-----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, L/JeW+5O/YHNlIDNsYZEk/4PZDysusjE1AovClZ91i7RT5w84OtY+tLwGhLxQ/J0 fR7mjR+VRRmu7HlfxfyoqA== 0000008868-02-000003.txt : 20020415 0000008868-02-000003.hdr.sgml : 20020415 ACCESSION NUMBER: 0000008868-02-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVON PRODUCTS INC CENTRAL INDEX KEY: 0000008868 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 130544597 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04881 FILM NUMBER: 02577429 BUSINESS ADDRESS: STREET 1: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105 BUSINESS PHONE: 9149352588 MAIL ADDRESS: STREET 1: PECK & MIDLAND AVE STREET 2: PECK & MIDLAND AVE CITY: RYE STATE: NY ZIP: 10580 10-K 1 edgar10k.txt AVON PRODUCTS, INC. 10K CONFORMED COPY SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 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 (Address of principal executive offices) (212) 282-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ---------------------------------------------------------------- Common stock (par value $.25) New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. The aggregate market value of Common Stock (par value $.25) held by non-affiliates at February 28, 2002 was $12.2 billion. The number of shares of Common Stock (par value $.25) outstanding at February 28, 2002 was 236,825,272. Documents Incorporated by Reference Parts I and II Portions of the 2001 Annual Report to Shareholders. Part III Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders. Forward-Looking Statements 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. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Such forward-looking statements involve 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") to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management's expectations. Such factors include, among others, the following: general economic and business conditions in the Company's markets; Avon's ability to implement its business strategy; Avon's ability to successfully identify new business opportunities; Avon's access to financing; the impact of substantial currency fluctuations in Avon's principal foreign markets; Avon's ability to attract and retain key executives; Avon's ability to achieve anticipated cost savings and profitability targets; changes in the industry; competition; the effect of regulatory, tax and legal proceedings and restrictions imposed by domestic and foreign governments; and other factors 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 Avon. Neither Avon nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements, nor undertakes an obligation to update them. PART I Dollars in Millions ITEM 1. BUSINESS General Avon commenced operations in 1886 and was incorporated in the State of New York on January 27, 1916. Avon is a global manufacturer and marketer of beauty and related products. Avon's products fall into three product categories: "Beauty" which consists of cosmetics, fragrance and toiletries ("CFT"); "Beauty Plus" which consists of jewelry, watches and apparel and accessories; and "Beyond Beauty" which consists of home products, gift and decorative and candles. In 2001, Avon -1- launched an entirely new global product category in the area of women's health and wellness. This new line expands the definition of beauty to include inner health, as well as outward appearance. The new products are sold through a separate catalog and include vitamins and nutrition supplements, exercise and fitness items, and a variety of self-care and stress relief products. Vitamins and nutritional supplements have been developed for Avon by Roche Consumer Healthcare and are marketed under the name VitAdvance. Health and Wellness products are divided among all three product categories based on product segmentation. Additionally, in 2001, Avon launched a retail line in the U.S. to sell a new line of Avon products called "beComing" in selected stores of a major retailer, J.C. Penney Company, Inc. ("J.C. Penney"). The new line offers beauty products, as well as a selection of jewelry and accessories and health and wellness products. The "beComing" line is priced significantly higher than the core Avon line, but well below prestige brands. This retail arrangement leverages Avon's product development and manufacturing capabilities with the retail expertise of J.C. Penney. The retail strategy is intended to enable Avon to access new customers that Avon is not currently reaching through the direct selling channel. In 2003, Avon plans to launch a new global business targeted to teenage girls to win market share in the worldwide youth market. Avon's business primarily 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 24 and 56 through 57, respectively, in Avon's 2001 Annual Report to Shareholders. Distribution Avon presently has operations in 58 countries, including the United States, and its products are distributed in 85 more for coverage in 143 markets. Sales are made to the ultimate customer principally through a combination of direct selling and marketing by approximately 3.5 million independent Avon Representatives, approximately 451,000 of whom are in the United States. 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. No single customer accounts for more than 10% of Avon's net sales. -2- A Representative contacts customers, selling primarily through the use of brochures which also highlight new products and specially-priced items for each sales campaign. Sales campaigns are generally for a two- week duration in the United States and a three to four week duration outside the United States. Product samples, demonstration products and selling aids such as make-up color charts are also used. Generally, the Representative forwards an order to a designated distribution center. A Representative can place an order 24 hours a day, 7 days a week using the mail, telephone, fax or the Internet. 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 his or her own account. Avon employs certain electronic order systems to increase Representative support, which allows the Representatives to run their businesses more efficiently as well as to improve order processing accuracy. Additionally, Avon Representatives can utilize the Internet to manage their business electronically. In the U.S., Avon Representatives use a new online marketing tool called youravon.com, which was introduced in 2000. The site features a complete line of Avon's products 24 hours a day, 7 days a week, with no geographic boundaries. The site helps Representatives build their own Avon business by enabling them to sell online through their own personalized web pages, developed in partnership with Avon. Additionally, these e-Representatives have the advantage of business-to-business capabilities that connect them to Avon's order and fulfillment systems. While their customers benefit from the speed, convenience and delivery flexibility of online ordering, Avon e- Representatives are able to promote special products, target specific groups of customers, place and track orders online, and capitalize on e- mail to share product information, selling tips and marketing incentives. Self-paced online training also is available, as well as up-to-the-minute news about Avon. Globally, Avon has internet sites in more than 20 markets. Most are consumer information sites, but in 2001, the U.K., Brazil, Argentina, Mexico and Hungary also piloted business-to-business sites to support Representatives. In the United States, Avon also sells its products to the ultimate customer through licensed kiosks located in shopping malls across the U.S and on Avon's internet site if the customer chooses not to purchase through a Representative. Avon also sells products at 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. As previously discussed, in 2001, Avon opened Avon Centers in selected stores of J.C. Penney to sell a new line of Avon products. -3- Primarily in the Asia Pacific region, Avon uses 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 markets such as China, Taiwan, Malaysia, the Philippines and Venezuela, Representatives can manage Avon beauty boutiques, beauty counters, licensed Avon beauty centers and other retail-oriented opportunities to build their careers and bring Avon to new customers in complementary ways to direct selling. The recruiting and training of Representatives are the primary responsibilities of District Sales Managers. District Sales 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 (including the Sales Leadership program), and local advertising constitute the primary means of obtaining new Representatives. The Sales Leadership program is a modified multi-level selling system which gives Representatives the opportunity to earn commissions on their own sales, as well as from downstream sales of Representatives they recruit. This program limits the number of levels to three and continues to focus on individual product sales. The Sales Leadership program is active in 24 countries, including the U.S., Poland and Hungary. Ten additional markets are scheduled to launch this program in 2002. 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. Avon also has a Representative development strategy in the U.S. that focuses on the professional training and development of Representatives through the Avon Beauty Advisor program. Under this program, Representatives enroll in a series of courses designed to enhance their product knowledge and professional beauty consulting skills. 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 -4- 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 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 other 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 Sales 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 introductory specials and periodic sales are maintained on selected items for limited time periods. Avon is marketing a more vibrant beauty image through increased advertising and image-building programs focused on the consumer. In 2000, Avon launched its first-ever global advertising campaign entitled "Let's Talk", increased investments in product sampling and development and upgraded the quality of its brochure to further strengthen its worldwide beauty image. In 2001, "Let's Talk" advertising campaigns included the Williams sisters, accomplished young sports professionals who, through their embodiment of Avon's values of empowerment and self- fulfillment, serve as role models for women everywhere. From time to time, various regulations or laws have been proposed or adopted that would, in general, restrict the frequency, duration or -5- volume of sales resulting from new product introductions, special prices or other special price offers. Avon'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, specialty retailers 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. 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. -6- International Operations Avon's international operations are conducted primarily through subsidiaries in 57 countries and Avon's products are distributed in some 85 other countries. The Company has entered 30 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. 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. 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 believes that it can continue to obtain sufficient raw materials and supplies to manufacture and produce its products. Avon has 18 manufacturing laboratories around the world, one of which is principally devoted to the manufacture of fashion jewelry. In the first quarter of 2002, the laboratory that manufactures fashion jewelry will be closed. Avon will outsource jewelry manufacturing and purchase its full jewelry line from suppliers in Asia. In the United States, Avon's CFT products are produced in three manufacturing laboratories. Most products sold in foreign countries are manufactured in Avon's facilities abroad. Trademarks and Patents Avon's business is not materially dependent on the existence of third party patent or other intellectual property rights and Avon is not a party to any ongoing material license, franchise or concession. -7- 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. 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. Holiday sales cause a sales peak in the fourth quarter of the year. Fourth quarter net sales were approximately 30 percent of total net sales in both 2001 and 2000, respectively, and before special and non-recurring charges, fourth quarter operating profit was 34 percent and 33 percent of total operating profit in 2001 and 2000, respectively. Research Activities Avon's research and development department is a leader in the industry, based on the number of new product launches, including formulating effective beauty treatments relevant to women's needs. 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 enhance Avon's ability to deliver new formulas and ingredients to market. Avon has pioneered many innovative products, including Skin-So-Soft, BioAdvance, the first skin care product with stabilized retinol, and Collagen Booster, a product that capitalizes 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. Avon's Anew product line has been expanded to include technologically advanced products such as Retroactive, Retinol Recovery Complex PM Treatment, Night Force Vertical Lifting Complex, Clearly C 10% Vitamin C Serum and Luminosity Brightening Complex. Retroactive utilizes Avon's exclusive Rejuvi-cell complex, a blend of ingredients formulated to enhance cellular communication and re-energize aging skin cells. -8- 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 2001, Avon updated packaging for the Anew line and Anew Retroactive, launched Pure 02, a facial lotion that increases oxygen delivery to skin cells and erases signs of stress and fatigue; Avon Beyond Color Illuminating Radiance Vitamin C Foundation; Avon Beyond Color Nutralush Plumping Lipstick and a new fragrance called Little Black Dress. In 2000, the Company launched a complete renovation of Avon Color with improved formulas and redesigned packaging, rolled out a reformulated Anew All-In-One skin care regimen, launched Positivity, a new line of skin care products for menopausal women, and launched Advance Techniques, a full line of upscale patent- pending hair-care products. The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $45.9 in 2001, $43.1 in 2000, and $38.2 in 1999. 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 adverse effect upon the capital expenditures, financial position or competitive position of Avon. Employees At December 31, 2001, Avon employed 43,800 people. Of these, 9,600 were employed in the United States and 34,200 in other countries. The number of employees tends to rise from a low point in January to a high point in November and decreases slightly in December after holiday shipments are completed. -9- ITEM 2. PROPERTIES Avon's principal properties consist of manufacturing laboratories for the production of CFT 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 three manufacturing laboratories and eleven distribution centers in Europe; six manufacturing laboratories and nine distribution centers in Latin America; two manufacturing laboratories and two distribution centers in North America (other than in the United States); and four manufacturing laboratories and nine 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. The jewelry manufacturing facility will be closed by March 2002. Avon also has Avon beauty boutiques, licensed satellite stores and Avon beauty centers in 32 countries. ITEM 3. Legal Proceedings Avon is a defendant in a class action suit commenced in 1991 on behalf of certain classes of holders of Avon's Preferred Equity- Redemption Cumulative Stock ("PERCS"). Plaintiffs allege various contract and securities law claims related to the PERCS (which were fully redeemed in 1991) and seek aggregate damages of approximately $145.0, plus interest. A trial of this action took place in the United States District Court for the Southern District of New York and concluded in November 2001. At the conclusion of the trial, the judge reserved decision in the matter. Avon believes it presented meritorious defenses to the claims asserted. However, it is not possible to predict the outcome of litigation and it is reasonably possible that the trial, and any possible appeal, could be decided unfavorably. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome but, under some of the damage theories presented, an adverse award could be material to the Consolidated Financial Statements. Avon is a defendant in an action commenced in 1997 in the Supreme Court of the State of New York by Sheldon Solow d/b/a Solow Building Company, the landlord of the Company's former headquarters in New York -10- City. Plaintiff seeks aggregate damages of approximately $80.0, plus interest, for the Company's alleged failure to restore the leasehold premises at the conclusion of the lease term in 1997. A trial of this matter had been scheduled for February 2002, but has been stayed pending the determination of (i) an interlocutory appeal by plaintiff of an order that denied the plaintiff's motion for summary judgment and granted partial summary judgment in favor of the Company on one of plaintiff's claims; and (ii) an appeal by plaintiff of a decision in an action against another former tenant that dismissed plaintiff's claims after trial. While it is not possible to predict the outcome of litigation, management believes that there are meritorious defenses to the claims asserted and that this action should not have a material adverse effect on the Consolidated Financial Statements. This action is being vigorously contested. Various other 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 the opinion of Avon's management, based on its review of the information available at this time, the total cost of resolving such other contingencies at December 31, 2001 should not have a material adverse impact on Avon's Consolidated Financial Statements. In 1998, the Argentine tax authorities denied certain past excise tax credits taken by Avon's subsidiary in Argentina and assessed this subsidiary for the corresponding taxes. Avon vigorously contested this assessment through local administrative and judicial proceedings since 1998. In the third quarter of 2001, the Argentine government issued a decree permitting taxpayers to satisfy certain tax liabilities on favorable terms using Argentine government bonds as payment. Avon decided to settle this contested tax assessment by applying for relief under this new government program and purchased bonds to tender in settlement of the aforementioned assessment. As a result, a pre-tax charge of $6.4 ($3.4 after-tax, or $.01 per diluted share) was included in Other expense, net in the Consolidated Statements of Income in the third quarter of 2001. Avon has been responding to a formal investigation by the Securities and Exchange Commission ("SEC") which commenced in August 2000, and has furnished to the SEC information that principally concerns a special charge reported by Avon in the first quarter of 1999, which included the write-off of approximately $15.0 in pre-tax costs associated with an order management software system known as the FIRST project. The balance of the FIRST project's development costs had been carried as an asset until the third quarter of 2001, when Avon recorded a pre-tax charge of $23.9 ($14.5 after-tax, or $.06 per diluted share) to write off the carrying value of costs related to that project. As part of a resolution of the investigation or at the conclusion of a contested proceeding, there may be a finding that Avon knew or should have known in the first quarter of 1999 that it was not probable that FIRST would be implemented -11- and therefore, the entire FIRST asset should have been written off as abandoned at that time. In that connection, it may also be necessary for Avon to restate its financial statements to write off the entire FIRST asset in the first quarter of 1999. If Avon were to restate its financial statements to write off the FIRST asset in the first quarter of 1999, then the charge recorded in the third quarter of 2001 and other FIRST-related items recorded in prior periods would also be restated. 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, 2001. 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 37 of Avon's 2001 Annual Report to Shareholders. PART II ITEM 6. SELECTED FINANCIAL DATA The information for the five-year period 1997 through 2001 is incorporated by reference to the "Eleven-Year Review" on pages 62 and 63 of Avon's 2001 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 21 through 35 of Avon's 2001 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information is incorporated by reference to "Risk Management Strategies and Market Rate Sensitive Instruments" on pages 32 through 35 and Note 7 on pages 49 through 51 of Avon's 2001 Annual Report to Shareholders for information concerning market risk sensitive instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated by reference to the "Consolidated Financial Statements and Notes" on pages 38 through 60, together with the report thereon of PricewaterhouseCoopers LLP, on page 61, and "Results of Operations by Quarter" on page 36 of Avon's 2001 Annual Report to shareholders. -12- 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 2002 Annual Meeting of Shareholders. 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 2002 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 Executive Officer - ----- ---- --- ----------------- Chairman of the Board, Chief Executive Officer and Director......Andrea Jung 43 1997(1) President and Chief Operating Officer, and Director ..........................Susan J. Kropf 53 1997(2) Executive Vice President and Chief Financial Officer................Robert J. Corti 52 1988 Executive Vice President, Asia Pacific....Fernando Lezama* 62 1997 Executive Vice President, Asia Pacific, Europe, Middle East and Africa.............................Robert Toth* 49 2002(3) Senior Vice President, General Counsel and Secretary..........Gilbert L. Klemann,II 51 2001(4) Senior Vice President, Human Resources....Jill Kanin-Lovers 50 1998 Senior Vice President and President, Avon North America.....................Brian C. Connolly 46 2002(5) Vice President and Controller.............Janice Marolda 41 1998 *Mr. Lezama will retire from Avon, effective March 31, 2002. On that date, Mr. Toth will assume the position and title indicated above. -13- (1) Andrea Jung was elected Chairman of the Board of Avon in September 2001. She has been Chief Executive Officer of Avon since November 1999 concurrently holding the position of President until January 2001. 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. From January 1998 to November 1999 she was President and Chief Operating Officer of Avon. (2) Susan J. Kropf was elected President and Chief Operating Officer, effective January 2001. She had been elected Executive Vice President, Chief Operating Officer, North America and Global Business Operations effective November 1999. Previously she had been Executive Vice President and President, North America and prior to that she had served as Senior Vice President, U.S. Marketing and Vice President, Product Development. Ms. Kropf has been with Avon for 31 years. (3) Robert Toth was elected Executive Vice President, Asia Pacific, Europe, Middle East and Africa in December 2001, effective March 2002. Prior to that, Mr. Toth had been Senior Vice President and OBU ("Operating Business Unit") Leader for Europe, Middle East and Africa since 1999. From 1997 to 1999, Mr. Toth had been Group Vice President for Eastern Europe, Middle East and Africa. Mr. Toth has been with Avon since 1978. (4) Gilbert L. Klemann, II was elected Senior Vice President and General Counsel of Avon effective January 1, 2001, and was elected Secretary effective June 1, 2001. Prior to joining Avon he had been an Executive Vice President of Fortune Brands, Inc. (formerly American Brands, Inc.) from 1998-1999 with responsibilities that included corporate development, legal and administrative functions. He was the Senior Vice President and General Counsel of American Brands, Inc. during the period 1991-1997 and previously was a partner in the New York law firm of Chadbourne & Parke. (5) Brian C. Connolly was elected Senior Vice President and President, North America on December 20, 2001. Prior to that, Mr. Connolly has been President of Avon U.S. since 2000 and Senior Vice President of Sales and Operations for Avon U.S. since 1999. Previously, Mr. Connolly had been Group Vice President of Sales and Customer Service for Avon U.S. since 1998 and Group Vice President- Sales for Avon U.S. since 1997. Mr. Connolly joined Avon in 1978. -14- 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 2002 Annual Meeting of Shareholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This information is incorporated by reference to the "Ownership of Shares" section of Avon's Proxy Statement for the 2002 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 2002 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, 2001........ 38 27 Consolidated Balance Sheets at December 31, 2001 and 2000............. 39 28 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2001......... 40 29 Consolidated Statements of Changes in Shareholders' (Deficit) Equity for each of the years in the three-year period ended December 31, 2001................ 41 30 Notes to Consolidated Financial Statements............................. 42-60 31-61 Report of Independent Accountants PricewaterhouseCoopers LLP............. 61 63 -15- (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, 2001............... II. Valuation and qualifying accounts............. S-3 -16- 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 8, 2000 (incorporated by reference to Exhibit 3.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 3.2 By-laws of Avon, as restated, effective December 2, 1999 (incorporated by reference to Exhibit 3.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 4.1 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. 33- 41299 filed December 1, 1997). 4.2 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). 4.3 Indenture, dated as of May 11, 1998, between Avon Products, Inc., as Issuer, and The Chase Manhattan Bank, as Trustee, relating to the 6.25% Putable/Callable Notes due May 1, 2018, Putable/Callable May 1, 2003. 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. 33- 92333 filed December 8, 1999). 4.5 Indenture, dated as of July 12, 2000, between Avon, as Issuer, and The Chase Manhattan Bank, as Trustee, relating to the Zero Coupon Convertible Senior Notes due 2020 (incorporated by reference to Exhibit 4.2 to Avon's Registration Statement on Form S-3, Registration Statement No. 333-45808 filed September 14, 2000). -17- 4.6 $600,000,000 Revolving Credit and Competitive Advance Facility Agreement, dated as of May 1, 2001, 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 June 30, 2001). 4.7 Agency Agreement, dated September 20, 2001, between Avon and HSBC Bank plc, as initial principal paying agent, relating to the JPY 9,000,000,000 1.06 percent Notes due 2006 (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 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 of the Avon Products, Inc. 1993 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 and 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* Amendment to Avon Products, Inc., Benefit Restoration Plan, effective as of December 5, 2001. 10.8* Trust Agreement, dated 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). - -18- 10.9* First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.10* Second Amendment, dated as of June 12, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.12* The Avon Products, Inc. Deferred Compensation Plan, amended and restated, effective as of July 1, 1998 (incorporated by reference to Exhibit 4(b) to Avon's Registration Statement on Form S-8, Registration No. 33-65989 filed October 22, 1998). 10.13* First Amendment to the Avon Products, Inc. Deferred Compensation Plan, (as amended and restated as of July 1, 1998), effective December 6, 2001. 10.14* 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). 10.15* Stock Option Agreement, dated November 4, 1999, between Avon and Stanley C. Gault (incorporated by reference to Exhibit 10.13 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 10.16* Avon Products, Inc. 2000 Stock Incentive Plan (incorporated by reference to Appendix A to the Company's Proxy Statement on Form 14A as filed with the Commission on March 27, 2000 (File No. 1- 04881)). 10.17* 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). 10.18* Form of Employment Agreement, dated as of September 1, 1994, between Avon and certain senior officers and substantially similar -19- to the employment agreements entered into with other executive officers (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.19* Description of Consulting Arrangement between Avon and Fernando Lezama, effective as of March 31, 2002. 10.20* Avon Products, Inc. Compensation Plan for Non-Employee Directors, (as amended and restated as of June 1, 2000), effective as of May 1, 1997 (incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 2000). 10.21* First Amendment to the Restated Avon Products, Inc. Compensation Plan for Non-Employee Directors (as amended restated as of June 1, 2000), executed as of September 6, 2001 and effective January 1, 2002. 10.22* 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). 10.23* 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). 10.24* 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). 10.25* Stock Option Agreement, dated June 4, 1998, between Avon and Andrea Jung (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, 2001 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 (incorporated by reference to Exhibit 18 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). - -20- 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 * 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 On October 12, 2001, the Company filed a Form 8-K to announce the write-off of the carrying value of an order management system known as the "FIRST" project. (c) Avon's Annual Report on Form 10-K for the year ended December 31, 2001, 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. -21- 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 18th day of March 2002. Avon Products, Inc. /s/GILBERT L. KLEMANN, II ---------------------- Gilbert L. Klemann, II Senior Vice President, General Counsel and Secretary -22- 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 Chairman of the Board and Chief Executive Officer and Director - Principal Executive Officer March 18, 2002 - --------------- Susan J. Kropf President March 18, 2002 and Chief Operating Officer and Director - --------------- Robert J. Corti Executive Vice President and Chief Financial Officer - Principal Financial Officer March 18, 2002 - --------------- Janice Marolda Vice President and Controller - Principal Accounting Officer March 18, 2002 -23- - --------------- Brenda C. Barnes Director March 18, 2002 - --------------- W. Don Cornwell Director March 18, 2002 - --------------- Edward T. Fogarty Director March 18, 2002 - --------------- Stanley C. Gault Director March 18, 2002 - --------------- Fred Hassan Director March 18, 2002 - --------------- Maria Elena Lagomasino Director March 18, 2002 - --------------- Ann S. Moore Director March 18, 2002 -24- - --------------- Paula Stern Director March 18, 2002 - --------------- Lawrence A. Weinbach Director March 18, 2002 /s/GILBERT L. KLEMANN, II - --------------------- Gilbert L. Klemann, II Attorney-in-fact March 18, 2002 - -25- 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 31, 2002, appearing in the 2001 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 31, 2002 S-1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements on Form S-3 (Reg. No. 33-45808) and Form S-8 (Reg. Nos. 33- 43820, 33-47209, 33-65989 and 33-65998) of Avon Products, Inc. of our report dated January 31, 2002 relating to the financial statements which appear in the 2001 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 31, 2002 relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP New York, New York March 18, 2002 S-2 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 --------- -------- -------- ---------- --------- 2001 Allowance for doubtful accounts receivable $ 39.2 $ 105.6 $ - $99.7(a) $45.1 Deferred tax asset valuation allowance 25.4 3.4(b) - - 28.8 ======= ======= ======= ====== ===== 2000 Allowance for doubtful accounts receivable $ 40.0 $ 94.3 $ - $95.1(a) $39.2 Deferred tax asset valuation allowance 46.7 (21.3)(c) - - 25.4 ======== ======= ======== ====== ===== 1999 Allowance for doubtful accounts receivable $ 49.0 $ 87.5 $ - $96.5(a) $40.0 Deferred tax asset valuation allowance 46.9 (0.2)(c) - - 46.7 ======= ======= ======== ===== ===== (a) Accounts written off, net of recoveries and foreign currency translation adjustment. (b) Increase in valuation allowance for tax loss and tax credit carryforward benefits is because it is more likely than not that some or all of the deferred tax assets will not be utilized in the future. (c) Decrease in valuation allowance for tax loss and tax credit carryforward benefits is because it is more likely than not that a portion of the asset balance will be utilized in the future. S-3 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, 2001 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 8, 2000 (incorporated by reference to Exhibit 3.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 3.2 By-laws of Avon, as restated, effective December 2, 1999 (incorporated by reference to Exhibit 3.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 4.1 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. 33- 41299 filed December 1, 1997). 4.2 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). 4.3 Indenture, dated as of May 11, 1998, between Avon Products, Inc., as Issuer, and The Chase Manhattan Bank, as Trustee, relating to the 6.25% Putable/Callable Notes due May 1, 2018, Putable/Callable May 1, 2003. 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. 33- 92333 filed December 8, 1999). 4.5 Indenture, dated as of July 12, 2000, between Avon, as Issuer, and The Chase Manhattan Bank, as Trustee, relating to the Zero Coupon Convertible Senior Notes due 2020 (incorporated by reference to Exhibit 4.2 to Avon's Registration Statement on Form S-3, Registration No. 333-45808 filed September 14, 2000). 4.6 $600,000,000 Revolving Credit and Competitive Advance Facility Agreement, dated as of May 1, 2001, 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 June 30, 2001). 4.7 Agency Agreement, dated September 20, 2001, between Avon and HSBC Bank plc, as initial principal paying agent, relating to the JPY 9,000,000,000 1.06 percent Notes due 2006 (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). 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 of the Avon Products, Inc. 1993 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 and 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* Amendment to Avon Products, Inc. Benefit Restoration Plan effective as of December 5, 2001. 10.8* Trust Agreement, dated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990 and refiled under Form SE for the year ended December 31, 1996). 10.9* First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.10* Second Amendment, dated as of June 12, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.12* The Avon Products, Inc. Deferred Compensation Plan, amended and restated, effective as of July 1, 1998 (incorporated by reference to Exhibit 4(b) to Avon's Registration Statement on Form S-8, Registration No. 33-65989 filed October 22, 1998). 10.13* First Amendment to the Avon Products, Inc. Deferred Compensation Plan, (as amended and restated as of July 1, 1998), effective December 6, 2001. 10.14* 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). 10.15* Stock Option Agreement, dated November 4, 1999, between Avon and Stanley C. Gault (incorporated by reference to Exhibit 10.13 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 10.16* Avon Products, Inc. 2000 Stock Incentive Plan (incorporated by reference to Appendix A to the Company's Proxy Statement on Form 14A as filed with the Commission on March 27, 2000 (File No. 1- 04881)). 10.17* 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). 10.18* Form of Employment Agreement, dated as of September 1, 1994, between Avon and certain senior officers and substantially similar to the employment agreements entered into with other executive officers (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.19* Description of Consulting Arrangement between Avon and Fernando Lezama, effective as of March 31, 2002. 10.20* Avon Products, Inc. Compensation Plan for Non-Employee Directors, (as amended and restated as of June 1, 2000), effective as of May 1, 1997 (incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 2000. 10.21* First Amendment to the Restated Avon Products, Inc. Compensation Plan for Non-Employee Directors (as amended and restated as of June 1, 2000), executed as of September 6, 2001 and effective January 1, 2002. 10.22* 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). 10.23* 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). 10.24* 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). 10.25* Stock Option Agreement, dated June 4, 1998, between Avon and Andrea Jung (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, 2001 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 (incorporated by reference to Exhibit 18 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 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 * The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. EX-10.13 2 exhibit1013.txt AVON PRODUCTS, INC. EXHIBIT 10.13 Exhibit 10.13 FIRST AMENDMENT TO THE AVON DEFERRED COMPENSATION PLAN THIS FIRST AMENDMENT is made on this 6th day of December, 2001, by AVON PRODUCTS, INC., a corporation duly organized and existing under the laws of the State of New York (the "Company"). WITNESSETH: WHEREAS, the Company maintains the Avon Deferred Compensation Plan (the "Plan"), as amended and restated effective January 1, 1998; WHEREAS, the Company now desires to amend the Plan's eligibility requirements; and WHEREAS, the Company now desires to change the type of Annual Bonus an eligible employee may defer. NOW, THEREFORE, effective December 31, 2001, the Company hereby amends the Plan as follows: 1. By deleting Section 1(a) in its entirety and by substituting therefor the following: "(a) All or part of his or her annual cash bonus awarded under the Company's Management Incentive Plan, U.S. Incentive Plan or specified annual incentive awards (collectively referred to as 'Annual Bonus');" 2. By deleting Section 2 in its entirety and by substituting therefor the following: "2. Eligibility: Any employee of the Company may participate in the Plan who is on the U.S. payroll, eligible to participate in the Company's 1997 LTIP or successor long term incentive plan, and selected by the Company as eligible to participate in the Plan (collectively referred to as 'Participants')." Except as specifically amended hereby, the Plan shall remain in full force and effect as prior to this First Amendment. IN WITNESS WHEREOF, the Company has caused this First Amendment to be executed on the date first written above. AVON PRODUCTS, INC. By: /s/Andrea Jung ATTEST: /s/Gilbert L. Klemann, II Title: Chief Executive Officer By: Title: Secretary EX-10.19 3 exhibit1019.txt AVON PRODUCTS, INC. EXHIBIT 10.19 Exhibit 10.19 Description of Consulting Arrangement with Fernando Lezama Mr. Lezama will be retiring from the Company on March 31, 2002. The Company has arranged for Mr. Lezama to provide consulting services to the Company relating principally to the Company's business in Latin America and Asia Pacific for a period of up to two years after his retirement. As compensation for these consulting services, the Company will pay Mr. Lezama during the consulting period a consulting fee equal to one-half of Mr. Lezama's base salary at the time of his retirement. EX-10.21 4 exhibit1021.txt AVON PRODUCTS, INC. EXHIBIT 10.21 Exhibit 10.21 FIRST AMENDMENT TO THE RESTATED AVON PRODUCTS, INC. COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS The Avon Products, Inc. Compensation Plan for Non-Employee Directors (the "Plan"), restated as of June 1, 2000 is hereby amended in accordance with resolutions adopted by the Board of Directors of Avon Products, Inc. (the "Company") on September 6, 2001. The Plan is amended, effective January 1, 2002, as follows: 1..Section 2.1 of the Plan is revised in its entirety to read as follows: "2.1 Annual Retainer Each non-employee Director shall be entitled to receive an annual retainer consisting of (a) $30,000 payable in cash and (b) an annual grant of Restricted Stock having a value as of the date of grant of approximately $30,000. The cash portion shall be payable in quarterly installments of $7,500 each." 2. Section 3.1 of the Plan is revised in its entirety to read as follows: "3.1 Annual Grant of Stock Options Each year a non-employee Director whose term of office is scheduled to continue beyond that year's Annual Meeting of Shareholders shall be granted a non- qualified option to purchase 4,000 shares of the Company's Common Stock. Such grants shall coincide with the general annual grants of options to Company employees taking place during the first quarter of the year. A non-employee Director who is first elected to the Board of Directors at an Annual Meeting of Shareholders, however, will receive his or her initial grant of options as of such date." Except as hereby amended, the Plan shall continue in full force and effect. IN WITNESS WHEREOF, the Company has caused this First Amendment of the Plan to be executed as of this 6th day of September, 2001. AVON PRODUCTS, INC. By: /s/ Andrea Jung Andrea Jung, Chief Executive Officer ATTEST: /s/ Gilbert L. Klemann II Secretary EX-10.7 5 exhibit107.txt AVON PRODUCTS, INC. EXHIBIT 10.7 Exhibit 10.7 AMENDMENT TO AVON PRODUCTS, INC. BENEFIT RESTORATION PLAN* (Effective as of December 5, 2001) Section 3.1 is hereby amended by changing the first sentence thereof as follows: The annual amount of Supplemental Benefit payable with respect to a Member,expressed as a single life annuity, shall be equal to: (a) the amount of the Retirement Allowance that would be payable in theform of a single life annuity if (i) the limitations of Code Section 415 were not applicable, (ii) the annual compensation limitations under Code Section 401(a)(17) were not applicable, [and] (iii) the definition of compensation under the Retirement Plan included compensation electively deferred by the Member for the plan year (as defined in the Retirement Plan) to a deferred compensation plan or program maintained by the Company, and (iv) the definition of compensation under the Retirement Plan included the amount of the award for 2001 and later years under the Avon Products, Inc. Management Incentive Plan that is paid in the form of restricted stock or stock options, but not in excess of the amount determined to be the base award for the year under the Avon Products, Inc. Management Incentive Plan plus any premium for superior performance, disregarding any enhancement provided as a result of payment in the form of restricted stock or stock options rather than cash; less (b) the Retirement Allowance that is actually payable to the Member. AVON PRODUCTS, INC. Date: December 5, 2001 By /s/ Andrea Jung EX-21 6 exhibit21.txt AVON PRODUCTS, INC. 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. Jurisdiction of Incorporation or Subsidiary Organization - ------- ----------- - ----- Cosmeticos Avon S.A.C.I. Argentina Avon Cosmetics (Australia) 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 Avon Holdings Ltd. Bermuda Productos Avon (Bolivia) Ltda. Bolivia Avon Cosmeticos, Ltda. Brazil Avon Industrial Ltda. Brazil Nucleo de Atualizacao Technologica Avon Ltda. (Nata) Brazil Interlagos Investments Inc. British VI Avon Cosmetics Bulgaria Food Bulgaria Avon Canada, Inc. Canada Avon Fashions, Inc. - Avon Mode Inc. Canada Cosmeticos Avon S.A. Chile Avon Products (China) Co. Ltd. (73.845%) China Avon Manufacturing (Guangzhou) Ltd. (73.845%) China Avon Kosmetika d.o.o. Croatia Avon Cosmetics, Spolecnosti S. Rucenim 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. DE C.V. Honduras Avon Cosmetics (FEBO) Limited Hong Kong Avon Cosmetics Hungary KFT Hungary Avon Service Center, Inc. Illinois Avon Beauty Products India Private Limited India P.T. Avon Indonesia (92%) Indonesia Albee Dublin Finance Company Ireland Avon Limited Ireland Avon Cosmetics S.p.A. Italy Avon Products Company Limited (72%) Japan Live and Life Company Limited Japan Avon Cosmetics SIA Latvia UAB Avon Cosmetics Lithuania Avon Cosmetics (Malaysia) Sendirian Berhad (70%) Malaysia Beautifont (Malaysia) Sendirian Berhad Malaysia Maximin Corporation Sdn Bhd (70%) Malaysia Avon Cosmetics, S.A. de C.V. Mexico Avonova, S. A. de C.V. Mexico M.I. Holdings, Inc. Missouri Avon Cosmetics (Moldova) S.R.L. Moldova 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. zo.o. Poland Avon Operations Polska Sp. zo.o. Poland Avon Cosmeticos, Lda. Portugal Avon Cosmetics (Romania) SRL Romania Avon Beauty Products Co. (ABPC) Russia Russia Avon Cosmetics Spolecnosti S.R.O. Slovak Republic Avon Kosmetika D.O.O. Slovenia Justine/Avon (PTY.) Ltd. South Africa Avon Cosmetics, S.A. Spain Avon Cosmetics (Taiwan) Ltd. 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 Avon Cosmetics Ireland Limited United Kingdom Cosmeticos Avon De Uruguay S.A. Uruguay Avon Cosmetics de Venezuela, C.A. Venezuela EX-4.3 7 exhibit43.txt AVON PRODUCTS, INC. EXHIBIT 4.3 Exhibit 4.3 -------------------------------------------------------------- AVON PRODUCTS, INC. as Issuer AND THE CHASE MANHATTAN BANK as Trustee ----------------------- Indenture Dated as of May 11, 1998 ----------------------- $100,000,000 6.25% Putable/Callable Notes due May 1, 2018, Putable/Callable May 1, 2003 --------------------------------------------------------------- Certain Sections of this Indenture relating to Sections 310 through 318 of the Trust Indenture Act of 1939: Trust Indenture Indenture Act Section Section ---------------- ----------- ss. 310(a)(1) ..................................... 6.09 (a)(2) ..................................... 6.09 (a)(3) ..................................... Not Applicable (a)(4) ..................................... Not Applicable (b) ..................................... 6.08 6.10 ss. 311(a) ..................................... 6.13 (b) ..................................... 6.13 ss. 312(a) ..................................... 7.01 7.02(a) (b) ..................................... 7.02(b) (c) ..................................... 7.02(c) ss. 313(a) ..................................... 7.03(a) (b) ..................................... 7.03(a) (c) ..................................... 7.03(a) (d) ..................................... 7.03(b) ss. 314(a) ..................................... 7.04 (b) ..................................... Not Applicable (c)(1) ..................................... 1.02 (c)(2) ..................................... 1.02 (c)(3) ..................................... Not Applicable (d) ..................................... Not Applicable (e) ..................................... 1.02 ss. 315(a) ..................................... 6.01 (b) ..................................... 6.02 (c) ..................................... 6.01 (d) ..................................... 6.01 (e) ..................................... 5.14 ss. 3l6(a)(1)(A) ..................................... 5.12 - --------------------- Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. -i- (a)(l)(B) ..................................... 5.13 (a)(2) ..................................... Not Applicable (b) ..................................... 5.08 (c) ..................................... 1.04(c) ss. 3l7(a)(1) ..................................... 5.03 (a)(2) ..................................... 5.04 (b) ..................................... 10.03 ss. 318(a) ..................................... 1.07 - ---------------------- Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. -ii- TABLE OF CONTENTS ------------- ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01. Definitions.............................................1 SECTION 1.02. Compliance Certificates and Opinions....................12 SECTION 1.03. Form of Documents Delivered to Trustee..................12 SECTION 1.04. Acts of Holders; Record Dates...........................13 SECTION 1.05. Notices, Etc., to Trustee, Company and Callholder.......14 SECTION 1.06. Notice to Holders; Waiver...............................15 SECTION 1.07. Conflict with Trust Indenture Act.......................16 SECTION 1.08. Effect of Headings and Table of Contents................16 SECTION 1.09. Successors and Assigns..................................16 SECTION 1.10. Separability Clause.....................................16 SECTION 1.11. Benefits of Indenture...................................16 SECTION 1.12. Governing Law...........................................16 SECTION 1.13. Legal Holidays..........................................16 ARTICLE 2 SECURITY FORMS SECTION 2.01. Forms Generally.........................................17 SECTION 2.02. Form of Face of Security................................17 SECTION 2.03. Form of Reverse of Security.............................20 SECTION 2.04. Form of Trustee's Certificate of Authentication.........26 SECTION 2.05. Legend on Restricted Securities.........................26 ARTICLE 3 THE SECURITIES SECTION 3.01. Title and Terms.........................................26 SECTION 3.02. Denominations...........................................27 SECTION 3.03. Execution, Authentication, Delivery and Dating..........27 SECTION 3.04. Temporary Securities....................................28 SECTION 3.05. Registration; Registration of Transfer and Exchange; Restrictions on Transfer...........................29 SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities........31 SECTION 3.07. Payment of Interest; Interest Rights Preserved..........31 SECTION 3.08. Persons Deemed Owners...................................33 SECTION 3.09. Book-entry Provisions for Global Securities.............33 SECTION 3.10. Cancellation............................................35 SECTION 3.11. Computation of Interest.................................35 SECTION 3.12. Special Transfer Provisions.............................35 ARTICLE 4 SATISFACTION AND DISCHARGE SECTION 4.01. Satisfaction and Discharge of Indenture.................36 SECTION 4.02. Application of Trust Money..............................38 ARTICLE 5 REMEDIES SECTION 5.01. Events of Default.......................................38 SECTION 5.02. Acceleration of Maturity; Rescission and Annulment......40 SECTION 5.03. Collection of lndebtedness and Suits for Enforcement by Trustee............................................41 SECTION 5.04. Trustee May File Proofs of Claim........................41 SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities.........................................42 SECTION 5.06. Application of Money Collected..........................42 SECTION 5.07. Limitation on Suits.....................................43 SECTION 5.08. Unconditional Right of Holders to Receive Principal and Interest...........................................43 SECTION 5.09. Restoration of Rights and Remedies......................43 SECTION 5.10. Rights and Remedies Cumulative..........................44 SECTION 5.11. Delay or Omission Not Waiver............................44 SECTION 5.12. Control by Holders......................................44 SECTION 5.13. Waiver of Past Defaults.................................44 SECTION 5.14. Undertaking for Costs...................................45 SECTION 5.15. Waiver of Stay or Extension Laws........................45 SECTION 5.16. Notice to the Callholder of an Event of Default.........45 -ii- ARTICLE 6 THE TRUSTEE SECTION 6.01. Certain Duties and Responsibilities.....................46 SECTION 6.02. Notice of Defaults......................................46 SECTION 6.03. Certain Rights of Trustee...............................46 SECTION 6.04. Not Responsible for Recitals............................47 SECTION 6.05. May Hold Securities.....................................48 SECTION 6.06. Money Held in Trust.....................................48 SECTION 6.07. Compensation and Reimbursement..........................48 SECTION 6.08. Disqualification; Conflicting Interests.................49 SECTION 6.09. Corporate Trustee Required; Eligibility.................49 SECTION 6.10. Resignation and Removal; Appointment of Successor.......49 SECTION 6.11. Acceptance of Appointment by Successor..................50 SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business...........................................51 SECTION 6.13. Preferential Collection of Claims Against...............51 ARTICLE 7 HOLDERS' LISTS AND REPORTS BY TRUSTEE SECTION 7.01. Company to Furnish Trustee Names and Addresses of Holders............................................51 SECTION 7.02. Preservation of Information; Communications to Holders..52 SECTION 7.03. Reports by Trustee......................................52 SECTION 7.04. Reports by Company......................................53 ARTICLE 8 CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 8.01. Company May Consolidate, Etc., Only on Certain Terms....53 SECTION 8.02. Successor Substituted...................................54 ARTICLE 9 SUPPLEMENTAL INDENTURE SECTION 9.01. Supplemental Indentures Without Consent of Holders......54 -iii- SECTION 9.02. Supplemental Indentures with Consent of Holders.........55 SECTION 9.03. Execution of Supplemental Indentures....................56 SECTION 9.04. Effect of Supplemental Indentures.......................56 SECTION 9.05. Conformity with Trust Indenture Act.....................56 SECTION 9.06. Reference in Securities to Supplemental Indentures......56 ARTICLE 10 COVENANTS SECTION 10.01. Payment of Principal and Interest.......................57 SECTION 10.02. Maintenance of Office or Agency.........................57 SECTION 10.03. Money for Security Payments to Be Held in Trust.........57 SECTION 10.04. Statement by Officers as to Default.....................58 SECTION 10.05. Existence...............................................59 SECTION 10.06. Liens...................................................59 SECTION 10.07. Limitation on Restricted Sale/Leaseback Transactions....59 SECTION 10.08. Reports and Delivery of Certain Information.............59 SECTION 10.09. Resale of Certain Securities............................60 SECTION 10.10. Book-Entry System.......................................60 SECTION 10.11. Waiver of Certain Covenants.............................60 ARTICLE 11 DEFEASANCE AND COVENANT DEFEASANCE SECTION 11.01. Company's Option to Effect Defeasance or Covenant Defeasance.........................................61 SECTION 11.02. Defeasance and Discharge................................61 SECTION 11.03. Covenant Defeasance.....................................61 SECTION 11.04. Conditions to Defeasance or Covenant Defeasance.........62 SECTION 11.05. Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions.................64 SECTION 11.06. Reinstatement...........................................65 ARTICLE 12 CALL AND PUT OPTIONS SECTION 12.01. Call Option.............................................65 -iv- SECTION 12.02. Put Option..............................................68 SECTION 12.03. Calculation Agent.......................................68 SECTION 12.04. Coupon Reset Process....................................70 SECTION 12.05. The Company as Callholder...............................73 SECTION 12.06. Third Party Beneficiaries...............................73 -v- INDENTURE, dated as of May 11, 1998, between AVON PRODUCTS, INC., a corporation duly organized and existing under the laws of the State of New York, as Issuer (herein called the "Company"), having its principal office at 1345 Avenue of the Americas, New York, New York 10105-0196, and THE CHASE MANHATTAN BANK, a banking corporation duly organized under the laws of the State of New York, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of its 6.25% Putable/Callable Notes due May 1, 2018, Putable/Callable May 1, 2003 (herein called the "Securities") of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company, and to make this Indenture a valid agreement of the Company, in accordance with their and its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; and (4) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "Act", when used with respect to any Holder, has the meaning specified in Section 1.04. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Attributable Debt", in respect to any Sale/Leaseback Transaction, means, as of any time of determination, the present value (discounted at the rate per annum equal to the rate of interest implicit in the lease involved in such Sale/Leaseback Transaction, as determined in good faith by the Company) of the obligation of the lessee thereunder for rental payments (excluding, however, any amounts required to be paid by such lessee, whether or not designated as rent or additional rent, on account of maintenance and repairs, insurance, taxes, assessments, water rates or similar charges or any amounts required to be paid by such lessee thereunder contingent upon the amount of sales or similar contingent awards) during the remaining term of such lease (including any period for which such lease has been extended or may, at the option of the lessor, be extended). In the case of any lease which is terminable by the lessee upon the payment of a penalty, such rental payments shall also include the amount of such penalty, but no rental payments shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated. "Bid" has the meaning specified in Section 12.04(a). "Bid Date" has the meaning specified in Section 12.04(a). "Bid Deadline" has the meaning specified in Section 12.04(a). 2 "Board of Directors" means, with respect to any Person, either the board of directors of such Person or any duly authorized committee of that board. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in The City of New York are authorized or obligated by law, executive order or governmental decree to be closed. "Calculation Agent" has the meaning specified in Section 12.03(a). "Callholder" has the meaning specified in Section 12.01(a). "Call Notice" has the meaning specified in Section 12.01(b). "Call Option" has the meaning specified in Section 12.01(a). "Call Price" means a price equal to 100% of the principal amount of the Securities. "Capital Stock" means any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, including, without limitation, with respect to partnerships, partnership interests (whether general or limited) and any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, such partnership. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman of the Board, its Vice 3 Chairman of the Board, its President or any Vice President, and by its Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered to the Trustee. "Consolidated Net Tangible Assets" means (a) the total amount of assets (less applicable reserves and other properly deductible items) which under GAAP would be included on the most recent audited annual consolidated balance sheet of the Company and its consolidated Subsidiaries after deducting therefrom, without duplication, the sum of (i) all current liabilities and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, which in each case under GAAP would be included on such consolidated balance sheet. "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date of this Indenture, located at 450 West 33rd Street, New York, NY 10001-2697, Attention: Global Trust Services. "corporation" means a corporation, association, company, joint-stock company or business trust. "Coupon Reset Date" means May 1, 2003. "Coupon Reset Process" has the meaning specified in Section 12.04(a). "Coupon Reset Rate" has the meaning specified in Section 12.04(a). "Credit Agreement" means the Amended and Restated $600,000,000 Revolving Credit and Competitive Advance Facility Agreement, dated as of August 8, 1996, among the Company, Avon Capital Corporation, the Lenders and Co-Agents named therein and The Chase Manhattan Bank, as Administrative Agent. "Dealer" has the meaning specified in Section 12.04(a). "Dealer List" has the meaning specified in Section 12.04(a). "Default" means any event that is or with the passage of time or the giving of notice or both would become an Event of Default. "Defaulted Interest" has the meaning specified in Section 3.07. "Defeasance" has the meaning specified in Section 11.02. 4 "Depositary" means The Depository Trust Company until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Depositary" shall mean such successor Depositary. "Equity Interests" means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock). "Event of Default" has the meaning specified in Section 5.01. "Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended. "Final Maturity Date" means May 1, 2018. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, in each case, as in effect in the United States on the date hereof. "Global Security" means a Security in global form registered in the Security Register in the name of a Depositary or a nominee thereof. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indebtedness" means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of (i) borrowed money evidenced by bonds, notes, debentures or similar instruments, (ii) indebtedness secured by a mortgage, pledge, lien, charge, encumbrance of any security interest existing on property owned by such Person, (iii) the reimbursement obligations, contingent or otherwise, in connection with any letters of credit actually issued or amounts representing the balance that constitutes an accrued expense or trade payable or (iv) any lease of property by such Person as lessee which is reflected in such Person's consolidated balance sheet as a capitalized lease in accordance with GAAP, in the case of items of Indebtedness under (i) through (iii) above to the extent that any such items (other than letters of credit) would appear as a liability on such Person's consolidated balance sheet in accordance with GAAP, and also includes, to the extent not otherwise included, any obligation by such Person to be 5 liable for, or to pay, as obligor, guarantor or otherwise (other than for purposes of collection in the ordinary course of business), Indebtedness of another Person. "Indenture" means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. "Initial Purchasers" means UBS Securities LLC, BancAmerica Robertson Stephens, J.P. Morgan Securities Inc. and Morgan Stanley & Co. Incorporated. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Investments" means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of loans, advances or capital contributions, purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investment Company Act" means the Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time. "Issue Date" means the date the Securities are originally issued under this Indenture. "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction). "Market Disruption Event" means any of the following in the reasonable judgment of the Calculation Agent and the Company: (i) a suspension or material limitation in trading in securities generally on the New York Stock Exchange or the establishment of minimum prices on such exchange; (ii) a general moratorium on commercial banking activities declared by either U.S. federal or New York State authorities; (iii) a material adverse change in the existing financial, political 6 or economic conditions in the United States; (iv) an outbreak or escalation of major hostilities involving the United States, or the declaration of a national emergency or war by the United States; or (v) a material disruption of the U.S. government securities market, U.S. corporate bond market, or U.S. federal wire system. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by exercise of the Put Option, declaration of acceleration or otherwise. "Offering Memorandum" means the Offering Memorandum dated May 6, 1998, offering the Securities for sale as provided therein. "Officers' Certificate" means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the President or any Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of the Company, and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 10.04 shall be the principal executive, financial or accounting officer of the Company. "Opinion of Counsel" means a written opinion of counsel, who may be external or in-house counsel for the Company, and who shall be acceptable to the Trustee. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities for whose payment money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; and (iii) Securities which have been paid or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such 7 Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that, in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Paying Agent" means any Person authorized by the Company to pay the principal of or interest on any Securities on behalf of the Company. The Trustee shall initially be the Paying Agent. "Permitted Liens" means any of the following: (a) Liens on any Principal Property acquired by the Company or a Subsidiary after the date of this Indenture to secure or provide for the payment or financing of all or any part of the purchase price thereof or construction of fixed improvements thereon (prior to, at the time of or within 180 days after the latest of the acquisition, completion of construction or commencement of commercial operation thereof); (b) Liens on any shares of stock or Principal Property acquired by the Company or a Subsidiary after the date of this Indenture existing at the time of such acquisition; (c) Liens on any shares of stock or Principal Property of a corporation which is merged into or consolidated with the Company or a Subsidiary or substantially all of the assets of which are acquired by the Company or a Subsidiary; (d) Liens securing Indebtedness of a Subsidiary owing to the Company or another Subsidiary; (e) Liens existing on the date of this Indenture; (f) Liens on any Principal Property being constructed or improved securing loans to finance such construction or improvements; (g) Liens in favor of governmental bodies of the United States or any State thereof or any other country or political subdivision thereof to secure partial, progress or advance payments pursuant to any contract or statute, or to secure any Indebtedness incurred or guaranteed for the purpose of financing all or any part of the cost of acquiring, constructing or improving the property subject to such Liens; (h) Liens securing taxes, assessments or governmental charges or levies not yet delinquent, or already delinquent but the validity of which is being contested in good faith; (i) Liens arising by reason of 8 deposits necessary to qualify the Company or any Subsidiary to conduct business, maintain self-insurance, or obtain the benefit of, or comply with, any law; and (j) extensions, renewals or replacement of Liens referred to in the foregoing clauses provided that the Indebtedness secured is not increased nor the Lien extended to any additional assets. "Person" means any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "Principal Property" means any manufacturing plant, testing or research and development facility, distribution facility, processing plant or warehouse (including, without limitation, land, fixtures and equipment), owned or leased by the Company or any Subsidiary (including any of the foregoing acquired or leased after the date of this Indenture) and located within the United States of America, its territories and possessions, unless the Board of Directors of the Company determines in good faith that such plant or facility is not of material importance to the total business conducted by the Company and its consolidated Subsidiaries. "Purchase Agreement" means the Purchase Agreement dated May 6, 1998 entered into by the Company and the Initial Purchasers in connection with the sale of the Securities. "Purchase Price" has the meaning specified in Section 12.04(a). "Put Option" has the meaning specified in Section 12.02(a). "Put Redemption Price" has the meaning specified in Section 12.02(a). "Qualified Institutional Buyer" or "QIB" shall have the meaning specified in Rule l44A. "Reasonable Cause" has the meaning specified in Section 12.03(e). 9 "Regular Record Date" for the interest payable on any Interest Payment Date means the fifteenth calendar day (whether or not a Business Day) immediately preceding such Interest Payment Date. "Responsible Officer" means any officer of the Trustee within the Corporate Trust Office of the Trustee with direct responsibility for the administration of this Indenture and also, with respect to a particular matter, any other officer of the Trustee to whom such matter is referred because of such officer's knowledge and familiarity with the particular subject. "Restricted Global Security" means a Global Security representing Restricted Securities. "Restricted Sale/Leaseback Transaction" means any Sale/Leaseback Transaction entered into by the Company or any Subsidiary after the date of this Indenture, except: (i) Sale/Leaseback Transactions entered into by and between the Company or a Subsidiary and one or more Subsidiaries of the Company; (ii) Sale/Leaseback Transactions as to which, during the period commencing 60 days prior to and ending 120 days after entering into such Sale/Leaseback Transaction, the Company or a Subsidiary applies an amount equal to the Attributable Debt with respect to such Sale/Leaseback Transaction to the acquisition, directly or indirectly and in whole or in part, of one or more Principal Properties or to the retirement of long-term Indebtedness (other than mandatory prepayment or retirement) of the Company or any Subsidiary; and (iii) Sale/Leaseback Transactions involving the taking back of a lease for a period of three years or less. "Restricted Securities" has the meaning specified in Section 2.05. "Rule 144" means Rule 144 under the Securities Act (including any successor rule thereto), as the same may be amended from time to time. "Rule l44A" means Rule l44A under the Securities Act (including any successor rule thereto), as the same may be amended from time to time. "Sale/Leaseback Transaction" means any arrangement, directly or indirectly, with any Person whereby the Company or any Subsidiary shall sell or transfer any Principal Property whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such Principal Property or any part thereof which the Company or such Subsidiary, as the case may be, intends to use for substantially the same purpose as the Principal Property being sold or transferred. "Secured Debt" has the meaning specified in Section 10.06. 10 "Securities" has the meaning specified in the first paragraph of the Recitals of the Company. "Securities Act" means the U.S. Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Securities Premium" has the meaning specified in Section 12.04(a). "Security Register" and "Security Registrar" have the respective meanings specified in Section 3.05. "Selected Bid" has the meaning specified in Section 12.04(a). "Special Record Date" for the payment of Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.07. "Stated Maturity", when used with respect to the Securities or any installment of interest thereon, means the date specified in the Securities as the fixed date on which the principal thereof or such installment of interest is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "Treasury Rate" has the meaning specified in Section 12.04(a). "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trustee" means the Person named as the "Trustee" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. 11 "Unrestricted Global Security" means a Global Security representing Securities which are not Restricted Securities. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Yield to Maturity" has the meaning specified in Section 12.04(a). SECTION 1.02. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, such individual has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.03. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or 12 covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or opinion of counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.04. Acts of Holders; Record Dates. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, 13 such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. (c) The Company may, in the circumstances permitted by the Trust Indenture Act, fix any day as the record date for the purpose of determining the Holders entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 7.01) prior to such first solicitation or vote, as the case may be. With regard to any record date, only the Holders on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action. (d) The ownership of Securities shall be proved by the Security Register. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. SECTION 1.05. Notices, Etc., to Trustee, Company and Callholder. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at 450 West 33rd Street, New York, New York 10001, Attention: Global Trust Services, (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified 14 in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company, Attention: Treasurer. (3) the Callholder by the Company shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Callholder addressed to it at the address below: Union Bank of Switzerland London Branch, 100 Liverpool Street London EC2M 2RH England Attention: Derivative Legal Group DELG/Tania Salin Telephone: 44-171-901-6309 Facsimile: 44-171-901-2898 Telex: 923333 UBSPDW G SECTION 1.06. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. 15 SECTION 1.07. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 1.08. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.09. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 1.10. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1.11. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto, the Callholder and the Calculation Agent, and their respective successors hereunder and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.12. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York. SECTION 1.13. Legal Holidays. In any case where any Interest Payment Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or at the Stated Maturity, provided that no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date or Stated Maturity, as the case may be. 16 ARTICLE 2 SECURITY FORMS SECTION 2.01. Forms Generally. The Securities and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor, the Internal Revenue Code of 1986, as amended, and regulations thereunder, or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. The Securities shall be issued in the form of permanent Global Securities in registered form in substantially the form set forth in this Article. The aggregate principal amount of the Global Securities may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depository, as hereinafter provided. SECTION 2.02. Form of Face of Security. [INCLUDE IF SECURITY IS A RESTRICTED SECURITY -- THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH BELOW. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), (2) AGREES THAT IT WILL NOT WITHIN TWO YEARS AFTER THE ORIGINAL ISSUANCE OF THIS SECURITY RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR (D) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS SECURITY AND ANY RELATED DOCUMENTATION MAY BE AMENDED OR SUPPLEMENTED FROM TIME TO TIME TO MODIFY THE RESTRICTIONS ON AND PROCEDURES FOR RESALES AND OTHER 17 TRANSFERS OF THIS SECURITY TO REFLECT ANY CHANGE IN APPLICABLE LAW OR REGULATION (OR THE INTERPRETATION THEREOF) OR IN PRACTICES RELATING TO THE RESALE OR TRANSFER OF RESTRICTED SECURITIES GENERALLY. THE HOLDER OF THIS SECURITY SHALL BE DEEMED BY THE ACCEPTANCE OF THIS SECURITY TO HAVE AGREED TO ANY SUCH AMENDMENT OR SUPPLEMENT.] [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC"), A NEW YORK CORPORATION, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF) DTC, ANY TRANSFER, PLEDGE OR OTHER USE THEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.] AVON PRODUCTS, INC. 6.25% Putable/Callable Notes due May 1, 2018, Putable/Callable May 1, 2003 CUSIP No. _____________________ $100,000,000 Avon Products, Inc., a corporation duly organized and existing under the laws of New York (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to ___________________, or registered assigns, the 18 principal sum of _________________________ Dollars [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- (which amount may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary, in accordance with the rules and procedures of the Depositary)] on May 1, 2018, and to pay interest thereon from May 11, 1998 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semiannually on May 1 and November 1 in each year, commencing November 1, 1998 at the rate of 6.25% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the fifteenth calendar day (whether or not a Business Day) immediately preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of and interest on this Security will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. If this Security is a Global Security, then notwithstanding the foregoing, each such payment will be made in accordance with the procedures of the Depositary as then in effect. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, including those describing the Call Option and the Put Option, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall 19 not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: AVON PRODUCTS, INC. By_______________________ Attest: - --------------------------------- SECTION 2.03. Form of Reverse of Security. This Security is one of a duly authorized issue of Securities of the Company designated as its 6.25% Putable/Callable Notes due May 1, 2018, Putable/Callable May 1, 2003 (herein called the "Securities"), limited in aggregate principal amount to $100 million, issued and to be issued under an Indenture, dated as of May 11, 1998 (herein called the "Indenture"), between the Company and The Chase Manhattan Bank, as Trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Securities will bear interest, payable on each Interest Payment Date to holders of record on the fifteenth calendar day (whether or not a Business Day) immediately preceding such Interest Payment Date, at 6.25% per annum until May 1, 2003 (the "Coupon Reset Date"), whereupon (x) if all of the Securities are purchased on such date by the Callholder pursuant to its Call Option, the Securities shall bear interest from and including the Coupon Reset Date to, but excluding, May 1, 2018 (the "Final Maturity Date") at the Coupon Reset Rate determined in accordance with the Coupon Reset Process described in the Indenture, or (y) the Securities shall be redeemed by the Company pursuant to the exercise of the Put Option by the Trustee on behalf of the Holders of the Securities. The Callholder may call the Securities (the "Call Option") by notifying the Trustee by 4:00 p.m., New York time, on the day that is fifteen calendar days prior to the Coupon Reset Date of its intention to purchase all, but not less than all, of the Securities at a price equal to 100% of the principal amount of 20 the Securities on the Coupon Reset Date. If the Call Option terminates in accordance with the terms of the Indenture, then the Trustee is obliged, without any further action by any holder of Securities or any owner of any beneficial interest therein, to exercise on behalf of such Holders their right to require the Company to repurchase the Securities at a price equal to 100% of the principal amount of the Securities on the Coupon Reset Date (the "Put Option"). Except for the exercise of the Call Option and/or the Put Option, the Securities are not redeemable prior to maturity and do not have the benefit of a sinking fund. [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- In the event of a deposit or withdrawal of an interest in this Security, including an exchange, transfer, repurchase or conversion of this Security in part only, the Trustee, as custodian of the Depositary, shall make an adjustment on its records to reflect such deposit or withdrawal in accordance with the rules and procedures of the Depositary.] [INCLUDE IF SECURITY IS A RESTRICTED SECURITY -- Subject to certain limitations in the Indenture, at any time when the Company is not subject to Section 13 or 15(d) of the United States Securities Exchange Act of 1934, as amended, upon the request of a Holder of a Restricted Security, the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder of Restricted Securities, or to a prospective purchaser of any such security designated by any such Holder, to the extent required to permit compliance by any such Holder with Rule l44A under the Securities Act of 1933, as amended (the "Securities Act"). "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act (or any successor provision thereto).] If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time, upon compliance with certain conditions set forth therein, of (i) the entire Indebtedness evidenced by this Security or (ii) certain restrictive covenants and Events of Default with respect to this Security. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less 21 than a majority in aggregate principal amount of the Outstanding Securities; provided that no amendment, modification or waiver of the Indenture which materially adversely affects the interests of the Callholder may be made without the Callholder's prior written consent. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities, the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Outstanding Securities a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or interest hereon on or after the respective due dates expressed herein. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. 22 The Securities are issuable only in registered form without coupons in denominations of $100,000 and any integral multiple of $1,000 above that amount. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. 23 ASSIGNMENT FORM If you want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to: ================================================================================ (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint__________________________________, agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. Date: _________________ Signed:_____________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: _______________________________ In connection with any transfer of this Security occurring prior to May 11, 2000, the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that this Security is being transferred: [Check One] (1) [ ] to the Company or a subsidiary thereof; or (2) [ ] pursuant to and in compliance with Rule l44A under the Securities Act; or (3) [ ] outside the United States to a "foreign person" in compliance with Rule 904 of Regulation S under the Securities Act; or (4) [ ] pursuant to the exemption from registration provided by Rule 144 under the Securities Act; or 24 (5) [ ] pursuant to an effective registration statement under the Securities Act; or (6) [ ] pursuant to another available exemption from the registration requirements of the Securities Act. Unless one of the boxes is checked, the Trustee will refuse to register any of the Securities evidenced by this certificate in the name of any Person other than the registered Holder thereof; provided that if box (3), (4) or (6) is checked, the Company may require, prior to registering any such transfer of the Securities, in its sole discretion, such legal opinions, certifications (including an investment letter in the case of box (3) or (4)) and other information as the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. If none of the foregoing boxes is checked, the Trustee or Security Registrar shall not be obligated to register this Security in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 3.12 of the Indenture shall have been satisfied. Date: _________________ Signed:_____________________________ (Sign exactly as your name appears on the other side of this Security) Signature Guarantee: _______________________________ TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule l44A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule l44A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Date: _________________ Signed:_____________________________] 25 NOTICE: To be executed by an executive officer. SECTION 2.04. Form of Trustee's Certificate of Authentication. This is one of the Securities referred to in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, as Trustee By______________________________ Authorized Officer SECTION 2.05. Legend on Restricted Securities. During the period beginning on May 11, 1998 and ending on the date two years from such date, any Security including any Security issued in exchange therefor or in lieu thereof, shall be deemed a "Restricted Security" and shall be subject to the restrictions on transfer provided in the legends set forth on the face of the form of Security in Section 2.02; provided, however, that the term "Restricted Security" shall not include any Securities as to which restrictions have been terminated in accordance with Section 3.05. All Securities shall bear the applicable legends set forth on the face of the form of Security in Section 2.02. Except as provided in Section 3.05 and Section 3.12, the Trustee shall not issue any unlegended Security until it has received an Officers' Certificate from the Company directing it to do so. ARTICLE 3 THE SECURITIES SECTION 3.01. Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $100 million, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 3.04, 3.05, 3.06 or 9.06. The Securities shall be known and designated as the "6.25% Putable/Callable Notes due May 1, 2018, Putable/Callable May 1, 2003" of the Company. Their Stated Maturity shall be May 1, 2018, and they shall bear interest at the rate of 6.25% per annum, from May 11, 1998 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, as the case may be, payable semiannually on May 1 and November 1, 26 commencing November 1, 1998 until the Coupon Reset Date, whereupon (x) if the Notes are purchased by the Callholder pursuant to its Call Option on the Coupon Reset Date, the Notes shall bear interest from the Coupon Reset Date to the Final Maturity Date at the Coupon Reset Rate determined in accordance with the Coupon Reset Process described in Section 12.04, payable semi-annually on May 1 and November 1,commencing on November 1, 2003, or (y) the Notes shall be redeemed by the Company pursuant to the exercise of the Put Option by the Trustee on behalf of the Holders of the Notes. The principal of and interest on the Securities shall be payable at the office or agency of the Company in The City of New York maintained for such purpose and at any other office or agency maintained by the Company for such purpose; provided, however, that at the option of the Company payment of interest may be made by wire transfer or by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. Except for the exercise of the Call Option or the Put Option, the Securities shall not be redeemable prior to maturity and shall not have the benefit of a sinking fund. The Securities shall not be superior in right of payment to, and shall rank pari passu with, all other unsecured and unsubordinated Indebtedness of the Company. The Securities shall be subject to defeasance at the option of the Company as provided in Article Eleven and they shall be subject to an assignable Call Option and to a Put Option to be exercised under certain conditions by the Trustee for and on behalf of the Holders as provided in Article Twelve. SECTION 3.02. Denominations. The Securities shall be issuable only in registered form without coupons and in denominations of $100,000 and any integral multiple of $l,000 above that amount. SECTION 3.03. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its President or one of its Vice Presidents, under its corporate seal reproduced thereon attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such 27 offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities. The Company Order shall specify the amount of Securities to be authenticated and shall specify the amount of the Securities to be issued as a Global Security. The Trustee in accordance with such Company Order shall authenticate and deliver the Securities as in this Indenture provided and not otherwise. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. SECTION 3.04. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at any office or agency of the Company designated pursuant to Section 10.02, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. 28 SECTION 3.05. Registration; Registration of Transfer and Exchange; Restrictions on Transfer. (a) The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 10.02 being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at an office or agency of the Company designated pursuant to Section 10.02 for such purpose, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations and of a like aggregate principal amount and tenor each such Security bearing such restrictive legends as may be required by this Indenture (including Sections 2.02 and 3.12). At the option of the Holder and subject to the other provisions of this Section 3.05 and to Section 3.12, Securities may be exchanged for other Securities of any authorized denominations and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. As a condition to the registration of transfer of any Restricted Securities, the Company or the Trustee may require evidence satisfactory to them as to the compliance with the restrictions set forth in the legend on such securities. Except as provided in the following sentence and in Section 3.12, all Securities originally issued hereunder and all Securities issued upon registration of transfer or exchange or replacement thereof shall be Restricted Securities and 29 shall bear the legend required by Sections 2.02 and 2.05, unless the Company shall have delivered to the Trustee (and the Security Registrar, if other than the Trustee) a Company Order stating that the Security is not a Restricted Security and may be issued without such legend thereon. Securities which are issued upon registration of transfer of, or in exchange for, Securities which are not Restricted Securities shall not be Restricted Securities and shall not bear such legend. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.04 or 9.06 not involving any transfer. (b) Beneficial ownership of every Restricted Security shall be subject to the restrictions on transfer provided in the legends required to be set forth on the face of each Restricted Security pursuant to Sections 2.02 and 2.05, unless such restrictions on transfer shall be terminated in accordance with this Section 3.05(b) or Section 3.12. The Holder of each Restricted Security, by such Holder's acceptance thereof, agrees to be bound by such restrictions on transfer. The restrictions imposed by this Section 3.05 and Sections 2.02, 2.05 and 3.12 upon the transferability of any particular Restricted Security shall cease and terminate upon delivery by the Company to the Trustee of an Officers' Certificate stating that such Restricted Security has been sold pursuant to an effective registration statement under the Securities Act or transferred in compliance with Rule 144 under the Securities Act (or any successor provision thereto). Any Restricted Security as to which the Company has delivered to the Trustee an Officers' Certificate that such restrictions on transfer shall have expired in accordance with their terms or shall have terminated may, upon surrender of such Restricted Security for exchange to the Security Registrar in accordance with the provisions of this Section 3.05, be exchanged for a new Security, of like tenor and aggregate principal amount, which shall not bear the restrictive legends required by Sections 2.02 and 2.05. The Company shall inform the Trustee in writing of the effective date of any registration statement registering the Securities under the Securities Act. The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the aforementioned registration statement. As used in the preceding two paragraphs of this Section 3.05, the term "transfer" encompasses any sale, pledge, transfer or other disposition of any Restricted Security. 30 (c) Neither the Trustee nor any of its agents shall (1) have any duty to monitor compliance with or with respect to any federal or state or other securities or tax laws or (2) have any duty to obtain documentation on any transfers or exchanges other than as specifically required hereunder. SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indenmity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 3.07. Payment of Interest; Interest Rights Preserved. Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or 31 one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "Defaulted Interest") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). 32 (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 3.08. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 3.09. Book-entry Provisions for Global Securities. (a) The Global Securities initially shall (i) be registered in the name of the Depositary or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for the Depositary and (iii) bear legends as set forth on the face of the form of Security in Section 2.02. Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of any Holder. (b) Transfers of the Global Securities shall be limited to transfers in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Security may be transferred 33 or exchanged, in whole or in part, for certificated Securities in accordance with the rules and procedures of the Depositary and the provisions of Section 3.12. In addition, certificated Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in the Global Securities if (A) such Depositary has notified the Company (or the Company becomes aware) that the Depositary (i) is unwilling or unable to continue as Depositary for such Global Security or (ii) has ceased to be a clearing agency registered under the Exchange Act when the Depositary is required to be so registered to act as such Depositary and, in both such cases, no successor Depositary shall have been appointed within 90 days of such notification or of the Company becoming aware of such event, (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security and the Outstanding Securities shall have become due and payable pursuant to Section 5.02 and the Trustee has requested that certificated Securities be issued or (C) the Company has decided to discontinue use of book-entry transfers through the Depositary (or a successor Depositary); provided that Holders of Securities in the form of permanent certificated Securities in registered form shall have the right, subject to applicable law, to request that such Securities be exchanged for interests in the Global Security. (c) In connection with any transfer or exchange of a portion of the beneficial interest in the Global Security to beneficial owners pursuant to paragraph (b), the Security Registrar shall (if one or more certificated Securities are to be issued) reflect on its books and records the date and a decrease in the principal amount of the Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more certificated Securities of like tenor and amount. (d) In connection with the transfer of the entire Global Security to beneficial owners pursuant to paragraph (b), the Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the Global Security, an equal aggregate principal amount of certificated Securities of authorized denominations. (e) Any certificated Security constituting a Restricted Security delivered in exchange for an interest in the Global Security pursuant to paragraph (c) or (d) shall, except if the requested transfer is after May 11, 2000, bear the legend regarding transfer restrictions applicable to the certificated Securities set forth on the face of the form of Security in Section 2.02. 34 (f) The Holder of the Global Securities may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. SECTION 3.10. Cancellation. The Company at any time may deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold. The Trustee shall cancel and destroy all Securities surrendered for registration of transfer, exchange, payment or cancellation and shall deliver certificates of destruction to the Company, all in accordance with its customary practices. The Company may not issue new Securities to replace Securities it has paid in full or delivered to the Trustee for cancellation. SECTION 3.11. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 3.12. Special Transfer Provisions. (a) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Security constituting a Restricted Security to a QIB: (i) the Security Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Security stating, or has otherwise advised the Company and the Security Registrar in writing, that the sale has been made in compliance with the provisions of Rule l44A to a transferee who has signed the certification provided for on the form of Security stating, or has otherwise advised the Company and the Security Registrar in writing, that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule l44A, and is aware that the sale to it is being made in reliance on Rule l44A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule l44A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule l44A; and (ii) if the proposed transferee is an Agent Member, and the Securities to be transferred consist of certificated Securities which after transfer are to be evidenced by an interest in the Global Security, upon 35 receipt by the Security Registrar of instructions given in accordance with the Depositary's and the Security Registrar's procedures, the Security Registrar shall reflect on its books and records the date and an increase in the principal amount of the Global Security in an amount equal to the principal amount of the certificated Securities to be transferred, and the Trustee shall cancel the certificated Securities so transferred. (b) Private Placement Legend. Upon the registration of transfer, exchange or replacement of Securities not bearing the legends required by Sections 2.02 and 2.05, the Security Registrar shall deliver Securities that do not bear such legends. Upon the registration of transfer, exchange or replacement of Securities bearing the legends required by Sections 2.02 and 2.05, the Security Registrar shall deliver only Securities that bear such legends unless (i) the requested transfer is after May 11, 2000 or (ii) there is delivered to the Security Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (c) General. By its acceptance of any Security bearing the legends required by Sections 2.02 and 2.05, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in such legends and agrees that it will transfer such Security only as provided in this Indenture. The Security Registrar shall retain, in accordance with its customary procedures, copies of all letters, notices and other written communications received pursuant to this Section 3.12. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Security Registrar. ARTICLE 4 SATISFACTION AND DISCHARGE SECTION 4.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when 36 (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 3.06 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section 10.03) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, and the Company, in the case of (i) or (ii) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness evidenced by such Securities not theretofore delivered to the Trustee for cancellation, for principal and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.07 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 10.03 shall survive. 37 SECTION 4.02. Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section 4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Trustee. ARTICLE 5 REMEDIES SECTION 5.01. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of any Security at its Maturity; or (3) default in the performance of any covenant, agreement or condition of the Company in this Indenture or the Securities, and continuance of such default for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (4) a default under any bond, debenture, note or other evidence of Indebtedness for money borrowed by the Company, whether such Indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay the principal (or premium, if any) of Indebtedness having an aggregate principal amount outstanding of at least $50 million when due and payable after the expiration of any applicable 38 grace period with respect thereto or shall have resulted in such Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such Indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 30 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities a written notice specifying such default and requiring the Company to cause such Indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; provided, however, that, subject to the provisions of Sections 6.01 and 6.02, the Trustee shall not be deemed to have knowledge of such default unless either (A) a Responsible Officer of the Trustee shall have actual knowledge of such default or (B) the Trustee shall have received written notice thereof from the Company, from any Holder or from the holder of or trustee in respect of any such Indebtedness; or (5) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or (6) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, 39 receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action. SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than those specified in Sections 5.01(5) and 5.01(6)) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal shall become immediately due and payable. Notwithstanding the foregoing, in the case of an Event of Default specified in Sections 5.01(5) or 5.01(6), all Outstanding Securities will ipso facto become due and payable without any declaration or other Act on the part of the Trustee or any Holder. At any time after such a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities, (B) the principal of any Securities which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07; 40 and (2) all Events of Default, other than the non-payment of the principal of Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 5.03. Collection of lndebtedness and Suits for Enforcement by Trustee. The Company covenants that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and on any overdue interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default with respect to the Securities occurs and is continuing, the Trustee may in its discretion, subject to applicable law, proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 5.04. Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be 41 authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 5.06. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 6.07; and SECOND: To the payment of the amounts then due and unpaid for principal of and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively. 42 SECTION 5.07. Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 5.08. Unconditional Right of Holders to Receive Principal and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and (subject to Section 3.07) interest on such Security on the respective Stated Maturities expressed in such Security and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 5.09. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then 43 and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 5.10. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 5.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 5.12. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, and (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. SECTION 5.13. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in the payment of the principal of or interest on any Security, or 44 (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 5.14. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, in either case in respect to the Securities of any series, a court may require any party litigant in such suit to file an undertaking to pay the costs of the suit, and the court may assess reasonable costs, including reasonable attorney's fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 10% in principal amount of the outstanding Securities of any series, or to any suit instituted by any Holder for the enforcement of the payment of the principal of or interest on any Security on or after the maturity of such Security. SECTION 5.15. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 5.16. Notice to the Callholder of an Event of Default. The Company shall give prompt notice to the Callholder if an Event of Default shall have occurred. 45 ARTICLE 6 THE TRUSTEE SECTION 6.01. Certain Duties and Responsibilities. The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. SECTION 6.02. Notice of Defaults. The Trustee shall give the Holders notice of any default hereunder as and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default of the character specified in Section 5.01(3), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term "default" means any event which is, or after notice or lapse of time or both would become, an Event of Default. SECTION 6.03. Certain Rights of Trustee. Subject to the provisions of Section 6.01: (a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors of the Company may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; 46 (d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit; (g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; (h) the Trustee shall not be charged with knowledge of any Default or Event of Default (except as provided in Section 5.01(4)) with respect to the Securities unless either (i) a Responsible Officer shall have actual knowledge of such Default or Event of Default or (ii) written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on such Securities or by any Holder of such Securities; and (i) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. SECTION 6.04. Not Responsible for Recitals. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. 47 SECTION 6.05. May Hold Securities. The Trustee, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 6.08 and 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent. SECTION 6.06. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company. SECTION 6.07. Compensation and Reimbursement. The Company agrees (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the reasonable costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The obligations of the Company under this Section 6.07 shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section 6.07, the Trustee shall have a Lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on the Securities. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after a Default or an Event of Default specified in Section 5.01(5) or 5.01(6) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are 48 intended to constitute expenses of administration under U.S. Code, Title 11 or any other similar foreign, federal or state law for the relief of debtors. SECTION 6.08. Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. SECTION 6.09. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 6.10. Resignation and Removal; Appointment of Successor.(a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with Section 6.08 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or 49 (2) the Trustee shall cease to be eligible under Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by a Company Order may remove the Trustee, or (ii) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Company Order, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to all Holders in the manner provided in Section 1.06. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 6.11. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring 50 Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 6.13. Preferential Collection of Claims Against. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor). ARTICLE 7 HOLDERS' LISTS AND REPORTS BY TRUSTEE SECTION 7.01. Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee 51 (a) semiannually, not more than 15 days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of such Regular Record Date, and (b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar; provided, however, that no such list need be furnished so long as the Trustee is acting as Security Registrar. SECTION 7.02. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.01 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished. (b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 7.03. Reports by Trustee. (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. Reports so required to be transmitted at stated intervals of not more than 12 months shall be transmitted no later than January 31, in each calendar year, commencing in January, 1999. (b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when the Securities are listed on any stock exchange. 52 SECTION 7.04. Reports by Company. The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. In the event the Company is not subject to Section 13 or 15(d) of the Exchange Act, it shall file with the Trustee upon request the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act. ARTICLE 8 CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 8.01. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless: (1) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction and treating any Indebtedness which becomes an obligation of the Company as a result of such transaction as having been incurred by the Company at the 53 time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article. SECTION 8.02. Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 8.01, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE 9 SUPPLEMENTAL INDENTURE SECTION 9.01. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders or the Callholder, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders, or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default for the benefit of the Holders; or 54 (4) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture; provided that such action pursuant to this Clause (4) shall not adversely affect the interests of the Holders or the rights of the Callholder hereunder in any material respect. SECTION 9.02. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby, (1) change the Stated Maturity of the principal of, or any instalment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon, or change the place of payment where, or the coin or currency in which, any Security or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof, or (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section, Section 5.13 or Section 10.11, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby; 55 provided, further, that no such supplemental indenture shall modify, amend or eliminate any provision in a way which materially adversely affects the interest of the Callholder without the prior written consent of the Callholder. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 9.03. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, in addition to the documents required by Section 1.02, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.05. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 9.06. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. 56 ARTICLE 10 COVENANTS SECTION 10.01. Payment of Principal and Interest. The Company shall duly and punctually pay the principal of and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 10.02. Maintenance of Office or Agency. The Company shall maintain in the Borough of Manhattan, The City of New York, an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside the Borough of Manhattan, The City of New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York, for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 10.03. Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it shall, on or before each due date of the principal of or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and shall promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents, it will, prior to each due date of the principal of or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as 57 provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act. The Company shall cause each Paying Agent other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (i) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent as such. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Security and remaining unclaimed for two years after such principal or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining shall be repaid to the Company. SECTION 10.04. Statement by Officers as to Default. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the 58 performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 10.05. Existence. Subject to Article Eight, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders. SECTION 10.06. Liens. The Company shall not, and shall not permit any Subsidiary to issue, assume, incur or guarantee any Indebtedness secured by a Lien, except Permitted Liens, on any Principal Property or any shares of Capital Stock of any Subsidiary ("Secured Debt"), without at the same time effectively providing that the Securities shall be secured equally and ratably with (or prior to) the Indebtedness so secured for so long as such Indebtedness is so secured, unless after giving effect thereto, the aggregate amount of Secured Debt, together with all Attributable Debt of the Company and its Subsidiaries in respect of Restricted Sale/Leaseback Transactions would not exceed 20% of Consolidated Net Tangible Assets. SECTION 10.07. Limitation on Restricted Sale/Leaseback Transactions. The Company shall not, and shall not permit any Subsidiary to, enter into, assume, guarantee or otherwise become liable with respect to any Restricted Sale/Leaseback Transaction, unless after giving effect thereto the aggregate amount of Attributable Debt of the Company and its Subsidiaries in respect of Restricted Sale/Leaseback Transactions, together (without duplication) with all Secured Debt then outstanding, would not exceed 20% of Consolidated Net Tangible Assets. SECTION 10.08. Reports and Delivery of Certain Information. Whether or not required by the rules and regulations of the Commission, so long as any Securities are outstanding, the Company shall furnish to the Holders of the Securities (i) all quarterly and annual financial information that is substantially equivalent to that which would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and, with respect to the annual information only, a report thereon by the Company's certified independent 59 accountants and (ii) all reports that are substantially equivalent to that which would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company shall file a copy of all such information with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to investors who request it in writing. So long as any of the Securities remain Outstanding, the Company shall make available to any prospective purchaser of Securities or beneficial owner of Securities in connection with any sale thereof the information required by Rule 144A(d)(4) under the Securities Act, until such time as the Company has either exchanged the Securities for securities identical in all material respects which have been registered under the Securities Act or until such time as the Holders thereof have disposed of such Securities pursuant to an effective registration statement under the Securities Act. SECTION 10.09. Resale of Certain Securities. During the period beginning on the Issue Date and ending on the date that is two years from the Issue Date, the Company shall not, and shall not permit any of its "affiliates" (as defined under Rule 144 under the Securities Act or any successor provision thereto) to, resell any Securities which constitute "restricted securities" under Rule 144 that have been reacquired by any of them. The Trustee shall have no responsibility in respect of the Company's performance of its agreement in the preceding sentence. SECTION 10.10. Book-Entry System. If the Securities cease to trade in the Depositary's book-entry settlement system, the Company covenants and agrees that it shall use reasonable efforts to make such other book-entry arrangements that it determines are reasonable for the Securities. SECTION 10.11. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 10.06 and 10.07 if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities shall, by Act of such Holders, either Waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect. 60 ARTICLE 11 DEFEASANCE AND COVENANT DEFEASANCE SECTION 11.01. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may elect, at its option at any time, to have Section 11.02 or Section 11.03 applied to the Outstanding Securities upon compliance with the conditions set forth below in this Article. Any such election shall be evidenced by a Board Resolution. SECTION 11.02. Defeasance and Discharge. Upon the Company's exercise of its option (if any) to have this Section applied to the Outstanding Securities, the Company shall be deemed to have been discharged from its obligations with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 11.04 are satisfied (hereinafter called "Defeasance"). For this purpose, such Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), subject to the following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of such Securities to receive, solely from the trust fund described in Section 11.04 and as more fully set forth in such Section, payments in respect of the principal of and interest on such Securities when payments are due, (2) the Company's obligations with respect to such Securities under Sections 3.04, 3.05, 3.06, 10.02 and 10.03, (3) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (4) this Article. Subject to compliance with this Article, the Company may exercise its option (if any) to have this Section applied to the Outstanding Securities notwithstanding the prior exercise of its option (if any) to have Section 11.03 applied to such Securities. SECTION 11.03. Covenant Defeasance. Upon the Company's exercise of its option (if any) to have this Section applied to any Securities, (1) the Company shall be released from its obligations under Sections 10.06 through 10.08, inclusive and (2) the occurrence of any event specified in Sections 5.01(3) (with respect to any of Sections 10.06 through 10.08, inclusive) or 5.01(4) shall be deemed not to be or result in an Event of Default, in each case with respect to such Securities as provided in this Section on and after the date the conditions set forth in Section 11.04 are satisfied (hereinafter called "Covenant Defeasance"). For this purpose, such Covenant Defeasance means that, with respect to such Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such specified Section 61 (to the extent so specified in the case of Section 5.01(3)), whether directly or indirectly by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 11.04. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to the application of Section 11.02 or Section 11.03 to the then Outstanding Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee which satisfies the requirements contemplated by Section 6.09 and agrees to comply with the provisions of this Article applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefits of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or any such other qualifying trustee) to pay and discharge, the principal of and interest on such Securities on the respective Stated Maturities, in accordance with the terms of this Indenture and such Securities. As used herein, "U.S. Government Obligation" means (x) any security which is (i) a direct obligation of the United States of America for the payment of which the full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (y) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in Clause (x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. 62 Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt. (2) In the event of an election to have Section 11.02 apply to such Securities, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this instrument, there has been a change in the applicable Federal income tax law, in either case (A) or (B) to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit, Defeasance and discharge to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit, Defeasance and discharge were not to occur. (3) In the event of an election to have Section 11.03 apply to such Securities, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit and Covenant Defeasance to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit and Covenant Defeasance were not to occur. (4) The Company shall have delivered to the Trustee an Officer's Certificate to the effect that such Securities, if then listed on any securities exchange, will not be delisted as a result of such deposit. (5) No event which is, or after notice or lapse of time or both would become, an Event of Default with respect to such Securities shall have occurred and be continuing at the time of such deposit or, with regard to any such event specified in Sections 5.01(5) and 5.01(6), at any time on or prior to the 90th day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until after such 90th day). (6) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming all Securities are in default within the meaning of such Act). (7) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement 63 or instrument to which the Company is a party or by which the Company is bound. (8) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act unless such trust shall be registered under such Act or exempt from registration thereunder. (9) The Company shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with. SECTION 11.05. Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 10.03, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee or other qualifying trustee (solely for purposes of this Section and Section 11.06, the Trustee and any such other trustee are referred to collectively as the "Trustee") pursuant to Section 11.04 in respect of the Outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any such Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal and interest, but money so held in trust need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 11.04 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Securities. Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 11.04 with respect to the Outstanding Securities which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect the Defeasance or Covenant Defeasance, as the case may be, with respect to such Securities. 64 SECTION 11.06. Reinstatement. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article with respect to the Outstanding Securities by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations under this Indenture and such Securities from which the Company has been discharged or released pursuant to Section 11.02 or 11.03 shall be revived and reinstated as though no deposit had occurred pursuant to this Article with respect to such Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to Section 11.05 with respect to such Securities in accordance with this Article; provided, however, that if the Company makes any payment of principal of or interest on any such Security following such reinstatement of its obligations, the Company shall be subrogated to the rights (if any) of the Holders of such Securities to receive such payment from the money so held in trust. ARTICLE 12 CALL AND PUT OPTIONS SECTION 12.01. Call Option. (a) The Company (or its successors or assigns) shall have the right to purchase the Securities from the Holders on the Coupon Reset Date, in whole but not in part (the "Call Option"), in exchange for an amount equal to the Call Price. The Company, as holder of the Call Option, or any Person to whom the Call Option is assigned in accordance with subsection (d) below, is referred to herein as the "Callholder". If the Callholder exercises its rights under the Call Option in accordance with Section 12.01(b) hereof, then (i) subject to Section 12.05, not later than 9:00 a.m., New York time, on the Business Day prior to the Coupon Reset Date, the Callholder shall deliver an amount equal to the Call Price in U.S. Dollars in immediately available funds to the Trustee for payment of the Call Price on the Coupon Reset Date; (ii) if the Callholder is not the Company, promptly upon delivery by the Callholder of the Call Price to the Trustee (and in no event later than 9:00 a.m. on the Business Day prior to the Coupon Reset Date), the Trustee shall notify the Company of such delivery of and receipt of the Call Price; and 65 (iii) the Holders of the Securities shall be required to deliver the Securities to the Callholder against payment therefor on the Coupon Reset Date. If the Call Option has not been exercised, or in the event the Callholder is not required or fails to deliver the Call Price to the Trustee at or prior to 9:00 a.m., New York time, on the Business Day prior to the Coupon Reset Date, the Trustee shall give notice of such occurrence to the Company. (b) The Callholder must, in order to exercise its rights under the Call Option, deliver irrevocable, written notice (the "Call Notice") to the Company (unless the Company shall be the Callholder) and to the Trustee of its exercise of the Call Option prior to 4:00 p.m., New York time, on the day that is fifteen (15) calendar days prior to the Coupon Reset Date. The Call Notice shall contain the requisite delivery details, including the identification of the Callholder's Depositary account. The Trustee shall send a copy of the Call Notice to the Holders of the Securities no later than the immediately succeeding Business Day. No Holder of Securities shall have any rights or claims against the Callholder as a result of the Callholder electing to purchase or not purchase the Securities. (c) If the Callholder elects to exercise the Call Option, the obligation of the Callholder to pay the Call Price and the corresponding obligation of the Trustee to deliver the Securities to the Callholder pursuant to exercise of the Call Option is subject to the following conditions precedent that, after the Call Notice is given: (i) (x) no Event of Default with respect to the Securities or (y) no (A) event of Default with respect to any senior indebtedness of the Company other than the Securities (as such event of default is defined in any notes, indenture, credit agreement, or other similar document relating to such senior indebtedness) which shall have resulted in such senior indebtedness becoming due and payable under such document before it would otherwise have been due and payable or (B) a default in making a payment on the due date thereof under documents relating to senior indebtedness (after giving effect to any applicable notice requirement or grace period) shall have occurred; provided that the aggregate amount relating to the events specified in clause (A) and (B) hereof is not less than $50,000,000; (ii) and until 9:00 a.m. New York time, on the Business Day prior to the Coupon Reset Date, no Market Disruption Event shall have occurred; 66 (iii) at least three Dealers shall have provided timely Bids in the manner provided in Section 12.04 hereof; (iv) no legal defeasance or covenant defeasance with respect to the Securities shall have occurred; and (v) none of the Securities shall have been purchased by the Company. The Call Option will automatically and immediately terminate without any further action by the Callholder, Company or Trustee, and the Trustee will exercise the Put Option pursuant to Section 12.02 on behalf of the Holders, upon the occurrence of any one or more of the following events: (i) an Event of Default with respect to the Securities under Section 5.01(1), (2), (5) or (6) hereof; (ii) prior to 9:00 a.m. New York time on the Business Day prior to the Coupon Reset Date, a Market Disruption Event shall have occurred; (iii) after the Call Notice is given, at least three Dealers shall have failed to provide timely Bids in the manner provided in Section 12.04 hereof; and (iv) a legal defeasance or covenant defeasance with respect to the Securities shall have occurred. The Call Option will immediately terminate upon the election of the Callholder following the occurrence of any one or more of the following events: (i) an Event of Default with respect to the Securities under Section 5.01(3) or (4) hereof; (ii) (A) an event of default with respect to any senior indebtedness of the Company other than the Notes (as such event of default is defined in any notes, indenture, credit agreement, or other similar document relating to such senior indebtedness) which shall have resulted in such senior indebtedness becoming due and payable under such document before it would otherwise have been due and payable or (B) a default in making a payment on the due date thereof under documents relating to senior indebtedness (after giving effect to any applicable notice requirement or grace period) shall have occurred; provided that the 67 aggregate amount relating to the events specified in Clause (A) and (B) hereof is not less than $50,000,000; and (iii) any or all of the Securities shall have been purchased by the Company. The Company will promptly notify the Trustee in writing of any termination of the Call Option. (d) The Callholder may at any time assign its rights and obligations under the Call Option; provided that (i) such rights and obligations are assigned in whole and not in part, and (ii) such assigning Callholder provides the Company (unless the Company is a participant in the assignment) and the Trustee with written notice of such assignment contemporaneously with such assignment. Upon receipt of notice of assignment, the Trustee shall treat the assignee as the Callholder for all purposes hereunder. A Callholder may assign its rights under the Call Option without notice to, or consent of, the Holders of the Securities. SECTION 12.02. Put Option. (a) By its purchase of a Security, each Holder irrevocably agrees that if either (i) the Call Option has not been exercised, or (ii) the Callholder is not required, as set forth in Section 12.01(c), or fails to deliver the Call Price to the Trustee not later than 9:00 a.m., New York time, on the Business Day prior to the Coupon Reset Date, the Trustee shall, for and on behalf of the Holders of the Securities, have the right to require the Company to purchase the Securities, in whole but not in part, on the Coupon Reset Date (the "Put Option") at a purchase price equal to 100% of the aggregate principal amount thereof and accrued and unpaid interest thereon (the "Put Redemption Price"). The Trustee shall be required to exercise the Put Option, for and on behalf of the Holders, if the Call Option has not been exercised or in the event the Callholder is not required or fails to deliver the Call Price to the Trustee when due. If the Put Option is exercised, the Trustee shall promptly thereafter notify the Holders of the Securities that the Trustee, on behalf of the Holders, has exercised the Put Option. (b) If the Trustee exercises the Put Option, then the Company shall deliver the Put Redemption Price to the Trustee by no later than 12:30 p.m., New York time, on the Coupon Reset Date, and the Holders of the Securities shall be required to deliver the Securities to the Company against payment therefor on the Coupon Reset Date. No Holder of any Securities or any interest therein has the right to consent or object to the Trustee's exercise of the Put Option. SECTION 12.03. Calculation Agent. (a) The Company shall appoint a calculation agent with respect to the Securities (the "Calculation Agent") which 68 initially shall be UBS Securities LLC, as acknowledged in the letter attached hereto as Appendix A. (b) The Calculation Agent shall incur no liability for, or in respect of, any action taken, omitted to be taken or suffered by it in such capacity in reliance upon any certificate, affidavit, instruction, notice, request, direction, order, statement or other paper, document or communication reasonably believed by it to be genuine. Any order, certificate, affidavit, instruction, notice, request, direction, statement or other communication from the Company made or given by it and sent, delivered or directed to the Calculation Agent under, pursuant to, or as permitted by, any provision of this Indenture shall be sufficient for purposes of this Indenture if such communication is in writing and signed by any officer or attorney-in-fact of the Company. The Calculation Agent may consult with counsel satisfactory to it, and the advice of such counsel shall constitute full and complete authorization and protection of such Calculation Agent with respect to any action taken, omitted to be taken or suffered by it hereunder in good faith and in accordance with and in reliance upon the advice of such counsel. (c) The Calculation Agent, in its individual capacity, may, as if it were not the Calculation Agent, (i) buy, sell, hold and deal in Securities and may exercise any vote or join in any action which any Holder of Securities may be entitled to exercise or take or (ii) engage in any financial or other transaction with the Company or any of its Affiliates. (d) In acting in connection with the Securities, the Calculation Agent shall be obligated only to perform such duties as are specifically set forth herein, and no other duties or obligations on the part of the Calculation Agent, in its capacity as such, shall be implied by this Indenture. In acting under this Indenture, the Calculation Agent in its capacity as such does not assume any obligation towards, or any relationship of agency or trust for or with the Holders of the Securities. (e) The Calculation Agent may resign at any time as Calculation Agent, such resignation to be effective ten Business Days after the delivery to the Company and the Trustee of written notice of such resignation. In such case, the Company shall appoint a successor Calculation Agent. In addition, the Company may at any time remove the existing Calculation Agent and appoint a successor Calculation Agent if Reasonable Cause exists at such time by giving written notice to the existing Calculation Agent and the Trustee and specifying the date when the termination shall become effective. "Reasonable Cause" shall mean the failure or inability of the existing Calculation Agent to perform any obligations it may have hereunder for any reason. 69 (f) Any successor Calculation Agent appointed by the Company pursuant to the provisions of subsection (e) shall execute and deliver to the predecessor Calculation Agent, the Company and the Trustee an instrument accepting such appointment and thereupon the successor Calculation Agent shall, without any further act or instrument, become vested with all the rights, immunities, duties and obligations of the initial Calculation Agent, with like effect as if originally named as initial Calculation Agent hereunder, and the predecessor Calculation Agent shall thereupon be obligated to deliver, and the successor Calculation Agent shall be entitled to receive, copies of any available records maintained by the predecessor Calculation Agent in connection with the performance of its obligations hereunder. The Company shall notify the Trustee in writing upon any such appointment. (g) The Company shall indemnify and hold harmless the Calculation Agent and any successor thereof, and its officers and employees, from and against all actions, claims, damages, liabilities, losses and reasonable expenses (including reasonable legal fees and reasonable disbursements) relating to or arising out of actions or omissions of the Calculation Agent hereunder, except actions, claims, damages, liabilities, losses and expenses caused by the bad faith, gross negligence or wilful misconduct of the Calculation Agent or its officers or employees. This subsection shall survive the termination of the Indenture and the payment in full of all obligations under the Securities, whether by redemption, repayment or otherwise. (h) Notwithstanding any other provision of this Indenture, the parties hereto acknowledge that (i) the rights and obligations of the Calculation Agent hereunder are those of the Calculation Agent and its legal successors, and accordingly that this Indenture will survive any merger of the Calculation Agent with an affiliate of Swiss Bank Corporation ("SBC") or Union Bank of Switzerland and (ii) Union Bank of Switzerland and its Affiliates may provide to SBC and its Affiliates information related to the transactions contemplated hereby or the other parties to such transactions for purposes related to the effectuation of the merger of Union Bank of Switzerland and SBC. Any entity into which the Calculation Agent may be merged, converted or consolidated, or any entity resulting from any merger, conversion or consolidation to which the Calculation Agent may be a party, or any entity to which the Calculation Agent may sell or otherwise transfer all or substantially all of its business, shall, to the extent permitted by applicable law, automatically succeed the Calculation Agent. SECTION 12.04. Coupon Reset Process. If the Callholder has exercised the Call Option, the Company and the Calculation Agent shall complete the following steps (the "Coupon Reset Process") in order to determine the interest rate ("Coupon Reset Rate") to be paid on the Securities from, and including the 70 Coupon Reset Date to, but excluding, the Final Maturity Date; provided that the Coupon Reset Process shall be discontinued if, at any time prior to and including 9:00 a.m., New York time, on the Business Day prior to the Coupon Reset Date, (i) an event shall have occurred following which the Callholder is not required to pay the Call Price pursuant to Section 12.01(c) hereof or (ii) the Call Option shall have terminated pursuant to Section 12.01(c) hereof. The Company and the Calculation Agent shall use reasonable efforts to cause the actions described below to be completed in a timely manner. (i) The Company shall provide the Calculation Agent with a list (a "Dealer List"), no later than seven Business Days prior to the Coupon Reset Date, containing the names and addresses of five dealers, one of which shall be UBS Securities LLC or its successor, from which it desires the Calculation Agent to obtain the Bids for the purchase of the Securities. (ii) Within one Business Day following receipt by the Calculation Agent of the Dealer List, the Calculation Agent shall provide to each dealer (a "Dealer") on the Dealer List (a) a copy of the Offering Memorandum, (b) a copy of the form of the Securities, (c) a written request that each Dealer submit a Bid to the Calculation Agent at 12:00 noon, New York time (the "Bid Deadline"), on the third Business Day prior to the Coupon Reset Date (the "Bid Date") and (d) an estimate of the Purchase Price (which shall be stated as a U.S. Dollar amount and be calculated by the Calculation Agent in accordance with clause (iii) below). "Bid" means an irrevocable written offer given by a Dealer for the purchase of the Securities at the Purchase Price (as defined herein), such purchase to settle on the Coupon Reset Date, and such Purchase Price shall be quoted by such Dealer as a stated yield to maturity on the Securities (the "Yield to Maturity"). (iii) The purchase price to be paid for the Securities by a Dealer (the "Purchase Price") shall be equal to (x) the aggregate principal amount of the Securities plus (y) a premium (the "Securities Premium") which shall be equal to the excess, if any, on the Coupon Reset Date of (A) the discounted present value to the Coupon Reset Date of a bond with a maturity of the Final Maturity Date which has an interest rate of 5.69%, semiannual interest payments on each May 1 and November 1 commencing November 1, 2003, and a principal amount of $100,000,000, and which is discounted at a rate equal to the Treasury Rate over (B) $100,000,000. "Treasury Rate" means the per annum rate equal to the offer side yield to maturity of the current on-the-run ten-year United States Treasury Security 71 appearing on Telerate page 500, or any successor page, at 11:00 a.m., New York time, on the Bid Date (or such other date or time that may be agreed upon by the Company and the Calculation Agent) or, if such rate does not appear on Telerate page 500, or any successor page, at such time or date, the rate appearing on GovPx End-of-Day Pricing at 3:00 p.m., New York time, on the Bid Date. (iv) Immediately after receiving the Bids on the Bid Date, the Calculation Agent shall provide written notice to the Company, setting forth (a) the names of each of the Dealers from whom the Calculation Agent received such Bids on the Bid Date, (b) the Bid submitted by each such Dealer and (c) the Purchase Price. Except as provided in the first paragraph of this Section 12.04, on the day that Bids are received by the Calculation Agent, the Calculation Agent shall select the Bid with the lowest Yield to Maturity (the "Selected Bid") from the Bids received by the Bid Deadline, provided, that at least three Bids are properly received in a timely manner, and establish the Coupon Reset Rate (the "Coupon Reset Rate") equal to the interest rate which would amortize the Securities Premium fully over the remaining term of the Securities at the Yield to Maturity indicated by the Selected Bid; provided, however, that if any two or more of the lowest Bids submitted are equivalent, the Company shall in its sole discretion select any of such equivalent Bids (and such Bid selected shall be the Selected Bid). (v) Immediately after calculating the Coupon Reset Rate, the Calculation Agent shall provide written notice to the Company and the Trustee, setting forth such Coupon Reset Rate. (vi) The Company shall thereafter establish the Coupon Reset Rate as the new interest rate on the Securities, effective from and including the Coupon Reset Date to, but not including, the Final Maturity Date, by delivery to the Trustee on or before the Coupon Reset Date of an Officer's Certificate setting forth such Coupon Reset Rate. (vii) The Callholder shall sell the Securities to the Dealer that made the Selected Bid at the Purchase Price, such sale to be settled on the Coupon Reset Date in immediately available funds. 72 SECTION 12.05. The Company as Callholder. If the Company becomes the Callholder subsequent to an exercise of the Call Option, the Company, so long as it shall be the Callholder, (a) shall have no obligation (i) to initiate, participate in or conclude, as the case may be, the Coupon Reset Process or (ii) to pay the Call Price by 9:00 a.m. on the Business Day prior to the Coupon Reset Date; and (b) if the Company does not pay the Call Price by 9:00 a.m. on the Business Day prior to the Coupon Reset Date, the Trustee shall exercise the Put Option pursuant to Section 12.02 on behalf of the Holders. SECTION 12.06. Third Party Beneficiaries. Each of the Callholder and the Calculation Agent shall be a third party beneficiary of this Indenture and may enforce the obligations of the Company and of the Trustee hereunder running in favor of the Callholder and the Calculation Agent, as applicable. --------------------------------- This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 73 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. AVON PRODUCTS, INC. By: /s/ Dennis Ling --------------------------------- Name: Dennis Ling Title: Vice President & Treasurer THE CHASE MANHATTAN BANK By: /s/ Kathleen Perry --------------------------------- Name: Kathleen Perry Title: Second Vice President May 11, 1998 Acknowledgment -------------- Avon Products, Inc. 1345 Avenue of the Americas New York, NY 10105-0196 Attention: Treasurer The Chase Manhattan Bank 450 West 33rd Street New York, NY 10001 Attention: Global Trust Services Ladies and Gentlemen: Reference is made to the Indenture dated as of May 11, 1998 (the "Indenture") between Avon Products, Inc., a New York corporation, and The Chase Manhattan Bank, a banking corporation duly organized under the laws of the State of New York, as Trustee, in connection with the offering of $100,000,000 aggregate principal amount of 6.25% Putable/Callable Notes due May 1, 2018, Putable/Callable May 1, 2003. Capitalized terms used but not defined herein shall have the meaning given to such terms in the Indenture. The undersigned hereby acknowledges its obligations as Calculation Agent under Article 12 of the Indenture. The acknowledgment shall be binding upon any Persons who are successors to the Calculation Agent Very truly yours, UBS Securities LLC By: /s/ Bruce Wides --------------------------------- Name: Bruce Wides Title: Managing Director Appendix B ---------- Form of Put Notice to be Delivered by the Trustee to the Company Upon Exercise of the Put Option ---------------------------------------------- Avon Products, Inc. 1345 Avenue of the Americas New York, New York 10105 Attention: Treasurer The Chase Manhattan Bank, as Trustee for Avon Products, Inc.'s $100 million aggregate principal amount of 6.25% Putable/Callable Notes due May 1, 2018, Putable/Callable May 1, 2003, issued under the Indenture dated as of May 11, 1998, (the "Indenture") hereby gives notice of exercise of the Put Option (as defined in the Indenture) pursuant to Section 12.02 of the Indenture. The Chase Manhattan Bank ________________________________ Authorized Officer 76 EX-24 10 exhibit24.txt AVON PRODUCTS, INC. EXHIBIT 24 EXHIBIT 24 FORM 10-K POWER OF ATTORNEY - ----------------- KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints GILBERT L. KLEMANN, II, C. RICHARD MATHEWS, and KATHERINE O'HARA 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 2001 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 February 1, 2002. Signature Title - --------- ----- /s/Andrea Jung Chairman of the Board and Chief Andrea Jung Executive Officer and Director - Principal Executive Officer /s/Susan J. Kropf President and Chief Operating Officer Susan J. Kropf and Director /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/ W. Don Cornwell Director W. Don Cornwell /s/Edward T. Fogarty Director Edward T. Fogarty /s/Stanley C. Gault Director Stanley C. Gault /s/Fred Hassan Director Fred Hassan /s/Maria Elena Lagomasino Director Maria Elena Lagomasino /s/Ann S. Moore Director Ann S. Moore /s/ Paula Stern Director Paula Stern /s/Lawrence A. Weinbach Director Lawrence A. Weinbach EX-13 11 exhibit13.txt AVON PRODUCTS, INC. EXHIBIT 13 Management's Discussion and Analysis Avon Products, Inc. Dollars in millions, except share data 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. Such forward-looking statements are based on management's reasonable current assumptions and expectations. Such forward-looking statements involve 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") to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management's expectations. Such factors include, among others, the following: general economic and business conditions in the Company's markets; Avon's ability to implement its business strategy; Avon's ability to successfully identify new business opportunities; Avon's access to financing; the impact of substantial currency fluctuations in Avon's principal foreign markets; Avon's ability to attract and retain key executives; Avon's ability to achieve anticipated cost savings and profitability targets; changes in the industry; competition; the effect of regulatory, tax and legal proceedings and restrictions imposed by domestic and foreign governments; and other factors discussed in Item 1 of Avon'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 Avon. Neither Avon nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements, nor undertakes an obligation to update them. The following discussion of the results of operations and financial condition of Avon should be read in conjunction with the information contained in the Consolidated Financial Statements and Notes thereto. These statements have been prepared in conformity with generally accepted accounting principles in the U.S. and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. On an ongoing basis, management reviews its estimates, including those related to revenue recognition, allowances for doubtful accounts receivable, allowances for sales returns, provisions for inventory obsolescence, income taxes and tax valuation reserves, loss contingencies and the determination of discount and other rate assumptions for pension, post-retirement and post- employment benefit expenses. Changes in facts and circumstances may result in revised estimates, which are recorded in the period they become known. Critical Accounting Policies and Estimates Avon believes the accounting policies below represent its critical accounting policies due to the estimation processes involved in each. See Note 1 of the Notes to Consolidated Financial Statements for a detailed discussion on the application of these and other accounting policies. -1- Revenue recognition - Avon recognizes revenue upon delivery, when both title and risks and rewards of ownership pass to the independent Representatives. Avon uses estimates in determining revenue and operating profit for orders that have been shipped but not delivered as of the end of the period. These estimates are based on daily sales levels, delivery lead times, gross margin and variable expense ratios. It is possible that future results of operations for any particular quarterly or annual period could be materially affected by changes in Avon's assumptions. Allowances for doubtful accounts receivable - Avon maintains allowances for doubtful accounts for estimated losses resulting from the inability of its Representatives to make required payments. If the financial condition of Avon's Representatives were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Allowances for sales returns - Avon records a provision for estimated sales returns based on historical experience with product returns. If the historical data Avon uses to calculate these estimates does not properly reflect future returns, additional allowances may be required. Provisions for inventory obsolescence - Avon writes down its inventory for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value based on assumptions about future sales and disposition plans. If actual sales are less favorable than those projected by management, additional inventory write- downs may be required. Income taxes and valuation reserves - Avon records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While Avon has considered projected future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance, in the event Avon were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase earnings in the period such determination was made. Likewise, should Avon determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to earnings in the period such determination was made. Contingencies - Avon determines whether to disclose and accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable and, where reasonable estimates can be made of the amount of potential loss, of the materiality of the loss contingency, in accordance with Statement of Financial Accounting Standards ("FAS") No. 5, "Accounting for Contingencies". Management's assessment is developed in consultations with the Company's outside advisors and is based on an analysis of possible outcomes under various strategies. Loss contingency assumptions involve judgements that are inherently subjective and frequently involve matters that are in litigation, which by its nature is unpredictable. Management believes that its loss contingency assumptions are sound, but because of the subjectivity involved and the unpredictable nature of the subject matter at issue, management's assumptions may prove to be incorrect, which could materially impact the Consolidated Financial Statements in future periods. -2- Business The Company is a global manufacturer and marketer of beauty and related products. The product categories include Beauty which consists of cosmetics, fragrance and toiletries ("CFT"); Beauty Plus which consists of jewelry, watches and apparel and accessories; and Beyond Beauty which consists of home products, gift and decorative and candles. Health and Wellness products are divided among all three product categories based on product segmentation. Avon's business is primarily 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. Additionally, Avon launched a Retail business in the U.S. in the third quarter of 2001. Results of Operations Consolidated - Net income for 2001 was $430.0 compared with $478.4 in 2000. Basic and diluted earnings per share in 2001 were $1.82 and $1.79, respectively, compared with $2.01 and $1.99, respectively, for 2000. Net income for 1999 was $302.4 and basic and diluted earnings per share were $1.18 and $1.17, respectively. The 2001 results included the following items: special and non-recurring charges of $97.4 pretax ($68.3 after-tax, or $.28 per diluted share), primarily related to workforce reduction programs and facility rationalizations (see Note 13 of the Notes to Consolidated Financial Statements); an Asset impairment charge of $23.9 pretax ($14.5 after-tax, or $.06 per diluted share) related to the write off of the remaining carrying value of an order management software system that had been under development (see Notes 14 and 16 of the Notes to Consolidated Financial Statements); a charge of $6.4 pretax ($3.4 after-tax, or $.01 per diluted share) related to the settlement of a contested tax assessment in Argentina (see Note 14 of the Notes to Consolidated Financial Statements); and a Contract settlement gain, net of related expenses, of $25.9 pretax ($15.7 after-tax, or $.06 per diluted share) related to the cancellation of a retail agreement between Avon and Sears Roebuck & Company ("Sears")(see Note 15 of the Notes to Consolidated Financial Statements). The 2000 results included the settlement of a federal income tax refund, which was received in January 2001, consisting of $32.5 of tax and $62.7 of interest related to the years ended December 31, 1982, 1983, 1985 and 1986. For the year ended December 31, 2000, Avon recognized $40.1 ($.16 per diluted share) as an income tax benefit in the Consolidated Statements of Income, resulting from the impact of the tax refund offset by taxes due on interest received and other related tax obligations. The 1999 results included special and non-recurring charges of $151.2 pretax ($121.9 after-tax, or $.47 per diluted share) related to Avon's Business Process Redesign ("BPR") program. Effective January 1, 2001, Avon adopted FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. In accordance with the provisions of FAS No. 133 and FAS No. 138, Avon recorded a charge to earnings of $0.3, net of a tax benefit of $0.2, in the first quarter of 2001 and a charge to Shareholders' (deficit) equity of $3.9, -3- net of a tax benefit of $2.1, which is included in Accumulated other comprehensive loss in the Consolidated Balance Sheets. These charges are reflected as a Cumulative effect of an accounting change in the accompanying Consolidated Financial Statements. See Note 2 of the Notes to Consolidated Financial Statements. Effective January 1, 2000, Avon changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements" (see Note 2 of the Notes to Consolidated Financial Statements). The cumulative effect of the change on prior years resulted in a charge of $6.7, net of a tax benefit of $3.5, or $.03 per diluted share, which is included in Net income for the year ended December 31, 2000. Consolidated net sales increased 5% in 2001 to $5.95 billion from $5.67 billion in 2000. Sales in North America increased 6% to $2.27 billion in 2001. International sales increased 4% to $3.68 billion in 2001 due to increases in Europe and Latin America, partially offset by a decline in the Pacific region. In 2000, consolidated net sales of $5.67 billion increased 7% from $5.29 billion in 1999. Sales in North America increased 5% to $2.15 billion in 2000. International sales increased 9% to $3.53 billion in 2000 due to strong growth in the Latin American and Pacific regions and, to a lesser extent, in the European region. Excluding the unfavorable impact of foreign currency translation, consolidated net sales increased 10% and 11% in 2001 and 2000, respectively. Other revenue includes shipping and handling fees billed to Representatives and totaled $42.5, $40.9 and $38.8 in 2001, 2000 and 1999, respectively. Cost of sales as a percentage of total revenue was 37.0% in 2001, compared with 37.1% in 2000 and 38.1% in 1999. The 2001 cost of sales included $2.5 of non-recurring charges related to inventory write-downs associated with facility closures. The 1999 cost of sales included $46.0 of non- recurring charges for inventory write-downs related to the closure of facilities, discontinuation of certain product lines, size-of-line reductions and a change in strategy for product dispositions. In 2001, gross margin was slightly favorable versus 2000 primarily due to improvements in Russia resulting from product sourcing benefits and a reduction in customs duties on certain products; the United Kingdom driven by favorable comparisons against product supply difficulties in 2000; the Philippines resulting from a change in product mix to higher priced products as well as vendor cost negotiations; and in the U.S. due to supply chain savings. These improvements were partially offset by a decline in gross margin in Poland mainly from favorable foreign exchange on inventory purchases in 2000 and pricing investments in 2001 to gain market share, as well as declines in gross margin in most Western European countries, which were negatively impacted by sales pressure associated with a weak economic environment. In 2000, gross margin was favorable versus 1999 due to improvements in all international regions, most significantly in the Pacific region, including Japan and China, as well as the Central and Eastern Europe region, due to lower product costs on imports from euro countries coupled with a shift in mix to higher margin products, and in Russia, due to a favorable comparison resulting from a discount pricing policy in 1999. Gross margins remained level with 1999 in Brazil and the U.S. These improvements were partially offset by declines in Puerto Rico, due to inventory variations related to the consolidation of operations, and in Mexico and the Philippines, resulting from higher sales of a lower margin mix of CFT products and selective price cuts to meet competition. -4- Marketing, distribution and administrative expenses of $2.93 billion in 2001 increased $128.9, or 5%, over 2000, but decreased as a percentage of total revenue to 48.9% from 49.1% in 2000. The improvement in the expense ratio was favorably impacted by improved expense ratios in Russia, China and the Ukraine from significant sales increases, and in the U.S. due to BPR savings. These improvements were partially offset by expenses associated with the U.S. Retail business and worldwide investments in consumer-related initiatives, such as incremental spending on advertising, sampling and brochure enhancements. Marketing, distribution and administrative expenses of $2.80 billion in 2000 increased $161.4, or 6%, over 1999, but decreased as a percentage of total revenue to 49.1% from 49.6% in 1999. The overall improvement in the expense ratio was due to a favorable expense ratio in Mexico, resulting from lower marketing and promotional expenses associated with product introductions, in Russia, due to strict expense controls, and in the Philippines and China, reflecting fixed administrative expenses on a higher sales base. Expense ratio improvements were partially offset by higher expenses in Argentina, reflecting increased advertising and brochure costs, in the United Kingdom, due to increased shipping and distribution costs from decreased capacity of shipping lines during transition to a new system, and in Puerto Rico, reflecting higher transitional expenses related to the consolidation of operations. Interest expense decreased $13.6 in 2001 to $71.1 primarily as a result of a decline in domestic interest rates in 2001. Interest expense increased $41.5 in 2000 to $84.7 primarily due to increased domestic borrowings related to the acceleration of Avon's share repurchase program and higher working capital requirements. Interest income increased $5.9 in 2001 to $14.4 primarily due to stronger cash flow levels during 2001. Interest income decreased $2.6 in 2000 to $8.5 primarily resulting from reduced interest rates in Brazil and Mexico during 2000. Other expense, net in 2001 of $27.0 was $5.5 unfavorable to 2000 mainly due to the settlement of a contested excise tax assessment in Argentina in 2001 (see Note 14 of the Notes to Consolidated Financial Statements), additional legal expenses in 2001, and unfavorable foreign exchange movements on the Mexican peso, British pound and Philippine peso contracts, partially offset by transaction gains on a U.S. dollar intercompany loan receivable in Argentina and favorable foreign exchange movements in 2001 on Japanese yen contracts. Other expense, net in 2000 was $10.8 unfavorable to 1999 mainly due to favorable foreign exchange in 1999 resulting from gains on Brazilian forward contracts and, to a lesser extent, a value added tax refund in China in 1999, partially offset by favorable comparisons versus 1999, primarily in Europe and the Pacific. The effective tax rate was 34.7% in 2001 compared with 29.2% for 2000. The effective tax rate was higher in 2001 versus 2000 due to a federal income tax refund in 2000 (see Note 6 of the Notes to Consolidated Financial Statements) and the tax benefit of the 2001 special and non-recurring charges (see Note 13 of the Notes to Consolidated Financial Statements), partially offset by the favorable impact of repatriation planning, the earnings mix and tax rates of international subsidiaries. The effective tax rate was 29.2% in 2000 compared with 40.3% in 1999. The effective tax rate was lower in 2000 versus 1999 due to a federal income tax refund in 2000, the settlement of foreign audits, dividend planning, -5- utilization of net operating loss carryforwards, the mix of earnings and tax rates of international subsidiaries, and the impact of the 1999 special and non-recurring charges. 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, 2001. Years ended December 31 2001 2000 1999
Net Operating Net Operating Net Operating Sales Profit(Loss) Sales Profit(Loss) Sales Profit(Loss) North America: U.S. $2,016.7 $ 373.4 $1,894.9 $ 343.5 $1,809.3 $329.3 U.S. Retail* 13.9 (25.9) 8.5 (4.5) 3.4 (2.7) Other** 242.6 32.7 244.5 29.2 237.6 34.5 Total 2,273.2 380.2 2,147.9 368.2 2,050.3 361.1 International: Latin America North*** 966.3 251.6 848.8 215.2 731.7 181.6 Latin America South*** 933.3 175.9 992.0 200.3 909.0 184.9 Latin America 1,899.6 427.5 1,840.8 415.5 1,640.7 366.5 Europe 1,009.6 167.0 885.6 129.5 878.0 126.2 Pacific 771.4 112.6 799.4 117.8 720.1 102.1 Total 3,680.6 707.1 3,525.8 662.8 3,238.8 594.8 Total from operations 5,953.8 1,087.3 5,673.7 1,031.0 5,289.1 955.9 Global expenses (1.8) (242.5) - (242.3) - (255.3) Contact settlement gain, net of related expenses - 25.9 - - - - Asset impairment charge - (23.9) - - - - Special and non-recurring charges**** - (97.4) - - - (151.2) Total $5,952.0 $ 749.4 $5,673.7 $ 788.7 $5,289.1 $ 549.4
*Includes U.S. Retail and Avon Centre. **Includes operating information for Canada and Puerto Rico. ***Latin America North primarily includes the markets of Mexico, Venezuela and Central America. Latin America South primarily includes the markets of Brazil, Argentina, Chile and Peru. Avon's operations in Mexico reported net sales for 2001, 2000 and 1999 of $620.7, $555.6 and $471.6, respectively. Avon's operations in Mexico reported operating profit for 2001, 2000 and 1999 of $154.8, $136.0 and $115.1, respectively. ****The $97.4 is included in the Consolidated Statements of Income as a Special charge ($94.9) and as inventory writedowns in Cost of sales ($2.5). -6- The following table presents consolidated net sales by classes of principal products, for the years ended December 31: 2001 2000 1999 Beauty* $3,730.5 $3,533.9 $3,220.8 Beauty Plus** 1,233.7 1,174.6 1,061.6 Beyond Beauty*** 987.8 965.2 1,006.7 Total net sales $5,952.0 $5,673.7 $5,289.1 *Beauty includes cosmetics, fragrances, and toiletries. **Beauty Plus includes fashion jewelry, watches and apparel and accessories. ***Beyond Beauty includes home products, gift and decorative and candles. Sales from Health and Wellness products are divided among the three categories based on product segmentations. To conform to the 2001 presentation, certain reclassifications were made to the prior periods' segment information. 2001 Compared to 2000 North America Net sales in North America grew 6% and operating profit increased 3% in 2001. The U.S business, which represents almost 90% of the North American segment, reported sales and operating profit growth of 6% and 9%, respectively. The sales increase in the U.S. resulted from a 3% increase in the number of active Representatives due to the successful implementation of Avon's career strategies, particularly Sales Leadership, as well as the strength of Avon's marketing plans. The 2001 sales increase was also driven by a 6% growth in units due to the success of the Kiss Goodbye to Breast Cancer lipstick campaign and inventory clearance programs, partially offset by a temporary pause in recruitment resulting from the events of September 11th. U.S. sales improvements resulted from the successful launch of the new Health and Wellness line of beauty, vitamin and fitness products. The Beauty category increased 4% with double-digit percentage increases in color cosmetics and hair care and a mid- single digit increase in skin care. Color had its second year of double-digit growth. The eye and lip segments led with strong performance in both new and existing areas. Primary drivers of growth were the focus and resources that supported the relaunch of key sub-brands: Beyond Color, with the introduction of Nutralush plumping lipstick, as well as Perfect Wear, with the introduction of EverGlaze Lip Ink. The company-wide Kiss Goodbye to Breast Cancer event was also critical to the color category's success in 2001. Hair care increased as a result of the strong performance of the Advance Techniques brand, including the introduction of the new color protection line. Skin care increased due to exceptional new products from Anew including Line Eliminator, Force Extra, and Pure O2 as well as a significant increase in existing Anew product sales. The personal care category was slightly down as strength in the specialty bath segment did not compensate for the inability to match Skin-So-Soft's 2000 record performance. Fragrance sales were flat on the year, with an increase in the fourth quarter reflecting the largest fragrance launch in Avon history, Little Black Dress. Sales in the Beauty Plus category also grew in 2001 due to increases -7- in apparel and accessories and watches, partially offset by a slight decline in jewelry. The growth in watches resulted from a strategic decision to offer more concepts as well as increased resourcing. Beyond Beauty sales grew in 2001, driven by an increase in gifts, partially offset by declines in toys and home entertainment. The gift line was up due to a successful fourth quarter holiday line. The operating profit increase in North America was primarily attributable to sales increases in the U.S., partially offset by costs associated with the Retail business, which launched in September 2001. Operating profit margin in North America declined 0.4 points for 2001 primarily due to investments associated with the U.S. Retail business, partially offset by an improvement in the U.S. The U.S. operating margin improved due to an increase in gross margin, the realization of certain process redesign savings and a favorable comparison to 2000 operating results which were negatively impacted by the costs associated with exiting certain Avon-owned Beauty Centers. Such improvements more than offset the higher 2001 investments associated with the launch of the Health and Wellness business and the U.S. Internet initiative. Avon launched the beComing brand in select J.C. Penney stores in the U.S. in the third quarter of 2001. The termination of a retail venture with Sears resulted in a gain in the third quarter of 2001 but will unfavorably impact subsequent periods due to the loss of anticipated contribution from the Sears business. The aggregate impact of the termination is expected to be neutral through 2002 after taking into account results and the contract settlement with Sears. International International net sales in U.S. dollars increased 4% and operating profit increased 7% in 2001. The sales improvement was a result of increases in Europe and Latin America, partially offset by a decline in the Pacific region. Excluding the effect of foreign currency exchange, international sales increased 12% in 2001. In Latin America, sales increased 3% in 2001 mainly due to double-digit sales growth in Mexico and Venezuela, partially offset by declines in Chile, Brazil and Argentina. The sales increases in Mexico and Venezuela were primarily driven by strong increases in active Representatives, customers and units. The increase in Mexico was also driven by strong performance in fragrance and skin care due to new product introductions. Venezuela had double-digit percentage sales growth in the Beauty category resulting from competitive pricing in fragrance and personal care. In Brazil, local currency sales grew double-digits in 2001, driven by an increase in units, active Representatives and customers, but U.S. dollar sales were negatively impacted by foreign exchange. Sales in Argentina decreased in 2001 primarily due to a weak economic and political environment. From 1991 until early 2002, Argentina maintained the peso at a one-to-one ratio with the U.S. dollar. During the second half of 2001, the Argentine peso came under increased pressure due to three consecutive years of recession and concerns about the government's financial policies. In January 2002, the Argentine peso devalued against the U.S. dollar and Avon expects inflation to increase in Argentina as a result of the devaluation of the peso. While the Argentine peso did not devalue until January 2002, the pressure on the peso had a negative impact during 2001 on other currencies in the region, -8- including the Brazilian real and the Chilean peso. As a result, Avon Brazil's and Avon Chile's U.S. dollar results were adversely impacted. In Brazil, an effective deployment of resources supported by productivity gains, as well foreign exchange contracts previously in place, partially compensated for the weaker currency and related economic impact. Excluding the impact of exchange, sales in Latin America increased 12% in 2001. Operating profit in Latin America increased 3% in 2001. The operating profit improvement resulted from the sales increases discussed above, as well as operating profit margin improvements in Venezuela and Mexico, partially offset by operating profit margin declines in Argentina and Brazil. Venezuela's operating margin improvement reflects expense control and savings from BPR initiatives. The operating margin improvement in Mexico resulted from successful vendor negotiations to lower product costs, a decrease in damaged merchandise returns as a result of moving to a new distribution center and a reduction in local housing taxes. Argentina's operating margin declined mainly due to sales-related declines, as well as a new banking tax imposed in April 2001. Brazil's operating margin declined in 2001 due to a negative foreign exchange impact in costs and expenses, as well as a migration of customers to lower priced items driven by an erosion in consumers' purchasing power. Brazil's margin was also impacted by higher expenses associated with incremental investments to support new product launches and improve order quality, which in turn contributed to top-line local currency sales growth. In Europe, sales increased 14% in 2001 driven by growth in Central and Eastern Europe, primarily Poland, Russia and the Ukraine, and, to a lesser extent, in the United Kingdom, partially offset by sales declines in most Western European markets. Higher sales in Central and Eastern Europe resulted from double-digit percentage increases in customers, active Representatives and units. Poland's continued strong sales growth was aided by the successful implementation of the Sales Leadership Strategy (launched in 2000). This strategy has resulted in increased market penetration and, along with continued focus on Representative retention, contributed to a significant increase in Representatives. In Russia, higher sales resulted from an improved local economy, coupled with an increase in the average order resulting from a 2001 change in the commission structure. In the United Kingdom, the sales increase was accomplished by growth in both customers and customer spending despite strong competition, as well as significant gains in color cosmetics. Sales declines in most Western European markets were primarily the result of a weak economic climate, which negatively impacted business in 2001. Excluding the impact of exchange, Europe sales grew 18%. Europe's operating profit increased 29% in 2001 primarily due to the higher sales discussed above, as well as operating profit margin improvements in Russia, the United Kingdom and the Ukraine, partially offset by margin declines in Poland, South Africa and most Western European markets. Russia's operating margin improvement was due to significant sales growth (which led to an improvement in the expense ratio), as well as product sourcing benefits and a reduction in custom duties on certain products. The operating margin improvement in the United Kingdom resulted from tighter expense management and a reduction in shipping and distribution costs as the shipping systems installed in 2000 were completed and began to improve productivity. The operating margin improvement in the Ukraine was driven by an improvement in the expense ratio resulting from sales growth of 80% in 2001, and an improvement in gross margin, which -9- benefited from a reduction in import duties. The operating margin decline in Poland was driven by favorable foreign exchange on inventory purchases in 2000 and pricing investments in 2001 to gain market share. The operating profit margin decline in South Africa was due to a higher expense ratio, resulting from lower sales volume. Operating margins in most Western European markets continued to be negatively impacted by sales pressures associated with a weak economic environment. Overall, the operating margin in Europe in 2001 increased 1.9 points, as compared to 2000. In 2001, U.S. dollar sales for most major markets in the Pacific region were negatively impacted by foreign exchange, most significantly the Philippines, Japan and Taiwan. U.S. dollar sales in the Pacific region declined 4% in 2001, but sales increased 6% in local currency. Despite U.S. dollar declines in the region, U.S. dollar and local currency sales in China grew 36% in 2001, driven by the success of consumer initiatives and the opening of additional beauty boutiques. Despite the weakness of the local economy, Japan's local currency sales increased 2% in 2001. The Philippines posted strong increases in average Representatives, customers and units, resulting in double-digit percentage local currency sales growth in 2001. U.S. dollar and local currency sales in Taiwan declined in 2001 due to an economic slowdown, which has negatively impacted employment rates and consumer spending this year. Operating profit in the Pacific region declined 4% in 2001 resulting from the negative impact of foreign currency translation. Excluding the impact of foreign exchange, operating profit increased 6% in 2001 with increases in most major markets. China's operating margin improved significantly in 2001 due to a favorable expense ratio resulting from higher sales. Japan's operating margin improved, largely driven by BPR efforts, which continue to generate significant savings across all expense areas. Operating margin in Taiwan declined in 2001 due to a higher expense ratio resulting from lower sales. Operating margin in the Philippines declined resulting from costs associated with an increase in brochure pages, partially offset by favorable product mix and pricing. 2000 Compared to 1999 North America - Net sales in North America increased 5% to $2.15 billion in 2000. The U.S. business, representing almost 90% of the North American segment, reported sales growth of 5%. The sales increase in the U.S. resulted primarily from a 6% increase in the number of units sold, a 2% increase in active Representatives and a higher average CFT order size. Sales improvements in the U.S. resulted from increases in CFT categories, fashion jewelry and watches and accessories, partially offset by declines in apparel and home entertainment products. U.S. sales of CFT increased 7% over 1999 reflecting a double-digit increase in skincare, primarily due to strong launches of Botanisource and Anew Retroactive, which was Avon's largest CFT launch ever. Color cosmetics also reported a double-digit increase versus 1999, reflecting our commitment to the Avon Color brand and powerful new product introductions, such as Nailwear and Glazewear. Growth in the fragrance category was driven by strong performance in Men's brands. The personal care category also contributed to the sales increase, with particular strength coming from the launch of Chamomile and sales of existing Skin-So-Soft lines, which reported the largest increases ever for this brand. Fashion jewelry and watches increased mid-single digits versus 1999 due to strategic growth in fashion and fine jewelry segments. Higher sales in accessories were driven by a strong performance in fashion accessories, including handbags, totes and small leather goods. These increases were partially offset by declines in the apparel category, due to softness in casual wear items, and lower sales in home entertainment products, resulting from fewer new product introductions. -10- Operating profit in North America increased 2% to $368.2 in 2000 due to the region's increased sales, discussed above, while the operating margin declined 0.5 points. The decline in operating margin was primarily due to an increase in the operating expense ratio in Puerto Rico caused by higher transitional expenses related to the consolidation of operations. Gross margin in North America remained level in 2000 as compared to 1999. Operating profit in the U.S. of $343.5 increased 4% versus 1999 reflecting sales growth, partially offset by a slightly unfavorable expense ratio. The expense ratio in the U.S. was negatively impacted by asset writedowns associated with the closure of certain Company-owned Avon Beauty Centers. Excluding the asset writedowns, the expense ratio was favorable to 1999 resulting from cost containment, BPR savings and lower benefit expenses partially offset by increased spending on advertising and e-commerce initiatives. International International sales increased 9% to $3.53 billion and operating profit increased 11% to $662.8 in 2000. Excluding the effect of foreign exchange, international sales increased 14% in 2000 with double-digit increases in all regions. In Latin America, sales increased 12% to $1.84 billion in 2000 driven by improvements in all major markets, with Mexico, Brazil and Venezuela being the main contributors. Excluding the impact of foreign exchange, sales in Latin America increased 15% in 2000. Units and active Representatives for the region rose 4% and 10%, respectively, versus the same period in 1999. The sales growth in Mexico was driven by increases in the number of units sold, active Representatives and customers served. Mexico had double-digit sales growth in all product categories, with particular strength in CFT, and apparel categories. In Brazil, higher average orders, along with increased prices and more Representatives were the main drivers of sales improvements. Venezuela's sales improvement resulted from increases in the number of units sold, orders, active Representatives and customers served. Venezuela was able to post these increases despite severe flooding in late 1999, which negatively affected operations at the beginning of 2000, along with persistent economic and political uncertainty. Operating profit in Latin America grew 13% to $415.5 in 2000 due to the sales increases discussed above and operating margin improvements in Venezuela and Brazil, partially offset by a decline in Argentina. Latin America's 2000 operating margin improved 0.2 points versus 1999. Venezuela's operating margin reflected a higher gross margin, driven by price increases and cost improvements, partially offset by increased marketing spending and incentive programs. Brazil's operating margin increased primarily due to lower bad debt and recognition expenses. Mexico's operating margin remained level with 1999 due to savings in marketing and cost savings on purchase orders, offset by a decrease in gross margin resulting from increased sales of lower margin items and selective pricing cuts. In Argentina, operating margin declined as incentives and advertising expenses were increased to solidify our leading market position in a weak economic environment. In Europe, sales increased 1% to $885.6 versus 1999 but increased 13% in local currency on 12% growth in units and 15% higher active Representatives. The euro, pound and zloty devalued significantly in 2000 and, as a result, negatively affected U.S. dollar results. Sales growth in Central and Eastern Europe, primarily Poland and Russia, was partially offset by declines in most Western European markets, most significantly in Germany. The sales improvement in Central Europe resulted from double-digit increases in units, active -11- Representatives and customers served. New Representative leadership programs and a new campaign cycle also favorably impacted sales in Poland. The sales increase in Russia was due to double-digit increases in units and active Representatives and an improved economic environment resulting from the stability of the Russian ruble. In Germany, the sales decline reflected a weak economic climate. In the United Kingdom, sales increased in local currency but U.S. dollar results were negatively impacted by foreign currency exchange. Operating profit in Europe grew 3% to $129.5 in 2000 due to the sales increases discussed above coupled with operating margin improvements in Central and Eastern Europe, particularly Poland and Russia, partially offset by increased spending on incentives and advertising throughout the region and the impact of weaker currencies. In the Europe region, operating margin in 2000 improved 0.3 points over 1999. In Poland, gross margin improved due to a shift in mix to higher margin items, partially offset by the cost of shipping increased orders. The operating margin improvement in Russia was primarily due to a favorable comparison against 1999's discount pricing policy and product sourcing, as well as tight expense controls on a higher sales base. A decline in the United Kingdom's operating margin was primarily due to increased advertising, consumer motivation and sampling activities to support sales growth, as well as increased shipping, distribution and volume related costs due to reduced capacity of shipping lines during transition to a new shipping system. In the Pacific region, sales increased 11% to $799.4 in 2000 due to increases in all major markets resulting from an 18% increase in the number of units sold and 31% increase in active Representatives. In 2000, dollar sales for most markets were negatively impacted by foreign currency exchange, excluding Japan and Taiwan, where foreign currency exchange had a positive impact on dollar sales. In Japan, sales increased double-digits, despite a reduction in consumer spending due to economic pressures, due to an increase in units sold and active Representatives as well as a favorable exchange rate impact versus 1999. In China, sales growth of 44% was driven by channel expansion, led by beauty boutiques. In the Philippines, dollar sales grew in the mid- single digits, but local currency sales increased solid double- digits, as increased advertising and consumer promotions resulted in strong increases in units sold, customers served and active Representatives. Excluding the impact of foreign exchange, sales in the Pacific region rose 13%. Operating profit in the Pacific region increased 15% to $117.8 in 2000 due to the sales increases discussed above and operating margin improvements, primarily in Japan and China, partially offset by operating margin declines in Taiwan and the Philippines. In the Pacific region, 2000 operating margin improved 0.6 points over 1999. In Japan, operating margin was favorably impacted by product cost savings initiatives and a favorable change of product mix from non-CFT to higher margin CFT products. China's operating margin improvement was driven primarily by increased sales growth and new higher margin products. Operating margin declined in Taiwan primarily due to increased costs resulting from moving to a new distribution facility and increased spending to support sales growth. Operating margin in the Philippines was negatively impacted by higher sales of lower margin items, and higher advertising expenses. -12- Global Expenses - Global expenses were $242.5 in 2001 compared with $242.3 in 2000. Global expenses remained level in 2001, primarily due to savings in global departmental expenses (including such areas as marketing and information technology systems), offset by higher benefit expenses in 2001 and insurance proceeds received in 2000 related to 1998 hurricane losses in Central America, 1999 flood losses in Venezuela and 1999 earthquake losses in Taiwan. Global expenses were $242.3 in 2000 compared with $255.3 in 1999. The $13.0 decrease was primarily due to lower expenses related to the Company's long-term incentive plan, lower benefit expenses, insurance proceeds received in 2000 discussed above, and savings in global marketing departments, partially offset by increased investments in information technology and retail initiatives. In 2001, the assets associated with the Company's benefit plans experienced weaker investment returns, which was mostly due to unfavorable returns on equity securities. These unfavorable investment returns are expected to increase pension costs in the near future. In addition, net periodic pension cost may significantly increase in the future if settlement losses are required due to an increase in the aggregate benefits paid to retirees as lump sum distributions. Settlement losses may result in the future if the number of eligible participants deciding to receive lump sum distributions and the amount of their benefits increases. (See Note 10 of the Notes to Consolidated Financial Statements). Accounting Changes - See Note 2 of the Notes to Consolidated Financial Statements for a discussion regarding recent accounting standards, including FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," FAS No. 141, "Business Combinations," FAS No. 142, "Goodwill and Other Intangible Assets," FAS No. 143, "Accounting for Asset Retirement Obligations" and FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," SAB No. 101, "Revenue Recognition in Financial Statements," Emerging Issues Task Force ("EITF") 00- 10, "Accounting for Shipping and Handling Fees and Costs," EITF 00-14, "Accounting for Certain Sales Incentives," EITF 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products," and EITF 00-19, "Determination of Whether Share Settlement Is Within the Control of the Issuer for Purposes of Applying Issue No. 96-13, 'Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock'". Contingencies - Avon is a defendant in a class action suit commenced in 1991 on behalf of certain classes of holders of Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS"). Plaintiffs allege various contract and securities law claims related to the PERCS (which were fully redeemed in 1991) and seek aggregate damages of approximately $145.0, plus interest. A trial of this action took place in the United States District Court for the Southern District of New York and concluded in November 2001. At the conclusion of the trial, the judge reserved decision in the matter. Avon believes it presented meritorious defenses to the claims asserted. However, it is not possible to predict the outcome of litigation and it is reasonably possible that the trial, and any possible appeal, could be decided unfavorably. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome but, under some of the damage theories presented, an adverse award could be material to the Consolidated Financial Statements. Avon is a defendant in an action commenced in the Supreme Court of the State of New York by Sheldon Solow d/b/a Solow Building Company, the landlord of the Company's former headquarters in New York City. Plaintiff seeks aggregate damages of approximately $80.0, plus interest, for the Company's alleged failure to restore the -13- leasehold premises at the conclusion of the lease term in 1997. A trial of this matter had been scheduled for February 2002, but has been stayed pending the determination of (i) an interlocutory appeal by plaintiff of an order that denied the plaintiff's motion for summary judgment and granted partial summary judgment in favor of the Company on one of plaintiff's claims; and (ii) an appeal by plaintiff of a decision in an action against another former tenant that dismissed plaintiff's claims after trial. While it is not possible to predict the outcome of litigation, management believes that there are meritorious defenses to the claims asserted and that this action should not have a material adverse effect on the Consolidated Financial Statements. This action is being vigorously contested. Various other 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 the opinion of Avon's management, based on its review of the information available at this time, the total cost of resolving such other contingencies at December 31, 2001 should not have a material adverse impact on the Consolidated Financial Statements. In 1998, the Argentine tax authorities denied certain past excise tax credits taken by Avon's subsidiary in Argentina and assessed this subsidiary for the corresponding taxes. Avon vigorously contested this assessment through local administrative and judicial proceedings since 1998. In the third quarter of 2001, the Argentine government issued a decree permitting taxpayers to satisfy certain tax liabilities on favorable terms using Argentine government bonds as payment. Avon decided to settle this contested tax assessment by applying for relief under this new government program and purchased bonds to tender in settlement of the aforementioned assessment. As a result, a pre- tax charge of $6.4 ($3.4 after-tax, or $.01 per diluted share) was included in Other expense, net in the Consolidated Statements of Income in the third quarter of 2001. Avon has been responding to a formal investigation by the Securities and Exchange Commission ("SEC") which commenced in August 2000, and has furnished to the SEC information that principally concerns a special charge reported by Avon in the first quarter of 1999, which included the writeoff of approximately $15.0 in pre-tax costs associated with an order management software system known as the FIRST project. The balance of the FIRST project's development costs had been carried as an asset until the third quarter of 2001, when Avon recorded a pre-tax charge of $23.9 ($14.5 after-tax, or $.06 per diluted share) to write off the carrying value of costs related to that project. As part of a resolution of the investigation or at the conclusion of a contested proceeding, there may be a finding that Avon knew or should have known in the first quarter of 1999 that it was not probable that FIRST would be implemented and therefore, the entire FIRST asset should have been written off as abandoned at that time. In that connection, it may also be necessary for Avon to restate its financial statements to write off the entire FIRST asset in the first quarter of 1999. If Avon were to restate its financial statements to write off the FIRST asset in the first quarter of 1999, then the charge recorded in the third quarter of 2001 and other FIRST-related items recorded in prior periods would also be restated. (See Note 16 of the Notes to Consolidated Financial Statements). Liquidity and Capital Resources Cash Flows - Net cash provided by operating activities was $754.9 in 2001 compared to $323.9 in 2000. The 2001 increase principally reflects the receipt of an income tax refund in 2001 and higher net income (adjusted for non-cash items and including the -14- cash settlement from Sears), as well as higher working capital needs in 2000, including the payout of a long-term incentive plan, timing of cash payments and a larger increase in inventories. Excluding changes in debt and other financing activities, net cash flow of $321.8 in 2001 was $418.9 favorable compared with net cash usage of $97.1 in 2000. The $418.9 variance primarily resulted from higher net cash provided by operations in 2001 and a reduction in capital expenditures, as 2000 results included significant spending for the U.S. Internet project. Partially offsetting this increase were higher repurchases of Avon common stock in 2001. During 1998 and 1997, Avon received net proceeds under securities lending transactions that were settled in the fourth quarter of 2000 for $101.4 and were included in the cash flows as Other financing activities. For the period 1994 through 2001, approximately 62.9 million shares of common stock were purchased for approximately $1.6 billion under share repurchase programs. See Note 9 of the Notes to Consolidated Financial Statements for further details of the share repurchase programs. Working Capital - As of December 31, 2001 and December 31, 2000, current assets exceeded current liabilities by $428.1 and $186.4, respectively. The increase of current assets over current liabilities of $241.7 was primarily due to higher cash balances and the repayment of short-term borrowings. The increase was partially offset by a lower receivable balance reflecting the receipt of an income tax refund in 2001 and a higher accrued liability balance due to the 2001 Special charge. Primarily as a result of the Company's share repurchase program, at December 31, 2001 and 2000, the Company reported a shareholders' deficit balance of $74.6 and $215.8, respectively. Capital Resources - Total debt of $1,325.1 at December 31, 2001, increased $111.5 from $1,213.6 at December 31, 2000, principally due to the issuance in September 2001 of Japanese yen denominated notes payable and an adjustment to debt to reflect the fair value of outstanding interest rate swaps (see Note 4 of the Notes to Consolidated Financial Statements). Total debt of $1,213.6 at December 31, 2000, increased $206.2 from December 31, 1999, primarily due to the issuance of convertible notes in 2000. During 2001 and 2000, cash flows from operating activities combined with cash on hand and higher debt levels were used for repurchases of common stock, payment of dividends, and capital expenditures. Management believes that cash from operations and available sources of financing are adequate to meet anticipated requirements for working capital, dividends, capital expenditures, the stock repurchase program and other cash needs. -15- Debt and Contractual Financial Obligations and Commitments - At December 31, 2001, Avon's debt and contractual financial obligations and commitments by due date were as follows:
2002 2003 2004 2005 2006 and Beyond Total Notes payable $ 87.6 $ - $ - $ - $ - $ 87.6 Long-term debt 0.1 0.1 200.0 - 991.3 (1) 1,191.5 Capital lease obligations 1.1 2.0 2.1 0.1 - 5.3 Operating leases 70.0 53.1 40.8 32.4 211.9 408.2 Other long-term Obligations 2.0 2.0 2.0 2.0 0.5 8.5 Total debt and Ccontractual financial Oobligations and Ccommitments(2) $ 160.8$ 57.2 $ 244.9 $34.5$ 1,203.7 $ 1,701.1
(1) $100.0 of bonds embedded with option features maturing in May 2018 can be sold back to Avon at par or can be called at par by the underwriter and resold to investors as 15-year debt in May 2003. Convertible Notes of $422.4 maturing in 2020 may be redeemed at the option of Avon on or after July 12, 2003. In addition, at the holder's option, the Convertible Notes may be sold to Avon, for cash or shares at Avon's discretion, at the redemption price on July 12, 2003, July 12, 2008 and July 12, 2013. (2) The amount of debt and contractual financial obligations and commitments excludes amounts due pursuant to derivative transactions. See Notes 4 and 12 of the Notes to Consolidated Financial Statements for further information on Avon's debt and contractual financial obligations and commitments. Avon has a five-year $600.0 revolving credit and competitive advance facility (the "credit facility"), which expires in 2006. The credit facility may be used for general corporate purposes, including financing working capital and capital expenditures and supporting the stock repurchase program. The interest rate on borrowings under the credit facility is based on LIBOR or on the higher of prime or 1/2% plus the federal funds rate. The credit facility has an annual facility fee, payable quarterly, of $0.5, based on Avon's current credit ratings. The credit facility contains customary covenants, including one which requires Avon's interest coverage ratio (determined in relation to Avon's consolidated pre-tax income and interest expense) to equal or exceed 4:1. At December 31, 2001, Avon was in compliance with all covenants in the credit facility. At December 31, 2001 and December 31, 2000, there were no borrowings under the credit facility. Avon maintains a $600.0 commercial paper program, which is supported by the credit facility. Outstanding commercial paper effectively reduces the amount available for borrowing under the credit facility. At December 31, 2001, Avon had no commercial paper outstanding, and at December 31, 2000, Avon had $29.9 in commercial paper outstanding under this program. The cost of borrowings under the credit facility, as well as the amount of the facility fee and utilization fee (applicable only if more than 50% of the facility is borrowed), depend on Avon's credit ratings. A downgrade in Avon's credit ratings might increase the cost to Avon of maintaining and borrowing under the credit facility, or preclude Avon from issuing commercial paper or increase the cost to Avon of issuing commercial paper in the future, but the credit facility does not contain a rating downgrade trigger that would prevent Avon from borrowing under the credit facility. The credit facility would become unavailable for borrowing only if Avon were to fail to satisfy one of the conditions to borrowing in the facility. These conditions to borrowing are generally based on the accuracy of certain representations and warranties, compliance by Avon with the covenants in the credit facility (discussed above) and the absence of defaults, including but not limited to -16- bankruptcy and insolvency, change of control, failure to pay other material debts, and failure to stay or pay material judgments, as those events are described more fully in the credit facility agreement. At December 31, 2001, Avon was in compliance with all covenants in its indentures (see Note 4 of the Notes to Consolidated Financial Statements), which do not contain any rating downgrade triggers that would accelerate the maturity of its debt. Neither the credit facility nor any of the indentures contains any covenant or other requirement relating to maintenance of a positive shareholders' equity balance. Avon had uncommitted domestic lines of credit available of $49.0 in 2001 and 2000 with various banks. As of December 31, 2001 and 2000, $11.1 of these lines are being used for letters of credit. In addition, as of December 31, 2001 and 2000, there were international lines of credit totaling $457.4 and $449.5, respectively, of which $87.9 and $74.8, respectively, were outstanding and included in Notes payable and Long-term debt. At December 31, 2001 and 2000, Avon also had letters of credit outstanding totaling $13.9 and $9.5, respectively, which guarantee various insurance activities. In addition, Avon had outstanding letters of credit for various trade activities and commercial commitments executed in the ordinary course of business, such as purchase orders for normal replenishment of inventory levels. Inventories - Avon's products are marketed during 12 to 26 individual sales campaigns each year. Each campaign is conducted using a brochure offering a wide assortment of products, many of which change from campaign to campaign. It is necessary for Avon to maintain relatively high inventory levels as a result of the nature of its business, including the number of campaigns conducted annually and the large number of products marketed. Avon's operations have a seasonal pattern characteristic of many companies selling CFT, fashion jewelry and 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 reduced by the end of the fourth quarter. Inventories of $612.5 at December 31, 2001, were slightly higher than at December 31, 2000. At the same time, inventory days outstanding declined from prior year, reflecting Avon's efforts to manage purchases and inventory levels while maintaining a focus on operating the business at efficient inventory levels. It is Avon's objective to continue to focus on inventory management. 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 inventory levels to grow periodically. Capital Expenditures - Capital expenditures during 2001 were $155.3 compared with $193.5 in 2000. Those expenditures were made for improvements on existing facilities, continued investments for capacity expansion, facility modernization, information systems, including spending on the Internet strategy, and equipment replacement projects. Numerous construction and information systems projects were in progress at December 31, 2001, with an estimated cost to complete of approximately $119.2. Capital expenditures in 2002 are currently expected to be in the range of $220.0 - $230.0. These expenditures will include improvements on existing facilities, continued investments for capacity expansion, facility modernization, information systems and equipment replacement projects. Foreign Operations - For the three years ended 2001, 2000 and 1999, the Company derived approximately 60% of its consolidated net sales and total operating profit from operations from subsidiaries outside of the U.S. In addition, as of December 31, 2001 and 2000, these subsidiaries comprised approximately 50% of the Company's consolidated total assets. Avon has significant net assets in Brazil, Mexico, the United Kingdom, Japan, Argentina, Venezuela, Canada, the Philippines and Poland. -17- The functional currency for most of Avon's foreign operations is the local currency. The cumulative effects of translating balance sheet accounts from the functional currency into the U.S. dollar at current exchange rates are included in Accumulated other comprehensive loss in Shareholders equity. The U.S. dollar is used as the functional currency for operations in highly inflationary foreign economies, including Russia and Venezuela, where cumulative inflation rates in those countries exceeded 100% over a three-year period. Effective January 1, 1995, Venezuela was designated as a country with a highly inflationary economy due to cumulative inflation rates over the three-year period 1992 - 1994. Effective January 1, 1997, Russia was designated as a country with a highly inflationary economy due to cumulative inflation rates over the three-year period 1994 - 1996. Venezuela has converted to non-hyperinflationary status effective January 1, 2002 due to reduced cumulative inflation rates. During 2001, the Argentine economy remained in a deep recession, making 2001 the third consecutive year of negative growth. In addition to the economic crisis, the Argentine peso, which had been maintained at a one-to-one ratio for 11 years with the U.S. dollar, came under pressure. In December 2001, foreign exchange transactions were prohibited by the government. On January 6, 2002, the government announced it was devaluing the peso by abandoning the one-to-one ratio. The foreign exchange markets reopened on January 11, 2002. Pursuant to FAS No. 52, "Foreign Currency Translation", the exchange rate from January 11, 2002, was used as a reference rate for the translation of Avon Argentina's December 31, 2001 balance sheet. Because Avon Argentina had a U.S. dollar intercompany loan receivable on its balance sheet, Avon Argentina recognized a net foreign exchange gain of approximately $8.0 pretax. With the Argentine peso devaluation on January 6, 2002, and a forecast for continued negative economic conditions, Avon anticipates the 2002 U.S. dollar results of Avon Argentina to be negatively impacted. Net sales from Avon Argentina represent 5% of Avon's consolidated net sales. The impact of any further devaluation is expected to be partially offset by inflation, hedging strategies and certain actions taken by management. Management expects to leverage the direct selling channel through Representative recruiting and price adjustments, as well as Avon's local production capability, to respond to changing market conditions, thereby achieving market share gain. Avon's 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 the possible effect of such fluctuations upon translated amounts or future earnings. This is due to the large number of currencies, intercompany transactions, the hedging activity entered into in an attempt to minimize certain 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. -18- Certain of Avon'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. 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. At December 31, 2001, the total indebtedness of foreign subsidiaries to third parties was $93.1. It is Avon's practice 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 2001, Avon's foreign subsidiaries remitted, net of taxes, $343.5 in dividends and royalties. This sum is a substantial portion of the 2001 consolidated net earnings of those subsidiaries. Risk Management Strategies and Market Rate Sensitive Instruments - As discussed above, Avon operates globally, with manufacturing and distribution facilities in various locations around the world. Avon may reduce its exposure to fluctuations in earnings and cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. Since Avon uses foreign currency rate-sensitive and interest rate-sensitive instruments to hedge a certain portion of its existing and forecasted transactions, Avon expects that any loss in value for the hedge instruments generally would be offset by increases in the value of the underlying transactions. Derivatives are recognized on the balance sheet at their fair values. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether it has been designated by Avon and qualifies as part of a hedging relationship and further, on the type of hedging relationship. Changes in the fair value of a derivative that is designated as a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in other comprehensive income ("OCI") to the extent effective and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is designated as a hedge of a net investment in a foreign operation are recorded in foreign currency translation adjustments within OCI to the extent effective as a hedge. "Effectiveness" is the extent to which changes in fair value of a derivative offsets changes in fair value of the hedged item. Changes in the fair value of a derivative not designated as a hedging instrument are recognized in earnings in Other expense, net on the Consolidated Statements of Income. Avon assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Highly effective means that cumulative changes in the fair value of the derivative are between 80% - 125% of the cumulative changes in the fair value of the hedged item. The ineffective portion of the derivative's gain or loss, if any, is recorded in earnings in Other expense, net on the Consolidated Statements of Income. Prior to June 1, 2001, Avon excluded the change in the time value of option contracts from its assessment of hedge effectiveness. Effective June 1, 2001, Avon includes the change in the time value of options in its assessment of hedge effectiveness. When Avon determines that -19- a derivative is not highly effective as a hedge, hedge accounting is discontinued prospectively. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, Avon discontinues hedge accounting for the affected portion of the forecasted transaction, and reclassifies gains and losses that were accumulated in OCI to earnings in Other expense, net on the Consolidated Statements of Income. Avon has not entered into derivative financial instruments for trading purposes, nor is Avon a party to leveraged derivatives. The master agreements governing Avon's derivative contracts generally contain standard provisions that could trigger early termination of the contracts in certain circumstances, including if Avon were to merge with another entity and the creditworthiness of the surviving entity were to be "materially weaker" than that of Avon prior to the merger. In certain of these master agreements, "materially weaker" has been defined by reference to specific credit ratings. Interest Rate Risk - Avon uses interest rate swaps to hedge interest rate risk on its fixed-rate debt. In addition, Avon may periodically employ interest rate caps and forward interest rate agreements to reduce exposure, if any, to increases in variable interest rates. At December 31, 2001, Avon has outstanding interest rate swap agreements that effectively convert fixed interest on a portion of Avon's outstanding debt to a variable interest rate based on LIBOR, as follows: Notional Maturity Amount Date Related Outstanding Debt $ 50.0 May 2003 $100.0, 6.25% Bonds, due 2018 100.0 November 2004 200.0, 6.90% Notes, due 2004 100.0 November 2004 200.0, 6.90% Notes, due 2004 150.0 November 2009 300.0, 7.15% Notes, due 2009 150.0 November 2009* 300.0, 7.15% Notes, due 2009 *This interest rate swap agreement requires Avon to post collateral in certain circumstances if Avon's credit rating drops below BBB. Avon has designated the interest rate swaps as fair value hedges pursuant to FAS No. 133 (see Note 4 of the Notes to Consolidated Financial Statements). During 2001, Long-term debt increased by $33.2 with a corresponding increase to Other assets to reflect the fair values of outstanding interest rate swaps. Long-term debt also includes the remaining unamortized gain of $7.5 resulting from a terminated swap agreement, which is being amortized over the remaining term of the underlying debt. There were no amounts of hedge ineffectiveness for the year ended December 31, 2001, related to these interest rate swaps (see Note 7 of the Notes to Consolidated Financial Statements). At December 31, 2001, Avon has forward interest rate agreements to protect against increases in interest rates on a portion of Avon's fixed to variable interest rate swap agreements as follows: Notional Maturity Amount Date $ 150.0 May 15, 2002 150.0 November 15, 2002 250.0 May 15, 2002 The forward interest rate agreements have not been designated as hedges and have been recorded at fair value in earnings in the Consolidated Statements of Income. -20- See Note 4 of the Notes to Consolidated Financial Statements for further discussion regarding the interest rate swap and forward rate agreements. Foreign Currency Risk - Avon uses foreign currency forward contracts and options to hedge portions of its forecasted foreign currency cash flows resulting from intercompany royalties, intercompany loans, and other third-party and intercompany foreign currency transactions where there is a high probability that anticipated exposures will materialize. These contracts have been designated as cash flow hedges. At December 31, 2001, the primary currencies for which Avon has net underlying foreign currency exchange rate exposure are the U.S. dollar versus the Argentine peso, Brazilian real, British pound, the euro, Japanese yen, Mexican peso, Philippine peso, Polish zloty, the Russian ruble and Venezuelan bolivar. Avon also enters into foreign currency forward contracts and options to protect against the adverse effects that exchange rate fluctuations may have on the earnings of its foreign subsidiaries. These derivatives do not qualify for hedge accounting and therefore, the gains and losses on these derivatives have been recognized in earnings each reporting period. Avon's hedges of its foreign currency exposure cannot entirely eliminate the effect of changes in foreign exchange rates on Avon's consolidated financial position, results of operations and cash flows. Avon uses foreign currency forward contracts and foreign currency denominated debt to hedge the foreign currency exposure related to the net assets of certain of its foreign subsidiaries. During 2001, Avon entered into loan agreements and notes payable to borrow Japanese yen to hedge Avon's net investment in its Japanese subsidiary (see Note 4 of the Notes to Consolidated Financial Statements). Avon also entered into foreign currency forward contracts to hedge its net investment in its Mexican subsidiary. For the year ended December 31, 2001, net gains of $5.1 related to the effective portion of these hedges were included in foreign currency translation adjustments within Accumulated other comprehensive loss on the Consolidated Balance Sheets. At December 31, 2001, Avon held foreign currency forward and option contracts to buy and sell foreign currencies, including cross-currency contracts to sell one foreign currency for another, with notional amounts in U.S. dollars as follows: Buy Sell Argentine peso $ 4.6 $ 5.0 Brazilian real - 15.0 British pound 46.6 16.4 Canadian dollar - 17.2 Czech koruna - 11.0 Euro 83.4 45.4 Hungarian forint - 18.8 Japanese yen 12.6 23.2 Mexican peso - 88.0 Polish zloty - 6.5 Taiwanese dollar - 11.0 Other currencies - 11.3 Total $147.2 $ 268.8 -21- Other Financing Activities - As of December 31, 2001, Avon has forward contracts to purchase approximately 271,000 shares of Avon common stock at an average price of $46.01 per share. The contracts mature in October 2002 and were recorded as equity instruments. As equity instruments, no adjustment for subsequent changes in fair value has been recognized. The maturities of forward contracts are accelerated in the event that either Avon's credit rating declines to Baa2 or its stock price closes at the trigger price of approximately $16.00 per share for a two-day period. In accordance with the provisions of EITF 00-19, $51.0 of contracts outstanding at December 31, 2000, were included in the accompanying Consolidated Balance Sheets in Share repurchase commitments with a corresponding decrease in Additional paid-in capital (see Note 2 of the Notes to Consolidated Financial Statements). Credit and Market Risk - Avon attempts to minimize its credit exposure to counterparties by entering into interest rate swap, forward rate and interest rate cap contracts only with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor's Corporation. Avon's foreign currency and interest rate derivatives are comprised of over-the-counter forward contracts, swaps or options with major international financial institutions. Although Avon's theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring credit risk losses is remote and that such losses, if any, would not be material. Non-performance of the counterparties on the balance of all the foreign exchange and interest rate swap and forward rate agreements would not result in a material write off at December 31, 2001. In addition, Avon may be exposed to market risk on its foreign exchange and interest rate swap and forward rate 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. Avon 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 Avon 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 Avon. Based on the outstanding balance of all these financial instruments at December 31, 2001, a hypothetical 50 basis point change (either an increase or a decrease) in interest rates prevailing at that 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 Avon's current cost of debt. In 2001, Avon did not experience a material loss in fair value, earnings or cash flows associated with changes in interest rates. Avon is exposed to equity price fluctuations for investments included in the grantors trust (see Note 10 of the Notes to Consolidated Financial Statements). A 10% change (either an increase or decrease)in equity prices would not be material based on the fair value of equity investments as of December 31, 2001. -22 As previously discussed, Avon 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 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. Avon uses a Value at Risk (VaR) model to evaluate the potential loss due to adverse changes in market risk factors relating to its outstanding foreign currency derivative instruments. The VaR computation includes Avon's outstanding foreign currency forwards and options. The computation excludes anticipated transactions, foreign currency payables and receivables and net investments in foreign subsidiaries, which the foregoing instruments are intended to hedge. The VaR model uses a Monte Carlo methodology that values foreign currency derivative instruments against one thousand randomly generated sets of price outcomes. The model generates its prices based on historical volatilities and correlations observed over the last year (approximately 250 business days). Based on a 95% confidence level, a one-month holding period at December 31, 2001, and normal market conditions, the potential loss in fair value from these foreign currency derivative instruments would not materially affect Avon's earnings or cashflows. The VaR model is a risk estimation tool and is not intended to project actual losses in fair value that will be incurred by Avon nor is it intended to estimate the risk that non-normal market conditions or other unusual events will occur that might affect the fair value of Avon's foreign currency derivative instruments. Prior to 2001, Avon used a sensitivity analysis to evaluate the risk of adverse changes in market risk factors. The risk of loss at December 31, 2001, using a sensitivity analysis was not material. Euro A single currency called the euro was introduced in Europe on January 1, 1999. On that date, 12 of the 15 member countries of the European Union adopted the euro as their common legal currency. 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. 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 were issued. Generally legacy currencies were withdrawn from circulation on February 28, 2002. Avon operating subsidiaries affected by the euro conversion have addressed 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. The system and equipment conversion costs were not material. Due to the numerous uncertainties associated with the market impact of the euro conversion, Avon cannot reasonably estimate the effects one common currency will have on pricing and the resulting impact, if any, on results of operations, financial position or cash flows. Other Information In 1997, the Company announced its BPR program to streamline operations and improve profitability through margin improvement and expense reductions. In connection with this program, BPR initiatives reduced costs by approximately -23- $400.0 in 2000 versus 1997 levels, with a portion of the savings being reinvested primarily in consumer-focused initiatives. In May 2001, Avon announced its new Business Transformation plans, which are designed to significantly reduce costs and expand profit margins, while continuing to focus on consumer growth strategies. Business Transformation initiatives include an end-to-end evaluation of business processes in key operating areas, with target completion dates through 2004. Specifically, the initiatives focus on simplifying Avon's marketing processes, driving supply chain opportunities, strengthening Avon's sales model through the Sales Leadership program and the Internet, and streamlining the Company's organizational structure. In the fourth quarter of 2001, Avon recorded special and non-recurring charges of $97.4 pretax ($68.3 after-tax, or $.28 per diluted share), primarily associated with facility rationalizations and workforce reduction programs related to implementation of certain Business Transformation initiatives. Approximately 80% of the charge was cash related. See Note 13 of the Notes to Consolidated Financial Statements for further details of the special and non-recurring charges. Beginning in 2002, Avon expects to see savings, net of transitional costs, of approximately $30.0, from actions associated with the special charge. It is expected that the savings will provide added financial flexibility to achieve profit targets, while enabling further investment in consumer growth strategies and driving operating margin expansion. Cost savings from current initiatives should accelerate thereafter, with savings in 2004 expected to be approximately $80.0 - $90.0. Additional special charges are under consideration for 2002, primarily related to additional Business Transformation initiatives. Although the nature and extent of any further charges remain under consideration, such charges might be in the range of $100.0 - - $150.0, pretax. Based on the estimated benefits it expects to realize from its overall Business Transformation initiatives, Avon has set as a goal improvements in operating margin of 50 basis points in 2002 and 100 basis points in each of 2003 and 2004. -24- Results of Operations by Quarter (Unaudited) Avon Products, Inc. In millions, except per share data
2001 First Second Third Fourth Year Net sales $1,347.2 $1,452.5 $1,412.8 $1,739.5 $5,952.0 Other revenue 10.6 10.2 9.7 12.0 42.5 Gross profit* 856.7 940.2 897.5 1,080.0 3,774.4 Contract settlement gain, net of related expenses - - (25.9) - (25.9) Asset impairment charge - - 23.9 - 23.9 Special charges - - - 94.9 94.9 Operating profit 145.8 235.8 177.2 190.6 749.4 Income before taxes, minority interest and cumulative effect of accounting change 126.5 213.8 152.2 173.2 665.7 Income before minority interest and cumulative effect of accounting change 82.0 139.2 100.9 112.7 434.8 Income before cumulative effect of accounting change 82.0 137.7 100.3 110.3 430.3 Net income $ 81.7 $ 137.7 $ 100.3 $ 110.3 $ 430.0 Earnings per share: Basic $ .34 $ .58 $ .42 $ .47 $ 1.82(1) Diluted $ .34 $ .57 $ .42 $ .46 $ 1.79(1) *Fourth quarter and full year 2001 includes a non-recurring charge of $2.5 for inventory writedowns. 2000 First Second Third Fourth Year Net sales $1,306.7 $1,382.6 $1,336.0 $1,648.4 $5,673.7 Other revenue 10.4 10.0 9.7 10.8 40.9 Gross profit 826.3 894.0 855.5 1,016.1 3,591.9 Operating profit 137.8 220.4 168.6 261.9 788.7 Income before taxes, minority interest and cumulative effect of accounting change 109.5 195.1 144.3 242.1 691.0 Income before minority interest and cumulative effect of accounting change 70.4 125.9 93.2 199.8 489.3 Income before cumulative effect of accounting change 70.4 124.9 92.3 197.5 485.1 Net income $ 63.7 $ 124.9 $ 92.3 $ 197.5 $ 478.4 Basic earnings per share: Continuing operations $ .30 $ .53 $ .39 $ .83 $ 2.04(1) Cumulative effect of accounting change (.03) - - - (.03) $ .27 $ .53 $ .39 $ .83 $ 2.01(1) Diluted earnings per share: Continuing operations $ .30 $ .52 $ .38 $ .81 $ 2.02(1) Cumulative effect of accounting change (.03) - - - (.03) $ .27 $ .52 $ .38 $ .81 $ 1.99(1)
(1) The sum of per share amounts for the quarters does not necessarily equal that for the year because the computations were made independently. -25- Market Prices Per Share of Common Stock by Quarter 2001 2000 High Low High Low Quarter First $ 48.25 $ 38.00 $ 34.50 $ 25.25 Second 48.26 35.55 44.50 28.38 Third 50.12 42.00 44.00 35.00 Fourth 49.88 43.07 49.75 38.19 Avon common stock is listed on the New York Stock Exchange. At December 31, 2001, there were 21,393 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 $.76 per share, or $.19 per share each quarter, were declared and paid in 2001. Dividends of $.74 per share, or $.185 per share each quarter, were declared and paid in 2000. -26- Consolidated Statements of Income Avon Products, Inc. In millions, except per share data Years ended December 31 2001 2000 1999 Net sales $5,952.0 $5,673.7 $5,289.1 Other revenue 42.5 40.9 38.8 Total revenue 5,994.5 5,714.6 5,327.9 Costs, expenses and other: Cost of sales* 2,220.1 2,122.7 2,031.5 Marketing, distribution and administrative expenses 2,932.1 2,803.2 2,641.8 Contract settlement gain, net of related expenses (Note 15) (25.9) - - Asset impairment charge(Note 16) 23.9 - - Special charge (Note 13) 94.9 - 105.2 Operating profit 749.4 788.7 549.4 Interest expense 71.1 84.7 43.2 Interest income (14.4) (8.5) (11.1) Other expense, net 27.0 21.5 10.7 Total other expenses 83.7 97.7 42.8 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 665.7 691.0 506.6 Income taxes 230.9 201.7 204.2 Income before minority interest and cumulative effect of accounting changes 434.8 489.3 302.4 Minority interest (4.5) (4.2) - Income from continuing operations before cumulative effect of accounting changes 430.3 485.1 302.4 Cumulative effect of accounting changes, net of tax (0.3) (6.7) - Net income $ 430.0 $ 478.4 $ 302.4 Basic earnings per share: Continuing operations $ 1.82 $ 2.04 $ 1.18 Cumulative effect of accounting changes - (.03) - $ 1.82 $ 2.01 $ 1.18 Diluted earnings per share: Continuing operations $ 1.79 $ 2.02 $ 1.17 Cumulative effect of accounting changes - (.03) - $ 1.79 $ 1.99 $ 1.17 *2001 and 1999 include non-recurring charges of $2.5 and $46.0, respectively, for inventory write-downs. The accompanying notes are an integral part of these statements. -27- Consolidated Balance Sheets Avon Products, Inc.
In millions, except share data December 31 2001 2000 Assets Current assets Cash, including cash equivalents of $381.8 and $23.9 $ 508.5 $122.7 Accounts receivable (less allowance for doubtful accounts of $45.1 and $39.2) 519.5 499.0 Income tax receivable - 95.2 Inventories 612.5 610.6 Prepaid expenses and other 248.6 218.2 Total current assets 1,889.1 1,545.7 Property, plant and equipment, at cost Land 49.4 53.0 Buildings and improvements 664.0 659.5 Equipment 841.2 810.6 1,554.6 1,523.1 Less accumulated depreciation 779.7 754.7 774.9 768.4 Other assets 529.1 512.3 Total assets $ 3,193.1 2,826.4 Liabilities and Shareholders' (Deficit) Equity Current liabilities Debt maturing within one year $ 88.8 $105.4 Accounts payable 404.1 391.3 Accrued compensation 145.2 138.2 Other accrued liabilities 338.2 251.7 Sales and taxes other than income 108.8 101.1 Income taxes 375.9 371.6 Total current liabilities 1,461.0 1,359.3 Long-term debt 1,236.3 1,108.2 Employee benefit plans 436.6 397.2 Deferred income taxes 30.6 31.3 Other liabilities (including minority interest of $29.0 and $30.7) 103.2 95.2 Commitments and Contingencies (Notes 12 and 14) Share repurchase commitments (Note 2) - 51.0 Shareholders' (deficit) equity Common stock, par value $.25 - authorized: 800,000,000 shares; issued 356,312,680 and 354,535,840 shares 89.1 88.6 Additional paid-in capital 938.0 824.1 Retained earnings 1,389.9 1,139.8 Accumulated other comprehensive loss (489.5) (399.1) Treasury stock, at cost - 119,631,574 and 116,373,394 shares (2,002.1) (1,869.2) Total shareholders' (deficit) equity (74.6) (215.8) Total liabilities and shareholders' (deficit) equity $ 3,193.1 $2,826.4
The accompanying notes are an integral part of these statements. -28- Consolidated Statements of Cash Flows Avon Products, Inc. In millions Years ended December 31 2001 2000 1999 Cash flows from operating activities Net income $ 430.0 $ 478.4 $ 302.4 Adjustments to reconcile income to net cash provided by operating activities: Cumulative effect of accounting change 0.3 6.7 - Depreciation and amortization 109.1 97.1 83.0 Provision for doubtful accounts 105.6 94.3 87.5 Amortization of debt discounts(premiums) 14.9 1.4 (6.7) Translation losses(gains) 6.8 2.7 (.9) Deferred income taxes (31.1) 13.5 (20.0) Special charges, net of payments 89.1 (18.3) 84.1 Asset impairment charge 23.9 - - Other 15.9 13.8 9.8 Changes in assets and liabilities: Accounts receivable (155.5) (145.6) (132.7) Income tax receivable 95.2 (95.2) - Inventories (33.2) (103.3) (57.8) Prepaid expenses and other (17.7) (30.7) 1.1 Accounts payable and accrued liabilities 71.7 (57.3) 46.3 Income and other taxes 38.4 81.5 27.6 Noncurrent assets and liabilities (8.5) (15.1) 25.0 Net cash provided by operating activities 754.9 323.9 448.7 Cash flows from investing activities Capital expenditures (155.3) (193.5) (203.4) Disposal of assets 8.2 7.2 11.7 Acquisitions of subsidiary stock and other investing activities (5.0) (1.4) (16.5) Net cash used by investing activities (152.1) (187.7) (208.2) Cash flows from financing activities Cash dividends (181.9) (178.2) (186.3) Book overdrafts (0.2) (13.5) 15.9 Debt, net (maturities of three months or less) (23.0) (194.3) 227.2 Proceeds from short-term debt 99.7 90.5 90.8 Retirement of short-term debt (89.1) (92.2) (69.4) Proceeds from long-term debt 76.5 400.1 500.0 Retirement of long-term debt (.2) (.3) (.2) Proceeds from exercise of stock options 49.1 38.4 23.9 Repurchase of common stock (132.9) (68.1) (800.6) Other financing activities - (101.4) - Net cash used by financing activities (202.0) (119.0) (198.7) Effect of exchange rate changes on cash and equivalents (15.0) (11.9) (30.0) Net increase in cash and equivalents 385.8 5.3 11.8 Cash and equivalents at beginning of year 122.7 117.4 105.6 Cash and equivalents at end of year $ 508.5 $ 122.7 $ 117.4 Cash paid for: Interest, net of amounts capitalized $ 55.3 $ 98.6 $ 47.1 Income taxes, net of refunds received 123.7 207.6 176.0 The accompanying notes are an integral part of these statements. -29- Consolidated Statements of Changes in Shareholders' (Deficit) Equity Avon Products, Inc.
Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Treasury In millions, except share data Shares Amount Capital Earnings Loss Stock Total 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, net of taxes of $0.7 1.3 1.3 Total comprehensive income 254.0 Dividends - $.72 per share (184.3) (184.3) Exercise of stock options, including tax benefits of $7.9 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) Comprehensive income: Net income 478.4 478.4 Foreign currency translation adjustments (42.9) (42.9) Unrealized loss from available- for-sale securities, net of taxes of $3.3 (6.0) (6.0) Minimum pension liability adjustment, net of taxes of $0.3 (.5) (.5) Total comprehensive income 429.0 Dividends - $.74 per share (175.8) (175.8) Exercise of stock options, including tax benefits of $8.8 1,701,935 .4 49.1 49.5 Grant, cancellation and amortization of restricted stock 257,981 .1 6.6 6.7 Repurchase of common stock (68.1) (68.1) Share repurchase commitments ___________ ______ (51.0) ________ _______ _______ (51.0) Balance at December 31, 2000 354,535,840 88.6 824.1 1,139.8 (399.1) (1,869.2) (215.8) Comprehensive income: Net income 430.0 430.0 Foreign currency translation adjustments (50.6) (50.6) Unrealized loss from available- for-sale securities, net of taxes of $1.4 (2.6) (2.6) Minimum pension liability adjustment, net of taxes of $17.7 (35.0) (35.0) Net derivative losses on cash flow hedges, net of taxes of $1.2 (2.2) (2.2) Total comprehensive income 339.6 Dividends - $.76 per share (179.9) (179.9) Exercise of stock options, including tax benefits of $8.3 1,626,233 .4 55.0 55.4 Grant, cancellation and amortization of restricted stock 150,607 .1 7.9 8.0 Repurchase of common stock (132.9) (132.9) Share repurchase commitments ___________ ______ 51.0 ________ _______ _________ 51.0 Balance at December 31, 2001 356,312,680 $ 89.1 $ 938.0 $1,389.9 $(489.5) $(2,002.1) $(74.6)
The accompanying notes are an integral part of these statements. -30- 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 Beauty which consists of cosmetics, fragrance and toiletries ("CFT"); Beauty Plus which consists of jewelry, watches and apparel and accessories; and Beyond Beauty which consists of home products, gift and decorative and candles. Health and Wellness products are divided among all three product categories based on product segmentation. Avon's business is primarily 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. Additionally, Avon launched a Retail business in the U.S. in the third quarter of 2001. 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. Use of Estimates - These statements have been prepared in conformity with generally accepted accounting principles in the U.S. and require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. On an ongoing basis, management reviews its estimates, including those related to revenue recognition, allowances for doubtful accounts receivable, allowances for sales returns, provisions for inventory obsolescence, income taxes and tax valuation reserves, loss contingencies and the determination of discount and other rate assumptions for pension, post-retirement and post-employment benefit expenses. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known. Foreign Currency - Statement of Financial Accounting Standards ("FAS") No. 52 distinguishes between translation adjustments, which are usually reported as a separate component of Shareholders' (deficit) equity, and foreign currency transactions, which are included in the determination of net income. 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 loss. 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 earnings. Gains or losses resulting from foreign currency transactions are recorded in earnings in Other expense, net. Revenue Recognition - Net sales primarily includes sales generated as a result of Representative orders less any discounts, commissions, taxes and other -31- deductions. Avon recognizes revenue upon delivery, when both title and risks and rewards of ownership pass to the independent Representatives, who are Avon's customers. Prior to 2000, Avon recognized revenue as shipments were made. See Note 2 of the Notes to Consolidated Financial Statements. Avon uses estimates in determining revenue and operating profit for orders that have been shipped but not delivered as of the end of the period. These estimates are based on daily sales levels, delivery lead times, gross margin and variable expenses. Avon also estimates an allowance for sales returns based on historical experience with product returns. In addition, Avon estimates an allowance for doubtful accounts receivable based on analysis of historical data. Other revenues include shipping and handling fees charged to Representatives. Cash and Cash Equivalents - Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are high quality, short-term money market instruments with an original maturity of 3 months or less and consist of time deposits with a number of U.S. and non-U.S. commercial banks and money market fund investments. 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 cost reductions as a result of technological advancements and process improvements in its manufacturing operations. The FIFO method is a better measure of the current value of such inventories, provides a more appropriate matching of revenues and expenses, and conforms 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. Avon classifies inventory into various categories based upon their stage in the product life cycle, future sales plans and disposition process. Avon assigns a degree of obsolescence risk to products based on this classification to determine the level of obsolescence provision. 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. Deferred Software - 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. Unamortized deferred software costs totaled $97.4 and $121.2 at December 31, 2001 and 2000, respectively, and are included in Other assets on the Consolidated Balance Sheets. Stock Awards - 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 and awards 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 and is amortized over the vesting period. -32- Financial Instruments - The Company uses derivative financial instruments, including swaps, forward contracts and options, to manage interest rate and foreign currency exposures. Effective January 1, 2001, Avon records all derivative instruments at their fair values on the Consolidated Balance Sheet as either assets or liabilities (see Notes 2 and 7 of the Notes to Consolidated Financial Statements). Avon also uses financial instruments, including forward contracts to purchase Avon common stock, to hedge certain employee benefit costs and the cost of Avon's share repurchase program. Effective September 1, 2000, Avon adopted the provisions of Emerging Issues Task Force ("EITF") Issue No. 00-19 (see Note 2 of the Notes to Consolidated Financial Statements). Contracts that require physical or net share settlement and contracts that give Avon a choice of net-cash settlement or settlement in its own shares are recorded as equity instruments and are initially measured at fair value with subsequent changes in fair value not recognized. Contracts that require net-cash settlement and contracts that give the counterparty a choice of net-cash settlement or settlement in shares are recorded as assets or liabilities and 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 2001 - $45.9 (2000 - $43.1; 1999 - $38.2). Advertising - Advertising costs are expensed as incurred and aggregated in 2001 - $97.2 (2000 - $92.4; 1999 - $63.4). 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. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before Avon is able to realize their benefit, or that future deductibility is uncertain. U.S. income taxes have not been provided on approximately $221.5 of undistributed income of subsidiaries that has been or is intended to be permanently reinvested outside the United States. Shipping and Handling - Shipping and handling costs are expensed as incurred and aggregated in 2001 - $538.0 (2000 - $517.4; 1999 - $495.4). Shipping and handling costs are included in Marketing, distribution and administrative expenses on the Consolidated Statements of Income. Contingencies - Avon determines whether to disclose and accrue for loss contingencies based on an assessment of whether the risk of loss is remote, reasonably possible or probable and, where reasonable estimates can be made of the amount of potential loss, of the materiality of the loss contingency, in accordance with FAS No. 5, "Accounting for Contingencies". Reclassifications - To conform to the 2001 presentation, certain reclassifications were made to the prior years' Consolidated Financial Statements and the accompanying footnotes. Earnings per Share - Basic earnings per share ("EPS") are computed by dividing net income by the weighted-average number of shares outstanding during the year. Diluted EPS are calculated to give effect to all potentially dilutive common shares that were outstanding during the year. -33- For each of the three years ended December 31, the components of basic and diluted earnings per share are as follows: 2001 2000 1999 Numerator: Basic: Income from continuing operations before cumulative effect of accounting changes $ 430.3 $ 485.1 $ 302.4 Cumulative effect of accounting changes (0.3) (6.7) - ______ _ Net income $ 430.0 $ 478.4 $ 302.4 Diluted: Income from continuing operations before cumulative effect of accounting changes $ 430.3 $ 485.1 $ 302.4 Interest expense on Convertible Notes, net of taxes 10.0 4.5 - Income for purposes of computing diluted EPS before cumulative effect of accounting changes 440.3 489.6 302.4 Cumulative effect of accounting changes (0.3) (6.7) - Net income for purposes of computing diluted EPS $ 440.0 $ 482.9 $ 302.4 Denominator: Basic EPS weighted-average shares outstanding 236.83 237.67 256.78 Dilutive effect of: Assumed conversion of stock options and settlement of forward contracts 2.26* 2.06* 2.59* Assumed conversion of Convertible Notes 6.96 3.22 - Diluted EPS adjusted weighted-average shares outstanding 246.05 242.95 259.37 Basic EPS: Continuing operations $ 1.82 $ 2.04 $ 1.18 Cumulative effect of accounting changes - (.03) - $ 1.82 $ 2.01 $ 1.18 Diluted EPS: Continuing operations $ 1.79 $ 2.02 $ 1.17 Cumulative effect of accounting changes - (.03) - $ 1.79 $ 1.99 $ 1.17 *At December 31, 2001, 2000, and 1999 stock options and forward contracts to purchase Avon common stock totaling 0.3 million shares, 1.1 million shares and 3.8 million shares, respectively, are not included in the diluted EPS calculation since their impact is anti-dilutive. -34- 2. Accounting Changes Effective January 1, 2001, Avon adopted FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by FAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. FAS No. 133, as amended, requires all derivative instruments be recorded at their fair values on the Consolidated Balance Sheet as either assets or liabilities. In accordance with the provisions of FAS No. 133, Avon recorded a charge to earnings of $0.3, net of a tax benefit of $0.2, in the first quarter of 2001 to reflect the change in the time value of Avon's outstanding options from the dates of the options' inceptions through the date of transition (January 1, 2001). Avon also recorded a charge to Shareholders' (deficit) equity of $3.9, net of a tax benefit of $2.1, included in Accumulated other comprehensive loss in the Consolidated Balance Sheets, to recognize the fair value of all derivatives designated as cash flow hedging instruments, which Avon reclassified into earnings during 2001. These charges are reflected as a Cumulative effect of an accounting change in the accompanying Consolidated Financial Statements. In May 2000, the EITF reached a consensus on EITF 00-14, "Accounting for Certain Sales Incentives," which provides guidance on accounting for discounts, coupons, rebates and free products, as well as the income statement classification of these items. As a result of this new guidance, the cost of certain products used in Avon's promotional activities, which was previously reported in Marketing, distribution and administrative expenses, will be reclassified as Cost of sales. Although operating profit will remain unchanged, gross margin will decrease by approximately 0.5 points to 0.7 points, offset by a decrease in Marketing, distribution and administrative expenses. EITF 00-14 is effective January 1, 2002, for Avon and will be applied retroactively for purposes of comparability. In April 2001, the EITF reached a consensus on EITF 00- 25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products," which provides guidance on the income statement classification of consideration from a vendor to a retailer in connection with the retailer's purchase of the vendor's products or to promote sales of the vendor's products. In September 2001, the EITF issued EITF 01-09, "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products," which addresses the accounting for consideration given by a vendor to a customer or a reseller of the vendor's products. As a result of this new guidance, certain expenses related to the U.S. retail business included in Marketing, distribution and administrative expenses will be reclassified as a reduction of Net sales. EITF 00-25 and EITF 01-09 are both effective January 1, 2002, for Avon and will be applied retroactively for purposes of comparability. The adoption of EITF 00-25 and EITF 01-09 was not material to the Consolidated Financial Statements. In June 2001, the Financial Accounting Standard Board ("FASB") issued FAS No. 141, "Business Combinations," which addresses the accounting for the cost of an acquired business, and FAS No. 142, "Goodwill and Other Intangible -35- Assets," which addresses the accounting for goodwill and other intangible assets subsequent to their acquisition. FAS No. 141 was effective for business combinations completed after June 30, 2001, and FAS No. 142 was effective January 1, 2002, for the Company. The adoption of FAS Nos. 141 and 142 was not material. In August 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement Obligations," which addresses the accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. FAS No. 143 is effective January 1, 2003 for Avon. Avon is currently evaluating the impact of this new guidance. In October 2001, the FASB issued FAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses the accounting and reporting for the impairment and disposal of long-lived assets. FAS No. 144 was effective January 1, 2002 for Avon. The adoption of FAS No. 144 was not material. Effective January 1, 2000, the Company adopted Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 provides the Securities and Exchange Commission's views in applying generally accepted accounting principles to revenue recognition in the financial statements. As a result of adopting SAB No. 101, Avon changed its revenue recognition policy to recognize revenue upon delivery, when both title and risks and rewards of ownership pass to the independent Representative. In accordance with the provisions of SAB No. 101, the Company recorded a charge to earnings of $6.7, net of a tax benefit of $3.5, to reflect the accounting change. This charge is reflected as a Cumulative effect of an accounting change in the accompanying Consolidated Statements of Income. The change in accounting method would not have a material effect on the Consolidated Statements of Income in 1999 if adopted in this period. In September 2000, the EITF issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs". Under the provisions of EITF 00-10, amounts billed to a customer in a sales transaction related to shipping and handling should be classified as revenue. EITF 00-10 also requires the disclosure of the income statement classification of any shipping and handling costs. Prior to October 1, 2000, the Company included shipping and handling fees in Marketing, distribution and administrative expenses in the Consolidated Statements of Income. Effective October 1, 2000, Avon adopted EITF 00-10, with restatement of all comparative prior period financial statements. The adoption had no impact on the determination of net income. In September 2000, the EITF reached a consensus on EITF 00-19, "Determination of Whether Share Settlement Is Within the Control of the Issuer for Purposes of Applying Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock"". EITF 00-19 sets forth a model to be used to determine whether equity derivative contracts should be recorded as equity, an asset or a liability. Under the transition provisions of EITF 00-19, all contracts existing prior to the date of the consensus were grandfathered until June 30, 2001, with a cumulative catch-up adjustment at that time. Additionally, any contracts entered into prior to September 20, 2000, which were not revised to comply with EITF 00-19 by December 31, 2000, were required to be reclassified from permanent to temporary equity. In accordance with the transition provisions of EITF 00-19, contracts aggregating $51.0 did not comply with the provisions of EITF 00-19 at December 31, 2000, and were included in the accompanying Consolidated Balance Sheets in -36- Share repurchase commitments with a corresponding decrease in Additional paid-in capital. All of these contracts were settled prior to June 30, 2001 and therefore, no cumulative adjustment was recorded. All contracts entered into during 2001 met the requirements for equity classification under EITF 00-19. 3. Inventories Inventories at December 31 consisted of the following: 2001 2000 Raw materials $167.0 $168.0 Finished goods 445.5 442.6 Total $612.5 $610.6 4. Debt and Other Financing Debt at December 31 consisted of the following (see also Note 7 of the Notes to Consolidated Financial Statements regarding financial instruments): 2001 2000 Maturing within one year: Notes payable $ 87.6 $ 104.6 Current portion of long-term debt 1.2 .8 Total $ 88.8 $ 105.4 Long-term debt: 1.06% Yen Notes, due 2006 $ 68.8 $ - Convertible Notes, due 2020 422.4 407.0 6.90% Notes, due 2004 200.0 200.0 7.15% Notes, due 2009 300.0 300.0 6.25% Bonds, due 2018 100.0 100.0 6.55% Notes, due 2007 100.0 100.0 Other, payable through 2005 with interest from 3% to 17% 5.6 2.0 Total long-term debt 1,196.8 1,109.0 Interest rate swaps - FAS 133 adjustment* 40.7 - Less current portion (1.2) (.8) Total $1,236.3 $1,108.2 *Adjustment to reflect the fair value of outstanding interest rate swaps and an unamortized gain on a terminated swap agreement (see Note 7 of the Notes to Consolidated Financial Statements). Annual maturities of long-term debt (excluding the interest rate swaps) for each of the next five years are: 2002 - $1.2; 2003 - $2.1; 2004 - $202.1; 2005 - $.1; and 2006 and beyond - $991.3. Convertible Notes, due 2020 and 6.25% Bonds, due 2018 are subject to certain early maturity provisions described below in this Note 4. 1.06% Yen Notes, due 2006 - In September 2001, Avon issued 9,000.0 Japanese yen of notes payable (the "Yen Notes"). The Yen Notes are unsecured and unsubordinated obligations of Avon. The Yen Notes bear interest at a per annum rate of 1.06% and mature on September 20, 2006. Interest on the Yen Notes is payable semi-annually. The agency agreement under which the Yen Notes were issued limits the incurrence of liens under certain circumstances. The net proceeds from the issuance of the Yen Notes were used for general corporate purposes, including the repayment of short-term debt. The Yen Notes are designated as a hedge of Avon's net investment in its Japanese subsidiary (See Note 7 of the Notes to Consolidated Financial Statements). -37- In 2001, Avon entered into a series of short-term loan agreements to borrow Japanese yen. The loans bore interest at per annum rates ranging from 0.425% to 0.875% with interest payable at maturity. In September 2001, the remaining loan was repaid, together with the interest thereon, with the proceeds from the Yen Notes. Convertible Notes, due 2020 - In July 2000, Avon issued in a private placement $735.8 principal amount at maturity of zero-coupon convertible senior notes (the "Convertible Notes"), due July 12, 2020 with proceeds of approximately $350.0. The issue price per Convertible Note was $475.66, being 47.566% of the principal amount of $1,000 per Convertible Note at maturity. The Convertible Notes have a 3.75% yield to maturity and are convertible at any time into Avon's common stock at a conversion rate of 8.2723 shares of common stock per $1,000 principal amount at maturity of the Convertible Notes (equivalent to a conversion price of $57.50 per share based on the initial offering price of the Convertible Notes). The Convertible Notes may be redeemed at the option of Avon on or after July 12, 2003, at a redemption price equal to the issue price plus accrued original issue discount to the redemption date. The holders can require Avon to purchase all or a portion of the Convertible Notes on July 12, 2003, July 12, 2008, and July 12, 2013, at the redemption price per Convertible Note of $531.74, $640.29 and $771.00, respectively. The holders may also require Avon to repurchase the Convertible Notes if a fundamental change, as defined, involving Avon occurs prior to July 12, 2003. Avon has the option to pay the purchase price or, if a fundamental change has occurred, the repurchase price in cash or common stock or a combination of cash and common stock. The indenture under which the Convertible Notes were issued restricts the Company's ability to merge with or consolidate into another company or to sell substantially all of Avon's assets. Avon also granted to the initial purchasers of the Convertible Notes an over-allotment option to purchase an additional $105.0 of Convertible Notes. As of August 8, 2000, the over-allotment option had been exercised and additional Convertible Notes with an aggregate principal amount at maturity of approximately $105.0 were purchased by the initial purchasers from Avon for proceeds of approximately $50.0. The net proceeds from the offering (including the proceeds of the over-allotment option) were used for general corporate purposes, including the repayment of short-term debt. 6.90% Notes, due 2004 and 7.15% Notes, due 2009 - In November 1999, Avon issued $500.0 of notes payable (the "Notes") in a private offering to institutional investors. The Notes are unsubordinated, unsecured obligations of Avon. $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 a merger, consolidation or a sale of substantially all of Avon's assets. In connection with the November 1999 offering, Avon entered into five-year and 10-year interest rate swap contracts with notional amounts totaling $200.0 and $300.0, respectively, to effectively convert fixed interest rates on the Notes to variable interest rates, based on commercial paper rates. -38- In November 2000, these interest rate swap contracts were terminated. The cost to settle these contracts is being amortized to Interest expense over the remaining term of the underlying debt. At the same time, Avon entered into new four-year and nine-year interest rate swap contracts with notional amounts totaling $200.0 and $300.0, respectively, to effectively convert fixed interest on the Notes to variable interest rates, based on LIBOR. In September 2001, Avon terminated an interest rate swap contract with a notional amount of $100.0, effective November 15, 2001. At inception, the swap was designated as a hedge of a portion of Avon's five-year, $200.0 Notes and accordingly both the interest rate swap and underlying debt were adjusted to reflect their fair values at termination. Effective with the termination of the swap, the fair value adjustment to the underlying debt is being amortized over the remaining term of that debt. In November 2001, Avon entered into a new three-year interest rate swap contract with a notional amount of $100.0 to effectively convert fixed interest on a portion of the Notes to a variable interest rate, based on LIBOR. In September 2001, Avon entered into two forward interest rate agreements, each with a notional amount of $150.0, to protect against increases in interest rates on a portion of Avon's fixed to variable interest rate swap contracts. The agreements provide six-month LIBOR interest rate locks at 2.48% and 2.915% for the periods November 15, 2001 to May 15, 2002 and May 15, 2002 to November 15, 2002, respectively. In October 2001, Avon entered into a forward interest rate agreement with a notional amount of $250.0 to protect against increases on a portion of Avon's fixed to variable interest rate swap contracts. The agreement provides a six-month LIBOR interest rate lock at 2.28% for the period November 15, 2001 to May 15, 2002. The forward interest rate agreements have not been designated as hedges pursuant to FAS No. 133 and have been recorded in the Consolidated Financial Statements at fair value. 6.25% Bonds, due 2018 - 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 20-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 15-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 May 1998 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. 6.55% Notes, due 2007 - During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007, to pay down commercial paper borrowings. Revolving Credit Facility, Lines of Credit and Letters of Credit - Avon has a five-year $600.0 revolving credit and competitive advance facility (the "credit facility"), which expires in 2006. The credit facility may be used for general corporate purposes, including financing working capital and capital expenditures and supporting the stock repurchase program. The interest rate on borrowings under the credit facility is based on LIBOR or on the higher of prime or 1/2% plus the federal funds rate. The credit facility has an annual facility fee, payable quarterly, of $0.5, based on Avon's current credit ratings. The credit facility contains customary covenants, including one which requires Avon's interest coverage ratio (determined in relation to Avon's consolidated pre-tax -39- income and interest expense) to equal or exceed 4:1. At December 31, 2001, Avon was in compliance with all covenants in the credit facility. At December 31, 2001 and December 31, 2000, there were no borrowings under the credit facility. Avon maintains a $600.0 commercial paper program, which is supported by the credit facility. Outstanding commercial paper effectively reduces the amount available for borrowing under the credit facility. At December 31, 2001, Avon had no commercial paper outstanding, and at December 31, 2000, Avon had $29.9 in commercial paper outstanding under this program. Avon had uncommitted domestic lines of credit available of $49.0 in 2001 and 2000 with various banks which have no compensating balances or fees. As of December 31, 2001 and 2000, $11.1 of these lines were being used for letters of credit. The maximum borrowings under these combined domestic facilities during 2001 and 2000 were $409.0 and $515.4, respectively, and the annual average borrowings during each year were approximately $202.0 and $313.7, respectively, at average annual interest rates of approximately 3.4% and 6.5%, respectively. At December 31, 2001 and 2000, international lines of credit totaled $457.4 and $449.5, respectively, of which $87.9 and $74.8, respectively, were outstanding and included in Notes payable and Long-term debt. The maximum borrowings under these facilities during 2001 and 2000 were $89.0 and $86.4, respectively, and the annual average borrowings during each year were $77.4 and $77.8, respectively, at average annual interest rates of approximately 7.3% and 6.9%, respectively. Such lines have no compensating balances or fees. At December 31, 2001 and 2000, Avon also had letters of credit outstanding totaling $13.9 and $9.5, respectively, which guarantee various insurance activities. In addition, Avon had outstanding letters of credit for various trade activities and commercial commitments executed in the ordinary course of business, such as purchase orders for normal replenishment of inventory levels. -40- 5. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss at December 31 consisted of the following: 2001 2000 Foreign currency translation Aadjustments $(429.1) $(378.5) Unrealized loss from available-for- sale securities, net of taxes (8.6) (6.0) Minimum pension liability adjustment, net of taxes (49.6) (14.6) Net derivative losses from cash flow hedges, net of taxes (2.2) ______- Total $(489.5) $(399.1) 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: 2001 2000 Deferred tax assets: Postretirement benefits $ 76.5 $ 80.7 Accrued expenses 51.0 48.9 Special and non-recurring charges 30.7 2.4 Employee benefit plans 79.6 69.8 Foreign operating loss carryforwards 29.1 25.9 Capital loss carryforwards - .2 Postemployment benefits 7.4 7.4 Revenue recognition 3.0 4.2 All other 36.1 32.0 Valuation allowance (28.8) (25.4) Total deferred tax assets 284.6 246.1 Deferred tax liabilities: Depreciation (40.4) (43.1) Prepaid retirement plan costs (47.8) (50.0) Capitalized interest (7.7) (8.7) Capitalized software (15.4) (1.4) Unremitted foreign earnings (15.0) (13.7) All other (34.0) (27.2) Total deferred tax liabilities (160.3) (144.1) Net deferred tax assets $ 124.3 $ 102.0 -41- Deferred tax assets (liabilities) at December 31 were classified as follows: 2001 2000 Deferred tax assets: Prepaid expenses and other $ 111.7 $ 86.0 Other assets 62.5 66.1 Total deferred tax assets 174.2 152.1 Deferred tax liabilities: Income taxes (19.3) (18.8) Deferred income taxes (30.6) (31.3) Total deferred tax liabilities (49.9) (50.1) Net deferred tax assets $ 124.3 $102.0 The valuation allowance primarily represents reserves for foreign operating loss and capital loss carryforwards. The basis used for recognition of deferred tax assets included the profitability of the operations and related deferred tax liabilities. Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes for the years ended December 31 was as follows: 2001 2000 1999 United States $ 148.5 $ 172.0 $ 102.2 Foreign 517.2 519.0 404.4 Total $ 665.7 $ 691.0 $ 506.6 The provision for income taxes for the years ended December 31 was as follows: 2001 2000 1999 Federal: Current $ 61.8 $ (3.2) $ 48.4 Deferred (9.4) 11.1 (13.3) 52.4 7.9 35.1 Foreign: Current 197.2 183.8 167.5 Deferred (21.4) - (4.5) 175.8 183.8 163.0 State and other: Current 3.0 7.6 8.3 Deferred (.3) 2.4 (2.2) 2.7 10.0 6.1 Total $ 230.9 $ 201.7 $ 204.2 The effective tax rate for the years ended December 31 was as follows: 2001 2000 1999 Statutory federal rate 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit .3 .5 .8 Tax-exempt operations .7 (.2) (.3) Taxes on foreign income, including translation (.8) .3 4.2 Tax refund, net of taxes - (5.8) - Other (.5) (.6) .6 Effective tax rate 34.7% 29.2% 40.3% -42- At December 31, 2001, Avon had foreign operating loss carryforwards of approximately $91.1. The loss carryforwards expiring between 2002 and 2009 were $71.8 and the loss carryforwards which do not expire were $19.3. There are no capital loss carryforwards that expire in 2002 which may be used to offset capital gains. In January 2001, Avon received a federal income tax refund consisting of $32.5 of tax and $62.7 of interest related to the carryback of foreign tax credits and general business credits to the years ended December 31, 1982, 1983, 1985 and 1986. The Company recognized $40.1 million as an income tax benefit in 2000 resulting from the impact of the tax refund offset by taxes due on interest received and other related tax obligations. 7. Financial Instruments and Risk Management Avon operates globally, with manufacturing and distribution facilities in various locations around the world. Avon may reduce its exposure to fluctuations in earnings and cash flows associated with changes in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. Since Avon uses foreign currency rate sensitive and interest rate sensitive instruments to hedge a certain portion of its existing and forecasted transactions, Avon expects that any loss in value for the hedge instruments generally would be offset by increases in the value of the underlying transactions. Avon does not enter into derivative financial instruments for trading purposes, nor is Avon a party to leveraged derivatives. General Derivatives are recognized on the balance sheet at their fair values. The accounting for changes in fair value (gains or losses) of a derivative instrument depends on whether it has been designated by Avon and qualifies as part of a hedging relationship and further, on the type of hedging relationship. Changes in the fair value of a derivative that is designated as a fair value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk, are recorded in earnings. Changes in the fair value of a derivative that is designated as a cash flow hedge are recorded in other comprehensive income ("OCI") to the extent effective and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of a derivative that is designated as a hedge of a net investment in a foreign operation are recorded in foreign currency translation adjustments within OCI to the extent effective as a hedge. "Effectiveness" is the extent to which changes in fair value of a derivative offsets changes in fair value of the hedged item. Changes in the fair value of a derivative not designated as a hedging instrument are recognized in earnings in Other expense, net on the Consolidated Statements of Income. Avon assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Highly effective means that cumulative changes in the fair value of the derivative are between 80% - 125% of the cumulative changes in the fair value of the hedged item. The ineffective portion of the derivative's gain or loss, if any, is recorded in earnings in Other expense, net on the Consolidated Statements of Income. Prior to June 1, 2001, Avon excluded the change in the time value of option contracts from its assessment of hedge effectiveness. Effective June 1, 2001, Avon includes the change in the time value of options -43- in its assessment of hedge effectiveness. When Avon determines that a derivative is not highly effective as a hedge, hedge accounting is discontinued prospectively. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, Avon discontinues hedge accounting for the affected portion of the forecasted transaction, and reclassifies gains and losses that were accumulated in OCI to earnings in Other expense, net on the Consolidated Statements of Income. Interest Rate Risk Avon uses interest rate swaps to hedge interest rate risk on its fixed-rate debt. In addition, Avon may periodically employ interest rate caps and forward interest rate agreements to reduce exposure, if any, to increases in variable interest rates. Avon has entered into interest rate swap contracts that effectively convert $550.0 of its fixed-rate debt to a variable rate based on LIBOR. Avon has designated the interest rate swaps as fair value hedges pursuant to FAS No. 133 (see Note 4 of the Notes to Consolidated Financial Statements). During 2001, Long-term debt increased by $33.2 with a corresponding increase to Other assets to reflect the fair values of outstanding interest rate swap contracts. Long-term debt also included the remaining unamortized gain of $7.5 resulting from a terminated swap agreement, which is being amortized over the remaining term of the underlying debt. There were no amounts of hedge ineffectiveness for the year ended December 31, 2001 related to these interest rate swaps. Avon has forward interest rate agreements to protect against increases in interest rates on a portion of Avon's fixed to variable interest rate swap contracts (see Note 4 of the Notes to Consolidated Financial Statements). The forward interest rate agreements have not been designated as hedges and have been recorded at fair value in the Consolidated Financial Statements. Foreign Currency Risk Avon uses foreign currency forward contracts and options to hedge portions of its forecasted foreign currency cash flows resulting from intercompany royalties, intercompany loans, and other third-party and intercompany foreign currency transactions where there is a high probability that anticipated exposures will materialize. These contracts have been designated as cash flow hedges. At December 31, 2001, the primary currencies for which Avon has net underlying foreign currency exchange rate exposure are the U.S. dollar versus the Argentine peso, Brazilian real, British pound, the euro, Japanese yen, Mexican peso, Philippine peso, Polish zloty, the Russian ruble and the Venezuelan bolivar. For the year ended December 31, 2001, the ineffective portion of Avon's cash flow hedging instruments was not material. In addition, the portion of hedging instruments excluded from the assessment of hedge effectiveness (time value of options prior to June 1, 2001) was not material. For the year ended December 31, 2001, the net gain reclassified from OCI to earnings for cash flow hedges that had been discontinued because the forecasted transactions were not probable of occurring, were not material. At December 31, 2001, Avon held foreign currency forward contracts and option contracts, principally for the Mexican peso, the euro, Japanese yen, Brazilian real, British pound, Canadian dollar, Czech koruna, Hungarian forint and Taiwanese dollar, with aggregate notional amounts totaling $385.6 and $30.4, respectively, for both the purchase and/or sale of foreign currencies. -44- At December 31, 2001, the maximum remaining term over which Avon was hedging exposures to the variability of cash flows for all forecasted transactions was 13 months. As of December 31, 2001, Avon expected to reclassify $3.5 ($2.3, net of taxes) of net losses on derivative instruments designated as cash flow hedges from Accumulated other comprehensive loss to earnings during the next 12 months due to (a) foreign currency denominated intercompany royalties (b) intercompany loan settlements and (c) foreign currency denominated purchases or receipts. For the year ended December 31, 2001, cash flow hedges impacted Accumulated other comprehensive loss as follows: Net derivative losses at beginning of year $ - Cumulative effect of accounting change, net of taxes of $2.1 (3.9) Net losses on derivative instruments, net of taxes of $1.8 (3.3) Reclassification of net losses to earnings, net of taxes of $2.7 5.0 Net derivative losses at end of year, net of taxes of $1.2 $ (2.2) Avon also enters into foreign currency forward contracts and options to protect against the adverse effects that exchange rate fluctuations may have on the earnings of its foreign subsidiaries. These derivatives do not qualify for hedge accounting and therefore, the gains and losses on these derivatives have been recognized in earnings each reporting period. Hedges of Net Investments in Foreign Operations Avon uses foreign currency forward contracts and foreign currency denominated debt to hedge the foreign currency exposure related to the net assets of certain of its foreign subsidiaries. During 2001, Avon entered into loan agreements and notes payable to borrow Japanese yen to hedge Avon's net investment in its Japanese subsidiary (see Note 4 of the Notes to Consolidated Financial Statements). Avon also entered into foreign currency forward contracts to hedge its net investment in its Mexican subsidiary. For the year ended December 31, 2001, net gains of $5.1 related to the effective portion of these hedges were included in foreign currency translation adjustments within Accumulated other comprehensive loss on the Consolidated Balance Sheets. Other Financing Activities As of December 31, 2001, Avon has forward contracts to purchase approximately 271,000 shares of Avon common stock at an average price of $46.01 per share. The contracts mature in October 2002 and were recorded as equity instruments. As equity instruments, no adjustment for subsequent changes in fair value has been recognized. Credit and Market Risk Avon attempts to minimize its credit exposure to counterparties by entering into interest rate swap, forward rate and interest rate cap contracts only with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor's Corporation. Avon's foreign currency and interest rate derivatives are comprised of over-the-counter forward contracts, swaps or options with major international financial institutions. Although the Company's theoretical credit risk is the replacement cost at the -45- then estimated fair value of these instruments, management believes that the risk of incurring credit risk losses is remote and that such losses, if any, would not be material. Non-performance of the counterparties on the balance of all the foreign exchange and interest rate swap and forward rate agreements would not result in a material write-off at December 31, 2001. In addition, Avon may be exposed to market risk on its foreign exchange and interest rate swap and forward rate 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 - 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 methods and assumptions used to estimate fair value are as follows: Grantors trust - The fair value of these investments, principally fixed income funds and equity securities, was based on the quoted market prices for issues listed on exchanges. Debt maturing within one year and Long-term debt - The fair value of all debt and other financing was estimated based on quoted market prices. Share repurchase commitments and foreign exchange forward and option contracts - The fair value of forward and option contracts was estimated based on quoted market prices from banks. Interest rate swap, forward rate and cap agreements - The fair value of interest rate swap, forward rate and cap agreements was estimated based on quotes from market makers of these instruments and represent the estimated amounts that Avon would expect to receive or pay to terminate the agreements. The asset (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at December 31 consisted of the following: 2001 2000 Carrying Fair Carrying Fair Amount Value Amount Value Cash and cash equivalents $ 508.5 $ 508.5 $ 122.7 $ 122.7 Grantors trust 61.5 61.5 70.1 70.1 Debt maturing within one year (88.8) (88.8) (105.4) (105.4) Long-term debt, net of related discount or premium (1,236.2) (1,250.3) (1,108.8) (1,139.3) Share repurchase commitments (.6) (.7) (51.0) (14.8) Foreign exchange forward and option contracts (7.3) (7.3) .6 (4.2) Interest rate swap, forward rate and cap agreements 35.1 35.1 .3 20.0 -46- 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 was as follows: 1999 2000 2001________ 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 7,127 $25.46 8,106 $29.38 9,579 $33.47 Granted 2,225 37.33 3,424 38.28 2,729 41.96 Exercised (1,152) 20.35 (1,702) 23.94 (1,626) 28.94 Forfeited (94) 31.14 (249) 31.68 (131) 36.09 Outstanding - end of year 8,106 $29.38 9,579 $33.47 10,551 $36.33 Options exercisable - end of year 3,627 $23.32 4,241 $28.61 4,869 $32.23 The following table summarizes information about stock options outstanding at December 31, 2001: ___Options Outstanding__ ___Options Exercisable__ Exercise Shares Average Average Shares Average Prices (in 000's) Price Term (in 000's) Price $13.13 - 29.63 893 $20.07 5 years 825 $19.30 30.06 - 39.91 6,646 35.96 7 years 3,849 34.46 40.16 - 54.81 3,012 41.97 9 years 195 42.88 10,551 4,869 The 1993 Stock Incentive Plan (the "1993 Plan"), and the Avon Products, Inc. 2000 Stock Incentive Plan (the "2000 Plan"), which replaced the 1993 Plan effective May 4, 2000, provide for several types of equity-based incentive compensation awards. Under the 2000 Plan, the maximum number of shares that may be awarded is 18,250,000 shares, of which no more than 6,000,000 shares may be used for restricted share and stock bonus grants. Under the 1993 Plan, the maximum number of shares that could be awarded was 14,100,000 shares, of which no more than 8,000,000 shares could be used for restricted share and stock bonus grants. Awards under either plan may be in the form of stock options, stock appreciation rights, dividend equivalent rights or performance unit awards. Stock options are granted at a price no less than fair market value on the date the option is granted and have a term of 10 years from the date of grant. During 2001, 2000 and 1999, restricted shares with aggregate value and vesting and related amortization periods were granted as follows: 2001 - 143,500 valued at $6.2 vesting over one to three years; 2000 - 261,700 valued at $10.2 vesting over one to three years and 1999 - 137,000 valued at $5.8 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 provided for the grant of two forms of incentive awards, performance units for potential cash incentives and 10-year stock options. Performance units were earned over the three-year performance period (1997-1999), based on the degree of -47- attainment of performance objectives. As of December 31, 1999, certain performance goals under the 1997 LTIP were achieved and, accordingly, cash incentives totaling approximately $31.0 were paid in 2000. Effective May 4, 2000, stock options are awarded annually over a three-year performance period and vest in thirds over the three-year period following each option grant date under the 2000 Plan. As discussed above, these options are granted at the fair market value on the date the option is granted. Compensation expense under all stock-based compensation plans in 2001 was $7.5 (2000 - $6.6; 1999 - $20.4). The unamortized cost of restricted shares as of December 31, 2001, was $8.5 (2000 - $10.0). The Company has adopted the disclosure provisions of FAS No. 123, "Accounting for Stock-Based Compensation", in lieu of recording the value of the compensation costs of those plans, as permitted by 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 (after the cumulative effect of the accounting change) would have been the pro forma amounts indicated below: 2001 2000 1999 Pro forma net income $ 402.4 $ 460.9 $ 291.0 Pro forma earnings per share: Basic $ 1.70 $ 1.94 $ 1.13 Diluted $ 1.68 $ 1.92 $ 1.12 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: 2001 2000 1999 Risk-free interest rate 4.7% 6.7% 5.4% Expected life 5 years 5 years 5 years Expected volatility 40% 40% 30% Expected dividend yield 2.0% 2.0% 2.0% The weighted-average grant date fair values of options granted during 2001, 2000 and 1999 were $12.05, $11.73 and $10.09, respectively. 9. Shareholders' (Deficit) Equity 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. -48- Stock Repurchase Programs - During 1994, Avon's Board authorized a stock repurchase program under which Avon could 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. In February 1997, Avon's Board authorized a new repurchase program under which the Company was authorized to buy back up to $1,100.0 of its outstanding common stock through open market purchases over a period of up to five years. In the third quarter of 2000, when the program was completed, the cumulative number of shares repurchased was 33.7 million shares at a total cost of $1,060.0. In September 2000, Avon's Board approved a new share repurchase program under which the Company may buy up to $1,000.0 of its outstanding stock over the next five years. As of December 31, 2001, the Company had repurchased approximately 3.9 million shares at a total cost of approximately $158.8 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. Avon 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. In 2001, 2000 and 1999, matching contributions approximating $13.3, $12.7 and $12.8, respectively, were made to this plan in cash, which was then used by the plan to purchase Avon shares in the open market. 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. 52,786 shares 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 2001 and 2000 consisted of 32,000 and 34,000 options, respectively, with an exercise price of $43.12 and $38.25, respectively. Also effective as of May 1, 1997, the annual retainer paid to non-management directors was changed to consist of twenty-five thousand dollars cash plus an annual grant of shares having a value of twenty-five thousand dollars based on the average closing market price of the stock for the 10 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 2001 and 2000 consisted of a total of 5,024 and 5,232 shares, respectively. Effective January 1, 2002, the annual retainer paid to non-management directors was increased to thirty thousand dollars cash plus an annual grant of shares having a value of thirty thousand dollars based on the average closing market price of the stock for the 10 days preceding the date of grant. -49- 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. This conversion also included a 10-year transitional benefit arrangement for certain employees covered under a pre-existing defined benefit retirement plan who retire during that 10-year period, which provides them with the higher of the benefit they would have received under the previous defined benefit retirement plan and the current cash balance 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. In 2000, Avon adopted certain amendments to its retiree medical plans which increased retiree contributions, changed the prescription drug program and implemented a future cap on Company contributions. -50- The following provides a reconciliation of benefit obligations, plan assets and funded status of these plans: Pension Postretirement Benefits Benefits 2001 2000 2001 2000 Change in benefit obligation: Beginning balance $(914.2) $(919.2) $(136.0) $(181.6) Service cost (34.3) (36.5) (1.2) (1.9) Interest cost (65.2) (65.6) (10.7) (11.2) Actuarial (loss) gain (76.0) (6.8) (44.2) 2.7 Benefits paid 90.6 84.3 16.9 13.7 Plan amendments (.4) (1.5) - 42.1 Settlements/special termination benefits (11.5) 1.7 (1.2) - Foreign currency changes 19.0 31.2 - - Other (7.4) (1.8) .3 .2 Ending balance $(999.4) $(914.2) $(176.1) $(136.0) Change in plan assets: Beginning balance $ 799.3 $ 860.0 $ - $ - Actual (loss) return on plan assets (44.9) 7.1 - - Company contributions 59.2 39.9 16.9 13.7 Plan participant contributions 2.1 2.0 - - Benefits paid (90.6) (84.3) (16.9) (13.7) Foreign currency changes (7.9) (21.3) - - Settlements/special termination benefits (.6) (4.1) - - Ending balance $ 716.6 $ 799.3 $ - $ - Funded status of the plan: $(282.8) $(114.9) $(176.1) $(136.0) Unrecognized actuarial loss(gain) 291.6 107.5 17.0 (27.6) Unrecognized prior service cost 2.2 2.8 (37.8) (44.3) Unrecognized net transition obligation 1.9 2.1 .2 .3 Accrued benefit cost $ 12.9 $ (2.5) $(196.7) $(207.6) Amount recognized in the statements: Prepaid benefit $ 158.1 $ 143.9 $ - $ - Accrued liability (145.2) (146.4) (196.7) (207.6) Additional minimum liability (85.6) (31.1) - - Intangible asset 9.6 7.8 - - Accumulated other comprehensive loss 76.0 23.3 - - $ 12.9 $ (2.5) $(196.7) $(207.6) At December 31, 2001 and 2000, the weighted-average discount rate used in determining the pension benefit obligation was 6.7% and 7.1%, respectively. At December 31, 2001 and 2000, the weighted-average discount rates used in determining the postretirement benefit obligation were 7.3% and 7.8%, 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 $606.5, $564.1, and $178.2, respectively, as of December 31, 2001, and $390.3, $349.0, and $40.1, respectively, as of December 31, 2000. -51- Net periodic benefit cost for the years ended December 31 was determined as follows: Pension Postretirement Benefits Benefits s 2001 2000 1999 2001 2000 1999 Service cost $ 34.3 $ 36.5 $ 38.1 $ 1.2 $ 1.9 $ 3.6 Interest cost 65.2 65.6 67.6 10.7 11.2 13.4 Expected return on plan assets (68.1) (66.6) (69.6) - - - Amortization of transition liability .2 (.7) (.7) - - - Amortization of prior service cost 1.0 1.0 .8 (3.9) - - Amortization of actuarial losses (gains) 4.0 5.6 10.2 (.3) (3.8) (.4) Settlements or curtailments 2.5 (1.2) 2.0 (2.1) - - Special termination benefits 9.4 2.5 1.5 .7 - - Other (1.1) (.9) - - - - Net periodic benefit cost $ 47.4 $ 41.8 $ 49.9 $ 6.3 $ 9.3 $16.6 In 2001, the plan assets experienced weaker investment returns, which was mostly due to unfavorable returns on equity securities. These unfavorable investment returns are expected to increase pension costs in the near future. In addition, net periodic pension cost may significantly increase in the future if settlement losses are required due to an increase in the aggregate benefits paid as lump sum distributions. Settlement losses may result in the future if the number of eligible participants deciding to receive lump sum distributions and the amount of their benefits increases. Special termination benefits primarily represent the impact of employee terminations on the Company's benefits plans in the U.S. and certain international locations (see Note 13 of the Notes to Consolidated Financial Statements). The weighted-average assumptions used to determine the data for the years ended December 31 were as follows: Pension Postretirement Benefits Benefits___ 2001 2000 1999 2001 2000 1999 Discount rate 7.1% 7.2% 6.8% 7.8% 8.0% 7.0% Rate of compensation increase 3.9 4.0 4.0 4.5 4.5 4.5 Rate of return on assets 8.8 8.8 8.8 N/A N/A N/A For 2001, the assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 10% for pre- age 65 claims and post-age 65 claims and will gradually decrease each year thereafter to 5.0% in 2005 and beyond. 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 $ .6 $ (.6) Effect on postretirement benefit obligation 7.4 (7.1) Supplemental Retirement Program - Avon maintains a supplemental retirement program consisting of a Supplemental Executive Retirement Plan ("SERP") and a Benefits Restoration -52- Pension Plan ("Restoration Plan") under which non-qualified supplemental pension benefits are paid to higher paid employees in addition to amounts received under Avon's qualified retirement plan which is subject to IRS limitations on covered compensation. The annual cost of this program has been included in the determination of the net periodic benefit cost shown above and in 2001 amounted to $10.5 (2000 - $10.2, 1999 - $10.1). The benefit obligation under this program at December 31, 2001 was $35.5 (2000 - $32.9) and was 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, 2001 was $26.6 (2000 - $26.1) and is held in a grantors trust. In addition, Avon has established a grantors trust to provide funding for the benefits payable under the SERP and SLIP and to provide for funding of obligations under Avon's Deferred Compensation Plan. The trust is irrevocable and, although subject to creditors' claims, 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, 2001, amounting to $88.1 (2000 - $96.2), consisted of a fixed-income portfolio, a managed portfolio of equity securities, corporate- owned life insurance policies and cash and cash equivalents. These assets are included in Other assets. The equity securities and fixed-income portfolio included in the grantors trust are classified as available-for-sale and recorded at current market value. In 2001 and 2000, net unrealized gains and losses on these securities were recorded in Accumulated other comprehensive loss (see Note 5 of the Notes to Consolidated Financial Statements). The cost, gross unrealized gains and losses and market value of the available- for-sale securities as of December 31, were as follows: 2001 Gross Gross Unrealized Unrealized Market Cost Gains Losses Value Equity Securities $ 44.4 $ 1.5 $ (15.2) $ 30.7 U.S. Government Bonds 2.1 - - 2.1 State and Municipal Bonds 21.9 .4 (.1) 22.2 Mortgage Backed 2.8 - - 2.8 Corporate Bonds .6 - - .6 Total available-for-sale securities 71.8 1.9 (15.3) 58.4 Cash and Equivalents 3.1 - - 3.1 Total $ 74.9 $ 1.9 $ (15.3) $ 61.5 Payments, proceeds and net realized losses from the purchases and sales of these securities totaled $50.9, $58.3 and $0.1, respectively, during 2001. 2000 Gross Gross Unrealized Unrealized Market Cost Gains Losses Value Equity Securities $ 44.2 $ 2.6 $ (12.2) $ 34.6 U.S. Government Bonds 1.5 - - 1.5 State and Municipal Bonds 30.9 .6 (.2) 31.3 Mortgage Backed 1.9 - - 1.9 Corporate Bonds .8 - - .8 Total $ 79.3 $ 3.2 $ (12.4) $ 70.1 Payments, proceeds and net realized gains from the purchases and sales of these securities totaled $99.3, $100.3 and $5.8, respectively, during 2000. For the purpose of determining realized gains and losses, the cost of securities sold was based on specific identification. -53- 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, 2001, the accrued cost for postemployment benefits was $32.7 (2000 - $31.9) and was 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, Europe and Pacific regions. With the exception of the U.S. retail business, 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. Summarized financial information concerning Avon'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 6. Total Assets: 2001 2000 1999 North America U.S. $ 638.9 $ 640.0 $ 536.9 U.S. Retail* 29.2 12.0 13.3 Other** 119.1 116.2 101.2 Total 787.2 768.2 651.4 International Latin America North*** 334.6 292.9 248.9 Latin America South 277.8 310.7 294.1 Latin America 612.4 603.6 543.0 Europe 512.3 451.3 415.4 Pacific 393.9 399.8 411.2 Total 1,518.6 1,454.7 1,369.6 Corporate and other 887.3 603.5 507.6 Total assets $3,193.1 $2,826.4 $2,528.6 *Includes U.S. Retail and Avon Centre. **Includes Canada and Puerto Rico. ***Avon's operations in Mexico reported total assets at December 31, 2001, 2000 and 1999 of $211.0, $189.9 and $157.4, respectively. -54- Capital Expenditures: 2001 2000 1999 North America U.S. $ 26.4 $ 67.6 $ 39.2 U.S. Retail* 7.5 .1 .4 Other** 6.4 8.6 8.7 Total 40.3 ____76.3 48.3 International Latin America North*** 20.5 17.5 37.6 Latin America South 15.4 24.6 15.8 Latin America 35.9 42.1 53.4 Europe 42.0 47.1 39.6 Pacific 11.9 13.4 33.6 Total 89.8 102.6 126.6 Corporate and other 25.2 14.6 28.5 Total capital expenditures $ 155.3 $ 193.5 $ 203.4 *Includes U.S. Retail and Avon Centre. **Includes Canada and Puerto Rico. ***Avon's operations in Mexico reported capital expenditures for 2001, 2000 and 1999 of $13.9, $11.7 and $32.1, respectively. Depreciation and Amortization: 2001 2000 1999 North America U.S. $ 32.4 $ 28.5 $ 23.7 U.S. Retail* 1.5 .9 .4 Other** 3.0 2.6 2.4 Total 36.9 32.0 26.5 International Latin America North*** 9.9 9.3 6.4 Latin America South 7.8 7.4 6.6 Latin America 17.7 16.7 13.0 Europe 18.7 16.0 15.4 Pacific 15.3 16.9 16.1 Total 51.7 49.6 44.5 Corporate and other 20.5 15.5 12.0 Total depreciation and amortization $ 109.1 $ 97.1 $ 83.0 *Includes U.S. Retail and Avon Centre. **Includes Canada and Puerto Rico. ***Avon's operations in Mexico reported depreciation and amortization for 2001, 2000 and 1999 of $7.0, $5.7 and $4.4, respectively. -55- Long-Lived Assets: 2001 2000 1999 North America U.S. $ 253.5 $ 264.4 $ 228.8 U.S. Retail* 16.8 10 5 11.3 Other** 35.4 33.5 __ 28.7 Total 305.7 308.4 268.8 International Latin America North*** 95.9 81.4 73.6 Latin America South 70.8 73.5 59.8 Latin America 166.7 154.9 133.4 Europe 202.5 176.7 153.8 Pacific 159.9 174.5 193.0 Total 529.1 506.1 480.2 Corporate and other 152.9 145.3 139.9 Total long-lived assets $ 987.7 $ 959.8 $ 888.9 *Includes U.S. Retail and Avon Centre. **Includes Canada and Puerto Rico. ***Avon's operations in Mexico reported long-lived assets at December 31, 2001, 2000 and 1999 of $73.8, $62.5 and $56.6, respectively. Net sales by classes of principal products are presented on page 7. Foreign Exchange - Financial statement translation of subsidiaries operating in highly inflationary economies and foreign currency transactions resulted in losses in 2001 netting to $7.7 (2000 - $12.6; 1999 - $7.5), which are included in Other expense, net and income taxes. Foreign exchange losses in 2001 include transaction gains of approximately $8.0 pretax related to the translation of a U.S. dollar intercompany loan receivable on Avon Argentina's balance sheet. In addition, Cost of sales and expenses included the unfavorable impact of the translation of inventories and prepaid expenses at historical rates in countries with highly inflationary economies in 2001 of $2.0 (2000 - $3.2; 1999 - $7.1). 12. Leases and Commitments Minimum rental commitments under noncancellable operating leases, primarily for equipment and office facilities at December 31, 2001, consisted of the following: Year 2002 $ 70.8 2003 53.4 2004 40.9 2005 32.5 2006 28.0 Later years 184.9 Sublease rental income (2.3) Total $408.2 Rent expense in 2001 was $92.1 (2000 - $85.4; 1999 - $84.5). Various construction and information systems projects were in progress at December 31, 2001, with an estimated cost to complete of approximately $119.2. -56- 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 diluted basis) for the year ended December 31, 1999 and totaled $154.4 pretax ($122.8 net of tax, or $.46 per share on a diluted basis) for the year ended December 31, 1998. The remaining liability balance at December 31, 2001, which primarily relates to employee severance costs, was not material. In May 2001, Avon announced its new Business Transformation plans, which are designed to significantly reduce costs and expand profit margins, while continuing to focus on consumer growth strategies. Business Transformation initiatives include an end-to-end evaluation of business processes in key operating areas, with target completion dates through 2004. Specifically, the initiatives focus on simplifying Avon's marketing processes, driving supply chain opportunities, strengthening Avon's sales model through the Sales Leadership program and the Internet, and streamlining the Company's organizational structure. In the fourth quarter of 2001, Avon recorded special and non-recurring charges of $97.4 pretax ($68.3 after-tax, or $.28 per share on a diluted basis) primarily associated with facility rationalizations and workforce reduction programs related to implementation of certain Business Transformation initiatives. The $97.4 was included in the Consolidated Statements of Income for 2001 as a Special charge ($94.9) and as inventory write-downs which were included in Cost of sales ($2.5). Special and non-recurring charges by business segment were as follows:
Corporate North Latin and America* U.S. America Europe Other Total Facility Rationalizations $ 16.8 $ 14.3 $ 17.7 $ 13.2 $ - $ 62.0 Workforce reduction Programs .9 9.7 6.4 2.1 14.0 33.1 Other - 2.1 - - .2 2.3 Total accrued charges $ 17.7 $ 26.1 $ 24.1 $ 15.3 $ 14.2 $ 97.4 *Excludes amounts related to the U.S. **Includes accrued severance and related costs associated with facility rationalizations.
-57- Special and non-recurring charges by category of expenditures were as follows for the year ended December 31, 2001:
Accrued Cost of Asset Accrued Severance Sales Impair Special Contract Facility and Charge ment Termination Termination Ration Related Charge Costs Costs ization Costs and Other Costs Total Facility Rationalizations $ 42.9 $ 2.5 $ 5.1 5.0 $ 2.2 $ 4.3 $ 62.0 Workforce reduction programs 26.9 - - 6.2 - - 33.1 Other - - .3 - 1.3 .7 2.3 Total accrued charges $ 69.8 $ 2.5 $ 5.4 $ 11.2 $ 3.5 $ 5.0 $ 97.4 Cash expenditures (2.7) - - - - - (2.7) Non-cash write-offs - (2.5) (5.4) (11.2) - (.5) (19.6) Balance at December 31, 2001 $ 67.1 $ - $ - $ - $ 3.5 $ 4.5 $ 75.1
Accrued severance and related costs are expenses, both domestic and international, associated with facility rationalizations and workforce reduction programs. Employee severance costs were accounted for in accordance with the Company's existing FAS No. 112, "Employers' Accounting for Postemployment Benefits," severance plans, or with other accounting literature. Approximately 3,500 employees, or 8.0% of the total workforce will receive severance benefits. Approximately 85% of these costs related to the facility rationalizations. The facility rationalizations will primarily result in either expanding an existing facility, building a new facility or sourcing product through third party vendors. In certain circumstances, employees terminated due to facility rationalizations will need to be replaced. The majority of the employee severance costs will be paid in 2002 and 2003. The Cost of sales charge represents losses associated with a facility closure in North America. Primarily as a result of facility rationalizations, management identified indicators of possible impairment of certain long-lived assets, consisting of buildings and improvements, equipment and other assets. In assessing and measuring impairment of long-lived assets, the Company applied the provisions of FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". Recoverability of assets to be held and used was measured by the comparison of the carrying amount of the assets with expected future cash flows of the assets (assets were grouped at the lowest level for which there were identifiable cash flows that were largely independent of the cash flows of other groups of assets). As a result of the impairment review, an asset impairment charge was recorded. Approximately $4.0 of the asset impairment charge relates to the closure of a facility in North America and reflects the reduction in the carrying value of equipment to its estimated fair market value based on selling prices for comparable equipment. The equipment is expected to be sold in the first half of 2002. The remaining charge relates to assets (leasehold improvements and other assets) that have been abandoned. -58- Special termination benefits represent the impact of employee terminations on the Company's benefit plans in the U.S. and certain international locations. In accordance with FAS No. 88, "Employers' Accounting for Settlements and Curtailment of Defined Benefit Pension Plans and for Termination Benefits," the plans experienced a net loss from curtailment and special termination benefits of $1.3 and $9.9, respectively. The curtailment charge reflects the difference between the liability assuming all of the participants terminate as of their severance date versus the ongoing liability for these participants assuming continued active employment. The special termination benefits include a liability loss resulting from additional service and pay earned during the severance period, coupled with an additional liability attributable to paying benefits at an actual rate versus an assumed rate. Contract termination costs primarily represent lease buyout costs related to the facility closures in North America (including the U.S.) and a cancellation of a contract with a third party (a supplier of warehousing and logistical services) in the U.S. Accrued facility rationalization and other costs primarily represent incremental costs associated with the facility rationalizations, including administrative expenses during the shutdown period, employee and union communication costs and legal fees. 14. Contingencies Avon is a defendant in a class action suit commenced in 1991 on behalf of certain classes of holders of Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS"). Plaintiffs allege various contract and securities law claims related to the PERCS (which were fully redeemed in 1991) and seek aggregate damages of approximately $145.0, plus interest. A trial of this action took place in the United States District Court for the Southern District of New York and concluded in November 2001. At the conclusion of the trial, the judge reserved decision in the matter. Avon believes it presented meritorious defenses to the claims asserted. However, it is not possible to predict the outcome of litigation and it is reasonably possible that the trial, and any possible appeal, could be decided unfavorably. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome but, under some of the damage theories presented, an adverse award could be material to the Consolidated Financial Statements. Avon is a defendant in an action commenced in the Supreme Court of the State of New York by Sheldon Solow d/b/a Solow Building Company, the landlord of the Company's former headquarters in New York City. Plaintiff seeks aggregate damages of approximately $80.0, plus interest, for the Company's alleged failure to restore the leasehold premises at the conclusion of the lease term in 1997. A trial of this matter had been scheduled for February 2002, but has been stayed pending the determination of (i) an interlocutory appeal by plaintiff of an order that denied the plaintiff's motion for summary judgment and granted partial summary judgment in favor of the Company on one of the plaintiff's claims; and (ii) an appeal by plaintiff of a decision in an action against another former tenant that dismissed plaintiff's claims after trial. While it is not possible to predict the outcome of litigation, management believes that there are meritorious defenses to the claims asserted and that this action should not have a material adverse effect on the Consolidated Financial Statements. This action is being vigorously contested. -59- Various other 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 the opinion of Avon's management, based on its review of the information available at this time, the total cost of resolving such other contingencies at December 31, 2001 should not have a material adverse impact on the Consolidated Financial Statements. In 1998, the Argentine tax authorities denied certain past excise tax credits taken by Avon's subsidiary in Argentina and assessed this subsidiary for the corresponding taxes. Avon vigorously contested this assessment through local administrative and judicial proceedings since 1998. In the third quarter of 2001, the Argentine government issued a decree permitting taxpayers to satisfy certain tax liabilities on favorable terms using Argentine government bonds as payment. Avon decided to settle this contested tax assessment by applying for relief under this new government program and purchased bonds to tender in settlement of the aforementioned assessment. As a result, a pre-tax charge of $6.4 ($3.4 after-tax, or $.01 per diluted share) was included in Other expense, net in the Consolidated Statements of Income in the third quarter of 2001. Avon has been responding to a formal investigation by the Securities and Exchange Commission ("SEC") which commenced in August 2000, and has furnished to the SEC information that principally concerns a special charge reported by Avon in the first quarter of 1999, which included the write off of approximately $15.0 in pre-tax costs associated with an order management software system known as the FIRST project. The balance of the FIRST project's development costs had been carried as an asset until the third quarter of 2001, when Avon recorded a pre-tax charge of $23.9 ($14.5 after-tax, or $.06 per diluted share) to write off the carrying value of costs related to that project. As part of a resolution of the investigation or at the conclusion of a contested proceeding, there may be a finding that Avon knew or should have known in the first quarter of 1999 that it was not probable that FIRST would be implemented and therefore, the entire FIRST asset should have been written off as abandoned at that time. In that connection, it may also be necessary for Avon to restate its financial statements to write off the entire FIRST asset in the first quarter of 1999. If Avon were to restate its financial statements to write off the FIRST asset in the first quarter of 1999, then the charge recorded in the third quarter of 2001 and other FIRST-related items recorded in prior periods would also be restated. (See Note 16 of the Notes to Consolidated Financial Statements). 15. Contract Settlement In July 2001, Avon announced that, due to a change in Sears' business strategy, which included de-emphasizing cosmetics, Avon would not proceed with the launch of its retail brand, beComing, in Sears stores in the fall of 2001. In July 2001, Avon and Sears reached an agreement, under which Avon received a Contract settlement gain, net of related expenses, of approximately $25.9 pretax ($15.7 after-tax, or $.06 per diluted share) to compensate Avon for lost profits and incremental expenses as a result of the cancellation of the retail agreement. -60- This termination resulted in a gain in the third quarter of 2001 but will unfavorably impact subsequent periods due to the loss of anticipated contribution from the Sears business. The aggregate impact of the termination is expected to be neutral through 2002 after taking into account results and the contract settlement with Sears. 16. Asset Impairment Charge In September 2001, Avon determined that an order management system known as the "FIRST" project would not be implemented and would be abandoned. As a result, Avon recorded in the third quarter of 2001 a non-cash Asset impairment charge of $23.9 pretax ($14.5 after-tax, or $.06 per diluted share) to write off the carrying value of costs related to the abandoned FIRST project. The decision not to use FIRST was based on various factors, including an assessment of the needs of target markets, changes in Avon's business strategies, project management and implementation costs, and costs for the ongoing support of FIRST following implementation. As the FIRST project has been abandoned, under FAS No. 121, Avon recorded a charge in the third quarter of 2001 to write off the carrying value of the abandoned asset. The non-cash charge included software development costs, certain hardware, software interfaces and other related costs. Prior to the write off, the capitalized software was included in Other assets on the Consolidated Balance Sheet. Avon has been responding to a formal investigation by the SEC which commenced in August 2000, and has furnished to the SEC information regarding the FIRST project and a special charge reported by Avon in the first quarter of 1999, which included the write off of approximately $15.0 in pre-tax costs associated with FIRST. The balance of the project's development costs was carried as an asset until the third quarter of 2001. As part of a resolution of the investigation or at the conclusion of a contested proceeding, there may be a finding that Avon knew or should have known in the first quarter of 1999 that it was not probable that FIRST would be implemented and therefore, the entire FIRST asset should have been written off as abandoned at that time. In that connection, it may also be necessary for Avon to restate its financial statements to write off the entire FIRST asset in the first quarter of 1999. If Avon were to restate its financial statements to write off the FIRST asset in the first quarter of 1999, then the charge recorded in the third quarter of 2001 and other FIRST-related items recorded in prior periods would also be restated. 17. Subsequent Event On January 31, 2002, Avon's Board approved an increase in the quarterly cash dividend to $.20 per share from $.19. The first dividend at the new rate will be paid on March 1, 2002 to shareholders of record on February 15, 2002. On an annualized basis, the new dividend rate is $.80 per share. -61- Report of Management The accompanying consolidated financial statements of Avon Products, Inc. have been prepared by management in conformity with generally accepted accounting principles in the U.S. 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 Chairman and Chief Executive Officer Executive Vice President, Chief Financial Officer -62- 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 our opinion. As discussed in Note 2 of the Notes to the Consolidated Financial Statements, the Company changed its method of accounting for revenue recognition as a result of the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition." PricewaterhouseCoopers LLP New York, New York January 31, 2002 -63- Eleven-Year Review Avon Products, Inc. In millions, except per share and employee data
2001 2000 1999 1998 Income data Net sales $5,952.0 $5,673.7 $5,289.1 $ 5,212.7 Other revenue 42.5 40.9(1) 38.8(1) 35.0(1) Total revenue 5,994.5 5,714.6 5,327.9 5,247.7 Operating profit (4) 794.4 788.7 549.4 473.2 Interest expense (4) 71.1 84.7 43.2 34.7 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 665.7 (14) 691.0 506.6(8) 455.9(8) Income from continuing operations before minority interest and cumulative effect of accounting changes 434.8 (14) 489.3 302.4(8) 265.1(8) Income from continuing operations before cumulative effect of accounting changes 430.3 (14) 485.1 302.4(8) 270.0(8) (Loss)income from discontinued operations, net - - - - Cumulative effect of accounting changes, net (0.3)(13) (6.7)(2) - - Net income 430.0 (14) 478.4 302.4(8) 270.0(8) Earnings (loss) per share - basic (5) (6) Continuing operations $ 1.82 (14) $ 2.04 $ 1.18(8) $ 1.03(8) Discontinued operations - - - - Cumulative effect of accounting changes - (.03) - - Net income 1.82 (14) 2.01 1.18(8) 1.03(8) Earnings (loss) per share - diluted (5) (6) Continuing operations $ 1.79 (14) $ 2.02(3)$ 1.17(8) $ 1.02(8) Discontinued operations - - - - Cumulative effect of accounting changes - (.03) - - Net income 1.79 (14) 1.99(3) 1.17(8) 1.02(8) Cash dividends per share Common $ .76 $ .74 $ .72 $ .68 Preferred - - - - Balance sheet data Working capital $ 428.1 $ 186.4 $ (375.0) $ 11.9 Capital expenditures 155.3 193.5 203.4 189.5 Property, plant and equipment, net 774.9 768.4 734.8 669.9 Total assets 3,193.1 2,826.4 2,528.6 2,433.5 Debt maturing within one year 88.8 105.4 306.0 55.3 Long-term debt 1,236.3 1,108.2 701.4 201.0 Total debt 1,325.1 1,213.6 1,007.4 256.3 Shareholders' (deficit) equity (74.6) (215.8) (406.1) 285.1 Number of employees United States 9,600 9,800 9,700 8,000 International 34,200 33,200 30,800 25,900 Total employees (7) 43,800 43,000 40,500 33,900 -64- 1997 1996 1995 1994 Income data Net sales $5,079.4 $4,814.2 $4,492.1 $4,266.5 Other revenue - - - - Total revenue 5,079.4 4,814.2 4,492.1 4,266.5 Operating Profit (4) 537.8 538.0 500.8 489.5 Interest expense (4) 35.5 33.2 34.6 44.7 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 534.9 510.4 465.0 433.8 Income from continuing operations before minority interest and cumulative effect of accounting changes 337.0 319.0 288.6 270.3 Income from continuing operations before cumulative effect of accounting changes 338.8 317.9 286.1 264.8 (Loss)income from discontinued operations, net - - (29.6) (23.8) Cumulative effect of accounting changes, net - - - (45.2)(9) Net income 338.0 317.9 256.5 195.8 Earnings (loss) per share - basic (5) (6) Continuing operations $ 1.28 $ 1.19 $ 1.05 $ .94 Discontinued operations - - (.11) (.09) Cumulative effect of accounting changes - - - (.16) Net income 1.28 1.19 .94 .69 Earnings(loss) per share - diluted (5) (6) Continuing operations $ 1.27 $ 1.18 $ 1.05 $ .93 Discontinued operations - - (.11) (.08) Cumulative effect of accounting changes - - - (.16) Net income 1.27 1.18 .94 .69 Cash dividends per share Common $ .63 $ .58 $ .53 $ .48 Preferred - - - - Balance sheet data Working capital $ (11.9) $ (41.7) $ (30.3) $ 9.3 Capital expenditures 169.4 103.6 72.7 99.9 Property, plant and equipment, net 611.0 566.6 537.8 528.4 Total assets 2,272.9 2,222.4 2,052.8 1,978.3 Debt maturing within one year 132.1 97.1 47.3 61.2 Long-term debt 102.2 104.5 114.2 116.5 Total debt 234.3 201.6 161.5 177.7 Shareholders' (deficit) equity 285.0 241.7 192.7 185.6 Number of employees United States 8,100 7,800 8,000 7,900 International 26,900 25,900 23,800 22,500 Total employees (7) 35,000 33,700 31,800 30,400 -65- 1993 1992 1991 Income data Net sales $3,844.1 $3,660.5 $3,441.0 Other revenue - - - Total revenue 3,844.1 3,660.5 3,441.0 Operating Profit (4) 427.4 339.9 430.9 Interest expense (4) 39.4 38.4 71.6 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 394.6 290.0(10) 352.9 Income from continuing operations before minority interest and cumulative effect of accounting changes 243.8 169.4(10) 209.3 Income from continuing operations before cummulative effect of accounting changes 236.9 164.2(10) 204.8 (Loss)income from discontinued operations, net 2.7 10.8 (69.1) Cumulative effect of accounting changes, net (107.5)(9) - - Net income 132.1 175.0(10) 135.7 Earnings (loss) per share - basic (5) (6) Continuing operations $ .82 $ .57(10) $ .65(11) Discontinued operations .01 .04 (.24) Cumulative effect of accounting changes (.37) - - Net income .46 .61(10) .41(11) Earnings (loss) per share - diluted (5) (6) Continuing operations $ .82 $ .57(10) $ .71(11) Discontinued operations .01 .04 (.24) Cumulative effect of accounting changes (.37) - - Net income .46 .61(10) .47(11) Cash dividends per share Common $ .43 $ .38 $ 1.10(12) Preferred - - .253 Balance sheet data Working capital $ 23.1 $ (99.5) $ (135.3) Capital expenditures 58.1 62.7 61.2 Property, plant and equipment, net 476.2 476.7 468.5 Total assets 1,918.7 1,692.6 1,693.3 Debt maturing within one year 70.4 37.3 143.8 Long-term debt 123.7 177.7 208.1 Total debt 194.1 215.0 351.9 Shareholders' (deficit) equity 314.0 310.5 251.6 Number of employees United States 8,000 8,700 9,200 International 21,500 20,700 20,900 Total employees (7) 29,500 29,400 30,100
-66- (1) For the year ended December 31, 2000, the Company adopted the provisions of Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires that amounts billed to customers for shipping and handling fees be classified as revenues. 1999 and 1998 have been restated to reflect shipping and handling fees, previously reported in Marketing, distribution and administrative expenses, in Other revenue in the Consolidated Statements of Income. (2) For the year ended December 31, 2000, the Company recorded a charge of $6.7 million, after tax, to reflect the adoption of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." This charge is reflected as a cumulative effect of an accounting change in the Consolidated Statements of Income. (3) For purposes of calculating diluted earnings per share for the year ended December 31, 2001 and 2000, after tax interest expense of $10.0 and $4.5, respectively, applicable to Convertible Notes, has been added back to net income. (4) Certain reclassifications have been made to conform to the current full year presentation. (5) 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. (6) Effective for the year ended December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("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. (7) 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. Approximately 26% of Avon's U.S. associates are men. Men hold approximately 16% of all U.S. officer and manager positions, and approximately 12% of all U.S. office and clerical positions. (8) 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 diluted basis). 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 diluted basis). (9) Effective January 1, 1994, Avon adopted FAS No. 112, "Employers' Accounting for Postemployment Benefits", for all applicable operations, -67- 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." (10) In 1992, Avon recorded a provision of $96.0 ($64.4 after tax, or $.22 per share on a basic and diluted basis) for restructuring of its worldwide manufacturing and distribution facilities. Income from continuing operations in 1993 increased 4% from $228.6, or $.79 per share on a diluted basis, excluding the 1992 restructuring charge. (11) 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. (12) Includes special dividend of $.75 paid in 1991. (13) Effective, January 1, 2001, Avon adopted FAS No. 133 "Accounting for Derivative Instruments and Hedging Activities", as amended by FAS No. 138, "Accounting for Certain Derivatives and Hedging Activities", which establishes accounting and reporting standards for derivative instruments and hedging activities. To reflect the adoption of FAS 133, Avon recorded a charge of $0.3, net of a tax benefit of $0.2. This charge is reflected as a cumulative effect of an accounting change in the Consolidated Statements of Income. (14) In 2001, Avon recorded special and non-recurring charges of $97.4 pretax ($68.3 after-tax or $.28 per diluted share), primarily related to workforce reductions and facility rationalizations. In 2001, results also included a non-cash charge of $23.9 pretax ($14.5 after-tax; $0.06 per diluted share) to write off the carrying value of costs related to an order management system known as the "FIRST" project. In 2001, Avon also received a cash settlement, net of related expenses, of $25.9 pretax ($15.7 after-tax; $0.06 per diluted share) to compensate Avon for lost profits and incremental expenses as a result of the cancellation of a retail agreement with Sears. -68- -----END PRIVACY-ENHANCED MESSAGE-----