-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, kXNuO5nV0PuTZc0hYsVoxVlRtXMEQXg5TEZ4HglNgO+Sjqg6nWLukxlfj0YcKKbH BTEyCDkUHebBi0tvZvQznQ== 0000008868-94-000003.txt : 19940523 0000008868-94-000003.hdr.sgml : 19940523 ACCESSION NUMBER: 0000008868-94-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVON PRODUCTS INC CENTRAL INDEX KEY: 0000008868 STANDARD INDUSTRIAL CLASSIFICATION: 2844 IRS NUMBER: 130544597 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04881 FILM NUMBER: 94517880 BUSINESS ADDRESS: STREET 1: 9 W 57TH ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125466015 10-K 1 YEAR ENDED DECEMBER 31, 1993 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1993 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____ to ____ Commission file number 1-4881 AVON PRODUCTS, INC. (Exact name of registrant as specified in its charter) NEW YORK 13-0544597 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9 WEST 57TH STREET, NEW YORK, NEW YORK 10019 (Address of principal executive offices) (212) 546-6015 (Telephone number) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- Common Stock (par value $.50) New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. The aggregate market value of Common Stock (par value $.50) held by non- affiliates at February 28, 1994 was $4.2 billion. The number of shares of Common Stock (par value $.50) outstanding at February 28, 1994 was 71,922,660. Documents Incorporated by Reference Parts I and II --Portions of the 1993 Annual Report to Shareholders. Part III --Portions of the Proxy Statement for the 1994 Annual Meeting of Shareholders. PART I ITEM 1. BUSINESS Avon Products, Inc. ("Avon" or the "Company") is one of the world's leading manufacturers and marketers of beauty products, which include cosmetics, fragrances and toiletries; fashion jewelry; gift and decorative products; and prestige fragrances. Avon commenced operations in 1886 and was incorporated in the State of New York on January 27, 1916. Avon's business is comprised of two industry segments: Direct Selling, which includes Avon U.S. and Avon International, and Retail, which consists of Giorgio Beverly Hills, Inc. Financial information relating to industry segments and geographic areas is incorporated by reference to the analysis of net sales and pretax income by business segment and geographic area on page 18 and to Notes 11 and 12 of "Notes to Consolidated Financial Statements" on page 35 in Avon's 1993 Annual Report to Shareholders. DIRECT SELLING The direct selling segment consists of Avon U.S. and Avon International. In the direct selling beauty business, sales are made directly to consumers principally through Avon Representatives throughout the world. The beauty products sold include cosmetics, fragrances and toiletries; fashion jewelry and accessories; and gift and decorative products. Although the products offered in Europe, the Americas and the Pacific are not as varied as those sold in the United States, most are substantially the same as those marketed domestically. Distribution Avon's products are sold by a worldwide total of approximately 1,745,000 Representatives, 415,000 of whom are in the United States. Almost all Representatives are women who sell on a part-time basis. Representatives are independent contractors or independent dealers, and are not agents or employees of Avon. They purchase products directly from Avon and sell them directly to their customers. The Company's products are sold to customers either through independent Representatives or directly through the mail, by phone or fax. Representatives go where the customers are, either in the home or in the workplace. Representatives may sell in a territory, which typically averages 100 homes in the United States and from 100 to 150 homes in other countries. Representatives in the United States have the opportunity to take responsibility for sales in larger areas. Representatives also sell in offices, factories, schools and hospitals. In the United States, the Representative contacts customers, selling primarily through the use of brochures highlighting new products and specially priced items for each two-week sales campaign. Product samples, demonstration products, makeup color charts and catalogs are also used. Generally the Representative forwards an order every two weeks to a designated distribution center. This order is processed and the products are assembled at the distribution center and delivered to the Representative's home, usually by a local delivery service. The Representative then delivers the merchandise and collects payment from the customer for her own account. Payment by the Representative to Avon is customarily made when the next order is forwarded to 1 the distribution center. The cost of merchandise to the Representative varies according to the total order size for each two-week sales campaign and averages approximately 60 percent of the recommended selling price. In order to increase support of the Representative in the United States and allow her to run her business more efficiently as well as to improve order processing accuracy, Avon has implemented certain electronic order systems technology. One of these systems permits Avon Representatives to submit add-on orders with a touch-tone telephone, enabling them to augment orders already submitted by placing a phone call. Another system, Avon's Personal Order Entry Terminal, permits approximately 20,000 top-producing Representatives in the United States to transmit orders electronically by phone line, 24 hours a day, seven days a week. Outside the United States, each sales campaign is generally of a three- week duration. Although terms of payment and cost of merchandise to the Representative vary from country to country, the basic method of direct selling by Representatives is essentially the same as that used in the United States, and substantially the same merchandising and promotional techniques are utilized. The recruiting of Representatives is the primary responsibility of district managers, most of whom are former Representatives. In the United States, each district manager has responsibility for a market area covered by 225 to 300 Representatives. District managers are employees of Avon and are paid a salary and a commission based on purchases of Avon products by Representatives in their district. Personal contacts, including recommendations from current Representatives and local advertising, constitute the primary means of obtaining new Representatives. Because of the high rate of turnover among Representatives, a characteristic of the direct-selling method, recruiting and training of new Representatives are continually necessary. From time to time, the question of the legal status of Representatives has arisen, usually in regard to possible coverage under social benefit laws that would require Avon (and in most instances, the Representatives) to make regular contributions to social benefit funds established for employees. Although Avon has generally been able to address these questions in a satisfactory manner, the matter has not been fully resolved in all countries, including the United States. If there should be a final judicial determination adverse to Avon in a country, the cost for future, and possibly past contributions could be so substantial in the context of the volume of business of Avon in that country that it would have to consider discontinuing operations in that country. Promotion and Marketing Sales promotion and sales development activities are directed toward giving selling assistance to the Representatives by making available sales aids such as brochures, product samples and demonstration products. In order to support the efforts of Representatives to reach new customers, especially working women and other individuals who frequently are not at home, specially designed sales aids, promotional pieces and customer flyers are used. In addition, Avon seeks to motivate its Representatives through the use of special incentive programs that reward superior sales performance. Periodic sales meetings, to which Representatives are invited, are conducted by the district manager. The meetings are designed to keep Representatives abreast of product line changes, explain sales techniques and provide recognition for sales performance. 2 A number of merchandising techniques, including the introduction of new products, the use of combination offers, the use of trial sizes and the promotion of products packaged as gift items, are used. In general for each sales campaign, a distinctive brochure is published, in which new products are introduced and selected items are offered at special prices or are given particular prominence in the brochure. In the United States, all cosmetic, toiletry and fragrance products are featured in each brochure at a constant low price, while maintaining introductory specials and periodic sales on selected items for limited time periods. From time to time, various federal and state regulations or laws have been proposed or adopted that would, in general, restrict the frequency or duration of, or volume of sales resulting from new product introductions, special prices or other special price offers. The Company's U.S. pricing policy discussed above, will mitigate the effect of these regulations. Avon also utilizes marketing programs that combine direct selling and direct marketing to meet the diverse needs of customers. One of the direct marketing programs, Select, enables customers to purchase Avon products in a number of convenient ways: through a Representative, by mail through a Select catalog, or by telephone. For most transactions this program also provides commission income for Representatives. Competitive Conditions The cosmetics, fragrances and toiletries industry, the fashion jewelry industry and the gift and decorative products industry are highly competitive. Avon is one of the leading manufacturers and distributors of cosmetics and fragrances in the United States. Its principal competitors are the large and well-known cosmetics and fragrances companies that manufacture and sell broad product lines through various types of retail establishments. There are many other companies that compete in particular products or product lines sold through retail establishments. There are also a number of direct-selling cosmetics and fragrances companies that compete in the United States, although none has total sales or income comparable with those of Avon. Avon is one of the leading distributors of fashion jewelry for women in the United States. Its principal competition in the fashion jewelry industry consists of a few large companies and many small companies that manufacture and sell fashion jewelry for women through retail establishments. There are also a number of direct-selling fashion jewelry companies that compete in the United States, although none has total sales or income comparable with those of Avon. Avon has many competitors in the gift and decorative products industry in the United States, including retail establishments, principally department stores and gift shops, and direct-mail companies specializing in these products. There are also a number of direct-selling companies selling gift and decorative products in the United States, although none has total sales and income comparable with those of Avon. The number of competitors and degree of competition that Avon faces in its foreign cosmetics, fragrances and fashion jewelry markets varies widely from country to country. Avon is one of the leading manufacturers and distributors in the cosmetics and fragrances industry in most of its foreign markets, as well as in the fashion jewelry industry in Europe. 3 Avon believes that the personalized customer service offered by Representatives; the high quality, attractive designs and reasonable prices of its products; new product introductions; and the guarantee of satisfaction are significant factors in establishing and maintaining its competitive position. Avon's consolidated net sales by classes of principal products follows:
Years ended December 31 ------------------------------ 1993 1992 1991 ---- ---- ---- (In millions) Cosmetics, fragrances and toiletries...... $2,538.2 $2,392.0 $2,293.6 Fashion jewelry and accessories........... 809.9 734.6 672.8 Gift and decorative....................... 659.5 683.3 626.9 -------- -------- -------- $4,007.6 $3,809.9 $3,593.3 ======== ======== ========
International Operations Avon's international operations are subject to certain customary risks inherent in carrying on business abroad, including the risk of adverse currency fluctuations, currency remittance restrictions and unfavorable economic and political conditions. Avon's international operations are conducted primarily through wholly owned subsidiaries in 39 countries and our products are distributed in 79 other countries. Manufacturing Avon manufactures and packages almost all of its cosmetics, fragrances and toiletries products. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components, are purchased from various suppliers. Packages, consisting of containers and packaging components, are designed by its staff of artists and designers. The design and development of new products are affected by the cost and availability of materials such as glass, plastics and chemicals. Avon believes that it can continue to obtain sufficient raw materials and supplies to manufacture and supply its products. Avon has nineteen manufacturing laboratories around the world, three of which are principally devoted to the manufacture of fashion jewelry. In the United States, its cosmetics, fragrances and toiletries products are produced in three manufacturing laboratories for the four distribution centers located throughout the country. Most products sold in foreign countries are manufactured in its facilities abroad. The fashion jewelry line is generally developed by Avon's staff and produced in its two manufacturing laboratories in Puerto Rico and a manufacturing laboratory in Ireland or by several independent manufacturers. 4 Trademarks and Patents Although Avon owns several patents and has several more patent applications pending in the United States Patent Office, its business, both in the United States and abroad, is not materially dependent upon patents or patent protection. Avon has no material licenses, franchises or concessions. Avon's major trademarks are protected by registration in the United States and the other countries where its products are marketed as well as in many other countries throughout the world. RETAIL The retail segment consists of Giorgio Beverly Hills, Inc. Among the upscale fragrances offered are: Giorgio Beverly Hills, Red by Giorgio Beverly Hills and Red for Men. A new fragrance, Wings, introduced on a limited basis in 1992, was launched nationwide in the United States and in the United Kingdom during 1993. The prestige fragrance products are sold through a select group of department stores and specialty shops in the United States and Europe, and in duty-free shops around the world. These products are advertised in upscale magazines and in cooperative department store advertisements in newspapers, as well as by spot commercials on television, in selected markets. The prestige fragrance market is highly competitive. Major competitors include companies based in the United States and Europe. The products sold by Giorgio are produced to its specifications by Avon and by third-party manufacturers in the United States and Europe. The trademarks of Giorgio are protected in the United States and the other countries where its products are marketed as well as in many other countries throughout the world. DISCONTINUED OPERATIONS During 1993, Avon recorded an additional discontinued operations provision of $10.0 million after tax, or $.14 per share, for the final settlement and related expenses in an arbitration proceeding related to a business previously sold. During 1992, Avon recorded an additional discontinued operations provision of approximately $10.0 million principally for claims and litigation relating to businesses previously sold, which was offset by amounts recovered for notes and securities previously written off. During 1991, Avon revised its estimate of loss for previously discontinued operations by $75.0 million, or $1.05 per share, primarily related to the writedown of the value of securities previously received. Although Avon has completed its divestiture of all discontinued operations, it may be liable for various contingencies relating to, among other things, an indemnification given to the purchaser of certain discontinued operations. The indemnification, currently being litigated, covers a patent dispute, various environmental claims and numerous other lawsuits and claims. Due to the complex nature of these contingencies, the ultimate outcome and related total costs to Avon cannot currently be determined. For further discussion of the 5 contingencies see Note 14 of the Notes to the Consolidated Financial Statements and Item 3 of this report. PROVISION FOR RESTRUCTURING COSTS A provision of $96.0 million ($64.4 million after tax, or $.90 per share) was recorded in the first quarter of 1992 for the restructuring and reconfiguration of Avon's worldwide manufacturing and distribution facilities. The restructuring program included closing the manufacturing facility in Spain during 1992 and the distribution facility in Springdale, Ohio in July 1993, as well as the reconfiguring of several other international operations. The program was substantially completed by the end of 1993. When completed in early 1994, the program will have eliminated over 1,200 positions worldwide. The restructuring program has increased operating efficiency in distribution, eliminated redundancies in manufacturing by rationalizing product mix, and reduced operating expenses. Expense savings of approximately $50.0 million per year beginning in 1994 are anticipated. SEASONAL NATURE OF BUSINESS Avon's sales and earnings have a marked seasonal pattern characteristic of many companies selling cosmetics, fragrances and toiletries; gift and decorative products; fashion jewelry; and prestige fragrance products. Christmas sales cause a sales peak in the fourth quarter of the year. Fourth- quarter net sales are typically about 30 percent of full-year net sales, and fourth-quarter pretax income is typically about 43 percent of full-year pretax income. Fourth quarter net sales were 31 percent of full-year net sales in 1993 and 1992, and fourth quarter pretax income was 43 percent in 1993 and 1992, excluding the effect of the restructuring charge in 1992. RESEARCH ACTIVITIES Avon's research and development department is a leader in the industry, formulating affordable, effective beauty treatments relevant to women's needs. A team of researchers and technicians applies the disciplines of science to the practical aspects of bringing products to market around the world. Relationships with well known dermatologists and other specialists supplements Avon's own research to deliver new formulas and ingredients. Each year, Avon researchers analyze and evaluate more than 600 products in the following categories: cosmetics, fragrances, toiletries, jewelry, fashions, gifts and decorative items. Avon has pioneered many innovative products, including Skin-So-Soft, its best-selling bath oil; BioAdvance, the first skin care product with stabilized retinol, the purest form of Vitamin A; and Collagen Booster, the premier product to capitalize on Vitamin C technology. Avon also introduced the benefits of aromatherapy to millions of American women, encapsulated color for the Color-Release line and alpha hydroxy acid for the Anew Perfecting Complex products. The amounts spent on research activities relating to the development of new products and the improvement of existing products were $20.7 million in 1993, $29.4 million in 1992 and $29.6 million in 1991. This research included the activities of product research and development, and package design and development. Most of these activities are related to the development of cosmetics, fragrances and toiletries products. 6 ENVIRONMENTAL MATTERS Avon conducts regular environmental audits to ensure that its facilities around the world meet or exceed local regulatory standards in such categories as waste disposal and air and water emissions, and that opportunities for environmental performance improvements are reflected in our products and packaging. In general, compliance with regulations governing the discharge of materials into the environment or otherwise relating to the protection of the environment has not had, and is not anticipated to have, any material effect upon the capital expenditures, financial position or competitive position of Avon. Reference is made to Item 3 of this report for additional information regarding environmental matters. EMPLOYEES At December 31, 1993, Avon employed approximately 29,800 persons. Of these, 8,300 were employed in the United States and 21,500 in other countries. The number of employees of the direct selling segment tends to rise from a low point in January to a high point in November and decreases somewhat in December when Christmas shipments are completed. ITEM 2. PROPERTIES Avon's principal properties consist of manufacturing laboratories for the production of cosmetics, fragrances and toiletries and fashion jewelry and distribution facilities where offices are located and where finished merchandise is warehoused and shipped to Representatives in fulfillment of their orders. Substantially all of these properties are owned by Avon or its subsidiaries, are in good repair, adequately meet Avon's needs and operate at reasonable levels of productive capacity. The domestic manufacturing laboratories are located in Morton Grove, IL; Springdale, OH; and Suffern, NY; and the distribution centers are located in Atlanta, GA; Glenview, IL; Newark, DE; and Pasadena, CA. The Springdale, OH distribution center was closed in July 1993, as part of a previously announced restructuring plan. International properties include four manufacturing laboratories, including a fashion jewelry manufacturing laboratory in Ireland, and six distribution centers in Europe, six manufacturing laboratories and twelve distribution centers in the Americas and four manufacturing laboratories and nine distribution centers in the Pacific. The research and development laboratories are located in Suffern, NY. Avon leases space for its executive and administrative offices in New York City and its fashion jewelry manufacturing facilities in Puerto Rico. ITEM 3. LEGAL PROCEEDINGS Various lawsuits and claims (asserted and unasserted) arising in the ordinary course of business are pending or threatened against Avon. The most significant of these are described below. In April 1991, Wertheim Schroder & Co. Incorporated, a holder of Avon's Preferred Equity-Redemption Cumulative Stock (the "PERCS"), filed, on behalf of certain classes of PERCS holders, a suit against Avon in the United States District Court for the Southern District of New York alleging various contract and securities law claims relating to the PERCS. Avon's motion for summary 7 judgment was denied, except as to one claim, on April 1, 1993. Avon rejects the assertions in this case, believes it has meritorious defenses to the claims and intends to vigorously contest this lawsuit. In June 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International Minerals & Chemical Corporation ("IMC"), now known as Imcera Group Inc., filed a lawsuit against Avon in the St. Louis Missouri City Circuit Court arising from Avon's sale of Mallinckrodt to IMC in 1986. The suit alleged that a certain patent dispute and a settlement, referred to as the DuPont patent case, various environmental claims and numerous other lawsuits and claims are contingent liabilities covered by an indemnification given by Avon in connection with the sale of Mallinckrodt. In October 1991, the Missouri Supreme Court affirmed the Circuit Court's decision that Avon has the obligation to indemnify IMC and Mallinckrodt in connection with the DuPont patent case, but remanded the matter for a trial on the damages, if any, suffered by the parties. On July 27, 1992 a jury returned a verdict in the DuPont patent case for $16.0 million, and a judgment for that amount plus approximately $6.5 million interest was entered. On August 11, 1992 IMC and Mallinckrodt filed post-trial motions, including a motion for a judgment notwithstanding the verdict or, in the alternative, a motion for a new trial. On November 5, 1992, the St. Louis Missouri City Circuit Court granted IMC's and Mallinckrodt's motion for a judgment notwithstanding the verdict and directed a verdict for plaintiffs in the amount of $27.1 million plus interest. As of November 5, 1992, the interest amounted to approximately $11.7 million. Avon, IMC and Mallinckrodt have appealed this decision. Pre-trial proceedings and discovery activities are ongoing with respect to the environmental and general litigation portions of the case. With respect to the environmental contingencies which constitute a part of the indemnification litigation, the total cost to Avon cannot be determined with certainty as a result of such factors as the preliminary status of information relating to the sites owned by the purchaser, the preliminary regulatory involvement, the unknown magnitude and timing of cleanup efforts, if any, to be undertaken by the purchaser or Mallinckrodt, the possibility of recoveries against other parties, the uncertainty of the success of Avon's defenses, and unasserted claims, if any. However, these factors have been assessed and will continue to be assessed by Avon in estimating reserves to be recorded in its financial statements. The ultimate outcome and aggregate cost of resolving all of the above contingencies will be based on a number of factors and will be determined over a number of years. Accordingly, the total cost to Avon cannot currently be determined with certainty. The reserves for such contingencies at December 31, 1993, which are recorded gross without anticipation of insurance recoveries or other third party recoveries, if any, have been estimated by Avon's management based on its review of currently known facts and circumstances at December 31, 1993. In the opinion of Avon's management, based on its review of the preliminary information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1993 should not have a material adverse impact on Avon's consolidated financial position or results of operations, based on the current levels of such amounts. However, this difference, if any, could have a material effect on results of operations in a future period when resolved. Avon is involved in a number of proceedings arising out of the federal Superfund law and similar state laws. In some instances Avon, along with other companies, has been designated as a potentially responsible party which may be 8 liable for costs associated with these various hazardous waste sites. Based upon Avon's current knowledge of these proceedings, management believes, without taking into consideration any insurance recoveries, if any, that in the aggregate they would not have a material adverse impact on Avon's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1993. - - ---------- Executive Officers of the Registrant Officers are elected by the Board of Directors at its first meeting following the Annual Meeting of Shareholders. Officers serve until the first meeting of the Board of Directors following the Annual Meeting of Shareholders at which Directors are elected for the succeeding year, or until their successors are elected, except in the event of death, resignation or removal, or the earlier termination of the term of office. Information regarding employment contracts between Avon and named executive officers is incorporated by reference to the "Contracts with Executives" section of Avon's Proxy Statement for the 1994 Annual Meeting of Shareholders. Listed below are the executive officers of Avon, each of whom (except as noted) has served in various executive and operating capacities with Avon during the past five years: Elected Title Name Age Officer ----- ---- --- ------- Chairman of the Board, Chief Executive Officer and Director. James E. Preston 60 1971 President, Chief Operating Officer and Director......................... Edward J. Robinson 53 1989 (1) Executive Vice President............... John I. Novosad 53 1989 Senior Vice President, General Counsel and Secretary........................ Siri S. Marshall 45 1985 Senior Vice President and Chief Financial Officer.................... Edwina D. Woodbury 42 1990 Senior Vice Presidents................. Christina A. Gold 46 1993 Robert F. McCracken 55 1992 (2) Marcia L. Worthing 51 1988 Group Vice President, Controller....... Robert J. Conologue 45 1989 (3) Group Vice President, Taxes/Finance.... Robert J. Corti 44 1988 [FN] - - ---------- (1) Edward J. Robinson was elected President and Chief Operating Officer in November 1993 and a member of the Board of Directors of Avon in May 1992. Mr. Robinson had been Vice Chairman, Chief Financial and Administrative Officer of Avon since May 1992; he joined the Company in April 1989 as Executive Vice 9 President and Chief Financial Officer. Immediately prior to joining Avon, he served as Executive Vice President - Finance and Chief Financial Officer of RJR Nabisco, Inc. from October 1987 to March 1989. Mr. Robinson was associated with RJR Nabisco, Inc. and its predecessor companies, Nabisco Brands, Inc. and Standard Brands Incorporated for 16 years. During that time, he served in a number of financial positions, including senior financial officer capacities, as a Controller, Treasurer or Chief Financial Officer. Prior to that time, Mr. Robinson was associated with Ward Foods, Inc. (1970 to 1972) and Peat Marwick Mitchell & Co. (1963 to 1970). (2) Robert F. McCracken joined Avon and was elected Senior Vice President in February 1992. Prior to joining Avon, he was Vice President of the Sears Specialty Merchandising Group of Sears Roebuck & Co. Mr. McCracken joined Sears and was elected Vice President of Sears World Trade, Inc. in 1984. Prior to joining Sears, Mr. McCracken was with General Electric Co. from 1975. (3) Robert J. Conologue was elected Group Vice President and Controller in November 1992. Mr. Conologue joined Avon in July 1989 as Vice President and Controller. Prior to joining Avon, he was Vice President and Corporate Controller of Emery Air Freight Corporation since 1986. Mr. Conologue joined Emery Air Freight as Assistant Corporate Controller in 1982 and was appointed Controller U.S. Operations in 1984. Prior to joining Emery Air Freight Corporation, he was with Arthur Andersen & Co. from 1970. PART II ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS This information is incorporated by reference to "Market Prices of Common Stock by Quarter" on page 24 of Avon's 1993 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information for the five-year period 1989 through 1993 is incorporated by reference to the "Eleven-Year Review" on pages 38 and 39 of Avon's 1993 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This information is incorporated by reference to "Management's Discussion and Analysis" on pages 16 through 23 of Avon's 1993 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated by reference to the "Consolidated Financial Statements and Notes" on pages 25 through 36, together with the report thereon of Coopers & Lybrand, on page 37, and "Results of Operations by Quarter" on page 24 of Avon's 1993 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is incorporated by reference to the "Election of Directors" and "Information Concerning the Board of Directors" sections of Avon's Proxy Statement for the 1994 Annual Meeting of Shareholders. Information regarding executive officers is presented in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the "Information Concerning the Board of Directors" and "Executive Compensation" sections of Avon's Proxy Statement for the 1994 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the "Ownership of Shares" section of Avon's Proxy Statement for the 1994 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the "Compensation Committee Interlocks and Insider Participation" section and the "Contracts with Executives" section of Avon's Proxy Statement for the 1994 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Annual Report to Shareholders Form 10-K Page Number Page Number ------------ ----------- (a) 1. Consolidated Financial Statements of Avon Products, Inc. and Subsidiaries Consolidated statement of income for each of the years in the three-year period ended December 31, 1993........ 25 Consolidated balance sheet at December 31, 1993 and 1992............ 26 Consolidated statement of cash flows for each of the years in the three-year period ended December 31, 1993........ 27 11 Consolidated statement of changes in shareholders' equity for each of the years in the three-year period ended December 31, 1993............... 28 Notes to consolidated financial statements............................ 29 Report of Independent Accountants Coopers & Lybrand..................... 37 (a) 2. Financial Statement Schedules Report of Independent Accountants Coopers & Lybrand..................... S-1 Consent of Independent Accountants Coopers & Lybrand..................... S-2 Financial statement schedules for each of the years in the three-year period ended December 31, 1993 V --Property, plant and equipment................... S-3 VI --Accumulated depreciation and amortization--property, plant and equipment......... S-4 VIII--Valuation and qualifying accounts.................... S-5 IX --Short-term borrowings......... S-6 X --Supplementary income statement information................. S-6
Financial statements of the registrant and all other financial statement schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements and notes. (a) 3. Exhibits Exhibit Number Description ------- ----------- 3.1 --Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on August 12, 1988. 3.2 --By-laws, as amended to April 27, 1990, of Avon (incorporated by reference to Exhibit 3.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 12 4.1 --Instrument defining the rights of holders of Avon's preferred share purchase rights to purchase Avon's Series A Junior Participating Preferred Stock (reference is made to Article IIIA of the restated Certificate of Incorporation of Avon, filed with the Secretary of State of New York State on August 12, 1988 and included as Exhibit 3.1 to this Annual Report on Form 10-K). 4.2 --Rights Agreement, dated as of March 30, 1988 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (as successor to Morgan Shareholder Services Trust Company) (incorporated by reference to Exhibit 1 to Avon's Registration Statement on Form 8-A, filed April 7, 1988). 4.3 --Amendment, dated as of January 3, 1989, to the Rights Agreement (incorporated by reference to Exhibit 3 to Avon's Amendment No. 1 on Form 8, filed January 4, 1989, amending its Registration Statement on Form 8-A, filed April 7, 1988). 4.4 --Second Amendment, dated as of April 5, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(c) to Avon's Current Report on Form 8-K, dated April 5, 1990). 4.5 --Third Amendment, dated as of May 10, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(d) to Avon's Current Report on Form 8-K, dated May 10, 1990). 4.6 --Multifacility Credit Agreement, dated as of June 17, 1992, among Avon Capital Corporation, Avon and a group of banks (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992). 4.7 --First Amendment, dated as of April 15, 1993, to the Multi- facility Credit Agreement, dated as of June 17, 1992, among Avon Capital Corporation, Avon and a group of banks (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.1* --Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders May 6, 1993 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.2* --Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan. 10.3* --Avon Products, Inc. 1994 Long-Term Incentive Plan, effective as of January 1, 1994. 10.4* --Avon Products, Inc. 1970 Stock Option Incentive Plan, as amended and restated through May 4, 1989 (incorporated by reference to Exhibit 4.6 to Avon's Registration Statement on Form S-8, Registration No. 33-28653, filed May 18, 1989). 13 10.5* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. 1970 Stock Option Incentive Plan as amended and restated through May 4, 1989 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.6* --Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated through July 1, 1991 (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.7* --First Amendment, dated as of January 21, 1994, to the Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated through July 1, 1991. 10.8* --The Supplemental Life Plan of Avon, effective as of January 1, 1990 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991). 10.9* --Trust Agreement, amended and restated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 10.10* --First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* --Second Amendment, dated as of June 12, 1992 to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.12* --Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.13* --The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of October 8, 1990 (incorporated by reference to Exhibit 10.5 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.14* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of October 8, 1990 (incorporated by reference to Exhibit 10.5 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 14 10.15* --Trust Agreement, dated as of August 3, 1989, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.4 to Avon's Annual Report of Form 10-K for the year ended December 31, 1989). 10.16 --Not Used. 10.17* --Instrument of Amendment, effective as of April 1, 1990 amending various employee benefit plans and agreements as stipulated in the Instrument of Amendment (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 10.18* --Employment Agreement, dated as of November 5, 1992, between Avon and James E. Preston (incorporated by reference to Exhibit 10.10 to Avon's Annual Report on Form 10-K for the year ended December 31, 1992). 10.19* --Non-Qualified Stock Option Award, dated as of December 5, 1991, granted by Avon to James E. Preston (incorporated by reference to Exhibit 10.11 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.20* --Employment Agreement, dated as of November 5, 1992, between Avon and Edward J. Robinson (incorporated by reference to Exhibit 10.12 to Avon's Annual Report on Form 10-K for the year ended December 31, 1992). 10.21* --Restricted Stock Agreement, effective as of November 4, 1993, granted by Avon to Edward J. Robinson. 10.22* --Employment Agreement, dated as of January 2, 1993, between Avon and Siri S. Marshall (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.23* --Avon Products, Inc. Directors' Retirement Plan, effective as of January 1, 1988 (incorporated by reference to Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.24* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. Directors' Retirement Plan (incorporated by reference to Exhibit 10.6 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 15 10.25* --Trust Agreement, dated as of December 31, 1991, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.26* --First Amendment, dated as of November 5, 1992, to the Trust Agreement dated as of December 31, 1991, by and between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.7 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 11.1 --Statement re computation of primary income per share. 11.2 --Statement re computation of fully diluted income per share. 13 --Portions of the Annual Report to Shareholders for the year ended December 31, 1993 incorporated by reference in response to Items 5 through 8 in this filing. 21 --Subsidiaries of the registrant. 23 --Consent of Coopers & Lybrand (set forth on page S-2 of this Annual Report on Form 10-K). 24 --Power of Attorney. 99 --Financial statements for the Avon Products, Inc. Employees' Savings and Stock Ownership Plan and the Avon Mirabella/ Lomalinda Employees' Savings Plan for the year ended December 31, 1993 will be filed by amendment. *The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1993. (c) Avon's Annual Report on Form 10-K for the year ended December 31, 1993, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933, which incorporates by reference such Annual Report on Form 10-K. 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of March 1994. Avon Products, Inc. By/s/ SIRI S. MARSHALL ----------------------------- Siri S. Marshall Senior Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- Chairman of the Board and Chief Executive Officer-- * Principal Executive - - --------------------------- Officer and Director March 23, 1994 James E. Preston * President, Chief Operating - - --------------------------- Officer and Director March 23, 1994 Edward J. Robinson Senior Vice President, * Chief Financial Officer-- - - --------------------------- Principal Financial Officer March 23, 1994 Edwina D. Woodbury Group Vice President, * Controller--Principal - - --------------------------- Accounting Officer March 23, 1994 Robert J. Conologue BRENDA BARNES ) DANIEL B. BURKE ) STANLEY C. GAULT ) GEORGE V. GRUNE ) CHARLES S. LOCKE ) ANN S. MOORE ) Directors* March 23, 1994 REMEDIOS DIAZ OLIVER ) JOHN J. PHELAN, JR. ) ERNESTA G. PROCOPE ) JOSEPH A. RICE ) CECILY C. SELBY ) *By/s/ SIRI S. MARSHALL - - ---------------------------- March 23, 1994 Siri S. Marshall, Attorney-in-fact 17 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Avon Products, Inc. Our report on the consolidated financial statements of Avon Products, Inc. and subsidiaries as of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993 has been incorporated by reference in this Form 10-K from page 37 of the 1993 Annual Report to Shareholders of Avon Products, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedules for each of the years in the three-year period ended December 31, 1993, as listed in the Index under Item 14(a)2 of this Form 10-K. In our opinion, the financial statement schedules for each of the years in the three-year period ended December 31, 1993 referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/Coopers & Lybrand New York, New York February 3, 1994 S-1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following Registration Statements of Avon Products, Inc.: Form S-8 (Reg. No. 2-37955), Form S-8 (Reg. No. 2-48080), Form S-8 (Reg. No. 2-61285), Form S-8 (Reg. No. 2-83235), Form S-8 (Reg. No. 2-94959), Form S-8 (Reg. No. 33-28653), Form S-8 (Reg. No. 33-47209), Form S-8 (Reg. No. 33-60218), Form S-8 (Reg. No. 33-60918), Form S-8 (Reg. No. 33-65998), Post Effective Amendment No. 1 to Form S-8 (Reg. No. 2-98707), Pre-Effective Amendment No. 1 to Form S-8 (Reg. No. 33-22099), of our reports dated February 3, 1994 on our audits of (i) the consolidated financial statements of Avon Products, Inc. as of December 31, 1993 and 1992 and for each of the years in the three-year period ended December 31, 1993, which report is included in the 1993 Annual Report to Shareholders and incorporated by reference in this Annual Report on Form 10-K and (ii) the 1993, 1992 and 1991 financial statement schedules of Avon Products, Inc., which report is included in this Annual Report on Form 10-K. /s/Coopers & Lybrand New York, New York March 23, 1994 S-2 AVON PRODUCTS, INC. AND SUBSIDIARIES SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT (In millions) Years ended December 31
Balance at Balance beginning Additions Other at end of period at cost Retirements changes(c) of period ---------- --------- ----------- ---------- --------- 1993 Land.............. $ 39.4 $ .4 $ -- $ 1.9 $ 41.7 Buildings and improvements.... 478.9 19.2 6.0 7.2 499.3 Equipment......... 530.6 40.4 31.8 (9.7) 529.5 -------- ----- ----- ------ -------- $1,048.9 $60.0(a) $37.8 $ (.6) $1,070.5 ======== ===== ===== ====== ======== 1992 Land.............. $ 23.0 $14.6 $ -- $ 1.8 $ 39.4 Buildings and improvements.... 489.4 15.5 1.0 (25.0) 478.9 Equipment......... 516.3 50.2 23.3 (12.6) 530.6 -------- ----- ----- ------ -------- $1,028.7 $80.3(a) $24.3 $(35.8) $1,048.9 ======== ===== ===== ====== ======== 1991 Land.............. $ 24.0 $ .2 $ 1.7 $ .5 $ 23.0 Buildings and improvements.... 477.1 46.2 17.5 (16.4) 489.4 Equipment......... 490.0 18.4 8.9 16.8 516.3 -------- ----- ----- ------ -------- $ 991.1 $64.8(b) $28.1 $ .9 $1,028.7 ======== ===== ===== ====== ========
[FN] - - ------------ (a) 1993 includes $1.5 related to acquisitions of minority interests in two foreign subsidiaries and 1992 includes $16.9 related to the acquisition of an additional 5.7 shares of Avon Products Company Limited in 1992. (b) Includes new distribution center in Gwinnett County, Georgia, which cost approximately $20.0, including equipment. (c) Translation adjustments, and transfers and reclassifications between accounts. Substantially all plant and equipment is depreciated using the straight- line method over estimated useful lives, which are generally as follows: Buildings and improvements............................. 20-45 years Equipment.............................................. 5-15 years S-3 AVON PRODUCTS, INC. AND SUBSIDIARIES SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION PROPERTY, PLANT AND EQUIPMENT (In millions) Years ended December 31
Additions Balance at charged to Balance beginning costs and Other at end of period expenses Retirements changes(a) of period ---------- ---------- ----------- ---------- --------- 1993 Buildings and improvements. $237.0 $18.9 $ .6 $ 3.5 $258.8 Equipment...... 329.6 31.5 26.8 (3.1) 331.2 ------ ----- ----- ------ ------ $566.6 $50.4 $27.4 $ .4 $590.0 ====== ===== ===== ====== ====== 1992 Buildings and improvements. $225.5 $18.9 $ .6 $ (6.8) $237.0 Equipment...... 327.9 30.4 17.3 (11.4) 329.6 ------ ----- ----- ------ ------ $553.4 $49.3 $17.9 $(18.2) $566.6 ====== ===== ===== ====== ====== 1991 Buildings and improvements. $216.0 $17.5 $ 9.5 $ 1.5 $225.5 Equipment...... 303.0 31.3 6.7 .3 327.9 ------ ----- ----- ------ ------ $519.0 $48.8 $16.2 $ 1.8 $553.4 ====== ===== ===== ====== ======
[FN] - - ------------ (a) Translation adjustments, and transfers and reclassifications between accounts. S-4 AVON PRODUCTS, INC. AND SUBSIDIARIES SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS (In millions) Years ended December 31
Additions -------------------- Balance at Charged to Charged Balance beginning costs and to other at end of period expenses accounts Deductions of period ---------- ---------- -------- ---------- --------- 1993 Allowance for doubtful accounts receivable. $23.5 $ 51.7 $ -- $ 52.1(a) $23.1 ===== ====== ===== ====== ===== 1992 Allowance for doubtful accounts receivable. $30.8 $ 47.5 $ -- $ 54.8(a) $23.5 Allowance for long- term receivables and investments..... 33.1 -- -- 33.1(b) -- ----- ------ ----- ------ ----- $63.9 $ 47.5 $ -- $ 87.9 $23.5 ===== ====== ===== ====== ===== 1991 Allowance for doubtful accounts receivable. $21.2 $ 55.2 $ -- $ 45.6(a) $30.8 Allowance for long- term receivables and investments..... 67.5 73.8 -- 108.2(b) 33.1 ----- ------ ----- ------ ----- $88.7 $129.0 $ -- $153.8 $63.9 ===== ====== ===== ====== =====
[FN] - - ------------ (a)Accounts written off, less recoveries and foreign currency translation adjustment. (b)Write off of various notes and other securities, which Avon received in connection with the sale of health care and other businesses. S-5 AVON PRODUCTS, INC. AND SUBSIDIARIES SCHEDULE IX--SHORT-TERM BORROWINGS (In millions) Years ended December 31 Maximum Average Weighted Category of Weighted amount amount average aggregate Balance average outstanding outstanding interest rate short-term at end of interest during the during the during the borrowings(a) period rate(b) period period(c) period(b)(c) - - ------------- --------- -------- ----------- ----------- ------------- 1993 Payable to banks. $ 16.1 9% $250.0 $159.9 4% 1992 Payable to banks. $ 4.1 11% $285.2 $198.2 5% 1991 Payable to banks. $104.0 6% $260.9 $173.8 7% [FN] - - ------------- (a) Most short-term borrowings are notes payable to banks of domestic and foreign subsidiaries. Most of the notes of foreign subsidiaries are payable in local currency. (b) Includes interest rates for borrowings of foreign subsidiaries operating in highly inflationary economies. (c) The average short-term borrowings and the weighted average interest rate were calculated on borrowings outstanding at the end of each month. SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION (In millions)
Years ended December 31 ----------------------- 1993 1992 1991 ---- ---- ---- Taxes, other than payroll and income taxes........... $60.1 $55.5 $50.7
S-6 EX-99 2 EXHIBIT-INDEX SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1993 Commission file number 1-4881 ____________ AVON PRODUCTS, INC. (Exact name of registrant as specified in its charter) ____________ EXHIBITS INDEX TO EXHIBITS Exhibit Number Description - - ------- ----------- 3.1 --Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on August 12, 1988. 3.2 --By-laws, as amended to April 27, 1990, of Avon (incorporated by reference to Exhibit 3.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 4.1 --Instrument defining the rights of holders of Avon's preferred share purchase rights to purchase Avon's Series A Junior Participating Preferred Stock (reference is made to Article IIIA of the restated Certificate of Incorporation of Avon, filed with the Secretary of State of New York State on August 12, 1988 and included as Exhibit 3.1 to this Annual Report on Form 10-K). 4.2 --Rights Agreement, dated as of March 30, 1988 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (as successor to Morgan Shareholder Services Trust Company) (incorporated by reference to Exhibit 1 to Avon's Registration Statement on Form 8-A, filed April 7, 1988). 4.3 --Amendment, dated as of January 3, 1989, to the Rights Agreement (incorporated by reference to Exhibit 3 to Avon's Amendment No. 1 on Form 8, filed January 4, 1989, amending its Registration Statement on Form 8-A, filed April 7, 1988). 4.4 --Second Amendment, dated as of April 5, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(c) to Avon's Current Report on Form 8-K, dated April 5, 1990). 4.5 --Third Amendment, dated as of May 10, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(d) to Avon's Current Report on Form 8-K, dated May 10, 1990). 4.6 --Multifacility Credit Agreement, dated as of June 17, 1992, among Avon Capital Corporation, Avon and a group of banks (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1992). 1 Exhibit Number Description - - ------- ----------- 4.7 --First Amendment, dated as of April 15, 1993, to the Multi- facility Credit Agreement, dated as of June 17, 1992, among Avon Capital Corporation, Avon and a group of banks (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.1* --Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders May 6, 1993 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.2* --Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan. 10.3* --Avon Products, Inc. 1994 Long-Term Incentive Plan, effective as of January 1, 1994. 10.4* --Avon Products, Inc. 1970 Stock Option Incentive Plan, as amended and restated through May 4, 1989 (incorporated by reference to Exhibit 4.6 to Avon's Registration Statement on Form S-8, Registration No. 33-28653, filed May 18, 1989). 10.5* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. 1970 Stock Option Incentive Plan as amended and restated through May 4, 1989 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.6* --Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated through July 1, 1991 (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.7* --First Amendment, dated as of January 21, 1994, to the Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated through July 1, 1991. 10.8* --The Supplemental Life Plan of Avon, effective as of January 1, 1990 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991). 10.9* --Trust Agreement, amended and restated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 2 Exhibit Number Description - - ------- ----------- 10.10* --First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* --Second Amendment, dated as of June 12, 1992 to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.12* --Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.13* --The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of October 8, 1990 (incorporated by reference to Exhibit 10.5 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.14* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of October 8, 1990 (incorporated by reference to Exhibit 10.5 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.15* --Trust Agreement, dated as of August 3, 1989, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.4 to Avon's Annual Report of Form 10-K for the year ended December 31, 1989). 10.16 --Not Used. 10.17* --Instrument of Amendment, effective as of April 1, 1990 amending various employee benefit plans and agreements as stipulated in the Instrument of Amendment (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 10.18* --Employment Agreement, dated as of November 5, 1992, between Avon and James E. Preston (incorporated by reference to Exhibit 10.10 to Avon's Annual Report on Form 10-K for the year ended December 31, 1992). 3 Exhibit Number Description - - ------- ----------- 10.19* --Non-Qualified Stock Option Award, dated as of December 5, 1991, granted by Avon to James E. Preston (incorporated by reference to Exhibit 10.11 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.20* --Employment Agreement, dated as of November 5, 1992, between Avon and Edward J. Robinson (incorporated by reference to Exhibit 10.12 to Avon's Annual Report on Form 10-K for the year ended December 31, 1992). 10.21* --Restricted Stock Agreement, effective as of November 4, 1993, granted by Avon to Edward J. Robinson. 10.22* --Employment Agreement, dated as of January 2, 1993, between Avon and Siri S. Marshall (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.23* --Avon Products, Inc. Directors' Retirement Plan, effective as of January 1, 1988 (incorporated by reference to Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.24* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. Directors' Retirement Plan (incorporated by reference to Exhibit 10.6 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.25* --Trust Agreement, dated as of December 31, 1991, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.26* --First Amendment, dated as of November 5, 1992, to the Trust Agreement dated as of December 31, 1991, by and between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.7 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 11.1 --Statement re computation of primary income per share. 11.2 --Statement re computation of fully diluted income per share. 13 --Portions of the Annual Report to Shareholders for the year ended December 31, 1993 incorporated by reference in response to Items 5 through 8 in this filing. 21 --Subsidiaries of the registrant. 4 Exhibit Number Description - - ------- ----------- 23 --Consent of Coopers & Lybrand (set forth on page S-2 of this Annual Report on Form 10-K). 24 --Power of Attorney. 99 --Financial statements for the Avon Products, Inc. Employees' Savings and Stock Ownership Plan and the Avon Mirabella/ Lomalinda Employees' Savings Plan for the year ended December 31, 1993 will be filed by amendment. *The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. 5 EX-3.1 3 EX-3.1 EXHIBIT 3.1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF AVON PRODUCTS, INC. Under Section 807 of the Business Corporation Law We, HICKS B. WALDRON and W. THOMAS KNIGHT, being respectively Chairman of the Board and Secretary of AVON PRODUCTS, INC. (the "Corporation"), do hereby certify as follows: 1. The name of the Corporation is AVON PRODUCTS, INC. 2. The name under which the Corporation was formed is California Perfume Company, Inc. 3. The Certificate of Incorporation of the Corporation was filed by the Department of State of the State of New York on January 27, 1916, and Restated Certificates of Incorporation were filed by the Department of State of the State of New York on May 3, 1984, April 11, 1986, and May 5, 1988. 4. The text of the Certificate of Incorporation of the Corporation as heretofore amended is hereby restated without amendment or change to read as herein set forth in full: ARTICLE I: The corporate name is AVON PRODUCTS, INC. ARTICLE II: The purposes for which the Corporation is formed are: To develop, manufacture, produce, provide, operate, distribute and deal in and with services, property and goods of all kinds including without limitation engaging in the manufacture and distribution of cosmetics and toiletries. To engage in any lawful act or activity for which corporations may be organized under the Business Corporation Law of the State of New York. ARTICLE III: The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 225,000,000 shares, divided into two classes consisting of 200,000,000 shares of Common Stock, par value $.50 per share (the "Common Stock"), and 25,000,000 shares of Preferred Stock, par value $1.00 per share (the "Preferred Stock"). The shares of authorized Common Stock of the Corporation shall be identical in all respects and shall have equal rights and privileges. The Board of Directors shall have authority by resolution to issue the shares of Preferred Stock from time to time on such terms as it may determine and to divide the Preferred Stock into one or more classes or 1 series and, in connection with the creation of any such class or series, to determine and fix by the resolution or resolutions providing for the issuance of shares thereof the designation, powers and relative participating, optional, or other special rights of such class or series, and the qualifications, limitations or restrictions thereof, to the full extent now or hereafter permitted by law. The holders of capital stock of the Corporation shall not have any preemptive rights. ARTICLE lllA. Series A Junior Participating Preferred Stock: 1. Designation and Amount. An aggregate of 800,000 shares of Preferred Stock, par value $l.00, of the Corporation are hereby constituted as a series designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock"). Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. 2. Dividends and Distributions. a. Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $0.50 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10 or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount 2 by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. b. The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph 1 of this Section A immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $l0 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. c. Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of shares of Series A Preferred Stock shall have the following voting rights: a. Subject to the provision for adjustment, hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the shareholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 3 b. Except as otherwise provided herein, in any other Certificate of Amendment creating a series of Preferred Stock or any similar stock, or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of shareholders of the Corporation. (c) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no voting rights. 4. Certain Restrictions. (a). Whenever quarterly dividends or other dividends or distribution payable on the Series A Preferred Stock as provided in Section B are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation, or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph 1 of this Section D purchase or otherwise acquire such shares at such time and in such manner. 4 5. Reacquired Shares. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, in any other Certificate of Amendment creating a series of Preferred Stock or any similar stock or as otherwise required by law. 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (ii) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitles immediately prior to such event under the proviso in clause (i) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and /or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change 5 of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. Redemption. The shares of Series A Preferred Stock shall not be redeemable. 9. Rank. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Corporation's Preferred Stock. 10. Amendment. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single series. ARTICLE IIIB. There is hereby established a series of the Corporation's authorized shares of Preferred Stock of the par value of $1 each ("Preferred Stock"), and the authorized number of shares of that series, and the designation, relative rights, preferences and limitations thereof are as follows: 1. Designation. The series of Preferred Stock established hereby shall be designated the "$2.00 Preferred Equity-Redemption Cumulative Stock" (hereinafter called the "$2.00 Redeemable Preferred Stock") and the authorized number of shares of $2.00 Redeemable Preferred Stock shall be 18,000,000 shares. 2. Dividends. (a) In respect of the period beginning on June 1, 1988 and ending on and including September 1, 1991 (the "Preference Period"), the holders of outstanding shares of the $2.00 Redeemable Preferred Stock will be entitled to receive, when and as declared by the Board of Directors out of funds legally available therefor, cumulative cash dividends at the per share rate of $2.00 per annum and not more, payable quarterly on March 1, June 1, September 1 and December 1 of each year, commencing September 1, 1988. Each such dividend will be payable to holders of record as they appear on the stock books of the Corporation on such record dates, not less than 10 nor more than 50 days preceeding the payment dates thereof, as shall be fixed by the Board of Directors. Dividends on the $2.00 Redeemable Preferred Stock in respect of the Preference Period will be cumulative from June 1, 1988 to and including the earliest to occur of September 1, 1991, the date of redemption of the $2.00 Redeemable Preferred Stock and the date of final distribution of assets upon Liquidation (as hereinafter defined) of the Corporation. In the case of shares of $2.00 Redeemable Preferred Stock issued upon transfer, dividends in respect of the Preference Period shall be cumulative from the quarterly dividend payment date next preceding the date of issue of such shares to which dividends have been paid, unless the date of issue is a quarterly dividend payment date or is a date after the record date for the determination of holders of shares of $2.00 Redeemable Preferred Stock entitled to receive a quarterly dividend and before such quarterly dividend payment date, in either of which events such dividends shall be cumulative from such quarterly dividend date; provided that, if dividends shall not be paid to 6 that quarterly dividend date, then dividends shall be cumulative from the quarterly dividend date to which dividends have been paid or, if dividends have never been paid, from June 1, 1988. Accumulated dividends shall not bear interest. Dividends payable on the $2.00 Redeemable Preferred Stock for any period less than a full quarter dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. (b) No dividend shall be declared or paid or set apart for payment on, and no other distribution shall be ordered or made in respect of, Common Stock or on any other class of stock of the Corporation ranking junior to or on a parity with the $2.00 Redeemable Preferred Stock as to dividends (other than dividends payable in Common Stock or in any other class of stock of the Corporation ranking junior to the $2.00 Redeemable Preferred Stock as to dividends and distribution of assets upon Liquidation) or distribution of assets upon Liquidation, and no payment shall be made for or set aside for the purchase or redemption of any other class of stock of the Corporation ranking junior to or on a parity with the $2.00 Redeemable Preferred Stock as to dividends or distribution of assets upon Liquidation, until full cumulative dividends payable for all past quarterly dividend periods in the Preference Period and for the current dividend period (if during the Preference Period) on all outstanding shares of the $2.00 redeemable Preferred Stock have been paid, or declared and set apart for payment, in full; provided that the Corporation may pay less than all cumulated and unpaid dividends on any class or series of stock ranking on a parity with the $2.00 Redeemable Preferred Stock in respect of dividends if such payment is made ratably in accordance with the respective cumulated and unpaid dividends on the $2.00 Redeemable Preferred Stock and such series of stock ranking on a parity with the $2.00 Redeemable Preferred Stock in respect of dividends. 3. Redemptions. (a) Final Redemption. On September 1, 1991 (the "Final Redemption Date"), the Corporation shall redeem, to the fullest extent permitted by applicable law, all outstanding shares of $2.00 Redeemable Preferred Stock in exchange for, and through the issue by the Corporation in the manner provided hereinafter of, fully paid and non-assessable shares of Common Stock. On such date, a holder of shares of $2.00 Redeemable Preferred Stock shall receive, upon redemption of the $2.00 Redeemable Preferred Stock, the number of shares of Common Stock equal to the product of the common equivalent rate (determined as Final Redemption Date, multiplied by the number of shares of $2.00 Redeemable Preferred Stock owned by such holder, together with an amount in cash equal to accrued and unpaid dividends to the Final Redemption Date, whether or not earned or declared, out of funds legally available therefor. If for any reason the Corporation does not redeem all outstanding shares of $2.00 Redeemable Preferred Stock as provided in this paragraph (a), then the Corporation shall so redeem such shares as promptly as practicable and, until all outstanding shares of $2.00 Redeemable Preferred Stock have been so redeemed (i) no dividend shall be declared or paid or set apart for payment on, and no other distribution shall be ordered or made in respect of, the Common Stock or any other class of stock ranking junior to or on a parity with the $2,00 Redeemable Preferred Stock as to dividends or distribution of assets upon Liquidation, (ii) no payment shall be made or set aside for the purchase or redemption of any class of stock of the Corporation ranking junior to or on a parity with the $2.00 Redeemable Preferred Stock as to dividends or distribution of assets upon Liquidation, and (iii) the Corporation shall not take any of the actions specified in paragraph (d) (A) (ii)-(iv) of this Section 3. 7 (b) Accelerated Redemption. In the event (i) of any consolidation or merger of the Corporation as a result of which the holders of Common Stock shall be entitled to receive stock, other securities or other assets with respect to or in exchange for Common Stock or of any sale or (ii) the Corporation shall pay any regular quarterly cash dividend or any other cash dividend with respect to shares of its Common Stock at a cumulative rate per annum equal to or greater then $1.50 per share, then the Corporation shall redeem all outstanding shares of $2.00 Redeemable Preferred Stock (y) in the case of clause (i) above, on the day of the con- summation of such consolidation, merger, sale or conveyance, or (z) in the case of clause (ii) above, on the business day next preceding the date fixed as the record date for the determination of holders of shares of Common Stock entitled to receive such cash dividend. In any such event, the shares of $2.00 Redeemable Preferred Stock shall be redeemed in exchange for, and through the issue by the Corporation in the manner provided hereinafter of, fully paid and non-assessable shares of Common Stock (determined as to each holder of shares of $2.00 Redeemable Preferred Stock by multiplying the number of shares of $2.00 Redeemable Preferred Stock owned by such holder and the common equivalent rate in effect on such day) plus a premium per share determined as set forth below, together with accrued and unpaid dividends to the date fixed for redemption, whether or not earned or declared. If redeemed during Premium the period beginning Per Share June 1, 1988 $3.25 September 1, 1988 $3.00 December 1, 1988 $2.75 March 1, 1989 $2.50 June 1, 1989 $2.25 September 1, 1989 $2.00 December 1, 1989 $1.75 March 1, 1990 $1.50 June 1, 1990 $1.25 September 1, 1990 $1.00 December 1, 1990 $0.75 March 1, 1991 $0.50 June 1, 1991 $0.25 July 1, 1991 $0.00 At the Corporation's option such premium and accrued and unpaid dividends may be paid in cash out of funds legally available therefor or in shares of Common Stock. If the Corporation elects to pay such amounts in Common Stock, the number of shares of Common Stock payable in respect thereof for each share of $2.00 Redeemable Preferred Stock shall be determined by dividing the aggregate of such amounts per share by the current market price (as defined in clause (E) of paragraph (d) of this Section 3) of the Common Stock on the second Trading Date preceding the date fixed for redemption pursuant to this paragraph (b). (c) Optional Redemption. The shares of $2.00 Redeemable Preferred Stock may be redeemed by the Corporation, at its option, as a whole or in part (subject to the last sentence of this paragraph (c) ), at any time or from time to time prior to September 1, 1991 subject to the notice provisions set forth in paragraph (k) of this Section 3, at the following redemption prices, plus an amount equal to accrued and unpaid 8 dividends to the date fixed for redemption, whether or not earned or declared (the redemption price plus such accrued and unpaid dividends, collectively, the "Call Price"): If redeemed during Redemption the period beginning Price Per Share June 1, 1988 $34.75 September 1, 1988 $34.50 December 1, 1988 $34.25 March 1, 1989 $34.00 June 1, 1989 $33.75 September 1, 1989 $33.50 December 1, 1989 $33.25 March 1, 1990 $33.00 June 1, 1990 $32.75 September 1, 1990 $32.50 December 1, 1990 $32.25 March 1, 1991 $32.00 June 1, 1991 $31.75 July 1, 1991 $31.50 At the Corporation's option the Call Price may be paid in cash of funds legally available therefor or in shares of Common Stock. If the Corporation elects to pay the Call Price in Common Stock, the number of shares of Common Stock payable pursuant to this paragraph (c) for each share of $2.00 Redeemable Preferred Stock shall be determined by dividing the Call Price per share by the current market price (as defined in clause (E) of paragraph (d) of this Section 3) of the Common Stock on the second Trading Date preceding the date notice of redemption is first mailed to holders of $2.00 Redeemable Preferred Stock as provided in paragraph (k) of this Section 3. In no event shall the Corporation redeem less than all the outstanding shares of $2.00 Redeemable Preferred Stock pursuant to this paragraph (c) unless full cumulative dividends shall have been paid or declared and set apart for payment upon all outstanding shares of $2.00 Redeemable Preferred stock for all past dividend periods during the Preference Period. (d) Common Equivalent Rate; Cash Option; Adjustments. The common equivalent rate to be used to determine the number of shares of Common stock to be delivered on the redemption of the $2.00 Redeemable Preferred Stock in exchange for shares of Common Stock pursuant to para- graph (a) or (b) of this Section 3 shall be initially one (1) share of Common Stock for each share of $2.00 Redeemable Preferred Stock; provided that such common equivalent rate shall be subject to adjustment from time to time in certain instances provided below in this paragraph (d). All adjustments to the common equivalent rate shall be calculated to the nearest 1/100th of a share of Common Stock. The common equivalent rate in effect at any time is herein called the "common equivalent rate." Anything in paragraph (a) or (b) of this Section 3 notwithstanding at the Corporation's option, the Corporation may redeem the $2.00 Redeemable Preferred Stock for cash in lieu of redeeming the $2.00 Redeemable Preferred Stock in exchange for Common Stock. If the Corporation elects to pay the redemption price in cash, the amount payable for each share of $2.00 Redeemable Preferred Stock shall be the product of the current market price (as defined in clause (E) of paragraph (d) of this Section 3) of the Common Stock on the second Trading Date preceding (i) in the case of 9 paragraph (a), the date notice of redemption is first mailed to holders of $2.00 Redeemable Preferred Stock as provided in paragraph (k) of this Section 3 and (ii) in the case of paragraph (b), the date fixed for redemption, multiplied by the number of shares of Common Stock to which the holder of such share of $2.00 Redeemable Preferred Stock would otherwise be entitled pursuant to paragraph (a) or (b) of this Section 3. (A) If the Corporation shall (i) pay a dividend or make a distribution with respect to Common Stock in shares of Common Stock, (ii) subdivide or split its outstanding shares of Common Stock, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its shares of Common Stock any shares of Common Stock of the Corporation, the common equivalent rate in effect immediately prior thereto shall be adjusted so that the holder of a share of the $2.00 Redeemable Preferred Stock surrendered for redemption shall be entitled to receive the number of share of Common Stock of the Corporation which he would have owned or been entitled to receive after the happening of any of the events described above had such shares of the $2.00 Redeemable Preferred Stock been surrendered for redemption at the common equivalent rate in effect immediately prior to such time. Such adjustments shall become effective at the opening of business on the business day next following the record date for determination of stockholders entitled to receive such dividend or distribution in the case of a dividend or distribution and shall become effective immediately after the effective date in case of a subdivision, combination or reclassification; and any shares of Common Stock issuable in payment of a dividend shall be deemed to have been issued immediately prior to the close of business on the record date for such dividend for purposes of calculating the number of outstanding shares of Common Stock under clauses (B) and (C) below. (B) If the Corporation shall issue rights or warrants to all holders of its Common Stock entitling them (for a period not exceeding 45 days from the date of such issuance) to subscribe for or pur- chase shares of Common Stock at a price per share less than the current market price per share (determined pursuant to clause (E) below) of the Common Stock on the record date mentioned below, then in each case the common equivalent rate shall be adjusted by multiplying the common equivalent rate in effect immediately prior thereto by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the denominator shall be the number of shares of Common Stock outstanding on the date of issuance of such rights or warrants, immediately prior to such issuance, plus the number of shares which the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at such current market price (determined by multiplying such total number of shares by the exercise price of such rights or warrants and dividing the product so obtained by such current market price). Shares of Common Stock owned by or held for the account of the Corporation shall not be deemed to be outstanding for purposes of such computation. Such adjustment shall become effective at the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the common equivalent rate shall be readjusted to the common equivalent rate which would then be in effect had the adjustments made upon the issuance of such 10 rights or warrants been made upon the basis of delivery of only the number of shares of Common Stock actually delivered. (C) If the Corporation shall distribute to all holders of its indebtedness or other assets (excluding any cash dividends or distributions and dividends referred to in clause (A) above), or shall distribute to all holders of its Common Stock rights or warrants to subscribe for or purchase securities of the Corporation or any of its subsidiaries (other than those referred to in clause (B) above), then in each such case the common equivalent rate shall be adjusted by multiplying the common equivalent rate in effect immediately prior to the date of such distribution by a fraction, of which the numerator shall be the current market price per share of Common Stock (determined pursuant to clause (E) below) on the record date mentioned below, and of which the denominator shall be such current market price of Common Stock less the then fair market value (as determined by the Board of Directors of the Corporation, whose determination shall be conclusive) as of such record date of the portion of the assets or evidences of indebtedness so distributed, or of such subscription rights or warrants, applicable to one share of Common Stock. Such adjustment shall become effective on the opening of business on the business day next following the record date for the determination of stockholders entitled to receive such distribution. (D) Anything in this Section 3 notwithstanding, the Corporation shall be entitled to make such adjustments in the common equivalent rate, in addition to those required by this Section 3, as it inits discretion shall determine to be advisable in order that any stock distribution of securities convertible into or exchangeable for stock, or any transaction which could be treated as any of the foregoing transactions pursuant to Section 305 of the Internal Revenue Code of 1986, as amended, thereafter made by the Corporation to its stockholders shall not be taxable. (E) As used in this Section 3, the current market price per share of Common Stock on any date shall be the average of the daily Closing Prices for the ten (10) consecutive Trading Dates ending on the date of determination of the current market price. (F) In any case in which this Section 3 shall require that an adjustment as a result of any event become effective at the opening of business on the business day next following a record date and the date fixed for redemption pursuant to paragraph (a), (b) or (c) of this Section 3 occurs after such record date, but before the occurrence of such event, the Corporation may elect to defer until after the occurrence of such event (i) issuing to the holder of any shares of the $2.00 Redeemable Preferred Stock surrendered for redemption the additional shares of Common Stock issuable upon such redemption over and above the shares of Common Stock issuable upon such redemption on the basis of the common equivalent rate prior to adjustment and (ii) paying to such holder any amount in cash in lieu of a fractional share of Common Stock pursuant to paragraph (f) of this Section 3. (e) Notice of Adjustments. Whenever the common equivalent rate is adjusted as herein provided: (A) The Corporation shall forthwith compute the adjusted common equivalent rate in accordance with this Section 3 and shall prepare a certificate signed by the Chief Executive Officer, the President or the Chief Financial Officer and by the Treasurer or an Assistant 11 Treasurer of the Corporation setting forth the adjusted common equivalent rate, the method of calculation thereof in reasonable detail and the facts requiring such adjustment and upon which such adjustment is based, and such certificate shall forthwith be filed at its principal office and with the transfer agent or agents for the $2.00 Redeemable Preferred Stock and the Common Stock; and (B) A notice stating that the common equivalent rate has been adjusted, the facts requiring such adjustments and upon which such adjustments are based and setting forth the adjusted common equivalent rate shall be mailed to the holders of record of the outstanding shares of the $2.00 Redeemable Preferred Stock at or prior to the time the Corporation mails an interim statement to its stockholders covering the quarterly period during which the facts requiring such adjustment occurred, but in any event within 45 days of the end of such quarter. (f) Fractional Shares. No fractional shares of Common Stock shall be issued upon redemption of shares of the $2.00 Redeemable Preferred Stock but, in lieu of any fraction of a share of Common Stock which would otherwise be issuable in respect of the aggregate number of shares of the $2.00 Redeemable Preferred Stock surrendered for redemption at one time by the same holder, the Corporation shall pay in cash as an adjustment of such fraction an amount equal to the same fraction of the Closing Price of the Common Stock on the last second Trading Date preceding the date fixed for redemption. (g) Reservation of Shares. The Corporation shall at all times reserve and keep available out of the authorized but unissued shares of Common Stock the maximum number of shares of Common Stock for which all shares of $2.00 Redeemable Preferred Stock from time to time outstanding are redeemable, but shares of Common Stock held in the treasury of the Corporation may in its discretion be delivered upon any redemption of shares of $2.00 Redeemable Preferred Stock. (h) Taxes. The Corporation will pay any and all issue and other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on redemption of shares of $2.00 to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any shares of Common Stock in a name other than that in which the shares of $2.00 Redeemable Preferred Stock so redeemed were registered and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid or is not required to be paid. (i) Cancellation. Shares of $2.00 Redeemable Preferred Stock redeemed shall be canceled and shall have the status of authorized but unissued shares of Preferred Stock, but such shares shall not be reissued as shares of $2.00 Redeemable Preferred Stock. (j) Definitions. As used in this Section 3, the term "Closing Price" on any day shall mean the last reported sales price regular way on such day or in case no such sale takes place on such day, the average of the reported closing bid and asked prices regular way, in each case on the New York Stock Exchange, or, if the Common Stock is not listed or admitted to trading on such Exchange, on the principal national securities exchange on which the Common Stock is listed or admitted to trading, or, if 12 not listed or admitted to trading on any national securities exchange, the average of the closing bid and asked prices of the Common Stock in the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similarly generally accepted reporting service, or if not so available in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors of the Corporation for that purpose, and the term "Trading Date" shall mean a date on which the New York Stock Exchange (or any successor to such Exchange), is open for the transaction of business. (k) Notice of Redemption. The Corporation will cause notification of any redemption of shares of $2.00 Redeemable Preferred Stock to be mailed, first class postage prepaid, to record holders of the $2.00 Redeemable Preferred Stock to be redeemed at such holder's address as it appears on the stock register of the Corporation, not less than 30 nor more than 60 days prior to the date fixed for redemption. Each such notice shall state: (1) the redemption date; (2) the number of shares of $2.00 Redeemable Preferred Stock to be redeemed and if less than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (3) the redemption price and whether the redemption price shall be paid in cash or in Common Stock or a combination thereof; (4) the place or places where certificates for such shares are to be surrendered for redemption; and (5) that dividends on the shares of $2.00 Redeemable Preferred Stock to be redeemed will cease to accrue on such redemption date unless default shall be made in providing the funds or shares of Common Stock at the time and place specified for the payment of the redemption price. The Corporation's obligation to provide funds or shares of Common Stock in accordance with this Section 3 shall be deemed fulfilled if on or before the redemption date, the Corporation shall deposit with a bank or trust company having an office or agency in New York City and having a capital and surplus of at least $50,000,000, funds or shares of Common Stock necessary for such redemption, in trust for the account of the holders of the shares to be redeemed (and so as to be and continue to be available therefor), with irrevocable instructions and authority to such bank or trust company that such funds or shares of Common Stock be applied to the redemption of the shares of $2.00 Redeemable Preferred Stock so called for redemption. Any interest accrued on such funds shall be paid to the Corporation from time to time. Any funds or shares of Common Stock so deposited and unclaimed at the end of three years from such redemption date shall be repaid or released to the Corporation, after which the holder or holders of such shares of $2.00 Redeemable Preferred Stock so called for redemption shall look only to the Corporation for payment of the redemption price. Each holder of shares of $2.00 Redeemable Preferred Stock called for redemption shall surrender the certificates evidencing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the Redemption price. In case less than all the shares represented by any such surrendered certificate are redeemed, a new certificate shall be issued at the expense of the Corporation representing the unredeemed shares. If such notice of redemption shall have been duly given, and if on the date fixed for redemption funds or shares of Common Stock necessary for the redemption shall have been either set aside by the Corporation separate and apart from its other funds or assets in trust for the account of the holders of the shares so to be redeemed (and so as to be and continue to be available therefor) or deposited with a bank or trust company as provided above, then, notwithstanding that the certificates evidencing any shares of $2.00 Redeemable Preferred Stock so called for redemption shall not have been surrendered, the shares represented thereby 13 so called for redemption shall be deemed no longer outstanding, dividends with respect to the shares so called for redemption shall cease to accrue after the date fixed for redemption and all rights with respect to the shares so called for redemption shall forthwith after such date cease and terminate, except for the right of the holders to receive the redemption price without interest upon surrender of their certificates therefor. If ess than all the outstanding shares of $2.00 Redeemable Preferred Stock are to be redeemed, shares to be redeemed shall be selected by the Corporation from outstanding shares of $2.00 Redeemable Preferred Stock not previously called for redemption by lot or pro rata (as nearly as may be) or by any other method determined by the Board of Directors of the Corporation in its sole discretion to be equitable. 4. Liquidation Rights. In the event of any voluntary or invol- untary liquidation, dissolution or winding up (collectively, a "Liquidation") of the Corporation, the holders of shares of $2.00 Redeemable Preferred Stock shall be entitled to have paid to them out of the assets of the Corporation, before any distribution is made to or set apart for the holders of any shares of Common Stock, or of any class or series of stock of the Corporation ranking junior to the $2.00 Redeemable Preferred Stock in respect of distribution of assets upon Liquidation, an amount equal to $1.00 per share, plus an amount equal to any dividends applicable to the Preference Period which have accumulated but have not been paid on or prior to the date of final distribution to holders of $2.00 Redeemable Preferred Stock. If upon any Liquidation of the Corporation the assets of the Corporation or proceeds thereof distributable among the holders of shares of $2.00 Redeemable Preferred Stock and of any class or series of stock ranking on a parity with the $2.00 Preferred Stock as to distribution of assets upon Liquidation shall be insufficient to pay in full the preferential amounts payable to such holders, then such assets or the proceeds thereof shall be distributed among such holders ratably in accordance with the respective amounts that would be payable to such holders with respect to such shares if all amounts payable thereon were paid in full. After payment of the full preferential amount to which holders of $2.00 Redeemable Preferred Stock are entitled as aforesaid, the holders of shares of $2.00 Redeemable Preferred Stock will participate ratably with the holders of Common Stock in any distribution of the remaining assets of the Corporation or proceeds thereof, each holder of shares of $2.00 Redeemable Preferred Stock to participate in any such distribution on the basis of the number of shares of Common Stock determined by multiplying the number of shares of $2.00 Redeemable Preferred Stock owned by such holder and the common equivalent rate in effect at the time of such distribution. For purposes of this Section 4, the voluntary sale lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Corporation to, or a consolidation or merger of the Corporation with, one or more corporations shall not be deemed to be a Liquidation. 5. Voting Rights. In addition to any voting rights that the holders of shares of $2.00 Redeemable Preferred Stock shall be entitled pursuant to any other provision of the Certificate of Incorporation or applicable law, each outstanding share of $2.00 Redeemable Preferred Stock is entitled to vote on all matters submitted to a vote of stockholders of the Corporation, each holder of shares of $2.00 Redeemable Preferred Stock to have the number of votes equal to the product of the number of shares of $2.00 Redeemable Preferred Stock owned by such holder multiplied by the 14 common equivalent rate in effect on the record date for determining the stockholders of the Corporation entitled to vote; provided, that in the case of clauses (a), (b) and (c) below each share of $2.00 Redeemable Preferred Stock shall be entitled to one vote per share. The $2.00 Redeemable Preferred Stock and the Common Stock shall vote as a single class on all matters submitted to a vote of stockholders of the Corporation, except that, for so long as any shares of $2.00 Redeemable Preferred Stock shall be outstanding: (a) The Corporation shall not, without the affirmative vote of holders of two-thirds of the aggregate number of shares of $2.00 Redeemable Preferred Stock at the time outstanding, given by such holders together as one class, and given by vote in person or by proxy at a meeting duly called for that purpose or given in writing, alter or change the rights, preferences or limitations given to the $2.00 Redeemable Preferred Stock herein so as to affect the holders of the $2.00 Redeemable Preferred Stock adversely; (b) The Corporation shall not, without the affirmative vote of the holders of two-thirds of the aggregate number of shares of Preferred Stock of all series at the time outstanding, considered as a class without regard to series and given by vote in person or by proxy at a meeting duly called for that purpose or given in writing: (i) Alter or change the rights, preferences or limitations given to Preferred Stock so as to affect the holders of Preferred Stock adversely, or (ii) Authorize or create any class or stock ranking, either as to payment of dividends or distribution of assets, prior to such Preferred Stock; and (c) The Corporation shall not without the affirmative vote or written consent of the holders of a majority of the aggregate number of shares of Preferred Stock of all series at the time outstanding, considered as a class without regard to series and given by vote in person or by proxy at a meeting duly called for that purpose or given in writing, increase the authorized number of shares of Preferred Stock or authorize or create any class of stock ranking, either as to payment of dividends or distributions of assets, on a parity with such Preferred Stock. 6. Additional Voting Rights. The voting rights specified in this Section 6 are in addition to, and do not otherwise limit, the voting rights specified in Section 5 above. (a) If at any time a default in preferred dividends (as the term "default in preferred dividends" is hereinafter defined) with respect to the $2.00 Redeemable Preferred Stock shall exist or is the Corporation shall fail to redeem the $2.00 Redeemable Preferred Stock on the Final Redemption Date, the holders of $2.00 Redeemable Preferred Stock voting separately as a class, shall have the right to elect two members of the Board of Directors, and the holders of Common Stock shall not be entitled to vote in the election of the two directors of the Corporation to be elected as hereinabove provided. If, at the time, the Corporation shall have any other class or series of Preferred Stock outstanding with voting rights substantially similar to those provided in this Section 6, and a default in preferred dividends (as hereinafter defined) with respect to 15 such Preferred Stock or a failure to redeem such Preferred Stock in accordance with its terms exists, the holders of such Preferred Stock shall be entitled to vote with the holders of the $2.00 Redeemable Preferred Stock, as a class, to elect such members of the Board. Whenever a default in preferred dividends or a failure to redeem shall exist, the Corporation, upon the written request of the holders of 5% or more of the outstanding shares of all affected series of Preferred Stock, shall call a special meeting of the holders of such Preferred Stock, such special meeting or meetings to be held within 120 days after the date on which such request is received by the Corporation for the purpose of enabling such holders to elect members of the Board of Directors; provided that such special meeting or meetings need not be called if an annual meeting of shareholders of the Corporation for the election of directors shall be scheduled to be held within 120 days. Prior to any such meeting or meetings, the number of directors of the Corporation shall be increased to the extent necessary to provide as additional places on the Board of Directors the directorships to be filled by the directors to be elected thereat. If such meeting shall not be called by the proper officers of the Corporation within twenty days after personal service of such written request upon the Secretary of the Corporation, or within twenty days after mailing the same within the United States of America, by registered mail addressed to the Secretary of the Corporation at its principal office, then the holders of record of at least 5% of the shares of all affected series of Preferred Stock then outstanding may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders. Any holder of such Preferred Stock so designated shall have access to the stock books of the Corporation for the purpose of causing meeting of stockholders to be called pursuant to these provisions. Any director elected aforesaid by the holders of such Preferred Stock shall cease to serve as such director whenever all defaults in preferred dividends and all failures to redeem with respect to each affected series of Preferred Stock shall cease to exist. If, prior to the end of the term of any director elected in accordance with the provisions of this Section 6, a vacancy in the office of such director shall occur by reason of death, resignation, removal or disability, or for any other cause, such vacancy shall be filled for the unexpired term by the remaining director elected by the holders of the Preferred Stock which elected the director whose office shall have become vacant. If there shall be a vacancy in the office of both of such directors, such vacancies shall be filled by another election in accordance with this paragraph (a). (b) At any meeting held for the purpose of electing directors at which the holders of all affected series of Preferred Stock shall have the special right, voting separately as a class, to elect directors as provided in this Section 6, the presence, in persona or by proxy of the holders of 50% of the shares of such Preferred Stock then outstanding shall be required to constitute a quorum for the election of any director by the holders of such Preferred Stock as a class. At any such meeting or adjournment thereof, (A) the absence of a quorum of such Preferred Stock shall not prevent the election of directors other than those to be elected by holders of such Preferred Stock voting as a class, and the absence of a quorum for the election of such other directors shall not prevent the election of the directors to be elected by holders of such Preferred Stock voting as a class, and (B) in the absence of either or both such quorums, a majority of the holders present in person or by proxy of the stock or stocks which lack a quorum shall have power to adjourn the 16 meeting for the election of directors which they are entitled to elect from time to time without notice other than announcement at the meeting until a quorum shall be present. (c) For the purposes of this Section 6, a "default in preferred dividends" shall be deemed to have occurred whenever the amount of dividends in arrears upon any series of Preferred Stock shall be equivalent to six full quarter-yearly dividends or more, and, having so occurred, such default in preferred dividends shall be deemed to exist thereafter until, but only until, all dividends in arrears on all shares of Preferred Stock then outstanding, of each and every series, shall have been paid. 7. The shares of Common Stock issuable upon redemption of the shares of $2.00 Redeemable Preferred Stock, when the same shall be issued in accordance with the terms hereof, are hereby declared to be and shall be fully paid shares of Common Stock and not liable to any calls or assessments thereon, and the holders thereof shall not be liable for any further payments in respect thereof. 5. The amendment to the Certificate of Incorporation of the Corporation set forth in paragraph 4 of this Certificate was authorized by the Board of Directors on June 3, 1988 pursuant to authority vested in the Board by the Certificate of Incorporation and the By-Laws of the Corporation and in accordance with Section 502 of the New York Business Corporation Law. ARTICLE IV: The office of the Corporation is to be located in the City and County of New York, State of New York. ARTICLE V: The number of directors of the Corporation shall be not less than ten (10) nor more than twenty (20). The number of directors to be chosen within said maximum and minimum limits shall be determined in the manner prescribed by the By-Laws. The Board of Directors shall be divided into three classes as nearly equal in number as possible, with each class having at least three members, with the term of office of one class expiring each year. At the annual meeting of shareholders in 1986, directors of the first class shall be elected to hold office for a term expiring at the next succeeding annual meeting, directors of the second class shall be elected to hold office for a term expiring at the second succeeding annual meeting and directors of the third class shall be elected to hold office for a term expiring at the third succeeding annual meeting. At each annual meeting of shareholders after 1986, successors to the directors whose terms shall then expire shallbe elected to hold office for terms expiring at the third succeeding annual meeting. Any vacancies in the Board of Directors, by reason of an increasein the number of directors or otherwise, shall be filled solely by the Board of Directors, by majority vote of the directors then in office, though less than a quorum, but any such director so elected shall hold office only until the next succeeding annual meeting of shareholders. At such annual meeting, such director shall be elected and qualified in the class in which such director is assigned to hold office for the term or remainder of the term of such class. Directors shall continue in office until others are chosen and qualified in their stead. When the number of directors is changed, any newly created directorships or any decrease in directorships shall be so assigned among the classes by a majority of the directors then in office, though less than a quorum, so as to make all classes as nearly equal in number as possible. To the extent of any inequality within the limits of the foregoing, the class or classes 17 caused to have the greatest or greater number of directorships shall be the class or classes then having the last date or the later dates for the expirationof its or their terms. No decrease in the number of directors shall shorten the term of any incumbent director. Any director may be removed from office as a director but only for cause by the affirmative vote of the holders of eighty percent of the combined voting power of the then outstanding shares of stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Notwithstanding anything contained in this Restated Certificate of Incorporation to the contrary, the affirmative vote of the holders of a least eighty percent of the combined voting power of the then outstanding shares of the stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or adopt any provisions inconsistent with or repeal this Article V. The directors need not be shareholders of the Corporation. ARTICLE VI: At all elections of directors of the Corporation each shareholder shall be entitled to as many votes as shall equal the number of votes which (except for the provisions of this article) he would be entitled to cast for the election of directors with respect to his shares of stock multiplied by the number of directors to be elected, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them, as he may see fit. ARTICLE VII: (A) In addition to any affirmative vote required by law or this Restated Certificate of Incorporation, 1. any merger of consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) an Interested Shareholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Shareholder, or 2. any sale, lease, exchange, mortgage, pledge, grant of a security interest, transfer or other disposition (in one transaction or a series of transactions) to or with (a) an Interested Shareholder or (b) an Affiliate of an Interested Shareholder of assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $25,000,000 or more, or 3. the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary, having an aggregate Fair Market Value of $25,000,000 or more to an Interested Shareholder or any Affiliate of an Interested Shareholder in exchange for cash, securities or other property (or combination thereof), or 4. the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of an Interested Shareholder or 5. any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has 18 the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary directly or indirectly beneficially owned by (a) an Interested Shareholder or (b) an Affiliate of an Interested Shareholder shall require either: (a) the approval of a majority of the Disinterested Directors (as hereinafter defined) or (b) the affirmative vote of the holders of that amount of the voting power of the Voting Stock (as hereinafter defined) equal to the sum of (1) the voting power of the shares of Voting Stock of which their Interested Shareholder is the beneficial owner and (2) a majority of the voting power of the remaining outstanding shares of Voting Stock, voting together as a single class; provided, however, that no such vote shall be required for the purchase by the Corporation of shares of Voting Stock from an Interested Shareholder unless such vote is required by Paragraph B of this Article VII. (B) Any purchase by the Corporation of shares of Voting Stock from an Interested Shareholder, other than pursuant to an offer to the holders of all of the outstanding shares of the same class of Voting Stock as those so purchased, at a per share price in excess of the Market Price (as hereinafter defined), at the time of such purchase, of the shares so purchased, shall require the affirmative vote of the holders of that amount of the voting power of the Voting Stock equal to the sum of (i) the voting power of the shares of Voting Stock of which the Interested Shareholder is the beneficial owner (as hereinafter defined) and (ii) a majority of the voting power of the remaining outstanding shares of Voting Stock, voting together as a single class. (C) It shall be the duty of any Interested Shareholder: (i) to give or cause to be given written notice to the Corporation, immediately upon becoming an Interested Shareholder, of such person's status as an Interested Shareholder and of such other information as the Corporation may reasonably require with respect to identifying all owners and amount of ownership of the outstanding Voting Stock of which such Interested Shareholder is the beneficial owner, and (ii) to notify the Corporation promptly in writing of any change in the information provided in subparagraph (i) of this Paragraph (C), provided, however, that the failure of an Interested Shareholder to comply with the provisions of this Paragraph (C) shall not in any way be construed to prevent the Corporation from enforcing the provisions of Paragraphs A and B of this Article VII. (D) For the purposes of this Article VII: 1. "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. 2. "Person" shall mean any individual, firm, corporation or other entity. 3. "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (a) is the beneficial owner, directly or indirectly, of 5% or more of the voting power of the outstanding Voting Stock; or (b) is an Affiliate of the Corporation and at any time 19 within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 5% or more of the voting power of the then outstanding Voting Stock; or (c) is an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in questions beneficially owned by an Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. For the purposes of determining whether a person is an Interested Shareholder, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of subparagraph 4 below but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 4. A person shall be a "beneficial owner" of any Voting Stock: (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (b) which such person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is execrable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise or (ii) the right to vote or to direct the voting thereof pursuant to any agreement, arrangement or understanding; or (c) which is beneficially owned, directly or indirectly, by any other person with which such person or its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. 5. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities and Exchange Act of 1934, as in effect on January 1, 1986. 6. "Subsidiary" shall mean any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that, for purposes of the definition of Interested Shareholder set forth in subparagraph 3, the term "Subsidiary" shall mean only a corporation of which a majority of the voting power of the capital stock entitled to vote generally in the election of directors is owned, directly or indirectly, by the Corporation. 7. "Disinterested Director" shall mean any member of the Board of Directors of the Corporation who is unaffiliated with an Interested Shareholder and was a member of the Board prior to the time that such Interested Shareholder became an Interested Shareholder, and any successor of a Disinterested Director who is unaffiliated with an Interested Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board. 20 8. "Market Price" means the last closing sale price immediately preceding the time in question of a share of the stock in question on the Composite Tape for New York Stock Exchange-Listed Stocks. 9. "Fair Market Value" means: (i) in the case of stock, the Market Price, and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith. (E) A majority of the Disinterested Directors shall have the power to determine for the purpose of this Article VII on the basis of information known to them after reasonable inquiry, (1) whether a person is an Interested Shareholder, (2) the number of shares of Voting Stock beneficially owned by any person, (3) whether a person is an Affiliate or Associate of another, (4) whether a transaction or series of transactions constitutes one of the transactions specified in Paragraph (A) hereof. The good faith determination of a majority of the Disinterested Directors shall be conclusive and binding for all purposes of this Article VII. (F) Notwithstanding any other provision of this Restated Certificate of Incorporation or the By-Laws of the Corporation or the fact that a lesser percentage may be specified by law, this Restated Certificate of Incorporation or the By-Laws of the Corporation, the affirmative vote of the holders of at least eighty percent of the combined voting power of the then outstanding Voting Stock, voting together as a single class, shall be required to amend, alter or adopt any provision inconsistent with or repeal this Article VII. The Secretary of State is designed as the agent of the Corporation upon whom process in any action or proceeding against it may be served; and the address to which the Secretary of State shall mail a copy of any process against the Corporation which may be served upon him pursuant to law is : 9 West 57th Street New York, New York 10019 ARTICLE VIII: No person who is or was a director of the Corporation shall have personal liability to the Corporation or its shareholders for damages for any breach of duty in such capacity, provided that the foregoing shall not limit the liability of any such person (i) if a judgment or other final adjudication adverse to him establishes that his acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law or that he personally gained, in fact, a financial profit or other advantage to which he was not legally entitled or that his acts violated Section 719 of the Business Corporation Law of New York or, (ii) for any act or omission occurring prior to the adoption of this Article VIII. No Amendment to our repeal of this Article VIII shall apply to or have any effect on the liability or alleged liability of any such person to the Corporation for or with respect to any acts or omissions of such person occurring prior to such amendment or repeal. If the Business Corporation law of New York is amended hereafter to expand or limit the liability of a director, then the liability of a person who is or was a director of the Corporation shall be deemed to be expanded to the extent required or limited to the extent permitted by the Business Corporation Law of New York, as so amended. 5. This restatement of the Certificate of Incorporation was authorized by the Board of Directors of the Corporation. IN WITNESS WHEREOF, we have subscribed this certificate as of the 4th day of August, 1988, and we affirm the statements contained herein 21 as true under the penalties of perjury. /s/Hicks B. Waldron Chairman of the Board /s/W. Thomas Knight Secretary 22 EX-10.2 4 EX-10.2 EXHIBIT 10.2 EXHIBIT 10.2 AVON PRODUCTS, INC. 1993 STOCK INCENTIVE PLAN STOCK OPTION AGREEMENT DATE OF GRANT: JANUARY 7, 1994 1. Grant of Option. Pursuant to the provisions of the Avon Products, Inc., 1993 Stock Incentive Plan (the "Plan"), Avon Products, Inc. (the "Company"), on the above date has granted to (the "Optionee") the right and option to purchase from the Company a total of shares of Common Stock of the Company at the exercise price of $52.50 per share (the "Option"). This Option is subject to the terms and conditions of the Plan and those set forth in this Agreement. All capitalized terms used herein shall have the meaning set forth in the Plan, unless the context requires a different meaning. 2. Exercise of Option (a) This Option shall be exercisable in three installments. The first installment shall be exercisable on the first anniversary of the Date of Grant for 33.3% of the number of shares of Common Stock subject to this option. Thereafter, on each subsequent anniversary of the Grant Date, an installment shall become exercisable for 33.3% and 33.4%, respectively, of the number of shares subject to this Option with the entire option fully exercisable after the third anniversary of the Date of Grant. To the extent that any of the above installments is not exercised when it becomes exercisable, it shall not expire, but shall continue to be exercisable at any time thereafter until this Option shall terminate, expire or be surrendered. An exercise shall be for whole shares only. (b) In accordance with the Plan this entire Option shall be immediately cashed out effective as of the date of any "Change in Control", regardless of whether or not any portion is otherwise exercisable. For this purpose, the "Change in Control Price" shall be the higher of (i) the highest price paid for a share of Stock as reported on the New York Stock Exchange Composite Tape during the 12 month period ending with the effective date of Change in Control or (ii) the highest cash tender offer price for a share of Stock during such period. In the event that a tender offer for Stock consists of a combination of cash and securities, the Change in Control Price calculated under (ii) would be based solely on the cash price equivalent of such offer. (c) Shares may be purchased by giving the Company's Corporate Secretary or Assistant Secretary written notice of exercise, specifying the number of shares to be purchased, in substantially the form of the Notice of Exercise attached hereto as Exhibit A. The notice of exercise shall designate one of the following methods of purchase: (i) tender to the Company of a check for the full exercise price of the shares with respect to which such Option or portion thereof is exercised, or (ii) instructions to the Company to deliver all the shares being exercised to a broker-dealer with whom an arrangement has been made to deliver the full exercise price to the Company. The Company may establish special terms and conditions for this "cashless" exercise, and at any time may terminate availability of this form of purchase. 3. Expiration of Option. The Option shall expire or terminate and may not be exercised to any extent by the Optionee as of the first to occur of the following events: (a) The tenth anniversary of the Date of Grant, or such earlier time as the Company may determine is necessary or appropriate in light of applicable foreign tax laws; or (b) The second anniversary of the date of the Optionee's Termination of Employment by reason of death, Permanent Disability or Retirement; or (c) The Optionee's Termination of Employment for Cause (as defined below); or (d) The date that is ninety days after Termination of Employment of the Optionee for a reason other than for Cause, death, Permanent Disability or Retirement. If the Optionee's employment is involuntarily terminated by the Company other than for Cause, however, the option may be extended for up to an additional 270 days at the discretion of the Company, or (e) The Optionee's violation of any non-disclosure or non-compete covenant applicable to the Optionee as set forth in his or her severance agreement, employment contract or any Company policy, regardless of whether or not the Optionee has terminated employment due to Permanent Disability or Retirement, provided that expiration of the Option may not be effective prior to the date of Termination of Employment. In the event of Termination of Employment because of death, Permanent Disability or Retirement the entire Option shall immediately become exercisable as to all shares, notwithstanding Section 2(a) of this Agreement. "Retirement" means retirement at or after attainment of age 55. "Permanent Disability" shall have the same meaning as that provided by the Company's Long Term Disability Plan regardless of whether or not the Optionee is covered by such plan. "Cause" shall have the same meaning as that provided by the Company Severance Pay Plan applicable to the Optionee or his or her employment contract, if any. In addition, termination for cause shall include any termination due to acts of dishonesty or gross misconduct on the part of the Optionee which results, or is intended to result, in damage to the Company's business or reputation. 4. Tax Withholding. No distribution of shares may be made to the Optionee until the Company has received all amounts required for federal, state or local tax withholding. The method of discharging such withholding obligation shall be elected with the notice of exercise and may include (i) payment by check, (ii) withholding of that number of Option shares by the Company having a Fair Market Value equal to the amount required to satisfy such withholding obligation, or (iii) use of a 'cashless exercise' using a broker-dealer in a manner similar to that described in Section 2(c)(ii) hereof. The method of withholding shall be subject to such rules as the -2- Committee may adopt from time to time. It is recognized by both parties that, based on current laws, the difference between the Fair Market Value of the shares purchased by an option exercise and the exercise price of such shares generally will constitute ordinary taxable income for federal income and "Medicare" tax purposes and for most state and local income tax purposes. 5. Non-Transferability. The Option is non-transferable, except by will or the laws of descent and distribution, if applicable, and shall be exercisable only by the Optionee during his or her lifetime. 6. Notice. Any notices required to be given hereunder to the Company shall be addressed to the Secretary or Assistant Secretary of the Company at the Company's headquarters offices in New York City, New York. Any notice required to be given hereunder to the Optionee shall be addressed to the Optionee at his or her current address shown on the Company's records. Notice shall be sent by mail, express delivery or, if practical, by hand delivery. 7. Other Provisions. The provisions set forth in Section 5 of the Plan are specifically incorporated by reference in this Agreement, including but not limited to those pertaining to the following matters: a. Changes in Capitalization; Merger; Liquidation b. Right to Terminate Employment c. Non-alienation of Benefits d. Choice of Law IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Optionee, have entered this Agreement as of the Date of Grant first above written. AVON PRODUCTS, INC. Optionee Marcia L. Worthing Senior Vice President, Human Resources -3- EX-10.3 5 EX-10.3 EXHIBIT 10.3 EXHIBIT 10.3 AVON PRODUCTS, INC. 1994 Long Term Incentive Plan I. INTRODUCTION 1.1 Purpose. The purpose of this Plan is to provide additional incentives for officers and key employees of the Company to operate and manage the Company's business in a manner that will achieve long-term growth and profitability and to provide a means of recruiting and retaining such officers and key employees. 1.2 Relationship to 1993 Stock Incentive Plan. This Plan is subject to the Avon Products, Inc., 1993 Stock Incentive Plan which has been approved by the Company's shareholders. Accordingly, this Plan shall be deemed a "Stock Incentive Program" as defined therein and shall be subject to the terms and conditions of the 1993 Stock Incentive Plan. In the event of any conflict, the terms and conditions of the 1993 Stock Incentive Plan shall govern. 1.3 General Description. This Plan provides for the grant to eligible Participants of two forms of incentive awards with respect to a performance period covering the three years 1994-1996, namely Performance Units and Stock Options. While Performance Units will consist of potential cash incentives, both types of awards shall be considered as "Stock Incentives" eligible for grants under the 1993 Stock Incentive Plan. The Plan also provides for the grant of shares of Restricted Stock Awards as set forth in Part V hereof. 1.4 Definitions. Capitalized words and phrases in this Plan shall have the same meaning as the definitions set forth in the 1993 Stock Incentive Plan, to the extent that they are defined therein, except that "Committee" shall have the meaning set forth below. Other definitions used in this Plan shall have the meanings set forth below: "Committee" means the Compensation Committee of the Board of Directors, each member of which is an outside director, none of whom are or have been officers or employees of the Company or any Company Subsidiary. "Performance Period" means the period of three consecutive calendar years commencing with the year 1994. "Plan" means the Avon Products, Inc., 1994 Long Term Incentive Plan. "Senior Officers" means those Company Executive Officers who are subject to Section 16 of the Exchange Act and all other officers who report to the Company's Chief Executive Officer. II. PARTICIPATION 2.1 General Rule. The Committee shall determine the levels and categories of officers and key employees of the Company and its Subsidiaries who shall be Participants in the Plan. The initial grant of Plan awards shall be made during the first 90 days of the first year of the Performance Period. 2.2 Participants Not Eligible at Time of Initial Grant. If an employee becomes eligible for Participation subsequent to the date of initial grant he or she may become a Participant at such later date, with awards to such a Participant to be subject to the terms set forth below. III. PERFORMANCE UNIT AWARDS 3.1 Definitions for Performance Unit Awards. Terms applicable to Performance Unit awards shall have the meanings set forth below: a. "Base Grant Value" means the target cash value of each Performance Unit which shall be $100.00. b. "Ultimate Payment Value" means the cash value of each Performance Unit, which shall be determined by the Committee following the end of the Performance Period. Such value may be as high at $200.00 if the Maximum Growth Rate has been attained, or zero if the Threshold Growth Rate has not been attained. c. "Base Year" means the calendar year immediately preceding the Performance Period, viz., 1993 for a 1994-1996 Performance Period. d. "Earnings Per Share" means the fully diluted earnings per share of Stock calculated on the weighted average number of shares outstanding as reported in the Company's Annual Report based on consolidated net income (before extraordinary items and income taxes related thereto) of the Company, as determined by the Company's independent public accountants. Such determination and report shall be made as of the end of the Performance Period with respect to such Period and the applicable Base Year in conformity with generally accepted accounting principles consistently applied. e. "Cumulative EPS" means the aggregate total Earnings Per Share for the entire Performance Period. f. "Target EPS Growth" means the Cumulative EPS established by the Committee for the Performance Period which , if exactly attained, shall result in an Ultimate Payment Value of $100.00 per Performance Unit. g. "Maximum EPS Growth" means the Cumulative EPS established by the Committee for the Performance Period which, if attained or exceeded, shall result in an Ultimate Payment Value of $200.00 per Performance Unit. h. "Threshold EPS Growth" means the Cumulative EPS established by the Committee for the Performance Period which, if exactly attained, shall result in an Ultimate Payment Value of $50.00 per Performance Unit and, if not attained, shall result in an Ultimate Payment Value of zero. I. "Proration Table" means a table approved by the Committee which shall determine the Ultimate Payment Value per Performance Unit in the event the Cumulative EPS for the Performance Period exceeds the Minimum EPS Growth but is less than the Maximum EPS Growth (and is not the exact Target EPS Growth). 3.2 Grants of Performance Units. The Committee shall authorize grants of Performance Units to Participants after first establishing the performance criteria to be applied for such units, including, but not necessarily limited to, the applicable EPS Growth objectives (Target, Maximum and Threshold) and Proration Scale. At any time during the first half of a Performance Period, the Committee may adjust the applicable EPS Growth objectives if it determines that it is warranted by extraordinary events. The Committee shall approve (a) all specific grants of Performance Units to Senior Officers and (b) an aggregate number of Performance Units to be granted other Participants, which shall be allocated by the Company's Chief Executive Officer. The number of Performance Units to be initially granted a Participant shall be determined as follows: (a) an annualized cash target amount shall be established, expressed as a percentage of the rate of his or her annual base salary in effect on the date of grant, (b) such cash target amount shall be divided by the Base Grant Value of $100.00 and (c) the resulting number shall be multiplied by the number of years in the Performance Period (three). At any time during the first two years of a Performance Period supplemental grants of Performance Units may be made reflecting increases in base salary attributable to a Participant's promotion and grants to employees hired subsequent to the initial grant date or who otherwise have subsequently become eligible for Participation. The number of Performance Units that may be granted a Participant subsequent to the initial grant date shall take into account the shorter period of time remaining between the date of the supplemental grant and the end of the Performance Period. If, for example, a supplemental grant was made effective as of the first day of the second year of the Performance Period the cash target amount referred to in the preceding paragraph would be multiplied by two rather than three. All Performance Units, regardless of when granted, shall be subject to the same performance criteria in determining Ultimate Payment Value, including the three-year growth rate objectives. 3.3 Value Determination and Payment. The Ultimate Payment Value of all Performance Units shall be determined by the Committee as soon as practicable after the end of the Performance Period and its review of a report concerning actual Cumulative EPS for the period submitted to the Committee by the Company's independent public accountants. The Committee may provide at the time of grant that the pay-out of Performance Units is subject to additional performance requirements, including achievement of a pre-established level of return on Company operating assets. Payment to a Participant shall be made in a single sum in cash equal to the applicable Ultimate Payment Value multiplied by his or her total Performance Units and reduced by applicable tax withholding requirements. Such payments shall be made as soon as practicable after the Committee determines such Ultimate Payment Value. 3.4 Termination of Employment During Performance Period. If prior to the end of the Performance Period but after completion of the period's first calendar year, a Participant (a) dies while employed by the Company, (b) retires under the terms of a Company retirement plan or (c) is involuntarily terminated by the Company, other than for cause, such Participant shall remain entitled to a portion of the Performance Units granted to him or her. Such portion shall be the Participant's total number of Performance Units multiplied by a fraction, the numerator of which is the number of months in which such Participant was actively employed during the Participant's Performance Period (including the month during which employment terminated) and the denominator of which is 36 or, if fewer, the number of months from the effective date of the grant of the Participant's Performance Units to the end of the Performance Period (applicable in the case of grants first made after the initial grant). Except as provided below, no payment can be made for such retained Performance Units prior to the time the Committee has determined the Ultimate Payment Value assigned to all Performance Units. If the applicable Threshold Growth Rate has not been attained no payment would be made for any Performance Units. At the discretion of the Committee, however, a payment may be made on behalf of a deceased Participant prior to the end of the Performance Period based on the above described proration formula and a Base Grant value. Any payment made with respect to a Participant who has died shall be paid to the beneficiary designated by the Participant to receive the proceeds of any group life insurance coverage provided for the Participant by the Company. A Participant who has not designated such beneficiary, or who desires to designate a different beneficiary, may file with the Company a written designation of a beneficiary under the Plan, which designation may be changed or revoked only by the Participant. If no designation of beneficiary has been made under such life insurance coverage or filed with the Company distribution shall be made to the Participant's spouse, if surviving, and if not, to the Participant's estate. No payment will be due any Participant who voluntarily terminates employment or whose employment has been involuntarily terminated by the Company for "cause" prior to the end of the Performance Period. Unless otherwise provided by an individual employment agreement, a Participant who is deemed terminated for cause pursuant to the terms of the applicable Company Severance Pay Plan, shall be deemed terminated for cause for purposes of this Plan. Except in the case of a "change of control" situation any Participant who is terminated for any reason during the first year of the Performance Period is not entitled to any payment, provided that the Committee, at its discretion, may make a payment on behalf of a deceased Participant. 3.5 Change of Control. In the event that a Change of Control should occur payment will be made with respect to all Performance Units as soon as practicable. The amount to be paid per Performance Unit shall be the greater of the Base Grant Value ($100) or such higher Ultimate Payment Value up to $200 as may be established by the Committee in its discretion. In the event Change of Control occurs prior to the end of the first calendar year of the Performance Period only Base Grant Value will be used. IV. STOCK OPTION GRANTS 4.1 Initial Option Grants. Any Participant eligible to receive an award of Performance Units at the time of initial grants for the Performance Period shall also receive a grant of Stock Options. Additional options may be granted to active Participants on the first and second anniversary dates of the initial grant or at such other times as the Committee may determine. The Committee shall approve (a) all specific grants of Stock Options to Senior Officers and (b) an aggregate number of Stock Options to be granted other Participants, which shall be allocated by the Company's Chief Executive Officer. 4.2 Supplemental Option Grants. Participants who are first awarded Performance Units subsequent to the date of the initial grants may also receive a grant of Stock Options. 4.3 Terms and Conditions. One-third of the shares covered by each Stock Option grant under the Plan shall be exercisable one year following the date of grant with another one-third exercisable one year thereafter and the final one-third one year after that. The exercisability of Stock Options is not affected by the Plan's performance objectives affecting Performance Units. All other terms and conditions shall be set forth in a form of Stock Option Agreement which shall be executed by the optionee Participant and the Company. All stock options granted under this Plan shall be consistent with, and subject to, the terms and conditions of the 1993 Stock Incentive Plan. Stock Option Agreements shall be deemed to be the same as a "Stock Incentive Agreement" referred to in Section 3.2 of such plan. V. RESTRICTED STOCK GRANTS At any time, and from time to time, during the Performance Period the Committee, at its discretion, may make grants of Restricted Stock to selected key employees. Such grants principally would be made for the purpose of attracting and retaining those individuals for whom such form of additional incentive compensation is deemed to be necessary and in the best interests of the Company. Such awards of Restricted Stock need not be affected by the terms and conditions of this Plan applicable to grants of Performance Units or Stock Options. The terms and conditions of any grant of Restricted Stock shall be set forth in a Stock Incentive Agreement executed by the employee and the Company. Such terms and conditions shall be consistent with the 1993 Stock Incentive Plan. Dividends on such shares, even though not vested, may, at the Committee's discretion, be paid out currently. The number of shares of Restricted Stock available for awards under this Plan shall not exceed 200,000. Any such shares forfeited pursuant to the terms of Stock Incentive Agreements, however, may again be available for award within that overall limitation. VI. MISCELLANEOUS 6.1 The Company, the Board of Directors, the Committee and the officers and other employees of the Company shall not be liable for any action taken in good faith in interpreting and administering the Plan. 6.2 Pursuant to the provisions of the 1993 Stock Incentive Plan the Company shall deduct from all cash payments and distributions under the Plan any taxes required to be withheld by federal, state, or local governments. 6.3 The establishment of the Plan shall not be construed as conferring on any Participant any right to continued employment or employment in any position, and the employment of any Participant may be terminated by the Company or by the Participant without regard to the effect which such action might have upon him or her as a Participant in the Plan. 6.4 No benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by the Participant, be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the Participant. No benefit or promise hereunder shall be secured by any specific assets of the Company, nor shall any assets of the Company be designated as attributable or allocated to the satisfaction of the Company's obligations under the Plan. 6.5 The Committee at any time may terminate and in any respect amend or modify the Plan, so long as such amendment does not adversely affect the rights of any Participant with respect to Performance Units and Stock Options granted prior to such amendment. The Committee shall have the power to interpret the Plan and all interpretations, determinations and actions by the Committee shall be final, conclusive and binding upon all parties. 6.6 The Plan shall be governed by and subject to the laws of the State of New York to the extent not preempted by federal law. VII. EFFECTIVE DATE This Plan is effective as of January 1, 1994, and its three-year Performance Period will commence with the Calendar Year 1994. AVON PRODUCTS, INC. By:/s/Marcia L. Worthing Title: Senior Vice President - Human Resources ATTEST: /s/Maureen Boyan Title: Assistant Secretary (CORPORATE SEAL) EX-10.7 6 EX-10.7 EXHIBIT 10.7 EXHIBIT 10.7 FIRST AMENDMENT TO THE SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AND SUPPLEMENTAL LIFE PLAN OF AVON PRODUCTS, INC. THIS FIRST AMENDMENT made on the 21 day of January, 1994, by AVON PRODUCTS, INC., a corporation duly organized and existing under the laws of the State of New York (hereinafter called the "Primary Sponsor"); WHEREAS, effective January 1, 1982, the Primary Sponsor adopted the Supplemental Executive Retirement Plan and Supplemental Life Plan (the "Plan"), which was last amended and restated July 1, 1991; and WHEREAS, the Primary Sponsor now desires to further amend the Plan to make changes embodied herein; and WHEREAS, the Compensation Committee of the Board of Directors of the Primary Sponsor has duly approved and authorized the amendment of the Plan; NOW, THEREFORE, the Primary Sponsor does hereby amend the Plan, effective as of January 1, 1994, by substituting the following for Plan Section 2(1): (1) " 'Actuarial Equivalent' shall mean a benefit of equivalent value, when computed on the basis of the same mortality table and the rate or rates of interest and/or the empirical tables which are being used to determine the Participant's benefit under the Retirement Plan. However, in the case of lump sum distributions under the Plan, the conversion factor used to determine the Actuarial Equivalent shall be the same as specified in paragraph 6 of Appendix I of the Retirement Plan, except that (A) clauses(i) and (ii) of such paragraph shall be inapplicable and (B) the applicable interest rate shall not be greater than the lowest rate in effect at any time on or after the date the Participant attains age 60 if the sum of the Participant's age and Creditable Service is a least 85 years." Except as specifically amended herein, the Plan shall remain in full force and effect as prior to this First Amendment. -2- IN WITNESS WHEREOF, the Primary Sponsor has caused this First Amendment to be executed as of the day and year first above written. AVON PRODUCTS, INC. By: /s/Marcia L. Worthing Title: Senior Vice President Human Resources ATTEST: /s/ Maureen Boyan Title: Assistant Secretary (CORPORATE SEAL) EX-10.21 7 EX-10.21 EXHIBIT 10.21 EXHIBIT 10.21 RESTRICTED STOCK AGREEMENT 1. Grant of Restricted Stock. Pursuant to the provisions of the Avon Products, Inc., 1993 Stock Incentive Plan (the "Plan"), Avon Products, Inc. ("Company"), effective as of November 4, 1993, has granted to Edward J. Robinson ("Grantee") Ten Thousand (10,000) shares of the Company's Common Stock. This grant is subject to the terms and conditions set forth below, as well as those in the Plan to the extent not inconsistent herein. 2. Receipt and Delivery of Restricted Stock. The Grantee waives receipt from the Company of a certificate or certificates representing the shares of Common Stock granted hereunder. Grantee acknowledges and agrees that the Company shall retain custody of such certificate or certificates until the restrictions imposed by Paragraph 3 on the Common Stock granted hereunder lapse. Concurrently with the execution of this agreement, the Grantee has delivered to the Company an irrevocable stock power endorsed in blank. 3. Restrictions of Transfer of Stock. The Common Stock granted hereunder may not be sold, tendered, assigned, transferred, pledged or otherwise encumbered prior to the earliest of: (a) June 1, 2001, (b) the date of occurrence of a "Change of Control" as defined in the Plan, (c) The date the Grantee's employment has been terminated by action of the Company other than for "cause", or (d) the date at which all grants of Restricted Stock to Grantee made after May 1, 1991, must fully vest pursuant to the terms of Grantee's Employment Agreement with the Company, including if applicable, vesting due to "Constructive Termination" as defined therein, at which time the restrictions imposed on such Common Stock shall lapse and the Common Stock shall be delivered to Grantee without a restrictive legend on any Common Stock certificate. In the event that Grantee should receive any such shares within six months of the date of grant, however, he may not sell or otherwise transfer such shares prior to the end of such six month period (May 4, 1994). 4. Forfeiture of Stock. (a) In the event the Grantee terminates employment at any time prior to Paragraph 3 having become effective and his termination is (i) voluntary, but with the consent of the Company, or (ii) due to death or disability, the Grantee (or his estate) shall receive a portion of such shares determined by multiplying the number of such shares by a fraction, the denominator of which is 90 months and the numerator of which is the number of months of the Grantee's active employment from the date of Grant to the date of employment termination. The balance of such shares shall be forfeited and shall revert to the Company. (b) In the event that the Grantee terminates employment at any time prior to Paragraph 3 having become effective and his termination is (i) voluntary, but without the Company's consent, or (ii) due to action by the Company for "cause" as defined in Grantee's Employment Agreement with the Company, all shares shall be forfeited and shall revert to the Company. 5. Dividends and Voting. The Grantee shall receive any and all dividends on the Common Stock granted hereunder when paid regardless of whether the restrictions imposed by Paragraph 3 hereof have lapsed. The Grantee also shall have the right to vote the Common Stock granted hereunder regardless of whether such restrictions have lapsed. 6. No Right to Employment. The execution and delivery of this agreement and the granting of Common Stock hereunder shall not constitute or be evidence of any agreement or understanding, express or implied, on the part of the Company to employ the Grantee for any specific period. 7. Change of Capitalization. If, prior to the time the restrictions imposed by Paragraph 3 on the Common Stock granted hereunder lapse, the Company shall be reorganized, or consolidated or merged with another corporation, any stock, securities or other property exchangeable for such Common Stock pursuant to such reorganization, consolidation or merger shall be deposited with the Company and shall become subject to the restrictions and conditions of this agreement to the same extent as if it had been the original property granted hereby. 8. Application of Laws. The granting of Common Stock hereunder shall be subject to all applicable laws, rules and regulations, including all reporting requirements of federal securities laws. 9. Taxes. Any taxes required by federal, state or local laws to be withheld by the Company on the delivery of Common Stock hereunder shall be paid to the Company by the Grantee by the time such taxes are required to be paid or deposited by the Company. Prior to the lapse of restrictions, the Grantee shall be given the option to satisfy any tax obligations by (i) tendering cash to the Company prior to the time of delivery or (ii) authorizing the conversion to cash by the Company of a sufficient amount of Common Stock prior to delivery. In any event, the Company reserves the right to retain the value of sufficient shares to equal the amount of the tax required to be withheld. 10. Change in Control. In accordance with Section 3.1(d) of the Plan all of the shares of Common Stock granted hereunder shall be cashed out in the event of a Change in Control as defined by the Plan. For this purpose, the "Change in Control Price" shall be the higher of (i) the highest price paid for a share of Stock as reported on the New York Stock Exchange Composite Tape during the 12 month period ending with the effective date of Change in Control or (ii) the highest cash tender offer price for a share of Stock during such period. In the event that a tender offer for Stock consists of a combination of cash and securities, the Change in Control Price calculated under (ii) would be based solely on the cash price equivalent of such offer. IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Grantee have executed this agreement in duplicate as of the Date of Grant first written above. AVON PRODUCTS, INC. By:/s/ Marcia L. Worthing Senior Vice President- Human Resources /s/ Edward J. Robinson EX-11 8 EX 11 EXHIBIT 11.1 EXHIBIT 11.1 AVON PRODUCTS, INC. COMPUTATION OF PRIMARY INCOME (LOSS) PER SHARE (In millions, except per share data)
Years ended December 31 --------------------------- 1993 1992 1991 ---- ---- ---- Weighted average shares of common stock Weighted average shares outstanding during the year excluding shares issued for the conversion of preferred stock............ 72.06 71.99 58.47 Weighted average shares outstanding during the year issued for the conversion of preferred stock.......................... -- -- 7.53* Common stock equivalents................... ** ** ** ------- ------ ------ Weighted average shares for primary income per share computation.................... 72.06 71.99 66.00 ======= ====== ====== Income applicable to common stock Income from continuing operations.......... $ 249.6 $175.0 $210.7 Preferred dividends........................ -- -- (18.2) ------- ------ ------ Income from continuing operations.......... 249.6 175.0 192.5 Discontinued operations, net............... (10.0) -- (75.0) Cumulative effect of changes in accounting for postretirement benefits and income taxes.................................... (107.5) -- -- ------- ------ ------ Income applicable to common stock.......... $ 132.1 $175.0 $117.5 ======= ====== ====== Primary income (loss) per share of common stock Continuing operations...................... $ 3.46 $ 2.43 $ 2.92 Discontinued operations, net............... (.14) -- (1.14) Cumulative effect of accounting changes.... (1.49) -- -- ------- ------ ------ Net income................................. $ 1.83 $ 2.43 $ 1.78 ======= ====== ======
[FN] - - ------------ *On June 3, 1991, 18.0 preferred shares were converted into approximately 12.96 common shares, which have been included in the weighted average shares outstanding subsequent to that date. **Common stock equivalents are not reported because they result in less than three percent dilution. EXHIBIT 11.2 EXHIBIT 11.2 AVON PRODUCTS, INC. COMPUTATION OF FULLY DILUTED INCOME (LOSS) PER SHARE (In millions, except per share data)
Years ended December 31 --------------------------- 1993 1992 1991 ---- ---- ---- Weighted average shares of common stock Weighted average shares outstanding during the year excluding shares issued for the conversion of preferred stock............ 72.06 71.99 58.47 Shares issued for the conversion of preferred stock.......................... -- -- 12.96* Common stock equivalents................... .08 .11 .25 ------- ------ ------ Weighted average shares for fully diluted income per share computation............. 72.14 72.10 71.68 ======= ====== ====== Income applicable to common stock Income from continuing operations.......... $ 249.6 $175.0 $210.7 Discontinued operations, net............... (10.0) -- (75.0) Cumulative effect of changes in accounting for postretirement benefits and income taxes.................................... (107.5) -- -- ------- ------ ------ Net income................................. $ 132.1 $175.0 $135.7 ======= ====== ====== Fully diluted income (loss) per share of common stock Continuing operations...................... $ 3.46 $ 2.43 $ 2.94 Discontinued operations, net............... (.14) -- (1.05) Cumulative effect of accounting changes.... (1.49) -- -- ------- ------ ------ Net income................................. $ 1.83 $ 2.43 $ 1.89 ======= ====== ======
[FN] - - ------------ *On June 3, 1991, 18.0 preferred shares were converted into approximately 12.96 common shares, which have been included in the weighted average shares outstanding from the beginning of 1991. EX-13 9 EX-13 EXHIBIT 13 EXHIBIT 13 Management's Discussion and Analysis The following discussion of the results of operations and financial condition of Avon should be read in conjunction with the information contained in the Consolidated Financial Statements and Notes thereto. All references to income per share amounts assume full dilution, as described in Note 1. Results of Operations Consolidated Net income in 1993 was $132.1 million or $1.83 per share, compared with $175.0 million or $2.43 per share in 1992. The 1993 results include a non-cash net charge of $107.5 million after tax, or $1.49 per share, for the cumulative effect of accounting changes for the adoption of Statement of Financial Accounting Standards ("FAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" and the adoption of FAS No. 109, "Accounting for Income Taxes". In addition, 1993 results include a $10.0 million, or $.14 per share, charge to discontinued operations for the final settlement and related expenses in an arbitration proceeding related to a business previously sold. The 1992 results include a restructuring charge of $64.4 million after tax, or $.90 per share. Net income for 1991 was $135.7 million, or $1.89 per share, which includes a non-cash charge of $75.0 million, or $1.05 per share, for previously discontinued health care and other operations. Continuing Operations Income from continuing operations before cumulative effect of accounting changes was $249.6 million in 1993, or $3.46 per share compared with $175.0 million or $2.43 per share in 1992. Excluding the 1992 restructuring charge, income from continuing operations in 1993 increased 4 percent from $239.4 million or $3.32 per share in 1992. Income from continuing operations in 1992, excluding the restructuring charge, increased $28.7 million, or $.38 per share from 1991. Consolidated net sales of $4.01 billion in 1993 increased 5 percent from $3.81 billion in 1992. Sales in Avon International improved 9 percent to $2.45 billion from $2.25 billion in 1992, primarily due to strong growth in the Americas Region and the Pacific Rim, and the favorable impact of exchange rate fluctuations in Japan. These increases were partially offset by lower sales in Europe due to the unfavorable impact of a stronger dollar against most European currencies and operational declines, mainly in Germany. Sales in Avon U.S. declined 1 percent to $1.40 billion primarily due to a decrease in the number of orders. In 1992, consolidated net sales increased 6 percent over 1991, reflecting higher sales in Avon International, primarily as a result of increased units sold in all markets in the Americas Region, excluding Brazil and Mexico, and the favorable impact of a weaker U.S. dollar in Europe and Japan and higher sales in Avon U.S., primarily due to an increase in average order size. These increases were partially offset by a decline in sales in Brazil due to a recessionary economy. Since 1988 sales have increased each year. However, the percentage increase has decreased in the years between 1989 and 1991. This trend is partially a result of the inclusion of the first full year of retail operations in 1988 as well as the exclusion of Parfums Stern upon its sale in January 1990. Excluding the net sales of the retail businesses, consolidated sales trends for the core direct selling businesses have shown growth rates of 13 percent, 6 percent, 10 percent, 5 percent, 6 percent and 5 percent in each of the years from 1988 to 1993, respectively. The decline in the growth rate from 1988 to 1993 was partially caused by recessionary economies in the U.S., Europe and Brazil and the decline in the annual frequency of customer purchases in the U.S. In addition, since 1988, Avon's primary focus has been on strengthening its financial condition by significantly improving cash flow and reducing debt and inventory levels. With substantial progress made in achieving these goals by the end of 1992, more resources are now being devoted to increasing sales. Cost of sales as a percentage of sales was 38.5 percent in 1993, compared to 39.0 percent in 1992. The improved cost ratio resulted primarily from margin improvements in the Americas Region, primarily Mexico and Brazil, and in Avon U.S. reflecting a shift in product mix to the higher margin CFT product category. In 1992 cost of sales as a percentage of sales was even with 1991. An improved margin in Avon U.S. was offset by lower margins in the Americas Region due to increased sales of lower margin products in Argentina and Mexico and the impact of a recessionary economy in Brazil. Marketing, distribution and administrative expenses of $2.0 billion increased 8 percent from 1992 and increased as a percentage of sales to 50.1 percent compared with 48.9 percent in 1992. The dollar increase reflects higher expenses associated with increased sales volume in the Americas Region, significantly higher advertising and marketing expenses and the incremental effect of FAS No. 106 in Avon U.S., and higher expenses in the Pacific Region partially offset by lower expens- 16 es in Europe. The increase in the operating expense ratio was primarily due to the impact of lower sales and higher expenses in Avon U.S. and an unfavorable operating expense ratio in Europe, primarily due to lower sales in Germany and Spain. These increases were partially offset by an improved operating expense ratio in the Americas Region, mainly Venezuela and Argentina. In 1992 marketing, distribution and administrative expenses of $1.86 billion increased 7 percent from 1991 and increased slightly as a percentage of sales to 48.9 percent compared with 48.6 percent in 1991. The dollar increase reflects higher selling and marketing expenses associated with increased sales volume in most international markets, higher expenses relating to direct response programs and customer service improvements in Avon U.S. and a one-time $17.0 million reduction in Avon U.S. employee benefit expenses in 1991. The increase in the operating expense ratio was driven by the Europe Region, primarily due to increased operating expenses in Spain and Germany. A provision of $96.0 million ($64.4 million after tax, or $.90 per share) was recorded in the first quarter of 1992 for the restructuring and reconfiguration of Avon's worldwide manufacturing and distribution facilities. The restructuring program included closing the manufacturing facility in Spain in 1992 and the distribution facility in Springdale, Ohio in July 1993, as well as the reconfiguring of several other international operations. The program was substantially completed by December 31, 1993. When completed in early 1994, the program will have eliminated over 1,200 positions worldwide. The restructuring program has increased operating efficiency in distribution, eliminated redundancies in manufacturing by rationalizing product mix, and reduced operating expenses. Expense savings of approximately $50.0 million per year beginning in 1994 are anticipated. Of the total restructuring charge, approximately $73.0 million will be operating cash related, of which $27.0 million and $40.0 million impacted cash flow in 1993 and 1992, respectively. Interest expense in 1993 of $45.2 million increased $1.2 million or 3 percent from last year primarily due to hyperinflationary interest rates and higher debt levels in Brazil, partially offset by lower average debt levels in the U.S. and lower borrowings and interest rates in Japan. In 1992, interest expense of $44.0 million was $32.1 million or 42 percent lower than 1991. This significant decline was primarily due to lower average debt levels and interest rates and reduced non-debt related interest. Interest income in 1993 of $25.5 million decreased $12.2 million from 1992 primarily due to significantly lower levels of short-term investments in Brazil in 1993. In 1992, interest income of $37.7 million decreased $24.9 million or 40 percent from 1991. The decline reflects higher average levels of short-term investments in 1991 used to fund the special dividend paid in September 1991, lower interest rates on U.S. short-term investments in 1992 and a shift in Brazil to higher levels of U.S. dollar-denominated investments in 1992, which bear lower interest rates than Brazilian Cruzeiro investments. Other expense, net was $17.9 million in 1993, a decrease of $26.7 million from 1992. The decrease is due to gains relating to an investment in a non- operating asset sold in 1993, a gain on the sale of land and lower non-operating expenses in 1993. Other expense, net was $44.6 million in 1992, a decrease of $24.8 million from 1991. The decrease was due to lower foreign exchange losses primarily in Brazil and Argentina, lower monetary correction expense in Brazil and the absence of takeover defense costs in 1992. The favorable impact of these items was partially offset by a gain on the sale of a small non-operating investment in 1991. Income taxes were $161.9 million in 1993 and the effective tax rate was 38.7 percent, compared with $131.5 million and an effective tax rate of 42.2 percent in 1992. Excluding the effect of the 1992 restructuring charge, income taxes were $163.1 million in 1992, and the effective tax rate was 40.0 percent. The lower effective tax rate in 1993 resulted primarily from the use of capital loss carryforwards to offset the gain on the sale of a non-operating asset, the mix of international and domestic income and a favorable adjustment to net deferred tax assets resulting from the change in the U.S. statutory tax rate in 1993. The effective tax rate of 40.0 percent in 1992, excluding the restructuring charge, decreased .9 percentage points from 1991 primarily due to the mix of international and domestic income and international tax plans implemented in 1992. Inflation in the United States has remained at a relatively low level during the last three years, and has not had a major effect on Avon's results of operations. Many countries in which Avon has operations have experienced higher rates of inflation than the United States. Among the countries in which Avon has significant operations, extremely high rates of inflation have been experienced in Brazil and to a lesser degree, in Argentina. 17 Below is an analysis of the key factors affecting net sales and pretax income from continuing operations by business segment and geographic area for each of the years in the three-year period ended December 31, 1993.
In millions Years ended December 31 1993 1992 1991 - - -------------------------------------------------------------------------------------------------------- Net Pretax Net Pretax Net Pretax Sales Income Sales Income Sales Income - - -------------------------------------------------------------------------------------------------------- Direct Selling United States $1,395.6 $152.8 $1,408.1 $140.8 (1) $1,357.7 $182.2 - - -------------------------------------------------------------------------------------------------------- International Americas 1,175.2 196.4 980.6 168.4 (1) 894.0 161.4 Pacific 625.6 90.9 542.8 84.0 502.6 74.2 Europe 647.7 53.5 729.0 31.5 (1) 686.7 62.8 - - -------------------------------------------------------------------------------------------------------- Total International 2,448.5 340.8 2,252.4 283.9 2,083.3 298.4 - - -------------------------------------------------------------------------------------------------------- Total Direct Selling 3,844.1 493.6 3,660.5 424.7 3,441.0 480.6 Retail 163.5 23.4 149.4 21.6 152.3 13.8 - - -------------------------------------------------------------------------------------------------------- Total $4,007.6 517.0 $3,809.9 446.3 $3,593.3 494.4 Corporate expenses -------- (68.6) -------- (72.7)(1) -------- (53.7) Interest expense (45.2) (44.0) (76.1) Other income (expense) 15.2 (17.9) (.3) - - -------------------------------------------------------------------------------------------------------- Total $418.4 $311.7 $364.3 - - --------------------------------------------------------------------------------------------------------
[FN] (1) Pretax income for business segment and geographic area data in 1992 includes the charge for restructuring costs of $96.0. The effect of this charge was to reduce the pretax income of U.S., Europe and the Americas by $54.4, $28.6 and $3.5, respectively, and to increase corporate expenses by $9.5. Avon U.S. Avon U.S. sales decreased 1 percent to $1.40 billion and pretax income was $152.8 million in 1993 as compared with $140.8 million in 1992. Excluding the impact of the 1992 restructuring charge, pretax income in 1993 decreased 22 percent from the prior year. The decrease in sales reflects a 2 percent decline in the number of Repre- sentative orders partially offset by a 1 percent increase in average order size. The improvement in average order size was partially driven by an increase in sa- les of higher priced products while total units sold declined 5 percent in 1993. Marketing emphasis on the beauty categories, which began in late 1992 and conti- nued throughout 1993, yielded positive results as sales in both the jewelry and cosmetics, fragrances and toiletries ("CFT") categories, particularly in the ANEW and other skin care brands, increased over 1992. However, these increases were more than offset by a decline in the gift category as consumer buying patterns shifted and a low level of consumer confidence prevailed throughout the year. The decrease in pretax income in 1993 from 1992, excluding the restructur- ing charge, was due primarily to higher operating expenses as the sales decline was offset by an improved gross margin reflecting the shift in sales mix from gifts to the higher margin CFT and jewelry categories. The increase in operating expenses reflects higher spending on advertising and marketing programs designed to stimulate sales and enhance methods of customer access and the ongoing incre- mental expense of FAS No. 106. In 1992, Avon U.S. sales increased 4 percent to $1.41 billion and pretax income, excluding restructuring charges, increased 7 percent to $195.2 million. The sales increase reflects a strong improvement in Representative productivity, which caused a 7 percent increase in average order size. The improvement in average order was also driven by an increase in net sales per unit which was greatly influenced by the strong performance of the higher-priced skin care products. Total units sold declined 1 percent in 1992 as volume increases in CFT and jewelry were offset by lower unit volume in the gift category. The increase in pretax income reflects the sales increase and an improved gross margin as a result of higher CFT sales and a lower volume of business in the gift category in 1992 and the impact of promotional pricing in 1991. These favorable results were partially offset by higher operating expenses in 1992 relating to direct response programs and customer service improvements, and a one-time $17.0 million reduction in employee benefit expenses in 1991. Avon International Avon International sales increased 9 percent to $2.45 billion and pretax income, excluding 1992 restructuring charges, increased 8 percent to $340.8 million from $316.0 million in 1992. The sales growth reflects strong unit growth in most mar- 18 kets in the Americas Region and the Pacific Rim, and the favorable impact of the weaker U.S. dollar in Japan. These improvements were partially offset by sales declines in most European markets primarily due to the strengthening of the U.S. dollar in Europe and operational declines, most significantly in Germany, reflecting a recessionary economy. In the Americas Region, sales increased 20 percent to $1.18 billion and pretax income, excluding 1992 restructuring charges increased 14 percent to $196.4 million from $171.9 million in 1992. The sales increase reflects increased units sold in most markets, primarily Brazil due to new product introductions and Argentina due to higher volume in the CFT and home product lines. In addition, the successful launch of higher priced skin care products and inflation-related increases in Mexico, and higher average order size in Venezuela due to further expansion of the fashion apparel and home product lines also contributed to the increase. The improvement in pretax income reflects strong operating results in Argentina and Mexico due to the sales growth in both markets coupled with a shift to higher margin CFT products in Mexico and a favorable operating expense ratio in Argentina resulting from an effective cost containment program. These improvements were partially offset by profit declines in Brazil. Although Brazil's sales increased and the cost ratio improved due to a favorable product mix and aggressive price negotiations with vendors, pretax income declined significantly from the prior year due to higher monetary correction expense and lower interest income, partially offset by lower foreign exchange losses. The decline in interest income reflects lower average short- term investments in 1993 due to higher dividend remittances than in 1992. Sales in the Pacific Region increased 15 percent over 1992 due to the favorable impact of a weaker U.S. dollar in Japan and increased units sold in the Pacific Rim countries. Pretax income for the region increased 8 percent over 1992 reflecting the sales improvement, partially offset by increased expenses for enhanced field training and marketing programs in Japan and higher costs in the Pacific Rim markets relating to additional initiatives to accelerate growth in the area. In the Europe Region, sales decreased 11 percent and pretax income, excluding 1992 restructuring charges, decreased 11 percent to $53.5 million from $60.1 million in 1992. The sales decline was primarily due to the unfavorable impact of the stronger U.S. dollar against most of the European currencies and operational declines throughout the Region, most significantly in Germany reflecting a recessionary economy. The decrease in pretax income was primarily due to the sales decline, an unfavorable gross margin in Portugal and Italy due to aggressive pricing strategies to stimulate sales, and an unfavorable operating expense ratio. The higher operating expense ratio was primarily in Germany due to the sales softness and increased expenses relating to service enhancements, and in Spain due to the sales softness and salary increases mandated by labor regulations. In 1992, Avon International sales increased 8 percent to $2.25 billion and pretax income was $283.9 million, compared with $298.4 million in 1991. Excluding the effect of the restructuring charge, pretax income increased 6 percent over 1991 to $316.0 million. The sales growth reflects higher units sold in all markets in the Americas Region, excluding Brazil and Mexico, as well as the favorable impact of a weaker U.S. dollar in Europe and Japan. These improvements were partially offset by the impact of recessionary economies in several markets, most significantly Brazil. In 1992, sales in the Americas Region increased 10 percent and pretax income was $168.4 million compared with $161.4 million in 1991. Excluding the effect of the restructuring charges, pretax income increased 6 percent to $171.9 million. The sales increase was primarily due to increased units sold in all markets, excluding Brazil and Mexico where improvements in the latter part of the year were insufficient to offset earlier declines. Sales were also favorably impacted by inflation-related price increases in Mexico. The improvement in pretax income reflects strong operating results in Argentina and Venezuela due to the continued growth of the fashion apparel and lingerie lines as well as sales of non-Avon branded products, and increased profits in Mexico, despite gross margin declines relating to higher sales of lower margin, non-CFT products in 1992. The overall performance of the Americas Region, compared to the prior year, was negatively impacted by a decline in sales and pretax income in Brazil. The impact of a continuing recession, political disruptions, mandated salary increases and increased incentive programs caused Brazil's sales and pretax earnings to decline significantly from the prior year. Sales in the Pacific Region increased 8 percent over 1991 primarily due to the favorable impact of a weaker U.S. dollar in Japan and increased units sold in the Pacific Rim countries. The region's pretax income increased 13 percent over 1991 reflecting the sales improvement and a higher gross margin, primarily in Japan, due to a planned refocusing of the business into higher margin skin care and beauty products in the CFT line. In the Europe Region, sales increased 6 percent over 1991 and pretax income was $31.5 million compared with $62.8 million in 1991. Excluding the effect of the restructuring charges, pretax income decreased 4 percent from 1991. The sales increase was primarily due to the favorable impact of a weaker U.S. dollar in most countries. This was partially offset by a 19 decline in units sold, most significantly in Germany, where consumer demand slackened as a result of the recessionary environment. Despite the sales increase, pretax income decreased primarily due to an increase in operating expenses. This was driven by an unfavorable operating expense ratio in Germany due to general wage inflation and the start-up investment costs for a new direct mail business, and in Spain due to general wage and benefit increases as well as higher advertising and motivation expenses. See Foreign Operations section under Liquidity and Capital Resources for additional discussion. Retail Giorgio's sales increased 9 percent from 1992 due to the successful roll-out of a new women's fragrance, WINGS, in the United States and United Kingdom retail markets. The sales increase was partially offset by a decline in sales to duty free shops and international distributors resulting from management's decision to control distribution. Pretax income increased 8 percent over 1992 due to the successful launch of WINGS and an improved gross margin due to a shift in sales to the higher margin U.S. retail channel from the lower margin international distributor channel. These increases were partially offset by increased marketing expenses associated with the launch of WINGS and higher foreign exchange losses incurred by the European operations. In 1992, sales decreased 2 percent reflecting the impact of the recession on retail sales of luxury goods in the United States. This was partially offset by increased duty free sales, first time sales of the fragrance RED for MEN in Europe and the limited introduction of a new women's fragrance, WINGS. Pretax income increased significantly from 1991 due to lower operating expenses resulting from tighter expense controls in 1992 and non-recurring expenses associated with a new product launch in 1991. Corporate Expenses Corporate expenses were $68.6 million in 1993 compared with $72.7 million in 1992. Excluding the effect of 1992 restructuring charges, corporate expenses increased $5.4 million from 1992. The increase in 1993 is primarily due to higher pension expense caused by changes in actuarial assumptions and the incremental expense of FAS No. 106. In 1992, corporate expenses were $72.7 million compared with $53.7 million in 1991. Excluding the effect of the restructuring charges, corporate expenses increased $9.5 million from 1991. The increase reflects higher compensation expense in 1992 relating to lump-sum distributions under the Supplemental Executive Retirement Plan and one-time benefit cost reductions in 1991. Other Income (Expense) Other income (expense) includes corporate non-operating income and expense items and corporate interest income. Other income, net was $15.2 million in 1993, an increase of $33.1 million from 1992. The increase reflects gains relating to an investment in a non-operating asset sold in 1993, a gain on the sale of land and lower non-operating expenses in 1993. Other expense, net was $17.9 million in 1992, a $17.6 million increase from 1991. The increase reflects lower interest income in 1992 due to lower average levels of short-term investments and lower interest rates and a one-time gain on the sale of a small non-operating investment in 1991, partially offset by the absence of takeover defense costs in 1992. Income Taxes Effective January 1, 1993, Avon adopted FAS No. 109, which supersedes FAS No. 96 and continues the requirement that taxes be provided based upon the tax rate at which the items of income and expense are expected to be settled in Avon's tax return. Among other things, the criteria for recognizing deferred tax assets have been revised to permit recognition when future realization is more likely than not. The cumulative effect of this accounting change increased 1993 results of operations by $2.5 million ($.04 per share). The effect of the adoption of FAS No. 109 on income from continuing operations before the cumulative effect of accounting changes was not material. Net deferred tax assets, net of valuation allowance, were $56.6 million at December 31, 1993, an increase of $92.8 million from a net deferred tax liability of $36.2 million at December 31, 1992, primarily as a result of the adoption of FAS No. 109 and FAS No. 106, effective as of January 1, 1993. A valuation allowance, as required under FAS No. 109, was established in 1993, primarily for foreign operating and capital loss carryforwards. Based on current levels of income, management currently expects that levels of future income should be sufficient to realize net deferred tax assets. Accounting Changes Effective January 1, 1993, Avon adopted FAS No. 106, for its U.S. retiree health care and life insurance benefit plans. FAS No. 106 requires the accrual of the cost of these postretirement benefits over the estimated service lives of the employees receiving such benefits, rather than recognizing these expenses when incurred. FAS No. 106 resulted in the recognition of an additional liability and expense for postretirement benefits. Avon recorded the entire unrecognized obligation of $183.3 million ($110.0 million after tax, or $1.53 per share) at the time of adoption as a cumulative effect adjustment. The additional after-tax expense in 1993 was $6.5 million. 20 During 1992 and 1991 health care and life insurance benefits were provided for the majority of employees who retire under Avon's retirement plans in the United States and certain foreign countries. The after-tax cost of these benefits, which were expensed when incurred, amounted to $4.7 million in 1992 and $5.3 million in 1991. During 1993, the after-tax cost for certain foreign countries was $.3 million. Avon has not adopted FAS No. 106 for its foreign postretirement benefit plans, which is required to be adopted in 1995 but permits earlier adoption. Avon will adopt FAS No. 106 effective January 1, 1994 for its foreign health care and life insurance benefit plans and will record a cumulative after-tax adjustment of approximately $8.0 million. Postemployment Benefits FAS No. 112, "Employers' Accounting for Postemployment Benefits", was issued in November 1992 and is effective beginning in 1994. FAS No. 112 will require Avon to accrue the cost of postemployment benefits rather than expensing the costs when incurred. These benefits include salary continuation, severance benefits, disability benefits and continuation of health care benefits and life insurance coverage to former employees after employment but before retirement. Avon will adopt FAS No. 112 effective January 1, 1994 and will record a cumulative after- tax adjustment of approximately $29.0 million. Discontinued Operations During 1993, Avon recorded an additional discontinued operations provision of $10.0 million after tax, or $.14 per share, for the final settlement and related expenses in an arbitration proceeding related to a business previously sold. During 1991, Avon revised its estimate of loss for previously discontinued operations by $75.0 million, or $1.05 per share, primarily related to the writedown of the value of securities previously received. Although Avon has completed its divestiture of all discontinued operations, it may be liable for various contingencies relating to, among other things, an indemnification given to the purchaser of certain discontinued operations. The indemnification, currently being litigated, covers a patent dispute, various environmental claims and numerous other lawsuits and claims. Due to the complex nature of these contingencies, the ultimate outcome and related total costs to Avon cannot currently be determined. For further discussion of the contingencies see Note 14 of the Notes to the Consolidated Financial Statements. In June 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International Minerals & Chemical Corporation ("IMC"), now known as Imcera Group Inc., filed a lawsuit against Avon in the St. Louis Missouri City Circuit Court arising from Avon's sale of Mallinckrodt to IMC in 1986. The suit alleged that a certain patent dispute and a settlement, referred to as the DuPont patent case, various environmental claims and numerous other lawsuits and claims are contingent liabilities covered by an indemnification given by Avon in connection with the sale of Mallinckrodt. In October 1991, the Missouri Supreme Court affirmed the Circuit Court's decision that Avon has the obligation to indemnify IMC and Mallinckrodt in connection with the DuPont patent case, but remanded the matter for a trial on the damages, if any, suffered by the parties. On July 27, 1992 a jury returned a verdict in the DuPont patent case for $16.0 million, and a judgment for that amount plus approximately $6.5 million interest was entered. On August 11, 1992 IMC and Mallinckrodt filed post-trial motions, including a motion for a judgment notwithstanding the verdict or, in the alternative, a motion for a new trial. On November 5, 1992, the St. Louis Missouri City Circuit Court granted IMC's and Mallinckrodt's motion for a judgment notwithstanding the verdict and directed a verdict for plaintiffs in the amount of $27.1 million plus interest. As of November 5, 1992, the interest amounted to approximately $11.7 million. Avon, IMC and Mallinckrodt have appealed this decision. Pre-trial proceedings and discovery activities are ongoing with respect to the environmental and general litigation portions of the case. With respect to the environmental contingencies which constitute a part of the indemnification litigation, the total cost to Avon cannot be determined with certainty as a result of such factors as the preliminary status of information relating to the sites owned by the purchaser, the preliminary regulatory involvement, the unknown magnitude and timing of cleanup efforts, if any, to be undertaken by the purchaser or Mallinckrodt, the possibility of recoveries against other parties, the uncertainty of the success of Avon's defenses, and unasserted claims, if any. However, these factors have been assessed and will continue to be assessed by Avon in estimating reserves to be recorded in its financial statements. The ultimate outcome and aggregate cost of resolving all of the above contingencies will be based on a number of factors and will be determined over a number of years. Accordingly, the total cost to Avon cannot currently be determined with certainty. The reserves for such contingencies at December 31, 1993, which are recorded gross without anticipation of insurance recoveries, or other third party recoveries, if any, have been estimated by Avon's management based on its review of currently known facts and circumstances at December 31, 1993. In the opinion of Avon's management, based on its review of the preliminary information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1993 should not 21 have a material adverse impact on Avon's consolidated financial position or results of operations, based on the current levels of such amounts. However, this difference, if any, could have a material effect on results of operations in a future period when resolved. Liquidity and Capital Resources Cash Flows Net cash provided by continuing operations was $317.6 million in 1993, compared with $384.3 million in 1992 and $338.7 million in 1991. The $66.7 million decrease in 1993 compared to 1992 was primarily due to lower cash provided by operations in the U.S. and Europe, mainly Germany, caused by higher working capital levels and lower net income. The higher working capital levels reflect an increase in inventories due to lower sales and line extensions to higher priced merchandise in Avon U.S. and lower sales in Europe. The decline in the level of accounts payable and accrued liabilities was primarily due to the discontinuance of certain Representative recognition programs in Avon U.S. These declines were partially offset by strong cash flow results in the Americas Region, the proceeds of $16.6 million received from the sale of interest rate swap contracts on the Deutsche Mark Notes and lower payments relating to restructuring. The cash flow results in 1993 and 1992 include approximately $27.0 million and $40.0 million, respectively, relating to restructuring. The $45.6 million increase in 1992 compared to 1991 reflects the increase in income from continuing operations, excluding the effect of the restructuring charge, and continued emphasis on working capital control. Cash used by discontinued operations was $17.7 million in 1993 compared with cash provided of $8.8 million in 1992 and $14.0 million used in 1991. The $26.5 million decrease in 1993 compared to 1992 reflects the final settlement of the arbitration proceeding in 1993, as discussed under the Discontinued Operations section, and cash received in 1992 from previously written off notes and securities Avon received in connection with the sale of health care and other businesses in prior years. The $22.8 million improvement in 1992 reflects the continued reduction of divestiture costs and the cash received from various notes and securities, previously discussed. Excluding changes in debt, net cash flow of $105.8 million in 1993 decreased $56.7 million from $162.5 million in 1992. This decrease was primarily due to the decrease in cash provided by all operating activities, as previously discussed, and higher dividend payments in 1993. This decrease was partially offset by the proceeds received on the sale of a non-operating asset in 1993 and lower cash used for the acquisition of minority interests in two foreign subsidiaries in 1993 compared with the cost of acquiring additional shares of the Japanese subsidiary in 1992. In 1992, excluding changes in debt, net cash flow of $162.5 million was $232.7 million favorable to net cash usage of $70.2 million in 1991. The significant increase was primarily due to the payment of a special dividend of $213.1 million in 1991 and an increase in cash provided by all operating activities, as previously discussed. These improvements were partially offset by the cost of acquiring the shares of the Japanese subsidiary in 1992 and the proceeds received on the sale of a small non-operating investment in 1991. Working Capital As of December 31, 1993, current assets exceeded current liabilities by $23.1 million compared with a $99.5 million working capital deficit at the end of 1992. The improvement from December 1992 reflects higher inventory levels, as discussed in the Inventory section, an increase in cash and equivalents and an increase in net current deferred tax assets, partially offset by an increase in the debt maturing within one year. Avon's liquidity results from its ability to generate significant cash flows from operations, and its ample unused borrowing capacity. Avon's credit agreements do not contain any provisions or requirements with respect to working capital. Avon is in compliance with all financial covenants. Capital Resources Total debt decreased by $20.9 million to $194.1 million at December 31, 1993 from $215.0 million at December 31, 1992, compared with reductions of $137.1 million and $189.8 million during 1992 and 1991, respectively. These decreases reflect the debt reduction program initiated in 1989. During 1993, 1992 and 1991, cash flow from operations was used to reduce debt. It is currently anticipated that existing debt maturing over the next five years will be paid without refinancing. Debt maturing within one year consists of borrowings from banks of $16.1 million and the current maturities of long-term debt of $54.3 million. Management believes that cash from operations and available sources of financing are adequate to meet anticipated requirements for working capital, dividends, capital expenditures and other cash needs. Avon has a $400.0 million multifacility credit agreement used to finance working capital and to provide support for the issuance of commercial paper. There were no borrowings under this facility at December 31, 1993. There are fees under this agreement that may aggregate up to $.8 million per year. The agreement contains covenants that include requirements for minimum net worth, as defined, interest coverage and maximum borrowings. Avon is prohibited from using this facility to pur- 22 chase its common stock. International lines of credit total $255.1 million of which $16.1 million was outstanding at December 31, 1993 and have no material compensating balances or fees. Avon also uses bankers' acceptances. Inventories Avon's products are marketed during twelve to twenty-six individual sales campaigns each year. Each campaign is conducted using a brochure offering a wide assortment of products, many of which change from campaign to campaign. It is necessary for Avon to maintain relatively high inventory levels as a result of the nature of its business, including the number of campaigns conducted annually and the large number of products marketed. Avon's operations have a seasonal pattern characteristic of many companies selling CFT, fashion jewelry and gift items. Christmas sales cause a peak in the fourth quarter which results in the build up of inventory at the end of the third quarter. Inventory levels are then sharply reduced by the end of the fourth quarter. Net inventories of $374.9 million at December 31, 1993 were $42.7 million higher than 1992, primarily as a result of higher priced products and new product lines in Avon U.S., sales growth in the Americas Region and business expansion in the Pacific Rim countries. In addition, higher inventory levels resulted from lower fourth quarter sales in the U.S. and Europe. It is Avon's objective to continue to manage purchases and inventory levels maintaining the focus of operating the business at efficient inventory levels. However, the addition or expansion of product lines such as fashion-oriented lingerie, jewelry and impulse gift items, products that are subject to changing fashion trends and consumer tastes, as well as planned expansion in high growth markets may cause the inventory levels to grow. Capital Expenditures Capital expenditures during 1993 of $58.5 million (1992 - $63.4 million) were used for capacity expansion in high growth markets and to maintain worldwide beauty facilities. Numerous construction programs were in progress at December 31, 1993, with an estimated cost to complete of $25.0 million. Capital expenditures in 1994 are currently expected to approximately double from 1993 levels as a result of investments for capacity expansion requirements in high growth markets, most significantly in the Pacific Rim, and for facility modernization and equipment replacement projects. Foreign Operations Avon's operations in many countries utilize numerous currencies. Avon has significant net assets in Japan, the United Kingdom, Germany and Canada. Changes in the value of these countries' currencies relative to the U.S. dollar result in direct charges or credits to equity. Avon also has substantial operations in Brazil and Argentina, countries with economies designated as highly inflationary whose functional currency is the U.S. dollar, whereby changes in exchange rates result in charges or credits to income and may significantly impact the results of operations. As a result of the sharply reduced rate of inflation in Mexico during the three years ended in 1992, effective January 1, 1993 Mexico was no longer designated as having a highly inflationary economy. Although the rate of inflation in Argentina was reduced during 1993, its three-year cumulative rate of inflation continues to meet the requirement to be designated as having a highly inflationary economy. Brazil continues to suffer hyperinflationary conditions, despite efforts to introduce stabilization policies. These conditions have eroded consumers' purchasing power in recent years and may continue to do so in the near future. Fluctuations in the value of foreign currencies cause U.S. dollar translated amounts to change in comparison with previous periods and, accordingly, Avon cannot project in any meaningful way the possible effect of such fluctuations upon future earnings. This is due to the large number of currencies involved, the constantly changing exposure in these currencies, the complexity of intercompany relationships, the hedging activity entered into to minimize the effect of exchange rate changes and the fact that all foreign currencies do not react in the same manner against the U.S. dollar. With the exception of Avon Japan, no foreign subsidiary relies, to any material extent, on long-term financing. Many subsidiaries have short-term borrowings from local commercial banks during the first nine months of the year to fund working capital needs created by Avon's highly seasonal sales pattern. From time to time when tax and other cost considerations dictate, Avon will finance subsidiary working capital needs. At December 31, 1993, the total indebtedness of foreign subsidiaries, excluding the long-term debt of Avon Japan, was $19.7 million. It is Avon's policy to remit all the available cash (cash in excess of working capital requirements, having no legal restrictions and not considered permanently reinvested) of foreign subsidiaries as rapidly as is practical. During 1993, these subsidiaries remitted, net of taxes, $195.8 million in dividends and royalties. This sum is a substantial portion of the consolidated net earnings of Avon's foreign subsidiaries. 23 Results of Operations by Quarter
In millions, except per share data First Second Third Fourth Year 1993 Net sales $841.9 $949.3 $957.1 $1,259.3 $4,007.6 Gross profit 519.0 590.2 588.6 766.2 2,464.0 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 40.5 112.5 85.2 180.2 418.4 Income from continuing operations before minority interest and cumulative effect of accounting changes 24.3 67.5 54.2 110.5 256.5 Discontinued operations, net (1) (10.0) - - - (10.0) Cumulative effect of accounting changes (2) (107.5) - - - (107.5) Net income (loss) (92.9) 65.6 54.0 105.4 132.1 Income (loss) per share of common stock: Income from continuing operations before cumulative effect of accounting changes $ .34 $ .91 $ .75 $ 1.46 $ 3.46 Discontinued operations (.14) - - - (.14) Cumulative effect of accounting changes (1.49) - - - (1.49) - - --------------------------------------------------------------------------------------------------- Net income (loss) $(1.29) $ .91 $ .75 $ 1.46 $ 1.83 (4) - - --------------------------------------------------------------------------------------------------- 1992 Net sales $810.2 $886.3 $938.8 $1,174.6 $3,809.9 Gross profit 497.3 549.3 567.6 708.2 2,322.4 Provision for restructuring costs (3) 96.0 - - - 96.0 Income (loss) before taxes and minority interest (58.0) 103.7 90.1 175.9 311.7 Income (loss) before minority interest (41.9) 61.9 54.2 106.0 180.2 Net income (loss) (42.1) 59.9 53.9 103.3 175.0 Income (loss) per share of common stock $ (.59) $ .83 $ .75 $ 1.43 $ 2.43 (4) - - ---------------------------------------------------------------------------------------------------
[FN] (1) See Note 3 to the Consolidated Financial Statements regarding discontinued operations. (2) See Note 2 to the Consolidated Financial Statements regarding cumulative effect of accounting changes. (3) See Note 4 to the Consolidated Financial Statements regarding provision for restructuring costs. (4) The sum of per share amounts for the quarters does not necessarily equal that for the year because the computations are made independently. Market Prices of Common Stock by Quarter 1993 1992 - - ---------------------------------------------------------- Quarter High Low High Low - - ---------------------------------------------------------- First $64 3/8 $51 7/8 $51 1/8 $44 Second 61 3/4 52 1/8 54 45 5/8 Third 59 1/2 49 7/8 54 7/8 50 Fourth 53 5/8 47 7/8 60 1/4 52 3/8 - - ---------------------------------------------------------- Avon common stock is listed on the New York Stock Exchange. At December 31, 1993, there were approximately 27,300 shareholders of record. Dividends declared for the last two quarters of 1993 were $.45 per share and for the first two quarters of 1993 and last two quarters of 1992 were $.40 per share and for the first two quarters of 1992 were $.35 per share. 24 Consolidated Statement of Income
In millions, except per share data Years ended December 31 1993 1992 1991 Net sales $4,007.6 $3,809.9 $3,593.3 - - -------------------------------------------------------------------------------------------------- Costs, expenses and other Cost of sales 1,543.6 1,487.5 1,400.0 Marketing, distribution and administrative expenses 2,008.0 1,863.8 1,746.1 Provision for restructuring costs - 96.0 - Interest expense 45.2 44.0 76.1 Interest income (25.5) (37.7) (62.6) Other expense, net 17.9 44.6 69.4 - - -------------------------------------------------------------------------------------------------- Total costs, expenses and other 3,589.2 3,498.2 3,229.0 - - -------------------------------------------------------------------------------------------------- Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 418.4 311.7 364.3 Income taxes 161.9 131.5 149.1 - - -------------------------------------------------------------------------------------------------- Income from continuing operations before minority interest and cumulative effect of accounting changes 256.5 180.2 215.2 Minority interest (6.9) (5.2) (4.5) - - -------------------------------------------------------------------------------------------------- Income from continuing operations before cumulative effect of accounting changes 249.6 175.0 210.7 Discontinued operations, net (10.0) - (75.0) Cumulative effect of changes in accounting for postretirement benefits and income taxes (107.5) - - - - -------------------------------------------------------------------------------------------------- Net income 132.1 175.0 135.7 Prefer dividends - - (18.2) - - -------------------------------------------------------------------------------------------------- Income applicable to common stock $ 132.1 $ 175.0 $ 117.5 - - -------------------------------------------------------------------------------------------------- Income (loss) per share of common stock - assuming full dilution (Note 1) Continuing operations $ 3.46 $ 2.43 $ 2.94 Discontinued operations (.14) - (1.05) Cumulative effect of accounting changes (1.49) - - - - -------------------------------------------------------------------------------------------------- Net income $ 1.83 $ 2.43 $ 1.89 - - -------------------------------------------------------------------------------------------------- Average shares outstanding Primary 72.06 71.99 66.00 Assuming full dilution 72.14 72.10 71.68 - - --------------------------------------------------------------------------------------------------
[FN] The accompanying notes are an integral part of this statement. 25 Consolidated Balance Sheet
In millions, except share data December 31 1993 1992 Assets Current assets Cash, including cash equivalents of $160.0 and $95.9 $ 231.8 $ 147.4 Accounts receivable (less allowance for doubtful accounts of $23.1 and $23.5) 329.3 316.3 Inventories 374.9 332.2 Prepaid expenses and other 145.8 107.4 - - ---------------------------------------------------------------------------------- Total current assets 1,081.8 903.3 - - ---------------------------------------------------------------------------------- Property, plant and equipment, at cost Land 41.7 39.4 Buildings and improvements 499.3 478.9 Equipment 529.5 530.6 - - ---------------------------------------------------------------------------------- 1,070.5 1,048.9 Less accumulated depreciation 590.0 566.6 - - ---------------------------------------------------------------------------------- 480.5 482.3 - - ---------------------------------------------------------------------------------- Intangible assets (less accumulated amortization of $27.9 and $23.6) 145.3 144.8 Other assets 250.4 205.3 - - ---------------------------------------------------------------------------------- Total assets $1,958.0 $1,735.7 - - ---------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities Debt maturing within one year $ 70.4 $ 37.3 Accounts payable 378.0 365.2 Accrued compensation 59.5 62.0 Other accrued liabilities 225.7 247.7 Sales and other taxes 95.8 94.0 Income taxes 229.3 196.6 - - ---------------------------------------------------------------------------------- Total current liabilities 1,058.7 1,002.8 - - ---------------------------------------------------------------------------------- Long-term debt 123.7 177.7 Employee benefit plans 295.1 100.7 Deferred income taxes 30.5 23.0 Other liabilities (including minority interest of $43.2 and $36.9) 136.0 121.0 Commitments and contingencies Shareholders' equity Common stock, par value $.50 - authorized: 200,000,000 shares; issued - 86,528,692 and 86,445,682 shares 43.3 43.2 Additional paid-in capital 652.3 654.3 Retained earnings 150.6 126.5 Translation adjustments (175.3) (155.6) Treasury stock, at cost - 14,430,073 and 14,479,431 shares (356.9) (357.9) - - ---------------------------------------------------------------------------------- Total shareholders' equity 314.0 310.5 - - ---------------------------------------------------------------------------------- Total liabilities and shareholders+ equity $1,958.0 $1,735.7 - - ---------------------------------------------------------------------------------- The accompanying notes are an integral part of this statement.
26 Consolidated Statement of Cash Flows
In millions Years ended December 31 1993 1992 1991 Cash flows from operating activities Net income $132.1 $175.0 $135.7 Adjustments to reconcile income to net cash provided by continuing operations: Cumulative effect of changes in accounting for postretirement benefits and income taxes 107.5 - - Provision for discontinued operations, net 10.0 - 75.0 Provision (payments) for restructuring costs (27.0) 56.3 - Depreciation and amortization 62.8 62.4 61.4 Provision for doubtful accounts 51.7 47.5 55.2 Translation losses 14.7 12.8 39.9 Deferred income taxes (12.1) (29.8) (1.2) Other 21.8 33.7 2.8 Changes in assets and liabilities: Accounts receivable (149.4) (130.8) (128.7) Inventories (55.0) 15.1 11.3 Prepaid expenses and other (.9) 2.8 12.1 Accounts payable and accrued liabilities 74.4 93.2 28.3 Income and other taxes 77.5 48.6 46.4 Noncurrent assets and liabilities 9.5 (2.5) .5 - - ------------------------------------------------------------------------------ Net cash provided by continuing operations 317.6 384.3 338.7 Net cash (used) provided by discontinued operations (17.7) 8.8 (14.0) - - ------------------------------------------------------------------------------ Net cash provided by operating activities 299.9 393.1 324.7 - - ------------------------------------------------------------------------------ Cash flows from investing activities Capital expenditures (58.5) (63.4) (63.3) Disposal of assets 18.9 2.8 30.3 Acquisitions of subsidiary stock (6.4) (28.5) - - - ------------------------------------------------------------------------------ Net cash (used) by investing activities (46.0) (89.1) (33.0) - - ------------------------------------------------------------------------------ Cash flows from financing activities Cash dividends (124.9) (109.9) (326.6) Debt, net (maturities of three months or less) 14.8 (5.6) (27.4) Proceeds from short-term debt 26.8 24.2 116.2 Retirement of short-term debt (24.8) (112.7) (28.5) Retirement of long-term debt (38.2) (37.4) (253.9) Proceeds from exercise of stock options, net of taxes .9 4.2 42.3 Repurchase of common stock (.4) (7.4) (11.5) - - ------------------------------------------------------------------------------ Net cash (used) by financing activities (145.8) (244.6) (489.4) - - ------------------------------------------------------------------------------ Effect of exchange rate changes on cash (23.7) (28.4) (66.1) - - ------------------------------------------------------------------------------ Net increase (decrease) in cash and equivalents 84.4 31.0 (263.8) Cash and equivalents at beginning of year 147.4 116.4 380.2 - - ------------------------------------------------------------------------------ Cash and equivalents at end of year $231.8 $147.4 $116.4 - - ------------------------------------------------------------------------------ Cash paid for Interest $ 37.6 $ 37.6 $ 74.0 Income taxes, net of refunds received 133.7 127.4 99.8 - - ------------------------------------------------------------------------------ The accompanying notes are an integral part of this statement.
27 Consolidated Statement of Changes in Shareholder's Equity
Additional Preferred Common Stock Paid-In Retained Translation Treasury In millions, except share data Stock Shares Amount Capital Earnings Adjustments Stock Total Balance at December 31, 1990 $18.0 83,965,438 $ 42.0 $ 948.9 $ 171.0 $ (129.2) $ (657.3) $ 393.4 Net income 135.7 135.7 Conversion of preferred stock to common stock (18.0) (298.9) 316.8 (.1) Dividends Common - $1.40 per share (90.6) (90.6) Common - $3.00 per share (76.1) (138.9) (215.0) Preferred - $1.011 per share (18.2) (18.2) Translation adjustments (2.5) (2.5) Exercise of stock options, including tax benefits 1,500,339 .8 50.4 51.2 Grant, cancellation and amortization of restricted stock 702,230 .3 6.2 6.5 Repurchase of common stock (11.5) (11.5) Benefit plan contributions 2.5 .2 2.7 - - -------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1991 - 86,168,007 43.1 633.0 59.0 (131.7) (351.8) 251.6 Net income 175.0 175.0 Common dividends - $1.50 per share (107.5) (107.5) Translation adjustments (23.9) (23.9) Exercise of stock options, including tax benefits 150,380 .1 10.3 10.4 Grant, cancellation and amortization of restricted stock 127,295 9.6 9.6 Repurchase of common stock (7.4) (7.4) Benefit plan contributions 1.4 1.3 2.7 - - -------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1992 - 86,445,682 43.2 654.3 126.5 (155.6) (357.9) 310.5 Net income 132.1 132.1 Common dividends - $1.70 per share (14.5) (108.0) (122.5) Translation adjustments (19.7) (19.7) Exercise of stock options, including tax benefits 24,920 .1 1.3 1.4 Grant, cancellation and amortization of restricted stock 58,090 9.4 9.4 Repurchase of common stock (.4) (.4) Benefit plan contributions 1.8 1.4 3.2 - - -------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 $ - 86,528,692 $ 43.3 $ 652.3 $ 150.6 $(175.3) $(356.9) $ 314.0 The accompanying notes are an integral part of this statement.
28 Notes to Consolidated Financial Statements In millions, except share data 1 Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Avon Products, Inc. and its subsidiaries. Intercompany balances and transactions are eliminated. Foreign Currency Translation - Financial statements of foreign subsidiaries operating in non-highly inflationary economies are translated at year-end exchange rates for assets and liabilities and average exchange rates prevailing during the year for income and expense accounts. Translation adjustments are recorded as a separate component of shareholders' equity. For financial statements of subsidiaries operating in highly inflationary economies, nonmonetary assets (principally inventories and fixed assets) and the related expenses (principally cost of sales and depreciation) are translated at the respective historical exchange rates in effect when the assets were acquired. Monetary assets and liabilities are translated at year-end exchange rates. All other income and expense accounts are translated at average exchange rates prevailing during the year. Adjustments resulting from the translation of the financial statements of these subsidiaries are included in net income. Revenue Recognition - Avon recognizes revenue as shipments are made and title passes to independent Representatives, who are Avon's customers. Cash and Equivalents - Cash equivalents are stated at cost plus accrued inter- est, which approximates fair value. Cash equivalents are highly liquid debt instruments with an original maturity of three months or less and consist of time deposits with a number of large highly rated commercial banks in the U.S. and abroad. In accordance with Avon's policy, the maximum amount invested in any one bank is limited. Avon does not believe it is exposed to any significant credit risk on cash and equivalents. Inventories - Inventories are stated at the lower of cost or market. Cost is de- termined using the last-in, first-out (LIFO) method for substantially all U.S. inventories and using the first-in, first-out method for all other inventories. Depreciation - Substantially all plant and equipment is depreciated using the straight-line method over estimated useful lives. Intangible Assets - Intangible assets, primarily goodwill, are amortized using the straight-line method, principally over 40 years. Management periodically assesses whether there has been a permanent impairment in the value of intangi- ble assets by considering, among other things, anticipated future cash flows, current operating results, trends and prospects, as well as market and economic factors. Other Assets - Avon defers certain costs related to the development of major in- formation and accounting systems which are expected to benefit future periods. Upon completion, the related costs are amortized over periods not exceeding five years. Amortization was $8.1 (1992 - $8.2; 1991 - $8.5) and the unamortized ba- lance at December 31, 1993 was $17.1 (1992 - $22.0). Other assets also include prepaid employee benefits, such as prepaid retire- ment plan costs and a grantor trust to partially fund the supplemental executi- ve retirement and life insurance plans, both described in Note 10. Financial Instruments - Avon enters into foreign currency exchange contracts and interest rate swap agreements to manage exposure to currency and interest rate movements on certain obligations. Gains and losses on currency exchange con- tracts are recognized and offset the related foreign exchange gains and losses on the foreign currency-denominated debt. The interest to be paid or received on interest rate swap agreements is accrued and recognized as an adjustment to in- terest expense. Gains and losses on the sale of interest rate swaps are deferred and amortized over the life of the underlying transaction. Avon enters into forward exchange and currency option contracts to hedge fo- reign currency fluctuations. Realized and unrealized gains and losses on con- tracts to hedge specific foreign currency commitments are deferred and recogni- zed when the underlying position is closed out. Realized and unrealized gains or losses on other contracts are insignificant. At December 31, 1993, Avon had for- ward contracts for the purchase of foreign currencies totaling $147.4 (1992 - $136.6), contracts to sell foreign currencies totaling $162.8 (1992 - $111.6) and cross-currency contracts to sell one foreign currency for another currency totaling $99.5 (1992 - $28.7). These financial instruments are for European, Japanese, Australian, Canadian and Argentine currencies and have original maturities or expiration dates of up to eighteen months and mature or expire in less than fifteen months from December 31, 1993. The counterparties to currency exchange contracts and interest rate swap a- greements consist of a number of major international financial institutions. Avon is exposed to credit loss in the event of nonperformance by the counterpar- ties to the currency exchange contracts and interest rate swap agreements. How- ever, Avon does not anticipate non-performance by the counterparties. In addi- tion, Avon may be exposed to market risk on its foreign exchange and interest rate swap agreements as a result of changes in foreign exchange and interest ra- tes. The market risk related to the foreign exchange agreements should be subs- tantially offset by changes in the valuation of the underlying transactions be- ing hedged. 29 Research and Development - Research and development costs are expensed as incur- red and aggregated $20.7 (1992 - $29.4; 1991 - $29.6). Advertising - Advertising costs are expensed as incurred and aggregated $74.0 (1992 - $40.1; 1991 - $36.2). Income Taxes - Effective January 1, 1993, Avon accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("FAS") No. 109, "Accounting for Income Taxes", which requires that taxes be provided based upon the tax rate at which the items of income and expense are expected to be settled in Avon's tax return. See Note 2 for the effect of the adoption of FAS No. 109. Deferred income taxes are provided on items recognized for financial report- ing purposes in different periods than for income tax purposes. Deferred income taxes include the effects of differences such as postretirement benefits, pre- paid taxes, restricted stock grants, depreciation, capitalized interest, inven- tory valuation reserves, prepaid employee benefit plans and unremitted foreign earnings. U.S. income taxes have not been provided on approximately $177.0 of undistributed income of subsidiaries that has been or is intended to be permanently reinvested outside the United States or is expected to be remitted free of U.S. income taxes. If such undistributed income was remitted, foreign withholding taxes of approximately $20.0 would be payable. Income per Share - In management's opinion, per share amounts assuming full di- lution provide the most meaningful comparison of per share data because they show the full effect of the conversion of 18.0 million preferred shares into approximately 12.96 million common shares on June 3, 1991. The weighted average number of shares outstanding for the computation of income per share assuming full dilution includes common stock equivalents which would arise from the exer- cise of stock options and assumes that all of the preferred shares were conver- ted to common shares at the beginning of 1991. Income per share amounts included in the Notes to Consolidated Financial Statements are calculated assuming full dilution. Primary income per share of common stock is based on the weighted average number of shares outstanding. Common stock issued June 3, 1991 for the conver- sion of the preferred stock has been included in the weighted average number of shares outstanding subsequent to that date. Dilution that could result from the exercise of stock options is not material. Net income used in this computation has been reduced by preferred stock dividends in 1991. Primary income per share was the same as income per common share assuming full dilution, for 1993 and 1992. In 1991, primary income per share from continuing operations was $2.92 and primary income per share was $1.78. 2 Accounting Changes Postretirement Benefits Avon provides health care, in excess of Medicare coverage, and life insurance benefits for the majority of employees who retire under Avon's retirement plans in the United States and certain foreign countries. The cost of such health care benefits is shared by Avon and retirees. Effective January 1, 1993, Avon adopted FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", for its U.S. retiree health care and life insurance benefit plans. FAS No. 106 requires the accrual of the cost of these postretirement benefits over the estimated service lives of the employees receiving such benefits, rather than recognizing these expenses when incurred. The new method does not impact Avon's cash flow, but results in the recognition of an additional liability and expense for postretirement benefits for financial statement purposes. FAS No. 106 permits recording the entire unrecognized obligation at the date of adoption or amortizing it over twenty years. Avon recorded the entire unrecognized obligation of $183.3 ($110.0 after tax, or $1.53 per share), at the time of adoption as a cumulative effect adjustment. The additional after-tax expense in 1993 was $6.5. The postretirement health care and life insurance benefits expense under FAS No. 106 for the U.S. plans for the year ended December 31, 1993 was $17.5, which consisted of service cost of $3.3 and interest cost of $14.2. FAS No. 106 is effective for the foreign plans in 1995 but permits earlier adoption. Avon will adopt FAS No. 106 for foreign plans effective January 1, 1994, and will record a cumulative after-tax adjustment of approximately $8.0. During 1992 and 1991, health care and life insurance benefits for U.S. and certain foreign countries, which were expensed when incurred, amounted to $4.7 in 1992 and $5.3 in 1991, on an after-tax basis. During 1993, the after tax cost for certain foreign countries was $.3. The accumulated postretirement benefits obligation for the U.S. plans deter- mined at January 1, 1993, due to the initial adoption of FAS No. 106, and Decem- ber 31, 1993, are as follows: December 31 January 1 1993 1993 - - ---------------------------------------------------------------------- Retirees $112.9 $112.9 Other fully eligible participants 29.3 27.5 Other active participants 47.1 42.9 Unrealized gains 3.1 - - - ---------------------------------------------------------------------- Accumulated postretirement benefits obligation $192.4 $183.3 - - ---------------------------------------------------------------------- Discount rate 7.5 % 8.0 % Rate of assumed compensation increases 4.5 5.5 - - ---------------------------------------------------------------------- The assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 11.3% for 1993 and gradually decreases each year thereafter to 5.2% in 2005 and beyond. Increasing the health care cost trend rate by one percentage point would increase the accumulated postretirement benefits obligation at December 31, 1993 by $21.1 and would increase the 1993 annual postretirement benefits expense by $2.2. Income Taxes Effective January 1, 1993, Avon adopted FAS No. 109, which supersedes FAS No. 96 and continues the requirement that taxes 30 be provided based upon the tax rate at which the items of income and expense are expected to be settled in Avon's tax return. Among other things, the criteria for recognizing deferred tax assets have been revised to permit recognition of such assets when future realization is more likely than not. The cumulative effect of this accounting change increased results of operations for 1993 by $2.5 ($.04 per share). The effect of the adoption of FAS No. 109 on income from continuing operations before the cumulative effect of accounting changes for the year ended December 31, 1993 was not material. Deferred tax assets (liabilities) resulting from temporary differences in the recognition of income and expense for tax and financial reporting purposes at January 1, 1993, adjusted to reflect the initial adoption of FAS No. 109 and FAS No. 106, and December 31, 1993, consisted of the following: December 31 January 1 1993 1993 Deferred tax assets: Postretirement benefits $ 78.0 $ 71.8 Accrued expenses and reserves 57.8 49.4 Foreign operating loss carryforwards 41.2 34.5 Capital loss carryforwards 12.2 18.5 Provision for restructuring costs 8.5 18.0 Provision for inventory obsolescence 12.3 17.0 All other 42.5 44.3 Valuation allowance (66.9) (71.4) - - ------------------------------------------------------------------------- Total deferred tax assets 185.6 182.1 - - ------------------------------------------------------------------------- Deferred tax liabilities: Depreciation (44.0) (50.7) Prepaid retirement plan cost (35.4) (34.2) Capitalized interest (19.0) (19.8) Unremitted foreign earnings (7.9) (17.2) All other (22.7) (22.1) - - ------------------------------------------------------------------------- Total deferred tax liabilities (129.0) (144.0) - - ------------------------------------------------------------------------- Net deferred tax assets $ 56.6 $ 38.1 - - ------------------------------------------------------------------------- Deferred tax assets (liabilities) at December 31, 1993, January 1, 1993, adjusted to reflect the initial adoption of FAS No. 109, and December 31, 1992, are classified as follows: December 31 January 1 December 31 1993 1993 1992 - - ----------------------------------------------------------------------------- Deferred tax assets: Prepaid expenses and other $43.3 $ 8.5 $ 4.1 Other assets 50.6 75.7 3.9 - - ----------------------------------------------------------------------------- Total deferred tax assets 93.9 84.2 8.0 - - ----------------------------------------------------------------------------- Deferred tax liabilities: Income taxes (6.8) (19.7) (21.2) Deferred income taxes (30.5) (26.4) (23.0) - - ----------------------------------------------------------------------------- Total deferred tax liabilities (37.3) (46.1) (44.2) - - ----------------------------------------------------------------------------- Net deferred tax assets (liabilities) $56.6 $ 38.1 $(36.2) - - ----------------------------------------------------------------------------- The valuation allowance required under FAS No. 109 primarily represents re- serves for foreign operating loss and capital loss carryforwards. The other pro- visions of FAS No. 109 did not have a material effect on Avon primarily due to the similarity between those provisions under FAS No. 109 and FAS No. 96. Income from continuing operations before taxes and minority interest for the years ended December 31, is as follows: 1993 1992 1991 - - ----------------------------------------------------------------------------- United States $129.9 $111.4 $124.0 Foreign 288.5 200.3 240.3 - - ----------------------------------------------------------------------------- Total $418.4 $311.7 $364.3 - - ----------------------------------------------------------------------------- The provision for income taxes for the years ended December 31, is as follows: 1993 1992 1991 - - ----------------------------------------------------------------------------- Federal: Current $ 20.6 $ 38.7 $ 20.5 Deferred (2.0) (16.6) 5.6 - - ----------------------------------------------------------------------------- 18.6 22.1 26.1 - - ----------------------------------------------------------------------------- Foreign: Current 143.3 111.4 121.8 Deferred (9.2) (10.4) (8.7) - - ----------------------------------------------------------------------------- 134.1 101.0 113.1 - - ----------------------------------------------------------------------------- State and other: Current 10.1 11.2 8.0 Deferred (.9) (2.8) 1.9 - - ----------------------------------------------------------------------------- 9.2 8.4 9.9 - - ----------------------------------------------------------------------------- Total $161.9 $131.5 $149.1 - - ----------------------------------------------------------------------------- The effective tax rate for the years ended December 31, is as follows: 1993 1992 1991 - - ----------------------------------------------------------------------------- Statutory federal rate 35.0% 34.0% 34.0% State and local taxes, net of federal tax benefit 1.4 1.8 1.8 Tax-exempt operations (1.7) (1.4) (1.1) Taxes on foreign income, including translation 7.9 10.6 8.6 Other (3.9) (2.8) (2.4) - - ----------------------------------------------------------------------------- Effective tax rate 38.7% 42.2% 40.9% - - ----------------------------------------------------------------------------- At December 31, 1993, Avon has foreign operating loss carryforwards of $106.0. The loss carryforwards expiring between 1994 and 1998 are $48.3 and the loss carryforwards which do not expire are $57.7. Capital loss carryforwards, which expire between 1995 and 1997 and may be used to offset capital gains, if any, approximate $35.0 at December 31, 1993. Postemployment Benefits FAS No. 112, "Employers' Accounting for Postemployment Benefits", was issued in November 1992 and is effective beginning in 1994. FAS No. 112 requires the accrual of the cost of postemployment benefits rather than expensing the costs when incurred. These benefits include salary continuation, severance benefits, disability benefits and continuation of health care benefits and life insurance coverage to former employees after employment but before retirement. Avon will adopt FAS No. 112 effective January 1, 1994 and will record a cumulative after- tax adjustment of approximately $29.0. 31 3 Discontinued Operations During 1993, Avon recorded an additional discontinued operations provision of $10.0 after tax, or $.14 per share, for the final settlement and related expen- ses in an arbitration proceeding related to a business previously sold. During 1992, Avon recorded an additional discontinued operations provision of approximately $10.0 principally for claims and litigation relating to businesses previously sold, which was offset by amounts recovered for notes and securities previously written off. During 1991, Avon revised its estimate of loss for previously discontinued operations by $75.0, or $1.05 per share, primarily related to the writedown of the value of securities previously received. Other current and non-current liabilities include $54.0 relating to discon- tinued operations. These liabilities represent the estimated cost of legal con- tingencies discussed in Note 14, and other remaining divestiture costs. 4 Provision for Restructuring Costs A provision of $96.0 ($64.4 after tax, or $.90 per share) was recorded in the first quarter of 1992 for the restructuring and reconfiguration of Avon's world- wide manufacturing and distribution facilities. The restructuring program inclu- ded closing the manufacturing facility in Spain in 1992 and the distribution fa- cility in Springdale, Ohio in July 1993, as well as the reconfiguring of several other international operations. The program was substantially completed by De- cember 31, 1993. 5 Acquisitions of Subsidiary Stock During 1993, Avon acquired minority interests in two foreign subsidiaries for a total of $6.4 resulting in an increase in intangible assets of $4.5. During 1992, Avon acquired additional shares of its Japanese subsidiary for a total cost of $28.5. These acquisitions have been accounted for as purchases and did not have a material effect on Avon's financial position or results of opera- tions. 6 Inventories Inventories at December 31, consisted of the following: 1993 1992 - - --------------------------------------------------- Raw materials $126.8 $122.7 Finished goods 248.1 209.5 - - --------------------------------------------------- Total $374.9 $332.2 - - --------------------------------------------------- LIFO-based inventories totaled $89.3 (1992 - $84.5), with the current esti- mated replacement cost exceeding the carrying value by approximately $25.7 (1992 - - - $29.0). 7 Debt Debt at December 31, consisted of the following: 1993 1992 - - ------------------------------------------------------------------- Maturing within one year: Notes payable $ 16.1 $ 4.1 Current portion of long-term debt 54.3 33.2 - - ------------------------------------------------------------------- Total $ 70.4 $ 37.3 - - ------------------------------------------------------------------- Long-term debt: 5 3/8% Swiss Franc Bonds, due 1994 (1) $ 35.2 $ 35.2 6 1/8% Deutsche Mark Notes, due 1998 (1) 100.0 100.0 7 1/2% Deutsche Mark Bonds, due 1993 - 5.7 8 1/2% Yen Notes, due 1994 and 1995 (2) 39.1 60.2 9% Euronotes, due 1993 - 5.0 Other, payable to 1996 with interest from 6% to 17% 3.7 4.8 Less current portion (54.3) (33.2) - - ------------------------------------------------------------------- Total $123.7 $177.7 - - ------------------------------------------------------------------- (1) The Swiss Franc and Deutsche Mark obligations have been effectively conver- ted into U.S. dollar debt with currency exchange contracts, the fair value of which approximates the carrying amount of $24.8 at December 31, 1993. (2) The Yen notes are the obligation of the Japanese subsidiary and are collate- ralized by its property and plant having a net book value of $62.3 at December 31, 1993. Annual maturities of long-term debt for each of the next five years are: 1994 - - - $54.3; 1995 - $23.7; 1996 - $0; 1997 - $0; and 1998 - $100.0. Avon has a $400.0 multifacility credit agreement expiring in June 1995. There were no borrowings under this facility at December 31, 1993. This facility is used to finance working capital and to provide support for the issuance of com- mercial paper. There are fees under this agreement that may aggregate up to $.8 per year. The agreement contains covenants that include requirements for minimum net worth, as defined, interest coverage and maximum borrowings. Shareholders' equity, as defined, exceeded minimum net worth by approximately $325.0 at Decem- ber 31, 1993. Avon is prohibited from using the multifacility credit agreement to purchase its common stock. At Avon's option, borrowing rates are based on LIBOR, certificate of deposit, prime, federal funds or money market auction rates. Avon has entered into agreements whereby its maximum LIBOR borrowing rate in 1994 will be 5.0% on working capital borrowings up to $100.0. During 1993, Avon had bankers' acceptance facilities available of $192.0 with various banks which had no material compensating balances or fees. As of Decem- ber 31, 1993, there were no borrowings under the bankers' acceptance facilities. The maximum borrowings under these facilities during 1993 was $51.0 and the annual average borrowing during the year was approximately $22.0 at an average interest rate of approximately 3.5%. International lines of credit total $255.1 of which $16.1 was outstanding as of December 31, 1993. Such lines have no material compensating balances or fees. Avon also has letters of credit outstanding totaling $21.3 (1992 - $24.7), which guarantee various insurance activities. In addition, Avon has letters of credit for trade activities. 32 Interest Rate Swaps - Avon has interest rate swap agreements having a notional principal amount at December 31, 1993 of $100.0 (1992 - $105.7). The interest rate on the 6-1/8% Deutsche Mark Notes is fixed at 10.3% for 1994, and at 1.4 percentage points above one-month LIBOR for 1995 through 1998, when the notes mature. One of the swap agreements related to these notes had original terms of ten years and one month; one of the swap agreements had an original term of four years and eight months; and the third had an original term of two years and eleven months. Two of the agreements expire May 6, 1998 and the third on November 7, 1994. Non-performance of the counterparties to all the currency and interest rate swap agreements would result in a write-off of interest receivable of $.5 at De- cember 31, 1993. During 1993, Avon received $16.6 from the sale of interest rate swap con- tracts on the Deutsche Mark Notes, which is being amortized over the remaining term of the swap agreements. The gain on the sale, in 1990, of certain interest rate swap agreements related to the Swiss Franc Bonds is being amortized over the remaining term of the swap agreements. Interest Expense - The components of interest expense for the years ended Decem- ber 31, are as follows: 1993 1992 1991 - - ----------------------------------------------------------------------- Interest on debt $35.0 $32.9 $53.3 Other 10.2 11.1 22.8 - - ----------------------------------------------------------------------- Total $45.2 $44.0 $76.1 - - ----------------------------------------------------------------------- 8 Fair Value of Financial Instruments FAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the following information about the fair value of certain fi- nancial instruments for which it is practicable to estimate that value. For purposes of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The amounts disclosed represent management's best estimates of fair value. In accordance with FAS No. 107, Avon has excluded certain financial instruments and all other assets and liabilities from its disclosure. Accordingly, the aggregate fair value amounts presented are not intended to, and do not represent the un- derlying fair value of Avon. The methods and assumptions used to estimate fair value are as follows: Grantor trust investments - The fair value of these investments has been esti- mated based on the quoted market prices for issues listed on exchanges. The carrying amount of money market funds approximates fair value. Debt maturing within one year and long-term debt - The fair value of all debt has been estimated based on the quoted market prices for issues listed on ex- changes and the current rates offered to Avon Japan for debt of the same remain- ing maturities. Forward exchange and currency option contracts - The fair value of forward ex- change and currency option contracts (used principally for hedging purposes) is estimated based on quoted market prices from banks. Interest rate swap agreements - The fair value of interest rate swap and option agreements is estimated based on quotes from the market makers of these instru- ments or the estimated amounts that Avon would expect to receive or pay to ter- minate the agreements. The amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at December 31, consisted of the following: 1993 1992 - - ---------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - - ---------------------------------------------------------------------------- Grantor trust investments $ 20.8 $ 20.8 $ 19.9 $ 19.8 Debt maturing within one year (70.4) (71.5) (37.3) (36.5) Long-term debt (123.7) (124.1) (177.7) (170.9) Forward exchange, currency option and interest rate swap contracts 3.3 (20.8) 3.8 2.4 - - ---------------------------------------------------------------------------- 9 Shareholders' Equity Stock Plans - Under Avon's 1970 Stock Option Incentive Plan ("1970 Plan"), as amended, options have been granted to key employees to purchase stock at the fair market value on the date of grant. Options vest over a period of three to five years, or earlier if certain events occur. At December 31, 1993, options for 127,330 shares were exercisable. No future awards can be made under the 1970 Plan. A summary of changes in stock options, is as follows: Shares Price - - ----------------------------------------------------------------------------- December 31, 1991 333,805 $23 - $40 Granted 50,000 48 - 52 Reinstated 9,825 23 - 33 Exercised (150,380) 23 - 33 Canceled (5,333) 25 - 29 - - ----------------------------------------------------------------------------- December 31, 1992 237,917 23 - 52 Granted 25,000 63 Exercised (24,920) 23 - 33 Canceled (14,000) 23 - 33 - - ----------------------------------------------------------------------------- December 31, 1993 223,997 $23 - $63 - - ----------------------------------------------------------------------------- The 1970 Plan also permits the issuance of restricted shares to key employees. During 1993, 48,090 shares subject to restrictions were issued (1992 - 127,295; 1991 - 702,230) with an aggregate fair value of $3.5 (1992 - $6.9; 1991 - $18.7) on the date of grant. Compensation expense is recorded as the shares vest over the periods established for each grant. Under the 1970 Plan, the 1991 Long-Term Incentive Plan ("1991 LTIP"), effec- tive January 2, 1991, authorized the issuance of up to 985,000 restricted shares. When Avon achieves certain cash flow and operational return goals, as defined, fifty percent of the shares vest. An additional thirty percent and the remaining twenty percent vest one and two years, 33 respectively, after the goals are achieved. As of December 31, 1993, Avon achieved the required goals, and accordingly, fifty percent of issued shares vested as of January 3, 1994. During 1993, shareholders approved, at the Annual Meeting, the 1993 Stock In- centive Plan ("1993 Plan"). The 1993 Plan, which replaces the 1970 Plan, provi- des for several types of equity based incentive compensation awards not included in the 1970 Plan. Under the 1993 Plan, the maximum number of shares that may be awarded is 3,525,000 shares of which no more than 2,000,000 shares may be used for restricted stock and stock bonus grants. Awards, when made, may be in the form of stock options, stock appreciation rights, dividend equivalent rights or performance unit awards, as defined in the 1993 Plan. Stock options granted to officers and key employees shall be at a price no less than fair market value on the date the option is granted. During 1993, 10,000 shares were granted under the 1993 Plan, with an aggregate fair value of approximately $.5, which is being amortized over a 7.6 year vesting period. Compensation expense under the 1993 Plan and the 1991 LTIP for 1993 was $9.4 (1992 - $9.8; 1991 - $5.6). The unamortized cost as of December 31, 1993 was $5.3 (1992 - $10.8). In 1993, Avon contributed 57,501 shares (1992 - 51,291) of treasury stock to employee benefit plans and recognized expense for its fair value on the date of grant. Effective January 2, 1994, a new 1994 Long-Term Incentive Plan was authorized under the 1993 Plan authorizing the issuance of non-qualified stock options, and up to 200,000 restricted shares. No further award grants may be made under the 1991 LTIP. Conversion of Preferred Stock - On June 3, 1991, Avon converted 18.0 million shares outstanding of its $2.00 Preferred Equity-Redemption Cumulative Stock ("PERCS") in exchange for approximately 12.96 million shares of its common stock. Each share of PERCS was converted into .72 shares of common stock. Share Rights Plan - Avon has a 1987 Share Rights Plan under which one right has been declared as a dividend for each outstanding share of its common stock. Each right, which is redeemable at $.01 at any time at Avon's option, entitles the shareholder, among other things, to purchase one share of Avon common stock at a price equal to one-half the then current market price, if certain events have occurred. The right is exercisable if, among other events, one party obtains a beneficial ownership of 20 percent or more of Avon's voting stock. Dividends - On August 9, 1993, Avon increased the regular dividend on common shares to an annual rate of $1.80 per share from an annual rate of $1.60. The first quarterly dividend at the new rate of $.45 per share was paid on September 1, 1993. On August 3, 1992, Avon increased the regular dividend on common shares to an annual rate of $1.60 per share from an annual rate of $1.40. The first quarterly dividend at the new rate of $.40 per share was paid on September 1, 1992. On February 7, 1991, Avon increased the regular dividend on common shares to an annual rate of $1.40 from an annual rate of $1.00, and paid a special common dividend of $3.00 per share on September 16, 1991. The first quarterly dividend at $.35 per share was paid on March 1, 1991. 10 Employee Benefit Plans Retirement Plans - Avon and certain subsidiaries have noncontributory retirement plans for substantially all employees. Benefits under these plans are generally based on an employee's years of service and average compensation near retirement. Plans are funded on a current basis except where funding is not required. During 1992, as a result of an enhanced early retirement program in in the United States, an additional liability of $15.9 was recognized and included in the 1992 Provision for Restructuring Costs. Net retirement plan expense for the years ended December 31, was determined as follows: 1993 1992 1991 - - ----------------------------------------------------------------------------- Service cost $ 33.6 $ 31.2 $ 27.8 Interest cost 55.3 51.5 46.7 Actual return on plan assets (77.4) (48.3) (135.0) Net amortization (deferral) 19.8 (14.0) 74.7 - - ----------------------------------------------------------------------------- Net retirement plan expense $ 31.3 $ 20.4 $ 14.2 - - ----------------------------------------------------------------------------- The funded status of retirement plans at December 31, consisted of the follow- ing: Assets Exceed Accumulated Accumulated Benefits Benefits Exceed Assets 1993 1992 1993 1992 - - ----------------------------------------------------------------------------- Plan assets at fair value (primarily listed stocks and bonds) $567.1 $591.7 $ 38.8 $ 30.8 - - ----------------------------------------------------------------------------- Present value of projected benefit obligation Accumulated benefit obligation Vested (374.9) (370.7) (129.7) (115.5) Nonvested (59.4) (60.5) (25.0) (20.5) Projected compensation increases (87.5) (99.3) (34.9) (35.0) - - ----------------------------------------------------------------------------- Projected benefit obligation (521.8) (530.5) (189.6) (171.0) - - ----------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 45.3 61.2 (150.8) (140.2) Unrecognized net loss 69.0 62.7 22.5 24.0 Unrecognized prior service cost 12.5 18.4 8.8 5.3 Unrecognized transition (gain) loss (45.0) (62.6) 18.3 14.9 Adjustment for additional liability - - (13.0) (9.3) - - ----------------------------------------------------------------------------- Prepaid (accrued) retirement plan cost $ 81.8 $ 79.7 $(114.2) $(105.3) - - ----------------------------------------------------------------------------- Prepaid retirement plan cost shown above is included in Other Assets. The accrued retirement plan cost shown above is primarily included in Employee Bene- fit Plans. 34 The weighted average assumptions used to determine the data above for the years ended December 31, are as follows: 1993 1992 1991 - - ----------------------------------------------------------------------------- Discount rate 7.7% 8.1% 8.1% Rate of compensation increase 5.5 6.1 6.0 Rate of return on assets 9.5 10.3 10.5 - - ----------------------------------------------------------------------------- Retirement plan expense is determined using assumptions as of the beginning of the year. The funded status is determined using assumptions as of the end of the year. Supplemental Executive Retirement and Life Insurance Plans - Avon has a Supple- mental Executive Retirement Plan ("SERP") which is a defined benefit plan under which Avon will pay supplemental pension benefits to key executives in addition to amounts received under Avon's retirement plan. The annual cost of this plan has been included in the determination of the net retirement plan expense shown above and amounted to $4.3 (1992 - $6.4; 1991 - $4.2). Such benefits will be paid from Avon's assets. The unfunded accumulated benefit obligation under this plan at December 31, 1993 was $16.9 (1992 - $12.6) and is primarily included in Employee Benefit Plans. Avon also maintains a Supplemental Life Insurance Plan ("SLIP") under which additional death benefits ranging from $.35 to $2.0 are provided to certain ac- tive and retired officers. Avon has acquired corporate-owned life insurance po- licies to provide partial funding of the benefits. The cash surrender value of these policies at December 31, 1993 was $21.9 (1992 - $20.6) and is held in the grantor trust. Avon has established a grantor trust to provide funding for the benefits pay- able under the SERP and SLIP. The trust is irrevocable and assets contributed to the trust can only be used to pay such benefits with certain exceptions. The assets held in the trust at December 31, 1993 amounted to $42.7 (1992 - $40.5), consisting of a money market fund, a managed portfolio of equity securities and corporate-owned life insurance policies, which are included in Other Assets. 11 Business Segments Avon's business comprises two industry segments: the sale of beauty products di- rectly to consumers primarily through independent sales Representatives and the sale of prestige fragrance products to retail stores by Giorgio. Sales and pre- tax income by segment are presented on page 18. Identifiable assets, capital ex- penditures and depreciation expense by business segment for the years ended De- cember 31, are as follows: 1993 1992 1991 - - ----------------------------------------------------------------------------- Identifiable Assets: Direct selling $1,301.5 $1,208.8 $1,221.3 Retail 194.0 200.1 202.0 Corporate and other* 462.5 326.8 305.2 - - ----------------------------------------------------------------------------- Consolidated $1,958.0 $1,735.7 $1,728.5 - - ----------------------------------------------------------------------------- Capital Expenditures: Direct selling $ 53.5 $ 58.1 $ 56.3 Retail .5 .7 3.6 Corporate 4.5 4.6 4.9 - - ---------------------------------------------------------------------------- Consolidated $ 58.5 $ 63.4 $ 64.8 - - ---------------------------------------------------------------------------- Depreciation Expense: Direct selling $ 41.6 $ 41.3 $ 40.3 Retail 1.6 1.7 1.6 Corporate 7.2 7.1 6.9 - - ---------------------------------------------------------------------------- Consolidated $ 50.4 $ 50.1 $ 48.8 - - ---------------------------------------------------------------------------- *Includes Cash Equivalents of $160.0 (1992 - $95.9; 1991 - $72.2). 12 International Foreign Exchange - Financial statement translation of subsidiaries operating in highly inflationary economies and foreign currency transactions resulted in losses netting to $8.0 (1992 - $17.0; 1991 - $26.5), which are included in Other Expense, net and Income Taxes. In addition, cost of sales and expenses include the unfavorable impact of the translation of inventories and prepaid expenses at historical rates in countries with highly inflationary economies of $34.7 (1992 - $28.6; 1991 - $22.9). Operations by Geographic Area - Direct selling operations are conducted in the United States, the Americas, the Pacific and Europe. Retail operations are con- ducted by Giorgio in the United States and Europe. Sales and pretax income by geographic area are presented on page 18. Identifiable assets by geographic area at December 31, are as follows: 1993 1992 1991 - - ----------------------------------------------------------------------------- United States $ 549.2 $ 562.1 $ 597.0 - - ----------------------------------------------------------------------------- International Americas 366.6 338.2 312.8 Pacific 279.8 232.0 208.2 Europe 299.9 276.6 305.3 - - ----------------------------------------------------------------------------- Total International 946.3 846.8 826.3 - - ----------------------------------------------------------------------------- Corporate and other* 462.5 326.8 305.2 - - ----------------------------------------------------------------------------- Total $1,958.0 $1,735.7 $1,728.5 - - ----------------------------------------------------------------------------- *Includes Cash Equivalents of $160.0 (1992 - $95.9; 1991 - $72.2). 35 13 Leases and Commitments Minimum rental commitments under noncancelable operating leases primarily for equipment and office space at December 31, 1993, consisted of the following: Year - - ---------------------------------------------------------- 1994 $ 55.9 1995 41.6 1996 28.7 1997 14.6 1998 7.1 Later years 14.2 Sublease rental income (22.8) - - ---------------------------------------------------------- Total $139.3 - - ---------------------------------------------------------- Rent expense related to continuing operations was $93.5 (1992 - $89.6; 1991 - $85.2). Various construction programs were in progress at December 31, 1993 with an estimated cost to complete of $25.0. 14 Contingencies Various lawsuits and claims (asserted and unasserted) arising in the ordinary course of business are pending or threatened against Avon. The most significant of these are described below. In April 1991, Wertheim Schroder & Co. Incorporated, a holder of Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS"), filed, on behalf of certain classes of PERCS holders, a suit against Avon in the United States District Court for the Southern District of New York alleging various contract and securities law claims relating to PERCS. Avon's motion for summary judgment was denied, except as to one claim, on April 1, 1993. Avon rejects the asser- tions in this case, believes it has meritorious defenses to the claims and in- tends to vigorously contest this lawsuit. In June 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International Minerals & Chemical Corporation ("IMC"), now known as Imcera Group Inc., filed a lawsuit against Avon in the St. Louis Missouri City Circuit Court arising from Avon's sale of Mallinckrodt to IMC in 1986. The suit alleged that a certain patent dispute and a settlement, referred to as the DuPont patent case, various envir- onmental claims and numerous other lawsuits and claims are contingent liabilit- ies covered by an indemnification given by Avon in connection with the sale of Mallinckrodt. In October 1991, the Missouri Supreme Court affirmed the Circuit Court's decision that Avon has the obligation to indemnify IMC and Mallinckrodt in connection with the DuPont patent case, but remanded the matter for a trial on the damages, if any, suffered by the parties. On July 27, 1992 a jury returned a verdict in the DuPont patent case for $16.0, and a judgment for that amount plus approximately $6.5 interest was entered. On August 11, 1992 IMC and Mallinckrodt filed post-trial motions, including a motion for a judgment not- withstanding the verdict or, in the alternative, a motion for a new trial. On November 5, 1992, the St. Louis Missouri City Circuit Court granted IMC's and Mallinckrodt's motion for a judgment notwithstanding the verdict and directed a verdict for plaintiffs in the amount of $27.1 plus interest. As of November 5, 1992, the interest amounted to approximately $11.7. Avon, IMC and Mallinckrodt have appealed this decision. Pre-trial proceedings and discovery activities are ongoing with respect to the environmental and general litigation portions of the case. With respect to the environmental contingencies which constitute a part of the indemnification litigation, the total cost to Avon cannot be determined with certainty as a result of such factors as the preliminary status of information relating to the sites owned by the purchaser, the preliminary regulatory invol- vement, the unknown magnitude and timing of cleanup efforts, if any, to be un- dertaken by the purchaser or Mallinckrodt, the possibility of recoveries against other parties, the uncertainty of the success of Avon's defenses, and unasserted claims, if any. However, these factors have been assessed and will continue to be assessed by Avon in estimating reserves to be recorded in its financial statements. The ultimate outcome and aggregate cost of resolving all of the above contin- gencies will be based on a number of factors and will be determined over a num- ber of years. Accordingly, the total cost to Avon cannot currently be determined with certainty. The reserves for such contingencies at December 31, 1993, which are recorded gross without anticipation of insurance recoveries or other third party recoveries, if any, have been estimated by Avon's management based on its review of currently known facts and circumstances at December 31, 1993. In the opinion of Avon's management, based on its review of the preliminary information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1993 should not have a material adverse impact on Avon's consolidated financial position or results of operations, based on the current levels of such amounts. However, this difference, if any, could have a material effect on results of operations in a future period when resolved. 15 Subsequent Event On February 3, 1994, Avon's Board of Directors authorized a stock repurchase program under which Avon may buyback up to 10% of its currently outstanding common stock, or approximately 7,000,000 shares. The shares would be purchased in the open market over a period of up to three years, beginning in 1994. 36 Report of Management The accompanying consolidated financial statements of Avon Products, Inc. have been prepared by management in conformity with generally accepted accounting principles and necessarily include amounts that are based on judgments and esti- mates. The audit report of Coopers & Lybrand, independent accountants, on these financial statements is the result of their audits of these consolidated finan- cial statements, which were performed in accordance with generally accepted auditing standards. Avon maintains an internal control structure and related systems, policies and procedures designed to provide reasonable assurance that assets are safe- guarded, transactions are executed in accordance with appropriate authorization and accounting records may be relied upon for the preparation of financial in- formation. Avon also maintains an internal audit department that evaluates and formally reports to management on the adequacy and effectiveness of controls, policies and procedures. The audit committee of the board of directors, comprised solely of outside directors, has an oversight role in the area of financial reporting and internal controls. This committee meets several times during the year with management, Coopers & Lybrand and the internal auditors to monitor the proper discharge of each of their respective responsibilities. Coopers & Lybrand and the internal auditors have free access to management and to the audit committee to discuss the results of their activities and the adequacy of controls. It is management's opinion that Avon's policies and procedures, reinforced by the internal control structure, provide reasonable assurance that operations are managed in a responsible and professional manner with a commitment to the high- est standard of business conduct. /s/James E. Preston /s/Edwina D. Woodbury Chairman of the Board and Senior Vice President and Chief Executive Officer Chief Financial Officer Report of Independent Accountants To the Shareholders of Avon Products, Inc. We have audited the accompanying consolidated balance sheet of Avon Products, Inc. and subsidiaries as of December 31, 1993 and 1992, and the related consoli- dated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1993. These finan- cial statements are the responsibility of Avon'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 stan- dards. Those standards require that we plan and perform the audit 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 man- agement, 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 consolidated financial statements referred to above pre- sent fairly, in all material respects, the financial position of Avon Products, Inc. and subsidiaries at December 31, 1993 and 1992, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in 1993 Avon changed its methods of accounting for postretirement benefits other than pen- sions and income taxes. /s/Coopers & Lybrand New York, New York February 3, 1994 37 Eleven-Year Review
In millions, except per share and employee data 1993 1992 1991 0 Income data Net sales $4,007.6 $3,809.9 $3,593.3 Interest expense 45.2 44.0 76.1 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 418.4 311.7 (2) 364.3 Income from continuing operations before minority interest and cumulative effect of accounting changes 256.5 180.2 (2) 215.2 Income from continuing operations 249.6 175.0 (2) 210.7 Income (loss) from discontinued operations, net (10.0) - (75.0) Cumulative effect of accounting changes (1) (107.5) - - Net income (loss) 132.1 175.0 (2) 135.7 - - -------------------------------------------------------------------------------------------------------- Income (loss) per share of common stock - assuming full dilution (5) Continuing operations $ 3.46 $ 2.43 (2) $ 2.94 Discontinued operations (.14) - (1.05) Cumulative effect of accounting changes (1.49) - - Net income (loss) 1.83 2.43 (2) 1.89 - - -------------------------------------------------------------------------------------------------------- Cash dividends per share Common $ 1.70 $ 1.50 $ 4.40 (6) Preferred - - 1.011 - - -------------------------------------------------------------------------------------------------------- Balance sheet data Working capital $ 23.1 $ (99.5) $ (135.3) Capital expenditures 58.5 63.4 64.8 Property, plant and equipment, net 480.5 482.3 475.3 Total assets 1,958.0 1,735.7 1,728.5 Debt maturing within one year 70.4 37.3 144.0 Long-term debt 123.7 177.7 208.1 Total debt 194.1 215.0 352.1 Shareholders' equity 314.0 310.5 251.6 - - -------------------------------------------------------------------------------------------------------- Number of employees United States 8,300 9,000 9,600 International 21,500 20,700 20,900 - - -------------------------------------------------------------------------------------------------------- Total employees 29,800 29,700 30,500 - - -------------------------------------------------------------------------------------------------------- (1) Effective January 1, 1993, Avon adopted Statement of Financial Accounting Standards ("FAS") No. 106, "Employers Accounting for Postretirement Benefits Other Than Pensions" for its U.S. retiree health care and life insurance benefit plans and FAS No. 109, "Accounting for Income Taxes", see Note 2 to the Consoli- dated Financial Statements. Effective January 1, 1988 Avon adopted FAS No. 96, "Accounting for Income Taxes". (2) In 1992, Avon began the restructuring of its worldwide manufacturing and distribution facilities and recorded a provision of $96.0 ($64.4 after tax, or $.90 per share) as described in Note 4 to the Consolidated Financial Statements. Income from continuing operations in 1993 increased 4% from $239.4, or $3.32 per share, excluding the 1992 restructuring charge. (3) On January 3, 1990, Avon sold Parfums Stern Inc. The accounts of Parfums Stern have been included in the consolidated statements from November 6, 1987 through December 31, 1989. (4) The following nonrecurring transactions were recorded during 1987: a pretax gain of $191.0 ($121.1 after tax, or $1.72 per share) resulting from the sale of subsidiary stock and a special provision for restructure of $47.5 ($29.4 after tax, or $.42 per share). (5) In management's opinion, per share amounts assuming full dilution provide the most meaningful comparison of per share data because they show the full effect of the conversion of 18.0 preferred shares into approximately 12.96 co- mmon shares on June 3, 1991. (6) Includes special dividend of $3.00 paid in 1991. (7) In 1989 and 1988, the calculation of income per share assuming full dilu- tion is antidilutive and, accordingly, the primary income per share amount is reported as "income per share of common stock assuming full dilution."
38 Eleven-Year Review (Continued)
1990 1989 (3) 1988 1987 1986 1985 1984 1983 $3,453.8 $3,299.6 $3,063.0 $2,595.4 $2,235.1 $2,003.7 $2,260.3 $2,336.6 77.9 120.5 113.2 77.6 45.5 49.1 45.0 38.3 339.2 289.0 226.5 368.5 (4) 205.0 171.2 253.9 209.6 201.5 159.9 129.9 229.2 (4) 127.1 104.9 141.2 121.1 195.3 152.4 121.1 227.2 (4) 126.7 105.0 141.4 121.8 - (97.8) (545.6) (68.1) 32.0 (164.9) 40.3 51.1 - - 20.0 - - - - - 195.3 54.6 (404.5) 159.1 (4) 158.7 (59.9) 181.7 172.9 - - -------------------------------------------------------------------------------------------------- $ 2.60 $ 2.10 (7) $ 1.66 $ 3.22 (4) $ 1.78 $ 1.31 $ 1.68 $ 1.45 - (1.76) (8.77) (7) (.96) .45 (2.07) .48 .61 - - .32 - - - - - 2.60 .34 (7) (6.79) (7) 2.26 (4) 2.23 (.76) 2.16 2.06 - - -------------------------------------------------------------------------------------------------- $ 1.00 $ 1.00 $ 1.50 $ 2.00 $ 2.00 $ 2.00 $ 2.00 $ 2.00 2.00 2.00 1.00 - - - - - - - -------------------------------------------------------------------------------------------------- $ 71.7 $ 56.3 $ 81.5 $ 146.4 $ 129.1 $ 186.6 $ 191.7 $ 307.6 38.1 37.1 48.1 46.5 57.5 47.2 73.6 93.0 472.1 486.3 540.7 571.7 536.2 544.6 526.6 553.5 2,059.2 2,098.0 2,460.4 2,499.7 2,143.0 2,188.0 2,188.7 2,198.2 207.1 164.0 208.0 65.4 104.6 54.5 56.8 61.3 334.8 674.1 918.7 804.3 671.2 592.2 392.0 288.3 541.9 838.1 1,126.7 869.7 775.8 646.7 448.8 349.6 393.4 228.3 239.3 758.6 681.3 926.4 1,157.1 1,273.1 - - -------------------------------------------------------------------------------------------------- 10,000 10,200 10,400 10,500 10,800 10,000 11,400 13,700 20,300 19,900 18,400 18,100 17,700 18,200 18,300 19,100 - - -------------------------------------------------------------------------------------------------- 30,300 30,100 28,800 28,600 28,500 28,200 29,700 32,800 - - --------------------------------------------------------------------------------------------------
39 EX-21 10 EX-21 EXHIBIT 21 EXHIBIT 21 AVON PRODUCTS, INC. AND SUBSIDIARIES Subsidiaries of the Registrant Avon Products, Inc. ("Avon"), a New York corporation, consolidates all majority owned subsidiaries. The principal consolidated subsidiaries, all of which are wholly owned by Avon or its wholly owned subsidiaries, except as indicated, are listed below. Included on the list below are subsidiaries which individually are not significant subsidiaries but primarily represent subsidiaries in countries in which the Company has direct selling operations. The names of Avon's other consolidated subsidiaries, which are primarily wholly owned by Avon or its wholly owned subsidiaries, are not listed because all such subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. Incorporation - Company Country or State ------- ---------------- Cosmeticos Avon S.A.C.I...................... Argentina Avon Cosmetics Australia Proprietary Limited. Australia Avon Products Pty. Limited................... Australia Avon Cosmetics Vertriebsgesellschaft m.b.h... Austria Arlington Limited............................ Bermuda Stratford Insurance Company, Ltd. ........... Bermuda Productos Avon Bolivia Ltda.................. Bolivia Avon Cosmeticos, Ltda........................ Brazil Avon Canada, Inc............................. Canada Avon Direct Inc.............................. Canada Cosmeticos Avon S.A.......................... Chile Compagnia de Venta Directa Seller Chile S.A.. Chile Avon Products (Guangzhau) Ltd (60%).......... China CS Avon Cosmetics, Spol. sr.o................ Czech Republic Avon Capital Corporation..................... Delaware Avon Diversified Services, Inc............... Delaware Avon International Operations, Inc........... Delaware Avon-Lomalinda, Inc.......................... Delaware Avon-Mirabella, Inc.......................... Delaware Giorgio Beverly Hills, Inc................... Delaware Marbella Dominicana.......................... Delaware Manila Manufacturing Company................. Delaware Productos Avon S.A........................... Dominican Republic Productos Avon Ecuador S.A................... Ecuador Productos Avon, S.A.......................... El Salvador Avon S.A..................................... France Avon Cosmetics GmbH.......................... Germany Productos Avon de Guatemala, S.A............. Guatemala Productos Avon, S.A.......................... Honduras Avon Cosmetics (FEBO) Limited................ Hong Kong Avon Cosmetics Hungary KFT................... Hungary Avon Service Center, Inc..................... Illinois P.T. Avon Indonesia (49%).................... Indonesia Albee Dublin Finance Company................. Ireland Avon Limited................................. Ireland Avon Cosmetics S.p.A......................... Italy Avon Products Company Limited (66%).......... Japan Live and Life Company Limited................ Japan Avon Cosmetics (Malaysia) Sendirian Berhad... Malaysia Avon Cosmetics, S.A. de C.V.................. Mexico Avonova, S.A. de C.V. (49%).................. Mexico M.I. Holdings, Inc........................... Missouri Avon International Finance N.V............... Netherlands Antilles Avon Americas, Ltd........................... New York Avon Overseas Capital Corporation............ New York Avon Cosmetics Limited....................... New Zealand Productos Avon S.A........................... Panama Productos Avon S.A........................... Peru Productos De Belleza, S.A.................... Peru Avon Cosmetics, Inc.......................... Philippines Avon Products Mfg., Inc...................... Philippines Beautifont Products, Inc..................... Philippines Avon Cosmetics Polska Sp. z o.o.............. Poland Avon Cosmeticos, Lda......................... Portugal Avon Cosmetics Spal s r.o.................... Slovak Republic Avon Beauty Products Company................. Russia Avon Cosmetics, S.A.......................... Spain Avon Cosmetics (Taiwan) Ltd.................. Taiwan Avon Products Limited........................ Taiwan Avon Cosmetics (Thailand) Ltd................ Thailand California Manufacturing Company Ltd......... Thailand Eczacibasi Avon Kosmetik Urunleri Sanayi ve Ticaret A.S. (50%)...................... Turkey Avon Cosmetics Limited....................... United Kingdom Avon European Holdings Ltd................... United Kingdom Avon Cosmetics de Venezuela, C.A............. Venezuela EX-24 11 EX-24 EXHIBIT 24 EXHIBIT 24 FORM 10-K POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints SIRI S. MARSHALL, WARD M. MILLER and MAUREEN BOYAN, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 1993 Annual Report on Form 10-k of Avon Products, Inc. and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such at- torneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, thereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this power of attorney as of March 3, 1994. Signature Title --------- ----- /s/James E. Preston Chairman of the Board and Chief ------------------------------ Executive Officer - Principal James E. Preston Executive Officer and Director /s/Edward J. Robinson President, Chief Operating ------------------------------ Officer and Director Edward J. Robinson /s/Edwina D. Woodbury Senior Vice President, ------------------------------ Chief Financial Officer Edwina D. Woodbury /s/Robert J. Conologue Group Vice President and ------------------------------ Controller - Principal Accounting Robert J. Conologue Officer /s/Brenda Barnes Director ------------------------------ Brenda Barnes /s/Daniel B. Burke Director ------------------------------ Daniel B. Burke Signature Title --------- ----- /s/Remedios Diaz Oliver Director ------------------------------ Remedios Diaz Oliver /s/Stanley C. Gault Director ------------------------------ Stanley C. Gault /s/George V. Grune Director ------------------------------ George V. Grune /s/Charles S. Locke Director ------------------------------ Charles S. Locke /s/Ann S. Moore Director ------------------------------ Ann S. Moore /s/John J. Phelan, Jr. Director ------------------------------ John J. Phelan, Jr. /s/Ernesta G. Procope Director ------------------------------ Ernesta G. Procope /s/Joseph A. Rice Director ------------------------------ Joseph A. Rice /s/Cecily C. Selby Director ------------------------------ Cecily C. Selby -2- -----END PRIVACY-ENHANCED MESSAGE-----