Exhibit (13)
------------
Annual Report to Shareholders. (Pages 1-33, 36)
(Top of page 1 - Picture of John E. Pepper with name and title)
John E. Pepper
Chairman and Chief Executive Officer
(Top of page 1 - Picture of Durk I. Jager with name and title)
Durk I. Jager
President and Chief Operating Officer
...AND OLEAN IS A VERY BIG IDEA. Maynard Danker, an Iowa farmer, remembers the
first day he heard about Olean. "The folks who make Crisco were going to start
with soybeans like mine to come up with a new kind of cooking oil. It fries up
snacks that are a little healthier, without adding any fat. Makes them taste
good, too. That's something that's never been done before." Improving consumers'
lives by doing things that have never been done before is what Procter & Gamble
is all about. In more than 140 countries around the world, we work to understand
what consumers want and need. Then we develop innovative brands to serve those
needs - creating new products, new categories and new growth opportunities for
our Company. More than 110,000 P&G employees around the world, committed to
breakthrough innovation and superior execution, drive our growth. Again this
year, we delivered record performance: net earnings of $3.78 billion, up 11%;
basic net earnings per common share of $2.74, up 13%; and worldwide net sales of
$37.2 billion, up 4% on 6% unit volume growth. These results fueled solid
performance in the areas that matter most to you, our shareholders. Over the
past three years, we've delivered an average annual Total Shareholder Return
(TSR) of 37%, compared to a TSR of 30% for the S&P 500. And we concluded the
1997/1998 fiscal year by increasing common share dividends 13% to $1.14 -
marking the 43rd consecutive year of increased dividend payments.
(Bottom of page 1, right-hand margin -- picture of Maynard Danker sitting on his
tractor)
(Middle of pages 2 and 3 -- picture of several people with the caption "WE
MAKE EVERY DAY BETTER IN EVERY WAY WE CAN FOR PEOPLE AROUND THE WORLD.")
FASTER, BIGGER INNOVATION
These results are good, yet we can and must do better. In particular, we are not
satisfied with our rate of volume and sales growth. We must significantly
accelerate our progress if we are to achieve the goals we've reported here in
previous years:
(bullet) To double our business in 10 years,
(bullet) To grow shares in categories representing the majority of
our volume, and
(bullet) To remain consistently among the top third of our peer
companies in TSR performance.
We know the key is faster, bigger innovation in every part of our business. And
we've made important strides in the past year to strengthen our pipeline of
innovations on established brands and on new brands entering test market. But
there is much more we intend to do. We must bring even better products to more
markets with greater speed than ever before. And we must release the untapped
power of our organization.
IMPORTANT CHANGES TO ACCELERATE GROWTH
For some time, we've been examining how our organization should evolve, and in
the coming weeks, we will announce details of a comprehensive plan to simplify
the way we're structured and to strengthen how we operate. The changes, while
consistent with the direction in which we've been growing, are significant and
will improve our ability to create and build even more profitable leadership
brands around the world.
Four changes, in particular, are worth noting here:
(bullet) We will move from our current regional business units
to product-based, global business units - a direction
we've been heading since the late 1980s with the
start of Global Category Management.
(bullet) We will strengthen our already-strong, country-based
organizations to provide even deeper knowledge of
local consumers and stronger partnerships with our
customers. These local market organizations will be
essential to bringing our product initiatives to
consumers with the highest impact possible.
(bullet) We will create a new Global Business Services
organization to support the global business units and
the local market organizations. This move will bring
together business services that are currently
dispersed throughout the organization. It will also
help us achieve significant economies of scale, while
improving the overall quality and speed of these
services.
(bullet) And finally, we will streamline our corporate staff.
We will align many corporate resources with the
business units and refocus others on developing the
cutting-edge, functional knowledge and innovation
important to our future growth and success.
To support these new structural advantages, we are also making important changes
in our culture and in our reward system - all to encourage greater speed,
innovation and flexibility in the organization. Taken together, we believe these
improvements will enable us to build stronger global brands; achieve faster,
bigger innovation; produce accelerated business growth; and result in greater
satisfaction for our people. These are the kinds of changes we've made
throughout P&G's 161-year history - changes always designed to get us closer to
consumers and to keep our business growing at a level we - and you - have every
right to expect, given the extraordinary caliber of the men and women of Procter
& Gamble.
A BIG IDEA
It's been a good year. And we are committed to making the future even better. We
owe it to people like Maynard Danker. And we owe it to you, the fellow owners of
our Company. We want to ensure that whenever and wherever people see P&G or its
brands, they can say to themselves, "Now that's a big idea."
/s/JOHN E. PEPPER /s/DURK I. JAGER
John E. Pepper Durk I. Jager
Chairman and Chief Executive Officer President and Chief Operating
Officer
July 30, 1998
Key Brands
Laundry & Cleaning Products
Ace Bleach
Ariel
Bounce
Cascade
Cheer
Dawn
Downy
Fairy
Joy
Lenor
Mr. Clean
Tide
Paper Products
Always/Whisper Bounty
Charmin
Luvs
Pampers
Pampers wipes
Puffs
Tampax
Tempo
Beauty Care Products
Cover Girl
Head & Shoulders
Ivory
Max Factor
Oil of Olay
Old Spice
Pantene Pro-V
Pert Plus
Rejoice
Safeguard
Secret
SK-II
Vidal Sassoon
Zest
Health Care Products
Asacol
Blend-A-Med
Chloraseptic
Crest
Didronel
Macrobid
NyQuil
Pepto-Bismol
Scope
Vicks Formula 44
Vicks VapoRub
Food & Beverage Products
Crisco
Folgers
Hawaiian Punch
Jif
Millstone
Olean
Pringles
Punica
Sunny Delight
(Top of page 4 -- picture of a man, a boy, ThermaCare heatwrap wrapped around a
person's back and ThermaCare product) THERMACARE: EASE YOUR PAIN -- WITH
WEARABLE HEAT ThermaCare ultra-thin wraps fit comfortably under your clothes for
soothing heat that helps relieve pain all day long.
(Bottom of page 4 -- picture of a lady holding a hanger with a blouse hung on it
and picture of Dryel product) DRYEL: CARE FOR "DRY CLEAN ONLY" FABRICS -- AT
HOME For less than a $1 a garment and about 30 minutes a load, Dryel helps clean
and freshen wool, rayon, silk and other "dry clean only" clothes in your home
dryer.
(Top of page 5 -- picture of a lady holding the following products: Ritz
crackers, Lay's Wow Chips and Pringles Fat Free Chips; Olean logo) OLEAN: ENJOY
GREAT-TASTING SNACKS -- WITH LESS FAT Our Crisco people came up with a cooking
oil that fries up great-tasting snacks, without adding any fat or a single
calorie.
(Middle of page 5 -- caption "NEW TO THE WORLD BRANDS . . .")
(Bottom of page 5 -- picture of a boy and a dog on a couch, 3 pictures of small
pieces of fabric with the caption "THE FINE MIST PENETRATES FIBERS, CLEANING
AWAY ODORS AS IT EVAPORATES." Picture of Febreze product) FEBREZE: CLEAN BAD
SMELLS OUT OF FABRICS -- FOR GOOD Just spray Febreze on furniture, carpets,
rugs, car interiors, clothing, even shoes -- and odors trapped in fabrics are
gone.
(Top of page 6 -- picture of two babies and Pampers Premium product)
PAMPERS: BREAKTHROUGH TECHNOLOGY ADVANCES BABY SKIN CARE
With its unique Gentle Touch Liner, Pampers has surpassed competition to become
the U.S. share leader in premium diapers.
(Middle of page 6 -- caption "NEW TO THE BRAND INNOVATIONS")
(Bottom of page six -- picture of a woman and a man, toothbrush with toothpaste
and Crest Extra Whitening Toothpaste product) CREST: BREAKTHROUGH INGREDIENT
INTRODUCED IN CREST EXTRA WHITENING Its patented, enamel-safe soft silica helps
remove surface stains to let the natural whiteness of your teeth shine through.
(Top of page 7 -- picture of Nelson Watts, M.D., Director, Osteoporosis Program,
Emory University, consults with a patient and a picture of Actonel product)
ACTONEL: NEW STANDARD OF CARE FOR PAGET'S DISEASE, THE SECOND MOST COMMON
METABOLIC BONE DISORDER FDA approves remission indication with only 1/3 the
treatment time of current leading therapies, moving Actonel closer to regulatory
submission for osteoporosis.
(Middle or page 7 -- picture of Fairy product)
FAIRY LIQUID: FIRST ANTI-BACTERIAL DISH SOAP IN THE U.K.
Fairy received Royal Institute of Public Health and Hygiene certification for
its innovative, germ-killing property that fights cross-contamination.
(Bottom of page 7 -- picture of a lady and Pantene Pro-V Elastesse Hairspray
product) PANTENE ELASTESSE: FIRST MAJOR BREAKTHROUGH IN HAIR SPRAY TECHNOLOGY IN
OVER 40 YEARS The natural, touchable, flexible hold meets consumer needs and
grows our global dollar share to #1.
FINANCIAL RESULTS
(Middle of page 8 -- pictures of Crisco, Tide, Pampers, Pert, Crest, Always and
Ariel products with the caption "A TRADITION OF GROWTH THROUGH INNOVATION.")
9 Financial Review
18 Responsibility for the Financial Statements and Report of Independent
Accountants
19 Consolidated Financial Statements
24 Notes to Consolidated Financial Statements
FINANCIAL REVIEW
RESULTS OF OPERATIONS
The Company achieved record sales, unit volume and net earnings for the year
ended June 30, 1998. Basic net earnings per common share increased 13% to $2.74.
Worldwide net earnings for the year were $3.78 billion, an 11% increase over the
prior year earnings of $3.42 billion.
(Middle of page 9, left-hand margin -- bar graph showing Net Earnings in
Billions of Dollars -- 1996 - 3.0, 1997 - 3.4 and 1998 - 3.8)
Worldwide net sales for the current year were $37.15 billion, an increase
of 4% on worldwide unit volume growth of 6%. The difference between the sales
and volume growth rates was primarily due to weaker currencies in Europe and
Asia. Excluding these impacts, sales increased 8%.
Worldwide gross margin for the current year was 43.3% compared to 42.7% in
the prior year. The current year improvement reflects cost savings, primarily
from the Company's ongoing simplification and standardization program, as
ongoing cost savings generated by the program exceeded the net cost to fund
current year projects.
Worldwide marketing, research and administrative expenses were $10.04
billion compared to $9.77 billion in the prior year. This equates to 27.0% of
sales, compared with 27.3% in the prior year. The 3% increase in total spending
was primarily due to increased marketing support behind new brands, such as
Tampax and Fat Free Pringles, and the expansion of existing brands into new
markets.
Operating income grew 10%, primarily reflecting sales growth and
cost-control efforts. The Company's net earnings margin increased from 9.5% to
10.2%, the highest level in 57 years.
Interest expense increased 20% to $548 million on increased debt, due
mainly to acquisitions. Other income, net, which consists primarily of interest
and investment income, contributed $201 million in the current year. In the
prior year, other income, net, was $218 million.
The Company's effective tax rate for the year was 33.8% compared to 34.9%
in the prior year. The decline reflects the benefits of lower tax rates in
Europe, increased research and development tax credits in North America, and
continued emphasis on effective tax planning.
In 1997, the Company completed its $2.4 billion restructuring program
started in 1993, with annual cost savings in excess of $600 million after tax.
The Company is continuing an ongoing program of simplification and
standardization, which includes projects to consolidate selected manufacturing
facilities, re-engineer manufacturing and distribution processes, redesign
organizations, simplify product line-ups and divest non-strategic brands and
assets. This program did not have a significant impact on 1998 net earnings, as
the aggregate pre-tax cost of projects was offset by gains on sales of
non-strategic brands and other assets. The net cost of these activities in 1997
was offset by increased licensing activity in the Health Care sector.
(Middle of page 9, right-hand margin -- bar graph showing Net Sales in Billions
of Dollars -- 1996 - 35.3, 1997 - 35.8 and 1998 - 37.2)
(Bottom of page 9, right-hand margin -- picture of Crisco product with caption
"1911: FIRST ALL-VEGETABLE SHORTENING")
The following provides perspective on the year ended June 30, 1997 versus the
prior year:
Worldwide net earnings increased 12% to $3.42 billion in 1997. Net earnings
for 1996 were $3.05 billion and included the settlement of the Bankers Trust
lawsuit, profit from the sale of the Company's share of a health care joint
venture, a reserve for estimated losses on a supply agreement entered into as
part of the previous divestiture of the commercial pulp business, and adoption
of FASB Statement No. 121 covering recognition of impairment of long-lived
assets. If these items had been excluded from 1996 earnings, the growth rate for
the year ended June 30, 1997 would have been 13%.
(Middle of page 10, left-hand margin -- bar graph showing Net Earnings
Margin % -- 1996 - 8.6%, 1997 - 9.5% and 1998 - 10.2%)
Worldwide net sales in 1997 were $35.76 billion, up 1% from the prior year
on unit volume growth of 3%. The difference between sales and volume growth
rates was primarily due to weaker currencies in Europe and Asia.
Worldwide gross margin increased to 42.7% from 40.7% in 1996, reflecting
cost savings from the Company's simplification and standardization efforts and
the continuing benefits of the restructuring project initiated in 1993.
Worldwide marketing, research and administrative expenses were 27.3% of
sales compared with 27.0% in 1996, primarily due to increases in advertising and
research.
(Bottom of page 10, left-hand margin -- picture of Tide product with caption
"1946: FIRST HEAVY-DUTY SYNTHETIC LAUNDRY DETERGENT)
Other income, net, was $218 million in 1997. In 1996, other income, net,
was $338 million and included a $120 million benefit from reversing the reserve
for two interest rate swap contracts following settlement of a lawsuit against
Bankers Trust; a $185 million gain on the sale of the Company's 50% share of a
health care joint venture to its venture partner; and a $230 million charge to
increase the reserve for estimated losses on a supply agreement entered into as
part of the previous sale of the Company's commercial pulp business.
(Middle of page 10, right-hand margin -- bar graph showing Total Shareholder
Return Relative to S&P 500 -- Past 10 Years - Procter & Gamble - 26.8% and S&P
500 - 18.0%, Past 5 Years - Procter & Gamble - 31.5% and S&P 500 - 22.7% and
Past 3 Years - Procter & Gamble - 37.0% and S&P 500 - 29.7%)
Net earnings margin increased to 9.5% in 1997 from 8.6% in 1996, reflecting
unit volume growth and continued emphasis on cost control through the Company's
simplification and standardization program.
FINANCIAL CONDITION
Cash flow from operations was $4.89 billion, $5.88 billion and $4.16 billion in
1998, 1997 and 1996, respectively. Operating cash flow provided the primary
source of funds to finance operating needs, capital expenditures and the share
repurchase programs. Operating cash flow, combined with additional borrowings,
provided the primary source of funds to finance current year acquisitions.
Cash and cash equivalents decreased $801 million in the current year to
$1.55 billion, primarily due to acquisitions and increased capital expenditures.
Capital expenditures were $2.56 billion in 1998, $2.13 billion in 1997, and
$2.18 billion in 1996. Current year expenditures included capacity expansions in
the paper and food businesses, primarily in tissue and towel and snacks. Capital
expenditures are expected to increase during the upcoming year, reflecting
planned capacity increases and technological advances, primarily in the paper
and laundry businesses.
Net cash used for acquisitions completed during 1998 totaled $3.27 billion,
the highest level in the Company's history. Acquisitions were largely
concentrated in paper businesses, and included Tambrands, Inc. and its global
leading brand, Tampax, the Loreto y Pena paper company in Mexico, and the
Ssangyong Paper Company in Korea. The Company also increased ownership of
various ventures in Asia and Latin America. Current year acquisitions were
funded through a combination of existing cash balances and the issuance of debt.
Net cash used for acquisition activities in 1997 and 1996 totaled $150 million
and $358 million, respectively. The Company continued to divest certain
non-strategic brands in 1998 in order to focus organizational resources on the
Company's core businesses. The proceeds from these sales, the most significant
of which was Duncan Hines, and other asset sales, generated $555 million in cash
flow in the current year, compared to $520 million and $402 million in 1997 and
1996, respectively.
(Middle of page 11, left-hand margin -- bar graph showing Operating Cash Flow in
Billions of Dollars -- 1996 - 4.2, 1997 - 5.9 and 1998 - 4.9)
The Company initiated a share repurchase program in 1995 which authorized
the Company to purchase shares annually to mitigate the dilutive impact of
management compensation programs. The Company also initiated discretionary
buy-back programs to repurchase additional outstanding shares of up to $1
billion per year during 1997 and 1998, in addition to purchases made under the
1995 program. Current year purchases under the repurchase programs totaled $1.93
billion compared to $1.65 billion in the prior year. The Company has announced
plans to increase and accelerate its discretionary share repurchase programs in
1999 beyond its previous annual target of $1 billion.
Common share dividends grew 12% to $1.01 per share in 1998, compared to
$.90 and $.80 in 1997 and 1996, respectively. For the coming year, the annual
dividend rate will increase to $1.14 per common share, marking the forty-third
consecutive year of increased common share dividend payments. Total dividend
payments, to both common and preferred shareholders, were $1.46 billion, $1.33
billion and $1.20 billion in 1998, 1997 and 1996, respectively. Total debt was
up $3.06 billion to $8.05 billion, primarily due to the issuance of commercial
paper to fund current year acquisitions. Long-term borrowing available under the
Company's shelf registration statement filed in 1995, as amended in July 1997,
was $2.0 billion at June 30, 1998. Additionally, the Company has the ability to
issue commercial paper at favorable rates.
(Middle of page 11, right-hand margin -- pie chart showing Net Sales by
Geographic Region in Billions of Dollars -- North America - 18.5, Europe, Middle
East and Africa - 11.8, Asia - 3.5, Latin America - 2.6 and Corporate - 0.8)
The following pages provide perspective on the Company's geographic operating
segments. Geographic segments exclude corporate items, most notably certain
financing and employee benefit costs, goodwill amortization, segment
eliminations and projects related to the Company's simplification and
standardization program.
(Bottom of page 11, right-hand margin -- picture of Crest product with captin
"1955: FIRST FLUORIDE TOOTHPASTE CLINICALLY PROVEN TO PREVENT CAVITIES")
NORTH AMERICA REGION
The North America region continued to deliver solid progress, achieving record
sales, unit volume and net earnings.
Net sales for the year were $18.46 billion, an increase of 5% from the
prior year level of $17.63 billion, on unit volume growth of 4%.
Net earnings for the region were up 10% to $2.47 billion. The region
achieved this earnings growth through increased unit volume, a continued focus
on cost control through simplification and standardization, and a lower tax
rate, primarily related to increased research and development tax credits,
partially offset by increased spending on product initiatives. Prior year net
earnings were $2.25 billion, which represented a 15% increase over 1996. Net
earnings margin for the region was 13.4%, compared to 12.8% and 11.3% in 1997
and 1996, respectively.
(Middle of page 12, left-hand margin -- bar graph showing North America Net
Sales in Billions of Dollars -- 1996 - 17.2, 1997 - 17.6 and 1998 - 18.5)
The Paper sector led the region's current year volume progress, generating
10% unit volume growth versus the prior year and delivering over half of the
region's total unit volume increase. This unit volume growth was achieved behind
the strength of the feminine protection business, driven by the Tambrands
acquisition; diapers, due to initiative programs; and tissue and towel, as a
result of prior year capacity increases. The Paper sector also led the region's
profit improvements, driven by volume growth, increased pricing in tissue and
towel, and cost reduction from the ongoing simplification and standardization
program. In the prior year, operating results were driven by the diaper
category, behind the acquisition of baby wipes and the introduction of Pampers
Baby-Dry, and by tissue and towel capacity increases.
The Laundry and Cleaning sector was also a strong contributor to the
region's current year unit volume progress, with a 3% increase over a strong
prior year base period. The volume gains were driven by laundry, which also
contributed heavily to the sector's earnings progress, and by fabric
conditioners.
(Middle of page 12, right-hand margin -- bar graph showing North America Net
Earnings in Millions of Dollars -- 1996 - 1,953, 1997 - 2,253 and 1998 - 2,474)
The Food and Beverage sector achieved 1% unit volume growth in the current
year, despite reduced coffee volumes resulting from commodity-based price
increases and the sale of Duncan Hines. The snacks category posted the highest
increase, behind the launch of Fat Free Pringles. The sector's earnings were
negatively impacted by the loss of profit contribution from Duncan Hines, and by
investments in new initiatives. In 1997, unit volume growth was led by the
snacks category, which achieved double-digit growth behind new production
capacity.
Unit volume in the Beauty Care sector grew 2% during the year, led by hair
care and deodorants. Net earnings for the sector increased over a strong prior
year base, driven by the skin care and personal cleansing and the cosmetics and
fragrances categories. Earnings growth declined from the double-digit increases
of prior years, due to intense competition in hair care and deodorants, and
increased investments in the development of future product initiatives.
(Bottom of page 12, left-hand margin -- picture of Comet product with caption
"1956: FIRST SCOURING CLEANSER WITH EFFECTIVE BLEACHING")
Unit volume in the Health Care sector was down 1%, as volume softness
caused by intense competitive activity in oral care was partially offset by
improved volume in the pharmaceuticals category. The sector's unit volume posted
a 3% decline in 1997 compared to 1996. Earnings declined in 1998, as the sector
continued to invest in research and development, primarily in pharmaceuticals,
and in marketing support in the highly competitive oral care category. The
sector will continue to invest heavily in research and development, with a
pipeline for launching new pharmaceutical drugs in the coming years and a
renewed focus on future innovations in other health care products.
EUROPE, MIDDLE EAST AND AFRICA REGION
Record unit volume, sales and earnings in the Europe, Middle East and Africa
region were driven by continued expansion into developing markets, increased
pricing, cost improvements and lower tax rates.
Net sales grew 2% to $11.84 billion, on 8% unit volume growth. Excluding
the effects of unfavorable exchange rates, primarily in Western Europe, sales
grew 10%, ahead of volume. During the prior year, sales increased 1% to $11.59
billion, which trailed the 7% unit volume growth rate due to unfavorable
exchange rates.
(Bottom of page 13, left-hand margin -- bar graph showing Europe, Middle East
and Africa Net Sales in Billions of Dollars -- 1996 - 11.5, 1997 - 11.6 and 1998
- 11.8)
The region's net earnings progress continued in the current year, growing
14% to $1.09 billion. Net earnings in 1997 were $956 million, a 21% increase
over 1996. Current year earnings growth was driven by the region's volume
growth, continued efforts to reduce cost via simplification and standardization
and lower tax rates, partially offset by negative exchange impacts. The net
earnings margin progress also continued in the current year to 9.2%, from 8.3%
and 6.9%, in 1997 and 1996, respectively.
Central and Eastern Europe led the region's unit volume growth, with a 25%
increase, driven by growth in emerging markets. This follows a 42% growth rate
in 1997. Earnings increased as a result of unit volume growth, reduced costs and
economies of scale, partially offset by continued investment in new product
initiatives and new markets to facilitate future growth.
(Middle of page 13, right-hand margin -- bar graph showing Europe, Middle East
and Africa Net Earnings in Millions of Dollars -- 1996 - 793, 1997 - 956 and
1998 - 1,092)
Middle East and Africa, which includes the region's snack business,
increased unit volume 18% over the prior year base period, which also generated
a double-digit increase over 1996. Unit volume progress was broadly based across
countries and key categories, led by increased snack sales.
Western Europe unit volume increased 2%, reflecting the net impact of the
Tambrands acquisition and the divestiture of non-strategic local brands,
primarily in health and beauty care. Net earnings increased well above volume
growth, due to cost savings, primarily in laundry and cleaning products, and
lower tax rates, partially offset by increased spending to promote new brand
launches.
(Bottom of page 13, right-hand margin -- picture of Head & Shoulders product
with caption "1961: FIRST PLEASANT-TO-USE SHAMPOO EFFECTIVE AGAINST DANDRUFF"
ASIA REGION
The Asia region was negatively impacted by a general market contraction caused
by the currency and economic crises in Korea and the ASEAN countries (Thailand,
Malaysia, Philippines, Indonesia and Singapore) and the continuing economic
recession in Japan.
Net sales for the region were $3.45 billion, 3% below the prior year on 4%
unit volume growth. Current year volume growth was driven by acquisitions,
including Ssangyong, a paper business in Korea, and increased ownership of a
venture in China, which more than offset volume declines in the rest of the
region. Net sales lagged volume growth as the impact of improved pricing and
product mix were more than offset by the impact of unfavorable exchange rate
movements. Excluding adverse exchange effects, sales grew 10%, primarily due to
pricing aimed at recovering the currency devaluation effects. In the prior year,
net sales declined 8% to $3.57 billion on a 7% unit volume decline. Excluding
exchange effects in 1997, sales were down 2% versus 1996.
(Middle of page 14, left-hand margin -- bar graph showing Asia Net Sales in
Billions of Dollars -- 1996 - 3.9, 1997 - 3.6 and 1998 - 3.5)
The region's net earnings were $174 million, a 37% decrease from the prior
year. Current year earnings were impacted by lower sales, increased investment
in new product initiatives and the currency crisis. The prior year net earnings
of $275 million represented a 1% increase over 1996. Net earnings margin for the
current year was 5.0%, compared to 7.7% in 1997 and 7.0% in 1996. The 1998
margin decline reflects lower sales, exchange impacts and initiative
investments.
Greater China's unit volume was up 6% versus the prior year. Volume
increases were driven by increased ownership of a joint venture. Net earnings
were higher as the impact of increased volume was partially offset by
unfavorable sales mix and investment behind new product introductions.
(Bottom of page 14, left-hand margin -- picture of Pampers product with the
caption "1961: FIRST SUCCESSFUL, MASS-MARKETED DISPOSABLE DIAPER)
In Japan, unit volume was relatively flat, reflecting the continued
depressed state of the Japanese economy. Despite the economic troubles, the
Company continued to invest in new product initiatives and was successful in
increasing market shares during the second half of the year. Net earnings were
lower due to unfavorable sales mix, investment in new products and the weakened
yen.
(Middle of page 14, right-hand margin -- bar graph showing Asia Net Earnings in
Millions of Dollars -- 1996 - 273, 1997 - 275 and 1998 - 174)
The balance of Asia was positively impacted by the acquisition of the
Ssangyong Paper Company in Korea. The increased volume in Korea resulting from
this acquisition more than offset volume declines brought about by the economic
crisis. Earnings, however, declined as a result of the currency crisis.
The Asian markets are expected to remain weak through at least fiscal 1999.
Because the Asia region accounted for less than 10% of the Company's total sales
and 5% of the Company's total earnings in fiscal 1998, the economic situation is
not expected to be significant to the Company's overall growth rate for the
coming year. While the region is expected to recover from these difficulties,
the depth and duration of the economic effects are still uncertain.
LATIN AMERICA REGION
Latin America continued its positive trends in net sales and net earnings, with
current year results being driven by acquisitions and the continued
strengthening in Mexico and Venezuela.
Net sales in the region grew 14% to $2.64 billion on 12% unit volume
growth, as pricing outpaced the negative impact of currency devaluation. Volume
gains resulted from the acquisition of Loreto y Pena, a paper company in Mexico,
the buy-out of a paper joint venture in the Southern Cone (Brazil, Argentina,
Chile), the prior year acquisition of a laundry and cleaning business in Brazil,
and the strengthening of the base business in Mexico, Venezuela and Argentina.
In the prior year, sales for the region grew 6% to $2.31 billion, while unit
volume was down 2%, reflecting inflation-driven pricing action. In Mexico, the
Company's largest operation in the region, business results were strong. Unit
volume increased 16%, behind the acquisition of the Loreto y Pena paper company
and a general economic recovery in the market.
(Top of page 15, left-hand margin -- bar graph showing Latin America Net Sales
in Billions of Dollars - 1996 - 2.2, 1997 - 2.3 and 1998 - 2.6)
Net earnings for the region were $274 million, a 7% increase. Current year
earnings lagged behind sales growth due to increased investment to support brand
expansion in the Southern Cone. Excluding these geographies, the balance of the
region's earnings grew in double digits. Prior year net earnings were $256
million, a 17% increase over 1996. Net earnings margin for the current year was
10.4% compared to 11.1% and 10.1% in 1997 and 1996, respectively, reflecting
initiative investments.
(Bottom of page 15, left-hand margin -- bar graph showing Latin America Net
Earnings in Millions of Dollars -- 1996 - 219, 1997 - 256 and 1998 - 274)
Prior to January 1, 1998, both Brazil and Peru were highly inflationary
economies, and accordingly, the results of the Company's subsidiaries in Brazil
and Peru were measured using the United States dollar as their functional
currency. Effective January 1, 1998, neither Brazil nor Peru qualified as a
highly inflationary economy. The impact of this change was not material.
HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risk, including changes in interest rates,
currency exchange rates and commodity prices. To manage the volatility relating
to these exposures on a consolidated basis, the Company nets the exposures to
take advantage of natural offsets and enters into various derivative
transactions for the remaining exposures pursuant to the Company's policies in
areas such as counterparty exposure and hedging practices. The financial impacts
of these hedging instruments are offset by corresponding changes in the
underlying exposures being hedged. The Company does not hold or issue derivative
financial instruments for trading purposes. Note 5 to the consolidated financial
statements includes a discussion of the Company's accounting policies for
financial instruments.
Derivative positions are monitored using techniques including market value,
sensitivity analysis and a value at risk model. The tests for interest rate and
currency rate exposures discussed below are based on a variance/co-variance
value at risk model using a one-year horizon and a 95% confidence level. The
model assumes that financial returns are normally distributed and approximates
the financial return for options and other non-linear instruments. The model
also reflects the impact of correlation and diversification from holding
multiple currency and interest rate instruments. Estimates of volatility and
correlations of market factors are drawn from the JP Morgan
RiskMetrics(trademark) dataset as of June 30, 1998. In cases where data is
unavailable in RiskMetrics(trademark), a reasonable approximation is included.
The effect of these estimates did not significantly change the total value at
risk.
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.
(Bottom of page 15, right-hand margin -- picture of Ariel product with caption
"1967: FIRST MASS-MARKETED LAUNDRY DETERGENT WITH ENZYMES FOR PRESOAKING AND
WASHING")
INTEREST RATE EXPOSURE
Interest rate swaps are used to hedge underlying debt obligations. Certain
currency interest rate swaps are designated to hedge the foreign currency
exposure of the Company's related foreign net investments.
Based on the Company's overall interest rate exposure as of and during the
year ended June 30, 1998, including derivative and other interest rate sensitive
instruments, a near-term change in interest rates, within a 95% confidence level
based on historical interest rate movements, would not materially affect the
consolidated financial position, results of operations or cash flows.
CURRENCY RATE EXPOSURES
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 major foreign currency exposures involve the
markets in Western Europe, Mexico and Canada. The primary purpose of the
Company's foreign currency hedging activities is to protect against 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 durations of
generally less than 12 months.
In addition, the Company enters into foreign currency swaps to hedge
intercompany financing transactions, and utilizes purchased foreign currency
options with durations of generally less than 18 months and forward exchange
contracts to hedge against the effect of exchange rate fluctuations on royalties
and foreign source income.
Based on the Company's overall currency rate exposure as of and during the
year ended June 30, 1998, including derivative and other foreign currency
sensitive instruments, a near-term change in currency rates, within a 95%
confidence level based on historical currency rate movements, would not
materially affect the consolidated financial position, results of operations or
cash flows.
(Bottom of page 16, left-hand margin -- picture of Pringles product with caption
"1968: FIRST UNIFORMLY SHAPED, STACKABLE POTATO CHIP")
COMMODITY PRICE EXPOSURE
Raw materials used by the Company are subject to price volatility caused by
weather, supply conditions and other unpredictable factors. The Company uses
futures and options contracts, primarily in food and beverage products, to
manage the volatility related to certain of these exposures. Gains and losses
relating to qualifying hedges of firm commitments or anticipated inventory
transactions are deferred in prepaid expenses and are included in the basis of
the underlying transactions. Commodity hedging activity is not material to the
Company's consolidated financial position, results of operations or cash flows.
ORGANIZATION 2005
The Company is currently designing Organization 2005, a realignment of the
organization structure, work processes and culture to accelerate growth and
innovation. While the details are not final, the design will likely include:
(bullet) A move from current geographic business units to product-based
Global Business Units (GBUs).
(bullet) The further strengthening of country-based organizations to
provide even greater focus on deep local level consumer and
customer knowledge.
(bullet) The establishment of centers of excellence for key administrative,
logistics and support functions.
(bullet) Changes in the culture and reward systems to encourage greater
speed, innovation and flexibility.
The nature, timing and implications related to this design change have not
yet been determined. The Company expects to finalize plans and to make available
further details of the Organization 2005 changes in Fall 1998.
YEAR 2000
The Company has developed plans to address the possible exposures related to the
impact on its computer systems of the Year 2000. Key financial, information and
operational systems, including equipment with embedded microprocessors, have
been inventoried and assessed, and detailed plans are in place for the required
systems modifications or replacements. Progress against these plans is monitored
and reported to management and to the Audit Committee of the Board of Directors
on a regular basis. Implementation of required changes to critical systems is
expected to be completed during fiscal 1999. Testing and certification of
critical systems, which includes review of documented remediation work and test
results by technical experts, key users and a central project team, is expected
to be successfully completed by December 31, 1999. In addition, the Company's
Internal Controls organization plans to review the testing and certification
process and observe the testing of selected critical systems in each region.
Critical Systems Description
% of Applications Year 2000 Compliant
--------------------------------------------
Actual as of Planned Planned
June 1998 December 1998 June 1999
-------------------------------------------------------------------------
Critical manufacturing,
operating and
control systems 44% 90% 100%
All other critical systems 56% 100% 100%
Incremental costs, which include contractor costs to modify existing
systems and costs of internal resources dedicated to achieving Year 2000
compliance, are charged to expense as incurred. Costs are expected to total
approximately $100 million, of which 34% has been spent to date.
The Company is also in contact with suppliers and customers to assess the
potential impact on operations if key third parties are not successful in
converting their systems in a timely manner. Risk assessment, readiness
evaluation, action plans and contingency plans related to these third parties
are expected to be completed by December 1998.
The Company's risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a
business-critical system. These procedures will be expanded to include specific
procedures for potential Year 2000 issues. Contingency plans to protect the
business from Year 2000-related interruptions are being developed. These plans
will be complete by June 1999 and will include, for example, development of
backup procedures, identification of alternate suppliers and possible increases
in safety inventory levels.
The Company is taking reasonable steps to prevent major interruptions in
the business due to Year 2000 issues. The effect, if any, on the Company's
results of operations if the Company, its customers or its suppliers are not
fully Year 2000 compliant is not reasonably estimable. The Company believes its
global presence and broad-based manufacturing capability help mitigate the risk.
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, Year 2000 compliance, financial goals and cost reduction, among
others.
These forward-looking statements represent challenging goals for the
Company and are based on certain assumptions and estimates regarding the
worldwide economy, technological innovation, competitive activity, pricing,
currency movements, product introductions, governmental action and the
development of certain markets. Among the key factors necessary to achieve the
Company's goals are: (1) the achievement of lower costs and increases in
reliability and capacity utilization, resulting from simplification and
standardization; (2) the ability to improve results despite high levels of
competitive activity and the economic downturn in Asia; (3) the successful
implementation of ECR and the ability to maintain key customer relationships in
important developed markets; (4) the continuation of substantial growth in
significant developing markets such as China, Mexico, Brazil and the countries
of Central and Eastern Europe; (5) obtaining successful outcomes in regulatory,
tax and legal matters; (6) the ability to continue technological innovation; and
(7) the timely resolution of the Year 2000 issue by the Company and its
customers and suppliers. 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.
(Bottom of page 17, right-hand margin -- picture of Bounce product with caption
"1972: FIRST EFFECTIVE DRYER-ADDED FABRIC SOFTENER ")
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 generally accepted accounting principles 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 LLP, independent public accountants, have audited and
reported on the Company's consolidated financial statements. Their audits were
performed in accordance with generally accepted auditing standards.
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 LLP
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/JOHN E. PEPPER /S/ERIK G. NELSON
John E. Pepper Erik G. Nelson
Chairman and Chief Executive Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
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, 1998 and 1997 and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1998. 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 generally accepted auditing
standards. 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, 1998
and 1997 and the results of its operations and cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
/S/DELOITTE & TOUCHE LLP
July 30, 1998
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended June 30
----------------------
Amounts in Millions Except Per Share Amounts 1998 1997 1996
==============================================================================
NET SALES $37,154 $35,764 $35,284
Cost of products sold 21,064 20,510 20,938
Marketing, research and administrative expenses 10,035 9,766 9,531
-------------------------
OPERATING INCOME 6,055 5,488 4,815
Interest expense 548 457 484
Other income, net 201 218 338
-------------------------
EARNINGS BEFORE INCOME TAXES 5,708 5,249 4,669
Income taxes 1,928 1,834 1,623
-------------------------
NET EARNINGS $ 3,780 $ 3,415 $ 3,046
=========================
BASIC NET EARNINGS PER COMMON SHARE $2.74 $2.43 $2.14
DILUTED NET EARNINGS PER COMMON SHARE $2.56 $2.28 $2.01
DIVIDENDS PER COMMON SHARE $1.01 $ .90 $ .80
=========================
See accompanying Notes to Consolidated Financial Statements.
(Bottom of page 19, right-hand margin -- picture of Dawn product with caption
"1972: FIRST DISHWASHING LIQUID WITH GREASE-CUTTING SUPERIORITY ")
CONSOLIDATED BALANCE SHEETS
June 30
----------------
Amounts in Millions Except Per Share Amounts 1998 1997
===========================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,549 $ 2,350
Investment securities 857 760
Accounts receivable 2,781 2,738
Inventories
Materials and supplies 1,225 1,131
Work in process 343 228
Finished goods 1,716 1,728
Deferred income taxes 595 661
Prepaid expenses and other current assets 1,511 1,190
----------------
TOTAL CURRENT ASSETS 10,577 10,786
PROPERTY, PLANT AND EQUIPMENT
Buildings 3,660 3,409
Machinery and equipment 15,953 14,646
Land 539 570
----------------
20,152 18,625
Accumulated depreciation (7,972) (7,249)
----------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 12,180 11,376
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill 7,023 3,915
Trademarks and other intangible assets 1,157 1,085
----------------
8,180 5,000
Accumulated amortization (1,169) (1,051)
----------------
TOTAL GOODWILL AND OTHER INTANGIBLE ASSETS 7,011 3,949
OTHER NON-CURRENT ASSETS 1,198 1,433
----------------
TOTAL ASSETS $30,966 $27,544
================
See accompanying Notes to Consolidated Financial Statements.
(Bottom of page 20, left-hand margin -- picture of Luvs product with caption
"1975: FIRST CONTOUR-SHAPED DIAPER ")
June 30
----------------
Amounts in Millions Except Per Share Amounts 1998 1997
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,051 $ 2,203
Accrued and other liabilities 3,942 3,802
Taxes payable 976 944
Debt due within one year 2,281 849
----------------
TOTAL CURRENT LIABILITIES 9,250 7,798
LONG-TERM DEBT 5,765 4,143
DEFERRED INCOME TAXES 428 559
OTHER NON-CURRENT LIABILITIES 3,287 2,998
----------------
TOTAL LIABILITIES 18,730 15,498
----------------
SHAREHOLDERS' EQUITY
Convertible Class A preferred stock,
stated value $1 per share
(600 shares authorized) 1,821 1,859
Non-Voting Class B preferred stock,
stated value $1 per share (200 shares
authorized; none issued) - -
Common stock, stated value $1 per share
(5,000 shares authorized; shares outstanding:
1998-1,337.4 and 1997-1,350.8) 1,337 1,351
Additional paid-in capital 907 559
Reserve for employee stock ownership plan
debt retirement (1,616) (1,634)
Accumulated other comprehensive income (1,357) (819)
Retained earnings 11,144 10,730
----------------
TOTAL SHAREHOLDERS' EQUITY 12,236 12,046
----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,966 $27,544
================
(Bottom of page 21, right-hand margin -- picture of Didronel product with
caption "DIDRONEL, THE FIRST GLOBAL OSTEOPOROSIS DRUG ")
See accompanying Notes to Consolidated Financial Statements.
(Bottom of page 22, left-hand margin -- picture of Bounty product with caption
"1985: SUPERIOR PAPER-MAKING TECHNOLOGY YIELDS STRONGER, MORE ABSORBENT PAPER
TOWELS")
See accompanying Notes to Consolidated Financial Statements.
(Bottom of page 23, right-hand margin -- picture of Pampers product with caption
"1986: SUPER-ABSORBENT POLYMER TECHNOLOGY PROVIDES UNPARALLELED DRYNESS IN A
THIN DIAPER")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Millions of Dollars Except Per Share Amounts
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 that are at least 20% to 50% owned, and over which the Company exerts
significant influence but does not control the financial and operating
decisions, are accounted for by the equity method. These investments are managed
as integral parts of the Company's segment operations, and the Company's share
of their results is included in net sales for the related segments.
Use of Estimates: Preparation of financial statements in conformity with
generally accepted accounting principles 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.
Accounting Changes: In 1998, the Company adopted several FASB statements.
Statement No. 128, "Earnings per Share," which revises the manner in which
earnings per share is calculated, did not impact the Company's previously
reported earnings per share. Statement No. 130, "Reporting Comprehensive
Income," requires the components of comprehensive income to be disclosed in the
financial statements. Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires certain information to be reported
about operating segments on a basis consistent with the Company's internal
organizational structure. Statement No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," revises the disclosures for
pensions and other postretirement benefits and standardizes them into a combined
format. Required disclosures have been made and prior years' information has
been reclassified for the impact of FASB Statements 130, 131 and 132.
New Pronouncements: In June 1998, the FASB issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which revises the accounting
for derivative financial instruments. In March 1998, the AICPA issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which revises the accounting for software development costs and
will require the capitalization of certain costs which the Company has
historically expensed. The Company is currently analyzing the impacts of these
statements, which are required to be adopted in 2000, and does not expect either
statement to have a material impact on the Company's financial position, results
of operations or cash flows.
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 accumulated in a
separate component of shareholders' equity. 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 (losses) are reflected in earnings and were $0, $1
and $(28) for 1998, 1997 and 1996, respectively.
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 exceeds carrying value by approximately $91 and $122 at June 30,
1998 and 1997, respectively.
Goodwill and Other Intangible Assets: The cost of intangible assets is
amortized, principally on a straight-line basis, over the estimated periods
benefited, generally 40 years for goodwill and periods ranging from 10 to 40
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 profitability projections that
incorporate the impact of existing Company businesses. The analyses necessarily
involve significant management judgment to evaluate the capacity of an acquired
business to perform within projections. Historically, the Company has generated
sufficient returns from acquired businesses to recover the cost of the goodwill
and other intangible assets.
(Bottom of page 24, left-hand margin -- picture of Pert product with caption
"1986: FIRST COMPLETE SHAMPOO AND CONDITIONER IN ONE ")
Property, Plant and Equipment: Property, plant and equipment are recorded at
cost reduced by accumulated depreciation. Depreciation expense is provided based
on estimated useful lives using the straight-line method.
Selected Operating Expenses: Research and development costs are charged to
earnings as incurred and were $1,546 in 1998, $1,469 in 1997 and $1,399 in 1996.
Advertising costs are charged to earnings as incurred and were $3,704 in 1998,
$3,466 in 1997 and $3,254 in 1996.
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
------------------------
1998 1997 1996
===================================================================
Net earnings available to
common shareholders $3,676 $3,311 $2,943
Effect of dilutive securities
Preferred dividends,
net of tax benefit 104 104 103
Preferred dividend
impact on funding
of ESOP (25) (32) (39)
--------------------------
Diluted net earnings 3,755 3,383 3,007
--------------------------
Basic weighted average
common shares
outstanding 1,343.4 1,360.3 1,372.6
Effect of dilutive securities
Conversion of
preferred shares 99.8 101.9 103.8
Exercise of stock options 22.3 24.8 19.8
---------------------------
Diluted weighted average
common shares
outstanding 1,465.5 1,487.0 1,496.2
Stock Split: In July 1997, the Company's board of directors approved a
two-for-one stock split that was effective for common and preferred shareholders
of record as of August 22, 1997. The financial statements, notes and other
references to share and per-share data reflect the stock split for all periods
presented.
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 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.
Major Customer: The Company's largest customer, Wal-Mart Stores, Inc. and its
affiliates, accounted for 11% and 10% of consolidated net sales in 1998 and
1997, respectively. These sales occurred primarily in the North America segment.
Reclassifications: Certain reclassifications of prior years' amounts have been
made to conform with the current year presentation, primarily related to certain
component parts of research and development costs.
2 | ACQUISITIONS
In July 1997, the Company acquired Tambrands, Inc., a company in the feminine
protection category, for approximately $1,844 in cash. Other acquisitions in
1998 totaled $1,425 and included the acquisition of paper businesses and
increased ownership in various ventures in Latin America and Asia. These
acquisitions, all of which were accounted for using the purchase method,
resulted in goodwill of $3,335. Acquisitions accounted for as purchases in 1997
and 1996 totaled $150 and $358, respectively.
The following table reflects unaudited pro forma combined results of
operations on the basis that the 1998 acquisitions had taken place at the
beginning of the year for each of the periods presented:
Years Ended June 30
-------------------
1998 1997
==========================================================
Pro forma amounts
Net sales $37,476 $37,008
Net earnings 3,756 3,409
Net earnings per common share
Basic 2.72 2.43
Diluted 2.55 2.27
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
under the ownership and management of the Company.
(Bottom of page 25, right-hand margin -- picture of Always product with caption
"1986: PATENTED "WINGS" TECHNOLOGY COMBINED WITH "DRI-WEAVE" TOPSHEET CREATES
SUPERIOR FEMININE PROTECTION")
3 | SUPPLEMENTAL BALANCE SHEET INFORMATION
June 30
---------------
1998 1997
======================================================
ACCRUED AND OTHER LIABILITIES
Marketing expenses $1,109 $1,129
Compensation expenses 485 461
Other 2,348 2,212
---------------
3,942 3,802
OTHER NON-CURRENT LIABILITIES
Postretirement benefits $1,193 $1,300
Pension benefits 843 815
Other 1,251 883
---------------
3,287 2,998
Currency
Translation Other Total
==========================================================================
ACCUMULATED OTHER
COMPREHENSIVE INCOME
Balance June 30, 1995 $64 $ 1 $ 65
Current period change (483) 0 (483)
--------------------------------
Balance June 30, 1996 (419) 1 (418)
Current period change (412) 11 (401)
--------------------------------
Balance June 30, 1997 (831) 12 (819)
Current period change (536) (2) (538)
--------------------------------
Balance June 30, 1998 (1,367) 10 (1,357)
4 | SHORT-TERM AND LONG-TERM DEBT
June 30
-------------
1998 1997
==============================================================
SHORT-TERM DEBT
U.S. obligations $1,435 $183
Foreign obligations 560 343
Current portion of long-term debt 286 323
-------------
2,281 849
The weighted average short-term interest rates were 6.2% and 6.9% as of
June 30, 1998 and 1997, respectively.
June 30
Average ----------------
Rate Maturities 1998 1997
========================================================================
LONG-TERM DEBT
U.S. notes and
debentures 6.96% 1998-2029 $2,897 $2,082
ESOP Series A 8.33% 1998-2004 545 613
ESOP Series B 9.36% 2021 1,000 1,000
U.S. commercial
paper 1,207 585
Foreign obligations 402 186
Current portion of
long-term debt (286) (323)
----------------
5,765 4,143
Long-term weighted average interest rates in the preceding table are as of
June 30, 1998 and include the effects of related interest rate swaps discussed
in Note 5. Certain commercial paper balances have been classified as long-term
debt based on the Company's intent and ability to renew the obligations on a
long-term basis. The Company has entered into derivatives that convert certain
of these commercial paper obligations into fixed-rate obligations. The fair
value of the long-term debt was $6,412 and $4,509 at June 30, 1998 and 1997,
respectively. Long-term debt maturities during the next five years are as
follows: 1999-$286; 2000-$387; 2001-$339; 2002-$427 and 2003-$1,141.
5 | RISK MANAGEMENT ACTIVITIES
The Company is exposed to market risk, including changes in interest rates,
currency exchange rates and commodity prices. To manage the volatility relating
to these exposures on a consolidated basis, the Company nets the exposures to
take advantage of natural offsets and enters into various derivative
transactions for the remaining exposures pursuant to the Company's policies in
areas such as counterparty exposure and hedging practices. The financial impacts
of these hedging instruments are offset by corresponding changes in the
underlying exposures being hedged. The Company does not hold or issue derivative
financial instruments for trading purposes.
Interest Rate Management
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. These swaps
are designated to hedge underlying debt obligations. For qualifying hedges, the
interest rate differential is reflected as an adjustment to interest expense
over the life of the swaps.
Certain currency interest rate swaps are designated to hedge the foreign
currency exposure of the Company's related foreign net investments. Currency
effects of these hedges are reflected in the accumulated other comprehensive
income section of shareholders' equity, offsetting a portion of the translation
of the net assets.
(Bottom of page 26, left-hand margin -- picture of Tide product with caption
"1989: FIRST NORTH AMERICAN LAUNDRY DETERGENT WITH ACTIVATED BLEACH ")
The following table presents information for all interest rate instruments.
The notional amount does not necessarily represent amounts exchanged by the
parties and, therefore, is not a direct measure of the Company's exposure to
credit risk. The fair value approximates the cost to settle the outstanding
contracts. The carrying value includes the net amount due to counterparties
under swap contracts, currency translation associated with currency interest
rate swaps and any marked-to-market value adjustments of instruments.
June 30
----------------
1998 1997
============================================
Notional amount $2,149 $1,488
Fair value $ 7 $ (54)
Carrying value 28 (28)
----------------
Unrecognized loss (21) (26)
Although derivatives are an important component of the Company's interest
rate management program, their incremental effect on interest expense for 1998,
1997 and 1996 was not material.
Currency Rate Management
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 major foreign currency exposures involve the
markets in Western Europe, Mexico and Canada. The primary purpose of the
Company's foreign currency hedging activities is to protect against 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 durations of
generally less than 12 months.
In addition, the Company enters into foreign currency swaps to hedge
intercompany financing transactions, and utilizes purchased foreign currency
options with durations of generally less than 18 months and forward exchange
contracts to hedge against the effect of exchange rate fluctuations on royalties
and foreign source income.
Gains and losses related to qualifying hedges of foreign currency firm
commitments or anticipated transactions are deferred in prepaid expense and are
included in the basis of the underlying transactions. To the extent that a
qualifying hedge is terminated or ceases to be effective as a hedge, any
deferred gains and losses up to that point continue to be deferred and are
included in the basis of the underlying transaction. All other foreign exchange
contracts are marked-to-market on a current basis, generally to marketing,
research and administration expense. To the extent anticipated transactions are
no longer likely to occur, the related hedges are closed with gains or losses
charged to earnings on a current basis.
Currency instruments outstanding are as follows:
June 30
---------------
1998 1997
==========================================
Notional amount
Forward contracts $3,448 $2,607
Purchased options 1,262 1,643
Currency swaps 217 358
Fair value
Forward contracts $ 30 $ (2)
Purchased options 16 38
Currency swaps 8 (1)
The deferred gains and losses on these instruments were not material.
In addition, in order to hedge currency exposures related to the net
investments in foreign subsidiaries, the Company utilizes local currency
financing entered into by the subsidiaries, and currency interest rate swaps and
other foreign currency denominated financing instruments entered into by the
parent. Gains and losses on instruments designated as hedges of net investments
are offset against the translation effects reflected in shareholders' equity.
Currency interest rate swaps, foreign currency instruments and foreign
currency denominated debt that have been designated as hedges of the Company's
net investment exposure in certain foreign subsidiaries have notional amounts
totaling $1,138 and $936 at June 30, 1998 and 1997, respectively. These hedges
resulted in gains of $42 and $63, net of $25 and $38 in tax effects, reflected
in shareholders' equity.
(Bottom of page 27, right-hand margin -- picture of Ace product with caption
"1990: BREAKTHROUGH TECHNOLOGY IN A NON-CHLORINE, GENTLE BLEACH ")
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.
6 | 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. The grants are fully exercisable after one year and have a ten-year
life. In 1998, the Company granted stock options to all eligible employees not
covered by the key manager and director plans. These grants, which comprised 8.7
million of the 20.3 million options granted in 1998, are fully exercisable after
five years and have a ten-year life. The Company issues stock appreciation
rights in countries where stock options have not been approved by local
governments.
Pursuant to FASB Statement 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."
Accordingly, no compensation cost has been recognized for these plans. Had
compensation cost for the plans been determined based on the fair value at the
grant date consistent with FASB Statement No. 123, the Company's net earnings
and earnings per share would have been as follows:
Years Ended June 30
-------------------------
1998 1997 1996
=============================================
Net earnings
As reported $3,780 $3,415 $3,046
Pro forma 3,472 3,305 2,981
Net earnings per
common share
Basic
As reported $ 2.74 $ 2.43 $ 2.14
Pro forma 2.51 2.35 2.10
Diluted
As reported 2.56 2.28 2.01
Pro forma 2.35 2.20 1.97
(Bottom of page 28, left-hand margin -- picture of Crest product with caption
"1990: FIRST TARTER CONTROL TOOTHPASTE ")
The fair value of each option grant is estimated on the date of grant using
the Binomial option-pricing model with the following weighted average
assumptions:
Years Ended June 30
----------------------
1998 1997 1996
================================================
Interest rate 5.6% 6.6% 6.1%
Dividend yield 2% 2% 2%
Expected volatility 26% 22% 20%
Expected life in years 6 6 6
Stock option activity was as follows:
Options in Thousands
-------------------------
1998 1997 1996
========================================================
Outstanding, July 1 68,514 66,657 63,384
Granted 20,315 10,409 9,605
Exercised (8,477) (8,357) (6,110)
Canceled (434) (195) (222)
-------------------------
Outstanding, June 30 79,918 68,514 66,657
Exercisable 59,610 58,098 57,048
Available for grant 31,558 28,538 24,418
Average price
Outstanding,
beginning of year $31.00 $24.79 $21.36
Granted 83.26 58.72 40.87
Exercised 18.57 16.02 14.52
Outstanding, end of year 45.58 31.00 24.79
Exercisable, end of year 32.74 26.03 22.09
Weighted average grant
date fair value of options 24.56 17.14 10.88
The following table summarizes information about stock options outstanding
at June 30, 1998:
Options Outstanding
---------------------------------------------------
Number Weighted-Avg
Range of Outstanding Weighted-Avg Remaining
Prices (Thousands) Exercise Price Contractual Life
=================================================================
$8 to 30 33,626 $22.69 3.4 years
33 to 46 16,821 37.85 7.1
57 to 71 9,349 60.42 8.5
71 to 85 20,122 83.39 9.5
The following table summarizes information about stock options exercisable
at June 30, 1998:
Options Exercisable
--------------------------------
Number
Range of Exercisable Weighted-Avg
Prices (Thousands) Exercise Price
==================================================
$8 to 30 33,626 $22.69
33 to 46 16,821 37.85
57 to 71 9,163 60.24
71 to 85 - -
7 | 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 funded by an employee stock ownership plan
(ESOP) and Company contributions. 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.
Years Ended June 30
----------------------
1998 1997 1996
=======================================================
ESOP preferred shares
allocated at market value $235 $247 $200
Company contributions 58 35 75
Benefits earned 293 282 275
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 from retirees and pay a stated percentage of expenses,
reduced by deductibles and other coverages. Retiree contributions change
annually in line with medical 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.
Summarized information on the Company's postretirement plans is as follows:
Other
Pension Benefits Retiree Benefits
---------------- ----------------
Years Ended June 30
----------------------------------
1998 1997 1998 1997
==========================================================================
CHANGE IN BENEFIT
OBLIGATION
Benefit obligation at
beginning of year $1,991 $1,886 $1,460 $1,405
Service cost 106 100 42 45
Interest cost 148 131 102 109
Participants' contributions 3 5 11 12
Amendments 21 2 (6) 5
Actuarial loss (gain) 87 54 (71) (50)
Acquisitions 154 42 1 0
Curtailments 13 0 0 0
Currency exchange (85) (117) (7) (4)
Benefit payments (156) (112) (67) (62)
----------------------------------
Benefit obligation
at end of year 2,282 1,991 1,465 1,460
----------------------------------
CHANGE IN PLAN
ASSETS
Fair value of plan
assets at beginning
of year 1,229 1,019 1,828 838
Actual return on
plan assets 243 180 803 999
Acquisitions 131 42 0 0
Employer
contributions 103 83 37 41
Participants'
contributions 3 5 11 12
Currency exchange (30) 12 (1) 0
Benefit payments (156) (112) (67) (62)
----------------------------------
Fair value of plan
assets at end
of year 1,523 1,229 2,611 1,828
----------------------------------
FUNDED STATUS
Funded status at
end of year (759) (762) 1,146 368
Unrecognized net
actuarial gain (163) (95) (2,354) (1,691)
Unrecognized
transition amount 32 35 0 0
Unrecognized prior
service cost 75 43 (21) (17)
----------------------------------
Net amount recognized (815) (779) (1,229) (1,340)
==================================
Prepaid benefit cost $ 34 $ 52 $ 1 $ 0
Accrued benefit cost (849) (831) (1,230) (1,340)
----------------------------------
Net liability recognized (815) (779) (1,229) (1,340)
==================================
(Bottom of page 29, right-hand margin -- picture of Cheer product with caption
"1992: BREAKTHROUGH CAREZYME TECHNOLOGY PREVENTS FUZZING AND COLOR FADING ")
The Company's stock comprised $2,443 and $1,687 of other retiree plan
assets, net of Series B ESOP debt, as of June 30, 1998 and 1997, respectively.
Other
Pension Benefits Retiree Benefits
---------------- ----------------
Years Ended June 30
-----------------------------------
1998 1997 1998 1997
==========================================================================
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate 7.0% 7.2% 6.8% 7.5%
Expected return on plan assets 9% 9% 9% 9%
Rate of compensation increase 5% 5% - -
Initial health care cost trend rate* - - 8% 9%
*Assumed to decrease gradually to 5% in 2006 and remain at that level
thereafter.
Other
Pension Benefits Retiree Benefits
---------------------- ----------------------
Years Ended June 30
-------------------------------------------------
1998 1997 1996 1998 1997 1996
===========================================================================
COMPONENTS OF
NET PERIODIC
BENEFIT COST
Service cost $106 $100 $ 96 $ 42 $ 45 $ 47
Interest cost 148 131 131 102 109 102
Expected return
on plan assets (103) (87) (75) (171) (138) (121)
Amortization of
prior service cost 7 5 6 (2) (2) (2)
Amortization of
transition amount 3 0 0 0 0 0
Curtailment loss 12 0 0 0 0 0
Recognized net
actuarial gain 0 (7) (3) (41) (18) (15)
-------------------------------------------------
Gross benefit cost 173 142 155 (70) (4) 11
Dividends on ESOP
preferred stock 0 0 0 (78) (79) (79)
-------------------------------------------------
Net periodic
benefit cost 173 142 155 (148) (83) (68)
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 $1,206, $984 and $155, respectively, as of June
30, 1998, and $1,172, $899 and $158, respectively, as of June 30, 1997.
Assumed health care cost trend rates have a signi- ficant 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:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Effect on total of service and
interest cost components $ 26 $ (22)
Effect on postretirement
benefit obligation 207 (181)
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 described in Note 7: 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. The liquidation value is equal to the issue price of
$13.75 per share.
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 issuance price of $26.12 per share.
Shares in Thousands
------------------------
1998 1997 1996
======================================================
Shares Outstanding
Series A 60,635 62,952 64,562
Series B 37,805 38,045 38,204
(Bottom of page 30, left-hand margin -- picture of Pantene product with caption
"1992: FIRST PENETRATING, PRO-VITAMIN FORMULA FOR HAIR WITH SUPERIOR SHINE ")
Shares of the ESOP are allocated at original cost based on debt service
requirements, net of advances made by the Company to the trust. 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. The Series B shares are
considered plan assets of the other retiree benefits plan. 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.
9 | INCOME TAXES
Earnings before income taxes consist of the following:
Years Ended June 30
------------------------
1998 1997 1996
===============================================
United States $3,632 $3,232 $3,023
International 2,076 2,017 1,646
------------------------
5,708 5,249 4,669
The income tax provision consists of the following:
Years Ended June 30
------------------------
1998 1997 1996
========================
Current tax expense
U.S. Federal $ 996 $ 967 $ 776
International 918 805 413
U.S. State & Local 115 88 106
------------------------
2,029 1,860 1,295
Deferred tax expense
U.S. Federal 51 1 220
International & other (152) (27) 108
------------------------
(101) (26) 328
------------------------
Total 1,928 1,834 1,623
Taxes credited to shareholders' equity for the years ended June 30, 1998
and 1997 were $147 and $97, respectively. Undistributed earnings of foreign
subsidiaries that are considered to be reinvested indefinitely were $6,739 at
June 30, 1998.
The effective income tax rate was 33.8%, 34.9% and 34.8% in 1998, 1997 and
1996, respectively, compared to the U.S. statutory rate of 35%.
Deferred income tax assets and liabilities are comprised of the following:
June 30
-------------------
1998 1997
=======================================================
Current deferred tax assets $ 595 $ 661
Non-current deferred tax
assets (liabilities)
Depreciation (1,058) (1,031)
Postretirement benefits 435 475
Loss carryforwards 167 84
Other 28 (87)
(428) (559)
Included in the above are total valuation allowances of $177 and $113 in
1998 and 1997, respectively. The valuation allowance increased in 1998 primarily
due to the generation of additional net operating loss carryforwards.
10 | 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 at prices in excess of current market.
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 at June 30, 1998 were $66, and in
management's opinion, such accruals are appropriate based on existing facts and
circumstances. Current year expenditures were not material.
While the effect on future results of these items is not subject to
reasonable estimation because considerable uncertainty exists, in the opinion of
management and Company counsel, the ultimate liabilities resulting from such
claims will not materially affect the consolidated financial position, results
of operations or cash flows of the Company.
(Bottom of page 31, right-hand margin -- picture of Asacol product with caption
"1992: ASACOL LAUNCHED FOR TREATMENT OF ULCERATIVE COLITIS ")
11 | SEGMENT INFORMATION
The Company has adopted FASB Statement No. 131, "Disclosures about Segments of a
Business Enterprise and Related Information." The Company is managed in four
operating segments: North America, which includes the United States and Canada;
Europe, Middle East and Africa; Asia; and Latin America.
Corporate operations include certain financing and employee benefits costs,
goodwill amortization, other general corporate income and expense, segment
eliminations and projects included in the Company's ongoing simplification and
standardization program, which includes costs for consolidation of selected
manufacturing facilities, re-engineering of manufacturing and distribution
processes, organization redesign and simplified product line-ups, as well as
gains and losses on sales of non-strategic brands and assets. Corporate assets
include primarily cash, investment securities and goodwill.
Product Net Sales Information
The following is supplemental information on net sales by product groups,
aligned as follows:
Laundry and Cleaning -- dishcare, fabric conditioners, hard surface
cleaners and laundry.
Paper -- diapers, feminine protection, incontinence, tissue and towel, and
wipes.
Beauty Care -- cosmetics and fragrances, deodorants, hair care, and skin
care and personal cleansing.
Food and Beverage -- coffee, commercial services, juice, peanut butter,
shortening and oil, and snacks.
Health Care -- gastrointestinal, oral care, pharmaceuticals and respiratory
care.
(Bottom of page 32, left-hand margin -- picture of Macrobid product with caption
"1992: MACROBID LAUNCHED AS A URINARY TRACT ANTI-INFECTIVE ")
(Bottom of page 33, right-hand margin -- picture of Oil of Olay product with
caption "1994: FIRST BODY WASH WITH PUFF THAT CLEANS AND CONDITIONS YOUR SKIN")
IF...
(bullet) You need help with your account or if you need automated access to your
account
(bullet) You are interested in our Certificate Safekeeping service
(bullet) You need to change an address or discontinue duplicate mailings
(bullet) You want to arrange for direct deposit of dividends (bullet) A stock
certificate is lost, stolen or destroyed (bullet) You want to
participate in our Shareholder Investment Program...
CONTACT P&G'S SHAREHOLDER SERVICES
OFFICE IN CINCINNATI.
Call: 1-800-742-6253
1-513-983-3034 (outside the U.S.)
Write: The Procter & Gamble Company
Shareholder Services Department
P.O. Box 5572
Cincinnati, Ohio 45201-5572
Financial information is available 24 hours a day.
Just call 1-800-764-7483.
You can also visit us on the World Wide Web.
Our address is www.pg.com/investor
COMMON STOCK PRICE RANGE AND DIVIDENDS
Price Range Dividends
------------------------------- ----------------
1997-98 1996-97 1997-98 1996-97
---------------------------------------------------
Quarter Ended High Low High Low
=====================================================================
September 30 $77.56 $64.06 $48.75 $41.19 $.2525 $.2250
December 31 83.44 62.00 55.50 45.75 .2525 .2250
March 31 87.88 77.31 64.81 51.81 .2525 .2250
June 30 92.50 80.19 71.94 56.63 .2525 .2250
CORPORATE HEADQUARTERS
The Procter & Gamble Company
P.O. Box 599
Cincinnati, Ohio 45201-0599
TRANSFER AGENT/SHAREHOLDER SERVICES
The Procter & Gamble Company
Shareholder Services Department
P.O. Box 5572
Cincinnati, Ohio 45201-5572
REGISTRAR
PNC Bank, N.A.
P.O. Box 1198
Cincinnati, Ohio 45201-1198
EXCHANGE LISTING
New York, Cincinnati, Amsterdam, Paris, Basle,
Geneva, Lausanne, Zurich, Frankfurt, Brussels, Tokyo
SHAREHOLDERS OF COMMON STOCK
There were 272,723 Common Stock shareholders of record, including participants
in the Shareholder Investment Program, as of July 24, 1998.
FORM 10-K
Beginning in October 1998, shareholders may obtain a copy of the Company's 1998
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 1-800-742-6253.
This information is also available at no charge by sending a request to
Shareholder Services at the address above.
SHAREHOLDERS' MEETING
The next annual meeting of shareholders will be held on Tuesday, October 13,
1998. A full transcript of the meeting will be available from Linda D. Rohrer,
Assistant Secretary, at a cost of $10. Ms. Rohrer can be reached at One P&G
Plaza, Cincinnati, Ohio 45202-3315.
------------
Annual Report to Shareholders. (Pages 1-33, 36)
(Top of page 1 - Picture of John E. Pepper with name and title)
John E. Pepper
Chairman and Chief Executive Officer
(Top of page 1 - Picture of Durk I. Jager with name and title)
Durk I. Jager
President and Chief Operating Officer
...AND OLEAN IS A VERY BIG IDEA. Maynard Danker, an Iowa farmer, remembers the
first day he heard about Olean. "The folks who make Crisco were going to start
with soybeans like mine to come up with a new kind of cooking oil. It fries up
snacks that are a little healthier, without adding any fat. Makes them taste
good, too. That's something that's never been done before." Improving consumers'
lives by doing things that have never been done before is what Procter & Gamble
is all about. In more than 140 countries around the world, we work to understand
what consumers want and need. Then we develop innovative brands to serve those
needs - creating new products, new categories and new growth opportunities for
our Company. More than 110,000 P&G employees around the world, committed to
breakthrough innovation and superior execution, drive our growth. Again this
year, we delivered record performance: net earnings of $3.78 billion, up 11%;
basic net earnings per common share of $2.74, up 13%; and worldwide net sales of
$37.2 billion, up 4% on 6% unit volume growth. These results fueled solid
performance in the areas that matter most to you, our shareholders. Over the
past three years, we've delivered an average annual Total Shareholder Return
(TSR) of 37%, compared to a TSR of 30% for the S&P 500. And we concluded the
1997/1998 fiscal year by increasing common share dividends 13% to $1.14 -
marking the 43rd consecutive year of increased dividend payments.
(Bottom of page 1, right-hand margin -- picture of Maynard Danker sitting on his
tractor)
(Middle of pages 2 and 3 -- picture of several people with the caption "WE
MAKE EVERY DAY BETTER IN EVERY WAY WE CAN FOR PEOPLE AROUND THE WORLD.")
FASTER, BIGGER INNOVATION
These results are good, yet we can and must do better. In particular, we are not
satisfied with our rate of volume and sales growth. We must significantly
accelerate our progress if we are to achieve the goals we've reported here in
previous years:
(bullet) To double our business in 10 years,
(bullet) To grow shares in categories representing the majority of
our volume, and
(bullet) To remain consistently among the top third of our peer
companies in TSR performance.
We know the key is faster, bigger innovation in every part of our business. And
we've made important strides in the past year to strengthen our pipeline of
innovations on established brands and on new brands entering test market. But
there is much more we intend to do. We must bring even better products to more
markets with greater speed than ever before. And we must release the untapped
power of our organization.
IMPORTANT CHANGES TO ACCELERATE GROWTH
For some time, we've been examining how our organization should evolve, and in
the coming weeks, we will announce details of a comprehensive plan to simplify
the way we're structured and to strengthen how we operate. The changes, while
consistent with the direction in which we've been growing, are significant and
will improve our ability to create and build even more profitable leadership
brands around the world.
Four changes, in particular, are worth noting here:
(bullet) We will move from our current regional business units
to product-based, global business units - a direction
we've been heading since the late 1980s with the
start of Global Category Management.
(bullet) We will strengthen our already-strong, country-based
organizations to provide even deeper knowledge of
local consumers and stronger partnerships with our
customers. These local market organizations will be
essential to bringing our product initiatives to
consumers with the highest impact possible.
(bullet) We will create a new Global Business Services
organization to support the global business units and
the local market organizations. This move will bring
together business services that are currently
dispersed throughout the organization. It will also
help us achieve significant economies of scale, while
improving the overall quality and speed of these
services.
(bullet) And finally, we will streamline our corporate staff.
We will align many corporate resources with the
business units and refocus others on developing the
cutting-edge, functional knowledge and innovation
important to our future growth and success.
To support these new structural advantages, we are also making important changes
in our culture and in our reward system - all to encourage greater speed,
innovation and flexibility in the organization. Taken together, we believe these
improvements will enable us to build stronger global brands; achieve faster,
bigger innovation; produce accelerated business growth; and result in greater
satisfaction for our people. These are the kinds of changes we've made
throughout P&G's 161-year history - changes always designed to get us closer to
consumers and to keep our business growing at a level we - and you - have every
right to expect, given the extraordinary caliber of the men and women of Procter
& Gamble.
A BIG IDEA
It's been a good year. And we are committed to making the future even better. We
owe it to people like Maynard Danker. And we owe it to you, the fellow owners of
our Company. We want to ensure that whenever and wherever people see P&G or its
brands, they can say to themselves, "Now that's a big idea."
/s/JOHN E. PEPPER /s/DURK I. JAGER
John E. Pepper Durk I. Jager
Chairman and Chief Executive Officer President and Chief Operating
Officer
July 30, 1998
Key Brands
Laundry & Cleaning Products
Ace Bleach
Ariel
Bounce
Cascade
Cheer
Dawn
Downy
Fairy
Joy
Lenor
Mr. Clean
Tide
Paper Products
Always/Whisper Bounty
Charmin
Luvs
Pampers
Pampers wipes
Puffs
Tampax
Tempo
Beauty Care Products
Cover Girl
Head & Shoulders
Ivory
Max Factor
Oil of Olay
Old Spice
Pantene Pro-V
Pert Plus
Rejoice
Safeguard
Secret
SK-II
Vidal Sassoon
Zest
Health Care Products
Asacol
Blend-A-Med
Chloraseptic
Crest
Didronel
Macrobid
NyQuil
Pepto-Bismol
Scope
Vicks Formula 44
Vicks VapoRub
Food & Beverage Products
Crisco
Folgers
Hawaiian Punch
Jif
Millstone
Olean
Pringles
Punica
Sunny Delight
(Top of page 4 -- picture of a man, a boy, ThermaCare heatwrap wrapped around a
person's back and ThermaCare product) THERMACARE: EASE YOUR PAIN -- WITH
WEARABLE HEAT ThermaCare ultra-thin wraps fit comfortably under your clothes for
soothing heat that helps relieve pain all day long.
(Bottom of page 4 -- picture of a lady holding a hanger with a blouse hung on it
and picture of Dryel product) DRYEL: CARE FOR "DRY CLEAN ONLY" FABRICS -- AT
HOME For less than a $1 a garment and about 30 minutes a load, Dryel helps clean
and freshen wool, rayon, silk and other "dry clean only" clothes in your home
dryer.
(Top of page 5 -- picture of a lady holding the following products: Ritz
crackers, Lay's Wow Chips and Pringles Fat Free Chips; Olean logo) OLEAN: ENJOY
GREAT-TASTING SNACKS -- WITH LESS FAT Our Crisco people came up with a cooking
oil that fries up great-tasting snacks, without adding any fat or a single
calorie.
(Middle of page 5 -- caption "NEW TO THE WORLD BRANDS . . .")
(Bottom of page 5 -- picture of a boy and a dog on a couch, 3 pictures of small
pieces of fabric with the caption "THE FINE MIST PENETRATES FIBERS, CLEANING
AWAY ODORS AS IT EVAPORATES." Picture of Febreze product) FEBREZE: CLEAN BAD
SMELLS OUT OF FABRICS -- FOR GOOD Just spray Febreze on furniture, carpets,
rugs, car interiors, clothing, even shoes -- and odors trapped in fabrics are
gone.
(Top of page 6 -- picture of two babies and Pampers Premium product)
PAMPERS: BREAKTHROUGH TECHNOLOGY ADVANCES BABY SKIN CARE
With its unique Gentle Touch Liner, Pampers has surpassed competition to become
the U.S. share leader in premium diapers.
(Middle of page 6 -- caption "NEW TO THE BRAND INNOVATIONS")
(Bottom of page six -- picture of a woman and a man, toothbrush with toothpaste
and Crest Extra Whitening Toothpaste product) CREST: BREAKTHROUGH INGREDIENT
INTRODUCED IN CREST EXTRA WHITENING Its patented, enamel-safe soft silica helps
remove surface stains to let the natural whiteness of your teeth shine through.
(Top of page 7 -- picture of Nelson Watts, M.D., Director, Osteoporosis Program,
Emory University, consults with a patient and a picture of Actonel product)
ACTONEL: NEW STANDARD OF CARE FOR PAGET'S DISEASE, THE SECOND MOST COMMON
METABOLIC BONE DISORDER FDA approves remission indication with only 1/3 the
treatment time of current leading therapies, moving Actonel closer to regulatory
submission for osteoporosis.
(Middle or page 7 -- picture of Fairy product)
FAIRY LIQUID: FIRST ANTI-BACTERIAL DISH SOAP IN THE U.K.
Fairy received Royal Institute of Public Health and Hygiene certification for
its innovative, germ-killing property that fights cross-contamination.
(Bottom of page 7 -- picture of a lady and Pantene Pro-V Elastesse Hairspray
product) PANTENE ELASTESSE: FIRST MAJOR BREAKTHROUGH IN HAIR SPRAY TECHNOLOGY IN
OVER 40 YEARS The natural, touchable, flexible hold meets consumer needs and
grows our global dollar share to #1.
FINANCIAL RESULTS
(Middle of page 8 -- pictures of Crisco, Tide, Pampers, Pert, Crest, Always and
Ariel products with the caption "A TRADITION OF GROWTH THROUGH INNOVATION.")
9 Financial Review
18 Responsibility for the Financial Statements and Report of Independent
Accountants
19 Consolidated Financial Statements
24 Notes to Consolidated Financial Statements
FINANCIAL REVIEW
RESULTS OF OPERATIONS
The Company achieved record sales, unit volume and net earnings for the year
ended June 30, 1998. Basic net earnings per common share increased 13% to $2.74.
Worldwide net earnings for the year were $3.78 billion, an 11% increase over the
prior year earnings of $3.42 billion.
(Middle of page 9, left-hand margin -- bar graph showing Net Earnings in
Billions of Dollars -- 1996 - 3.0, 1997 - 3.4 and 1998 - 3.8)
Worldwide net sales for the current year were $37.15 billion, an increase
of 4% on worldwide unit volume growth of 6%. The difference between the sales
and volume growth rates was primarily due to weaker currencies in Europe and
Asia. Excluding these impacts, sales increased 8%.
Worldwide gross margin for the current year was 43.3% compared to 42.7% in
the prior year. The current year improvement reflects cost savings, primarily
from the Company's ongoing simplification and standardization program, as
ongoing cost savings generated by the program exceeded the net cost to fund
current year projects.
Worldwide marketing, research and administrative expenses were $10.04
billion compared to $9.77 billion in the prior year. This equates to 27.0% of
sales, compared with 27.3% in the prior year. The 3% increase in total spending
was primarily due to increased marketing support behind new brands, such as
Tampax and Fat Free Pringles, and the expansion of existing brands into new
markets.
Operating income grew 10%, primarily reflecting sales growth and
cost-control efforts. The Company's net earnings margin increased from 9.5% to
10.2%, the highest level in 57 years.
Interest expense increased 20% to $548 million on increased debt, due
mainly to acquisitions. Other income, net, which consists primarily of interest
and investment income, contributed $201 million in the current year. In the
prior year, other income, net, was $218 million.
The Company's effective tax rate for the year was 33.8% compared to 34.9%
in the prior year. The decline reflects the benefits of lower tax rates in
Europe, increased research and development tax credits in North America, and
continued emphasis on effective tax planning.
In 1997, the Company completed its $2.4 billion restructuring program
started in 1993, with annual cost savings in excess of $600 million after tax.
The Company is continuing an ongoing program of simplification and
standardization, which includes projects to consolidate selected manufacturing
facilities, re-engineer manufacturing and distribution processes, redesign
organizations, simplify product line-ups and divest non-strategic brands and
assets. This program did not have a significant impact on 1998 net earnings, as
the aggregate pre-tax cost of projects was offset by gains on sales of
non-strategic brands and other assets. The net cost of these activities in 1997
was offset by increased licensing activity in the Health Care sector.
(Middle of page 9, right-hand margin -- bar graph showing Net Sales in Billions
of Dollars -- 1996 - 35.3, 1997 - 35.8 and 1998 - 37.2)
(Bottom of page 9, right-hand margin -- picture of Crisco product with caption
"1911: FIRST ALL-VEGETABLE SHORTENING")
The following provides perspective on the year ended June 30, 1997 versus the
prior year:
Worldwide net earnings increased 12% to $3.42 billion in 1997. Net earnings
for 1996 were $3.05 billion and included the settlement of the Bankers Trust
lawsuit, profit from the sale of the Company's share of a health care joint
venture, a reserve for estimated losses on a supply agreement entered into as
part of the previous divestiture of the commercial pulp business, and adoption
of FASB Statement No. 121 covering recognition of impairment of long-lived
assets. If these items had been excluded from 1996 earnings, the growth rate for
the year ended June 30, 1997 would have been 13%.
(Middle of page 10, left-hand margin -- bar graph showing Net Earnings
Margin % -- 1996 - 8.6%, 1997 - 9.5% and 1998 - 10.2%)
Worldwide net sales in 1997 were $35.76 billion, up 1% from the prior year
on unit volume growth of 3%. The difference between sales and volume growth
rates was primarily due to weaker currencies in Europe and Asia.
Worldwide gross margin increased to 42.7% from 40.7% in 1996, reflecting
cost savings from the Company's simplification and standardization efforts and
the continuing benefits of the restructuring project initiated in 1993.
Worldwide marketing, research and administrative expenses were 27.3% of
sales compared with 27.0% in 1996, primarily due to increases in advertising and
research.
(Bottom of page 10, left-hand margin -- picture of Tide product with caption
"1946: FIRST HEAVY-DUTY SYNTHETIC LAUNDRY DETERGENT)
Other income, net, was $218 million in 1997. In 1996, other income, net,
was $338 million and included a $120 million benefit from reversing the reserve
for two interest rate swap contracts following settlement of a lawsuit against
Bankers Trust; a $185 million gain on the sale of the Company's 50% share of a
health care joint venture to its venture partner; and a $230 million charge to
increase the reserve for estimated losses on a supply agreement entered into as
part of the previous sale of the Company's commercial pulp business.
(Middle of page 10, right-hand margin -- bar graph showing Total Shareholder
Return Relative to S&P 500 -- Past 10 Years - Procter & Gamble - 26.8% and S&P
500 - 18.0%, Past 5 Years - Procter & Gamble - 31.5% and S&P 500 - 22.7% and
Past 3 Years - Procter & Gamble - 37.0% and S&P 500 - 29.7%)
Net earnings margin increased to 9.5% in 1997 from 8.6% in 1996, reflecting
unit volume growth and continued emphasis on cost control through the Company's
simplification and standardization program.
FINANCIAL CONDITION
Cash flow from operations was $4.89 billion, $5.88 billion and $4.16 billion in
1998, 1997 and 1996, respectively. Operating cash flow provided the primary
source of funds to finance operating needs, capital expenditures and the share
repurchase programs. Operating cash flow, combined with additional borrowings,
provided the primary source of funds to finance current year acquisitions.
Cash and cash equivalents decreased $801 million in the current year to
$1.55 billion, primarily due to acquisitions and increased capital expenditures.
Capital expenditures were $2.56 billion in 1998, $2.13 billion in 1997, and
$2.18 billion in 1996. Current year expenditures included capacity expansions in
the paper and food businesses, primarily in tissue and towel and snacks. Capital
expenditures are expected to increase during the upcoming year, reflecting
planned capacity increases and technological advances, primarily in the paper
and laundry businesses.
Net cash used for acquisitions completed during 1998 totaled $3.27 billion,
the highest level in the Company's history. Acquisitions were largely
concentrated in paper businesses, and included Tambrands, Inc. and its global
leading brand, Tampax, the Loreto y Pena paper company in Mexico, and the
Ssangyong Paper Company in Korea. The Company also increased ownership of
various ventures in Asia and Latin America. Current year acquisitions were
funded through a combination of existing cash balances and the issuance of debt.
Net cash used for acquisition activities in 1997 and 1996 totaled $150 million
and $358 million, respectively. The Company continued to divest certain
non-strategic brands in 1998 in order to focus organizational resources on the
Company's core businesses. The proceeds from these sales, the most significant
of which was Duncan Hines, and other asset sales, generated $555 million in cash
flow in the current year, compared to $520 million and $402 million in 1997 and
1996, respectively.
(Middle of page 11, left-hand margin -- bar graph showing Operating Cash Flow in
Billions of Dollars -- 1996 - 4.2, 1997 - 5.9 and 1998 - 4.9)
The Company initiated a share repurchase program in 1995 which authorized
the Company to purchase shares annually to mitigate the dilutive impact of
management compensation programs. The Company also initiated discretionary
buy-back programs to repurchase additional outstanding shares of up to $1
billion per year during 1997 and 1998, in addition to purchases made under the
1995 program. Current year purchases under the repurchase programs totaled $1.93
billion compared to $1.65 billion in the prior year. The Company has announced
plans to increase and accelerate its discretionary share repurchase programs in
1999 beyond its previous annual target of $1 billion.
Common share dividends grew 12% to $1.01 per share in 1998, compared to
$.90 and $.80 in 1997 and 1996, respectively. For the coming year, the annual
dividend rate will increase to $1.14 per common share, marking the forty-third
consecutive year of increased common share dividend payments. Total dividend
payments, to both common and preferred shareholders, were $1.46 billion, $1.33
billion and $1.20 billion in 1998, 1997 and 1996, respectively. Total debt was
up $3.06 billion to $8.05 billion, primarily due to the issuance of commercial
paper to fund current year acquisitions. Long-term borrowing available under the
Company's shelf registration statement filed in 1995, as amended in July 1997,
was $2.0 billion at June 30, 1998. Additionally, the Company has the ability to
issue commercial paper at favorable rates.
(Middle of page 11, right-hand margin -- pie chart showing Net Sales by
Geographic Region in Billions of Dollars -- North America - 18.5, Europe, Middle
East and Africa - 11.8, Asia - 3.5, Latin America - 2.6 and Corporate - 0.8)
The following pages provide perspective on the Company's geographic operating
segments. Geographic segments exclude corporate items, most notably certain
financing and employee benefit costs, goodwill amortization, segment
eliminations and projects related to the Company's simplification and
standardization program.
(Bottom of page 11, right-hand margin -- picture of Crest product with captin
"1955: FIRST FLUORIDE TOOTHPASTE CLINICALLY PROVEN TO PREVENT CAVITIES")
NORTH AMERICA REGION
The North America region continued to deliver solid progress, achieving record
sales, unit volume and net earnings.
Net sales for the year were $18.46 billion, an increase of 5% from the
prior year level of $17.63 billion, on unit volume growth of 4%.
Net earnings for the region were up 10% to $2.47 billion. The region
achieved this earnings growth through increased unit volume, a continued focus
on cost control through simplification and standardization, and a lower tax
rate, primarily related to increased research and development tax credits,
partially offset by increased spending on product initiatives. Prior year net
earnings were $2.25 billion, which represented a 15% increase over 1996. Net
earnings margin for the region was 13.4%, compared to 12.8% and 11.3% in 1997
and 1996, respectively.
(Middle of page 12, left-hand margin -- bar graph showing North America Net
Sales in Billions of Dollars -- 1996 - 17.2, 1997 - 17.6 and 1998 - 18.5)
The Paper sector led the region's current year volume progress, generating
10% unit volume growth versus the prior year and delivering over half of the
region's total unit volume increase. This unit volume growth was achieved behind
the strength of the feminine protection business, driven by the Tambrands
acquisition; diapers, due to initiative programs; and tissue and towel, as a
result of prior year capacity increases. The Paper sector also led the region's
profit improvements, driven by volume growth, increased pricing in tissue and
towel, and cost reduction from the ongoing simplification and standardization
program. In the prior year, operating results were driven by the diaper
category, behind the acquisition of baby wipes and the introduction of Pampers
Baby-Dry, and by tissue and towel capacity increases.
The Laundry and Cleaning sector was also a strong contributor to the
region's current year unit volume progress, with a 3% increase over a strong
prior year base period. The volume gains were driven by laundry, which also
contributed heavily to the sector's earnings progress, and by fabric
conditioners.
(Middle of page 12, right-hand margin -- bar graph showing North America Net
Earnings in Millions of Dollars -- 1996 - 1,953, 1997 - 2,253 and 1998 - 2,474)
The Food and Beverage sector achieved 1% unit volume growth in the current
year, despite reduced coffee volumes resulting from commodity-based price
increases and the sale of Duncan Hines. The snacks category posted the highest
increase, behind the launch of Fat Free Pringles. The sector's earnings were
negatively impacted by the loss of profit contribution from Duncan Hines, and by
investments in new initiatives. In 1997, unit volume growth was led by the
snacks category, which achieved double-digit growth behind new production
capacity.
Unit volume in the Beauty Care sector grew 2% during the year, led by hair
care and deodorants. Net earnings for the sector increased over a strong prior
year base, driven by the skin care and personal cleansing and the cosmetics and
fragrances categories. Earnings growth declined from the double-digit increases
of prior years, due to intense competition in hair care and deodorants, and
increased investments in the development of future product initiatives.
(Bottom of page 12, left-hand margin -- picture of Comet product with caption
"1956: FIRST SCOURING CLEANSER WITH EFFECTIVE BLEACHING")
Unit volume in the Health Care sector was down 1%, as volume softness
caused by intense competitive activity in oral care was partially offset by
improved volume in the pharmaceuticals category. The sector's unit volume posted
a 3% decline in 1997 compared to 1996. Earnings declined in 1998, as the sector
continued to invest in research and development, primarily in pharmaceuticals,
and in marketing support in the highly competitive oral care category. The
sector will continue to invest heavily in research and development, with a
pipeline for launching new pharmaceutical drugs in the coming years and a
renewed focus on future innovations in other health care products.
EUROPE, MIDDLE EAST AND AFRICA REGION
Record unit volume, sales and earnings in the Europe, Middle East and Africa
region were driven by continued expansion into developing markets, increased
pricing, cost improvements and lower tax rates.
Net sales grew 2% to $11.84 billion, on 8% unit volume growth. Excluding
the effects of unfavorable exchange rates, primarily in Western Europe, sales
grew 10%, ahead of volume. During the prior year, sales increased 1% to $11.59
billion, which trailed the 7% unit volume growth rate due to unfavorable
exchange rates.
(Bottom of page 13, left-hand margin -- bar graph showing Europe, Middle East
and Africa Net Sales in Billions of Dollars -- 1996 - 11.5, 1997 - 11.6 and 1998
- 11.8)
The region's net earnings progress continued in the current year, growing
14% to $1.09 billion. Net earnings in 1997 were $956 million, a 21% increase
over 1996. Current year earnings growth was driven by the region's volume
growth, continued efforts to reduce cost via simplification and standardization
and lower tax rates, partially offset by negative exchange impacts. The net
earnings margin progress also continued in the current year to 9.2%, from 8.3%
and 6.9%, in 1997 and 1996, respectively.
Central and Eastern Europe led the region's unit volume growth, with a 25%
increase, driven by growth in emerging markets. This follows a 42% growth rate
in 1997. Earnings increased as a result of unit volume growth, reduced costs and
economies of scale, partially offset by continued investment in new product
initiatives and new markets to facilitate future growth.
(Middle of page 13, right-hand margin -- bar graph showing Europe, Middle East
and Africa Net Earnings in Millions of Dollars -- 1996 - 793, 1997 - 956 and
1998 - 1,092)
Middle East and Africa, which includes the region's snack business,
increased unit volume 18% over the prior year base period, which also generated
a double-digit increase over 1996. Unit volume progress was broadly based across
countries and key categories, led by increased snack sales.
Western Europe unit volume increased 2%, reflecting the net impact of the
Tambrands acquisition and the divestiture of non-strategic local brands,
primarily in health and beauty care. Net earnings increased well above volume
growth, due to cost savings, primarily in laundry and cleaning products, and
lower tax rates, partially offset by increased spending to promote new brand
launches.
(Bottom of page 13, right-hand margin -- picture of Head & Shoulders product
with caption "1961: FIRST PLEASANT-TO-USE SHAMPOO EFFECTIVE AGAINST DANDRUFF"
ASIA REGION
The Asia region was negatively impacted by a general market contraction caused
by the currency and economic crises in Korea and the ASEAN countries (Thailand,
Malaysia, Philippines, Indonesia and Singapore) and the continuing economic
recession in Japan.
Net sales for the region were $3.45 billion, 3% below the prior year on 4%
unit volume growth. Current year volume growth was driven by acquisitions,
including Ssangyong, a paper business in Korea, and increased ownership of a
venture in China, which more than offset volume declines in the rest of the
region. Net sales lagged volume growth as the impact of improved pricing and
product mix were more than offset by the impact of unfavorable exchange rate
movements. Excluding adverse exchange effects, sales grew 10%, primarily due to
pricing aimed at recovering the currency devaluation effects. In the prior year,
net sales declined 8% to $3.57 billion on a 7% unit volume decline. Excluding
exchange effects in 1997, sales were down 2% versus 1996.
(Middle of page 14, left-hand margin -- bar graph showing Asia Net Sales in
Billions of Dollars -- 1996 - 3.9, 1997 - 3.6 and 1998 - 3.5)
The region's net earnings were $174 million, a 37% decrease from the prior
year. Current year earnings were impacted by lower sales, increased investment
in new product initiatives and the currency crisis. The prior year net earnings
of $275 million represented a 1% increase over 1996. Net earnings margin for the
current year was 5.0%, compared to 7.7% in 1997 and 7.0% in 1996. The 1998
margin decline reflects lower sales, exchange impacts and initiative
investments.
Greater China's unit volume was up 6% versus the prior year. Volume
increases were driven by increased ownership of a joint venture. Net earnings
were higher as the impact of increased volume was partially offset by
unfavorable sales mix and investment behind new product introductions.
(Bottom of page 14, left-hand margin -- picture of Pampers product with the
caption "1961: FIRST SUCCESSFUL, MASS-MARKETED DISPOSABLE DIAPER)
In Japan, unit volume was relatively flat, reflecting the continued
depressed state of the Japanese economy. Despite the economic troubles, the
Company continued to invest in new product initiatives and was successful in
increasing market shares during the second half of the year. Net earnings were
lower due to unfavorable sales mix, investment in new products and the weakened
yen.
(Middle of page 14, right-hand margin -- bar graph showing Asia Net Earnings in
Millions of Dollars -- 1996 - 273, 1997 - 275 and 1998 - 174)
The balance of Asia was positively impacted by the acquisition of the
Ssangyong Paper Company in Korea. The increased volume in Korea resulting from
this acquisition more than offset volume declines brought about by the economic
crisis. Earnings, however, declined as a result of the currency crisis.
The Asian markets are expected to remain weak through at least fiscal 1999.
Because the Asia region accounted for less than 10% of the Company's total sales
and 5% of the Company's total earnings in fiscal 1998, the economic situation is
not expected to be significant to the Company's overall growth rate for the
coming year. While the region is expected to recover from these difficulties,
the depth and duration of the economic effects are still uncertain.
LATIN AMERICA REGION
Latin America continued its positive trends in net sales and net earnings, with
current year results being driven by acquisitions and the continued
strengthening in Mexico and Venezuela.
Net sales in the region grew 14% to $2.64 billion on 12% unit volume
growth, as pricing outpaced the negative impact of currency devaluation. Volume
gains resulted from the acquisition of Loreto y Pena, a paper company in Mexico,
the buy-out of a paper joint venture in the Southern Cone (Brazil, Argentina,
Chile), the prior year acquisition of a laundry and cleaning business in Brazil,
and the strengthening of the base business in Mexico, Venezuela and Argentina.
In the prior year, sales for the region grew 6% to $2.31 billion, while unit
volume was down 2%, reflecting inflation-driven pricing action. In Mexico, the
Company's largest operation in the region, business results were strong. Unit
volume increased 16%, behind the acquisition of the Loreto y Pena paper company
and a general economic recovery in the market.
(Top of page 15, left-hand margin -- bar graph showing Latin America Net Sales
in Billions of Dollars - 1996 - 2.2, 1997 - 2.3 and 1998 - 2.6)
Net earnings for the region were $274 million, a 7% increase. Current year
earnings lagged behind sales growth due to increased investment to support brand
expansion in the Southern Cone. Excluding these geographies, the balance of the
region's earnings grew in double digits. Prior year net earnings were $256
million, a 17% increase over 1996. Net earnings margin for the current year was
10.4% compared to 11.1% and 10.1% in 1997 and 1996, respectively, reflecting
initiative investments.
(Bottom of page 15, left-hand margin -- bar graph showing Latin America Net
Earnings in Millions of Dollars -- 1996 - 219, 1997 - 256 and 1998 - 274)
Prior to January 1, 1998, both Brazil and Peru were highly inflationary
economies, and accordingly, the results of the Company's subsidiaries in Brazil
and Peru were measured using the United States dollar as their functional
currency. Effective January 1, 1998, neither Brazil nor Peru qualified as a
highly inflationary economy. The impact of this change was not material.
HEDGING AND DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to market risk, including changes in interest rates,
currency exchange rates and commodity prices. To manage the volatility relating
to these exposures on a consolidated basis, the Company nets the exposures to
take advantage of natural offsets and enters into various derivative
transactions for the remaining exposures pursuant to the Company's policies in
areas such as counterparty exposure and hedging practices. The financial impacts
of these hedging instruments are offset by corresponding changes in the
underlying exposures being hedged. The Company does not hold or issue derivative
financial instruments for trading purposes. Note 5 to the consolidated financial
statements includes a discussion of the Company's accounting policies for
financial instruments.
Derivative positions are monitored using techniques including market value,
sensitivity analysis and a value at risk model. The tests for interest rate and
currency rate exposures discussed below are based on a variance/co-variance
value at risk model using a one-year horizon and a 95% confidence level. The
model assumes that financial returns are normally distributed and approximates
the financial return for options and other non-linear instruments. The model
also reflects the impact of correlation and diversification from holding
multiple currency and interest rate instruments. Estimates of volatility and
correlations of market factors are drawn from the JP Morgan
RiskMetrics(trademark) dataset as of June 30, 1998. In cases where data is
unavailable in RiskMetrics(trademark), a reasonable approximation is included.
The effect of these estimates did not significantly change the total value at
risk.
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.
(Bottom of page 15, right-hand margin -- picture of Ariel product with caption
"1967: FIRST MASS-MARKETED LAUNDRY DETERGENT WITH ENZYMES FOR PRESOAKING AND
WASHING")
INTEREST RATE EXPOSURE
Interest rate swaps are used to hedge underlying debt obligations. Certain
currency interest rate swaps are designated to hedge the foreign currency
exposure of the Company's related foreign net investments.
Based on the Company's overall interest rate exposure as of and during the
year ended June 30, 1998, including derivative and other interest rate sensitive
instruments, a near-term change in interest rates, within a 95% confidence level
based on historical interest rate movements, would not materially affect the
consolidated financial position, results of operations or cash flows.
CURRENCY RATE EXPOSURES
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 major foreign currency exposures involve the
markets in Western Europe, Mexico and Canada. The primary purpose of the
Company's foreign currency hedging activities is to protect against 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 durations of
generally less than 12 months.
In addition, the Company enters into foreign currency swaps to hedge
intercompany financing transactions, and utilizes purchased foreign currency
options with durations of generally less than 18 months and forward exchange
contracts to hedge against the effect of exchange rate fluctuations on royalties
and foreign source income.
Based on the Company's overall currency rate exposure as of and during the
year ended June 30, 1998, including derivative and other foreign currency
sensitive instruments, a near-term change in currency rates, within a 95%
confidence level based on historical currency rate movements, would not
materially affect the consolidated financial position, results of operations or
cash flows.
(Bottom of page 16, left-hand margin -- picture of Pringles product with caption
"1968: FIRST UNIFORMLY SHAPED, STACKABLE POTATO CHIP")
COMMODITY PRICE EXPOSURE
Raw materials used by the Company are subject to price volatility caused by
weather, supply conditions and other unpredictable factors. The Company uses
futures and options contracts, primarily in food and beverage products, to
manage the volatility related to certain of these exposures. Gains and losses
relating to qualifying hedges of firm commitments or anticipated inventory
transactions are deferred in prepaid expenses and are included in the basis of
the underlying transactions. Commodity hedging activity is not material to the
Company's consolidated financial position, results of operations or cash flows.
ORGANIZATION 2005
The Company is currently designing Organization 2005, a realignment of the
organization structure, work processes and culture to accelerate growth and
innovation. While the details are not final, the design will likely include:
(bullet) A move from current geographic business units to product-based
Global Business Units (GBUs).
(bullet) The further strengthening of country-based organizations to
provide even greater focus on deep local level consumer and
customer knowledge.
(bullet) The establishment of centers of excellence for key administrative,
logistics and support functions.
(bullet) Changes in the culture and reward systems to encourage greater
speed, innovation and flexibility.
The nature, timing and implications related to this design change have not
yet been determined. The Company expects to finalize plans and to make available
further details of the Organization 2005 changes in Fall 1998.
YEAR 2000
The Company has developed plans to address the possible exposures related to the
impact on its computer systems of the Year 2000. Key financial, information and
operational systems, including equipment with embedded microprocessors, have
been inventoried and assessed, and detailed plans are in place for the required
systems modifications or replacements. Progress against these plans is monitored
and reported to management and to the Audit Committee of the Board of Directors
on a regular basis. Implementation of required changes to critical systems is
expected to be completed during fiscal 1999. Testing and certification of
critical systems, which includes review of documented remediation work and test
results by technical experts, key users and a central project team, is expected
to be successfully completed by December 31, 1999. In addition, the Company's
Internal Controls organization plans to review the testing and certification
process and observe the testing of selected critical systems in each region.
Critical Systems Description
% of Applications Year 2000 Compliant
--------------------------------------------
Actual as of Planned Planned
June 1998 December 1998 June 1999
-------------------------------------------------------------------------
Critical manufacturing,
operating and
control systems 44% 90% 100%
All other critical systems 56% 100% 100%
Incremental costs, which include contractor costs to modify existing
systems and costs of internal resources dedicated to achieving Year 2000
compliance, are charged to expense as incurred. Costs are expected to total
approximately $100 million, of which 34% has been spent to date.
The Company is also in contact with suppliers and customers to assess the
potential impact on operations if key third parties are not successful in
converting their systems in a timely manner. Risk assessment, readiness
evaluation, action plans and contingency plans related to these third parties
are expected to be completed by December 1998.
The Company's risk management program includes emergency backup and
recovery procedures to be followed in the event of failure of a
business-critical system. These procedures will be expanded to include specific
procedures for potential Year 2000 issues. Contingency plans to protect the
business from Year 2000-related interruptions are being developed. These plans
will be complete by June 1999 and will include, for example, development of
backup procedures, identification of alternate suppliers and possible increases
in safety inventory levels.
The Company is taking reasonable steps to prevent major interruptions in
the business due to Year 2000 issues. The effect, if any, on the Company's
results of operations if the Company, its customers or its suppliers are not
fully Year 2000 compliant is not reasonably estimable. The Company believes its
global presence and broad-based manufacturing capability help mitigate the risk.
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, Year 2000 compliance, financial goals and cost reduction, among
others.
These forward-looking statements represent challenging goals for the
Company and are based on certain assumptions and estimates regarding the
worldwide economy, technological innovation, competitive activity, pricing,
currency movements, product introductions, governmental action and the
development of certain markets. Among the key factors necessary to achieve the
Company's goals are: (1) the achievement of lower costs and increases in
reliability and capacity utilization, resulting from simplification and
standardization; (2) the ability to improve results despite high levels of
competitive activity and the economic downturn in Asia; (3) the successful
implementation of ECR and the ability to maintain key customer relationships in
important developed markets; (4) the continuation of substantial growth in
significant developing markets such as China, Mexico, Brazil and the countries
of Central and Eastern Europe; (5) obtaining successful outcomes in regulatory,
tax and legal matters; (6) the ability to continue technological innovation; and
(7) the timely resolution of the Year 2000 issue by the Company and its
customers and suppliers. 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.
(Bottom of page 17, right-hand margin -- picture of Bounce product with caption
"1972: FIRST EFFECTIVE DRYER-ADDED FABRIC SOFTENER ")
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 generally accepted accounting principles 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 LLP, independent public accountants, have audited and
reported on the Company's consolidated financial statements. Their audits were
performed in accordance with generally accepted auditing standards.
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 LLP
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/JOHN E. PEPPER /S/ERIK G. NELSON
John E. Pepper Erik G. Nelson
Chairman and Chief Executive Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
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, 1998 and 1997 and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended June 30, 1998. 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 generally accepted auditing
standards. 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, 1998
and 1997 and the results of its operations and cash flows for each of the three
years in the period ended June 30, 1998, in conformity with generally accepted
accounting principles.
/S/DELOITTE & TOUCHE LLP
July 30, 1998
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended June 30
----------------------
Amounts in Millions Except Per Share Amounts 1998 1997 1996
==============================================================================
NET SALES $37,154 $35,764 $35,284
Cost of products sold 21,064 20,510 20,938
Marketing, research and administrative expenses 10,035 9,766 9,531
-------------------------
OPERATING INCOME 6,055 5,488 4,815
Interest expense 548 457 484
Other income, net 201 218 338
-------------------------
EARNINGS BEFORE INCOME TAXES 5,708 5,249 4,669
Income taxes 1,928 1,834 1,623
-------------------------
NET EARNINGS $ 3,780 $ 3,415 $ 3,046
=========================
BASIC NET EARNINGS PER COMMON SHARE $2.74 $2.43 $2.14
DILUTED NET EARNINGS PER COMMON SHARE $2.56 $2.28 $2.01
DIVIDENDS PER COMMON SHARE $1.01 $ .90 $ .80
=========================
See accompanying Notes to Consolidated Financial Statements.
(Bottom of page 19, right-hand margin -- picture of Dawn product with caption
"1972: FIRST DISHWASHING LIQUID WITH GREASE-CUTTING SUPERIORITY ")
CONSOLIDATED BALANCE SHEETS
June 30
----------------
Amounts in Millions Except Per Share Amounts 1998 1997
===========================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,549 $ 2,350
Investment securities 857 760
Accounts receivable 2,781 2,738
Inventories
Materials and supplies 1,225 1,131
Work in process 343 228
Finished goods 1,716 1,728
Deferred income taxes 595 661
Prepaid expenses and other current assets 1,511 1,190
----------------
TOTAL CURRENT ASSETS 10,577 10,786
PROPERTY, PLANT AND EQUIPMENT
Buildings 3,660 3,409
Machinery and equipment 15,953 14,646
Land 539 570
----------------
20,152 18,625
Accumulated depreciation (7,972) (7,249)
----------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 12,180 11,376
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill 7,023 3,915
Trademarks and other intangible assets 1,157 1,085
----------------
8,180 5,000
Accumulated amortization (1,169) (1,051)
----------------
TOTAL GOODWILL AND OTHER INTANGIBLE ASSETS 7,011 3,949
OTHER NON-CURRENT ASSETS 1,198 1,433
----------------
TOTAL ASSETS $30,966 $27,544
================
See accompanying Notes to Consolidated Financial Statements.
(Bottom of page 20, left-hand margin -- picture of Luvs product with caption
"1975: FIRST CONTOUR-SHAPED DIAPER ")
June 30
----------------
Amounts in Millions Except Per Share Amounts 1998 1997
===========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,051 $ 2,203
Accrued and other liabilities 3,942 3,802
Taxes payable 976 944
Debt due within one year 2,281 849
----------------
TOTAL CURRENT LIABILITIES 9,250 7,798
LONG-TERM DEBT 5,765 4,143
DEFERRED INCOME TAXES 428 559
OTHER NON-CURRENT LIABILITIES 3,287 2,998
----------------
TOTAL LIABILITIES 18,730 15,498
----------------
SHAREHOLDERS' EQUITY
Convertible Class A preferred stock,
stated value $1 per share
(600 shares authorized) 1,821 1,859
Non-Voting Class B preferred stock,
stated value $1 per share (200 shares
authorized; none issued) - -
Common stock, stated value $1 per share
(5,000 shares authorized; shares outstanding:
1998-1,337.4 and 1997-1,350.8) 1,337 1,351
Additional paid-in capital 907 559
Reserve for employee stock ownership plan
debt retirement (1,616) (1,634)
Accumulated other comprehensive income (1,357) (819)
Retained earnings 11,144 10,730
----------------
TOTAL SHAREHOLDERS' EQUITY 12,236 12,046
----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,966 $27,544
================
(Bottom of page 21, right-hand margin -- picture of Didronel product with
caption "DIDRONEL, THE FIRST GLOBAL OSTEOPOROSIS DRUG ")
See accompanying Notes to Consolidated Financial Statements.
(Bottom of page 22, left-hand margin -- picture of Bounty product with caption
"1985: SUPERIOR PAPER-MAKING TECHNOLOGY YIELDS STRONGER, MORE ABSORBENT PAPER
TOWELS")
See accompanying Notes to Consolidated Financial Statements.
(Bottom of page 23, right-hand margin -- picture of Pampers product with caption
"1986: SUPER-ABSORBENT POLYMER TECHNOLOGY PROVIDES UNPARALLELED DRYNESS IN A
THIN DIAPER")
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Millions of Dollars Except Per Share Amounts
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 that are at least 20% to 50% owned, and over which the Company exerts
significant influence but does not control the financial and operating
decisions, are accounted for by the equity method. These investments are managed
as integral parts of the Company's segment operations, and the Company's share
of their results is included in net sales for the related segments.
Use of Estimates: Preparation of financial statements in conformity with
generally accepted accounting principles 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.
Accounting Changes: In 1998, the Company adopted several FASB statements.
Statement No. 128, "Earnings per Share," which revises the manner in which
earnings per share is calculated, did not impact the Company's previously
reported earnings per share. Statement No. 130, "Reporting Comprehensive
Income," requires the components of comprehensive income to be disclosed in the
financial statements. Statement No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires certain information to be reported
about operating segments on a basis consistent with the Company's internal
organizational structure. Statement No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," revises the disclosures for
pensions and other postretirement benefits and standardizes them into a combined
format. Required disclosures have been made and prior years' information has
been reclassified for the impact of FASB Statements 130, 131 and 132.
New Pronouncements: In June 1998, the FASB issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which revises the accounting
for derivative financial instruments. In March 1998, the AICPA issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," which revises the accounting for software development costs and
will require the capitalization of certain costs which the Company has
historically expensed. The Company is currently analyzing the impacts of these
statements, which are required to be adopted in 2000, and does not expect either
statement to have a material impact on the Company's financial position, results
of operations or cash flows.
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 accumulated in a
separate component of shareholders' equity. 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 (losses) are reflected in earnings and were $0, $1
and $(28) for 1998, 1997 and 1996, respectively.
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 exceeds carrying value by approximately $91 and $122 at June 30,
1998 and 1997, respectively.
Goodwill and Other Intangible Assets: The cost of intangible assets is
amortized, principally on a straight-line basis, over the estimated periods
benefited, generally 40 years for goodwill and periods ranging from 10 to 40
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 profitability projections that
incorporate the impact of existing Company businesses. The analyses necessarily
involve significant management judgment to evaluate the capacity of an acquired
business to perform within projections. Historically, the Company has generated
sufficient returns from acquired businesses to recover the cost of the goodwill
and other intangible assets.
(Bottom of page 24, left-hand margin -- picture of Pert product with caption
"1986: FIRST COMPLETE SHAMPOO AND CONDITIONER IN ONE ")
Property, Plant and Equipment: Property, plant and equipment are recorded at
cost reduced by accumulated depreciation. Depreciation expense is provided based
on estimated useful lives using the straight-line method.
Selected Operating Expenses: Research and development costs are charged to
earnings as incurred and were $1,546 in 1998, $1,469 in 1997 and $1,399 in 1996.
Advertising costs are charged to earnings as incurred and were $3,704 in 1998,
$3,466 in 1997 and $3,254 in 1996.
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
------------------------
1998 1997 1996
===================================================================
Net earnings available to
common shareholders $3,676 $3,311 $2,943
Effect of dilutive securities
Preferred dividends,
net of tax benefit 104 104 103
Preferred dividend
impact on funding
of ESOP (25) (32) (39)
--------------------------
Diluted net earnings 3,755 3,383 3,007
--------------------------
Basic weighted average
common shares
outstanding 1,343.4 1,360.3 1,372.6
Effect of dilutive securities
Conversion of
preferred shares 99.8 101.9 103.8
Exercise of stock options 22.3 24.8 19.8
---------------------------
Diluted weighted average
common shares
outstanding 1,465.5 1,487.0 1,496.2
Stock Split: In July 1997, the Company's board of directors approved a
two-for-one stock split that was effective for common and preferred shareholders
of record as of August 22, 1997. The financial statements, notes and other
references to share and per-share data reflect the stock split for all periods
presented.
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 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.
Major Customer: The Company's largest customer, Wal-Mart Stores, Inc. and its
affiliates, accounted for 11% and 10% of consolidated net sales in 1998 and
1997, respectively. These sales occurred primarily in the North America segment.
Reclassifications: Certain reclassifications of prior years' amounts have been
made to conform with the current year presentation, primarily related to certain
component parts of research and development costs.
2 | ACQUISITIONS
In July 1997, the Company acquired Tambrands, Inc., a company in the feminine
protection category, for approximately $1,844 in cash. Other acquisitions in
1998 totaled $1,425 and included the acquisition of paper businesses and
increased ownership in various ventures in Latin America and Asia. These
acquisitions, all of which were accounted for using the purchase method,
resulted in goodwill of $3,335. Acquisitions accounted for as purchases in 1997
and 1996 totaled $150 and $358, respectively.
The following table reflects unaudited pro forma combined results of
operations on the basis that the 1998 acquisitions had taken place at the
beginning of the year for each of the periods presented:
Years Ended June 30
-------------------
1998 1997
==========================================================
Pro forma amounts
Net sales $37,476 $37,008
Net earnings 3,756 3,409
Net earnings per common share
Basic 2.72 2.43
Diluted 2.55 2.27
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred
under the ownership and management of the Company.
(Bottom of page 25, right-hand margin -- picture of Always product with caption
"1986: PATENTED "WINGS" TECHNOLOGY COMBINED WITH "DRI-WEAVE" TOPSHEET CREATES
SUPERIOR FEMININE PROTECTION")
3 | SUPPLEMENTAL BALANCE SHEET INFORMATION
June 30
---------------
1998 1997
======================================================
ACCRUED AND OTHER LIABILITIES
Marketing expenses $1,109 $1,129
Compensation expenses 485 461
Other 2,348 2,212
---------------
3,942 3,802
OTHER NON-CURRENT LIABILITIES
Postretirement benefits $1,193 $1,300
Pension benefits 843 815
Other 1,251 883
---------------
3,287 2,998
Currency
Translation Other Total
==========================================================================
ACCUMULATED OTHER
COMPREHENSIVE INCOME
Balance June 30, 1995 $64 $ 1 $ 65
Current period change (483) 0 (483)
--------------------------------
Balance June 30, 1996 (419) 1 (418)
Current period change (412) 11 (401)
--------------------------------
Balance June 30, 1997 (831) 12 (819)
Current period change (536) (2) (538)
--------------------------------
Balance June 30, 1998 (1,367) 10 (1,357)
4 | SHORT-TERM AND LONG-TERM DEBT
June 30
-------------
1998 1997
==============================================================
SHORT-TERM DEBT
U.S. obligations $1,435 $183
Foreign obligations 560 343
Current portion of long-term debt 286 323
-------------
2,281 849
The weighted average short-term interest rates were 6.2% and 6.9% as of
June 30, 1998 and 1997, respectively.
June 30
Average ----------------
Rate Maturities 1998 1997
========================================================================
LONG-TERM DEBT
U.S. notes and
debentures 6.96% 1998-2029 $2,897 $2,082
ESOP Series A 8.33% 1998-2004 545 613
ESOP Series B 9.36% 2021 1,000 1,000
U.S. commercial
paper 1,207 585
Foreign obligations 402 186
Current portion of
long-term debt (286) (323)
----------------
5,765 4,143
Long-term weighted average interest rates in the preceding table are as of
June 30, 1998 and include the effects of related interest rate swaps discussed
in Note 5. Certain commercial paper balances have been classified as long-term
debt based on the Company's intent and ability to renew the obligations on a
long-term basis. The Company has entered into derivatives that convert certain
of these commercial paper obligations into fixed-rate obligations. The fair
value of the long-term debt was $6,412 and $4,509 at June 30, 1998 and 1997,
respectively. Long-term debt maturities during the next five years are as
follows: 1999-$286; 2000-$387; 2001-$339; 2002-$427 and 2003-$1,141.
5 | RISK MANAGEMENT ACTIVITIES
The Company is exposed to market risk, including changes in interest rates,
currency exchange rates and commodity prices. To manage the volatility relating
to these exposures on a consolidated basis, the Company nets the exposures to
take advantage of natural offsets and enters into various derivative
transactions for the remaining exposures pursuant to the Company's policies in
areas such as counterparty exposure and hedging practices. The financial impacts
of these hedging instruments are offset by corresponding changes in the
underlying exposures being hedged. The Company does not hold or issue derivative
financial instruments for trading purposes.
Interest Rate Management
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. These swaps
are designated to hedge underlying debt obligations. For qualifying hedges, the
interest rate differential is reflected as an adjustment to interest expense
over the life of the swaps.
Certain currency interest rate swaps are designated to hedge the foreign
currency exposure of the Company's related foreign net investments. Currency
effects of these hedges are reflected in the accumulated other comprehensive
income section of shareholders' equity, offsetting a portion of the translation
of the net assets.
(Bottom of page 26, left-hand margin -- picture of Tide product with caption
"1989: FIRST NORTH AMERICAN LAUNDRY DETERGENT WITH ACTIVATED BLEACH ")
The following table presents information for all interest rate instruments.
The notional amount does not necessarily represent amounts exchanged by the
parties and, therefore, is not a direct measure of the Company's exposure to
credit risk. The fair value approximates the cost to settle the outstanding
contracts. The carrying value includes the net amount due to counterparties
under swap contracts, currency translation associated with currency interest
rate swaps and any marked-to-market value adjustments of instruments.
June 30
----------------
1998 1997
============================================
Notional amount $2,149 $1,488
Fair value $ 7 $ (54)
Carrying value 28 (28)
----------------
Unrecognized loss (21) (26)
Although derivatives are an important component of the Company's interest
rate management program, their incremental effect on interest expense for 1998,
1997 and 1996 was not material.
Currency Rate Management
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 major foreign currency exposures involve the
markets in Western Europe, Mexico and Canada. The primary purpose of the
Company's foreign currency hedging activities is to protect against 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 durations of
generally less than 12 months.
In addition, the Company enters into foreign currency swaps to hedge
intercompany financing transactions, and utilizes purchased foreign currency
options with durations of generally less than 18 months and forward exchange
contracts to hedge against the effect of exchange rate fluctuations on royalties
and foreign source income.
Gains and losses related to qualifying hedges of foreign currency firm
commitments or anticipated transactions are deferred in prepaid expense and are
included in the basis of the underlying transactions. To the extent that a
qualifying hedge is terminated or ceases to be effective as a hedge, any
deferred gains and losses up to that point continue to be deferred and are
included in the basis of the underlying transaction. All other foreign exchange
contracts are marked-to-market on a current basis, generally to marketing,
research and administration expense. To the extent anticipated transactions are
no longer likely to occur, the related hedges are closed with gains or losses
charged to earnings on a current basis.
Currency instruments outstanding are as follows:
June 30
---------------
1998 1997
==========================================
Notional amount
Forward contracts $3,448 $2,607
Purchased options 1,262 1,643
Currency swaps 217 358
Fair value
Forward contracts $ 30 $ (2)
Purchased options 16 38
Currency swaps 8 (1)
The deferred gains and losses on these instruments were not material.
In addition, in order to hedge currency exposures related to the net
investments in foreign subsidiaries, the Company utilizes local currency
financing entered into by the subsidiaries, and currency interest rate swaps and
other foreign currency denominated financing instruments entered into by the
parent. Gains and losses on instruments designated as hedges of net investments
are offset against the translation effects reflected in shareholders' equity.
Currency interest rate swaps, foreign currency instruments and foreign
currency denominated debt that have been designated as hedges of the Company's
net investment exposure in certain foreign subsidiaries have notional amounts
totaling $1,138 and $936 at June 30, 1998 and 1997, respectively. These hedges
resulted in gains of $42 and $63, net of $25 and $38 in tax effects, reflected
in shareholders' equity.
(Bottom of page 27, right-hand margin -- picture of Ace product with caption
"1990: BREAKTHROUGH TECHNOLOGY IN A NON-CHLORINE, GENTLE BLEACH ")
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.
6 | 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. The grants are fully exercisable after one year and have a ten-year
life. In 1998, the Company granted stock options to all eligible employees not
covered by the key manager and director plans. These grants, which comprised 8.7
million of the 20.3 million options granted in 1998, are fully exercisable after
five years and have a ten-year life. The Company issues stock appreciation
rights in countries where stock options have not been approved by local
governments.
Pursuant to FASB Statement 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."
Accordingly, no compensation cost has been recognized for these plans. Had
compensation cost for the plans been determined based on the fair value at the
grant date consistent with FASB Statement No. 123, the Company's net earnings
and earnings per share would have been as follows:
Years Ended June 30
-------------------------
1998 1997 1996
=============================================
Net earnings
As reported $3,780 $3,415 $3,046
Pro forma 3,472 3,305 2,981
Net earnings per
common share
Basic
As reported $ 2.74 $ 2.43 $ 2.14
Pro forma 2.51 2.35 2.10
Diluted
As reported 2.56 2.28 2.01
Pro forma 2.35 2.20 1.97
(Bottom of page 28, left-hand margin -- picture of Crest product with caption
"1990: FIRST TARTER CONTROL TOOTHPASTE ")
The fair value of each option grant is estimated on the date of grant using
the Binomial option-pricing model with the following weighted average
assumptions:
Years Ended June 30
----------------------
1998 1997 1996
================================================
Interest rate 5.6% 6.6% 6.1%
Dividend yield 2% 2% 2%
Expected volatility 26% 22% 20%
Expected life in years 6 6 6
Stock option activity was as follows:
Options in Thousands
-------------------------
1998 1997 1996
========================================================
Outstanding, July 1 68,514 66,657 63,384
Granted 20,315 10,409 9,605
Exercised (8,477) (8,357) (6,110)
Canceled (434) (195) (222)
-------------------------
Outstanding, June 30 79,918 68,514 66,657
Exercisable 59,610 58,098 57,048
Available for grant 31,558 28,538 24,418
Average price
Outstanding,
beginning of year $31.00 $24.79 $21.36
Granted 83.26 58.72 40.87
Exercised 18.57 16.02 14.52
Outstanding, end of year 45.58 31.00 24.79
Exercisable, end of year 32.74 26.03 22.09
Weighted average grant
date fair value of options 24.56 17.14 10.88
The following table summarizes information about stock options outstanding
at June 30, 1998:
Options Outstanding
---------------------------------------------------
Number Weighted-Avg
Range of Outstanding Weighted-Avg Remaining
Prices (Thousands) Exercise Price Contractual Life
=================================================================
$8 to 30 33,626 $22.69 3.4 years
33 to 46 16,821 37.85 7.1
57 to 71 9,349 60.42 8.5
71 to 85 20,122 83.39 9.5
The following table summarizes information about stock options exercisable
at June 30, 1998:
Options Exercisable
--------------------------------
Number
Range of Exercisable Weighted-Avg
Prices (Thousands) Exercise Price
==================================================
$8 to 30 33,626 $22.69
33 to 46 16,821 37.85
57 to 71 9,163 60.24
71 to 85 - -
7 | 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 funded by an employee stock ownership plan
(ESOP) and Company contributions. 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.
Years Ended June 30
----------------------
1998 1997 1996
=======================================================
ESOP preferred shares
allocated at market value $235 $247 $200
Company contributions 58 35 75
Benefits earned 293 282 275
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 from retirees and pay a stated percentage of expenses,
reduced by deductibles and other coverages. Retiree contributions change
annually in line with medical 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.
Summarized information on the Company's postretirement plans is as follows:
Other
Pension Benefits Retiree Benefits
---------------- ----------------
Years Ended June 30
----------------------------------
1998 1997 1998 1997
==========================================================================
CHANGE IN BENEFIT
OBLIGATION
Benefit obligation at
beginning of year $1,991 $1,886 $1,460 $1,405
Service cost 106 100 42 45
Interest cost 148 131 102 109
Participants' contributions 3 5 11 12
Amendments 21 2 (6) 5
Actuarial loss (gain) 87 54 (71) (50)
Acquisitions 154 42 1 0
Curtailments 13 0 0 0
Currency exchange (85) (117) (7) (4)
Benefit payments (156) (112) (67) (62)
----------------------------------
Benefit obligation
at end of year 2,282 1,991 1,465 1,460
----------------------------------
CHANGE IN PLAN
ASSETS
Fair value of plan
assets at beginning
of year 1,229 1,019 1,828 838
Actual return on
plan assets 243 180 803 999
Acquisitions 131 42 0 0
Employer
contributions 103 83 37 41
Participants'
contributions 3 5 11 12
Currency exchange (30) 12 (1) 0
Benefit payments (156) (112) (67) (62)
----------------------------------
Fair value of plan
assets at end
of year 1,523 1,229 2,611 1,828
----------------------------------
FUNDED STATUS
Funded status at
end of year (759) (762) 1,146 368
Unrecognized net
actuarial gain (163) (95) (2,354) (1,691)
Unrecognized
transition amount 32 35 0 0
Unrecognized prior
service cost 75 43 (21) (17)
----------------------------------
Net amount recognized (815) (779) (1,229) (1,340)
==================================
Prepaid benefit cost $ 34 $ 52 $ 1 $ 0
Accrued benefit cost (849) (831) (1,230) (1,340)
----------------------------------
Net liability recognized (815) (779) (1,229) (1,340)
==================================
(Bottom of page 29, right-hand margin -- picture of Cheer product with caption
"1992: BREAKTHROUGH CAREZYME TECHNOLOGY PREVENTS FUZZING AND COLOR FADING ")
The Company's stock comprised $2,443 and $1,687 of other retiree plan
assets, net of Series B ESOP debt, as of June 30, 1998 and 1997, respectively.
Other
Pension Benefits Retiree Benefits
---------------- ----------------
Years Ended June 30
-----------------------------------
1998 1997 1998 1997
==========================================================================
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate 7.0% 7.2% 6.8% 7.5%
Expected return on plan assets 9% 9% 9% 9%
Rate of compensation increase 5% 5% - -
Initial health care cost trend rate* - - 8% 9%
*Assumed to decrease gradually to 5% in 2006 and remain at that level
thereafter.
Other
Pension Benefits Retiree Benefits
---------------------- ----------------------
Years Ended June 30
-------------------------------------------------
1998 1997 1996 1998 1997 1996
===========================================================================
COMPONENTS OF
NET PERIODIC
BENEFIT COST
Service cost $106 $100 $ 96 $ 42 $ 45 $ 47
Interest cost 148 131 131 102 109 102
Expected return
on plan assets (103) (87) (75) (171) (138) (121)
Amortization of
prior service cost 7 5 6 (2) (2) (2)
Amortization of
transition amount 3 0 0 0 0 0
Curtailment loss 12 0 0 0 0 0
Recognized net
actuarial gain 0 (7) (3) (41) (18) (15)
-------------------------------------------------
Gross benefit cost 173 142 155 (70) (4) 11
Dividends on ESOP
preferred stock 0 0 0 (78) (79) (79)
-------------------------------------------------
Net periodic
benefit cost 173 142 155 (148) (83) (68)
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 $1,206, $984 and $155, respectively, as of June
30, 1998, and $1,172, $899 and $158, respectively, as of June 30, 1997.
Assumed health care cost trend rates have a signi- ficant 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:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Effect on total of service and
interest cost components $ 26 $ (22)
Effect on postretirement
benefit obligation 207 (181)
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 described in Note 7: 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. The liquidation value is equal to the issue price of
$13.75 per share.
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 issuance price of $26.12 per share.
Shares in Thousands
------------------------
1998 1997 1996
======================================================
Shares Outstanding
Series A 60,635 62,952 64,562
Series B 37,805 38,045 38,204
(Bottom of page 30, left-hand margin -- picture of Pantene product with caption
"1992: FIRST PENETRATING, PRO-VITAMIN FORMULA FOR HAIR WITH SUPERIOR SHINE ")
Shares of the ESOP are allocated at original cost based on debt service
requirements, net of advances made by the Company to the trust. 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. The Series B shares are
considered plan assets of the other retiree benefits plan. 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.
9 | INCOME TAXES
Earnings before income taxes consist of the following:
Years Ended June 30
------------------------
1998 1997 1996
===============================================
United States $3,632 $3,232 $3,023
International 2,076 2,017 1,646
------------------------
5,708 5,249 4,669
The income tax provision consists of the following:
Years Ended June 30
------------------------
1998 1997 1996
========================
Current tax expense
U.S. Federal $ 996 $ 967 $ 776
International 918 805 413
U.S. State & Local 115 88 106
------------------------
2,029 1,860 1,295
Deferred tax expense
U.S. Federal 51 1 220
International & other (152) (27) 108
------------------------
(101) (26) 328
------------------------
Total 1,928 1,834 1,623
Taxes credited to shareholders' equity for the years ended June 30, 1998
and 1997 were $147 and $97, respectively. Undistributed earnings of foreign
subsidiaries that are considered to be reinvested indefinitely were $6,739 at
June 30, 1998.
The effective income tax rate was 33.8%, 34.9% and 34.8% in 1998, 1997 and
1996, respectively, compared to the U.S. statutory rate of 35%.
Deferred income tax assets and liabilities are comprised of the following:
June 30
-------------------
1998 1997
=======================================================
Current deferred tax assets $ 595 $ 661
Non-current deferred tax
assets (liabilities)
Depreciation (1,058) (1,031)
Postretirement benefits 435 475
Loss carryforwards 167 84
Other 28 (87)
(428) (559)
Included in the above are total valuation allowances of $177 and $113 in
1998 and 1997, respectively. The valuation allowance increased in 1998 primarily
due to the generation of additional net operating loss carryforwards.
10 | 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 at prices in excess of current market.
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 at June 30, 1998 were $66, and in
management's opinion, such accruals are appropriate based on existing facts and
circumstances. Current year expenditures were not material.
While the effect on future results of these items is not subject to
reasonable estimation because considerable uncertainty exists, in the opinion of
management and Company counsel, the ultimate liabilities resulting from such
claims will not materially affect the consolidated financial position, results
of operations or cash flows of the Company.
(Bottom of page 31, right-hand margin -- picture of Asacol product with caption
"1992: ASACOL LAUNCHED FOR TREATMENT OF ULCERATIVE COLITIS ")
11 | SEGMENT INFORMATION
The Company has adopted FASB Statement No. 131, "Disclosures about Segments of a
Business Enterprise and Related Information." The Company is managed in four
operating segments: North America, which includes the United States and Canada;
Europe, Middle East and Africa; Asia; and Latin America.
Corporate operations include certain financing and employee benefits costs,
goodwill amortization, other general corporate income and expense, segment
eliminations and projects included in the Company's ongoing simplification and
standardization program, which includes costs for consolidation of selected
manufacturing facilities, re-engineering of manufacturing and distribution
processes, organization redesign and simplified product line-ups, as well as
gains and losses on sales of non-strategic brands and assets. Corporate assets
include primarily cash, investment securities and goodwill.
Product Net Sales Information
The following is supplemental information on net sales by product groups,
aligned as follows:
Laundry and Cleaning -- dishcare, fabric conditioners, hard surface
cleaners and laundry.
Paper -- diapers, feminine protection, incontinence, tissue and towel, and
wipes.
Beauty Care -- cosmetics and fragrances, deodorants, hair care, and skin
care and personal cleansing.
Food and Beverage -- coffee, commercial services, juice, peanut butter,
shortening and oil, and snacks.
Health Care -- gastrointestinal, oral care, pharmaceuticals and respiratory
care.
(Bottom of page 32, left-hand margin -- picture of Macrobid product with caption
"1992: MACROBID LAUNCHED AS A URINARY TRACT ANTI-INFECTIVE ")
(Bottom of page 33, right-hand margin -- picture of Oil of Olay product with
caption "1994: FIRST BODY WASH WITH PUFF THAT CLEANS AND CONDITIONS YOUR SKIN")
IF...
(bullet) You need help with your account or if you need automated access to your
account
(bullet) You are interested in our Certificate Safekeeping service
(bullet) You need to change an address or discontinue duplicate mailings
(bullet) You want to arrange for direct deposit of dividends (bullet) A stock
certificate is lost, stolen or destroyed (bullet) You want to
participate in our Shareholder Investment Program...
CONTACT P&G'S SHAREHOLDER SERVICES
OFFICE IN CINCINNATI.
Call: 1-800-742-6253
1-513-983-3034 (outside the U.S.)
Write: The Procter & Gamble Company
Shareholder Services Department
P.O. Box 5572
Cincinnati, Ohio 45201-5572
Financial information is available 24 hours a day.
Just call 1-800-764-7483.
You can also visit us on the World Wide Web.
Our address is www.pg.com/investor
COMMON STOCK PRICE RANGE AND DIVIDENDS
Price Range Dividends
------------------------------- ----------------
1997-98 1996-97 1997-98 1996-97
---------------------------------------------------
Quarter Ended High Low High Low
=====================================================================
September 30 $77.56 $64.06 $48.75 $41.19 $.2525 $.2250
December 31 83.44 62.00 55.50 45.75 .2525 .2250
March 31 87.88 77.31 64.81 51.81 .2525 .2250
June 30 92.50 80.19 71.94 56.63 .2525 .2250
CORPORATE HEADQUARTERS
The Procter & Gamble Company
P.O. Box 599
Cincinnati, Ohio 45201-0599
TRANSFER AGENT/SHAREHOLDER SERVICES
The Procter & Gamble Company
Shareholder Services Department
P.O. Box 5572
Cincinnati, Ohio 45201-5572
REGISTRAR
PNC Bank, N.A.
P.O. Box 1198
Cincinnati, Ohio 45201-1198
EXCHANGE LISTING
New York, Cincinnati, Amsterdam, Paris, Basle,
Geneva, Lausanne, Zurich, Frankfurt, Brussels, Tokyo
SHAREHOLDERS OF COMMON STOCK
There were 272,723 Common Stock shareholders of record, including participants
in the Shareholder Investment Program, as of July 24, 1998.
FORM 10-K
Beginning in October 1998, shareholders may obtain a copy of the Company's 1998
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 1-800-742-6253.
This information is also available at no charge by sending a request to
Shareholder Services at the address above.
SHAREHOLDERS' MEETING
The next annual meeting of shareholders will be held on Tuesday, October 13,
1998. A full transcript of the meeting will be available from Linda D. Rohrer,
Assistant Secretary, at a cost of $10. Ms. Rohrer can be reached at One P&G
Plaza, Cincinnati, Ohio 45202-3315.