Notes to Consolidated Financial Statements

Dollars in Millions Except Per Share Amounts
1. Nature of Operations

The Company manufactures and markets a wide variety of products in the U.S. and around the world in two distinct business segments: Oral, Personal and Household Care, and Pet Nutrition. Oral, Personal and Household Care products include toothpaste, oral rinses and toothbrushes, bar and liquid soaps, shampoos, conditioners, deodorants and antiperspirants, baby and shave products, laundry and dishwashing detergents, fabric softeners, cleansers and cleaners, bleaches and other similar items. These products are sold primarily to wholesale and retail distributors worldwide. Pet Nutrition products include pet food products manufactured and marketed by Hill's Pet Nutrition. The principal customers for Pet Nutrition products are veterinarians and specialty pet retailers. Principal global trademarks include Colgate, Palmolive, Mennen Speed Stick, Protex, Ajax, Soupline, Suavitel, Fab, Science Diet and Prescription Diet in addition to various regional trademarks.

The Company's principal classes of products accounted for the following percentages of worldwide sales for the past three years:

                                                         1999  1998  1997
                                                         ----  ----  ----
Oral Care...............................................  32%   32%   31%
Personal Care...........................................  24    24    23
Household Surface Care..................................  16    16    16
Fabric Care.............................................  14    15    16
Pet Nutrition...........................................  12    11    11

2. Summary of Significant Accounting Policies

Principles of Consolidation

The Consolidated Financial Statements include the accounts of Colgate- Palmolive Company and its majority-owned subsidiaries. Intercompany transactions and balances have been eliminated. Investments in companies in which the Company's interest is between 20% and 50% are accounted for using the equity method. The Company's share of the net income from such investments is recorded as equity earnings and is classified as Other expense, net in the Consolidated Statements of Income.

Revenue Recognition

Sales are recorded at the time products are shipped to trade customers. Net sales reflect units shipped at selling list prices reduced by promotion allowances.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent gains and losses at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounting Changes

In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge

COLGATE-PALMOLIVE COMPANY

Notes to Consolidated Financial Statements--(continued)

(Dollars in Millions Except Per Share Amounts)

accounting criteria are met. Statement No. 133 will be effective, prospectively, for the Company's financial statements in the year 2001. The statement is not expected to have a material impact on the Company's financial position, results of operations or cash flows.

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturity of three months or less when purchased to be cash equivalents. Investments in short- term securities that do not meet the definition of cash equivalents are classified as marketable securities. Marketable securities are reported at cost, which approximates market.

Inventories

Inventories are valued at the lower of cost or market. The first-in, first- out (FIFO) method is used to value most inventories. The remaining inventories are valued using the last-in, first-out (LIFO) method.

Property, Plant and Equipment

Land, buildings, and machinery and equipment are stated at cost. Depreciation is provided, primarily using the straight-line method, over estimated useful lives ranging from 3 to 40 years.

Goodwill and Other Intangibles

Intangible assets principally consist of goodwill, which is amortized on the straight-line method, generally over a period of 40 years. Other intangible assets, principally non-compete agreements and customer lists, are amortized on the straight-line method over periods ranging from 5 to 20 years depending on their useful lives.

The recoverability of the carrying values of intangible assets is evaluated periodically based on a review of forecasted operating cash flows and the profitability of the related business. For the three-year period ended December 31, 1999, there were no material adjustments to the carrying values of intangible assets resulting from these evaluations.

Advertising

Advertising costs are expensed in the year incurred.

Income Taxes

Deferred taxes are recognized for the expected future tax consequences of temporary differences between the amounts carried for financial reporting and tax purposes. Provision is made currently for taxes payable on remittances of overseas earnings; no provision is made for taxes on overseas retained earnings that are deemed to be permanently reinvested.

Translation of Overseas Currencies

The assets and liabilities of subsidiaries, other than those operating in highly inflationary environments, are translated into U.S. dollars at year-end exchange rates, with resulting translation gains and losses accumulated in a separate component of shareholders' equity. Income and expense items are converted into U.S. dollars at average rates of exchange prevailing during the year.

COLGATE-PALMOLIVE COMPANY

Notes to Consolidated Financial Statements--(continued)

(Dollars in Millions Except Per Share Amounts)

For subsidiaries operating in highly inflationary environments, inventories, goodwill and property, plant and equipment are translated at the rate of exchange on the date the assets were acquired, while other assets and liabilities are translated at year-end exchange rates. Translation adjustments for these operations are included in net income.

Prior to 1999, Mexico was a highly inflationary economy and the results of the Company's Mexican operations were measured using the U.S. dollar as its functional currency. Effective January 1, 1999, the Company ceased to account for its Mexican operations as highly inflationary as historical inflation levels had fallen sharply. The impact of the change was not material to the Company's earnings.

During 1998, as required by generally accepted accounting principles, the Company ceased to account for its Brazilian operations as highly inflationary. The effect of this change was to reduce shareholders' equity by $98.4, primarily related to the recognition of deferred tax benefits expected to be realized in the future. Due to the devaluation of the Brazilian real during 1999, $242.4 was charged to cumulative translation adjustments which was, in effect, a write-down of our foreign-currency-denominated assets (primarily goodwill and property, plant and equipment). This will be accompanied by lower amortization and depreciation expense in future periods.

Financial Instruments

The net effective cash payment of the interest rate swap contracts combined with the related interest payments on the debt that they hedge are accounted for as interest expense. Those interest rate instruments that do not qualify as hedge instruments for accounting purposes are marked to market and recorded at fair value.

Gains and losses from foreign exchange contracts that hedge the Company's investments in its foreign subsidiaries are shown in the cumulative translation adjustments account included in shareholders' equity. Gains and losses from contracts that hedge firm commitments are recorded in the balance sheets as a component of the related receivable or payable until realized, at which time they are recognized in the statements of income. The contracts that hedge anticipated sales and purchases do not qualify as hedges for accounting purposes. Accordingly, the related gains and losses are calculated using the current forward rates and are recorded in the Consolidated Statements of Income as Other expense, net.

Segment Information

The Company operates in two product segments: Oral, Personal and Household Care, and Pet Nutrition. The operations of the Oral, Personal and Household Care segment are managed geographically in four reportable operating segments:
North America, Latin America, Europe and Asia/Africa.

Management measures segment profit as operating income, which is defined as income before interest expense and income taxes. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Corporate operations include research and development costs, unallocated overhead costs, and gains and losses on sales of non-strategic brands and assets. Corporate assets include primarily real estate and benefit plan assets.

The financial and descriptive information on the Company's geographic area and industry segment data, appearing in the tables contained in management's discussion of this report, is an integral part of these financial statements.

COLGATE-PALMOLIVE COMPANY

Notes to Consolidated Financial Statements--(continued)

(Dollars in Millions Except Per Share Amounts)

3. Acquisitions and Divestitures

During 1999, 1998 and 1997, the Company made several acquisitions totaling $46.4, $22.6 and $20.3, respectively. Individually, none of these acquisitions were significant.

The acquisitions were accounted for as purchases, and accordingly, the purchase prices were allocated to the net tangible and intangible assets acquired based on estimated fair values at the dates the acquisitions were consummated. The results of operations of the acquired businesses have been included in the Consolidated Financial Statements since the respective acquisition dates. The inclusion of pro forma financial data for all acquisitions would not have materially affected the financial information included herein.

The aggregate sale price of all 1999, 1998 and 1997 divestitures was $94.7, $57.4 and $101.4, respectively. In 1999, the U.S. Baby Magic brand and related assets were sold for $90.0, and in 1998, the HandiWipes brand and related assets were sold for $53.0. In 1997, the Sterno fuel brand and related assets were sold for $70.0.

4. Long-Term Debt and Credit Facilities

Long-term debt consists of the following at December 31:

                                     Weighted
                                      Average
                                   Interest Rate Maturities   1999     1998
                                   ------------- ---------- -------- --------
Notes............................       7.0%     2000-2028  $1,423.5 $1,382.4
Commercial paper and other short-
 term borrowings, reclassified...       5.9      2000          477.3    461.2
ESOP notes, guaranteed by the
 Company.........................       8.7      2001-2009     366.9    373.6
Payable to banks.................       6.5      2000-2007     313.7    361.8
Capitalized leases...............                                 .8      3.2
                                                            -------- --------
                                                             2,582.2  2,582.2
Less: current portion of long-
 term debt.......................                              338.9    281.6
                                                            -------- --------
                                                            $2,243.3 $2,300.6
                                                            ======== ========

Commercial paper and certain other short-term borrowings are classified as long-term debt as it is the Company's intent and ability to refinance such obligations on a long-term basis. Scheduled maturities of debt outstanding at December 31, 1999, excluding short-term borrowings reclassified, are as follows: 2000--$338.9; 2001--$192.5; 2002--$135.0; 2003--$409.8; 2004--$205.1, and $823.6 thereafter. The Company has entered into interest rate swap agreements and foreign exchange contracts related to certain of these debt instruments (see Note 11).

At December 31, 1999, the Company had unused credit facilities amounting to $1,527.9. Commitment fees related to credit facilities are not material. The weighted average interest rate on short-term borrowings, excluding amounts reclassified, as of December 31, 1999 and 1998, was 7.8% and 6.2%, respectively.

The Company's long-term debt agreements include various restrictive covenants and require the maintenance of certain defined financial ratios with which the Company is in compliance.

5. Capital Stock and Stock Compensation Plans

Preferred Stock

Preferred Stock consists of 250,000 authorized shares without par value. It is issuable in series, of which one series of 125,000 shares, designated $4.25 Preferred Stock, with a stated and redeemable value of $100 per share,

COLGATE-PALMOLIVE COMPANY

Notes to Consolidated Financial Statements--(continued)

(Dollars in Millions Except Per Share Amounts)

has been issued. The $4.25 Preferred Stock is redeemable only at the option of the Company. At December 31, 1999 and 1998, 115,510 and 122,620 shares of $4.25 Preferred Stock, respectively, were outstanding.

Preference Stock

In 1988, the Company authorized the issuance of 50,000,000 shares of Preference Stock, without par value. The Series B Convertible Preference Stock, which is convertible into eight shares of common stock, ranks junior to all series of the Preferred Stock. At December 31, 1999 and 1998, 5,446,442 and 5,598,808 shares of Series B Convertible Preference Stock, respectively, were outstanding and issued to the Company's Employee Stock Ownership Plan.

Common Stock

On May 5, 1999, the Company's Board of Directors approved a two-for-one common stock split effected in the form of a 100% stock dividend. As a result of the split, shareholders received one additional share of common stock for each share they held as of May 19, 1999, which was distributed June 30, 1999. Par value remained at $1 per share. The Consolidated Financial Statements and financial information contained elsewhere in this report have been restated to reflect the effect of the common stock split for all periods presented.

Shareholder Rights Plan

Under the Company's Shareholder Rights Plan, each share of the Company's common stock carries with it one Preference Share Purchase Right ("Rights"). The Rights themselves will at no time have voting power or pay dividends. The Rights become exercisable only if a person or group acquires 15% or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the common stock. When exercisable, each Right entitles a holder to buy one two- hundredth of a share of a new series of preference stock at an exercise price of $220.00, subject to adjustment.

If the Company is acquired in a merger or other business combination, each Right will entitle a holder to buy, at the Right's then current exercise price, a number of the acquiring company's common shares having a market value of twice such price. In addition, if a person or group acquires 15% or more of the Company's common stock, each Right will entitle its holder (other than such person or members of such group) to purchase, at the Right's then current exercise price, a number of shares of the Company's common stock having a market value of twice the Right's exercise price.

Further, at any time after a person or group acquires 15% or more (but less than 50%) of the Company's common stock, the Board of Directors may, at its option, exchange part or all of the Rights (other than Rights held by the acquiring person or group) for shares of the Company's common stock on a one- for-one basis.

The Company, at the option of its Board of Directors, may amend the Rights or redeem the Rights for $.01 at any time before the acquisition by a person or group of beneficial ownership of 15% or more of its common stock. The Board of Directors is also authorized to reduce the 15% threshold to not less than 10%. Unless redeemed earlier, the Rights will expire on October 31, 2008.

Stock Repurchases

During 1998, the Company entered into a series of forward purchase agreements on its common stock. These agreements are settled on a net basis in shares of the Company's common stock. To the extent that the market price of the Company's common stock on a settlement date is higher/(lower) than the forward purchase

COLGATE-PALMOLIVE COMPANY

Notes to Consolidated Financial Statements--(continued)

(Dollars in Millions Except Per Share Amounts)

price, the net differential is received/(paid) by the Company. As of December 31, 1999, agreements were in place covering approximately $480.5 of the Company's common stock (7.7 million shares) that had forward prices averaging $62.56 per share. If these agreements were settled based on the December 31, 1999 market price of the Company's common stock ($65.00 per share), the Company would be entitled to receive approximately 288,000 shares. During 1999 and 1998, settlements resulted in the Company receiving 2,322,701 and 642,662 shares, respectively, which were recorded as treasury stock.

Incentive Stock Plan

The Company has a plan which provides for grants of restricted stock awards for officers and other executives of the Company and its major subsidiaries. A committee of non-employee members of the Board of Directors administers the plan. During 1999 and 1998, 692,238 and 570,154 shares, respectively, were awarded to employees in accordance with the provisions of the plan.

Stock Option Plans

The Company's Stock Option Plans ("Plans") provide for the issuance of non- qualified stock options to officers and key employees. Options are granted at prices not less than the fair market value on the date of grant. At 1999 year- end, 31,119,432 shares of common stock were available for future grants.

The Plans contain an accelerated ownership feature which provides for the grant of new options when previously owned shares of Company stock are used to exercise existing options. The number of new options granted under this feature is equal to the number of shares of previously owned Company stock used to exercise the original options and to pay the related required U.S. income tax. The new options are granted at a price equal to the fair market value on the date of the new grant and have the same expiration date as the original options exercised.

Stock option plan activity is summarized below:

                                 1999                  1998                  1997
                         --------------------- --------------------- ---------------------
                                      Weighted              Weighted              Weighted
                                      Average               Average               Average
                                      Exercise              Exercise              Exercise
                           Shares      Price     Shares      Price     Shares      Price
                         -----------  -------- -----------  -------- -----------  --------
Options outstanding,
 January 1..............  42,786,246    $28     45,534,784    $23     42,830,396    $16
Granted.................  11,414,328     53     12,537,288     39     15,406,114     37
Exercised............... (14,586,597)    26    (14,917,508)    22    (12,190,554)    16
Canceled or expired.....    (417,880)    49       (368,318)    21       (511,172)    19
                         -----------           -----------           -----------
Options outstanding,
 December 31............  39,196,097     36     42,786,246     28     45,534,784     23
                         ===========           ===========           ===========
Options exercisable,
 December 31............  23,813,363    $28     26,688,764    $23     29,366,358    $19
                         ===========           ===========           ===========

                           Weighted Average
                              Remaining                    Weighted                   Weighted
                           Contractual Life   Options      Average       Options      Average
Range of Exercise Prices       in Years     Outstanding Exercise Price Exercisable Exercise Price
------------------------   ---------------- ----------- -------------- ----------- --------------
$ 8.04-$17.17...........           4         6,271,637       $15        6,271,637       $15
$17.53-$24.95...........           5         6,888,774        21        6,888,774        21
$24.98-$31.08...........           8         3,911,523        31        2,238,830        31
$31.33-$43.66...........           8         8,221,126        36        4,242,264        37
$43.67-$53.02...........           6         6,581,369        50        4,170,408        49
$53.06-$62.50...........           8         7,321,668        56            1,450        56
                                            ----------                 ----------
                                   6        39,196,097       $36       23,813,363       $28
                                            ==========                 ==========

The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for options granted under the Plans. Accordingly, no compensation expense has been recognized. Had compensation expense been determined based on the Black- Scholes option pricing model value at the grant date for awards in 1999, 1998 and 1997 consistent with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company's net income, basic earnings per common share and diluted earnings per common share would have been $891.9, $1.49 per share and $1.40 per share, respectively, in 1999; $803.5, $1.33 per share and $1.25 per share, respectively, in 1998; and $716.1, $1.18 per share and $1.10 per share, respectively, in 1997.

The weighted average Black-Scholes value of grants issued in 1999, 1998 and 1997 was $8.61, $6.24 and $3.93, respectively. The Black-Scholes value of each option granted is estimated using the Black-Scholes option pricing model with the following assumptions: option term until exercise ranging from 2 to 7 years, volatility ranging from 19% to 30%, risk-free interest rate ranging from 5.0% to 6.2% and an expected dividend yield of 2.5%. The Black-Scholes model used to determine the option values shown above was developed to estimate the fair value of short-term freely tradable, fully transferable options without vesting restrictions and was not designed to value reloads, all of which significantly differ from the Company's stock option awards. The value of this model is also limited by the inclusion of highly subjective assumptions which greatly affect calculated values.

6. Employee Stock Ownership Plan

In 1989, the Company expanded its Employee Stock Ownership Plan ("ESOP") through the introduction of a leveraged ESOP covering certain employees who have met certain eligibility requirements. The ESOP issued $410.0 of long-term notes due through 2009 bearing an average interest rate of 8.7%. The long-term notes, which are guaranteed by the Company, are reflected in the accompanying Consolidated Balance Sheets. The ESOP used the proceeds of the notes to purchase 6.3 million shares of Series B Convertible Preference Stock from the Company. The Stock has a minimum redemption price of $65 per share and pays semiannual dividends equal to the higher of $2.44 or the current dividend paid on eight common shares for the comparable six-month period.

Dividends on these preferred shares, as well as common shares also held by the ESOP, are paid to the ESOP trust and, together with contributions, are used by the ESOP to repay principal and interest on the outstanding notes. Preferred shares are released for allocation to participants based upon the ratio of the current year's debt service to the sum of total principal and interest payments over the life of the loan. At December 31, 1999,

COLGATE-PALMOLIVE COMPANY

Notes to Consolidated Financial Statements--(continued)

(Dollars in Millions Except Per Share Amounts)

1,628,735 shares were allocated to participant accounts and 3,817,707 shares were available for future allocation. Each allocated share may be converted by the trustee into eight common shares but preferred shares generally convert only after the employee ceases to work for the Company.

Dividends on these preferred shares are deductible for income tax purposes and, accordingly, are reflected net of their tax benefit in the Consolidated Statements of Retained Earnings, Comprehensive Income and Changes in Capital Accounts.

Annual expense related to the leveraged ESOP, determined as interest incurred on the notes, less employee contributions and dividends received on the shares held by the ESOP, plus the higher of either principal repayments on the notes or the cost of shares allocated, was $9.2 in 1999, $2.4 in 1998 and $3.0 in 1997. Similarly, unearned compensation, shown as a reduction in shareholders' equity, is reduced by the higher of principal payments or the cost of shares allocated.

Interest incurred on the ESOP's notes amounted to $32.0 in 1999, $32.5 in 1998 and $33.0 in 1997. The Company paid dividends on the stock held by the ESOP of $29.1 in 1999, $29.3 in 1998 and $29.8 in 1997. Company contributions to the ESOP were $9.3 in 1999, $0 in 1998 and $1.0 in 1997. Employee contributions to the ESOP were $.6 in 1999, $9.4 in 1998 and $8.2 in 1997.

7. Retirement Plans and Other Retiree Benefits

Retirement Plans

The Company, its U.S. subsidiaries and some of its overseas subsidiaries maintain defined benefit retirement plans covering substantially all of their employees. Benefits are based primarily on years of service and employees' career earnings. In the Company's principal U.S. plans, funds are contributed to the trusts in accordance with regulatory limits to provide for current service and for any unfunded projected benefit obligation over a reasonable period. To the extent these requirements are exceeded by plan assets, a contribution may not be made in a particular year. Assets of the plans consist principally of common stocks, guaranteed investment contracts with insurance companies, investments in real estate funds and U.S. Government and corporate obligations. Domestic plan assets also include investments in the Company's common stock representing 10% and 7% of plan assets at December 31, 1999 and 1998, respectively.

Other Retiree Benefits

The Company and certain of its subsidiaries provide health care and life insurance benefits for retired employees to the extent not provided by government-sponsored plans. The Company utilizes a portion of its leveraged ESOP, in the form of future retiree contributions, to reduce its obligation to provide these postretirement benefits and offset its current service cost. Postretirement benefits otherwise are not currently funded.

                                                                Other Retiree
                                  Pension Benefits                Benefits
                           ----------------------------------  ----------------
                             1999     1998    1999     1998     1999     1998
                           --------  ------  -------  -------  -------  -------
                            North America     International
                           ----------------  ----------------
Change in Benefit
 Obligation
Benefit obligation at
 beginning of year.......  $  998.3  $976.6  $ 329.6  $ 278.8  $ 153.0  $ 143.7
Service cost.............      29.4    28.1     12.4     17.7     (5.0)   (11.0)
Interest cost............      65.9    68.9     19.0     18.2     14.5     14.7
Participant's
 contribution............       3.1     3.3      2.3      9.7      --       --
Acquisitions/plan
 amendments..............        .2     1.5       .1      4.0      (.2)    (3.7)
Actuarial (gain)/loss....     (96.7)    7.9      3.5     14.1      5.4     20.0
Foreign exchange impact..       (.7)   (2.6)   (38.3)     4.4      (.2)     --
Benefits paid............     (80.3)  (85.4)   (17.6)   (17.3)   (11.4)   (10.7)
                           --------  ------  -------  -------  -------  -------
Benefit obligation at end
 of year.................  $  919.2  $998.3  $ 311.0  $ 329.6  $ 156.1  $ 153.0
                           --------  ------  -------  -------  -------  -------
Change in Plan Assets
Fair value of plan assets
 at beginning of year....  $  962.8  $907.3  $ 215.0  $ 193.4  $   --   $   --
Actual return on plan
 assets..................     179.7   133.1     35.6     18.5      --       --
Company contributions....       7.7     6.9     13.6     16.6     11.4     10.7
Plan participant
 contributions...........       3.1     3.3      2.3      9.7      --       --
Foreign exchange impact..       2.1    (2.4)   (25.1)   (10.9)     --       --
Acquisitions/plan
 amendments..............       --      --        .9      5.0      --       --
Benefits paid............     (80.3)  (85.4)   (17.6)   (17.3)   (11.4)   (10.7)
                           --------  ------  -------  -------  -------  -------
Fair value of plan assets
 at end of year..........  $1,075.1  $962.8  $ 224.7  $ 215.0  $   --   $   --
                           --------  ------  -------  -------  -------  -------
Funded Status
Funded status at end of
 year....................  $  155.9  $(35.5)  $(86.3) $(114.6) $(156.1) $(153.0)
Unrecognized net
 transition
 liability/(asset).......        .8    (6.6)      .5     (2.5)     --       --
Unrecognized net
 actuarial (gain)/loss...    (176.1)   19.0     (1.0)    16.4    (17.7)   (22.5)
Unrecognized prior
 service costs...........      33.8    39.9      4.0      3.9     (7.5)    (8.3)
                           --------  ------  -------  -------  -------  -------
Net amount recognized....  $   14.4  $ 16.8  $ (82.8) $ (96.8) $(181.3) $(183.8)
                           ========  ======  =======  =======  =======  =======
Amounts Recognized in
 Balance Sheet
Other assets.............  $   97.7  $ 93.3  $  34.4  $  40.9  $   --   $   --
Other liabilities........     (83.3)  (76.5)  (117.2)  (137.7)  (181.3)  (183.8)
                           --------  ------  -------  -------  -------  -------
Net amount recognized....  $   14.4  $ 16.8  $ (82.8) $ (96.8) $(181.3) $(183.8)
                           ========  ======  =======  =======  =======  =======
Weighted Average
 Assumptions
Discount rate............      8.00%   7.25%    7.04%    6.82%    8.00%    7.25%
Long-term rate of return
 on plan assets..........      9.25%   9.25%    8.75%    8.92%     --       --
Long-term rate of
 compensation increase...      5.00%   5.00%    4.54%    4.44%     --       --
ESOP growth rate.........       --      --       --       --     10.00%   10.00%

                                                                                Other
                                     Pension Benefits                     Retiree Benefits
                         ----------------------------------------------  ---------------------
                          1999    1998    1997    1999    1998    1997   1999    1998    1997
                         ------  ------  ------  ------  ------  ------  -----  ------  ------
                            North America           International
                         ----------------------  ----------------------
Components of Net
 Periodic Benefit Costs
Service cost............ $ 29.4  $ 28.1  $ 24.9  $ 12.4  $ 17.7  $ 16.6  $ 3.4  $  4.0  $  2.3
Interest cost...........   65.9    68.9    67.6    19.0    18.2    17.6   14.5    14.7    13.4
Annual ESOP allocation..    --      --      --      --      --      --    (8.4)  (15.0)  (10.1)
Expected return on plan
 assets.................  (85.5)  (80.8)  (77.0)  (13.3)  (13.9)  (14.2)   --      --      --
Amortization of
 transition/prior
 service costs..........   (1.0)    (.9)    1.3     --       .1      .8    (.9)    (.6)    (.3)
Amortization of
 actuarial loss/(gain)..    1.7     1.5      .7      .7      .5      .4    (.4)   (1.0)   (1.8)
                         ------  ------  ------  ------  ------  ------  -----  ------  ------
Net periodic benefit
 cost................... $ 10.5  $ 16.8  $ 17.5  $ 18.8  $ 22.6  $ 21.2  $ 8.2  $  2.1  $  3.5
                         ======  ======  ======  ======  ======  ======  =====  ======  ======

The accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $203.7 and $9.7, respectively, as of December 31, 1999, and $206.9 and $8.5, respectively, as of December 31, 1998. These amounts represent non- qualified domestic plans and plans at foreign locations that are primarily unfunded, as such book reserves equal to the unfunded amount have been recorded.

The projected benefit obligation and fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets were $271.6 and $42.9, respectively, as of December 31, 1999, and $360.0 and $110.1, respectively, as of December 31, 1998.

The assumed medical cost trend rate used in measuring the postretirement benefit obligation was 5.50% for 2000 and years thereafter. Changes in this rate can have a significant effect on amounts reported. The effect of a 1% increase/decrease in the assumed medical cost trend rate would change the accumulated postretirement benefit obligation by approximately $14.3; annual expense would change by approximately $1.7.

8.Income Taxes

The provision for income taxes consists of the following for the years ended December 31:

                                                          1999   1998   1997
                                                         ------ ------ ------
United States........................................... $130.5 $122.6 $ 91.0
International...........................................  326.8  278.9  270.9
                                                         ------ ------ ------
                                                         $457.3 $401.5 $361.9
                                                         ====== ====== ======

The components of income before income taxes are as follows for the three years ended December 31:

                                                     1999     1998     1997
                                                   -------- -------- --------
United States..................................... $  406.3 $  362.0 $  271.8
International.....................................    988.3    888.1    830.5
                                                   -------- -------- --------
                                                   $1,394.6 $1,250.1 $1,102.3
                                                   ======== ======== ========

Percentage of Income Before Tax                             1999  1998  1997
-------------------------------                             ----  ----  ----
Tax at U.S. statutory rate................................. 35.0% 35.0% 35.0%
State income taxes, net of federal benefit.................   .9    .7    .6
Earnings taxed at other than U.S. statutory rate........... (1.4) (2.6) (1.8)
Reversal of valuation allowance............................  (.2) (2.7) (1.5)
Other, net................................................. (1.5)  1.7    .5
                                                            ----  ----  ----
Effective tax rate......................................... 32.8% 32.1% 32.8%
                                                            ====  ====  ====

In addition, net tax benefits (costs) of $169.0 in 1999 and $(18.5) in 1998 were recorded directly through equity which included tax benefits related to employee benefit plans. The 1999 amount also reflects tax benefits related to currency devaluation in Brazil whereas the 1998 amount reflects tax adjustments recorded upon the change in accounting for Brazil as no longer highly inflationary.

Differences between accounting for financial statement purposes and accounting for tax purposes result in taxes currently payable being lower than the total provision for income taxes as follows:

                                                    1999     1998     1997
                                                   -------  -------  -------
Excess of tax over book depreciation.............. $ (11.6) $ (40.0) $ (12.7)
Net restructuring spending........................   (14.1)   (13.6)   (47.5)
Tax credit utilization............................   (39.0)   (10.2)   (11.5)
Other, net........................................    16.0    (37.0)    16.7
                                                   -------  -------  -------
                                                   $ (48.7) $(100.8) $ (55.0)
                                                   =======  =======  =======

The components of deferred tax assets (liabilities) are as follows at December 31:

                                                            1999     1998
                                                           -------  -------
Deferred Taxes--Current:
  Accrued liabilities..................................... $  69.5  $  73.8
  Restructuring...........................................     --      14.1
  Other, net..............................................    39.7     22.5
                                                           -------  -------
  Total deferred taxes current............................   109.2    110.4
                                                           -------  -------
Deferred Taxes--Long-term:
  Intangible assets.......................................  (275.9)  (328.5)
  Property, plant and equipment...........................  (254.2)  (251.1)
  Postretirement benefits.................................    57.0     62.6
  Tax loss and tax credit carryforwards...................   140.4    176.9
  Other, net..............................................    71.1     14.9
  Valuation allowance.....................................  (137.0)  (122.8)
                                                           -------  -------
  Total deferred taxes long-term..........................  (398.6)  (448.0)
                                                           -------  -------
    Net deferred taxes.................................... $(289.4) $(337.6)
                                                           =======  =======

The major component of the 1999 and 1998 valuation allowance relates to tax benefits in certain jurisdictions not expected to be realized.

COLGATE-PALMOLIVE COMPANY

Notes to Consolidated Financial Statements--(continued)

(Dollars in Millions Except Per Share Amounts)

Applicable U.S. income and foreign withholding taxes have not been provided on approximately $728.7 of undistributed earnings of foreign subsidiaries at December 31, 1999. These earnings are currently considered to be permanently invested and are not subject to such taxes. Determining the tax liability that would arise if these earnings were remitted is not practicable.

9. Supplemental Income Statement Information

Other Expense, Net                                        1999    1998    1997
------------------                                       ------  ------  ------
Amortization of intangibles............................. $ 75.6  $ 81.7  $ 86.5
Earnings from equity investments........................   (5.3)   (5.3)   (5.6)
Minority interest.......................................   30.4    28.1    29.1
Other...................................................  (27.1)  (43.3)  (37.6)
                                                         ------  ------  ------
                                                         $ 73.6  $ 61.2  $ 72.4
                                                         ======  ======  ======
Interest Expense, Net                                     1999    1998    1997
---------------------                                    ------  ------  ------
Interest incurred....................................... $224.0  $216.8  $241.6
Interest capitalized....................................  (11.8)  (12.3)  (10.0)
Interest income.........................................  (40.6)  (31.6)  (48.1)
                                                         ------  ------  ------
                                                         $171.6  $172.9  $183.5
                                                         ======  ======  ======
Research and development................................ $169.2  $166.0  $166.3
Media advertising.......................................  575.6   592.2   637.0

10. Supplemental Balance Sheet Information

Inventories                                                        1999   1998
-----------                                                       ------ ------
Raw materials and supplies....................................... $259.6 $257.9
Work-in-process..................................................   33.2   32.9
Finished goods...................................................  490.9  455.2
                                                                  ------ ------
                                                                  $783.7 $746.0
                                                                  ====== ======

Inventories valued under LIFO amounted to $168.1 and $162.2 at December 31, 1999 and 1998, respectively. The excess of current cost over LIFO cost at the end of each year was $37.2 and $39.8, respectively. The liquidations of LIFO inventory quantities increased income by $0, $1.3 and $0 in 1999, 1998 and 1997, respectively.

Property, Plant and Equipment, Net                             1999      1998
----------------------------------                           --------  --------
Land........................................................ $  128.4  $  122.6
Buildings...................................................    708.0     705.0
Machinery and equipment.....................................  3,329.6   3,299.7
                                                             --------  --------
                                                              4,166.0   4,127.3
Accumulated depreciation.................................... (1,614.9) (1,538.1)
                                                             --------  --------
                                                             $2,551.1  $2,589.2
                                                             ========  ========
Goodwill and Other Intangible Assets, Net                      1999      1998
-----------------------------------------                    --------  --------
Goodwill and other intangibles.............................. $2,764.3  $3,080.8
Accumulated amortization....................................   (578.9)   (556.7)
                                                             --------  --------
                                                             $2,185.4  $2,524.1
                                                             ========  ========

Other Accruals                                                     1999   1998
--------------                                                    ------ ------
Accrued payroll and employee benefits............................ $341.4 $312.4
Accrued advertising..............................................  268.3  232.6
Accrued interest.................................................   52.5   51.2
Accrued taxes other than income taxes............................   52.8   72.0
Restructuring accrual............................................    5.4   39.6
Other............................................................  125.5  149.4
                                                                  ------ ------
                                                                  $845.9 $857.2
                                                                  ====== ======
Other Liabilities                                                  1999   1998
-----------------                                                 ------ ------
Minority interest................................................ $226.3 $230.5
Pension and other benefits.......................................  381.8  398.0
Other............................................................   65.9  108.1
                                                                  ------ ------
                                                                  $674.0 $736.6
                                                                  ====== ======

11. Fair Value of Financial Instruments

The Company utilizes interest rate swap contracts and foreign currency exchange contracts to manage interest rate and foreign currency exposures. (See Management's Discussion and Analysis--Managing Foreign Currency and Interest Rate Exposure for further discussion.) In assessing the fair value of financial instruments at December 31, 1999 and 1998, the Company has used available market information and other valuation methodologies. Some judgment is necessarily required in interpreting market data to develop the estimates of fair value, and, accordingly, the estimates are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

The carrying amounts of cash and cash equivalents, marketable securities, long-term investments and short-term debt approximated fair value as of December 31, 1999 and 1998. The estimated fair value of the Company's remaining financial instruments at December 31 are summarized as follows:

                                           1999                  1998
                                    --------------------  --------------------
                                    Carrying     Fair     Carrying     Fair
                                     Amount      Value     Amount      Value
                                    ---------  ---------  ---------  ---------
(Liabilities)/Assets
  Long-term debt, including current
   portion......................... $(2,582.2) $(2,616.5) $(2,582.2) $(2,800.0)
  (including foreign exchange
   contracts)
Other liabilities:
  Interest rate contracts..........       --        (3.9)      (2.4)      (3.6)
  Foreign exchange contracts.......      (4.1)      (6.8)      (8.7)     (13.0)
Equity:
  Foreign exchange contracts.......        .4         .6       (2.9)      (2.7)
  (to hedge investment in subsidi-
   aries)

As of December 31, 1999 and 1998, the Company had interest rate agreements outstanding with an aggregate notional amount of $965.9 and $825.0, respectively, with maturities through 2018.

As of December 31, 1999 and 1998, the Company had approximately $431.6 and $411.1, respectively, of outstanding foreign exchange contracts. At December 31, 1999, approximately 7% of outstanding foreign exchange contracts served to hedge net investments in foreign subsidiaries, 28% hedged intercompany loans and 65% hedged third-party debt and other firm commitments.

COLGATE-PALMOLIVE COMPANY

Notes to Consolidated Financial Statements--(continued)

(Dollars in Millions Except Per Share Amounts)

The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate agreements and foreign exchange contracts; however, nonperformance by these counterparties is considered remote as it is the Company's policy to contract with diversified counterparties that have a long-term debt rating of A or higher. The amount of any such exposure is generally the unrealized gain on such contracts, which at December 31, 1999 was not significant.

12. Restructured Operations

In September 1995, a reserve of $460.5 was established to cover a worldwide restructuring of manufacturing and administrative operations. The primary elements of the reserve related to employee termination costs and expenses associated with the realignment of the Company's global manufacturing operations, as well as settlement of contractual obligations. As planned, the restructuring has produced savings that increase pretax earnings by over $150.0 annually.

The planned restructuring projects, primarily in North America and Europe but also affecting Hill's Pet Nutrition and Colgate locations in Asia/Africa and certain Latin America locations, are substantially completed. The remaining reserve amount of $5.4 relates to the consolidation of administrative operations following the implementation of SAP and related process changes in Europe.

A summary of the changes in the restructuring reserve is as follows:

                                               Manufacturing Contractual
                                     Workforce    Plants     Settlements Total
                                     --------- ------------- ----------- ------
Original reserve                      $210.0      $204.1        $46.4    $460.5
1995 activity.......................    (4.2)       (7.2)       (13.5)    (24.9)
1996 activity.......................   (93.4)     (118.6)       (20.4)   (232.4)
1997 activity.......................   (45.0)      (48.0)       (11.0)   (104.0)
1998 activity.......................   (37.1)      (22.5)         --      (59.6)
                                      ------      ------        -----    ------
Balance at December 31, 1998........  $ 30.3      $  7.8        $ 1.5    $ 39.6
1999 activity.......................   (24.9)       (7.8)        (1.5)    (34.2)
                                      ------      ------        -----    ------
Balance at December 31, 1999........  $  5.4      $  --         $ --     $  5.4
                                      ======      ======        =====    ======

In total, the headcount reductions resulting from the restructuring projects will total 4,907. The cumulative headcount reductions as of 1997, 1998 and 1999 were 3,133, 3,986 and 4,807, respectively. Factory closures and/or reconfigurations totaled 25. The cumulative factory closures and/or reconfigurations as of 1997, 1998 and 1999 were 20, 23 and 25, respectively. The costs of completing the restructuring activities to date approximated the original reserve. The headcount and factory totals were increased by 765 and 1, respectively, as a result of refinements of original estimates.

Of the restructuring reserve remaining as of December 31, 1999 and 1998, $5.4 and $39.6, respectively, is classified as a current liability.

                         For the Year Ended   For the Year Ended   For the Year Ended
                                1999                 1998                 1997
                         -------------------- -------------------- --------------------
                                         Per                  Per                  Per
                         Income  Shares Share Income  Shares Share Income  Shares Share
                         ------  ------ ----- ------  ------ ----- ------  ------ -----
Net income.............. $937.3               $848.6               $740.4
Preferred dividends.....  (21.0)               (20.9)               (21.1)
                         ------               ------               ------
Basic EPS...............  916.3  583.1  $1.57  827.7  590.0  $1.40  719.3  590.6  $1.22
                                        =====                =====                =====
Stock options...........          11.7                 13.6                 13.8
ESOP conversion.........   19.7   44.0          18.4   44.8          17.9   45.9
                         ------  -----        ------  -----        ------  -----
Diluted EPS............. $936.0  638.8  $1.47 $846.1  648.4  $1.30 $737.2  650.3  $1.13
                         ======  =====  ===== ======  =====  ===== ======  =====  =====

14. Commitments and Contingencies

Minimum rental commitments under noncancellable operating leases, primarily for office and warehouse facilities, are $65.9 in 2000, $60.6 in 2001, $52.7 in 2002, $44.2 in 2003, $38.5 in 2004 and $134.4 thereafter. Rental expense amounted to $102.4 in 1999, $102.7 in 1998 and $94.4 in 1997. Contingent rentals, sublease income and capital leases, which are included in fixed assets, are not significant.

The Company has various contractual commitments to purchase raw materials, products and services totaling $62.7 that expire through 2001.

The Company is a party to various superfund and other environmental matters and is contingently liable with respect to lawsuits, taxes and other matters arising out of the normal course of business. Management proactively reviews and manages its exposure to, and the impact of, environmental matters and other contingencies.

On September 8, 1998, one of the Company's Brazilian subsidiaries, Kolynos do Brasil Ltda. ("Kolynos"), received notice of an administrative proceeding from the Central Bank of Brazil. The notice primarily takes issue with certain filings made with the Central Bank in connection with financing arrangements related to the acquisition of Kolynos in January 1995. The Central Bank seeks to impose fines prescribed by statute, and it, in no way, challenges or seeks to unwind the acquisition. Management believes, based on the opinion of its Brazilian legal counsel, that the filings challenged by the Central Bank fully complied with Brazilian law and that the issues raised in the notice are without merit.

While it is possible that the Company's cash flows and results of operations in particular quarterly or annual periods could be affected by the one-time impacts of the resolution of the above contingencies, it is the opinion of management that the ultimate disposition of these matters, to the extent not previously provided for, will not have a material impact on the Company's financial condition or ongoing cash flows and results of operations.

                                             First    Second   Third    Fourth
                                            Quarter  Quarter  Quarter  Quarter
                                            -------- -------- -------- --------
1999
Net sales.................................. $2,175.3 $2,285.0 $2,314.0 $2,343.9
Gross profit...............................  1,165.9  1,221.3  1,253.6  1,253.4
Net income.................................    208.9    228.1    239.7    260.6
Earnings per common share:
  Basic....................................      .35      .38      .40      .44
  Diluted..................................      .32      .36      .38      .41
1998
Net sales.................................. $2,159.5 $2,256.5 $2,265.4 $2,290.2
Gross profit...............................  1,123.5  1,172.6  1,192.6  1,192.6
Net income.................................    196.0    203.5    214.9    234.2
Earnings per common share:
  Basic....................................      .32      .34      .35      .39
  Diluted..................................      .30      .31      .33      .36

                               Common Stock            $4.25 Preferred Stock
Market Price            --------------------------- ---------------------------
Quarter Ended               1999          1998          1999          1998
-------------           ------------- ------------- ------------- -------------
                         High   Low    High   Low    High   Low    High   Low
                        ------ ------ ------ ------ ------ ------ ------ ------
March 31............... $47.06 $37.53 $43.90 $33.94 $89.50 $86.75 $79.50 $72.50
June 30................  52.41  45.78  45.72  41.22  87.50  85.50  81.00  76.50
September 30...........  58.38  45.75  48.47  32.78  88.00  86.00  87.00  80.50
December 31............  65.00  47.81  47.37  34.00  91.00  87.00  88.00  85.00
Closing Price..........    $65.00        $46.44        $87.00        $88.00

Quarter Ended                                       1999   1998   1999    1998
-------------                                      ------ ------ ------- -------
March 31.......................................... $.1375 $.1375 $1.0625 $1.0625
June 30...........................................  .1375  .1375  1.0625  1.0625
September 30......................................  .1575  .1375  1.0625  1.0625
December 31.......................................  .1575  .1375  1.0625  1.0625
                                                   ------ ------ ------- -------
  Total........................................... $  .59 $  .55 $  4.25 $  4.25
                                                   ====== ====== ======= =======