-----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, Omuuf3kJENzx9uuvsHt/IqV/m5heiPJV34491c85rYM0bvg9bpgTaW8RimNO8CdU EWrLLmpJaYP69hvPqxHqAg== 0000008868-00-000001.txt : 20000404 0000008868-00-000001.hdr.sgml : 20000404 ACCESSION NUMBER: 0000008868-00-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVON PRODUCTS INC CENTRAL INDEX KEY: 0000008868 STANDARD INDUSTRIAL CLASSIFICATION: 2844 IRS NUMBER: 130544597 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04881 FILM NUMBER: 579532 BUSINESS ADDRESS: STREET 1: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105-0196 BUSINESS PHONE: 2122825000 MAIL ADDRESS: STREET 2: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105-0196 10-K 1 DECEMBER 31, 1999 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, 1999 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 29, 2000 was $6.4 billion. The number of shares of Common Stock (par value $.25) outstanding at February 29, 2000 was 237,514,173. Documents Incorporated by Reference Parts I and II Portions of the 1999 Annual Report to Shareholders. Part III Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders. 1 PART I ITEM 1. BUSINESS Certain statements in this report which are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the information set forth herein. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, levels of activity, performance or achievement of Avon Products, Inc. ("Avon" or the "Company"), or industry results, to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward- looking statements. Such factors include, among others, the following: General economic and business conditions; the ability of the Company to implement its business strategy; the Company's access to financing and its management of foreign currency risks; the Company's ability to successfully identify new business opportunities; the Company's ability to attract and retain key executives; the Company's ability to achieve anticipated cost savings and profitability targets; the impact of substantial currency exchange devaluations in the Company's principal foreign markets; changes in the industry; competition; the effect of regulatory and legal restrictions imposed by foreign governments; the effect of regulatory and legal proceedings and other factors as discussed in Item 1 of this Form 10- K. As a result of the foregoing and other factors, no assurance can be given as to the future results and achievements of the Company. Neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements. General The Company is one of the world's leading manufacturers and marketers of beauty and related products, which include cosmetics, fragrance and toiletries (CFT); "beauty plus" which consists of jewelry and accessories and apparel; and "non-core" which consists of gift and decorative and home entertainment products. 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, which is conducted in North America, Latin America, the Pacific and Europe. The Company's reportable segments are based on geographic operations. Financial information relating to the reportable segments is incorporated by reference to the analysis of net sales and operating profit by geographic area, and to Note 11 of the Notes to the Consolidated Financial Statements, on pages 31 and 56, respectively, in Avon's 1999 Annual Report to Shareholders. Business Process Redesign In October 1997, the Company announced a worldwide business process redesign ("BPR") program to streamline operations and improve profitability through margin improvement and expense reductions. The 2 special and non-recurring charges associated with this program totaled $151.2 pretax ($121.9 net of tax, or $.47 per share on a basic and diluted basis) for the year ended December 31, 1999 and $154.4 pretax ($122.8 net of tax, or $.46 per share on a basic and diluted basis) for the year ended December 31, 1998. At December 31, 1999, the remaining liability balance was $26.2 and relates primarily to severance costs that will be paid in 2000. BPR initiatives underway are intended to reduce costs by up to $400.0 a year by 2000, with a portion of the savings being reinvested primarily in consumer-focused initiatives. Total savings from BPR initiatives for 1999 approximated $250.0. Global Business Strategy In 1999, the Company adopted a new strategic plan to drive revenue growth and expand its customer base around the world by building on the Company's strength as a beauty marketer and a leading home direct seller. The new strategy includes, but is not limited to, plans to accelerate growth in its core beauty business by growing global brands, expanding market share, upgrading its beauty image and new product innovation; building a global portfolio of jewelry and accessories; developing innovative programs to train, motivate and retain Representatives; exploiting retail opportunities; and developing new businesses. The Company expects that its BPR programs will continue to provide resources to fund these strategic growth initiatives and contribute to earnings growth. Spending for product innovation and advertising are also key components in building a global beauty image and reaching the end consumer. In 2000, the Company will launch its first-ever global advertising campaign and significantly expand its use of Internet technology. Avon's global strategies include the following key growth initiatives: Direct Selling Contemporization The Company continues to contemporize its direct selling channel enabling it to reach women quickly and efficiently by offering Representative training, support and earnings opportunities. The Company is planning to roll out a global Sales Leadership program in its ten largest markets around the world. The Sales Leadership program is a modified multi-level selling system which will give Representatives the opportunity to earn commissions generated from downstream sales of other Representatives they recruit. This program limits the number of levels to three and continues to focus on individual product sales. The Company also plans to implement a Representative development strategy in 2000. This strategy will focus on the professional training and development of its Representatives through the introduction of the Avon Beauty Advisor. Beauty Advisor training will include an in-home study package as well as seminars where Representatives will be trained 3 to do beauty makeovers, where permissible, and consultations. In addition to introducing the Avon Beauty Advisor, the Company has formed an alliance with a sales motivation company to introduce a series of Avon-sponsored training materials and seminars called "Success by Design". Avon is also developing enhanced Representative training to support the Sales Leadership opportunity, including a certification process for each Leadership level. In addition to the Sales Leadership program and Representative development strategy, the Company is planning to build and relaunch its Avon.com Internet site in the United States with a technology partner. The site will feature Avon's full product line and will be designed to help its U.S. sales Representatives build their own Avon business by enabling them to sell online through their own personalized web pages, developed in partnership with the Company. The Representatives can tailor their web pages to their specific customer bases by promoting particular products, targeting specific age groups and consumer segments, and reflecting seasonal interests and regional tastes. These "e- Representatives" will be able to conduct all aspects of their Avon business online, including customer prospecting, ordering, getting account status and making payments. Avon will also sell products directly to consumers if they choose not to purchase through a Representative. Additionally, the Company annually produces more than 600 million brochures in a dozen languages, utilizing common imagery and layouts from a single global database to enhance its global beauty image. In 2000, Avon plans on incremental spending to upgrade the quality of brochures, in several of its largest markets, including the U.S. Complementary Access To accelerate growth in established industrial nations such as the U.S., Western Europe and Japan, the Company has developed new channels to reach more customers and improve access to its products through Avon Beauty Centers and Express Centers in the U.S., toll-free telephone numbers, direct mail and "on line" shopping via the Internet on Avon's web site, Avon.com. Avon Beauty Centers, located in urban malls across the United States, are designed to display an upscale beauty image, showcase the Company's beauty brands and encourage customer trial of product. Avon Express Centers also provide easy access to products and allow Representatives to fill orders immediately, rather than waiting for campaign deliveries. In 2000, Avon intends to implement a more integrated Internet strategy beginning with the U.S. to focus on improving access and accelerating growth. These complementary access programs will further increase Avon's brand awareness and drive its global beauty image. 4 Access strategies also have helped reach new customers in the Pacific Region. For example, the Philippines, India and Indonesia use decentralized branches and satellite stores to serve Representatives and customers. Representatives come to a branch near their homes to place and pick up product orders for their customers. The branches also create visibility for Avon with consumers and help reinforce the Company's beauty image. In Malaysia, Avon has 180 franchised beauty boutiques, which are staffed by franchise Representatives and are located in areas with high concentrations of Representatives. The boutiques provide more direct and personal service to Representatives and their customers. Additionally, in China and Taiwan, beauty counters managed by Avon Representatives are in retail store chains. The Company is exploring potential retail opportunities in the U.S., including a franchising opportunity for women who would own their own Avon retail store or kiosk and a "store within a store" concept developed through a joint venture with a major retailer. Image Enhancement The Company continues to update the image of its core beauty products and its portfolio of global beauty brands. In the past five years, CFT products have all undergone extensive upgrades in packaging, imaging and formulations, consistent with the global brand strategy. These contemporary products project a consistent, high quality image in all markets and include brands such as Anew, Skin-So-Soft, Avon Color, Far Away, Rare Gold, Millennia, Perceive, Starring, Avon Skin Care and Women of Earth. Global brands are growing rapidly as a percentage of the Company's worldwide CFT business and in 1999, they accounted for 51% of core beauty sales. The Company plans on launching three global hair care brands and launching a global jewelry and fashion accessories line around the world. The development of global brands has also enabled the Company to deliver a consistent beauty image around the world, as well as improve margins through pricing and supply chain efficiencies. Avon is also marketing a more vibrant beauty image through increased advertising and image-building programs focused on the consumer. In 2000, the Company intends to launch its first-ever global advertising campaign entitled "Let's Talk", increase investments in product sampling and development and upgrade the quality of its brochure to further build its worldwide beauty image. 5 In 1998, an important image enhancement came with the opening of the Avon Centre, a spa, salon and retail store located in Trump Tower, New York City. The Avon Centre emphasizes health and beauty and offers a selection of Avon beauty products created exclusively for use at the Avon Centre. Through these strategic initiatives designed to focus on high- quality, affordable products, as well as convenience for the customer, Avon is not only positioned for continued growth but also as a leading beauty company. International Expansion Avon is one of the most widely recognized brand names in the world. The Company is particularly well positioned to capitalize on growth in new international markets due to high demand for quality products, underdeveloped retail, infrastructures and relatively attractive earnings opportunities for women. The Company presently has operations in 50 countries outside the United States and its products are distributed in 86 more for coverage in 137 markets, and it continues to expand into new markets. The Company has entered 24 new markets since 1990, including Russia and China and rapidly emerging nations throughout Central Europe, and is currently evaluating several other markets in Eastern Europe and the Pacific region. Distribution Avon's products are sold worldwide by approximately 3.0 million Representatives, approximately 445,000 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 to their customers. The Company's products are sold to customers through a combination of direct selling and marketing utilizing independent Representatives, Avon Beauty Centers, Express Centers in urban areas, the mail, phone, fax or "on-line". Representatives go where the customers are, both in the home and 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 selling aids such as 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. 6 Avon employs certain electronic order systems 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. One of these systems permits 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. The current Internet site, Avon.com, with nearly 400,000 visitors a month, also sells a limited line of CFT products directly to consumers. In 2000, the Company plans to launch a completely new Avon.com in the U.S., with implementation in certain key markets within about one year of the U.S. launch. The new online initiative will be available to all Representatives and offer a complete line of Avon products 24 hours a day, 7 days a week, with no geographic boundaries. 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 responsibilities 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 sales incentive based primarily 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 at assisting the Representatives, through sales aids such as brochures, product samples and demonstration products. In order to support the 7 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 Representatives through the use of special incentive programs that reward superior sales performance. Periodic sales meetings with Representatives are conducted by the district managers. 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. CFT products are available each sales campaign at consistently low prices, 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, duration 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 CFT; 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. The number of competitors and degree of competition that Avon faces in its foreign CFT and fashion jewelry markets varies widely from country to country. Avon is one of the leading manufacturers and distributors in the CFT industry in most of its foreign markets, as well as in the fashion jewelry industry in Europe. 8 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 its Representatives; the high quality, attractive designs and reasonable prices of its products; new product introductions; innovative CFT products; and its 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 ----------------------- 1999 1998 1997 ---- ---- ---- Cosmetics, fragrance and toiletries $3,226.1 $3,176.6 $3,093.9 Beauty Plus: Jewelry and accessories 455.4 408.1 370.2 Apparel 556.1 567.7 565.6 1,011.5 975.8 935.8 Non-core* 1,051.5 1,060.3 1,049.7 Total net sales $5,289.1 $5,212.7 $5,079.4 * Non-core category primarily includes gift and decorative and home entertainment items. 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 50 countries and Avon's products are distributed in some 86 other countries. Manufacturing Avon manufactures and packages almost all of its CFT products. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components, are purchased from various suppliers. Packages, consisting of containers and packaging components, are designed by its staff of artists and designers. The design and development of new products are affected by the cost and availability of materials such as glass, plastics and chemicals. Avon 9 believes that it can continue to obtain sufficient raw materials and supplies to manufacture and produce its products. Avon has eighteen manufacturing laboratories around the world, one of which is principally devoted to the manufacture of fashion jewelry. In the United States, Avon's CFT products are produced in three manufacturing laboratories for the four distribution centers and all Beauty and Express 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 manufacturing laboratory in Puerto Rico or by several independent manufacturers. Trademarks and Patents Avon's business is not materially dependent on third party patent or other intellectual property rights and Avon is not a party to any material license, franchise or concession. The Company, however, does seek to protect its key proprietary technologies by aggressively pursuing comprehensive patent coverage in all major markets. 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 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 total cost of resolving such contingencies 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 CFT; 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 30 percent of total net sales in both 1999 and 1998, respectively, and before one-time charges, fourth quarter operating profit was 35% percent and 37 percent of total operating profit in 1999 and 1998, respectively. RESEARCH ACTIVITIES Avon's research and development department is a leader in the industry, based on the number of new product launches, including 10 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 extend Avon's own research to deliver new formulas and ingredients. Each year, Avon researchers test and develop more than 600 products in the CFT and Beauty Plus categories. 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. Today, Avon's Anew product line has been expanded to include technologically advanced products such as Retinol Recovery Complex PM Treatment, Night Force Vertical Lifting Complex, Clearly C 10% Vitamin C Serum and Luminosity Brightening Complex. Night Force employs a patented material named AVC10, a molecule that was engineered by Avon researchers over a three-year period. Luminosity Brightening Complex contains Diamonex, Avon's exclusive skin brightening system. Avon has introduced Hydra Finish Lip Color, the first lipstick developed with 20% water, and Perceive, a fragrance which uses the mood-enhancing effects of pheromone technology. In 2000, the Company will be launching a complete renovation of Avon Color with improved formulas and redesigned packaging, rolling out a reformulated Anew All-In-One skin care regimen and launching Positivity, a new line of skin care products for menopausal women. The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $34.4 million in 1999, $31.4 million in 1998, and $29.9 million in 1997. 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 CFT 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. A corporate environmental operations committee ensures that opportunities for environmental performance improvements are reflected in our products, packaging and manufacturing processes. In general, compliance with environmental regulations impacting 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. 11 EMPLOYEES At December 31, 1999, Avon employed 40,500 people. Of these, 8,800 were employed in the United States and 31,700 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 CFT 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; the distribution centers are located in Atlanta, GA; Glenview, IL; Newark, DE; and Pasadena, CA. Other properties include four manufacturing laboratories and ten distribution centers in Europe; five manufacturing laboratories and nine distribution centers in Latin America; two manufacturing laboratories and three distribution centers in North America (other than in the United States); and four manufacturing laboratories and ten distribution centers in the Pacific region. 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 facility in Puerto Rico. 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. It is anticipated that a trial may take place later in 2000. 12 In the opinion of Avon's management, based on its review of the information available at this time, the total cost of resolving such contingencies 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, 1999. 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 2000 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 - - ----- ---- --- ------- Retired Chairman of the Board and Director ..James E. Preston 66 1971(1) Retired Chief Executive Officer and Director.Charles R. Perrin 54 1998(1) President and Chief Executive Officer and Director... Andrea Jung 41 1997(2) 13 Executive Vice President Chief Operating Officer, North America and Global Business Operations Susan J. Kropf 51 1997(3) Executive Vice President Chief Operating Officer, International and New Business Development...........Jose Ferreira 43 1997(4) Executive Vice President, Asia Pacific....Fernando Lezama 60 1997 Executive Vice President and Chief Financial Officer................Robert J. Corti 50 1988 Senior Vice President, General Counsel and Secretary...........................Ward M. Miller, Jr. 67 1993 Senior Vice President, Human Resources....Jill Kanin-Lovers 48 1998 Vice President and Controller.............Janice Marolda 39 1998 (1)Charles R. Perrin joined Avon as Vice Chairman and Chief Operating Officer in January 1998 and was later elected Chief Executive Officer, effective July 1998 and Chairman of the Board in May 1999, succeeding James E. Preston in his capacity as Chairman of the Board. Mr. Perrin retired from Avon in November 1999. Also effective November 1999, Ms. Andrea Jung was named President and CEO, succeeding Mr. Perrin in his capacity as CEO and outside director Stanley C. Gault was elected non-executive Chairman of the Board of Directors. (2)Andrea Jung was elected President and Chief Executive Officer effective November 1999. succeeding Charles R. Perrin who retired November 1999. Ms. Jung joined Avon in January 1994 as President, Product Marketing and was promoted to Executive Vice President, Global Marketing and New Business in March 1997. In January 1998, she was elected President and was later elected Chief Operating Officer. (3)Susan J. Kropf was elected Chief Operating Officer, North America and Global Business Operations, effective November 1999. Ms. Kropf has been with Avon for almost thirty years. Prior to this appointment, she had been Executive Vice President and President, North America. She also served as Senior Vice President, U.S. Marketing and as Vice President, Product Development. (4)Jose Ferreira was elected Chief Operating Officer, International and New Business Development, effective November 1999. Mr. Ferreira has been with Avon for twenty years. Prior to this appointment, he had been Executive Vice President, Europe, Asia and Africa since January 1999. Prior to that, in 1997, he was promoted to Executive Vice President and President, Asia Pacific. PART II ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS This information is incorporated by reference to "Market Prices per Share of Common Stock by Quarter" on page 42 of Avon's 1999 Annual Report to Shareholders. 14 ITEM 6. SELECTED FINANCIAL DATA The information for the five-year period 1995 through 1999 is incorporated by reference to the "Eleven-Year Review" on pages 60 and 61 of Avon's 1999 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 41 of Avon's 1999 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See discussion under the heading "Risk Management Strategies and Market Rate Sensitive Instruments" on page 39 and Note 7 on page 51 of Avon's 1999 Annual Report to Shareholders for information concerning market risk sensitive instruments. Such information is incorporated by reference in this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated by reference to the "Consolidated Financial Statements and Notes" on pages 43 through 58, together with the report thereon of PricewaterhouseCoopers LLP, on page 59, and "Results of Operations by Quarter" on page 42 of Avon's 1999 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 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 2000 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 1999 Annual Meeting of Shareholders. 15 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 2000 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the "Contracts with Executives" section of Avon's Proxy Statement for the 2000 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, 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 statements of income for each of the years in the three-year period ended December 31, 1999........ 43 Consolidated balance sheets at December 31, 1999 and 1998............. 44 Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 1999......... 45 Consolidated statements of changes in shareholders' (deficit)equity for each of the years in the three-year period ended December 31, 1999................ 46 Notes to consolidated financial statements............................. 47-58 Report of Independent Accountants PricewaterhouseCoopers LLP............. 59 16 (a) 2. Financial Statement Schedule Report of Independent Accountants on Financial Statement Schedule PricewaterhouseCoopers LLP S-1 Consent of Independent Accountants PricewaterhouseCoopers LLP S-2 Financial statement schedule for each of the years in the three-year period ended December 31, 1999............... II. Valuation and qualifying accounts............. S-3 17 Financial statements of the registrant and all other financial statement schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements and notes. (a)3. Exhibits Exhibit Number Description - - ------ ----------- 3.1 Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on 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 December 2, 1999. 3.3 Certificate of Amendment of the Certificate of Incorporation of Avon Products, Inc., filed May 13, 1998 (incorporated by reference to Exhibit 3.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998). 4.1 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). 4.2 Indenture dated as of August 1, 1997 between Avon as Issuer, and The Chase Manhattan Bank, as Trustee relating to the 6.55% Notes due 2007 (incorporated by reference to Exhibit 4.2 to Avon's Registration Statement on Form S-4, Registration Statement No. 333-41299 filed December 1, 1997). 4.3 Rights Agreement, dated as of March 30, 1998 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (incorporated by reference to Exhibit 4 to Avon's Registration Statement on Form 8-A, filed March 18, 1998). 4.4 Indenture dated as of November 9, 1999 between Avon as Issuer and The Chase Manhattan Bank, as Trustee relating to the 6.9% Notes due November 15, 2004 and the 7.15% Notes due November 15, 2009 (incorporated by reference to Exhibit 4.4 to Avon's Registration Statement on Form S-4, Registration Statement No. 333-92333 filed December 8, 1999). 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). 18 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* First Amendment to the 1993 Avon Stock Incentive Plan effective January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as of January 1, 1997 approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.4 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.5* Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of July 1, 1998 (incorporated by reference to Exhibit 10.5 to Avon's Annual Report on Form 10K for the year ended December 31, 1998). 10.6* 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). 10.7* 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). 10.8* 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). 10.9* 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). 10.10* 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). 19 10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of July 1, 1998 (incorporated by reference to Exhibit 4(b) to Avon's Registration Statement on Form S-8, Registration No. 333-65989 filed October 22, 1998). 10.12* 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). 10.13*Stock Option Agreement between Avon and Stanley C. Gault dated November 4, 1999. 10.14* Employment Agreement, dated as of December 11, 1997 between Avon and Charles R. Perrin (incorporated by reference to Exhibit 10.18 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.15* Stock Option Agreement between Avon and Charles R. Perrin dated December 10, 1997 (incorporated by reference to Exhibit 10.19 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.16* Employment Agreement dated as of December 11, 1997 between Avon and Andrea Jung (incorporated by reference to Exhibit 10.20 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.17* 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). 10.18* Avon Products, Inc. Compensation Plan for Non-Employee Directors, effective May 1, 1997 (incorporated by reference to Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.19* Avon Products, Inc. Board of Directors' Deferred Compensation Plan, amended and restated, effective January 1, 1997 (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.20* 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). 20 10.21* 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). 10.22* Stock Option Agreement between Avon and Charles R. Perrin dated June 4, 1998 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.23* Stock Option Agreement between Avon and Andrea Jung dated June 4, 1998 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 13 Portions of the Annual Report to Shareholders for the year ended December 31, 1999 incorporated by reference in response to Items 1,5 through 8 in this filing. 18 Preferability letter from PricewaterhouseCoopers LLP regarding change in accounting principle. 21 Subsidiaries of the registrant. 23 Consent of PricewaterhouseCoopers LLP (set forth on page S-2 of this Annual Report on Form 10-K). 24 Power of Attorney 27 Financial Data Schedule 21 * 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 1999. (c) Avon's Annual Report on Form 10-K for the year ended December 31, 1999, 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. 22 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 27 day of March 2000. Avon Products, Inc. /s/WARD M. MILLER, JR. ---------------------- Ward M. Miller, Jr. Senior Vice President, General Counsel and Secretary 23 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 - - --------- ----- ---- * - - --------------- Andrea Jung President, Chief Executive Officer and Director - Principal Executive Officer March 9, 2000 * - - --------------- Jose Ferreira, Jr. Executive Vice President March 9, 2000 and Chief Operating Officer - International and New Business Development * - - --------------- Susan J. Kropf Executive Vice President March 9, 2000 and Chief Operating Officer - North America and Global Business Operations * - - --------------- Robert J. Corti Executive Vice President, Chief Financial Officer - Principal Financial Officer March 9, 2000 * - - --------------- Janice Marolda Vice President and Controller - Principal Accounting Officer March 9, 2000 24 * - - --------------- Brenda C. Barnes Director March 9, 2000 * - - --------------- Richard S. Barton Director March 9, 2000 * - - --------------- Stanley C. Gault Chairman of the Board and Director March 9, 2000 * - - --------------- Fred Hassan Director March 9, 2000 * - - --------------- Ann S. Moore Director March 9, 2000 * - - --------------- Lawrence A. Weinbach Director March 9, 2000 /s/WARD M. MILLER, JR. - - --------------------- Ward M. Miller, Jr. Attorney-in-fact March 9, 2000 S-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Avon Products, Inc.: Our audits of the consolidated financial statements referred to in our report dated January 27, 2000, appearing in the 1999 Annual Report to Shareholders of Avon Products, Inc., which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K, also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP New York, New York January 27, 2000 S-2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements of Avon Products, Inc. on Form S-8 (Reg. Nos. 33-47209, 33- 60218, 33-60918 and 33-65998) of our report dated January 27, 2000 relating to the financial statements which appear in the 1999 Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated January 27, 2000 relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 27, 2000 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 --------- -------- -------- ---------- ----- 1999 Allowance for doubtful accounts receivable $ 49.0 $ 87.5 $ -- $96.5(a) $40.0 ======= ======= ======= ===== ===== 1998 Allowance for doubtful accounts receivable $ $35.5 $ 91.3 $ -- $77.8(a) $49.0 ======= ======= ======= ===== ===== 1997 Allowance for doubtful accounts receivable $ $36.4 $ 80.8 $ -- $81.7(a) $35.5 ======== ======= ======= ====== ===== (a) Accounts written off, net of recoveries and foreign currency translation adjustment. EX-99 2 EX-INDEX CONFORMED COPY 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, 1999 Commission file number 1-4881 - - -------- AVON PRODUCTS, INC. (Exact name of registrant as specified in its charter) - - -------- EXHIBITS INDEX TO 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 December 2, 1999. 3.3 Certificate of Amendment of the Certificate of Incorporation of Avon Products, Inc., filed May 13, 1998 (incorporated by reference to Exhibit 3.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998). 4.1 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). 4.2 Indenture dated as of August 1, 1997 between Avon as Issuer, and The Chase Manhattan Bank, as Trustee relating to the 6.55% Notes due 2007 (incorporated by reference to Exhibit 4.2 to Avon's Registration Statement S-4, Registration Statement No. 333-41299 filed December 1, 1997). 4.3 Rights Agreement, dated as of March 30, 1998 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (incorporated by reference to Exhibit 4 to Avon's Registration Statement on Form 8-A, filed March 18, 1998). 4.4 Indenture dated as of November 9, 1999 between Avon as Issuer and The Chase Manhattan Bank, as Trustee relating to the 6.9% Notes due November 15, 2004 and the 7.15% Notes due November 15, 2009 (incorporated by reference to Exhibit 4.4 to Avon's Registration Statement on Form S-4, Registration Statement No. 333-92333 filed December 8, 1999). 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* First Amendment to the 1993 Avon Stock Incentive Plan effective January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as of January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.4 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.5* Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of July 1, 1998 (incorporated by reference to Exhibit 10.5 to Avon's Annual Report on Form 10-K for the year ended December 31, 1998). 10.6* 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). 10.7* 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). 10.8* 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). 10.9* 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). 10.10* 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). 10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1998 (incorporated by reference to Exhibit 4(b) to Avon's Registration Statement on Form S-8, Registration No. 333-65989 filed October 22, 1998). 10.12* 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). 10.13* Stock Option Agreement between Avon and Stanley C. Gualt dated November 4, 1999. 10.14* Employment Agreement, dated as of December 11, 1997 between Avon and Charles R. Perrin (incorporated by reference to Exhibit 10.18 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.15* Stock Option Agreement between Avon and Charles R. Perrin dated December 10, 1997 (incorporated by reference to Exhibit 10.19 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.16* Employment Agreement dated as of December 11, 1997 between Avon and Andrea Jung (incorporated by reference to Exhibit 10.20 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.17* 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). 10.18* Avon Products, Inc. Compensation Plan for Non-Employee Directors, effective May 1, 1997 (incorporated by reference to Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.19* Avon Products, Inc. Board of Directors' Deferred Compensation Plan, amended and restated, effective January 1, 1997 (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.20* 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). 10.21* 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). 10.22* Stock Option Agreement between Avon and Charles R. Perrin dated June 4, 1998 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.23* Stock Option Agreement between Avon and Andrea Jung dated June 4, 1998 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 13 Portions of the Annual Report to Shareholders for the year ended December 31, 1999 incorporated by reference in response to Items 1,5 through 8 in this filing. 18 Preferability letter from PricewaterhouseCoopers LLP regarding change in accounting principle. 21 Subsidiaries of the registrant. 23 Consent of PricewaterhouseCoopers LLP (set forth on page S-2 of this Annual Report on Form 10-K). 24 Power of Attorney 27 Financial Data Schedule * The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. EX-3.2 3 EX-3.2 EXHIBIT 3.2 December 2, 1999 BY-LAWS OF AVON PRODUCTS, INC. ARTICLE I OFFICES Section 1. Location. The principal office of the corporation shall be located in the City of New York, County of New York. The post office address to which the Secretary of State shall mail a copy of any process against the corporation served upon him is 1345 Avenue of the Americas, New York, New York 10105. The corporation may also have other offices at such places either withinor without the State of New York as the board of directors may from time to time designate or the business of the corporation may require. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. Annual Meeting. The annual meeting of the shareholders of the corporation, for the election of directors and the transaction of such other business as may properly come before said meeting, shall be held annually at such place within or without the State of New York as may from time to time be designated by the directors and set forth in the notice of the meeting. The meeting shall be held on the first Thursday in May or on such other date during the months of April or May in each year as may from time to time be designated by the directors and set forth in the notice of the meeting. The chairman of the board of directors, or another member of the board of directors appointed by the chairman, shall be the presiding officer at every meeting of the shareholders of the corporation. Section 2. Special Meetings. Special meetings of shareholders, unless otherwise prescribed by law, may be called for any purpose or purposes at any time by the chairman of the board or the president or by the order of the board of directors, and special meetings of shareholders prescribed by law for the election of directors shall be called by the board or by the secretary or an assistant secretary upon demand as prescribed by law. Such meetings shall, except as otherwise prescribed by law, be held at such time and placewithin or without the State of New York as shall be designated by the person, or in the order of the board of directors, calling such meeting. Section 3. Notice of Meetings. A copy of the notice of every annual and special meeting of shareholders, other than any meeting the giving of notice of which is otherwise prescribed by law, stating the place, date and hour thereof, and in the case of any special meeting, indicating that it is being issued by or at the direction of the person or persons calling the meeting and setting forth the purposes for which the meeting is called, shall be given personally, electronically, or mailed, at least ten but not more than fifty days before such meeting, to each shareholder of record entitled to vote thereat. If sent electronically, such notice shall be directed to the e-mail address provided by the shareholder in writing. If mailed, such copy shall b deposited in the United States mail with postage thereon prepaid, directed to each such shareholder at his address as the same appears on the record of shareholders of the corporation or, if he shall have filed with the secretary of the corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. If any meeting, annual or special, action is proposed to be taken which would, if taken, entitle shareholders fulfilling the requirements of law to receive payment for their shares, the notice of the meeting shall include a statement of that purpose and to that effect. Section 4. Quorum. At all meetings of shareholders, except as otherwise expressly provided by law, there shall be present either in person or by proxy shareholders of record holding at least a majority of the shares entitled to vote at such meetings in order to constitute a quorum, but less than a quorum shall have the power to adjourn any meeting until a quorum shall be present. The presiding officer at any meeting of shareholders may adjourn such meeting at any time for the purpose of determining whether a quorum is present or for any other reason. When a quorum is once present to organize a meeting, it is not broken by the subsequent withdrawal of any shareholders. Section 5. Voting. At every meeting of shareholders every shareholder of record shall be entitled to one vote for every share standing in his name on the record of shareholders on any matter to be voted upon at such meeting, unless otherwise provided in the certificate of incorporation, and may exercise such voting right either in person or by proxy, except that no proxy shall be voted on after eleven months from its date unless otherwise provided in the proxy. As provided in the certificate of incorporation, at all elections of directors each shareholder shall be entitled to as many votes as shall equal the number of votes which (except for such provision) he would be entitled to cast for the election of directors with respect to his shares, multiplied by the number of directors to be elected, and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them, as he may see fit. No share of stock shall be voted at any meeting by any person other than (i) the owner thereof registered as such on the corporation's books on the record date fixed by the directors, or (ii) the duly appointed proxy of such registered owner. Any vote for directors and/or proposals that shall be presented at a shareholders' meeting may be by written, telephonic or electronic means. This includes, but is not limited to, written ballots, telegrams, cablegrams, facsimile or internet transmissions, provided that such electronic transmissions are submitted with proof that such electronic transmission is authorized by the shareholder. Section 6. Inspectors of Voting. The board of directors, in advance of any shareholders' meeting, may appoint one or more inspectors to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at a shareholders' meeting may, and on the request of any shareholder entitled to vote thereat shall, appoint one or more inspectors. In case any person appointed fails to appear or act, the vacancy may be filled by appointment made by the board of directors in advance of the meeting or at the meeting by the person presiding thereat. Inspectors, none of whom shall be an officer, director or a candidate for the office of director, shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall determine and report to the meeting as to the results of all voting (by ballot or otherwise) on all matters submitted to a vote at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. Section 7. Voting List of Shareholders. A list of shareholders as of the record date, certified by the corporate officer responsible for its preparation or by a transfer agent, shall be produced at any meeting of shareholders upon the request thereat or prior thereto of any shareholder. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding thereat, shall require such list of shareholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be shareholders entitled to vote thereat may vote at such meeting. Section 8. Conduct of Meetings of Shareholders. Subject to the following and any other provisions of the corporation's certificate of incorporation or by-laws, meetings of shareholders generally shall follow accepted rules of parliamentary procedure, as determined by the presiding officer at such meeting. (a) The presiding officer of the meeting shall have absolute authority over matters of procedure, and there shall be no appeal from the ruling of the presiding officer. If the presiding officer, in his absolute discretion, deems it advisable to dispense with the rules of parliamentary procedure as to any meeting or any part thereof, the presiding officer shall so state and shall also state the rules under which the meeting or any part thereof shall be conducted. (b) In order to prevent disruption or disorder which could interfere with the conduct of the business of the meeting or for any other reason deemed necessary or advisable, the presiding officer at any meeting may, in his sole discretion, quit the chair and announce the adjournment of the meeting; and upon his so doing, the meeting is thereupon adjourned. (c) Any other motion for adjournment, if otherwise properly made, other than a motion to adjourn at the close of business of the meeting or a motion to adjourn for the purpose of tabulating votes or proxies, shall be disposed of by a per share vote. (d) The presiding officer of the meeting may require that any person not a bona fide shareholder of record or the proxy of a bona fide shareholder of record leave the meeting. (e) A resolution or motion shall be considered for a vote at a meeting only if (i) proposed by a bona fide shareholder of record or a duly authorized proxy of such a shareholder of record, (ii) seconded by a bona fide shareholder of record or a duly authorized proxy of such a shareholder of record (other than the individual proposing the resolution or motion) and (iii) such resolution or motion is ruled in order by the presiding officer of the meeting in his sole discretion, which order shall not be appealable. (f) At any meeting called for the election of directors, the polls shall be opened and closed at the times and in the manner directed by the presiding officer of such meeting. Once the presiding officer has announced the closing of the polls, no further voting shall be permitted. Section 9. Notice of Proposed Shareholder Business. (a) A proposal of business to be considered by the shareholders at an annual meeting of shareholders ("annual meeting") may be made (i) pursuant to the corporation's notice of meeting, (ii) by or at the direction of the board of directors or (iii) by any shareholder of the corporation who was a shareholder of record at the time of giving notice provided for in this Section 9, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 9. (b) For an item of business to be properly brought before an annual meeting by a shareholder pursuant to clause (iii) of paragraph (a) of this Section 9, the shareholder must have given timely notice thereof in writing to the secretary of the corporation and such item of business must otherwise be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the secretary at the principal office of the corporation not later than the close of business on the 90th day nor earlier than the close of business on the 120th day prior to the first anniversary of the preceding year's annual meeting. In the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (i) a brief description of the business desired to be brought before the meeting, the reasons for considering such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made and (ii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made, (A) the name and address of such shareholder, as they appear on the corporation's books, and of such beneficial owner, and (B) the class and number of shares of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (c) Only such business shall be conducted at an annual meeting as shall have been brought before the meeting in accordance with the procedures set forth in this Section 9. Except as otherwise provided by law, the presiding officer of the meeting shall have the power and duty to determine whether any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the notice procedures set forth in this Section 9 and, if any proposed business is not in compliance with this Section 9, to declare that such proposal shall be disregarded. (d) For purposes of this Section 9, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). (e) Notwithstanding the foregoing provisions of this Section 9, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 9. Nothing in this Section 9 shall be deemed to adversely affect any rights of shareholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE III DIRECTORS Section 1. Number, Election and Terms. The number of the directors constituting the entire board of directors shall be not less than ten (10) nor more than twenty (20). Subject to such limitation the number shall be fixed by the board of directors. The directors shall be classified, with respect to the time for which they shall severally hold office, into three classes, as nearly equal in number as possible, as determined by the board of directors of the corporation, one class originally elected for a term expiring at the annual meeting of shareholders held in 1987, another class originally elected for a term expiring at the annual meeting of shareholders held in 1988, and another class originally elected for a term expiring at the annual meeting of shareholders held in 1989, with each director to hold office until his or her successor is duly elected and qualified. At each annual meeting of shareholders of the corporation, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the first, second or third year following the year of their election. Except as otherwise provided by law, by the certificate of incorporation, or by the by-laws of this corporation, the directors in each class shall be elected by ballot at the applicable annual meeting of shareholders by a plurality of the votes of the shareholders cast in person or by proxy at such election. In voting for the election of directors, shareholders shall be entitled to cumulative voting. Each director shall be elected to serve until the expiration of his or her term or until his or her successor shall have been elected and qualified except in the event of the death, resignation or removal or the earlier termination of the term of office of any such director. Each director shall be at least 21 years of age. It is not necessary for a director to be a shareholder of the corporation. Section 2. Newly Created Directorships and Vacancies. Newly created directorships resulting from any increase in the number of directors and any vacancies on the board of directors resulting from death, resignation, disqualification, removal or other cause shall be filled only by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the board of directors. Any director elected in accordance with the preceding sentence shall hold office until the next meeting of shareholders at which the election of directors is in the regular order of business, and until such director's successor shall have been duly elected and qualified. No decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director. Section 3. Removal. Any director, or the entire board of directors, may be removed from office at any time only for cause and only by the affirmative vote of the holders of at least eighty percent of the voting power of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class. Section 4. Powers and Duties of the Board of Directors. Except as otherwise provided by law or by the certificate of incorporation, the business of the corporation shall be managed by the board of directors, which may adopt such rules and regulations for that purpose and for the conduct of its meetings as it may deem proper. The board of directors may have one or more offices and keep the books, records and minutes of the corporation, except such records as are required to be kept in the State of New York, at such places as it may from time to time determine. Any of such records may be in written form or in any other form capable of being converted into written form within a reasonable time. In addition to the powers and authority expressly conferred upon it by these by-laws, the board of directors may exercise all such powers of the corporation and do all such lawful acts and things as are allowed by the certificate of incorporation or by law. Section 5. First Meeting of the Board of Directors. The first meeting of the board of directors to be held after an annual meeting of shareholders for the election of directors shall be called and held for the purposes of organization, the election or appointment of officers and the transaction of such other business as may be stated in the notice thereof. The first meeting shall be held at such time and place as shall be fixed in written notice mailed to each newly elected director at his last known post office address at least two days prior to such meeting. Section 6. Regular Meetings. Regular meetings of the board of directors shall be held at such time and place within or without the State of New York as may be determined by resolution of the board, and no notice shall be required for any regular meeting. Except as otherwise provided by law, any business may be transacted at any regular meeting. Section 7. Special Meetings. Special meetings of the board of directors may, unless otherwise prescribed by law, be called from time to time by the chairman of the board or the president. Upon the written request directed to the chairman of the board, president or the secretary of a majority of the directors stating the time, place and purposes of such special meeting, the chairman of the board, president or the secretary shall call a special meeting of the board of directors. Special meetings of the board of directors shall be held at the place where regular meetings of the board are held unless otherwise fixed by the board. Section 8. Notice of Special Meetings. Notice of the time, place and purpose of each special meeting of the board of directors, other than any meeting the giving of notice of which is otherwise prescribed by law, shall be given to each director at least two hours prior to such meeting. For the purpose of this Section, notice will be deemed to be duly given to a director if given to him orally (including by telephone) or if such notice be delivered to such director in person or be mailed, sent by facsimile transmission, or cabled to his address as it appears upon the books of the corporation or to the address last made known in writing to the secretary of the corporation by such director as the address to which such notices are to be given. Section 9. Quorum. At each meeting of the board of directors, one- half (1/2) of the entire board shall constitute a quorum for the transaction of business, except as provided in Section 2 of this Article III but less than a quorum may, without notice other than announcement at the meeting, adjourn a meeting until a quorum shall be present. Every act of a majority of the directors present at any meeting or adjourned session of a meeting at which there is a quorum shall be the act of the board of directors. Section 10. Compensation of Directors and Members of Committees. The board of directors may from time to time, in its discretion, fix the amount which shall be payable to members of the board of directors and to members of any committee for attendance at the meetings of the board or of such committee and for services rendered to the corporation. A director or member of the committee may serve the corporation in any other capacity and receive compensation therefor. Section 11. Meetings by Communication Equipment. The board of directors or any committee of the board may hold a meeting by means of conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at the meeting. Section 12. Nomination of Director Candidates. Nominations for the election of directors may be made by the board of directors or a proxy committee appointed by the board of directors or by any shareholder entitled to vote in the election of directors generally. However, any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination is given to the secretary of the corporation not later than (i) with respect to an election to be held at an annual meeting of shareholders, 60 days in advance of such meeting, and (ii) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of common stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (d) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission, had the nominee been nominated, or intended to be nominated, by the board of directors; and (e) the consent of each nominee to serve as a director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. ARTICLE IV COMMITTEES OF THE BOARD OF DIRECTORS Section 1. Committees. The board of directors, by resolution or resolutions passed by a majority of the entire board, may designate from among its members various committees, each consisting of three or more of the directors, and each of which, to the extent provided in said resolution or resolutions, shall have and may exercise such powers and authority as may be specified by the board of directors, except that no such committee shall have authority as to (1) the submission to shareholders of any action that needs shareholders' authorization under law, (2) the filling of vacancies in the board or in any committee, (3) the fixing of compensation of the directors for serving on the board or on any committee, (4) the amendment or repeal of the by-laws, or the adoption of new by-laws, or (5) the amendment or repeal of any resolution of the board which by its terms shall not be so amendable or repealable. The board of directors may designate one or more directors as alternate members of any such committee. Each such committee and the members thereof shall serve at the pleasure of the board of directors. Section 2. Standing Committees. There shall at all times be at least three standing committees of the board of directors, namely an audit committee, a compensation committee, and a nominating committee, each of which shall consist of three or more directors, none of whom may be a current or former officer or employee of the corporation. The compensation committee shall, in addition to such other duties as the board of directors may specify, administer the corporation's 1993 Stock Incentive Plan and be responsible for reviewing and approving all stock option awards or other forms of stock incentive awards, whether or not granted pursuant to that plan. Section 3. General Rules. At each meeting of a committee, one-third of the entire committee, but not less than two (2) members, shall constitute a quorum for the transaction of business. Notice of the time and place of each committee meeting shall be subject to the same notice rules as are applicable to special meetings of the board of directors, except that no notice of the purpose of a committee meeting need be stated. Any action required or permitted to be taken at any meeting of a committee of the board of directors may be taken without a meeting if all members of such committee consent to such action in writing and such writing or writings are filed with the minutes of proceedings of the committee. Except as otherwise provided in this Article IV, each committee of the board of directors may adopt its own rules of procedure, may meet at stated times or on such notice as the committee may determine and shall keep regular minutes of its proceedings and report the same to the board of directors when required. ARTICLE V OFFICERS Section 1. Number and Designation. The officers of the corporation will consist of a chairman of the board, a president, one or more vice presidents, a treasurer and a secretary and such other officers as the board of directors may elect, including, but not limited to, one or more "executive" vice presidents, "senior" vice presidents or "group" vice presidents. Any two offices may be held by one person, except that the chairman of the board or president may not also be the secretary, and except that, where the by-laws or resolutions of the board of directors provide for signatures of the incumbents of two offices of the corporation upon certificates for shares, notes, checks or other instruments or documents issued by the corporation, such offices must be held by two separate persons. Section 2. Election. The board of directors shall, at their first meeting after their election, elect a chairman of the board and a president from their number and shall also elect one or more vice-presidents, a secretary and a treasurer who need not be members of the board of directors, but in the event of the failure of the board so to elect any officer, such officer may be elected at any subsequent meeting of the board. Each officer so elected shall hold office until the first meeting of the board of directors following the next annual meeting of shareholders for the election of directors and until his successor is elected, except in the event of his death, resignation or removal or the earlier termination of his term of office, and except that the terms of office of all vice-presidents shall terminate with each annual election of officers at which any vice-president is elected. Any vacancy in an office may be filled for the unexpired portion of the term of such office by the board of directors at any regular or special meeting. The board of directors may also elect other officers, including a controller, who need not be members of the board of directors, and may prescribe, and from time to time change, their respective powers and duties, except as the powers and duties of the controller are prescribed by these by- laws. Each officer so elected shall hold office at the pleasure of the board of directors. Section 3. Chairman of the Board. The chairman of the board who need not be a member of management shall preside at all meetings of the shareholders and of the board of directors. He shall perform such other duties as may be required in the management of the business, or if he is not a member of management, as may be prescribed by the board. Section 4. The President. The president shall have the general powers and duties of supervision and management of the corporation. In the absence or incapacity of the chairman of the board, he shall also preside at all meetings of the shareholders and of the board of directors. Section 4A. The function of chief executive officer, and chief operating officer of the corporation, shall be discharged by such officer or officers as the board of directors may from time to time designate. Section 5. Vice Presidents. Each vice-president, including any executive vice presidents, senior vice presidents and/or group vice presidents, shall have such powers and shall perform such duties as may be assigned to him by the board, the chairman of the board or the president. Section 6. The Treasurer. The treasurer shall have the care and custody of all the funds and securities of the corporation and shall deposit the same in the name of the corporation in such bank or banks, trust company or trust companies and in such safe deposit company or companies as the board of directors may designate. He shall be responsible for the disbursement of funds of the corporation and shall perform the duties and exercise all the powers usually incidental to the office of the treasurer and such other duties as from time to time may be assigned to him by the board, the chairman of the board or the president. Section 7. The Secretary. The secretary shall keep the minutes and act as secretary of all meetings of the board of directors and of the shareholders. He shall attend to the giving and serving of all notices of the corporation. He shall be the custodian of the records and of the corporate seal of the corporation. He shall attend to such correspondence as may be assigned to him and perform all the duties incidental to his office. He shall be empowered to affix the corporate seal to all documents, execution of which, on behalf of the corporation, under its seal, is duly authorized and when so affixed may attest the same; and, in general, he shall perform the duties and exercise all the powers usually incidental to the office of a secretary of a corporation, and such other duties as, from time to time, may be assigned to him by the board, the chairman of the board or the president. Section 8. The Controller. The controller shall maintain and supervise proper books and records of all assets, liabilities, disbursements and transactions of the corporation. He shall prepare such financial statements and reports as shall be required, and shall perform such other duties as from time to time may be assigned to him by the board, the chairman of the board or the president. Section 9. Appointed Officers. The chief executive officer of the corporation may from time to time appoint one or more officers with the title of vice president with such powers and duties as the chief executive officer may specify. The chief executive officer may from time to time also appoint (a) one or more assistant treasurers who may perform some or all of the duties and powers usually incidental to the treasurer, (b) one or more assistant secretaries who may perform some or all of the duties and powers usually incidental to the secretary and (c) one or more assistant controllers who may perform some or all of the duties assigned to the controller. Any of said appointed officers may be removed at any time by the chief executive officer. The chief executive officer or the president also may appoint one or more officers of operating business units or divisions of the corporation, who shall not be officers of the corporation, but shall have such powers and duties as the chief executive officer, president or the head of the operating business unit or division shall specify. Any appointed officers of operating business units or divisions may be removed at any time by the chief executive officer, the president, or the head of the business unit or division to whom such appointed officer reports. Section 10. Stockholder Consents and Proxies. The chief executive officer, president, treasurer and secretary of the corporation or any one of them or their designees, shall have the power and authority on behalf of the corporation to execute any consents or proxies, authorizing any person to attend and act and vote in person or by proxy at any meetings of the stockholders or members of any corporation or other entity in which the corporation owns stock or otherwise has an ownership interest, or to attend such meetings themselves, and at any such meetings they or their designees or proxies, as the case may be, shall possess and may exercise any and all rights and powers incidental to such ownership as the corporation as the owner thereof might have possessed and executed if present. Section 11. Delegation of Duties of Officer. The board of directors may delegate the duties and powers of any officer, agent or employee of the corporation to any other officer, agent or employee or director for a specified time during the absence of any such person or for any other reason that the board may deem sufficient. Section 12. Removal. Any officer of the corporation elected or appointed by the board of directors may be removed by the board with or without cause. Section 13. Bond. The board of directors shall have power, to the extent permitted by law, to require any officer, agent or employee of the corporation to give bond for the faithful discharge of his duties in such form and with such surety or sureties as the board may deem advisable. ARTICLE VI CAPITAL SHARES Section 1. Form. The certificates for shares shall be in such forms as may be prescribed by law and as shall be approved by the board of directors. Section 2. Issuance. All certificates for shares shall be signed by the chairman of the board or the president or a vice-president and the secretary or an assistant secretary or the treasurer or an assistant treasurer and shall have the seal of the corporation affixed thereto. Such seal may be a facsimile, engraved or printed. Where any such certificate is countersigned by a transfer agent or registered by a registrar, other than the corporation itself or its employee, the signatures of any such officers or assistant officers upon such certificate may be facsimiles, engraved or printed. Section 3. Transfer. The board of directors shall have the power and authority to make such rules and regulations as it may deem expedient concerning the issue, registration and transfer of certificates for shares, and may appoint transfer agents or clerks and registrars thereof. Section 4. Fixing of Record Date. The board of directors may at any time fix a record date not more than fifty nor less than ten days prior to (a) the date of any meeting of shareholders or (b) the last day on which the shareholders are entitled to express consent or dissent from any proposal without a meeting, as the date as of which shareholders entitled to notice of or to vote at such a meeting, or whose consent or dissent is required or may be expressed, for any purpose, as the case may be, shall be determined, and, except as otherwise provided by law, all persons who were the holders of record of voting shares at such date and no others shall be entitled to notice of and to vote at such meeting or to express their consent or dissent, as the case may be. The board of directors may at any time fix a record date not exceeding fifty days prior to the date fixed for the payment of any dividend or the making of any distribution or for the delivery or allotment of evidences of rights or evidences of interest arising out of any change, conversion, or exchange of capital shares, as the date for the determination of the shareholders entitled to receive any such dividend, distribution, rights or interest, and in any such case only shareholders of record at the date so fixed shall be entitled to receive such dividend, distribution, rights or interest. ARTICLE VII NEGOTIABLE INSTRUMENTS, CONTRACTS, ETC. Section 1. Signatures on Checks, etc. All checks, drafts, bills of exchange, notes or other obligations or orders for the payment of money shall be signed in the name of the corporation by such officer or officers, person or persons, as the board of directors may from time to time designate by resolution. Section 2. Execution of Contracts, Deeds, etc. The board of directors or any committee given specific authority in the premises, or given authority to exercise generally the powers of the board during the interval between meetings of the board to the extent permitted by law, may authorize any officer or officers, agent or agents, in the name of and on behalf of the corporation, to enter into or execute and deliver any and all deeds, bonds, mortgages, contracts and other obligations or instruments and to vote on behalf of the corporation shares of stock of other domestic or foreign corporations standing in the name of the corporation, and such authority may be general or confined to specific instances. ARTICLE VIII CORPORATE SEAL Section 1. Description. The seal of the corporation shall be circular in form with the name of the corporation in the circumference and the words and figures "Corporate Seal--1916--N.Y. " in the center. ARTICLE IX FISCAL YEAR Section 1. Definition. The fiscal year of this corporation shall be from the first day of January to the thirty-first day of December, inclusive, in each year or such other twelve consecutive months as the board of directors may by resolution designate. ARTICLE X WAIVER OF NOTICE Section 1. Meetings Held on Waiver. Whenever any notice is required to be given under the provisions of these by-laws, or of the certificate of incorporation, or of any of the laws of the State of New York, a waiver thereof, in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. The attendance of any shareholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him. ARTICLE XI AMENDMENTS Section 1. By the Shareholders. Except as otherwise provided by law, these by-laws may be amended or repealed or new by-laws may be adopted at any meeting of the shareholders of the corporation by the affirmative vote of shareholders holding of record a majority of the issued and outstanding shares entitled to vote, represented either in person or by proxy, provided notice of the proposed amendment be contained in the notice or waiver of notice of such meeting. Section 2. By the Board of Directors. Except as otherwise provided by law, these by-laws may be amended at any meeting of the board of directors of the corporation at which a quorum is present by the affirmative vote of a majority of the directors present at such meeting, provided notice of the proposed amendment is contained in the notice or waiver of notice of such meeting, provided, however, that the board of directors shall have no power to amend or repeal the by-laws, or adopt any new by-laws, with respect to cumulative voting. Section 3. All By-Law Amendments. Notwithstanding anything contained in these by-laws to the contrary, the affirmative vote of the holders of at least eighty percent of the voting power of all shares of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to alter, amend or repeal Sections 1, 2, 3 or 12 of Article III, or this Section 3 of this Article XI. ARTICLE XII INDEMNIFICATION Section 1. Indemnification - Third Party and Derivative Actions. (a) The corporation shall indemnify any person made, or threatened to be made, a party to an action or proceeding, whether civil or criminal (other than one by or in the right of the corporation to procure a judgment in its favor), including an action by or in the right of any other corporation of any type or kind, domestic or foreign, or any partnership, joint venture, trust, employee benefit plan or other enterprise, which any director, officer or employee of the corporation served in any capacity at the request of the corporation, by reason of the fact that he is or was a director or officer of the corporation, or is or was serving such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise in any capacity, against judgments, fines, including excise taxes, amounts paid in settlement and expenses, including attorneys' fees, incurred in connection with any such action or proceeding, or any appeal therein, provided that no indemnification may be made to or on behalf of such person if a judgment or other final adjudication adverse to such person establishes that (i) his acts were committed in bad faith or were the result of his active or deliberate dishonesty and were material to such action or proceeding or (ii) he personally gained in fact a financial profit or other advantage to which he was not legally entitled. (b) The corporation shall indemnify any person made, or threatened to be made, a party to an action by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director or officer of the corporation, or is or was serving at the request of the corporation as a director or officer of any other corporation of any type or kind, domestic or foreign, or of any partnership, joint venture, trust, employee benefit plan or other enterprise, against amounts paid in settlement and expenses, including attorneys' fees, incurred in connection with such action, or any appeal therein, provided that no indemnification may be made to or on behalf of such person if (i) his acts were committed in bad faith or were the result of his active and deliberate dishonesty and were material to such action or (ii) he personally gained in fact a financial profit or other advantage to which he was not legally entitled. (c) The termination of any civil or criminal action or proceeding by judgment, settlement, conviction or upon a plea of nolo contendere, or its equivalent, shall not in itself create a presumption that any such person has not met the standard of conduct set forth in this Section 1. Section 2. Payment of Indemnification; Repayment. (a) A person who has been successful, on the merits or otherwise, in the defense of a civil or criminal action or proceeding of the character described in Section 1 of this Article shall be entitled to indemnification as authorized in such Section. (b) Any indemnification under Section 1 of this Article, unless ordered by a court, shall be made by the corporation in such manner as provided by law. (c) Expenses incurred by a person referred to in Section 1 of this Article in defending a civil or criminal action or proceeding shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount in case he is ultimately found, in accordance with this Article, not to be entitled to indemnification or, where indemnity is granted, to the extent the expenses so paid exceed the indemnification to which he is entitled. (d) Any indemnification of a person under Section 1 of this Article, or advancement of expenses under Section 2(c) of this Article, shall be made promptly, and in any event within 60 days, upon the written request of such person. Section 3. Enforcement; Defenses. The right to indemnification or advancement of expenses granted by this Article shall be enforceable by the person in question in any court of competent jurisdiction if the corporation denies such request, in whole or in part, or if no disposition thereof is made within 60 days. Such person's expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advancement of expenses under Section 2(c) of this Article where the required undertaking has been received by the corporation) that the claimant has not met the standard of conduct set forth in Section 1 of this Article, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation to have made a determination that indemnification of the claimant is proper, nor the fact that there has been an actual determination by the corporation that indemnification of the claimant is not proper, shall be a defense to the action or create a presumption that the claimant is not entitled to indemnification. Section 4. Survival; Savings Clause; Preservation of Other Rights. (a) The foregoing indemnification provisions shall be deemed to be a contract between the corporation and each person who serves in such capacity at any time while these provisions as well as the relevant provisions of the New York Business Corporation Law are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a contract right may not be modified retroactively without the consent of such person. (b) If this Article or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each such person against judgments, fines, amounts paid in settlement and expenses, including attorneys' fees, incurred in connection with any actual or threatened action by or in the right of the corporation, or any appeal therein, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated and to the full extent permitted by applicable law. (c) The indemnification provided by this Article shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of shareholders or directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer or employee of the corporation and shall inure to the benefit of the heirs, executors and administrators of such a person. The corporation is hereby authorized to provide further indemnification if it deems it advisable by resolution of shareholders or directors, by amendment of these by-laws or by agreement. * * * For purposes of these by-laws, the masculine pronoun means the feminine and the singular means the plural whenever appropriate. EX-10.13 4 EX-10.13 EXHIBIT 10.13 STANLEY C. GAULT STOCK OPTION AGREEMENT 1. Grant of Option. Pursuant to the provisions of its 1993 Stock Incentive Plan (the "Plan"), Avon Products, Inc. (the "Company") as of November 4, 1999 has granted to Stanley C. Gault (the "Optionee") non- qualified options to purchase from the Company a total of 200,000 shares of Common Stock of the Company at the exercise price of $29.625 per share (the "Option"). This Option is subject to the terms and conditions of the Plan and those set forth in this Agreement. All capitalized terms used herein shall have the meaning set forth in the Plan, unless the context requires a different meaning. 2. Exercise of Option (a) This Option shall be exercisable in three installments. The first installment shall be exercisable on the first anniversary of the Date of Grant for 33.3% of the number of shares of Common Stock subject to this option. Thereafter, on each subsequent anniversary of the Grant Date, an installment shall become exercisable for 33.3% and 33.4%, respectively, of the number of shares subject to this Option with the entire option fully exercisable after the third anniversary of the Date of Grant. To the extent that any of the above installments is not exercised when it becomes exercisable, it shall not expire, but shall continue to be exercisable at any time thereafter until this Option shall terminate, expire or be surrendered. An exercise shall be for whole shares only. (b) In accordance with the Plan this entire Option shall be immediately cashed out effective as of the date of any "Change in Control", regardless of whether or not any portion is otherwise exercisable. For this purpose, the "Change in Control Price" shall be the higher of (i) the highest price paid for a share of Stock as reported on the New York Stock Exchange Composite Tape during the 12 month period ending with the effective date of Change in Control or (ii) the highest cash tender offer price for a share of Stock during such period. In the event that a tender offer for Stock consists of a combination of cash and securities, the Change in Control Price calculated under (ii) would be based solely on the cash price equivalent of such offer. (c) Shares may be purchased by giving the Company's Corporate Secretary or Assistant Secretary written notice of exercise, specifying the number of shares to be purchased. The notice of exercise shall designate one of the following methods of purchase: (i) tender to the Company of a check for the full exercise price of the shares with respect to which such Option or portion thereof is exercised, or (ii) instructions to the Company to deliver all the shares being exercised to a broker-dealer with whom an arrangement has been made to deliver the full exercise price to the Company. The Company may establish special terms and conditions for this "cashless" exercise, and at any time may terminate availability of this form of purchase. 3. Expiration of Option. The Option shall expire or terminate and may not be exercised to any extent by the Optionee as of the first to occur of the following events: (a) The tenth anniversary of the Date of Grant; or (b) The second anniversary of the date of the Optionee's death; or (c) the date that is ninety days after the optionee resigns as Chairman of the Board if prior to May 4, 2000 and if such resignation is without the consent of the Board of Directors. In the event of Termination of Employment because of death, the entire Option shall immediately become exercisable as to all shares, notwithstanding Section 2(a) of this Agreement. 4. Tax Withholding. No distribution of shares may be made to the Optionee until the Company has received all amounts required for federal, state or local tax withholding. The method of discharging such withholding obligation shall be elected with the notice of exercise and may include (i) payment by check, or (ii) use of a 'cashless exercise' using a broker-dealer in a manner similar to that described in Section 2(c)(ii) hereof. The method of withholding shall be subject to such rules as the Company may adopt from time to time. It is recognized by both parties that, based on current laws, the difference between the Fair Market Value of the shares purchased by an option exercise and the exercise price of such shares generally will constitute ordinary taxable income for federal income tax purposes and for most state and local income tax purposes. 5. Notice. Any notices required to be given hereunder to the Company shall be addressed to the Secretary or Assistant Secretary of the Company at the Company's headquarters offices in New York City, New York. Any notice required to be given hereunder to the Optionee shall be addressed to the Optionee at his current address shown on the Company's records. Notice shall be sent by mail, express delivery or, if practical, by hand delivery. 6. Other Provisions. The provisions set forth in Section 5 of the Plan are specifically incorporated by reference in this Agreement, including but not limited to those pertaining to the following matters: a. Changes in Capitalization; Merger; Liquidation b. Non-alienation of Benefits c. Choice of Law AVON PRODUCTS, INC. _____________________________ Andrea Jung, President and Chief Executive Officer EX-13 5 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 which 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. Cautionary Statement for Purposes of the "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 Certain statements in this report which are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the information set forth herein. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, levels of activity, performance or achievement of the Company, or industry results, to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: General economic and business conditions; the ability of the Company to implement its business strategy; the Company's access to financing and its management of foreign currency risks; the Company's ability to successfully identify new business opportunities; the Company's ability to attract and retain key executives; the Company's ability to achieve anticipated cost savings and profitability targets; the impact of substantial currency exchange devaluations in the Company's principal foreign markets; changes in the industry; competition; the effect of regulatory and legal restrictions imposed by foreign governments; the effect of regulatory and legal proceedings and other factors discussed in Item 1 of the Company's Form 10-K. As a result of the foregoing and other factors, no assurance can be given as to the future results and achievements of the Company. Neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements. Results of Operations Consolidated - Net income in 1999 was $302.4 compared with $270.0 in 1998. Basic and diluted earnings per share in 1999 were $1.18 and $1.17, respectively, compared with $1.03 and $1.02, respectively, in 1998. Special and non-recurring charges were recorded in the first quarter of 1999 for the Company's business process redesign ("BPR") program. These charges totaled $151.2 pretax, which reduced net income by $121.9 after tax, or $.47 per share on a basic and diluted basis. The 1998 results include special and non-recurring charges totaling $154.4 pretax, which reduced net income by $122.8 after tax, or $.46 per share on a basic and diluted basis. See Note 13 of the Notes to Consolidated Financial Statements for further discussion of this program. Before the charges, net income for the year ended December 31, 1999 of $424.3 increased 8% over 1998. Earnings per share before the charges of $1.65 and $1.64 on a basic and diluted basis, respectively, both increased 11% over the comparable period in 1998. Net income for 1997 was $338.8 and basic and diluted earnings per share were $1.28 and $1.27, respectively. The 1997 results include the favorable settlement of a value-added tax claim in the United Kingdom equal to approximately $26.5 on a pretax basis. The $26.5 gain represents a $20.6 settlement of disputed value-added tax charges from prior years, which is included in other expense (income), net and $5.9 of interest which is included in interest income. The net effect of this gain was to increase 1997 net income by $16.7 and both basic and diluted earnings per share by $.06. Excluding the charges, operating profit in 1999 was $700.6, or 12% over 1998, due to higher sales, an improved gross margin and a slight improvement in the operating expense ratio. The increase in operating profit was partially offset by higher net interest expense and unfavorable foreign exchange in 1999. As a result, pretax income before the charges rose $47.5, or 8%, over 1998. Net income was favorably impacted by a lower effective tax rate in 1999, partially offset by lower minority interest income due mainly to the improved results in Japan and China. On a consolidated basis, Avon's net sales of $5.29 billion increased 1% from $5.21 billion in 1998. International sales increased 2% to $3.21 billion due to strong growth in the Pacific region, most significantly in Japan, the Philippines, Taiwan and 30 Australia, and in Europe due to continued improvements in Poland and the United Kingdom, partially offset by declines in Russia, Germany and France. U.S. dollar sales decreased in Latin America primarily as a result of the Brazilian real devaluation in early 1999 and declines in Argentina and Chile, partially offset by growth in Mexico, Venezuela and Central America. Sales in North America increased 1% to $2.08 billion in 1999. Excluding the impact of foreign exchange, consolidated net sales rose 9% over the prior year. In 1998, consolidated net sales of $5.21 billion increased 3% from $5.08 billion in 1997. Sales in North America increased 5% to $2.06 billion primarily due to a 5% increase in the U.S. attributable mainly to a higher average order size. International sales increased 1% to $3.15 billion from $3.11 billion due to strong growth in Latin America, most significantly in Brazil, Mexico, Argentina and Venezuela, as well as in Europe reflecting improvements in the United Kingdom and Poland. These increases were partially offset by sales declines in the Pacific, most significantly in Japan, China and the Philippines. Excluding the impact of foreign exchange, consolidated net sales rose 9% over 1997. Cost of sales as a percentage of sales was 38.4% in 1999, compared with 39.4% in 1998. The 1999 and 1998 cost of sales include $46.0 and $37.9, respectively, of non-recurring charges for inventory write-downs related to the Company's BPR program. The charges relate to the closure of facilities, discontinuation of certain product lines, size-of-line reductions and a change in strategy for product dispositions. See Note 13 of the Notes to Consolidated Financial Statements for further discussion of these charges. Excluding the charges, cost of sales as a percentage of sales was 37.5% in 1999 versus 38.7% in 1998. This favorable variance was due to improvements in all regions, most significantly in Europe, including the United Kingdom, Germany, Italy and Central Europe, due to a continuing focus on pricing strategies and improved profitability of beauty plus categories, including fashion jewelry and accessories. Japan, Mexico and the U.S. also posted strong gross margin improvements. These improvements were partially offset by a decline in Brazil resulting from higher costs in the second half of the year as a result of the devaluation, and in Russia due to a pricing discount policy begun in the fourth quarter of 1998. Excluding the charge, the 1998 cost of sales as a percentage of sales was 1.7 points favorable over 1997. This improvement was primarily due to a higher margin in Brazil, reflecting actions taken in 1997 to reduce inventory levels combined with cost reduction programs in 1998. Additionally, the gross margin in Venezuela improved as a result of pricing strategies and business redesign efforts. Japan's gross margin improved as a result of cost reduction initiatives, and the U.S. improved its margin through pricing strategies, cost improvements and reduced clearance activity in the non-cosmetics, fragrance and toiletries category. Marketing, distribution and administrative expenses of $2.60 billion increased $33.0, or 1%, over prior year, but decreased slightly as a percentage of sales to 49.2% from 49.3% in 1998. Expense ratio improvements were reported in Brazil reflecting strict expense management and BPR initiatives, in Japan reflecting BPR efforts, and in Central Europe reflecting volume efficiencies and a significant reduction in expenses. These improvements were partially offset by higher expense ratios in Mexico due to increased advertising and incentive programs in 1999, in Germany due to strategic marketing investments, in Venezuela due to increased incentive programs and in the United Kingdom due to higher shipping expenses, most significantly in the fourth quarter. In 1998, marketing, distribution and administrative expenses of $2.57 billion increased $79.4, or 3%, from 1997 and increased as a percentage of sales to 49.3% from 49.0% in 1997. The overall increase in the expense ratio was due to higher expense ratios in Mexico due to increased marketing and promotional expenses associated with new product launches, in Venezuela due to increased administrative expenses as a result of the implementation of a new labor law, in Argentina due to increased marketing expenses and in China reflecting the shutdown of sales operations for most of the second quarter of 1998. Special charges of $105.2 and $116.5 were recorded in 1999 and 1998, respectively, for the Company's BPR program. The 1999 charges are primarily related to employee severance benefits worldwide and the restructuring of operations in Western Europe. The 1998 charges mainly related to employee severance benefits and facility rationalizations in Puerto Rico, the Dominican Republic, Hong Kong and China as well as asset write-downs associated with the divestiture of the Discovery Toys business unit. See Note 13 of the Notes to Consolidated Financial Statements for further discussion of these charges. 31 Interest expense in 1999 of $43.2 increased $8.5 over the prior year primarily due to increased domestic borrowings associated with the acceleration of the Company's share repurchase program discussed in Notes 4 and 9 of the Notes to Consolidated Financial Statements. Interest expense in 1998 of $34.7 was $.8 favorable to 1997 due to lower cost of borrowings. Interest income in 1999 of $11.1 decreased $4.8 mainly due to a Mexico tax refund claim recognized in June 1998. Interest income in 1998 of $15.9 decreased $.8 compared to 1997 primarily due to the interest portion of the 1997 favorable value-added tax settlement in the United Kingdom, partially offset by the 1998 Mexico tax refund claim, as well as higher interest rates and increased average short-term investments in Brazil in 1998. In 1999, other expense (income), net was $12.2 unfavorable to the prior year due primarily to unfavorable net foreign exchange in 1999 resulting from exchange losses, primarily in Europe and Latin America. In 1998, other expense (income), net was $14.4 unfavorable to 1997. Excluding the 1997 value-added tax settlement in the United Kingdom, other expense (income), net was $6.2 favorable primarily due to favorable foreign exchange. Income taxes were $204.2 in 1999 and the effective tax rate was 40.3% compared with $190.8 in 1998 and an effective tax rate of 41.9%. Excluding the effect of the special and non-recurring charges, the effective tax rate was 35.5% in 1999 compared with 36.4% in 1998 due to the earnings mix and tax rates of international subsidiaries. Income taxes in 1997 were $197.9 and the effective tax rate was 37.0%. The 36.4% effective tax rate was lower in 1998 versus 1997 due to the mix of earnings and income tax rates of the 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. Venezuela and Russia experienced high cumulative rates of inflation over the past three years. Mexico was converted to non- hyperinflationary status beginning January 1, 1999 due to reduced cumulative inflation rates during the three-year period 1996 through 1998. Below is an analysis of the key factors affecting net sales and operating profit by reportable segment for each of the years in the three-year period ended December 31, 1999. Years ended December 31 1999 1998 1997 Net Operating Net Operating Net Operating Sales Profit Sales Profit Sales Profit North America: U.S. $1,809.3 $ 329.3 $1,774.0 $ 302.8 $1,696.7 $ 261.8 Other 274.0 44.7 287.6 40.2 275.4 35.1 Total 2,083.3 374.0 2,061.6 343.0 1,972.1 296.9 International: Latin America 1,607.7 353.6 1,665.1 344.4 1,513.3 280.0 Europe 878.0 126.2 862.7 102.2 811.6 85.4 Pacific 720.1 102.1 623.3 62.5 782.4 67.0 Total 3,205.8 581.9 3,151.1 509.1 3,107.3 432.4 Total from operations $5,289.1 955.9 $5,212.7 852.1 $5,079.4 729.3 Global expenses (255.3) (224.5) (191.5) Special and non-recurring charges (151.2) (154.4) - Operating profit $ 549.4 $ 473.2 $ 537.8 Canada, Dominican Republic and Puerto Rico are included in North America - Other. 32 1999 Compared to 1998 North America - Sales in North America increased 1% to $2.08 billion, and operating profit increased 9% to $374.0 in 1999. The U.S. business, which represents almost 90% of the North American segment, reported sales and operating profit growth of 2% and 9%, respectively. The sales increase in the U.S. resulted primarily from an increase in the average order size. Growth in fashion jewelry and accessories and non-core categories was partially offset by sales decreases in cosmetics, fragrances and toiletries ("CFT") and apparel. Sales of fashion jewelry and accessories rose significantly over the prior year reflecting the success of sterling silver and bolder jewelry designs, the introduction of licensed luggage and a strong performance in watches and handbags. Additionally, sales of accessories increased significantly due to the success of the Pokemon watch in the fourth quarter. The non-core category, consisting primarily of home entertainment and gift and decorative items, posted strong growth due to increased sales of inspirational and religious products. Fourth quarter sales of Millennium products also contributed to the overall increase of non-core items. These improvements were partially offset by declines in the CFT and apparel categories. The decrease in CFT sales resulted primarily from lower fragrance sales in 1999 due to the underperformance of women's new products as well as fewer offers on existing products. Apparel sales decreased due to underperformance of new product introductions and demonstration products as well as a shift in focus from sales growth to increased profitability. A 1.1 point operating margin improvement in the U.S. included favorable gross margin and operating expense ratios. The gross margin improvement resulted from supply chain cost improvements and product category management, partially offset by price reductions in CFT during the fourth quarter to drive sales. The favorable expense ratio reflects lower spending in 1999 on advertising, lower variable compensation and the elimination of the Sponsorship program, partially offset by increased spending on strategic initiatives such as the Internet and express and beauty centers. International - International sales increased 2% to $3.21 billion and operating profit increased 14% to $581.9 from $509.1 in 1998. The sales growth resulted from strong double-digit growth in the Pacific region, most significantly in Japan, the Philippines, Taiwan and Australia, as well as growth in Europe reflecting improvements in Poland and the United Kingdom, and in Mexico, Venezuela and Central America. These results were significantly offset by sales declines in Brazil, and, to a lesser extent, in Russia, Argentina and Germany. Excluding the impact of foreign currency exchange, international sales rose 14% and operating profit increased 27% over 1998. In Latin America, sales declined 3% to $1.61 billion while operating profit increased 3% to $353.6 in 1999. Excluding the impact of foreign currency exchange, sales increased 16%, a 19 point differential due primarily to the Brazilian real devaluation which began in early 1999, discussed below. Brazil, however, had double-digit increases in local currency sales, units and number of customers served. Sales decreased in Argentina and Chile as a result of weak economic conditions. The Argentine economy has been in a prolonged recession with high unemployment and low consumer spending. Despite the sales decline, Avon continued to gain market share in Argentina in 1999. These sales declines were partially offset by strong growth in Mexico, and, to a lesser extent, in Venezuela and Central America. Mexico's sales increase resulted from both operational factors including new product launches in the cosmetics, home and fashion lines as well as economic growth reflecting consumer price increases in 1999. Sales grew in Venezuela due mainly to price increases as well as double-digit increases in number of orders and active Representatives, and in Central America due to strong increases in units, customers served and active Representatives. The improvement in the region's operating profit was primarily due to favorable results in Mexico attributable to the sales increase and an improved gross margin, partially offset by increased advertising expense and incentive programs in 1999. The gross margin improvement in Mexico resulted from a shift in the sales mix from fewer sales of toiletries to more sales of higher-margin cosmetics and fragrances. However, in the third quarter of 1999, Avon's retail competitors in the toiletries and non-CFT categories significantly discounted their prices which led to unit declines. Management in Mexico adjusted prices in the fourth quarter of 1999 and planned incentive programs to aggressively recruit Representatives to mitigate the impact of competitors' deep discounting. Active Representatives in Mexico grew 11% in 1999. Venezuela 33 contributed to the region's growth in operating profit through a gross margin improvement driven by price increases as well as BPR initiatives, particularly in the home segment. As discussed, these improvements were partially offset by sales and a gross margin decline in Brazil and weak economic conditions in Argentina and Chile. Brazil's gross margin decline, particularly during the fourth quarter of 1999, resulted from increased costs due to the impact of the devaluation. However, Brazil made tremendous improvements in the operating expense ratio attributable to reduced bad debt expense, sales returns and transportation costs. Excluding the impact of foreign currency exchange, operating profit in Latin America increased 22% over 1998. The Brazilian real devalued significantly in January 1999 and, as a result, negatively affected Brazil's U.S. dollar results in 1999. The effect of exchange rates was reduced by foreign exchange contracts previously in place and several actions taken by local management to offset the devaluation, including a focused effort directed at vendor negotiations and additional local sourcing to reduce imports. To grow sales in 2000, management plans to increase advertising, sampling and motivation to support new products, add more pages to the brochure and focus on key categories including fragrance, color, skincare and haircare. Brazil's 1999 sales, although up over 20% in local currency, were down approximately 20% in U.S. dollars due to the devaluation. In the Europe region, sales increased 2% to $878.0 and operating profit increased 24% to $126.2 in 1999. Sales growth in Central Europe, primarily Poland, and the United Kingdom was partially offset by declines in Russia, Germany and France. Continued double-digit increases in units, customers served and active Representatives contributed to Central Europe's sales increase. Poland's success reflects strong growth in the CFT category, increased Representative retention and a change in the campaign cycle including a new brochure every 4 weeks versus 6 weeks in the prior year. Growth in the United Kingdom resulted from a higher average order size, increased distributorship sales and the successful launch of a new brochure in 1999 to enhance Avon's image. Sales were lower in Russia due to the economic crisis and ruble devaluation, which occurred in August 1998, and in Germany due to a weak economy. Local currency sales in Russia increased almost 30% over 1998, with a strong increase in active Representatives. Excluding the impact of foreign currency exchange, sales in Europe increased 13% over prior year. The increase in Europe's operating profit resulted from operating margin improvements in Central Europe, mainly Poland, the United Kingdom and Italy due to higher gross margins which resulted from a continuing focus on pricing strategies and improved profitability of non-CFT categories. These operating profit increases were partially offset by continued declines in Russia due to the ruble devaluation. Management in Russia will continue to focus on market share growth and improved margins through pricing flexibility and tight expense management. Excluding the impact of foreign currency exchange, operating profit increased 31% over 1998. In the Pacific region, sales increased 16% to $720.1 and operating profit increased 63% to $102.1 in 1999. Excluding the impact of foreign currency exchange, sales increased 8% over 1998. The sales improvement resulted from growth in every market, most significantly in Japan due to a favorable currency impact in 1999, and in the Philippines, Taiwan and Australia due to strong increases in units and customers served. Despite the earthquake in Taiwan in September 1999, sales were up double-digits over prior year due to aggressive marketing and sales programs, incentive offers and increased spending on advertising. The increase in the region's operating profit resulted primarily from the above sales increases and operating margin improvements in Japan and China. Japan's gross margin improved due to product cost savings initiatives in CFT and improved sourcing decisions for non-CFT as well as a profitability screening process that led to the elimination of many low-margin products in the apparel and jewelry segments. Additionally, BPR efforts continue to generate significant savings across all expense areas in Japan. China's operating margin also improved significantly in 1999 reflecting the suspension of operations for most of the second quarter of 1998, discussed below. Excluding the impact of foreign currency exchange, operating profit increased 53% over 1998. 1998 Compared to 1997 North America - North American sales increased 5% to $2.06 billion and operating profit increased 16% to $343.0 in 1998. The U.S. business reported sales and operating profit growth of 5% and 16%, respectively. Sales growth in the U.S. reflected a 4% 34 increase in the average order size coupled with a 1% increase in the number of Representative orders. The sales improvement resulted from increases in fashion jewelry and accessories as well as in the CFT and home entertainment categories. These improvements were partially offset by a decline in the gift and decorative category. Sales of fashion jewelry and accessories rose significantly over 1997, primarily in the accessories segment, with the success of such products as organizer handbags, the Home Run Hero watch introduced in the fourth quarter and increased sales of licensed products, including Winnie the Pooh carryalls and sports watches. Growth in the CFT category was driven by successful launches of Rare Rubies, Anew Retinol Hand Complex and the Diane Von Furstenberg fragrance, Forest Lily. In addition, the success of Avon's transfer resistant technology lipstick and Avon Color's Spring Shade Collection combined with continued growth of the Avon Techniques hair care and Skin-So-Soft lines contributed to the growth in CFT. Higher sales in the home entertainment category were driven by the launch of a collection of inspirational and religious products, as well as an increase in the sales of demonstration products purchased by Representatives. These increases were partially offset by a decline in the gift and decorative category resulting from the phasing out of the Avon Home line and lower sales of Barbie and holiday products in 1998. The improvement in U.S. operating profit was mainly a result of the above sales increase combined with a favorable gross margin driven by cost improvements, revised pricing strategies and reduced clearance activity. International - In 1998, International sales increased 1% to $3.15 billion and operating profit increased 18% to $509.1 from $432.4 in 1997. The sales growth resulted from strong growth in Latin America, particularly in Brazil, Mexico, Argentina and Venezuela, as well as in Europe reflecting improvements in the United Kingdom and Poland. These results were significantly offset by sales declines in the Pacific, most significantly in Japan, China and the Philippines. Excluding the impact of foreign currency exchange, international sales rose 11% and operating profit increased 31% over 1997. In Latin America, 1998 sales increased 10% to $1.67 billion and operating profit increased 23%, or $64.4, to $344.4 in 1998. The sales improvement resulted from strong growth in Brazil and, to a lesser extent, Mexico, Argentina and Venezuela. Brazil's growth in sales was driven by attractive pricing and successful new product launches, which resulted in strong double-digit increases in units and orders in 1998. Additionally, the number of active Representatives rose 31% from 1997. Mexico's sales increase was driven by successful new product launches including Anew Night Force, Yessamin fragrance and Women of Earth, as well as increases in the apparel and home line extensions which offered superior design and promotions in 1998. Argentina and Venezuela reported strong increases in units, orders and customers served. Excluding the impact of foreign currency exchange, sales in Latin America rose 19% over 1997. The increase in the region's operating profit was primarily due to favorable results in Brazil attributable to the strong sales increase and an improved gross margin and operating expense ratio. Brazil's gross margin improvement resulted from actions taken in 1997 to reduce inventory levels as well as better vendor negotiations and continued cost reduction programs in 1998. The favorable operating expense ratio was driven by the strong sales increase. Operating profit improvements in Mexico due to the sales increase, and in Venezuela due to pricing strategies and business redesign efforts, contributed to the region's growth in operating profit. Excluding the impact of foreign currency exchange, operating profit in Latin America increased 34% over 1997. In the Europe Region, 1998 sales increased 6% to $862.7 and operating profit increased $16.8, or 20%, to $102.2 in 1998. The sales increase was primarily due to growth in the United Kingdom resulting from a higher average order size in 1998. The United Kingdom continues to focus on developing the core business through Representatives, growth in orders and customers as well as brand awareness and image enhancement. In addition, Poland's sales increased significantly from 1997 as a result of dramatic growth in active Representatives and all business fundamentals including units, orders and customers served. These improvements were partially offset by sales shortfalls in Russia attributable to the devaluation of the ruble in August 1998. Average orders declined significantly in Russia due to low consumer purchasing power. In response to this situation, several actions were taken by local management including pricing flexibility to maintain and build market share and reduce credit sales, as well as a tightening of expense controls. Geographic expansion into new cities was deferred. The devaluation negatively affected Russia's U.S. dollar results in 1998. 35 Excluding the impact of foreign currency exchange, sales in Europe and Russia increased 10% and 26%, respectively, from 1997. The increase in the region's operating profit was due to the overall sales increase combined with an improved operating margin in the United Kingdom. A shift in sales mix to higher-margin items contributed to a gross margin improvement, and continued active expense management led to a favorable operating expense ratio in the United Kingdom. These increases were partially offset by operating profit declines in Russia mainly due to the devaluation of the ruble discussed above. Excluding the impact of foreign currency exchange, operating profit in Europe increased 27% over 1997. In the Pacific Region, 1998 sales decreased 20% to $623.3 and operating profit decreased 7% to $62.5 from $67.0 in 1997. The decline in sales resulted from decreases in every major market, most significantly in Japan, China and the Philippines. The Asian currency and economic crisis which began in mid-1997 continued throughout 1998 and negatively impacted results in the Pacific. The general economic environment was poor with low consumer confidence and reduced spending. Excluding the impact of foreign currency exchange, sales decreased 3%, a 17 point differential from U.S. dollar reported results. In addition, selling activities in China were suspended for most of the second quarter of 1998 due to governmental restrictions on direct-selling companies. As of the beginning of June, the Company received Chinese governmental approval to resume operations as a wholesale and retail business and became operational again in mid-June. The Company converted its branches into retail outlets to serve customers and received approval to utilize sales promoters, much like Representatives, to promote product sales in China. Despite the above difficulties, most markets showed growth in active Representatives and number of customers served resulting from a strong focus on active recruitment to expand the Representative base throughout the region. The Philippines posted double-digit increases in orders, customers served and active Representatives. Local currency sales in the Philippines increased 10% over the prior year. The decrease in the region's operating profit resulted primarily from sales declines discussed above. Despite the sales decline, Japan's operating profit increased significantly over 1997 as a result of improvements in gross margin and operating expense ratios. Japan's margin improvements resulted from cost reduction strategies and the elimination of many lower-margin products in 1998. Additionally, BPR efforts resulted in lower operating expenses. Excluding the impact of foreign currency exchange, operating profit in the Pacific increased 19% from 1997. See Foreign Operations section under Liquidity and Capital Resources for additional discussion. Global Expenses - Global expenses were $255.3 in 1999 compared with $224.5 in 1998. The $30.8 increase was due to higher spending related to global marketing and information technology system initiatives in 1999. In 1998, global expenses were $33.0 higher than in 1997 due to increased expenses associated with information technology system and global marketing initiatives and higher expenses for incentive compensation programs primarily due to the improved operating results in 1998 versus 1997. Recent Pronouncements - In June 1999, the Financial Accounting Standards Board issued Financial Accounting Standard ("FAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS No. 133" which delayed the effective date of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" by one year. FAS No. 133 is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). FAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or accumulated other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction. For fair- value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative instrument will be included in the income statement along with the offsetting changes in the hedged item's fair value. For cash-flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in accumulated other comprehensive income. The gains and losses on the derivative instruments that are reported in accumulated other comprehensive income will be 36 reclassified to earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all of the hedges will be recognized in current period earnings. The impact of FAS No. 133 on the Company's financial statements will depend on a variety of factors, including the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. Based on an analysis of Avon's financial instruments outstanding at December 31, 1999, the Company does not expect the adoption of FAS No. 133 to have a material impact on its earnings or statement of financial position. 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 total cost of resolving such contingencies at December 31, 1999 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 operating activities was $464.6 in 1999 compared to $324.4 in 1998. The 1999 increase principally reflects, among other things, favorable working capital levels, higher net income and higher funding of the Company's benefit plans in 1998. A more detailed analysis of the individual items contributing to the 1999 and 1998 amounts is included in the Consolidated Statements of Cash Flows. Excluding changes in debt and other financing activities, net cash usage of $736.6 in 1999 was $619.0 unfavorable compared to net cash usage of $117.6 in 1998. The $619.0 variance primarily reflects increased repurchases of common stock resulting from the accelerated buyback program. See Note 9 of the Notes to Consolidated Financial Statements for further discussion of this program. In addition, the variance was also a result of an unfavorable exchange rate impact and increased cash used for investing activities in 1999, including the acquisition of a manufacturing facility in Poland and increased capital expenditures. These uses were partially offset by higher cash provided by operating activities, discussed above. During 1998 and 1997, the Company received net proceeds of approximately $58.1 and $58.6, respectively, under securities lending transactions which were used to repay domestic commercial paper borrowings and are included in the cash flows as other financing activities. See Note 4 of the Notes to Consolidated Financial Statements for further discussion of these transactions. In 1998, excluding changes in debt and other financing activities, there was a net decrease in cash usage of $19.7. This variance reflects a favorable exchange rate impact on cash and higher cash provided by operating activities. These sources were partially offset by higher capital expenditures and increased dividend payouts in 1998. For the period 1994 through 1999, 58.0 million shares of common stock have been purchased for approximately $1,442.1 under the stock repurchase programs. See Note 9 of the Notes to Consolidated Financial Statements for further details of the stock repurchase programs. Working Capital - At December 31, 1999, current liabilities exceeded current assets by $375.0 while at the end of 1998, current assets exceeded current liabilities by $11.9. This increase of $386.9 is primarily due to increased net debt (short-term debt less cash and equivalents) associated with the accelerated stock repurchase program, discussed above, as well as the reclassification of approximately $106.4 of proceeds from securities lending transactions from other non-current liabilities to other accrued liabilities at December 31, 1999. In addition, lower inventory levels, as discussed in the Inventories Section, also contributed to the variance. Although current liabilities exceeded current assets at December 31, 1999, management believes this is due to the Company's direct selling business format which results in lower receivable and working capital levels. Avon's liquidity results from its ability to generate significant cash flows from operations and its ample unused borrowing capacity. At December 31, 1999, the large excess of current 37 liabilities over current assets as well as the issuance of long-term debt in 1999, discussed in Note 4 of the Notes to Consolidated Financial Statements, reflects the acceleration of the Company's share repurchase program. These share repurchases resulted in a shareholders' deficit balance at December 31, 1999 of $406.1. Avon's credit agreements do not contain any provisions or requirements with respect to working capital or equity balances. Capital Resources - Total debt of $1,007.4 at December 31, 1999 increased $751.1 from $256.3 at December 31, 1998, compared with an increase of $22.0 from December 31, 1997. At December 31, 1999 and 1998, approximately $106.4 and $112.4, respectively, related to security lending activities were included in other accrued liabilities and other non-current liabilities, respectively. See Note 4 of the Notes to Consolidated Financial Statements for further discussion of these transactions. During 1999 and 1998, cash flows from operating activities and other financing activities combined with cash on hand and higher debt levels were used for repurchase of common stock, dividends, capital expenditures and the acquisition of a manufacturing facility in Poland. At December 31, 1999, debt maturing within one year consists of borrowings from banks of $305.2 and the current maturities of long-term debt of $.8. Management believes that cash from operations and available sources of financing are adequate to meet anticipated requirements for working capital, dividends, capital expenditures, the remainder of the stock repurchase program and other cash needs. In November 1999, the Company issued $500.0 of unsubordinated, unsecured notes payable (the "Notes") in a private offering to institutional investors. The proceeds from this issuance were used for general corporate purposes, including the repayment of outstanding short-term borrowings incurred to finance the acceleration of the Company's share repurchase program. In connection with the offering, Avon entered into five-year and ten-year interest rate swap contracts with notional amounts of $200.0 and $300.0, respectively, to effectively convert fixed interest to a variable interest rate, based on commercial paper rates on the Notes. In May 1998, Avon issued $100.0 of bonds embedded with option features (the "Bonds") to pay down commercial paper borrowings. The Bonds have a twenty-year maturity; however, after five years, the Bonds, at the holder's option, can be sold back to the Company at par or can be called at par by the underwriter and resold to investors as fifteen-year debt. The coupon rate on the Bonds is 6.25% for the first five years, but will be refinanced at 5.69% plus the then corporate spread if the Bonds are reissued. In connection with the Bond issuance, Avon entered into a five-year interest rate swap contract with a notional amount of $50.0 to effectively convert fixed interest on a portion of the Bonds to a variable interest rate, based on LIBOR. During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007, to pay down commercial paper borrowings. During 1996, the Company entered into an agreement (the "credit facility"), which expires in 2001, with various banks to amend and restate the five-year, $600.0 revolving credit and competitive advance facility agreement. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. 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 or the higher of 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, 1999, the Company has $226.4 outstanding under a $600.0 commercial paper program supported by the credit facility. There were no borrowings outstanding as of December 31, 1998. The Company has uncommitted lines of credit available of $49.0 in 1999 and 1998 with various banks which have no compensating balances or fees. As of December 31, 1999 and 1998, $11.1 of these lines are being used for letters of credit. In addition, as of December 31, 1999 and 1998, there were international lines of credit totaling $399.5 and $329.5, respectively, of which $81.6 and $53.9 were outstanding, respectively. 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 38 which change from campaign to campaign. It is necessary for Avon to maintain relatively high inventory levels as a result of the nature of its business, including the number of campaigns conducted annually and the large number of products marketed. Avon's operations have a seasonal pattern characteristic of many companies selling CFT, fashion jewelry and accessories, gift and decorative items and apparel. Holiday 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 $523.5 at December 31, 1999 were $14.9 lower than 1998 as a result of a new business strategy, meant to complement other redesign initiatives, with the objective of reducing inventory clearance sales, building core brochure sales and building global brands. This decrease was partially offset by an increase in inventory levels in Mexico, resulting from higher costs for cosmetics materials, increased imports to support the home products line and lower than expected fragrance sales. 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, which 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 1999 were $203.4 (1998 - $189.5). These expenditures were made for capacity expansion in high growth markets, maintenance of worldwide facilities, contemporization and replacement of information systems, supply chain initiatives in the U.S. and for shipping and other customer service improvements including a new manufacturing and distribution facility in Mexico and a new plant facility and national distribution center in the Philippines. Numerous construction and information systems projects were in progress at December 31, 1999 with an estimated cost to complete of approximately $126.1. Capital expenditures in 2000 are currently expected to be in the range of $220.0 - $240.0. These expenditures will include improvements on existing facilities, continued investments for capacity expansion in high growth markets, facility modernization, information systems, including spending on the new Internet strategy, and equipment replacement projects. Foreign Operations - For the three years ending 1999, 1998 and 1997, the Company derived approximately 60% of its consolidated net sales and consolidated operating profit from operations from its subsidiaries outside of North America. In addition, as of December 31, 1999 and 1998, these subsidiaries comprised approximately 53% of the Company's consolidated total assets. Avon's operations in many countries utilize numerous currencies. Avon has significant net assets in Brazil, Mexico, the United Kingdom, Japan, Argentina, Canada and the Philippines. Changes in the value of non- hyperinflationary countries' currencies relative to the U.S. dollar result in direct charges or credits to equity. Effective January 1, 1997, Mexico was designated as a country with a highly inflationary economy due to the cumulative inflation rates over the three year period 1994 - 1996. However, Mexico was converted to non-hyper inflationary status effective January 1, 1999 due to reduced cumulative inflation rates during the three year period 1996 through 1998. The Brazilian real devalued significantly in January 1999 and, as a result, negatively affected Brazil's U.S. dollar results in 1999. The effect of exchange rates was reduced by foreign exchange contracts previously in place and several actions taken by local management to offset the devaluation including a focused effort directed at vender negotiations and local sourcing to reduce imports. Brazil's 1999 net sales represented approximately 9% of Avon's consolidated net sales. On April 21, 1998, the Chinese government issued a directive banning all direct selling in China resulting in the shutdown of the Company's sales operations for most of the second quarter. As of the beginning of June 1998, the Company received Chinese governmental approval to resume operations as a wholesale and retail business and became operational again on June 15, 1998. The Company converted its 75 branches into retail outlets to serve customers. During the end of the second quarter of 1998, Avon received government approval to utilize sales promoters, much like Representatives, to promote product sales in China. In early April 1999, the United States and China agreed to remove all market access restrictions on direct selling in China by January 1, 2003, including the current ban on direct selling imposed by the Chinese government in April 1998. The agreement is 39 contingent upon successful completion of the World Trade Organization accession negotiations between the United States and China and also includes development of regulations for direct selling based on the World Federation of Direct Selling Association's World Code of Conduct. Avon supports resolution of this direct selling issue in China and remains committed to the opportunities this promising region offers. 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, 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. Certain of the Company's financial instruments, which are discussed below under Risk Management Strategies and Market Rate Sensitive Instruments and in Note 7 of the Notes to Consolidated Financial Statements, are used to hedge various amounts relating to certain international subsidiaries. However, the Company's foreign currency hedging activities are not material when compared to the Company's international financial position or results of operations. Some foreign subsidiaries rely primarily on 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, 1999, the total indebtedness of foreign subsidiaries was $83.4. 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 1999, these subsidiaries remitted, net of taxes, $375.9 in dividends and royalties. This sum is a substantial portion of the 1999 consolidated net earnings of Avon's foreign subsidiaries. Risk Management Strategies and Market Rate Sensitive Instruments - The Company operates globally, with manufacturing and distribution facilities in various locations around the world. The Company may reduce its primary market exposures to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company 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. The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments and 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, 1999, the Company held foreign currency forward contracts with notional amounts totaling $290.2 and option contracts with notional amounts totaling $20.0 to hedge foreign currency items. All of these contracts have maturities prior to December 31, 2000. Also outstanding in 1999 were foreign currency forward contracts totaling $66.7 which do not qualify as hedging transactions under the current accounting definitions and, accordingly, have been marked to market. The mark-to-market adjustment at December 31, 1999 was not material. The Company has entered into forward contracts to purchase approximately 2,433,200 shares of Avon common stock at an average price of $38.06 per share at December 31, 1999. The contracts mature over the next two years and provide for physical or net share settlement to the Company. Accordingly, no adjustment for subsequent changes in fair value has been recognized. 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 40 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 would not result in a significant write off at December 31, 1999. In addition, Avon may be exposed to market risk on its foreign exchange and interest rate swap agreements as a result of changes in foreign exchange and interest 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. The Company is exposed to changes in financial market conditions in the normal course of its operations primarily due to international businesses and transactions denominated in foreign currencies and the use of various financial instruments to fund ongoing activities. Various derivative and non-derivative financial instruments held by the Company are sensitive to changes in interest rates. These financial instruments are either discussed above or in Notes 4 and 7 of the Notes to Consolidated Financial Statements. Interest rate changes would result in gains or losses in the fair value of debt and other financing instruments held by the Company. Based on the outstanding balance of all instruments at December 31, 1999, a hypothetical 50 basis point increase or decrease in interest rates prevailing at this date, sustained for one year, would not represent a material potential loss in fair value, earnings or cash flows. This potential loss was calculated based on discounted cash flow analyses using interest rates comparable to the Company's current cost of debt. In 1999, the Company did not experience a material loss in fair value, earnings or cash flows associated with changes in interest rates. The Company is exposed to equity price fluctuations for investments included in the grantors trust. A 10% change in equity prices would not be material based on the fair value of equity investments as of December 31, 1999. The Company also engages in various hedging activities in order to reduce potential losses due to foreign currency risks. Consistent with the nature of the economic hedge of such foreign exchange contracts, any unrealized gain or loss would be offset by corresponding decreases or increases, respectively, of the underlying instrument or transaction being hedged. These financial instruments are discussed above and in Note 7 of the Notes to Consolidated Financial Statements. Based on the Company's foreign exchange contracts at December 31, 1999, the impact of a 10% appreciation or 10% depreciation of the U.S. dollar against the Company's foreign exchange contracts would not represent a material potential loss in fair value, earnings or cash flows. This potential loss does not consider the underlying foreign currency transaction or translation exposures of the Company. The hypothetical impact was calculated on the combined option and forward positions using forward rates at December 31, 1999 adjusted for an assumed 10% appreciation or 10% depreciation of the U.S. dollar against the foreign contracts. The impact of payoffs on option contracts is not significant to this calculation. In 1999, net foreign exchange losses associated with the Company's foreign exchange contracts did not represent a material loss in fair value, earnings or cash flows. As of December 31, 1999, the primary currencies for which the Company has net underlying foreign currency exchange rate exposure are the U.S. dollar versus the Argentine peso, Brazilian real, British pound, Canadian dollar, euro, French franc, German mark, Japanese yen and the Mexican peso. The Company is also exposed to other South American and Asian currencies. The Company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign exchange rates on the Company's consolidated financial position, results of operations and cash flows. The impact of a 10% appreciation or 10% depreciation of the U.S. dollar against the Company's net underlying foreign currency transaction and translation exposures could be material. Other Information In October 1997, the Company announced a worldwide business process redesign ("BPR") program to streamline operations and improve profitability through margin improvement and expense reductions. The special and non-recurring charges associated with this program totaled $151.2 pretax ($121.9 net of tax, or $.47 per share on a basic and diluted basis) for the year ended December 31, 1999 and 41 $154.4 pretax ($122.8 net of tax, or $.46 per share on a basic and diluted basis) for the year ended December 31, 1998. BPR initiatives underway are intended to reduce costs by up to $400.0 a year by 2000, with a portion of the savings being reinvested primarily in consumer-focused initiatives. Total savings from BPR initiatives for 1999 approximated $250.0. Euro A single currency called the euro was introduced in Europe on January 1, 1999. Eleven of the fifteen member countries of the European Union adopted the euro as their common legal currency on that date. Fixed conversion rates between these participating countries' existing currencies (the "legacy currencies") and the euro were established as of that date. The legacy currencies are scheduled to remain legal tender as denominations of the euro until June 30, 2002 after which they will be withdrawn from circulation. During this transition period, parties may settle transactions using either the euro or a participating country's legal currency. Beginning in January 2002, new euro- denominated bills and coins will be issued. Avon operating subsidiaries affected by the euro conversion have established plans to address issues raised by the euro currency conversion. These issues include, among others, the need to adapt information technology systems, business processes and equipment to accommodate euro-denominated transactions, the impact of one common currency on pricing and recalculating currency risk. Avon does not expect system and equipment conversion costs to be material. Due to the numerous uncertainties associated with the market impact of the euro conversion, the Company cannot reasonably estimate the effects one common currency will have on pricing and the resulting impact, if any, on results of operations, financial condition or cash flows. Year 2000 Update The Company did not experience any disruptions to its normal operations as a result of the transition into calendar year 2000. Thorough testing of mission critical business processes was performed on January 1, 2000 in order to validate the data integrity of internal and external system interfaces. In addition, the Company obtained confirmation from its key suppliers and vendors that services to Avon Products, Inc. would not be interrupted. The total estimated cost associated with achieving worldwide Year 2000 compliance, excluding internal costs, will be approximately $33.7, of which $33.2 has been spent to date. Replacement costs and costs associated with the validation of third party compliance are included in these figures. The Company did not separately track the internal costs incurred for the Year 2000 project, those costs primarily being related to payroll costs for the Company's information systems group. The Company's policy was to expense as incurred information system maintenance and modification costs and to capitalize costs related to system replacement. The costs of the Company's Year 2000 compliance efforts are being funded through operating cash flows. The Company will continue to monitor its business processes and third parties for potential problems that could arise in the first few months of calendar year 2000. Based on the Company's preparations prior to January 1, 2000 and the absence of any problems to date, no significant disruptions are anticipated. 42 Results of Operations by Quarter Avon Products, Inc. In millions, except per share data First Second Third Fourth Year 1999** Net sales $1,213.8 $1,258.1 $1,250.6 $1,566.6 $5,289.1 Gross profit* 705.6 806.4 785.6 960.0 3,257.6 Special charges 105.2 - - - 105.2 Operating (loss)profit (41.3) 195.8 146.3 248.6 549.4 (Loss)income before taxes and minority interest (39.3) 188.4 136.3 221.2 506.6 (Loss)income before minority interest (50.7) 120.6 88.5 144.0 302.4 Net(loss)income $ (48.9) $ 121.4 $ 88.2 $ 141.7 $ 302.4 (Loss)earnings per share: Basic $ (.19) $ .46 $ .34 $ .58 $ 1.18(1) Diluted $ (.19) $ .46 $ .34 $ .58 $ 1.17(1) 1998** Net sales $1,183.4 $1,247.2 $1,233.2 $1,548.9 $5,212.7 Gross profit* 680.3 781.6 755.0 942.8 3,159.7 Special charges 70.5 - 46.0 - 116.5 Operating (loss)profit (17.8) 177.0 81.1 232.9 473.2 (Loss)income before taxes and minority interest (26.6) 173.6 76.5 232.4 455.9 (Loss)income before minority interest (32.7) 109.7 39.8 148.3 265.1 Net(loss)income $ (31.0) $ 111.4 $ 41.5 $ 148.1 $ 270.0 (Loss)earnings per share: Basic $ (.12) $ .42 $ .16 $ .56 $ 1.03(1) Diluted $ (.12) $ .42 $ .16 $ .56 $ 1.02(1) *First quarter 1999 and 1998 include special and non-recurring charges of $46.0 and $37.9, respectively, for inventory write-downs. **Certain reclassifications have been made to the 1998 financial and 1999 quarterly information to conform to the current full year presentation. (1) The sum of per share amounts for the quarters does not necessarily equal that for the year because the computations are made independently. Market Prices Per Share of Common Stock by Quarter 1999 1998 Quarter High Low High Low First $ 49.00 $ 35.50 $ 40.63 $ 28.00 Second 59.13 46.38 44.50 36.94 Third 56.75 24.63 44.31 25.00 Fourth 37.38 23.31 46.25 25.75 Avon common stock is listed on the New York Stock Exchange. At December 31, 1999, there were 22,964 shareholders of record. The Company believes that there are over 70,000 additional shareholders who are not "shareholders of record" but who beneficially own and vote shares through nominee holders such as brokers and benefit plan trustees. Dividends of $.72 per share, or $.18 per share each quarter, were declared and paid in 1999. Dividends of $.68 per share, or $.17 per share each quarter, were declared and paid in 1998. 43 Consolidated Statements of Income Avon Products, Inc. In millions, except per share data Years ended December 31 1999 1998 1997 Net sales $5,289.1 $5,212.7 $5,079.4 Costs, expenses and other: Cost of sales* 2,031.5 2,053.0 2,051.0 Marketing, distribution and administrative expenses 2,603.0 2,570.0 2,490.6 Special charges 105.2 116.5 - Operating profit 549.4 473.2 537.8 Interest expense 43.2 34.7 35.5 Interest income (11.1) (15.9) (16.7) Other expense (income), net 10.7 (1.5) (15.9) Total other expenses 42.8 17.3 2.9 Income before taxes and minority interest 506.6 455.9 534.9 Income taxes 204.2 190.8 197.9 Income before minority interest 302.4 265.1 337.0 Minority interest 0.0 4.9 1.8 Net income $ 302.4 $ 270.0 $ 338.8 Earnings per share: Basic $ 1.18 $ 1.03 $ 1.28 Diluted $ 1.17 $ 1.02 $ 1.27 *1999 and 1998 include special and non-recurring charges of $46.0 and $37.9, respectively, for inventory write-downs. The accompanying notes are an integral part of these statements. 44 Consolidated Balance Sheets Avon Products, Inc. In millions, except share data December 31 1999 1998 Assets Current assets Cash, including cash equivalents of $49.6 and $59.7 $ 117.4 $ 105.6 Accounts receivable (less allowance for doubtful accounts of $40.0 and $49.0) 495.6 492.6 Inventories 523.5 538.4 Prepaid expenses and other 201.3 204.8 Total current assets $1,337.8 $1,341.4 Property, plant and equipment, at cost Land 55.1 51.4 Buildings and improvements 653.4 613.0 Equipment 763.5 728.4 1,472.0 1,392.8 Less accumulated depreciation 737.2 722.9 734.8 669.9 Other assets 456.0 422.2 Total assets $2,528.6 $2,433.5 Liabilities and Shareholders' (Deficit) Equity Current liabilities Debt maturing within one year $ 306.0 $ 55.3 Accounts payable 435.9 416.9 Accrued compensation 165.8 161.3 Other accrued liabilities 411.6 308.2 Sales and taxes other than income 107.5 106.2 Income taxes 286.0 281.6 Total current liabilities $1,712.8 $1,329.5 Long-term debt 701.4 201.0 Employee benefit plans 398.1 390.0 Deferred income taxes 36.7 36.3 Other liabilities (including minority interest of $32.7 and $36.1) 85.7 191.6 Commitments and contingencies (Note 14) Shareholders' (deficit) equity Common stock, par value $.25 - authorized: 400,000,000 shares; issued 352,575,924 and 351,314,366 shares 88.1 87.8 Additional paid-in capital 819.4 780.0 Retained earnings 837.2 719.1 Accumulated other comprehensive income (349.7) (301.3) Treasury stock, at cost - 114,680,525 and 88,793,640 shares (1,801.1) (1,000.5) Total shareholders' (deficit) equity (406.1) 285.1 Total liabilities and shareholders' (deficit) equity $2,528.6 $2,433.5 The accompanying notes are an integral part of these statements. 45 Consolidated Statements of Cash Flows Avon Products, Inc. In millions Years ended December 31 1999 1998 1997 Cash flows from operating activities Net income $ 302.4 $ 270.0 $ 338.8 Adjustments to reconcile income to net cash provided by operating activities: Depreciation and amortization 83.0 72.0 72.1 Provision for doubtful accounts 87.5 91.3 80.8 Translation gains (.9) (7.2) (.1) Deferred income taxes (20.0) (13.0) 18.0 Special charges 84.1 88.5 - Other 9.7 3.9 9.4 Changes in assets and liabilities: Accounts receivable (132.7) (157.6) (121.4) Inventories (57.8) (17.2) (67.5) Prepaid expenses and other 1.1 (4.0) 6.7 Accounts payable and accrued liabilities 56.3 13.0 42.9 Income and other taxes 27.6 19.5 (56.1) Noncurrent assets and liabilities 24.3 (34.8) (8.1) Net cash provided by operating activities 464.6 324.4 315.5 Cash flows from investing activities Capital expenditures (203.4) (189.5) (169.4) Disposal of assets 11.7 5.8 3.3 Acquisitions of subsidiary stock and other investing activities (16.5) 1.4 (9.0) Net cash used by investing activities (208.2) (182.3) (175.1) Cash flows from financing activities Cash dividends (186.3) (180.6) (168.3) Debt, net (maturities of three months or less) 227.2 (96.1) (39.8) Proceeds from short-term debt 90.8 54.7 25.7 Retirement of short-term debt (69.4) (34.9) (49.0) Proceeds from long-term debt 500.0 100.1 100.0 Retirement of long-term debt (.2) (.6) (.8) Proceeds from exercise of stock options 23.9 24.0 20.6 Repurchase of common stock (800.6) (107.8) (110.8) Other financing activities - 58.1 58.6 Net cash used by financing activities (214.6) (183.1) (163.8) Effect of exchange rate changes on cash and equivalents (30.0) 4.7 (19.2) Net increase(decrease) in cash and equivalents 11.8 (36.3) (42.6) Cash and equivalents at beginning of year 105.6 141.9 184.5 Cash and equivalents at end of year $ 117.4 $ 105.6 $ 141.9 Cash paid for Interest $ 47.1 $ 39.2 $ 36.0 Income taxes, net of refunds received 176.0 188.5 215.8 The accompanying notes are an integral part of these statements. 46 Consolidated Statements of Changes in Shareholders' (Deficit) Equity Avon Products, Inc. In millions, except share data
Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Treasury Shares Amount Capital Earnings Income Stock Total Balance at December 31, 1996 173,957,379 $ 43.5 $ 693.6 $ 488.8 $(210.7) $(773.5) $ 241.7 Comprehensive income: Net income 338.8 338.8 Foreign currency translation adjustments (59.6) (59.6) Total comprehensive income 279.2 Dividends - $1.26 per share (166.7) (166.7) Exercise of stock options, including tax benefits 713,298 .2 30.3 30.5 Grant, cancellation and amortization of restricted stock 40,496 4.6 4.6 Repurchase of common stock (110.8) (110.8) Benefit plan contributions 4.6 1.9 6.5 Balance at December 31, 1997 174,711,173 43.7 733.1 660.9 (270.3) (882.4) 285.0 Comprehensive income: Net income 270.0 270.0 Foreign currency translation adjustments (15.6) (15.6) Minimum pension liability adjustment (15.4) (15.4) Total comprehensive income 239.0 Dividends - $.68 per share (178.9) (178.9) Two-for-one stock split effected in the form of a stock dividend from retained earnings (Note 9) 175,419,475 43.9 (32.9) (11.0) - Exercise of stock options, including tax benefits 916,102 .2 38.2 38.4 Grant, cancellation and amortization of restricted stock 267,616 7.1 7.1 Repurchase of common stock (107.8) 107.8) Benefit plan contributions 1.6 .7 2.3 Balance at December 31, 1998 351,314,366 87.8 780.0 719.1 (301.3)(1,000.5) 285.1 Comprehensive income: Net income 302.4 302.4 Foreign currency translation adjustments (49.7) (49.7) Minimum pension liability adjustment 1.3 1.3 Total comprehensive income 254.0 Dividends - $.72 per share (184.3) (184.3) Exercise of stock options, including tax benefits 1,152,549 .3 30.7 31.0 Grant, cancellation and amortization of restricted stock 109,009 8.7 8.7 Repurchase of common stock (800.6) (800.6) Balance at December 31, 1999 352,575,924 $88.1 $819.4 $837.2 $(349.7)$(1,801.1)$(406.1) The accompanying notes are an integral part of these statements.
47 Notes to Consolidated Financial Statements Avon Products, Inc. In millions, except per share data 1. Description of the Business and Summary of Significant Accounting Policies Business Avon Products, Inc. ("Avon" or the "Company") is a global manufacturer and marketer of beauty and related products. The product categories include cosmetics, fragrance and toiletries; beauty plus which consists of jewelry and accessories and apparel; and non-core which consists of gift and decorative and home entertainment products. Avon's business is comprised of one industry segment, direct selling, which is conducted in North America, Latin America, the Pacific and Europe. Sales are made to the ultimate customers principally by independent Avon Representatives. Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Avon and its majority and wholly-owned 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 - 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 during the year for income and expense accounts. The resulting translation adjustments are recorded within accumulated other comprehensive income. Financial statements of subsidiaries operating in highly inflationary economies are translated using a combination of current and historical exchange rates and any translation adjustments are included in income. Revenue Recognition - Avon recognizes revenue as shipments are made and title passes to the 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 U.S. and non-U.S. commercial banks with high credit ratings. Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method for all inventories. Prior to October 1999, substantially all U.S. inventories, except apparel, used the last-in, first-out ("LIFO") method to determine cost. The LIFO value of such inventory was approximately $3.6 lower than it would have been under the FIFO method at December 31, 1998. Effective October 1, 1999, the U.S. inventories using the LIFO method were changed to the FIFO method. The change was made because the Company had begun to realize and expects to continue to experience cost reductions as a result of technological advancements and process improvements in its manufacturing operations. As a result, the FIFO method will better measure the current value of such inventories, provide a more appropriate matching of revenues and expenses, and conform all inventories of the Company to the same accounting method. This accounting change was not material to the financial statements on an annual or quarterly basis, and accordingly, no restatement of prior periods' financial statements was made. 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 approximately 20 to 45 years and equipment range from 3 to 15 years. Other Assets - Systems development costs related to the development of major information and accounting systems are capitalized and amortized over the estimated useful life of the related project, not to exceed five years. Stock Options - Avon applies APB Opinion 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its long-term incentive plans. Compensation cost for fixed price options is measured as the excess, if any, of the quoted market price of Avon's stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Financial Instruments - The Company uses derivative financial instruments, including swaps, forward contracts and options, to manage interest rate and foreign currency exposures. These instruments are accounted for on an accrual basis. Gains and losses 48 on existing assets, liabilities and firm commitments designated as hedged items are deferred and included in other assets or liabilities and recognized when the offsetting gains and losses are recognized in the related financial instrument. Gains and losses and cash flows from derivative instruments designated as hedges are classified consistent with the items being hedged. Items which do not qualify for hedge accounting are marked to market with the resulting gain or loss recognized in other expense (income), net. Gains and losses on terminations of foreign exchange and interest rate swap contracts are deferred and amortized over the remaining terms of the original agreements. The Company also uses financial instruments, including forward contracts to purchase Avon common stock, to hedge certain employee benefit costs and the cost of the Company's share repurchase program. Contracts that require physical or net share settlement are initially measured at fair value with subsequent changes in fair value not recognized. Contracts that require net cash settlement are initially measured at fair value with subsequent changes in fair value recognized as gains or losses in the income statement. Research and Development - Research and development costs are expensed as incurred and aggregated in 1999 $34.4 (1998 - $31.4; 1997 - $29.9). Advertising - Advertising costs are expensed as incurred and aggregated in 1999 $63.4 (1998 - $65.0; 1997 - $64.5). 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 $195.0 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, no substantial tax cost would be incurred. Earnings per Share - Basic earnings per share are computed by dividing net income by the weighted-average number of shares outstanding during the year. Diluted earnings per share are calculated to give effect to all potentially dilutive common shares that were outstanding during the year. For each of the three years ended December 31, the number of shares used in the computation of basic and diluted earnings per share are as follows: 1999 1998 1997 Basic EPS Weighted-average shares 256.78 263.27 264.67 Incremental shares from conversion of: Stock options 2.59* 2.68 2.33 Diluted EPS Adjusted weighted-average shares 259.37 265.95 267.00 *At December 31, 1999, stock options and forward contracts to purchase Avon common stock totaling 3.8 million shares are not included in the diluted earnings per share calculation since their impact is anti- dilutive. Reclassifications - To conform to the 1999 presentation, certain reclassifications were made to the prior years' consolidated financial statements and the accompanying footnotes. 2. Accounting Changes In June 1999, the Financial Accounting Standards Board issued Financial Accounting Standard ("FAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS No. 133", which delayed the effective date of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", by one year. FAS No. 133 is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). FAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative instrument will be included in the income statement along with the offsetting changes in the hedged item's fair value. For cash- flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in accumulated other comprehensive income. The gains and losses on the derivative instruments that are reported in accumulated other comprehensive income will be reclassified to earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all of the hedges will be recognized in current period earnings. The impact of FAS No. 133 on the Company's financial statements will depend on a variety of factors, including the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. Based on an analysis of Avon's financial instruments outstanding at December 31, 1999, the 49 Company does not expect the adoption of FAS No. 133 to have a material impact on its earnings or statement of financial position. 3. Inventories Inventories at December 31 consisted of the following: 1999 1998 Raw materials $156.9 $140.6 Finished goods 366.6 397.8 Total $523.5 $538.4 4. Debt and Other Financing Debt at December 31 consisted of the following (see also Note 7 regarding financial instruments): 1999 1998 Maturing within one year: Notes payable $305.2 $ 53.9 Current portion of long-term debt .8 1.4 Total $306.0 $ 55.3 Long-term debt: 6.90% Notes, due 2004 $200.0 $ - 6.55% Notes, due 2007 100.0 100.0 7.15% Notes, due 2009 300.0 - 6.25% Bonds, due 2018 100.0 100.0 Other, payable through 2002 with interest from 3% to 38% 2.2 2.4 Less current portion (.8) (1.4) Total $701.4 $ 201.0 Annual maturities of long-term debt for each of the next five years are: 2000 - $.8; 2001 - $.8; 2002 - $.4; 2003 - $.2; and 2004 and beyond - $700.0. In November of 1999, Avon issued $500.0 of notes payable (the "Notes") in a private offering to institutional investors. The Notes are unsubordinated, unsecured obligations of the Company. $200.0 of the Notes bear interest at a per annum rate equal to 6.90% and mature on November 15, 2004. $300.0 of the Notes bear interest at a per annum rate equal to 7.15% and mature on November 15, 2009. Interest on the Notes is payable semi-annually. The indenture under which the Notes were issued limits the incurrence of liens and restricts the incurrence of sales and leaseback transactions and transactions involving mergers, consolidation or a sale of substantially all of the Company's assets. In connection with the offering, Avon entered into five-year and ten-year interest rate swap contracts with notional amounts of $200.0 and $300.0, respectively, to effectively convert fixed interest to a variable interest rate, based on commercial paper rates on the Notes. In May 1998, Avon issued $100.0 of bonds embedded with option features (the "Bonds") to pay down commercial paper borrowings. The Bonds have a twenty-year maturity; however, after five years, the Bonds, at the holder's option, can be sold back to the Company at par or can be called at par by the underwriter and resold to investors as fifteen-year debt. The coupon rate on the Bonds is 6.25% for the first five years, but will be refinanced at 5.69% plus the then corporate spread if the Bonds are reissued. In connection with the Bond issuance, Avon entered into a five-year interest rate swap contract with a notional amount of $50.0 to effectively convert fixed interest on a portion of the Bonds to a variable interest rate, based on LIBOR. During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007, to pay down commercial paper borrowings. Under the terms of a revolving credit and competitive advance facility agreement amended in 1996 and expiring in 2001 (the "credit facility"), the Company may borrow up to $600.0. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. 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 or the higher of 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, 1999, the Company has $226.4 outstanding under a $600.0 commercial paper program supported by the credit facility. At December 31, 1998, there were no borrowings outstanding under the credit facility. The Company has uncommitted lines of credit available of $49.0 in 1999 and 1998 with various banks which have no compensating balances or fees. As of December 31, 1999 and 1998, $11.1 of these lines are being used for letters of credit. The maximum borrowings under these combined facilities during 1999 and 1998 were $840.7 and $290.7, respectively, and the annual average borrowings during each year were approximately $304.0 and $205.7, respectively, at average annual interest rates of approximately 5.3% and 4.8%, respectively. At December 31, 1999 and 1998, international lines of credit totaled $399.5 and $329.5, respectively, of which $81.6 and $53.9 were outstanding, respectively. The maximum borrowings under these facilities during 1999 and 1998 were $121.0 and $63.6, respectively, and the annual average borrowings during each year were $73.0 and $49.3, respectively, at average annual interest rates of approximately 6.2% and 12.3%, respectively. Such lines have no compensating balances or fees. 50 At December 31, 1999 and 1998, Avon also had letters of credit outstanding totaling $15.5, which guarantee various insurance activities. In addition, Avon had outstanding letters of credit for various trade activities. During 1998 and 1997, the Company entered into securities lending transactions resulting in the borrowing of securities which were subsequently sold for net proceeds approximating $58.1 and $58.6, respectively, used to repay commercial paper borrowings. The borrowed securities are due to the lender no later than December 29, 2000. The obligations are included in other accrued liabilities on the balance sheet. The effective rates on the transactions are expected to be 5.5% and 6.5%, respectively. 5. Comprehensive Income The following table reflects comprehensive income as of December 31: 1999 1998 1997 Net income $302.4 $270.0 $338.8 Other comprehensive loss Change in equity due to foreign currency translation adjustments (49.7) (15.6) (59.6) Minimum pension liability adjustment 1.3 (15.4) - Comprehensive income $254.0 $239.0 $279.2 Accumulated other comprehensive income at December 31 consisted of the following: 1999 1998 Foreign currency translation adjustments $(335.6) $(285.9) Minimum pension liability adjustments (14.1) (15.4) Total $(349.7) $(301.3) 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 December 31 consisted of the following: 1999 1998 Deferred tax assets: Postretirement benefits $ 82.8 $ 82.0 Accrued expenses and reserves 48.6 58.7 Special and non-recurring charges 7.2 9.0 Employee benefit plans 70.9 54.5 Foreign operating loss carryforwards 37.3 29.1 Capital loss carryforwards 10.0 17.4 Postemployment benefits 9.3 11.0 All other 27.0 21.3 Valuation allowance (46.7) (46.9) Total deferred tax assets 246.4 236.1 Deferred tax liabilities: Depreciation (43.6) (41.5) Prepaid retirement plan costs (54.9) (55.2) Capitalized interest (9.7) (10.6) Unremitted foreign earnings (17.7) (17.4) All other (19.7) (22.1) Total deferred tax liabilities (145.6) (146.8) Net deferred tax assets $ 100.8 $ 89.3 Deferred tax assets (liabilities) at December 31 were classified as follows: 1999 1998 Deferred tax assets: Prepaid expenses and other $ 90.0 $ 86.9 Other assets 52.2 44.2 Total deferred tax assets 142.2 131.1 Deferred tax liabilities: Income taxes (4.7) (5.5) Deferred income taxes (36.7) (36.3) Total deferred tax liabilities (41.4) (41.8) Net deferred tax assets $100.8 $ 89.3 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 before taxes and minority interest for the years ended December 31 was as follows: 1999 1998 1997 United States $ 102.2 $ 74.2 $ 153.6 Foreign 404.4 381.7 381.3 Total $ 506.6 $ 455.9 $ 534.9 51 The provision for income taxes for the years ended December 31 was as follows: 1999 1998 1997 Federal: Current $ 48.4 $ 39.2 $ 27.1 Deferred (13.3) (10.4) 21.3 35.1 28.8 48.4 Foreign: Current 167.5 153.7 148.0 Deferred (4.5) .9 (7.7) 163.0 154.6 140.3 State and other: Current 8.3 10.9 4.8 Deferred (2.2) (3.5) 4.4 6.1 7.4 9.2 Total $ 204.2 $ 190.8 $ 197.9 The effective tax rate for the years ended December 31 was as follows: 1999 1998 1997 Statutory federal rate 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit .8 1.0 1.1 Tax-exempt operations (.3) .8 (.5) Taxes on foreign income, including translation 4.2 4.6 1.3 Other .6 .5 .1 Effective tax rate 40.3% 41.9% 37.0% In the fourth quarter of 1997, the Company recorded a benefit related to a value-added tax settlement in the United Kingdom totaling $26.5, of which $20.6 and $5.9 have been reflected in other expense (income), net and interest income, respectively. At December 31, 1999, Avon had foreign operating loss carryforwards of approximately $106.0. The loss carryforwards expiring between 2000 and 2007 were $55.5 and the loss carryforwards which do not expire were $50.5. Capital loss carryforwards, which expire between 2000 and 2001 and may be used to offset capital gains, if any, were approximately $28.7 at December 31, 1999. 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 does not use derivative financial 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. As discussed in Note 4 of the Notes to Consolidated Financial Statements, the Company entered into a five-year interest rate swap contract with a notional amount of $50.0 to effectively convert fixed interest on a portion of the Bonds to a variable interest rate based on LIBOR. The Company has also entered into five-year and ten-year interest rate swap contracts with notional amounts of $200.0 and $300.0, respectively, to convert fixed interest to a variable interest rate, based on commercial paper rates on the Notes. Foreign Currencies - The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments and 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, 1999, the Company held foreign currency forward contracts with notional amounts totaling $290.2 (1998 - $285.9) and option contracts with notional amounts totaling $20.0 (1998 - $32.6) to hedge foreign currency items. All of these contracts have maturities prior to December 31, 2000. Additionally, the Company also held forward contracts with notional amounts totaling $66.7 (1998 - $45.0) 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 forward contracts at December 31, 1999 and 1998 were insignificant. 52 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: 1999 1998 Buy Sell Buy Sell Brazilian real $ 15.0 $65.0 $ - $ 45.0 British pound 7.3 30.1 37.9 57.7 Canadian dollar - 23.8 - 39.1 Chinese renminbi - - - 5.0 Euro 82.9 10.0 - - French franc 10.9 - - - German mark - - 71.8 - Indonesian rupiah 1.7 - - - Irish punt 1.7 - - - Italian lira 4.7 - 7.3 - Japanese yen 4.8 60.5 1.5 67.3 Mexican peso - 45.0 - - Spanish peseta - - 1.3 - Taiwanese dollar - 3.0 - 18.5 Other currencies 6.2 4.3 6.8 4.3 Total $ 135.2 $241.7 $126.6 $236.9 At December 31, 1999, the Company has entered into forward contracts to purchase approximately 2,433,200 shares of Avon common stock at an average price of $38.06 per share at December 31, 1999. The contracts mature over the next two years and provide for physical or net share settlement to the Company. Accordingly, no adjustment for subsequent changes in fair value has been recognized. 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 would not result in a significant write-off at December 31, 1999. In addition, Avon may be exposed to market risk on its foreign exchange and interest rate swap agreements as a result of changes in foreign exchange and interest 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 - 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 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 fixed income 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 and other financing - The fair value of all debt and other financing is estimated based on the quoted market prices. Forward stock purchases and foreign exchange forward and option contracts - The fair value of forward and option contracts is estimated based on quoted market prices from banks. Interest rate swap agreements - The fair value of interest rate swap 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: 1999 1998 Carrying Fair Carrying Fair Amount Value Amount Value Cash and equivalents $ 117.4 $ 117.4 $105.6 $105.6 Grantor trust 75.4 75.4 72.2 72.7 Debt maturing within one year* (412.4) (412.4) (55.3) (55.3) Long-term debt* (701.1) (675.6) (316.6) (322.2) Forward stock purchases and foreign exchange forward and option contracts 9.8 (8.0) 1.7 23.8 Interest rate swap receivable (payable) .5 (13.4) .1 1.6 *Other financing activities are included in Debt maturing within one year in 1999 and in Long-term debt in 1998. 53 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: 1997 1998 1999 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 5,750 $16.28 7,070 $22.29 7,127 $25.46 Granted 2,860 30.68 1,664 32.40 2,225 37.33 Exercised (1,426) 14.47 (1,412) 17.59 (1,152) 20.35 Forfeited (114) 27.50 (195) 26.87 (94) 31.14 Outstanding - end of year 7,070 $22.29 7,127 $25.46 8,106 $29.38 Options exer- cisable - end of year 1,360 $15.27 2,943 $18.74 3,627 $23.32 The following table summarizes information about stock options outstanding at December 31, 1999: Options Outstanding Options Exercisable Exercise Shares Average Shares Average Price (in 000's) Price Term (in 000's) Price $13.13 - $23.00 2,077 $ 17.21 6 years 2,077 $ 17.21 $29.63 - $35.25 4,503 $ 31.44 8 years 1,388 $ 30.44 $39.00 - $54.81 1,526 $ 39.83 9 years 162 $ 40.54 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 14,100,000 shares, of which no more than 8,000,000 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 are at a price no less than fair market value on the date the option is granted. During 1999, 1998 and 1997, restricted shares with aggregate value and vesting and related amortization periods were granted as follows: 1999 - 137,000 valued at $5.8 vesting over one to three years; 1998 - 499,000 valued at $16.0 vesting over one to three years; and 1997- 36,000 shares valued at $1.2 vesting over one to three years. Effective January 1, 1997, the 1997 Long-Term Incentive Plan ("1997 LTIP") was authorized under the 1993 Plan. The 1997 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 (1997-1999), based on the degree of attainment of performance objectives. As of December 31, 1999, certain performance goals under the 1997 LTIP were achieved and accordingly, cash incentives totaling $31.7 were paid in 2000. Options are 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. Compensation expense under all plans in 1999 was $20.4 (1998 - $17.8; 1997 - $15.6). The unamortized cost as of December 31, 1999 was $6.8 (1998 - $10.5). The accrued cost of the performance units in 1999 was $35.9 (1998 - $24.1). The Company has adopted the disclosure provisions of FAS No. 123. Had compensation cost for the plans been based on the fair value at the grant dates for awards under those plans consistent with the method prescribed by FAS No. 123, net income and earnings per share would have been the pro forma amounts indicated below: 1999 1998 1997 Pro forma net income $ 291.0 $263.0 $332.5 Pro forma earnings per share: Basic $ 1.13 $ 1.00 $ 1.26 Diluted $ 1.12 $ .99 $ 1.25 The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted- average assumptions: 1999 1998 1997 ---- ---- ---- Risk-free interest rate 5.4% 5.5% 6.3% Expected life 5 years 5 years 5 years Expected volatility 30% 25% - 30% 25% Expected dividend yield 2.0% 2.0% 2.0% The weighted-average grant date fair values of options granted during 1999, 1998 and 1997 were $10.09, $7.67 and $7.12, respectively. 54 9. Shareholders' (Deficit) Equity Stock Split - On July 22, 1998, the Company declared a two-for-one stock split in the form of a 100% stock dividend which was distributed in September 1998 to shareholders of record as of the close of business on August 24, 1998. Accordingly, the stock split has been recognized by reclassifying the par value of the additional shares resulting from the split from retained earnings to common stock and treasury stock. The effect of this stock split was not retroactively reflected in the statement of changes in shareholders' equity for 1997. All references to the number of share and per share amounts elsewhere in the consolidated financial statements and related footnotes have been restated to reflect the effect of the split for all periods presented. Share Rights Plan - Avon has a 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 of 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. Stock Repurchase Programs - During 1994, Avon's Board authorized a stock repurchase program under which Avon would buy back up to 10% of its then outstanding common stock, or approximately 28.0 million shares. As of February 1997, when the plan ended, the cumulative number of shares repurchased was 25.3 million shares at a total cost of $424.4 which are included in Treasury Stock. Under a new repurchase program, which began in February 1997, the Company was authorized to buy back up to $1,100.0 of its currently outstanding common stock through open market purchases over a period of up to five years. In October 1999, Avon's Board approved a significant acceleration of the share repurchase program which substantially completed this buyback program. As of December 31, 1999, the Company repurchased approximately 32.6 million shares at a total cost of approximately $1,017.8 under this new program. Savings Plan - The Company offers a qualified defined contribution plan, the Avon Products, Inc. 401(k) Personal Savings Account, which allows eligible participants to contribute 1% to 20% of qualified compensation through payroll deductions. Effective July 1, 1998, the Company matches employee contributions dollar for dollar up to the first 3% of eligible compensation and $.50 for each $1.00 contributed from 4% to 6% of eligible compensation. Prior to July 1, 1998, the Company matched contributions in an amount equal to 25% of an employee's qualified contribution. In 1999, matching contributions approximating $12.8 were made in cash, which was then used to purchase Avon shares in the open market. In 1998, Avon contributed 62,520 shares of treasury stock to an employees' savings plan and recognized expense for its fair value. In addition, during 1997, the Company contributed an additional 120,000 shares, for which the expense had been accrued at December 31, 1996. Board of Directors Remuneration - Effective May 1, 1997, the Company discontinued the Board retirement plan, which was applicable only to non-management directors. Directors retiring after that date have had the actuarial value of their accrued retirement benefits converted to a one-time grant of common stock which is restricted as to transfer until retirement. Shares totaling 52,786 were issued to directors as a result of the discontinuance of the plan. As a replacement for such plan, effective on and after May 1, 1997, each non-management director is annually granted options to purchase 4,000 shares of common stock, at an exercise price based on the fair market price of the stock on the date of grant. The annual grant made in 1999 and 1998 consisted of 36,000 options in each year with an exercise price of $51.38 and $41.31, respectively. Also effective as of May 1, 1997, the annual retainer paid to non- management directors was changed to consist of $.025 cash plus an annual grant of shares having a value of $.025 based on the average closing market price of the stock for the ten days preceding the date of grant. These shares are also restricted as to transfer until the director retires from the Board. The annual grant made in 1999 and 1998 consisted of a total of 4,284 and 5,472 shares, respectively. 10. Employee Benefit Plans Retirement Plans - Avon and certain subsidiaries have contributory and 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. Plan assets consist primarily of equity securities, corporate and government bonds and bank deposits. Effective July 1998, the defined benefit retirement plan covering U.S.-based employees was converted to a cash balance plan with benefits determined by compensation credits related to age and service and interest credits based on individual account balances and prevailing interest rates. Additional amendments include a ten-year transitional benefit arrangement for certain employees covered under the existing defined benefit retirement plan. Postretirement Benefits - Avon provides health care 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. The following provides a reconciliation of benefit obligations, plan assets and funded status of these plans: Pension Postretirement Benefits Benefits 1999 1998 1999 1998 Change in benefit obligation: Beginning balance $(999.8) $(889.9) $(201.8) $(197.1) Service cost (38.1) (35.4) (3.6) (3.3) Interest cost (67.6) (64.5) (13.4) (13.0) Actuarial (loss) gain 43.5 (83.0) 19.5 1.4 Benefits paid 155.1 84.9 12.1 10.2 Plan amendments (2.9) - 5.5 - Settlements/special termination benefits (17.2) - - - Other 7.8 (11.9) .1 - Ending balance $(919.2) $(999.8) $(181.6) $(201.8) Change in plan assets: Beginning balance $ 863.1 $ 785.5 $ - $ - Actual return on plan assets 113.7 102.9 - - Company contributions 36.1 61.3 12.1 10.2 Plan participant - - contributions 2.2 1.5 - - Benefits paid (155.1) (84.9) (12.1) (10.2) Other - (3.2) - - Ending balance $ 860.0 $ 863.1 $ - $ - Funded status of the plan $ (59.2) $(136.7) $(181.6) $(201.8) Unrecognized actuarial loss(gain) 48.1 139.3 (26.1) (6.2) Unrecognized prior service cost 3.0 (9.6) (5.0) - Unrecognized net transition obligation(asset) 1.6 1.3 .4 - Accrued benefit cost $ (6.5) $ (5.7) $(212.3) $(208.0) Amount recognized in the statements: Prepaid benefit $ 138.8 $ 138.0 $ - $ - Accrued liability (145.3) (143.7) (212.3) (208.0) Additional minimum liability (22.0) (19.7) - - Intangible asset 7.9 4.3 - - Accumulated other comprehensive income 14.1 15.4 - - $ (6.5) $ (5.7) $(212.3) $(208.0) At December 31, 1999 and 1998, the weighted-average discount rates used in determining the pension benefit obligation were 7.1% and 6.7%, respectively. At December 31, 1999 and 1998, the weighted-average discount rates used in determining the postretirement benefit obligation were 8.0% and 7.0%, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension and postretirement benefit plans with accumulated benefit obligations in excess of plan assets were $428.8, $381.4, and $39.4, respectively, as of December 31, 1999 and $435.4, $397.7, and $30.7, respectively, as of December 31, 1998. Net periodic benefit cost for the years ended December 31 was determined as follows: Pension Postretirement Benefits Benefits 1999 1998 1997 1999 1998 1997 Service cost $ 38.1 $ 35.4 $ 35.2 $ 3.6 $ 3.3 $ 3.0 Interest cost 67.6 64.5 63.1 13.4 13.0 13.0 Expected return on plan assets (69.6) (64.0) (58.9) - - - Amortization of transition (liability) asset (.7) (6.8) (6.8) - - - Amortization of prior service cost .8 (.4) 3.6 - - - Amortization of actuarial losses (gains) 10.2 12.3 7.7 (.4) - - Settlements or curtailments 3.5 - 4.6 - - - Other - .3 - - - - Net periodic benefit cost $ 49.9 $ 41.3 $ 48.5 $16.6 $16.3 $16.0 56 The weighted-average assumptions used to determine the data for the years ended December 31 are as follows: Pension Postretirement Benefits Benefits 1999 1998 1997 1999 1998 1997 Discount rate 6.8% 7.1% 7.4% 7.0% 7.2% 7.7% Rate of compensation increase 4.0 4.0 4.7 4.5 4.5 4.5 Rate of return on assets 8.8 9.2 9.2 N/A N/A N/A For 1999, the assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 7.4% for pre-65 claims (7.1% for post-65 claims) and will gradually decrease each year thereafter to 5.0% in 2005 and beyond. The healthcare cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point change in the assumed health care cost trend rates would have the following effects: 1 Percentage 1 Percentage (In millions) Point Increase Point Decrease Effect on total of service and interest cost components $ 2.4 $ 2.0 Effect on postretirement benefit obligation 20.7 17.0 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 periodic benefit cost shown above and in 1999 amounted to $10.1 (1998 - $6.1; 1997 - $5.5). The accumulated benefit obligation under this plan at December 31, 1999 was $29.3 (1998 - $21.9) 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, 1999 was $24.2 (1998 - $22.4) 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, 1999, amounting to $99.6 (1998 - $94.5), consisted of a fixed income portfolio, a managed portfolio of equity securities and corporate-owned life insurance policies. These assets are included in Other Assets. Postemployment Benefits - Avon provides postemployment benefits which include salary continuation, severance benefits, disability benefits, continuation of health care benefits and life insurance coverage to former employees after employment but before retirement. At December 31, 1999, the accrued cost for postemployment benefits was $38.5 (1998 - $33.5) and is included in Employee Benefit Plans. 11. Segment Information The Company's reportable segments are based on geographic operations and include a North American business unit and International business units in Latin America, Pacific and Europe regions. The segments have similar business characteristics and each offers similar products through common customer access methods. The accounting policies of the reportable segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on operating profits or losses. Segment revenues reflect direct sales of products to representatives based on their geographic location. Intersegment sales and transfers are not significant. Each segment records direct expenses related to its employees and its operations. The Company does not allocate income taxes, foreign exchange gains or losses, or corporate overhead expenses to operating segments. Identifiable assets are primarily those directly used in the operations of each segment. Corporate and other identifiable assets include cash, investments, deferred tax assets and prepaid pension assets. Summarized financial information concerning the Company's reportable segments as of December 31, is shown in the following table. Net sales and operating profit by reportable segment are presented on page 5. Identifiable Assets: 1999 1998 1997 North America US $ 536.9 $ 497.2 $ 516.0 Other* 130.3 111.9 118.3 Total 667.2 609.1 634.3 International Latin America 523.7 530.8 481.4 Europe 412.8 390.1 361.9 Pacific 410.6 379.9 376.7 Total 1,347.1 1,300.8 1,220.0 Corporate and other 514.3 523.6 418.6 Total identifiable assets $2,528.6 $2,433.5 $2,272.9 57 Capital Expenditures: 1999 1998 1997 North America US $ 39.2 $ 32.1 $ 24.0 Other* 10.6 11.7 5.2 Total 49.8 43.8 29.2 International Latin America 51.9 33.5 21.4 Europe 39.6 28.8 17.5 Pacific 33.6 28.1 41.2 Total 125.1 90.4 80.1 Corporate and Other 28.5 55.3 60.1 Total capital expenditures $ 203.4 $ 189.5 $ 169.4 Depreciation and Amortization: 1999 1998 1997 North America US $ 23.7 $ 19.2 $ 17.9 Other* 3.0 2.4 2.2 Total 26.7 21.6 20.1 International Latin America 12.8 12.0 10.7 Europe 15.4 14.9 14.8 Pacific 16.1 11.2 15.3 Total 44.3 38.1 40.8 Corporate and Other 12.0 12.3 11.2 Total depreciation and amortization $ 83.0 $ 72.0 $ 72.1 *Includes operating information for Puerto Rico, Dominican Republic, Canada and Discovery Toys. The following table presents consolidated net sales by classes of principal products, as of December 31: 1999 1998 1997 Cosmetics, fragrance and toiletries $3,226.1 $3,176.6 $3,093.9 Beauty Plus: Jewelry and accessories 455.4 408.1 370.2 Apparel 556.1 567.7 565.6 1,011.5 975.8 935.8 Non-core* 1,051.5 1,060.3 1,049.7 Total net sales $5,289.1 $5,212.7 $5,079.4 * Non-core category primarily includes gift and decorative and home entertainment items. Foreign Exchange - Financial statement translation of subsidiaries operating in highly inflationary economies and foreign currency transactions resulted in losses (gains) in 1999 netting to $7.5 (1998 - ($1.1); 1997 - $2.2), which are included in other expense (income), 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 1999 of $7.1 (1998 - $15.8; 1997 - $6.0). 12. Leases and Commitments Minimum rental commitments under noncancellable operating leases, primarily for equipment and office facilities at December 31, 1999, consisted of the following: Year 2000 $ 70.0 2001 53.2 2002 39.8 2003 31.0 2004 27.2 Later years 250.3 Sublease rental income (6.5) Total $465.0 Rent expense in 1999 was $84.5 (1998 - $84.7; 1997 - $88.2). Various construction and information systems projects were in progress at December 31, 1999 with an estimated cost to complete of approximately $126.1. 13. Special and Non-Recurring Charges In October 1997, the Company announced a worldwide business process redesign program to streamline operations and improve profitability through margin improvement and expense reductions. The special and non- recurring charges associated with this program totaled $151.2 pretax ($121.9 net of tax, or $.47 per share on a basic and diluted basis) for the year ended December 31, 1999 and $154.4 pretax ($122.8 net of tax, or $.46 per share on a basic and diluted basis) for the year ended December 31, 1998. Special and non-recurring charges by business segment are as follows: 1999 1998 North America $33.6 $ 84.6 Latin America 14.7 6.3 Europe 69.8 18.2 Pacific 11.8 27.3 Corporate 21.3 18.0 Total $151.2 $154.4 Special and non-recurring charges by category of expenditures are as follows for the years ended December 31: 1999 Special Cost of Charges Sales Charge Total Employee severance costs $ 57.0 $ - $ 57.0 Inventories - 46.0 46.0 Write-down of assets to net realizable value 26.4 - 26.4 Recognition of foreign currency translation adjustment 9.8 9.8 Other 12.0 - 12.0 $105.2 $46.0 $151.2 58 1998 Special Cost of Charges Sales Charge Total Employee severance costs $ 56.4 $ - $ 56.4 Inventories - 37.9 37.9 Write-down of assets to net realizable value 31.8 - 31.8 Field program buy-out 14.4 - 14.4 Other 13.9 - 13.9 $116.5 $37.9 $154.4 Employee severance costs are expenses, both domestic and international, associated with the realignment of the Company's global operations. Certain employee severance costs were accounted for in accordance with the Company's existing FAS 112, ("Employers' Accounting for Postemployment Benefits") severance plans. Remaining severance costs were accounted for in accordance with other accounting literature. The workforce will be reduced by approximately 3,700 employees, or 9% of the total. Approximately one-half of the terminated employees related to the facility closures. As of December 31, 1999, substantially all employees have been terminated. Inventory-related charges represent losses to write down the carrying value of non-strategic inventory prior to disposal. The 1999 charges primarily result from a new business strategy for product dispositions which fundamentally changes the way the Company markets and sells certain inventory. This new strategy, approved and effective in March 1999, is meant to complement other redesign initiatives, with the objective of reducing inventory clearance sales, building core brochure sales and building global brands. The 1998 charges resulted from the closure of facilities, discontinuation of certain product lines, size- of-line reductions and a change in strategy for product dispositions. The 1999 write-down of assets (primarily fixed and other assets) relates to the restructuring of operations in Western Europe, including the closure of a jewelry manufacturing facility in Ireland, and the write-down of software, the use of which is no longer consistent with the strategic direction of the Company. By centralizing certain key functional areas and exiting unprofitable situations, the Company plans to increase operating efficiencies and ultimately, profit growth in the long term. The 1998 write-down of assets relates to the closure of a Far East buying office and manufacturing facilities in Puerto Rico and the Dominican Republic. As a result of ongoing government restrictions, the Company has also decided to close certain branches and a regional office in China. Also, write-downs include assets (primarily fixed and intangible assets) associated with the divestiture of the Discovery Toys business unit, which was effective January 15, 1999. The field program buy-out represents costs to terminate the Company's prior representative recruitment program in the U.S. The recognition of foreign currency translation adjustment relates to the closure of the jewelry manufacturing facility in Ireland. "Other" category primarily represents lease and contract termination costs, litigation costs, and other costs associated with the facility closures. The liability balance included in other accrued liabilities as of December 31, 1999 and 1998 is as follows: Special Cost of Charges Sales Charge Total Provision $116.5 $37.9 $154.4 Cash expenditures (66.0) (66.0) Non-cash write-offs (22.0) (37.9) (59.9) Balance at December 31, 1998 28.5 - 28.5 Provision 105.2 46.0 151.2 Cash expenditures (67.1) (67.1) Non-cash write-offs (40.4) (46.0) (86.4) Balance at December 31, 1999 $ 26.2 $ - $ 26.2 The balance at December 31, 1999 relates primarily to employee severance costs that will be paid during 2000. 14. 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. It is anticipated that a trial may take place later in 2000. In the opinion of Avon's management, based on its review of the information available at this time, the total cost of resolving such contingencies at December 31, 1999 should not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. 15. Subsequent Event On February 3, 2000 Avon's Board approved an increase in the quarterly cash dividend to $.185 per share from $.18. The first dividend at the new rate will be paid on March 1, 2000 to shareholders of record on February 16, 2000. On an annualized basis, the new dividend rate will be $.74 per share. 59 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 PricewaterhouseCoopers LLP, 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, PricewaterhouseCoopers LLP and the internal auditors to monitor the proper discharge of each of their respective responsibilities. PricewaterhouseCoopers LLP 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. Andrea Jung Robert J. Corti Chief Executive Officer Executive Vice President, Chief Financial Officer Report of Independent Accountants To the Board of Directors and Shareholders of Avon Products, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and changes in shareholders' equity present fairly, in all material respects, the financial position of Avon Products, Inc. at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States. 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 of these statements in accordance with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York January 27, 2000 60 Eleven-Year Review In millions, except per share and employee data 1999 1998 1997 1996 Income data Net sales $5,289.1 $5,212.7 $5,079.4 $4,814.2 Operating Profit (1) 549.4 473.2 537.8 538.0 Interest expense (1) 43.2 34.7 35.5 33.2 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 506.6(5) 455.9(5) 534.9 510.4 Income from continuing operations before minority interest and cumulative effect of accounting changes 302.4(5) 265.1(5) 337.0 319.0 Income from continuing operations 302.4(5) 270.0(5) 338.8 317.9 Income (loss) from discontinued operations, net - - - - Cumulative effect of accounting changes, net - - - - Net income 302.4(5) 270.0(5) 338.8 317.9 Earnings (loss) per share - basic (2) (3) Continuing operations $ 1.18(5) $ 1.03(5) $ 1.28 $ 1.19 Discontinued operations - - - - Cumulative effect of accounting changes - - - - Net income 1.18(5) 1.03(5) 1.28 1.19 Earnings (loss) per share - diluted (2) (3) Continuing operations $ 1.17(5) $ 1.02(5) $ 1.27 $ 1.18 Discontinued operations - - - - Cumulative effect of accounting changes - - - - Net income 1.17(5) 1.02(5) 1.27 1.18 Cash dividends per share Common $ .72 $ .68 $ .63 $ .58 Preferred - - - - Balance sheet data Working capital $ (375.0) $ 11.9 $ (11.9) $ (41.7) Capital expenditures 203.4 189.5 169.4 103.6 Property, plant and equipment, net 734.8 669.9 611.0 566.6 Total assets 2,528.6 2,433.5 2,272.9 2,222.4 Debt maturing within one year 306.0 55.3 132.1 97.1 Long-term debt 701.4 201.0 102.2 104.5 Total debt 1,007.4 256.3 234.3 201.6 Shareholders' (deficit) equity (406.1) 285.1 285.0 241.7 Number of employees United States 8,800 8,000 8,100 7,800 International 31,700 25,900 26,900 25,900 Total employees (4) 40,500 33,900 35,000 33,700 61 1995 1994 1993 1992 Income data Net sales $4,492.1 $4,266.5 $3,844.1 $3,660.5 Operating Profit (1) 500.8 489.5 427.4 339.9 Interest expense (1) 34.6 44.7 39.4 38.4 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 465.0 433.8 394.6 290.0(7) Income from continuing operations before minority interest and cumulative effect of accounting changes 288.6 270.3 243.8 169.4(7) Income from continuing operations 286.1 264.8 236.9 164.2(7) Income (loss) from discontinued operations, net (29.6) (23.8) 2.7 10.8 Cumulative effect of accounting changes, net - (45.2)(6) (107.5)(6) - Net income 256.5 195.8 132.1 175.0(7) Earnings (loss) per share - basic (2) (3) Continuing operations $ 1.05 $ .94 $ .82 $ 57(7) Discontinued operations (.11) (.09) .01 .04 Cumulative effect of accounting changes - (.16) (.37) - Net income .94 .69 .46 .61(7) Earnings(loss) per share diluted (2) (3) Continuing operations $ 1.05 $ .93 $ .82 $ .57(7) Discontinued operations (.11) (.08) .01 .04 Cumulative effect of accounting changes - (.16) (.37) - Net income .94 .69 .46 .61(7) Cash dividends per share Common $ .53 $ .48 $ .43 $ 38 Preferred - - - - Balance sheet data Working capital $ (30.3) $ 9.3 $ 23.1 $ (99.5) Capital expenditures 72.7 99.9 58.1 62.7 Property, plant and equipment, net 537.8 528.4 476.2 476.7 Total assets 2,052.8 1,978.3 1,918.7 1,692.6 Debt maturing within one year 47.3 61.2 70.4 37.3 Long-term debt 114.2 116.5 123.7 177.7 Total debt 161.5 177.7 194.1 215.0 Shareholders' (deficit) equity 192.7 185.6 314.0 310.5 Number of employees United States 8,000 7,900 8,000 8,700 International 23,800 22,500 21,500 20,700 Total employees (4) 31,800 30,400 29,500 29,400 Avon Products, Inc. 1991 1990 1989 Income data Net sales $3,441.0 $3,291.6 $2,998.3 Operating Profit (1) 430.9 409.9 369.8 Interest expense (1) 71.6 74.1 115.2 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 352.9 305.6 252.9 Income from continuing operations before minority interest and cumulative effect of accounting changes 209.3 180.3 134.1 Income from continuing operations 204.8 174.1 126.5 Income (loss) from discontinued operations, net (69.1) 21.2 (71.9) Cumulative effect of accounting changes, net - - - Net income 135.7 195.3 54.6 Earnings (loss) per share - basic (2) (3) Continuing operations $ .65(8) $ .61 $ .41(10) Discontinued operations (.24) .09 (.33) Cumulative effect of accounting changes - - - Net income .41(8) .70 .08(10) Earnings (loss) per share - diluted (2) (3) Continuing operations $ .71(8) $ .58 $ .40(10) Discontinued operations (.24) .07 (.32) Cumulative effect of accounting changes - - - Net income .47(8) .65 .08(10) Cash dividends per share Common $ 1.10(9) $ .25 $ .25 Preferred .253 .50 .50 Balance sheet data Working capital $ (135.3) $ 71.6 $ 56.3 Capital expenditures 61.2 36.3 33.3 Property, plant and equipment, net 468.5 467.2 472.5 Total assets 1,693.3 2,010.1 1,994.1 Debt maturing within one year 143.8 207.1 151.7 Long-term debt 208.1 334.8 673.2 Total debt 351.9 541.9 824.9 Shareholders' (deficit) equity 251.6 393.4 228.3 Number of employees United States 9,200 9,500 9,400 International 20,900 20,300 19,900 Total employees (4) 30,100 29,800 29,300 (1) Certain reclassifications have been made to conform to the current full year presentation. (2) Two-for-one stock splits were distributed in September 1998 and June 1996. All per share data in this report, unless indicated, have been restated to reflect the splits. (3) Effective for the year ended December 31, 1997, the Company adopted FAS No. 128, "Earnings per Share". FAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and replaces the presentation of previously disclosed EPS with both basic and diluted EPS. Based upon the Company's capitalization structure, the EPS amounts calculated in accordance with FAS No. 128 approximated the Company's EPS amounts in accordance with Accounting Principles Board Opinion No. 15, "Earnings per Share". All prior period EPS data have been restated in accordance with FAS No. 128. (4) Avon's calculation of full-time equivalents, or number of employees, was revised in 1999. Restatements of prior year data are not available, and therefore, year over year comparisons are not meaningful. (5) In 1998, Avon began a worldwide business process redesign program in order to streamline operations and recorded special and non-recurring charges of $154.4 ($122.8 net of tax, or $.46 per share on a basic and diluted basis). Excluding the special and non-recurring charges, net income in 1998 increased 16% to $392.8 from $338.8. In 1999, special and non-recurring charges related to this program totaled $151.2 ($121.9 net of tax, or $.47 per share on a basic and diluted basis). Excluding the special and non-recurring charges, net income in 1999 increased 8% to $424.3 from $392.8. (6) 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. 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". (7) 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 $.22 per share on a basic and diluted basis). Income from continuing operations in 1993 increased 4% from $228.6, or $.79 per share on a basic and diluted basis, excluding the 1992 restructuring charge. (8) For 1991, in management's opinion, per share amounts assuming dilution, even though the result is antidilutive, provide the most meaningful comparison of per share data because they show the full effect of the conversion of 72 preferred shares into approximately 51.84 common shares on June 3, 1991. (9) Includes special dividend of $.75 paid in 1991. (10) In 1989, the calculation of earnings per share was assumed to be antidilutive and, accordingly, earnings per share were not adjusted for the conversion of preferred shares into additional common shares. EX-18 6 EX-18 EXHIBIT 18 EXHIBIT 18 January 27, 2000 Board of Directors Avon Products, Inc. 1345 Avenue of the Americas New York, NY 10105-0196 Dear Directors: We are providing this letter to you for inclusion as an exhibit to your Form 10-K filing pursuant to Item 601 of Regulation S-K. We have audited the consolidated financial statements incorporated by reference in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and issued our report thereon dated January 27, 2000. Note 1 to the financial statements describes a change in accounting principle for determining the cost of certain inventories from the Last- in, First-out ("LIFO") method to the First-in, First-out ("FIFO") method. It should be understood that the preferability of one acceptable method of accounting over another for inventory costing has not been addressed in any authoritative accounting literature, and in expressing our concurrence below, we have relied on management's determination that this change in accounting principles is preferable. Based on our reading of management's stated reasons and justification for this change in accounting principles in the Form 10-K, and our discussions with management as to their judgment about the relevant business planning factors relating to the change, we concur with management that such change represents, in the Company's circumstances, the adoption of a preferable accounting principle in conformity with Accounting Principles Board Opinion No. 20. Very truly yours, PricewaterhouseCoopers LLP New York, New York 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 - - ------- ---------------- Cosmetics Avon S.A.C.I. Argentina Avon Cosmetics Pty. Limited Australia Avon Products Pty. Limited Australia Avon Cosmetics Vertriebsgesellschaft m.b.h Austria Arlington Limited Bermuda Avon International (Bermuda) Ltd. Bermuda Stratford Insurance Company, Ltd. Bermuda Productos Avon Bolivia Ltda. Bolivia Avon Cosmeticos, Ltda. Brazil Avon Industrial Ltda. Brazil Nucleo de Atualiza cao Techologia Avon Ltda. (Nata) Brazil Tortola Interlagos Investments Inc. British VI Avon Canada, Inc. Canada Avon Fashions, Inc. - Avon Mode Inc. Canada Cosmeticos Avon S.A. Chile Avon Products (Guangzhou) Ltd. (73.845%), China Avon Manufacturing (Guangzhou) Ltd. (73.845%) China Avon Kosmetika d.o.o. Croatia Avon Cosmetics, Spolecnosti S. Rucenlm Omezenym Czech Republic Avon Capital Corporation Delaware Avon International Operations, Inc. Delaware Avon-Lomalinda, Inc. Delaware Avon (Windsor) Limited Delaware Manila Manufacturing Company Delaware Surrey Leasing, Limited 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 Avon Beauty Productos India Private Limited India P.T. Avon Indonesia (85%) Indonesia Albee Dublin Finance Company Ireland Avon Limited Ireland Avon Cosmetics Ireland 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 (70%) Malaysia Beautifont (Malaysia) Sendirian Berhad Malaysia Maximen Corporation Sdn Bhd Malaysia Avon Cosmetics, S.A. de C.V. Mexico Avonova, S. A. de C.V. Mexico M.I. Holdings, Inc. Missouri Avon Americas, Ltd. New York Avon Overseas Capital Corporation New York Avon Cosmetics Limited New Zealand Productos Avon de Nicaragua, S.A. Nicaragua Avon Cosmetics A/S Norway Productos Avon S.A. Panama Productos Avon S.A Peru Cosmeticos Aliados S.A. Peru Avon Cosmetics, Inc. Philippines Avon Products Mfg., Inc. Philippines Beautifont Products, Inc. Philippines Avon Cosmetics Polska Sp. z.o.o. Poland Esmeralda Sp. z.o.o. Poland Avon Cosmeticos, Lda. Portugal Avon Cosmetics Spal s.r.o. Slovak Republic Avon Cosmetics (Romania) SRL Romania Avon Beauty Products Co. (ABPC) Russia Russia Justine/Avon PTY. Ltd. South Africa Avon Cosmetics, S.A. Spain Avon Cosmetics (Taiwan) Ltd. Taiwan Avon Products Limited Taiwan Avon Cosmetics (Thailand) Ltd. Thailand California Manufacturing Company Ltd. Thailand Exzacibasi Avon Kosmetik Urunleri Turkey Sanayi ve Ticaret A.S. (50%) (Joint Venture) Avon Cosmetics (Ukraine) Ukraine Avon Cosmetics Export Limited United Kingdom Avon Cosmetics Limited United Kingdom Avon European Holdings Ltd. United Kingdom Avon Fashions (UK) Limited United Kingdom Avon S.U. Export Limited United Kingdom Cosmeticos Avon De Uruguay S.A. Uruguay Avon Cosmetics de Venezuela, C.A. Venezuela Albee Holdings 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 C. Richard Mathews, and each of them, his or her true and lawful attorneys- in-fact and agents, with full power of substitution and resubstitution, in his or her name, place and stead, in any and all capacities, to sign the 1999 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, 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 9, 2000. Signature Title - - --------- ----- /s/Andrea Jung President, Chief Executive Officer Andrea Jung and Director - Principal Executive Officer /s/Jose Ferreira, Jr. Executive Vice President and Jose Ferreira, Jr. Chief Operating Officer - International and New Business Development /s/Susan J. Kropf Executive Vice President and Susan J. Kropf Chief Operating Officer - North America and Global Business Operations /s/Robert J. Corti Executive Vice President and Robert J. Corti Chief Financial Officer - Principal Financial Officer /s/Janice Marolda Vice President and Controller - Janice Marolda Principal Accounting Officer Signature Title - - --------- ----- /s/Brenda C. Barnes Director Brenda C. Barnes /s/Richard S. Barton Director Richard S. Barton /s/Stanley C. Gault Chairman of the Board Stanely C. Gault and Director /s/Fred Hassan Director Fred Hassan /s/Ann S. Moore Ann S. Moore Director /s/Lawrence A. Weinbach Director Lawrence A. Weinbach EX-27 9 EX-27
5 EXHIBIT 27 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, 1999 and for the year then ended included in the Form 10-K as of December 31, 1999 and is qualified in its entirety by reference to such financial statements. 1000000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 117 0 536 (40) 524 1,338 1,472 (737) 2,529 1,713 701 0 0 88 (494) 2,529 5,289 5,289 2,032 4,652 0 88 43 507 204 302 0 0 0 302 1.18 1.17
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