ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
The Gillette Company was incorporated under the laws of the State of Delaware in 1917 as the successor of a Massachusetts corporation incorporated in 1912 which corporation was the successor of a Maine corporation organized in 1901 by King C. Gillette, inventor of the safety razor.
A description of the Company and its businesses appears in the 1997 Annual Report on the inside front cover, at pages 2 through 5 under the caption "Letter to Stockholders" and at pages 18 through 21 under the caption "AMEE: Gateway to Growth" the texts of which are incorporated by reference. See also Item 7, "Management's Discussion" at page 5 of this report.
INDUSTRY SEGMENTS
The approximate percentages of consolidated net sales and segment profit from operations during the last five years for each of the Company's business segments appear in the 1997 Annual Report at page 41 under the caption, "Business Segments," and are incorporated by reference.
"Financial Information by Business Segment," containing information on net sales, profit from operations, identifiable assets, capital expenditures and depreciation for each of the last three years, appears in the 1997 Annual Report at page 40 and is incorporated by reference.
The Company's businesses range across several industry segments, including blades and razors, toiletries and cosmetics, stationery products, electric shavers, small household appliances, hair care appliances, oral care appliances, oral care products and alkaline batteries for consumer products. Descriptions of those businesses appear in the 1997 Annual Report at pages 6 through 17, the text of which is incorporated by reference.
DISTRIBUTION
In the Company's major geographic markets, traditional Gillette product lines, Duracell batteries and Oral-B products are sold to wholesalers, chain stores and large retailers and are resold to consumers primarily through food, drug, discount, stationery, hardware, toy, tobacco and department stores. Jafra skin care products are sold to independent consultants and are resold to consumers, primarily at classes in the home and office. Waterman and Parker products are sold to wholesalers and retailers and are resold to consumers through fine jewelry, fine stationery and department stores, pen specialists and other retail outlets. Braun products are sold to wholesalers and retailers and are resold to consumers mainly through department, discount, catalogue and specialty stores. Oral-B products are marketed directly to dental professionals for distribution to patients as well as through standard distribution channels. In many small Gillette, Duracell, Braun and Oral-B markets, products are distributed through local distributors and sales agents.
PATENTS
Certain of the Company's patents and licenses in the blade and razor segment are of substantial value and importance when considered in the aggregate. Additionally, the Company holds significant patents in its toiletries and cosmetics, stationery products, Duracell, Braun, and Oral-B businesses. No patent or license held by the Company is considered to be of material importance when judged from the standpoint of the Company's total businesses. Gillette has licensed many of its blade and razor patents to other manufacturers. In all of these categories, Gillette competitors also have significant patent positions. The patents and licenses held by the Company are of varying remaining durations.
TRADEMARKS
In general, the Company's principal trademarks have been registered in the United States and throughout the world where the Company's products are sold. Gillette products are marketed outside the United States under various trademarks, many of which are the same as those used in the United States. The trademark "Gillette" is of principal importance to the Company. In addition, a number of other trademarks owned by the
Company and its subsidiaries have significant importance within their industries. The Company's rights in these trademarks endure for as long as they are used or registered.
COMPETITION
The blades and razors segment is marked by competition in new technology, as well as by competition in price, marketing, advertising and promotion to retail outlets and to consumers. The Company's major competitors worldwide are Warner-Lambert Company, with its Schick and, in North America and Europe, its Wilkinson Sword product lines, and Societe Bic S.A., a French company. Additional competition in the United States and in certain other markets is provided by the American Safety Razor Company, Inc. under its own brands and a number of private label brands, as well as other private label suppliers. The toiletries and cosmetics segment is highly competitive in terms of price, product innovation and market positioning, with frequent introduction of new brands and marketing concepts, especially for products sold through retail outlets, and with product life cycles typically shorter than in the other businesses of the Company. Competition in the stationery products segment, particularly in the writing instruments market, is marked by a high degree of competition from domestic and foreign suppliers and low entry barriers, and is focused on a wide variety of factors including product performance, design and price, with price an especially important factor in the commercial sector. Competition in the Braun products markets is based primarily on product performance, innovation and price, with numerous competitors in the small household and hair care appliances segments. Competition in the Oral-B products markets is focused on product performance, price and dental profession endorsement. The Duracell products markets are marked by competition in product performance, innovation and price and in marketing, advertising and promotion to retail outlets and to consumers. Many of the Company's competitors are larger and have greater resources than the Company.
EMPLOYEES
At year-end, Gillette employed approximately 44,000 persons, three-quarters of them outside the United States.
RESEARCH AND DEVELOPMENT
In 1997, research and development expenditures were $212 million, compared with $204 million in 1996 and $187 million in 1995.
RAW MATERIALS
The raw materials used by Gillette in the manufacture of products are purchased from a number of suppliers, and substantially all such materials are readily available.
OPERATIONS BY GEOGRAPHIC AREA
The following table indicates the geographic sources of consolidated net sales and profit from operations of the Company for the last three years:
"Financial Information by Business Segment" and "Financial Information by Geographic Area" containing information on net sales, profit from operations and identifiable assets for each of the last three years appear in the 1997 Annual Report under the same captions at page 40 and are incorporated by reference.
ITEM 2.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns and leases manufacturing facilities and other real estate properties in the United States and a number of foreign countries. The Company's executive offices are located in the Prudential
Center, Boston, Massachusetts where it holds a long term lease. The following table sets forth the Company's principal manufacturing plants:
The above facilities are in good repair, adequately meet the Company's needs and operate at reasonable levels of production capacity. - ---------------
* Engaged in the manufacture of products for two or more business segments.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject, from time to time, to legal proceedings and claims arising out of its business, which cover a wide range of matters, including antitrust and trade regulation, product liability, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable. ------------------------
EXECUTIVE OFFICERS OF REGISTRANT
Information regarding the Executive Officers of the Company as of March 19, 1998 is set out below.
The Executive Officers hold office until the first meeting of the Board of Directors following the annual meeting of the stockholders and until their successors are elected or appointed and qualified, unless a shorter period shall have been specified by the terms of their election or appointment, or until their earlier resignation, removal or death.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The information required by this item with respect to the Company's common stock appears in the 1997 Annual Report on the inside back cover under the caption "common stock" and at page 41 under the caption, "Quarterly Financial Information," and is incorporated by reference. As of February 27, 1998, the record date for the 1998 Annual Meeting, there were 56,720 Gillette stockholders of record.
On November 14, 1997, the Company sold 6 percent notes due November 14, 2000 in the aggregate principal amount of $300 million to a syndicate of underwriters led by ABN AMRO Bank N.V. The underwriters subscribed to the notes at 100.960% of their principal amount less a combined management and underwriting commission of 0.200% and a selling concession of 1.175% of the principal amount of the notes. In addition, the Company paid certain expenses of the underwriters. The notes were sold pursuant to the exemption provided by Regulation S for offers and sales of securities outside the United States.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item appears in the 1997 Annual Report at pages 42 and 43 under the caption, "Historical Financial Summary," and is incorporated by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item appears in the 1997 Annual Report at pages 22 through 24 under the caption, "Management's Discussion," and is incorporated by reference.
CAUTIONARY STATEMENT
From time to time, the Company may make statements which constitute or contain "forward-looking" information as that term is defined in the Private Securities Litigation Reform Act of 1995 (the "Act") or by the Securities and Exchange Commission in its rules, regulations and releases. The Company cautions investors that any such forward-looking statements made by the Company are not guarantees of future performance and that actual results may differ materially from those in the forward-looking statements. The following are some of the factors that could cause actual results to differ materially from estimates contained in the Company's forward-looking statements:
- 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;
- historically, almost two-thirds of the Company's sales having been made outside the United States, making forecasting of sales more difficult;
- the impact on sales or earnings of fluctuations in exchange rates in one or more of the Company's geographic markets;
- the impact of the year 2000 on the Company's order, production, distribution and financial systems and the systems of its suppliers and customers;
- the possibility of one or more of the global markets in which the Company competes being impacted by variations in political, economic or other factors, such as inflation rates, recessionary or expansive trends, tax changes, legal and regulatory changes or other external factors over which the Company has no control.
ITEM 7A.
ITEM 7A. DISCLOSURES CONCERNING MARKET RISK SENSITIVE INSTRUMENTS
The following statements provide information about the Company's market sensitive financial instruments and constitutes a "forward-looking statement." The Company uses financial instruments, including fixed and variable rate debt, as well as swap, forward and option contracts to finance its operations and to hedge interest rate, currency, commodities, and certain equity-linked compensation liability exposures as well as to enhance its stock repurchase program. The swap, forward and option contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company does not hold or issue financial instruments for trading, profit, or speculative purposes.
Derivative positions are constantly monitored using techniques including fair market value, sensitivity analysis and a value at risk model. A near term change in currency, interest rates, commodity prices and stock equity prices when evaluated with the above three methodologies for:
- forward contracts - foreign currency swaps - interest rate swaps, - commodity swaps and - equity contracts,
will not materially impact the consolidated financial position, results of operations or cash flows of the Company.
The above financial instruments, when individually evaluated by the various methods, do not expose the Company to material market risks. When the instruments above are combined with each other, and with the underlying exposures, a further reduction in market risk for the Company is realized.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Financial Statements and Supplementary Data for The Gillette Company and Subsidiary Companies appear in the 1997 Annual Report at the pages indicated below and are incorporated by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item with respect to the Directors of the Company appears in the 1998 Proxy Statement at pages 2 through 4 and at pages 7 and 8 under the caption "Certain Transactions with Directors and Officers", the texts of which are incorporated by reference.
The information required for Executive Officers of the Company appears at the end of Part I of this report at page 4.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the 1998 Proxy Statement at pages 8 through 17 under the captions "Compensation of Directors", "Gillette Comparative Five-Year Investment Performance", "Personnel Committee Report on Executive Compensation", "Executive Compensation" and "Retirement Plan" and is incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item concerning the security ownership of certain beneficial owners and management appears in the 1998 Proxy Statement at pages 6 and 7 under the caption "Stock Ownership of Certain Beneficial Owners and Management" and is incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item appears in the 1998 Proxy Statement at pages 7 through 9 under the captions "Certain Transactions with Directors and Officers" and "Compensation of Directors" and is incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
FINANCIAL STATEMENTS
The following appear in the 1997 Annual Report at the pages indicated below and are incorporated into Part II by reference.
SCHEDULES
The following schedule appears at page 13 of this report:
II. Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because they are either not required or not applicable.
EXHIBITS
- ---------------
* Filed pursuant to Item 14(c).
B. REPORTS ON FORM 8-K
There were no reports on Form 8-K filed by the registrant during the fourth quarter of the period covered by this report.
OTHER MATTERS
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into the following Registration Statements of the registrant on Form S-8 (1) No. 33-27916, filed April 10, 1989, and amended thereafter, which incorporates by reference therein Registration Statements on Form S-8 Nos. 2-90276, 2-63951 and 1-50710, and all amendments thereto, all relating to shares issuable and deliverable under The Gillette Company 1971 Stock Option Plan and 1974 Stock Purchase Plan and on Form S-7 No. 2-41016 relating to shares issuable and deliverable under The Gillette Company 1971 Stock Option Plan; (2) No. 33-9495, filed October 20, 1986, and all amendments thereto, relating to shares and plan interests in The Gillette Company Employees' Savings Plan; (3) No. 2-93230, filed September 12, 1984, and all amendments thereto, relating to shares and plan interests in the Oral B Laboratories Savings Plan; (4) No. 33-56218, filed December 23, 1992, relating to shares and plan interests in The Gillette Company Employees' Savings Plan; (5) No. 33-52465, filed March 1, 1994, and all amendments thereto, relating to shares issuable and deliverable under The Gillette Company Global Employee Stock Ownership Plan; (6) No. 33-53257, filed April 25, 1994, and all amendments thereto, relating to shares issuable and deliverable under The Gillette Company Outside Director's Stock Ownership Plan; (7) No. 33-53258, filed April 25, 1994, and all amendments thereto, relating to shares issuable and deliverable under The Gillette Company 1971 Stock Option Plan; (8) No. 33-59125, filed May 5, 1995, and all amendments thereto, relating to shares and plan interests in The Gillette Company Employees' Savings Plan; (9) No. 33-63707 filed October 26, 1995, and all amendments thereto, relating to shares and plan interests in the Parker Pen 401(K) Plan; (10) No. 333-19133 filed December 31, 1996, and all amendments thereto, relating to shares issuable and deliverable under the Duracell Shares Plan and Stock Option Plan for Key Employees of Duracell International Inc. and Subsidiaries and (11) No. 333-25533 filed April 21, 1997, and all amendments thereto, relating to shares issuable and deliverable under The Gillette Company 1971 Stock Option Plan.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event a claim for indemnification against such liabilities (other than the payments by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors of THE GILLETTE COMPANY:
Under date of January 28, 1998, we reported on the consolidated balance sheet of The Gillette Company and subsidiary companies as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and stockholders' equity for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 Annual Report to Stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1997. In connection with our audits of the aforementioned consolidated financial statements, we also audited the financial statement schedule on page 13 of this report. The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Boston, Massachusetts January 28, 1998
THE GILLETTE COMPANY AND SUBSIDIARY COMPANIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(MILLIONS OF DOLLARS)
* Acquisition balances
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE GILLETTE COMPANY (Registrant)
By CHARLES W. CRAMB ------------------------------------ Charles W. Cramb Senior Vice President, Chief Financial Officer and Principal Accounting Officer Date: March 20, 1998
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.