SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999 Commission File Number 1-922
THE GILLETTE COMPANY
(Exact name of registrant as specified in its charter)
Incorporated in Delaware 04-1366970
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Prudential Tower Building, Boston, Massachusetts 02199
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 421-7000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of each class
Common Stock, $1.00 par value
Shares Outstanding March 31, 1999 . . . . . . . . . . . . . . 1,109,122,807
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PAGE 1
PART I. FINANCIAL INFORMATION
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF INCOME
(Millions, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31
------------------
1999 1998
---- ----
<S> <C> <C>
Net Sales .......................................... $ 1,939 $ 2,025
Cost of Sales ...................................... 693 783
------- -------
Gross Profit ................................... 1,246 1,242
Selling, General and Administrative Expenses ....... 799 808
------- -------
Profit from Operations ......................... 447 434
Nonoperating Charges (Income):
Interest income .................................. (2) (1)
Interest expense ................................. 28 17
Exchange ......................................... 9 6
Other charges - net .............................. - (2)
------- -------
35 20
------- -------
Income before Income Taxes ..................... 412 414
Income Taxes ....................................... 143 146
------- -------
Net Income ..................................... 269 268
======= =======
Net Income per common share
Basic .......................................... $ .24 $ .24
Assuming full dilution ......................... $ .24 $ .23
Dividends per common share
Declared ....................................... $ - $ -
Paid ........................................... $ .1275 $ .1075
Weighted average number of common shares outstanding
Basic .......................................... 1,107 1,122
Assuming full dilution ......................... 1,132 1,152
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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PAGE 2
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
ASSETS
(Millions of dollars)
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents ........................ $ 102 $ 102
Receivables, less allowances 1999-$67; 1998-$79... 2,322 2,943
Inventories:
Raw materials and supplies .................... 229 244
Work in process ............................... 274 232
Finished goods ................................ 1,317 1,119
------- -------
Total Inventories ....................... 1,820 1,595
Deferred income taxes ............................ 530 517
Prepaid expenses ................................. 298 283
------- -------
Total Current Assets .................... 5,072 5,440
------- -------
Property, Plant and Equipment, at cost ............. 5,551 5,705
Less accumulated depreciation ................... 2,190 2,233
------- -------
Net Property, Plant and Equipment .......... 3,361 3,472
------- -------
Intangible Assets, less accumulated amortization ... 2,409 2,448
Other Assets ....................................... 617 542
------- -------
$11,459 $11,902
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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<TABLE>
PAGE 3
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
LIABILITIES AND STOCKHOLDERS' EQUITY
(Millions of dollars)
<CAPTION>
March 31, December 31,
1999 1998
------------ -----------
(Unaudited)
<S> <C> <C>
Current Liabilities:
Loans payable .................................... $ 755 $ 981
Current portion of long-term debt ................ 36 9
Accounts payable ................................. 536 606
Accrued liabilities .............................. 1,276 1,423
Dividends payable ................................ - 141
Income taxes ..................................... 201 318
-------- --------
Total Current Liabilities ..................... 2,804 3,478
-------- --------
Long-Term Debt ..................................... 2,277 2,256
Deferred Income Taxes .............................. 435 411
Other Long-Term Liabilities ........................ 870 898
Minority Interest .................................. 39 39
Contingent Redemption Value of Common Stock
Put Options ...................................... 328 277
Stockholders' Equity:
8.0% Cumulative Series C ESOP Convertible
Preferred, without par value, issued: 1999,
147,581 shares; 1998, 148,627 shares ........... 89 90
Unearned ESOP compensation ....................... (10) (10)
Common stock, par value $1.00 per share:
Authorized 2,320,000,000 shares
Issued: 1999, 1,361,546,297 shares;
1998, 1,357,913,938 shares ............. 1,362 1,358
Additional paid-in capital ....................... 648 621
Earnings reinvested in the business .............. 5,797 5,529
Accumulated other comprehensive income ........... (1,009) (873)
Treasury stock, at cost: 1999, 252,423,490 shares;
l998, 252,507,187 shares ............... (2,171) (2,172)
-------- --------
Total Stockholders' Equity ............... 4,706 4,543
-------- --------
$ 11,459 $ 11,902
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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PAGE 4
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(Millions of dollars)
(Unaudited)
<CAPTION> Three Months Ended
March 31
-----------------
1999 1998
---- ----
<S> <C> <C>
Operating Activities
Net income .................................... $ 269 $ 268
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............... 121 116
Other ....................................... 1 (3)
Changes in assets and liabilities, net of
effects from acquisition of businesses:
Accounts receivable ....................... 616 413
Inventories ............................... (240) (226)
Accounts payable and accrued liabilities .. (175) (197)
Other working capital items ............... (197) 107
Other noncurrent assets and liabilities ... (74) (44)
Funding German pension plans............... - (252)
----- -----
Net cash provided by operating activities 321 182
----- -----
Investing Activities
Additions to property, plant and equipment .... (173) (193)
Disposals of property, plant and equipment .... 54 30
Other ......................................... 1 1
----- -----
Net cash used in investing activities .... (118) (162)
----- -----
Financing Activities
Purchase of treasury stock .................... - -
Proceeds from sale of put options ............. 16 -
Proceeds from exercise of stock option and
purchase plans ........................... 61 32
Increase(Decrease) in long-term debt .......... 668 (12)
Increase(Decrease) in loans payable ........... (809) 70
Dividends paid ................................ (142) (122)
----- -----
Net cash used in financing activities .... (206) (32)
----- -----
Effect of Exchange Rate Changes on Cash ........... 3 -
----- -----
Increase(Decrease) in Cash and Cash Equivalents ... - (12)
Cash and Cash Equivalents at Beginning of Year .... 102 105
----- -----
Cash and Cash Equivalents at End of Quarter ....... $ 102 $ 93
===== =====
Supplemental disclosure of cash paid for:
Interest ...................................... $ 30 $ 25
Income taxes .................................. $ 43 $ 52
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
<PAGE>
PAGE 5
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Millions of dollars)
(Unaudited)
Three Months Ended
March 31
------------------
1999 1998
---- ----
Net Income $ 269 $ 268
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adj. (136) 24
--- ---
Comprehensive Income $ 133 $ 292
=== ===
Foreign currency translation adjustments are after favorable (unfavorable) tax
effects for three months in 1999, $(54) million and three months in 1998, $3
million.
Accumulated Other Comprehensive Income
- --------------------------------------
The accumulated balances for the components of Other Comprehensive Income are:
<TABLE>
Accumulated
Foreign Other
Currency Pension Comprehensive
Translation Adjustment Income
----------- ---------- -------------
Balance December 31, 1997 $(790) $ (20) $(810)
Change in period 24 - 24
----- ----- -----
Balance March 31, 1998 $(766) $ (20) $(786)
===== ===== =====
Balance December 31, 1998 $(826) $ (47) $ (873)
Change in period (136) - (136)
----- ----- -------
Balance March 31, 1999 $(962) $ (47) $(1,009)
===== ===== =======
(/TABLE>
See Accompanying Notes to Consolidated Financial Statements.
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PAGE 6
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
COMPUTATION OF NET INCOME PER COMMON SHARE
(Millions, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31
------------------
1999 1998
---- ----
<S> <C> <C>
Net Income, as reported ............. $ 269 $ 268
Less: Preferred stock dividends .... 1 1
------ ------
Net Income, basic ................... $ 268 $ 267
Effect of dilutive securities:
Convertible preferred stock ..... 1 1
------ ------
Net Income, assuming full dilution .. $ 269 $ 268
====== ======
Common shares, basic ................ 1,107 1,122
Effect of dilutive securities:
Convertible preferred stock ..... 12 12
Stock options ................... 13 18
------ ------
Common shares, assuming full dilution 1,132 1,152
====== ======
Net Income per Common Share
Basic ............................. $ .24 $ .24
====== ======
Assuming full dilution ............ $ .24 $ .23
====== ======
</TABLE>
See Acccompanying Notes to Consolidated Financial Statements.
<PAGE>
PAGE 7
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Comments
- -------------------
Reference is made to the registrant's 1998 annual report to stockholders, which
contains, at pages 24 through 40, financial statements and the notes thereto,
which are incorporated by reference in the registrant's Annual Report on Form
10-K for the year ended December 31, 1998.
For interim reporting purposes, advertising expenses are charged to operations
as a percentage of sales, based on estimated sales and related advertising
expense for the full year. On an annual basis, advertising costs are expensed
in the year incurred.
Effective January 1, 1999, Gillette operations in Mexico have ceased using
hyperinflationary accounting. The functional currency in Mexico is the Peso and
the switch to non-hyperinflationary accounting had no material impact on
reported results.
The Company assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation. If
the goodwill amortization cannot be fully recovered, the amount of goodwill
impairment is determined based on projected discounted future operating cash
flows or appraised values, depending on the nature of the asset.
With respect to the financial information for the interim periods included in
this report, which is unaudited, the management of the Company believes that all
adjustments necessary for a fair presentation of the results for such interim
periods have been included.
Accounting Pronouncements
- -------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company will
adopt SFAS 133 no later than January 1, 2000. Its impact on the consolidated
financial statements is still being evaluated, but it is not expected to be
material.
<PAGE>
PAGE 8
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reorganization and Realignment
- ------------------------------
On September 28, 1998, the Company announced a reorganization that would realign
its worldwide operations. In connection with the reorganization and realignment,
and in accordance with EITF issue 94-3 and SFAS 121, the Company recorded in the
third quarter of 1998 a charge to operating expenses of $535 million ($347
million after taxes, or $.30 in net income per common share, fully diluted).
Employee severance and related benefits, shown below, includes severance
payments, fringe benefits, outplacement fees and special termination benefits
related to pensions.
Details of the reorganization and realignment charges follow.
Activity Current Activity
Initial Through Quarter Through
(Millions of dollars) Provision Dec.31,1998 Activity Mar.31,1999 Balance
- --------------------- --------- ----------- -------- ----------- -------
Employee severance and
related benefits $385 $ 51 $ 19 $ 70 $315
Asset impairments 135 135 - 135 -
Distributor buyout costs 15 3 7 10 5
---- ---- ---- ---- ---
Total $535 $189 $ 26 $215 $320
==== ==== ==== ==== ===
The effect of suspending depreciation for impaired assets in the first quarter
was $3 million.
Share Repurchase Program
- ------------------------
On September 18, 1997, the Company's Board of Directors authorized a share
repurchase program to purchase up to 50 million shares in the open market or in
privately negotiated transactions, depending on market conditions and other
factors. The Company did not repurchase any shares in the first quarter of 1999.
From the inception of the program through March 31, 1999, the Company
repurchased 22 million shares in the open market for $1,119 million.
In 1999, the Company continued to sell equity put options as an enhancement to
its ongoing share repurchase program and collected $16 million in premiums in
the first quarter. These options provide the Company with an additional
opportunity to supplement open-market purchases of its common stock if the
options expire "in the money" (the option strike price is greater than the
closing price for Gillette common stock on the expiration date). In addition,
the premiums received are a source of funding for share purchases. The options
are exercisable only on the last day of their term. The Company may elect to
settle by paying net cash or by purchasing the shares. To date the Company has
always purchased shares upon settlement and it is the intention of the Company
to continue this practice.
The option prices were based on the market value of the Company's stock at the
date of issuance. The redemption value of the outstanding options, which
represents the options' price multiplied by the number of shares under option,
is presented in the accompanying consolidated balance sheet as "Contingent
Redemption Value of Common Stock Put Options." At March 31, 1999, no "in the
money" obligations existed on outstanding options.
<PAGE>
PAGE 9
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Information by Business Segment
- -----------------------------------------
Net sales, profit from operations and identifiable assets for each of the
Company's business segments are set forth below. There are no material
intersegment revenues.
Net Sales
---------
Three Months Ended
March 31
-------------------
(Millions of dollars) 1999 1998
------ ------
Blades & Razors $ 652 $ 584
Toiletries 225 306
Stationery Products 143 166
Braun Products 298 343
Oral-B Products 145 144
Duracell Products 476 482
------ ------
Total $1,939 $2,025
====== ======
Profit from Operations
----------------------
Three Months Ended
March 31
------------------
(Millions of dollars) 1999 1998
------ ------
Blades & Razors $ 266 $ 243
Toiletries 30 23
Stationery Products 1 13
Braun Products 38 39
Oral-B Products 23 19
Duracell Products 92 98
------ ------
Sub-total Reportable Segments 450 435
All Other (3) (1)
------ ------
Total $ 447 $ 434
====== ======
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PAGE 10
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Identifiable Assets
----------------------------------------
Mar 31, Dec 31, Mar 31, Dec 31,
(Millions of dollars) 1999 1998 1998 1997
------- ------- ------- -------
Blades & Razors $ 3,347 $ 3,378 $ 3,009 $ 3,006
Toiletries 747 771 861 1,004
Stationery Products 1,211 1,330 1,269 1,299
Braun Products 1,574 1,679 1,397 1,544
Oral-B Products 725 680 602 622
Duracell Products 3,014 3,288 2,926 3,138
------ ------ ------ ------
Sub-total Reportable Segments 10,618 11,126 10,064 10,613
All Other 841 776 628 251
------ ------ ------ ------
Total $11,459 $11,902 $10,692 $10,864
====== ====== ====== ======
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PAGE 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Results for any interim period, such as that described in the following
analysis, are not necessarily indicative of the results for the entire year.
First Quarter 1999 versus 1998
- ------------------------------
Sales for the quarter ended March 31, 1999, were $1.94 billion, a decrease of 4%
versus the same quarter of the prior year. Excluding the adverse effects of
exchange and the divestitures of Jafra Cosmetics International and the
rechargeable battery business, sales rose 3%.
Sales in North America were considerably above those of the prior year, due to
successful new product launches, including the Mach3 shaving system, Oral-B
CrossAction toothbrush and Duracell Ultra battery. Sales in Latin America were
significantly below those of the prior year, reflecting the negative effect of
Brazil's recessionary environment on both volume and exchange rates. Sales in
Asia-Pacific were appreciably above those of the prior year, due to the success
of the Mach3 launch in Australia and Japan, as well as improvement of the
battery market in South Korea. Sales in Western Europe were marginally below
those of the previous year, as considerable gains in blades and razors, driven
by the Mach3 system, were offset by softness in stationery products and the
impact of Germany's weak economy on Braun sales. Sales in AMEE (Africa, Middle
East and Eastern Europe) were substantially below those of the prior year, due
to unfavorable exchange and the poor Russian economy.
Sales and profits of blade and razor products were notably higher than those of
the prior year, buoyed by sales of the Mach3 system. Sales and profits in North
America, three full quarters after the initial launch of Mach3, were
substantially above those of the prior year, a pattern that is being repeated in
markets around the world. Driven by the June 1998 launch of the Mach3 shaving
system, Gillette blade dollar share in the United States has grown 3.5
percentage points, from 66.9% in March 1998 to 70.4% in March 1999. In Western
Europe, where the Mach3 system was launched in September 1998, and sales grew
considerably, Gillette blade dollar share increased 2.4 percentage points to
73.2 percent, from Jan/Feb 1998 to Jan/Feb 1999.
Sales of Duracell products were about the same as those of the prior year, as
strength in the United States and some recovery in South Korea were offset by
weakness in Latin America and AMEE, and by the negative impact of exiting the
rechargeable battery business. The total alkaline battery dollar market in the
United States grew by 13% from March 1998 to March 1999, with the Duracell share
of that rapidly expanding market growing from 48.6% in March 1998 to 50.2% in
March 1999. Duracell profits declined from those of the prior year, reflecting
marketing expenses behind the geographic rollout of Ultra batteries.
Braun sales were significantly below those of 1998, due to poor Christmas retail
offtake in the United States and softness in Western Europe and AMEE. Profits
were only marginally below those of 1998, the result of manufacturing
efficiencies, cost containment and reduced marketing expenses.
Toiletries sales were markedly below those of the prior year, due in part to
unmatched Jafra sales since the divestiture of the business on April 30, 1998.
Excluding Jafra, toiletries sales were appreciably below those of the prior
year, as good growth in North America was overshadowed by much lower sales in
AMEE markets. Profits were sharply higher, due to unmatched new product launch
expenses in 1998.
<PAGE>
PAGE 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Sales and profits of stationery products were substantially below those of 1998.
Sales were affected by weakness in Parker pen sales in all regions, while the
sharp drop in profits was due to fewer sales dollars to cover fixed costs.
Sales of Oral-B products in the first quarter showed little change from those of
the prior year, as strong growth in North America, driven by the CrossAction
toothbrush, was offset by much lower sales in Latin America. Profits were
significantly higher than those of the previous year, aided by favorable product
mix.
Costs and Expenses
- -------------------
Gross profit was $1.25 billion, virtually unchanged from 1998. Gross profit as a
percentage of sales was 64.3%, compared with 61.3% in 1998. Margin
improvement is due to improved sales mix from increased sales of higher margin
blade and razor products, plus the introduction of higher margin new products
for Duracell and Oral-B.
Selling, general and administrative expenses decreased by $9 million, or 1%.
Combined advertising and sales promotion expenses increased 6% versus the prior
year. Spending on research and development decreased 2%, while other marketing
and administrative expenses decreased 5%.
Profit from operations was $447 million, up 3% from $434 million a year earlier.
Net interest expense was higher, due to increased borrowings to fund the share
repurchase program. Net exchange losses were also higher, primarily due to
conditions in Turkey. The effective tax rate was lower.
Net income of $269 million was virtually unchanged from the $268 million in
1998. Diluted net income per common share of $.24 was 4% above the $.23 of a
year earlier.
Reorganization and Realignment
- ------------------------------
On September 28, 1998, the Company announced a reorganization and realignment
program that resulted in a third-quarter charge to operations of $535 million
($347 million after taxes, or $.30 in net income per common share, fully
diluted).
The program will result in the closure of 14 factories, 12 warehouses and 30
office facilities, as well as a reduction of approximately 4,700 employees
across all business segments, geographies and employee groups. Pretax cash
outlays were $16 million in 1998 and are estimated at approximately $180 million
in 1999 and $160 million in 2000. Cash severance payments will extend beyond the
completion of program activities, due to the severance payment options available
to affected employees. In 1999, cash expenditures from the program are expected
to be greater than the cash benefits generated. Cash requirements will be funded
from operations. When fully implemented in 2000, the program will generate
pretax savings of approximately $200 million annually.
<PAGE>
PAGE 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Employee reductions through March 31, 1999, totaled 846 employees. Progress to
date has met expectations, and the pace of realignment activities is
accelerating. In 1999, approximately 40% of the annual benefit should be
achieved, with the majority of the estimated annual savings realized in 2000,
when the program is completed.
Additional reorganization and realignment details are provided in the Notes to
Consolidated Financial Statements.
Financial Condition
- -------------------
Net cash provided by operating activities for the three months ended March 31,
1999, amounted to $321 million, compared with $182 million in the same period
last year. A significant portion of this change is due to the funding of the
German pension plan in 1998. Other working capital items compared unfavorably to
1998 due to the timing of tax payments.
At March 31, 1999, receivables were significantly below the year-end balance,
while inventories increased markedly, typical movements in the first quarter.
Net debt (Loans Payable, Current portion of long-term debt and Long-Term debt,
net of associated swaps, less Cash and cash equivalents) at March 31, 1999,
amounted to $2.89 billion, compared with $3.18 billion at year-end 1998. The
decrease in net debt was primarily due to the availability of cash provided by
operating activities. The Company's current ratio at March 31, 1999, was 1.81,
compared with 1.56 at December 31, 1998, reflecting the impact of lower loans
payable.
On February 2, 1999, the Company issued a $343 million Euro denominated debt
obligation due February 2004. On March 26, 1999, the Company entered into a $325
million Euro denominated debt obligation which expires in March 2002. The
proceeds were used to reduce commercial paper borrowing and for other Corporate
purposes. Based on the Company's intention and ability to maintain its revolving
credit agreements beyond 1999, $500 million of commercial paper borrowing was
classified as long-term debt at March 31, 1999. At December 31, 1998, $1,100
million of commercial paper borrowing was classified as long-term debt.
Year 2000
- ---------
The Company has undertaken a comprehensive approach to address its potential
exposure to the Year 2000 issue - covering all potentially affected areas
(applications, computers, facilities, manufacturing equipment, suppliers,
customers, etc.) at all locations.
At March 31, 1999, 93% of the affected items identified were certified to be
Year 2000 compliant, or their risks have been minimized to an appropriate level.
The Company expects to make substantial progress on the remaining items by June
30, 1999. The remaining tasks have been identified and are well understood.
Resources have been assigned, and the work is under way.
<PAGE>
PAGE 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Gillette has established 180 separate contact points around the world to track
the year 2000 progress of each of the Company's 180 facilities or organizations.
In the discovery phase of the Year 2000 effort, potentially affected items at
all 180 locations were identified. Of the 25,000 total items identified, 7,800
were internal Information Technology (IT) and non-IT items classified as high
impact. Of those 7,800 high impact items, only 3% are not yet compliant. There
are four information technology system replacement projects under way, in
individual foreign countries, which will result in Year 2000 compliance for all
remaining items that are considered significant. These four projects are in
phase five (phase six is Year 2000 certified compliance). Three of the
replacements are scheduled for completion in June through August 1999.The fourth
system replacement, which in one country supports half of our business activity,
is scheduled for completion in October 1999. Although this project supports only
a portion of our business in a single country, with minimal business risk,
contingency plans are being developed for this system and will be enacted if
required.
The Company has material third-party relationships with suppliers of raw
materials, and with customers and utility providers. Raw materials are readily
available and most can be supplied by a number of alternate vendors.
We purchase raw materials externally and generally have strong relationships
with our vendors, for whom we are a significant source of revenue. For large or
important vendors, we have asked for confirmation of their compliance and
verification that their program also extends to the compliance of their
suppliers. Where initial responses were questionable, we have engaged in
dialogue and followed up with on-site visits where appropriate. For those very
few who remain questionable, we continue to monitor them closely. If not
confident of their compliance, we will invoke contingency plans as and when
necessary.
For our largest customers (those cumulatively representing 75% of sales for a
country), we have informed them of our progress and inquired of theirs, focusing
on their ability to order, receive and pay for our products. We are in the
process of testing electronic interfaces with all significant North American
customers. In addition, some local operations have mailed informational packages
to all customers and/or hosted conferences to raise awareness, share our
progress and assess our customers' efforts.
The Company has an extensive quality assurance program in place, including the
RAP 2000 program (rapid assessment program) carried out by external consultants,
designed to ensure that Year 2000 activities are accomplishing their objectives.
In addition, the Company has reviewed independent external assessments of
infrastructure risk in foreign countries.
The Company continues to develop detailed contingency plans to deal with
unexpected issues, which may occur. These plans include the identification of
appropriate resources and response teams. Individual business managers worldwide
are responsible to ensure their business functions continue to operate normally.
We have established Company-wide minimum requirements for contingency plans,
which are under development. While the specifics vary by country, the general
strategies include: increasing the on-hand supply of raw materials and finished
goods; identifying alternate suppliers of raw materials; employing backup
generators; ensuring key personnel (both business and technical) are physically
on-site; backing up critical systems just before year-end; and identifying
alternative methods of doing business with customers as necessary.
<PAGE>
PAGE 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
We are also in the process of establishing contingency teams at each operating
location that will be empowered to address any internal or third-party failures
by approving temporary changes in our business processes and policies, should
this be necessary to ensure business continuity.
In addition, Gillette operations depend on infrastructures in over 200 countries
and territories in which the Company operates and, therefore, a failure of any
one of those infrastructures could materially adversely affect its operations.
Our most significant foreign markets, based on net sales and manufacturing, are,
in alphabetical order, Belgium, Brazil, Canada, France, Germany, Italy, Mexico,
and the United Kingdom. In these countries, we are not aware of any significant
weaknesses in their infrastructures. Independent external consultants have
reinforced our conclusions.
Despite this comprehensive approach, the Company cannot be completely sure that
issues will not arise, nor events occur, that could have material adverse
effects on the Company's results of operations or financial condition.
Nevertheless, Gillette does not expect a material failure. The Company's Year
2000 program is designed to minimize the likelihood of any failure occurring.
The most reasonably likely worst-case scenario is that a short-term disruption
will occur with a small number of customers or suppliers, requiring an
appropriate response.
Spending for the program is budgeted, expensed as incurred and not expected to
be material.
<PAGE>
PAGE 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject, from time to time, to legal proceedings and claims
arising out of its business, which cover a wide range of matters, including
antitrust and trade regulation, advertising, product liability, contracts,
environmental issues, patent and trademark matters and taxes. Management, after
review and consultation with counsel, considers that any liability from all of
these legal proceedings and claims would not materially affect the consolidated
financial position, results of operations or liquidity of the Company.
Item 4. Vote of Security Holders
At its Annual Meeting on April 15, 1999, the stockholders of The Gillette
Company took the following actions:
1. Elected the following four directors for terms to expire at the 2002
Annual Meeting of Stockholders, with votes as indicated opposite each
director's name:
For Withheld
----------- ----------
Warren E. Buffett 945,682,707 9,717,203
Michael B. Gifford 945,500,205 9,899,705
Carol R. Goldberg 945,182,731 10,217,179
Marjorie M. Yang 945,347,881 10,052,029
2. Approved the appointment by the Board of Directors of KPMG as auditors
for the year 1999. The vote was 949,806,941 for and 2,044,875 against the
proposal, with 3,548,094 abstentions.
3. Rejected a stockholder proposal calling for the Company's endorsement of
the CERES principles on the environment. The vote was 660,554,966 against
and 53,965,835 for the proposal with 65,140,499 abstentions and
175,738,610 broker nonvotes.
<PAGE>
PAGE 17
Item 5. Other Information
Cautionary Statement
- --------------------
From time to time, the Company may make statements which constitute or contain
"forward-looking" information as that term is defined within the meaning of the
Federal securities laws. These statements may be identified by such
forward-looking words as "expect," "look," "believe," "anticipate," "may,"
"will," and variations of these words or other forward-looking terminology.
Forward-looking statements made by the Company are not guarantees of future
performance. Actual results may differ materially from those in the
forward-looking statements as the result of risks and uncertainties including
those listed below. The Company assumes no obligation to update any
forward-looking information.
* the pattern of the Company's sales, including variations in sales volume
within periods, which makes forward-looking statements about sales and
earnings difficult and may result in variance of actual results from those
contained in statements made at any time prior to the period's close;
* vigorous competition within the Company's product markets, including
pricing and promotional advertising or other activities in order to
preserve or gain market share, the timing of which cannot be foreseen by
the Company;
* the Company's reliance on the development of new products and the inherent
risks associated with new product introductions, including uncertainty of
trade and customer acceptance and competitive reaction;
* the costs and effects of unanticipated legal and administrative
proceedings;
* the impacts of unusual items resulting from ongoing evaluations of
business strategies, asset valuations and organizational structure;
* a substantial portion of the Company's sales having been made outside the
United States, making forecasting of sales more difficult;
* the impact on sales or earnings of fluctuations in exchange rates in one
or more of the Company's foreign markets;
* the impact of the year 2000 issue on the Company's order, production,
distribution and financial systems and the systems of its suppliers,
customers and utility providers;
* the possibility of one or more of the global markets in which the Company
competes being impacted by variations in political, economic or other
factors, such as inflation rates, recessionary or expansive trends, tax
changes, legal and regulatory changes or other external factors over which
the Company has no control;
<PAGE>
PAGE 18
* the effects of rapid technological change on product development
differentiation, acceptance and costs including technological advances of
competitors;
* the effects of patents including possible new patents granted to
competitors or challenges to Company patents and expiration of patents,
which affect competition and product acceptance.
Item 6(a) Exhibits
Exhibit 27 Financial Data Schedule
Item 6(b) Reports on Form 8-K
The Company filed a current report on Form 8-K dated February 19, 1999, which
referred to an announcement by the Company on the previous day of the planned
retirement of Alfred M. Zeien, Chairman of the Board and Chief Executive
Officer, and the election of Michael C. Hawley as Chairman of the Board and
Chief Executive Officer.
<PAGE>
PAGE 19
SIGNATURE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE GILLETTE COMPANY
(Registrant)
CHARLES W. CRAMB
Charles W. Cramb
Senior Vice President, Finance,
Chief Financial Officer and
Principal Accounting Officer
May 14, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The data reported in this exhibit are based on unaudited statements but include
all adjustments which the company considers necessary for a fair presentation of
results for this period.
</LEGEND>
<CIK> 0000041499
<NAME> THE GILLETTE COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
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<PP&E> 5,551,000
<DEPRECIATION> 2,190,000
<TOTAL-ASSETS> 11,459,000
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<BONDS> 2,277,000
0
89,000
<COMMON> 1,362,000
<OTHER-SE> 3,255,000
<TOTAL-LIABILITY-AND-EQUITY> 11,459,000
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<OTHER-EXPENSES> 799,000
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<NET-INCOME> 269,000
<EPS-PRIMARY> .24
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</TABLE>
