-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Sgs+Xa/56KYvUl9V86i3uiUDk9S0pr/5237CawYaOPon62B1Lk6ZEG79OpWz2T/u H54e/bN6LdYc5t9mQnRMzw== 0000008868-98-000002.txt : 19980326 0000008868-98-000002.hdr.sgml : 19980326 ACCESSION NUMBER: 0000008868-98-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVON PRODUCTS INC CENTRAL INDEX KEY: 0000008868 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 130544597 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04881 FILM NUMBER: 98573040 BUSINESS ADDRESS: STREET 1: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105-0196 BUSINESS PHONE: 2122825000 MAIL ADDRESS: STREET 2: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105-0196 10-K 1 DECEMBER 31, 1997 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, 1997 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___ to ___ Commission file number 1-4881 AVON PRODUCTS, INC. ____________________________________________________ (Exact name of registrant as specified in its charter) New York 13-0544597 ______________________________ __________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1345 Avenue of the Americas, New York, N.Y. 10105-0196 _______________________________________________________ (New address of principal executive offices) (212) 282-5000 _________________ (Telephone number) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered _______________________________ _______________________ Common stock (par value $.25) New York Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]. The aggregate market value of Common Stock (par value $.25) held by non-affiliates at February 28, 1998 was $9.3 billion. The number of shares of Common Stock (par value $.25) outstanding at February 28, 1998 was 131,794,374. Documents Incorporated by Reference Parts I and II Portions of the 1997 Annual Report to Shareholders. Part III Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders. 1 PART I ITEM 1. BUSINESS Certain statements in this report which are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, levels of activity, performance or achievement of Avon Products, Inc. ("Avon" or "Company"), or industry results, to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the ability of the Company to implement its business strategy; the Company's access to financing and its management of foreign currency risks; the Company's ability to successfully identify new business opportunities; the Company's ability to attract and retain key executives; the Company's ability to achieve anticipated cost savings and profitability targets; changes in the industry; competition; the effect of regulatory and legal restrictions imposed by foreign governments; the effect of regulatory and legal proceedings and other factors as discussed in Item 1 of this Form 10-K. As a result of the foregoing and other factors, no assurance can be given as to the future results and achievements of the Company. Neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements. General The Company is one of the world's leading manufacturers and marketers of beauty and related products, which include cosmetics, fragrance and toiletries (CFT); 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 29 in Avon's 1997 Annual Report to Shareholders. Recent Developments On October 23, 1997, the Company announced that it has raised its long-term growth targets for sales and earnings and that it expects to record special charges in connection with a major re-engineering program. Commencing in 1998, the long- term target for sales growth has been raised to 8-10% compounded annually, and its target for earnings per share growth has been raised to 16-18% annually. Previously, the Company targeted long-term sales growth of 6-8% and long-term earnings per share growth of 13-15%. The higher targets come largely as a result of initiatives currently underway and others under review intended to reduce costs by 2 up to $400.0 million a year by 2000, with $200.0 million of the savings being reinvested concurrently in advertising and marketing programs to boost sales. Avon expects to record special charges totaling $150.0- $200.0 million pretax to cover one-time costs associated with the re- engineering program. Approximately half the charges are expected to be recorded in the first quarter of 1998, with the balance to be recorded in early 1999. Approximately $50.0 million of the charges will be cash related. On December 11, 1997, the Company announced several senior executive changes including the appointment of Charles R. Perrin as Vice Chairman and Chief Operating Officer and the promotion of Andrea Jung to President, as part of an overall management succession plan for the Company. In addition, Andrea Jung and Susan J. Kropf, head of Avon's North American business, were elected to Avon's Board of Directors, effective January 5, 1998. Mr. Perrin will serve as Chief Operating Officer until mid-1998, when he is expected to be elected Chief Executive Officer, succeeding James E. Preston in that capacity. Mr. Preston will then continue as Chairman of the Board on a full-time basis until his current term as director expires in May 1999. Avon expects Ms. Jung to become Chief Operating Officer later in 1998, succeeding Mr. Perrin in that capacity. On February 9, 1998, the Company announced that Robert J. Corti was promoted to Senior Vice President and Chief Financial Officer, effective February 5, 1998, succeeding Edwina D. Woodbury, in her CFO capacity. Ms. Woodbury, an Executive Vice President, will now be responsible full- time for Avon's business process redesign activities. Strategy Avon's global strategy is primarily focused on the following key growth initiatives: International Expansion Avon is one of the most widely recognized brand names in the world. The Company is particularly well positioned to capitalize on growth in new international markets due to high demand for quality products, underdeveloped retail infrastructures and relatively attractive earnings opportunity for women. The Company presently has operations in 44 countries outside the U.S. and its products are distributed in 90 more, for coverage in 135 markets and it continues to expand into new markets. The Company has entered 18 new markets since 1990, including Russia and China and rapidly emerging nations throughout Central Europe, and is currently evaluating several other markets in Eastern Europe and Asia Pacific. 3 Leveraging Direct Selling Channel The Company has revitalized its direct selling channel, enabling the Company to reach women quickly and efficiently as well as introduce new products that complement the core beauty business. In 1994, Avon introduced a line of apparel in the U.S., which by 1997 achieved over $500 million in sales. In 1996 and 1997, the Company had outstanding success with Barbie dolls, designed exclusively for Avon, making her the Company's best selling gift product ever. The relationship with Mattel was expanded in 1997 to include additional products. This array of products, available through the direct selling channel, increases earnings opportunities and presents a consistent beauty image to consumers across a broad product line. Customer Access and Image Enhancement To restore and accelerate growth in established industrial nations such as the U.S., Western Europe and Japan, the Company has developed new channels to reach customers and improve access to its products through direct mail catalogs, toll-free telephone numbers, buying by fax and "on line" with a new home page on the world-wide web, Avon.com. The Company has also updated the image of its core beauty products and has created a portfolio of global beauty brands. These contemporary products project a consistent, high quality image in all markets and include brands such as Anew, Avon Color, Far Away, Rare Gold, Natori, Millennia, Josie, and Avon Skin Care. Global brands are growing rapidly as a percentage of the Company's worldwide CFT business. In 1997 and 1996, they accounted for 39% and 26%, respectively, of core beauty sales. The development of global brands has also enabled the Company to achieve major economies of scale by consolidating certain functions like sourcing and logistics. Avon is also marketing a more vibrant beauty image through increased promotional spending and image-building programs. Distribution Avon's products are sold worldwide by approximately 2.6 million Representatives, approximately 445,000 of whom are in the United States. Almost all Representatives are women who sell on a part-time basis. Representatives are independent contractors or independent dealers, and are not agents or employees of Avon. Representatives purchase products directly from Avon and sell them directly to their customers. 4 The Company's products are sold to customers through a combination of direct selling and marketing utilizing independent Representatives, the mail, phone, fax or "on-line". Representatives go where the customers are, including in the home or in the workplace. In the United States, the Representative contacts customers, selling primarily through the use of brochures which also highlight new products and specially priced items for each two-week sales campaign. Product samples, demonstration products and selling aids such as make-up color charts are also used. Generally, the Representative forwards an order every two weeks to a designated distribution center. This order is processed and the products are assembled at the distribution center and delivered to the Representative's home, usually by a local delivery service. The Representative then delivers the merchandise and collects payment from the customer for their own account. Payment by the Representative to Avon is customarily made when the next order is forwarded to the distribution center. The cost of merchandise to the Representative varies according to the product category and/or to the total order size for each two-week sales campaign and averages approximately 60 percent of the recommended selling price. In order to increase Representative support in the United States and allow them to run their business more efficiently as well as to improve order processing accuracy, Avon employs certain electronic order systems. One of these systems permits Avon Representatives to submit add-on orders with a touch-tone telephone, enabling them to augment orders already submitted by placing a phone call. Another system, Avon's Personal Order Entry Terminal, permits the top-producing Representatives in the United States to transmit orders electronically by phone line, 24 hours a day, seven days a week. Outside the United States, each sales campaign is generally of a three or four week duration. Although terms of payment and cost of merchandise to the Representative vary from country to country, the basic method of direct selling and marketing by Representatives is essentially the same as that used in the United States, and substantially the same merchandising and promotional techniques are utilized. The recruiting and training of Representatives are the primary responsibilities of district managers. In the United States, each district manager has responsibility for a market area covered by 225 to 300 Representatives. District managers are employees of Avon and are paid a salary and a sales incentive based primarily on the increase over the prior year's sales of Avon products by Representatives in their district. 5 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 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 consistently low prices, while maintaining introductory specials and periodic sales on selected items for limited time periods. 6 From time to time, various regulations or laws have been proposed or adopted that would, in general, restrict the frequency or duration of, or volume of sales resulting from new product introductions, special prices or other special price offers. The Company's pricing flexibility and broad product lines are expected to be able to mitigate the effect of these regulations. Competitive Conditions The cosmetic, fragrance and toiletry; gift and decorative; apparel; and fashion jewelry and accessory industries are highly competitive. Avon is one of the leading manufacturers and distributors of cosmetics and fragrances in the United States. Its principal competitors are the large and well-known cosmetics and fragrances companies that manufacture and sell broad product lines through various types of retail establishments. There are many other companies that compete in particular products or product lines sold through retail establishments. Avon has many competitors in the gift and decorative products and apparel industries in the United States, including retail establishments, principally department stores, gift shops and direct- mail companies, specializing in these products. Avon is one of the leading distributors of fashion jewelry and accessories for women in the United States. Its principal competition in the fashion jewelry industry consists of a few large companies and many small companies that manufacture and sell fashion jewelry for women through retail establishments. The number of competitors and degree of competition that Avon faces in its foreign cosmetics, fragrance, toiletries and fashion jewelry markets varies widely from country to country. Avon is one of the leading manufacturers and distributors in the cosmetics, fragrance and toiletries industry in most of its foreign markets, as well as in the fashion jewelry industry in Europe. There are a number of direct-selling companies which sell product lines similar to Avon's, some of which also have worldwide operations and compete with Avon. Avon believes that the personalized customer service offered by Representatives; the high quality, attractive designs and reasonable prices of its products; new product introductions; and its guarantee of satisfaction are significant factors in establishing and maintaining its competitive position. 7 Avon's consolidated net sales, by classes of principal products, are as follows: Years ended December 31 1997 1996 1995 (In millions) Cosmetics, fragrance and toiletries $3,093.9 $2,946.8 $2,797.2 Gift and decorative 1,049.7 934.1 780.6 Apparel 565.6 556.3 500.5 Fashion jewelry and accessories 370.2 377.0 413.8 _______ _______ _______ $5,079.4 $4,814.2 $4,492.1 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 44 countries and Avon's products are distributed in some 90 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 produce its products. Avon has nineteen manufacturing laboratories around the world, three of which are principally devoted to the manufacture of fashion jewelry. In the United States, Avon's cosmetic, fragrance and toiletry products are produced in three manufacturing 8 laboratories for the four distribution centers. Also, in the United States, Avon's Discovery Toy business is supported by one distribution center. Most products sold in foreign countries are manufactured in Avon's facilities abroad. The fashion jewelry line is generally developed by Avon's staff and produced in its two manufacturing laboratories in Puerto Rico and Avon's manufacturing laboratory in Ireland or by several independent manufacturers. Trademarks and Patents Although Avon owns several patents and has several more patent applications pending in the United States Patent Office, its business, both in the United States and abroad, is not materially dependent upon patents or patent protection. Avon has no material licenses, franchises or concessions. Avon's major trademarks are protected by registration in the United States and the other countries where its products are marketed as well as in many other countries throughout the world. Contingencies Various lawsuits and claims (asserted and unasserted), arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. The Company is also involved in a number of proceedings arising out of the federal Superfund law and similar state laws. In some instances Avon, along with other companies, has been designated as a potentially responsible party which may be liable for costs associated with these various hazardous waste sites. In the opinion of Avon's management, based on its review of the information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1997 should not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. SEASONAL NATURE OF BUSINESS Avon's sales and earnings have a marked seasonal pattern characteristic of many companies selling cosmetics, fragrance and toiletries; gift and decorative products; apparel; and fashion jewelry. Christmas sales cause a sales peak in the fourth quarter of the year. Fourth quarter net sales were 30 percent and 31 percent of total net sales in 1997 and 1996, respectively, and fourth quarter pretax income 9 from continuing operations was 40 percent and 42 percent in 1997 and 1996, respectively. RESEARCH ACTIVITIES Avon's research and development department is a leader in the industry, based on the number of new product launches, including formulating effective beauty treatments relevant to women's needs. In addition, Avon's research and development supports its environmental responsibilities. A team of researchers and technicians apply the disciplines of science to the practical aspects of bringing products to market around the world. Relationships with well known dermatologists and other specialists extends Avon's own research to deliver new formulas and ingredients. Each year, Avon researchers test and develop more than 600 products in the cosmetic, fragrance, toiletry and jewelry categories as well as analyze, evaluate and develop gift and decorative products. Avon has pioneered many innovative products, including Skin-So- Soft, its best-selling bath oil; BioAdvance, the first skin care product with stabilized retinol, the purest form of Vitamin A; and Collagen Booster, the premier product to capitalize on Vitamin C technology. Avon also introduced the benefits of aromatherapy to millions of American women, encapsulated color for the Color-Release line and introduced alpha-hydroxy acid for cosmetic use in the Anew Perfecting Complex products. Today, Avon's Anew product line has been expanded to include technologically advanced products such as Retinol Recovery Complex PM Treatment and Night Force Vertical Lifting Complex. Night Force employs a patent-pending material named AVC10, a molecule that was engineered by Avon researchers over a three-year period. The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $29.9 million in 1997, $30.2 million in 1996 and $27.8 million in 1995. 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. A corporate environmental operations committee ensures that opportunities for environmental performance improvements are reflected in our products, packaging and manufacturing processes. In general, compliance with environmental regulations impacting Avon's global operations has not had, and is not anticipated to have, any material effect upon the 10 capital expenditures, financial position or competitive position of Avon. EMPLOYEES At December 31, 1997, Avon employed 34,995 people. Of these, 8,053 were employed in the United States and 26,942 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, fragrance and toiletries and fashion jewelry and distribution centers where offices are located and where finished merchandise is warehoused and shipped to Representatives in fulfillment of their orders. Substantially all of these properties are owned by Avon or its subsidiaries, are in good repair, adequately meet Avon's needs and operate at reasonable levels of productive capacity. The domestic manufacturing laboratories are located in Morton Grove, IL; Springdale, OH; and Suffern, NY; the distribution centers are located in Atlanta, GA; Glenview, IL; Newark, DE; Pasadena, CA; and Discovery Toy's distribution center located in Livermore, CA. International properties include four manufacturing laboratories, including a fashion jewelry manufacturing laboratory in Ireland, and ten distribution centers in Europe; five manufacturing laboratories and eleven distribution centers in Latin America; one manufacturing and one distribution center in Canada; and four manufacturing laboratories and ten distribution centers in the Pacific region. The research and development laboratories are located in Suffern, NY. Avon leases space for its executive and administrative offices in New York City and its fashion jewelry manufacturing facilities in Puerto Rico. During 1997, the office facilities for the U.S. and global operations were relocated within New York City. ITEM 3. LEGAL PROCEEDINGS Various lawsuits and claims (asserted and unasserted), arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In 1991, a class action lawsuit was initiated against Avon on behalf of certain classes of holders of Avon's Preferred Equity- Redemption Cumulative Stock ("PERCS"). This lawsuit alleges various contract and securities law claims relating to the PERCS (which were fully redeemed that year). Avon has rejected the assertions in this case, believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. 11 In the opinion of Avon's management, based on its review of the information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1997 should not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. Avon is involved in a number of proceedings arising out of the federal Superfund law and similar state laws. In some instances Avon, along with other companies, has been designated as a potentially responsible party which may be liable for costs associated with these various hazardous waste sites. Based upon Avon's current knowledge of the proceedings, management believes, without taking into consideration any insurance recoveries, if any, that in the aggregate they would not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 1997. ______________ Executive Officers of the Registrant Officers are elected by the Board of Directors at its first meeting following the Annual Meeting of Shareholders. Officers serve until the first meeting of the Board of Directors following the Annual Meeting of Shareholders at which Directors are elected for the succeeding year, or until their successors are elected, except in the event of death, resignation or removal, or the earlier termination of the term of office. Information regarding employment contracts between Avon and named executive officers is incorporated by reference to the "Contracts with Executives" section of Avon's Proxy Statement for the 1998 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 64 1971 Vice Chairman, Chief Operating Officer and Director Charles R. Perrin 52 1998(1) President and Director Andrea Jung 39 1997(2) Executive Vice President, Business Process Redesign Edwina D. Woodbury 46 1990 12 Executive Vice President and Director Susan J. Kropf 49 1997 Executive Vice Presidents Jose Ferreira 41 1997 Fernando Lezama 58 1997 Senior Vice President, General Counsel and Secretary Ward M. Miller, Jr. 65 1993(3) Senior Vice President and Chief Financial Officer Robert J. Corti 48 1988 Senior Vice President Marcia L. Worthing 55 1988 Vice President and Controller Michael R. Mathieson 45 1995 (1) Charles R. Perrin joined Avon as Vice Chairman and Chief Operating Officer in January 1998. Mr. Perrin has been a member of Avon's Board of Directors since May 1996. Prior to joining Avon, he was Chairman and Chief Executive Officer of Duracell International Inc. from 1994 until 1996. He joined Duracell in 1985 as President of its U.S. Business and was named President and Chief Operating Officer in 1992. (2) Andrea Jung was elected President in January 1998. Ms. Jung joined Avon in January 1994 as President, Product Marketing and was promoted to Executive Vice President, Global Marketing and New Business in March 1997. Prior to joining Avon, she was Executive Vice President of Nieman Marcus and Senior Vice President, General Merchandise for I. Magnin. (3) 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 40 of Avon's 1997 Annual Report to Shareholders. 13 ITEM 6. SELECTED FINANCIAL DATA The information for the five-year period 1993 through 1997 is incorporated by reference to the "Eleven-Year Review" on pages 58 and 59 of Avon's 1997 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This information is incorporated by reference to "Management's Discussion and Analysis" on pages 27 through 39 of Avon's 1997 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 41 through 56, together with the report thereon of Coopers & Lybrand L.L.P., on page 57, and "Results of Operations by Quarter" on page 40 of Avon's 1997 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 1998 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 1998 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 1998 Annual Meeting of Shareholders. 14 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 1998 Annual Meeting of Shareholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Annual Report to Shareholders Form 10-K Page Number Page Number ____________ ___________ (a)1. Consolidated Financial Statements of Avon Products, Inc. and Subsidiaries Consolidated statement of income for each of the years in the three-year period ended December 31, 1997 41 Consolidated balance sheet at December 31, 1997 and 1996 42 Consolidated statement of cash flows for each of the years in the three-year period ended December 31, 1997 43 Consolidated statement of changes in shareholders' equity for each of the years in the three-year period ended December 31, 1997 44 Notes to consolidated financial statements 45-56 Report of Independent Accountants Coopers & Lybrand L.L.P. 57 (a) 2. Financial Statement Schedules Report of Independent Accountants Coopers & Lybrand L.L.P. S-1 Consent of Independent Accountants Coopers & Lybrand L.L.P. S-2 Financial statement schedule for each of the years in the three-year period ended December 31, 1997 II.--Valuation and qualifying accounts S-3 15 Financial statements of the registrant and all other financial statement schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements and notes. (a)3. Exhibits Exhibit Number Description _______ ___________ 3.1 Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on May 13, 1996 (incorporated by reference to Exhibit 3.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 3.2 By-laws of Avon, as restated, effective June 6, 1996 (incorporated by reference to Exhibit 3.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 4.1 Instrument defining the rights of holders of Avon's preferred share purchase rights to purchase Avon's Series A Junior Participating Preferred Stock (reference is made to Article IIIA of the restated Certificate of Incorporation of Avon, filed with the Secretary of State of New York State on August 12, 1988 and included as Exhibit 3.1 to the 1993 Annual Report on Form 10-K). 4.2 Rights Agreement, dated as of March 30, 1988 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (as successor to Morgan Shareholder Services Trust Company) incorporated by reference to Exhibit 1 to Avon's Registration Statement on Form 8-A, filed April 7, 1988 and refiled under Form SE as of December 31, 1996). 4.3 Amendment, dated as of January 3, 1989, to the Rights Agreement (incorporated by reference to Exhibit 3 to Avon's Amendment No. 1 on Form 8, filed January 4, 1989, amending its Registration Statement on Form 8-A, filed April 7, 1988 and refiled under Form SE as of December 31, 1996). 4.4 Second Amendment, dated as of April 5, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(c) to Avon's Current Report on Form 8-K, dated April 5, 1990 and refiled under Form SE as of December 31, 1996). 4.5 Third Amendment, dated as of May 10, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(d) to Avon's Current Report on Form 8-K, dated May 10, 1990 and refiled under Form SE as of December 31, 1996). 16 4.6 Amended and Restated Revolving Credit and Competitive Advance Facility Agreement, dated as of August 8, 1996, among Avon, Avon Capital Corporation and a group of banks and other lenders (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 4.7 Indenture dated as of August 1, 1997 between Avon as Issuer, and The Chase Manhattan Bank, as Trustee relating to the 6.55% Notes due 2007 (incorporated by reference to Exhibit 4.2 to Avon's Registration Statement on Form S-4, Registration Statement No. 333-41299 filed December 1, 1997). 4.8 Rights Agreement, dated as of March 30, 1998 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (incorporated by reference to Exhibit to Avon's Registration Statement on Form 8-A, filed March 18, 1998). 10.1* Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders on May 6, 1993 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.2* Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.3* First Amendment to the 1993 Avon Stock Incentive Plan effective January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as of January 1, 1997 approved by stockholders on May 1, 1997. 10.5* Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of September 1, 1994 (incorporated by reference to Exhibit 10.6 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.6* Benefit Restoration Pension Plan of Avon Products, Inc., effective as of January 1, 1994 (incorporated by reference to Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.7* Trust Agreement, amended and restated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990 and refiled under Form SE for the year ended December 31, 1996). 17 10.8* First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.9* Second Amendment, dated as of June 12, 1992 to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.10* Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1996 (incorporated by reference to Exhibit 10.12 to Avon's Annual Report on Form 10-K for the year ended December 31, 1996). 10.12* Trust Agreement, dated as of April 21, 1995, between Avon and Chemical Bank, amending and restating the Trust Agreement as of August 3, 1989 between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.14 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.13* Instrument of Amendment, effective as of April 1, 1990, amending various employee benefit plans and agreements as stipulated in the Instrument of Amendment (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990 and refiled under Form SE for the year ended December 31, 1996). 10.14* Employment Agreement, dated as of November 1, 1995, between Avon and James E. Preston (incorporated by reference to Exhibit 10.16 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.15* Stock Option Agreement between Avon and James E. Preston dated October 30, 1995 (incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.16* Supplemental Employment Agreement, dated as of December 10, 1997 between Avon and James E. Preston. 10.17* Stock Option Agreement between Avon and James E. Preston dated December 10, 1997. 18 10.18* Employment Agreement, dated as of December 11, 1997 between Avon and Charles R. Perrin. 10.19* Stock Option Agreement between Avon and Charles R. Perrin dated December 10, 1997. 10.20* Employment Agreement dated as of December 11, 1997 between Avon and Andrea Jung. 10.21* 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). 10.22* Avon Products, Inc. Compensation Plan for Non-Employee Directors, effective May 1, 1997. 10.23* Avon Products, Inc. Board of Directors' Deferred Compensation Plan, amended and restated, effective January 1, 1997. 10.24* Trust Agreement, dated as of December 31, 1991, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991 and refiled under Form SE for the year ended December 31, 1996). 10.25* 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). 13 Portions of the Annual Report to Shareholders for the year ended December 31, 1997 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, 1997 will be filed by amendment. * The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. (b) Reports on Form 8-K There was no Form 8-K filed during the fourth quarter of 1997. 19 On March 18, 1998, the Company filed a Form 8-K announcing that on March 5, 1998, the Board of Directors of Avon Products, Inc., adopted a new shareholder rights plan, effective as of the close of business on March 30, 1998, to replace the Company's existing shareholder rights plan, which expires at the close of business on March 30, 1998. (c) Avon's Annual Report on Form 10-K for the year ended December 31, 1997, 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. 20 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 1998. Avon Products, Inc. By /s/WARD M. MILLER, JR. Ward M. Miller, Jr. Senior Vice President, General Counsel and Secretary 21 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date _________ _____ ____ * ______________________ James E. Preston Chairman of the Board and Chief Executive Officer - Principal Executive Officer and Director March 5, 1998 * ______________________ Charles R. Perrin Vice Chairman, Chief Operating Officer and Director March 5, 1998 * ______________________ Robert J. Corti Senior Vice President, Chief Financial Officer Principal Financial Officer March 5, 1998 * ______________________ Michael R. Mathieson Vice President and Controller - Principal Accounting Officer March 5, 1998 * ______________________ Andrea Jung President, Avon Products, Inc. and Director March 5, 1998 * ______________________ Susan J. Kropf Executive Vice President, President, Avon North America and Director March 5, 1998 BRENDA BARNES ) RICHARD S. BARTON ) REMEDIOS DIAZ OLIVER ) EDWARD T. FOGARTY ) Directors March 5, 1998 CHARLES S. LOCKE ) ANN S. MOORE ) /s/WARD M. MILLER, JR. ______________________ Ward M. Miller, Jr. Attorney-in- fact March 5, 1998 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, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997 has been incorporated by reference in this Form 10-K from page 57 of the 1997 Annual Report to Shareholders of Avon Products, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule for each of the years in the three- year period ended December 31, 1997, 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, 1997 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 5, 1998 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. 33- 47209), Form S-8 (Reg. No. 33-60218), Form S-8 (Reg. No. 33-60918), and Form S-8 (Reg. No. 33-65998), of our reports dated February 5, 1998 on our audits of (i) the consolidated financial statements of Avon Products, Inc. as of December 31, 1997 and 1996 and for each of the years in the three-year period ended December 31, 1997, which report is included in the 1997 Annual Report to Shareholders and incorporated by reference in this Annual Report on Form 10-K and (ii) the 1997, 1996 and 1995 financial statement schedule of Avon Products, Inc., which report is included in this Annual Report on Form 10-K. New York, New York March 23, 1998 S-3 AVON PRODUCTS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (In millions) Years ended December 31 Additions ____________________ Balance at Charged to Charged Balance beginning costs and to other at end of period expenses accounts Deductions of period 1997 Allowance for doubtful accounts receivable $36.4 $80.8 $ -- $81.7(a) $35.5 1996 Allowance for doubtful accounts receivable $32.6 $79.0 $ -- $75.2(a) $36.4 1995 Allowance for doubtful accounts receivable $27.3 $78.0 $ -- $72.7(a) $32.6 (a) Accounts written off, net of recoveries and foreign currency translation adjustment. EX-99 2 EX-INDEX SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 Commission file number 1-4881 ____________ AVON PRODUCTS, INC. (Exact name of registrant as specified in its charter) ____________ EXHIBITS INDEX TO EXHIBITS (a)3. Exhibits Exhibit Number Description 3.1 Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on May 13, 1996 (incorporated by reference to Exhibit 3.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 3.2 By-laws of Avon, as restated, effective June 6, 1996 (incorporated by reference to Exhibit 3.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 4.1 Instrument defining the rights of holders of Avon's preferred share purchase rights to purchase Avon's Series A Junior Participating Preferred Stock (reference is made to Article IIIA of the restated Certificate of Incorporation of Avon, filed with the Secretary of State of New York State on August 12, 1988 and included as Exhibit 3.1 to the 1993 Annual Report on Form 10-K). 4.2 Rights Agreement, dated as of March 30, 1988 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (as successor to Morgan Shareholder Services Trust Company) incorporated by reference to Exhibit 1 to Avon's Registration Statement on Form 8-A, filed April 7, 1988 and refiled under Form SE as of December 31, 1996). 4.3 Amendment, dated as of January 3, 1989, to the Rights Agreement (incorporated by reference to Exhibit 3 to Avon's Amendment No. 1 on Form 8, filed January 4, 1989, amending its Registration Statement on Form 8-A, filed April 7, 1988 and refiled under Form SE as of December 31, 1996). 4.4 Second Amendment, dated as of April 5, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(c) to Avon's Current Report on Form 8-K, dated April 5, 1990 and refiled under Form SE as of December 31, 1996). 4.5 Third Amendment, dated as of May 10, 1990, to the Rights Agreement (incorporated by reference to Exhibit 4(d) to Avon's Current Report on Form 8-K, dated May 10, 1990) and refiled under Form SE as of December 31, 1996). 4.6 Amended and Restated Revolving Credit and Competitive Advance Facility Agreement, dated as of August 8, 1996, among Avon, Avon Capital Corporation and a group of banks and other lenders (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 4.7 Indenture dated as of August 1, 1997 between Avon as Issuer, and The Chase Manhattan Bank, as Trustee relating to the 6.55% Notes due 2007 (incorporated by reference to Exhibit 4.2 to Avon's Registration Statement S-4, Registration Statement No. 333-41299 filed December 1, 1997). 4.8 Rights Agreement, dated as of March 30, 1998 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (incorporated by reference to Exhibit to Avon's Registration Statement on Form 8-A, filed March 18, 1998). 10.1* Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders on May 6, 1993 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.2* Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.3* First Amendment to the 1993 Avon Stock Incentive Plan effective January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as of January 1,1997, approved by stockholders on May 1, 1997. 10.5* Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of September 1, 1994 (incorporated by reference to Exhibit 10.6 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.6* Benefit Restoration Pension Plan of Avon Products, Inc., effective as of January 1, 1994 (incorporated by reference to Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994. 10.7* Trust Agreement, amended and restated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990 and refiled under Form SE for the year ended December 31, 1996). 10.8* First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.9* Second Amendment, dated as of June 12, 1992 to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A.(incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.10* Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1996 (incorporated by reference to Exhibit 10.12 to Avon's Annual Report on Form 10-K for the year ended December 31, 1996). 10.12* Trust Agreement, dated as of April 21, 1995, between Avon and Chemical Bank, amending and restating the Trust Agreement as of August 3, 1989 between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.14 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.13* Instrument of Amendment, effective as of April 1, 1990, amending various employee benefit plans and agreements as stipulated in the Instrument of Amendment (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990 and refiled under Form SE for the year ended December 31, 1996). 10.14* Employment Agreement, dated as of November 1, 1995, between Avon and James E. Preston (incorporated by reference to Exhibit 10.16 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.15* Stock Option Agreement between Avon and James E. Preston dated October 30, 1995 (incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.16* Supplemental Employment Agreement, dated as of December 10, 1997 between Avon and James E. Preston. 10.17* Stock Option Agreement between Avon and James E. Preston dated December 10, 1997. 10.18* Employment Agreement, dated as of December 11, 1997 between Avon and Charles R. Perrin. 10.19* Stock Option Agreement between Avon and Charles R. Perrin dated December 10, 1997. 10.20* Employment Agreement dated as of December 11, 1997 between Avon and Andrea Jung. 10.21* 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). 10.22* Avon Products, Inc. Compensation Plan for Non-Employee Directors, effective May 1, 1997. 10.23* Avon Products, Inc. Board of Directors' Deferred Compensation Plan, amended and restated, effective January 1, 1997. 10.24* Trust Agreement, dated as of December 31, 1991, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991 and refiled under Form SE for the year ended December 31, 1996). 10.25* 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). 13 Portions of the Annual Report to Shareholders for the year ended December 31, 1997 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, 1997 will be filed by amendment. * The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. EX-10.4 3 EXHIBIT 10.4 EXHIBIT 10.4 Appendix B AVON PRODUCTS, INC. 1997 Long Term Incentive Plan I. INTRODUCTION 1.1 Purpose The purpose of this Plan is to provide additional incentives for officers and key employees of the Company to operate and manage the Company's business in a manner that will achieve long-term growth and profitability and to provide a means of recruiting and retaining such officers and key employees. 1.2 Relationship to 1993 Stock Incentive Plan This Plan is subject to the Avon Products, Inc. 1993 Stock Incentive Plan which has been approved by the Company's shareholders. Accordingly, this Plan shall be deemed a "Stock Incentive Program" as defined therein and shall be subject to the terms and conditions of the 1993 Stock Incentive Plan. In the event of any conflict, the terms and conditions of the 1993 Stock Incentive Plan shall govern. 1.3 General Description This Plan provides for the grant to eligible Participants of two forms of incentive awards with respect to a performance period covering the three years 1997 - 1999, namely Performance Units and Stock Options. While Performance Units will consist of potential cash incentives, both types of awards shall be considered as "Stock Incentives" eligible for grants under the 1993 Stock Incentive Plan. The Plan also provides for the grant of shares of Restricted Stock Awards as set forth in Part V hereof. 1.4 Definitions Capitalized words and phrases in this Plan shall have the same meaning as the definitions set forth in the 1993 Stock Incentive Plan, to the extent that they are defined therein, except as otherwise indicated. Definitions used in this Plan shall have the meanings set forth below: "Committee" means the Compensation Committee of the Board of Directors, each member of which is an "outside director", within the meaning of Section 162(m) of the 1986 Internal Revenue Code. "Performance Period" means the period of three consecutive calendar years commencing with the year 1997. "Plan" means the Avon Products, Inc. 1997 Long Term Incentive Plan. "Senior Officers" means those Company Executive Officers who are subject to Section 16 of the Exchange Act and all other officers who report to the Company's Chief Executive Officer. II. PARTICIPATION 2.1 General Rule The Committee shall determine the levels and categories of officers and key employees of the Company and its Subsidiaries who shall be Participants in the Plan. The initial grant of Plan awards shall be made during the first 90 days of the first year of the Performance Period. 2.2 Participants Not Eligible at Time of Initial Grant If an employee becomes eligible for Participation subsequent to the date of initial grant, he or she may become a Participant at such later date, with awards to such a Participant to be subject to the terms set forth below. III. PERFORMANCE UNIT AWARDS 3.1 Performance Objectives Performance Units will realize a cash payout value following the end of the Performance Period, only to the extent applicable Performance Objectives have been attained for such period. Performance Objectives applicable to Performance Units awarded to Global Participants, i.e. participants who are not principally members of management of an Operating Business Unit ("OBU") or Country, shall solely be the Cumulative EPS Objectives described below. With respect to Participants who are principally members of management of an OBU or Country, 60% of their awarded units shall be subject to the Cumulative EPS Objectives and 40% subject to their applicable Non-EPS Performance Objectives, as described below. Appropriate adjustments in Performance Objectives may be made with respect to the Performance Units of Participants who during the course of the Performance Period transfer between OBU's or Countries or have their status changed to or from that of a Global Participant to reflect for the balance of the Period the Performance Objectives associated with each Participant's new status or location. At the discretion of the Committee, however, a Participant's compensation payable pursuant to this Article III may be reduced to the amount otherwise payable solely based on the Performance Objectives applicable to such Participant as of the time of his or her initial grant of Performance Units. 3.2 Definitions for Performance Award Units Terms applicable to Performance Unit awards shall have the meanings set forth below: a. "Base Grant Value" means the target cash value of each Performance Unit which shall be $100. b. "Ultimate Payment Value" means the cash value of each Performance Unit, which shall be determined by the Committee following the end of the Performance Period. Such value may be as high as $200 if the Maximum Growth Rate has been attained, or zero if the Threshold Growth Rate has not been attained. c. "Earnings Per Share" means the fully diluted earnings per share of Stock calculated on the weighted average number of shares outstanding as reported in the Company's Annual Report based on consolidated net income (before extraordinary items and income taxes related thereto) of the Company, as determined by the Company's independent public accountants. Such determination and report shall be made as of the end of the Performance Period with respect to such Period and the applicable Base Year in conformity with generally accepted accounting principles consistently applied. d. "Cumulative EPS" means the aggregate total Earnings Per Share for the entire Performance Period. e. "Target EPS Objective" means the Cumulative EPS established by the Committee for the Performance Period which, if exactly attained, shall result in an Ultimate Payment Value of $100 per Performance Unit. f. "Maximum EPS Objective" means the Cumulative EPS established by the Committee for the Performance Period which, if attained or exceeded, shall result in an Ultimate Payment Value of $200 per Performance Unit. g. "Threshold EPS Objective" means the Cumulative EPS established by the Committee for the Performance Period which, if exactly attained, shall result in an Ultimate Payment Value of $50 per Performance Unit and, if not attained, shall result in an Ultimate Payment Value of zero for all Performance Units. h. "Cumulative Operating Profit" means the aggregate total operating profit achieved for the entire Performance Period of a designated OBU or Country business unit. i. "Cumulative Pretax Contribution" means the aggregate total pretax contribution to the Company achieved for the entire Performance Period by a designated Country business unit. j. "Non-EPS Performance Objectives" means the Cumulative Operating Profit or Cumulative Pretax Contribution objectives, as established by the Committee, which are applicable to that portion of a Participant's Performance Units whose value will be determined by the degree to which such objectives have been achieved. The value of such units will be zero, however, if the Threshold EPS Objective has not been achieved. k. "Target Non-EPS Performance Objectives" means the level of Cumulative Operating Profit or Cumulative Pretax Contribution, whichever is applicable, as established by the Committee, which, if exactly attained, shall result in an Ultimate Payment Value of $100 for each Performance Unit whose value is to be determined by Non-EPS Performance Objectives. l. "Maximum Non-EPS Performance Objectives" means the level of Cumulative Operating Profit or Cumulative Pretax Contribution, whichever is applicable, as established by the Committee, which, if attained or exceeded, shall result in an Ultimate Payment Value of $200 for each Performance Unit whose value is to be determined by Non-EPS Performance Objectives. m. "Threshold Non-EPS Performance Objectives" means the level of Cumulative Operating Profit or Cumulative Pretax Contribution, whichever is applicable, as established by the Committee which, if exactly attained, shall result in an Ultimate Payment Value of $50 for each Performance Unit whose value is to be determined by Non-EPS Performance Objectives. n. "Proration Tables" mean the tables established by the Committee which shall determine the Ultimate Values of Performance Units where the applicable performance attained exceeds its Threshold Objective but is less than its Maximum Objective (and is not exactly at Target). All of the foregoing Performance Objectives and Proration Tables shall be established by the Committee during the first 90 days of the Performance Period. 3.3 Grants of Performance Units The Committee shall authorize grants of Performance Units to Participants and establish the Performance Objectives to be applied for such units, including the Target, Maximum and Threshold levels of all relevant objectives and their Proration Tables. The Committee shall approve (a) all specific grants of Performance Units to Senior Officers and (b) an aggregate number of Performance Units to be granted other Participants, which shall be allocated by the Company's Chief Executive Officer. The number of Performance Units to be initially granted a Participant shall be determined as follows: (a) an annualized cash target amount shall be established, (b) such cash target amount shall be divided by the Base Grant Value of $100 and (c) the resulting number shall be multiplied by the number of years in the Performance Period (three). When a Participant is promoted to a higher level position, supplemental grants of Performance Units shall be awarded to such Participant determined by the amount of base salary increase attributable to the promotion and the same cash target percentage used in calculating his or her prior initial grant. The Committee reserves the right, however, to decline to grant such supplemental Performance Units. At any time during the Performance Period, grants of Performance Units may be made, at the Committee's sole discretion, to employees hired subsequent to the initial grant date or who otherwise have subsequently become eligible for Participation. All Performance Units granted subsequent to the initial grant date shall take into account the shorter period of time remaining between the date of the grant and the end of the Performance Period. If, for example, a grant was made effective as of the first day of the second year of the Performance Period, the cash target amount referred to in the preceding paragraph would be multiplied by two rather than three. In no event, however, may the total cash value for aggregate Performance Units awarded to any one Participant exceed $6,000,000. All Performance Units, regardless of when granted, shall be subject to the same performance criteria in determining Ultimate Payment Value, including the relevant three-year Performance Objectives. 3.4 Value Determination and Payment The Ultimate Payment Value(s) of all Performance Units shall be determined by the Committee as soon as practicable after the end of the Performance Period and its review of a report concerning actual Cumulative EPS for the period submitted to the Committee by the Company's independent public accountants, and the Cumulative Operating Profit and Cumulative Pretax Contribution totals submitted by the Company's Chief Financial Officer. The Ultimate Payment Value initially so determined for Performance Units shall be increased by 10% if an Avon Value Added ("AVA") growth objective for the Performance Period has been attained or exceeded. Such AVA "kicker" objective shall be established by the Committee during the first 90 days of the Performance Period. Payment to a Participant shall be made in a single sum in cash equal to the applicable Ultimate Payment Value(s), adjusted by any AVA kicker, multiplied by his or her total Performance Units and reduced by applicable tax withholding. Such payments shall be made as soon as practicable after the Committee determines such Ultimate Payment Value(s). 3.5 Termination of Employment During Performance Period If prior to the end of the Performance Period but after completion of the period's first calendar year, a Participant (a) dies while employed by the Company, (b) retires under the terms of a Company retirement plan or (c) is involuntarily terminated by the Company, other than for cause, such Participant shall remain entitled to a portion of the Performance Units granted to him or her. Such portion shall be the Participant's total number of Performance Units multiplied by a fraction, the numerator of which is the number of months in which such Participant was actively employed during the Participant's Performance Period (including the month during which employment terminated) and the denominator of which is 36 or, if fewer, the number of months from the effective date of the grant of the Participant's Performance Units to the end of the Performance Period (applicable in the case of grants first made after the initial grant). Except as provided below, no payment can be made for such retained Performance Units prior to the time the Committee has determined the Ultimate Payment Value(s) assigned to all Performance Units. To the extent applicable, if a Threshold Objective has not been attained, no payment would be made for any Performance Units subject to such Threshold Objective. At the discretion of the Committee, however, a payment may be made on behalf of a deceased Participant prior to the end of the Performance Period based on the above described proration formula and a Base Grant Value. Any payment made with respect to a Participant who has died shall be paid to the beneficiary designated by the Participant to receive the proceeds of any group life insurance coverage provided for the Participant by the Company. A Participant who has not designated such beneficiary, or who desires to designate a different beneficiary, may file with the Company a written designation of a beneficiary under the Plan, which designation may be changed or revoked only by the Participant. If no designation of beneficiary has been made under such life insurance coverage or filed with the Company, distribution shall be made to the Participant's spouse, if surviving, and if not, to the Participant's estate. No payment will be due any Participant who voluntarily terminates employment or whose employment has been involuntarily terminated by the Company for "cause" prior to the end of the Performance Period. Unless otherwise provided by an individual employment agreement, a Participant who is deemed terminated for cause pursuant to the terms of the applicable Company Severance Pay Plan, shall be deemed terminated for cause for purposes of this Plan. Except in the case of a "Change of Control" situation, any Participant who is terminated for any reason during the first year of the Performance Period is not entitled to any payment, provided that the Committee, at its discretion, may make a payment on behalf of a deceased Participant. No payment will be due any Participant who terminates employment and prior to the end of the Performance Period, without the written consent to the Company, (a) knowingly discloses confidential information concerning the Company, (b) accepts employment, or enters into a consulting arrangement with, another direct selling company that competes with the Company or (c) solicits any Company employees to leave to work for another employer. 3.6 Change of Control In the event that a Change of Control should occur, payment will be made with respect to all Performance Units as soon as practicable. The amount to be paid per Performance Unit shall be the greater of the Base Grant Value ($100) or such higher Ultimate Payment Value up to $200 as may be established by the Committee in its discretion. In the event Change of Control occurs prior to the end of the first calendar year of the Performance Period, only Base Grant Value will be used. IV. STOCK OPTION GRANTS 4.1 Initial Option Grants Any Participant eligible to receive an award of Performance Units at the time of initial grants for the Performance Period shall also receive a grant of Stock Options. Stock Options may also be granted to certain Participants who are not otherwise eligible to receive an award of performance units. Additional options may be granted to active Participants on the first and second anniversary dates of the initial grant or at such other times as the Committee may determine. The Committee shall approve (a) all specific grants of Stock Options to Senior Officers and (b) an aggregate number of Stock Options to be granted other Participants, which shall be allocated by the Company's Chief Executive Officer. 4.2 Supplemental Option Grants Participants who are first awarded Performance Units subsequent to the date of the initial grants may also receive a grant of Stock Options. 4.3 Terms and Conditions One-third of the shares covered by each Stock Option grant under the Plan shall be exercisable one year following the date of grant with another one-third exercisable one year thereafter and the final one-third one year after that. The exercisability of Stock Options is not affected by the Plan's performance objectives affecting Performance Units. All other terms and conditions shall be set forth in a form of Stock Option Agreement. All Stock Options granted under this Plan shall be consistent with, and subject to, the terms and conditions of the 1993 Stock Incentive Plan. 4.4 Elective Stock Options Within 60 days of the initial grant, a Participant may irrevocably elect, subject to the approval of the Committee, to exchange up to 50% of his or her initially granted Performance Units for additional "Elective Stock Options". Terms and conditions relating to the exchange of Performance Units for Elective Stock Options will be established by the Committee; the exercise terms for Elective Stock Options may be different than those for regular stock option grants under this Plan. In no event may any one Participant, however, receive stock options which, when aggregated with all of his or her other stock options and stock incentives awarded pursuant to the 1993 Plan, exceed 10% of the Maximum Plan Shares issuable under the 1993 Plan. V. RESTRICTED STOCK GRANTS At any time, and from time to time, during the Performance Period the Committee, at its discretion, may make grants of Restricted Stock to selected key employees. Such grants principally would be made for the purpose of attracting and retaining those individuals for whom such form of additional incentive compensation is deemed to be necessary and in the best interests of the Company. Such awards of Restricted Stock need not be affected by the terms and conditions of this Plan applicable to grants of Performance Units or Stock Options. The terms and conditions of any grant of Restricted Stock shall be set forth in a Stock Incentive Agreement executed by the employee and the Company. Such terms and conditions shall be consistent with the 1993 Stock Incentive Plan. Dividends on such shares, even though not vested, may, at the Committee's discretion, be paid out currently. VI. MISCELLANEOUS 6.1 The Company, the Board of Directors, the Committee and the officers and other employees of the Company shall not be liable for any action taken in good faith in interpreting and administering the Plan. 6.2 Pursuant to the provisions of the 1993 Stock Incentive Plan, the Company shall deduct from all cash payments and distributions under the Plan any taxes required to be withheld by federal, state, or local governments. 6.3 The establishment of the Plan shall not be construed as conferring on any Participant any right to continued employment or employment in any position, and the employment of any Participant may be terminated by the Company or by the Participant without regard to the effect which such action might have upon him or her as a Participant in the Plan. 6.4 No benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge; and any attempt to do so shall be void. No such benefit shall, prior to receipt thereof by the Participant, be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the Participant. No benefit or promise hereunder shall be secured by any specific assets of the Company, nor shall any assets of the Company be designated as attributable or allocated to the satisfaction of the Company's obligations under the Plan. 6.5 The Committee at any time may terminate and in any respect amend or modify the Plan, so long as such amendment does not adversely affect the rights of any Participant with respect to Performance Units and Stock Options granted prior to such amendment. The Committee shall have the power to interpret the Plan and all interpretations, determinations and actions by the Committee shall be final, conclusive and binding upon all parties. 6.6 The Plan shall be governed by and subject to the laws of the State of New York to the extent not preempted by federal law. VII. EFFECTIVE DATE This Plan is effective as of January 1, 1997, and its three-year Performance Period will commence with the Calendar Year 1997. EX-10.16 4 EXHIBIT 10.16 EXHIBIT 10.16 SUPPLEMENTAL EMPLOYMENT AGREEMENT THIS AGREEMENT, by and between AVON PRODUCTS, INC., a New York corporation (the "Corporation"), and JAMES E. PRESTON (the "Executive"), dated as of this 10th day of December, 1997. WHEREAS, the Corporation and the Executive have entered into an Employment Agreement between the parties dated as of November 1, 1995 ("1995 Agreement"), and now wish to modify certain of the provisions of the 1995 Agreement, effective as of the date of execution of this agreement; NOW, THEREFORE, the Corporation and the Executive do hereby agree as follows: 1. Applicability of 1995 Agreement Except as hereafter provided in this agreement to the contrary, the terms and conditions of the 1995 Agreement shall remain in full force and effect. 2. Term The term of the 1995 Agreement, as hereby amended, shall expire on May 6, 1999 which date shall constitute the new "Agreement Expiration Date". 3. Position The Executive shall continue to serve as Chairman of the Board of the Corporation until the Agreement Expiration Date. He shall also serve as Chief Executive Officer of the Corporation during such period until the Board of Directors elects another officer to be Chief Executive Officer, which change is anticipated to occur during 1998 effective subsequent to the Annual Meeting of Shareholders on May 7, 1998. 4. Compensation The Executive shall continue to receive a Base Salary at an annual rate of $1,000,000 for the balance of the term of this Supplemental Agreement. There would be no Base Salary increase in 1998 as set forth in the original 1995 Agreement. Concurrent with the date of this Supplemental Agreement the Executive has been granted non- qualified stock options for 155,530 shares of the Corporation's Common Stock but he does not participate in the Corporation's 1997 Long Term Incentive Plan. All other terms and conditions relating to compensation as set forth in the 1995 Agreement remain in effect for the balance of the term of this Supplemental Agreement. 5. Change of Control In the event of a Change of Control, as defined in the 1995 Agreement, the Executive will be entitled to all of the benefits and protections provided in the 1995 Agreement, as amended by this Supplemental Agreement. IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all effective as of the day and year first above written. AVON PRODUCTS, INC. By: /S/ Marcia L. Worthing Marcia L. Worthing, Senior Vice President, Human Resources and Corporate Affairs ATTEST: /s/ Ward M. Miller, Jr. Ward M. Miller, Jr., Secretary EXECUTIVE: /s/ James E. Preston James E. Preston Chairman of the Board and Chief Executive Officer EX-10.17 5 EXHIBIT 10.17 EXHIBIT 10.17 AVON PRODUCTS, INC. 1993 STOCK INCENTIVE PLAN STOCK OPTION AGREEMENT DATE OF GRANT: DECEMBER 10, 1997 1. Grant of Option. Pursuant to the provisions of the Avon Products, Inc. 1993 Stock Incentive Plan (the "Plan"), Avon Products, Inc. (the "Company"), on the above date has granted to James E. Preston (the "Optionee") the right and option to purchase from the Company a total of One Hundred and Fifty-Five Thousand and Five Hundred and Thirty (155,530) shares of Common Stock of the Company at the exercise price of $60.50 per share (the "Option"). This Option is subject to the terms and conditions of the Plan and those set forth in this Agreement. All capitalized terms used herein shall have the meaning set forth in the Plan, unless the context requires a different meaning. 2. Exercise of Option (a) Except as otherwise provided in this Agreement, this Option shall be exercisable in its entirety commencing May 6, 1999 and shall continue to be exercisable, in whole or in part, subject to the terms of Section 3 hereof. The Option may become exercisable at a date earlier than May 6, 1999 in the event of the Optionee's termination of employment due to death, permanent disability, involuntary termination by the Company other than for cause, or voluntary termination with the consent of the Company's Board of Directors. Except in the case of death, however, this Option may not be exercisable prior to December 10, 1998. (b) In accordance with the Plan, this entire Option shall be immediately cashed out effective as of the date of any "Change in Control", regardless of whether or not otherwise exercisable. For this purpose, the "Change in Control Price" shall be the higher of (i) the highest price paid for a share of Stock as reported on the New York Stock Exchange Composite Tape during the 12 month period ending with the effective date of Change in Control or (ii) the highest cash tender offer price for a share of Stock during such period. In the event that a tender offer for Stock consists of a combination of cash and securities, the Change in Control Price calculated under (ii) would be based solely on the cash price equivalent of such offer (c) Shares may be purchased by giving the Company's Corporate Secretary or Assistant Secretary written notice of exercise, specifying the number of shares to be purchased. The notice of exercise shall designate one of the following methods of purchase: (i) tender to the Company of a check for the full exercise price of the shares with respect to which such Option or portion thereof is exercised, or (ii) instructions to the Company to deliver all the shares being exercised to a broker-dealer with whom an arrangement has been made to deliver the full exercise price to the Company. The Company may establish special terms and conditions for this "cashless" exercise, and at any time may terminate availability of this form of purchase. 3. Expiration of Option. The Option shall expire or terminate and may not be exercised to any extent by the Optionee as of the first to occur of the following events: (a) December 10, 2007. (b) The Optionee's Termination of Employment for Cause (as defined below) or the Optionee's voluntary termination of employment without consent of the Company's Board of Directors; or (c) The Optionee's intentional material violation of any non- disclosure or non-compete covenant applicable to the Optionee as set forth in his employment agreement. Retirement prior to attainment of age 66 shall be deemed to constitute voluntary termination of employment for purposes of this Agreement. "Permanent Disability" shall have the same meaning as that provided by the Company's Long Term Disability Plan regardless of whether or not the Optionee is covered by such a plan. "Cause" shall have the same meaning as that provided by the Optionee's employment agreement dated as of November 1, 1995. 4. Tax Withholding. No distribution of shares may be made to the Optionee until the Company has received all amounts required for federal, state or local tax withholding. The method of discharging such withholding obligation shall be elected with the notice of exercise and may include (i) payment by check or (ii) use of a "cashless exercise" using a broker-dealer in a manner similar to that described in Section 2(c)(ii) hereof. The method of withholding shall be subject to such rules as the Committee may adopt from time-to-time. It is recognized by both parties that, based on current laws, the difference between the Fair Market Value of the shares purchased by an option exercise and the exercise price of such shares generally will constitute ordinary taxable income for federal income and "Medicare" tax purposes and for most state and local income tax purposes. 5. Notice. Any notices required to be given hereunder to the Company shall be addressed to the Secretary or Assistant Secretary of the Company at the Company's headquarters offices in New York City, New York. Any notice required to be given hereunder to the Optionee shall be addressed to the Optionee at his current address shown on the Company's records. Notice shall be sent by mail, express delivery or, if practical, by hand delivery. 6. Other Provisions. The provisions set forth in Section 5 of the Plan are specifically incorporated by reference in this Agreement, including but not limited to those pertaining to the following matters: a. Changes in Capitalization; Merger; Liquidation b. Right to Terminate Employment c. Non-alienation of Benefits d. Choice of Law IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Optionee, have entered this Agreement as of the Date of Grant first above written. AVON PRODUCTS, INC. /s/ James E. Preston /s/ Ward M. Miller, Jr. James E. Preston Ward M. Miller, Jr. Senior Vice President, General Counsel and Secretary EX-10.18 6 EXHIBIT 10.18 EXHIBIT 10.18 EMPLOYMENT AGREEMENT THIS AGREEMENT, by and between AVON PRODUCTS, INC., a New York corporation (the "Corporation"), and CHARLES R. PERRIN (the "Executive"), dated as of this 11th day of December, 1997. W I T N E S S E T H: WHEREAS, the Corporation desires to recognize the Executive's commitment to the Corporation and to confirm the right of the Executive to certain employment, compensation and severance benefits; and NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and other good and valuable consideration, the Corporation and the Executive do hereby agree as follows: 1. Employment. The Corporation shall employ the Executive and the Executive agrees to serve as an executive of the Corporation, in such capacities and upon such conditions as are hereinafter set forth. 2. Term. The Executive shall be considered an at-will employee and his employment may be terminated by either party subject to the obligations of the parties upon such termination as may be set forth hereinafter. 3. Position and Duties. (a) Position. The Executive shall serve as Vice Chairman and Chief Operating Officer, effective January 5, 1998. (b) Business Time. The Executive agrees to devote his full business time during normal business hours to the business and affairs of the Corporation and to use his best efforts to perform faithfully and efficiently the responsibilities assigned to him hereunder, to the extent necessary to discharge such responsibilities. The Executive's continuing to serve on any boards and committees on which he is serving or with which he is otherwise associated immediately preceding the date hereof, or his service on any other boards and committees of which the Corporation has knowledge and does not object, in writing, within thirty (30) days after first becoming aware of such service, shall not be deemed to interfere with the performance of the Executive's services to the Corporation. 4. Compensation. The Executive shall be entitled to the following compensation for as long as the Executive remains an employee of the Corporation; (a) Base Salary. The Executive shall receive a base salary (the "Base Salary") payable in equal bi-weekly installments at an annual rate of $750,000, effective as of January 1, 1998. The Corporation shall review the Base Salary periodically and in light of such review may increase (but not decrease) the Base Salary taking into account any change in the Executive's responsibilities, increases in compensation of other executives with comparable responsibilities, performance of the Executive and other pertinent factors, and such adjusted Base Salary shall then constitute the "Base Salary" for purposes of this Agreement. Neither the Base Salary nor any increase in Base Salary after the date hereof shall serve to limit or reduce any other obligation of the Corporation hereunder. (b) Annual Bonus. (I) In General. For each fiscal year of the Corporation during which he is employed by the Corporation the Executive shall be eligible to receive an annual bonus ("Annual Bonus") under the Corporation's Management Incentive Plan or successor annual incentive award plan. Such Annual Bonus shall be determined on the basis of an annual target bonus opportunity of at least seventy percent (70%) of the Base Salary paid the Executive with respect to such fiscal year, which annual target bonus opportunity may be increased but not decreased except for annual reductions of up to ten percent (10%) that apply to all officers of the Corporation. Each Annual Bonus (or portion thereof) shall be paid in cash in February of the year next following the year for which the Annual Bonus (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Corporation may make available to the Executive. (ii) Change of Control. Notwithstanding the foregoing, the Annual Bonus awarded to the Executive for each fiscal year of the Corporation ending during the period commencing on the Change of Control Date and ending on the third anniversary thereof or during the pendency of a Potential Change of Control, shall not be less than the largest bonus earned by or awarded to the Executive for any the of three fiscal years of the Corporation ending before such Potential Change of Control or Change of Control Date, as applicable, or for the fiscal year in which such Potential Change of Control or Change of Control Date occurs. For a fiscal year of the Corporation that commences but does not end before the third anniversary of a Change of Control Date, the Annual Bonus earned by or awarded to the Executive for that portion of such fiscal year shall not be less than a ratable portion (based on the total days elapsed in that fiscal year) of the Annual Bonus that would have been payable to the Executive had that entire fiscal year ended before the third anniversary of a Change of Control Date. (c) Incentive and Savings Plans; Retirement and Death Benefit Programs. The Executive shall be entitled to participate in all incentive and savings plans and programs, including stock option plans and other equity-based compensation plans, and in all employee retirement, executive retirement and executive death benefit plans on a basis no less favorable than that basis generally available to executives of the Corporation holding comparable positions or having comparable responsibilities who become an elected or appointed officer of the Corporation on or after the date on which the Executive first became an elected or appointed officer of the Corporation. The Executive is entitled to a death benefit under the SLIP of $750,000. (d) Other Benefit Plans. The Executive, his spouse and their eligible dependents (as defined in, and to the extent permitted by, the applicable plan), as the case may be, shall be entitled to participate in or be covered under all medical, dental, disability, group life, severance, accidental death and travel accident insurance plans and programs of the Corporation and any Affiliated Companies at the most favorable level of participation and providing the highest levels of benefits available to him and his dependents. (e) Other Perquisites. The Executive shall also be entitled to: (i) prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Corporation providing the highest level of reimbursement on the least restrictive basis available; (ii) paid vacation and fringe benefits in accordance with the most favorable policies of the Corporation; and (iii) all forms of other perquisite benefits made available to senior officers of the Corporation not specifically mentioned herein. (f) Effect of Change of Control on Benefit Plans and Other Perquisites. Without limiting the generality of Sections 4(c), 4(d) and 4(e) hereof, during the pendency of a Potential Change of Control or during the period commencing on a Change of Control Date and ending on the third anniversary thereof, the benefits provided for in such Sections may not be diminished from the highest level previously provided or available to the Executive immediately prior to the Potential Change of Control or within the ninety-day period prior to the Change of Control Date, as applicable. (g) Enhanced Retirement Benefits. If the Executive continues to be employed by the Corporation until July 1, 2004, he will be provided with a special enhanced retirement benefit commencing at retirement on or after that date. Details concerning retirement benefits will be determined in accordance with the terms of a separate agreement, but in the event of retirement at or after July 1, 2004, the benefit would approximate 50% of the sum of his salary and annual bonus averaged over the last three years of his service with the Corporation, the present value of which will be reduced by the sum of the present values of all retirement benefits accrued or paid with respect to his previous employment with other companies and all retirement benefits derived from other retirement programs maintained by the Corporation. The Executive will not participate in the Corporation's SERP. 5. Termination. (a) Disability. The Corporation may terminate the Executive's employment after having established the Executive's Disability, by giving to the Executive written notice of its intention to terminate his employment, and his employment with the Corporation shall terminate effective on the 90th day after receipt of such notice if the Executive shall fail to return to full-time performance of his duties within ninety (90) days after such receipt. (b) Voluntary Termination by Executive. Notwithstanding anything in this Agreement to the contrary, the Executive may, upon not less than thirty (30) days' written notice to the Corporation, voluntarily terminate employment for any reason (including retirement under the terms of the Corporation's retirement plan as in effect from time to time), provided that any termination by the Executive pursuant to Section 5(d) on account of Constructive Termination shall not be treated as a voluntary termination under this Section 5(b). (c) Termination by the Corporation. The Corporation at any time may terminate the Executive's employment for Cause or without Cause. (d) Constructive Termination. The Executive at any time may terminate his employment for Constructive Termination. (e) Notice of Termination. Any termination by the Corporation for Cause or by the Executive for Constructive Termination shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 14(c). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within ten (10) business days of the Corporation's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Constructive Termination, within 60 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than fifteen (15) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Constructive Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing his rights hereunder. (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be and (ii) in all other cases, the actual date on which the Executive's employment terminates. 6. Obligations of the Corporation Upon Termination. Upon termination of the Executive's employment with the Corporation, the Corporation shall have the following obligations (including the obligation to pay the cost of all benefits provided by the applicable benefit plan to the Executive and the Executive's family under this Section 6 except normal employee contributions required by the applicable benefit plan of other participating executives with comparable responsibilities), provided, however, that any item paid or payable under this Agreement shall be reduced by any amount paid or payable to the Executive and the Executive's family with respect to the same type of payment under the Severance Plan. For this purpose, any payment under this Agreement or the Severance Plan made over time shall be discounted to present value at the Interest Rate before reducing any payment under this Agreement by any amount paid or payable to the Executive under the Severance Plan. (a) Death and Retirement. If the Executive's employment is terminated by reason of the Executive's death or on or after the attainment of age sixty-five (65), this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement other than payment of the Accrued Obligations. Unless otherwise directed by the Executive (or, in the case of a Qualified Plan, as may be required by such plan) all Accrued Obligations shall be paid to the Executive, his beneficiaries or his estate, as applicable, in a lump sum in cash within thirty (30) days of the Date of Termination. In the event of the retirement of the Executive, he and his family shall be entitled to benefits generally available upon retirement to executives with comparable responsibilities or positions and their families. In the event of the Executive's death, his family shall be entitled to receive benefits generally available to the surviving families of executives with comparable responsibilities or positions. (b) Disability. If the Executive's employment is terminated by reason of the Executive's Disability, the Executive, the Executive's spouse and their eligible dependents (as defined in, and to the extent permitted by, the applicable plan) shall be entitled for a period of two years after the Date of Termination (or, if the Date of Termination occurs within three years after a Change of Control Date, until the earlier to occur of the Executive's 65th birthday or the third anniversary of the Change of Control Date, if later) to continue to participate in or be covered under the benefit plans and programs referred to in Section 4(d) or, at the Corporation's option, to receive equivalent benefits by alternate means, at least equal to those described in Section 4(d). Executive (or, in the case of any Qualified Plan, as may be required by such plan), the Executive shall also be paid all Accrued Obligations in a lump sum in cash within thirty (30) days of the Date of Termination. In addition, the Executive and the Executive's family shall be entitled to receive disability and other benefits generally available to executives with comparable responsibilities or positions. Notwithstanding the foregoing, in the event that the Date of Termination occurs during the pendency of a Potential Change of Control or during the three year period commencing on a Change of Control, the benefits provided to the Executive and his family shall not be less than the benefits generally available to executives with comparable responsibilities or positions immediately prior to the Potential Change of Control or within the ninety-day period prior to the Change of Control Date, as applicable. (c) Termination by the Corporation for Cause and Voluntary Termination by Executive. If the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Constructive Termination), the Corporation shall pay the Executive the Accrued Obligations. The Executive shall be paid all such Accrued Obligations in a lump sum in cash within thirty (30) days of the Date of Termination and the Corporation shall have no further obligations to the Executive under this Agreement, unless otherwise required by a Qualified Plan or specified pursuant to a valid election to defer the receipt of all or a portion of such payments made in accordance with any plan of deferred compensation sponsored by the Corporation. (d) Other Termination of Employment If Not Related to Change of Control or Potential Change of Control. If the Corporation (I) terminates the Executive's employment other than for Cause or Disability, or the Executive terminates his employment for Constructive Termination, and (ii) the Date of Termination occurs during a period which is not during the pendency of a Potential Change of Control or the three year period commencing on a Change of Control Date, the Corporation shall pay or provide to the Executive the following: (A) Cash Payment. The Corporation shall pay to the Executive in a lump sum in cash within fifteen (15) days after the Date of Termination the aggregate of the following amounts (other than amounts payable from Qualified Plans, non-qualified retirement plans and deferred compensation plans, which amounts shall be paid in accordance with the terms of such plans): (1) all Accrued Obligations plus, in the case of termination without Cause, two weeks of Base Salary in lieu of notice; (2) the present value, discounted at the Interest Rate as if paid monthly from the Date of Termination in arrears of the lesser of (I) thirty-six (36) months of the Executive's Base Salary at the rate in effect on the Date of Termination, and (II) the Executive's Base Salary (at the same rate) through the end of the month in which the executive attains age sixty- five (65); (3) a bonus equal to the Executive's target annual bonus for the year of termination; and (4) if the Date of Termination is on or after August 1st of the year of termination, a prorated bonus based on earned salary for that year (not to exceed the Executive's target bonus award for such year and, if the Executive's bonus is subject to the discretion of the Board, in the discretion of the Board). (B) Benefit Continuation. The Corporation shall provide for the continued participation of the Executive, his spouse and their eligible dependents (as defined in the applicable plan), the case maybe, for a period of two years after the Date of Termination, in the plans described in Section 4(d) on the same terms as described in Section 4(d). (e) Other Termination of Employment Occurring Within Three Years Following Change of Control. If the Corporation (i) terminates the Executive's employment other than for Cause or Disability, or the Executive terminates his employment for Constructive Termination and (ii) the Date of Termination occurs during the three (3) year period commencing on the Change of Control Date, the Corporation shall pay or provide the Executive the following: (A) Cash Payment. The Corporation shall pay to the Executive in a lump sum in cash within fifteen (15) days after the Date of Termination the aggregate of the following amounts (other than amounts payable from Qualified Plans, non-qualified retirement plans and deferred compensation plans, which amounts shall be paid in accordance with the terms of such plans): (1) all Accrued Obligations; (2) a cash amount equal to three (3) times the sum of (I) the Executive's annual Base Salary at the greater of the rate in effect as of the date when the Notice of Termination was given or the Change of Control Date; (II) the greater of the (x) Annual Bonus earned by or awarded to the Executive for the last fiscal year of the Corporation ending prior to the Change of Control Date or (y) the Annual Bonus earned by or awarded to the Executive for the fiscal year of the Corporation which includes the Change of Control Date; and (III) the present value, calculated using the Interest Rate, of (without duplication) the annualized value of the fringe benefits described under Section 4(e) of this Agreement, provided, however, that in no event shall the Executive entitled to receive under this clause (2) more than the greater of (I) product obtained by multiplying the amount determined as herein above provided in this clause by a fraction, the numerator of which shall be the number of months (including fractions of a month) which at the Date of Termination remain until the Executive attains age sixty-five (65) or if earlier, the third anniversary of the Change of Control Date and the denominator of which shall be thirty-six (36) and (II) an amount equal to the cash payment that would have been payable under Section 6(d)(A) hereof had the Change of Control not occurred. (3) a cash amount equal to the difference between (I) the sum of the maximum payments the Executive would have received for all awards (or other similar rights) outstanding at the Date of Termination and granted to the Executive under any long-term incentive compensation or performance plan of the Corporation if he had continued in the employ of the Corporation through the earlier to occur of the third anniversary of the Change of Control Date or the Executive's 65th birthday and the Corporation had met its maximum performance goals under each suc award and the maximum amount payable under each such award was paid and (II) any amounts actually paid under any such plan with respect to such awards. The cash amount payable pursuant to this paragraph shall include the maximum payment value of all outstanding Performance Units awarded the Executive under the Corporation's 1997 Long-Term Incentive Plan reduced by any amounts actually paid or payable under such plan with respect to such units; (B) Other Benefit Continuation. The Corporation shall provide for the continued participation of the Executive, his spouse and their eligible dependents (as defined in the applicable plan), as the case may be, for a period equal to the greater of two years after the Date of Termination or until the third anniversary of the Change of Control Date, in the plans described in Section 4(d) on the same terms as described in Section 4(d). In lieu of continued participation in medical and life insurance programs referred to the foregoing, the Executive may elect by written notice delivered to the Corporation prior to the Date of Termination, to receive an amount equal to three (3) times the annual cost to the Corporation (based on premium rates) of providing such coverage. (f) Other Termination of Employment Occurring During Pendency of Potential Change of Control. If the Corporation (i) terminates the Executive's employment other than for Cause or Disability, or the Executive terminates his employment for Constructive Termination and (ii) the Date of Termination occurs during the pendency of a Potential Change of Control, the Executive shall be entitled to the payments and benefits set forth in Section 6(d) hereof. In the event that a Change of Control occurs before the expiration of the pendency of the Potential Change of Control during which the Date of Termination occurred, the Executive shall also be entitled to such additional cash payments as would have been made under Section 6(e) hereof as if the Date of Termination had occurred immediately on the Change of Control Date, in excess of the amount of the cash payment made to the Executive under Section 6(d) hereof. In addition, in the event that a Change of Control occurs during the pendency of the Potential Change of Control during which the Date of Termination occurred, the Executive shall also be entitled to benefit continuation provided for under Section 6(e) in excess of the benefit continuation to which he was entitled under Section 6(d) hereunder. The Executive shall have an additional thirty (30) days after the Change of Control Date to provide a written election to the Corporation for a cash payment in lieu of those benefits for which the Executive has the choice under Section 6(e) between continued coverage and a cash payment. The cost (based on premium rates) of the period of coverage previously provided to the Executive before such election shall be subtracted from any such cash payment. (g) Discharge of Corporation's Obligations. Subject to the performance of its obligations under Sections 6, 7, 8 and 11, the Corporation shall have no further obligations to the Executive under this Agreement in respect of any termination by the Executive for Constructive Termination or by the Corporation other than for Cause or Disability. 7. Cash-Out of Stock Options and Restricted Stock. (a) In General. The Executive shall be entitled to receive a cash out of all of his outstanding restricted stock, stock option and other equity based awards upon a Change of Control in accordance with the terms of the Corporation's plans under which such awards were granted. To the extent that such awards are not cashed out pursuant to the terms of such plans, they shall become fully vested as of the Change of Control Date. (b) Effect of Termination During Pendency of a Potential Change of Control. If (i) the Executive is terminated during the pendency of a Potential Change of Control under circumstances giving rise to payments pursuant to Section 6(f) hereof, (ii) such termination results in a forfeiture of any of the Executive's restricted stock, options or other equity based awards under any of the Corporation's plans, and (iii) prior to the expiration of the pendency of that Potential Change of Control, a Change of Control occurs, the Executive shall thereupon be entitled to a cash payment equal to the amount the Executive would had received under such plans with respect to such restricted stock, options and other equity based awards as if he had remained in the Corporation's employ until the Change of Control Date. Such cash payment shall be made at the same time and in the same manner as payment would have been made under the applicable plans had the Executive remained in the Corporation's employ until the Change of Control Date. 8. Certain Further Payments by the Corporation. (a) Tax Reimbursement Payment. In the event that any amount or benefit paid or distributed to the Executive by the Corporation or any Affiliated Company, whether pursuant to this Agreement or otherwise (collectively, the "Covered Payments"), is or becomes subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code or any similar tax that may hereafter be imposed, the Corporation shall either pay to the Executive or contribute for the benefit of the Executive to a "rabbi" trust established by the Corporation prior to the Change of Control Date, at the time specified in Section 8(e) below, the Tax Reimbursement Payment (as defined below). The Tax Reimbursement Payment is defined as an amount, which when added to the Covered Payments and reduced by any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Agreement (but without reduction for any federal, state or local income or employment tax on such Covered Payments), shall be equal to the sum of (i) the amount of the Covered Payments, and (ii) an amount equal to the product of any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income and the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is to be made. (b) Determining Excise Tax. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the opinion of the Corporation's independent certified public accountants, which, in the case of Covered Payments made after the Change of Control Date, shall be the Corporation's independent certified public accountants appointed prior to the Change of Control Date, or tax counsel selected by such accountants (the "Accountants"), such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount", or such "parachute payments" are otherwise not subject to such Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (c) Applicable Tax Rates and Deductions. For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed: (i) to pay federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, (ii) to pay any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of the Executive's adjusted gross income), and (iii) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income. (d) Subsequent Events. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Corporation, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that has been paid to the Executive or to federal, state or local tax authorities on the Executive's behalf and that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Corporation has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Corporation shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Corporation shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Corporation shall make an additional Tax Reimbursement Payment in respect of such excess (which Tax Reimbursement Payment shall include any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (e) Date of Payment. The portion of the Tax Reimbursement Payment attributable to a Covered Payment shall be paid to the Executive or to a "rabbi" trust established by the Corporation prior to the Change of Control Date within ten (10) business days following the payment of the Covered Payment. If the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Corporation shall either pay to the Executive or contribute for the benefit of the Executive to a "rabbi" trust established by the Corporation prior to the Change of Control Date, an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (which Tax Reimbursement Payment shall include interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than forty-five (45) calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall be repaid or refunded pursuant to the provisions of Section 8(d) above. 9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Corporation or any of its Affiliated Companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Corporation or any Affiliated Companies, including, but not limited to stock option or restricted stock agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Corporation or any Affiliated Companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 10. Full Settlement. Except as provided in Section 12(b), the Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. In no event shall the Executive be obligated to seek other employment by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. In the event that the Executive shall in good faith give a Notice of Termination for Constructive Termination and it shall thereafter be determined that Constructive Termination did not take place, the employment of the Executive shall, unless the Corporation and the Executive shall otherwise mutually agree, be deemed to have terminated, at the date of giving such purported Notice of Termination, by mutual consent of the Corporation and the Executive and, except as provided in the last preceding sentence, the Executive shall be entitled to receive only those payments and benefits which he would have been entitled to receive at such date had he terminated his employment voluntarily at such date under this Agreement. 11. Legal Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, the Corporation shall pay all reasonable attorney fees and expenses incurred by the Executive in pursuing such claim, provided that the Executive is successful as to at least part of the disputed claim by reason of litigation, arbitration or settlement. 12. Confidential Information and Noncompetition. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Corporation all secret or confidential information, knowledge or data, including without limitation all trade secrets, relating to the Corporation or any Affiliated Companies, and their respective businesses, (i) obtained by the Executive during his employment by the Corporation or any of its Affiliated Companies and (ii) which is not otherwise publicly known (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Corporation, the Executive shall not without the prior written consent of the Corporation, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Corporation and those designated by it. In no event shall an asserted violation of the provisions of this Section 12(a) constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) Upon termination of the Executive's employment for any reason whatsoever prior to a Change of Control, the Executive shall not, without the prior written consent of the Corporation, during the two- year period following the Date of Termination (i) accept employment or enter into a consulting or advisory arrangement with Amway Corporation, Sara Lee Corporation, Premark International, Inc., Mary Kay Cosmetics, Inc., or any of their affiliates; or (ii) directly solicit or aid in the direct solicitation of any employees of the Corporation or an Affiliated Company to leave their employment. In the event the Executive violates the terms of this Section 12(b), all benefit continuation coverage that the Executive and/or his family members are then receiving pursuant to the terms of Section 6(d) shall cease. Also, in the event that this Section 12(b) is determined to be unenforceable in part, it shall be construed to be enforceable to the maximum extent permitted by law. 13. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Corporation, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Corporation and its successors. The Corporation shall require any successor to all or substantially all of the business and/or assets of the Corporation, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Corporation would be required to perform if no such succession had taken place. 14. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. (b) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the address listed on the last page hereof If to the Corporation: Avon Products, Inc. 1345 Avenue of the Americas New York, New York 10105-0196 Attention: Secretary (with a copy to the attention of the General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith). Notice and communications shall be effective when actually received by the addressee. (d) Tax Withholding. The Corporation may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (f) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (g) Entire Agreement. This Agreement expresses the entire understanding and agreement of the parties regarding the terms and conditions governing the Executive's employment with the Corporation, and all prior agreements governing the Executive's employment with the Corporation shall have no further effect; provided, however, that except as specifically provided herein, the terms of this Agreement do not supersede the terms of any grant or award to the Executive under the 1993 Stock Incentive Plan, any Long Term Incentive Plan, Management Incentive Plan and any other similar or successor plan or program. 15. Definitions. (a) "Accountants" shall have the meaning set forth in Section 8(b). (b) "Accrued Obligations" shall mean (i) the Executive's full Base Salary through the Date of Termination, (ii) in the case of death or retirement, the product of the Annual Bonus paid to the Executive for the last full fiscal year of the Corporation and a fraction, the numerator of which is the number of days in the current fiscal year of the Corporation through the Date of Termination, and the denominator of which is 365, (iii) any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Corporation and any accrued vacation pay for the current year not yet paid by the Corporation, (iv) any amounts or benefits owing to the Executive or to the Executive's beneficiaries under the then applicable employee benefit plans or policies of the Corporation and (v) any amounts owing to the Executive for reimbursement of expenses properly incurred by the Executive prior to the Date of Termination and which are reimbursable in accordance with the reimbursement policy of the Corporation described in Section 4(e). (c) "Affiliated Company" shall mean any company controlling, controlled by or under common control with the Corporation. (d) "Annual Bonus" shall have the meaning set forth in Section 4(b). (e) "Base Salary" shall have the meaning set forth in Section 4(a). (f) "Board" shall mean the Board of Directors of the Corporation. (g) "Cause" shall mean (i) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Corporation's business or reputation or (ii) repeated material violations by the Executive of his obligations under Section 3 of this Agreement which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Corporation's business or reputation and as to which material violations the Board has notified the Executive in writing. (h) A "Change of Control" means: (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 Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this Subsection (A), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Corporation, (ii) any acquisition by the Corporation, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of Subsection (C) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Corporation Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Corporation, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Corporation Voting Securities; or (B) individuals who as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation'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; or (C) the approval by the shareholders of the Corporation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Voting Securities, (ii) no Person (excluding any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Notwithstanding the foregoing, no Change of Control shall be deemed to have occurred for purposes of this Agreement (i) by reason of any actions or events in which the Executive participates in a capacity other than in his capacity as Executive (or as a director of the Corporation or a Subsidiary, where applicable) or (ii) if prior to what otherwise would have been a Change of Control Date, the Executive is demoted below the position described in Section 3(a) hereof and the Board provides written notification to the Executive, no later than thirty (30) days thereafter, that a Change of Control will not be deemed to occur with respect to the Executive. (i) "Change of Control Date" shall mean the date on which a Change of Control shall be deemed to have occurred. (j) "Code" shall mean the Internal Revenue Code of 1986, as amended. (k) "Constructive Termination" shall mean any of the following: (A) Reduction in Base Salary. (B) Reduction in annual target bonus opportunity (excluding annual reductions of up to 10% that apply to all officers of the Corporation). (C) A change of more than twenty-five (25) miles in the office or location where the Executive is based. (D) (1) General. With respect to any period not within the three year period following a Change of Control Date and not during the pendency of a Potential Change of Control, a demotion to a position below that of Vice Chairman. (2) Change of Control. With respect to any period during the pendency of a Potential Change of Control and the three year period following a Change of Control Date, unless with the express written consent of the Executive, (I) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive's position, authority or responsibilities as contemplated by Section 3(b) of this Agreement, or (II) any other substantial change in such position, including titles, authority or responsibilities from those previously held by the Executive prior to the Potential Change of Control or Change of Control Date, as applicable. The Executive's position, authority and responsibilities shall not be regard as not commensurate with previous position, authority and responsibilities merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Corporation. (E) (1) In General. With respect to any period not within the three year period following a Change of Control Date and not during the pendency of a Potential Change of Control, any material reduction in any of the benefits described in Sections 4(c) through 4(e) hereof (excluding, in each case, reductions that apply to all officers of the Corporation). (2) Change of Control. With respect to any period during the pendency of a Potential Change of Control and the three year period following a Change of Control Date, any failure by the Corporation to comply with any of the provisions of Section 4 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Corporation promptly after receipt of notice thereof given by the Executive. (F) Any failure of the Corporation to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 13(b), provided that the successor has had actual written notice of the existence of this Agreement and its terms and an opportunity to assume the Corporation's responsibilities under this Agreement during a period of ten (10) business days after receipt of such notice. (l) "Covered Payments" shall have the meaning set forth in Section 8(a). (m) "Date of Termination" shall have the meaning set forth in Section 5(f). (n) "Disability" shall mean disability, which would entitle the Executive to receive full long-term disability benefits under the Corporation's long- term disability plan on terms substantially similar to those of the long-term disability plan as in on the date of this Agreement. (o) "Excise Tax" shall have the meaning as set forth in Section 8(a). (p) "Interest Rate" shall mean the interest rate payable on one year Treasury Bills in effect on the day that is 30 business days (days other than Saturday, Sunday or legal holidays in the City of New York) prior to the Date of Termination. (q) "Notice of Termination" shall have the meaning as set forth in Section 5(f). (r) "Potential Change of Control" shall be deemed to have occurred if: (A) the commencement of a tender or exchange offer by any third person (other than a tender or exchange offer which, if consummated, would not result in a Change of Control) for 20% or more of the then outstanding shares of common stock or combined voting power of the Corporation's then outstanding voting securities; (B) the execution of an agreement by the Corporation, the consummation of which would result in the occurrence of a Change of Control; (C) the public announcement by any person (including the Corporation) of an intention to take or to consider taking actions which if consummated would constitute a Change of Control other than through a contested election for directors of the Corporation; or (D) the adoption by the Board, as a result of other circumstances, including circumstances similar or related to the foregoing, or a resolution to the effect that, for purposes of this Agreement, a Potential Change of Control has occurred. A Potential Change of Control will be deemed to be pending from the occurrence of the event giving rise to the Potential Change of Control until the earlier of the first anniversary thereof or the date the Board determines in good faith that such events will not result in the occurrence of a Change of Control. Notwithstanding the foregoing, no Potential Change of Control shall be deemed to have occurred for purposes of this Agreement (i) by reason of any actions or events in which the Executive participates in a capacity other than in his capacity as Executive (or as a director of the Corporation or a Subsidiary, as applicable) or (ii) if prior to occurrence of an event that would have given rise to a Potential Change of Control, the Executive is demoted below the position described in Section 3(a) hereof and the Board provides written notification to the Executive, no later than thirty (30) days thereafter, that a Potential Change of Control will not be deemed to occur with respect to the Executive. (s) "Qualified Plan" shall mean an employee benefit plan qualified (or which is intended to be qualified) under Section 401(a) of the Code. (t) "SERP" shall mean the Supplemental Executive Retirement Plan of Avon Products, Inc. (u) "Severance Plan" shall mean Avon Products, Inc. Severance Plan, or any successor thereof. (v) "SLIP" shall mean the Supplemental Life Plan of Avon Products, Inc. (w) "Subsidiary" shall mean any majority owned subsidiary of the Corporation. (x) "Tax Reimbursement Payment" shall have the meaning set forth in Section 8(a). IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all effective as of the day and year first above written. AVON PRODUCTS, INC. By:/s/ Marcia L. Worthing Marcia L. Worthing Title Senior Vice President Human Resources & Corp. Affairs ATTEST: /s/ Ward M. Miller, Jr. Title: Senior Vice President, General Counsel & Sec. (CORPORATE SEAL) EXECUTIVE: /s/ Charles R. Perrin Address: 80 Pumping Station Road Ridgefield, CT 06877 EX-10.19 7 EXHIBIT 10.19 EXHIBIT 10.19 AVON PRODUCTS, INC. 1993 STOCK INCENTIVE PLAN STOCK OPTION AGREEMENT DATE OF GRANT: DECEMBER 10, 1997 1. Grant of Option. Pursuant to the provisions of its 1993 Stock Incentive Plan (the "Plan"), Avon Products, Inc. (the "Company"), on the above date has granted to Charles R. Perrin (the "Optionee") the right and option to purchase from the Company a total of 100,000 shares of Common Stock of the Company at the exercise price of $60.50 per share (the "Option"). This Option is subject to the terms and conditions of the Plan and those set forth in this Agreement. All capitalized terms used herein shall have the meaning set forth in the Plan, unless the context requires a different meaning. 2. Exercise of Option This option shall be in two sections having different exercise rights, with Option Grant A covering 37,500 shares and Option Grant B covering 62,500 shares. (a) Option Grant A (37,500 shares) This Option shall be exercisable in three installments of 12,500 shares each. The first installment shall be exercisable on December 10, 1998, the second on December 10, 1999 and the third on December 10, 2000, with all 37,500 shares fully exercisable thereafter. To the extent that any of the above installments is not exercised when it becomes exercisable, it shall not expire, but shall continue to be exercisable at any time thereafter until this Option shall terminate, expire or be surrendered. (b) Option Grant B (62,500 shares) This Option shall also be exercisable in three installments, with the first installment of 20,833 shares exercisable on December 10, 2000. The second installment of 20,833 shares shall be exercisable on December 10, 2001 and the final installment of 20,834 shares exercisable on December 10, 2002, with all 62,500 shares fully exercisable thereafter. To the extent that any of the above installments is not exercised when it becomes exercisable, it shall not expire, but shall continue to be exercisable at any time thereafter until this Option shall terminate, expire or be surrendered (c) In accordance with the Plan this entire Option (both portions) shall be immediately cashed out effective as of the date of any "Change in Control", regardless of whether or not any portion is otherwise exercisable. For this purpose, the "Change in Control Price" shall be the higher of (i) the highest price paid for a share of Stock as reported on the New York Stock Exchange Composite Tape during the 12 month period ending with the effective date of Change in Control or (ii) the highest cash tender offer price for a share of Stock during such period. In the event that a tender offer for Stock consists of a combination of cash and securities, the Change in Control Price calculated under (ii) would be based solely on the cash price equivalent of such offer. (d) Shares may be purchased by giving the Company's Corporate Secretary or Assistant Secretary written notice of exercise, specifying the number of shares to be purchased. The notice of exercise shall designate one of the following methods of purchase: (i) tender to the Company of a check for the full exercise price of the shares with respect to which such Option or portion thereof is exercised, or (ii) instructions to the Company to deliver all the shares being exercised to a broker-dealer with whom an arrangement has been made to deliver the full exercise price to the Company. The Company may establish special terms and conditions for this "cashless" exercise, and at any time may terminate availability of this form of purchase. 3. Expiration of Option. The Option (both portions) shall expire or terminate and may not be exercised to any extent by the Optionee as of the first to occur of the following events: (a) The tenth anniversary of the Date of Grant, or such earlier time as the Company may determine is necessary or appropriate in light of applicable foreign tax laws; or (b) The second anniversary of the date of the Optionee's Termination of Employment by reason of death, Permanent Disability or Retirement; or (c) The Optionee's Termination of Employment for Cause (as defined below); or (d) The date that is ninety days after Termination of Employment of the Optionee for a reason other than for Cause, death, Permanent Disability or Retirement. If the Optionee's employment is involuntarily terminated by the Company other than for Cause, however, the option may be extended for up to an additional 270 days at the discretion of the Company, or (e) The Optionee's violation of any non-disclosure or non-compete covenant applicable to the Optionee as set forth in his severance agreement, employment contract or any Company policy, regardless of whether or not the Optionee has terminated employment due to Permanent Disability or Retirement, provided that expiration of the Option may not be effective prior to the date of Termination of Employment. In the event of Termination of Employment because of death, Permanent Disability or Retirement, the entire Option shall immediately become exercisable as to all shares, notwithstanding Section 2 of this Agreement. "Retirement" means retirement at or after completion of five (5) years of service with the Company. "Permanent Disability" shall have the same meaning as that provided by the Company's Long Term Disability Plan regardless of whether or not the Optionee is covered by such plan. "Cause" shall have the same meaning as that provided by the Optionee's employment contract. In addition, termination for cause shall include any termination due to acts of dishonesty or gross misconduct on the part of the Optionee which results, or is intended to result, in damage to the Company's business reputation. 4. Tax Withholding. No distribution of shares may be made to the Optionee until the Company has received all amounts required for federal, state or local tax withholding. The method of discharging such withholding obligation shall be elected with the notice of exercise and may include (i) payment by check, or (ii) use of a 'cashless exercise' using a broker-dealer in a manner similar to that described in Section 2(d)(ii) hereof. The method of withholding shall be subject to such rules as the Company may adopt from time to time. It is recognized by both parties that, based on current laws, the difference between the Fair Market Value of the shares purchased by an option exercise and the exercise price of such shares generally will constitute ordinary taxable income for federal income and "Medicare" tax purposes and for most state and local income tax purposes. 5. Notice. Any notices required to be given hereunder to the Company shall be addressed to the Secretary or Assistant Secretary of the Company at the Company's headquarters offices in New York City, New York. Any notice required to be given hereunder to the Optionee shall be addressed to the Optionee at his current address shown on the Company's records. Notice shall be sent by mail, express delivery or, if practical, by hand delivery. 6. Other Provisions. The provisions set forth in Section 5 of the Plan are specifically incorporated by reference in this Agreement, including but not limited to those pertaining to the following matters: a. Changes in Capitalization; Merger; Liquidation b. Right to Terminate Employment c. Non-alienation of Benefits d. Choice of Law IN WITNESS WHEREOF, the Company, by its duly authorized officer, and the Optionee, have entered this Agreement as of the Date of Grant first above written. /S/ Charles R. Perrin Charles R. Perrin AVON PRODUCTS, INC. /s/ Ward M. Miller Ward M. Miller, Jr. Senior Vice President, General Counsel and Secretary EX-10.20 8 EXHIBIT 10.20 EXHIBIT 10.20 EMPLOYMENT AGREEMENT THIS AGREEMENT, by and between AVON PRODUCTS, INC., a New York corporation (the "Corporation"), and ANDREA JUNG (the "Executive"), dated as of this 11th day of December, 1997. W I T N E S S E T H: WHEREAS, the Corporation desires to recognize the Executive's commitment to the Corporation and to confirm the right of the Executive to certain employment, compensation and severance benefits; and NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, and other good and valuable consideration, the Corporation and the Executive do hereby agree as follows: 1. Employment. The Corporation shall employ the Executive and the Executive agrees to serve as an executive of the Corporation, in such capacities and upon such conditions as are hereinafter set forth. 2. Term. The Executive shall be considered an at-will employee and her employment may be terminated by either party subject to the obligations of the parties upon such termination as may be set forth hereinafter. 3. Position and Duties. (a) Position. The Executive shall serve as President, effective January 5, 1998. (b) Business Time. The Executive agrees to devote her full business time during normal business hours to the business and affairs of the Corporation and to use her best efforts to perform faithfully and efficiently the responsibilities assigned to her hereunder, to the extent necessary to discharge such responsibilities. The Executive's continuing to serve on any boards and committees on which she is serving or with which she is otherwise associated immediately preceding the date hereof, or her service on any other boards and committees of which the Corporation has knowledge and does not object, in writing, within thirty (30) days after first becoming aware of such service, shall not be deemed to interfere with the performance of the Executive's services to the Corporation. 4. Compensation. The Executive shall be entitled to the following compensation for as long as the Executive remains an employee of the Corporation; (a) Base Salary. The Executive shall receive a base salary (the "Base Salary") payable in equal bi-weekly installments at an annual rate of $500,000, effective as of January 1, 1998. The Corporation shall review the Base Salary periodically and in light of such review may increase (but not decrease) the Base Salary taking into account any change in the Executive's responsibilities, increases in compensation of other executives with comparable responsibilities, performance of the Executive and other pertinent factors, and such adjusted Base Salary shall then constitute the "Base Salary" for purposes of this Agreement. Neither the Base Salary nor any increase in Base Salary after the date hereof shall serve to limit or reduce any other obligation of the Corporation hereunder. (b) Annual Bonus. (I) In General. For each fiscal year of the Corporation during which she is employed by the Corporation the Executive shall be eligible to receive an annual bonus ("Annual Bonus") under the Corporation's Management Incentive Plan or successor annual incentive award plan. Such Annual Bonus shall be determined on the basis of an annual target bonus opportunity of at least sixty percent (60%) of the Base Salary paid the Executive with respect to such fiscal year, which annual target bonus opportunity may be increased but not decreased except for annual reductions of up to ten percent (10%) that apply to all officers of the Corporation. Each Annual Bonus (or portion thereof) shall be paid in cash in February of the year next following the year for which the Annual Bonus (or prorated portion) is earned or awarded, unless electively deferred by the Executive pursuant to any deferral programs or arrangements that the Corporation may make available to the Executive. (ii) Change of Control. Notwithstanding the foregoing, the Annual Bonus awarded to the Executive for each fiscal year of the Corporation ending during the period commencing on the Change of Control Date and ending on the third anniversary thereof or during the pendency of a Potential Change of Control, shall not be less than the largest bonus earned by or awarded to the Executive for any the of three fiscal years of the Corporation ending before such Potential Change of Control or Change of Control Date, as applicable, or for the fiscal year in which such Potential Change of Control or Change of Control Date occurs. For a fiscal year of the Corporation that commences but does not end before the third anniversary of a Change of Control Date, the Annual Bonus earned by or awarded to the Executive for that portion of such fiscal year shall not be less than a ratable portion (based on the total days elapsed in that fiscal year) of the Annual Bonus that would have been payable to the Executive had that entire fiscal year ended before the third anniversary of a Change of Control Date. (c) Incentive and Savings Plans; Retirement and Death Benefit Programs. The Executive shall be entitled to participate in all incentive and savings plans and programs, including stock option plans and other equity-based compensation plans, and in all employee retirement, executive retirement and executive death benefit plans (including the SERP and SLIP) on a basis no less favorable than that basis generally available to executives of the Corporation holding comparable positions or having comparable responsibilities who become an elected or appointed officer of the Corporation on or after the date on which the Executive first became an elected or appointed officer of the Corporation. As of January 1, 1998, the Executive is entitled to a death benefit under the SLIP of $750,000. As of January 1, 1998, the Executive will have accumulated four (4) years of Creditable Service under the SERP. (d) Other Benefit Plans. The Executive, her spouse and their eligible dependents (as defined in, and to the extent permitted by, the applicable plan), as the case may be, shall be entitled to participate in or be covered under all medical, dental, disability, group life, severance, accidental death and travel accident insurance plans and programs of the Corporation and any Affiliated Companies at the most favorable level of participation and providing the highest levels of benefits available to her and her dependents. (e) Other Perquisites. The Executive shall also be entitled to: (I) prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the policies and procedures of the Corporation providing the highest level of reimbursement on the least restrictive basis available; (ii) paid vacation and fringe benefits in accordance with the most favorable policies of the Corporation; and (iii) all forms of perquisite benefits made available to senior officers of the Corporation. (f) Effect of Change of Control on Benefit Plans and Other Perquisites. Without limiting the generality of Sections 4(c), 4(d) and 4(e) hereof, during the pendency of a Potential Change of Control or during the period commencing on a Change of Control Date and ending on the third anniversary thereof, the benefits provided for in such Sections may not be diminished from the highest level previously provided or available to the Executive immediately prior to the Potential Change of Control or within the ninety-day period prior to the Change of Control Date, as applicable. 5. Termination. (a) Disability. The Corporation may terminate the Executive's employment after having established the Executive's Disability, by giving to the Executive written notice of its intention to terminate her employment, and her employment with the Corporation shall terminate effective on the 90th day after receipt of such notice if the Executive shall fail to return to full-time performance of her duties within ninety (90) days after such receipt. (b) Voluntary Termination by Executive. Notwithstanding anything in this Agreement to the contrary, the Executive may, upon not less than thirty (30) days' written notice to the Corporation, voluntarily terminate employment for any reason (including retirement under the terms of the Corporation's retirement plan as in effect from time to time), provided that any termination by the Executive pursuant to Section 5(d) on account of Constructive Termination shall not be treated as a voluntary termination under this Section 5(b). (c) Termination by the Corporation. The Corporation at any time may terminate the Executive's employment for Cause or without Cause. (d) Constructive Termination. The Executive at any time may terminate her employment for Constructive Termination. (e) Notice of Termination. Any termination by the Corporation for Cause or by the Executive for Constructive Termination shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 14(c). For purposes of this Agreement, a "Notice of Termination" means a written notice given, in the case of a termination for Cause, within ten (10) business days of the Corporation's having actual knowledge of the events giving rise to such termination, and in the case of a termination for Constructive Termination, within 60 days of the Executive's having actual knowledge of the events giving rise to such termination, and which (i) indicates the specific termination provision in this Agreement relied upon, (ii) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated, and (iii) if the termination date is other than the date of receipt of such notice, specifies the termination date of this Agreement (which date shall be not more than fifteen (15) days after the giving of such notice). The failure by the Executive to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Constructive Termination shall not waive any right of the Executive hereunder or preclude the Executive from asserting such fact or circumstance in enforcing her rights hereunder. (f) Date of Termination. For the purpose of this Agreement, the term "Date of Termination" means (i) in the case of a termination for which a Notice of Termination is required, the date of receipt of such Notice of Termination or, if later, the date specified therein, as the case may be and (ii) in all other cases, the actual date on which the Executive's employment terminates. 6. Obligations of the Corporation Upon Termination. Upon termination of the Executive's employment with the Corporation, the Corporation shall have the following obligations (including the obligation to pay the cost of all benefits provided by the applicable benefit plan to the Executive and the Executive's family under this Section 6 except normal employee contributions required by the applicable benefit plan of other participating executives with comparable responsibilities), provided, however, that any item paid or payable under this Agreement shall be reduced by any amount paid or payable to the Executive and the Executive's family with respect to the same type of payment under the Severance Plan. For this purpose, any payment under this Agreement or the Severance Plan made over time shall be discounted to present value at the Interest Rate before reducing any payment under this Agreement by any amount paid or payable to the Executive under the Severance Plan. (a) Death and Retirement. If the Executive's employment is terminated by reason of the Executive's death or on or after the attainment of age sixty-five (65), this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement other than payment of the Accrued Obligations. Unless otherwise directed by the Executive (or, in the case of a Qualified Plan, as may be required by such plan) all Accrued Obligations shall be paid to the Executive, her beneficiaries or her estate, as applicable, in a lump sum in cash within thirty (30) days of the Date of Termination. In the event of the retirement of the Executive, she and her family shall be entitled to benefits generally available upon retirement to executives with comparable responsibilities or positions and their families. In the event of the Executive's death, her family shall be entitled to receive benefits generally available to the surviving families of executives with comparable responsibilities or positions. (b) Disability. If the Executive's employment is terminated by reason of the Executive's Disability, the Executive, the Executive's spouse and their eligible dependents (as defined in, and to the extent permitted by, the applicable plan) shall be entitled for a period of two years after the Date of Termination (or, if the Date of Termination occurs within three years after a Change of Control Date, until the earlier to occur of the Executive's 65th birthday or the third anniversary of the Change of Control Date, if later) to continue to participate in or be covered under the benefit plans and programs referred to in Section 4(d) or, at the Corporation's option, to receive equivalent benefits by alternate means, at least equal to those described in Section 4(d). Unless otherwise directed by the Executive (or, in the case of any Qualified Plan, as may be required by such plan), the Executive shall also be paid all Accrued Obligations in a lump sum in cash within thirty (30) days of the Date of Termination. In addition, the Executive and the Executive's family shall be entitled to receive disability and other benefits generally available to executives with comparable responsibilities or positions. Notwithstanding the foregoing, in the event that the Date of Termination occurs during the pendency of a Potential Change of Control or during the three year period commencing on a Change of Control, the benefits provided to the Executive and her family shall not be less than the benefits generally available to executives with comparable responsibilities or positions immediately prior to the Potential Change of Control or within the ninety-day period prior to the Change of Control Date, as applicable. (c) Termination by the Corporation for Cause and Voluntary Termination by Executive. If the Executive's employment shall be terminated for Cause or voluntarily terminated by the Executive (other than on account of Constructive Termination), the Corporation shall pay the Executive the Accrued Obligations. The Executive shall be paid all such Accrued Obligations in a lump sum in cash within thirty (30) days of the Date of Termination and the Corporation shall have no further obligations to the Executive under this Agreement, unless otherwise required by a Qualified Plan or specified pursuant to a valid election to defer the receipt of all or a portion of such payments made in accordance with any plan of deferred compensation sponsored by the Corporation. (d) Other Termination of Employment If Not Related to Change of Control or Potential Change of Control. If the Corporation (I) terminates the Executive's employment other than for Cause or Disability, or the Executive terminates her employment for Constructive Termination, and (ii) the Date of Termination occurs during a period which is not during the pendency of a Potential Change of Control or the three year period commencing on a Change of Control Date, the Corporation shall pay or provide to the Executive the following: (A) Cash Payment. The Corporation shall pay to the Executive in a lump sum in cash within fifteen (15) days after the Date of Termination the aggregate of the following amounts (other than amounts payable from Qualified Plans, non-qualified retirement plans and deferred compensation plans, which amounts shall be paid in accordance with the terms of such plans): (1) all Accrued Obligations plus, in the case of termination without Cause, two weeks of Base Salary in lieu of notice; (2) the present value, discounted at the Interest Rate as if paid monthly from the Date of Termination in arrears of the lesser of (I) thirty-six (36) months of the Executive's Base Salary at the rate in effect on the Date of Termination, and (II) the Executive's Base Salary (at the same rate) through the end of the month in which the Executive attains age sixty- five (65); (3) a bonus equal to the Executive's target annual bonus for the year of termination; and (4) if the Date of Termination is on or after August 1st of the year of termination, a prorated bonus based on earned salary for that year (not to exceed the Executive's target bonus award for such year and, if the Executive's bonus is subject to the discretion of the Board, in the discretion of the Board). (B) Benefit Continuation. The Corporation shall provide for the continued participation of the Executive, her spouse and their eligible dependents (as defined in the applicable plan), as the case may be, for a period of two years after the Date of Termination, in the plans described in Section 4(d) on the same terms as described in Section 4(d) and in the SERP and SLIP on the same terms described in Section 4(c), and the Executive shall receive Creditable Service (as defined in the SERP) for that period (with Average Final Compensation, as defined in the SERP, to be determined as of the Date of Termination) for purposes of the SERP and SLIP. (e) Other Termination of Employment Occurring Within Three Years Following Change of Control. If the Corporation (i) terminates the Executive's employment other than for Cause or Disability, or the Executive terminates her employment for Constructive Termination and (ii) the Date of Termination occurs during the three (3) year period commencing on the Change of Control Date, the Corporation shall pay or provide the Executive the following: (A) Cash Payment. The Corporation shall pay to the Executive in a lump sum in cash within fifteen (15) days after the Date of Termination the aggregate of the following amounts (other than amounts payable from Qualified Plans, non-qualified retirement plans and deferred compensation plans, which amounts shall be paid in accordance with the terms of such plans): (1) all Accrued Obligations; (2) a cash amount equal to three (3) times the sum of (I) the Executive's annual Base Salary at the greater of the rate in effect as of the date when the Notice of Termination was given or the Change of Control Date; (II) the greater of the (x) Annual Bonus earned by or awarded to the Executive for the last fiscal year of the Corporation ending prior to the Change of Control Date or (y) the Annual Bonus earned by or awarded to the Executive for the fiscal year of the Corporation which includes the Change of Control Date; and (III) the present value, calculated using the Interest Rate, of (without duplication) the annualized value of the fringe benefits described under Section 4(e) of this Agreement, provided, however, that in no event shall the Executive be entitled to receive under this clause (2) more than the greater of (I) product obtained by multiplying the amount determined as herein above provided in this clause by a fraction, the numerator of which shall be the number of months (including fractions of a month) which at the Date of Termination remain until the Executive attains age sixty-five (65) or if earlier, the third anniversary of the Change of Control Date and the denominator of which shall be thirty-six (36) and (II) an amount equal to the cash payment that would have been payable under Section 6(d)(A) hereof had the Change of Control not occurred. (3) a cash amount equal to the difference between (I) the sum of the maximum payments the Executive would have received for all awards (or other similar rights) outstanding at the Date of Termination and granted to the Executive under any long-term incentive compensation or performance plan of the Corporation if she had continued in the employ of the Corporation through the earlier to occur of the third anniversary of the Change of Control Date or the Executive's 65th birthday and the Corporation had met its maximum performance goals under each such award and the maximum amount payable under each such award was paid and (II) any amounts actually paid under any such plan with respect to such awards. The cash amount payable pursuant to this paragraph shall include the maximum payment value of all outstanding Performance Units awarded the Executive under the Corporation's 1997 Long-Term Incentive Plan reduced by any amounts actually paid or payable under such plan with respect to such units; (4) a cash amount equal to the present value, calculated using the Interest Rate, of the difference between (I) the lump sum value of the retirement benefits (including, without limitation, any pension, retiree life, or retiree medical benefits) that would have been payable or available to the Executive under any Qualified Plan, under the SERP, and under any other supplemental retirement, life (other than the SLIP) or medical plan or arrangement, whether or not qualified, maintained by the Corporation or an Affiliated Company based on the age and service the Executive would have attained or completed had the Executive continued in the Corporation's employ until the earlier of the expiration of the third anniversary of the Change of Control Date or the Executive's 65th birthday, determined using, where compensation is a relevant factor, her pensionable compensation at the Date of Termination (or, if greater, at the rate in effect on the date on which occurred an event giving rise to a Constructive Termination), with such lump sum value being calculated using, where applicable, assumptions contained in the respective plans or, where such assumptions are not applicable, the Interest Rate; and (II) the present value of the retirement benefits (including, without limitation, any pension, retiree life, or retiree medical benefits) that are payable or available to the Executive under any Qualified Plan, under the SERP, and under any other supplemental retirement, life (other than the SLIP) or medical plan or arrangement, whether or not qualified, maintained by the Corporation or an Affiliated Company based on the age and service the Executive has attained or completed as of the Executive's Date of Termination determined using, where compensation is a relevant factor, her pensionable compensation at the Date of Termination (or, if greater, at the rate in effect on the date on which occurred an event giving rise to a Constructive Termination), with such present value being calculated using, where applicable, assumptions contained in the respective plans or, where such assumptions are not applicable, the Interest Rate. The incremental retirement benefits which would have become payable under such plans include, without limitation, the additional benefits attributable to such additional service which would have been rendered during such period and the benefits which would have vested under such plans as a result of such service, but which were otherwise forfeited. Notwithstanding the foregoing, in lieu of any cash payment in respect of retiree life or retiree medical coverage for which the Executive would have qualified by remaining in the Corporation's employ until the earlier of the third anniversary of the Change of Control Date or the Executive's 65th birthday, the Corporation may arrange at its option or shall arrange at the election of the Executive for such coverage to continue for the Executive (or may secure equivalent conversion coverage) and shall pay the cost of such coverage. Any election by the Executive pursuant to the immediately preceding sentence shall be made in writing and delivered to the Corporation prior to the Date of Termination. (B) Other Benefit Continuation. The Corporation shall provide for the continued participation of the Executive, her spouse and their eligible dependents (as defined in the applicable plan), as the case may be, for a period equal to the greater of two years after the Date of Termination or until the third anniversary of the Change of Control Date, in the plans described in Section 4(d) on the same terms as described in Section 4(d). In lieu of continued participation in medical and life insurance programs referred to the foregoing, the Executive may elect by written notice delivered to the Corporation prior to the Date of Termination, to receive an amount equal to three (3) times the annual cost to the Corporation (based on premium rates) of providing such coverage. (f) Other Termination of Employment Occurring During Pendency of Potential Change of Control. If the Corporation (i) terminates the Executive's employment other than for Cause or Disability, or the Executive terminates her employment for Constructive Termination and (ii) the Date of Termination occurs during the pendency of a Potential Change of Control, the Executive shall be entitled to the payments and benefits set forth in Section 6(d) hereof. In the event that a Change of Control occurs before the expiration of the pendency of the Potential Change of Control during which the Date of Termination occurred, the Executive shall also be entitled to such additional cash payments as would have been made under Section 6(e) hereof as if the Date of Termination had occurred immediately on the Change of Control Date, in excess of the amount of the cash payment made to the Executive under Section 6(d) hereof. In addition, in the event that a Change of Control occurs during the pendency of the Potential Change of Control during which the Date of Termination occurred, the Executive shall also be entitled to benefit continuation provided for under Section 6(e) in excess of the benefit continuation to which she was entitled under Section 6(d) hereunder. The Executive shall have an additional thirty (30) days after the Change of Control Date to provide a written election to the Corporation for a cash payment in lieu of those benefits for which the Executive has the choice under Section 6(e) between continued coverage and a cash payment. The cost (based on premium rates) of the period of coverage previously provided to the Executive before such election shall be subtracted from any such cash payment. (g) Discharge of Corporation's Obligations. Subject to the performance of its obligations under Sections 6, 7, 8 and 11, the Corporation shall have no further obligations to the Executive under this Agreement in respect of any termination by the Executive for Constructive Termination or by the Corporation other than for Cause or Disability. 7. Cash-Out of Stock Options and Restricted Stock. (a) In General. The Executive shall be entitled to receive a cash out of all of her outstanding restricted stock, stock option and other equity based awards upon a Change of Control in accordance with the terms of the Corporation's plans under which such awards were granted. To the extent that such awards are not cashed out pursuant to the terms of such plans, they shall become fully vested as of the Change of Control Date. (b) Effect of Termination During Pendency of a Potential Change of Control. If (i) the Executive is terminated during the pendency of a Potential Change of Control under circumstances giving rise to payments pursuant to Section 6(f) hereof, (ii) such termination results in a forfeiture of any of the Executive's restricted stock, options or other equity based awards under any of the Corporation's plans, and (iii) prior to the expiration of the pendency of that Potential Change of Control, a Change of Control occurs, the Executive shall thereupon be entitled to a cash payment equal to the amount the Executive would had received under such plans with respect to such restricted stock, options and other equity based awards as if she had remained in the Corporation's employ until the Change of Control Date. Such cash payment shall be made at the same time and in the same manner as payment would have been made under the applicable plans had the Executive remained in the Corporation's employ until the Change of Control Date. 8. Certain Further Payments by the Corporation. (a) Tax Reimbursement Payment. In the event that any amount or benefit paid or distributed to the Executive by the Corporation or any Affiliated Company, whether pursuant to this Agreement or otherwise (collectively, the "Covered Payments"), is or becomes subject to the tax (the "Excise Tax") imposed under Section 4999 of the Code or any similar tax that may hereafter be imposed, the Corporation shall either pay to the Executive or contribute for the benefit of the Executive to a "rabbi" trust established by the Corporation prior to the Change of Control Date, at the time specified in Section 8(e) below, the Tax Reimbursement Payment (as defined below). The Tax Reimbursement Payment is defined as an amount, which when added to the Covered Payments and reduced by any Excise Tax on the Covered Payments and any federal, state and local income tax and Excise Tax on the Tax Reimbursement Payment provided for by this Agreement (but without reduction for any federal, state or local income or employment tax on such Covered Payments), shall be equal to the sum of (i) the amount of the Covered Payments, and (ii) an amount equal to the product of any deductions disallowed for federal, state or local income tax purposes because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income and the highest applicable marginal rate of federal, state or local income taxation, respectively, for the calendar year in which the Tax Reimbursement Payment is to be made. (b) Determining Excise Tax. For purposes of determining whether any of the Covered Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) such Covered Payments will be treated as "parachute payments" within the meaning of Section 280G of the Code, and all "parachute payments" in excess of the "base amount" (as defined under Section 280G(b)(3) of the Code) shall be treated as subject to the Excise Tax, unless, and except to the extent that, in the opinion of the Corporation's independent certified public accountants, which, in the case of Covered Payments made after the Change of Control Date, shall be the Corporation's independent certified public accountants appointed prior to the Change of Control Date, or tax counsel selected by such accountants (the "Accountants"), such Covered Payments (in whole or in part) either do not constitute "parachute payments" or represent reasonable compensation for services actually rendered (within the meaning of Section 280G(b)(4) of the Code) in excess of the "base amount", or such "parachute payments" are otherwise not subject to such Excise Tax, and (ii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Accountants in accordance with the principles of Section 280G of the Code. (c) Applicable Tax Rates and Deductions. For purposes of determining the amount of the Tax Reimbursement Payment, the Executive shall be deemed: (i) to pay federal income taxes at the highest applicable marginal rate of federal income taxation for the calendar year in which the Tax Reimbursement Payment is to be made, (ii) to pay any applicable state and local income taxes at the highest applicable marginal rate of taxation for the calendar year in which the Tax Reimbursement Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from the deduction of such state or local taxes if paid in such year (determined without regard to limitations on deductions based upon the amount of the Executive's adjusted gross income), and (iii) to have otherwise allowable deductions for federal, state and local income tax purposes at least equal to those disallowed because of the inclusion of the Tax Reimbursement Payment in the Executive's adjusted gross income. (d) Subsequent Events. In the event that the Excise Tax is subsequently determined by the Accountants to be less than the amount taken into account hereunder in calculating the Tax Reimbursement Payment made, the Executive shall repay to the Corporation, at the time that the amount of such reduction in the Excise Tax is finally determined, the portion of such prior Tax Reimbursement Payment that has been paid to the Executive or to federal, state or local tax authorities on the Executive's behalf and that would not have been paid if such Excise Tax had been applied in initially calculating such Tax Reimbursement Payment, plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. Notwithstanding the foregoing, in the event any portion of the Tax Reimbursement Payment to be refunded to the Corporation has been paid to any federal, state or local tax authority, repayment thereof shall not be required until actual refund or credit of such portion has been made to the Executive, and interest payable to the Corporation shall not exceed interest received or credited to the Executive by such tax authority for the period it held such portion. The Executive and the Corporation shall mutually agree upon the course of action to be pursued (and the method of allocating the expenses thereof) if the Executive's good faith claim for refund or credit is denied. In the event that the Excise Tax is later determined by the Accountants to exceed the amount taken into account hereunder at the time the Tax Reimbursement Payment is made (including, but not limited to, by reason of any payment the existence or amount of which cannot be determined at the time of the Tax Reimbursement Payment), the Corporation shall make an additional Tax Reimbursement Payment in respect of such excess (which Tax Reimbursement Payment shall include any interest or penalty payable with respect to such excess) at the time that the amount of such excess is finally determined. (e) Date of Payment. The portion of the Tax Reimbursement Payment attributable to a Covered Payment shall be paid to the Executive or to a "rabbi" trust established by the Corporation prior to the Change of Control Date within ten (10) business days following the payment of the Covered Payment. If the amount of such Tax Reimbursement Payment (or portion thereof) cannot be finally determined on or before the date on which payment is due, the Corporation shall either pay to the Executive or contribute for the benefit of the Executive to a "rabbi" trust established by the Corporation prior to the Change of Control Date, an amount estimated in good faith by the Accountants to be the minimum amount of such Tax Reimbursement Payment and shall pay the remainder of such Tax Reimbursement Payment (which Tax Reimbursement Payment shall include interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined, but in no event later than forty-five (45) calendar days after payment of the related Covered Payment. In the event that the amount of the estimated Tax Reimbursement Payment exceeds the amount subsequently determined to have been due, such excess shall be repaid or refunded pursuant to the provisions of Section 8(d) above. 9. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Corporation or any of its Affiliated Companies and for which the Executive may qualify, nor shall anything herein limit or otherwise prejudice such rights as the Executive may have under any other agreements with the Corporation or any Affiliated Companies, including, but not limited to stock option or restricted stock agreements. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan or program of the Corporation or any Affiliated Companies at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 10. Full Settlement. Except as provided in Section 12(b), the Corporation's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Corporation may have against the Executive or others whether by reason of the subsequent employment of the Executive or otherwise. In no event shall the Executive be obligated to seek other employment by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. In the event that the Executive shall in good faith give a Notice of Termination for Constructive Termination and it shall thereafter be determined that Constructive Termination did not take place, the employment of the Executive shall, unless the Corporation and the Executive shall otherwise mutually agree, be deemed to have terminated, at the date of giving such purported Notice of Termination, by mutual consent of the Corporation and the Executive and, except as provided in the last preceding sentence, the Executive shall be entitled to receive only those payments and benefits which she would have been entitled to receive at such date had she terminated her employment voluntarily at such date under this Agreement. 11. Legal Fees and Expenses. In the event that a claim for payment or benefits under this Agreement is disputed, the Corporation shall pay all reasonable attorney fees and expenses incurred by the Executive in pursuing such claim, provided that the Executive is successful as to at least part of the disputed claim by reason of litigation, arbitration or settlement. 12. Confidential Information and Noncompetition. (a) The Executive shall hold in a fiduciary capacity for the benefit of the Corporation all secret or confidential information, knowledge or data, including without limitation all trade secrets, relating to the Corporation or any Affiliated Companies, and their respective businesses, (i) obtained by the Executive during her employment by the Corporation or any of its Affiliated Companies and (ii) which is not otherwise publicly known (other than by reason of an unauthorized act by the Executive). After termination of the Executive's employment with the Corporation, the Executive shall not without the prior written consent of the Corporation, unless compelled pursuant to an order of a court or other body having jurisdiction over such matter, communicate or divulge any such information, knowledge or data to anyone other than the Corporation and those designated by it. In no event shall an asserted violation of the provisions of this Section 12(a) constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. (b) Upon termination of the Executive's employment for any reason whatsoever prior to a Change of Control, the Executive shall not, without the prior written consent of the Corporation, during the two- year period following the Date of Termination (i) accept employment or enter into a consulting or advisory arrangement with Amway Corporation, Sara Lee Corporation, Premark International, Inc., Mary Kay Cosmetics, Inc., or any of their affiliates; or (ii) directly solicit or aid in the direct solicitation of any employees of the Corporation or an Affiliated Company to leave their employment. In the event the Executive violates the terms of this Section 12(b), all benefit continuation coverage that the Executive and/or her family members are then receiving pursuant to the terms of Section 6(d) shall cease. Also, in the event that this Section 12(b) is determined to be unenforceable in part, it shall be construed to be enforceable to the maximum extent permitted by law. 13. Successors. (a) This Agreement is personal to the Executive and, without the prior written consent of the Corporation, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Corporation and its successors. The Corporation shall require any successor to all or substantially all of the business and/or assets of the Corporation, whether direct or indirect, by purchase, merger, consolidation, acquisition of stock, or otherwise, by an agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent as the Corporation would be required to perform if no such succession had taken place. 14. Miscellaneous. (a) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, applied without reference to principles of conflict of laws. (b) Amendments. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand-delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: at the address listed on the last page hereof If to the Corporation: Avon Products, Inc. 1345 Avenue of the Americas New York, New York 10105-0196 Attention: Secretary (with a copy to the attention of the General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith). Notice and communications shall be effective when actually received by the addressee. (d) Tax Withholding. The Corporation may withhold from any amounts payable under this Agreement such federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (f) Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (g) Entire Agreement. This Agreement expresses the entire understanding and agreement of the parties regarding the terms and conditions governing the Executive's employment with the Corporation, and all prior agreements governing the Executive's employment with the Corporation shall have no further effect; provided, however, that except as specifically provided herein, the terms of this Agreement do not supersede the terms of any grant or award to the Executive under the 1993 Stock Incentive Plan, any Long Term Incentive Plan, Management Incentive Plan and any other similar or successor plan or program. 15. Definitions. (a) "Accountants" shall have the meaning set forth in Section 8(b). (b) "Accrued Obligations" shall mean (i) the Executive's full Base Salary through the Date of Termination, (ii) in the case of death or retirement, the product of the Annual Bonus paid to the Executive for the last full fiscal year of the Corporation and a fraction, the numerator of which is the number of days in the current fiscal year of the Corporation through the Date of Termination, and the denominator of which is 365, (iii) any compensation previously deferred by the Executive (together with any accrued earnings thereon) and not yet paid by the Corporation and any accrued vacation pay for the current year not yet paid by the Corporation, (iv) any amounts or benefits owing to the Executive or to the Executive's beneficiaries under the then applicable employee benefit plans or policies of the Corporation and (v) any amounts owing to the Executive for reimbursement of expenses properly incurred by the Executive prior to the Date of Termination and which are reimbursable in accordance with the reimbursement policy of the Corporation described in Section 4(e). (c) "Affiliated Company" shall mean any company controlling, controlled by or under common control with the Corporation. (d) "Annual Bonus" shall have the meaning set forth in Section 4(b). (e) "Base Salary" shall have the meaning set forth in Section 4(a). (f) "Board" shall mean the Board of Directors of the Corporation. (g) "Cause" shall mean (i) an act or acts of dishonesty or gross misconduct on the Executive's part which result or are intended to result in material damage to the Corporation's business or reputation or (ii) repeated material violations by the Executive of her obligations under Section 3 of this Agreement which violations are demonstrably willful and deliberate on the Executive's part and which result in material damage to the Corporation's business or reputation and as to which material violations the Board has notified the Executive in writing. (h) A "Change of Control" means: (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 Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this Subsection (A), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Corporation, (ii) any acquisition by the Corporation, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of Subsection (C) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Corporation Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Corporation, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Corporation Voting Securities; or (B) individuals who as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation'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; or (C) the approval by the shareholders of the Corporation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Voting Securities, (ii) no Person (excluding any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. Notwithstanding the foregoing, no Change of Control shall be deemed to have occurred for purposes of this Agreement (i) by reason of any actions or events in which the Executive participates in a capacity other than in her capacity as Executive (or as a director of the Corporation or a Subsidiary, where applicable) or (ii) if prior to what otherwise would have been a Change of Control Date, the Executive is demoted below the position described in Section 3(a) hereof and the Board provides written notification to the Executive, no later than thirty (30) days thereafter, that a Change of Control will not be deemed to occur with respect to the Executive. (I) "Change of Control Date" shall mean the date on which a Change of Control shall be deemed to have occurred. (j) "Code" shall mean the Internal Revenue Code of 1986, as amended. (k) "Constructive Termination" shall mean any of the following: (A) Reduction in Base Salary. (B) Reduction in annual target bonus opportunity (excluding annual reductions of up to 10% that apply to all officers of the Corporation). (C) A change of more than twenty-five (25) miles in the office or location where the Executive is based. (D) (1) In General. With respect to any period not within the three year period following a Change of Control Date and not during the pendency of a Potential Change of Control, a demotion to a position below that of President. (2) Change of Control. With respect to any period during the pendency of a Potential Change of Control and the three year period following a Change of Control Date, unless with the express written consent of the Executive, (I) the assignment to the Executive of any duties inconsistent in any substantial respect with the Executive's position, authority or responsibilities as contemplated by Section 3(b) of this Agreement, or (II) any other substantial change in such position, including titles, authority or responsibilities from those previously held by the Executive prior to the Potential Change of Control or Change of Control Date, as applicable. The Executive's position, authority and responsibilities shall not be regard as not commensurate with previous position, authority and responsibilities merely by virtue of the fact that a successor shall have acquired all or substantially all of the business and/or assets of the Corporation. (E) (1) In General. With respect to any period not within the three year period following a Change of Control Date and not during the pendency of a Potential Change of Control, any material reduction in any of the benefits described in Sections 4(c) through 4(e) hereof (excluding, in each case, reductions that apply to all officers of the Corporation). (2) Change of Control. With respect to any period during the pendency of a Potential Change of Control and the three year period following a Change of Control Date, any failure by the Corporation to comply with any of the provisions of Section 4 of this Agreement, other than an insubstantial or inadvertent failure remedied by the Corporation promptly after receipt of notice thereof given by the Executive. (F) Any failure of the Corporation to obtain the assumption and agreement to perform this Agreement by a successor as contemplated by Section 13(b), provided that the successor has had actual written notice of the existence of this Agreement and its terms and an opportunity to assume the Corporation's responsibilities under this Agreement during a period of ten (10) business days after receipt of such notice. (G) Any failure of the Corporation to elect the Executive to the additional position of Chief Operating Officer effective on or before January 1, 1999. (l) "Covered Payments" shall have the meaning set forth in Section 8(a). (m) "Date of Termination" shall have the meaning set forth in Section 5(f). (n) "Disability" shall mean disability, which would entitle the Executive to receive full long-term disability benefits under the Corporation's long-term disability plan on terms substantially similar to those of the long-term disability plan as in on the date of this Agreement. (o) "Excise Tax" shall have the meaning as set forth in Section 8(a). (p) "Interest Rate" shall mean the interest rate payable on one year Treasury Bills in effect on the day that is 30 business days (days other than Saturday, Sunday or legal holidays in the City of New York) prior to the Date of Termination. (q) "Notice of Termination" shall have the meaning as set forth in Section 5(f). (r) "Potential Change of Control" shall be deemed to have occurred if: (A) the commencement of a tender or exchange offer by any third person (other than a tender or exchange offer which, if consummated, would not result in a Change of Control) for 20% or more of the then outstanding shares of common stock or combined voting power of the Corporation's then outstanding voting securities; (B) the execution of an agreement by the Corporation, the consummation of which would result in the occurrence of a Change of Control; (C) the public announcement by any person (including the Corporation) of an intention to take or to consider taking actions which if consummated would constitute a Change of Control other than through a contested election for directors of the Corporation; or (D) the adoption by the Board, as a result of other circumstances, including circumstances similar or related to the foregoing, or a resolution to the effect that, for purposes of this Agreement, a Potential Change of Control has occurred. A Potential Change of Control will be deemed to be pending from the occurrence of the event giving rise to the Potential Change of Control until the earlier of the first anniversary thereof or the date the Board determines in good faith that such events will not result in the occurrence of a Change of Control. Notwithstanding the foregoing, no Potential Change of Control shall be deemed to have occurred for purposes of this Agreement (i) by reason of any actions or events in which the Executive participates in a capacity other than in her capacity as Executive (or as a director of the Corporation or a Subsidiary, as applicable) or (ii) if prior to occurrence of an event that would have given rise to a Potential Change of Control, the Executive is demoted below the position described in Section 3(a) hereof and the Board provides written notification to the Executive, no later than thirty (30) days thereafter, that a Potential Change of Control will not be deemed to occur with respect to the Executive. (s) "Qualified Plan" shall mean an employee benefit plan qualified (or which is intended to be qualified) under Section 401(a) of the Code. (t) "SERP" shall mean the Supplemental Executive Retirement Plan of Avon Products, Inc. (u) "Severance Plan" shall mean Avon Products, Inc. Severance Plan, or any successor thereof. (v) "SLIP" shall mean the Supplemental Life Plan of Avon Products, Inc. (w) "Subsidiary" shall mean any majority owned subsidiary of the Corporation. (x) "Tax Reimbursement Payment" shall have the meaning set forth in Section 8(a). IN WITNESS WHEREOF, the Executive has hereunto set her hand and the Corporation has caused this Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all effective as of the day and year first above written. AVON PRODUCTS, INC. By:/S/ Marcia L. Worthing Marcia L. Worthing Title: Senior Vice President Human Resources & Corp. Affairs ATTEST: Ward M. Miller, Jr. Title: Senior Vice President General Counsel & Sec. (CORPORATE SEAL) EXECUTIVE: /S/ Andrea Jung Andrea Jung Address: 620 Park Avenue New York, NY 10021 EX-10.21 9 EXHIBIT 10.21 EXHIBIT 10.21 Exhibit 10.21 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: Susan J. Kropf Ward Miller, Jr. Edwina Woodbury Marcia Worthing EX-10.22 10 EXHIBIT 10.22 EXHIBIT 10.22 Adopted by Board of Directors 3/6/97 AVON PRODUCTS, INC. COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (Effective May 1, 1997) I. GENERAL PROVISIONS 1.1 Purpose The purpose of the Avon Products, Inc. Compensation Plan for Non-Employee Directors (the "Plan") is to provide a comprehensive revised compensation program which will attract and retain qualified individuals who are not employed by Avon Products, Inc. or its subsidiaries (the "Company") to serve on the Company's Board of Directors. In particular, the Plan aligns the interests of such directors with those of the Company's shareholders by providing that a significant portion of such compensation is directly linked to increases in the value of the Company's Common Stock. 1.2 Relationship to 1993 Stock Incentive Plan The Company's 1993 Stock Incentive Plan ("1993 Plan") which was approved by the Company's shareholders at the Annual Meeting of Shareholders on May 6, 1993, provides for the award of stock incentives, including stock options and restricted stock, to key employees of the Company but not to non- employee directors. Accordingly, this Plan is subject to the approval by Company shareholders of an amendment to the 1993 Plan at the Annual Meeting of Shareholders scheduled for May 1, 1997, which amendment provides that awards pursuant to the 1993 Plan may also be made to non- employee directors. Subject to such approval, the Plan will become effective as of May 1, 1997. 1.3 Definitions Capitalized words and phrases in this Plan shall have the same meaning as the definitions set forth in the 1993 Stock Incentive Plan to the extent they are defined therein. 1.4 Prior Compensation Program: Transition Prior to the effective date of this Plan, the compensation program for the Company's non-employee directors principally consisted of an annual retainer payable wholly in cash, fees for attendance at committee meetings and special Board meetings, and a retirement plan. Such program remains applicable for all periods of service prior to May 1, 1997 with the former annual cash retainer remaining in effect until June 30, 1997. Non-employee directors who as of May 1, 1997 are within five years of age 70 may elect to continue to accrue benefits under the terms of the retirement plan. The retirement plan, however, will be discontinued for all other directors as of May 1, 1997 with the actuarial value of benefits accrued to that date converted into a grant of restricted stock as set forth in Section 4.2 below. II. ANNUAL RETAINER AND MEETING FEES 2.1 Annual Retainer Each non-employee director shall be entitled to receive an annual retainer consisting of (a) $25,000 payable in cash and (b) Restricted Stock having a value as of the date of grant of approximately $25,000. The cash portion shall be payable in quarterly installments of $6,250 each, effective July 1, 1997. 2.2 Annual Restricted Stock Award As part of the Annual Retainer compensation, each non-employee director will receive an award of shares of Restricted Stock immediately following each Annual Meeting of Shareholders, with the first such award being made immediately after the Annual Meeting held May 1, 1997. The number of shares so granted each year will be determined by dividing the sum of $25,000 by the closing price of a share of the Company's Common Stock on the New York Stock Exchange averaged over 10 consecutive trading days, ending with the trading day immediately preceding the applicable Annual Meeting. All grants of Restricted Stock shall be subject to the terms and conditions set forth in Article IV below. 2.3 Meeting Fees Each non-employee director shall receive a fee of $1,000, payable in cash, for each meeting of a committee of the Board of Directors that he or she attends and each special meeting of the Board of Directors that he or she attends. No fee is payable with respect to attendance at a regular meeting of the Board of Directors, including the annual organizational meeting occurring immediately after an Annual Meeting of Shareholders. 2.4 Retainer Fee for Committee Chairs A non-employee director appointed to chair any committee of the Board of Directors shall be paid an annual retainer of $3,000 in cash, such payment to be made within 30 days following the effective date of appointment. 2.5 Deferred Cash Alternative Each non-employee director annually may elect to have all or a part of his or her cash compensation, including annual retainers and meeting fees, deferred for payment in accordance with the provisions of the Deferred Compensation - Stock Credit Plan. All such elections for each year shall be made prior to the beginning of the year. III. STOCK OPTIONS 3.1 Annual Grants of Stock Options Except as provided in Section 3.5 below, each non-employee director on the effective date of the Plan shall be awarded an option ("Option") to purchase 2,000 shares of the Company's Common Stock ("Stock") if he or she continues as a director. As of the close of business on the date of each successive Annual Meeting of Shareholders held thereafter, each non -employee director who then continues as a director (whether or not re-elected at any such meeting) shall be granted an additional Option to purchase 2,000 shares. All Options granted pursuant to the Plan shall be non- qualified Options and shall expire ten (10) years from the date of grant. 3.2 Option Exercise Price The per share price to be paid to exercise an Option shall be the "Fair Market Value" of the Stock on the date of grant which, in accordance with the 1993 Plan, shall be the closing price for the Stock as traded on the New York Stock Exchange on the next preceding date during which trading occurred. 3.3 Vesting and Exercise of Options Each Option will become exercisable one year after the date of grant and may be exercised for a period of ten (10) years after the date of grant. In the event of death, a vested Option may be exercised by the estate of the non- employee director. 3.4 Method of Exercise and Purchase An Option shall be exercised by giving written notice to the Secretary, or an Assistant Secretary, of the Company specifying the number of shares to be purchased and the particular grant being exercised. Such notice shall be accompanied by a check as payment of the exercise price of the shares with respect to which such Option, or portion thereof, is exercised. Alternatively, such notice may include an election to have such shares delivered to a broker-dealer with whom arrangements have been made to immediately sell the shares and withhold from the net sale proceeds the full purchase price amount to be delivered to the Company. The Company may also require payment of all withholding taxes to exercise an Option, whether or not a broker-dealer arrangement has been used. 3.5 Continued Participation in Retirement Plan A non-employee director who as of the effective date, is within five years of retirement due to attainment of age 70, is eligible to elect to continue to participate in the existing Retirement Plan for Non-Employee Directors ("Retirement Plan") and thus accrue additional retirement benefits for periods of service subsequent to the effective date. No stock options will be granted to a director who so elects to continue in that Plan. IV. RESTRICTED STOCK 4.1 Annual Retainer Grants of Restricted Stock Each non- employee director on the effective date of the Plan who continues as a director shall be awarded shares of Stock that are restricted as to transfer ("Restricted Stock"). At the close of business on the date of each successive Annual Meeting of Shareholders held thereafter, each non-employee director who then continues as a director (whether or not re-elected at any such meeting) shall be granted additional shares of Restricted Stock. The number of shares of Restricted Stock to be granted at the effective date and at each successive Annual Meeting of Shareholders will have a Fair Market Value of $25,000 on the date of grant. The Fair Market Value per share shall be deemed to be the closing price of a share of Company Common Stock as reported on the New York Stock Exchange averaged over the ten trading days next preceding the date of grant. A fractional share resulting from such calculation will be rounded to the nearest whole share. 4.2 Special Grants of Restricted Stock (a) Each non-employee director whose participation in the Retirement Plan is automatically discontinued as of the effective date of the Plan shall receive an award of shares of Restricted Stock having a Fair Market Value equal to the actuarial present value of his or her retirement benefits accrued as of that date. (b) Each non-employee director who is eligible to continue to participate in the Retirement Plan after the effective date of the Plan may elect to convert all or one-half of the actuarial present value of his or her accrued retirement benefits into shares of Restricted Stock having an equivalent Fair Market Value. Such election would be irrevocable, and must be made prior to such effective date. (c) In determining the actuarial present value of accrued retirement benefits it shall be deemed that the director has retired as of the effective date of the Plan and commenced to receive such benefits as soon thereafter as would be prescribed by the Retirement Plan. All awards pursuant to this Section 4.2 shall be made as of the close of business on the effective date of the Plan and shall be valued in the same manner as set forth in Section 4.1 4.3 Restrictions and Terms and Conditions All shares of Restricted Stock granted under this Plan may not be sold, traded, assigned, transferred or otherwise encumbered until and unless restrictions are removed. The Company shall retain custody of all shares until restrictions are removed or may hold such shares by book entry registration. Each director granted Restricted Stock shall have all the rights of a Shareholder with respect to such shares, including the right to vote such shares and receive dividends and other distributions. 4.4 Removal of Restrictions No shares of Restricted Stock will become free of restrictions and non-forfeitable for a director until the termination of the director's services as a member of the Company's Board of Directors. Shares shall become non-forfeitable at the earliest to occur of: (a) the director's death or permanent disability, (b) mandatory retirement, pursuant to Company policy, effective at the end of the term of service during which the director has attained age 70, (c) resignation, or failure to stand for re-election, prior to such mandatory retirement provided that such action must have the consent of at least 80% of all directors then on the Board, with the affected director abstaining, or (d) the occurrence of a Change of Control as defined in the 1993 Stock Incentive Plan. Termination of service as a director for any other reason shall result in forfeiture of his or her shares of Restricted Stock. Forfeiture of shares will also result with respect to a director who, without the Company's written consent, becomes employed by, or provides consulting services to, a major direct selling company substantially engaged in a business which is competitive to a principal business conducted by the Company. The Company may require payment of all withholding taxes that may become due upon the removal of restrictions. V. ADDITIONAL PROVISIONS 5.1 The Plan shall be administered by the Compensation Committee of the Board of Directors which shall have the power to interpret the Plan and amend it from time to time as it deems proper. To the fullest extent practicable, however, the terms and conditions of the 1993 Stock Incentive Plan shall be applicable to this Plan. 5.2 The number of shares of Stock covered by any Option or award of Restricted Stock shall be proportionately adjusted for any increase or decrease in the number of issued shares of Stock resulting from a split or subdivision of shares, a combination of shares, or the payment of a stock dividend. 5.3 All Options shall become fully exercisable and all shares of Restricted Stock will become vested, upon the occurrence of a Change of Control as defined in the 1993 Stock Incentive Plan. 5.4 The Plan shall be governed by and subject to the laws of the State of New York and applicable Federal laws. EX-10.23 11 EXHIBIT 10.23 EXHIBIT 10.23 BOARD OF DIRECTORS OF AVON PRODUCTS, INC. DEFERRED COMPENSATION PLAN (As Amended and Restated Effective as of January 1, 1997) BOARD OF DIRECTORS DEFERRED COMPENSATION PLAN (As amended and Restated Effective as of January 1, 1997) ELIGIBILITY Any member of the Board of Directors of Avon Products, Inc. (the "Company") who is not also an officer may participate in the Plan. ELECTION TO DEFER Each eligible Director may elect to defer all or part of his or her cash compensation (annual retainers and meeting fees) payable for the succeeding calendar year of service. Once made, this election is irrevocable for such calendar year. With regard to amounts deferred, the participant may choose between crediting these amounts to a Deferred Stock Account or a Deferred Cash Account. The percentage allocated to these accounts is at the discretion of the participant. CREDITING OF DEFERRED AMOUNTS The Company shall establish and maintain individual accounts in the name of each participant who elects to defer compensation. Compensation deferred during any calendar quarter will be credited to the applicable account on the last day of such quarter. CASH ACCOUNT- INTEREST All deferred compensation, inclusive of accumulated interest, credited to a Deferred Cash Account as of the end of each calendar year will be credited with additional interest for such year at a rate which shall be the prime rate charged by Morgan Guaranty Trust Company of New York, in effect on the last business day of the year. The account balance as of the beginning of such year will be credited with a full year's interest. The compensation amounts newly deferred in each subsequent quarter will be credited with a portion of such annualized interest commencing as of the end of the applicable quarter, e.g. half of a full year's interest would be credited for compensation newly deferred in the second quarter of a year. The foregoing notwithstanding, any and all compensation deferred by a participant prior to 1992, inclusive of accumulated interest, will continue to be credited at the end of each calendar year with an interest rate equal to the sum of Moody's Composite Bond Rate, plus four percentage points, through the end of the year in which the Director's service is terminated. STOCK ACCOUNT - - DIVIDENDS Compensation deferred for any calendar quarter which is allocated to a Participant's Deferred Stock Account will be credited to such account as of the last day of the applicable quarter and its total dollar amount converted into a number of shares of Avon Common Stock equivalents, including fractions, ("Stock Units"). The number of Stock Units so credited will be equal to the number of shares of Avon Common Stock, including fractions, that could have been purchased with the amount of compensation deferred for the calendar quarter at the closing price of a share of such stock on the New York Stock Exchange averaged over the last 10 trading days during the calendar quarter. As of the date any dividend is paid to shareholders of Common Stock, the participant's Deferred Stock Account shall also be credited with additional Stock Units equal to the number of shares of Common Stock (including fractions of a share) that could have been purchased at the closing price of Common Stock on such date with the dividends paid on the number of shares of Common Stock to which the Participant's Stock Units are then equivalent. If at any time the number of the Company's outstanding shares of Common Stock shall be increased as the result of any stock split, stock dividend or other reclassification of shares, the number of Stock Units to which such stock is equivalent will be increased in the same proportion. As of the end of the calendar year in which the participant for any reason ceases to be a Director, including retirement, termination, or death, the total number of the participant's Stock Units, including fractions, will be converted to a cash value amount. In determining such amount, each Stock Unit will be deemed to have a value equal to the closing price of a share of Avon Common Stock on the New York Stock Exchange averaged over the last 10 trading days of such year. The resulting cash value will then b merged with the value of any separate Deferred Cash Account that may be maintained for the participant. VALUATION OF ACCOUNTS The cash value of a participant's total account including any accumulated interest and Stock Units will be determined each December 31st ("Valuation Date"). For years during which the participant continues to be a Director, Stock Units will be valued for this purpose based on the closing price of a share of Avon Common Stock on the New York Stock Exchange on the last trading day of the year. PAYMENT OF DEFERRED COMPENSATION The value of the participant's entire deferred compensation account shall be payable in cash in a single payment on or about January 15th of the year next following termination of service as a Director of the Company. If otherwise previously elected by the participant, however, such value may be paid out in consecutive annual installments up to a maximum of fifteen annual installments. All installment payments will be made on or about January 15th commencing with the year next following termination of service as a Director of the Company. Should a participant elect installment payments, the amount of the first installment payment will be a fraction of the value of the participant's total deferred compensation account on the preceding Valuation Date, the numerator of which is one (1) and the denominator of which is the total number of annual installments elected. Thereafter, the amount of each subsequent payment will be a fraction of the remaining value of the participant's deferred compensation account on the Valuation Date preceding each subsequent installment payment, the numerator of which is one (1) and the denominator of which is the total number of installments elected minus the number of installments previously paid. Interest shall continue to accrue on the unpaid balance of the account, credited annually, at the prime rate described above. DEATH OF A PARTICIPANT In the event of a participant's death any time prior to complete distribution of all amounts payable, the unpaid balance of the participant's account, including any unpaid installments, will be determined as of the Valuation Date as of the end of the calendar year in which death has occurred, and will be paid in a single sum on the January 15th following such Valuation Date, or as soon as reasonably possible thereafter. All Stock Units credited to a Deferred Stock Account will be converted to a cash value as described above. Payment will be made to the beneficiary designated by the Director in writing. In the event that a participant is not survived by a designated beneficiary, payment of the account balance will be made to the participant's surviving spouse, if any, otherwise to the participant's estate. MANNER OF ELECTION The election to defer cash compensation for any calendar year must be in writing and received by the Company prior to the beginning of such year. An election to receive payments of deferred compensation in annual installments must be made prior to the end of the year in which service with the Board has terminated; i.e. before the first installment payment has been distributed. ADMINISTRATION The Plan shall be administered by the Secretary of the Company. The right to receive deferred compensation may not be transferred, assigned, or subject to attachment or other legal process. AMENDMENT The Plan may be amended at any time by action of the Nominating and Directors' Activities Committee of the Board of Directors, provided, that no amendment may adversely effect rights to deferred compensation accrued prior to the effective date of such amendment. EX-13 12 EXHIBIT 13 EXHIBIT 13 27 Management's Discussion and Analysis Avon Products, Inc. Dollars in millions, except share data The following discussion of the results of operations and financial condition of Avon Products, Inc. ("Avon" or "Company") should be read in conjunction with the information contained in the Consolidated Financial Statements and Notes thereto. These statements have been prepared in conformity with generally accepted accounting principles and require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. All share and per share data included in this report have been restated to reflect a two-for-one stock split distributed in June 1996. Forward-Looking Statement Certain statements in this report which are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the information set forth herein. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, levels of activity, performance or achievement of the Company, or industry results, to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the ability of the Company to implement its business strategy; the Company's access to financing and its management of foreign currency risks; the Company's ability to successfully identify new business opportunities; the Company's ability to attract and retain key executives; the Company's ability to achieve anticipated cost savings and profitability targets; changes in the industry; competition; the effect of regulatory and legal restrictions imposed by foreign governments; the effect of regulatory and legal proceedings and other factors discussed in Item 1 of the Company's Form 10-K. As a result of the foregoing and other factors, no assurance can be given as to the future results and achievements of the Company. Neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements. Results of Operations Consolidated - Net income in 1997 was $338.8 compared with $317.9 in 1996. Basic and diluted earnings per share in 1997 were $2.56 and $2.54, respectively, compared with $2.38 and $2.36, respectively, in 1996. The 1997 results include the benefit of a favorable settlement of a value-added tax claim in the United Kingdom equal to approximately $26.5 on a pretax basis. The $26.5 gain represents a $20.6 settlement of disputed value-added tax charges from prior years, which is included in other (income) expense, net, and $5.9 of interest which is included in interest income. The net effect of this gain was to increase net income by $16.7 and both basic and diluted earnings per share by $.13. Net income for 1995 was $256.5, and basic and diluted earnings per share were $1.88 and $1.87, respectively. The 1995 results include a $29.6 after-tax charge to discontinued operations and a $.22 per share charge to both basic and diluted earnings per share relating to a litigation settlement with Mallinckrodt Group, Inc. ("Mallinckrodt"). See Note 3 of the Notes to the Consolidated Financial Statements for further discussion of this settlement. In addition, the following one-time pretax items are included in the 1995 results: a gain of $25.0, net of related costs, from a cash settlement of a lease dispute and a $7.0 gain, net of related expenses, due to a value-added tax refund in the United Kingdom. Partially offsetting these gains were charges of $12.0 related to an early retirement program implemented in Japan and $11.0 for severance costs, primarily in Europe, as part of Avon's program to reduce fixed expenses in certain markets. The gain in the United Kingdom and expenses in Japan and Europe are included in marketing, distribution and administrative expenses. The lease dispute related to prior year rent charges for the Company's previous headquarters building. The $25.0 gain represents a $14.0 recovery of disputed rent, which is included in marketing, distribution and administrative expenses, and $11.0 of interest, net of related costs, which is included in other (income) expense, net. The net effect of these one-time items was to increase income from continuing operations and net income by $7.6 and to increase both basic and diluted earnings per share by $.06. 28 Continuing Operations - Income from continuing operations was $338.8, or 7% over 1996. Earnings per share from continuing operations increased 8% on a basic and diluted basis to $2.56 and $2.54, respectively, from 1996. This 8% increase exceeded the 7% increase in income from continuing operations reflecting the impact of lower average shares outstanding in 1997 compared with the prior year due to the continued stock repurchase program. See Note 9 of the Notes to the Consolidated Financial Statements for further discussion of this program. Pretax income was $534.9, a 5%, or $24.5, increase over prior year. The increase was due to higher sales, the favorable value-added tax settlement in the United Kingdom, previously discussed, lower foreign exchange losses in 1997 and favorable minority interest due mainly to the results in Japan. Net income was also favorably impacted by a lower effective tax rate in 1997. These favorable results were partially offset by a decline in the gross margin and a slightly higher operating expense ratio. Income from continuing operations in 1996 increased $31.8 and basic and diluted earnings per share increased $.28 and $.27, respectively, from 1995. On a consolidated basis, Avon's net sales of $5.08 billion increased 6% from $4.81 billion in 1996. International sales increased 7% to $3.35 billion from $3.14 billion in 1996 due to strong growth in the Americas, most significantly in Mexico, Argentina, Chile and Venezuela, and in the United Kingdom, Russia, Central Europe and the Pacific Rim, primarily Taiwan and the Philippines. These improvements were partially offset by sales declines in Germany, Brazil and Japan. Sales in the U.S., including the results of Discovery Toys, Inc. which was acquired in early 1997, increased 4% to $1.73 billion due to an increase in the average order size partially offset by a decrease in the number of Representative orders. Excluding the impact of foreign currency exchange, consolidated net sales rose 10% over the prior year. In 1996, consolidated net sales of $4.81 billion increased 7% over 1995 reflecting an 8% increase in international sales due to strong growth in most markets in the Americas, the Pacific Rim, Russia, the United Kingdom and the Central European markets. These improvements were partially offset by sales declines in Japan and, to a lesser extent, Venezuela and Germany. 1996 sales in the U.S. increased 6% to $1.67 billion due to an increase in both average order size and number of Representative orders. Excluding the impact of foreign currency exchange, 1996 consolidated sales increased 14% over 1995. Cost of sales as a percentage of sales was 40.4% in 1997, compared with 39.9% in 1996. The decline in gross margin was primarily due to unfavorable cost ratios in Japan resulting from an aggressive pricing strategy and a shift in sales mix to lower-margin items and in Brazil reflecting a consumer shift towards lower-priced products as well as actions taken to reduce inventory levels. These declines were partially offset by a margin improvement in the United Kingdom due to a shift in sales mix to higher-margin items. In 1996, cost of sales as a percentage of sales was 39.9%, compared with 39.4% in 1995. The decline in gross margin was primarily due to an unfavorable cost ratio in Venezuela reflecting the impact of the bolivar devaluations, a shift to sales of lower-priced products in Japan and investments made to reduce excess inventory in Brazil. These declines were partially offset by margin improvements in Mexico, Argentina and the United Kingdom. Marketing, distribution and administrative expenses of $2.48 billion increased $136.1, or 6%, from 1996 and increased slightly as a percentage of sales to 48.9% from 48.8% in 1996. The increase in operating expenses was attributed to markets which have experienced strong sales growth, including Mexico, the United Kingdom, Russia, Taiwan and Venezuela. Operating expenses in the U.S. increased due to higher strategic spending in advertising and promotional support for new launches, the national rollout of Avon Home and costs associated with the centralization of certain operational areas. In addition, operating expenses in China were higher due to expenses incurred in preparation for the planned opening of 24 new branches during 1997 which were not put into operation because of new government recertification requirements on direct selling activities. These increases were partially offset by lower expenses in Germany due mainly to the impact of a stronger U.S. dollar in 1997. In 1996, marketing, distribution and administrative expenses of $2.35 billion increased $132.6, or 6%, from 1995 and decreased as a percentage of sales to 48.8% from 49.3% in 1995. Excluding the 1995 one-time items previously mentioned, operating expenses increased $134.6. The increase in operating expenses reflects sales volume-related increases in most markets in the Americas, the Pacific Rim and in the U.S. and higher marketing and distribution expenses in Brazil. These increases were partially offset by lower expenses in Japan reflecting the sales decline and the impact of a stronger U.S. dollar in 1996. In addition, expense levels were lower in Germany due to a continued active focus on expense reduction and in Venezuela due to the impact of the bolivar devaluations. 29 The decrease in the operating expense ratio reflects improvements in most European markets due to continued fixed expense reduction efforts, in Venezuela due to the impact of the bolivar devaluations and in Mexico and China due primarily to the significant sales growth. These improvements were partially offset by an unfavorable expense ratio in Japan due to the sales decline. Interest expense in 1997 of $41.8 increased $1.8 compared to the prior year primarily due to increased domestic debt levels partially offset by lower average debt outstanding in Brazil in 1997. Interest expense in 1996 of $40.0 decreased $1.3 from 1995 as a result of lower interest rates partially offset by slightly higher debt levels. Interest income in 1997 of $16.7 increased $2.2 compared to last year due to the interest portion of the previously discussed favorable value-added tax settlement in the United Kingdom partially offset by lower interest rates in Brazil and lower cash investment levels in the U.S. Interest income in 1996 of $14.5 decreased $4.9 compared to 1995 due to lower interest rates in Brazil and Mexico and lower cash investment levels in Brazil and in the U.S. Other (income) expense, net, was $24.8 favorable to prior year due to the $20.6 portion of the previously discussed favorable value-added tax settlement in the United Kingdom as well as lower foreign exchange losses in 1997. Other (income) expense, net, was $8.9 in 1996, an $11.7 decrease from 1995. The decrease primarily reflects favorable corporate non-operating items and lower foreign exchange losses in 1996, partially offset by the $11.0 portion of the previously discussed favorable lease settlement in 1995. Income taxes were $197.9 in 1997 and the effective tax rate was 37.0% compared with $191.4 and an effective tax rate of 37.5% in 1996. The effective tax rate was lower in 1997 due to the mix of earnings and income tax rates of international subsidiaries. In 1996, the effective tax rate was 37.5% compared with 37.9% in 1995. The lower effective tax rate in 1996 resulted from the mix of earnings and income tax rates of international subsidiaries, including a decrease in Brazil's statutory corporate tax rate. 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, Brazil has experienced high rates of inflation for a number of years. The annual inflation rate in Brazil, however, has decreased significantly over the last three years as the economic environment has improved as a result of the government's economic stabilization program implemented in mid-1994. Due to the reduced cumulative inflation rate over the past three years, Brazil, previously designated as a country with a highly inflationary economy, was converted to non- hyperinflationary status effective July 1, 1997. Venezuela and Mexico experienced high cumulative rates of inflation over the three-year period 1995 through 1997. 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, 1997. Years ended December 31 1997 1996 1995 Net Pretax Net Pretax Net Pretax Sales Income Sales Income Sales Income ________ ______ ________ _______ ________ ______ United States $1,732.9 $219.8 $1,672.5 $227.3 $1,584.8 $211.6 ________ ______ ________ _______ ________ ______ International Americas 1,752.6 310.8 1,609.9 291.9 1,466.9 265.8 Pacific 782.4 55.9 751.1 73.6 712.0 67.5 Europe 811.5 99.2 780.7 54.4 728.4 41.7 _______ ______ _______ _______ ________ ______ Total International 3,346.5 465.9 3,141.7 419.9 2,907.3 375.0 _______ ______ _______ _______ ________ ______ Total from operations $5,079.4 685.7 $4,814.2 647.2 $4,492.1 586.6 _______ _______ ________ Corporate expenses (104.3) (95.4) (74.6) Interest expense (41.8) (40.0) (41.3) Other expense, net (4.7) (1.4) (5.7) ______ _______ ______ Total $534.9 $510.4 $465.0 30 U.S. - U.S. sales increased 4% to $1.73 billion and pretax income decreased 3% to $219.8 in 1997. Excluding the results of Discovery Toys, sales were up 1% and pretax income decreased 2%. The 1% sales growth reflected a 3% increase in average order size partially offset by a 2% decrease in the number of Representative orders. Units sold increased 4% over 1996. The sales improvement resulted from increases in the cosmetics, fragrance and toiletries("CFT") and gift and decorative categories partially offset by declines in apparel. The growth in the CFT category was driven by the launches of Anew Retinol Recovery Complex and Avon Techniques hair care line in addition to the first quarter 1997 product introductions in the specialty bath segment, such as California Bath and the Soft and Sensual line extension of the Skin-So-Soft brand. Additionally, the renovated Anew launch in early 1997 contributed to higher CFT sales. The continued success of the seasonal Barbie dolls, the launch of Avon Home and the success of the Mattel line of toys led to the increase in gift and decorative sales. Apparel sales were lower in 1997 due to the success of the Olympic Games collection in 1996 and lower sales of demonstration products in the first two quarters of 1997. The decrease in pretax income resulted from a lower gross margin and a higher operating expense ratio. The decline in gross margin was due to strategic price investments in CFT products aimed at energizing customer sales and the addition of Avon Home, a lower-margin new business. The unfavorable operating expense ratio was driven by higher expenses related to advertising and promotional support for new products, costs associated with the centralization of the returned goods and call center operations and increased field incentives designed to drive sales. In addition, operational costs associated with higher returned goods processing in 1997 contributed to the unfavorable expense ratio. In 1996, U.S. sales increased 6% to $1.67 billion and pretax income increased 7% to $227.3. The sales growth reflected a 4% increase in average order size and a 2% increase in the number of Representative orders. The sales improvement was driven by significant increases in the gift and decorative, apparel and CFT categories. These improvements were partially offset by a decline in sales of the fashion jewelry and accessories category. The growth in the gift and decorative category resulted mainly from the success of both the Spring Blossom and Winter Velvet Barbie dolls introduced in 1996. The Winter Velvet Barbie doll was the most successful new product introduction in Avon's history. The success of the Diane Von Furstenberg spring and summer collections, novelty and children's lines and the launch of Legwear in 1996 contributed to the increase in apparel sales. The growth in the CFT category consisted primarily of increases in sales of personal care and fragrance products. The growth of personal care products was driven by the specialty bath segment which in 1996 reflected an aggressive new products program and a heightened promotional focus. Sales of fragrance products rose due to the introduction of several new fragrances including Millennia, Sunny Sky and Butterfly. Units sold decreased 2% from 1995. Despite strong sales growth in the gift and decorative category, units sold in this category decreased due to increased sales of higher-priced items such as the collectible Barbie dolls. Lower sales of fashion jewelry and accessories also resulted in unit declines. In addition, units decreased due to a shift in emphasis to higher quality premium-priced global brands, such as Avon Color, and away from promotional products and commodity items such as roll-ons, mini- colognes, bubble bath and talc. Despite increased expenses in 1996 due to investments in both advertising and direct access strategies, the operating expense ratio remained level with the prior year. The increase in pretax income was primarily due to the sales increase and a slightly improved gross margin. International - International sales increased 7% to $3.35 billion and pretax income increased 11% to $465.9. The sales increase reflected strong growth in the Americas, particularly in Mexico, Argentina, Chile and Venezuela, and in the United Kingdom, Russia, Central Europe and the Pacific Rim, most significantly in Taiwan and the Philippines. These improvements were partially offset by sales declines in Germany, Brazil and Japan, discussed below. Excluding the impact of foreign currency exchange, international sales grew 13% over 1996. In the Americas Region, sales increased 9% to $1.75 billion and pretax income increased 6%, or $18.9, to $310.8 from $291.9 in 1996. The sales improvement was driven by tremendous growth in Mexico reflecting strong increases in the number of orders, average order size and active Representatives primarily due to customer growth initiatives. These initiatives included incentive programs focused on 31 retention, increased sampling on breakthrough products such as Anew Vitamin C, increased advertising and an emphasis on market penetration in metropolitan areas. The sales increase in the region also reflected significant unit growth in Argentina and Chile and an increased average order size in Venezuela. In addition, Central American markets and the Dominican Republic posted strong sales increases in 1997 attributable to growth in units and active Representatives. These improvements were partially offset by a significant sales decline in Brazil. In 1997, consumers in Brazil experienced a tightening of credit which limited their purchasing ability resulting in declines in units sold and active Representatives. To improve Representative count, aggressive retention and achievement programs were implemented including incentives and premiums to improve activity and order size. Excluding the impact of foreign currency exchange, sales in the Americas were up 14% over 1996. The increase in the region's pretax income was primarily due to favorable results in Mexico reflecting the strong sales increase, described above, combined with a favorable operating expense ratio. In addition, pretax profits were higher in Argentina and Chile due mainly to the sales growth. These improvements were partially offset by a lower pretax profit in Brazil due to a significant gross margin decline and an unfavorable operating expense ratio. The gross margin decline resulted from a shift in consumer preferences towards lower-priced products and margin investments relating to inventory reduction efforts. The unfavorable operating expense ratio in Brazil was driven by the sales decline. Actions are underway in Brazil to reduce manufacturing and customer service costs, negotiate better conditions and costs with vendors and introduce more global products with a higher price and improved margin. In the Pacific Region, sales increased 4% to $782.4 and pretax income decreased 24% to $55.9 from $73.6 in 1996. The increase in sales was driven by operational improvements in the Pacific Rim, most significantly in Taiwan and the Philippines. Growth in units, customers served and active Representatives was significant in both Taiwan and the Philippines. Taiwan's sales performance was the strongest in the region resulting from successful merchandising campaigns, product launches supported by strong advertising and promotional activities including the introduction of Lighten Up Undereye Treatment, and effective field sales programs in 1997. The sales growth in the Philippines was driven by successful new and extended CFT lines, a new line of children's apparel and an additional service center in 1997. These improvements were partially offset by a significant sales decline in Japan due primarily to an unfavorable exchange impact of a stronger U.S. dollar in 1997 and a reduction in the average order size. Excluding the impact of foreign currency exchange, sales in the Pacific were up 14%. The decrease in the region's pretax income resulted from declines in Japan and, to a lesser extent, in China. The gross margin in Japan declined significantly as a result of strategic pricing programs as well as a shift in sales mix to lower-margin non-CFT items. The competitive environment remains intense in Japan with the continued relaxation of import restrictions and the accelerated growth in discount outlets. As a result, prices were adjusted earlier this year to make products more competitive in the marketplace. Efforts have been focused on restructuring the business in Japan for improved profitability including innovative recruiting programs, enhanced advertising campaigns and new systems focused on improving customer access. Despite sales growth in China, pretax profits declined due to the current government licensing revalidation process of all direct selling companies. As a result, no new branches were opened in 1997, but the expense base associated with the planned expansions negatively impacted China's pretax profit. The region's pretax income was also negatively impacted by currency devaluations throughout Southeast Asia. Several currencies in the Pacific Rim devalued significantly during 1997. The Thai baht devalued by 57%, the Philippine peso by 34%, the Malaysian ringgit by 39% and the Indonesian rupiah by 61%. These devaluations lowered pretax income by approximately $7.0 for the full year. In response to this situation, several actions have been taken by local management including cost negotiations with vendors and a focus on growing the Representative base. In terms of size, these markets represented approximately 5% of Avon's consolidated net sales in 1997. In the Europe Region, sales increased 4% to $811.5 and pretax income increased $44.8, or 82%, to $99.2 in 1997. The sales increase was primarily due to strong growth in the United Kingdom resulting from an increased average order size, unit growth and a favorable exchange rate impact. The sales growth in the United Kingdom was also attributable to 32 a focus on improving market share through brand and image enhancement. Customers have been spending more as a function of the improvement in image and the quality of the Avon brochure. The European sales improvement was also driven by unit and active Representative growth in Russia and in Central Europe, primarily Poland. Russia continues to exceed expectations as the most successful startup market in Avon's history. Russia's success was attributable to a strong Representative structure, geographic expansion into new cities, installation of new assembly lines which increased capacity and investment in system upgrades to support the sales growth. These improvements were partially offset by sales shortfalls in Germany resulting from an unfavorable exchange impact of a stronger U.S. dollar in 1997 and a weak economic environment which led to lower consumer spending and higher unemployment. Excluding the impact of foreign currency exchange, sales in Europe increased 11% over 1996. Excluding the impact of the favorable value-added tax settlement in the United Kingdom, previously discussed, pretax income rose $18.3, or 34%, over 1996. This increase was mainly due to the overall sales increase and an improved gross margin in the United Kingdom resulting from a favorable product mix of higher-margin items in 1997. Additionally, the continued effect of expense reduction efforts in Europe contributed to a lower operating expense ratio. In 1996, international sales increased 8% to $3.14 billion and pretax income increased 12% to $419.9. Excluding the 1995 one-time items previously mentioned, pretax income increased 8%. The sales increase reflected strong unit growth in most markets in the Americas Region, the Pacific Rim, the United Kingdom, Russia and Central Europe. These improvements were partially offset by sales declines in Japan attributable to both operational and economic factors, discussed below, and, to a lesser extent, in Venezuela due to the impact of the bolivar devaluations and in Germany due to both operational declines as well as a negative foreign currency impact in 1996. Excluding the impact of foreign currency exchange, international sales were up 18% over 1995. In the Americas Region, 1996 sales increased 10% to $1.61 billion and pretax income increased 10%, or $26.1, to $291.9 from $265.8 in 1995. The sales increase was driven by growth in almost every market in the region, most significantly in Mexico and Brazil. Higher sales in Mexico reflected increases in prices at a rate below the inflation level, as well as increases in average order size and unit growth. The number of active Representatives in Mexico continued to grow from the prior year due to the implementation of incentive programs focused on retention and increasing the number of orders. Brazil's sales growth was due to double-digit increases in unit volume and customers. The growth in Brazil's number of customers resulted from a revision of pricing strategies and new product launches aimed at increasing customer orders in response to an increasingly intense competitive environment in 1996. The sales increase in the region also reflected strong unit growth in Chile, Argentina and Central America. These improvements were partially offset by the decline in Venezuela resulting mainly from the negative impact of a devaluation of the bolivar. Venezuela did, however, have double-digit increases in both local currency sales and in active Representatives in 1996 attributable to a focus on building market share and Representative growth. The increase in the region's pretax income was primarily due to favorable results in Mexico reflecting the strong sales increase combined with a lower rate of increase in operating expenses, an improved gross margin and foreign exchange gains in 1996 compared to losses in 1995. The operating expense ratio in Mexico improved significantly as a result of an expense control program implemented in 1996. In addition, pretax profit was higher in Chile due mainly to sales growth. These improvements were partially offset by a lower pretax profit in Venezuela, as a result of the bolivar devaluation, and in Brazil reflecting a lower gross margin and an unfavorable operating expense ratio. The gross margin decline in Brazil resulted from investments to reduce excess inventory as well as an aggressive pricing policy to respond to intensified competitive pressures. The unfavorable operating expense ratio reflected increased investments in marketing and higher facilities expenses related to a new distribution center. In addition, a higher volume of lower-priced units in 1996 resulted in increased distribution expenses. In the Pacific Region, 1996 sales increased 6% to $751.1 and pretax income, excluding Japan's early retirement program costs in 1995 mentioned previously, decreased 7% to $73.6 from $79.5 in 1995. The increase in sales was driven by strong operational improvements in the Philippines and 33 China, and, to a lesser extent, in Taiwan, Malaysia and Australia. Sales growth in virtually all of these markets was accompanied by strong increases in units sold, customers served and active Representatives. These improvements were partially offset by a significant sales decline in Japan resulting from the unfavorable exchange impact of a stronger U.S. dollar in 1996, a shift in pricing strategy to sales of lower- priced products and a decrease in average order size. These shortfalls resulted from both internal operational factors, including changes made to the Representative commission structure at the beginning of 1996, and external conditions such as the relaxation of cosmetic import regulations which led to accelerated retail pricing competition. To address these challenges, organizational changes were made in July 1996 to better integrate the sales and marketing functions. In addition, national recruiting drives among sales managers and Representatives were conducted and product offerings in the gift and decorative and CFT categories were enhanced. In late December 1996, aggressive actions to align price levels more closely to the market were taken in Japan. These actions resulted in a 20% reduction in CFT prices. The decrease in the region's pretax income resulted from operational difficulties in Japan including a decline in the gross margin due to a continuous focus on lower-priced impulse items in an attempt to increase consumer appeal, as well as an unfavorable expense ratio caused by the significant sales decline, despite a decrease in operating expenses. In addition, pretax profits declined in Thailand due to an unfavorable operating expense ratio caused by lower sales combined with higher spending for incentive awards in 1996. These decreases were partially offset by favorable results in the Philippines due to the significant sales growth and in China due mainly to higher sales and an improved operating expense ratio. In addition, pretax profits were higher in Malaysia, Australia and Taiwan. In the Europe Region, 1996 sales increased 7% to $780.7. Excluding the 1995 one-time items, pretax income increased $10.3, or 24%, to $54.4 in 1996. The sales increase was due to unit growth in Russia, the United Kingdom and Central Europe. The Representative base in Russia and Central Europe has grown significantly in 1996 due to a continuous focus on expansion of operations in these markets. Sales also rose in Italy mainly due to a favorable impact of a weaker U.S. dollar in 1996. These improvements were partially offset by sales shortfalls in Germany reflecting a shift to lower-priced items and weak economic conditions, including increased unemployment, which resulted in a general decline in consumer confidence and spending in 1996. Aggressive discounting from competitors and a negative currency impact also contributed to the sales decline in Germany. New initiatives were launched in Germany to improve market coverage, enhance Avon's image and stimulate customer growth. The increase in pretax income was mainly due to the overall sales increase and favorable operating expense ratios in most markets due to the continued effect of fixed expense reduction efforts. Central European markets posted strong pretax profits reflecting double-digit increases in units, customers served and active Representatives despite gross margin declines from targeted pricing investments to accelerate market penetration in 1996. See Foreign Operations section under Liquidity and Capital Resources for additional discussion. Corporate Expenses - Corporate expenses were $104.3 in 1997 compared with $95.4 in 1996. The $8.9 increase reflected increased expenses in 1997 associated with process redesign and system initiatives. In 1996, corporate expenses were $95.4 compared with $74.6 in 1995. The $20.8 increase was primarily due to the favorable lease settlement in 1995 and higher expenses in 1996 for information systems upgrades and enhancements. Other Expense, Net - Other expense, net, includes corporate non- operating income and expense items and corporate interest income. Other expense, net, was $4.7 in 1997 compared with $1.4 in 1996, an increase of $3.3, due to higher non-operating expenses and lower interest income resulting from lower cash investment levels partially offset by favorable exchange in 1997. Other expense, net, was $1.4 in 1996 compared with $5.7 in 1995, a decrease of $4.3, due to lower non- operating expenses partially offset by the $11.0 portion of the 1995 lease settlement. Accounting Changes - Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings per Share". FAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and replaces the presentation of previously disclosed EPS with both basic and diluted EPS. 34 Based upon the Company's capitalization structure, the EPS amounts calculated in accordance with FAS No. 128 approximated the Company's EPS amounts in accordance with Accounting Principles Board Opinion No. 15, "Earnings per Share". All prior period EPS data have been restated in accordance with FAS No. 128. Effective January 1, 1996, the Company adopted FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. There was no impact on the Company's results of operations or financial position in adopting this statement. Also, effective January 1, 1996, the Company adopted the fair value disclosure requirements of FAS No. 123, "Accounting for Stock-Based Compensation". As permitted by the statement, the Company did not change the method of accounting for its employee stock compensation plans. See Note 8 of the Notes to the Consolidated Financial Statements for the fair value disclosures required under FAS No. 123. Recent Pronouncements - In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS No. 130, "Reporting Comprehensive Income". FAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. FAS No. 130 is effective for fiscal years beginning after December 15, 1997. The adoption of FAS No. 130 will have no impact on the Company's results of operations or financial position. Also, in June 1997, the FASB issued FAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". FAS No. 131 establishes standards for the way that publicly-held companies report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. FAS No. 131 is effective for fiscal years beginning after December 15, 1997. The adoption of FAS No. 131 will have no impact on the Company's results of operations or financial position. Discontinued Operations - In December 1995, the Company entered into an agreement with Mallinckrodt, which fully settled the litigation initiated by Mallinckrodt. The settlement covers all indemnity obligations related to Avon's sale of Mallinckrodt, including environmental clean-up claims and litigation concerning Mallinckrodt's settlement of a DuPont patent claim. The settlement payments made by Avon to Mallinckrodt, and related costs, resulted in an after-tax charge to discontinued operations in the fourth quarter of 1995, net of existing reserves, of $29.6 and a charge to both basic and diluted earnings per share of $.22. Since the Company had capital loss carryforwards, no tax benefits were recognized on the loss in 1995. Contingencies - Although Avon has completed its divestiture of all discontinued operations, various lawsuits and claims (asserted and unasserted) are pending or threatened against Avon. The Company is also involved in a number of proceedings arising out of the federal Superfund law and similar state laws. In some instances, Avon, along with other companies, has been designated as a potentially responsible party which may be liable for costs associated with these various hazardous waste sites. In the opinion of Avon's management, based on its review of the information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1997 should not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. Liquidity and Capital Resources Cash Flows - Net cash provided by continuing operations was $315.5 in 1997 compared to $425.1 in 1996. The 1997 decrease in net cash provided by continuing operations principally reflects, among other things, a higher working capital level partially offset by higher net income in 1997. The higher funding of working capital included the settlement of tax issues in the U.S. and the conclusion of the three-year long-term incentive plan which resulted in a cash 35 payment during the first quarter of 1997. A more detailed analysis of the individual items contributing to the 1997 and 1996 amounts is included in the Consolidated Statement of Cash Flows. There was no cash used by discontinued operations in 1997, compared to $38.2 in 1996 and $49.6 in 1995. The $38.2 cash used in 1996 primarily reflected final payment of the Mallinckrodt settlement in January 1996, while the $49.6 in 1995 primarily reflected the initial payment of the Mallinckrodt settlement. See discussion above in the Discontinued Operations section regarding this settlement. Excluding changes in debt, net cash usage of $78.7 in 1997 was $72.1 unfavorable compared to net cash usage of $6.6 in 1996. During 1997, the Company received net proceeds of approximately $58.6 under a securities lending transaction which was used to repay domestic commercial paper borrowings and is included in the cash flows as other financing activities. See Note 5 of the Notes to the Consolidated Financial Statements for further discussion of this transaction. Excluding changes in debt and other financing activities, there was a net increase in cash usage of $130.7. This variance reflected lower cash provided by continuing operations, higher capital expenditures and an unfavorable exchange rate impact on cash. These uses were partially offset by the unfavorable impact of discontinued operations reflected in 1996 cash flows and lower repurchases of common stock in 1997. Excluding changes in debt, net cash usage of $6.6 in 1996 was $38.1 favorable compared to net cash usage of $44.7 in 1995. This improvement reflects higher cash provided by continuing operations as well as lower cash used in 1996 for discontinued operations, partially offset by higher capital expenditures, higher cash used for the repurchase of common stock, an unfavorable exchange rate impact on cash and higher dividend payments in 1996. For the period 1994 through 1997, 14.5 million shares of common stock have been purchased for approximately $533.7 under the stock repurchase programs. See Note 9 of the Notes to the Consolidated Financial Statements for further details of the stock repurchase programs. Working Capital - As of December 31, 1997, current liabilities exceeded current assets by $11.9 compared with $41.7 at the end of 1996. The variance was primarily due to a decrease in income taxes and sales and other taxes and an increase in inventories, as discussed in the Inventories section, partially offset by an increase in net debt (debt less cash and equivalents). The decrease in income taxes was mainly due to the settlement of tax issues in the U.S., and the decrease in sales and other taxes was primarily due to the value-added tax settlement in the United Kingdom, previously discussed. See Note 6 of the Notes to the Consolidated Financial Statements for discussion on the tax settlement in the U.S. The increase in net debt was mainly due to the reclassification of the 170 million 6-1/8% deutsche mark notes from long-term to short-term with payment due in May 1998 partially offset by lower international debt levels in 1997. 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 of $234.3 at December 31, 1997, increased $32.7 from $201.6 at December 31, 1996, compared with an increase of $40.1 from December 31, 1995. In addition, at December 31, 1997, other non-current liabilities included approximately $58.6 related to securities lending activities. See Note 5 of the Notes to the Consolidated Financial Statements for further discussion of these activities. During 1997, cash flows from continuing operations and other financing activities combined with higher debt levels and cash on hand were used for dividends, repurchase of common stock and capital expenditures. During 1996, cash flows from continuing operations and higher debt levels, partially offset by higher cash and equivalents, were used for dividends, the stock repurchase program, capital expenditures, a payment made related to discontinued operations and the purchase of a company in South Africa. During 1995, cash flows from continuing operations as well as cash on hand were used for dividends, the stock repurchase program, capital expenditures, a payment made related to discontinued operations and the reduction of debt. Debt maturing within one year consisted of borrowings from banks of $29.4 and the current maturities of long-term debt of $102.7. Management believes that cash from operations and available sources of financing are adequate to meet anticipated requirements for working capital, dividends, capital expenditures, the stock repurchase program and other cash needs. During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007, for which the net proceeds were used to pay down commercial paper borrowings. 36 During 1996, the Company entered into an agreement, which expires in 2001, with various banks to amend and restate the five-year, $600.0 revolving credit and competitive advance facility agreement, which was entered into in 1994. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. The new agreement and the prior agreement are referred to, collectively, as the credit facility. The credit facility is primarily to be used to finance working capital, provide support for the issuance of commercial paper and support the stock repurchase program. At the Company's option, the interest rate on borrowings under the credit facility is based on LIBOR, prime or federal fund rates. The credit facility has an annual facility fee of $.4. The credit facility contains a covenant for interest coverage, as defined. The Company is in compliance with this covenant. At December 31, 1996, borrowings of $29.7 were outstanding under the credit facility. There were no borrowings outstanding at December 31, 1997. At December 31, 1996, Avon had $34.1 outstanding under a $500.0 commercial paper program supported by the credit facility. In addition, the Company has bankers' acceptance facilities and uncommitted lines of credit available of $205.0 with various banks which have no compensating balances or fees. As of December 31, 1997 and 1996, there were no borrowings under these facilities. In addition, as of December 31, 1997 and 1996, there were international lines of credit totaling $295.8 and $357.0, respectively, of which $29.4 and $30.2, respectively, were outstanding. There were 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 and accessories, gift and decorative items and apparel. Christmas sales cause a peak in the fourth quarter which results in the build up of inventory at the end of the third quarter. Inventory levels are then sharply reduced by the end of the fourth quarter. Inventories of $564.8 at December 31, 1997 were $34.8 higher than 1996 due to higher inventory levels in the U.S. and China and business growth and continued expansion into Central Europe and Russia. The increase in the U.S. reflects higher CFT levels to support expansion of these lines in 1998 and the addition of Avon Home in 1997 partially offset by a lower level of apparel inventory. China's higher inventory level at December 31, 1997 resulted from lower than expected sales in the fourth quarter. Additionally, the delay of planned branch expansion in China, discussed previously, contributed to a higher production of inventory during the year. These increases were partially offset by lower levels in Brazil due to inventory reduction programs in 1997 and in the Philippines due primarily to currency devaluation. 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 1997 were $169.4 (1996 - $103.6). These expenditures were made for capacity expansion in high growth markets, most significantly in China, to maintain worldwide facilities, for contemporization and replacement of information systems and for the relocation of the global and U.S. office facilities. Numerous construction and information systems projects were in progress at December 31, 1997 with an estimated cost to complete of approximately $107.0. Capital expenditures in 1998 are currently expected to be in the range of $140.0 - $160.0. These expenditures will include maintenance on existing facilities, continued investments for capacity expansion in high growth markets, facility modernization, information systems and equipment replacement projects. 37 Foreign Operations - The Company derived approximately 66% and 68% of its 1997 consolidated net sales and consolidated pretax income from operations, respectively, from its international subsidiaries. In addition, as of December 31, 1997, international subsidiaries comprised approximately 58% of the Company's consolidated total assets. Avon's operations in many countries utilize numerous currencies. Avon has significant net assets in the United Kingdom, Argentina, Japan, Germany, the Philippines and Canada. Changes in the value of these countries' currencies relative to the U.S. dollar result in direct charges or credits to equity. Avon also has substantial operations in Brazil, a country which has experienced extremely high rates of inflation for a number of years. However, due to the reduced cumulative inflation rate over the past three years, Brazil, previously designated as a country with a highly inflationary economy, was converted to non- hyperinflationary status effective July 1, 1997. Effective January 1, 1997, Mexico was designated as a country with a highly inflationary economy due to the cumulative inflation rates over the past three years. Several currencies in the Pacific Rim devalued significantly during 1997. The Thai baht devalued by 57%, the Philippine peso by 34%, the Malaysian ringgit by 39% and the Indonesian rupiah by 61%. These devaluations lowered pretax income by approximately $7.0 for the full year. In response to this situation, several actions have been taken by local management including cost negotiations with vendors and a focus on growing the Representative base. In terms of size, these markets represented approximately 5% of Avon's consolidated net sales in 1997. 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 Market Rate Sensitive Instruments and in Note 7 of the Notes to the Consolidated Financial Statements, are used to hedge various amounts relating to certain international subsidiaries. However, the Company's foreign currency hedging activities are not significant when compared to the Company's international financial position or results of operations. Some foreign subsidiaries rely primarily on short-term borrowings from local commercial banks to fund working capital needs created by their highly seasonal sales pattern. From time to time, when tax and other considerations dictate, Avon will finance subsidiary working capital needs or borrow foreign currencies. At December 31, 1997, the total indebtedness of foreign subsidiaries was $33.9. 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 1997, these subsidiaries remitted, net of taxes, $269.9 in dividends and royalties. This sum is a substantial portion of the 1997 consolidated net earnings of Avon's foreign subsidiaries. Risk Management Strategies and Market Rate Sensitive Instruments - The Company operates globally, with manufacturing and distribution facilities in various locations around the world. The Company may reduce its primary market exposures to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company currently does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives. The Company periodically uses interest rate swaps to hedge portions of interest payable on its debt. In addition, the Company may periodically employ interest rate caps to reduce exposure, if any, to increases in variable interest rates. During a substantial portion of the three-year period ended December 31, 1997, the Company utilized interest rate swaps to effectively convert variable interest on its long-term debt to a fixed interest rate. From January 1995 through July 10, 1995, due to the expiration of an interest rate swap, the interest payable on the 6 1/8% deutsche mark notes ("Notes") became variable at a rate of one-month LIBOR plus 1.4%. During this period, the Company had an interest rate cap in place to reduce its exposure to increases 38 in that variable interest rate above a specified level. On July 11, 1995, the Company entered into a new interest rate swap agreement, which effectively reconverted the interest payable on the Notes to a fixed rate basis of approximately 7.2% through maturity. Avon has three interest rate swap agreements on the Notes at December 31, 1997 and 1996, each such agreement having a notional amount of $100.0, yielding an aggregate notional amount at December 31, 1997 and 1996 of $300.0. Effective January 1995, the Company had two interest rate caps on the Notes, each with a notional amount of $100.0, one of which expired in 1996 and the other expires when the Notes mature. Subsequent to the interest rate on the Notes becoming fixed, these caps have been marked to market with an insignificant mark-to-market adjustment. In December 1995, the Company entered into an interest rate cap contract with a notional amount of $100.0, which expired in early 1997, in order to hedge a portion of the Company's anticipated short-term variable interest rate working capital debt. This cap has been marked to market with an insignificant mark-to-market adjustment. The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments and contractual foreign currency cash flows or obligations, including third- party and intercompany foreign currency transactions. The Company regularly monitors its foreign currency exposures and ensures that hedge contract amounts do not exceed the amounts of the underlying exposures. At December 31, 1997, the Company held foreign currency forward contracts with notional amounts totaling $319.1 and option contracts with notional amounts totaling $80.0 to hedge foreign currency items. These contracts all have maturities prior to December 31, 1998. During 1996, the Company also entered into certain option contracts with notional amounts totaling $46.4, and during 1997 and 1996, foreign currency forward contracts totaling $44.2, and $99.0, respectively, which do not qualify as hedging transactions under the current accounting definitions and, accordingly, have been marked to market. The mark-to-market adjustment on these option and forward contracts at 31, 1997 and 1996 was insignificant. The Company's risk of loss on these options in the future is limited to premiums paid, which are insignificant. The Company attempts to minimize its credit exposure to counterparties by entering into interest rate swap and cap contracts only with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor's Corporation. The Company's foreign currency and interest rate derivatives are comprised of over- the-counter forward contracts or options with major international financial institutions. Although the Company's theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring losses is remote and that such losses, if any, would not be material. Non-performance of the counterparties to the balance of all the currency and interest rate swap agreements would not result in a significant write-off at December 31, 1997. In addition, there are other swap agreements in a net payable position of an insignificant amount at December 31, 1997. 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. The Company is exposed to changes in financial market conditions in the normal course of its operations primarily due to international businesses and transactions denominated in foreign currencies and the use of various financial instruments to fund ongoing activities. Various derivative and non-derivative financial instruments held by the Company are sensitive to changes in interest rates. These financial instruments are either discussed above or in Notes 5 and 7 of the Notes to the Consolidated Financial Statements. Interest rate changes would result in gains or losses in the fair value of debt and other financing instruments held by the Company. Based on the outstanding balance of all instruments at December 31, 1997, a hypothetical 50 basis point increase or decrease in interest rates prevailing at this date, sustained for one year, would not represent a material potential loss in fair value, earnings or cash flows. This potential loss was calculated based on discounted cash flow analyses using interest rates comparable to the Company's current cost of debt. In 39 1997, the Company did not experience a material loss in fair value, earnings or cash flows associated with changes in interest rates. The Company also engages in various hedging activities in order to reduce potential losses due to foreign currency risks. Consistent with the nature of the economic hedge of such foreign exchange contracts, any unrealized gain or loss would be offset by corresponding decreases or increases, respectively, of the underlying instrument or transaction being hedged. These financial instruments are discussed above and in Note 7 of the Notes to the Consolidated Financial Statements. Based on the Company's foreign exchange contracts at December 31, 1997, the impact of a 10% appreciation or 10% depreciation of the U.S. dollar against the Company's foreign exchange contracts would not represent a material potential loss in fair value, earnings or cash flows. This potential loss does not consider the underlying foreign currency transaction or translation exposures of the Company. The hypothetical impact was calculated on the combined option and forward positions using forward rates at December 31, 1997 adjusted for an assumed 10% appreciation or 10% depreciation of the U.S. dollar against the foreign contracts. The impact of payoffs on option contracts is not significant to this calculation. Additionally, any foreign currency risk associated with the foreign denominated debt instrument was assumed to be offset by a related currency exchange swap contract. In 1997, foreign exchange losses associated with the Company's foreign exchange contracts did not represent a material loss in fair value, earnings or cash flows. As of December 31, 1997, the primary currencies for which the Company has foreign currency exchange rate exposure are the U.S. dollar versus the Argentine peso, Brazilian real, British pound, Canadian dollar, German mark, Japanese yen and the Mexican peso. The Company is also exposed to other South American and Asian currencies. The Company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign exchange rates on the Company's consolidated financial position, results of operations and cash flows. The impact of a 10% appreciation or 10% depreciation of the U.S. dollar against the Company's net underlying foreign currency transaction and translation exposures could be significant. Year 2000 Management has developed a worldwide program to prepare the Company's computer systems and applications for the Year 2000. Based on a comprehensive assessment of key systems, the Company has commenced a project plan to address all necessary code changes, testing and implementation required to ensure Year 2000 compliance by December 31, 1999. Management does not expect the incremental costs of making the required system modifications to have a material impact on the Company's consolidated financial position, results of operations or cash flows. Other Information On October 23, 1997, the Company announced that it has raised its long- term growth targets for sales and earnings and that it expects to record special charges in connection with a major re-engineering program. Commencing in 1998, the long-term target for sales growth has been raised to 8-10% compounded annually, and its target for earnings per share growth has been raised to 16-18% annually. Previously, the Company targeted long-term sales growth of 6-8% and long-term earnings per share growth of 13-15%. The higher targets come largely as a result of initiatives currently underway and others under review intended to reduce costs by up to $400.0 a year by 2000, with $200.0 of the savings being reinvested concurrently in advertising and marketing programs to boost sales. Avon expects to record special charges totaling $150.0- $200.0 pretax to cover one-time costs associated with the re-engineering program. Approximately half the charges are expected to be recorded in the first quarter of 1998, with the balance to be recorded in early 1999. Approximately $50.0 of the charges will be cash-related. 40 Results of Operations by Quarter Avon Products, Inc. During 1996, the Board of Directors authorized a two-for-one stock split which was distributed in June 1996. All share data shown below have been restated to reflect the split. In millions, except per share data First Second Third Fourth Year 1997 _______ _______ _______ _______ _______ Net sales $1,087.6 $1,225.0 $1,249.4 $1,517.4 $5,079.4 Gross profit 646.0 748.9 732.2 901.3 3,028.4 Income before taxes and minority interest 63.0 150.5 107.9 213.5 534.9 Income before minority interest 39.7 94.8 68.0 134.5 337.0 Net income $ 41.3 $ 95.2 $ 68.6 $ 133.7 $ 338.8 _______ _______ _______ _______ _______ Earnings per share: Basic $ .31 $ .72 $ .52 $ 1.01 $ 2.56(1) Diluted $ .31 $ .71 $ .51 $ 1.01 $ 2.54(1) _______ _______ _______ _______ _______ 1996 Net sales $1,016.1 $1,128.7 $1,177.3 $1,492.1 $4,814.2 Gross profit 614.5 691.6 702.5 884.4 2,893.0 Income before taxes and minority interest 59.8 138.7 98.9 213.0 510.4 Income before minority interest 37.1 86.0 62.8 133.1 319.0 Net income $ 37.7 $ 85.7 $ 62.5 $ 132.0 $ 317.9 _______ _______ _______ _______ _______ Earnings per share: Basic $ .28 $ .64 $ .47 $ .99 $ 2.38(1) Diluted $ .28 $ .64 $ .47 $ .99 $ 2.36(1) (1) The sum of per share amounts for the quarters does not necessarily equal that for the year because the computations are made independently. Market Prices of Common Stock by Quarter 1997 1996 Quarter High Low High Low First $ 63.63 $ 52.13 $ 44.38 $ 36.31 Second 74.00 50.63 47.56 42.56 Third 78.00 58.50 50.25 39.00 Fourth 76.75 55.50 59.50 48.50 Avon common stock is listed on the New York Stock Exchange. At December 31, 1997, there were 23,912 shareholders of record. The Company believes that there are over 50,000 additional shareholders who are not "shareholders of record" but who beneficially own and vote shares through nominee holders such as brokers, benefit plan trustees, etc. Dividends of $1.26 per share, or $.315 per share each quarter, were declared and paid in 1997. Dividends of $1.16 per share, or $.29 per share each quarter, were declared and paid in 1996. 41 Consolidated Statement of Income Avon Products, Inc. In millions, except per share data Years ended December 31 1997 1996 1995 _______ _______ _______ Net sales $ 5,079.4 $ 4,814.2 $ 4,492.1 _______ _______ _______ Costs, expenses and other Cost of sales 2,051.0 1,921.2 1,769.0 Marketing, distribution and administrative expenses 2,484.3 2,348.2 2,215.6 Interest expense 41.8 40.0 41.3 Interest income (16.7) (14.5) (19.4) Other (income) expense, net (15.9) 8.9 20.6 _______ _______ _______ Total costs, expenses and other 4,544.5 4,303.8 4,027.1 Income from continuing operations _______ _______ _______ before taxes and minority interest 534.9 510.4 465.0 Income taxes 197.9 191.4 176.4 Income from continuing operations _______ _______ _______ before minority interest 337.0 319.0 288.6 Minority interest 1.8 (1.1) (2.5) _______ _______ _______ Income from continuing operations 338.8 317.9 286.1 Discontinued operations Loss on disposals, net of taxes - - (29.6) _______ _______ _______ Net income $ 338.8 $ 317.9 $ 256.5 _______ _______ _______ Earnings per share: Basic: Continuing operations $ 2.56 $ 2.38 $ 2.10 Discontinued operations - - (.22) _______ _______ _______ Net income $ 2.56 $ 2.38 $ 1.88 Diluted: Continuing operations $ 2.54 $ 2.36 $ 2.09 Discontinued operations - - (.22) _______ _______ _______ Net income $ 2.54 $ 2.36 $ 1.87 The accompanying notes are an integral part of these statements. 42 Consolidated Balance Sheet Avon Products, Inc. In millions, except share data December 31 1997 1996 _______ _______ Assets Current assets Cash, including cash equivalents of $60.0 and $87.9 $ 141.9 $ 184.5 Accounts receivable (less allowance for doubtful accounts of $35.5 and $36.4) 444.8 437.0 Inventories 564.8 530.0 Prepaid expenses and other 192.5 198.1 _______ _______ Total current assets $1,344.0 $1,349.6 _______ _______ Property, plant and equipment, at cost Land 48.6 51.5 Buildings and improvements 567.0 564.5 Equipment 666.0 608.9 _______ _______ 1,281.6 1,224.9 Less accumulated depreciation 670.6 658.3 _______ _______ 611.0 566.6 Other assets 317.9 306.2 _______ _______ Total assets $2,272.9 $2,222.4 Liabilities and Shareholders' Equity Current liabilities Debt maturing within one year $ 132.1 $ 97.1 Accounts payable 476.0 469.3 Accrued compensation 111.3 142.4 Other accrued liabilities 268.9 238.7 Sales and other taxes 101.0 124.6 Income taxes 266.6 319.2 _______ _______ Total current liabilities $1,355.9 $1,391.3 _______ _______ Long-term debt 102.2 104.5 Employee benefit plans 367.6 384.8 Deferred income taxes 31.2 33.9 Other liabilities (including minority interest of $37.5 and $41.1) 131.0 66.2 Commitments and contingencies Shareholders' equity Common stock, par value $.25 - authorized: 400,000,000 shares; issued 174,711,173 and 173,957,379 shares 43.7 43.5 Additional paid-in capital 733.1 693.6 Retained earnings 660.9 488.8 Translation adjustments (270.3) (210.7) Treasury stock, at cost - 42,897,463 and 41,137,297 shares (882.4) (773.5) _______ _______ Total shareholders' equity 285.0 241.7 Total liabilities and _______ _______ shareholders' equity $2,272.9 $2,222.4 _______ _______ The accompanying notes are an integral part of these statements. 43 Consolidated Statement of Cash Flows Avon Products, Inc. In millions Years ended December 31 1997 1996 1995 _____ _____ _____ Cash flows from operating activities Net income $ 338.8 $ 317.9 $ 256.5 Adjustments to reconcile income to net cash provided by continuing operations: Depreciation and amortization 72.1 64.5 58.3 Provision for doubtful accounts 80.8 79.0 78.0 Translation gains (.1) (.2) (.4) Deferred income taxes 18.0 (.7) (.6) Discontinued operations, net - - 29.6 Other 9.4 9.9 13.3 Changes in assets and liabilities: Accounts receivable (121.4) (125.5) (132.5) Inventories (67.5) (65.4) (54.6) Prepaid expenses and other 6.7 13.7 (41.8) Accounts payable and accrued liabilities 42.9 97.8 59.6 Income and other taxes (56.1) 57.7 57.5 Noncurrent assets and liabilities (8.1) (23.6) 5.7 _____ _____ _____ Net cash provided by continuing operations 315.5 425.1 328.6 Net cash used by discontinued operations - (38.2) (49.6) _____ _____ _____ Net cash provided by operating activities 315.5 386.9 279.0 _____ _____ _____ Cash flows from investing activities Capital expenditures (169.4) (103.6) (72.7) Disposal of assets 3.3 3.3 2.8 Acquisitions of subsidiary stock (9.0) (6.3) (3.4) _____ _____ _____ Net cash used by investing activities (175.1) (106.6) (73.3) _____ _____ _____ Cash flows from financing activities Cash dividends (168.3) (158.1) (147.8) Debt, net (maturities of three months or less) (39.8) 17.8 8.8 Proceeds from short-term debt 25.7 37.5 32.7 Retirement of short-term debt (49.0) (14.1) (30.6) Proceeds from long-term debt 100.0 - - Retirement of long-term debt (.8) (1.5) (29.6) Proceeds from exercise of stock options, net of taxes 20.6 10.0 1.4 Repurchase of common stock (110.8) (127.8) (106.9) Other financing activities 58.6 - - _____ _____ _____ Net cash used by financing activities (163.8) (236.2) (272.0) Effect of exchange rate changes on cash and _____ _____ _____ equivalents (19.2) (11.0) 2.9 Net (decrease) increase in cash and equivalents (42.6) 33.1 (63.4) Cash and equivalents at beginning of year 184.5 151.4 214.8 _____ _____ _____ Cash and equivalents at end of year $ 141.9 $ 184.5 $ 151.4 Cash paid for _____ _____ _____ Interest $ 36.0 $ 35.2 $ 36.4 Income taxes, net of refunds received 215.8 158.9 133.5 The accompanying notes are an integral part of these statements. 44
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, 1994 173,327,748 $43.3 $660.5 $212.4 $(187.1) $(543.5) $185.6 Net income 256.5 256.5 Dividends - $1.05 per share (143.1) (143.1) Translation adjustments (15.0) (15.0) Exercise of stock options, including tax benefits 79,254 .1 1.5 1.6 Grant, cancellation and amortization of restricted stock 91,110 8.2 8.2 Repurchase of common stock (106.9) (106.9) Benefit plan contributions 2.7 3.1 5.8 ___________ ____ _____ _____ _____ _____ _____ Balance at December 31, 1995 173,498,112 43.4 672.9 325.8 (202.1) (647.3) 192.7 Net income 317.9 317.9 Dividends - $1.16 per share (154.9) (154.9) Translation adjustments (8.6) (8.6) Exercise of stock options, including tax benefits 423,267 .1 15.6 15.7 Grant, cancellation and amortization of restricted stock 36,000 2.7 2.7 Repurchase of common stock (127.8) (127.8) Benefit plan contributions 2.4 1.6 4.0 ___________ ____ _____ _____ _____ _____ _____ Balance at December 31, 1996 173,957,379 43.5 693.6 488.8 (210.7) (773.5) 241.7 Net income 338.8 338.8 Dividends - $1.26 per share (166.7) (166.7) Translation adjustments (59.6) (59.6) Exercise of stock options, including tax benefits 713,298 .2 30.3 30.5 Grant, cancellation and amortization of restricted stock 40,496 4.6 4.6 Repurchase of common stock (110.8) (110.8) Benefit plan contributions 4.6 1.9 6.5 ___________ ____ _____ _____ _____ _____ _____ Balance at December 31, 1997 174,711,173 $43.7 $733.1 $660.9 $(270.3) $(882.4) $285.0 The accompanying notes are an integral part of these statements
45 Notes to Consolidated Financial Statements Avon Products, Inc. In millions, except share data 1. Description of the Business and Summary of Significant Accounting Policies Business Avon Products, Inc. ("Avon" or the "Company") is a global manufacturer and marketer of beauty and related products. The product categories include cosmetics, fragrance and toiletries; gift and decorative; apparel; and fashion jewelry and accessories. Avon's business is comprised of one industry segment, direct selling, which is conducted in the U.S., the Americas, the Pacific and Europe. Sales are made to the ultimate customers principally by Avon Representatives. Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Avon and its subsidiaries. Intercompany balances and transactions are eliminated. These statements have been prepared in conformity with generally accepted accounting principles and require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. Foreign Currency - The Company has operations in various countries around the world. Fluctuations in the value of foreign currencies cause U.S. dollar-translated amounts to change in comparison with previous periods. Accordingly, the Company cannot project in any meaningful way the possible effect of such fluctuations upon translated amounts or future earnings. This is due to the large number of currencies involved, the constantly changing exposure in these currencies, the complexity of intercompany relationships, the hedging activity entered into in an attempt to minimize certain of the effects of exchange rate changes where economically feasible and the fact that all foreign currencies do not react in the same manner against the U.S. dollar. Financial statements of foreign subsidiaries operating in other than highly inflationary economies are translated at year-end exchange rates for assets and liabilities and average exchange rates prevailing during the year for income and expense accounts. Translation adjustments of these subsidiaries are recorded as a separate component of shareholders' equity. For financial statements of subsidiaries operating in highly inflationary economies, nonmonetary assets (principally inventories and fixed assets) and the related expenses (principally cost of sales and depreciation) are translated at the respective historical exchange rates in effect when the assets were acquired or when the subsidiary was designated as operating in a highly inflationary economy. Monetary assets and liabilities are translated at year-end exchange rates. All other income and expense accounts are translated at average exchange rates prevailing during the year. Adjustments resulting from the translation of the financial statements of these subsidiaries are included in income. Revenue Recognition - Avon recognizes revenue as shipments are made and title passes to independent Representatives, who are Avon's customers. Cash and Equivalents - Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are highly liquid debt instruments with an original maturity of three months or less and consist of time deposits with a number of U.S. and non-U.S. commercial banks with high credit ratings. In accordance with Avon's policy, the maximum amount invested in any one bank is limited. Avon believes it is not exposed to any significant credit risk regarding cash and equivalents. Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out ("LIFO") method for substantially all U.S. inventories, except apparel, and the first-in, first-out method for all other inventories. Depreciation - Substantially all buildings, improvements and equipment are depreciated using the straight-line method over estimated useful lives. Estimated useful lives for buildings and improvements range from 20 to 45 years and equipment ranges from 3 to 15 years. Other Assets - Internal system development costs related to the development of major information and accounting systems are expensed as incurred. Stock Options - Compensation cost is recognized for fixed price options using the intrinsic value method. Under this method, compensation cost is the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Financial Instruments - Derivative financial instruments are used by the Company in the management of its interest rate and foreign currency exposures and are accounted for on an accrual basis. Gains and losses resulting from effective hedges of existing assets, liabilities or firm commitments are deferred as other assets or liabilities and recognized when the offsetting gains and losses are recognized on the related hedged items. Income and expense are recorded in 46 the same category as that arising from the related asset or liability being hedged. Items not qualifying for hedge accounting are marked to market with the resulting gain or loss recognized in other (income) expense, net. Gains realized on termination of interest rate swap contracts are deferred and amortized over the remaining terms of the original swap agreements. Costs of interest rate cap contracts are amortized over the effective lives of the contracts if considered to be economic hedges; otherwise, they are marked to market. Research and Development - Research and development costs are expensed as incurred and aggregated in 1997 $29.9 (1996 - $30.2; 1995 - $27.8). Advertising - Advertising costs are expensed as incurred and aggregated in 1997 $64.5 (1996 - $69.6; 1995 - $52.8). Income Taxes - Deferred income taxes have been provided on items recognized for financial reporting purposes in different periods than for income tax purposes at future enacted rates. U.S. income taxes have not been provided on approximately $191.4 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 $25.7 would be payable. Earnings per Share - Basic earnings per share are computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted earnings per share are calculated to give effect to all potentially dilutive common shares that were outstanding during the year. For each of the three years ended December 31, 1997, the number of shares used in the computation of basic and diluted earnings per share are as follows: 1997 1996 1995 Basic EPS ______ ______ ______ Weighted-average shares 132.34 133.70 136.48 Incremental shares from conversion of: Stock options 1.16 .93 .38 Diluted EPS ______ ______ ______ Adjusted weighted-average shares 133.50 134.63 136.86 ______ ______ ______ All share and per share data included in this report have been restated to reflect a two-for-one stock split distributed in June 1996. Reclassifications - To conform to the 1997 presentation, certain reclassifications were made to the prior years' consolidated financial statements. 2. Accounting Changes Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 128, "Earnings per Share". FAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and replaces the presentation of previously disclosed EPS with both basic and diluted EPS. Based upon the Company's capitalization structure, the EPS amounts calculated in accordance with FAS No. 128 approximated the Company's EPS amounts in accordance with Accounting Principles Board Opinion ("APB") No. 15, "Earnings per Share." All prior period EPS data have been restated in accordance with FAS No. 128. Effective January 1, 1996, the Company adopted FAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. There was no impact on the Company's results of operations or financial position in adopting this statement. Also, effective January 1, 1996, the Company adopted the fair value disclosure requirements of FAS No. 123, "Accounting for Stock-Based Compensation". As permitted by the statement, the Company did not change the method of accounting for its employee stock compensation plans. See Note 8 for the fair value disclosures required under FAS No. 123. Recent Pronouncements - In June 1997, the Financial Accounting Standards Board ("FASB") issued FAS No. 130, "Reporting Comprehensive Income". FAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. FAS No. 130 is effective for fiscal years beginning after December 15, 1997. The adoption of FAS No. 130 will have no impact on the Company's results of operations or financial position. 47 Also, in June 1997, the FASB issued FAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". FAS No. 131 establishes standards for the way that publicly-held companies report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. FAS No. 131 is effective for fiscal years beginning after December 15, 1997. The adoption of FAS No. 131 will have no impact on the Company's results of operations or financial position. 3. Discontinued Operations In December 1995, the Company entered into an agreement with Mallinckrodt Group, Inc. ("Mallinckrodt"), which fully settled the litigation initiated by Mallinckrodt. The settlement covers all indemnity obligations related to Avon's sale of Mallinckrodt, including environmental clean-up claims and litigation concerning Mallinckrodt's settlement of a DuPont patent claim. The settlement payments made by Avon to Mallinckrodt, and related costs, resulted in an after-tax charge to discontinued operations in the fourth quarter of 1995, net of existing reserves, of $29.6 and a charge to both basic and diluted earnings per share of $.22. Since the Company had capital loss carryforwards, no tax benefits were recognized on the loss in 1995. 4. Inventories Inventories at December 31 consisted of the following: 1997 1996 _____ _____ Raw materials $147.4 $136.7 Finished goods 417.4 393.3 _____ _____ Total $564.8 $530.0 _____ _____ LIFO-based inventories at December 31, 1997 were $143.5; (1996 - $120.3) with the current estimated replacement cost exceeding the carrying value by approximately $15.2 (1996 - $20.0). 5. Debt and Other Financing Debt at December 31 consisted of the following (See also Note 7 regarding financial instruments.): 1997 1996 _____ _____ Maturing within one year: Notes payable $ 29.4 $ 94.0 Current portion of long-term debt 102.7 3.1 _____ _____ Total $ 132.1 $ 97.1 _____ _____ Long-term debt: 6.55% notes, due 2007 $ 100.0 $ - 170 million 6-1/8% deutsche mark notes, due 1998 (1) 100.0 100.0 Other, payable to 2002 with interest from 9% to 30% 4.9 7.6 Less current portion (102.7) (3.1) _____ _____ Total $ 102.2 $ 104.5 _____ _____ (1) The deutsche mark notes ("Notes") have been effectively converted into U.S. dollar debt through the use of a currency exchange swap contract which includes both the principal and the interest. Reflected in the carrying value of the debt was a currency swap contract (payable)/receivable at December 31, 1997 of ($5.1) (1996 - $9.7). Annual maturities of long-term debt for each of the next five years are: 1998 - $102.7; 1999 - $1.4; 2000 - $.5; 2001 - $.2, and 2002 and beyond $100.1. During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007 for which the net proceeds were used to pay down commercial paper borrowings. During 1996, the Company entered into an agreement, which expires in 2001, with various banks to amend and restate the five-year, $600.0 revolving credit and competitive advance facility agreement, which was previously entered into in 1994. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. The new agreement and the prior agreement are referred to, collectively, as the credit facility. The credit facility is primarily to be used to finance working capital, provide support for the issuance of commercial paper and support the stock repurchase program. At the Company's option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, or federal fund rates. The credit facility has an annual facility fee of $.4. The credit facility contains a covenant for interest coverage, as defined. The Company is in compliance with this covenant. 48 At December 31, 1997, there were no borrowings outstanding under the credit facility. At December 31, 1996, borrowings of $29.7 were outstanding under the credit facility. The borrowings of $29.7 represented a 3.45 billion yen loan, which was paid in November 1997, used to hedge the Company's net investment in Japan. The annual interest rate was .78%. At December 31, 1996, Avon had $34.1 outstanding under a $500.0 commercial paper program supported by the credit facility. In addition, the Company has bankers' acceptance facilities and uncommitted lines of credit available of $205.0 (1996 - $230.0) with various banks which have no compensating balances or fees. As of December 31, 1997 and 1996, there were no borrowings under the bankers' acceptance facilities and uncommitted lines. The maximum borrowings under these combined facilities during 1997 and 1996 were $409.3 and $361.9, respectively, and the annual average borrowings during each year were approximately $274.6 and $271.3, respectively, at average annual interest rates of approximately 5.2% and 5.5%, respectively. At December 31, 1997 and 1996, international lines of credit totaled $295.8 and $357.0, respectively, of which $29.4 and $30.2 were outstanding, respectively. The maximum borrowings under these facilities during 1997 and 1996 were $38.8 and $58.3, respectively, and the annual average borrowings during each year were $33.8 and $47.2, respectively, at average annual interest rates of approximately 9.9% and 6.3%, respectively. Such lines have no compensating balances or fees. At December 31, 1997 and 1996, Avon also has letters of credit outstanding totaling $15.5 and $18.7, respectively, which guarantee various insurance activities. In addition, Avon has outstanding letters of credit for various trade activities. During 1997, the Company entered into a securities lending transaction resulting in the borrowing of securities which were subsequently sold for net proceeds approximating $58.6 used to repay commercial paper borrowings. The borrowed securities are due to the lender no later than December 29, 2000, but at the Company's option can be returned at any time. The obligation is included in other non- current liabilities on the balance sheet. The effective rate on the transaction is expected to be 6.5%. 6. Income Taxes Deferred tax assets (liabilities) resulting from temporary differences in the recognition of income and expense for tax and financial reporting purposes at December 31 consisted of the following: 1997 1996 Deferred tax assets: _____ _____ Postretirement benefits $ 69.3 $ 83.5 Accrued expenses and reserves 44.0 53.2 Employee benefit plans 40.0 46.8 Foreign operating loss carryforwards 32.5 30.1 Capital loss carryforwards 21.2 36.3 Postemployment benefits 10.6 10.9 All other 17.7 25.8 Valuation allowance (55.7) (70.0) _____ _____ Total deferred tax assets 179.6 216.6 Deferred tax liabilities: _____ _____ Depreciation (35.6) (44.0) Prepaid retirement plan costs (52.4) (54.6) Capitalized interest (13.5) (15.0) Unremitted foreign earnings (12.0) (11.6) All other (9.0) (14.8) _____ _____ Total deferred tax liabilities (122.5) (140.0) _____ _____ Net deferred tax assets $ 57.1 $ 76.6 Deferred tax assets (liabilities) at December 31 were classified as follows: 1997 1996 Deferred tax assets: _____ _____ Prepaid expenses and other $ 76.5 $ 67.4 Other assets 16.1 46.6 _____ _____ Total deferred tax assets 92.6 114.0 Deferred tax liabilities: _____ _____ Income taxes (4.3) (3.5) Deferred income taxes (31.2) (33.9) _____ _____ Total deferred tax liabilities (35.5) (37.4) _____ _____ Net deferred tax assets $ 57.1 $ 76.6 The valuation allowance primarily represents reserves for foreign operating loss and capital loss carryforwards. The basis used for recognition of deferred tax assets included the profitability of the operations and related deferred tax liabilities. 49 Income from continuing operations before taxes and minority interest for the years ended December 31 was as follows: 1997 1996 1995 _____ _____ _____ United States $ 153.6 $ 171.3 $ 149.7 Foreign 381.3 339.1 315.3 _____ _____ _____ Total $ 534.9 $ 510.4 $ 465.0 The provision for income taxes for the years ended December 31 was as follows: 1997 1996 1995 Federal: Current $ 5.4 $ 30.9 $ 23.3 Deferred 21.3 1.0 .9 _____ _____ _____ 26.7 31.9 24.2 Foreign: Current 169.7 152.4 146.2 Deferred (7.7) (1.5) (1.4) _____ _____ _____ 162.0 150.9 144.8 State and other: Current 4.8 8.8 7.5 Deferred 4.4 (.2) (.1) _____ _____ _____ 9.2 8.6 7.4 _____ _____ _____ Total $ 197.9 $ 191.4 $ 176.4 The effective tax rate for the years ended December 31 was as follows: 1997 1996 1995 ____ ____ ____ Statutory federal rate 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit 1.1 1.1 1.0 Tax-exempt operations (.5) (.7) (.7) Taxes on foreign income, including translation 5.3 6.8 7.5 Utilization of net operating loss carryforwards .0 (.5) (.1) Other (3.9) (4.2) (4.8) ____ ____ ____ Effective tax rate 37.0% 37.5% 37.9% During 1997, the Company reached final agreement with the Internal Revenue Service with respect to its examination of the Company's income tax returns for the years 1982 through 1989. As anticipated, payments, including related interest, made under this settlement were approximately $42.4. Reserves previously had been provided by the Company related to the agreement. In the fourth quarter of 1997, the Company recorded a benefit related to a value-added tax settlement in the United Kingdom totaling $26.5, of which $20.6 and $5.9 have been reflected in other (income) expense, net and interest income, respectively. At December 31, 1997, Avon had foreign operating loss carryforwards of approximately $84.0. The loss carryforwards expiring between 1998 and 2005 were $53.5 and the loss carryforwards which do not expire were $30.5. Capital loss carryforwards, which expire between 1999 and 2001 and may be used to offset capital gains, if any, were approximately $60.6 at December 31, 1997. 7. Financial Instruments and Risk Management Risk Management - The Company operates globally, with manufacturing and distribution facilities in various locations around the world. The Company may reduce its exposure to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company currently does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives. The notional amount of forward exchange contracts and options is the amount of foreign currency bought or sold at maturity. The notional amount of interest rate swaps is the underlying principal amount used in determining the interest payments exchanged over the life of the swap. The notional amounts are not a direct measure of the Company's exposure through its use of derivatives. Interest Rates - The Company periodically uses interest rate swaps to hedge portions of interest payable on its debt. In addition, the Company may periodically employ interest rate caps to reduce exposure, if any, to increases in variable interest rates. 50 During a substantial portion of the three-year period ended December 31, 1997, the Company utilized interest rate swaps to effectively convert variable interest on its long-term debt to a fixed interest rate. From January 1995 through July 10, 1995, due to the expiration of an interest rate swap, the interest payable on the Notes became variable at a rate of one-month LIBOR plus 1.4%. During this period, the Company had an interest rate cap in place to reduce its exposure to increases in that variable interest rate above a specified level. On July 11, 1995, the Company entered into a new interest rate swap agreement, which effectively reconverted the interest payable on the Notes to a fixed rate basis of approximately 7.2% through maturity. Avon has three interest rate swap agreements on the Notes at December 31, 1997 and 1996, each such agreement having a notional amount of $100.0, yielding an aggregate notional amount at December 31, 1997 and 1996 of $300.0. Effective January 1995, the Company had two interest rate caps on the Notes, each with a notional amount of $100.0, one of which expired in 1996 and the other expires when the Notes mature. Subsequent to the interest rate on the Notes becoming fixed, these caps were marked to market with an insignificant mark-to-market adjustment. In December 1995, the Company entered into an interest rate cap contract with a notional amount of $100.0, which expired in early 1997, in order to hedge a portion of the Company's anticipated short-term variable interest rate working capital debt. This cap has been marked to market with an insignificant mark-to-market adjustment. Foreign Currencies - The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments and contractual foreign currency cash flows or obligations, including third-party and intercompany foreign currency transactions. The Company regularly monitors its foreign currency exposures and ensures that hedge contract amounts do not exceed the amounts of the underlying exposures. At December 31, 1997, the Company held foreign currency forward contracts with notional amounts totaling $319.1 (1996 - $203.1) and option contracts with notional amounts totaling $80.0 (1996 - $61.2) to hedge foreign currency items. These contracts all have maturities prior to December 31, 1998. During 1996, the Company also entered into certain option contracts with notional amounts totaling $46.4 and, during 1997 and 1996, foreign currency forward contracts totaling $44.2 and $99.0, respectively, which do not qualify as hedging transactions under the current accounting definitions and, accordingly, have been marked to market. The mark-to-market adjustments on these option and forward contracts at December 31, 1997 and 1996 were insignificant. The Company's risk of loss on the options in the future is limited to premiums paid, which are insignificant. These forward and option contracts to purchase and sell foreign currencies, including cross-currency contracts to sell one foreign currency for another currency at December 31 are summarized below: 1997 1996 Buy Sell Buy Sell _____ _____ _____ _____ Argentine peso $ - $ - $ - $ 15.0 Brazilian real - - - 84.0 British pound 29.1 56.5 1.5 33.9 Canadian dollar - 30.8 - 44.1 Chinese renminbi - - - 10.0 French franc - 13.8 1.0 14.4 German mark 77.2 12.4 59.5 16.2 Indonesian rupiah 3.7 5.0 - - Irish punt 13.0 2.9 13.6 1.6 Italian lira 7.8 3.7 12.7 1.8 Japanese yen 12.0 53.3 57.2 28.1 Malaysian ringgit - 6.0 - - Mexican peso - 40.0 - - Philippine peso - 15.0 - - Russian ruble - 20.0 - - Spanish peseta - 7.0 - 10.1 Taiwanese dollar - 20.2 - - Thai baht - 5.1 - - Other currencies 4.1 4.7 .9 4.1 _____ _____ _____ _____ Total $146.9 $296.4 $146.4 $263.3 51 Credit and Market Risk - The Company attempts to minimize its credit exposure to counterparties by entering into interest rate swap and cap contracts only with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor's Corporation. The Company's foreign currency and interest rate derivatives are comprised of over-the-counter forward contracts or options with major international financial institutions. Although the Company's theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring losses is remote and that such losses, if any, would not be material. Non-performance of the counterparties to the balance of all the currency and interest rate swap agreements would not result in a significant write-off at December 31, 1997. In addition, there are other swap agreements in a net payable position of an insignificant amount at December 31, 1997. 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 - For purposes of the following disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The aggregate fair value amounts presented are not intended to, and do not, represent the underlying fair value of Avon. The methods and assumptions used to estimate fair value are as follows: Grantor trust - The fair value of these investments, principally money market funds and equity securities, is based on the quoted market prices for issues listed on exchanges. Debt maturing within one year and long-term debt and other financing - The fair value of all debt and other financing is estimated based on the quoted market prices for issues listed on exchanges. Forward exchange and currency option contracts - The fair value of forward exchange and currency option contracts is estimated based on quoted market prices from banks. Interest rate swap, currency swap and interest rate cap agreements - The fair value of interest rate swap, currency swap and interest rate cap agreements is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that Avon would expect to receive or pay to terminate the agreements. The asset and (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at December 31 consisted of the following: 1997 1996 Carrying Fair Carrying Fair Amount Value Amount Value _____ _____ _____ _____ Cash and equivalents $141.9 $141.9 $184.5 $184.5 Grantor trust 61.1 62.7 49.4 57.2 Debt maturing within one year (127.0) (127.6) (97.1) (97.1) Long-term debt and other financing (160.3) (162.7) (114.2) (117.2) Currency swap contract on long-term debt (5.1) (1.7) 9.7 16.2 Other forward exchange and option contracts 5.0 10.3 .3 1.0 Interest rate swap receivable - .1 - .1 Interest rate swaps payable (.7) (2.2) (.7) (6.4) 52 8. Stock Option Plans A summary of the Company's stock option activity, weighted-average exercise price and related information for the years ended December 31 is as follows: 1995 1996 1997 __________________ ___________________ ___________________ Weighted Weighted Weighted Shares Average Shares Average Shares Average (in 000's) Price (in 000's) Price (in 000's) Price __________________ ___________________ ___________________ Outstanding - beginning of year 1,064 $24.22 2,409 $28.45 2,875 $32.56 Granted 1,430 30.96 894 39.62 1,430 61.35 Exercised (79) 17.46 (423) 24.16 (713) 28.93 Forfeited (6) 23.20 (5) 24.93 (57) 55.00 Outstanding - _____ _____ _____ _____ _____ _____ end of year 2,409 $28.45 2,875 $32.56 3,535 $44.58 Options exer- cisable - _____ _____ _____ _____ _____ _____ end of year 449 $24.21 575 $26.03 680 $30.53 Exercise prices for options outstanding as of December 31, 1997 consisted of 10,000 options at a price range of $12 to $13; 2,142,000 options at a price range of $26 to $46 and 1,383,000 options at a price range of $61 to $63, with weighted-average remaining contractual lives of approximately one year, eight years and nine years, respectively. The 1993 Stock Incentive Plan ("1993 Plan") provides for several types of equity-based incentive compensation awards. Under the 1993 Plan, the maximum number of shares that may be awarded is 7,050,000 shares, of which no more than 4,000,000 shares may be used for restricted share and stock bonus grants. Awards, when made, may also be in the form of stock options, stock appreciation rights, dividend equivalent rights or performance unit awards. Stock options granted to officers and key employees shall be at a price no less than fair market value on the date the option is granted. During 1997, 1996 and 1995, restricted shares with aggregate value and vesting and related amortization periods were granted as follows: 1997 - 18,000 shares valued at $1.2 vesting over one to three years; 1996 - 39,000 shares valued at $1.7 vesting over two to four years; and 1995 - 96,000 shares valued at $2.8 vesting over two to four years. Effective January 1, 1997, the 1997 Long-Term Incentive Plan ("1997 LTIP") was authorized under the 1993 Plan. The 1997 LTIP provides for the grant of two forms of incentive awards, performance units for potential cash incentives and ten-year stock options. Performance units are earned over the three-year performance period (1997-1999), based on the degree of attainment of performance objectives. Options are awarded annually over the three-year performance period and vest in thirds over the three-year period following each option grant date. As discussed above, these options are granted at the fair market value on the date the option is granted. Effective January 1, 1994, the 1994 Long-Term Incentive Plan ("1994 LTIP") was authorized under the 1993 Plan authorizing the grant of two forms of incentive awards, performance units for potential cash incentives and ten-year stock options. As of December 31, 1996, required performance goals under the 1994 LTIP were achieved and, accordingly, the cash incentives totaling $31.0 were paid in early 1997. As of December 31, 1993, required performance goals under the prior long-term incentive plan were achieved and, accordingly, 50% of previously issued restricted shares were vested and issued in early 1994. An additional 30% of such shares vested and were issued in early 1995 while the remaining 20% vested and were issued in early 1996. During 1993, 96,180 restricted shares were issued under that plan, with an aggregate value on the date of grant of $3.5. Expense was recorded as the restricted shares vested over the periods established for each grant. Compensation expense under all plans in 1997 was $15.6 (1996 - $14.7; 1995 - $13.7). The unamortized cost as of December 31, 1997 was $2.0 (1996 - $4.0). The accrued cost of the performance units in 1997 was $12.7 (1996 - $12.0; 1995 - $9.4). 53 The Company has adopted the disclosure provisions of FAS No. 123, but, as permitted by the statement, has continued to apply APB No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its employee stock option plans. Under APB No. 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. If the Company had elected to recognize compensation cost for the plans based on the fair value at the grant dates, consistent with the method prescribed by FAS No. 123, net income and earnings per share would have been changed to the pro forma amounts indicated below (in millions, except for earnings per share information): 1997 1996 1995 Pro forma net income $332.5 $314.9 $255.3 Pro forma earnings per share : Basic $ 2.51 $ 2.36 $ 1.87 Diluted $ 2.49 $ 2.34 $ 1.87 Pro forma information regarding net income and earnings per share is required by FAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of FAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model which was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including the expected stock price volatility. The weighted-average assumptions used for 1997 were the risk-free interest rate of approximately 6.3%; dividend yield of 2%; expected volatility of the market price of the Company's common stock of 25%; and a weighted- average expected life of the options of approximately five years. The weighted-average assumptions used for both 1996 and 1995 were the risk- free interest rate of approximately 5.5%; dividend yield of 3%; expected volatility of the market price of the Company's common stock of 20%; and a weighted-average expected life of the options of approximately three years. 9. Shareholders' Equity Stock Split - At the 1996 Annual Meeting, the shareholders approved an amendment to the Company's Certificate of Incorporation to increase the number of shares of common stock authorized from 200 million to 400 million shares and decrease the par value per share from $.50 to $.25. Subsequently, the Company's Board of Directors ("Board") authorized a two-for-one stock split which was distributed in June 1996 to shareholders of record after the close of business on May 15, 1996. Share Rights Plan - Avon has a 1988 Share Rights Plan under which one right has been declared as a dividend for each outstanding share of its common stock. Each right, which is redeemable at $.005 at any time at Avon's option, entitles the shareholder, among other things, to purchase one share of Avon common stock at a price equal to one-half of the then current market price, if certain events have occurred. The right is exercisable if, among other events, one party obtains a beneficial ownership of 20% or more of Avon's voting stock. Dividends - On February 1, 1997, Avon increased the regular dividend on common shares to an annual rate of $1.26 per share, with the first quarterly dividend at the rate of $.315 per share having been paid on March 3, 1997. On February 1, 1996, Avon increased the regular dividend on common shares to an annual rate of $1.16 per share, with the first quarterly dividend at the rate of $.29 per share having been paid on March 1, 1996. On August 2, 1995, Avon increased the regular dividend on common shares to an annual rate of $1.10 per share, with the first quarterly dividend at the rate of $.275 per share having been paid on September 1, 1995. Stock Repurchase Programs - During 1994, Avon's Board authorized a stock repurchase program under which Avon would buy back up to 10% of its then outstanding common stock, or approximately 14,000,000 shares. As of February 1997, when the plan ended, the cumulative number of shares repurchased was 12.7 million shares at a total cost of $424.4 which are included in Treasury Stock. Under a new repurchase program, which began in February 1997, the Company repurchased approximately 1.8 million shares at a total cost of approximately $109.3 as of December 31, 1997. Under this new program, the Company may buy back up to $500.0 of its currently outstanding common stock through open market purchases over a period of up to three to five years. 54 Savings Plan - In 1997, Avon contributed 43,672 (1996 - 86,186) shares of treasury stock to an employees' savings plan and recognized expense for its fair value. In addition, during 1997, the Company contributed an additional 60,000 shares, for which the expense had been accrued at December 31, 1996. The expense recognized for the plan in 1997 was $2.6 (1996 - $7.0; 1995 - $3.7). Board of Directors Remuneration - Effective May 1, 1997, the Company discontinued the Board retirement plan, which was applicable only to non-management directors. Directors retiring after that date have had the actuarial value of their accrued retirement benefits converted to a one-time grant of common stock which is restricted as to transfer until retirement. 26,393 shares were issued to directors as a result of the discontinuance of the plan. As a replacement for such plan, effective on and after May 1, 1997, each non-management director is annually granted options to purchase 2,000 shares of common stock, at an exercise price based on the fair market price of the stock on the date of grant. The first such annual grant was made May 1, 1997 consisting of a total of 20,000 options with an exercise price of $61.63. Also effective as of May 1, 1997, the annual retainer paid to non- management directors was changed to consist of $.025 cash plus an annual grant of shares having a value of $.025 based on the average closing market price of the stock for the ten days preceding the date of grant. These shares are also restricted as to transfer until the director retires from the Board. The first such grant was made May 1, 1997 consisting of a total of 4,260 shares. 10. Employee Benefit Plans Retirement Plans - Avon and certain subsidiaries have noncontributory retirement plans for substantially all employees. Benefits under these plans are generally based on an employee's years of service and average compensation near retirement. Plans are funded on a current basis except where funding is not required. Net retirement plan expense for the years ended December 31 was determined as follows: 1997 1996 1995 Service cost $ 35.2 $ 36.6 $ 33.4 Interest cost 63.1 61.4 58.5 Actual return on plan assets (117.3) (72.8) (121.1) Net amortization 67.5 21.2 66.4 _____ _____ _____ Net retirement plan expense $ 48.5 $ 46.4 $ 37.2 Retirement plan expense is determined using assumptions as of the beginning of the year. The weighted-average assumptions used to determine the data for the years ended December 31 are as follows: 1997 1996 1995 ____ ____ ____ Discount rate 7.4% 7.3% 8.2% Rate of compensation increase 4.7 4.5 4.8 Rate of return on assets 9.2 9.3 9.3 The funded status of retirement plans at December 31, using assumptions as of the end of the year, consisted of the following: Assets Exceed Accumulated Accumulated Benefits Benefits Exceed Assets 1997 1996 1997 1996 Plan assets at fair value (primarily listed stocks and bonds) $ 753.7 $ 657.5 $ 31.8 $ 33.2 ______ ______ ______ ______ Present value of projected benefit obligation: Accumulated benefit obligation Vested (508.4) (496.8) (143.5) (151.1) Nonvested (82.0) (73.1) (33.3) (24.8) Projected compensation increases (90.4) (91.8) (32.3) (37.0) ______ ______ ______ ______ Projected benefit obligation (680.8) (661.7) (209.1) (212.9) ______ ______ ______ ______ Plan assets in excess of (less than) projected benefit obligation 72.9 (4.2) (177.3) (179.7) Unrecognized net loss 67.3 111.5 32.0 25.2 Unrecognized prior service cost (12.4) 16.5 5.2 8.1 Unrecognized transition (gain) loss (12.6) (21.3) 9.6 9.1 Adjustment for additional liability - - (18.1) (11.2) Prepaid (accrued) retirement ______ ______ ______ ______ plan cost $ 115.2 $ 102.5 $(148.6) $(148.5) 55 At December 31, 1997 and 1996, the weighted-average discount rates used in determining the projected benefit obligations were 7.0% and 7.6%, respectively. Prepaid retirement plan cost shown above is included in Other Assets. The accrued retirement plan cost shown above is primarily included in Employee Benefit Plans. Effective July 1998, the defined benefit retirement plan covering U.S.-based employees will be converted to a cash balance plan with benefits determined by compensation credits related to age and service and interest credits based on individual account balances and prevailing interest rates. Additional amendments include an increased company matching contribution to the savings plan and a ten year transitional benefit arrangement for certain employees covered under the existing defined benefit retirement plan. Supplemental Executive Retirement and Life Insurance Plans - Avon has a Supplemental Executive Retirement Plan ("SERP") which is a defined benefit plan under which Avon will pay supplemental pension benefits to key executives in addition to amounts received under Avon's retirement plan. The annual cost of this plan has been included in the determination of the net retirement plan expense shown above and in 1997 amounted to $5.5 (1996 - $5.5; 1995 - $4.4). Such benefits will be paid from Avon's assets. The accumulated benefit obligation under this plan at December 31, 1997 was $22.8 (1996 - $21.8) 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, 1997 was $20.6 (1996 - $29.3) and is held in a grantor trust. During 1997, certain retirees elected to receive a cash distribution from the SLIP approximating $10.0, which was funded by corporate-owned life insurance policies. Avon has established a grantor trust to provide funding for the benefits payable under the SERP and SLIP. The trust is irrevocable and assets contributed to the trust can only be used to pay such benefits with certain exceptions. The assets held in the trust at December 31, 1997, amounted to $81.7 (1996 - $78.7), 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. Net postretirement benefit cost for the years ended December 31 included the following components: 1997 1996 1995 Service cost $ 3.0 $ 3.3 $ 4.0 Interest cost 13.0 14.0 16.3 ____ ____ ____ Total postretirement benefit cost $16.0 $17.3 $20.3 The assumptions used to determine the data for the years ended December 31 are as follows: 1997 1996 1995 Discount rate 7.7% 7.2% 8.5% Rate of assumed compensation increases 4.5 4.5 4.5 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: 1997 1996 Retirees $136.6 $139.2 Other fully eligible participants 3.8 3.7 Other active participants 56.7 53.1 Unrealized gain 6.2 10.8 _____ _____ Accumulated postretirement benefits obligation $203.3 $206.8 At December 31, 1997 and 1996, the weighted-average discount rates used in determining the accumulated benefits obligation were 7.2% and 7.7%, respectively. For 1997, the assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 9.0% for pre-65 claims (8.5% for post-65 claims) and will gradually decrease each year thereafter to 5.0% in 2005 and beyond. Increasing the health care cost trend rate by one percentage point would have increased the accumulated postretirement benefits obligation at December 31, 1997 by $23.2 and would have increased the 1997 annual postretirement benefits expense by $2.4. 56 Postemployment Benefits - Avon provides postemployment benefits which include salary continuation, severance benefits, disability benefits and continuation of health care benefits and life insurance coverage to former employees after employment but before retirement. At December 31, 1997, the accrued cost for postemployment benefits was $35.0 (1996 - $32.2) and is included in Employee Benefit Plans. 11. Geographic Information Sales and pretax income by geographic area are presented on page 29. Identifiable assets by geographic area at December 31 were as follows: 1997 1996 1995 United States $ 528.9 $ 470.2 $ 449.2 _______ _______ _______ International Americas 583.5 548.8 498.4 Pacific 378.4 383.5 375.5 Europe 363.5 377.4 339.7 Total International 1,325.4 1,309.7 1,213.6 Corporate and other* 418.6 442.5 390.0 Total $2,272.9 $2,222.4 $2,052.8 *Includes Cash Equivalents in 1997 of $60.0 (1996 - $87.9; 1995 - $60.5). Foreign Exchange - Financial statement translation of subsidiaries operating in highly inflationary economies and foreign currency transactions resulted in losses in 1997 netting to $2.2 (1996 - $3.1; 1995 - $6.9), which are included in Other (income) expense, net and Income taxes. In addition, cost of sales and expenses include the unfavorable impact of the translation of inventories and prepaid expenses at historical rates in countries with highly inflationary economies in 1997 of $6.0 (1996 - $12.6; 1995 - $4.7). 12. Leases and Commitments Minimum rental commitments under noncancellable operating leases, primarily for equipment and office facilities at December 31, 1997, consisted of the following: Year 1998 $ 60.9 1999 45.4 2000 35.0 2001 26.3 2002 19.2 Later years 208.5 Sublease rental income (8.5) _____ Total $386.8 Rent expense related to continuing operations in 1997 was $88.2 (1996 - $89.7; 1995 - $78.0). Various construction and information systems projects were in progress at December 31, 1997 with an estimated cost to complete of approximately $107.0. 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. In 1991, a class action lawsuit was initiated against Avon on behalf of certain classes of holders of Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS"). This lawsuit alleges various contract and securities law claims relating to the PERCS (which were fully redeemed that year). Avon has rejected the assertions in this case, believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. In the opinion of Avon's management, based on its review of the information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1997 should not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. 14. Subsequent Event On February 5, 1998, Avon's Board approved an increase in the quarterly cash dividend to $.34 per share from $.315. The first dividend at the new rate will be paid on March 2, 1998 to shareholders of record on February 17, 1998. On an annualized basis, the new dividend rate will be $1.36 per share. 57 Report of Management The accompanying consolidated financial statements of Avon Products, Inc. have been prepared by management in conformity with generally accepted accounting principles and necessarily include amounts that are based on judgments and estimates. The audit report of Coopers & Lybrand L.L.P., independent accountants, on these financial statements is the result of their audits of these consolidated financial statements, which were performed in accordance with generally accepted auditing standards. Avon maintains an internal control structure and related systems, policies and procedures designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with appropriate authorization and accounting records may be relied upon for the preparation of financial information. Avon also maintains an internal audit department that evaluates and formally reports to management on the adequacy and effectiveness of controls, policies and procedures. The audit committee of the board of directors, comprised solely of outside directors, has an oversight role in the area of financial reporting and internal controls. This committee meets several times during the year with management, Coopers & Lybrand L.L.P. and the internal auditors to monitor the proper discharge of each of their respective responsibilities. Coopers & Lybrand L.L.P. and the internal auditors have free access to management and to the audit committee to discuss the results of their activities and the adequacy of controls. It is management's opinion that Avon's policies and procedures, reinforced by the internal control structure, provide reasonable assurance that operations are managed in a responsible and professional manner with a commitment to the highest standard of business conduct. James E. Preston Robert J. Corti Chairman of the Board and Senior Vice President, 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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. New York, New York February 5, 1998 58 Eleven-Year Review In millions, except per share and employee data 1997 1996 1995 1994 Income data Net sales $5,079.4 $4,814.2 $4,492.1 $4,266.5 Interest expense 41.8 40.0 41.3 50.8 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 534.9 510.4 465.0 433.8 Income from continuing operations before minority interest and cumulative effect of accounting changes 337.0 319.0 288.6 270.3 Income from continuing operations 338.8 317.9 286.1 264.8 Income (loss) from discontinued operations, net - - (29.6) (23.8) Cumulative effect of accounting changes, net - - - (45.2)(1) Net income (loss) 338.8 317.9 256.5 195.8 Earnings (loss) per share - basic (4) (5) Continuing operations $ 2.56 $ 2.38 $ 2.10 $ 1.88 Discontinued operations - - (.22) (.17) Cumulative effect of accounting changes - - - (.32) Net income (loss) 2.56 2.38 1.88 1.39 Earnings (loss) per share - diluted (4) (5) Continuing operations $ 2.54 $ 2.36 $ 2.09 $ 1.87 Discontinued operations - - (.22) (.17) Cumulative effect of accounting changes - - - (.32) Net income (loss) 2.54 2.36 1.87 1.38 Cash dividends per share Common $ 1.26 $ 1.16 $ 1.05 $ .95 Preferred - - - - Balance sheet data Working capital $ (11.9) $ (41.7) $ (30.3) $ 9.3 Capital expenditures 169.4 103.6 72.7 99.9 Property, plant and equipment, net 611.0 566.6 537.8 528.4 Total assets 2,272.9 2,222.4 2,052.8 1,978.3 Debt maturing within one year 132.1 97.1 47.3 61.2 Long-term debt 102.2 104.5 114.2 116.5 Total debt 234.3 201.6 161.5 177.7 Shareholders' equity 285.0 241.7 192.7 185.6 Number of employees United States 8,100 7,800 8,000 7,900 International 26,900 25,900 23,800 22,500 Total employees 35,000 33,700 31,800 30,400 59 1993 1992 1991 1990 Income data Net sales $3,844.1 $3,660.5 $3,441.0 $3,291.6 Interest expense 45.2 43.7 75.4 77.5 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 394.6 290.0(2) 352.9 305.6 Income from continuing operations before minority interest and cumulative effect of accounting changes 243.8 169.4(2) 209.3 180.3 Income from continuing operations 236.9 164.2(2) 204.8 174.1 Income (loss) from discontinued operations, net 2.7 10.8 (69.1) 21.2 Cumulative effect of accounting changes, net (107.5)(1) - - - Net income (loss) 132.1 175.0(2) 135.7 195.3 Earnings (loss) per share - basic (4) (5) Continuing operations $ 1.64 $ 1.14 $ 1.30(6) $ 1.22 Discontinued operations .02 .08 (.48) .18 Cumulative effect of accounting changes (.74) - - - Net income (loss) .92 1.22 .82(6) 1.40 Earnings (loss) per share - diluted (4) (5) Continuing operations $ 1.64 $ 1.14(2) $ 1.43(6) $ 1.16 Discontinued operations .02 .07 (.48) .14 Cumulative effect of accounting changes (.74) - - - Net income (loss) .92 1.21(2) .95(6) 1.30 Cash dividends per share Common $ .85 $ .75 $ 2.20(8) $ .50 Preferred - - .505 1.00 Balance sheet data Working Capital $ 23.1 $ (99.5) $ (135.3) $ 71.6 Capital expenditures 58.1 62.7 61.2 36.3 Property, plant and equipment, net 476.2 476.7 468.5 467.2 Total assets 1,918.7 1,692.6 1,693.3 2,010.1 Debt maturing within one year 70.4 37.3 143.8 207.1 Long-term debt 123.7 177.7 208.1 334.8 Total debt 194.1 215.0 351.9 541.9 Shareholders' equity 314.0 310.5 251.6 393.4 Number of employees United States 8,000 8,700 9,200 9,500 International 21,500 20,700 20,900 20,300 Total employees 29,500 29,400 30,100 29,800 Avon Products, Inc. 1989 1988 1987 Income data Net sales $2,998.3 $2,835.2 $2,506.2 Interest expense 118.0 112.9 77.5 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 252.9 208.3 359.6(3) Income from continuing operations before minority interest and cumulative effect of accounting changes 134.1 121.1 224.8(3) Income from continuing operations 126.5 112.3 222.8(3) Income (loss) from discontinued operations, net (71.9) (536.8) (63.7) Cumulative effect of accounting changes, net - 20.0(1) - Net income (loss) 54.6 (404.5) 159.1(3) Earnings (loss) per share - basic (4) (5) Continuing operations $ .82(7) $ .76(7) $ 1.58 Discontinued operations (.65) (4.31) (.45) Cumulative effect of accounting changes - .16 - Net income (loss) .17(7) (3.39)(7) 1.13 Earnings (loss) per share - diluted (4) (5) Continuing operations $ .81(7) $ .76(7) $ 1.57(3) Discontinued operations (.64) (4.31) (.45) Cumulative effect of accounting changes - .16 - Net income (loss) .17(7) (3.39)(7) 1.12(3) Cash dividends per share Common $ .50 $ .75 $ 1.00 Preferred 1.00 .50 - Balance sheet data Working capital $ 56.3 $ 51.0 $ 122.2 Capital expenditures 33.3 46.0 45.9 Property, plant and equipment, net 472.5 529.1 561.3 Total assets 1,994.1 2,362.6 2,419.6 Debt maturing within one year 151.7 205.6 62.8 Long-term debt 673.2 917.9 801.8 Total debt 824.9 1,123.5 864.6 Shareholders' equity 228.3 239.3 758.6 Number of employees United States 9,400 9,700 10,500 International 19,900 18,400 18,100 Total employees 29,300 28,100 28,600 (1) Effective January 1, 1994, Avon adopted Statement of Financial Accounting Standards ("FAS") No. 112, "Employers' Accounting for Postemployment Benefits", for all applicable operations, and FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", for its foreign benefit plans. In addition, effective January 1, 1994, Avon changed its method of accounting for internal systems development costs. These development costs are being expensed as incurred, rather than deferred and amortized over future periods. Effective January 1, 1993, Avon adopted FAS No. 106, for its U.S. retiree health care and life insurance benefit plans and FAS No. 109, "Accounting for Income Taxes". Effective January 1, 1988, Avon adopted FAS No. 96, "Accounting for Income Taxes". (2) In 1992, Avon began the restructuring of its worldwide manufacturing and distribution facilities and recorded a provision of $96.0 ($64.4 after tax, or $.45 per share). Income from continuing operations in 1993 increased 4% from $228.6, or $1.59 per share, excluding the 1992 restructuring charge. (3) The following nonrecurring transactions were recorded during 1987: a pretax gain of $191.0 ($121.1 after tax, or $.86 per share) resulting from the sale of subsidiary stock and a special provision for restructuring of $47.5 ($29.4 after tax, or $.21 per share). (4) A two-for-one stock split was distributed in June 1996. All per share data in this report, unless indicated, have been restated to reflect the split. (5) Effective for the year ended December 31, 1997, the Company adopted FAS No. 128, "Earnings per Share". FAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and replaces the presentation of previously disclosed EPS with both basic and diluted EPS. Based upon the Company's capitalization structure, the EPS amounts calculated in accordance with FAS No. 128 approximated the Company's EPS amounts in accordance with Accounting Principles Board Opinion No. 15, "Earnings per Share". All prior period EPS data have been restated in accordance with FAS No. 128. (6) For 1991, in management's opinion, per share amounts assuming dilution, even though the result is antidilutive, provide the most meaningful comparison of per share data because they show the full effect of the conversion of 36 preferred shares into approximately 25.92 common shares on June 3, 1991. (7) In 1989 and 1988, the calculation of earnings per share assuming dilution is antidilutive and accordingly, earnings per share have not been adjusted for the conversion of preferred shares into additional common shares. (8) Includes special dividend of $1.50 paid in 1991. EX-21 13 EXHIBIT 21 EXHIBIT 21 AVON PRODUCTS, INC. AND SUBSIDIARIES Subsidiaries of the Registrant Avon Products, Inc. ("Avon"), a New York corporation, consolidates all majority owned subsidiaries. The principal consolidated subsidiaries, all of which are wholly owned by Avon or its wholly owned subsidiaries, except as indicated, are listed below. Included on the list below are subsidiaries which individually are not significant subsidiaries but primarily represent subsidiaries in countries in which the Company has direct selling operations. The names of Avon's other consolidated subsidiaries, which are primarily wholly owned by Avon or its wholly owned subsidiaries, are not listed because all such subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. Incorporation Company Country or State ______________________ ________________ Cosmetics Avon S.A.C.I. Argentina Avon Cosmetics Pty. Limited Australia Avon Products Pty. Limited Australia Avon Cosmetics Vertriebsgesellschaft m.b.h Austria Arlington Limited Bermuda Avon International (Bermuda) Ltd. Bermuda Productos Avon Bolivia Ltda. Bolivia Avon Cosmeticos, Ltda. Brazil Avon Canada, Inc. Canada Avon Fashions, Inc. - Avon Mode Inc. Canada Cosmeticos Avon S.A. Chile Avon Products (Guangzhou) Ltd. (73.845%), China Avon Manufacturing (Guangzhou) Ltd. (73.845%) China Avon Kosmetika d.o.o. Croatia Avon Cosmetics, Spolecnosti S. Rucenlm Omezenym Czech Republic Avon Capital Corporation Delaware Avon Diversified Services, Inc. Delaware Avon International Operations, Inc. Delaware Avon-Lomalinda, Inc. Delaware Avon-Mirabella, Inc. Delaware Marbella Dominicana Delaware Manila Manufacturing Company Delaware Productos Avon S.A. Dominican Republic Productos Avon Ecuador S.A. Ecuador Productos Avon, S.A. El Salvador Avon S.A. France Avon Cosmetics GmbH Germany Productos Avon de Guatemala, S.A. Guatemala Productos Avon, S.A. Honduras Avon Cosmetics (FEBO) Limited Hong Kong Avon Cosmetics Hungary KFT Hungary Avon Service Center, Inc. Illinois Avon Beauty Productos India Private Limited India P.T. Avon Indonesia (85%) Indonesia Albee Dublin Finance Company Ireland Avon Limited Ireland Avon Cosmetics Ireland Limited Ireland Avon Cosmetics S.p.A. Italy Avon Products Company Limited (66%) Japan Live and Life Company Limited Japan Avon Cosmetics (Malaysia) Sendirian Berhad Malaysia Avon Cosmetics, S.A. de C.V. Mexico M.I. Holdings, Inc. Missouri Avon Americas, Ltd. New York Avon Overseas Capital Corporation New York Avon Cosmetics Limited New Zealand Productos Avon S.A. Panama Productos Avon S.A Peru Cosmeticos Aliados S.A. Peru Avon Cosmetics, Inc. Philippines Avon Products Mfg., Inc. Philippines Beautifont Products, Inc. Philippines Avon Cosmetics Polska Sp. z.o.o. Poland Esmeralda Sp. z.o.o. (30%) Poland Avon Cosmeticos, Lda. Portugal Avon Cosmetics Spal s.r.o. Slovak Republic Avon Beauty Products Co. (ABPC) Russia Russia Justine/Avon PTY. Ltd. South Africa Avon Cosmetics, S.A. Spain Avon Cosmetics (Taiwan) Ltd. Taiwan Avon Products Limited Taiwan Avon Cosmetics (Thailand) Ltd. Thailand California Manufacturing Company Ltd. Thailand Exzacibasi Avon Kosmetik Urunleri Turkey Sanayi ve Ticaret A.S. (50%) (Joint Venture) Avon Cosmetics Limited United Kingdom Avon European Holdings Ltd. United Kingdom Avon Cosmetics de Venezuela, C.A. Venezuela Albee Holdings C.A. Venezuela EX-24 14 EXHIBIT 24 EXHIBIT 24 FORM 10-K POWER OF ATTORNEY _________________ KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, WARD M. MILLER, JR. and MARTIN H. MICHAEL and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, in his or her name, place and stead, in any and all capacities, to sign the 1997 Annual Report on Form 10-K of Avon Products, Inc. and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys-in-fact and agents full power and authority to do and perform each and every act, as fully to all intents and purposes as they might or could do in person, thereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this power of attorney as of March 5, 1998. Signature Title _________ _____ Chairman of the Board and Chief Executive Officer - Principal /s/James E. Preston Executive Officer and Director ___________________ James E. Preston Vice Chairman, Chief Operating /s/Charles R. Perrin Officer and Director ___________________ Charles R. Perrin Senior Vice President, Chief Financial Officer /s/Robert J. Corti Principal Financial Officer __________________ Robert J. Corti Vice President and Controller - /s/Michael R. Mathieson Principal Accounting Officer _______________________ Michael R. Mathieson President, Avon Products, Inc. /s/Andrea Jung and Director _______________________ Andrea Jung Executive Vice President, President, Avon North America /s/Susan J. Kropf and Director _______________________ Susan J. Kropf Signature Title _________ _____ /s/Brenda C. Barnes Director ___________________ Brenda C. Barnes /s/Richard S. Barton Director ____________________ Richard S. Barton /s/Remedios Diaz Oliver Director _______________________ Remedios Diaz Oliver /s/Edward T. Fogarty Director ____________________ Edward T. Fogarty /s/Charles S. Locke Director ___________________ Charles S. Locke /s/Ann S. Moore Director _______________ Ann S. Moore EX-27 15 EXHIBIT 27
5 EXHIBIT 27 Exhibit 27 Avon Products, Inc. Financial Data Schedule This schedule contains summary financial information extracted from the Avon Products, Inc. financial statements as of December 31, 1997 and for the year then ended included in the Form 10-K as of December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1000000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 142 0 481 (36) 565 1,344 1,282 (671) 2,273 1,356 102 0 0 44 241 2,273 5,079 5,079 2,051 4,454 0 81 42 535 198 339 0 0 0 339 2.56 2.54
-----END PRIVACY-ENHANCED MESSAGE-----