-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U4YcE1mmnBV07zApV91CCzVq0lQew3zheG3y68dW774NXQUZLMfvZclHUgLtjCnD BTNJNYuaoQUTiYlHh99hpQ== 0000008868-97-000002.txt : 19970401 0000008868-97-000002.hdr.sgml : 19970401 ACCESSION NUMBER: 0000008868-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVON PRODUCTS INC CENTRAL INDEX KEY: 0000008868 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [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: 97569557 BUSINESS ADDRESS: STREET 1: 9 W 57TH ST CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125466015 10-K 1 DECEMBER 31, 1996 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, 1996 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.) 1345 Avenue of the Americas, New York, N.Y. 10105-0196 ------------------------------------------------------- (New address of principal executive offices) (212) 282-5000 -------------- (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 $.25) 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 $.25) held by non- affiliates at February 28, 1997 was $7.8 billion. The number of shares of Common Stock (par value $.25) outstanding at February 28, 1997 was 133,032,198. Documents Incorporated by Reference Parts I and II Portions of the 1996 Annual Report to Shareholders. Part III Portions of the Proxy Statement for the 1997 Annual Meeting of Shareholders. 1 PART I ITEM 1. BUSINESS Avon Products, Inc. ("Avon" or "Company") is one of the world's leading manufacturers and marketers of beauty and related products, which include cosmetics, fragrance and toiletries; gift and decorative; apparel; and fashion jewelry and accessories. Avon commenced operations in 1886 and was incorporated in the State of New York on January 27, 1916. Avon's business is comprised of one industry segment, direct selling, with worldwide operations. Financial information relating to geographic areas is incorporated by reference to the analysis of net sales and pretax income from operations by geographic area on page 31 in Avon's 1996 Annual Report to Shareholders. Distribution Avon's products are sold worldwide by approximately 2.3 million Representatives, approximately 440,000 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. Representatives purchase products directly from Avon and sell them directly to their customers. The Company's products are sold to customers through a combination of direct selling and marketing utilizing independent Representatives, the mail, by phone or fax. Representatives go where the customers are, either in the home or in the workplace. In the United States, the Representative contacts customers, selling primarily through the use of brochures which also highlight new products and specially priced items for each two-week sales campaign. Product samples, demonstration products and make-up color charts 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 their own account. Payment by the Representative to Avon is customarily made when the next order is forwarded to the distribution center. The cost of merchandise to the Representative varies according to the product category and/or 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 Representative support in the United States and allow them to run their business more efficiently as well as to improve order processing accuracy, 2 Avon employs 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 the 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 or four week duration. Although terms of payment and cost of merchandise to the Representative vary from country to country, the basic method of direct selling and marketing 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 and training of Representatives are the primary responsibility of district managers. 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 the increase over the prior year's sales 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. Although Avon has generally been able to address these questions in a satisfactory manner, the matter has not been fully resolved in all countries. If there should be a final 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, customer flyers and product and image enhancing media advertising are used. In addition, Avon seeks to motivate its 3 Representatives through the use of special incentive programs that reward superior sales performance. Periodic sales meetings with Representatives 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. 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. Cosmetic, fragrance and toiletry products are available each sales campaign at a constant low price, while maintaining introductory specials and periodic sales on selected items for limited time periods. From time to time, various 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 pricing flexibility and broad product lines are expected to be able to mitigate the effect of these regulations. Competitive Conditions The cosmetic, fragrance and toiletry; gift and decorative; apparel; and fashion jewelry and accessory industries 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. Avon has many competitors in the gift and decorative products and apparel industries in the United States, including retail establishments, principally department stores, gift shops and direct-mail companies, specializing in these products. Avon is one of the leading distributors of fashion jewelry and accessories 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. 4 The number of competitors and degree of competition that Avon faces in its foreign cosmetics, fragrance, toiletries and fashion jewelry markets varies widely from country to country. Avon is one of the leading manufacturers and distributors in the cosmetics, fragrance and toiletries industry in most of its foreign markets, as well as in the fashion jewelry industry in Europe. There are a number of direct-selling companies which sell product lines similar to Avon's, some of which also have worldwide operations and compete with Avon. 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, are as follows: Years ended December 31 ------------------------ 1996 1995 1994 ---- ---- ---- (In millions) Cosmetics, fragrance and toiletries............. $2,946.8 $2,797.2 $2,604.2 Gift and decorative............................. 934.1 780.6 769.2 Apparel......................................... 556.3 500.5 480.3 Fashion jewelry and accessories................. 377.0 413.8 412.8 -------- -------- -------- $4,814.2 $4,492.1 $4,266.5 ======== ======== ======== 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 subsidiaries in 41 countries and Avon's products are distributed in some 89 other countries. Manufacturing Avon manufactures and packages almost all of its cosmetic, fragrance and toiletry 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. 5 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, Avon's cosmetic, fragrance and toiletry products are produced in three manufacturing laboratories for the four distribution centers. Most products sold in foreign countries are manufactured in Avon's facilities abroad. The fashion jewelry line is generally developed by Avon's staff and produced in its two manufacturing laboratories in Puerto Rico, and Avon's manufacturing laboratory in Ireland or by several independent manufacturers. 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. Contingencies Various lawsuits and claims (asserted and unasserted), arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. The Company is also 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 liable for costs associated with these various hazardous waste sites. In the opinion of Avon's management, based on its review of the 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, 1996 should not have a material adverse impact on Avon's consolidated financial position, results of operations, or cash flows. SEASONAL NATURE OF BUSINESS Avon's sales and earnings have a marked seasonal pattern characteristic of many companies selling cosmetics, fragrance and toiletries; gift and decorative products; apparel; and fashion jewelry. Christmas sales cause a sales peak in the fourth quarter of the year. Fourth quarter net sales were 31 6 percent of total net sales in 1996 and 1995 and fourth quarter pretax income from continuing operations was 42 percent and 40 percent in 1996 and 1995, respectively. RESEARCH ACTIVITIES Avon's research and development department is a leader in the industry, based on the number of new product launches, including formulating effective beauty treatments relevant to women's needs. In addition, Avon's research and development supports its environmental responsibilities. A team of researchers and technicians apply the disciplines of science to the practical aspects of bringing products to market around the world. Relationships with well known dermatologists and other specialists extends Avon's own research to deliver new formulas and ingredients. Each year, Avon researchers test and develop more than 600 products in the cosmetic, fragrance, toiletry and jewelry categories as well as analyze, evaluate and develop gift and decorative products. 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 introduced alpha-hydroxy acid for cosmetic use in the Anew Perfecting Complex products. The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $30.2 million in 1996, $27.8 million in 1995 and $27.9 million in 1994. 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 cosmetic, fragrance and toiletry products. ENVIRONMENTAL MATTERS Pursuant to Avon's global environmental policy, environmental audits are conducted to ensure Avon facilities around the world meet or exceed local regulatory standards in such categories as waste disposal and air and water emissions. A corporate environmental operations committee ensures that opportunities for environmental performance improvements are reflected in our products and packaging. In general, compliance with environmental regulations which impact Avon's global operations has not had, and is not anticipated to have, any material effect upon the capital expenditures, financial position or competitive position of Avon. EMPLOYEES At December 31, 1996, Avon employed approximately 33,700 people. Of 7 these, approximately 7,800 were employed in the United States and approximately 25,900 in other countries. The number of employees 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 centers 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. International properties include four manufacturing laboratories, including a fashion jewelry manufacturing laboratory in Ireland, and ten distribution centers in Europe; five manufacturing laboratories and eleven distribution centers in Latin America; one manufacturing and one distribution center in Canada; and four manufacturing laboratories and ten distribution centers in the Pacific. During 1996, the Company added one manufacturing and two distribution centers in Europe and one distribution center 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. During 1995, the Company signed new leases, commencing in 1997, for office facilities for the U.S. and global operations, which will be relocated within New York City. ITEM 3. LEGAL PROCEEDINGS Various lawsuits and claims (asserted and unasserted), arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In 1991, a class action lawsuit was initiated against Avon on behalf of certain classes of holders of Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS"). This lawsuit alleges various contract and securities law claims relating to the PERCS (which were fully redeemed that year). Avon has rejected the assertions in this case, believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. In the opinion of Avon's management, based on its review of the information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 8 31, 1996 should not have a material adverse impact on Avon's consolidated financial position, results of operations, or cash flows. 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 liable for costs associated with these various hazardous waste sites. Based upon Avon's current knowledge of the 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, results of operations, or cash flows. 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, 1996. ______________ 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 1997 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 63 1971 President, Chief Operating Officer and Director......................... Edward J. Robinson 56 1989 Senior Vice President, General Counsel and Secretary........................ Ward M. Miller, Jr. 64 1993(1) Senior Vice President, Chief Financial and Administrative Officer. Edwina D. Woodbury 45 1990 Senior Vice Presidents.................. Christina A. Gold 49 1993 Marcia L. Worthing 54 1988 Group Vice President, Finance........... Robert J. Corti 47 1988 Vice President and Controller........... Michael R. Mathieson 44 1995(2) 9 (1) Ward M. Miller, Jr. was elected Senior Vice President, General Counsel and Secretary in October 1994. Mr. Miller joined Avon in February 1993 as Vice President. Prior to joining Avon, he was Senior Vice President and General Counsel of Nabisco Brands; and Vice President, Associate General Counsel and Secretary of its parent, RJR Nabisco. (2) Michael R. Mathieson was elected Vice President and Controller in April 1995. Mr. Mathieson joined Avon in May 1990 as Assistant Corporate Controller. Prior to joining Avon, he was Vice President and Director of Accounting Research for Chase Manhattan Bank. 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 41 of Avon's 1996 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information for the five-year period 1992 through 1996 is incorporated by reference to the "Eleven-Year Review" on pages 58 and 59 of Avon's 1996 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 29 through 40 of Avon's 1996 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 42 through 56, together with the report thereon of Coopers & Lybrand L.L.P., on page 57, and "Results of Operations by Quarter" on page 41 of Avon's 1996 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 1997 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 1997 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 1997 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 1997 Annual Meeting of Shareholders. 11 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, 1996........ 42 Consolidated balance sheet at December 31, 1996 and 1995............. 43 Consolidated statement of cash flows for each of the years in the three-year period ended December 31, 1996......... 44 Consolidated statement of changes in shareholders' equity for each of the years in the three-year period ended December 31, 1996................ 45 Notes to consolidated financial statements............................. 46-56 Report of Independent Accountants Coopers & Lybrand L.L.P................ 57 (a) 2. Financial Statement Schedules Report of Independent Accountants Coopers & Lybrand L.L.P................ S-1 Consent of Independent Accountants Coopers & Lybrand L.L.P................ S-2 Financial statement schedule for each of the years in the three-year period ended December 31, 1996................ II.--Valuation and qualifying accounts............... S-3 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. 12 (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 May 13, 1996 (incorporated by reference to Exhibit 3.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 3.2 By-laws of Avon, as restated, effective June 6, 1996 (incorporated by reference to Exhibit 3.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 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 the 1993 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 and refiled under Form SE as of December 31, 1996). 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 and refiled under Form SE as of December 31, 1996). 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 and refiled under Form SE as of December 31, 1996). 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 and refiled under Form SE as of December 31, 1996). 4.6 Amended and Restated Revolving Credit and Competitive Advance Facility Agreement, dated as of August 8, 1996, among Avon, Avon Capital Corporation and a group of banks and other lenders (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 13 10.1* Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders on 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 (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.3* Avon Products, Inc. 1994 Long-Term Incentive Plan, effective as of January 1, 1994 (incorporated by reference to Exhibit 10.3 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 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 as of September 1, 1994 (incorporated by reference to Exhibit 10.6 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.7* Benefit Restoration Pension Plan of Avon Products, Inc., effective as of January 1, 1994 (incorporated by reference to Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.8* 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 and refiled under Form SE for the year ended December 31, 1996). 10.9* 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). 10.10* 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). 14 10.11* 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). 10.12* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1996. 10.13* Trust Agreement, dated as of April 21, 1995, between Avon and Chemical Bank, amending and restating the Trust Agreement as of August 3, 1989 between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.14 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.14* 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 and refiled under Form SE as of December 31, 1996). 10.15* Employment Agreement, dated as of November 1, 1995, between Avon and James E. Preston (incorporated by reference to Exhibit 10.16 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.16* Stock Option Agreement between Avon and James E. Preston dated October 30, 1995 (incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.17* Employment Agreement, dated as of September 1, 1994, between Avon and Edward J. Robinson (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.18* Restricted Stock Agreement, effective as of November 4, 1993, granted by Avon to Edward J. Robinson (incorporated by reference to Exhibit 10.21 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.19* Form of Employment Agreement, dated as of September 1, 1994, between Avon and certain senior officers (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.20* 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 and refiled under Form SE for the year ended December 31, 1996). 15 10.21* 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). 10.22* 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 and refiled under Form SE for the year ended December 31, 1996). 10.23* 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, 1996 incorporated by reference in response to Items 1,5 through 8 in this filing. 21 Subsidiaries of the registrant. 23 Consent of Coopers & Lybrand L.L.P. (set forth on page S-2 of this Annual Report on Form 10-K). 24 Power of Attorney 27 Financial Data Schedule 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, 1996 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 was no Form 8-K filed during the fourth quarter of 1996. (c) Avon's Annual Report on Form 10-K for the year ended December 31, 1996, 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 27th day of March 1997. Avon Products, Inc. By /s/WARD M. MILLER, JR. ------------------------- Ward M. Miller, Jr. Senior Vice President, General Counsel and Secretary 17 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 - --------- ----- ---- * ___________________________ James E. Preston Chairman of the Board and Chief Executive Officer - Principal Executive Officer and Director March 6, 1997 * ___________________________ Edward J. Robinson President, Chief Operating Officer and Director March 6, 1997 * ___________________________ Edwina D. Woodbury Senior Vice President, Chief Financial Officer - Principal Financial Officer March 6, 1997 * ___________________________ Michael R. Mathieson Vice President and Controller - Principal Accounting Officer March 6, 1997 BRENDA BARNES* ) RICHARD S. BARTON* ) REMEDIOS DIAZ OLIVER* ) EDWARD T. FOGARTY* ) STANLEY C. GAULT ) GEORGE V. GRUNE* ) Directors March 6, 1997 CHARLES S. LOCKE* ) ANN S. MOORE* ) CHARLES R. PERRIN* ) JOSEPH A. RICE* ) CECILY C. SELBY* ) /s/WARD M. MILLER, JR. ____________________________________ March 6, 1997 Ward M. Miller, Jr. Attorney-in-fact S-1 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, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996 has been incorporated by reference in this Form 10-K from page 57 of the 1996 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 schedule for each of the years in the three-year period ended December 31, 1996, as listed in the Index under Item 14(a)2 of this Form 10-K. In our opinion, the financial statement schedule for each of the years in the three-year period ended December 31, 1996 referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. New York, New York February 6, 1997 S-2 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), and Pre-Effective Amendment No. 1 to Form S-8 (Reg. No. 33-22099), of our reports dated February 6, 1997 on our audits of (i) the consolidated financial statements of Avon Products, Inc. as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996, which report is included in the 1996 Annual Report to Shareholders and incorporated by reference in this Annual Report on Form 10-K and (ii) the 1996, 1995 and 1994 financial statement schedule of Avon Products, Inc., which report is included in this Annual Report on Form 10-K. New York, New York March 27, 1997 S-3
AVON PRODUCTS, INC. AND SUBSIDIARIES SCHEDULE II -- 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 ---------- ---------- -------- ---------- --------- 1996 Allowance for doubtful accounts receivable $32.6 $79.0 $ -- $75.2(a) $36.4 ===== ===== ======= ===== ===== 1995 Allowance for doubtful accounts receivable $27.3 $78.0 $ -- $72.7(a) $32.6 ===== ===== ======= ===== ===== 1994 Allowance for doubtful accounts receivable $22.0 $64.9 $ -- $59.6(a) $27.3 ===== ===== ======= ===== =====
(a) Accounts written off, net of recoveries and foreign currency translation adjustment. EX-99 2 EX-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, 1996 Commission file number 1-4881 ____________ AVON PRODUCTS, INC. (Exact name of registrant as specified in its charter) ____________ EXHIBITS (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 May 13, 1996 (incorporated by reference to Exhibit 3.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 3.2 By-laws of Avon, as restated, effective June 6, 1996 (incorporated by reference to Exhibit 3.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 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 the 1993 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 and refiled under Form SE as of December 31, 1996). 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 and refiled under Form SE as of December 31, 1996). 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 and refiled under Form SE as of December 31, 1996). 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 and refiled under Form SE as of December 31, 1996). 4.6 Amended and Restated Revolving Credit and Competitive Advance Facility Agreement, dated as of August 8, 1996, among Avon, Avon Capital Corporation and a group of banks and other lenders (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 10.1* Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders on 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 (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.3* Avon Products, Inc. 1994 Long-Term Incentive Plan, effective as of January 1, 1994 (incorporated by reference to Exhibit 10.3 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 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 as of September 1, 1994 (incorporated by reference to Exhibit 10.6 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.7* Benefit Restoration Pension Plan of Avon Products, Inc., effective as of January 1, 1994 (incorporated by reference to Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.8* 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 and refiled under Form SE for the year ended December 31, 1996). 10.9* 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). 10.10* 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). 10.11* 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). 10.12* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1996. 10.13* Trust Agreement, dated as of April 21, 1995, between Avon and Chemical Bank, amending and restating the Trust Agreement as of August 3, 1989 between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.14 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.14* 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 and refiled under Form SE as of December 31, 1996). 10.15* Employment Agreement, dated as of November 1, 1995, between Avon and James E. Preston (incorporated by reference to Exhibit 10.16 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.16* Stock Option Agreement between Avon and James E. Preston dated October 30, 1995 (incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.17* Employment Agreement, dated as of September 1, 1994, between Avon and Edward J. Robinson (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.18* Restricted Stock Agreement, effective as of November 4, 1993, granted by Avon to Edward J. Robinson (incorporated by reference to Exhibit 10.21 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.19* Form of Employment Agreement, dated as of September 1, 1994, between Avon and certain senior officers (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.20* 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 and refiled under Form SE for the year ended December 31, 1996). 10.21* 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). 10.22* 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 and refiled under Form SE for the year ended December 31, 1996). 10.23* 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, 1996 incorporated by reference in response to Items 1,5 through 8 in this filing. 21 Subsidiaries of the registrant. 23 Consent of Coopers & Lybrand L.L.P. (set forth on page S-2 of this Annual Report on Form 10-K). 24 Power of Attorney 27 Financial Data Schedule 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, 1996 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. EX-10.2 3 EX-10.2 EXHIBIT 10.2 Exhibit 10.2 Form of Employment Agreement, dated as of September 1, 1994 between Avon Products, Inc. and certain senior officers (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). Avon has an employment agreement with each of the following senior officers: Christina Gold Susan Kropf Ward Miller, Jr. Edwina Woodbury Marcia Worthing EX-10.12 4 EX-10.12 EXHIBIT 10.12 THE AVON PRODUCTS, INC. DEFERRED COMPENSATION PLAN (as amended and restated as of January 1, 1996) THE AVON PRODUCTS, INC. DEFERRED COMPENSATION PLAN 1. Purpose: Under the terms of the Plan, a director or an elected or appointed officer of Avon Products, Inc. (the "Company") may defer receipt of all or part of his or her award payable under the Management Incentive Plan, or other annual incentive award for a particular calendar year (collectively referred to as "Annual Bonus"). In addition, a director or officer may defer receipt of all or part of his or her cash award otherwise payable in 1997 under the 1994 Long Term Incentive Plan or otherwise payable in future years under the 1997 Long Term Incentive Plan or other Long Term Incentive Plans (collectively referred to as "LTIP Bonus"). In addition, if an eligible officer or director is a participant in the Avon Employees' Savings and Stock Ownership Plan or its successor (the "Savings Plan"), he (i) may elect to defer receipt of all or a portion of those before-tax contributions, and (ii) shall be credited with those matching contributions, which would have been made to the Savings Plan had his compensation not been reduced by the deferral of compensation, or limited by maximum contribution levels or the limitation on annual compensation set forth under Code Section 401(a)(17). 2. Eligibility: All Officers and directors of the Company may participate in the Plan (collectively referred to as the "Participants"). Notwithstanding the foregoing, the continued Plan participation of a Participant may be suspended in accordance with Section 14. 3. Deferral of Annual Bonus: Each Participant may elect to defer all or a portion of his Annual Bonus for each calendar year. The amount or percentage of the Annual Bonus to be deferred for a calendar year is at the discretion of the Participant, except that the elected amount or percentage must be at least equal to the lesser of $1,000 or 100% of the cash portion of such Bonus. An election by a Participant to defer all or part of such Bonus must be made prior to the end of the calendar year for which the Annual Bonus is paid. (For example, the Annual Bonus for 1996 will be paid in 1997, but the election to defer has to be made in 1996.) Each such election is only valid for the calendar year in which it is made and a new election must be made for each subsequent calendar year in which the Participant chooses to participate. The election must include an election of the method of payment as specified in Section 9 or 9A. 3A. LTIP Bonus The amount or percentage of an LTIP Bonus to be deferred will be elected at the discretion of the Participant in the same manner as described in Section 3, with separate elections required for each Long Term Incentive Plan, and in each instance to include an election as to the method of payment as specified in either Sections 9 or Section 9A. 4. Deferral of Savings Plan Contributions: Each Participant (I) may elect to defer receipt of all or a portion of the Before-Tax Participant Contributions (as defined in the Savings Plan) which would have been permitted to be made under the Savings Plan for a Plan year, as if subsections (a) through (d) below applied, in excess of the Before-Tax Participant Contributions actually made by such Participant to the Savings Plan for such Plan Year, and (ii) shall be credited with those matching contributions which would have been made under Section 3.3 of the Savings Plan for a Plan Year in excess of those matching contributions actually made to the Savings Plan for such Plan Year, as if (a) the limitations of Code Section 415 were not applicable, and (b) the limitations of Code Section 401(a)(17) were not applicable, and (c) the limitations of Code Section 402(g) were not applicable, and (d) the definition of compensation under the Savings Plan included any compensation electively deferred by a member for the Plan Year (as that term is defined in the Savings Plan) to a deferred compensation plan or program maintained by the Company. The election to defer pursuant to this Section 4 must be made independently from any bonus deferral election pursuant to Sections 3 or 3A, and prior to the performance of the services to which the compensation deferral relates. Each such election is valid only for the present calendar year, and a new election must be made for each subsequent year in which the officer or director chooses to participate in the Plan. 5. Crediting of Deferred Amounts: The Company shall establish and maintain individual accounts under the name of each Participant who elects to defer compensation under Sections 3, 3A or 4 above. Bonus deferrals under either Section 3 or Section 3A will be credited to a Participant's account as of the date the Annual Bonus or LTIP Bonus, whichever is applicable, would otherwise be payable. Deferred compensation under Section 4 will be credited to a Participant's account as of the date of withholding, along with associated matching contributions. 6. Interest: Interest will be accrued from the date in which the funds are credited to a Participant's account. Except as provided below, interest on amounts deferred with respect to calendar years before 1990 will be compounded annually at an interest rate equal to Moody's Composite Bond Average (determined as of the date of deferral and on each anniversary thereof) plus four percentage points, or such higher rates as the Company may deem appropriate. Amounts deferred with respect to calendar years after 1989 shall bear interest at a rate determined by the Company, but in no event shall such interest rate be less than equal to the average annual yield on long term (30 years) U.S. treasury bonds (the "T-Bill Rate") as reported in the Federal Reserve Bulletin (determined as of the date of deferral and on each anniversary thereof). The Company shall have the right to lower any interest rate payable on a prospective basis, but not below the T-Bill Rate. Interest will continue to be credited and compounded until the Valuation Date (as defined below) preceding the final payment made to a Participant or a Participant's beneficiary. 7. Valuation of Accounts: The value of each Participant's account, including accrued interest will be calculated on December 31 of each year (the "Valuation Date"). 8. Hardship Withdrawals: At any time prior to commencement of benefits pursuant to Sections 9 or 9A, a Participant may request a withdrawal of all or a portion of the amounts he has previously deferred under the Plan. Such a request shall be approved by the Company only upon a finding that the Participant has suffered a hardship as defined under the Savings Plan, or as defined by any regulations promulgated under Code Section 401(k). In the event such a withdrawal is approved, payment of all or a portion of the amounts deferred by a Participant, together with annual interest compounded as of the date such withdrawal is approved, shall be made as soon as practicable to the Participant. Any benefits otherwise payable hereunder shall be adjusted for such financial hardship payment. 9. Payment of Deferred Compensation: Except as modified by Sections 9A, 10 or 11 below, a Participant's account shall be payable in cash in a single payment on January 15 of the first full calendar year following severance of employment or, if so elected, in annual installments commencing on January 15 of the first full calendar year following severance of employment and continuing on each subsequent January 15 for the period elected. For purposes of this Plan, severance of employment means severance for any reason including, but not limited to, death, retirement, resignation or disability under the Company's Long Term Disability Plan. If severance is due to disability, as defined under the Company's Long Term Disability Plan, the Participant, with the Company's consent, may elect to receive all or a portion of the accrued account upon such Disability; otherwise, the Participant's account will continue to accrue interest on the deferred amounts and will not become payable until final separation from the Company. A Participant shall elect prior to retirement or termination of employment to receive his or her account in a single payment or in annual installments up to a maximum of 15 annual installments. A Participant may change his or her payout election at any time up to the effective date of retirement or termination of employment but may not make any change thereafter, with no payment to be made prior to the date indicated by the preceding paragraph. Should a participant elect installment payments, the amount of the first installment payment will be a fraction of the value of the Participant's deferred compensation account on the preceding Valuation Date, the numerator of which is one (1) and the denominator of which is the total number of annual installments elected. (If a Participant elects one installment, the Participant's entire account balance will be distributed in a single sum on the distribution date.) The amount of each subsequent payment will be a fraction of the remaining value of the Participant's deferred compensation account on the Valuation Date preceding each subsequent installment date, the numerator of which is one (1) and the denominator of which is the total number of installments elected minus the number of installments previously paid. Interest shall continue to accrue on the unpaid balance of the account. 9A. In-Service Payment Option Effective with respect to any deferral of Annual Bonus, or LTIP Bonus otherwise payable in 1997 or subsequent years, and/or any Savings Plan Contributions Deferral for 1997 or subsequent years, a Participant can elect prior to the year in which the payment(s) would otherwise be made, to have payment of a specified portion of his or her deferred account (allocated solely to such compensation) payable on January 15th of an irrevocably designated subsequent year. Such "In-Service" deferred compensation payment will be made at such time notwithstanding that the Participant may not have by then terminated employment. If, however, a Participant in fact terminates employment for any reason prior to such designated date, including death, such In-Service deferred amount will in all cases be distributed in a lump sum as of the January 15th next following such termination. 10. Death of a Participant In the event of a Participant's death prior to termination of employment, the Participant's designated beneficiary will receive payment of the account as of the January 15th of the year next following, in the payout manner which the Participant had elected, i.e. either in a lump sum or in annual installment payments commencing as of such January 15th. The unpaid portion of an account allocated to an In-Service payout election, however, will in all cases be distributed in a lump sum as of the January 15th next following the Participant's death. In the event that a Participant dies after severance of employment, the balance of the Participant's unpaid account shall continue to be paid to the Participant's designated beneficiary in the manner of payment previously elected by the Participant. In the event that a Participant is not survived by a designated beneficiary, or such designated beneficiary subsequently dies before all installment payments have been made, remaining account payments will be made to the Participant's surviving spouse, if any, otherwise to the Participant's estate. 11. Change of Control: Notwithstanding the foregoing, upon the occurrence of a Change of Control (as defined below), the Plan shall automatically terminate and the total deferred amount, plus interest, then standing to the credit of each Participant under the Plan (including a Participant who has terminated employment with the Company and elected to receive distributions in installments) shall be paid to such Participant in a single lump sum as soon as practicable but in no event later than fifteen (15) business days following such Change of Control. Any payment made after such fifteenth business day shall bear additional interest from the date of such Change of Control until the date of payment at the highest rate of interest applicable to any deferral in effect under the Plan at the time of such Change of Control. (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the corporation where such acquisition causes such person to own 20% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this Subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii), and (iii) of Subsection (c) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Corporation Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (i) or (ii) above, and Person subsequently acquires beneficial ownership of additional voting such securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Corporation Voting Securities; or (b) individuals who as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the effective date of this provision whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (c) the approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Voting Securities, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the Board of Directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (d) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, no Change of Control shall be deemed to have occurred with respect to an individual by reason of any actions or events in which such individual participates in a capacity other than in his capacity as officer or employee of the Company (or as a member of the Board of Directors of the Company or a Subsidiary, where applicable). 12. Administration of the Plan: The Company shall be the administrator of the Plan and shall have the discretionary authority to determine all questions arising in connection with the Plan including its interpretation, and may adopt procedural rules and may employ and rely on such legal counsel, accountants, and agents as it may deem advisable to assist in the administration of the Plan. Decisions of the Company shall be conclusive and binding on all persons. 13. Amendment or Termination of the Plan: The Company reserves the right, at any time, and from time to time, and retroactively as deemed necessary or appropriate, to amend or modify in whole or in part any or all of the provisions of the Plan, including the right to discontinue contributions, provided that no such amendment or modification shall adversely affect the benefits accrued under the Plan prior to the effective date of such amendment or modification. The Company may terminate the Plan for any reason at any time, provided that such termination shall not adversely affect the benefits accrued under the Plan prior to such effective date of such termination. 14. Suspension of Deferrals: Notwithstanding any other provision of this Plan, a Participant shall be suspended from continued participation under this Plan for the twelve (12) month period immediately following the date on which the Participant receives any hardship distribution from any Company Savings Plan qualified under Code Section 401(k). 15. No Employment Rights: The existence of the Plan or of a deferral agreement does not constitute a contract for continued employment between a Participant and the Company. The Company reserves the right to modify a Participant's compensation and to terminate a Participant for any reason at any time, notwithstanding the existence of this program or of a deferral agreement. The Company reserves the right not to grant awards to Participants for any reason. 16. Segregation of Monies Not Required: Nothing contained in this Plan or in a deferral agreement shall require the Company to segregate any monies from their general funds, or to create any trusts, or to make any special deposits for any amounts to be paid to any Participant, beneficiary or contingent beneficiary. Neither the Participant, his beneficiary, contingent beneficiary, heirs or personal representatives shall have any right, title or interest in or to any funds of the Company on account of this program or on account of having completed a deferral agreement. 17. Restriction on Transfer: The right to receive any benefits under this Plan may not be transferred, assigned, subject to garnishment, attachment or other legal equitable process without the prior written consent of the Company. 18. Application of Law: The provisions of this Plan shall be construed in accordance with the Employee Retirement Income Security Act of 1974, as amended, and to the extent not superseded thereby, in accordance with the laws of the State of New York. EX-11.1 5 EX-11.1 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 ----------------------- 1996 1995 1994 ---- ---- ---- Weighted average shares of common stock: Weighted average shares outstanding, during the year.............................. 133.70 136.48 141.18 Common stock equivalents........................ * * * ------ ------ ------ Weighted average shares for primary income per share computation................. 133.70 136.48 141.18 ====== ====== ====== Income applicable to common stock: Income from continuing operations............... $317.9 $286.1 $264.8 Discontinued operations, net.................... -- (29.6) (23.8) Cumulative effect of accounting changes, net of taxes........................ -- -- (45.2) ------ ------ ------ Net income...................................... $317.9 $256.5 $195.8 ====== ====== ====== Primary income(loss) per share: Continuing operations........................ $ 2.38 $ 2.10 $ 1.88 Discontinued operations...................... -- (.22) (.17) Cumulative effect of accounting changes...... -- -- (.32) ------ ------ ------ Net income...................................... $ 2.38 $ 1.88 $ 1.39 ====== ====== ====== ________________ *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 ----------------------- 1996 1995 1994 ---- ---- ---- Weighted average shares of common stock: Weighted averge shares outstanding during the year............................ 133.70 136.48 141.18 Common stock equivalents...................... 1.28 .59 .39 ------ ------ ------ Weighted average shares for fully diluted income per share computation............... 134.98 137.07 141.57 ====== ====== ====== Income applicable to common stock: Income from continuing operations............. $317.9 $286.1 $264.8 Discontinued operations, net.................. -- (29.6) (23.8) Cumulative effect of accounting changes, net of taxes...................... -- -- (45.2) ------ ------ ------ Net Income.................................... $317.9 $256.5 $195.8 ====== ====== ====== Fully diluted income (loss) per share: Continuing operations...................... $ 2.36 $ 2.09 $ 1.87 Discontinued operations....................... -- (.22) (.17) Cumulative effect of accounting changes.... -- -- (.32) ------ ------ ------ Net income.................................... $ 2.36 $ 1.87 $ 1.38 ====== ====== ====== EX-13 6 EX-13 EXHIBIT 13 29 Management's Discussion and Analysis Avon Products, Inc. Dollars in millions, except share data The following discussion of the results of operations and financial condition of Avon Products, Inc. ("Avon" or "Company") should be read in conjunction with the information contained in the Consolidated Financial Statements and Notes thereto. These statements have been prepared in conformity with generally accepted accounting principles and require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. All share and per share data included in this report have been restated to reflect a two-for-one stock split distributed in June 1996. Results of Operations Consolidated - Net income in 1996 was $317.9, or $2.38 per share, compared with $256.5, or $1.88 per share, in 1995. The 1995 results include a $29.6, or $.22 per share, after-tax charge to discontinued operations relating to a litigation settlement with Mallinckrodt Group, Inc. ("Mallinckrodt"). See Note 3 of the Notes to the Consolidated Financial Statements for further discussion of this settlement. In addition, the following one-time pretax items are included in the 1995 results: a gain of $25.0, net of related costs, from a cash settlement of a lease dispute and a $7.0 gain, net of related expenses, due to a value-added tax refund in the United Kingdom. Partially offsetting these gains were charges of $12.0 related to an early retirement program implemented in Japan and $11.0 for severance costs, primarily in Europe, as part of Avon's program to reduce fixed expenses in certain markets. The gain in the United Kingdom and expenses in Japan and Europe are included in marketing, distribution and administrative expenses. The lease dispute related to prior year rent charges for the Company's headquarters building. The $25.0 gain represents a $14.0 recovery of disputed rent, which is included in marketing, distribution and administrative expenses, and $11.0 of interest, net of related costs, which is included in other expense, net. The net effect of these one-time items was to increase income from continuing operations and net income by $7.6, or $.06 per share. The Japan and Europe expense reduction programs, which were substantially completed at December 31, 1995, generated approximately $6.0 and $5.0, respectively, of pretax savings in 1995 and $9.0 and $8.0, respectively, of pretax savings in 1996. Net income for 1994 was $195.8, or $1.39 per share, which included a loss of $23.8, or $.17 per share, for discontinued operations relating to the sale of Giorgio Beverly Hills, Inc. ("Giorgio") and a non-cash charge for accounting changes of $45.2 after tax, or $.32 per share. Continuing Operations - Income from continuing operations was $317.9, or 11% over 1995. Income per share from continuing operations increased 13% to $2.38 from $2.10 in the prior year. This 13% increase in income per share exceeded the 11% increase in income from continuing operations reflecting the impact of lower average shares outstanding in 1996 compared with the prior year due to the stock repurchase program begun in 1994. See Note 9 of the Notes to the Consolidated Financial Statements for further discussion of this program. Pretax income was $510.4, a 10%, or $45.4, increase over prior year. The increase was due to higher sales, an improved operating expense ratio, lower non-operating expenses and lower net foreign exchange losses in 1996. These favorable results were partially offset by a decline in the gross margin, lower interest income in 1996 and the favorable net effect of the one- time items in 1995, previously discussed. Income from continuing operations before the cumulative effect of accounting changes in 1995 increased $21.3, or $.22 per share, from 1994. On a consolidated basis, Avon's net sales of $4.81 billion increased 7% from $4.49 billion in 1995. International sales increased 8% to $3.14 billion from $2.91 billion in 1995 due to strong growth in most markets in the Americas, the Pacific Rim, Russia, the United Kingdom and the Central European markets. These improvements were partially offset by sales declines in Japan and, to a lesser extent, Venezuela and Germany. Sales in the U.S. increased 6% to $1.67 billion due to an increase in both average order size and number of Representative orders. Excluding the impact of foreign currency exchange, consolidated net sales rose 14% over the prior year. In 1995, consolidated net sales of $4.49 billion increased 5% over 1994 reflecting a 6% increase in international due to the favorable impact of a weaker U.S. dollar in relation to the currencies in the Europe and Pacific Regions and strong growth in the Americas Region, primarily Brazil, and to a lesser extent, in the United Kingdom, Central European markets and the Pacific Rim. These improvements were partially offset by lower sales in Mexico due to the significant peso devaluation and operational declines in Japan. 1995 sales in the U.S. increased 3% to $1.58 billion due to an increase in Representative orders and an increase in average order size. Cost of sales as a percentage of sales was 39.9% in 1996, compared with 39.4% in 1995. The decline in gross margin was primarily due to an unfavorable cost ratio in Venezuela reflecting the impact of the bolivar devaluations, a shift to sales of lower-priced products in Japan and investments made to reduce excess inventory in Brazil. These declines were partially offset by margin improvements in Mexico, Argentina and the United Kingdom. In 1995, cost of sales as a percentage of sales was 39.4%, compared with 39.2% in 1994. The decline in gross margin was primarily due to a shift in sales mix to the lower margin apparel line and investments made to reduce inventory levels in the U.S., margin investments in the United Kingdom to drive sales and a shift in the sales mix to lower margin products in Japan and the United Kingdom. The decline was partially offset by margin improvements in Brazil reflecting the favorable impact of the government's economic stabilization program implemented in July 1994, a shift in sales mix to higher margin items in Argentina and improvements in most Pacific Rim markets. Marketing, distribution and administrative expenses of $2.35 billion increased $132.6, or 6%, from 1995 and decreased as a percentage of sales to 48.8% from 49.3% in 1995. Excluding the 1995 one-time items previously mentioned, operating expenses increased $134.6. The increase in operating expenses reflects sales volume-related increases in most markets in the Americas, Pacific Rim and in the U.S. and higher marketing and distribution expenses in Brazil. These increases were partially offset by lower expenses in Japan reflecting the sales decline and the impact of a stronger U.S. dollar in 1996. In addition, expense levels were lower in Germany due to a continued active focus on expense reduction and in Venezuela due to the impact of the bolivar devaluations. The decrease in the operating expense ratio reflects improvements in most European markets due to continued fixed expense reduction efforts, in Venezuela due to the impact of the bolivar devaluations and in Mexico and China due primarily to the significant sales growth. These improvements were partially offset by an unfavorable expense ratio in Japan due to the sales decline. In 1995, marketing, distribution and administrative expenses of $2.2 billion increased $116.8, or 6%, from 1994 and increased as a percentage of sales to 49.3% from 49.2% in 1994. Excluding the one-time items previously mentioned, operating expenses increased $114.8. The increase in operating expenses reflects sales-related increases throughout most markets in the Americas Region, most significantly Brazil, and higher expense levels in the Pacific Rim, Japan and most European markets. These increases were partially offset by lower expenses in Mexico due to the significant peso devaluation. The increase in the operating expense ratio reflects increased expenses in relation to sales in Brazil and Venezuela, lower sales in Mexico and higher expenses in Japan mainly due to expanded marketing programs in 1995. These increases were partially offset by improved operating expense ratios in the U.S., throughout Europe, most significantly in the United Kingdom and Germany, and in China due to the sales increase. Interest expense in 1996 of $40.0 decreased $1.3 compared to the prior year as a result of lower interest rates partially offset by slightly higher debt levels. Interest expense in 1995 of $41.3 decreased $9.5 from 1994 due to lower interest rates on borrowings in Brazil and in the U.S. and lower debt levels in Japan. These decreases were partially offset by higher borrowings in the Central European markets reflecting Avon's continued global expansion strategy. Interest income in 1996 of $14.5 decreased $4.9 compared to last year due to lower interest rates in Brazil and Mexico and lower cash investment levels in Brazil and in the U.S. Interest income in 1995 of $19.4 decreased $2.7 compared to 1994 due to lower interest rates and lower average cash balances in Brazil. 31 Other expense, net, was $8.9, an $11.7 decrease from 1995. The decrease primarily reflects favorable corporate non-operating items and lower foreign exchange losses in 1996, partially offset by the $11.0 portion of the previously discussed favorable lease settlement in 1995. Other expense, net, was $20.6 in 1995, a $12.5 decrease from 1994, or $1.5, excluding the previously discussed lease settlement. The $1.5 decrease is primarily due to lower monetary correction expense in Brazil, partially offset by higher non-operating expenses and unfavorable net foreign exchange in 1995. Income taxes were $191.4 in 1996 and the effective tax rate was 37.5% compared with $176.4 and an effective tax rate of 37.9% in 1995. The effective tax rate was lower in 1996 due to the mix of earnings and income tax rates of international subsidiaries, including a decrease in Brazil's statutory corporate tax rate. In 1995, the effective tax rate was 37.9%, compared with 37.7% in 1994. The higher effective tax rate in 1995 resulted from the mix of earnings and income tax rates of international subsidiaries. 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 for a number of years. The annual inflation rate in Brazil, however, has decreased significantly in 1995 and 1996 as the economic environment has improved as a result of the government's economic stabilization program implemented in mid-1994. While it is not possible to forecast with certainty, it is currently expected that Brazil's inflation rate will continue to remain relatively stable throughout 1997. Venezuela and Mexico experienced high rates of inflation in 1996. Below is an analysis of the key factors affecting net sales and pretax income from continuing operations by geographic area for each of the years in the three-year period ended December 31, 1996. Years ended December 31 1996 1995 1994 ---- ---- ---- Net Pretax Net Pretax Net Pretax Sales Income Sales Income Sales Income ----- ------ ----- ------ ----- ------ United States $1,672.5 $227.3 $1,584.8 $211.6 $1,535.1 $201.2 -------- ------ -------- ------ -------- ------ International Americas 1,609.9 291.9 1,466.9 265.8 1,415.3 273.9 Pacific 751.1 73.6 712.0 67.5 664.3 89.7 Europe 780.7 54.4 728.4 41.7 651.8 15.3 -------- ------ -------- ------ -------- ------ Total International 3,141.7 419.9 2,907.3 375.0 2,731.4 378.9 -------- ------ -------- ------ -------- ------ Total from operations $4,814.2 647.2 $4,492.1 586.6 $4,266.5 580.1 ======== ======== ======== Corporate expenses (95.4) (74.6) (84.9) Interest expense (40.0) (41.3) (50.8) Other expense, net (1.4) (5.7) (10.6) ------ ------ ------ Total $510.4 $465.0 $433.8 ====== ====== ====== 32 U.S. - U.S. sales increased 6% to $1.67 billion and pretax income increased 7% to $227.3 in 1996. The sales growth reflects a 4% increase in average order size and a 2% increase in the number of Representative orders. The sales improvement was driven by significant increases in the gift and decorative, apparel and cosmetics, fragrance and toiletries ("CFT") categories. These improvements were partially offset by a decline in sales of the fashion jewelry and accessories category. The growth in the gift and decorative category resulted mainly from the success of both the Spring Blossom and Winter Velvet Barbie dolls introduced in 1996. The Winter Velvet Barbie doll was the most successful new product introduction in Avon's history. The success of the Diane Von Furstenberg spring and summer collections, novelty and children's lines and the launch of Legwear in 1996 contributed to the increase in apparel sales. The growth in the CFT category consisted primarily of increases in sales of personal care and fragrance products. The growth of personal care products was driven by the specialty bath segment which in 1996 reflected an aggressive new products program and a heightened promotional focus. Sales of fragrance products rose due to the introduction of several new fragrances including Millennia, Sunny Sky and Butterfly. Units sold decreased 2% over 1995. Despite strong sales growth in the gift and decorative category, units sold in this category decreased due to increased sales of higher-priced items such as the collectible Barbie dolls. Lower sales of fashion jewelry and accessories also resulted in unit declines. In addition, units decreased due to a shift in emphasis to higher quality premium-priced global brands, such as Avon Color, and away from promotional products and commodity items such as roll-ons, mini-colognes, bubble bath and talc. Despite increased expenses in 1996 due to investments in both advertising and direct access strategies, the operating expense ratio remained level with the prior year. The increase in pretax income was primarily due to the sales increase and a slightly improved gross margin. In 1995, U.S. sales increased 3% to $1.58 billion and pretax income increased 5% to $211.6. The increase in sales reflected a 2% increase in the number of Representative orders and a 1% increase in average order size. Units sold increased 3% over 1994. The sales improvement was driven by increases in the apparel and fragrance and color cosmetics categories, partially offset by declines in the jewelry and gift categories. A full year of apparel sales in 1995, a category originally launched in March 1994, the fall introduction of the Diane Von Furstenberg collections and the success of the children's and novelty lines all contributed to the increase in apparel sales. The increase in the fragrance and color cosmetics category was driven by the successful launch of Avon's global fragrance, Rare Gold, in the fourth quarter and the introductions of Incredible Lengths Mascara and Perfect Wear for Eyes in 1995. The increase in pretax income was primarily due to the sales increase and lower overall operating expenses, despite a significant increase in the price of paper in 1995. These improvements were partially offset by a lower gross margin resulting from higher sales of the lower margin apparel line and margin investments, including clearance sales, to reduce inventory levels. In addition, the margin was impacted by an increase in the demand for new and attractively-priced holiday products as well as some incremental costs incurred in meeting the exceptional demand for several of these products. International - International sales increased 8% to $3.14 billion and pretax income increased 12% to $419.9. Excluding the 1995 one-time items previously mentioned, pretax income increased 8%. The sales increase reflects strong unit growth in most markets in the Americas Region, the Pacific Rim, the United Kingdom, Russia and Central Europe. These improvements were partially offset by sales declines in Japan attributable to both operational and economic factors, discussed below, and to a lesser extent in Venezuela due to the impact of the bolivar devaluations and in Germany due to both operational declines as well as a negative foreign currency impact in 1996. Excluding the impact of foreign currency exchange, international sales were up 18% over 1995. In the Americas Region, sales increased 10% to $1.61 billion and pretax income increased 10%, or $26.1, to $291.9 from $265.8 in 1995. The sales 33 increase was driven by growth in almost every market in the region, most significantly in Mexico and Brazil. Higher sales in Mexico reflect increases in prices at a rate below the inflation level, as well as increases in average order size and unit growth. The number of active Representatives in Mexico has continued to grow from the prior year due to the implementation of incentive programs focused on retention and increasing the number of orders. Brazil's sales growth was due to double-digit increases in unit volume and customers. The growth in Brazil's number of customers resulted from a revision of pricing strategies and new product launches aimed at increasing customer orders in response to an increasingly intense competitive environment in 1996. The sales increase in the region also reflects strong unit growth in Chile, Argentina and Central America. These improvements were partially offset by the decline in Venezuela resulting mainly from the negative impact of two maxi-devaluations of the bolivar. Venezuela did, however, have double- digit increases in both local currency sales and in active Representatives in 1996 attributable to a focus on building market share and Representative growth. The increase in the region's pretax income was primarily due to favorable results in Mexico reflecting the strong sales increase combined with a lower rate of increase in operating expenses, an improved gross margin and foreign exchange gains in 1996 compared to losses in 1995. The operating expense ratio in Mexico improved significantly as a result of an expense control program implemented in 1996. In addition, pretax profit was higher in Chile due mainly to sales growth. These improvements were partially offset by a lower pretax profit in Venezuela, as a result of the bolivar devaluations, and in Brazil reflecting a lower gross margin and an unfavorable operating expense ratio. The gross margin decline in Brazil resulted from investments to reduce excess inventory as well as an aggressive pricing policy to respond to intensified competitive pressures. The unfavorable operating expense ratio reflects increased investments in marketing and higher facilities expenses related to a new distribution center. In addition, a higher volume of lower-priced units in 1996 resulted in increased distribution expenses. In the Pacific Region, sales increased 6% to $751.1 and pretax income, excluding Japan's early retirement program costs in 1995 mentioned previously, decreased 7% to $73.6 from $79.5 in 1995. The increase in sales was driven by strong operational improvements in the Philippines and China, and, to a lesser extent, in Taiwan, Malaysia and Australia. Sales growth in virtually all of these markets was accompanied by strong increases in units sold, customers served and active Representatives. These improvements were partially offset by a significant sales decline in Japan resulting from the unfavorable exchange impact of a stronger U.S. dollar in 1996, a shift in pricing strategy to sales of lower-priced products and a decrease in average order size. These shortfalls resulted from both internal operational factors, including changes made to the Representative commission structure at the beginning of 1996, and external conditions such as the relaxation of cosmetic import regulations which led to accelerated retail pricing competition. To address these challenges, organizational changes were made in July 1996 to better integrate the sales and marketing functions. In addition, national recruiting drives among sales managers and Representatives were conducted and product offerings in the gift and decorative and CFT categories were enhanced. In late December 1996, aggressive actions to align price levels more closely to the market were taken in Japan. These actions resulted in a 20% reduction in CFT prices. The decrease in the region's pretax income resulted from operational difficulties in Japan including a decline in the gross margin due to a continuous focus on lower-priced impulse items in an attempt to increase consumer appeal, as well as an unfavorable expense ratio caused by the significant sales decline, despite a decrease in operating expenses. In addition, pretax profits declined in Thailand due to an unfavorable operating expense ratio caused by lower sales combined with higher spending for incentive awards in 1996. These decreases were partially offset by favorable results in the Philippines due to the significant sales growth and in China due mainly to higher sales and an improved operating expense ratio. In addition, pretax profits were higher in Malaysia, Australia and Taiwan. In the Europe Region, sales increased 7% to $780.7. Excluding the 1995 one-time items, pretax income increased $10.3, or 24%, to $54.4 in 1996. The sales increase was due to unit growth in Russia, the United Kingdom and Central Europe. The Representative base in Russia and Central Europe has 34 grown significantly in 1996 due to a continuous focus on expansion of operations in these markets. Sales also rose in Italy mainly due to a favorable impact of a weaker U.S. dollar in 1996. These improvements were partially offset by sales shortfalls in Germany reflecting a shift to lower- priced items and weak economic conditions, including increased unemployment, which resulted in a general decline in consumer confidence and spending in 1996. Aggressive discounting from competitors and a negative currency impact also contributed to the sales decline in Germany. New initiatives have been launched in Germany to improve market coverage, enhance Avon's image and stimulate customer growth. The increase in pretax income was mainly due to the overall sales increase and favorable operating expense ratios in most markets due to the continued effect of fixed expense reduction efforts. Central European markets posted strong pretax profits reflecting double-digit increases in units, customers served and active Representatives despite gross margin declines from targeted pricing investments to accelerate market penetration in 1996. In 1995, international sales increased 6% to $2.91 billion and pretax income of $375.0 was slightly below 1994. Excluding the one-time items previously mentioned, pretax income increased 3%. The increase in sales reflects the favorable impact of the weaker U.S. dollar in the Europe and Pacific Regions and strong unit growth in the Americas Region, especially Brazil, most Pacific Rim markets and the United Kingdom. These improvements were partially offset by a significant sales decline in Mexico due to the negative impact of the peso devaluation and reduced consumer spending due to the weak economy. In addition, there were operational sales declines in Japan. In the Americas Region, 1995 sales increased 4% to $1.47 billion and pretax income decreased 3% to $265.8 from $273.9 in 1994. The sales increase was mainly due to significant growth in Brazil. The economic stabilization program implemented in Brazil in July 1994 has produced significantly lower levels of annual inflation generating improved consumer confidence. In addition, in 1995, the implementation of a new distribution center, the introduction of new higher-priced products such as Rare Gold Parfum and Renew (Anew) Intensive Treatment, strong unit growth and an increase in number of orders contributed to the sales increase in Brazil. The sales increase in the region also reflected strong unit growth in Venezuela and Chile. These improvements were partially offset by a significant sales decline in Mexico resulting from the negative impact of the peso devaluation which began in late December 1994. As a result, the purchasing power of the Mexican consumer, who was struggling with one of the worst recessions on record, decreased in 1995. This deep recession has resulted in a shift in sales to lower-priced products with purchases directed toward essential products and away from luxury items such as jewelry. Mexico, however, had double-digit increases in local currency sales reflecting an increase in the number of active Representatives. The decrease in pretax income was primarily due to the unfavorable results in Mexico as well as higher operating expenses in Brazil associated with the sales increase, including bad debt and transportation expenses, and the implementation of a new distribution center in 1995. In addition, higher field recognition and marketing expenses in Venezuela in 1995 and unfavorable net foreign exchange in Brazil also contributed to the decrease in pretax income. Brazil's net asset position and slight devaluation generated translation losses in 1995 as compared to a net liability position and significant devaluation which generated gains in 1994. These declines were partially offset by the overall sales increase and lower monetary correction expense in Brazil reflecting the more economically stable environment. In addition, pretax profit was higher in Argentina due to an improved gross margin, resulting from a shift in sales to higher margin items, and lower operating expenses, and in Venezuela due to higher sales and lower foreign exchange losses. The significant devaluation of the bolivar, approximately 40%, in December 1995 did not have a material impact on Venezuela's results for the year. In the Pacific Region, 1995 sales increased 7% to $712.0 and pretax income, excluding Japan's early retirement program costs mentioned previously, decreased 11% to $79.5 from $89.7 in 1994. The increase in sales was due to the favorable impact of a weaker U.S. dollar throughout the region, most significantly in Japan, and strong unit growth in the Pacific Rim, most 35 significantly in China and the Philippines. These improvements were partially offset by operational sales declines in Japan reflecting a shift in pricing strategy to sales of lower-priced products as a result of a decline in consumer spending due to a weak economic climate. In addition, sales were lower in Taiwan due to a shift to lower-priced products, and in Australia, reflecting declines in number of units sold. The results in Japan have been impacted by the economy, which has suffered in 1995 from significant exchange fluctuations, political instability, aggressive competition from discounters and a major earthquake. Sales of CFT have declined significantly in Japan. In response to these difficult conditions, Japan has taken numerous actions, including expanded marketing activities, an early retirement program, previously discussed, and other cost-cutting measures. The decrease in pretax income was due to the unfavorable operating results in Japan, reflecting a decline in gross margin due to a brochure focus on lower-priced impulse items and higher advertising expenses to enhance product awareness and increase consumer appeal. In addition, operating expenses were higher in the Pacific Rim markets due to continued business expansion, mainly in China, and increased investments to respond to heightened competition in several markets as well as high fixed expenses in Australia. These decreases were partially offset by the overall sales increase and improved gross margins in China and the Philippines. In the Europe Region, 1995 sales increased 12% to $728.4. Excluding the one-time items, pretax income increased $28.8 to $44.1 from 1994. The sales increase was due to the favorable impact of a weaker U.S. dollar throughout Europe, most significantly in Germany and the United Kingdom, as well as unit growth in the United Kingdom, the Central European markets and Spain. The developing Central European markets have had solid operational growth as demonstrated by their double-digit increases in units sold in both 1995 and 1994. These improvements were partially offset by shortfalls in Germany reflecting decreased units sold as a result of the economic downturn in the second half of the year. The increase in pretax income was primarily due to the overall sales increase as well as the effect of continued expense reduction efforts throughout Europe. These improvements were partially offset by a gross margin decline in the United Kingdom resulting from margin investments made to support sales with low margin special offers and also to reduce inventory levels. See Foreign Operations section under Liquidity and Capital Resources for additional discussion. Corporate Expenses - Corporate expenses were $95.4 in 1996 compared with $74.6 in 1995. The $20.8 increase is primarily due to the favorable lease settlement in 1995 and higher expenses in 1996 for information systems upgrades and enhancements. In 1995, corporate expenses decreased $10.3 from 1994. The $10.3 decrease is primarily due to the lease settlement in 1995, partially offset by higher non-recurring expenses. Other Expense, Net - Other expense, net, includes corporate non-operating income and expense items and corporate interest income. Other expense, net, was $1.4 in 1996 compared with $5.7 in 1995, a decrease of $4.3 due to lower non-operating expenses partially offset by the $11.0 portion of the 1995 lease settlement. Other expense, net, was $5.7 in 1995 compared with $10.6 in 1994, a decrease of $4.9, due to the $11.0 portion of the lease settlement partially offset by higher non-operating expenses in 1995. Accounting Changes - Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. There was no impact on the Company's results of operations or financial position. Also, effective January 1, 1996, the Company adopted the fair value disclosure requirements of FAS No. 123, "Accounting for Stock-Based Compensation". As permitted by the statement, the Company did not change the method of accounting for its employee stock compensation plans. See Note 8 for the fair value disclosures required under FAS No. 123. 36 Effective January 1, 1994, Avon adopted FAS No. 112, "Employers' Accounting for Postemployment Benefits", for all applicable operations, and FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", for its foreign benefit plans. In addition, effective January 1, 1994, Avon changed its method of accounting for internal systems development costs. Previously, Avon deferred certain internal costs related to the development of major information and accounting systems and amortized them over future periods. These internal development costs are now being expensed as incurred. As a result of the accounting changes that were effective January 1, 1994, Avon recorded an aggregate non-cash charge in the first quarter of 1994 of $45.2, or $.32 per share. This amount reflects the cumulative effect of adjustments for FAS No. 112 of $28.9, or $.20 per share, FAS No. 106 of $8.0, or $.06 per share, and systems development costs of $8.3, or $.06 per share. Discontinued Operations - In December 1995, the Company entered into an agreement with Mallinckrodt, which fully settled the litigation initiated by Mallinckrodt. The settlement covers all indemnity obligations related to Avon's sale of Mallinckrodt, including environmental clean-up claims and litigation concerning Mallinckrodt's settlement of a DuPont patent claim. The settlement payments made by Avon to Mallinckrodt, and related costs, resulted in an after-tax charge to discontinued operations in the fourth quarter of 1995, net of existing reserves, of $29.6, or $.22 per share. During 1994, the Company sold Giorgio, its remaining retail business, for cash of $150.0. The Company recorded a loss of $25.0 on the sale. Giorgio's operating results are segregated and reported as discontinued operations through the date of sale. Since the Company had capital loss carryforwards, no tax benefits were recognized on the above losses in 1995 and 1994. Contingencies - Although Avon has completed its divestiture of all discontinued operations, various lawsuits and claims (asserted and unasserted) are pending or threatened against Avon. The Company is also 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 liable for costs associated with these various hazardous waste sites. In the opinion of Avon's management, based on its review of the 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, 1996 should not have a material adverse impact on Avon's consolidated financial position, results of operations, or cash flows. Liquidity and Capital Resources Cash Flows - Net cash provided by continuing operations was $425.1 in 1996 compared to $328.6 in 1995. The 1996 increase in net cash provided by continuing operations principally reflects, among other things, an increase in net income of $61.4 and a lower funding of working capital. The lower funding of working capital reflects improvements in both prepaid expenses and accounts payable and accrued liabilities. A more detailed analysis of the individual items contributing to the 1996 and 1995 amounts is included in the Consolidated Statement of Cash Flows. Cash used by discontinued operations was $38.2 in 1996, compared to $49.6 in 1995 and $6.0 in 1994. The $38.2 cash used in 1996 primarily reflects final payment of the Mallinckrodt settlement in January 1996. The $43.6 increase in cash used in 1995 compared to 1994 primarily reflects the initial payment of the Mallinckrodt settlement. See discussion above in the Discontinued Operations section regarding this settlement. Excluding changes in debt, net cash usage of $6.6 in 1996 was $38.1 favorable compared to net cash usage of $44.7 in 1995. This improvement reflects higher cash provided by continuing operations, described above, as well as lower cash used in 1996 for discontinued operations, partially offset by higher capital expenditures, higher cash used for the repurchase of common stock, an unfavorable exchange rate impact on cash and higher dividend payments in 1996. Excluding changes in debt, net cash usage of $44.7 in 1995 was $52.4 unfavorable to net cash flow of $7.7 in 1994. This variance reflects higher cash provided by continuing operations, as well as lower cash used in 1995 for the repurchase of common stock, lower capital expenditures and a favorable exchange rate impact on cash. This was more than offset by the 37 proceeds in 1994 from the sale of Giorgio, the Mallinckrodt settlement payment and higher dividends paid in 1995. As of December 31, 1996, 12.6 million shares of common stock have been purchased for $422.9 under the stock repurchase program begun in 1994. Working Capital - As of December 31, 1996, current liabilities exceeded current assets by $41.7 compared with $30.3 at the end of 1995. The variance was primarily due to an increase in accounts payable and net debt (debt less cash and equivalents) partially offset by higher inventory levels, as discussed in the Inventories section, and accounts receivable, due to a higher 1996 sales level. The increase in net debt is primarily due to the final payment of the Mallinckrodt litigation settlement and the ongoing share repurchase program, and the increase in accounts payable resulted from higher inventory levels. Avon's liquidity results from its ability to generate significant cash flows from operations and its ample unused borrowing capacity. Management does not presently plan any actions that would eliminate the working capital deficit at this time. Avon's credit agreements do not contain any provisions or requirements with respect to working capital. Capital Resources - Total debt of $201.6 at December 31, 1996, increased $40.1 from $161.5 at December 31, 1995, compared with a reduction of $16.2 from December 31,1994. During 1996, cash flows from continuing operations and higher debt levels, partially offset by higher cash and equivalents, were used for dividends, the stock repurchase program, capital expenditures, a payment made related to discontinued operations and the purchase of a company in South Africa. During 1995, cash flows from continuing operations as well as cash on hand were used for dividends, the stock repurchase program, capital expenditures, a payment made related to discontinued operations and the reduction of debt. During 1994, cash flows from operations and proceeds from the sale of Giorgio, which more than offset cash used for the stock repurchase program, dividends and capital expenditures, were used to reduce debt. Debt maturing within one year consists of borrowings from banks of $94.0 and the current maturities of long-term debt of $3.1. Management believes that cash from operations and available sources of financing are adequate to meet anticipated requirements for working capital, dividends, capital expenditures, the stock repurchase program and other cash needs. During 1996, the Company entered into an agreement, which expires in 2001, with various banks to amend and restate the five-year, $600.0 revolving credit and competitive advance facility agreement, which was entered into in 1994. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. The new agreement and the prior agreement are referred to, collectively, as the credit facility. The credit facility is primarily to be used to finance working capital, provide support for the issuance of commercial paper and support the stock repurchase program. At the Company's option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, or federal fund rates. The credit facility has an annual facility fee of $.4. The credit facility contains a covenant for interest coverage, as defined. The Company is in compliance with this covenant. At December 31, 1996, borrowings of $29.7 were outstanding under the credit facility. There were no borrowings outstanding at December 31, 1995. At December 31, 1996, Avon has $34.1 outstanding under a $500.0 commercial paper program supported by the credit facility. There were no borrowings outstanding as of December 31, 1995. In addition, the Company has bankers' acceptance facilities and uncommitted lines of credit available of $230.0 with various banks which have no compensating balances or fees. As of December 31, 1996 and 1995, there were no borrowings under these facilities. In addition, as of December 31, 1996 and 1995, there were international lines of credit totaling $357.0 and $320.0, respectively, of which $30.2 and $42.3, respectively, were outstanding. There are no compensating balances or fees under these facilities. 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 38 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 accessories, gift and decorative items and apparel. 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 Inventories of $530.0 at December 31, 1996 were $63.7 higher than 1995 due to higher CFT levels in the U.S. to support the launch of new skin care products in the first quarter of 1997 and business growth and continued expansion into Central Europe, Russia and the Pacific Rim markets. 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 apparel, 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 periodically. Capital Expenditures - Capital expenditures during 1996 were $103.6 (1995 - $72.7). These expenditures were made for capacity expansion in high growth markets and for facility modernization, information systems upgrades and enhancements, equipment replacement projects and leasehold improvements related to office facilities for U.S. and global operations. Numerous construction and information systems projects were in progress at December 31, 1996 with an estimated cost to complete of approximately $74.9. Capital expenditures in 1997 are currently expected to be in the range of $150.0 - $175.0. These expenditures will include continued investments for capacity expansion in high growth markets, most significantly in the Pacific Rim, to maintain worldwide facilities, for contemporization and replacement of information systems and for expenditures related to the relocation of office facilities for the U.S. and global operations. Foreign Operations - The Company derived approximately 65% of both its 1996 consolidated net sales and consolidated pretax income from operations from its international subsidiaries. In addition, as of December 31, 1996, international subsidiaries comprised approximately 59% of the Company's consolidated total assets. Avon's operations in many countries utilize numerous currencies. Avon has significant net assets in Japan, Argentina, Mexico, the United Kingdom, Germany and the Philippines. 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, a country with an economy 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. Effective January 1, 1997, Mexico was designated as a country with a highly inflationary economy due to the cumulative inflation rates over the past three years. The Venezuelan bolivar devalued significantly in December 1995. However, because the devaluation occurred late in the year, there was no material impact on the 1995 results of operations. Following the December 1995 devaluation, another devaluation occurred in late April 1996. As previously mentioned, these devaluations negatively affected Venezuela's U.S. dollar results in 1996. Venezuela's 1996 and 1995 sales represent approximately 2% of Avon's consolidated net sales. Efforts have been focused on building market share and Representative growth in Venezuela. It is expected that a continued weak bolivar will have some impact on 1997 results; however, management cannot at this time project what this impact will be. Avon's well diversified global portfolio of businesses has demonstrated that the effects of weak economies and currency fluctuations in certain countries may be offset by strong results in others. Fluctuations in the value of foreign currencies cause U.S. dollar- translated amounts to change in comparison with previous periods. Accordingly, Avon cannot project in any meaningful way the possible effect of such fluctuations upon translated amounts or 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 in an attempt to minimize certain of the effects of exchange rate changes where economically feasible and the fact that all 39 foreign currencies do not react in the same manner against the U.S. dollar. Certain of the Company's financial instruments, which are discussed below under Risk Management Strategies and in Note 7 of the Notes to the Consolidated Financial Statements, are used to hedge various amounts relating to certain international subsidiaries. However, the Company's foreign currency hedging activities are not significant when compared to the Company's international financial position or results of operations. Some foreign subsidiaries rely primarily on short-term borrowings from local commercial banks to fund working capital needs created by their highly seasonal sales pattern. From time to time, when tax and other considerations dictate, Avon will finance subsidiary working capital needs or borrow foreign currencies. At December 31, 1996, the total indebtedness of foreign subsidiaries was $37.4. In addition, Avon borrowed $29.7 which represented a 3.45 billion yen loan, due November 1997, used to hedge the Company's net investment in Japan. 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 1996, these subsidiaries remitted, net of taxes, $251.1 in dividends and royalties. This sum is a substantial portion of the 1996 consolidated net earnings of Avon's foreign subsidiaries. Risk Management Strategies - The Company operates globally, with manufacturing and distribution facilities in various locations around the world. The Company may reduce its exposure to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company currently does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives. The Company periodically uses interest rate swaps to hedge portions of interest payable on its debt. In addition, the Company may periodically employ interest rate caps to reduce exposure, if any, to increases in variable interest rates. During a substantial portion of the three-year period ended December 31 1996, the Company utilized interest rate swaps to effectively convert variable interest on its long-term debt to a fixed interest rate. From November 1994 through July 10, 1995, due to the expiration of an interest rate swap, the interest payable on the 6 1/8% deutsche mark notes ("Notes") became variable at a rate of one-month LIBOR plus 1.4%. During this period, the Company had an interest rate cap in place to reduce its exposure to increases in that variable interest rate above a specified level. On July 11, 1995, the Company entered into a new interest rate swap agreement, which effectively reconverted the interest payable on the Notes to a fixed rate basis of approximately 7.2% through maturity. Avon has three interest rate swap agreements on the Notes at December 31, 1996 and 1995, each such agreement having a notional amount of $100.0, yielding an aggregate notional amount at December 31, 1996 and 1995 of $300.0. Effective January 1995, the Company had two interest rate caps on the Notes, each with a notional amount of $100.0, one of which expired in 1996 and the other expires when the Notes mature. Subsequent to the interest rate on the Notes becoming fixed, these caps have been marked to market with an insignificant mark-to-market adjustment. In December 1995, the Company entered into an interest rate cap contract with a notional amount of $100.0, which expired in early 1997, in order to hedge a portion of the Company's anticipated short-term variable interest rate working capital debt. This cap has been marked to market with an insignificant mark-to-market adjustment. The interest rate on the Notes was fixed at approximately 10% for most of 1994 through the use of a currency exchange swap contract and several interest rate swaps. With the expiration of one interest rate swap in November 1994, the Company's interest rate on this $100.0 debt was converted from a fixed to a floating rate determined at one-month LIBOR plus 1.4%. The effective rate of interest paid for the Notes in 1996 and 1995 was approximately 7.2% and 7.5%, respectively. The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments, contractual foreign currency cash flows or obligations, including third-party and 40 intercompany foreign currency transactions. The Company regularly monitors its foreign currency exposures and ensures that hedge contract amounts do not exceed the amounts of the underlying exposures. At December 31, 1996, the Company held foreign currency forward contracts with notional amounts totaling $203.1 and option contracts with notional amounts totaling $61.2 to hedge foreign currency items. These contracts all have maturities prior to December 31, 1997. The Company also entered into certain option contracts with notional amounts totaling $46.4 and foreign currency forward contracts totaling $99.0, which do not qualify as hedging transactions under the current accounting definitions and, accordingly, have been marked to market. The mark-to-market adjustment on these option contracts at December 31, 1996, was insignificant. The Company's risk of loss on these options in the future is limited to premiums paid, which are insignificant. The Company attempts to minimize its credit exposure to counterparties by entering into interest rate swap and cap contracts only with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor's Corporation. The Company's foreign currency and interest rate derivatives are comprised of over-the-counter forward contracts or options with major international financial institutions. Although the Company's theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring losses is remote and that such losses, if any, would not be material. Non-performance of the counterparties to the balance of all the currency and interest rate swap agreements in a net receivable position would not result in a significant write-off at December 31, 1996. In addition, there are other swap agreements in a net payable position of an insignificant amount at December 31, 1996. Each agreement provides for the right of offset between counterparties to the agreement. In addition, Avon may be exposed to market risk on its foreign exchange and interest rate swap and cap agreements as a result of changes in foreign exchange and interest rates. The market risk related to the foreign exchange agreements should be substantially offset by changes in the valuation of the underlying items being hedged. 41 Results of Operations by Quarter Avon Products, Inc. During 1996, the Board of Directors authorized a two-for-one stock split which was distributed in June 1996. All share data shown below have been restated to reflect the split. In millions, except per share data First Second Third Fourth Year ----- ------ ----- ------ ---- 1996 Net sales $1,016.1 $1,128.7 $1,177.3 $1,492.1 $4,814.2 Gross profit 614.5 691.6 702.5 884.4 2,893.0 Income before taxes and minority interest 59.8 138.7 98.9 213.0 510.4 Income before minority interest 37.1 86.0 62.8 133.1 319.0 Net income $ 37.7 $ 85.7 $ 62.5 $ 132.0 $ 317.9 ========= ======== ======== ======== ======== Income per share $ .28 $ .64 $ .47 $ .99 $ 2.38(1) ======== ======== ======== ======== ======== 1995 Net sales $ 976.2 $1,064.0 $1,067.8 $1,384.1 $4,492.1 Gross profit 588.9 659.1 648.4 826.7 2,723.1 Income from continuing operations before taxes and minority interest 56.5 133.7 87.2 187.6 465.0 Income from continuing operations before minority interest 34.0 80.3 55.8 118.5 288.6 Discontinued operations, net(2) - - - (29.6) (29.6) Net income $ 34.4 $ 80.4 $ 55.2 $ 86.5 $ 256.5 ======== ======== ======== ======== ======== Income (loss) per share: Continuing operations $ .25 $ .59 $ .41 $ .86 $ 2.10 Discontinued operations - - - (.22) (.22) -------- -------- -------- -------- -------- Income per share $ .25 $ .59 $ .41 $ .64 $ 1.88(1) ======== ======== ======== ======== ======== (1) The sum of per share amounts for the quarters does not necessarily equal that for the year because the computations are made independently. (2) See Note 3 to the Consolidated Financial Statements regarding discontinued operations. Market Prices of Common Stock by Quarter 1996 1995 Quarter High Low High Low ---- --- ---- --- First $44.38 $36.31 $30.69 $27.00 Second 47.56 42.56 34.88 29.81 Third 50.25 39.00 37.69 32.81 Fourth 59.50 48.50 39.19 34.25 Avon common stock is listed on the New York Stock Exchange. At December 31, 1996, there were approximately 24,200 shareholders of record. Dividends of $1.16 per share, or $.29 per share each quarter, were declared and paid in 1996. Dividends declared and paid in 1995 of $1.05 per share include $.275 per share for the last two quarters and $.25 per share for the first two quarters. 42 Consolidated Statement of Income Avon Products, Inc. In millions, except per share data Years ended December 31 1996 1995 1994 ---- ---- ---- Net sales $4,814.2 $4,492.1 $4,266.5 -------- -------- -------- Costs, expenses and other Cost of sales 1,921.2 1,769.0 1,672.1 Marketing, distribution and administrative expenses 2,348.2 2,215.6 2,098.8 Interest expense 40.0 41.3 50.8 Interest income (14.5) (19.4) (22.1) Other expense, net 8.9 20.6 33.1 -------- -------- -------- Total costs, expenses and other 4,303.8 4,027.1 3,832.7 -------- -------- -------- Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 510.4 465.0 433.8 Income taxes 191.4 176.4 163.5 -------- -------- -------- Income from continuing operations before minority interest and cumulative effect of accounting changes 319.0 288.6 270.3 Minority interest (1.1) (2.5) (5.5) -------- -------- -------- Income from continuing operations before cumulative effect of accounting changes 317.9 286.1 264.8 Discontinued operations Income, net of taxes - - 1.2 Loss on disposals, net of taxes - (29.6) (25.0) Cumulative effect of accounting changes, net of taxes - - (45.2) -------- -------- -------- Net income $ 317.9 $ 256.5 $ 195.8 ======== ======== ======== Income (loss) per share: Continuing operations $ 2.38 $ 2.10 $ 1.88 Discontinued operations - (.22) (.17) Cumulative effect of accounting changes - - (.32) -------- -------- -------- Income per share $ 2.38 $ 1.88 $ 1.39 ======== ======== ======== Average shares outstanding 133.70 136.48 141.18 The accompanying notes are an integral part of these statements. 43 Consolidated Balance Sheet Avon Products, Inc. In millions, except share data December 31 1996 1995 ---- ---- Assets Current assets Cash, including cash equivalents of $87.9 and $60.5 $ 184.5 $ 151.4 Accounts receivable (less allowance for doubtful accounts of $36.4 and $32.6) 437.0 402.0 Inventories 530.0 466.3 Prepaid expenses and other 198.1 195.3 -------- -------- Total current assets 1,349.6 1,215.0 -------- -------- Property, plant and equipment, at cost Land 51.5 53.5 Buildings and improvements 564.5 546.1 Equipment 608.9 569.9 -------- -------- 1,224.9 1,169.5 Less accumulated depreciation 658.3 631.7 -------- -------- 566.6 537.8 -------- -------- Other assets 306.2 300.0 -------- -------- Total assets $2,222.4 $2,052.8 ======== ======== Liabilities and Shareholders' Equity Current liabilities Debt maturing within one year $ 97.1 $ 47.3 Accounts payable 469.3 419.7 Accrued compensation 142.4 109.3 Other accrued liabilities 238.7 277.3 Sales and other taxes 124.6 101.8 Income taxes 319.2 289.9 -------- -------- Total current liabilities 1,391.3 1,245.3 -------- -------- Long-term debt 104.5 114.2 Employee benefit plans 384.8 390.8 Deferred income taxes 33.9 33.6 Other liabilities (including minority interest of $41.1 and $46.5) 66.2 76.2 Commitments and contingencies Shareholders' equity Common stock, par value $.25 - authorized: 400,000,000 shares; issued 173,957,379 and 173,498,112 shares 43.5 43.4 Additional paid-in capital 693.6 672.9 Retained earnings 488.8 325.8 Translation adjustments (210.7) (202.1) Treasury stock, at cost - 41,137,297 and 38,263,644 shares (773.5) (647.3) -------- -------- Total shareholders' equity 241.7 192.7 -------- -------- Total liabilities and shareholders' equity $2,222.4 $2,052.8 ======== ======== The accompanying notes are an integral part of these statements. 44 Consolidated Statement of Cash Flows Avon Products, Inc. In millions Years ended December 31 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Net income $ 317.9 $ 256.5 $ 195.8 Adjustments to reconcile income to net cash provided by continuing operations: Depreciation and amortization 64.5 58.3 55.7 Provision for doubtful accounts 79.0 78.0 64.9 Translation gains (.2) (.4) (9.0) Deferred income taxes (.7) (.6) 2.2 Cumulative effect of accounting changes, net - - 45.2 Discontinued operations, net - 29.6 23.8 Other 9.9 13.3 10.7 Changes in assets and liabilities: Accounts receivable (125.5) (132.5) (179.4) Inventories (65.4) (54.6) (61.3) Prepaid expenses and other 13.7 (41.8) (12.7) Accounts payable and accrued liabilities 97.8 59.6 147.4 Income and other taxes 57.7 57.5 45.4 Noncurrent assets and liabilities (23.6) 5.7 (30.4) ------- ------- ------- Net cash provided by continuing operations 425.1 328.6 298.3 Net cash used by discontinued operations (38.2) (49.6) (6.0) ------- ------- ------- Net cash provided by operating activities 386.9 279.0 292.3 ------- ------- ------- Cash flows from investing activities Capital expenditures (103.6) (72.7) (99.9) Disposal of assets 3.3 2.8 4.5 Acquisitions of subsidiary stock (6.3) (3.4) - Proceeds from sale of Giorgio Beverly Hills, Inc. - - 150.0 ------- ------- ------- Net cash (used) provided by investing activities (106.6) (73.3) 54.6 ------- ------- ------- Cash flows from financing activities Cash dividends (158.1) (147.8) (141.1) Debt, net (maturities of three months or less) 17.8 8.8 (23.3) Proceeds from short-term debt 37.5 32.7 35.0 Retirement of short-term debt (14.1) (30.6) (16.2) Proceeds from long-term debt - - 6.1 Retirement of long-term debt (1.5) (29.6) (18.4) Proceeds from exercise of stock options, net of taxes 10.0 1.4 .7 Repurchase of common stock (127.8) (106.9) (188.2) ------- ------- ------- Net cash used by financing activities (236.2) (272.0) (345.4) ------- ------- ------- Effect of exchange rate changes on cash and equivalents (11.0) 2.9 (10.6) ------- ------- ------- Net increase (decrease) in cash and equivalents 33.1 (63.4) (9.1) Cash and equivalents at beginning of year 151.4 214.8 223.9 ------- ------- ------- Cash and equivalents at end of year $ 184.5 $ 151.4 $ 214.8 ======= ======= ======= Cash paid for Interest $ 35.2 $ 36.4 $ 47.8 Income taxes, net of refunds received 158.9 133.5 130.4 The accompanying notes are an integral part of these statements. 45
Consolidated Statement of Changes Avon Products, Inc. in Shareholders' Equity Additional Common Stock Paid-In Retained Translation Treasury In millions, except share data Shares Amount Capital Earnings Adjustments Stock Total ------ ------ ------- -------- ----------- -------- ----- Balance at December 31, 1993 173,057,384 $43.3 $652.3 $ 150.6 $(175.3) $(356.9) $ 314.0 Net income 195.8 195.8 Dividends - $.95 per share (134.0) (134.0) Translation adjustments (11.8) (11.8) Exercise of stock options, including tax benefits 48,136 1.6 1.6 Grant, cancellation and amorti- zation of restricted stock 222,228 4.8 4.8 Repurchase of common stock (188.2) (188.2) Benefit plan contributions 1.8 1.6 3.4 ----------- ----- ------ ------- ------- ------- ------- Balance at December 31, 1994 173,327,748 43.3 660.5 212.4 (187.1) (543.5) 185.6 Net income 256.5 256.5 Dividends - $1.05 per share (143.1) (143.1) Translation adjustments (15.0) (15.0) Exercise of stock options, including tax benefits 79,254 .1 1.5 1.6 Grant, cancellation and amorti- zation of restricted stock 91,110 8.2 8.2 Repurchase of common stock (106.9) (106.9) Benefit plan contributions 2.7 3.1 5.8 ----------- ----- ------ ------- ------- ------- ------- Balance at December 31, 1995 173,498,112 43.4 672.9 325.8 (202.1) (647.3) 192.7 Net income 317.9 317.9 Dividends - $1.16 per share (154.9) (154.9) Translation adjustments (8.6) (8.6) Exercise of stock options, including tax benefits 423,267 .1 15.6 15.7 Grant, cancellation and amorti- zation of restricted stock 36,000 2.7 2.7 Repurchase of common stock (127.8) (127.8) Benefit plan contributions 2.4 1.6 4.0 ----------- ----- ------ ------- ------- ------- ------- Balance at December 31, 1996 173,957,379 $43.5 $693.6 $ 488.8 $(210.7) $(773.5) $ 241.7 =========== ===== ====== ======= ======= ======= ======= The accompanying notes are an integral part of these statements.
46 Notes to Consolidated Financial Statements Avon Products, Inc. In millions, except share data 1. Description of the Business and Summary of Significant Accounting Policies Business Avon Products, Inc. ("Avon" or "Company") is a global manufacturer and marketer of beauty and related products. The product categories include cosmetics, fragrance and toiletries; gift and decorative; apparel; and fashion jewelry and accessories. Avon's business is comprised of one industry segment, direct selling, which is conducted in the U.S., the Americas, the Pacific and Europe. Sales are made to the ultimate customers principally by Avon Representatives. Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Avon and its subsidiaries. Intercompany balances and transactions are eliminated. These statements have been prepared in conformity with generally accepted accounting principles and require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. Foreign Currency - The Company has operations in various countries around the world. Fluctuations in the value of foreign currencies cause U.S. dollar- translated amounts to change in comparison with previous periods. Accordingly, the Company cannot project in any meaningful way the possible effect of such fluctuations upon translated amounts or 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 in an attempt to minimize certain of the effects of exchange rate changes where economically feasible and the fact that all foreign currencies do not react in the same manner against the U.S. dollar. Financial statements of foreign subsidiaries operating in other than 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 of these subsidiaries 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 or when the subsidiary was designated as operating in a highly inflationary economy. 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 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 interest, 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 commercial banks with high credit ratings in the U.S. and abroad. In accordance with Avon's policy, the maximum amount invested in any one bank is limited. Avon believes it is not exposed to any significant credit risk regarding cash and equivalents. Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method for substantially all U.S. inventories, except apparel, and the first-in, first-out method for all other inventories. Depreciation - Substantially all buildings, improvements and equipment are depreciated using the straight-line method over estimated useful lives. Estimated useful lives for buildings and improvements range from 20 to 45 years and equipment ranges from 3 to 15 years. Other Assets - Internal system development costs related to the development of major information and accounting systems are expensed as incurred. Stock Options - Compensation cost is recognized for fixed price options using the intrinsic value method. Under this method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Financial Instruments - Derivative financial instruments are used by the Company in the management of its interest rate and foreign currency exposures and are accounted for on an accrual basis. Gains and losses resulting from effective hedges of existing assets, liabilities or firm commitments are deferred and recognized when the offsetting gains and losses are recognized on the related hedged items. Income and expense are recorded in the same category as that arising from the related asset or liability being hedged. 47 Gains realized on termination of interest rate swap contracts are deferred and amortized over the remaining terms of the original swap agreements. Costs of interest rate cap contracts are amortized over the effective lives of the contracts if considered to be economic hedges; otherwise, they are marked to market. Research and Development - Research and development costs are expensed as incurred and aggregated in 1996 $30.2 (1995 - $27.8; 1994 - $27.9). Advertising - Advertising costs are expensed as incurred and aggregated in 1996 $69.6 (1995 - $52.8; 1994 - $42.6). Income Taxes - Deferred income taxes have been provided on items recognized for financial reporting purposes in different periods than for income tax purposes at future enacted rates. U.S. income taxes have not been provided on approximately $260.0 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 $26.0 would be payable. Income per Share - Income per share of common stock is based on the weighted average number of shares outstanding. The decrease in average shares outstanding during the period 1994 to 1996 is primarily due to the shares acquired under the stock repurchase program. All share and per share data included in this report have been restated to reflect a two-for-one stock split distributed in June 1996. Reclassifications - To conform to the 1996 presentation, certain reclassifications were made to the prior years' consolidated financial statements. 2. Accounting Changes Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. There was no impact on the Company's results of operations or financial position. Also, effective January 1, 1996, the Company adopted the fair value disclosure requirements of FAS No. 123, "Accounting for Stock-Based Compensation". As permitted by the statement, the Company did not change the method of accounting for its employee stock compensation plans. See Note 8 for the fair value disclosures required under FAS No. 123. Effective January 1, 1994, Avon adopted FAS No. 112, "Employers' Accounting for Postemployment Benefits", for all applicable operations, and FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", for its foreign benefit plans. In addition, effective January 1, 1994, Avon changed its method of accounting for internal systems development costs. Previously, Avon deferred certain internal costs related to the development of major information and accounting systems and amortized them over future periods. These internal development costs are now being expensed as incurred. As a result of these accounting changes, Avon recorded an aggregate non- cash charge in the first quarter of 1994 of $45.2, or $.32 per share. This amount reflects the cumulative effect of adjustments for FAS No. 112 of $28.9, or $.20 per share, FAS No. 106 of $8.0, or $.06 per share, and systems development costs of $8.3, or $.06 per share. 3. Discontinued Operations In December 1995, the Company entered into an agreement with Mallinckrodt Group, Inc. ("Mallinckrodt"), which fully settled the litigation initiated by Mallinckrodt. The settlement covers all indemnity obligations related to Avon's sale of Mallinckrodt, including environmental clean-up claims and litigation concerning Mallinckrodt's settlement of a DuPont patent claim. The settlement payments made by Avon to Mallinckrodt, and related costs, resulted in an after-tax charge to discontinued operations in the fourth quarter of 1995, net of existing reserves, of $29.6, or $.22 per share. The remaining reserve relating to discontinued operations, which is not significant, relates to other businesses previously sold. During 1994, the Company sold Giorgio Beverly Hills, Inc. ("Giorgio"), its remaining retail business, for cash of $150.0. The Company recorded a loss of $25.0 on the sale. Giorgio's operating results are segregated and reported as discontinued operations through the date of sale. Since the Company had capital loss carryforwards, no tax benefits were recognized on the above losses in 1995 and 1994. 48 Amounts included in income from discontinued operations for Giorgio through the measurement date of June 30, 1994: net sales of $58.1; income before taxes of $2.0; and net income of $1.2. 4. Inventories Inventories at December 31 consisted of the following: 1996 1995 ---- ---- Raw materials $136.7 $133.2 Finished goods 393.3 333.1 ------ ------ Total $530.0 $466.3 ====== ====== LIFO-based inventories totaled at December 31, 1996 $120.3 (1995 - $107.1), with the current estimated replacement cost exceeding the carrying value by approximately $20.0 (1995 - $20.4). 5. Debt Debt at December 31 consisted of the following: 1996 1995 ---- ---- Maturing within one year: Notes payable $ 94.0 $ 42.3 Current portion of long-term debt 3.1 5.0 ------ ------ Total $ 97.1 $ 47.3 ====== ====== Long-term debt: 170 million 6-1/8% deutsche mark notes, due 1998 (1) $100.0 $100.0 Other, payable to 2002 with interest from 7% to 27% 7.6 19.2 Less current portion (3.1) (5.0) ------ ------ Total $104.5 $114.2 ====== ====== (1) The deutsche mark notes ("Notes") have been effectively converted into U.S. dollar debt through the use of a currency exchange swap contract which includes both the principal and the interest. Reflected in the carrying value of the debt was a currency swap contract receivable at December 31, 1996 of $9.7 (1995 - $18.7). (2) See Note 7 regarding financial instruments. Annual maturities of long-term debt for each of the next five years are: 1997 - $3.1; 1998 - $102.7; 1999 - $1.2; 2000 - $.4; and 2001 - $.1. During 1996, the Company entered into an agreement, which expires in 2001, with various banks to amend and restate the five-year, $600.0 revolving credit and competitive advance facility agreement, which was entered into in 1994. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. The new agreement and the prior agreement are referred to, collectively, as the credit facility. The credit facility is primarily to be used to finance working capital, provide support for the issuance of commercial paper and support the stock repurchase program. At the Company's option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, or federal fund rates. The credit facility has an annual facility fee of $.4. The credit facility contains a covenant for interest coverage, as defined. The Company is in compliance with this covenant. At December 31, 1996, borrowings of $29.7 were outstanding under the credit facility. There were no borrowings outstanding at December 31, 1995. The borrowings of $29.7 represented a 3.45 billion yen loan, due November 1997, used to hedge the Company's net investment in Japan. The annual interest rate is .78%. At December 31, 1996, Avon has $34.1 outstanding under a $500.0 commercial paper program supported by the credit facility. In addition, the Company has bankers' acceptance facilities and uncommitted lines of credit available of $230.0 (1995 - $215.0) with various banks which have no compensating balances or fees. As of December 31, 1996 and 1995, there were no borrowings under the bankers' acceptance facilities and uncommitted lines. The maximum borrowings under these combined facilities during 1996 and 1995 were $361.9 and $230.5, respectively, and the annual average borrowings during each year were approximately $271.3 and $151.7, respectively, at average annual interest rates of approximately 5.5% and 6.0%, respectively. At December 31, 1996 and 1995, international lines of credit totaled $357.0 and $320.0, respectively, of which $30.2 and $42.3 were outstanding, respectively. The maximum borrowings under these facilities during 1996 and 1995 were $58.3 and $55.7, respectively, and the annual average borrowings during each year were $47.2 and $43.9, respectively, at average annual interest rates of approximately 6.3% and 10.5%, respectively. Such lines have no compensating balances or fees. At December 31, 1996 and 1995, Avon also has letters of credit outstanding totaling $18.7 which guarantee various insurance activities. In addition, Avon has outstanding letters of credit for various trade activities. 6. Income Taxes Deferred tax assets (liabilities) resulting from temporary differences in the recognition of income and expense for tax and financial reporting purposes at 49 December 31 consisted of the following: 1996 1995 ---- ---- Deferred tax assets: Postretirement benefits $ 83.5 $ 86.8 Accrued expenses and reserves 53.2 54.5 Employee benefit plans 46.8 40.1 Foreign operating loss carryforwards 30.1 37.5 Capital loss carryforwards 36.3 34.8 Postemployment benefits 10.9 12.2 All other 25.8 22.0 Valuation allowance (70.0) (77.6) ------- ------- Total deferred tax assets 216.6 210.3 ------- ------- Deferred tax liabilities: Depreciation (44.0) (45.5) Prepaid retirement plan costs (54.6) (48.1) Capitalized interest (15.0) (16.3) Unremitted foreign earnings (11.6) (11.0) All other (14.8) (13.1) ------- ------- Total deferred tax liabilities (140.0) (134.0) ------- ------- Net deferred tax assets $ 76.6 $ 76.3 ======= ======= Deferred tax assets (liabilities) at December 31 were classified as follows: 1996 1995 ---- ---- Deferred tax assets: Prepaid expenses and other $ 67.4 $ 50.8 Other assets 46.6 62.0 ------ ------ Total deferred tax assets 114.0 112.8 ------ ------ Deferred tax liabilities: Income taxes (3.5) (2.9) Deferred income taxes (33.9) (33.6) ------ ------ Total deferred tax liabilities (37.4) (36.5) ------ ------ Net deferred tax assets $ 76.6 $ 76.3 ====== ====== The valuation allowance primarily represents reserves for foreign operating loss and capital loss carryforwards. The basis used for recognition of deferred tax assets included the profitability of the operations and related deferred tax liabilities. Income from continuing operations before taxes and minority interest for the years ended December 31 was as follows: 1996 1995 1994 ---- ---- ---- United States $171.3 $149.7 $127.3 Foreign 339.1 315.3 306.5 ------ ------ ------ Total $510.4 $465.0 $433.8 ====== ====== ====== The provision for income taxes for the years ended December 31 was as follows: 1996 1995 1994 ---- ---- ---- Federal: Current $ 30.9 $ 23.3 $ 34.0 Deferred 1.0 .9 (4.1) ------ ------ ------ 31.9 24.2 29.9 ------ ------ ------ Foreign: Current 152.4 146.2 119.8 Deferred (1.5) (1.4) 6.1 ------ ------ ------ 150.9 144.8 125.9 ------ ------ ------ State and other: Current 8.8 7.5 7.5 Deferred (.2) (.1) .2 ------ ------ ------ 8.6 7.4 7.7 ------ ------ ------ Total $191.4 $176.4 $163.5 ====== ====== ====== The effective tax rate for the years ended December 31 was as follows: 1996 1995 1994 ---- ---- ---- Statutory federal rate 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit 1.1 1.0 1.2 Tax-exempt operations (.7) (.7) (1.4) Taxes on foreign income, including translation 6.8 7.5 9.3 Utilization of net operating loss carryforwards (.5) (.1) (5.0) Other (4.2) (4.8) (1.4) ---- ---- ---- Effective tax rate 37.5% 37.9% 37.7% ==== ==== ==== At December 31, 1996, Avon had foreign operating loss carryforwards of approximately $88.9. The loss carryforwards expiring between 1997 and 2004 were $64.3 and the loss carryforwards which do not expire were $24.6. Capital loss carryforwards, which expire between 1997 and 2000 and may be used to offset capital gains, if any, were approximately $103.7 at December 31, 1996. 7. Financial Instruments and Risk Management Risk Management - The Company operates globally, with manufacturing and distribution facilities in various locations around the world. The Company may reduce its exposure to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company currently does not use derivative financial 50 instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives. The notional amount of forward exchange contracts and options is the amount of foreign currency bought or sold at maturity. The notional amount of interest rate swaps is the underlying principal amount used in determining the interest payments exchanged over the life of the swap. The notional amounts are not a direct measure of the Company's exposure through its use of derivatives. Interest Rates - The Company periodically uses interest rate swaps to hedge portions of interest payable on its debt. In addition, the Company may periodically employ interest rate caps to reduce exposure, if any, to increases in variable interest rates. During a substantial portion of the three-year period ended December 31, 1996, the Company utilized interest rate swaps to effectively convert variable interest on its long-term debt to a fixed interest rate. From November 1994 through July 10, 1995, due to the expiration of an interest rate swap, the interest payable on the Notes became variable at a rate of one-month LIBOR plus 1.4%. During this period, the Company had an interest rate cap in place to reduce its exposure to increases in that variable interest rate above a specified level. On July 11, 1995, the Company entered into a new interest rate swap agreement, which effectively reconverted the interest payable on the Notes to a fixed rate basis of approximately 7.2% through maturity. Avon has three interest rate swap agreements on the Notes at December 31, 1996 and 1995, each such agreement having a notional amount of $100.0, yielding an aggregate notional amount at December 31, 1996 and 1995 of $300.0. Effective January 1995, the Company had two interest rate caps on the Notes, each with a notional amount of $100.0, one of which expired in 1996 and the other expires when the Notes mature. Subsequent to the interest rate on the Notes becoming fixed, these caps have been marked to market with an insignificant mark-to-market adjustment. In December 1995, the Company entered into an interest rate cap contract with a notional amount of $100.0, which expired in early 1997, in order to hedge a portion of the Company's anticipated short-term variable interest rate working capital debt. This cap has been marked to market with an insignificant mark-to-market adjustment. During 1993, Avon had a gain of $16.6 from the sale of interest rate swap contracts on the Notes, which is being amortized over the remaining term of the original swap agreements. As of December 31, 1996, the unamortized balance was $4.7 (1995 - $8.2). Foreign Currencies - The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments, contractual foreign currency cash flows or obligations, including third-party and intercompany foreign currency transactions. The Company regularly monitors its foreign currency exposures and ensures that hedge contract amounts do not exceed the amounts of the underlying exposures. At December 31, 1996, the Company held foreign currency forward contracts with notional amounts totaling $203.1 (1995 - $182.2) and option contracts with notional amounts totaling $61.2 (1995 - $90.4) to hedge foreign currency items. These contracts all have maturities prior to December 31, 1997. The Company also entered into certain option contracts with notional amounts totaling $46.4, including the yen borrowing (1995 - $8.2) and, during 1996, foreign currency forward contracts totaling $99.0 which do not qualify as hedging transactions under the current accounting definitions and, accordingly, have been marked to market. The mark-to-market adjustments on these option and forward contracts at December 31, 1996 and 1995, were insignificant. The Company's risk of loss on the options in the future is limited to premiums paid, which are insignificant. These forward and option contracts to purchase and sell foreign currencies, including cross-currency contracts to sell one foreign currency for another currency at December 31 are summarized below: 1996 1995 ---------------- ---------------- Buy Sell Buy Sell --- ---- --- ---- Argentine peso $ - $ 15.0 $ - $ - Brazilian real - 84.0 - - British pound 1.5 33.9 4.4 44.9 Canadian dollar - 44.1 4.5 23.6 Chinese renminbi - 10.0 - - French franc 1.0 14.4 - 5.1 German mark 59.5 16.2 88.4 19.8 Irish punt 13.6 1.6 2.1 - Italian lira 12.7 1.8 1.2 - Japanese yen 57.2 28.1 35.6 45.0 Spanish peseta - 10.1 - 1.6 Other currencies .9 4.1 .1 4.5 ------ ------ ------ ------ Total $146.4 $263.3 $136.3 $144.5 ====== ====== ====== ====== 51 Credit and Market Risk - The Company attempts to minimize its credit exposure to counterparties by entering into interest rate swap and cap contracts only with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor's Corporation. The Company's foreign currency and interest rate derivatives are comprised of over-the-counter forward contracts or options with major international financial institutions. Although the Company's theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring losses is remote and that such losses, if any, would not be material. Non-performance of the counterparties to the balance of all the currency and interest rate swap agreements in a net receivable position would not result in a significant write-off at December 31, 1996. In addition, there are other swap agreements in a net payable position of an insignificant amount at December 31, 1996. Each agreement provides for the right of offset between counterparties to the agreement. In addition, Avon may be exposed to market risk on its foreign exchange and interest rate swap and cap agreements as a result of changes in foreign exchange and interest rates. The market risk related to the foreign exchange agreements should be substantially offset by changes in the valuation of the underlying items being hedged. 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 financial instruments for which it is practicable to estimate that value. For purposes of the following 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 underlying fair value of Avon. The methods and assumptions used to estimate fair value are as follows: Grantor trust - The fair value of these investments, principally money market funds and equity securities, is based on the quoted market prices for issues listed on exchanges. Debt maturing within one year and long-term debt - The fair value of all debt is estimated based on the quoted market prices for issues listed on exchanges. Forward exchange and currency option contracts - The fair value of forward exchange and currency option contracts is estimated based on quoted market prices from banks. Interest rate swap, currency swap and interest rate cap agreements - The fair value of interest rate swap, currency swap and interest rate cap agreements is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that Avon would expect to receive or pay to terminate the agreements. The asset and (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at December 31 consisted of the following: 1996 1995 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash and equivalents $184.5 $184.5 $151.4 $151.4 Grantor trust 49.4 57.2 49.5 52.2 Debt maturing within one year (97.1) (97.1) (47.3) (47.3) Long-term debt (114.2) (117.2) (132.9) (135.9) Currency swap contract on long-term debt 9.7 16.2 18.7 26.9 Other forward exchange and option contracts .3 1.0 4.6 5.0 Interest rate cap contracts - - .1 .1 Interest rate swap receivable - .1 .1 .1 Interest rate swaps payable (.7) (6.4) (.7) (11.3) 52 8. Stock Option Plans A summary of the Company's stock option activity, weighted average exercise price and related information for the years ended December 31 is as follows: 1994 1995 1996 --------------------- ------------------------ --------------------- Weighted Weighted Weighted Shares Average Shares Average Shares Average (in 000's) Price (in 000's) Price (in 000's) Price ---------- -------- ---------- -------- ---------- -------- Outstanding- beginning of year 448 $19.79 1,064 $24.22 2,409 $28.45 Granted 826 26.25 1,430 30.96 894 39.62 Exercised (48) 14.46 (79) 17.46 (423) 24.16 Forfeited (162) 25.21 (6) 23.20 (5) 24.93 ----- ------ ----- ------ ----- ------ Outstanding- end of year 1,064 $24.22 2,409 $28.45 2,875 $32.56 ===== ====== ===== ====== ===== ====== Options exer- cisable - end of year 217 $17.45 449 $24.21 575 $26.03 ===== ====== ===== ====== ===== ====== Exercise prices for options outstanding as of December 31, 1996, consisted of 45,000 options at a price range of $12 to $20; 1,935,000 options at a price range of $26 to $36 and 895,000 at a price range of $40 to $46, with weighted- average remaining contractual lives of approximately three years, eight years and nine years, respectively. The 1993 Stock Incentive Plan ("1993 Plan") provides for several types of equity-based incentive compensation awards. Under the 1993 Plan, the maximum number of shares that may be awarded is 7,050,000 shares, of which no more than 4,000,000 shares may be used for restricted share and stock bonus grants. Awards, when made, may also be in the form of stock options, stock appreciation rights, dividend equivalent rights or performance unit awards. 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 1996, 1995 and 1994, restricted shares with aggregate value and vesting and related amortization periods were granted as follows: 1996 - 39,000 shares valued at $1.7 vesting over two to four years; 1995 - 96,000 shares valued at $2.8 vesting over two to four years; and 1994 - 267,970 shares valued at $7.6 vesting over one to five years. Effective January 1, 1994, the 1994 Long-Term Incentive Plan ("1994 LTIP") was authorized under the 1993 Plan. The 1994 LTIP provides for the grant of two forms of incentive awards, performance units for potential cash incentives and ten-year stock options. Performance units are earned over the three-year performance period (1994-1996), based on the degree of attainment of performance objectives. Options were awarded annually over the three-year performance period and vest in thirds over the three-year period following each option grant date. As discussed above, these options are granted at the fair market value on the date the option is granted. As of December 31, 1996, required performance goals under the 1994 LTIP were achieved and, accordingly, the cash incentives totaling $31.0 are payable. Payment will be made in early 1997. Effective January 1, 1997, a new 1997 Long-Term Incentive Plan was authorized under the 1993 Plan authorizing the grant of two forms of incentive awards, performance units for potential cash incentives and ten-year stock options. As of December 31, 1993, required performance goals under the prior long-term incentive plan were achieved and, accordingly, 50% of previously issued restricted shares were vested and issued in early 1994. An additional 30% of such shares vested and were issued in early 1995 while the remaining 20% vested and were issued in early 1996. During 1993, 96,180 restricted shares were issued under that plan, with an aggregate value on the date of grant of $3.5. Expense is recorded as the restricted shares vest over the periods established for each grant. Compensation expense under all plans in 1996 was $14.7 (1995 - $13.7; 1994 - $14.4). The unamortized cost as of December 31, 1996 was $4.0 (1995 - $5.0). The accrued cost of the performance units in 1996 was $12.0 (1995 - $9.4; 1994 - $9.6). 53 The Company has adopted the disclosure provisions of FAS No. 123, but, as permitted by the statement, has continued to apply Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock option plans. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. If the Company had elected to recognize compensation cost for the plans based on the fair value at the grant dates, consistent with the method prescribed by FAS No. 123, net income and income per share would have been changed to the pro forma amounts indicated below (in millions, except for income per share information): 1996 1995 ---- ---- Pro forma net income $314.9 $255.3 Pro forma income per share $ 2.36 $ 1.87 Pro forma information regarding net income and income per share is required by FAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model which was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. The weighted-average assumptions used for both 1995 and 1996 were the risk-free interest rate of approximately 5.5%; dividend yield of 3%; expected volatility of the market price of the Company's common stock of 20%; and a weighted-average expected life of the option of approximately three years. 9. Shareholders' Equity Stock Split - At the 1996 Annual Meeting, the shareholders approved an amendment to the Company's Certificate of Incorporation to increase the number of shares of common stock authorized from 200 million to 400 million shares and decrease the par value per share from $.50 to $.25. Subsequently, the Company's Board of Directors authorized a two-for-one stock split which was distributed in June 1996 to shareholders of record after the close of business on May 15, 1996. 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 $.005 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% or more of Avon's voting stock. Dividends - On February 1, 1996, Avon increased the regular dividend on common shares to an annual rate of $1.16 per share from an annual rate of $1.10. The first quarterly dividend at the new rate of $.29 per share was paid on March 1, 1996. On August 2, 1995, Avon increased the regular dividend on common shares to an annual rate of $1.10 per share from an annual rate of $1.00. The first quarterly dividend at the new rate of $.275 per share was paid on September 1, 1995. On August 2, 1994, Avon increased the regular dividend on common shares to an annual rate of $1.00 per share from an annual rate of $.90. The first quarterly dividend at the new rate of $.25 per share was paid on September 1, 1994. Stock Repurchase Program - During 1994, Avon's Board of Directors authorized a stock repurchase program under which Avon would buy back up to 10% of its then outstanding common stock, or approximately 14,000,000 shares. The shares would be purchased in the open market over a period of up to three years. As of December 31, 1996, 12.6 million shares have been purchased for $422.9 which are included in Treasury Stock. Savings Plan - In 1996, Avon contributed 86,186 (1995 - 92,356) shares of treasury stock to an employees' savings plan and recognized expense for its fair value. An estimated additional contribution of 60,000 shares, for which the expense has been accrued at December 31, 1996, will be made to the plan since the Company met its performance goal, as defined in the plan. The expense recognized for the plan in 1996 was $7.0 (1995 - $3.7; 1994 - $6.5). 54 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. Net retirement plan expense for the years ended December 31 was determined as follows: 1996 1995 1994 ---- ---- ---- Service cost $ 36.6 $ 33.4 $ 33.7 Interest cost 61.4 58.5 54.2 Actual return on plan assets (72.8) (121.1) 19.9 Net amortization (deferral) 21.2 66.4 (72.5) ------ ------- ------ Net retirement plan expense $ 46.4 $ 37.2 $ 35.3 ====== ======= ======= Retirement plan expense is determined using assumptions as of the beginning of the year. The weighted average assumptions used to determine the data for the years ended December 31 are as follows: 1996 1995 1994 ---- ---- ---- Discount rate 7.3% 8.2% 7.7% Rate of compensation increase 4.5 4.8 4.7 Rate of return on assets 9.3 9.3 9.2 The funded status of retirement plans at December 31, using assumptions as of the end of the year, consisted of the following: Assets Exceed Accumulated Accumulated Benefits Benefits Exceed Assets 1996 1995 1996 1995 ---- ---- ---- ---- Plan assets at fair value (primarily listed stocks and bonds) $ 657.5 $ 623.7 $ 33.2 $ 34.4 ------- ------- ------- ------- Present value of projected benefit obligation Accumulated benefit obligation Vested (496.8) (475.2) (151.1) (148.0) Nonvested (73.1) (72.3) (24.8) (30.4) Projected compensation increases (91.8) (88.3) (37.0) (38.9) ------- ------- ------- ------- Projected benefit obligation (661.7) (635.8) (212.9) (217.3) ------- ------- ------- ------- Plan assets less than projected benefit obligation (4.2) (12.1) (179.7) (182.9) Unrecognized net loss 111.5 123.1 25.2 28.4 Unrecognized prior service cost 16.5 19.0 8.1 8.4 Unrecognized transition (gain) loss (21.3) (29.0) 9.1 11.6 Adjustment for additional liability - - (11.2) (14.5) ------- ------- ------- ------- Prepaid (accrued) retirement plan cost $ 102.5 $ 101.0 $(148.5) $(149.0) ======= ======= ======= ======= At December 31, 1996 and 1995, the weighted average discount rates used in determining the projected benefit obligations were 7.6% and 7.2%, respectively. Prepaid retirement plan cost shown above is included in Other Assets. The accrued retirement plan cost shown above is primarily included in Employee Benefit Plans. 55 Supplemental Executive Retirement and Life Insurance Plans - Avon has a Supplemental 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 in 1996 amounted to $5.5 (1995 - $4.4; 1994 - $3.9). Such benefits will be paid from Avon's assets. The accumulated benefit obligation under this plan at December 31, 1996 was $21.8 (1995 - $21.5) 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 active and retired officers. Avon has acquired corporate-owned life insurance policies to provide partial funding of the benefits. The cash surrender value of these policies at December 31, 1996 was $29.3 (1995 - $27.1) and is held in a grantor trust. Avon has established a grantor trust to provide funding for the benefits payable 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, 1996, amounted to $78.7 (1995 - $76.6), consisting of a money market fund, a managed portfolio of equity securities and corporate-owned life insurance policies. These assets are included in Other Assets. 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 its retirees. Net postretirement benefit cost for the years ended December 31 included the following components: 1996 1995 1994 ----- ---- ---- Service cost $ 3.3 $ 4.0 $ 3.3 Interest cost 14.0 16.3 15.2 ----- ----- ----- Total postretirement benefit cost $17.3 $20.3 $18.5 ===== ===== ===== The assumptions used to determine the data for the years ended December 31 are as follows: 1996 1995 1994 ---- ---- ---- Discount rate 7.2% 8.5% 8.5% Rate of assumed compensation increases 4.5 4.5 5.0 The accumulated postretirement benefits obligation at December 31, which is unfunded, for the U.S. plan and certain foreign plans for which the obligation was not significant, consisted of the following: 1996 1995 ---- ---- Retirees $139.2 $158.3 Other fully eligible participants 3.7 14.9 Other active participants 53.1 63.4 Unrealized gain (loss) 10.8 (17.8) ------ ------ Accumulated postretirement benefits obligation $206.8 $218.8 ====== ====== At December 31, 1996 and 1995, the weighted average discount rates used in determining the accumulated benefits obligation were 7.7% and 7.2%, respectively. The assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 10.0% for 1996 and will gradually decrease each year thereafter to 5.0% in 2005 and beyond. Increasing the health care cost trend rate by one percentage point would have increased the accumulated postretirement benefits obligation at December 31, 1996 by $24.0 and would have increased the 1996 annual postretirement benefits expense by $2.6. Postemployment Benefits - Effective January 1, 1994, the Company adopted FAS No. 112, as discussed in Note 2. FAS No. 112 requires the accrual of the cost of postemployment benefits rather than expensing the costs when paid. 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. At December 31, 1996, the accrued cost for postemployment benefits was $32.2 (1995 - $35.8) and is included in Employee Benefit Plans. 56 11. Geographic Information Sales and pretax income by geographic area are presented on page 31. Identifiable assets by geographic area at December 31 were as follows: 1996 1995 1994 ---- ---- ---- United States $ 470.2 $ 449.2 $ 414.2 -------- -------- -------- International Americas 548.8 498.4 463.9 Pacific 383.5 375.5 329.2 Europe 377.4 339.7 308.6 -------- -------- -------- Total International 1,309.7 1,213.6 1,101.7 -------- -------- -------- Corporate and other* 442.5 390.0 462.4 -------- -------- -------- Total $2,222.4 $2,052.8 $1,978.3 ======== ======== ======== *Includes Cash Equivalents in 1996 of $87.9 (1995 - $60.5; 1994 - $132.5). Foreign Exchange - Financial statement translation of subsidiaries operating in highly inflationary economies and foreign currency transactions resulted in losses in 1996 netting to $3.1 (1995 - $6.9; 1994 - $6.8), 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 in 1996 of $12.6 (1995 - $4.7; 1994 - $23.9). 12. Leases and Commitments Minimum rental commitments under noncancellable operating leases primarily for equipment and office facilities at December 31, 1996, consisted of the following: Year ---- 1997 $ 56.1 1998 45.8 1999 32.3 2000 24.5 2001 18.9 Later years 221.0 Sublease rental income (13.4) ------- Total $ 385.2(1) ======= (1) Includes leases for office facilities entered into in 1995 for U.S. and global operations commencing in 1997. Rent expense related to continuing operations in 1996 was $89.7 (1995 - $78.0; 1994 - $94.0). Various construction and information systems projects were in progress at December 31, 1996 with an estimated cost to complete of approximately $74.9. 13. Contingencies Various lawsuits and claims (asserted and unasserted), arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In 1991, a class action lawsuit was initiated against Avon on behalf of certain classes of holders of Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS"). This lawsuit alleges various contract and securities law claims relating to the PERCS (which were fully redeemed that year). Avon has rejected the assertions in this case, believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. In the opinion of Avon's management, based on its review of the 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, 1996 should not have a material adverse impact on Avon's consolidated financial position, results of operations, or cash flows. 14. Subsequent Event On February 6, 1997, Avon's Board of Directors authorized a new stock repurchase program under which Avon may buy back up to $500.0 of its currently outstanding common stock. The shares would be purchased in the open market over a period of up to three to five years, beginning in 1997. Also, on February 6, 1997, Avon's Board of Directors approved an increase in the quarterly cash dividend to $.315 per share from $.29. The first dividend at the new rate will be paid on March 3, 1997 to shareholders of record on February 18, 1997. On an annualized basis, the new dividend rate will be $1.26 per share. 57 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 estimates. The audit report of Coopers & Lybrand L.L.P., independent accountants, on these financial statements is the result of their audits of these consolidated financial 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 safeguarded, transactions are executed in accordance with appropriate authorization and accounting records may be relied upon for the preparation of financial information. 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 L.L.P. and the internal auditors to monitor the proper discharge of each of their respective responsibilities. Coopers & Lybrand L.L.P. 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 highest standard of business conduct. James E. Preston Edwina D. Woodbury Chairman of the Board and Senior Vice President, Chief Executive Officer Chief Financial and Administrative 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, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These financial 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 standards. 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 management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avon Products, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. In 1994, Avon changed its methods of accounting for postemployment benefits, for postretirement benefits other than pensions for its foreign benefit plans, and internal systems development costs. These changes are discussed in Note 2 to the consolidated financial statements. Coopers & Lybrand L.L.P. New York, New York February 6, 1997 58 Eleven-Year Review In millions, except per share and employee data 1996 1995 1994 1993 ---- ---- ---- ---- Income data Net sales $4,814.2 $4,492.1 $4,266.5 $3,844.1 Interest expense 40.0 41.3 50.8 45.2 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 510.4 465.0 433.8 394.6 Income from continuing operations before minority interest and cumulative effect of accounting changes 319.0 288.6 270.3 243.8 Income from continuing operations 317.9 286.1 264.8 236.9 Income (loss) from discontinued operations, net - (29.6) (23.8) 2.7 Cumulative effect of accounting changes, net - - (45.2)(1) (107.5)(1) Net income (loss) 317.9 256.5 195.8 132.1 Income (loss) per share of common stock - assuming full dilution (4) Continuing operations $ 2.38 $ 2.10 $ 1.88 $ 1.64 Discontinued operations - (.22) (.17) .02 Cumulative effect of accounting changes - - (.32) (.74) Net income (loss) 2.38 1.88 1.39 .92 Cash dividends per share Common $ 1.16 $ 1.05 $ .95 $ .85 Preferred - - - - Balance sheet data Working capital $ (41.7) $ (30.3) $ 9.3 $ 23.1 Capital expenditures 103.6 72.7 99.9 58.1 Property, plant and equipment, net 566.6 537.8 528.4 476.2 Total assets 2,222.4 2,052.8 1,978.3 1,918.7 Debt maturing within one year 97.1 47.3 61.2 70.4 Long-term debt 104.5 114.2 116.5 123.7 Total debt 201.6 161.5 177.7 194.1 Shareholders' equity 241.7 192.7 185.6 314.0 Number of employees United States 7,800 8,000 7,900 8,000 International 25,900 23,800 22,500 21,500 -------- -------- -------- -------- Total employees 33,700 31,800 30,400 29,500 ======== ======== ======== ======== 59 1992 1991 1990 1989 ---- ---- ---- ---- $3,660.5 $3,441.0 $3,291.6 $2,998.3 43.7 75.4 77.5 118.0 290.0(2) 352.9 305.6 252.9 169.4(2) 209.3 180.3 134.1 164.2(2) 204.8 174.1 126.5 10.8 (69.1) 21.2 (71.9) - - - - 175.0(2) 135.7 195.3 54.6 $ 1.14(2) $ 1.43 $ 1.16 $ .82(5) .08 (.48) .14 (.65)(5) - - - - 1.22(2) .95 1.30 .17(5) $ .75 $ 2.20(6) $ .50 $ .50 - .505 1.00 1.00 $ (99.5) $ (135.3) $ 71.6 $ 56.3 62.7 61.2 36.3 33.3 476.7 468.5 467.2 472.5 1,692.6 1,693.3 2,010.1 1,994.1 37.3 143.8 207.1 151.7 177.7 208.1 334.8 673.2 215.0 351.9 541.9 824.9 310.5 251.6 393.4 228.3 8,700 9,200 9,500 9,400 20,700 20,900 20,300 19,900 ------ ------ ------ ------ 29,400 30,100 29,800 29,300 ====== ====== ====== ====== Avon Products, Inc. 1988 1987 1986 ---- ---- ---- $2,835.2 $2,506.2 $2,235.1 112.9 77.5 45.5 208.3 359.6(3) 205.0 121.1 224.8(3) 127.1 112.3 222.8(3) 126.7 (536.8) (63.7) 32.0 20.0(1) - - (404.5) 159.1(3) 158.7 $ .76(5) $ 1.58(3) $ .89 (4.31)(5) (.45) .22 .16(5) - - (3.39)(5) 1.13(3) 1.11 $ .75 $ 1.00 $ 1.00 .50 - - $ 51.0 $ 122.2 $ 129.1 46.0 45.9 57.5 529.1 561.3 536.2 2,362.6 2,419.6 2,143.0 205.6 62.8 104.6 917.9 801.8 671.2 1,123.5 864.6 775.8 239.3 758.6 681.3 9,700 10,500 10,800 18,400 18,100 17,700 - -------- ------- ------- 28,100 28,600 28,500 ======== ======= ======= (1) Effective January 1, 1994, Avon adopted Statement of Financial Accounting Standards ("FAS") No. 112, "Employers' Accounting for Postemployment Benefits", for all applicable operations, and FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", for its foreign benefit plans. In addition, effective January 1, 1994, Avon changed its method of accounting for internal systems development costs. These development costs are being expensed as incurred, rather than deferred and amortized over future periods. Effective January 1, 1993, Avon adopted FAS No. 106, for its U.S. retiree health care and life insurance benefit plans and FAS No. 109, "Accounting for Income Taxes". 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 $.45 per share). Income from continuing operations in 1993 increased 4% from $228.6, or $1.59 per share, excluding the 1992 restructuring charge. (3) The following nonrecurring transactions were recorded during 1987: a pretax gain of $191.0 ($121.1 after tax, or $.86 per share) resulting from the sale of subsidiary stock and a special provision for restructuring of $47.5 ($29.4 after tax, or $.21 per share). (4) A two-for-one stock split was distributed in June 1996. All per share data in this report, unless indicated, have been restated to reflect the split. 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 36.0 preferred shares into approximately 25.92 common shares on June 3, 1991. (5) In 1989 and 1988, the calculation of income per share assuming full dilution is antidilutive and, accordingly, the primary income per share amount is reported as "income per share of common stock assuming full dilution." (6) Includes special dividend of $1.50 paid in 1991. EX-21 7 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 (Guangzhou) 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 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 (85%) 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 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 Turkey Sanayi ve Ticaret A.S. (50%) Avon Cosmetics Limited United Kingdom Avon European Holdings Ltd. United Kingdom Avon Cosmetics de Venezuela, C.A. Venezuela EX-24 8 EX-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, WARD M. MILLER, JR. and MARTIN H. MICHAEL 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 1996 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 attorneys-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 6, 1997. Signature Title - --------- ----- Chairman of the Board and Chief Executive Officer - Principal /s/James E. Preston Executive Officer and Director - ------------------- James E. Preston President, Chief Operating /s/Edward J. Robinson Officer and Director - --------------------- Edward J. Robinson Senior Vice President, Chief Financial Officer - /s/Edwina D. Woodbury Principal Financial Officer - --------------------- Edwina D. Woodbury Vice President and Controller - /s/Michael R. Mathieson Principal Accounting Officer - ----------------------- Michael R. Mathieson Signature Title /s/Brenda C. Barnes - -------------------- Brenda C. Barnes Director /s/Richard S. Barton - -------------------- Richard S. Barton Director /s/Remedios Diaz Oliver - ----------------------- Remedios Diaz Oliver Director /s/Edward T. Fogarty - -------------------- Edward T. Fogarty Director - -------------------- Stanley C. Gault Director /s/George V. Grune - ------------------- George V. Grune Director /s/Charles S. Locke - -------------------- Charles S. Locke Director /s/Ann S. Moore - --------------- Ann S. Moore Director /s/Charles R. Perrin - -------------------- Charles R. Perrin Director /s/Joseph A. Rice - ------------------ Joseph A. Rice Director /s/Cecily C. Selby - ------------------ Cecily C. Selby Director EX-27 9 EX-27
5 EXHIBIT 27 Exhibit 27 Avon Products, Inc. Financial Data Schedule This schedule contains summary financial information extracted from the Avon Products, Inc. financial statements as of December 31, 1996 and for the year then ended included in the Form 10-K as of December 31, 1996 and is qualified in its entirety by reference to such financial statements. 1000000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 185 0 473 (36) 530 1,350 1,225 (658) 2,222 1,391 105 0 0 44 198 2,222 4,814 4,814 1,921 4,190 9 79 40 510 191 318 0 0 0 318 2.38 2.38
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