any Affiliate of Seller (other than employment agreements covered by clause (i) above); PROVIDED, HOWEVER, that the foregoing shall be deemed not to include any Transitional Services Agreement and any agreement, contract or other arrangement that will expire or be terminated at or prior to Closing; (v) a lease, sublease or similar agreement with any person under which Seller or any Affiliate of Seller, as applicable, is a lessor or sublessor of, or makes available for use, to any person, any Company Property; (vi) a lease or similar agreement with any person under which (1) Seller or any Affiliate of Seller, as 40 32 applicable, is lessee of, or holds or uses, any machinery, equipment, vehicle or other tangible personal property owned by any person or (2) Seller or any Affiliate of Seller, as applicable, is a lessor or sublessor of, or makes available for use by any person, any tangible personal property owned or leased by Seller or such Affiliate of Seller, as applicable, in any such case which has an aggregate future liability or receivable, as the case may be, in excess of $1,000,000 and is not terminable by Seller or such Affiliate of Seller, as applicable, by notice of not more than 180 days for a cost of less than $1,000,000; (vii) a (1) continuing contract for the future purchase of materials, supplies or equipment (other than purchase contracts and orders for inventory in the ordinary course of business consistent with past practice); (2) management, service, consulting or other similar type of contract (other than contracts for services in the ordinary course of business) or (3) advertising agreement or arrangement, in any such case which has an aggregate future liability to any person in excess of $1,000,000 and is not terminable by Seller or an Affiliate of Seller, as applicable, by notice of not more than 180 days for a cost of less than $1,000,000; (viii) a material license, option or other agreement relating in whole or in part to the Clairol Intellectual Property (including any license or other agreement under which Seller or any Affiliate of Seller is licensee or licensor of any such Clairol Intellectual Property); (ix) an agreement, contract or other instrument under which Seller or any Affiliate of Seller, as applicable, has borrowed any money from, or issued any note, bond, debenture or other evidence of indebtedness to, any person or any other note, bond, debenture or other evidence of indebtedness issued to any person in any such case which, individually, is in excess of $1,000,000; PROVIDED, HOWEVER, that the foregoing shall be deemed not to include any Transitional Services Agreement and any agreement, contract or other arrangement that will expire or be terminated at or prior to Closing; (x) an agreement, contract or other instrument (including so-called take-or-pay or keepwell agreements) 41 33 under which (1) any person has directly or indirectly guaranteed indebtedness, liabilities or obligations of Seller or any Affiliate of Seller, as applicable, (2) Seller or any Affiliate of Seller, as applicable, has directly or indirectly guaranteed indebtedness, liabilities or obligations of any person (in each case other than endorsements for the purpose of collection in the ordinary course of business), in any such case which, individually, is in excess of $1,000,000; PROVIDED, HOWEVER, that the foregoing shall be deemed not to include any Transitional Services Agreement and any agreement, contract or other arrangement that will expire or be terminated at or prior to Closing; (xi) an agreement, contract or other instrument under which Seller or any Affiliate of Seller, as applicable, has, directly or indirectly, made any advance, loan, extension of credit or capital contribution to, or other investment in, any person, in any such case which, individually, is in excess of $1,000,000; PROVIDED, HOWEVER, that the foregoing shall be deemed not to include Transitional Services Agreements and any agreement, contract or other arrangement that will expire or be terminated at or prior to Closing; (xii) another agreement, contract, lease, license, commitment or instrument to which Seller or any Affiliate of Seller, as applicable, is a party or by or to which it or any of its assets or business is bound or subject which has an aggregate future liability to any person in excess of $1,000,000 and is not terminable by Seller or such Affiliate of Seller, as applicable, by notice of not more than 180 days for a cost of less than $1,000,000. SECTION 4.13. LITIGATION. Section 4.13 of the Seller Disclosure Schedule sets forth a list, as of the date of this Agreement, of all pending lawsuits or claims, with respect to which Seller, any Seller Entity or any Clairol Entity has been contacted in writing by the plaintiff or claimant or by counsel for the plaintiff or claimant, which relate to the Acquired Business and which (a) involve a claim against Seller, any Seller Entity or any Clairol Entity, as applicable, and which involve a specified amount of, or unspecified amount which would reasonably be likely to result in a liability of, more than $1,000,000, (b) seek any material injunctive relief or (c) seek any legal restraint on or prohibition against the transactions contemplated by this Agreement. To the knowledge of Seller, as of the date of this 42 34 Agreement, none of Seller, the Seller Entities or the Clairol Entities is a party or subject to or in default under any material judgment, order, injunction or decree of any Governmental Entity or arbitration tribunal applicable to the Acquired Business. This Section 4.13 does not relate to matters with respect to environmental matters, which are the subject of Section 4.16(b), or to matters with respect to employee benefits or ERISA matters, which are the subject of Section 4.14. SECTION 4.14. BENEFIT PLANS. The representations made herein in Sections 4.14(a)-(h) below relate solely to plans and arrangements maintained by Seller, the Seller Entities or the Clairol Entities for Employees (as defined in Section 9.01(a)) primarily based in the United States. (a) Section 4.14(a) of the Seller Disclosure Schedule contains a list of all "EMPLOYEE PENSION BENEFIT PLANS" (as defined in Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) (sometimes referred to herein as "PENSION PLANS"), "EMPLOYEE WELFARE BENEFIT PLANS" (as defined in Section 3(1) of ERISA), bonus, stock option, stock purchase, deferred compensation plans or arrangements and other employee fringe benefit plans (all the foregoing being herein called "BENEFIT PLANS") maintained, or contributed to, by Seller or the Company or the U.S. Clairol Subsidiaries for the benefit of any officers or employees of the Company or the U.S. Clairol Subsidiaries. Seller has made available to Buyer true, complete and correct copies of (i) each Benefit Plan (or, in the case of any unwritten Benefit Plans, descriptions thereof), (ii) the most recent annual report on Form 5500 filed with the Internal Revenue Service with respect to each Benefit Plan (if any such report was required) and (iii) the most recent summary plan description for each Benefit Plan for which such a summary plan description is required. (b) Except for matters that would not be reasonably likely to have a Material Adverse Effect or as disclosed in writing to Buyer, (i) each Benefit Plan has been administered in all material respects in accordance with its terms; (ii) the Company or the U.S. Clairol Subsidiaries and all the Benefit Plans are in compliance in all material respects with the applicable provisions of ERISA and the Code; and (iii) there are no material lawsuits, actions, termination proceedings or other proceedings pending, or, to the knowledge of Seller, threatened against or involving any Benefit Plan and, to the knowledge of Seller, there are no investigations 43 35 by any Governmental Entity or other claims (except claims for benefits payable in the normal operation of the Benefit Plans) pending or threatened against or involving any Benefit Plan or asserting any rights to benefits under any Benefit Plan. (c) Except for matters that would not be reasonably likely to have a Material Adverse Effect, (i) all contributions to, and payments from, the Benefit Plans that have been required to be made in accordance with the Benefit Plans and, when applicable, Section 302 of ERISA or Section 412 of the Code, have been timely made, (ii) there has been no application for or waiver of the minimum funding standards imposed by Section 412 of the Code with respect to any Pension Plan and (iii) no Pension Plan has an "ACCUMULATED FUNDING DEFICIENCY" within the meaning of Section 412(a) of the Code as of the most recent plan year. (d) All Pension Plans that are intended to qualify under Section 401(c) of the Code have been the subject of determination letters from the Internal Revenue Service to the effect that such Pension Plans are qualified and exempt from Federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, and no such determination letter has been revoked nor, to the knowledge of Seller, has revocation been threatened, nor has any such Pension Plan been amended since the date of its most recent determination letter or application therefor in any respect that is reasonably expected to adversely affect its qualification or materially increase its cost. (e) Except for matters that would not be reasonably likely to have a Material Adverse Effect, (i) to Seller's knowledge, no "PROHIBITED TRANSACTION" (as defined in Section 4975 of the Code or Section 406 of ERISA) has occurred that involves the assets of any Benefit Plan and that is reasonably expected to subject the Company or the U.S. Clairol Subsidiaries or any of its employees, or a trustee, administrator or other fiduciary of any trusts created under any Benefit Plan to a material tax or penalty on prohibited transactions imposed by Section 4975 of ERISA or the sanctions imposed under Title I of ERISA; (ii) none of the Pension Plans has been terminated nor have there been any "REPORTABLE EVENTS" (as defined in Section 4043 of ERISA and the regulations thereunder) with respect thereto that are required to be reported to the Pension Benefit Guaranty Corporation by law or regulation; and (iii) to the knowledge of Seller, neither Seller nor any trustee, administrator or other fiduciary of any Benefit Plan nor any agent of any of the 44 36 foregoing has engaged in any transaction or acted or failed to act in a manner that is reasonably expected to subject the Company or the U.S. Clairol Subsidiaries to any material liability for breach of fiduciary duty under ERISA or any other applicable law. (f) Except for amounts that would not be reasonably likely to have a Material Adverse Effect, with respect to any Pension Plan subject to Title IV of ERISA (including for the purposes of this Section 4.14(f) any Pension Plan maintained or contributed to by Seller or any other person required to be treated as a single employer with Seller under Section 414 of the Code), Seller has not incurred any material liability to such Pension Plan or to the Pension Benefit Guaranty Corporation, other than for the payment of contributions or premiums. Seller has delivered or made available to Buyer the most recent actuarial report or valuation with respect to each Pension Plan that is a "DEFINED BENEFIT PENSION PLAN" (as defined in Section 3(35) of ERISA. (g) At no time within the five years preceding the Closing Date has Seller or the Company or the U.S. Clairol Subsidiaries been required to contribute to any "MULTIEMPLOYER PLAN" (as defined in Section 4001(a)(3) of ERISA) for the benefit of any employees of the Company or the U.S. Clairol Subsidiaries or incurred any withdrawal liability, within the meaning of Section 4201 of ERISA, with respect to any multiemployer plan for the benefit of employees of the Company or the U.S. Clairol Subsidiaries, which liability has not been fully paid as of the date hereof, or announced an intention to withdraw, but not yet completed such withdrawal, from any such multiemployer plan. (h) Except for matters that would not be reasonably likely to have a Material Adverse Effect, each Benefit Plan that is a group health plan, as such term is defined in Section 5000(b)(1) of the Code, complies in all material respects with the applicable requirements of Section 4980B(f) of the Code. (i) Except for matters that would not be reasonably likely to have a Material Adverse Effect or as disclosed in writing to Buyer, to the knowledge of Seller, all plans and arrangements maintained outside of the United States for the benefit of Employees are in material compliance with all applicable laws of the relevant jurisdiction in which such plans or arrangements are maintained. Section 4.14(i) of the Seller Disclosure Schedule contains a list of the material 45 37 employee benefit plans maintained by Seller, the Seller Entities or the Clairol Entities for Employees primarily based in countries and territories other than the United States. SECTION 4.15. ABSENCE OF CHANGES OR EVENTS. (a) As of the date of this Agreement, since December 31, 2000, there has not been any material adverse change in the business, financial condition or results of operations of the Acquired Business other than changes relating to United States or foreign economies in general or the Acquired Business's industries in general and not specifically relating to the Acquired Business. Buyer acknowledges that there has been and will continue to be a disruption to the Acquired Business as a result of the possibility of a sale by Seller of the Acquired Business to Buyer(and there may be further disruption to the Acquired Business as a result of the execution and public announcement of this Agreement and the Other Transaction Documents and the consummation of the transactions contemplated hereby and thereby) (any such disruption, a "BUSINESS DISRUPTION"), and Buyer agrees that any such Business Disruption does not and shall not constitute a breach of this Section 4.15. (b) As of the date of this Agreement, except as contemplated by this Agreement and the Other Transaction Documents (including the Seller Disclosure Schedule), including actions taken in furtherance of the separation of the Acquired Business from Seller and its Affiliates, since December 31, 2000, Seller has caused the Acquired Business to be conducted in the ordinary course and none of Seller, the Seller Entities or the Clairol Entities has taken any action that, if taken after the date of this Agreement, would constitute a breach of any of the covenants set forth in Section 5.02. SECTION 4.16. COMPLIANCE WITH APPLICABLE LAWS. As of the date of this Agreement: (a) Except as previously disclosed by Seller to Buyer in writing, Seller, the Seller Entities and the Clairol Entities are in compliance with all applicable statutes, laws, ordinances, rules, orders and regulations of any Governmental Entity ("APPLICABLE LAWS") (in the case of Seller and the Seller Entities, solely to the extent related to the Acquired Business conducted by Seller and the Seller Entities), including those relating to occupational health and safety, except for instances of noncompliance that, individually or in the aggregate, would not be reasonably likely to have a 46 38 Material Adverse Effect. None of Seller, the Seller Entities or the Clairol Entities has received any written communication during the two years prior to the date hereof from a Governmental Entity that alleges that Seller, any of the Seller Entities or any of the Clairol Entities is in violation of any Applicable Laws (in the case of Seller or the Seller Entities, solely to the extent related to the Acquired Business conducted by Seller and the Seller Entities) except for any such violations that, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect. This Section 4.16(a) does not relate to matters with respect to Taxes, which are the subject of Section 4.08, to employee benefit or ERISA matters which are the subject of Section 4.14 or to environmental matters, which are the subject of Section 4.16(b). (b) Seller has provided Buyer with certain environmental reports relating to the facilities and operations of the Clairol Entities, Seller and the Seller Entities (in the case of Seller and the Seller Entities, solely to the extent such reports relate to the Acquired Business conducted by Seller and the Seller Entities) which are identified in Section 4.16(b) of the Seller Disclosure Schedule (the "ENVIRONMENTAL REPORTS"). Except as set forth in the Environmental Reports, and except as would not, individually or in the aggregate, be reasonably likely to have a Material Adverse Effect, (i) none of Seller, the Seller Entities or the Clairol Entities has received any written communication during the two years prior to the date hereof from a Governmental Entity that alleges that any of Seller, the Seller Entities or the Clairol Entities are in violation of any Environmental Laws or of any Environmental Permits (as hereinafter defined), the substance of which communication has not been resolved, (ii) none of Seller, the Seller Entities or the Clairol Entities has received any written communication during the past five years from a Governmental Entity or any person that alleges any of the Seller, the Seller Entities or the Clairol Entities is a potentially responsible party under the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 or state or international equivalents thereof (in each case, in the case of Seller or the Seller Entities, solely to the extent related to the Acquired Business conducted by Seller or the Seller Entities), (iii) each of Seller, the Seller Entities and the Clairol Entities hold, and are in compliance with, all permits, licenses and governmental authorizations required under Environmental Laws for it to conduct the Acquired Business, 47 39 ("Environmental Permits"), none of which is being threatened in writing with suspension or cancellation, (iv) Seller, the Seller Entities and the Clairol Entities are in compliance with all Environmental Laws (in the case of Seller and the Seller Entities, solely to the extent related to the Acquired Business conducted by Seller and the Seller Entities), (v) Seller, the Seller Entities and the Clairol Entities have not entered into or agreed to any agreement, consent decree or order, which agreement, decree or order is still in effect, and are not subject to any outstanding judgment, decree or judicial order with respect to any property currently or formerly owned, occupied or operated by Seller, a Seller Entity or a Clairol Entity relating to compliance with any Environmental Law or to the investigation or cleanup of Hazardous Substances under any Environmental Law (in the case of Seller and the Seller Entities, solely to the extent related to the Acquired Business conducted by Seller and the Seller Entities), (vi) to the knowledge of Seller, the Seller Entities and the Clairol Entities, there are no pending or threatened investigations, claims or complaints relating to compliance with Environmental Laws or Environmental Permits or to Hazardous Substances with respect to the Acquired Business or to any property currently or formerly owned, occupied, or operated by Seller, Seller Entity or a Clairol Entity, in each case, in connection with the Acquired Business, and (vii) there are no Hazardous Substances requiring remediation under Environmental Laws located on Company Property or, to Seller's knowledge, on any property formerly owned, occupied or operated by Seller, the Seller Entities or the Clairol Entities. The representations and warranties made in this Section 4.16(b) are Seller's exclusive representations and warranties relating to environmental matters. As used in this Agreement, the term "ENVIRONMENTAL LAWS" means any applicable statutes, laws (including common law), regulations, ordinances, rules or administrative or judicial orders, in any such case entered into, issued, or promulgated in final form as of the Closing Date by any Governmental Entity, relating to the environment, pollution preservation or reclamation of natural resources, or to the management of Hazardous Substances. As used in this Agreement, the term "HAZARDOUS SUBSTANCES" means any hazardous or toxic substance or waste that is regulated pursuant to any Environmental Law. SECTION 4.17. EMPLOYEE AND LABOR MATTERS. As of the date of this Agreement and except as would not be reasonably likely to have a Material Adverse Effect and only insofar as it relates to the Acquired Business or to an 48 40 Employee, there is not and since January 1, 1998, has not been: (a) any labor strike, dispute, work stoppage or lockout pending, or, to the knowledge of Seller, threatened, against Seller, any Seller Entity or any Clairol Entity; (b) to the knowledge of Seller, any union organizational campaign in progress with respect to the employees of Seller, any Asset Selling Entity or any Clairol Entity or any question concerning representation respecting such employees other than routine employee representative issues in those countries other than in the U.S. where employee representative bodies such as works councils exist; (c) any unfair labor practice charge or complaint against the Company or the U.S. Clairol Subsidiaries pending, or, to the knowledge of Seller, threatened, before the National Labor Relations Board; (d) any pending, or, to the knowledge of Seller, threatened, union grievances against Seller, any Seller Entity or any Clairol Entity as to which there is a reasonable possibility of adverse determination; (e) any pending, or, to the knowledge of Seller, threatened, charges or claims against the Company or the U.S. Clairol Subsidiaries or any current or former employee of Seller, any Seller Entity or any Clairol Entity (solely to the extent such employees relate to the Acquired Business) before the Equal Employment Opportunity Commission or any federal, state, local or foreign agency or court responsible for the prevention of unlawful employment practices or breaches of employment contracts; and (f) to the knowledge of Seller, any receipt of written notice by Seller, the Seller Entities or the Clairol Entities, of the intent of any Governmental Entity responsible for the enforcement of labor or employment laws to conduct an investigation of Seller, any Seller Entity or any Clairol Entity and, to the knowledge of Seller, any such investigation in progress. SECTION 4.18. LIMITATIONS ON REPRESENTATIONS AND WARRANTIES. SELLER DOES NOT MAKE ANY REPRESENTATIONS OR WARRANTIES RELATING TO THE MAINTENANCE, REPAIR, CONDITION, DESIGN, PERFORMANCE OR MARKETABILITY OF ANY ACQUIRED ASSETS, INCLUDING MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS, BUYER AND THE BUYER SUBSIDIARIES WILL OBTAIN RIGHTS IN THE ACQUIRED ASSETS IN THEIR PRESENT CONDITION AND STATE OF REPAIR, "AS IS" AND "WHERE IS." 49 41 ARTICLE V COVENANTS OF SELLER Seller covenants and agrees as follows: SECTION 5.01. ACCESS. From the date hereof to the Closing, Seller shall, and shall cause the Seller Entities and the Clairol Entities to, give or furnish Buyer and its representatives, employees, counsel and accountants reasonable access, during normal business hours and upon reasonable notice, to the personnel, properties, books and records of the Acquired Business; PROVIDED, HOWEVER, that such access does not unreasonably disrupt the normal operations of Seller, the Seller Entities or the Clairol Entities. SECTION 5.02. ORDINARY CONDUCT. (a) Except as set forth in Section 5.02 of the Seller Disclosure Schedule or otherwise contemplated by the terms of this Agreement and the Other Transaction Documents, including any actions taken in furtherance of the separation of the Acquired Business from Seller and its Affiliates from the date hereof to the Closing, Seller shall use commercially reasonable efforts consistent with past practice to cause the Acquired Business to be conducted in the ordinary course consistent with past practice and shall make commercially reasonable efforts consistent with past practice to preserve the Acquired Business's relationships with customers, suppliers, distributors and others with whom the Acquired Business has a material business relationship. In the event of any Business Disruption after the date hereof, Seller shall act in good faith and in a commercially reasonable manner in its response to such Business Disruption; PROVIDED, HOWEVER, that Seller shall not have any liability under, or be deemed in breach of, this Section 5.02(a) for any loss, liability, claim, damage or expense (including reasonable legal fees and expenses)that arises out of, results from or is related to any such Business Disruption (including any such loss, liability, claim, damage or expense arising out of, resulting from or related to Seller's good faith, commercially reasonable response to any such Business Disruption). Notwithstanding anything to the contrary in this Section 5.02(a), Seller shall not be obligated to, directly or indirectly, provide any funds to the Acquired Business. (b) Except as set forth in Section 5.02 of the Seller Disclosure Schedule or otherwise contemplated by the 50 42 terms of this Agreement and the Other Transaction Documents (including any actions taken in furtherance of the separation of the Acquired Business from Seller and its Affiliates), Seller shall not permit any of the following in connection with the Acquired Business without the prior written consent of Buyer (which shall not be unreasonably withheld): (i) a Clairol Entity to amend its Certificate of Incorporation, By-laws or other organizational documents; (ii) a Clairol Entity to declare or pay any dividend or make any other distribution to its stockholders whether or not upon or in respect of any shares of its capital stock; PROVIDED, HOWEVER, that (A) Buyer acknowledges that the Clairol Entities do not maintain cash balances and, at or prior to the time of the Closing, Seller will withdraw any cash balances of the Clairol Entities and (B) dividends and distributions of cash may continue to be made by Clairol Entities to Seller or its Affiliates; (iii) a Clairol Entity to redeem or otherwise acquire any shares of its capital stock or issue any capital stock or any option, warrant or right relating thereto or any securities convertible into or exchangeable for any shares of capital stock; (iv) a Clairol Entity to adopt or amend in any material respect any Benefit Plan or collective bargaining agreement, in each case relating to any Employees, except as required by Applicable Law and except as disclosed in Section 4.17(b) of the Seller Disclosure Schedule; (v) a Clairol Entity to grant to any Employee that is an executive officer or executive employee any increase in compensation or benefits, except in the ordinary course of business consistent with past practice or as may be required under existing agreements or Applicable Law and except for any increases for which Seller shall be solely obligated; (vi) a Clairol Entity to incur or assume any liabilities, obligations or indebtedness for borrowed money or guarantee any such liabilities, obligations or indebtedness, other than in the ordinary course of business consistent with past practice; PROVIDED, HOWEVER, that the foregoing shall be deemed not to 51 43 include any liabilities, obligations or indebtedness, or guarantees thereof, that will be satisfied in full or terminated prior to Closing; (vii) a Clairol Entity to voluntarily permit any of its assets, or Seller or a Seller Entity to voluntarily permit any of the Acquired Assets, to become subjected to any mortgage, lien, security interest, encumbrance, easement, covenant, right-of-way or other similar restriction of any nature whatsoever which would have been required to be set forth in Section 4.09 or 4.10 of the Seller Disclosure Schedule if existing on the date of this Agreement; (viii) except for intercompany transactions in the ordinary course of business or necessary to withdraw cash or settle intercompany accounts prior to the Closing, a Clairol Entity, Seller or an Asset Selling Entity to cancel any material indebtedness (individually or in the aggregate) or waive any claims or rights of material value (in the case of Seller or an Asset Selling Entity, solely to the extent such indebtedness, claims or rights relate to the Acquired Business); (ix) except for (A) dividends and distributions permitted under clause (ii) above and (B) intercompany transactions in the ordinary course of business or necessary to withdraw cash or settle intercompany accounts prior to the Closing, a Clairol Entity to pay, loan or advance any amount to, or sell, transfer or lease any of its assets to, or enter into any agreement or arrangement with, Seller or any of its Affiliates (other than other Clairol Entities); (x) a Clairol Entity, Seller or any Seller Entity to make any change in any method of accounting or accounting practice or policy other than those required by GAAP (in the case of Seller or any Seller Entity, solely to the extent such change is applicable to the Acquired Business); (xi) a Clairol Entity, Seller or a Seller Entity to acquire by merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof which are material, individually or in the aggregate, to the Acquired Business; 52 44 (xii) a Clairol Entity, Seller or a Seller Entity to make or incur any capital expenditure that is not currently approved or budgeted which, individually, is in excess of $1,000,000 or make or incur any such expenditures which, in the aggregate, are in excess of $5,000,000 (in the case of Seller or a Seller Entity, solely to the extent such capital expenditure relates to the Acquired Business); (xiii) a Clairol Entity to sell, lease or otherwise dispose of any of its assets, or Seller or an Asset Selling Entity to sell, lease or otherwise dispose of any Acquired Assets, which are material, individually or in the aggregate, to the Acquired Business, except in the ordinary course of business consistent with past practice or enter into any lease of any personal property except leases entered into in the ordinary course of business or leases with aggregate lease payments not in excess of $1,000,000; (xiv) a Clairol Entity, Seller or a Seller Entity to enter into any lease of real property, except any renewals of existing leases in the ordinary course of business consistent with past practice (in the case of Seller or a Seller Entity, solely to the extent such lease relates to the Acquired Business); (xv) a Clairol Entity, Seller or a Seller Entity to modify, amend, terminate or permit the lapse of any lease of, or reciprocal easement agreement, operating agreement or other material agreement relating to, any Company Property (except modifications or amendments associated with renewals of existing leases in the ordinary course of business); or (xvi) Seller, a Seller Entity or a Clairol Entity to agree, whether in writing or otherwise, to do any of the foregoing. SECTION 5.03. INSURANCE. Seller shall keep, or cause to be kept, all insurance policies presently maintained with respect to the Clairol Entities, their respective assets and properties and the Acquired Assets, or suitable replacements therefor, in full force and effect through the close of business on the Closing Date. Any and all insurance policies maintained with respect to the Clairol Entities, their respective assets and properties and the Acquired Assets are owned and maintained by Seller and its Affiliates. None 53 45 of the Buyer, any Buyer Subsidiary or the Clairol Entities will have any rights under any such insurance policies from and after the Closing Date; PROVIDED, HOWEVER, that after the Closing Date Buyer, any Buyer Subsidiary, or Clairol Entities will have the right to submit claims under the Seller's workers compensation policies in accordance with such policies to the extent such claims occurred prior to the Closing Date. SECTION 5.04. NO USE OF CLAIROL NAMES. Seller shall, and shall cause its Affiliates to, promptly, and in any event, within 60 days after Closing, change the names of its Affiliates to discontinue any references to the Clairol Names. "Clairol Names" means "Clairol" and any variation or derivative thereof and any logos or trademarks related to the Acquired Business included in Section 4.11 of the Seller Disclosure Schedule. SECTION 5.05. INTERCOMPANY ACCOUNTS. All intercompany accounts between Seller or its Affiliates, on the one hand, and any Clairol Entity, on the other hand, shall be settled in full or cancelled, at Seller's option, at or prior to the Closing so that the Acquired Business shall have no further intercompany liabilities as of the Closing. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows: SECTION 6.01. AUTHORITY. Buyer is a corporation duly organized, validly existing and in good standing under the laws of Ohio. Buyer has all requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. All corporate acts and other proceedings required to be taken by Buyer to authorize the execution, delivery and performance of this Agreement and any Other Transaction Documents to which it or any Buyer Subsidiary is a party and the consummation of the transactions contemplated hereby and thereby have been duly and properly taken. This Agreement has been duly executed and delivered by Buyer and, prior to the Closing, each of the Other Transaction Documents to which Buyer or any Buyer Subsidiary is, or is specified to be, a party, will be duly executed and delivered by such 54 46 party. This Agreement, and each Other Transaction Document to which Buyer or any Buyer Subsidiary, is, or is specified to be, a party, constitutes a legal, valid and binding obligation of Buyer or such Buyer Subsidiary, enforceable against Buyer or such Buyer Subsidiary in accordance with its terms. SECTION 6.02. NO CONFLICTS; CONSENTS. (a) The execution and delivery of this Agreement by Buyer does not, and the execution and delivery by Buyer or any Buyer Subsidiary of each Other Transaction Document to which it is, or is specified to be, a party will not, and the consummation of the transactions contemplated hereby and thereby and compliance with the terms hereof and thereof will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to the loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of Buyer, any subsidiary of Buyer or any Buyer Subsidiary or the Acquired Assets under any provision of (i) the Certificate of Incorporation or By-laws of Buyer or the comparable governing instruments of any subsidiary of Buyer or any Buyer Subsidiary (ii) any material note, bond, mortgage, indenture, deed of trust, license, lease, contract, commitment, agreement or arrangement to which Buyer or any subsidiary of Buyer or any Buyer Subsidiary is a party or by which any of their respective properties or assets or the Acquired Assets are bound, or (iii) any judgment, order, or decree, or material statute, law, ordinance, rule or regulation applicable to Buyer, any subsidiary of Buyer or any Buyer Subsidiary or their respective properties or assets or the Acquired Assets, other than, in the case of clauses (ii) and (iii) above, any such items that, individually or in the aggregate, would not have a material adverse effect on the ability of Buyer or any Buyer Subsidiary, as applicable, to either perform its obligations hereunder or under any Other Transaction Document or consummate the transactions contemplated hereby. (b) No material consent, approval, license, permit, order or authorization of, or registration, declaration or filing with, any Governmental Entity is required to be obtained or made by or with respect to Buyer, the Buyer Subsidiaries or any of their respective subsidiaries or Affiliates in connection with the execution, delivery and performance of this Agreement or any Other Transaction Document or the consummation of the transactions contemplated 55 47 hereby or thereby, other than (i) compliance with and filings under the HSR Act, the Mexican Merger Regulation, the Canada Competition Act, the merger control acts in the United Kingdom and Germany and the Irish Mergers Act, if applicable, and (ii) those that may be required solely by reason of Seller's or the Seller Entities' (as opposed to any other third party's) participation in the transactions contemplated hereby and in the Other Transaction Documents. SECTION 6.03. SECURITIES ACT. The Clairol Shares and the International Shares purchased by Buyer or the Buyer Subsidiaries pursuant to this Agreement are being acquired for investment only and not with a view to any public distribution thereof, and Buyer or the Buyer Subsidiaries, as applicable, shall not offer to sell or otherwise dispose of the Clairol Shares or International Shares so acquired by it or them in violation of any of the registration requirements of the Securities Act or the securities laws of any other jurisdiction applicable to the transactions contemplated hereby. SECTION 6.04. ACTIONS AND PROCEEDINGS, ETC. There are no (a) outstanding judgments, orders, injunctions or decrees of any Governmental Entity or arbitration tribunal against Buyer or any of its Affiliates, (b) lawsuits, actions or proceedings pending or, to the knowledge of Buyer, threatened against Buyer or any of its Affiliates, or (c) investigations by any Governmental Entity which are, to the knowledge of Buyer, pending or threatened against Buyer or any of its Affiliates, which, in the case of each of clauses (a), (b) and (c), have or could have a material adverse effect on the ability of Buyer to perform its obligations hereunder or consummate the transactions contemplated hereby. SECTION 6.05. AVAILABILITY OF FUNDS. Buyer has cash available or has existing borrowing facilities which together are sufficient to enable it to consummate the transactions contemplated by this Agreement. The financing required to consummate the transactions contemplated hereby is collectively referred to as the "Financing". As of the date hereof, Buyer has no reason to believe that Financing will not be available on a timely basis for the transactions contemplated by this Agreement. 56 48 ARTICLE VII COVENANTS OF BUYER Buyer covenants and agrees as follows: SECTION 7.01. CONFIDENTIALITY. Buyer acknowledges that the information being provided to it in connection with the Transaction and the consummation of the other transactions contemplated hereby is subject to the terms of a confidentiality agreement between Buyer and Seller dated December 13, 2000 (the "CONFIDENTIALITY AGREEMENT"), the terms of which are incorporated herein by reference. Effective upon, and only upon, the Closing, the Confidentiality Agreement shall terminate with respect to information relating solely to the Acquired Business PROVIDED, HOWEVER, that Buyer acknowledges that any and all other information not related to the Acquired Business provided to it by Seller or Seller's representatives concerning Seller, the Seller Entities or any other Affiliate of Seller shall remain subject to the terms and conditions of the Confidentiality Agreement after the Closing Date. SECTION 7.02. NO ADDITIONAL REPRESENTATIONS. Buyer acknowledges that none of Seller, any of its Affiliates (including any Seller Entity or any Clairol Entity) or any other person has made any representation or warranty, expressed or implied, as to the accuracy or completeness of any information regarding the Acquired Business furnished or made available to Buyer and its representatives, except as expressly set forth in this Agreement or the Seller Disclosure Schedule, and none of Seller, any of its Affiliates (including any Seller Entity or any Clairol Entity) or any other person shall have or be subject to any liability to Buyer, any Buyer Subsidiary or any other person resulting from the distribution to Buyer, or Buyer's use of, any such information, including the Confidential Offering Memorandum prepared by Goldman, Sachs & Co. dated December 2000, and any information, documents or material made available to Buyer and its representatives in certain "data rooms", management presentations or in any other form in expectation of the transactions contemplated hereby. SECTION 7.03. NO USE OF CERTAIN NAMES. Subject to the terms of the Transaction Documents, Buyer shall, and shall cause the Buyer Subsidiaries and the Clairol Entities to, promptly and in any event (a) within 60 days after Closing, to 57 49 change the names of the International Clairol Subsidiaries to discontinue any references to the BMS Names, (b) within 90 days after Closing, to revise product literature and labeling to delete all references to the BMS Names and (c) within 45 days after Closing, to change signing and stationery and otherwise discontinue use of the BMS Names; PROVIDED, HOWEVER, that, for a period of 180 days from the Closing Date, Buyer, the Buyer Subsidiaries and the Clairol Entities may continue to distribute product literature that uses any BMS Names and distribute products with labeling that uses any BMS Names to the extent that such product literature and labeling exists on the Closing Date. In no event shall Buyer, any Buyer Subsidiary or any Clairol Entity use any BMS Names after the Closing in any manner or for any purpose different from the use of such BMS Names by Seller, the Seller Entities and the Clairol Entities during the 90-day period preceding the Closing. With respect to product inventory manufactured prior to the Closing, Buyer, the Buyer Subsidiaries and the Clairol Entities may continue to sell such inventory, notwithstanding that it bears one or more of the BMS Names, for a reasonable time after the Closing (not to exceed 365 days). "BMS Names" means "BRISTOL-MYERS", "Bristol-Myers Squibb" and "Bristol- Myers Squibb Company", any variations and derivatives thereof and all other logos or trademarks of Seller or its Affiliates not included in Section 4.11 of the Seller Disclosure Schedule. SECTION 7.04. BUYER ACTIVITY ON CLOSING DATE. On the Closing Date, Buyer shall, and shall cause the Buyer Subsidiaries and the Clairol Entities to, conduct the Acquired Business in the ordinary course in substantially the same manner as presently conducted and, on the Closing Date, shall not permit any Buyer Subsidiary or any Clairol Entity to effect any extraordinary transactions (other than any such transactions expressly required by Applicable Law or by this Agreement) that could result in Tax liability to Seller, a Seller Entity or a Clairol Entity in excess of Tax liability associated with the conduct of their business in the ordinary course. SECTION 7.05. SECURITIES ACT. Buyer and the Buyer Subsidiaries shall not offer to sell or otherwise dispose of the Clairol Shares or the International Shares so acquired by it or them in violation of any of the registration requirements of the Securities Act of 1933, as amended, or the applicable securities laws of any other jurisdiction. 58 50 SECTION 7.06. GUARANTEES. To the extent Seller or an Affiliate of Seller (other than a Clairol Entity) has made or given a Seller Guarantee, Buyer will use its best efforts to cause Seller or such Affiliate of Seller to be released from such Seller Guarantee or to terminate such Seller Guarantee. SECTION 7.07. LION AGREEMENT. Buyer and Seller agree that this Agreement shall not be deemed to constitute an assignment of the Seller's rights and obligations under the License Agreement, effective January 1, 1984 (as the same may be amended from time to time, the "LION AGREEMENT"), by and between the Seller and Lion Corporation ("LION"), which grants to Lion, among other things, the exclusive right to Vitalis and other products (the "COVERED PRODUCTS") in Japan. Buyer agrees not to, and agrees to cause any purchaser or transferee of the Acquired Business or rights with respect to the Covered Products to agree not to, directly or indirectly, manufacture, market or sell Covered Products in Japan. Buyer shall have no liability to Seller pursuant to this Section 7.07 if, through no fault or knowledge of Buyer, a third party unaffiliated with Buyer sells any Covered Products in the Japanese market; PROVIDED that if Buyer learns of such diversion of Covered Products into the Japanese market by a third party, Buyer shall use its best efforts to cease selling Covered Products to such third party. SECTION 7.08. CERTAIN ACTIONS. Buyer agrees not to take any of the actions set forth in Schedule I. ARTICLE VIII MUTUAL COVENANTS Each of Seller and Buyer covenants and agrees as follows: SECTION 8.01. CONSENTS. Buyer acknowledges that consents and waivers with respect to the transactions contemplated by this Agreement and the Other Transaction Documents may be required from parties to contracts that are Acquired Assets or Assumed Liabilities, or contracts to which a Clairol Entity is a party, including the Contracts listed in the Seller Disclosure Schedule (collectively, the "TRANSFERRED CONTRACTS") or with respect to environmental permits or other assets and that such consents and waivers have not been 59 51 obtained. Buyer agrees that Seller shall not have any liability whatsoever to Buyer arising out of or relating to the failure to obtain any consents or waivers that may be required in connection with the transactions contemplated by this Agreement or because of the termination of any Transferred Contract as a result thereof. Buyer further agrees that no representation, warranty or covenant of Seller contained herein shall be breached or deemed breached, and no condition shall be deemed not satisfied, as a result of (a) the failure to obtain any such consent or waiver, (b) any such termination or (c) any lawsuit, action, proceeding or investigation commenced or threatened by or on behalf of any person arising out of or relating to the failure to obtain any such consent or any such termination. Prior to the Closing, Seller and Buyer will use commercially reasonable efforts to obtain all such consents and waivers; PROVIDED, HOWEVER, that such efforts shall not include any requirement of Seller or any of its Affiliates to expend money, commence, defend or participate in any litigation, incur any obligation in favor of, or offer or grant any accommodation (financial or otherwise) to, any third party, and all costs and expenses related to seeking and obtaining such consents and waivers shall be for Buyer's account. SECTION 8.02. COOPERATION. Buyer and Seller shall cooperate with each other, and shall cause their officers, employees, agents, auditors and representatives to cooperate with each other, for a period of 60 days after the Closing to ensure the orderly transition of the Acquired Business from Seller to Buyer and to minimize any disruption to the respective businesses of Seller, Buyer and the Acquired Business, that might result from the transactions contemplated hereby. After the Closing, upon reasonable written notice, Buyer and Seller shall furnish or cause to be furnished to each other and their employees, counsel, auditors and representatives access, during normal business hours, to such information and assistance relating to the Acquired Business as is reasonably necessary for financial reporting and accounting matters, the preparation and filing of any Tax returns, reports or forms or the defense of any Tax claim or assessment. The obligation to cooperate pursuant to the preceding sentence insofar as it concerns Taxes shall terminate at the time the relevant applicable statute of limitations expires (giving effect to any extension thereof). Each party shall reimburse the other for reasonable out-of- pocket costs and expenses incurred in assisting the other pursuant to this Section 8.02. Neither party shall be 60 52 required by this Section 8.02 to take any action that would unreasonably interfere with the conduct of its business or unreasonably disrupt its normal operations (or, in the case of Buyer, the Acquired Business). SECTION 8.03. PUBLICITY. Seller and Buyer agree that, from the date hereof through the Closing Date, no public release or announcement concerning the transactions contemplated hereby shall be issued by either party without the prior consent of the other party (which consent shall not be unreasonably withheld), except as such release or announcement may be required by law or the rules or regulations of any United States or foreign securities exchange, in which case the party required to make the release or announcement shall allow the other party reasonable time to comment on such release or announcement in advance of such issuance. SECTION 8.04. BEST EFFORTS. (a) Subject to the terms and conditions of this Agreement (including the provisions set forth in Sections 8.01 and 8.05), each party shall use its best efforts to cause the Closing to occur. Without limiting the foregoing or the provisions set forth in Section 8.05 and without limiting the requirements for Closing set forth in Section 2.01(a), Buyer and Seller shall use their respective best efforts to cause the Closing to occur on or prior to the Six Month Anniversary or as soon as practicable thereafter. Except as expressly provided in Section 8.05(c), each of Seller and Buyer shall not, and shall not permit any of their respective Affiliates to, take any action that would, or that could reasonably be expected to, result in any of the conditions to the purchase and sale of the Clairol Shares, the International Shares and the Acquired Assets and the assignment and assumption of the Assumed Liabilities set forth in Article III not being satisfied. (b) Except as expressly provided in Section 8.05(c), Buyer shall use its best efforts to have any restraint or prohibition of the type described in clause (z) of the proviso to Section 2.01(a)(ii) terminated as promptly as practicable. (c) Buyer and Seller agree that Seller's right to (i) receive interest on the Purchase Price after the Six Month Anniversary pursuant to Section 1.01(a), (ii) terminate this Agreement pursuant to Section 13.01(d) and (iii) receive the payment specified in Section 13.03 upon a termination pursuant to Section 13.01(d), do not, in any manner, reduce, lessen, 61 53 alter, modify or otherwise change Buyer's obligations under this Section 8.04 to use its best efforts to cause the Closing to occur (including its obligation to use best efforts to cause the Closing to occur on or prior to the Six Month Anniversary or as soon as practicable thereafter) or to cause any restraint or prohibition of the type described in clause (z) of the proviso to Section 2.01(a)(ii) to be lifted or terminated. SECTION 8.05. ANTITRUST NOTIFICATION AND OTHER REGULATORY FILINGS. (a) Each of Seller and Buyer shall as promptly as practicable, but in no event later than five business days following the execution and delivery of this Agreement, file with the United States Federal Trade Commission (the "FTC") and the United States Department of Justice (the "DOJ") the notification and report form required for the transactions contemplated hereby. Each of Buyer and Seller shall furnish to the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission which is necessary under the HSR Act. Seller and Buyer shall keep each other apprised of the status of any communications with, and any inquiries or requests for additional information from, the FTC and the DOJ and shall comply with any such inquiry or request as promptly as practicable, but in no event later than five business days after receipt of such inquiry or request. Any such notification and report form and supplemental information shall be in substantial compliance with the requirements of the HSR Act. Each of Seller and Buyer shall use its best efforts to obtain any clearance required under the HSR Act for the Transaction. (b) Seller and Buyer shall make any required regulatory filings, and shall use their best efforts to obtain any required regulatory consents, authorizations, orders, approvals and declarations outside the United States, in each case as promptly as practicable after the execution and delivery of this Agreement, including filings under the Mexican Merger Regulation, the Canada Competition Act and the merger control acts in the United Kingdom and Germany and the Irish Mergers Act. (c) Seller and Buyer shall further use their best efforts to (i) if and to the extent Buyer so elects, contest any Antitrust Proceeding until each such Antitrust Proceeding is either resolved pursuant to a final nonappealable court order or Buyer has determined not to further contest such Antitrust Proceeding and (ii) once all such Antitrust 62 54 Proceedings are so resolved or abandoned by Buyer, take such actions as may be necessary to resolve any objections as may be asserted by any Governmental Entity to obtain all necessary clearances and approvals under the U.S. Antitrust Laws. Subject to Buyer's obligations pursuant to Section 8.05(a) to keep Seller apprised of the status of the regulatory process, Buyer shall control the regulatory process to obtain all such clearances and consents under the U.S. Antitrust Laws (including all Antitrust Proceedings), subject to Seller's right to participate therein. Seller shall not have independent substantive contacts with any Governmental Entities administering the U.S. Antitrust Laws with respect to the transactions contemplated hereby (unless Seller is otherwise advised by its counsel that it is advisable for Seller to do so). (d) Buyer and Seller agree that Seller's right to (i) receive interest on the Purchase Price after the Six Month Anniversary pursuant to Section 1.01(a), (ii) terminate this Agreement pursuant to Section 13.01(d) and (iii) receive the payment specified in Section 13.03 upon a termination pursuant to Section 13.01(d), do not, in any manner, reduce, lessen, alter, modify, or otherwise change Buyer's obligations under this Section 8.05 to use its best efforts to obtain any clearance required under the HSR Act for the Transaction and any other required regulatory consents, authorizations, orders, approvals and declarations outside the United States. SECTION 8.06. RECORDS. As soon as practicable on or after the Closing Date, Seller shall deliver or cause to be delivered to Buyer all Records, if any, in the possession of Seller and its Affiliates relating to the Acquired Business to the extent not then in the possession of the Clairol Entities, subject to the following exceptions: 63 55 (i) Buyer recognizes that certain Records may contain incidental information relating to the Acquired Business or may relate primarily to subsidiaries or divisions of Seller other than the Acquired Business and that Seller may retain such Records and shall provide copies of the relevant portions thereof to Buyer; (ii) Seller may retain all Records prepared in connection with the Transaction, including bids received from other parties and analyses relating to the Acquired Business; and (iii) Seller may retain any Tax returns, reports or forms, and Buyer shall be provided with copies of such returns, reports or forms only to the extent that they relate to the Company's or the Clairol Subsidiaries' separate returns or separate Tax liability. SECTION 8.07. SUPPORT SERVICES. Seller and its Affiliates provide certain support services, including accounting, office, sales and distribution, corporate management, information management, tax, legal, financial, treasury, strategic sourcing, logistics, trademark maintenance, and employee compensation and benefits services ("SUPPORT SERVICES") to the Acquired Business. Buyer acknowledges that, except to the extent provided in the Transitional Services Agreements, all Support Services will be terminated as of the Closing Date. SECTION 8.08. COLLECTION OF RECEIVABLES; FORWARDING OF PAYMENTS. From and after the Closing, Buyer and each of the Buyer Subsidiaries and Clairol Entities, as applicable, shall have the right and authority to collect for its own account all Receivables and other related items that are included in the Acquired Assets and to endorse with the name of Seller or an Affiliate of Seller, as applicable, any checks or drafts received with respect to any Receivables or such other related items. Seller shall, or shall cause its Affiliates to, promptly deliver to Buyer, the Buyer Subsidiaries and the Clairol Entities, as applicable, any cash or other property received directly or indirectly by it with respect to the Receivables and such other related items. Buyer shall, or shall cause its Affiliates to, promptly deliver to Seller and its Affiliates, as applicable, any cash or other property received directly 64 56 or indirectly by it with respect to the Excluded Receivables or any other Excluded Assets. SECTION 8.09 ADVISORY COMMITTEES. Seller and Buyer shall establish four advisory committees (the "ADVISORY COMMITTEES"), which shall each act as a forum in which issues and disputes arising under the International Sales and Distribution Transitional Services Agreement, the GBS Transitional Services Agreement, the CMO Transitional Services Agreement and the IM Transitional Services Agreement, respectively, can be evaluated and discussed. Each Advisory Committee will consist of four members, with Buyer eligible to designate two members and Seller eligible to designate two members. Seller and Buyer agree that they shall designate the members of each Advisory Committee within thirty days following the date of this Agreement, and shall cause each Advisory Committee to establish guidelines governing its operation and function within sixty days following the date of this Agreement. SECTION 8.10. TRANSITIONAL RELABELING SERVICES. Seller agrees that, not less than thirty days prior to the Closing Date, it will provide written notice to Buyer if Seller or its Affiliates will require Buyer or its Affiliates to perform relabeling services that, as a result of the Transaction, are required to comply with Applicable Laws after the Closing ("TRANSITIONAL RELABELING SERVICES"). Buyer agrees that, not less than thirty days prior to the Closing Date, it will provide written notice to Seller if Buyer or its Affiliates will require Seller or its Affiliates to perform Transitional Relabeling Services. Any notice provided pursuant to this Section 8.10 shall describe the Transitional Relabeling Services, including the nature of such services and the countries in which they will be necessary. Seller and Buyer further agree that, to the extent any such notice is provided, they will agree on a fee for such services based on the fully burdened costs of the party responsible for providing the services, and the Schedules to the International Sales and Distribution Transitional Services Agreement shall be appropriately modified to reflect such services and the related fees for such services. 65 57 ARTICLE IX EMPLOYEE AND RELATED MATTERS SECTION 9.01. EMPLOYEE MATTERS. (a) Effective as of the Closing Date, Buyer, shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, assume and be responsible for all employment and employee benefit-related matters, obligations and liabilities that are payable on or after the Closing Date, regardless of whether such liabilities arise before, on or after the Closing Date, with respect to all persons who are employees of the Acquired Business immediately before the Closing Date, including active employees, employees on leave of absence or vacation, employees on short-term or long-term disability, employees represented by bargaining unit representatives and persons employed within and outside the United States (collectively, the "EMPLOYEES"), except as specifically provided otherwise in this Article IX. From and after the Closing Date, (i) Buyer and the Clairol Entities shall assume and have all responsibilities, liabilities and obligations with respect to the Employees and their beneficiaries, including any claims incurred at any time, and (ii) Seller and its Affiliates shall have no responsibilities, liabilities or obligations with respect to the Employees and their beneficiaries, except as specifically provided otherwise in this Article IX. (b) The provisions of this Article IX shall apply to all Employees, including Employees based in locations outside the United States. The term "Employee" includes all employees of the CMO, other than BMS Retained Employees (as defined in the CMO Transitional Services Agreement). (c) In addition to the foregoing, effective as of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries to, assume all contracts, obligations and liabilities with respect to independent contractors of Seller, the Seller Entities and the Clairol Entities that relate primarily to the Acquired Business (including any sales agents and other independent contractors who are not Employees). (d) Seller has provided to Buyer a list (by name or by category and number) of all Employees of the Acquired Business who are employees of the Clairol Entities, as well as all Employees who are not employees of the Clairol Entities, and all independent contractors of Seller, the Seller Entities and the Clairol Entities that relate primarily to the Acquired 66 58 Business. Seller shall provide Buyer with an updated list on the Closing Date, which shall reflect any employment terminations and new hires in the ordinary course of business consistent with this Agreement. SECTION 9.02. BARGAINING UNIT EMPLOYEES. From and after the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries, if applicable, to, assume the collective bargaining agreement between Clairol, Inc. and Local 300S, Production Service & Sales District Council, U.F.C.W. AFL-CIO- CLC and any other collective bargaining or labor agreements with respect to Employees previously disclosed to Buyer (collectively, the "COLLECTIVE BARGAINING AGREEMENTS"), and shall assume all liabilities and obligations under the Collective Bargaining Agreements arising under, inter alia, the terms of the Collective Bargaining Agreements, the National Labor Relations Act, the Labor Management Relations Act and all other laws and regulations applicable in the jurisdictions in which Employees are employed, and Seller and its Affiliates shall have no liability in connection with the Collective Bargaining Agreements with respect to Employees and their beneficiaries. SECTION 9.03. CONTINUITY OF EMPLOYMENT. (a) Buyer and Seller intend that there shall be continuity of employment with respect to all Employees as of the Closing Date. Buyer shall, or shall cause the Buyer Subsidiaries to, offer employment to each Employee as of the Closing Date, or, as applicable, shall cause the Clairol Entity that presently employs each Employee to continue the Employee's employment as of the Closing Date, in all cases on substantially the same terms and conditions as are applicable to such Employees immediately before the Closing Date. (b) Notwithstanding anything in this Agreement to the contrary, as of the Closing Date, Buyer shall, or shall cause, the Buyer Subsidiaries and the Clairol Entities to, continue the employment of Employees based in locations outside the United States as required by the Acquired Rights Directive or any similar law in the relevant jurisdiction, and shall grant for a period of not less than that provided for by local country law, substantially the same terms and conditions of employment that apply to such Employees immediately prior to the Closing Date. The term "ACQUIRED RIGHTS DIRECTIVE" shall mean the "European Council Directive of February 14, 1977 on the Approximation of the Laws of the Member States relating to the Safeguarding of Employee's Rights in the Event of Transfers of Undertakings, Business or Parts of Businesses" 67 59 (77/187/EC), as amended, and its subsequent transposition into local laws. In addition, notwithstanding anything in this Agreement to the contrary, as of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, offer and continue the employment of the Employees on the same terms and conditions as in effect before the Closing Date, where necessary to avoid the imposition of severance or similar obligations on Seller or its Affiliates or where otherwise required by law. (c) For not less than 18 months following the Closing Date (the "CONTINUATION PERIOD"), Buyer shall maintain, or, where applicable, shall cause the Buyer Subsidiaries and the Clairol Entities to maintain (to the extent permitted by law), compensation arrangements, employee benefit plans, and perquisites with respect to Employees that are comparable in the aggregate to those provided to such Employees by Seller and its Affiliates immediately prior to the Closing Date. In the alternative, during the Continuation Period, Buyer may replace or, where applicable, cause the Buyer Subsidiaries and the Clairol Entities to replace (to the extent permitted by law), Seller's compensation arrangements, employee benefit plans and perquisites with compensation arrangements, employee benefit plans and perquisites that are comparable in the aggregate to those provided to similarly situated employees of Buyer and the Buyer Subsidiaries, PROVIDED that Employees shall either be treated entirely under the first sentence or entirely under the second sentence of this Section 9.03(c). With respect to Buyer's stock-based plans, all Employees in Seller's grades D-8 and above, and at least 50% of the Employees in Seller's grades D-6 and D-7, shall receive stock awards from Buyer in accordance with this Section 9.03 immediately after the Closing, and Employees' stock awards shall provide for full vesting upon termination of employment in circumstances that entitle such Employees to severance benefits under Section 9.08. (d) Buyer shall cause Employees' service with Seller and its Affiliates before the Closing Date to be credited for all purposes for which such service was recognized by Seller and its Affiliates with respect to all employee benefit plans and arrangements and employment-related entitlements provided, maintained or contributed to by Buyer, the Buyer Subsidiaries and the Clairol Entities for Employees on or after the Closing Date, except as specifically provided otherwise in this Article IX. 68 60 (e) Nothing in this Agreement shall be deemed to prohibit the termination of any Employee's employment or the modification of any benefit plans and arrangements, consistent with applicable law and the requirements of Sections 9.03(b) and (c). SECTION 9.04. PENSION PLAN. Seller shall retain responsibility for all benefits accrued before the Closing Date by Employees under the Bristol-Myers Squibb Company Retirement Income Plan (the "Seller's Pension Plan"), and neither Buyer, the Buyer Subsidiaries nor any of their Affiliates shall have any liability with respect to the Seller's Pension Plan. As of the Closing Date, all Employees shall have a fully vested interest in their accrued benefits under the Seller's Pension Plan. Employees who, on the Closing Date, are participants in the Seller's Pension Plan shall be immediately eligible on the Closing Date for participation under the terms of the Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan ("PST PLAN"). Employees shall receive credit for their service with Seller and its Affiliates prior to the Closing Date for all purposes under the PST Plan, including for the purposes of eligibility, vesting and contribution formulas. SECTION 9.05. SAVINGS AND INVESTMENT PLAN. (a) Effective as of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, have in effect a profit-sharing plan in accordance with Section 9.03 hereof that includes a qualified cash or deferred arrangement within the meaning of Section 401(k) of the Code (the "BUYER'S 401(k) PLAN") and is intended to be qualified pursuant to Section 401(a) of the Code. Buyer shall cause Buyer's 401(k) Plan to accept direct rollover contributions (within the meaning of Section 401(a)(31) of the Code and the regulations promulgated thereunder) of Employee account balances which are made in the form of cash and/or outstanding Employee loan balances from the Bristol-Myers Squibb Company Savings and Investment Program (the "SELLER'S 401(k) PLAN"). Employees shall have a fully vested interest in their accounts under the Seller's 401(k) Plan, and in any accounts transferred to the Buyer's 401(k) Plan. Neither Buyer, the Buyer Subsidiaries, Buyer's 401(k) Plan nor any of their Affiliates shall have or assume any liability in connection with Seller's 401(k) Plan (except with respect to accounts that are transferred as described above). SECTION 9.06. NON-QUALIFIED PLANS. (a) Effective as of the Closing Date, Buyer shall, or shall cause the Buyer 69 61 Subsidiaries and the Clairol Entities to, have in effect non-qualified defined benefit and defined contribution plans that provide benefits to Employees who are participating in Seller's Benefit Equalization Plans and Key International Pension Plan before the Closing Date, in accordance with Section 9.03 above. (b) The non-qualified defined contribution plans of Buyer, the Buyer Subsidiaries and the Clairol Entities ("BUYER'S BEP-SIP") shall provide those Employees who are participating before the Closing Date in the Benefits Equalization Plan of Bristol-Myers Squibb Company and its Subsidiary or Affiliated Corporations Participating in the Bristol-Myers Squibb Company Savings and Investment Program ("SELLER'S BEP-SIP") with an account balance under Buyer's BEP-SIP equal to the Employees' account balance under Seller's BEP-SIP as of the Closing Date. Buyer shall, and shall cause the Buyer Subsidiaries and the Clairol Entities to, assume and be responsible for paying all benefits accrued by Employees under Seller's BEP-SIP before the Closing Date. (c) Seller shall retain responsibility for all benefits accrued before the Closing Date by Employees under (i) the Benefits Equalization Plan of Bristol-Myers Squibb Company and its Subsidiary or Affiliated Corporations Participating in the Bristol-Myers Squibb Company Retirement Income Plan or the Bristol-Myers Squibb Company Puerto Rico, Inc. Retirement Income Plan ("SELLER'S BEP-RIP") and (ii) Seller's Key International Pension Plan ("SELLER'S KIP"). Neither Buyer, the Buyer Subsidiaries, the Clairol Entities nor any plan of Buyer, the Buyer Subsidiaries, or the Clairol Entities shall have or assume any liability with respect to Seller's BEP-RIP or Seller's KIP. SECTION 9.07. WELFARE BENEFIT PLANS. (a) Effective as of the Closing Date, Buyer shall, and shall cause the Buyer Subsidiaries and the Clairol Entities to, offer the Employees and their eligible dependents participation in welfare benefit plans and programs of Buyer (the "BUYER WELFARE BENEFIT PLANS"), including medical, dental, life insurance, accident, survivor, short term disability, long term disability, long term care, flexible benefit, adoption assistance and other welfare benefit plans and programs, as applicable, in accordance with Section 9.03. All waiting periods and pre-existing condition clauses shall be waived under the Buyer Welfare Benefit Plans for Employees and their eligible dependents who were participating in the welfare benefits plans and programs of Seller and its Affiliates 70 62 ("SELLER WELFARE BENEFIT PLANS") before the Closing Date. Buyer shall cause the Buyer Welfare Benefit Plans to recognize any out-of-pocket medical and dental expenses incurred by each of the Employees and their eligible dependents prior to the Closing Date and during the calendar year in which the Closing Date occurs for purposes of determining deductibles and out-of-pocket maximums under the Buyer Welfare Benefit Plans. (b) Seller shall retain responsibility for (i) all claims incurred by Employees under Seller's health and dental plans before the Closing Date and (ii) all stock options and restricted stock granted to Employees under Seller's equity plans before the Closing Date, and Buyer shall not be responsible for such health and dental claims, stock options and restricted stock. In addition, Buyer shall not be responsible for any dependent life insurance and other insured benefit claims that are incurred by Employees before the Closing Date, to the extent that such claims are paid by the insurance carrier to the Employees according to the terms of the applicable insurance contracts maintained by Seller. (c) Buyer agrees to provide or cause to be provided under the Buyer Welfare Benefit Plans to each Employee who retires on or after the Closing Date and during the Continuation Period, and their dependents, health care benefits and coverage that are comparable in the aggregate to those set forth in the Comprehensive Medical Plan Summary Plan Description for Retirees of Bristol-Myers Squibb Company, or such other retiree benefit plan or arrangement of Seller or its Affiliates that is applicable to the Employee immediately before the Closing Date (or that would have been applicable had the Employee been eligible to retire immediately before the Closing Date), in accordance with Section 9.03. If Employees are eligible to receive health care benefits under Seller's retiree plans on or after the Closing Date, Buyer agrees that Seller's retiree plans shall be secondary to the Buyer Welfare Benefit Plans (both active and retiree plans). (d) Effective as of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, have in effect a health care and dependent care reimbursement account plan (the "BUYER REIMBURSEMENT PLAN"), in accordance with Section 9.03. Buyer's Reimbursement Plan shall give full effect to, and continues in effect, salary reduction elections made under the health care and dependent care reimbursement account plans of Seller and its Affiliates as in effect on the Closing Date (the "Seller Reimbursement Plan"). The Seller Reimbursement Plan shall transfer to the 71 63 Buyer Reimbursement Plan an amount equal to the aggregate account balances of Employees as of the Closing Date under the Seller Reimbursement Plan. Buyer shall reimburse Seller on a dollar-for-dollar basis for forfeitures of the Employee accounts under the Buyer Reimbursement Plan that relate to the calendar year in which the Closing Date occurs. (e) Effective as of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, assume all responsibilities and obligations for continuation coverage under Sections 601 ET SEQ. of ERISA (COBRA obligations) and any state continuation coverage requirements with respect to the Employees and their beneficiaries. SECTION 9.08. SEVERANCE. Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, adopt and maintain, effective as of the Closing Date, one or more severance policies which shall be identical in all material respects (including the Rule of 70 provisions, as described in Seller's written communications to Employees) to the terms of the severance policies of Seller and its Affiliates applicable to Employees as in effect on the Closing Date (the "SELLER SEVERANCE POLICIES") and which shall be enhanced as described in Exhibit N (the "ENHANCED SEVERANCE PROGRAM"). Buyer shall cause the Enhanced Severance Program to be maintained for Employees whose employment terminates on or after the Closing Date and during the Continuation Period. Buyer and the Buyer Subsidiaries shall assume and be responsible for paying any severance obligations (including termination indemnities, notice liabilities and statutory severance obligations) that are payable as a result of the transactions contemplated by this Agreement, or that are otherwise payable with respect to Employees on or after the Closing Date. SECTION 9.09. VACATION BENEFITS. As of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, recognize all of the Employees' accrued and unused vacation benefits consistent with the terms of the vacation policies of Seller and its Affiliates applicable to Employees as in effect on the Closing Date. SECTION 9.10. RELOCATION BENEFITS. As of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, provide each eligible Employee with relocation benefits that are comparable 72 64 in the aggregate to the relocation policies of Seller and its Affiliates that are applicable to such Employees on the Closing Date. Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, perform or cause to be performed all obligations of Seller and its Affiliates with respect to Employees' existing relocation arrangements, and Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, have all rights and obligations of Seller and its Affiliates under such relocation arrangements with respect to Employees. SECTION 9.11. EXPATRIATES. As of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, assume all obligations and responsibilities with respect to each Employee who is or was temporarily assigned to work at a location outside such Employee's home country ("EXPATRIATES") as of the Closing Date as disclosed to Buyer. Such obligations and responsibilities shall include, without limitation, compensation increments, housing expenses, travel expenses, relocation expenses and all other applicable benefits, all of which shall be provided by Buyer according to the terms of the Employee's agreement with Seller and its Affiliates as in effect before the Closing Date. Buyer and Seller shall take all actions necessary so that Buyer, the Buyer Subsidiaries and the Clairol Entities shall have all rights and obligations of Seller and its Affiliates with respect to Expatriates, including rights and obligations under tax equalization agreements with the Expatriates. SECTION 9.12. OTHER AGREEMENTS AND BENEFITS. Without limiting the foregoing, as of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, assume all liabilities, and perform or cause to be performed all obligations, of Seller or its Affiliates under the following agreements, programs and policies in effect with respect to Employees as of the Closing Date as disclosed to Buyer: (i) employment and supplemental benefit agreements with respect to Employees based in countries outside the United States, (ii) tuition assistance programs and automobile policies, and (iii) statutory benefits applicable to Employees and their beneficiaries. SECTION 9.13. ANNUAL BONUSES. As of the Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, assume responsibility for, and pay, all annual bonuses that are payable to Employees for the year 73 65 2001, including bonuses accrued before the Closing Date under the annual bonus plans of Seller and its Affiliates. SECTION 9.14. RETENTION BONUS ARRANGEMENTS. (a) To the extent so requested by Seller, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to, administer and make any and all retention bonus payments required to be made to Employees pursuant to the retention bonus arrangements of Seller and its Affiliates that are applicable to the Employees, as set forth in the retention bonus announcements to Employees dated October 2000 from Charles G. Tharp. Seller shall retain the economic obligation with respect to such retention bonus payments to Employees and shall reimburse Buyer, the Buyer Subsidiaries or the Clairol Entities, as applicable, for the net cost of such retention bonus payments made by Buyer, the Buyer Subsidiaries or the Clairol Entities to Employees. (b) In addition to the foregoing, as of the Closing Date, Buyer shall, and shall cause the Buyer Subsidiaries and the Clairol Entities to, provide to Employees the additional retention bonuses described in Exhibit N. Buyer shall be liable for all costs of the retention bonuses described in Exhibit N. SECTION 9.15. INTERNATIONAL PENSION AND SAVINGS PLANS. Appendix A sets forth provisions that are applicable to certain pension and savings plans maintained for Employees based outside the United States. ARTICLE X FURTHER ASSURANCES SECTION 10.01. FURTHER ASSURANCES. From time to time, as and when requested by either party hereto, the other party shall execute and deliver, or cause to be executed and delivered, all such documents and instruments and shall take, or cause to be taken, all such further or other actions (subject to the provisions of Sections 8.01, 8.04 and 8.05), as such other party may reasonably deem necessary or desirable to consummate the transactions contemplated by this Agreement. 74 66 ARTICLE XI INDEMNIFICATION SECTION 11.01. TAX INDEMNIFICATION. (a) Seller shall indemnify Buyer and its Affiliates (including the Clairol Entities) and each of their respective officers, directors, employees, stockholders, agents and representatives and hold them harmless from (i) all liability for Taxes of the Clairol Entities and Taxes relating to the Acquired Assets for the Pre-Closing Tax Period (including any U.S. federal income Taxes imposed on the Company or the U.S. Clairol Subsidiaries as a result of the Code Section 338(h)(10) election contemplated by Section 12.04 of this Agreement), (ii) all liability for Taxes of the Clairol Entities for any taxable period ending after the Closing Date attributable to Seller's breach of its obligations under Section 12.04, and (iii) all liability as a result of Treasury Regulation sec. 1.1502-6(a) for Taxes of Seller or any other corporation which is or has been affiliated with Seller (other than the Clairol Entities). Notwithstanding the foregoing, Seller shall not indemnify and hold harmless Buyer and its Affiliates (including the Clairol Entities) and each of their respective officers, directors, employees or agents, from any liability for Taxes attributable to any action taken on or after the Closing Date by Buyer, any of its Affiliates (including the Clairol Entities), or any transferee of Buyer or any of its Affiliates (other than any such action expressly required by Applicable Law or by this Agreement) (a "BUYER TAX ACT") or attributable to a breach by Buyer of its obligations under this Agreement. (b) Buyer shall, and shall cause the Buyer Subsidiaries and Clairol Entities to, indemnify Seller and its Affiliates and each of their respective officers, directors, employees, stockholders, agents and representatives and hold them harmless from (i) all liability for Taxes of the Clairol Entities and Taxes relating to the Acquired Assets for any taxable period ending after the Closing Date (except to the extent such taxable period began before the Closing Date, in which case Buyer's indemnity will cover only that portion of any such Taxes that are not for the Pre-Closing Tax Period) and (ii) all liability for Taxes attributable to a Buyer Tax Act or to a breach by Buyer of its obligations under this Agreement. 75 67 (c) In the case of any taxable period that includes (but does not end on) the Closing Date (a "STRADDLE PERIOD"): (i) real, personal and intangible property Taxes ("PROPERTY TAXES") of the Clairol Entities and Property Taxes relating to the Acquired Assets allocable to the Pre-Closing Tax Period shall be equal to the amount of such Property Taxes for the entire Straddle Period multiplied by a fraction, the numerator of which is the number of days during the Straddle Period that are in the Pre-Closing Tax Period and the denominator of which is the number of days in the Straddle Period; and (ii) the Taxes of the Clairol Entities and Taxes relating to the Acquired Assets (other than Property Taxes) allocable to the Pre-Closing Tax Period shall be computed as if such taxable period ended as of the close of business on the Closing Date. SECTION 11.02. OTHER INDEMNIFICATION BY SELLER. (a) Except as relates to Taxes, for which the sole indemnification is provided in Section 11.01, Seller shall indemnify Buyer, its Affiliates (including the Clairol Entities) and each of their respective officers, directors, employees, stockholders, agents and representatives against and hold them harmless from any loss, liability, claim, damage or expense (including reasonable legal fees and expenses) suffered or incurred by any such indemnified party to the extent arising from (i) any breach of any representation or warranty of Seller contained in this Agreement or in any certificate delivered pursuant hereto, in each case, which survives the Closing, (ii) any breach of any covenant of Seller contained in this Agreement or any Other Transaction Document, (iii) any failure of Seller to perform or satisfy any employee benefit obligations or liabilities specifically retained by Seller under Article IX, (iv) all Excluded Liabilities or (v) any breach by Buyer or any of its Affiliates of the Agreements set forth in Section 11.02(a)(v) of the Seller Disclosure Schedule. Notwithstanding the foregoing, (A) Seller shall not have any liability under clause (i) or clause (ii) of this Section 11.02(a) (in the case of clause (ii), only with respect to breaches of covenants that occur prior to Closing) unless the aggregate of all losses, liabilities, costs and expenses relating thereto for which Seller would, but for this clause (A), be liable exceeds on a cumulative basis an amount equal to 1% of the Purchase Price, and then only to the extent of any such 76 68 excess; (B) Seller shall not have any liability under clause (i) or clause (ii) of this Section 11.02(a) (in the case of clause (ii), only with respect to breaches of covenants that occur prior to Closing) for any individual item or series of related items where the loss, liability, cost or expense relating thereto is less than $250,000 and such items shall not be aggregated for purposes of the foregoing clause (A) of this Section 11.02(a); (C) Seller's liability under clause (i) or clause (ii) of this Section 11.02(a) (in the case of clause (ii), only with respect to breaches of covenants that occur prior to Closing) shall in no event exceed 20% of the Purchase Price; and (D) Seller shall not have any liability under this Section 11.02(a) to the extent the liability or obligation arises as a result of any action taken or omitted to be taken by Buyer or any of its Affiliates. Notwithstanding the foregoing, the limitations of clauses (A), (B) and (C) of the preceding sentence shall not apply to any employee benefit obligations or liabilities specifically retained by Seller pursuant to the provisions of Article IX or any Excluded Liabilities. In no event shall Seller be obligated to indemnify Buyer or any other person with respect to any matter to the extent that such matter was reflected in the calculation of the adjustment to the Purchase Price, if any, pursuant to Section 2.02. (b) Buyer further acknowledges and agrees that, should the Closing occur, its sole and exclusive remedy with respect to any and all claims relating to this Agreement, any Other Transaction Document, any document or certificate delivered in connection herewith, the transactions contemplated hereby, the Clairol Shares, the International Shares, the Acquired Assets, the Assumed Liabilities or the Clairol Entities or their respective assets, liabilities and business (other than claims of, or causes of action arising from, fraud) or any Federal, state, local or foreign statute, law, ordinance, rule or regulation or otherwise, shall be pursuant to the indemnification provisions set forth in this Article XI. In furtherance of the foregoing, Buyer hereby waives, from and after the Closing, to the fullest extent permitted under applicable law, any and all rights, claims and causes of action (other than claims of, or causes of action arising from, fraud) it or any of its Affiliates (including the Clairol Entities) may have against Seller and its Affiliates arising under or based upon this Agreement, any Other Transaction Document, any document or certificate delivered in connection herewith, or any Federal, state, local or foreign statute, law, ordinance, rule or regulation or 77 69 otherwise (except pursuant to the indemnification provisions set forth in this Article XI). SECTION 11.03. OTHER INDEMNIFICATION BY BUYER. Except as relates to Taxes, for which the sole indemnification is provided in Section 11.01, Buyer shall, and shall cause the Buyer Subsidiaries and Clairol Entities to, indemnify Seller, its Affiliates and each of their respective officers, directors, employees, stockholders, agents and representatives against and hold them harmless from any loss, liability, claim, damage or expense (including reasonable legal fees and expenses) suffered or incurred by any such indemnified party to the extent arising from (i) any breach of any representation or warranty of Buyer contained in this Agreement or in any certificate delivered pursuant hereto, in each case, which survives the Closing, (ii) any breach of any covenant of Buyer contained in this Agreement or any Other Transaction Document, (iii) any guarantee or obligation or liability given or made by Seller or an Affiliate of Seller with respect to any obligation or any Assumed Liability set forth in clause (iv),(v) or (vi) below (each, a "SELLER GUARANTEE"), (iv) all Assumed Liabilities, (v) any obligations assumed or retained by Buyer, the Buyer Subsidiaries or the Clairol Entities pursuant to Article IX, (vi) all obligations and liabilities of whatever kind and nature, primary or secondary, direct or indirect, absolute or contingent, known or unknown, whether or not accrued, whether arising before, on or after the Closing Date, of the Clairol Entities, including any such obligations or liabilities under any agreement, lease, license, permit, plan or commitment to which any Clairol Entity is a party or by which any Clairol Entity or any of its properties or assets are bound or the Benefit Plans set forth in Section 4.14 of the Seller Disclosure Schedule or any plan, fund, program, policy, contract or arrangement described in Section 4.14 but not required to be set forth in Section 4.14 of the Seller Disclosure Schedule (collectively, the "PLANS") (in each case other than items for which indemnification is provided under Section 11.02), (vii) any discontinuance, suspension or modification on or after the Closing Date of any Plan and (viii) any claim that the purchase and sale of the Clairol Shares, the International Shares, the Acquired Assets or the transactions contemplated hereby give rise to any severance or other benefits under any Plan. SECTION 11.04. LIMITATIONS ON LIABILITY; COOPERATION. (a) Notwithstanding any provision herein, 78 70 neither Seller nor Buyer shall in any event be liable to the other party or its Affiliates, officers, directors, employees, stockholders, agents or representatives on account of any indemnity obligation set forth in Section 11.02 or 11.03 for any indirect, consequential, special, incidental or punitive damages (including, but not limited to, lost profits, loss of use, damage to goodwill or loss of business). (b) Buyer and Seller shall cooperate with each other with respect to resolving any claim or liability with respect to which one party is obligated to indemnify the other party hereunder including by making commercially reasonable efforts to mitigate or resolve any such claim or liability. SECTION 11.05. LOSSES NET OF INSURANCE, ETC. The amount of any loss, liability, claim, damage, expense or Tax for which indemnification is provided under this Article XI shall be net of any amounts recovered or recoverable by the indemnified party under insurance policies with respect to such loss, liability, claim, damage, expense or Tax (collectively, a "LOSS") and shall be reduced to take account of any net Tax benefit (including as a result of any basis adjustment) of the indemnified party arising from the incurrence or payment of any such Loss. In computing the amount of any such Tax benefit, the indemnified party shall be deemed to recognize all other items of income, gain, loss, deduction or credit before recognizing any item arising from the receipt of any indemnity payment hereunder or the incurrence or payment of any indemnified Loss. Any indemnity payment under this Agreement shall be treated as an adjustment to the Purchase Price for Tax purposes, unless a final determination (which shall include the execution of a Form 870-AD or successor form) with respect to the indemnified party or any of its Affiliates causes any such payment not to be treated as an adjustment to the Purchase Price for United States Federal income Tax purposes. SECTION 11.06. TERMINATION OF INDEMNIFICATION. The obligations to indemnify and hold harmless a party hereto (a) pursuant to Section 11.01, shall terminate at the time the applicable statutes of limitation with respect to the Tax liabilities in question expire (giving effect to any extension thereof), (b) pursuant to Sections 11.02(a)(i) and 11.03(i), shall terminate when the applicable representation or warranty terminates pursuant to Article XIV and (c) pursuant to Sections 11.02(a)(ii) and 11.03(ii), in each case with respect to breaches of covenants that occur prior to the Closing, shall terminate eighteen months after the Closing Date and (d) 79 71 pursuant to the other clauses of Sections 11.02 and 11.03 shall not terminate; PROVIDED, HOWEVER, that as to clauses (a), (b) and (c) above such obligations to indemnify and hold harmless shall not terminate with respect to any item as to which the person to be indemnified or the related party thereto shall have, before the expiration of the applicable period, previously made a claim by delivering a notice of such claim (stating in reasonable detail the basis of such claim) to the indemnifying party. SECTION 11.07. PROCEDURES RELATING TO INDEMNIFICATION FOR THIRD PARTY CLAIMS. In order for a party (the "INDEMNIFIED PARTY") to be entitled to any indemnification provided for under this Agreement (other than indemnification for a Tax Claim under Section 11.01 which shall be governed by Section 11.09) in respect of, arising out of or involving a claim or demand made by any person against the indemnified party (a "THIRD PARTY CLAIM"), such indemnified party must notify the indemnifying party in writing, and in reasonable detail, of the Third Party Claim within 10 business days after receipt by such indemnified party of written notice of the Third Party Claim; PROVIDED, HOWEVER, that failure to give such notification shall not affect the indemnification provided hereunder except to the extent the indemnifying party shall have been actually prejudiced as a result of such failure (except that the indemnifying party shall not be liable for any expenses incurred during the period in which the indemnified party failed to give such notice). Thereafter, the indemnified party shall deliver to the indemnifying party, promptly after the indemnified party's receipt thereof, copies of all notices and documents (including court papers) received by the indemnified party relating to the Third Party Claim. If a Third Party Claim is made against an indemnified party, the indemnifying party shall be entitled to participate in the defense thereof and, if it so chooses and acknowledges its obligation to indemnify the indemnified party therefor, to assume the defense thereof with counsel selected by the indemnifying party; PROVIDED, HOWEVER, that such counsel is not reasonably objected to by the indemnified party. Should the indemnifying party so elect to assume the defense of a Third Party Claim, the indemnifying party shall not be liable to the indemnified party for legal expenses subsequently incurred by the indemnified party in connection with the defense thereof, unless the indemnified party retains its own counsel due to a mutually agreed upon conflict of 80 72 interest. If the indemnifying party assumes such defense, the indemnified party shall have the right to participate in the defense thereof and to employ counsel (not reasonably objected to by the indemnifying party), at its own expense, separate from the counsel employed by the indemnifying party, it being understood that the indemnifying party shall control such defense. The indemnifying party shall be liable for the fees and expenses of counsel employed by the indemnified party for any period during which the indemnifying party has failed to assume the defense thereof (other than during the period prior to the time the indemnified party shall have given notice of the Third Party Claim as provided above). If the indemnifying party so elects to assume the defense of any Third Party Claim, all of the indemnified parties shall cooperate with the indemnifying party in the defense or prosecution thereof. Such cooperation shall include the retention and (upon the indemnifying party's request) the provision to the indemnifying party of records and information which are reasonably relevant to such Third Party Claim, and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Whether or not the indemnifying party shall have assumed the defense of a Third Party Claim, the indemnified party shall not admit any liability with respect to, or settle, compromise or discharge, such Third Party Claim without the indemnifying party's prior written consent (which consent shall not be unreasonably withheld). SECTION 11.08. PROCEDURES RELATED TO INDEMNIFICATION FOR OTHER CLAIMS (OTHER THAN TAX CLAIMS UNDER SECTION 11.01). In the event any indemnified party should have a claim against any indemnifying party under Section 11.02 or 11.03 that does not involve a Third Party Claim being asserted against or sought to be collected from such indemnified party, the indemnified party shall deliver notice of such claim with reasonable promptness to the indemnifying party. The failure by any indemnified party so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to such indemnified party under Section 11.02 or 11.03, except to the extent that the indemnifying party demonstrates that it has been materially prejudiced by such failure. SECTION 11.09. PROCEDURES RELATING TO INDEMNIFICATION OF TAX CLAIMS. (a) If one party is responsible for the payment of Taxes pursuant to Section 11.01 81 73 (the "TAX INDEMNIFYING PARTY"), and the other party to this Agreement (the "TAX INDEMNIFIED PARTY") receives notice of any deficiency, proposed adjustment, assessment, audit, examination, suit, dispute or other claim (a "TAX CLAIM") with respect to such Taxes, the Tax Indemnified Party shall promptly notify the Tax Indemnifying Party in writing of such Tax Claim. If notice of a Tax Claim is not given to the Tax Indemnifying Party within a sufficient period of time to allow such party effectively to contest such Tax Claim, or in reasonable detail to apprise such party of the nature of the Tax Claim, in each case taking into account the facts and circumstances with respect to such Tax Claim, the Tax Indemnifying Party shall not be liable to the Tax Indemnified Party (or, any of its Affiliates or any of their respective officers, directors, employees, stockholders, agents or representatives) to the extent that the Tax Indemnifying Party position is materially prejudiced as a result thereof. (b) With respect to any Tax Claim, for which the Tax Indemnified Party has not waived its rights to indemnification for Taxes under this Agreement, the Tax Indemnifying Party shall assume and control all proceedings taken in connection with such Tax Claim (including selection of counsel) and, without limiting the foregoing, may in its sole discretion pursue or forego any and all administrative appeals, proceedings, hearings and conferences with any taxing authority with respect thereto, and may, in its sole discretion, either pay the Tax claimed and sue for a refund where applicable law permits such refund suits or contest the Tax Claim in any permissible manner; PROVIDED, HOWEVER, that in the case of a Tax Claim relating solely to Taxes with respect to any Clairol Entity for a Straddle Period, Seller and Buyer shall jointly control all proceedings taken in connection with any such Tax Claim. (c) The Tax Indemnified Party and each of its respective Affiliates shall cooperate with the Tax Indemnifying Party in contesting any Tax Claim, which cooperation shall include the retention and (upon the Tax Indemnifying Party's request) the provision to the Tax Indemnifying Party of records and information which are reasonably relevant to such Tax Claim, and making employees available on a mutually convenient basis to provide additional information or explanation of any material provided hereunder or to testify at proceedings relating to such Tax Claim. (d) In no case shall Buyer, the Buyer Subsidiaries, the Clairol Entities or any of their respective 82 74 officers, directors, employees, stockholders, agents or representatives settle or otherwise compromise any Tax Claim without Seller's prior written consent. Neither party shall settle a Tax Claim relating solely to Taxes of the Company or the Clairol Subsidiaries for a Straddle Period without the other party's prior written consent. ARTICLE XII TAX MATTERS SECTION 12.01. RESPONSIBILITY FOR PREPARATION AND FILING OF TAX RETURNS AND AMENDMENTS. (a) For any taxable period of the Clairol Entities that includes (but does not end on) the Closing Date, Buyer shall timely prepare and file with the appropriate authorities all Tax returns, reports and forms required to be filed and shall pay all Taxes due with respect to such returns, reports and forms; PROVIDED that Seller shall remit to Buyer not less than ten (10) days prior to the due date of any such return, report or form any amount owed by Seller pursuant to Section 11.01 with respect to the taxable periods covered by such returns, reports or forms. All such returns shall be prepared on a basis consistent with the past practice of the Clairol Entities and in a manner that does not distort taxable income provided such basis will not subject Buyer to any penalties or fines or such basis is otherwise not prohibited by Applicable Law. Buyer shall furnish such returns to Seller for its approval (which approval shall not be unreasonably delayed or withheld) at least 30 days prior to the due date for filing such returns. (b) For any taxable period of the Clairol Entities that ends on or before the Closing Date, Seller shall timely prepare and file with the appropriate authorities all Tax returns, reports and forms required to be filed, and shall pay all Taxes due with respect to such returns, reports and forms. To the extent that they relate to the Clairol Entities, all such returns shall be prepared on a basis consistent with the past practice of Clairol Entities and in a manner that does not distort taxable income. Buyer and Seller agree to cause the Clairol Entities to file all Tax returns, reports and forms for the period including the Closing Date on the basis that the relevant taxable period ended as of the close of business on the Closing Date, unless the relevant taxing authority will not accept a return, report or form filed on that basis. 83 75 (c) Seller shall be responsible for filing any amended, consolidated, combined or unitary Tax returns for taxable years ending on or prior to the Closing Date. For those jurisdictions in which separate Tax returns are filed by the Company or the Clairol Subsidiaries, any required amended returns shall be prepared by Seller and furnished to the Company or the Clairol Subsidiaries, as the case may be, for signature and filing at least 30 days prior to the due date for filing such returns, and the Company or applicable Clairol Subsidiary, as the case may be, shall promptly sign and timely file any such amended return. SECTION 12.02. COOPERATION. Each of Seller, the Seller Entities, the Clairol Entities and Buyer shall reasonably cooperate, and shall cause their respective Affiliates, officers, employees, agents, auditors and representatives reasonably to cooperate, in preparing and filing all returns, reports and forms relating to Taxes, including maintaining and making available to each other all records necessary in connection with Taxes and in resolving all disputes and audits with respect to all taxable periods relating to Taxes. Buyer and Seller recognize that Seller and its Affiliates will need access, from time to time, after the Closing Date, to certain accounting and Tax records and information held by the Clairol Entities to the extent such records and information pertain to events occurring prior to the Closing Date; therefore, Buyer agrees, and agrees to cause the Clairol Entities, (a) to use their best efforts to properly retain and maintain such records until such time as Seller agrees that such retention and maintenance is no longer necessary, and (b) to allow Seller and its agents and representatives (and agents or representatives of any of its Affiliates), at times and dates mutually acceptable to the parties, to inspect, review and make copies of such records as Seller may deem necessary or appropriate from time to time, such activities to be conducted during normal business hours and at Seller's expense. SECTION 12.03. REFUNDS AND CREDITS. Any refunds or credits of Taxes of the Clairol Entities or Taxes relating to the Acquired Assets for any taxable period ending on or before the Closing Date shall be for the account of Seller. Any refunds or credits of Taxes of the Clairol Entities or Taxes relating to the Acquired Assets for any taxable period beginning after the Closing Date shall be for the account of the Buyer. Any refunds or credits of Taxes of the Clairol Entities or Taxes relating to the Acquired Assets for any 84 76 Straddle Period shall be equitably apportioned between Seller and Buyer. Buyer shall, if Seller so requests and at Seller's expense, cause the Clairol Entities to file for and obtain any refunds or credits to which Seller is entitled under this Section 12.03. Buyer shall permit Seller to control the prosecution of any such refund claim and, where deemed appropriate by Seller, shall cause the Clairol Entities to authorize by appropriate powers of attorney such persons as Seller shall designate to represent the Clairol Entities, as applicable, with respect to such refund claim, PROVIDED, HOWEVER, that the prosecution of such could not give rise to Taxes imposed upon any Buyer Indemnified Person. Buyer shall cause the Clairol Entities to forward to Seller any such refund to which it is entitled under this Section 12.03 within 10 days after the refund is received (or reimburse Seller for any such credit within 10 days after the credit is allowed or applied against other Tax liability); PROVIDED, HOWEVER, that any such amounts payable to Seller shall be net of any Tax cost or Tax benefit (including as a result of any basis adjustment) to Buyer or the Clairol Entities, as the case may be, attributable to the receipt of such refund and/or the payment of such amounts to Seller. Seller and Buyer shall treat any payments under the preceding sentence that Seller shall receive pursuant to this Section 12.03 as an adjustment to the Purchase Price, unless a final determination (which shall include the execution of a Form 870-AD or successor form) with respect to the Buyer or any of its Affiliates causes any such payment not to be treated as an adjustment to the Purchase Price for United Stated Federal income Tax purposes. Notwithstanding the foregoing, the control of the prosecution of a claim for refund of Taxes paid pursuant to a deficiency assessed subsequent to the Closing Date as a result of an audit shall be governed by the provisions of Section 11.09. SECTION 12.04. SECTION 338(h)(10). (a) SECTION 338(h)(10) ELECTIONS. Buyer and Seller shall (i) join in making an election under Section 338(h)(10) of the Code and Section 1.338(h)(10)-1 of the United States Treasury Regulations promulgated thereunder (the "TREASURY REGULATIONS") and any comparable election under state or local Tax law with respect to Clairol, Inc., any U.S. Clairol Subsidiaries and U.S. legal entity acquired pursuant to these Transaction Documents (the "ELECTIONS"), (ii) provide to the other party any information reasonably requested in reasonable detail by such other party to permit the Elections to be made, (iii) as promptly as practicable following the Closing Date, 85 77 take all actions reasonably requested in reasonable detail by the other party to effect and preserve timely Elections (including filing such forms, returns, elections, schedules and other documents reasonably requested in reasonable detail by the other party to effect and preserve timely Elections in accordance with the provisions of Section 1.338(h)(10)-1 of the Treasury Regulations (or any comparable provisions of state or local tax law)) and (iv) report Buyer's acquisitions pursuant to this Agreement consistent with such Elections. (b) SECTION 338(g) ELECTIONS. Buyer and Seller agree that neither Buyer nor Seller nor any Affiliate of either thereof shall make any election pursuant to Section 338(g) of the Code and the United States Treasury Regulations promulgated thereunder (or any comparable election under state or local Tax law) with respect to any International Clairol Subsidiary. SECTION 12.05. PURCHASE PRICE ALLOCATIONS. (a) ALLOCATIONS OF PURCHASE PRICE. As soon as practicable following the Closing Date (but in no event later than sixty (60) calendar days prior to the last date on which an IRS Form 8023 ("FORM 8023") can be filed to provide for the Elections) Seller shall prepare and deliver to Buyer, and Buyer and Seller shall agree on (i) an allocation of that portion of the Purchase Price (as adjusted pursuant to the operation of Section 2.02) attributable to the Clairol Shares pursuant to Section 1.01(d) among the assets of the Company and each U.S. Clairol Subsidiary and (ii) a completed Form 8023 and the required schedules thereto, providing for each election under Section 338(h)(10) of the Code and Section 1.338(h)(10)-1 of the Treasury Regulations. (b) ADJUSTMENTS TO PURCHASE PRICE. Buyer and Seller agree that, to the extent that the Purchase Price is adjusted pursuant to the operation of Section 2.02, Buyer and Seller, for all Tax purposes (including for purposes of completing or amending Form 8023), shall allocate such adjustment to the item or items to which it is principally attributable. (c) PARTIES AGREE TO REPORT THE ELECTIONS, PURCHASE PRICE ALLOCATIONS AND INDEMNITY PAYMENTS CONSISTENTLY. Buyer and Seller agree to file all Tax returns, reports and forms consistent with the Elections and with the allocations described in Section 1.01(d) (including the allocations set forth on Exhibit E) and this Section 12.05 and not to take any position inconsistent therewith for any Tax 86 78 purpose, unless required by Applicable Law. In addition, Buyer and Seller agree to treat any indemnity payment under Article XI as an adjustment to the Purchase Price (as adjusted pursuant to the operation of Section 2.02) for all Tax purposes, unless otherwise required by Applicable Law. (d) DISPUTES BY TAXING AUTHORITY. In the event that any of the allocations described in Section 1.01(d) (including the allocations set forth on Exhibit E) or this Section 12.05 are disputed by any Taxing Authority, the party receiving notice of such dispute shall promptly notify the other party in writing of such dispute, and Buyer and Seller shall cooperate in good faith in responding to such challenge in order to preserve the effectiveness of such allocation. SECTION 12.06. TRANSFER TAXES. All transfer, documentary, sales, use, value added, registration and other such Taxes (including all applicable real estate transfer or gains Taxes) and related fees (including any penalties, interest and additions to Tax) incurred in connection with this Agreement and the transactions contemplated hereby ("TRANSFER TAXES") shall be shared equally between Seller and Buyer, and Seller and Buyer shall cooperate in timely making all filings, returns, reports and forms as may be required to comply with the provisions of such Tax laws; PROVIDED, HOWEVER, that all Transfer Taxes which are refundable to or otherwise recoverable by Buyer shall be paid solely by Buyer. SECTION 12.07. FIRPTA CERTIFICATE. Seller shall deliver to Buyer at the Closing a certificate in form and substance satisfactory to Buyer, duly executed and acknowledged, certifying any facts that would exempt the transactions contemplated hereby from withholding pursuant to the provisions of the Foreign Investment in Real Property Tax Act. SECTION 12.08. BUYER ACTIVITY POST-CLOSING. Buyer shall not, with respect to any Pre-Closing Tax Period, (a) file any amended Tax return with respect to the Clairol Entities; (b) carry back any loss or other Tax attribute of the Clairol Entities; or (c) take or advocate any position with respect to Taxes of the Clairol Entities that reasonably could be expected to adversely affect Seller or that would have the effect of shifting income to a Pre-Closing Tax Period unless, in each case, Seller shall have consented in writing to such action by the Buyer. 87 79 ARTICLE XIII TERMINATION SECTION 13.01. TERMINATION. Anything contained herein to the contrary notwithstanding, this Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing Date: (a) by mutual written consent of Seller and Buyer; (b) by Seller if any of the conditions set forth in Section 3.02 shall have become incapable of fulfillment, and shall not have been waived by Seller; (c) by Buyer if any of the conditions set forth in Section 3.01 (other than the conditions set forth in Sections 3.01(b) or 3.01(c)) shall have become incapable of fulfillment, and shall not have been waived by Buyer; or (d) by Seller, if the Closing does not occur on or prior to the Twelve Month Anniversary of the date of this Agreement; PROVIDED, HOWEVER, that the party seeking termination pursuant to clause (b), (c) or (d) is not in breach in any material respect of any of its representations, warranties, covenants or agreements contained in this Agreement. SECTION 13.02. RETURN OF CONFIDENTIAL INFORMATION. If the transactions contemplated by this Agreement are terminated as provided herein: 88 80 (a) Buyer shall return all documents and other material received from Seller, any Seller Entity, any Clairol Entity or any other Affiliate of Seller relating to the transactions contemplated hereby, whether so obtained before or after the execution hereof, to Seller; and (b) all confidential information received by Buyer with respect to the businesses of Seller and its Affiliates (including the Clairol Entities, the Acquired Assets and the Assumed Liabilities) shall be treated in accordance with the Confidentiality Agreement, which shall remain in full force and effect notwithstanding the termination of this Agreement. SECTION 13.03. CONSEQUENCES OF TERMINATION. In the event of termination by Seller or Buyer pursuant to Article XIII, written notice thereof shall forthwith be given to the other party and the transactions contemplated by this Agreement shall be terminated, without further action by either party. If this Agreement is terminated and the transactions contemplated hereby are abandoned as described in this Article XIII, this Agreement shall become void and of no further force or effect, except for the provisions of (a) Section 7.01 relating to the obligation of Buyer to keep confidential certain information and data obtained by it, (b) Section 15.03 relating to certain expenses, (c) Section 15.04 relating to attorney fees and expenses, (d) Section 8.03 relating to publicity, (e) Section 15.10 relating to finder's fees and broker's fees and (f) this Article XIII. Nothing in this Article XIII or elsewhere in this Agreement shall be deemed to impair the right of either party to compel specific performance by the other party of its obligations under this Agreement. Subject to Section 13.04, nothing in this Article XIII shall be deemed to release either party from any liability for any breach by such party of the terms and provisions of this Agreement. SECTION 13.04. PAYMENT. Buyer shall pay to Seller $500 million if this Agreement is terminated by Seller pursuant to Section 13.01(d) at any time on or after the Twelve Month Anniversary, which payment shall be Seller's sole and exclusive remedy against and recovery from Buyer in the event of such a termination. Any payment due under this Section shall be paid by wire transfer of same-day funds on the date of termination of this Agreement. 89 81 ARTICLE XIV SURVIVAL OF REPRESENTATIONS SECTION 14.01. SURVIVAL OF REPRESENTATIONS. The representations and warranties in this Agreement and in any certificate delivered pursuant hereto (in each case other than the representations and warranties relating to Taxes) shall survive the Closing solely for purposes of Sections 11.02 and 11.03 and shall terminate at the close of business on the eighteen month anniversary of the Closing Date, except that (a) representations and warranties relating to Tax matters (including the representations and warranties set forth in Section 4.08) shall not survive the Closing and (b) the representations and warranties set forth in Section 4.03 (a) and, with respect to Bristol-Myers Company Limited and Bristol-Myers de Mexico S. de R.L. de C.V., 4.03(b) shall terminate on the fifth anniversary of the Closing Date. ARTICLE XV MISCELLANEOUS SECTION 15.01. ASSIGNMENT. This Agreement and the rights and obligations hereunder shall not be assignable or transferable by Buyer or Seller without the prior written consent of the other party hereto; PROVIDED, HOWEVER, that Buyer may assign its right to purchase the Clairol Shares, the International Shares or the Acquired Assets hereunder to a majority-owned, controlled subsidiary of Buyer (each, a "BUYER SUBSIDIARY") without the prior written consent of Seller; PROVIDED FURTHER, HOWEVER, that no assignment shall limit or affect Buyer's obligations hereunder. Any attempted assignment in violation of this Section 15.01 shall be void. SECTION 15.02. NO THIRD-PARTY BENEFICIARIES. Except as provided in Article XI, this Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein expressed or implied shall give or be construed to give to any person, other than the parties hereto and such assigns, any legal or equitable rights hereunder. SECTION 15.03. EXPENSES. Whether or not the transactions contemplated hereby are consummated, and except as otherwise specifically provided in this Agreement, all costs and expenses incurred in connection with this Agreement 90 82 and the transactions contemplated hereby shall be paid by the party incurring such costs or expenses. SECTION 15.04. ATTORNEY FEES. A party in breach of this Agreement shall, on demand, indemnify and hold harmless the other party for and against all reasonable out- of-pocket expenses, including legal fees, incurred by such other party by reason of the enforcement and protection of its rights under this Agreement. The payment of such expenses is in addition to any other relief to which such other party may be entitled. SECTION 15.05. AMENDMENTS. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. By an instrument in writing Buyer, on the one hand, or Seller, on the other hand, may waive compliance by the other with any term or provision of this Agreement that such other party was or is obligated to comply with or perform. SECTION 15.06. NOTICES. All notices or other communications required or permitted to be given hereunder shall be in writing and shall be delivered by hand or sent by prepaid telex, cable or telecopy or sent, postage prepaid, by registered, certified or express mail or reputable overnight courier service and shall be deemed given when so delivered by hand, telexed, cabled or telecopied, or if mailed, three days after mailing (one business day in the case of express mail or overnight courier service), as follows: (a) if to Buyer, The Procter & Gamble Company 1 Procter & Gamble Plaza Cincinnati, OH 45202 Attention: Chief Financial Officer with a copy to: The Procter & Gamble Company 1 Procter & Gamble Plaza Cincinnati, OH 45202 Attention: Secretary (b) if to Seller, 91 83 Bristol-Myers Squibb Company 345 Park Avenue New York, NY 10154 Attention: General Counsel with a copy to: Cravath, Swaine & Moore Worldwide Plaza 825 Eighth Avenue New York, NY 10019 Attention: Susan Webster, Esq. SECTION 15.07. INTERPRETATION; EXHIBITS AND THE SELLER DISCLOSURE SCHEDULE; DEFINITIONS. (a) The definitions of the terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (ii) any reference herein to any Person shall be construed to include the Person's successors and assigns, (iii) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (iv) all references herein to Articles, Sections, Appendices, Exhibits or Schedules shall be construed to refer to Articles, Sections, Appendices, Exhibits and Schedules of this Agreement and (v) the headings contained in this Agreement, the Seller Disclosure Schedule, other Schedules or any Appendix or Exhibit and in the table of contents to this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Any matter set forth in any provision, subprovision, section or subsection of the Seller Disclosure Schedule shall be deemed set forth for all purposes of the 92 84 Seller Disclosure Schedule to the extent relevant and reasonably apparent. The Seller Disclosure Schedule, all other Schedules and all Appendices and Exhibits annexed hereto or referred to herein are hereby incorporated in and made a part of this Agreement as if set forth in full herein. Any capitalized terms used in the Seller Disclosure Schedule, any other Schedule or any Appendix or Exhibit annexed hereto but not otherwise defined therein, shall have the meaning as defined in this Agreement. In the event of an ambiguity or a question of intent or interpretation, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. (b) For all purposes hereof: 93 85 "ACQUIRED BUSINESS" means the businesses and operations conducted by the Seller, Seller Entities, the Company, the Clairol Subsidiaries, the CMO and the International Business Units, relating to the research and development, manufacturing, marketing, distribution or sales of the hair care, hair color, antiperspirant/deodorant and all other products of the Company worldwide, as currently conducted, including the Clairol Entities, the Acquired Assets and the Assumed Liabilities. "AFFILIATE" means, with respect to any specified person, any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person; and for the purposes of this definition, "control" when used with respect to any specified person means the power to direct the management and policies of such person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "ANTITRUST PROCEEDING" means any proceeding seeking a preliminary injunction or other comparable legal impediment to the acquisition by Buyer of the Acquired Business or to Buyer's freedom to operate the Acquired Business after Closing under any U.S. Antitrust Laws. "ASSET SELLING ENTITIES" means the U.S. Asset Selling Entities and the International Asset Selling Entities. "CLAIROL" means the Clairol Entities, the CMO Acquired Assets, the Other U.S. Acquired Assets, the International Acquired Assets, the Other U.S. Assumed Liabilities (other than any such Other U.S. Assumed Liabilities related to Boclaro, Inc.) and the International Assumed Liabilities, taken as a whole. "CLAIROL ENTITIES" means the Company and the Clairol Subsidiaries. "CLAIROL SUBSIDIARIES" means the U.S. Clairol Subsidiaries and the International Clairol Subsidiaries. "CMO ACQUIRED ASSETS" means certain assets attributable to the CMO, as set forth in Exhibit F-1. 94 86 "CMO ASSUMED LIABILITIES" means certain liabilities attributable to the CMO, as set forth in Exhibit G-1. "CMO EXCLUDED ASSETS" means certain assets attributable to the CMO, as set forth in Exhibit F-2. "CMO EXCLUDED LIABILITIES" means certain liabilities attributable to the CMO, as set forth in Exhibit G-2. "CMO TRANSITIONAL SERVICES AGREEMENT" means the agreement dated as of the date hereof between Buyer and Seller regarding the provision of certain services by the Buyer to the Seller in connection with the business of the CMO. "EXCLUDED ASSETS" means the U.S. Excluded Assets and the International Excluded Assets. "EXCLUDED LIABILITIES" means the U.S. Excluded Liabilities and the International Excluded Liabilities. "GAAP" means United States generally accepted accounting principles. "GBS TRANSITIONAL SERVICES AGREEMENT" means the agreement dated as of the Closing Date between Buyer and Seller regarding the provision of certain services by Seller's Global Business Services to Buyer and Buyer Subsidiaries. "IM TRANSITIONAL SERVICE AGREEMENT" means the agreement dated as of the date hereof between Buyer and Seller regarding the provision of information management services by Seller to Buyer and Buyer Subsidiaries. "INTERNATIONAL ACQUIRED ASSETS" means certain assets of Seller and its Affiliates related to the Acquired Business, as set forth in Exhibit H-1. "INTERNATIONAL ASSUMED LIABILITIES" means certain liabilities of Seller and its Affiliates related to the Acquired Business, as set forth in Exhibit I-1. "INTERNATIONAL BUSINESS UNIT" means the Acquired Business conducted in any country outside the U.S. by the Asset Selling Entity or Asset Selling Entities in each 95 87 such country, together with the assets and liabilities related thereto. "INTERNATIONAL EXCLUDED ASSETS" means certain assets of Seller and its Affiliates related to the Acquired Business, as set forth in Exhibit H-2. "INTERNATIONAL EXCLUDED LIABILITIES" means certain liabilities of Seller and its Affiliates related to the Acquired Business, as set forth in Exhibit I-2. "INTERNATIONAL SALES AND DISTRIBUTION TRANSITIONAL SERVICES AGREEMENT" means the agreement dated as of the Closing Date between Buyer and Seller regarding the provision of certain sales and distribution services by Seller to Buyer and Buyer Subsidiaries. "MATERIAL ADVERSE EFFECT" means a material adverse effect on the business, financial condition or results of operations of the Acquired Business. "OTHER U.S. ACQUIRED ASSETS" means certain assets of the Seller and its Affiliates related to the Acquired Business, as set forth in Exhibit J-1. "OTHER U.S. ASSUMED LIABILITIES" means certain liabilities of the Seller and its Affiliates related to the Acquired Business, as set forth in Exhibit K-1. "OTHER U.S. EXCLUDED ASSETS" means certain assets of the Seller and its Affiliates related to the Acquired Business, as set forth in Exhibit J-2. "OTHER U.S. EXCLUDED LIABILITIES" means certain liabilities of the Seller and its Affiliates related to the Acquired Business, as set forth in Exhibit K-2. "PERMITTED LIENS" means (a) Liens set forth in Section 4.09 of the Seller Disclosure Schedule; (b) mechanics', carriers', workmen's, repairmen's or other like Liens arising or incurred in the ordinary course of business, Liens arising under original purchase price conditional sales contracts and equipment leases with third parties entered into in the ordinary course of business and liens for Taxes and other governmental charges which are not due and payable or which may thereafter be paid without penalty; (c) mortgages and Liens which secure debt that is reflected as a liability 96 88 on the Clairol Balance Sheet and the existence of which is indicated in the notes thereto; and (d) other imperfections of title or encumbrances, if any, which do not, individually or in the aggregate, materially impair the continued use and operation of the assets to which they relate in the Acquired Business. "PERSON" means any individual, firm, corporation, partnership, limited liability company, trust, joint venture, Governmental Entity or other entity. "PRIME RATE" means the rate of interest from time to time publicly announced by Citibank, N.A., in its New York office as its prime or base rate, calculated on the basis of the actual number of days elapsed over 365. "SELLER ENTITIES" means the International Stock Selling Entities and the Asset Selling Entities. "SIX MONTH ANNIVERSARY" means the six month anniversary of the date of this Agreement. "TRANSITIONAL SERVICES AGREEMENTS" means the CMO Transitional Services Agreement, the GBS Transitional Services Agreement, the International Sales and Distribution Transitional Services Agreement and the IM Transitional Services Agreement set forth in Exhibits L- 1, L-2, L-3 and L-4, respectively. "TWELVE MONTH ANNIVERSARY" means the twelve month anniversary of the date of this Agreement. "U.S." means the 50 states of the United States of America and the District of Columbia, and does not include the Commonwealth of Puerto Rico or any other territory or possession of the United States of America. "U.S. ACQUIRED ASSETS" means the CMO Acquired Assets and the Other U.S. Acquired Assets. "U.S. ACQUIRED LIABILITIES" means the CMO Acquired Liabilities and the Other U.S. Acquired Liabilities. "U.S. ANTITRUST LAWS" means the HSR Act and any other Applicable Laws in the U.S. that pertain to antitrust or competition matters. 97 89 "U.S. EXCLUDED ASSETS" means the CMO Excluded Assets and the Other U.S. Excluded Assets. "U.S. EXCLUDED LIABILITIES" means the CMO Excluded Liabilities and the Other U.S. Excluded Liabilities. (c) The following terms have the meanings given such terms in the Sections set forth below: 98 90 Term Section ---- ------- Accounting Firm 2.02(a) Acquired Assets 2.01(e) Acquired Rights Directive 9.03(b) Adjusted Closing Date Amount 2.02(b) Applicable Laws 4.16(a) Assumed Liabilities 1.02 Benefit Plans 4.14(a) BMS Names 7.03 Boclaro Working Capital Statement 4.07(b) Buyer Subsidiary 15.01 Buyer Tax Act 11.01(a) Buyer's 401(k) Plan 9.05(a) Buyer's Pension Plan 9.04 Buyer Reimbursement Plan 9.07(d) Buyer Severance Policies 9.08 Buyer Welfare Benefit Plans 9.07(a) Covered Products 7.07 Clairol Balance Sheet 4.07 Clairol Intellectual Property 4.11(b) Clairol Names 5.04 Clairol Shares Preamble Clairol Subsidiaries 4.06(a) Closing 2.01(a) Closing Date 2.01(a) Closing Date Amount 2.01(b) Closing Working Capital 2.02(a) CMO Working Capital Statement 4.07(b) Code 4.08(a) Collective Bargaining Agreements 9.02 Clairol Balance Sheet 4.07 Clairol Working Capital 2.02(b) Company Preamble Company Property 4.10(a) Confidentiality Agreement 7.01 Continuation Period 9.03(c) Contracts 4.12(a) Current Liabilities 2.02(b) Current Assets 2.02(b) DOJ 8.05(a) EC Merger Regulation 3.01(c) Elections 12.04 Employees 9.01(a) Environmental Permits 4.16(b) Environmental Reports 4.16(b) Environmental Laws 4.16(b) 99 91 Excluded Inventories Exhibit H-2 Excluded Receivables Exhibit H-2 Expatriates 9.11 ERISA 4.14(a) Financial Statements 4.07 Financing 6.05 Form 8023 12.05(a) FTC 8.05(a) Governmental Entity 3.01(b) Hazardous Substances 4.16(b) HSR Act 3.01(c) indemnified party 11.07 Intellectual Property 4.11(a) International Asset Purchase Agreements 1.01(c) International Asset Selling Entity Preamble International Shares Preamble International Stock Purchase Agreement 1.01(b) International Clairol Subsidiary Preamble International Stock Selling Entity Preamble Inventories Exhibit H-1 Leased Property 4.10(a) Liens 4.02(a) Lion 7.07 Lion Agreement 7.07 Loss 11.05 Mexican Merger Regulation 3.01(c) Notice of Disagreement 2.02(a) Other Intellectual Property 4.11(b) Other Transaction Documents 3.01(d) Owned Property 4.10 Pension Plans 4.14(a) Plans 11.03 Pre-Closing Tax Period 4.08(a) Property Taxes 11.01(c) Purchase Price 1.01(a) Receivables Exhibit H-1 Records Exhibit H-1 Seller Disclosure Schedule Article IV Seller Guarantee 11.03 Seller's 401(k) Plan 9.05(a) Seller's BEP-SIP 9.06(a) Seller Reimbursement Plan 9.07(d) 100 92 Seller Severance Policies 9.08 Seller's Stock Fund 9.05(b) Seller Welfare Benefit Plans 9.07(a) Statement 2.02(a) Straddle Period 11.01(c) Support Services 8.07 Tax 4.08(a) Tax Claim 11.09(a) Tax Indemnified Party 11.09(a) Tax Indemnifying Party 11.09(a) Taxes 4.08(a) Third Party Claim 11.07 Transaction 1.01(a) Transaction Documents 4.01 Transfer Documents 2.01(e) Transfer Taxes 12.06 Transferred Contracts 8.01 Treasury Regulations 12.04 U.S. Asset Selling Entity Preamble U.S. Clairol Subsidiaries 4.06(a) W.C. Amount 2.02(b) Working Capital 2.02(c) Working Capital Statement 2.02(a) SECTION 15.08. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more such counterparts have been signed by each of the parties and delivered to the other party. SECTION 15.09. ENTIRE AGREEMENT. This Agreement, the Other Transaction Documents and the Confidentiality Agreement, in each case along with the Appendices, Exhibits and Schedules hereto and thereto, contain the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings relating to such subject matter. Neither party shall be liable or bound to any other party in any manner by any representations, warranties or covenants relating to such subject matter except as specifically set forth herein, in the Other Transaction Documents or in the Confidentiality Agreement. SECTION 15.10. BROKER AND FINDER FEES. Each party hereto hereby represents and warrants that (a) the only brokers or finders that have acted for such party in connection with this Agreement or the transactions 101 93 contemplated hereby or that may be entitled to any brokerage fee, finder's fee or commission in respect thereof are Goldman, Sachs & Co. with respect to Seller and J.P. Morgan with respect to Buyer and (b) each party shall pay all fees or commissions which may be payable to the firm so named with respect to such party. SECTION 15.11. SEVERABILITY. If any provision of this Agreement (or any portion thereof) or the application of any such provision (or any portion thereof) to any person or circumstance shall be held invalid, illegal or unenforceable in any respect by a court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision hereof (or the remaining portion thereof) or the application of such provision to any other persons or circumstances. SECTION 15.12. BULK TRANSFER LAWS. Buyer hereby waives compliance by Seller and its Affiliates with the provisions of any so-called "bulk transfer law" of any jurisdiction in connection with the sale of the Acquired Business. SECTION 15.13. CONSENT TO JURISDICTION. Each of Buyer and Seller irrevocably submits to the exclusive jurisdiction of (a) the Supreme Court of the State of New York, New York County, and (b) the United States District Court for the Southern District of New York, for the purposes of any suit, action or other proceeding arising out of this Agreement, the Other Transaction Documents or any transaction contemplated hereby or thereby. Each of Buyer and Seller agrees to commence any action, suit or proceeding relating hereto either in the United States District Court for the Southern District of New York or if such suit, action or other proceeding may not be brought in such court for jurisdictional reasons, in the Supreme Court of the State of New York, New York County. Each of Buyer and Seller further agrees that service of any process, summons, notice or document by U.S. registered mail to such party's respective address set forth above shall be effective service of process for any action, suit or proceeding in New York with respect to any matters to which it has submitted to jurisdiction in this Section 15.13. Each of Buyer and Seller irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby in (i) the Supreme Court of the State of New York, New York County, or (ii) the United States District Court for the Southern District of New York, 102 94 and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. SECTION 15.14. WAIVER OF JURY TRIAL. Each party hereto hereby waives to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation directly or indirectly arising out of, under or in connection with this Agreement or any of the Other Transaction Documents or any transaction contemplated hereby or thereby. Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce that foregoing waiver and (b) acknowledges that it and the other parties hereto have been induced to enter into this Agreement and the Other Transaction Documents, as applicable, by, among other things, the mutual waivers and certifications in Section 15.13 and in this Section 15.14. SECTION 15.15. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES OF SUCH STATE. 103 95 IN WITNESS WHEREOF, the parties have caused this Stock and Asset Purchase Agreement to be duly executed as of the date first written above. BRISTOL-MYERS SQUIBB COMPANY, by /s/ Robert E. Ewers, Jr. ------------------------------------ Name: Robert E. Ewers, Jr. Title: Vice President THE PROCTER & GAMBLE COMPANY, by /s/ Clayton C. Daley, Jr. ------------------------------------ Name: Clayton C. Daley, Jr. Title: Senior Vice President and Chief Financial Officer EX-10.1 4 l90238aex10-1.txt EXHIBIT 10.1 1 EXHIBIT (10-1) The Procter & Gamble 2001 Stock and Incentive Compensation Plan 2 THE PROCTER & GAMBLE 2001 STOCK AND INCENTIVE COMPENSATION PLAN ARTICLE A -- PURPOSE. The purposes of The Procter & Gamble 2001 Stock and Incentive Compensation Plan (the "Plan") are to strengthen the alignment of interests between those employees of The Procter & Gamble Company (the "Company") and its subsidiaries who are largely responsible for the success of the business (the "Participants") and the Company's shareholders through ownership behavior and the increased ownership of shares of the Company's common stock (the "Common Stock"), and to encourage the Participants to remain in the employ of the Company and its subsidiaries. This will be accomplished through the granting of options to purchase shares of Common Stock, the granting of performance related awards, the payment of a portion of the Participants' remuneration in shares of Common Stock, and the granting of deferred awards related to the increase in the price of Common Stock. ARTICLE B -- ADMINISTRATION. 1. The Plan shall be administered by the Compensation Committee (the "Committee") of the Board of Directors of the Company (the "Board"), or such other committee as may be designated by the Board. The Committee shall consist of not fewer than three (3) members of the Board who are "Non-Employee Directors" as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or any successor rule or definition adopted by the Securities and Exchange Commission, to be appointed by the Board from time to time and to serve at the discretion of the Board. The Committee may establish such regulations, provisions, and procedures within the terms of the Plan as, in its opinion, may be advisable for the administration and operation of the Plan, and may designate the Secretary of the Company or other employees of the Company to assist the Committee in the administration and operation of the Plan and may grant authority to such persons to execute documents on behalf of the Committee. The Committee shall report to the Board on the administration of the Plan not less than once each year. 2. Subject to the express provisions of the Plan, the Committee shall have authority: to grant nonstatutory and incentive stock options; to grant stock appreciation rights either freestanding or in tandem with simultaneously granted stock options; to grant Performance Awards (as defined in Article J); to award a portion of a Participant's remuneration in shares of Common Stock subject to such conditions or restrictions, if any, as the Committee may determine; to determine all the terms and provisions of the respective stock option, stock appreciation right, and stock award agreements including setting the dates when each stock option or stock appreciation right or part thereof may be exercised and determining the conditions and restrictions, if any, of any shares of Common Stock acquired through the exercise of any stock option; to provide for special terms for any stock options, stock appreciation rights or stock awards granted to Participants who are foreign nationals or who are employed by the Company or any of its subsidiaries outside of the United States of America in order to fairly accommodate for differences in local law, tax policy or custom and to approve such supplements to or amendments, restatements or alternative versions of the Plan as the Committee may consider necessary or appropriate for such purposes (without affecting the terms of the Plan for any other purpose); and to make all other determinations it deems necessary or advisable for administering the Plan. In addition, at the time of grant the Committee shall have the further authority to: (a) waive the provisions of Article F, Paragraph 1(a); (b) waive the provisions of Article F, Paragraph 1(b); (c) waive the provisions of Article G, Paragraph 4(a), 4(b) and 4(c); and 1 3 (d) impose conditions in lieu of those set forth in Article G, Paragraphs 4 through 7, for nonstatutory stock options, stock appreciation rights, stock awards, or Performance Awards which do not increase or extend the rights of the Participant. ARTICLE C -- PARTICIPATION. The Committee shall select as Participants those employees of the Company and its subsidiaries who, in the opinion of the Committee, have demonstrated a capacity for contributing in a substantial manner to the success of such companies. ARTICLE D -- LIMITATION ON NUMBER OF SHARES AVAILABLE UNDER THE PLAN. 1. Unless otherwise authorized by the shareholders and subject to Paragraph 2 of this Article D, the maximum aggregate number of shares available for award under the Plan shall be ninety-five million shares. Any of the authorized shares may be used for any of the types of awards described in the Plan, except that no more than fifteen percent (15%) of the authorized shares may be awarded as restricted or unrestricted stock. 2. In addition to the shares authorized for award by Paragraph 1 of this Article, the following shares may be awarded under the Plan: (a) shares that were authorized to be awarded under The Procter & Gamble 1992 Stock Plan (the "1992 Plan"), but that were not awarded under the 1992 Plan; (b) shares awarded under the Plan or the 1992 Plan that are subsequently forfeited in accordance with the Plan or the 1992 Plan, respectively; (c) shares tendered by a Participant in payment of all or part of the exercise price of a stock option awarded under the Plan or the 1992 Plan; (d) shares tendered by or withheld from a Participant in satisfaction of withholding tax obligations with respect to a stock option awarded under the Plan or the 1992 Plan. ARTICLE E -- SHARES SUBJECT TO USE UNDER THE PLAN. 1. The shares to be delivered by the Company upon exercise of stock options or stock appreciation rights shall be determined by the Board and may consist, in whole or in part, of authorized but unissued shares or treasury shares. In the case of redemption of stock appreciation rights by one of the Company's subsidiaries, such shares shall be shares acquired by that subsidiary. Notwithstanding any terms or conditions contained herein, the shares to be delivered by the Company upon exercise of stock options or stock appreciation rights by a Participant located in Italy shall be authorized but unissued shares. 2. For purposes of the Plan, restricted or unrestricted stock awarded under the terms of the Plan shall be authorized but unissued shares, treasury shares, or shares acquired in the open market by the Company or a subsidiary, as determined by the Board. ARTICLE F -- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. 1. In addition to such other conditions as may be established by the Committee, in consideration of the granting of stock options or stock appreciation rights under the terms of the Plan, each Participant agrees as follows: 2 4 (a) The right to exercise any stock option or stock appreciation right shall be conditional upon certification by the Participant at time of exercise that the Participant intends to remain in the employ of the Company or one of its subsidiaries for at least one (1) year following the date of the exercise of the stock option or stock appreciation right (provided that termination of employment due to Retirement or Special Separation shall not constitute a breach of such certification), and, (b) In order to better protect the goodwill of the Company and its subsidiaries and to prevent the disclosure of the Company's or its subsidiaries' trade secrets and confidential information and thereby help insure the long-term success of the business, the Participant, without prior written consent of the Company, will not engage in any activity or provide any services, whether as a director, manager, supervisor, employee, adviser, consultant or otherwise, for a period of three (3) years following the date of the Participant's termination of employment with the Company (except for terminations of employment resulting from Retirement or Special Separation), in connection with the manufacture, development, advertising, promotion, or sale of any product which is the same as or similar to or competitive with any products of the Company or its subsidiaries (including both existing products as well as products known to the Participant, as a consequence of the Participant's employment with the Company or one of its subsidiaries, to be in development): (1) with respect to which the Participant's work has been directly concerned at any time during the two (2) years preceding termination of employment with the Company or one of its subsidiaries or (2) with respect to which during that period of time the Participant, as a consequence of the Participant's job performance and duties, acquired knowledge of trade secrets or other confidential information of the Company or its subsidiaries. For purposes of this paragraph, it shall be conclusively presumed that Participants have knowledge of information they were directly exposed to through actual receipt or review of memos or documents containing such information, or through actual attendance at meetings at which such information was discussed or disclosed. (c) The provisions of this Article are not in lieu of, but are in addition to the continuing obligation of the Participant (which Participant hereby acknowledges) to not use or disclose the Company's or its subsidiaries' trade secrets and confidential information known to the Participant until any particular trade secret or confidential information become generally known (through no fault of the Participant), whereupon the restriction on use and disclosure shall cease as to that item. Information regarding products in development, in test marketing or being marketed or promoted in a discrete geographic region, which information the Company or one of its subsidiaries is considering for broader use, shall not be deemed generally known until such broader use is actually commercially implemented. As used in this Article, "generally known" means known throughout the domestic U. S. industry or, in the case of Participants who have job responsibilities outside of the United States, the appropriate foreign country or countries' industry. (d) By acceptance of any offered stock option or stock appreciation rights granted under the terms of the Plan, the Participant acknowledges that if the Participant were, without authority, to use or disclose the Company's or any of its subsidiaries' trade secrets or confidential information or threaten to do so, the Company or one of its subsidiaries would be entitled to injunctive and other appropriate relief to prevent the Participant from doing so. The Participant acknowledges that the harm caused to the Company by the breach or anticipated breach of this Article is by its nature irreparable because, among other things, it 3 5 is not readily susceptible of proof as to the monetary harm that would ensue. The Participant consents that any interim or final equitable relief entered by a court of competent jurisdiction shall, at the request of the Company or one of its subsidiaries, be entered on consent and enforced by any court having jurisdiction over the Participant, without prejudice to any rights either party may have to appeal from the proceedings which resulted in any grant of such relief. (e) If any of the provisions contained in this Article shall for any reason, whether by application of existing law or law which may develop after the Participant's acceptance of an offer of the granting of stock appreciation rights or stock options, be determined by a court of competent jurisdiction to be overly broad as to scope of activity, duration, or territory, the Participant agrees to join the Company or any of its subsidiaries in requesting such court to construe such provision by limiting or reducing it so as to be enforceable to the extent compatible with then applicable law. If any one or more of the terms, provisions, covenants, or restrictions of this Article shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants, and restrictions of this Article shall remain in full force and effect and shall in no way be affected, impaired, or invalidated. 2. The fact that a Participant has been granted a stock option or a stock appreciation right under the Plan shall not limit the right of the employer to terminate the Participant's employment at any time. The Committee is authorized to suspend or terminate any outstanding stock option or stock appreciation right for actions taken by a Participant prior to termination of employment if the Committee determines the Participant has acted significantly contrary to the best interests of the Company or its subsidiaries. 3. The maximum number of shares with respect to which stock options or stock appreciation rights may be granted to any Participant in any calendar year shall not exceed 1,000,000 shares. 4. The aggregate fair market value (determined at the time when the incentive stock option is exercisable for the first time by a Participant during any calendar year) of the shares for which any Participant may be granted incentive stock options under the Plan and all other stock option plans of the Company and its subsidiaries in any calendar year shall not exceed $100,000 (or such other amount as reflected in the limits imposed by Section 422(d) of the Internal Revenue Code of 1986, as it may be amended from time to time). 5. If the Committee grants incentive stock options, all such stock options shall contain such provisions as permit them to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as may be amended from time to time. 6. With respect to stock options granted in tandem with stock appreciation rights, the exercise of either such stock options or such stock appreciation rights will result in the simultaneous cancellation of the same number of tandem stock appreciation rights or stock options, as the case may be. 7. The exercise price for all stock options and stock appreciation rights shall be established by the Committee at the time of their grant and shall be not less than one hundred percent (100%) of the fair market value of the Common Stock on the date of grant. 8. Unless otherwise authorized by the shareholders of the Company, neither the Board nor the Committee shall authorize the amendment of any outstanding stock option or stock appreciation right to reduce the exercise price. 9. No stock option or stock appreciation right shall be cancelled and replaced with awards having a lower exercise price without the prior approval of the shareholders of the Company. This 4 6 Article F, Paragraph 9 is intended to prohibit the repricing of "underwater" stock options and stock appreciation rights and shall not be construed to prohibit the adjustments permitted under Article J of the Plan. 10. The Committee may require any Participant to accept any stock options or stock appreciation rights by means of electronic signature. ARTICLE G -- EXERCISE OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. 1. All stock options and stock appreciation rights granted hereunder shall have a maximum life of no more than ten (10) years from the date of grant. 2. No stock options or stock appreciation rights shall be exercisable within one (1) year from their date of grant, except in the case of the death of the Participant. 3. Unless a transfer has been duly authorized by the Committee pursuant to Article G, Paragraph 6 of the Plan, during the lifetime of the Participant, stock options and stock appreciation rights may be exercised only by the Participant personally, or, in the event of the legal incompetence of the Participant, by the Participant's duly appointed legal guardian. 4. In the event that a Participant ceases to be an employee of the Company or any of its subsidiaries while holding an unexercised stock option or stock appreciation right: (a) Any unexercisable portions thereof are then void, except in the case of: (1) death of the Participant; (2) Retirement or Special Separation that occurs more than six months from the date the options were granted; or (3) any option as to which the Committee has waived, at the time of grant, the provisions of this Article G, Paragraph 4(a). (b) Any exercisable portions thereof are then void, except in the case of: (1) death of the Participant; (2) Retirement or Special Separation; or (3) any option as to which the Committee has waived, at the time of grant, the provisions of this Article G, Paragraph 4(b). (c) In the case of Special Separation, any stock option or stock appreciation right must be exercised within the time specified in the original grant or five (5) years from the date of Special Separation, whichever is shorter. 5. In the case of the death of a Participant, the persons to whom the stock options or stock appreciation rights have been transferred by will or the laws of descent and distribution shall have the privilege of exercising remaining stock options, stock appreciation rights or parts thereof, whether or not exercisable on the date of death of such Participant, at any time prior to the expiration date of the stock options or stock appreciation rights. 6. Stock options and stock appreciation rights are not transferable other than by will or by the laws of descent and distribution. For the purpose of exercising stock options or stock appreciation rights after the death of the Participant, the duly appointed executors and administrators of the estate of the deceased Participant shall have the same rights with respect to the stock options and stock appreciation rights as legatees or distributees would have after distribution to them from the Participant's estate. Notwithstanding the foregoing, the Committee may authorize the transfer of stock options and stock appreciation rights upon such terms and conditions as the Committee may require. Such transfer shall become effective only upon the Committee's complete satisfaction that the proposed transferee has strictly complied with such terms and conditions, and both the original Participant and the transferee shall be subject to the same terms and conditions hereunder as the original Participant. 5 7 7. Upon the exercise of stock appreciation rights, the Participant shall be entitled to receive a redemption differential for each such stock appreciation right which shall be the difference between the then fair market value of one share of Common Stock and the exercise price of one stock appreciation right then being exercised. In the case of the redemption of stock appreciation rights by a subsidiary of the Company not located in the United States, the redemption differential shall be calculated in United States dollars and converted to the appropriate local currency on the exercise date. As determined by the Committee, the redemption differential may be paid in cash, Common Stock to be valued at its fair market value on the date of exercise, any other mode of payment deemed appropriate by the Committee or any combination thereof. 8. Time spent on leave of absence shall be considered as employment for the purposes of the Plan. Leave of absence means any period of time away from work granted to any employee by his or her employer because of illness, injury, or other reasons satisfactory to the employer. 9. The Company reserves the right from time to time to suspend the exercise of any stock option or stock appreciation right where such suspension is deemed by the Company as necessary or appropriate for corporate purposes. No such suspension shall extend the life of the stock option or stock appreciation right beyond its expiration date, and in no event will there be a suspension in the five (5) calendar days immediately preceding the expiration date. 10. The Committee may require any Participant to exercise any stock options or stock appreciation rights by means of electronic signature. ARTICLE H -- PAYMENT FOR STOCK OPTIONS AND TAX WITHHOLDING. Upon the exercise of a stock option, payment in full of the exercise price shall be made by the Participant. As determined by the Committee, the stock option exercise price may be paid by the Participant either in cash, shares of Common Stock valued at their fair market value on the date of exercise, a combination thereof, or such other method as determined by the Committee. In addition to payment of the exercise price, the Committee may authorize the Company to charge a reasonable administrative fee for the exercise of any stock option. Furthermore, to the extent the Company is required to withhold federal, state, local or foreign taxes in connection with any Participant's stock option exercise, the Committee may require the Participant to make such arrangements as the Company may deem necessary for the payment of such taxes required to be withheld (including, without limitation, relinquishment of a portion of such stock options or relinquishment of a portion of the proceeds received by the Participant in a simultaneous exercise and sale of stock during a "cashless" exercise). In no event, however, shall the Committee be permitted to require payment from a Participant in excess of the maximum required tax withholding rates. ARTICLE I -- GRANT OF UNRESTRICTED OR RESTRICTED STOCK. The Committee may grant Common Stock to Participants under the Plan subject to such conditions or restrictions, if any, as the Committee may determine. To the extent the Company is required to withhold federal, state, local or foreign taxes in connection with the lapse of restrictions on any Participant's shares of Common Stock, the Committee may require the Participant to make such arrangements as the Company may deem necessary for the payment of such taxes required to be withheld (including, without limitation, relinquishment of a portion of such shares of Common Stock). In no event, however, shall the Committee be permitted to require payment from a Participant in excess of the maximum required tax withholding rates. ARTICLE J -- PERFORMANCE RELATED AWARDS. 6 8 1. The Committee, in its discretion, may establish performance goals for selected Participants and authorize the granting of cash, stock options, stock appreciation rights, Common Stock, other property, or any combination thereof ("Performance Awards") to such Participants upon achievement of such established performance goals during a specified time period (the "Performance Period"). The Committee, in its discretion, shall determine the Participants eligible for Performance Awards, the performance goals to be achieved during each Performance Period, the amount of any Performance Awards to be paid, and the method of payment for any Performance Awards. Performance Awards may be granted either alone or in addition to other grants made under the Plan. 2. Notwithstanding the foregoing, any Performance Awards granted to the Chief Executive and the Company's other four highest paid executive officers (as reported in the Company's proxy statement pursuant to Regulation S-K, Item 402(a)(3)) under Article J, Paragraph 1 shall comply with all of the following requirements: (a) Each grant shall specify the specific performance objectives (the "Performance Objectives") which, if achieved, will result in payment or early payment of the Performance Award. The Performance Objectives may be described in terms of Company-wide objectives that are related to the individual Participant or objectives that are related to a subsidiary, division, department, region, function or business unit of the Company in which the Participant is employed, and may consist of one or more or any combination of the following criteria: stock price, market share, sales revenue, cash flow, earnings per share, return on equity, total shareholder return, gross margin, and/or costs. The Performance Objectives may be made relative to the performance of other corporations. The Committee, in its discretion, may change or modify these criteria, however, at all times the criterion must be valid performance criterion for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The Committee may not change the criteria or Performance Objectives for any Performance Period that has already been approved by the Committee. The Committee may cancel a Performance Period or replace a Performance Period with a new Performance Period, provided that any such cancellation or replacement shall not cause the Performance Award to fail to meet the requirements of Section 162(m) of the Code. (b) Each grant shall specify the minimum level of achievement required by the Participant relative to the Performance Objectives to qualify for a Performance Award. In doing so, the grant shall establish a formula for determining the percentage of the Performance Award to be awarded if performance is at or above the minimum level, but falls short of full achievement of the specified Performance Objectives. Each grant may also establish a formula for determining an additional award above and beyond the Performance Award to be granted to the Participant if performance is at or above the specified Performance Objectives. Such additional award shall also be established as a percentage of the Performance Award. The Committee may decrease a Performance Award as determined by the Performance Objectives, but in no case may the Committee increase any Performance Award as determined by the Performance Objectives. (c) The maximum Performance Award that may be granted to any Participant for any one-year Performance Period shall not exceed $20,000,000 or 400,000 shares of Common Stock (the "Annual Maximum"). The maximum Performance Award that may be granted to any Participant for a Performance Period greater than one year shall not exceed the Annual Maximum multiplied by the number of full years in the Performance Period. ARTICLE K -- ADJUSTMENTS. The amount of shares authorized to be issued under the Plan will be adjusted appropriately in the event of future stock splits, stock dividends, or other changes in capitalization of the Company occurring after the date of approval of the Plan by the Company's shareholders to prevent the dilution or enlargement of rights under the Plan; following any such change, the term "Common Stock" shall be 7 9 deemed to refer to such class of shares or other securities as may be applicable. The number of shares and exercise prices covered by outstanding stock options and stock appreciation rights shall be adjusted to give effect to any such stock splits, stock dividends, or other changes in the capitalization. ARTICLE L -- ADDITIONAL PROVISIONS AND DEFINITIONS. 1. The Board may, at any time, repeal the Plan or may amend it except that no such amendment may amend this paragraph, increase the total aggregate number of shares subject to the Plan, reduce the price at which stock options or stock appreciation rights may be granted or exercised, alter the class of employees eligible to receive stock options, or increase the percentage of shares authorized to be transferred as restricted or unrestricted stock. Participants and the Company shall be bound by any such amendments as of their effective dates, but if any outstanding stock options or stock appreciation rights are materially affected adversely, notice thereof shall be given to the Participants holding such stock options and stock appreciation rights and such amendments shall not be applicable without such Participant's written consent. If the Plan is repealed in its entirety, all theretofore granted unexercised stock options or stock appreciation rights shall continue to be exercisable in accordance with their terms and shares subject to conditions or restrictions granted pursuant to the Plan shall continue to be subject to such conditions or restrictions. 2. In the case of a Participant who is an employee of a subsidiary of the Company, performance under the Plan, including the granting of shares of the Company, may be by the subsidiary. Nothing in the Plan shall affect the right of the Company or any subsidiary to terminate the employment of any employee with or without cause. None of the Participants, either individually or as a group, and no beneficiary, transferee or other person claiming under or through any Participant, shall have any right, title, or interest in any shares of the Company purchased or reserved for the purpose of the Plan except as to such shares, if any, as shall have been granted or transferred to him or her. Nothing in the Plan shall preclude the awarding or granting of shares of the Company to employees under any other plan or arrangement now or hereafter in effect. 3. "Subsidiary" means any company in which more than fifty percent (50%) of the total combined voting power of all classes of stock is owned, directly or indirectly, by the Company or, if the company does not issue stock, more than fifty percent (50%) of the total combined ownership interest is owned, directly or indirectly, by the Company. In addition, the Board may designate for participation in the Plan as a "subsidiary," except for the granting of incentive stock options, those additional companies affiliated with the Company in which the Company's direct or indirect stock ownership is fifty percent (50%) or less of the total combined voting power of all classes of such company's stock, or, if the company does not issue stock, the Company's direct or indirect ownership is fifty percent (50%) or less of the company's total combined ownership interest. 4. Notwithstanding anything to the contrary in the Plan, stock options and stock appreciation rights granted hereunder shall vest immediately and any conditions or restrictions on Common Stock shall lapse upon a "Change in Control." A "Change in Control" shall mean the occurrence of any of the following: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the then outstanding shares or the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred pursuant to this Paragraph 4(a), shares or Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in 8 10 Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Related Entity"), (ii) the Company or any Related Entity, or (iii) any Person in connection with a "Non-Control Transaction" (as hereinafter defined); (b) The individuals who, as of July 10, 2001 are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least half of the members of the Board; or, following a Merger (as hereinafter defined) which results in a Parent Corporation (as hereinafter defined), the board of directors of the ultimate Parent Corporation; provided, however, that if the election, or nomination for election by the Company's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of the Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) The consummation of: (i) A merger, consolidation or reorganization with or into the Company or in which securities of the Company are issued (a "Merger"), unless such Merger is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a Merger where: (A) the stockholders of the Company, immediately before such Merger own directly or indirectly immediately following such Merger at least fifty percent (50%) of the combined voting power of the outstanding voting securities of (x) the corporation resulting from such Merger (the "Surviving Corporation") if fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly by another Person (a "Parent Corporation"), or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Merger constitute at least half of the members of the board of directors of (x) the Surviving Corporation, if there is no Parent Corporation, or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation; and (C) no Person other than (1) the Company, (2) any Related Entity, (3) any employee benefit plan (or any trust forming a part thereof) that, immediately prior to such Merger was maintained by the Company or any Related Entity, or (4) any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Voting Securities or shares, has Beneficial Ownership of twenty percent (20%) or more of the combined voting power of the outstanding voting securities or common stock of (x) the Surviving Corporation if there is no Parent Corporation, or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation; 9 11 (ii) A complete liquidation or dissolution of the Company; or (iii) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Related Entity or under conditions that would constitute a Non-Control Transaction with the disposition of assets being regarded as a Merger for this purpose or the distribution to the Company's stockholders of the stock of a Related Entity or any other assets). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding shares or Voting Securities as a result of the acquisition of shares or Voting Securities by the Company which, by reducing the number of shares or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of shares or Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional shares or Voting Securities which increases the percentage of the then outstanding shares or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. 5. The term "Special Separation" shall mean any termination of employment that occurs prior to the time a Participant is eligible to retire, except a termination for cause or a voluntary resignation that is not initiated or encouraged by the Company. 6. The term "Retirement" shall mean: (a) retirement in accordance with the provisions of any appropriate retirement plan of the Company or any of its subsidiaries; or (b) termination of employment under the permanent disability provision of any retirement plan of the Company or any of its subsidiaries. 10 12 ARTICLE M -- CONSENT. Every Participant who receives a stock option, stock appreciation right, or grant of shares pursuant to the Plan shall be bound by the terms and provisions of the Plan and of the stock option, stock appreciation right, or grant of shares agreement referable thereto, and the acceptance of any stock option, stock appreciation right, or grant of shares pursuant to the Plan shall constitute a binding agreement between the Participant and the Company and its subsidiaries and any successors in interest to any of them. Every Person who receives a stock option, stock appreciation right, or grant of shares from a Participant pursuant to the Plan shall, in addition to such terms and conditions as the Committee may require upon such grant, be bound by the terms and provisions of the Plan and of the stock option, stock appreciation right, or grant of shares agreement referable thereto, and the acceptance of any stock option, stock appreciation right, or grant of shares by such Person shall constitute a binding agreement between such Person and the Company and its subsidiaries and any successors in interest to any of them. ___ The Plan shall be governed by and construed in accordance with the laws of the State of Ohio, United States of America. ARTICLE N - PURCHASE OF SHARES OR STOCK OPTIONS. The Committee may authorize any Participant to convert cash compensation otherwise payable to such Participant into stock options or shares of Common Stock under the Plan upon such terms and conditions as the Committee, in its discretion, shall determine. Notwithstanding the foregoing, in any such conversion the shares of Common Stock shall be valued at no less than one hundred percent (100%) of their fair market value. ARTICLE O -- DURATION OF PLAN. The Plan will terminate on July 10, 2011 unless a different termination date is fixed by the shareholders or by action of the Board of Directors, but no such termination shall affect the prior rights under the Plan of the Company (or any subsidiary) or of anyone to whom stock options or stock appreciation rights were granted prior thereto or to whom shares have been transferred prior to such termination. 11 EX-10.2 5 l90238aex10-2.txt EXHIBIT 10.2 1 EXHIBIT (10-2) The Procter & Gamble 1992 Stock Plan 2 THE PROCTER & GAMBLE 1992 STOCK PLAN (as amended June 12, 2001) ARTICLE A - PURPOSE. The purpose of The Procter & Gamble 1992 Stock Plan (hereinafter referred to as the "Plan) is to encourage those employees of The Procter & Gamble Company (hereinafter referred to as the "Company") and its subsidiaries who are largely responsible for the long-term success and development of the business to strengthen the alignment of interests between employees and the Company's shareholders through the increased ownership of shares of the Company's Common Stock, and to encourage those employees to remain in the employ of the Company and its subsidiaries. This will be accomplished through the granting to employees of options to purchase shares of the Common Stock of the Company, payment of a portion of the employees' remuneration in shares of the Common Stock, and the granting to them by the Company and a subsidiary, if appropriate, of deferred awards related to the increase in the price of the Common Stock of the Company as provided by the terms and conditions set forth in the Plan. ARTICLE B - ADMINISTRATION. 1. The Plan shall be administered by the Compensation Committee (hereinafter referred to as the "Committee") of the Board of Directors of the Company (hereinafter referred to as the "Board"), or such other committee as may be designated by the Board. The Committee shall consist of not less than three (3) members of the Board who are neither officers nor employees, or members of the Board who are "Non-Employee Directors" as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended (hereinafter referred to as the "1934 Act"), or any successor rule or definition adopted by the Securities and Exchange Commission, to be appointed by the Board from time to time and to serve at the discretion of the Board. 2. It shall be the duty of the Committee to administer this Plan in accordance with its provisions, to report thereon not less than once each year to the Board and to make such recommendations of amendments or otherwise as it deems necessary or appropriate. A decision by a majority of the Committee shall govern all actions of the Committee. 3. Subject to the express provisions of this Plan, the Committee shall have authority: to grant nonstatutory and incentive stock options; to grant to recipients stock appreciation rights either freestanding, in tandem with simultaneously granted stock options, or in parallel with simultaneously granted stock options; to award a portion of a recipient's remuneration in shares of Common Stock of the Company subject to such conditions or restrictions, if any, as the Committee may determine; to determine all the terms and provisions of the respective stock option, stock appreciation right, and stock award agreements including setting the dates when each stock option or stock appreciation right or part thereof may be exercised and determining the conditions and restrictions, if any, of any shares of Common Stock acquired through the exercise of any stock option; and to make all other determinations it deems necessary or advisable for administering this Plan; provided, however, the Committee shall have the further authority at time of grant to: (a) waive the provisions of Article F, paragraph 1(a); (b) waive the provisions of Article F, paragraph 1(b); (c) waive the provisions of Article G, paragraph 4(a); and 1 3 (d) impose conditions in lieu of those set forth in Article G, paragraphs 4 through 7, for nonstatutory stock options, stock appreciation rights, and stock award grants which do not increase or extend the rights of the recipient, to take into consideration the differences, limitations, and requirements of foreign laws or conditions including tax regulations, exchange controls or investment restrictions, possible unenforceability of any part of this Plan, or other matters deemed appropriate by it. 4. The Committee may establish from time to time such regulations, provisions, and procedures within the terms of this Plan as, in its opinion, may be advisable in the administration of this Plan. 5. The Committee may designate the Secretary of the Company or other employees of the Company to assist the Committee in the administration of this Plan and may grant authority to such persons to execute documents on behalf of the Committee. ARTICLE C -- PARTICIPATION. The Committee shall select those employees of the Company and its subsidiaries who, in the opinion of the Committee, have demonstrated a capacity for contributing in a substantial manner to the success of such companies and shall determine the number of shares of the Common Stock of the Company to be transferred under this Plan subject to such conditions or restrictions as the Committee may determine and the number of shares with respect to which stock options or stock appreciation rights will be granted. The Committee may consult with the Chief Executive, but nevertheless the Committee has the full authority to act, and the Committee's actions shall be final. ARTICLE D -- LIMITATION ON NUMBER OF SHARES FOR THE PLAN. 1. Unless otherwise authorized by the shareholders, the maximum aggregate number of shares available for award under this Plan for each calendar year the Plan is in effect shall be one percent (1%) of the total issued shares of Common Stock of the Company as of June 30 of the immediately preceding fiscal year. 2. Any of the authorized shares may be used in respect of any of the types of awards described in this Plan, except that no more than twenty-five percent (25%) of the authorized shares in any calendar year may be issued as restricted or unrestricted stock and no more than 50,000,000 of the authorized shares during the term of the Plan may be issued as incentive stock options. 3. Any authorized shares not used in a calendar year shall be available for awards under this Plan in succeeding calendar years. ARTICLE E -- SHARES SUBJECT TO USE UNDER THE PLAN. 1. The shares to be delivered by the Company upon exercise of stock options or stock appreciation rights shall be either authorized but unissued shares or treasury shares, as determined by the Board. In the case of redemption of stock appreciation rights by one of the Company's subsidiaries, such shares shall be shares acquired by that subsidiary. Notwithstanding any terms or conditions contained herein, the shares to be delivered by the Company upon exercise of stock options or stock appreciation rights by a participant located in Italy shall be authorized but unissued shares. 2. For purposes of this Plan, restricted or unrestricted stock awarded under the terms of this Plan shall be authorized but unissued shares, treasury shares, or shares acquired for purposes of the Plan by the Company or a subsidiary, as determined by the Board. 2 4 ARTICLE F -- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. 1. In addition to such other conditions as may be established by the Committee, in consideration of the granting of stock options or stock appreciation rights under the terms of this Plan, the recipient agrees as follows: (a) The right to exercise any stock option or stock appreciation right shall be conditional upon certification by the recipient at time of exercise that the recipient intends to remain in the employ of the Company or one of its subsidiaries (except in cases of retirement, disability or Special Separation as defined in section 6 of Article G) for at least one (1) year following the date of the exercise of the stock option or stock appreciation right, and, (b) In order to better protect the goodwill of the Company and its subsidiaries and to prevent the disclosure of the Company's or it subsidiaries' trade secrets and confidential information and thereby help insure the long-term success of the business, the recipient, without prior written consent of the Company, will not engage in any activity or provide any services, whether as a director, manager, supervisor, employee, adviser, consultant or otherwise, for a period of three (3) years following the date of the recipient's termination of employment with the Company (except for terminations of employment resulting from retirement or Special Separation), in connection with the manufacture, development, advertising, promotion, or sale of any product which is the same as or similar to or competitive with any products of the Company or its subsidiaries (including both existing products as well as products known to the recipient, as a consequence of the recipient's employment with the Company or one of its subsidiaries, to be in development): (1) with respect to which the recipient's work has been directly concerned at any time during the two (2) years preceding termination of employment with the Company or one of its subsidiaries or (2) with respect to which during that period of time the recipient, as a consequence of the recipient's job performance and duties, acquired knowledge of trade secrets or other confidential information of the Company or its subsidiaries. For purposes of this section, it shall be conclusively presumed that recipients have knowledge of information they were directly exposed to through actual receipt or review of memos or documents containing such information, or through actual attendance at meetings at which such information was discussed or disclosed. (c) The provisions of this Article are not in lieu of, but are in addition to the continuing obligation of the recipient (which recipient hereby acknowledges) to not use or disclose the Company's or its subsidiaries' trade secrets and confidential information known to the recipient until any particular trade secret or confidential information become generally known (through no fault of the recipient), whereupon the restriction on use and disclosure shall cease as to that item. Information regarding products in development, in test marketing or being marketed or promoted in a discrete geographic region, which information the Company or one of its subsidiaries is considering for broader use, shall not be deemed generally known until such broader use is actually commercially implemented. As used in this Article, "generally known" means known throughout the domestic U. S. industry or, in the case of recipients who have job responsibilities outside of the United States, the appropriate foreign country or countries' industry. (d) By acceptance of any offered stock option or stock appreciation rights granted under the terms of this Plan, the recipient acknowledges that if the recipient were, without authority, to 3 5 use or disclose the Company's or any of its subsidiaries' trade secrets or confidential information or threaten to do so, the Company or one of its subsidiaries would be entitled to injunctive and other appropriate relief to prevent the recipient from doing so. The recipient acknowledges that the harm caused to the Company by the breach or anticipated breach of this Article is by its nature irreparable because, among other things, it is not readily susceptible of proof as to the monetary harm that would ensue. The recipient consents that any interim or final equitable relief entered by a court of competent jurisdiction shall, at the request of the Company or one of its subsidiaries, be entered on consent and enforced by any court having jurisdiction over the recipient, without prejudice to any rights either party may have to appeal from the proceedings which resulted in any grant of such relief. (e) If any of the provisions contained in this Article shall for any reason, whether by application of existing law or law which may develop after the recipient's acceptance of an offer of the granting of stock appreciation rights or stock options, be determined by a court of competent jurisdiction to be overly broad as to scope of activity, duration, or territory, the recipient agrees to join the Company or any of its subsidiaries in requesting such court to construe such provision by limiting or reducing it so as to be enforceable to the extent compatible with then applicable law. If any one or more of the terms, provisions, covenants, or restrictions of this Article shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, then the remainder of the terms, provisions, covenants, and restrictions of this Article shall remain in full force and effect and shall in no way be affected, impaired, or invalidated. 2. The fact that an employee has been granted a stock option or a stock appreciation right under this Plan shall not limit the right of the employer to terminate the recipient's employment at any time. The Committee is authorized to suspend or terminate any outstanding stock option or stock appreciation right for actions taken prior to termination of employment if the Committee determines the recipient has acted significantly contrary to the best interests of the Company. 3. More than one stock option or stock appreciation right may be granted to any employee under this Plan but the maximum number of shares with respect to which stock options or stock appreciation rights may be granted to any employee in any calendar year shall not exceed five percent (5%) of the number of shares which can be issued or transferred annually hereunder. 4. The aggregate fair market value (determined at the time when the incentive stock option is exercisable for the first time by an employee during any calendar year) of the shares for which any employee may be granted incentive stock options under this Plan and all other stock option plans of the Company and its subsidiaries in any calendar year shall not exceed $100,000 (or such other amount as reflected in the limits imposed by Section 422(d) of the Internal Revenue Code of 1986, as it may be amended from time to time). 5. If the Committee grants incentive stock options, all such stock options shall contain such provisions as permit them to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as may be amended from time to time. 6. With respect to stock options granted in tandem with or parallel to stock appreciation rights, the exercise of either such stock options or such stock appreciation rights will result in the simultaneous cancellation of the same number of tandem or parallel stock appreciation rights or stock options, as the case may be. 7. The exercise price for all stock options and stock appreciation rights shall be established by the Committee at the time of their grant and shall be not less than one hundred percent (100%) of the fair market value of the Common Stock of the Company on the date of grant. 4 6 ARTICLE G -- EXERCISE OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. 1. All stock options and stock appreciation rights granted hereunder shall have a maximum life of no more than fifteen (15) years from the date of grant; provided, however, that any stock options or stock appreciation rights with a life of more than ten (10) years from the date of grant that have been conditionally granted to the Chief Executive or to any other executive officer subject to the provisions of Section 162(m) of the Internal Revenue Code and subject to taxation under United States law, as it may be amended from time to time, prior to the annual meeting of shareholders scheduled for October 12, 1999 shall automatically be canceled effective October 12, 1999 if the shareholders do not adopt a resolution at such annual meeting approving grants to such officers with a maximum life of up to fifteen (15) years from the date of grant. 2. No stock options or stock appreciation rights shall be exercisable within one (1) year from their date of grant, except in the case of the death of the recipient. 3. During the lifetime of the recipient, stock options and stock appreciation rights may be exercised only by the recipient personally, or, in the event of the legal incompetence of the recipient, by the recipient's duly appointed legal guardian. 4. In case a recipient of stock options or stock appreciation rights ceases to be an employee of the Company or any of its subsidiaries while holding an unexercised stock option or stock appreciation right: (a) Any unexercisable portions thereof are then void, except in the case of: (1) death of the recipient; (2) any Special Separation (as defined in section 6 of this Article G) that occurs more than six months from the date the options were granted; or (3) any option as to which the Committee has waived, at the time of grant, the provisions of this Article G, paragraph 4(a) pursuant to the authority granted by Article B, paragraph 3. (b) Any exercisable portions thereof are then void, except in the case of death, retirement in accordance with the provisions of any appropriate profit sharing or retirement plan of the Company or any of its subsidiaries, or Special Separation (as defined in section 6 of this Article G) of the recipient. 5. In the case of the death of a recipient of stock options or stock appreciation rights while an employee of the Company or any of its subsidiaries, the persons to whom the stock options or stock appreciation rights have been transferred by will or the laws of descent and distribution shall have the privilege of exercising remaining stock options, stock appreciation rights or parts thereof, whether or not exercisable on the date of death of such employee, at any time prior to the expiration date of the stock options or stock appreciation rights. 6. Termination of employment under the permanent disability provision of any appropriate profit sharing or retirement plan of the Company or any of its subsidiaries shall be deemed the same as retirement. Special Separation means any termination of employment, except a termination for cause or a voluntary resignation that is not initiated or encouraged by the Company, that occurs prior to the time a recipient is eligible to retire. The death of a recipient of stock options or stock appreciation rights subsequent to retirement or Special Separation shall not render exercisable stock options or stock appreciation rights which were unexercisable at the time of the retirement or Special Separation. The persons to whom the exercisable stock options or stock appreciation rights have been transferred by will or the laws of descent and distribution shall have the privilege of exercising such remaining stock options, stock appreciation rights or parts thereof, at any time prior to the expiration date of the stock options or stock appreciation rights. 5 7 7. Stock options and stock appreciation rights are not transferable other than by will or by the laws of descent and distribution. For the purpose of exercising stock options or stock appreciation rights after the death of the recipient, the duly appointed executors and administrators of the estate of the deceased recipient shall have the same rights with respect to the stock options and stock appreciation rights as legatees or distributees would have after distribution to them from the recipient's estate. 8. Upon the exercise of stock appreciation rights, the recipient shall be entitled to receive a redemption differential for each such stock appreciation right which shall be the difference between the then fair market value of one share of the Common Stock of the Company and the exercise price of one stock appreciation right then being exercised. In the case of the redemption of stock appreciation rights by a subsidiary of the Company not located in the United States, the redemption differential shall be calculated in United States dollars and converted to the appropriate local currency on the exercise date. As determined by the Committee, the redemption differential may be paid in cash, Common Stock of the Company to be valued at its fair market value on the date of exercise, any other mode of payment deemed appropriate by the Committee or any combination thereof. The number of shares with respect to which stock appreciation rights are being exercised shall not be available for granting future stock options or stock appreciation rights under this Plan. 9. The Committee may, in its sole discretion, permit a stock option which is being exercised either (a) by an optionee whose retirement is imminent or who has retired or (b) after the death of the optionee, to be surrendered, in lieu of exercise, for an amount equal to the difference between the stock option exercise price and the fair market value of shares of the Common Stock of the Company on the day the stock option is surrendered, payment to be made in shares of the Company's Common Stock which are subject to this Plan valued at their fair market value on such date, cash, or a combination thereof, in such proportion and upon such terms and conditions as shall be determined by the Committee. The difference between the number of shares subject to stock options so surrendered and the number of shares, if any, issued upon such surrender shall represent shares which shall not be available for granting future stock options under this Plan. 10. Time spent on leave of absence shall be considered as employment for the purposes of this Plan. Leave of absence means any period of time away from work granted to any employee by his or her employer because of illness, injury, or other reasons satisfactory to the employer. 11. The Company reserves the right from time to time to suspend the exercise of any stock option or stock appreciation right where such suspension is deemed by it necessary or appropriate for corporate purposes. No such suspension shall extend the life of the stock option or stock appreciation right beyond its expiration date, and in no event will there be a suspension in the five (5) calendar days immediately preceding the expiration date. ARTICLE H -- PAYMENT FOR STOCK OPTIONS. Upon the exercise of a stock option, payment in full of the exercise price shall be made by the optionee. As determined by the Committee, the stock option exercise price may be paid for by the optionee either in cash, shares of the Common Stock of the Company to be valued at their fair market value on the date of exercise, a combination thereof, or such other method as determined by the Committee. ARTICLE I -- TRANSFER OF SHARES. 1. The Committee may transfer Common Stock of the Company under the Plan subject to such conditions or restrictions, if any, as the Committee may determine. The conditions and restrictions may vary from time to time and with respect to particular employees or group of employees and may be set 6 8 forth in agreements between the Company and the employee or in the awards of stock to them, all as the Committee determines. It is contemplated that the conditions and restrictions established by the Committee will be consistent with the objectives of this Plan and may be of the following types. In giving these examples, it is not intended to restrict the Committee's authority to impose other restrictions or conditions, or to waive restrictions or conditions under circumstances deemed by the Committee to be appropriate and not contrary to the best interests of the Company. (a) Restrictions The employee will not be able to sell, pledge, or dispose of the shares during a specified period except in accordance with the agreement or award. Such restrictions will lapse either after a period of, for example, five years, or in fifteen or fewer annual installments following retirement or termination of employment, as the Committee from time to time may determine. However, upon the transfer of shares subject to restrictions, an employee will have all incidents of ownership in the shares, including the right to dividends (unless otherwise restricted by the Committee), to vote the shares, and to make gifts of them to family members (still subject to the restrictions). (b) Lapse of Restrictions In order to have the restrictions lapse, an employee may be required to continue in the employ of the Company or a subsidiary for a prescribed period of time. Exemption from this requirement may be prescribed in the case of death, disability, or retirement, or as otherwise prescribed by the Committee. ARTICLE J -- ADJUSTMENTS. The amount of shares authorized to be issued annually under this Plan will be subject to appropriate adjustments in their numbers in the event of future stock splits, stock dividends, or other changes in capitalization of the Company occurring after the date of approval of this Plan by the Company's shareholders to prevent the dilution or enlargement of rights under this Plan; following any such change, the term "Common Stock" shall be deemed to refer to such class of shares or other securities as may be applicable. The number of shares and exercise prices covered by outstanding stock options and stock appreciation rights shall be adjusted to give effect to any such stock splits, stock dividends, or other changes in the capitalization. ARTICLE K -- ADDITIONAL PROVISIONS. 1. The Board may, at any time, repeal this Plan or may amend it from time to time except that no such amendment may amend this paragraph, increase the annual aggregate number of shares subject to this Plan, reduce the price at which stock options or stock appreciation rights may be granted, exercised, or surrendered, alter the class of employees eligible to receive stock options, or increase the percentage of shares authorized to be transferred as restricted or unrestricted stock. The recipient of awards under this Plan and the Company shall be bound by any such amendments as of their effective dates, but if any outstanding stock options or stock appreciation rights are affected, notice thereof shall be given to the holders of such stock options and stock appreciation rights and such amendments shall not be applicable to such holder without his or her written consent. If this Plan is repealed in its entirety, all theretofore granted unexercised stock options or stock appreciation rights shall continue to be exercisable in accordance with their terms and shares subject to conditions or restrictions transferred pursuant to this Plan shall continue to be subject to such conditions or restrictions. 2. In the case of an employee of a subsidiary company, performance under this Plan, including the transfer of shares of the Company, may be by the subsidiary. Nothing in this Plan shall affect the 7 9 right of the Company or any subsidiary to terminate the employment of any employee with or without cause. None of the participants, either individually or as a group, and no beneficiary or other person claiming under or through any participant, shall have any right, title, or interest in any shares of the Company purchased or reserved for the purpose of this Plan except as to such shares, if any, as shall have been granted or transferred to him or her. Nothing in this Plan shall preclude the issuance or transfer of shares of the Company to employees under any other plan or arrangement now or hereafter in effect. 3. "Subsidiary" means any company in which greater than fifty percent (50%) of the total combined voting power of all classes of stock is owned, directly or indirectly, by the Company. In addition, the Board may designate for participation in this Plan as a "subsidiary," except for the granting of incentive stock options, those additional companies affiliated with the Company in which the Company's direct or indirect stock ownership is less than fifty percent (50%) of the total combined voting power of all classes of such company's stock. 4. Notwithstanding anything to the contrary in the this Plan, stock options and stock appreciation rights granted hereunder shall vest immediately and any conditions or restrictions on Common Stock shall lapse upon a "Change in Control." A "Change in Control" shall mean the occurrence of any of the following: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the then outstanding Shares or the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred pursuant to this Section 4(a), Shares or Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Related Entity"), (ii) the Company or any Related Entity, or (iii) any Person in connection with a "Non-Control Transaction" (as hereinafter defined); (b) The individuals who, as of July 11, 2000 are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least half of the members of the Board; or, following a Merger (as hereinafter defined) which results in a Parent Corporation (as hereinafter defined), the board of directors of the ultimate Parent Corporation; provided, however, that if the election, or nomination for election by the Company's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) The consummation of: 8 10 (i) A merger, consolidation or reorganization with or into the Company or in which securities of the Company are issued (a "Merger"), unless such Merger is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a Merger where: (A) the stockholders of the Company, immediately before such Merger own directly or indirectly immediately following such Merger at least fifty percent (50%) of the combined voting power of the outstanding voting securities of (x) the corporation resulting from such Merger (the "Surviving Corporation") if fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly by another Person (a "Parent Corporation"), or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Merger constitute at least half of the members of the board of directors of (x) the Surviving Corporation, if there is no Parent Corporation, or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation; and (C) no Person other than (1) the Company, (2) any Related Entity, (3) any employee benefit plan (or any trust forming a part thereof) that, immediately prior to such Merger was maintained by the Company or any Related Entity, or (4) any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Voting Securities or Shares, has Beneficial Ownership of twenty percent (20%) or more of the combined voting power of the outstanding voting securities or common stock of (x) the Surviving Corporation if there is no Parent Corporation, or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation; (ii) A complete liquidation or dissolution of the Company; or (iii) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Related Entity or under conditions that would constitute a Non-Control Transaction with the disposition of assets being regarded as a Merger for this purpose or the distribution to the Company's stockholders of the stock of a Related Entity or any other assets). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding Shares or Voting Securities as a result of the acquisition of Shares or Voting Securities by the Company which, by reducing the number of Shares or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Shares or Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Shares or Voting Securities which increases the percentage of the then outstanding Shares or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. ARTICLE L -- CONSENT. Every recipient of a stock option, stock appreciation right, or transfer of shares pursuant to this Plan shall be bound by the terms and provisions of this Plan and of the stock option, stock appreciation 9 11 right, or transfer of shares agreement referable thereto, and the acceptance of any stock option, stock appreciation right, or transfer of shares pursuant to this Plan shall constitute a binding agreement between the recipient and the Company and its subsidiaries and any successors in interest to any of them. This Plan shall be governed by and construed in accordance with the laws of the State of Ohio, United States of America. ARTICLE M -- DURATION OF PLAN. This Plan will terminate on July 14, 2002 unless a different termination date is fixed by the shareholders or by action of the Board of Directors, but no such termination shall affect the prior rights under this Plan of the Company (or any subsidiary) or of anyone to whom stock options or stock appreciation rights were granted prior thereto or to whom shares have been transferred prior to such termination. 10 12 ADDITIONAL INFORMATION 1. SHARES AWARDED AS A PORTION OF REMUNERATION Any shares of Common Stock of the Company awarded as a portion of a participant's remuneration shall be valued at not less than one hundred percent (100%) of the fair market value of the Company's Common Stock on the date of the award. These shares may be subject to such conditions or restrictions as the Committee may determine, including a requirement that the participant remain in the employ of the Company or one of its subsidiaries for a set period of time, or until retirement. Failure to abide by any applicable restriction will result in forfeiture of the shares. 2. TAX EFFECTS INCENTIVE STOCK OPTIONS With regard to tax effects which may accrue to the optionee, counsel advises that if the optionee has continuously been an employee from the time an option has been granted until at least three months before it is exercised, under existing law no taxable income results to the optionee from the exercise of an incentive stock option at the time of exercise. However, the spread at exercise is an "adjustment" item for alternative minimum tax purposes. Any gain realized on the sale or other disposition of stock acquired on exercise of an incentive stock option is considered as long-term capital gain for tax purposes if the stock has been held more than two years after the date the option was granted and more than one year after the date of exercise of the option. If the stock is disposed of within one year after exercise, the lesser of any gain on such disposition or the spread at exercise (i.e., the excess of the fair market value of the stock on the date of exercise over the option price) is treated as ordinary income, and any appreciation after the date of exercise is considered long-term or short-term capital gain to the optionee depending on the holding period prior to sale. However, the spread at exercise (even if greater than the gain on the disposition) is treated as ordinary income if the disposition is one on which a loss, if sustained, is not recognized--e.g., a gift, a "wash" sale or a sale to a related party. The amount of ordinary income recognized by the optionee is treated as a tax deductible expense to the Company. No other amount relative to an incentive stock option is a tax deductible expense to the Company. NONSTATUTORY STOCK OPTIONS With regard to tax effects which may accrue to the optionee, counsel advises that under existing tax law gain taxable as ordinary income to the optionee is deemed to be realized at the date of exercise of the option, the gain on each share being the difference between the market price on the date of exercise and the option price. This amount is treated as a tax deductible expense to the Company at the time of the exercise of the option. Any appreciation in the value of the stock after the date of exercise is considered a long-term or short-term capital gain to the optionee depending on whether or not the stock was held for the appropriate holding period prior to sale. STOCK APPRECIATION RIGHTS With regard to tax effects which may accrue to the recipient, counsel advises that "United States persons," as defined in the Internal Revenue Code of 1986 (the "I.R.C."), must recognize ordinary income as of the date of exercise equal to the amount paid to the recipient, i.e., the difference between the grant price and the value of the shares on the date of exercise. 11 13 SHARES AWARDED AS A PORTION OF REMUNERATION With regard to tax effects which may accrue to the recipient, counsel advises that "United States persons" as defined in the Internal Revenue Code of 1986 (the "I.R.C."), must recognize ordinary income in the first taxable year in which the recipient's rights to the stock are transferable or are not subject to a substantial risk of forfeiture, whichever is applicable. Recipients who are "United States persons" may also elect to include the income in their tax returns for the taxable year in which they receive the shares by filing an election to do so with the appropriate office of the Internal Revenue Service within 30 days of the date the shares are transferred to them. The amount includable in income is the fair market value of the shares as of the day the shares are transferable or not subject to a substantial risk of forfeiture, whichever is applicable; if the recipient has elected to include the income in the year in which the shares are received, the amount of income includable is the fair market value of the shares at the time of transfer. For non-United States persons, the time when income is realized, its measurement and its taxation, will depend on the laws of the particular countries in which the recipients are residents and/or citizens at the time of transfer or when the shares are first transferable and not subject to a substantial risk of forfeiture, as the case may be. "United States persons" who receive shares awarded as a portion of remuneration may also have tax consequences with respect to the receipt of shares or the expiration of restrictions or substantial risk of forfeiture on such shares under the laws of the particular country other than the United States of which such person is a resident or citizen. Notwithstanding the above advice received by the Company, it is each individual recipient's responsibility to check with his or her personal tax adviser as to the tax effects and proper handling of stock options, stock appreciation rights and Common Stock acquired. The above advice relates specifically to the U.S. consequences of stock options, stock appreciation rights and Common Stock acquired, including the U.S. consequences to "United States persons" whether or not resident in the U.S. In addition to U.S. tax consequences, for all persons who are not U.S. residents, the time when income, if any, is realized, the measurement of such income and its taxation will also depend on the laws of the particular country other than the U.S. of which such persons are resident and/or citizens at the time of grant or the time of exercise, as the case may be. The Plan is not subject to the qualification requirements of Section 401(a) of the I.R.C. 3. EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA"), as amended. 4. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Securities and Exchange Commission (File No. 1-434) pursuant to the 1934 Act are incorporated into this document by reference: 1. The Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999; 2. The Company's Quarterly Reports on Form 10-Q for the quarters ended September 30, 1999, December 31, 1999 and March 31, 2000; and 3. All other documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this Prospectus and prior to the filing of a post-effective 12 14 amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold. The Company will provide without charge to each participant in the Plan, upon oral or written request, a copy of any or all of these documents other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents. In addition, the Company will provide without charge to such participants a copy of the Company's most recent annual report to shareholders, proxy statement, and other communications distributed generally to security holders of the Company. Requests for such copies should be directed to Mr. Robert J. Thompson, Manager, Shareholder Services, The Procter & Gamble Company, P.O. Box 5572, Cincinnati, Ohio 45201, (513) 983-3413. 5. ADDITIONAL INFORMATION Additional information about the Plan and its administrators may be obtained from Mr. Terry L. Overbey, Secretary, The Procter & Gamble Company, One Procter & Gamble Plaza, Cincinnati, Ohio 45202, (513) 983-4463. 13 EX-10.3 6 l90238aex10-3.txt EXHIBIT 10.3 1 EXHIBIT (10-3) The Procter & Gamble 1983 Stock Plan 2 THE PROCTER & GAMBLE 1983 STOCK PLAN (AS AMENDED EFFECTIVE JUNE 12, 2001) ARTICLE A - PURPOSE. The purpose of The Procter & Gamble 1983 Stock Plan (hereinafter referred to as the "Plan") is to encourage those key employees of The Procter & Gamble Company (herein referred to as the "Company") and its subsidiaries who are largely responsible for the long-term success and development of the business to increase their proprietary and other interest in the Company's progress, and to remain in the employ of the Company and its subsidiaries, by the granting to them by the Company of options to purchase shares of the Common Stock of the Company and the granting to them by the Company and a subsidiary, if appropriate, of deferred awards related to the increase in the price of the Common Stock of the Company as provided in this Plan. ARTICLE B - ADMINISTRATION. 1. The Plan shall be administered by the Compensation Committee (herein referred to as the "Committee") of the Board of Directors of the Company (herein referred to as the "Board"). The Committee shall operate, administer, and interpret the Plan and shall be composed of three or more members of the Board to be appointed by the Board from time to time to serve until they resign, die, or are removed by resolution of the Board. No member of the Committee shall participate or be eligible to participate in this Plan, but he or she may exercise stock options or stock appreciation rights previously granted to him or her in accordance with the terms of said stock options or stock appreciation rights. 2. It shall be the duty of the Committee to administer this Plan in accordance with its provisions, to report thereon not less than once each year to the Board and to make such recommendations of amendments or otherwise as it may deem necessary or appropriate. A decision by a majority of the Committee shall govern all actions of the Committee. 3. Subject to the express provisions of this Plan, the Committee shall have authority: to grant nonstatutory and incentive stock options; to grant to recipients who are nonresidents of the United States on the date of grant stock appreciation rights either freestanding, in tandem with simultaneously granted stock options or in parallel with simultaneously granted stock options; to determine all the terms and provisions of the respective stock option and stock appreciation right agreements including setting the dates when each stock option or stock appreciation right or part thereof may be exercised; and to make all other determinations it deems necessary or advisable for administering this Plan; provided, however, for recipients who are nonresidents of the United States on the date of any grant, the Committee shall have the further authority to: (a) waive the provisions of Article G, paragraph 1(b); (b) except in the case of a recipient who is an executive officer of the Company subject to Section 16 of the Securities Exchange Act of 1934, waive the provisions of Article G, paragraph 1(a); 1 3 (c) impose conditions in lieu of those set forth in Article J, paragraphs 4 through 7, for nonstatutory stock options and stock appreciation rights grants which do not increase or extend the rights of the recipient, to take into consideration the differences, limitations and requirements of local foreign laws or conditions including, but not limited to, tax regulations, exchange controls, investment restrictions, possible unenforceability of any part of this Plan and other similar matters deemed appropriate by it. 2 4 4. The Committee may establish from time to time such regulations, provisions and procedures within the terms of this Plan as, in its opinion, may be advisable in the administration of this Plan. 5. The Committee may designate the Secretary of the Company or other employees of the Company to assist the Committee in the administration of this Plan and may grant authority to such persons to execute documents on behalf of the Committee. ARTICLE C - PARTICIPATION. The Committee shall select those key employees of the Company and its subsidiaries who, in the opinion of the Committee, have demonstrated a capacity for contributing in a substantial manner to the success of such companies and shall determine the number of shares with respect to which stock options or stock appreciation rights are to be granted to each, the type of stock options or stock appreciation rights to be granted and the number of shares under each type. The Committee may consult with the Chairman of the Board or the President, but nevertheless the Committee has full authority to act, and the Committee's actions shall be final. ARTICLE D - NUMBER OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. 1. The aggregate number of shares of the Common Stock of the Company which may be issued or transferred under all stock options to be granted, or with respect to which stock appreciation rights may be granted, pursuant to this Plan shall not exceed 25,996,446 shares. 2. With respect to stock options granted in tandem with or parallel to stock appreciation rights, the exercise of either such stock options or such stock appreciation rights will result in the simultaneous cancellation of the same number of tandem or parallel stock appreciation rights or stock options, as the case may be. ARTICLE E - SHARES SUBJECT TO USE UNDER THE PLAN. The shares to be delivered by the Company upon exercise of stock options or stock appreciation rights shall be either authorized but unissued shares or treasury shares, as determined by the Board. In the case of redemption of stock appreciation rights by one of the Company's subsidiaries, such shares shall be shares acquired by that subsidiary. ARTICLE F - PRICE. The exercise price for all stock options and stock appreciation rights shall be established by the Committee at the time of their grant and shall be not less than one hundred percent (100%) of the fair market value of the Common Stock of the Company on the date of grant. ARTICLE G - AGREEMENT OF OPTIONEE AND CONDITIONS OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. 1. In addition to such other conditions as may be established by the Committee, in consideration of the granting of stock options or stock appreciation rights under the terms of this Plan, the recipient agrees as follows: (a) To remain in the employ of the Company or one of its subsidiaries for at least one (1) year following the date of the granting of the stock option or stock appreciation right, and, 3 5 (b) In order to better protect the goodwill of the Company and prevent the disclosure of the Company's trade secrets and other confidential information and thereby help insure the long-term success and development of the business, the recipient will not engage in competitive employment for a period of three (3) years following the date of the granting of a stock option or a stock appreciation right without first obtaining written permission from the Company. "Engage in competitive employment" means rendering services, or becoming associated in any way or in any capacity in the manufacture, development, advertising, promotion or sale of any product which is the same as or similar to or competitive with any products of the Company or one of its subsidiaries (including existing products and products known to the recipient to be in development) with respect to which the recipient's work has been directly concerned at any time during the two (2) years preceding termination of employment with the Company or any of its subsidiaries or with respect to which during that period of time recipient acquired knowledge of trade secrets or other confidential information. 2. The fact that an employee has been granted a stock option or a stock appreciation right under this Plan shall not affect or qualify the right of the employer to terminate the recipient's employment at any time. In the event the recipient breaches or violates section 1 above, the Company may seek injunctive or other appropriate relief. ARTICLE H - LIMITATIONS. 1. More than one stock option or stock appreciation right may be granted to any employee under this Plan but the maximum number of shares with respect to which stock options or stock appreciation rights may be granted to any employee shall not exceed five percent (5%) of the number of shares which can be issued or transferred hereunder. 2. The aggregate fair market value (determined at the time of the grant of the stock option) of the shares for which any employee may be granted incentive stock options under this Plan and all other stock option plans of the Company and its subsidiaries in any calendar year shall not exceed $100,000 plus any unused limit carry-over to such year as provided for in Section 422A(c)(4) of the Internal Revenue Code of 1954, as amended. (This amount will automatically change to reflect the limits imposed by Section 422A(b)(8) of the Internal Revenue Code of 1954 as it may be amended from time to time.) 3. If the Committee grants incentive stock options, all such stock options shall contain such provisions as permit them to qualify as "incentive stock options" within the meaning of Section 422A of the Internal Revenue Code of 1954, as amended by the Economic Recovery Tax Act of 1981, and as the same may from time to time be amended. 4. Resale of securities offered under this Plan by Directors and executive officers of the Company subject to Section 16 of the Securities Exchange Act of 1934 must be pursuant to a valid registration statement on other than Form S-8 or pursuant to an exemption from registration provided under the Securities Act of 1933, as amended. Other employees of the Company or its subsidiaries are free to make resales of the securities offered hereunder without further registration. ARTICLE I - ADJUSTMENTS. Appropriate adjustments in the number of shares of stock options and stock appreciation rights which can be granted under this Plan and in the numbers and exercise prices covered by outstanding stock options and stock appreciation rights shall be made to give effect to any stock splits, stock dividends or other changes in the Common Stock of the Company occurring after October 11, 1983, the date of approval of this Plan by the Company's shareholders. 4 6 ARTICLE J - EXERCISE OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. 1. All stock options and stock appreciation rights granted hereunder shall have a maximum life of no more than ten (10) years from the date of grant. 2. No stock options or stock appreciation rights shall be exercisable within one (1) year from their date of grant, except in the case of the death of the recipient. 3. During the lifetime of the recipient, stock options and stock appreciation rights may be exercised only by the recipient personally. Stock options and stock appreciation rights are not assignable and are not transferable otherwise than by will or by the laws of descent and distribution. 4. In case a recipient of stock options or stock appreciation rights ceases to be an employee of the Company or any of its subsidiaries while holding an unexercised stock option or stock appreciation right: (a) Any unexercisable portions thereof are then void, except in the case of death of the recipient or in the case of any option as to which the Committee has waived, at the time of grant, the provisions of Article G, paragraph 1(a) pursuant to the authority granted by Article B, paragraph 3. (b) Any exercisable portions thereof are then void, except in the case of death, retirement in accordance with the provisions of any appropriate profit sharing or retirement plan of the Company or any of its subsidiaries, or Special Separation (as defined in section 7 of this Article J) of the recipient. 5. In the case of the death of a recipient of stock options or stock appreciation rights while an employee of the Company or any of its subsidiaries, the persons to whom the stock options or stock appreciation rights have been transferred by will or the laws of descent and distribution shall have the privilege of exercising remaining stock options, stock appreciation rights or parts thereof, whether or not exercisable on the date of death of such employee, at any time prior to the expiration date of the stock option or stock appreciation right. 6. Stock options and stock appreciation rights are not transferable other than by will or by the laws of descent and distribution. For the purpose of exercising stock options or stock appreciation rights after the death of the recipient, the duly appointed executors and administrators of the estate of the deceased recipient shall have the same rights with respect to the stock options and stock appreciation rights as legatees or distributees would have had after distribution to them from the deceased recipient's estate. 7. Termination of employment under the permanent disability settlement provision of any appropriate profit sharing or retirement plan of the Company or any of its subsidiaries shall be deemed the same as retirement. Special Separation means any termination of employment, except a termination for cause or a voluntary resignation that is not initiated or encouraged by the Company, that occurs prior to the time a recipient is eligible to retire. The death of a recipient of stock options or stock appreciation rights subsequent to retirement or Special Separation shall not render exercisable options or rights which were unexercisable at time of the retirement or Special Separation. 8. Upon the exercise of stock appreciation rights, the recipient shall be entitled to receive a redemption differential for each such stock appreciation right which shall be the difference between the then fair market value of one share of the Common Stock of the Company and the exercise price of one stock appreciation right then being exercised. In the case of the redemption of stock appreciation rights by a subsidiary of the Company not located in the United States the redemption differential shall be calculated in United States dollars and converted to the appropriate local currency on the exercise date. 5 7 As determined by the Committee, the redemption differential may be paid in cash, Common Stock of the Company to be valued at its fair market value on the date of exercise, any other mode of payment deemed appropriate by the Committee or any combination thereof. The number of shares with respect to which stock appreciation rights are being exercised shall not be available for granting future stock options or stock appreciation rights under this Plan. 9. The Committee may, in its sole discretion, permit a stock option which is being exercised either (a) by an optionee whose retirement is imminent or who has retired or (b) after the death of the optionee, to be surrendered, in lieu of exercise, for an amount equal to the difference between the stock option exercise price and the fair market value of shares of the Common Stock of the Company on the day the stock option is surrendered, payment to be made in shares of the Company's Common Stock which are subject to this Plan valued at their fair market value on such date, cash or a combination thereof, in such proportion and upon such terms and conditions as shall be determined by the Committee. The difference between the number of shares subject to stock options so surrendered and the number of shares, if any, issued upon such surrender shall represent shares which shall not be available for granting future stock options under this Plan. 10. Time spent on leave of absence shall be considered as employment for the purposes of this Plan. Leave of absence means any period of time away from work granted to any employee by his or her employer because of illness, injury or other reasons satisfactory to the employer. 11. The Company reserves the right from time to time to suspend the exercise of any stock option or stock appreciation right where such suspension is deemed by it necessary or appropriate for corporate purposes. No such suspension shall extend the life of the stock option or stock appreciation right beyond its expiration date, and in no event will there be a suspension in the five (5) calendar days immediately preceding the expiration date. ARTICLE K - PAYMENT FOR STOCK OPTIONS. Upon the exercise of a stock option, payment in full of the exercise price shall be made by the optionee. As determined by the Committee, the stock option exercise price may be paid for by the optionee either in cash, shares of the Common Stock of the Company to be valued at their fair market value on the date of exercise or a combination thereof. ARTICLE L - ADDITIONAL PROVISIONS. 1. The Board may, at any time, repeal this Plan and may amend it from time to time except that no such amendment may amend this paragraph, increase the aggregate number of shares subject to this Plan or reduce the price at which stock options or stock appreciation rights may be granted, exercised or surrendered, or alter the class of employees eligible to receive stock options. The recipient of stock options and stock appreciation rights and the Company shall be bound by any such amendments as of their effective dates, but if any outstanding stock options or stock appreciation rights are affected, notice thereof shall be given to the holders of such stock options and stock appreciation rights and such amendments shall not be applicable to such holder without his or her written consent. If this Plan is repealed in its entirety, all theretofore granted unexercised stock options or stock appreciation rights shall continue to be exercisable in accordance with their terms. 2. In case any stock option or stock appreciation right is surrendered before exercise or for any reason other than exercise ceases to be exercisable, except as specifically required by the terms of this Plan, the shares reserved therefor shall continue to be set aside for, and be subject to, use under this Plan. 6 8 3. Subsidiary means any company in which greater than fifty percent (50%) of the total combined voting power of all classes of stock is owned, directly or indirectly, by the Company. In addition, the Board may designate for participation in this Plan as a "subsidiary," except for the granting of incentive stock options, those additional companies affiliated with the Company in which the Company's direct or indirect stock ownership is less than fifty percent (50%) of the total combined voting power of all classes of such company's stock. ARTICLE M - CONSENT. Every recipient of a stock option or stock appreciation right granted under this Plan shall be bound by the terms and provisions of this Plan and of the stock option or stock appreciation right agreement referable thereto, and the acceptance of any stock option or stock appreciation right agreement shall constitute a binding agreement between the recipient and the Company and its subsidiaries and any successors in interest to any of them. ARTICLE N - DURATION OF THE PLAN. This Plan will terminate on June 14, 1993 unless a different termination date is fixed by action of the Board, but all stock options or stock appreciation rights granted prior thereto may be exercised in accordance with their terms. 7 9 ADDITIONAL INFORMATION 1. TAX EFFECTS INCENTIVE STOCK OPTIONS With regard to tax effects which may accrue to the optionee, counsel advises that if the optionee has continuously been an employee from the time an option has been granted until at least three months before it is exercised, under existing law no taxable income results to the optionee from the exercise of an incentive stock option at the time of exercise. However, the spread at exercise is a "tax preference" item for alternative minimum tax purposes. Any gain realized on the sale or other disposition of stock acquired on exercise of an incentive stock option is considered as long-term capital gain for tax purposes if the stock has been held more than two years after the date the option was granted and more than one year after the date of exercise of the option. If the stock is disposed of within one year after exercise, the lesser of any gain on such disposition or the spread at exercise (i.e., the excess of the fair market value of the stock on the date of exercise over the option price) is treated as ordinary income, and any appreciation after the date of exercise is considered long-term or short-term capital gain to the owner depending on the holding period prior to sale. However, the spread at exercise (even if greater than the gain on the disposition) is treated as ordinary income if the disposition is one on which a loss, if sustained, is not recognized -- e.g., a gift, a "wash" sale or a sale to a related party. The amount of ordinary income recognized by the optionee is treated as a tax deductible expense to the Company. No other amount relative to an incentive stock option is a tax deductible expense to the Company. NONSTATUTORY STOCK OPTIONS With regard to tax effects which may accrue to the optionee, counsel advises that under existing tax law gain taxable as ordinary income to the optionee is deemed to be realized at the date of exercise of the option, the gain on each share being the difference between the market price on the date of exercise and the option price. This amount is treated as a tax deductible expense to the Company at the time of the exercise of the option. Any appreciation in the value of the stock after the date of exercise is considered a long-term or short-term capital gain to the owner depending on whether or not the stock was held for the appropriate holding period prior to sale. STOCK APPRECIATION RIGHTS With regard to tax effects which may accrue to the recipient, counsel advises that "United States persons," as defined in the Internal Revenue Code of 1986 (the "I.R.C."), must recognize ordinary income as of the date of exercise equal to the amount paid to the recipient, i.e., the difference between the grant price and the value of the shares on the date of exercise. For non-United States persons, the time when income is realized, the measurement of such income, and its taxation will depend on the laws of the particular country of which such persons are resident and/or citizens at the time of grant or the time of exercise, as the case may be. There may also be tax consequences with respect to an exercise by a United States person under the laws of the particular country other than the United States of which such person is a resident and/or citizen. Notwithstanding the above advice received by the Company, it is each individual recipient's responsibility to check with his or her personal tax adviser as to the tax effects and proper handling of stock options, stock appreciation rights and Common Stock acquired. 8 10 The Plan is not subject to the qualification requirements of Section 401(a) of the I.R.C. 2. EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. 3. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission (File No. 1-434) pursuant to the Exchange Act are incorporated herein by reference: 1. The Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1999; 2. The Company's Quarterly Reports on Form 10-Q for the quarters ended September 30, 1999, December 31, 1999 and March 31, 2000; and 3. All other documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this Prospectus and prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold. All other documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such documents. The Company will provide without charge to each optionee, upon the request of the optionee, a copy of any or all of these documents other than exhibits to such documents, unless such exhibits are specifically incorporated by reference into such documents. In addition, the Company will provide without charge to such optionees, a copy of the annual report and all reports, proxy statements, and other communications distributed to its security holders generally. Requests for such copies, or for additional information about the Plan or its administrators, should be directed to Mr. Robert J. Thompson, Manager, Shareholder Services, The Procter & Gamble Company, One Procter & Gamble Plaza, Cincinnati, Ohio 45202, telephone: (513) 983-3413. 9 EX-10.8 7 l90238aex10-8.txt EXHIBIT 10.8 1 EXHIBIT (10-8) The Procter & Gamble 1993 Non-Employee Directors' Stock Plan 2 THE PROCTER & GAMBLE 1993 NON-EMPLOYEE DIRECTORS' STOCK PLAN (AS AMENDED DECEMBER 12, 2000) ARTICLE A -- PURPOSE. The purpose of The Procter & Gamble 1993 Non-Employee Directors' Stock Plan (hereinafter referred to as the "Plan") is to strengthen the alignment of interests between non-employee Directors (hereinafter referred to as "Participants") and the shareholders of The Procter & Gamble Company (hereinafter referred to as the "Company") through the increased ownership of shares of the Company's Common Stock. This will be accomplished by allowing Participants to elect voluntarily to convert a portion or all of their cash fees for services as a Director into Common Stock, by granting Participants a fixed value of shares of Common Stock restricted until retirement (hereinafter referred to as "Retirement Shares") and by granting Participants non-qualified options to purchase shares of Common Stock (hereinafter referred to as "Stock Options"). ARTICLE B -- ADMINISTRATION. 1. The Plan shall be administered by the Compensation Committee (hereinafter referred to as the "Committee") of the Board of Directors of the Company (hereinafter referred to as the "Board"), or such other committee as may be designated by the Board. The Committee shall consist of not less than three (3) members of the Board who are "Non-Employee Directors" as defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended, or any successor rule or definition adopted by the Securities and Exchange Commission, to be appointed by the Board from time to time and to serve at the discretion of the Board. 2. It shall be the duty of the Committee to administer this Plan in accordance with its provisions and to make such recommendations of amendments or otherwise as it deems necessary or appropriate. A decision by a majority of the Committee shall govern all actions of the Committee. 3. Subject to the express provisions of this Plan, the Committee shall have authority to allow Participants the right to elect to receive fees for services as a director in either cash or an equivalent amount of whole shares of Common Stock of the Company, or partly in cash and partly in whole shares of the Common Stock of the Company, subject to such conditions or restrictions, if any, as the Committee may determine. The Committee also has the authority to make all other determinations it deems necessary or advisable for administering this Plan. 4. The Committee may establish from time to time such regulations, provisions, and procedures within the terms of this Plan as, in its opinion, may be advisable in the administration of this Plan. 5. The Committee may designate the Secretary of the Company or other employees of the Company to assist the Committee in the administration of this Plan and may grant authority to such persons to execute documents on behalf of the Committee. ARTICLE C -- PARTICIPATION. 1 3 Participation in the Plan shall be limited to all non-employee Directors of the Company. ARTICLE D -- LIMITATION ON NUMBER OF SHARES FOR THE PLAN. The total number of shares of Common Stock of the Company that may be awarded each year shall not exceed 50,000 shares. ARTICLE E -- SHARES SUBJECT TO USE UNDER THE PLAN. Shares of Common Stock to be awarded under the terms of this Plan shall be treasury shares. ARTICLE F -- RETIREMENT SHARES 1. Commencing January 2, 1997 and on the first business day in each January thereafter, each Participant shall receive Retirement Shares with a fair market value of $20,000 on the date of grant. 2. All shares awarded under this Article shall be valued as set forth in Article I. ARTICLE G -- STOCK OPTIONS. 1. The Committee may, from time to time, grant Participants a Stock Option to purchase shares of Common Stock having an exercise price of one hundred percent (100%) of the fair market value of the Common Stock on the date of the grant. 2. The Stock Options shall have a term of fifteen (15) years from the date of grant, subject to earlier termination as provided herein, and shall be exercisable three (3) years from the date of grant, except in the case of death, in which case the Stock Options shall be immediately exercisable. 3. Stock Options are not transferable other than by will or by the laws of descent and distribution. Legatees, distributees and duly appointed executors and administrators of the estate of a deceased Participant shall have the right to exercise such Stock Options at any time prior to the expiration date of the Stock Options. 4. If a Participant ceases to be a Director while holding unexercised Stock Options, such stock options are then void, except in the case of (i) death, (ii) disability, (iii) retirement at the end of a term, (iv) retirement after attaining the age of sixty-nine (69) or (v) resignation from the Board for reasons of the antitrust laws or the conflict of interest, corporate governance or continued service policies. 5. Upon the exercise of a Stock Option, payment in full of the exercise price shall be made by the Participant. The exercise price may be paid for by the Participant either in cash, shares of the Common Stock of the Company to be valued at their fair market value on the date of exercise, or a combination thereof. ARTICLE H -- ADJUSTMENTS. 2 4 The amount of shares authorized to be issued annually under this Plan will be subject to appropriate adjustment in the event of future stock splits, stock dividends, or other changes in capitalization of the Company to prevent the dilution or enlargement of rights under this Plan; following any such change, the term "Common Stock" shall be deemed to refer to such class of shares or other securities as may be applicable. The number of shares and exercise prices covered by outstanding Stock Options and the number of shares to be granted as Stock Options pursuant to Article F, paragraph 1 shall be adjusted to give effect to any such stock splits, stock dividends, or other changes in the capitalization. ARTICLE I -- TRANSFER OF SHARES. 1. The Committee may transfer Common Stock of the Company under the Plan subject to such conditions or restrictions, if any, as the Committee may determine. The conditions and restrictions may vary from time to time and may be set forth in agreements between the Company and the Participant or in the awards of stock to them, all as the Committee determines. 2. The shares awarded shall be valued at the average of the high and low quotations for Common Stock of the Company on the New York Stock Exchange on the day of the transfer to a Participant. All shares awarded shall be full shares, rounded up to the nearest whole share. ARTICLE J -- ADDITIONAL PROVISIONS. 1. The Board may, at any time, repeal this Plan or may amend it from time to time except that no such amendment may amend this paragraph, increase the annual aggregate number of shares subject to this Plan, or alter the persons eligible to participate in this Plan. The Participants and the Company shall be bound by any such amendments as of their effective dates, but if any outstanding awards are affected, notice thereof shall be given to the holders of such awards and such amendments shall not be applicable to such holder without his or her written consent. If this Plan is repealed in its entirety, all theretofore awarded shares subject to conditions or restrictions transferred pursuant to this Plan shall continue to be subject to such conditions or restrictions. 2. Every recipient of shares pursuant to this Plan shall be bound by the terms and provisions of this Plan and of the transfer of shares agreement referable thereto, and the acceptance of any transfer of shares pursuant to this Plan shall constitute a binding agreement between the recipient and the Company. 3. Notwithstanding anything to the contrary in the this Plan, stock options and stock appreciation rights granted hereunder shall vest immediately and any conditions or restrictions on Common Stock shall lapse upon a "Change in Control." A "Change in Control" shall mean the occurrence of any of the following: (a) An acquisition (other than directly from the Company) of any voting securities of the Company (the "Voting Securities") by any "Person" (as the term person is used for purposes of Section 13(d) or 14(d) of the Exchange Act), immediately after which such Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of the then 3 5 outstanding Shares or the combined voting power of the Company's then outstanding Voting Securities; provided, however, in determining whether a Change in Control has occurred pursuant to this Section 4(a), Shares or Voting Securities which are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition which would cause a Change in Control. A "Non-Control Acquisition" shall mean an acquisition by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (A) the Company or (B) any corporation or other Person of which a majority of its voting power or its voting equity securities or equity interest is owned, directly or indirectly, by the Company (for purposes of this definition, a "Related Entity"), (ii) the Company or any Related Entity, or (iii) any Person in connection with a "Non-Control Transaction" (as hereinafter defined); (b) The individuals who, as of July 11, 2000 are members of the Board (the "Incumbent Board"), cease for any reason to constitute at least half of the members of the Board; or, following a Merger (as hereinafter defined) which results in a Parent Corporation (as hereinafter defined), the board of directors of the ultimate Parent Corporation; provided, however, that if the election, or nomination for election by the Company's common stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Plan, be considered as a member of the Incumbent Board; provided further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "Proxy Contest") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) The consummation of: (i) A merger, consolidation or reorganization with or into the Company or in which securities of the Company are issued (a "Merger"), unless such Merger is a "Non-Control Transaction." A "Non-Control Transaction" shall mean a Merger where: (A) the stockholders of the Company, immediately before such Merger own directly or indirectly immediately following such Merger at least fifty percent (50%) of the combined voting power of the outstanding voting securities of (x) the corporation resulting from such Merger (the "Surviving Corporation") if fifty percent (50%) or more of the combined voting power of the then outstanding voting securities of the Surviving Corporation is not Beneficially Owned, directly or indirectly by another Person (a "Parent Corporation"), or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such Mergerconstitute at least half of the members of the board of directors of (x) the Surviving Corporation, if there is no Parent Corporation, or (y) if 4 6 there is one or more Parent Corporations, the ultimate Parent Corporation; and (C) no Person other than (1) the Company, (2) any Related Entity, (3) any employee benefit plan (or any trust forming a part thereof) that, immediately prior to such Merger was maintained by the Company or any Related Entity, or (4) any Person who, immediately prior to such merger, consolidation or reorganization had Beneficial Ownership of twenty percent (20%) or more of the then outstanding Voting Securities or Shares, has Beneficial Ownership of twenty percent (20%) or more of the combined voting power of the outstanding voting securities or common stock of (x) the Surviving Corporation if there is no Parent Corporation, or (y) if there is one or more Parent Corporations, the ultimate Parent Corporation; (ii) A complete liquidation or dissolution of the Company; or (iii) The sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Related Entity or under conditions that would constitute a Non-Control Transaction with the disposition of assets being regarded as a Merger for this purpose or the distribution to the Company's stockholders of the stock of a Related Entity or any other assets). Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any Person (the "Subject Person") acquired Beneficial Ownership of more than the permitted amount of the then outstanding Shares or Voting Securities as a result of the acquisition of Shares or Voting Securities by the Company which, by reducing the number of Shares or Voting Securities then outstanding, increases the proportional number of shares Beneficially Owned by the Subject Persons, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of Shares or Voting Securities by the Company, and after such share acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Shares or Voting Securities which increases the percentage of the then outstanding Shares or Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur. ARTICLE K -- DURATION OF PLAN. This Plan shall be effective as of January 1, 1994. This Plan will terminate on December 31, 2003 unless a different termination date is fixed by the shareholders or by action of the Board but no such termination shall affect the prior rights under this Plan of the Company or of anyone to whom shares have been transferred prior to such termination. Plan adopted November 9, 1993 Plan Amended January 10, 1995 Plan Amended June 11, 1996 Adjusted for August 22, 1997 stock split 5 7 Plan amended January 12, 1999 Plan amended July 11, 2000 Plan amended December 12, 2000 6 EX-11 8 l90238aex11.txt EXHIBIT 11 1

EXHIBIT (11) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Computation of Earnings Per Share --------------------------------- Amounts in millions except per share amounts Years Ended June 30 ------------------------------------------------------------- 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- BASIC NET EARNINGS PER SHARE - ---------------------------- Net earnings $ 3,415 $ 3,780 $ 3,763 $ 3,542 $ 2,922 Deduct preferred stock dividends 104 104 109 115 121 --------- --------- --------- --------- --------- Net earnings applicable to common stock $ 3,311 $ 3,676 $ 3,654 $ 3,427 $ 2,801 ========= ========= ========= ========= ========= Average number of common shares outstanding 1,360.3 1,343.4 1,328.1 1,313.2 1,300.3 ========= ========= ========= ========= ========= Basic net earnings per share $ 2.43 $ 2.74 $ 2.75 $ 2.61 $ 2.15 ========= ========= ========= ========= ========= DILUTED NET EARNINGS PER SHARE - ------------------------------ Net earnings $ 3,415 $ 3,780 $ 3,763 $ 3,542 $ 2,922 Deduct differential - preferred vs. common dividends 32 25 22 18 15 --------- --------- --------- --------- --------- Net earnings applicable to common stock $ 3,383 $ 3,755 $ 3,741 $ 3,524 $ 2,907 ========= ========= ========= ========= ========= Average number of common shares outstanding 1,360.3 1,343.4 1,328.1 1,313.2 1,300.3 Add potential effect of: Exercise of options 24.8 22.3 21.5 19.7 13.4 Conversion of preferred stock 101.9 99.8 97.2 94.3 91.9 --------- --------- --------- --------- --------- Average number of common shares outstanding, assuming dilution 1,487.0 1,465.5 1,446.8 1,427.2 1,405.6 ========= ========= ========= ========= ========= Diluted net earnings per share $ 2.28 $ 2.56 $ 2.59 $ 2.47 $ 2.07 ========= ========= ========= ========= =========

EX-12 9 l90238aex12.txt EXHIBIT 12 1

EXHIBIT (12) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Computation of Ratio of Earnings to Fixed Charges ------------------------------------------------- Millions of Dollars Years Ended June 30 -------------------------------------------------------------- 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ EARNINGS AS DEFINED Earnings from operations before income taxes after eliminating undistributed earnings of equity method investees $5,274 $5,704 $5,866 $5,474 $4,574 Fixed charges, excluding capitalized interest 534 639 751 811 872 ------ ------ ------ ------ ------ TOTAL EARNINGS, AS DEFINED $5,808 $6,343 $6,617 $6,285 $5,446 ====== ====== ====== ====== ====== FIXED CHARGES, AS DEFINED Interest expense (including capitalized interest) $ 457 $ 548 $ 650 $ 792 $ 794 1/3 of rental expense 77 91 101 89 78 ------ ------ ------ ------ ------ TOTAL FIXED CHARGES, AS DEFINED $ 534 $ 639 $ 751 $ 881 $ 872 ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES 10.9 9.9 8.8 7.1 6.2

EX-13 10 l90238aex13.txt EXHIBIT 13 1 Exhibit (13) Annual Report to Shareholders (pages 1-3, 10-35 and inside back cover) 2 To Our Shareholders: When we began the 2000/2001 fiscal year, Job One was getting P&G's business back on track and growing again. We have refocused on our biggest, and fastest growing brands, in our biggest markets, with our leading customers. We've strengthened the value of our brands for consumers. We've made strategic choices about which businesses P&G should be in, and which it should not. And we've improved P&G's competitiveness by controlling costs and managing cash more effectively. We believe these are the choices that will deliver superior Total Shareholder Return, which is the key measure of our progress and our underlying commitment to P&G shareholders. MAKING PROGRESS We've made progress, although there's more to do. - Sales were $39.2 billion, down slightly from last year but up 2% excluding the effects of unfavorable exchange rates. - Net earnings were $2.9 billion. Core net earnings, which exclude restructuring charges, were $4.4 billion - up 4% -- while earnings per share were $3.12, up 6%. - Business trends improved during the year. Fourth quarter unit volumes grew 3% and we made significant progress on costs, delivering core operating income growth of 12%. - Operating cash flow increased over $1 billion. Progress in the U.S. - our largest market - is particularly encouraging. A year ago, only three of our top 10 U.S. brands were growing share; at the end of the 2000/2001 fiscal year, eight of 10 were growing share. This progress isn't limited to the U.S. - In Latin America, 3% volume growth drove earnings to record levels. - Profits rebounded in China during the year and market shares are now growing broadly. - Elsewhere in Asia, we grew volume in virtually every country; in the Philippines, for example, our Fabric and Home Care business turned in an exceptional year with record volume and profits while regaining volume-share leadership for the past six months. - In Central and Eastern Europe, Russia bounced back from the 1998 economic and currency crises: volume, sales and market shares are all rebounding with solid profits. While we are pleased with this progress, we know we still have a lot of hard work ahead of us. Diapers and Feminine Protection - both of which are core, [Photograph of P&G Products--P&G'S BILLION DOLLAR BRANDS In 2000/2001, Iams joined P&G's "Billion Dollar Club." The Company now has 11 brands with more than a billion dollars in sales.] 3 TWO multi-billion-dollar businesses -- are not performing satisfactorily. Western Europe - our second largest market - also lags expectations. We have improvements planned for each of these businesses. GETTING COMPETITIVE Cost competitiveness improved. - We reduced P&G's overhead costs in 2000/2001 for the first time in five years. - We reduced marketing spending in 2000/2001 - for the first time in five years. - We reduced capital spending from 7.6% of sales last fiscal year to 6.3% this year, and revised our goal to 6% of sales by 2002/2003, one year ahead of plan. We also announced plans to broaden our Organization 2005 restructuring program to drive costs to best-in- class levels, rationalize our manufacturing capacity and address under-performing businesses. This includes a reduction in force of 9,600 jobs, in addition to 7,800 remaining from our original Organization 2005 program. We are on track to achieve the nearly $2 billion in savings expected from this program by fiscal year 2004. STRATEGIC CHOICES Last year, we identified the need to make clearer, tougher choices. Again, we've made progress. Here's where P&G will focus: 1. BUILD EXISTING CORE BUSINESSES INTO STRONGER GLOBAL LEADERS. Baby Care, Fabric Care, Feminine Protection and Hair Care are our top-priority core businesses. These are categories in which P&G is #1 in global sales and market share, and where the Company believes it can consistently grow earnings at double-digit rates. Together, these four businesses represent about two-thirds of P&G sales and an even greater percentage of profit. 2. GROW BIG BRANDS, BIG COUNTRIES, LEADING CUSTOMERS. With this focus, we intend to grow sales, market shares and profits at rates that exceed Company averages. We'll concentrate on our billion-dollar and soon-to-be billion-dollar brands, and on our top customers in our top 10 countries. 3. DEVELOP FASTER-GROWING, HIGHER-MARGIN, MORE ASSET-EFFICIENT BUSINESSES WITH GLOBAL LEADERSHIP POTENTIAL. These are businesses - such as Personal Health Care and Beauty Care - that are high Total Shareholder Return performers. We'll develop them through internal innovation, as we're doing with Crest Whitestrips, and through acquisitions and alliances that are in or adjacent to core P&G categories, such as Clairol, which we announced our intention to acquire in May. 4. REGAIN GROWTH MOMENTUM AND LEADERSHIP IN WESTERN EUROPE. We'll restore P&G leadership in Western Europe by focusing on core categories and on our biggest brands, leading customers, biggest countries. 5. DRIVE GROWTH IN KEY DEVELOPING MARKETS. We expect growth in the coming decade to come from a balanced mix of developed and developing markets. We'll win in our high-priority developing markets by tailoring low-income offerings in core P&G categories. In all these areas, innovation will continue to be the primary driver of P&G growth. We intend to be the innovation leader in new and established businesses alike, and in both developed and developing markets. In 2000, for example, P&G had five of the top new U.S. consumer products, as reported in the Information Resources, Inc. (IRI) annual study. Over the past eight years, we have averaged three to four of the top 10 new items each year. In fact, over the last four years, P&G has launched 13 new products in the U.S., each of which has exceeded $100 million in sales - nearly a third of all new consumer products during that time that beat the $100 million mark. 4 THREE Importantly, P&G innovation doesn't stop with products. We define innovation broadly, and consistently strive to innovate in every part of the business -- with new business models, such as Reflect.com; new organization models, such as the Global Business Services shared- service organization; and new approaches to consumer and customer marketing. Innovation is a deliberate process at P&G. We organize for it, catalyze it and apply it broadly. BOTTOM LINE: We're focusing on being the leader in our core categories, with our big brands -- brands that are big today and brands that have the potential to be big tomorrow; we're taking steps to ensure that P&G brands provide the best consumer value; we're shifting our mix to categories with higher growth and higher margins; we're focusing on big countries in both developed and developing markets, and on our leading global customers. IMPROVING EVERYDAY LIFE In all we do, the consumer is boss. We win when we understand consumers better than our competitors. And it's with that recognition that we have committed ourselves to making P&G the most consumer- driven company in the world. Our mission as a company is to improve everyone's quality of life every day, everywhere. We have a relentless quest to be the best - and our dedication to that quest has never been more evident than in the past year. P&G people have risen to the challenges our Company has faced with a sense of pride, resourcefulness and dogged determination. The spirit of our people is a tremendous driver of our confidence in P&G's future. We enter this new fiscal year with renewed dedication to fulfill our mission and to deliver our commitments to you, our fellow owners of Procter & Gamble. /s/ A. G. Lafley A. G. Lafley President and Chief Executive August 7, 2001 /s/ John E. Pepper John E. Pepper Chairman of the Board August 7, 2001 5 10 The Procter & Gamble Company and Subsidiaries FINANCIAL REVIEW RESULTS OF OPERATIONS Fiscal 2001 was a year of progress - in making choices, establishing realistic goals and delivering on commitments. The Company also made considerable progress on strengthening its cost structure and improving cash efficiency. This was despite a tough year that included weakening economies in some major geographies, significant currency impacts, rising commodity prices and an increasingly competitive environment. To accelerate long-term growth, the Company has made and will continue to make tough, clear choices about where to play and how to win. The Company is focused on building superior shareholder return - by creating and building big brands with top-line results, sales margins and cash flow at the best competitive benchmarks. During the past year, the Company refocused on its core categories to develop high-margin growth businesses with global leadership potential. The Company also expanded its restructuring program, initiated in June 1999, in conjunction with Organization 2005, to drive further enrollment reductions and address under-performing businesses. These actions are critical to delivering on the Company's long-term goals to consistently grow earnings and earnings per share at double-digit rates. NET EARNINGS Reported net earnings were $2.92 billion or $2.07 per share in 2001. This compared to $3.54 billion or $2.47 per share in 2000, and $3.76 billion or $2.59 per share in 1999. Current year results include charges of $1.48 billion after tax for restructuring program costs. These costs were $688 million and $385 million in 2000 and 1999, respectively. This program covers a significant reduction in enrollment, manufacturing consolidations and portfolio choices to scale back or discontinue under-performing businesses and initiatives. Core net earnings, which exclude restructuring program costs, increased to $4.40 billion in 2001 from $4.23 billion in 2000 and $4.15 billion in 1999. Core net earnings per share were $3.12, compared to $2.95 per share in 2000 and $2.85 per share in 1999. Core net earnings per share increased 6% in 2001, compared to 4% in 2000. Core net earnings progress was significant in light of product cost increases and exchange impacts, which were offset by pricing benefits, lower taxes and gains from the divestiture of non- strategic brands. Growth in the prior year was affected by significant investments in new initiatives. NET EARNINGS PER SHARE (on a diluted basis) [BAR GRAPH] NET EARNINGS PER SHARE CORE NET EARNINGS PER SHARE* *EXCLUDES RESTRUCTURING PROGRAM COSTS. NET SALES Reported net sales were $39.24 billion, compared to $39.95 billion in 2000 and $38.13 billion in 1999. Excluding an unfavorable exchange rate impact of over 3% in the current year, net sales grew 2%, reflecting improved pricing in beauty care, fabric and home care and paper, primarily family care. Unit volume was flat in 2001, as exceptionally strong performance by new businesses in health care was offset by softness in food and beverage. Unit volume grew 4% in 2000, while net sales excluding a 2% unfavorable exchange impact increased 7%. This growth reflected strong product initiative activity, the acquisition of the Iams pet health and nutrition business and progress on flagship brands, largely in fabric and home care. NET SALES AND EXCHANGE IMPACTS (in billions) [BAR GRAPH] NET SALES FOREIGN EXCHANGE IMPACTS 6 The Procter & Gamble Company and Subsidiaries 11 FINANCIAL REVIEW (CONTINUED) OPERATING COSTS Consistent with its commitment to reduce its cost structure to more competitive levels, in the fourth quarter, the Company broadened its restructuring program to deliver further cost reductions by reducing overheads, consolidating manufacturing operations and addressing under-performing businesses and initiatives. Given the nature and magnitude of the charges related to this program, the following discussions include supplemental information on a "core" basis - excluding restructuring charges. Cost of products sold was $22.10 billion in 2001, compared to $21.51 billion and $21.03 billion in 2000 and 1999, respectively. Restructuring costs included in cost of products sold were $1.14 billion in 2001, $496 million in 2000 and $443 million in 1999. Excluding restructuring charges, cost of products sold was flat versus the prior year, as a disciplined cost focus overcame commodity cost increases, such as energy. Core cost of products sold was up 2% in 2000. Marketing, research and administrative expense was $12.41 billion versus $12.48 billion in 2000 and $10.85 billion in 1999. These include restructuring costs of $583 million in 2001, $318 million in 2000 and $38 million in 1999, primarily due to employee separation expenses. Excluding restructuring charges, marketing, research and administrative expense was $11.82 billion in the current year versus $12.17 billion in 2000 and $10.81 billion in 1999. As a percent of net sales, this was 30.0% in 2001, 30.4% in 2000 and 28.3% in 1999. The decrease in the current year was due to a reduction in overhead costs, as well as marketing support efficiencies. The increase in 2000 reflects the high level of initiative investment. MARGINS In 2001, gross margin was 43.7%, compared to 46.1% in 2000 and 44.8% in 1999. Gross margin included restructuring charges that consisted primarily of accelerated depreciation, asset write-downs and employee separation costs for manufacturing employees. Excluding these charges, gross margin was 46.8%, 47.4% and 46.0% in 2001, 2000 and 1999, respectively, reflecting rising material costs despite the benefit of pricing actions and effective cost management. Operating margin was 12.1%, compared to 14.9% in 2000 and 16.4% in 1999. Excluding restructuring charges, core operating margin was 16.7%, compared to 16.9% in 2000 and 17.7% in 1999. Net earnings margin was 7.4% versus 8.9% in 2000 and 9.9% in 1999. Excluding restructuring charges, core net earnings margin was 11.2%, up from 10.6% in 2000 and 10.9% in 1999. The margin increase in 2001 reflects the gains from minor brand divestitures and lower taxes, partially offset by increased product costs and unfavorable exchange impacts. In 2000, the core net earnings margin decreased, reflecting increased spending, primarily from initiative investments. NON-OPERATING ITEMS Interest expense was $794 million in 2001, compared to $722 million in 2000 and $650 million in 1999. The interest expense trend reflects higher average debt levels, primarily due to share repurchases and acquisitions. Other income, net, which consists primarily of interest and investment income and divestiture gains contributed $674 million, compared to $304 million in 2000 and $235 million in 1999. Increased gains from the divestiture of minor brands drove the year- to-year changes. The Company's effective tax rate for the current year was 36.7%, compared to 36.0% in 2000 and 35.5% in 1999. Excluding restructuring costs and related tax effects, the effective tax rate was 32.0%, compared to 33.4% in 2000 and 34.4% in 1999. This change reflects the continuing benefit of the implementation of the Company's new global business unit structure. 7 12 The Procter & Gamble Company and Subsidiaries FINANCIAL REVIEW (CONTINUED) FINANCIAL CONDITION One of the Company's focus areas is to improve its cash efficiency as a key element of achieving superior shareholder return. CASH Operating cash flow provides the primary source of funds to finance operating needs, capital expenditures and shareholder dividends. This is supplemented by additional borrowings to provide funds to finance the share repurchase program and acquisitions. Cash flow from operations was $5.80 billion, $4.68 billion and $5.54 billion in 2001, 2000 and 1999, respectively. Operating cash flow trends were primarily impacted by working capital changes, including the impact of restructuring program accruals. Cash and cash equivalents increased $891 million in the current year to $2.31 billion, reflecting reduced capital expenditures and improved working capital. Cash and cash equivalents were $1.42 billion in 2000 and $2.29 billion in 1999. The decrease in 2000 reflected acquisition spending and lower net earnings, partially offset by the issuance of debt. Net cash used for acquisitions completed during 2001 totaled $138 million. This compares to acquisition spending of $2.97 billion in 2000 and $137 million in 1999. Spending in fiscal 2000 was primarily related to the acquisitions of The Iams Company and Affiliates, Recovery Engineering, Inc. and a joint venture ownership increase in China. In May 2001, the Company announced its intent to acquire the Clairol business, pending regulatory clearance. A substantial portion of the $4.95 billion purchase price will be financed with debt. The Company continues its program to divest certain non-strategic brands in order to focus resources on core businesses. The proceeds from these and other asset sales generated $788 million in cash flow in the current year, compared to $419 million and $434 million in 2000 and 1999, respectively. The Company maintains a share repurchase program, which authorizes the purchase of shares annually on the open market to mitigate the dilutive impact of employee compensation programs. The Company also has a discretionary buy-back program under which it may repurchase additional outstanding shares. Current year purchases under the combined programs were $1.25 billion, compared to $1.77 billion in 2000 and $2.53 billion in 1999. The Company issued equity put options in 2001 for one million shares at approximately $74 per share and for 12 million shares at prices ranging from $60 to $71 per share in 2000, which reduce the Company's cash outlay for share repurchases. Common share dividends grew 9% to $1.40 per share in 2001, compared to $1.28 and $1.14 in 2000 and 1999, respectively. For the coming year, the annual dividend rate will increase to $1.52 per common share, marking the 46th consecutive year of increased common share dividend payments. Total dividend payments, to both common and preferred shareholders, were $1.94 billion, $1.80 billion and $1.63 billion in 2001, 2000 and 1999, respectively. DIVIDENDS ($ per share) [BAR GRAPH] 0.90 1.01 1.14 1.28 1.40 1997 1998 1999 2000 2001 Total debt was fairly stable at $12.03 billion at June 30, 2001 and $12.25 billion at June 30, 2000. A number of factors influenced the various debt components, including issuance of long-term debt, reductions in short-term debt, currency effects and mark-to-market impacts of derivative financial instruments. Long-term borrowing available under the Company's shelf registration statement filed in 1995, as amended in July 1997 and 8 The Procter & Gamble Company and Subsidiaries 13 FINANCIAL REVIEW (CONTINUED) September 1999, was $489 million at June 30, 2001. Additionally, the Company is able to issue commercial paper at favorable rates and to access general bank financing. CAPITAL SPENDING Significant progress was made in 2001, as capital expenditures decreased to $2.49 billion compared to $3.02 billion in 2000 and $2.83 billion in 1999. Current year spending is 6.3% of net sales, compared to 7.6% and 7.4% in 2000 and 1999. During 2001, capital spending declined in most segments due to more choiceful investments, increased efficiencies and favorable currency impacts. The Company has revised its goal to reduce capital spending to 6% of net sales by fiscal 2003, one year ahead of plan. CAPITAL SPENDING (in billions) [BAR GRAPH PLUS LINE GRAPH] % OF SALES CAPITAL SPENDING The following pages provide perspective on the Company's business segments. Product-based segment results exclude items that are not included in measuring business performance for management reporting purposes, most notably certain financing, investing and employee benefit costs, goodwill amortization and restructuring costs. Sales in companies over which the Company exerts significant influence, but does not control the financial and operating decisions, are reported for segment purposes in a manner similar to consolidated subsidiaries. Taxes are reflected in the business segments at local statutory tax rates. The effects of these conventions are eliminated in the corporate segment to adjust management reporting conventions to accounting principles generally accepted in the United States of America. 2001 NET SALES BY BUSINESS SEGMENT [PIE GRAPH] 30% FABRIC AND HOME CARE 30% PAPER 18% BEAUTY CARE 11% HEALTH CARE 11% FOOD AND BEVERAGE 2001 NET EARNINGS BY BUSINESS SEGMENT [PIE GRAPH] 37% FABRIC AND HOME CARE 24% PAPER 22% BEAUTY CARE 9% HEALTH CARE 8% FOOD AND BEVERAGE FABRIC AND HOME CARE Fabric and home care trends reflect the significant effort to restore historical margins through innovation combined with necessary pricing, disciplined cost focus and more efficient marketing. Net sales were $11.66 billion, down 4% versus a strong year ago base which included new brand introductions. Excluding a 3% unfavorable foreign exchange impact, net sales decreased 1%. Unit volume decreased 2% due to heavy competitive activity, primarily in Western Europe. Despite the volume decline, net earnings increased 13% to $1.64 billion. Net earnings growth was significant in light of product cost increases and exchange impacts, which were offset by the benefits of laundry pricing actions and lower taxes. Latin America delivered particularly strong earnings progress, reflecting disciplined cost management. Fabric and home care is the Company's most profitable segment, accounting for nearly a third of net sales and an even greater percentage of profits. 9 14 The Procter & Gamble Company and Subsidiaries FINANCIAL REVIEW (CONTINUED) The Company is committed to strengthening the business in Western Europe. Strategic plans are in place to improve the business through a differentiated portfolio of brands that provide superior value, meet a variety of consumer needs and build to a total leadership position. In 2000, net sales for fabric and home care were $12.16 billion, an increase of 7% over 1999. Excluding unfavorable foreign exchange impacts, primarily in Western Europe, net sales grew 9% on 5% unit volume growth. Top-line growth was spurred by the introduction of new brands and solid base business performance. Net earnings for the segment were $1.45 billion, down 3% versus the prior year, primarily due to investments in product initiatives. PAPER The paper segment, which includes baby, feminine and family care, reflected mixed results. Net sales were $11.99 billion, compared to $12.04 billion in 2000. Excluding a 4% negative impact of exchange rates, primarily the euro, net sales increased 4%. Unit volume grew 2%, driven by family care and baby care. Commodity- related cost increases and weaker foreign currencies resulted in net earnings decreasing 2% to $1.04 billion, despite progress in family care and feminine care. These were partially offset by pricing actions and lower overhead and marketing spending. Family care volume grew 3% due to new product introductions and base business growth in North America. Net sales increased 10%, excluding a 2% unfavorable impact of exchange, resulting from commodity-driven global pricing actions on Charmin and Bounty. Baby care volume increased 3% driven by Latin America and Central and Eastern Europe. Excluding a 5% negative exchange impact, net sales increased 1%. Feminine care volume declined 3% due to a challenging competitive environment in North America and Northeast Asia, partially offset by growth in developing markets. Net sales were comparable to the prior year - excluding a 5% negative exchange impact. In 2000, paper segment net sales were $12.04 billion, down 1% from the prior year on flat unit volume. Excluding the impact of exchange rates, primarily the euro, net sales were up 1%. Excluding the impact of the Attends divestiture in 1999, unit volume increased 2%. Net earnings were $1.07 billion, down 16%, reflecting family care expansion in Western Europe, investments in new product initiatives on Charmin, a tough competitive environment in baby care and feminine care businesses, increased capacity and unfavorable raw and packing material cost trends. Looking forward, initiative programs are currently underway to drive future growth. Though challenges remain, a continued focus on innovation and cost reductions should lead to stronger performance. BEAUTY CARE Beauty care increased profitability behind innovative, high-margin, global brands. Net sales were $7.26 billion, down 2% versus $7.39 billion in 2000. Excluding a 4% impact of unfavorable exchange rates, primarily in Western Europe and Asia, net sales increased 2%. Unit volume was down 1% versus the prior year. Excluding the impact of divestitures, volume was flat. Volume growth in hair care and skin care was offset by competitive activity in deodorants and bar soaps. Net earnings were $972 million, a 9% improvement behind the successful expansion of high-performance, premium- priced products. Positive results in hair care were primarily driven by the global restage of Pantene and Head & Shoulders. Latin America, in particular, posted record results on double-digit top-line growth. 10 The Procter & Gamble Company and Subsidiaries 15 FINANCIAL REVIEW (CONTINUED) Skin care delivered record net sales and share growth led by the launch of Olay Daily Facials and Olay Total Effects. In the past year, Cover Girl has built share in the United States behind superior products. The cosmetics business posted strong results behind recently launched Cover Girl Outlast and Max Factor Lipfinity, breakthrough long-wearing lipsticks. During the year, the Company announced the intent to acquire the Clairol business, a world leader in hair color and hair care products with prominent brands such as Herbal Essences, Aussie, Infusium, Nice `n Easy and Natural Instincts. The pending Clairol acquisition will represent the Company's entry into the fast growing hair- colorant category. In 2000, net sales were $7.39 billion, comparable to the prior year, but up 1% excluding the impact of unfavorable exchange rates, primarily in Western Europe. Unit volume declined 2%, impacted by a difficult competitive environment in key European markets and significant contraction of the market in China. Net earnings were $894 million, a 3% decrease from the prior year due to initiative investments. HEALTH CARE Health care delivered exceptional growth on the expansion of new products. Net sales were $4.35 billion, up 11%. Excluding a 3% unfavorable exchange impact, net sales grew 14%. Unit volume increased 15%, driven by the excellent performance of Iams pet health and nutrition, pharmaceuticals and oral care businesses. Net earnings were $390 million, a 16% increase over fiscal 2000, consistent with volume growth. Health care net sales in North America grew behind volume progress on the strength of new businesses. The Iams Company and Affiliates again posted record results, with net sales up double-digits behind continued growth in North America and expansion into new retail channels in the United Kingdom, Italy and Japan. Pharmaceutical net sales grew primarily due to the strength of Actonel, the Company's post-menopausal osteoporosis drug, which achieved $150 million in total global sales. Actonel was launched in 2000 and is now approved in 47 countries and currently marketed in 30 countries. Oral care top-line growth reflected the benefits of broadening the appeal of core brands beyond cavity and tartar protection into new whitening and cleaning products. Crest Whitestrips and Crest Spinbrush are driving the trends toward at-home whitening and powered brushing, respectively. Western Europe health care net sales were below year ago, primarily due to the weak euro. The expansion of Crest Spinbrush and the continued growth of Actonel are expected to improve Western Europe results next year. In 2000, health care net sales were $3.91 billion, with growth resulting primarily from acquisitions. Volume and net sales increased 34% and 36%, respectively, versus the prior year. Unfavorable exchange rates impacted net sales by 2%. Net earnings were $335 million, a 38% increase over 1999. 11 16 The Procter & Gamble Company and Subsidiaries FINANCIAL REVIEW (CONTINUED) FOOD AND BEVERAGE Food and beverage results were below year ago, as strong sales and earnings in coffee were offset by soft snacks and juice results. Net sales were $4.14 billion, down 11%. Excluding a 1% impact of divestitures and a 2% unfavorable foreign exchange impact, net sales declined 8%. Unit volume declined 10% including a 2% impact from divestitures. Unit volume was negatively affected by reduced trade merchandising and snacks pricing actions in North America and Western Europe, and the divestiture of institutional shortening and oils. Net earnings were $333 million, down 9% versus last year. The coffee business had a record year with Folgers achieving its strongest volume increase in a decade. In snacks and juice, North America results are showing signs of stabilizing as merchandising returned to competitive levels. Lower net earnings in Western Europe were primarily due to investments in Sunny Delight and the impact of a strong U.S. dollar. During the year, P&G and The Coca-Cola Company announced the intent to form a new venture to maximize the growth potential of the snacks and juice business on a global basis. Both parties are committed to completing a mutually-agreed transaction; however, the parties anticipate that any transaction will likely contain terms different from those announced previously. The Company also separately announced its intent to explore strategic options for its peanut butter and retail shortening and oils business. In 2000, net sales were flat versus the prior year at $4.63 billion, including a 1% negative exchange impact. Unit volume also was flat. Excluding the 1999 divestiture of Hawaiian Punch, unit volume increased 5% behind strong growth in Western Europe and Northeast Asia, partially due to the expansion of Pringles. Net earnings increased to $364 million, up 11% versus the previous year, primarily due to gross margin improvement. CORPORATE The corporate segment includes both operating and non-operating elements such as financing and investing activities, goodwill amortization, employee benefit costs, charges related to restructuring, segment eliminations and other general corporate items. Corporate includes adjustments from management reporting conventions to conform with accounting principles generally accepted in the United States of America. These primarily affect the treatment of unconsolidated investees and income taxes, which are reflected in the business segments using applicable local statutory tax rates. Corporate results reflect one-time gains from the Company's non- strategic brand divestiture program, increased restructuring costs, reduced overhead spending and corporate hedging gains, partially offset by higher employee benefit costs, and certain tax impacts not reflected in the business segments. HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS The Company is exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, the Company enters into various derivative transactions pursuant to the Company's hedging policies. The financial impacts of these hedging instruments are offset in part or in whole by corresponding changes in the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. Note 6 to the consolidated financial statements includes a discussion of the Company's accounting policies for financial instruments. 12 The Procter & Gamble Company and Subsidiaries 17 FINANCIAL REVIEW (CONTINUED) Derivative positions are monitored using techniques including market value, sensitivity analysis and value at risk modeling. The tests for interest rate and currency rate exposures discussed below are based on a Monte Carlo simulation value at risk model using a one year horizon and a 95% confidence level. The model incorporates the impact of correlation and diversification from holding multiple currency and interest rate instruments and assumes that financial returns are normally distributed. Estimates of volatility and correlations of market factors are drawn from the RiskMetrics(TM) dataset as of June 30, 2001. In cases where data is unavailable in RiskMetrics(TM) a reasonable proxy is included. The Company's market risk exposures relative to interest and currency rates, as discussed below, have not changed materially versus the previous reporting period. In addition, the Company is not aware of any facts or circumstances that would significantly impact such exposures in the near term. INTEREST RATE EXPOSURE Interest rate swaps are used to hedge underlying debt obligations. Certain currency interest rate swaps are designated as hedges of the Company's foreign net investments. Based on the Company's overall interest rate exposure as of and during the year ended June 30, 2001, including derivative and other instruments sensitive to interest rates, a near-term change in interest rates, at a 95% confidence level based on historical interest rate movements, would not materially affect the Company's financial statements. CURRENCY RATE EXPOSURE The Company manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. The Company's major foreign currency exposures involve the markets in Western and Eastern Europe, Asia, Mexico and Canada. The primary purpose of the Company's foreign currency hedging activities is to manage the volatility associated with foreign currency purchases of materials and other assets and liabilities created in the normal course of business. Corporate policy prescribes the range of allowable hedging activity. The Company primarily utilizes forward exchange contracts and purchased options with maturities of less than 18 months. In addition, the Company enters into certain foreign currency swaps with maturities of up to five years to hedge intercompany financing transactions. The Company also utilizes purchased foreign currency options with maturities of generally less than 18 months and forward exchange contracts to hedge against the effect of exchange rate fluctuations on royalties and income from international operations. Based on the Company's overall currency rate exposure as of and during the year ended June 30, 2001, including derivative and other instruments sensitive to foreign currency movements, a near-term change in currency rates, at a 95% confidence level based on historical currency rate movements, would not materially affect the Company's financial statements. COMMODITY PRICE EXPOSURE Raw materials used by the Company are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. The Company uses futures, option and swap contracts to manage the volatility related to certain of these exposures. Commodity hedging activity is not material to the Company's financial statements. 13 18 The Procter & Gamble Company and Subsidiaries FINANCIAL REVIEW (CONTINUED) RESTRUCTURING PROGRAM Beginning in 1999 - concurrent with the Company's reorganization into product-based global business units - the Company initiated its Organization 2005 restructuring program. The program was expanded in the current year to deliver further cost reductions through reduced overheads, further manufacturing consolidations, and discontinuation of under-performing businesses and initiatives. This significant, multi-year program also is discussed in Note 2 to the consolidated financial statements. The total cost of the program is expected to be $5.6 billion before tax ($4.4 billion after tax). Remaining costs will be incurred through fiscal 2004, with a significant amount of separation related costs expected to occur in the next fiscal year. Given the nature and duration of the program, costs to be incurred in future years are subject to varying degrees of estimation for key assumptions, such as actual timing of execution, currency effects, enrollment impacts and other variables. All restructuring costs are reported in the corporate segment for management and external reporting. SUMMARY OF RESTRUCTURING CHARGES Years ended June 30 ------------------------ (in millions) 2001 2000 1999 - --------------------------------------------------- Separations $ 341 $ 153 $ 45 Accelerated Depreciation 276 386 208 Asset Write-Downs 731 64 217 Other 502 211 11 - --------------------------------------------------- Total (before tax) 1,850 814 481 - --------------------------------------------------- Total (after tax) 1,475 688 385 Separations represent the cost of packages offered to employees to reduce overhead and manufacturing costs, which are accrued upon employee acceptance. The separation packages, predominantly voluntary, are formula driven based on salary levels and past service. Separation costs are charged to costs of products sold for manufacturing employees and marketing, research and administrative expense for all others. Total separations under the program are expected to be approximately 24,600. Approximately 9,200 separations have been provided for through June 30, 2001, as follows: 6,000 in 2001, 2,800 in 2000 and 400 in 1999. While all geographies and businesses are impacted by the enrollment reduction programs, a higher number of United States employees are affected, given the concentration of operations. Net enrollment for the Company may decline by less than the total separations, as terminations will be offset by increased enrollment at remaining sites, acquisitions and other impacts. Accelerated depreciation relates to long-lived assets that will be taken out of service prior to the end of their normal service period due to manufacturing consolidations, technology standardization, plant closures or strategic choices to discontinue initiatives. The Company has shortened the estimated useful lives of such assets, resulting in incremental depreciation expense. For segment and management reporting purposes, normal depreciation expense is reported by the business segments, with the incremental accelerated depreciation reported in the corporate segment. Accelerated depreciation and write-downs are charged to cost of products sold for manufacturing assets and marketing, research and administrative expense for all other assets. Asset write-downs relate to establishment of new fair-value bases for assets held for sale or disposal and for assets whose future cash flow expectations have declined significantly as a direct result of restructuring decisions. Assets held for sale or disposal represent excess capacity that is in the process of being removed from service and businesses held for sale within the next 12 months. Such assets are written down to the net amount expected to be realized upon sale or disposal. Assets expected to continue to be operated, but whose nominal cash flows are no longer sufficient to recover existing book values, are written down to estimated fair value, generally determined by reference to discounted expected future cash flows. Write-downs of assets that will continue to be used were 14 The Procter & Gamble Company and Subsidiaries 19 FINANCIAL REVIEW (CONTINUED) approximately $160 million before tax ($133 million after tax) in 2001, $0 in 2000 and $160 million before tax ($100 million after tax) in 1999. Asset write-downs are not expected to significantly impact future annual depreciation expense. Other contains charges incurred as a direct result of restructuring decisions, including relocation, training, the establishment of global business services and the new legal and organization structure of Organization 2005, and discontinuation of initiatives. These costs are charged to the applicable income statement line item based on the underlying nature of the charge. Most restructuring accruals represent current liabilities. Reserve balances were $460 million, $88 million and $44 million at June 30, 2001, 2000 and 1999, respectively. During the current year, approximately 40% of restructuring charges were cash. Going forward, approximately 70% of future charges are expected to be cash - primarily separations. Savings from the restructuring program are difficult to estimate, given the nature of the activities, the corollary benefits achieved, timing and the degree of reinvestment. Overall, the program is expected to deliver nearly $2 billion after tax of annual savings by fiscal 2004. Estimated incremental savings were $235 million in 2001 and $65 million in 2000. Savings are expected to ramp up during 2002 and are estimated to increase by approximately $600 million after tax. FORWARD-LOOKING STATEMENT The Company has made and will make certain forward-looking statements in the Annual Report and in other contexts relating to volume growth, increases in market shares, Organization 2005, financial goals and cost reduction, among others. These forward-looking statements are based on assumptions and estimates regarding competitive activity, pricing, product introductions, economic conditions, technological innovation, currency movements, governmental action and the development of certain markets. Among the key factors necessary to achieve the Company's goals are: (1) the successful execution of Organization 2005, including achievement of expected cost and tax savings and successful management of organizational and work process restructuring; (2) the ability to achieve business plans, including volume growth and pricing plans, despite high levels of competitive activity, especially with respect to the product categories and geographical markets in which the Company has chosen to focus; (3) the ability to maintain key customer relationships; (4) the achievement of growth in significant developing markets such as China, Korea, Mexico, the Southern Cone of Latin America and the countries of Central and Eastern Europe; (5) the ability to successfully manage regulatory, tax and legal matters, including resolution of pending matters within current estimates; (6) the successful and timely execution of planned brand divestitures; (7) the ability to successfully implement cost improvement plans in manufacturing and overhead areas; (8) the timely execution of definitive agreements and the receipt of timely and successful regulatory clearances with respect to a transaction with The Coca- Cola Company; (9) the timely and successful receipt of regulatory clearances and subsequent successful integration of the Clairol business; and (10) the ability to successfully manage currency, interest rate and certain commodity cost exposures. If the Company's assumptions and estimates are incorrect or do not come to fruition, or if the Company does not achieve all of these key factors, then the Company's actual performance could vary materially from the forward-looking statements made herein. 15 20 The Procter & Gamble Company and Subsidiaries RESPONSIBILITY FOR THE FINANCIAL STATEMENTS Consolidated financial statements and financial information included in this report are the responsibility of Company management. This includes preparing the statements in accordance with accounting principles generally accepted in the United States of America and necessarily includes estimates based on management's best judgments. To help insure the accuracy and integrity of Company financial data, management maintains internal controls designed to provide reasonable assurance that transactions are executed as authorized and accurately recorded and that assets are properly safeguarded. These controls are monitored by an ongoing program of internal audits. These audits are supplemented by a self-assessment program that enables individual organizations to evaluate the effectiveness of their controls. Careful selection of employees and appropriate divisions of responsibility are designed to achieve control objectives. The Company's "Worldwide Business Conduct Manual" sets forth management's commitment to conduct its business affairs with the highest ethical standards. Deloitte & Touche, independent auditors, have audited and reported on the Company's consolidated financial statements. Their audits were performed in accordance with auditing standards generally accepted in the United States of America. The Board of Directors, acting through its Audit Committee composed entirely of outside directors, oversees the adequacy of internal controls. The Audit Committee meets periodically with representatives of Deloitte & Touche and internal financial management to review internal control, auditing and financial reporting matters. The independent auditors and the internal auditors also have full and free access to meet privately with the Audit Committee. /s/ A. G. Lafley /s/ Clayton C. Daley Jr. A. G. Lafley Clayton C. Daley Jr. President and Chief Executive Chief Financial Officer and Comptroller INDEPENDENT AUDITORS' REPORT DELOITTE & TOUCHE 250 East Fifth Street Cincinnati, Ohio 45202 To the Board of Directors and Shareholders of The Procter & Gamble Company: We have audited the accompanying consolidated balance sheets of The Procter & Gamble Company and subsidiaries as of June 30, 2001 and 2000 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended June 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company at June 30, 2001 and 2000 and the results of its operations and cash flows for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche August 7, 2001 16 The Procter & Gamble Company and Subsidiaries 21 CONSOLIDATED STATEMENTS OF EARNINGS Amounts in millions except per share amounts Years ended June 30 ---------------------------- 2001 2000 1999 - ----------------------------------------------------------------------------- NET SALES $39,244 $39,951 $38,125 Cost of products sold 22,102 21,514 21,027 Marketing, research and administrative expense 12,406 12,483 10,845 - ----------------------------------------------------------------------------- OPERATING INCOME 4,736 5,954 6,253 Interest expense 794 722 650 Other income, net 674 304 235 - ----------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 4,616 5,536 5,838 Income taxes 1,694 1,994 2,075 - ----------------------------------------------------------------------------- NET EARNINGS(1) $ 2,922 $ 3,542 $ 3,763 - ----------------------------------------------------------------------------- BASIC NET EARNINGS PER COMMON SHARE(1) $ 2.15 $ 2.61 $ 2.75 DILUTED NET EARNINGS PER COMMON SHARE(1) $ 2.07 $ 2.47 $ 2.59 DIVIDENDS PER COMMON SHARE $ 1.40 $ 1.28 $ 1.14 - ----------------------------------------------------------------------------- (1) Net earnings include an after-tax charge for restructuring costs of $1,475 in 2001, $688 in 2000 and $385 in 1999. Basic and diluted net earnings per share include restructuring charges of $1.14 and $1.05 in 2001, $.52 and $.48 in 2000 and $.29 and $.26 in 1999, respectively. See accompanying Notes to Consolidated Financial Statements. 17 22 The Procter & Gamble Company and Subsidiaries CONSOLIDATED BALANCE SHEETS Amounts in millions June 30 --------------------- 2001 2000 - ------------------------------------------------------------------- ASSETS - ------------------------------------------------------------------- CURRENT ASSETS Cash and cash equivalents $ 2,306 $ 1,415 Investment securities 212 185 Accounts receivable 2,931 2,910 INVENTORIES Materials and supplies 1,096 1,254 Work in process 373 394 Finished goods 1,915 1,842 - ------------------------------------------------------------------- TOTAL INVENTORIES 3,384 3,490 Deferred income taxes 397 309 Prepaid expenses and other current assets 1,659 1,837 - ------------------------------------------------------------------- TOTAL CURRENT ASSETS 10,889 10,146 PROPERTY, PLANT AND EQUIPMENT Buildings 4,148 4,259 Machinery and equipment 18,165 18,366 Land 508 596 - ------------------------------------------------------------------- 22,821 23,221 Accumulated depreciation (9,726) (9,529) - ------------------------------------------------------------------- TOTAL PROPERTY, PLANT AND EQUIPMENT 13,095 13,692 GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill 8,805 9,080 Trademarks and other intangible assets 1,331 1,305 - ------------------------------------------------------------------- 10,136 10,385 Accumulated amortization (1,836) (1,599) - ------------------------------------------------------------------- TOTAL GOODWILL AND OTHER INTANGIBLE ASSETS 8,300 8,786 OTHER NON-CURRENT ASSETS 2,103 1,742 - ------------------------------------------------------------------- TOTAL ASSETS $ 34,387 $ 34,366 - ------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. 18 The Procter & Gamble Company and Subsidiaries 23 CONSOLIDATED BALANCE SHEETS Amounts in millions June 30 -------------------- 2001 2000 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------ CURRENT LIABILITIES Accounts payable $ 2,075 $ 2,209 Accrued and other liabilities 4,631 3,766 Taxes payable 907 925 Debt due within one year 2,233 3,241 - ------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 9,846 10,141 - ------------------------------------------------------------------------------ LONG-TERM DEBT 9,792 9,012 DEFERRED INCOME TAXES 894 625 OTHER NON-CURRENT LIABILITIES 1,845 2,301 - ------------------------------------------------------------------------------ TOTAL LIABILITIES 22,377 22,079 - ------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY Convertible Class A preferred stock, stated value $1 per share (600 shares authorized) 1,701 1,737 Non-Voting Class B preferred stock, stated value $1 per share (200 shares authorized) -- -- Common stock, stated value $1 per share (5,000 shares authorized; shares outstanding: 2001 - 1,295.7 and 2000 - 1,305.9) 1,296 1,306 Additional paid-in capital 2,057 1,794 Reserve for Employee Stock Ownership Plan debt retirement (1,375) (1,418) Accumulated other comprehensive income (2,120) (1,842) Retained earnings 10,451 10,710 - ------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 12,010 12,287 - ------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 34,387 $ 34,366 - ------------------------------------------------------------------------------ See accompanying Notes to Consolidated Financial Statements. 19 24 The Procter & Gamble Company and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Common Additional Reserve for Dollars in millions/ Shares Stock Preferred Paid-In ESOP Debt Shares in thousands Outstanding Common Stock Capital Retirement - -------------------------------------------------------------------------------------------------- BALANCE JUNE 30, 1998 1,337,461 $1,337 $1,821 $ 907 $(1,616) - -------------------------------------------------------------------------------------------------- Net earnings Other comprehensive income: Financial statement translation Net investment hedges, net of $4 tax Other, net of tax Total comprehensive income Dividends to shareholders: Common Preferred, net of tax benefit Treasury purchases (29,924) (30) Employee plan issuances 9,605 10 393 Preferred stock conversions 2,612 3 (40) 37 ESOP debt guarantee reduction 64 - -------------------------------------------------------------------------------------------------- Balance June 30, 1999 1,319,754 1,320 1,781 1,337 (1,552) - -------------------------------------------------------------------------------------------------- Net earnings Other comprehensive income: Financial statement translation Net investment hedges, net of $88 tax Other, net of tax Total comprehensive income Dividends to shareholders: Common Preferred, net of tax benefit Treasury purchases (24,296) (24) 72(1) Employee plan issuances 7,592 7 344 Preferred stock conversions 2,817 3 (44) 41 ESOP debt guarantee reduction 134 - -------------------------------------------------------------------------------------------------- Balance June 30, 2000 1,305,867 1,306 1,737 1,794 (1,418) - -------------------------------------------------------------------------------------------------- Net earnings Other comprehensive income: Financial statement translation Net investment hedges, net of $276 tax Other, net of tax Total comprehensive income Dividends to shareholders: Common Preferred, net of tax benefit Treasury purchases (18,238) (18) 6(1) Employee plan issuances 5,924 6 223 Preferred stock conversions 2,185 2 (36) 34 ESOP debt guarantee reduction - -------------------------------------------------------------------------------------------------- Balance June 30, 2001 1,295,738 $1,296 $1,701 $2,057 $(1,375) - --------------------------------------------------------------------------------------------------

Accumulated Other Total Dollars in millions/ Comprehensive Retained Comprehensive Shares in thousands Income Earnings Total Income - ------------------------------------------------------------------------ ------------- BALANCE JUNE 30, 1998 $(1,357) $11,144 $12,236 - ----------------------------------------------------------------------- Net earnings 3,763 3,763 $3,763 Other comprehensive income: Financial statement translation (237) (237) (237) Net investment hedges, net of $4 tax 5 5 5 Other, net of tax (17) (17) (17) -------- Total comprehensive income $3,514 -------- Dividends to shareholders: Common (1,517) (1,517) Preferred, net of tax benefit (109) (109) Treasury purchases (2,503) (2,533) Employee plan issuances 403 Preferred stock conversions - ESOP debt guarantee reduction 64 - ----------------------------------------------------------------------- Balance June 30, 1999 (1,606) 10,778 12,058 - ----------------------------------------------------------------------- Net earnings 3,542 3,542 $3,542 Other comprehensive income: Financial statement translation (449) (449) (449) Net investment hedges, net of $88 tax 150 150 150 Other, net of tax 63 63 63 -------- Total comprehensive income $3,306 -------- Dividends to shareholders: Common (1,681) (1,681) Preferred, net of tax benefit (115) (115) Treasury purchases (1,814) (1,766) Employee plan issuances 351 Preferred stock conversions - ESOP debt guarantee reduction 134 - ----------------------------------------------------------------------- Balance June 30, 2000 (1,842) 10,710 12,287 - ----------------------------------------------------------------------- Net earnings 2,922 2,922 $2,922 Other comprehensive income: Financial statement translation (715) (715) (715) Net investment hedges, net of $276 tax 460 460 460 Other, net of tax (23) (23) (23) -------- Total comprehensive income $2,644 -------- Dividends to shareholders: Common (1,822) (1,822) Preferred, net of tax benefit (121) (121) Treasury purchases (1,238) (1,250) Employee plan issuances 229 Preferred stock conversions - ESOP debt guarantee reduction 43 43 - ----------------------------------------------------------------------- Balance June 30, 2001 $(2,120) $10,451 12,010 - -----------------------------------------------------------------------

(1)Premium on equity put options. See accompanying Notes to Consolidated Financial Statements. 20 The Procter & Gamble Company and Subsidiaries 25 CONSOLIDATED STATEMENTS OF CASH FLOWS Amounts in millions Years ended June 30 ----------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 1,415 $ 2,294 $ 1,549 - ------------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings 2,922 3,542 3,763 Depreciation and amortization 2,271 2,191 2,148 Deferred income taxes (102) 463 (60) Change in accounts receivable (122) 64 (207) Change in inventories (67) (176) (96) Change in accounts payable, accrued and other liabilities 801 (883) 792 Change in other operating assets and liabilities 57 (404) (926) Other 44 (122) 130 - ------------------------------------------------------------------------------- TOTAL OPERATING ACTIVITIES 5,804 4,675 5,544 - ------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (2,486) (3,018) (2,828) Proceeds from asset sales 788 419 434 Acquisitions (138) (2,967) (137) Change in investment securities (7) 221 356 - ------------------------------------------------------------------------------- TOTAL INVESTING ACTIVITIES (1,843) (5,345) (2,175) - ------------------------------------------------------------------------------- FINANCING ACTIVITIES Dividends to shareholders (1,943) (1,796) (1,626) Change in short-term debt (1,092) 243 689 Additions to long-term debt 1,356 4,196 986 Reductions of long-term debt (226) (1,409) (334) Proceeds from stock options 141 336 212 Treasury purchases (1,250) (1,766) (2,533) - ------------------------------------------------------------------------------- TOTAL FINANCING ACTIVITIES (3,014) (196) (2,606) - ------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (56) (13) (18) - ------------------------------------------------------------------------------- CHANGE IN CASH AND CASH EQUIVALENTS 891 (879) 745 - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,306 $ 1,415 $ 2,294 - ------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE Cash payments for: Interest, net of amount capitalized $ 735 $ 700 $ 640 Income taxes 1,701 1,712 1,743 Liabilities assumed in acquisitions 108 236 38 - ------------------------------------------------------------------------------- See accompanying Notes to Consolidated Financial Statements. 21 26 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The consolidated financial statements include The Procter & Gamble Company and its controlled subsidiaries (the Company). Investments in companies over which the Company exerts significant influence, but does not control the financial and operating decisions, are accounted for using the equity method. These investments are managed as integral parts of the Company's business units, and segment reporting reflects such investments as consolidated subsidiaries. USE OF ESTIMATES: Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying disclosures. These estimates are based on management's best knowledge of current events and actions the Company may undertake in the future. Actual results may ultimately differ from estimates. NEW PRONOUNCEMENTS: The Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" which was adopted by the Company effective July 1, 2000. See further discussion in Note 6. The Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements," which became effective in the fourth quarter. During 2000 and 2001, the Emerging Issues Task Force issued: EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs" addressing the statement of earnings classification of shipping and handling costs billed to customers; EITF No. 00-14, "Accounting for Certain Sales Incentives" addressing the recognition, measurement and statement of earnings classification of certain sales incentives; and EITF No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products" addressing the statement of earnings classification of consideration from a vendor to an entity that purchases the vendor's products for resale. There is no material impact on the Company's financial statements resulting from application of the above new pronouncements. In June 2001, the FASB approved two new pronouncements: SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 applies to all business combinations with a closing date after June 30, 2001. This Statement eliminates the pooling-of-interests method of accounting and further clarifies the criteria for recognition of intangible assets separately from goodwill. SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived intangible assets and initiates an annual review for impairment. Identifiable intangible assets with a determinable useful life will continue to be amortized. The amortization provisions apply to goodwill and other intangible assets acquired after June 30, 2001. Goodwill and other intangible assets acquired prior to June 30, 2001 will be affected upon adoption. The Company will adopt SFAS No. 142 effective July 1, 2001, which will require the Company to cease amortization of its remaining net goodwill balance and to perform an impairment test of its existing goodwill based on a fair value concept. Although the Company is still reviewing the provisions of these Statements, it is management's preliminary assessment that goodwill impairment will not result upon adoption. As of June 30, 2001, the Company has net unamortized goodwill of $7,429 and amortization expense of $224, $214 and $180 for the years ended June 30, 2001, 2000 and 1999, respectively. REVENUE RECOGNITION: Sales are recognized when revenue is realized or realizable and has been earned. In general, revenue is recognized when risk and title to the product transfers to the customer, which usually occurs at the time shipment is made. CURRENCY TRANSLATION: Financial statements of subsidiaries outside the U.S. generally are measured using the local currency as the functional currency. Adjustments to translate those statements into U.S. dollars are recorded in other comprehensive income. For subsidiaries operating in highly inflationary economies, the U.S. dollar is the functional currency. Remeasurement adjustments for highly inflationary economies and other transactional exchange gains and losses are reflected in earnings. CASH EQUIVALENTS: Highly liquid investments with maturities of three months or less when purchased are considered cash equivalents. INVENTORY VALUATION: Inventories are valued at cost, which is not in excess of current market price. Cost is primarily determined by either the average cost or the first-in, first-out method. The replacement cost of last-in, first-out inventories exceeded carrying value by approximately $55 and $83 at June 30, 2001 and 2000, respectively. GOODWILL AND OTHER INTANGIBLE ASSETS: Under current accounting guidance, the cost of intangible assets is amortized, principally on a straight-line basis, over the estimated periods benefited, generally forty years for goodwill and periods ranging from three to forty years for other intangible assets. The realizability of goodwill and other intangibles is evaluated periodically when events or circumstances indicate a possible inability to recover the carrying amount. Such evaluation is based on various analyses, including cash flow and Millions of dollars except per share amounts 22 The Procter & Gamble Company and Subsidiaries 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) profitability projections that incorporate the impact of the Company's existing businesses. The analyses necessarily involve significant management judgment to evaluate the capacity of an acquired business to perform within projections. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at cost reduced by accumulated depreciation. Depreciation expense is based on estimated useful lives using the straight-line method. Estimated useful lives are periodically reviewed, and where warranted, changes are made that result in an acceleration of depreciation. FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of cash equivalents, short- and long-term investments and short-term debt approximate cost. The estimated fair values of other financial instruments, including debt, equity and risk management instruments, have been determined using available market information and valuation methodologies, primarily discounted cash flow analysis. These estimates require considerable judgment in interpreting market data, and changes in assumptions or estimation methods may significantly affect the fair value estimates. RECLASSIFICATIONS: Certain reclassifications of prior years' amounts have been made to conform to the current year presentation. NOTE 2 RESTRUCTURING PROGRAM Beginning in 1999 - concurrent with the Company's reorganization into product-based global business units - the Company initiated its Organization 2005 restructuring program. The program was expanded in the current year to deliver further cost reductions through reduced overheads, additional manufacturing consolidations, and discontinuation of under-performing businesses and initiatives. Costs to be incurred include separation related costs, asset write- downs or accelerated depreciation, and other costs directly related to the restructuring effort. Due to the nature of the charges and the duration of the program, estimates of the timing and amount of costs and savings require significant judgment and may change over time. Based on current estimates, the overall program is expected to result in total charges of $5.6 billion ($4.4 billion after tax) over the six-year period that began in fiscal 1999. Before-tax restructuring charges to date are:

Asset Write- Accelerated Separations Downs Depreciation Other Total - ----------------------------------------------------------------------------------------------------------------------- 1999: Charges $ 45 $ 217 $ 208 $ 11 $ 481 Cash spent (10) -- -- (2) (12) Charged against assets -- (217) (208) -- (425) - ----------------------------------------------------------------------------------------------------------------------- Reserve balance June 30, 1999 35 -- -- 9 44 - ----------------------------------------------------------------------------------------------------------------------- 2000: Charges 153 64 386 211 814 Cash spent (100) -- -- (220) (320) Charged against assets -- (64) (386) -- (450) - ----------------------------------------------------------------------------------------------------------------------- Reserve balance June 30, 2000 88 -- -- -- 88 - ----------------------------------------------------------------------------------------------------------------------- 2001: CHARGES 341 731 276 502 1,850 CASH SPENT (186) -- -- (199) (385) CHARGED AGAINST ASSETS -- (731) (276) (86) (1,093) - ----------------------------------------------------------------------------------------------------------------------- RESERVE BALANCE JUNE 30, 2001 243 -- -- 217 460 - -----------------------------------------------------------------------------------------------------------------------

Charges for the program are reflected in the corporate segment for management and external reporting. SEPARATION COSTS Employee separation charges are related to severance packages for approximately 6,000 people in 2001, 2,800 people in 2000 and 400 people in 1999. The packages are predominantly voluntary and are formula driven based on salary levels and past service. Severance costs related to voluntary separations are charged to earnings when the employee accepts the offer. The current and planned separations span the entire organization, including manufacturing, selling, research and administrative positions. ASSET WRITE-DOWNS AND ACCELERATED DEPRECIATION Asset write-downs relate to establishment of new fair value bases for assets held for sale or disposal that represent excess capacity in the process of being removed from service or disposed and businesses held for sale in the next 12 months. These assets were written down to the amounts expected to be realized upon sale or disposal, less minor disposal costs. Additionally, asset write-downs included certain manufacturing assets that are expected to operate at levels significantly below their planned capacity, primarily capital expansions related to recent initiatives that have not met expectations. The projected cash flows [Millions of dollars except per share amounts] 23 28 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) from such assets over their remaining useful lives were no longer estimated to be greater than their current carrying values; therefore, they were written down to estimated fair value, generally determined by reference to discounted expected future cash flows. Such charges represented approximately $160 before tax in 2001, $0 in 2000 and $160 in 1999. Charges for accelerated depreciation are related to long-lived assets that will be taken out of service prior to the end of their normal service period due to manufacturing consolidations, technology standardization, plant closures or strategic choices to discontinue initiatives. The Company has shortened the estimated useful lives of such assets, resulting in incremental depreciation expense. OTHER RESTRUCTURING CHARGES Other costs incurred as a direct result of the program included relocation, training, establishment of global business services and the new legal and organization structure of Organization 2005, and discontinuation of initiatives. NOTE 3 ACQUISITIONS In 2001, acquisitions were accounted for using the purchase method and totaled $246. These acquisitions resulted in goodwill and other intangibles of $208. In 2000, the Company acquired The Iams Company and Affiliates for approximately $2,222 in cash. Other acquisitions in 2000 totaled $745 and consisted primarily of Recovery Engineering, Inc. and a joint venture ownership increase in China. The 2000 acquisitions were accounted for using the purchase method and resulted in goodwill and other intangibles of $2,508. Purchase acquisitions in 1999 totaled $137. In May 2001, the Company announced its intent to purchase the Clairol business from Bristol-Myers Squibb Company for $4,950. The acquisition is subject to regulatory approvals. NOTE 4 SUPPLEMENTAL FINANCIAL INFORMATION June 30 --------------- 2001 2000 - ---------------------------------------------------------- ACCRUED AND OTHER LIABILITIES Marketing expenses $1,271 $1,142 Compensation expenses 576 462 Organization 2005 restructuring reserves 460 88 Other 2,324 2,074 - ---------------------------------------------------------- 4,631 3,766 - ---------------------------------------------------------- OTHER NON-CURRENT LIABILITIES Other postretirement benefits $ 534 $ 824 Pension benefits 925 975 Other 386 502 - ---------------------------------------------------------- 1,845 2,301 - ---------------------------------------------------------- SELECTED OPERATING EXPENSES Research and development costs are charged to earnings as incurred and were $1,769 in 2001, $1,899 in 2000 and $1,726 in 1999. Advertising costs are charged to earnings as incurred and were $3,193 in 2001, $3,793 in 2000 and $3,639 in 1999. NET EARNINGS PER COMMON SHARE Net earnings less preferred dividends (net of related tax benefits) are divided by the weighted average number of common shares outstanding during the year to calculate basic net earnings per common share. Diluted net earnings per common share are calculated to give effect to stock options and convertible preferred stock. Basic and diluted net earnings per share are reconciled as follows: Years ended June 30 -------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------- Net earnings available to common shareholders $ 2,801 $ 3,427 $ 3,654 Effect of dilutive securities Preferred dividends, net of tax benefit 121 115 109 Preferred dividend impact on funding of ESOP (15) (18) (22) - ---------------------------------------------------------------------- Diluted net earnings 2,907 3,524 3,741 - ---------------------------------------------------------------------- Years ended June 30 -------------------------------- Shares in millions 2001 2000 1999 - ---------------------------------------------------------------------- Basic weighted average common shares outstanding 1,300.3 1,313.2 1,328.1 Effect of dilutive securities Conversion of preferred shares 91.9 94.3 97.2 Exercise of stock options (1) 13.4 19.7 21.5 - ---------------------------------------------------------------------- Diluted weighted average common shares outstanding 1,405.6 1,427.2 1,446.8 - ---------------------------------------------------------------------- (1) Approximately one-third of the Company's outstanding stock options were not included in the diluted net earnings per share calculation for 2001 because to do so would have been antidilutive. EQUITY PUT OPTIONS During 2001 and 2000, the Company entered into equity put options on its common stock. These agreements can be settled on a physical or net-share basis at the Company's option. The premium received from the sale of the instruments is credited to equity and reduces the Company's cash outlay for share repurchases. The 2001 options are equivalent to one million common shares, at approximately $74 per share. They expire in the first quarter of 2002. The options entered into in 2000 were equivalent to 12 million common shares, at prices ranging from $60 to $71 per share. They expired mostly unexercised in the second quarter of 2001. [Millions of dollars except per share amounts] 24 The Procter & Gamble Company and Subsidiaries 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 SHORT-TERM AND LONG-TERM DEBT June 30 ------------------ 2001 2000 - -------------------------------------------------------------- SHORT-TERM DEBT USD commercial paper $ 675 $ 2,188 Non USD commercial paper 559 -- Current portion of long-term debt 414 283 Other 585 770 - -------------------------------------------------------------- 2,233 3,241 - -------------------------------------------------------------- The weighted average short-term interest rates were 5.3% and 4.8% as of June 30, 2001 and 2000, respectively. June 30 ------------------ 2001 2000 - -------------------------------------------------------------- LONG-TERM DEBT 5.25% USD note due 2003 $ 750 $ 750 6.00% USD note due 2003 500 500 6.60% USD note due 2004 1,000 1,000 8.33% ESOP debentures due 2003, 2004 306 392 1.50% JPY note due 2005 441 518 5.75% EUR note due 2005 1,270 -- 6.13% USD note due 2008 500 500 6.88% USD note due 2009 1,000 1,000 2.00% JPY note due 2010 401 471 9.36% ESOP debentures due 2007-2021 1,000 1,000 6.45% USD note due 2026 300 300 6.25% GBP note due 2030 705 757 All other long-term debt 2,033 2,107 Current portion of long-term debt (414) (283) - -------------------------------------------------------------- 9,792 9,012 - -------------------------------------------------------------- Long-term weighted average interest rates were 5.0% and 6.1% as of June 30, 2001 and 2000, respectively, and include the effects of related interest rate swaps discussed in Note 6. The fair value of the long-term debt was $10,164 and $9,024 at June 30, 2001 and 2000, respectively. Long-term debt maturities during the next five years are as follows: 2002--$622; 2003-- $1,117; 2004--$1,040; 2005--$1,912 and 2006 -- $32. NOTE 6 RISK MANAGEMENT ACTIVITIES Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting SFAS No. 133 as of July 1, 2000 was not material. The Company is exposed to market risks, such as changes in interest rates, currency exchange rates and commodity pricing. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, the Company enters into various derivative transactions pursuant to the Company's policies in areas such as counterparty exposure and hedging practices. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. INTEREST RATE HEDGING The Company's policy is to manage interest cost using a mix of fixed- and variable-rate debt. To manage this mix in a cost efficient manner, the Company enters into interest rate swaps in which the Company agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. At June 30, 2001, the Company had swaps with a fair value of $125 designated as fair value hedges of underlying fixed-rate debt obligations and recorded as long-term assets. The mark-to-market values of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains and losses in the interest expense component of the income statement. All existing fair value hedges are 100% effective. As a result, there is no impact to earnings due to hedge ineffectiveness. Non-qualifying instruments are also recorded on the balance sheet at fair value, but the impact was not material to the income statement. CURRENCY RATE HEDGING The Company manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. The Company's major foreign currency exposures involve the markets in Western and Eastern Europe, Asia, Mexico and Canada. The primary purpose of the Company's foreign currency hedging activities is to manage the volatility associated with foreign currency purchases of materials and other assets and liabilities created in the normal course of business. The Company primarily utilizes forward exchange contracts and purchased options with maturities of less than 18 months and currency swaps with maturities up to five years. The Company enters into certain foreign currency derivative instruments that do not meet hedge accounting criteria. These primarily are intended to protect against exposure related to intercompany financing transactions and income from international operations. The fair values of these instruments at June 30, 2001 were recorded as $136 in assets and $16 in liabilities. The net impact on marketing, research and administrative expense was a $24 after-tax gain. In addition, the Company utilizes purchased foreign currency options, forward exchange contracts and cross currency swaps which qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales, inventory purchases, intercompany royalties and intercompany loans [Millions of dollars except per share amounts] 25 30 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) denominated in foreign currency. The fair values of these instruments at June 30, 2001 were recorded as $94 in assets and $101 in liabilities. Gains and losses on these instruments are deferred in other comprehensive income (OCI) until the underlying transaction is recognized in earnings. The earnings impact is reported in either net sales, cost of products sold, or marketing research and administrative expenses, to match the underlying transaction being hedged. Qualifying cash flow hedges currently deferred in OCI are not material. These amounts will be reclassified into earnings as the underlying transactions are recognized. During the year the Company charged to earnings a $15 after-tax loss due to the change in the time value of options excluded from the hedge effectiveness test. This was prior to the change in SFAS No. 133 interpretation that allows change in time value to be included in effectiveness testing. No currency cash flow hedges were discontinued during the year due to changes in expectations on the original forecasted transactions. NET INVESTMENT HEDGING The Company hedges its net investment position in major currencies and generates foreign currency interest payments that offset other transactional exposures in these currencies. To accomplish this, the Company borrows directly in foreign currency and designates a portion of foreign currency debt as a hedge of net investments. In addition, certain foreign currency interest rate swaps are designated as hedges of the Company's related foreign net investments. Currency effects of these hedges reflected in OCI produced a $460 after-tax gain during the year, leaving an accumulated net balance of $577. COMMODITY PRICE MANAGEMENT Raw materials used by the Company are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. To manage the volatility related to anticipated inventory purchases, the Company uses futures and options with maturities generally less than one year and swap contracts with maturities up to five years. These market instruments are designated as cash flow hedges. The mark-to- market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of products sold in the period during which the hedged transaction affects earnings. Qualifying cash flow hedges currently deferred in OCI are not material. These amounts will be reclassified into earnings as the underlying transactions are recognized. The mark-to-market gains or losses on non-qualifying, excluded and ineffective portions of hedges are recognized in cost of products sold immediately. No cash flow hedges were discontinued during the year ended June 30, 2001. Commodity hedging activity is not material to the Company's financial statements. CREDIT RISK Credit risk arising from the inability of a counterparty to meet the terms of the Company's financial instrument contracts is generally limited to the amounts, if any, by which the counterparty's obligations exceed the obligations of the Company. It is the Company's policy to enter into financial instruments with a diversity of creditworthy counterparties. Therefore, the Company does not expect to incur material credit losses on its risk management or other financial instruments. NOTE 7 STOCK OPTIONS The Company has stock-based compensation plans under which stock options are granted annually to key managers and directors at the market price on the date of grant. Grants after 1998 are fully exercisable after three years and have a fifteen-year life, while prior years' grants are fully exercisable after one year and have a ten- year life. The Company issues stock appreciation rights in countries where stock options are not permitted by local governments. Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has elected to account for its employee stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees." Because stock options have been issued with exercise prices equal to grant date fair value, compensation cost has not been recognized. Had compensation cost for the plans been determined based on the fair value at the grant date consistent with SFAS No. 123, the Company's net earnings and earnings per share would have been as follows: Years ended June 30 ------------------------------------ 2001 2000 1999 - -------------------------------------------------------------------- Net earnings As reported $ 2,922 $ 3,542 $ 3,763 Pro forma 2,612 3,363 3,683 - -------------------------------------------------------------------- Net earnings per common share Basic As reported $ 2.15 $ 2.61 $ 2.75 Pro forma 1.92 2.47 2.69 Diluted As reported 2.07 2.47 2.59 Pro forma 1.85 2.34 2.53 - -------------------------------------------------------------------- The fair value of each option grant is estimated on the date of grant using a binomial option-pricing model with the following assumptions: Options Granted in Years ended June 30 ------------------------------------ 2001 2000 1999 - -------------------------------------------------------------------- Interest rate 5.8% 6.0% 5.4% Dividend yield 2.0% 1.5% 1.5% Expected volatility 26% 28% 26% Expected life in years 9 9 7 - -------------------------------------------------------------------- [Millions of dollars except per share amounts] 26 The Procter & Gamble Company and Subsidiaries 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Stock option activity was as follows: Options in Thousands -------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------- Outstanding, July 1 82,744 76,810 79,918 Granted 28,400 14,360 7,026 Exercised (5,709) (7,401) (9,397) Canceled (1,239) (1,025) (737) - ------------------------------------------------------------------------- Outstanding, June 30 104,196 82,744 76,810 Exercisable 48,805 54,667 61,664 Available for grant 27,994 41,387 39,874 Average price: Outstanding, beginning of year $ 61.73 $ 52.11 $ 45.58 Granted 62.20 96.10 89.72 Exercised 24.77 25.21 22.36 Outstanding, end of year 63.64 61.73 52.11 Exercisable, end of year 49.14 46.67 43.79 Weighted average fair value of options granted during the year 22.45 37.21 32.23 - ------------------------------------------------------------------------- The following table summarizes information about stock options outstanding at June 30, 2001: Options Outstanding ----------------------------------------------------- Number Weighted Avg. Outstanding Weighted Avg. Remaining Range of prices (Thousands) Exercise Price Contractual Life - ---------------------------------------------------------------------- $25 to 30 14,507 $26.66 1.8 YEARS 33 to 46 14,505 37.91 4.3 55 to 76 38,675 62.11 12.0 82 to 107 36,509 90.17 10.0 - ---------------------------------------------------------------------- The following table summarizes information about stock options exercisable at June 30, 2001: Options Exercisable -------------------------------- Number Exercisable Weighted Avg. Range of prices (Thousands) Exercise Price - -------------------------------------------------- $25 to 30 14,507 $26.66 33 to 46 14,505 37.91 55 to 76 9,394 61.61 82 to 107 10,399 84.89 - -------------------------------------------------- NOTE 8 EMPLOYEE STOCK OWNERSHIP PLAN The Company maintains The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan (ESOP) to provide funding for two primary postretirement benefits: a defined contribution profit sharing plan and certain U.S. postretirement health care benefits. The ESOP borrowed $1,000 in 1989, which has been guaranteed by the Company. The proceeds were used to purchase Series A ESOP Convertible Class A Preferred Stock to fund a portion of the defined contribution plan. Principal and interest requirements are $117 per year, paid by the trust from dividends on the preferred shares and from cash contributions and advances from the Company. The shares are convertible at the option of the holder into one share of the Company's common stock. Annual credits to participants' accounts are based on individual base salaries and years of service, and do not exceed 15% of total participants' annual salaries and wages. The liquidation value is equal to the issue price of $13.75 per share. Years ended June 30 ------------------- 2001 2000 1999 - ----------------------------------------------------- ESOP preferred shares allocated at market value $ 63 $313 $279 Company contributions 272 1 18 Benefits earned 335 314 297 In 1991, the ESOP borrowed an additional $1,000, also guaranteed by the Company. The proceeds were used to purchase Series B ESOP Convertible Class A Preferred Stock to fund a portion of retiree health care benefits. Debt service requirements are $94 per year, funded by preferred stock dividends and cash contributions from the Company. Each share is convertible at the option of the holder into one share of the Company's common stock. The liquidation value is equal to the issue price of $26.12 per share. Shares in Thousands ------------------------- 2001 2000 1999 - ------------------------------------------------ Outstanding, June 30 Series A 54,220 55,925 58,342 Series B 36,605 37,085 37,485 - ------------------------------------------------ Shares of the ESOP are allocated at original cost based on debt service requirements, net of advances made by the Company to the trust. Dividends on all preferred shares, net of related tax benefit, are charged to retained earnings. The preferred shares held by the ESOP are considered outstanding from inception for purposes of calculating diluted net earnings per common share. The fair value of the Series A shares serves to reduce the Company's cash contribution required to fund the profit sharing plan contributions earned. In 2001, allocated shares declined, primarily due to changes in debt service requirements; this impacted the Company's cash contribution. The Series B shares are considered plan assets of the other retiree benefits plan. NOTE 9 POSTRETIREMENT BENEFITS The Company offers various postretirement benefits to its employees. DEFINED CONTRIBUTION RETIREMENT PLANS Within the U.S., the most significant retirement benefit is the defined contribution profit sharing plan described in Note 8. OTHER RETIREE BENEFITS The Company also provides certain health care and life insurance benefits for substantially all U.S. employees who become eligible for these benefits when they meet minimum age and service requirements. Generally, the health care plans require contributions. [Millions of dollars except per share amounts] 27 32 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) from retirees and pay a stated percentage of expenses, reduced by deductibles and other coverages. Retiree contributions change annually in line with health care cost trends. These benefits are partially funded by an ESOP, as well as certain other assets contributed by the Company. Certain other employees, primarily outside the U.S., are covered by local defined benefit pension, health care and life insurance plans. The elements of the net amount recognized for the Company's postretirement plans are summarized below: Years ended June 30 ----------------------------------------- Other Pension Benefits Retiree Benefits ------------------- ------------------- 2001 2000 2001 2000 - ---------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 2,627 $ 2,488 $ 1,270 $ 1,199 Service cost 115 120 40 39 Interest cost 149 151 101 90 Participants' contributions 4 4 18 16 Amendments (10) 9 0 20 Actuarial loss (gain) 86 35 250 (7) Acquisitions/(Divestitures) (14) 47 (5) 0 Curtailments and settlements (22) (20) 0 0 Currency exchange (232) (79) (4) (3) Benefit payments (136) (128) (93) (84) - ---------------------------------------------------------------------------- Benefit obligation at end of year 2,567 2,627 1,577 1,270 - ---------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 1,691 1,555 1,274 2,516 Actual return on plan assets (88) 198 235 (1,178) Acquisitions/(Divestitures) (19) 28 0 0 Employer contributions 81 73 14 4 Participants' contributions 4 4 18 16 Settlements (3) (2) 0 0 Currency exchange (98) (37) 1 0 Benefit payments (136) (128) (93) (84) - ---------------------------------------------------------------------------- Fair value of plan assets at end of year 1,432 1,691 1,449 1,274 - ---------------------------------------------------------------------------- FUNDED STATUS Funded status at end of year (1,135) (936) (128) 4 Unrecognized net actuarial loss (gain) 243 (30) (418) (828) Unrecognized transition amount 17 21 0 0 Unrecognized prior service cost 20 39 (8) 1 - ---------------------------------------------------------------------------- Net amount recognized (855) (906) (554) (823) - ---------------------------------------------------------------------------- Years ended June 30 ---------------------------------------- Other Pension Benefits Retiree Benefits 2001 2000 2001 2000 - ------------------------------------------------------------------- Prepaid benefit cost $ 75 $ 59 $ 2 $ 2 Accrued benefit cost (1,006) (990) (556) (825) Intangible asset 16 0 0 0 Accumulated other comprehensive income 60 25 0 0 - ------------------------------------------------------------------- Net liability recognized (855) (906) (554) (823) - ------------------------------------------------------------------- The Company's stock comprised $1,335 and $1,123 of other retiree plan assets, net of Series B ESOP debt, as of June 30, 2001 and 2000, respectively. Assumptions for the postretirement benefit calculations are as follows: Years ended June 30 ------------------------------------ Other Pension Benefits Retiree Benefits 2001 2000 2001 2000 - ----------------------------------------------------------------- WEIGHTED AVERAGE ASSUMPTIONS Discount rate 5.9% 6.1% 7.3% 8.0% Expected return on plan assets 8.3% 8.1% 10.0% 10.0% Rate of compensation increase 4.1% 4.5% -- -- Initial health care cost trend rate* -- -- 8.8% 5.8% - ----------------------------------------------------------------- *Five year trend rate assumption was adjusted in 2001 to reflect market trends. Rate is assumed to decrease to 5.0% by 2007 and remain at that level thereafter. COMPONENTS OF THE NET PERIODIC BENEFIT COST ARE AS FOLLOWS: Years ended June 30 -------------------------------------------------- Other Pension Benefits Retiree Benefits ------------------------ ----------------------- 2001 2000 1999 2001 2000 1999 - ------------------------------------------------------------------------------ COMPONENTS OF NET PERIODIC BENEFIT COST Service cost $ 115 $ 120 $ 111 $ 40 $ 39 $ 49 Interest cost 149 151 140 101 90 97 Expected return on plan assets (127) (122) (105) (317) (294) (218) Amortization of prior service cost 5 7 8 (1) (2) (2) Amortization of prior transition amount 3 4 3 0 0 0 Settlement loss (gain) 6 (6) 0 0 0 0 Curtailment gain (13) (3) 0 0 0 0 Recognized net actuarial loss (gain) 3 4 4 (85) (92) (58) - ------------------------------------------------------------------------------ Gross benefit cost 141 155 161 (262) (259) (132) Dividends on ESOP preferred stock 0 0 0 (76) (77) (78) - ------------------------------------------------------------------------------ Net periodic benefit cost 141 155 161 (338) (336) (210) - ------------------------------------------------------------------------------ [Millions of dollars except per share amounts] 28 The Procter & Gamble Company and Subsidiaries 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $1,414, $1,124 and $230, respectively, as of June 30, 2001, and $1,368, $1,073 and $189, respectively, as of June 30, 2000. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects: One Percentage One Percentage Point Increase Point Decrease - ----------------------------------------------------------------------- Effect on total of service and interest cost components $ 24 $ (19) Effect on postretirement benefit obligation 213 (175) - ----------------------------------------------------------------------- NOTE 10 INCOME TAXES Earnings before income taxes consist of the following: Years ended June 30 ------------------------------ 2001 2000 1999 - ---------------------------------------------------------- United States $ 3,340 $ 3,006 $ 3,474 International 1,276 2,530 2,364 - ---------------------------------------------------------- 4,616 5,536 5,838 - ---------------------------------------------------------- The income tax provision consists of the following: Years ended June 30 ------------------------------ 2001 2000 1999 - ---------------------------------------------------------- CURRENT TAX EXPENSE U.S. Federal $ 985 $ 648 $ 1,080 International 721 816 934 U.S. State & Local 90 67 121 - ---------------------------------------------------------- 1,796 1,531 2,135 DEFERRED TAX EXPENSE U.S. Federal 142 241 (74) International & other (244) 222 14 - ---------------------------------------------------------- (102) 463 (60) - ---------------------------------------------------------- 1,694 1,994 2,075 - ---------------------------------------------------------- The Company's effective income tax rate was 36.7%, 36.0% and 35.5% in 2001, 2000 and 1999, respectively, compared to the U.S. statutory rate of 35.0%. Excluding the restructuring costs and related tax effects, the effective tax rate was 32.0%, 33.4% and 34.4% in 2001, 2000 and 1999, respectively. This change reflects the execution of tax planning opportunities and country mix effects. Taxes impacted shareholders' equity with a $155 charge for the year ended June 30, 2001 and a $59 credit for the year ended June 30, 2000. Undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely were $9,231 and $8,828 at June 30, 2001 and 2000, respectively. Deferred income tax assets and liabilities are comprised of the following: June 30 ------------------- 2001 2000 Current deferred tax assets $ 397 $ 309 - ------------------------------------------------------------------- Non-current deferred tax assets (liabilities) Fixed assets $(1,081) $ (951) Other postretirement benefits 197 273 Loss and other carryforwards 509 512 Other (415) (252) Valuation allowances (104) (207) - ------------------------------------------------------------------- (894) (625) - ------------------------------------------------------------------- As of June 30, 2001, net operating loss carryforwards totaling $995 were available to reduce future taxable income. If unused, $415 will expire between 2002 and 2011. The remainder, totaling $580, may be carried forward indefinitely. NOTE 11 COMMITMENTS AND CONTINGENCIES The Company has purchase commitments for materials, supplies and property, plant and equipment incidental to the ordinary conduct of business. In the aggregate, such commitments are not in excess of current market prices. The Company is subject to various lawsuits and claims with respect to matters such as governmental regulations, income taxes and other actions arising out of the normal course of business. The Company is also subject to contingencies pursuant to environmental laws and regulations that in the future may require the Company to take action to correct the effects on the environment of prior manufacturing and waste disposal practices. Accrued environmental liabilities for remediation and closure costs were $43 and $47 at June 30, 2001 and 2000, respectively, and, in management's opinion, such accruals are appropriate based on existing facts and circumstances. Current year expenditures were not material. While considerable uncertainty exists, in the opinion of management and Company counsel, the ultimate liabilities resulting from such lawsuits and claims will not materially affect the Company's financial statements. [Millions of dollars except per share amounts] 29 34 The Procter & Gamble Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12 SEGMENT INFORMATION The Company is organized by product-based global business units. The segments manufacture and market products as follows: - - Fabric and home care includes products for laundry, dish, fabric enhancers and hard surface cleaners. - - Paper includes family care, feminine care and baby care. Products include tissues, towel, tampons, pads and liners, diapers and wipes. - - Beauty care products include cosmetics, hair care, deodorants, fragrances and other beauty products. - - Health care includes personal health care, oral care, pharmaceuticals and pet health and nutrition. - - Food and beverage includes coffee, snacks, commercial services, juice, peanut butter and shortening and oil. The corporate segment includes both operating and non-operating elements such as financing and investing activities, goodwill amortization, employee benefit costs, charges related to restructuring, segment eliminations and other general corporate items. The segment eliminations adjust management reporting principles to accounting principles generally accepted in the United States of America and primarily affect the treatment of unconsolidated investees and income taxes, which are reflected in the business segments using applicable local statutory tax rates. Corporate assets primarily include cash, investment securities and goodwill.

Fabric and Beauty Health Food and Home Care Paper Care Care Beverage Corporate Total - ------------------------------------------------------------------------------------------------------------------------ NET SALES 2001 $ 11,660 $ 11,991 $ 7,257 $ 4,353 $ 4,139 $ (156) $ 39,244 2000 12,157 12,044 7,389 3,909 4,634 (182) 39,951 1999 11,415 12,190 7,376 2,876 4,655 (387) 38,125 - ------------------------------------------------------------------------------------------------------------------------ NET EARNINGS 2001 1,641 1,043 972 390 333 (1,457) 2,922 2000 1,450 1,069 894 335 364 (570) 3,542 1999 1,497 1,278 917 242 328 (499) 3,763 - ------------------------------------------------------------------------------------------------------------------------ BEFORE-TAX EARNINGS 2001 2,427 1,735 1,404 584 547 (2,081) 4,616 2000 2,318 1,817 1,393 540 566 (1,098) 5,536 1999 2,417 2,195 1,457 372 528 (1,131) 5,838 - ------------------------------------------------------------------------------------------------------------------------ DEPRECIATION AND AMORTIZATION 2001 328 673 183 159 146 782 2,271 2000 354 664 194 159 153 667 2,191 1999 293 638 198 107 149 763 2,148 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS 2001 5,533 8,629 3,371 2,290 2,479 12,085 34,387 2000 5,477 8,415 3,497 2,229 2,611 12,137 34,366 - ------------------------------------------------------------------------------------------------------------------------ CAPITAL EXPENDITURES 2001 516 1,307 261 231 235 (64) 2,486 2000 807 1,512 310 195 235 (41) 3,018 - ------------------------------------------------------------------------------------------------------------------------

The Company had net sales in the United States of $20,334, $20,038 and $18,314 for the years ended June 30, 2001, 2000 and 1999, respectively. Assets in the United States totaled $18,318 and $17,398 as of June 30, 2001 and 2000, respectively. The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates, accounted for 15%, 14% and 12% of consolidated net sales in 2001, 2000 and 1999, respectively. These sales occurred primarily in the United States. [Millions of dollars except per share amounts] 30 The Procter & Gamble Company and Subsidiaries 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13 QUARTERLY RESULTS (UNAUDITED)

Quarters Ended ----------------------------------------------- Total Sept. 30 Dec. 31 Mar. 31 June 30 Year - ------------------------------------------------------------------------------------------------------------------------------ Net Sales 2000-2001 $9,969 $10,182 $9,511 $9,582 $39,244 1999-2000 9,919 10,588 9,783 9,661 39,951 - ------------------------------------------------------------------------------------------------------------------------------ Operating Income 2000-2001 1,779 1,711 1,302 (56) 4,736 1999-2000 1,847 1,842 1,320 945 5,954 - ------------------------------------------------------------------------------------------------------------------------------ Net Earnings 2000-2001 1,155 1,194 893 (320) 2,922 1999-2000 1,147 1,126 753 516 3,542 - ------------------------------------------------------------------------------------------------------------------------------ Core Net Earnings(1) 2000-2001 1,240 1,314 1,006 837 4,397 1999-2000 1,267 1,263 923 777 4,230 - ------------------------------------------------------------------------------------------------------------------------------ Diluted Net Earnings Per Common Share 2000-2001 0.82 0.84 0.63 (0.23) 2.07 1999-2000 0.80 0.78 0.52 0.36 2.47 - ------------------------------------------------------------------------------------------------------------------------------ Diluted Core Net Earnings per Common Share(1) 2000-2001 0.88 0.93 0.71 0.60 3.12 1999-2000 0.88 0.88 0.64 0.55 2.95 - ------------------------------------------------------------------------------------------------------------------------------

(1)Amounts exclude restructuring costs. FINANCIAL SUMMARY

2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------------------------- Net Sales $39,244 $39,951 $38,125 $37,154 $35,764 Operating Income 4,736 5,954 6,253 6,055 5,488 Net Earnings 2,922 3,542 3,763 3,780 3,415 Core Net Earnings(2) 4,397 4,230 4,148 3,780 3,415 Net Earnings Margin 7.4% 8.9% 9.9% 10.2% 9.5% Core Net Earnings Margin(2) 11.2% 10.6% 10.9% 10.2% 9.5% Basic Net Earnings per Common Share 2.15 2.61 2.75 2.74 2.43 Diluted Net Earnings per Common Share 2.07 2.47 2.59 2.56 2.28 Diluted Core Net Earnings per Common Share(2) 3.12 2.95 2.85 2.56 2.28 Dividends per Common Share 1.40 1.28 1.14 1.01 .90 Research and Development Expense 1,769 1,899 1,726 1,546 1,469 Advertising Expense 3,193 3,793 3,639 3,801 3,574 Total Assets 34,387 34,366 32,192 31,042 27,598 Capital Expenditures 2,486 3,018 2,828 2,559 2,129 Long-Term Debt 9,792 9,012 6,265 5,774 4,159 Shareholders' Equity 12,010 12,287 12,058 12,236 12,046 - ---------------------------------------------------------------------------------------------------

(2) 2001, 2000 and 1999 amounts exclude restructuring costs. [Millions of dollars except per share amounts] 31 SHAREHOLDER INFORMATION IF... - - You need help with your account - - You need automated access to your account - - You are interested in our certificate safekeeping service - - You want to arrange for direct deposit of dividends - - A stock certificate is lost, stolen or destroyed CONTACT P&G...24 HOURS A DAY Visit our Web site at www.pg.com/investor E-mail us at shareholders.im@pg.com Call for financial information 1-800-764-7483 (1-513-945-9990 outside the U.S. and Canada) PERSON TO PERSON Shareholder Services representatives available Monday-Friday, 9-4 EST 1-800-742-6253 (1-513-983-3034 outside the U.S. and Canada) Automated service available after U.S. business hours OR WRITE The Procter & Gamble Company Shareholder Services Department P.O. Box 5572 Cincinnati, Ohio 45201-5572 GALLERIA You can order imprinted P&G merchandise from the P&G Galleria. Shop for umbrellas, business accessories and clothing online through www.pg.com in Try and Buy or call 1-800-969-4693 (1-513-651-1888 outside the U.S.). P&G ALUMNI NETWORK There's a new independent P&G Alumni Network to advance personal and professional interests of former P&G employees through networking opportunities and shared resources. Look for a web site in early September - www.pgalums.com. The site will have a worldwide alumni directory, job postings and communications tools. CORPORATE HEADQUARTERS The Procter & Gamble Company P.O. Box 599 Cincinnati, Ohio 45201-0599 TRANSFER AGENT/SHAREHOLDERS SERVICES The Procter & Gamble Company Shareholder Services Department P.O. Box 5572 Cincinnati, Ohio 45201-5572 REGISTRAR Chase Manhattan Trust Company, N.A. 255 East Fifth Street, Suite 2115 Cincinnati, Ohio 45202 EXCHANGE LISTING New York, Cincinnati, Amsterdam, Paris, Basle, Geneva, Lausanne, Zurich, Frankfurt, Brussels, Tokyo SHAREHOLDERS OF COMMON STOCK There were approximately 1,090,000 common stock shareowners, including shareholders of record, participants in the Shareholder Investment Program, participants in P&G stock ownership plans and beneficial owners with accounts at banks and brokerage firms, as of July 27, 2001. FORM 10-K Shareholders may obtain a copy of the Company's 2001 report to the Securities and Exchange Commission on Form 10-K by going to P&G's investor Web site at www.pg.com/investor or by calling us at 1-800-764-7483. This information is also available at no charge by sending a request to Shareholder Services at the address listed above. SHAREHOLDERS' MEETING The next annual meeting of shareholders will be held on Tuesday, October 9, 2001. A full transcript of the meeting will be available from Linda D. Rohrer, Assistant Secretary. Ms. Rohrer can be reached at One P&G Plaza, Cincinnati, Ohio 45202-3315. COMMON STOCK PRICE RANGE AND DIVIDENDS

Price Range ---------------------------------------------------------- 2000 - 2001 1999-2000 Dividends ------------------------ ------------------------ --------------------------- Quarter ended HIGH LOW High Low 2000 - 2001 1999 - 2000 September 30 $ 67.81 $ 54.19 $104.13 $ 84.56 $ .35 $ .32 December 31 79.31 66.56 115.63 92.00 .35 .32 March 31 79.19 59.25 118.38 52.75 .35 .32 June 30 68.30 55.96 72.75 53.25 .35 .32

EX-21 11 l90238aex21.txt EXHIBIT 21 1 EXHIBIT (21) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Subsidiaries of the Registrant ------------------------------ Alejandro Llauro E Hijos S.A.I.C. [Argentina] Anjali (HK) Corporation [Hong Kong] Anjali Corporation [Delaware] AnPro Company [Ohio] Arbora & Ausonia, S.L. [Spain] Arbora S.A. [Spain] B&C International Co. (BVI) Ltd. Bess Hygiene AG [Switzerland] Beta BT [Hungary] Betrix Cosmetic GmbH [Germany] Blendax GmbH [Germany] Blendax Unterstutzungskasse GmbH [Germany] Buscher GmbH [Germany] Carlos BT [Hungary] Celtic Insurance Company Limited [Bermuda] Colfax Laboratories (India) Ltd. [India] Compania Procter & Gamble Mexico, S. de R.L. de C.V. [Mexico] Compania Quimica S.A. [Argentina] Comunivers sa [Morocco] Corpydes S.A. de C.V. [Mexico] Crest Toothpaste Inc. [Canada] Culinary Sol, Inc. [Ohio] Detergent Products A.G. [Switzerland] Eczacibasi Yatirim Holding Ortakligi A.S. [Turkey] Elysee BT [Hungary] Eurocos Cosmetic GmbH [Germany] Eurocos Cosmetic Warenvertrieb GmbH [Austria] Eurocos Ltd [U.K.] EURO-Juice G.m.b.H. Import und Vertrieb [Germany] European Beauty Products (U.K.) Limited [U.K.] Fameccanica Data S.p.A. [Italy] Fater S.p.A. [Italy] Ferraris BT [Hungary] Food Ingredients Technology Company (FITCO) [Alabama] Fountain Square Music Publishing Co., Inc. [Ohio] FPG Oleochemicals Sdn. Bhd. [Malaysia] Frank BT [Hungary] Gala Cosmetics International Limited [U.K.] Gala of London Limited [U.K.] Giorgio Beverly Hills, Inc. [Delaware] Girl Cosmetics Ltd. (U.K.) Global Business Services de Costa Rica Limitada [Costa Rica] Herve Leger Parfums GmbH [Germany] Humatro Corporation [Delaware] [ Hyginett KFT [Hungary] Iams (Deutschland) Vertriebs GmbH [Germany] Iams Argentina S.R.L. [Argentina] Iams Australia/New Zealand Pty. Ltd. [Australia] Iams Canada Inc. [Canada] [ ] Brackets indicate state or country of incorporation and do not form part of corporate name 2 EXHIBIT (21) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Subsidiaries of the Registrant ------------------------------ Iams Chile Limitada [Chile] Iams Companion Animal Research Institute (ICARI) [Ohio] Iams do Brasil [Brazil] [ Iams Europe B.V. [Netherlands] Iams France EURL [France] Iams Global Inc. [Ohio] Iams Japan K.K. [Japan] Iams Mexico, S. de R.L. de C.V. [Mexico] Iams Pet Food GmbH & Co. KG [Germany] Iams Pet Food International B.V. [Netherlands] Iams S. Africa Pty. [S. Africa] Iams Servicios, S. de R.L. de C.V. [Mexico} Iams U.K. Limited [U.K.] Industria de Concentrados Crush Limitada [Uruguay] Industrial Catenation Services (Pty.) Ltd. [S. Africa] Inmobiliaria Procter & Gamble de Venezuela, S.C.S. [Venezuela] Inmobiliaria Procter & Gamble de Venezuela, S.R.L. [Venezuela] Inversiones 1667, S.A. [Venezuela] Inversiones Industrias Mammi, C.A. [Venezuela] Inversiones PGV, S.R.L. [Venezuela] Inversiones PGV-1, S.C.S. [Venezuela] Inversiones Procter & Gamble de Venezuela, C.A. [Venezuela] Juvian Fabric Care Corporation [Ohio] Kangra Valley Enterprises Ltd. [Delaware] Karm, S.A. [Liechtenstein] Komal Manufacturing Chemists Ltd. [India] Laboratoire Lachartre S.N.C. [France] Liberty Street Music Publishing Company, Inc. [Ohio] Loreto y Pena Pobre, S.A. de C.V. [Mexico] Malabar (HK) Corporation Limited [Hong Kong] [ Marcvenca Inversiones, C.A. [Venezuela] Max Factor & Co. (U.K.) Ltd. [Bermuda] Max Factor & Co. [Delaware] Max Factor K.K. [Japan] Max Factor Limited [U.K.] Midway Holdings Ltd. [Cayman Islands] Midway Holdings Ltd. [Cayman Islands] Millstone Coffee, Inc. [Washington] Modern Industries Company - Dammam [Saudi Arabia] Modern Industries Company - Jeddah [Saudi Arabia] Modern Products Company - Jeddah [Saudi Arabia] Moroccan Modern Industries [Morocco] N.S. Holding Company [Canada] Neoblanc-Produtos de Higiene e Limpeza Lda. [Portugal] Novomoskovskbytkhim [Russia] Noxell (Barbados) Limited [Barbados] Noxell (Panama) S.A. [Panama] Noxell (Thailand) Limited [Thailand] Noxell Corporation [Maryland] [ ] Brackets indicate state or country of incorporation and do not form part of corporate name 3 EXHIBIT (21) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Subsidiaries of the Registrant ------------------------------ Olay Company, Inc. [Delaware] Olga BT [Hungary] OOO Procter & Gamble Services Company [Russia] P&G C&CA, Inc. [Ohio] P&G Consultoria E Servicos Ltda. [Brazil] P&G do Brasil Comercial Ltda. [Brazil] P&G Holding B.V. [Netherlands] P&G Indochina [Vietnam] P&G Industrial Peru S.R.L. [Peru] P&G K.K. [Japan] P&G Northeast Asia Pte. Ltd. [Singapore] P&G Prestige Beaute GmbH [Germany] P&G Prestige Beaute SARL [Switzerland] P&G Prestige Food Products SARL [Switzerland] P. T. Procter & Gamble Indonesia TbK [Indonesia] P.T. Procter & Gamble Home Products Indonesia [Indonesia] Papierhygiene GmbH [Germany] PFX Pet Supply, Inc. [Ohio] PFX Real Estate Company [Canada PGV Chile S.A. [Chile] PGV-1 Investment, Ltd. [Cayman Islands] [ PGV-2 Investment, Ltd. [Cayman Islands] PNX-Distributing, Inc. [Ohio] PNX-Real Estate, Inc. [Ohio] Procter & Gamble (Chengdu) Ltd. [PRC] Procter & Gamble (China) Ltd. [PRC] Procter & Gamble (Cosmetics and Fragrances) Limited [U.K.] Procter & Gamble (East Africa) Limited [Kenya] Procter & Gamble (Egypt) Industrial and Commercial Company [Egypt] Procter & Gamble (Egypt) Manufacturing Company [Egypt] (Partnership) Procter & Gamble (Enterprise Fund) Limited [U.K.] Procter & Gamble (Guangzhou) Ltd. [PRC] Procter & Gamble (Health & Beauty Care) Limited [U.K.] Procter & Gamble (Ireland) Limited [Ireland] Procter & Gamble (Malaysia) Sdn. Berhad [Malaysia] Procter & Gamble (Manufacturing) Ireland Limited [Ireland] Procter & Gamble (NBD) Pty. Ltd. [Australia] Procter & Gamble (Singapore) Pte. Ltd. [Singapore] Procter & Gamble (Vietnam) Ltd. [Vietnam] Procter & Gamble (Yemen) Ltd [Yemen] Procter & Gamble A/S [Norway] Procter & Gamble AG [Switzerland] Procter & Gamble Amiens S.N.C. [France] Procter & Gamble Asia Pacific Ltd. [Hong Kong] Procter & Gamble Asia Pte. Ltd. [Singapore] Procter & Gamble Australia Proprietary Limited [Australia] Procter & Gamble Austria GmbH [Austria] Procter & Gamble Bangladesh Private Ltd. (Bangladesh) Procter & Gamble Beteiligungs GmbH [Germany] [ ] Brackets indicate state or country of incorporation and do not form part of corporate name 4 EXHIBIT (21) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Subsidiaries of the Registrant ------------------------------ Procter & Gamble Beverages GmbH [Germany] Procter & Gamble Blois S.A.S. [France] Procter & Gamble Bolivia S.R.L. [Bolivia] Procter & Gamble Bulgaria EOOD [Bulgaria] Procter & Gamble Business Services Canada Company [Canada] Procter & Gamble Central & Eastern Europe GmbH [Germany] Procter & Gamble Chile, Inc. [Ohio] Procter & Gamble Colombia Ltda. [Colombia] Procter & Gamble Commercial de Cuba, S.A. [Cuba] Procter & Gamble D.J.L. Sarajevo [Bosnia] Procter & Gamble d.o.o. za trgovinu [Croatia] Procter & Gamble Danmark AS [Denmark] Procter & Gamble de Panama, S.A. [Panama] Procter & Gamble de Venezuela, C.A. [Venezuela] Procter & Gamble Detergent (Beijing) Ltd. [PRC] Procter & Gamble Detergent (Guangzhou) Ltd. [PRC] Procter & Gamble Development Company A.G. [Switzerland] Procter & Gamble Distributing Limited [U.K.] Procter & Gamble Distribution Company (Europe) BVBA [Belgium] Procter & Gamble do Brasil & Cia (Partnership) [Brazil] Procter & Gamble do Brasil S/A [Brazil] Procter & Gamble do Brazil, Inc. [Delaware] Procter & Gamble do Nordeste S/A [Brazil] Procter & Gamble Eastern Europe, Inc. [Ohio] Procter & Gamble Ecuador Compania Anonima [Ecuador] Procter & Gamble Egypt [Egypt] Procter & Gamble Espana S.A. [Spain] Procter & Gamble Eurocor N.V. [Belgium] Procter & Gamble Europe N.V. [Belgium] Procter & Gamble Europe SA [Switzerland] Procter & Gamble European Supply Company BVBA [Belgium] Procter & Gamble European Technical Center BVBA [Belgium] Procter & Gamble Export Operations SARL [Switzerland] Procter & Gamble Far East, Inc. [Ohio] Procter & Gamble Financial Services [Ireland] Procter & Gamble Finland OY [Finland] Procter & Gamble France S.N.C. [France] Procter & Gamble FSC (Barbados) Inc. [Barbados] Procter & Gamble Ghana, Ltd. [Ghana] Procter & Gamble GmbH [Germany] Procter & Gamble Health and Beauty Care-Europe Limited [U.K.] Procter & Gamble Health Products, Inc. [Delaware] Procter & Gamble Hellas A.E. (Chemical Industries) [Greece] Procter & Gamble Holding Denmark ApS [Denmark] Procter & Gamble Holding GmbH [Germany] Procter & Gamble Holding S.A. [Argentina] Procter & Gamble Holdings Singapore Pte. Ltd. [Singapore] Procter & Gamble Home Products Limited [India] Procter & Gamble Hong Kong Limited [Hong Kong] [ ] Brackets indicate state or country of incorporation and do not form part of corporate name 5 EXHIBIT (21) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Subsidiaries of the Registrant ------------------------------ Procter & Gamble Hungary Wholesale Trading Partnership (KKT) [Hungary] Procter & Gamble Hygien OY [Finland] Procter & Gamble Hygiene & Health Care Limited [India] Procter & Gamble Inc. [Ontario, Canada] Procter & Gamble India Holdings, Inc. [Ohio] Procter & Gamble Industrial e Comercial Ltda.[Brazil] Procter & Gamble Interamericas de Costa Rica Ltda. [Costa Rica] Procter & Gamble Interamericas de El Salvador Ltda. [El Savador] Procter & Gamble Interamericas de Guatemala Ltda. [Guatemala] Procter & Gamble Interamericas de Honduras Ltda. [Honduras] Procter & Gamble Interamericas de Nicaragua, S.A. [Nicaragua] Procter & Gamble Interamericas, LLC [Delaware] Procter & Gamble International Operations Pte. Ltd. [Singapore] Procter & Gamble International Operations SA [Switzerland] Procter & Gamble Investment Subsidiary Inc. [Canada] Procter & Gamble Investments U.K. Limited [U.K.] Procter & Gamble Italia, S.p.A. [Italy] Procter & Gamble Italy s.r.l. [Italy] Procter & Gamble Jamaica Ltd. [Jamaica] Procter & Gamble Kazakhstan [Kazakhstan] Procter & Gamble Korea IE, Co. [Korea] Procter & Gamble Korea Inc. [Korea] Procter & Gamble Korea S&D Co. [Korea] Procter & Gamble Laundry & Cleaning Products Limited [U.K.] Procter & Gamble Limited [U.K.] Procter & Gamble Limited Liability Company [Uzbekistan] Procter & Gamble Lonkey (Guangzhou) Ltd. [PRC] Procter & Gamble Lonkey (Shaoguan) Ltd. [PRC] Procter & Gamble Luxembourg Finance Sarl [Luxembourg] Procter & Gamble Luxembourg Investment Sarl [Luxembourg] Procter & Gamble Manufactura, S. de R.L. de C.V. [Mexico] Procter & Gamble Manufacturing (Thailand) Limited [Thailand] Procter & Gamble Manufacturing (Tianjin) Co. Ltd. [PRC] Procter & Gamble Manufacturing Belgium N.V. [Belgium] Procter & Gamble Manufacturing GmbH [Germany] Procter & Gamble Manufacturing Istra [Russia] Procter & Gamble Manufacturing Romania SRL [Romania] Procter & Gamble Marketing & Commercial Activities d.o.o. [Slovenia] Procter & Gamble Marketing and Services D.O. [Yugoslavia ] Procter & Gamble Marketing Latvia Ltd. [Latvia] Procter & Gamble Marketing Ltd. Skopje [Macedonia] Procter & Gamble Marketing Romania SRL (Romania) Procter & Gamble Maroc [Morocco] Procter & Gamble Mataro, S.L. [Spain] Procter & Gamble Mexico Holdings, B.V. [Netherlands] Procter & Gamble Moldova SRL [Moldova] Procter & Gamble Nederland B.V. [Netherlands] Procter & Gamble Nigeria Limited [Nigeria] Procter & Gamble Nordic Inc. [Ohio] [ ] Brackets indicate state or country of incorporation and do not form part of corporate name 6 EXHIBIT (21) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Subsidiaries of the Registrant ------------------------------ Procter & Gamble Norge AS [Norway] Procter & Gamble NPD, Inc. [Ohio] Procter & Gamble O.O.O. [Russia] Procter & Gamble Operations Polska - Spolka Akcyjna [Poland] Procter & Gamble Oral Care (Guangzhou) [China] Procter & Gamble Orleans S.A.S. [France] Procter & Gamble Pakistan (Private) Limited [Pakistan] Procter & Gamble Paper (Guangzhou) Ltd. [PRC] Procter & Gamble Paper (Suzhou) Co. Ltd. [PRC] Procter & Gamble Personal Cleansing (Tianjin) Ltd. [PRC] Procter & Gamble Peru S.R.L. [Peru] Procter & Gamble Pharmaceuticals Canada, Inc. [Canada] Procter & Gamble Pharmaceuticals France [France] Procter & Gamble Pharmaceuticals Longjumeau S.A.S. [France] Procter & Gamble Pharmaceuticals N.V. [Belgium] Procter & Gamble Pharmaceuticals Nederland B.V. [Netherlands] Procter & Gamble Pharmaceuticals Puerto Rico, Inc. [Delaware] Procter & Gamble Pharmaceuticals SARL [Switzerland] Procter & Gamble Pharmaceuticals U.K. Limited [U.K.] Procter & Gamble Pharmaceuticals, Inc. [Ohio] Procter & Gamble Pharmaceuticals-Germany GmbH [Germany] Procter & Gamble Philippines, Inc. [Philippines] Procter & Gamble Platform Inc. [Ohio Procter & Gamble Polska Sp. zo.o [Poland] Procter & Gamble Porto, Lda. [Portugal] Procter & Gamble Portugal S.A. (Portugal) Procter & Gamble Product Supply (U.K.) Limited [U.K.] Procter & Gamble Productions, Inc. [Ohio] Procter & Gamble Quimica Ltda. [Brazil] Procter & Gamble reflect.com, Inc. [Delaware] [ Procter & Gamble RHD, Inc. [Ohio] Procter & Gamble S.A. [Chile] Procter & Gamble S.r.l. [Italy] Procter & Gamble Service GmbH [Germany] Procter & Gamble Services (Switzerland) SA [Switzerland] Procter & Gamble Services Company N.V. [Belgium] Procter & Gamble Services France S.A.S. [France] Procter & Gamble Servicios Latinoamerica, S.C.A. [Venezuela] Procter & Gamble Servicios Latinoamerica-1, S.R.L. [Venezuela] Procter & Gamble Singapore Investment Pte. Ltd. [Singapore] Procter & Gamble South Africa Proprietary Limited [South Africa] Procter & Gamble Sri Lanka Private Ltd. [Sri Lanka] Procter & Gamble Sverige AB [Sweden] Procter & Gamble Switzerland SARL [Switzerland] Procter & Gamble Taiwan Limited [Taiwan] Procter & Gamble Technical Centers Limited [U.K.] Procter & Gamble Technology (Beijing) Co., Ltd. [PRC] Procter & Gamble Trading (Thailand) Limited [Thailand] [ ] Brackets indicate state or country of incorporation and do not form part of corporate name 7 EXHIBIT (21) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Subsidiaries of the Registrant ------------------------------ Procter & Gamble Tuketim Mallari Sanayii A.S. [Turkey] Procter & Gamble U.K. [U.K.] (Partnership) Procter & Gamble Ukraine (Ukraine) Procter & Gamble, Spol. s r.o. (Ltd.) [Slovak Republic] Procter & Gamble-Hutchison Ltd. [Hong Kong] Procter & Gamble-Rakona, A.S. [Czech Republic] Productos Sanitarios S.A. [Argentina] Progam Realty & Development Corporation [Philippines] Progasud S.p.A. [Italy] Promotora de Bienes y Valores, S. de R.L. de C.V. [Mexico] PUR Water Purification Products, Inc. [Ohio] reflect.com corporation [Delaware reflect.com llc [Delaware] Richardson-Vicks do Brasil Quimica e Farmaceutica S.A. [Brazil] Richardson-Vicks Real Estate Inc. [Ohio] Richvest B.V. [Netherlands] Riverfront Music Publishing Co., Inc. [Ohio] Rohm Pharma GmbH Wien [Austria] Rosemount Corporation [Delaware] R-V Chemicals Holdings Ltd. [Ireland] S.C. Detergenti S.A. [Romania] Sacoma, S.A. [Argentina] SCS Sales + Cosmetic Service GmbH [Germany] Shulton (Great Britain) Ltd. [U.K.] Shulton (New Zealand) Limited [New Zealand] Shulton S.A. [Guatemala] Shulton, Inc. [New Jersey] Societe Immobiliere Les Colombettes, S.A. [Switzerland] Spin Brush Company [Ohio] SsangYong Paper Co. Ltd. [Korea] Sundor Brands Inc. [Florida] Sundor Brands Limited [U.K.] Sundor Canada Inc. [Delaware] Surfac S. R. Ltda. [Peru] Sycamore Productions, Inc. [Ohio] Tambrands (Continental) Ltd. [U.K.] Tambrands de Venezuela, C.A. [Venezuela] Tambrands Dosmil, S.A. de C.V. [Mexico] Tambrands France [France] Tambrands Inc. [Delaware] Tambrands Industria e Comercia Ltda. [Brazil] Tambrands International Trading (Shanghai) Co., Ltd. [PRC] Tambrands Investments Ltd. [U.K.] Tambrands Ireland Limited [Ireland] Tambrands Limited [U.K.] Tambrands Ukraine Ltd. [Ukraine] Temple Trees Investments [India] Tempo AG [Switzerland] The Dover Wipes Company [Ohio] [ ] Brackets indicate state or country of incorporation and do not form part of corporate name 8 EXHIBIT (21) THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES --------------------------------------------- Subsidiaries of the Registrant ------------------------------ The Folger Coffee Company [Ohio] The Iams Company [Ohio] The Malabar Company [Delaware] The Procter & Gamble Commercial Company [Ohio] The Procter & Gamble Company of South Africa (Proprietary) Limited [S. Africa] The Procter & Gamble Distributing Company [Ohio] The Procter & Gamble Global Finance Corporation [Ohio] The Procter & Gamble iVentures Company [Ohio] The Procter & Gamble Manufacturing Company [Ohio] The Procter & Gamble Manufacturing Company of Lebanon, S.A.L.[Lebanon] The Procter & Gamble Paper Products Company [Ohio] Thomas Hedley & Co. Limited [U.K.] Topsy S.A. [Argentina] TRAPOFA Leonhard-Speditions GmbH I.L. [Germany] US/KK-Investments, Inc. [Ohio] Verwaltlungsgesellschaft Iams Pet Food mbH [Germany] Vick International Corporation [Delaware] Vick Nigeria Limited [Nigeria] Vidal Sassoon (Shanghai) Academy [PRC] Vidal Sassoon Co. [Ohio [ ] Brackets indicate state or country of incorporation and do not form part of corporate name EX-23 12 l90238aex23.txt EXHIBIT 23 1 EXHIBIT (23) Independent Auditors' Consent 2 DELOITTE & TOUCHE LLP 250 East Fifth Street Post Office Box 5340 Cincinnati, Ohio 45202 Telephone: (513) 784-7100 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the following documents of our report dated August 7, 2001, incorporated by reference in this Annual Report on Form 10-K of The Procter & Gamble Company for the year ended June 30, 2001. 1. Amendment No. 2, Post-Effective Amendment No. 2 to Registration Statement No. 33-26514 on Form S-8 For The Procter & Gamble 1983 Stock Plan; 2. Amendment No. 1 on Form S-8 to Registration Statement No. 33-31855 on Form S-4 (now S-8) for the 1982 Noxell Employees' Stock Option Plan and the 1984 Noxell Employees' Stock Option Plan; 3. Amendment No. 1, Post Effective Amendment No. 1 to Registration Statement No. 33-49289 on Form S-8 for The Procter & Gamble 1992 Stock Plan; 4. Registration Statement No. 33-47656 on Form S-8 for The Procter & Gamble International Stock Ownership Plan; 5. Registration Statement No. 33-50273 on Form S-8 for The Procter & Gamble Commercial Company Employees' Savings Plan; 6. Registration Statement No. 33-51469 on Form S-8 for The Procter & Gamble 1993 Non-Employee Directors' Stock Plan; 7. Registration Statement No. 333-05715 on Form S-8 for The Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan; 8. Amendment No. 2, Post-Effective Amendment No. 2 to Registration Statement No. 33-59257 on Form S-3 for The Procter & Gamble Shareholder Investment Program; 9. Registration Statement No. 333-14381 on Form S-8 for Profit Sharing Retirement Plan of The Procter & Gamble Commercial Company; 3 10. Registration Statement No. 333-14389 on Form S-8 for Procter & Gamble Pharmaceuticals Savings Plan; 11. Registration Statement No. 333-14391 on Form S-8 for Richardson-Vicks Savings Plan; 12. Registration Statement No. 333-14397 on Form S-8 for Procter & Gamble Subsidiaries Savings Plan; 13. Registration Statement No. 333-14395 on Form S-8 for Procter & Gamble Subsidiaries Savings and Investment Plan; 14. Registration Statement No. 333-21783 on Form S-8 for The Procter & Gamble 1992 Stock Plan (Belgian Version); 15. Registration Statement No. 333-37905 on Form S-8 for The Procter & Gamble Future Shares Plan; 16. Registration Statement No. 333-51213 on Form S-8 for Group Profit Sharing, Incentive, and Employer Contribution Plan (France); 17. Registration Statement No. 333-51219 on Form S-8 for Procter & Gamble Ireland Employees Share Ownership Plan; 18. Registration Statement No. 333-51221 on Form S-8 for Employee Stock Purchase Plan (Japan); 19. Registration Statement No. 333-51223 on Form S-8 for Savings and Thrift Plan (Saudi Arabia); 20. Registration Statement No. 333-51225 on Form S-8 for The Procter & Gamble UK Matched Savings Share Purchase Plan; 21. Registration Statement No. 333-87133 on Form S-3 for The Procter & Gamble Company Debt Securities and Warrants; 22. Registration Statement No. 333-34606 on Form S-8 for The Procter & Gamble Future Shares Plan; 23. Registration Statement No. 333-40264 on Form S-8 for Savings and Thrift Plan Saudi Arabia; 24. Registration Statement No. 333-44034 on Form S-8 for The Procter & Gamble International Stock Ownership Plan; 25. Registration Statement No. 333-47132 on Form S-8 for Employee Stock Purchase Plan (Japan); 4 26. Registration Statement No. 333-47136 on Form S-8 for The Procter & Gamble UK Matched Savings Share Purchase Plan; 27. Amendment No. 1, Post-Effective Amendment No. 1 to Registration Statement No. 333-47136 on Form S-8 for The Procter & Gamble UK Matched Savings Share Purchase Plan; and 28. Registration Statement No. 333-49764 on Form S-3 for The Procter & Gamble U.K. Share Investment Scheme. /s/ Deloitte & Touche LLP - ------------------------- Deloitte & Touche LLP September 12, 2001 EX-99.1 13 l90238aex99-1.txt EXHIBIT 99.1 1 EXHIBIT (99-1) Directors and Officers Liability Policy 2 Exhibit 99.1 CODA Premier(SM) DIRECTORS AND OFFICERS LIABILITY Directors and Officers Liability Insurance Policy Issued by CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. This is a three-year policy with an automatic extension provision Please read this policy carefully. This is a claims first made policy. Defense costs are included in the limit of liability. Words and phrases that appear below in all capital letters have the special meanings set forth in Clause 2 (Definitions). This POLICY shall constitute the entire contract between the INSUREDS, the COMPANY, and the INSURER. COMPANY THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY POLICY No. PG-106C PRODUCER H & H PARK INTERNATIONAL Countersigned at Hamilton Bermuda on the 6th of JULY, 2001. /s/ Mark Herman /s/ Jonathan Evans President Authorised Representative 3 DECLARATIONS Policy No: PG-106C Item I COMPANY: THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY Principal Address: ONE PROCTER & GAMBLE PLAZA CINCINNATI, OHIO 45202 Item II POLICY PERIOD: From MARCH 15,1987 to JUNE 30, 2004 12:01 a.m. Standard Time at the address of the Company stated above. Item III LIMIT OF LIABILITY: $25,000,000 Aggregate LIMIT OF LIABILITY for all LOSS paid on behalf of all INSUREDS arising from all CLAIMS first made during each POLICY YEAR. Item IV PREMIUM: At inception of this POLICY YEAR: $325,000 (prepaid total for three years) 6/30/01-02 Year 1 $325,000 6/30/02-03 Year 2 $345,000 DEPOSIT PREMIUM 6/30/03-04 Year 3 $350,000 DEPOSIT PREMIUM At each anniversary thereafter: Subject to adjustment on each anniversary date in accordance with Clause 7 (Automatic Extension) of this POLICY item V NOTICE TO COMPANY: Any notice to the COMPANY or, except in accordance with Clause 17 (Representation) of this POLICY, to the INSUREDS, shall be given or made to the individual listed above, if any, or otherwise to the individual designated in the APPLICATION, if any, or otherwise to the signer of the APPLICATION, and shall be given or made in accordance with Clause 16 (Notice) of this POLICY. Item VI NOTICE TO INSURER: Any notice to be given or payment to be made to the INSURER under this POLICY shall be given or made to CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD., The ACE Building, 30 Woodbourne Avenue, Hamilton HM 08, Bermuda, Fax 441-295-5221, and shall be given or made in accordance with Clause 16 (Notice) of this POLICY. Endorsements 19 to 24 are made part of this POLICY at Policy Issuance. ii 4 TABLE OF CONTENTS Clause Page 1. Insuring Clause .................................................. 1 2. Definitions ...................................................... 1 3. Exclusions ........................................................3 4. Appeals ...........................................................5 5. Arbitration .......................................................5 6. Assistance and Cooperation ........................................7 7. Automatic Extension ...............................................8 8. Cancellation ......................................................8 9. Changes and Assignments ...........................................10 10. Advancement of DEFENSE COSTS ......................................10 11. Currency ..........................................................10 12. Headings ..........................................................10 13. INSUREDS' Reporting Duties ........................................10 14. LOSS Provisions ...................................................11 15. Other Insurance ...................................................11 16. Notice ............................................................11 17. Representation ....................................................11 18. Severability ......................................................12 19. Spousal Liability .................................................12 20. Subrogation .......................................................12 21. Acquisition, Creation or Disposition of a Subsidiary ..............13 22. Bankruptcy ........................................................13 iii 5 DIRECTORS AND OFFICERS LIABILITY INSURANCE In consideration of the payment of the premium and in reliance on all statements made and information furnished by the COMPANY to the INSURER in the APPLICATION, which is hereby made a part hereof, and subject to the foregoing Declarations and to all other terms of this POLICY, the COMPANY, the INSUREDS, and the INSURER agree as follows: 1. INSURING CLAUSE The INSURER shall pay on behalf of the INSUREDS or any of them, any and all LOSS that the INSUREDS shall become legally obligated to pay by reason of any CLAIM or CLAIMS first made against the INSUREDS or any of them during the POLICY PERIOD, for any WRONGFUL ACTS that are actually or allegedly caused, committed, or attempted prior to the end of the POLICY PERIOD by the INSUREDS, not exceeding the LIMIT OF LIABILITY. 2. DEFINITIONS (a) "APPLICATION" shall mean the signed, written application for this POLICY and for any policy issued by the INSURER of which this POLICY is a direct or indirect renewal or replacement, including the schedules thereto and all supplementary information submitted in connection therewith, and all underwriting data submitted in connection with the automatic extension of this POLICY, all of which materials shall be deemed attached hereto, as if physically attached hereto, and incorporated herein. (b) "CLAIM" shall mean: (1) any demand or any civil or criminal judicial, administrative, regulatory or arbitration proceeding or investigation against any INSURED for a WRONGFUL ACT, including any appeal therefrom; or (2) written notice to the INSURER by the INSUREDS and/or the COMPANY during the POLICY PERIOD describing circumstances that may reasonably be expected to give rise to a CLAIM described in subpart (b)(1) above being made against the INSUREDS. Multiple demands, suits or proceedings arising out of the same WRONGFUL ACT shall be deemed to be a single CLAIM, which shall be treated as a CLAIM first made during the POLICY YEAR in which the first of such multiple demands, suits or proceedings is made against any INSURED or in which notice of circumstances relating thereto is first given in accordance with subpart (b) of Clause 14 (Loss Provisions) below, whichever occurs first. (c) "COMPANY' shall mean: (1) the company shown in Item I of the Declarations; (2) any company that prior to the starting date of the POLICY PERIOD merged into or consolidated with the company shown in Item I of the Declarations and was not the surviving entity; (3) any SUBSIDIARY of either such company; 1 6 (4) if covered in accordance with subpart (a) of Clause 21 (Acquisition, Creation or Disposition of a Subsidiary) below, any other subsidiary; (5) any foundation, charitable trust or political action committee controlled by one or more organizations described in (1) through (4) above; and (6) any organization described in (1) through (5) above as a debtor in possession under United States bankruptcy law or an equivalent status under the law of any other country (d) "DEFENSE COSTS" shall mean that portion of LOSS consisting of reasonable and necessary costs, charges, fees (including but not limited to attorneys' fees and experts' fees) and expenses incurred in the defense or investigation of a CLAIM and the premium for appeal, attachment or similar bonds, but shall not include wages, salaries, fees, benefits or office expenses of INSUREDS or employees of the COMPANY. (e) "INSUREDS" shall mean one or more of the following: (1) all persons who were, now are, or shall be duly elected or appointed directors, trustees, officers, MANAGERS, in-house general counsel, comptroller or risk manager of the COMPANY, or with respect to any COMPANY chartered outside the United States, the functional equivalent of any such executive; (2) all other persons not described in (1) above who were, now are, or shall be full-time or part-time employees of the COMPANY, provided coverage for such other persons shall apply only while the CLAIM against such other person is also made against a person described in (1) above; (3) all persons who were, now are, or shall be serving as directors, officers, trustees, governors, partners or the equivalent thereof for any NON-PROFIT OUTSIDE ENTITY if: (i) such activity is part of their duties regularly assigned by the COMPANY, or (ii) they are a member of a class of persons so directed to serve by the COMPANY; or (4) the estates, heirs, legal representatives or assigns of deceased INSUREDS and the legal representatives or assigns of INSUREDS in the event of their incompetency, insolvency or bankruptcy. (f) "INSURER" shall mean Corporate Officers & Directors Assurance, Ltd., Hamilton, Bermuda. (g) "LIMIT OF LIABILITY" shall mean the amount described in Item III of the Declarations. Regardless of the time of payment of LOSS by the INSURER, the LIMIT OF LIABILITY as stated in Item III of the Declarations shall be the maximum liability of the INSURER for all LOSS arising from all CLAIMS first made during each POLICY YEAR. DEFENSE COSTS shall be part of and not in addition to the LIMIT OF LIABILITY as stated in Item III of the Declarations, and payment by the INSURER of DEFENSE COSTS shall reduce the LIMIT OF LIABILITY. 2 7 (h) "LOSS" shall mean any and all amounts that the INSUREDS are legally obligated to pay by reason of a CLAIM made against the INSUREDS for any WRONGFUL ACT, and shall include but not be limited to compensatory, exemplary, punitive and multiple damages, judgments, settlements, pre-judgment and post-judgment interest, and DEFENSE COSTS, providing always, however, LOSS shall not include taxes, fines or penalties imposed by law, or matters that may be deemed uninsurable under the law pursuant to which this POLICY shall be construed. ("Fines or penalties" do not include punitive, exemplary, or multiple damages). (i) "MANAGERS" shall mean any one or more natural persons who were, now are or shall become a manager, member of the board of managers or equivalent executive of a COMPANY that is a limited liability company. (j) "NON-PROFIT OUTSIDE ENTITY" shall mean any non-profit corporation, community chest, fund or foundation that is exempt from U.S. federal income tax as an organization described in Section 501 (c)(3) of the Internal Revenue Code of 1986, as amended. (k) "POLICY" shall mean this insurance policy, including the APPLICATION, the Declarations, and any endorsements hereto issued by the INSURER. (l) "POLICY PERIOD" shall mean the period of time stated in Item II of the Declarations, as may be automatically extended in accordance with Clause 7 (Automatic Extension) below. If this POLICY is cancelled in accordance with subpart (b) of Clause 8 (Cancellation) below, the POLICY PERIOD shall end upon the effective date of such cancellation. (m) "POLICY YEAR" shall mean a period of one year, within the POLICY PERIOD, commencing each year on the day and hour first named in Item II of the Declarations, or if the time between the inception date, or any anniversary date and the termination date of this POLICY is less than one year, then such lesser period. (n) "SUBSIDIARY" shall mean any corporation or limited liability company in which more than 50% of the outstanding securities representing the present right to vote for election of directors or MANAGERS is owned, directly or indirectly, in any combination, by the COMPANY and/or by one or more of its SUBSIDIARIES, at the starting date of the POLICY PERIOD. (o) "WRONGFUL ACT" shall mean any actual or alleged error, misstatement, misleading statement or act, omission, neglect, or breach of duty by the INSUREDS while acting, individually or collectively, in their capacities as INSUREDS, or any other matter claimed against them by reason of their serving in such capacities. All such errors, misstatements, misleading statements or acts, omissions, neglects or breaches of duty actually or allegedly caused, committed, or attempted by or claimed against one or more of the INSUREDS arising out of or relating to the same or series of related facts, circumstances, situations, transactions or events shall be deemed to be a single WRONGFUL ACT. 3. EXCLUSIONS The INSURER shall not be liable to make any payment for LOSS in connection with that portion of any CLAIM made against the INSUREDS: 3 8 (a) for which the COMPANY or, with respect to INSUREDS described in Clause 2(e)(3) above, the NON-PROFIT OUTSIDE ENTITY actually pays or indemnifies or is required or permitted to pay on behalf of or to indemnify the INSUREDS pursuant to the charter or other similar formative document or by-laws or written agreements of the COMPANY or the NON-PROFIT OUTSIDE ENTITY duly effective under applicable law, that determines and defines such rights of indemnity; provided, however, this exclusion shall not apply if: (1) the COMPANY and the NON-PROFIT OUTSIDE ENTITY refuse to indemnify or advance DEFENSE COSTS or other LOSS as required or permitted, or are financially unable to indemnify; and (2) the INSUREDS comply with Clause 20 (Subrogation) below; (b) based upon or attributable to the INSUREDS having gained any personal profit to which they were not legally entitled if a judgment or other final adjudication adverse to the INSUREDS or any arbitration proceeding pursuant to Clause 5 (Arbitration) below establishes that the INSUREDS in fact gained any such personal profit; however, this exclusion shall not apply to defense costs; (c) for the return by the INSUREDS of any improper or illegal remuneration paid in fact to the INSUREDS if it shall be determined by a judgment or other final adjudication adverse to the INSUREDS that such remuneration is improper or illegal or if such remuneration is to be repaid to the COMPANY under a settlement agreement; however, this exclusion shall not apply to defense costs; (d) brought about or contributed to by the dishonesty of the INSUREDS if a judgment or other final adjudication adverse to the INSUREDS or any arbitration proceeding pursuant to Clause 5 (Arbitration) below establishes that acts of active and deliberate dishonesty committed by the INSUREDS with actual dishonest purpose and intent were material to the CLAIM; however, this exclusion shall not apply to defense costs; (e) which is insured by any other existing valid policy or policies under which payment of the LOSS is actually made except in respect of any excess beyond the amounts of payments under such other policy or policies; (f) for which the INSUREDS are indemnified by reason of having given notice of a CLAIM or of any circumstance which might give rise to a CLAIM under any policy or policies of which this POLICY is a renewal or replacement or which it may succeed in time; (g) for emotional distress, mental anguish, bodily injury, sickness, disease, or death of any person, or for damage to or destruction of any tangible property, including the loss of use thereof; however, this exclusion shall not apply to: (1) any CLAIM by securities holders of the COMPANY in their capacity as such, including without limitation any shareholder derivative or securities class action lawsuit; (2) any CLAIM for emotional distress or mental anguish by any former, current or prospective employee of the COMPANY based upon or attributable to any actual or alleged employment-related WRONGFUL ACT; or 4 9 (3) any CLAIM for the actual or alleged discharge, dispersal, release or escape of any solid, liquid, gaseous, or thermal irritant, contaminant or other pollutant, provided any coverage under this POLICY with respect to any such CLAIM shall be specifically excess of the amount of coverage available under any general liability, environmental impairment or similar insurance policy with respect to such CLAIM; (j) by, on behalf of, at the behest of, or in the right of the COMPANY, if brought within the United States, Canada or their territories or possessions by or with the solicitation, approval, assistance or participation of two or more persons each of whom at the time such CLAIM is brought is the president, chief executive officer, MANAGER, chief financial officer, executive vice president or in-house general counsel of the COMPANY; however, this exclusion shall not apply if, between the starting date of the POLICY PERIOD and the date of the CLAIM, the COMPANY shall have undergone any of the events listed in subpart (a) of Clause 8 (Cancellation) or in Clause 22 (Bankruptcy) below, and the CLAIM is brought after the date of such event; or (i) for any actual or alleged error, misstatement, misleading statement or act, omission, neglect or breach of duty by the INSUREDS while acting in their capacities as directors, officers, trustees, governors, partners, MANAGERS, employees or agents of any entity other than the COMPANY or by reason of their being directors, officers, trustees, governors, partners, MANAGERS, employees or agents of such other entity; however, this exclusion shall not apply with respect to any CLAIM for WRONGFUL ACTS by an INSURED serving a NON-PROFIT OUTSIDE ENTITY as described in Clause 2(e)(3) above. It is agreed that any fact pertaining to any INSURED shall not be imputed to any other INSURED for the purpose of determining the application of the Exclusions. 4. APPEALS In the event the INSUREDS elect not to appeal a judgment, the INSURER may elect to make such appeal at its own expense, and shall be liable for any increased award, taxable costs and disbursements and any additional interest incidental to such appeal, to the extent such payments are not covered by other valid and collectible insurance. 5. ARBITRATION (a) My dispute, controversy or claim arising out of or relating to this POLICY or the breach, termination or invalidity thereof shall be finally and fully determined in London, England under the provisions of the Arbitration Acts of 1950, 1975, 1979 and 1996, and/or any statutory modifications or amendments thereto, for the time being in force, by a Board composed of three arbitrators to be selected for each controversy as follows: Any party may, in the event of a dispute, controversy or claim, notify the other party or parties to such dispute, controversy or claim of its desire to arbitrate the matter, and at the time of such notification the party desiring arbitration shall notify the other party or parties of the name of the arbitrator selected by it. The other party who has been so notified shall within thirty (30) calendar days thereafter select an arbitrator and notify the party desiring arbitration of the name of such second arbitrator. 5 10 If the party notified of a desire for arbitration shall fail or refuse to nominate the second arbitrator within thirty (30) calendar days following the receipt of such notification, the party who first served notice of a desire to arbitrate will, within an additional period of thirty (30) calendar days, apply to a judge of the High Court of Justice of England and Wales for the appointment of a second arbitrator and in such a case the arbitrator appointed by such a judge shall be deemed to have been nominated by the party or parties who failed to select the second arbitrator. The two arbitrators, chosen as above provided, shall within thirty (30) calendar days after the appointment of the second arbitrator choose a third arbitrator. In the event of the failure of the first two arbitrators to agree on a third arbitrator within said thirty (30) calendar day period, either of the parties may within a period of thirty (30) calendar days thereafter, after notice to the other party or parties, apply to a judge of the High Court of Justice of England and Wales for the appointment of a third arbitrator and in such case the person so appointed shall be deemed and shall act as a third arbitrator. Upon acceptance of the appointment by said third arbitrator, the Board of Arbitration for the controversy in question shall then be deemed fixed. All claims, demands, denials of claims and notices pursuant to this Clause 5 shall be given in accordance with Clause 16 below. (b) The Board of Arbitration shall fix, by a notice in writing to the parties involved, a reasonable time and place for the hearing and may prescribe reasonable rules and regulations governing the course and conduct of the arbitration proceeding, including, without limitation, discovery by the parties. (c) This POLICY, and any dispute, controversy or claim arising out of or relating to this POLICY, shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, except insofar as such laws: (i) may prohibit payment hereunder in respect of punitive damages; (ii) pertain to the procurement, issuance, delivery, renewal, nonrenewal or cancellation of policies of insurance or the regulation under New York Insurance Law, or regulations issued by the Insurance Department of the State of New York pursuant thereto, applying to insurers doing insurance business within the State of New York or as respects risks or insureds situated in the State of New York; or (iii) are inconsistent with any provisions of this POLICY. Notwithstanding anything herein to the contrary, the provisions, stipulations, exclusions and conditions of this POLICY are to be construed in an evenhanded fashion as between the parties. Without limitation, where the language of this POLICY is deemed to be ambiguous or otherwise unclear, the issue shall be resolved in the manner most consistent with the relevant provisions, stipulations, exclusions and conditions (without regard to authorship of the language, without any presumption or arbitrary interpretation or construction in favor of either the INSUREDS or the INSURER, without reference to the "reasonable expectations" of either thereof or to contra proferentem and without reference to parol or other extrinsic evidence). To the extent that New York law is inapplicable by virtue of any exception or proviso enumerated above or otherwise, and as respects any arbitration procedure pursuant to this Clause 5, the internal laws of England and Wales shall apply. 6 11 (d) The Board of Arbitration shall, within ninety (90) calendar days following the conclusion of the hearing, render its decision on the matter or matters in controversy in writing and shall cause a copy thereof to be served on all the parties thereto, In case the Board of Arbitration fails to reach a unanimous decision, the decision of the majority of the members of said Board shall be deemed to be the decision of the Board and the same shall be final and binding on the parties thereto. Such decision shall be a complete defense to any attempted appeal or litigation of such decision in the absence of fraud or collusion. Without limiting the foregoing, the parties waive any right to appeal, an/or seek collateral review of the decision of the Board of Arbitration by any court or other body to the fullest extent permitted by applicable law. (e) Any order as to the costs of arbitration shall be in the sole discretion of the Board of Arbitration, who may direct to whom and by whom and in what manner the costs, shall be paid. (f) The INSURER and the INSUREDS agree that in the event that claims for indemnity or contribution are asserted in any action or proceeding against the INSURER by any of the INSUREDS' other insurers in any jurisdiction or forum other than that set forth in this Clause 5, the INSUREDS will in good faith take all reasonable steps requested by the INSURER to assist the INSURER in obtaining a dismissal of these claims (other than on the merits) and will, without limitation, undertake to the court or other tribunal to reduce any judgment or award against such other insurers to the extent that the court or tribunal determines that the INSURER would have been liable to such insurers for indemnity or contribution pursuant to this POLICY. The INSUREDS shall be entitled to assert claims against the INSURER for coverage under this POLICY, including, without limitation, for amounts by which the INSUREDS reduced its judgment against such other insurers in respect of such claims for indemnity or contribution, in an arbitration between the INSURER and the INSUREDS pursuant to this Clause 5 which arbitration may take place before, concurrently with and/or after the action or proceeding involving such other insurers; provided, however, that the INSURER in such arbitration in respect of such reduction of any judgment shall be entitled to raise any defenses under this POLICY and any other defenses (other than jurisdictional defenses) as it would have been entitled to raise in the action or proceeding with such insurers. No determination in any such action or proceeding involving such other insurers shall have collateral estoppel, res judicata or other issue preclusion or estoppel effect against the INSURER in such arbitration, irrespective of whether or not the INSURER remained a party to such action or proceeding. 6. ASSISTANCE AND COOPERATION The INSURER has no duty to defend any CLAIM and shall not be called upon to assume charge of the investigation; settlement or defense of any CLAIM, but the INSURER shall have the right and shall be given the opportunity to associate with the INSUREDS and the COMPANY in the investigation,-settlement, defense and control of any CLAIM relative to any WRONGFUL ACT where the CLAIM is or may be covered in whole or in part by this POLICY. At all times, the INSUREDS and the COMPANY and the INSURER shall cooperate in the investigation, settlement and defense of such CLAIM. The failure of the COMPANY to assist and cooperate with the INSURER shall not impair the rights of the INSUREDS under this POLICY. The INSUREDS shall not settle or admit any liability with respect to any CLAIM which involves or appears reasonably likely to involve this POLICY without the INSURER'S consent, which shall not be unreasonably withheld. 7 12 7. AUTOMATIC EXTENSION Except in the event this POLICY is cancelled in whole or in part in accordance with Clause 8 (Cancellation) below, on each anniversary of this POLICY, upon submission of the extension application and payment of the charged premium, this POLICY shall automatically be continued to a date one year beyond its previously stated expiration date, unless written notice is given by the INSURER to the COMPANY, or by the COMPANY to the INSURER, that such POLICY extension is not desired. Such written notice may be given at any time prior to the anniversary of the POLICY, except that such notice by the INSURER to the COMPANY may be given only during the period commencing ninety (90) days and ending ten (10) days prior to such anniversary, in which case the POLICY shall automatically expire two years from such anniversary date. Such written notice shall be given by the INSURER to the COMPANY only if it is determined to be appropriate by the Chief Executive Officer, the Executive Vice President for Underwriting and the Executive Vice-President for Claims of ACE Limited. If the COMPANY or the INSURER gives written notice that the POLICY extension is not desired, the COMPANY shall pay on or before each of the two remaining anniversary dates the charged premium for the next succeeding POLICY YEAR, respectively, less a premium credit equal to the premium paid for years two and three of the POLICY as specified in Item IV of the Declarations Page. If any such premium credit exceeds the charged premium, the INSURER shall refund to the COMPANY the difference within ten days following such anniversary date. The premium charged on each anniversary of this POLICY shall be determined by the rating plan and by-laws of the INSURER in force at such anniversary date. If during any POLICY YEAR the INSURER announces amendments to this standard policy form which are generally applicable to all similar policies issued by the INSURER, such amendments shall be applicable to this POLICY as of the second anniversary following the POLICY YEAR in which the INSURER announced such amendments. 8. CANCELLATION This POLICY shall not be subject to cancellation except as follows: (a) In the event during the POLICY PERIOD: (1) the company named in Item I of the Declarations shall merge into or consolidate with another organization in which the company named in Item I of the Declarations is not the surviving entity, or (2) any person or entity or group of persons and/or entitles acting in concert shall acquire securities or voting rights which results in ownership or voting control by such person or entity or group of persons or entities of more than 50% of the outstanding securities representing the present right to vote for election of directors or MANAGERS of the company named in Item I of the Declarations this POLICY shall remain in force until the later of: (i) the third anniversary of such merger, consolidation or acquisition if during the POLICY PERIOD the COMPANY or the INSUREDS give notice to the INSURER of their desire to elect such extension (no additional premium shall be required for such extension), (ii) any subsequent date to which the INSURER may agree by endorsement, or 8 13 (iii) termination of the POLICY PERIOD, but only with respect to CLAIMS for WRONGFUL ACTS actually or allegedly taking place before the effective date of said merger, consolidation or acquisition. If the POLICY remains in force beyond the period of time stated in Item II of the Declarations by reason of this Clause 8(a), the LIMIT OF LIABILITY for such extension is part of and not in addition to the LIMIT OF LIABILITY to the immediately preceding POLICY YEAR. All premiums paid or due at the time of said merger, consolidation or acquisition shall be fully earned and in no respect refundable. (b) This POLICY may be cancelled by the INSURER upon granting of 365 days written notice, providing such cancellation is determined to be appropriate by the Chief Executive Officer, the Executive Vice President for Underwriting and the Executive Vice President for Claims of ACE Limited. Payment or tender of any unearned premium by the INSURER shall not be a condition precedent to the effectiveness of cancellation, but return of the pro rata unearned premium shall be made as soon as practicable. (c) In the event the charged premium for any POLICY YEAR is not paid as provided in Clause 7 (Automatic Extension), above, this POLICY shall not apply to any WRONGFUL ACTS actually or allegedly taking place after the anniversary date on which the additional premium was due; however, this POLICY shall remain in force for the remainder of the POLICY PERIOD as to CLAIMS first made during the POLICY PERIOD for WRONGFUL ACTS actually or allegedly caused, committed or attempted prior to such anniversary date. With respect to all CLAIMS first made after such anniversary date, one LIMIT OF LIABILITY shall apply for the remainder of the POLICY PERIOD. Such LIMIT OF LIABILITY shall be separate from the LIMIT OF LIABILITY provided during the POLICY YEAR immediately preceding such anniversary date. All premiums paid as of such anniversary date shall be fully earned and in no respect refundable. 9. CHANGES AND ASSIGNMENTS The terms and conditions of this POLICY shall not be waived or changed, nor shall an assignment of interest under this POLICY be binding, except by an endorsement to this POLICY issued by the INSURER. 10. ADVANCEMENT OF DEFENSE COSTS Except in those instances when the INSURER has denied liability for the CLAIM because of the application of one or more exclusions, or other coverage issues, if the COMPANY refuses or is financially unable to advance DEFENSE COSTS, the INSURER shall, upon request and if proper documentation accompanies the request, advance on behalf of the INSUREDS, or any of them, DEFENSE COSTS that they have incurred in connection with a CLAIM, prior to disposition of such CLAIM. In the event that the INSURER so advances DEFENSE COSTS and it is finally established that the INSURER has no liability hereunder, such INSUREDS on whose behalf advances have been made and the COMPANY, to the full extent legally permitted, agree to repay to the INSURER, upon demand, all monies advanced. 11. CURRENCY All premium, limits, retentions, LOSS and other amounts under this POLICY are expressed and payable in the currency of the United States of America. 9 14 12. HEADINGS The descriptions in the headings and sub-headings of this POLICY are inserted solely for convenience and do not constitute any part of the terms or conditions hereof. 13. INSUREDS' REPORTING DUTIES The INSUREDS and/or the COMPANY shall give written notice to the INSURER of any of the following as soon as practicable after the in-house general counsel or risk manager of the COMPANY first learns thereof: (a) any CLAIM described in subpart (b) (1) of Clause 2 (Definitions) above, which notice shall include the nature of the WRONGFUL ACT, the alleged injury, the names of the claimants, and the manner in which the INSUREDS or COMPANY first became aware of the CLAIM; or (b) any event described in subpart (a) of Clause 8 (Cancellation) above, The INSUREDS and the COMPANY shall cooperate with the INSURER and give such additional information as the INSURER may reasonably require. 14. LOSS PROVISIONS (a) The time when a CLAIM shall be made for purposes of determining the application of Clause 1 (Insuring Clause) above shall be the date on which the CLAIM is first made against the INSURED. (b) If during the POLICY PERIOD, the INSUREDS or the COMPANY shall become aware of any circumstances that are likely to give rise to a CLAIM being made against the INSUREDS and shall give written notice to the INSURER of the circumstances and the reasons for anticipating a CLAIM, with particulars as to dates and persons involved, then any CLAIM that is subsequently made against the INSUREDS arising out of such circumstances shall be treated as a CLAIM made during the first POLICY YEAR in which the INSUREDS or the COMPANY gave such notice. (c) The COMPANY and the INSUREDS shall give the INSURER such information and cooperation as it may reasonably require and as shall be in the COMPANY'S and the lNSUREDS' power. 15. OTHER INSURANCE Subject to subparts (e) and (f) of Clause 3 (Exclusions) above, if other valid and collectible insurance with any other insurer, whether such insurance is issued before, concurrent with, or after inception of this POLICY, is available to the INSUREDS covering a CLAIM also covered by this POLICY, other than insurance that is issued specifically as insurance in excess of the insurance afforded by this POLICY, this POLICY shall be in excess of and shall not contribute with such other insurance. Without limiting the foregoing, this POLICY is specifically excess of and shall not contribute with any insurance which is maintained by a NON-PROFIT OUTSIDE ENTITY and available to an INSURED. Nothing herein shall be construed to make this POLICY subject to the terms of other insurance. 10 15 16. NOTICE All notices under any provision of this POLICY shall be in writing and given by prepaid express courier or electronic service properly addressed to the appropriate party at the respective addresses as shown in Items V and VI of the Declarations. Notice so given shall be deemed to be received and effective upon actual receipt thereof by the party or one day following the date such notice is sent, whichever is earlier. Notice to the INSURER of any CLAIM shall be directed to the attention of the INSURER's Claims Department. All other notices to the INSURER shall be directed to the attention of the INSURER's Underwriting Department. 17. REPRESENTATION By acceptance of this POLICY, the company named in Item I of the Declarations agrees to represent the INSUREDS with respect to all matters under this POLICY, including, but not limited to, the giving and receiving of notice of CLAIM or cancellation or desire not to extend the POLICY, the payment of premiums, the receiving of LOSS payments and any return premiums that may become due under this POLICY, the requesting, receiving, and acceptance of any endorsement to this POLICY, and the submission of a dispute to arbitration. The INSUREDS agree that said company shall represent them but, for purposes of the investigation, defense, settlement, or appeal of any CLAIM, the INSUREDS who are named as defendants in the CLAIM may, upon their unanimous agreement and upon notice to the INSURER, replace said company with another agent to represent them with respect to the CLAIM, including giving and receiving of notice of CLAIM and other correspondence, the receiving of LOSS payments, and the submission of a dispute to arbitration. 18. SEVERABILITY (a) The APPLICATION for coverage shall be construed as a separate APPLICATION for coverage by each INSURED. With respect to the declarations and statements contained in such APPLICATION for coverage, no statement in the APPLICATION or knowledge possessed by any one INSURED shall be imputed to any other INSURED for the purpose of determining the availability of coverage with respect to CLAIMS made against any other INSURED. The acts, omissions, knowledge, or warranties of any INSURED shall not be imputed to any other INSURED with respect to the coverages applicable under this POLICY. (b) This POLICY shall not be rescinded by the INSURER in whole or in part based upon the restatement of, or any misstatement or error in, any financial statements of the COMPANY contained within the APPLICATION. (c) In the event that any provision of this POLICY shall be declared or deemed to be invalid or unenforceable under any applicable law, such invalidity or unenforceability shall not affect the validity or enforceability of the remaining portion of this POLICY. 11 16 19. SPOUSAL LIABILITY If a CLAIM against an INSURED includes a claim against the INSURED'S lawful spouse solely by reason of (i) such spouse's status as a spouse of the INSURED, or (ii) such spouse's ownership interest in property which the claimant seeks as recovery for alleged WRONGFUL ACTS of the INSURED, all loss which such spouse becomes legally obligated to pay by reason of such CLAIM shall be treated for purposes of this POLICY as LOSS which the INSURED becomes legally obligated to pay by reason of the CLAIM made against the INSURED. Such spousal loss shall be covered under the POLICY only if and to the extent such loss would be covered if incurred by the INSURED. The coverage extension afforded by this Clause 19 does not apply to the extent such CLAIM alleges a wrongful act or omission by the INSURED's spouse. 20. SUBROGATION In the event of any payment under this POLICY, the INSURER shall be subrogated to the extent of such payment to all the INSUREDS' rights of recovery, and the INSUREDS shall execute all papers reasonably required and shall take all reasonable actions that may be necessary to secure such rights including the execution of such documents necessary to enable the INSURER effectively to bring suit in the name of the INSUREDS, including but not limited to an action against the COMPANY for nonpayment of indemnity due and owing to the INSUREDS by the COMPANY. 21. ACQUISITION, CREATION OR DISPOSITION OF A SUBSIDIARY (a) Coverage shall apply to the INSUREDS of any subsidiary corporation or limited liability company in which more than 50% of the outstanding securities representing the present right to vote for election of directors or MANAGERS is owned, directly or indirectly, in any combination, by the COMPANY and/or one or more of its SUBSIDIARIES, and which is acquired or created after the inception of this POLICY, if written notice is given to the INSURER within sixty (60) days after the acquisition or creation, and any additional premium required by the INSURER is paid within thirty (30) days of the request therefor by the INSURER. The INSURER waives the obligation to provide notice and to pay any additional premium if the assets of such newly created or acquired company are not more than 15% of the total assets of the COMPANY or $500,000,000, whichever is less. The coverage provided for the INSUREDS of such new subsidiary shall be limited to CLAIMS for WRONGFUL ACTS actually or allegedly taking place subsequent to the date of acquisition or creation of the subsidiary. (b) Coverage shall not apply to directors, MANAGERS, officers and employees of any subsidiary, including a SUBSIDIARY as defined in Clause 2 (Definitions) above, for CLAIMS for WRONGFUL ACTS actually or allegedly taking place subsequent to the date that the COMPANY and/or one or more of its SUBSIDIARIES, directly or indirectly, in any combination, ceases to own more than 50% of the outstanding securities representing the present right to vote for election of directors or MANAGERS in such subsidiary. 12 17 22. BANKRUPTCY In the event a liquidation or reorganization proceeding is commenced by or against a COMPANY pursuant to the United States Bankruptcy Code, as amended, or any similar state or local law, the COMPANY and the INSUREDS hereby (i) waive and release any automatic stay or injunction which may apply in such proceeding to this POLICY or its proceeds under such Bankruptcy Code or law, and (ii) agree not to oppose or object to any efforts by the INSURER, the COMPANY or any INSURED to obtain relief from any such stay or injunction. In the event the COMPANY becomes a debtor in possession under the United States Bankruptcy Code or an equivalent status under the law of any other country and the aggregate LOSS due under this POLICY exceeds the remaining available LIMIT OF LIABILITY, the INSURER shall: (a) first pay such LOSS allocable to WRONGFUL ACTS that are actually or allegedly caused, committed, or attempted prior to the COMPANY becoming a debtor in possession, then (b) with respect to whatever remaining amount of the LIMIT OF LIABILITY is available after payment under (a) above, pay such LOSS allocable to WRONGFUL ACTS that are actually or alleged caused, committed, or attempted after the COMPANY became a debtor in possession. 13 18 [CODA LOGO] CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. Endorsement No. 24 Effective Date of Endorsement June 30, 2001 Attached to and forming part of POLICY No. PG-1O6C COMPANY THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY In consideration of the premium paid for this POLICY, it is hereby understood and agreed that: CORPORATE REIMBURSEMENT AND ENTiTY COVERAGE ENDORSEMENT Note: The corporate reimbursement and entity coverage provided by this endorsement is subject to a deductible equal to the LIMIT OF LIABILITY with respect to such coverage and therefore the INSURER will never be liable to reimburse the COMPANY for any amounts under this endorsement. This endorsement is issued at the COMPANY'S request solely to facilitate the COMPANY'S purchase of coverage in excess of this POLICY by providing a corporate reimbursement and entity coverage POLICY form. - (A) Item III (LIMIT OF LIABILITY) of the Declarations of this POLICY is hereby deleted in its entirety and replaced with the following: Item III. LIMIT OF LIABILITY: (A) $25,000,000 Aggregate LIMIT OF LIABILITY for all LOSS under Part 1of Clause 1 (Insuring Clause) arising from all CLAIMS first made during each POLICY YEAR. (B) $25,000,000 Aggregate LIMIT OF LIABILITY for all LOSS under Part II of Clause 1 (Insuring Clauses) arising from all CLAIMS first made during each POLICY YEAR. - (B) Items IV, V and VI of the Declarations of this POLICY are hereby renumbered as Items V, VI and VII, respectively, and the following Item IV is hereby inserted in the Declarations: Item IV. DEDUCTIBLE: $25,000,000 In the aggregate for all LOSS arising from a single CLAIM covered by Part 1 of Clause 1 (Insuring Clause). PAGE 1 of 4 19 [CODA Logo] - (C) Clause 1 (Insuring Clause) of this POLICY is hereby deleted in its entirety and replaced with the following: 1. INSURING CLAUSE PART I (a) Subpart to the Deductible as set forth in paragraph (c) of this Part I, the INSURER shall pay on behalf of the COMPANY amounts for which the COMPANY grants indemnification to the INSUREDS, pursuant to the COMPANY'S charter or other similar formative documents or by-laws or written agreements of the COMPANY, duly effective under applicable law, for LOSS that the INSUREDS are legally obligated to pay by reason of any CLAIM or CLAIMS first made against the INSUREDS or any of them during the POLICY PERIOD for any WRONGFUL ACTS that are actually or allegedly caused, committed or attempted prior to the end of the POLICY PERIOD by the INSUREDS, not exceeding the LIMIT OF LIABILITY stated in Item III (A) of the Declarations. (b) Subject to the Deductible as set forth in paragraph (c) of this Part I, the INSURER shall pay on behalf of the COMPANY LOSS that the COMPANY is legally obligated to pay on behalf of the COMPANY LOSS that the COMPANY is legally obligated to pay by reason of any SECURITIES CLAIM or SECURITIES CLAIMS first made against the COMPANY during the POLICY PERIOD for any WRONGFUL ACTS that are actually or allegedly caused, committed or attempted prior to the end of the POLICY PERIOD by the INSUREDS or the COMPANY, not exceeding the LIMIT OF LIABILITY stated in Item III(A) of the Declarations. (c) In respect of all LOSS arising from a single CLAIM covered under this Part I, this POLICY shall pay only the amount in excess of the amount stated in item IV of the Declarations as the Deductible, and the LIMIT OF LIABILITY stated in Item III(A) of the Declarations shall be reduced by the amount of such Deductible. PART II The INSURER shall pay on behalf of the INSUREDS or any of them, any and all LOSS that the INSUREDS shall become legally obligated to pay by reason of any CLAIM or CLAIMS first made against the INSUREDS or any of them during the POLICY PERIOD, for any WRONGFUL ACTS that are actually or allegedly caused, committed, or attempted prior to the end of the POLICY PERIOD by the INSUREDS, not exceeding the LIMIT OF LIABILITY stated in Item III (B) of the Declarations. (-) Subpart (e) of Clause 2 (Definitions) of this POLICY is hereby amended to also include the following: in its entirety and replaced with the following: (4) with respect to SECURITIES CLAIMS, the COMPANY. PAGE 2 OF 4 20 [CODA Logo] - (E) Subpart (f) of Clause 2 (Definitions) of this POLICY is hereby deleted in its entirety and replaced with the following: (f) "LIMIT OF LIABILITY" shall mean the amount described in Item III (A) or (B) of the Declarations. Regardless of the time of payment of LOSS by the INSURER, the LIMITS OF LIABILITY as stated in Item III (A) and (B) of the Declarations (as reduced by the amount of the applicable Deductible) shall be the maximum liability of the INSURER as respects Part I and Part II, respectively of Clause 1 (Insuring Clause) for all LOSS arising from all CLAIMS first made during each POLICY YEAR. Reasonable and necessary attorneys fees incurred in investigating and defending a CLAIM shall be part of and not in addition to the LIMITS OF LIABILITY as stated in Item III (A) and (B) of the Declarations and payment by the INSURER under such Part II of such attorneys fees shall reduce the LIMIT OF LIABILITY as stated in such Item III (B). - (F) Subpart (h) of Clause 2 (Definitions) of this POLICY is hereby amended by the addition, at the end of the subpart, of the following: Further, with respect to Coverage under Part I(b) of Clause 1 (Insuring Clause) only, LOSS shall not include damages, judgements or settlements which the COMPANY has paid or agreed to pay arising out of the COMPANY allegedly paying an inadequate price or consideration for the purchase of its own securities or the securities of a SUBSIDIARY. - (G) The following additional definition is added to Clause 2 (Definitions): "SECURITIES CLAIM" shall mean a CLAIM which is whole or in part alleges a violation of the Securities Act of 1933, the Securities Exchange Acts of 1934, any similar federal or state securities law, or any rules of regulations promulgated thereunder, in connection with the purchase or sale of, or offer to purchase or sell, any securities issued by the COMPANY. SECURITIES CLAIM shall not mean or include a criminal or administrative proceeding against the COMPANY. - (H) Subpart (h) of Clause 2 (Definitions) of this POLICY is hereby deleted in its entirety and replaced with the following: "WRONGFUL ACT" shall mean (1) with respect to all INSUREDS except the COMPANY, any actual or alleged error, misstatement, misleading statement or act, omission, neglect, or breach or duty by the INSUREDS while acting, individually or collectively, in their capacities as directors or officers of the COMPANY, or any other matter claimed against them by reason of their serving as directors or officers of the COMPANY, and (2) with respect to the COMPANY, any actual or alleged error, misstatement, misleading statement or act, omission, neglect or breach or duty by the COMPANY but solely as respects a SECURITIES CLAIM covered by this POLICY. All such errors, misstatements, misleading statements or acts, omissions, neglects or breaches of duty actually or allegedly caused, committed or attempted by or claimed against one or more of the INSUREDS arising out of or relating to the same or series of related facts, circumstances, situations, transactions or events shall be deemed to be a single WRONGFUL ACT. PAGE 3 OF 4 21 [CODA Logo] - (I) Subpart (a) of Clause 3 (Exclusions) of this POLICY is hereby modified by the addition, at the beginning of the subpart, of the following: (a) As respects Part II of Clause 1 (Insuring Clause), - (J) Clause 10 (Payment for LOSS) of this POLICY is hereby modified by the addition, at the beginning of the Clause, of the following: As respects Part II of Clause 1 (Insuring Clause), - (K) Clause 17 (Representation) of this POLICY is hereby modified by the addition, at the beginning of the Clause, of the following: As respects Part II of Clause 1 (Insuring Clause), Nothing herein shall be held to vary, after, waive or extend any of the terms, conditions, exclusions or limitations of this POLICY, except as expressly stated herein. This endorsement is part of such POLICY and is incorporated therein. BY /s/ Jonathan Evans ----------------------------- AUTHORIZED REPRESENTATIVE END 02 ED 05/89 PAGE 4 OF 4 22 [CODA Logo] CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. Endorsement No. 23 Effective Date of Endorsement JUNE 30, 2001 Attached to and forming part of POLICY No. PG-1O6C COMPANY THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY In consideration of the premium paid for this POLICY, it is hereby understood and agreed that: 1. The definition of "INSUREDS" is amended to also include all natural persons who were, now are, or shall be duly appointed trustees of the COMPANY's Profit Sharing Trust and Employee Stock Ownership Plan ("Plan"), provided that such person is a party to and shall be entitled to any COMPANY indemnification afforded by The Proctor & Gamble Profit Sharing Trust and Employee Stock Ownership Plan Trust Agreement. 2. The coverage afforded under this POLICY by reason of this endorsement shall be specifically excess of any fiduciary liability insurance purchased or maintained by the COMPANY or the Plan for the benefit of the Plan and its fiduciaries. Nothing herein shall be held to vary, alter, waive or extend any of the terms, conditions, exclusions or limitations of this POLICY, except as expressly stated herein. This endorsement is part of such POLICY and is incorporated therein. BY /s/ Jonathan Evans ---------------------------- AUTHORIZED REPRESENTATIVE 23 [CODA Logo] CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. Endorsement No. 22 Effective Date of Endorsement JUNE 30, 2001 Attached to and forming part of POLICY No. PG-1O6C COMPANY THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY In consideration of the premium paid for this POLICY, it is hereby understood and agreed that on the Outside Positions Endorsement (Endorsement No. 2.) Section A(1) is amended to read after the word "foundation" as follows: Trustees of Procter & Gamble's Global Pension Funds Nothing herein shall be held to vary, alter, waive or extend any of the terms, conditions, exclusions or limitations of this POLICY, except as expressly stated herein. This endorsement is part of such POLICY and is incorporated therein. BY /s/ Jonathan Evans ---------------------------- AUTHORIZED REPRESENTATIVE 24 [CODA Logo] CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. Endorsement No. 21 Effective Date of Endorsement JUNE 30, 2001 Attached to and forming part of POLICY No. PG-1O6C COMPANY THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY In consideration of the premium paid for this POLICY, it is hereby understood and agreed that on the Outside Positions Endorsements Section A(1) is amended to read after the word "foundation" as follows:- Employee Stock Ownership Trust of the Procter & Gamble Profit Sharing Trust and Employee Stock Ownership Plan. Nothing herein shall be held to vary, alter, waive or extend any of the terms, conditions, exclusions or limitations of this POLICY, except as expressly stated herein. This endorsement is part of such POLICY and is incorporated therein. BY /s/ Jonathan Evans ---------------------------- AUTHORIZED REPRESENTATIVE 25 [CODA Logo] CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. Endorsement No. 20 Effective Date of Endorsement JUNE 30, 2001 Attached to and forming part of POLICY No. PG-1O6C COMPANY THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY In consideration of the premium paid for this POLICY, it is hereby understood and agreed that this POLICY is amended as indicated below. All other terms of this POLICY remain unchanged. OUTSIDE POSITIONS ENDORSEMENT: SUBLIMIT, NON-SPECIFIC INDIVIDUALS (A) Subject to the sublimit of liability set forth in (C) below, the definition of "INSUREDS" is hereby extended to include: (1) all persons who were, are, or shall be serving as directors, officers, trustees, governors, partners or the equivalent thereof for any corporation, partnership, joint venture, eleemosynary institution, non-profit organization, industry association, or foundation, (any such enterprises referred to below as "Entity"), if: (a) such activity is part of their duties regularly assigned by the COMPANY, or (b) they are a member of a class of persons so directed to serve by the COMPANY. (2) the estates, heirs, legal representatives or assigns of deceased persons who were INSUREDS, as defined in subpart (A)(1) above, and the legal representatives or assigns of INSUREDS in the event of their incompetency, insolvency or bankruptcy. (B) It is further understood and agreed that this extension of coverage: (1) is to be excess of any other insurance and excess of any director or officer liability insurance and/or company reimbursement insurance any conditions in such other insurance notwithstanding: END 06 ED 05 89 PAGE 1 OF 3 26 [CODA Logo] (2) shall not apply to any LOSS for which such Entity or the COMPANY actually pays or indemnifies or is required or permitted to pay on behalf of or to indemnify the INSUREDS pursuant to the charter or other similar formative document or by-laws or written agreements of such Entity or the COMPANY duly effective under applicable law, that determines and defines such rights of indemnity; provided, however, this subpart (2) shall not apply if: (a) such Entity and the COMPANY refuse to indemnify or advance defense or other costs as required or permitted, or if such Entity and the COMPANY are financially unable to indemnify; and (b) the INSUREDS comply with Clause 20 (Subrogation) of the POLICY; (3) shall not apply to any LOSS in connection with any CLAIM made against the INSUREDS in their capacity as directors or officers of Corporate Officers & Directors Assurance Ltd. or Corporate Officers & Directors Assurance Holding, Ltd.; and (4) is not to be construed to extend to the Entity nor to any other director, officer, trustee, governor, partner or employee of such Entity. (C) In lieu of the LIMIT OF LIABILITY stated in Item III of the Declarations, the limit of liability of the INSURER for this extension of coverage shall be $25,000,000 in the aggregate for all LOSS which is covered by reason of this extension of coverage and which is paid on behalf of all INSUREDS arising from all CLAIMS first made during each POLICY YEAR. It is understood that the amount stated in Item III of the Declarations is the maximum amount payable by the INSURER under this POLICY for all CLAIMS first made during each POLICY YEAR, and that this Endorsement extends coverage with a sublimit which further limits the INSURER'S liability and does not increase the INSURER'S maximum liability beyond the LIMIT OF LIABILITY stated in Item III of the Declarations. It is further understood that such sublimit is separate from and payment of LOSS pursuant to this Endorsement does not reduce the sublimit or limit contained in any other Outside Positions Endorsement to this POLICY. (D) Solely for purposes of this extension of coverage, the definition of "WRONGFUL ACT" is hereby modified to replace the word "COMPANY" with the word "Entity" wherever the word "COMPANY" appears. (E) Solely for purposes of applying subparts (i) and (j) of Clause 3 (Exclusions) of the POLICY to this extension of coverage, the definition of "COMPANY" is hereby modified to include such Entity. PAGE 2 OF 3 27 [CODA Logo] Noting herein shall be held to vary, alter, waive or extend any of the terms, conditions, exclusions or limitations of this POLICY, except as expressly stated herein. This endorsement is part of such POLICY and is incorporated therein. BY /s/ Jonathan Evans ---------------------------- AUTHORIZED REPRESENTATIVE PAGE 3 OF 3 28 [CODA Logo] CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. Endorsement No. 19 Effective Date of Endorsement JUNE 30, 2001 Attached to and forming part of POLICY No. PG-106C COMPANY THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY AMENDED POLICY FORM ------------------- 3-YEAR MID-TERM: NEW FORM) -------------------------- In consideration of the premium paid for this POLICY, it is hereby understood and agreed that: 1. Coverage afforded by the INSURER under this POLICY for CLAIMS first made against the INSUREDS after the effective date of this Endorsement and prior to expiration of the POLICY PERIOD shall be subject to the terms and conditions of this policy form and the Endorsements attached to this policy form, and shall not be subject to the terms and conditions of the previous policy form for this POLICY and its Endorsements. 2. The issuance of this policy form and its Endorsements is intended to implement amendments to the INSURER's standard policy form for all similar policies issued by the INSURER and does not increase the LIMIT OF LIABILITY of the INSURER or change the inception date, anniversary date or POLICY YEAR under this POLICY. Nothing herein shall be held to vary, after, waive or extend any of the terms, conditions, exclusions or limitations of this POLICY, except as expressly stated herein. This endorsement is part of such POLICY and is incorporated therein. BY /s/ Jonathan Evans ---------------------------- AUTHORIZED REPRESENTATIVE 29 [CODA Logo] CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD. Endorsement No. 18 Effective Date of Endorsement JUNE 30, 2001 Attached to and forming part of POLICY No. PG-106C COMPANY THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY AMENDED POLICY FORM ------------------- (3-YEAR MID-TERM: NEW FORM) --------------------------- In consideration of the premium paid for this POLICY, It is hereby understood and agreed that 1. Coverage afforded by the INSURER under this POLICY for CLAIMS first made against the INSUREDS after the effective date of this Endorsement and prior to expiration of the POLICY PERIOD shall be subject to the terms and conditions of this policy form and the Endorsements attached to this policy form, and shall not be subject to the terms and conditions of the previous policy form for this POLICY and its Endorsements. 2. The issuance of this policy form and its Endorsements is intended to implement amendments to the INSURER's standard policy form for all similar policies issued by the INSURER and does not increase the LIMIT OF LIABILITY of the INSURER or change the inception date, anniversary date or POLICY YEAR under this POLICY. Nothing herein shall be held to vary, after, waive or extend any of the terms, conditions, exclusions or limitations of this POLICY, except as expressly stated herein. This endorsement is part of such POLICY and is incorporated therein. BY /s/ Jonathan Evans ---------------------------- AUTHORIZED REPRESENTATIVE EX-99.2 14 l90238aex99-2.txt EXHIBIT 99.2 1 EXHIBIT (99-2) Directors and Officers (First) Excess Liability Binder of Insurance 2 - ------------------------------------------------------------------------------- From: Telephone No: (441) 292 8515 Facsimile No: (441) 292 1566 XL INSURANCE LTD. [XL Logo] Cumberland House One Victoria Street P. O. Box HM 2245 Hamilton HM JX Bermuda - ------------------------------------------------------------------------------- Coverage Binder for: The Proctor & Gamble Company Type: Directors and Officers Liability including Company Reimbursement Liability Our Reference: 134/7 Policy No: XLD+O-00364 Policy Period: June 30, 2001 to June 30, 2002 Brokerage: 12.00% New Aggregate: Yes Gross Written Limit Attachment Premium - ------------------------------------------------------------------------------- USD 25,000,000 D+O/CR USD 25,000,000 D+O/CR USD 300,000 USD 25,000,000 CR USD 145,000,000 CR USD 70,000 3 Coverage Binder for: The Proctor & Gamble Company Page: 2 Retro Date: As per CODA Premier form. Special Conditions A) XL. coverage to follow form of CODA Premier (10/00) form - as per ACE's 5/7/01 fax. B) Issue standard XL. Policy: D+O-005. C) Discovery period: 12 months at 100 Percent of annual premium. D) Cancellation period: as per primary. E) Attach Policy Interpretation Endorsement. F) XL is not in a position to follow any State Amendatory Endorsement. G) XL will attach the following exclusions to Sides B & C of the Policy: - Broad Form BI/PD Exclusion - Broad Form Pollution Exclusion - P/P Litigation Exclusion effective inception H) XL will not follow exclusion (h) of the CODA Premier form on Side B. XL will utilize the wording in exclusion (i) of the CODA 5/92 form. I) ODL coverage as per expiring endorsement 2. J) Deletion of General Condition J, as per expiring endorsement. K) XL will incorporate CODA's 3/7/01 renewal application into our Policy, when issued. L) XL is not in a position to follow Section 8(a)(i) of the CODA Premier Policy form. We will provide a 3 year option for an additional premium of 100% of the annual premium. M) Subject to receipt of premium funds by 7/6/01. N) XL will not be in a position to follow Section 18(b) of the CODA Premier Policy Form. 4 Coverage Binder for: The Proctor & Gamble Company Page 3 Standard Conditions 1) The above binder does not include any amount with respect to Insurance Premium Tax. The terms of this binder include the obligation of the insured to reimburse XL for any Insurance Premium Tax incurred by it with respect to the premiums received from the insured. All terms and conditions as per wording of Policy and appropriate endorsements. Regards, Sharron Williams XL Insurance Ltd. EX-99.3 15 l90238aex99-3.txt EXHIBIT 99.3 1 EXHIBIT (99-3) Directors and Officers (Second and Fifth) Excess Liability Binder of Insurance 2 Exhibit 99-3 [ACE LOGO] ACE Bermuda PO Box I-M 1015 Insurance Ltd. Hamilton HM DX The ACE Building Bermuda 30 Woodbourne Avenue Hamilton HM 08 441 295 5200 main ace bermuda Bermuda www.acelimited.com ACE Bermuda Insurance Ltd. is pleased to confirm binding the following: Policy Period: June 30th, 2001--June 30th, 2002 Limit of Liability: $45 Million xs $50 Million $5 Million xs $170 Million Premium: $375,000.00 Gross Less 12% Commission: $45,000.00 ----------- Premium Due: $330,000.00 Net Underlying Structure: - -------------------- NAME LIMITS D&O/CR CODA $25M XL $25M ACE $45M CHUBB ATLANTIC $25M STARR $25M XL $25M ACE $5M One of the ACE Group of Insurance & Reinsurance Companies. 3 [ACE LOGO] ace bermuda SPECIAL CONDITIONS - ------------------ 1. Followed Policy is XL. 2. Discovery Period & Pct: as per followed policy. 3. Cancellation Period:365 days (as expiring) 4. Coverage is D&O and CR. 5. Cover will be issued on Policy Form ACE D&O 5/96, Policy No. PG-9470D. 6. Endorsements to be included: Endorsement evidencing ACE will not follow section 18(b) of the CODA policy 7. Binding is subject to receipt of the appropriate premium on or before Monday, July 2nd, 2001. Best regards, /s/ Jonathan Evans Jonathan Evans ACE Bermuda Insurance Ltd. Page 2/2 EX-99.4 16 l90238aex99-4.txt EXHIBIT 99.4 1 EXHIBIT (99-4) Directors and Officers (Third) Excess Liability Binder of Insurance 2 Exhibit 99-4 [CHUBB LOGO] CHUBB ATLANTIC INDEMNITY LTD. LOCATION: BELVADENE BUILDING, 89 PITT'S RAY ROAD, PEMBROKE HM 08, BERMUDA MAILING: SUITE 773, 345 PARIA-VILLA ROAD, HAMILTON HM 11, BERMUDA PHONE: (441) 292-7343 - FACSIMILE: (441) 296-1728 WWW.CHUBBATLANTIC.BM - -------------------------------------------------------------------------------- EXCESS DIRECTORS AND OFFICERS LIABILITY SIDE A AND SIDE B COVERAGE RENEWAL BINDER THIS CERTIFIES THAT pending the issuance of a Policy in the form described below, Chubb Atlantic Indemnity Ltd., hereinafter called the Company, is binding coverage described as follows: 1. INSURED The Proctor & Gamble Company Address: One P&G Plaza Cincinnati, Ohio U.S.A. 45202 2. PRODUCER H&H Park International Limited Attn: Mr. Marty Svenson Address: Bermuda Commercial Bank Building 44 Church Street, PO Box HM 2064 Hamilton HM HX Bermuda 3. POLICY NO. (02) 3310-04-49 4. POLICY PERIOD From: June 30, 2001 To: June 30, 2002 (12:01 a.m. Standard Time on both dates, at the address of the entity stated in Item 1 this Binder) 5. TERM OF BINDER Effective: June 30, 2000 Expires: October 15, 2001 (12:01 a.m. Standard Time on both dates, at the address of the entity stated in Item 1 this Binder) 6. ANNUAL PREMIUM $145,000 7. POLICY FORM NO/TYPE Chubb Atlantic Indemnity Ltd. Excess Follow Form D&O policy 8. LIMITED OF LIABILITY $25,000,000 Annual Aggregate Limit of Liability for the Policy Period Excess of the Underlying Insurance shown in Item 9 3 -2- 9. UNDERLYING INSURANCE a. Each Claim Limit $95,000,000 Side A $120,000,000 Side B & C b. Aggregate Limit $95,000,000 Side A $120,000,000 Side B & C 10. FOLLOWING FORM OF: XL policy wording (which cite excess of CODA primary policy). 11. ENDORSEMENTS (a) Pending or Prior Litigation at June 30, 1994 with respect to side A coverage only; (b) Amended Limit of Liability; (c) Bermuda Law & Arbitration wording; (d) Pending and Prior Litigation exclusion as at June 30 2001 with respect to Side B & C coverage. 12. THIS BINDER WILL NOT BE EXTENDED NOR WILL A POLICY BE ISSUED UNLESS THE FOLLOWING CONDITIONS HAVE BEEN SATISFIED: - Receipt, review and acceptance of a signed warranty statement with regard to Side B & C coverage and - Receipt of the binders for the underlying policies to be submitted to Chubb Atlantic Indemnity Ltd. THE TERMS AND CONDITIONS GIVEN ABOVE ARE SUBJECT TO CHANGE OR WITHDRAWAL BASED UPON REVIEW OF THE ADDITIONAL INFORMATION REQUESTED. It is expressly stipulated that except as otherwise provided herein the coverage provided by this binder is subject to all of the terms and conditions of the quotation letter of May 14, 2001, and attachments thereto issued by the Company. 4 -3- This binder may be cancelled at any time by the entity referred to in Item 1 by giving written notice of cancellation to the Company. This binder may be cancelled at any time by the Company upon ten (10) days written notice of cancellation to the entity referred to in Item 1 or its agent. This binder shall terminate automatically upon the expiration date shown above, or upon issuance of the policy, whichever occurs first. A short rate premium charge will be made for this binder unless the policy is issued by the Company and accepted by the entity referred to above. The Company reserves the right to modify the policy's terms and conditions upon underwriting review of any information received. /s/ Rachel Thomson June 28, 2001 - -------------------------- --------------------- Authorized Representative Date EX-99.5 17 l90238aex99-5.txt EXHIBIT 99.5 1 EXHIBIT (99-5) Directors and Officers (Fourth) Excess Liability Binder of Insurance 2 Exhibit 99-5 [STARR EXCESS INTERNATIONAL LOGO] EXCESS DIRECTORS & OFFICERS INSURANCE AND CORPORATE REIMBURSEMENT INSURANCE NEW BUSINESS BINDER NAMED CORPORATION: Proctor & Gamble POLICY NUMBER: 6457675 POLICY PERIOD: June 30, 2001 to June 30, 2002 LIMIT OF LIABILITY: US$25,000,000 ATTACHMENT: US$150,000,000 GROSS WRITTEN PREMIUM: US$116,000 CURRENCY: U.S. Dollar COMMISSION: 15% SUBJECT TO: 1. Warranty statement; 2. Details of SEC and IAMS claims; 3. Copies of all underlying binders, within 15 days; 4. Copies of all underlying policies, as soon as possible; 5. Copy of CODA renewal application. ADDITIONAL TERMS: 1. Discovery--1 year at 100% of the annual premium; 2. Cancellation Clause--per followed policy; 3. Prior Notice Exclusion effective inception; 4. Prior & Pending Litigation Exclusion effective inception; 5. Retention; 6. Broad form Pollution Exclusion applicable to Side B of policy; 7. Broad form BI/PD Exclusion applicable to Side B of the policy; 8. Starr is not in a position to follow State Amendatory Endorsements; 9. Starr is not in a position to follow underlying sub-limits, but will recognize erosion; 10. This quote is subject to confirmation that no layer placed excess of Starr attracts a higher premium per million than Starr's lower layer. FOLLOWED POLICY: CODA 3 [STARR EXCESS INTERNATIONAL LOGO] Page 2 Proctor & Gamble New Business binder UNDERLYING POLICIES: CODA $25m XL $25m ACE Bermuda $50m Chubb $25m Premium to be received no later than June 30, 2001. The captioned policy will be issued upon receipt of the primary and all underlying policies. ACCEPTED BY: /s/ Adam Kleinman DATE: June 26, 2001 Adam Kleinman Vice President -----END PRIVACY-ENHANCED MESSAGE-----

EX-2.1

   1
                                  EXHIBIT (2-1)



           Stock and Asset Purchase Agreement for Clairol Incorporated


The exhibits referenced at the end of the Table of Contents will be furnished to
the Commission upon request.


   2

                                                                  CONFORMED COPY

                       STOCK AND ASSET PURCHASE AGREEMENT

                                     between

                          BRISTOL-MYERS SQUIBB COMPANY

                                       and

                          THE PROCTER & GAMBLE COMPANY

                            Dated as of May 20, 2001

                          SALE OF CLAIROL INCORPORATED

                                       and

                            RELATED STOCK AND ASSETS









   3

                                TABLE OF CONTENTS

                                                                          Page
                                                                          ----

                                    ARTICLE I

           Purchase and Sale of the Clairol Shares, the International
                         Shares and the Acquired Assets

SECTION 1.01.  Purchase and Sale of the Clairol Shares, the
               International Shares and the
               Acquired Assets .............................................2
SECTION 1.02.  Assumption of the Assumed Liabilities .......................4
SECTION 1.03.  Consents of Third Parties ...................................4

                                   ARTICLE II

                       Closing; Purchase Price Adjustment

SECTION 2.01.  Closing .....................................................5
SECTION 2.02.  Purchase Price Adjustment ...................................7

                                   ARTICLE III

                              Conditions to Closing

SECTION 3.01.  Buyer's Obligation ..........................................12
SECTION 3.02.  Seller's Obligation .........................................14
SECTION 3.03.  Frustration of Closing Conditions ...........................16

                                   ARTICLE IV

                    Representations and Warranties of Seller

SECTION 4.01.  Authority ...................................................16
SECTION 4.02.  No Conflicts; Consents ......................................17
SECTION 4.03.  The Clairol Shares and the International
               Shares ......................................................18
SECTION 4.04.  Organization and Standing; Books and Records ................19
SECTION 4.05.  Capital Stock of the Company ................................19
SECTION 4.06.  Clairol Subsidiaries; Equity Interests ......................20
SECTION 4.07.  Financial Statements ........................................21
SECTION 4.08.  Taxes .......................................................22
   4

SECTION 4.09.  Assets Other than Real Property Interests ...................24
SECTION 4.10.  Title to Real Property ......................................24
SECTION 4.11.  Intellectual Property .......................................25
SECTION 4.12.  Contracts ...................................................27
SECTION 4.13.  Litigation ..................................................33
SECTION 4.14.  Benefit Plans ...............................................34
SECTION 4.15.  Absence of Changes or Events ................................37
SECTION 4.16.  Compliance with Applicable Laws .............................37
SECTION 4.17.  Employee and Labor Matters ..................................39
SECTION 4.18.  Limitations on Representations and
               Warranties ..................................................40

                                    ARTICLE V

                               Covenants of Seller

SECTION 5.01.  Access ......................................................41
SECTION 5.02.  Ordinary Conduct ............................................41
SECTION 5.03.  Insurance ...................................................44
SECTION 5.04.  No Use of Clairol Names .....................................44
SECTION 5.05.  Intercompany Accounts .......................................45

                                   ARTICLE VI

                     Representations and Warranties of Buyer

SECTION 6.01.  Authority ...................................................45
SECTION 6.02.  No Conflicts; Consents ......................................45
SECTION 6.03.  Securities Act ..............................................46
SECTION 6.04.  Actions and Proceedings, etc. ...............................47
SECTION 6.05.  Availability of Funds .......................................47

                                   ARTICLE VII

                               Covenants of Buyer

SECTION 7.01.  Confidentiality .............................................47
SECTION 7.02.  No Additional Representations ...............................48
SECTION 7.03.  No Use of Certain Names .....................................48
SECTION 7.04.  Buyer Activity on Closing Date ..............................49
SECTION 7.05.  Securities Act ..............................................49
SECTION 7.06.  Guarantees ..................................................49
   5

                                  ARTICLE VIII

                                Mutual Covenants

SECTION 8.01.  Consents ....................................................50
SECTION 8.02.  Cooperation .................................................50
SECTION 8.03.  Publicity ...................................................51
SECTION 8.04.  Best Efforts ................................................51
SECTION 8.05.  Antitrust Notification and Other Regulatory
               Filings .....................................................52
SECTION 8.06.  Records .....................................................53
SECTION 8.07.  Support Services ............................................54
SECTION 8.08.  Collection of Receivables; Forwarding of
               Payments ....................................................54
SECTION 8.09   Advisory Committees .........................................54
SECTION 8.10.  Transitional Relabeling Services ............................55

                                   ARTICLE IX

                          Employee and Related Matters

SECTION 9.01.  Employee Matters ............................................55
SECTION 9.02.  Bargaining Unit Employees ...................................56
SECTION 9.03.  Continuity of Employment ....................................57
SECTION 9.04.  Pension Plan ................................................58
SECTION 9.05.  Savings and Investment Plan .................................59
SECTION 9.06.  Non-Qualified Plans .........................................59
SECTION 9.07.  Welfare Benefit Plans .......................................60
SECTION 9.08.  Severance ...................................................62
SECTION 9.09.  Vacation Benefits ...........................................62
SECTION 9.10.  Relocation Benefits .........................................62
SECTION 9.11.  Expatriates .................................................63
SECTION 9.12.  Other Agreements and Benefits ...............................63
SECTION 9.13.  Annual Bonuses ..............................................63
SECTION 9.14.  Retention Bonus Arrangements ................................63
SECTION 9.15.  International Pension and Savings Plans .....................64

                                    ARTICLE X

                               Further Assurances

SECTION 10.01.  Further Assurances .........................................64






   6

                                   ARTICLE XI

                                 Indemnification

SECTION 11.01.  Tax Indemnification ......................................64
SECTION 11.02.  Other Indemnification by Seller ..........................66
SECTION 11.03.  Other Indemnification by Buyer ...........................67
SECTION 11.04.  Limitations on Liability; Cooperation ....................67
SECTION 11.05.  Losses Net of Insurance, etc. ............................68
SECTION 11.06.  Termination of Indemnification ...........................69
SECTION 11.07.  Procedures Relating to Indemnification for
                Third Party Claims .......................................69
SECTION 11.08.  Procedures Related to Indemnification for
                Other Claims (Other than Tax Claims under
                Section 11.01) ...........................................71
SECTION 11.09.  Procedures Relating to Indemnification
                of Tax Claims ............................................71

                                   ARTICLE XII

                                   Tax Matters

SECTION 12.01.  Responsibility for Preparation and Filing
                of Tax Returns and Amendment .............................72
SECTION 12.02.  Cooperation ..............................................73
SECTION 12.03.  Refunds and Credits ......................................74
SECTION 12.04.  Section 338(h)(10) .......................................75
SECTION 12.05.  Purchase Price Allocations ...............................76
SECTION 12.06.  Transfer Taxes ...........................................76
SECTION 12.07.  FIRPTA Certificate .......................................77
SECTION 12.08.  Buyer Activity Post-Closing ..............................77

                                  ARTICLE XIII

                                   Termination

SECTION 13.01.  Termination ..............................................77
SECTION 13.02.  Return of Confidential Information .......................78
SECTION 13.03.  Consequences of Termination ..............................78
SECTION 13.04.  Payment ..................................................79







   7

                                   ARTICLE XIV

                           Survival of Representations

SECTION 14.01.  Survival of Representations ..............................79

                                   ARTICLE XV

                                  Miscellaneous

SECTION 15.01.  Assignment ...............................................79
SECTION 15.02.  No Third-Party Beneficiaries .............................80
SECTION 15.03.  Expenses .................................................80
SECTION 15.04.  Attorney Fees ............................................80
SECTION 15.05.  Amendments ...............................................80
SECTION 15.06.  Notices ..................................................80
SECTION 15.07.  Interpretation; Exhibits and the Seller
                Disclosure Schedule; Definitions .........................81
SECTION 15.08.  Counterparts .............................................89
SECTION 15.09.  Entire Agreement .........................................89
SECTION 15.10.  Broker and Finder Fees ...................................89
SECTION 15.11.  Severability .............................................90
SECTION 15.12.  Bulk Transfer Laws .......................................90
SECTION 15.13.  Consent to Jurisdiction ..................................90
SECTION 15.14.  Waiver of Jury Trial .....................................91
SECTION 15.15.  GOVERNING LAW ............................................91

EXHIBIT A       International Stock Selling Entities and
                International Subsidiaries

EXHIBIT B-1     U.S. Asset Selling Entities

EXHIBIT B-2     International Asset Selling Entities

EXHIBIT C       Form of International Stock Purchase Agreement

EXHIBIT D       Form of International Asset Purchase Agreement

EXHIBIT E       Allocations

EXHIBIT F-1     CMO Acquired Assets

EXHIBIT F-2     CMO Excluded Assets




   8

EXHIBIT G-1     CMO Assumed Liabilities

EXHIBIT G-2     CMO Excluded Liabilities

EXHIBIT H-1     International Acquired Assets

EXHIBIT H-2     International Excluded Assets

EXHIBIT I-1     International Assumed Liabilities

EXHIBIT I-2     International Excluded Liabilities

EXHIBIT J-1     Other U.S. Acquired Assets

EXHIBIT J-2     Other U.S. Excluded Assets

EXHIBIT K-1     Other U.S. Assumed Liabilities

EXHIBIT K-2     Other U.S. Excluded Liabilities

EXHIBIT L-1     CMO Transitional Services Agreement

EXHIBIT L-2     GBS Transitional Service Agreement

EXHIBIT L-3     International Transitional Services Agreement

EXHIBIT L-4     Information Management Agreement

EXHIBIT M       Employee Benefits

EXHIBIT N       Clairol Enhanced Severance/Retention Program

APPENDIX A      International Pension and Savings Plans

   9
                                                                  CONFORMED COPY

                           STOCK AND ASSET PURCHASE AGREEMENT dated as of May
                  20, 2001 (this "AGREEMENT"), between BRISTOL-MYERS SQUIBB
                  COMPANY, a Delaware corporation ("SELLER"), and THE PROCTER &
                  GAMBLE COMPANY, an Ohio corporation ("BUYER").

         Buyer desires to purchase from Seller, and Seller desires to sell to
Buyer, all the issued and outstanding shares of Common Stock, par value $10 per
share (the "CLAIROL SHARES"), of Clairol Incorporated, a Delaware corporation
and wholly owned subsidiary of Seller (the "COMPANY")

         Buyer also desires to purchase from the subsidiaries of Seller set
forth under the relevant caption in Exhibit A (each, an "INTERNATIONAL STOCK
SELLING ENTITY"), and Seller desires to cause the International Stock Selling
Entities to sell to Buyer and its designated Buyer Subsidiaries, all the issued
and outstanding capital stock owned by Seller and its subsidiaries (the
"INTERNATIONAL SHARES") of each of the subsidiaries of Seller set forth under
the relevant caption in Exhibit A attached hereto (each, an "INTERNATIONAL
CLAIROL SUBSIDIARY").

          Seller's customer management organization in the United States (the
"CMO") distributes and sells products of the Company, together with products of
other businesses of Seller and its Affiliates. Buyer and Seller desire that
Buyer acquire all Seller's CMO business and operations and that, following such
acquisition, Buyer provide certain transitional distribution and sales services
to Seller and its Affiliates as contemplated by the CMO Transitional Services
Agreement. Accordingly, Buyer desires to acquire from Seller, and Seller desires
to sell to Buyer, the CMO Acquired Assets. Buyer desires to assume, and Seller
desires to assign, the CMO Assumed Liabilities.

          Seller and certain of its subsidiaries set forth in Exhibit B-1 (each,
a "U.S. ASSET SELLING ENTITY") hold certain assets of, and provide certain
services to, the Acquired Business. Buyer and Seller desire that Buyer acquire
such assets and certain other assets related to the provision of such services
and assume certain liabilities related thereto. Accordingly, Buyer desires to
acquire from Seller and the U.S. Asset Selling Entities, and Seller and the U.S.
Asset Selling

   10

                                                                               2

         Entities desire to sell to Buyer, the Other U.S. Acquired Assets. Buyer
desires to assume, and Seller and the U.S. Asset Selling Entities desire to
assign, the Other U.S. Assumed Liabilities.

         Seller and certain of its subsidiaries set forth in Exhibit B-2 (each,
an "INTERNATIONAL ASSET SELLING ENTITY") manufacture, market, distribute or sell
the products of the Acquired Business (other than the CMO) or otherwise have
assets or liabilities of the Acquired Business (other than the CMO) in each of
the corresponding countries set forth in Exhibit B-2. Buyer desires to acquire,
or to cause its designated Buyer Subsidiaries to acquire, from Seller and the
Asset Selling Entities, and Seller desires to transfer, and to cause the Asset
Selling Entities to transfer, to Buyer and its designated Buyer Subsidiaries,
the International Acquired Assets. Buyer desires to assume, and Seller desires
to assign, the International Assumed Liabilities.

         Buyer desires to hire certain employees associated with the Acquired
Business, as set forth in this Agreement and the Other Transaction Documents.

         Section 15.07(c) identifies the Sections of this Agreement in which
capitalized terms used in this Agreement are defined.

         Accordingly, Seller and Buyer hereby agree as follows:

                                    ARTICLE I

           PURCHASE AND SALE OF THE CLAIROL SHARES, THE INTERNATIONAL
                         SHARES AND THE ACQUIRED ASSETS

         SECTION 1.01. PURCHASE AND SALE OF THE CLAIROL SHARES, THE
INTERNATIONAL SHARES AND THE ACQUIRED ASSETS. (a) On the terms and subject to
the conditions set forth in this Agreement, (i) Seller will sell, transfer and
deliver to Buyer, and Buyer will purchase from Seller, the Clairol Shares, (ii)
Seller will cause the International Stock Selling Entities to sell, transfer and
deliver to Buyer or its designated Buyer Subsidiaries, and Buyer will purchase
or cause such Buyer Subsidiaries to purchase from the International Stock
Selling Entities, the International Shares, (iii) Seller will, and will cause
the U.S. Asset
   11

                                                                               3

Selling Entities to, sell, convey, transfer, assign and deliver to Buyer or its
designated Buyer Subsidiaries, and Buyer will purchase or cause such Buyer
Subsidiaries to purchase from Seller and the U.S. Asset Selling Entities, the
U.S. Acquired Assets and (iv) Seller will, and will cause the International
Asset Selling Entities to, sell, convey, transfer, assign and deliver to Buyer
or its designated Buyer Subsidiaries, and Buyer will purchase or cause such
Buyer Subsidiaries, to purchase from the International Asset Selling Entities,
the International Acquired Assets, for (A) an aggregate purchase price equal to
$4.95 billion (the "PURCHASE PRICE") together with, if the Closing shall occur
after the Six Month Anniversary, interest on the Purchase Price accrued from the
Six Month Anniversary to the Closing Date at the Prime Rate, payable and subject
to adjustment as set forth in Article II, and (B) the assumption of the Assumed
Liabilities. The purchase and sale of the Clairol Shares, the International
Shares, the U.S. Acquired Assets and the International Acquired Assets and the
assumption of the Assumed Liabilities is referred to in this Agreement,
collectively, as the "TRANSACTION".

         (b) The purchase and sale of the International Shares with respect to
each International Clairol Subsidiary will be effected pursuant to short-form
stock purchase agreements (each, an "INTERNATIONAL STOCK PURCHASE AGREEMENT") in
substantially the same form as the form of International Stock Purchase
Agreement attached as Exhibit C to this Agreement, except (as Buyer and Seller
shall reasonably agree) for (i) the deletion of provisions which are
inapplicable to such International Clairol Subsidiary, (ii) such changes as may
be necessary to satisfy the requirements of applicable local law, (iii) such
changes as may be reasonably agreed upon by Seller and Buyer regarding employees
and employee benefits matters in order to adapt such agreement to the particular
circumstances of the relevant International Clairol Subsidiary and country or
countries in which it operates, provided that such changes shall be consistent
with the principles underlying the corresponding provisions of this Agreement
and (iv) such other changes as may be agreed by Seller and Buyer.

         (c) The transfer of each International Business Unit (including the
International Acquired Assets and International Assumed Liabilities) will be
effected pursuant to short-form asset purchase agreements (the "INTERNATIONAL
ASSET PURCHASE AGREEMENTS") on a country-by-country basis. Each International
Asset Purchase Agreement shall be in
   12

                                                                               4

substantially the same form as the form of International Asset Purchase
Agreement attached as Exhibit D, except (as Buyer and Seller shall reasonably
agree) for (i) the deletion of provisions which are inapplicable to such
International Business Unit, (ii) such changes as may be necessary to satisfy
the requirements of applicable local law, (iii) such changes as may be
reasonably agreed upon by Seller and Buyer regarding employees and employee
benefits matters in order to adapt such agreement to the particular
circumstances of the relevant International Business Unit and country, provided
that such changes shall be consistent with the terms and conditions of, and
principles underlying, the corresponding provisions of this Agreement, and (iv)
such other changes as may be agreed by Seller and Buyer.

         (d) Buyer and Seller agree to allocate a portion of the Purchase Price
(as adjusted pursuant to Section 2.02) to the International Shares and the
Acquired Assets in accordance with Exhibit E, and the remainder of the Purchase
Price (as adjusted pursuant to Section 2.02) to the Clairol Shares, in each case
in accordance with Section 12.05. Buyer and Seller shall further agree on the
allocation of the Purchase Price (as adjusted pursuant to Section 2.02) with
respect to the Acquired Assets on a country-by-country or asset-by-asset basis.
A proposed Exhibit E shall be prepared by Seller and delivered to Buyer not
later than 30 days prior to Closing and Buyer and Seller shall reach agreement
on a final Exhibit E no later than 120 days after the Closing Date. If Buyer and
Seller are unable to reach agreement on a final Exhibit E by the end of such
120-day period, either party may refer any items of disagreement to the
Accounting Firm for resolution within 45 days of the receipt of such submission
using procedures comparable to those provided in Section 2.02(a)(iii).

         SECTION 1.02. ASSUMPTION OF THE ASSUMED LIABILITIES. On the terms and
subject to the conditions of this Agreement, Buyer shall, on the Closing Date,
assume and shall pay, honor, perform and discharge (or cause to be assumed,
paid, honored, performed and discharged) when due all the U.S. Assumed
Liabilities and the International Assumed Liabilities (collectively, the
"ASSUMED LIABILITIES").

         SECTION 1.03. CONSENTS OF THIRD PARTIES. (a) Notwithstanding anything
in this Agreement to the contrary, this Agreement shall not constitute an
agreement to assign any asset or any claim or right or any benefit arising under
or resulting from such asset if an attempted assignment thereof,
   13

                                                                               5

without the consent of a third party, would constitute a breach or other
contravention of the rights of such third party, would be ineffective with
respect to any party to an agreement concerning such asset, or would in any way
adversely affect the rights of Seller or the Seller Entities or, upon transfer,
Buyer or its designated Buyer Subsidiary under such asset. If any transfer or
assignment by Seller or any Seller Entity to, or any assumption by Buyer or its
designated Buyer Subsidiary of, any interest in, or liability, obligation or
commitment under, any asset requires the consent of a third party, then such
assignment or assumption shall be made subject to such consent being obtained.

           (b) If any such consent is not obtained prior to the Closing, Seller
and the Seller Entities, on the one hand, and Buyer and the Buyer Subsidiaries,
on the other hand, shall cooperate (at their own expense) in any lawful and
commercially reasonable arrangement reasonably proposed by Buyer under which (i)
Buyer or its designated Buyer Subsidiary shall obtain (without infringing upon
the legal rights of such third party or outside party or violating any
Applicable Law) the economic claims, rights and benefits (net of the amount of
any related Tax costs imposed on Seller and its Affiliates) under the asset,
claim or right with respect to which the consent has not been obtained in
accordance with this Agreement, and (ii) Buyer shall assume any related economic
burden (including the amount of any related Tax costs imposed on Seller and its
Affiliates) with respect to the asset, claim or right with respect to which the
consent has not been obtained (including any related Assumed Liability).

                                   ARTICLE II

                       CLOSING; PURCHASE PRICE ADJUSTMENT

         SECTION 2.01. CLOSING. (a) Each of the Buyer and Seller are obligated
to consummate the closing (the "CLOSING") of the Transaction on the earlier of
(i) the second business day after the first date on which all the conditions to
the Closing set forth in Article III shall have been satisfied and (ii) the
Twelve Month Anniversary; PROVIDED, HOWEVER, that if on the Twelve Month
Anniversary, (x) any of the conditions set forth in Section 3.01 (other than the
conditions set forth in Sections 3.01(b) and (c)) shall not have been satisfied
(or waived in writing by Buyer), (y) any of the conditions set forth in Section
3.02 shall not have been satisfied (or waived
   14

                                                                               6

in writing by Seller) or (z) any statute, rule, regulation, executive order,
decree, temporary restraining order, preliminary or permanent injunction or
other similar legal restraint or prohibition or other order enacted, entered,
promulgated, enforced or issued by any U.S. Governmental Entity shall be in
effect that prevents the purchase and sale of the Clairol Shares, then the
Closing shall occur no later than the second business day after the satisfaction
of such conditions or the termination of such restraint or prohibition, as
applicable. The Closing shall be held on the Closing Date at 10:00 a.m. at the
offices of Cravath, Swaine & Moore, Worldwide Plaza, 825 Eighth Avenue, New
York, New York. The date on which the Closing shall occur is hereinafter
referred to as the "Closing Date."

         (b) At the Closing, Buyer shall deliver to Seller, by wire transfer to
a bank account designated in writing by Seller at least two business days prior
to the Closing Date, immediately available funds in an amount equal to the sum
of (i) the Purchase Price plus or minus (ii) an estimate, prepared by Seller and
delivered to Buyer at least two business days prior to the Closing Date, of any
adjustment to the Purchase Price under Section 2.02(b) plus (iii) any interest
payable to Seller pursuant to Section 1.01(a). The Purchase Price plus or minus
such estimate of any such adjustment under Section 2.02(b) is hereinafter called
the "CLOSING DATE AMOUNT".

         (c) Seller shall deliver or cause to be delivered to Buyer certificates
representing the Clairol Shares, duly endorsed in blank or accompanied by stock
powers duly endorsed in blank in proper form for transfer, with appropriate
transfer stamps, if any, affixed.

         (d) Seller (acting as agent for the International Stock Selling
Entities) shall deliver or cause to be delivered to Buyer or its designated
Buyer Subsidiary with respect to each International Clairol Subsidiary (i)
certificates representing the International Shares for such International
Clairol Subsidiary, duly endorsed in blank or accompanied by stock powers duly
endorsed in blank in proper form for transfer, with appropriate transfer stamps,
if any, affixed, or other appropriate instruments sufficient to evidence the
transfer of the International Shares under the Applicable Laws of the relevant
jurisdiction, and (ii) an appropriately executed International Stock Purchase
Agreement for each such International Clairol Subsidiary. Buyer shall deliver,
or cause its designated Buyer Subsidiary to deliver, to Seller
   15

                                                                               7

(acting as agent for the International Stock Selling Entities) an appropriately
executed International Stock Purchase Agreement for each International Clairol
Subsidiary.

         (e)(i) Seller (acting for itself and as agent for the Asset Selling
Entities) shall deliver or cause to be delivered to Buyer or its designated
Buyer Subsidiary such appropriately executed instruments of sale, assignment,
transfer and conveyance (including its counterpart signature page to each
applicable International Asset Purchase Agreement) in form and substance
reasonably satisfactory to Buyer and Seller and their respective counsel
evidencing and effecting the sale, assignment, and transfer to Buyer or
designated Buyer Subsidiaries of the U.S. Acquired Assets and the International
Acquired Assets (collectively, the "ACQUIRED ASSETS") (it being understood that
such instruments shall not require the Seller or, as the case may be, the Asset
Selling Entities to make any additional representations, warranties or
covenants, expressed or implied, not contained in this Agreement) and (ii) Buyer
shall deliver or cause to be delivered by its applicable Buyer Subsidiaries to
Seller appropriately executed counterparts to such instruments of sale,
assignment, transfer and conveyance (including its counterpart signature page to
each applicable International Asset Purchase Agreement), and appropriately
executed instruments of assumption (it being understood that such instruments
described above shall not require Buyer or, as the case may be, Buyer
Subsidiaries, to make any additional representations, warranties or covenants,
expressed or implied, or assume any additional liabilities, expressed or
implied, not contained in this Agreement) by Buyer or its applicable Buyer
Subsidiaries of the Assumed Liabilities, in form and substance reasonably
satisfactory to Buyer, Seller and their respective counsel. The documents and
instruments referred to in Section 2.01(c), (d) and (e), together with the
International Stock Purchase Agreements and the International Asset Purchase
Agreements, are collectively referred to herein as the "TRANSFER DOCUMENTS".

         SECTION 2.02. PURCHASE PRICE ADJUSTMENT. (a) (i) Within 90 days after
the Closing Date, Buyer shall prepare and deliver to Seller a statement (the
"WORKING CAPITAL STATEMENT"), setting forth Working Capital as of the close of
business on the Closing Date ("CLOSING WORKING CAPITAL"). The Working Capital
Statement is hereinafter sometimes referred to as the "STATEMENT". The Statement
shall be accompanied by a certificate of Buyer stating that the Statement has
been
   16

                                                                               8

prepared in compliance with the applicable requirements of this Section 2.02.

         (ii) The Statement shall become final and binding on the parties on the
sixtieth day following receipt thereof by the Seller, unless Seller gives
written notice of its disagreement with the Statement (a "NOTICE OF
DISAGREEMENT") to Buyer prior to such date. Any Notice of Disagreement shall (A)
specify in reasonable detail the nature of any disagreement so asserted and (B)
only include disagreements based on mathematical errors or based on Closing
Working Capital not being calculated in accordance with this Section 2.02. If a
Notice of Disagreement is received by Buyer in a timely manner, then the
Statement (as revised in accordance with clause (1) or (2) below) shall become
final and binding upon Seller and Buyer, on the earlier of (1) the date Seller
and Buyer resolve in writing any differences they have with respect to the
matters specified in such Notice of Disagreement and (2) the date all disputed
matters specified in such Notice of Disagreement are finally resolved in writing
by the Accounting Firm.

         (iii) During the 60-day period following the delivery of a Notice of
Disagreement, Seller and Buyer shall seek in good faith to resolve in writing
any differences which they may have with respect to the matters specified in
such Notice of Disagreement. At the end of such 60-day period, Seller and Buyer
shall submit to an internationally recognized independent accounting firm
mutually agreed upon by Seller and Buyer (the "ACCOUNTING FIRM") for review and
resolution of any and all matters which remain in dispute and which were
properly included in such Notice of Disagreement. The scope of the Accounting
Firm's review shall be limited to only those matters which remain in dispute and
which were properly included in such Notice of Disagreement. Seller and Buyer
shall use reasonable efforts to cause the Accounting Firm to render a decision
resolving the matters submitted to the Accounting Firm within 45 days of the
receipt of such submission. Seller and Buyer agree that judgment may be entered
upon the determination of the Accounting Firm in any court having jurisdiction
over the party against which such determination is to be enforced. The
Accounting Firm's determination shall be accompanied by a certificate of the
Accounting Firm that it reached its decision in accordance with the provisions
of this Section 2.02(a). The cost of any arbitration (including the fees and
expenses of the Accounting Firm) with respect to any Notice of Disagreement
pursuant to
   17

                                                                               9

this Section 2.02(a) shall be borne by Buyer and Seller in inverse proportion as
they may prevail on matters resolved by the Accounting Firm with respect to such
Notice of Disagreement, which proportionate allocation also shall be determined
by the Accounting Firm at the time the determination of the Accounting Firm is
rendered on the merits of the matter submitted.

           (b) (i) The Purchase Price shall be increased by the amount by which
Closing Working Capital exceeds $164,900,000 (the "W.C. AMOUNT"), and the
Purchase Price shall be decreased by the amount by which Closing Working Capital
is less than the W.C. Amount (the Purchase Price as so increased or decreased
shall hereinafter be referred to as the "ADJUSTED CLOSING DATE AMOUNT"). If the
Closing Date Amount is less than the Adjusted Closing Date Amount, Buyer shall,
and if the Closing Date Amount is greater than the Adjusted Closing Date Amount,
Seller shall, within 10 business days after the Working Capital Statement
becomes final and binding on the parties, make payment by wire transfer in
immediately available funds of the amount of such difference, together with
interest thereon accrued from the Closing Date to the date of payment at the
Prime Rate. Notwithstanding the foregoing provisions of this Section 2.02(b), no
adjustment to the Purchase Price pursuant to this Section 2.02(b) shall be made
unless such adjustment (whether an increase or a decrease) would exceed
$12,500,000, and if the adjustment would exceed such amount, then the full
amount of the adjustment shall be made.

           (ii) The term "WORKING CAPITAL" shall mean Current Assets minus
Current Liabilities. The W.C. Amount equals Working Capital on December 31,
2000, as reflected in the Clairol Balance Sheet, the Boclaro Working Capital
Statement and the CMO Working Capital Statement, and shall not be subject to
change regardless of whether the items included therein were in accordance with
generally accepted accounting principles or the Seller Accounting Policies. The
term "CURRENT ASSETS" shall mean the combined net account receivables, net
inventory and prepaid and other current assets of the Acquired Business, all
calculated (A) in accordance with the Bristol-Myers Squibb Company Accounting
Policies and Procedures previously delivered to Buyer and in effect as of
December 31, 2000, (B) to give effect to the requirements of Emerging Issues
Task Force Issue No. 00-14 "ACCOUNTING FOR CERTAIN SALES INCENTIVES" and (C)
otherwise in conformity with the basis of presentation described in the
   18

                                                                              10

notes to the Financial Statements (clauses (A), (B) and (C), collectively, the
"SELLER ACCOUNTING POLICIES"). The term "CURRENT LIABILITIES" shall mean the sum
of (x) combined accounts payable and accrued liabilities of the Acquired
Business (other than the CMO) and (y)(1) the sum of 50% of combined accounts
payable and accrued liabilities of the CMO other than brokers' commissions and
(2) all brokers' commissions related to Clairol included in combined accounts
payable of the CMO, all calculated in accordance with the Seller Accounting
Policies. For the avoidance of doubt, current assets and current liabilities
relating to cash and cash equivalents, Taxes, deferred Tax assets and deferred
Tax liabilities, intercompany transactions, any other Excluded Assets and any
other Excluded Liabilities are not included in the Clairol Balance Sheet, the
Boclaro Working Capital Statement or the CMO Working Capital Statement shall not
be taken into account in determining Working Capital. Items for which Buyer and
its Affiliates (including the Clairol Entities and any Buyer Subsidiaries that
acquire Acquired Assets or assume Assumed Liabilities) are indemnified by Seller
pursuant to Article XI shall not be taken into account in determining Working
Capital. The parties agree that the adjustment contemplated by Section 2.02(b)
is intended to show the change in Working Capital from December 31, 2000, to the
Closing Date and that such change can only be measured if the calculation is
done in the same way, using the Seller Accounting Policies at both dates.

           (c) The scope of the disputes to be resolved by the Accounting Firm
is limited to whether such calculations were done in accordance with Section
2.02(b), including whether the calculations were in compliance with Seller
Accounting Policies and whether there were mathematical errors in the Statement,
and the Accounting Firm is not to make any other determination, including any
determination as to whether the Seller Accounting Policies are in accordance
with GAAP or whether GAAP was followed for the Statement or as to whether the
W.C. Amount is correct. Any items on or omissions from the Clairol Balance
Sheet, the Boclaro Working Capital Statement or the CMO Working Capital
Statement that are based upon errors of fact or mathematical errors or that are
not in accordance with the Seller Accounting Policies shall be carried forward
for purposes of calculating Closing Working Capital, as applicable.

           (d)  Until the later to occur of (i) the date on which the Statement
shall become final and binding on the
   19

                                                                              11

parties pursuant to Section 2.02(a)(ii) and (ii) the date on which the Assumed
Liabilities Statement (as defined in the CMO Transitional Services Agreement)
shall become final and binding on the parties pursuant to Section 5.03 of the
CMO Transitional Services Agreement, Buyer agrees that following the Closing it
shall not take any actions with respect to the accounting books and records of
Clairol on which the Statement is to be based that are not consistent with the
Acquired Business' past practices except to the extent that such changes are, in
the written opinion of outside counsel, necessary to comply with Applicable Law.
Without limiting the generality of the foregoing, no changes shall be made
during such period in any reserve or other account existing as of December 31,
2000, except as a result of events occurring after December 31, 2000 and, in
such event, only in a manner consistent with past practices.

           (e) Until the later to occur of (i) the date on which the Statement
shall become final and binding on the parties pursuant to Section 2.02(a)(ii)
and (ii) the date on which the Assumed Liabilities Statement (as defined in the
CMO Transitional Services Agreement) shall become final and binding on the
parties pursuant to Section 5.03 of the CMO Transitional Services Agreement,
Buyer agrees that following the Closing it shall, and shall cause the Acquired
Business (including the Clairol Entities and any Buyer Subsidiaries that acquire
Acquired Assets or assume Assumed Liabilities) to, afford to Seller and any
accountants, counsel or financial advisors retained by Seller in connection with
any adjustment to the Purchase Price contemplated by this Section 2.02 and the
calculation of each of the BMS Division's Allocable Portion of the CMO Accounts
Payable and Accrued Liabilities reasonable access upon reasonable notice during
normal business hours to the properties, books, contracts, personnel and records
of the Acquired Business (including the Clairol Entities and any Buyer
Subsidiaries that acquire Acquired Assets or assume Assumed Liabilities) and
Buyer's and its accountant's work papers relating to the Statement and the
Assumed Liabilities Statement relevant to the adjustment contemplated by this
Section 2.02 and the calculation of each of the BMS Division's Allocable Portion
of the CMO Accounts Payable and Accrued Liabilities and shall provide Seller
upon Seller's reasonable request and at Seller's expense, with copies of any
such books, contracts and records, including Buyer's and its accountants, work
papers relating to the Statement.
   20

                                                                              12

                                   ARTICLE III

                              CONDITIONS TO CLOSING

          SECTION 3.01. BUYER'S OBLIGATION. The obligation of Buyer to purchase
and pay for the Clairol Shares, the International Shares and the Acquired Assets
and to assume the Assumed Liabilities is subject to the satisfaction (or written
waiver by Buyer) as of the Closing of the following conditions:

          (a) (i) The representations and warranties of Seller made in this
     Agreement shall be true and correct in all material respects on and as of
     the date hereof, except to the extent such representations and warranties
     expressly relate to an earlier date (in which case such representations and
     warranties shall be true and correct in all material respects, on and as of
     such earlier date) and (ii) the representations and warranties of Seller
     made in Sections 4.01, 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.10, 4.11
     and 4.14 shall be true and correct in all material respects as of the date
     hereof and as of the time of the Closing as though made as of such time,
     except to the extent such representations and warranties expressly relate
     to an earlier date (in which case such representations and warranties shall
     be true and correct in all material respects, on and as of such earlier
     date), in each case in clauses (i) and (ii) except for breaches as to
     matters that, individually or in the aggregate, would not be reasonably
     likely to have a Material Adverse Effect. Seller shall have performed or
     complied in all material respects with all obligations and covenants
     required by this Agreement to be performed or complied with by Seller by
     the time of the Closing; PROVIDED, HOWEVER, that for purposes of this
     condition each of the covenants in Section 5.02 with respect to the conduct
     by Seller of the Acquired Business from the date hereof to the Closing that
     are qualified by references to the phrase "consistent with past practice"
     shall be read as if such phrase were deleted from such covenants. Seller
     shall have delivered to Buyer a certificate dated the Closing Date and
     signed by an authorized officer of Seller confirming the foregoing.

           (b) No statute, rule, regulation, executive order, decree, temporary
     restraining order, preliminary or permanent injunction or other order
     enacted, entered,
   21

                                                                              13

     promulgated, enforced or issued by any Federal, state, local or foreign
     government or any court of competent jurisdiction, administrative agency or
     commission or other governmental authority or instrumentality, domestic or
     foreign (a "GOVERNMENTAL ENTITY"), or other legal restraint or prohibition
     shall be in effect preventing (i) the purchase and sale of the Clairol
     Shares or (ii) prior to the Twelve Month Anniversary, the purchase or sale
     of any portion of the International Shares or any portion of the Acquired
     Assets or the assumption of any portion of the Assumed Liabilities, to the
     extent the exclusion of such portion of the International Shares, Acquired
     Assets or Assumed Liabilities would be reasonably likely to have a Material
     Adverse Effect.

          (c) (i) The waiting period under the Hart-Scott-Rodino Antitrust
     Improvements Act of 1976 (the "HSR ACT"), the Mexican Federal Economic
     Competition Law (the "MEXICAN MERGER REGULATION") and Section 123 of the
     Competition Act (Canada) (the "CANADA COMPETITION ACT"), if applicable to
     the Transaction, shall have expired or been terminated and in Canada, Buyer
     shall have been advised in writing, in a form and upon terms reasonably
     satisfactory to Buyer, that the Commissioner of Competition does not oppose
     the Transaction and will not make an application under Section 92 or any
     other section of the Competition Act in relation to the Transaction. Any
     consents, authorizations, orders, approvals, declarations and filings under
     the HSR Act, the Mexican Merger Regulation, the Canada Competition Act or
     any other applicable antitrust law, the absence of which would prohibit the
     consummation of (i) the purchase and sale of the Clairol Shares or (ii) the
     purchase and sale of any portion of the International Shares or any portion
     of the Acquired Assets, or the assumption of any portion of the Assumed
     Liabilities, to the extent the exclusion of such portion of the
     International Shares, Acquired Assets or Assumed Liabilities would be
     reasonably likely to have a Material Adverse Effect, shall have been made
     or obtained.

          (ii) The Office of Fair Trading shall have indicated, in terms and a
     form reasonably satisfactory to Buyer, that it is not the intention of the
     Secretary of the State for Trade and Industry to refer the proposed
     acquisition of the Clairol Shares, the International Shares and the
     Acquired Assets and the assumption of the
   22

                                                                              14

     Assumed Liabilities, or any matter arising therefrom, to the Competition
     Commission; and/or if the Secretary of the State for Trade and Industry
     makes a reference to the Competition Commission, either:

              (A) the Competition Commission has concluded, in terms and a form
          reasonably satisfactory to Buyer, that neither the acquisition of the
          Clairol Shares, the International Shares and the Acquired Assets and
          the assumption of the Assumed Liabilities, nor any matter arising
          therefrom, may be expected to operate against the public interest;
          and/or

               (B) the Secretary of the State for Trade and Industry allowing
          the acquisition of the Clairol Shares, the International Shares and
          the Acquired Assets and the assumption of the Assumed Liabilities to
          proceed on terms reasonably satisfactory to the Buyer.

          Notwithstanding anything else to the contrary herein, on and after the
     Twelve Month Anniversary of the date of this Agreement, the conditions set
     forth in Section 3.01(b)(ii) and Section 3.01(c) shall cease to be
     conditions to Buyer's obligation to purchase and pay for the Clairol
     Shares, the International Shares and the Acquired Assets and to assume the
     Assumed Liabilities.

          (d) Seller shall have executed and delivered, or shall have caused its
     Affiliates named as parties to any Transaction Document other than this
     Agreement (the "OTHER TRANSACTION DOCUMENTS") to execute and deliver, the
     Other Transaction Documents.

          SECTION 3.02. SELLER'S OBLIGATION. The obligation of Seller to sell
and deliver the Clairol Shares, the International Shares, the Acquired Assets
and the Assumed Liabilities to Buyer is subject to the satisfaction (or written
waiver by Seller) as of the Closing of the following conditions:

           (a) The representations and warranties of Buyer made in this
     Agreement shall be true and correct in all material respects, as of the
     date hereof and as of the time of the Closing as though made as of such
     time, except to the extent such representations and warranties
   23

                                                                              15

     expressly relate to an earlier date (in which case such representations and
     warranties shall be true and correct in all material respects, on and as of
     such earlier date), in each case except for breaches as to matters that,
     individually or in the aggregate, would not be reasonably likely to have a
     material adverse effect on the ability of Buyer to consummate the
     transactions contemplated hereby. Buyer shall have performed or complied in
     all material respects with all obligations and covenants required by this
     Agreement to be performed or complied with by Buyer by the time of the
     Closing. Buyer shall have delivered to Seller a certificate dated the
     Closing Date and signed by an authorized officer of Buyer confirming the
     foregoing.

          (b) No statute, rule, regulation, executive order, decree, temporary
     restraining order, preliminary or permanent injunction or other order
     enacted, entered, promulgated, enforced or issued by any Governmental
     Entity or other legal restraint or prohibition shall be in effect
     preventing (i) the purchase and sale of the Clairol Shares or (ii) the
     purchase and sale of any portion of the International Shares material,
     individually or in the aggregate, to the Acquired Business or any portion
     of the Acquired Assets material, individually or in the aggregate, to the
     Acquired Business or the assumption of any portion of the Assumed
     Liabilities material, individually or in the aggregate, to the Acquired
     Business.

          (c) The waiting period under the HSR Act, the Mexican Merger
     Regulation and the Canada Competition Act and the merger control act in the
     United Kingdom or any other antitrust law, if applicable to the
     Transaction, shall have expired or been terminated. Any consents,
     authorizations, orders, approvals, declarations and filings under the HSR
     Act, the Mexican Merger Regulation, the Canada Competition Act or any other
     applicable antitrust law, the absence of which would prohibit the
     consummation of (i) the purchase of the Clairol Shares or (ii) the purchase
     and sale of any portion of the International Shares material, individually
     or in the aggregate, to the Acquired Business or any portion of the
     Acquired Assets material, individually or in the aggregate, to the Acquired
     Business or the assumption of any portion of the Assumed Liabilities
     material,
   24

                                                                              16

     individually or in the aggregate, to the Acquired Business, shall have been
     made or obtained.

           (d) Buyer shall have executed and delivered, or shall have caused its
     Affiliates named as parties to any Other Transaction Document to execute
     and deliver, the Other Transaction Documents.

           SECTION 3.03. FRUSTRATION OF CLOSING CONDITIONS. Neither Buyer nor
Seller may rely on the failure of any condition set forth in Section 3.01 or
3.02, respectively, to be satisfied if such failure was caused by such party's
failure to act in good faith or to use its best efforts to cause the Closing to
occur, as required by Section 8.04.

                                   ARTICLE IV

                    REPRESENTATIONS AND WARRANTIES OF SELLER

          Except as set forth in the Seller Disclosure Schedule attached hereto
(the "SELLER DISCLOSURE SCHEDULE"), Seller hereby represents and warrants to
Buyer with respect to Sections 4.01, 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08,
4.09, 4.10, 4.11 and 4.14, as of the date hereof and as of the Closing Date,
except to the extent such representations and warranties expressly relate to an
earlier date (in which case such representations and warranties shall be true
and correct in all material respects, on and as of such earlier date) and with
respect to all other representations and warranties, as of the date hereof,
except to the extent such representations and warranties expressly relate to an
earlier date (in which case such representations and warranties shall be true
and correct in all material respects, on and as of such earlier date), as
follows:

           SECTION 4.01. AUTHORITY. Seller is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to enter into this
Agreement. Each Seller Entity is a legal entity duly organized, validly existing
and in good standing under the laws of the jurisdiction of its organization.
Seller and the Seller Entities have all requisite corporate power to consummate
the transactions contemplated hereby. All corporate acts and other proceedings
required to be taken by Seller and the Seller Entities to authorize the
execution, delivery and
   25

                                                                              17

performance of this Agreement, the Transfer Documents and the Transitional
Services Agreements (collectively, the "TRANSACTION DOCUMENTS"), to the extent
such persons are parties to such agreements, and the consummation of the
transactions contemplated hereby and thereby have been, or in the case of the
Seller Entities will have been by the Closing Date, duly and properly taken.
This Agreement and each of the Other Transaction Documents has been, or in the
case of the Other Transaction Documents will have been by the Closing Date, duly
executed and delivered by Seller or the applicable Seller Entity or Seller
Entities and constitutes a legal, valid and binding obligation of Seller or such
Seller Entity or Seller Entities, enforceable against Seller or such Seller
Entity or Seller Entities in accordance with its terms.

           SECTION 4.02. NO CONFLICTS; CONSENTS. (a) The execution and delivery
of this Agreement by Seller do not, and the execution and delivery of the Other
Transaction Documents by Seller or the Seller Entities, as applicable, will not,
and the consummation of the transactions contemplated hereby and thereby and
compliance with the terms hereof and thereof will not, conflict with, or result
in any violation of or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a material benefit under, or result in
the creation of any liens, claims, encumbrances, security interests, options,
charges or restrictions of any kind ("Liens") upon any of the properties or
assets of the Clairol Entities or the Acquired Assets under, any provision of
(i) the Certificate of Incorporation or By-laws (or the comparable governing
instruments) of Seller, any Seller Entity or any Clairol Entity, (ii) as of the
date of this Agreement, any note, bond, mortgage, indenture, deed of trust,
license, lease, contract, commitment, agreement or arrangement to which Seller,
any Seller Entity or any Clairol Entity is a party (in the case of Seller or any
Seller Entity, solely to the extent such note, bond, mortgage, indenture, deed
of trust, license, lease, contract, commitment, agreement or arrangement relates
to the Acquired Business) or by which any of the properties or assets of any
Clairol Entity or any Acquired Assets are bound or (iii) as of the date of this
Agreement, any judgment, order or decree, or, subject to the matters referred to
in clauses (i), (ii) and (iii) of paragraph (b) below, statute, law, ordinance,
rule or regulation applicable to Seller, any Seller Entity or any Clairol Entity
(in the case of Seller or any Seller Entity, solely to the extent such judgment,
order,
   26

                                                                              18

decree, statute, law, ordinance, rule or regulation relates to the Acquired
Business) or the properties or assets of any Clairol Entity or any Acquired
Assets, other than, in the case of clauses (ii) and (iii) above, any such items
that, individually or in the aggregate, would not be reasonably likely to have a
Material Adverse Effect.

           (b) No material consent, approval, license, permit, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required to be obtained or made by or with respect to Seller, any
Seller Entity or any Clairol Entity in connection with the execution, delivery
and performance of this Agreement, the Other Transaction Documents or the
consummation of the transactions contemplated hereby or thereby other than (i)
compliance with and filings under the HSR Act, the Mexican Merger Regulation,
the Canada Competition Act, the merger control acts in the United Kingdom and
Germany and the Irish Mergers Act, if applicable, (ii) those that may be
required solely by reason of Buyer's or any Buyer Subsidiary's (as opposed to
any other third party's) participation in the transactions contemplated hereby
or by the Other Transaction Documents, (iii) those required to transfer
environmental permits, and (iv) such consents, approvals, licenses, permits,
orders, authorizations, registrations, declarations and filings the absence of
which, or the failure to make or obtain which, individually or in the aggregate,
would not be reasonably likely to have a Material Adverse Effect.

           SECTION 4.03. THE CLAIROL SHARES AND THE INTERNATIONAL SHARES. (a)
Seller has good and valid title to the Clairol Shares, free and clear of any
Liens. Assuming Buyer has the requisite power and authority to be the lawful
owner of the Clairol Shares, upon delivery to Buyer at the Closing of
certificates representing the Clairol Shares, duly endorsed by Seller for
transfer to Buyer, and upon Seller's receipt of the Closing Date Amount
(including any interest payable on the Purchase Price pursuant to Section
1.01(a)), good and valid title to the Clairol Shares will pass to Buyer, free
and clear of any Liens, other than those arising from acts of Buyer or its
Affiliates. Other than this Agreement, the Clairol Shares are not subject to any
voting trust agreement or other contract, agreement, arrangement, commitment or
understanding, including any such agreement, arrangement, preemptive rights,
commitment or understanding restricting or otherwise relating to the voting,
dividend rights or disposition of the Clairol Shares.
   27

                                                                              19

           (b) Each International Stock Selling Entity has good and valid title
to the International Shares corresponding to its applicable International
Clairol Subsidiary, free and clear of any Liens. Assuming Buyer or its
designated Buyer Subsidiary has the requisite power and authority to be the
lawful owner of such International Shares, upon delivery to Buyer at the Closing
of certificates representing such International Shares, duly endorsed by the
applicable International Stock Selling Entity for transfer to Buyer or such
Buyer Subsidiary, or other appropriate instruments sufficient to evidence the
transfer of the International Shares under the Applicable Laws of the relevant
jurisdiction, and upon Seller's receipt of the Closing Date Amount (including
any interest payable on the Purchase Price pursuant to Section 1.01(a)), good
and valid title to such International Shares will pass to Buyer or such Buyer
Subsidiary, free and clear of any Liens, other than those arising from acts of
Buyer or its Affiliates. Other than this Agreement, the International Shares are
not subject to any voting trust agreement or other contract, agreement,
arrangement, preemptive rights, commitment or understanding, including any such
agreement, arrangement, commitment or understanding restricting or otherwise
relating to the voting, dividend rights or disposition of the International
Shares.

           SECTION 4.04. ORGANIZATION AND STANDING; BOOKS AND RECORDS. Each of
the Company and each of the Clairol Subsidiaries is an entity duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization. Each of the Company and each of the Clairol Subsidiaries has full
corporate power and authority and possesses all governmental franchises,
licenses, permits, authorizations and approvals necessary to enable it to own,
lease or otherwise hold its properties and assets and to carry on its business
as presently conducted, other than such franchises, licenses, permits,
authorizations and approvals the lack of which, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect.
Each of the Company and each of the Clairol Subsidiaries is duly qualified and
in good standing to do business as a foreign corporation in each jurisdiction in
which the conduct or nature of its business or the ownership, leasing or holding
of its properties makes such qualification necessary, except such jurisdictions
where the failure to be so qualified or in good standing, individually or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect.
Seller has prior to the Closing Date delivered to Buyer true and
   28

                                                                              20

complete copies of the organizational documents, each as amended to the date
hereof, of the Company, and the Clairol Subsidiaries.

           SECTION 4.05. CAPITAL STOCK OF THE COMPANY. The authorized capital
stock of the Company consists of 200,000 shares of common stock, $10 par value
per share. Of such 200,000 duly authorized shares, 100,000 shares (constituting
the Clairol Shares) are validly issued and outstanding, fully paid and
nonassessable. Seller is the record and beneficial owner of the Clairol Shares.
Except for the Clairol Shares, there are no shares of capital stock or other
equity securities of the Company outstanding. The Clairol Shares have not been
issued in violation of, and are not subject to, any preemptive, subscription or
similar rights under any provision of applicable law, the Certificate of
Incorporation or By-laws of the Company, any contract, agreement or instrument
to which the Company is subject, bound or a party or otherwise. There are no
outstanding warrants, options, rights, "phantom" stock rights, agreements,
convertible or exchangeable securities or other commitments (other than this
Agreement) (a) pursuant to which Seller or the Company is or may become
obligated to issue, sell, purchase, return or redeem any shares of capital stock
or other securities of the Company or (b) that give any person the right to
receive any benefits or rights similar to any rights enjoyed by or accruing to
the holders of shares of capital stock of the Company. There are no equity
securities of the Company reserved for issuance for any purpose. There are no
outstanding bonds, debentures, notes or other indebtedness having the right to
vote on any matters on which stockholders of the Company may vote.

           SECTION 4.06. CLAIROL SUBSIDIARIES; EQUITY INTERESTS. (a) Section
4.06(a) of the Seller Disclosure Schedule lists, for each company that is a
subsidiary of the Company as of the date of this Agreement (the "U.S. CLAIROL
SUBSIDIARIES"), its jurisdiction of organization and its authorized and
outstanding capital stock. All the outstanding shares of capital stock of each
U.S. Clairol Subsidiary have been validly issued and are fully paid and
nonassessable and are as of the date of this Agreement owned by the Company or
by an Affiliate of the Company or by the Company and an Affiliate of the
Company, free and clear of all Liens.

           (b) Section 4.06(b) of the Seller Disclosure Schedule lists, for each
International Clairol Subsidiary, its jurisdiction of organization and its
authorized and
   29

                                                                              21

outstanding capital stock. All of the outstanding shares of capital stock of
each International Clairol Subsidiary have been validly issued and are fully
paid and nonassessable and, except as set forth in Section 4.06(b) of the Seller
Disclosure Schedule, are as of the date of this Agreement owned by the
applicable International Stock Selling Entity or International Stock Selling
Entities, free and clear of all Liens.

           (c) None of the outstanding shares of capital stock of any U.S.
Clairol Subsidiary or any International Clairol Subsidiary have been issued in
violation of, and is subject to, any preemptive, subscription or similar rights
under any provision of Applicable Law, the Certificate of Incorporation or
By-laws of such Subsidiary, any contract, agreement or instrument to which such
Subsidiary is subject, bound or a party or otherwise. There are no outstanding
warrants, options, rights, "phantom" stock rights, agreements, convertible or
exchangeable securities or other commitments (other than this Agreement) (i)
pursuant to which Seller, the applicable Clairol Subsidiary or any such
Subsidiary is or may become obligated to issue, sell, purchase, return or redeem
any shares of capital stock or other securities of U.S. Clairol Subsidiaries or
the International Clairol Subsidiaries or (ii) that give any person the right to
receive any benefits or rights similar to any rights enjoyed by or accruing to
the holders of shares of capital stock of the applicable Clairol Subsidiaries or
any such Subsidiaries. There are no equity securities of any U.S. Clairol
Subsidiary or International Clairol Subsidiary reserved for issuance for any
purpose. There are no outstanding bonds, debentures, notes or other indebtedness
having the right to vote on any matters on which stockholders of any U.S.
Clairol Subsidiary or International Clairol Subsidiary may vote.

           (d) As of the date of this Agreement, except for the Company's
interests in the U.S. Clairol Subsidiaries, none of the Clairol Entities as of
the date of this Agreement owns, directly or indirectly, and the Acquired Assets
do not include any capital stock, membership interest, partnership interest,
joint venture interest or other equity interest with a net book value as of the
date of this Agreement in excess of $5,000,000 in any person.

           SECTION 4.07. FINANCIAL STATEMENTS. (a) Section 4.07 (a) of the
Seller Disclosure Schedule sets forth (i) the audited combined statements of
assets to be acquired and liabilities to be assumed as of December 31, 2000, of
Clairol
   30

                                                                              22

(the "CLAIROL BALANCE SHEET") and the audited combined statement of earnings
before taxes of Clairol for the year ended December 31, 2000, together with the
notes to such financial statements, (ii) the audited combined statement of
assets to be acquired and liabilities to be assumed as of December 31, 1999, of
Clairol, and the audited statement of earnings before taxes of Clairol for the
years ended December 31, 1998 and 1999, together with the notes to such
financial statements (the financial statements described in clauses (i) and (ii)
above, together with the notes to such financial statements, collectively, the
"FINANCIAL STATEMENTS").

           (b) Section 4.07(b) of the Seller Disclosure Schedule sets forth (i)
the unaudited Boclaro Working Capital Statement as of December 31, 2000 (the
"BOCLARO WORKING CAPITAL STATEMENT") and (ii) the unaudited CMO Working Capital
Statement as of December 31, 2000 (the "CMO WORKING CAPITAL STATEMENT") (the
statements in (i) and (ii) collectively, the "ADDITIONAL FINANCIAL STATEMENTS").

           (c) The Financial Statements do not include any Other U.S. Assumed
Liabilities related to Boclaro, Inc. or any CMO Assumed Liabilities. The
Financial Statements have been prepared in conformity with GAAP consistently
applied (except in each case as described in the notes thereto) and on a basis
that fairly presents in all material respects the combined financial condition
and results of operations of Clairol as of the respective dates thereof and for
the respective periods indicated in conformity with the basis of presentation
described in the notes to the Financial Statements. The Additional Financial
Statements have been prepared in good faith in substantial conformity with the
Seller Accounting Policies, in each case consistently applied. The Clairol
Balance Sheet, the Boclaro Working Capital Statement and the CMO Working Capital
Statement, collectively, fairly present in all material respects the combined
financial condition of the Acquired Business as of December 31, 2000 in
conformity with the basis of presentation described in the notes to the
Financial Statements.

           SECTION 4.08. TAXES. (a) For purposes of this Agreement, (i) "TAX" or
"TAXES" shall mean all Federal, state, local and foreign taxes and similar
assessments, including all interest, penalties and additions imposed with
respect to such amounts; (ii) "PRE-CLOSING TAX PERIOD" shall mean all taxable
periods ending on or before the Closing Date and the portion ending on the
Closing Date of any taxable period that includes
   31

                                                                              23

(but does not end on) the Closing Date; and (iii) "CODE" shall mean the U.S.
Internal Revenue Code of 1986, as amended.

           (b) (i) All material Tax returns, reports and forms required to be
filed by the Code or by applicable state, local or foreign Tax laws by or on
behalf of the Clairol Entities or with respect to the Acquired Assets have been
duly filed in a timely manner (within any applicable extension periods), and
such returns, reports and forms are true, complete and correct in all material
respects, (ii) all Taxes shown to be due on such returns, reports and forms and
all material Taxes otherwise due and payable have been timely paid in full or
will be timely paid in full by the due date thereof, and (iii) no material Tax
liens have been filed with respect to the assets of the Clairol Entities or with
respect to the Acquired Assets and no material claims are being asserted in
writing with respect to any Taxes of the Clairol Entities or with respect to the
Acquired Assets.

           (c) (i) None of the Clairol Entities has filed a consent under
Section 341(f) of the Code concerning collapsible corporations, (ii) no property
of the Clairol Entities and none of the Acquired Assets is "tax exempt use
property" within the meaning of Section 168(h) of the Code, and (iii) none of
the Clairol Entities is a party to any lease, and none of the Acquired Assets
are subject to any lease, made pursuant to Section 168(f)(8) of the Internal
Revenue Code of 1954.

           (d) None of the Clairol Entities has been a "United States real
property holding corporation" within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code. None of the Acquired Assets constitutes a "United States real property
interest" within the meaning of Section 897(c)(1) of the Code.

           (e)  Seller is not a "foreign person" within the
meaning of Section 1445(f)(3) of the Code.

           (f) None of the Clairol Entities has entered into any compensatory
agreements with respect to the performance of services that would, as a result
of the transactions contemplated by this Agreement, reasonably be likely to
result in a nondeductible expense pursuant to Section 280G of the Code or an
excise tax pursuant to Section 4999 of the Code to the recipient of a payment
under any such compensatory
   32

                                                                              24

agreement as a result of the transactions contemplated by this Agreement.

           (g) None of the Clairol Entities has participated in an international
boycott within the meaning of Section 999 of the Code.

           (h) None of the Clairol Entities has been a member of an affiliated
group filing consolidated returns other than the Seller's group.

           (i) As of the Closing Date, none of the Clairol Entities will be a
party to any written Tax sharing agreement or will be liable for any material
Taxes of any person under any contract, in each case except for any such
agreement or contract with, between or among any Clairol Entity.

           (j) Except as set forth in Section 4.08(j) of the Seller Disclosure
Schedule, none of the Clairol Entities has made an election to be treated as a
partnership or as an entity disregarded from its single owner for U.S. federal
income tax purposes pursuant to Treasury Regulation Section 301.7701-3.

           SECTION 4.09. ASSETS OTHER THAN REAL PROPERTY INTERESTS. (a) The
Clairol Entities have, or as of the Closing Date will have, good and valid title
to all material assets reflected on the Clairol Balance Sheet or thereafter
acquired (other than the Acquired Assets), except those sold or otherwise
disposed of since the date of the Clairol Balance Sheet in the ordinary course
of business consistent with past practice and not in violation of this
Agreement, in each case free and clear of all Liens, except Permitted Liens.

           (b) Seller and the Asset Selling Entities have, or as of the Closing
Date will have, good and valid title to all material Acquired Assets reflected
on the Clairol Balance Sheet or thereafter acquired, except those sold or
otherwise disposed of since the date of the Clairol Balance Sheet in the
ordinary course of business consistent with past practice and not in violation
of this Agreement, in each case free and clear of all Liens, except Permitted
Liens.

           (d) This Section 4.09 does not relate to real property or interests
in real property, Intellectual Property or Contracts, such items being the
subjects of Section 4.10, Section 4.11 and Section 4.12, respectively.
   33

                                                                              25

           SECTION 4.10. TITLE TO REAL PROPERTY. (a) Section 4.10(a)(i) of the
Seller Disclosure Schedule sets forth a list of all real property and interests
in real property owned in fee by the Clairol Entities, Seller and the Seller
Entities (in the case of Seller and the Seller Entities, solely to the extent
such property and interests are included in the Acquired Assets) (individually,
an "OWNED PROPERTY"). Section 4.10(a)(ii) of the Seller Disclosure Schedule sets
forth a complete list of all real property and interests in real property leased
by the Clairol Entities, Seller and the Seller Entities (in the case of Seller
and the Seller Entities, solely to the extent such property and interests are
included in the Acquired Assets) (individually, a "LEASED PROPERTY"). The
Clairol Entities, Seller and the Seller Entities, as applicable, have good and
insurable fee title to all Owned Property and have good and valid title to the
leasehold estates in all Leased Property (an Owned Property or Leased Property
being sometimes referred to herein, individually, as a "COMPANY PROPERTY"), in
each case free and clear of all mortgages, Liens, leases, assignments,
subleases, easements, covenants, rights-of-way and other similar restrictions of
any nature whatsoever, except (1) such as are set forth in Section 4.10 of the
Seller Disclosure Schedule; (2) leases, subleases and similar agreements set
forth in Section 4.12 of the Seller Disclosure Schedule; (3) Permitted Liens;
(4) easements, covenants, rights-of-way and other similar restrictions of
record; (5) (A) zoning, building and other similar restrictions, (B) mortgages,
Liens, easements, covenants, rights-of-way and other similar restrictions that
have been placed by any developer, landlord or other third party on property
over which the Clairol Entities, Seller or the Asset Selling Entities, as
applicable, have easement rights or on any Company Property and subordination or
similar agreements relating thereto, and (C) unrecorded easements, covenants,
rights-of-way and other similar restrictions, none of which items set forth in
clause (5), individually or in the aggregate, materially impairs the continued
use and operation of the property to which they relate in the Acquired Business.

           (b) Section 4.10(b) of the Seller Disclosure Schedule sets forth a
list of all material real property premises occupied by the Acquired Business
other than any Company Property.

           SECTION 4.11. INTELLECTUAL PROPERTY. (a) Section 4.11(a) of the
Seller Disclosure Schedule sets forth a list of
   34

                                                                              26

all material registered and unregistered trademarks and service marks, trade
names and domain names and registered copyrights, owned or licensed and used or
held for use by the Seller and its Affiliates with respect to the Acquired
Business (the "INTELLECTUAL PROPERTY"). With respect to trademarks, registered
and pending, Section 4.11(a) of the Seller Disclosure Schedule sets forth a list
of all jurisdictions in which such trademarks are registered or applied for and
all the respective registration and application numbers. Seller, the Asset
Selling Entities and the Clairol Entities own, or as of the Closing Date will
own, free and clear of all Liens (except as set forth in Section 4.16(a) of the
Seller Disclosure Schedule and except to the extent the Intellectual Property
may be licensed from third parties, as specified on Section 4.11(c) of the
Seller Disclosure Schedule), all the Intellectual Property and the consummation
of the transactions contemplated hereby will not conflict with, alter or impair
any such rights in any material respect. The Intellectual Property contains all
material registered and unregistered trademarks and service marks, trade names,
domain names, including pending intent-to-use applications, and registered
copyrights necessary for the conduct of the Acquired Business. No claims are
pending or, to the knowledge of Seller, threatened in writing, as of the date of
this Agreement, against Seller or any of its Affiliates by any person with
respect to the ownership, validity, enforceability, effectiveness or use of any
Intellectual Property.

           (b) Section 4.11(b) of the Seller Disclosure Schedule sets forth a
list of all material patents owned, used, filed by or licensed to Seller and its
Affiliates with respect to the Acquired Business (the "Patents"). The Company
has the right (or will have the right as of the Closing Date) to use all the
Patents and all material processes, specifications and know-how (including trade
secrets and proprietary knowledge to the extent existing) necessary for the
conduct of the Acquired Business (collectively, the "OTHER INTELLECTUAL
PROPERTY" and, together with the Intellectual Property, the "CLAIROL
INTELLECTUAL PROPERTY") without payment to any other person (except to the
extent the Other Intellectual Property may be licensed from third parties, as
specified on Section 4.11(c) of the Seller Disclosure Schedule), and the
consummation of the transactions contemplated hereby will not conflict with,
alter or impair any such rights in any material respect. To the knowledge of
Seller, there are no claims of others or Liens with respect to
   35

                                                                              27

the Other Intellectual Property that conflict with or prohibit the Company's use
of the Other Intellectual Property. No claims are pending or, to the knowledge
of Seller, threatened, as of the date of this Agreement, against Seller or its
Affiliates by any person with respect to the ownership, validity,
enforceability, effectiveness or the use by the Company of any Other
Intellectual Property.

           (c) None of Seller, the Seller Entities or the Clairol Entities has
granted any material options, licenses or agreements relating to Clairol
Intellectual Property or the marketing or distribution thereof, except
non-exclusive implied licenses to end-users in the ordinary course of business.
None of Seller, the Seller Entities or the Clairol Entities as of the date
hereof is bound by or a party to any material options, licenses or agreements of
any kind relating to the intellectual property of any other person (in the case
of Seller and the Seller Entities, solely to the extent relating to the Acquired
Business), except for agreements relating to computer software licensed to
Seller or its Affiliates in the ordinary course of business.

           SECTION 4.12. CONTRACTS. (a) As of the date of this Agreement, except
as set forth in Section 4.12(a) of the Seller Disclosure Schedule, no contract
that constitutes an Acquired Asset or an Assumed Liability is, and none of the
Clairol Entities is a party to, any of the following:

          (i) an employment agreement or employment contract that has an
     aggregate future liability in excess of $250,000 and is not terminable by
     Seller, an Asset Selling Entity or a Clairol Entity, as applicable, by
     notice of not more than 90 days for a cost of less than $250,000
     (excluding, for this purpose, any such agreements or contracts, express or
     implied, oral or written, which are required to be provided or are imposed
     under applicable law, practice, code, industry-wide collective or social
     plan);

           (ii) an employee collective bargaining agreement;

           (iii) a covenant not to compete (other than pursuant to any radius
     restriction contained in any lease, reciprocal easement or development,
     construction, operating or similar agreement) or other covenant restricting
     the development, manufacture, marketing or distribution of the products and
     services of the Acquired
   36

                                                                              28

     Business, in each case that materially impairs the operation of the
     Acquired Business;

          (iv) an agreement, contract or other arrangement with (1) Seller or
     any Affiliate of Seller (other than a Clairol Entity or an Employee) or (2)
     any officer, director or employee of Seller or any Affiliate of Seller
     (other than employment agreements covered by clause (i) above); PROVIDED,
     HOWEVER, that the foregoing shall be deemed not to include any Transitional
     Services Agreement and any agreement, contract or other arrangement that
     will expire or be terminated at or prior to Closing;

          (v) a lease, sublease or similar agreement with any person under which
     Seller, an Asset Selling Entity or a Clairol Entity, as applicable, is a
     lessor or sublessor of, or makes available for use, to any person or any
     Company Property;

          (vi) a lease or similar agreement with any person under which (1)
     Seller, an Asset Selling Entity or a Clairol Entity, as applicable, is
     lessee of, or holds or uses, any machinery, equipment, vehicle or other
     tangible personal property owned by any person or (2) Seller, an Asset
     Selling Entity or a Clairol Entity, as applicable, is a lessor or sublessor
     of, or makes available for use by any person, any tangible personal
     property owned or leased by Seller or such Asset Selling Entity or Clairol
     Entity, as applicable, in any such case which has an aggregate future
     liability or receivable, as the case may be, in excess of $1,000,000 and is
     not terminable by Seller or such Asset Selling Entity or Clairol Entity, as
     applicable, by notice of not more than 180 days for a cost of less than
     $1,000,000;

          (vii) (1) a continuing contract for the future purchase of materials,
     supplies or equipment (other than purchase contracts and orders for
     inventory in the ordinary course of business consistent with past
     practice); (2) a management, service, consulting or other similar type of
     contract (other than contracts for services in the ordinary course of
     business) or (3) an advertising agreement or arrangement, in any such case
     which has an aggregate future liability to any person in excess of
     $1,000,000 and is not terminable by Seller, an Asset Selling Entity or a
     Clairol Entity, as applicable, by notice of not more than 180 days for a
     cost of less than $1,000,000;
   37

                                                                              29

          (viii) a material license, option or other agreement relating in whole
     or in part to the Clairol Intellectual Property (including any license or
     other agreement under which Seller, an Asset Selling Entity or a Clairol
     Entity, as applicable, is licensee or licensor of any such Clairol
     Intellectual Property);

          (ix) an agreement, contract or other instrument under which Seller, an
     Asset Selling Entity or a Clairol Entity, as applicable, has borrowed any
     money from, or issued any note, bond, debenture or other evidence of
     indebtedness to, any person or any other note, bond, debenture or other
     evidence of indebtedness issued to any person in any such case which,
     individually, is in excess of $1,000,000; PROVIDED, HOWEVER, that the
     foregoing shall be deemed not to include Transitional Services Agreements
     and any agreement, contract or other arrangement that will expire or be
     terminated at or prior to Closing;

          (x) an agreement, contract or other instrument (including so-called
     take-or-pay or keepwell agreements) under which (1) any person has directly
     or indirectly guaranteed indebtedness, liabilities or obligations of
     Seller, an Asset Selling Entity or a Clairol Entity, as applicable, or (2)
     Seller, an Asset Selling Entity or a Clairol Entity, as applicable, has
     directly or indirectly guaranteed indebtedness, liabilities or obligations
     of any person (in each case other than endorsements for the purpose of
     collection in the ordinary course of business), in any such case which,
     individually, is in excess of $1,000,000, PROVIDED, HOWEVER, that the
     foregoing shall be deemed not to include any Transitional Services
     Agreement and any agreement, contract or other arrangement that will expire
     or be terminated at or prior to Closing;

          (xi) an agreement, contract or other instrument under which Seller, an
     Asset Selling Entity or a Clairol Entity, as applicable, has, directly or
     indirectly, made any advance, loan, extension of credit or capital
     contribution to, or other investment in, any person, in any such case
     which, individually, is in excess of $1,000,000; PROVIDED, HOWEVER, that
     the foregoing shall be deemed not to include Transitional Services
     Agreements and any agreement, contract or other arrangement that will
     expire or be terminated at or prior to Closing;
   38

                                                                              30

           (xii) a material mortgage, pledge, security agreement, deed of trust
     or other instrument granting a Lien upon any Company Property, which Lien
     is not set forth in Section 4.10 of the Seller Disclosure Schedule;

           (xiii) an agreement or instrument providing for indemnification of
     any person with respect to material liabilities relating to any former
     business of Seller, an Asset Selling Entity or a Clairol Entity, as
     applicable, or any predecessor person; or

           (xiv) another agreement, contract, lease, license, commitment or
     instrument to which Seller, an Asset Selling Entity or a Clairol Entity, as
     applicable, is a party or by or to which it or any of its assets or
     business is bound or subject which has an aggregate future liability to any
     person in excess of $1,000,000 and is not terminable by Seller or such
     Asset Selling Entity or Clairol Entity, as applicable, by notice of not
     more than 180 days for a cost of less than $1,000,000.

Except as set forth in Section 4.12(a) of the Seller Disclosure Schedule, as of
the date of this Agreement, each agreement, contract, lease, license, commitment
or instrument of Seller, an Asset Selling Entity and a Clairol Entity listed in
Section 4.12(a) of the Seller Disclosure Schedule (collectively, the
"CONTRACTS") is valid, binding and in full force and effect and, to the
knowledge of Seller, is enforceable by Seller or such Clairol Entity or Asset
Selling Entity, as applicable, in accordance with its terms subject to
applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other laws affecting creditors' rights generally, general
principles of equity and the discretion of courts in granting equitable remedies
and except to the extent that the failure of a Contract to be valid, binding and
in full force and effect would not be reasonably likely to have a Material
Adverse Effect. Each of Seller, the Asset Selling Entities and the Clairol
Entities, as applicable, has performed all material obligations required to be
performed by it to the date of this Agreement under the Contracts and, as of the
date of this Agreement, it is not (with or without the lapse of time or the
giving of notice, or both) in breach or default in any material respect
thereunder and, to the knowledge of Seller, no other party to any of the
Contracts, as of the date of this Agreement, is (with or without the lapse of
time or the giving of notice, or both) in breach or default in any material
respect thereunder, except
   39

                                                                              31

to the extent that such breach or default would not be reasonably likely to have
a Material Adverse Effect.

           (b) As of the date of this Agreement, except as set forth in Section
4.12(b) of the Seller Disclosure Schedule, no contract related to the Acquired
Business that is not an Acquired Asset, Assumed Liability or a contract to which
a Clairol Entity is a party is any of the following:

           (i) an employment agreement or employment contract for an Employee
     that has an aggregate future liability in excess of $250,000 and is not
     terminable by a Seller or one of its Affiliates, as applicable, by notice
     of not more than 90 days for a cost of less than $250,000 (excluding, for
     this purpose, any such agreements or contracts, express or implied, oral or
     written, which are required to be provided or are imposed under applicable
     law, practice, code, industry-wide collective or social plan);

           (ii) an employee collective bargaining agreement;

           (iii) a covenant not to compete (other than pursuant to any radius
     restriction contained in any lease, reciprocal easement or development,
     construction, operating or similar agreement) or other covenant restricting
     the development, manufacture, marketing or distribution of the products and
     services of the Acquired Business, in each case that materially impairs the
     operation of the Acquired Business;

           (iv) an agreement, contract or other arrangement with (1) Seller or
     any Affiliate of Seller (other than a Clairol Entity or an Employee) or (2)
     any officer, director or employee of Seller or any Affiliate of Seller
     (other than employment agreements covered by clause (i) above); PROVIDED,
     HOWEVER, that the foregoing shall be deemed not to include any Transitional
     Services Agreement and any agreement, contract or other arrangement that
     will expire or be terminated at or prior to Closing;

           (v) a lease, sublease or similar agreement with any person under
     which Seller or any Affiliate of Seller, as applicable, is a lessor or
     sublessor of, or makes available for use, to any person, any Company
     Property;

           (vi) a lease or similar agreement with any person under which (1)
     Seller or any Affiliate of Seller, as
   40

                                                                              32

     applicable, is lessee of, or holds or uses, any machinery, equipment,
     vehicle or other tangible personal property owned by any person or (2)
     Seller or any Affiliate of Seller, as applicable, is a lessor or sublessor
     of, or makes available for use by any person, any tangible personal
     property owned or leased by Seller or such Affiliate of Seller, as
     applicable, in any such case which has an aggregate future liability or
     receivable, as the case may be, in excess of $1,000,000 and is not
     terminable by Seller or such Affiliate of Seller, as applicable, by notice
     of not more than 180 days for a cost of less than $1,000,000;

          (vii) a (1) continuing contract for the future purchase of materials,
     supplies or equipment (other than purchase contracts and orders for
     inventory in the ordinary course of business consistent with past
     practice); (2) management, service, consulting or other similar type of
     contract (other than contracts for services in the ordinary course of
     business) or (3) advertising agreement or arrangement, in any such case
     which has an aggregate future liability to any person in excess of
     $1,000,000 and is not terminable by Seller or an Affiliate of Seller, as
     applicable, by notice of not more than 180 days for a cost of less than
     $1,000,000;

          (viii) a material license, option or other agreement relating in whole
     or in part to the Clairol Intellectual Property (including any license or
     other agreement under which Seller or any Affiliate of Seller is licensee
     or licensor of any such Clairol Intellectual Property);

          (ix) an agreement, contract or other instrument under which Seller or
     any Affiliate of Seller, as applicable, has borrowed any money from, or
     issued any note, bond, debenture or other evidence of indebtedness to, any
     person or any other note, bond, debenture or other evidence of indebtedness
     issued to any person in any such case which, individually, is in excess of
     $1,000,000; PROVIDED, HOWEVER, that the foregoing shall be deemed not to
     include any Transitional Services Agreement and any agreement, contract or
     other arrangement that will expire or be terminated at or prior to Closing;

          (x) an agreement, contract or other instrument (including so-called
     take-or-pay or keepwell agreements)
   41

                                                                              33

     under which (1) any person has directly or indirectly guaranteed
     indebtedness, liabilities or obligations of Seller or any Affiliate of
     Seller, as applicable, (2) Seller or any Affiliate of Seller, as
     applicable, has directly or indirectly guaranteed indebtedness, liabilities
     or obligations of any person (in each case other than endorsements for the
     purpose of collection in the ordinary course of business), in any such case
     which, individually, is in excess of $1,000,000; PROVIDED, HOWEVER, that
     the foregoing shall be deemed not to include any Transitional Services
     Agreement and any agreement, contract or other arrangement that will expire
     or be terminated at or prior to Closing;

           (xi) an agreement, contract or other instrument under which Seller or
     any Affiliate of Seller, as applicable, has, directly or indirectly, made
     any advance, loan, extension of credit or capital contribution to, or other
     investment in, any person, in any such case which, individually, is in
     excess of $1,000,000; PROVIDED, HOWEVER, that the foregoing shall be deemed
     not to include Transitional Services Agreements and any agreement, contract
     or other arrangement that will expire or be terminated at or prior to
     Closing;

           (xii) another agreement, contract, lease, license, commitment or
     instrument to which Seller or any Affiliate of Seller, as applicable, is a
     party or by or to which it or any of its assets or business is bound or
     subject which has an aggregate future liability to any person in excess of
     $1,000,000 and is not terminable by Seller or such Affiliate of Seller, as
     applicable, by notice of not more than 180 days for a cost of less than
     $1,000,000.

           SECTION 4.13. LITIGATION. Section 4.13 of the Seller Disclosure
Schedule sets forth a list, as of the date of this Agreement, of all pending
lawsuits or claims, with respect to which Seller, any Seller Entity or any
Clairol Entity has been contacted in writing by the plaintiff or claimant or by
counsel for the plaintiff or claimant, which relate to the Acquired Business and
which (a) involve a claim against Seller, any Seller Entity or any Clairol
Entity, as applicable, and which involve a specified amount of, or unspecified
amount which would reasonably be likely to result in a liability of, more than
$1,000,000, (b) seek any material injunctive relief or (c) seek any legal
restraint on or prohibition against the transactions contemplated by this
Agreement. To the knowledge of Seller, as of the date of this
   42

                                                                              34

Agreement, none of Seller, the Seller Entities or the Clairol Entities is a
party or subject to or in default under any material judgment, order, injunction
or decree of any Governmental Entity or arbitration tribunal applicable to the
Acquired Business. This Section 4.13 does not relate to matters with respect to
environmental matters, which are the subject of Section 4.16(b), or to matters
with respect to employee benefits or ERISA matters, which are the subject of
Section 4.14.

           SECTION 4.14. BENEFIT PLANS. The representations made herein in
Sections 4.14(a)-(h) below relate solely to plans and arrangements maintained by
Seller, the Seller Entities or the Clairol Entities for Employees (as defined in
Section 9.01(a)) primarily based in the United States.

           (a) Section 4.14(a) of the Seller Disclosure Schedule contains a list
of all "EMPLOYEE PENSION BENEFIT PLANS" (as defined in Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
(sometimes referred to herein as "PENSION PLANS"), "EMPLOYEE WELFARE BENEFIT
PLANS" (as defined in Section 3(1) of ERISA), bonus, stock option, stock
purchase, deferred compensation plans or arrangements and other employee fringe
benefit plans (all the foregoing being herein called "BENEFIT PLANS")
maintained, or contributed to, by Seller or the Company or the U.S. Clairol
Subsidiaries for the benefit of any officers or employees of the Company or the
U.S. Clairol Subsidiaries. Seller has made available to Buyer true, complete and
correct copies of (i) each Benefit Plan (or, in the case of any unwritten
Benefit Plans, descriptions thereof), (ii) the most recent annual report on Form
5500 filed with the Internal Revenue Service with respect to each Benefit Plan
(if any such report was required) and (iii) the most recent summary plan
description for each Benefit Plan for which such a summary plan description is
required.

           (b) Except for matters that would not be reasonably likely to have a
Material Adverse Effect or as disclosed in writing to Buyer, (i) each Benefit
Plan has been administered in all material respects in accordance with its
terms; (ii) the Company or the U.S. Clairol Subsidiaries and all the Benefit
Plans are in compliance in all material respects with the applicable provisions
of ERISA and the Code; and (iii) there are no material lawsuits, actions,
termination proceedings or other proceedings pending, or, to the knowledge of
Seller, threatened against or involving any Benefit Plan and, to the knowledge
of Seller, there are no investigations
   43

                                                                              35

by any Governmental Entity or other claims (except claims for benefits payable
in the normal operation of the Benefit Plans) pending or threatened against or
involving any Benefit Plan or asserting any rights to benefits under any Benefit
Plan.

           (c) Except for matters that would not be reasonably likely to have a
Material Adverse Effect, (i) all contributions to, and payments from, the
Benefit Plans that have been required to be made in accordance with the Benefit
Plans and, when applicable, Section 302 of ERISA or Section 412 of the Code,
have been timely made, (ii) there has been no application for or waiver of the
minimum funding standards imposed by Section 412 of the Code with respect to any
Pension Plan and (iii) no Pension Plan has an "ACCUMULATED FUNDING DEFICIENCY"
within the meaning of Section 412(a) of the Code as of the most recent plan
year.

           (d) All Pension Plans that are intended to qualify under Section
401(c) of the Code have been the subject of determination letters from the
Internal Revenue Service to the effect that such Pension Plans are qualified and
exempt from Federal income taxes under Sections 401(a) and 501(a), respectively,
of the Code, and no such determination letter has been revoked nor, to the
knowledge of Seller, has revocation been threatened, nor has any such Pension
Plan been amended since the date of its most recent determination letter or
application therefor in any respect that is reasonably expected to adversely
affect its qualification or materially increase its cost.

           (e) Except for matters that would not be reasonably likely to have a
Material Adverse Effect, (i) to Seller's knowledge, no "PROHIBITED TRANSACTION"
(as defined in Section 4975 of the Code or Section 406 of ERISA) has occurred
that involves the assets of any Benefit Plan and that is reasonably expected to
subject the Company or the U.S. Clairol Subsidiaries or any of its employees, or
a trustee, administrator or other fiduciary of any trusts created under any
Benefit Plan to a material tax or penalty on prohibited transactions imposed by
Section 4975 of ERISA or the sanctions imposed under Title I of ERISA; (ii) none
of the Pension Plans has been terminated nor have there been any "REPORTABLE
EVENTS" (as defined in Section 4043 of ERISA and the regulations thereunder)
with respect thereto that are required to be reported to the Pension Benefit
Guaranty Corporation by law or regulation; and (iii) to the knowledge of Seller,
neither Seller nor any trustee, administrator or other fiduciary of any Benefit
Plan nor any agent of any of the
   44

                                                                              36

foregoing has engaged in any transaction or acted or failed to act in a manner
that is reasonably expected to subject the Company or the U.S. Clairol
Subsidiaries to any material liability for breach of fiduciary duty under ERISA
or any other applicable law.

           (f) Except for amounts that would not be reasonably likely to have a
Material Adverse Effect, with respect to any Pension Plan subject to Title IV of
ERISA (including for the purposes of this Section 4.14(f) any Pension Plan
maintained or contributed to by Seller or any other person required to be
treated as a single employer with Seller under Section 414 of the Code), Seller
has not incurred any material liability to such Pension Plan or to the Pension
Benefit Guaranty Corporation, other than for the payment of contributions or
premiums. Seller has delivered or made available to Buyer the most recent
actuarial report or valuation with respect to each Pension Plan that is a
"DEFINED BENEFIT PENSION PLAN" (as defined in Section 3(35) of ERISA.

           (g) At no time within the five years preceding the Closing Date has
Seller or the Company or the U.S. Clairol Subsidiaries been required to
contribute to any "MULTIEMPLOYER PLAN" (as defined in Section 4001(a)(3) of
ERISA) for the benefit of any employees of the Company or the U.S. Clairol
Subsidiaries or incurred any withdrawal liability, within the meaning of Section
4201 of ERISA, with respect to any multiemployer plan for the benefit of
employees of the Company or the U.S. Clairol Subsidiaries, which liability has
not been fully paid as of the date hereof, or announced an intention to
withdraw, but not yet completed such withdrawal, from any such multiemployer
plan.

           (h) Except for matters that would not be reasonably likely to have a
Material Adverse Effect, each Benefit Plan that is a group health plan, as such
term is defined in Section 5000(b)(1) of the Code, complies in all material
respects with the applicable requirements of Section 4980B(f) of the Code.

           (i) Except for matters that would not be reasonably likely to have a
Material Adverse Effect or as disclosed in writing to Buyer, to the knowledge of
Seller, all plans and arrangements maintained outside of the United States for
the benefit of Employees are in material compliance with all applicable laws of
the relevant jurisdiction in which such plans or arrangements are maintained.
Section 4.14(i) of the Seller Disclosure Schedule contains a list of the
material
   45

                                                                              37

employee benefit plans maintained by Seller, the Seller Entities or the Clairol
Entities for Employees primarily based in countries and territories other than
the United States.

           SECTION 4.15. ABSENCE OF CHANGES OR EVENTS. (a) As of the date of
this Agreement, since December 31, 2000, there has not been any material adverse
change in the business, financial condition or results of operations of the
Acquired Business other than changes relating to United States or foreign
economies in general or the Acquired Business's industries in general and not
specifically relating to the Acquired Business. Buyer acknowledges that there
has been and will continue to be a disruption to the Acquired Business as a
result of the possibility of a sale by Seller of the Acquired Business to
Buyer(and there may be further disruption to the Acquired Business as a result
of the execution and public announcement of this Agreement and the Other
Transaction Documents and the consummation of the transactions contemplated
hereby and thereby) (any such disruption, a "BUSINESS DISRUPTION"), and Buyer
agrees that any such Business Disruption does not and shall not constitute a
breach of this Section 4.15.

           (b) As of the date of this Agreement, except as contemplated by this
Agreement and the Other Transaction Documents (including the Seller Disclosure
Schedule), including actions taken in furtherance of the separation of the
Acquired Business from Seller and its Affiliates, since December 31, 2000,
Seller has caused the Acquired Business to be conducted in the ordinary course
and none of Seller, the Seller Entities or the Clairol Entities has taken any
action that, if taken after the date of this Agreement, would constitute a
breach of any of the covenants set forth in Section 5.02.

           SECTION 4.16. COMPLIANCE WITH APPLICABLE LAWS. As of the date of this
Agreement:

           (a) Except as previously disclosed by Seller to Buyer in writing,
Seller, the Seller Entities and the Clairol Entities are in compliance with all
applicable statutes, laws, ordinances, rules, orders and regulations of any
Governmental Entity ("APPLICABLE LAWS") (in the case of Seller and the Seller
Entities, solely to the extent related to the Acquired Business conducted by
Seller and the Seller Entities), including those relating to occupational health
and safety, except for instances of noncompliance that, individually or in the
aggregate, would not be reasonably likely to have a
   46

                                                                              38

Material Adverse Effect. None of Seller, the Seller Entities or the Clairol
Entities has received any written communication during the two years prior to
the date hereof from a Governmental Entity that alleges that Seller, any of the
Seller Entities or any of the Clairol Entities is in violation of any Applicable
Laws (in the case of Seller or the Seller Entities, solely to the extent related
to the Acquired Business conducted by Seller and the Seller Entities) except for
any such violations that, individually or in the aggregate, would not be
reasonably likely to have a Material Adverse Effect. This Section 4.16(a) does
not relate to matters with respect to Taxes, which are the subject of Section
4.08, to employee benefit or ERISA matters which are the subject of Section 4.14
or to environmental matters, which are the subject of Section 4.16(b).

           (b) Seller has provided Buyer with certain environmental reports
relating to the facilities and operations of the Clairol Entities, Seller and
the Seller Entities (in the case of Seller and the Seller Entities, solely to
the extent such reports relate to the Acquired Business conducted by Seller and
the Seller Entities) which are identified in Section 4.16(b) of the Seller
Disclosure Schedule (the "ENVIRONMENTAL REPORTS"). Except as set forth in the
Environmental Reports, and except as would not, individually or in the
aggregate, be reasonably likely to have a Material Adverse Effect, (i) none of
Seller, the Seller Entities or the Clairol Entities has received any written
communication during the two years prior to the date hereof from a Governmental
Entity that alleges that any of Seller, the Seller Entities or the Clairol
Entities are in violation of any Environmental Laws or of any Environmental
Permits (as hereinafter defined), the substance of which communication has not
been resolved, (ii) none of Seller, the Seller Entities or the Clairol Entities
has received any written communication during the past five years from a
Governmental Entity or any person that alleges any of the Seller, the Seller
Entities or the Clairol Entities is a potentially responsible party under the
Federal Comprehensive Environmental Response, Compensation and Liability Act of
1980 or state or international equivalents thereof (in each case, in the case of
Seller or the Seller Entities, solely to the extent related to the Acquired
Business conducted by Seller or the Seller Entities), (iii) each of Seller, the
Seller Entities and the Clairol Entities hold, and are in compliance with, all
permits, licenses and governmental authorizations required under Environmental
Laws for it to conduct the Acquired Business,
   47

                                                                              39

("Environmental Permits"), none of which is being threatened in writing with
suspension or cancellation, (iv) Seller, the Seller Entities and the Clairol
Entities are in compliance with all Environmental Laws (in the case of Seller
and the Seller Entities, solely to the extent related to the Acquired Business
conducted by Seller and the Seller Entities), (v) Seller, the Seller Entities
and the Clairol Entities have not entered into or agreed to any agreement,
consent decree or order, which agreement, decree or order is still in effect,
and are not subject to any outstanding judgment, decree or judicial order with
respect to any property currently or formerly owned, occupied or operated by
Seller, a Seller Entity or a Clairol Entity relating to compliance with any
Environmental Law or to the investigation or cleanup of Hazardous Substances
under any Environmental Law (in the case of Seller and the Seller Entities,
solely to the extent related to the Acquired Business conducted by Seller and
the Seller Entities), (vi) to the knowledge of Seller, the Seller Entities and
the Clairol Entities, there are no pending or threatened investigations, claims
or complaints relating to compliance with Environmental Laws or Environmental
Permits or to Hazardous Substances with respect to the Acquired Business or to
any property currently or formerly owned, occupied, or operated by Seller,
Seller Entity or a Clairol Entity, in each case, in connection with the Acquired
Business, and (vii) there are no Hazardous Substances requiring remediation
under Environmental Laws located on Company Property or, to Seller's knowledge,
on any property formerly owned, occupied or operated by Seller, the Seller
Entities or the Clairol Entities. The representations and warranties made in
this Section 4.16(b) are Seller's exclusive representations and warranties
relating to environmental matters. As used in this Agreement, the term
"ENVIRONMENTAL LAWS" means any applicable statutes, laws (including common law),
regulations, ordinances, rules or administrative or judicial orders, in any such
case entered into, issued, or promulgated in final form as of the Closing Date
by any Governmental Entity, relating to the environment, pollution preservation
or reclamation of natural resources, or to the management of Hazardous
Substances. As used in this Agreement, the term "HAZARDOUS SUBSTANCES" means any
hazardous or toxic substance or waste that is regulated pursuant to any
Environmental Law.

           SECTION 4.17. EMPLOYEE AND LABOR MATTERS. As of the date of this
Agreement and except as would not be reasonably likely to have a Material
Adverse Effect and only insofar as it relates to the Acquired Business or to an
   48


                                                                              40

Employee, there is not and since January 1, 1998, has not been: (a) any labor
strike, dispute, work stoppage or lockout pending, or, to the knowledge of
Seller, threatened, against Seller, any Seller Entity or any Clairol Entity; (b)
to the knowledge of Seller, any union organizational campaign in progress with
respect to the employees of Seller, any Asset Selling Entity or any Clairol
Entity or any question concerning representation respecting such employees other
than routine employee representative issues in those countries other than in the
U.S. where employee representative bodies such as works councils exist; (c) any
unfair labor practice charge or complaint against the Company or the U.S.
Clairol Subsidiaries pending, or, to the knowledge of Seller, threatened, before
the National Labor Relations Board; (d) any pending, or, to the knowledge of
Seller, threatened, union grievances against Seller, any Seller Entity or any
Clairol Entity as to which there is a reasonable possibility of adverse
determination; (e) any pending, or, to the knowledge of Seller, threatened,
charges or claims against the Company or the U.S. Clairol Subsidiaries or any
current or former employee of Seller, any Seller Entity or any Clairol Entity
(solely to the extent such employees relate to the Acquired Business) before the
Equal Employment Opportunity Commission or any federal, state, local or foreign
agency or court responsible for the prevention of unlawful employment practices
or breaches of employment contracts; and (f) to the knowledge of Seller, any
receipt of written notice by Seller, the Seller Entities or the Clairol
Entities, of the intent of any Governmental Entity responsible for the
enforcement of labor or employment laws to conduct an investigation of Seller,
any Seller Entity or any Clairol Entity and, to the knowledge of Seller, any
such investigation in progress.

           SECTION 4.18. LIMITATIONS ON REPRESENTATIONS AND WARRANTIES. SELLER
DOES NOT MAKE ANY REPRESENTATIONS OR WARRANTIES RELATING TO THE MAINTENANCE,
REPAIR, CONDITION, DESIGN, PERFORMANCE OR MARKETABILITY OF ANY ACQUIRED ASSETS,
INCLUDING MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS
EXPRESSLY SET FORTH IN THIS AGREEMENT AND THE OTHER TRANSACTION DOCUMENTS, BUYER
AND THE BUYER SUBSIDIARIES WILL OBTAIN RIGHTS IN THE ACQUIRED ASSETS IN THEIR
PRESENT CONDITION AND STATE OF REPAIR, "AS IS" AND "WHERE IS."
   49

                                                                              41

                                    ARTICLE V

                               COVENANTS OF SELLER

                     Seller covenants and agrees as follows:

           SECTION 5.01. ACCESS. From the date hereof to the Closing, Seller
shall, and shall cause the Seller Entities and the Clairol Entities to, give or
furnish Buyer and its representatives, employees, counsel and accountants
reasonable access, during normal business hours and upon reasonable notice, to
the personnel, properties, books and records of the Acquired Business; PROVIDED,
HOWEVER, that such access does not unreasonably disrupt the normal operations of
Seller, the Seller Entities or the Clairol Entities.

           SECTION 5.02. ORDINARY CONDUCT. (a) Except as set forth in Section
5.02 of the Seller Disclosure Schedule or otherwise contemplated by the terms of
this Agreement and the Other Transaction Documents, including any actions taken
in furtherance of the separation of the Acquired Business from Seller and its
Affiliates from the date hereof to the Closing, Seller shall use commercially
reasonable efforts consistent with past practice to cause the Acquired Business
to be conducted in the ordinary course consistent with past practice and shall
make commercially reasonable efforts consistent with past practice to preserve
the Acquired Business's relationships with customers, suppliers, distributors
and others with whom the Acquired Business has a material business relationship.
In the event of any Business Disruption after the date hereof, Seller shall act
in good faith and in a commercially reasonable manner in its response to such
Business Disruption; PROVIDED, HOWEVER, that Seller shall not have any liability
under, or be deemed in breach of, this Section 5.02(a) for any loss, liability,
claim, damage or expense (including reasonable legal fees and expenses)that
arises out of, results from or is related to any such Business Disruption
(including any such loss, liability, claim, damage or expense arising out of,
resulting from or related to Seller's good faith, commercially reasonable
response to any such Business Disruption). Notwithstanding anything to the
contrary in this Section 5.02(a), Seller shall not be obligated to, directly or
indirectly, provide any funds to the Acquired Business.

           (b) Except as set forth in Section 5.02 of the Seller Disclosure
Schedule or otherwise contemplated by the
   50

                                                                              42

terms of this Agreement and the Other Transaction Documents (including any
actions taken in furtherance of the separation of the Acquired Business from
Seller and its Affiliates), Seller shall not permit any of the following in
connection with the Acquired Business without the prior written consent of Buyer
(which shall not be unreasonably withheld):

           (i) a Clairol Entity to amend its Certificate of Incorporation,
     By-laws or other organizational documents;

           (ii) a Clairol Entity to declare or pay any dividend or make any
     other distribution to its stockholders whether or not upon or in respect of
     any shares of its capital stock; PROVIDED, HOWEVER, that (A) Buyer
     acknowledges that the Clairol Entities do not maintain cash balances and,
     at or prior to the time of the Closing, Seller will withdraw any cash
     balances of the Clairol Entities and (B) dividends and distributions of
     cash may continue to be made by Clairol Entities to Seller or its
     Affiliates;

           (iii) a Clairol Entity to redeem or otherwise acquire any shares of
     its capital stock or issue any capital stock or any option, warrant or
     right relating thereto or any securities convertible into or exchangeable
     for any shares of capital stock;

           (iv) a Clairol Entity to adopt or amend in any material respect any
     Benefit Plan or collective bargaining agreement, in each case relating to
     any Employees, except as required by Applicable Law and except as disclosed
     in Section 4.17(b) of the Seller Disclosure Schedule;

           (v) a Clairol Entity to grant to any Employee that is an executive
     officer or executive employee any increase in compensation or benefits,
     except in the ordinary course of business consistent with past practice or
     as may be required under existing agreements or Applicable Law and except
     for any increases for which Seller shall be solely obligated;

           (vi) a Clairol Entity to incur or assume any liabilities, obligations
     or indebtedness for borrowed money or guarantee any such liabilities,
     obligations or indebtedness, other than in the ordinary course of business
     consistent with past practice; PROVIDED, HOWEVER, that the foregoing shall
     be deemed not to
   51

                                                                              43

     include any liabilities, obligations or indebtedness, or guarantees
     thereof, that will be satisfied in full or terminated prior to Closing;

          (vii) a Clairol Entity to voluntarily permit any of its assets, or
     Seller or a Seller Entity to voluntarily permit any of the Acquired Assets,
     to become subjected to any mortgage, lien, security interest, encumbrance,
     easement, covenant, right-of-way or other similar restriction of any nature
     whatsoever which would have been required to be set forth in Section 4.09
     or 4.10 of the Seller Disclosure Schedule if existing on the date of this
     Agreement;

          (viii) except for intercompany transactions in the ordinary course of
     business or necessary to withdraw cash or settle intercompany accounts
     prior to the Closing, a Clairol Entity, Seller or an Asset Selling Entity
     to cancel any material indebtedness (individually or in the aggregate) or
     waive any claims or rights of material value (in the case of Seller or an
     Asset Selling Entity, solely to the extent such indebtedness, claims or
     rights relate to the Acquired Business);

          (ix) except for (A) dividends and distributions permitted under clause
     (ii) above and (B) intercompany transactions in the ordinary course of
     business or necessary to withdraw cash or settle intercompany accounts
     prior to the Closing, a Clairol Entity to pay, loan or advance any amount
     to, or sell, transfer or lease any of its assets to, or enter into any
     agreement or arrangement with, Seller or any of its Affiliates (other than
     other Clairol Entities);

          (x) a Clairol Entity, Seller or any Seller Entity to make any change
     in any method of accounting or accounting practice or policy other than
     those required by GAAP (in the case of Seller or any Seller Entity, solely
     to the extent such change is applicable to the Acquired Business);

          (xi) a Clairol Entity, Seller or a Seller Entity to acquire by merging
     or consolidating with, or by purchasing a substantial portion of the assets
     of, or by any other manner, any business or any corporation, partnership,
     association or other business organization or division thereof which are
     material, individually or in the aggregate, to the Acquired Business;
   52

                                                                              44

           (xii) a Clairol Entity, Seller or a Seller Entity to make or incur
     any capital expenditure that is not currently approved or budgeted which,
     individually, is in excess of $1,000,000 or make or incur any such
     expenditures which, in the aggregate, are in excess of $5,000,000 (in the
     case of Seller or a Seller Entity, solely to the extent such capital
     expenditure relates to the Acquired Business);

           (xiii) a Clairol Entity to sell, lease or otherwise dispose of any of
     its assets, or Seller or an Asset Selling Entity to sell, lease or
     otherwise dispose of any Acquired Assets, which are material, individually
     or in the aggregate, to the Acquired Business, except in the ordinary
     course of business consistent with past practice or enter into any lease of
     any personal property except leases entered into in the ordinary course of
     business or leases with aggregate lease payments not in excess of
     $1,000,000;

           (xiv) a Clairol Entity, Seller or a Seller Entity to enter into any
     lease of real property, except any renewals of existing leases in the
     ordinary course of business consistent with past practice (in the case of
     Seller or a Seller Entity, solely to the extent such lease relates to the
     Acquired Business);

           (xv) a Clairol Entity, Seller or a Seller Entity to modify, amend,
     terminate or permit the lapse of any lease of, or reciprocal easement
     agreement, operating agreement or other material agreement relating to, any
     Company Property (except modifications or amendments associated with
     renewals of existing leases in the ordinary course of business); or

           (xvi) Seller, a Seller Entity or a Clairol Entity to agree, whether
     in writing or otherwise, to do any of the foregoing.

           SECTION 5.03. INSURANCE. Seller shall keep, or cause to be kept, all
insurance policies presently maintained with respect to the Clairol Entities,
their respective assets and properties and the Acquired Assets, or suitable
replacements therefor, in full force and effect through the close of business on
the Closing Date. Any and all insurance policies maintained with respect to the
Clairol Entities, their respective assets and properties and the Acquired Assets
are owned and maintained by Seller and its Affiliates. None
   53

                                                                              45

of the Buyer, any Buyer Subsidiary or the Clairol Entities will have any rights
under any such insurance policies from and after the Closing Date; PROVIDED,
HOWEVER, that after the Closing Date Buyer, any Buyer Subsidiary, or Clairol
Entities will have the right to submit claims under the Seller's workers
compensation policies in accordance with such policies to the extent such claims
occurred prior to the Closing Date.

           SECTION 5.04. NO USE OF CLAIROL NAMES. Seller shall, and shall cause
its Affiliates to, promptly, and in any event, within 60 days after Closing,
change the names of its Affiliates to discontinue any references to the Clairol
Names. "Clairol Names" means "Clairol" and any variation or derivative thereof
and any logos or trademarks related to the Acquired Business included in Section
4.11 of the Seller Disclosure Schedule.

           SECTION 5.05. INTERCOMPANY ACCOUNTS. All intercompany accounts
between Seller or its Affiliates, on the one hand, and any Clairol Entity, on
the other hand, shall be settled in full or cancelled, at Seller's option, at or
prior to the Closing so that the Acquired Business shall have no further
intercompany liabilities as of the Closing.

                                   ARTICLE VI

                     REPRESENTATIONS AND WARRANTIES OF BUYER

          Buyer hereby represents and warrants to Seller as follows:

           SECTION 6.01. AUTHORITY. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of Ohio. Buyer has all
requisite corporate power and authority to enter into this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. All corporate acts and other proceedings required to be taken by Buyer
to authorize the execution, delivery and performance of this Agreement and any
Other Transaction Documents to which it or any Buyer Subsidiary is a party and
the consummation of the transactions contemplated hereby and thereby have been
duly and properly taken. This Agreement has been duly executed and delivered by
Buyer and, prior to the Closing, each of the Other Transaction Documents to
which Buyer or any Buyer Subsidiary is, or is specified to be, a party, will be
duly executed and delivered by such
   54

                                                                              46

party. This Agreement, and each Other Transaction Document to which Buyer or any
Buyer Subsidiary, is, or is specified to be, a party, constitutes a legal, valid
and binding obligation of Buyer or such Buyer Subsidiary, enforceable against
Buyer or such Buyer Subsidiary in accordance with its terms.

           SECTION 6.02. NO CONFLICTS; CONSENTS. (a) The execution and delivery
of this Agreement by Buyer does not, and the execution and delivery by Buyer or
any Buyer Subsidiary of each Other Transaction Document to which it is, or is
specified to be, a party will not, and the consummation of the transactions
contemplated hereby and thereby and compliance with the terms hereof and thereof
will not, conflict with, or result in any violation of or default (with or
without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to the loss of a
material benefit under, or result in the creation of any Lien upon any of the
properties or assets of Buyer, any subsidiary of Buyer or any Buyer Subsidiary
or the Acquired Assets under any provision of (i) the Certificate of
Incorporation or By-laws of Buyer or the comparable governing instruments of any
subsidiary of Buyer or any Buyer Subsidiary (ii) any material note, bond,
mortgage, indenture, deed of trust, license, lease, contract, commitment,
agreement or arrangement to which Buyer or any subsidiary of Buyer or any Buyer
Subsidiary is a party or by which any of their respective properties or assets
or the Acquired Assets are bound, or (iii) any judgment, order, or decree, or
material statute, law, ordinance, rule or regulation applicable to Buyer, any
subsidiary of Buyer or any Buyer Subsidiary or their respective properties or
assets or the Acquired Assets, other than, in the case of clauses (ii) and (iii)
above, any such items that, individually or in the aggregate, would not have a
material adverse effect on the ability of Buyer or any Buyer Subsidiary, as
applicable, to either perform its obligations hereunder or under any Other
Transaction Document or consummate the transactions contemplated hereby.

           (b) No material consent, approval, license, permit, order or
authorization of, or registration, declaration or filing with, any Governmental
Entity is required to be obtained or made by or with respect to Buyer, the Buyer
Subsidiaries or any of their respective subsidiaries or Affiliates in connection
with the execution, delivery and performance of this Agreement or any Other
Transaction Document or the consummation of the transactions contemplated
   55

                                                                              47

hereby or thereby, other than (i) compliance with and filings under the HSR Act,
the Mexican Merger Regulation, the Canada Competition Act, the merger control
acts in the United Kingdom and Germany and the Irish Mergers Act, if applicable,
and (ii) those that may be required solely by reason of Seller's or the Seller
Entities' (as opposed to any other third party's) participation in the
transactions contemplated hereby and in the Other Transaction Documents.

           SECTION 6.03. SECURITIES ACT. The Clairol Shares and the
International Shares purchased by Buyer or the Buyer Subsidiaries pursuant to
this Agreement are being acquired for investment only and not with a view to any
public distribution thereof, and Buyer or the Buyer Subsidiaries, as applicable,
shall not offer to sell or otherwise dispose of the Clairol Shares or
International Shares so acquired by it or them in violation of any of the
registration requirements of the Securities Act or the securities laws of any
other jurisdiction applicable to the transactions contemplated hereby.

           SECTION 6.04. ACTIONS AND PROCEEDINGS, ETC. There are no (a)
outstanding judgments, orders, injunctions or decrees of any Governmental Entity
or arbitration tribunal against Buyer or any of its Affiliates, (b) lawsuits,
actions or proceedings pending or, to the knowledge of Buyer, threatened against
Buyer or any of its Affiliates, or (c) investigations by any Governmental Entity
which are, to the knowledge of Buyer, pending or threatened against Buyer or any
of its Affiliates, which, in the case of each of clauses (a), (b) and (c), have
or could have a material adverse effect on the ability of Buyer to perform its
obligations hereunder or consummate the transactions contemplated hereby.

           SECTION 6.05. AVAILABILITY OF FUNDS. Buyer has cash available or has
existing borrowing facilities which together are sufficient to enable it to
consummate the transactions contemplated by this Agreement. The financing
required to consummate the transactions contemplated hereby is collectively
referred to as the "Financing". As of the date hereof, Buyer has no reason to
believe that Financing will not be available on a timely basis for the
transactions contemplated by this Agreement.
   56

                                                                              48

                                   ARTICLE VII

                               COVENANTS OF BUYER

          Buyer covenants and agrees as follows:

           SECTION 7.01. CONFIDENTIALITY. Buyer acknowledges that the
information being provided to it in connection with the Transaction and the
consummation of the other transactions contemplated hereby is subject to the
terms of a confidentiality agreement between Buyer and Seller dated December 13,
2000 (the "CONFIDENTIALITY AGREEMENT"), the terms of which are incorporated
herein by reference. Effective upon, and only upon, the Closing, the
Confidentiality Agreement shall terminate with respect to information relating
solely to the Acquired Business PROVIDED, HOWEVER, that Buyer acknowledges that
any and all other information not related to the Acquired Business provided to
it by Seller or Seller's representatives concerning Seller, the Seller Entities
or any other Affiliate of Seller shall remain subject to the terms and
conditions of the Confidentiality Agreement after the Closing Date.

           SECTION 7.02. NO ADDITIONAL REPRESENTATIONS. Buyer acknowledges that
none of Seller, any of its Affiliates (including any Seller Entity or any
Clairol Entity) or any other person has made any representation or warranty,
expressed or implied, as to the accuracy or completeness of any information
regarding the Acquired Business furnished or made available to Buyer and its
representatives, except as expressly set forth in this Agreement or the Seller
Disclosure Schedule, and none of Seller, any of its Affiliates (including any
Seller Entity or any Clairol Entity) or any other person shall have or be
subject to any liability to Buyer, any Buyer Subsidiary or any other person
resulting from the distribution to Buyer, or Buyer's use of, any such
information, including the Confidential Offering Memorandum prepared by Goldman,
Sachs & Co. dated December 2000, and any information, documents or material made
available to Buyer and its representatives in certain "data rooms", management
presentations or in any other form in expectation of the transactions
contemplated hereby.

           SECTION 7.03. NO USE OF CERTAIN NAMES. Subject to the terms of the
Transaction Documents, Buyer shall, and shall cause the Buyer Subsidiaries and
the Clairol Entities to, promptly and in any event (a) within 60 days after
Closing, to
   57

                                                                              49

change the names of the International Clairol Subsidiaries to discontinue any
references to the BMS Names, (b) within 90 days after Closing, to revise product
literature and labeling to delete all references to the BMS Names and (c) within
45 days after Closing, to change signing and stationery and otherwise
discontinue use of the BMS Names; PROVIDED, HOWEVER, that, for a period of 180
days from the Closing Date, Buyer, the Buyer Subsidiaries and the Clairol
Entities may continue to distribute product literature that uses any BMS Names
and distribute products with labeling that uses any BMS Names to the extent that
such product literature and labeling exists on the Closing Date. In no event
shall Buyer, any Buyer Subsidiary or any Clairol Entity use any BMS Names after
the Closing in any manner or for any purpose different from the use of such BMS
Names by Seller, the Seller Entities and the Clairol Entities during the 90-day
period preceding the Closing. With respect to product inventory manufactured
prior to the Closing, Buyer, the Buyer Subsidiaries and the Clairol Entities may
continue to sell such inventory, notwithstanding that it bears one or more of
the BMS Names, for a reasonable time after the Closing (not to exceed 365 days).
"BMS Names" means "BRISTOL-MYERS", "Bristol-Myers Squibb" and "Bristol- Myers
Squibb Company", any variations and derivatives thereof and all other logos or
trademarks of Seller or its Affiliates not included in Section 4.11 of the
Seller Disclosure Schedule.

           SECTION 7.04. BUYER ACTIVITY ON CLOSING DATE. On the Closing Date,
Buyer shall, and shall cause the Buyer Subsidiaries and the Clairol Entities to,
conduct the Acquired Business in the ordinary course in substantially the same
manner as presently conducted and, on the Closing Date, shall not permit any
Buyer Subsidiary or any Clairol Entity to effect any extraordinary transactions
(other than any such transactions expressly required by Applicable Law or by
this Agreement) that could result in Tax liability to Seller, a Seller Entity or
a Clairol Entity in excess of Tax liability associated with the conduct of their
business in the ordinary course.

           SECTION 7.05. SECURITIES ACT. Buyer and the Buyer Subsidiaries shall
not offer to sell or otherwise dispose of the Clairol Shares or the
International Shares so acquired by it or them in violation of any of the
registration requirements of the Securities Act of 1933, as amended, or the
applicable securities laws of any other jurisdiction.
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           SECTION 7.06. GUARANTEES. To the extent Seller or an Affiliate of
Seller (other than a Clairol Entity) has made or given a Seller Guarantee, Buyer
will use its best efforts to cause Seller or such Affiliate of Seller to be
released from such Seller Guarantee or to terminate such Seller Guarantee.

           SECTION 7.07. LION AGREEMENT. Buyer and Seller agree that this
Agreement shall not be deemed to constitute an assignment of the Seller's rights
and obligations under the License Agreement, effective January 1, 1984 (as the
same may be amended from time to time, the "LION AGREEMENT"), by and between the
Seller and Lion Corporation ("LION"), which grants to Lion, among other things,
the exclusive right to Vitalis and other products (the "COVERED PRODUCTS") in
Japan. Buyer agrees not to, and agrees to cause any purchaser or transferee of
the Acquired Business or rights with respect to the Covered Products to agree
not to, directly or indirectly, manufacture, market or sell Covered Products in
Japan. Buyer shall have no liability to Seller pursuant to this Section 7.07 if,
through no fault or knowledge of Buyer, a third party unaffiliated with Buyer
sells any Covered Products in the Japanese market; PROVIDED that if Buyer learns
of such diversion of Covered Products into the Japanese market by a third party,
Buyer shall use its best efforts to cease selling Covered Products to such third
party.

           SECTION 7.08. CERTAIN ACTIONS. Buyer agrees not to take any of the
actions set forth in Schedule I.

                                  ARTICLE VIII

                                MUTUAL COVENANTS

          Each of Seller and Buyer covenants and agrees as follows:

           SECTION 8.01. CONSENTS. Buyer acknowledges that consents and waivers
with respect to the transactions contemplated by this Agreement and the Other
Transaction Documents may be required from parties to contracts that are
Acquired Assets or Assumed Liabilities, or contracts to which a Clairol Entity
is a party, including the Contracts listed in the Seller Disclosure Schedule
(collectively, the "TRANSFERRED CONTRACTS") or with respect to environmental
permits or other assets and that such consents and waivers have not been
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obtained. Buyer agrees that Seller shall not have any liability whatsoever to
Buyer arising out of or relating to the failure to obtain any consents or
waivers that may be required in connection with the transactions contemplated by
this Agreement or because of the termination of any Transferred Contract as a
result thereof. Buyer further agrees that no representation, warranty or
covenant of Seller contained herein shall be breached or deemed breached, and no
condition shall be deemed not satisfied, as a result of (a) the failure to
obtain any such consent or waiver, (b) any such termination or (c) any lawsuit,
action, proceeding or investigation commenced or threatened by or on behalf of
any person arising out of or relating to the failure to obtain any such consent
or any such termination. Prior to the Closing, Seller and Buyer will use
commercially reasonable efforts to obtain all such consents and waivers;
PROVIDED, HOWEVER, that such efforts shall not include any requirement of Seller
or any of its Affiliates to expend money, commence, defend or participate in any
litigation, incur any obligation in favor of, or offer or grant any
accommodation (financial or otherwise) to, any third party, and all costs and
expenses related to seeking and obtaining such consents and waivers shall be for
Buyer's account.

           SECTION 8.02. COOPERATION. Buyer and Seller shall cooperate with each
other, and shall cause their officers, employees, agents, auditors and
representatives to cooperate with each other, for a period of 60 days after the
Closing to ensure the orderly transition of the Acquired Business from Seller to
Buyer and to minimize any disruption to the respective businesses of Seller,
Buyer and the Acquired Business, that might result from the transactions
contemplated hereby. After the Closing, upon reasonable written notice, Buyer
and Seller shall furnish or cause to be furnished to each other and their
employees, counsel, auditors and representatives access, during normal business
hours, to such information and assistance relating to the Acquired Business as
is reasonably necessary for financial reporting and accounting matters, the
preparation and filing of any Tax returns, reports or forms or the defense of
any Tax claim or assessment. The obligation to cooperate pursuant to the
preceding sentence insofar as it concerns Taxes shall terminate at the time the
relevant applicable statute of limitations expires (giving effect to any
extension thereof). Each party shall reimburse the other for reasonable out-of-
pocket costs and expenses incurred in assisting the other pursuant to this
Section 8.02. Neither party shall be
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required by this Section 8.02 to take any action that would unreasonably
interfere with the conduct of its business or unreasonably disrupt its normal
operations (or, in the case of Buyer, the Acquired Business).

           SECTION 8.03. PUBLICITY. Seller and Buyer agree that, from the date
hereof through the Closing Date, no public release or announcement concerning
the transactions contemplated hereby shall be issued by either party without the
prior consent of the other party (which consent shall not be unreasonably
withheld), except as such release or announcement may be required by law or the
rules or regulations of any United States or foreign securities exchange, in
which case the party required to make the release or announcement shall allow
the other party reasonable time to comment on such release or announcement in
advance of such issuance.

           SECTION 8.04. BEST EFFORTS. (a) Subject to the terms and conditions
of this Agreement (including the provisions set forth in Sections 8.01 and
8.05), each party shall use its best efforts to cause the Closing to occur.
Without limiting the foregoing or the provisions set forth in Section 8.05 and
without limiting the requirements for Closing set forth in Section 2.01(a),
Buyer and Seller shall use their respective best efforts to cause the Closing to
occur on or prior to the Six Month Anniversary or as soon as practicable
thereafter. Except as expressly provided in Section 8.05(c), each of Seller and
Buyer shall not, and shall not permit any of their respective Affiliates to,
take any action that would, or that could reasonably be expected to, result in
any of the conditions to the purchase and sale of the Clairol Shares, the
International Shares and the Acquired Assets and the assignment and assumption
of the Assumed Liabilities set forth in Article III not being satisfied.

           (b) Except as expressly provided in Section 8.05(c), Buyer shall use
its best efforts to have any restraint or prohibition of the type described in
clause (z) of the proviso to Section 2.01(a)(ii) terminated as promptly as
practicable.

           (c) Buyer and Seller agree that Seller's right to (i) receive
interest on the Purchase Price after the Six Month Anniversary pursuant to
Section 1.01(a), (ii) terminate this Agreement pursuant to Section 13.01(d) and
(iii) receive the payment specified in Section 13.03 upon a termination pursuant
to Section 13.01(d), do not, in any manner, reduce, lessen,
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alter, modify or otherwise change Buyer's obligations under this Section 8.04 to
use its best efforts to cause the Closing to occur (including its obligation to
use best efforts to cause the Closing to occur on or prior to the Six Month
Anniversary or as soon as practicable thereafter) or to cause any restraint or
prohibition of the type described in clause (z) of the proviso to Section
2.01(a)(ii) to be lifted or terminated.

           SECTION 8.05. ANTITRUST NOTIFICATION AND OTHER REGULATORY FILINGS.
(a) Each of Seller and Buyer shall as promptly as practicable, but in no event
later than five business days following the execution and delivery of this
Agreement, file with the United States Federal Trade Commission (the "FTC") and
the United States Department of Justice (the "DOJ") the notification and report
form required for the transactions contemplated hereby. Each of Buyer and Seller
shall furnish to the other such necessary information and reasonable assistance
as the other may request in connection with its preparation of any filing or
submission which is necessary under the HSR Act. Seller and Buyer shall keep
each other apprised of the status of any communications with, and any inquiries
or requests for additional information from, the FTC and the DOJ and shall
comply with any such inquiry or request as promptly as practicable, but in no
event later than five business days after receipt of such inquiry or request.
Any such notification and report form and supplemental information shall be in
substantial compliance with the requirements of the HSR Act. Each of Seller and
Buyer shall use its best efforts to obtain any clearance required under the HSR
Act for the Transaction.

           (b) Seller and Buyer shall make any required regulatory filings, and
shall use their best efforts to obtain any required regulatory consents,
authorizations, orders, approvals and declarations outside the United States, in
each case as promptly as practicable after the execution and delivery of this
Agreement, including filings under the Mexican Merger Regulation, the Canada
Competition Act and the merger control acts in the United Kingdom and Germany
and the Irish Mergers Act.

           (c) Seller and Buyer shall further use their best efforts to (i) if
and to the extent Buyer so elects, contest any Antitrust Proceeding until each
such Antitrust Proceeding is either resolved pursuant to a final nonappealable
court order or Buyer has determined not to further contest such Antitrust
Proceeding and (ii) once all such Antitrust
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Proceedings are so resolved or abandoned by Buyer, take such actions as may be
necessary to resolve any objections as may be asserted by any Governmental
Entity to obtain all necessary clearances and approvals under the U.S. Antitrust
Laws. Subject to Buyer's obligations pursuant to Section 8.05(a) to keep Seller
apprised of the status of the regulatory process, Buyer shall control the
regulatory process to obtain all such clearances and consents under the U.S.
Antitrust Laws (including all Antitrust Proceedings), subject to Seller's right
to participate therein. Seller shall not have independent substantive contacts
with any Governmental Entities administering the U.S. Antitrust Laws with
respect to the transactions contemplated hereby (unless Seller is otherwise
advised by its counsel that it is advisable for Seller to do so).

           (d) Buyer and Seller agree that Seller's right to (i) receive
interest on the Purchase Price after the Six Month Anniversary pursuant to
Section 1.01(a), (ii) terminate this Agreement pursuant to Section 13.01(d) and
(iii) receive the payment specified in Section 13.03 upon a termination pursuant
to Section 13.01(d), do not, in any manner, reduce, lessen, alter, modify, or
otherwise change Buyer's obligations under this Section 8.05 to use its best
efforts to obtain any clearance required under the HSR Act for the Transaction
and any other required regulatory consents, authorizations, orders, approvals
and declarations outside the United States.

           SECTION 8.06. RECORDS. As soon as practicable on or after the Closing
Date, Seller shall deliver or cause to be delivered to Buyer all Records, if
any, in the possession of Seller and its Affiliates relating to the Acquired
Business to the extent not then in the possession of the Clairol Entities,
subject to the following exceptions:
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      (i) Buyer recognizes that certain Records may contain incidental
information relating to the Acquired Business or may relate primarily to
subsidiaries or divisions of Seller other than the Acquired Business and that
Seller may retain such Records and shall provide copies of the relevant portions
thereof to Buyer;

      (ii) Seller may retain all Records prepared in connection with the
Transaction, including bids received from other parties and analyses relating to
the Acquired Business; and

      (iii) Seller may retain any Tax returns, reports or forms, and Buyer shall
be provided with copies of such returns, reports or forms only to the extent
that they relate to the Company's or the Clairol Subsidiaries' separate returns
or separate Tax liability.

      SECTION 8.07. SUPPORT SERVICES. Seller and its Affiliates provide certain
support services, including accounting, office, sales and distribution,
corporate management, information management, tax, legal, financial, treasury,
strategic sourcing, logistics, trademark maintenance, and employee compensation
and benefits services ("SUPPORT SERVICES") to the Acquired Business. Buyer
acknowledges that, except to the extent provided in the Transitional Services
Agreements, all Support Services will be terminated as of the Closing Date.

      SECTION 8.08. COLLECTION OF RECEIVABLES; FORWARDING OF PAYMENTS. From and
after the Closing, Buyer and each of the Buyer Subsidiaries and Clairol
Entities, as applicable, shall have the right and authority to collect for its
own account all Receivables and other related items that are included in the
Acquired Assets and to endorse with the name of Seller or an Affiliate of
Seller, as applicable, any checks or drafts received with respect to any
Receivables or such other related items. Seller shall, or shall cause its
Affiliates to, promptly deliver to Buyer, the Buyer Subsidiaries and the Clairol
Entities, as applicable, any cash or other property received directly or
indirectly by it with respect to the Receivables and such other related items.
Buyer shall, or shall cause its Affiliates to, promptly deliver to Seller and
its Affiliates, as applicable, any cash or other property received directly
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or indirectly by it with respect to the Excluded Receivables or any other
Excluded Assets.

      SECTION 8.09 ADVISORY COMMITTEES. Seller and Buyer shall establish four
advisory committees (the "ADVISORY COMMITTEES"), which shall each act as a forum
in which issues and disputes arising under the International Sales and
Distribution Transitional Services Agreement, the GBS Transitional Services
Agreement, the CMO Transitional Services Agreement and the IM Transitional
Services Agreement, respectively, can be evaluated and discussed. Each Advisory
Committee will consist of four members, with Buyer eligible to designate two
members and Seller eligible to designate two members. Seller and Buyer agree
that they shall designate the members of each Advisory Committee within thirty
days following the date of this Agreement, and shall cause each Advisory
Committee to establish guidelines governing its operation and function within
sixty days following the date of this Agreement.

      SECTION 8.10. TRANSITIONAL RELABELING SERVICES. Seller agrees that, not
less than thirty days prior to the Closing Date, it will provide written notice
to Buyer if Seller or its Affiliates will require Buyer or its Affiliates to
perform relabeling services that, as a result of the Transaction, are required
to comply with Applicable Laws after the Closing ("TRANSITIONAL RELABELING
SERVICES"). Buyer agrees that, not less than thirty days prior to the Closing
Date, it will provide written notice to Seller if Buyer or its Affiliates will
require Seller or its Affiliates to perform Transitional Relabeling Services.
Any notice provided pursuant to this Section 8.10 shall describe the
Transitional Relabeling Services, including the nature of such services and the
countries in which they will be necessary. Seller and Buyer further agree that,
to the extent any such notice is provided, they will agree on a fee for such
services based on the fully burdened costs of the party responsible for
providing the services, and the Schedules to the International Sales and
Distribution Transitional Services Agreement shall be appropriately modified to
reflect such services and the related fees for such services.
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                                   ARTICLE IX

                          EMPLOYEE AND RELATED MATTERS

          SECTION 9.01. EMPLOYEE MATTERS. (a) Effective as of the Closing Date,
Buyer, shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to,
assume and be responsible for all employment and employee benefit-related
matters, obligations and liabilities that are payable on or after the Closing
Date, regardless of whether such liabilities arise before, on or after the
Closing Date, with respect to all persons who are employees of the Acquired
Business immediately before the Closing Date, including active employees,
employees on leave of absence or vacation, employees on short-term or long-term
disability, employees represented by bargaining unit representatives and persons
employed within and outside the United States (collectively, the "EMPLOYEES"),
except as specifically provided otherwise in this Article IX. From and after the
Closing Date, (i) Buyer and the Clairol Entities shall assume and have all
responsibilities, liabilities and obligations with respect to the Employees and
their beneficiaries, including any claims incurred at any time, and (ii) Seller
and its Affiliates shall have no responsibilities, liabilities or obligations
with respect to the Employees and their beneficiaries, except as specifically
provided otherwise in this Article IX.

           (b) The provisions of this Article IX shall apply to all Employees,
including Employees based in locations outside the United States. The term
"Employee" includes all employees of the CMO, other than BMS Retained Employees
(as defined in the CMO Transitional Services Agreement).

           (c) In addition to the foregoing, effective as of the Closing Date,
Buyer shall, or shall cause the Buyer Subsidiaries to, assume all contracts,
obligations and liabilities with respect to independent contractors of Seller,
the Seller Entities and the Clairol Entities that relate primarily to the
Acquired Business (including any sales agents and other independent contractors
who are not Employees).

           (d) Seller has provided to Buyer a list (by name or by category and
number) of all Employees of the Acquired Business who are employees of the
Clairol Entities, as well as all Employees who are not employees of the Clairol
Entities, and all independent contractors of Seller, the Seller Entities and the
Clairol Entities that relate primarily to the Acquired
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Business. Seller shall provide Buyer with an updated list on the Closing Date,
which shall reflect any employment terminations and new hires in the ordinary
course of business consistent with this Agreement.

           SECTION 9.02. BARGAINING UNIT EMPLOYEES. From and after the Closing
Date, Buyer shall, or shall cause the Buyer Subsidiaries, if applicable, to,
assume the collective bargaining agreement between Clairol, Inc. and Local 300S,
Production Service & Sales District Council, U.F.C.W. AFL-CIO- CLC and any other
collective bargaining or labor agreements with respect to Employees previously
disclosed to Buyer (collectively, the "COLLECTIVE BARGAINING AGREEMENTS"), and
shall assume all liabilities and obligations under the Collective Bargaining
Agreements arising under, inter alia, the terms of the Collective Bargaining
Agreements, the National Labor Relations Act, the Labor Management Relations Act
and all other laws and regulations applicable in the jurisdictions in which
Employees are employed, and Seller and its Affiliates shall have no liability in
connection with the Collective Bargaining Agreements with respect to Employees
and their beneficiaries.

           SECTION 9.03. CONTINUITY OF EMPLOYMENT. (a) Buyer and Seller intend
that there shall be continuity of employment with respect to all Employees as of
the Closing Date. Buyer shall, or shall cause the Buyer Subsidiaries to, offer
employment to each Employee as of the Closing Date, or, as applicable, shall
cause the Clairol Entity that presently employs each Employee to continue the
Employee's employment as of the Closing Date, in all cases on substantially the
same terms and conditions as are applicable to such Employees immediately before
the Closing Date.

           (b) Notwithstanding anything in this Agreement to the contrary, as of
the Closing Date, Buyer shall, or shall cause, the Buyer Subsidiaries and the
Clairol Entities to, continue the employment of Employees based in locations
outside the United States as required by the Acquired Rights Directive or any
similar law in the relevant jurisdiction, and shall grant for a period of not
less than that provided for by local country law, substantially the same terms
and conditions of employment that apply to such Employees immediately prior to
the Closing Date. The term "ACQUIRED RIGHTS DIRECTIVE" shall mean the "European
Council Directive of February 14, 1977 on the Approximation of the Laws of the
Member States relating to the Safeguarding of Employee's Rights in the Event of
Transfers of Undertakings, Business or Parts of Businesses"
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(77/187/EC), as amended, and its subsequent transposition into local laws. In
addition, notwithstanding anything in this Agreement to the contrary, as of the
Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol
Entities to, offer and continue the employment of the Employees on the same
terms and conditions as in effect before the Closing Date, where necessary to
avoid the imposition of severance or similar obligations on Seller or its
Affiliates or where otherwise required by law.

           (c) For not less than 18 months following the Closing Date (the
"CONTINUATION PERIOD"), Buyer shall maintain, or, where applicable, shall cause
the Buyer Subsidiaries and the Clairol Entities to maintain (to the extent
permitted by law), compensation arrangements, employee benefit plans, and
perquisites with respect to Employees that are comparable in the aggregate to
those provided to such Employees by Seller and its Affiliates immediately prior
to the Closing Date. In the alternative, during the Continuation Period, Buyer
may replace or, where applicable, cause the Buyer Subsidiaries and the Clairol
Entities to replace (to the extent permitted by law), Seller's compensation
arrangements, employee benefit plans and perquisites with compensation
arrangements, employee benefit plans and perquisites that are comparable in the
aggregate to those provided to similarly situated employees of Buyer and the
Buyer Subsidiaries, PROVIDED that Employees shall either be treated entirely
under the first sentence or entirely under the second sentence of this Section
9.03(c). With respect to Buyer's stock-based plans, all Employees in Seller's
grades D-8 and above, and at least 50% of the Employees in Seller's grades D-6
and D-7, shall receive stock awards from Buyer in accordance with this Section
9.03 immediately after the Closing, and Employees' stock awards shall provide
for full vesting upon termination of employment in circumstances that entitle
such Employees to severance benefits under Section 9.08.

           (d) Buyer shall cause Employees' service with Seller and its
Affiliates before the Closing Date to be credited for all purposes for which
such service was recognized by Seller and its Affiliates with respect to all
employee benefit plans and arrangements and employment-related entitlements
provided, maintained or contributed to by Buyer, the Buyer Subsidiaries and the
Clairol Entities for Employees on or after the Closing Date, except as
specifically provided otherwise in this Article IX.
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           (e) Nothing in this Agreement shall be deemed to prohibit the
termination of any Employee's employment or the modification of any benefit
plans and arrangements, consistent with applicable law and the requirements of
Sections 9.03(b) and (c).

           SECTION 9.04. PENSION PLAN. Seller shall retain responsibility for
all benefits accrued before the Closing Date by Employees under the
Bristol-Myers Squibb Company Retirement Income Plan (the "Seller's Pension
Plan"), and neither Buyer, the Buyer Subsidiaries nor any of their Affiliates
shall have any liability with respect to the Seller's Pension Plan. As of the
Closing Date, all Employees shall have a fully vested interest in their accrued
benefits under the Seller's Pension Plan. Employees who, on the Closing Date,
are participants in the Seller's Pension Plan shall be immediately eligible on
the Closing Date for participation under the terms of the Procter & Gamble
Profit Sharing Trust and Employee Stock Ownership Plan ("PST PLAN"). Employees
shall receive credit for their service with Seller and its Affiliates prior to
the Closing Date for all purposes under the PST Plan, including for the purposes
of eligibility, vesting and contribution formulas.

           SECTION 9.05. SAVINGS AND INVESTMENT PLAN. (a) Effective as of the
Closing Date, Buyer shall, or shall cause the Buyer Subsidiaries and the Clairol
Entities to, have in effect a profit-sharing plan in accordance with Section
9.03 hereof that includes a qualified cash or deferred arrangement within the
meaning of Section 401(k) of the Code (the "BUYER'S 401(k) PLAN") and is
intended to be qualified pursuant to Section 401(a) of the Code. Buyer shall
cause Buyer's 401(k) Plan to accept direct rollover contributions (within the
meaning of Section 401(a)(31) of the Code and the regulations promulgated
thereunder) of Employee account balances which are made in the form of cash
and/or outstanding Employee loan balances from the Bristol-Myers Squibb Company
Savings and Investment Program (the "SELLER'S 401(k) PLAN"). Employees shall
have a fully vested interest in their accounts under the Seller's 401(k) Plan,
and in any accounts transferred to the Buyer's 401(k) Plan. Neither Buyer, the
Buyer Subsidiaries, Buyer's 401(k) Plan nor any of their Affiliates shall have
or assume any liability in connection with Seller's 401(k) Plan (except with
respect to accounts that are transferred as described above).

           SECTION 9.06. NON-QUALIFIED PLANS. (a) Effective as of the Closing
Date, Buyer shall, or shall cause the Buyer
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Subsidiaries and the Clairol Entities to, have in effect non-qualified defined
benefit and defined contribution plans that provide benefits to Employees who
are participating in Seller's Benefit Equalization Plans and Key International
Pension Plan before the Closing Date, in accordance with Section 9.03 above.

           (b) The non-qualified defined contribution plans of Buyer, the Buyer
Subsidiaries and the Clairol Entities ("BUYER'S BEP-SIP") shall provide those
Employees who are participating before the Closing Date in the Benefits
Equalization Plan of Bristol-Myers Squibb Company and its Subsidiary or
Affiliated Corporations Participating in the Bristol-Myers Squibb Company
Savings and Investment Program ("SELLER'S BEP-SIP") with an account balance
under Buyer's BEP-SIP equal to the Employees' account balance under Seller's
BEP-SIP as of the Closing Date. Buyer shall, and shall cause the Buyer
Subsidiaries and the Clairol Entities to, assume and be responsible for paying
all benefits accrued by Employees under Seller's BEP-SIP before the Closing
Date.

           (c) Seller shall retain responsibility for all benefits accrued
before the Closing Date by Employees under (i) the Benefits Equalization Plan of
Bristol-Myers Squibb Company and its Subsidiary or Affiliated Corporations
Participating in the Bristol-Myers Squibb Company Retirement Income Plan or the
Bristol-Myers Squibb Company Puerto Rico, Inc. Retirement Income Plan ("SELLER'S
BEP-RIP") and (ii) Seller's Key International Pension Plan ("SELLER'S KIP").
Neither Buyer, the Buyer Subsidiaries, the Clairol Entities nor any plan of
Buyer, the Buyer Subsidiaries, or the Clairol Entities shall have or assume any
liability with respect to Seller's BEP-RIP or Seller's KIP.

           SECTION 9.07. WELFARE BENEFIT PLANS. (a) Effective as of the Closing
Date, Buyer shall, and shall cause the Buyer Subsidiaries and the Clairol
Entities to, offer the Employees and their eligible dependents participation in
welfare benefit plans and programs of Buyer (the "BUYER WELFARE BENEFIT PLANS"),
including medical, dental, life insurance, accident, survivor, short term
disability, long term disability, long term care, flexible benefit, adoption
assistance and other welfare benefit plans and programs, as applicable, in
accordance with Section 9.03. All waiting periods and pre-existing condition
clauses shall be waived under the Buyer Welfare Benefit Plans for Employees and
their eligible dependents who were participating in the welfare benefits plans
and programs of Seller and its Affiliates
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("SELLER WELFARE BENEFIT PLANS") before the Closing Date. Buyer shall cause the
Buyer Welfare Benefit Plans to recognize any out-of-pocket medical and dental
expenses incurred by each of the Employees and their eligible dependents prior
to the Closing Date and during the calendar year in which the Closing Date
occurs for purposes of determining deductibles and out-of-pocket maximums under
the Buyer Welfare Benefit Plans.

           (b) Seller shall retain responsibility for (i) all claims incurred by
Employees under Seller's health and dental plans before the Closing Date and
(ii) all stock options and restricted stock granted to Employees under Seller's
equity plans before the Closing Date, and Buyer shall not be responsible for
such health and dental claims, stock options and restricted stock. In addition,
Buyer shall not be responsible for any dependent life insurance and other
insured benefit claims that are incurred by Employees before the Closing Date,
to the extent that such claims are paid by the insurance carrier to the
Employees according to the terms of the applicable insurance contracts
maintained by Seller.

           (c) Buyer agrees to provide or cause to be provided under the Buyer
Welfare Benefit Plans to each Employee who retires on or after the Closing Date
and during the Continuation Period, and their dependents, health care benefits
and coverage that are comparable in the aggregate to those set forth in the
Comprehensive Medical Plan Summary Plan Description for Retirees of
Bristol-Myers Squibb Company, or such other retiree benefit plan or arrangement
of Seller or its Affiliates that is applicable to the Employee immediately
before the Closing Date (or that would have been applicable had the Employee
been eligible to retire immediately before the Closing Date), in accordance with
Section 9.03. If Employees are eligible to receive health care benefits under
Seller's retiree plans on or after the Closing Date, Buyer agrees that Seller's
retiree plans shall be secondary to the Buyer Welfare Benefit Plans (both active
and retiree plans).

           (d) Effective as of the Closing Date, Buyer shall, or shall cause the
Buyer Subsidiaries and the Clairol Entities to, have in effect a health care and
dependent care reimbursement account plan (the "BUYER REIMBURSEMENT PLAN"), in
accordance with Section 9.03. Buyer's Reimbursement Plan shall give full effect
to, and continues in effect, salary reduction elections made under the health
care and dependent care reimbursement account plans of Seller and its Affiliates
as in effect on the Closing Date (the "Seller Reimbursement Plan"). The Seller
Reimbursement Plan shall transfer to the
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Buyer Reimbursement Plan an amount equal to the aggregate account balances of
Employees as of the Closing Date under the Seller Reimbursement Plan. Buyer
shall reimburse Seller on a dollar-for-dollar basis for forfeitures of the
Employee accounts under the Buyer Reimbursement Plan that relate to the calendar
year in which the Closing Date occurs.

           (e) Effective as of the Closing Date, Buyer shall, or shall cause the
Buyer Subsidiaries and the Clairol Entities to, assume all responsibilities and
obligations for continuation coverage under Sections 601 ET SEQ. of ERISA (COBRA
obligations) and any state continuation coverage requirements with respect to
the Employees and their beneficiaries.

           SECTION 9.08. SEVERANCE. Buyer shall, or shall cause the Buyer
Subsidiaries and the Clairol Entities to, adopt and maintain, effective as of
the Closing Date, one or more severance policies which shall be identical in all
material respects (including the Rule of 70 provisions, as described in Seller's
written communications to Employees) to the terms of the severance policies of
Seller and its Affiliates applicable to Employees as in effect on the Closing
Date (the "SELLER SEVERANCE POLICIES") and which shall be enhanced as described
in Exhibit N (the "ENHANCED SEVERANCE PROGRAM"). Buyer shall cause the Enhanced
Severance Program to be maintained for Employees whose employment terminates on
or after the Closing Date and during the Continuation Period. Buyer and the
Buyer Subsidiaries shall assume and be responsible for paying any severance
obligations (including termination indemnities, notice liabilities and statutory
severance obligations) that are payable as a result of the transactions
contemplated by this Agreement, or that are otherwise payable with respect to
Employees on or after the Closing Date.

           SECTION 9.09. VACATION BENEFITS. As of the Closing Date, Buyer shall,
or shall cause the Buyer Subsidiaries and the Clairol Entities to, recognize all
of the Employees' accrued and unused vacation benefits consistent with the terms
of the vacation policies of Seller and its Affiliates applicable to Employees as
in effect on the Closing Date.

           SECTION 9.10. RELOCATION BENEFITS. As of the Closing Date, Buyer
shall, or shall cause the Buyer Subsidiaries and the Clairol Entities to,
provide each eligible Employee with relocation benefits that are comparable
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in the aggregate to the relocation policies of Seller and its Affiliates that
are applicable to such Employees on the Closing Date. Buyer shall, or shall
cause the Buyer Subsidiaries and the Clairol Entities to, perform or cause to be
performed all obligations of Seller and its Affiliates with respect to
Employees' existing relocation arrangements, and Buyer shall, or shall cause the
Buyer Subsidiaries and the Clairol Entities to, have all rights and obligations
of Seller and its Affiliates under such relocation arrangements with respect to
Employees.

           SECTION 9.11. EXPATRIATES. As of the Closing Date, Buyer shall, or
shall cause the Buyer Subsidiaries and the Clairol Entities to, assume all
obligations and responsibilities with respect to each Employee who is or was
temporarily assigned to work at a location outside such Employee's home country
("EXPATRIATES") as of the Closing Date as disclosed to Buyer. Such obligations
and responsibilities shall include, without limitation, compensation increments,
housing expenses, travel expenses, relocation expenses and all other applicable
benefits, all of which shall be provided by Buyer according to the terms of the
Employee's agreement with Seller and its Affiliates as in effect before the
Closing Date. Buyer and Seller shall take all actions necessary so that Buyer,
the Buyer Subsidiaries and the Clairol Entities shall have all rights and
obligations of Seller and its Affiliates with respect to Expatriates, including
rights and obligations under tax equalization agreements with the Expatriates.

           SECTION 9.12. OTHER AGREEMENTS AND BENEFITS. Without limiting the
foregoing, as of the Closing Date, Buyer shall, or shall cause the Buyer
Subsidiaries and the Clairol Entities to, assume all liabilities, and perform or
cause to be performed all obligations, of Seller or its Affiliates under the
following agreements, programs and policies in effect with respect to Employees
as of the Closing Date as disclosed to Buyer: (i) employment and supplemental
benefit agreements with respect to Employees based in countries outside the
United States, (ii) tuition assistance programs and automobile policies, and
(iii) statutory benefits applicable to Employees and their beneficiaries.

           SECTION 9.13. ANNUAL BONUSES. As of the Closing Date, Buyer shall, or
shall cause the Buyer Subsidiaries and the Clairol Entities to, assume
responsibility for, and pay, all annual bonuses that are payable to Employees
for the year
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2001, including bonuses accrued before the Closing Date under the annual bonus
plans of Seller and its Affiliates.

           SECTION 9.14. RETENTION BONUS ARRANGEMENTS. (a) To the extent so
requested by Seller, Buyer shall, or shall cause the Buyer Subsidiaries and the
Clairol Entities to, administer and make any and all retention bonus payments
required to be made to Employees pursuant to the retention bonus arrangements of
Seller and its Affiliates that are applicable to the Employees, as set forth in
the retention bonus announcements to Employees dated October 2000 from Charles
G. Tharp. Seller shall retain the economic obligation with respect to such
retention bonus payments to Employees and shall reimburse Buyer, the Buyer
Subsidiaries or the Clairol Entities, as applicable, for the net cost of such
retention bonus payments made by Buyer, the Buyer Subsidiaries or the Clairol
Entities to Employees.

           (b) In addition to the foregoing, as of the Closing Date, Buyer
shall, and shall cause the Buyer Subsidiaries and the Clairol Entities to,
provide to Employees the additional retention bonuses described in Exhibit N.
Buyer shall be liable for all costs of the retention bonuses described in
Exhibit N.

           SECTION 9.15. INTERNATIONAL PENSION AND SAVINGS PLANS. Appendix A
sets forth provisions that are applicable to certain pension and savings plans
maintained for Employees based outside the United States.

                                    ARTICLE X

                               FURTHER ASSURANCES

          SECTION 10.01. FURTHER ASSURANCES. From time to time, as and when
requested by either party hereto, the other party shall execute and deliver, or
cause to be executed and delivered, all such documents and instruments and shall
take, or cause to be taken, all such further or other actions (subject to the
provisions of Sections 8.01, 8.04 and 8.05), as such other party may reasonably
deem necessary or desirable to consummate the transactions contemplated by this
Agreement.
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                                   ARTICLE XI

                                 INDEMNIFICATION

          SECTION 11.01. TAX INDEMNIFICATION. (a) Seller shall indemnify Buyer
and its Affiliates (including the Clairol Entities) and each of their respective
officers, directors, employees, stockholders, agents and representatives and
hold them harmless from (i) all liability for Taxes of the Clairol Entities and
Taxes relating to the Acquired Assets for the Pre-Closing Tax Period (including
any U.S. federal income Taxes imposed on the Company or the U.S. Clairol
Subsidiaries as a result of the Code Section 338(h)(10) election contemplated by
Section 12.04 of this Agreement), (ii) all liability for Taxes of the Clairol
Entities for any taxable period ending after the Closing Date attributable to
Seller's breach of its obligations under Section 12.04, and (iii) all liability
as a result of Treasury Regulation sec. 1.1502-6(a) for Taxes of Seller or any
other corporation which is or has been affiliated with Seller (other than the
Clairol Entities). Notwithstanding the foregoing, Seller shall not indemnify and
hold harmless Buyer and its Affiliates (including the Clairol Entities) and each
of their respective officers, directors, employees or agents, from any liability
for Taxes attributable to any action taken on or after the Closing Date by
Buyer, any of its Affiliates (including the Clairol Entities), or any transferee
of Buyer or any of its Affiliates (other than any such action expressly required
by Applicable Law or by this Agreement) (a "BUYER TAX ACT") or attributable to a
breach by Buyer of its obligations under this Agreement.

           (b) Buyer shall, and shall cause the Buyer Subsidiaries and Clairol
Entities to, indemnify Seller and its Affiliates and each of their respective
officers, directors, employees, stockholders, agents and representatives and
hold them harmless from (i) all liability for Taxes of the Clairol Entities and
Taxes relating to the Acquired Assets for any taxable period ending after the
Closing Date (except to the extent such taxable period began before the Closing
Date, in which case Buyer's indemnity will cover only that portion of any such
Taxes that are not for the Pre-Closing Tax Period) and (ii) all liability for
Taxes attributable to a Buyer Tax Act or to a breach by Buyer of its obligations
under this Agreement.
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           (c) In the case of any taxable period that includes (but does not end
on) the Closing Date (a "STRADDLE PERIOD"):

          (i) real, personal and intangible property Taxes ("PROPERTY TAXES") of
     the Clairol Entities and Property Taxes relating to the Acquired Assets
     allocable to the Pre-Closing Tax Period shall be equal to the amount of
     such Property Taxes for the entire Straddle Period multiplied by a
     fraction, the numerator of which is the number of days during the Straddle
     Period that are in the Pre-Closing Tax Period and the denominator of which
     is the number of days in the Straddle Period; and

         (ii) the Taxes of the Clairol Entities and Taxes relating to the
     Acquired Assets (other than Property Taxes) allocable to the Pre-Closing
     Tax Period shall be computed as if such taxable period ended as of the
     close of business on the Closing Date.

           SECTION 11.02. OTHER INDEMNIFICATION BY SELLER. (a) Except as relates
to Taxes, for which the sole indemnification is provided in Section 11.01,
Seller shall indemnify Buyer, its Affiliates (including the Clairol Entities)
and each of their respective officers, directors, employees, stockholders,
agents and representatives against and hold them harmless from any loss,
liability, claim, damage or expense (including reasonable legal fees and
expenses) suffered or incurred by any such indemnified party to the extent
arising from (i) any breach of any representation or warranty of Seller
contained in this Agreement or in any certificate delivered pursuant hereto, in
each case, which survives the Closing, (ii) any breach of any covenant of Seller
contained in this Agreement or any Other Transaction Document, (iii) any failure
of Seller to perform or satisfy any employee benefit obligations or liabilities
specifically retained by Seller under Article IX, (iv) all Excluded Liabilities
or (v) any breach by Buyer or any of its Affiliates of the Agreements set forth
in Section 11.02(a)(v) of the Seller Disclosure Schedule. Notwithstanding the
foregoing, (A) Seller shall not have any liability under clause (i) or clause
(ii) of this Section 11.02(a) (in the case of clause (ii), only with respect to
breaches of covenants that occur prior to Closing) unless the aggregate of all
losses, liabilities, costs and expenses relating thereto for which Seller would,
but for this clause (A), be liable exceeds on a cumulative basis an amount equal
to 1% of the Purchase Price, and then only to the extent of any such
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excess; (B) Seller shall not have any liability under clause (i) or clause (ii)
of this Section 11.02(a) (in the case of clause (ii), only with respect to
breaches of covenants that occur prior to Closing) for any individual item or
series of related items where the loss, liability, cost or expense relating
thereto is less than $250,000 and such items shall not be aggregated for
purposes of the foregoing clause (A) of this Section 11.02(a); (C) Seller's
liability under clause (i) or clause (ii) of this Section 11.02(a) (in the case
of clause (ii), only with respect to breaches of covenants that occur prior to
Closing) shall in no event exceed 20% of the Purchase Price; and (D) Seller
shall not have any liability under this Section 11.02(a) to the extent the
liability or obligation arises as a result of any action taken or omitted to be
taken by Buyer or any of its Affiliates. Notwithstanding the foregoing, the
limitations of clauses (A), (B) and (C) of the preceding sentence shall not
apply to any employee benefit obligations or liabilities specifically retained
by Seller pursuant to the provisions of Article IX or any Excluded Liabilities.
In no event shall Seller be obligated to indemnify Buyer or any other person
with respect to any matter to the extent that such matter was reflected in the
calculation of the adjustment to the Purchase Price, if any, pursuant to Section
2.02.

           (b) Buyer further acknowledges and agrees that, should the Closing
occur, its sole and exclusive remedy with respect to any and all claims relating
to this Agreement, any Other Transaction Document, any document or certificate
delivered in connection herewith, the transactions contemplated hereby, the
Clairol Shares, the International Shares, the Acquired Assets, the Assumed
Liabilities or the Clairol Entities or their respective assets, liabilities and
business (other than claims of, or causes of action arising from, fraud) or any
Federal, state, local or foreign statute, law, ordinance, rule or regulation or
otherwise, shall be pursuant to the indemnification provisions set forth in this
Article XI. In furtherance of the foregoing, Buyer hereby waives, from and after
the Closing, to the fullest extent permitted under applicable law, any and all
rights, claims and causes of action (other than claims of, or causes of action
arising from, fraud) it or any of its Affiliates (including the Clairol
Entities) may have against Seller and its Affiliates arising under or based upon
this Agreement, any Other Transaction Document, any document or certificate
delivered in connection herewith, or any Federal, state, local or foreign
statute, law, ordinance, rule or regulation or
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otherwise (except pursuant to the indemnification provisions set forth in this
Article XI).

           SECTION 11.03. OTHER INDEMNIFICATION BY BUYER. Except as relates to
Taxes, for which the sole indemnification is provided in Section 11.01, Buyer
shall, and shall cause the Buyer Subsidiaries and Clairol Entities to, indemnify
Seller, its Affiliates and each of their respective officers, directors,
employees, stockholders, agents and representatives against and hold them
harmless from any loss, liability, claim, damage or expense (including
reasonable legal fees and expenses) suffered or incurred by any such indemnified
party to the extent arising from (i) any breach of any representation or
warranty of Buyer contained in this Agreement or in any certificate delivered
pursuant hereto, in each case, which survives the Closing, (ii) any breach of
any covenant of Buyer contained in this Agreement or any Other Transaction
Document, (iii) any guarantee or obligation or liability given or made by Seller
or an Affiliate of Seller with respect to any obligation or any Assumed
Liability set forth in clause (iv),(v) or (vi) below (each, a "SELLER
GUARANTEE"), (iv) all Assumed Liabilities, (v) any obligations assumed or
retained by Buyer, the Buyer Subsidiaries or the Clairol Entities pursuant to
Article IX, (vi) all obligations and liabilities of whatever kind and nature,
primary or secondary, direct or indirect, absolute or contingent, known or
unknown, whether or not accrued, whether arising before, on or after the Closing
Date, of the Clairol Entities, including any such obligations or liabilities
under any agreement, lease, license, permit, plan or commitment to which any
Clairol Entity is a party or by which any Clairol Entity or any of its
properties or assets are bound or the Benefit Plans set forth in Section 4.14 of
the Seller Disclosure Schedule or any plan, fund, program, policy, contract or
arrangement described in Section 4.14 but not required to be set forth in
Section 4.14 of the Seller Disclosure Schedule (collectively, the "PLANS") (in
each case other than items for which indemnification is provided under Section
11.02), (vii) any discontinuance, suspension or modification on or after the
Closing Date of any Plan and (viii) any claim that the purchase and sale of the
Clairol Shares, the International Shares, the Acquired Assets or the
transactions contemplated hereby give rise to any severance or other benefits
under any Plan.

           SECTION 11.04. LIMITATIONS ON LIABILITY; COOPERATION. (a)
Notwithstanding any provision herein,
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neither Seller nor Buyer shall in any event be liable to the other party or its
Affiliates, officers, directors, employees, stockholders, agents or
representatives on account of any indemnity obligation set forth in Section
11.02 or 11.03 for any indirect, consequential, special, incidental or punitive
damages (including, but not limited to, lost profits, loss of use, damage to
goodwill or loss of business).

           (b) Buyer and Seller shall cooperate with each other with respect to
resolving any claim or liability with respect to which one party is obligated to
indemnify the other party hereunder including by making commercially reasonable
efforts to mitigate or resolve any such claim or liability.

           SECTION 11.05. LOSSES NET OF INSURANCE, ETC. The amount of any loss,
liability, claim, damage, expense or Tax for which indemnification is provided
under this Article XI shall be net of any amounts recovered or recoverable by
the indemnified party under insurance policies with respect to such loss,
liability, claim, damage, expense or Tax (collectively, a "LOSS") and shall be
reduced to take account of any net Tax benefit (including as a result of any
basis adjustment) of the indemnified party arising from the incurrence or
payment of any such Loss. In computing the amount of any such Tax benefit, the
indemnified party shall be deemed to recognize all other items of income, gain,
loss, deduction or credit before recognizing any item arising from the receipt
of any indemnity payment hereunder or the incurrence or payment of any
indemnified Loss. Any indemnity payment under this Agreement shall be treated as
an adjustment to the Purchase Price for Tax purposes, unless a final
determination (which shall include the execution of a Form 870-AD or successor
form) with respect to the indemnified party or any of its Affiliates causes any
such payment not to be treated as an adjustment to the Purchase Price for United
States Federal income Tax purposes.

           SECTION 11.06. TERMINATION OF INDEMNIFICATION. The obligations to
indemnify and hold harmless a party hereto (a) pursuant to Section 11.01, shall
terminate at the time the applicable statutes of limitation with respect to the
Tax liabilities in question expire (giving effect to any extension thereof), (b)
pursuant to Sections 11.02(a)(i) and 11.03(i), shall terminate when the
applicable representation or warranty terminates pursuant to Article XIV and (c)
pursuant to Sections 11.02(a)(ii) and 11.03(ii), in each case with respect to
breaches of covenants that occur prior to the Closing, shall terminate eighteen
months after the Closing Date and (d)
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pursuant to the other clauses of Sections 11.02 and 11.03 shall not terminate;
PROVIDED, HOWEVER, that as to clauses (a), (b) and (c) above such obligations to
indemnify and hold harmless shall not terminate with respect to any item as to
which the person to be indemnified or the related party thereto shall have,
before the expiration of the applicable period, previously made a claim by
delivering a notice of such claim (stating in reasonable detail the basis of
such claim) to the indemnifying party.

           SECTION 11.07. PROCEDURES RELATING TO INDEMNIFICATION FOR THIRD PARTY
CLAIMS. In order for a party (the "INDEMNIFIED PARTY") to be entitled to any
indemnification provided for under this Agreement (other than indemnification
for a Tax Claim under Section 11.01 which shall be governed by Section 11.09) in
respect of, arising out of or involving a claim or demand made by any person
against the indemnified party (a "THIRD PARTY CLAIM"), such indemnified party
must notify the indemnifying party in writing, and in reasonable detail, of the
Third Party Claim within 10 business days after receipt by such indemnified
party of written notice of the Third Party Claim; PROVIDED, HOWEVER, that
failure to give such notification shall not affect the indemnification provided
hereunder except to the extent the indemnifying party shall have been actually
prejudiced as a result of such failure (except that the indemnifying party shall
not be liable for any expenses incurred during the period in which the
indemnified party failed to give such notice). Thereafter, the indemnified party
shall deliver to the indemnifying party, promptly after the indemnified party's
receipt thereof, copies of all notices and documents (including court papers)
received by the indemnified party relating to the Third Party Claim.

           If a Third Party Claim is made against an indemnified party, the
indemnifying party shall be entitled to participate in the defense thereof and,
if it so chooses and acknowledges its obligation to indemnify the indemnified
party therefor, to assume the defense thereof with counsel selected by the
indemnifying party; PROVIDED, HOWEVER, that such counsel is not reasonably
objected to by the indemnified party. Should the indemnifying party so elect to
assume the defense of a Third Party Claim, the indemnifying party shall not be
liable to the indemnified party for legal expenses subsequently incurred by the
indemnified party in connection with the defense thereof, unless the indemnified
party retains its own counsel due to a mutually agreed upon conflict of
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interest. If the indemnifying party assumes such defense, the indemnified party
shall have the right to participate in the defense thereof and to employ counsel
(not reasonably objected to by the indemnifying party), at its own expense,
separate from the counsel employed by the indemnifying party, it being
understood that the indemnifying party shall control such defense. The
indemnifying party shall be liable for the fees and expenses of counsel employed
by the indemnified party for any period during which the indemnifying party has
failed to assume the defense thereof (other than during the period prior to the
time the indemnified party shall have given notice of the Third Party Claim as
provided above).

           If the indemnifying party so elects to assume the defense of any
Third Party Claim, all of the indemnified parties shall cooperate with the
indemnifying party in the defense or prosecution thereof. Such cooperation shall
include the retention and (upon the indemnifying party's request) the provision
to the indemnifying party of records and information which are reasonably
relevant to such Third Party Claim, and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder. Whether or not the indemnifying party shall have
assumed the defense of a Third Party Claim, the indemnified party shall not
admit any liability with respect to, or settle, compromise or discharge, such
Third Party Claim without the indemnifying party's prior written consent (which
consent shall not be unreasonably withheld).

           SECTION 11.08. PROCEDURES RELATED TO INDEMNIFICATION FOR OTHER CLAIMS
(OTHER THAN TAX CLAIMS UNDER SECTION 11.01). In the event any indemnified party
should have a claim against any indemnifying party under Section 11.02 or 11.03
that does not involve a Third Party Claim being asserted against or sought to be
collected from such indemnified party, the indemnified party shall deliver
notice of such claim with reasonable promptness to the indemnifying party. The
failure by any indemnified party so to notify the indemnifying party shall not
relieve the indemnifying party from any liability which it may have to such
indemnified party under Section 11.02 or 11.03, except to the extent that the
indemnifying party demonstrates that it has been materially prejudiced by such
failure.

           SECTION 11.09. PROCEDURES RELATING TO INDEMNIFICATION OF TAX CLAIMS.
(a) If one party is responsible for the payment of Taxes pursuant to Section
11.01
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(the "TAX INDEMNIFYING PARTY"), and the other party to this Agreement (the "TAX
INDEMNIFIED PARTY") receives notice of any deficiency, proposed adjustment,
assessment, audit, examination, suit, dispute or other claim (a "TAX CLAIM")
with respect to such Taxes, the Tax Indemnified Party shall promptly notify the
Tax Indemnifying Party in writing of such Tax Claim. If notice of a Tax Claim is
not given to the Tax Indemnifying Party within a sufficient period of time to
allow such party effectively to contest such Tax Claim, or in reasonable detail
to apprise such party of the nature of the Tax Claim, in each case taking into
account the facts and circumstances with respect to such Tax Claim, the Tax
Indemnifying Party shall not be liable to the Tax Indemnified Party (or, any of
its Affiliates or any of their respective officers, directors, employees,
stockholders, agents or representatives) to the extent that the Tax Indemnifying
Party position is materially prejudiced as a result thereof.

           (b) With respect to any Tax Claim, for which the Tax Indemnified
Party has not waived its rights to indemnification for Taxes under this
Agreement, the Tax Indemnifying Party shall assume and control all proceedings
taken in connection with such Tax Claim (including selection of counsel) and,
without limiting the foregoing, may in its sole discretion pursue or forego any
and all administrative appeals, proceedings, hearings and conferences with any
taxing authority with respect thereto, and may, in its sole discretion, either
pay the Tax claimed and sue for a refund where applicable law permits such
refund suits or contest the Tax Claim in any permissible manner; PROVIDED,
HOWEVER, that in the case of a Tax Claim relating solely to Taxes with respect
to any Clairol Entity for a Straddle Period, Seller and Buyer shall jointly
control all proceedings taken in connection with any such Tax Claim.

           (c) The Tax Indemnified Party and each of its respective Affiliates
shall cooperate with the Tax Indemnifying Party in contesting any Tax Claim,
which cooperation shall include the retention and (upon the Tax Indemnifying
Party's request) the provision to the Tax Indemnifying Party of records and
information which are reasonably relevant to such Tax Claim, and making
employees available on a mutually convenient basis to provide additional
information or explanation of any material provided hereunder or to testify at
proceedings relating to such Tax Claim.

           (d) In no case shall Buyer, the Buyer Subsidiaries, the Clairol
Entities or any of their respective
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officers, directors, employees, stockholders, agents or representatives settle
or otherwise compromise any Tax Claim without Seller's prior written consent.
Neither party shall settle a Tax Claim relating solely to Taxes of the Company
or the Clairol Subsidiaries for a Straddle Period without the other party's
prior written consent.

                                   ARTICLE XII

                                   TAX MATTERS

          SECTION 12.01. RESPONSIBILITY FOR PREPARATION AND FILING OF TAX
RETURNS AND AMENDMENTS. (a) For any taxable period of the Clairol Entities that
includes (but does not end on) the Closing Date, Buyer shall timely prepare and
file with the appropriate authorities all Tax returns, reports and forms
required to be filed and shall pay all Taxes due with respect to such returns,
reports and forms; PROVIDED that Seller shall remit to Buyer not less than ten
(10) days prior to the due date of any such return, report or form any amount
owed by Seller pursuant to Section 11.01 with respect to the taxable periods
covered by such returns, reports or forms. All such returns shall be prepared on
a basis consistent with the past practice of the Clairol Entities and in a
manner that does not distort taxable income provided such basis will not subject
Buyer to any penalties or fines or such basis is otherwise not prohibited by
Applicable Law. Buyer shall furnish such returns to Seller for its approval
(which approval shall not be unreasonably delayed or withheld) at least 30 days
prior to the due date for filing such returns.

           (b) For any taxable period of the Clairol Entities that ends on or
before the Closing Date, Seller shall timely prepare and file with the
appropriate authorities all Tax returns, reports and forms required to be filed,
and shall pay all Taxes due with respect to such returns, reports and forms. To
the extent that they relate to the Clairol Entities, all such returns shall be
prepared on a basis consistent with the past practice of Clairol Entities and in
a manner that does not distort taxable income. Buyer and Seller agree to cause
the Clairol Entities to file all Tax returns, reports and forms for the period
including the Closing Date on the basis that the relevant taxable period ended
as of the close of business on the Closing Date, unless the relevant taxing
authority will not accept a return, report or form filed on that basis.
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           (c) Seller shall be responsible for filing any amended, consolidated,
combined or unitary Tax returns for taxable years ending on or prior to the
Closing Date. For those jurisdictions in which separate Tax returns are filed by
the Company or the Clairol Subsidiaries, any required amended returns shall be
prepared by Seller and furnished to the Company or the Clairol Subsidiaries, as
the case may be, for signature and filing at least 30 days prior to the due date
for filing such returns, and the Company or applicable Clairol Subsidiary, as
the case may be, shall promptly sign and timely file any such amended return.

           SECTION 12.02. COOPERATION. Each of Seller, the Seller Entities, the
Clairol Entities and Buyer shall reasonably cooperate, and shall cause their
respective Affiliates, officers, employees, agents, auditors and representatives
reasonably to cooperate, in preparing and filing all returns, reports and forms
relating to Taxes, including maintaining and making available to each other all
records necessary in connection with Taxes and in resolving all disputes and
audits with respect to all taxable periods relating to Taxes. Buyer and Seller
recognize that Seller and its Affiliates will need access, from time to time,
after the Closing Date, to certain accounting and Tax records and information
held by the Clairol Entities to the extent such records and information pertain
to events occurring prior to the Closing Date; therefore, Buyer agrees, and
agrees to cause the Clairol Entities, (a) to use their best efforts to properly
retain and maintain such records until such time as Seller agrees that such
retention and maintenance is no longer necessary, and (b) to allow Seller and
its agents and representatives (and agents or representatives of any of its
Affiliates), at times and dates mutually acceptable to the parties, to inspect,
review and make copies of such records as Seller may deem necessary or
appropriate from time to time, such activities to be conducted during normal
business hours and at Seller's expense.

           SECTION 12.03. REFUNDS AND CREDITS. Any refunds or credits of Taxes
of the Clairol Entities or Taxes relating to the Acquired Assets for any taxable
period ending on or before the Closing Date shall be for the account of Seller.
Any refunds or credits of Taxes of the Clairol Entities or Taxes relating to the
Acquired Assets for any taxable period beginning after the Closing Date shall be
for the account of the Buyer. Any refunds or credits of Taxes of the Clairol
Entities or Taxes relating to the Acquired Assets for any
   84

                                                                              76

Straddle Period shall be equitably apportioned between Seller and Buyer. Buyer
shall, if Seller so requests and at Seller's expense, cause the Clairol Entities
to file for and obtain any refunds or credits to which Seller is entitled under
this Section 12.03. Buyer shall permit Seller to control the prosecution of any
such refund claim and, where deemed appropriate by Seller, shall cause the
Clairol Entities to authorize by appropriate powers of attorney such persons as
Seller shall designate to represent the Clairol Entities, as applicable, with
respect to such refund claim, PROVIDED, HOWEVER, that the prosecution of such
could not give rise to Taxes imposed upon any Buyer Indemnified Person. Buyer
shall cause the Clairol Entities to forward to Seller any such refund to which
it is entitled under this Section 12.03 within 10 days after the refund is
received (or reimburse Seller for any such credit within 10 days after the
credit is allowed or applied against other Tax liability); PROVIDED, HOWEVER,
that any such amounts payable to Seller shall be net of any Tax cost or Tax
benefit (including as a result of any basis adjustment) to Buyer or the Clairol
Entities, as the case may be, attributable to the receipt of such refund and/or
the payment of such amounts to Seller. Seller and Buyer shall treat any payments
under the preceding sentence that Seller shall receive pursuant to this Section
12.03 as an adjustment to the Purchase Price, unless a final determination
(which shall include the execution of a Form 870-AD or successor form) with
respect to the Buyer or any of its Affiliates causes any such payment not to be
treated as an adjustment to the Purchase Price for United Stated Federal income
Tax purposes. Notwithstanding the foregoing, the control of the prosecution of a
claim for refund of Taxes paid pursuant to a deficiency assessed subsequent to
the Closing Date as a result of an audit shall be governed by the provisions of
Section 11.09.

           SECTION 12.04. SECTION 338(h)(10). (a) SECTION 338(h)(10) ELECTIONS.
Buyer and Seller shall (i) join in making an election under Section 338(h)(10)
of the Code and Section 1.338(h)(10)-1 of the United States Treasury Regulations
promulgated thereunder (the "TREASURY REGULATIONS") and any comparable election
under state or local Tax law with respect to Clairol, Inc., any U.S. Clairol
Subsidiaries and U.S. legal entity acquired pursuant to these Transaction
Documents (the "ELECTIONS"), (ii) provide to the other party any information
reasonably requested in reasonable detail by such other party to permit the
Elections to be made, (iii) as promptly as practicable following the Closing
Date,
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                                                                              77

take all actions reasonably requested in reasonable detail by the other party to
effect and preserve timely Elections (including filing such forms, returns,
elections, schedules and other documents reasonably requested in reasonable
detail by the other party to effect and preserve timely Elections in accordance
with the provisions of Section 1.338(h)(10)-1 of the Treasury Regulations (or
any comparable provisions of state or local tax law)) and (iv) report Buyer's
acquisitions pursuant to this Agreement consistent with such Elections.

           (b) SECTION 338(g) ELECTIONS. Buyer and Seller agree that neither
Buyer nor Seller nor any Affiliate of either thereof shall make any election
pursuant to Section 338(g) of the Code and the United States Treasury
Regulations promulgated thereunder (or any comparable election under state or
local Tax law) with respect to any International Clairol Subsidiary.

           SECTION 12.05. PURCHASE PRICE ALLOCATIONS. (a) ALLOCATIONS OF
PURCHASE PRICE. As soon as practicable following the Closing Date (but in no
event later than sixty (60) calendar days prior to the last date on which an IRS
Form 8023 ("FORM 8023") can be filed to provide for the Elections) Seller shall
prepare and deliver to Buyer, and Buyer and Seller shall agree on (i) an
allocation of that portion of the Purchase Price (as adjusted pursuant to the
operation of Section 2.02) attributable to the Clairol Shares pursuant to
Section 1.01(d) among the assets of the Company and each U.S. Clairol Subsidiary
and (ii) a completed Form 8023 and the required schedules thereto, providing for
each election under Section 338(h)(10) of the Code and Section 1.338(h)(10)-1 of
the Treasury Regulations.

           (b) ADJUSTMENTS TO PURCHASE PRICE. Buyer and Seller agree that, to
the extent that the Purchase Price is adjusted pursuant to the operation of
Section 2.02, Buyer and Seller, for all Tax purposes (including for purposes of
completing or amending Form 8023), shall allocate such adjustment to the item or
items to which it is principally attributable.

           (c) PARTIES AGREE TO REPORT THE ELECTIONS, PURCHASE PRICE ALLOCATIONS
AND INDEMNITY PAYMENTS CONSISTENTLY. Buyer and Seller agree to file all Tax
returns, reports and forms consistent with the Elections and with the
allocations described in Section 1.01(d) (including the allocations set forth on
Exhibit E) and this Section 12.05 and not to take any position inconsistent
therewith for any Tax
   86

                                                                              78

purpose, unless required by Applicable Law. In addition, Buyer and Seller agree
to treat any indemnity payment under Article XI as an adjustment to the Purchase
Price (as adjusted pursuant to the operation of Section 2.02) for all Tax
purposes, unless otherwise required by Applicable Law.

           (d) DISPUTES BY TAXING AUTHORITY. In the event that any of the
allocations described in Section 1.01(d) (including the allocations set forth on
Exhibit E) or this Section 12.05 are disputed by any Taxing Authority, the party
receiving notice of such dispute shall promptly notify the other party in
writing of such dispute, and Buyer and Seller shall cooperate in good faith in
responding to such challenge in order to preserve the effectiveness of such
allocation.

           SECTION 12.06. TRANSFER TAXES. All transfer, documentary, sales, use,
value added, registration and other such Taxes (including all applicable real
estate transfer or gains Taxes) and related fees (including any penalties,
interest and additions to Tax) incurred in connection with this Agreement and
the transactions contemplated hereby ("TRANSFER TAXES") shall be shared equally
between Seller and Buyer, and Seller and Buyer shall cooperate in timely making
all filings, returns, reports and forms as may be required to comply with the
provisions of such Tax laws; PROVIDED, HOWEVER, that all Transfer Taxes which
are refundable to or otherwise recoverable by Buyer shall be paid solely by
Buyer.

           SECTION 12.07. FIRPTA CERTIFICATE. Seller shall deliver to Buyer at
the Closing a certificate in form and substance satisfactory to Buyer, duly
executed and acknowledged, certifying any facts that would exempt the
transactions contemplated hereby from withholding pursuant to the provisions of
the Foreign Investment in Real Property Tax Act.

           SECTION 12.08. BUYER ACTIVITY POST-CLOSING. Buyer shall not, with
respect to any Pre-Closing Tax Period, (a) file any amended Tax return with
respect to the Clairol Entities; (b) carry back any loss or other Tax attribute
of the Clairol Entities; or (c) take or advocate any position with respect to
Taxes of the Clairol Entities that reasonably could be expected to adversely
affect Seller or that would have the effect of shifting income to a Pre-Closing
Tax Period unless, in each case, Seller shall have consented in writing to such
action by the Buyer.
   87

                                                                              79

                                  ARTICLE XIII

                                   TERMINATION

           SECTION 13.01. TERMINATION. Anything contained herein to the contrary
notwithstanding, this Agreement may be terminated and the transactions
contemplated hereby abandoned at any time prior to the Closing Date:

           (a) by mutual written consent of Seller and Buyer;

           (b) by Seller if any of the conditions set forth in Section 3.02
     shall have become incapable of fulfillment, and shall not have been waived
     by Seller;

           (c) by Buyer if any of the conditions set forth in Section 3.01
     (other than the conditions set forth in Sections 3.01(b) or 3.01(c)) shall
     have become incapable of fulfillment, and shall not have been waived by
     Buyer; or

           (d) by Seller, if the Closing does not occur on or prior to the
     Twelve Month Anniversary of the date of this Agreement;

PROVIDED, HOWEVER, that the party seeking termination pursuant to clause (b),
(c) or (d) is not in breach in any material respect of any of its
representations, warranties, covenants or agreements contained in this
Agreement.

           SECTION 13.02. RETURN OF CONFIDENTIAL INFORMATION. If the
transactions contemplated by this Agreement are terminated as provided herein:

























   88
                                                                              80

           (a) Buyer shall return all documents and other material received from
     Seller, any Seller Entity, any Clairol Entity or any other Affiliate of
     Seller relating to the transactions contemplated hereby, whether so
     obtained before or after the execution hereof, to Seller; and

           (b) all confidential information received by Buyer with respect to
     the businesses of Seller and its Affiliates (including the Clairol
     Entities, the Acquired Assets and the Assumed Liabilities) shall be treated
     in accordance with the Confidentiality Agreement, which shall remain in
     full force and effect notwithstanding the termination of this Agreement.

           SECTION 13.03. CONSEQUENCES OF TERMINATION. In the event of
termination by Seller or Buyer pursuant to Article XIII, written notice thereof
shall forthwith be given to the other party and the transactions contemplated by
this Agreement shall be terminated, without further action by either party. If
this Agreement is terminated and the transactions contemplated hereby are
abandoned as described in this Article XIII, this Agreement shall become void
and of no further force or effect, except for the provisions of (a) Section 7.01
relating to the obligation of Buyer to keep confidential certain information and
data obtained by it, (b) Section 15.03 relating to certain expenses, (c) Section
15.04 relating to attorney fees and expenses, (d) Section 8.03 relating to
publicity, (e) Section 15.10 relating to finder's fees and broker's fees and (f)
this Article XIII. Nothing in this Article XIII or elsewhere in this Agreement
shall be deemed to impair the right of either party to compel specific
performance by the other party of its obligations under this Agreement. Subject
to Section 13.04, nothing in this Article XIII shall be deemed to release either
party from any liability for any breach by such party of the terms and
provisions of this Agreement.

           SECTION 13.04. PAYMENT. Buyer shall pay to Seller $500 million if
this Agreement is terminated by Seller pursuant to Section 13.01(d) at any time
on or after the Twelve Month Anniversary, which payment shall be Seller's sole
and exclusive remedy against and recovery from Buyer in the event of such a
termination. Any payment due under this Section shall be paid by wire transfer
of same-day funds on the date of termination of this Agreement.
   89

                                                                              81

                                   ARTICLE XIV

                           SURVIVAL OF REPRESENTATIONS

           SECTION 14.01. SURVIVAL OF REPRESENTATIONS. The representations and
warranties in this Agreement and in any certificate delivered pursuant hereto
(in each case other than the representations and warranties relating to Taxes)
shall survive the Closing solely for purposes of Sections 11.02 and 11.03 and
shall terminate at the close of business on the eighteen month anniversary of
the Closing Date, except that (a) representations and warranties relating to Tax
matters (including the representations and warranties set forth in Section 4.08)
shall not survive the Closing and (b) the representations and warranties set
forth in Section 4.03 (a) and, with respect to Bristol-Myers Company Limited and
Bristol-Myers de Mexico S. de R.L. de C.V., 4.03(b) shall terminate on the fifth
anniversary of the Closing Date.

                                   ARTICLE XV

                                  MISCELLANEOUS

          SECTION 15.01. ASSIGNMENT. This Agreement and the rights and
obligations hereunder shall not be assignable or transferable by Buyer or Seller
without the prior written consent of the other party hereto; PROVIDED, HOWEVER,
that Buyer may assign its right to purchase the Clairol Shares, the
International Shares or the Acquired Assets hereunder to a majority-owned,
controlled subsidiary of Buyer (each, a "BUYER SUBSIDIARY") without the prior
written consent of Seller; PROVIDED FURTHER, HOWEVER, that no assignment shall
limit or affect Buyer's obligations hereunder. Any attempted assignment in
violation of this Section 15.01 shall be void.

           SECTION 15.02. NO THIRD-PARTY BENEFICIARIES. Except as provided in
Article XI, this Agreement is for the sole benefit of the parties hereto and
their permitted assigns and nothing herein expressed or implied shall give or be
construed to give to any person, other than the parties hereto and such assigns,
any legal or equitable rights hereunder.

           SECTION 15.03. EXPENSES. Whether or not the transactions contemplated
hereby are consummated, and except as otherwise specifically provided in this
Agreement, all costs and expenses incurred in connection with this Agreement
   90

                                                                              82

and the transactions contemplated hereby shall be paid by the party incurring
such costs or expenses.

           SECTION 15.04. ATTORNEY FEES. A party in breach of this Agreement
shall, on demand, indemnify and hold harmless the other party for and against
all reasonable out- of-pocket expenses, including legal fees, incurred by such
other party by reason of the enforcement and protection of its rights under this
Agreement. The payment of such expenses is in addition to any other relief to
which such other party may be entitled.

           SECTION 15.05. AMENDMENTS. This Agreement may not be amended except
by an instrument in writing signed on behalf of each of the parties hereto. By
an instrument in writing Buyer, on the one hand, or Seller, on the other hand,
may waive compliance by the other with any term or provision of this Agreement
that such other party was or is obligated to comply with or perform.

           SECTION 15.06. NOTICES. All notices or other communications required
or permitted to be given hereunder shall be in writing and shall be delivered by
hand or sent by prepaid telex, cable or telecopy or sent, postage prepaid, by
registered, certified or express mail or reputable overnight courier service and
shall be deemed given when so delivered by hand, telexed, cabled or telecopied,
or if mailed, three days after mailing (one business day in the case of express
mail or overnight courier service), as follows:

          (a) if to Buyer,

              The Procter & Gamble Company
              1 Procter & Gamble Plaza
              Cincinnati, OH 45202

              Attention:  Chief Financial Officer

     with a copy to:

              The Procter & Gamble Company
              1 Procter & Gamble Plaza
              Cincinnati, OH 45202

              Attention:  Secretary

          (b)  if to Seller,







   91


                                                                              83

              Bristol-Myers Squibb Company
              345 Park Avenue
              New York, NY 10154

              Attention:  General Counsel

     with a copy to:

              Cravath, Swaine & Moore
              Worldwide Plaza
              825 Eighth Avenue
              New York, NY 10019

              Attention:  Susan Webster, Esq.

          SECTION 15.07. INTERPRETATION; EXHIBITS AND THE SELLER DISCLOSURE
SCHEDULE; DEFINITIONS. (a) The definitions of the terms herein shall apply
equally to the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include", "includes" and "including" shall
be deemed to be followed by the phrase "without limitation". The word "will"
shall be construed to have the same meaning and effect as the word "shall".
Unless the context requires otherwise, (i) any definition of or reference to any
agreement, instrument or other document herein shall be construed as referring
to such agreement, instrument or other document as from time to time amended,
supplemented or otherwise modified (subject to any restrictions on such
amendments, supplements or modifications set forth herein), (ii) any reference
herein to any Person shall be construed to include the Person's successors and
assigns, (iii) the words "herein", "hereof" and "hereunder", and words of
similar import, shall be construed to refer to this Agreement in its entirety
and not to any particular provision hereof, (iv) all references herein to
Articles, Sections, Appendices, Exhibits or Schedules shall be construed to
refer to Articles, Sections, Appendices, Exhibits and Schedules of this
Agreement and (v) the headings contained in this Agreement, the Seller
Disclosure Schedule, other Schedules or any Appendix or Exhibit and in the table
of contents to this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement. Any matter
set forth in any provision, subprovision, section or subsection of the Seller
Disclosure Schedule shall be deemed set forth for all purposes of the
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                                                                              84

Seller Disclosure Schedule to the extent relevant and reasonably apparent. The
Seller Disclosure Schedule, all other Schedules and all Appendices and Exhibits
annexed hereto or referred to herein are hereby incorporated in and made a part
of this Agreement as if set forth in full herein. Any capitalized terms used in
the Seller Disclosure Schedule, any other Schedule or any Appendix or Exhibit
annexed hereto but not otherwise defined therein, shall have the meaning as
defined in this Agreement. In the event of an ambiguity or a question of intent
or interpretation, this Agreement shall be construed as if drafted jointly by
the parties and no presumption or burden of proof shall arise favoring or
disfavoring any party by virtue of the authorship of any provisions of this
Agreement.

           (b)  For all purposes hereof:























   93

                                                                              85

          "ACQUIRED BUSINESS" means the businesses and operations conducted by
     the Seller, Seller Entities, the Company, the Clairol Subsidiaries, the CMO
     and the International Business Units, relating to the research and
     development, manufacturing, marketing, distribution or sales of the hair
     care, hair color, antiperspirant/deodorant and all other products of the
     Company worldwide, as currently conducted, including the Clairol Entities,
     the Acquired Assets and the Assumed Liabilities.

          "AFFILIATE" means, with respect to any specified person, any other
     person directly or indirectly controlling or controlled by or under direct
     or indirect common control with such specified person; and for the purposes
     of this definition, "control" when used with respect to any specified
     person means the power to direct the management and policies of such
     person, directly or indirectly, whether through the ownership of voting
     securities, by contract or otherwise; and the terms "controlling" and
     "controlled" have meanings correlative to the foregoing.

          "ANTITRUST PROCEEDING" means any proceeding seeking a preliminary
     injunction or other comparable legal impediment to the acquisition by Buyer
     of the Acquired Business or to Buyer's freedom to operate the Acquired
     Business after Closing under any U.S. Antitrust Laws.

          "ASSET SELLING ENTITIES" means the U.S. Asset Selling Entities and the
     International Asset Selling Entities.

          "CLAIROL" means the Clairol Entities, the CMO Acquired Assets, the
     Other U.S. Acquired Assets, the International Acquired Assets, the Other
     U.S. Assumed Liabilities (other than any such Other U.S. Assumed
     Liabilities related to Boclaro, Inc.) and the International Assumed
     Liabilities, taken as a whole.

          "CLAIROL ENTITIES" means the Company and the Clairol Subsidiaries.

          "CLAIROL SUBSIDIARIES" means the U.S. Clairol Subsidiaries and the
     International Clairol Subsidiaries.

          "CMO ACQUIRED ASSETS" means certain assets attributable to the CMO, as
     set forth in Exhibit F-1.
   94

                                                                              86

          "CMO ASSUMED LIABILITIES" means certain liabilities attributable to
     the CMO, as set forth in Exhibit G-1.

          "CMO EXCLUDED ASSETS" means certain assets attributable to the CMO, as
     set forth in Exhibit F-2.

          "CMO EXCLUDED LIABILITIES" means certain liabilities attributable to
     the CMO, as set forth in Exhibit G-2.

          "CMO TRANSITIONAL SERVICES AGREEMENT" means the agreement dated as of
     the date hereof between Buyer and Seller regarding the provision of certain
     services by the Buyer to the Seller in connection with the business of the
     CMO.

          "EXCLUDED ASSETS" means the U.S. Excluded Assets and the International
     Excluded Assets.

          "EXCLUDED LIABILITIES" means the U.S. Excluded Liabilities and the
     International Excluded Liabilities.

          "GAAP" means United States generally accepted accounting principles.

          "GBS TRANSITIONAL SERVICES AGREEMENT" means the agreement dated as of
     the Closing Date between Buyer and Seller regarding the provision of
     certain services by Seller's Global Business Services to Buyer and Buyer
     Subsidiaries.

          "IM TRANSITIONAL SERVICE AGREEMENT" means the agreement dated as of
     the date hereof between Buyer and Seller regarding the provision of
     information management services by Seller to Buyer and Buyer Subsidiaries.

          "INTERNATIONAL ACQUIRED ASSETS" means certain assets of Seller and its
     Affiliates related to the Acquired Business, as set forth in Exhibit H-1.

          "INTERNATIONAL ASSUMED LIABILITIES" means certain liabilities of
     Seller and its Affiliates related to the Acquired Business, as set forth in
     Exhibit I-1.

          "INTERNATIONAL BUSINESS UNIT" means the Acquired Business conducted in
     any country outside the U.S. by the Asset Selling Entity or Asset Selling
     Entities in each
   95

                                                                              87

     such country, together with the assets and liabilities related thereto.

          "INTERNATIONAL EXCLUDED ASSETS" means certain assets of Seller and its
     Affiliates related to the Acquired Business, as set forth in Exhibit H-2.

          "INTERNATIONAL EXCLUDED LIABILITIES" means certain liabilities of
     Seller and its Affiliates related to the Acquired Business, as set forth in
     Exhibit I-2.

          "INTERNATIONAL SALES AND DISTRIBUTION TRANSITIONAL SERVICES AGREEMENT"
     means the agreement dated as of the Closing Date between Buyer and Seller
     regarding the provision of certain sales and distribution services by
     Seller to Buyer and Buyer Subsidiaries.

          "MATERIAL ADVERSE EFFECT" means a material adverse effect on the
     business, financial condition or results of operations of the Acquired
     Business.

          "OTHER U.S. ACQUIRED ASSETS" means certain assets of the Seller and
     its Affiliates related to the Acquired Business, as set forth in Exhibit
     J-1.

          "OTHER U.S. ASSUMED LIABILITIES" means certain liabilities of the
     Seller and its Affiliates related to the Acquired Business, as set forth in
     Exhibit K-1.

          "OTHER U.S. EXCLUDED ASSETS" means certain assets of the Seller and
     its Affiliates related to the Acquired Business, as set forth in Exhibit
     J-2.

          "OTHER U.S. EXCLUDED LIABILITIES" means certain liabilities of the
     Seller and its Affiliates related to the Acquired Business, as set forth in
     Exhibit K-2.

          "PERMITTED LIENS" means (a) Liens set forth in Section 4.09 of the
     Seller Disclosure Schedule; (b) mechanics', carriers', workmen's,
     repairmen's or other like Liens arising or incurred in the ordinary course
     of business, Liens arising under original purchase price conditional sales
     contracts and equipment leases with third parties entered into in the
     ordinary course of business and liens for Taxes and other governmental
     charges which are not due and payable or which may thereafter be paid
     without penalty; (c) mortgages and Liens which secure debt that is
     reflected as a liability
   96

                                                                              88

     on the Clairol Balance Sheet and the existence of which is indicated in the
     notes thereto; and (d) other imperfections of title or encumbrances, if
     any, which do not, individually or in the aggregate, materially impair the
     continued use and operation of the assets to which they relate in the
     Acquired Business.

          "PERSON" means any individual, firm, corporation, partnership, limited
     liability company, trust, joint venture, Governmental Entity or other
     entity.

          "PRIME RATE" means the rate of interest from time to time publicly
     announced by Citibank, N.A., in its New York office as its prime or base
     rate, calculated on the basis of the actual number of days elapsed over
     365.

          "SELLER ENTITIES" means the International Stock Selling Entities and
     the Asset Selling Entities.

          "SIX MONTH ANNIVERSARY" means the six month anniversary of the date of
     this Agreement.

          "TRANSITIONAL SERVICES AGREEMENTS" means the CMO Transitional Services
     Agreement, the GBS Transitional Services Agreement, the International Sales
     and Distribution Transitional Services Agreement and the IM Transitional
     Services Agreement set forth in Exhibits L- 1, L-2, L-3 and L-4,
     respectively.

          "TWELVE MONTH ANNIVERSARY" means the twelve month anniversary of the
     date of this Agreement.

          "U.S." means the 50 states of the United States of America and the
     District of Columbia, and does not include the Commonwealth of Puerto Rico
     or any other territory or possession of the United States of America.

          "U.S. ACQUIRED ASSETS" means the CMO Acquired Assets and the Other
     U.S. Acquired Assets.

          "U.S. ACQUIRED LIABILITIES" means the CMO Acquired Liabilities and the
     Other U.S. Acquired Liabilities.

          "U.S. ANTITRUST LAWS" means the HSR Act and any other Applicable Laws
     in the U.S. that pertain to antitrust or competition matters.
   97

                                                                              89

           "U.S. EXCLUDED ASSETS" means the CMO Excluded Assets and the Other
     U.S. Excluded Assets.

           "U.S. EXCLUDED LIABILITIES" means the CMO Excluded
     Liabilities and the Other U.S. Excluded Liabilities.

          (c) The following terms have the meanings given such terms in the
Sections set forth below:























   98

                                                                              90
               Term                          Section
               ----                          -------

     Accounting Firm                         2.02(a)
     Acquired Assets                         2.01(e)
     Acquired Rights Directive               9.03(b)
     Adjusted Closing Date Amount            2.02(b)
     Applicable Laws                         4.16(a)
     Assumed Liabilities                     1.02
     Benefit Plans                           4.14(a)
     BMS Names                               7.03
     Boclaro Working Capital Statement       4.07(b)
     Buyer Subsidiary                        15.01
     Buyer Tax Act                           11.01(a)
     Buyer's 401(k) Plan                     9.05(a)
     Buyer's Pension Plan                    9.04
     Buyer Reimbursement Plan                9.07(d)
     Buyer Severance Policies                9.08
     Buyer Welfare Benefit Plans             9.07(a)
     Covered Products                        7.07
     Clairol Balance Sheet                   4.07
     Clairol Intellectual Property           4.11(b)
     Clairol Names                           5.04
     Clairol Shares                          Preamble
     Clairol Subsidiaries                    4.06(a)
     Closing                                 2.01(a)
     Closing Date                            2.01(a)
     Closing Date Amount                     2.01(b)
     Closing Working Capital                 2.02(a)
     CMO Working Capital Statement           4.07(b)
     Code                                    4.08(a)
     Collective Bargaining Agreements        9.02
     Clairol Balance Sheet                   4.07
     Clairol Working Capital                 2.02(b)
     Company                                 Preamble
     Company Property                        4.10(a)
     Confidentiality Agreement               7.01
     Continuation Period                     9.03(c)
     Contracts                               4.12(a)
     Current Liabilities                     2.02(b)
     Current Assets                          2.02(b)
     DOJ                                     8.05(a)
     EC Merger Regulation                    3.01(c)
     Elections                               12.04
     Employees                               9.01(a)
     Environmental Permits                   4.16(b)
     Environmental Reports                   4.16(b)
     Environmental Laws                      4.16(b)




   99


                                                                              91

     Excluded Inventories               Exhibit H-2
     Excluded Receivables               Exhibit H-2
     Expatriates                        9.11
     ERISA                              4.14(a)
     Financial Statements               4.07
     Financing                          6.05
     Form 8023                          12.05(a)
     FTC                                8.05(a)
     Governmental Entity                3.01(b)
     Hazardous Substances               4.16(b)
     HSR Act                            3.01(c)
     indemnified party                  11.07
     Intellectual Property              4.11(a)
     International Asset Purchase
     Agreements                         1.01(c)
     International Asset Selling
     Entity                             Preamble
     International Shares               Preamble
     International Stock Purchase
     Agreement                          1.01(b)
     International Clairol
     Subsidiary                         Preamble
     International Stock Selling
     Entity                             Preamble
     Inventories                        Exhibit H-1
     Leased Property                    4.10(a)
     Liens                              4.02(a)
     Lion                               7.07
     Lion Agreement                     7.07
     Loss                               11.05
     Mexican Merger Regulation          3.01(c)
     Notice of Disagreement             2.02(a)
     Other Intellectual Property        4.11(b)
     Other Transaction Documents        3.01(d)
     Owned Property                     4.10
     Pension Plans                      4.14(a)
     Plans                              11.03
     Pre-Closing Tax Period             4.08(a)
     Property Taxes                     11.01(c)
     Purchase Price                     1.01(a)
     Receivables                        Exhibit H-1
     Records                            Exhibit H-1
     Seller Disclosure Schedule         Article IV
     Seller Guarantee                   11.03
     Seller's 401(k) Plan               9.05(a)
     Seller's BEP-SIP                   9.06(a)
     Seller Reimbursement Plan          9.07(d)
   100

                                                                              92

     Seller Severance Policies          9.08
     Seller's Stock Fund                9.05(b)
     Seller Welfare Benefit Plans       9.07(a)
     Statement                          2.02(a)
     Straddle Period                    11.01(c)
     Support Services                   8.07
     Tax                                4.08(a)
     Tax Claim                          11.09(a)
     Tax Indemnified Party              11.09(a)
     Tax Indemnifying Party             11.09(a)
     Taxes                              4.08(a)
     Third Party Claim                  11.07
     Transaction                        1.01(a)
     Transaction Documents              4.01
     Transfer Documents                 2.01(e)
     Transfer Taxes                     12.06
     Transferred Contracts              8.01
     Treasury Regulations               12.04
     U.S. Asset Selling Entity          Preamble
     U.S. Clairol Subsidiaries          4.06(a)
     W.C. Amount                        2.02(b)
     Working Capital                    2.02(c)
     Working Capital Statement          2.02(a)

          SECTION 15.08. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement,
and shall become effective when one or more such counterparts have been signed
by each of the parties and delivered to the other party.

           SECTION 15.09. ENTIRE AGREEMENT. This Agreement, the Other
Transaction Documents and the Confidentiality Agreement, in each case along with
the Appendices, Exhibits and Schedules hereto and thereto, contain the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof and supersede all prior agreements and understandings
relating to such subject matter. Neither party shall be liable or bound to any
other party in any manner by any representations, warranties or covenants
relating to such subject matter except as specifically set forth herein, in the
Other Transaction Documents or in the Confidentiality Agreement.

           SECTION 15.10. BROKER AND FINDER FEES. Each party hereto hereby
represents and warrants that (a) the only brokers or finders that have acted for
such party in connection with this Agreement or the transactions
   101

                                                                              93

contemplated hereby or that may be entitled to any brokerage fee, finder's fee
or commission in respect thereof are Goldman, Sachs & Co. with respect to Seller
and J.P. Morgan with respect to Buyer and (b) each party shall pay all fees or
commissions which may be payable to the firm so named with respect to such
party.

           SECTION 15.11. SEVERABILITY. If any provision of this Agreement (or
any portion thereof) or the application of any such provision (or any portion
thereof) to any person or circumstance shall be held invalid, illegal or
unenforceable in any respect by a court of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect any other provision
hereof (or the remaining portion thereof) or the application of such provision
to any other persons or circumstances.

           SECTION 15.12. BULK TRANSFER LAWS. Buyer hereby waives compliance by
Seller and its Affiliates with the provisions of any so-called "bulk transfer
law" of any jurisdiction in connection with the sale of the Acquired Business.

           SECTION 15.13. CONSENT TO JURISDICTION. Each of Buyer and Seller
irrevocably submits to the exclusive jurisdiction of (a) the Supreme Court of
the State of New York, New York County, and (b) the United States District Court
for the Southern District of New York, for the purposes of any suit, action or
other proceeding arising out of this Agreement, the Other Transaction Documents
or any transaction contemplated hereby or thereby. Each of Buyer and Seller
agrees to commence any action, suit or proceeding relating hereto either in the
United States District Court for the Southern District of New York or if such
suit, action or other proceeding may not be brought in such court for
jurisdictional reasons, in the Supreme Court of the State of New York, New York
County. Each of Buyer and Seller further agrees that service of any process,
summons, notice or document by U.S. registered mail to such party's respective
address set forth above shall be effective service of process for any action,
suit or proceeding in New York with respect to any matters to which it has
submitted to jurisdiction in this Section 15.13. Each of Buyer and Seller
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the transactions
contemplated hereby in (i) the Supreme Court of the State of New York, New York
County, or (ii) the United States District Court for the Southern District of
New York,
   102

                                                                              94

and hereby further irrevocably and unconditionally waives and agrees not to
plead or claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum.

           SECTION 15.14. WAIVER OF JURY TRIAL. Each party hereto hereby waives
to the fullest extent permitted by applicable law, any right it may have to a
trial by jury in respect of any litigation directly or indirectly arising out
of, under or in connection with this Agreement or any of the Other Transaction
Documents or any transaction contemplated hereby or thereby. Each party hereto
(a) certifies that no representative, agent or attorney of any other party has
represented, expressly or otherwise, that such other party would not, in the
event of litigation, seek to enforce that foregoing waiver and (b) acknowledges
that it and the other parties hereto have been induced to enter into this
Agreement and the Other Transaction Documents, as applicable, by, among other
things, the mutual waivers and certifications in Section 15.13 and in this
Section 15.14.

           SECTION 15.15. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE,
WITHOUT REGARD TO THE CONFLICTS OF LAW PRINCIPLES OF SUCH STATE.


















   103

                                                                              95

          IN WITNESS WHEREOF, the parties have caused this Stock and Asset
Purchase Agreement to be duly executed as of the date first written above.

                        BRISTOL-MYERS SQUIBB COMPANY,

                          by  /s/ Robert E. Ewers, Jr.
                              ------------------------------------
                               Name:  Robert E. Ewers, Jr.
                               Title: Vice President

                        THE PROCTER & GAMBLE COMPANY,

                          by  /s/ Clayton C. Daley, Jr.
                              ------------------------------------
                               Name:  Clayton C. Daley, Jr.
                               Title: Senior Vice President
                                      and Chief Financial
                                      Officer

EX-10.1

   1




                                 EXHIBIT (10-1)



         The Procter & Gamble 2001 Stock and Incentive Compensation Plan


   2



         THE PROCTER & GAMBLE 2001 STOCK AND INCENTIVE COMPENSATION PLAN


ARTICLE A -- PURPOSE.

       The purposes of The Procter & Gamble 2001 Stock and Incentive
Compensation Plan (the "Plan") are to strengthen the alignment of interests
between those employees of The Procter & Gamble Company (the "Company") and its
subsidiaries who are largely responsible for the success of the business (the
"Participants") and the Company's shareholders through ownership behavior and
the increased ownership of shares of the Company's common stock (the "Common
Stock"), and to encourage the Participants to remain in the employ of the
Company and its subsidiaries. This will be accomplished through the granting of
options to purchase shares of Common Stock, the granting of performance related
awards, the payment of a portion of the Participants' remuneration in shares of
Common Stock, and the granting of deferred awards related to the increase in the
price of Common Stock.

ARTICLE B -- ADMINISTRATION.

         1. The Plan shall be administered by the Compensation Committee (the
"Committee") of the Board of Directors of the Company (the "Board"), or such
other committee as may be designated by the Board. The Committee shall consist
of not fewer than three (3) members of the Board who are "Non-Employee
Directors" as defined in Rule 16b-3 under the Securities Exchange Act of 1934,
as amended (the "1934 Act"), or any successor rule or definition adopted by the
Securities and Exchange Commission, to be appointed by the Board from time to
time and to serve at the discretion of the Board. The Committee may establish
such regulations, provisions, and procedures within the terms of the Plan as, in
its opinion, may be advisable for the administration and operation of the Plan,
and may designate the Secretary of the Company or other employees of the Company
to assist the Committee in the administration and operation of the Plan and may
grant authority to such persons to execute documents on behalf of the Committee.
The Committee shall report to the Board on the administration of the Plan not
less than once each year.

         2. Subject to the express provisions of the Plan, the Committee shall
have authority: to grant nonstatutory and incentive stock options; to grant
stock appreciation rights either freestanding or in tandem with simultaneously
granted stock options; to grant Performance Awards (as defined in Article J); to
award a portion of a Participant's remuneration in shares of Common Stock
subject to such conditions or restrictions, if any, as the Committee may
determine; to determine all the terms and provisions of the respective stock
option, stock appreciation right, and stock award agreements including setting
the dates when each stock option or stock appreciation right or part thereof may
be exercised and determining the conditions and restrictions, if any, of any
shares of Common Stock acquired through the exercise of any stock option; to
provide for special terms for any stock options, stock appreciation rights or
stock awards granted to Participants who are foreign nationals or who are
employed by the Company or any of its subsidiaries outside of the United States
of America in order to fairly accommodate for differences in local law, tax
policy or custom and to approve such supplements to or amendments, restatements
or alternative versions of the Plan as the Committee may consider necessary or
appropriate for such purposes (without affecting the terms of the Plan for any
other purpose); and to make all other determinations it deems necessary or
advisable for administering the Plan. In addition, at the time of grant the
Committee shall have the further authority to:

      (a)   waive the provisions of Article F, Paragraph 1(a);

      (b)   waive the provisions of Article F, Paragraph 1(b);

      (c)   waive the provisions of Article G, Paragraph 4(a), 4(b) and 4(c);
            and



                                       1
   3

      (d)   impose conditions in lieu of those set forth in Article G,
            Paragraphs 4 through 7, for nonstatutory stock options, stock
            appreciation rights, stock awards, or Performance Awards which do
            not increase or extend the rights of the Participant.

ARTICLE C -- PARTICIPATION.

       The Committee shall select as Participants those employees of the Company
and its subsidiaries who, in the opinion of the Committee, have demonstrated a
capacity for contributing in a substantial manner to the success of such
companies.

ARTICLE D -- LIMITATION ON NUMBER OF SHARES AVAILABLE UNDER THE PLAN.

      1. Unless otherwise authorized by the shareholders and subject to
Paragraph 2 of this Article D, the maximum aggregate number of shares available
for award under the Plan shall be ninety-five million shares. Any of the
authorized shares may be used for any of the types of awards described in the
Plan, except that no more than fifteen percent (15%) of the authorized shares
may be awarded as restricted or unrestricted stock.

      2. In addition to the shares authorized for award by Paragraph 1 of this
Article, the following shares may be awarded under the Plan:

         (a) shares that were authorized to be awarded under The Procter &
Gamble 1992 Stock Plan (the "1992 Plan"), but that were not awarded under the
1992 Plan;

         (b) shares awarded under the Plan or the 1992 Plan that are
subsequently forfeited in accordance with the Plan or the 1992 Plan,
respectively;

         (c) shares tendered by a Participant in payment of all or part of the
exercise price of a stock option awarded under the Plan or the 1992 Plan;

         (d) shares tendered by or withheld from a Participant in satisfaction
of withholding tax obligations with respect to a stock option awarded under the
Plan or the 1992 Plan.

ARTICLE E -- SHARES SUBJECT TO USE UNDER THE PLAN.

         1. The shares to be delivered by the Company upon exercise of stock
options or stock appreciation rights shall be determined by the Board and may
consist, in whole or in part, of authorized but unissued shares or treasury
shares. In the case of redemption of stock appreciation rights by one of the
Company's subsidiaries, such shares shall be shares acquired by that subsidiary.
Notwithstanding any terms or conditions contained herein, the shares to be
delivered by the Company upon exercise of stock options or stock appreciation
rights by a Participant located in Italy shall be authorized but unissued
shares.

         2. For purposes of the Plan, restricted or unrestricted stock awarded
under the terms of the Plan shall be authorized but unissued shares, treasury
shares, or shares acquired in the open market by the Company or a subsidiary, as
determined by the Board.

ARTICLE F -- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.

         1. In addition to such other conditions as may be established by the
Committee, in consideration of the granting of stock options or stock
appreciation rights under the terms of the Plan, each Participant agrees as
follows:




                                       2
   4

      (a)   The right to exercise any stock option or stock appreciation right
            shall be conditional upon certification by the Participant at time
            of exercise that the Participant intends to remain in the employ of
            the Company or one of its subsidiaries for at least one (1) year
            following the date of the exercise of the stock option or stock
            appreciation right (provided that termination of employment due to
            Retirement or Special Separation shall not constitute a breach of
            such certification), and,

      (b)   In order to better protect the goodwill of the Company and its
            subsidiaries and to prevent the disclosure of the Company's or its
            subsidiaries' trade secrets and confidential information and thereby
            help insure the long-term success of the business, the Participant,
            without prior written consent of the Company, will not engage in any
            activity or provide any services, whether as a director, manager,
            supervisor, employee, adviser, consultant or otherwise, for a period
            of three (3) years following the date of the Participant's
            termination of employment with the Company (except for terminations
            of employment resulting from Retirement or Special Separation), in
            connection with the manufacture, development, advertising,
            promotion, or sale of any product which is the same as or similar to
            or competitive with any products of the Company or its subsidiaries
            (including both existing products as well as products known to the
            Participant, as a consequence of the Participant's employment with
            the Company or one of its subsidiaries, to be in development):

            (1)   with respect to which the Participant's work has been directly
                  concerned at any time during the two (2) years preceding
                  termination of employment with the Company or one of its
                  subsidiaries or

            (2)   with respect to which during that period of time the
                  Participant, as a consequence of the Participant's job
                  performance and duties, acquired knowledge of trade secrets or
                  other confidential information of the Company or its
                  subsidiaries.

            For purposes of this paragraph, it shall be conclusively presumed
            that Participants have knowledge of information they were directly
            exposed to through actual receipt or review of memos or documents
            containing such information, or through actual attendance at
            meetings at which such information was discussed or disclosed.

      (c)   The provisions of this Article are not in lieu of, but are in
            addition to the continuing obligation of the Participant (which
            Participant hereby acknowledges) to not use or disclose the
            Company's or its subsidiaries' trade secrets and confidential
            information known to the Participant until any particular trade
            secret or confidential information become generally known (through
            no fault of the Participant), whereupon the restriction on use and
            disclosure shall cease as to that item. Information regarding
            products in development, in test marketing or being marketed or
            promoted in a discrete geographic region, which information the
            Company or one of its subsidiaries is considering for broader use,
            shall not be deemed generally known until such broader use is
            actually commercially implemented. As used in this Article,
            "generally known" means known throughout the domestic U. S. industry
            or, in the case of Participants who have job responsibilities
            outside of the United States, the appropriate foreign country or
            countries' industry.

      (d)   By acceptance of any offered stock option or stock appreciation
            rights granted under the terms of the Plan, the Participant
            acknowledges that if the Participant were, without authority, to use
            or disclose the Company's or any of its subsidiaries' trade secrets
            or confidential information or threaten to do so, the Company or one
            of its subsidiaries would be entitled to injunctive and other
            appropriate relief to prevent the Participant from doing so. The
            Participant acknowledges that the harm caused to the Company by the
            breach or anticipated breach of this Article is by its nature
            irreparable because, among other things, it



                                       3
   5

            is not readily susceptible of proof as to the monetary harm that
            would ensue. The Participant consents that any interim or final
            equitable relief entered by a court of competent jurisdiction shall,
            at the request of the Company or one of its subsidiaries, be entered
            on consent and enforced by any court having jurisdiction over the
            Participant, without prejudice to any rights either party may have
            to appeal from the proceedings which resulted in any grant of such
            relief.

      (e)   If any of the provisions contained in this Article shall for any
            reason, whether by application of existing law or law which may
            develop after the Participant's acceptance of an offer of the
            granting of stock appreciation rights or stock options, be
            determined by a court of competent jurisdiction to be overly broad
            as to scope of activity, duration, or territory, the Participant
            agrees to join the Company or any of its subsidiaries in requesting
            such court to construe such provision by limiting or reducing it so
            as to be enforceable to the extent compatible with then applicable
            law. If any one or more of the terms, provisions, covenants, or
            restrictions of this Article shall be determined by a court of
            competent jurisdiction to be invalid, void or unenforceable, then
            the remainder of the terms, provisions, covenants, and restrictions
            of this Article shall remain in full force and effect and shall in
            no way be affected, impaired, or invalidated.

         2. The fact that a Participant has been granted a stock option or a
stock appreciation right under the Plan shall not limit the right of the
employer to terminate the Participant's employment at any time. The Committee is
authorized to suspend or terminate any outstanding stock option or stock
appreciation right for actions taken by a Participant prior to termination of
employment if the Committee determines the Participant has acted significantly
contrary to the best interests of the Company or its subsidiaries.

         3. The maximum number of shares with respect to which stock options or
stock appreciation rights may be granted to any Participant in any calendar year
shall not exceed 1,000,000 shares.

         4. The aggregate fair market value (determined at the time when the
incentive stock option is exercisable for the first time by a Participant during
any calendar year) of the shares for which any Participant may be granted
incentive stock options under the Plan and all other stock option plans of the
Company and its subsidiaries in any calendar year shall not exceed $100,000 (or
such other amount as reflected in the limits imposed by Section 422(d) of the
Internal Revenue Code of 1986, as it may be amended from time to time).

         5. If the Committee grants incentive stock options, all such stock
options shall contain such provisions as permit them to qualify as "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as may be amended from time to time.

         6. With respect to stock options granted in tandem with stock
appreciation rights, the exercise of either such stock options or such stock
appreciation rights will result in the simultaneous cancellation of the same
number of tandem stock appreciation rights or stock options, as the case may be.

         7. The exercise price for all stock options and stock appreciation
rights shall be established by the Committee at the time of their grant and
shall be not less than one hundred percent (100%) of the fair market value of
the Common Stock on the date of grant.

         8. Unless otherwise authorized by the shareholders of the Company,
neither the Board nor the Committee shall authorize the amendment of any
outstanding stock option or stock appreciation right to reduce the exercise
price.

         9. No stock option or stock appreciation right shall be cancelled and
replaced with awards having a lower exercise price without the prior approval of
the shareholders of the Company. This



                                       4
   6

Article F, Paragraph 9 is intended to prohibit the repricing of "underwater"
stock options and stock appreciation rights and shall not be construed to
prohibit the adjustments permitted under Article J of the Plan.

         10. The Committee may require any Participant to accept any stock
options or stock appreciation rights by means of electronic signature.

ARTICLE G -- EXERCISE OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.

         1. All stock options and stock appreciation rights granted hereunder
shall have a maximum life of no more than ten (10) years from the date of grant.

         2. No stock options or stock appreciation rights shall be exercisable
within one (1) year from their date of grant, except in the case of the death of
the Participant.

         3. Unless a transfer has been duly authorized by the Committee pursuant
to Article G, Paragraph 6 of the Plan, during the lifetime of the Participant,
stock options and stock appreciation rights may be exercised only by the
Participant personally, or, in the event of the legal incompetence of the
Participant, by the Participant's duly appointed legal guardian.

         4. In the event that a Participant ceases to be an employee of the
Company or any of its subsidiaries while holding an unexercised stock option or
stock appreciation right:

         (a)      Any unexercisable portions thereof are then void, except in
                  the case of: (1) death of the Participant; (2) Retirement or
                  Special Separation that occurs more than six months from the
                  date the options were granted; or (3) any option as to which
                  the Committee has waived, at the time of grant, the provisions
                  of this Article G, Paragraph 4(a).

         (b)      Any exercisable portions thereof are then void, except in the
                  case of: (1) death of the Participant; (2) Retirement or
                  Special Separation; or (3) any option as to which the
                  Committee has waived, at the time of grant, the provisions of
                  this Article G, Paragraph 4(b).

         (c)      In the case of Special Separation, any stock option or stock
                  appreciation right must be exercised within the time specified
                  in the original grant or five (5) years from the date of
                  Special Separation, whichever is shorter.

         5. In the case of the death of a Participant, the persons to whom the
stock options or stock appreciation rights have been transferred by will or the
laws of descent and distribution shall have the privilege of exercising
remaining stock options, stock appreciation rights or parts thereof, whether or
not exercisable on the date of death of such Participant, at any time prior to
the expiration date of the stock options or stock appreciation rights.

         6. Stock options and stock appreciation rights are not transferable
other than by will or by the laws of descent and distribution. For the purpose
of exercising stock options or stock appreciation rights after the death of the
Participant, the duly appointed executors and administrators of the estate of
the deceased Participant shall have the same rights with respect to the stock
options and stock appreciation rights as legatees or distributees would have
after distribution to them from the Participant's estate. Notwithstanding the
foregoing, the Committee may authorize the transfer of stock options and stock
appreciation rights upon such terms and conditions as the Committee may require.
Such transfer shall become effective only upon the Committee's complete
satisfaction that the proposed transferee has strictly complied with such terms
and conditions, and both the original Participant and the transferee shall be
subject to the same terms and conditions hereunder as the original Participant.




                                       5
   7

         7. Upon the exercise of stock appreciation rights, the Participant
shall be entitled to receive a redemption differential for each such stock
appreciation right which shall be the difference between the then fair market
value of one share of Common Stock and the exercise price of one stock
appreciation right then being exercised. In the case of the redemption of stock
appreciation rights by a subsidiary of the Company not located in the United
States, the redemption differential shall be calculated in United States dollars
and converted to the appropriate local currency on the exercise date. As
determined by the Committee, the redemption differential may be paid in cash,
Common Stock to be valued at its fair market value on the date of exercise, any
other mode of payment deemed appropriate by the Committee or any combination
thereof.

         8. Time spent on leave of absence shall be considered as employment for
the purposes of the Plan. Leave of absence means any period of time away from
work granted to any employee by his or her employer because of illness, injury,
or other reasons satisfactory to the employer.

         9. The Company reserves the right from time to time to suspend the
exercise of any stock option or stock appreciation right where such suspension
is deemed by the Company as necessary or appropriate for corporate purposes. No
such suspension shall extend the life of the stock option or stock appreciation
right beyond its expiration date, and in no event will there be a suspension in
the five (5) calendar days immediately preceding the expiration date.

         10. The Committee may require any Participant to exercise any stock
options or stock appreciation rights by means of electronic signature.

ARTICLE H -- PAYMENT FOR STOCK OPTIONS AND TAX WITHHOLDING.

         Upon the exercise of a stock option, payment in full of the exercise
price shall be made by the Participant. As determined by the Committee, the
stock option exercise price may be paid by the Participant either in cash,
shares of Common Stock valued at their fair market value on the date of
exercise, a combination thereof, or such other method as determined by the
Committee. In addition to payment of the exercise price, the Committee may
authorize the Company to charge a reasonable administrative fee for the exercise
of any stock option. Furthermore, to the extent the Company is required to
withhold federal, state, local or foreign taxes in connection with any
Participant's stock option exercise, the Committee may require the Participant
to make such arrangements as the Company may deem necessary for the payment of
such taxes required to be withheld (including, without limitation,
relinquishment of a portion of such stock options or relinquishment of a portion
of the proceeds received by the Participant in a simultaneous exercise and sale
of stock during a "cashless" exercise). In no event, however, shall the
Committee be permitted to require payment from a Participant in excess of the
maximum required tax withholding rates.

ARTICLE I -- GRANT OF UNRESTRICTED OR RESTRICTED STOCK.

         The Committee may grant Common Stock to Participants under the Plan
subject to such conditions or restrictions, if any, as the Committee may
determine. To the extent the Company is required to withhold federal, state,
local or foreign taxes in connection with the lapse of restrictions on any
Participant's shares of Common Stock, the Committee may require the Participant
to make such arrangements as the Company may deem necessary for the payment of
such taxes required to be withheld (including, without limitation,
relinquishment of a portion of such shares of Common Stock). In no event,
however, shall the Committee be permitted to require payment from a Participant
in excess of the maximum required tax withholding rates.

ARTICLE J -- PERFORMANCE RELATED AWARDS.





                                       6
   8

         1. The Committee, in its discretion, may establish performance goals
for selected Participants and authorize the granting of cash, stock options,
stock appreciation rights, Common Stock, other property, or any combination
thereof ("Performance Awards") to such Participants upon achievement of such
established performance goals during a specified time period (the "Performance
Period"). The Committee, in its discretion, shall determine the Participants
eligible for Performance Awards, the performance goals to be achieved during
each Performance Period, the amount of any Performance Awards to be paid, and
the method of payment for any Performance Awards. Performance Awards may be
granted either alone or in addition to other grants made under the Plan.

         2. Notwithstanding the foregoing, any Performance Awards granted to the
Chief Executive and the Company's other four highest paid executive officers (as
reported in the Company's proxy statement pursuant to Regulation S-K, Item
402(a)(3)) under Article J, Paragraph 1 shall comply with all of the following
requirements:

         (a) Each grant shall specify the specific performance objectives (the
"Performance Objectives") which, if achieved, will result in payment or early
payment of the Performance Award. The Performance Objectives may be described in
terms of Company-wide objectives that are related to the individual Participant
or objectives that are related to a subsidiary, division, department, region,
function or business unit of the Company in which the Participant is employed,
and may consist of one or more or any combination of the following criteria:
stock price, market share, sales revenue, cash flow, earnings per share, return
on equity, total shareholder return, gross margin, and/or costs. The Performance
Objectives may be made relative to the performance of other corporations. The
Committee, in its discretion, may change or modify these criteria, however, at
all times the criterion must be valid performance criterion for purposes of
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code").
The Committee may not change the criteria or Performance Objectives for any
Performance Period that has already been approved by the Committee. The
Committee may cancel a Performance Period or replace a Performance Period with a
new Performance Period, provided that any such cancellation or replacement shall
not cause the Performance Award to fail to meet the requirements of Section
162(m) of the Code.

         (b) Each grant shall specify the minimum level of achievement required
by the Participant relative to the Performance Objectives to qualify for a
Performance Award. In doing so, the grant shall establish a formula for
determining the percentage of the Performance Award to be awarded if performance
is at or above the minimum level, but falls short of full achievement of the
specified Performance Objectives. Each grant may also establish a formula for
determining an additional award above and beyond the Performance Award to be
granted to the Participant if performance is at or above the specified
Performance Objectives. Such additional award shall also be established as a
percentage of the Performance Award. The Committee may decrease a Performance
Award as determined by the Performance Objectives, but in no case may the
Committee increase any Performance Award as determined by the Performance
Objectives.

         (c) The maximum Performance Award that may be granted to any
Participant for any one-year Performance Period shall not exceed $20,000,000 or
400,000 shares of Common Stock (the "Annual Maximum"). The maximum Performance
Award that may be granted to any Participant for a Performance Period greater
than one year shall not exceed the Annual Maximum multiplied by the number of
full years in the Performance Period.

ARTICLE K -- ADJUSTMENTS.

       The amount of shares authorized to be issued under the Plan will be
adjusted appropriately in the event of future stock splits, stock dividends, or
other changes in capitalization of the Company occurring after the date of
approval of the Plan by the Company's shareholders to prevent the dilution or
enlargement of rights under the Plan; following any such change, the term
"Common Stock" shall be



                                       7
   9

deemed to refer to such class of shares or other securities as may be
applicable. The number of shares and exercise prices covered by outstanding
stock options and stock appreciation rights shall be adjusted to give effect to
any such stock splits, stock dividends, or other changes in the capitalization.

ARTICLE L -- ADDITIONAL PROVISIONS AND DEFINITIONS.

         1. The Board may, at any time, repeal the Plan or may amend it except
that no such amendment may amend this paragraph, increase the total aggregate
number of shares subject to the Plan, reduce the price at which stock options or
stock appreciation rights may be granted or exercised, alter the class of
employees eligible to receive stock options, or increase the percentage of
shares authorized to be transferred as restricted or unrestricted stock.
Participants and the Company shall be bound by any such amendments as of their
effective dates, but if any outstanding stock options or stock appreciation
rights are materially affected adversely, notice thereof shall be given to the
Participants holding such stock options and stock appreciation rights and such
amendments shall not be applicable without such Participant's written consent.
If the Plan is repealed in its entirety, all theretofore granted unexercised
stock options or stock appreciation rights shall continue to be exercisable in
accordance with their terms and shares subject to conditions or restrictions
granted pursuant to the Plan shall continue to be subject to such conditions or
restrictions.

         2. In the case of a Participant who is an employee of a subsidiary of
the Company, performance under the Plan, including the granting of shares of the
Company, may be by the subsidiary. Nothing in the Plan shall affect the right of
the Company or any subsidiary to terminate the employment of any employee with
or without cause. None of the Participants, either individually or as a group,
and no beneficiary, transferee or other person claiming under or through any
Participant, shall have any right, title, or interest in any shares of the
Company purchased or reserved for the purpose of the Plan except as to such
shares, if any, as shall have been granted or transferred to him or her. Nothing
in the Plan shall preclude the awarding or granting of shares of the Company to
employees under any other plan or arrangement now or hereafter in effect.

         3. "Subsidiary" means any company in which more than fifty percent
(50%) of the total combined voting power of all classes of stock is owned,
directly or indirectly, by the Company or, if the company does not issue stock,
more than fifty percent (50%) of the total combined ownership interest is owned,
directly or indirectly, by the Company. In addition, the Board may designate for
participation in the Plan as a "subsidiary," except for the granting of
incentive stock options, those additional companies affiliated with the Company
in which the Company's direct or indirect stock ownership is fifty percent (50%)
or less of the total combined voting power of all classes of such company's
stock, or, if the company does not issue stock, the Company's direct or indirect
ownership is fifty percent (50%) or less of the company's total combined
ownership interest.

         4. Notwithstanding anything to the contrary in the Plan, stock options
and stock appreciation rights granted hereunder shall vest immediately and any
conditions or restrictions on Common Stock shall lapse upon a "Change in
Control." A "Change in Control" shall mean the occurrence of any of the
following:

         (a)      An acquisition (other than directly from the Company) of any
                  voting securities of the Company (the "Voting Securities") by
                  any "Person" (as the term person is used for purposes of
                  Section 13(d) or 14(d) of the Exchange Act), immediately after
                  which such Person has "Beneficial Ownership" (within the
                  meaning of Rule 13d-3 promulgated under the Exchange Act) of
                  twenty percent (20%) or more of the then outstanding shares or
                  the combined voting power of the Company's then outstanding
                  Voting Securities; provided, however, in determining whether a
                  Change in Control has occurred pursuant to this Paragraph
                  4(a), shares or Voting Securities which are acquired in a
                  "Non-Control Acquisition" (as hereinafter defined) shall not
                  constitute an acquisition which would cause a Change in





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                  Control. A "Non-Control Acquisition" shall mean an acquisition
                  by (i) an employee benefit plan (or a trust forming a part
                  thereof) maintained by (A) the Company or (B) any corporation
                  or other Person of which a majority of its voting power or its
                  voting equity securities or equity interest is owned, directly
                  or indirectly, by the Company (for purposes of this
                  definition, a "Related Entity"), (ii) the Company or any
                  Related Entity, or (iii) any Person in connection with a
                  "Non-Control Transaction" (as hereinafter defined);

         (b)      The individuals who, as of July 10, 2001 are members of the
                  Board (the "Incumbent Board"), cease for any reason to
                  constitute at least half of the members of the Board; or,
                  following a Merger (as hereinafter defined) which results in a
                  Parent Corporation (as hereinafter defined), the board of
                  directors of the ultimate Parent Corporation; provided,
                  however, that if the election, or nomination for election by
                  the Company's common stockholders, of any new director was
                  approved by a vote of at least two-thirds of the Incumbent
                  Board, such new director shall, for purposes of the Plan, be
                  considered as a member of the Incumbent Board; provided
                  further, however, that no individual shall be considered a
                  member of the Incumbent Board if such individual initially
                  assumed office as a result of either an actual or threatened
                  "Election Contest" (as described in Rule 14a-11 promulgated
                  under the Exchange Act) or other actual or threatened
                  solicitation of proxies or consents by or on behalf of a
                  Person other than the Board (a "Proxy Contest") including by
                  reason of any agreement intended to avoid or settle any
                  Election Contest or Proxy Contest; or

         (c)      The consummation of:

                  (i)   A merger, consolidation or reorganization with or into
                        the Company or in which securities of the Company are
                        issued (a "Merger"), unless such Merger is a
                        "Non-Control Transaction." A "Non-Control Transaction"
                        shall mean a Merger where:

                        (A)   the stockholders of the Company, immediately
                              before such Merger own directly or indirectly
                              immediately following such Merger at least fifty
                              percent (50%) of the combined voting power of the
                              outstanding voting securities of (x) the
                              corporation resulting from such Merger (the
                              "Surviving Corporation") if fifty percent (50%) or
                              more of the combined voting power of the then
                              outstanding voting securities of the Surviving
                              Corporation is not Beneficially Owned, directly or
                              indirectly by another Person (a "Parent
                              Corporation"), or (y) if there is one or more
                              Parent Corporations, the ultimate Parent
                              Corporation;

                        (B)   the individuals who were members of the Incumbent
                              Board immediately prior to the execution of the
                              agreement providing for such Merger constitute at
                              least half of the members of the board of
                              directors of (x) the Surviving Corporation, if
                              there is no Parent Corporation, or (y) if there is
                              one or more Parent Corporations, the ultimate
                              Parent Corporation; and

                        (C)   no Person other than (1) the Company, (2) any
                              Related Entity, (3) any employee benefit plan (or
                              any trust forming a part thereof) that,
                              immediately prior to such Merger was maintained by
                              the Company or any Related Entity, or (4) any
                              Person who, immediately prior to such merger,
                              consolidation or reorganization had Beneficial
                              Ownership of twenty percent (20%) or more of the
                              then outstanding Voting Securities or shares, has
                              Beneficial Ownership of twenty percent (20%) or
                              more of the combined voting power of the
                              outstanding voting securities or common stock of
                              (x) the Surviving Corporation if there is no
                              Parent Corporation, or (y) if there is one or more
                              Parent Corporations, the ultimate Parent
                              Corporation;





                                       9
   11

            (ii)  A complete liquidation or dissolution of the Company; or

            (iii) The sale or other disposition of all or substantially all of
                  the assets of the Company to any Person (other than a transfer
                  to a Related Entity or under conditions that would constitute
                  a Non-Control Transaction with the disposition of assets being
                  regarded as a Merger for this purpose or the distribution to
                  the Company's stockholders of the stock of a Related Entity or
                  any other assets).

         Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the then outstanding shares or
Voting Securities as a result of the acquisition of shares or Voting Securities
by the Company which, by reducing the number of shares or Voting Securities then
outstanding, increases the proportional number of shares Beneficially Owned by
the Subject Persons, provided that if a Change in Control would occur (but for
the operation of this sentence) as a result of the acquisition of shares or
Voting Securities by the Company, and after such share acquisition by the
Company, the Subject Person becomes the Beneficial Owner of any additional
shares or Voting Securities which increases the percentage of the then
outstanding shares or Voting Securities Beneficially Owned by the Subject
Person, then a Change in Control shall occur.

         5. The term "Special Separation" shall mean any termination of
employment that occurs prior to the time a Participant is eligible to retire,
except a termination for cause or a voluntary resignation that is not initiated
or encouraged by the Company.

         6. The term "Retirement" shall mean: (a) retirement in accordance with
the provisions of any appropriate retirement plan of the Company or any of its
subsidiaries; or (b) termination of employment under the permanent disability
provision of any retirement plan of the Company or any of its subsidiaries.






                                       10
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ARTICLE M -- CONSENT.

       Every Participant who receives a stock option, stock appreciation right,
or grant of shares pursuant to the Plan shall be bound by the terms and
provisions of the Plan and of the stock option, stock appreciation right, or
grant of shares agreement referable thereto, and the acceptance of any stock
option, stock appreciation right, or grant of shares pursuant to the Plan shall
constitute a binding agreement between the Participant and the Company and its
subsidiaries and any successors in interest to any of them. Every Person who
receives a stock option, stock appreciation right, or grant of shares from a
Participant pursuant to the Plan shall, in addition to such terms and conditions
as the Committee may require upon such grant, be bound by the terms and
provisions of the Plan and of the stock option, stock appreciation right, or
grant of shares agreement referable thereto, and the acceptance of any stock
option, stock appreciation right, or grant of shares by such Person shall
constitute a binding agreement between such Person and the Company and its
subsidiaries and any successors in interest to any of them. ___ The Plan shall
be governed by and construed in accordance with the laws of the State of Ohio,
United States of America.

ARTICLE N - PURCHASE OF SHARES OR STOCK OPTIONS.

       The Committee may authorize any Participant to convert cash compensation
otherwise payable to such Participant into stock options or shares of Common
Stock under the Plan upon such terms and conditions as the Committee, in its
discretion, shall determine. Notwithstanding the foregoing, in any such
conversion the shares of Common Stock shall be valued at no less than one
hundred percent (100%) of their fair market value.

ARTICLE O -- DURATION OF PLAN.

         The Plan will terminate on July 10, 2011 unless a different termination
date is fixed by the shareholders or by action of the Board of Directors, but no
such termination shall affect the prior rights under the Plan of the Company (or
any subsidiary) or of anyone to whom stock options or stock appreciation rights
were granted prior thereto or to whom shares have been transferred prior to such
termination.






                                       11

EX-10.2

   1
                                 EXHIBIT (10-2)


                      The Procter & Gamble 1992 Stock Plan





   2


                      THE PROCTER & GAMBLE 1992 STOCK PLAN
                           (as amended June 12, 2001)

ARTICLE A - PURPOSE.

     The purpose of The Procter & Gamble 1992 Stock Plan (hereinafter referred
to as the "Plan) is to encourage those employees of The Procter & Gamble Company
(hereinafter referred to as the "Company") and its subsidiaries who are largely
responsible for the long-term success and development of the business to
strengthen the alignment of interests between employees and the Company's
shareholders through the increased ownership of shares of the Company's Common
Stock, and to encourage those employees to remain in the employ of the Company
and its subsidiaries. This will be accomplished through the granting to
employees of options to purchase shares of the Common Stock of the Company,
payment of a portion of the employees' remuneration in shares of the Common
Stock, and the granting to them by the Company and a subsidiary, if appropriate,
of deferred awards related to the increase in the price of the Common Stock of
the Company as provided by the terms and conditions set forth in the Plan.

ARTICLE B - ADMINISTRATION.

     1. The Plan shall be administered by the Compensation Committee
(hereinafter referred to as the "Committee") of the Board of Directors of the
Company (hereinafter referred to as the "Board"), or such other committee as may
be designated by the Board. The Committee shall consist of not less than three
(3) members of the Board who are neither officers nor employees, or members of
the Board who are "Non-Employee Directors" as defined in Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (hereinafter referred to as the
"1934 Act"), or any successor rule or definition adopted by the Securities and
Exchange Commission, to be appointed by the Board from time to time and to serve
at the discretion of the Board.

     2. It shall be the duty of the Committee to administer this Plan in
accordance with its provisions, to report thereon not less than once each year
to the Board and to make such recommendations of amendments or otherwise as it
deems necessary or appropriate. A decision by a majority of the Committee shall
govern all actions of the Committee.

     3. Subject to the express provisions of this Plan, the Committee shall have
authority: to grant nonstatutory and incentive stock options; to grant to
recipients stock appreciation rights either freestanding, in tandem with
simultaneously granted stock options, or in parallel with simultaneously granted
stock options; to award a portion of a recipient's remuneration in shares of
Common Stock of the Company subject to such conditions or restrictions, if any,
as the Committee may determine; to determine all the terms and provisions of the
respective stock option, stock appreciation right, and stock award agreements
including setting the dates when each stock option or stock appreciation right
or part thereof may be exercised and determining the conditions and
restrictions, if any, of any shares of Common Stock acquired through the
exercise of any stock option; and to make all other determinations it deems
necessary or advisable for administering this Plan; provided, however, the
Committee shall have the further authority at time of grant to:

     (a)  waive the provisions of Article F, paragraph 1(a);

     (b)  waive the provisions of Article F, paragraph 1(b);

     (c)  waive the provisions of Article G, paragraph 4(a); and





                                       1
   3

     (d)  impose conditions in lieu of those set forth in Article G, paragraphs
          4 through 7, for nonstatutory stock options, stock appreciation
          rights, and stock award grants which do not increase or extend the
          rights of the recipient,

to take into consideration the differences, limitations, and requirements of
foreign laws or conditions including tax regulations, exchange controls or
investment restrictions, possible unenforceability of any part of this Plan, or
other matters deemed appropriate by it.

     4. The Committee may establish from time to time such regulations,
provisions, and procedures within the terms of this Plan as, in its opinion, may
be advisable in the administration of this Plan.

     5. The Committee may designate the Secretary of the Company or other
employees of the Company to assist the Committee in the administration of this
Plan and may grant authority to such persons to execute documents on behalf of
the Committee.

ARTICLE C -- PARTICIPATION.

     The Committee shall select those employees of the Company and its
subsidiaries who, in the opinion of the Committee, have demonstrated a capacity
for contributing in a substantial manner to the success of such companies and
shall determine the number of shares of the Common Stock of the Company to be
transferred under this Plan subject to such conditions or restrictions as the
Committee may determine and the number of shares with respect to which stock
options or stock appreciation rights will be granted. The Committee may consult
with the Chief Executive, but nevertheless the Committee has the full authority
to act, and the Committee's actions shall be final.

ARTICLE D -- LIMITATION ON NUMBER OF SHARES FOR THE PLAN.

     1. Unless otherwise authorized by the shareholders, the maximum aggregate
number of shares available for award under this Plan for each calendar year the
Plan is in effect shall be one percent (1%) of the total issued shares of Common
Stock of the Company as of June 30 of the immediately preceding fiscal year.

     2. Any of the authorized shares may be used in respect of any of the types
of awards described in this Plan, except that no more than twenty-five percent
(25%) of the authorized shares in any calendar year may be issued as restricted
or unrestricted stock and no more than 50,000,000 of the authorized shares
during the term of the Plan may be issued as incentive stock options.

     3. Any authorized shares not used in a calendar year shall be available for
awards under this Plan in succeeding calendar years.

ARTICLE E -- SHARES SUBJECT TO USE UNDER THE PLAN.

     1. The shares to be delivered by the Company upon exercise of stock options
or stock appreciation rights shall be either authorized but unissued shares or
treasury shares, as determined by the Board. In the case of redemption of stock
appreciation rights by one of the Company's subsidiaries, such shares shall be
shares acquired by that subsidiary. Notwithstanding any terms or conditions
contained herein, the shares to be delivered by the Company upon exercise of
stock options or stock appreciation rights by a participant located in Italy
shall be authorized but unissued shares.

     2. For purposes of this Plan, restricted or unrestricted stock awarded
under the terms of this Plan shall be authorized but unissued shares, treasury
shares, or shares acquired for purposes of the Plan by the Company or a
subsidiary, as determined by the Board.




                                       2
   4

ARTICLE F -- STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.

     1. In addition to such other conditions as may be established by the
Committee, in consideration of the granting of stock options or stock
appreciation rights under the terms of this Plan, the recipient agrees as
follows:

     (a)  The right to exercise any stock option or stock appreciation right
          shall be conditional upon certification by the recipient at time of
          exercise that the recipient intends to remain in the employ of the
          Company or one of its subsidiaries (except in cases of retirement,
          disability or Special Separation as defined in section 6 of Article G)
          for at least one (1) year following the date of the exercise of the
          stock option or stock appreciation right, and,

     (b)  In order to better protect the goodwill of the Company and its
          subsidiaries and to prevent the disclosure of the Company's or it
          subsidiaries' trade secrets and confidential information and thereby
          help insure the long-term success of the business, the recipient,
          without prior written consent of the Company, will not engage in any
          activity or provide any services, whether as a director, manager,
          supervisor, employee, adviser, consultant or otherwise, for a period
          of three (3) years following the date of the recipient's termination
          of employment with the Company (except for terminations of employment
          resulting from retirement or Special Separation), in connection with
          the manufacture, development, advertising, promotion, or sale of any
          product which is the same as or similar to or competitive with any
          products of the Company or its subsidiaries (including both existing
          products as well as products known to the recipient, as a consequence
          of the recipient's employment with the Company or one of its
          subsidiaries, to be in development):

          (1)  with respect to which the recipient's work has been directly
               concerned at any time during the two (2) years preceding
               termination of employment with the Company or one of its
               subsidiaries or

          (2)  with respect to which during that period of time the recipient,
               as a consequence of the recipient's job performance and duties,
               acquired knowledge of trade secrets or other confidential
               information of the Company or its subsidiaries.

          For purposes of this section, it shall be conclusively presumed that
          recipients have knowledge of information they were directly exposed to
          through actual receipt or review of memos or documents containing such
          information, or through actual attendance at meetings at which such
          information was discussed or disclosed.

     (c)  The provisions of this Article are not in lieu of, but are in addition
          to the continuing obligation of the recipient (which recipient hereby
          acknowledges) to not use or disclose the Company's or its
          subsidiaries' trade secrets and confidential information known to the
          recipient until any particular trade secret or confidential
          information become generally known (through no fault of the
          recipient), whereupon the restriction on use and disclosure shall
          cease as to that item. Information regarding products in development,
          in test marketing or being marketed or promoted in a discrete
          geographic region, which information the Company or one of its
          subsidiaries is considering for broader use, shall not be deemed
          generally known until such broader use is actually commercially
          implemented. As used in this Article, "generally known" means known
          throughout the domestic U. S. industry or, in the case of recipients
          who have job responsibilities outside of the United States, the
          appropriate foreign country or countries' industry.

     (d)  By acceptance of any offered stock option or stock appreciation rights
          granted under the terms of this Plan, the recipient acknowledges that
          if the recipient were, without authority, to





                                       3
   5

          use or disclose the Company's or any of its subsidiaries' trade
          secrets or confidential information or threaten to do so, the Company
          or one of its subsidiaries would be entitled to injunctive and other
          appropriate relief to prevent the recipient from doing so. The
          recipient acknowledges that the harm caused to the Company by the
          breach or anticipated breach of this Article is by its nature
          irreparable because, among other things, it is not readily susceptible
          of proof as to the monetary harm that would ensue. The recipient
          consents that any interim or final equitable relief entered by a court
          of competent jurisdiction shall, at the request of the Company or one
          of its subsidiaries, be entered on consent and enforced by any court
          having jurisdiction over the recipient, without prejudice to any
          rights either party may have to appeal from the proceedings which
          resulted in any grant of such relief.

     (e)  If any of the provisions contained in this Article shall for any
          reason, whether by application of existing law or law which may
          develop after the recipient's acceptance of an offer of the granting
          of stock appreciation rights or stock options, be determined by a
          court of competent jurisdiction to be overly broad as to scope of
          activity, duration, or territory, the recipient agrees to join the
          Company or any of its subsidiaries in requesting such court to
          construe such provision by limiting or reducing it so as to be
          enforceable to the extent compatible with then applicable law. If any
          one or more of the terms, provisions, covenants, or restrictions of
          this Article shall be determined by a court of competent jurisdiction
          to be invalid, void or unenforceable, then the remainder of the terms,
          provisions, covenants, and restrictions of this Article shall remain
          in full force and effect and shall in no way be affected, impaired, or
          invalidated.

     2. The fact that an employee has been granted a stock option or a stock
appreciation right under this Plan shall not limit the right of the employer to
terminate the recipient's employment at any time. The Committee is authorized to
suspend or terminate any outstanding stock option or stock appreciation right
for actions taken prior to termination of employment if the Committee determines
the recipient has acted significantly contrary to the best interests of the
Company.

     3. More than one stock option or stock appreciation right may be granted to
any employee under this Plan but the maximum number of shares with respect to
which stock options or stock appreciation rights may be granted to any employee
in any calendar year shall not exceed five percent (5%) of the number of shares
which can be issued or transferred annually hereunder.

     4. The aggregate fair market value (determined at the time when the
incentive stock option is exercisable for the first time by an employee during
any calendar year) of the shares for which any employee may be granted incentive
stock options under this Plan and all other stock option plans of the Company
and its subsidiaries in any calendar year shall not exceed $100,000 (or such
other amount as reflected in the limits imposed by Section 422(d) of the
Internal Revenue Code of 1986, as it may be amended from time to time).

     5. If the Committee grants incentive stock options, all such stock options
shall contain such provisions as permit them to qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as may be amended from time to time.

     6. With respect to stock options granted in tandem with or parallel to
stock appreciation rights, the exercise of either such stock options or such
stock appreciation rights will result in the simultaneous cancellation of the
same number of tandem or parallel stock appreciation rights or stock options, as
the case may be.

     7. The exercise price for all stock options and stock appreciation rights
shall be established by the Committee at the time of their grant and shall be
not less than one hundred percent (100%) of the fair market value of the Common
Stock of the Company on the date of grant.




                                       4
   6

ARTICLE G -- EXERCISE OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.

     1. All stock options and stock appreciation rights granted hereunder shall
have a maximum life of no more than fifteen (15) years from the date of grant;
provided, however, that any stock options or stock appreciation rights with a
life of more than ten (10) years from the date of grant that have been
conditionally granted to the Chief Executive or to any other executive officer
subject to the provisions of Section 162(m) of the Internal Revenue Code and
subject to taxation under United States law, as it may be amended from time to
time, prior to the annual meeting of shareholders scheduled for October 12, 1999
shall automatically be canceled effective October 12, 1999 if the shareholders
do not adopt a resolution at such annual meeting approving grants to such
officers with a maximum life of up to fifteen (15) years from the date of grant.

     2. No stock options or stock appreciation rights shall be exercisable
within one (1) year from their date of grant, except in the case of the death of
the recipient.

     3. During the lifetime of the recipient, stock options and stock
appreciation rights may be exercised only by the recipient personally, or, in
the event of the legal incompetence of the recipient, by the recipient's duly
appointed legal guardian.

     4. In case a recipient of stock options or stock appreciation rights ceases
to be an employee of the Company or any of its subsidiaries while holding an
unexercised stock option or stock appreciation right:

     (a)  Any unexercisable portions thereof are then void, except in the case
          of: (1) death of the recipient; (2) any Special Separation (as defined
          in section 6 of this Article G) that occurs more than six months from
          the date the options were granted; or (3) any option as to which the
          Committee has waived, at the time of grant, the provisions of this
          Article G, paragraph 4(a) pursuant to the authority granted by Article
          B, paragraph 3.

     (b)  Any exercisable portions thereof are then void, except in the case of
          death, retirement in accordance with the provisions of any appropriate
          profit sharing or retirement plan of the Company or any of its
          subsidiaries, or Special Separation (as defined in section 6 of this
          Article G) of the recipient.

     5. In the case of the death of a recipient of stock options or stock
appreciation rights while an employee of the Company or any of its subsidiaries,
the persons to whom the stock options or stock appreciation rights have been
transferred by will or the laws of descent and distribution shall have the
privilege of exercising remaining stock options, stock appreciation rights or
parts thereof, whether or not exercisable on the date of death of such employee,
at any time prior to the expiration date of the stock options or stock
appreciation rights.

     6. Termination of employment under the permanent disability provision of
any appropriate profit sharing or retirement plan of the Company or any of its
subsidiaries shall be deemed the same as retirement. Special Separation means
any termination of employment, except a termination for cause or a voluntary
resignation that is not initiated or encouraged by the Company, that occurs
prior to the time a recipient is eligible to retire. The death of a recipient of
stock options or stock appreciation rights subsequent to retirement or Special
Separation shall not render exercisable stock options or stock appreciation
rights which were unexercisable at the time of the retirement or Special
Separation. The persons to whom the exercisable stock options or stock
appreciation rights have been transferred by will or the laws of descent and
distribution shall have the privilege of exercising such remaining stock
options, stock appreciation rights or parts thereof, at any time prior to the
expiration date of the stock options or stock appreciation rights.




                                       5
   7

     7. Stock options and stock appreciation rights are not transferable other
than by will or by the laws of descent and distribution. For the purpose of
exercising stock options or stock appreciation rights after the death of the
recipient, the duly appointed executors and administrators of the estate of the
deceased recipient shall have the same rights with respect to the stock options
and stock appreciation rights as legatees or distributees would have after
distribution to them from the recipient's estate.

     8. Upon the exercise of stock appreciation rights, the recipient shall be
entitled to receive a redemption differential for each such stock appreciation
right which shall be the difference between the then fair market value of one
share of the Common Stock of the Company and the exercise price of one stock
appreciation right then being exercised. In the case of the redemption of stock
appreciation rights by a subsidiary of the Company not located in the United
States, the redemption differential shall be calculated in United States dollars
and converted to the appropriate local currency on the exercise date. As
determined by the Committee, the redemption differential may be paid in cash,
Common Stock of the Company to be valued at its fair market value on the date of
exercise, any other mode of payment deemed appropriate by the Committee or any
combination thereof. The number of shares with respect to which stock
appreciation rights are being exercised shall not be available for granting
future stock options or stock appreciation rights under this Plan.

     9. The Committee may, in its sole discretion, permit a stock option which
is being exercised either (a) by an optionee whose retirement is imminent or who
has retired or (b) after the death of the optionee, to be surrendered, in lieu
of exercise, for an amount equal to the difference between the stock option
exercise price and the fair market value of shares of the Common Stock of the
Company on the day the stock option is surrendered, payment to be made in shares
of the Company's Common Stock which are subject to this Plan valued at their
fair market value on such date, cash, or a combination thereof, in such
proportion and upon such terms and conditions as shall be determined by the
Committee. The difference between the number of shares subject to stock options
so surrendered and the number of shares, if any, issued upon such surrender
shall represent shares which shall not be available for granting future stock
options under this Plan.

     10. Time spent on leave of absence shall be considered as employment for
the purposes of this Plan. Leave of absence means any period of time away from
work granted to any employee by his or her employer because of illness, injury,
or other reasons satisfactory to the employer.

     11. The Company reserves the right from time to time to suspend the
exercise of any stock option or stock appreciation right where such suspension
is deemed by it necessary or appropriate for corporate purposes. No such
suspension shall extend the life of the stock option or stock appreciation right
beyond its expiration date, and in no event will there be a suspension in the
five (5) calendar days immediately preceding the expiration date.

ARTICLE H -- PAYMENT FOR STOCK OPTIONS.

     Upon the exercise of a stock option, payment in full of the exercise price
shall be made by the optionee. As determined by the Committee, the stock option
exercise price may be paid for by the optionee either in cash, shares of the
Common Stock of the Company to be valued at their fair market value on the date
of exercise, a combination thereof, or such other method as determined by the
Committee.

ARTICLE I -- TRANSFER OF SHARES.

     1. The Committee may transfer Common Stock of the Company under the Plan
subject to such conditions or restrictions, if any, as the Committee may
determine. The conditions and restrictions may vary from time to time and with
respect to particular employees or group of employees and may be set



                                       6
   8

forth in agreements between the Company and the employee or in the awards of
stock to them, all as the Committee determines. It is contemplated that the
conditions and restrictions established by the Committee will be consistent with
the objectives of this Plan and may be of the following types. In giving these
examples, it is not intended to restrict the Committee's authority to impose
other restrictions or conditions, or to waive restrictions or conditions under
circumstances deemed by the Committee to be appropriate and not contrary to the
best interests of the Company.

       (a)    Restrictions

              The employee will not be able to sell, pledge, or dispose of the
              shares during a specified period except in accordance with the
              agreement or award. Such restrictions will lapse either after a
              period of, for example, five years, or in fifteen or fewer annual
              installments following retirement or termination of employment, as
              the Committee from time to time may determine. However, upon the
              transfer of shares subject to restrictions, an employee will have
              all incidents of ownership in the shares, including the right to
              dividends (unless otherwise restricted by the Committee), to vote
              the shares, and to make gifts of them to family members (still
              subject to the restrictions).

       (b)    Lapse of Restrictions

              In order to have the restrictions lapse, an employee may be
              required to continue in the employ of the Company or a subsidiary
              for a prescribed period of time. Exemption from this requirement
              may be prescribed in the case of death, disability, or retirement,
              or as otherwise prescribed by the Committee.

ARTICLE J -- ADJUSTMENTS.

       The amount of shares authorized to be issued annually under this Plan
will be subject to appropriate adjustments in their numbers in the event of
future stock splits, stock dividends, or other changes in capitalization of the
Company occurring after the date of approval of this Plan by the Company's
shareholders to prevent the dilution or enlargement of rights under this Plan;
following any such change, the term "Common Stock" shall be deemed to refer to
such class of shares or other securities as may be applicable. The number of
shares and exercise prices covered by outstanding stock options and stock
appreciation rights shall be adjusted to give effect to any such stock splits,
stock dividends, or other changes in the capitalization.

ARTICLE K -- ADDITIONAL PROVISIONS.

       1. The Board may, at any time, repeal this Plan or may amend it from time
to time except that no such amendment may amend this paragraph, increase the
annual aggregate number of shares subject to this Plan, reduce the price at
which stock options or stock appreciation rights may be granted, exercised, or
surrendered, alter the class of employees eligible to receive stock options, or
increase the percentage of shares authorized to be transferred as restricted or
unrestricted stock. The recipient of awards under this Plan and the Company
shall be bound by any such amendments as of their effective dates, but if any
outstanding stock options or stock appreciation rights are affected, notice
thereof shall be given to the holders of such stock options and stock
appreciation rights and such amendments shall not be applicable to such holder
without his or her written consent. If this Plan is repealed in its entirety,
all theretofore granted unexercised stock options or stock appreciation rights
shall continue to be exercisable in accordance with their terms and shares
subject to conditions or restrictions transferred pursuant to this Plan shall
continue to be subject to such conditions or restrictions.

       2. In the case of an employee of a subsidiary company, performance under
this Plan, including the transfer of shares of the Company, may be by the
subsidiary. Nothing in this Plan shall affect the






                                       7
   9

right of the Company or any subsidiary to terminate the employment of any
employee with or without cause. None of the participants, either individually or
as a group, and no beneficiary or other person claiming under or through any
participant, shall have any right, title, or interest in any shares of the
Company purchased or reserved for the purpose of this Plan except as to such
shares, if any, as shall have been granted or transferred to him or her. Nothing
in this Plan shall preclude the issuance or transfer of shares of the Company to
employees under any other plan or arrangement now or hereafter in effect.

       3. "Subsidiary" means any company in which greater than fifty percent
(50%) of the total combined voting power of all classes of stock is owned,
directly or indirectly, by the Company. In addition, the Board may designate for
participation in this Plan as a "subsidiary," except for the granting of
incentive stock options, those additional companies affiliated with the Company
in which the Company's direct or indirect stock ownership is less than fifty
percent (50%) of the total combined voting power of all classes of such
company's stock.

       4. Notwithstanding anything to the contrary in the this Plan, stock
options and stock appreciation rights granted hereunder shall vest immediately
and any conditions or restrictions on Common Stock shall lapse upon a "Change in
Control." A "Change in Control" shall mean the occurrence of any of the
following:

       (a)    An acquisition (other than directly from the Company) of any
              voting securities of the Company (the "Voting Securities") by any
              "Person" (as the term person is used for purposes of Section 13(d)
              or 14(d) of the Exchange Act), immediately after which such Person
              has "Beneficial Ownership" (within the meaning of Rule 13d-3
              promulgated under the Exchange Act) of twenty percent (20%) or
              more of the then outstanding Shares or the combined voting power
              of the Company's then outstanding Voting Securities; provided,
              however, in determining whether a Change in Control has occurred
              pursuant to this Section 4(a), Shares or Voting Securities which
              are acquired in a "Non-Control Acquisition" (as hereinafter
              defined) shall not constitute an acquisition which would cause a
              Change in Control. A "Non-Control Acquisition" shall mean an
              acquisition by (i) an employee benefit plan (or a trust forming a
              part thereof) maintained by (A) the Company or (B) any corporation
              or other Person of which a majority of its voting power or its
              voting equity securities or equity interest is owned, directly or
              indirectly, by the Company (for purposes of this definition, a
              "Related Entity"), (ii) the Company or any Related Entity, or
              (iii) any Person in connection with a "Non-Control Transaction"
              (as hereinafter defined);

       (b)    The individuals who, as of July 11, 2000 are members of the Board
              (the "Incumbent Board"), cease for any reason to constitute at
              least half of the members of the Board; or, following a Merger (as
              hereinafter defined) which results in a Parent Corporation (as
              hereinafter defined), the board of directors of the ultimate
              Parent Corporation; provided, however, that if the election, or
              nomination for election by the Company's common stockholders, of
              any new director was approved by a vote of at least two-thirds of
              the Incumbent Board, such new director shall, for purposes of this
              Plan, be considered as a member of the Incumbent Board; provided
              further, however, that no individual shall be considered a member
              of the Incumbent Board if such individual initially assumed office
              as a result of either an actual or threatened "Election Contest"
              (as described in Rule 14a-11 promulgated under the Exchange Act)
              or other actual or threatened solicitation of proxies or consents
              by or on behalf of a Person other than the Board (a "Proxy
              Contest") including by reason of any agreement intended to avoid
              or settle any Election Contest or Proxy Contest; or

       (c)    The consummation of:





                                       8
   10

              (i)    A merger, consolidation or reorganization with or into the
                     Company or in which securities of the Company are issued (a
                     "Merger"), unless such Merger is a "Non-Control
                     Transaction." A "Non-Control Transaction" shall mean a
                     Merger where:

                     (A)    the stockholders of the Company, immediately before
                            such Merger own directly or indirectly immediately
                            following such Merger at least fifty percent (50%)
                            of the combined voting power of the outstanding
                            voting securities of (x) the corporation resulting
                            from such Merger (the "Surviving Corporation") if
                            fifty percent (50%) or more of the combined voting
                            power of the then outstanding voting securities of
                            the Surviving Corporation is not Beneficially Owned,
                            directly or indirectly by another Person (a "Parent
                            Corporation"), or (y) if there is one or more Parent
                            Corporations, the ultimate Parent Corporation;

                     (B)    the individuals who were members of the Incumbent
                            Board immediately prior to the execution of the
                            agreement providing for such Merger constitute at
                            least half of the members of the board of directors
                            of (x) the Surviving Corporation, if there is no
                            Parent Corporation, or (y) if there is one or more
                            Parent Corporations, the ultimate Parent
                            Corporation; and

                     (C)    no Person other than (1) the Company, (2) any
                            Related Entity, (3) any employee benefit plan (or
                            any trust forming a part thereof) that, immediately
                            prior to such Merger was maintained by the Company
                            or any Related Entity, or (4) any Person who,
                            immediately prior to such merger, consolidation or
                            reorganization had Beneficial Ownership of twenty
                            percent (20%) or more of the then outstanding Voting
                            Securities or Shares, has Beneficial Ownership of
                            twenty percent (20%) or more of the combined voting
                            power of the outstanding voting securities or common
                            stock of (x) the Surviving Corporation if there is
                            no Parent Corporation, or (y) if there is one or
                            more Parent Corporations, the ultimate Parent
                            Corporation;

              (ii)   A complete liquidation or dissolution of the Company; or

              (iii)  The sale or other disposition of all or substantially all
                     of the assets of the Company to any Person (other than a
                     transfer to a Related Entity or under conditions that would
                     constitute a Non-Control Transaction with the disposition
                     of assets being regarded as a Merger for this purpose or
                     the distribution to the Company's stockholders of the stock
                     of a Related Entity or any other assets).

         Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the then outstanding Shares or
Voting Securities as a result of the acquisition of Shares or Voting Securities
by the Company which, by reducing the number of Shares or Voting Securities then
outstanding, increases the proportional number of shares Beneficially Owned by
the Subject Persons, provided that if a Change in Control would occur (but for
the operation of this sentence) as a result of the acquisition of Shares or
Voting Securities by the Company, and after such share acquisition by the
Company, the Subject Person becomes the Beneficial Owner of any additional
Shares or Voting Securities which increases the percentage of the then
outstanding Shares or Voting Securities Beneficially Owned by the Subject
Person, then a Change in Control shall occur.

ARTICLE L -- CONSENT.

       Every recipient of a stock option, stock appreciation right, or transfer
of shares pursuant to this Plan shall be bound by the terms and provisions of
this Plan and of the stock option, stock appreciation






                                       9
   11

right, or transfer of shares agreement referable thereto, and the acceptance of
any stock option, stock appreciation right, or transfer of shares pursuant to
this Plan shall constitute a binding agreement between the recipient and the
Company and its subsidiaries and any successors in interest to any of them. This
Plan shall be governed by and construed in accordance with the laws of the State
of Ohio, United States of America.

ARTICLE M -- DURATION OF PLAN.

       This Plan will terminate on July 14, 2002 unless a different termination
date is fixed by the shareholders or by action of the Board of Directors, but no
such termination shall affect the prior rights under this Plan of the Company
(or any subsidiary) or of anyone to whom stock options or stock appreciation
rights were granted prior thereto or to whom shares have been transferred prior
to such termination.































                                       10
   12


                             ADDITIONAL INFORMATION

1.       SHARES AWARDED AS A PORTION OF REMUNERATION

         Any shares of Common Stock of the Company awarded as a portion of a
participant's remuneration shall be valued at not less than one hundred percent
(100%) of the fair market value of the Company's Common Stock on the date of the
award. These shares may be subject to such conditions or restrictions as the
Committee may determine, including a requirement that the participant remain in
the employ of the Company or one of its subsidiaries for a set period of time,
or until retirement. Failure to abide by any applicable restriction will result
in forfeiture of the shares.

2.       TAX EFFECTS

         INCENTIVE STOCK OPTIONS

                  With regard to tax effects which may accrue to the optionee,
         counsel advises that if the optionee has continuously been an employee
         from the time an option has been granted until at least three months
         before it is exercised, under existing law no taxable income results to
         the optionee from the exercise of an incentive stock option at the time
         of exercise. However, the spread at exercise is an "adjustment" item
         for alternative minimum tax purposes.

                  Any gain realized on the sale or other disposition of stock
         acquired on exercise of an incentive stock option is considered as
         long-term capital gain for tax purposes if the stock has been held more
         than two years after the date the option was granted and more than one
         year after the date of exercise of the option. If the stock is disposed
         of within one year after exercise, the lesser of any gain on such
         disposition or the spread at exercise (i.e., the excess of the fair
         market value of the stock on the date of exercise over the option
         price) is treated as ordinary income, and any appreciation after the
         date of exercise is considered long-term or short-term capital gain to
         the optionee depending on the holding period prior to sale. However,
         the spread at exercise (even if greater than the gain on the
         disposition) is treated as ordinary income if the disposition is one on
         which a loss, if sustained, is not recognized--e.g., a gift, a "wash"
         sale or a sale to a related party. The amount of ordinary income
         recognized by the optionee is treated as a tax deductible expense to
         the Company. No other amount relative to an incentive stock option is a
         tax deductible expense to the Company.

         NONSTATUTORY STOCK OPTIONS

                  With regard to tax effects which may accrue to the optionee,
         counsel advises that under existing tax law gain taxable as ordinary
         income to the optionee is deemed to be realized at the date of exercise
         of the option, the gain on each share being the difference between the
         market price on the date of exercise and the option price. This amount
         is treated as a tax deductible expense to the Company at the time of
         the exercise of the option. Any appreciation in the value of the stock
         after the date of exercise is considered a long-term or short-term
         capital gain to the optionee depending on whether or not the stock was
         held for the appropriate holding period prior to sale.

         STOCK APPRECIATION RIGHTS

                  With regard to tax effects which may accrue to the recipient,
         counsel advises that "United States persons," as defined in the
         Internal Revenue Code of 1986 (the "I.R.C."), must recognize ordinary
         income as of the date of exercise equal to the amount paid to the
         recipient, i.e., the difference between the grant price and the value
         of the shares on the date of exercise.




                                       11
   13

         SHARES AWARDED AS A PORTION OF REMUNERATION

                  With regard to tax effects which may accrue to the recipient,
         counsel advises that "United States persons" as defined in the Internal
         Revenue Code of 1986 (the "I.R.C."), must recognize ordinary income in
         the first taxable year in which the recipient's rights to the stock are
         transferable or are not subject to a substantial risk of forfeiture,
         whichever is applicable. Recipients who are "United States persons" may
         also elect to include the income in their tax returns for the taxable
         year in which they receive the shares by filing an election to do so
         with the appropriate office of the Internal Revenue Service within 30
         days of the date the shares are transferred to them.

                  The amount includable in income is the fair market value of
         the shares as of the day the shares are transferable or not subject to
         a substantial risk of forfeiture, whichever is applicable; if the
         recipient has elected to include the income in the year in which the
         shares are received, the amount of income includable is the fair market
         value of the shares at the time of transfer.

                  For non-United States persons, the time when income is
         realized, its measurement and its taxation, will depend on the laws of
         the particular countries in which the recipients are residents and/or
         citizens at the time of transfer or when the shares are first
         transferable and not subject to a substantial risk of forfeiture, as
         the case may be. "United States persons" who receive shares awarded as
         a portion of remuneration may also have tax consequences with respect
         to the receipt of shares or the expiration of restrictions or
         substantial risk of forfeiture on such shares under the laws of the
         particular country other than the United States of which such person is
         a resident or citizen.

         Notwithstanding the above advice received by the Company, it is each
individual recipient's responsibility to check with his or her personal tax
adviser as to the tax effects and proper handling of stock options, stock
appreciation rights and Common Stock acquired. The above advice relates
specifically to the U.S. consequences of stock options, stock appreciation
rights and Common Stock acquired, including the U.S. consequences to "United
States persons" whether or not resident in the U.S. In addition to U.S. tax
consequences, for all persons who are not U.S. residents, the time when income,
if any, is realized, the measurement of such income and its taxation will also
depend on the laws of the particular country other than the U.S. of which such
persons are resident and/or citizens at the time of grant or the time of
exercise, as the case may be.

         The Plan is not subject to the qualification requirements of Section
401(a) of the I.R.C.

3.       EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

         The Plan is not subject to the provisions of the Employee Retirement
Income Security Act of 1974 ("ERISA"), as amended.

4.       INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

         The following documents filed by the Company with the Securities and
Exchange Commission (File No. 1-434) pursuant to the 1934 Act are incorporated
into this document by reference:

          1.   The Company's Annual Report on Form 10-K for the fiscal year
               ended June 30, 1999;

          2.   The Company's Quarterly Reports on Form 10-Q for the quarters
               ended September 30, 1999, December 31, 1999 and March 31, 2000;
               and

          3.   All other documents filed by the Company pursuant to Sections
               13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of this
               Prospectus and prior to the filing of a post-effective



                                       12
   14

               amendment which indicates that all securities offered have been
               sold or which deregisters all securities then remaining unsold.

         The Company will provide without charge to each participant in the
Plan, upon oral or written request, a copy of any or all of these documents
other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into such documents. In addition, the Company will
provide without charge to such participants a copy of the Company's most recent
annual report to shareholders, proxy statement, and other communications
distributed generally to security holders of the Company. Requests for such
copies should be directed to Mr. Robert J. Thompson, Manager, Shareholder
Services, The Procter & Gamble Company, P.O. Box 5572, Cincinnati, Ohio 45201,
(513) 983-3413.

5.       ADDITIONAL INFORMATION

         Additional information about the Plan and its administrators may be
obtained from Mr. Terry L. Overbey, Secretary, The Procter & Gamble Company, One
Procter & Gamble Plaza, Cincinnati, Ohio 45202, (513) 983-4463.



























                                       13

EX-10.3

   1












                                EXHIBIT (10-3)


                      The Procter & Gamble 1983 Stock Plan










   2




                      THE PROCTER & GAMBLE 1983 STOCK PLAN

                      (AS AMENDED EFFECTIVE JUNE 12, 2001)

ARTICLE A - PURPOSE.

      The purpose of The Procter & Gamble 1983 Stock Plan (hereinafter referred
to as the "Plan") is to encourage those key employees of The Procter & Gamble
Company (herein referred to as the "Company") and its subsidiaries who are
largely responsible for the long-term success and development of the business to
increase their proprietary and other interest in the Company's progress, and to
remain in the employ of the Company and its subsidiaries, by the granting to
them by the Company of options to purchase shares of the Common Stock of the
Company and the granting to them by the Company and a subsidiary, if
appropriate, of deferred awards related to the increase in the price of the
Common Stock of the Company as provided in this Plan.

ARTICLE B - ADMINISTRATION.

      1. The Plan shall be administered by the Compensation Committee (herein
referred to as the "Committee") of the Board of Directors of the Company (herein
referred to as the "Board"). The Committee shall operate, administer, and
interpret the Plan and shall be composed of three or more members of the Board
to be appointed by the Board from time to time to serve until they resign, die,
or are removed by resolution of the Board. No member of the Committee shall
participate or be eligible to participate in this Plan, but he or she may
exercise stock options or stock appreciation rights previously granted to him or
her in accordance with the terms of said stock options or stock appreciation
rights.

      2. It shall be the duty of the Committee to administer this Plan in
accordance with its provisions, to report thereon not less than once each year
to the Board and to make such recommendations of amendments or otherwise as it
may deem necessary or appropriate. A decision by a majority of the Committee
shall govern all actions of the Committee.

      3. Subject to the express provisions of this Plan, the Committee shall
have authority: to grant nonstatutory and incentive stock options; to grant to
recipients who are nonresidents of the United States on the date of grant stock
appreciation rights either freestanding, in tandem with simultaneously granted
stock options or in parallel with simultaneously granted stock options; to
determine all the terms and provisions of the respective stock option and stock
appreciation right agreements including setting the dates when each stock option
or stock appreciation right or part thereof may be exercised; and to make all
other determinations it deems necessary or advisable for administering this
Plan; provided, however, for recipients who are nonresidents of the United
States on the date of any grant, the Committee shall have the further authority
to:

          (a)  waive the provisions of Article G, paragraph 1(b);

          (b)  except in the case of a recipient who is an executive officer of
               the Company subject to Section 16 of the Securities Exchange Act
               of 1934, waive the provisions of Article G, paragraph 1(a);





                                       1
   3



          (c)  impose conditions in lieu of those set forth in Article J,
               paragraphs 4 through 7, for nonstatutory stock options and stock
               appreciation rights grants which do not increase or extend the
               rights of the recipient, to take into consideration the
               differences, limitations and requirements of local foreign laws
               or conditions including, but not limited to, tax regulations,
               exchange controls, investment restrictions, possible
               unenforceability of any part of this Plan and other similar
               matters deemed appropriate by it.



































                                       2
   4


      4. The Committee may establish from time to time such regulations,
provisions and procedures within the terms of this Plan as, in its opinion, may
be advisable in the administration of this Plan.

      5. The Committee may designate the Secretary of the Company or other
employees of the Company to assist the Committee in the administration of this
Plan and may grant authority to such persons to execute documents on behalf of
the Committee.

ARTICLE C - PARTICIPATION.

      The Committee shall select those key employees of the Company and its
subsidiaries who, in the opinion of the Committee, have demonstrated a capacity
for contributing in a substantial manner to the success of such companies and
shall determine the number of shares with respect to which stock options or
stock appreciation rights are to be granted to each, the type of stock options
or stock appreciation rights to be granted and the number of shares under each
type. The Committee may consult with the Chairman of the Board or the President,
but nevertheless the Committee has full authority to act, and the Committee's
actions shall be final.

ARTICLE D - NUMBER OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.

      1. The aggregate number of shares of the Common Stock of the Company which
may be issued or transferred under all stock options to be granted, or with
respect to which stock appreciation rights may be granted, pursuant to this Plan
shall not exceed 25,996,446 shares.

      2. With respect to stock options granted in tandem with or parallel to
stock appreciation rights, the exercise of either such stock options or such
stock appreciation rights will result in the simultaneous cancellation of the
same number of tandem or parallel stock appreciation rights or stock options, as
the case may be.

ARTICLE E - SHARES SUBJECT TO USE UNDER THE PLAN.

      The shares to be delivered by the Company upon exercise of stock options
or stock appreciation rights shall be either authorized but unissued shares or
treasury shares, as determined by the Board. In the case of redemption of stock
appreciation rights by one of the Company's subsidiaries, such shares shall be
shares acquired by that subsidiary.

ARTICLE F - PRICE.

      The exercise price for all stock options and stock appreciation rights
shall be established by the Committee at the time of their grant and shall be
not less than one hundred percent (100%) of the fair market value of the Common
Stock of the Company on the date of grant.

ARTICLE G -   AGREEMENT OF OPTIONEE AND CONDITIONS OF STOCK OPTIONS AND
              STOCK APPRECIATION RIGHTS.

      1. In addition to such other conditions as may be established by the
Committee, in consideration of the granting of stock options or stock
appreciation rights under the terms of this Plan, the recipient agrees as
follows:

      (a)  To remain in the employ of the Company or one of its subsidiaries for
           at least one (1) year following the date of the granting of the stock
           option or stock appreciation right, and,









                                       3
   5

      (b)  In order to better protect the goodwill of the Company and prevent
           the disclosure of the Company's trade secrets and other confidential
           information and thereby help insure the long-term success and
           development of the business, the recipient will not engage in
           competitive employment for a period of three (3) years following the
           date of the granting of a stock option or a stock appreciation right
           without first obtaining written permission from the Company. "Engage
           in competitive employment" means rendering services, or becoming
           associated in any way or in any capacity in the manufacture,
           development, advertising, promotion or sale of any product which is
           the same as or similar to or competitive with any products of the
           Company or one of its subsidiaries (including existing products and
           products known to the recipient to be in development) with respect to
           which the recipient's work has been directly concerned at any time
           during the two (2) years preceding termination of employment with the
           Company or any of its subsidiaries or with respect to which during
           that period of time recipient acquired knowledge of trade secrets or
           other confidential information.

      2. The fact that an employee has been granted a stock option or a stock
appreciation right under this Plan shall not affect or qualify the right of the
employer to terminate the recipient's employment at any time. In the event the
recipient breaches or violates section 1 above, the Company may seek injunctive
or other appropriate relief.

ARTICLE H - LIMITATIONS.

      1. More than one stock option or stock appreciation right may be granted
to any employee under this Plan but the maximum number of shares with respect to
which stock options or stock appreciation rights may be granted to any employee
shall not exceed five percent (5%) of the number of shares which can be issued
or transferred hereunder.

      2. The aggregate fair market value (determined at the time of the grant of
the stock option) of the shares for which any employee may be granted incentive
stock options under this Plan and all other stock option plans of the Company
and its subsidiaries in any calendar year shall not exceed $100,000 plus any
unused limit carry-over to such year as provided for in Section 422A(c)(4) of
the Internal Revenue Code of 1954, as amended. (This amount will automatically
change to reflect the limits imposed by Section 422A(b)(8) of the Internal
Revenue Code of 1954 as it may be amended from time to time.)

      3. If the Committee grants incentive stock options, all such stock options
shall contain such provisions as permit them to qualify as "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code of
1954, as amended by the Economic Recovery Tax Act of 1981, and as the same may
from time to time be amended.

      4. Resale of securities offered under this Plan by Directors and executive
officers of the Company subject to Section 16 of the Securities Exchange Act of
1934 must be pursuant to a valid registration statement on other than Form S-8
or pursuant to an exemption from registration provided under the Securities Act
of 1933, as amended. Other employees of the Company or its subsidiaries are free
to make resales of the securities offered hereunder without further
registration.

ARTICLE I - ADJUSTMENTS.

      Appropriate adjustments in the number of shares of stock options and stock
appreciation rights which can be granted under this Plan and in the numbers and
exercise prices covered by outstanding stock options and stock appreciation
rights shall be made to give effect to any stock splits, stock dividends or
other changes in the Common Stock of the Company occurring after October 11,
1983, the date of approval of this Plan by the Company's shareholders.





                                       4
   6

ARTICLE J - EXERCISE OF STOCK OPTIONS AND STOCK APPRECIATION RIGHTS.

      1. All stock options and stock appreciation rights granted hereunder shall
have a maximum life of no more than ten (10) years from the date of grant.

      2. No stock options or stock appreciation rights shall be exercisable
within one (1) year from their date of grant, except in the case of the death of
the recipient.

      3. During the lifetime of the recipient, stock options and stock
appreciation rights may be exercised only by the recipient personally. Stock
options and stock appreciation rights are not assignable and are not
transferable otherwise than by will or by the laws of descent and distribution.

      4. In case a recipient of stock options or stock appreciation rights
ceases to be an employee of the Company or any of its subsidiaries while holding
an unexercised stock option or stock appreciation right:

         (a)  Any unexercisable portions thereof are then void, except in the
              case of death of the recipient or in the case of any option as to
              which the Committee has waived, at the time of grant, the
              provisions of Article G, paragraph 1(a) pursuant to the authority
              granted by Article B, paragraph 3.

         (b)  Any exercisable portions thereof are then void, except in the case
              of death, retirement in accordance with the provisions of any
              appropriate profit sharing or retirement plan of the Company or
              any of its subsidiaries, or Special Separation (as defined in
              section 7 of this Article J) of the recipient.

      5. In the case of the death of a recipient of stock options or stock
appreciation rights while an employee of the Company or any of its subsidiaries,
the persons to whom the stock options or stock appreciation rights have been
transferred by will or the laws of descent and distribution shall have the
privilege of exercising remaining stock options, stock appreciation rights or
parts thereof, whether or not exercisable on the date of death of such employee,
at any time prior to the expiration date of the stock option or stock
appreciation right.

      6. Stock options and stock appreciation rights are not transferable other
than by will or by the laws of descent and distribution. For the purpose of
exercising stock options or stock appreciation rights after the death of the
recipient, the duly appointed executors and administrators of the estate of the
deceased recipient shall have the same rights with respect to the stock options
and stock appreciation rights as legatees or distributees would have had after
distribution to them from the deceased recipient's estate.

      7. Termination of employment under the permanent disability settlement
provision of any appropriate profit sharing or retirement plan of the Company or
any of its subsidiaries shall be deemed the same as retirement. Special
Separation means any termination of employment, except a termination for cause
or a voluntary resignation that is not initiated or encouraged by the Company,
that occurs prior to the time a recipient is eligible to retire. The death of a
recipient of stock options or stock appreciation rights subsequent to retirement
or Special Separation shall not render exercisable options or rights which were
unexercisable at time of the retirement or Special Separation.

      8. Upon the exercise of stock appreciation rights, the recipient shall be
entitled to receive a redemption differential for each such stock appreciation
right which shall be the difference between the then fair market value of one
share of the Common Stock of the Company and the exercise price of one stock
appreciation right then being exercised. In the case of the redemption of stock
appreciation rights by a subsidiary of the Company not located in the United
States the redemption differential shall be calculated in United States dollars
and converted to the appropriate local currency on the exercise date.



                                       5
   7

As determined by the Committee, the redemption differential may be paid in cash,
Common Stock of the Company to be valued at its fair market value on the date of
exercise, any other mode of payment deemed appropriate by the Committee or any
combination thereof. The number of shares with respect to which stock
appreciation rights are being exercised shall not be available for granting
future stock options or stock appreciation rights under this Plan.

      9. The Committee may, in its sole discretion, permit a stock option which
is being exercised either (a) by an optionee whose retirement is imminent or who
has retired or (b) after the death of the optionee, to be surrendered, in lieu
of exercise, for an amount equal to the difference between the stock option
exercise price and the fair market value of shares of the Common Stock of the
Company on the day the stock option is surrendered, payment to be made in shares
of the Company's Common Stock which are subject to this Plan valued at their
fair market value on such date, cash or a combination thereof, in such
proportion and upon such terms and conditions as shall be determined by the
Committee. The difference between the number of shares subject to stock options
so surrendered and the number of shares, if any, issued upon such surrender
shall represent shares which shall not be available for granting future stock
options under this Plan.

      10. Time spent on leave of absence shall be considered as employment for
the purposes of this Plan. Leave of absence means any period of time away from
work granted to any employee by his or her employer because of illness, injury
or other reasons satisfactory to the employer.

      11. The Company reserves the right from time to time to suspend the
exercise of any stock option or stock appreciation right where such suspension
is deemed by it necessary or appropriate for corporate purposes. No such
suspension shall extend the life of the stock option or stock appreciation right
beyond its expiration date, and in no event will there be a suspension in the
five (5) calendar days immediately preceding the expiration date.

ARTICLE K - PAYMENT FOR STOCK OPTIONS.

      Upon the exercise of a stock option, payment in full of the exercise price
shall be made by the optionee. As determined by the Committee, the stock option
exercise price may be paid for by the optionee either in cash, shares of the
Common Stock of the Company to be valued at their fair market value on the date
of exercise or a combination thereof.

ARTICLE L - ADDITIONAL PROVISIONS.

      1. The Board may, at any time, repeal this Plan and may amend it from time
to time except that no such amendment may amend this paragraph, increase the
aggregate number of shares subject to this Plan or reduce the price at which
stock options or stock appreciation rights may be granted, exercised or
surrendered, or alter the class of employees eligible to receive stock options.
The recipient of stock options and stock appreciation rights and the Company
shall be bound by any such amendments as of their effective dates, but if any
outstanding stock options or stock appreciation rights are affected, notice
thereof shall be given to the holders of such stock options and stock
appreciation rights and such amendments shall not be applicable to such holder
without his or her written consent. If this Plan is repealed in its entirety,
all theretofore granted unexercised stock options or stock appreciation rights
shall continue to be exercisable in accordance with their terms.

      2. In case any stock option or stock appreciation right is surrendered
before exercise or for any reason other than exercise ceases to be exercisable,
except as specifically required by the terms of this Plan, the shares reserved
therefor shall continue to be set aside for, and be subject to, use under this
Plan.







                                       6
   8

      3. Subsidiary means any company in which greater than fifty percent (50%)
of the total combined voting power of all classes of stock is owned, directly or
indirectly, by the Company. In addition, the Board may designate for
participation in this Plan as a "subsidiary," except for the granting of
incentive stock options, those additional companies affiliated with the Company
in which the Company's direct or indirect stock ownership is less than fifty
percent (50%) of the total combined voting power of all classes of such
company's stock.

ARTICLE M - CONSENT.

      Every recipient of a stock option or stock appreciation right granted
under this Plan shall be bound by the terms and provisions of this Plan and of
the stock option or stock appreciation right agreement referable thereto, and
the acceptance of any stock option or stock appreciation right agreement shall
constitute a binding agreement between the recipient and the Company and its
subsidiaries and any successors in interest to any of them.

ARTICLE N - DURATION OF THE PLAN.

      This Plan will terminate on June 14, 1993 unless a different termination
date is fixed by action of the Board, but all stock options or stock
appreciation rights granted prior thereto may be exercised in accordance with
their terms.






















                                       7
   9



                             ADDITIONAL INFORMATION

1.    TAX EFFECTS

      INCENTIVE STOCK OPTIONS

           With regard to tax effects which may accrue to the optionee, counsel
       advises that if the optionee has continuously been an employee from the
       time an option has been granted until at least three months before it is
       exercised, under existing law no taxable income results to the optionee
       from the exercise of an incentive stock option at the time of exercise.
       However, the spread at exercise is a "tax preference" item for
       alternative minimum tax purposes.

           Any gain realized on the sale or other disposition of stock acquired
       on exercise of an incentive stock option is considered as long-term
       capital gain for tax purposes if the stock has been held more than two
       years after the date the option was granted and more than one year after
       the date of exercise of the option. If the stock is disposed of within
       one year after exercise, the lesser of any gain on such disposition or
       the spread at exercise (i.e., the excess of the fair market value of the
       stock on the date of exercise over the option price) is treated as
       ordinary income, and any appreciation after the date of exercise is
       considered long-term or short-term capital gain to the owner depending on
       the holding period prior to sale. However, the spread at exercise (even
       if greater than the gain on the disposition) is treated as ordinary
       income if the disposition is one on which a loss, if sustained, is not
       recognized -- e.g., a gift, a "wash" sale or a sale to a related party.
       The amount of ordinary income recognized by the optionee is treated as a
       tax deductible expense to the Company. No other amount relative to an
       incentive stock option is a tax deductible expense to the Company.

      NONSTATUTORY STOCK OPTIONS

           With regard to tax effects which may accrue to the optionee, counsel
       advises that under existing tax law gain taxable as ordinary income to
       the optionee is deemed to be realized at the date of exercise of the
       option, the gain on each share being the difference between the market
       price on the date of exercise and the option price. This amount is
       treated as a tax deductible expense to the Company at the time of the
       exercise of the option. Any appreciation in the value of the stock after
       the date of exercise is considered a long-term or short-term capital gain
       to the owner depending on whether or not the stock was held for the
       appropriate holding period prior to sale.

      STOCK APPRECIATION RIGHTS

           With regard to tax effects which may accrue to the recipient, counsel
       advises that "United States persons," as defined in the Internal Revenue
       Code of 1986 (the "I.R.C."), must recognize ordinary income as of the
       date of exercise equal to the amount paid to the recipient, i.e., the
       difference between the grant price and the value of the shares on the
       date of exercise. For non-United States persons, the time when income is
       realized, the measurement of such income, and its taxation will depend on
       the laws of the particular country of which such persons are resident
       and/or citizens at the time of grant or the time of exercise, as the case
       may be. There may also be tax consequences with respect to an exercise by
       a United States person under the laws of the particular country other
       than the United States of which such person is a resident and/or citizen.

           Notwithstanding the above advice received by the Company, it is each
      individual recipient's responsibility to check with his or her personal
      tax adviser as to the tax effects and proper handling of stock options,
      stock appreciation rights and Common Stock acquired.












                                       8
   10

      The Plan is not subject to the qualification requirements of Section
401(a) of the I.R.C.

2.    EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974

           The Plan is not subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended.

3.    INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

           The following documents filed by the Company with the Commission
      (File No. 1-434) pursuant to the Exchange Act are incorporated herein by
      reference:

         1.       The Company's Annual Report on Form 10-K for the fiscal year
                  ended June 30, 1999;

         2.       The Company's Quarterly Reports on Form 10-Q for the quarters
                  ended September 30, 1999, December 31, 1999 and March 31,
                  2000; and

         3.       All other documents filed by the Company pursuant to Sections
                  13(a), 13(c), 14 or 15(d) of the 1934 Act after the date of
                  this Prospectus and prior to the filing of a post-effective
                  amendment which indicates that all securities offered have
                  been sold or which deregisters all securities then remaining
                  unsold.

       All other documents filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and
prior to the filing of a post-effective amendment which indicates that all
securities offered have been sold or which deregisters all securities then
remaining unsold shall be deemed to be incorporated by reference herein and to
be a part hereof from the date of filing of such documents.

       The Company will provide without charge to each optionee, upon the
request of the optionee, a copy of any or all of these documents other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into such documents. In addition, the Company will provide without
charge to such optionees, a copy of the annual report and all reports, proxy
statements, and other communications distributed to its security holders
generally. Requests for such copies, or for additional information about the
Plan or its administrators, should be directed to Mr. Robert J. Thompson,
Manager, Shareholder Services, The Procter & Gamble Company, One Procter &
Gamble Plaza, Cincinnati, Ohio 45202, telephone: (513) 983-3413.

















                                       9

EX-10.8

   1











                                 EXHIBIT (10-8)



          The Procter & Gamble 1993 Non-Employee Directors' Stock Plan





   2



                THE PROCTER & GAMBLE 1993 NON-EMPLOYEE DIRECTORS'
                                   STOCK PLAN
                         (AS AMENDED DECEMBER 12, 2000)


ARTICLE A -- PURPOSE.

         The purpose of The Procter & Gamble 1993 Non-Employee Directors' Stock
Plan (hereinafter referred to as the "Plan") is to strengthen the alignment of
interests between non-employee Directors (hereinafter referred to as
"Participants") and the shareholders of The Procter & Gamble Company
(hereinafter referred to as the "Company") through the increased ownership of
shares of the Company's Common Stock. This will be accomplished by allowing
Participants to elect voluntarily to convert a portion or all of their cash fees
for services as a Director into Common Stock, by granting Participants a fixed
value of shares of Common Stock restricted until retirement (hereinafter
referred to as "Retirement Shares") and by granting Participants non-qualified
options to purchase shares of Common Stock (hereinafter referred to as "Stock
Options").

ARTICLE B -- ADMINISTRATION.

         1. The Plan shall be administered by the Compensation Committee
(hereinafter referred to as the "Committee") of the Board of Directors of the
Company (hereinafter referred to as the "Board"), or such other committee as may
be designated by the Board. The Committee shall consist of not less than three
(3) members of the Board who are "Non-Employee Directors" as defined in Rule
16b-3 under the Securities Exchange Act of 1934, as amended, or any successor
rule or definition adopted by the Securities and Exchange Commission, to be
appointed by the Board from time to time and to serve at the discretion of the
Board.

         2. It shall be the duty of the Committee to administer this Plan in
accordance with its provisions and to make such recommendations of amendments or
otherwise as it deems necessary or appropriate. A decision by a majority of the
Committee shall govern all actions of the Committee.

         3. Subject to the express provisions of this Plan, the Committee shall
have authority to allow Participants the right to elect to receive fees for
services as a director in either cash or an equivalent amount of whole shares of
Common Stock of the Company, or partly in cash and partly in whole shares of the
Common Stock of the Company, subject to such conditions or restrictions, if any,
as the Committee may determine. The Committee also has the authority to make all
other determinations it deems necessary or advisable for administering this
Plan.

         4. The Committee may establish from time to time such regulations,
provisions, and procedures within the terms of this Plan as, in its opinion, may
be advisable in the administration of this Plan.

         5. The Committee may designate the Secretary of the Company or other
employees of the Company to assist the Committee in the administration of this
Plan and may grant authority to such persons to execute documents on behalf of
the Committee.

ARTICLE C -- PARTICIPATION.





                                       1
   3


         Participation in the Plan shall be limited to all non-employee
Directors of the Company.

ARTICLE D -- LIMITATION ON NUMBER OF SHARES FOR THE PLAN.

         The total number of shares of Common Stock of the Company that may be
awarded each year shall not exceed 50,000 shares.

ARTICLE E -- SHARES SUBJECT TO USE UNDER THE PLAN.

         Shares of Common Stock to be awarded under the terms of this Plan shall
be treasury shares.

ARTICLE F -- RETIREMENT SHARES

         1. Commencing January 2, 1997 and on the first business day in each
January thereafter, each Participant shall receive Retirement Shares with a fair
market value of $20,000 on the date of grant.

         2. All shares awarded under this Article shall be valued as set forth
in Article I.

ARTICLE G -- STOCK OPTIONS.

         1. The Committee may, from time to time, grant Participants a Stock
Option to purchase shares of Common Stock having an exercise price of one
hundred percent (100%) of the fair market value of the Common Stock on the date
of the grant.

         2. The Stock Options shall have a term of fifteen (15) years from the
date of grant, subject to earlier termination as provided herein, and shall be
exercisable three (3) years from the date of grant, except in the case of death,
in which case the Stock Options shall be immediately exercisable.

         3. Stock Options are not transferable other than by will or by the laws
of descent and distribution. Legatees, distributees and duly appointed executors
and administrators of the estate of a deceased Participant shall have the right
to exercise such Stock Options at any time prior to the expiration date of the
Stock Options.

         4. If a Participant ceases to be a Director while holding unexercised
Stock Options, such stock options are then void, except in the case of (i)
death, (ii) disability, (iii) retirement at the end of a term, (iv) retirement
after attaining the age of sixty-nine (69) or (v) resignation from the Board for
reasons of the antitrust laws or the conflict of interest, corporate governance
or continued service policies.

         5. Upon the exercise of a Stock Option, payment in full of the exercise
price shall be made by the Participant. The exercise price may be paid for by
the Participant either in cash, shares of the Common Stock of the Company to be
valued at their fair market value on the date of exercise, or a combination
thereof.

ARTICLE H -- ADJUSTMENTS.






                                       2
   4

         The amount of shares authorized to be issued annually under this Plan
will be subject to appropriate adjustment in the event of future stock splits,
stock dividends, or other changes in capitalization of the Company to prevent
the dilution or enlargement of rights under this Plan; following any such
change, the term "Common Stock" shall be deemed to refer to such class of shares
or other securities as may be applicable. The number of shares and exercise
prices covered by outstanding Stock Options and the number of shares to be
granted as Stock Options pursuant to Article F, paragraph 1 shall be adjusted to
give effect to any such stock splits, stock dividends, or other changes in the
capitalization.

ARTICLE I -- TRANSFER OF SHARES.

         1. The Committee may transfer Common Stock of the Company under the
Plan subject to such conditions or restrictions, if any, as the Committee may
determine. The conditions and restrictions may vary from time to time and may be
set forth in agreements between the Company and the Participant or in the awards
of stock to them, all as the Committee determines.

         2. The shares awarded shall be valued at the average of the high and
low quotations for Common Stock of the Company on the New York Stock Exchange on
the day of the transfer to a Participant. All shares awarded shall be full
shares, rounded up to the nearest whole share.

ARTICLE J -- ADDITIONAL PROVISIONS.

         1. The Board may, at any time, repeal this Plan or may amend it from
time to time except that no such amendment may amend this paragraph, increase
the annual aggregate number of shares subject to this Plan, or alter the persons
eligible to participate in this Plan. The Participants and the Company shall be
bound by any such amendments as of their effective dates, but if any outstanding
awards are affected, notice thereof shall be given to the holders of such awards
and such amendments shall not be applicable to such holder without his or her
written consent. If this Plan is repealed in its entirety, all theretofore
awarded shares subject to conditions or restrictions transferred pursuant to
this Plan shall continue to be subject to such conditions or restrictions.

         2. Every recipient of shares pursuant to this Plan shall be bound by
the terms and provisions of this Plan and of the transfer of shares agreement
referable thereto, and the acceptance of any transfer of shares pursuant to this
Plan shall constitute a binding agreement between the recipient and the Company.

         3. Notwithstanding anything to the contrary in the this Plan, stock
options and stock appreciation rights granted hereunder shall vest immediately
and any conditions or restrictions on Common Stock shall lapse upon a "Change in
Control." A "Change in Control" shall mean the occurrence of any of the
following:

          (a)  An acquisition (other than directly from the Company) of any
               voting securities of the Company (the "Voting Securities") by any
               "Person" (as the term person is used for purposes of Section
               13(d) or 14(d) of the Exchange Act), immediately after which such
               Person has "Beneficial Ownership" (within the meaning of Rule
               13d-3 promulgated under the Exchange Act) of twenty percent (20%)
               or more of the then



                                       3
   5

               outstanding Shares or the combined voting power of the Company's
               then outstanding Voting Securities; provided, however, in
               determining whether a Change in Control has occurred pursuant to
               this Section 4(a), Shares or Voting Securities which are acquired
               in a "Non-Control Acquisition" (as hereinafter defined) shall not
               constitute an acquisition which would cause a Change in Control.
               A "Non-Control Acquisition" shall mean an acquisition by (i) an
               employee benefit plan (or a trust forming a part thereof)
               maintained by (A) the Company or (B) any corporation or other
               Person of which a majority of its voting power or its voting
               equity securities or equity interest is owned, directly or
               indirectly, by the Company (for purposes of this definition, a
               "Related Entity"), (ii) the Company or any Related Entity, or
               (iii) any Person in connection with a "Non-Control Transaction"
               (as hereinafter defined);

          (b)  The individuals who, as of July 11, 2000 are members of the Board
               (the "Incumbent Board"), cease for any reason to constitute at
               least half of the members of the Board; or, following a Merger
               (as hereinafter defined) which results in a Parent Corporation
               (as hereinafter defined), the board of directors of the ultimate
               Parent Corporation; provided, however, that if the election, or
               nomination for election by the Company's common stockholders, of
               any new director was approved by a vote of at least two-thirds of
               the Incumbent Board, such new director shall, for purposes of
               this Plan, be considered as a member of the Incumbent Board;
               provided further, however, that no individual shall be considered
               a member of the Incumbent Board if such individual initially
               assumed office as a result of either an actual or threatened
               "Election Contest" (as described in Rule 14a-11 promulgated under
               the Exchange Act) or other actual or threatened solicitation of
               proxies or consents by or on behalf of a Person other than the
               Board (a "Proxy Contest") including by reason of any agreement
               intended to avoid or settle any Election Contest or Proxy
               Contest; or

          (c)  The consummation of:

               (i)  A merger, consolidation or reorganization with or into the
                    Company or in which securities of the Company are issued (a
                    "Merger"), unless such Merger is a "Non-Control
                    Transaction." A "Non-Control Transaction" shall mean a
                    Merger where:

                    (A)  the stockholders of the Company, immediately before
                         such Merger own directly or indirectly immediately
                         following such Merger at least fifty percent (50%) of
                         the combined voting power of the outstanding voting
                         securities of (x) the corporation resulting from such
                         Merger (the "Surviving Corporation") if fifty percent
                         (50%) or more of the combined voting power of the then
                         outstanding voting securities of the Surviving
                         Corporation is not Beneficially Owned, directly or
                         indirectly by another Person (a "Parent Corporation"),
                         or (y) if there is one or more Parent Corporations, the
                         ultimate Parent Corporation;

                    (B)  the individuals who were members of the Incumbent Board
                         immediately prior to the execution of the agreement
                         providing for such Mergerconstitute at least half of
                         the members of the board of directors of (x) the
                         Surviving Corporation, if there is no Parent
                         Corporation, or (y) if




                                       4
   6

                         there is one or more Parent Corporations, the ultimate
                         Parent Corporation; and

                    (C)  no Person other than (1) the Company, (2) any Related
                         Entity, (3) any employee benefit plan (or any trust
                         forming a part thereof) that, immediately prior to such
                         Merger was maintained by the Company or any Related
                         Entity, or (4) any Person who, immediately prior to
                         such merger, consolidation or reorganization had
                         Beneficial Ownership of twenty percent (20%) or more of
                         the then outstanding Voting Securities or Shares, has
                         Beneficial Ownership of twenty percent (20%) or more of
                         the combined voting power of the outstanding voting
                         securities or common stock of (x) the Surviving
                         Corporation if there is no Parent Corporation, or (y)
                         if there is one or more Parent Corporations, the
                         ultimate Parent Corporation;

              (ii)  A complete liquidation or dissolution of the Company; or

              (iii) The sale or other disposition of all or substantially all of
                    the assets of the Company to any Person (other than a
                    transfer to a Related Entity or under conditions that would
                    constitute a Non-Control Transaction with the disposition of
                    assets being regarded as a Merger for this purpose or the
                    distribution to the Company's stockholders of the stock of a
                    Related Entity or any other assets).

         Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the then outstanding Shares or
Voting Securities as a result of the acquisition of Shares or Voting Securities
by the Company which, by reducing the number of Shares or Voting Securities then
outstanding, increases the proportional number of shares Beneficially Owned by
the Subject Persons, provided that if a Change in Control would occur (but for
the operation of this sentence) as a result of the acquisition of Shares or
Voting Securities by the Company, and after such share acquisition by the
Company, the Subject Person becomes the Beneficial Owner of any additional
Shares or Voting Securities which increases the percentage of the then
outstanding Shares or Voting Securities Beneficially Owned by the Subject
Person, then a Change in Control shall occur.

ARTICLE K -- DURATION OF PLAN.

         This Plan shall be effective as of January 1, 1994. This Plan will
terminate on December 31, 2003 unless a different termination date is fixed by
the shareholders or by action of the Board but no such termination shall affect
the prior rights under this Plan of the Company or of anyone to whom shares have
been transferred prior to such termination.




Plan adopted November 9, 1993
Plan Amended January 10, 1995
Plan Amended June 11, 1996
Adjusted for August 22, 1997 stock split







                                       5
   7

Plan amended January 12, 1999
Plan amended July 11, 2000
Plan amended December 12, 2000


















                                       6

EX-11

   1




                                                              EXHIBIT (11)

                                              THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                                              ---------------------------------------------

                                                    Computation of Earnings Per Share
                                                    ---------------------------------


Amounts in millions except per share amounts
                                                                           Years Ended June 30
                                                       -------------------------------------------------------------
                                                          1997         1998         1999         2000         2001
                                                       ---------    ---------    ---------    ---------    ---------

BASIC NET EARNINGS PER SHARE
- ----------------------------
                                                                                            
Net earnings                                           $   3,415    $   3,780    $   3,763    $   3,542    $   2,922
Deduct preferred stock dividends                             104          104          109          115          121
                                                       ---------    ---------    ---------    ---------    ---------

Net earnings applicable to common stock                $   3,311    $   3,676    $   3,654    $   3,427    $   2,801
                                                       =========    =========    =========    =========    =========

Average number of common shares outstanding              1,360.3      1,343.4      1,328.1      1,313.2      1,300.3
                                                       =========    =========    =========    =========    =========


Basic net earnings per share                           $    2.43    $    2.74    $    2.75    $    2.61    $    2.15
                                                       =========    =========    =========    =========    =========


DILUTED NET EARNINGS PER SHARE
- ------------------------------
Net earnings                                           $   3,415    $   3,780    $   3,763    $   3,542    $   2,922
Deduct differential - preferred
    vs. common dividends                                      32           25           22           18           15
                                                       ---------    ---------    ---------    ---------    ---------

Net earnings applicable to common stock                $   3,383    $   3,755    $   3,741    $   3,524    $   2,907
                                                       =========    =========    =========    =========    =========

Average number of common shares outstanding              1,360.3      1,343.4      1,328.1      1,313.2      1,300.3
Add potential effect of:
    Exercise of options                                     24.8         22.3         21.5         19.7         13.4
    Conversion of preferred stock                          101.9         99.8         97.2         94.3         91.9
                                                       ---------    ---------    ---------    ---------    ---------

Average number of common shares
    outstanding, assuming dilution                       1,487.0      1,465.5      1,446.8      1,427.2      1,405.6
                                                       =========    =========    =========    =========    =========

Diluted net earnings per share                         $    2.28    $    2.56    $    2.59    $    2.47    $    2.07
                                                       =========    =========    =========    =========    =========

EX-12

   1




                                                               EXHIBIT (12)

                                              THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                                              ---------------------------------------------

                                            Computation of Ratio of Earnings to Fixed Charges
                                            -------------------------------------------------



Millions of Dollars
                                                                                      Years Ended June 30
                                                               --------------------------------------------------------------
                                                                1997          1998          1999          2000          2001
                                                               ------        ------        ------        ------        ------
EARNINGS AS DEFINED

                                                                                                        
  Earnings from operations before income taxes
    after eliminating undistributed earnings
    of equity method investees                                 $5,274        $5,704        $5,866        $5,474        $4,574

  Fixed charges, excluding capitalized interest                   534           639           751           811           872
                                                               ------        ------        ------        ------        ------

    TOTAL EARNINGS, AS DEFINED                                 $5,808        $6,343        $6,617        $6,285        $5,446
                                                               ======        ======        ======        ======        ======

FIXED CHARGES, AS DEFINED

  Interest expense (including capitalized interest)            $  457        $  548        $  650        $  792        $  794
  1/3 of rental expense                                            77            91           101            89            78
                                                               ------        ------        ------        ------        ------

    TOTAL FIXED CHARGES, AS DEFINED                            $  534        $  639        $  751        $  881        $  872
                                                               ======        ======        ======        ======        ======

    RATIO OF EARNINGS TO FIXED CHARGES                           10.9           9.9           8.8           7.1           6.2

EX-13

   1
                                  Exhibit (13)

                         Annual Report to Shareholders
                    (pages 1-3, 10-35 and inside back cover)

   2
To Our Shareholders:

When we began the 2000/2001 fiscal year, Job One was getting P&G's business back
on track and growing again.

We have refocused on our biggest, and fastest growing brands, in our biggest
markets, with our leading customers. We've strengthened the value of our brands
for consumers. We've made strategic choices about which businesses P&G should be
in, and which it should not. And we've improved P&G's competitiveness by
controlling costs and managing cash more effectively. We believe these are the
choices that will deliver superior Total Shareholder Return, which is the key
measure of our progress and our underlying commitment to P&G shareholders.

MAKING PROGRESS
We've made progress, although there's more to do.

     -    Sales were $39.2 billion, down slightly from last year but up 2%
          excluding the effects of unfavorable exchange rates.

     -    Net earnings were $2.9 billion. Core net earnings, which exclude
          restructuring charges, were $4.4 billion - up 4% -- while earnings per
          share were $3.12, up 6%.

     -    Business trends improved during the year. Fourth quarter unit volumes
          grew 3% and we made significant progress on costs, delivering core
          operating income growth of 12%.

     -    Operating cash flow increased over $1 billion.

Progress in the U.S. - our largest market - is particularly encouraging. A year
ago, only three of our top 10 U.S. brands were growing share; at the end of the
2000/2001 fiscal year, eight of 10 were growing share.

This progress isn't limited to the U.S.

     -    In Latin America, 3% volume growth drove earnings to record levels.

     -    Profits rebounded in China during the year and market shares are now
          growing broadly.

     -    Elsewhere in Asia, we grew volume in virtually every country; in the
          Philippines, for example, our Fabric and Home Care business turned in
          an exceptional year with record volume and profits while regaining
          volume-share leadership for the past six months.

     -    In Central and Eastern Europe, Russia bounced back from the 1998
          economic and currency crises: volume, sales and market shares are all
          rebounding with solid profits.

While we are pleased with this progress, we know we still have a lot of hard
work ahead of us. Diapers and Feminine Protection - both of which are core,

[Photograph of P&G Products--P&G'S BILLION DOLLAR BRANDS In 2000/2001, Iams
joined P&G's "Billion Dollar Club." The Company now has 11 brands with more than
a billion dollars in sales.]

   3
TWO

multi-billion-dollar businesses -- are not performing satisfactorily. Western
Europe - our second largest market - also lags expectations. We have
improvements planned for each of these businesses.

GETTING COMPETITIVE

Cost competitiveness improved.

    -   We reduced P&G's overhead costs in 2000/2001 for the first time in five
        years.

    -   We reduced marketing spending in 2000/2001 - for the first time in five
        years.

    -   We reduced capital spending from 7.6% of sales last fiscal year to 6.3%
        this year, and revised our goal to 6% of sales by 2002/2003, one year
        ahead of plan.

We also announced plans to broaden our Organization 2005 restructuring program
to drive costs to best-in- class levels, rationalize our manufacturing capacity
and address under-performing businesses. This includes a reduction in force of
9,600 jobs, in addition to 7,800 remaining from our original Organization 2005
program. We are on track to achieve the nearly $2 billion in savings expected
from this program by fiscal year 2004.

STRATEGIC CHOICES

Last year, we identified the need to make clearer, tougher choices. Again, we've
made progress. Here's where P&G will focus:

     1.   BUILD EXISTING CORE BUSINESSES INTO STRONGER GLOBAL LEADERS. Baby
          Care, Fabric Care, Feminine Protection and Hair Care are our
          top-priority core businesses. These are categories in which P&G is #1
          in global sales and market share, and where the Company believes it
          can consistently grow earnings at double-digit rates. Together, these
          four businesses represent about two-thirds of P&G sales and an even
          greater percentage of profit.

     2.   GROW BIG BRANDS, BIG COUNTRIES, LEADING CUSTOMERS. With this focus, we
          intend to grow sales, market shares and profits at rates that exceed
          Company averages. We'll concentrate on our billion-dollar and
          soon-to-be billion-dollar brands, and on our top customers in our top
          10 countries.

     3.   DEVELOP FASTER-GROWING, HIGHER-MARGIN, MORE ASSET-EFFICIENT BUSINESSES
          WITH GLOBAL LEADERSHIP POTENTIAL. These are businesses - such as
          Personal Health Care and Beauty Care - that are high Total Shareholder
          Return performers. We'll develop them through internal innovation, as
          we're doing with Crest Whitestrips, and through acquisitions and
          alliances that are in or adjacent to core P&G categories, such as
          Clairol, which we announced our intention to acquire in May.

     4.   REGAIN GROWTH MOMENTUM AND LEADERSHIP IN WESTERN EUROPE. We'll restore
          P&G leadership in Western Europe by focusing on core categories and on
          our biggest brands, leading customers, biggest countries.

     5.   DRIVE GROWTH IN KEY DEVELOPING MARKETS. We expect growth in the coming
          decade to come from a balanced mix of developed and developing
          markets. We'll win in our high-priority developing markets by
          tailoring low-income offerings in core P&G categories.

In all these areas, innovation will continue to be the primary driver of P&G
growth. We intend to be the innovation leader in new and established businesses
alike, and in both developed and developing markets.

In 2000, for example, P&G had five of the top new U.S. consumer products, as
reported in the Information Resources, Inc. (IRI) annual study. Over the past
eight years, we have averaged three to four of the top 10 new items each year.
In fact, over the last four years, P&G has launched 13 new products in the U.S.,
each of which has exceeded $100 million in sales - nearly a third of all new
consumer products during that time that beat the $100 million mark.

   4
                                                                           THREE

Importantly, P&G innovation doesn't stop with products. We define innovation
broadly, and consistently strive to innovate in every part of the business --
with new business models, such as Reflect.com; new organization models, such as
the Global Business Services shared- service organization; and new approaches to
consumer and customer marketing. Innovation is a deliberate process at P&G. We
organize for it, catalyze it and apply it broadly.

BOTTOM LINE: We're focusing on being the leader in our core categories, with our
big brands -- brands that are big today and brands that have the potential to be
big tomorrow; we're taking steps to ensure that P&G brands provide the best
consumer value; we're shifting our mix to categories with higher growth and
higher margins; we're focusing on big countries in both developed and developing
markets, and on our leading global customers.

IMPROVING EVERYDAY LIFE
In all we do, the consumer is boss. We win when we understand consumers better
than our competitors. And it's with that recognition that we have committed
ourselves to making P&G the most consumer- driven company in the world.

Our mission as a company is to improve everyone's quality of life every day,
everywhere. We have a relentless quest to be the best - and our dedication to
that quest has never been more evident than in the past year. P&G people have
risen to the challenges our Company has faced with a sense of pride,
resourcefulness and dogged determination. The spirit of our people is a
tremendous driver of our confidence in P&G's future.

We enter this new fiscal year with renewed dedication to fulfill our mission and
to deliver our commitments to you, our fellow owners of Procter & Gamble.

/s/ A. G. Lafley

A. G. Lafley
President and Chief Executive
August 7, 2001

/s/ John E. Pepper

John E. Pepper
Chairman of the Board
August 7, 2001



   5
10               The Procter & Gamble Company and Subsidiaries

                                FINANCIAL REVIEW

RESULTS OF OPERATIONS
Fiscal 2001 was a year of progress - in making choices, establishing realistic
goals and delivering on commitments. The Company also made considerable progress
on strengthening its cost structure and improving cash efficiency. This was
despite a tough year that included weakening economies in some major
geographies, significant currency impacts, rising commodity prices and an
increasingly competitive environment.

To accelerate long-term growth, the Company has made and will continue to make
tough, clear choices about where to play and how to win. The Company is focused
on building superior shareholder return - by creating and building big brands
with top-line results, sales margins and cash flow at the best competitive
benchmarks.

During the past year, the Company refocused on its core categories to develop
high-margin growth businesses with global leadership potential. The Company also
expanded its restructuring program, initiated in June 1999, in conjunction with
Organization 2005, to drive further enrollment reductions and address
under-performing businesses. These actions are critical to delivering on the
Company's long-term goals to consistently grow earnings and earnings per share
at double-digit rates.

NET EARNINGS
Reported net earnings were $2.92 billion or $2.07 per share in 2001. This
compared to $3.54 billion or $2.47 per share in 2000, and $3.76 billion or $2.59
per share in 1999. Current year results include charges of $1.48 billion after
tax for restructuring program costs. These costs were $688 million and $385
million in 2000 and 1999, respectively. This program covers a significant
reduction in enrollment, manufacturing consolidations and portfolio choices to
scale back or discontinue under-performing businesses and initiatives.


Core net earnings, which exclude restructuring program costs, increased to $4.40
billion in 2001 from $4.23 billion in 2000 and $4.15 billion in 1999. Core net
earnings per share were $3.12, compared to $2.95 per share in 2000 and $2.85 per
share in 1999. Core net earnings per share increased 6% in 2001, compared to 4%
in 2000. Core net earnings progress was significant in light of product cost
increases and exchange impacts, which were offset by pricing benefits, lower
taxes and gains from the divestiture of non- strategic brands. Growth in the
prior year was affected by significant investments in new initiatives.



NET EARNINGS PER SHARE
(on a diluted basis)

[BAR GRAPH]

NET EARNINGS PER SHARE
CORE NET EARNINGS PER SHARE*

*EXCLUDES RESTRUCTURING PROGRAM COSTS.

NET SALES
Reported net sales were $39.24 billion, compared to $39.95 billion in 2000 and
$38.13 billion in 1999. Excluding an unfavorable exchange rate impact of over 3%
in the current year, net sales grew 2%, reflecting improved pricing in beauty
care, fabric and home care and paper, primarily family care. Unit volume was
flat in 2001, as exceptionally strong performance by new businesses in health
care was offset by softness in food and beverage. Unit volume grew 4% in 2000,
while net sales excluding a 2% unfavorable exchange impact increased 7%. This
growth reflected strong product initiative activity, the acquisition of the Iams
pet health and nutrition business and progress on flagship brands, largely in
fabric and home care.

NET SALES AND EXCHANGE IMPACTS
(in billions)

[BAR GRAPH]

NET SALES
FOREIGN EXCHANGE IMPACTS

   6
                 The Procter & Gamble Company and Subsidiaries                11

                          FINANCIAL REVIEW (CONTINUED)


OPERATING COSTS
Consistent with its commitment to reduce its cost structure to more competitive
levels, in the fourth quarter, the Company broadened its restructuring program
to deliver further cost reductions by reducing overheads, consolidating
manufacturing operations and addressing under-performing businesses and
initiatives. Given the nature and magnitude of the charges related to this
program, the following discussions include supplemental information on a "core"
basis - excluding restructuring charges.

Cost of products sold was $22.10 billion in 2001, compared to $21.51 billion and
$21.03 billion in 2000 and 1999, respectively. Restructuring costs included in
cost of products sold were $1.14 billion in 2001, $496 million in 2000 and $443
million in 1999. Excluding restructuring charges, cost of products sold was flat
versus the prior year, as a disciplined cost focus overcame commodity cost
increases, such as energy. Core cost of products sold was up 2% in 2000.

Marketing, research and administrative expense was $12.41 billion versus $12.48
billion in 2000 and $10.85 billion in 1999. These include restructuring costs of
$583 million in 2001, $318 million in 2000 and $38 million in 1999, primarily
due to employee separation expenses. Excluding restructuring charges, marketing,
research and administrative expense was $11.82 billion in the current year
versus $12.17 billion in 2000 and $10.81 billion in 1999. As a percent of net
sales, this was 30.0% in 2001, 30.4% in 2000 and 28.3% in 1999. The decrease in
the current year was due to a reduction in overhead costs, as well as marketing
support efficiencies. The increase in 2000 reflects the high level of initiative
investment.

MARGINS
In 2001, gross margin was 43.7%, compared to 46.1% in 2000 and 44.8% in 1999.
Gross margin included restructuring charges that consisted primarily of
accelerated depreciation, asset write-downs and employee separation costs for
manufacturing employees.

Excluding these charges, gross margin was 46.8%, 47.4% and 46.0% in 2001, 2000
and 1999, respectively, reflecting rising material costs despite the benefit of
pricing actions and effective cost management.

Operating margin was 12.1%, compared to 14.9% in 2000 and 16.4% in 1999.
Excluding restructuring charges, core operating margin was 16.7%, compared to
16.9% in 2000 and 17.7% in 1999.

Net earnings margin was 7.4% versus 8.9% in 2000 and 9.9% in 1999. Excluding
restructuring charges, core net earnings margin was 11.2%, up from 10.6% in 2000
and 10.9% in 1999. The margin increase in 2001 reflects the gains from minor
brand divestitures and lower taxes, partially offset by increased product costs
and unfavorable exchange impacts. In 2000, the core net earnings margin
decreased, reflecting increased spending, primarily from initiative investments.

NON-OPERATING ITEMS
Interest expense was $794 million in 2001, compared to $722 million in 2000 and
$650 million in 1999. The interest expense trend reflects higher average debt
levels, primarily due to share repurchases and acquisitions.

Other income, net, which consists primarily of interest and investment income
and divestiture gains contributed $674 million, compared to $304 million in 2000
and $235 million in 1999. Increased gains from the divestiture of minor brands
drove the year- to-year changes.

The Company's effective tax rate for the current year was 36.7%, compared to
36.0% in 2000 and 35.5% in 1999. Excluding restructuring costs and related tax
effects, the effective tax rate was 32.0%, compared to 33.4% in 2000 and 34.4%
in 1999. This change reflects the continuing benefit of the implementation of
the Company's new global business unit structure.


   7
12                The Procter & Gamble Company and Subsidiaries

                          FINANCIAL REVIEW (CONTINUED)


FINANCIAL CONDITION
One of the Company's focus areas is to improve its cash efficiency as a key
element of achieving superior shareholder return.


CASH
Operating cash flow provides the primary source of funds to finance operating
needs, capital expenditures and shareholder dividends. This is supplemented by
additional borrowings to provide funds to finance the share repurchase program
and acquisitions.

Cash flow from operations was $5.80 billion, $4.68 billion and $5.54 billion in
2001, 2000 and 1999, respectively. Operating cash flow trends were primarily
impacted by working capital changes, including the impact of restructuring
program accruals.

Cash and cash equivalents increased $891 million in the current year to $2.31
billion, reflecting reduced capital expenditures and improved working capital.
Cash and cash equivalents were $1.42 billion in 2000 and $2.29 billion in 1999.
The decrease in 2000 reflected acquisition spending and lower net earnings,
partially offset by the issuance of debt.

Net cash used for acquisitions completed during 2001 totaled $138 million. This
compares to acquisition spending of $2.97 billion in 2000 and $137 million in
1999. Spending in fiscal 2000 was primarily related to the acquisitions of The
Iams Company and Affiliates, Recovery Engineering, Inc. and a joint venture
ownership increase in China. In May 2001, the Company announced its intent to
acquire the Clairol business, pending regulatory clearance. A substantial
portion of the $4.95 billion purchase price will be financed with debt.

The Company continues its program to divest certain non-strategic brands in
order to focus resources on core businesses. The proceeds from these and other
asset sales generated $788 million in cash flow in the current year, compared to
$419 million and $434 million in 2000 and 1999, respectively.

The Company maintains a share repurchase program, which authorizes the purchase
of shares annually on the open market to mitigate the dilutive impact of
employee compensation programs. The Company also has a discretionary buy-back
program under which it may repurchase additional outstanding shares. Current
year purchases under the combined programs were $1.25 billion, compared to $1.77
billion in 2000 and $2.53 billion in 1999. The Company issued equity put options
in 2001 for one million shares at approximately $74 per share and for 12 million
shares at prices ranging from $60 to $71 per share in 2000, which reduce the
Company's cash outlay for share repurchases.

Common share dividends grew 9% to $1.40 per share in 2001, compared to $1.28 and
$1.14 in 2000 and 1999, respectively. For the coming year, the annual dividend
rate will increase to $1.52 per common share, marking the 46th consecutive year
of increased common share dividend payments. Total dividend payments, to both
common and preferred shareholders, were $1.94 billion, $1.80 billion and $1.63
billion in 2001, 2000 and 1999, respectively.

DIVIDENDS
($ per share)
[BAR GRAPH]

0.90   1.01   1.14  1.28  1.40
1997   1998   1999  2000  2001

Total debt was fairly stable at $12.03 billion at June 30, 2001 and $12.25
billion at June 30, 2000. A number of factors influenced the various debt
components, including issuance of long-term debt, reductions in short-term debt,
currency effects and mark-to-market impacts of derivative financial instruments.

Long-term borrowing available under the Company's shelf registration statement
filed in 1995, as amended in July 1997 and

   8
                  The Procter & Gamble Company and Subsidiaries               13

                          FINANCIAL REVIEW (CONTINUED)

September 1999, was $489 million at June 30, 2001. Additionally, the Company is
able to issue commercial paper at favorable rates and to access general bank
financing.


CAPITAL SPENDING
Significant progress was made in 2001, as capital expenditures decreased to
$2.49 billion compared to $3.02 billion in 2000 and $2.83 billion in 1999.
Current year spending is 6.3% of net sales, compared to 7.6% and 7.4% in 2000
and 1999. During 2001, capital spending declined in most segments due to more
choiceful investments, increased efficiencies and favorable currency impacts.
The Company has revised its goal to reduce capital spending to 6% of net sales
by fiscal 2003, one year ahead of plan.

CAPITAL SPENDING
(in billions)

[BAR GRAPH PLUS LINE GRAPH]

% OF SALES
CAPITAL SPENDING


The following pages provide perspective on the Company's business segments.
Product-based segment results exclude items that are not included in measuring
business performance for management reporting purposes, most notably certain
financing, investing and employee benefit costs, goodwill amortization and
restructuring costs.

Sales in companies over which the Company exerts significant influence, but does
not control the financial and operating decisions, are reported for segment
purposes in a manner similar to consolidated subsidiaries. Taxes are reflected
in the business segments at local statutory tax rates. The effects of these
conventions are eliminated in the corporate segment to adjust management
reporting conventions to accounting principles generally accepted in the United
States of America.


2001 NET SALES BY BUSINESS SEGMENT

[PIE GRAPH]

30%    FABRIC AND HOME CARE
30%    PAPER
18%    BEAUTY CARE
11%    HEALTH CARE
11%    FOOD AND BEVERAGE


2001 NET EARNINGS BY BUSINESS SEGMENT

[PIE GRAPH]

37%    FABRIC AND HOME CARE
24%    PAPER
22%    BEAUTY CARE
9%     HEALTH CARE
8%     FOOD AND BEVERAGE



FABRIC AND HOME CARE
Fabric and home care trends reflect the significant effort to restore historical
margins through innovation combined with necessary pricing, disciplined cost
focus and more efficient marketing. Net sales were $11.66 billion, down 4%
versus a strong year ago base which included new brand introductions. Excluding
a 3% unfavorable foreign exchange impact, net sales decreased 1%. Unit volume
decreased 2% due to heavy competitive activity, primarily in Western Europe.

Despite the volume decline, net earnings increased 13% to $1.64 billion. Net
earnings growth was significant in light of product cost increases and exchange
impacts, which were offset by the benefits of laundry pricing actions and lower
taxes. Latin America delivered particularly strong earnings progress, reflecting
disciplined cost management.

Fabric and home care is the Company's most profitable segment, accounting for
nearly a third of net sales and an even greater percentage of profits.



   9
14                The Procter & Gamble Company and Subsidiaries

                          FINANCIAL REVIEW (CONTINUED)


The Company is committed to strengthening the business in Western Europe.
Strategic plans are in place to improve the business through a differentiated
portfolio of brands that provide superior value, meet a variety of consumer
needs and build to a total leadership position.

In 2000, net sales for fabric and home care were $12.16 billion, an increase of
7% over 1999. Excluding unfavorable foreign exchange impacts, primarily in
Western Europe, net sales grew 9% on 5% unit volume growth. Top-line growth was
spurred by the introduction of new brands and solid base business performance.
Net earnings for the segment were $1.45 billion, down 3% versus the prior year,
primarily due to investments in product initiatives.


PAPER
The paper segment, which includes baby, feminine and family care, reflected
mixed results. Net sales were $11.99 billion, compared to $12.04 billion in
2000. Excluding a 4% negative impact of exchange rates, primarily the euro, net
sales increased 4%. Unit volume grew 2%, driven by family care and baby care.
Commodity- related cost increases and weaker foreign currencies resulted in net
earnings decreasing 2% to $1.04 billion, despite progress in family care and
feminine care. These were partially offset by pricing actions and lower overhead
and marketing spending.

Family care volume grew 3% due to new product introductions and base business
growth in North America. Net sales increased 10%, excluding a 2% unfavorable
impact of exchange, resulting from commodity-driven global pricing actions on
Charmin and Bounty.

Baby care volume increased 3% driven by Latin America and Central and Eastern
Europe. Excluding a 5% negative exchange impact, net sales increased 1%.


Feminine care volume declined 3% due to a challenging competitive environment in
North America and Northeast Asia, partially offset by growth in developing
markets. Net sales were comparable to the prior year - excluding a 5% negative
exchange impact.

In 2000, paper segment net sales were $12.04 billion, down 1% from the prior
year on flat unit volume. Excluding the impact of exchange rates, primarily the
euro, net sales were up 1%. Excluding the impact of the Attends divestiture in
1999, unit volume increased 2%. Net earnings were $1.07 billion, down 16%,
reflecting family care expansion in Western Europe, investments in new product
initiatives on Charmin, a tough competitive environment in baby care and
feminine care businesses, increased capacity and unfavorable raw and packing
material cost trends.

Looking forward, initiative programs are currently underway to drive future
growth. Though challenges remain, a continued focus on innovation and cost
reductions should lead to stronger performance.


BEAUTY CARE
Beauty care increased profitability behind innovative, high-margin, global
brands. Net sales were $7.26 billion, down 2% versus $7.39 billion in 2000.
Excluding a 4% impact of unfavorable exchange rates, primarily in Western Europe
and Asia, net sales increased 2%. Unit volume was down 1% versus the prior year.
Excluding the impact of divestitures, volume was flat. Volume growth in hair
care and skin care was offset by competitive activity in deodorants and bar
soaps. Net earnings were $972 million, a 9% improvement behind the successful
expansion of high-performance, premium- priced products.

Positive results in hair care were primarily driven by the global restage of
Pantene and Head & Shoulders. Latin America, in particular, posted record
results on double-digit top-line growth.

   10
                  The Procter & Gamble Company and Subsidiaries               15

                          FINANCIAL REVIEW (CONTINUED)

Skin care delivered record net sales and share growth led by the launch of Olay
Daily Facials and Olay Total Effects.

In the past year, Cover Girl has built share in the United States behind
superior products. The cosmetics business posted strong results behind recently
launched Cover Girl Outlast and Max Factor Lipfinity, breakthrough long-wearing
lipsticks.

During the year, the Company announced the intent to acquire the Clairol
business, a world leader in hair color and hair care products with prominent
brands such as Herbal Essences, Aussie, Infusium, Nice `n Easy and Natural
Instincts. The pending Clairol acquisition will represent the Company's entry
into the fast growing hair- colorant category.

In 2000, net sales were $7.39 billion, comparable to the prior year, but up 1%
excluding the impact of unfavorable exchange rates, primarily in Western Europe.
Unit volume declined 2%, impacted by a difficult competitive environment in key
European markets and significant contraction of the market in China. Net
earnings were $894 million, a 3% decrease from the prior year due to initiative
investments.

HEALTH CARE
Health care delivered exceptional growth on the expansion of new products. Net
sales were $4.35 billion, up 11%. Excluding a 3% unfavorable exchange impact,
net sales grew 14%. Unit volume increased 15%, driven by the excellent
performance of Iams pet health and nutrition, pharmaceuticals and oral care
businesses. Net earnings were $390 million, a 16% increase over fiscal 2000,
consistent with volume growth.

Health care net sales in North America grew behind volume progress on the
strength of new businesses.

The Iams Company and Affiliates again posted record results, with net sales up
double-digits behind continued growth in North America and expansion into new
retail channels in the United Kingdom, Italy and Japan.

Pharmaceutical net sales grew primarily due to the strength of Actonel, the
Company's post-menopausal osteoporosis drug, which achieved $150 million in
total global sales. Actonel was launched in 2000 and is now approved in 47
countries and currently marketed in 30 countries.

Oral care top-line growth reflected the benefits of broadening the appeal of
core brands beyond cavity and tartar protection into new whitening and cleaning
products. Crest Whitestrips and Crest Spinbrush are driving the trends toward
at-home whitening and powered brushing, respectively.

Western Europe health care net sales were below year ago, primarily due to the
weak euro. The expansion of Crest Spinbrush and the continued growth of Actonel
are expected to improve Western Europe results next year.

In 2000, health care net sales were $3.91 billion, with growth resulting
primarily from acquisitions. Volume and net sales increased 34% and 36%,
respectively, versus the prior year. Unfavorable exchange rates impacted net
sales by 2%. Net earnings were $335 million, a 38% increase over 1999.



   11
16                The Procter & Gamble Company and Subsidiaries

                          FINANCIAL REVIEW (CONTINUED)


FOOD AND BEVERAGE
Food and beverage results were below year ago, as strong sales and earnings in
coffee were offset by soft snacks and juice results. Net sales were $4.14
billion, down 11%. Excluding a 1% impact of divestitures and a 2% unfavorable
foreign exchange impact, net sales declined 8%. Unit volume declined 10%
including a 2% impact from divestitures. Unit volume was negatively affected by
reduced trade merchandising and snacks pricing actions in North America and
Western Europe, and the divestiture of institutional shortening and oils. Net
earnings were $333 million, down 9% versus last year.

The coffee business had a record year with Folgers achieving its strongest
volume increase in a decade.

In snacks and juice, North America results are showing signs of stabilizing as
merchandising returned to competitive levels. Lower net earnings in Western
Europe were primarily due to investments in Sunny Delight and the impact of a
strong U.S. dollar.

During the year, P&G and The Coca-Cola Company announced the intent to form a
new venture to maximize the growth potential of the snacks and juice business on
a global basis. Both parties are committed to completing a mutually-agreed
transaction; however, the parties anticipate that any transaction will likely
contain terms different from those announced previously. The Company also
separately announced its intent to explore strategic options for its peanut
butter and retail shortening and oils business.

In 2000, net sales were flat versus the prior year at $4.63 billion, including a
1% negative exchange impact. Unit volume also was flat. Excluding the 1999
divestiture of Hawaiian Punch, unit volume increased 5% behind strong growth in
Western Europe and Northeast Asia, partially due to the expansion of Pringles.
Net earnings increased to $364 million, up 11% versus the previous year,
primarily due to gross margin improvement.


CORPORATE
The corporate segment includes both operating and non-operating elements such as
financing and investing activities, goodwill amortization, employee benefit
costs, charges related to restructuring, segment eliminations and other general
corporate items.

Corporate includes adjustments from management reporting conventions to conform
with accounting principles generally accepted in the United States of America.
These primarily affect the treatment of unconsolidated investees and income
taxes, which are reflected in the business segments using applicable local
statutory tax rates.

Corporate results reflect one-time gains from the Company's non- strategic brand
divestiture program, increased restructuring costs, reduced overhead spending
and corporate hedging gains, partially offset by higher employee benefit costs,
and certain tax impacts not reflected in the business segments.


HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risks, such as changes in interest rates,
currency exchange rates and commodity prices. To manage the volatility relating
to these exposures, the Company nets the exposures on a consolidated basis to
take advantage of natural offsets. For the residual portion, the Company enters
into various derivative transactions pursuant to the Company's hedging policies.
The financial impacts of these hedging instruments are offset in part or in
whole by corresponding changes in the underlying exposures being hedged. The
Company does not hold or issue derivative financial instruments for trading
purposes. Note 6 to the consolidated financial statements includes a discussion
of the Company's accounting policies for financial instruments.

   12
                  The Procter & Gamble Company and Subsidiaries               17

                          FINANCIAL REVIEW (CONTINUED)

Derivative positions are monitored using techniques including market value,
sensitivity analysis and value at risk modeling. The tests for interest rate and
currency rate exposures discussed below are based on a Monte Carlo simulation
value at risk model using a one year horizon and a 95% confidence level. The
model incorporates the impact of correlation and diversification from holding
multiple currency and interest rate instruments and assumes that financial
returns are normally distributed. Estimates of volatility and correlations of
market factors are drawn from the RiskMetrics(TM) dataset as of June 30, 2001.
In cases where data is unavailable in RiskMetrics(TM) a reasonable proxy is
included.

The Company's market risk exposures relative to interest and currency rates, as
discussed below, have not changed materially versus the previous reporting
period. In addition, the Company is not aware of any facts or circumstances that
would significantly impact such exposures in the near term.

INTEREST RATE EXPOSURE
Interest rate swaps are used to hedge underlying debt obligations. Certain
currency interest rate swaps are designated as hedges of the Company's foreign
net investments.

Based on the Company's overall interest rate exposure as of and during the year
ended June 30, 2001, including derivative and other instruments sensitive to
interest rates, a near-term change in interest rates, at a 95% confidence level
based on historical interest rate movements, would not materially affect the
Company's financial statements.

CURRENCY RATE EXPOSURE
The Company manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. The Company's major foreign currency exposures involve
the markets in Western and Eastern Europe, Asia, Mexico and Canada. The primary
purpose of the Company's foreign currency hedging activities is to manage the
volatility associated with foreign currency purchases of materials and other
assets and liabilities created in the normal course of business. Corporate
policy prescribes the range of allowable hedging activity. The Company primarily
utilizes forward exchange contracts and purchased options with maturities of
less than 18 months.

In addition, the Company enters into certain foreign currency swaps with
maturities of up to five years to hedge intercompany financing transactions. The
Company also utilizes purchased foreign currency options with maturities of
generally less than 18 months and forward exchange contracts to hedge against
the effect of exchange rate fluctuations on royalties and income from
international operations.

Based on the Company's overall currency rate exposure as of and during the year
ended June 30, 2001, including derivative and other instruments sensitive to
foreign currency movements, a near-term change in currency rates, at a 95%
confidence level based on historical currency rate movements, would not
materially affect the Company's financial statements.

COMMODITY PRICE EXPOSURE
Raw materials used by the Company are subject to price volatility caused by
weather, supply conditions, political and economic variables and other
unpredictable factors. The Company uses futures, option and swap contracts to
manage the volatility related to certain of these exposures. Commodity hedging
activity is not material to the Company's financial statements.



   13
18                The Procter & Gamble Company and Subsidiaries

                          FINANCIAL REVIEW (CONTINUED)

RESTRUCTURING PROGRAM
Beginning in 1999 - concurrent with the Company's reorganization into
product-based global business units - the Company initiated its Organization
2005 restructuring program. The program was expanded in the current year to
deliver further cost reductions through reduced overheads, further manufacturing
consolidations, and discontinuation of under-performing businesses and
initiatives. This significant, multi-year program also is discussed in Note 2 to
the consolidated financial statements.

The total cost of the program is expected to be $5.6 billion before tax ($4.4
billion after tax). Remaining costs will be incurred through fiscal 2004, with a
significant amount of separation related costs expected to occur in the next
fiscal year. Given the nature and duration of the program, costs to be incurred
in future years are subject to varying degrees of estimation for key
assumptions, such as actual timing of execution, currency effects, enrollment
impacts and other variables. All restructuring costs are reported in the
corporate segment for management and external reporting.

SUMMARY OF RESTRUCTURING CHARGES
                              Years ended June 30
                           ------------------------
(in millions)                2001     2000     1999
- ---------------------------------------------------
Separations                $  341   $  153   $   45
Accelerated Depreciation      276      386      208
Asset Write-Downs             731       64      217
Other                         502      211       11
- ---------------------------------------------------
Total (before tax)          1,850      814      481
- ---------------------------------------------------
Total (after tax)           1,475      688      385

Separations represent the cost of packages offered to employees to reduce
overhead and manufacturing costs, which are accrued upon employee acceptance.
The separation packages, predominantly voluntary, are formula driven based on
salary levels and past service. Separation costs are charged to costs of
products sold for manufacturing employees and marketing, research and
administrative expense for all others.

Total separations under the program are expected to be approximately 24,600.
Approximately 9,200 separations have been provided for through June 30, 2001, as
follows: 6,000 in 2001, 2,800 in 2000 and 400 in 1999. While all geographies and
businesses are impacted by the enrollment reduction programs, a higher number of
United States employees are affected, given the concentration of operations. Net
enrollment for the Company may decline by less than the total separations, as
terminations will be offset by increased enrollment at remaining sites,
acquisitions and other impacts.

Accelerated depreciation relates to long-lived assets that will be taken out of
service prior to the end of their normal service period due to manufacturing
consolidations, technology standardization, plant closures or strategic choices
to discontinue initiatives. The Company has shortened the estimated useful lives
of such assets, resulting in incremental depreciation expense. For segment and
management reporting purposes, normal depreciation expense is reported by the
business segments, with the incremental accelerated depreciation reported in the
corporate segment. Accelerated depreciation and write-downs are charged to cost
of products sold for manufacturing assets and marketing, research and
administrative expense for all other assets.

Asset write-downs relate to establishment of new fair-value bases for assets
held for sale or disposal and for assets whose future cash flow expectations
have declined significantly as a direct result of restructuring decisions.
Assets held for sale or disposal represent excess capacity that is in the
process of being removed from service and businesses held for sale within the
next 12 months. Such assets are written down to the net amount expected to be
realized upon sale or disposal. Assets expected to continue to be operated, but
whose nominal cash flows are no longer sufficient to recover existing book
values, are written down to estimated fair value, generally determined by
reference to discounted expected future cash flows. Write-downs of assets that
will continue to be used were

   14
                  The Procter & Gamble Company and Subsidiaries               19

                          FINANCIAL REVIEW (CONTINUED)

approximately $160 million before tax ($133 million after tax) in 2001, $0 in
2000 and $160 million before tax ($100 million after tax) in 1999. Asset
write-downs are not expected to significantly impact future annual depreciation
expense.

Other contains charges incurred as a direct result of restructuring decisions,
including relocation, training, the establishment of global business services
and the new legal and organization structure of Organization 2005, and
discontinuation of initiatives. These costs are charged to the applicable income
statement line item based on the underlying nature of the charge.

Most restructuring accruals represent current liabilities. Reserve balances were
$460 million, $88 million and $44 million at June 30, 2001, 2000 and 1999,
respectively. During the current year, approximately 40% of restructuring
charges were cash. Going forward, approximately 70% of future charges are
expected to be cash - primarily separations.

Savings from the restructuring program are difficult to estimate, given the
nature of the activities, the corollary benefits achieved, timing and the degree
of reinvestment. Overall, the program is expected to deliver nearly $2 billion
after tax of annual savings by fiscal 2004. Estimated incremental savings were
$235 million in 2001 and $65 million in 2000. Savings are expected to ramp up
during 2002 and are estimated to increase by approximately $600 million after
tax.

FORWARD-LOOKING STATEMENT
The Company has made and will make certain forward-looking statements in the
Annual Report and in other contexts relating to volume growth, increases in
market shares, Organization 2005, financial goals and cost reduction, among
others.

These forward-looking statements are based on assumptions and estimates
regarding competitive activity, pricing, product introductions, economic
conditions, technological innovation, currency movements, governmental action
and the development of certain markets. Among the key factors necessary to
achieve the Company's goals are: (1) the successful execution of Organization
2005, including achievement of expected cost and tax savings and successful
management of organizational and work process restructuring; (2) the ability to
achieve business plans, including volume growth and pricing plans, despite high
levels of competitive activity, especially with respect to the product
categories and geographical markets in which the Company has chosen to focus;
(3) the ability to maintain key customer relationships; (4) the achievement of
growth in significant developing markets such as China, Korea, Mexico, the
Southern Cone of Latin America and the countries of Central and Eastern Europe;
(5) the ability to successfully manage regulatory, tax and legal matters,
including resolution of pending matters within current estimates; (6) the
successful and timely execution of planned brand divestitures; (7) the ability
to successfully implement cost improvement plans in manufacturing and overhead
areas; (8) the timely execution of definitive agreements and the receipt of
timely and successful regulatory clearances with respect to a transaction with
The Coca- Cola Company; (9) the timely and successful receipt of regulatory
clearances and subsequent successful integration of the Clairol business; and
(10) the ability to successfully manage currency, interest rate and certain
commodity cost exposures. If the Company's assumptions and estimates are
incorrect or do not come to fruition, or if the Company does not achieve all of
these key factors, then the Company's actual performance could vary materially
from the forward-looking statements made herein.


   15
20                The Procter & Gamble Company and Subsidiaries

                  RESPONSIBILITY FOR THE FINANCIAL STATEMENTS


Consolidated financial statements and financial information included in this
report are the responsibility of Company management. This includes preparing the
statements in accordance with accounting principles generally accepted in the
United States of America and necessarily includes estimates based on
management's best judgments.
         To help insure the accuracy and integrity of Company financial data,
management maintains internal controls designed to provide reasonable assurance
that transactions are executed as authorized and accurately recorded and that
assets are properly safeguarded. These controls are monitored by an ongoing
program of internal audits. These audits are supplemented by a self-assessment
program that enables individual organizations to evaluate the effectiveness of
their controls. Careful selection of employees and appropriate divisions of
responsibility are designed to achieve control objectives. The Company's
"Worldwide Business Conduct Manual" sets forth management's commitment to
conduct its business affairs with the highest ethical standards.
         Deloitte & Touche, independent auditors, have audited and reported on
the Company's consolidated financial statements. Their audits were performed in
accordance with auditing standards generally accepted in the United States of
America.
         The Board of Directors, acting through its Audit Committee composed
entirely of outside directors, oversees the adequacy of internal controls. The
Audit Committee meets periodically with representatives of Deloitte & Touche and
internal financial management to review internal control, auditing and financial
reporting matters. The independent auditors and the internal auditors also have
full and free access to meet privately with the Audit Committee.


    /s/ A. G. Lafley                   /s/ Clayton C. Daley Jr.
    A. G. Lafley                       Clayton C. Daley Jr.
    President and Chief Executive      Chief Financial Officer and Comptroller

                          INDEPENDENT AUDITORS' REPORT

DELOITTE & TOUCHE                                          250 East Fifth Street
                                                          Cincinnati, Ohio 45202

To the Board of Directors and Shareholders of The Procter & Gamble Company:

We have audited the accompanying consolidated balance sheets of The Procter &
Gamble Company and subsidiaries as of June 30, 2001 and 2000 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the three years in the period ended June 30, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company at June
30, 2001 and 2000 and the results of its operations and cash flows for each of
the three years in the period ended June 30, 2001, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Deloitte & Touche
August 7, 2001

   16
                  The Procter & Gamble Company and Subsidiaries               21

                       CONSOLIDATED STATEMENTS OF EARNINGS


Amounts in millions except per share amounts        Years ended June 30
                                                 ----------------------------
                                                  2001      2000      1999
- -----------------------------------------------------------------------------
NET SALES                                        $39,244   $39,951   $38,125
Cost of products sold                             22,102    21,514    21,027
Marketing, research and administrative expense    12,406    12,483    10,845
- -----------------------------------------------------------------------------
OPERATING INCOME                                   4,736     5,954     6,253
Interest expense                                     794       722       650
Other income, net                                    674       304       235
- -----------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES                       4,616     5,536     5,838
Income taxes                                       1,694     1,994     2,075
- -----------------------------------------------------------------------------
NET EARNINGS(1)                                  $ 2,922   $ 3,542   $ 3,763
- -----------------------------------------------------------------------------

BASIC NET EARNINGS PER COMMON SHARE(1)           $  2.15   $  2.61   $  2.75

DILUTED NET EARNINGS PER COMMON SHARE(1)         $  2.07   $  2.47   $  2.59

DIVIDENDS PER COMMON SHARE                       $  1.40   $  1.28   $  1.14
- -----------------------------------------------------------------------------

(1) Net earnings include an after-tax charge for restructuring costs of $1,475
    in 2001, $688 in 2000 and $385 in 1999. Basic and diluted net earnings per
    share include restructuring charges of $1.14 and $1.05 in 2001, $.52 and
    $.48 in 2000 and $.29 and $.26 in 1999, respectively.

See accompanying Notes to Consolidated Financial Statements.
   17
22                The Procter & Gamble Company and Subsidiaries

                           CONSOLIDATED BALANCE SHEETS


Amounts in millions                                  June 30
                                              ---------------------
                                                2001        2000
- -------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents                     $  2,306    $  1,415
Investment securities                              212         185
Accounts receivable                              2,931       2,910
INVENTORIES
     Materials and supplies                      1,096       1,254
     Work in process                               373         394
     Finished goods                              1,915       1,842
- -------------------------------------------------------------------
TOTAL INVENTORIES                                3,384       3,490
Deferred income taxes                              397         309
Prepaid expenses and other current assets        1,659       1,837
- -------------------------------------------------------------------
TOTAL CURRENT ASSETS                            10,889      10,146

PROPERTY, PLANT AND EQUIPMENT
     Buildings                                   4,148       4,259
     Machinery and equipment                    18,165      18,366
     Land                                          508         596
- -------------------------------------------------------------------
                                                22,821      23,221
     Accumulated depreciation                   (9,726)     (9,529)
- -------------------------------------------------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT             13,095      13,692

GOODWILL AND OTHER INTANGIBLE ASSETS
     Goodwill                                    8,805       9,080
     Trademarks and other intangible assets      1,331       1,305
- -------------------------------------------------------------------
                                                10,136      10,385
     Accumulated amortization                   (1,836)     (1,599)
- -------------------------------------------------------------------
TOTAL GOODWILL AND OTHER INTANGIBLE ASSETS       8,300       8,786

OTHER NON-CURRENT ASSETS                         2,103       1,742
- -------------------------------------------------------------------
TOTAL ASSETS                                  $ 34,387    $ 34,366
- -------------------------------------------------------------------

See accompanying Notes to Consolidated Financial Statements.


   18
                  The Procter & Gamble Company and Subsidiaries               23

                           CONSOLIDATED BALANCE SHEETS


Amounts in millions                                             June 30
                                                          --------------------
                                                            2001        2000
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable                                          $  2,075    $  2,209
Accrued and other liabilities                                4,631       3,766
Taxes payable                                                  907         925
Debt due within one year                                     2,233       3,241
- ------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                    9,846      10,141
- ------------------------------------------------------------------------------

LONG-TERM DEBT                                               9,792       9,012
DEFERRED INCOME TAXES                                          894         625
OTHER NON-CURRENT LIABILITIES                                1,845       2,301
- ------------------------------------------------------------------------------
TOTAL LIABILITIES                                           22,377      22,079
- ------------------------------------------------------------------------------


SHAREHOLDERS' EQUITY
Convertible Class A preferred stock,
    stated value $1 per share
    (600 shares authorized)                                  1,701       1,737
Non-Voting Class B preferred stock,
    stated value $1 per share
    (200 shares authorized)                                   --          --
Common stock, stated value $1 per share (5,000 shares
    authorized; shares outstanding:
    2001 - 1,295.7 and 2000 - 1,305.9)                       1,296       1,306
Additional paid-in capital                                   2,057       1,794
Reserve for Employee Stock Ownership Plan debt
    retirement                                              (1,375)     (1,418)
Accumulated other comprehensive income                      (2,120)     (1,842)
Retained earnings                                           10,451      10,710
- ------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                  12,010      12,287
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                $ 34,387    $ 34,366
- ------------------------------------------------------------------------------

See accompanying Notes to Consolidated Financial Statements.

   19
24                The Procter & Gamble Company and Subsidiaries

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY





                                         Common                       Additional    Reserve for
Dollars in millions/                     Shares    Stock  Preferred      Paid-In      ESOP Debt
Shares in thousands                 Outstanding   Common      Stock      Capital     Retirement
- --------------------------------------------------------------------------------------------------
                                                                        
BALANCE JUNE 30, 1998                 1,337,461  $1,337     $1,821       $  907        $(1,616)
- --------------------------------------------------------------------------------------------------
Net earnings
Other comprehensive income:
   Financial statement translation
   Net investment hedges,
      net of $4 tax
  Other, net of tax
  Total comprehensive income
Dividends to shareholders:
  Common
  Preferred, net of tax benefit
Treasury purchases                      (29,924)    (30)
Employee plan issuances                   9,605      10                     393
Preferred stock conversions               2,612       3        (40)          37
ESOP debt guarantee reduction                                                               64
- --------------------------------------------------------------------------------------------------
Balance June 30, 1999                 1,319,754   1,320      1,781        1,337         (1,552)
- --------------------------------------------------------------------------------------------------
Net earnings
Other comprehensive income:
   Financial statement translation
   Net investment hedges,
      net of $88 tax
  Other, net of tax
  Total comprehensive income
Dividends to shareholders:
  Common
  Preferred, net of tax benefit
Treasury purchases                      (24,296)    (24)                     72(1)
Employee plan issuances                   7,592       7                     344
Preferred stock conversions               2,817       3        (44)          41
ESOP debt guarantee reduction                                                              134
- --------------------------------------------------------------------------------------------------
Balance June 30, 2000                 1,305,867   1,306      1,737        1,794         (1,418)
- --------------------------------------------------------------------------------------------------
Net earnings
Other comprehensive income:
  Financial statement translation
  Net investment hedges,
      net of $276 tax
  Other, net of tax
  Total comprehensive income
Dividends to shareholders:
  Common
  Preferred, net of tax benefit
Treasury purchases                      (18,238)    (18)                      6(1)
Employee plan issuances                   5,924       6                     223
Preferred stock conversions               2,185       2       (36)           34
ESOP debt guarantee reduction
- --------------------------------------------------------------------------------------------------
Balance June 30, 2001                 1,295,738  $1,296    $1,701        $2,057        $(1,375)
- --------------------------------------------------------------------------------------------------



                                      Accumulated
                                            Other                                  Total
Dollars in millions/                Comprehensive    Retained              Comprehensive
Shares in thousands                        Income    Earnings      Total          Income
- ------------------------------------------------------------------------   -------------
                                                                
BALANCE JUNE 30, 1998                    $(1,357)    $11,144    $12,236
- -----------------------------------------------------------------------
Net earnings                                           3,763      3,763         $3,763
Other comprehensive income:
   Financial statement translation          (237)                 (237)           (237)
   Net investment hedges,
      net of $4 tax                            5                     5               5
  Other, net of tax                          (17)                  (17)            (17)
                                                                              --------
  Total comprehensive income                                                    $3,514
                                                                              --------
Dividends to shareholders:
  Common                                              (1,517)   (1,517)
  Preferred, net of tax benefit                         (109)     (109)
Treasury purchases                                    (2,503)   (2,533)
Employee plan issuances                                            403
Preferred stock conversions                                          -
ESOP debt guarantee reduction                                       64
- -----------------------------------------------------------------------
Balance June 30, 1999                     (1,606)     10,778    12,058
- -----------------------------------------------------------------------
Net earnings                                           3,542     3,542          $3,542
Other comprehensive income:
   Financial statement translation          (449)                 (449)           (449)
   Net investment hedges,
      net of $88 tax                         150                   150             150
  Other, net of tax                           63                    63              63
                                                                              --------
  Total comprehensive income                                                    $3,306
                                                                              --------
Dividends to shareholders:
  Common                                              (1,681)   (1,681)
  Preferred, net of tax benefit                         (115)     (115)
Treasury purchases                                    (1,814)   (1,766)
Employee plan issuances                                            351
Preferred stock conversions                                          -
ESOP debt guarantee reduction                                      134
- -----------------------------------------------------------------------
Balance June 30, 2000                     (1,842)     10,710    12,287
- -----------------------------------------------------------------------
Net earnings                                           2,922     2,922          $2,922
Other comprehensive income:
   Financial statement translation          (715)                 (715)           (715)
   Net investment hedges,
      net of $276 tax                       460                    460             460
  Other, net of tax                         (23)                   (23)            (23)
                                                                              --------
  Total comprehensive income                                                    $2,644
                                                                              --------
Dividends to shareholders:
  Common                                              (1,822)   (1,822)
  Preferred, net of tax benefit                         (121)     (121)
Treasury purchases                                    (1,238)   (1,250)
Employee plan issuances                                            229
Preferred stock conversions                                                          -
ESOP debt guarantee reduction                 43                    43
- -----------------------------------------------------------------------
Balance June 30, 2001                    $(2,120)    $10,451    12,010
- -----------------------------------------------------------------------


(1)Premium on equity put options.

See accompanying Notes to Consolidated Financial Statements.

   20
                  The Procter & Gamble Company and Subsidiaries               25

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

Amounts in millions                                    Years ended June 30
                                                  -----------------------------
                                                     2001       2000       1999
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR      $ 1,415    $ 2,294    $ 1,549
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings                                        2,922      3,542      3,763
Depreciation and amortization                       2,271      2,191      2,148
Deferred income taxes                                (102)       463        (60)
Change in accounts receivable                        (122)        64       (207)
Change in inventories                                 (67)      (176)       (96)
Change in accounts payable, accrued and other
  liabilities                                         801       (883)       792
Change in other operating assets and liabilities       57       (404)      (926)
Other                                                  44       (122)       130
- -------------------------------------------------------------------------------
TOTAL OPERATING ACTIVITIES                          5,804      4,675      5,544
- -------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures                               (2,486)    (3,018)    (2,828)
Proceeds from asset sales                             788        419        434
Acquisitions                                         (138)    (2,967)      (137)
Change in investment securities                        (7)       221        356
- -------------------------------------------------------------------------------
TOTAL INVESTING ACTIVITIES                         (1,843)    (5,345)    (2,175)
- -------------------------------------------------------------------------------
FINANCING ACTIVITIES
Dividends to shareholders                          (1,943)    (1,796)    (1,626)
Change in short-term debt                          (1,092)       243        689
Additions to long-term debt                         1,356      4,196        986
Reductions of long-term debt                         (226)    (1,409)      (334)
Proceeds from stock options                           141        336        212
Treasury purchases                                 (1,250)    (1,766)    (2,533)
- -------------------------------------------------------------------------------
TOTAL FINANCING ACTIVITIES                         (3,014)      (196)    (2,606)
- -------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
  EQUIVALENTS                                         (56)       (13)       (18)
- -------------------------------------------------------------------------------
CHANGE IN CASH AND CASH EQUIVALENTS                   891       (879)       745
- -------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR            $ 2,306    $ 1,415    $ 2,294
- -------------------------------------------------------------------------------

SUPPLEMENTAL DISCLOSURE
Cash payments for:

     Interest, net of amount capitalized          $   735    $   700    $   640
     Income taxes                                   1,701      1,712      1,743
Liabilities assumed in acquisitions                   108        236         38
- -------------------------------------------------------------------------------


See accompanying Notes to Consolidated Financial Statements.
   21
26                The Procter & Gamble Company and Subsidiaries

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION: The consolidated financial statements include The Procter
& Gamble Company and its controlled subsidiaries (the Company). Investments in
companies over which the Company exerts significant influence, but does not
control the financial and operating decisions, are accounted for using the
equity method. These investments are managed as integral parts of the Company's
business units, and segment reporting reflects such investments as consolidated
subsidiaries.

USE OF ESTIMATES: Preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying disclosures.
These estimates are based on management's best knowledge of current events and
actions the Company may undertake in the future. Actual results may ultimately
differ from estimates.

NEW PRONOUNCEMENTS:  The Financial  Accounting Standards Board (FASB)
issued SFAS No.  133,  "Accounting  for  Derivative  Instruments  and
Hedging  Activities"  which was adopted by the Company effective July
1, 2000. See further discussion in Note 6.

The Securities and Exchange Commission issued Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements," which became effective in the
fourth quarter.

During 2000 and 2001, the Emerging Issues Task Force issued: EITF No. 00-10,
"Accounting for Shipping and Handling Fees and Costs" addressing the statement
of earnings classification of shipping and handling costs billed to customers;
EITF No. 00-14, "Accounting for Certain Sales Incentives" addressing the
recognition, measurement and statement of earnings classification of certain
sales incentives; and EITF No. 00-25, "Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendor's Products" addressing the
statement of earnings classification of consideration from a vendor to an entity
that purchases the vendor's products for resale.

There is no material impact on the Company's financial statements resulting from
application of the above new pronouncements.

In June 2001, the FASB approved two new pronouncements: SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 applies to all business combinations with a closing date after June 30,
2001. This Statement eliminates the pooling-of-interests method of accounting
and further clarifies the criteria for recognition of intangible assets
separately from goodwill.

SFAS No. 142 eliminates the amortization of goodwill and indefinite-lived
intangible assets and initiates an annual review for impairment. Identifiable
intangible assets with a determinable useful life will continue to be amortized.
The amortization provisions apply to goodwill and other intangible assets
acquired after June 30, 2001. Goodwill and other intangible assets acquired
prior to June 30, 2001 will be affected upon adoption. The Company will adopt
SFAS No. 142 effective July 1, 2001, which will require the Company to cease
amortization of its remaining net goodwill balance and to perform an impairment
test of its existing goodwill based on a fair value concept. Although the
Company is still reviewing the provisions of these Statements, it is
management's preliminary assessment that goodwill impairment will not result
upon adoption. As of June 30, 2001, the Company has net unamortized goodwill of
$7,429 and amortization expense of $224, $214 and $180 for the years ended June
30, 2001, 2000 and 1999, respectively.

REVENUE RECOGNITION: Sales are recognized when revenue is realized or realizable
and has been earned. In general, revenue is recognized when risk and title to
the product transfers to the customer, which usually occurs at the time shipment
is made.

CURRENCY TRANSLATION: Financial statements of subsidiaries outside the U.S.
generally are measured using the local currency as the functional currency.
Adjustments to translate those statements into U.S. dollars are recorded in
other comprehensive income. For subsidiaries operating in highly inflationary
economies, the U.S. dollar is the functional currency. Remeasurement adjustments
for highly inflationary economies and other transactional exchange gains and
losses are reflected in earnings.

CASH EQUIVALENTS: Highly liquid investments with maturities of three months or
less when purchased are considered cash equivalents.

INVENTORY VALUATION: Inventories are valued at cost, which is not in excess of
current market price. Cost is primarily determined by either the average cost or
the first-in, first-out method. The replacement cost of last-in, first-out
inventories exceeded carrying value by approximately $55 and $83 at June 30,
2001 and 2000, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS: Under current accounting guidance, the
cost of intangible assets is amortized, principally on a straight-line basis,
over the estimated periods benefited, generally forty years for goodwill and
periods ranging from three to forty years for other intangible assets. The
realizability of goodwill and other intangibles is evaluated periodically when
events or circumstances indicate a possible inability to recover the carrying
amount. Such evaluation is based on various analyses, including cash flow and


Millions of dollars except per share amounts

   22
                  The Procter & Gamble Company and Subsidiaries               27

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

profitability projections that incorporate the impact of the Company's existing
businesses. The analyses necessarily involve significant management judgment to
evaluate the capacity of an acquired business to perform within projections.

PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost reduced by accumulated depreciation. Depreciation expense is based on
estimated useful lives using the straight-line method. Estimated useful lives
are periodically reviewed, and where warranted, changes are made that result in
an acceleration of depreciation.

FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of cash equivalents, short-
and long-term investments and short-term debt approximate cost. The estimated
fair values of other financial instruments, including debt, equity and risk
management instruments, have been determined using available market information
and valuation methodologies, primarily discounted cash flow analysis. These
estimates require considerable judgment in interpreting market data, and changes
in assumptions or estimation methods may significantly affect the fair value
estimates.

RECLASSIFICATIONS: Certain reclassifications of prior years' amounts have been
made to conform to the current year presentation.


NOTE 2 RESTRUCTURING PROGRAM

Beginning in 1999 - concurrent with the Company's reorganization into
product-based global business units - the Company initiated its Organization
2005 restructuring program. The program was expanded in the current year to
deliver further cost reductions through reduced overheads, additional
manufacturing consolidations, and discontinuation of under-performing businesses
and initiatives.

Costs to be incurred include separation related costs, asset write- downs or
accelerated depreciation, and other costs directly related to the restructuring
effort.

Due to the nature of the charges and the duration of the program, estimates of
the timing and amount of costs and savings require significant judgment and may
change over time. Based on current estimates, the overall program is expected to
result in total charges of $5.6 billion ($4.4 billion after tax) over the
six-year period that began in fiscal 1999.


Before-tax restructuring charges to date are:



                                                Asset Write-        Accelerated
                             Separations           Downs            Depreciation           Other                Total
- -----------------------------------------------------------------------------------------------------------------------
                                                                                               
1999:
Charges                       $    45             $   217             $   208             $    11             $   481
Cash spent                        (10)               --                  --                    (2)                (12)
Charged against
     assets                      --                  (217)               (208)               --                  (425)
- -----------------------------------------------------------------------------------------------------------------------
Reserve balance
     June 30, 1999                 35                --                  --                     9                  44
- -----------------------------------------------------------------------------------------------------------------------
2000:
Charges                           153                  64                 386                 211                 814
Cash spent                       (100)               --                  --                  (220)               (320)
Charged against
     assets                      --                   (64)               (386)               --                  (450)
- -----------------------------------------------------------------------------------------------------------------------
Reserve balance
     June 30, 2000                 88                --                  --                  --                    88
- -----------------------------------------------------------------------------------------------------------------------
2001:
CHARGES                           341                 731                 276                 502               1,850
CASH SPENT                       (186)               --                  --                  (199)               (385)
CHARGED AGAINST
     ASSETS                      --                  (731)               (276)                (86)             (1,093)
- -----------------------------------------------------------------------------------------------------------------------
RESERVE BALANCE
     JUNE 30, 2001                243                --                  --                   217                 460
- -----------------------------------------------------------------------------------------------------------------------


Charges for the program are reflected in the corporate segment for management
and external reporting.

SEPARATION COSTS
Employee separation charges are related to severance packages for approximately
6,000 people in 2001, 2,800 people in 2000 and 400 people in 1999. The packages
are predominantly voluntary and are formula driven based on salary levels and
past service. Severance costs related to voluntary separations are charged to
earnings when the employee accepts the offer. The current and planned
separations span the entire organization, including manufacturing, selling,
research and administrative positions.

ASSET WRITE-DOWNS AND ACCELERATED DEPRECIATION

Asset write-downs relate to
establishment of new fair value bases for assets held for sale or disposal that
represent excess capacity in the process of being removed from service or
disposed and businesses held for sale in the next 12 months. These assets were
written down to the amounts expected to be realized upon sale or disposal, less
minor disposal costs.

Additionally, asset write-downs included certain manufacturing assets that are
expected to operate at levels significantly below their planned capacity,
primarily capital expansions related to recent initiatives that have not met
expectations. The projected cash flows


[Millions of dollars except per share amounts]
   23
28                The Procter & Gamble Company and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


from such assets over their remaining useful lives were no longer estimated to
be greater than their current carrying values; therefore, they were written down
to estimated fair value, generally determined by reference to discounted
expected future cash flows. Such charges represented approximately $160 before
tax in 2001, $0 in 2000 and $160 in 1999.

Charges for accelerated depreciation are related to long-lived assets that will
be taken out of service prior to the end of their normal service period due to
manufacturing consolidations, technology standardization, plant closures or
strategic choices to discontinue initiatives. The Company has shortened the
estimated useful lives of such assets, resulting in incremental depreciation
expense.

OTHER RESTRUCTURING CHARGES
Other costs incurred as a direct result of the program included relocation,
training, establishment of global business services and the new legal and
organization structure of Organization 2005, and discontinuation of initiatives.


NOTE 3 ACQUISITIONS

In 2001, acquisitions were accounted for using the purchase method and totaled
$246. These acquisitions resulted in goodwill and other intangibles of $208. In
2000, the Company acquired The Iams Company and Affiliates for approximately
$2,222 in cash. Other acquisitions in 2000 totaled $745 and consisted primarily
of Recovery Engineering, Inc. and a joint venture ownership increase in China.
The 2000 acquisitions were accounted for using the purchase method and resulted
in goodwill and other intangibles of $2,508. Purchase acquisitions in 1999
totaled $137.

In May 2001, the Company announced its intent to purchase the Clairol business
from Bristol-Myers Squibb Company for $4,950. The acquisition is subject to
regulatory approvals.


NOTE 4 SUPPLEMENTAL FINANCIAL INFORMATION

                                               June 30
                                           ---------------
                                             2001     2000
- ----------------------------------------------------------
ACCRUED AND OTHER LIABILITIES
Marketing expenses                         $1,271   $1,142
Compensation expenses                         576      462
Organization 2005 restructuring reserves      460       88
Other                                       2,324    2,074
- ----------------------------------------------------------
                                            4,631    3,766
- ----------------------------------------------------------

OTHER NON-CURRENT LIABILITIES
Other postretirement benefits              $  534   $  824
Pension benefits                              925      975
Other                                         386      502
- ----------------------------------------------------------
                                            1,845    2,301
- ----------------------------------------------------------



SELECTED OPERATING EXPENSES
Research and development costs are charged to earnings as incurred and were
$1,769 in 2001, $1,899 in 2000 and $1,726 in 1999. Advertising costs are charged
to earnings as incurred and were $3,193 in 2001, $3,793 in 2000 and $3,639 in
1999.

NET EARNINGS PER COMMON SHARE
Net earnings less preferred dividends (net of related tax benefits) are divided
by the weighted average number of common shares outstanding during the year to
calculate basic net earnings per common share. Diluted net earnings per common
share are calculated to give effect to stock options and convertible preferred
stock.

Basic and diluted net earnings per share are reconciled as follows:

                                             Years ended June 30
                                      --------------------------------
                                          2001        2000        1999
- ----------------------------------------------------------------------
Net earnings available to
     common shareholders              $  2,801    $  3,427    $  3,654
Effect of dilutive securities
     Preferred dividends, net
         of tax benefit                    121         115         109
     Preferred dividend impact on
     funding of ESOP                       (15)        (18)        (22)
- ----------------------------------------------------------------------
Diluted net earnings                     2,907       3,524       3,741
- ----------------------------------------------------------------------

                                             Years ended June 30
                                      --------------------------------
Shares in millions                        2001        2000        1999
- ----------------------------------------------------------------------
Basic weighted average common
      shares outstanding               1,300.3     1,313.2     1,328.1
Effect of dilutive securities
     Conversion of preferred shares       91.9        94.3        97.2
     Exercise of stock options (1)        13.4        19.7        21.5
- ----------------------------------------------------------------------
Diluted weighted average common
      shares outstanding               1,405.6     1,427.2     1,446.8
- ----------------------------------------------------------------------

(1)  Approximately one-third of the Company's outstanding stock options were not
     included in the diluted net earnings per share calculation for 2001 because
     to do so would have been antidilutive.

EQUITY PUT OPTIONS
During 2001 and 2000, the Company entered into equity put options on its common
stock. These agreements can be settled on a physical or net-share basis at the
Company's option. The premium received from the sale of the instruments is
credited to equity and reduces the Company's cash outlay for share repurchases.

The 2001 options are equivalent to one million common shares, at approximately
$74 per share. They expire in the first quarter of 2002. The options entered
into in 2000 were equivalent to 12 million common shares, at prices ranging from
$60 to $71 per share. They expired mostly unexercised in the second quarter of
2001.


[Millions of dollars except per share amounts]
   24
                The Procter & Gamble Company and Subsidiaries                 29

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 5 SHORT-TERM AND LONG-TERM DEBT
                                                  June 30
                                            ------------------
                                               2001       2000
- --------------------------------------------------------------
SHORT-TERM DEBT
USD commercial paper                        $   675    $ 2,188
Non USD commercial paper                        559       --
Current portion of long-term debt               414        283
Other                                           585        770
- --------------------------------------------------------------
                                              2,233      3,241
- --------------------------------------------------------------

The weighted average short-term interest rates were 5.3% and 4.8% as of June 30,
2001 and 2000, respectively.

                                                  June 30
                                            ------------------
                                               2001       2000
- --------------------------------------------------------------
LONG-TERM DEBT
     5.25% USD note due 2003                $   750    $   750
     6.00% USD note due 2003                    500        500
     6.60% USD note due 2004                  1,000      1,000
     8.33% ESOP debentures due 2003, 2004       306        392
     1.50% JPY note due 2005                    441        518
     5.75% EUR note due 2005                  1,270       --
     6.13% USD note due 2008                    500        500
     6.88% USD note due 2009                  1,000      1,000
     2.00% JPY note due 2010                    401        471
     9.36% ESOP debentures due 2007-2021      1,000      1,000
     6.45% USD note due 2026                    300        300
     6.25% GBP note due 2030                    705        757
     All other long-term debt                 2,033      2,107
     Current portion of long-term debt         (414)      (283)
- --------------------------------------------------------------
                                              9,792      9,012
- --------------------------------------------------------------

Long-term weighted average interest rates were 5.0% and 6.1% as of June 30, 2001
and 2000, respectively, and include the effects of related interest rate swaps
discussed in Note 6.

The fair value of the long-term debt was $10,164 and $9,024 at June 30, 2001 and
2000, respectively. Long-term debt maturities during the next five years are as
follows: 2002--$622; 2003-- $1,117; 2004--$1,040; 2005--$1,912 and 2006 -- $32.

NOTE 6 RISK MANAGEMENT ACTIVITIES

Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended, which requires that
all derivative instruments be reported on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
The cumulative effect of adopting SFAS No. 133 as of July 1, 2000 was not
material.

The Company is exposed to market risks, such as changes in interest rates,
currency exchange rates and commodity pricing. To manage the volatility relating
to these exposures, the Company nets the exposures on a consolidated basis to
take advantage of natural offsets. For the residual portion, the Company enters
into various derivative transactions pursuant to the Company's policies in areas
such as counterparty exposure and hedging practices. Designation is performed on
a specific exposure basis to support hedge accounting. The changes in fair value
of these hedging instruments are offset in part or in whole by corresponding
changes in the fair value or cash flows of the underlying exposures being
hedged. The Company does not hold or issue derivative financial instruments for
trading purposes.

INTEREST RATE HEDGING
The Company's policy is to manage interest cost using a mix of fixed- and
variable-rate debt. To manage this mix in a cost efficient manner, the Company
enters into interest rate swaps in which the Company agrees to exchange, at
specified intervals, the difference between fixed and variable interest amounts
calculated by reference to an agreed-upon notional principal amount.

At June 30, 2001, the Company had swaps with a fair value of $125 designated as
fair value hedges of underlying fixed-rate debt obligations and recorded as
long-term assets. The mark-to-market values of both the fair value hedging
instruments and the underlying debt obligations are recorded as equal and
offsetting gains and losses in the interest expense component of the income
statement. All existing fair value hedges are 100% effective. As a result, there
is no impact to earnings due to hedge ineffectiveness.

Non-qualifying instruments are also recorded on the balance sheet at fair value,
but the impact was not material to the income statement.

CURRENCY RATE HEDGING
The Company manufactures and sells its products in a number of countries
throughout the world and, as a result, is exposed to movements in foreign
currency exchange rates. The Company's major foreign currency exposures involve
the markets in Western and Eastern Europe, Asia, Mexico and Canada. The primary
purpose of the Company's foreign currency hedging activities is to manage the
volatility associated with foreign currency purchases of materials and other
assets and liabilities created in the normal course of business. The Company
primarily utilizes forward exchange contracts and purchased options with
maturities of less than 18 months and currency swaps with maturities up to five
years.

The Company enters into certain foreign currency derivative instruments that do
not meet hedge accounting criteria. These primarily are intended to protect
against exposure related to intercompany financing transactions and income from
international operations. The fair values of these instruments at June 30, 2001
were recorded as $136 in assets and $16 in liabilities. The net impact on
marketing, research and administrative expense was a $24 after-tax gain.

In addition, the Company utilizes purchased foreign currency options, forward
exchange contracts and cross currency swaps which qualify as cash flow hedges.
These are intended to offset the effect of exchange rate fluctuations on
forecasted sales, inventory purchases, intercompany royalties and intercompany
loans

[Millions of dollars except per share amounts]

   25
30                The Procter & Gamble Company and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


denominated in foreign currency. The fair values of these instruments at June
30, 2001 were recorded as $94 in assets and $101 in liabilities. Gains and
losses on these instruments are deferred in other comprehensive income (OCI)
until the underlying transaction is recognized in earnings. The earnings impact
is reported in either net sales, cost of products sold, or marketing research
and administrative expenses, to match the underlying transaction being hedged.
Qualifying cash flow hedges currently deferred in OCI are not material. These
amounts will be reclassified into earnings as the underlying transactions are
recognized. During the year the Company charged to earnings a $15 after-tax loss
due to the change in the time value of options excluded from the hedge
effectiveness test. This was prior to the change in SFAS No. 133 interpretation
that allows change in time value to be included in effectiveness testing. No
currency cash flow hedges were discontinued during the year due to changes in
expectations on the original forecasted transactions.

NET INVESTMENT HEDGING
The Company hedges its net investment position in major currencies and generates
foreign currency interest payments that offset other transactional exposures in
these currencies. To accomplish this, the Company borrows directly in foreign
currency and designates a portion of foreign currency debt as a hedge of net
investments. In addition, certain foreign currency interest rate swaps are
designated as hedges of the Company's related foreign net investments. Currency
effects of these hedges reflected in OCI produced a $460 after-tax gain during
the year, leaving an accumulated net balance of $577.

COMMODITY PRICE MANAGEMENT
Raw materials used by the Company are subject to price volatility caused by
weather, supply conditions, political and economic variables and other
unpredictable factors. To manage the volatility related to anticipated inventory
purchases, the Company uses futures and options with maturities generally less
than one year and swap contracts with maturities up to five years. These market
instruments are designated as cash flow hedges. The mark-to- market gain or loss
on qualifying hedges is included in other comprehensive income to the extent
effective, and reclassified into cost of products sold in the period during
which the hedged transaction affects earnings. Qualifying cash flow hedges
currently deferred in OCI are not material. These amounts will be reclassified
into earnings as the underlying transactions are recognized. The mark-to-market
gains or losses on non-qualifying, excluded and ineffective portions of hedges
are recognized in cost of products sold immediately. No cash flow hedges were
discontinued during the year ended June 30, 2001. Commodity hedging activity is
not material to the Company's financial statements.

CREDIT RISK

Credit risk arising from the inability of a counterparty to meet the terms of
the Company's financial instrument contracts is generally limited to the
amounts, if any, by which the counterparty's obligations exceed the obligations
of the Company. It is the Company's policy to enter into financial instruments
with a diversity of creditworthy counterparties. Therefore, the Company does not
expect to incur material credit losses on its risk management or other financial
instruments.


NOTE 7 STOCK OPTIONS

The Company has stock-based compensation plans under which stock options are
granted annually to key managers and directors at the market price on the date
of grant. Grants after 1998 are fully exercisable after three years and have a
fifteen-year life, while prior years' grants are fully exercisable after one
year and have a ten- year life. The Company issues stock appreciation rights in
countries where stock options are not permitted by local governments.

Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company has elected to account for its employee stock option plans under APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Because stock
options have been issued with exercise prices equal to grant date fair value,
compensation cost has not been recognized. Had compensation cost for the plans
been determined based on the fair value at the grant date consistent with SFAS
No. 123, the Company's net earnings and earnings per share would have been as
follows:


                                         Years ended June 30
                                ------------------------------------
                                     2001         2000         1999
- --------------------------------------------------------------------
Net earnings
     As reported                $   2,922    $   3,542    $   3,763
     Pro forma                      2,612        3,363        3,683
- --------------------------------------------------------------------

Net earnings per common share
Basic
     As reported                $    2.15    $    2.61    $    2.75
     Pro forma                       1.92         2.47         2.69
Diluted
     As reported                     2.07         2.47         2.59
     Pro forma                       1.85         2.34         2.53
- --------------------------------------------------------------------

The fair value of each option grant is estimated on the date of grant using a
binomial option-pricing model with the following assumptions:

                                          Options Granted in
                                          Years ended June 30
                                ------------------------------------
                                     2001         2000         1999
- --------------------------------------------------------------------
Interest rate                         5.8%         6.0%         5.4%
Dividend yield                        2.0%         1.5%         1.5%
Expected volatility                    26%          28%          26%
Expected life in years                  9            9            7
- --------------------------------------------------------------------


[Millions of dollars except per share amounts]

   26
               The Procter & Gamble Company and Subsidiaries                  31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Stock option activity was as follows:
                                                Options in Thousands
                                         --------------------------------
                                             2001        2000        1999
- -------------------------------------------------------------------------
Outstanding, July 1                        82,744      76,810      79,918
Granted                                    28,400      14,360       7,026
Exercised                                  (5,709)     (7,401)     (9,397)
Canceled                                   (1,239)     (1,025)       (737)
- -------------------------------------------------------------------------
Outstanding, June 30                      104,196      82,744      76,810
Exercisable                                48,805      54,667      61,664
Available for grant                        27,994      41,387      39,874
Average price:
     Outstanding, beginning of year      $  61.73    $  52.11    $  45.58
     Granted                                62.20       96.10       89.72
     Exercised                              24.77       25.21       22.36
     Outstanding, end of year               63.64       61.73       52.11
     Exercisable, end of year               49.14       46.67       43.79
Weighted average fair value of options
     granted during the year                22.45       37.21       32.23
- -------------------------------------------------------------------------

The following table summarizes information about stock options outstanding at
June 30, 2001:
                                Options Outstanding
                 -----------------------------------------------------
                      Number                           Weighted Avg.
                 Outstanding        Weighted Avg.       Remaining
Range of prices  (Thousands)       Exercise Price    Contractual Life
- ----------------------------------------------------------------------
$25 to 30             14,507          $26.66             1.8 YEARS
 33 to 46             14,505           37.91             4.3
 55 to 76             38,675           62.11            12.0
 82 to 107            36,509           90.17            10.0
- ----------------------------------------------------------------------

The following table summarizes information about stock options exercisable at
June 30, 2001:

                         Options Exercisable
                  --------------------------------
                       Number
                  Exercisable       Weighted Avg.
Range of prices   (Thousands)      Exercise Price
- --------------------------------------------------
$25 to 30              14,507          $26.66
 33 to 46              14,505           37.91
 55 to 76               9,394           61.61
 82 to 107             10,399           84.89
- --------------------------------------------------


NOTE 8 EMPLOYEE STOCK OWNERSHIP PLAN

The Company maintains The Procter & Gamble Profit Sharing Trust and Employee
Stock Ownership Plan (ESOP) to provide funding for two primary postretirement
benefits: a defined contribution profit sharing plan and certain U.S.
postretirement health care benefits.

The ESOP borrowed $1,000 in 1989, which has been guaranteed by the Company. The
proceeds were used to purchase Series A ESOP Convertible Class A Preferred Stock
to fund a portion of the defined contribution plan. Principal and interest
requirements are $117 per year, paid by the trust from dividends on the
preferred shares and from cash contributions and advances from the Company. The
shares are convertible at the option of the holder into one share of the
Company's common stock. Annual credits to participants' accounts are based on
individual base salaries and years of service, and do not exceed 15% of total
participants' annual salaries and wages. The liquidation value is equal to the
issue price of $13.75 per share.

                                  Years ended June 30
                                  -------------------
                                  2001   2000   1999
- -----------------------------------------------------
ESOP preferred shares allocated
      at market value             $ 63   $313   $279
Company contributions              272      1     18
Benefits earned                    335    314    297

In 1991, the ESOP borrowed an additional $1,000, also guaranteed by the Company.
The proceeds were used to purchase Series B ESOP Convertible Class A Preferred
Stock to fund a portion of retiree health care benefits. Debt service
requirements are $94 per year, funded by preferred stock dividends and cash
contributions from the Company. Each share is convertible at the option of the
holder into one share of the Company's common stock. The liquidation value is
equal to the issue price of $26.12 per share.

                           Shares in Thousands
                       -------------------------
                         2001     2000     1999
- ------------------------------------------------
Outstanding, June 30
     Series A          54,220   55,925   58,342
     Series B          36,605   37,085   37,485
- ------------------------------------------------

Shares of the ESOP are allocated at original cost based on debt service
requirements, net of advances made by the Company to the trust. Dividends on all
preferred shares, net of related tax benefit, are charged to retained earnings.
The preferred shares held by the ESOP are considered outstanding from inception
for purposes of calculating diluted net earnings per common share.

The fair value of the Series A shares serves to reduce the Company's cash
contribution required to fund the profit sharing plan contributions earned. In
2001, allocated shares declined, primarily due to changes in debt service
requirements; this impacted the Company's cash contribution. The Series B shares
are considered plan assets of the other retiree benefits plan.


NOTE 9 POSTRETIREMENT BENEFITS

The Company offers various postretirement benefits to its employees.

DEFINED CONTRIBUTION RETIREMENT PLANS
Within the U.S., the most significant retirement benefit is the defined
contribution profit sharing plan described in Note 8.

OTHER RETIREE BENEFITS
The Company also provides certain health care and life insurance benefits for
substantially all U.S. employees who become eligible for these benefits when
they meet minimum age and service requirements. Generally, the health care plans
require contributions.

[Millions of dollars except per share amounts]

   27
32                The Procter & Gamble Company and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


from retirees and pay a stated percentage of expenses, reduced by deductibles
and other coverages. Retiree contributions change annually in line with health
care cost trends. These benefits are partially funded by an ESOP, as well as
certain other assets contributed by the Company.

Certain other employees, primarily outside the U.S., are covered by local
defined benefit pension, health care and life insurance plans.

The elements of the net amount recognized for the Company's postretirement plans
are summarized below:

                                                Years ended June 30
                                   -----------------------------------------
                                                                Other
                                     Pension Benefits      Retiree Benefits
                                   -------------------   -------------------
                                      2001       2000       2001       2000
- ----------------------------------------------------------------------------
CHANGE IN BENEFIT
OBLIGATION
Benefit obligation
     at beginning of year          $ 2,627    $ 2,488    $ 1,270    $ 1,199
Service cost                           115        120         40         39
Interest cost                          149        151        101         90
Participants' contributions              4          4         18         16
Amendments                             (10)         9          0         20
Actuarial loss (gain)                   86         35        250         (7)
Acquisitions/(Divestitures) (14)        47         (5)         0
Curtailments and
     settlements                       (22)       (20)         0          0
Currency exchange                     (232)       (79)        (4)        (3)
Benefit payments                      (136)      (128)       (93)       (84)
- ----------------------------------------------------------------------------
Benefit obligation
     at end of year                  2,567      2,627      1,577      1,270
- ----------------------------------------------------------------------------

CHANGE IN PLAN ASSETS
Fair value of plan assets
      at beginning of year           1,691      1,555      1,274      2,516
Actual return on plan assets           (88)       198        235     (1,178)
Acquisitions/(Divestitures)            (19)        28          0          0
Employer contributions                  81         73         14          4
Participants' contributions              4          4         18         16
Settlements                             (3)        (2)         0          0
Currency exchange                      (98)       (37)         1          0
Benefit payments                      (136)      (128)       (93)       (84)
- ----------------------------------------------------------------------------
Fair value of plan assets
      at end of year                 1,432      1,691      1,449      1,274
- ----------------------------------------------------------------------------

FUNDED STATUS
Funded status at
      end of year                   (1,135)      (936)      (128)         4
Unrecognized net
     actuarial loss (gain)             243        (30)      (418)      (828)
Unrecognized transition
     amount                             17         21          0          0
Unrecognized prior
      service cost                      20         39         (8)         1
- ----------------------------------------------------------------------------
Net amount recognized                 (855)      (906)      (554)      (823)
- ----------------------------------------------------------------------------


                                     Years ended June 30
                           ----------------------------------------
                                                        Other
                             Pension Benefits      Retiree Benefits
                              2001       2000       2001       2000
- -------------------------------------------------------------------
Prepaid benefit cost       $    75    $    59    $     2    $     2
Accrued benefit cost        (1,006)      (990)      (556)      (825)
Intangible asset                16          0          0          0
Accumulated other
    comprehensive income        60         25          0          0
- -------------------------------------------------------------------
Net liability recognized      (855)      (906)      (554)      (823)
- -------------------------------------------------------------------


The Company's stock comprised $1,335 and $1,123 of other retiree plan assets,
net of Series B ESOP debt, as of June 30, 2001 and 2000, respectively.
Assumptions for the postretirement benefit calculations are as follows:

                                     Years ended June 30
                             ------------------------------------
                                                      Other
                             Pension Benefits    Retiree Benefits
                              2001      2000      2001      2000
- -----------------------------------------------------------------
WEIGHTED AVERAGE
ASSUMPTIONS
     Discount rate             5.9%      6.1%      7.3%      8.0%
     Expected return
     on plan assets            8.3%      8.1%     10.0%     10.0%
     Rate of compensation
     increase                  4.1%      4.5%     --        --
     Initial health care
       cost trend rate*       --        --         8.8%      5.8%
- -----------------------------------------------------------------

*Five year trend rate assumption was adjusted in 2001 to reflect market trends.
Rate is assumed to decrease to 5.0% by 2007 and remain at that level thereafter.

COMPONENTS OF THE NET PERIODIC BENEFIT COST ARE AS FOLLOWS:

                                             Years ended June 30
                            --------------------------------------------------
                                                                 Other
                                 Pension Benefits          Retiree Benefits
                            ------------------------   -----------------------
                             2001     2000     1999     2001     2000     1999
- ------------------------------------------------------------------------------
COMPONENTS OF NET
PERIODIC BENEFIT COST
Service cost                $ 115    $ 120    $ 111    $  40    $  39    $  49
Interest cost                 149      151      140      101       90       97
Expected return on
    plan assets              (127)    (122)    (105)    (317)    (294)    (218)
Amortization of
    prior service cost          5        7        8       (1)      (2)      (2)
Amortization of prior
    transition amount           3        4        3        0        0        0
Settlement loss (gain)          6       (6)       0        0        0        0
Curtailment gain              (13)      (3)       0        0        0        0
Recognized net
    actuarial loss (gain)       3        4        4      (85)     (92)     (58)
- ------------------------------------------------------------------------------
Gross benefit cost            141      155      161     (262)    (259)    (132)
Dividends on ESOP
    preferred stock             0        0        0      (76)     (77)     (78)
- ------------------------------------------------------------------------------
Net periodic
    benefit cost              141      155      161     (338)    (336)    (210)
- ------------------------------------------------------------------------------

[Millions of dollars except per share amounts]


   28
                  The Procter & Gamble Company and Subsidiaries               33

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $1,414, $1,124 and $230, respectively, as of June 30,
2001, and $1,368, $1,073 and $189, respectively, as of June 30, 2000.

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one percentage point change in assumed
health care cost trend rates would have the following effects:

                                    One Percentage       One Percentage
                                    Point Increase       Point Decrease
- -----------------------------------------------------------------------
Effect on total of service and
    interest cost components                 $  24               $ (19)
Effect on postretirement
    benefit obligation                         213                (175)
- -----------------------------------------------------------------------


NOTE 10 INCOME TAXES


Earnings before income taxes consist of the following:

                                  Years ended June 30
                            ------------------------------
                               2001       2000       1999
- ----------------------------------------------------------
United States               $ 3,340    $ 3,006    $ 3,474
International                 1,276      2,530      2,364
- ----------------------------------------------------------
                              4,616      5,536      5,838
- ----------------------------------------------------------

The income tax provision consists of the following:

                                  Years ended June 30
                            ------------------------------
                               2001       2000       1999
- ----------------------------------------------------------
CURRENT TAX EXPENSE
    U.S. Federal            $   985    $   648    $ 1,080
    International               721        816        934
    U.S. State & Local           90         67        121
- ----------------------------------------------------------
                              1,796      1,531      2,135
DEFERRED TAX EXPENSE
    U.S. Federal                142        241        (74)
    International & other      (244)       222         14
- ----------------------------------------------------------
                               (102)       463        (60)
- ----------------------------------------------------------
                              1,694      1,994      2,075
- ----------------------------------------------------------

The Company's effective income tax rate was 36.7%, 36.0% and 35.5% in 2001, 2000
and 1999, respectively, compared to the U.S. statutory rate of 35.0%. Excluding
the restructuring costs and related tax effects, the effective tax rate was
32.0%, 33.4% and 34.4% in 2001, 2000 and 1999, respectively. This change
reflects the execution of tax planning opportunities and country mix effects.


Taxes impacted shareholders' equity with a $155 charge for the year ended June
30, 2001 and a $59 credit for the year ended June 30, 2000. Undistributed
earnings of foreign subsidiaries that are considered to be reinvested
indefinitely were $9,231 and $8,828 at June 30, 2001 and 2000, respectively.

Deferred income tax assets and liabilities are comprised of the following:

                                                      June 30
                                                -------------------
                                                   2001       2000
Current deferred tax assets                     $   397    $   309
- -------------------------------------------------------------------

Non-current deferred tax assets (liabilities)
     Fixed assets                               $(1,081)   $  (951)
     Other postretirement benefits                  197        273
     Loss and other carryforwards                   509        512
     Other                                         (415)      (252)
     Valuation allowances                          (104)      (207)
- -------------------------------------------------------------------
                                                   (894)      (625)
- -------------------------------------------------------------------

As of June 30, 2001, net operating loss carryforwards totaling $995 were
available to reduce future taxable income. If unused, $415 will expire between
2002 and 2011. The remainder, totaling $580, may be carried forward
indefinitely.


NOTE 11 COMMITMENTS AND CONTINGENCIES

The Company has purchase commitments for materials, supplies and property, plant
and equipment incidental to the ordinary conduct of business. In the aggregate,
such commitments are not in excess of current market prices.

The Company is subject to various lawsuits and claims with respect to matters
such as governmental regulations, income taxes and other actions arising out of
the normal course of business. The Company is also subject to contingencies
pursuant to environmental laws and regulations that in the future may require
the Company to take action to correct the effects on the environment of prior
manufacturing and waste disposal practices. Accrued environmental liabilities
for remediation and closure costs were $43 and $47 at June 30, 2001 and 2000,
respectively, and, in management's opinion, such accruals are appropriate based
on existing facts and circumstances. Current year expenditures were not
material.

While considerable uncertainty exists, in the opinion of management and Company
counsel, the ultimate liabilities resulting from such lawsuits and claims will
not materially affect the Company's financial statements.


[Millions of dollars except per share amounts]

   29
34                The Procter & Gamble Company and Subsidiaries

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 12 SEGMENT INFORMATION

The Company is organized by product-based global business units. The segments
manufacture and market products as follows:

- -   Fabric and home care includes products for laundry, dish, fabric enhancers
    and hard surface cleaners.

- -   Paper includes family care, feminine care and baby care. Products include
    tissues, towel, tampons, pads and liners, diapers and wipes.

- -   Beauty care products include cosmetics, hair care, deodorants, fragrances
    and other beauty products.

- -   Health care includes personal health care, oral care, pharmaceuticals and
    pet health and nutrition.

- -   Food and beverage includes coffee, snacks, commercial services, juice,
    peanut butter and shortening and oil.

The corporate segment includes both operating and non-operating elements such as
financing and investing activities, goodwill amortization, employee benefit
costs, charges related to restructuring, segment eliminations and other general
corporate items. The segment eliminations adjust management reporting principles
to accounting principles generally accepted in the United States of America and
primarily affect the treatment of unconsolidated investees and income taxes,
which are reflected in the business segments using applicable local statutory
tax rates. Corporate assets primarily include cash, investment securities and
goodwill.



                                            Fabric and             Beauty     Health     Food and
                                            Home Care    Paper      Care       Care      Beverage   Corporate    Total
- ------------------------------------------------------------------------------------------------------------------------
                                                                                        
NET SALES                            2001   $ 11,660   $ 11,991   $  7,257   $  4,353   $  4,139    $   (156)   $ 39,244
                                     2000     12,157     12,044      7,389      3,909      4,634        (182)     39,951
                                     1999     11,415     12,190      7,376      2,876      4,655        (387)     38,125
- ------------------------------------------------------------------------------------------------------------------------
NET EARNINGS                         2001      1,641      1,043        972        390        333      (1,457)      2,922
                                     2000      1,450      1,069        894        335        364        (570)      3,542
                                     1999      1,497      1,278        917        242        328        (499)      3,763
- ------------------------------------------------------------------------------------------------------------------------
BEFORE-TAX EARNINGS                  2001      2,427      1,735      1,404        584        547      (2,081)      4,616
                                     2000      2,318      1,817      1,393        540        566      (1,098)      5,536
                                     1999      2,417      2,195      1,457        372        528      (1,131)      5,838
- ------------------------------------------------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION        2001        328        673        183        159        146         782       2,271
                                     2000        354        664        194        159        153         667       2,191
                                     1999        293        638        198        107        149         763       2,148
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                         2001      5,533      8,629      3,371      2,290      2,479      12,085      34,387
                                     2000      5,477      8,415      3,497      2,229      2,611      12,137      34,366
- ------------------------------------------------------------------------------------------------------------------------
CAPITAL EXPENDITURES                 2001        516      1,307        261        231        235         (64)      2,486
                                     2000        807      1,512        310        195        235         (41)      3,018
- ------------------------------------------------------------------------------------------------------------------------


The Company had net sales in the United States of $20,334, $20,038 and $18,314
for the years ended June 30, 2001, 2000 and 1999, respectively. Assets in the
United States totaled $18,318 and $17,398 as of June 30, 2001 and 2000,
respectively.

The Company's largest customer, Wal-Mart Stores, Inc. and its affiliates,
accounted for 15%, 14% and 12% of consolidated net sales in 2001, 2000 and 1999,
respectively. These sales occurred primarily in the United States.

[Millions of dollars except per share amounts]

   30
                  The Procter & Gamble Company and Subsidiaries               35

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


NOTE 13 QUARTERLY RESULTS (UNAUDITED)



                                                                             Quarters Ended
                                                              -----------------------------------------------
                                                                                                                        Total
                                                              Sept. 30     Dec. 31       Mar. 31      June 30            Year
                                                                                                      
- ------------------------------------------------------------------------------------------------------------------------------
Net Sales                                      2000-2001       $9,969      $10,182       $9,511       $9,582           $39,244
                                               1999-2000        9,919       10,588        9,783         9,661           39,951
- ------------------------------------------------------------------------------------------------------------------------------
Operating Income                               2000-2001        1,779        1,711        1,302           (56)           4,736
                                               1999-2000        1,847        1,842        1,320           945            5,954
- ------------------------------------------------------------------------------------------------------------------------------
Net Earnings                                   2000-2001        1,155        1,194          893          (320)           2,922
                                               1999-2000        1,147        1,126          753           516            3,542
- ------------------------------------------------------------------------------------------------------------------------------
Core Net Earnings(1)                           2000-2001        1,240        1,314        1,006           837            4,397
                                               1999-2000        1,267        1,263          923           777            4,230
- ------------------------------------------------------------------------------------------------------------------------------
Diluted Net Earnings Per Common Share          2000-2001         0.82         0.84         0.63         (0.23)            2.07
                                               1999-2000         0.80         0.78         0.52          0.36             2.47
- ------------------------------------------------------------------------------------------------------------------------------
Diluted Core Net Earnings per Common Share(1)  2000-2001         0.88         0.93         0.71          0.60             3.12
                                               1999-2000         0.88         0.88         0.64          0.55             2.95
- ------------------------------------------------------------------------------------------------------------------------------


(1)Amounts exclude restructuring costs.





                                FINANCIAL SUMMARY



                                                   2001       2000       1999       1998       1997
- ---------------------------------------------------------------------------------------------------
                                                                             
Net Sales                                       $39,244    $39,951    $38,125    $37,154    $35,764
Operating Income                                  4,736      5,954      6,253      6,055      5,488
Net Earnings                                      2,922      3,542      3,763      3,780      3,415
Core Net Earnings(2)                              4,397      4,230      4,148      3,780      3,415
Net Earnings Margin                                 7.4%       8.9%       9.9%      10.2%       9.5%
Core Net Earnings Margin(2)                        11.2%      10.6%      10.9%      10.2%       9.5%

Basic Net Earnings per Common Share                2.15       2.61       2.75       2.74       2.43
Diluted Net Earnings per Common Share              2.07       2.47       2.59       2.56       2.28
Diluted Core Net Earnings per Common Share(2)      3.12       2.95       2.85       2.56       2.28
Dividends per Common Share                         1.40       1.28       1.14       1.01        .90

Research and Development Expense                  1,769      1,899      1,726      1,546      1,469
Advertising Expense                               3,193      3,793      3,639      3,801      3,574
Total Assets                                     34,387     34,366     32,192     31,042     27,598
Capital Expenditures                              2,486      3,018      2,828      2,559      2,129
Long-Term Debt                                    9,792      9,012      6,265      5,774      4,159
Shareholders' Equity                             12,010     12,287     12,058     12,236     12,046
- ---------------------------------------------------------------------------------------------------


(2) 2001, 2000 and 1999 amounts exclude restructuring costs.




[Millions of dollars except per share amounts]

   31
SHAREHOLDER INFORMATION

IF...
- - You need help with your account
- - You need automated access to your account
- - You are interested in our certificate safekeeping service
- - You want to arrange for direct deposit of dividends
- - A stock certificate is lost, stolen or destroyed

CONTACT P&G...24 HOURS A DAY
Visit our Web site at www.pg.com/investor
E-mail us at shareholders.im@pg.com
Call for financial information 1-800-764-7483
(1-513-945-9990 outside the U.S. and Canada)

PERSON TO PERSON
Shareholder Services representatives available
Monday-Friday, 9-4 EST
1-800-742-6253
(1-513-983-3034 outside the U.S. and Canada)
Automated service available after U.S. business hours

OR WRITE
The Procter & Gamble Company
Shareholder Services Department
P.O. Box 5572
Cincinnati, Ohio 45201-5572

GALLERIA
You can order imprinted P&G merchandise from the P&G Galleria. Shop for
umbrellas, business accessories and clothing online through www.pg.com in Try
and Buy or call 1-800-969-4693 (1-513-651-1888 outside the U.S.).


P&G ALUMNI NETWORK
There's a new independent P&G Alumni Network to advance personal and
professional interests of former P&G employees through networking opportunities
and shared resources. Look for a web site in early September - www.pgalums.com.
The site will have a worldwide alumni directory, job postings and communications
tools.

CORPORATE HEADQUARTERS
The Procter & Gamble Company
P.O. Box 599
Cincinnati, Ohio 45201-0599

TRANSFER AGENT/SHAREHOLDERS SERVICES
The Procter & Gamble Company
Shareholder Services Department
P.O. Box 5572
Cincinnati, Ohio 45201-5572

REGISTRAR
Chase Manhattan Trust Company, N.A.
255 East Fifth Street, Suite 2115
Cincinnati, Ohio 45202

EXCHANGE LISTING
New York, Cincinnati, Amsterdam, Paris, Basle, Geneva, Lausanne,
Zurich, Frankfurt, Brussels, Tokyo

SHAREHOLDERS OF COMMON STOCK
There were approximately 1,090,000 common stock shareowners, including
shareholders of record, participants in the Shareholder Investment Program,
participants in P&G stock ownership plans and beneficial owners with accounts at
banks and brokerage firms, as of July 27, 2001.

FORM 10-K
Shareholders may obtain a copy of the Company's 2001 report to the Securities
and Exchange Commission on Form 10-K by going to P&G's investor Web site at
www.pg.com/investor or by calling us at 1-800-764-7483. This information is also
available at no charge by sending a request to Shareholder Services at the
address listed above.

SHAREHOLDERS' MEETING
The next annual meeting of shareholders will be held on Tuesday,
October 9, 2001. A full transcript of the meeting will be available
from Linda D. Rohrer, Assistant Secretary. Ms. Rohrer can be
reached at One P&G Plaza, Cincinnati, Ohio 45202-3315.


COMMON STOCK PRICE RANGE AND DIVIDENDS



                                             Price Range
                      ----------------------------------------------------------
                              2000 - 2001                     1999-2000                        Dividends
                      ------------------------          ------------------------       ---------------------------
Quarter ended           HIGH             LOW             High              Low         2000 - 2001     1999 - 2000
                                                                                         
September 30          $ 67.81          $ 54.19          $104.13          $ 84.56          $   .35          $   .32
December 31             79.31            66.56           115.63            92.00              .35              .32
March 31                79.19            59.25           118.38            52.75              .35              .32
June 30                 68.30            55.96            72.75            53.25              .35              .32

EX-21

   1



                                  EXHIBIT (21)

                  THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                  ---------------------------------------------
                         Subsidiaries of the Registrant
                         ------------------------------

Alejandro Llauro E Hijos S.A.I.C. [Argentina]
Anjali (HK) Corporation [Hong Kong]
Anjali Corporation [Delaware]
AnPro Company [Ohio]
Arbora & Ausonia, S.L. [Spain]
Arbora S.A. [Spain]
B&C International Co. (BVI) Ltd.
Bess Hygiene AG [Switzerland]
Beta BT [Hungary]
Betrix Cosmetic GmbH [Germany]
Blendax GmbH [Germany]
Blendax Unterstutzungskasse GmbH [Germany]
Buscher GmbH [Germany]
Carlos BT [Hungary]
Celtic Insurance Company Limited [Bermuda]
Colfax Laboratories (India) Ltd. [India]
Compania Procter & Gamble Mexico, S. de R.L. de C.V.   [Mexico]
Compania Quimica S.A. [Argentina]
Comunivers sa [Morocco]
Corpydes S.A. de C.V. [Mexico]
Crest Toothpaste Inc. [Canada]
Culinary Sol, Inc. [Ohio]
Detergent Products A.G. [Switzerland]
Eczacibasi Yatirim Holding Ortakligi A.S. [Turkey]
Elysee BT [Hungary]
Eurocos Cosmetic GmbH [Germany]
Eurocos Cosmetic Warenvertrieb GmbH [Austria]
Eurocos Ltd [U.K.]
EURO-Juice G.m.b.H. Import und Vertrieb [Germany]
European Beauty Products (U.K.) Limited [U.K.]
Fameccanica Data S.p.A. [Italy]
Fater S.p.A. [Italy]
Ferraris BT [Hungary]
Food Ingredients Technology Company (FITCO) [Alabama]
Fountain Square Music Publishing Co., Inc. [Ohio]
FPG Oleochemicals Sdn. Bhd. [Malaysia]
Frank BT [Hungary]
Gala Cosmetics International Limited [U.K.]
Gala of London Limited [U.K.]
Giorgio Beverly Hills, Inc. [Delaware]
Girl Cosmetics Ltd. (U.K.)
Global Business Services de Costa Rica Limitada [Costa Rica]
Herve Leger Parfums GmbH [Germany]
Humatro Corporation [Delaware] [
Hyginett KFT [Hungary]
Iams (Deutschland) Vertriebs GmbH [Germany]
Iams Argentina S.R.L. [Argentina]
Iams Australia/New Zealand Pty. Ltd. [Australia]
Iams Canada Inc. [Canada]

[ ] Brackets indicate state or country of incorporation and do not form part
    of corporate name


   2



                                  EXHIBIT (21)

                  THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                  ---------------------------------------------
                         Subsidiaries of the Registrant
                         ------------------------------

Iams Chile Limitada [Chile]
Iams Companion Animal Research Institute (ICARI) [Ohio]
Iams do Brasil [Brazil] [
Iams Europe B.V. [Netherlands]
Iams France EURL [France]
Iams Global Inc. [Ohio]
Iams Japan K.K. [Japan]
Iams Mexico, S. de R.L. de C.V. [Mexico]
Iams Pet Food GmbH & Co. KG [Germany]
Iams Pet Food International B.V. [Netherlands]
Iams S. Africa Pty. [S. Africa]
Iams Servicios, S. de R.L. de C.V. [Mexico}
Iams U.K. Limited [U.K.]
Industria de Concentrados Crush Limitada  [Uruguay]
Industrial Catenation Services (Pty.) Ltd. [S. Africa]
Inmobiliaria Procter & Gamble de Venezuela, S.C.S. [Venezuela]
Inmobiliaria Procter & Gamble de Venezuela, S.R.L. [Venezuela]
Inversiones 1667, S.A. [Venezuela]
Inversiones Industrias Mammi, C.A. [Venezuela]
Inversiones PGV, S.R.L. [Venezuela]
Inversiones PGV-1, S.C.S. [Venezuela]
Inversiones Procter & Gamble de Venezuela, C.A. [Venezuela]
Juvian Fabric Care Corporation [Ohio]
Kangra Valley Enterprises Ltd. [Delaware]
Karm, S.A. [Liechtenstein]
Komal Manufacturing Chemists Ltd.  [India]
Laboratoire Lachartre S.N.C. [France]
Liberty Street Music Publishing Company, Inc. [Ohio]
Loreto y Pena Pobre, S.A. de C.V. [Mexico]
Malabar (HK) Corporation Limited [Hong Kong] [
Marcvenca Inversiones, C.A. [Venezuela]
Max Factor & Co. (U.K.) Ltd. [Bermuda]
Max Factor & Co. [Delaware]
Max Factor K.K. [Japan]
Max Factor Limited [U.K.]
Midway Holdings Ltd. [Cayman Islands]
Midway Holdings Ltd. [Cayman Islands]
Millstone Coffee, Inc. [Washington]
Modern Industries Company - Dammam [Saudi Arabia]
Modern Industries Company - Jeddah [Saudi Arabia]
Modern Products Company - Jeddah [Saudi Arabia]
Moroccan Modern Industries [Morocco]
N.S. Holding Company [Canada]
Neoblanc-Produtos de Higiene e Limpeza Lda. [Portugal]
Novomoskovskbytkhim [Russia]
Noxell (Barbados) Limited [Barbados]
Noxell (Panama) S.A. [Panama]
Noxell (Thailand) Limited [Thailand]
Noxell Corporation [Maryland]

[ ] Brackets indicate state or country of incorporation and do not form part of
    corporate name


   3



                                  EXHIBIT (21)

                  THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                  ---------------------------------------------
                         Subsidiaries of the Registrant
                         ------------------------------

Olay Company, Inc. [Delaware]
Olga BT [Hungary]
OOO Procter & Gamble Services Company [Russia]
P&G C&CA, Inc. [Ohio]
P&G Consultoria E Servicos Ltda. [Brazil]
P&G do Brasil Comercial Ltda. [Brazil]
P&G Holding B.V. [Netherlands]
P&G Indochina [Vietnam]
P&G Industrial Peru S.R.L. [Peru]
P&G K.K. [Japan]
P&G Northeast Asia Pte. Ltd. [Singapore]
P&G Prestige Beaute GmbH  [Germany]
P&G Prestige Beaute SARL [Switzerland]
P&G Prestige Food Products SARL [Switzerland]
P. T. Procter & Gamble Indonesia TbK [Indonesia]
P.T. Procter & Gamble Home Products Indonesia [Indonesia]
Papierhygiene GmbH [Germany]
PFX Pet Supply, Inc. [Ohio]
PFX Real Estate Company [Canada
PGV Chile S.A. [Chile]
PGV-1 Investment, Ltd. [Cayman Islands] [
PGV-2 Investment, Ltd. [Cayman  Islands]
PNX-Distributing, Inc. [Ohio]
PNX-Real Estate, Inc. [Ohio]
Procter & Gamble (Chengdu) Ltd. [PRC]
Procter & Gamble (China) Ltd. [PRC]
Procter & Gamble (Cosmetics and Fragrances) Limited [U.K.]
Procter & Gamble (East Africa) Limited [Kenya]
Procter & Gamble (Egypt) Industrial and Commercial Company [Egypt]
Procter & Gamble (Egypt) Manufacturing Company [Egypt] (Partnership)
Procter & Gamble (Enterprise Fund) Limited [U.K.]
Procter & Gamble (Guangzhou) Ltd. [PRC]
Procter & Gamble (Health & Beauty Care) Limited [U.K.]
Procter & Gamble (Ireland) Limited [Ireland]
Procter & Gamble (Malaysia) Sdn. Berhad [Malaysia]
Procter & Gamble (Manufacturing) Ireland Limited [Ireland]
Procter & Gamble (NBD) Pty. Ltd. [Australia]
Procter & Gamble (Singapore) Pte. Ltd. [Singapore]
Procter & Gamble (Vietnam) Ltd. [Vietnam]
Procter & Gamble (Yemen) Ltd [Yemen]
Procter & Gamble A/S [Norway]
Procter & Gamble AG [Switzerland]
Procter & Gamble Amiens S.N.C.  [France]
Procter & Gamble Asia Pacific Ltd. [Hong Kong]
Procter & Gamble Asia Pte. Ltd. [Singapore]
Procter & Gamble Australia Proprietary Limited [Australia]
Procter & Gamble Austria GmbH [Austria]
Procter & Gamble Bangladesh Private Ltd. (Bangladesh)
Procter & Gamble Beteiligungs GmbH [Germany]

[ ] Brackets indicate state or country of incorporation and do not form part of
    corporate name


   4



                                  EXHIBIT (21)

                  THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                  ---------------------------------------------
                         Subsidiaries of the Registrant
                         ------------------------------

Procter & Gamble Beverages GmbH [Germany]
Procter & Gamble Blois S.A.S. [France]
Procter & Gamble Bolivia S.R.L. [Bolivia]
Procter & Gamble Bulgaria EOOD [Bulgaria]
Procter & Gamble Business Services Canada Company [Canada]
Procter & Gamble Central & Eastern Europe GmbH [Germany]
Procter & Gamble Chile, Inc. [Ohio]
Procter & Gamble Colombia Ltda. [Colombia]
Procter & Gamble Commercial de Cuba, S.A. [Cuba]
Procter & Gamble D.J.L. Sarajevo [Bosnia]
Procter & Gamble d.o.o. za trgovinu [Croatia]
Procter & Gamble Danmark AS [Denmark]
Procter & Gamble de Panama, S.A. [Panama]
Procter & Gamble de Venezuela, C.A. [Venezuela]
Procter & Gamble Detergent (Beijing) Ltd. [PRC]
Procter & Gamble Detergent (Guangzhou) Ltd. [PRC]
Procter & Gamble Development Company A.G. [Switzerland]
Procter & Gamble Distributing Limited [U.K.]
Procter & Gamble Distribution Company (Europe) BVBA [Belgium]
Procter & Gamble do Brasil & Cia (Partnership) [Brazil]
Procter & Gamble do Brasil S/A [Brazil]
Procter & Gamble do Brazil, Inc. [Delaware]
Procter & Gamble do Nordeste S/A [Brazil]
Procter & Gamble Eastern Europe, Inc. [Ohio]
Procter & Gamble Ecuador Compania Anonima [Ecuador]
Procter & Gamble Egypt [Egypt]
Procter & Gamble Espana S.A. [Spain]
Procter & Gamble Eurocor N.V. [Belgium]
Procter & Gamble Europe N.V. [Belgium]
Procter & Gamble Europe SA [Switzerland]
Procter & Gamble European Supply Company BVBA [Belgium]
Procter & Gamble European Technical Center BVBA [Belgium]
Procter & Gamble Export Operations SARL [Switzerland]
Procter & Gamble Far East, Inc. [Ohio]
Procter & Gamble Financial Services [Ireland]
Procter & Gamble Finland OY [Finland]
Procter & Gamble France S.N.C. [France]
Procter & Gamble FSC (Barbados) Inc. [Barbados]
Procter & Gamble Ghana, Ltd. [Ghana]
Procter & Gamble GmbH [Germany]
Procter & Gamble Health and Beauty Care-Europe Limited [U.K.]
Procter & Gamble Health Products, Inc. [Delaware]
Procter & Gamble Hellas A.E. (Chemical Industries) [Greece]
Procter & Gamble Holding Denmark ApS [Denmark]
Procter & Gamble Holding GmbH [Germany]
Procter & Gamble Holding S.A. [Argentina]
Procter & Gamble Holdings Singapore Pte. Ltd. [Singapore]
Procter & Gamble Home Products Limited [India]
Procter & Gamble Hong Kong Limited [Hong Kong]

[ ] Brackets indicate state or country of incorporation and do not form part
    of corporate name


   5



                                  EXHIBIT (21)

                  THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                  ---------------------------------------------
                         Subsidiaries of the Registrant
                         ------------------------------

Procter & Gamble Hungary Wholesale Trading Partnership (KKT) [Hungary]
Procter & Gamble Hygien OY [Finland]
Procter & Gamble Hygiene & Health Care Limited [India]
Procter & Gamble Inc. [Ontario, Canada]
Procter & Gamble India Holdings, Inc. [Ohio]
Procter & Gamble Industrial e Comercial Ltda.[Brazil]
Procter & Gamble Interamericas de Costa Rica Ltda. [Costa Rica]
Procter & Gamble Interamericas de El Salvador Ltda. [El Savador]
Procter & Gamble Interamericas de Guatemala Ltda. [Guatemala]
Procter & Gamble Interamericas de Honduras Ltda. [Honduras]
Procter & Gamble Interamericas de Nicaragua, S.A. [Nicaragua]
Procter & Gamble Interamericas, LLC [Delaware]
Procter & Gamble International Operations Pte. Ltd. [Singapore]
Procter & Gamble International Operations SA [Switzerland]
Procter & Gamble Investment Subsidiary Inc. [Canada]
Procter & Gamble Investments U.K. Limited [U.K.]
Procter & Gamble Italia, S.p.A. [Italy]
Procter & Gamble Italy s.r.l. [Italy]
Procter & Gamble Jamaica Ltd. [Jamaica]
Procter & Gamble Kazakhstan [Kazakhstan]
Procter & Gamble Korea IE, Co. [Korea]
Procter & Gamble Korea Inc.  [Korea]
Procter & Gamble Korea S&D Co. [Korea]
Procter & Gamble Laundry & Cleaning Products Limited [U.K.]
Procter & Gamble Limited [U.K.]
Procter & Gamble Limited Liability Company [Uzbekistan]
Procter & Gamble Lonkey (Guangzhou) Ltd. [PRC]
Procter & Gamble Lonkey (Shaoguan) Ltd. [PRC]
Procter & Gamble Luxembourg Finance Sarl [Luxembourg]
Procter & Gamble Luxembourg Investment Sarl [Luxembourg]
Procter & Gamble Manufactura, S. de R.L. de C.V. [Mexico]
Procter & Gamble Manufacturing (Thailand) Limited [Thailand]
Procter & Gamble Manufacturing (Tianjin) Co. Ltd. [PRC]
Procter & Gamble Manufacturing Belgium N.V. [Belgium]
Procter & Gamble Manufacturing GmbH [Germany]
Procter & Gamble Manufacturing Istra [Russia]
Procter & Gamble Manufacturing Romania SRL [Romania]
Procter & Gamble Marketing & Commercial Activities d.o.o. [Slovenia]
Procter & Gamble Marketing and Services D.O. [Yugoslavia ]
Procter & Gamble Marketing Latvia Ltd. [Latvia]
Procter & Gamble Marketing Ltd. Skopje [Macedonia]
Procter & Gamble Marketing Romania SRL (Romania)
Procter & Gamble Maroc [Morocco]
Procter & Gamble Mataro, S.L. [Spain]
Procter & Gamble Mexico Holdings, B.V. [Netherlands]
Procter & Gamble Moldova SRL [Moldova]
Procter & Gamble Nederland B.V. [Netherlands]
Procter & Gamble Nigeria Limited [Nigeria]
Procter & Gamble Nordic Inc. [Ohio]

[ ] Brackets indicate state or country of incorporation and do not form part
    of corporate name


   6



                                  EXHIBIT (21)

                  THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                  ---------------------------------------------
                         Subsidiaries of the Registrant
                         ------------------------------

Procter & Gamble Norge AS [Norway]
Procter & Gamble NPD, Inc. [Ohio]
Procter & Gamble O.O.O. [Russia]
Procter & Gamble Operations Polska - Spolka Akcyjna [Poland]
Procter & Gamble Oral Care (Guangzhou) [China]
Procter & Gamble Orleans S.A.S. [France]
Procter & Gamble Pakistan (Private) Limited [Pakistan]
Procter & Gamble Paper (Guangzhou) Ltd. [PRC]
Procter & Gamble Paper (Suzhou) Co. Ltd. [PRC]
Procter & Gamble Personal Cleansing (Tianjin) Ltd. [PRC]
Procter & Gamble Peru S.R.L. [Peru]
Procter & Gamble Pharmaceuticals Canada, Inc. [Canada]
Procter & Gamble Pharmaceuticals France [France]
Procter & Gamble Pharmaceuticals Longjumeau S.A.S. [France]
Procter & Gamble Pharmaceuticals N.V. [Belgium]
Procter & Gamble Pharmaceuticals Nederland B.V. [Netherlands]
Procter & Gamble Pharmaceuticals Puerto Rico, Inc. [Delaware]
Procter & Gamble Pharmaceuticals SARL [Switzerland]
Procter & Gamble Pharmaceuticals U.K. Limited [U.K.]
Procter & Gamble Pharmaceuticals, Inc. [Ohio]
Procter & Gamble Pharmaceuticals-Germany GmbH [Germany]
Procter & Gamble Philippines, Inc. [Philippines]
Procter & Gamble Platform Inc. [Ohio
Procter & Gamble Polska Sp. zo.o [Poland]
Procter & Gamble Porto, Lda. [Portugal]
Procter & Gamble Portugal S.A. (Portugal)
Procter & Gamble Product Supply (U.K.) Limited [U.K.]
Procter & Gamble Productions, Inc. [Ohio]
Procter & Gamble Quimica Ltda. [Brazil]
Procter & Gamble reflect.com, Inc. [Delaware] [
Procter & Gamble RHD, Inc. [Ohio]
Procter & Gamble S.A. [Chile]
Procter & Gamble S.r.l. [Italy]
Procter & Gamble Service GmbH [Germany]
Procter & Gamble Services (Switzerland) SA [Switzerland]
Procter & Gamble Services Company N.V. [Belgium]
Procter & Gamble Services France S.A.S. [France]
Procter & Gamble Servicios Latinoamerica, S.C.A. [Venezuela]
Procter & Gamble Servicios Latinoamerica-1, S.R.L. [Venezuela]
Procter & Gamble Singapore Investment Pte. Ltd. [Singapore]
Procter & Gamble South Africa Proprietary Limited [South Africa]
Procter & Gamble Sri Lanka Private Ltd. [Sri Lanka]
Procter & Gamble Sverige AB [Sweden]
Procter & Gamble Switzerland SARL [Switzerland]
Procter & Gamble Taiwan Limited [Taiwan]
Procter & Gamble Technical Centers Limited [U.K.]
Procter & Gamble Technology (Beijing) Co., Ltd. [PRC]
Procter & Gamble Trading (Thailand) Limited [Thailand]

[ ] Brackets indicate state or country of incorporation and do not form part
    of corporate name


   7



                                  EXHIBIT (21)

                  THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                  ---------------------------------------------
                         Subsidiaries of the Registrant
                         ------------------------------

Procter & Gamble Tuketim Mallari Sanayii A.S. [Turkey]
Procter & Gamble U.K. [U.K.] (Partnership)
Procter & Gamble Ukraine (Ukraine)
Procter & Gamble, Spol. s r.o. (Ltd.)  [Slovak Republic]
Procter & Gamble-Hutchison Ltd. [Hong Kong]
Procter & Gamble-Rakona, A.S.  [Czech Republic]
Productos  Sanitarios S.A. [Argentina]
Progam Realty & Development Corporation [Philippines]
Progasud S.p.A. [Italy]
Promotora de Bienes y Valores, S. de R.L. de C.V. [Mexico]
PUR Water Purification Products, Inc. [Ohio]
reflect.com corporation [Delaware
reflect.com llc [Delaware]
Richardson-Vicks do Brasil Quimica e Farmaceutica S.A. [Brazil]
Richardson-Vicks Real Estate Inc. [Ohio]
Richvest B.V. [Netherlands]
Riverfront Music Publishing Co., Inc. [Ohio]
Rohm Pharma GmbH Wien  [Austria]
Rosemount Corporation [Delaware]
R-V Chemicals Holdings Ltd. [Ireland]
S.C. Detergenti S.A. [Romania]
Sacoma, S.A. [Argentina]
SCS Sales + Cosmetic Service GmbH [Germany]
Shulton (Great Britain) Ltd. [U.K.]
Shulton (New Zealand) Limited [New Zealand]
Shulton S.A. [Guatemala]
Shulton, Inc. [New Jersey]
Societe Immobiliere Les Colombettes, S.A. [Switzerland]
Spin Brush Company  [Ohio]
SsangYong Paper Co. Ltd. [Korea]
Sundor Brands Inc. [Florida]
Sundor Brands Limited [U.K.]
Sundor Canada Inc. [Delaware]
Surfac S. R. Ltda. [Peru]
Sycamore Productions, Inc. [Ohio]
Tambrands (Continental) Ltd. [U.K.]
Tambrands de Venezuela, C.A. [Venezuela]
Tambrands Dosmil, S.A. de C.V. [Mexico]
Tambrands France [France]
Tambrands Inc. [Delaware]
Tambrands Industria e Comercia Ltda. [Brazil]
Tambrands International Trading (Shanghai) Co., Ltd. [PRC]
Tambrands Investments Ltd.  [U.K.]
Tambrands Ireland Limited [Ireland]
Tambrands Limited [U.K.]
Tambrands Ukraine Ltd. [Ukraine]
Temple Trees Investments [India]
Tempo AG [Switzerland]
The Dover Wipes Company [Ohio]

[ ] Brackets indicate state or country of incorporation and do not form part
    of corporate name


   8



                                  EXHIBIT (21)

                  THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
                  ---------------------------------------------
                         Subsidiaries of the Registrant
                         ------------------------------

The Folger Coffee Company [Ohio]
The Iams Company [Ohio]
The Malabar Company  [Delaware]
The Procter & Gamble Commercial Company [Ohio]
The Procter & Gamble Company of South Africa (Proprietary) Limited  [S. Africa]
The Procter & Gamble Distributing Company [Ohio]
The Procter & Gamble Global Finance Corporation [Ohio]
The Procter & Gamble iVentures Company [Ohio]
The Procter & Gamble Manufacturing Company [Ohio]
The Procter & Gamble Manufacturing Company of Lebanon, S.A.L.[Lebanon]
The Procter & Gamble Paper Products Company [Ohio]
Thomas Hedley & Co. Limited [U.K.]
Topsy S.A. [Argentina]
TRAPOFA Leonhard-Speditions GmbH I.L. [Germany]
US/KK-Investments, Inc. [Ohio]
Verwaltlungsgesellschaft Iams Pet Food mbH [Germany]
Vick International Corporation [Delaware]
Vick Nigeria Limited [Nigeria]
Vidal Sassoon (Shanghai) Academy [PRC]
Vidal Sassoon Co. [Ohio

[ ] Brackets indicate state or country of incorporation and do not form part
    of corporate name

EX-23

   1










                                  EXHIBIT (23)


                          Independent Auditors' Consent


   2



                              DELOITTE & TOUCHE LLP

                                                       250 East Fifth Street
                                                       Post Office Box 5340
                                                       Cincinnati, Ohio 45202
                                                       Telephone: (513) 784-7100

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the following documents of our
report dated August 7, 2001, incorporated by reference in this Annual Report on
Form 10-K of The Procter & Gamble Company for the year ended June 30, 2001.

1.     Amendment No. 2, Post-Effective Amendment No. 2 to Registration Statement
       No. 33-26514 on Form S-8 For The Procter & Gamble 1983 Stock Plan;

2.     Amendment No. 1 on Form S-8 to Registration Statement No. 33-31855 on
       Form S-4 (now S-8) for the 1982 Noxell Employees' Stock Option Plan and
       the 1984 Noxell Employees' Stock Option Plan;

3.     Amendment No. 1, Post Effective Amendment No. 1 to Registration Statement
       No. 33-49289 on Form S-8 for The Procter & Gamble 1992 Stock Plan;

4.     Registration Statement No. 33-47656 on Form S-8 for The Procter & Gamble
       International Stock Ownership Plan;

5.     Registration Statement No. 33-50273 on Form S-8 for The Procter & Gamble
       Commercial Company Employees' Savings Plan;

6.     Registration Statement No. 33-51469 on Form S-8 for The Procter & Gamble
       1993 Non-Employee Directors' Stock Plan;

7.     Registration Statement No. 333-05715 on Form S-8 for The Procter & Gamble
       Profit Sharing Trust and Employee Stock Ownership Plan;

8.     Amendment No. 2, Post-Effective Amendment No. 2 to Registration Statement
       No. 33-59257 on Form S-3 for The Procter & Gamble Shareholder Investment
       Program;

9.     Registration Statement No. 333-14381 on Form S-8 for Profit Sharing
       Retirement Plan of The Procter & Gamble Commercial Company;




   3





10.    Registration Statement No. 333-14389 on Form S-8 for Procter & Gamble
       Pharmaceuticals Savings Plan;

11.    Registration Statement No. 333-14391 on Form S-8 for Richardson-Vicks
       Savings Plan;

12.    Registration Statement No. 333-14397 on Form S-8 for Procter & Gamble
       Subsidiaries Savings Plan;

13.    Registration Statement No. 333-14395 on Form S-8 for Procter & Gamble
       Subsidiaries Savings and Investment Plan;

14.    Registration Statement No. 333-21783 on Form S-8 for The Procter & Gamble
       1992 Stock Plan (Belgian Version);

15.    Registration Statement No. 333-37905 on Form S-8 for The Procter & Gamble
       Future Shares Plan;

16.    Registration Statement No. 333-51213 on Form S-8 for Group Profit
       Sharing, Incentive, and Employer Contribution Plan (France);

17.    Registration Statement No. 333-51219 on Form S-8 for Procter & Gamble
       Ireland Employees Share Ownership Plan;

18.    Registration Statement No. 333-51221 on Form S-8 for Employee Stock
       Purchase Plan (Japan);

19.    Registration Statement No. 333-51223 on Form S-8 for Savings and Thrift
       Plan (Saudi Arabia);

20.    Registration Statement No. 333-51225 on Form S-8 for The Procter & Gamble
       UK Matched Savings Share Purchase Plan;

21.    Registration Statement No. 333-87133 on Form S-3 for The Procter & Gamble
       Company Debt Securities and Warrants;

22.    Registration Statement No. 333-34606 on Form S-8 for The Procter & Gamble
       Future Shares Plan;

23.    Registration Statement No. 333-40264 on Form S-8 for Savings and Thrift
       Plan Saudi Arabia;

24.    Registration Statement No. 333-44034 on Form S-8 for The Procter & Gamble
       International Stock Ownership Plan;


25.    Registration Statement No. 333-47132 on Form S-8 for Employee Stock
       Purchase Plan (Japan);





   4

26.    Registration Statement No. 333-47136 on Form S-8 for The Procter & Gamble
       UK Matched Savings Share Purchase Plan;

27.    Amendment No. 1, Post-Effective Amendment No. 1 to Registration Statement
       No. 333-47136 on Form S-8 for The Procter & Gamble UK Matched Savings
       Share Purchase Plan; and

28.    Registration Statement No. 333-49764 on Form S-3 for The Procter & Gamble
       U.K. Share Investment Scheme.


/s/ Deloitte & Touche LLP
- -------------------------
Deloitte & Touche LLP
September 12, 2001

EX-99.1

   1



                                 EXHIBIT (99-1)



                     Directors and Officers Liability Policy


   2

                                                                    Exhibit 99.1


                                CODA Premier(SM)
                        DIRECTORS AND OFFICERS LIABILITY

               Directors and Officers Liability Insurance Policy
                                   Issued by

                 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD.

       This is a three-year policy with an automatic extension provision
                       Please read this policy carefully.

        This is a claims first made policy. Defense costs are included in
                             the limit of liability.

        Words and phrases that appear below in all capital letters have the
              special meanings set forth in Clause 2 (Definitions).

          This POLICY shall constitute the entire contract between the
                     INSUREDS, the COMPANY, and the INSURER.


                                    COMPANY

       THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS
                OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY

                                   POLICY No.

                                     PG-106C

                                    PRODUCER

                            H & H PARK INTERNATIONAL


          Countersigned at Hamilton Bermuda on the 6th of JULY, 2001.

/s/ Mark Herman                            /s/ Jonathan Evans

President                                Authorised Representative



   3


                                  DECLARATIONS

                                                              Policy No: PG-106C

Item I      COMPANY:   THE PROCTER AND GAMBLE COMPANY/THE
                       PROCTER AND GAMBLE FUND/OFFICERS OF
                       OPERATING UNITS OF PROCTER AND GAMBLE COMPANY



            Principal Address:     ONE PROCTER & GAMBLE PLAZA
                                   CINCINNATI, OHIO 45202

Item II     POLICY PERIOD: From MARCH 15,1987 to JUNE 30, 2004
            12:01 a.m. Standard Time at the address of the Company stated
            above.

Item III    LIMIT OF LIABILITY: $25,000,000

            Aggregate LIMIT OF LIABILITY for all LOSS paid on behalf of all
            INSUREDS arising from all CLAIMS first made during each POLICY
            YEAR.

Item IV     PREMIUM:     At inception of this POLICY YEAR: $325,000
                         (prepaid total for three years)

                         6/30/01-02       Year 1      $325,000
                         6/30/02-03       Year 2      $345,000 DEPOSIT PREMIUM
                         6/30/03-04       Year 3      $350,000 DEPOSIT PREMIUM


            At each anniversary thereafter: Subject to adjustment on each
                                            anniversary date in accordance
                                            with Clause 7 (Automatic Extension)
                                            of this POLICY

item V      NOTICE TO COMPANY:

            Any notice to the COMPANY or, except in accordance with Clause 17
            (Representation) of this POLICY, to the INSUREDS, shall be given or
            made to the individual listed above, if any, or otherwise to the
            individual designated in the APPLICATION, if any, or otherwise to
            the signer of the APPLICATION, and shall be given or made in
            accordance with Clause 16 (Notice) of this POLICY.

Item VI     NOTICE TO INSURER:

            Any notice to be given or payment to be made to the INSURER under
            this POLICY shall be given or made to CORPORATE OFFICERS &
            DIRECTORS ASSURANCE LTD., The ACE Building, 30 Woodbourne Avenue,
            Hamilton HM 08, Bermuda, Fax 441-295-5221, and shall be given or
            made in accordance with Clause 16 (Notice) of this POLICY.



            Endorsements 19 to 24 are made part of this POLICY at Policy
            Issuance.



                                      ii
   4


                               TABLE OF CONTENTS
Clause                                                                     Page

1.       Insuring Clause .................................................. 1

2.       Definitions ...................................................... 1

3.       Exclusions ........................................................3

4.       Appeals ...........................................................5

5.       Arbitration .......................................................5

6.       Assistance and Cooperation ........................................7

7.       Automatic Extension ...............................................8

8.       Cancellation ......................................................8

9.       Changes and Assignments ...........................................10

10.      Advancement of DEFENSE COSTS ......................................10

11.      Currency ..........................................................10

12.      Headings ..........................................................10

13.      INSUREDS' Reporting Duties ........................................10

14.      LOSS Provisions ...................................................11

15.      Other Insurance ...................................................11

16.      Notice ............................................................11

17.      Representation ....................................................11

18.      Severability ......................................................12

19.      Spousal Liability .................................................12

20.      Subrogation .......................................................12

21.      Acquisition, Creation or Disposition of a Subsidiary ..............13

22.      Bankruptcy ........................................................13


                                      iii
   5





                  DIRECTORS AND OFFICERS LIABILITY INSURANCE


In consideration of the payment of the premium and in reliance on all
statements made and information furnished by the COMPANY to the INSURER in the
APPLICATION, which is hereby made a part hereof, and subject to the foregoing
Declarations and to all other terms of this POLICY, the COMPANY, the INSUREDS,
and the INSURER agree as follows:

1.    INSURING CLAUSE

      The INSURER shall pay on behalf of the INSUREDS or any of them, any and
      all LOSS that the INSUREDS shall become legally obligated to pay by
      reason of any CLAIM or CLAIMS first made against the INSUREDS or any of
      them during the POLICY PERIOD, for any WRONGFUL ACTS that are actually or
      allegedly caused, committed, or attempted prior to the end of the POLICY
      PERIOD by the INSUREDS, not exceeding the LIMIT OF LIABILITY.

2.    DEFINITIONS

      (a)   "APPLICATION" shall mean the signed, written application for this
            POLICY and for any policy issued by the INSURER of which this
            POLICY is a direct or indirect renewal or replacement, including
            the schedules thereto and all supplementary information submitted
            in connection therewith, and all underwriting data submitted in
            connection with the automatic extension of this POLICY, all of
            which materials shall be deemed attached hereto, as if physically
            attached hereto, and incorporated herein.

      (b)   "CLAIM" shall mean:

            (1)   any demand or any civil or criminal judicial, administrative,
                  regulatory or arbitration proceeding or investigation against
                  any INSURED for a WRONGFUL ACT, including any appeal
                  therefrom; or

            (2)   written notice to the INSURER by the INSUREDS and/or the
                  COMPANY during the POLICY PERIOD describing circumstances
                  that may reasonably be expected to give rise to a CLAIM
                  described in subpart (b)(1) above being made against the
                  INSUREDS.

            Multiple demands, suits or proceedings arising out of the same
            WRONGFUL ACT shall be deemed to be a single CLAIM, which shall be
            treated as a CLAIM first made during the POLICY YEAR in which the
            first of such multiple demands, suits or proceedings is made
            against any INSURED or in which notice of circumstances relating
            thereto is first given in accordance with subpart (b) of Clause 14
            (Loss Provisions) below, whichever occurs first.


      (c)   "COMPANY' shall mean:

            (1)   the company shown in Item I of the Declarations;

            (2)   any company that prior to the starting date of the POLICY
                  PERIOD merged into or consolidated with the company shown in
                  Item I of the Declarations and was not the surviving entity;

            (3)   any SUBSIDIARY of either such company;






                                       1
   6

            (4)   if covered in accordance with subpart (a) of Clause 21
                  (Acquisition, Creation or Disposition of a Subsidiary) below,
                  any other subsidiary;

            (5)   any foundation, charitable trust or political action
                  committee controlled by one or more organizations described
                  in (1) through (4) above; and

            (6)   any organization described in (1) through (5) above as a
                  debtor in possession under United States bankruptcy law or an
                  equivalent status under the law of any other country

      (d)   "DEFENSE COSTS" shall mean that portion of LOSS consisting of
            reasonable and necessary costs, charges, fees (including but not
            limited to attorneys' fees and experts' fees) and expenses incurred
            in the defense or investigation of a CLAIM and the premium for
            appeal, attachment or similar bonds, but shall not include wages,
            salaries, fees, benefits or office expenses of INSUREDS or
            employees of the COMPANY.

      (e)   "INSUREDS" shall mean one or more of the following:

            (1)   all persons who were, now are, or shall be duly elected or
                  appointed directors, trustees, officers, MANAGERS, in-house
                  general counsel, comptroller or risk manager of the COMPANY,
                  or with respect to any COMPANY chartered outside the United
                  States, the functional equivalent of any such executive;

            (2)   all other persons not described in (1) above who were, now
                  are, or shall be full-time or part-time employees of the
                  COMPANY, provided coverage for such other persons shall apply
                  only while the CLAIM against such other person is also made
                  against a person described in (1) above;

            (3)   all persons who were, now are, or shall be serving as
                  directors, officers, trustees, governors, partners or the
                  equivalent thereof for any NON-PROFIT OUTSIDE ENTITY if:

                  (i)   such activity is part of their duties regularly
                        assigned by the COMPANY, or

                  (ii)  they are a member of a class of persons so directed to
                        serve by the COMPANY; or

            (4)   the estates, heirs, legal representatives or assigns of
                  deceased INSUREDS and the legal representatives or assigns of
                  INSUREDS in the event of their incompetency, insolvency or
                  bankruptcy.

      (f)   "INSURER" shall mean Corporate Officers & Directors Assurance,
            Ltd., Hamilton, Bermuda.

      (g)   "LIMIT OF LIABILITY" shall mean the amount described in Item III of
            the Declarations. Regardless of the time of payment of LOSS by the
            INSURER, the LIMIT OF LIABILITY as stated in Item III of the
            Declarations shall be the maximum liability of the INSURER for all
            LOSS arising from all CLAIMS first made during each POLICY YEAR.
            DEFENSE COSTS shall be part of and not in addition to the LIMIT OF
            LIABILITY as stated in Item III of the Declarations, and payment by
            the INSURER of DEFENSE COSTS shall reduce the LIMIT OF LIABILITY.



                                       2
   7





      (h)   "LOSS" shall mean any and all amounts that the INSUREDS are legally
            obligated to pay by reason of a CLAIM made against the INSUREDS for
            any WRONGFUL ACT, and shall include but not be limited to
            compensatory, exemplary, punitive and multiple damages, judgments,
            settlements, pre-judgment and post-judgment interest, and DEFENSE
            COSTS, providing always, however, LOSS shall not include taxes,
            fines or penalties imposed by law, or matters that may be deemed
            uninsurable under the law pursuant to which this POLICY shall be
            construed. ("Fines or penalties" do not include punitive,
            exemplary, or multiple damages).

      (i)   "MANAGERS" shall mean any one or more natural persons who were, now
            are or shall become a manager, member of the board of managers or
            equivalent executive of a COMPANY that is a limited liability
            company.

      (j)   "NON-PROFIT OUTSIDE ENTITY" shall mean any non-profit corporation,
            community chest, fund or foundation that is exempt from U.S.
            federal income tax as an organization described in Section 501
            (c)(3) of the Internal Revenue Code of 1986, as amended.

      (k)   "POLICY" shall mean this insurance policy, including the
            APPLICATION, the Declarations, and any endorsements hereto issued
            by the INSURER.

      (l)   "POLICY PERIOD" shall mean the period of time stated in Item II of
            the Declarations, as may be automatically extended in accordance
            with Clause 7 (Automatic Extension) below. If this POLICY is
            cancelled in accordance with subpart (b) of Clause 8 (Cancellation)
            below, the POLICY PERIOD shall end upon the effective date of such
            cancellation.

      (m)   "POLICY YEAR" shall mean a period of one year, within the POLICY
            PERIOD, commencing each year on the day and hour first named in
            Item II of the Declarations, or if the time between the inception
            date, or any anniversary date and the termination date of this
            POLICY is less than one year, then such lesser period.

      (n)   "SUBSIDIARY" shall mean any corporation or limited liability
            company in which more than 50% of the outstanding securities
            representing the present right to vote for election of directors or
            MANAGERS is owned, directly or indirectly, in any combination, by
            the COMPANY and/or by one or more of its SUBSIDIARIES, at the
            starting date of the POLICY PERIOD.

      (o)   "WRONGFUL ACT" shall mean any actual or alleged error,
            misstatement, misleading statement or act, omission, neglect, or
            breach of duty by the INSUREDS while acting, individually or
            collectively, in their capacities as INSUREDS, or any other matter
            claimed against them by reason of their serving in such capacities.

            All such errors, misstatements, misleading statements or acts,
            omissions, neglects or breaches of duty actually or allegedly
            caused, committed, or attempted by or claimed against one or more
            of the INSUREDS arising out of or relating to the same or series of
            related facts, circumstances, situations, transactions or events
            shall be deemed to be a single WRONGFUL ACT.

3.    EXCLUSIONS

      The INSURER shall not be liable to make any payment for LOSS in
      connection with that portion of any CLAIM made against the INSUREDS:



                                       3
   8


      (a)   for which the COMPANY or, with respect to INSUREDS described in
            Clause 2(e)(3) above, the NON-PROFIT OUTSIDE ENTITY actually pays
            or indemnifies or is required or permitted to pay on behalf of or
            to indemnify the INSUREDS pursuant to the charter or other similar
            formative document or by-laws or written agreements of the COMPANY
            or the NON-PROFIT OUTSIDE ENTITY duly effective under applicable
            law, that determines and defines such rights of indemnity;
            provided, however, this exclusion shall not apply if:


            (1)   the COMPANY and the NON-PROFIT OUTSIDE ENTITY refuse to
                  indemnify or advance DEFENSE COSTS or other LOSS as required
                  or permitted, or are financially unable to indemnify; and

            (2)   the INSUREDS comply with Clause 20 (Subrogation) below;

      (b)   based upon or attributable to the INSUREDS having gained any
            personal profit to which they were not legally entitled if a
            judgment or other final adjudication adverse to the INSUREDS or any
            arbitration proceeding pursuant to Clause 5 (Arbitration) below
            establishes that the INSUREDS in fact gained any such personal
            profit; however, this exclusion shall not apply to defense costs;

      (c)   for the return by the INSUREDS of any improper or illegal
            remuneration paid in fact to the INSUREDS if it shall be determined
            by a judgment or other final adjudication adverse to the INSUREDS
            that such remuneration is improper or illegal or if such
            remuneration is to be repaid to the COMPANY under a settlement
            agreement; however, this exclusion shall not apply to defense
            costs;


      (d)   brought about or contributed to by the dishonesty of the INSUREDS
            if a judgment or other final adjudication adverse to the INSUREDS
            or any arbitration proceeding pursuant to Clause 5 (Arbitration)
            below establishes that acts of active and deliberate dishonesty
            committed by the INSUREDS with actual dishonest purpose and intent
            were material to the CLAIM; however, this exclusion shall not apply
            to defense costs;

      (e)   which is insured by any other existing valid policy or policies
            under which payment of the LOSS is actually made except in respect
            of any excess beyond the amounts of payments under such other
            policy or policies;

      (f)   for which the INSUREDS are indemnified by reason of having given
            notice of a CLAIM or of any circumstance which might give rise to a
            CLAIM under any policy or policies of which this POLICY is a
            renewal or replacement or which it may succeed in time;

      (g)   for emotional distress, mental anguish, bodily injury, sickness,
            disease, or death of any person, or for damage to or destruction of
            any tangible property, including the loss of use thereof; however,
            this exclusion shall not apply to:

            (1)   any CLAIM by securities holders of the COMPANY in their
                  capacity as such, including without limitation any
                  shareholder derivative or securities class action lawsuit;

            (2)   any CLAIM for emotional distress or mental anguish by any
                  former, current or prospective employee of the COMPANY based
                  upon or attributable to any actual or alleged
                  employment-related WRONGFUL ACT; or





                                       4
   9

            (3)   any CLAIM for the actual or alleged discharge, dispersal,
                  release or escape of any solid, liquid, gaseous, or thermal
                  irritant, contaminant or other pollutant, provided any
                  coverage under this POLICY with respect to any such CLAIM
                  shall be specifically excess of the amount of coverage
                  available under any general liability, environmental
                  impairment or similar insurance policy with respect to such
                  CLAIM;

      (j)   by, on behalf of, at the behest of, or in the right of the COMPANY,
            if brought within the United States, Canada or their territories or
            possessions by or with the solicitation, approval, assistance or
            participation of two or more persons each of whom at the time such
            CLAIM is brought is the president, chief executive officer,
            MANAGER, chief financial officer, executive vice president or
            in-house general counsel of the COMPANY; however, this exclusion
            shall not apply if, between the starting date of the POLICY PERIOD
            and the date of the CLAIM, the COMPANY shall have undergone any of
            the events listed in subpart (a) of Clause 8 (Cancellation) or in
            Clause 22 (Bankruptcy) below, and the CLAIM is brought after the
            date of such event; or

      (i)   for any actual or alleged error, misstatement, misleading statement
            or act, omission, neglect or breach of duty by the INSUREDS while
            acting in their capacities as directors, officers, trustees,
            governors, partners, MANAGERS, employees or agents of any entity
            other than the COMPANY or by reason of their being directors,
            officers, trustees, governors, partners, MANAGERS, employees or
            agents of such other entity; however, this exclusion shall not
            apply with respect to any CLAIM for WRONGFUL ACTS by an INSURED
            serving a NON-PROFIT OUTSIDE ENTITY as described in Clause 2(e)(3)
            above.

      It is agreed that any fact pertaining to any INSURED shall not be imputed
      to any other INSURED for the purpose of determining the application of
      the Exclusions.

4.    APPEALS

      In the event the INSUREDS elect not to appeal a judgment, the INSURER may
      elect to make such appeal at its own expense, and shall be liable for any
      increased award, taxable costs and disbursements and any additional
      interest incidental to such appeal, to the extent such payments are not
      covered by other valid and collectible insurance.

5.    ARBITRATION

      (a)   My dispute, controversy or claim arising out of or relating to this
            POLICY or the breach, termination or invalidity thereof shall be
            finally and fully determined in London, England under the
            provisions of the Arbitration Acts of 1950, 1975, 1979 and 1996,
            and/or any statutory modifications or amendments thereto, for the
            time being in force, by a Board composed of three arbitrators to be
            selected for each controversy as follows:

                  Any party may, in the event of a dispute, controversy or
                  claim, notify the other party or parties to such dispute,
                  controversy or claim of its desire to arbitrate the matter,
                  and at the time of such notification the party desiring
                  arbitration shall notify the other party or parties of the
                  name of the arbitrator selected by it. The other party who
                  has been so notified shall within thirty (30) calendar days
                  thereafter select an arbitrator and notify the party desiring
                  arbitration of the name of such second arbitrator.





                                       5
   10


                  If the party notified of a desire for arbitration shall fail
                  or refuse to nominate the second arbitrator within thirty
                  (30) calendar days following the receipt of such
                  notification, the party who first served notice of a desire
                  to arbitrate will, within an additional period of thirty (30)
                  calendar days, apply to a judge of the High Court of Justice
                  of England and Wales for the appointment of a second
                  arbitrator and in such a case the arbitrator appointed by
                  such a judge shall be deemed to have been nominated by the
                  party or parties who failed to select the second arbitrator.
                  The two arbitrators, chosen as above provided, shall within
                  thirty (30) calendar days after the appointment of the second
                  arbitrator choose a third arbitrator. In the event of the
                  failure of the first two arbitrators to agree on a third
                  arbitrator within said thirty (30) calendar day period,
                  either of the parties may within a period of thirty (30)
                  calendar days thereafter, after notice to the other party or
                  parties, apply to a judge of the High Court of Justice of
                  England and Wales for the appointment of a third arbitrator
                  and in such case the person so appointed shall be deemed and
                  shall act as a third arbitrator. Upon acceptance of the
                  appointment by said third arbitrator, the Board of
                  Arbitration for the controversy in question shall then be
                  deemed fixed. All claims, demands, denials of claims and
                  notices pursuant to this Clause 5 shall be given in
                  accordance with Clause 16 below.

      (b)   The Board of Arbitration shall fix, by a notice in writing to the
            parties involved, a reasonable time and place for the hearing and
            may prescribe reasonable rules and regulations governing the course
            and conduct of the arbitration proceeding, including, without
            limitation, discovery by the parties.

      (c)   This POLICY, and any dispute, controversy or claim arising out of
            or relating to this POLICY, shall be governed by and construed and
            enforced in accordance with the internal laws of the State of New
            York, except insofar as such laws: (i) may prohibit payment
            hereunder in respect of punitive damages; (ii) pertain to the
            procurement, issuance, delivery, renewal, nonrenewal or
            cancellation of policies of insurance or the regulation under New
            York Insurance Law, or regulations issued by the Insurance
            Department of the State of New York pursuant thereto, applying to
            insurers doing insurance business within the State of New York or
            as respects risks or insureds situated in the State of New York; or
            (iii) are inconsistent with any provisions of this POLICY.

            Notwithstanding anything herein to the contrary, the provisions,
            stipulations, exclusions and conditions of this POLICY are to be
            construed in an evenhanded fashion as between the parties. Without
            limitation, where the language of this POLICY is deemed to be
            ambiguous or otherwise unclear, the issue shall be resolved in the
            manner most consistent with the relevant provisions, stipulations,
            exclusions and conditions (without regard to authorship of the
            language, without any presumption or arbitrary interpretation or
            construction in favor of either the INSUREDS or the INSURER,
            without reference to the "reasonable expectations" of either
            thereof or to contra proferentem and without reference to parol or
            other extrinsic evidence). To the extent that New York law is
            inapplicable by virtue of any exception or proviso enumerated above
            or otherwise, and as respects any arbitration procedure pursuant to
            this Clause 5, the internal laws of England and Wales shall apply.





                                       6
   11


      (d)   The Board of Arbitration shall, within ninety (90) calendar days
            following the conclusion of the hearing, render its decision on the
            matter or matters in controversy in writing and shall cause a copy
            thereof to be served on all the parties thereto, In case the Board
            of Arbitration fails to reach a unanimous decision, the decision of
            the majority of the members of said Board shall be deemed to be the
            decision of the Board and the same shall be final and binding on
            the parties thereto. Such decision shall be a complete defense to
            any attempted appeal or litigation of such decision in the absence
            of fraud or collusion. Without limiting the foregoing, the parties
            waive any right to appeal, an/or seek collateral review of the
            decision of the Board of Arbitration by any court or other body to
            the fullest extent permitted by applicable law.

      (e)   Any order as to the costs of arbitration shall be in the sole
            discretion of the Board of Arbitration, who may direct to whom and
            by whom and in what manner the costs, shall be paid.

      (f)   The INSURER and the INSUREDS agree that in the event that claims
            for indemnity or contribution are asserted in any action or
            proceeding against the INSURER by any of the INSUREDS' other
            insurers in any jurisdiction or forum other than that set forth in
            this Clause 5, the INSUREDS will in good faith take all reasonable
            steps requested by the INSURER to assist the INSURER in obtaining a
            dismissal of these claims (other than on the merits) and will,
            without limitation, undertake to the court or other tribunal to
            reduce any judgment or award against such other insurers to the
            extent that the court or tribunal determines that the INSURER would
            have been liable to such insurers for indemnity or contribution
            pursuant to this POLICY. The INSUREDS shall be entitled to assert
            claims against the INSURER for coverage under this POLICY,
            including, without limitation, for amounts by which the INSUREDS
            reduced its judgment against such other insurers in respect of such
            claims for indemnity or contribution, in an arbitration between the
            INSURER and the INSUREDS pursuant to this Clause 5 which
            arbitration may take place before, concurrently with and/or after
            the action or proceeding involving such other insurers; provided,
            however, that the INSURER in such arbitration in respect of such
            reduction of any judgment shall be entitled to raise any defenses
            under this POLICY and any other defenses (other than jurisdictional
            defenses) as it would have been entitled to raise in the action or
            proceeding with such insurers. No determination in any such action
            or proceeding involving such other insurers shall have collateral
            estoppel, res judicata or other issue preclusion or estoppel effect
            against the INSURER in such arbitration, irrespective of whether or
            not the INSURER remained a party to such action or proceeding.

6.    ASSISTANCE AND COOPERATION

      The INSURER has no duty to defend any CLAIM and shall not be called upon
      to assume charge of the investigation; settlement or defense of any
      CLAIM, but the INSURER shall have the right and shall be given the
      opportunity to associate with the INSUREDS and the COMPANY in the
      investigation,-settlement, defense and control of any CLAIM relative to
      any WRONGFUL ACT where the CLAIM is or may be covered in whole or in part
      by this POLICY. At all times, the INSUREDS and the COMPANY and the
      INSURER shall cooperate in the investigation, settlement and defense of
      such CLAIM. The failure of the COMPANY to assist and cooperate with the
      INSURER shall not impair the rights of the INSUREDS under this POLICY.
      The INSUREDS shall not settle or admit any liability with respect to any
      CLAIM which involves or appears reasonably likely to involve this POLICY
      without the INSURER'S consent, which shall not be unreasonably withheld.




                                       7
   12



7.    AUTOMATIC EXTENSION

      Except in the event this POLICY is cancelled in whole or in part in
      accordance with Clause 8 (Cancellation) below, on each anniversary of
      this POLICY, upon submission of the extension application and payment of
      the charged premium, this POLICY shall automatically be continued to a
      date one year beyond its previously stated expiration date, unless
      written notice is given by the INSURER to the COMPANY, or by the COMPANY
      to the INSURER, that such POLICY extension is not desired. Such written
      notice may be given at any time prior to the anniversary of the POLICY,
      except that such notice by the INSURER to the COMPANY may be given only
      during the period commencing ninety (90) days and ending ten (10) days
      prior to such anniversary, in which case the POLICY shall automatically
      expire two years from such anniversary date. Such written notice shall be
      given by the INSURER to the COMPANY only if it is determined to be
      appropriate by the Chief Executive Officer, the Executive Vice President
      for Underwriting and the Executive Vice-President for Claims of ACE
      Limited.

      If the COMPANY or the INSURER gives written notice that the POLICY
      extension is not desired, the COMPANY shall pay on or before each of the
      two remaining anniversary dates the charged premium for the next
      succeeding POLICY YEAR, respectively, less a premium credit equal to the
      premium paid for years two and three of the POLICY as specified in Item
      IV of the Declarations Page. If any such premium credit exceeds the
      charged premium, the INSURER shall refund to the COMPANY the difference
      within ten days following such anniversary date. The premium charged on
      each anniversary of this POLICY shall be determined by the rating plan
      and by-laws of the INSURER in force at such anniversary date. If during
      any POLICY YEAR the INSURER announces amendments to this standard policy
      form which are generally applicable to all similar policies issued by the
      INSURER, such amendments shall be applicable to this POLICY as of the
      second anniversary following the POLICY YEAR in which the INSURER
      announced such amendments.

8.    CANCELLATION

      This POLICY shall not be subject to cancellation except as follows:

      (a)   In the event during the POLICY PERIOD:

            (1)   the company named in Item I of the Declarations shall merge
                  into or consolidate with another organization in which the
                  company named in Item I of the Declarations is not the
                  surviving entity, or

            (2)   any person or entity or group of persons and/or entitles
                  acting in concert shall acquire securities or voting rights
                  which results in ownership or voting control by such person
                  or entity or group of persons or entities of more than 50% of
                  the outstanding securities representing the present right to
                  vote for election of directors or MANAGERS of the company
                  named in Item I of the Declarations

            this POLICY shall remain in force until the later of:

            (i)   the third anniversary of such merger, consolidation or
                  acquisition if during the POLICY PERIOD the COMPANY or the
                  INSUREDS give notice to the INSURER of their desire to elect
                  such extension (no additional premium shall be required for
                  such extension),

            (ii)  any subsequent date to which the INSURER may agree by
                  endorsement, or






                                       8
   13

            (iii) termination of the POLICY PERIOD,

            but only with respect to CLAIMS for WRONGFUL ACTS actually or
            allegedly taking place before the effective date of said merger,
            consolidation or acquisition. If the POLICY remains in force beyond
            the period of time stated in Item II of the Declarations by reason
            of this Clause 8(a), the LIMIT OF LIABILITY for such extension is
            part of and not in addition to the LIMIT OF LIABILITY to the
            immediately preceding POLICY YEAR. All premiums paid or due at the
            time of said merger, consolidation or acquisition shall be fully
            earned and in no respect refundable.

      (b)   This POLICY may be cancelled by the INSURER upon granting of 365
            days written notice, providing such cancellation is determined to
            be appropriate by the Chief Executive Officer, the Executive Vice
            President for Underwriting and the Executive Vice President for
            Claims of ACE Limited. Payment or tender of any unearned premium by
            the INSURER shall not be a condition precedent to the effectiveness
            of cancellation, but return of the pro rata unearned premium shall
            be made as soon as practicable.

      (c)   In the event the charged premium for any POLICY YEAR is not paid as
            provided in Clause 7 (Automatic Extension), above, this POLICY
            shall not apply to any WRONGFUL ACTS actually or allegedly taking
            place after the anniversary date on which the additional premium
            was due; however, this POLICY shall remain in force for the
            remainder of the POLICY PERIOD as to CLAIMS first made during the
            POLICY PERIOD for WRONGFUL ACTS actually or allegedly caused,
            committed or attempted prior to such anniversary date. With respect
            to all CLAIMS first made after such anniversary date, one LIMIT OF
            LIABILITY shall apply for the remainder of the POLICY PERIOD. Such
            LIMIT OF LIABILITY shall be separate from the LIMIT OF LIABILITY
            provided during the POLICY YEAR immediately preceding such
            anniversary date. All premiums paid as of such anniversary date
            shall be fully earned and in no respect refundable.

9.    CHANGES AND ASSIGNMENTS

      The terms and conditions of this POLICY shall not be waived or changed,
      nor shall an assignment of interest under this POLICY be binding, except
      by an endorsement to this POLICY issued by the INSURER.

10.   ADVANCEMENT OF DEFENSE COSTS

      Except in those instances when the INSURER has denied liability for the
      CLAIM because of the application of one or more exclusions, or other
      coverage issues, if the COMPANY refuses or is financially unable to
      advance DEFENSE COSTS, the INSURER shall, upon request and if proper
      documentation accompanies the request, advance on behalf of the INSUREDS,
      or any of them, DEFENSE COSTS that they have incurred in connection with
      a CLAIM, prior to disposition of such CLAIM. In the event that the
      INSURER so advances DEFENSE COSTS and it is finally established that the
      INSURER has no liability hereunder, such INSUREDS on whose behalf
      advances have been made and the COMPANY, to the full extent legally
      permitted, agree to repay to the INSURER, upon demand, all monies
      advanced.

11.   CURRENCY

      All premium, limits, retentions, LOSS and other amounts under this POLICY
      are expressed and payable in the currency of the United States of
      America.





                                       9
   14


12.   HEADINGS

      The descriptions in the headings and sub-headings of this POLICY are
      inserted solely for convenience and do not constitute any part of the
      terms or conditions hereof.

13.   INSUREDS' REPORTING DUTIES

      The INSUREDS and/or the COMPANY shall give written notice to the INSURER
      of any of the following as soon as practicable after the in-house general
      counsel or risk manager of the COMPANY first learns thereof:

      (a)   any CLAIM described in subpart (b) (1) of Clause 2 (Definitions)
            above, which notice shall include the nature of the WRONGFUL ACT,
            the alleged injury, the names of the claimants, and the manner in
            which the INSUREDS or COMPANY first became aware of the CLAIM; or

      (b)   any event described in subpart (a) of Clause 8 (Cancellation)
            above,

      The INSUREDS and the COMPANY shall cooperate with the INSURER and give
      such additional information as the INSURER may reasonably require.

14.   LOSS PROVISIONS

      (a)   The time when a CLAIM shall be made for purposes of determining the
            application of Clause 1 (Insuring Clause) above shall be the date
            on which the CLAIM is first made against the INSURED.

      (b)   If during the POLICY PERIOD, the INSUREDS or the COMPANY shall
            become aware of any circumstances that are likely to give rise to a
            CLAIM being made against the INSUREDS and shall give written notice
            to the INSURER of the circumstances and the reasons for
            anticipating a CLAIM, with particulars as to dates and persons
            involved, then any CLAIM that is subsequently made against the
            INSUREDS arising out of such circumstances shall be treated as a
            CLAIM made during the first POLICY YEAR in which the INSUREDS or
            the COMPANY gave such notice.

      (c)   The COMPANY and the INSUREDS shall give the INSURER such
            information and cooperation as it may reasonably require and as
            shall be in the COMPANY'S and the lNSUREDS' power.


15.   OTHER INSURANCE

      Subject to subparts (e) and (f) of Clause 3 (Exclusions) above, if other
      valid and collectible insurance with any other insurer, whether such
      insurance is issued before, concurrent with, or after inception of this
      POLICY, is available to the INSUREDS covering a CLAIM also covered by
      this POLICY, other than insurance that is issued specifically as
      insurance in excess of the insurance afforded by this POLICY, this POLICY
      shall be in excess of and shall not contribute with such other insurance.
      Without limiting the foregoing, this POLICY is specifically excess of and
      shall not contribute with any insurance which is maintained by a
      NON-PROFIT OUTSIDE ENTITY and available to an INSURED. Nothing herein
      shall be construed to make this POLICY subject to the terms of other
      insurance.



                                      10
   15


16.   NOTICE

      All notices under any provision of this POLICY shall be in writing and
      given by prepaid express courier or electronic service properly addressed
      to the appropriate party at the respective addresses as shown in Items V
      and VI of the Declarations. Notice so given shall be deemed to be
      received and effective upon actual receipt thereof by the party or one
      day following the date such notice is sent, whichever is earlier. Notice
      to the INSURER of any CLAIM shall be directed to the attention of the
      INSURER's Claims Department. All other notices to the INSURER shall be
      directed to the attention of the INSURER's Underwriting Department.

17.   REPRESENTATION

      By acceptance of this POLICY, the company named in Item I of the
      Declarations agrees to represent the INSUREDS with respect to all matters
      under this POLICY, including, but not limited to, the giving and
      receiving of notice of CLAIM or cancellation or desire not to extend the
      POLICY, the payment of premiums, the receiving of LOSS payments and any
      return premiums that may become due under this POLICY, the requesting,
      receiving, and acceptance of any endorsement to this POLICY, and the
      submission of a dispute to arbitration. The INSUREDS agree that said
      company shall represent them but, for purposes of the investigation,
      defense, settlement, or appeal of any CLAIM, the INSUREDS who are named
      as defendants in the CLAIM may, upon their unanimous agreement and upon
      notice to the INSURER, replace said company with another agent to
      represent them with respect to the CLAIM, including giving and receiving
      of notice of CLAIM and other correspondence, the receiving of LOSS
      payments, and the submission of a dispute to arbitration.

18.   SEVERABILITY

      (a)   The APPLICATION for coverage shall be construed as a separate
            APPLICATION for coverage by each INSURED. With respect to the
            declarations and statements contained in such APPLICATION for
            coverage, no statement in the APPLICATION or knowledge possessed by
            any one INSURED shall be imputed to any other INSURED for the
            purpose of determining the availability of coverage with respect to
            CLAIMS made against any other INSURED.

            The acts, omissions, knowledge, or warranties of any INSURED shall
            not be imputed to any other INSURED with respect to the coverages
            applicable under this POLICY.

      (b)   This POLICY shall not be rescinded by the INSURER in whole or in
            part based upon the restatement of, or any misstatement or error
            in, any financial statements of the COMPANY contained within the
            APPLICATION.

      (c)   In the event that any provision of this POLICY shall be declared or
            deemed to be invalid or unenforceable under any applicable law,
            such invalidity or unenforceability shall not affect the validity or
            enforceability of the remaining portion of this POLICY.




                                      11
   16

19.   SPOUSAL LIABILITY

      If a CLAIM against an INSURED includes a claim against the INSURED'S
      lawful spouse solely by reason of (i) such spouse's status as a spouse of
      the INSURED, or (ii) such spouse's ownership interest in property which
      the claimant seeks as recovery for alleged WRONGFUL ACTS of the INSURED,
      all loss which such spouse becomes legally obligated to pay by reason of
      such CLAIM shall be treated for purposes of this POLICY as LOSS which the
      INSURED becomes legally obligated to pay by reason of the CLAIM made
      against the INSURED. Such spousal loss shall be covered under the POLICY
      only if and to the extent such loss would be covered if incurred by the
      INSURED.

      The coverage extension afforded by this Clause 19 does not apply to the
      extent such CLAIM alleges a wrongful act or omission by the INSURED's
      spouse.

20.   SUBROGATION

      In the event of any payment under this POLICY, the INSURER shall be
      subrogated to the extent of such payment to all the INSUREDS' rights of
      recovery, and the INSUREDS shall execute all papers reasonably required
      and shall take all reasonable actions that may be necessary to secure
      such rights including the execution of such documents necessary to enable
      the INSURER effectively to bring suit in the name of the INSUREDS,
      including but not limited to an action against the COMPANY for nonpayment
      of indemnity due and owing to the INSUREDS by the COMPANY.

21.   ACQUISITION, CREATION OR DISPOSITION OF A SUBSIDIARY

      (a)   Coverage shall apply to the INSUREDS of any subsidiary corporation
            or limited liability company in which more than 50% of the
            outstanding securities representing the present right to vote for
            election of directors or MANAGERS is owned, directly or indirectly,
            in any combination, by the COMPANY and/or one or more of its
            SUBSIDIARIES, and which is acquired or created after the inception
            of this POLICY, if written notice is given to the INSURER within
            sixty (60) days after the acquisition or creation, and any
            additional premium required by the INSURER is paid within thirty
            (30) days of the request therefor by the INSURER. The INSURER
            waives the obligation to provide notice and to pay any additional
            premium if the assets of such newly created or acquired company are
            not more than 15% of the total assets of the COMPANY or
            $500,000,000, whichever is less. The coverage provided for the
            INSUREDS of such new subsidiary shall be limited to CLAIMS for
            WRONGFUL ACTS actually or allegedly taking place subsequent to the
            date of acquisition or creation of the subsidiary.

      (b)   Coverage shall not apply to directors, MANAGERS, officers and
            employees of any subsidiary, including a SUBSIDIARY as defined in
            Clause 2 (Definitions) above, for CLAIMS for WRONGFUL ACTS actually
            or allegedly taking place subsequent to the date that the COMPANY
            and/or one or more of its SUBSIDIARIES, directly or indirectly, in
            any combination, ceases to own more than 50% of the outstanding
            securities representing the present right to vote for election of
            directors or MANAGERS in such subsidiary.







                                      12


   17


22.   BANKRUPTCY

      In the event a liquidation or reorganization proceeding is commenced by
      or against a COMPANY pursuant to the United States Bankruptcy Code, as
      amended, or any similar state or local law, the COMPANY and the INSUREDS
      hereby (i) waive and release any automatic stay or injunction which may
      apply in such proceeding to this POLICY or its proceeds under such
      Bankruptcy Code or law, and (ii) agree not to oppose or object to any
      efforts by the INSURER, the COMPANY or any INSURED to obtain relief from
      any such stay or injunction.

      In the event the COMPANY becomes a debtor in possession under the United
      States Bankruptcy Code or an equivalent status under the law of any other
      country and the aggregate LOSS due under this POLICY exceeds the
      remaining available LIMIT OF LIABILITY, the INSURER shall:

      (a)   first pay such LOSS allocable to WRONGFUL ACTS that are actually or
            allegedly caused, committed, or attempted prior to the COMPANY
            becoming a debtor in possession, then

      (b)   with respect to whatever remaining amount of the LIMIT OF LIABILITY
            is available after payment under (a) above, pay such LOSS allocable
            to WRONGFUL ACTS that are actually or alleged caused, committed, or
            attempted after the COMPANY became a debtor in possession.













                                      13


   18

[CODA LOGO]

                 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD.


Endorsement No. 24 Effective Date of Endorsement June 30, 2001


Attached to and forming part of POLICY No. PG-1O6C


COMPANY      THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE
             FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY


In consideration of the premium paid for this POLICY, it is hereby understood
and agreed that:

            CORPORATE REIMBURSEMENT AND ENTiTY COVERAGE ENDORSEMENT


Note: The corporate reimbursement and entity coverage provided by this
endorsement is subject to a deductible equal to the LIMIT OF LIABILITY with
respect to such coverage and therefore the INSURER will never be liable to
reimburse the COMPANY for any amounts under this endorsement. This endorsement
is issued at the COMPANY'S request solely to facilitate the COMPANY'S purchase
of coverage in excess of this POLICY by providing a corporate reimbursement and
entity coverage POLICY form.

      -     (A) Item III (LIMIT OF LIABILITY) of the Declarations of this
            POLICY is hereby deleted in its entirety and replaced with the
            following:

            Item III. LIMIT OF LIABILITY:

                  (A)   $25,000,000 Aggregate LIMIT OF LIABILITY for all LOSS
                                    under Part 1of Clause 1 (Insuring Clause)
                                    arising from all CLAIMS first made during
                                    each POLICY YEAR.

                  (B)   $25,000,000 Aggregate LIMIT OF LIABILITY for all LOSS
                                    under Part II of Clause 1 (Insuring Clauses)
                                    arising from all CLAIMS first made during
                                    each POLICY YEAR.


      -     (B) Items IV, V and VI of the Declarations of this POLICY are
            hereby renumbered as Items V, VI and VII, respectively, and the
            following Item IV is hereby inserted in the Declarations:

            Item  IV. DEDUCTIBLE:

                      $25,000,000   In the aggregate for all LOSS arising from
                                    a single CLAIM covered by Part 1 of Clause 1
                                    (Insuring Clause).


                                                                   PAGE 1 of 4
   19

[CODA Logo]

      -     (C) Clause 1 (Insuring Clause) of this POLICY is hereby deleted in
            its entirety and replaced with the following:


      1.    INSURING CLAUSE

            PART I

            (a)   Subpart to the Deductible as set forth in paragraph (c) of
                  this Part I, the INSURER shall pay on behalf of the COMPANY
                  amounts for which the COMPANY grants indemnification to the
                  INSUREDS, pursuant to the COMPANY'S charter or other similar
                  formative documents or by-laws or written agreements of the
                  COMPANY, duly effective under applicable law, for LOSS that
                  the INSUREDS are legally obligated to pay by reason of any
                  CLAIM or CLAIMS first made against the INSUREDS or any of
                  them during the POLICY PERIOD for any WRONGFUL ACTS that are
                  actually or allegedly caused, committed or attempted prior
                  to the end of the POLICY PERIOD by the INSUREDS, not
                  exceeding the LIMIT OF LIABILITY stated in Item III (A) of
                  the Declarations.

            (b)   Subject to the Deductible as set forth in paragraph (c) of
                  this Part I, the INSURER shall pay on behalf of the COMPANY
                  LOSS that the COMPANY is legally obligated to pay on behalf
                  of the COMPANY LOSS that the COMPANY is legally obligated to
                  pay by reason of any SECURITIES CLAIM or SECURITIES CLAIMS
                  first made against the COMPANY during the POLICY PERIOD for
                  any WRONGFUL ACTS that are actually or allegedly caused,
                  committed or attempted prior to the end of the POLICY PERIOD
                  by the INSUREDS or the COMPANY, not exceeding the LIMIT OF
                  LIABILITY stated in Item III(A) of the Declarations.

            (c)   In respect of all LOSS arising from a single CLAIM covered
                  under this Part I, this POLICY shall pay only the amount in
                  excess of the amount stated in item IV of the Declarations
                  as the Deductible, and the LIMIT OF LIABILITY stated in Item
                  III(A) of the Declarations shall be reduced by the amount of
                  such Deductible.

            PART II

                  The INSURER shall pay on behalf of the INSUREDS or any of
                  them, any and all LOSS that the INSUREDS shall become
                  legally obligated to pay by reason of any CLAIM or CLAIMS
                  first made against the INSUREDS or any of them during the
                  POLICY PERIOD, for any WRONGFUL ACTS that are actually or
                  allegedly caused, committed, or attempted prior to the end
                  of the POLICY PERIOD by the INSUREDS, not exceeding the
                  LIMIT OF LIABILITY stated in Item III (B) of the
                  Declarations.

      (-)   Subpart (e) of Clause 2 (Definitions) of this POLICY is hereby
            amended to also include the following: in its entirety and replaced
            with the following:

      (4)   with respect to SECURITIES CLAIMS, the COMPANY.


                                                                   PAGE 2 OF 4

   20

[CODA Logo]

         - (E) Subpart (f) of Clause 2 (Definitions) of this POLICY is hereby
           deleted in its entirety and replaced with the following:

                  (f) "LIMIT OF LIABILITY" shall mean the amount described in
                  Item III (A) or (B) of the Declarations. Regardless of the
                  time of payment of LOSS by the INSURER, the LIMITS OF
                  LIABILITY as stated in Item III (A) and (B) of the
                  Declarations (as reduced by the amount of the applicable
                  Deductible) shall be the maximum liability of the INSURER as
                  respects Part I and Part II, respectively of Clause 1
                  (Insuring Clause) for all LOSS arising from all CLAIMS first
                  made during each POLICY YEAR. Reasonable and necessary
                  attorneys fees incurred in investigating and defending a
                  CLAIM shall be part of and not in addition to the LIMITS OF
                  LIABILITY as stated in Item III (A) and (B) of the
                  Declarations and payment by the INSURER under such Part II
                  of such attorneys fees shall reduce the LIMIT OF LIABILITY
                  as stated in such Item III (B).

         - (F) Subpart (h) of Clause 2 (Definitions) of this POLICY is hereby
           amended by the addition, at the end of the subpart, of the following:

                       Further, with respect to Coverage under Part I(b) of
                       Clause 1 (Insuring Clause) only, LOSS shall not include
                       damages, judgements or settlements which the COMPANY has
                       paid or agreed to pay arising out of the COMPANY
                       allegedly paying an inadequate price or consideration for
                       the purchase of its own securities or the securities of a
                       SUBSIDIARY.

         - (G) The following additional definition is added to Clause 2
           (Definitions):

                  "SECURITIES CLAIM" shall mean a CLAIM which is whole or in
                  part alleges a violation of the Securities Act of 1933, the
                  Securities Exchange Acts of 1934, any similar federal or
                  state securities law, or any rules of regulations
                  promulgated thereunder, in connection with the purchase or
                  sale of, or offer to purchase or sell, any securities issued
                  by the COMPANY. SECURITIES CLAIM shall not mean or include a
                  criminal or administrative proceeding against the COMPANY.

         - (H) Subpart (h) of Clause 2 (Definitions) of this POLICY is hereby
           deleted in its entirety and replaced with the following:

                  "WRONGFUL ACT" shall mean (1) with respect to all INSUREDS
                  except the COMPANY, any actual or alleged error, misstatement,
                  misleading statement or act, omission, neglect, or breach or
                  duty by the INSUREDS while acting, individually or
                  collectively, in their capacities as directors or officers of
                  the COMPANY, or any other matter claimed against them by
                  reason of their serving as directors or officers of the
                  COMPANY, and (2) with respect to the COMPANY, any actual or
                  alleged error, misstatement, misleading statement or act,
                  omission, neglect or breach or duty by the COMPANY but solely
                  as respects a SECURITIES CLAIM covered by this POLICY. All
                  such errors, misstatements, misleading statements or acts,
                  omissions, neglects or breaches of duty actually or allegedly
                  caused, committed or attempted by or claimed against one or
                  more of the INSUREDS arising out of or relating to the same or
                  series of related facts, circumstances, situations,
                  transactions or events shall be deemed to be a single WRONGFUL
                  ACT.


                                                                   PAGE 3 OF 4


   21

[CODA Logo]

      -     (I)   Subpart (a) of Clause 3 (Exclusions) of this POLICY is hereby
                  modified by the addition, at the beginning of the subpart,
                  of the following:

                        (a)   As respects Part II of Clause 1 (Insuring
                              Clause),

      -     (J)   Clause 10 (Payment for LOSS) of this POLICY is hereby modified
                  by the addition, at the beginning of the Clause, of the
                  following:

                         As respects Part II of Clause 1 (Insuring Clause),

       -    (K)   Clause 17 (Representation) of this POLICY is hereby modified
                  by the addition, at the beginning of the Clause, of the
                  following:

                         As respects Part II of Clause 1 (Insuring Clause),


Nothing herein shall be held to vary, after, waive or extend any of the terms,
conditions, exclusions or limitations of this POLICY, except as expressly
stated herein. This endorsement is part of such POLICY and is incorporated
therein.





                                        BY  /s/ Jonathan Evans
                                           -----------------------------
                                           AUTHORIZED REPRESENTATIVE

END 02
ED 05/89                                                             PAGE 4 OF 4

   22




[CODA Logo]

                 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD.





Endorsement No. 23 Effective Date of Endorsement JUNE 30, 2001


Attached to and forming part of POLICY No. PG-1O6C


COMPANY  THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE
         FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY

In consideration of the premium paid for this POLICY, it is hereby understood
and agreed that:


1.   The definition of "INSUREDS" is amended to also include all natural persons
     who were, now are, or shall be duly appointed trustees of the COMPANY's
     Profit Sharing Trust and Employee Stock Ownership Plan ("Plan"), provided
     that such person is a party to and shall be entitled to any COMPANY
     indemnification afforded by The Proctor & Gamble Profit Sharing Trust and
     Employee Stock Ownership Plan Trust Agreement.


2.   The coverage afforded under this POLICY by reason of this endorsement shall
     be specifically excess of any fiduciary liability insurance purchased or
     maintained by the COMPANY or the Plan for the benefit of the Plan and its
     fiduciaries.


Nothing herein shall be held to vary, alter, waive or extend any of the terms,
conditions, exclusions or limitations of this POLICY, except as expressly
stated herein. This endorsement is part of such POLICY and is incorporated
therein.




                                                BY /s/ Jonathan Evans
                                                   ----------------------------
                                                   AUTHORIZED REPRESENTATIVE




   23




[CODA Logo]

                 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD.





Endorsement No. 22 Effective Date of Endorsement JUNE 30, 2001


Attached to and forming part of POLICY No. PG-1O6C


COMPANY  THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE
         FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY

In consideration of the premium paid for this POLICY, it is hereby understood
and agreed that on the Outside Positions Endorsement (Endorsement No. 2.)
Section A(1) is amended to read after the word "foundation" as follows:



        Trustees of Procter & Gamble's Global Pension Funds


Nothing herein shall be held to vary, alter, waive or extend any of the terms,
conditions, exclusions or limitations of this POLICY, except as expressly
stated herein. This endorsement is part of such POLICY and is incorporated
therein.




                                                BY /s/ Jonathan Evans
                                                   ----------------------------
                                                   AUTHORIZED REPRESENTATIVE








   24




[CODA Logo]

                 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD.





Endorsement No. 21 Effective Date of Endorsement JUNE 30, 2001


Attached to and forming part of POLICY No. PG-1O6C


COMPANY  THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE
         FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY

In consideration of the premium paid for this POLICY, it is hereby understood
and agreed that on the Outside Positions Endorsements Section A(1) is amended to
read after the word "foundation" as follows:-

Employee Stock Ownership Trust of the Procter & Gamble Profit Sharing Trust and
Employee Stock Ownership Plan.


Nothing herein shall be held to vary, alter, waive or extend any of the terms,
conditions, exclusions or limitations of this POLICY, except as expressly
stated herein. This endorsement is part of such POLICY and is incorporated
therein.




                                                BY /s/ Jonathan Evans
                                                   ----------------------------
                                                   AUTHORIZED REPRESENTATIVE

   25

[CODA Logo]

                 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD.





Endorsement No. 20 Effective Date of Endorsement JUNE 30, 2001


Attached to and forming part of POLICY No. PG-1O6C


COMPANY  THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE
         FUND/OFFICERS OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY

In consideration of the premium paid for this POLICY, it is hereby understood
and agreed that this POLICY is amended as indicated below. All other terms of
this POLICY remain unchanged.

                         OUTSIDE POSITIONS ENDORSEMENT:
                       SUBLIMIT, NON-SPECIFIC INDIVIDUALS

(A)      Subject to the sublimit of liability set forth in (C) below, the
         definition of "INSUREDS" is hereby extended to include:

         (1)      all persons who were, are, or shall be serving as directors,
                  officers, trustees, governors, partners or the equivalent
                  thereof for any corporation, partnership, joint venture,
                  eleemosynary institution, non-profit organization, industry
                  association, or foundation, (any such enterprises referred to
                  below as "Entity"), if:

                  (a)      such activity is part of their duties regularly
                           assigned by the COMPANY, or

                  (b)      they are a member of a class of persons so directed
                           to serve by the COMPANY.

         (2)      the estates, heirs, legal representatives or assigns of
                  deceased persons who were INSUREDS, as defined in subpart
                  (A)(1) above, and the legal representatives or assigns of
                  INSUREDS in the event of their incompetency, insolvency or
                  bankruptcy.

(B)      It is further understood and agreed that this extension of coverage:

         (1)      is to be excess of any other insurance and excess of any
                  director or officer liability insurance and/or company
                  reimbursement insurance any conditions in such other insurance
                  notwithstanding:


END 06
ED 05 89                                                             PAGE 1 OF 3


   26

[CODA Logo]


         (2)      shall not apply to any LOSS for which such Entity or the
                  COMPANY actually pays or indemnifies or is required or
                  permitted to pay on behalf of or to indemnify the INSUREDS
                  pursuant to the charter or other similar formative document or
                  by-laws or written agreements of such Entity or the COMPANY
                  duly effective under applicable law, that determines and
                  defines such rights of indemnity; provided, however, this
                  subpart (2) shall not apply if:

                  (a)      such Entity and the COMPANY refuse to indemnify or
                           advance defense or other costs as required or
                           permitted, or if such Entity and the COMPANY are
                           financially unable to indemnify; and

                  (b)      the INSUREDS comply with Clause 20 (Subrogation) of
                           the POLICY;

         (3)      shall not apply to any LOSS in connection with any CLAIM made
                  against the INSUREDS in their capacity as directors or
                  officers of Corporate Officers & Directors Assurance Ltd. or
                  Corporate Officers & Directors Assurance Holding, Ltd.; and


         (4)      is not to be construed to extend to the Entity nor to any
                  other director, officer, trustee, governor, partner or
                  employee of such Entity.


(C)      In lieu of the LIMIT OF LIABILITY stated in Item III of the
         Declarations, the limit of liability of the INSURER for this extension
         of coverage shall be $25,000,000 in the aggregate for all LOSS which is
         covered by reason of this extension of coverage and which is paid on
         behalf of all INSUREDS arising from all CLAIMS first made during each
         POLICY YEAR. It is understood that the amount stated in Item III of the
         Declarations is the maximum amount payable by the INSURER under this
         POLICY for all CLAIMS first made during each POLICY YEAR, and that this
         Endorsement extends coverage with a sublimit which further limits the
         INSURER'S liability and does not increase the INSURER'S maximum
         liability beyond the LIMIT OF LIABILITY stated in Item III of the
         Declarations. It is further understood that such sublimit is separate
         from and payment of LOSS pursuant to this Endorsement does not reduce
         the sublimit or limit contained in any other Outside Positions
         Endorsement to this POLICY.


(D)      Solely for purposes of this extension of coverage, the definition of
         "WRONGFUL ACT" is hereby modified to replace the word "COMPANY" with
         the word "Entity" wherever the word "COMPANY" appears.

(E)      Solely for purposes of applying subparts (i) and (j) of Clause 3
         (Exclusions) of the POLICY to this extension of coverage, the
         definition of "COMPANY" is hereby modified to include such Entity.


                                                                     PAGE 2 OF 3


   27


[CODA Logo]


Noting herein shall be held to vary, alter, waive or extend any of the terms,
conditions, exclusions or limitations of this POLICY, except as expressly
stated herein. This endorsement is part of such POLICY and is incorporated
therein.





















                                                BY /s/ Jonathan Evans
                                                   ----------------------------
                                                   AUTHORIZED REPRESENTATIVE



                                                                     PAGE 3 OF 3
   28

[CODA Logo]


                 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD.


Endorsement No. 19 Effective Date of Endorsement JUNE 30, 2001


Attached to and forming part of POLICY No. PG-106C


COMPANY   THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS OF
          OPERATING UNITS OF PROCTER AND GAMBLE COMPANY

                              AMENDED POLICY FORM
                              -------------------
                           3-YEAR MID-TERM: NEW FORM)
                           --------------------------

In consideration of the premium paid for this POLICY, it is hereby understood
and agreed that:


1.       Coverage afforded by the INSURER under this POLICY for CLAIMS first
         made against the INSUREDS after the effective date of this Endorsement
         and prior to expiration of the POLICY PERIOD shall be subject to the
         terms and conditions of this policy form and the Endorsements attached
         to this policy form, and shall not be subject to the terms and
         conditions of the previous policy form for this POLICY and its
         Endorsements.


2.       The issuance of this policy form and its Endorsements is intended to
         implement amendments to the INSURER's standard policy form for all
         similar policies issued by the INSURER and does not increase the LIMIT
         OF LIABILITY of the INSURER or change the inception date, anniversary
         date or POLICY YEAR under this POLICY.


Nothing herein shall be held to vary, after, waive or extend any of the terms,
conditions, exclusions or limitations of this POLICY, except as expressly stated
herein. This endorsement is part of such POLICY and is incorporated therein.











                                                BY /s/ Jonathan Evans
                                                   ----------------------------
                                                   AUTHORIZED REPRESENTATIVE



   29



[CODA Logo]

                 CORPORATE OFFICERS & DIRECTORS ASSURANCE LTD.



Endorsement No. 18 Effective Date of Endorsement JUNE 30, 2001


Attached to and forming part of POLICY No. PG-106C


COMPANY    THE PROCTER AND GAMBLE COMPANY/THE PROCTER AND GAMBLE FUND/OFFICERS
           OF OPERATING UNITS OF PROCTER AND GAMBLE COMPANY

                              AMENDED POLICY FORM
                              -------------------
                          (3-YEAR MID-TERM: NEW FORM)
                          ---------------------------

In consideration of the premium paid for this POLICY, It is hereby
understood and agreed that

1.       Coverage afforded by the INSURER under this POLICY for CLAIMS first
         made against the INSUREDS after the effective date of this Endorsement
         and prior to expiration of the POLICY PERIOD shall be subject to the
         terms and conditions of this policy form and the Endorsements attached
         to this policy form, and shall not be subject to the terms and
         conditions of the previous policy form for this POLICY and its
         Endorsements.


2.       The issuance of this policy form and its Endorsements is intended to
         implement amendments to the INSURER's standard policy form for all
         similar policies issued by the INSURER and does not increase the LIMIT
         OF LIABILITY of the INSURER or change the inception date, anniversary
         date or POLICY YEAR under this POLICY.



Nothing herein shall be held to vary, after, waive or extend any of the terms,
conditions, exclusions or limitations of this POLICY, except as expressly
stated herein. This endorsement is part of such POLICY and is incorporated
therein.



                                                BY /s/ Jonathan Evans
                                                   ----------------------------
                                                   AUTHORIZED REPRESENTATIVE

EX-99.2

   1
                                 EXHIBIT (99-2)


       Directors and Officers (First) Excess Liability Binder of Insurance



   2



- -------------------------------------------------------------------------------
From:                                     Telephone No: (441) 292 8515
                                          Facsimile No: (441) 292 1566

   XL INSURANCE LTD.                      [XL Logo]
   Cumberland House
   One Victoria Street
   P. O. Box HM 2245
   Hamilton HM JX
   Bermuda


- -------------------------------------------------------------------------------
Coverage Binder for:          The Proctor & Gamble Company

Type:                         Directors and Officers Liability including
                              Company Reimbursement Liability

Our Reference:                134/7

Policy No:                    XLD+O-00364

Policy Period:                June 30, 2001 to June 30, 2002

Brokerage:                    12.00%

New Aggregate:  Yes

                                                            Gross Written
Limit                         Attachment                    Premium
- -------------------------------------------------------------------------------
USD 25,000,000 D+O/CR         USD 25,000,000 D+O/CR         USD 300,000
USD 25,000,000 CR             USD 145,000,000 CR            USD 70,000


   3
Coverage Binder for:          The Proctor & Gamble Company       Page: 2

Retro Date: As per CODA Premier form.

Special Conditions

     A) XL. coverage to follow form of CODA Premier (10/00) form - as per ACE's
        5/7/01 fax.

     B) Issue standard XL. Policy: D+O-005.

     C) Discovery period: 12 months at 100 Percent of annual premium.

     D) Cancellation period: as per primary.

     E) Attach Policy Interpretation Endorsement.

     F) XL is not in a position to follow any State Amendatory Endorsement.

     G) XL will attach the following exclusions to Sides B & C of the Policy:

        - Broad Form BI/PD Exclusion
        - Broad Form Pollution Exclusion
        - P/P Litigation Exclusion effective inception

     H) XL will not follow exclusion (h) of the CODA Premier form on Side B.
        XL will utilize the wording in exclusion (i) of the CODA 5/92 form.

     I) ODL coverage as per expiring endorsement 2.

     J) Deletion of General Condition J, as per expiring endorsement.

     K) XL will incorporate CODA's 3/7/01 renewal application into our Policy,
        when issued.

     L) XL is not in a position to follow Section 8(a)(i) of the CODA Premier
        Policy form. We will provide a 3 year option for an additional premium
        of 100% of the annual premium.

     M) Subject to receipt of premium funds by 7/6/01.

     N) XL will not be in a position to follow Section 18(b) of the CODA Premier
        Policy Form.


   4
Coverage Binder for:               The Proctor & Gamble Company       Page 3

Standard Conditions

     1) The above binder does not include any amount with respect to Insurance
        Premium Tax. The terms of this binder include the obligation of the
        insured to reimburse XL for any Insurance Premium Tax incurred by it
        with respect to the premiums received from the insured.

     All terms and conditions as per wording of Policy and appropriate
     endorsements.


Regards,


Sharron Williams
XL Insurance Ltd.

EX-99.3

   1
                                 EXHIBIT (99-3)

 Directors and Officers (Second and Fifth) Excess Liability Binder of Insurance


   2
                                                                    Exhibit 99-3

[ACE LOGO]     ACE Bermuda              PO Box I-M 1015
               Insurance Ltd.           Hamilton HM DX
               The ACE Building         Bermuda
               30 Woodbourne Avenue
               Hamilton HM 08           441 295 5200 main
ace bermuda    Bermuda                  www.acelimited.com


ACE Bermuda Insurance Ltd. is pleased to confirm binding the following:

Policy Period:           June 30th, 2001--June 30th, 2002
Limit of Liability:      $45 Million xs $50 Million
                         $5 Million xs $170 Million


Premium:              $375,000.00 Gross
Less 12% Commission:   $45,000.00
                      -----------
Premium Due:          $330,000.00 Net


Underlying Structure:
- --------------------
NAME                LIMITS
                    D&O/CR
CODA                $25M
XL                  $25M
ACE                 $45M
CHUBB ATLANTIC      $25M
STARR               $25M
XL                  $25M
ACE                 $5M

One of the ACE Group of Insurance & Reinsurance Companies.

   3
[ACE LOGO]

ace bermuda

SPECIAL CONDITIONS
- ------------------
1. Followed Policy is XL.
2. Discovery Period & Pct: as per followed policy.
3. Cancellation Period:365 days (as expiring)
4. Coverage is D&O and CR.
5. Cover will be issued on Policy Form ACE D&O 5/96, Policy No. PG-9470D.
6. Endorsements to be included:
     Endorsement evidencing ACE will not follow section 18(b) of the CODA policy
7. Binding is subject to receipt of the appropriate premium on or before
   Monday, July 2nd, 2001.

Best regards,
/s/ Jonathan Evans
Jonathan Evans
ACE Bermuda Insurance Ltd.

Page 2/2

EX-99.4

   1
                                 EXHIBIT (99-4)


      Directors and Officers (Third) Excess Liability Binder of Insurance
   2
                                                                    Exhibit 99-4

[CHUBB LOGO]     CHUBB ATLANTIC INDEMNITY LTD.
                 LOCATION: BELVADENE BUILDING, 89 PITT'S RAY ROAD,
                 PEMBROKE HM 08, BERMUDA
                 MAILING: SUITE 773, 345 PARIA-VILLA ROAD,
                 HAMILTON HM 11, BERMUDA
                 PHONE: (441) 292-7343 - FACSIMILE: (441) 296-1728
                 WWW.CHUBBATLANTIC.BM

- --------------------------------------------------------------------------------

                    EXCESS DIRECTORS AND OFFICERS LIABILITY
                           SIDE A AND SIDE B COVERAGE
                                 RENEWAL BINDER

THIS CERTIFIES THAT pending the issuance of a Policy in the form described
below, Chubb Atlantic Indemnity Ltd., hereinafter called the Company, is
binding coverage described as follows:

1.   INSURED        The Proctor & Gamble Company
     Address:       One P&G Plaza
                    Cincinnati, Ohio
                    U.S.A. 45202

2.   PRODUCER       H&H Park International Limited
     Attn:          Mr. Marty Svenson
     Address:       Bermuda Commercial Bank Building
                    44 Church Street, PO Box HM 2064
                    Hamilton HM HX
                    Bermuda

3.   POLICY NO.     (02) 3310-04-49

4.   POLICY PERIOD
     From:     June 30, 2001                To:   June 30, 2002
     (12:01 a.m. Standard Time on both dates, at the address of the entity
     stated in Item 1 this Binder)

5.   TERM OF BINDER
     Effective:     June 30, 2000       Expires:  October 15, 2001
     (12:01 a.m. Standard Time on both dates, at the address of the entity
     stated in Item 1 this Binder)

6.   ANNUAL PREMIUM           $145,000

7.   POLICY FORM NO/TYPE      Chubb Atlantic Indemnity Ltd. Excess Follow Form
                              D&O policy

8.   LIMITED OF LIABILITY     $25,000,000 Annual Aggregate Limit of Liability
                              for the Policy Period Excess of the Underlying
                              Insurance shown in Item 9





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                                      -2-


9.   UNDERLYING INSURANCE     a. Each Claim Limit      $95,000,000 Side A
                                                       $120,000,000 Side B & C

                              b. Aggregate Limit       $95,000,000 Side A
                                                       $120,000,000 Side B & C


10.  FOLLOWING FORM OF:       XL policy wording (which cite excess of CODA
                              primary policy).

11.  ENDORSEMENTS

     (a) Pending or Prior Litigation at June 30, 1994 with respect to side A
         coverage only;
     (b) Amended Limit of Liability;
     (c) Bermuda Law & Arbitration wording;
     (d) Pending and Prior Litigation exclusion as at June 30 2001 with respect
         to Side B & C coverage.

12.  THIS BINDER WILL NOT BE EXTENDED NOR WILL A POLICY BE ISSUED UNLESS THE
     FOLLOWING CONDITIONS HAVE BEEN SATISFIED:

     -    Receipt, review and acceptance of a signed warranty statement with
          regard to Side B & C coverage and
     -    Receipt of the binders for the underlying policies to be submitted to
          Chubb Atlantic Indemnity Ltd.

THE TERMS AND CONDITIONS GIVEN ABOVE ARE SUBJECT TO CHANGE OR WITHDRAWAL BASED
UPON REVIEW OF THE ADDITIONAL INFORMATION REQUESTED.

It is expressly stipulated that except as otherwise provided herein the coverage
provided by this binder is subject to all of the terms and conditions of the
quotation letter of May 14, 2001, and attachments thereto issued by the Company.
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                                      -3-


This binder may be cancelled at any time by the entity referred to in Item 1 by
giving written notice of cancellation to the Company. This binder may be
cancelled at any time by the Company upon ten (10) days written notice of
cancellation to the entity referred to in Item 1 or its agent. This binder
shall terminate automatically upon the expiration date shown above, or upon
issuance of the policy, whichever occurs first. A short rate premium charge will
be made for this binder unless the policy is issued by the Company and accepted
by the entity referred to above. The Company reserves the right to modify the
policy's terms and conditions upon underwriting review of any information
received.

/s/ Rachel Thomson                 June 28, 2001
- --------------------------         ---------------------
Authorized Representative          Date

EX-99.5

   1
                                 EXHIBIT (99-5)

      Directors and Officers (Fourth) Excess Liability Binder of Insurance


   2
                                                                    Exhibit 99-5

[STARR EXCESS INTERNATIONAL LOGO]

                   EXCESS DIRECTORS & OFFICERS INSURANCE AND
                       CORPORATE REIMBURSEMENT INSURANCE

                              NEW BUSINESS BINDER

NAMED CORPORATION:       Proctor & Gamble

POLICY NUMBER:           6457675

POLICY PERIOD:           June 30, 2001 to June 30, 2002

LIMIT OF LIABILITY:      US$25,000,000

ATTACHMENT:              US$150,000,000


GROSS WRITTEN PREMIUM:   US$116,000

CURRENCY:                U.S. Dollar

COMMISSION:              15%

SUBJECT TO:
     1. Warranty statement;
     2. Details of SEC and IAMS claims;
     3. Copies of all underlying binders, within 15 days;
     4. Copies of all underlying policies, as soon as possible;
     5. Copy of CODA renewal application.

ADDITIONAL TERMS:
     1. Discovery--1 year at 100% of the annual premium;
     2. Cancellation Clause--per followed policy;
     3. Prior Notice Exclusion effective inception;
     4. Prior & Pending Litigation Exclusion effective inception;
     5. Retention;
     6. Broad form Pollution Exclusion applicable to Side B of policy;
     7. Broad form BI/PD Exclusion applicable to Side B of the policy;
     8. Starr is not in a position to follow State Amendatory Endorsements;
     9. Starr is not in a position to follow underlying sub-limits, but will
        recognize erosion;
    10. This quote is subject to confirmation that no layer placed excess of
        Starr attracts a higher premium per million than Starr's lower layer.


FOLLOWED POLICY:
CODA

   3
[STARR EXCESS INTERNATIONAL LOGO]

Page 2
Proctor & Gamble New Business binder

UNDERLYING POLICIES:

     CODA           $25m
     XL             $25m
     ACE Bermuda    $50m
     Chubb          $25m

Premium to be received no later than June 30, 2001.

The captioned policy will be issued upon receipt of the primary and all
underlying policies.

ACCEPTED BY: /s/ Adam Kleinman          DATE: June 26, 2001
             Adam Kleinman
             Vice President