-----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, WcqkQGEQ6ZcXVJURrNkeIrwzNa8zmnzuUwXkQ5p4MUcZahYOlHhJGldVJ3XFnTqQ 9u6grQYSJ+SajQe7LefpoA== 0000950103-02-000805.txt : 20020812 0000950103-02-000805.hdr.sgml : 20020812 20020812141457 ACCESSION NUMBER: 0000950103-02-000805 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20020812 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-04881 FILM NUMBER: 02726519 BUSINESS ADDRESS: STREET 1: 1345 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10105 BUSINESS PHONE: 9149352588 MAIL ADDRESS: STREET 1: PECK & MIDLAND AVE STREET 2: PECK & MIDLAND AVE CITY: RYE STATE: NY ZIP: 10580 10-K/A 1 aug0502_2000-10ka.txt FORM 10-K/A 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, 2000 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/A or any amendment to this Form 10-K/A. [ ]. The aggregate market value of Common Stock (par value $.25) held by non-affiliates at February 28, 2001 was $10.1 billion. The number of shares of Common Stock (par value $.25) outstanding at February 28, 2001 was 237,927,022. Documents Incorporated by Reference Parts I and II Portions of the 2000 Annual Report to Shareholders. Part III Portions of the Proxy Statement for the 2001 Annual Meeting of Shareholders. Introductory Note--Restatements In connection with the settlement of the previously disclosed investigation by the Securities and Exchange Commission ("SEC") relating to the write off of an order management software system known as the "FIRST" project, Avon has restated its Consolidated Financial Statements as of December 31, 2001, 2000 and 1999 and for the years then ended and for each of the fiscal quarters ended March 31, 1999 through March 31, 2002. Avon had written off $14.8 pretax, or $10.0 after tax, of FIRST assets in the first quarter of 1999 and $23.9 pretax, or $14.5 after tax, of FIRST assets in the third quarter of 2001. Avon has restated its financial statements to reflect the additional write off as of March 31, 1999 of all capitalized costs ($23.3 pretax, or $14.0 after tax), associated with the FIRST project as of that date and a reversal of the charge recorded in the third quarter of 2001. Other FIRST-related activity (capitalized costs and amortization) recorded during 1999-2002 has also been restated. A description of the adjustments that comprise the restatements is set forth in Notes 2 and 15 of the Notes to Consolidated Financial Statements filed with this Form 10-K/A. The accompanying financial statements have been restated to reflect the restatements discussed above as well as the accounting changes outlined in Note 2. No attempt has been made in this Form 10-K/A to modify or update any disclosures except as required to reflect the results of the restatements discussed above and any changes made to prior period financial information for which a Form 10-K/A was not filed. 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/A. 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 a global manufacturer and marketer of beauty and related products, which include cosmetics, fragrance and toiletries ("CFT"); "Beauty Plus" which consists of jewelry, watches and accessories, and apparel; and "Beyond Beauty" which consists of gift and decorative, home entertainment, and health and nutrition products. Avon commenced operations in 1886 and was incorporated in the State of New York on January 27, 1916. Avon's business is comprised of one industry segment, direct selling, which is conducted in North America, Latin America, the Pacific and Europe. The Company's reportable segments are based on geographic operations. Financial information relating to the reportable segments is incorporated by reference to the analysis of net sales and operating profit by geographic area, and to Note 12 of the Notes to the Consolidated Financial Statements, in Avon's Restated 2000 Annual Report to Shareholders. Business Process Redesign In October 1997, the Company announced a worldwide business process redesign ("BPR") program to streamline operations and improve profitability through margin improvement and expense reductions. The special and non-recurring charges associated with this program totaled $136.4 pretax ($111.9 net of tax, or $.43 per share on a basic and diluted basis) for the year ended December 31, 1999 and $154.4 pretax($122.8 net of tax, or $.46 per share on a basic and diluted basis) for the year ended December 31, 1998. At December 31, 2000, the -1- remaining liability balance was $7.9, which relates primarily to severance costs that will be paid in 2001. Total savings from BPR initiatives reduced costs by approximately $400 in 2000 versus 1997 levels, with a portion of the savings being reinvested primarily in consumer-focused initiatives. Global Business Strategy In 2000, the Company focused on strategic priorities to drive revenue growth and expand its customer base around the world by building on the Company's strength as a beauty marketer and a leading home direct seller. Our business strategy includes, but is not limited to, plans to accelerate growth in our core beauty business, expanding market share, upgrading our beauty image and new product innovation; building a global portfolio of jewelry and accessories; developing innovative programs to train, motivate and retain Representatives; exploiting retail opportunities; and developing new businesses. The Company expects that BPR programs will continue to provide resources to fund these strategic growth initiatives and contribute to earnings growth. Spending for product innovation and advertising are also key components in building a global beauty image and reaching the end consumer. In 2000, the Company committed much of its strategic spending to the launch of its first-ever global advertising campaign, supported by investments in consumer sampling and upgrades to its sales brochures. Additionally, in the fourth quarter of 2000, the Company significantly expanded its use of Internet technology. In 2001, the Company will launch a new global product category of women's health and wellness products and plans to sell a new retail brand of products at Avon Centers located in the stores of two major retailers. Avon's global strategies include the following key growth initiatives: Direct Selling Contemporization The Company continues to modernize its direct selling channel and Representative experience, enabling it to reach women quickly and efficiently by offering to Representatives training, enhanced earnings opportunities and career options. In 2000, the Company rolled out a global Sales Leadership program in several of its largest markets around the world. The Sales Leadership program is a modified multi-level selling system which gives Representatives the opportunity to earn commissions on their own sales, as well as from downstream sales of Representatives they recruit. This program limits the number of levels to three and continues to focus on individual product sales. The Company also implemented a Representative development strategy in 2000. This strategy focuses on the professional training and development of Representatives through the Avon Beauty Advisor program, which gives Representatives the most extensive beauty training ever offered by Avon. Under this program, Representatives enroll in a series of courses designed to upgrade their makeup and skin care consulting skills and teach them about the latest advances in beauty products. Successful graduates are certified as beauty advisors. Avon is licensing Representatives to operate stand-alone kiosks selling Avon's core beauty products in shopping malls across the U.S. In addition to increasing their personal sales, entrepreneurial Representatives also use the kiosks to recruit new Representatives to Avon. -2- In addition to the Sales Leadership program and Representative development strategy, the Company built and relaunched its Avon.com internet site in the United States during 2000. In September 2000, the Company announced to its Representatives a new online marketing tool called, youravon.com. The site features Avon's full product line and helps U.S. sales Representatives build their own Avon business by enabling them to sell online through their own personalized web pages, developed in partnership with the Company. Using their own personalized consumer-facing Web sites, e-Representatives provide their family of customers with 24x7 access to Avon products. At the same time, e-Representatives have the advantage of business-to-business capabilities that connect them seamlessly to Avon's order and fulfillment systems. While their customers benefit from the speed, convenience and delivery flexibility of online ordering, Avon e-Representatives are able to promote special products, target specific groups of customers, place and track orders online, and capitalize on e-mail to share product information, selling tips and marketing incentives. Self-paced online training also is available, as well as up-to-the-minute news about the Company. Available to the Representatives and District Sales Managers are new on-line tools that will allow them to engage in more value-added activities, such as recruiting, training and selling. Avon also continues to sell products directly to consumers on Avon's internet site if they choose not to purchase through a Representative. The Company annually produces more than 600 million brochures in a dozen languages, utilizing common imagery and layouts from a single global database to enhance its global beauty image. Avon is upgrading the quality of brochures in several of its largest markets, including the United Kingdom and is testing the concept in the U.S. Complementary Access To accelerate growth in established industrial regions 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 licensed kiosks and Express Centers in the U.S., toll-free telephone numbers, direct mail and "on line" shopping via the Internet. These complementary access programs will further increase sales to an entirely new customer segment -- women who prefer to do their shopping in stores and malls. Access strategies also have helped reach new customers in the Pacific Region. For example, the Philippines, India and Indonesia use decentralized branches and satellite stores to serve Representatives and customers. Representatives come to a branch near their homes to place and pick up product orders for their customers. The branches also create visibility for Avon with consumers and help reinforce the Company's beauty image. In Malaysia, Avon has numerous franchised beauty boutiques, which are staffed by franchise Representatives and are located -3- in areas with high concentrations of Representatives. The boutiques provide more direct and personal service to Representatives and their customers. Additionally, in China, Venezuela and Taiwan, beauty counters managed by Avon Representatives are in retail store chains. In 2001, Avon will open Avon Centers in the stores of Sears, Roebuck and Company ("Sears") and J.C. Penney Company, Inc. ("J.C. Penney"), to sell a new line of Avon products called "beComing". The new line will offer beauty products, as well as a selection of jewelry and accessories and well-being products. The "beComing" line will be priced significantly higher than the core Avon line, but well below prestige brands. This retail partnership leverages Avon's product development and manufacturing capabilities with the retail expertise of Sears and J.C. Penney. It is expected that approximately 200 "store-within-a-store" locations will open in the latter half of 2001. The new retail strategy is intended to enable Avon to access new customers that the Company is not currently reaching through the direct selling channel. Image Enhancement The Company continues to update the image of its core beauty products and its portfolio of global beauty brands. In the past five years, CFT products have all undergone extensive upgrades in packaging, imaging and formulations, consistent with the global brand strategy. These contemporary products project a consistent, high quality image in all markets and include brands such as Anew, Skin-So-Soft, Avon Color, Far Away, Rare Gold, Perceive, and Avon Skin Care. Global brands are growing rapidly as a percentage of the Company's worldwide CFT business and in 2000, they accounted for 50% of core beauty sales. Anew Retroactive, a ground breaking age-reversal cream introduced in 2000, rolling out globally in 2001, utilizes Avon's exclusive, patent-pending blend of ingredients formulated to enhance cellular communication and re-energize aging skin cells. In 2000, the Company launched an upscale global hair care brand called Advance Techniques and launched a global jewelry and fashion accessories line around the world. The development of global brands has also enabled the Company to deliver a consistent beauty image around the world, as well as improve margins through pricing and supply chain efficiencies. Avon is also marketing a more vibrant beauty image through increased advertising and image-building programs focused on the consumer. In 2000, the Company launched its first-ever global advertising campaign entitled "Let's Talk", increased investments in product sampling and development and upgraded the quality of its brochure to further strengthen its worldwide beauty image. In 2001, "Let's Talk" advertising campaigns will include the Williams sisters, accomplished young sports professionals who, through their embodiment of Avon's values of empowerment and self-fulfillment, serve as role models for women everywhere. In 2001, Avon will launch an entirely new global product category in the area of women's health and wellness in 15 countries. This new line will help Avon expand the definition of beauty to include inner health, as well as outward appearance. The new products will be sold through a separate catalog and will include vitamins and nutrition supplements, exercise and fitness items, and a variety of self-care and stress relief -4- products. Vitamins and nutritional supplements have been developed for Avon by Roche Consumer Healthcare and will be marketed under the name VitAdvance. Twenty VitAdvance products are expected to launch in 2001. In 1998, an important image enhancement came with the opening of the Avon Centre, a spa, salon and retail store located in Trump Tower, New York City. The Avon Centre emphasizes health and beauty and offers a selection of Avon beauty products created exclusively for use at the Avon Centre. International Expansion Avon is one of the most widely recognized brand names in the world. The Company is particularly well positioned to capitalize on growth in new international markets due to high demand for quality products, underdeveloped retail infrastructures, and relatively attractive earnings opportunities for women. The Company presently has operations in 52 countries outside the United States and its products are distributed in 86 more for coverage in 139 markets, and it continues to expand into new markets. The Company has entered 26 new markets since 1990, including Russia and China and rapidly emerging nations throughout Central Europe, and is currently evaluating several other markets in Eastern Europe and the Pacific region. Distribution Avon's products are sold worldwide by approximately 3.4 million Representatives, approximately 452,000 of whom are in the United States. Almost all Representatives are women who sell on a part-time basis. Representatives are independent contractors or independent dealers, and are not agents or employees of Avon. Representatives purchase products directly from Avon and sell them to their customers. The Company's products are sold to customers through a combination of direct selling and marketing utilizing independent Representatives, licensed kiosks, 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 her 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. -5- 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, 7 days a week. In September 2000, the Company announced to its U.S. Representatives a new online marketing tool called youravon.com. The new online initiative is available to all Representatives and offers a complete line of Avon products 24 hours a day, 7 days a week, with no geographic boundaries. Implementation in certain other key markets is expected during 2001. 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 Sales Managers. In the United States, each district manager has responsibility for a market area covered by 225 to 300 Representatives. Approximately 1,800 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 (including the Sales Leadership Program in the U.S.), and local advertising constitute the primary means of obtaining new Representatives. Because of the high rate of turnover among Representatives, a characteristic of the direct-selling method, recruiting and training of new Representatives are continually necessary. From time to time, the question of the legal status of Representatives has arisen, usually in regard to possible coverage under social benefit laws that would require Avon (and in most instances, the Representatives) to make regular contributions to social benefit funds. Although Avon has generally been able to address these questions in a satisfactory manner, the matter has not been fully resolved in all countries. If there should be a final determination adverse to Avon in a country, the cost for future, and possibly past, contributions could be so substantial in the context of the volume of business of Avon in that country that it would have to consider discontinuing operations in that country. Promotion and Marketing Sales promotion and sales development activities are directed at assisting the Representatives, through sales aids such as brochures, product samples and demonstration products. In order to support the efforts of Representatives to reach new customers, especially working -6- women and other individuals who frequently are not at home, specially designed sales aids, promotional pieces, customer flyers and product and image enhancing media advertising are used. In addition, Avon seeks to motivate its Representatives through the use of special incentive programs that reward superior sales performance. Periodic sales meetings with Representatives are conducted by the district managers. The meetings are designed to keep Representatives abreast of product line changes, explain sales techniques and provide recognition for sales performance. A number of merchandising techniques, including the introduction of new products, the use of combination offers, the use of trial sizes and the promotion of products packaged as gift items, are used. In general for each sales campaign, a distinctive brochure is published, in which new products are introduced and selected items are offered at special prices or are given particular prominence in the brochure. CFT products are available each sales campaign at consistently low prices, while maintaining introductory specials and periodic sales on selected items for limited time periods. From time to time, various regulations or laws have been proposed or adopted that would, in general, restrict the frequency, duration or volume of sales resulting from new product introductions, special prices or other special price offers. The Company's pricing flexibility and broad product lines are expected to be able to mitigate the effect of these regulations. Competitive Conditions The CFT; gift and decorative; apparel; and fashion jewelry and accessory industries are highly competitive. Avon is one of the leading manufacturers and distributors of cosmetics and fragrances in the United States. Its principal competitors are the large and well-known cosmetics and fragrances companies that manufacture and sell broad product lines through various types of retail establishments. There are many other companies that compete in particular products or product lines sold through retail establishments. Avon has many competitors in the gift and decorative products and apparel industries in the United States, including retail establishment 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. -7- There are a number of direct-selling companies which sell product lines similar to Avon's, some of which also have worldwide operations and compete with Avon. Avon believes that the personalized customer service offered by its Representatives; the high quality, attractive designs and reasonable prices of its products; new product introductions; innovative CFT products; and its guarantee of satisfaction are significant factors in establishing and maintaining its competitive position. Avon's consolidated net sales, by classes of principal products, are as follows: Years ended December 31 ---------------------------- 2000 1999 1998 -------- --- ---- -------- Cosmetics, fragrance and toiletries $3,501.3 $3,220.8 $3,181.1 Beauty Plus: Fashion jewelry 323.4 313.4 294.5 Accessories 275.8 223.9 222.4 Apparel 476.3 474.5 469.1 Watches 68.6 49.8 42.1 Beyond Beauty and Other* 1,036.3 1,006.7 1,003.5 -------- -------- -------- Total net sales $5,681.7 $5,289.1 $5,212.7 ======== ======== ======== *Beyond Beauty and Other primarily includes home products, gift and decorative, health and nutrition, and candles. 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 52 countries and Avon's products are distributed in some 86 other countries. Manufacturing Avon manufactures and packages almost all of its CFT products. Raw materials, consisting chiefly of essential oils, chemicals, containers and packaging components, are purchased from various suppliers. Packages, consisting of containers and packaging components, are designed by its staff of artists and designers. The design and development of new products are affected by the cost and availability of materials such as glass, plastics and chemicals. Avon believes that it can continue to obtain sufficient raw materials and supplies to manufacture and produce its products. Avon has nineteen manufacturing laboratories around the world, one of which is principally devoted to the manufacture of fashion jewelry. In -8- the United States, Avon's CFT products are produced in three manufacturing laboratories for the four distribution centers and all kiosks and Express centers. Most products sold in foreign countries are manufactured in Avon's facilities abroad. The fashion jewelry line is generally developed by Avon's staff and produced in its manufacturing laboratory in Puerto Rico or by several independent manufacturers. Trademarks and Patents Avon's business is not materially dependent on third party patent or other intellectual property rights and Avon is not a party to any material license, franchise or concession. The Company, however, does seek to protect its key proprietary technologies by aggressively pursuing comprehensive patent coverage in all major markets. Avon's major trademarks are protected by registration in the United States and the other countries where its products are marketed as well as in many other countries throughout the world. 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 approximately 30 percent of total net sales in both 2000 and 1999, respectively, and before special and non-recurring charges, fourth quarter operating profit was 33 percent and 35 percent of total operating profit in 2000 and 1999, respectively. RESEARCH ACTIVITIES Avon's research and development department is a leader in the industry, based on the number of new product launches, including formulating effective beauty treatments relevant to women's needs. In addition, Avon's research and development supports its environmental responsibilities. A team of researchers and technicians apply the disciplines of science to the practical aspects of bringing products to market around the world. Relationships with well known dermatologists and other specialists extend Avon's own research to deliver new formulas and ingredients. Each year, Avon researchers test and develop more than 600 products in the CFT and Beauty Plus categories. Avon has pioneered many innovative products, including Skin-So-Soft, its best-selling bath oil; BioAdvance, the first skin care product with stabilized retinol, the purest form of Vitamin A; and Collagen Booster, the premier product to capitalize on Vitamin C technology. Avon also introduced the benefits of aromatherapy to millions of American women, encapsulated color for the Color-Release line and introduced alpha-hydroxy acid for cosmetic use in the Anew Perfecting Complex products. Today, Avon's Anew product line has been expanded to include technologically advanced products such as Retroactive, launched in the -9- fourth quarter of 2000, Retinol Recovery Complex PM Treatment, Night Force Vertical Lifting Complex, Clearly C 10% Vitamin C Serum and Luminosity Brightening Complex. Retroactive utilizes Avon's exclusive Rejuvi-cell complex, a patent pending blend of ingredients formulated to enhance cellular communication and re-energize aging skin cells. Night Force employs a patented material named AVC10, a molecule that was engineered by Avon researchers over a three-year period. Luminosity Brightening Complex contains Diamonex, Avon's exclusive skin brightening system. Avon has introduced Hydra Finish Lip Color, the first lipstick developed with 20% water, and Perceive, a fragrance which uses the mood-enhancing effects of pheromone technology. In 2000, the Company launched a complete renovation of Avon Color with improved formulas and redesigned packaging, rolled out a reformulated Anew All-In-One skin care regimen, launched Positivity, a new line of skin care products for menopausal women, and launched Advance Techniques, a full line of upscale patented hair-care products. In 2001, there will be updated packaging for the Anew line and Anew Retroactive. The amounts incurred on research activities relating to the development of new products and the improvement of existing products were $43.1 million in 2000, $38.2 million in 1999, and $31.4 million in 1998. 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. EMPLOYEES At December 31, 2000, Avon employed 43,000 people. Of these, 9,800 were employed in the United States and 33,200 in other countries. The number of employees tends to rise from a low point in January to a high point in November and decreases 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 -10- 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 five manufacturing laboratories and twenty distribution centers in Europe; five manufacturing laboratories and fourteen distribution centers in Latin America; two manufacturing laboratories and two distribution centers in North America (other than in the United States); and four manufacturing laboratories and eleven 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). While it is not possible to predict the outcome of litigation, Avon has rejected the assertions in this case, believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. It is anticipated that a trial may take place in late 2001. In the opinion of Avon's management, based on its review of the information available at this time, the total cost of resolving such contingencies should not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. Avon is involved in a number of proceedings arising out of the federal Superfund law and similar state laws. In some instances Avon, along with other companies, has been designated as a potentially responsible party which may be liable for costs associated with these various hazardous waste sites. Based upon Avon's current knowledge of the proceedings, management believes, without taking into consideration any insurance recoveries, if any, that in the aggregate they would not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. -11- 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, 2000. 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" in Avon's 2000 Restated Annual Report to Shareholders. PART II ITEM 6. SELECTED FINANCIAL DATA (RESTATED) The information for the five-year period 1996 through 2000 is incorporated by reference to the "Eleven-Year Review" in Avon's Restated 2000 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (RESTATED) This information is incorporated by reference to "Management's Discussion and Analysis" in Avon's Restated 2000 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This information is incorporated by reference to "Risk Management Strategies and Market Rate Sensitive Instruments" and in Avon's Restated 2000 Annual Report to Shareholders for information concerning market risk sensitive instruments. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (RESTATED) This information is incorporated by reference to the "Consolidated Financial Statements and Notes", together with the report thereon of PricewaterhouseCoopers LLP, and "Results of Operations by Quarter" in Avon's Restated 2000 Annual Report to Shareholders. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -12- 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 2001 Annual Meeting of Shareholders. Officers are elected by the Board of Directors at its first meeting following the Annual Meeting of Shareholders. Officers serve until the first meeting of the Board of Directors following the Annual Meeting of Shareholders at which Directors are elected for the succeeding year, or until their successors are elected, except in the event of death, resignation or removal, or the earlier termination of the term of office. Information regarding employment contracts between Avon and named executive officers is incorporated by reference to the "Contracts with Executives" section of Avon's Proxy Statement for the 2001 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 - ----- ---- --- ------- Chief Executive Officer and Director......Andrea Jung 42 1997(1) President and Chief Operating Officer, and Director ..........................Susan J. Kropf 52 1997(2) Executive Vice President, Asia Pacific....Fernando Lezama 61 1997 Executive Vice President and Chief Financial Officer................Robert J. Corti 51 1988 Senior Vice President and General Counsel........................Gilbert L. Klemann, II 50 2001(3) Senior Vice President, Human Resources....Jill Kanin-Lovers 49 1998 Vice President and Controller.............Janice Marolda 40 1998 (1) Andrea Jung has been the Chief Executive Officer of Avon since November 1999 concurrently holding the position of President until January 2001. Ms. Jung joined Avon in January 1994 as President, Product Marketing and was promoted to Executive Vice President, Global Marketing and New Business in March 1997. From January 1998 to November 1999 she was President and Chief Operating Officer of Avon. (2) Susan J. Kropf was elected President and Chief Operating Officer, effective January 2001. She had been elected Executive Vice President, Chief Operating Officer, North America and Global Business Operations effective November 1999. Previously she had been Executive Vice President and President, North America and prior to that she had served as Senior Vice President, U.S. Marketing and Vice President, Product Development. Ms. Kropf has been with Avon for 30 years. -13- (3) Gilbert L. Klemann, II was elected Senior Vice President and General Counsel of Avon effective January 1, 2001. Prior to joining Avon he had been an Executive Vice President of Fortune Brands, Inc. (formerly American Brands, Inc.)from 1998-1999 with responsibilities that included corporate development, legal and administrative functions. He was the Senior Vice President and General Counsel of American Brands, Inc. during the period 1991-1997 and previously was a partner in the New York law firm of Chadbourne & Parke. ITEM 11. EXECUTIVE COMPENSATION This information is incorporated by reference to the "Information Concerning the Board of Directors" and "Executive Compensation" sections of Avon's Proxy Statement for the 2001 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 2001 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 2001 Annual Meeting of Shareholders. -14- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (RESTATED) Form 10-K/A Page Number ----------- (a) 1. Consolidated Financial Statements of Avon Products, Inc. and Subsidiaries (as restated) Consolidated statements of income for each of the years in the three-year period ended December 31, 2000............ 19 Consolidated balance sheets at December 31, 2000 and 1999................. 20 Consolidated statements of cash flows for each of the years in the three-year period ended December 31, 2000............. 21 Consolidated statements of changes in shareholders' (deficit) for each of the years in the three-year period ended December 31, 2000.................... 22 Notes to consolidated financial statements................................. 23-50 Report of Independent Accountants PricewaterhouseCoopers LLP................. 51 (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, 2000............... II. Valuation and qualifying accounts............. S-3 -15- Financial statements of the registrant and all other financial statement schedules are omitted because they are not applicable or because the required information is shown in the consolidated financial statements and notes. (a) 3. Exhibits Exhibit Number Description - ------ ----------- 3.1 Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on May 8, 2000 (incorporated by reference to Exhibit 3.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 3.2 By-laws of Avon, as restated, effective December 2, 1999 (incorporated by reference to Exhibit 3.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 4.1 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. 33-41299 filed December 1, 1997). 4.3 Rights Agreement, dated as of March 30, 1998 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (incorporated by reference to Exhibit 4 to Avon's Registration Statement on Form 8-A, filed March 18, 1998). 4.4 Indenture dated as of November 9, 1999 between Avon as Issuer and The Chase Manhattan Bank, as Trustee relating to the 6.9% Notes due November 15, 2004 and the 7.15% Notes due November 15, 2009 (incorporated by reference to Exhibit 4.4 to Avon's Registration Statement on Form S-4, Registration Statement No. 33-92333 filed December 8, 1999). 10.1* Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders on May 6, 1993 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.2* Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). -16- 10.3* First Amendment to the 1993 Avon Stock Incentive Plan effective January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as of January 1, 1997 approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.4 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.5* Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of July 1, 1998 (incorporated by reference to Exhibit 10.5 to Avon's Annual Report on Form 10-K for the year ended December 31, 1998). 10.6* Benefit Restoration Pension Plan of Avon Products, Inc., effective as of January 1, 1994 (incorporated by reference to Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.7* Trust Agreement, amended and restated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990 and refiled under Form SE for the year ended December 31, 1996). 10.8* First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.9* Second Amendment, dated as of June 12, 1992 to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.10* Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of July 1, 1998 (incorporated by reference to Exhibit 4(b) to Avon's Registration Statement on Form S-8, Registration No. 33-65989 filed October 22, 1998). 10.12* 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). -17- 10.13* Stock Option Agreement between Avon and Stanley C. Gault dated November 4, 1999 (incorporated by reference to Exhibit 10.13 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 10.14* Avon Products, Inc. 2000 Stock Incentive Plan (incorporated by reference to Appendix A to the Company's Proxy Statement on Form 14A as filed with the Commission on March 27, 2000 (File No. 1-04881)). 10.15* 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). 10.16* 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). 10.17* Avon Products, Inc. Compensation Plan for Non-Employee Directors, amended and restated, effective June 1, 2000 (incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 2000). 10.18* 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). 10.19* 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). 10.20* 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). 10.21* 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 Restated Annual Report to Shareholders for the year ended December 31, 2000 incorporated by reference in response to Items 1,5 through 8 in this filing. 18 Preferability letter from PricewaterhouseCoopers LLP regarding change in accounting principle (incorporated by reference to Exhibit 18 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). -18- 21 Subsidiaries of the registrant (incorporated by reference to Exhibit 21 to Avon's Report Annual Report on Form 10-K for the year ended December 31, 2000). 23 Consent of PricewaterhouseCoopers LLP (set forth on page S-2 of this Annual Report on Form 10-K/A). * The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. (b) Reports on Form 8-K On February 8, 2001, the Company filed a Form 8-K to detail restatements of financial information for the first three quarters of 2000 as a result of the adoption of SAB No. 101 and EITF 00-10. (c) Avon's Annual Report on Form 10-K/A for the year ended December 31, 2000, 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/A. -19- 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. Avon Products, Inc. ------------------- (Registrant) Date: August 12, 2002 /s/JANICE MAROLDA. ------------------------------ Janice Marolda Vice President, Controller Principal Accounting Officer -20- REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Avon Products, Inc.: Our audits of the consolidated financial statements referred to in our report dated January 25, 2001, except for Notes 2 and 15 as to which the date is July 31, 2002, appearing in the 2000 Annual Report to Shareholders of Avon Products, Inc., which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K/A, also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K/A. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP New York, New York January 25, 2001, except for Notes 2 and 15 as to which the date is July 31, 2002. S-1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statements on Form S-3 (Reg. No. 33-45808) and Form S-8 (Reg. Nos. 33-43820, 33-47209, 33-65989 and 33-65998) of Avon Products, Inc. of our report dated January 25, 2001, except for Notes 2 and 15 as to which the date is July 31, 2002, relating to the financial statements which appear in the 2000 Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K/A. We also consent to the incorporation by reference of our report dated January 25, 2001, except for Notes 2 and 15 as to which the date is July 31, 2002, relating to the financial statement schedule, which appears in this Form 10-K/A. PricewaterhouseCoopers LLP New York, New York August 12, 2002 S-2 AVON PRODUCTS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (In millions) Years ended December 31 Additions --------------------- Balance Charged at to costs Charged Balance beginning and to other at end of period expenses accounts Deductions of period --------- -------- -------- ---------- --------- 2000 Allowance for doubtful accounts receivable $ 40.0 $ 94.3 $ -- $ 95.1(a) $39.2 ======= ======= ======= ====== ===== 1999 Allowance for doubtful accounts receivable $ 49.0 $ 87.5 $ -- $ 96.5(a) $40.0 ======= ======= ======= ===== ===== 1998 Allowance for doubtful accounts receivable $ 35.5 $ 91.3 $ -- $77.8(a) $49.0 ======= ======= ======= ===== ===== (a) Accounts written off, net of recoveries and foreign currency translation adjustment. S-3 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------- FORM 10-K/A Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2000 Commission file number 1-4881 -------- AVON PRODUCTS, INC. (Exact name of registrant as specified in its charter) -------- EXHIBITS INDEX TO EXHIBITS (a)3. Exhibits Exhibit Number Description - ------ ----------- 3.1 Restated Certificate of Incorporation of Avon, filed with the Secretary of State of the State of New York on May 8, 2000 (incorporated by reference to Exhibit 3.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 3.2 By-laws of Avon, as restated, effective December 2, 1999 (incorporated by reference to Exhibit 3.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 3.3 Certificate of Amendment of the Certificate of Incorporation of Avon Products, Inc., filed May 13, 1998 (incorporated by reference to Exhibit 3.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 30, 1998). 4.1 Amended and Restated Revolving Credit and Competitive Advance Facility Agreement, dated as of August 8, 1996, among Avon, Avon Capital Corporation and a group of banks and other lenders (incorporated by reference to Exhibit 4.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996). 4.2 Indenture dated as of August 1, 1997 between Avon as Issuer, and The Chase Manhattan Bank, as Trustee relating to the 6.55% Notes due 2007 (incorporated by reference to Exhibit 4.2 to Avon's Registration Statement S-4, Registration Statement No. 333-41299 filed December 1, 1997). 4.3 Rights Agreement, dated as of March 30, 1998 (the "Rights Agreement"), between Avon and First Chicago Trust Company of New York (incorporated by reference to Exhibit 4 to Avon's Registration Statement on Form 8-A, filed March 18, 1998). 4.4 Indenture dated as of November 9, 1999 between Avon as Issuer and The Chase Manhattan Bank, as Trustee relating to the 6.9% Notes due November 15, 2004 and the 7.15% Notes due November 15, 2009 (incorporated by reference to Exhibit 4.4 to Avon's Registration Statement on Form S-4, Registration Statement No. 333-92333 filed December 8, 1999). 10.1* Avon Products, Inc. 1993 Stock Incentive Plan, approved by stockholders on May 6, 1993 (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993). 10.2* Form of Stock Option Agreement to the Avon Products, Inc. 1993 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Avon's Annual Report on Form 10-K for the year ended December 31, 1993). 10.3* First Amendment to the 1993 Avon Stock Incentive Plan effective January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.1 to Avon's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997). 10.4* Avon Products, Inc. 1997 Long-Term Incentive Plan, effective as of January 1, 1997, approved by stockholders on May 1, 1997 (incorporated by reference to Exhibit 10.4 to Avon's Annual Report on Form 10-K for the year ended December 31, 1997). 10.5* Supplemental Executive Retirement Plan and Supplemental Life Plan of Avon Products, Inc., as amended and restated as of July 1, 1998 (incorporated by reference to Exhibit 10.5 to Avon's Annual Report on Form 10-K for the year ended December 31, 1998). 10.6* Benefit Restoration Pension Plan of Avon Products, Inc., effective as of January 1, 1994 (incorporated by reference to Exhibit 10.7 to Avon's Annual Report on Form 10-K for the year ended December 31, 1994). 10.7* Trust Agreement, amended and restated as of March 2, 1990, between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1990 and refiled under Form SE for the year ended December 31, 1996). 10.8* First Amendment, dated as of January 30, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.2 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.9* Second Amendment, dated as of June 12, 1992 to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.3 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.10* Third Amendment, dated as of November 5, 1992, to the Trust Agreement, dated as of March 2, 1990, by and between Avon and Chase Manhattan Bank, N.A. (incorporated by reference to Exhibit 10.4 to Avon's Quarterly Report on Form 10-Q for the quarter ended March 31, 1993). 10.11* The Avon Products, Inc. Deferred Compensation Plan, as amended and restated as of January 1, 1998 (incorporated by reference to Exhibit 4(b) to Avon's Registration Statement on Form S-8, Registration No. 333-65989 filed October 22, 1998). 10.12* Trust Agreement, dated as of April 21, 1995, between Avon and Chemical Bank, amending and restating the Trust Agreement as of August 3, 1989 between Avon and Manufacturers Hanover Trust Company (incorporated by reference to Exhibit 10.14 to Avon's Annual Report on Form 10-K for the year ended December 31, 1995). 10.13* Stock Option Agreement between Avon and Stanley C. Gualt dated November 4, 1999 (incorporated by reference to Exhibit 10.13 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 10.14 Avon Products, Inc. 2000 Stock Incentive Plan (incorporated by reference to Appendix A to the Company's Proxy Statement on Form 14A as filed with the Commission on March 27, 2000 (File No. 1-04881)). 10.15* 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). 10.16* 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). 10.17* Avon Products, Inc. Compensation Plan for Non-Employee Directors, amended and restated effective June 1, 2000 (incorporated by reference to Exhibit 10.17 to Avon's Annual Report on Form 10-K for the year ended December 31, 2000). 10.18* 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). 10.19* 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). 10.20* 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). 10.21* 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 Restated Annual Report to Shareholders for the year ended December 31, 2000 incorporated by reference in response to Items 1,5 through 8 in this filing. 18 Preferability letter from PricewaterhouseCoopers LLP regarding change in accounting principle (incorporated by reference to Exhibit 18 to Avon's Annual Report on Form 10-K for the year ended December 31, 1999). 21 Subsidiaries of the registrant (incorporated by reference to Exhibit 21 to Avon's Annual Report on Form 10-K for the year ended December 31, 2000). 23 Consent of PricewaterhouseCoopers LLP (set forth on page S-2 of this Annual Report on Form 10-K/A). * The Exhibits identified above and in the Exhibit Index with an asterisk (*) are management contracts or compensatory plans or arrangements. EX-13 3 aug0502_2000ex13.txt EXHIBIT 13 Introductory Note--Restatements In connection with the settlement of the previously disclosed investigation by the Securities and Exchange Commission ("SEC") relating to the write off of an order management software system known as the "FIRST" project, Avon has restated its Consolidated Financial Statements as of December 31, 2001, 2000 and 1999 and for the years then ended and for each of the fiscal quarters ended March 31, 1999 through March 31, 2002. Avon had written off $14.8 pretax, or $10.0 after tax, of FIRST assets in the first quarter of 1999 and $23.9 pretax, or $14.5 after tax, of FIRST assets in the third quarter of 2001. Avon has restated its financial statements to reflect the additional write off as of March 31, 1999 of all capitalized costs ($23.3 pretax, or $14.0 after tax), associated with the FIRST project as of that date and a reversal of the charge recorded in the third quarter of 2001. Other FIRST-related activity (capitalized costs and amortization) recorded during 1999-2002 has also been restated. A description of the adjustments that comprise the restatements is set forth in Notes 2 and 15 of the Notes to Consolidated Financial Statements filed with this Form 10-K/A. The accompanying financial statements have been restated to reflect the restatements discussed above as well as the accounting changes outlined in Note 2. No attempt has been made in this Form 10-K/A to modify or update any disclosures except as required to reflect the results of the restatements discussed above and any changes made to prior period financial information for which a Form 10-K/A was not filed. 1 Management's Discussion and Analysis (Restated) 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 the "Company") should be read in conjunction with the information contained in the Consolidated Financial Statements and Notes thereto. These statements have been prepared in conformity with generally accepted accounting principles which require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. Cautionary Statement for Purposes of the "Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995 Certain statements in this report which are not historical facts or information are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the information set forth herein. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, levels of activity, performance or achievement of the Company, or industry results, to be materially different from any future results, levels of activity, performance or achievement expressed or implied by such forward-looking statements. Such factors include, among others, the following: General economic and business conditions; the ability of the Company to implement its business strategy; the Company's access to financing and its management of foreign currency risks; the Company's ability to successfully identify new business opportunities; the Company's ability to attract and retain key executives; the Company's ability to achieve anticipated cost savings and profitability targets; the impact of substantial currency exchange devaluations in the Company's principal foreign markets; changes in the industry; competition; the effect of regulatory and legal restrictions imposed by foreign governments; the effect of regulatory and legal proceedings and other factors discussed in Item 1 of the Company's Form 10-K/A. 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 2000 was $479.1 compared with $286.6 in 1999. Basic and diluted earnings per share in 2000 were $2.01 and $1.99, respectively, compared with $1.12 and $1.10, respectively, in 1999. Net income for 1998 was $270.0 and basic and diluted earnings per share were $1.03 and $1.02, respectively. Effective January 1, 2000, the Company changed its method of accounting for revenue recognition in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." See Note 3 of the Notes to Consolidated Financial Statements. The cumulative effect of the change on prior years resulted in a charge of $6.7, net of a tax benefit of $3.5, or $.03 per share on a basic and diluted basis, which is included in net income for the year ended December 31, 2000. The effect of the accounting change in 2000 was to decrease net income before the cumulative effect of the accounting change by $1.1. In addition, the 2000 results include the settlement of a federal income tax refund, which was received in January 2001, consisting of $32.5 of tax and $62.7 of interest related to the years ended December 31, 1982, 1983, 1985 and 1986. For the year ended December 31, 2000, the Company recognized $40.1 ($.17 and $.16 per share on a basic and diluted basis, respectively) as an income tax benefit in the Consolidated Statements of Income, resulting from the impact of the tax refund offset by taxes due on interest received and other related tax obligations. 2 Special and non-recurring charges were recorded in the first quarter of 1999 for the Company's business process redesign ("BPR") program. These charges totaled $136.4 pretax, which reduced net income by $111.9 after tax, or $.43 per share on a diluted basis. In addition, in 1999, the company recorded an Asset impairment charge of $38.1 related to the write off of an order management software system, which reduced net income by $24.0 or $.09 per diluted share. The 1998 results include special and non-recurring charges totaling $154.4 pretax, which reduced net income by $122.8 after tax, or $.46 per share on a basic and diluted basis. See Notes 14 and 15 of the Notes to Consolidated Financial Statements for further discussion of these charges. Consolidated net sales increased 7% in 2000 to $5.68 billion from $5.29 billion in 1999. Sales in North America increased 5% to $2.15 billion in 2000. International sales increased 9% to $3.53 billion due to strong growth in the Latin American and Pacific regions and, to a lesser extent, in the European region. In 1999, consolidated net sales of $5.29 billion increased 1% from $5.21 billion in 1998. Sales in North America increased 1% to $2.05 billion in 1999. International sales increased 2% to $3.24 billion due to strong growth in the Pacific region and in Europe, partially offset by declines in Latin America. Excluding the unfavorable impact of foreign currency translation, consolidated net sales would have increased 11% and 9% in 2000 and 1999, respectively. Other revenue includes shipping and handling fees billed to Representatives and totaled $40.9, $38.8 and $35.0 in 2000, 1999 and 1998, respectively. Cost of sales as a percentage of total revenue was 37.9% in 2000, compared with 38.1% in 1999 and 39.1% in 1998. The 1999 and 1998 cost of sales included $46.0 and $37.9, respectively, of non-recurring charges for inventory write-downs related to the Company's BPR program. The charges related to the closure of facilities, discontinuation of certain product lines, size-of-line reductions and a change in strategy for product dispositions. See Note 14 of the Notes to Consolidated Financial Statements for further discussion of these charges. Excluding the charges, cost of sales as a percentage of total revenue was 37.3% in 1999 versus 38.4% in 1998. In 2000, the gross margin variance versus 1999 was due to improvements in all international regions, most significantly in the Pacific region, including Japan and China, as well as Central and Eastern Europe, due to lower product costs on imports from euro countries coupled with a shift in mix to higher margin products, and in Russia, due to a favorable comparison resulting from a discount pricing policy in 1999. Gross margins remained level with prior year in Brazil and the U.S. These improvements were partially offset by declines in Puerto Rico, due to inventory variations related to the consolidation of operations, and in Mexico and the Philippines, resulting from higher sales of a lower margin mix of cosmetics, fragrance and toiletries ("CFT") products and selective price cuts to meet competition. In addition, the 2000 financial information was restated to reflect certain accounting changes (see Note 2 of the Notes to Consolidated Financial Statements), which had an unfavorable impact on gross margin, and no restatements were made to the 1999 Financial Statements for these changes. In 1999, the favorable gross margin variance versus 1998 was due to improvements in all regions, most significantly in Europe, including the United Kingdom, Germany, Italy and Central Europe, due to a continuing focus on pricing strategies and improved profitability of Beauty Plus categories, including fashion jewelry and accessories. Japan, Mexico and the U.S. also posted strong gross margin improvements. These improvements were partially offset by a decline in Brazil, resulting from higher costs in the second half of 1999 as a result of major currency devaluation, and in Russia, due to a pricing discount policy begun in the fourth quarter of 1998. 3 Marketing, distribution and administrative expenses of $2.76 billion increased $116.6, or 4%, over prior year, but decreased as a percentage of total revenue to 48.3% from 49.6% in 1999. The overall improvement in the expense ratio was due to a favorable expense ratio in Mexico, resulting from lower marketing and promotional expenses associated with product introductions, in Russia, due to strict expense controls as well as favorable comparisons against prior year, and in the Philippines and China, reflecting fixed administrative expenses on a higher sales base. Expense ratio improvements were partially offset by higher expenses in Argentina, reflecting increased advertising and brochure costs, in the United Kingdom, due to increased shipping and distribution costs from decreased capacity of shipping lines during transition to a new system, and in Puerto Rico, reflecting higher transitional expenses related to the consolidation of operations. Marketing, distribution and administrative expenses of $2.64 billion in 1999 increased $39.8, or 2%, over 1998, but remained level as a percentage of total revenue versus 1998. Expense ratio improvements were reported in Brazil reflecting strict expense management and BPR initiatives, in Japan reflecting BPR efforts, and in Central Europe reflecting volume efficiencies and a significant reduction in expenses. These improvements were offset by higher expense ratios in Mexico due to increased advertising and incentive programs in 1999, in Germany due to strategic marketing investments, in Venezuela due to increased incentive programs and in the United Kingdom due to higher shipping expenses, most significantly in the fourth quarter of 1999. Interest expense increased $41.5 in 2000 to $84.7 and $8.5 in 1999 to $43.2. The increases in both 2000 and 1999 are primarily the result of increased domestic borrowings related to the acceleration of the Company's share repurchase program, which occurred in the second half of 1999, and working capital requirements. Interest income in 2000 of $8.5 versus the prior year decreased $2.6 primarily resulting from reduced interest rates in Brazil and Mexico during 2000. Interest income in 1999 of $11.1 decreased $4.8 versus 1998 mainly due to a tax refund claim recognized in 1998. In 2000, other expense (income) net was $10.8 unfavorable to 1999 mainly due to favorable foreign exchange in 1999 resulting from gains on Brazilian forward contracts and, to a lesser extent, a value added tax refund in China in 1999, partially offset by favorable comparisons versus 1999, primarily in Europe and the Pacific. In 1999, other expense (income) net was $12.2 unfavorable to 1998 due primarily to unfavorable net foreign exchange in 1999 resulting from exchange losses, primarily in Europe and Latin America. Income taxes were $202.2 in 2000 and the effective tax rate was 29.2% compared with $193.7 in 1999 and an effective tax rate of 40.3%. Excluding the effect of a federal income tax refund in 2000 and special and non-recurring charges in 1999, the effective tax rate was 35.0% and 35.5% in 2000 and 1999, respectively. The effective tax rate was lower in 2000 versus 1999 due to the settlement of foreign audits, dividend planning, utilization of net operating loss carryforwards and the mix of earnings and income tax rates of the international subsidiaries. Income taxes in 1998 were $190.8 and the effective tax rate was 41.9% (36.4% excluding the effect of the special and non-recurring charges). 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, including Venezuela and Russia, which experienced high cumulative rates of inflation over the past three years. Mexico was converted to non-hyperinflationary status beginning January 1, 1999 due to reduced cumulative inflation rates during the three-year period 1996 through 1998. 4 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, 2000. Years ended December 31 2000 1999 1998 ---- ---- ---- Net Operating Net Operating Net Operating Sales Profit Sales Profit Sales Profit ------- -------- ------- --------- -------- ---------- North America: U.S. $1,894.9 $ 343.5 $1,809.3 $ 329.3 $1,774.0 $ 302.8 Other* 253.0 24.7 241.0 31.2 259.7 29.3 -------- -------- ------- ------- -------- ------- Total 2,147.9 368.2 2,050.3 360.5 2,033.7 332.1 International: Latin America North** 848.8 215.2 731.7 181.6 636.0 156.4 Latin America South** 992.0 200.3 909.0 184.9 1,057.0 198.9 -------- -------- -------- ------- ------- ------- Latin America 1,840.8 415.5 1,640.7 366.5 1,693.0 355.3 Europe 885.6 129.5 878.0 126.2 862.7 102.2 Pacific 799.4 117.8 720.1 102.1 623.3 62.5 -------- -------- -------- ------- -------- ------- Total 3,525.8 662.8 3,238.8 594.8 3,179.0 520.0 Total from operations $5,673.7 1,031.0 $5,289.1 955.3 $5,212.7 852.1 Global expenses (241.1) (257.7) (224.5) Special and non-recurring charges - (136.4) (154.4) Asset impairment charge - (38.1) - Reclassifications for Accounting changes (Note 2) 8.0 - - - - - -------- -------- -------- -------- -------- ------- Total $5,681.7 $ 789.9 $5,289.1 $ 523.1 $5,212.7 $ 473.2 ======== ======== ======== ======== ======== =======
*Includes operating information for Canada and Puerto Rico. ** Latin America North includes the major markets of Mexico, Venezuela and Central America. Latin America South includes the major markets of Brazil, Argentina, Chile and Peru. 2000 Compared to 1999 North America - Net sales in North America increased 5% to $2.15 billion in 2000. The U.S. business, which represents almost 90% of the North American segment, reported sales growth of 5%. The sales increase in the U.S. resulted primarily from a 6% increase in the number of units sold, a 2% increase in active Representatives and a higher average CFT order size. Sales improvements in the U.S. resulted from increases in CFT categories, fashion jewelry and watches and accessories, partially offset by declines in apparel and home entertainment products. U.S. sales of CFT increased 7% over 1999 reflecting a double-digit increase in skincare, primarily due to strong launches of Botanisource and Anew Retroactive, which was the largest CFT launch ever. Color cosmetics also reported double-digit increases versus prior year, reflecting our commitment to the Avon Color brand and powerful new product introductions, such as Nailwear and Glazewear. Growth in the fragrance category was driven by strong performance in Men's brands. The personal care category also contributed to the sales increase, particularly from the strength of the new launch of Chamomile and sales of existing Skin-So-Soft lines, which reported the largest increases ever for this brand. Fashion jewelry and watches increased mid-single digits versus 1999 due to strategic growth in fashion and fine jewelry segments. Higher sales in accessories were driven by strong performance in fashion accessories, including handbags, totes and small leather goods. These increases were partially offset by declines in the apparel category, due to softness in casual wear items, and lower sales in home entertainment products, resulting from fewer new product introductions. 5 Operating profit in North America increased 2% to $368.2 in 2000 due to the region's increased sales, discussed above, while the operating margin declined 0.5 points. The decline in operating margin is primarily due to an increase in the operating expense ratio in Puerto Rico caused by higher transitional expenses related to the consolidation of operations. Operating profit in the U.S. of $343.5 increased 4% versus 1999 reflecting sales growth, partially offset by a slightly unfavorable expense ratio. The expense ratio in the U.S. was negatively impacted by asset writedowns associated with the closure of certain Company-owned Avon Beauty Centers. Excluding the asset writedowns, the expense ratio was favorable to 1999 resulting from cost containment, BPR savings and lower benefit expenses partially offset by increased spending on advertising and e-commerce initiatives. International International sales increased 9% to $3.53 billion and operating profit increased 11% to $662.8 in 2000. Excluding the effect of foreign exchange, international sales increased 14% in 2000 with double-digit increases in all regions. In Latin America, sales increased 12% to $1.84 billion in 2000 driven by improvements in all major markets, with Mexico, Brazil and Venezuela being the main contributors. Excluding the impact of foreign exchange, sales in Latin America increased 15% in 2000. Units and active Representatives for the region rose 4% and 10%, respectively, versus the same period in 1999. The sales growth in Mexico was driven by increases in the number of units sold, active Representatives and customers served. Mexico had double-digit sales growth in all product categories, particularly in the CFT category, as well as in apparel, as a result of greater product selection. In Brazil, higher average orders, along with increased prices and more Representatives were the main drivers of sales improvements. Venezuela's sales improvement resulted from increases in the number of units sold, orders, active Representatives and customers served. Venezuela was able to post these increases despite severe flooding in late 1999, which negatively affected operations at the beginning of 2000, along with persistent economic and political uncertainty. Operating profit in Latin America grew 13% to $415.5 in 2000 due to the sales increases, discussed above, and operating margin improvements in Venezuela and Brazil, partially offset by a decline in Argentina. The operating margin in 2000 in Latin America improved 30 basis points versus 1999. Venezuela's operating margin reflected a higher gross margin, driven by price increases and cost improvement, partially offset by increased marketing spending and incentive programs. Brazil's operating margin increased primarily due to lower bad debt and recognition expenses. Mexico's operating margin improved 10 basis points due to savings in marketing and cost savings on purchase orders, partially offset by a decrease in gross margin due to increased sales of lower margin items and selective pricing cuts. In Argentina, operating margin declined as incentives and advertising expenses were increased to solidify our leading market position in a weak economic environment. In Europe, sales increased 1% to $885.6 versus 1999 but increased 13% in local currency on 12% growth in units and 15% higher active Representatives. The euro, pound and zloty devalued significantly in 2000 and, as a result, negatively affected U.S. dollar results. Sales growth in Central and Eastern Europe, primarily Poland, and in Russia was partially offset by declines in most Western European markets, most significantly in Germany. The sales improvement in Central Europe resulted from double-digit increases in units, active Representatives and customers served. New Representative leadership programs and a new campaign cycle also favorably impacted sales in Poland. The sales increase in Russia was due to double-digit increases in units and active Representatives and an improved economic environment resulting from the stability of the Russian ruble. In Germany, the sales decline reflected a continuing weak economic climate. In the United Kingdom, sales increased in local currency but U.S. dollar results were negatively impacted by foreign currency exchange. 6 Operating profit in Europe grew 3% to $129.5 in 2000 due to the sales increases, discussed above, coupled with operating margin improvements in Central and Eastern Europe, particularly Poland, and Russia, partially offset by increased spending on incentives and advertising throughout the region and the impact of weaker currencies. In the Europe region, operating margin in 2000 improved 30 basis points over 1999. In Poland, gross margin improved due to a shift in mix to higher margin items, partially offset by the cost of shipping increased orders. The operating margin improvement in Russia was primarily due to a favorable comparison against the prior year's discount pricing policy and product sourcing, as well as tight expense controls on a higher sales base. A decline in the United Kingdom's operating margin was primarily due to increased advertising, consumer motivation and sampling activities to support sales growth, as well as increased shipping, distribution and volume related costs due to reduced capacity of shipping lines during transition to a new shipping system. In the Pacific region, sales increased 11% to $799.4 in 2000 due to increases in all major markets resulting from an 18% increase in the number of units sold and 31% increase in active Representatives. In 2000, dollar sales for most markets were negatively impacted by foreign currency exchange, excluding Japan and Taiwan, where foreign currency exchange had a positive impact on dollar sales. In Japan, sales increased double-digits due to an increase in units sold and active Representatives despite a reduction in consumer spending due to economic pressures, as well as a favorable exchange rate impact versus 1999. In China, sales growth of 44% was driven by channel expansion, led by beauty boutiques. In the Philippines, dollar sales and local currency sales increased solid double-digits. In the Philippines, increased advertising and consumer promotions resulted in strong increases in units sold, customers served and active Representatives. Excluding the impact of foreign exchange, sales in the Pacific region rose 13%. Operating profit in the Pacific region increased 15% to $117.8 in 2000 due to the sales increases, discussed above, and operating margin improvements, primarily in Japan and China, partially offset by operating margin declines in Taiwan and the Philippines. In the Pacific region, 2000 operating margin improved 60 basis points over 1999. In Japan, operating margin was favorably impacted by an improvement in gross margin due to product cost savings initiatives and a favorable change of product mix from non-CFT to higher margin CFT products. China's operating margin improvement was driven primarily by increased sales growth and new higher margin products. Operating margin declined in Taiwan primarily due to increased costs resulting from moving to a new distribution facility and increased spending to support sales growth. Operating margin in the Philippines was negatively impacted by a lower gross margin resulting from higher sales of lower margin items, and higher advertising expenses. 1999 Compared to 1998 North America - Sales in North America increased 1% to $2.05 billion, and operating profit increased 9% to $360.5 in 1999. The U.S. business reported sales and operating profit growth of 2% and 9%, respectively. The sales increase in the U.S. resulted primarily from an increase in the average order size. Growth in fashion jewelry and accessories and beyond beauty categories was partially offset by sales decreases in CFT and apparel. Sales of fashion jewelry and accessories rose significantly over 1998 reflecting the success of sterling silver and bolder jewelry designs, the introduction of licensed luggage and a strong performance in watches and handbags. Additionally, sales of accessories increased significantly due to the success of the Pokemon watch in the fourth quarter. The Beyond Beauty category, consisting primarily of home entertainment and gift and decorative items, posted strong growth due to increased sales of inspirational and religious products. Fourth quarter sales of Millennium products also contributed to the overall increase of Beyond Beauty items. These improvements were partially offset by declines in the CFT and apparel categories. The decrease in CFT sales resulted primarily from lower fragrance sales in 1999 due to the underperformance of women's new products as well as fewer offers on existing products. Apparel sales decreased due to underperformance of new product introductions and demonstration products as well as a shift in focus from sales growth to 7 increased profitability. A 1.0 point operating margin improvement in the U.S. included favorable gross margin and operating expense ratios. The gross margin improvement resulted from supply chain cost improvements and product category management, partially offset by price reductions in CFT during the fourth quarter to drive sales. The favorable expense ratio reflects lower spending in 1999 on advertising, lower variable compensation and the elimination of the Sponsorship program, partially offset by increased spending on strategic initiatives such as the Internet and express and Beauty Centers. International - International sales increased 2% to $3.24 billion and operating profit increased 14% to $594.8 from $520.0 in 1998. Excluding the impact of foreign currency exchange, international sales rose 14% and operating profit increased 27% over 1998. The sales growth resulted from strong double-digit growth in the Pacific region, most significantly in Japan, the Philippines, Taiwan and Australia, as well as growth in Europe reflecting improvements in Poland and the United Kingdom, and in Mexico, Venezuela and Central America. These results were significantly offset by sales declines in Brazil, and, to a lesser extent, in Russia, Argentina and Germany. In Latin America, sales declined 3% to $1.64 billion while operating profit increased 3% to $366.5 in 1999. Excluding the impact of foreign currency exchange, sales increased 17%, a 20 point differential due primarily to the Brazilian real devaluation that began in early 1999, discussed below. Brazil, however, had double-digit increases in local currency sales, units and number of customers served. Sales decreased in Argentina and Chile as a result of weak economic conditions. The Argentine economy has been in a prolonged recession with high unemployment and low consumer spending. Despite the sales decline, Avon continued to gain market share in Argentina in 1999. These sales declines were partially offset by strong growth in Mexico, and, to a lesser extent, in Venezuela and Central America. Mexico's sales increase resulted from both operational factors including new product launches in the cosmetics, home and fashion lines as well as economic growth reflecting consumer price increases in 1999. Sales grew in Venezuela due mainly to price increases as well as double-digit increases in number of orders and active Representatives, and in Central America due to strong increases in units, customers served and active Representatives. The improvement in the region's operating profit was primarily due to favorable results in Mexico attributable to the sales increase and an improved gross margin, partially offset by increased advertising expense and incentive programs in 1999. The gross margin improvement in Mexico resulted from a shift in the sales mix from fewer sales of toiletries to more sales of higher-margin cosmetics and fragrances. However, in the third quarter of 1999, Avon's retail competitors in the toiletries and non-CFT categories significantly discounted their prices which led to unit declines. Management in Mexico adjusted prices in the fourth quarter of 1999 and planned incentive programs to aggressively recruit Representatives to mitigate the impact of competitors' deep discounting. Active Representatives in Mexico grew 11% in 1999. Venezuela contributed to the region's growth in operating profit through a gross margin improvement driven by price increases as well as BPR initiatives, particularly in the home segment. As discussed, these improvements were partially offset by reduced sales and a gross margin decline in Brazil and weak economic conditions in Argentina and Chile. Brazil's gross margin decline, particularly during the fourth quarter of 1999, resulted from increased costs due to the impact of the devaluation. However, Brazil made tremendous improvements in the operating expense ratio attributable to reduced bad debt expense, sales returns and transportation costs. Excluding the impact of foreign currency exchange, operating profit in Latin America increased 22% over 1998. The Brazilian real devalued significantly in January 1999 and, as a result, negatively affected Brazil's U.S. dollar results in 1999. The effect of exchange rates was reduced by foreign exchange contracts previously in place and several actions taken by local management to offset the devaluation, including a focused effort directed at vendor negotiations and additional local sourcing to reduce imports. Brazil's 1999 sales, although up over 20% in local currency, were down approximately 20% in U.S. dollars due to the devaluation. In the Europe region, sales increased 2% to $878.0 and operating profit increased 23% to $126.2 in 1999. Sales growth in Central Europe, primarily Poland, and the United Kingdom was partially offset by declines in Russia, 8 Germany and France. Continued double-digit increases in units, customers served and active Representatives contributed to Central Europe's sales increase. Poland's success reflects strong growth in the CFT category, increased Representative retention and a change in the campaign cycle, including a new brochure every four weeks versus six weeks in 1998. Growth in the United Kingdom resulted from a higher average order size, increased distributorship sales and the successful launch of a new brochure in 1999 to enhance Avon's image. Sales were lower in Russia due to the economic crisis and ruble devaluation, which occurred in August 1998, and in Germany due to a weak economy. Local currency sales in Russia increased almost 30% over 1998, with a strong increase in active Representatives. Excluding the impact of foreign currency exchange, sales in Europe increased 13% over 1998. The increase in Europe's operating profit resulted from operating margin improvements in Central Europe, mainly Poland, the United Kingdom and Italy due to higher gross margins that resulted from a continuing focus on pricing strategies and improved profitability of non-CFT categories. These operating profit increases were partially offset by continued declines in Russia due to the ruble devaluation. Management in Russia will continue to focus on market share growth and improved margins through pricing flexibility and tight expense management. Excluding the impact of foreign currency exchange, operating profit increased 31% over 1998. In the Pacific region, sales increased 16% to $720.1 and operating profit increased 63% to $102.1 in 1999. Excluding the impact of foreign currency exchange, sales increased 8% over 1998. The sales improvement resulted from growth in every market, most significantly in Japan due to a favorable currency impact in 1999, and in the Philippines, Taiwan and Australia due to strong increases in units and customers served. Despite the earthquake in Taiwan in September 1999, sales were up double-digits over 1998 due to aggressive marketing and sales programs, incentive offers and increased spending on advertising. The increase in the region's operating profit resulted primarily from the above sales increases and operating margin improvements in Japan and China. Japan's gross margin improved due to product cost savings initiatives in CFT and improved sourcing decisions for non-CFT as well as a profitability screening process that led to the elimination of many low-margin products in the apparel and jewelry segments. Additionally, BPR efforts continue to generate significant savings across all expense areas in Japan. China's operating margin also improved significantly in 1999 reflecting the suspension of operations for most of the second quarter of 1998. Excluding the impact of foreign currency exchange, operating profit increased 53% over 1998. See Foreign Operations section under Liquidity and Capital Resources for additional discussion. Global Expenses - Global expenses were $241.1 in 2000 compared with $257.7 in 1999. The decrease was primarily due to lower expenses related to the Company's long-term incentive plan, lower benefit expenses, insurance proceeds received in 2000 related to the 1998 hurricane losses in Central America, the 1999 flood losses in Venezuela and 1999 earthquake losses in Taiwan, and savings in global marketing departments, partially offset by increased investments in information technology and retail initiatives. In 1999, global expenses were higher than 1998 due to higher spending related to global marketing and information technology system initiatives. Accounting Changes - See Note 3 of the Notes to Consolidated Financial Statements for a discussion regarding recently issued accounting standards, including Financial Accounting Standard No. 137, Staff Accounting Bulletin No. 101, Emerging Issues Task Force ("EITF") 00-10, EITF 00-14 and EITF 00-19. Contingencies - Although Avon has completed its divestiture of all discontinued operations, various lawsuits and claims (asserted and unasserted) are pending or threatened against Avon. The Company is also involved in a number of proceedings arising out of the federal Superfund law and similar state laws. In some instances, Avon, along with other companies, has been designated as a potentially responsible party which may be liable for costs associated with these various hazardous waste sites. In the opinion of Avon's management, based on its review of the information available at this time, the total cost of resolving such contingencies at December 31, 2000 should not 9 have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. Liquidity and Capital Resources Cash Flows - Net cash provided by operating activities was $323.9 in 2000 compared to $445.5 in 1999. The 2000 decrease principally reflects higher working capital levels, which primarily included increased inventory levels and a use of cash related to accounts payable and accrued expenses, partially offset by higher net income. The increase in inventory was mainly due to higher sales volume and additional stock on hand to protect service levels. Accounts payable and accrued expenses reflected the payout of the Company's long-term incentive plan in 2000, as well as a decline in days in payables, to a level that is consistent with valuable supply chain partnerships developed in recent years. Excluding changes in debt and other financing activities, net cash usage of $97.1 in 2000 was $639.5 favorable compared to net cash usage of $736.6 in 1999. The variance primarily reflects a decrease in repurchases of common stock resulting from the acceleration of the buyback program in the second half of 1999. See Note 10 of the Notes to Consolidated Financial Statements for further discussion of the Company's share repurchase program. In addition, the variance was also a result of a favorable exchange rate impact on cash and decreased cash used for investing activities in 2000, due to the acquisition of a manufacturing facility in Poland in 1999 and lower capital expenditures in 2000. These sources of cash were partially offset by lower cash provided by operating activities, discussed above, and a reduction in book overdrafts in 2000. During 1998 and 1997, the Company received net proceeds of approximately $58.1 and $58.6, respectively, under securities lending transactions that were settled in the fourth quarter of 2000 and are included in the cash flows as other financing activities. See Note 5 of the Notes to Consolidated Financial Statements for further discussion of these transactions. For the period 1994 through 2000, 59.6 million shares of common stock have been purchased for approximately $1.51 billion under the stock repurchase programs. See Note 10 of the Notes to Consolidated Financial Statements for further details of the share repurchase programs. Working Capital - At December 31, 2000, current assets exceeded current liabilities by $186.4 while at December 31, 1999, current liabilities exceeded current assets by $375.0. This increase of $561.4 is primarily due to decreased net debt (short-term debt less cash and equivalents), the repayment of $101.4 related to securities lending transactions that were included in other accrued liabilities in 1999, the payout of the long-term incentive plan in 2000 as well as the net effect of the 2000 tax refund. In addition, higher inventory levels, as discussed in the Inventories Section, also contributed to the variance. Although current liabilities exceeded current assets at December 31, 1999, management believes this is due to the Company's direct selling business format which results in lower receivable and working capital levels. Avon's liquidity results from its ability to generate significant cash flows from operations and its ample unused borrowing capacity. At December 31, 1999, the large excess of current liabilities over current assets as well as the issuance of long-term debt in 1999, discussed in Note 5 of the Notes to Consolidated Financial Statements, reflects the acceleration of the Company's share repurchase program. These share repurchases resulted in a shareholders' deficit balance at December 31, 2000 and 1999, of $230.9 and $421.9, respectively. Avon's credit agreements do not contain any provisions or requirements with respect to working capital or equity balances. Capital Resources - Total debt of $1,213.6 at December 31, 2000 increased $206.2 from $1,007.4 at December 31, 1999, compared with an increase of $751.1 from December 31, 1998. At December 31, 1999, other accrued liabilities included approximately $106.4, related to securities lending activities. These liabilities were repaid in 2000. See Note 5 of the Notes to Consolidated Financial Statements for further discussion of these transactions. During 2000 and 1999, cash flows from operating activities combined with cash on hand and higher debt levels were used for repurchase of common stock, dividends, capital expenditures and the acquisition of a manufacturing facility in Poland in 1999. 10 At December 31, 2000, debt maturing within one year consisted of borrowings from banks of $104.6 and the current maturities of long-term debt of $.8. Management believes that cash from operations and available sources of financing are adequate to meet anticipated requirements for working capital, dividends, capital expenditures, the remainder of the stock repurchase program and other cash needs. In July 2000, the Company issued in a private placement $735.8 principal amount at maturity of zero coupon convertible senior notes ("Convertible Notes") due July 12, 2020, with proceeds of approximately $350.0. The issue price per note was $475.66, being 47.566% of the principal amount of $1,000 per note at maturity. The Convertible Notes have a 3.75% yield to maturity and are convertible at any time into the Company's common stock at a conversion rate of 8.2723 shares of common stock per $1,000 principal amount at maturity of the Convertible Notes (equivalent to a conversion price of $57.50 per share based on the initial offering price of the Convertible Notes). The Convertible Notes may be redeemed at the option of the Company on or after July 12, 2003, at a redemption price equal to the issue price plus accrued original issue discount to the redemption date. The holders can require the Company to purchase all or a portion of the Convertible Notes on July 12, 2003, July 12, 2008 and July 12, 2013, at the redemption price per Note of $531.74, $640.29 and $771.00, respectively. The holders may also require the Company to repurchase the Convertible Notes if a fundamental change, as defined, involving Avon occurs prior to July 12, 2003. The Company has the option to pay the purchase price or, if a fundamental change has occurred, the repurchase price in cash or common stock or a combination of cash and common stock. The indenture under which the Convertible Notes were issued restricts the Company's ability to merge with or consolidate into another company or to sell substantially all of the Company's assets. The Company also granted to the initial purchasers of the Convertible Notes an over-allotment option to purchase an additional $105.0 of Convertible Notes. As of August 8, 2000, the over-allotment option had been exercised and additional Convertible Notes with an aggregate principal amount at maturity of approximately $105.0 were purchased by the initial purchasers from the Company for proceeds of approximately $50.0. The net proceeds from the offering (including the proceeds of the over-allotment option) were used for general corporate purposes, including the repayment of short-term debt. In November 1999, the Company issued $500.0 of unsubordinated, unsecured notes payable (the "Notes") in a private offering to institutional investors. The proceeds from this issuance were used for general corporate purposes, including the repayment of outstanding short-term borrowings incurred to finance the acceleration of the Company's share repurchase program. In connection with the November 1999 offering, Avon entered into five-year and ten-year interest rate swap contracts with notional amounts of $200.0 and $300.0, respectively, to effectively convert fixed interest on the Notes to a variable interest rate, based on commercial paper rates. In November 2000, these interest rate swap contracts were terminated. The cost to settle these contracts is being amortized over the remaining term of the underlying debt. At the same time, the Company entered into new four-year and nine-year interest rate swap contracts with notional amounts of $200.0 and $300.0, respectively, to effectively convert fixed interest on the Notes to a variable interest rate, based on LIBOR. In May 2000, the Company entered into an interest rate cap agreement with a notional amount of $150.0 expiring on May 31, 2001, to convert a variable interest rate, resulting from the interest rate swaps above, to a fixed interest rate. The cap rate under this contract is 7%. 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 11 the Bonds is 6.25% for the first five years, but will be refinanced at 5.69% plus the then corporate spread if the Bonds are reissued. In connection with the May 1998 Bond issuance, Avon entered into a five-year interest rate swap contract with a notional amount of $50.0 to effectively convert fixed interest on a portion of the Bonds to a variable interest rate, based on LIBOR. During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007, to pay down commercial paper borrowings. During 1996, the Company entered into an agreement (the "credit facility"), which expires in 2001, with various banks to amend and restate the five-year, $600.0 revolving credit and competitive advance facility agreement. The Company is currently negotiating with various banks to renew this credit facility and expects to have a final agreement by the end of the second quarter of 2001. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. The credit facility is primarily to be used to finance working capital, provide support for the issuance of commercial paper and support the stock repurchase program. At the Company's option, the interest rate on borrowings under the credit facility is based on LIBOR or the higher of prime or federal fund rates. The credit facility has an annual facility fee of $.4. The credit facility contains a covenant for interest coverage, as defined. The Company is in compliance with this covenant. At December 31, 2000 and 1999, the Company has $29.9 and $226.4, respectively, outstanding under a $600.0 commercial paper program supported by the credit facility. The Company has uncommitted lines of credit available of $49.0 in 2000 and 1999 with various banks that have no compensating balances or fees. As of December 31, 2000 and 1999, $11.1 of these lines are being used for letters of credit. In addition, as of December 31, 2000 and 1999, there were international lines of credit totaling $449.5 and $399.5, respectively, of which $74.8 and $81.6, respectively, were outstanding. Inventories - Avon's products are marketed during 12 to 26 individual sales campaigns each year. Each campaign is conducted using a brochure offering a wide assortment of products, many of which change from campaign to campaign. It is necessary for Avon to maintain relatively high inventory levels as a result of the nature of its business, including the number of campaigns conducted annually and the large number of products marketed. Avon's operations have a seasonal pattern characteristic of many companies selling CFT, fashion jewelry and accessories, gift and decorative items, and apparel. Holiday sales cause a peak in the fourth quarter, which results in the build up of inventory at the end of the third quarter. Inventory levels are then reduced by the end of the fourth quarter. Inventories of $610.6 at December 31, 2000 were $87.1 higher than 1999 as a result of worldwide inventory investments due to sales increases; an increase in beauty inventories to protect service levels, primarily in the U.S. and Europe; transitional start-up related to new distribution/manufacturing facilities in Taiwan, Mexico and Poland; and European new market entries. It is Avon's objective to continue to manage purchases and inventory levels maintaining the focus of operating the business at efficient inventory levels. However, the addition or expansion of product lines, which are subject to changing fashion trends and consumer tastes, as well as planned expansion in high growth markets, may cause the inventory levels to grow periodically. Capital Expenditures - Capital expenditures during 2000 were $193.5 (1999 - $200.2). These expenditures were made for capacity expansion in high growth markets, maintenance of worldwide facilities, contemporization and replacement of information systems, the new Internet strategy and a new manufacturing facility in Poland. Numerous construction and information systems projects were in progress at December 31, 2000 with an estimated cost to complete of approximately $130.0. Capital expenditures in 2001 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, including spending on the new Internet strategy, and equipment replacement projects. 12 Foreign Operations - For the three years ended 2000, 1999 and 1998, the Company derived approximately 60% of its consolidated net sales and consolidated operating profit from operations from its subsidiaries outside of North America. In addition, as of December 31, 2000 and 1999, these subsidiaries comprised approximately 51% of the Company's consolidated total assets. Avon's operations in many countries utilize numerous currencies. Avon has significant net assets in Brazil, Mexico, the United Kingdom, Japan, Argentina, Canada, the Philippines and Poland. Changes in the value of non-hyperinflationary countries' currencies relative to the U.S. dollar result in direct charges or credits to equity. Effective January 1, 1997, Mexico was designated as a country with a highly inflationary economy due to the cumulative inflation rates over the three-year period 1994 - 1996. However, Mexico was converted to non-hyperinflationary status effective January 1, 1999 due to reduced cumulative inflation rates during the three-year period 1996 through 1998. The euro devalued significantly during 2000 and, as a result, negatively affected the 2000 U.S. dollar results of the European countries using this common currency. Net sales from these countries represent 5% of Avon's consolidated net sales. The impact on earnings of this devaluation was reduced by foreign exchange contracts previously in place. The Brazilian real devalued significantly in January 1999 and, as a result, negatively affected Brazil's U.S. dollar results in 1999. The effect of exchange rates was reduced by foreign exchange contracts previously in place and several actions taken by local management to offset the devaluation, including a focused effort directed at vendor negotiations and local sourcing to reduce imports. Brazil's 1999 net sales represented approximately 9% of Avon's consolidated net sales. On April 21, 1998, the Chinese government issued a directive banning all direct selling in China resulting in the shutdown of the Company's sales operations for most of the second quarter. As of the beginning of June 1998, the Company received Chinese governmental approval to resume operations as a wholesale and retail business and became operational again on June 15, 1998. The Company converted its 75 branches into retail outlets to serve customers. During the end of the second quarter of 1998, Avon received government approval to utilize sales promoters, much like Representatives, to promote product sales in China. In early April 1999, the United States and China agreed to remove all market access restrictions on direct selling in China by January 1, 2003, including the current ban on direct selling imposed by the Chinese government in April 1998. The agreement is contingent upon successful completion of the World Trade Organization accession negotiations between the United States and China and also includes development of regulations for direct selling based on the World Federation of Direct Selling Association's World Code of Conduct. Avon supports resolution of this direct selling issue in China and remains committed to the opportunities this promising region offers. Avon's well diversified global portfolio of businesses has demonstrated that the effects of weak economies and currency fluctuations in certain countries may be offset by strong results in others. Fluctuations in the value of foreign currencies cause U.S. dollar-translated amounts to change in comparison with previous periods. Accordingly, Avon cannot project in any meaningful way the possible effect of such fluctuations upon translated amounts or future earnings. This is due to the large number of currencies, the complexity of intercompany relationships, the hedging activity entered into in an attempt to minimize certain 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 8 of the Notes to Consolidated Financial Statements, are used to hedge various amounts relating to certain international subsidiaries. However, the 13 Company's foreign currency hedging activities are not material when compared to the Company's international financial position or results of operations. Some foreign subsidiaries rely primarily on borrowings from local commercial banks to fund working capital needs created by their highly seasonal sales pattern. From time to time, when tax and other considerations dictate, Avon will finance subsidiary working capital needs or borrow foreign currencies. At December 31, 2000, the total indebtedness of foreign subsidiaries was $76.5. 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 2000, these subsidiaries remitted, net of taxes, $393.3 in dividends and royalties. This sum is a substantial portion of the 2000 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, 2000, the Company held foreign currency forward contracts with notional amounts totaling $393.7 and option contracts with notional amounts totaling $19.1 to hedge foreign currency items. All of these contracts mature within the next 13 months. Also outstanding in 2000 were foreign currency forward contracts totaling $34.2, 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, 2000 was not material. The Company has entered into forward contracts to purchase approximately 1,374,400 shares of Avon common stock at an average price of $37.09 per share at December 31, 2000. The contracts mature over the next ten months and provide for physical or net share settlement to the Company. Accordingly, no adjustment for subsequent changes in fair value has been recognized. In accordance with the provisions of EITF 00-19, $51.0 of these contracts have been included in the accompanying Consolidated Balance Sheets in Share repurchase commitments with a corresponding decrease in Additional paid-in capital. See Note 3 of the Notes to Consolidated Financial Statements. On March 1, 2001, the Company purchased 260,000 shares of Avon common stock at a purchase price of $11.5 under these contracts. 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. 14 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, 2000. 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 5 and 8 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, 2000, 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 2000, the Company did not experience a material loss in fair value, earnings or cash flows associated with changes in interest rates. The Company is exposed to equity price fluctuations for investments included in the grantors trust. A 10% change in equity prices would not be material based on the fair value of equity investments as of December 31, 2000. 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 8 of the Notes to Consolidated Financial Statements. Based on the Company's foreign exchange contracts at December 31, 2000, 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, 2000 adjusted for an assumed 10% appreciation or 10% depreciation of the U.S. dollar against the foreign contracts. The impact of payoffs on option contracts is not significant to this calculation. In 2000, net foreign exchange losses associated with the Company's foreign exchange contracts did not represent a material loss in fair value, earnings or cash flows. As of December 31, 2000, the primary currencies for which the Company has net underlying foreign currency exchange rate exposure are the U.S. dollar versus the Mexican peso, Brazilian real, Argentine peso, British pound, Philippine peso, Polish zloty, Japanese yen and the euro. The Company is also exposed to other South American and Asian currencies. The Company does not hedge its foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign exchange rates on the Company's consolidated financial position, results of operations and cash flows. The impact of a 10% appreciation or 10% depreciation of the U.S. dollar against the Company's net underlying foreign currency transaction and translation exposures could be material. 15 Other Information In October 1997, the Company announced its BPR program to streamline operations and improve profitability through margin improvement and expense reductions. The special and non-recurring charges associated with this program totaled $136.4 pretax ($111.9 net of tax, or $.43 per share on a basic and diluted basis) for the year ended December 31, 1999 and $154.4 pretax ($122.8 net of tax, or $.46 per share on a basic and diluted basis) for the year ended December 31, 1998. In connection with these programs, BPR initiatives reduced costs by approximately $400.0 in 2000 versus 1997 levels, with a portion of the savings being reinvested primarily in consumer-focused initiatives. Euro A single currency called the euro was introduced in Europe on January 1, 1999. Eleven of the fifteen member countries of the European Union adopted the euro as their common legal currency on that date. Fixed conversion rates between these participating countries' existing currencies (the "legacy currencies") and the euro were established as of that date. The legacy currencies are scheduled to remain legal tender as denominations of the euro until June 30, 2002 after which they will be withdrawn from circulation. During this transition period, parties may settle transactions using either the euro or a participating country's legal currency. Beginning in January 2002, new euro-denominated bills and coins will be issued. Avon operating subsidiaries affected by the euro conversion have established plans to address issues raised by the euro currency conversion. These issues include, among others, the need to adapt information technology systems, business processes and equipment to accommodate euro-denominated transactions, the impact of one common currency on pricing and recalculating currency risk. Avon does not expect system and equipment conversion costs to be material. Due to the numerous uncertainties associated with the market impact of the euro conversion, the Company cannot reasonably estimate the effects one common currency will have on pricing and the resulting impact, if any, on results of operations, financial position or cash flows. 16 Results of Operations by Quarter (Unaudited) (Restated - Note 2) Avon Products, Inc. In millions, except per share data First Second Third Fourth Year ------------------ ------------------ ------------------- ------------------- ------------------- As As As As As As As As As As Reported Restated Reported Restated Reported Restated Reported Restated Reported Restated -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- 2000 Net Sales $1,306.7 $1,306.3 $1,382.6 $1,386.4 $1,336.0 $1,335.8 $1,648.4 $1,653.2 $5,673.7 $5,681.7 Other revenue 10.4 10.4 10.0 10.0 9.7 9.7 10.8 10.8 40.9 40.9 Gross profit 826.3 815.3 894.0 884.5 855.5 843.2 1,016.1 1,008.3 3,591.9 3,551.3 Operating profit 137.8 137.9 220.4 221.2 168.6 168.8 261.9 262.0 788.7 789.9 Income before taxes, minority interest and cumulative effect of accounting change 109.5 109.6 195.1 195.9 144.3 144.5 242.1 242.2 691.0 692.2 Income minority interest and cumulative effect of accounting change 70.4 70.5 125.9 126.4 93.2 93.3 199.8 199.8 489.3 490.0 Income before cumulative of accounting change 70.4 70.5 124.9 125.4 92.3 92.4 197.5 197.5 485.1 485.8 Net income 63.7 63.8 124.9 125.4 92.3 92.4 197.5 197.5 478.4 479.1 Basic earnings per share: Continuing operations $ 0.30 $ 0.30 $ 0.53 $ 0.53 $ 0.39 $ 0.39 $ 0.83 $ 0.83 $ 2.04 $ 2.04 Cumulative effect of accounting change (0.03) (0.03) (0.03) (0.03) -------- ------- ------- ------- ------- ------- ------- ------- ------ ------ $ .27 $ .27 $ 0.53 $ 0.53 $ 0.39 $ 0.39 $ 0.83 $ 0.83 $ 2.01 $ 2.01(1) ======== ======= ======= ======= ======= ======= ======= ======= ====== ====== Diluted earnings per share: Continuing operations $ .30 $ .30 $ .52 $ 0.52 $ 0.38 $ 0.38 $ 0.81 $ 0.81 $ 2.02 $ 2.02 Cumulative effect of accounting change (.03) (.03) - - - - - - (.03) (.03) -------- ------ ------- ------ ------- ------ ------- ------ ------ ----- $ .27 $ .27 $ .52 $ 0.52 $ 0.38 $ 0.38 $ 0.81 $ 0.81 $ 1.99 $ 1.99(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. 17 1999 First Second Third Fourth Year ----- ------ ----- ------ ---- Net sales $1,213.8 $1,258.1 $1,250.6 $1,566.6 $5,289.1 Other revenue 9.2 9.1 9.1 11.4 38.8 Gross profit** 714.8 815.5 794.7 971.4 3,296.4 Special charges 90.4 - - - 90.4 Asset impairment charge 38.1 - - - 38.1 Operating (loss)profit (64.6) 192.7 146.1 248.9 523.1 (Loss)income before taxes and minority interest (62.6) 185.3 136.1 221.5 480.3 (Loss)income before minority interest (64.7) 118.7 88.4 144.2 286.6 Net(loss)income $ (62.9) $ 119.5 $ 88.1 $ 141.9 $ 286.6 ======== ======== ======== ======== ======== (Loss)earnings per share: Basic $ (.24) $ .46 $ .34 $ .58 $ 1.12(1) ======== ======== ======== ======== ======= Diluted $ (.24) $ .45 $ .34 $ .58 $ 1.10(1) ======== ======== ======== ======== =======
**First quarter 1999 includes a special and non-recurring charge of $46.0 for inventory write-downs. (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 2000 1999 ---- ---- High Low High Low ---- --- ---- --- Quarter First $ 34.50 $ 25.25 $ 49.00 $ 35.50 Second 44.50 28.38 59.13 46.38 Third 44.00 35.00 56.75 24.63 Fourth 49.75 38.19 37.38 23.31 Avon common stock is listed on the New York Stock Exchange. At December 31, 2000, there were 21,978 shareholders of record. The Company believes that there are over 70,000 additional shareholders who are not "shareholders of record" but who beneficially own and vote shares through nominee holders such as brokers and benefit plan trustees. Dividends of $.74 per share, or $.185 per share each quarter, were declared and paid in 2000. Dividends of $.72 per share, or $.18 per share each quarter, were declared and paid in 1999. 18 Consolidated Statements of Income Avon Products, Inc. In millions, except per share data Years ended December 31 2000 1999 1998 ---- ---- ---- (Restated Note 2) Net sales $5,681.7 $5,289.1 $5,212.7 Other revenue 40.9 38.8 35.0 -------- -------- -------- Total revenue $5,722.6 $5,327.9 $5,247.7 Costs, expenses and other: Cost of sales* 2,171.3 2,031.5 2,053.0 Marketing, distribution and administrative expenses 2,761.4 2,644.8 2,605.0 Special charges - 90.4 116.5 Asset impairment charge - 38.1 - --------- -------- -------- Operating profit 789.9 523.1 473.2 --------- -------- -------- Interest expense 84.7 43.2 34.7 Interest income (8.5) (11.1) (15.9) Other expense (income), net 21.5 10.7 (1.5) --------- -------- -------- Total other expenses 97.7 42.8 17.3 --------- -------- -------- Income from continuing operations before taxes, minority interest and cumulative effect of accounting change 692.2 480.3 455.9 Income taxes 202.2 193.7 190.8 --------- -------- -------- Income before minority interest and cumulative effect of accounting change 490.0 286.6 265.1 Minority interest (4.2) 0.0 4.9 --------- -------- -------- Income from continuing operations before cumulative effect of accounting change 485.8 286.6 270.0 Cumulative effect of accounting change, net of tax (6.7) - - --------- -------- -------- Net income $ 479.1 $ 286.6 $ 270.0 ========= ======== ======== Basic earnings per share: Continuing operations $ 2.04 $ 1.12 $ 1.03 Cumulative effect of accounting change (.03) - - --------- -------- -------- $ 2.01 $ 1.12 $ 1.03 ========= ======== ======== Diluted earnings per share: Continuing operations $ 2.02 $ 1.10 $ 1.02 Cumulative effect of accounting change (.03) - - ---------- -------- -------- $ 1.99 $ 1.10 $ 1.02 ========= ======== ======== *1999 and 1998 include special and non-recurring charges of $46.0 and $37.9, respectively, for inventory write-downs. The accompanying notes are an integral part of these statements. 19 Consolidated Balance Sheets Avon Products, Inc. In millions, except share data December 31 2000 1999 ---- ---- (Restated Noted 2) Assets Current assets Cash, including cash equivalents of $23.9 and $49.6 $ 122.7 $ 117.4 Accounts receivable (less allowance for doubtful accounts of $39.2 and $40.0) 499.0 495.6 Income tax receivable 95.2 - Inventories 610.6 523.5 Prepaid expenses and other 218.2 201.3 -------- -------- Total current assets 1,545.7 1,337.8 -------- -------- Property, plant and equipment, at cost Land 53.0 55.1 Buildings and improvements 659.5 653.4 Equipment 807.9 760.8 -------- -------- 1,520.4 1,469.3 Less accumulated depreciation 754.7 737.2 -------- -------- 765.7 732.1 Other assets 499.9 442.9 -------- -------- Total assets $2,811.3 $2,512.8 ======== ======== Liabilities and Shareholders' (Deficit) Equity Current liabilities Debt maturing within one year $ 105.4 $ 306.0 Accounts payable 391.3 435.9 Accrued compensation 138.2 165.8 Other accrued liabilities 251.7 411.6 Sales and taxes other than income 101.1 107.5 Income taxes 371.6 286.0 -------- -------- Total current liabilities 1,359.3 1,712.8 -------- -------- Long-term debt 1,108.2 701.4 Employee benefit plans 397.2 398.1 Deferred income taxes 31.3 36.7 Other liabilities (including minority interest of $30.7 and $32.7) 95.2 85.7 Commitments and contingencies (Notes 5, 13 and 16) Share repurchase commitments (Note 3) 51.0 - Shareholders' (deficit) equity Common stock, par value $.25 - authorized: 800,000,000 shares; issued 354,535,840 and 352,575,924 shares 88.6 88.1 Additional paid-in capital 824.1 819.4 Retained earnings 1,124.7 821.4 Accumulated other comprehensive loss (399.1) (349.7) Treasury stock, at cost - 116,373,394 and 114,680,525 shares (1,869.2) (1,801.1) -------- -------- Total shareholders' (deficit) equity (230.9) (421.9) -------- -------- Total liabilities and shareholders' (deficit) equity $2,811.3 $2,512.8 ======== ======== The accompanying notes are an integral part of these statements. 20 Consolidated Statements of Cash Flows Avon Products, Inc. In millions Years ended December 31 2000 1999 1998 ---- ---- ---- (Restated Note 2) Cash flows from operating activities Net income $ 479.1 $ 286.6 $ 270.0 Adjustments to reconcile income to net cash provided by operating activities: Cumulative effect of accounting change 6.7 - - Depreciation and amortization 95.9 82.7 72.0 Provision for doubtful accounts 94.3 87.5 91.3 Translation losses(gains) 2.7 (.9) (7.2) Deferred income taxes 14.0 (30.5) (13.0) Special charges (18.3) 69.3 88.5 Asset impairment charge - 38.1 - Amortization of debt discount 1.4 - - Other 13.8 9.8 3.9 Changes in assets and liabilities: Accounts receivable (145.6) (132.7) (157.6) Income tax receivable (95.2) - - Inventories (103.3) (57.8) (17.2) Prepaid expenses and other (30.7) 1.1 (4.0) Accounts payable and accrued liabilities (57.3) 40.4 13.0 Income and other taxes 81.5 27.6 19.5 Noncurrent assets and liabilities (15.1) 24.3 (34.8) ------- ------- ------- Net cash provided by operating activities 323.9 445.5 324.4 ------- ------- -------- Cash flows from investing activities Capital expenditures (193.5) (200.2) (189.5) Disposal of assets 7.2 11.7 5.8 Acquisitions of subsidiary stock and other investing activities (1.4) (16.5) 1.4 ------- ------- ------- Net cash used by investing activities (187.7) (205.0) (182.3) ------- ------- ------- Cash flows from financing activities Cash dividends (178.2) (186.3) (180.6) Book overdrafts (13.5) 15.9 - Debt, net (maturities of three months or less) (194.3) 227.2 (96.1) Proceeds from short-term debt 90.5 90.8 54.7 Retirement of short-term debt (92.2) (69.4) (34.9) Proceeds from long-term debt 400.1 500.0 100.1 Retirement of long-term debt (.3) (.2) (.6) Proceeds from exercise of stock options 38.4 23.9 24.0 Repurchase of common stock (68.1) (800.6) (107.8) Other financing activities (101.4) - 58.1 ------- ------- ------- Net cash used by financing activities (119.0) (198.7) (183.1) ------- ------- ------- Effect of exchange rate changes on cash and equivalents (11.9) (30.0) 4.7 ------- ------- ------- Net increase(decrease) in cash and equivalents 5.3 11.8 (36.3) Cash and equivalents at beginning of year 117.4 105.6 141.9 ------- ------- ------- Cash and equivalents at end of year $ 122.7 $ 117.4 $ 105.6 ======= ======= ======= Cash paid for: Interest, net of amounts capitalized $ 96.9 $ 47.1 $ 39.2 Income taxes, net of refunds received 207.6 176.0 188.5 The accompanying notes are an integral part of these statements. 21 Consolidated Statements of Changes in Shareholders' (Deficit) Equity Avon Products, Inc. Accumulated (Restated-Note 2) Additional Compre- Other Common Stock Paid-In Retained hensive Treasury In millions, except share data Shares Amount Capital Earnings Loss Stock Total ----------- ------- -------- -------- ------- --------- -------- Balance at December 31, 1997 174,711,173 $ 43.7 $ 733.1 $ 660.9 $(270.3) $(882.4) $ 285.0 Comprehensive income: Net income 270.0 270.0 Foreign currency translation adjustments (15.6) (15.6) Minimum pension liability adjustment (15.4) (15.4) ------- Total comprehensive income 239.0 Dividends - $.68 per share (178.9) (178.9) Two-for-one stock split effected in the form of a stock dividend from retained earnings (Note 9) 175,419,475 43.9 (32.9) (11.0) - Exercise of stock options, including tax benefits 916,102 .2 38.2 38.4 Grant, cancellation and amortization of restricted stock 267,616 7.1 7.1 Repurchase of common stock (107.8) (107.8) Benefit plan contributions 1.6 .7 2.3 ----------- ------ ------- -------- ------- --------- -------- Balance at December 31, 1998 351,314,366 87.8 780.0 719.1 (301.3) (1,000.5) 285.1 Comprehensive income: Net income 286.6 286.6 Foreign currency translation adjustments (49.7) (49.7) Minimum pension liability adjustment 1.3 1.3 ------- Total comprehensive income 238.2 Dividends - $.72 per share (184.3) (184.3) Exercise of stock options, including tax benefits of $7.9 1,152,549 .3 30.7 31.0 Grant, cancellation and amortization of restricted stock 109,009 8.7 8.7 Repurchase of common stock (800.6) (800.6) ----------- ------ ------- -------- ------- --------- -------- Balance at December 31, 1999 352,575,924 88.1 819.4 821.4 (349.7) (1,801.1) (421.9) Comprehensive income: Net income (Restated - Note 2) 479.1 479.1 Foreign currency translation adjustments (42.9) (42.9) Unrealized loss from available- for-sale securities, net of tax (6.0) (6.0) Minimum pension liability adjustment, net of tax (.5) (.5) --- Total comprehensive income (Restated - Note 2) 429.7 Dividends - $.74 per share (175.8) (175.8) Exercise of stock options, including tax benefits of $8.8 1,701,935 .4 49.1 49.5 Grant, cancellation and amortization of restricted stock 257,981 .1 6.6 6.7 Repurchase of common stock (68.1) (68.1) (68.1) Share repurchase commitments (51.0) (51.0) ----------- ------ ------- -------- ------- --------- -------- Balance at December 31, 2000 (Restated-Note2) 354,535,840 $ 88.6 $ 824.1 $1,124.7 $(399.1) $(1,869.2) $ (230.9) ----------- ------ ------- -------- ------- --------- --------
The accompanying notes are an integral part of these statements. 22 Notes to Consolidated Financial Statements Avon Products, Inc. In millions, except per share data 1. Description of the Business and Summary of Significant Accounting Policies Business Avon Products, Inc. ("Avon" or the "Company") is a global manufacturer and marketer of beauty and related products. The product categories include cosmetics, fragrance and toiletries ("CFT"); Beauty Plus which consists of jewelry, watches and accessories and apparel; and Beyond Beauty which consists of gift and decorative, home entertainment and health and nutrition products. Avon's business is primarily comprised of one industry segment, direct selling, which is conducted in North America, Latin America, the Pacific and Europe. Sales are made to the ultimate customers principally by independent Avon Representatives. Significant Accounting Policies Principles of Consolidation - The consolidated financial statements include the accounts of Avon and its majority and wholly-owned subsidiaries. Intercompany balances and transactions are eliminated. These statements have been prepared in conformity with generally accepted accounting principles and require management to make estimates and assumptions that affect amounts reported and disclosed in the financial statements and related notes. Actual results could differ from these estimates. Foreign Currency - Financial statements of foreign subsidiaries operating in other than highly inflationary economies are translated at year-end exchange rates for assets and liabilities and average exchange rates during the year for income and expense accounts. The resulting translation adjustments are recorded within accumulated other comprehensive income. Financial statements of subsidiaries operating in highly inflationary economies are translated using a combination of current and historical exchange rates and any translation adjustments are included in income. Revenue Recognition - Avon recognizes revenue upon delivery, when both title and risks and rewards of ownership pass to the independent Representatives, who are Avon's customers. Prior to 2000, Avon recognized revenue as shipments were made. See Note 3 of the Notes to Consolidated Financial Statements. Other revenues include shipping and handling fees charged to Representatives. Cash and Equivalents - Cash equivalents are stated at cost plus accrued interest, which approximates fair value. Cash equivalents are highly liquid debt instruments with an original maturity of three months or less and consist of time deposits with a number of U.S. and non-U.S. commercial banks with high credit ratings. Inventories - Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out ("FIFO") method for all inventories. Prior to October 1999, substantially all U.S. inventories, except apparel, used the last-in, first-out ("LIFO") method to determine cost. The LIFO value of such inventory at December 31, 1999 was approximately $3.6 lower than it would have been under the FIFO method at December 31, 1998. Effective October 1, 1999, the U.S. inventories using the LIFO method were changed to the FIFO method. The change was made because the Company had begun to realize and expects to continue to experience cost reductions as a result of technological advancements and process improvements in its manufacturing operations. As a result, the FIFO method will better measure the current value of such inventories, provide a more appropriate matching of revenues and expenses, and conform all inventories of the Company to the same accounting method. This 23 accounting change was not material to the financial statements on an annual or quarterly basis, and accordingly, no restatement of prior periods' financial statements was made. Depreciation - Substantially all buildings, improvements and equipment are depreciated using the straight-line method over estimated useful lives. Estimated useful lives for buildings and improvements range from approximately 20 to 45 years and equipment range from 3 to 15 years. Deferred Software - Systems development costs related to the development of major information and accounting systems are capitalized and amortized over the estimated useful life of the related project, not to exceed five years. Unamortized deferred software costs totaled $98.9 and $72.5 at December 31, 2000 and 1999, respectively, and are included in Other assets on the Consolidated Balance Sheets. Stock Options - Avon applies APB Opinion 25, "Accounting for Stock Issued to Employees", and related interpretations in accounting for its long-term incentive plans. Compensation cost for fixed price options is measured as the excess, if any, of the quoted market price of Avon's stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Financial Instruments - The Company uses derivative financial instruments, including swaps, forward contracts and options, to manage interest rate and foreign currency exposures. Gains and losses on existing assets, liabilities and firm commitments designated as hedged items are deferred and included in other assets or liabilities and recognized when the offsetting gains and losses are recognized on the related financial instrument. Gains and losses and cash flows from derivative instruments designated as hedges are classified consistent with the items being hedged. Items which do not qualify for hedge accounting are marked to market with the resulting gain or loss recognized in other expense (income), net. Gains and losses on terminations of foreign exchange and interest rate swap contracts are deferred and amortized over the remaining terms of the original agreements. The Company also uses financial instruments, including forward contracts to purchase Avon common stock, to hedge certain employee benefit costs and the cost of the Company's share repurchase program. Contracts that require physical or net share settlement are initially measured at fair value with subsequent changes in fair value not recognized. Contracts that require net cash settlement are initially measured at fair value with subsequent changes in fair value recognized as gains or losses in the income statement. Research and Development - Research and development costs are expensed as incurred and aggregated in 2000 - $43.1 (1999 - $38.2; 1998 - $31.4). Advertising - Advertising costs are expensed as incurred and aggregated in 2000 - - $92.4 (1999 - $63.4; 1998 - $65.0). 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 $204.0 of undistributed income of subsidiaries that has been or is intended to be permanently reinvested outside the United States. Shipping and Handling - Shipping and handling costs are expensed as incurred and aggregated in 2000 - $533.2 (1999 - $495.4; 1998 - $440.9). Shipping and handling costs are included in Marketing, distribution and administrative expenses on the Consolidated Statements of Income. 24 Earnings per Share - Basic earnings per share ("EPS") are computed by dividing net income by the weighted-average number of shares outstanding during the year. Diluted 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 components of basic and diluted earnings per share are as follows: 2000 1999 1998 ---- ---- ---- Numerator: Basic: Income from continuing operations before cumulative effect of accounting change $ 485.8 $ 286.6 $ 270.0 Cumulative effect of accounting change (6.7) - - ------- ------- ------- Net Income $ 479.1 $ 286.6 $ 270.0 ======= ======= ======= Diluted: Income from continuing operations before cumulative effect of accounting change $ 485.8 $ 286.6 $ 270.0 Interest expense on Convertible Notes, net of taxes 4.5 - - ------- ------- ------- Income for purposes of computing diluted EPS before cumulative effect of accounting change 490.3 286.6 270.0 Cumulative effect of accounting change (6.7) - - ------ ------- ------- Net income for purposes of computing diluted EPS $ 483.6 $ 286.6 $ 270.0 ======= ======= ======= Denominator: Basic EPS weighted-average shares outstanding 237.67 256.78 263.27 Dilutive effect of: Assumed conversion of stock options and settlement of forward contracts 2.06* 2.59* 2.68 Assumed conversion of Convertible Notes 3.22 - - ------ ------- ------ Diluted EPS adjusted weighted-average shares outstanding 242.95 259.37 265.95 ====== ======= ====== Basic EPS: Continuing operations $ 2.04 $ 1.12 $ 1.03 Cumulative effect of accounting change (.03) - - ------- ------- ------- $ 2.01 $ 1.12 $ 1.03 ======= ======= ======= Diluted EPS: Continuing operations $ 2.02 $ 1.10 $ 1.02 Cumulative effect of accounting change (.03) - - ------- ------- ------- $ 1.99 $ 1.10 $ 1.02 ======= ======= ======= *At December 31, 2000 and 1999, stock options and forward contracts to purchase Avon common stock totaling 1.1 million and 3.8 million shares, respectively, are not included in the diluted EPS calculation since their impact is anti-dilutive. 25 Reclassifications - To conform to the 2000 presentation, certain reclassifications were made to the prior years' consolidated financial statements and the accompanying footnotes. 2. Restatements and Accounting Changes Restatements In connection with the settlement of a previously disclosed investigation by the Securities and Exchange Commission relating to the write off of an order management software system known as the "FIRST" project, Avon has restated its Consolidated Financial Statements as of December 31, 2001, 2000 and 1999 and for the years then ended and for each of the fiscal quarters ended March 31, 1999 through March 31, 2002. See Introductory Note-Restatements and Note 15 of the Notes to Consolidated Financial Statements, "Asset Impairment Charge". The accompanying financial statements have been restated to reflect the restatements discussed above as well as the accounting changes outlined in this Note. No attempt has been made in this Form 10-K/A to modify or update any disclosures except as required to reflect the results of the restatements discussed above and any changes made to prior period financial information for which a Form 10-K/A was not filed. The principal adjustments comprising the restatements are as follows: o Reclassification of $14.8 of pre-tax charges recorded in the first quarter of 1999 related to the write off of a portion of the FIRST project, out of the "Special charges" line and into the "Asset impairment charge" line; o An additional Asset impairment charge of $23.3 pretax in the first quarter of 1999 to reflect the write off of all capitalized costs associated with the FIRST project as of March 31, 1999; o Reversal of the third quarter 2001 Asset impairment charge of $23.9 pretax related to the abandonment of the FIRST project; and o Restatement of all other activity related to the FIRST project, consisting of costs incurred and capitalized subsequent to March 31, 1999 and amortization, recorded from the second quarter of 1999 through the first quarter of 2002. These adjustments resulting from the restatements are reflected in Results of Operations by Quarter, Management's Discussion & Analysis, Eleven-Year Review and the following notes: Special and Non-Recurring Charges, Earnings per Share, Comprehensive Income, Income Taxes, Segment Information and Asset Impairment Charge. Accounting Changes In addition, the Form 10-K/A reflects the following changes to prior period financial information for which a Form 10-K/A was not previously filed. These changes are primarily the result of the previously disclosed adoption of new accounting pronouncements and are unrelated to the restatements described above and the FIRST project: o Reclassifications made to reported 2000 financial information as a result of the adoption of EITF No. 00-14, "Accounting for Certain Sales Incentives", EITF No. 00-25, "Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products" and EITF 01-09 "Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor's Products". The adoption of these EITFs had no impact on Operating profit, Net income or Earnings per share; and o Reclassifications made to reported financial information to conform with the 2002 presentation primarily relating to the sale of fundraising products in the U.S. Previously the net sales and fundraising expenses associated with certain U.S. fundraising products had been included within Marketing, distribution and administrative expenses. This reclassification resulted in an increase to Net sales, Cost of sales and Marketing, distribution and administrative expenses of $13.1, $6.3 and $6.8, respectively for the year ended December 31, 2000 and had no impact on reported Operating profit, Net income or Earnings per share. 26 The effects of these restatements and accounting changes on the Consolidated Financial Statements are set forth below: Consolidated Statement of Operations Year ended December 31, 2000 --------------------------------------------------------- As As Reported(1) (2) Restated(3) ----------- --- ----------- Net sales $5,673.7 $5,681.7 $5,681.7 Total revenue 5,714.6 5,722.6 5,722.6 Cost of sales 2,122.7 2,171.3 2,171.3 Marketing, distribution and administrative expenses 2,803.2 2,762.6 2,761.4 Operating profit 788.7 788.7 789.9 Income from continuing operations before taxes, minority interest and cumulative effect of accounting change 691.0 691.0 692.2 Income taxes 201.7 201.7 202.2 Income from continuing operations before minority interest and cumulative effect of accounting change 489.3 489.3 490.0 Income from continuing operations before cumulative effect of accounting change 485.1 485.1 485.8 Net income 478.4 478.4 479.1 Basic earning per share: Continuing operations $ 2.04 $ 2.04 $ 2.04 Cumulative effect of accounting change (.03) (.03) (.03) -------- ------- ------- $ 2.01 $ 2.01 $ 2.01 ======== ======= ======= Diluted earnings per share: Continuing operations $ 2.02 $ 2.02 $ 2.02 Cumulative effect of accounting change (.03) (.03) (.03) -------- ------- ------- $ 1.99 $ 1.99 $ 1.99 ======== ======= =======
Consolidated Balance Sheet As of December 31, 2000 -------------------------------------- As Previously As Reported(1) Restated(3) ----------- ----------- Property, plant and equipment, at cost $1,523.1 $1,520.4 Other assets 512.3 499.9 Total assets 2,826.4 2,811.3 Retained earnings 1,139.8 1,124.7 Total liabilities and shareholder's (deficit) equity 2,826.4 2,811.3
(1) As reported in Avon's Form 10-K for the year ended December 31, 2000. (2) Includes the effects of accounting changes outlined above. (3) Includes the effects of restatements and accounting changes outlined above. Note: Refer to the Company's Form 10-K/A for the year ended December 31, 1999 for restatements to 1999 information. 27 3. Accounting Changes In June 1999, the Financial Accounting Standards Board ("FASB") issued Financial Accounting Standard ("FAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FAS No. 133", which delayed the effective date of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", by one year. FAS No. 133 is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). In June 2000, the FASB issued FAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133". FAS No. 138 amends FAS No. 133 and will be adopted concurrently with FAS No. 133. FAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives will be recorded each period in current earnings or accumulated other comprehensive income, depending on whether the derivative is designated as part of a hedge transaction. For fair-value hedge transactions in which the Company is hedging changes in the fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative instrument will be included in the income statement along with the offsetting changes in the hedged item's fair value. For cash-flow hedge transactions in which the Company is hedging the variability of cash flows related to a variable rate asset, liability, or a forecasted transaction, changes in the fair value of the derivative instrument will be reported in accumulated other comprehensive income. The gains and losses on the derivative instruments that are reported in accumulated other comprehensive income will be reclassified to earnings in the periods in which earnings are impacted by the variability of the cash flows of the hedged item. The ineffective portion of all of the hedges will be recognized in current period earnings. The impact of FAS No. 133 as amended by FAS No. 138 on the Company's financial statements will depend on a variety of factors, including the future level of forecasted and actual foreign currency transactions, the extent of the Company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. Based on Avon's financial instruments outstanding at December 31, 2000, the Company has determined that the cumulative effect of adoption will not be material to the Consolidated Financial Statements. Effective January 1, 2000, the Company adopted Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides the Securities and Exchange Commission's views in applying generally accepted accounting principles to revenue recognition in the financial statements. As a result of adopting SAB 101, Avon changed its revenue recognition policy to recognize revenue upon delivery, when both title and risks and rewards of ownership pass to the independent Representative. In accordance with the provisions of SAB 101, the Company recorded a charge to earnings of $6.7, net of a tax benefit of $3.5, to reflect the accounting change. This charge is reflected as a cumulative effect of an accounting change in the accompanying Consolidated Statements of Income. The effect of the change on the year ended December 31, 2000, was to decrease net income before the cumulative effect of the accounting change by $1.1. The change in accounting method would not have a material effect on the Statements of Income in 1999 or 1998 if adopted in these periods. In September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-10, "Accounting for Shipping and Handling Fees and Costs". Under the provisions of EITF 00-10, amounts billed to a customer in a sales transaction related to shipping and handling should be classified as revenue. EITF 00-10 also requires the disclosure of the income statement classification of any shipping and handling costs. Prior to October 1, 2000, the Company included shipping and handling fees in Marketing, distribution and administrative expenses in the Consolidated Statements of Income. Effective October 1, 2000, the Company adopted EITF 00-10, with restatement of all comparative prior period financial statements. The adoption has no impact on the determination of net income. 28 In March 2000, the EITF reached a consensus on the application of EITF Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", with Issue No. 00-7, "Equity Derivative Transactions that Require Net Cash Settlement if Certain Events Outside the Control of the Issuer Occur" ("EITF 00-7"). Equity derivative contracts that contain any provision that could require net cash settlement (except upon the complete liquidation of the Company) must be marked to fair value through earnings under EITF 00-7. In September 2000, the EITF reached a consensus on Issue No.00-19, "Determination of Whether Share Settlement Is Within the Control of the Issuer for Purposes of Applying Issue No. 96-13, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock" ("EITF 00-19"). EITF 00-19 addresses questions regarding the application of EITF 00-7 and sets forth a model to be used to determine whether equity derivative contracts should be recorded as equity. Under the transition provisions of EITF 00-19, all contracts existing prior to the date of the consensus are grandfathered until June 30, 2001, with a cumulative catch-up adjustment to be recorded at that time. Additionally, any contracts entered into prior to September 20, 2000, which are not revised to comply with the requirements of EITF 00-19 by December 31, 2000, will require reclassification out of permanent equity and into temporary equity pursuant to Accounting Series Release No. 268. This reclassification will remain until the contracts are revised to comply with EITF 00-19 through June 30, 2001. At December 31, 2000, contracts aggregating $51.0 do not comply with the provisions of EITF 00-19 and have been included in the accompanying Consolidated Balance Sheets in Share repurchase commitments with a corresponding decrease in Additional paid-in capital. The Company believes that the equity derivative contracts that may remain outstanding at June 30, 2001, if any, will be in accordance with the requirements of EITF 00-19 and does not anticipate that such adoption will have a material impact on the consolidated financial statements. On March 1, 2001, the Company purchased 260,000 shares of Avon common stock for a purchase price of $11.5 under these contracts. In May 2000, the EITF reached a consensus on EITF 00-14, "Accounting for Certain Sales Incentives", which provides guidance on accounting for discounts, coupons, rebates and free products, as well as the income statement classification of these discounts, coupons, rebates and free products. EITF 00-14 is effective April 1, 2001, for the Company. The Company is currently evaluating the impact of this new guidance. 4. Inventories Inventories at December 31 consisted of the following: 2000 1999 Raw materials $168.0 $156.9 Finished goods 442.6 366.6 ------ ------ Total $610.6 $523.5 ====== ====== 29 5. Debt and Other Financing Debt at December 31 consisted of the following (see also Note 8 of the Notes to Consolidated Financial Statements regarding financial instruments): 2000 1999 Maturing within one year: Notes payable $ 104.6 $305.2 Current portion of long-term debt .8 .8 ------ ------ Total $ 105.4 $306.0 ====== ====== Long-term debt: 6.90% Notes, due 2004 $ 200.0 $200.0 6.55% Notes, due 2007 100.0 100.0 7.15% Notes, due 2009 300.0 300.0 6.25% Bonds, due 2018 100.0 100.0 Convertible Notes, due 2020 407.0 - Other, payable through 2005 with interest from 3% to 15% 2.0 2.2 Less current portion (.8) (.8) -------- ------ Total $1,108.2 $701.4 ======== ====== Annual maturities of long-term debt for each of the next five years are: 2001 - $.8; 2002 - $.6; 2003 - $.4; 2004 - $200.1; and 2005 and beyond - $907.1. In July 2000, the Company issued in a private placement $735.8 principal amount at maturity of zero-coupon convertible senior notes (the "Convertible Notes"), due July 12, 2020 with proceeds of approximately $350.0. The issue price per Convertible Note was $475.66, being 47.566% of the principal amount of $1,000 per note at maturity. The Convertible Notes have a 3.75% yield to maturity and are convertible at any time into the Company's common stock at a conversion rate of 8.2723 shares of common stock per $1,000 principal amount at maturity of the Convertible Notes (equivalent to a conversion price of $57.50 per share based on the initial offering price of the Convertible Notes). The Convertible Notes may be redeemed at the option of the Company on or after July 12, 2003 at a redemption price equal to the issue price plus accrued original issue discount to the redemption date. The holders can require the Company to purchase all or a portion of the Convertible Notes on July 12, 2003, July 12, 2008 and July 12, 2013, at the redemption price per note of $531.74, $640.29 and $771.00, respectively. The holders may also require the Company to repurchase the Convertible Notes if a fundamental change, as defined, involving Avon occurs prior to July 12, 2003. The Company has the option to pay the purchase price or, if a fundamental change has occurred, the repurchase price in cash or common stock or a combination of cash and common stock. The indenture under which the Convertible Notes were issued restricts the Company's ability to merge with or consolidate into another company or to sell substantially all of the Company's assets. The Company also granted to the initial purchasers of the Convertible Notes an over-allotment option to purchase an additional $105.0 of Convertible Notes. As of August 8, 2000, the over-allotment option had been exercised and additional Convertible Notes with an aggregate principal amount at maturity of approximately $105.0 were purchased by the initial purchasers from the Company for proceeds of approximately $50.0. The net proceeds from the offering (including the proceeds of the over-allotment option) were used for general corporate purposes, including the repayment of short-term debt. 30 In November 1999, Avon issued $500.0 of notes payable (the "Notes") in a private offering to institutional investors. The Notes are unsubordinated, unsecured obligations of the Company. $200.0 of the Notes bear interest at a per annum rate equal to 6.90% and mature on November 15, 2004. $300.0 of the Notes bear interest at a per annum rate equal to 7.15% and mature on November 15, 2009. Interest on the Notes is payable semi-annually. The indenture under which the Notes were issued limits the incurrence of liens and restricts the incurrence of sales and leaseback transactions and transactions involving the mergers, consolidation or a sales of substantially all of the Company's assets. In connection with the November 1999 offering, Avon entered into five-year and ten-year interest rate swap contracts with notional amounts of $200.0 and $300.0, respectively, to effectively convert fixed interest rates on the Notes to a variable interest rate, based on commercial paper rates. In November 2000, these interest rate swap contracts were terminated. The cost to settle these contracts is being amortized over the remaining term of the underlying debt. At the same time, the Company entered into new four year and nine-year interest rate swap contracts with notional amounts of $200.0 and $300.0, respectively, to effectively convert fixed interest on the Notes to a variable interest rate, based on LIBOR. In May 2000, Avon entered into an interest rate cap agreement with a notional amount of $150.0 expiring on May 31, 2001, to convert a variable interest rate, resulting from the interest rate swaps above, to a fixed interest rate. The cap rate under this contract is 7%. In May 1998, Avon issued $100.0 of bonds embedded with option features (the "Bonds") to pay down commercial paper borrowings. The Bonds have a twenty-year maturity; however, after five years, the Bonds, at the holder's option, can be sold back to the Company at par or can be called at par by the underwriter and resold to investors as fifteen-year debt. The coupon rate on the Bonds is 6.25% for the first five years, but will be refinanced at 5.69% plus the then corporate spread if the Bonds are reissued. In connection with the May 1998 Bond issuance, Avon entered into a five-year interest rate swap contract with a notional amount of $50.0 to effectively convert fixed interest on a portion of the Bonds to a variable interest rate, based on LIBOR. During 1997, the Company issued $100.0 of 6.55% notes, due August 1, 2007, to pay down commercial paper borrowings. Under the terms of a revolving credit and competitive advance facility agreement amended in 1996 and expiring in 2001 (the "credit facility"), the Company may borrow up to $600.0. The Company is currently negotiating with various banks to renew this credit facility and expects to have a final agreement by the end of the second quarter of 2001. Within this facility, the Company is able to borrow, on an uncommitted basis, various foreign currencies. The credit facility is primarily to be used to finance working capital, provide support for the issuance of commercial paper and support the stock repurchase program. At the Company's option, the interest rate on borrowings under the credit facility is based on LIBOR or the higher of prime or federal fund rates. The credit facility has an annual facility fee of $.4. The credit facility contains a covenant for interest coverage, as defined. The Company is in compliance with this covenant. At December 31, 2000 and 1999, the Company has $29.9 and $226.4, respectively, outstanding under a $600.0 commercial paper program supported by the credit facility. The Company has uncommitted lines of credit available of $49.0 in 2000 and 1999 with various banks which have no compensating balances or fees. As of December 31, 2000 and 1999, $11.1 of these lines are being used for letters of credit. 31 The maximum borrowings under these combined facilities during 2000 and 1999 were $515.4 and $840.7, respectively, and the annual average borrowings during each year were approximately $313.7 and $304.0, respectively, at average annual interest rates of approximately 6.5% and 5.3%, respectively. At December 31, 2000 and 1999, international lines of credit totaled $449.5 and $399.5, respectively, of which $74.8 and $81.6 were outstanding, respectively. The maximum borrowings under these facilities during 2000 and 1999 were $86.4 and $121.0, respectively, and the annual average borrowings during each year were $77.8 and $73.0, respectively, at average annual interest rates of approximately 6.4% and 6.2%, respectively. Such lines have no compensating balances or fees. At December 31, 2000 and 1999, Avon also had letters of credit outstanding totaling $15.5, which guarantee various insurance activities. In addition, Avon had outstanding letters of credit for various trade activities. During 1998 and 1997, the Company entered into securities lending transactions resulting in the borrowing of securities which were subsequently sold for net proceeds approximating $58.1 and $58.6, respectively, used to repay commercial paper borrowings. The borrowed securities were paid during 2000. The obligations are included in other accrued liabilities on the balance sheet at December 31, 1999. The effective rates on the transactions were 5.5% and 6.5%, respectively. 6. Comprehensive Income The following table reflects comprehensive income as of December 31: 2000 1999 1998 ---- ---- ---- Net income $479.1 $286.6 $270.0 Other comprehensive loss: Foreign currency translation adjustments (42.9) (49.7) (15.6) Available-for-sale securities Unrealized loss (9.3) - - Income taxes 3.3 - - Minimum pension liability Aadjustment (.8) 2.0 (24.6) Income taxes .3 (.7) 9.2 ------ ------ ------ Comprehensive income $429.7 $238.2 $239.0 ====== ====== ====== Accumulated other comprehensive loss at December 31 consisted of the following: 2000 1999 ---- ---- Foreign currency translation Aadjustments $(378.5) $(335.6) Unrealized loss from available-for- sale securities, net of tax (6.0) - Minimum pension liability Aadjustment, net of tax (14.6) (14.1) ------- ------- Total $(399.1) $(349.7) ======= ======= 32 7. 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: 2000 1999 ---- ---- Deferred tax assets: Postretirement benefits $ 80.7 $ 82.8 Accrued expenses and reserves 48.9 48.6 Special and non-recurring charges 2.4 7.2 Employee benefit plans 69.8 70.9 Foreign operating loss carryforwards 25.9 37.3 Capital loss carryforwards .2 10.0 Postemployment benefits 7.4 9.3 Revenue recognition 4.2 - All other 30.6 27.0 Valuation allowance (25.4) (46.7) ------- ------- Total deferred tax assets 244.7 246.4 ------- ------- Deferred tax liabilities: Depreciation (43.1) (43.6) Prepaid retirement plan costs (50.0) (54.9) Capitalized interest (8.7) (9.7) Unremitted foreign earnings (13.7) (17.7) All other (17.2) (9.3) ------- ------- Total deferred tax liabilities (132.7) (135.2) ------- ------- Net deferred tax assets $ 112.0 $ 111.2 ======= ======= Deferred tax assets (liabilities) at December 31 were classified as follows: 2000 1999 ---- ---- Deferred tax assets: Prepaid expenses and other $ 86.0 $ 90.0 Other assets 76.1 62.6 ------ ------ Total deferred tax assets 162.1 152.6 ----- ----- Deferred tax liabilities: Income taxes (18.8) (4.7) Deferred income taxes (31.3) (36.7) ------ ------ Total deferred tax liabilities (50.1) (41.4) ------ ------ Net deferred tax assets $112.0 $111.2 ====== ====== The valuation allowance primarily represents reserves for foreign operating loss and capital loss carry forwards. The basis used for recognition of deferred tax assets included the profitability of the operations and related deferred tax liabilities. Income from continuing operations before taxes, minority interest and cumulative effect of an accounting change for the years ended December 31 was as follows: 2000 1999 1998 ---- ---- ---- United States $ 173.1 $ 78.6 $ 74.2 Foreign 519.1 401.7 381.7 ------- ------- ------- Total $ 692.2 $ 480.3 $ 455.9 ======= ======= ======= 33 The provision for income taxes for the years ended December 31 was as follows: 2000 1999 1998 ---- ---- ---- Federal: Current $ (3.2) $ 48.4 $ 39.2 Deferred 11.5 (21.0) (10.4) ------- ------- ------- 8.3 27.4 28.8 ------- ------- ------- Foreign: Current 183.8 167.5 153.7 Deferred - (5.6) .9 ------- ------- ------- 183.8 161.9 154.6 ------- ------- ------- State and other: Current 7.6 8.3 10.9 Deferred 2.5 (3.9) (3.5) ------- ------- ------- 10.1 4.4 7.4 ------- ------- ------- Total $ 202.2 $ 193.7 $ 190.8 ======= ======= ======= The effective tax rate for the years ended December 31 was as follows: 2000 1999 1998 ---- ---- ---- Statutory federal rate 35.0% 35.0% 35.0% State and local taxes, net of federal tax benefit .5 .6 1.0 Tax-exempt operations (.2) (.3) .8 Taxes on foreign income, including translation .3 4.4 4.6 Tax refund, net of taxes (5.8) - - Other (.6) .6 .5 ---- ---- ---- Effective tax rate 29.2% 40.3% 41.9% ==== ==== ==== At December 31, 2000, Avon had foreign operating loss carryforwards of approximately $78.7. The loss carryforwards expiring between 2001 and 2008 were $35.5 and the loss carryforwards which do not expire were $43.2. Capital loss carryforwards, which expire in 2001 and may be used to offset capital gains, if any, were approximately $.7 at December 31, 2000. In January 2001, the Company received a federal income tax refund consisting of $32.5 of tax and $62.7 of interest related to the carryback of foreign tax credits and general business credits to the years ended December 31, 1982, 1983, 1985 and 1986. The Company recognized $40.1 million as an income tax benefit in 2000 resulting from the impact of the tax refund offset by taxes due on interest received and other related tax obligations. 8. 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 34 periodically employ interest rate caps to reduce exposure, if any, to increases in variable interest rates. As discussed in Note 5 of the Notes to Consolidated Financial Statements, the Company entered into a five-year interest rate swap contract with a notional amount of $50.0 to effectively convert fixed interest on a portion of the Bonds to a variable interest rate based on LIBOR. The Company has also entered into four-year and nine-year interest rate swap contracts with notional amounts of $200.0 and $300.0, respectively, to convert fixed interest on the Notes to a variable interest rate, based on LIBOR. In May 2000, Avon entered into an interest rate cap agreement with a notional amount of $150.0 expiring on May 31, 2001, to convert a variable interest rate, resulting from the interest rate swaps above, to a fixed interest rate. The cap rate under this contract is 7%. 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, 2000, the Company held foreign currency forward contracts with notional amounts totaling $393.7 (1999 - $290.2) and option contracts with notional amounts totaling $19.1 (1999 - $20.0) to hedge foreign currency items. All of these contracts mature within the next 13 months. Additionally, the Company also held forward contracts with notional amounts totaling $34.2 (1999 - $66.7) which do not qualify as hedging transactions under the current accounting definitions and, accordingly, have been marked to market. The mark-to-market adjustments on these forward contracts at December 31, 2000 and 1999, were not material. 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: 2000 1999 ---- ---- Buy Sell Buy Sell Argentine peso $ - $ 15.0 $ - $ - Brazilian real - 8.0 15.0 65.0 British pound 5.5 41.7 7.3 30.1 Canadian dollar - 10.8 - 23.8 Euro 151.3 104.1 82.9 10.0 French franc .9 - 10.9 - Indonesian rupiah .9 - 1.7 - Irish punt 2.8 - 1.7 - Italian lira 1.6 - 4.7 - Japanese yen 13.7 20.0 4.8 60.5 Mexican peso - 43.8 - 45.0 Polish zloty - 8.4 - - Taiwanese dollar - 7.0 - 3.0 Other currencies 2.3 9.2 6.2 4.3 ------ ------- ------- ------ Total $179.0 $ 268.0 $ 135.2 $241.7 ====== ======= ======= ====== At December 31, 2000, the Company has entered into forward contracts to purchase approximately 1,374,400 shares of Avon common stock at an average price of $37.09 per share at December 31, 2000. The contracts mature over the next 10 months and provide for physical or net share settlement to the Company. Accordingly, no adjustment for subsequent changes in fair value has been recognized. In accordance with the provisions of EITF 00-19, $51.0 of these contracts have been included in the accompanying Consolidated Balance Sheets in Share repurchase commitments with a corresponding decrease in Additional paid-in capital. 35 See Note 3 of the Notes to Consolidated Financial Statements. On March 1, 2001, the Company purchased 260,000 shares of Avon common stock at a purchase price of $11.5 under these contracts. 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, 2000. 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 quoted market prices. Forward stock purchases and foreign exchange forward and option contracts - The fair value of forward and option contracts is estimated based on quoted market prices from banks. Interest rate swap agreements - The fair value of interest rate swap agreements is estimated based on quotes from the market makers of these instruments and represents the estimated amounts that Avon would expect to receive or pay to terminate the agreements. 36 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: 2000 1999 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash and equivalents $ 122.7 $ 122.7 $ 117.4 $ 117.4 Grantor trust 70.1 70.1 75.4 75.4 Debt maturing within one year* (105.4) (105.4) (412.4) (412.4) Long-term debt, net of related discount or premium (1,108.8) (1,139.3) (701.1) (675.6) Share repurchase commitments (51.0) (14.8) - (12.3) Foreign exchange forward and option contracts .6 (4.2) 9.8 4.3 Interest rate swap and cap receivable (payable) .3 20.0 .5 (13.4) *Other financing activities are included in Debt maturing within one year in 1999. 9. 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: 1998 1999 2000 ---- ---- ---- Weighted Weighted Weighted Shares Average Shares Average Shares Average (in 000's) Price (in 000's) Price (in 000's) Price ---------- ----- ---------- ----- ---------- ----- Outstanding - beginning of year 7,070 $22.29 7,127 $25.46 8,106 $29.38 Granted 1,664 32.40 2,225 37.33 3,424 38.28 Exercised (1,412) 17.59 (1,152) 20.35 (1,702) 23.94 Forfeited (195) 26.87 (94) 31.14 (249) 31.68 ----- ----- ----- ----- ------ ----- Outstanding - end of year 7,127 $25.46 8,106 $29.38 9,579 $33.47 ===== ====== ===== ====== ====== ====== Options exercisable - end of year 2,943 $18.74 3,627 $23.32 4,241 $28.61 ===== ====== ===== ====== ====== ====== 37 The following table summarizes information about stock options outstanding at December 31, 2000: Options Outstanding Options Exercisable ------------------- ------------------- Exercise Shares Average Average Shares Average Price (in 000's) Price Term (in 000's) Price ----- ---------- ----- ---- ---------- ----- $13.13 - $23.00 1,142 $ 17.23 5 years 1,142 $ 17.23 $29.63 - $35.25 3,611 $ 31.54 7 years 2,532 $ 31.10 $38.25 - $54.81 4,826 $ 38.75 9 years 567 $ 40.43 The 1993 Stock Incentive Plan (the "1993 Plan"), and the Avon Products, Inc. 2000 Stock Incentive Plan (the "2000 Plan"), which replaced the 1993 Plan effective May 4, 2000, provide for several types of equity-based incentive compensation awards. Under the 2000 Plan, the maximum number of shares that may be awarded is 18,250,000 shares, of which no more than 6,000,000 shares may be used for restricted share and stock bonus grants. Under the 1993 Plan, the maximum number of shares that could be awarded was 14,100,000 shares, of which no more than 8,000,000 shares could be used for restricted share and stock bonus grants. Awards under either plan may be in the form of stock options, stock appreciation rights, dividend equivalent rights or performance unit awards. Stock options are granted at a price no less than fair market value on the date the option is granted. During 2000, 1999 and 1998, restricted shares with aggregate value and vesting and related amortization periods were granted as follows: 2000 - 261,700 valued at $10.2 vesting over one to three years; 1999 - 137,000 valued at $5.8 vesting over one to three years and 1998 - 499,000 valued at $16.0 vesting over one to three years. Effective January 1, 1997, the 1997 Long-Term Incentive Plan ("1997 LTIP") was authorized under the 1993 Plan. The 1997 LTIP provided for the grant of two forms of incentive awards, performance units for potential cash incentives and ten-year stock options. Performance units were earned over the three-year performance period (1997-1999), based on the degree of attainment of performance objectives. As of December 31, 1999, certain performance goals under the 1997 LTIP were achieved and, accordingly, cash incentives totaling approximately $31.0 were paid in 2000. Effective May 4, 2000, stock options were awarded under the 2000 Plan. Options are awarded annually over a three-year performance period and vest in thirds over the three-year period following each option grant date. As discussed above, these options are granted at the fair market value on the date the option is granted. Compensation expense under all plans in 2000 was $6.6 (1999 - $20.4; 1998 - $17.8). The unamortized cost of restricted shares as of December 31, 2000 was $10.0 (1999 - $6.8). The Company has adopted the disclosure provisions of FAS No. 123. Had compensation cost for the plans been based on the fair value at the grant dates for awards under those plans consistent with the method prescribed by FAS No. 123, net income and earnings per share (after the cumulative effect of the accounting change) would have been the pro forma amounts indicated below: 2000 1999 1998 ---- ---- ---- Pro forma net income $ 461.6 $ 275.2 $ 263.0 Pro forma earnings per share: Basic $ 1.94 $ 1.07 $ 1.00 Diluted $ 1.92 $ 1.05 $ .99 38 The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: 2000 1999 1998 ---- ---- ---- Risk-free interest rate 6.7% 5.4% 5.5% Expected life 5 years 5 years 5 years Expected volatility 40% 30% 25% - 30% Expected dividend yield 2.0% 2.0% 2.0% The weighted-average grant date fair values of options granted during 2000, 1999 and 1998 were $11.73, $10.09, and $7.67, respectively. 10. Shareholders' (Deficit) Equity Stock Split - On July 22, 1998, the Company declared a two-for-one stock split in the form of a 100% stock dividend which was distributed in September 1998 to shareholders of record as of the close of business on August 24, 1998. Accordingly, the stock split has been recognized by reclassifying the par value of the additional shares resulting from the split from retained earnings to common stock and treasury stock. All references to the number of share and per share amounts elsewhere in the consolidated financial statements and related footnotes have been restated to reflect the effect of the split for all periods presented. Share Rights Plan - Avon has a Share Rights Plan under which one right has been declared as a dividend for each outstanding share of its common stock. Each right, which is redeemable at $.005 at any time at Avon's option, entitles the shareholder, among other things, to purchase one share of Avon common stock at a price equal to one-half of the then current market price, if certain events have occurred. The right is exercisable if, among other events, one party obtains a beneficial ownership of 20% or more of Avon's voting stock. Stock Repurchase Programs - During 1994, Avon's Board authorized a stock repurchase program under which Avon could buy back up to 10% of its then outstanding common stock, or approximately 28.0 million shares. As of February 1997, when the plan ended, the cumulative number of shares repurchased was 25.3 million shares at a total cost of $424.4 which are included in Treasury stock. In February 1997, Avon's Board authorized a new repurchase program under which the Company was authorized to buy back up to $1,100.0 of its currently outstanding common stock through open market purchases over a period of up to five years. In the third quarter of 2000, when the program was completed, the cumulative number of shares repurchased was 33.7 million shares at a total cost of $1,060.0. In September 2000, Avon's Board approved a new share repurchase program under which the Company may buy up to $1,000.0 of its outstanding stock over the next five years. As of December 31, 2000, the Company repurchased approximately 0.6 million shares at a total cost of approximately $25.8 under this new program. Savings Plan - The Company offers a qualified defined contribution plan, the Avon Products, Inc. 401(k) Personal Savings Account, which allows eligible participants to contribute 1% to 20% of qualified compensation through payroll deductions. Effective July 1, 1998, the Company matches employee contributions dollar for dollar up to the first 3% of eligible compensation and $.50 for each $1.00 contributed from 4% to 6% of eligible compensation. Prior to July 1, 1998, the Company matched contributions in an amount equal to 25% of an employee's qualified contribution. In 2000 and 1999, matching contributions approximating $12.7 and $12.8, respectively, were made in cash, which was then used to 39 purchase Avon shares in the open market. In 1998, Avon contributed 62,520 shares of treasury stock to the employees' savings plan and recognized expense for its fair value. Board of Directors Remuneration - Effective May 1, 1997, the Company discontinued the Board retirement plan, which was applicable only to non-management directors. Directors retiring after that date have had the actuarial value of their accrued retirement benefits converted to a one-time grant of common stock which is restricted as to transfer until retirement. 52,786 shares were issued to directors as a result of the discontinuance of the plan. As a replacement for such plan, effective on and after May 1, 1997, each non-management director is annually granted options to purchase 4,000 shares of common stock, at an exercise price based on the fair market price of the stock on the date of grant. The annual grant made in 2000 and 1999 consisted of 34,000 and 36,000 options, respectively, with an exercise price of $38.25 and $51.38, respectively. Also effective as of May 1, 1997, the annual retainer paid to non-management directors was changed to consist of twenty-five thousand dollars cash plus an annual grant of shares having a value of twenty-five thousand dollars based on the average closing market price of the stock for the 10 days preceding the date of grant. These shares are also restricted as to transfer until the director retires from the Board. The annual grant made in 2000 and 1999 consisted of a total of 5,232 and 4,284 shares, respectively. 11. Employee Benefit Plans Retirement Plans - Avon and certain subsidiaries have contributory and noncontributory retirement plans for substantially all employees. Benefits under these plans are generally based on an employee's years of service and average compensation near retirement. Plans are funded on a current basis except where funding is not required. Plan assets consist primarily of equity securities, corporate and government bonds and bank deposits. Effective July 1998, the defined benefit retirement plan covering U.S.-based employees was converted to a cash balance plan with benefits determined by compensation credits related to age and service and interest credits based on individual account balances and prevailing interest rates. Additional amendments include a 10 year transitional benefit arrangement for certain employees covered under the existing defined benefit retirement plan. Postretirement Benefits - Avon provides health care and life insurance benefits for the majority of employees who retire under Avon's retirement plans in the United States and certain foreign countries. The cost of such health care benefits is shared by Avon and its retirees. In 2000, Avon adopted certain amendments to its retiree medical plans which increases retiree contributions, changes the prescription drug program and implements a future cap on Company contributions. 40 The following provides a reconciliation of benefit obligations, plan assets and funded status of these plans: Pension Postretirement Benefits Benefits -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- Change in benefit obligation: Beginning balance $(919.2) $(999.8) $(181.6) $(201.8) Service cost (36.5) (38.1) (1.9) (3.6) Interest cost (65.6) (67.6) (11.2) (13.4) Actuarial (loss) gain (6.8) 43.5 2.7 19.5 Benefits paid 84.3 155.1 13.7 12.1 Plan amendments (1.5) (2.9) 42.1 5.5 Settlements/special termination benefits 1.7 (17.2) - - Foreign currency changes 31.2 10.6 - - Other (1.8) (2.8) .2 .1 ------- ------- ------- ------- Ending balance $(914.2) $(919.2) $(136.0) $(181.6) ------- ------- ------- ------- Change in plan assets: Beginning balance $ 860.0 $ 863.1 $ - $ - Actual return on plan assets 7.1 113.7 - - Company contributions 39.9 36.1 13.7 12.1 Plan participant contributions 2.0 2.2 - - Benefits paid (84.3) (155.1) (13.7) (12.1) Foreign currency changes (21.3) 2.0 - - Settlements/special termination benefits (4.1) (2.0) - - ------- -------- ------- ------- Ending balance $ 799.3 $ 860.0 $ - $ - ------- -------- ------- ------- Funded status of the plan $(114.9) $ (59.2) $(136.0) $(181.6) Unrecognized actuarial loss(gain) 107.5 48.1 (27.6) (26.1) Unrecognized prior service cost 2.8 3.0 (44.3) (5.0) Unrecognized net transition obligation 2.1 1.6 .3 .4 ------- ------- ------- ------- Accrued benefit cost $ (2.5) $ (6.5) $(207.6) $(212.3) ======= ======= ======= ======= Amount recognized in the statements: Prepaid benefit $ 143.9 $ 138.8 $ - $ - Accrued liability (146.4) (145.3) (207.6) (212.3) Additional minimum liability (31.1) (22.0) - - Intangible asset 7.8 7.9 - - Accumulated other comprehensive income 23.3 14.1 - - ------- -------- ------- ------- $ (2.5) $ (6.5) $(207.6) $(212.3) ======= ======== ======= ======= At December 31, 2000 and 1999, the weighted-average discount rate used in determining the pension benefit obligation was 7.1%. At December 31, 2000 and 1999, the weighted-average discount rates used in determining the postretirement benefit obligation were 7.8% and 8.0%, respectively. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension and postretirement benefit plans with accumulated benefit obligations in excess of plan assets were $390.3, $349.0, and $40.1, respectively, as of December 31, 2000, and $428.8, $381.4, and $39.4, respectively, as of December 31, 1999. 41 Net periodic benefit cost for the years ended December 31 was determined as follows: Pension Postretirement Benefits Benefits -------- -------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- Service cost $ 36.5 $ 38.1 $ 35.4 $ 1.9 $ 3.6 $ 3.3 Interest cost 65.6 67.6 64.5 11.2 13.4 13.0 Expected return on plan assets (66.6) (69.6) (64.0) - - - Amortization of transition liability (.7) (.7) (6.8) - - - Amortization of prior service cost 1.0 .8 (.4) - - - Amortization of actuarial losses (gains) 5.6 10.2 12.3 (3.8) (.4) - Settlements or curtailments (1.2) 2.0 - - - - Special termination benefits 2.5 1.5 - - - - Other (.9) - .3 - - - ------ ------ ------ ----- --- ----- Net periodic benefit cost $ 41.8 $ 49.9 $ 41.3 $ 9.3 $16.6 $16.3 ====== ====== ====== ===== ===== ===== The weighted-average assumptions used to determine the data for the years ended December 31 are as follows: Pension Postretirement Benefits Benefits ---------------- ----------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ---- ---- ---- Discount rate 7.2% 6.8% 7.1% 8.0% 7.0% 7.2% Rate of compensation increase 4.0 4.0 4.0 4.5 4.5 4.5 Rate of return on assets 8.8 8.8 9.2 N/A N/A N/A For 2000, the assumed rate of future increases in the per capita cost of health care benefits (the health care cost trend rate) was 6.8% for pre-65 claims (6.4% 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 $ 1.8 $ 1.4 Effect on postretirement benefit obligation 17.6 14.5 Supplemental Retirement Program - Avon maintains a supplemental retirement program consisting of a Supplemental Executive Retirement Plan ("SERP") and a Benefits Restoration Pension Plan ("Restoration Plan") under which non-qualified supplemental pension benefits are paid to higher paid employees in addition to amounts received under Avon's qualified retirement plan which is subject to IRS limitations on covered compensation. The annual cost of this program has been included in the determination of the net periodic benefit cost shown above and in 2000 amounted to $10.2 (1999 - $10.1, 1998 - $6.1). The benefit obligation under this program at December 31, 2000 was $32.9 (1999 - $29.3) 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. 42 The cash surrender value of these policies at December 31, 2000 was $26.1 (1999 - - $24.2) and is held in a grantor trust. Avon has established a grantor trust to provide funding for the benefits payable under the SERP and SLIP and further provides for funding of obligations under Avon's Deferred Compensation Plan. 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, 2000, amounting to $96.2 (1999 - $99.6), consisted of a fixed income portfolio, a managed portfolio of equity securities and corporate-owned life insurance policies. These assets are included in Other assets. The equity securities and fixed income portfolio included in the grantor trust are classified as available-for-sale and recorded at current market value. In 2000, net unrealized gains and losses on these securities were recorded in Other Comprehensive Income (see Note 5). In 1999, the net unrealized gains and losses on these securities were not recorded as the carrying value approximated market. The cost, gross unrealized gains and losses and market value of the available-for-sale securities as of December 31, 2000, are as follows: Gross Gross Unrealized Unrealized Market Cost Gains Losses Value -------- ---------- ---------- -------- Equity Securities $ 44.3 $ 2.5 $ (12.2) $ 34.6 U.S. Government Bonds 1.5 - - 1.5 State and Municipal Bonds 30.9 .6 (.2) 31.3 Mortgage Backed 1.9 - - 1.9 Corporate Bonds .8 - - .8 -------- ---------- ---------- ------ Total $ 79.4 $ 3.1 $ (12.4) $ 70.1 ======== ========== =========== ====== Payments, proceeds and net realized gains from the purchases and sales of these securities totaled $98.3, $100.3 and $6.0, respectively, during 2000. For the purpose of determining realized gains and losses, the cost of securities sold was based on specific identification. 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, 2000, the accrued cost for postemployment benefits was $31.9 (1999 - $38.5) and is included in Employee Benefit Plans. 12. Segment Information The Company's reportable segments are based on geographic operations and include a North American business unit and International business units in Latin America, Europe and Pacific regions. The segments have similar business characteristics and each offers similar products through common customer access methods. The accounting policies of the reportable segments are the same as those described in Note 1 of the Notes to Consolidated Financial Statements. The Company evaluates the performance of its operating segments based on operating profits or losses. Segment revenues reflect direct sales of products to Representatives based on their geographic location. Intersegment sales and transfers are not significant. Each segment records direct expenses related to its employees and its operations. The Company does not allocate income taxes, foreign exchange gains or losses, or corporate overhead expenses to operating segments. Identifiable assets are primarily those directly used in the operations of each segment. Corporate and other identifiable assets include cash, investments, deferred tax assets and prepaid pension assets. 43 Summarized financial information concerning the Company's reportable segments as of December 31 is shown in the following table. Net sales and operating profit by reportable segment are presented on page 5. Total Assets: 2000 1999 1998 ---- ---- ---- North America U.S. $ 640.0 $ 536.9 $ 497.2 Other* 125.4 111.8 111.1 -------- -------- -------- Total 765.4 648.7 608.3 -------- -------- -------- International Latin America North 292.9 248.9 205.3 Latin America South 310.7 294.1 338.1 -------- ------- -------- Latin America 603.6 543.0 543.4 Europe 451.3 415.4 386.0 Pacific 399.8 411.2 379.5 -------- -------- -------- Total 1,454.7 1,369.6 1,308.9 -------- -------- -------- Corporate and other 581.2 484.1 516.3 -------- -------- -------- Total assets $2,801.3 $2,502.4 $2,433.5 ======== ======== ======== Capital Expenditures: 2000 1999 1998 ---- ---- ---- North America U.S. $ 67.6 $ 39.2 $ 32.1 Other* 8.7 8.6 8.6 -------- -------- -------- Total 76.3 47.8 40.7 -------- -------- -------- International Latin America North 17.5 37.6 17.5 Latin America South 24.6 15.8 19.1 -------- -------- ------- Latin America 42.1 53.4 36.6 Europe 47.1 39.6 28.8 Pacific 13.4 33.6 28.1 -------- -------- -------- Total 102.6 126.6 93.5 -------- -------- -------- Corporate and other 14.6 25.8 55.3 -------- -------- -------- Total capital expenditures $ 193.5 $ 200.2 $ 189.5 ======== ======== ======== Depreciation and Amortization: 2000 1999 1998 ---- ---- ---- North America U.S. $ 28.5 $ 23.7 $ 19.2 Other* 3.5 2.8 2.4 -------- -------- -------- Total 32.0 26.5 21.6 -------- -------- -------- International Latin America North 9.3 6.4 5.1 Latin America South 7.4 6.6 6.9 -------- -------- -------- Latin America 16.7 13.0 12.0 Europe 16.0 15.4 14.9 Pacific 16.9 16.1 11.2 -------- -------- -------- Total 49.6 44.5 38.1 -------- -------- -------- Corporate and other 14.3 11.7 12.3 -------- -------- -------- Total depreciation and amortization $ 95.9 $ 82.7 $ 72.0 ======== ======== ======== 44 Long-Lived Assets: 2000 1999 1998 ---- ---- ---- North America U.S. $ 264.4 $ 251.6 $ 215.9 Other* 41.3 14.5 23.9 ------- ------- ------- Total 305.7 266.1 239.8 ------- ------- ------- International Latin America North 81.4 73.7 47.2 Latin America South 73.5 59.7 62.1 ------- ------- ------- Latin America 154.9 133.4 109.3 Europe 176.7 152.9 135.0 Pacific 174.5 193.1 167.1 ------- ------- ------- Total 506.1 479.4 411.4 ------- ------- ------- Corporate and other 122.9 117.2 153.9 ------- ------- ------- Total long-lived assets $ 934.7 $ 862.7 $ 805.1 ======= ======= ======= *Includes operating information for Puerto Rico, Canada and Discovery Toys. The following table presents consolidated net sales by classes of principal products, as of December 31: 2000 1999 1998 ---- ---- ---- Cosmetics, fragrance and toiletries $3,501.3 $3,220.8 $3,181.1 Beauty Plus: Fashion Jewelry 323.4 313.4 294.5 Accessories 275.8 223.9 222.4 Apparel 476.3 474.5 469.1 Watches 68.6 49.8 42.1 -------- ------- -------- 1,144.1 1,061.6 1,028.1 Beyond Beauty and Other* 1,036.3 1,006.7 1,003.5 -------- -------- -------- Total net sales $5,681.7 $5,289.1 $5,212.7 ======== ======== ======== *Beyond Beauty and Other primarily includes home products, gift and decorative, health and nutrition, and candles. Foreign Exchange - Financial statement translation of subsidiaries operating in highly inflationary economies and foreign currency transactions resulted in losses (gains) in 2000 netting to $12.6 (1999 - $7.5; 1998 - $(1.1)), which are included in other expense (income), net and income taxes. In addition, cost of sales and expenses include the unfavorable impact of the translation of inventories and prepaid expenses at historical rates in countries with highly inflationary economies in 2000 of $3.2 (1999 - $7.1; 1998 - $15.8). 45 13. Leases and Commitments Minimum rental commitments under noncancellable operating leases, primarily for equipment and office facilities at December 31, 2000, consisted of the following: Year ---- 2001 $ 69.1 2002 52.8 2003 40.6 2004 33.1 2005 29.1 Later years 225.3 Sublease rental income (4.5) ------- Total $ 445.5 ======= Rent expense in 2000 was $85.4 (1999 - $84.5; 1998 - $84.7). Various construction and information systems projects were in progress at December 31, 2000, with an estimated cost to complete of approximately $130.0. 14. 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 $136.4 pretax ($111.9 net of tax, or $.43 per share on a basic and diluted basis) for the year ended December 31, 1999 and totaled $154.4 pretax ($122.8 net of tax, or $.46 per share on a basic and diluted basis) for the year ended December 31, 1998. Special and non-recurring charges by business segment are as follows: 1999 1998 ---- ---- North America $33.6 $84.6 Latin America 14.7 6.3 Europe 69.8 18.2 Pacific 11.8 27.3 Corporate 6.5 18.0 ---- ------ Total $136.4 $154.4 ====== ====== Special and non-recurring charges by category of expenditures are as follows for the years ended December 31: 1999 ---- Special Cost of Charges Sales Charge Total ------- ------------ ----- Employee severance costs $ 57.0 $ - $ 57.0 Inventories - 46.0 46.0 Writedown of assets to net realizable value 11.6 - 11.6 Recognition of foreign currency translation adjustment 9.8 - 9.8 Other 12.0 - 12.0 ------ ------ ------ $90.4 $ 46.0 $136.4 ===== ====== ====== 46 1998 ---- Special Cost of Charges Sales Charge Total ------- ------------ ----- Employee severance costs $ 56.4 $ - $ 56.4 Inventories - 37.9 37.9 Writedown of assets to net realizable value 31.8 - 31.8 Field program buy-out 14.4 - 14.4 Other 13.9 - 13.9 ------ ------ ------ $116.5 $ 37.9 $154.4 ====== ====== ====== Employee severance costs are expenses, both domestic and international, associated with the realignment of the Company's global operations. Certain employee severance costs were accounted for in accordance with the Company's existing FAS 112 ("Employers' Accounting for Postemployment Benefits") severance plans. Remaining severance costs were accounted for in accordance with other accounting literature. The workforce was reduced by approximately 3,700 employees, or 9% of the total. Approximately one-half of the terminated employees related to the facility closures. As of December 31, 2000, all employees under the program have been terminated. Inventory-related charges represent losses to write down the carrying value of non-strategic inventory prior to disposal. The 1999 charges primarily result from a new business strategy for product dispositions which fundamentally changes the way the Company markets and sells certain inventory. This new strategy, approved and effective in March 1999, is meant to complement other redesign initiatives, with the objective of reducing inventory clearance sales, building core brochure sales and building global brands. The 1998 charges resulted from the closure of facilities, discontinuation of certain product lines, size-of-line reductions and a change in strategy for product dispositions. The 1999 writedown of assets (primarily fixed and other assets) mainly relates to the restructuring of operations in Western Europe, including the closure of a jewelry manufacturing facility in Ireland. By centralizing certain key functional areas and exiting unprofitable situations, the Company plans to increase operating efficiencies and, ultimately, profit growth in the long term. The 1998 writedown 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, writedowns include assets (primarily fixed and intangible assets) associated with the divestiture of the Discovery Toys business unit, which was effective January 15, 1999. The field program buy-out represents costs to terminate the Company's prior representative recruitment program in the U.S. The recognition of a foreign currency translation adjustment relates to the closure of the jewelry manufacturing facility in Ireland. "Other" category primarily represents lease and contract termination costs, litigation costs, and other costs associated with the facility closures. 47 The liability balance included in other accrued liabilities as of December 31, 2000 and 1999, is as follows: Special Cost of Charges Sales Charge Total ------- ------------ ----- Balance at December 31, 1998 $ 28.5 $ - $ 28.5 Provision 90.4 46.0 136.4 Cash expenditures (67.1) - (67.1) Non-cash write-offs (25.6) (46.0) (71.6) ----- ----- ----- Balance at December 31, 1999 26.2 - 26.2 Cash expenditures (18.3) - (18.3) ------ ----- ----- Balance at December 31, 2000 $ 7.9 $ - $ 7.9 ====== ===== ====== The balance at December 31, 2000, relates primarily to employee severance costs that will be paid in accordance with the original plan during 2001. 15. Asset Impairment Charge In the first quarter of 1999, Avon originally recorded a Special charge of $151.2 pretax, which included the write off of $14.8 in pre-tax costs ($10.0 after tax) associated with a portion of the order management software system known as the FIRST project. The balance of the FIRST project's development costs had been carried as an asset until the third quarter of 2001, when Avon recorded a pre-tax charge of $23.9 ($14.5 after tax) to write off the carrying value of costs related to that project. The non-cash charge recorded in the third quarter of 2001 included software development costs, certain hardware, software interfaces and other related costs. Prior to the write off, the capitalized software was included in Property, plant and equipment, at cost, and Other assets on the Consolidated Balance Sheet. The decision to abandon the FIRST project was based on various factors, including project management and implementation issues and costs, costs for ongoing support, and changes in Avon business strategies. The FIRST project, and the Special charge reported by Avon in the first quarter of 1999 that included the write off of $14.8 in pre-tax costs associated with FIRST, were the subject of a formal investigation by the SEC commenced in August 2000. Avon has settled that matter with the SEC and, as part of that settlement, has restated its financial statements to reflect the additional write off as of March 31, 1999 of all capitalized costs ($23.3 pretax, and $14.0 after tax) associated with the FIRST project as of that date for a total first quarter write off of $38.1 pretax ($24.0 after tax). Avon has also reversed the charge recorded in the third quarter of 2001, and has restated all other FIRST-related activity recorded during 1999-2002. See the Introductory Note - Restatements and Note 2 of the Notes to Consolidated Financial Statements, "Restatements and Accounting Changes". 16. 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). While it is not possible to predict the outcome of litigation, Avon has rejected the assertions in this case, 48 believes it has meritorious defenses to the claims and is vigorously contesting this lawsuit. It is anticipated that a trial may take place in late 2001. In the opinion of Avon's management, based on its review of the information available at this time, the total cost of resolving such contingencies at December 31, 2000 should not have a material adverse impact on Avon's consolidated financial position, results of operations or cash flows. 17. Subsequent Event On February 1, 2001, Avon's Board approved an increase in the quarterly cash dividend to $.19 per share from $.185. The first dividend at the new rate will be paid on March 1, 2001, to shareholders of record on February 15, 2001. On an annualized basis, the new dividend rate will be $.76 per share. 49 Report of Management The accompanying consolidated financial statements of Avon Products, Inc. have been prepared by management in conformity with generally accepted accounting principles and necessarily include amounts that are based on judgments and estimates. The audit report of PricewaterhouseCoopers LLP, independent accountants, on these financial statements is the result of their audits of these consolidated financial statements, which were performed in accordance with generally accepted auditing standards. Avon maintains an internal control structure and related systems, policies and procedures designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with appropriate authorization and accounting records may be relied upon for the preparation of financial information. Avon also maintains an internal audit department that evaluates and formally reports to management on the adequacy and effectiveness of controls, policies and procedures. The audit committee of the board of directors, comprised solely of outside directors, has an oversight role in the area of financial reporting and internal controls. This committee meets several times during the year with management, PricewaterhouseCoopers LLP and the internal auditors to monitor the proper discharge of each of their respective responsibilities. PricewaterhouseCoopers LLP and the internal auditors have free access to management and to the audit committee to discuss the results of their activities and the adequacy of controls. It is management's opinion that Avon's policies and procedures, reinforced by the internal control structure, provide reasonable assurance that operations are managed in a responsible and professional manner with a commitment to the highest standard of business conduct. Andrea Jung Robert J. Corti Chief Executive Officer Executive Vice President, Chief Financial Officer 50 Report of Independent Auditors To the Board of Directors and Shareholders of Avon Products, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and changes in shareholders' equity, after the restatement described in Note 2, present fairly, in all material respects, the financial position of Avon Products, Inc. at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Avon's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 of the Notes to the Consolidated Financial Statements, the Company changed its method of accounting for revenue recognition as a result of the adoption of Staff Accounting Bulletin No. 101, "Revenue Recognition." The accompanying consolidated financial statements for the years ended December 31, 2000 and 1999 have been restated as discussed in Note 2. PricewaterhouseCoopers LLP New York, New York January 25, 2001, except for Notes 2 and 15 as to which the date is July 31, 2002 51 Eleven-Year Review Avon Products, Inc. In millions, except per share and employee data 2000 1999 1998 1997 ---- ---- ---- ---- (Restated-Note 2) Income data Net sales $5,681.7 $5,289.1 $5,212.7 $5,079.4 Other revenue 40.9 (1) 38.8(1) 35.0(1) - Total revenue 5,722.6 5,327.9 5,247.7 5,079.4 Operating profit (4) 789.9 523.1 473.2 537.8 Interest expense (4) 84.7 43.2 34.7 35.5 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 692.2 480.3(8) 455.9(8) 534.9 Income from continuing operations before minority interest and cumulative effect of accounting changes 490.0 286.6(8) 265.1(8) 337.0 Income from continuing operations before cumulative effect of accounting changes 485.8 286.6(8) 270.0(8) 338.8 (Loss)income from discontinued operations, net - - - - Cumulative effect of accounting changes, net (6.7)(2) - - - Net income 479.1 286.6(8) 270.0(8) 338.8 Earnings (loss) per share - basic (5) (6) Continuing operations $ 2.04 $ 1.12(8)$ 1.03(8) $ 1.28 Discontinued operations - - - - Cumulative effect of accounting changes (.03) - - - Net income 2.01 1.12(8) 1.03(8) 1.28 Earnings (loss) per share - diluted (5) (6) Continuing operations $ 2.02 (3) $ 1.10(8)$ 1.02(8) $ 1.27 Discontinued operations - - - - Cumulative effect of accounting changes (.03) - - - Net income 1.99 (3) 1.10(8) 1.02(8) 1.27 Cash dividends per share Common $ .74 $ .72 $ .68 $ .63 Preferred - - - - Balance sheet data Working capital $ 186.4 $ (375.0) $ 11.9 $ (11.9) Capital expenditures 193.5 200.2 189.5 169.4 Property, plant and equipment, net 765.7 732.1 669.9 611.0 Total assets 2,811.3 2,512.8 2,433.5 2,272.9 Debt maturing within one year 105.4 306.0 55.3 132.1 Long-term debt 1,108.2 701.4 201.0 102.2 Total debt 1,213.6 1,007.4 256.3 234.3 Shareholders' (deficit) equity (230.9) (421.9) 285.1 285.0 Number of employees United States 9,800 9,700 8,000 8,100 International 33,200 30,800 25,900 26,900 -------- ------- -------- -------- Total employees (7) 43,000 40,500 33,900 35,000 ========= ======= ======== ======== 52 1996 1995 1994 1993 ---- ---- ---- ---- Income data Net sales $4,814.2 $4,492.1 $4,266.5 $3,844.1 Other revenue - - - - Total revenue 4,814.2 4,492.1 4,266.5 3,844.1 Operating Profit (4) 538.0 500.8 489.5 427.4 Interest expense (4) 33.2 34.6 44.7 39.4 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 510.4 465.0 433.8 394.6 Income from continuing operations before minority interest and cumulative effect of accounting changes 319.0 288.6 270.3 243.8 Income from continuing operations before cumulative effect of accounting changes 317.9 286.1 264.8 236.9 (Loss)income from discontinued operations, net - (29.6) (23.8) 2.7 Cumulative effect of accounting changes, net - - (45.2)(9) (107.5)(9) Net income 317.9 256.5 195.8 132.1 Earnings (loss) per share - basic (5) (6) Continuing operations $ 1.19 $ 1.05 $ .94 $ .82 Discontinued operations - (.11) (.09) .01 Cumulative effect of accounting changes - - (.16) (.37) Net income 1.19 .94 .69 .46 Earnings(loss) per share - diluted (5) (6) Continuing operations $ 1.18 $ 1.05 $ .93 $ .82 Discontinued operations - (.11) (.08) .01 Cumulative effect of accounting changes - - (.16) (.37) Net income 1.18 .94 .69 .46 Cash dividends per share Common $ .58 $ .53 $ .48 $ .43 Preferred - - - - Balance sheet data Working capital $ (41.7) $ (30.3) $ 9.3 $ 23.1 Capital expenditures 103.6 72.7 99.9 58.1 Property, plant and equipment, net 566.6 537.8 528.4 476.2 Total assets 2,222.4 2,052.8 1,978.3 1,918.7 Debt maturing within one year 97.1 47.3 61.2 70.4 Long-term debt 104.5 114.2 116.5 123.7 Total debt 201.6 161.5 177.7 194.1 Shareholders' (deficit) equity 241.7 192.7 185.6 314.0 Number of employees United States 7,800 8,000 7,900 8,000 International 25,900 23,800 22,500 21,500 --------- -------- -------- -------- Total employees (7) 33,700 31,800 30,400 29,500 ========= ======== ======== ========
53 1992 1991 1990 ---- ---- ---- Income data Net sales $3,660.5 $3,441.0 $3,291.6 Other revenue - - - Total revenue 3,660.5 3,441.0 3,291.6 Operating Profit (4) 339.9 430.9 409.9 Interest expense (4) 38.4 71.6 74.1 Income from continuing operations before taxes, minority interest and cumulative effect of accounting changes 290.0(10) 352.9 305.6 Income from continuing operations before minority interest and cumulative effect of accounting changes 169.4(10) 209.3 180.3 Income from continuing operations before cummulative effect of accounting changes 164.2(10) 204.8 174.1 (Loss)income from discontinued operations, net 10.8 (69.1) 21.2 Cumulative effect of accounting changes, net - - - Net income 175.0(10) 135.7 195.3 Earnings (loss) per share - basic (5) (6) Continuing operations $ .57(10) $ .65(11) $ .61 Discontinued operations .04 (.24) .09 Cumulative effect of accounting changes - - - Net income .61(10) .41(11) .70 Earnings (loss) per share - diluted (5) (6) Continuing operations $ .57(10) $ .71(11) $ .58 Discontinued operations .04 (.24) .07 Cumulative effect of accounting changes - - - Net income .61(10) .47(11) .65 Cash dividends per share Common $ .38 $ 1.10(12) $ .25 Preferred - .253 .50 Balance sheet data Working capital $ (99.5) $ (135.3) $ 71.6 Capital expenditures 62.7 61.2 36.3 Property, plant and equipment, net 476.7 468.5 467.2 Total assets 1,692.6 1,693.3 2,010.1 Debt maturing within one year 37.3 143.8 207.1 Long-term debt 177.7 208.1 334.8 Total debt 215.0 351.9 541.9 Shareholders' (deficit) equity 310.5 251.6 393.4 Number of employees United States 8,700 9,200 9,500 International 20,700 20,900 20,300 ------- -------- -------- Total employees (7) 29,400 30,100 29,800 ======= ======== ======== 54 (1) For the year ended December 31, 2000, the Company adopted the provisions of Emerging Issues Task Force ("EITF") 00-10, "Accounting for Shipping and Handling Fees and Costs," which requires that amounts billed to customers for shipping and handling fees be classified as revenues. 1999 and 1998 have been restated to reflect shipping and handling fees, previously reported in Marketing, distribution and administrative expenses, in Other revenue in the Consolidated Statements of Income. (2) For the year ended December 31, 2000, the Company recorded a charge of $6.7 million, after tax, to reflect the adoption of Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." This charge is reflected as a cumulative effect of an accounting change in the Consolidated Statements of Income. (3) For purposes of calculating diluted earnings per share for the year ended December 31, 2000, after tax interest expense of $4.5, applicable to Convertible Notes, has been added back to net income. (4) Certain reclassifications have been made to conform to the current full year presentation. (5) Two-for-one stock splits were distributed in September 1998 and June 1996. All per share data in this report, unless indicated, have been restated to reflect the splits. (6) Effective for the year ended December 31, 1997, the Company adopted FAS No. 128, "Earnings per Share." FAS No. 128 establishes standards for computing and presenting earnings per share ("EPS") and replaces the presentation of previously disclosed EPS with both basic and diluted EPS. Based upon the Company's capitalization structure, the EPS amounts calculated in accordance with FAS No. 128 approximated the Company's EPS amounts in accordance with Accounting Principles Board Opinion No. 15, "Earnings per Share." All prior period EPS data have been restated in accordance with FAS No. 128. (7) Avon's calculation of full-time equivalents, or number of employees, was revised in 1999. Restatements of prior year data are not available, and therefore, year-over-year comparisons are not meaningful. Approximately 25% of Avon's U.S. employees are men. Men hold approximately 15% of all U.S. officer and manager positions, and approximately 10% of all U.S. office and clerical positions. (8) In 1998, Avon began a worldwide business process redesign program in order to streamline operations and recorded special and non-recurring charges of $154.4 ($122.8 net of tax, or $.46 per share on a basic and diluted basis). In 1999, special and non-recurring charges related to this program totaled $136.4 ($111.9 net of tax, or $.43 per share on a basic and diluted basis). (9) 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." (10) 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. 55 (11) For 1991, in management's opinion, per share amounts assuming dilution, even though the result is antidilutive, provide the most meaningful comparison of per share data because they show the full effect of the conversion of 72 preferred shares into approximately 51.84 common shares on June 3, 1991. (12) Includes special dividend of $.75 paid in 1991. 56 -----END PRIVACY-ENHANCED MESSAGE-----