10-K 1 YEAR ENDED DECEMBER 31, 1994 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1994 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____ to ____ Commission file number 1-4881 AVON PRODUCTS, INC. (Exact name of registrant as specified in its charter) NEW YORK 13-0544597 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 9 WEST 57TH STREET, NEW YORK, NEW YORK 10019 (Address of principal executive offices) (212) 546-6015 (Telephone number) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ---------------- Common Stock (par value $.50) New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. The aggregate market value of Common Stock (par value $.50) held by non- affiliates at February 28, 1995 was $3.9 billion. The number of shares of Common Stock (par value $.50) outstanding at February 28, 1995 was 68,658,266. Documents Incorporated by Reference Parts I and II --Portions of the 1994 Annual Report to Shareholders. Part III --Portions of the Proxy Statement for the 1995 Annual Meeting of Shareholders. 1 PART I ITEM 1. BUSINESS Avon Products, Inc. ("Avon" or "Company") is one of the world's leading manufacturers and marketers of beauty and related products, which include cosmetic, fragrance and toiletry; gift and decorative; apparel; and fashion jewelry and accessories. Avon commenced operations in 1886 and was incorporated in the State of New York on January 27, 1916. Avon's business is comprised of one industry segment, direct selling, with worldwide operations. Financial information relating to geographic areas is incorporated by reference to the analysis of net sales and pretax income from operations by geographic area on page 26 in Avon's 1994 Annual Report to Shareholders. During 1994, Avon sold Giorgio Beverly Hills, Inc. ("Giorgio"), its remaining retail business. For further discussion, see Discontinued Operations section included herein, and Note 3 of the Notes to the Consolidated Financial Statements on page 40 in Avon's 1994 Annual Report to Shareholders. Avon's direct selling business consists of the U.S. and International operations. Sales are made directly to consumers principally through Avon Representatives throughout the world. Although some of the products offered internationally may vary by market, most are substantially the same as those marketed domestically. Distribution Avon's products are sold worldwide by approximately 1.9 million Repre- sentatives, approximately 440,000 of whom are in the United States. Almost all Representatives are women who sell on a part-time basis. Representatives are independent contractors or independent dealers, and are not agents or employees of Avon. Representatives purchase products directly from Avon and sell them directly to their customers. The Company's products are sold to customers through a combination of direct selling and marketing utilizing independent Representatives, the mail, by phone or fax. Representatives go where the customers are, either in the home or in the workplace. Representatives may sell in a territory, which typically averages 100 homes in the United States and from 100 to 150 homes in other countries. Representatives in the United States have the opportunity to take responsibility for sales in larger areas. Representatives also sell in offices, factories, schools and hospitals. In the United States, the Representative contacts customers, selling primarily through the use of brochures which also highlight new products and specially priced items for each two-week sales campaign. Product samples, demonstration products, make-up color charts and catalogs are also used. Generally the Representative forwards an order every two weeks to a designated distribution center. This order is processed and the products are assembled at the distribution center and delivered to the Representative's home, usually by a local delivery service. The Representative then delivers the merchandise and collects payment from the customer for their own account. Payment by the Representative to Avon is customarily made when the next order is forwarded to 1 2 the distribution center. The cost of merchandise to the Representative varies according to the total order size for each two-week sales campaign and averages approximately 60 percent of the recommended selling price. In order to increase support of the Representative in the United States and allow them to run their business more efficiently as well as to improve order processing accuracy, Avon has implemented certain electronic order systems technology. One of these systems permits Avon Representatives to submit add-on orders with a touch-tone telephone, enabling them to augment orders already submitted by placing a phone call. Another system, Avon's Personal Order Entry Terminal, permits approximately 20,000 top-producing Representatives in the United States to transmit orders electronically by phone line, 24 hours a day, seven days a week. Outside the United States, each sales campaign is generally of a three or four week duration. Although terms of payment and cost of merchandise to the Representative vary from country to country, the basic method of direct selling and marketing by Representatives is essentially the same as that used in the United States, and substantially the same merchandising and promotional techniques are utilized. The recruiting and training of Representatives are the primary responsibility of district managers. In the United States, each district manager has responsibility for a market area covered by 225 to 300 Representatives. District managers are employees of Avon and are paid a salary and a commission based on purchases of Avon products by Representatives in their district. Personal contacts, including recommendations from current Representatives and local advertising, constitute the primary means of obtaining new Representatives. Because of the high rate of turnover among Representatives, a characteristic of the direct-selling method, recruiting and training of new Representatives are continually necessary. From time to time, the question of the legal status of Representatives has arisen, usually in regard to possible coverage under social benefit laws that would require Avon (and in most instances, the Representatives) to make regular contributions to social benefit funds. Although Avon has generally been able to address these questions in a satisfactory manner, the matter has not been fully resolved in all countries. If there should be a final determination adverse to Avon in a country, the cost for future, and possibly past, contributions could be so substantial in the context of the volume of business of Avon in that country that it would have to consider discontinuing operations in that country. Promotion and Marketing Sales promotion and sales development activities are directed toward giving selling assistance to the Representatives by making available sales aids such as brochures, product samples and demonstration products. In order to support the efforts of Representatives to reach new customers, especially working women and other individuals who frequently are not at home, specially designed sales aids, promotional pieces, customer flyers and product and image enhancing media advertising are used. In addition, Avon seeks to motivate its Representatives through the use of special incentive programs that reward 2 3 superior sales performance. Periodic sales meetings with Representatives are conducted by the district manager. The meetings are designed to keep Representatives abreast of product line changes, explain sales techniques and provide recognition for sales performance. A number of merchandising techniques, including the introduction of new products, the use of combination offers, the use of trial sizes and the promotion of products packaged as gift items, are used. In general for each sales campaign, a distinctive brochure is published, in which new products are introduced and selected items are offered at special prices or are given particular prominence in the brochure. Cosmetic, fragrance and toiletry products are available each sales campaign at a constant low price, while maintaining introductory specials and periodic sales on selected items for limited time periods. From time to time, various regulations or laws have been proposed or adopted that would, in general, restrict the frequency or duration of, or volume of sales resulting from new product introductions, special prices or other special price offers. The Company's pricing flexibility and broad product lines are expected to be able to mitigate the effect of these regulations. Competitive Conditions The cosmetic, fragrance and toiletry; gift and decorative; apparel; and fashion jewelry and accessory industries are highly competitive. Avon is one of the leading manufacturers and distributors of cosmetics and fragrances in the United States. Its principal competitors are the large and well-known cosmetics and fragrances companies that manufacture and sell broad product lines through various types of retail establishments. There are many other companies that compete in particular products or product lines sold through retail establishments. Avon has many competitors in the gift and decorative products industry in the United States, including retail establishments, principally department stores, gift shops and direct-mail companies, specializing in these products. Avon is one of the leading distributors of fashion jewelry and accessories for women in the United States. Its principal competition in the fashion jewelry industry consists of a few large companies and many small companies that manufacture and sell fashion jewelry for women through retail establishments. The number of competitors and degree of competition that Avon faces in its foreign cosmetics, fragrances, toiletries and fashion jewelry markets varies widely from country to country. Avon is one of the leading manufacturers and distributors in the cosmetics, fragrances and toiletries industry in most of its foreign markets, as well as in the fashion jewelry industry in Europe. There are a number of direct-selling companies which sell product lines similar to Avon's, some of which also have worldwide operations and compete with Avon, although none have comparable sales or income. Avon believes that the personalized customer service offered by Representatives; the high quality, attractive designs and reasonable prices of its products; new product introductions; and the guarantee of satisfaction are significant factors in establishing and maintaining its competitive position. 3 4 Avon's consolidated net sales, by classes of principal products, are as follows: Years ended December 31 ------------------------------ 1994 1993 1992 ---- ---- ---- (In millions) Cosmetics, fragrances and toiletries...... $2,604.2 $2,375.2 $2,243.1 Gift and decorative....................... 769.2 663.6 683.3 Apparel................................... 480.3 350.0 296.9 Fashion jewelry and accessories........... 412.8 455.3 437.2 -------- -------- -------- $4,266.5 $3,844.1 $3,660.5 ======== ======== ======== International Operations Avon's International operations are subject to certain customary risks inherent in carrying on business abroad, including the risk of adverse currency fluctuations, currency remittance restrictions and unfavorable economic and political conditions. Avon's International operations are conducted primarily through subsidiaries in 40 countries and Avon's products are distributed in some 80 other countries. Manufacturing Avon manufactures and packages almost all of its cosmetic, fragrance and toiletry products. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components, are purchased from various suppliers. Packages, consisting of containers and packaging components, are designed by its staff of artists and designers. The design and development of new products are affected by the cost and availability of materials such as glass, plastics and chemicals. Avon believes that it can continue to obtain sufficient raw materials and supplies to manufacture and supply its products. Avon has eighteen manufacturing laboratories around the world, three of which are principally devoted to the manufacture of fashion jewelry. In the United States, Avon's cosmetic, fragrance and toiletry products are produced in three manufacturing laboratories for the four distribution centers located throughout the country. Most products sold in foreign countries are manufactured in Avon's facilities abroad. The fashion jewelry line is generally developed by Avon's staff and produced in its two manufacturing laboratories in Puerto Rico, and Avon's manufacturing laboratory in Ireland or by several independent manufacturers. 4 5 Trademarks and Patents Although Avon owns several patents and has several more patent applications pending in the United States Patent Office, its business, both in the United States and abroad, is not materially dependent upon patents or patent protection. Avon has no material licenses, franchises or concessions. Avon's major trademarks are protected by registration in the United States and the other countries where its products are marketed as well as in many other countries throughout the world. DISCONTINUED OPERATIONS During 1994, the Company sold Giorgio, its remaining retail business for cash of $150.0 million. The Company recorded a loss of $25.0 million on the sale. Since the Company has excess capital loss carryforwards, no tax benefits have been recognized on the loss. For further discussion, see Note 3 of the Notes to the Consolidated Financial Statements on page 40 to Avon's 1994 Annual Report to Shareholders. During 1993, Avon recorded a discontinued operations provision of $10.0 million after tax, or $.14 per share, for the final settlement and related expenses in an arbitration proceeding related to a business previously sold. During 1992, Avon recorded a discontinued operations provision of approximately $10.0 million principally for claims and litigation relating to businesses previously sold, which was offset by amounts recovered for notes and securities previously written off. Although Avon has completed its divestiture of all discontinued operations, it may be liable for various contingencies relating to, among other things, indemnifications given to the purchasers of certain discontinued operations. An indemnification, currently being litigated, covers a patent dispute, various environmental claims and numerous other lawsuits and claims. Due to the complex nature of these contingencies, the ultimate outcome and related total costs to Avon cannot currently be determined. For further discussion of the contingencies, see Note 13 of the Notes to the Consolidated Financial Statements and Item 3 of this report. SEASONAL NATURE OF BUSINESS Avon's sales and earnings have a marked seasonal pattern characteristic of many companies selling cosmetics, fragrances and toiletries; gift and decorative products; and fashion jewelry. Christmas sales cause a sales peak in the fourth quarter of the year. Fourth quarter net sales were 32 percent and 31 percent of full year net sales in 1994 and 1993, respectively, and fourth quarter pretax income from continuing operations was 42 percent in 1994 and 1993. 5 6 RESEARCH ACTIVITIES Avon's research and development department is a leader in the industry, based on the number of new product launches, including formulating affordable, effective beauty treatments relevant to women's needs. A team of researchers and technicians applies the disciplines of science to the practical aspects of bringing products to market around the world. Relationships with well known dermatologists and other specialists supplements Avon's own research to deliver new formulas and ingredients. Each year, Avon researchers test and develop more than 600 products in the cosmetic, fragrance, toiletry and jewelry categories as well as analyze, evaluate and develop gift and decorative products. Avon has pioneered many innovative products, including Skin-So-Soft, its best-selling bath oil; BioAdvance, the first skin care product with stabilized retinol, the purest form of Vitamin A; and Collagen Booster, the premier product to capitalize on Vitamin C technology. Avon also introduced the benefits of aromatherapy to millions of American women, encapsulated color for the Color-Release line and introduced alpha-hydroxy acid for the Anew Perfecting Complex products. The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $27.9 million in 1994, $28.5 million in 1993 and $27.9 million in 1992. This research included the activities of product research and development and package design and development. Most of these activities are related to the development of cosmetic, fragrance and toiletry products. ENVIRONMENTAL MATTERS Pursuant to Avon's global environmental policy, environmental audits are conducted to ensure Avon facilities around the world meet or exceed local regulatory standards in such categories as waste disposal and air and water emissions. A corporate environmental operations committee ensures that opportunities for environmental performance improvements are reflected in our products and packaging. In general, compliance with environmental regulations which impact Avon's global operations has not had, and is not anticipated to have, any material effect upon the capital expenditures, financial position or competitive position of Avon. Reference is made to Item 3 of this report for additional information regarding environmental matters. EMPLOYEES At December 31, 1994, Avon employed approximately 30,400 persons. Of these, approximately 7,900 were employed in the United States and approximate- ly 22,500 in other countries. The number of employees tends to rise from a low point in January to a high point in November and decreases somewhat in December when Christmas shipments are completed. ITEM 2. PROPERTIES Avon's principal properties consist of manufacturing laboratories for the production of cosmetics, fragrances and toiletries and fashion jewelry and distribution facilities where offices are located and where finished 6 7 merchandise is warehoused and shipped to Representatives in fulfillment of their orders. Substantially all of these properties are owned by Avon or its subsidiaries, are in good repair, adequately meet Avon's needs and operate at reasonable levels of productive capacity. The domestic manufacturing laboratories are located in Morton Grove, IL; Springdale, OH; and Suffern, NY; and the distribution centers are located in Atlanta, GA; Glenview, IL; Newark, DE; and Pasadena, CA. International properties include three manufacturing laboratories, including a fashion jewelry manufacturing laboratory in Ireland, and eight distribution centers in Europe; five manufacturing laboratories and eleven distribution centers in Latin America; one manufacturing and one distribution center in Canada; and four manufacturing laboratories and nine distribution centers in the Pacific. The research and development laboratories are located in Suffern, NY. Avon leases space for its executive and administrative offices in New York City and its fashion jewelry manufacturing facilities in Puerto Rico. The manufacturing laboratory in Italy was sold in December 1994. ITEM 3. LEGAL PROCEEDINGS Various lawsuits and claims (asserted and unasserted), arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. The most significant of these are described below. In 1991, a class action suit was initiated against Avon on behalf of certain classes of holders of Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS"), alleging various contract and securities law claims relating to the PERCS (which were fully redeemed that year). Avon has rejected the assertions in this case, believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. In June 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International Minerals & Chemical Corporation ("IMC"), now known as Mallinckrodt Group Inc., filed a lawsuit against Avon in the St. Louis Missouri City Circuit Court arising from Avon's sale of Mallinckrodt to IMC in 1986. The suit alleged that a certain patent dispute and a settlement, referred to as the DuPont patent case, various environmental claims and numerous other lawsuits and claims are contingent liabilities covered by an indemnification given by Avon in connection with the sale of Mallinckrodt. In October 1991, the Missouri Supreme Court affirmed the Circuit Court's decision that Avon has the obligation to indemnify IMC and Mallinckrodt in connection with the DuPont patent case, but remanded the matter for a trial on the damages, if any, suffered by the parties. On July 27, 1992, a jury returned a verdict in the DuPont patent case for $16.0 million, and a judgment for that amount plus approximately $6.5 million interest was entered. On August 11, 1992, IMC and Mallinckrodt filed post-trial motions, including a motion for a judgment notwithstanding the verdict or, in the alternative, a motion for a new trial. On November 5, 1992, the St. Louis Missouri City Circuit Court granted IMC's and Mallinckrodt's motion for a judgment notwithstanding the verdict and directed a verdict for plaintiffs in the amount of $27.1 million plus interest. As of November 5, 1992, the interest amounted to approximately $11.7 million. Avon, IMC and Mallinckrodt appealed this decision. This issue was argued before the Missouri Court of Appeals, Eastern District on May 11, 1994. On November 8, 1994, the Court of Appeals overturned the judgment notwithstanding the verdict and ordered a new trial. All possible further 7 8 judicial review has now been exhausted and a retrial is expected during 1995. Pre-trial proceedings and discovery activities are ongoing with respect to the environmental and general litigation portions of the case. With respect to the environmental contingencies which constitute a part of the indemnification litigation, the total cost to Avon cannot be determined with certainty as a result of such factors as the preliminary status of information relating to the sites owned by the purchaser, the preliminary regulatory involvement, the unknown magnitude and timing of cleanup efforts, if any, to be undertaken by the purchaser or Mallinckrodt, the possibility of recoveries against other parties, the uncertainty of the success of Avon's defenses, and unasserted claims, if any. However, these factors have been assessed and will continue to be assessed by Avon in estimating reserves to be recorded in its consolidated financial statements. The ultimate outcome and aggregate cost of resolving all of the above contingencies will be based on a number of factors and will be determined over a number of years. Accordingly, the total cost to Avon cannot currently be determined with certainty. The reserves for such contingencies at December 31, 1994, which are recorded gross without anticipation of insurance recoveries or other third-party recoveries, if any, have been estimated by Avon's management based on its review of currently known facts and circumstances at December 31, 1994. In the opinion of Avon's management, based on its review of the preliminary information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1994 should not have a material adverse impact on Avon's consolidated financial position or results of operations, based on the current levels of such amounts. However, this difference, if any, could have a material effect on results of operations in a future period when resolved. Avon is involved in a number of proceedings arising out of the federal Superfund law and similar state laws. In some instances Avon, along with other companies, has been designated as a potentially responsible party which may be liable for costs associated with these various hazardous waste sites. Based upon Avon's current knowledge of proceedings, management believes, without taking into consideration any insurance recoveries, if any, that in the aggregate they would not have a material adverse impact on Avon's consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1994. ---------- Executive Officers of the Registrant Officers are elected by the Board of Directors at its first meeting following the Annual Meeting of Shareholders. Officers serve until the first meeting of the Board of Directors following the Annual Meeting of Shareholders at which Directors are elected for the succeeding year, or until their successors are elected, except in the event of death, resignation or removal, or the earlier termination of the term of office. 8 9 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 1995 Annual Meeting of Shareholders. Listed below are the executive officers of Avon, each of whom (except as noted) has served in various executive and operating capacities with Avon during the past five years: Elected Title Name Age Officer ----- ---- --- ------- Chairman of the Board, Chief Executive Officer and Director. James E. Preston 61 1971 President, Chief Operating Officer and Director......................... Edward J. Robinson 54 1989 Executive Vice President............... John I. Novosad 54 1989 Senior Vice President, General Counsel and Secretary........................ Ward M. Miller, Jr. 62 1993 (1) Senior Vice President and Chief Financial Officer.................... Edwina D. Woodbury 43 1990 Senior Vice Presidents................. Christina A. Gold 47 1993 Marcia L. Worthing 52 1988 Group Vice President, Controller....... Robert J. Conologue 46 1989 Group Vice President, Taxes and Treasurer............................ Robert J. Corti 45 1988 ---------- (1) Ward M. Miller, Jr. was elected Senior Vice President, General Counsel and Secretary in October 1994. Mr. Miller joined Avon in February 1993 as Vice President. Prior to joining Avon, he was Senior Vice President and General Counsel of Nabisco Brands; and Vice President, Associate General Counsel and Secretary of its parent, RJR Nabisco. PART II ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS This information is incorporated by reference to "Market Prices of Common Stock by Quarter" on page 34 of Avon's 1994 Annual Report to Shareholders. ITEM 6. SELECTED FINANCIAL DATA The information for the five-year period 1990 through 1994 is incorporated by reference to the "Eleven-Year Review" on pages 52 and 53 of Avon's 1994 Annual Report to Shareholders. 9 10 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 24 through 33 of Avon's 1994 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated by reference to the "Consolidated Financial Statements and Notes" on pages 35 through 50, together with the report thereon of Coopers & Lybrand, L.L.P., on page 51, and "Results of Operations by Quarter" on page 34 of Avon's 1994 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information regarding directors is incorporated by reference to the "Election of Directors" and "Information Concerning the Board of Directors" sections of Avon's Proxy Statement for the 1995 Annual Meeting of Shareholders. Information regarding executive officers is presented in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the "Information Concerning the Board of Directors" and "Executive Compensation" sections of Avon's Proxy Statement for the 1995 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 1995 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the "Compensation Committee Interlocks and Insider Participation" section and the "Contracts with Executives" section of Avon's Proxy Statement for the 1995 Annual Meeting of Shareholders. 10 11 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Annual Report to Shareholders Form 10-K Page Number Page Number ------------ ----------- (a) 1. Consolidated Financial Statements of Avon Products, Inc. and Subsidiaries Consolidated statement of income for each of the years in the three-year period ended December 31, 1994........ 35 Consolidated balance sheet at December 31, 1994 and 1993............ 36 Consolidated statement of cash flows for each of the years in the three-year period ended December 31, 1994........ 37 Consolidated statement of changes in shareholders' equity for each of the years in the three-year period ended December 31, 1994............... 38 Notes to consolidated financial statements............................ 39-50 Report of Independent Accountants Coopers & Lybrand L.L.P............... 51 (a) 2. Financial Statement Schedules Report of Independent Accountants Coopers & Lybrand L.L.P............... S-1 Consent of Independent Accountants Coopers & Lybrand L.L.P............... S-2 Financial statement schedule for each of the years in the three-year period ended December 31, 1994 VIII--Valuation and qualifying accounts.................... S-3 Financial statements of the registrant and all other financial statement schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements and notes. 11 12 (a) 3. Exhibits Exhibit Number Description ------- ----------- 3.1 --Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on August 12, 1988 (incorporated by reference to Exhibit 3.1 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 3.2 --By-laws, as amended to April 27, 1990, of Avon (incorporated by reference to Exhibit 3.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 4.1 --Instrument defining the rights of holders of Avon's preferred share purchase rights to purchase Avon's Series A Junior Participating Preferred Stock (reference is made to Article IIIA of the restated Certificate of Incorporation of Avon, filed with the Secretary of State of New York State on August 12, 1988 and included as Exhibit 3.1 to the 1993 Annual Report on Form 10-K). 4.2 --Rights Agreement, dated as of March 30, 1988 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (as successor to Morgan Shareholder Services Trust Company) (incorporated by reference to Exhibit 1 to Avon's Registration Statement on Form 8-A, filed April 7, 1988). 4.3 --Amendment, dated as of January 3, 1989, to the Rights Agreement (incorporated by reference to Exhibit 3 to Avon's Amendment No. 1 on Form 8, filed January 4, 1989, amending its Registration Statement on Form 8-A, filed April 7, 1988). 4.4 --Second Amendment, dated as of April 5, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(c) to Avon's Current Report on Form 8-K, dated April 5, 1990). 4.5 --Third Amendment, dated as of May 10, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(d) to Avon's Current Report on Form 8-K, dated May 10, 1990). 4.6 --Revolving Credit and Competitive Advance Facility Agreement, dated as of October 5, 1994, among Avon, Avon Capital Corporation and a group of banks and other lenders (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.1* --Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders May 6, 1993 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 12 13 10.2* --Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.3* --Avon Products, Inc. 1994 Long-Term Incentive Plan, effective as of January 1, 1994 (incorporated by reference to Exhibit 10.3 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.4* --Avon Products, Inc. 1970 Stock Option Incentive Plan, as amended and restated through May 4, 1989 (incorporated by reference to Exhibit 4.6 to Avon's Registration Statement on Form S-8, Registration No. 33-28653, filed May 18, 1989). 10.5* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. 1970 Stock Option Incentive Plan as amended and restated through May 4, 1989 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.6* --Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of September 1, 1994. 10.7* --Benefit Restoration Pension Plan of Avon Products, Inc., effective as of January 1, 1994. 10.8* --Trust Agreement, amended and restated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 10.9* --First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.10* --Second Amendment, dated as of June 12, 1992 to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* --Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.12* --The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of October 8, 1990 (incorporated by reference to Exhibit 10.5 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 13 14 10.13* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of October 8, 1990 (incorporated by reference to Exhibit 10.5 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.14* --Trust Agreement, dated as of August 3, 1989, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.4 to Avon's Annual Report of Form 10-K for the year ended December 31, 1989). 10.15* --Instrument of Amendment, effective as of April 1, 1990 amending various employee benefit plans and agreements as stipulated in the Instrument of Amendment (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 10.16* --Employment Agreement, dated as of November 5, 1992, between Avon and James E. Preston (incorporated by reference to Exhibit 10.10 to Avon's Annual Report on Form 10-K for the year ended December 31, 1992). 10.17* --Non-Qualified Stock Option Award, dated as of December 5, 1991, granted by Avon to James E. Preston (incorporated by reference to Exhibit 10.11 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.18* --Employment Agreement, dated as of September 1, 1994, between Avon and Edward J. Robinson (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.19* --Restricted Stock Agreement, effective as of November 4, 1993, granted by Avon to Edward J. Robinson (incorporated by reference to Exhibit 10.21 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.20* --Form of Employment Agreement, dated as of September 1, 1994, between Avon and certain senior officers (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.21* --Avon Products, Inc. Directors' Retirement Plan, effective as of January 1, 1988 (incorporated by reference to Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.22* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. Directors' Retirement Plan (incorporated by reference to Exhibit 10.6 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.23* --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). 14 15 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). 11.1 --Statement re computation of primary income per share. 11.2 --Statement re computation of fully diluted income per share. 13 --Portions of the Annual Report to Shareholders for the year ended December 31, 1994 incorporated by reference in response to Items 1, 5 through 8 in this filing. 21 --Subsidiaries of the registrant. 23 --Consent of Coopers & Lybrand L.L.P. (set forth on page S-2 of this Annual Report on Form 10-K). 24 --Power of Attorney. 27 --Financial Data Schedule. 99 --Financial statements for the Avon Products, Inc. Employees' Savings and Stock Ownership Plan and the Avon Mirabella/ Lomalinda Employees' Savings Plan for the year ended December 31, 1994 will be filed by amendment. *The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the fourth quarter of 1994. (c) Avon's Annual Report on Form 10-K for the year ended December 31, 1994, 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. 15 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of March 1995. Avon Products, Inc. By/s/ WARD M. MILLER, JR. -------------------------------- Ward M. Miller, Jr. Senior Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- Chairman of the Board and Chief Executive Officer-- * Principal Executive --------------------------- Officer and Director March 23, 1995 James E. Preston * President, Chief Operating --------------------------- Officer and Director March 23, 1995 Edward J. Robinson Senior Vice President and * Chief Financial Officer-- --------------------------- Principal Financial Officer March 23, 1995 Edwina D. Woodbury Group Vice President, * Controller--Principal --------------------------- Accounting Officer March 23, 1995 Robert J. Conologue BRENDA BARNES ) RICHARD S. BARTON* ) DANIEL B. BURKE* ) REMEDIOS DIAZ OLIVER* ) STANLEY C. GAULT ) GEORGE V. GRUNE* ) Directors March 23, 1995 CHARLES S. LOCKE* ) ANN S. MOORE* ) JOHN J. PHELAN, JR.* ) JOSEPH A. RICE* ) CECILY C. SELBY* ) *By/s/ WARD M. MILLER, JR. ------------------------------- March 23, 1995 Ward M. Miller, Jr. Attorney-in-fact 16 S-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Avon Products, Inc. Our report on the consolidated financial statements of Avon Products, Inc. and subsidiaries as of December 31, 1994 and 1993 and for each of the years in the three-year period ended December 31, 1994 has been incorporated by reference in this Form 10-K from page 51 of the 1994 Annual Report to Shareholders of Avon Products, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedules for each of the years in the three-year period ended December 31, 1994, as listed in the Index under Item 14(a)2 of this Form 10-K. In our opinion, the financial statement schedule for each of the years in the three-year period ended December 31, 1994 referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. New York, New York February 1, 1995 /s/Coopers & Lybrand L.L.P. S-1 S-2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following Registration Statements of Avon Products, Inc.: Form S-8 (Reg. No. 2-37955), Form S-8 (Reg. No. 2-48080), Form S-8 (Reg. No. 2-61285), Form S-8 (Reg. No. 2-83235), Form S-8 (Reg. No. 2-94959), Form S-8 (Reg. No. 33-28653), Form S-8 (Reg. No. 33-47209), Form S-8 (Reg. No. 33-60218), Form S-8 (Reg. No. 33-60918), Form S-8 (Reg. No. 33-65998), Post Effective Amendment No. 1 to Form S-8 (Reg. No. 2-98707), Pre-Effective Amendment No. 1 to Form S-8 (Reg. No. 33-22099), of our reports dated February 1, 1995 on our audits of (i) the consolidated financial statements of Avon Products, Inc. as of December 31, 1994 and 1993 and for each of the years in the three-year period ended December 31, 1994, which report is included in the 1994 Annual Report to Shareholders and incorporated by reference in this Annual Report on Form 10-K and (ii) the 1994, 1993 and 1992 financial statement schedules of Avon Products, Inc., which report is included in this Annual Report on Form 10-K. New York, New York March 23, 1995 /s/Coopers & Lybrand L.L.P. S-2 S-3 AVON PRODUCTS, INC. AND SUBSIDIARIES SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS (In millions) Years ended December 31 Additions -------------------- Balance at Charged to Charged Balance beginning costs and to other at end of period expenses accounts Deductions of period ---------- ---------- -------- ---------- --------- 1994 Allowance for doubtful accounts receivable. $22.0 $ 64.9 $ -- $ 59.6(a) $27.3 ===== ====== ===== ====== ===== 1993 Allowance for doubtful accounts receivable. $21.4 $ 51.4 $ -- $ 50.8(a) $22.0 ===== ====== ===== ====== ===== 1992 Allowance for doubtful accounts receivable. $28.5 $ 45.3 $ -- $ 52.4(a) $21.4 Allowance for long- term receivables and investments..... 33.1 -- -- 33.1(b) -- ----- ------ ----- ------ ----- $61.6 $ 45.3 $ -- $ 85.5 $21.4 ===== ====== ===== ====== ===== ------------ Note: Amounts have been restated for the sale of Giorgio, see Note 3 of the Notes to the Consolidated Financial Statements. (a)Accounts written off, net of recoveries and foreign currency translation adjustment. (b)Write-off of various notes and other securities, which Avon received in connection with the sale of health care and other businesses. S-3 EX-99.1 2 EXHIBIT INDEX SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1994 Commission file number 1-4881 ____________ AVON PRODUCTS, INC. (Exact name of registrant as specified in its charter) ____________ EXHIBITS INDEX TO EXHIBITS Exhibit Number Description ------- ----------- 3.1 --Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on August 12, 1988 (incorporated by reference to Exhibit 3.1 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 3.2 --By-laws, as amended to April 27, 1990, of Avon (incorporated by reference to Exhibit 3.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 4.1 --Instrument defining the rights of holders of Avon's preferred share purchase rights to purchase Avon's Series A Junior Participating Preferred Stock (reference is made to Article IIIA of the restated Certificate of Incorporation of Avon, filed with the Secretary of State of New York State on August 12, 1988 and included as Exhibit 3.1 to the 1993 Annual Report on Form 10-K). 4.2 --Rights Agreement, dated as of March 30, 1988 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (as successor to Morgan Shareholder Services Trust Company) (incorporated by reference to Exhibit 1 to Avon's Registration Statement on Form 8-A, filed April 7, 1988). 4.3 --Amendment, dated as of January 3, 1989, to the Rights Agreement (incorporated by reference to Exhibit 3 to Avon's Amendment No. 1 on Form 8, filed January 4, 1989, amending its Registration Statement on Form 8-A, filed April 7, 1988). 4.4 --Second Amendment, dated as of April 5, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(c) to Avon's Current Report on Form 8-K, dated April 5, 1990). 4.5 --Third Amendment, dated as of May 10, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(d) to Avon's Current Report on Form 8-K, dated May 10, 1990). 4.6 --Revolving Credit and Competitive Advance Facility Agreement, dated as of October 5, 1994, among Avon, Avon Capital Corporation and a group of banks and other lenders (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.1* --Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders May 6, 1993 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 1 Exhibit Number Description ------- ----------- 10.2* --Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.3* --Avon Products, Inc. 1994 Long-Term Incentive Plan, effective as of January 1, 1994 (incorporated by reference to Exhibit 10.3 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.4* --Avon Products, Inc. 1970 Stock Option Incentive Plan, as amended and restated through May 4, 1989 (incorporated by reference to Exhibit 4.6 to Avon's Registration Statement on Form S-8, Registration No. 33-28653, filed May 18, 1989). 10.5* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. 1970 Stock Option Incentive Plan as amended and restated through May 4, 1989 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.6* --Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of September 1, 1994. 10.7* --Benefit Restoration Pension Plan of Avon Products, Inc., effective as of January 1, 1994. 10.8* --Trust Agreement, amended and restated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 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). 2 Exhibit Number Description ------- ----------- 10.12* --The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of October 8, 1990 (incorporated by reference to Exhibit 10.5 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.13* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of October 8, 1990 (incorporated by reference to Exhibit 10.5 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.14* --Trust Agreement, dated as of August 3, 1989, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.4 to Avon's Annual Report of Form 10-K for the year ended December 31, 1989). 10.15* --Instrument of Amendment, effective as of April 1, 1990 amending various employee benefit plans and agreements as stipulated in the Instrument of Amendment (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990). 10.16* --Employment Agreement, dated as of November 5, 1992, between Avon and James E. Preston (incorporated by reference to Exhibit 10.10 to Avon's Annual Report on Form 10-K for the year ended December 31, 1992). 10.17* --Non-Qualified Stock Option Award, dated as of December 5, 1991, granted by Avon to James E. Preston (incorporated by reference to Exhibit 10.11 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 10.18* --Employment Agreement, dated as of September 1, 1994, between Avon and Edward J. Robinson (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.19* --Restricted Stock Agreement, effective as of November 4, 1993, granted by Avon to Edward J. Robinson (incorporated by reference to Exhibit 10.21 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.20* --Form of Employment Agreement, dated as of September 1, 1994, between Avon and certain senior officers (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). 10.21* --Avon Products, Inc. Directors' Retirement Plan, effective as of January 1, 1988 (incorporated by reference to Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991). 3 Exhibit Number Description ------- ----------- 10.22* --First Amendment, dated as of November 5, 1992, to the Avon Products, Inc. Directors' Retirement Plan (incorporated by reference to Exhibit 10.6 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.23* --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). 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). 11.1 --Statement re computation of primary income per share. 11.2 --Statement re computation of fully diluted income per share. 13 --Portions of the Annual Report to Shareholders for the year ended December 31, 1994 incorporated by reference in response to Items 1, 5 through 8 in this filing. 21 --Subsidiaries of the registrant. 23 --Consent of Coopers & Lybrand L.L.P. (set forth on page S-2 of this Annual Report on Form 10-K). 24 --Power of Attorney. 27 --Financial Data Schedule. 99 --Financial statements for the Avon Products, Inc. Employees' Savings and Stock Ownership Plan and the Avon Mirabella/ Lomalinda Employees' Savings Plan for the year ended December 31, 1994 will be filed by amendment. *The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. 4 EX-10.2 3 EX-10.2 EXHIBIT 10.2 Exhibit 10.2 Form of Employment Agreement, dated as of September 1, 1994 between Avon Products, Inc. and certain senior officers (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994). Avon has an employment agreement with each of the following senior officers: Christina Gold Susan Kropf Ward Miller, Jr. John Novosad Edwina Woodbury Marcia Worthing EX-10.6 4 EX-10.6 EXHIBIT 10.6 SUPPLEMENTAL EXECUTIVE RETIREMENT AND LIFE PLAN OF AVON PRODUCTS, INC. AMENDED AND RESTATED AS OF SEPTEMBER 1, 1994 TABLE OF CONTENTS PAGE SECTION 1 INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 2 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 3 PARTICIPATION . . . . . . . . . . . . . . . . . . . . . . 8 SECTION 4 SUPPLEMENTAL RETIREMENT ALLOWANCES. . . . . . . . . . . . 9 SECTION 5 SURVIVOR RETIREMENT ALLOWANCES. . . . . . . . . . . . . . 12 SECTION 6 SUPPLEMENTAL LIFE ALLOWANCES. . . . . . . . . . . . . . . 15 SECTION 7 FORMS OF PAYMENT. . . . . . . . . . . . . . . . . . . . . 17 SECTION 8 ADMINISTRATION OF THE PLAN. . . . . . . . . . . . . . . . 18 SECTION 9 CERTAIN RIGHTS AND LIMITATIONS. . . . . . . . . . . . . . 19 SECTION 10 AMENDMENT AND TERMINATION OF THE PLAN . . . . . . . . . . 21 SECTION 11 CLAIM PROCEDURES. . . . . . . . . . . . . . . . . . . . . 25 SECTION 1 INTRODUCTION Avon Products, Inc. (the "Company") adopted the Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., originally effective as of January 1, 1982, and last amended and restated such plan as of July 1, 1991. The Company now wishes to merge the Supplemental Life Plan of Avon Products, Inc., which was established effective January 1, 1990, into the Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., effective as of January 1, 1995 and to rename such plan the "Supplemental Executive Retirement and Life Plan of Avon Products, Inc." (the "Plan"). The terms and conditions of participation and benefits under the Plan are set out in this document. The Plan provides additional retirement income and death benefit protection to elected or appointed officers of the Company and to selected other employees of the Company and its Subsidiaries in recognition of their contribution to the Company in carrying out senior management responsibilities. The Company intends to maintain the Plan indefinitely and, in order to afford Plan Participants and their Beneficiaries the maximum security, has established a grantor trust (the "Trust") to aid it in accumulating the amounts necessary to satisfy its contractual liability to pay certain benefits under the terms of the Plan. The Plan provides for the Company to pay all benefits and administrative costs from its general assets to the extent not paid by the Trust. The establishment of the Trust shall not convey rights to the Participants which are greater than those of the general creditors of the Company and shall not affect the Company's continuing liability to pay Plan benefits and administrative costs, except that the Company's liability shall be offset by actual benefits and administrative cost payments, if any, made by the Trust. SECTION 2 DEFINITIONS As used in this Plan, the masculine pronoun shall include the feminine and the feminine pronoun shall include the masculine unless otherwise specifically indicated. In addition, the following words and phrases as used in this Plan shall have the following meaning unless a different meaning is plainly required by the context: 2.1 "Actuarial Equivalent" shall mean a benefit of equivalent value, when computed on the basis of the same mortality table and the rate or rates of interest and/or the empirical tables which are being used to determine the Participant's benefit under the Retirement Plan. However, in the case of lump sum distributions of a Participant's Supplemental Retirement Allowance, the conversion factor used to determine the Actuarial Equivalent shall be the same as specified in Section (e) of Appendix I of the Retirement Plan, except that (A) clauses (i) and (ii) of such Section (e) shall be inapplicable, and (B) the applicable interest rate with regard to any Participant shall not be greater than the lowest rate in effect at any time on or after the date the Participant attains age 60, if the sum of the Participant's age and Creditable Service is at least 85 years. 2.2 "Annual Benefit Offset" shall mean the aggregate annual retirement allowance which would have been payable to a Participant under the Retirement Plan and the Other Plans, expressed in the form of (A) a joint and 50% survivor annuity with the Participant's spouse as the survivor annuitant, if the Participant is married on the date the Supplemental Retirement Allowance is payable under Plan Section 4, or (B) a single life annuity if the Participant is not married on that date, which form of benefit shall be the Actuarial Equivalent of the aggregate benefits which would be payable under such plans if they commenced on the same date as the Supplemental Retirement Allowance. 2.3 "Average Final Compensation" shall mean the average annual Compensation of a Participant during the three years of theParticipant's last 10 years of Creditable Service in which the Participant's Compensation was highest. If a Participant has less than three years of Creditable Service, Average Final Compensation shall be computed over all such years. 2.4 "Beneficiary" shall mean the person or persons designated by aParticipant as beneficiary in a time and manner determined by the Retirement Board. If the Participant fails to designate a beneficiary or if the beneficiary predeceases the Participant, the Participant's spouse shall be the beneficiary, or if no spouse survives the Participant, the Participant's estate shall be the beneficiary. A Participant may change hisdesignated beneficiary at the time and in the manner determined by the Retirement Board. 2.5 "Board of Directors" shall mean the Board of Directors of Avon Products, Inc. 2.6 "Change of Control" shall mean: (a) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the corporation where such acquisition causes such person to own 20% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this Subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of Subsection (c) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Securities; or (b) individuals who as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (c) the approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board of Directors at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (d) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, no Change of Control shall be deemed to have occurred with respect to any individual by reason of any actions or events in which such individual participates in a capacity other than in his or her capacity as an officer or employee of the Company (or as a director of the Company or a Subsidiary, where applicable). 2.7 "Company" shall mean Avon Products, Inc. 2.8 "Compensation" shall mean the regular salary or wages paid to an Active Participant or deferred for services rendered to the Company or a Subsidiary during any year in which the Participant accrues Creditable Service, including any deferrals under a 401(k) plan or salary reduction under a 125 plan of the Company or a Subsidiary, plus any bonus payable to an employee (disregarding any election to defer the receipt thereof) under the Management Incentive Plan and Variable Incentive Plan or any similar or successor plan for services performed during the prior year. Compensation shall not include special termination or severance payments or benefits, whether characterized as such, made pursuant to any employment agreement, separation agreement, severance plan or policy or any similar arrangement, unless such agreement, plan, policy or arrangement provides that the special termination or severance payments or benefits are to be included as Compensation under the Plan. Notwithstanding the foregoing, with respect to any period of absence (during which disability benefits are being paid to the Participant under the Company's Short Term or Long Term Disability Plan) which is included as Creditable Service, the Participant's annual Compensation for purposes of the Plan during such period of absence shall be deemed to be the greater of (i) his Compensation in the last full calendar year of his employment immediately preceding the beginning of such absence, or (ii) the actual Compensation he received in the year the absence began. 2.9 "Compensation Committee" means the Compensation Committee appointed by the Board of Directors. 2.10 "Creditable Service" shall mean: (a) The total number of years and completed months of service rendered by an Active Participant as an employee of the Company or any Subsidiary; (b) Periods of authorized leaves of absence from the Company or a Subsidiary approved by the Retirement Board, including but not limited to leaves required to be granted pursuant to the Family and Medical Leave Act of 1993 and the Uniformed Services Employment and Reemployment Rights Act, and, notwithstanding any other provision of this Plan to the contrary, any period of absence while disability benefits are being paid to the Participant under the Company's Short Term or Long Term Disability Plans; (c) Any prior Creditable Service under this Plan rendered by an employee who was formerly a Participant and who subsequently becomes a new Active Participant pursuant to Plan Section 3.1 or 3.2; (d) Service which is recognized for purposes of the Plan by reason of any Outside Agreement. To the extent Creditable Service is recognized under an Outside Agreement for purposes of eligibility for the Supplemental Retirement Allowance, it shall also be recognized for purposes of the Supplemental Life Allowance unless otherwise specifically provided in such Outside Agreement; and (e) Solely for purposes of determining the time for the commencement of benefits under the SERP, a Vested or Frozen Participant shall continue to earn Creditable Service during the period in which he is an employee of the Company or a Subsidiary. Subject to approval by the Compensation Committee, a Participant may be granted additional years of Creditable Service either for purposes of determining the amount of allowance under the Plan or for purposes of satisfying the service requirements necessary for benefits under the Plan, or both. Additional service granted under a specific provision of the Plan or under provisions of individual contracts with the Participant or under any severance plan or policy of the Company covering the Participant shall also be included in determining Creditable Service, but only in accordance with the specific terms of such provisions. 2.11 "Dependent Child" shall mean any unmarried child of the Participant who has not attained age 21, or any unmarried child of the Participant regardless of the child's age, if the child becomes incapacitated prior to attaining age 19; provided, however, that such incapacitated child shall cease to be a Dependent Child at the later of the date the child attains age 21 or ceases to be incapacitated. The term child shall include a child born of the Participant, a child legally adopted by the Participant, and a stepchild of the Participant, in each instance living with the Participant in a normal parent-child relationship. 2.12 "Dependent Children's Allowance" shall mean the benefit payable to the Dependent Children of certain Participants pursuant to the SERP and as described in Plan Section 5.3. 2.13 "Nonforfeitable" shall refer only to the vested unsecured contractual right of a Participant, his Surviving Spouse and his Dependent Children, if any, to benefits under this Plan. In no event, however, shall "Nonforfeitable" imply any preferred claim on, or any beneficial ownership interest in, any assets of the Company before those assets are paid to any individual pursuant to the terms of the Plan. As provided in Plan Section 9.5, certain events may result in the forfeiture even of Nonforfeitable benefits. 2.14 "Normal Retirement Age" shall mean age 65. 2.15 "Other Plans" shall mean the employer-provided portion of any defined benefit pension plan sponsored by the Company (other than the Retirement Plan) or any Subsidiary and of any retirement or pension allowance (but not any form of severance or special termination payment) set forth and payable pursuant to any employment contract or any other agreement (other than an individual deferred compensation contract under which elective employee salary or bonus deferrals are made) between the Participant and the Company or a Subsidiary. The term "Other Plans" shall also include the employer- provided portion of any other pension or retirement plans sponsored by the predecessor employer of a Participant and of any retirement or pension allowance (but not any form of severance or special termination payment) set forth and payable pursuant to any employment contract or any other agreement (other than an individual deferred compensation contract under which elective employee salary or bonus deferrals are made) between the Participant and the predecessor employer of a Participant providing for benefits attributable in whole or in part to service which is recognized under the Plan as Creditable Service. Notwithstanding the foregoing, the employer-provided portion of the benefits paid or payable to or on behalf of a Participant pursuant to Other Plans shall only include a proportionate share of such benefits based on the ratio by which the portion of the service recognized under the Other Plan which is recognized as Creditable Service bears to the total service recognized under the Other Plan. 2.16 "Outside Agreement" shall mean a written agreement entered into between a duly authorized officer of the Company with authority to act in the matter and a Participant which recognizes any period of time prior to the commencement of such Participant's employment with the Company as service for purposes of certain retirement or other benefits or modifies any of the benefits or provisions of the Plan. 2.17 "Participant" shall mean any Active Participant, Vested Participant, Frozen Participant or Retired Participant. (a) "Active Participant" shall mean an employee from the time participation in the Plan begins pursuant to Plan Section 3 until the earliest of the time: (i) the Participant retires, (ii) the Participant dies, (iii) the Participant terminates employment with the Company and its Subsidiaries, or (iv) the Plan is terminated. In addition, if a Participant is placed on inactive employee status, as defined by the Retirement Board from time to time under uniform and nondiscriminatory rules, and, at the date of such change in status, the Participant has attained age 62 or the sum of the Participant's age and years of Creditable Service total at least 80 years, the Participant will continue as an Active Participant in the Plan. (b) "Retired Participant" shall mean a former employee who has retired on or after meeting the requirements for a Supplemental Retirement Allowance under Plan Section 4.1. (c) "Vested Participant" shall mean an employee or former employee of the Company or Subsidiary who ceased to be an Active Participant, who has not become a Retired Participant and who, immediately after ceasing to be an Active Participant, has a Nonforfeitable right to benefits under Plan Section 10. 2.18 "Plan" shall mean this Supplemental Executive Retirement and Life Plan of Avon Products, Inc., as from time to time amended. 2.19 "Pre-Retirement Spouse's Allowance" shall mean the benefit payable to the Surviving Spouse of certain Participants, pursuant to the SERP and as described in Plan Section 5.1. 2.20 "Post Retirement Spouse's Allowance" shall mean the benefit payable to the Surviving Spouse of certain Participants pursuant to the SERP and as described in Plan Section 5.2. 2.21 "Retirement Board" shall mean the person or persons appointed to administer the Plan as provided in Plan Section 8. 2.22 "Retirement Plan" shall mean the Employees' Retirement Plan of Avon Products, Inc., as amended from time to time. 2.23 "SERP" shall mean the portion of the Plan pursuant to which Supplemental Retirement Allowances, Pre-Retirement Spouse's Allowances, Post-Retirement Spouse's Allowances and Dependent Children's Allowances are payable. 2.24 "SLIP" shall mean the portion of the Plan pursuant to which Supplemental Life Allowances are payable. 2.25 "Subsidiary" shall mean any majority-owned subsidiary of the Company. 2.26 "Supplemental Life Allowance" shall mean the benefit referred to in Plan Section 6. 2.27 "Supplemental Retirement Allowance" shall mean the benefit referred to in Plan Section 4. 2.28 "Surviving Spouse" shall mean the spouse to whom the Participant was married on the date the Participant's Supplemental Retirement Allowance commenced under this Plan or on the Participant's date of death, if earlier. SECTION 3 PARTICIPATION 3.1 Commencement of SERP Participation. (a) Each individual who was a Participant in the SERP as of August 31, 1994, shall be a Participant in the SERP on September 1, 1994. A listing of Participants in the SERP as of January 1, 1995 is attached to the Plan as Appendix A, which Appendix may thereafter be updated from time to time, provided that all updates shall be attested by the signatures of two members of the Retirement Board. (b) All officers of the Company as of September 1, 1994, on the U.S. payroll at the level of Senior Vice President or above who are covered by individual employment agreements with the Company approved by the Board of Directors are Active Participants in the SERP. (c) The Compensation Committee shall have the authority to include as Active Participants in the SERP such other management or highly compensated employees of the Company or a Subsidiary (within the meaning of Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended) as it deems fit. 3.2 Commencement of SLIP Participation. Any employee who is an Active Participant in the SERP shall also be an Active Participant in the SLIP. 3.3 Termination of SERP Participation. When an individual ceases to be an Active Participant (as defined in Section 2.17(a) hereof), he shall cease to be a Participant and shall have no rights to a Supplemental Retirement Allowance unless he is a Vested Participant or a Retired Participant. 3.4 Termination of SLIP Participation. (a) If an individual who first became a Participant prior to January 1, 1990, ceases to be an Active Participant, he shall continue to be a Participant in the SLIP if he is eligible for a Supplemental Life Allowance in accordance with the provisions of Plan Section 6. (b) If an individual who first became a Participant on or after January 1, 1990, ceases to be an Active Participant, he shall cease to be a Participant in the SLIP on the date he ceases to be an Active Participant. SECTION 4 SUPPLEMENTAL RETIREMENT ALLOWANCES 4.1 Nonforfeitable Right to a Supplemental Retirement Allowance. (a) An Active Participant who attains Normal Retirement Age shall have a Nonforfeitable right to benefits under this Section 4, subject to the provisions of Plan Section 9, and may retire and receive payment of a Normal Retirement Allowance under the SERP. Payment of the Normal Retirement Allowance shall commence not later than 30 days after the later of the date the Participant actually retires or attains age 65. (b) An Active Participant who has attained age 55 and has 15 or more years of Creditable Service, or whose attained age plus his Creditable Service totals at least 85 years, shall have a Nonforfeitable right to benefits under this Section 4 and may retire and apply for payment of an Early Retirement Allowance under the SERP. Payment of the Early Retirement Allowance shall commence on the first day of the calendar month next following his date of retirement. (c) An Active Participant who has attained age 58 and completed 15 or more years of Creditable Service and who is deemed to be suffering from a hardship, as determined in the sole and unilateral discretion of the Retirement Board on a case-by-case basis, shall have a Nonforfeitable right to benefits under this Section 4 and may retire and apply for payment of a Hardship Retirement Allowance. Payment of the Hardship Retirement Allowance shall commence on the first day of the month following the date the Participant's application for retirement is approved by the Retirement Board. (d) Approval by the Retirement Board under this Section 4 may be evidenced by the written consent of any two members of such Board. In the event the Plan is amended or terminated or in the event of a Change of Control of the Company, Participants shall have the right to a Supplemental Retirement Allowance pursuant to Plan Section 10. 4.2 Amount of Normal Retirement Allowance. (a) The annual Normal Retirement Allowance under the SERP for Participants who have a Nonforfeitable right to such an allowance pursuant to Plan Section 4.1(a) shall be equal to: (i) 2% of the Participant's Average Final Compensation multiplied by the Participant's Creditable Service up to 25 years; plus (ii) 1% of the Participant's Average Final Compensation multiplied by the Participant's Creditable Service in excess of 25 years but not in excess of 35 years; less (iii) the Annual Benefit Offset. (b) Notwithstanding the provisions of Plan Subsection 4.2(a), any Participant entitled to a benefit pursuant to Plan Section 4.1(a) who (i) is or was an officer of the Company as of January 1, 1995, at the level of Senior Vice President or above, and covered by an individual employment agreement with the Company which had been approved by the Board of Directors or (ii) is or was a senior executive designated by the Compensation Committee as eligible to receive a minimum allowance, shall not receive an annual Normal Retirement Allowance which, when added to the Actuarial Equivalent of the benefit paid or payable to such Participant under the Retirement Plan and Other Plans (expressed as an annual benefit in the same form as the benefit under Plan Section 4.2 is payable), is less than 50% of the Participant's Average Final Compensation. Such offset shall be calculated in a manner similar to that set forth in the definition of Annual Benefit Offset. 4.3 Amount of Early Retirement Allowance. (a) The annual Early Retirement Allowance under the SERP for Participants who have a Nonforfeitable right to such an allowance pursuant to Plan Section 4.1(b) shall be equal to the Normal Retirement Allowance determined in accordance with Plan Subsection 4.2(a), based on the Participant's Average Final Compensation and Creditable Service at the date of retirement; provided, however, that if the Participant retires before the sum of suchParticipant's age and Creditable Service is 85 years, the allowance shall be calculated by determining the benefit without regard to the Annual Benefit Offset, by reducing the benefit 3/12ths of 1% for each month by which the date the allowance commences precedes the month in which the Supplemental Retirement Allowance would have commenced if the Participant retired at Normal Retirement Age and by 5/12ths of 1% for each such month in excess of 60 months and by then applying the Annual Benefit Offset. The Early Retirement Allowance payable to a Participant whose age and Creditable Service total at least 85 years shall be equal to the allowance determined in accordance with Plan Subsection 4.2(a) based on Average Final Compensation and Creditable Service at the time of retirement without reduction for commencement of payment prior to Normal Retirement Age; provided, however, that if such allowance commences after the first day of the calendar month following the month in which the Participant retires, the allowance shall be increased so that it is the Actuarial Equivalent of the allowance payable as of the first day of the month following the month in which the Participant retires. (b) Notwithstanding the provisions of Plan Subsection 4.3(a) above, any Participant entitled to a benefit pursuant to Plan Section 4.1(b) who has attained age 60 and completed 15 years of Creditable Service and who (i) is or was an officer of the Company as of January 1, 1995, at the level of Senior Vice President or above, and covered by an individual employment agreement with the Company which had been approved by the Board of Directors or (ii) is or was a senior executive designated by the Compensation Committee as eligible to receive a minimum allowance, shall not receive an annual Early Retirement Allowance which, when added to the Actuarial Equivalent of any retirement allowance paid or payable to such Participant under the Retirement Plan and any Other Plans (expressed as an annual benefit in the same form as the benefit payable pursuant to this Plan Section 4.3) is less than 50% of the Participant's Average Final Compensation, reduced by 4/12ths of 1% for each month by which the Participant's date of retirement precedes Normal Retirement Age; provided, however, that if such allowance commences after the first day of the calendar month following the month in which the Participant retires, the allowance shall be increased so that it is the Actuarial Equivalent of the allowance payable as of the first day of the month following the month in which the Participant retires. The offset described in the immediately preceding sentence shall be calculated in a manner similar to that set forth in the definition of the Annual Benefit Offset. 4.4 Amount of Hardship Retirement Allowance. The annual Hardship Retirement Allowance under the SERP for Participants who have a Nonforfeitable right to such an allowance pursuant to Plan Section 4.1(c) or 4.1(d) shall be equal to the Normal Retirement Allowance determined in Plan Subsection 4.2(a), based on the Participant's Average Final Compensation and Creditable Service at the date of retirement; provided, however, such allowance shall in no event be less than the Early Retirement Allowance to which such Participant would be entitled upon retirement under Plan Subsection 4.3(b), if applicable. 4.5 Restoration of Retired Participants to Service. Anything contained in this Plan to the contrary notwithstanding, if a Participant who has received or is receiving a Supplemental Retirement Allowance again becomes an employee of the Company or a Subsidiary, any retirement allowance payable under this Plan shall cease upon reemployment and such allowance shall commence to be paid when the Participant again retires. On subsequent retirement, the Supplemental Retirement Allowance payable to such Participant shall be based on Compensation and Creditable Service before and after the period of prior retirement, reduced by an amount which is the Actuarial Equivalent of the benefits the Participant received prior to reemployment; provided, however, that such benefit shall not be less than the benefit the Participant was receiving during prior retirement. 4.6 Outside Agreements. (a) To the extent an Outside Agreement provides for a benefit in addition to (or on the terms and conditions different from) any benefit otherwise payable under the Plan, such benefit under such Outside Agreement shall be deemed to be, and shall be, payable under this Plan. (b) Nothing in Plan Subsection (a) above shall be construed to limit any rights of any Participant under an Outside Agreement, except that any benefits paid hereunder pursuant to this Plan Section 4.6 shall be offset against any amounts payable with respect to any substantially similar obligations under the Outside Agreement so as to avoid duplication of payment. SECTION 5 SURVIVOR RETIREMENT ALLOWANCES 5.1 Pre-Retirement Spouse's Allowance. (a) If, prior to receipt of a Supplemental Retirement Allowance, a Participant dies while employed by the Company or a Subsidiary and has at least 10 years of Creditable Service, or has attained age 65, or dies while receiving disability benefits under the Company's Short Term or Long Term Disability Insurance Plans and after having completed 10 years of Creditable Service, or dies with Nonforfeitable benefits under Plan Section 10, his Surviving Spouse shall receive a Pre-Retirement Spouse's Allowance under the SERP payable during the Surviving Spouse's remaining lifetime. (b) Payment of the annual Pre-Retirement Spouse's Allowance under the SERP shall commence as of the first day of the calendar month following the month in which the Participant died or would have attained age 55, whichever is later. However, the Retirement Board may, under rules uniformly applicable to all similarly situated, approve a request made by a Surviving Spouse to commence payment on the first day of any earlier calendar month after the Participant's death ("early commencement date" hereafter). (c) If the Pre-Retirement Spouse's Allowance commences as of the first day of the month following the month in which the Participant died or would have attained age 55, whichever is later, the Pre-Retirement Spouse's Allowance shall be an annual allowance for the life of the spouse, payable monthly, equal to the greater of: (i) 20% of the Participant's annual rate of Compensation at the time of his death or earlier termination of employment, less the Actuarial Equivalent of the amount of any spouse's allowance (expressed as an annual amount payable for the life of the spouse and commencing on the same date as the Pre- Retirement Spouse's Allowance commences) paid or payable on behalf of such Participant under the Retirement Plan and any Other Plans, or (ii) the allowance (based on the Participant's Creditable Service as of his date of death) the Surviving Spouse would have received if the Participant had retired and begun to receive the Supplemental Retirement Allowance in the form of a 100% joint and survivor annuity on the date of death, or on the date such Participant would have attained age 55, if later. (d) If the Retirement Board approves an early commencement date with respect to the Pre-Retirement Spouse's Allowance under Plan Subsection (b) above, the Pre- Retirement Spouse's Allowance shall be a monthly allowance for the life of the Surviving Spouse and shall be equal to the Pre-Retirement Spouse's Allowance the Surviving Spouse would have received under Plan Subsection (c) above if the Retirement Board had not approved the early commencement date, reduced by 1/12th of 5% for each month by which the date payments commence precedes the first day of the month following the month in which the SERP Participant would have attained age 55, provided that in no event shall such reduced allowance be less than the Actuarial Equivalent of the allowance otherwise payable under Plan Subsection (c) above. 5.2 Post-Retirement Surviving Spouse's Allowance. The Surviving Spouse of a Retired Participant who dies prior to the commencement of a Supplemental Retirement Allowance will receive a Post-Retirement Surviving Spouse's Allowance from the Plan equal to 50% of the Supplemental Retirement Allowance the Retired Participant would have been receiving if benefits had commenced in the form provided for in Plan Section 7.1(b) on the date of the Retired Participant's death. The Post-Retirement Surviving Spouse's Allowance under the Plan shall begin on the first day of the month following the Retired Participant's death and shall be paid to the Surviving Spouse for such spouse's remaining lifetime. The Surviving Spouse of a Retired Participant who dies after the commencement of a Supplemental Retirement Allowance under the SERP shall be entitled to receive benefits from the SERP in accordance with the form of benefit payable to the Retired Participant in accordance with the provisions of Plan Section 7. 5.3 Dependent Children's Allowance. (a) Each Dependent Child, up to a maximum of four such children, shall receive a Dependent Children's Allowance from the SERP which is a yearly allowance equal to 10% of the yearly amount of the spouse's allowance calculated under Plan Section 5.1 or 5.2, whichever is applicable, at the time of the Participant's death, plus 10% of the yearly benefits which are payable to the Surviving Spouse under the Retirement Plan and any Other Plan (based on the assumption that benefits commence on the same date as benefits commence hereunder). (b) For purposes of Plan Subsection (a) above, if the spouse predeceases the Participant, the allowance under Plan Section 5.1 or 5.2 shall be determined as if the spouse had not predeceased the Participant and as if yearly benefits under the Retirement Plan and any Other Plan are payable to such predeceased spouse and shall be based upon the spouse's actuarially determined life expectancy as of the date of the spouse's death. (c) For purposes of Plan Subsection (a) above, in the event that the Participant had no spouse, other than for the reason that the spouse predeceased the Participant, the allowance under Plan Section 5.1 or 5.2 shall be based upon the assumption that the Participant had a spouse who was five years younger than the Participant, that any yearly benefits payable under the Retirement Plan and any Other Plan are payable to such assumed spouse, and that the spouse's allowance under Plan Section 5.1 or 5.2, whichever is applicable, had commenced on the date of the Participant's death. (d) For purposes of Plan Subsection (a) above, in the event the spouse of a Participant dies prior to commencement of benefits under the Plan, the amount of the Dependent Children's Allowance hereunder shall be determined on the assumption that the spouse's allowance under Plan Section 5.1 or 5.2, whichever is applicable, had commenced on the date of the spouse's death and that any yearly benefits payable under the Retirement Plan and any Other Plan had commenced on the date of the spouse's death. (e) The Dependent Children's Allowance hereunder shall commence on the day payment of the spouse's allowance commences under the SERP, or the earliest date it could have commenced had the spouse not predeceased the Participant, or if the Participant had no spouse for any other reason, on the earliest date it could have commenced had the Participant had a spouse who was five years younger than the Participant, and shall continue to be paid to each Dependent Child until the earlier of the date such child ceases to be a Dependent Child or dies. (f) If there are more than four Dependent Children, the total amount otherwise payable to four Dependent Children shall be divided equally among all Dependent Children at the time such payment is made. When a child ceases to be a Dependent Child or dies, the total allowance then payable shall be reallocated among the remaining Dependent Children to the extent applicable; provided, however, that no Dependent Child shall be entitled to an allowance in excess of the benefit set forth in Plan Subsection (a) above. 5.4 Allowance to Spouse Not Reduced. The amount of any allowance payable to a Surviving Spouse under Plan Section 5.1 or 5.2 shall not be reduced due to the payment of a benefit under the Plan to one or more Dependent Children. SECTION 6 SUPPLEMENTAL LIFE ALLOWANCES 6.1 Right to a Supplemental Life Allowance. (a) A Participant becomes eligible for a Supplemental Life Allowance payable to his Beneficiary if he dies: (i) while an Active Participant who is either employed by the Company or a Subsidiary or is receiving a disability benefit under the Company's Short Term or Long Term Disability Plans; or (ii) while a Frozen Participant or a Retired Participant, provided he became an Active Participant in the SLIP prior to January 1, 1990; (iii) while an employee, provided he became an Active Participant in the SLIP prior to January 1, 1990, and was an Active Participant for at least five (5) years; (b) A Participant who became an Active Participant in the SLIP prior to January 1, 1990, and is a Participant at the time the Plan is terminated or modified or at the time of a Change of Control will be entitled to a Supplemental Life Allowance as provided in Plan Section 10. (c) A Participant shall become Nonforfeitable in a Supplemental Life Allowance only if he dies under one of the circumstances described in Subsection (a) of this Section, if he was an Active Participant in the Plan prior to January 1, 1990 and becomes Nonforfeitable in a Supplemental Retirement Allowance or as provided in Section 10. 6.2 Amount of Supplemental Life Allowance. (a) If a Participant has a right to a Supplemental Life Allowance as described above, the Beneficiary of such Participant shall receive a Supplemental Life Allowance payable upon the death of a Participant, provided that such Participant has not made the election described in Plan Section 6.4 or 6.5. (b) The amount of the Supplemental Life Allowance shall be as established by the Compensation Committee upon theParticipant's commencement of participation in the Plan, except that the Compensation Committee reserves the right to increase or reduce the amount of such allowance from time to time, subject to the provisions of Plan Section 10. Notwithstanding the foregoing, if an Active Participant first became a Participant in the Plan prior to January 1, 1990, his level of coverage under the SLIP may not be reduced after he has been an Active Participant for at least two years for so long as he remains an Active Participant. Further, if a Participant has a right to a Supplemental Life Allowance pursuant to Plan Section 6.1(a)(ii) or (iii), his benefit under the slip will continue at the same level as in effect on the date preceding the date he ceased to be an Active Participant. 6.3 Notwithstanding the foregoing, if the Company obtains a life insurance policy (or policies) on the life of a Participant whether or not in connection with this Plan and the insurer is not obligated to pay the policy's death benefit proceeds on the grounds that the Participant committed suicide or any other grounds based on actions or inactions on the part of the Participant, then and in that event, the Company's obligation to make payments of a Supplemental Life Allowance shall be terminated. The Company shall, in its sole discretion, determine what steps are necessary and take such action as it deems reasonably appropriate to pursue and obtain payment of any death benefit under said policy or policies. Whatever steps are deemed appropriate by the Company to pursue this matter shall be conclusive. In no event shall any Participant have any ownership interest in such policy or policies. 6.4 Notwithstanding the foregoing, a SLIP Participant may elect not to be covered by the Supplemental Life Allowance benefit provided under this Plan Section 6. 6.5 Subject to the terms and conditions imposed by the Retirement Board any Participant who is eligible for the Supplemental Life Allowance during the time such Participant is a Retired Participant, may elect, subject to the approval of the Retirement Board, to forego the Supplemental Life Allowance coverage provided under this Plan Section 6 in exchange for a paid-up whole life insurance policy or policies (based on the application of dividends to pay premiums) on such Retired Participant's life in an amount to be determined by the Retirement Board. In the case of any such election, the Company will also pay cash to such Retired Participant in an amount sufficient to enable such Participant to pay any federal, state, and local income taxes (calculated at the highest applicable marginal rates) resulting from the distribution of such policy or policies and the corresponding cash payment. 6.6 If (a) a Participant terminates employment prior to becoming a Retired Participant or (b) the Company has obtained a life insurance policy on the life of such Participant to assist it in meeting its obligations under this Plan, and (c) such policy provides that it may be assigned, then if the Company elects, the Participant may purchase such policy from the Company on such terms and conditions as shall be determined by the Retirement Board; provided, however, that in no event shall the Company receive less than the amount of cash it could have received had it surrendered such policy to the insurer. SECTION 7 FORMS OF PAYMENT 7.1 Automatic Form. (a) Except as otherwise provided for married Participants pursuant to Plan Subsection 7.1(b), or unless an optional form of retirement allowance has been requested by the Participant under Plan Section 7.2 and approved by the Retirement Board, the annual Supplemental Retirement Allowance shall be payable in monthly installments for the life of the Participant only, ending with the last monthly payment during the month of the Participant's death. (b) Unless an optional form of retirement allowance has been requested by the Participant under Plan Section 7.2 and has been approved by the Retirement Board, the automatic form of payment of a Supplemental Retirement Allowance to a Participant who is married at the date the retirement allowance begins shall be a joint and survivor benefit payable to the Participant in the amount determined pursuant to the applicable Subsection of Plan Section 4 payable during the lifetime of the Participant with the provision that after the Participant's death an annual Supplemental Retirement Allowance shall be payable to the Surviving Spouse of the Participant equal to one-half the Supplemental Annual Retirement Allowance payable during the Participant's life. (c) Notwithstanding anything contained in Subsections (a) and (b) of this Plan Section 7.1 to the contrary, if the Actuarial Equivalent present value of any Supplemental Retirement Allowance payable to a Participant (including the value of any benefit payable to his Surviving Spouse after his death) does not exceed $10,000, or such greater amount as the Retirement Board shall from time to time determine under rules of uniform applicability, the Company may pay the Participant or Beneficiary a single lump sum payment. (d) Notwithstanding anything contained in the Plan to the contrary, on and after a Change of Control, the normal form of Supplemental Retirement Allowance shall be a single lump sum payment in cash. 7.2 Request for Optional Form. (a) Any Participant (other than Participants who have been cashed out by the Company pursuant to Plan Subsection 7.1(c) or 7.1(d)) may, by written notice received by a member of the Retirement Board at least two months prior to retirement or in the case of a Vested Participant, at least two months prior to the due date of the first payment of the Supplemental Retirement Allowance, request that the allowance be converted into an optional form of retirement allowance of Actuarial Equivalent value, in accordance with any form of payment as may be permitted under the Retirement Plan. Such request shall be subject to the approval of the Retirement Board. For purposes of this Plan Section 7.2, an eligible married Participant's retirement allowance prior to conversion into an optional form shall include the value of the benefit to be continued to the Surviving Spouse after the Participant's death. In the event a lump sum optional form of benefit is payable and such sum is not paid on the date benefit payments are scheduled to commence, the lump sum benefit shall be increased until the date paid by the interest rate factors utilized in valuing such lump sum. (b) A surviving spouse entitled to a Supplemental Retirement Allowance pursuant to Plan Section 5.1 or 5.2 may, by written notice received by a member of the Retirement Board within 60 days following the Participant's date of death, or if later, within 30 days following the surviving spouse's receipt of written notice from the Company that he or she is entitled to a spouse's allowance under the Plan, request that the allowance be converted into a lump sum optional form of benefit of Actuarial Equivalent value. Such request shall be subject to the approval of the Retirement Board. In the event a lump sum optional form of benefit is payable and such sum is not paid on the date benefit payments are scheduled to commence, the lump sum benefit shall be increased until the date paid by the interest rate factors utilized in valuing such lump sum. 7.3 Effective Optional Forms. The optional form of Supplemental Retirement Allowance requested and approved under Plan Section 7.2 shall become effective on the first day of the month for which the Participant's allowance is payable. If the Participant dies, or the designated Beneficiary dies before the first day of the month for which the Participant's allowance is payable under a contingent annuitant option, the approved option shall thereby be revoked. SECTION 8 ADMINISTRATION OF THE PLAN 8.1 Except as otherwise specifically provided in the Plan, the Retirement Board shall be the administrator of the Plan. The Retirement Board shall have full authority to determine all questions arising in connection with the Plan, including the discretionary authority to interpret the Plan, to adopt procedural rules and to employ and rely on such legal counsel, actuaries, accountants and agents as it may deem advisable to assist in the administration of the Plan. Decisions of the Retirement Board shall be conclusive and binding on all persons. The Retirement Board shall provide to the trustee of any Trust established pursuant to Plan Section 1, such certification or other documentation as may be required by the trustee in connection with the payment of benefits to Participants. 8.2 After a Change in Control, the Retirement Board may be changed by the Company only with the consent of a majority of the Participants (excluding Beneficiaries). SECTION 9 CERTAIN RIGHTS AND LIMITATIONS 9.1 The establishment of the Plan shall not be construed as conferring any legal rights upon any employee or other person for a continuation of employment, nor shall it interfere with the rights of the Company or a Subsidiary to discharge any employee and to treat such employee without regard to the effect which such treatment might have upon such employee as a Participant of the Plan. 9.2 If the Retirement Board shall find that a Participant or other person entitled to a benefit is unable to care for his affairs because of illness, accident or is a minor, the Retirement Board may direct that any benefit payment due such participant or other person, unless claim shall have been made therefor by a duly appointed legal representative, be paid to the spouse, a child, parent or other blood relative, or to a person with whom the Participant or other person resides. Any such payment so made shall be a complete discharge of the liabilities of the Plan with respect to such Participant or such other person. 9.3 Each Participant, before any benefit shall be payable to or on behalf of such person under the Plan, shall file with a member of the Retirement Board at least 30 days prior to the time of retirement or in the case of a Vested Participant prior to the earliest date the retirement allowance can commence, such information, if any, as shall be required to establish such person's rights and benefits under the Plan. 9.4 No benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, garnishment, attachment, encumbrance or charge, and any attempt so to do shall be void; nor shall any such benefit be in any manner liable for or subject to the debts, contract liabilities, engagements or torts of the person entitled to such benefit. 9.5 The obligation of the Company to make or continue payment of any benefits hereunder shall cease with respect to any Participant who (a) at any time is convicted of a crime involving dishonesty or fraud relating to the Company (b) at the time, without the Company's written consent knowingly uses or discloses any confidential or proprietary information relating to theCompany or (c) within three years following termination ofemployment, without the Company's written consent, accepts employment with, or provides consulting services to, a principal competitor of the Company. 9.6 Except to the extent a Participant has a Nonforfeitable right to a benefit pursuant to Plan Section 10, if, after written notice by the Company, the Participant declines retirement at the request of the Company, or if the Participant's voluntary retirement (other than for disability) prior to age 62 is not approved by the Company, the Retirement Board shall have the right to cause forfeiture of any benefit to or on account of the Participant under the Plan. 9.7 A Participant at the time participation commences shall supply the Retirement Board with such evidence of good health and insurability, including a physical examination, as the Retirement Board may from time to time require to satisfy any insurance company in connection with obtaining life insurance for benefits under Plan Section 6. A Participant who fails to supply such evidence when required shall not be entitled to such benefits under Plan Section 6. 9.8 All benefits payable under the Plan shall be payable by the Company from its general assets. The Plan shall not be funded by the Company. However, solely for its own convenience the Company reserves the right to provide for payment of benefits hereunder through a trust which may be irrevocable but the assets of which shall be subject to the claims of the Company's general creditors in the event of the Company's bankruptcy or insolvency, as defined in the Trust established pursuant to Plan Section 1. In no event shall the Company be required to segregate any amount credited to any account, which shall be established merely as an accounting convenience; no Participant, Beneficiary, Surviving Spouse or Dependent Child shall have any rights whatsoever in any specific assets of the Company or the Trust; no rights of any Participant, Beneficiary, Surviving Spouse or Dependent Child, hereunder shall be subject to participation, alienation, sale, transfer, assignment, pledge, garnishment, attachment or encumbrance nor to the debts, contracts, liabilities, engagements or torts of any Participant, Beneficiary, Surviving Spouse or Dependent Child. 9.9 When payments commence under the Plan, the Company shall have the right to deduct from each payment made under the Plan any required withholding taxes. 9.10 Notwithstanding any other provision of the Plan to the contrary, the Company shall make payments hereunder before such payments are otherwise due if it determines, based on a change in the tax or revenue laws of the United States of America, a published ruling or similar announcement issued by the Internal Revenue Service, a regulation issued by the Secretary of the Treasury or his delegate, a decision by a court of competent jurisdiction involving a Participant or Beneficiary, or a closing agreement made under Internal Revenue Code section 7121 that is approved by the Internal Revenue Service and involves a Participant or Beneficiary, that a Participant or Beneficiary has recognized or will recognize income for federal income tax purposes with respect to amounts that are or will be payable to him under the Plans before they are paid to him. SECTION 10 AMENDMENT AND TERMINATION OF THE PLAN 10.1 Right to Amend. The Board of Directors (or the Compensation Committee to the extent it has been delegated authority) reserves the right at any time and from time to time, and retroactively if deemed necessary r appropriate, to amend or modify in whole or in part, any or all of the provisions of the Plan pursuant to its normal procedures; provided that no such modification or amendment shall adversely affect the rights and benefits of Participants which had accrued or become Nonforfeitable under this Plan prior to the date such amendment or modification is adopted or becomes effective, whichever is later. For purposes of this Plan Section 10, "accrued" benefits refers to the benefits to which a Participant would be entitled, based on his Creditable Service and Compensation as of the date the determination is made, assuming the Participant had a Nonforfeitable right to benefits as of such date. 10.2 Right to Terminate. The Board of Directors (or the Compensation Committee to the extent it has been delegated authority) may terminate the Plan for any reason at any time provided that such termination shall not adversely affect the rights and benefits of Participants which had accrued or become Nonforfeitable under the Plan prior to the date termination is adopted or made effective, whichever is later. 10.3 Effect of Plan Termination on Benefits. (a) In the event the Plan is terminated, each Participant, whether or not such Participant has met the age or service requirements to be entitled to a benefit under the SERP or under the Retirement Plan, shall have a Nonforfeitable right to: (i) the Supplemental Retirement Allowance described in Plan Section 4, which such Participant had accrued through the date of the termination of the Plan; and (ii) to the death benefits described in Plan Section 5, based upon the Plan Section 4 benefits accrued by the Participant through the date of Plan termination. (b) For purposes of Plan Section 4, such accruedbenefit shall be computed in accordance with Plan Section 4.3 as though the date of termination of the Plan were the Participant's date of retirement, provided that (i) if the Participant is less than age 55, his minimum percentage benefit described in Plan Subsection 4.3(b) shall be determined upon the assumption that the Participant were 55, and such minimum benefit shall then be multiplied by a fraction, the numerator of which is the Participant's years of Creditable Service and the denominator of which is his years of such Creditable Service projected to age 55, and (ii) if the Participant terminates employment involuntarily as described in Plan Section 10.5 before he attains age 65 and before his age and Creditable Service total 85 years and his Supplemental Retirement Allowance commences on or after the date his age and Creditable Service would have totaled 85 years if his employment with the Company or a Subsidiary had continued, or it commences on or after his attainment of age 65, his Supplemental Retirement Allowance shall be computed without applying the reduction for early commencement. (c) The payment of the Supplemental Retirement Allowance described in this Section shall commence at the time a Participant (or the Participant's Surviving Spouse or Dependent Children) meets, under the terms of the Plan at the time of its termination, the requirements for payment of benefits whether or not employed by the Company at that time. For this purpose, the Participant shall be considered to accrue Creditable Service for purposes of determining the Participant's eligibility for the receipt of a Supplemental Retirement Allowance as if the Participant continued in the service of the Company as an Active Participant in the Plan, whether or not the Participant remains in the employ of the Company). Notwithstanding the foregoing, the Company in its discretion can pay a lump sum of Actuarial Equivalent value of any benefits due to the Participant or his Surviving Spouse or Dependent Children at any time following the termination of the Plan. (d) A Participant who participated in the SLIP prior to January 1, 1990, shall have a right to the Supplemental Life Allowance at the same level in effect at the time of Plan termination. The Company shall fully satisfy all of its obligations to the Participant with respect to such Supplemental Life Allowance by immediately distributing or causing to be distributed to such Participant a fully paid whole life insurance policy or policies on the Participant's life which, as of the date of distribution and thereafter will provide, without application of dividends, at death a death benefit at least equal to one-half of the amount of the Supplemental Life Allowance. In the case of any such distribution of a life insurance policy, the Company will also pay enough cash to the Participant to enable the Participant to pay any federal, state and local income taxes (calculated at the highest applicable marginal rates) resulting from the distribution of the policy and the corresponding cash payment made pursuant to this sentence. 10.4 Effect of Plan Amendment on Benefits. In the event the Plan is amended or modified in whole or in part to reduce future accruals of benefits, Supplemental Retirement Allowances or death benefits or to reduce or eliminate Supplemental Life Allowances, the Participants affected by any such amendment or modification shall be treated: (a) with respect to the Supplemental Retirement Allowance or death benefits based thereon that accrued through the date of such amendment or modification and were affected by such amendment or modification as if the Plan were terminated as of such date and their rights and entitlement to these benefits shall be determined under Plan Section 10.3; provided, however, that such Participants shall be entitled to continue to accrue benefits after the date of such amendment or modification under such modified or amended terms of the Plan; and (b) with respect to a Supplemental Life Allowance as of the date of such amendment or modification as if the Plan were terminated as of such date and their rights and entitlement to these benefits shall be determined under Plan Section 10.3(d); provided, however, that such Participants shall be entitled to continue to accrue benefits after the date of such amendment or modification under such modified or amended terms of the Plan. 10.5 Effect of a Change of Control. In the event of a Change of Control of the Company, then, with respect to (a) any person who has a right to a Supplemental Life Allowance as described in Plan Section 6.1, whether retired, terminated or still actively employed by the Company, and (b) any person who is an Active Participant in the SERP at the time of the Change of Control (or a former officer who is eligible to be a Participant under Plan Section 4.1(d)) who subsequently either ceases for any reason, other than voluntary termination of employment as defined in Plan Section 10.6 below, to be an Active Participant or becomes eligible for Plan participation at a reduced level, then the Plan shall be deemed terminated at the date of the Change of Control with respect to determining the Supplemental Life Allowance for persons described in clause (a) above or the date of termination of employment with respect to determining the Supplemental Retirement Allowance and death benefits for persons described in clause (b) above. Any such person's right and entitlement to Supplemental Retirement Allowances and death benefits based on the Supplemental Retirement Allowance accrued through such date, and Supplemental Life Allowances (including his or her right to an immediate distribution of a fully paid whole life policy and income tax gross up) payable to Participants who participated in the SLIP on January 1, 1990, shall be determined under the provision of Plan Section 10.3; provided, however that such Participants shall be entitled to continue to accrue benefits after the date of the Change of Control under such terms of the Plan if they are still eligible to continue participation under the Plan. 10.6 Voluntary Termination of Employment. For purposes of Plan Section 10.5, a voluntary termination of employment shall mean any termination initiated by the Participant except a termination initiated after: (a) any substantial adverse change in position, duties, title or responsibilities, other than merely by reason of the Company ceasing to be a publicly-traded corporation; (b) any material reduction in base salary or, unless replaced by equivalent arrangements, any material reduction in annual bonus opportunity or pension or welfare benefit plan coverages; (c) any relocation required by the Company to an office or location more than 25 miles from the Participant's current regular office or location; or (d) any failure of the Company to obtain the agreement of a successor entity to assume the obligations set forth hereunder, provided that the successor has had actual notice of the existence of this arrangement and an opportunity to assume the Company's responsibilities hereunder during a period of at least 10 business days after receipt of such notice; provided that, in order for a particular event to be treated as an exception to a "voluntary termination," a Participant must assert such exception within 180 days after actual knowledge of the events giving rise thereto by giving the Company written notice thereof and an opportunity to cure. Notwithstanding the foregoing, in the event that any employment agreement between the Participant and the Company or a Subsidiary in effect at the time of such termination provides a definition of "constructive termination" or termination for "good reason" or similar terminology, such definition shall govern over the event described in this Plan Section 10.6 to the extent that it provides addition exceptions to the events which are considered a voluntary termination. 10.7 Effect of Merger or Acquisition. If any company now or hereafter becomes a Subsidiary of the Company, the Board of Directors (or the Compensation Committee to the extent it has been delegated authority) may include an employee of such Subsidiary in the membership of the Plan upon appropriate action by such company. In such event, or, as a result of the merger or consolidation or as the result of acquisition by the Company of all or part of the assets or business of another company, the Board of Directors (or the Compensation Committee to the extent it has been delegated authority) shall determine to what extent, if any, benefits shall be granted for previous service with such Subsidiary, or other company. SECTION 11 CLAIM PROCEDURES 11.1 Every claim for benefits under the Plan shall be in writing directed to a member of the Retirement Board. 11.2 Each claim filed shall be passed upon by the Retirement Board within a reasonable time from its receipt. If a claim is denied in whole or in part the claimant shall be given written notice of the denial in language calculated to be understood by the claimant, which notice shall: (a) specify the reason or reasons for the denial; (b) specify the Plan provisions giving rise to the denial; and (c) describe any further information or documentation necessary for the claim to be honored, explain why such documentation or information is necessary, and explain the Plan's review procedure. 11.3 Upon written request of any claimant whose claim has been denied in whole or in part, the Retirement Board shall make a full and fair review of the claim and furnish the claimant with a written decision concerning it. IN WITNESS WHEREOF, the Company has caused this instrument to be executed as of MARCH 17TH, 1995. AVON PRODUCTS, INC. By: /s/ Marcia L. Worthing Title: Senior Vice President Human Resources and Corporate Affairs ATTEST: /s/ Ward M. Miller, Jr. Secretary [CORPORATE SEAL] EX-10.7 5 EX-10.7 EXHIBIT 10.7 BENEFIT RESTORATION PENSION PLAN OF AVON PRODUCTS, INC. Effective as of January 1, 1994 TABLE OF CONTENTS Page ARTICLE 1 Definitions 1 ARTICLE 2 Membership 2 ARTICLE 3 Amount and Payment of Benefits 3 ARTICLE 4 General Provisions 5 ARTICLE 5 Amendment or Termination 7 BENEFIT RESTORATION PENSION PLAN OF AVON PRODUCTS, INC. Introduction This amendment and restatement of the Excess Benefit Pension Plan of Avon Products, Inc., which is hereby renamed the Benefit Restoration Pension Plan of Avon Products, Inc. (the "Plan"), has been adopted by Avon Products, Inc. effective as of January 1, 1994. The Plan is designed to pay supplemental benefits to certain Employees who have qualified or may qualify for benefits under the Retirement Plan, as defined below. All benefits payable under this Plan shall be paid out of the general assets of the Company. The Company may establish a trust in order to aid it in providing benefits due under the Plan. ARTICLE 1 Definitions 1.1 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.2 "Company" shall mean Avon Products, Inc. or any successor by merger, purchase or otherwise, with respect to its employees; or any other affiliated company authorized by the Board of Directors to participate in the Plan. 1.3 "Compensation Committee" shall mean the Compensation Committee of the Board of Directors of the Company. 1.4 "Effective Date" shall mean January 1, 1994. 1.5 "Employee" shall mean an individual who is employed by the Company at any time on or after the Effective Date. 1.6 "Equivalent Actuarial Value" shall mean a benefit of equivalent value when computed on the basis of the same mortality table and rate or rates of interest and/or empirical tables which are being used to determine the Member's Retirement Allowance under the Retirement Plan. 1.7 "Member" shall mean any Employee or former Employee who has become a participant in the Plan for so long as his benefits under the Plan have not been fully distributed pursuant to the Plan. 1.8 "Normal Retirement Date" shall mean the first day of the calendar month next following the Member's attainment of age 65. 1.9 "Plan" shall mean the Benefit Restoration Pension Plan of Avon Products, Inc., as described herein or as hereafter amended. 1.10 "Retirement Allowance" shall mean the accrued benefit available under the Retirement Plan, determined without regard to any benefit provided under Section 17 of that Retirement Plan, in the event of a change of control. 1.11 "Retirement Board" shall mean the administrative board appointed to administer the Retirement Plan. 1.12 "Retirement Plan" shall mean the Employees' Retirement Plan of Avon Products, Inc. as in effect on the Effective Date and as may thereafter be amended from time to time. 1.13 "Supplemental Benefit" shall mean the accrued retirement benefit payable under the Plan. 1.14 "Supplemental Executive Retirement Plan" or "SERP" shall mean the Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc. as in effect on the Effective Date and as may thereafter be amended from time to time. ARTICLE 2 Membership 2.1 Eligibility (a) Every Employee who is a participant in the Retirement Plan shall become a Member of this Plan on the first day of the calendar month coincident with or next following the date his accrued Retirement Allowance is limited as a result of the application of Code Section 415 or 401(a)(17). (b) Each Employee who was a Member on December 31, 1993 shall continue to be a Member as of the Effective Date. 2.2 Termination of Membership A Member's participation in the Plan shall terminate on the later of the date of the Member's death or termination of employment with the Company or the date benefits payable under the Plan have been fully distributed. ARTICLE 3 Amount and Payment of Benefits 3.1 Amount of Supplemental Benefit 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 the form of a single life annuity if (i) the limitations of Code Section 415 were not applicable, (ii) if the Member has not been a participant in the Supplemental Executive Retirement Plan of Avon Products, Inc, the annual compensation limitations under Code Section 401(a)(17) were equal to $250,000, or, if the Member was a participant under the Supplemental Executive Retirement Plan of Avon Products, Inc., the annual compensation limitations under Code Section 401(a)(17) were not applicable, and (iii) the definition ofcompensation under the Retirement Plan included compensation electively deferred by the Member for the plan year (as deferred compensation plan or program maintained by the Company; less (b) the Retirement Allowance that is actually payable to the Member. For purposes of this Plan Section 3.1, if any benefit under Section 3.1(b) is payable in a form other than a single life annuity or at a time other than the time Supplemental Benefits are payable under this Plan, such benefit shall be converted to a single life annuity of Equivalent Actuarial Value effective as of the day Supplemental Benefits would commence under this Plan. 3.2 Normal and Optional Forms of Payment (a) Except as otherwise provided for married Members pursuant to paragraph (b) below, or unless an optional form of Supplemental Benefit has been requested by the Member under paragraph (c) and approved by the Retirement Board, the annual supplemental benefit provided pursuant to Section 3.1 shall be payable in monthly installments for the life of the Member only, ending with the last monthly payment during the month of the Member's death. (b) Unless an optional form of benefit has been requested by the Member under paragraph (c) and has been approved by the Retirement Board, the automatic form of payment of a Supplemental Benefit to a Member who is married at the date the applicable benefit begins shall be a joint and 50% survivor benefit. Such benefit shall be of Equivalent Actuarial Value of a single life annuity payable for the life of the Member and payable during the lifetime of the Member with the provision that after the Member's death an annual Supplemental Benefit shall be paid to the surviving spouse to whom the Member was married at the date the Member's benefits commenced, but only if such person is also married to the Member at the time of the Member's death, equal to one-half the annual Supplemental Benefit payable during the Member's life. (c) Any Member may, by written notice received by a member of the Retirement Board at least six months prior to the date that his Supplemental Benefit would commence, request that such benefit be converted into an optional form of benefit of Equivalent Actuarial Value in accordance with any optional form of payment as may be permitted under the Retirement Plan, including a lump sum benefit. Such request shall be subject to approval of the Retirement Board which approval may be evidenced by the written consent of any two members of the Retirement Board. The six month notice requirement may be reduced with the consent of the Retirement Board. (d) The optional form of Supplemental Benefit requested and approved under paragraph (c) shall become effective on the first day of the month for which the Member's Supplemental Benefit otherwise would be payable. If the Member dies, or the designated beneficiary dies before the first day of the month for which the Member's Supplemental Benefit is payable under a contingent annuitant option, such option shall thereby be revoked. (e) A Member's Supplemental Benefit shall commence or be payable on the date payment of his Retirement Allowance commences or is payable. 3.3 Benefit Payable to the Surviving Spouse of a Member If a Member's surviving spouse becomes entitled to a spouse's benefit pursuant to Section 4 of the Retirement Plan and such benefit is reduced by reason of the limitations of Section 415 or 401(a)(17) of the Code, a Supplemental Benefit shall be payable under this Plan to such spouse. The Supplemental Benefit payable to such spouse shall be determined in the manner described in Section 3.1 by substituting the benefits payable to the spouse in lieu of the benefits payable to the Member thereunder. 3.4 Restoration to Service If a Member who retired or otherwise terminated employment with the Company is restored to service, any payment of his Supplemental Benefit shall cease. Upon his subsequent retirement or termination, his Supplemental Benefit shall be recomputed in accordance with the provisions of this Article 3 and shall be reduced by the Equivalent Actuarial Value of the Supplemental Benefit payments he received prior to the resumption of participation in the Plan, if any. ARTICLE 4 General Provisions 4.1 Administration The Administration of the Plan, including but not limited to the exclusive and discretionary power to interpret and carry out its provisions, is the responsibility of the Retirement Board, and the provisions of Section 8 of the Retirement Plan are hereby incorporated by reference. 4.2 Funding All amounts payable in accordance with this Plan shall constitute a general unsecured obligation of the Company. Such amounts, as well as any administrative costs relating to the Plan, shall be paid out of the general assets of the Company, unless the Company establishes, in its sole discretion, a trust the assets of which will be used as a source of payment for some or all benefits due hereunder. In the event a trust is established for some or all the benefits payable hereunder, the trust shall not be considered to fund, within the meaning of ERISA, the benefits under this Plan. 4.3 No Contract of Employment The establishment of the Plan shall not be construed as conferring any legal rights upon any person for a continuation of employment, nor shall it interfere with the rights of the Company to discharge any employee and to treat him without regard to the effect which such treatment might have upon him as a Member of the Plan. 4.4 Facility of Payment In the event that the Retirement Board shall find that a Member is unable to care for his affairs because of illness or accident, the Retirement Board may direct that any benefit payment due him under this Plan, unless claim shall have been made therefor by a duly appointed legal representative, be paid to his spouse, a child, a parent or other blood relative, or to a person with whom he resides, and any such payment so made shall be a complete discharge of the liabilities of the Company therefor. 4.5 Withholding Taxes The Company shall have the right to deduct from each payment to be made under the Plan any required withholding taxes. 4.6 Nonalienation Subject to any applicable law, no benefit payable under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge, and any attempt so to do shall be void, nor shall any such benefit be in any manner liable for or subject to garnishment, attachment, execution or levy, or liable for or subject to the debts, contracts, liabilities, engagement or torts of the Member. 4.7 Forfeiture for Cause In the event that a Member shall at any time be convicted of a crime involving dishonesty or fraud on the part of such Member in his relationship with the Company, all benefits that would otherwise be payable to him under the Plan shall be forfeited. 4.8 Claims Procedure In the event that a Member or his beneficiary claims that he has improperly been denied an appropriate Supplemental Benefit under this Plan he shall be entitled to the Claim Review Procedure set forth in the Retirement Plan following any denial of his claims by the Company. 4.9 Construction (a) Except as otherwise provided by applicable law, all rights hereunder shall be governed by and construed in accordance with the laws of the State of New York and, except to the extent otherwise herein provided, consistent with the provisions of the Retirement Plan. (b) The masculine pronoun shall mean the feminine wherever appropriate. ARTICLE 5 Amendment or Termination The Compensation Committee reserves the right to modify or amend, in whole or in part, or to terminate this Plan at any time. However, no modification, amendment or termination of the Plan shall adversely affect the right of any Member, his surviving spouse or his beneficiary to receive the benefits accrued under the Plan in respect of such Member as of the date of modification, amendment or termination. IN WITNESS WHEREOF, the Company has executed this Plan as of the day of March, 1995. AVON PRODUCTS, INC. By: James E. Preston Title: Chairman and Chief Executive Officer ATTEST: Ward M. Miller, Jr. Title: Secretary [CORPORATE SEAL] EX-11.1 6 EX-11.1 EXHIBIT 11.1 EXHIBIT 11.1 AVON PRODUCTS, INC. COMPUTATION OF PRIMARY INCOME (LOSS) PER SHARE (In millions, except per share data) Years ended December 31 ------------------------ 1994 1993 1992 ---- ---- ---- Weighted average shares of common stock Weighted average shares outstanding during the year................................. 70.59 72.06 71.99 Common stock equivalents................... * * * ------- ------- ------ Weighted average shares for primary income per share computation.................... 70.59 72.06 71.99 ======= ======= ====== Income applicable to common stock: Income from continuing operations.......... $ 264.8 $ 236.9 $164.2 Discontinued operations, net............... (23.8) 2.7 10.8 Cumulative effect of accounting changes, net of taxes............................. (45.2) (107.5) -- ------- ------- ------ Net income................................. $ 195.8 $ 132.1 $175.0 ======= ======= ====== Primary income (loss) per share: Continuing operations...................... $ 3.75 $ 3.28 $ 2.28 Discontinued operations.................... (.34) .04 .15 Cumulative effect of accounting changes.... (.64) (1.49) -- ------- ------- ------ Net income................................. $ 2.77 $ 1.83 $ 2.43 ======= ======= ====== ------------ *Common stock equivalents are not reported because they result in less than three percent dilution. EX-11.2 7 EX-11.2 EXHIBIT 11.2 EXHIBIT 11.2 AVON PRODUCTS, INC. COMPUTATION OF FULLY DILUTED INCOME (LOSS) PER SHARE (In millions, except per share data) Years ended December 31 ----------------------- 1994 1993 1992 ---- ---- ---- Weighted average shares of common stock Weighted average shares outstanding during the year................................. 70.59 72.06 71.99 Common stock equivalents................... .19 .08 .11 ------- ------- ------ Weighted average shares for fully diluted income per share computation............. 70.78 72.14 72.10 ======= ======= ====== Income applicable to common stock: Income from continuing operations.......... $ 264.8 $236.9 $164.2 Discontinued operations, net............... (23.8) 2.7 10.8 Cumulative effect of accounting changes, net of taxes............................. (45.2) (107.5) -- ------- ------- ------ Net income................................. $ 195.8 $ 132.1 $175.0 ======= ======= ====== Fully diluted income (loss) per share: Continuing operations...................... $ 3.75 $ 3.28 $ 2.28 Discontinued operations.................... (.34) .04 .15 Cumulative effect of accounting changes.... (.64) (1.49) -- ------- ------- ------ Net income................................. $ 2.77 $ 1.83 $ 2.43 ======= ======= ====== EX-13 8 EX-13 EXHIBIT 13 24 Management's Discussion and Analysis Avon Products, Inc. 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. Results of Operations Consolidated - Net income in 1994 was $195.8 million, or $2.77 per share, compared with $132.1 million, or $1.83 per share, in 1993. The 1994 results include a charge for accounting changes of $45.2 million, or $.64 per share, and a charge to discontinued operations of $23.8 million, or $.34 per share. The charge for accounting changes is for the cumulative effect of changes in accounting principles for the following: Statement of Financial Accounting Standards ("FAS") No. 112, "Employers' Accounting for Postemployment Benefits", for all applicable operations of $28.9 million; FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", for foreign plans of $8.0 million; and costs related to the development of information systems of $8.3 million. Effective in the first quarter of 1994, internal information systems development costs are being expensed as incurred, rather than deferred and amortized over future periods. The 1994 loss from discontinued operations relates to the sale of Giorgio Beverly Hills, Inc. ("Giorgio") completed in the third quarter of 1994. See Note 3 of the Notes to the Consolidated Financial Statements. The 1993 results include a net charge for the cumulative effect of changes in accounting principles of $107.5 million after tax, or $1.49 per share, for postretirement benefits (FAS No. 106) for U.S. benefit plans and income taxes (FAS No. 109, "Accounting for Income Taxes"). The 1993 results also include a charge to discontinued operations for the final settlement and related expenses in an arbitration proceeding related to a business previously sold of $10.0 million and net income from discontinued operations related to Giorgio of $12.7 million. Net income per share from discontinued operations was $.04. Net income for 1992 was $175.0 million, or $2.43 per share, which includes a restructuring charge of $64.4 million after tax, or $.90 per share, and net income from Giorgio of $10.8 million, or $.15 per share, in discontinued operations. Continuing Operations - Income from continuing operations before cumulative effect of accounting changes was $264.8 million, or 12 percent, above 1993. Income per share from continuing operations increased 14 percent to $3.75 from $3.28 in the prior year. The 14 percent increase over prior year for income per share exceeds the 12 percent increase in income from continuing operations because of the lower average shares outstanding for 1994 compared with 1993. The Company initiated a stock repurchase program in 1994 which reduced the number of shares outstanding. See Note 9 of the Notes to the Consolidated Financial Statements for further discussion of this program. Pretax income was $433.8 million, a 10 percent, or $39.2 million, increase over prior year. This increase was primarily due to higher sales and a favorable operating expense ratio. These favorable results were partially offset by higher net interest expense, a lower gross margin and higher non-operating expenses. Net income was further improved by a lower effective tax rate (37.7 percent versus 38.2 percent in 1993) resulting primarily from the mix of earnings and tax rates of international subsidiaries. Income from continuing operations in 1993 increased $8.3 million, or $.11 per share from 1992, excluding the restructuring charge in 1992. Consolidated net sales of $4.27 billion increased 11 percent from $3.84 billion in 1993. Sales in international increased 12 percent to $2.73 billion from $2.45 billion in 1993 due to strong growth in the Americas Region and the Pacific Rim and the favorable impact of the weaker U.S. Dollar in relation to the currencies in Japan and most European countries. These improvements were partially offset by operational declines in most Western European markets and Japan. Sales in U.S. increased 10 percent to $1.54 billion primarily due to an increase in average order size and an increase in Representative orders. In 1993, consolidated net sales of $3.84 billion increased 5 percent over 1992 reflecting higher sales in international, primarily due to strong growth in the Americas Region and the Pacific Rim, and the favorable impact of exchange rate fluctuations in Japan. These increases were partially offset by lower sales in Europe due to the unfavorable impact of a stronger dollar against most European currencies and operational declines, 24 25 mainly in Germany. 1993 sales in U.S. declined 1 percent to $1.40 billion primarily due to a decrease in the number of orders. Cost of sales as a percentage of sales was 39.2 percent in 1994, compared with 38.9 percent in 1993. The decline in gross margin was primarily due to the 1994 introduction of the apparel line in the U.S., increased sales of the lower margin fashion, apparel and home product categories in Mexico and declines throughout most European markets. The decline was partially offset by margin improvements in Brazil and Argentina due to a shift in the sales mix to higher margin items. In 1993, cost of sales as a percentage of sales was 38.9 percent, compared to 39.3 percent in 1992. The improved cost ratio resulted primarily from margin improvements in the Americas Region, primarily Mexico and Brazil, and in the U.S. reflecting a shift in product mix to the higher margin cosmetics, fragrances and toiletries ("CFT") product category. Marketing, distribution and administrative expenses of $2.1 billion increased 10 percent from 1993 but decreased as a percentage of sales to 49.2 percent from 49.8 percent in 1993. The higher expense level reflects sales related increases in the U.S., Brazil, Argentina, Mexico and the Pacific Rim markets and higher expenses related to market expansion in the Eastern European markets and the Pacific Rim, most significantly China. The improvement in the operating expense ratio was due to sales increases in the U.S., Brazil and Argentina partially offset by increased expenses in relation to sales in Mexico and China and lower sales in Venezuela and Germany. In 1993, marketing, distribution and administrative expenses of $1.9 billion increased 7 percent from 1992 and increased as a percentage of sales to 49.8 percent compared with 48.7 percent in 1992. The dollar increase reflects higher expenses associated with increased sales volume in the Americas Region, significantly higher advertising and marketing expenses and the incremental effect of FAS No. 106 in the U.S., and higher expenses in the Pacific Region partially offset by lower expenses in Europe. The increase in the operating expense ratio was primarily due to the impact of lower sales and higher expenses in the U.S. and an unfavorable operating expense ratio in Europe, primarily due to lower sales in Germany and Spain. These increases were partially offset by an improved operating expense ratio in the Americas Region, mainly Venezuela and Argentina. A provision of $96.0 million ($64.4 million after tax, or $.90 per share) was recorded in 1992 for the restructuring and reconfiguration of Avon's worldwide manufacturing and distribution facilities. The restructuring program included closing the manufacturing facility in Spain in 1992 and the distribution facility in Springdale, Ohio in July 1993, as well as the reconfiguring of several other international operations. The restructuring program was substantially completed by December 31, 1993 and was fully completed by December 31, 1994 and has resulted in annual expense savings of approximately $50.0 million in 1994. The program has eliminated approximately 1,200 positions worldwide and has increased operating efficiency in distribution, eliminated redundancies in manufacturing by rationalizing product mix, and reduced operating expenses in certain regions. Of the total restructuring charge, approximately $71.0 million was operating-cash related of which $4.0 million, $27.0 million and $40.0 million impacted cash flow in 1994, 1993 and 1992, respectively. Interest expense in 1994 of $50.8 million increased $5.6 million, or 12 percent, over last year due to higher borrowings to fund working capital needs and hyperinflationary interest rates in Brazil and higher borrowings in the Eastern European markets and China as part of Avon's growth strategy. The increase was partially offset by lower interest expense in Japan and the United Kingdom reflecting lower borrowing levels in 1994. In 1993, interest expense of $45.2 million was $1.5 million, or 3 percent, higher than 1992. The increase was primarily due to hyperinflationary interest rates and higher debt levels in Brazil, partially offset by lower average debt levels in the U.S. and lower borrowings and interest rates in Japan. Interest income in 1994 of $22.1 million decreased $3.2 million, or 13 percent, compared to last year due to lower average cash balances in Brazil in 1994. In 1993, interest income of $25.3 million decreased $12.2 million from 1992 primarily due to significantly lower levels of short-term investments in Brazil in 1993. Other expense, net, of $33.1 million was $14.4 million higher than 1993. The increase was primarily due to gains related to the sales of a non-operating investment and land in 1993 and higher non-operating expenses in 1994. Other expense, net, was $18.7 million in 1993, a $30.3 million decrease from 1992. The decrease was due to the gains recorded in 1993, noted above, and lower non-operating expenses in 1993 compared to 1992. Income taxes were $163.5 million in 1994 and the effective tax rate was 37.7 percent compared with $150.8 million and an effective tax rate of 38.2 percent in 1993. The lower effective tax rate in 1994 resulted primarily from the mix of earnings and tax rates of international subsidiaries. The 1994 effective tax rate reflects the 25 26 utilization of foreign net operating loss carryforwards. Of the remaining net operating loss carryforwards, a significant portion is not expected to be utilizable in 1995, and therefore, it is expected that the 1995 effective tax rate will be somewhat higher. It is difficult to predict what the 1995 effective tax rate will be due to various factors, primarily the mix of international earnings. In 1993, the effective tax rate was 38.2 percent, compared with 41.6 percent in 1992. Excluding the effect of the 1992 restructuring charge, the effective tax rate was 39.4 percent. The lower effective tax rate in 1993 resulted primarily from the use of capital loss carryforwards to offset the gain on the sale of a non-operating investment, the mix of international and domestic income and a favorable adjustment to net deferred tax assets resulting from the increase in the U.S. statutory tax rate in 1993. Inflation in the United States has remained at a relatively low level during the last three years, and has not had a major effect on Avon's results of operations. Many countries in which Avon has operations have experienced higher rates of inflation than the United States. Among the countries in which Avon has significant operations, extremely high rates of inflation have been experienced in Brazil for a number of years. Below is an analysis of the key factors affecting net sales and pretax income from continuing operations by geographic area for each of the years in the three-year period ended December 31, 1994. Prior year data has been restated to reflect Giorgio as discontinued operations. In millions Years ended December 31 1994 1993 1992 ----------------- ----------------- ----------------- Net Pretax Net Pretax Net Pretax Sales Income Sales Income Sales Income ----- ------ ----- ------ ----- ------ United States $1,535.1 $201.2 $1,395.6 $152.8 $1,408.1 $140.8(1) -------- ------ -------- ------ -------- ------ International Americas 1,415.3 273.9 1,175.2 196.4 980.6 168.4(1) Pacific 664.3 89.7 625.6 90.9 542.8 84.0 Europe 651.8 15.3 647.7 53.5 729.0 31.5(1) -------- ------ -------- ------ -------- ------ Total Inter- national 2,731.4 378.9 2,448.5 340.8 2,252.4 283.9(1) -------- ------ -------- ------ -------- ------ Total from operations $4,266.5 580.1 $3,844.1 493.6 $3,660.5 424.7 ======== ======== ======== Corporate expenses (84.9) (69.0) (73.1)(1) Interest expense (50.8) (45.2) (43.7) Other income (expense) (10.6) 15.2 (17.9) ------ ------ ------ Total $433.8 $394.6 $290.0(1) ====== ====== ====== (1)Pretax income for geographic area data in 1992 includes the charge for restructuring costs of $96.0. The effect of this charge was to reduce the pretax income of U.S., Europe and the Americas by $54.4, $28.6 and $3.5, respectively, and to increase corporate expenses by $9.5. U.S. - U.S. sales increased 10 percent to $1.54 billion and pretax income increased 32 percent to $201.2 million in 1994. The increase in sales reflects a 6 percent increase in average order size and a 4 percent increase in the number of Representative orders. Units sold increased 5 percent over 1993. The sales improvement was driven by the introduction of the new apparel line in 1994, a strong increase in sales of color cosmetics and increases in most other major product categories. The increase in pretax income was primarily due to the sales increase and an improved operating expense ratio. The improved operating expense ratio reflects the sales increase, lower marketing-related expenses, primarily advertising, and expense savings resulting from the 1992 restructuring program. The increase was partially offset by a lower gross margin due to a shift in the sales mix to the lower margin apparel line. In 1993, U.S. sales decreased 1 percent to $1.40 billion and pretax income was $152.8 million as compared with $140.8 million in 1992. Excluding the impact of the 1992 restructuring charge, pretax income in 1993 decreased 22 percent from the prior year. The decrease in sales reflects a 2 percent decline in the number of Representative orders partially offset by a 1 percent increase in average order size. The improvement in 26 average order size was partially driven by an increase in sales of higher- priced products while total units sold declined 5 percent in 1993. Marketing emphasis on the beauty categories, which began in late 1992 and continued throughout 1993, yielded positive results as sales in both the jewelry and CFT categories, particularly in the Anew and other skin care brands, increased over 1992. However, these increases were more than offset by a decline in the gift category as consumer buying patterns shifted and a low level of consumer confidence prevailed throughout the year. The decrease in pretax income in 1993 from 1992, excluding the restructuring charge, was due primarily to higher operating expenses as the sales decline was offset by an improved gross margin reflecting the shift in sales mix from gifts to the higher margin CFT and jewelry categories. The increase in operating expenses reflects higher spending on advertising and marketing programs designed to stimulate sales and enhance methods of customer access and the ongoing incremental expense of FAS No. 106. International - International sales increased 12 percent to $2.73 billion and pretax income increased 11 percent to $378.9 million from $340.8 million in 1993. The sales increase reflects strong unit growth in the Americas Region, most significantly Brazil, and in the Pacific Rim and the favorable impact of the weaker U.S. Dollar in Japan and most European countries. These improvements were partially offset by unit declines in Europe, especially the United Kingdom and Germany, Venezuela and Japan. In the Americas Region, sales increased 20 percent to $1.42 billion and pretax income increased 39 percent to $273.9 million from $196.4 million in 1993. The sales increase was due to growth in all markets, except Venezuela, primarily in Brazil, Argentina and Mexico. The significant increase in Brazil was due to the solid growth in the higher-priced categories of fashions and home products and higher-priced CFT items such as Renew, a skin care product, and the benefits of the new economic stabilization package implemented in July which lowered inflation and improved consumer purchasing confidence. In addition, the number of Representatives in Brazil at the end of 1994 increased 38 percent from the end of 1993 which enabled the Company to take advantage of the improved economic environment. Argentina's strong sales growth was driven by its image enhancement strategies and product line expansion, especially in the CFT and fashions lines. Mexico's improvement reflects strong unit growth following successful market penetration and image building strategies. The large devaluation of the Peso in late December did not have a material impact on Mexico's results for the year. The sales decline in Venezuela reflects the significant currency devaluation and unsettled economic climate, which depressed consumer demand and negatively affected sales in all product categories. The improvement in pretax income reflects strong operating results in Brazil and Argentina due to the sales growth and improved gross margins resulting from the shift in sales to higher margin items and lower foreign exchange losses in Brazil. The improvement was partially offset by a lower gross margin due to increased sales in the lower margin fashion, apparel and home products categories and higher salary and field recognition expenses in Mexico and lower interest income in Brazil due to a lower cash position in 1994 compared with 1993. In addition, pretax profit was lower in Venezuela as a result of the sales decline, higher exchange losses and lower interest income reflecting the unstable economic climate. In the Pacific Region, sales increased 6 percent to $664.3 million and pretax income decreased 1 percent to $89.7 million from $90.9 million in 1993. The increase in sales was due to unit growth in all Pacific Rim markets and the favorable impact of a weaker U.S. Dollar in Japan. These improvements were partially offset by lower units sold in Japan, which was impacted by a significant field reconfiguration program implemented at the end of the first quarter. The decrease in pretax income was primarily due to higher operating expenses primarily for expansion in China as part of a long-term growth strategy, partially offset by the sales growth in the Pacific Rim. In the Europe Region, sales increased 1 percent to $651.8 million and pretax income declined 71 percent to $15.3 million from $53.5 million in 1993. The sales increase was due to the favorable impact of the weaker U.S. Dollar against most European currencies, mainly in the fourth quarter, and unit growth in the developing Eastern European markets, Spain and Italy. These improvements were partially offset by unit declines in the United Kingdom and Germany reflecting weak economies in the retail and consumer non-durable segments and sales of lower-priced products in France. The decline in pretax income was primarily due to operational sales declines in Germany, the United Kingdom and France, a high fixed expense base in the Region and higher operating expenses related to the expansion of Eastern European markets. 27 28 In 1993, international sales increased 9 percent to $2.45 billion and pretax income, excluding 1992 restructuring charges, increased 8 percent to $340.8 million from $316.0 million in 1992. The sales growth reflects strong unit growth in most markets in the Americas Region and the Pacific Rim, and the favorable impact of the weaker U.S. Dollar in Japan. These improvements were partially offset by sales declines in most European markets primarily due to the strengthening of the U.S. Dollar in Europe and operational declines, most significantly in Germany, reflecting a recessionary economy. In the Americas Region, 1993 sales increased 20 percent to $1.18 billion and pretax income, excluding 1992 restructuring charges, increased 14 percent to $196.4 million from $171.9 million in 1992. The sales increase reflects increased units sold in most markets, primarily Brazil due to new product introductions and Argentina due to higher volume in the CFT and home product lines. In addition, the successful launch of higher-priced skin care products and inflation-related increases in Mexico, and higher average order size in Venezuela due to further expansion of the fashion apparel and home product lines also contributed to the increase. The improvement in pretax income reflects strong operating results in Argentina and Mexico due to the sales growth in both markets coupled with a shift to higher margin CFT products in Mexico and a favorable operating expense ratio in Argentina resulting from an effective cost containment program. These improvements were partially offset by profit declines in Brazil. Although Brazil's sales increased and the cost ratio improved due to a favorable product mix and aggressive price negotiations with vendors, pretax income declined significantly from the prior year due to higher monetary correction expense and lower interest income, partially offset by lower foreign exchange losses. The decline in interest income reflects lower average short-term investments in 1993 due to higher dividend remittances than in 1992. Sales in the Pacific Region increased 15 percent over 1992 due to the favorable impact of a weaker U.S. Dollar in Japan and increased units sold in the Pacific Rim countries. Pretax income for the Region increased 8 percent over 1992 reflecting the sales improvement, partially offset by increased expenses for enhanced field training and marketing programs in Japan and higher costs in the Pacific Rim markets relating to additional initiatives to accelerate growth in the area. In the Europe Region, sales decreased 11 percent and pretax income, excluding 1992 restructuring charges, decreased 11 percent to $53.5 million from $60.1 million in 1992. The sales decline was primarily due to the unfavorable impact of the stronger U.S. Dollar against most of the European currencies and operational declines throughout the Region, most significantly in Germany reflecting a recessionary economy. The decrease in pretax income was primarily due to the sales decline, an unfavorable gross margin in Portugal and Italy due to aggressive pricing strategies to stimulate sales, and an unfavorable operating expense ratio. The higher operating expense ratio was primarily in Germany due to the sales softness and increased expenses relating to service enhancements, and in Spain due to the sales softness and salary increases mandated by labor regulations. See Foreign Operations section under Liquidity and Capital Resources for additional discussion. Corporate Expenses - Corporate expenses were $84.9 million in 1994 compared with $69.0 million in 1993. The $15.9 million increase over 1993 reflects higher expenses for incentive compensation programs primarily due to the improved operating results in 1994 and a change in the long-term compensation program. In 1993, corporate expenses increased $5.4 million from 1992, excluding the restructuring charge in 1992. The increase reflects higher pension expense caused by changes in actuarial assumptions and the incremental expense of FAS No. 106. Other Income (Expense) - Other income (expense) includes corporate non- operating income and expense items and corporate interest income. Other expense, net, was $10.6 million in 1994 compared with other income, net, of $15.2 million in 1993. The increase in the net expense reflects higher non-operating expenses in 1994 combined with the gains relating to the sales of a non-operating investment and land in 1993. Other income, net, increased $33.1 million from 1992 reflecting the gains on the investment and land, noted above, and lower non-operating expenses in 1993. Income Taxes - Effective January 1, 1993, Avon adopted FAS No. 109, whereby, among other things, the criteria for recognizing deferred tax assets was revised to permit recognition of such assets when future realization is more likely than not. The cumulative effect of this accounting change was an increase to income in 1993 of $2.5 million ($.04 per share). Net deferred tax assets, net of valuation allowance, were $77.9 million at December 31, 1994, an increase of $21.3 million from a net deferred tax asset of $56.6 million at December 31, 1993, primarily as a result of 28 29 the adoption of FAS No. 112 and FAS No. 106 for foreign plans, effective as of January 1, 1994. A valuation allowance, as required under FAS No. 109, is recorded primarily 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. Accounting Changes - Effective January 1, 1994, Avon adopted FAS No. 112 for all applicable operations and FAS No. 106 for its foreign plans. In addition, effective January 1, 1994, Avon changed its method of accounting for internal systems development costs. These internal costs, which were previously deferred and amortized over future periods, are now being expensed as incurred. As a result of these accounting changes, Avon recorded an aggregate non-cash charge in the first quarter of 1994 of $45.2 million, or $.64 per share. This amount reflects the cumulative effect of adjustments for FAS No. 112 of $28.9 million, or $.41 per share, FAS No. 106 of $8.0 million, or $.11 per share, and systems development costs of $8.3 million, or $.12 per share. The proforma effect for the change in accounting for the deferred internal systems development costs for the years ended December 31, 1993 and 1992, had the accounting change been adopted effective January 1, 1992, would not have been significant. Effective January 1, 1993, Avon adopted FAS No. 106, for its U.S. retiree health care and life insurance benefit plans. FAS No. 106 resulted in the recognition of an additional liability and expense for postretirement benefits. Avon recorded the entire previously unrecognized obligation of $183.3 million ($110.0 million after tax, or $1.53 per share) at the time of adoption as a cumulative effect adjustment. The additional after-tax expense in 1993 was $6.5 million. During 1992, costs of health care and life insurance benefits, for the U.S. and certain foreign countries, which were expensed when paid, amounted to $4.7 million, on an after-tax basis. During 1993, the after-tax cost for certain foreign countries was $.3 million. Discontinued Operations - During 1994, the Company sold Giorgio, its remaining retail business, for cash of $150.0 million. The Company recorded a loss of $25.0 million on the sale. Since the Company has excess capital loss carryforwards, no tax benefits have been recognized on the loss. Giorgio's operating results are segregated and reported as discontinued operations through the date of sale. During 1993, Avon recorded a discontinued operations provision of $10.0 million after tax, or $.14 per share, for the final settlement and related expenses in an arbitration proceeding related to a business previously sold. Although Avon has completed its divestiture of all discontinued operations, it may be liable for various contingencies relating to, among other things, indemnifications given to the purchasers of certain discontinued operations. An indemnification, currently being litigated, covers a patent dispute, various environmental claims and numerous other lawsuits and claims. Due to the complex nature of these contingencies, the ultimate outcome and related total costs to Avon cannot currently be determined. In June 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International Minerals & Chemical Corporation ("IMC"), now known as Mallinckrodt Group Inc., filed a lawsuit against Avon in the St. Louis Missouri City Circuit Court arising from Avon's sale of Mallinckrodt to IMC in 1986. The suit alleged that a certain patent dispute and a settlement, referred to as the DuPont patent case, various environmental claims and numerous other lawsuits and claims are contingent liabilities covered by an indemnification given by Avon in connection with the sale of Mallinckrodt. In October 1991, the Missouri Supreme Court affirmed the Circuit Court's decision that Avon has the obligation to indemnify IMC and Mallinckrodt in connection with the DuPont patent case, but remanded the matter for a trial on the damages, if any, suffered by the parties. On July 27, 1992, a jury returned a verdict in the DuPont patent case for $16.0 million, and a judgment for that amount plus approximately $6.5 million interest was entered. On August 11, 1992, IMC and Mallinckrodt filed post-trial motions, including a motion for a judgment notwithstanding the verdict or, in the alternative, a motion for a new trial. On November 5, 1992, the St. Louis Missouri City Circuit Court granted IMC's and Mallinckrodt's motion for a judgment notwithstanding the verdict and directed a verdict for plaintiffs in the amount of $27.1 million plus interest. As of November 5, 1992, the interest amounted to approximately $11.7 million. Avon, IMC and Mallinckrodt have appealed this decision. This issue was argued before the Missouri Court of Appeals, Eastern District on May 11, 1994. On November 8, 1994, the Court of Appeals overturned the judgment notwithstanding the verdict and ordered a new trial. All possible further judicial review has now been exhausted and a retrial is expected during 1995. Pre-trial proceedings and discovery activities are 29 30 ongoing with respect to the environmental and general litigation portions of the case. With respect to the environmental contingencies which constitute a part of the indemnification litigation, the total cost to Avon cannot be determined with certainty as a result of such factors as the preliminary status of information relating to the sites owned by the purchaser, the preliminary regulatory involvement, the unknown magnitude and timing of cleanup efforts, if any, to be undertaken by the purchaser or Mallinckrodt, the possibility of recoveries against other parties, the uncertainty of the success of Avon's defenses, and unasserted claims, if any. However, these factors have been assessed and will continue to be assessed by Avon in estimating reserves to be recorded in its consolidated financial statements. The ultimate outcome and aggregate cost of resolving all of the above contingencies will be based on a number of factors and will be determined over a number of years. Accordingly, the total cost to Avon cannot currently be determined with certainty. The reserves for such contingencies at December 31, 1994, which are recorded gross without anticipation of insurance recoveries or other third-party recoveries, if any, have been estimated by Avon's management based on its review of currently known facts and circumstances at December 31, 1994. In the opinion of Avon's management, based on its review of the preliminary information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1994 should not have a material adverse impact on Avon's consolidated financial position or results of operations, based on the current levels of such amounts. However, this difference, if any, could have a material effect on results of operations in a future period when resolved. Liquidity and Capital Resources Cash Flows - Net cash provided by continuing operations was $298.3 million in 1994 compared to $299.8 million in 1993. 1994 net cash provided by continuing operations principally reflects, among other things, an increase in net income of $63.7 million and an increase in accounts payable and accrued expenses resulting from the Company's cash management practices, offset by a reduced cumulative effect of accounting changes and increased receivables due to higher sales levels. 1994 net cash provided by continuing operations of $298.3 million was more than adequate to fully fund capital expenditures of $99.9 million, cash dividends of $141.1 million and all required long-term debt payments of $18.4 million. The $61.3 million decrease in net cash provided by continuing operations in 1993 compared to 1992 was primarily due to lower cash provided by operations in the U.S. and Europe, mainly Germany, caused by higher working capital levels and lower net income. A more detailed analysis of the individual items contributing to the 1994 and 1993 amounts is included in the Consolidated Statement of Cash Flows. Cash used by discontinued operations was $6.0 million in 1994, compared with $2.3 million in 1993 and cash provided by discontinued operations of $24.7 million in 1992. The $3.7 million increase in cash used in 1994 compared to 1993 reflects costs associated with the sale of Giorgio and lower cash provided by Giorgio operations in 1994, partially offset by the 1993 payment of an arbitration settlement and related expenses. The $27.0 million decrease in 1993 compared to 1992 reflects the final settlement of the arbitration proceeding in 1993 and cash received in 1992 from previously written-off notes and securities that Avon received in connection with the sale of health care and other businesses in prior years. Excluding changes in debt, net cash flow of $7.7 million in 1994 decreased $96.0 million from $103.7 million in 1993. This variance reflects an increase in cash used for the repurchase of common stock, an increase in capital expenditures, higher dividend payments and the proceeds received in 1993 from the sale of a non-operating investment. These declines were partially offset by $150.0 million of proceeds received from the sale of Giorgio and cash used for the acquisition of minority interests in two foreign subsidiaries in 1993. As of December 31, 1994, 3.2 million shares of common stock have been purchased for $188.2 million under the stock repurchase program begun in 1994. In 1993, excluding changes in debt, net cash flow of $103.7 million decreased $54.7 million from $158.4 million in 1992. This decrease was primarily due to the decrease in cash provided by all operating activities and higher dividend payments in 1993. This decrease was partially offset by the proceeds received from the sale of a non-operating investment in 1993 and lower cash used for the acquisition of minority interests in two foreign subsidiaries in 1993 compared with the cost of acquiring additional shares of the Japanese subsidiary in 1992. Working Capital - As of December 31, 1994, working capital was $9.3 million compared with $4.3 million at the end of 1993, excluding net assets of discontinued 30 31 operations. The increase was primarily due to higher investments in working assets (current assets excluding cash and equivalents and net assets of discontinued operations), primarily accounts receivable, due to a higher 1994 sales level, and inventory, as discussed in the Inventories section. The increase was partially offset by increases in accounts payable and accrued compensation. Avon's liquidity results from its ability to generate significant cash flows from operations and its ample unused borrowing capacity. Avon's credit agreements do not contain any provisions or requirements with respect to working capital. Capital Resources - Total debt decreased $16.4 million to $177.7 million at December 31, 1994 from $194.1 million at December 31, 1993 compared with a reduction of $20.9 million from December 31, 1992. During 1994, cash flow from operations and proceeds from the sale of Giorgio, which more than offset cash used for the stock repurchase program, dividends and capital expenditures, were used to reduce debt. During 1993 and 1992, cash flows from operations were used to reduce debt. Debt maturing within one year consists of borrowings from banks of $32.0 million and the current maturities of long-term debt of $29.2 million. 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. It is also currently anticipated that existing debt maturing over the next five years will be paid without refinancing. Avon has a $600.0 million revolving credit and competitive advance facility with various banks which can be used to finance working capital, to provide support for the issuance of commercial paper and to support the stock repurchase program. There were no borrowings under this facility at December 31, 1994. This facility has an annual facility fee of $.6 million as well as a utilization fee if more than 50 percent of the total commitment is outstanding. The agreement contains a financial covenant related to interest coverage, as defined. The Company is in compliance with this covenant. Avon has a $300.0 million commercial paper facility supported by the revolving credit and competitive advance facility. The Company also has bankers' acceptance facilities and uncommitted lines of credit available of $235.0 million with various banks which have no compensating balances or fees. As of December 31, 1994 and 1993, there were no borrowings under these facilities. In addition, there are international lines of credit totalling $276.4 million of which $32.0 million was outstanding at December 31, 1994. There are no compensating balances or fees under these facilities. Inventories - Avon's products are marketed during twelve to twenty-six individual sales campaigns each year. Each campaign is conducted using a brochure offering a wide assortment of products, many of which change from campaign to campaign. It is necessary for Avon to maintain relatively high 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, gift items and apparel. Christmas sales cause a peak in the fourth quarter which results in the build up of inventory at the end of the third quarter. Inventory levels are then sharply reduced by the end of the fourth quarter. Net inventories of $412.8 million at December 31, 1994 were $52.3 million higher than 1993 due to the introduction of the apparel line in the U.S., sales growth in the Americas Region, most significantly Brazil and Argentina, and expansion into new markets, primarily Poland, Hungary and China. In addition, higher inventory levels resulted from lower fourth quarter sales in the United Kingdom. It is Avon's objective to continue to manage purchases and inventory levels maintaining the focus of operating the business at efficient inventory levels. However, the addition or expansion of product lines such as apparel, jewelry and impulse gift items, products that are subject to changing fashion trends and consumer tastes, as well as planned expansion in high growth markets may cause the inventory levels to grow periodically. Capital Expenditures - Capital expenditures during 1994 of $99.9 million (1993 - $58.1 million) were made for capacity expansion in high growth markets, most significantly in the Pacific Rim, and to maintain worldwide facilities. Numerous construction and information systems projects were in progress at December 31, 1994 with an estimated cost to complete of approximately $24.0 million. Capital expenditures in 1995 are currently expected to increase approximately $25.0 million over 1994 levels as a result of continued investments for capacity expansion in high growth markets, most significantly in the Pacific Rim, and for facility modernization, information systems and equipment replacement projects. Foreign Operations - The Company derived approximately 64 percent and 65 percent of its 1994 consolidated net sales and consolidated pretax income from operations, 31 32 respectively, from its international subsidiaries. In addition, as of December 31, 1994, international subsidiaries comprised approximately 56 percent of the Company's consolidated total assets. Avon's operations in many countries utilize numerous currencies. Avon has significant net assets in Japan, Germany, Mexico, Philippines, Canada and the United Kingdom. Changes in the value of these countries' currencies relative to the U.S. Dollar result in direct charges or credits to equity. Avon also has substantial operations in Brazil and Argentina, countries with economies designated as highly inflationary whose functional currency is the U.S. Dollar, whereby changes in exchange rates result in charges or credits to income and may significantly impact the results of operations. In July 1994, Brazil implemented a new economic stabilization package which lowered inflation and improved consumer purchasing confidence during the second half of the year. As a result of the sharply reduced rate of inflation in Argentina during the past three years, effective January 1, 1995, the country is no longer designated as having a highly inflationary economy. Also, effective January 1, 1995, because of the trend of higher inflation rates, Venezuela is designated as a country with a highly inflationary economy. The Mexican Peso devalued significantly in December 1994. However, because the devaluation occurred late in the year, there was no material impact on the 1994 results of operations. This devaluation resulted in an $18.0 million charge to Translation Adjustments on the Consolidated Balance Sheet. In 1994, Mexico contributed approximately 9 percent of Avon's consolidated net sales. It is expected that a continued weak Peso will have some impact on 1995 results; however, management cannot at this time project what this impact will be. Management has formulated plans to mitigate the effect of the unstable economic conditions. Flexibility in pricing and reliance on locally-purchased and manufactured goods in Mexico will also help minimize the impact. In addition, Avon's well diversified global portfolio of businesses has demonstrated that the effects of weak economies and currency fluctuations in certain countries may be offset by strong results in others. Fluctuations in the value of foreign currencies cause U.S. Dollar- translated amounts to change in comparison with previous periods. Accordingly, Avon cannot project in any meaningful way the possible effect of such fluctuations upon translated amounts or future earnings. This is due to the large number of currencies involved, the constantly changing exposure in these currencies, the complexity of intercompany relationships, the hedging activity entered into in an attempt to minimize certain of the effects of exchange rate changes where economically feasible and the fact that all foreign currencies do not react in the same manner against the U.S. Dollar. Certain of the Company's financial instruments, which are discussed below under Risk Management Strategies and in Note 8 of the Notes to the Consolidated Financial Statements, are used to hedge various amounts relating to certain international subsidiaries. However, the Company's foreign currency hedging activities are not significant when compared to the Company's international financial position or results of operations. With the exception of Avon Japan, no foreign subsidiary relies, to any material extent, on long-term financing. Many subsidiaries have short-term borrowings from local commercial banks during the first nine months of the year to fund working capital needs created by Avon's highly seasonal sales pattern. From time to time, when tax and other cost considerations dictate, Avon will finance subsidiary working capital needs. At December 31, 1994, the total indebtedness of foreign subsidiaries was $77.7 million. It is Avon's policy to remit all the available cash (cash in excess of working capital requirements, having no legal restrictions and not considered permanently reinvested) of foreign subsidiaries as rapidly as is practical. During 1994, these subsidiaries remitted, net of taxes, $187.3 million in dividends and royalties. This sum is a substantial portion of the 1994 consolidated net earnings of Avon's foreign subsidiaries. Risk Management Strategies - The Company operates internationally, with manufacturing and distribution facilities in various locations around the world. The Company reduces its exposure to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company currently does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives. The Company may use interest rate swaps to hedge portions of its interest expense thereby allowing the Company to establish fixed or variable interest rates on its outstanding debt. During most of 1994 and over the recent past, the Company has elected to use interest rate swaps to establish fixed rates on its long-term debt. The Company closely monitors market conditions and, if in a variable position, may also use interest rate caps whereby its net interest expense is limited if interest rates rise above a defined level. In November 1994, one of the Company's fixed rate swap contracts expired and 32 the interest rate on the long-term Deutsche Mark debt became variable. Effective January 1995, the Company has interest rate caps on its long-term Deutsche Mark debt through its maturity date. Avon had two interest rate swap agreements at December 31, 1994 (three at December 31, 1993), each such agreement having a notional principal amount of $100.0 million (1993 - $100.0 million), yielding an aggregate notional principal amount at December 31, 1994 of $200.0 million (1993 - $300.0 million). These agreements have converted the interest rate on the 170 million 6 1/8 percent Deutsche Mark notes to a variable rate established at 1.4 percentage points above one-month LIBOR (6 percent at December 31, 1994) for November 1994 through May 1998, when the notes mature. At December 31, 1994, the Company also had three interest rate cap contracts, one of which expired in early January 1995. One contract is for the calendar year 1995 and places a ceiling on one-month LIBOR at 6 percent. The other contract is for the period January 1996 to the maturity of the notes and places a ceiling on one-month LIBOR at 9 percent. The unamortized cost of these contracts was approximately $1.4 million at December 31, 1994 and is included in Other Assets. The interest rate on the long-term 6 1/8 percent Deutsche Mark notes was fixed at approximately 10 percent from January 1992 to November 1994 through the use of a currency exchange swap contract and several interest rate swaps. With the expiration of one interest rate swap in November 1994, the Company's interest rate on this $100.0 million debt was converted from a fixed to a floating rate determined at one-month LIBOR plus 1.4 percent. At December 31, 1994 one-month LIBOR was 6 percent, resulting in an effective borrowing rate of 7.4 percent. As a floating rate payor, the Company will have to pay higher rates in 1995, should one-month LIBOR rise. In order to protect the Company from possible rising rates in calendar year 1995, the Company has purchased an interest rate cap which places a ceiling on one-month LIBOR at 6 percent. The notional principal on this cap is $100.0 million. Another $100.0 million notional cap was purchased for the period beginning January 1996 through May 1998, which places a ceiling on one-month LIBOR at 9 percent. The 5 3/8 percent Swiss Franc debt, which was outstanding from January 1992 through December 1, 1994, was effectively hedged into fixed U.S. Dollar debt through the use of a currency exchange swap contract, which also fixed the interest rate at approximately 9 percent for that period. The currency exchange swap agreement provided for the Company to pay in U.S. Dollars and receive the required Swiss Francs from the counterparty to pay the principal and interest owed to the bondholders at the required payment dates. These bonds were repaid on December 1, 1994. The only other significant long-term debt outstanding for the period January 1, 1992 to December 31, 1994 was a Yen note obligation of Avon's Japanese subsidiary, which has a fixed interest rate of 8.5 percent. The loan agreement required periodic principal payments throughout the term of the loan. As of December 31, 1994, the loan balance was $25.1 million, which is payable in full during 1995 in four equal installments. The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments, contractual foreign currency cash flows or obligations, including debt, and other third- party or intercompany foreign currency transactions. The Company regularly monitors its foreign currency exposures and ensures that hedge contract amounts do not exceed the amounts of the underlying exposures. At December 31, 1994, the Company held foreign currency forward contracts with notional amounts totalling $184.1 million and option contracts with notional amounts totalling $31.2 million to hedge foreign currency items. The Company attempts to minimize its credit exposure to counterparties by entering into interest rate swap and cap contracts only with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor's Corporation. The Company's foreign currency and interest rate derivatives are comprised of over-the-counter forward contracts or options with major international financial institutions to buy or sell foreign currencies. Although the Company's theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring losses is remote and that such losses, if any, would not be material. Non-performance of the counterparties to the balance of all the currency and interest rate swap agreements in a net receivable position would not result in a significant write-off at December 31, 1994. In addition, there are other swap agreements in a net payable position of an insignificant amount at December 31, 1994. Each agreement provides for the right of offset between counterparties to the agreement. In addition, Avon may be exposed to market risk on its foreign exchange and interest rate swap and cap agreements as a result of changes in foreign exchange and interest rates. The market risk related to the foreign exchange agreements should be substantially offset by changes in the valuation of the underlying items being hedged. 33 34 Results of Operations by Quarter Avon Products, Inc. In millions, except per share data First Second Third Fourth Year ----- ------ ----- ------ ---- 1994 Net sales $886.0 $1,007.2 $1,009.8 $1,363.5 $4,266.5 Gross profit 533.6 618.1 616.9 825.8 2,594.4 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 51.1 120.0 80.6 182.1 433.8 Income from continuing operations before minority interest and cumulative effect of accounting changes 31.2 73.2 51.9 114.0 270.3 Discontinued operations, net (1) (1.6) (22.2) - - (23.8) Cumulative effect of accounting changes (2) (45.2) - - - (45.2) Net income (loss) (15.7) 50.1 51.3 110.1 195.8 Income (loss) per share: Income from continuing operations before cumulative effect of accounting changes $ .43 $ 1.02 $ .73 $ 1.59 $ 3.75 Discontinued operations (.02) (.31) - - (.34) Cumulative effect of accounting changes (.63) - - - (.64) ------ -------- -------- -------- -------- Net income (loss) $ (.22) $ .71 $ .73 $ 1.59 $ 2.77(3) ====== ======== ======== ======== ======== First Second Third Fourth Year ----- ------ ----- ------ ---- 1993 Net sales $808.1 $920.2 $911.3 $1,204.5 $3,844.1 Gross profit 494.5 570.0 555.8 726.8 2,347.1 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 40.7 113.0 73.6 167.3 394.6 Income from continuing operations before minority interest and cumulative effect of accounting changes 24.4 67.8 47.8 103.8 243.8 Discontinued operations, net (1) (10.1) (.3) 6.4 6.7 2.7 Cumulative effect of accounting changes (2) (107.5) - - - (107.5) Net income (loss) (92.9) 65.6 54.0 105.4 132.1 Income (loss) per share: Income from continuing operations before cumulative effect of accounting changes $ .34 $ .91 $ .66 $ 1.37 $ 3.28 Discontinued operations (.14) - .09 .09 .04 Cumulative effect of accounting changes (1.49) - - - (1.49) ------ ------ ------ -------- -------- Net income (loss) $(1.29) $ .91 $ .75 $ 1.46 $ 1.83(3) ====== ====== ====== ======== ======== (1)See Note 3 to the Consolidated Financial Statements regarding discontinued operations. (2)See Note 2 to the Consolidated Financial Statements regarding cumulative effect of accounting changes. (3)The sum of per share amounts for the quarters does not necessarily equal that for the year because the computations are made independently. Market Prices of Common Stock by Quarter 1994 1993 ------------ ------------- Quarter High Low High Low ---- --- ---- --- First $58 $48-3/8 $64-3/8 $51-7/8 Second 61-1/4 55-5/8 61-3/4 52-1/8 Third 62-7/8 56 59-1/2 49-7/8 Fourth 63-5/8 58-5/8 53-5/8 47-7/8 Avon common stock is listed on the New York Stock Exchange. At December 31, 1994, there were approximately 26,100 shareholders of record. Dividends declared for the last two quarters of 1994 were $.50 per share and for the first two quarters of 1994 and last two quarters of 1993 were $.45 per share and for the first two quarters of 1993 were $.40 per share. 34 35 Consolidated Statement of Income Avon Products, Inc. In millions, except per share data Years ended December 31 1994 1993 1992 -------- -------- -------- Net sales $4,266.5 $3,844.1 $3,660.5 -------- -------- -------- Costs, expenses and other Cost of sales 1,672.1 1,497.0 1,438.2 Marketing, distribution and administrative expenses 2,098.8 1,913.9 1,781.1 Provision for restructuring costs - - 96.0 Interest expense 50.8 45.2 43.7 Interest income (22.1) (25.3) (37.5) Other expense, net 33.1 18.7 49.0 -------- -------- -------- Total costs, expenses and other 3,832.7 3,449.5 3,370.5 -------- -------- -------- Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 433.8 394.6 290.0 Income taxes 163.5 150.8 120.6 -------- -------- -------- Income from continuing operations before minority interest and cumulative effect of accounting changes 270.3 243.8 169.4 Minority interest (5.5) (6.9) (5.2) -------- -------- -------- Income from continuing operations before cumulative effect of accounting changes 264.8 236.9 164.2 Discontinued operations Income, net of taxes 1.2 12.7 10.8 Loss on sale, net of taxes in 1993 (25.0) (10.0) - Cumulative effect of accounting changes, net of taxes (45.2) (107.5) - -------- -------- -------- Net income $ 195.8 $ 132.1 $ 175.0 ======== ======== ======== Income (loss) per share: Continuing operations $ 3.75 $ 3.28 $ 2.28 Discontinued operations (.34) .04 .15 Cumulative effect of accounting changes (.64) (1.49) - -------- -------- -------- Net income $ 2.77 $ 1.83 $ 2.43 ======== ======== ======== Average shares outstanding 70.59 72.06 71.99 The accompanying notes are an integral part of these statements. 35 36 Consolidated Balance Sheet Avon Products, Inc. In millions, except share data December 31 1994 1993 ---- ---- Assets Current assets Cash, including cash equivalents of $132.5 and $159.7 $ 214.8 $ 223.9 Accounts receivable (less allowance for doubtful accounts of $27.3 and $22.0) 373.7 306.0 Inventories 412.8 360.5 Prepaid expenses and other 149.0 135.9 Net assets of discontinued operations - 18.8 -------- -------- Total current assets 1,150.3 1,045.1 -------- -------- Property, plant and equipment, at cost Land 54.3 41.7 Buildings and improvements 531.5 495.1 Equipment 560.9 524.7 -------- -------- 1,146.7 1,061.5 Less accumulated depreciation 618.3 585.3 -------- -------- 528.4 476.2 -------- -------- Net assets of discontinued operations - 136.2 Other assets 299.6 261.2 -------- -------- Total assets $1,978.3 $1,918.7 ======== ======== Liabilities and Shareholders' Equity Current liabilities Debt maturing within one year $ 61.2 $ 70.4 Accounts payable 408.0 365.4 Accrued compensation 100.0 62.7 Other accrued liabilities 222.3 203.3 Sales and other taxes 95.7 94.9 Income taxes 253.8 225.3 -------- -------- Total current liabilities 1,141.0 1,022.0 -------- -------- Long-term debt 116.5 123.7 Employee benefit plans 366.6 295.1 Deferred income taxes 32.2 30.5 Other liabilities (including minority interest of $48.9 and $43.2) 136.4 133.4 Commitments and contingencies Shareholders' equity Common stock, par value $.50 - authorized: 200,000,000 shares; issued - 86,663,874 and 86,528,692 shares 43.3 43.3 Additional paid-in capital 660.5 652.3 Retained earnings 212.4 150.6 Translation adjustments (187.1) (175.3) Treasury stock, at cost - 17,589,639 and 14,430,073 shares (543.5) (356.9) -------- -------- Total shareholders' equity 185.6 314.0 -------- -------- Total liabilities and shareholders' equity $1,978.3 $1,918.7 ======== ======== The accompanying notes are an integral part of these statements. 36 37 Consolidated Statement of Cash Flows Avon Products, Inc. In millions Years ended December 31 1994 1993 1992 ---- ---- ---- Cash flows from operating activities Net income $195.8 $132.1 $175.0 Adjustments to reconcile income to net cash provided by continuing operations: Cumulative effect of accounting changes, net 45.2 107.5 - Discontinued operations, net 23.8 (2.7) (10.8) (Payments) provision for restructuring costs (3.5) (27.0) 56.3 Depreciation and amortization 55.7 57.2 56.7 Provision for doubtful accounts 64.9 51.4 45.3 Translation (gains) losses (9.0) 14.7 12.8 Deferred income taxes 2.2 (12.1) (29.8) Other 26.9 17.5 27.5 Changes in assets and liabilities: Accounts receivable (179.4) (140.8) (122.3) Inventories (61.3) (60.9) 14.9 Prepaid expenses and other (12.1) (2.1) 4.5 Accounts payable and accrued liabilities 145.9 79.5 86.7 Income and other taxes 45.4 75.8 46.3 Noncurrent assets and liabilities (42.2) 9.7 (2.0) ------ ------ ------ Net cash provided by continuing operations 298.3 299.8 361.1 Net cash (used) provided by discontinued operations (6.0) (2.3) 24.7 ------ ------ ------ Net cash provided by operating activities 292.3 297.5 385.8 ------ ------ ------ Cash flows from investing activities Capital expenditures (99.9) (58.1) (62.7) Disposal of assets 4.5 19.1 2.9 Acquisitions of subsidiary stock - (6.4) (28.5) Proceeds from sale of Giorgio Beverly Hills, Inc. 150.0 - - ------ ------ ------ Net cash provided (used) by investing activities 54.6 (45.4) (88.3) ------ ------ ------ Cash flows from financing activities Cash dividends (141.1) (124.9) (109.9) Debt, net (maturities of three months or less) (23.3) 14.8 (5.4) Proceeds from short-term debt 35.0 26.8 24.2 Retirement of short-term debt (16.2) (24.8) (112.7) Proceeds from long-term debt 6.1 - - Retirement of long-term debt (18.4) (38.2) (37.4) Proceeds from exercise of stock options, net of taxes .7 .9 4.2 Repurchase of common stock (188.2) (.4) (7.4) ------ ------ ------ Net cash (used) by financing activities (345.4) (145.8) (244.4) ------ ------ ------ Effect of exchange rate changes on cash and equivalents (10.6) (24.0) (26.0) ------ ------ ------ Net (decrease) increase in cash and equivalents (9.1) 82.3 27.1 Cash and equivalents at beginning of year 223.9 141.6 114.5 ------ ------ ------ Cash and equivalents at end of year $214.8 $223.9 $141.6 ====== ====== ====== Cash paid for Interest $ 47.8 $ 37.6 $ 37.3 Income taxes, net of refunds received 130.0 132.7 125.8 The accompanying notes are an integral part of these statements. 37 38
Consolidated Statement of Changes in Shareholders' Equity Avon Products, Inc. Additional Common Stock Paid-In Retained Translation Treasury In millions, except share data Shares Amount Capital Earnings Adjustments Stock Total ------------------- ---------- -------- ----------- -------- ----- Balance at December 31, 1991 86,168,007 $43.1 $633.0 $ 59.0 $(131.7) $(351.8) $251.6 Net income 175.0 175.0 Dividends - $1.50 per share (107.5) (107.5) Translation adjustments (23.9) (23.9) Exercise of stock options, including tax benefits 150,380 .1 10.3 10.4 Grant, cancellation and amortization of restricted stock 127,295 9.6 9.6 Repurchase of common stock (7.4) (7.4) Benefit plan contributions 1.4 1.3 2.7 ---------- ----- ------ ------ ------- ------- ------ Balance at December 31, 1992 86,445,682 43.2 654.3 126.5 (155.6) (357.9) 310.5 Net income 132.1 132.1 Dividends - $1.70 per share (14.5) (108.0) (122.5) Translation adjustments (19.7) (19.7) Exercise of stock options, including tax benefits 24,920 .1 1.3 1.4 Grant, cancellation and amortization of restricted stock 58,090 9.4 9.4 Repurchase of common stock (.4) (.4) Benefit plan contributions 1.8 1.4 3.2 ---------- ----- ------ ------ ------- ------- ------ Balance at December 31, 1993 86,528,692 43.3 652.3 150.6 (175.3) (356.9) 314.0 Net income 195.8 195.8 Dividends - $1.90 per share (134.0) (134.0) Translation adjustments (11.8) (11.8) Exercise of stock options, including tax benefits 24,068 1.6 1.6 Grant, cancellation and amortization of restricted stock 111,114 4.8 4.8 Repurchase of common stock (188.2) (188.2) Benefit plan contributions 1.8 1.6 3.4 ---------- ----- ------ ------ ------- ------- ------ Balance at December 31, 1994 86,663,874 $43.3 $660.5 $212.4 $(187.1) $(543.5) $185.6 ========== ===== ====== ====== ======= ======= ====== The accompanying notes are an integral part of these statements.
38 39 Notes to Consolidated Financial Statements Avon Products, Inc. In millions, except share data 1. Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Avon Products, Inc. and its subsidiaries. Intercompany balances and transactions are eliminated. Foreign Currency Translation - Financial statements of foreign subsidiaries operating in other than highly inflationary economies are translated at year-end exchange rates for assets and liabilities and average exchange rates prevailing during the year for income and expense accounts. Translation adjustments of these subsidiaries are recorded as a separate component of shareholders' equity. For financial statements of subsidiaries operating in highly inflationary economies, nonmonetary assets (principally inventories and fixed assets) and the related expenses (principally cost of sales and depreciation) are translated at the respective historical exchange rates in effect when the assets were acquired or when the subsidiary was designated as operating in a highly inflationary economy. Monetary assets and liabilities are translated at year-end exchange rates. All other income and expense accounts are translated at average exchange rates prevailing during the year. Adjustments resulting from the translation of the financial statements of these subsidiaries are included in income. Revenue Recognition - Avon recognizes revenue as shipments are made and title passes to independent Representatives, who are Avon's customers. Cash and Equivalents - Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are highly liquid debt instruments with an original maturity of three months or less and consist of time deposits with a number of commercial banks with high credit ratings in the U.S. and abroad. In accordance with Avon's policy, the maximum amount invested in any one bank is limited. Avon does not believe it is exposed to any significant credit risk on cash and equivalents. Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (LIFO) method for substantially all U.S. inventories except apparel and the first-in, first-out method for all other inventories. Depreciation - Substantially all buildings, improvements and equipment are depreciated using the straight-line method over estimated useful lives. Estimated useful lives for buildings and improvements range from 20 to 45 years and equipment ranges from 5 to 15 years. Other Assets - Effective January 1, 1994, Avon changed its method of accounting for internal systems development costs. Previously, Avon deferred certain internal costs related to the development of major information and accounting systems and amortized them over future periods. These internal development costs are now being expensed as incurred. Financial Instruments - Derivative financial instruments are used by the Company in the management of its interest rate and foreign currency exposures and are accounted for on an accrual basis. Income and expense are recorded in the same category as that arising from the related asset or liability being hedged. Gains and losses resulting from effective hedges of existing assets, liabilities or firm commitments are deferred and recognized when the offsetting gains and losses are recognized on the related hedged items. Gains realized on termination of interest rate swap contracts are deferred and amortized over the remaining terms of the original swap agreements. Costs of interest rate cap contracts are amortized over the effective lives of the contracts. Research and Development - Research and development costs are expensed as incurred and aggregated $27.9 (1993 - $28.5; 1992 - $27.9). Advertising - Advertising costs are expensed as incurred and aggregated $42.6 (1993 - $49.4; 1992 - $23.6). Income Taxes - Effective January 1, 1993, Avon accounts for income taxes under the provisions of Statement of Financial Accounting Standards ("FAS") No. 109, "Accounting for Income Taxes", which requires that 39 40 deferred income taxes be provided on items recognized for financial reporting purposes in different periods than for income tax purposes at future enacted rates. See Note 7 for the cumulative effect of the adoption of FAS No. 109. U.S. income taxes have not been provided on approximately $222.0 of undistributed income of subsidiaries that has been or is intended to be permanently reinvested outside the United States or is expected to be remitted free of U.S. income taxes. If such undistributed income was remitted, foreign withholding taxes of approximately $27.0 would be payable. Income per Share - Primary income per share of common stock is based on the weighted average number of shares outstanding. The decrease in average shares outstanding for 1994 compared to 1993 is primarily due to the shares acquired under the stock repurchase program. Reclassifications - To conform to the 1994 presentation, certain reclass- ifications were made to the prior years' consolidated financial statements. See Note 3 regarding discontinued operations. 2. Accounting Changes Effective January 1, 1994, Avon adopted FAS No. 112, "Employers' Accounting for Postemployment Benefits", for all applicable operations and FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", for its foreign benefit plans. In addition, effective January 1, 1994, Avon changed its method of accounting for internal systems development costs. As a result of these accounting changes, Avon recorded an aggregate non-cash charge in the first quarter of 1994 of $45.2, or $.64 per share. This amount reflects the cumulative effect of adjustments for FAS No. 112 of $28.9, or $.41 per share, FAS No. 106 of $8.0, or $.11 per share, and systems development costs of $8.3, or $.12 per share. The proforma effect for the change in accounting for the deferred internal systems development costs for the years ended December 31, 1993 and 1992, had the accounting change been adopted effective January 1, 1992, would not have been significant. Effective January 1, 1993, Avon adopted FAS No. 106, for its U.S. retiree health care and life insurance benefit plans. FAS No. 106 requires the accrual of the cost of these postretirement benefits over the estimated service lives of the employees receiving such benefits, rather than recognizing these expenses when paid. Avon recorded the entire previously unrecognized obligation of $183.3 ($110.0 after tax, or $1.53 per share), at the time of adoption as a cumulative effect adjustment. 3. Discontinued Operations During 1994, the Company sold Giorgio Beverly Hills, Inc. ("Giorgio"), its remaining retail business for cash of $150.0. The Company recorded a loss of $25.0 on the sale. Since the Company has excess capital loss carryforwards, no tax benefits have been recognized on the loss. Giorgio's operating results are segregated and reported as discontinued operations through the date of sale in the accompanying consolidated financial statements. Prior period financial statements have been reclassified to conform to the current year presentation. Amounts included in income from discontinued operations for Giorgio for the years ended December 31, were as follows: 1994(1) 1993 1992 ---- ---- ---- Net sales $58.1 $163.5 $149.4 Income before taxes 2.0 23.8 21.7 Net income 1.2 12.7 10.8 (1) Represents the net sales and income through the measurement date of June 30, 1994. Assets and liabilities of Giorgio, reported as net assets of discontinued operations as of December 31, were as follows: 1993 ---- Current assets $ 55.5 Goodwill, net of accumulated amortization of $25.9 134.4 Other noncurrent assets 4.4 ------ Total assets 194.3 ------ Current liabilities 36.7 Long-term liabilities 2.6 ------ Total liabilities 39.3 ------ Net assets of discontinued operations $155.0 ====== During 1993, Avon recorded a discontinued operations provision of $10.0 after tax, or $.14 per share, for the final settlement and related expenses in an arbitration proceeding related to a business previously sold. During 1992, Avon recorded a discontinued operations provision of approximately $10.0 principally for 40 41 claims and litigation relating to businesses previously sold, which was offset by amounts recovered for notes and securities previously written off. Other current and noncurrent liabilities include $66.0 relating to discontinued operations. These liabilities represent the estimated cost relating to legal contingencies discussed in Note 13, and other costs related to businesses previously sold, including Giorgio. 4. Provision for Restructuring Costs A provision of $96.0 ($64.4 after tax, or $.90 per share) was recorded in 1992 for the restructuring and reconfiguration of Avon's worldwide manufacturing and distribution facilities. The restructuring program included closing the manufacturing facility in Spain in 1992 and the distribution facility in Springdale, Ohio in July 1993, as well as the reconfiguring of several other international operations. The restructuring program was substantially completed by December 31, 1993 and was fully completed by December 31, 1994. 5. Inventories Inventories at December 31, consisted of the following: 1994 1993 ---- ---- Raw materials $118.4 $117.8 Finished goods 294.4 242.7 ------ ------ Total $412.8 $360.5 ====== ====== LIFO-based inventories totaled $88.0 (1993--$89.3), with the current estimated replacement cost exceeding the carrying value by approximately $20.4 (1993 - $25.7). 6. Debt Debt at December 31, consisted of the following: 1994 1993 ---- ---- Maturing within one year: Notes payable $ 32.0 $ 16.1 Current portion of long-term debt 29.2 54.3 ------ ------ Total $ 61.2 $ 70.4 ====== ====== Long-term debt: 170 million 6 1/8% Deutsche Mark notes, due 1998 (1) $100.0 $100.0 10 billion 8 1/2% Yen notes, due 1994 and 1995 (2) 25.1 39.1 5 3/8% Swiss Franc bonds, due 1994 - 35.2 Other, payable to 2004 with interest from 6% to 24% 20.6 3.7 Less current portion (29.2) (54.3) ------ ------ Total $116.5 $123.7 ====== ====== (1)The Deutsche Mark notes have been effectively converted into U.S. Dollar debt through the use of a currency exchange swap contract which includes both the principal and the interest. Reflected in the carrying value of the debt was a swap contract receivable (payable) at December 31, 1994 of $9.0 (1993 - ($2.0)). (2)The Yen notes are the obligation of the Japanese subsidiary and are collateralized by its property and plant having a net book value of $67.6 at December 31, 1994. The 10 billion Yen notes were issued in 1990. As of December 31, 1993, the balance of the notes was 4.4 billion Yen of which 1.9 billion Yen were paid during 1994 and 2.5 billion Yen are payable during 1995. (3)See Note 8 regarding financial instruments. Annual maturities of long-term debt for each of the next five years are: 1995 - $29.2; 1996 - $4.3; 1997 - $2.5; 1998 - $102.0; and 1999 - $1.7. In October 1994, the Company entered into a five year, $600.0 revolving credit and competitive advance facility agreement with various banks. This facility replaces the two previously existing revolving credit facilities which totalled $600.0. At December 31, 1994 and 1993, there were no borrowings under the respective credit facilities. Within this new facility, the Company is able to borrow, on an uncommitted basis, up to $200.0 in various foreign currencies. The facility is primarily to be used to finance working capital, provide support for the issuance of commercial paper and support the stock repurchase program. At the Company's option, the interest rate on borrowings under the new facility is based on LIBOR, prime, federal funds or money market auction rates. This facility has an annual facility fee of $.6, as well as a utilization fee if more than 50% of the total commitment 41 42 is outstanding. The facility contains a covenant for interest coverage, as defined. The Company is in compliance with this covenant. Avon has a $300.0 commercial paper facility supported by the revolving credit and competitive advance facility. In addition, the Company has bankers' acceptance facilities and uncommitted lines of credit available of $235.0 with various banks which have no compensating balances or fees. As of December 31, 1994 and 1993, there were no borrowings under these facilities. The maximum borrowing under these facilities during 1994 and 1993 was $219.1 and $238.8, respectively, and the annual average borrowing during the year was approximately $127.2 and $143.5, respectively, at average annual interest rates of approximately 4.6% and 3.4%, respectively. International lines of credit total $276.4 of which $32.0 was outstanding at December 31, 1994. The maximum borrowing under these facilities during 1994 and 1993 was $50.5 and $73.1, respectively, and the annual average borrowing during the years was $38.9 and $46.8, respectively, at average annual interest rates of approximately 10.8% and 6.6%, respectively. Such lines have no compensating balances or fees. Avon also has letters of credit outstanding totalling $21.5 (1993 - $21.3), which guarantee various insurance activities. In addition, Avon has outstanding letters of credit for various trade activities. Interest Expense - The components of interest expense for the years ended December 31, were as follows: 1994 1993 1992 ---- ---- ---- Interest on debt $41.3 $35.0 $32.6 Other 9.5 10.2 11.1 ----- ----- ----- Total $50.8 $45.2 $43.7 ===== ===== ===== 7. Income Taxes Effective January 1, 1993, Avon adopted FAS No. 109, whereby, among other things, the criteria for recognizing deferred tax assets was revised to permit recognition of such assets when future realization is more likely than not. The cumulative effect of this accounting change was an increase to income in 1993 of $2.5 ($.04 per share). 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: 1994 1993 ---- ---- Deferred tax assets: Postretirement benefits $ 82.6 $ 78.0 Accrued expenses and reserves 67.5 57.8 Foreign operating loss carryforwards 29.5 41.2 Capital loss carryforwards 24.9 12.2 Postemployment benefits 12.6 - All other 55.2 63.3 Valuation allowance (69.5) (66.9) ------- ------- Total deferred tax assets 202.8 185.6 ------- ------- Deferred tax liabilities: Depreciation (46.6) (44.0) Prepaid retirement plan cost (35.9) (35.4) Capitalized interest (17.7) (19.0) Unremitted foreign earnings (10.6) (7.9) All other (14.1) (22.7) ------- ------- Total deferred tax liabilities (124.9) (129.0) ------- ------- Net deferred tax assets $ 77.9 $ 56.6 ======= ======= Deferred tax assets (liabilities) at December 31, were classified as follows: 1994 1993 ---- ---- Deferred tax assets: Prepaid expenses and other $ 45.5 $ 43.3 Other assets 69.3 50.6 ------- ------ Total deferred tax assets 114.8 93.9 ------- ------ Deferred tax liabilities: Income taxes (4.7) (6.8) Deferred income taxes (32.2) (30.5) ------- ------ Total deferred tax liabilities (36.9) (37.3) ------- ------ Net deferred tax assets $ 77.9 $ 56.6 ======= ====== 42 43 The valuation allowance required under FAS No. 109 primarily represents reserves for foreign operating loss and capital loss carryforwards. The basis used for recognition of deferred tax assets included the profitability of the operations and related deferred tax liabilities. Income from continuing operations before taxes and minority interest for the years ended December 31, was as follows: 1994 1993 1992 ---- ---- ---- United States $127.3 $109.6 $ 96.6 Foreign 306.5 285.0 193.4 ------ ------ ------ Total $433.8 $394.6 $290.0 ====== ====== ====== The provision for income taxes for the years ended December 31, was as follows: 1994 1993 1992 ---- ---- ---- Federal: Current $ 34.0 $ 14.9 $ 30.8 Deferred (4.1) (3.5) (16.8) ------ ------ ------ 29.9 11.4 14.0 ------ ------ ------ Foreign: Current 119.8 141.0 110.7 Deferred 6.1 (9.2) (10.4) ------ ------ ------ 125.9 131.8 100.3 ------ ------ ------ State and other: Current 7.5 8.5 9.1 Deferred .2 (.9) (2.8) ------ ------ ------ 7.7 7.6 6.3 ------ ------ ------ Total $163.5 $150.8 $120.6 ====== ====== ====== The effective tax rate for the years ended December 31, was as follows: 1994 1993 1992 ---- ---- ---- Statutory federal rate 35.0% 35.0% 34.0% State and local taxes, net of federal tax benefit 1.2 1.3 1.5 Tax-exempt operations (1.4) (1.8) (1.5) Taxes on foreign income, including translation 9.3 8.3 12.1 Utilization of net operating loss carryforwards (5.0) (.2) (.2) Other (1.4) (4.4) (4.3) ----- ----- ----- Effective tax rate 37.7% 38.2% 41.6% ===== ===== ===== At December 31, 1994, Avon had foreign operating loss carryforwards of $82.9. The loss carryforwards expiring between 1995 and 2003 were $61.8 and the loss carryforwards which do not expire were $21.1. Capital loss carryforwards, which expire between 1997 and 1999 and may be used to offset capital gains, if any, approximated $71.0 at December 31, 1994. 8. Financial Instruments and Risk Management Risk Management - The Company operates internationally, with manufacturing and distribution facilities in various locations around the world. The Company may reduce its exposure to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company currently does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives. The notional amount of forward exchange contracts and options is the amount of foreign currency bought or sold at maturity. The notional amount of interest rate swaps is the underlying principal amount used in determining the interest payments exchanged over the life of the swap. The notional amounts are not a measure of the Company's exposure through its use of derivatives. Interest Rates - The Company may use interest rate swaps to hedge portions of its interest expense thereby allowing the Company to establish fixed or variable interest rates on its outstanding debt. During most of 1994 and over the recent past, the Company elected to use interest rate swaps to establish fixed rates on its long-term debt. The Company closely monitors market conditions and, if in a variable position, may also use interest rate caps which limit net interest expense if interest rates rise above a defined level. In November 1994, one of the Company's fixed rate swap contracts expired and the interest rate on the long-term Deutsche Mark debt became variable. Effective January 1995, the Company has interest rate caps on its long-term Deutsche Mark debt through its maturity date. 43 44 Avon had two interest rate swap agreements at December 31, 1994 (three at December 31, 1993), each such agreement having a notional principal amount of $100.0 (1993 - $100.0), yielding an aggregate notional principal amount at December 31, 1994 of $200.0 (1993 - $300.0). These agreements have converted the interest rate on the 170 million 6 1/8% Deutsche Mark notes to a variable rate established at 1.4 percentage points above one-month LIBOR (6% at December 31, 1994) for November 1994 through May 1998, when the notes mature. At December 31, 1994, the Company also had three interest rate cap contracts, one of which expired in early January 1995. One contract is for the calendar year 1995 and places a ceiling on one-month LIBOR at 6%. The other contract is for the period January 1996 to the maturity of the notes and places a ceiling on one-month LIBOR at 9%. The unamortized cost of these contracts was approximately $1.4 at December 31, 1994 and is included in Other Assets. During 1993, Avon had a gain of $16.6 from the sale of interest rate swap contracts on the Deutsche Mark notes, which is being amortized over the remaining term of the original swap agreements. As of December 31, 1994, the unamortized balance was $11.7 (1993 - $15.9). In addition, a gain on the sale, in 1990, of certain interest rate swap agreements related to the Swiss Franc bonds was amortized over the life of the original swap agreements, which expired in December 1994. Foreign Currencies - The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments, contractual foreign currency cash flows or obligations, including debt, and other third-party or intercompany foreign currency transactions. The Company regularly monitors its foreign currency exposures and ensures that hedge contract amounts do not exceed the amounts of the underlying exposures. At December 31, 1994, the Company held foreign currency forward contracts with notional amounts totalling $184.1 and option contracts with notional amounts totalling $31.2 to hedge foreign currency items. These contracts all have maturities prior to December 31, 1995. These forward and option contracts to purchase and sell foreign currencies, including cross-currency contracts to sell one foreign currency for another currency at December 31, are summarized below: 1994 -------------- Buy Sell --- ---- Deutsche Marks $ 72.1 $ 10.4 Japanese Yen 40.0 - Pound Sterling - 53.2 Canadian Dollar - 26.1 Other currencies 2.2 11.3 ------ ------ $114.3 $101.0 ====== ====== Credit and Market Risk - The Company attempts to minimize its credit exposure to counterparties by entering into interest rate swap and cap contracts only with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor's Corporation. The Company's foreign currency and interest rate derivatives are comprised of over-the-counter forward contracts or options with major international financial institutions. Although the Company's theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring losses is remote and that such losses, if any, would not be material. Non-performance of the counterparties to the balance of all the currency and interest rate swap agreements in a net receivable position would not result in a significant write-off at December 31, 1994. In addition, there are other swap agreements in a net payable position of an insignificant amount at December 31, 1994. Each agreement provides for the right of offset between counterparties to the agreement. In addition, Avon may be exposed to market risk on its foreign exchange and interest rate swap and cap agreements as a result of changes in foreign exchange and interest rates. The market risk related to the foreign exchange agreements should be substantially offset by changes in the valuation of the underlying items being hedged. Fair Value of Financial Instruments - FAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosure of the following information about the fair value of certain financial instruments for which it is practicable to estimate that value. For purposes of the following disclosure, the fair value of a financial 44 45 instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The amounts disclosed represent management's best estimates of fair value. In accordance with FAS No. 107, Avon has excluded certain financial instruments and all other assets and liabilities from its disclosure. Accordingly, the aggregate fair value amounts presented are not intended to, and do not, represent the underlying fair value of Avon. The methods and assumptions used to estimate fair value are as follows: Grantor trust - The fair value of these investments, principally money market funds, is based on the quoted market prices for issues listed on exchanges. The carrying amount of money market funds approximates fair value. Debt maturing within one year and long-term debt - The fair value of all debt has been estimated based on the quoted market prices for issues listed on exchanges and the current rates offered to Avon Japan for debt of the same remaining maturities. Forward exchange and currency option contracts - The fair value of forward exchange and currency option contracts is estimated based on quoted market prices from banks. Interest rate swap, currency swap and interest rate cap agreements - The fair value of interest rate swap, currency swap and interest rate cap agreements is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that Avon would expect to receive or pay to terminate the agreements. The asset and (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at December 31, consisted of the following: 1994 1993 ------------------ ------------------ Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ----- Cash and equivalents $ 214.8 $ 214.8 $ 223.9 $ 223.9 Grantor trust 50.8 50.8 20.8 20.8 Debt maturing within one year (61.2) (62.1) (97.2) (96.5) Currency swap contract on debt maturing within one year - - 26.8 25.0 Long-term debt (125.5) (128.8) (121.7) (120.8) Currency swap contract on long-term debt 9.0 9.4 (2.0) (3.3) Other forward exchange and option contracts .5 2.1 2.7 2.9 Interest rate cap contracts 1.4 2.5 .6 .6 Interest rate swap receivable - - .2 .2 Interest rate swaps payable (.7) (13.7) (1.7) (23.7) 9. Shareholders' Equity Stock Plans - Under various plans, options have been granted to key employees to purchase stock at the fair market value on the date of grant. A summary of changes in stock options, is as follows: Outstanding Options Price ----------- ----- December 31, 1992 237,917 $23-$52 Granted 25,000 63 Exercised (24,920) 23- 33 Cancelled (14,000) 23- 33 -------- ------- December 31, 1993 223,997 23- 63 Granted 413,000 53 Exercised (24,068) 23- 33 Cancelled (80,827) 23- 63 -------- ------- December 31, 1994 532,102 $23-$53 ======== ======= 45 46 At December 31, 1994, options for 108,263 shares were exercisable at prices ranging from $23 to $52 per share. The 1993 Stock Incentive Plan ("1993 Plan"), which replaced the 1970 Stock Option Incentive Plan, provides for several types of equity-based incentive compensation awards. Under the 1993 Plan, the maximum number of shares that may be awarded is 3,525,000 shares of which no more than 2,000,000 shares may be used for restricted share and stock bonus grants. Awards, when made, may also be in the form of stock options, stock appreciation rights, dividend equivalent rights or performance unit awards. Stock options granted to officers and key employees shall be at a price no less than fair market value on the date the option is granted. During 1993, 10,000 restricted shares were granted under the 1993 Plan, with an aggregate value of approximately $.5, which is being amortized over a 7.6 year vesting period. During 1994, 133,985 restricted shares were granted under the 1993 Plan with an aggregate value of $7.6 and vest over a two to five year period. Effective January 1, 1994, the 1994 Long-Term Incentive Plan ("1994 LTIP") was authorized under the 1993 Plan. The 1994 LTIP provides for the grant of two forms of incentive awards; performance units consisting of potential cash incentives and 10 year stock options. Performance units are earned out over the three-year performance period 1994-1996, based on the degree of attainment of performance objectives. The cash target value of all performance units is approximately $29.0. One third of such options issued in 1994 vest each year over a three-year period following the grant date; no such options were exercisable as of December 31, 1994. As of December 31, 1993, required performance goals under the prior long-term incentive plan were achieved and accordingly fifty percent of previously issued restricted shares were vested and issued in early 1994. An additional thirty percent of such shares vested and were issued in early 1995 while the remaining twenty percent will vest as of January 3, 1996. During 1993, 48,090 restricted shares were issued under that plan (1992 - 127,295), with an aggregate value on the date of grant of $3.5 (1992 - $6.9). Expense is recorded as the restricted shares vest over the periods established for each grant. Compensation expense under all plans was $14.4 (1993 - $9.4; 1992 - $9.8). The unamortized cost as of December 31, 1994 was $7.2 (1993 - $5.3). The accrued cost of the performance units at December 31, 1994 was $9.6. In 1994, Avon contributed 59,520 shares (1993 - 57,501) of treasury stock to an employees' savings plan and recognized expense for its fair value on the dates of the contributions to the plan. An estimated additional contribution of 52,000 shares, for which the expense has been accrued at December 31, 1994, will be made to the plan in 1995 since the Company met its performance goal, as defined in the plan. The expense recognized for the plan in 1994 was $6.5 (1993 - $4.3; 1992 - $4.4). Share Rights Plan - Avon has a 1987 Share Rights Plan under which one right has been declared as a dividend for each outstanding share of its common stock. Each right, which is redeemable at $.01 at any time at Avon's option, entitles the shareholder, among other things, to purchase one share of Avon common stock at a price equal to one-half the then current market price, if certain events have occurred. The right is exercisable if, among other events, one party obtains a beneficial ownership of 20% or more of Avon's voting stock. Dividends - On August 2, 1994, Avon increased the regular dividend on common shares to an annual rate of $2.00 per share from an annual rate of $1.80. The first quarterly dividend at the new rate of $.50 per share was paid on September 1, 1994. On August 9, 1993, Avon increased the regular dividend on common shares to an annual rate of $1.80 per share from an annual rate of $1.60. The first quarterly dividend at the new rate of $.45 per share was paid on September 1, 1993. On August 3, 1992, Avon increased the regular dividend on common shares to an annual rate of $1.60 per share from an annual rate of $1.40. The first quarterly dividend at the new rate of $.40 per share was paid on September 1, 1992. Stock Repurchase Program - During 1994, Avon's Board of Directors authorized a stock repurchase program under which Avon may buyback up to 10% of its outstanding common stock, or approximately 7,000,000 shares. The shares will be purchased in the open market over a period of up to three years. As of December 31, 1994, 3.2 million shares have been purchased for $188.2 which is included in Treasury Stock. 46 47 10. Employee Benefit Plans Retirement Plans - Avon and certain subsidiaries have noncontributory retirement plans for substantially all employees. Benefits under these plans are generally based on an employee's years of service and average compensation near retirement. Plans are funded on a current basis except where funding is not required. During 1992, as a result of an enhanced early retirement program in the United States, an additional liability of $15.9 was recognized and included in the 1992 Provision for Restructuring Costs. Net retirement plan expense for the years ended December 31, was determined as follows: 1994 1993 1992 ---- ---- ---- Service cost $33.7 $33.6 $31.2 Interest cost 54.2 55.3 51.5 Actual return on plan assets 19.9 (77.4) (48.3) Net amortization (deferral) (72.5) 19.8 (14.0) ----- ----- ----- Net retirement plan expense $35.3 $31.3 $20.4 ===== ===== ===== The funded status of retirement plans at December 31, consisted of the following: Assets Exceed Accumulated Accumulated Benefits Benefits Exceed Assets ------------- ------------- 1994 1993 1994 1993 ---- ---- ---- ---- Plan assets at fair value (primarily listed stocks and bonds) $519.4 $567.1 $ 42.7 $ 38.8 ------ ------ ------- ------- Present value of projected benefit obligation Accumulated benefit obligation Vested (385.1) (374.9) (133.6) (129.7) Nonvested (54.5) (59.4) (29.5) (25.0) Projected compensation increases (81.6) (87.5) (41.1) (34.9) ------ ------ ------- ------- Projected benefit obligation (521.2) (521.8) (204.2) (189.6) ------ ------ ------- ------- Plan assets (less than) in excess of projected benefit obligation (1.8) 45.3 (161.5) (150.8) Unrecognized net loss 97.4 69.0 22.3 22.5 Urecognized prior service cost 15.4 12.5 8.9 8.8 Unrecognized transition (gain) loss (26.7) (45.0) 10.6 18.3 Adjustment for additional liability - - (7.3) (13.0) ------ ------ ------- ------- Prepaid (accrued) retirement plan cost $ 84.3 $ 81.8 $(127.0) $(114.2) ====== ====== ======= ======= Prepaid retirement plan cost shown above is included in Other Assets. The accrued retirement plan cost shown above is primarily included in Employee Benefit Plans. The weighted average assumptions used to determine the data above for the years ended December 31, are as follows: 1994 1993 1992 ---- ---- ---- Discount rate 7.7% 7.7% 8.1% Rate of compensation increase 4.7 5.5 6.1 Rate of return on assets 9.2 9.5 10.3 47 48 Retirement plan expense is determined using assumptions as of the beginning of the year. The funded status is determined using assumptions as of the end of the year. Supplemental Executive Retirement and Life Insurance Plans - Avon has a Supplemental Executive Retirement Plan ("SERP") which is a defined benefit plan under which Avon will pay supplemental pension benefits to key executives in addition to amounts received under Avon's retirement plan. The annual cost of this plan has been included in the determination of the net retirement plan expense shown above and amounted to $3.9 (1993 - $4.3; 1992 - $6.4). Such benefits will be paid from Avon's assets. The unfunded accumulated benefit obligation under this plan at December 31, 1994 was $15.5 (1993 - $16.9) and is primarily included in Employee Benefit Plans. Avon also maintains a Supplemental Life Insurance Plan ("SLIP") under which additional death benefits ranging from $.35 to $2.0 are provided to certain active and retired officers. Avon has acquired corporate-owned life insurance policies to provide partial funding of the benefits. The cash surrender value of these policies at December 31, 1994 was $24.8 (1993 - $21.9) and is held in the grantor trust. Avon has established a grantor trust to provide funding for the benefits payable under the SERP and SLIP. The trust is irrevocable and assets contributed to the trust can only be used to pay such benefits with certain exceptions. During 1994, the Company contributed an additional $32.2 to fund these benefit plans. The assets held in the trust at December 31, 1994, amounted to $75.6 (1993 - $42.7), consisting of a money market fund, a managed portfolio of equity securities and corporate-owned life insurance policies. These assets are included in Other Assets. Postretirement Benefits - Avon provides health care, in excess of Medicare coverage, and life insurance benefits for the majority of employees who retire under Avon's retirement plans in the United States and certain foreign countries. The cost of such health care benefits is shared by Avon and its retirees. See Note 2 regarding the adoption of FAS No. 106. Net postretirement benefit cost for the years ended December 31, included the following components: 1994 1993 ---- ---- Service cost $ 3.3 $ 3.3 Interest cost 15.2 14.2 ----- ----- Total postretirement benefit cost $18.5 $17.5 ===== ===== During 1992, costs of health care and life insurance benefits for the U.S. and certain foreign countries, which were expensed when incurred, amounted to $4.7, on an after-tax basis. During 1993, the after-tax cost for certain foreign countries was $.3. The accumulated postretirement benefits obligation at December 31, which is unfunded, for the U.S. plan, and certain foreign plans for which the obligation was not significant, consisted of the following: 1994 1993 ---- ---- Retirees $143.5 $112.9 Other fully eligible participants 11.6 29.3 Other active participants 51.3 47.1 Unrealized gains 3.4 3.1 ------ ------ Accumulated postretirement benefits obligation $209.8 $192.4 ====== ====== The assumptions used to determine the data above for the years ended December 31, are as follows: 1994 1993 ---- ---- Discount rate 8.5% 7.5% Rate of assumed compensation increases 5.0 4.5 The assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 12.0% for 1994 and will gradually decrease each year thereafter to 5.8% in 2005 and beyond. Increasing the health care cost trend rate by one percentage point would increase the accumulated postretirement benefits obligation at December 31, 1994 by $23.5 and would increase the 1994 annual postretirement benefits expense by $2.5. Postemployment Benefits - Effective January 1, 1994, the Company adopted FAS No. 112, as discussed in Note 2. FAS No. 112 requires the accrual of the cost of postemployment benefits rather than expensing the costs when paid. These benefits include salary continuation, severance benefits, disability benefits and continuation of health care benefits and life insurance coverage to former 48 49 employees after employment but before retirement. At December 31, 1994, the accrual for postemployment benefits was $38.8 and is included in Employee Benefit Plans. 11. Geographic Information Avon's business is comprised of one business segment, direct selling of products to consumers primarily through independent sales Representatives. Operations by Geographic Area - Direct selling operations are conducted in the United States, the Americas, the Pacific and Europe. Sales and pretax income by geographic area are presented on page 26. Identifiable assets by geographic area at December 31, were as follows: 1994 1993 1992 ---- ---- ---- United States $ 414.2 $ 379.6 $ 375.2 -------- -------- -------- International Americas 463.9 366.6 338.2 Pacific 329.2 279.8 232.0 Europe 308.6 275.5 263.4 -------- -------- -------- Total International 1,101.7 921.9 833.6 -------- -------- -------- Corporate and other* 462.4 617.2 483.8 -------- -------- -------- Total $1,978.3 $1,918.7 $1,692.6 ======== ======== ======== *Includes Cash Equivalents of $132.5 (1993 - $159.7; 1992 - $95.5). Foreign Exchange - Financial statement translation of subsidiaries operating in highly inflationary economies and foreign currency transactions resulted in losses netting to $6.8 (1993 - $5.2; 1992 - $16.9), which are included in Other Expense, net and Income Taxes. In addition, cost of sales and expenses include the unfavorable impact of the translation of inventories and prepaid expenses at historical rates in countries with highly inflationary economies of $23.9 (1993 - $34.7; 1992 - $28.6). 12. Leases and Commitments Minimum rental commitments under noncancellable operating leases primarily for equipment and office space at December 31, 1994, consisted of the following: Year 1995 $ 53.0 1996 38.2 1997 20.9 1998 7.3 1999 4.2 Later years 1.9 Sublease rental income (17.5) ------ Total $108.0 ====== Rent expense related to continuing operations was $94.0 (1993 - $90.9; 1992 - $86.9). Various construction and information systems projects were in progress at December 31, 1994 with an estimated cost to complete of approximately $24.0. 13. Contingencies Various lawsuits and claims (asserted and unasserted), arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. The most significant of these are described below. In 1991, a class action suit was initiated against Avon on behalf of certain classes of holders of Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS"), alleging various contract and securities law claims relating to the PERCS (which were fully redeemed that year). Avon has rejected the assertions in this case, believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. In June 1988, Mallinckrodt, Inc. ("Mallinckrodt") and International Minerals & Chemical Corporation ("IMC"), now known as Mallinckrodt Group Inc., filed a lawsuit against Avon in the St. Louis Missouri City Circuit Court arising from Avon's sale of Mallinckrodt to IMC in 1986. The suit alleged that a certain patent dispute and a settlement, referred to as the DuPont patent case, various environmental claims and numerous other lawsuits and claims are contingent liabilities covered by an indemnification given by Avon in connection with the sale of 49 50 Mallinckrodt. In October 1991, the Missouri Supreme Court affirmed the Circuit Court's decision that Avon has the obligation to indemnify IMC and Mallinckrodt in connection with the DuPont patent case, but remanded the matter for a trial on the damages, if any, suffered by the parties. On July 27, 1992, a jury returned a verdict in the DuPont patent case for $16.0, and a judgment for that amount plus approximately $6.5 interest was entered. On August 11, 1992, IMC and Mallinckrodt filed post-trial motions, including a motion for a judgment notwithstanding the verdict or, in the alternative, a motion for a new trial. On November 5, 1992, the St. Louis Missouri City Circuit Court granted IMC's and Mallinckrodt's motion for a judgment notwithstanding the verdict and directed a verdict for plaintiffs in the amount of $27.1 plus interest. As of November 5, 1992, the interest amounted to approximately $11.7. Avon, IMC and Mallinckrodt appealed this decision. This issue was argued before the Missouri Court of Appeals, Eastern District on May 11, 1994. On November 8, 1994, the Court of Appeals overturned the judgment notwithstanding the verdict and ordered a new trial. All possible further judicial review has now been exhausted and a retrial is expected during 1995. Pre-trial proceedings and discovery activities are ongoing with respect to the environmental and general litigation portions of the case. With respect to the environmental contingencies which constitute a part of the indemnification litigation, the total cost to Avon cannot be determined with certainty as a result of such factors as the preliminary status of information relating to the sites owned by the purchaser, the preliminary regulatory involvement, the unknown magnitude and timing of cleanup efforts, if any, to be undertaken by the purchaser or Mallinckrodt, the possibility of recoveries against other parties, the uncertainty of the success of Avon's defenses, and unasserted claims, if any. However, these factors have been assessed and will continue to be assessed by Avon in estimating reserves to be recorded in its consolidated financial statements. The ultimate outcome and aggregate cost of resolving all of the above contingencies will be based on a number of factors and will be determined over a number of years. Accordingly, the total cost to Avon cannot currently be determined with certainty. The reserves for such contingencies at December 31, 1994, which are recorded gross without anticipation of insurance recoveries or other third-party recoveries, if any, have been estimated by Avon's management based on its review of currently known facts and circumstances at December 31, 1994. In the opinion of Avon's management, based on its review of the preliminary information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1994 should not have a material adverse impact on Avon's consolidated financial position or results of operations, based on the current levels of such amounts. However, this difference, if any, could have a material effect on results of operations in a future period when resolved. 50 51 Report of Management The accompanying consolidated financial statements of Avon Products, Inc. have been prepared by management in conformity with generally accepted accounting principles and necessarily include amounts that are based on judgments and estimates. The audit report of Coopers & Lybrand L.L.P., independent accountants, on these financial statements is the result of their audits of these consolidated financial statements, which were performed in accordance with generally accepted auditing standards. Avon maintains an internal control structure and related systems, policies and procedures designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with appropriate authorization and accounting records may be relied upon for the preparation of financial information. Avon also maintains an internal audit department that evaluates and formally reports to management on the adequacy and effectiveness of controls, policies and procedures. The audit committee of the board of directors, comprised solely of outside directors, has an oversight role in the area of financial reporting and internal controls. This committee meets several times during the year with management, Coopers & Lybrand L.L.P. and the internal auditors to monitor the proper discharge of each of their respective responsibilities. Coopers & Lybrand L.L.P. and the internal auditors have free access to management and to the audit committee to discuss the results of their activities and the adequacy of controls. It is management's opinion that Avon's policies and procedures, reinforced by the internal control structure, provide reasonable assurance that operations are managed in a responsible and professional manner with a commitment to the highest standard of business conduct. /s/James E. Preston /s/Edwina D. Woodbury James E. Preston Edwina D. Woodbury Chairman of the Board and Senior Vice President and Chief Executive Officer Chief Financial Officer Report of Independent Accountants To the Shareholders of Avon Products, Inc. We have audited the accompanying consolidated balance sheet of Avon Products, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. These financial statements are the responsibility of Avon's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avon Products, Inc. and subsidiaries at December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. In 1994, Avon changed its methods of accounting for postemployment benefits, for postretirement benefits other than pensions for its foreign benefit plans, and for internal systems development costs. In addition, in 1993 Avon changed its methods of accounting for income taxes and postretirement benefits other than pensions for its United States benefit plans. These changes are discussed in Notes 1 and 2 to the consolidated financial statements. /s/Coopers & Lybrand L.L.P. New York, New York February 1, 1995 51 52
Eleven-Year Review In millions, except per share and employee data 1994 1993 1992 1991 ---- ---- ---- ---- Income data Net sales $4,266.5 $3,844.1 $3,660.5 $3,441.0 Interest expense 50.8 45.2 43.7 75.4 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 433.8 394.6 290.0(2) 352.9 Income from continuing operations before minority interest and cumulative effect of accounting changes 270.3 243.8 169.4(2) 209.3 Income from continuing operations 264.8 236.9 164.2(2) 204.8 Income (loss) from discontinued operations, net (23.8) 2.7 10.8 (69.1) Cumulative effect of accounting changes, net (1) (45.2) (107.5) - - Net income (loss) 195.8 132.1 175.0(2) 135.7 -------- -------- -------- -------- Income (loss) per share of common stock - assuming full dilution(4) Continuing operations $ 3.75 $ 3.28 $ 2.28(2) $ 2.86 Discontinued operations (.34) .04 .15 (.97) Cumulative effect of accounting changes (.64) (1.49) - - Net income (loss) 2.77 1.83 2.43(2) 1.89 -------- -------- -------- -------- Cash dividends per share Common $ 1.90 $ 1.70 $ 1.50 $ 4.40(6) Preferred - - - 1.011 Balance sheet data Working capital $ 9.3 $ 23.1 $ (99.5) $ (135.3) Capital expenditures 99.9 58.1 62.7 61.2 Property, plant and equipment, net 528.4 476.2 476.7 468.5 Total assets 1,978.3 1,918.7 1,692.6 1,693.3 Debt maturing within one year 61.2 70.4 37.3 143.8 Long-term debt 116.5 123.7 177.7 208.1 Total debt 177.7 194.1 215.0 351.9 Shareholders' equity 185.6 314.0 310.5 251.6 -------- -------- -------- -------- Number of employees United States 7,900 8,000 8,700 9,200 International 22,500 21,500 20,700 20,900 -------- -------- -------- -------- Total employees 30,400 29,500 29,400 30,100 ======== ======== ======== ======== Note: The data in the Eleven-Year Review has been restated to reflect the retail businesses, Giorgio (1987-1994) and Parfums Stern (1987-1989), as discontinued operations. (1)Effective January 1, 1994, Avon adopted Statement of Financial Accounting Standards Board ("FAS") No. 112, "Employer's Accounting for Postemployment Benefits", for all applicable operations and FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", for its foreign benefit plans. In addition, effective January 1, 1994, Avon changed its method of accounting for internal systems development costs. These development costs are being expensed as incurred, rather than deferred and amortized over future periods. Effective January 1, 1993, Avon adopted FAS No. 106, for its U.S. retiree health care and life insurance benefit plans and FAS No. 109, "Accounting for Income Taxes". See Notes 2 and 7 of the Notes to the Consolidated Financial Statements. Effective January 1, 1988 Avon adopted FAS No. 96, "Accounting for Income Taxes". (2)In 1992, Avon began the restructuring of its worldwide manufacturing and distribution facilities and recorded a provision of $96.0 ($64.4 after tax, or $.90 per share) as described in Note 4 of the Notes to the Consolidated Financial Statements. Income from continuing operations in 1993 increased 4% from $228.6, or $3.17 per share, excluding the 1992 restructuring charge. (3)The following nonrecurring transactions were recorded during 1987: a pretax gain of $191.0 ($121.1 after tax, or $1.72 per share) resulting from the sale of subsidiary stock and a special provision for restructure of $47.5 ($29.4 after tax, or $.42 per share). (4)In management's opinion, per share amounts assuming full dilution provide the most meaningful comparison of per share data because they show the full effect of the conversion of 18.0 preferred shares into approximately 12.96 common shares on June 3, 1991. (5)In 1989 and 1988, the calculation of income per share assuming full dilution is antidilutive and, accordingly, the primary income per share amount is reported as "income per share of common stock assuming full dilution." (6)Includes special dividend of $3.00 paid in 1991.
52 53 ELEVEN-YEAR REVIEW (CONTINUED)
Avon Products, Inc. 1990 1989 1988 1987 1986 1985 1984 ---- ---- ---- ---- ---- ---- ---- $3,291.6 $2,998.3 $2,835.2 $2,506.2 $2,235.1 $2,003.7 $2,260.3 77.5 118.0 112.9 77.5 45.5 49.1 45.0 305.6 252.9 208.3 359.6(3) 205.0 171.2 253.9 180.3 134.1 121.1 224.8(3) 127.1 104.9 141.2 174.1 126.5 112.3 222.8(3) 126.7 105.0 141.4 21.2 (71.9) (536.8) (63.7) 32.0 (164.9) 40.3 - - 20.0 - - - - 195.3 54.6 (404.5) 159.1(3) 158.7 (59.9) 181.7 -------- -------- -------- -------- -------- -------- -------- $ 2.32 $ 1.63(5) $ 1.51(5) $ 3.16(3) $ 1.78 $ 1.31 $ 1.68 .28 (1.29)(5) (8.62)(5) (.90) .45 (2.07) .48 - - .32(5) - - - - 2.60 .34(5) (6.79)(5) 2.26(3) 2.23 (.76) 2.16 -------- -------- -------- -------- -------- -------- -------- $ 1.00 $ 1.00 $ 1.50 $ 2.00 $ 2.00 $ 2.00 $ 2.00 2.00 2.00 1.00 - - - - $ 71.6 $ 56.3 $ 51.0 $ 122.2 $ 129.1 $ 186.6 $ 191.7 36.3 33.3 46.0 45.9 57.5 47.2 73.6 467.2 472.5 529.1 561.3 536.2 544.6 526.6 2,010.1 1,994.1 2,362.6 2,419.6 2,143.0 2,188.0 2,188.7 207.1 151.7 205.6 62.8 104.6 54.5 56.8 334.8 673.2 917.9 801.8 671.2 592.2 392.0 541.9 824.9 1,123.5 864.6 775.8 646.7 448.8 393.4 228.3 239.3 758.6 681.3 926.4 1,157.1 -------- -------- -------- -------- -------- -------- -------- 9,500 9,400 9,700 10,500 10,800 10,000 11,400 20,300 19,900 18,400 18,100 17,700 18,200 18.300 -------- -------- -------- -------- -------- -------- -------- 29,800 29,300 28,100 28,600 28,500 28,200 29,700 ======== ======== ======== ======== ======== ======== ========
53 EX-21 9 EX-21 EXHIBIT 21 EXHIBIT 21 AVON PRODUCTS, INC. AND SUBSIDIARIES Subsidiaries of the Registrant Avon Products, Inc. ("Avon"), a New York corporation, consolidates all majority owned subsidiaries. The principal consolidated subsidiaries, all of which are wholly owned by Avon or its wholly owned subsidiaries, except as indicated, are listed below. Included on the list below are subsidiaries which individually are not significant subsidiaries but primarily represent subsidiaries in countries in which the Company has direct selling operations. The names of Avon's other consolidated subsidiaries, which are primarily wholly owned by Avon or its wholly owned subsidiaries, are not listed because all such subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. Incorporation - Company Country or State ------- ---------------- Cosmeticos Avon S.A.C.I...................... Argentina Avon Cosmetics Australia Proprietary Limited. Australia Avon Products Pty. Limited................... Australia Avon Cosmetics Vertriebsgesellschaft m.b.h... Austria Arlington Limited............................ Bermuda Stratford Insurance Company, Ltd. ........... Bermuda Productos Avon Bolivia Ltda.................. Bolivia Avon Cosmeticos, Ltda........................ Brazil Avon Canada, Inc............................. Canada Avon Direct Inc.............................. Canada Cosmeticos Avon S.A.......................... Chile Compagnia de Venta Directa Seller Chile S.A.. Chile Avon Products (Guangzhou) Ltd (60%).......... China CS Avon Cosmetics, Spol. sr.o................ Czech Republic Avon Capital Corporation..................... Delaware Avon Diversified Services, Inc............... Delaware Avon International Operations, Inc........... Delaware Avon-Lomalinda, Inc.......................... Delaware Avon-Mirabella, Inc.......................... Delaware Giorgio Beverly Hills, Inc................... Delaware Marbella Dominicana.......................... Delaware Manila Manufacturing Company................. Delaware Productos Avon S.A........................... Dominican Republic Productos Avon Ecuador S.A................... Ecuador Productos Avon, S.A.......................... El Salvador Avon S.A..................................... France Avon Cosmetics GmbH.......................... Germany Productos Avon de Guatemala, S.A............. Guatemala Productos Avon, S.A.......................... Honduras Avon Cosmetics (FEBO) Limited................ Hong Kong Avon Cosmetics Hungary KFT................... Hungary Avon Service Center, Inc..................... Illinois P.T. Avon Indonesia (49%).................... Indonesia Albee Dublin Finance Company................. Ireland Avon Limited................................. Ireland Avon Cosmetics S.p.A......................... Italy Avon Products Company Limited (66%).......... Japan Live and Life Company Limited................ Japan Avon Cosmetics (Malaysia) Sendirian Berhad... Malaysia Avon Cosmetics, S.A. de C.V.................. Mexico Avonova, S.A. de C.V. (49%).................. Mexico M.I. Holdings, Inc........................... Missouri Avon International Finance N.V............... Netherlands Antilles Avon Americas, Ltd........................... New York Avon Overseas Capital Corporation............ New York Avon Cosmetics Limited....................... New Zealand Productos Avon S.A........................... Panama Productos Avon S.A........................... Peru Productos De Belleza, S.A.................... Peru Avon Cosmetics, Inc.......................... Philippines Avon Products Mfg., Inc...................... Philippines Beautifont Products, Inc..................... Philippines Avon Cosmetics Polska Sp. z o.o.............. Poland Avon Cosmeticos, Lda......................... Portugal Avon Cosmetics Spol s r.o.................... Slovak Republic Avon Beauty Products Company................. Russia Avon Cosmetics, S.A.......................... Spain Avon Cosmetics (Taiwan) Ltd.................. Taiwan Avon Products Limited........................ Taiwan Avon Cosmetics (Thailand) Ltd................ Thailand California Manufacturing Company Ltd......... Thailand Eczacibasi Avon Kosmetik Urunleri Sanayi ve Ticaret A.S. (50%)...................... Turkey Avon Cosmetics Limited....................... United Kingdom Avon European Holdings Ltd................... United Kingdom Avon Cosmetics de Venezuela, C.A............. Venezuela EX-24 10 EX-24 EXHIBIT 24 FORM 10-K POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, WARD M. MILLER, JR. and MARTIN H. MICHAEL and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign the 1994 Annual Report on Form 10-K of Avon Products, Inc. and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, thereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this power of attorney as of March 2, 1995. Signature Title --------- ----- /s/James E. Preston Chairman of the Board and Chief ------------------------------ Executive Officer - Principal James E. Preston Executive Officer and Director /s/Edward J. Robinson President, Chief Operating ------------------------------ Officer and Director Edward J. Robinson /s/Edwina D. Woodbury Senior Vice President, ------------------------------ Chief Financial Officer - Edwina D. Woodbury Principal Financial Officer /s/Robert J. Conologue Group Vice President, ------------------------------ Controller - Principal Accounting Robert J. Conologue Officer Director ------------------------------ Brenda Barnes /s/Richard S. Barton Director ------------------------------ Richard S. Barton Signature Title --------- ----- /s/Daniel B. Burke Director ------------------------------ Daniel B. Burke /s/Remedios Diaz Oliver Director ------------------------------ Remedios Diaz Oliver ------------------------------ Director Stanley C. Gault /s/George V. Grune Director ------------------------------ George V. Grune /s/Charles S. Locke Director ------------------------------ Charles S. Locke /s/Ann S. Moore Director ------------------------------ Ann S. Moore /s/John J. Phelan, Jr. Director ------------------------------ John J. Phelan, Jr. /s/Joseph A. Rice Director ------------------------------ Joseph A. Rice /s/Cecily C. Selby Director ------------------------------ Cecily C. Selby -2- EX-27 11 EX-27
5 Exhibit 27 Avon Products, Inc. Financial Data Schedule This schedule contains summary financial information extracted from the Avon Products, Inc. financial statements as of December 31, 1994 and for the twelve months then ended included in the Form 10-K as of December 31, 1994 and is qualified in its entirety by reference to such financial statements. 1,000,000 DEC-31-1994 JAN-01-1994 DEC-31-1994 YEAR 214 0 401 (27) 412 1,150 1,146 (618) 1,978 1,141 116 0 0 43 142 1,978 4,266 4,266 1,672 3,706 33 64 50 433 163 264 (23) 0 (45) 195 2.77 2.77