-----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, WAGruz7yUSOkTz243/0WP7pJrApwXU7W6U5g1n5H8B8hBMCxQOeOWu80nRA3nXQ/ XpYtWfPwpk2iwmQ/Dln3rQ== 0000950103-03-001650.txt : 20030811 0000950103-03-001650.hdr.sgml : 20030811 20030811160244 ACCESSION NUMBER: 0000950103-03-001650 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030811 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04881 FILM NUMBER: 03834653 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-Q 1 aug0803_10q.htm 10-Q


CONFORMED COPY

FORM 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

[x]   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2003

 

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 Incorporation or organization) (I.R S. EmployerIdentification No.)

 

 

 

 

1345 Avenue of the Americas, New York, N.Y.

10105-0196

(Address of principal executive offices)

(Zip Code)

 

 

(212) 282-5000

(Telephone Number, including area code)

 

 

    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 whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).    Yes X     No ___

   The number of shares of Common Stock (par value $.25) outstanding at July 31, 2003 was 236,211,769.



 

Table of Contents

 Page
Numbers
Part I. Financial Information
Item 1. Financial Statements (Unaudited)  
     
  Consolidated Statements of Income
   Three Months Ended June 30, 2003 and June 30, 2002
3
     Six Months Ended June 30, 2003 and June 30, 2002 4
     
  Consolidated Balance Sheets
   
June 30, 2003 and December 31, 2002
5
     
  Consolidated Statements of Cash Flows
    Six Months Ended June 30, 2003 and June 30, 2002
6
     
  Notes to Consolidated Financial Statements 7-23
     
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24-36
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
     
Item 4. Controls and Procedures 37
     
     
Part II. Other Information
Item 1. Legal Proceedings 38
     
Item 4. Submission of Matters to a Vote of Security Holders 38
     
Item 6. Exhibits and Reports on Form 8-K 39
     
Signature 40

 

2


      PART I.     FINANCIAL INFORMATION
             
ITEM 1. Financial Statements            
             
AVON PRODUCTS, INC.            
CONSOLIDATED STATEMENTS OF INCOME            
(Unaudited)            
(In millions, except per share data)            
             
    Three months ended  
    June 30,  
 
 
  2003   2002  
 
 

 

             
Net sales $ 1,639.8   $ 1,513.5  
             
Other revenue   16.2     13.7  
 
 
 
Total revenue   1,656.0     1,527.2  
             
Costs, expenses and other:            
   Cost of sales   620.1     588.6  
Marketing, distribution and administrative expenses   756.1     696.2  
 
 
 
Operating profit   279.8     242.4  
             
   Interest expense   10.6     12.9  
   Interest income   (3.0 )   (3.7 )
   Other expense (income), net   9.8     (8.3 )
 
 
 
Total other expense, net   17.4     .9  
 
 
 
             
             
Income before taxes and minority interest   262.4     241.5  
Income taxes   88.1     84.0  
 
 
 
Income before minority interest   174.3     157.5  
Minority interest   (2.8 )   (2.5 )
 
 
 
Net income $ 171.5   $ 155.0  
 
 
 
             
Earnings per share:            
   Basic $ .73   $ .66  
   Diluted $ .71   $ .64  
             
Weighted-average shares outstanding:            
   Basic   234.90     236.43  
   Diluted   244.29     246.28  

The accompanying notes are an integral part of these statements.

3


 

AVON PRODUCTS, INC.            
CONSOLIDATED STATEMENTS OF INCOME            
(Unaudited)            
(In millions, except per share data)            
             
  Six months ended  
  June 30,  
 
 
  2003   2002  
 
 
 
         
Net sales $ 3,105.5   $ 2,885.6  
             
Other revenue   31.9     25.2  
 
 
 
Total revenue   3,137.4     2,910.8  
             
Costs, expenses and other:            
   Cost of sales   1,194.3     1,129.5  
   Marketing, distribution and administrative expenses   1,499.7     1,386.3  
 
 
 
Operating profit   443.4     395.0  
             
   Interest expense   20.5     26.3  
   Interest income   (5.5 )   (8.0 )
   Other expense (income), net   11.6     (14.3 )
 
 
 
Total other expense, net   26.6     4.0  
 
 
 
             
Income before taxes and minority interest   416.8     391.0  
Income taxes   142.1     136.1  
 
 
 
Income before minority interest   274.7     254.9  
Minority interest   (4.3 )   (3.6 )
 
 
 
Net income $ 270.4   $ 251.3  
 
 
 
 
 
             
Earnings per share:            
   Basic $ 1.15   $ 1.06  
   Diluted $ 1.13   $ 1.04  
             
             
Weighted-average shares outstanding:            
   Basic   235.00     236.57  
   Diluted   244.05     246.30  

The accompanying notes are an integral part of these statements.

4


 

AVON PRODUCTS, INC.            
CONSOLIDATED BALANCE SHEETS            
(Unaudited)            
(In millions)            
             
  June 30,   December 31,  
  2003   2002  
 
 
 
ASSETS        
       
Current assets:        
Cash and cash equivalents $ 760.8   $ 606.8  
Accounts receivable   543.8     555.4  
Inventories   678.7     614.7  
Prepaid expenses and other   287.2     271.3  
 
 
 
Total current assets $ 2,270.5   $ 2,048.2  
 
 
 
             
Property, plant and equipment, at cost   1,622.4     1,548.4  
Less accumulated depreciation   826.9     779.3  
 
 
 
    795.5     769.1  
Other assets   531.7     510.2  
 
 
 
Total assets $ 3,597.7   $ 3,327.5  
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)            
           
Current liabilities:            
Debt maturing within one year $ 509.9   $ 605.2  
Accounts payable   367.9     379.9  
Accrued compensation   113.1     175.7  
Other accrued liabilities   323.8     336.6  
Sales and taxes other than income   116.0     125.1  
Income taxes   317.5     353.0  
 
 
 
Total current liabilities   1,748.2     1,975.5  
 
 
 
Long-term debt   1,118.6     767.0  
Employee benefit plans   530.5     560.4  
Deferred income taxes   35.2     35.4  
Other liabilities   125.2     116.9  
             
Contingencies (Note 6)            
             
Shareholders’ equity (deficit):            
Common stock   90.0     89.6  
Additional paid-in capital   1,077.0     1,019.5  
Retained earnings   1,907.1     1,735.3  
Accumulated other comprehensive loss   (761.5 )   (791.4 )
Treasury stock, at cost (2,272.6 ) (2,180.7 )
 
 
 
Total shareholders’ equity (deficit)   40.0     (127.7 )
 
 
 
Total liabilities and shareholders’ equity (deficit) $ 3,597.7   $ 3,327.5  
 
 
 

The accompanying notes are an integral part of these statements.

5


 

AVON PRODUCTS, INC.            
CONSOLIDATED STATEMENTS OF CASH FLOWS            
(Unaudited)            
(In millions)            
  Six months ended  
  June 30,  
 
 
  2003   2002  
 
 
 
Cash flows from operating activities:        
Net income $ 270.4   $ 251.3  
Adjustments to reconcile net income to net cash            
   provided by operating activities:            
Payments related to the Special Charges (Note 8)   (21.8 )   (14.7 )
Asset write-downs (Note 12)   12.1     -  
Depreciation and amortization   60.2     60.7  
Provision for doubtful accounts   57.2     50.4  
Amortization of debt discount   8.5     7.6  
Foreign exchange losses (gains)   12.4     (20.8 )
Deferred income taxes   4.0     5.1  
Other   (.2 )   5.5  
Changes in assets and liabilities:            
      Accounts receivable   (23.1 )   (47.9 )
      Inventories   (48.9 )   (76.3 )
      Prepaid expenses and other   (11.5 )   (6.1 )
      Accounts payable and accrued liabilities   (104.2 )   (81.0 )
      Income and other taxes   (55.8 )   1.8  
      Noncurrent assets and liabilities   (45.9 )   8.1  
   
 
 
Net cash provided by operating activities   113.4     143.7  
   
 
 
Cash flows from investing activities:            
Capital expenditures   (61.8 )   (38.2 )
Disposal of assets   11.7     .8  
Purchases of investments   (13.9 )   (24.6 )
Proceeds from sales of investments   13.7     18.6  
Other investing activities   (19.0 )   (.2 )
 
 
 
Net cash used in investing activities   (69.3 )   (43.6 )
 
 
 
Cash flows from financing activities:            
Cash dividends   (100.9 )   (96.8 )
Book overdraft   -     (.9 )
Debt, net (maturities of three months or less)   1.0     1.7  
Proceeds from short-term debt   29.5     35.1  
Proceeds from long-term debt   249.2     -  
Retirement of short-term debt   (37.4 )   (48.3 )
Retirement of long-term debt   -     -  
Repurchase of common stock   (92.8 )   (108.1 )
Proceeds from exercise of stock options, net of taxes   52.8     49.1  
   
 
 
Net cash provided by (used in) financing activities   101.4     (168.2 )
   
 
 
Effect of exchange rate changes on cash and equivalents.   8.5     (11.0 )
   
 
 
Net increase (decrease) in cash and equivalents   154.0     (79.1 )
Cash and equivalents at beginning of period   606.8     508.5  
   
 
 
Cash and equivalents at end of period $ 760.8   $ 429.4  
 
 
 

The accompanying notes are an integral part of these statements.

6


 

AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

 

1.    ACCOUNTING POLICIES

Basis of Presentation

     The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and the Notes thereto contained in Avon’s 2002 Annual Report to Shareholders. The interim statements are unaudited but include all adjustments, consisting of normal recurring adjustments, that management considers necessary to fairly present the results for the interim periods. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles.

     To conform to the 2003 presentation, certain reclassifications were made to the prior periods’ consolidated financial statements and the accompanying footnotes.

Consolidation of Variable Interest Entities

 

 

     In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The consolidation requirements of FIN 46 are effective immediately for variable interest entities created after January 31, 2003, and July 1, 2003, for variable interest entities created prior to February 1, 2003. Avon has a 40% interest in Mirabella Realty Company, (“Mirabella”), a Philippine company formed to purchase land in the Philippines. The remaining 60% interest is held by Company-sponsored retirement plans. The investment is currently accounted for under the equity method. Avon holds a variable interest in Mirabella because Avon guarantees $2.4 of Mirabella’s third-party borrowings. As a result, Mirabella will be consolidated beginning July 1, 2003. Mirabella’s net assets totaled $1.5 at June 30, 2003, and consist primarily of land of $4.0 and debt of $2.4. The Company does not expect the consolidation of Mirabella to have a material impact on the Consolidated Financial Statements.

 
   

Financial Instruments with Characteristics of both Liabilities and Equity

     In May 2003, the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” ("FAS No. 150"). This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. This Statement became effective on May 31, 2003, for financial instruments entered into or modified after that date, and July 1, 2003, for existing financial instruments. Currently, Avon does not have any financial instruments with characteristics of both liabilities and equity.

 

7


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

 

Amendment of Statement 133  

    In April 2003, the FASB issued FAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("FAS No. 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS No. 133. FAS No. 149 became effective on June 30, 2003, for contracts entered into or modified after that date. The provisions of FAS No. 149 are currently being evaluated, but management believes its adoption will not have a material impact on the Consolidated Financial Statements.

2.    EARNINGS PER SHARE

       Basic earnings per share (“EPS”) were computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted EPS were calculated to give effect to all potentially dilutive common shares that were outstanding during the period.

     For the three and six-months ended June 30, 2003 and 2002, the components of basic and diluted earnings per share were as follows:

  Three Months   Six Months  
  Ended June 30,   Ended June 30,  
  2003   2002   2003   2002  
 
 
 
 
 
Numerator:                        
Net income for purposes of computing                        
Basic EPS $ 171.5   $ 155.0   $ 270.4   $ 251.3  
                         
Interest expense on convertible notes,                        
   net of taxes   2.6     2.6     5.3     5.2  
   
   
   
   
 
Net income for purposes of computing                        
   diluted EPS $ 174.1   $ 157.6   $ 275.7   $ 256.5  
 
 
 
 
 
Denominator:                        
                       
Basic EPS weighted-average shares                        
   outstanding   234.90     236.43     235.00     236.57  
Dilutive effect of:                        
   Assumed conversion of                        
   stock options and settlement of                        
   forward contracts (1)   2.43     2.89     2.09     2.77  
Assumed conversion of convertible notes 6.96     6.96     6.96     6.96  
 
   
   
   
 
                         
Diluted EPS adjusted weighted-average                        
   shares outstanding   244.29     246.28     244.05     246.30  
   
   
   
   
 
                         
   Basic EPS $ .73   $ .66   $ 1.15   $ 1.06  
   Diluted EPS $ .71   $ .64   $ 1.13   $ 1.04  
                         
(1) At June 30, 2002, stock options totaling 0.3 million shares were not included in the earnings per share calculation since their impact is anti-dilutive.

     Avon purchased approximately 1.7 million shares of Avon common stock for $92.8 during the first six months of 2003, as compared to approximately 2.1 million shares of Avon common stock for $109.5 during the first six months of 2002. At June 30, 2002, 27,094 shares repurchased for $1.4 were not settled until July 2002.

8


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

3.     INVENTORIES

   
June 30,
 
December 31,
 
   
2003
 
2002
 
   
 
 
  Raw materials $ 168.6   $ 165.6  
  Finished goods   510.1     449.1  
   
 
 
    $ 678.7   $ 614.7  
   
 
 
 
 
           
4.     DIVIDENDS

       Cash dividends paid per share of common stock were $.21 and $.42 for the three and six months ended June 30, 2003, respectively, and $.20 and $.40 for the corresponding 2002 periods, respectively. On January 31, 2003, Avon increased the annualized dividend rate to $.84 from $.80.

5.     STOCK-BASED COMPENSATION

       Avon applies the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees,” and released interpretations in accounting for its long-term stock-based incentive plans. No compensation cost related to grants of stock options was reflected in Net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Compensation cost related to grants of restricted stock is equal to the quoted market price of Avon’s stock at the measurement date and is amortized to expense over the vesting period. Compensation expense under grants of restricted stock for the three months ended June 30, 2003 and 2002, was $1.7 in both periods, and for the six months ended June 30, 2003 and 2002, was $3.5 and $3.9, respectively. The effects on Net income and Earnings per share if Avon had applied the fair value recognition provisions of FAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based compensation for three and six months ended June 30, 2003 and 2002, were as follows:

    Three Months   Six Months  
    Ended June 30,   Ended June 30,  
    2003     2002   2003     2002  
   
 
                         
                         
Net income, as reported $ 171.5  
$
155.0   $ 270.4   $ 251.3  
Less: Stock-based compensation                        
   expense determined under                        
   FAS No. 123, net of tax   (6.7 )   (8.4 )   (14.3 )   (14.2 )
   
   
   
   
 
Pro forma Net income $ 164.8   $ 146.6   $ 256.1   $ 237.1  
 
 
   
 
 
Earnings per share:                        
   Basic – as reported $ .73   $ .66   $ 1.15   $ 1.06  
   Diluted – as reported $ .71   $ .64   $ 1.13   $ 1.04  
   Basic – pro forma $ .70   $ .62   $ 1.09   $ 1.00  
   Diluted – pro forma $ .69   $ .61   $ 1.07   $ .99  

6.     CONTINGENCIES

       Avon is a defendant in a class action suit commenced in 1991 on behalf of certain classes of holders of Avon’s Preferred Equity-Redemption Cumulative Stock (“PERCS”). Plaintiffs allege various contract and securities law claims related to the PERCS (which were fully redeemed in 1991) and seek aggregate damages of approximately $145.0, plus interest. A

9


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

trial of this action took place in the United States District Court for the Southern District of New York and concluded in November 2001. At the conclusion of the trial, the judge reserved decision in the matter. Avon believes it presented meritorious defenses to the claims asserted. However, it is not possible to predict the outcome of litigation and it is reasonably possible that the trial, and any possible appeal, could be decided unfavorably. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome but, under some of the damage theories presented, an adverse award could be material to the Consolidated Financial Statements.

     Avon is a defendant in an action commenced in the Supreme Court of the State of New York by Sheldon Solow d/b/a Solow Building Company, the landlord of the Company’s former headquarters in New York City. Plaintiff seeks aggregate damages of approximately $80.0, plus interest, for the Company’s alleged failure to restore the leasehold premises at the conclusion of the lease term in 1997. A trial of this matter was scheduled for February 2002, but was stayed pending the determination of (i) an interlocutory appeal by plaintiff of an order that denied the plaintiff’s motion for summary judgment and granted partial summary judgment in favor of the Company on one of the plaintiff’s claims; and (ii) an appeal by plaintiff of a decision in an action against another former tenant that dismissed plaintiff’s claims after trial. In January 2003, both appeals were decided against the plaintiff. Plaintiff filed motions for leave to appeal both decisions, which were denied. A trial has not yet been scheduled. While it is not possible to predict the outcome of litigation, management believes that there are meritorious defenses to the claims asserted and that this action should not have a material adverse effect on the Consolidated Financial Statements. This action is being vigorously contested.

     Avon Products Foundation, Inc. (the “Avon Foundation”) is a defendant in an arbitration proceeding brought by Pallotta TeamWorks (“Pallotta”) on September 3, 2002, before Judicial Arbitration and Mediation Services, Inc. (“JAMS”). Pallotta asserts claims of breach of contract, misappropriation of opportunity, tortious interference with prospective contractual arrangement and unfair competition arising out of the Avon Foundation’s decision to use another party to conduct breast cancer fundraising events, and seeks unspecified damages and attorneys’ fees. The arbitrator dismissed Pallotta’s misappropriation claim in January 2003, its unfair competition claim in February 2003 and its tortious interference claim in July 2003. A hearing on the remaining claim commenced in July 2003. The Avon Foundation believes that it has meritorious defenses to the claims asserted by Pallotta and has filed a number of counterclaims, and initiated a separate arbitration proceeding before JAMS. The Avon Foundation is a registered 501(c)(3) charity and is a distinct entity from Avon Products, Inc., which is not a party to these proceedings. While it is not possible to predict the outcome of litigation, management believes that these proceedings should not have a material adverse effect on the Consolidated Financial Statements of the Company.

     On December 20, 2002, a Brazilian subsidiary of the Company received a series of tax assessments from the Brazilian tax authorities asserting that the establishment in 1995 of separate manufacturing and distribution companies in that country was done without a valid business purpose. The assessments assert tax deficiencies during portions of the years 1997 and 1998 of approximately $66.0 at the exchange rate on the date of this filing, plus penalties and accruing interest totaling approximately $114.0 at the exchange rate on the date of this filing. On July 1, 2003 the Brazilian subsidiary of the Company was informed that the first-level appellate body had rejected the basis for assessments representing approximately 78% of the total assessment, or $139.0 (including interest), but that rejection is

10


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

subject to mandatory second-level appellate review. The balance of the assessment (approximately $39.0) was not affected. In the event that the assessments are upheld or reinstated in the earlier stages of review, it may be necessary for the Company to provide security to pursue further appeals, which, depending on the circumstances, may result in a charge to income. It is not possible to make a reasonable estimate of the amount or range of expense that could result from an unfavorable outcome in respect of these or any additional assessments that may be issued for subsequent periods. The structure adopted in 1995 is comparable to that used by many companies in Brazil, and the Company believes it is appropriate, both operationally and legally, and that the assessments are unfounded. This matter is being vigorously contested and in the opinion of the Company’s outside counsel the likelihood that the assessments ultimately will be upheld is remote. Management believes that the likelihood that the assessments will have a material impact on the Consolidated Financial Statements is also remote.

     Polish subsidiaries of the Company have been responding to Protocols of Inspection served by the Polish tax authorities in respect of 1999 and 2000 tax audits. The Protocols asserted tax deficiencies, penalties and accruing interest totaling approximately $30.0 at the exchange rate on the date of this filing: $16.0 primarily relating to the documentation of certain sales, and $14.0 relating to excise taxes. On July 29, 2003 the Company accepted a final assessment of approximately $0.6 in respect of the excise tax matter. The tax authorities have rejected the Company’s factual assertions in connection with the documentation of sales matter and that matter has entered a second stage of proceeding at which the applicable legal conclusions will be determined. In the event that an assessment is finally established at the second stage of the proceedings, it may be necessary to pay the assessment in order to pursue further appeals, which may result in a charge to income. Management believes that there are meritorious defenses to the remaining proceeding and it is being vigorously contested. It is not possible to make a reasonable estimate of the amount or range of expense that could result from an unfavorable outcome in the remaining proceeding but management does not believe that the proceeding ultimately will have a material impact on the Consolidated Financial Statements.

     Various other lawsuits and claims, arising in the ordinary course of business or related to businesses previously sold, are pending or threatened against Avon. In the opinion of Avon’s management, based on its review of the information available at this time, the total cost of resolving such other contingencies at June 30, 2003, should not have a material adverse effect on the Consolidated Financial Statements.

11


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

7.     COMPREHENSIVE INCOME

     For the three and six months ended June 30, 2003 and 2002, the components of comprehensive income were as follows:

    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
  2003   2002   2003   2002  
 
 
 
 
 
Net income $ 171.5   $ 155.0   $ 270.4   $ 251.3  
   Other comprehensive loss:                        
      Foreign currency translation and                        
         transaction adjustments   35.8     (32.7 )   30.5     (61.9 )
      Unrealized gains(losses) from available-                      
         for-sale securities   2.5     (1.9 )   2.0     (2.1 )
      Net derivative losses on cash                        
         flow hedges   (1.6 )   (1.4 )   (2.6 )   (.9 )
 
 
 
 
 
Comprehensive income $ 208.2   $ 119.0   $ 300.3   $ 186.4  
 
 
 
 
 
 
 
 
 

      Cash flow hedges impacted other comprehensive loss as follows:

    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
    2003     2002     2003     2002  
 
 
 
 
 
Net gains(losses) on derivative instruments $ (2.3 ) $ 2.1   $ (3.0 ) $ .6  
Reclassification of (gains)losses to earnings .7     (3.5 )   .4     (1.5 )
 
 
 
 
 
Net decrease to Other comprehensive loss $ (1.6 ) $ (1.4 ) $ (2.6 ) $ (.9 )
 
 
 
 
 
 
 
 
 

8.     SPECIAL CHARGES

     In May 2001, Avon announced its new Business Transformation plans, which are designed to significantly reduce costs and expand profit margins, while continuing to focus on consumer growth strategies. Business Transformation initiatives include an end-to-end evaluation of business processes in key operating areas, with target completion dates through 2004. Specifically, the initiatives focus on simplifying Avon’s marketing processes, taking advantage of supply chain opportunities, strengthening Avon’s sales model through the Sales Leadership program and the Internet, streamlining the Company’s organizational structure and integrating certain similar activities across markets to achieve efficiencies. Avon anticipates significant benefits from these Business Transformation initiatives, but the scope and complexity of these initiatives necessarily involve planning and execution risk.

Special Charges – Fourth Quarter 2001

     In the fourth quarter of 2001, Avon recorded Special charges of $97.4 pretax ($68.3 after tax, or $.28 per share on a diluted basis) primarily associated with facility rationalizations and workforce reduction programs related to implementation of certain Business Transformation initiatives. The charges of $97.4 were included in the Consolidated Statement of Income for 2001 as Special charges ($94.9) and as inventory write-downs, which were included in Cost of sales ($2.5). Approximately 80% of the charges related to future cash expenditures. Approximately 70% of these cash expenditures were made by June 2003, with approximately 90% of total cash payments to be made by December 2003. All payments are funded by cash flow from operations.

12


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

Special charges by business segment were as follows:

  North
America*
  U.S.   Latin
America
  Europe   Corporate
and
Other
  Total
 
 
 
 
 
 
Facility                                  
   rationalizations** $ 16.8   $ 14.3   $ 17.7   $ 13.2   $ -   $ 62.0
Workforce reduction                                  
   programs   .9     9.7     6.4     2.1     14.0     33.1
Other   -     2.1     -     -     .2     2.3
 
 
 
 
 
 
Total accrued charges $ 17.7 (1) $ 26.1 .(2) $ 24.1 (3) $ 15.3 (4) $ 14.2 (5) $ 97.4
 
 
 
 
 
 
                                   
Number of employee                                  
   terminations   362     460     2,007     533     125     3,487

*Excludes amounts related to the U.S.

**Includes accrued severance and related costs associated with facility rationalizations.

(1) The majority of the special charge within the North America segment related to a plan to outsource jewelry manufacturing through third party vendors, resulting in the closure of a jewelry manufacturing facility in Puerto Rico.

(2) The special charge within the U.S. segment primarily related to the closure of a manufacturing facility in Suffern, New York. Production is being moved to an existing facility in Springdale, Ohio and to one or more third party manufacturers. To a lesser extent, the special charge also included workforce reduction programs within the marketing and supply chain functions as well as the closure of four express centers (distribution centers where customers pick up products).

(3) The majority of the special charge within the Latin America segment related to the closure of a manufacturing and distribution facility in Mexico City, Mexico. The project also included a construction plan to expand an existing facility in Celaya, Mexico and the movement of the manufacturing and distribution functions on a staged basis to the newly constructed site. To a lesser extent, the special charge also included workforce reduction programs in Brazil (primarily in the supply chain function) and in Argentina and Mexico (across numerous functional areas).

(4) The special charge within Europe primarily related to the closure of a manufacturing facility in the United Kingdom, with most of the production moving to an existing facility in Poland.

(5) The Corporate and other special charge was the result of workforce reduction programs which spanned much of the organization, including the legal, human resources, information technology, communications, finance, marketing and research & development departments.

Special charges by category of expenditures were as follows:

                        Accrued      
  Accrued                   Facility      
  Severance       Asset           Rational-      
  and   Cost of   Impair-   Special   Contract   ization
     
  Related   Sales   ment   Termination   Termination   and other      
  Costs   Charge   Charge   Benefits   Costs   Costs   Total  
 
 
 
     
 
 
 
 
                               
                               
Facility rationalizations $ 42.9 $ 2.5 $ 5.1 $ 5.0 $ 2.2 $ 4.3 $ 62.0  
Workforce reduction                              
   programs   26.9   -   -   6.2   -   -   33.1  
Other   -   -   .3   -   1.3   .7   2.3  
   
 
 
 
 
 
 
 
Total accrued charges $ 69.8 $ 2.5 $ 5.4 $ 11.2 $ 3.5 $ 5.0 $ 97.4  
   
 
 
 
 
 
 
 

13


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

     Accrued severance and related costs are expenses associated with domestic and international facility rationalizations and workforce reduction programs. Employee severance costs were accounted for in accordance with the Company’s existing FAS No. 112, “Employers’ Accounting for Post-employment Benefits,” severance plans or in accordance with other accounting literature. Approximately 3,500 employees, or 8.0% of the total workforce, will receive severance benefits. Approximately 85% of the number of employees to be terminated relates to facility rationalizations, which represents employees within the manufacturing and distribution functions. The remainder of the employee severance costs are associated with workforce reduction programs, which span much of the organization including the functional areas of marketing, sales, information technology, human resources, finance, research & development, legal, communications and strategic planning. The facility rationalizations will primarily result in expanding production in existing facilities (Europe and U.S.), building a new facility (Latin America) and sourcing product through third party vendors (North America including the U.S.). In certain circumstances, employees terminated due to facility rationalizations will need to be replaced. The majority of the employee severance costs will be paid by the end of 2003 in accordance with the original plan.

     The Cost of sales charge represented losses for inventory write-downs associated with a facility closure in Puerto Rico.

     Primarily as a result of facility rationalizations, management identified indicators of possible impairment of certain long-lived assets, consisting of buildings and improvements, equipment and other assets. In assessing and measuring impairment of long-lived assets, the Company applied the provisions of FAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”. Recoverability of assets to be held and used was measured by the comparison of the carrying amount of the assets with expected future cash flows of the assets (assets were grouped at the lowest level for which there were identifiable cash flows that were largely independent of the cash flows of other groups of assets). As a result of the impairment review, an asset impairment charge was recorded. Approximately $4.0 of the asset impairment charge related to the closure of a facility in Puerto Rico and reflected the reduction in the carrying value of equipment to its estimated fair market value based on selling prices for comparable equipment. The equipment was sold in the first half of 2002. The remaining charge related to assets (leasehold improvements and other assets) that have been abandoned.

     Special termination benefits represent the impact of employee terminations on the Company’s benefit plans in the U.S. and certain international locations. In accordance with FAS No. 88, “Employers’ Accounting for Settlements and Curtailment of Defined Benefit Pension Plans and for Termination Benefits,” the plans experienced a net loss from curtailment and special termination benefits of $1.3 and $9.9, respectively. The curtailment charge reflected the difference between the liabilities assuming all of the participants terminate as of their severance date versus the ongoing liability for these participants under FAS No. 87, “Employers Accounting for Pensions”, at the curtailment date assuming continued active employment. The special termination benefits included a loss resulting from an increase in a liability due to additional service and pay earned during the severance period, coupled with an additional liability attributable to paying benefits at an actual rate versus an assumed rate.

     Contract termination costs primarily represented lease buyout costs related to facility closures in North America (including the U.S.) and cancellation of a contract with a third-party supplier of warehousing and logistical services in the U.S.

14


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

     Accrued facility rationalization and other costs primarily represented incremental costs associated with the facility rationalizations, including administrative expenses during the shutdown period, employee and union communication costs and legal fees.

     While project plans associated with these initiatives have not changed, the Company has experienced favorable adjustments to its original cost estimates. As a result, in the third quarter 2002, the Company reversed $7.3 pretax ($5.2 after tax, or $.02 per diluted share) against the Special charge line in the Consolidated Statements of Income, where the estimates were originally recorded. The favorable adjustments primarily related to certain employees pursuing reassignments in other Avon locations, as well as lower severance costs resulting from higher than anticipated lump-sum distributions (associates who elect lump-sum distributions do not receive benefits during the severance period).

Special Charges - Third Quarter 2002

     On September 30, 2002, the Company authorized a plan related to the implementation of its Business Transformation initiatives. In connection with these initiatives, in the third quarter of 2002, Avon recorded Special charges of $43.6 pretax ($30.4 after tax, or $.12 per diluted share). These charges were primarily associated with the following initiatives:

  • Supply chain initiatives, including actions to improve efficiencies and productivity in manufacturing, logistics, transportation and distribution activities;
  • Workforce reduction programs focused on realigning the organization and leveraging regional structures; and
  • Sales transformation initiatives, including a shift to a more variable expense base and changes in the selling structure due to a variety of initiatives to contemporize the sales model.

     Approximately 90% of the charge will result in future cash expenditures. Approximately 45% of these cash expenditures were made by June 2003, with over 90% of total cash payments to be made by December 2003. All payments will be funded by cash flow from operations.

     The third quarter charges (net of the $7.3 adjustment to the 2001 Special charges as previously disclosed) were included in the Consolidated Statements of Income as Special charges ($34.3) and as inventory write-downs, which were included in Cost of sales ($2.0).

     The third quarter 2002 Special charges (net of adjustment to the 2001 charges) affected all business segments as follows:

        North
America*
    U.S.     Latin
America
    Europe     Pacific     Corporate
and
Other
    Total  







Supply chain     $ 3.1   $ 3.2   $ .8   $ 5.9   $ 4.5   $ -   $ 17.5  
Workforce reduction programs       1.6     1.2     3.3     1.6     -     3.9     11.6  
Sales transformation initiatives       -     1.8     -     10.0     2.7     -     14.5  







Total accrued charge       4.7  (1)   6.2  (2)   4.1  (3)   17.5  (4)   7.2  (5)   3.9  (6)   43.6  
Adjustment to 2001 special charge       (2.0 )   (4.4 )   -     -     -     (.9 )   (7.3 )







  Net accrued charge     $ 2.7   $ 1.8   $ 4.1   $ 17.5   $ 7.2   $ 3.0   $ 36.3  







                                               
Number of employee terminations       152     179     241     302     119     41     1,034  

*Excludes amounts related to the U.S.

15


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

(1) The majority of the special charge within the North America segment related to the closure of a manufacturing facility in Canada and the transition of production to existing facilities in the U.S.

(2) The special charge within the U.S. segment primarily related to workforce reduction programs within the sales and supply chain functions.

(3) The majority of the special charge within the Latin America segment included workforce reduction programs in Argentina, Central America and in Venezuela (across numerous functional areas).

(4) The special charge within Europe primarily related to the restructuring of the sales force in certain Western European markets, as well as the closure of a distribution facility in Italy.

(5) The special charge within the Pacific segment primarily related to supply chain initiatives in Japan, Australia and the Philippines. In addition, the special charge included costs associated with the closure of stores and a procurement center in Hong Kong and the closure of a store and office in Singapore, as well as contract cancellation fees and other costs resulting from the shutdown of certain sales branches in Malaysia.

(6) The Corporate and other special charge was the result of a workforce reduction program primarily within the information technology department.

     2002 Special charges (net of adjustment to the 2001 charges) by category of expenditures were as follows:

        Accrued
Severance
and Related
Costs
    Cost of
Sales
Charge
    Contract
Termination
Costs
    Other Costs     Total  





Supply chain     $ 14.2   $ 1.4   $ .1   $ 1.8   $ 17.5  
Workforce reduction programs       11.0     -     -     .6     11.6  
Sales transformation initiatives       9.7     .6     2.3     1.9     14.5  





Total accrued charges       34.9     2.0     2.4     4.3     43.6  
Adjustment to 2001    
  Special charges       (5.7 )   -     -     (1.6 )   (7.3 )





  Net accrued charges     $ 29.2   $ 2.0   $ 2.4   $ 2.7   $ 36.3  






     Accrued severance and related costs are expenses, both domestic and international, associated with supply chain initiatives (primarily North America, Europe and the Pacific), workforce reduction programs (all segments except the Pacific) and sales transformation initiatives (primarily Europe, the Pacific and U.S). Employee severance costs were accounted for in accordance with the Company’s existing FAS No. 112 severance plans, or with other accounting literature. Approximately 1,000 employees, or 2.0% of the total workforce, will receive severance benefits. Over 90% of the employee severance costs will be paid by December 2003.

     Approximately 45% of the number of employees to be terminated related to facility rationalizations and the supply chain function, which primarily represents employees within the manufacturing and distribution functions. Approximately 20% of the number of employees to be terminated related to the sales transformation initiatives, which represent employees within the sales function. The remainder of the employee severance costs is associated with workforce reduction programs, which span much of the organization including the functional areas of marketing, information technology, human resources, research and development and strategic planning.

     The Cost of sales charge for inventory write-downs primarily represents losses associated with store and branch closures (primarily Pacific) as well as the discontinuation of selected product lines (Europe).

     Contract termination costs primarily represent lease buyout costs related to store and branch closures (primarily Pacific) and contract cancellation fees with store owners (Pacific).

16


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

     Other costs primarily represent administrative expenses associated with a facility rationalization, employee and union communication costs, pension termination benefits and legal and professional fees (primarily Europe).

Liability Balances for Special Charges

     The liability balances for Special charges at June 30, 2003, were as follows:

        Accrued
Severance
and
Related
Costs
    Cost of
Sales
Charge
    Asset
Impair
ment
Charge
    Special
Termination
Benefits
    Contract
Termination
Costs
    Other
Costs
    Total  







2001 Charges:                                              
     
Balance at    
 December 31, 2002     $ 27.1     -     -     -     -   $ 2.7   $ 29.8  
 Foreign exchange       (.4 )   -     -     -     -     (.1 )   (.5 )
 Cash payments       (9.6 )   -     -     -     -     (.4 )   (10.0 )







Balance at    
 June 30, 2003     $ 17.1   $ -   $ -   -   $ -   $ 2.2   $ 19.3  







 
2002 Charges:    
     
Balance at    
 December 31, 2002     $ 30.8   $ -   $ -     -   $ 1.0   $ 2.2   $ 34.0  
 Foreign exchange       3.0     -     -     -     .2     .3     3.5  
 Cash payments       (11.4 )   -     -     -     -   $ (.4 )   (11.8 )







Balance at    
 June 30, 2003     $ 22.4   $ -   $ -     -   $ 1.2   $ 2.1   $ 25.7  







The liability balances and employee terminations by business segment were as follows:

2001 Charges:                                              
        North
America*
    U.S.     Latin
America
    Europe     Pacific     Corporate
and
Other
    Total  







Total Accrued charges     $ 17.7   $ 26.1   $ 24.1   $ 15.3   $ -   $ 14.2   $ 97.4  
Less: Foreign exchange       -     -     (1.0 )   .5     -     -     (.5 )
Less: Expenses charged       (14.7 )   (17.5 )   (11.0 )   (14.8 )   -     (12.3 )   (70.3 )
Less: Adjustment       (2.0 )   (4.4 )   -     -     -     (.9 )   (7.3 )







Balance at    
   June 30, 2003     $ 1.0 (a) $ 4.2 (b) $ 12.1 (c) $ 1.0 (d) $ -   $ 1.0 (e) $ 19.3  







Number of planned employee    
   terminations       362     460     2,007     533     -     125     3,487  
     
Remaining employee    
   terminations at    
   June 30, 2003       -     4     1,105     9     -     -     1,118  

*Excludes amounts related to the U.S.

   
 (a) The majority of the remaining liability relates to remaining amounts payable to employees already receiving severance as a result of the closure of Avon’s jewelry manufacturing facility in Puerto Rico. The facility was closed in September 2002, with substantially all remaining severance payments to be made in 2003.
   
 (b) The majority of the remaining liability relates to employee severance costs resulting from the closure of a manufacturing facility in Suffern, NY. Employee terminations were effectively completed in June

17


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

   
  2003, with a majority of the remaining severance payments to be completed by December 2003.
   
 (c) The majority of the remaining liability relates to employee severance costs resulting from a facility rationalization in Mexico. The facility project includes the closure of a manufacturing and distribution facility, a construction plan to expand an existing facility and the moving of the manufacturing and distribution functions on a staged basis to a newly constructed site. The workforce will be terminated over a transition period through 2004 (700 in 2002, 500 in 2003 and 600 in 2004). The distribution facility was closed in October 2002. Construction of the manufacturing facility was substantially completed in the second quarter of 2003. Production will be transitioned to the new facility beginning in the third quarter of 2003 and continuing through December 2004.
   
 (d) The majority of the remaining liability relates to a facility rationalization in the United Kingdom. The facility closure was announced in 2002; however, severance benefits were not paid immediately since employees are being retained during the migration of production. Employee terminations were effectively completed in the second quarter of 2003, in accordance with the plan.
   
 (e) The remaining liability relates to remaining amounts payable to employees already receiving severance.
   
2002 Charges:
        North
America*
    U.S.     Latin
America
    Europe     Pacific     Corporate
and
Other
    Total  







Total Accrued Charges     $ 4.7   $ 6.2   $ 4.1   $ 17.5   $ 7.2   $ 3.9   $ 43.6  
Less: Foreign Exchange       .5     -     .3     2.5     .2     -     3.5  
Less: Expenses Charged       (2.3 )   (2.4 )   (2.7 )   (5.8 )   (5.6 )   (2.6 )   (21.4 )







Balance at    
   June 30, 2003     $ 2.9 (a) $ 3.8 (b) $ 1.7 (c) $ 14.2 (d) $ 1.8 (e) $ 1.3 (f) $ 25.7  







Number of planned employee    
   terminations       152     179     241     302     119     41     1,034  
     
Remaining employee    
   terminations at    
   June 30, 2003       82     50     149     193     12     -     486  
                                               
*Excludes amounts related to the U.S.
   
 (a) The majority of the remaining liability relates to employee severance costs resulting from the closure of a manufacturing facility in Canada and the transition of production to existing facilities in the U.S. Employee terminations began in March 2003, with the majority of payments to be made by December 2003.
   
 (b) The majority of the remaining liability relates to employee severance costs associated with workforce reduction programs within the sales and supply chain functions. Employee terminations began in December 2002, with a majority of payments to be made by December 2003.
   
 (c) The majority of the remaining liability relates to employee severance costs associated with workforce reduction programs in Argentina. Employee terminations began in October 2002, with a majority of payments to be made by December 2003.
   
 (d) The majority of the remaining liability relates to employee severance costs associated with sales force reductions in certain Western European markets and the closure of a distribution facility in Italy, scheduled for the third quarter of 2003. Employee terminations for the various initiatives began in November 2002, with a majority of payments to be made by December 2003.
   
 (e) The majority of the remaining liability relates to employee severance costs related to supply chain initiatives. Employee terminations began in December 2002, with a majority of payments made by March 2003. The procurement center in Hong Kong, the store and office in Singapore and 15 sales branches in Malaysia were closed in 2002.

 

18


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

   
 (f) The remaining liability relates to remaining amounts payable to employees already receiving severance.

 

19


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

9.     SEGMENT INFORMATION
       Summarized financial information concerning Avon’s reportable segments was as follows:

      Three Months Ended June 30,  

      2003   2002  


        Net
Sales
    Operating
Profit
    Net
Sales
    Operating
Profit
 




North America:                            
      U.S     $ 529.4   $ 111.9   $ 514.2   $ 112.3  
      U.S. Retail*       2.3     (1.5 )   2.3     (6.7 )
      Other**       74.6     10.1     73.1     14.3  




      Total North America       606.3     120.5     589.6     119.9  




International:    
      Latin America***       440.7     107.5     440.5     98.2  
      Europe       378.4     74.5     278.9     50.4  
      Pacific       214.4     36.7     204.5     33.7  




      Total International       1,033.5     218.7     923.9     182.3  




Total from operations     $ 1,639.8   $ 339.2   $ 1,513.5   $ 302.2  
 
Global expenses       -     (59.4 )   -     (59.8 )




Total     $ 1,639.8   $ 279.8   $ 1,513.5   $ 242.4  





*Includes U.S. Retail and Avon Centre.

**Includes Canada, Dominican Republic and Puerto Rico. Beginning January 1, 2003, the Dominican Republic was included in North America whereas in prior periods it had been included in Latin America. Prior periods have been restated to reflect this change.

***Avon’s operations in Mexico reported Net sales for 2003 and 2002 of $172.1 and $170.7, respectively, and Operating profit for 2003 and 2002 of $54.5 and $44.7, respectively.

20


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

      Six Months Ended June 30,  

      2003   2002  


        Net
Sales
    Operating
Profit
    Net
Sales
    Operating
Profit
 




North America:                            
      U.S     $ 1,030.6   $ 209.3   $ 1,010.8   $ 204.5  
      U.S. Retail*       4.2     (23.2 )   4.1     (13.7 )
      Other**       140.0     16.8     135.9     24.1  




      Total North America       1,174.8     202.9     1,150.8     214.9  




International:    
      Latin America***       799.6     171.8     830.3     160.1  
      Europe       704.7     121.8     519.0     81.8  
      Pacific       426.4     70.6     385.5     56.2  




      Total International       1,930.7     364.2     1,734.8     298.1  




Total from operations     $ 3,105.5   $ 567.1   $ 2,885.6   $ 513.0  
Global expenses       -     (123.7 )   -     (118.0 )




Total     $ 3,105.5   $ 443.4   $ 2,885.6   $ 395.0  




*Includes U.S. Retail and Avon Centre. 2003 operating profit for U.S. Retail includes costs of $18.3 related to severance and asset write-downs (see Note 12, Other Information).

**Includes Canada, Dominican Republic and Puerto Rico. Beginning January 1, 2003, the Dominican Republic was included in North America whereas in prior periods it had been included in Latin America. Prior periods have been restated to reflect this change.

***Avon’s operations in Mexico reported Net sales for 2003 and 2002 of $331.2 and $325.4, respectively, and Operating profit for 2003 and 2002 of $93.0 and $75.1, respectively.

     The following table presents consolidated Net sales by classes of principal products as follows:

      Three Months
Ended June 30,
  Six Months
Ended June 30,
 
        2003     2002     2003     2002  




Beauty*     $ 1,109.2   $ 972.6   $ 2,086.4   $ 1,853.6  
Beauty Plus**       280.5     289.9     534.9     551.2  
Beyond Beauty***       184.2     192.1     363.1     382.4  
Health and Wellness****       65.9     58.9     121.1     98.4  




Total Net sales     $ 1,639.8   $ 1,513.5   $ 3,105.5   $ 2,885.6  




*Beauty includes cosmetics, fragrance and toiletries.

**Beauty Plus includes fashion jewelry, watches, apparel and accessories.

***Beyond Beauty includes home products, gift and decorative products, and candles.

****Health and Wellness includes vitamins, aromatherapy products, exercise equipment, stress relief and weight management products.

21

 


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

10.      Debt and Financial Instruments

     In April 2003, the callholder exercised the call option associated with the $100.0 of 6.25% putable/callable notes scheduled to mature in 2018, and thus became the sole noteholder of these notes. Pursuant to an agreement with the sole noteholder, Avon modified the putable/callable notes into $125.0 aggregate principal amount of 4.625% notes due May 15, 2013. Interest was payable semi-annually. The modified principal amount represented the original value of the putable/callable notes, plus the market value of the related call option and approximately $4.0 principal amount of additional notes issued for cash. On May 13, 2003, $125.0 principal amount of registered senior notes (the “4.625% Notes”) were issued to the public in exchange for the modified notes held by the sole noteholder. No cash proceeds were received by the Company. These notes mature on May 15, 2013 and bear interest at a per annum rate of 4.625%, payable semi-annually. The 4.625% Notes were issued under the Company’s $1,000.0 shelf registration statement.

     On May 1, 2003, the Company entered into a 10-year interest rate swap agreement with a notional amount of $125.0 to effectively convert the fixed interest on the 4.625% Notes to variable interest rates, based on LIBOR. The swap permits either party to terminate the swap at the end of seven years.

     On June 23, 2003, Avon issued to the public $250.0 principal amount of registered senior notes (the “4.20% Notes”) under the Company’s $1,000.0 shelf registration statement. The 4.20% Notes mature on July 15, 2018, and bear interest at a per annum rate of 4.20%, payable semi-annually. The net proceeds were used to repay a portion of Avon’s outstanding convertible notes, discussed below.

     On June 23, 2003. Avon entered into two 15-year interest rate swap contracts with notional amounts that totaled $250.0 to effectively convert the fixed interest on the 4.20% Notes to a variable interest rate, based on LIBOR.  

     On May 9, 2003, a treasury lock agreement, which Avon had entered into in December 2002, with a notional amount of $100.0 was settled and Avon recorded a loss of $2.8. This agreement was used to hedge the exposure to a possible rise in interest rates prior to the issuance of the 4.20% Notes, discussed above. Accordingly, the loss was recorded in Accumulated Other Comprehensive Income (“OCI”) and is being amortized to interest expense over 10 years.

     On May 9, 2003, a treasury lock agreement, which Avon had entered into in February 2003, with a notional amount of $75.0 was settled and Avon recorded a gain of $0.1. This agreement was used to hedge the exposure to a possible rise in interest rates prior to the issuance of the 4.20% Notes, discussed above. Accordingly, the gain was recorded in Accumulated OCI and is being amortized to interest expense over 10 years.

     On June 12, 2003, Avon issued a redemption notice to the holders of the zero coupon convertible senior notes due 2020 (the “Convertible Notes”) that it had elected to redeem the Convertible Notes on July 12, 2003. On July 11, 2003, the holders of $48.3 of the Convertible Notes converted their notes into approximately 751,000 shares of Avon Common Stock in accordance with the conversion feature of the Convertible Notes. On July 12, 2003, Avon redeemed the remaining Convertible Notes, which were originally issued in 2000, by paying $399.0, which represented the redemption price of $531.74 for each $1,000 principal amount at maturity of Convertible Notes that was then outstanding. As a result of the redemption, deferred issuance costs related to the Convertible Notes of approximately $6.4 will be expensed in the third quarter.  
 

 

22


AVON PRODUCTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share data)

11.      Supplemental Income Statement Information

    Three Months     Six Months  
    Ended June 30,     Ended June 30,  
  2003   2002   2003   2002  
 
 
 
 
 
Foreign exchange losses (gains), net $ 7.7   $ (9.2 ) $ 8.8   $ (16.7 )
Amortization of debt issue costs                        
   and other financing   2.3     1.9     4.0     3.3  
Other   (.2 )   (1.0 )   (1.2 )   (.9 )
 
 
 
 
 
Other expense (income), net $ 9.8   $ (8.3 ) $ 11.6   $ (14.3 )
 
 
 
 
 

12.      Other Information

     In January 2003, Avon announced that it had agreed with J.C. Penney to end the business relationship pursuant to which Avon’s beComing line of products has been carried in approximately 90 J.C. Penney stores. The beComing brand is now being sold through Avon’s direct selling channel in the U.S., exclusively by Avon Beauty Advisors, who are independent Avon sales Representatives with specialized beauty product training and consultative selling skills. For the six months ended June 30, 2003, costs associated with ending this business relationship were $18.3, including severance costs ($4.1), asset and inventory write-downs ($12.1) and other related expenses ($2.1). These costs were included in the Consolidated Statements of Income in Marketing, distribution and administrative expenses ($10.5) and in Cost of sales ($7.8).

13.     Acquisition  

       In the second quarter of 2003, Avon purchased the outstanding 50% of shares in its Turkish joint venture business, Eczacibasi Avon Kozmetik (EAK) from its partner, Eczacibasi Group, for $18.4, including transaction costs. As a result of the acquisition agreement, Avon consolidated the remaining 50% of its Turkish joint venture business in the second quarter of 2003. Prior to the second quarter of 2003, the investment was accounted for under the equity method. The impact on Net sales for the second quarter 2003 was an increase of $13.9. Avon Turkey is included in Avon’s European operating segment. Avon has allocated approximately $17.0 of the purchase price to goodwill.

14.     Subsequent Events

       On August 7, 2003, Avon declared a quarterly dividend on its common stock of $.21 per share, payable September 2, 2003, to shareholders of record on August 22, 2003.

     See Note 10, Debt and Financial Instruments, for a discussion of the redemption of Avon’s Convertible Notes.

23


AVON PRODUCTS, INC.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS—THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002.

Consolidated

                                 
  Three-Month Period   Six-Month Period  
 
 
 
          Favorable             Favorable  
            (Unfavorable)               (Unfavorable)  
          %/Point             %/Point  
  2003   2002   Change   2003   2002   Change  
 
 
 
 
 
 
 
Net sales $ 1,639.8   $ 1,513.5   8 % $ 3,105.5   $ 2,885.6   8 %
Total revenue   1,656.0     1,527.2   8     3,137.4     2,910.8   8  
Cost of sales   620.1     588.6   (5 )   1,194.3     1,129.5   (6 )
Marketing, distribution and                              
   administrative expenses   756.1     696.2   (9 )   1,499.7     1,386.3   (8 )
Operating profit   279.8     242.4   15     443.4     395.0   12  
Interest expense   10.6     12.9   18     20.5     26.3   22  
Interest income   (3.0 )   (3.7 ) (19 )   (5.5 )   (8.0 ) (31 )
Other expense, (income) net   9.8     (8.3 ) -     11.6     (14.3 ) -  
Net income   171.5     155.0   11     270.4     251.3   8  
Diluted earnings per share   .71     .64   11     1.13     1.04   9  
                                 
Gross margin   62.6 %   61.5 % 1.1     61.9 %   61.2 % .7  
Operating expense ratio   45.7 %   45.6 % (.1 )   47.8 %   47.6 % (.2 )
Operating margin   16.9 %   15.9 % 1.0     14.1 %   13.6 % .5  
Effective tax rate   33.6 %   34.8 % 1.2     34.1 %   34.8 % .7  
                                 
Units Sold             2 %             6 %
Active Representatives             14 %             14 %
                                 

Net Sales

     Net sales growth was driven by an increase in the number of active Representatives and units, with dollar increases in all regions except Latin America, which was negatively impacted by weaker foreign exchange rates. Excluding the impact of foreign currency exchange, consolidated Net sales increased 10% and 11% in the three and six-month periods, respectively, with increases in all regions.

     Net sales in the three-month period was also driven by a 14% increase in Beauty Sales (reflecting strong increases in skin care, personal care and color care categories), and to a lesser extent, a 12% increase in Health and Wellness sales, partially offset by declines in Beyond Beauty of 4% and Beauty Plus of 3% (reflecting declines in accessories and watches).

     Net sales in the six-month period was also driven by a 13% increase in Beauty sales (including strong increases in skin care, personal care and color categories) and, to a lesser extent, a 23% increase in the smaller Health and Wellness category, partially offset by declines in Beyond Beauty of 5% and Beauty Plus of 3% (including declines in accessories and watches).

Gross Margin

     Gross margin improved in the three-month period due to increases in all regions as follows: Europe (1.4 points, which increased consolidated gross margin by .4 point), the Pacific (2.2 points, which increased consolidated gross margin by .3 point), Latin America (.9 points, which increased consolidated gross margin by .2 point) and North America (.2 point, which increased consolidated gross margin by .1 point). Additionally, gross margin

24


AVON PRODUCTS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

benefited from greater contributions from countries with higher gross margins (which increased consolidated gross margin by .1 point).

     Gross margin improved in the six-month period due to increases in all regions as follows: the Pacific (2.0 points, which increased consolidated gross margin by .3 point), Latin America (.7 point, which increased consolidated gross margin by .2 point), Europe (.5 point, which increased consolidated gross margin by .1 point) and North America (.1 point, which increased consolidated gross margin by less than .1 point). Additionally, gross margin benefited from greater contributions from countries with higher gross margins (which increased consolidated gross margin by .1 point).

     The gross margin improvements in the three and six-month periods discussed above include incremental net savings across all geographic segments associated with Business Transformation initiatives (including supply chain and marketing initiatives), which favorably impacted consolidated gross margin by 1.7 points and 1.3 points, respectively. Gross margin in the six-month period of 2003 also included $7.8 of inventory write-downs related to the repositioning of the beComing line of products, which decreased consolidated gross margin in the six-month period by .2 point (see Note 12, Other Information).

     See the “Segment Review” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in gross margin by segment.

Marketing, Distribution and Administrative Expenses

     Marketing, distribution and administrative expenses increased $59.9 in the three-month period of 2003 primarily due to an 8% sales increase (which resulted in an increase in expenses of approximately $31.0), an increase in consumer and strategic investments of $13.0 (including spending on the brochure and Sales Leadership), an increase in marketing expenses of $10.9 (including merchandising and public relations), an increase in U.S. transportation costs of $5.0, an increase in domestic pension expense of approximately $5.0, expenses of $5.4 related to Avon’s Turkish subsidiary which was consolidated in the second quarter of 2003 (see Note 13, Acquisition), and merit salary increases of approximately $4.0 for certain marketing, distribution and administrative personnel around the world. These increases in expenses were partially offset by incremental net savings from workforce reduction programs associated with Avon’s Business Transformation initiatives of approximately $27.0.

     Pension expense for full year 2003 related to the domestic plan is expected to increase in the range of $20.0 to $25.0 primarily due to negative investment returns in 2001 and 2002.

     As a percentage of Total revenue, Marketing, distribution and administrative expenses increased .1 point in the three-month period of 2003 due to higher expense ratios in North America (.7 point, which increased the consolidated ratio by .3 point) and the Pacific (1.6 points, which increased the consolidated ratio by .2 point), partially offset by lower expense ratios in Latin America (1.2 points, which reduced the consolidated ratio by .3 point) and Europe (.1 point, which reduced the consolidated ratio by .1 point), as well as lower global expenses (which reduced the consolidated ratio by .3 point). Additionally, the consolidated expense ratio was negatively impacted by greater contributions from markets with higher expense ratios (which increased the consolidated ratio by .3 point).

     Marketing, distribution and administrative expenses increased $113.4 in the six-month period of 2003 primarily due to a 8% sales increase (which resulted in an increase in expenses of approximately $62.0), an increase in

25


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

consumer and strategic investments of $23.0 (including spending on the brochure and Sales Leadership), an increase in marketing expenses of $17.6 (including merchandising and public relations), an increase in U.S. transportation costs of $8.0, costs of $10.5 (severance and asset write-downs) associated with the repositioning of the beComing line of products (see Note 12, Other information), an increase in domestic pension expense of approximately $10.0, merit salary increases of approximately $8.0 for certain marketing, distribution and administrative personnel around the world and expenses of $5.4 related to Avon’s Turkish subsidiary which was consolidated in the second quarter of 2003 (see Note 13, Acquisition). These increases in expenses were partially offset by incremental net savings from workforce reduction programs associated with Avon’s Business Transformation initiatives of approximately $40.0.

     As a percentage of Total revenue, Marketing, distribution and administrative expenses increased .2 point in the six-month period of 2003 due to a higher expense ratio in North America (1.5 points, which increased the consolidated ratio by .6 point), partially offset by lower expense ratios in Latin America (1.5 points, which reduced the consolidated ratio by .4 point), and Europe (1.0 points which reduced the consolidated ratio by .2 point). The expense ratio in the Pacific was flat. Additionally, the consolidated expense ratio was negatively impacted by greater contributions from markets with higher expense ratios (which increased the consolidated ratio by .2 point).

     See the “Segment Review” sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information related to changes in expense ratios by segment.

Other Expense (Income)

     Interest expense decreased in the three and six-month periods of 2003 primarily as a result of continued declines in domestic interest rates.

     Interest income decreased in the three and six-month periods of 2003 primarily due to lower average Cash and cash equivalent balances and lower domestic interest rates in 2003.

     Other expense (income), net was unfavorable in the three and six-month periods of 2003 as compared to 2002 by $18.1 and $25.9, respectively, primarily due to unfavorable foreign exchange of $16.9 and $25.5, respectively. The foreign exchange variance in the three-month period was primarily comprised of net foreign exchange losses of $2.1 in 2003 as compared to gains of $12.9 in 2002 on net U.S. dollar denominated assets primarily in Argentina, Venezuela, Brazil and Mexico. The foreign exchange variance in the six-month period was primarily comprised of net foreign exchange losses of $3.1 in 2003 as compared to gains of $26.3 in 2002 on net U.S. dollar denominated assets primarily in Mexico, Argentina, Brazil, and Venezuela.

     Avon anticipates that the overall foreign exchange variance will continue to be unfavorable in the second half of 2003 versus the same period in 2002, reflecting higher foreign exchange losses in 2003.

Effective Tax Rate

     The effective tax rate was lower in the three and six-month periods of 2003 primarily due to a tax audit settlement in the second quarter of 2003, which reduced the effective rate by 1.8% and 1.2% in the three and six month periods, respectively, partially offset by changes in the earnings mix and tax rates of international subsidiaries. The tax rate in both the third quarter and fourth quarter of 2003 is projected to be approximately 35%, resulting in a full-year effective tax rate of slightly less than 35%.

26


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

Segment Review

North America

    Three-Month Period     Six-Month Period  
 
 
 
              %/Point               %/Point  
  2003     2002   Change   2003     2002   Change  
 
 
 
 
 
 
 
Net sales $ 606.3   $ 589.6   3 % $ 1,174.8   $ 1,150.8   2 %
Operating profit   120.5     119.9   - %   202.9     214.9   (6 )%
Operating margin   19.5 %   20.0 % (.5 )   17.0 %   18.5 % (1.5 )
                                 
Units Sold             1 %             2 %
Active Representatives           4 %             4 %

     Net sales increased in both periods due to growth in the number of active Representatives. The U.S. business, which represents approximately 90% of the North American segment, reported a sales increase of 3% and 2% in the three and six-month periods, respectively, resulting from an increase in units, due to successful new product launches, and the number of active Representatives, due to continued growth of the Sales Leadership program.

     On a category basis, the 2003 sales increases in the three and six-month periods in the U.S. were driven by an increase in Beauty sales of 11% and 10%, respectively (driven by increases in the skin care and personal care categories) and an increase in Health and Wellness sales of 1% and 11%, respectively (driven by new product introductions), largely offset by a decline in Beyond Beauty of 11% and 14%, respectively, and a decline in Beauty Plus of 5% in both periods. A temporary disruption to the business in 2003 caused by severe snow storms and the impact of the war in Iraq on consumer spending contributed to declines in the Beyond Beauty and Beauty Plus categories.

     The decreases in operating margin in North America for the three and six-month periods were most significantly impacted by the following markets:

  • Operating margin in the U.S. declined in the three-month period (which decreased segment margin by .7 point) primarily due to an unfavorable expense ratio, partially offset by an increase in gross margin. Operating margin in the U.S. was flat in the six-month period as an increase in gross margin was offset by a higher expense ratio. Gross margin improved in both periods mainly due to a favorable mix of products sold, price increases in the Beauty category, and supply chain savings resulting from supply chain initiatives associated with Business Transformation, partially offset by higher transportation costs. The unfavorable expense ratio in both periods was primarily due to incremental spending on Sales Leadership, advertising and the brochure, and higher pension-related costs, partially offset by lower bonus accruals.
  • Operating margin for the U.S. Retail business declined significantly in the six-month period (which decreased segment margin by .8 point) resulting from costs of $18.3 in 2003 associated with the repositioning of the beComing line of products (see Note 12, Other Information), partially offset by operating losses in 2002, which were not repeated in 2003 due to the repositioning of the brand.

     Additionally, operating margin in North America for the three-month period improved by .9 point due to operating losses of the U.S. Retail

27


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

business reported in 2002, which were eliminated in 2003 after the brand was repositioned in the first quarter.

     Operating margin in both periods was negatively impacted by greater contributions from countries with lower margins (which reduced segment margin by .2 point in both periods).

     The Dominican Republic is facing a significant economic and currency crisis that was largely precipitated by the failure of the country’s second largest bank. As a result, the Dominican peso has devalued by approximately 40% since the beginning of 2003. The International Monetary Fund and other organizations are negotiating with the Dominican government for a financial assistance package but no final agreement has yet been reached. As a result of this crisis and local operational weakness, Avon anticipates that the U.S. dollar results of its business in the Dominican Republic will be negatively impacted in 2003. In 2002, the Dominican Republic represented approximately 1% of Avon’s consolidated Net sales and approximately 2% of consolidated Operating profit.  

Europe

                                         
    Three-Month Period         Six-Month Period      
 
 
 
              %/Point Change               %/Point Change  
             
             
 
                  Local                   Local  
  2003     2002   US$   Currency   2003     2002   US$   Currency  
   
   
 
 
   
   
 
 
 
Net sales $ 378.4   $ 278.9   36 % 22 % $ 704.7   $ 519.0   36 % 22 %
Operating profit   74.5     50.4   48 % 37 %   121.8     81.8   49 % 39 %
Operating margin   19.6 %   18.0 % 1.6   1.6     17.2 %   15.7 % 1.5   1.5  
                                         
Units Sold                 15 %                 20 %
Active Representatives             26 %                 28 %

     Net sales increased in U.S. dollars and local currencies in both periods driven by substantial growth in units and the number of active Representatives with the following markets having the most significant impact:

  • In the markets of Central and Eastern Europe, Net sales in U.S. dollars and local currencies grew significantly in both periods. In Russia, U.S. dollar and local currency sales grew more than 60% in both periods due to significant growth in active Representatives resulting from expansion into new geographic regions and improved access to products through additional sales centers. In Poland, U.S. dollar and local currency sales grew primarily due to an increase in active Representatives.
  • In Western Europe, Net sales in U.S. dollars and local currencies increased in both periods mainly due to an increase in the United Kingdom resulting from successful new product launches and growth in active Representatives. Additionally, in the second quarter of 2003, Avon began consolidating its Turkish subsidiary which increased Net sales by $13.9 in both periods (see Note 13, Acquisition).

     The increases in operating margin in the three and six-month periods in Europe were most significantly impacted by the following markets:

  • In Western Europe, operating margin improved in both periods (which increased segment margin by 1.1 points and .6 point in the three and six-month periods, respectively) primarily due to a higher gross margin resulting from lower product costs, due to supply chain benefits

28


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

including the closure of a manufacturing facility in the United Kingdom, price increases in certain markets and the exit of certain non-core categories, partially offset by foreign exchange losses resulting from the impact of the strengthening of the Polish zloty and the euro on manufacturing costs in the region.

  • In Central and Eastern Europe, operating margin improved in both periods (which increased segment margin by .7 point in both periods), primarily due to an improvement in the expense ratio resulting from continued leveraging of larger volumes over a relatively small fixed expense base.

     Operating margin in both periods benefited from greater contributions from countries with higher operating margins (which increased segment margin by .1 point and .4 point, respectively).

Latin America

                                         
    Three-Month Period             Six-Month Period  
 
 
 
              %/Point Change               %/Point Change  
             
               
 
                  Local                   Local  
  2003     2002   US$   Currency   2003     2002   US$   Currency  
 
 
 
 
 
   
 
 
 
Net sales $ 440.7   $ 440.5   - % 15 % $ 799.6   $ 830.3   (4 )% 18 %
Operating profit   107.5     98.2   10 % 23 %   171.8     160.1   7 % 27 %
Operating margin   24.4 %   22.3 % 2.1   2.1     21.5     19.3   2.2   2.2  
                                         
Units Sold                 (3 )%                 1 %
Active Representatives             15 %                 14 %

     Net sales in U.S. dollars in both periods were significantly impacted by weaker foreign exchange rates in most major markets. Excluding the impact of foreign currency exchange, Net sales increased in 2003 with increases in all major markets in the region, reflecting growth in active Representatives and increased sales of higher-priced products.

  • In Argentina, Net sales in U.S. dollars and local currency increased significantly, primarily driven by stabilization of that country’s economy, as well as growth in active Representatives and successful new product launches.
  • In Mexico, Net sales increased in U.S. dollars and local currency, benefiting from new product launches and growth in active Representatives.
  • In Brazil, Net sales in U.S. dollars decreased significantly due to the negative impact of foreign exchange, but increased in local currency, reflecting an increase in the number of active Representatives. Although local currency sales increased, units declined due to a shift in product mix towards higher priced products.
  • In Venezuela, Net sales in U.S. dollars decreased significantly due to the negative impact of foreign exchange, but increased in local currency, primarily due to growth in active Representatives and increased sales incentive programs, partially offset by external factors such as the national strike that lasted until February and the exchange rate control imposed by the Venezuelan government in February 2003.

     The increases in operating margin in Latin America in the three and six-month periods were most significantly impacted by the following markets:

  • In Mexico, operating margin increased (which increased segment margin by 2.1 points in both periods) due to an improvement in the expense ratio, reflecting savings associated with Business Transformation initiatives, including a gain from the sale of a warehouse property in Mexico City

29


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

as the Company transitioned to a new distribution center in Celaya, partially offset by an increase in consumer and strategic investments such as advertising. Gross margin also improved in both periods due to the introduction of products with higher margins and the mix of products sold.

  • In Argentina, operating margin increased (which increased segment margin by .8 point and .7 point, respectively) primarily due to improvement in the expense ratio driven by a significant increase in local currency sales and general cost containment initiatives, partially offset by higher investments in sales incentive programs. Additionally, gross margin improved in both periods due to pricing strategies and savings associated with supply chain Business Transformation initiatives.
  • In Brazil, operating margin decreased (which decreased segment margin by .6 point and .3 point, respectively) primarily due to an increase in the expense ratio resulting from incremental consumer and strategic investments such as spending on advertising, sampling and the brochure, and lower volume-related overhead absorption.
  • In Venezuela, operating margin decreased in both periods (which decreased segment margin by .1 point and .4 point, respectively) primarily due to a decline in gross margin resulting from an increase in the cost of imported raw materials and finished goods due to a weaker currency. Additionally, operating margin in the six-month period was negatively impacted by an increase in the expense ratio resulting from incremental consumer and strategic investments such as spending on the brochure, and expenses related to new Representative training programs.

     Operating margin was favorably impacted by greater contributions from countries with higher operating margins (which increased segment margin by .2 point and .1 point, respectively).

     In February 2003, the Venezuelan government implemented exchange controls and fixed the bolivar exchange rate at 1598 per U.S. dollar. This was done in response to a drop in foreign currency reserves resulting from the virtual shut down of the country's oil export sector. Since then, higher oil production and exports have resumed, increasing foreign currency reserves, although economic growth continues to be hampered by the lack of foreign exchange being made available to local importers. The country’s political and economic situation continues to impact Avon’s ability to conduct normal business operations as well as to obtain foreign currency to pay for imported products. The lack of foreign currency has required Avon Venezuela to rely on parent company support in order to continue importing material for its operations. Avon Venezuela’s results of operations in U.S. dollars have been and will continue to be negatively impacted until there is a significant improvement in the country’s political and economic situation and foreign currency is made available to importers.

     Since January 1, 2003, Avon has used the official rate of 1598.0 Venezuelan bolivars (“VEB”) for one U.S. dollar to translate the financial statements of its subsidiary in Venezuela (“Avon Venezuela”) into U.S. dollars. For the three and six-months ended June 30, 2003, Avon Venezuela’s Net sales and Operating profit represented approximately 2% of both consolidated Net sales and Operating profit. As of June 30, 2003, Avon Venezuela’s Total assets and Total liabilities represented approximately 2% and 1% of consolidated Total assets and Total liabilities, respectively. An increase of 100 VEB in the exchange rate used to translate the financial statements of Avon Venezuela would have decreased Net income for the three and six-month periods ended June 30, 2003 by $.2 and $.3, respectively, and would have decreased equity as of June 30, 2003 by $1.9.

     Despite higher inflationary pressure coming from last year’s strong devaluation impact, the Brazilian real has strengthened in the second quarter of 2003 as investors gained more confidence in the government’s economic policies, and the country’s high interest rates attracted short-term investments from overseas. Avon Brazil’s operations are expected to be positively impacted in the second half of 2003 if the currency stabilizes at current levels.

30


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

Pacific

                                         
        Three-Month Period     Six-Month Period      
 
 
 
              %/Point Change           %/Point Change  
             
             
 
              Local               Local  
  2003     2002   US$   Currency   2003     2002   US$   Currency  
 
 
 
 
 
 
 
 
 
Net sales $ 214.4   $ 204.5   5 % 2 % $ 426.4   $ 385.5   11 % 7 %
Operating profit   36.7     33.7   9 % 7 %   70.6     56.2   26 % 22 %
Operating margin   16.8 %   16.2 % .6   .6     16.3 %   14.3 % 2.0   2.0  
                                         
Units Sold                 1 %                 5 %
Active Representatives             8 %                 10 %

     Net sales in U.S. dollars and local currencies increased in both periods as a result of growth in all major markets in the region, reflecting increases in units and active Representatives.

  • In Japan, Net sales in U.S dollars and local currency increased in both periods mainly due to an increase in active Representatives and an increase in the number of direct mailings to customers.
  • In Australia, Net sales in U.S. dollars and local currency increased in both periods driven by an increase in active Representatives and customer clearance programs.
  • In China, Net sales in U.S. dollars and local currency increased in both periods primarily due to product promotions and new beauty boutiques, in spite of the negative impact from the outbreak of severe acute respiratory syndrome (“SARS”).
  • In the Philippines, Net sales in U.S. dollars were negatively impacted by foreign exchange. Local currency sales decreased in both periods primarily due to softer sales in non-Beauty categories.
     The outbreak of (SARS) in Asia had a significant impact on China and Taiwan in the second quarter 2003. Although this impact is difficult to quantify, the Company estimates that it reduced Net sales growth in the region in the second quarter by six percentage points. The Company expects no significant SARS-related impact on its business for the remainder of 2003.  

     The increases in operating margin in the Pacific in the three and six-month periods were most significantly impacted by the following markets:

  • In the Philippines, operating margin improved (which increased segment margin by .8 point and 1.1 points, respectively) due to a lower expense ratio, resulting from the timing of advertising spending and a decrease in the bad debt provision, and a higher gross margin resulting from a favorable mix of products sold (greater contributions from sales of Beauty products) and supply chain savings associated with Business Transformation initiatives.
  • In Australia, operating margin improved (which increased segment margin by .5 point in both periods) primarily due to an improvement in gross margin due to lower obsolescence expense resulting from increased customer clearance programs.
  •  In Japan, operating margin declined in the three-month period (which reduced segment margin by .2 point) primarily due to an unfavorable expense ratio due to incremental consumer investments, partially offset by an improvement in gross margin due to a favorable mix of products sold. Operating margin improved in the six-month period (which increased segment margin by .7 point) primarily due to a higher gross margin resulting from a favorable mix of products sold and supply chain savings associated with Business Transformation initiatives.

31

 


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

  • In China, operating margin declined in the three-month period (which reduced segment margin by .5 point) primarily due to a lower gross margin resulting from higher freight costs and obsolescence expense, and a higher expense ratio resulting from incremental advertising spending. Operating margin in China in the six-month period was flat as a lower gross margin due to pricing investments was offset by an improvement in the expense ratio resulting from an increase in sales.

Global Expenses

     Global expenses were flat in the three-month period reflecting no significant variances versus the prior year period.

     Global expenses increased $5.7 in the six-month period primarily due to incremental investments of $3.0 for global marketing, research and development and the new product line called “mark”; higher benefit-related accruals of $5.4; and higher charitable contributions of $2.1, partially offset by lower information technology expenses of $4.2 and incremental net savings of $1.3 from workforce reductions associated with Avon’s Business Transformation initiatives.

LIQUIDITY AND CAPITAL RESOURCES

     Avon's principal sources of funds historically have been cash flows from operations, commercial paper, borrowings under uncommitted lines of credit and long-term borrowings.

Cash Flows

     Net cash provided by operating activities in the first half of 2003 was $30.3 unfavorable to 2002 principally reflecting a contribution of $60.0 to the U.S. pension plan in 2003, a payment of $48.0 related to a tax audit settlement in 2003, and higher cash outlays in 2003 for severance and bonus payments, partially offset by higher Net income (adjusted for non-cash items), a tax payment of $20.0 in 2002 deferred from 2001 and favorable working capital (primarily inventories and accounts receivable).

     Excluding changes in debt, Cash and cash equivalents decreased $88.3 in the first half of 2003, compared to a decrease of $67.6 in the first half of 2002. The higher use of cash in 2003 resulted primarily from lower cash provided by operating activities, discussed above, higher capital expenditures and the purchase of the outstanding 50% of shares in the Company’s Turkish joint venture business for $18.4 (see Note 13, Acquisition), partially offset by lower repurchases of common stock, a gain on the sale of property in Mexico and the purchase of company-owned life insurance policies in 2002. Avon purchased approximately 1.7 million shares of Avon common stock for $92.8 during the first six months of 2003, compared with $109.5 spent for the repurchase of approximately 2.1 million shares during the first six months of 2002. At June 30, 2002, 27,094 shares repurchased for $1.4 were not settled until July 2002.

Capital Resources

     Total debt at June 30, 2003, increased $256.3 to $1,628.5 from $1,372.2 at December 31, 2002, principally due to the issuance of $250.0 of 4.20% registered notes (see Note 10, Debt and Financial Instruments) and amortization of the discount on Avon’s outstanding convertible notes, partially offset by an adjustment to reflect the fair value of outstanding interest rate swaps.

32


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

     At June 30, 2003, there were no borrowings under a $600.0 revolving credit and competitive advance facility (the "credit facility"). This credit facility is also used to support Avon's commercial paper facility, under which no amounts were outstanding at June 30, 2003.

     At June 30, 2003, there was $3.1 outstanding under uncommitted lines of credit.

     On June 12, 2003, Avon issued a redemption notice to the holders of the zero coupon convertible senior notes due 2020 (the “Convertible Notes”) that it had elected to redeem the Convertible Notes on July 12, 2003. On July 11, 2003, the holders of $48.3 of the Convertible Notes converted their notes into approximately 751,000 shares of Avon Common Stock in accordance with the conversion feature of the Convertible Notes. On July 12, 2003, Avon redeemed the remaining Convertible Notes, which were originally issued in 2000, by paying $399.0, which represented the redemption price of $531.74 for each $1,000 principal amount at maturity of Convertible Notes that was then outstanding.

     Management currently believes that cash from operations and available financing alternatives are adequate to meet anticipated requirements for working capital, dividends, capital expenditures, the stock repurchase program and other cash needs.

Financial Instruments and Risk Management Strategies

Interest Rate Risk

     On May 9, 2003, a treasury lock agreement, which Avon had entered into in December 2002, with a notional amount of $100.0 was settled and Avon recorded a loss of $2.8. This agreement was used to hedge the exposure to a possible rise in interest rates prior to the issuance of the $250.0 of 4.20% Notes. Accordingly, the loss was recorded in Accumulated Other Comprehensive Income (“OCI”) and is amortized to interest expense over 10 years.

     On May 9, 2003, a treasury lock agreement, which Avon had entered into in February 2003, with a notional amount of $75.0 was settled and Avon recorded a gain of $0.1. This agreement was used to hedge the exposure to a possible rise in interest rates prior to the issuance of the $250.0 of 4.20% Notes (see Note 10, Debt and Financial Instruments). Accordingly, the gain was recorded in Accumulated OCI and is being amortized to interest expense over 10 years.

     On May 1, 2003, the Company entered into a 10-year interest rate swap agreement with a notional amount of $125.0 to effectively convert the fixed interest on the $125.0 of 4.625% Notes to variable interest rates, based on LIBOR. The swap permits either party to terminate the swap at the end of seven years.

     On June 23, 2003, the Company entered into two 15-year interest rate swap contracts with notional amounts that totaled $250.0 to effectively convert the fixed interest on the $250.0 of 4.20% Notes to a variable interest rate, based on LIBOR.

33


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

Foreign Currency Risk

     At June 30, 2003, Avon held foreign currency forward and option contracts to buy and sell foreign currencies, including cross-currency contracts to sell one foreign currency for another, with notional amounts in U.S. dollars as follows:

  Buy   Sell  
 
 
 
Australian dollar $ 6.7   $ 5.9  
Brazilian real   -     16.0  
British pound   27.7     54.9  
Canadian dollar   2.9     38.3  
Czech koruna   -     18.1  
Euro   93.0     21.6  
Hungarian forint   -     12.6  
Japanese yen   21.0     10.8  
Mexican peso   11.0     29.8  
Polish zloty   48.8     2.9  
Taiwanese dollar   -     2.7  
Other currencies   -     8.7  
 
 
 
   Total $ 211.1   $ 222.3  
 
 
 
 
 

     At June 30, 2003, Avon’s subsidiary in Argentina held U.S. dollar denominated assets of $6.0, primarily to minimize foreign-currency risk and provide liquidity.

SPECIAL CHARGES

Business Transformation

     In May 2001, Avon announced its new Business Transformation plans, which are designed to significantly reduce costs and expand profit margins, while continuing to focus on consumer growth strategies. Business Transformation initiatives include an end-to-end evaluation of business processes in key operating areas, with target completion dates through 2004. Specifically, the initiatives focus on simplifying Avon’s marketing processes, taking advantage of supply chain opportunities, strengthening Avon’s sales model through the Sales Leadership program and the Internet, streamlining the Company’s organizational structure and integrating certain similar activities across markets to achieve efficiencies. Avon anticipates significant benefits from these Business Transformation initiatives, but the scope and complexity of these initiatives necessarily involve planning and execution risk.

     It is expected that the savings from these initiatives will provide additional financial flexibility to achieve profit targets, while enabling further investment in consumer growth strategies. Management believes that initiatives associated with the 2001 and 2002 Special charges discussed below will help the Company achieve its target of a significant expansion of its operating margin by the end of 2004.

Special Charges – Fourth Quarter 2001

     In the fourth quarter of 2001, Avon recorded Special charges of $97.4 pretax ($68.3 after tax, or $.28 per diluted share) primarily associated with facility rationalizations and workforce reduction programs related to implementation of certain Business Transformation initiatives. The charges of $97.4 were included in the Consolidated Statements of Income for 2001 as

34


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

Special charges ($94.9) and as inventory write-downs, which were included in Cost of sales ($2.5). Approximately 80% of the charges related to future cash expenditures. Approximately 70% of these cash expenditures were made by June 2003, with approximately 90% of total cash payments to be made by December 2003. All payments are funded by cash flow from operations. In the third quarter of 2002, Avon recorded an adjustment related to the fourth quarter 2001 charge. See Special Charges – Third Quarter 2002 below.

     In 2002, actions associated with the 2001 Special charges yielded net savings of approximately $30.0 (gross savings of $50.0 partially offset by transitional costs of $20.0). Cost savings from these initiatives should continue, with net savings in 2003 expected to be approximately $65.0 (net of additional transitional costs of approximately $10.0) and net savings in 2004 expected to be approximately $85.0 (net of additional transitional costs of approximately $2.0).

     The actions associated with the 2001 Special charges resulted in incremental cash outlays of $10.0 in 2002 and are expected to produce incremental cash flow of $40.0 in 2003. Capital expenditures associated with the 2001 Special charges were $20.0 in 2002 and are expected to be $15.0 in 2003. These cash outlays in 2002, and capital expenditures in 2002 and 2003 are funded through cash flow from operations.

Special Charges – Third Quarter 2002

     Special charges of $43.6 pretax ($30.4 after tax or $.12 per diluted share), recorded in the third quarter of 2002 primarily related to Avon’s Business Transformation initiatives, including supply chain initiatives, workforce reduction programs and sales transformation initiatives. Approximately 90% of the charges related to future cash expenditures. Approximately 45% of these expenditures were made by June 2003, with over 90% of the total cash payments to be made by December 2003. Avon also recorded a benefit of $7.3 pretax ($5.2 after tax, or $.02 per diluted share) from an adjustment to the Special charges recorded in the fourth quarter of 2001. The net effect of the special items was a charge of $36.3 pretax ($25.2 after tax, or $.10 per diluted share). The $36.3 was included in the Consolidated Statements of Income for 2002 as a Special charge ($34.3) and as inventory write-downs, which were included in Cost of sales ($2.0).

     In 2003, Avon expects actions associated with the 2002 Special charges to yield net savings of $15.0 (gross savings of $30.0 partially offset by transitional costs of $15.0). Cost savings from these initiatives should increase thereafter, with net savings in 2004 expected to be approximately $40.0 to $50.0, net of additional transitional costs of approximately $8.0.

     The actions associated with the 2002 Special charges are also expected to produce incremental cash flow from operations of $5.0 in 2003 and $20.0 to $30.0 in 2004. Capital expenditures associated with Business Transformation initiatives included in the 2002 Special charges are expected to be approximately $5.0 through 2003 and are funded through cash flow from operations.

Accounting Changes

     See Note 1, Accounting Policies, for a discussion regarding the adoption of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities”, Financial Accounting Standards (“FAS”) No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”.

35


AVON PRODUCTS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In millions, except per share data)

Website Access to Reports

     Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports are available, without charge, on our website, www.avoninvestor.com, as soon as reasonably practicable after they are filed electronically with the SEC. Copies are also available, without charge, from Investor Relations, Avon Products, Inc., 1345 Avenue of the Americas, New York, NY 10105-0196 or by sending an email to investor.relations@avon.com or by calling (212) 282-5623.

CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

     Statements in this report, which are not historical facts or information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on management’s reasonable current assumptions and expectations. Such forward-looking statements involve risks, uncertainties and other factors, which may cause the actual results, levels of activity, performance or achievement of the Company to be materially different from any future results expressed or implied by such forward-looking statements, and there can be no assurance that actual results will not differ materially from management’s expectations. Such factors include, among others, the following: general economic and business conditions in the Company’s markets, including economic and political uncertainties in Latin America; ; the Company’s ability to implement its business strategies and its Business Transformation initiatives, including the integration of similar activities across markets to achieve efficiencies; the Company’s ability to achieve anticipated cost savings and its profitability and growth targets; the impact of substantial currency fluctuations in the Company’s principal foreign markets and the success of the Company’s foreign currency hedging and risk management strategies; the impact of possible pension funding obligations and increased pension expense on the Company’s cash flow and results of operations; the effect of legal, regulatory and tax proceedings, as well as restrictions imposed on the Company, its operations or its Representatives by foreign governments; the Company’s ability to successfully identify new business opportunities; the Company’s access to financing; and the Company’s ability to attract and retain key executives. Additional information identifying such factors is contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, filed with the SEC. The Company undertakes no obligation to update any such forward-looking statements.

36


AVON PRODUCTS, INC.

ITEM 3.      Quantitative and Qualitative Disclosures about Market Risk

     There have been no material changes in market risk from the information provided in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of the Company's 2002 Form 10-K.

ITEM 4.      Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     As of the end of the period covered by this report, the Company’s Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the Company (including its consolidated subsidiaries) required to be disclosed by the Company in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods.

Changes in Internal Control Over Financial Reporting

     There was no change in the Company’s internal control over financial reporting identified in connection with the evaluation by the Company’s Chief Executive Officer and Chief Financial Officer of such changes in internal control over financial reporting that occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

37


AVON PRODUCTS, INC.

PART II. OTHER INFORMATION

ITEM 1.      Legal Proceedings

See Note 6, Contingencies

ITEM 4.      Submission of Matters to a Vote of Security Holders.

(a) At the annual meeting of shareholders of Avon, held on May 1, 2003, the matters described under (c) below were voted upon.
   
(c) Annual meeting votes:

 

    Against  
Broker
  For or Withheld Abstain Non-Votes
 



(1)To elect the following        
Directors to three-year terms        
expiring in 2006:        
         
   W. Don Cornwell 200,765,522 1,904,470 - -
   Stanley C. Gault 202,561,891 108,101 - -
   Andrea Jung 201,682,111 987,881 - -
   Paula Stern 202,470,938 199,054 - -
         
(2)To ratify the        
appointment of        
PricewaterhouseCoopers LLP        
as Avon’s independent        
accountants for 2003 200,730,570 4,029,325 1,200,499 -
         
(3)To approve an Executive        
Incentive Plan intended to        
comply with Section 162(m)        
of the 1986 Internal Revenue        
Code 189,892,181 14,527,063 1,541,150 -
         
(4)A Shareholder proposal        
requesting elimination of        
the classification of        
the Board of Directors 149,380,243 36,156,664 1,598,862 18,824,625
         
(5) A Shareholder proposal        
requesting expensing of        
stock options 103,210,837 79,935,232 3,989,402 18,824,923
         
(6)A Shareholder proposal        
requesting indexing of        
stock options 15,833,995 169,446,261 1,855,810 18,824,328
         
(7)A Shareholder proposal        
requesting a report on the        
removal of parabens from        
the Company’s products 10,946,755 166,149,842 10,040,810 18,822,987
         

38


AVON PRODUCTS, INC.

ITEM 6. Exhibits and Reports on Form 8-K.

   
 (a) Exhibits
   
 4.1 Indenture, dated as of May 13, 2003, between Avon, as Issuer, and JP Morgan Chase Bank, as Trustee, relating to Avon’s $125.0 aggregate principal amount of 4.625% Notes Due 2013 and $250.0 aggregate principal amount of 4.20% Notes Due 2018.
   
 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
 31.2 Certification Pursuant to Section 302 of the Sarabanes-Oxley Act of 2002.
   
 32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
 32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)     Reports on Form 8-K

       On April 25, 2003, Avon filed a Form 8-K to report that it had issued a press release announcing its results of operations for the first quarter of 2003.

     On April 29, 2003, Avon filed a Form 8-K to report that effective January 1, 2003, it had adjusted the income statement classification of certain expense items.

39


AVON PRODUCTS, INC.

SIGNATURE

     Pursuant to the requirements 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 11, 2003

  /s/ Janice Marolda                       
Janice Marolda
Vice President,
Controller
Principal Accounting Officer

Signed both on behalf of the
registrant and as principal
accounting officer.

40

EX-4.1 3 aug0803_ex0401.htm

Exhibit 4.1      


 

AVON PRODUCTS, INC.

as Issuer



AND


JPMORGAN CHASE BANK

as Trustee


Indenture

Dated as of May 13, 2003












..............................


Certain Sections of this Indenture relating to
Sections 310 through 318 of the
Trust Indenture Act of 1939:

Trust Indenture
Act Section

Indenture

Section

§ 310(a)(1) 6.09
(a)(2) 6.09
(a)(3) Not Applicable
(a)(4) Not Applicable
(b) 6.08
6.10
§ 311(a) 6.13
(b) 6.13
§ 312(a) 7.01
7.02(a)
(b) 7.02(b)
(c) 7.02(c)
§ 313(a) 7.03(a)
(b) 7.03(a)
(c) 7.03(a)
(d) 7.03(b)
§ 314(a) 7.04
(b) Not Applicable
(c)(1) 1.02
(c)(2) 1.02
(c)(3) Not Applicable
(d) Not Applicable
(e) 1.02
§ 315(a) 6.01
(b) 6.02
(c) 6.01
(d) 6.01
(e) 5.14
§ 316(a)(1)(A) 5.12
(a)(1)(B) 5.13
(a)(2) Not Applicable
(b) 5.08
(c) 1.04(c)
§ 317(a)(1) 5.03
(a)(2) 5.04
(b) 10.03
§ 318(a) 1.07
   
_____________
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of this indenture

i




TABLE OF CONTENTS





   Page
  ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
     
SECTION 1.01. Definitions 2
     
SECTION 1.02. Compliance Certificates and Opinions 12
     
  SECTION 1.03. Form of Documents Delivered to Trustee 13
     
SECTION 1.04. Acts of Holders; Record Dates 14
     
SECTION 1.05. Notices, Etc., to Trustee and Company 15
     
SECTION 1.06. Notice to Holders; Waiver 15
     
SECTION 1.07. Conflict with Trust Indenture Act 16
     
SECTION 1.08. Effect of Headings and Table of Contents 16
     
SECTION 1.09. Successors and Assigns 16
     
SECTION 1.10. Separability Clause 16
     
SECTION 1.11. Benefits of Indenture 16
     
SECTION 1.12. Governing Law 16
     
SECTION 1.13. Legal Holidays 16

   
   ARTICLE 2
SECURITY FORMS

     
SECTION 2.01. Forms Generally  17
     
SECTION 2.02. Form of Face of Security 17
     
SECTION 2.03. Form of Reverse of Security 19
     
  SECTION 2.04. Form of Trustee's Certificate of Authentication 23
     
   ARTICLE 3
THE SECURITIES
     
SECTION 3.01. Amount Unlimited; Issuable in Series 23
     
  SECTION 3.02. Denominations 26
     
  SECTION 3.03. Execution, Authentication, Delivery and Dating 26
     
  SECTION 3.04. Temporary Securities 27
     
  SECTION 3.05. Registration; Registration of Transfer and Exchange 28

    Page 
SECTION 3.06.  Mutilated, Destroyed, Lost and Stolen Securities 29
     
SECTION 3.07. Payment of Interest; Interest Rights Preserved 30
     
SECTION 3.08. Persons Deemed Owners 31
     
SECTION 3.09. Book-entry Provisions for Global Securities 31
     
SECTION 3.10. Cancellation 33
     
SECTION 3.11. Computation of Interest 33
     
  ARTICLE 4
SATISFACTION AND DISCHARGE
     
SECTION 4.01. Satisfaction and Discharge of Indenture 33
     
SECTION 4.02. Application of Trust Money 34
     
ARTICLE 5
REMEDIES
     
SECTION 5.01.  Events of Default 35
     
SECTION 5.02.  Acceleration of Maturity; Rescission and Annulment 37
     
SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee 38
     
SECTION 5.04. Trustee May File Proofs of Claim 38
     
SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities 39
     
SECTION 5.06.  Application of Money Collected 39
     
SECTION 5.07. Limitation on Suits 39
     
SECTION 5.08. Unconditional Right of Holders to Receive Principal and Interest 40
     
SECTION 5.09. Restoration of Rights and Remedies 40
     
SECTION 5.10. Rights and Remedies Cumulative 41
     
SECTION 5.11. Delay or Omission Not Waiver 41
     
SECTION 5.12. Control by Holders 41
     
SECTION 5.13. Waiver of Past Defaults 41
     
SECTION 5.14. Undertaking for Costs 42
     
SECTION 5.15. Waiver of Stay or Extension Laws 42
     
ARTICLE 6
THE TRUSTEE
     
SECTION 6.01. Certain Duties and Responsibilities 42

ii


 

    Page 
 SECTION 6.02. Notice of Defaults 43
     
SECTION 6.03. Certain Rights of Trustee 43
     
SECTION 6.04. Not Responsible for Recitals 44
     
SECTION 6.05. May Hold Securities 44
     
SECTION 6.06. Money Held in Trust 44
     
SECTION 6.07. Compensation and Reimbursement 44
     
SECTION 6.08. Disqualification; Conflicting Interests 45
     
SECTION 6.09. Corporate Trustee Required; Eligibility 45
     
SECTION 6.10. Resignation and Removal; Appointment of Successor 46
     
SECTION 6.11. Acceptance of Appointment by Successor 47
     
SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business 48
     
SECTION 6.13. Preferential Collection of Claims Against 49
     
ARTICLE 7
HOLDERS' LISTS AND REPORTS BY TRUSTEE
     
SECTION 7.01. Company to Furnish Trustee Names and Addresses of Holders 49
     
SECTION 7.02. Preservation of Information; Communications to Holders 49
     
SECTION 7.03. Reports by Trustee 50
     
SECTION 7.04. Reports by Company 50
     
   ARTICLE 8
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
     
SECTION 8.01. Company May Consolidate, Etc., Only on Certain Terms 50
     
SECTION 8.02. Successor Substituted 51
     
   ARTICLE 9
SUPPLEMENTAL INDENTURES
     
SECTION 9.01. Supplemental Indentures Without Consent of Holders 52
     
SECTION 9.02. Supplemental Indentures with Consent of Holders 53
     
SECTION 9.03. Execution of Supplemental Indentures 53
     
SECTION 9.04. Effect of Supplemental Indentures 54
     
SECTION 9.05. Conformity with Trust Indenture Act 54
     
SECTION 9.06. Reference in Securities to Supplemental Indentures 54

iii




    Page
ARTICLE 10
COVENANTS
     
SECTION 10.01. Payment of Principal and Interest 54
     
SECTION 10.02. Maintenance of Office or Agency 54
     
SECTION 10.03. Money for Security Payments to Be Held in Trust 55
     
SECTION 10.04. Statement by Officers as to Default 56
     
SECTION 10.05. Existence 56 
     
SECTION 10.06. Liens 56
     
SECTION 10.07. Limitation on Restricted Sale/Leaseback Transactions 57
     
SECTION 10.08. Reports and Delivery of Certain Information 57
     
SECTION 10.09. Resale of Certain Securities 57
     
SECTION 10.10. Book-Entry System 57
     
SECTION 10.11. Waiver of Certain Covenants 58
     
ARTICLE 11
OPTIONAL REDEMPTION OF SECURITIES
     
SECTION 11.01. Applicability of Article 58
     
SECTION 11.02. Election to Redeem; Notice to Trustee 58
     
SECTION 11.03. Selection by Trustee of Securities to Be Redeemed 58
     
SECTION 11.04. Notice of Redemption 59
     
SECTION 11.05. Deposit of Redemption Price 60
     
SECTION 11.06. Securities Payable on Redemption Date 60
     
SECTION 11.07. Securities Redeemed in Part 61
     
ARTICLE 12
DEFEASANCE AND COVENANT DEFEASANCE
     
SECTION 12.01. Company's Option to Effect Defeasance or Covenant Defeasance 61
     
SECTION 12.02. Defeasance and Discharge 61
     
SECTION 12.03. Covenant Defeasance 62
     
SECTION 12.04. Conditions to Defeasance or Covenant Defeasance 62
     
SECTION 12.05. Deposited Money and U.S. Government Obligations to be Held in Trust; Miscellaneous Provisions 64
     
SECTION 12.06. Reinstatement 65

iv




    Page 
ARTICLE 13
SINKING FUNDS
     
SECTION 13.01. Applicability of Article 65
     
SECTION 13.02. Satisfaction of Sinking Fund Payments with Securities 65
     
SECTION 13.03. Redemption of Securities for Sinking Fund 66



 

INDENTURE, dated as of May 13, 2003, between AVON PRODUCTS, INC., a corporation duly organized and existing under the laws of the State of New York, as Issuer (herein called the “Company”), having its principal office at 1345 Avenue of the Americas, New York, New York 10105-0196, and JPMORGAN CHASE BANK, a banking corporation duly organized under the laws of the State of New York, as Trustee (herein called the “Trustee”).

RECITALS OF THE COMPANY

The Company has duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of its senior unsecured debentures, notes or other evidences of indebtedness (herein called the “Securities”), to be issued in one or more series as provided in this Indenture.

All things necessary to make this Indenture a valid agreement of the Company, in accordance with its terms, have been done.

NOW, THEREFORE, THIS INDENTURE WITNESSETH:

For and in consideration of the premises and the purchases of the Securities by the Holders thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Securities or of series thereof, as follows:



ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION

SECTION 1.01. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:

(i) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular;

(ii) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein;

(iii) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP; and

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(iv) the words “herein," “hereof" and “hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision.

Act," when used with respect to any Holder, has the meaning specified in Section 1.04.

"Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling" and “controlled" have meanings correlative to the foregoing.

"Attributable Debt," in respect to any Sale/Leaseback Transaction, means, as of any time of determination, the present value (discounted at the rate per annum equal to the rate of interest implicit in the lease involved in such Sale/Leaseback Transaction, as determined in good faith by the Company) of the obligation of the lessee thereunder for rental payments (excluding, however, any amounts required to be paid by such lessee, whether or not designated as rent or additional rent, on account of maintenance and repairs, insurance, taxes, assessments, water rates or similar charges or any amounts required to be paid by such lessee thereunder contingent upon the amount of sales or similar contingent awards) during the remaining term of such lease (including any period for which such lease has been extended or may, at the option of the lessor, be extended). In the case of any lease which is terminable by the lessee upon the payment of a penalty, such rental payments shall also include the amount of such penalty, but no rental payments shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated.

"Board of Directors” means, with respect to any Person, either the board of directors of such Person or any duly authorized committee of that board.

"Board Resolution” means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors, or alternatively, in the case of the Company, by the Finance and Strategic Planning Committee of the Board of Directors of the Company pursuant to authority duly delegated to it by the Board of Directors of the Company, and to be in full force and effect on the date of such certification, and delivered to the Trustee.

"Business Day”, when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment are authorized or obligated by law to close.

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"Capital Stock” means any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, including, without limitation, with respect to partnerships, partnership interests (whether general or limited) and any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, such partnership.

Commission” means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time.

"Company” means the Person named as the “Company" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Company" shall mean such successor Person.

"Company Request” or “Company Order” means a written request or order signed in the name of the Company by both (i) any of its Chairman of the Board, its Vice Chairman of the Board, its Chief Executive Officer, its President or any Vice President, and (ii) any of its Treasurer, its Secretary, any Assistant Secretary or any Vice President (other than a Vice President signing pursuant to clause (i) above), and delivered to the Trustee.

"Comparable Treasury Issue” means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Securities that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Securities. “Independent Investment Banker” means one of the Reference Treasury Dealers appointed by the Trustee at the written direction of the Company.

"Comparable Treasury Price” means, with respect to any Redemption Date, as determined by the Trustee (i) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (ii) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations.

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"Consolidated Net Tangible Assets” means the total amount of assets (less applicable reserves and other properly deductible items) which under GAAP would be included on the most recent audited annual consolidated balance sheet of the Company and its consolidated Subsidiaries after deducting therefrom, without duplication, the sum of (i) all current liabilities and (ii) all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, which in each case under GAAP would be included on such consolidated balance sheet.

"Corporate Trust Office” means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is, at the date of this Indenture, located at 4 New York Plaza, New York, New York 10004, Attention: Institutional Trust Services.

"corporation” means a corporation, association, company, joint-stock company or business trust.

"Default” means any event that is or with the passage of time or the giving of notice or both would become an Event of Default.

"Defaulted Interest” has the meaning specified in Section 3.07.

"Defeasance” has the meaning specified in Section 12.02.

"Depositary” means The Depository Trust Company until a successor Depositary shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Depositary" shall mean such successor Depositary.

"Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).

"Event of Default” has the meaning specified in Section 5.01.

"Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

"GAAP” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, in each case, as in effect in the United States on the date hereof.

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"Global Security” means a Security in global form registered in the Security Register in the name of a Depositary or a nominee thereof.

"Holder” means a Person in whose name a Security is registered in the Security Register.

"Indebtedness” means, with respect to any Person, any indebtedness of such Person, whether or not contingent, in respect of (i) borrowed money evidenced by bonds, notes, debentures or similar instruments, (ii) indebtedness secured by a mortgage, pledge, lien, charge, encumbrance of any security interest existing on property owned by such Person, (iii) the reimbursement obligations, contingent or otherwise, in connection with any letters of credit actually issued or amounts representing the balance that constitutes an accrued expense or trade payable or (iv) any lease of property by such Person as lessee which is reflected in such Person's consolidated balance sheet as a capitalized lease in accordance with GAAP, in the case of items of Indebtedness under (i) through (iii) above to the extent that any such items (other than letters of credit) would appear as a liability on such Person's consolidated balance sheet in accordance with GAAP, and also includes, to the extent not otherwise included, any obligation by such Person to be liable for, or to pay, as obligor, guarantor or otherwise (other than for purposes of collection in the ordinary course of business), Indebtedness of another Person.

"Indenture” means this instrument as originally executed or as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, the terms of a particular series of Securities established pursuant to the applicable provisions hereof, and for all purposes of this instrument and any such supplemental indenture or terms of a particular series, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively.

"Interest”, when used with respect to an Original Issue Discount Security which by its terms bears interest only upon Maturity, means interest payable after Maturity.

"Interest Payment Date” means, with respect to any Security, the Stated Maturity of an instalment of interest on such Security.

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"Investments” means, with respect to any Person, all investments by such Person in other Persons (including Affiliates) in the forms of loans, advances or capital contributions, purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities and all other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP.

"Investment Company Act” means the Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time.

"Issue Date” means, with respect to any series of Securities, the date such series of Securities is originally issued under this Indenture.

"Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).

"Maturity”, when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity, on a Redemption Date or by declaration of acceleration or otherwise.

"Officers' Certificate” means a certificate signed by both (i) any of the Chairman of the Board, a Vice Chairman of the Board, the Chief Executive Officer, the President or any Vice President, and (ii) any of the Treasurer, the Secretary, any Assistant Secretary, or any Vice President (other than a Vice President signing pursuant to clause (i) above), of the Company, and delivered to the Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 10.04 shall be the principal executive, financial or accounting officer of the Company.

"Opinion of Counsel” means a written opinion of counsel, who may be external or in-house counsel for the Company, and who shall be acceptable to the Trustee.

"Original Issue Discount Security” means any Security which provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 5.02.

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"Outstanding," when used with respect to any Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:

(i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation;

(ii) Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that if such Securities are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given to the Holders as herein provided, or provision satisfactory to a Responsible Officer of the Trustee shall have been made for giving such notice; and

(iii) Securities which have been paid or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a protected purchaser in whose hands such Securities are valid obligations of the Company;

provided, however, that, in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, (i) the principal amount of an Original Issue Discount Security which shall be deemed to be Outstanding shall be the amount of the principal thereof which would be due and payable as of such date upon acceleration of the Maturity thereof to such date pursuant to Section 5.02, (ii) the principal amount of a Security denominated in one or more foreign currencies or currency units which shall be deemed to be Outstanding shall be the U.S. dollar equivalent, determined as of such date in the manner provided as contemplated by Section 3.01, of the principal amount of such Security and (iii) Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which a Responsible Officer of the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not

8


the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor.

"Paying Agent” means any Person authorized by the Company to pay the principal of, interest on or Redemption Price of any Securities on behalf of the Company. The Trustee shall initially be the Paying Agent.

"Permitted Liens” means any of the following: (a) Liens on any Principal Property acquired by the Company or a Subsidiary after the date of this Indenture to secure or provide for the payment or financing of all or any part of the purchase price thereof or construction of fixed improvements thereon (prior to, at the time of or within 180 days after the latest of the acquisition, completion of construction or commencement of commercial operation thereof); (b) Liens on any shares of stock or Principal Property acquired by the Company or a Subsidiary after the date of this Indenture existing at the time of such acquisition; (c) Liens on any shares of stock or Principal Property of a corporation which is merged into or consolidated with the Company or a Subsidiary or substantially all of the assets of which are acquired by the Company or a Subsidiary; (d) Liens securing Indebtedness of a Subsidiary owing to the Company or another Subsidiary; (e) Liens existing on the date of this Indenture; (f) Liens on any Principal Property being constructed or improved securing loans to finance such construction or improvements; (g) Liens in favor of governmental bodies of the United States or any State thereof or any other country or political subdivision thereof to secure partial, progress or advance payments pursuant to any contract or statute, or to secure any Indebtedness incurred or guaranteed for the purpose of financing all or any part of the cost of acquiring, constructing or improving the property subject to such Liens; (h) Liens securing taxes, assessments or governmental charges or levies not yet delinquent, or already delinquent but the validity of which is being contested in good faith; (i) Liens arising by reason of deposits necessary to qualify the Company or any Subsidiary to conduct business, maintain self-insurance, or obtain the benefit of, or comply with, any law; (j) liens arising out of judgments or awards against the Company or any Subsidiary with respect to which the Company or such Subsidiary shall in good faith be prosecuting an appeal or proceedings for review; provided that the Company or such Subsidiary shall have secured, within 60 days after the creation thereof, an effective stay of execution pending such appeal or review; and (k) extensions, renewals or replacement of Liens referred to in the foregoing clauses provided that the Indebtedness secured is not increased nor the Lien extended to any additional assets.

"Person” means any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof.

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"Physical Securities” has the meaning specified in Section 2.01.

"Place of Payment”, when used with respect to the Securities of any series, means the place or places where the principal of and any premium or interest on the Securities of that series are payable specified as required by Section 3.01.

"Predecessor Security” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.

"Principal Property” means any manufacturing plant, testing or research and development facility, distribution facility, processing plant or warehouse (including, without limitation, land, fixtures and equipment), owned or leased by the Company or any Subsidiary (including any of the foregoing acquired or leased after the date of this Indenture) and located within the United States of America, its territories and possessions, unless the Board of Directors of the Company determines in good faith that such plant or facility is not of material importance to the total business conducted by the Company and its consolidated Subsidiaries.

"Redemption Date” when used with respect to any Security to be redeemed, means any date which is a Business Day fixed for such redemption by the Company pursuant to Section 11.04 of this Indenture.

"Redemption Price” when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture.

"Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer, at 5:00 p.m., New York City time, on the third Business Day preceding such Redemption Date.

"Reference Treasury Dealers” means any four nationally recognized investment banking firms, and their successors, selected by the Company that are each also a primary U.S. Government securities dealer (a “Primary Treasury Dealer”); provided, however, that if any Reference Treasury Dealer shall cease to be a primary U.S. Government securities dealer, the Company shall substitute

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another nationally recognized investment banking firm that is a Primary Treasury Dealer.

"Remaining Scheduled Payments” means, with respect to each Security to be redeemed, the remaining scheduled payments of principal thereof and interest thereon that would be due after the related Redemption Date but for that redemption; provided, however, that if such Redemption Date is not an Interest Payment Date with respect to such Security, the amount of the next succeeding scheduled interest payment thereon shall be reduced by the amount of interest accrued thereon to such Redemption Date.

"Regular Record Date” for the interest payable on any Interest Payment Date with respect to any Security, means such date or dates specified in the Security (whether or not a Business Day), as the case may be, immediately preceding the relevant Interest Payment Date relating to such Security.

"Responsible Officer” means any officer of the Trustee within the Corporate Trust Office of the Trustee with direct responsibility for the administration of this Indenture and also, with respect to a particular matter, any other officer of the Trustee to whom such matter is referred because of such officer's knowledge and familiarity with the particular subject.

"Restricted Sale/Leaseback Transaction” means any Sale/Leaseback Transaction entered into by the Company or any Significant Subsidiary after the date of this Indenture, except: (i) Sale/Leaseback Transactions entered into by and between the Company or a Subsidiary and one or more Subsidiaries of the Company; (ii) Sale/Leaseback Transactions as to which, during the period commencing 60 days prior to and ending 120 days after entering into such Sale/Leaseback Transaction, the Company or a Subsidiary applies an amount equal to the Attributable Debt with respect to such Sale/Leaseback Transaction to the acquisition, directly or indirectly and in whole or in part, of one or more Principal Properties or to the retirement of long-term Indebtedness (other than mandatory prepayment or retirement) of the Company or any Subsidiary; and (iii) Sale/Leaseback Transactions involving the taking back of a lease for a period of three years or less.

"Sale/Leaseback Transaction” means any arrangement, directly or indirectly, with any Person whereby the Company or any Subsidiary shall sell or transfer any Principal Property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such Principal Property or any part thereof which the Company or such Subsidiary, as the case may be, intends to use for substantially the same purpose as the Principal Property being sold or transferred.

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"Secured Debt” has the meaning specified in Section 10.06.

"Securities” has the meaning specified in the first paragraph of the Recitals of the Company.

"Securities Act” means the U.S. Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder.

"Security Register” and “Security Registrar” have the respective meanings specified in Section 3.05.

"Significant Subsidiary” means any direct or indirect Subsidiary of the Company that generates 5% ( five percent) or more of the Company's revenue or income or that holds 5% ( five percent) or more of the Company's assets.

"Special Record Date” for the payment of Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.07.

"Stated Maturity," when used with respect to the Securities or any instalment of interest thereon, means the date specified in the Securities as the fixed date on which the principal thereof or such instalment of interest is due and payable.

"Subsidiary” means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, “voting stock” means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency.

"Treasury Rate” means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity (computed as of the second Business Day immediately preceding that Redemption Date) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for that Redemption Date.

"Trust Indenture Act” means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, “Trust Indenture Act” means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended.

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"Trustee” means the Person named as the “Trustee” in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “Trustee” shall mean such successor Trustee; provided, however, that if at any time there is more than one such Person, “Trustee" as used with respect to the Securities of any series shall mean only the Trustee with respect to Securities of that series.

"U.S. Government Obligation” has the meaning specified in Section 12.04.

"Vice President," when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title “vice president”.

SECTION 1.02. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officers' Certificate, if to be given by an officer of the Company, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirement set forth in this Indenture.

Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include

(i) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto;

(ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based;

(iii) a statement that, in the opinion of each such individual, such individual has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(iv) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with.

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SECTION 1.03. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous.

Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

SECTION 1.04. Acts of Holders; Record Dates. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. If any Securities are denominated in a currency other than that of the United States, then for the purposes of determining whether the Holders of the requisite principal amount of Securities have taken any action with respect to the Securities of more than one series as herein described, the principal amount of such Securities shall be deemed to be that amount of United States dollars that could be obtained for such principal amount on the basis of the spot rate of exchange into United States dollars for the currency in which such Securities are denominated (as evidenced to the Trustee by an Officers' Certificate) as of the date the taking of such action by the Holders of such requisite principal amount is evidenced to the Trustee as provided in the immediately preceding sentence. Such

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instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 6.01) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section.

(b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient.

(c) The Company may fix any day as the record date for the purpose of determining the Holders entitled to give or take any request, demand, authorization, direction, notice, consent, waiver or other action, or to vote on any action, authorized or permitted to be given or taken by Holders. If not set by the Company prior to the first solicitation of a Holder made by any Person in respect of any such action, or, in the case of any such vote, prior to such vote, the record date for any such action or vote shall be the 30th day (or, if later, the date of the most recent list of Holders required to be provided pursuant to Section 7.01) prior to such first solicitation or vote, as the case may be. With regard to any record date, only the Holders on such date (or their duly designated proxies) shall be entitled to give or take, or vote on, the relevant action.

(d) The ownership of Securities shall be proved by the Security Register.

(e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security.

SECTION 1.05. Notices, Etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with,

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(i) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at 4 New York Plaza, New York, New York 10004, Attention: Institutional Trust Services, or

(ii) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Company, Attention: Treasurer.

SECTION 1.06. Notice to Holders; Waiver. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder.

SECTION 1.07. Conflict with Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act that is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be.

SECTION 1.08. Effect of Headings and Table of Contents. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof.

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SECTION 1.09. Successors and Assigns. All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not.

SECTION 1.10. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

SECTION 1.11. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their respective successors hereunder and the Holders of Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture.

SECTION 1.12. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the laws of the State of New York.

SECTION 1.13. Legal Holidays. In any case where any Interest Payment Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities) payment of interest or principal need not be made at such Place of Payment on such date, but may be made on the next succeeding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or at the Stated Maturity, provided that no interest shall accrue with respect to such payment for the period from and after such Interest Payment Date or Stated Maturity or, as the case may be.



ARTICLE 2
SECURITY FORMS

SECTION 2.01. Forms Generally. The Securities of each series and the Trustee's certificates of authentication shall be in substantially the forms set forth in this Article, or in such other form as shall be established by or pursuant to a Board Resolution of the Company or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depositary therefor, the Internal Revenue Code of 1986, as amended, and regulations thereunder, or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof.

Unless it is determined pursuant to a Company Order or as otherwise provided in this Indenture that non-global Securities ("Physical Securities”) are to be issued, the Securities of each series shall be issued in the form of Global Securities.

SECTION 2.02. Form of Face of Security. [THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE].

[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC”), A NEW YORK CORPORATION, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF) DTC, ANY TRANSFER, PLEDGE OR OTHER USE THEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

AVON PRODUCTS, INC.

[Title of Security]

   
 CUSIP No. __________ $________ 

Avon Products, Inc., a corporation duly organized and existing under the laws of New York (herein called the “Company”, which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to __________________, or registered assigns, the principal sum of _____________________ Dollars [INCLUDE IF SECURITY IS A GLOBAL SECURITY -- (which amount may from time to time be

18


increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary, in accordance with the rules and procedures of the Depositary)] on ______________________, and to pay interest thereon from _______________ or from the most recent Interest Payment Date to which interest has been paid or duly provided for, [semiannually] on _____ and _____ in each year, commencing _____ at the rate of ___% per annum, until the principal hereof is paid or made available for payment.

The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the _____ or _____ (whether or not a Business Day), as the case may be, immediately preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of and interest on this Security will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. If this Security is a Global Security, then notwithstanding the foregoing, each such payment will be made in accordance with the procedures of the Depositary as then in effect.

Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place.

Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal.

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Dated:

AVON PRODUCTS, INC.

 

By

___________________________________
Name:
Title

Attest:

_________________________
Name:
Title:

   

 

SECTION 2.03. Form of Reverse of Security. This Security is one of a duly authorized issue of Securities of the Company (herein called the “Securities”), issued and to be issued in one or more series under an Indenture, dated as of ______, 2003 (herein called the “Indenture”), between the Company and JPMorgan Chase Bank, as Trustee (herein called the “Trustee”, which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered.

[If applicable, insert --The Securities are redeemable in whole or in part, at the option of the Company at any time and from time to time, on not less than 30 or more than 60 days' prior notice mailed to the Holders of the Securities, at a Redemption Price equal to the greater of (i) 100% of the principal amount of the Securities to be redeemed and (ii) the sum of the present values of the Remaining Scheduled Payments thereon discounted to the Redemption Date on a [semiannual] basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus __ basis points, together in either case with accrued interest on the principal amount being redeemed to the Redemption Date.

Subject to payment by the Company of a sum sufficient to pay the amount due on redemption, interest on this Security (or portion hereof if this Security is redeemed in part) shall cease to accrue upon the Redemption Date of this Security (or portion hereof if this Security is redeemed in part).]

[If applicable, insert - The Securities do not have the benefit of a sinking fund.]

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[INCLUDE IF SECURITY IS A GLOBAL SECURITY -- In the event of a deposit or withdrawal of an interest in this Security, including an exchange, transfer, repurchase or conversion of this Security in part only, the Trustee, as custodian of the Depositary, shall make an adjustment on its records to reflect such deposit or withdrawal in accordance with the rules and procedures of the Depositary.]

[If the Security is not an Original Issue Discount Security, insert -- If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture.] 

[If the Security is an Original Issue Discount Security, insert -- If an Event of Default with respect to Securities of this series shall occur and be continuing, an amount of principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. Such amount shall be equal to -- insert formula for determining the amount. Upon payment (i) of the amount of principal so declared due and payable and (ii) of interest on any overdue principal, premium and interest (in each case to the extent that the payment of such interest shall be legally enforceable), all of the Company's obligations in respect of the payment of the principal of and premium and interest, if any, on the Securities of this series shall terminate.]

The Indenture contains provisions for defeasance at any time, upon compliance with certain conditions set forth therein, of (i) the entire Indebtedness evidenced by this Security or (ii) certain restrictive covenants and Events of Default with respect to this Security.

The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Outstanding Securities of each series, on behalf of the Holders of all the Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

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As provided in and subject to the provisions of the Indenture, the Holder of this Security shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Securities of this series, the Holders of not less than 25% in principal amount of the Outstanding Securities of this series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee indemnity satisfactory to the Trustee, and the Trustee shall not have received from the Holders of a majority in principal amount of Outstanding Securities of this series a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Security for the enforcement of any payment of principal hereof or interest hereon on or after the respective due dates expressed herein.

No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security at the times, place and rate, and in the currency, herein prescribed.

As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Security Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

The Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof above that amount. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the Holder surrendering the same.

No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the

22


 

Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary.

All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture.

ASSIGNMENT FORM

If you want to assign this Security, fill in the form below and have your signature guaranteed:

I or we assign and transfer this Security to:




(Print or type name, address and zip code and social security or tax ID number of assignee)

and irrevocably appoint _____________________________________, agent to transfer this Security on the books of the Company. The agent may substitute another to act for him.



Date: _____________ Signed:____________________________

(Sign exactly as your name appears on the other side of this Security)

Signature Guarantee: ________________________________

NOTICE: To be executed by an executive officer.

SECTION 2.04. Form of Trustee's Certificate of Authentication. This is one of the Securities referred to in the within-mentioned Indenture.

JPMORGAN CHASE BANK,        
as Trustee

By__________________________
Authorized Officer

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ARTICLE 3
THE SECURITIES

SECTION 3.01. Amount Unlimited; Issuable in Series.

The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is unlimited.

The Securities may be issued in one or more series. There shall be established in or pursuant to a Board Resolution and, subject to Section 3.03, set forth, or determined in the manner provided, in an Officers' Certificate, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series:

(a)   the title of the Securities of the series (which shall distinguish the Securities of the series from all other Securities);

(b)   any limit upon the aggregate principal amount of the Securities of the series which may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to Section 3.04, 3.05, 3.06, 9.06 or 11.07 and except for any Securities which, pursuant to Section 3.03 of the Indenture, shall have not been issued and sold by the Company and are therefore deemed never to have been authenticated and delivered hereunder);

(c)   the date or dates on which the principal of the Securities of the series is payable;

(d)   the Person to whom any interest on any Security of the series shall be payable if other than as set forth in Section 3.07; the rate or rates at which the Securities of the series shall bear any interest or the manner of calculation of such rate or rates, if any, the date or dates from which any such interest shall accrue, the Interest Payment Dates on which any such interest shall be payable and the Regular Record Date, for the interest payable on any Interest Payment Date;

(e)   the place or places where the principal of and any premium or interest on Securities of the series shall be payable;

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(f)   the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series may be redeemed, in whole or in part, at the option of the Company and, if other than by a Board Resolution, the manner in which any election by the Company to redeem the Securities shall be evidenced;

(g)   the obligation, if any, of the Company to redeem or purchase Securities of the series pursuant to any sinking fund or analogous provisions or at the option of a Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which Securities of the series shall be redeemed or purchased in whole or in part, pursuant to such obligation;

(h) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which Securities of the series shall be issuable;

(i) if other than the principal amount thereof, the portion of the principal amount of Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to Section 3.10;

(j) if applicable, that the Securities of the series, in whole or any specified part, shall be defeasible pursuant to Article 12 and if other than a Board Resolution, the manner in which any election by the Company to defease those Securities shall be evidenced;

(k) whether the Securities of the series are to be issuable in whole or in part in permanent global form, without coupons, and, if so, (i) the form of any legend or legends which shall be borne by any such permanent Global Security in addition to or in lieu of that set forth in Section 2.02, (ii) any circumstances in addition to or in lieu of those set forth in Clause (2) of the last paragraph of Section 3.05 in which such permanent Global Security may be exchanged in whole or in part for Securities registered, and in which any transfer of such permanent Global Security in whole or in part may be registered, in the name of Persons other than the Depositary for such permanent Global Security or a nominee thereof and (iii) the Depositary with respect to any such permanent Global Security or Securities;

(l) the currency or currencies, including composite currencies, in which payment of the principal of, and any premium and interest on, the Securities of the series shall be payable if other than the currency of the United States of America;

(m) if the principal of, or any premium or interest on, any Securities of the series is to be payable, at the election of the Company or the Holder thereof, in one or more currencies or currency units other than that or those in which such Securities are stated to be payable, the currency, currencies or currency units in which the principal of or any premium or interest on such Securities as to which such election is made shall be payable, the periods within which and the terms and conditions upon which such election is to be made and the amount so payable (or the manner in which such amount shall be determined);

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(n) if the amount of payments of principal of, or any premium or interest on, the Securities of the series may be determined with reference to an index or pursuant to a formula, the manner in which such amounts shall be determined;

(o) if the principal amount payable at the Stated Maturity of any Securities of the series will not be determinable as of any one or more dates prior to the Stated Maturity, the amount which shall be deemed to be the principal amount of such Securities as of any such date for any purpose thereunder or hereunder, including the principal amount thereof which shall be due and payable upon any Maturity other than the Stated Maturity or which shall be deemed to be Outstanding as of any date prior to the Stated Maturity (or, in any such case, the manner in which such amount deemed to be the principal amount shall be determined);

(p) any addition to or change in the Events of Default which applies to any Securities of the series and any change in the right of the Trustee or the requisite Holders of such Securities to declare the principal amount thereof due and payable pursuant to Section 5.01;

(q) any addition to or change in the covenants set forth in Article Ten which applies to any Securities of the series;

(r) the terms, if any, on which Holders of Securities may convert or exchange any Securities of the series into any securities of any Person; and

(s) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture, except as permitted by Section 9.01(e)).

All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to the Board Resolution referred to above and (subject to Section 3.03) set forth in the Officers' Certificate referred to above or in any such indenture supplemental hereto.

If any of the terms of the series are established by action taken pursuant to a Board Resolution, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of the Company and delivered to the Trustee at or prior to the delivery of the Officers' Certificate setting forth the terms of the series.

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SECTION 3.02. Denominations. The Securities shall be issuable only in registered form and, unless otherwise provided as contemplated by Section 3.01 with respect to any series of Securities, without coupons and in denominations of $1,000 and any integral multiple thereof.

SECTION 3.03. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its Chief Executive Officer, its President or one of its Vice Presidents, attested by its Secretary or one of its Assistant Secretaries. The signature of any of these officers on the Securities may be manual or facsimile.

Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.

At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities of any series executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. If the form or terms of the Securities of the series have been established by or pursuant to one or more Board Resolutions as permitted by Sections 2.01 and 3.01, in authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to Section 6.01) shall be fully protected in relying upon, an Opinion of Counsel stating:

(a) if the form of such Securities has been established by or pursuant to Board Resolution as permitted by Section 2.01, that such form has been established in conformity with the provisions of this Indenture;

(b) if the terms of such Securities have been established by or pursuant to Board Resolution as permitted by Section 3.01, that such terms have been established in conformity with the provisions of this Indenture; and

(c) that such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, enforceable in accordance with their terms, subject to bankruptcy, insolvency, reorganization and other laws of general applicability

27


relating to or affecting the enforcement of creditors' rights and to general equity principles.

Notwithstanding the provisions of Section 3.01 and of the preceding paragraph, if all Securities of a series are not to be originally issued at one time, it shall not be necessary to deliver the Officers' Certificate otherwise required pursuant to Section 3.01 or the Company Order and Opinion of Counsel otherwise required pursuant to such preceding paragraph at or prior to the time of authentication of each Security of such series if such documents are delivered at or prior to the time of authentication upon original issuance of the first Security of such series to be issued.

Each Security shall be dated the date of its authentication.

No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture.

Notwithstanding the foregoing and subject, in the case of a Security in permanent global form, to Section 2.02, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 3.10 together with a written statement (which need not comply with Section 1.02 and need not be accompanied by an Opinion of Counsel) directing such cancellation and stating that such Security has never been issued and sold by the Company, for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.

SECTION 3.04. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.

If temporary Securities of any series are issued, the Company will cause definitive Securities of that series to be prepared without unreasonable delay.

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After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Company in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of the same series and of like tenor of authorized denominations. Until so exchanged the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series.

SECTION 3.05. Registration; Registration of Transfer and Exchange. (a) The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency in a Place of Payment being herein sometimes collectively referred to as the “Security Register”) in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed “Security Registrar" (the “Security Registrar”) for the purpose of registering Securities and transfers of Securities as herein provided.

Upon surrender for registration of transfer of any Security of any series at an office or agency of the Company in a Place of Payment for that series, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series of any authorized denominations and of a like aggregate principal amount and tenor.

At the option of the Holder, Securities may be exchanged for other Securities of the same series, of any authorized denominations and of a like aggregate principal amount and tenor, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive.

All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange.

Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. As a condition to the registration of transfer of any Restricted Securities, the Company or the Trustee may require evidence satisfactory to them as to the compliance with the restrictions set forth in the legend on such securities.

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No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 3.04, 9.06 or 11.07 not involving any transfer.

The Company shall not be required to exchange or register a transfer of any Security of a series (i) during the 15-day period immediately preceding the mailing of any notice of redemption of any Security of that series, or (ii) after any notice of redemption has been given to Holders of Securities of that series, except, where such notice provides that such Security is to be redeemed only in part, the Company shall be required to exchange or register a transfer of the portion thereof not to be redeemed.

(b) Neither the Trustee nor any of its agents shall (i) have any duty to monitor compliance with or with respect to any federal or state or other securities or tax laws or (ii) have any duty to obtain documentation on any transfers or exchanges other than as specifically required hereunder.

SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities. If any mutilated Security is surrendered to the Trustee, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding.

If there shall be delivered to the Company and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a protected purchaser, the Company shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing an identification number not contemporaneously outstanding.

In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, or has been called for redemption in full, the Company in its discretion may, instead of issuing a new Security, pay such Security.

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Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.

Every new Security issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder.

The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.

SECTION 3.07. Payment of Interest; Interest Rights Preserved. Unless otherwise provided as contemplated by Section 3.01 with respect to any series of Securities, interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest.

Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in Clause (a) or (b) below:

(a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the

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Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Securities of such series at his address as it appears in the Security Register, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (b).

(b) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee.

Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security.

SECTION 3.08. Persons Deemed Owners. Prior to due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and (subject to Section 3.07) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and neither the Company, the Trustee nor any agent of the Company or the Trustee shall be affected by notice to the contrary.

SECTION 3.09. Book-entry Provisions for Global Securities. (a) The Global Securities initially shall (i) be registered in the name of the Depositary or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for the Depositary and (iii) bear legends as set forth on the face of the form of Security in Section 2.02.

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Members of, or participants in, the Depositary ("Agent Members”) shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under the Global Security, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of any Holder.

(b) Transfers of the Global Securities shall be limited to transfers in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in a Global Security may be transferred or exchanged, in whole or in part, for Physical Securities in accordance with the rules and procedures of the Depositary. In addition, Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in the Global Securities if (A) such Depositary has notified the Company (or the Company becomes aware) that the Depositary (i) is unwilling or unable to continue as Depositary for such Global Security or (ii) has ceased to be a clearing agency registered under the Exchange Act when the Depositary is required to be so registered to act as such Depositary and, in both such cases, no successor Depositary shall have been appointed within 90 days of such notification or of the Company becoming aware of such event, (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security and the Outstanding Securities of such series shall have become due and payable pursuant to Section  5.02 and the Trustee has requested that Physical Securities be issued or (C) the Company has decided to discontinue use of book-entry transfers through the Depositary (or a successor Depositary).

(c) In connection with any transfer or exchange of a portion of the beneficial interest in the Global Security to beneficial owners pursuant to paragraph (b), the Security Registrar shall (if one or more Physical Securities are to be issued) reflect on its books and records the date and a decrease in the principal amount of the Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Securities of like tenor and amount.

(d) In connection with the transfer of the entire Global Security to beneficial owners pursuant to paragraph (b), the Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified

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by the Depositary in exchange for its beneficial interest in the Global Security, an equal aggregate principal amount of Physical Securities of authorized denominations and the same tenor.

(e) The Holder of the Global Securities may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities.

SECTION 3.10. Cancellation. The Company at any time may deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold. The Trustee shall cancel all Securities surrendered for registration of transfer, exchange, payment, redemption or cancellation and shall dispose of such cancelled Securities, all in accordance with its customary practices. If the Company shall acquire any of the Securities, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are delivered to the Trustee for cancellation. The Company may not issue new Securities to replace Securities it has paid in full or delivered to the Trustee for cancellation.

SECTION 3.11. Computation of Interest. Except as otherwise specified as contemplated by Section 3.01 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months.



ARTICLE 4
SATISFACTION AND DISCHARGE

SECTION 4.01. Satisfaction and Discharge of Indenture. This Indenture shall cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when

(a) either

(i) all Securities theretofore authenticated and delivered (other than (A) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section  3.06 and (B) Securities

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for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, as provided in Section  10.03) have been delivered to the Trustee for cancellation; or

(ii) all such Securities not theretofore delivered to the Trustee for cancellation

(A) have become due and payable, or

(B) will become due and payable at their Stated Maturity within one year, or

(C) will be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,

and the Company, in the case of (A), (B) or (C) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount sufficient to pay and discharge the entire indebtedness evidenced by such Securities not theretofore delivered to the Trustee for cancellation, for principal and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be;

(b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and

(c) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.07 and, if money shall have been deposited with the Trustee pursuant to subclause (ii) of Clause (a) of this Section, the obligations of the Trustee under Section 4.02 and the last paragraph of Section 10.03 shall survive.

SECTION 4.02. Application of Trust Money. Subject to the provisions of the last paragraph of Section 10.03, all money deposited with the Trustee pursuant to Section  4.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or

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through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Trustee.

ARTICLE 5
REMEDIES

SECTION 5.01. Events of Default. “Event of Default”, wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(a) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or

(b) default in the payment of the principal of any Security of that series at its Maturity; or

(c) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or

(d) default in the performance of any covenant, agreement or condition of the Company in this Indenture or the Securities of that series (other than a covenant, agreement or condition a default in whose performance or whose breach is specifically dealt with elsewhere in this section or which has been expressly included in this Indenture solely for the benefit of series of Securities other than that series), and continuance of such default for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(e) a default under any bond, debenture, note or other evidence of Indebtedness for money borrowed by the Company, whether such Indebtedness now exists or shall hereafter be created, which default shall constitute a failure to pay the principal of Indebtedness having an aggregate principal amount outstanding of at least $100 million when due and payable after the expiration of any applicable grace period with respect thereto or shall have resulted in such

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Indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable, without such Indebtedness having been discharged, or such acceleration having been rescinded or annulled, within a period of 30 days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default and requiring the Company to cause such Indebtedness to be discharged or cause such acceleration to be rescinded or annulled and stating that such notice is a “Notice of Default” hereunder; provided, however, that, subject to the provisions of Sections 6.01 and 6.02, the Trustee shall not be deemed to have knowledge of such default unless either (A) a Responsible Officer of the Trustee shall have actual knowledge of such default or (B) the Trustee shall have received written notice thereof from the Company, from any Holder or from the holder of or trustee in respect of any such Indebtedness; or

(f) the entry by a court having jurisdiction in the premises of (i) a decree or order for relief in respect of the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (ii) a decree or order adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 60 consecutive days; or

(g) the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or

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(h) the occurrence of any other event of default with respect to the Securities of that series as provided in a supplemental indenture applicable to such series of Securities or a Board Resolution pursuant to which such series of Securities is established.

SECTION 5.02. Acceleration of Maturity; Rescission and Annulment. (a) If an Event of Default (other than those specified in Sections 5.01(f) and 5.01(g)) occurs with respect to any series of Outstanding Securities and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities of such series may declare the principal amount (or, if the Securities of any such series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal shall become immediately due and payable.

Notwithstanding the foregoing, in the case of an Event of Default specified in Sections 5.01(f) or 5.01(g), the principal amount (or, if the Securities of any such series are Original Issue Discount Securities, such portion of the principal amount as may be specified in the terms of that series) of all Outstanding Securities will ipso facto become due and payable without any declaration or other Act on the part of the Trustee or any Holder.

(b) At any time after such a declaration of acceleration with respect to the Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in principal amount of the Outstanding Securities of that series, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if

(i) the Company has paid or deposited with the Trustee a sum sufficient to pay

(A) all overdue interest on all Securities of the series,

(B) the principal of any Securities of that series which have become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by such Securities,

(C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate borne by such Securities, and

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(D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07;

and

(ii) all Events of Default, other than the non-payment of the principal of Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 5.13.

No such rescission shall affect any subsequent default or impair any right consequent thereon.

SECTION 5.03. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if

(i) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or

(ii) default is made in the payment of the principal of any Security at the Maturity thereof,

the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and interest, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and on any overdue interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel.

If an Event of Default with respect to the Securities of any series occurs and is continuing, the Trustee may in its discretion, subject to applicable law, proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.

Section 5.04. Trustee May File Proofs of Claim. In case of any judicial proceeding relative to the Company (or any other obligor upon the Securities), its

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property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07.

No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding.

SECTION 5.05. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 6.07, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.

SECTION 5.06. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

FIRST: To the payment of all amounts due the Trustee under Section 6.07; and

SECOND: To the payment of the amounts then due and unpaid for principal of and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without

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preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively.

SECTION 5.07. Limitation on Suits. No Holder of any Security shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless

(i) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series;

(ii) the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;

(iii) such Holder or Holders have offered to the Trustee reasonable indemnity satisfactory to the Trustee against the costs, expenses and liabilities to be incurred in compliance with such request;

(iv) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and

(v) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in aggregate principal amount of the Outstanding Securities of that series;

it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders.

SECTION 5.08. Unconditional Right of Holders to Receive Principal and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and (subject to Section 3.07) interest on such Security on the respective Stated Maturities expressed in such Security and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.

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SECTION 5.09. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted.

SECTION 5.10. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

SECTION 5.11. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be.

SECTION 5.12. Control by Holders. The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that

(i) such direction shall not be in conflict with any rule of law or with this Indenture, and

(ii) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction.

SECTION 5.13. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities affected by any past default hereunder (all voting together as one class) may, on behalf of the Holders

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of all the Securities affected by such past default, waive such past default and its consequences, subject to the payment of the amounts required under Section 5.02(b)(i)(D), except a default

(i) in the payment of the principal of or interest on any Security, or

(ii) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected.

Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon.

SECTION 5.14. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, in either case in respect to the Securities, a court may require any party litigant in such suit to file an undertaking to pay the costs of the suit, and the court may assess reasonable costs, including reasonable attorney's fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant; but the provisions of this Section shall not apply to any suit instituted by the Company, to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than 25% in principal amount of the Outstanding Securities of any series, or to any suit instituted by any Holder for the enforcement of the payment of the principal of or interest on any Security on or after the maturity of such Security.

SECTION 5.15. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

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ARTICLE 6
THE TRUSTEE

SECTION 6.01. Certain Duties and Responsibilities. The duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section.

SECTION 6.02. Notice of Defaults. The Trustee shall give the Holders notice of any default hereunder as and to the extent provided by the Trust Indenture Act; provided, however, that in the case of any default of the character specified in Section 5.01(d), no such notice to Holders shall be given until at least 30 days after the occurrence thereof. For the purpose of this Section, the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default.

SECTION 6.03. Certain Rights of Trustee. Subject to the provisions of Section 6.01:

(a) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors of the Company, or the Finance and Strategic Planning Committee of the Board of Directors of the Company, may be sufficiently evidenced by a Board Resolution;

(c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate;

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(d) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction;

(f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit;

(g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder;

(h) the Trustee shall not be charged with knowledge of any Default or Event of Default (except as provided in Section 5.01(e)) with respect to the Securities unless either (i) a Responsible Officer shall have actual knowledge of such Default or Event of Default or (ii) written notice of such Default or Event of Default shall have been given to the Trustee by the Company or any other obligor on such Securities or by any Holder of such Securities; and

(i) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture.

SECTION 6.04. Not Responsible for Recitals. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof.

SECTION 6.05. May Hold Securities. The Trustee, any Paying Agent, any Security Registrar or any other agent of the Company, in its individual or any

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other capacity, may become the owner or pledgee of Securities and, subject to Sections 6.08 and 6.13, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent.

SECTION 6.06. Money Held in Trust. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Company.

SECTION 6.07. Compensation and Reimbursement. The Company agrees:

(i) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);

(ii) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and

(iii) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the reasonable costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.

The obligations of the Company under this Section 6.07 shall survive the satisfaction and discharge of this Indenture. To secure the Company's payment obligations in this Section 6.07, the Trustee shall have a Lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on the Securities. Such Lien shall survive the satisfaction and discharge of this Indenture. When the Trustee incurs expenses or renders services after a Default or an Event of Default specified in Sections 5.01(f) or 5.01(g) hereof occurs, the expenses and the compensation for the services (including the fees and expenses of its agents and counsel) are intended to constitute expenses of administration under U.S. Code, Title 11 or any other similar foreign, federal or state law for the relief of debtors.

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SECTION 6.08. Disqualification; Conflicting Interests. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture.

SECTION 6.09. Corporate Trustee Required; Eligibility. There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If such Person publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article.

SECTION 6.10. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee under Section 6.11.

(b) The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Company. If an instrument of acceptance by a successor Trustee shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series.

(c) The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Company.

(d) If at any time:

(i) the Trustee shall fail to comply with Section 6.08 after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or

(ii) the Trustee shall cease to be eligible under Section 6.09 and shall fail to resign after written request therefor by the Company or by any such Holder, or

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(iii) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent, or

(iv) a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation,

then, in any such case, (A) the Company by a Company Order may remove the Trustee, or (B) subject to Section 5.14, any Holder who has been a bona fide Holder of a Security of any series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to such series of Securities and the appointment of a successor Trustee.

(e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Company, by a Company Order, shall promptly appoint a successor Trustee with respect to the Securities of such series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series). If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee with respect to Securities of such series and supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to Securities of such series.

(f) The Company shall give notice of each resignation and each removal of the Trustee with respect to Securities of any series and each appointment of a successor Trustee with respect to Securities of such series to all Holders of Securities of such series in the manner provided in Section 1.06. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office.

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SECTION 6.11. Acceptance of Appointment by Successor.

(a) In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.

(b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees to be co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates.

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(c) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be.

(d) No such successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article.

SECTION 6.12. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities.

SECTION 6.13. Preferential Collection of Claims Against. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Company (or any such other obligor).



ARTICLE 7
HOLDERS' LISTS AND REPORTS BY TRUSTEE

SECTION 7.01.Company to Furnish Trustee Names and Addresses of Holders. The Company will furnish or cause to be furnished to the Trustee

(a) with respect to the Securities of any series, not more than 15 days after each Regular Record Date, if any, for such series, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of the Securities of such series as of such Regular Record Date, and

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(b) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished;

excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar; provided, however, that no such list need be furnished so long as the Trustee is acting as Security Registrar.

SECTION 7.02. Preservation of Information; Communications to Holders. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.01 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.01 upon receipt of a new list so furnished.

(b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act.

(c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act.

SECTION 7.03. Reports by Trustee. (a) The Trustee shall transmit to Holders such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. Reports so required to be transmitted at stated intervals of not more than 12 months shall be transmitted no later than January 31, in each calendar year, commencing one year after the original issuance of the first series of Securities under this Indenture.

(b) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange upon which the Securities are listed, with the Commission and with the Company. The Company will notify the Trustee when the Securities are listed on any stock exchange.

SECTION 7.04. Reports by Company. The Company shall file with the Trustee and the Commission, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required

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pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. In the event the Company is not subject to Section 13 or 15(d) of the Exchange Act, it shall file with the Trustee upon request the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.

ARTICLE 8
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE

SECTION 8.01. Company May Consolidate, Etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and the Company shall not permit any Person to consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless:

(i) in case the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety shall be a corporation, partnership or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and interest, if any, on all the Securities and the performance or observance of every covenant of this Indenture on the part of the Company to be performed or observed;

(ii) immediately after giving effect to such transaction and treating any Indebtedness which becomes an obligation of the Company as a result of such transaction as having been incurred by the Company at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and

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(iii) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article.

SECTION 8.02. Successor Substituted. Upon any consolidation of the Company with, or merger of the Company into, any other Person or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety in accordance with Section 8.01, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and thereafter, except in the case of a lease, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities.



ARTICLE 9
SUPPLEMENTAL INDENTURES

SECTION 9.01. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes:

(a) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company herein and in the Securities; or

(b) to add to the covenants of the Company for the benefit of the Holders of all or any series of the Securities, or to surrender any right or power herein conferred upon the Company; or

(c) to add any additional Events of Default for the benefit of the Holders of all or any series of the Securities;

(d) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture which shall not be inconsistent with the provisions of this Indenture, provided that such

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action pursuant to this Clause (d) shall not adversely affect the interests of the Holders in any material respect;

(e) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such addition, change or elimination shall (A) neither (i) apply to Securities of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (ii) modify the rights of the Holder of such Securities with respect to such provision or (B) become effective only when there is no such Security Outstanding;

(f) to establish the form or terms of Securities of any series as permitted by Sections 2.01 and 3.01;

(g) to authorize the issuance of additional Securities of a series previously authorized; or

(h) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series.

SECTION 9.02. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities of each series affected by such supplemental indenture voting as one class, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of each such series under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby,

(i) change the Stated Maturity of the principal of, or any installment of interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any Redemption Price thereof, or reduce the amount of the principal of an Original Issue Discount Security that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 5.02, or change the Place of Payment where, or the currency in which, any Security or interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); or

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(ii) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture; or

(iii) modify any of the provisions of this Section, Section 5.13 or Section  10.11, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby.

It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.

SECTION 9.03. Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to Section  6.01) shall be fully protected in relying upon, in addition to the documents required by Section 1.02, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture.

SECTION 9.04. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and, unless such supplemental indenture states that it shall only apply to Securities of series specified therein, every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

SECTION 9.05. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act.

SECTION 9.06. Reference in Securities to Supplemental Indentures. Securities of any series authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and

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executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series.

ARTICLE 10
COVENANTS

SECTION 10.01. Payment of Principal and Interest. The Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of and any premium or interest on the Securities of that series in accordance with the terms of the Securities of that series and this Indenture.

SECTION 10.02. Maintenance of Office or Agency. The Company shall maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Company shall give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands.

The Company may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee and the Holders of any such designation or rescission and of any change in the location of any such other office or agency.

SECTION 10.03. Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent with respect to any series of Securities, it shall, on or before each due date of the principal of or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed

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of as herein provided and shall promptly notify the Trustee of its action or failure so to act.

Whenever the Company shall have one or more Paying Agents for any series of Securities, it will, prior to 10:00 a.m., New York City time, on each due date of the principal of or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its action or failure so to act.

The Company shall cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (i) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities of that series) in the making of any payment in respect of the Securities of that series, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent as such.

The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.

Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Security of any series and remaining unclaimed for two years after such principal or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each New York City Business Day and of general circulation in The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less

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than 30 days from the date of such publication, any unclaimed balance of such money then remaining shall be repaid to the Company.

SECTION 10.04. Statement by Officers as to Default. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year of the Company ending after the date hereof, an Officers' Certificate, stating whether or not to the best knowledge of the signers thereof the Company is in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge.

SECTION 10.05. Existence. Subject to Article Eight, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its existence, rights (charter and statutory) and franchises; provided, however, that the Company shall not be required to preserve any such right or franchise if the Board of Directors of the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and that the loss thereof is not disadvantageous in any material respect to the Holders.

SECTION 10.06. Liens. The Company shall not, and shall not permit any Significant Subsidiary to issue, assume, incur or guarantee any Indebtedness secured by a Lien, except Permitted Liens, on any Principal Property or any shares of Capital Stock of any Subsidiary ("Secured Debt”), without at the same time effectively providing that the Securities shall be secured equally and ratably with (or prior to) the Indebtedness so secured for so long as such Indebtedness is so secured, unless after giving effect thereto, the aggregate amount of Secured Debt, together with all Attributable Debt of the Company and its Subsidiaries in respect of Restricted Sale/Leaseback Transactions would not exceed 20% of Consolidated Net Tangible Assets.

SECTION 10.07. Limitation on Restricted Sale/Leaseback Transactions. The Company shall not, and shall not permit any Significant Subsidiary to, enter into, assume, guarantee or otherwise become liable with respect to any Restricted Sale/Leaseback Transaction, unless after giving effect thereto the aggregate amount of Attributable Debt of the Company and its Subsidiaries in respect of Restricted Sale/Leaseback Transactions, together (without duplication) with all Secured Debt then outstanding, would not exceed 20% of Consolidated Net Tangible Assets.

SECTION 10.08. Reports and Delivery of Certain Information. Whether or not required by the rules and regulations of the Commission, so long as any Securities are outstanding, the Company shall furnish to the Holders of the

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Securities (i) all quarterly and annual financial information that is substantially equivalent to that which would be required to be contained in a filing with the Commission on Forms 10-Q and 10-K if the Company were required to file such Forms, including a “Management's Discussion and Analysis of Financial Condition and Results of Operations" section and, with respect to the annual information only, a report thereon by the Company's certified independent accountants and (ii) all reports that are substantially equivalent to that which would be required to be filed with the Commission on Form 8-K if the Company were required to file such reports. In addition, whether or not required by the rules and regulations of the Commission, the Company shall file a copy of all such information with the Commission for public availability (unless the Commission will not accept such a filing) and make such information available to investors who request it in writing.

SECTION 10.09. Resale of Certain Securities. During the period beginning on the Issue Date and ending on the date that is two years from the Issue Date, the Company shall not, and shall not permit any of its “affiliates” (as defined under Rule 144 under the Securities Act or any successor provision thereto) to, resell any Securities which constitute “restricted securities” under Rule 144 that have been reacquired by any of them. The Trustee shall have no responsibility in respect of the Company's performance of its agreement in the preceding sentence.

SECTION 10.10. Book-Entry System. If the Securities cease to trade in the Depositary's book-entry settlement system, the Company covenants and agrees that it shall use reasonable efforts to make such other book-entry arrangements that it determines are reasonable for the Securities.

SECTION 10.11. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any covenant or condition set forth in Sections 10.06 and 10.07 if before the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities of all series affected by such waiver, all voting together as one class, shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such covenant or condition shall remain in full force and effect.

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ARTICLE 11
OPTIONAL REDEMPTION OF SECURITIES

SECTION 11.01. Applicability of Article.

Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by Section 3.01 for Securities of any series) in accordance with this Article.

SECTION 11.02. Election to Redeem; Notice to Trustee.

The election of the Company to redeem any Securities shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company of less than all the Securities of any series, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date, of the tenor, if applicable, of the Securities to be redeemed, and of the principal amount of Securities of such series to be redeemed. In the case of any redemption of Securities prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, the Company shall furnish the Trustee with an Officers' Certificate evidencing compliance with such restriction.

SECTION 11.03. Selection by Trustee of Securities to Selection by Trustee of Securities to Be Redeemed.

If less than all the Securities of any series are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series or any integral multiple thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series.

The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed.

For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed.

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SECTION 11.04. Notice of Redemption.

Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date to each Holder of Securities to be redeemed, at the address appearing in the Security Register.

All notices of redemption shall state:

(a) the Redemption Date,

(b) the Redemption Price,

(c) if less than all the Outstanding Securities of any series are to be redeemed, the identification (and, in the case of partial redemption, the principal amounts) of the particular Securities to be redeemed,

(d) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date,

(e) the place or places where such Securities are to be surrendered for payment of the Redemption Price,

(f) for any Securities that by their terms may be converted, the terms of conversion, the date on which the right to convert the Security to be redeemed will terminate and the place or places where such Securities may be surrendered for conversion, and

(g) that the redemption is for a sinking fund, if such is the case.

Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company, and shall be irrevocable. The notice of redemption mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the Holder of any Security shall not affect the validity of the proceeding for the redemption of any other Security.

SECTION 11.05. Deposit of Redemption Price.

Prior to 10:00 a.m. New York City time on any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the

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Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 10.03) an amount of money sufficient to pay the Redemption Price of, and (except if the Redemption Date shall be an Interest Payment Date) accrued interest on, all the Securities which are to be redeemed on that date, other than any Securities called for redemption on that date which have been converted prior to the date of such deposit.

If any Security called for redemption is converted, any money deposited with the Trustee or with any Paying Agent or so segregated and held in trust for the redemption of such Security shall (subject to any right of the Holder of such Security or any Predecessor Security to receive interest as provided in the last paragraph of Section 3.07 or in the terms of such Security) be paid to the Company upon Company Request or, if then held by the Company, shall be discharged from such trust.

SECTION 11.06. Securities Payable on Redemption Date.

Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest), such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 3.07.

If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal and any premium shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.

SECTION 11.07. Securities Redeemed in Part. Any Security which is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge to the Holder, a new Security or Securities of the same series and of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered.

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ARTICLE 12
DEFEASANCE AND COVENANT DEFEASANCE

SECTION 12.01. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may elect, at its option at any time, to have Section 12.02 or Section 12.03 applied to any series of the Outstanding Securities upon compliance with the conditions set forth below in this Article. Any such election shall be evidenced by a Board Resolution.

SECTION 12.02. Defeasance and Discharge. Upon the Company's exercise of its option (if any) to have this Section applied to the Outstanding Securities of any series, the Company shall be deemed to have been discharged from its obligations with respect to such series of Securities as provided in this Section on and after the date the conditions set forth in Section 12.04 are satisfied (hereinafter called “Defeasance”). For this purpose, such Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities of such series and to have satisfied all its other obligations under such series of Securities and this Indenture insofar as such series of Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), subject to the following which shall survive until otherwise terminated or discharged hereunder: (a) the rights of Holders of such series of Securities to receive, solely from the trust fund described in Section 12.04 and as more fully set forth in such Section, payments in respect of the principal of and interest on such Securities when payments are due, (b) the Company's obligations with respect to such series of Securities under Sections 3.04, 3.05, 3.06, 10.02 and 10.03, (c) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (d) this Article. Subject to compliance with this Article, the Company may exercise its option (if any) to have this Section applied to the Outstanding Securities of any series notwithstanding the prior exercise of its option (if any) to have Section 12.03 applied to such series of Securities.

SECTION 12.03. Covenant Defeasance. Upon the Company's exercise of its option (if any) to have this Section applied to any series of the Securities, (a) the Company shall, with respect to such series of Securities, be released from its obligations under Section 10.06, Section 10.07 and Article 8 and (b) the occurrence of any event specified in Sections 5.01(d) (with respect to any of Section 10.06, Section 10.07 or Article 8) or 5.01(e) shall be deemed not to be or result in an Event of Default, in each case with respect to such series of Securities as provided in this Section on and after the date the conditions set forth in Section 12.04 are satisfied (hereinafter called “Covenant Defeasance”). For this purpose, such Covenant Defeasance means that, with respect to such series of Securities, the Company may omit to comply with and shall have no liability in respect of

63


any term, condition or limitation set forth in any such specified Section (to the extent so specified in the case of Section 5.01(d)), whether directly or indirectly by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision herein or in any other document, but the remainder of this Indenture and such series of Securities shall be unaffected thereby.

SECTION 12.04. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to the application of Section  12.02 or Section 12.03 to the then Outstanding Securities of any series:

(a) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee which satisfies the requirements contemplated by Section 6.09 and agrees to comply with the provisions of this Article applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefits of the Holders of such series of Securities, (i) money in an amount, or (ii) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (iii) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or any such other qualifying trustee) to pay and discharge, the principal of and interest, if any, on such series of Securities on the respective Stated Maturities, in accordance with the terms of this Indenture and such series of Securities. As used herein, “U.S. Government Obligation” means (x) any security which is (1) a direct obligation of the United States of America for the payment of which the full faith and credit of the United States of America is pledged or (2) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (1) or (2), is not callable or redeemable at the option of the issuer thereof, and (y) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in Clause (x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt.

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(b) In the event of an election to have Section 12.02 apply to such series of Securities, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (ii) since the date of this instrument, there has been a change in the applicable Federal income tax law, in either case (i) or (ii) to the effect that, and based thereon such opinion shall confirm that, the Holders of such series of Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit, Defeasance and discharge to be effected with respect to such series of Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit, Defeasance and discharge were not to occur.

(c) In the event of an election to have Section 12.03 apply to such series of Securities, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such series of Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit and Covenant Defeasance to be effected with respect to such series of Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit and Covenant Defeasance were not to occur.

(d) The Company shall have delivered to the Trustee an Officers' Certificate to the effect that such series of Securities, if then listed on any securities exchange, will not be delisted as a result of such deposit.

(e) No event which is, or after notice or lapse of time or both would become, an Event of Default with respect to such series of Securities shall have occurred and be continuing at the time of such deposit or, with regard to any such event specified in Sections 5.01(f) and 5.01(g), at any time on or prior to the 90th day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until after such 90th day).

(f) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming all Securities are in default within the meaning of such Act).

(g) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any other agreement or instrument to which the Company is a party or by which the Company is bound.

(h) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning

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of the Investment Company Act unless such trust shall be registered under such Act or exempt from registration thereunder.

(i) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with.

SECTION 12.05. Deposited Money and U.S. Government Obligations to be Held in Trust; Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 10.03, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee or other qualifying trustee (solely for purposes of this Section and Section 12.06, the Trustee and any such other trustee are referred to collectively as the “Trustee”) pursuant to Section 12.04 in respect of the Outstanding Securities of such series shall be held in trust and applied by the Trustee, in accordance with the provisions of such series of Securities and this Indenture, to the payment, either directly or through any such Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such series of Securities, of all sums due and to become due thereon in respect of principal and interest, but money so held in trust need not be segregated from other funds except to the extent required by law.

The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 12.04 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Securities.

Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations held by it as provided in Section 12.04 with respect to the Outstanding Securities of any series which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect the Defeasance or Covenant Defeasance, as the case may be, with respect to such series of Securities.

SECTION 12.06. Reinstatement. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article with respect to the Outstanding Securities of any series by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations under this Indenture and such series of

66


Securities from which the Company has been discharged or released pursuant to Section  12.02 or 12.03 shall be revived and reinstated as though no deposit had occurred pursuant to this Article with respect to such series of Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to Section 12.05 with respect to such series of Securities in accordance with this Article; provided, however, that if the Company makes any payment of principal of or interest on any such Security of that series following such reinstatement of its obligations, the Company shall be subrogated to the rights (if any) of the Holders of such series of Securities to receive such payment from the money so held in trust.

ARTICLE 13
SINKING FUNDS

SECTION 13.01. Applicability of Article. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of any series if so specified as contemplated by Section 3.01 for Securities of such series.

The minimum amount of any sinking fund payment provided for by the terms of the Securities of any series is herein referred to as a “mandatory sinking fund payment", and any payment in excess of such minimum amount provided for by the terms of the Securities of any series is herein referred to as an “optional sinking fund payment". If provided for by the terms of the Securities of any series, the cash amount of any sinking fund payment may be subject to reduction as provided in Section 13.02. Each sinking fund payment shall be applied to the redemption of the Securities of any series as provided for by the terms of the Securities of such series.

SECTION 13.02. Satisfaction of Sinking Fund Payments with Securities. The Company (1) may deliver Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been converted in accordance with their terms or which have been redeemed either at the election of the Company pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to the Securities of such series required to be made pursuant to the terms of the Securities of such series as provided for by the terms of such series; provided that the Securities to be so credited have not been previously so credited. The Securities to be so credited shall be received and credited for such purpose by the Trustee at the Redemption Price, as specified in the Securities to be so redeemed (or at such other prices as may be specified for such Securities as contemplated in Section 3.01), for

67


redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly.

SECTION 13.03. Redemption of Securities for Sinking Fund. Not less than 60 days prior to each sinking fund payment date for any series of Securities, the Company will deliver to the Trustee an Officers' Certificate specifying the amount of the next ensuing sinking fund payment for that series pursuant to the terms of such Securities, the portion thereof, if any, which is to be satisfied by payment of cash and the portion thereof, if any, which is to be satisfied by delivering and crediting Securities of that series pursuant to Section 13.02 stating that such Securities have not been previously used as a credit against any sinking fund payment and will also deliver to the Trustee any Securities to be so delivered. Not less than 30 days before each such sinking fund payment date the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in Section 11.03 and cause notice of the redemption thereof to be given in the name of and at the expense of the Company in the manner provided in Section 11.04. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in Section 11.05, 11.06 and 11.07.


This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument.

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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written.

  AVON PRODUCTS, INC.
   
  By /s/ Dennis Ling
Group Vice President - Finance and Treasurer

     
  JPMORGAN CHASE BANK,
     as Trustee,
   
  By /s/ Kathleen Perry
Vice President

     
  By /s/ Joanne Adamis
Vice President

     

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EX-31.1 4 aug0803_ex3101.htm Untitled Document

AVON PRODUCTS, INC.

Exhibit 31.1

Second Quarter 2003 Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Andrea Jung, certify that:

1.
  
I have reviewed this quarterly report on Form 10-Q of Avon Products, Inc.;
2.
  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
  
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
    b) [Paragraph omitted pursuant to S.E.C. Release Nos. 33-8238 and 34-47986];
  c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: August 11, 2003      /s/ Andrea Jung        
Andrea Jung
Chief Executive Officer

 

EX-31.2 5 aug0803_ex3102.htm Untitled Document

AVON PRODUCTS, INC.

Exhibit 31.2

Second Quarter 2003 Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Robert J. Corti, certify that:

1.
  
I have reviewed this quarterly report on Form 10-Q of Avon Products, Inc.;
2.
  
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
  
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
  
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
  b) [Paragraph omitted pursuant to S.E.C. Release Nos. 33-8238 and 34-47986];
  c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
  d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
   
 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

Date: August 11, 2003      /s/ Robert J. Corti     
Robert J. Corti
Chief Financial Officer

 

EX-32.1 6 aug0803_ex3201.htm Untitled Document

AVON PRODUCTS, INC.

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Avon Products, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrea Jung, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

       /s/ Andrea Jung     
Andrea Jung
Chief Executive Officer
August 11, 2003
 

EX-32.2 7 aug0803_ex3202.htm Untitled Document

AVON PRODUCTS, INC.

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Avon Products, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert J. Corti, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

       /s/ Robert J. Corti     
Robert J. Corti
Chief Financial Officer
August 11, 2003
 

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