-----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, QcuVc7GqXzrbVLBr4HIIp5pdundV6vK707BnTrkJLnS0nj0pZ0usyssX4BjH/yfm CZHjuU2caza1w/taO7mdZQ== 0000008868-99-000004.txt : 19990226 0000008868-99-000004.hdr.sgml : 19990226 ACCESSION NUMBER: 0000008868-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990225 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: 99549212 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, 1998 CONFORMED COPY 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, 1998 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 January 31, 1999 was $9.7 billion. The number of shares of Common Stock (par value $.25) outstanding at January 31, 1999 was 261,901,384. Documents Incorporated by Reference Parts I and II Portions of the 1998 Annual Report to Shareholders. Part III Portions of the Proxy Statement for the 1999 Annual Meeting of Shareholders. 1 PART I ITEM 1. BUSINESS Certain statements in this report which are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the information set forth herein. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, levels of activity, performance or achievement of Avon Products, Inc. ("Avon" or the "Company"), or industry results, to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions; the ability of the Company to implement its business strategy; the Company's access to financing and its management of foreign currency risks; the Company's ability to successfully identify new business opportunities; the Company's ability to attract and retain key executives; the Company's ability to achieve anticipated cost savings and profitability targets; the impact of substantial currency exchange devaluations in the Company's principal foreign markets; changes in the industry; competition; the effect of regulatory and legal restrictions imposed by foreign governments; the effect of regulatory and legal proceedings and other factors as discussed in Item 1 of this Form 10-K. As a result of the foregoing and other factors, no assurance can be given as to the future results and achievements of the Company. Neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements. General The Company is one of the world's leading manufacturers and marketers of beauty and related products, which include cosmetics, fragrance and toiletries (CFT); 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. The Company's reportable segments are based on geographic operations. Financial information relating to the reportable segments is incorporated by reference to the analysis of net sales and operating profit by geographic area, and to Note 11 of the Notes to the Consolidated Financial Statements, on pages 32 and 57, respectively, in Avon's 1998 Annual Report to Shareholders. Business Process Redesign On October 23, 1997, the Company announced that it raised its long- term growth targets for sales and earnings per share and that it expects to record special charges in connection with a major business redesign - -1- 2 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 million a year by 2000, with approximately $200.0 million of the savings being reinvested concurrently in advertising and marketing programs to boost sales. In the first quarter of 1998, the Company recorded $108.4 million pretax of such one-time charges ($84.2 million after tax, or $.32 per share on a basic and diluted basis) in connection with the business process redesign program. Slightly more than half of the total pretax charges in the first quarter were to be cash related with payments in 1998 and 1999. In the third quarter of 1998, the Company recorded additional special charges for business redesign efforts totaling $46.0 million pretax ($38.6 million after tax, or $.14 per share on a basic and diluted basis). Approximately 70% of the third quarter pretax charges were to be cash related with payments in 1998 and At December 31, 1998, the remaining liability balance was $28.5 million and relates primarily to severance costs that will be paid during 1999. The Company expects to record additional one-time charges in 1999 as plans are finalized. Global Business Strategy Business Process Redesign programs will continue to free resources to fund strategic growth initiatives and drive earnings. Organizationally, the Company will also continue to leverage economies of scale in critical functional areas in order to fully resource these strategies. Avon's global strategies are 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 45 countries outside the U.S. and its products are distributed in 89 more, for coverage in 135 markets and it continues to expand into new markets. The Company has entered 19 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. Direct Selling Contemporization The Company continues to revitalize its direct selling channel, enabling the Company to reach women quickly and efficiently by offering Representatives training, support and earnings opportunities. - -2- 3 In addition to new leadership, sales training and communication programs, the Company is planning to increase its leveraging of new technology such as the Internet to improve customer service, offer electronic ordering and provide Representatives ways to give instant feedback. As the first major beauty company to enable consumer purchases on line in 1997, the site now attracts 300,000 visitors per month. Additionally, Avon annually produces more than 600 million brochures in a dozen languages, utilizing common imagery and layouts from a single global database to enhance global beauty image. Avon's beauty strategy provides for product excellence in CFT brands and the introduction of new products that complement this core beauty business. In 1996 and 1997, the Company had outstanding success with Barbie dolls, designed exclusively for Avon, making it the Company's best selling gift product ever. The relationship with Mattel, which supplies the Barbie dolls, 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. Complementary Access and Image Enhancement To accelerate growth in established industrial nations such as the U.S., Western Europe and Japan, the Company has developed new channels to reach more customers and improve access to its products through Avon Beauty Centers and Express Centers in the U.S., toll-free telephone numbers, direct mail and "on line" shopping via the internet on Avon's web site, Avon.com. Avon Beauty Centers, located in urban malls across the U.S., are designed to display an upscale beauty image, showcase the Company's beauty brands and encourage customer trial of product. Avon Express Centers also provide easy access to products and allow Representatives to fill orders immediately, rather than waiting for campaign deliveries. In 1999, Avon intends to implement a more integrated Internet strategy to focus on improving access and accelerating growth. These complementary access programs will further increase Avon's brand awareness and drive global beauty image. Strategies to increase the number of "fixed locations" that sell Avon products also help reach new customers in the Pacific Region. For example, the Philippines, India and Indonesia use decentralized branches and satellite stores to serve Representatives and customers. Representatives come to a branch near their homes to place and pick up product orders for their customers. The branches also create -3- 4 visibility for Avon with consumers and help build the Company's beauty image. Additionally, in Malaysia, Avon has 145 franchised beauty boutiques, which are staffed by franchise Representatives and located in areas with high concentrations of Representatives. The boutiques provide more direct and personal service to Representatives and their customers. The Company continues to update the image of its core beauty products and its portfolio of global beauty brands. In the past four years, CFT products have all undergone extensive upgrades in packaging, imaging and formulations, consistent with the global brands strategy. These contemporary products project a consistent, high quality image in all markets and include brands such as Anew, Skin-So- Soft, Avon Color, Far Away, Rare Gold, Natori, Millennia, Josie, Starring, Avon Skin Care and Women of Earth. Global brands are growing rapidly as a percentage of the Company's worldwide CFT business and in 1998 and 1997, they accounted for 47% and 39%, respectively, of core beauty sales. The development of global brands has also enabled the Company to deliver a consistent beauty image around the world, as well as improve margins through pricing and supply chain efficiencies. Avon is also marketing a more vibrant beauty image through increased advertising and research and development spending and image-building programs focused on the consumer. In 1998, the Company's most dramatic move in image enhancement came with the opening of the Avon Centre, a spa, salon and retail store located in Trump Tower, New York City. The Avon Centre emphasizes health and beauty and offers a selection of Avon beauty products created exclusively for use at the Avon Centre. Through these strategic initiatives designed to focus on high- quality, affordable products, as well as convenience for the customer, Avon is not only positioned for continued growth but also strengthening its image. Distribution Avon's products are sold worldwide by approximately 2.8 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. The Company's products are sold to customers through a combination of direct selling and marketing utilizing independent -4- 5 Representatives, Avon Beauty Centers, Express Centers in urban areas, the mail, phone, fax or "on-line". Representatives go where the customers are, both in the home and in the workplace. In the United States, the Representative contacts customers, selling primarily through the use of brochures which also highlight new products and specially priced items for each two-week sales campaign. Product samples, demonstration products and selling aids such as make-up color charts are also used. Generally, the Representative forwards an order every two weeks to a designated distribution center. This order is processed and the products are assembled at the distribution center and delivered to the Representative's home, usually by a local delivery service. The Representative then delivers the merchandise and collects payment from the customer for their own account. Payment by the Representative to Avon is customarily made when the next order is forwarded to the distribution center. The cost of merchandise to the Representative varies according to the product category and/or to the total order size for each two-week sales campaign and averages approximately 60 percent of the recommended selling price. Avon employs certain electronic order systems to increase Representative support in the United States and allow them to run their business more efficiently as well as to improve order processing accuracy. One of these systems permits Representatives to submit add- on orders with a touch-tone telephone, enabling them to augment orders already submitted by placing a phone call. Another system, Avon's Personal Order Entry Terminal, permits the top-producing Representatives in the United States to transmit orders electronically by phone line, 24 hours a day, seven days a week. Outside the United States, each sales campaign is generally of a three or four week duration. Although terms of payment and cost of merchandise to the Representative vary from country to country, the basic method of direct selling and marketing by Representatives is essentially the same as that used in the United States, and substantially the same merchandising and promotional techniques are utilized. The recruiting and training of Representatives are the primary responsibilities of district managers. In the United States, each district manager has responsibility for a market area covered by 225 to 300 Representatives. District managers are employees of Avon and are paid a salary and a sales incentive based primarily on the increase over the prior year's sales of Avon products by Representatives in their district. Personal contacts, including recommendations from current Representatives and local advertising, -5- 6 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 through sales aids such as brochures, product samples and demonstration products. In order to support the efforts of Representatives to reach new customers, especially working women and other individuals who frequently are not at home, specially designed sales aids, promotional pieces, customer flyers and 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. CFT products are available each sales campaign at consistently low prices, while maintaining introductory specials and periodic sales on selected items for limited time periods. From time to time, various regulations or laws have been proposed or adopted that would, in general, restrict the frequency, duration or volume of sales resulting from new product introductions, special prices or other special price offers. The Company's pricing flexibility and broad product lines are expected to be able to mitigate the effect of these regulations. -6- 7 Competitive Conditions The CFT; gift and decorative; apparel; and fashion jewelry and accessory industries are highly competitive. Avon is one of the leading manufacturers and distributors of cosmetics and fragrances in the United States. Its principal competitors are the large and well- known cosmetics and fragrances companies that manufacture and sell broad product lines through various types of retail establishments. There are many other companies that compete in particular products or product lines sold through retail establishments. Avon has many competitors in the gift and decorative products and apparel industries in the United States, including retail establishments, principally department stores, gift shops and direct- mail companies, specializing in these products. Avon is one of the leading distributors of fashion jewelry and accessories for women in the United States. Its principal competition in the fashion jewelry industry consists of a few large companies and many small companies that manufacture and sell fashion jewelry for women through retail establishments. The number of competitors and degree of competition that Avon faces in its foreign CFT and fashion jewelry markets varies widely from country to country. Avon is one of the leading manufacturers and distributors in the CFT industry in most of its foreign markets, as well as in the fashion jewelry industry in Europe. 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- 8 Avon's consolidated net sales, by classes of principal products, are as follows: Years ended December 31 1998 1997 1996 (In millions) Cosmetics, fragrance and toiletries... $3,181.6 $3,093.9 $2,946.8 Gift and decorative...................... 1,050.6 1,049.7 934.1 Apparel.....................................572.0 565.6 556.3 Fashion jewelry and accessories......... 408.5 370.2 377.0 $5,212.7 $5,079.4 $4,814.2 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 45 countries and Avon's products are distributed in some 89 other countries. Manufacturing Avon manufactures and packages almost all of its CFT products. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components, are purchased from various suppliers. Packages, consisting of containers and packaging components, are designed by its staff of artists and designers. The design and development of new products are affected by the cost and availability of materials such as glass, plastics and chemicals. Avon believes that it can continue to obtain sufficient raw materials and supplies to manufacture and produce its products. Avon has eighteen manufacturing laboratories around the world, two of which are principally devoted to the manufacture of fashion jewelry. In the United States, Avon's CFT products are produced in three manufacturing laboratories for the four distribution centers and all Beauty and Express centers. Most products sold in foreign countries are manufactured in Avon's facilities abroad. The fashion jewelry line is generally developed by Avon's staff -8- 9 and produced in its two manufacturing laboratories, one in Puerto Rico and one in Ireland, or by several independent manufacturers. Trademarks and Patents Avon's business is not materially dependent on third party patent or other intellectual property rights and Avon is not a party to any material license, franchise or concession. The Company, however, does seek to protect its key proprietary technologies by aggressively pursuing comprehensive patent coverage in all major markets. Avon's major trademarks are protected by registration in the United States and the other countries where its products are marketed as well as in many other countries throughout the world. Contingencies Although Avon has completed its divestiture of all discontinued operations, various lawsuits and claims (asserted and unasserted), are pending or threatened against Avon. The Company is also involved in a number of proceedings arising out of the federal Superfund law and similar state laws. In some instances Avon, along with other companies, has been designated as a potentially responsible party which may be liable for costs associated with these various hazardous waste sites. In the opinion of Avon's management, based on its review of the information available at this time, the difference, if any, between the total cost of resolving such contingencies and reserves recorded by Avon at December 31, 1998 should not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. SEASONAL NATURE OF BUSINESS Avon's sales and earnings have a marked seasonal pattern characteristic of many companies selling CFT; gift and decorative products; apparel; and fashion jewelry. Christmas sales cause a sales peak in the fourth quarter of the year. Fourth quarter net sales were 30 percent of total net sales in both 1998 and 1997, respectively, and before one-time charges, fourth quarter operating profit was 37 percent and 36 percent of total operating profit in 1998 and 1997, 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 -9- 10 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 CFT 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 $31.4 million in 1998, $29.9 million in 1997, and $30.2 million in 1996. This research included the activities of product research and development and package design and development. Most of these activities are related to the development of CFT products. ENVIRONMENTAL MATTERS Pursuant to Avon's global environmental policy, environmental audits are conducted to ensure Avon facilities around the world meet or exceed local regulatory standards. A corporate environmental operations committee ensures that opportunities for environmental performance improvements are reflected in our products, packaging and manufacturing processes. In general, compliance with environmental regulations impacting Avon's global operations has not had, and is not anticipated to have, any material effect upon the capital expenditures, financial position or competitive position of Avon. -10- 11 EMPLOYEES At December 31, 1998, Avon employed 33,900 people. Of these, 8,000 were employed in the United States and 25,900 in other countries. The number of employees tends to rise from a low point in January to a high point in November and decreases somewhat in December when Christmas shipments are completed. ITEM 2. PROPERTIES Avon's principal properties consist of manufacturing laboratories for the production of CFT and fashion jewelry and distribution centers where offices are located and where finished merchandise is warehoused and shipped to Representatives in fulfillment of their orders. Substantially all of these properties are owned by Avon or its subsidiaries, are in good repair, adequately meet Avon's needs and operate at reasonable levels of productive capacity. The domestic manufacturing laboratories are located in Morton Grove, IL; Springdale, OH; and Suffern, NY; the distribution centers are located in Atlanta, GA; Glenview, IL; Newark, DE; and Pasadena, CA. Other properties include four manufacturing laboratories, including a fashion jewelry manufacturing laboratory in Ireland, and ten distribution centers in Europe; five manufacturing laboratories and nine distribution centers in Latin America; one manufacturing and three distribution centers in North America (other than in the U.S.); and four manufacturing laboratories and ten distribution centers in the Pacific region. The research and development laboratories are located in Suffern, NY. Avon leases space for its executive and administrative offices in New York City and its fashion jewelry manufacturing facility in Puerto Rico. ITEM 3. LEGAL PROCEEDINGS Various lawsuits and claims (asserted and unasserted), arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In 1991, a class action lawsuit was initiated against Avon on behalf of certain classes of holders of Avon's Preferred Equity- Redemption Cumulative Stock ("PERCS"). This lawsuit alleges various contract and securities law claims relating to the PERCS (which were fully redeemed that year). Avon has rejected the assertions in this case, believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. -11- 12 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, 1998 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, 1998. ___________________ 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 1999 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 and Director .. James E. Preston 65 1971 Chief Executive Officer and Director Charles R. Perrin 53 1998(1) President, Chief Operating Officer and Director..Andrea Jung 40 1997(2) -12- 13 Executive Vice President and Director.Susan J. Kropf 50 1997 Executive Vice Presidents.............Jose Ferreira 42 1997 Fernando Lezama 59 1997 Executive Vice President and Chief Financial Officer. ...........Robert J. Corti 49 1988 Senior Vice President, General Counsel and Secretary.......................Ward M. Miller, Jr. 66 1993 Senior Vice President.................Jill Kanin-Lovers 47 1998(3) Vice President and Controller.........Janice Marolda 38 1998(4) (1) Charles R. Perrin joined Avon as Vice Chairman and Chief Operating Officer in January 1998 and was later elected Chief Executive Officer, effective July 1, 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 and was later elected Chief Operating Officer, succeeding Mr. Perrin in that capacity, effective July 1, 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. (3) Jill Kanin-Lovers joined Avon as Senior Vice President, Human Resources, effective October 1, 1998. Prior to joining Avon, Ms. Kanin-Lovers was Vice President, Global Operations Human Resources at IBM and Senior Vice President, Worldwide Compensation and Benefits Services at American Express. (4) Janice Marolda was elected Vice President and Controller in June 1998. Ms. Marolda has been with Avon for thirteen years, in both the U.S. and Global organizations. PART II ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS This information is incorporated by reference to "Market Prices per share of Common Stock by Quarter" on page 43 of Avon's 1998 Annual Report to Shareholders. -13- 14 ITEM 6. SELECTED FINANCIAL DATA The information for the five-year period 1994 through 1998 is incorporated by reference to the "Eleven-Year Review" on pages 61 and 62 of Avon's 1998 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 30 through 42 of Avon's 1998 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See discussion under the heading "Risk Management Strategies and Market Rate Sensitive Instruments" on page 39 and Note 7 on page 52 of Avon's 1998 Annual Report to Shareholders for information concerning market risk sensitive instruments. Such information is incorporated by reference in this Form 10-K. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information is incorporated by reference to the "Consolidated Financial Statements and Notes" on pages 44 through 59, together with the report thereon of PricewaterhouseCoopers LLP, on page 60, and "Results of Operations by Quarter" on page 43 of Avon's 1998 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 1999 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" -14- 15 sections of Avon's Proxy Statement for the 1999 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 1999 Annual Meeting of Shareholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS This information is incorporated by reference to the "Contracts with Executives" section of Avon's Proxy Statement for the 1999 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 statements of income for each of the years in the three-year period ended December 31, 1998........ 44 Consolidated balance sheets at December 31, 1998 and 1997............. 45 Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 1998......... 46 Consolidated statements of changes in shareholders' equity for each of the years in the three-year period ended December 31, 1998................ 47 Notes to consolidated financial statements............................. 48-59 Report of Independent Accountants PricewaterhouseCoopers LLP............. 60 -15- 16 (a) 2. Financial Statement Schedule Report of Independent Accountants on Financial Statement Schedule PricewaterhouseCoopers LLP S-1 Consent of Independent Accountants PricewaterhouseCoopers LLP S-2 Financial statement schedule for each of the years in the three-year period ended December 31, 1998............... II. Valuation and qualifying accounts............. S-3 -16- 17 Financial statements of the registrant and all other financial statement schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements and notes. (a)3. Exhibits Exhibit Number Description 3.1 Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on May 13, 1996 (incorporated by reference to Exhibit 3.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996). 3.2 By-laws of Avon, as restated, effective 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). 3.3 Certificate of Amendment of the Certificate of Incorporation of Avon Products, Inc., filed May 13, 1998 (incorporated by reference to Exhibit 3.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998). 4.1 Amended and Restated Revolving Credit and Competitive Advance Facility Agreement, dated as of August 8, 1996, among Avon, Avon Capital Corporation and a group of banks and other lenders (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 4.2 Indenture dated as of August 1, 1997 between Avon as Issuer, and The Chase Manhattan Bank, as Trustee relating to the 6.55% Notes due 2007 (incorporated by reference to Exhibit 4.2 to Avon's Registration Statement on Form S-4, Registration Statement No. 333-41299 filed December 1, 1997). 4.3 Rights Agreement, dated as of March 30, 1998 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (incorporated by reference to Exhibit 4 to Avon's Registration Statement on Form 8-A, filed March 18, 1998). 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). -17- 18 10.2* Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.3* First Amendment to the 1993 Avon Stock Incentive Plan effective January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as of January 1, 1997 approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.4 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.5* Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of July 1, 1998. 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). - -18- 19 10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of July 1, 1998 (incorporated by reference to Exhibit 4(b) to Avon's Registration Statement on Form S-8, Registration No. 333-65989 filed October 22, 1998). 10.12* Trust Agreement, dated as of April 21, 1995, between Avon and Chemical Bank, amending and restating the Trust Agreement as of August 3, 1989 between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.14 to Avon's Annual Report on Form 10-K for the year ended December 31, 19975). 10.13*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). 10.14* 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). 10.15* Supplemental Employment Agreement, date as of December 10, 1997 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, 1997). 10.16* Stock Option Agreement between Avon and James E. Preston dated December 10, 1997(incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.17* Employment Agreement, dated as of December 11, 1997 between Avon and Charles R. Perrin (incorporated by reference to Exhibit 10.18 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.18* Stock Option Agreement between Avon and Charles R. Perrin dated December 10, 1997 (incorporated by reference to Exhibit 10.19 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.19* Employment Agreement dated as of December 11, 1997 between Avon and Andrea Jung (incorporated by reference to Exhibit 10.20 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.20* Form of Employment Agreement, dated as of September 1, 1994, between Avon and certain senior officers (incorporated by - -19- 20 reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10- Q for the quarter ended September 30, 1994). 10.21* Avon Products, Inc. Compensation Plan for Non-Employee Directors, effective May 1, 1997 (incorporated by reference to Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.22* Avon Products, Inc. Board of Directors' Deferred Compensation Plan, amended and restated, effective January 1, 1997 (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.23* Trust Agreement, dated as of December 31, 1991, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991 and refiled under Form SE for the year ended December 31, 1996). 10.24* First Amendment, dated as of November 5, 1992, to the Trust Agreement dated as of December 31, 1991, by and between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.7 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.25* Stock Option Agreement between Avon and Charles R. Perrin dated June 4, 1998 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.26* Stock Option Agreement between Avon and Andrea Jung dated June 4, 1998 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 13 Portions of the Annual Report to Shareholders for the year ended December 31, 1998 incorporated by reference in response to Items 1,5 through 8 in this filing. 21 Subsidiaries of the registrant. 23 Consent of PricewaterhouseCoopers LLP (set forth on page S-2 of this Annual Report on Form 10-K). 24 Power of Attorney 27 Financial Data Schedule 99 Financial statements for the Avon Products, Inc. Employees' Savings and Stock Ownership Plan and the Avon Mirabella/Lomalinda Employees' Savings Plan for - -20- 21 the year ended December 31, 1998 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 1998. (c) Avon's Annual Report on Form 10-K for the year ended December 31, 1998, at the time of filing with the Securities and Exchange Commission, shall modify and supersede all prior documents filed pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934 for purposes of any offers or sales of any securities after the date of such filing pursuant to any Registration Statement or Prospectus filed pursuant to the Securities Act of 1933, which incorporates by reference such Annual Report on Form 10-K. -21- 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 24th day of February 1999. Avon Products, Inc. By /s/WARD M. MILLER, JR. Ward M. Miller, Jr. Senior Vice President, General Counsel and Secretary -22- 23 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date * ________________ James E. Preston Chairman of the Board and Director February 4, 1999 * _________________ Charles R. Perrin Chief Executive Officer and Director - Principal Executive Officer February 4, 1999 * _______________ Robert J. Corti Executive Vice President, Chief Financial Officer - Principal Financial Officer February 4, 1999 * ______________ Janice Marolda Vice President and Controller - Principal Accounting Officer February 4, 1999 * ___________ Andrea Jung President and Chief February 4, 1999 Operating Officer and Director * ______________ Susan J. Kropf Executive Vice President, February 4, 1999 President, Avon North America and Director * ________________ Brenda C. Barnes Director February 4, 1999 * _________________ Richard S. Barton Director February 4, 1999 * ____________________ Remedios Diaz Oliver Director February 4, 1999 * _________________ Edward T. Fogarty Director February 4, 1999 * ________________ Stanley C. Gault Director February 4, 1999 - -23- 24 * _______________ George V. Grune Director February 4, 1999 * ____________ Ann S. Moore Director February 4, 1999 * ___________ Paula Stern Director February 4, 1999 /s/WARD M. MILLER, JR. ____________________________ Ward M. Miller, Jr. Attorney-in-fact February 4, 1999 - -24 S-1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders of Avon Products, Inc.: Our audits of the consolidated financial statements referred to in our report dated February 4, 1999 appearing in the 1998 Annual Report to Shareholders of Avon Products, Inc. and subsidiaries, which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K, also included an audit of the financial statement schedule list in Item 14 (a) (2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers L.L.P. New York, New York February 4, 1999 S-1 S-2 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the following Registration Statements of Avon Products, Inc. on Form S-8 (Reg. Nos. 33-47209, 33-60218, 33-60918 and 33-65998) of our reports dated February 4, 1999 on our audits of (i) the consolidated financial statements of Avon Products, Inc. as of December 31, 1998 and 1997 and for each of the years in the three-year period ended December 31, 1998, which report is included in the 1998 Annual Report to Shareholders and incorporated by reference in this Annual Report on Form 10-K, and (ii) the 1998, 1997 and 1996 financial statement schedule of Avon Products, Inc., which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers L.L.P. New York, New York February 24, 1999 S-2 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 1998 Allowance for doubtful accounts receivable $35.5 $91.3 $ -- $77.8(a) $49.0 1997 Allowance for doubtful accounts receivable $36.4 $80.8 $ -- $81.7(a) $35.5 1996 Allowance for doubtful accounts receivable $32.6 $79.0 $ -- $75.2(a) $36.4 (a) Accounts written off, net of recoveries and foreign currency translation adjustment. S-3 EX-99 2 EX-INDEX CONFORMED COPY SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________ FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1998 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). 3.3 Certificate of Amendment of the Certificate of Incorporation of Avon Products, Inc., filed May 13, 1998 (incorporated by reference to Exhibit 3.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998). 4.1 Amended and Restated Revolving Credit and Competitive Advance Facility Agreement, dated as of August 8, 1996, among Avon, Avon Capital Corporation and a group of banks and other lenders (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 4.2 Indenture dated as of August 1, 1997 between Avon as Issuer, and The Chase Manhattan Bank, as Trustee relating to the 6.55% Notes due 2007 (incorporated by reference to Exhibit 4.2 to Avon's Registration Statement S-4, Registration Statement No. 333-41299 filed December 1, 1997). 4.3 Rights Agreement, dated as of March 30, 1998 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (incorporated by reference to Exhibit 4 to Avon's Registration Statement on Form 8-A, filed March 18, 1998). 10.1* Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders on May 6, 1993 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.2* Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.3* First Amendment to the 1993 Avon Stock Incentive Plan effective January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as of January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.4 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.5* Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of July 1, 1998. 10.6* Benefit Restoration Pension Plan of Avon Products, Inc., effective as of January 1, 1994 (incorporated by reference to Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.7* Trust Agreement, amended and restated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10- Q for the quarter ended March 31, 1990 and refiled under Form SE for the year ended December 31, 1996). 10.8* First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.9* Second Amendment, dated as of June 12, 1992 to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.10* Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1998 (incorporated by reference to Exhibit 4(b) to Avon's Registration Statement on Form S-8, Registration No. 333-65989 filed October 22, 1998). 10.12* Trust Agreement, dated as of April 21, 1995, between Avon and Chemical Bank, amending and restating the Trust Agreement as of August 3, 1989 between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.14 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.13* 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). 10.14* 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). 10.15* Supplemental Employment Agreement, dated as of December 10, 1997 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, 1997). 10.16* Stock Option Agreement between Avon and James E. Preston dated December 10, 1997 (incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.17* Employment Agreement, dated as of December 11, 1997 between Avon and Charles R. Perrin (incorporated by reference to Exhibit 10.18 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.18* Stock Option Agreement between Avon and Charles R. Perrin dated December 10, 1997 (incorporated by reference to Exhibit 10.19 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.19* Employment Agreement dated as of December 11, 1997 between Avon and Andrea Jung (incorporated by reference to Exhibit 10.20 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.20* Form of Employment Agreement, dated as of September 1, 1994, between Avon and certain senior officers (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10- Q for the quarter ended September 30, 1994). 10.21* Avon Products, Inc. Compensation Plan for Non-Employee Directors, effective May 1, 1997 (incorporated by reference to Exhibit 10.22 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.22* Avon Products, Inc. Board of Directors' Deferred Compensation Plan, amended and restated, effective January 1, 1997 (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.23* Trust Agreement, dated as of December 31, 1991, between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.23 to Avon's Annual Report on Form 10-K for the year ended December 31, 1991 and refiled under Form SE for the year ended December 31, 1996). 10.24* First Amendment, dated as of November 5, 1992, to the Trust Agreement dated as of December 31, 1991, by and between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.7 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.25* Stock Option Agreement between Avon and Charles R. Perrin dated June 4, 1998 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.26* Stock Option Agreement between Avon and Andrea Jung dated June 4, 1998 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 13 Portions of the Annual Report to Shareholders for the year ended December 31, 1998 incorporated by reference in response to Items 1,5 through 8 in this filing. 21 Subsidiaries of the registrant. 23 Consent of PricewaterhouseCoopers LLP (set forth on page S-2 of this Annual Report on Form 10-K). 24 Power of Attorney 27 Financial Data Schedule 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, 1998 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-10.20 3 EX-10.20 EXHIBIT 10.20 Exhibit 10.20 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. EX-10.5 4 EX-10.5 EXHIBIT 10.5 SUPPLEMENTAL EXECUTIVE RETIREMENT AND LIFE PLAN OF AVON PRODUCTS, INC. AMENDED AND RESTATED AS OF JULY 1, 1998 TABLE OF CONTENTS PAGE SECTION 1 INTRODUCTION 1 SECTION 2 DEFINITIONS 1 SECTION 3 PARTICIPATION 8 SECTION 4 SUPPLEMENTAL RETIREMENT ALLOWANCES 9 SECTION 5 SURVIVOR RETIREMENT ALLOWANCES 12 SECTION 6 SUPPLEMENTAL LIFE ALLOWANCES 16 SECTION 7 FORMS OF PAYMENT 18 SECTION 8 ADMINISTRATION OF THE PLAN 19 SECTION 9 CERTAIN RIGHTS AND LIMITATIONS 20 SECTION 10 AMENDMENT AND TERMINATION OF THE PLAN 22 SECTION 11 CLAIM PROCEDURES 25 SECTION 1 INTRODUCTION Avon Products, Inc. (the "Company") adopted the Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., originally effective as of January 1, 1982, and last amended and restated such plan as of January 1, 1995 (the "Plan"). The Company now wishes to amend and restate the Plan to reflect changes to certain of the Company's other retirement programs. The terms and conditions of participation and benefits under the Plan are set out in this document. The terms of this document shall be effective as of July 1, 1998. The Company intends to maintain the Plan indefinitely and, in order to afford Plan Participants and their Beneficiaries the maximum security, has established a grantor trust (the "Trust") to aid it in accumulating the amounts necessary to satisfy its contractual liability to pay certain benefits under the terms of the Plan. The Plan provides for the Company to pay all benefits and administrative costs from its general assets to the extent not paid by the Trust. The establishment of the Trust shall not convey rights to the Participants which are greater than those of the general creditors of the Company and shall not affect the Company's continuing liability to pay Plan benefits and administrative costs, except that the Company's liability shall be offset by actual benefits and administrative cost payments, if any, made by the Trust. SECTION 2 DEFINITIONS As used in this Plan, the masculine pronoun shall include the feminine and the feminine pronoun shall include the masculine unless otherwise specifically indicated. In addition, the following words and phrases as used in this Plan shall have the following meaning unless a different meaning is plainly required by the context: 2.1 "Actuarial Equivalent" shall mean a benefit of equivalent value, when computed on the basis of the same mortality table and the rate or rates of interest and/or the empirical tables which are being used to determine the Participant's benefit under the Retirement Plan. However, in the case of lump sum distributions of a Participant's Supplemental Retirement Allowance, the conversion factor used to determine the Actuarial Equivalent shall be the same as specified in Section (e) of Appendix I of the Retirement Plan, except that the applicable interest rate with regard to any Participant shall not be greater than the lowest rate in effect at any time on or after the date the Participant attains age 60, if the sum of the Participant's age and Creditable Service is at least 85 years. 2.2 "Annual Benefit Offset" shall mean the aggregate annual retirement allowance which would have been payable to a Participant under the Retirement Plan and the Other Plans, expressed in the form of a single life annuity, which form of benefit shall be the Actuarial Equivalent of the aggregate benefits which would be payable under such plans if they commenced on the same date as the Supplemental Retirement Allowance. For purposes of determining the annual retirement allowance payable under the Retirement Plan in calculating the Annual Benefit Offset, such allowance shall be deemed to be the annual retirement allowance which would have been payable to the Participant under the formula contained in the Retirement Plan on June 30, 1998, if such formula had continued in effect after that date until the Participant's retirement or death. At the Company's discretion, the Annual Benefit Offset may exclude the Participant's annual retirement allowance payable to such Participant under any non-qualified defined benefit plan sponsored by the Company, including the Company's Benefit Restoration Plan, provided that such Participant must irrevocably elect in writing to forego any benefit under such excluded plan. 2.3 "Average Final Compensation" shall mean the average annual Compensation of a Participant during the three (3) years of the Participant's last ten (10) years of Creditable Service in which the Participant's Compensation was highest. If a Participant has less than three (3) years of Creditable Service, Average Final Compensation shall be computed over all such years. 2.4 "Beneficiary" shall mean the person or persons designated by a Participant as beneficiary in a time and manner determined by the Retirement Board. If the Participant fails to designate a beneficiary or if the beneficiary predeceases the Participant, the Participant's spouse shall be the beneficiary, or if no spouse survives the Participant, the Participant's estate shall be the beneficiary. A Participant may change his designated beneficiary at the time and in the manner determined by the Retirement Board. 2.5 "Board of Directors" shall mean the Board of Directors of Avon Products, Inc. 2.6 "Change of Control" shall mean: (a) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the corporation where such acquisition causes such person to own twenty percent (20%) or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this Subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of Subsection (c) below; and provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds twenty percent (20%) as a result of a transaction described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own twenty (20%) or more of the Outstanding Company Voting Securities; or (b) individuals who as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least two-thirds of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; or (c) the approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of allor substantially all of the assets of the Company ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than sixty percent (60%) of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (ii) no Person (excluding any employee Benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, twenty percent (20%) or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board of Directors at the time of the execution of the initial agreement, or of the action of the Board of Directors, providing for such Business Combination; or (d) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, no Change of Control shall be deemed to have occurred with respect to any individual by reason of any actions or events in which such individual participates in a capacity other than in his or her capacity as an officer or employee of the Company (or as a director of the Company or a Subsidiary, where applicable). 2.7 "Company" shall mean Avon Products, Inc. 2.8 "Compensation" shall mean the regular salary or wages paid to an Active Participant or deferred for services rendered to the Company or a Subsidiary during any year in which the Participant accrues Creditable Service, including any deferrals under a 401(k) plan or salary reduction under a 125 plan of the Company or a Subsidiary, plus any bonus payable to an employee (disregarding any election to defer the receipt thereof) under the Management Incentive Plan and Variable Incentive Plan or any similar or successor plan for services performed during the prior year; however, Active Participants eligible to participate in the Management Incentive Plan are not eligible to participate in the Variable Incentive Plan after January 1, 1998 but the bonus payable to the Active Participants participating in the Variable Incentive Plan prior to January 1, 1998 will continue to be included in Compensation. Compensation shall not include special termination or severance payments or benefits, whether characterized as such, made pursuant to any employment agreement, separation agreement, severance plan or policy or any similar arrangement, unless such agreement, plan, policy or arrangement provides that the special termination or severance payments or benefits are to be included as Compensation under the Plan. Notwithstanding the foregoing, with respect to any period of absence (during which disability benefits are being paid to the Participant under the Company's Short Term or Long Term Disability Plan) which is included as Creditable Service, the Participant's annual Compensation for purposes of the Plan during such period of absence shall be deemed to be the greater of (i) his Compensation in the last full calendar year of his employment immediately preceding the beginning of such absence, or (ii) the actual Compensation he received in the year the absence began. 2.9 "Compensation Committee" means the Compensation Committee appointed by the Board of Directors. 2.10 "Creditable Service" shall mean: (a) The total number of years and completed months of service rendered by an Active Participant as an employee of the Company or any Subsidiary; (b) Periods of authorized leaves of absence from the Company or a Subsidiary approved by the Retirement Board, including but not limited to leaves required to be granted pursuant to the Family and Medical Leave Act of 1993 and the Uniformed Services Employment and Reemployment Rights Act, and, notwithstanding any other provision of this Plan to the contrary, any period of absence while disability benefits are being paid to the Participant under the Company's Short Term or Long Term Disability Plans; (c) Any prior Creditable Service under this Plan rendered by an employee who was formerly a Participant and who subsequently becomes a new Active Participant pursuant to Plan Section 3.1 or 3.2; (d) Service which is recognized for purposes of the Plan by reason of any Outside Agreement. To the extent Creditable Service is recognized under an Outside purposes of eligibility for the Supplemental Retirement Allowance, it shall also be recognized for purposes of the Supplemental Life Allowance unless otherwise specifically provided in such Outside Agreement; and (e) Solely for purposes of determining the time for the commencement of benefits under the SERP, a Vested or Frozen Participant shall continue to earn Creditable Service during the period in which he is an employee of the Company or a Subsidiary. Subject to approval by the Compensation Committee, a Participant may be granted additional years of Creditable Service either for purposes of determining the amount of allowance under the Plan or for purposes of satisfying the service requirements necessary for benefits under the Plan, or both. Additional service granted under a specific provision of the Plan or under provisions of individual contracts with the Participant or under any severance plan or policy of the Company covering the Participant shall also be included in determining Creditable Service, but only in accordance with the specific terms of such provisions. 2.11 "Dependent Child" shall mean any unmarried child, who has not attained age 21, of the Participant or, effective January 1, 1999, a Participant's Domestic Partner or any unmarried child, regardless of the child's age, of the Participant or, effective January 1, 1999, the Participant's Domestic Partner, if the child becomes incapacitated prior to attaining age 19; provided, however, that such incapacitated child shall cease to be a Dependent Child at the later of the date the child attains age 21 or ceases to be incapacitated. The term child shall include a child born of the Participant or, effective January 1, 1999, a Participant's Domestic Partner, a child legally adopted by the Participant or, effective January 1, 1999, a Participant's Domestic Partner, and a stepchild of the Participant, in each instance living with the Participant or, effective January 1, 1999, the Participant's Domestic Partner in a normal parent-child relationship. 2.12 "Dependent Children's Allowance" shall mean the benefit payable to the Dependent Children pursuant to the SERP and as described in Plan Section 5.3. 2.13 "Domestic Partner" shall mean, effective January 1, 1999, an individual of the same or opposite sex as the Participant, who shares a committed and mutually dependent relationship with the Participant, and (a) both the Participant and the Domestic Partner must be at least the age of consent for marriage in the Participant's state of residence; and (b) the Domestic Partnership must be an exclusive relationship with the Participant in which the Domestic Partner resides with the Participant and intends to do so permanently; and (c) the Domestic Partner must be mutually responsible with the Participant for basic living expenses; and (d) the Domestic Partners cannot be related by blood to a degree of closeness that would prohibit legal marriage; (e) the Domestic Partners cannot be married to or in a Domestic Partner relationship with anyone else; and (f) a Participant must have filed an Affidavit of Eligibility for Domestic Partner Benefits with the Plan Administrator, and (g) the Participant has not filed an Affidavit of Termination of Domestic Partnership within the previous twelve (12) months; An individual shall cease to be a Domestic Partner upon the filing by the Participant of an Affidavit of Termination of Domestic Partnership with the Plan Administrator. 2.13 "Nonforfeitable" shall refer only to the vested unsecured contractual right of a Participant, his Beneficiary and his Dependent Children, if any, to benefits under this Plan. In no event, however, shall "Nonforfeitable" imply any preferred claim on, or any beneficial ownership interest in, any assets of the Company before those assets are paid to any individual pursuant to the terms of the Plan. As provided in Plan Section 9.5, certain events may result in the forfeiture even of Nonforfeitable benefits. 2.14 "Normal Retirement Age" shall mean age 65. 2.15 "Other Plans" shall mean the employer-provided portion of any defined benefit pension plan sponsored by the Company (other than the Retirement Plan) or any Subsidiary and of any retirement or pension allowance (but not any form of severance or special termination payment) set forth and payable pursuant to any employment contract or any other agreement (other than an individual deferred compensation contract under which elective employee salary or bonus deferrals are made) between the Participant and the Company or a Subsidiary. The term "Other Plans" shall also include the employer-provided portion of any other pension or retirement plans sponsored by the predecessor employer of a Participant and of any retirement or pension allowance (but not any form of severance or special termination payment) set forth and payable pursuant to any employment contract or any other agreement (other than an individual deferred compensation contract under which elective employee salary or bonus deferrals are made) between the Participant and the predecessor employer of a Participant providing for benefits attributable in whole or in part to service which is recognized under the Plan as Creditable Service. Notwithstanding the foregoing, the employer-provided portion of the benefits paid or payable to or on behalf of a Participant pursuant to Other Plans shall only include a proportionate share of such benefits based on the ratio by which the portion of the service recognized under the Other Plan which is recognized as Creditable Service bears to the total service recognized under the Other Plan. 2.16 "Outside Agreement" shall mean a written agreement entered into between a duly authorized officer of the Company with authority to act in the matter and a Participant which recognizes any period of time prior to the commencement of such Participant's employment with the Company as service for purposes of certain retirement or other benefits or modifies any of the benefits or provisions of the Plan. 2.17 "Participant" shall mean any Active Participant, Vested Participant, Frozen Participant or Retired Participant. (a) "Active Participant" shall mean an employee from the time participation in the Plan begins pursuant to Plan Section 3 until the earliest of the time: (i) the Participant retires, (ii) the Participant dies, (iii) the Participant terminates employment with the Company and its Subsidiaries, or (iv) the Plan is terminated. In addition, if a Participant is placed on inactive employee status, as defined by the Retirement Board from time to time under uniform and nondiscriminatory rules, and, at the date of such change in status, the Participant has attained age 62 or the sum of the Participant's age and years of Creditable Service total at least 80 years, the Participant will continue as an Active Participant in the Plan. (b) "Retired Participant" shall mean a former employee who has retired on or after meeting the requirements for a Supplemental Retirement Allowance under Plan Section 4.1. (c) "Vested Participant" shall mean an employee or former employee of the Company or Subsidiary who ceased to be an Active Participant, who has not become a Retired Participant and who, immediately after ceasing to be an Active Participant, has a Nonforfeitable right to benefits under Plan Section 10. 2.18 "Plan" shall mean this Supplemental Executive Retirement and Life Plan of Avon Products, Inc., as from time to time amended. 2.20 "Pre-Retirement Beneficiary's Allowance" shall mean the benefit payable to the Beneficiary of certain Participants, pursuant to the SERP and as described in Plan Section 5.1. 2.19 "Post Retirement Beneficiary's Allowance" shall mean the benefit payable to the Beneficiary of certain Participants pursuant to the SERP and as described in Plan Section 5.2. 2.20 "Retirement Board" shall mean the person or persons appointed to administer the Plan as provided in Plan Section 8. 2.21 "Retirement Plan" shall mean, prior to July 1, 1998, the Employees' Retirement Plan of Avon Products, Inc. and thereafter, the Avon Products, Inc. Personal Retirement Account Plan, as amended from time to time. 2.22 "SERP" shall mean the portion of the Plan pursuant to which Supplemental Retirement Allowances, Pre-Retirement Beneficiary's Allowances, Post-Retirement Beneficiary's Allowances and Dependent Children's Allowances are payable. 2.23 "SLIP" shall mean the portion of the Plan pursuant to which Supplemental Life Allowances are payable. 2.24 "Subsidiary" shall mean any majority-owned subsidiary of the Company. 2.25 "Supplemental Life Allowance" shall mean the benefit referred to in Plan Section 6. 2.26 "Supplemental Retirement Allowance" shall mean the benefit referred to in Plan Section 4. 2.27 "Surviving Spouse" shall mean the spouse to whom the Participant was married on the date the Participant's Supplemental Retirement Allowance commenced under this Plan or on the Participant's date of death, if earlier. SECTION 3 PARTICIPATION 3.1 Commencement of SERP Participation. (a) Each individual who was a Participant in the SERP as of June 30, 1998, shall be a Participant in the SERP on July 1, 1998. A listing of Participants in the SERP as of July 1, 1998 is attached to the Plan as Appendix A, which Appendix may thereafter be updated from time to time, provided that all updates shall be attested by the signatures of two members of the Retirement Board. (b) The Compensation Committee shall have the authority to include as Active Participants in the SERP officers of the Company on the U.S. payroll, at the level of Senior Vice President or above, who are covered by individual employment agreements with the Company which have been approved by the Board of Directors, and such other management or highly compensated employees of the Company or a Subsidiary (within the meaning of Section 201(2) of the Employee Retirement Income Security Act of 1974, as amended) as it deems fit. 3.2 Commencement of SLIP Participation. Any employee who is an Active Participant in the SERP shall also be an Active Participant in the SLIP. 3.3 Termination of SERP Participation. When an individual ceases to be an Active Participant (as defined in Section 2.17(a) hereof), he shall cease to be a Participant and shall have no rights to a Supplemental Retirement Allowance unless he is a Vested Participant or a Retired Participant. 3.4 Termination of SLIP Participation. (a) If an individual who first became a Participant prior to January 1, 1990, ceases to be an Active Participant, he shall continue to be a Participant in the SLIP if he is eligible for a Supplemental Life Allowance in accordance with the provisions of Plan Section 6. (b) If an individual who first became a Participant on or after January 1, 1990, ceases to be an Active Participant, he shall cease to be a Participant in the SLIP on the date he ceases to be an Active Participant. SECTION 4 SUPPLEMENTAL RETIREMENT ALLOWANCES 4.1 Nonforfeitable Right to a Supplemental Retirement Allowance. (a) An Active Participant who attains Normal Retirement Age shall have a Nonforfeitable right to benefits under this Section 4, subject to the provisions of Plan Section 9, and may retire and receive payment of a Normal Retirement Allowance under the SERP. Payment of the Normal Retirement Allowance shall commence not later than thirty (30) days after the later of the date the Participant actually retires or attains age 65. (b) An Active Participant who has attained age 55 and has fifteen (15) or more years of Creditable Service, or whose attained age plus his Creditable Service totals at least 85 years, shall have a Nonforfeitable right to benefits under this Section 4 and may retire and apply for payment of an Early Retirement Allowance under the SERP. Payment of the Early Retirement Allowance shall commence on the first day of the calendar month next following his date of retirement. (c) An Active Participant who has attained age 58 and completed fifteen (15) or more years of Creditable Service and who is deemed to be suffering from a hardship, as determined in the sole and unilateral discretion of the Retirement Board on a case-by-case basis, shall have a Nonforfeitable right to benefits under this Section 4 and may retire and apply for payment of a Hardship Retirement Allowance. Payment of the Hardship Retirement Allowance shall commence on the first day of the month following the date the Participant's application for retirement is approved by the Retirement Board. (d) Approval by the Retirement Board under this Section 4 may be evidenced by the written consent of any two members of such Board. In the event the Plan is amended or terminated or in the event of a Change of Control of the Company, Participants shall have the right to a Supplemental Retirement Allowance pursuant to Plan Section 10. 4.2 Amount of Normal Retirement Allowance. (a) The annual Normal Retirement Allowance under the SERP for Participants who have a Nonforfeitable right to such an allowance pursuant to Plan Section 4.1(a) shall be equal to: (1) 2% of the Participant's Average Final Compensation multiplied by the Participant's Creditable Service up to twenty-five (25) years; plus (2) 1% of the Participant's Average Final Compensation multiplied by the Participant's Creditable Service in excess of twenty-five (25) years but not in excess of thirty-five (35) years; less (3) the Annual Benefit Offset. (b) Notwithstanding the provisions of Plan Subsection 4.2(a), any Participant entitled to a benefit pursuant to Plan Section 4.1(a) who (i) is or was an officer of the Company as of January 1, 1995, at the level of Senior Vice President or above, and covered by an individual employment agreement with the Company which had been approved by the Board of Directors or (ii) is or was a senior executive designated by the Compensation Committee as eligible to receive a minimum allowance, shall receive an annual Normal Retirement Allowance which, when added to the Actuarial Equivalent of the benefit paid or payable to such Participant under the Retirement Plan and Other Plans (expressed as an annual benefit in the same form as the benefit under Plan Section 4.2 is payable), is not less than fifty percent (50%) of the Participant's Average Final Compensation. Such offset shall be calculated in a manner similar to that set forth in the definition of Annual Benefit Offset. 4.3 Amount of Early Retirement Allowance. (a) The annual Early Retirement Allowance under the SERP for Participants who have a Nonforfeitable right to such an allowance pursuant to Plan Section 4.1(b) shall be equal to the Normal Retirement Allowance determined in accordance with Plan Subsection 4.2(a), based on the Participant's Average Final Compensation and Creditable Service at the date of retirement; provided, however, that if the Participant retires before the sum of such Participant's age and Creditable Service is 85 years, the allowance shall be calculated by determining the benefit without regard to the Annual Benefit Offset, by reducing the benefit 3/12ths of 1% for each month by which the date the allowance commences precedes the month in which the Supplemental Retirement Allowance would have commenced if the Participant retired at Normal Retirement Age and by 5/12ths of 1% for each such month in excess of sixty (60) months and by then applying the Annual Benefit Offset. The Early Retirement Allowance payable to a Participant whose age and Creditable Service total at least 85 years shall be equal to the allowance determined in accordance with Plan Subsection 4.2(a) based on Average Final Compensation and Creditable Service at the time of retirement without reduction for commencement of payment prior to Normal Retirement Age; provided, however, that if such allowance commences after the first day of the calendar month following the month in which the Participant retires, the allowance shall be increased so that it is the Actuarial Equivalent of the allowance payable as of the first day of the month following the month in which the Participant retires. (b) Notwithstanding the provisions of Plan Subsection 4.3(a) above, any Participant entitled to a benefit pursuant to Plan Section 4.1(b) who has attained age 60 and completed fifteen (15) years of Creditable Service and who (i) is or was an officer of the Company as of January 1, 1995, at the level of Senior Vice President or above, and covered by an individual employment agreement with the Company which had been approved by the Board of Directors or (ii) is or was a senior executive designated by the Compensation Committee as eligible to receive a minimum allowance, shall receive an annual Early Retirement Allowance which, when added to the Actuarial Equivalent of any retirement allowance paid or payable to such Participant under the Retirement Plan and any Other Plans (expressed as an annual benefit in the same form as the benefit payable pursuant to this Plan Section 4.3) is not less than fifty percent (50%) of the Participant's Average Final Compensation, reduced by 4/12ths of 1% for each month by which the Participant's date of retirement precedes Normal Retirement Age; provided, however, that if such allowance commences after the first day of the calendar month following the month in which the Participant retires, the allowance shall be increased so that it is the Actuarial Equivalent of the allowance payable as of the first day of the month following the month in which the Participant retires. The offset described in the immediately preceding sentence shall be calculated in a manner similar to that set forth in the definition of the Annual Benefit Offset. 4.4 Amount of Hardship Retirement Allowance. The annual Hardship Retirement Allowance under the SERP for Participants who have a Nonforfeitable right to such an allowance pursuant to Plan Section 4.1(c) or 4.1(d) shall be equal to the Normal Retirement Allowance determined in Plan Subsection 4.2(a), based on the Participant's Average Final Compensation and Creditable Service at the date of retirement; provided, however, such allowance shall in no event be less than the Early Retirement Allowance to which such Participant would be entitled upon retirement under Plan Subsection 4.3(b), if applicable. 4.5 Restoration of Retired Participants to Service. Anything contained in this Plan to the contrary notwithstanding, if a Participant who has received or is receiving a Supplemental Retirement Allowance again becomes an employee of the Company or a Subsidiary, any retirement allowance payable under this Plan shall cease upon reemployment and such allowance shall commence to be paid when the Participant again retires. On subsequent retirement, the Supplemental Retirement Allowance payable to such Participant shall be based on Compensation and Creditable Service before and after the period of prior retirement, reduced by an amount which is the Actuarial Equivalent of the benefits the Participant received prior to reemployment; provided, however, that such benefit shall not be less than the benefit the Participant was receiving during prior retirement. 4.6 Outside Agreements. (a) To the extent an Outside Agreement provides for a benefit in addition to (or on the terms and conditions different from) any benefit otherwise payable under the Plan, such benefit under such Outside Agreement shall be deemed to be, and shall be, payable under this Plan. (b) Nothing in Plan Subsection (a) above shall be construed to limit any rights of any Participant under an Outside Agreement, except that any benefits paid hereunder pursuant to this Plan Section 4.6 shall be offset against any amounts payable with respect to any substantially similar obligations under the Outside Agreement so as to avoid duplication of payment. SECTION 5 BENEFICIARY RETIREMENT ALLOWANCES 5.1 Pre-Retirement Beneficiary's Allowance. (a) If, prior to receipt of a Supplemental Retirement Allowance, a Participant dies while employed by the Company or a Subsidiary and has at least ten (10) years of Creditable Service, or has attained age 65, or dies while receiving disability benefits under the Company's Short Term or Long Term Disability Insurance Plans and after having completed ten (10) years of Creditable Service, or dies with Nonforfeitable benefits under Plan Section 10, his Beneficiary shall receive a Pre-Retirement Beneficiary's Allowance under the SERP payable during the Beneficiary's remaining lifetime. (b) Payment of the annual Pre-Retirement Beneficiary's Allowance under the SERP shall commence as of the first day of the calendar month following the month in which the Participant died or would have attained age 55, whichever is later. However, the Retirement Board may, under rules uniformly applicable to all similarly situated, approve a request made by a Beneficiary to commence payment on the first day of any earlier calendar month after the Participant's death ("early commencement date" hereafter). (c) If the Pre-Retirement Beneficiary's Allowance commences as of the first day of the month following the month in which the Participant died or would have attained age 55, whichever is later, the Pre-Retirement Beneficiary's Allowance shall be an annual allowance for the life of the Beneficiary, payable monthly, equal to the allowance (based on the Participant's Creditable Service as of his date of death) the Beneficiary would have received if the Participant had retired and begun to receive the Supplemental Retirement Allowance in the form of a 100% joint and survivor annuity with such Beneficiary on the date of death, or on the date such Participant would have attained age 55, if later. Notwithstanding the foregoing, if the Participant was married or had a Domestic Partner on the date of the Participant's death, and the Pre-Retirement Beneficiary's Allowance is payable to such spouse or Domestic Partner, the Pre-Retirement Beneficiary Allowance shall not be less than an amount equal to twenty percent (20%) of the Participant's annual rate of Compensation at the time of his death or earlier termination of employment, less the Actuarial Equivalent of the amount of any death benefit allowance (expressed as an annual amount payable for the life of the Beneficiary and commencing on the same date as the Pre- Retirement Beneficiary's Allowance commences, regardless of whether the Beneficiary is the actual recipient of such death benefit allowance) paid or payable on behalf of such Participant under the Retirement Plan and any Other Plans. (d) Notwithstanding Subsection (c) hereof, if a Participant who as of the date of his death meets one of the requirements set forth below, dies while employed by the Company or a subsidiary, his Pre- Retirement Beneficiary's Allowance shall be determined pursuant to this Section (d): (1) Such Participant has attained age 65, or (2) Such Participant has attained age 55 and completed fifteen (15) or more years' Creditable Service, or (3) The sum of such Participant's age and Creditable Service is at least 85. The amount of such Pre-Retirement Beneficiary's Allowance for such Participant shall be the Actuarial Equivalent of the Normal Retirement Allowance, or if applicable, the Early Retirement Allowance, otherwise payable to the Participant if he had retired as of the date of his death. Such Pre-Retirement Beneficiary's Allowance shall be payable only in the form of a single lump sum payment in cash. In anticipation of the probability that the Pre-Retirement Beneficiary's Allowance will be subject to both Federal Income Taxes and Federal Estate Taxes, the payment of a Pre-Retirement Beneficiary's Allowance, at the Company's sole discretion, may be delayed, in whole or in part, for a period of up to twelve (12) months following the date of the Participant'sdeath, and may be subject to appropriate tax withholdings. If payment is delayed more than sixty (60) days after the date of death, however, the lump sum amount shall be increased until the actual payment date using the factors utilized in valuing such lump sum. (e) If the Retirement Board approves an early commencement date with respect to the Pre-Retirement Beneficiary's Allowance under Plan Subsection (b) above, the Pre-Retirement Beneficiary's Allowance shall be a monthly allowance for the life of the Beneficiary and shall be equal to the Pre-Retirement Beneficiary's Allowance the Beneficiary would have received under Plan Subsection (c) above if the Retirement Board had not approved the early commencement date, reduced by 1/12th of 5% for each month by which the date payments commence precedes the first day of the month following the month in which the SERP Participant would have attained age 55, provided that in no event shall such reduced allowance be less than the Actuarial Equivalent of the allowance otherwise payable under Plan Subsection (c) above. 5.2 Post-Retirement Beneficiary's Allowance. The Beneficiary of a Retired Participant who dies prior to the commencement of a Supplemental Retirement Allowance will receive a Post- Retirement Beneficiary's Allowance from the Plan equal to fifty percent (50%) of the Supplemental Retirement Allowance the Retired Participant would have been receiving if benefits had commenced in the form provided for in Plan Section 7.1(b) on the date of the Retired Participant's death. The Post- Retirement Beneficiary's Allowance under the Plan shall begin on the first day of the month following the Retired Participant's death and shall be paid to the Beneficiary for such Beneficiary's remaining lifetime. The Beneficiary of a Retired Participant who dies after the commencement of a Supplemental Retirement Allowance under the SERP shall be entitled to receive benefits from the SERP in accordance with the form of benefit payable to the Retired Participant in accordance with the provisions of Plan Section 7. 5.3 Dependent Children's Allowance. (a) Each Dependent Child, up to a maximum of four (4) such children, shall receive a Dependent Children's Allowance from the SERP which is a yearly allowance equal to ten percent (10%) of the yearly amount of the Beneficiary's Allowance calculated under Plan Section 5.1 or 5.2, whichever is applicable, at the time of the Participant's death (calculated as if the Beneficiary is the Surviving Spouse or Domestic Partner even if such allowance is not payable to such beneficiaries), plus ten percent (10%) of the yearly benefits which are payable to the Surviving Spouse or the Participant's Domestic Partner under the Retirement Plan and any Other Plan (or would be payable is such benefits were payable to such Surviving Spouse or Domestic Partner) (based on the assumption that benefits commence on the same date as benefits commence hereunder). (b) For purposes of Plan Subsection (a) above, if the spouse or Domestic Partner of a Participant predeceases the Participant, the allowance under Plan Section 5.1 or 5.2 shall be determined as if the spouse or Domestic Partner had not predeceased the Participant and as if yearly benefits under the Retirement Plan and any Other Plan are payable to such predeceased spouse or Domestic Partner and shall be based upon the spouse's or Domestic Partner's actuarially determined life expectancy as of the date of the spouse's or Domestic Partner's death. (c) For purposes of Plan Subsection (a) above, in the event that the Participant had no spouse or Domestic Partner, other than for the reason that the spouse or Domestic Partner predeceased the Participant, the allowance under Plan Section 5.1 or 5.2 shall be based upon the assumption that the Participant had a spouse or Domestic Partner who was five (5) years younger than the Participant, that any yearly benefits payable under the Retirement Plan and any Other Plan are payable to such assumed spouse or Domestic Partner, and that the spouse's or Domestic Partner's allowance under Plan Section 5.1 or 5.2, whichever is applicable, had commenced on the date of the Participant's death. (d) For purposes of Plan Subsection (a) above, in the event the spouse or Domestic Partner of a Participant dies prior to commencement of benefits under the Plan, the amount of the Dependent Children's Allowance hereunder shall be determined on the assumption that the spouse's or Domestic Partner's allowance under Plan Section 5.1 or 5.2, whichever is applicable, had commenced on the date of the spouse's or Domestic Partner's death and that any yearly benefits payable under the Retirement Plan and any Other Plan had commenced on the date of the spouse's or Domestic Partner's death. (e) The Dependent Children's Allowance hereunder shall commence on the day payment of the spouse's or Domestic Partner's allowance commences (or would have commenced) under the SERP, or the earliest date it could have commenced had the spouse or Domestic Partner not predeceased the Participant, or if the Participant had no spouse for any other reason, on the earliest date it could have commenced had the Participant had a spouse or Domestic Partner who was five (5) years younger than the Participant, and shall continue to be paid to each Dependent Child until the earlier of the date such child ceases to be a Dependent Child or dies. (f) If there are more than four (4) Dependent Children, the total amount otherwise payable to four (4) Dependent Children shall be divided equally among all Dependent Children at the time such payment is made. When a child ceases to be a Dependent Child or dies, the total allowance then payable shall be reallocated among the remaining Dependent Children to the extent applicable; provided, however, that no Dependent Child shall be entitled to an allowance in excess of the benefit set forth in Plan Subsection (a) above. 5.4 Allowance to Spouse Not Reduced. The amount of any allowance payable to a Beneficiary under Plan Section 5.1 or 5.2 shall not be reduced due to the payment of a benefit under the Plan to one or more Dependent Children. 5.5 Domestic Partner Benefits. Notwithstanding anything contained in this Section 5 to the contrary, the provisions of this Section 5 concerning Domestic Partners and Dependent Children of Domestic Partners shall not be effective until January 1, 1999. SECTION 6 SUPPLEMENTAL LIFE ALLOWANCES 6.1 Right to a Supplemental Life Allowance. (a) A Participant becomes eligible for a Supplemental Life Allowance payable to his Beneficiary if he dies: (1) while an Active Participant who is either employed by the Company or a Subsidiary or is receiving a disability benefit under the Company's Short Term or Long Term Disability Plans; or (2) while a Frozen Participant or a Retired Participant, provided he became an Active Participant in the SLIP prior to January 1, 1990; (3) while an employee, provided he became an Active Participant in the SLIP prior to January 1, 1990, and was an Active Participant for at least five (5) years; (b) A Participant who became an Active Participant in the SLIP prior to January 1, 1990, and is a Participant at the time the Plan is terminated or modified or at the time of a Change of Control will be entitled to a Supplemental Life Allowance as provided in Plan Section 10. (c) A Participant shall become Nonforfeitable in a Supplemental Life Allowance only if he dies under one of the circumstances described in Subsection (a) of this Section, if he was an Active Participant in the Plan prior to January 1, 1990 and becomes Nonforfeitable in a Supplemental Retirement Allowance or as provided in Section 10. 6.2 Amount of Supplemental Life Allowance. (a) If a Participant has a right to a Supplemental Life Allowance as described above, the Beneficiary of such Participant shall receive a Supplemental Life Allowance payable upon the death of a Participant, provided that such Participant has not made the election described in Plan Section 6.4 or 6.5. (b) The amount of the Supplemental Life Allowance shall be as established by the Compensation Committee upon the Participant's commencement of participation in the Plan, except that the Compensation Committee reserves the right to increase or reduce the amount of such allowance from time to time, subject to the provisions of Plan Section 10. Notwithstanding the foregoing, if an Active Participant first became a Participant in the Plan prior to January 1, 1990, his level of coverage under the SLIP may not be reduced after he has been an Active Participant for at least two years for so long as he remains an Active Participant. Further, if a Participant has a right to a Supplemental Life Allowance pursuant to Plan Section 6.1(a)(ii) or (iii), his benefit under the SLIP will continue at the same level as in effect on the date preceding the date he ceased to be an Active Participant. 6.3 Notwithstanding the foregoing, if the Company obtains a life insurance policy (or policies) on the life of a Participant whether or not in connection with this Plan and the insurer is not obligated to pay the policy's death benefit proceeds on the grounds that the Participant committed suicide or any other grounds based on actions or inactions on the part of the Participant, then and in that event, the Company's obligation to make payments of a Supplemental Life Allowance shall be terminated. The Company shall, in its sole discretion, determine what steps are necessary and take such action as it deems reasonably appropriate to pursue and obtain payment of any death benefit under said policy or policies. Whatever steps are deemed appropriate by the Company to pursue this matter shall be conclusive. In no event shall any Participant have any ownership interest in such policy or policies. 6.4 Notwithstanding the foregoing, a SLIP Participant may elect not to be covered by the Supplemental Life Allowance benefit provided under this Plan Section 6. 6.5 Subject to the terms and conditions imposed by the Retirement Board any Participant who is eligible for the Supplemental Life Allowance during the time such Participant is a Retired Participant, may elect, subject to the approval of the Retirement Board, to forego the Supplemental Life Allowance coverage provided under this Plan Section 6 in exchange for a paid-up whole life insurance policy or policies (based on the application of dividends to pay premiums) on such Retired Participant's life in an amount to be determined by the Retirement Board. In the case of any such election, the Company will also pay cash to such Retired Participant in an amount sufficient to enable such Participant to pay any federal, state, and local income taxes (calculated at the highest applicable marginal rates) resulting from the distribution of such policy or policies and the corresponding cash payment. 6.6 If (a) a Participant terminates employment prior to becoming a Retired Participant or (b) the Company has obtained a life insurance policy on the life of such Participant to assist it in meeting its obligations under this Plan, and (c) such policy provides that it may be assigned, then if the Company elects, the Participant may purchase such policy from the Company on such terms and conditions as shall be determined by the Retirement Board; provided, however, that in no event shall the Company receive less than the amount of cash it could have received had it surrendered such policy to the insurer. SECTION 7 FORMS OF PAYMENT 7.1 Automatic Form. (a) Except as otherwise provided for married Participants or, effective January 1, 1999, Participants with Domestic Partners pursuant to Plan Subsection 7.1(b), or unless an optional form of retirement allowance has been requested by the Participant under Plan Section 7.2 and approved by the Retirement Board, the annual Supplemental Retirement Allowance shall be payable in monthly installments for the life of the Participant only, ending with the last monthly payment during the month of the Participant's death. (b) Unless an optional form of retirement allowance has been requested by the Participant under Plan Section 7.2 and has been approved by the Retirement Board, the automatic form of payment of a Supplemental Retirement Allowance to a Participant who is married or has a Domestic Partner at the date the retirement allowance begins shall be a joint and survivor benefit payable to the Participant in the amount determined pursuant to the applicable Subsection of Plan Section 4 payable during the lifetime of the Participant with the provision that after the Participant's death an annual Supplemental Retirement Allowance shall be payable to the Surviving Spouse or Domestic Partner of the Participant equal to one-half the Supplemental Annual Retirement Allowance payable during the Participant's life. (c) Notwithstanding anything contained in Subsections (a) and (b) of this Plan Section 7.1 to the contrary, if the Actuarial Equivalent present value of any Supplemental Retirement Allowance payable to a Participant (including the value of any benefit payable to his Surviving Spouse or Domestic Partner after his death) does not exceed $10,000, or such greater amount as the Retirement Board shall from time to time determine under rules of uniform applicability, the Company may pay the Participant or Beneficiary a single lump sum payment. (d) Notwithstanding anything contained in the Plan to the contrary, on and after a Change of Control, the normal form of Supplemental Retirement Allowance shall be a single lump sum payment in cash. 7.2 Request for Optional Form. (a) Any Participant (other than Participants who have been cashed out by the Company pursuant to Plan Subsection 7.1(c) or 7.1(d)) may, by written notice received by a member of the Retirement Board at least two (2) months prior to retirement or in the case of a Vested Participant, at least two months prior to the due date of the first payment of the Supplemental Retirement Allowance, request that the allowance be converted into an optional form of retirement allowance of Actuarial Equivalent value, in accordance with any form of payment as may be permitted under the Retirement Plan. Such request shall be subject to the approval of the Retirement Board. For purposes of this PlanSection 7.2, a retirement allowance of a Participant who is married or has a Domestic Partner prior to conversion into an optional form shall include the value of the benefit to be continued to the Surviving Spouse or Domestic Partner after the Participant's death. In the event a lump sum optional form of benefit is payable and such sum is not paid on the date benefit payments are scheduled to commence, the lump sum benefit shall be increased until the date paid by the interest rate factors utilized in valuing such lump sum. (b) A Beneficiary entitled to a Supplemental Retirement Allowance pursuant to Plan Section 5.1 or 5.2 may, by written notice received by a member of the Retirement Board within sixty (60) days following the Participant's date of death, or if later, within thirty (30) days following the Beneficiary's receipt of written notice from the Company that he or she is entitled to an allowance under the Plan, request that the allowance be converted into a lump sum optional form of benefit of Actuarial Equivalent value. Such request shall be subject to the approval of the Retirement Board. In the event a lump sum optional form of benefit is payable and such sum is not paid on the date benefit payments are scheduled to commence, the lump sum benefit shall be increased until the date paid by the interest rate factors utilized in valuing such lump sum. 7.3 Effective Optional Forms. The optional form of Supplemental Retirement Allowance requested and approved under Plan Section 7.2 shall become effective on the first day of the month for which the Participant's allowance is payable. If the Participant dies, or the designated Beneficiary dies before the first day of the month for which the Participant's allowance is payable under a contingent annuitant option, the approved option shall thereby be revoked. 7.4 Elective Transfer to Deferred Compensation Plan. A Participant may elect by written notice delivered to the Company at least six months prior to the date on which the Supplemental Retirement Allowance would otherwise have been paid or commenced, or such other date as the Company may establish, to have the lump sum Actuarial Equivalent value of his or her Supplemental Retirement Allowance credited to the Participant's account under the Avon Products, Inc. Deferred Compensation Plan. If such election is made, the crediting of the Participant's account in the Avon Products, Inc. Deferred Compensation Plan of the amount required under this Section 7.4 shall be in complete discharge and satisfaction of the Company's obligation to pay the Participant a Supplemental Retirement Allowance pursuant to the SERP. SECTION 8 ADMINISTRATION OF THE PLAN 8.1 Except as otherwise specifically provided in the Plan, the Retirement Board shall be the administrator of the Plan. The Retirement Board shall have full authority to determine all questions arising in connection with the Plan, including the discretionary authority to interpret the Plan, to adopt procedural rules and to employ and rely on such legal counsel, actuaries, accountants and agents as it may deem advisable to assist in the administration of the Plan. Decisions of the Retirement Board shall be conclusive and binding on all persons. The Retirement Board shall provide to the trustee of any Trust established pursuant to Plan Section 1, such certification or other documentation as may be required by the trustee in connection with the payment of benefits to Participants. 8.2 After a Change in Control, the Retirement Board may be changed by the Company only with the consent of a majority of the Participants (excluding Beneficiaries). SECTION 9 CERTAIN RIGHTS AND LIMITATIONS 9.1 The establishment of the Plan shall not be construed as conferring any legal rights upon any employee or other person for a continuation of employment, nor shall it interfere with the rights of the Company or a Subsidiary to discharge any employee and to treat such employee without regard to the effect which such treatment might have upon such employee as a Participant of the Plan. 9.2 If the Retirement Board shall find that a Participant or other person entitled to a benefit is unable to care for his affairs because of illness, accident or is a minor, the Retirement Board may direct that any benefit payment due such participant or other person, unless claim shall have been made therefor by a duly appointed legal representative, be paid to the spouse, a child, parent or other blood relative, or to a person with whom the Participant or other person resides. Any such payment so made shall be a complete discharge of the liabilities of the Plan with respect to such Participant or such other person. 9.3 Each Participant, before any benefit shall be payable to or on behalf of such person under the Plan, shall file with a member of the Retirement Board at least thirty (30) days prior to the time of retirement or in the case of a Vested Participant prior to the earliest date the retirement allowance can commence, such information, if any, as shall be required to establish such person's rights and benefits under the Plan. 9.4 No benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, garnishment, attachment, encumbrance or charge, and any attempt so to do shall be void; nor shall any such benefit be in any manner liable for or subject to the debts, contract liabilities, engagements or torts of the person entitled to such benefit. 9.5 The obligation of the Company to make or continue payment of any benefits hereunder shall cease with respect to any Participant who (a) at any time is convicted of a crime involving dishonesty or fraud relating to the Company (b) at the time, without the Company's written consent knowingly uses or discloses any confidential or proprietary information relating to the Company or (c) within three years following termination of employment, without the Company's written consent, accepts employment with, or provides consulting services to, a principal competitor of the Company. 9.6 Except to the extent a Participant has a Nonforfeitable right to a benefit pursuant to Plan Section 10, if, after written notice by the Company, the Participant declines retirement at the request of the Company, or if the Participant's voluntary retirement (other than for disability) prior to age 62 is not approved by the Company, the Retirement Board shall have the right to cause forfeiture of any benefit to or on account of the Participant under the Plan. 9.7 A Participant at the time participation commences shall supply the Retirement Board with such evidence of good health and insurability, including a physical examination, as the Retirement Board may from time to time require to satisfy any insurance company in connection with obtaining life insurance for benefits under Plan Section 6. A Participant who fails to supply such evidence when required shall not be entitled to such benefits under Plan Section 6. 9.8 All benefits payable under the Plan shall be payable by the Company from its general assets. The Plan shall not be funded by the Company. However, solely for its own convenience the Company reserves the right to provide for payment of benefits hereunder through a trust which may be irrevocable but the assets of which shall be subject to the claims of the Company's general creditors in the event of the Company's bankruptcy or insolvency, as defined in the Trust established pursuant to Plan Section 1. In no event shall the Company be required to segregate any amount credited to any account, which shall be established merely as an accounting convenience; no Participant, Beneficiary, Surviving Spouse or Dependent Child shall have any rights whatsoever in any specific assets of the Company or the Trust; no rights of any Participant, Beneficiary, Surviving Spouse or Dependent Child, hereunder shall be subject to participation, alienation, sale, transfer, assignment, pledge, garnishment, attachment or encumbrance nor to the debts, contracts, liabilities, engagements or torts of any Participant, Beneficiary, Surviving Spouse or Dependent Child. 9.9 When payments commence under the Plan, the Company shall have the right to deduct from each payment made under the Plan any required withholding taxes. 9.10 Notwithstanding any other provision of the Plan to the contrary, the Company shall make payments hereunder before such payments are otherwise due if it determines, based on a change in the tax or revenue laws of the United States of America, a published ruling or similar announcement issued by the Internal Revenue Service, a regulation issued by the Secretary of the Treasury or his delegate, a decision by a court of competent jurisdiction involving a Participant or Beneficiary, or a closing agreement made under Internal Revenue Code section 7121 that is approved by the Internal Revenue Service and involves a Participant or Beneficiary, that a Participant or Beneficiary has recognized or will recognize income for federal income tax purposes with respect to amounts that are or will be payable to him under the Plans before they are paid to him. SECTION 10 AMENDMENT AND TERMINATION OF THE PLAN 10.1 Right to Amend. The Board of Directors (or the Compensation Committee to the extent it has been delegated authority) reserves the right at any time and from time to time, and retroactively if, to amend or modify in whole or in part, any or all of the provisions of the Plan pursuant to its normal procedures; provided that no such modification or amendment shall adversely affect the rights and benefits of Participants which had accrued or become Nonforfeitable under this Plan prior to the date such amendment or modification is adopted or becomes effective, whichever is later. For purposes of this Plan Section 10, "accrued" benefits refers to the benefits to which a Participant would be entitled, based on his Creditable Service and Compensation as of the date the determination is made, assuming the Participant had a Nonforfeitable right to benefits as of such date. 10.2 Right to Terminate. The Board of Directors (or the Compensation Committee to the extent it has been delegated authority) may terminate the Plan for any reason at any time provided that such termination shall not adversely affect the rights and benefits of Participants which had accrued or become Nonforfeitable under the Plan prior to the date termination is adopted or made effective, whichever is later. 10.3 Effect of Plan Termination on Benefits. (a) In the event the Plan is terminated, each Participant, whether or not such Participant has met the age or service requirements to be entitled to a benefit under the SERP or under the Retirement Plan, shall have a Nonforfeitable right to: (i) the Supplemental Retirement Allowance described in Plan Section 4, which such Participant had accrued through the date of the termination of the Plan; and (ii) to the death benefits described in Plan Section 5, based upon the Plan Section 4 benefits accrued by the Participant through the date of Plan termination. (b) For purposes of Plan Section 4, such accrued benefit shall be computed in accordance with Plan Section 4.3 as though the date of termination of the Plan were the Participant's date of retirement, provided that (i) if the Participant is less than age 55, his minimum percentage benefit described in Plan Subsection 4.3(b) shall be determined upon the assumption that the Participant were age 55, and such minimum benefit shall then be multiplied by a fraction, the numerator of which is the Participant's years of Creditable Service and the denominator of which is his years of such Creditable Service projected to age 55, and (ii) if the Participant terminates employment involuntarily as described in Plan Section 10.5 before he attains age 65 and before his age and Creditable Service total 85 years and his Supplemental Retirement Allowance commences on or after the date his age and Creditable Service would have totaled 85 years if his employment with the Company or a Subsidiary had continued, or it commences on or after his attainment of age 65, his Supplemental Retirement Allowance shall be computed without applying the reduction for early commencement. (c) The payment of the Supplemental Retirement Allowance described in this Section shall commence at the time a Participant (or the Participant's Beneficiary or Dependent Children) meets, under the terms of the Plan at the time of its termination, the requirements for payment of benefits whether or not employed by the Company at that time. For this purpose, the Participant shall be considered to accrue Creditable Service for purposes of determining the Participant's eligibility for the receipt of a Supplemental Retirement Allowance as if the Participant continued in the service of the Company as an Active Participant in the Plan, whether or not the Participant remains in the employ of the Company). Notwithstanding the foregoing, the Company in its discretion can pay a lump sum of Actuarial Equivalent value of any benefits due to the Participant or his Beneficiary or Dependent Children at any time following the termination of the Plan. (d) A Participant who participated in the SLIP prior to January 1, 1990, shall have a right to the Supplemental Life Allowance at the same level in effect at the time of Plan termination. The Company shall fully satisfy all of its obligations to the Participant with respect to such Supplemental Life Allowance by immediately distributing or causing to be distributed to such Participant a fully paid whole life insurance policy or policies on the Participant's life which, as of the date of distribution and thereafter will provide, without application of dividends, at death a death benefit at least equal to one-half of the amount of the Supplemental Life Allowance. In the case of any such distribution of a life insurance policy, the Company will also pay enough cash to the Participant to enable the Participant to pay any federal, state and local income taxes (calculated at the highest applicable marginal rates) resulting from the distribution of the policy and the corresponding cash payment made pursuant to this sentence. 10.4 Effect of Plan Amendment on Benefits. In the event the Plan is amended or modified in whole or in part to reduce future accruals of benefits, Supplemental Retirement Allowances or death benefits or to reduce or eliminate Supplemental Life Allowances, the Participants affected by any such amendment or modification shall be treated: (a) with respect to the Supplemental Retirement Allowance or death benefits based thereon that accrued through the date of such amendment or modification and were affected by such amendment or modification as if the Plan were terminated as of such date and their rights and entitlement to these benefits shall be determined under Plan Section 10.3; provided, however, that such Participants shall be entitled to continue to accrue benefits after the date of such amendment or modification under such modified or amended terms of the Plan; and (b) with respect to a Supplemental Life Allowance as of the date of such amendment or modification as if the Plan were terminated as of such date and their rights and entitlement to these benefits shall be determined under Plan Section 10.3(d); provided, however, that such Participants shall be entitled to continue to accrue benefits after the date of such amendment or modification under such modified or amended terms of the Plan. 10.5 Effect of a Change of Control. In the event of a Change of Control of the Company, then, with respect to (a) any person who has a right to a Supplemental Life Allowance as described in Plan Section 6.1, whether retired, terminated or still actively employed by the Company, and (b) any person who is an Active Participant in the SERP at the time of the Change of Control (or a former officer who is eligible to be a Participant under Plan Section 4.1(d)) who subsequently either ceases for any reason, other than voluntary termination of employment as defined in Plan Section 10.6 below, to be an Active Participant or becomes eligible for Plan participation at a reduced level, then the Plan shall be deemed terminated at the date of the Change of Control with respect to determining the Supplemental Life Allowance for persons described in clause (a) above or the date of termination of employment with respect to determining the Supplemental Retirement Allowance and death benefits for persons described in clause (b) above. Any such person's right and entitlement to Supplemental Retirement Allowances and death benefits based on the Supplemental Retirement Allowance accrued through such date, and Supplemental Life Allowances (including his or her right to an immediate distribution of a fully paid whole life policy and income tax gross up) payable to Participants who participated in the SLIP on January 1, 1990, shall be determined under the provision of Plan Section 10.3; provided, however that such Participants shall be entitled to continue to accrue benefits after the date of the Change of Control under such terms of the Plan if they are still eligible to continue participation under the Plan. 10.6 Voluntary Termination of Employment. For purposes of Plan Section 10.5, a voluntary termination of employment shall mean any termination initiated by the Participant except a termination initiated after: (a) any substantial adverse change in position, duties, title or responsibilities, other than merely by reason of the Company ceasing to be a publicly-traded corporation; (b) any material reduction in base salary or, unless replaced by equivalent arrangements, any material reduction in annual bonus opportunity or pension or welfare benefit plan coverages; (c) any relocation required by the Company to an office or location more than 25 miles from the Participant's current regular office or location; or (d) any failure of the Company to obtain the agreement of a successor entity to assume the obligations set forth hereunder, provided that the successor has had actual notice of the existence of this arrangement and an opportunity to assume the Company's responsibilities hereunder during a period of at least 10 business days after receipt of such notice; provided that, in order for a particular event to be treated as an exception to a "voluntary termination," a Participant must assert such exception within 180 days after actual knowledge of the events giving rise thereto by giving the Company written notice thereof and an opportunity to cure. Notwithstanding the foregoing, in the event that any employment agreement between the Participant and the Company or a Subsidiary in effect at the time of such termination provides a definition of "constructive termination" or termination for "good reason" or similar terminology, such definition shall govern over the event described in this Plan Section 10.6 to the extent that it provides addition exceptions to the events which are considered a voluntary termination. 10.7 Effect of Merger or Acquisition. If any company now or hereafter becomes a Subsidiary of the Company, the Board of Directors (or the Compensation Committee to the extent it has been delegated authority) may include an employee of such Subsidiary in the membership of the Plan upon appropriate action by such company. In such event, or, as a result of the merger or consolidation or as the result of acquisition by the Company of all or part of the assets or business of another company, the Board of Directors (or the Compensation Committee to the extent it has been delegated authority) shall determine to what extent, if any, benefits shall be granted for previous service with such Subsidiary, or other company. SECTION 11 CLAIM PROCEDURES 11.1 Every claim for benefits under the Plan shall be in writing directed to a member of the Retirement Board. 11.2 Each claim filed shall be passed upon by the Retirement Board within a reasonable time from its receipt. If a claim is denied in whole or in part the claimant shall be given written notice of the denial in language calculated to be understood by the claimant, which notice shall: (a) specify the reason or reasons for the denial; (b) specify the Plan provisions giving rise to the denial; and (c) describe any further information or documentation necessary for the claim to be honored, explain why such documentation or information is necessary, and explain the Plan's review procedure. 11.3 Upon written request of any claimant whose claim has been denied in whole or in part, the Retirement Board shall make a full and fair review of the claim and furnish the claimant with a written decision concerning it. IN WITNESS WHEREOF, the Company has caused this instrument to be Executed as of , 1988. AVON PRODUCTS, INC. By: /s/ James E. Preston Title: Chariman of the Board ATTEST: /s/ Ward M. Miller, Jr. Ward M. Miller, Jr. Secretary [CORPORATE SEAL] EX-13 5 EX-13 EXHIBIT 13 30 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 two-for-one stock splits distributed in September 1998 and 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; the impact of substantial currency exchange devaluations in the Company's principal foreign markets; changes in the industry; competition; the effect of regulatory and legal restrictions imposed by foreign governments; the effect of regulatory and legal proceedings and other factors discussed in Item 1 of the Company's Form 10-K. As a result of the foregoing and other factors, no assurance can be given as to the future results and achievements of the Company. Neither the Company nor any other person assumes responsibility for the accuracy and completeness of these statements. Results of Operations Consolidated - Net income in 1998 was $270.0 compared with $338.8 in 1997. Basic and diluted earnings per share in 1998 were $1.03 and $1.02, respectively, compared with $1.28 and $1.27, respectively, in 1997. Special and non-recurring charges were recorded in the first and third quarters of 1998 for the Company's previously announced business process redesign program. These charges totaled $154.4 pretax, which reduced net income by $122.8 after tax, or $.46 per share on a basic and diluted basis. See Note 13 of the Notes to Consolidated Financial Statements for further discussion of this program. Before the charges, net income for the year ended December 31, 1998 of $392.8 increased 16% over 1997. Earnings per share before the charges of $1.49 and $1.48 on a basic and diluted basis, respectively, increased 16% and 17%, respectively, from the comparable period in 1997. The 1997 results include the favorable settlement of a value-added tax claim in the United Kingdom equal to approximately $26.5 on a pretax basis. The $26.5 gain represents a $20.6 settlement of disputed value-added tax charges from prior years, which is included in other (income) expense, net and $5.9 of interest which is included in interest income. The net effect of this gain was to increase 1997 net income by $16.7 and both basic and diluted earnings per share by $.06. Net income for 1996 was $317.9 and basic and diluted earnings per share were $1.19 and $1.18, respectively. Excluding the charges, operating profit was $633.9, or 17% over 1997 due to higher sales and an improved gross margin, partially offset by a higher operating expense ratio in 1998. Excluding the impact of foreign exchange, operating profit increased 27% over 1997. The improvement in operating profit combined with a favorable foreign exchange impact was partially mitigated by the 1997 value-added tax settlement in the United Kingdom. As a result, pretax income before the charges, rose $75.4, or 14%, over 1997. Net income was also impacted by a lower effective tax rate in 1998 and by favorable minority interest due mainly to the results in China. On a consolidated basis, Avon's net sales of $5.21 billion increased 3% from $5.08 billion in 1997. Sales in North America increased 5% to $2.06 billion primarily due to a 5% increase in the U.S. attributable mainly to a higher average order size. International sales increased 1% to $3.15 billion from $3.11 billion due to strong growth in Latin America, most significantly in Brazil, Mexico, Argentina and Venezuela, as well as in Europe reflecting improvements in the United Kingdom and Poland. These increases 31 were partially offset by sales declines in the Pacific, most significantly in Japan, China and the Philippines. Excluding the impact of foreign exchange, consolidated net sales rose 9% over the prior year. In 1997, consolidated net sales of $5.08 billion increased 6% from $4.81 billion in 1996. International sales increased 7% to $3.11 billion from $2.92 billion in 1996 due to strong growth in Latin America, 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 North America increased 4% to $1.97 billion primarily due to the 1997 acquisition of Discovery Toys and an increase in the U.S. average order size partially offset by a decrease in the number of Representative orders. Excluding the impact of foreign currency exchange, 1997 consolidated net sales rose 10% over 1996. Cost of sales as a percentage of sales was 39.4% in 1998, compared with 40.4% in 1997. The 1998 cost of sales includes $37.9 of a non-recurring charge for inventory write-downs related to the Company's business process redesign program. The charge relates to the closure of facilities, discontinuation of certain product lines, size-of-line reductions and a change in strategy for product dispositions. See Note 13 of the Notes to the Consolidated Financial Statements for further discussion of these charges. Excluding the charge, cost of sales as a percentage of sales was 38.7%, a 1.7 point improvement from 1997. This improvement was primarily due to a higher margin in Brazil, reflecting actions taken in 1997 to reduce inventory levels combined with cost reduction programs in 1998. Additionally, the gross margin in Venezuela improved as a result of pricing strategies and business redesign efforts. Japan's gross margin improved as a result of cost reduction initiatives, and the U.S. improved its margin through pricing strategies, cost improvements and reduced clearance activity in the non-cosmetics, fragrance and toiletries categories. In 1997, cost of sales as a percentage of sales was 40.4%, 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. Marketing, distribution and administrative expenses of $2.56 billion increased $79.4, or 3%, from 1997 and increased as a percentage of sales to 49.2% from 48.9% in 1997. Increased operating expenses in the U.S. were attributable primarily to the sales growth. Operating expenses grew in Brazil in 1998 due to higher sales and increased marketing programs. Mexico's operating expenses were higher in 1998 reflecting sales growth driven by increased incentive programs and higher brochure costs to support the growth in Representatives. These increases were partially offset by lower expenses in the Pacific due to lower sales and the impact of currency devaluations. The overall increase in the expense ratio was due to higher expense ratios in Mexico due to increased marketing and promotional expenses associated with new product launches, in Venezuela due to increased administrative expenses as a result of the implementation of a new labor law, in Argentina due to increased marketing expenses and in China reflecting the shutdown of sales operations for most of the second quarter of 1998. In 1997, 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 had 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. Special charges of $116.5 were recorded in 1998 for the Company's business process redesign program. These charges are primarily related to employee severance benefits and facility rationalizations in Puerto Rico, the Dominican Republic, Hong Kong and China as well as asset write-downs associated with the divestiture of the Discovery Toys business unit. See Note 13 of the Notes to the Consolidated Financial Statements for further discussion of these charges. Interest expense in 1998 of $41.0 was $.8 favorable to prior year due to lower cost of borrowings. Interest expense in 1997 of $41.8 increased $1.8 compared to 1996 primarily due to increased domestic debt levels partially offset by lower average debt outstanding in Brazil in 1997. Interest income in 1998 of $15.9 decreased $.8 compared to 1997 primarily due to the interest portion of the 1997 favorable value-added tax settlement in the United Kingdom, partially offset by a Mexico tax refund claim, as well as higher interest rates and increased average short-term investments in Brazil in 1998. Interest income in 1997 of $16.7 increased $2.2 compared to 1996 due to the interest portion of the 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. 32 Other (income) expense, net, was $14.4 unfavorable to 1997. Excluding the 1997 value-added tax settlement in the United Kingdom, other (income) expense, net was $6.2 favorable primarily due to favorable foreign exchange. In 1997, other (income) expense, net, was $24.8 favorable to 1996 due to the $20.6 portion of the value-added tax settlement in the United Kingdom as well as lower foreign exchange losses in 1997. Income taxes were $190.8 in 1998 and the effective tax rate was 41.9% compared with $197.9 and an effective tax rate of 37.0% in 1997. Excluding the effect of the special and non-recurring charges, income taxes were $222.4 and the effective tax rate was 36.4%. The 36.4% effective tax rate was lower in 1998 due to the mix of earnings and income tax rates of the international subsidiaries. In 1997, the effective tax rate was 37.0% compared with 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. 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. Mexico, Venezuela and Russia experienced high cumulative rates of inflation over the three-year period 1996 through 1998. However, Mexico will be converted to non-hyperinflationary status beginning January 1, 1999 due to reduced cumulative inflation rates during the past three years. Below is an analysis of the key factors affecting net sales and operating profit by reportable segment for each of the years in the three-year period ended December 31, 1998. Years ended December 31 1998 1997 1996 Net Operating Net Operating Net Operating Sales Profit Sales Profit Sales Profit North America: U.S. $1,774.0 $ 302.8 $1,696.7 $ 261.8 $1,672.5 $ 267.4 Other 287.6 40.2 275.4 35.1 224.3 34.4 -------- ------- -------- ------- -------- ------- Total 2,061.6 343.0 1,972.1 296.9 1,896.8 301.8 International* Latin America 1,665.1 344.4 1,513.3 280.0 1,385.6 273.3 Pacific 623.3 62.5 782.4 67.0 751.1 77.0 Europe 862.7 108.5 811.6 91.7 780.7 67.4 -------- ------- -------- ------- -------- ------- Total 3,151.1 515.4 3,107.3 438.7 2,917.4 417.7 Total from operations $5,212.7 858.4 $5,079.4 735.6 $4,814.2 719.5 ======== ======= ======== ======= ======== ======= Global expenses (224.5) (191.5) (174.7) Special and non-recurring charges (154.4) - - Operating profit $ 479.5 $ 544.1 $ 544.8 ======= ======= ======= * Excludes Canada, Dominican Republic and Puerto Rico which are now included in North America. Note: 1997 and 1996 data have been restated to reflect the Company's segments on an operating profit basis. See Note 11 of the Notes to the Consolidated Financial Statements for further details. 33 North America - Sales in North America increased 5% to $2.06 billion and operating profit increased 16% to $343.0 in 1998. The U.S. business, which represents almost 90% of the North American segment, reported sales and operating profit growth of 5% and 16%, respectively. Sales growth in the U.S. reflected a 4% increase in the average order size coupled with a 1% increase in the number of Representative orders. The sales improvement resulted from increases in fashion jewelry and accessories, cosmetics, fragrance and toiletries ("CFT") and home entertainment categories partially offset by a decline in the gift and decorative category. Sales of fashion jewelry and accessories rose significantly over the prior year, primarily in the accessories segment, with the success of such products as organizer handbags, the Home Run Hero watch introduced in the fourth quarter and increased sales of licensed products, including Winnie the Pooh carryalls and sports watches. Growth in the CFT category was driven by successful launches of Rare Rubies, Anew Retinol Hand Complex, the Diane Von Furstenberg fragrance, Forest Lily. In addition, the success of Avon's transfer resistant technology lipstick and Avon Color's Spring Shade Collection combined with continued growth of the Avon Techniques hair care and Skin-So-Soft lines contributed to the growth in CFT. Higher sales in the home entertainment category were driven by the launch of a collection of inspirational and religious products, as well as an increase in the sales of demonstration products purchased by Representatives. These increases were partially offset by a decline in the gift and decorative category resulting from the phasing out of the Avon Home line and lower sales of Barbie and holiday products in 1998. The improvement in U.S. operating profit was mainly a result of the above sales increase combined with a favorable gross margin driven by cost improvements, revised pricing strategies and reduced clearance activity. In 1997, North American sales increased 4% to $1.97 billion and operating profit decreased 2% to $296.9. Sales in the U.S. segment rose 1% to $1.70 billion and operating profit decreased 2% to $261.8. 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 in the U.S. increased 4% over 1996. The U.S. sales improvement resulted from increases in the 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 operating profit 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. International - International sales increased 1% to $3.15 billion and operating profit increased 17% to $515.4 from $438.7 in 1997. The sales growth resulted from strong growth in Latin America, particularly in Brazil, Mexico, Argentina and Venezuela, as well as in Europe reflecting improvements in the United Kingdom and Poland. These results were significantly offset by sales declines in the Pacific, most significantly in Japan, China and the Philippines. Excluding the impact of foreign currency exchange, international sales rose 11% and operating profit increased 30% over 1997. In Latin America, sales increased 10% to $1.67 billion and operating profit increased 23%, or $64.4, to $344.4 in 1998. The sales improvement resulted from strong growth in Brazil and, to a lesser extent, Mexico, Argentina and Venezuela. Brazil's growth in sales was driven by attractive pricing and successful new product launches, which resulted in strong double-digit increases in units and orders in 1998. Additionally, the number of active Representatives rose 31% from 1997. Mexico's sales increase was driven by successful new product launches including Anew Night Force, Yessamin fragrance and Women of Earth, as well as increases in the apparel and home line extensions which offered superior design and promotions in 1998. Argentina and Venezuela reported strong increases in units, orders and customers served. Excluding the impact of foreign currency exchange, sales in Latin America rose 19% over 1997. The increase in the region's operating profit was primarily due to favorable results in Brazil attributable to the strong sales increase and an improved gross margin and operating expense ratio. Brazil's gross margin improvement resulted from actions taken in 1997 to reduce inventory levels as well as better vendor negotiations and continued cost reduction programs in 1998. The favorable operating expense ratio was driven by the strong sales increase. Operating profit improvements in Mexico due to the sales increase, and in Venezuela due to pricing strategies and business redesign efforts, contributed to the region's growth in operating profit. Excluding the impact of foreign currency exchange, operating profit in Latin America increased 34% over the prior year. 34 In the Pacific Region, sales decreased 20% to $623.3 in 1998 and operating profit decreased 7% to $62.5 from $67.0 in 1997. The decline in sales resulted from decreases in every major market, most significantly in Japan, China and the Philippines. The Asian currency and economic crisis which began in mid-1997 continued throughout 1998 and negatively impacted results in the Pacific. The general economic environment is poor with low consumer confidence and reduced spending. Excluding the impact of foreign currency exchange, sales decreased 3%, a 17 point differential from U.S. dollar reported results. In addition, selling activities in China were suspended for most of the second quarter of 1998 due to governmental restrictions on direct-selling companies. As of the beginning of June, the Company received Chinese governmental approval to resume operations as a wholesale and retail business and became operational again in mid-June. The Company converted its branches into retail outlets to serve customers and received approval to utilize sales promoters, much like Representatives, to promote product sales in China. Despite the above difficulties, most markets showed growth in active Representatives and number of customers served resulting from a strong focus on active recruitment to expand the Representative base throughout the region. The Philippines posted double- digit increases in orders, customers served and active Representatives. Local currency sales in the Philippines increased 10% over the prior year. The decrease in the region's operating profit resulted primarily from declines discussed above. Despite the sales decline, Japan's operating profit increased significantly over the prior year as a result of improvements in gross margin and operating expense ratio. Japan's margin improvements resulted from cost reduction strategies and the elimination of many lower-margin products in 1998. Additionally, business process redesign efforts have resulted in lower operating expenses. Excluding the impact of foreign currency exchange, operating profit in the Pacific increased 19% from 1997. In the Europe Region, sales increased 6% to $862.7 and operating profit increased $16.8, or 18%, to $108.5 in 1998. The sales increase was primarily due to growth in the United Kingdom resulting from a higher average order size in 1998. The United Kingdom continues to focus on developing the core business through Representatives, growth in orders and customers as well as brand awareness and image enhancement. In addition, Poland's sales increased significantly from 1997 as a result of dramatic growth in active Representatives and all business fundamentals including units, orders and customers served. These improvements were partially offset by sales shortfalls in Russia attributable to the devaluation of the Russian ruble in August 1998. Average orders have declined significantly in Russia due to low consumer purchasing power. In response to this situation, several actions have been taken by local management including pricing flexibility to maintain and build market share and reduce credit sales, as well as a tightening of expense controls. Geographic expansion into new cities has also been deferred. The devaluation negatively affected Russia's U.S. dollar results in 1998. Excluding the impact of foreign currency exchange, sales in Europe and Russia increased 10% and 26%, respectively, from prior year. The increase in the region's operating profit was due to the overall sales increase combined with an improved operating margin in the United Kingdom. A shift in sales mix to higher-margin items contributed to a gross margin improvement, and continued active expense management led to a favorable operating expense ratio in the United Kingdom. These increases were partially offset by operating profit declines in Russia mainly due to the devaluation of the ruble discussed above. Excluding the impact of foreign currency exchange, operating profit in Europe increased 25% over 1997. In 1997, international sales increased 7% to $3.11 billion and operating profit increased 5% to $438.7. The sales increase reflected strong growth in Latin America, 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 Latin America, 1997 sales increased 9% to $1.51 billion and operating profit increased 2%, or $6.7, to $280.0 from $273.3 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 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 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 35 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 Latin America were up 15% over 1996. The increase in the region's operating profit was primarily due to favorable results in Mexico reflecting the strong sales increase, described above, combined with a favorable operating expense ratio. In addition, operating profits were higher in Argentina and Chile due mainly to the sales growth. These improvements were partially offset by a lower operating 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 were taken in Brazil to reduce manufacturing and customer service costs, negotiate better terms and costs with vendors and introduce more global products with a higher price and improved margin. In the Pacific Region, 1997 sales increased 4% to $782.4 and operating profit decreased 13% to $67.0 from $77.0 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 operating profit 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 remained intense in Japan with the continued relaxation of import restrictions and the accelerated growth in discount outlets. As a result, prices were adjusted in early 1997 to make products more competitive in the marketplace. Efforts were 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, operating profits declined due to the 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 operating profit. The region's operating profit 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 were 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, 1997 sales increased 4% to $811.6 and operating profit increased $24.3, or 36%, to $91.7. 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 a focus on improving market share through brand and image enhancement. Customers were spending more in 1997 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 continued 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. The increase in operating profit 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. See Foreign Operations section under Liquidity and Capital Resources for additional discussion. 36 Global Expenses - Global expenses were $224.5 in 1998 compared with $191.5 in 1997. The $33.0 increase reflected increased expenses in 1998 associated with information technology system and global marketing initiatives and higher expenses for incentive compensation programs primarily due to the improved operating results in 1998. In 1997, global expenses were $16.8 unfavorable compared with 1996 primarily due to process redesign and system initiatives. Accounting Changes - Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income". This statement establishes standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements. As shown in the statements of changes in shareholders' equity and Note 5 of Notes to the Consolidated Financial Statements, comprehensive income includes all changes in equity during a period, except those resulting from investments by and distributions to the Company's stockholders. As this standard only requires additional information in the financial statements, it does not affect the Company's results of operations or financial position. Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which changes the way the Company reports information about its operating segments. The information for 1997 and 1996 has been restated from that previously reported in order to conform with the current year's presentation. FAS No. 131 requires a new basis, entitled the management approach, for determining reportable segments. This approach is based on the way management organizes segments within a company for making operating decisions and assessing performance. FAS No. 131 also establishes standards for supplemental disclosure about products and services, geographical areas and major customers. Segment results for the three years ended December 31, 1998 are presented in Note 11. Effective January 1, 1998, the Company adopted FAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". FAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits, although it does not impact the measurement or recognition of those benefits. There was no impact on the Company's results of operations or financial position in adopting this statement. Prior years' information has been restated to conform with the requirements of FAS No. 132. Effective January 1, 1998, the Company adopted AICPA Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP No. 98-1 requires certain costs in connection with developing or obtaining internally used software to be capitalized that previously would have been expensed as incurred. The adoption of SOP No. 98-1 did not have a material impact on the Company's results of operations, financial position or cash flows. Effective 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. 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 1998, the Financial Accounting Standards Board issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". FAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability or firm commitment, changes in the fair value of the derivative instrument will be included in the income statement along with the offsetting changes in the hedged item's fair value. For cash-flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable rate asset, liability or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instruments that are reported in other comprehensive income will be reclassified to earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all of the hedges will be recognized in current period earnings. The Company has not yet determined the impact that the adoption of FAS No. 133 will have on its results of operations or financial position. 37 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, 1998 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 $324.4 in 1998 compared to $315.5 in 1997. The 1998 increase principally reflects, among other things, a lower working capital level partially offset by lower adjusted net income. The lower funding of working capital included the 1997 settlement of tax issues in the U.S. A more detailed analysis of the individual items contributing to the 1998 and 1997 amounts is included in the Consolidated Statements of Cash Flows. There was no cash used by discontinued operations in 1998 and 1997, compared to $38.2 in 1996. The $38.2 cash used in 1996 primarily reflected final payment of a settlement reached with a discontinued operation, Mallinckrodt, in December 1995. Excluding changes in debt and other financing activities, net cash usage of $117.6 in 1998 was $19.7 favorable compared to net cash usage of $137.3 in 1997. During 1998 and 1997, the Company received net proceeds of approximately $58.1 and $58.6, respectively, under securities lending transactions which were used to repay domestic commercial paper borrowings and are included in the cash flows as other financing activities. See Note 4 of the Notes to the Consolidated Financial Statements for further discussion of these transactions. The $19.7 variance reflects a favorable exchange rate impact on cash and higher cash provided by continuing operations. These sources were partially offset by higher capital expenditures and increased dividend payouts in 1998. In 1997, 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. For the period 1994 through 1998, 32.1 million shares of common stock have been purchased for approximately $641.5 under the stock repurchase programs. See Note 9 of the Notes to Consolidated Financial Statements for further details of the stock repurchase programs. Working Capital - At December 31, 1998, current assets exceeded current liabilities by $11.9 while at the end of 1997, current liabilities exceeded current assets by $11.9. This increase of $23.8 is primarily due to lower net debt (debt less cash and equivalents) which resulted from the repayment of $100.0 reclassified as short-term debt in 1997 on the 6-1/8% deutsche mark notes and lower accounts payable. In addition, higher receivables, partially offset by lower inventory levels, as discussed in the Inventories section, and higher accrued compensation resulting from increased incentive compensation expense in 1998 also contributed to the variance. 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 $256.3 at December 31, 1998 increased $22.0 from $234.3 at December 31, 1997, compared with an increase of $32.7 from December 31, 1996. In addition, at December 31, 1998 and 1997, other non- current liabilities included approximately $112.4 and $58.1, respectively, related to securities lending activities. See Note 4 of the Notes to Consolidated Financial Statements for further discussion of these activities. During 1998 and 1997, cash flows from continuing operations and other financing activities combined with cash on hand and higher debt levels 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. At December 31, 1998, debt maturing within one year consists of borrowings from banks of $53.9 and the current maturities of long-term debt of $1.4. 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. In May 1998, Avon issued $100.0 of bonds embedded with option features (the "bonds") to pay down commercial paper borrowings. The bonds have a twenty-year maturity; however, after five years, the bonds, at the holder's option, can be sold back to the Company at par or can be called at par by the underwriter and resold to 38 investors as fifteen-year debt. The coupon rate on the bonds is 6.25% for the first five years, but will be refinanced at market rates if the bonds are called in year five. In connection with the bond issuance, Avon entered into a five-year interest rate swap contract with a notional amount of $50.0 to effectively convert fixed interest on a portion of the bonds to a variable interest rate, based on LIBOR. During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007 to pay down commercial paper borrowings. During 1996, the Company entered into an agreement, which expires in 2001, with various banks to amend and restate the five-year, $600.0 revolving credit and competitive advance facility agreement. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. The 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. There were no borrowings outstanding at December 31, 1998 and 1997. The Company has uncommitted lines of credit available of $65.0 with various banks which have no compensating balances or fees. As of December 31, 1998 and 1997, there were no borrowings under lines of credit or bankers' acceptance facilities. In addition, as of December 31, 1998 and 1997, there were international lines of credit totaling $329.5 and $295.8, respectively, of which $53.9 and $29.4 were outstanding, respectively. 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 $538.4 at December 31, 1998 were $26.4 lower than 1997 due mainly to reduced inventory levels in the U.S. The decrease in the U.S. results from improvements in CFT related to the implementation of supply chain initiatives which resulted in reduced cycle times, reorder quantity reductions, reduced overstocking and lower component prices. In addition, write-downs in fashion jewelry and accessories and apparel associated with the Company's business process redesign program contributed to the decrease. See Note 13 of the Notes to Consolidated Financial Statements for further discussion of the business process redesign program. 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 1998 were $189.5 (1997 - $169.4). These expenditures were made for capacity expansion in high growth markets, maintenance of worldwide facilities, contemporization and replacement of information systems, supply chain initiatives in the U.S. and for shipping and other customer service improvements, primarily in the United Kingdom and Brazil. Numerous construction and information systems projects were in progress at December 31, 1998 with an estimated cost to complete of approximately $87.4. Capital expenditures in 1999 are currently expected to be in the range of $200.0 - - $220.0. These expenditures will include improvements on existing facilities, continued investments for capacity expansion in high growth markets, facility modernization, information systems and equipment replacement projects. Foreign Operations - The Company derived approximately 60% of its 1998 consolidated net sales and consolidated operating profit from operations from its subsidiaries outside of North America. In addition, as of December 31, 1998, these subsidiaries comprised approximately 53% of the Company's consolidated total assets. Avon's operations in many countries utilize numerous currencies. Avon has significant net assets in Brazil, the United Kingdom, Japan, Argentina, Germany and the Philippines. Changes in the value of these countries' currencies relative to the U.S. dollar result in direct charges or credits to equity. Effective January 1, 1997, Mexico was designated as a country with a highly inflationary economy due to the cumulative inflation rates over the three year period 39 1994-1997. However, Mexico will be converted to non-hyper inflationary status effective January 1, 1999 due to reduced cumulative inflation rates over the past three years. The Russian ruble devalued significantly in August 1998. In response to this situation, several actions have been taken by local management including pricing flexibility to maintain and build market share, the reduction of credit sales as well as a tightening of expense controls. The devaluation negatively affected Russia's U.S. dollar results in 1998. In terms of size, Russia's 1998 net sales represented approximately 1% of Avon's consolidated net sales. Avon's results continue to be negatively impacted by the Asian currency and economic crisis which began in mid-1997. On April 21, 1998, the Chinese government issued a directive banning all direct selling in China resulting in the shutdown of the Company's sales operations for most of the second quarter. As of the beginning of June, the Company received Chinese governmental approval to resume operations as a wholesale and retail business and became operational again on June 15, 1998. The Company converted its 75 branches into retail outlets to serve customers. During the end of the second quarter of 1998, Avon received government approval to utilize sales promoters, much like Representatives, to promote product sales in China. 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 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, 1998, the total indebtedness of foreign subsidiaries was $55.6. 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 1998, these subsidiaries remitted, net of taxes, $340.2 in dividends and royalties. This sum is a substantial portion of the 1998 consolidated net earnings of Avon's foreign subsidiaries. Risk Management Strategies and Market Rate Sensitive Instruments - The Company operates globally, with manufacturing and distribution facilities in various locations around the world. The Company may reduce its primary market exposures to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives. The Company periodically uses interest rate swaps to hedge portions of interest payable on its debt. In addition, the Company may periodically employ interest rate caps to reduce exposure, if any, to increases in variable interest rates. The Company may periodically hedge foreign currency royalties, net investments in foreign subsidiaries, firm purchase commitments and contractual foreign currency cash flows or obligations, including third-party and intercompany foreign currency transactions. The Company regularly monitors its foreign currency exposures and ensures that hedge contract amounts do not exceed the amounts of the underlying exposures. At December 31, 1998, the Company held foreign currency forward contracts with notional amounts totaling $285.9 and option contracts with notional amounts totaling $32.6 to hedge foreign currency items. Only $7.3 of these contracts have maturities after December 31, 1999. Also outstanding in 1998 were foreign currency forward contracts totaling $45.0 which do not qualify as hedging transactions under the current accounting definitions and, accordingly, have been marked to market. The mark-to-market adjustment at December 31, 1998 was insignificant. At December 31, 1998, the Company has entered into forward contracts to purchase approximately 3,469,200 shares of Avon common stock at an average price of $36.31 per share at December 31, 1998. The contracts mature over the next three years and provide for physical or net share settlement to the Company. Accordingly, no adjustment for subsequent changes in fair value has been recognized. 40 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, 1998. 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 agreements as a result of changes in foreign exchange and interest rates. The market risk related to the foreign exchange agreements should be substantially offset by changes in the valuation of the underlying items being hedged. The Company is exposed to changes in financial market conditions in the normal course of its operations primarily due to international businesses and transactions denominated in foreign currencies and the use of various financial instruments to fund ongoing activities. Various derivative and non-derivative financial instruments held by the Company are sensitive to changes in interest rates. These financial instruments are either discussed above or in Notes 4 and 7 of the Notes to Consolidated Financial Statements. Interest rate changes would result in gains or losses in the fair value of debt and other financing instruments held by the Company. Based on the outstanding balance of all instruments at December 31, 1998, 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 1998, 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 Consolidated Financial Statements. Based on the Company's foreign exchange contracts at December 31, 1998, 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, 1998 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 1998, 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, 1998, the primary currencies for which the Company has net underlying foreign currency exchange rate exposure are the U.S. dollar versus the Argentine peso, Brazilian real, British pound, Canadian dollar, 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. Other Information On October 23, 1997, the Company announced that it raised its long-term growth targets for sales and earnings per share and that it expects to record special charges in connection with a major business process redesign 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. In the first quarter of 1998, the Company 41 recorded $108.4 pretax of such one-time charges ($84.2 after tax, or $.32 per share on a basic and diluted basis) in connection with the business process redesign program. Slightly more than half of the total pretax charges in the first quarter were to be cash related with payments in 1998 and 1999. In the third quarter of 1998, the Company recorded additional special charges for business redesign efforts totaling $46.0 pretax ($38.6 after tax, or $.14 per share on a basic and diluted basis). Approximately 70% of the third quarter pretax charges were to be cash related with payments in 1998 and 1999. At December 31, 1998, the remaining liability balance was $28.5 and relates primarily to severance costs that will be paid during 1999. The Company expects to record the additional one-time charges in 1999 as plans are finalized. Euro A single currency called the euro was introduced in Europe on January 1, 1999. Eleven of the fifteen member countries of the European Union adopted the euro as their common legal currency on that date. Fixed conversion rates between these participating countries' existing currencies (the "legacy currencies") and the euro were established as of that date. The legacy currencies are scheduled to remain legal tender as denominations of the euro until June 30, 2002. During this transition period, parties may settle transactions using either the euro or a participating country's legal currency. Beginning in January 2002, new euro- denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. Avon operating subsidiaries affected by the euro conversion have established plans to address issues raised by the euro currency conversion. These issues include, among others, the need to adapt information technology systems, business processes and equipment to accommodate euro-denominated transactions, the impact of one common currency on pricing and recalculating currency risk. Avon does not expect system and equipment conversion costs to be material. Due to the numerous uncertainties associated with the market impact of the euro conversion, the Company cannot reasonably estimate the effects one common currency will have on pricing and the resulting impact, if any, on results of operations, financial condition or cash flows. Year 2000 Update General The "Year 2000 issue" is the result of computer programs being written using two-digits rather than four to define the applicable year. If the Company's computer programs with date-sensitive functions are not Year 2000 compliant, they may fail or make miscalculations due to interpreting a date including "00" to mean 1900, not 2000. The result may be disruptions in operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. The Company commenced its worldwide Year 2000 initiative in early 1996. The Company has developed a comprehensive project plan as a means for ensuring that all information technology ("IT") systems, including applications, operating systems, mainframe, mid range and client server platforms, all non- information technology ("Non-IT") systems, including embedded applications and equipment and key third parties are Year 2000 compliant by December 31, 1999. The Company has identified high risk applications that are critical to its business, recognizing the fact that timely compliance of these systems is crucial, and, therefore, has designed its programs to address these systems first. Furthermore, the Company has established a project team to identify and address the Company's Year 2000 risks and issues in an attempt to ensure the integrity and reliability of the Company's information systems and business processes. Project Plan The Company's Year 2000 project plan is divided into four major sections, including: Infrastructure, Application Softwares, Validation of Third Party Compliance and Embedded Systems. The project has five phases, which are common to all sections: 1) identifying, inventorying and prioritizing Year 2000 items; 2) assessing Year 2000 compliance of identified items and related potential risks in circumstances of non-compliance of these items; 3) remediating, replacing or upgrading, as appropriate, material items that are determined not to be Year 2000 compliant; 4) validation testing of material items to ensure compliance; and 5) contingency planning and implementation. The Company utilizes internal resources and outside consultants to renovate and test its IT and Non-IT systems for Year 2000 compliance. None of the Company's other information technology projects have been deferred due to the implementation of the Year 2000 project. The Infrastructure section consists of hardware, including mainframe and AS/400 platforms, and software, including operating systems, other than Applications Software. This section has completed all phases through remediation and has progressed to the validation testing phase. All Infrastructure activities are expected to be completed by June 1999. The Applications Software section includes the conversion of both in-house developed and vendor-supplied software applications. 42 In-house developed software that is not Year 2000 compliant has undergone remediation of its application, whereas non-compliant vendor provided software has been upgraded or replaced, where available by the supplier. This section's testing phase, which includes procedures for independent validation and verification of code, is ongoing and is anticipated to be completed by June 1999. Validation of Third Party Compliance includes the process of recognizing, prioritizing and communicating with key suppliers and service providers with whom the Company has a direct and significant relationship and are believed to be critical to its business operations. Identification of significant vendors has been completed and a strategy has been initiated in an attempt to reasonably ascertain their progress in addressing the Year 2000 issue. The Company has distributed comprehensive questionnaires to key suppliers, and, with the guidance of outside consultants, is in the process of conducting detailed assessments of the responses received. The validation of third party compliance is expected to be completed by May 1999. Follow-up reviews will also be scheduled for the remainder of 1999. The Embedded Systems section includes all hardware, software and associated embedded computer chips that are utilized in operating and maintaining the internal functions of the Company's facilities, i.e. climate control systems. The Company has elected to employ a regional-based strategy for addressing Year 2000 compliance of its embedded systems. Avon U.S. operations have substantially completed the remediation of embedded systems and anticipate all repair and testing to be completed by March 1999. From an international standpoint, the Company is in the process of inventorying material items that are not Year 2000 compliant and expects the assessment phase to be completed by July 1999, with all remediation testing scheduled to be completed by year-end 1999. Costs The total estimated cost associated with achieving worldwide Year 2000 compliance will be approximately $29.4, of which $17.0 has been spent to date. Replacement costs and costs associated with the validation of third party compliance are included in these figures. The Company does not separately track the internal costs incurred for the Year 2000 project, those costs primarily being related to payroll costs for the Company's information systems group. The Company's policy is to expense as incurred information system maintenance and modification costs and to capitalize costs related to system replacement. The costs of the Company's Year 2000 compliance efforts are being funded through operating cash flows. Risks The Company expects to identify and resolve all Year 2000 problems that may adversely affect its business operations. However, management believes that it is not possible to determine with complete certainty that all Year 2000 matters affecting the Company have been or will be identified or corrected, resulting in part from the uncertainty of the Year 2000 readiness of third party suppliers. Thus, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's results of operations, liquidity or financial condition. The Company believes, however, that its risk of being adversely impacted by Year 2000 failures is mitigated due to its product portfolio being so diversified, with the vast majority of its items not being date-sensitive. The strategy employed by the Company's Year 2000 project is expected to significantly reduce the Company's level of uncertainty about the Year 2000 issue and the Year 2000 compliance of key third parties who materially impact its business. Contingency Plans Development of contingency plans is in progress and will be developed in detail during 1999. Once established, contingency plans and related cost estimates will be continually modified, if necessary, as additional information becomes available. Disclaimer Readers are cautioned that forward-looking statements contained in the Year 2000 Update should be read in conjunction with the Company's disclosure under the heading "Forward-Looking Statement". 43 Results of Operations by Quarter Avon Products, Inc. All share and per share data shown below have been restated to reflect two-for- one stock splits which were distributed in September 1998 and June 1996. In millions, except per share data First Second Third Fourth Year 1998 Net sales $1,183.4 $1,247.2 $1,233.2 $1,548.9 $5,212.7 Gross profit* 680.3 781.6 755.0 942.8 3,159.7 Special charges 70.5 - 46.0 - 116.5 Operating (loss)profit (16.3) 178.6 82.7 234.5 479.5 (Loss)income before taxes and minority interest (26.6) 173.6 76.5 232.4 455.9 (Loss)income before minority interest (32.7) 109.7 39.8 148.3 265.1 Net (loss)income $ (31.0) $ 111.4 $ 41.5 $ 148.1 $ 270.0 ========= ======== ======== ======== ======== (Loss)earnings per share: Basic $ (.12) $ .42 $ .16 $ .56 $ 1.03(1) ========= ======== ======== ======== ========== Diluted $ (.12) $ .42 $ .16 $ .56 $ 1.02(1) ========= ======== ======== ======== ========== *First quarter includes a one-time charge of $37.9 for inventory write-downs. 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 Operating profit 73.1 157.0 117.5 196.5 544.1 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 $ .16 $ .36 $ .26 $ .51 $ 1.28(1) ======== ======== ======== ======== =========== Diluted $ .15 $ .36 $ .26 $ .50 $ 1.27(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 per share of Common Stock by Quarter 1998 1997 Quarter High Low High Low First $ 40.63 $ 28.00 $ 31.81 $ 26.06 Second 44.50 36.94 37.00 25.31 Third 44.31 25.00 39.00 29.25 Fourth 46.25 25.75 38.38 27.75 Avon common stock is listed on the New York Stock Exchange. At December 31, 1998, there were 23,375 shareholders of record. The Company believes that there are over 60,000 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 $.68 per share, or $.17 per share each quarter, were declared and paid in 1998. Dividends of $.63 per share, or $.1575 per share each quarter, were declared and paid in 1997. 44 Consolidated Statements of Income Avon Products, Inc. In millions, except per share data Years ended December 31 1998 1997 1996 Net sales $5,212.7 $5,079.4 $4,814.2 Costs, expenses and other: Cost of sales** 2,053.0 2,051.0 1,921.2 Marketing, distribution and administrative expenses 2,563.7 2,484.3 2,348.2 Special charges 116.5 - - --------- --------- --------- Operating profit 479.5 544.1 544.8 ========= ========= ========= Interest expense 41.0 41.8 40.0 Interest income (15.9) (16.7) (14.5) Other (income) expense, net (1.5) (15.9) 8.9 --------- --------- --------- Total other expenses 23.6 9.2 34.4 Income before taxes and minority interest 455.9 534.9 510.4 Income taxes 190.8 197.9 191.4 --------- -------- -------- Income before minority interest 265.1 337.0 319.0 Minority interest 4.9 1.8 (1.1) --------- --------- --------- Net income $ 270.0 $ 338.8 $ 317.9 ========= ========= ========= Earnings per share: Basic $ 1.03 $ 1.28* $ 1.19* Diluted $ 1.02 $ 1.27* $ 1.18* *Restated to reflect a two-for-one stock split distributed in September 1998. **1998 includes a one-time charge of $37.9 for inventory write-downs. The accompanying notes are an integral part of these statements. 45 Consolidated Balance Sheets Avon Products, Inc. In millions, except share data December 31 1998 1997 Assets Current assets Cash, including cash equivalents of $59.7 and $60.0 $ 105.6 $ 141.9 Accounts receivable (less allowance for doubtful accounts of $49.0 and $35.5) 492.6 444.8 Inventories 538.4 564.8 Prepaid expenses and other 204.8 192.5 --------- --------- Total current assets $1,341.4 $1,344.0 Property, plant and equipment, at cost Land 51.4 48.6 Buildings and improvements 613.0 567.0 Equipment 728.4 666.0 -------- -------- 1,392.8 1,281.6 Less accumulated depreciation 722.9 670.6 - --------- --------- 669.9 611.0 Other assets 422.2 317.9 --------- --------- Total assets $2,433.5 $2,272.9 ========= ========= Liabilities and Shareholders' Equity Current liabilities Debt maturing within one year $ 55.3 $ 132.1 Accounts payable 416.9 476.0 Accrued compensation 161.3 111.3 Other accrued liabilities 308.2 268.9 Sales and taxes other than income 106.2 101.0 Income taxes 281.6 266.6 --------- --------- Total current liabilities $1,329.5 $1,355.9 Long-term debt 201.0 102.2 Employee benefit plans 390.0 367.6 Deferred income taxes 36.3 31.2 Other liabilities (including minority interest of $36.1 and $37.5) 191.6 131.0 Commitments and contingencies (Note 14) Shareholders' equity Common stock, par value $.25 - authorized: 400,000,000 shares; issued 351,314,366 and 174,711,173 shares 87.8 43.7 Additional paid-in capital 780.0 733.1 Retained earnings 719.1 660.9 Accumulated other comprehensive income (301.3) (270.3) Treasury stock, at cost - 88,793,640 and 42,897,463 shares (1,000.5) (882.4) --------- --------- Total shareholders' equity 285.1 285.0 --------- --------- Total liabilities and shareholders' equity $2,433.5 $2,272.9 ========= ========= The accompanying notes are an integral part of these statements. 46 Consolidated Statements of Cash Flows Avon Products, Inc. In millions Years ended December 31 1998 1997 1996 Cash flows from operating activities Net income $ 270.0 $ 338.8 $ 317.9 Adjustments to reconcile income to net cash provided by continuing operations: Depreciation and amortization 72.0 72.1 64.5 Provision for doubtful accounts 91.3 80.8 79.0 Translation gains (7.2) (.1) (.2) Deferred income taxes (13.0) 18.0 (.7) Special charges 88.5 - - Other 3.9 9.4 9.9 Changes in assets and liabilities: Accounts receivable (157.6) (121.4) (125.5) Inventories (17.2) (67.5) (65.4) Prepaid expenses and other (4.0) 6.7 13.7 Accounts payable and accrued liabilities 13.0 42.9 97.8 Income and other taxes 19.5 (56.1) 57.7 Noncurrent assets and liabilities (34.8) (8.1) (23.6) -------- -------- -------- Net cash provided by continuing operations 324.4 315.5 425.1 Net cash used by discontinued operations - - (38.2) Net cash provided by operating activities 324.4 315.5 386.9 -------- -------- -------- Cash flows from investing activities Capital expenditures (189.5) (169.4) (103.6) Disposal of assets 5.8 3.3 3.3 Acquisitions of subsidiary stock and other investing activities 1.4 (9.0) (6.3) -------- -------- -------- Net cash used by investing activities (182.3) (175.1) (106.6) -------- ------- ------- Cash flows from financing activities Cash dividends (180.6) (168.3) (158.1) Debt, net (maturities of three months or less) (96.1) (39.8) 17.8 Proceeds from short-term debt 54.7 25.7 37.5 Retirement of short-term debt (34.9) (49.0) (14.1) Proceeds from long-term debt 100.1 100.0 - Retirement of long-term debt (.6) (.8) (1.5) Proceeds from exercise of stock options, net of taxes 24.0 20.6 10.0 Repurchase of common stock (107.8) (110.8) (127.8) Other financing activities 58.1 58.6 - -------- -------- -------- Net cash used by financing activities (183.1) (163.8) (236.2) -------- -------- -------- Effect of exchange rate changes on cash and equivalents 4.7 (19.2) (11.0) -------- -------- -------- Net (decrease)increase in cash and equivalents (36.3) (42.6) 33.1 Cash and equivalents at beginning of year 141.9 184.5 151.4 -------- -------- -------- Cash and equivalents at end of year $ 105.6 $ 141.9 $ 184.5 ======== ======== ======== Cash paid for Interest $ 39.2 $ 36.0 $ 35.2 Income taxes, net of refunds received 188.5 215.8 158.9 The accompanying notes are an integral part of these statements. 47 Consolidated Statements of Changes in Shareholders' Equity Avon Products, Inc.
Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Treasury In millions, except share data Shares Amount Capital Earnings Income Stock Total Balance at December 31, 1995 173,498,112 $ 43.4 $ 672.9 $ 325.8 $(202.1) $(647.3) $192.7 Comprehensive income: Net income 317.9 317.9 Foreign currency translation adjustments (8.6) (8.6) - ------ Total comprehensive income 309.3 Dividends - $1.16 per share (154.9) (154.9) 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 Comprehensive income: Net income 338.8 338.8 Foreign currency translation adjustments (59.6) (59.6) - ------- Total comprehensive income 279.2 Dividends - $1.26 per share (166.7) (166.7) Exercise of stock options, including tax benefits 713,298 .2 30.3 30.5 Grant, cancellation and amortization of restricted stock 40,496 4.6 4.6 Repurchase of common stock (110.8) (110.8) Benefit plan contributions 4.6 1.9 6.5 ----------- ------ ------- ----- - --- -------- -------- ------- Balance at December 31, 1997 174,711,173 43.7 733.1 660.9 (270.3) (882.4) 285.0 Comprehensive income: Net income 270.0 270.0 Foreign currency translation adjustments (15.6) (15.6) Minimum pension liability adjustment (15.4) (15.4) - ------- Total comprehensive income 239.0 Dividends - $.68 per share (178.9) (178.9) Two-for-one stock split effected in the form of a stock dividend from retained earnings (Note 9) 175,419,475 43.9 (32.9) (11.0) - Exercise of stock options, including tax benefits 916,102 .2 38.2 38.4 Grant, cancellation and amortization of restricted stock 267,616 7.1 7.1 Repurchase of common stock (107.8) (107.8) Benefit plan contributions 1.6 .7 2.3 ----------- ------ ------- ----- - ---- -------- ---------- -------- Balance at December 31, 1998 351,314,366 $ 87.8 $ 780.0 $ 719.1 $(301.3) $(1,000.5) $ 285.1 =========== ====== ======= ========= ======== ========== ======== The accompanying notes are an integral part of these statements.
48 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 North America, Latin America, the Pacific and Europe. Sales are made to the ultimate customers principally by independent Avon Representatives. Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Avon and its majority and wholly-owned subsidiaries. Intercompany balances and transactions are eliminated. These statements have been prepared in conformity with generally accepted accounting principles and require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. Foreign Currency - 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 within accumulated other comprehensive income. 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 range from 3 to 15 years. Other Assets - Systems development costs related to the development of major information and accounting systems are capitalized and amortized over the estimated useful life of the related project, not to exceed five years. Stock Options - 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, 49 liabilities and 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 the same category as that arising from the related asset or liability being hedged. Items which do not qualify 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. The Company also uses financial instruments, principally forward contracts to purchase Avon common stock, to hedge certain employee benefit costs and the cost of the Company's share repurchase program. Contracts that require physical or net share settlement are initially measured at fair value with subsequent changes in fair value not recognized. Research and Development - Research and development costs are expensed as incurred and aggregated in 1998 $31.4 (1997 - $29.9; 1996 - $30.2). Advertising - Advertising costs are expensed as incurred and aggregated in 1998 $65.0 (1997 - $64.5; 1996 - $69.6). Income Taxes - Deferred income taxes have been provided on items recognized for financial reporting purposes in different periods than for income tax purposes at future enacted rates. U.S. income taxes have not been provided on approximately $198.9 of undistributed income of subsidiaries that has been or is intended to be permanently reinvested outside the United States or is expected to be remitted free of U.S. income taxes. If such undistributed income was remitted, no substantial tax cost would be incurred. Earnings per Share - Basic earnings per share are computed by dividing net income by the weighted-average number of shares outstanding during the year. Diluted earnings per share are calculated to give effect to all potentially dilutive common shares that were outstanding during the year. For each of the three years ended December 31, the number of shares used in the computation of basic and diluted earnings per share are as follows: 1998 1997 1996 Basic EPS Weighted-average shares 263.27 264.67 267.40 Incremental shares from conversion of: Stock options 2.68 2.33 1.86 ------ ------ ------ Diluted EPS Adjusted weighted-average shares 265.95 267.00 269.26 ====== ====== ====== Reclassifications - To conform to the 1998 presentation, certain reclassifications were made to the prior years' consolidated financial statements. 2. Accounting Changes Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("FAS") No. 130, "Reporting Comprehensive Income". This statement establishes standards for the reporting and presentation of comprehensive income and its components in a full set of financial statements. As shown in the Statement of Changes in Shareholders' Equity and Note 5, comprehensive income includes all changes in equity during a period, except those resulting from investments by and distributions to the Company's stockholders. As this standard only requires additional information in the financial statements, it does not affect the Company's results of operations or financial position. Effective January 1, 1998, the Company adopted FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which changes the way the Company reports information about its operating segments. The information for 1997 and 1996 has been restated from that previously reported in order to conform with the current year's presentation. FAS No. 131 requires a new basis, entitled the management approach, for determining reportable segments. This approach is based on the way management organizes segments within a company for making operating decisions and assessing performance. FAS No. 131 also establishes standards for supplemental disclosure about products and services, geographical areas and major customers. Segment results for the three years ended December 31, 1998 are presented in Note 11. Effective January 1, 1998, the Company adopted FAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". FAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits, though it does not impact the measurement or recognition of those benefits. There was no impact on the Company's results of operations or financial position in adopting this statement. Prior years' information has been restated to conform with the requirements of FAS No. 132. Effective January 1, 1998, the Company adopted AICPA Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP No. 98-1 requires certain costs in connection with developing or obtaining internally used software to be capitalized that previously would have been expensed as incurred. The adoption of SOP No. 98-1 did not have a material impact on the Company's results of operations, financial position, or cash flows. Effective 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 ("APB") No. 15, "Earnings per Share". All prior period EPS data have been restated in accordance with FAS No. 128. 50 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 1998, the Financial Accounting Standards Board issued FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". FAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the Company). FAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative instrument will be included in the income statement along with the offsetting changes in the hedged item's fair value. For cash-flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive income. The gains and losses on the derivative instruments that are reported in other comprehensive income will be reclassified to earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all of the hedges will be recognized in current period earnings. The Company has not yet determined the impact that the adoption of FAS No. 133 will have on its results of operations or financial position. 3. Inventories Inventories at December 31 consisted of the following: 1998 1997 Raw materials $140.6 $147.4 Finished goods 397.8 417.4 ------ ------ Total $538.4 $564.8 ====== ====== LIFO-based inventories at December 31, 1998 were $135.3; (1997 - $143.5) with the current estimated replacement cost exceeding the carrying value by approximately $3.6 (1997 - $15.2). 4. Debt and Other Financing Debt at December 31 consisted of the following (see also Note 7 regarding financial instruments): 1998 1997 Maturing within one year: Notes payable $ 53.9 $ 29.4 Current portion of long-term debt 1.4 102.7 ------- ------- Total $ 55.3 $ 132.1 ======= ======= Long-term debt: 6.25% bonds, due 2018 $ 100.0 $ - 6.55% notes, due 2007 100.0 100.0 170 million 6-1/8% deutsche mark notes, due 1998 (1) - 100.0 Other, payable to 2002 with interest from 7% to 31% 2.4 4.9 Less current portion (1.4) (102.7) -------- -------- Total $ 201.0 $ 102.2 ======== ======== (1) The deutsche mark notes ("Notes") were effectively converted into U.S. dollar debt through the use of a currency exchange swap contract which included both the principal and the interest. Reflected in the carrying value of the debt was a currency swap contract payable at December 31, 1997 of $5.1. Annual maturities of long-term debt for each of the next five years are: 1999 - $1.4; 2000 - $.6; 2001 - $.2; 2002 - $.1; and 2003 and beyond $200.1. In May 1998, Avon issued $100.0 of bonds embedded with option features (the "bonds") to pay down commercial paper borrowings. The bonds have a twenty-year maturity; however, after five years, the bonds, at the holder's option, can be sold back to the Company at par or can be called at par by the underwriter and resold to investors as fifteen-year debt. The coupon rate on the bonds is 6.25% for the first five years, but will be refinanced at market rates if the bonds are called in year five. In connection with the bond issuance, Avon entered into a five-year interest rate swap contract with a notional amount of $50.0 to effectively convert fixed interest on a portion of the bonds to a variable interest rate, based on LIBOR. During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007, to pay down commercial paper borrowings. During 1996, the Company entered into an agreement, which expires in 2001, with various banks to amend and restate the five-year, $600.0 revolving credit and competitive advance facility agreement. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. The 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 51 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, 1998 and 1997, there were no borrowings outstanding under the credit facility. The Company has bankers' acceptance facilities and uncommitted lines of credit available of $65.0 (1997 - $205.0) with various banks which have no compensating balances or fees. As of December 31, 1998 and 1997, there were no borrowings under either the bankers' acceptance facilities or uncommitted lines. The maximum borrowings under these combined facilities during 1998 and 1997 were $290.7 and $409.3, respectively, and the annual average borrowings during each year were approximately $205.7 and $274.6, respectively, at average annual interest rates of approximately 4.8% and 5.2%, respectively. At December 31, 1998 and 1997, international lines of credit totaled $329.5 and $295.8, respectively, of which $53.9 and $29.4 were outstanding, respectively. The maximum borrowings under these facilities during 1998 and 1997 were $63.6 and $38.8, respectively, and the annual average borrowings during each year were $49.3 and $33.8, respectively, at average annual interest rates of approximately 12.3% and 9.9%, respectively. Such lines have no compensating balances or fees. At December 31, 1998 and 1997, Avon also has letters of credit outstanding totaling $15.5 and $15.5, respectively, which guarantee various insurance activities. In addition, Avon has outstanding letters of credit for various trade activities. During 1998 and 1997, the Company entered into securities lending transactions resulting in the borrowing of securities which were subsequently sold for net proceeds approximating $58.1 and $58.6, respectively, used to repay commercial paper borrowings. The borrowed securities are due to the lender no later than December 29, 2000, but at the Company's option can be returned at any time. The obligations are included in other non-current liabilities on the balance sheet. The effective rates on the transactions are expected to be 5.5%. and 6.5%, respectively. 5. Comprehensive Income The following table reflects comprehensive income as of December 31: 1998 1997 1996 Net income $270.0 $338.8 $317.9 Other comprehensive loss Change in equity due to foreign currency translation adjustments (15.6) (59.6) (8.6) Minimum pension liability adjustment (15.4) - - ------- ------- ------- Comprehensive income $239.0 $279.2 $309.3 ======= ======= ======= Accumulated other comprehensive income at December 31 consisted of the following: 1998 1997 Foreign currency translation Adjustments $(285.9) $(270.3) Minimum pension liability Adjustment (15.4) - -------- -------- Total $(301.3) $(270.3) 6. Income Taxes Deferred tax assets (liabilities) resulting from temporary differences in the recognition of income and expense for tax and financial reporting purposes at December 31 consisted of the following: 1998 1997 Deferred tax assets: Postretirement benefits $ 82.0 $ 69.3 Accrued expenses and reserves 58.7 44.0 Special and non-recurring charges 9.0 - Employee benefit plans 54.5 40.0 Foreign operating loss carryforwards 29.1 32.5 Capital loss carryforwards 17.4 21.2 Postemployment benefits 11.0 10.6 All other 21.3 17.7 Valuation allowance (46.9) (55.7) -------- -------- Total deferred tax assets 236.1 179.6 Deferred tax liabilities: Depreciation (41.5) (35.6) Prepaid retirement plan costs (55.2) (52.4) Capitalized interest (10.6) (13.5) Unremitted foreign earnings (17.4) (12.0) All other (22.1) (9.0) -------- -------- Total deferred tax liabilities (146.8) (122.5) -------- -------- Net deferred tax assets $ 89.3 $ 57.1 ======== ======== Deferred tax assets (liabilities) at December 31 were classified as follows: 1998 1997 Deferred tax assets: Prepaid expenses and other $ 86.9 $ 76.5 Other assets 44.2 16.1 ------ ------ Total deferred tax assets 131.1 92.6 Deferred tax liabilities: Income taxes (5.5) (4.3) Deferred income taxes (36.3) (31.2) ------- ------- Total deferred tax liabilities (41.8) (35.5) ------- ------- Net deferred tax assets $ 89.3 $ 57.1 ======= ======= The valuation allowance primarily represents reserves for foreign operating loss and capital loss carryforwards. The basis used for recognition of deferred tax assets included the profitability of the operations and related deferred tax liabilities. Income before taxes and minority interest for the years ended December 31 was as follows: 1998 1997 1996 United States $ 74.2 $ 153.6 $ 171.3 Foreign 381.7 381.3 339.1 ------- ------- ------- Total $ 455.9 $ 534.9 $ 510.4 ======= ======= ======= 52 The provision for income taxes for the years ended December 31 was as follows: 1998 1997 1996 Federal: Current $ 16.7 $ 5.4 $ 30.9 Deferred (10.4) 21.3 1.0 -------- ------- -------- 6.3 26.7 31.9 Foreign: Current 176.2 169.7 152.4 Deferred .9 (7.7) (1.5) -------- -------- -------- 177.1 162.0 150.9 State and other: Current 10.9 4.8 8.8 Deferred (3.5) 4.4 (.2) -------- -------- -------- 7.4 9.2 8.6 Total $ 190.8 $ 197.9 $ 191.4 ======== ======== ======== The effective tax rate for the years ended December 31 was as follows: 1998 1997 1996 Statutory federal rate 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit 1.0 1.1 1.1 Tax-exempt operations .8 (.5) (.7) Taxes on foreign income, including translation 9.5 5.3 6.3 Other (4.4) (3.9) (4.2) ----- ----- ----- Effective tax rate 41.9% 37.0% 37.5% ===== ===== ===== 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, 1998, Avon had foreign operating loss carryforwards of approximately $87.8. The loss carryforwards expiring between 1999 and 2006 were $64.3 and the loss carryforwards which do not expire were $23.5. Capital loss carryforwards, which expire between 1999 and 2001 and may be used to offset capital gains, if any, were approximately $49.7 at December 31, 1998. 7. Financial Instruments and Risk Management Risk Management - The Company operates globally, with manufacturing and distribution facilities in various locations around the world. The Company may reduce its exposure to fluctuations in interest rates and foreign exchange rates by creating offsetting positions through the use of derivative financial instruments. The Company does not use derivative financial instruments for trading or speculative purposes, nor is the Company a party to leveraged derivatives. The notional amount of forward exchange contracts and options is the amount of foreign currency bought or sold at maturity. The notional amount of interest rate swaps is the underlying principal amount used in determining the interest payments exchanged over the life of the swap. The notional amounts are not a direct measure of the Company's exposure through its use of derivatives. Interest Rates - The Company periodically uses interest rate swaps to hedge portions of interest payable on its debt. In addition, the Company may periodically employ interest rate caps to reduce exposure, if any, to increases in variable interest rates. As discussed in Note 4, the Company entered into a five-year interest rate swap contract with a notional amount of $50.0 to effectively convert fixed interest on a portion of the bonds to variable interest rate based on LIBOR. 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, 1998, the Company held foreign currency forward contracts with notional amounts totaling $285.9 (1997 - $319.1) and option contracts with notional amounts totaling $32.6 (1997 - $80.0) to hedge foreign currency items. All except $7.3 of these contracts have maturities prior to December 31, 1999. Additionally, the Company also held forward contracts with notional amounts totaling $45.0 (1997 - $44.2) which do not qualify as hedging transactions under the current accounting definitions and, accordingly, have been marked to market. The mark-to-market adjustments on these forward contracts at December 31, 1998 and 1997 were insignificant. 53 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: 1998 1997 Buy Sell Buy Sell Brazilian real $ - $ 45.0 $ - $ - British pound 37.9 57.7 29.1 56.5 Canadian dollar - 39.1 - 30.8 Chinese renminbi - 5.0 - - French franc - - - 13.8 German mark 71.8 - 77.2 12.4 Indonesian rupiah - - 3.7 5.0 Irish punt - - 13.0 2.9 Italian lira 7.3 - 7.8 3.7 Japanese yen 1.5 67.3 12.0 53.3 Malaysian ringgit - - - 6.0 Mexican peso - - - 40.0 Philippine peso - - - 15.0 Russian ruble - - - 20.0 Spanish peseta 1.3 - - 7.0 Taiwanese dollar - 18.5 - 20.2 Thai baht - - - 5.1 Other currencies 6.8 4.3 4.1 4.7 ------ ------ ------ ------ Total $126.6 $236.9 $146.9 $296.4 At December 31, 1998, the Company has entered into forward contracts to purchase approximately 3,469,200 shares of Avon common stock at an average price of $36.31 per share at December 31, 1998. The contracts mature over the next three years and provide for physical or net share settlement to the Company. Accordingly, no adjustment for subsequent changes in fair value has been recognized. Credit and Market Risk - The Company attempts to minimize its credit exposure to counterparties by entering into interest rate swap and cap contracts only with major international financial institutions with "A" or higher credit ratings as issued by Standard & Poor's Corporation. The Company's foreign currency and interest rate derivatives are comprised of over-the-counter forward contracts or options with major international financial institutions. Although the Company's theoretical credit risk is the replacement cost at the then estimated fair value of these instruments, management believes that the risk of incurring losses is remote and that such losses, if any, would not be material. Non-performance of the counterparties to the balance of all the currency and interest rate swap agreements would not result in a significant write off at December 31, 1998. 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 agreements as a result of changes in foreign exchange and interest rates. The market risk related to the foreign exchange agreements should be substantially offset by changes in the valuation of the underlying items being hedged. Fair Value of Financial Instruments - For purposes of the following disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The aggregate fair value amounts presented are not intended to, and do not, represent the underlying fair value of Avon. The methods and assumptions used to estimate fair value are as follows: Grantor trust - The fair value of these investments, principally fixed income funds and equity securities, is based on the quoted market prices for issues listed on exchanges. Debt maturing within one year and long-term debt and other financing - The fair value of all debt and other financing is estimated based on the quoted market prices for issues listed on exchanges. Forward stock purchases and foreign exchange forward and option contracts - The fair value of forward and option contracts is estimated based on quoted market prices from banks. Interest rate swap and currency swap agreements - The fair value of interest rate swap and currency swap agreements is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that Avon would expect to receive or pay to terminate the agreements. The asset and (liability) amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at December 31 consisted of the following: 1998 1997 Carrying Fair Carrying Fair Amount Value Amount Value Cash and equivalents $105.6 $105.6 $141.9 $141.9 Grantor trust 72.2 72.7 61.1 62.7 Debt maturing within one year (55.3) (55.3) (127.0) (127.6) Long-term debt and other financing (316.6) (322.2) (160.3) (162.7) Currency swap contract on long-term debt - - (5.1) (1.7) Forward stock purchases and foreign exchange forward and option contracts 1.7 23.8 5.0 10.3 Interest rate swap receivable .1 1.6 - .1 Interest rate swap payable - - (.7) (2.2) 54 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: 1996 1997 1998 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 4,818 $14.23 5,750 $16.28 7,070 $22.29 Granted 1,788 19.81 2,860 30.68 1,664 32.40 Exercised (846) 12.08 (1,426) 14.47 (1,412) 17.59 Forfeited (10) 12.47 (114) 27.50 (195) 26.87 ------ ------ ------- ------ ------- ------ Outstanding - end of year 5,750 $16.28 7,070 $22.29 7,127 $25.46 ====== ====== ======= ====== ======= ====== Options exer- cisable - end of year 1,150 $13.02 1,360 $15.27 2,943 $18.74 ====== ====== ======= ====== ======= ====== Exercise prices for options outstanding as of December 31, 1998 consisted of 2,996,596 options at a price range of $13 to $23, 2,515,599 options at a price range of $30 to $32 and 1,614,678 options at a price range of $31 to $41, with weighted-average remaining contractual lives of approximately six years, seven 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 14,100,000 shares, of which no more than 8,000,000 shares may be used for restricted share and stock bonus grants. Awards, when made, may also be in the form of stock options, stock appreciation rights, dividend equivalent rights or performance unit awards. Stock options granted to officers and key employees shall be at a price no less than fair market value on the date the option is granted. During 1998, 1997 and 1996, restricted shares with aggregate value and vesting and related amortization periods were granted as follows: 1998 - 499,000 valued at $16.0 vesting over one to three years; 1997- 36,000 shares valued at $1.2 vesting over one to three years; and 1996 - 78,000 shares valued at $1.7 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. Compensation expense under all plans in 1998 was $17.8 (1997 - $15.6; 1996 - $14.7). The unamortized cost as of December 31, 1998 was $10.5 (1997 - $2.0). The accrued cost of the performance units in 1998 was $24.1 (1997 - $12.7). 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 the pro forma amounts indicated below: 1998 1997 1996 Pro forma net income $263.0 $332.5 $314.9 Pro forma earnings per share: Basic $ 1.00 $ 1.26 $ 1.18 Diluted $ .99 $ 1.25 $ 1.17 Pro forma information regarding net income and earnings per share is required by FAS No. 123, and has been determined as if the 55 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 1998 were the risk-free interest rate of approximately 5.5%; dividend yield of 2%; expected volatility of the market price of the Company's common stock of 25% to 30%; and a weighted- average expected life of the options of approximately five years. The weighted- average assumptions used for 1997 and 1996 were the risk-free interest rate of approximately 6.3% and 5.5%, respectively, dividend yield of 2% and 3%, respectively, expected volatility of the market price of the Company's common stock of 25% and 20%, respectively; and a weighted-average expected life of the options of approximately five and three years, respectively. 9. Shareholders' Equity Stock Split - On July 22, 1998, the Company declared a two-for-one stock split in the form of a 100% stock dividend which was distributed in September 1998 to shareholders of record as of the close of business on August 24, 1998. Accordingly, the stock split has been recognized by reclassifying the par value of the additional shares resulting from the split from retained earnings to common stock and treasury stock. The effect of this stock split was not retroactively reflected in the consolidated balance sheet and in the statement of changes in shareholders' equity for 1997 and prior periods. All references to the number of share and per share amounts elsewhere in the consolidated financial statements and related footnotes have been restated to reflect the effect of the split for all periods presented. Share Rights Plan - Avon has a 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 5, 1998, Avon increased the regular dividend on common shares to an annual rate of $.68 per share with the first quarterly dividend at the rate of $.17 per share having been paid on March 2, 1998. On February 1, 1997, Avon increased the regular dividend on common shares to an annual rate of $.63 per share, with the first quarterly dividend at the rate of $.1575 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 $.58 per share, with the first quarterly dividend at the rate of $.145 per share having been paid on March 1, 1996. Stock Repurchase Programs - During 1994, Avon's Board authorized a stock repurchase program under which Avon would buy back up to 10% of its then outstanding common stock, or approximately 28.0 million shares. As of February 1997, when the plan ended, the cumulative number of shares repurchased was 25.3 million shares at a total cost of $424.4 which are included in Treasury Stock. Under a new repurchase program, which began in February 1997, the Company repurchased approximately 6.7 million shares at a total cost of approximately $217.2 as of December 31, 1998. Under this new program, the Company may buy back up to $1,100.0 of its currently outstanding common stock through open market purchases over a period of up to five years. Savings Plan - In 1998, Avon contributed 62,520 (1997 - 87,344) shares of treasury stock to an employees' savings plan and recognized expense for its fair value. In addition, during 1997, the Company contributed an additional 120,000 shares, for which the expense had been accrued at December 31, 1996. The expense recognized for the plan in 1998 was $4.5 (1997 - $2.6; 1996 - $7.0). Board of Directors Remuneration - Effective May 1, 1997, the Company discontinued the Board retirement plan, which was applicable only to non- management directors. Directors retiring after that date have had the actuarial value of their accrued retirement benefits converted to a one-time grant of common stock which is restricted as to transfer until retirement. Shares totaling 52,786 were issued to directors as a result of the discontinuance of the plan. As a replacement for such plan, effective on and after May 1, 1997, each non-management director is annually granted options to purchase 4,000 shares of common stock, at an exercise price based on the fair market price of the stock on the date of grant. The annual grant made in 1998 and 1997 consisted of a total of 36,000 and 40,000 options with an exercise price of $41.31 and $30.82, respectively. Also effective as of May 1, 1997, the annual retainer paid to non- management directors was changed to consist of $.025 cash plus an annual grant of shares having a value of $.025 based on the average closing market price of the stock for the ten days preceding the date of grant. These shares are also restricted as to transfer until the director retires from the Board. The annual grant made in 1998 and 1997 consisted of a total of 5,472 and 8,520 shares, respectively. 10. Employee Benefit Plans Retirement Plans - Avon and certain subsidiaries have contributory and noncontributory retirement plans for substantially all employees. Benefits under these plans are generally based on an employee's years of service and average compensation near retirement. Plans are funded on a current basis except where funding is not required. Plan assets consist primarily of equity securities, corporate and government bonds, commingled funds and investments in limited partnerships. Effective July 1998, the defined benefit retirement plan covering U.S.-based employees was converted to a cash balance plan with benefits determined by compensation credits related to age and 56 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. 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. The following provides a reconciliation of benefit obligations, plan assets and funded status of these plans: Pension Postretirement Benefits Benefits 1998 1997 1998 1997 Change in benefit obligation: Beginning balance $(889.9) $(874.6) $(197.1) $(196.0) Service cost (35.4) (35.2) (3.3) (3.0) Interest cost (64.5) (63.1) (13.0) (13.0) Actuarial (loss) gain (83.0) (35.9) 1.4 (5.6) Benefits paid 84.9 61.8 10.2 20.5 Plan amendments - 26.9 - - Other (11.9) 30.2 - - -------- -------- -------- -------- Ending balance $(999.8) $(889.9) $(201.8) $(197.1) Change in plan assets: Beginning balance $ 785.5 $ 690.7 $ - $ - Actual return on - - plan assets 102.9 117.3 - - Company contributions 61.3 48.0 10.2 20.5 Plan participant - - contributions 1.5 1.2 - - Benefits paid (84.9) (61.8) (10.2) (20.5) Other (3.2) (9.9) - - -------- -------- -------- -------- Ending balance $ 863.1 $ 785.5 $ - $ - Funded status of the plan $(136.7) $(104.4) $(201.8) $(197.1) Unrecognized actuarial loss(gain) 139.3 99.3 (6.2) (6.2) Unrecognized prior service cost (9.6) (7.2) - - Unrecognized net transition obligation(asset) 1.3 (3.0) - - -------- -------- -------- -------- Prepaid (Accrued) benefit cost $ (5.7) $ (15.3) $(208.0) $(203.3) Amount recognized in the statements: Prepaid benefit $ 138.0 $ 115.2 $ - $ - Accrued liability (143.7) (130.5) (208.0) (203.3) Additional minimum liability (19.7) (18.1) - - Intangible asset 4.3 18.1 - - Accumulated other comprehensive income 15.4 - - - -------- -------- -------- -------- $ (5.7) $ (15.3) $(208.0) $(203.3) At December 31, 1998 and 1997, the weighted-average discount rates used in determining the pension benefit obligation were 6.7% and 7.0%, respectively. At December 31, 1998 and 1997, the weighted-average discount rates used in determining the postretirement benefit obligation were 7.0% and 7.2%, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension and postretirement benefit plans with accumulated benefits obligations in excess of plan assets were $435.4, $397.7, and $30.7, respectively, as of December 31, 1998 and $412.4, $380.1, and $31.8, respectively as of December 31, 1997. Net periodic benefit cost for the years ended December 31 was determined as follows: Pension Postretirement Benefits Benefits 1998 1997 1996 1998 1997 1996 Service cost $ 35.4 $ 35.2 $ 36.6 $ 3.3 $ 3.0 $ 3.3 Interest cost 64.5 63.1 61.4 13.0 13.0 14.0 Expected return on plan assets (64.0) (58.9) (58.9) - - - Amortization of transition (liability) asset (6.8) (6.8) (6.6) - - - Amortization of prior service cost (.4) 3.6 3.7 - - - Amortization of actuarial losses (gains) 12.3 7.7 8.9 - - - Settlements or curtailments - 4.6 .3 - - - Other .3 - 1.0 - - - ------ ------ ------ ----- ----- ----- Net periodic benefit cost $ 41.3 $ 48.5 $ 46.4 $16.3 $16.0 $17.3 The weighted-average assumptions used to determine the data for the years ended December 31 are as follows: Pension Postretirement Benefits Benefits 1998 1997 1996 1998 1997 1996 Discount rate 7.1% 7.4% 7.3% 7.2% 7.7% 7.2% Rate of compensation increase 4.0 4.7 4.5 4.5 4.5 4.5 Rate of return on assets 9.2 9.2 9.3 N/A N/A N/A 57 For 1998, the assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 8.1% for pre-65 claims (7.8% for post-65 claims) and will gradually decrease each year thereafter to 5.0% in 2005 and beyond. The healthcare cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point change in the assumed health care cost trend rates would have the following effects: 1 Percentage 1 Percentage (In millions) Point Increase Point Decrease Effect on total of service and interest cost components 2.4 2.0 Effect on postretirement benefit obligation 22.9 19.1 Supplemental Executive Retirement and Life Insurance Plans - Avon has a Supplemental Executive Retirement Plan ("SERP") which is a defined benefit plan under which Avon will pay supplemental pension benefits to key executives in addition to amounts received under Avon's retirement plan. The annual cost of this plan has been included in the determination of the net periodic benefit cost shown above and in 1998 amounted to $6.1 (1997 - $5.5; 1996 - $5.5). Such benefits will be paid from Avon's assets. The accumulated benefit obligation under this plan at December 31, 1998 was $21.9 (1997 - $22.8) 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, 1998 was $22.4 (1997 - $20.6) 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, 1998, amounted to $94.5 (1997 - $81.7), consisting of a fixed income portfolio, a managed portfolio of equity securities and corporate-owned life insurance policies. These assets are included in Other Assets. Postemployment Benefits - Avon provides postemployment benefits which include salary continuation, severance benefits, disability benefits, continuation of health care benefits and life insurance coverage to former employees after employment but before retirement. At December 31, 1998, the accrued cost for postemployment benefits was $33.5 (1997 - $35.0) and is included in Employee Benefit Plans. 11. Segment Information The Company's reportable segments are based on geographic operations and include a North American business unit and International business units in Latin America, Pacific and Europe regions. The segments have similar business characteristics and each offers similar products through common customer access methods. The accounting policies of the reportable segments are the same as those described in Note 1 of the Notes to the Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on operating profits or losses. Segment revenues reflect direct sales of products to representatives based on their geographic location. Intersegment sales and transfers are not significant. Each segment records direct expenses related to its employees and its operations. The Company does not allocate income taxes, foreign exchange gains or losses, or corporate overhead expenses to operating segments. Identifiable assets are primarily those directly used in the operations of each segment. "Other" assets include corporate cash, investments, deferred tax assets and certain intangibles. Summarized financial information concerning the Company's reportable segments as of December 31, is shown in the following table. Net sales and operating profit by reportable segment are presented on page 32. Identifiable Assets: 1998 1997 1996 North America US $ 497.2 $ 516.0 $ 473.3 Other* 111.9 118.3 86.1 -------- -------- -------- Total 609.1 634.3 559.4 International Latin America 530.8 481.4 461.7 Europe 390.1 361.9 376.4 Pacific 379.9 376.7 382.4 -------- -------- -------- Total 1,300.8 1,220.0 1,220.5 Corporate and other 523.6 418.6 442.5 -------- -------- -------- Total identifiable assets $2,433.5 $2,272.9 $2,222.4 58 Capital Expenditures: 1998 1997 1996 North America US $ 32.1 $ 24.0 $ 19.9 Other* 11.7 5.2 2.8 -------- -------- -------- Total 43.8 29.2 22.7 International Latin America 33.5 21.4 14.7 Europe 28.8 17.5 21.3 Pacific 28.1 41.2 28.0 -------- -------- -------- Total 90.4 80.1 64.0 Corporate and Other 55.3 60.1 16.9 -------- -------- -------- Total capital expenditures $ 189.5 $ 169.4 $ 103.6 Depreciation and Amortization: 1998 1997 1996 North America US $ 19.2 $ 17.9 $ 16.0 Other* 2.4 2.2 1.9 -------- -------- -------- Total 21.6 20.1 17.9 International Latin America 12.0 10.7 10.2 Europe 14.9 14.8 14.4 Pacific 11.2 15.3 13.0 -------- -------- -------- Total 38.1 40.8 37.6 Corporate and Other 12.3 11.2 9.0 -------- -------- -------- Total depreciation and amortization $ 72.0 $ 72.1 $ 64.5 *Includes operating information for Puerto Rico, Dominican Republic, Canada and Discovery Toys. The following table presents consolidated net sales by classes of principal products, as of December 31. 1998 1997 1996 Cosmetics, fragrance and toiletries $3,181.6 $3,093.9 $2,946.8 Gift and decorative 1,050.6 1,049.7 934.1 Apparel 572.0 565.6 556.3 Fashion jewelry and accessories 408.5 370.2 377.0 -------- -------- -------- Total $5,212.7 $5,079.4 $4,814.2 Foreign Exchange - Financial statement translation of subsidiaries operating in highly inflationary economies and foreign currency transactions resulted in (gains) losses in 1998 netting to ($1.1) (1997 - $2.2; 1996 - $3.1), 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 1998 of $15.8 (1997 - $6.0; 1996 - $12.6). 12. Leases and Commitments Minimum rental commitments under noncancellable operating leases, primarily for equipment and office facilities at December 31, 1998, consisted of the following: Year 1999 $ 65.5 2000 51.2 2001 38.4 2002 28.6 2003 22.9 Later years 230.1 Sublease rental income (6.3) ------- Total $430.4 Rent expense in 1998 was $84.7 (1997 - $88.2; 1996 - $89.7). Various construction and information systems projects were in progress at December 31, 1998 with an estimated cost to complete of approximately $87.4. 13. Special and Non-Recurring Charges In October 1997, the Company announced a worldwide business process redesign program to streamline operations and improve profitability through margin improvement and expense reductions. The special and non-recurring charges associated with this program totaled $154.4 pretax ($122.8 net of tax, or $.46 per share on a basic and diluted basis) for the year ended December 31, 1998. For the year ended December 31, 1998, special and non-recurring charges by business segment are as follows: Special Cost of Charges Sales Charge Total North America $ 58.9 $25.7 $ 84.6 Latin America 2.3 4.0 6.3 Europe 14.2 4.0 18.2 Pacific 23.1 4.2 27.3 Corporate 18.0 - 18.0 ------ ----- ------ Total $116.5 $37.9 $154.4 59 For the year ended December 31, 1998, special and non-recurring charges by category of expenditures are as follows: Special Cost of Charges Sales Charge Total Employee severance costs $ 56.4 $ - $ 56.4 Inventories - 37.9 37.9 Write-down of assets to net realizable value 31.8 - 31.8 Field program buy-out 14.4 - 14.4 Other 13.9 - 13.9 ------ ----- ------ $116.5 $37.9 $154.4 Employee severance costs are expenses, both domestic and international, associated with the realignment of the Company's global operations. The workforce will be reduced by approximately two thousand employees, or 7% of the total. Approximately one-half of the employees to be terminated relate to the facility closures. As of December 31, 1998, approximately 90% of the two thousand employees have been terminated. Inventory-related charges represent losses to write down the carrying value of non-strategic inventory prior to disposal. These charges result from the closure of facilities, discontinuation of certain product lines, size-of-line reductions and a change in strategy for product dispositions. The write-down of assets relates to the closure of a Far East buying office and manufacturing facilities in Puerto Rico and the Dominican Republic. As a result of ongoing government restrictions, the Company has also decided to close certain branches and a regional office in China. Also, write-downs include assets (primarily fixed and intangible assets) associated with the divestiture of the Discovery Toys business unit, which was effective January 15, 1999. The field program buy-out represents costs to revamp the Company's representative recruitment program in the U.S. "Other" category primarily represents lease and contract termination costs, litigation costs, and other costs associated with the facility closures. The liability balance at December 31, 1998 is as follows: Special Cost of Charges Sales Charge Total Provision $116.5 $37.9 $154.4 Cash expenditures: Severance (43.6) - (43.6) Field program buy-out (12.6) - (12.6) Other (9.8) - (9.8) Non-cash write-offs (22.0) (37.9) (59.9) ------- ------ ------- Total $ 28.5 $ - $ 28.5 The balance at December 31, 1998 relates primarily to employee severance costs that will be paid during 1999. The Company expects to record additional charges in 1999 as plans are finalized. 14. Contingencies Various lawsuits and claims (asserted and unasserted), arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In 1991, a class action lawsuit was initiated against Avon on behalf of certain classes of holders of Avon's Preferred Equity-Redemption Cumulative Stock ("PERCS"). This lawsuit alleges various contract and securities law claims relating to the PERCS (which were fully redeemed that year). Avon has rejected the assertions in this case, believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. 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, 1998 should not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. 15. Subsequent Event On February 4, 1999, Avon's Board approved an increase in the quarterly cash dividend to $.18 per share from $.17. The first dividend at the new rate will be paid on March 1, 1999 to shareholders of record on February 16, 1999. On an annualized basis, the new dividend rate will be $.72 per share. 60 Report of Management The accompanying consolidated financial statements of Avon Products, Inc. have been prepared by management in conformity with generally accepted accounting principles and necessarily include amounts that are based on judgments and estimates. The audit report of PricewaterhouseCoopers LLP, independent accountants, on these financial statements is the result of their audits of these consolidated financial statements, which were performed in accordance with generally accepted auditing standards. Avon maintains an internal control structure and related systems, policies and procedures designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with appropriate authorization and accounting records may be relied upon for the preparation of financial information. Avon also maintains an internal audit department that evaluates and formally reports to management on the adequacy and effectiveness of controls, policies and procedures. The audit committee of the board of directors, comprised solely of outside directors, has an oversight role in the area of financial reporting and internal controls. This committee meets several times during the year with management, PricewaterhouseCoopers LLP and the internal auditors to monitor the proper discharge of each of their respective responsibilities. PricewaterhouseCoopers LLP and the internal auditors have free access to management and to the audit committee to discuss the results of their activities and the adequacy of controls. It is management's opinion that Avon's policies and procedures, reinforced by the internal control structure, provide reasonable assurance that operations are managed in a responsible and professional manner with a commitment to the highest standard of business conduct. Charles R. Perrin Robert J. Corti Chief Executive Officer Executive Vice President, Chief Financial Officer Report of Independent Accountants To the Shareholders of Avon Products, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Avon Products, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of Avon's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP New York, New York February 4, 1999 61 Eleven-Year Review In millions, except per share and employee data 1998 1997 1996 1995 Income data Net sales $5,212.7 $5,079.4 $4,814.2 $4,492.1 Operating Profit 479.5 544.1 544.8 507.5 Interest expense 41.0 41.8 40.0 41.3 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 455.9(3) 534.9 510.4 465.0 Income from continuing operations before minority interest and cumulative effect of accounting changes 265.1(3) 337.0 319.0 288.6 Income from continuing operations 270.0(3) 338.8 317.9 286.1 Income (loss) from discontinued operations, net - - - (29.6) Cumulative effect of accounting changes, net - - - - Net income (loss) 270.0(3) 338.8 317.9 256.5 Earnings (loss) per share - basic (1) (2) Continuing operations $ 1.03(3) $ 1.28 $ 1.19 $ 1.05 Discontinued operations - - - (.11) Cumulative effect of accounting changes - - - - Net income (loss) 1.03(3) 1.28 1.19 .94 Earnings (loss) per share - diluted (1) (2) Continuing operations $ 1.02(3) $ 1.27 $ 1.18 $ 1.05 Discontinued operations - - - (.11) Cumulative effect of accounting changes - - - - Net income (loss) 1.02(3) 1.27 1.18 .94 Cash dividends per share Common $ .68 $ .63 $ .58 $ .53 Preferred - - - - Balance sheet data Working capital $ 11.9 $ (11.9) $ (41.7) $ (30.3) Capital expenditures 189.5 169.4 103.6 72.7 Property, plant and equipment, net 669.9 611.0 566.6 537.8 Total assets 2,433.5 2,272.9 2,222.4 2,052.8 Debt maturing within one year 55.3 132.1 97.1 47.3 Long-term debt 201.0 102.2 104.5 114.2 Total debt 256.3 234.3 201.6 161.5 Shareholders' equity 285.1 285.0 241.7 192.7 Number of employees United States 8,000 8,100 7,800 8,000 International 25,900 26,900 25,900 23,800 ------ ------ ------ ------ Total employees 33,900 35,000 33,700 31,800 ====== ====== ====== ====== 62 1994 1993 1992 1991 Income data Net sales $4,266.5 $3,844.1 $3,660.5 $3,441.0 Operating Profit 495.6 433.2 345.2 434.7 Interest expense 50.8 45.2 43.7 75.4 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 433.8 394.6 290.0(5) 352.9 Income from continuing operations before minority interest and cumulative effect of accounting changes 270.3 243.8 169.4(5) 209.3 Income from continuing operations 264.8 236.9 164.2(5) 204.8 Income (loss) from discontinued operations, net (23.8) 2.7 10.8 (69.1) Cumulative effect of accounting changes, net (45.2)(4) (107.5)(4) - - Net income (loss) 195.8 132.1 175.0(5) 135.7 Earnings (loss) per share - basic (1) (2) Continuing operations $ .94 $ .82 $ .57(5) $ .65(6) Discontinued operations (.09) .01 .04 (.24) Cumulative effect of accounting changes (.16) (.37) - - Net income (loss) .69 .46 .61(5) .41(6) Earnings (loss) per share - diluted (1) (2) Continuing operations $ .93 $ .82 $ .57(5) $ .71(6) Discontinued operations (.08) .01 .04 (.24) Cumulative effect of accounting changes (.16) (.37) - - Net income (loss) .69 .46 .61(5) .47(6) Cash dividends per share Common $ .48 $ .43 $ .38 $ 1.10(8) Preferred - - - .253 Balance sheet data Working capital $ 9.3 $ 23.1 $ (99.5) $ (135.3) Capital expenditures 99.9 58.1 62.7 61.2 Property, plant and equipment, net 528.4 476.2 476.7 468.5 Total assets 1,978.3 1,918.7 1,692.6 1,693.3 Debt maturing within one year 61.2 70.4 37.3 143.8 Long-term debt 116.5 123.7 177.7 208.1 Total debt 177.7 194.1 215.0 351.9 Shareholders' equity 185.6 314.0 310.5 251.6 Number of employees United States 7,900 8,000 8,700 9,200 International 22,500 21,500 20,700 20,900 ------ ------ ------ ------ Total employees 30,400 29,500 29,400 30,100 ====== ====== ====== ====== Avon Products, Inc. 1990 1989 1988 Income data Net sales $3,291.6 $2,998.3 $2,835.2 Operating Profit 413.3 372.6 317.6 Interest expense 77.5 118.0 112.9 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 305.6 252.9 208.3 Income from continuing operations before minority interest and cumulative effect of accounting changes 180.3 134.1 121.1 Income from continuing operations 174.1 126.5 112.3 Income (loss) from discontinued operations, net 21.2 (71.9) (536.8) Cumulative effect of accounting changes, net - - 20.0(4) Net income (loss) 195.3 54.6 (404.5) Earnings (loss) per share - basic (1) (2) Continuing operations $ .61 $ .41(7) $ .38(7) Discontinued operations .09 (.33) (2.16) Cumulative effect of accounting changes - - .08 Net income (loss) .70 .08(7) (1.70)(7) Earnings (loss) per share - diluted (1) (2) Continuing operations $ .58 $ .40(7) $ .38(7) Discontinued operations .07 (.32) (2.16) Cumulative effect of accounting changes - - .08 Net income (loss) .65 .08(7) (1.70)(7) Cash dividends per share Common $ .25 $ .25 $ .38 Preferred .50 .50 .25 Balance sheet data Working capital $ 71.6 $ 56.3 $ 51.0 Capital expenditures 36.3 33.3 46.0 Property, plant and equipment, net 467.2 472.5 529.1 Total assets 2,010.1 1,994.1 2,362.6 Debt maturing within one year 207.1 151.7 205.6 Long-term debt 334.8 673.2 917.9 Total debt 541.9 824.9 1,123.5 Shareholders' equity 393.4 228.3 239.3 Number of employees United States 9,500 9,400 9,700 International 20,300 19,900 18,400 ------ ------ ------ Total employees 29,800 29,300 28,100 ====== ====== ====== (1) Two-for-one stock splits were distributed in September 1998 and June 1996. All per share data in this report, unless indicated, have been restated to reflect the splits. (2) 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. (3) In 1998, Avon began a worldwide business process redesign program in order to streamline operations and recorded special and non-recurring charges of $154.4 ($122.8 net of tax, or $.46 per share on a basic and diluted basis). Excluding the special and non-recurring charges, net income in 1998 increased 16% to $392.8 from $338.8. (4) Effective January 1, 1994, Avon adopted Statement of Financial Accounting Standards ("FAS") No. 112, "Employers' Accounting for Postemployment Benefits", for all applicable operations, and FAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", for its foreign benefit plans. Effective January 1, 1993, Avon adopted FAS No. 106 for its U.S. retiree health care and life insurance benefit plans and FAS No. 109, "Accounting for Income Taxes". Effective January 1, 1988, Avon adopted FAS No. 96, "Accounting for Income Taxes". (5) In 1992, Avon began the restructuring of its worldwide manufacturing and distribution facilities and recorded a provision of $96.0 ($64.4 after tax, or $.22 per share on a basic and diluted basis). Income from continuing operations in 1993 increased 4% from $228.6, or $.79 per share on a basic and diluted basis, excluding the 1992 restructuring charge. (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 72 preferred shares into approximately 51.84 common shares on June 3, 1991. (7) In 1989 and 1988, the calculation of earnings per share was assumed to be antidilutive and, accordingly, earnings per share were not adjusted for the conversion of preferred shares into additional common shares. (8) Includes special dividend of $.75 paid in 1991. EX-21 6 EX-21 EXHIBIT 21 EXHIBIT 21 AVON PRODUCTS, INC. AND SUBSIDIARIES Subsidiaries of the Registrant Avon Products, Inc. ("Avon"), a New York corporation, consolidates all majority owned subsidiaries. The principal consolidated subsidiaries, all of which are wholly owned by Avon or its wholly owned subsidiaries, except as indicated, are listed below. Included on the list below are subsidiaries which individually are not significant subsidiaries but primarily represent subsidiaries in countries in which the Company has direct selling operations. The names of Avon's other consolidated subsidiaries, which are primarily wholly owned by Avon or its wholly owned subsidiaries, are not listed because all such subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. Incorporation Company Country or State Cosmetics Avon S.A.C.I. Argentina Avon Cosmetics Pty. Limited Australia Avon Products Pty. Limited Australia Avon Cosmetics Vertriebsgesellschaft m.b.h Austria Arlington Limited Bermuda Avon International (Bermuda) Ltd. Bermuda Productos Avon Bolivia Ltda. Bolivia Avon Cosmeticos, Ltda. Brazil Avon Industrial Ltda. Brazil Nucleo de Atualiza cao Techologia Avon Ltda. (Nata) Brazil Tortola Interlagos Investments Inc. British VI Avon Canada, Inc. Canada Avon Fashions, Inc. - Avon Mode Inc. Canada Cosmeticos Avon S.A. Chile Avon Products (Guangzhou) Ltd. (73.845%), China Avon Manufacturing (Guangzhou) Ltd. (73.845%) China Avon Kosmetika d.o.o. Croatia Avon Cosmetics, Spolecnosti S. Rucenlm Omezenym Czech Republic Avon Capital Corporation Delaware Avon International Operations, Inc. Delaware Avon-Lomalinda, Inc. Delaware 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 Beautifont (Malaysia) Sendirian Berhad Malaysia Maximen Corporation Sdn Bhd Malaysia Avon Cosmetics, S.A. de C.V. Mexico Avonova, S. A. de C.V. Mexico M.I. Holdings, Inc. Missouri Avon Americas, Ltd. New York Avon Overseas Capital Corporation New York Avon Cosmetics Limited New Zealand Productos Avon de Nicaragua, S.A. Nicaragua Avon Cosmetics A/S Norway Productos Avon S.A. Panama Productos Avon S.A Peru Cosmeticos Aliados S.A. Peru Avon Cosmetics, Inc. Philippines Avon Products Mfg., Inc. Philippines Beautifont Products, Inc. Philippines Avon Cosmetics Polska Sp. z.o.o. Poland Esmeralda Sp. z.o.o. (30%) Poland Avon Cosmeticos, Lda. Portugal Avon Cosmetics Spal s.r.o. Slovak Republic Avon Cosmetics (Romania) SRL Romania Avon Beauty Products Co. (ABPC) Russia Russia Justine/Avon PTY. Ltd. South Africa Avon Cosmetics, S.A. Spain Avon Cosmetics (Taiwan) Ltd. Taiwan Avon Products Limited Taiwan Avon Cosmetics (Thailand) Ltd. Thailand California Manufacturing Company Ltd. Thailand Exzacibasi Avon Kosmetik Urunleri Turkey Sanayi ve Ticaret A.S. (50%) (Joint Venture) Avon Cosmetics (Ukraine) Ukraine Avon Cosmetics Export Limited United Kingdom Avon Cosmetics Limited United Kingdom Avon European Holdings Ltd. United Kingdom Avon Fashions (UK) Limited United Kingdom Avon S.U. Export Limited United Kingdom Cosmeticos Avon De Uruguay S.A. Uruguay Avon Cosmetics de Venezuela, C.A. Venezuela Albee Holdings C.A. Venezuela EX-24 7 EX-24 EXHIBIT 24 FORM 10-K POWER OF ATTORNEY ________________________ KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, WARD M. MILLER, JR. and MARTIN H. MICHAEL and each of them, his 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 1998 Annual Report on Form 10-K of Avon Products, Inc. and any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys-in-fact and agents full power and authority to do and perform each and every act, as fully to all intents and purposes as they might or could do in person, thereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this power of attorney as of February 4, 1999. Signature Title /s/James E. Preston Chairman of the Board James E. Preston and Director /s/Charles R. Perrin Chief Executive Officer and Director- Charles R. Perrin Principal Executive Officer /s/Robert J. Corti Executive Vice President, Robert J. Corti Chief Financial Officer- Principal Financial Officer /s/Janice Marolda Vice President and Controller- Janice Marolda Principal Accounting Officer Signature Title /s/Andrea Jung President and Andrea Jung Chief Operating Officer and Director /s/Susan J. Kropf Executive Vice President, Susan J. Kropf President, Avon North America and Director /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/Stanley C. Gault Director Stanley C. Gault /s/George V. Grune Director George V. Grune /s/Ann S. Moore Ann S. Moore Director /s/Paula Stern Paula Stern Director EX-27 8 EX-27
5 EXHIBIT 27 Exhibit 27 Avon Products, Inc. Financial Data Schedule This schedule contains summary financial information extracted from theAvon Products, Inc. financial statements as of December 31, 1998 and for the year then ended included in the Form 10-K as of December 31, 1998 and is qualified in its entirety by reference to such financial statements. 1000000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 106 0 493 (49) 538 1,341 1,393 (723) 2,434 1,330 201 0 0 88 197 2,434 5,213 5,213 2,053 4,642 0 91 41 456 191 270 0 0 0 270 1.03 1.02
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